New Directions in Supply-Chain Management: Technology, Strategy, and Implementation

By Tonya BOONE and Ram GANESHAN

Technology has introduced dramatic new efficiencies to supply chain design, management, and control--but only to those who can open their minds to these new methods and strategies. This book presents innovative articles from eighteen of today's top young Ph.D. scholars, each based on discussions at the 2000 Frank Batten Young Leaders Forum of the College of William and Mary. These ""rising stars"" from the country's most prestigious operations management programs each take a fresh perspective on current practices and future directions in supply chain management and overall business strategy. Provocative yet valuable questions are asked--and answers provided--on subjects including: * Development of effective performance metrics * Techniques to streamline the order management cycle * Methods to leverage product design and manufacture to reduce supply chain costs * Ways to share knowledge throughout an organization concerning forecasts, manufacturing and sourcing plans, and distribution.

• Language: English
• Publisher: Thomas Nelson
• Release date: Apr 17, 2002
• ISBN: 9780814426371

Tonya BOONE

Tonya Boone, Ph.D. (Williamsburg, VA) teaches at the College of William and Mary and is an expert in knowledge management, design, and implementation of IT in supply chains. Ram Ganeshan, Ph.D. (Williamsburg, VA) also teaches at the College of William and Mary, and is co-editor of Quantitative Models for Supply Chain Management.

Book preview

Section I

INTEGRATING NEW TECHNOLOGIES

INTO SUPPLY-CHAIN OPERATIONS

Chapter 1

The Relationship-Technology Interface: A Path to Competitive Advantage

Sandy D. Jap

Massachusetts Institute of Technology

INTRODUCTION

HOW WILL EMERGING, WEB-BASED technologies impact supply chains in the future? The answer to this question carries tremendous stakes. It is estimated that the Internet has the potential to carve more than $1 trillion from the $7 trillion spent annually on components, supplies, and services worldwide (USA Today, 7 February, 2000, p. B1). How this will happen is a top-priority issue in many industries and corporations today. In this chapter, I strive to improve our understanding of this critical issue by developing a conceptual framework for how supply-chain organizations might respond to emerging technologies in order to create competitive advantages. The framework suggests that one means by which buyers and suppliers can jointly improve their competitive position is to learn how to smartly integrate the new technologies into their everyday activities and processes. This can be accomplished through careful consideration of the Relationship-Technology interface.

Throughout the chapter, I use the term relationship to refer to how supply-chain firms organize and coordinate their ongoing exchange activities. The relationship is a form of governance, which is "a shorthand expression for the institutional framework in which contracts¹ are initiated, negotiated, monitored, adapted, and terminated (Palay 1984, p. 265). This is a much broader concept than control, including elements of establishing and structuring exchange, as well as aspects of monitoring and enforcement. I also use the term technology," consistent with other authors, to reflect scientific knowledge applied to useful purposes (Capon and Glazer 1987; John, Weiss, and Dutta 1999; Quinn, Baruch, and Zien 1997). However, I restrict the scope of this term to refer to the new, emerging technologies developed specifically for use on the Internet via the World Wide Web. While there has been an explosion of new technology in this domain, there has also been some confusion and misunderstanding around the role of these technologies in supply-chain activities.

In this chapter, I contend that part of this confusion can be displaced by the recognition that there exists an interdependence between the ongoing exchange relationship and emerging technologies that can and should be systematically understood and managed. To some degree, this may explain why we witness starkly different outcomes among firms who attempt to incorporate new technologies in their supply-chain activities. Consider the scenario of a firm utilizing the Web as a low cost channel for reaching new consumers. On one hand, there are examples such as Herman Miller (HM) and its contract dealers (Garner 1999). HM, known for its high-end, ergonomic office furniture, typically sells its premium cubicle systems to major corporations under big contracts at volume discounts. In 1998, the company began to reach out via the Web to individual customers such as telecommuters, freelancers, and small business owners. After a communication and education campaign, HM successfully convinced all of its network dealers (its most strategic dealers) that the Internet channel reaches new customers without eroding the dealers’ existing customer base. The dealers realized that the handling and selling costs for these users did not justify the margin on the purchase, so dealers didn’t mind that the online store pursued these customers, because their real focus was serving the major contracts. Thus, HM was able to successfully utilize the Internet as a means of reaching new customers and growing sales.

