Comparing with Classic Articles

In Table 2-1 a list of classic articles on SCM is presented. The overlap between these articles and the results of this study is quite limited as they have only three articles in common (Hewitt, 1994; Lee & Billington, 1992; Towill, Naim, & Wikner, 1992). Encouraging though, is the fact that the classification of these articles are identical in the two studies (neither Lee & Billington (1992) nor Towill, Naim, & Wikner (1992) are considered relevant from a risk perspective).

Risk and Reward Structure

Of special interest is naturally the seven articles referring the category “Risk and Reward Structure”. The earliest of the articles (Ellram & Cooper, 1990) is on Supply Chain Management, partnerships, and third-party relationships (within transportation). Being an early contribution, the authors spend quite some time discussing SCM as well as explaining the role of uncertainty:

“Wherever uncertainty exists along a supply chain, whether it be in terms of product quality, delivery timing, final demand, or the actual amount of the product which will ultimately be received, this uncertainty has traditionally been buffered with inventory.” (p. 2).

The authors state that SCM challenges this traditional approach to managing uncertainty:

“The supply chain management concept focuses attention on holding inventory in the location and quantity that is optimal for the entire supply chain. Clearly, exchanging information for inventory is central to the supply chain management concept.” (p. 3).

They emphasize that strategic partnerships and leadership in the supply chain is crucial:

“Successful supply chain management relies on forming strategic partnerships with trading partners along the supply chain, with one partner playing a key role in coordinating and overseeing the whole supply chain, similar to what is called a channel captain in the marketing literature.” (p. 3).

Before presenting the framework for risks and benefits of entering into supply chain relationships, some risks are discussed, e.g. financial risks when using third parties:

“The risks associated with shifts in the market and in technology can be mitigated to some extent by shifting functions outside the firm. Market entry risks can be reduced by utilizing third parties, focusing on shorter time horizons and smaller investments than required for vertical integration.” (p. 5), and the economic risk of implementing dedicated IT systems:

“However, integrated information systems are costly and time-consuming to develop. If these costs can be shared by partners in a long-term relationship, the economic risk is reduced.” (p. 5).

The benefits of using third parties are clear:

“Third party benefits accrue from potentially more stable environments and longer term relationships with fewer shippers, thereby reducing the risks of open market uncertainty.” (p. 6).

The relationship between shipper and third party is analyzed and risk and benefits for both parties are outlined under the categories Economic, Managerial, & Strategic. But besides identifying potential sources of risk and reward, the authors do not offer insights into the management of these risks or procedures for the sharing of costs. In a later article Cooper &

Ellram (1993) continue the discussion on SCM and the risks of entering into this type of relationships, e.g. on the breadth of the supplier base:

“Traditional systems often involve several suppliers of the same materials or services to increase competition and to obtain more favorable terms of sale.

This approach also spreads the risk of shutdown if one supplier becomes suddenly unable to fulfill the contract or order. The supply chain management

approach suggests that the supplier base be reduced so that the firms can be more closely integrated. A reduced supplier base permits closer management and coordination of a few relationships.” (p. 17).

They claim sharing risks and rewards between partners is a prerequisite for SCM:

“…a close relationship requires that channel members be willing to share risks and rewards over the long term. This implies a win-win situation over the life of the supply chain. In traditional systems, channel members are relatively independent, with a short term approach that does not consider counter-balancing of risks and rewards over time.” (p. 17).

They argue that the planning of SCM should ensure a balanced or “fair” sharing of risks and rewards in the long run, and a willingness to “take a hit” in the short. But still there are no specific guidelines as how to perform the sharing, how to measure, or how to implement.

These shortcoming are not addressed in the article by Cooper & Gardner (1993), who continue the discussion on the contingencies for choosing one relationship form over another.

Lambert, Emmelhainz & Gardner (1996) present an extensive framework covering a multiplicity of “partnership components” of which “Risk/reward sharing” is of particular interest. They more or less mimic Ellram & Cooper (1990) when they state:

“A partnership is a tailored business relationship based on mutual trust, openness, shared risk and shared rewards that yield a competitive advantage, resulting in business performance greater than would be achieved by the firms individually.” (p. 2).

Figure 4-4: Partnership Component Levels¹³

Partnership Component Partnership type

Low Medium High

…

RISK/REWARD SHARING

Loss tolerance z Very low tolerance for z Some tolerance for z High tolerance for loss short-term loss short-term loss Gain commitment ^z Limited willingness to ^z Willingness to help the ^z Desire to help the other

help the other party gain other party gain party gain

Commitment to fairness ^z Fairness is evaluated by ^z Fairness is tracked year ^z Fairness is measured transaction to year over life of relationship

…

The article by Hammer (1990) does not contribute a lot to this discussions besides introducing two case studies (Mutual Benefit Life and Hewlett-Packard). Neither Andrews & Stalick (1994) nor Hewitt (1994) contributes significantly besides insisting design is multi-dimensional:

”A further output which has emerged from these discussions is a very clear consensus concerning the nature pf the redesign process itself. This is that true process redesign os only likely to be successful if it is recognized as a multi-dimensional activity, simultaneously and explicitly addressing the work activity dimension, the information flow dimension and the decision/authority dimension.” (Hewitt, 1994, p. 5).

13 Source: Table 4 in Lambert, Emmelhainz, & Gardner (1996), p. 17.

The claim made in Cooper, Lambert, & Pagh (1997), that ‘Risk and Reward Structure’ is a well-documented component within the SCM domain is thereby challenged. It seems the articles only contain statements in favor of dividing the gains from the implementation of SCM, but do not offer principles or methods for identifying or managing this division.