Chapter 5 Supply Chain Theories and Risk
5.4 The Interaction Approach (IA)
5.4.3 IA and Supply Chain Risks
Thorough analysis of the IMP literature reveals an absence of risk management. Instead, uncertainty has a focal position, at least in the early works (e.g. Håkonsson, Johanson, &
Wootz, 1976; IMP Group, 1982; & Hedaa, 1993). In Håkonsson, Johanson, & Wootz (1976), three types of uncertainties in the interaction process is identified:
¾ need uncertainty is the buyer’s uncertainty of identifying the exact nature of the need,
¾ market uncertainty is related to the buyers perception of the suppliers’ ability to deliver, and
¾ transaction uncertainty, which is the uncertainty of actually receiving the product or component ordered.
These three uncertainties constitute a framework for influencing the buyer, using two abilities:
the need solving ability and the transfer ability. The former is made up of characteristics of
the products (function, quality etc.) and the services which are rendered in combination with the product. The latter describe the reliability of delivery of the ordered. The organizational design is thereby of critical importance in the interaction process, as the need solving and transfer abilities determine the success or failure of the interactions. As stated in Håkonsson, Johanson, & Wootz (1976):
“By influencing the perceived uncertainty of the buyer in different ways it will be possible for the selling firm to bring about various types of behaviour effects.
The perceived uncertainty can be either increased or decreased depending on the contents of the influence tactics.” (p. 324).
In the typology of exchanges (see e.g. Figure 5-14) all elements reference uncertainty, e.g. in the money exchange as currency rate fluctuations or in the social exchange as a remover of uncertainty. Through social exchange trust is created and expectations are adjusted creating a stable and reliable room for exchanges.
Besides the episode level, uncertainty is present in the control element in the atmosphere. As stated in IMP Group (1982),
“Another important reason for the closer connection with a counterpart can be to reduce the uncertainty associated with that input or output by increasing its control over the other company.” (p. 22).
And further on dependency:
“… the level of dependence on one relationship affects the vulnerability of an organization to the exercise of power by its opposite number. … It is the management of the closeness of the relationship, with its associated power and dependence, which is perhaps a crucial aspect of many industrial marketing and purchasing strategies.” (p. 22),
and goal:
“Summing up this discussion on of the reasons for a close interaction, we can conclude that relationships are established and used in order to gain economic benefits, lower costs, higher profits, and/or improving the organization’s control of some aspect of its environment.” (p. 22).
Introducing three sources of uncertainty (supplier, customer, and competitor) and two new uncertainty types (technical and acceptance uncertainty) Hedaa (1993) extends the original typology by Håkonsson, Johanson, & Wootz (1976) briefly described above. The resulting matrix is depicted in Figure 5-17 below. The uncertainties in the matrix may be matched to the four definitions from the risk matrix. The process risk seems to be covered quite extensively, as e.g. market uncertainties (7, 8, & 9) and transaction uncertainties (13, 14, &
15) seem to translate quite well. The technical uncertainties (4, 5, & 6) might translate into the process risks, albeit the competitor class might be discarded altogether. If the structure component to the risk matrix is dealt with, it must be in the acceptance uncertainty class, for customers (10) and/or suppliers (11). The domain thereby might have a contribution, at least to a classification of risk sources.
Figure 5-17: Types and Sources of Uncertainties in Relationships62
what products to choose
what products to suggest
the solutions offered
failure of products or application
supplier’s skills in proper use of products
possible better technical solutions offered
variations in demand structure customers’ cust.
other customers demand occupying capacity
changes in
marketing strategies
changes in power structure decision making unit
supplying special designed products/
services
getting better access to people in DMU
changes in orders or trading terms
deviations from delivery schedules
increasing reliability in exchange
obligations
1 2 3
4 5 6
7 8 9
10 11 12
13 14 15
Customer Supplier Competitor
Uncertainties
Need
Technical
Market
Acceptance
Transaction Type Source
Management of Risks
But when it comes to the management of risks, it becomes a bit more unclear. The mechanisms of inclusion are clear, though: the slow adaptation process and build-up of knowledge and experience leads to trust. With trust comes the possibility of obtaining “full membership” of the network. Network members are expected to follow a set of rules shared by the entire network, so in a sense the “evaluation of the membership application” is a sort of risk management. The question posed by the network is really: “Is this company really trustworthy enough to become a member of our network?” And implicitly to each of the network members: “Do I really want to be burdened by this company’s mistakes and financial problems?”. The problems of each network member may become a problem for all in the network in the same manner as a distinct advantage for one network member is expected to spread to the rest of the network. One might therefore map a network as consisting of four classes of companies:
1. Non-interacting companies. Companies with whom no members have interactions, perhaps even competitors?
2. Interacting non-members. Companies not belonging to the network - either caused by earlier refusal or due to limited lack of relevance. Interaction is characterized by safeguards and controls.