Now consider the case of Compaq Computer, who attempted a similar strategy, but experienced very different outcomes (Fortune, 6 September, 1999). In an attempt to take business away from Dell, Compaq created a unique set of business-oriented Prosignia computers for Internet-only sales and targeted the small and medium-size businesses, which weren’t their dealers’ primary sales focus. It also created a way for the dealers to profit from Internet referrals. However, the dealers viewed Compaq’s activities as a sign of indifference toward their role and ultimately shunned selling any Compaq PCs, which had a crippling effect on the company for several years.

In both cases, the suppliers intended to use the Internet to reach new customers without cannibalizing the sales of their existing distributors and yet the firms experienced very different outcomes. I hypothesize that these differences may be the result of the type of relationships that were in place at the time the Web-based efforts were developed. HM and their dealers had a history of cooperatively working together to cover the costs associated with a customer’s customization preferences. Together, they had crafted customer-specific access into HM’s intranet to reflect the customer’s business processes, volume pricing, and product preferences. On the other hand, Compaq’s relationships with its dealers were historically contentious, with Compaq attempting power plays on the dealers. When it introduced the Prosignia line, Compaq began to deal in a more rigid fashion with the dealers, requiring them to adhere to minimum price rules and provide additional services. Thus, it may be that the types of relationships that were developed in these supply chains created a backdrop from which these chains viewed and responded to the opportunities created by new technologies.

In some cases, the relationship context facilitated their ability to adapt to and value the potential opportunity created by the Web, while in other cases, the relationship context impeded their ability to embrace the opportunity for progress and support the change. This is why I contend that the ongoing relationships of buyers and suppliers and the decision to invest in and utilize new technologies are interdependent variables in the management of supply chains. The successful deployment and utilization of Web-based technologies is systematically related to the type of relationship that has been developed in the supply chain. This implies that the relationship context should be a strategic consideration in the firm’s decision to make supply-chain investments in new technologies. By understanding the interface between the relationship and emerging, Web-based technologies, buyers and suppliers can improve their competitive position and better exploit the opportunities that these technologies offer.

In the pages to follow, I describe the possible specifications of the interface between relationships and technology (see also Figure 1.1): (1) Relationships → Technology, (2) Technology → Relationships, and (3) Relationships ↔ Technology. I discuss related theoretical research in progress and experience with firms who are creatively exploiting the interface of these two variables. The chapter begins with a review of the relevant literature on the development and management of supply-chain relationships for competitive advantage and then describes how a systematic understanding of the relationship-technology interface might be leveraged. A discussion of the implications for management and directions for future research concludes the chapter.

FIGURE 1.1The relationship-technology interface.

SUPPLY-CHAIN RELATIONSHIPS AS COMPETITIVE ADVANTAGE

During the 1990s, there was a growing recognition that long-term, cooperative exchange between buyers and suppliers offered significant opportunities for firms to jointly create and achieve extraordinary financial performance. The marketplace was replete with examples of this. Baxter Healthcare Corporation works closely with hospitals on storing and distributing supplies to and within a hospital. By focusing on the creation of optimal inventory levels and non-price benefits, both parties receive several valuable outcomes—the hospital gains reduced inventory investment and operating costs, while Baxter receives increased revenue, market share, and customer loyalty. Similarly, in 1986, Xerox worked closely with their suppliers to develop customized processes and components that reduced their copier manufacturing costs 30 to 40 percent. In turn, the suppliers received sales and volume guarantees, an enhanced understanding of their customers’ needs, and a strong position with Xerox for future sales. Hence, the nature of a firm’s relationship with other organizations in the supply chain is a strategic choice, worthy of study in its own right. The supply-chain relationship can have a profound impact on the implementation of marketing programs (Ruekert, Walker, and Roering 1985), product differentiation (Porter 1985), and can serve as a barrier to entry into a particular market (Reve 1986).