62 Source: Figure 4 in Hedaa (1993), p. 200.
3. Trusted members. Companies with whom sufficient experience has been obtained to interact with few safeguards and controls. Perhaps evolving into a “core member”.
4. Core members. Companies very important to the network – by size, history, access to markets, financial status… Core members share fate and rely on each other for the continuation of their company, and interaction is characterized by exceptions management instead of controls and safeguards.
Spelling out the classes it becomes obvious risk management differs greatly depending on the
“standing in the network”. Combining the standing of the focal company (down) with the network membership classes (across) a risk management schema might look like Figure 5-18 below. The schema describes the intentions of the various network members, e.g. the Interacting Non-member who aspires for membership, or the Core Member who is cautious about including new members before making sure they pose no threat to the network (and themselves). The schema also demonstrates the absence of risk management between Core Members, and the gradual increase in safe guards and controls (or contracts) as membership lessens.
Figure 5-18: Risk Management Schema for Network Membership Classes
4. Core
Members [ Monitored ] 1. Non-interacting
Companies
3. Trusted Members 1. Non-interacting
Companies [ Irrelevant ] [ Irrelevant ] [ Irrelevant ] Business relationship.
Safeguards and contracts
Trust supported by continuous contact.
Few safeguards.
Business relationship.
If membership desired, contracts are relaxed and
interaction intensified.
2. Interacting Non-members
Business relationship.
If partner might add value to the network,
interaction is encouraged.
[ Monitored ] [ Monitored ]
”Seller””Buyer” 2. Interacting
Non-members
4. Core Members [ Irrelevant ] Business relationship.
If membership desired, contracts are relaxed and
interaction intensified.
3. Trusted Members
Trust supported by continuous contact.
Few safeguards.
Business relationship.
If partner might add value to the network,
interaction is encouraged.
Trust supported by continuous contact.
Few safeguards.
Trust supported by continuous contact.
No safeguards.
The model may seem quite straight forward, but one should understand that a company might/will be interacting with/in more than one network. Empirical investigations show companies obtain memberships in network to varying degrees - from total embeddedness (Core Members) to less so (Interacting Non-members).
Management of Supply Chain Risks
From the description of IA it is evident the management of supply chain risks is not supported. The framework relies on the slow adaptation through interaction, creating an atmosphere of trust and reliance on good intentions. The intentional disruptions and intended exit of a critical supply chain (network) partner is thereby not within scope of IA. For the unintentional risks, the following can be concluded:
¾ Process Risk: Disruptions to the flow of goods in the network are inevitable, but in case of repeated non-performance network partners are expected to offer assistance to solve the problem. Network members are expected to be capable and competent, but circumstances outside the control of the individual members might influence the performance of the member and thereby the entire network. Therefore the network is committed to support the inflicted network members overcoming the difficulties, of whatever nature they might be. The distinct decision of dropping a non-performing network member is not really supported in the framework. Developments within the network are expected to be slow, altering the level of interaction and the controls and safeguards in place. Or alternatively: a non-performing “Core Network Member” might experience a degradation of membership to “Trusted Network Member”
¾ Structure Risk: As mentioned above IA does not relate to the intended exit of a critical partners, but the unintentional (e.g. a bankruptcy) is considered. Network members are expected in the same manner as for disruptions to support the troubled network member. Only in case helping the troubled network member is threatening the entire network member might it be considered not to offer assistance.
In conclusion, IA relies on slow adaptations and the emergence of trust between interacting parties as a precondition for network membership. Intentional disruptions or exits are not considered at all, but non-intentional are dealt with by means of offering assistance in the form of financial, operational or other types of aid. The core texts reviewed do not offer any support to the “strategic management perspective” but insist troubled network members are helped unless the survival of the entire network is at stake.