More recently, these relationships have come to represent a significant source of long-term competitive advantage (cf., Dyer 1996; Dyer and Singh 1998), a critical resource of the firm to be systematically leveraged. In an industrial supply context, competitive advantages are defined as strategic benefits gained over competing dyads that enable the dyad to compete more effectively in the marketplace (Sethuraman, Anderson, and Narus 1988). In the Resource Based View (RBV) of the firm framework, there are four theoretical conditions that underlie the achievement of competitive advantages: (1) resource heterogeneity, (2) ex-ante limitations to competition, (3) ex-post limitations to competition, or causal ambiguity, and (4) imperfect mobility. These characteristics also create the backdrop for the attainment of competitive advantages in interorganizational relationships. These conditions are briefly reviewed and its relevance is discussed in an industrial supply context.

Resource heterogeneity refers to the resource bundles and capabilities that underlie production in a firm (Barney 1991). These resources have varying levels of productivity efficiency that enable firms to produce more economically or better satisfy customer demands than their competitors. When these factors are inelastic in supply and insufficient to satisfy demand, then the low-cost firm will earn supernormal profits in the form of rents to their scarce resources. Other high-cost firms will breakeven. This is known as the Ricardian rents argument (Ricardo 1817; Rumelt 1987). A key aspect of the argument is that the superior resources remain limited in supply. This allows efficient firms to sustain their competitive advantage as long as the resources cannot be expanded or freely imitated by competition. Pralahad and Hamel (1990) note that core competencies that are enhanced as they are applied (that is, those that involve collective learning and are knowledge based) contain natural learning trajectories that also serve as a basis for competitive advantage.

In supply-chain relationships, buyers and suppliers bring together unique competencies in differing functional areas. These competencies may involve learning curves and differing levels of efficiency. When they are combined, the dyad gains access to critical resources that enable the creation of superior value in the marketplace. The more unique the combination of capabilities and the more inelastic the supply of the joint capability, the greater the potential for generating supernormal returns relative to competing dyads. For example, suppose a computer chip manufacturer and a car manufacturer consider the possibility of developing a chip that optimizes the performance of a new car. The chip manufacturer possesses chip design capabilities while the car manufacturer has car production capabilities. The heterogeneity of capabilities along with the inelasticity of supply of these capabilities allows for the creation of a unique, joint competency (that is, car-chip optimized capabilities). This competency serves as the basis for superior product offerings to downstream customers.

Ex-ante limitations to competition means that there must be limited competition for a particular resource position prior to any firm’s establishing the position. Barney (1986) contends that economic performance depends not only on the returns from various strategies, but also on the cost of implementing the strategies. Imperfections in strategic resource markets, where the necessary resources for implementation are acquired, enable the creation of supernormal returns. Without these imperfections in the markets, firms can only hope for normal returns. Rumelt (1987) argues that unless there is a difference in the ex-post value of a venture and the ex-ante cost of acquiring the necessary resources, the entrepreneurial rents are zero.

The car-chip collaboration between the two manufacturers may be an area in which there is limited competition. In the car market, there are many ways in which car manufacturers can create new customer value and earn supernormal rents. Some might offer better designs, lower costs, more efficient distribution, and so on. Each car manufacturer may choose one or more of these bases by which to differentiate its competitive offering. Since each manufacturer is heterogeneous in its ability to exploit or access these resources, the potential for competitive advantages is created. In the previous example, the design of a unique microprocessor that optimizes the performance of a new car is just one of many possible ways in which a car manufacturer may compete in the industry; hence, competition for this position may be limited or even unrecognized as a possible basis for competitive strategy. In order for competitors to duplicate this advantage, they would have to collaborate with the chip manufacturer or some other chip manufacturer and have similar capabilities for exploiting the joint competency.

Ex-post limitations to competition is the notion that once a firm is able to gain a superior position, there must be barriers to competition for the associated rents. The work in this area has focused on two forms of ex-post competition: imperfect substitutability and imperfect imitability (Barney 1991; Reed and DeFillippi 1990). Substitutes erode rents by making demand more elastic. Much greater attention has been paid to the concept of imperfect imitability. This is the notion that competitors have difficulty imitating the resource stream and eroding the firm’s rents. Lippman and Rumelt (1982) call this causal ambiguity, which prevents would-be imitators from knowing exactly what to imitate or how to go about it. Other similar mechanisms include producer learning, switching costs, reputation, search costs, or others barriers to entry.

Relationships between supply-chain members are particularly amenable to ex-post limitations to competition because it is very difficult for competitors to observe and duplicate the efforts and activities of the dyad. Returning to the car-chip manufacturer example, the development of a unique microprocessor is an elaborate process involving considerable specific, tacit, and complex information. In order for competitors to erode the rents that result from these efforts, the competition must be able to observe and easily duplicate the dyad’s interactions and collective functioning. They must understand the causal structure of activities, communication, and work processes occurring within the dyad that creates the basis for competitive advantage. This is a very difficult thing to accomplish.

Imperfect mobility refers to resources that are not easily traded; they are more valuable within the firm than in other firms. This includes resources that are ill-defined or non-fungible. Ill-defined resources are those for which there are no well-defined property rights. Examples of this may include customer loyalty or supplier trust. Non-fungible resources are those whose value is derived within a specific context; its value is not transferable to alternative relationships or firms. These resources may be tangible (for example, capital equipment, manufacturing facilities) or intangible (for example, human resource capabilities, specific technologies, and know-how). Teece (1986) describes co-specialized resources as another case in point. These are resources that have higher value when employed together than when employed separately. When co-specialized or non-fungible resources have few other equivalent uses or value outside the firm, then they are imperfectly mobile. These resources have less value outside the firm; hence, they are not readily bid away, remaining bound to the firm and available for use over the long run.² This provides a basis for competitive advantage.

In the car-chip manufacturer example, the unique microprocessor that is developed between the firms is a non-fungible, co-specialized resource that enables superior value over competitive offerings. In order for competitors to generate the same offering, they must work with the chip manufacturer or a competing chip manufacturer to develop another unique microprocessor that is optimized for their cars. This can take considerable time, energy, and effort to accomplish and may ultimately be imperfect. In the meantime, the rents of the original car-chip dyad and unique microprocessor are preserved.

In sum, supply-chain relationships are particularly amenable to the generation of competitive advantages, because (1) the buyers and suppliers are heterogeneous in their resources and capabilities, (2) they can identify joint positions for which there may be limited competition, (3) their activities are difficult for competitors to observe and duplicate, and (4) the creation of specialized, idiosyncratic investments between them enables a distinct advantage over competitors that can be realized into the long term. By moving away from arms-length exchanges and specializing their relationships through idiosyncratic investments, knowledge exchange, complementary competencies, and more effective governance mechanisms, supply-chain members can create the potential for earning competitive advantages (Dyer 1996; Dyer and Singh 1998).

One shortcoming of the work in the RBV literature is that it rarely explains how the resources of the buyers and suppliers work together to create competitive advantages. In my dissertation work, I extend the work of Dyer and his colleagues by testing a longitudinal explanation of how collaborative processes operate at the boundaries of the firm to expand the pie of benefits for both parties in an exchange (Jap 1999). In this study, I develop a longitudinal survey based on prior fieldwork with manufacturing purchasing managers from various industries. I then collect data from over 220 industrial buyers and suppliers reporting on their joint relationships. I model the impact of environmental uncertainty, complementary capabilities of the firms, goal congruence, and interpersonal trust, on the dyad’s coordination efforts and specific investments. I estimate the effects of these efforts and investments on the dyad’s achievement of competitive advantages and profit performance one year later.

The results indicate that environmental uncertainty motivates suppliers to form collaborative exchanges with buyers, and motivates the dyad to create binding, relationship-specific investments. Sociological factors such as goal congruence and trust between individual boundary spanners facilitate coordination efforts of the firms, while complementarities in the firms’ capabilities are a powerful incentive for joint coordination efforts and investments. These coordination efforts and investments enable the dyad to achieve advantages over competing dyads and improve their profit performance up to one year later.

Until this point, the research literature on interorganizational relations in marketing has been primarily descriptive, relying on cross-sectional surveys to identify characteristics of successful relationships and relating these characteristics to organizational structure, from the perspective of an individual firm. Rarely has the perspective of the dyad or the direct impact of their activities on performance been considered. My results provide insight into the conditions that facilitate collaborative efforts and motivate the creation of relationship-specific investments between two exchange parties. The results also demonstrate the sustaining payoff power of the dyad’s efforts and investments over time.

My subsequent work in this area reflects the formation, development, and dissolution of long-term, close relationship structures as a complex, phenomenon that can and should be systematically understood. This interorganizational process represents a system resource of the firm—a system resource is a complicated, socially created phenomenon involving a complex web of direct and indirect links between the organization’s capabilities, investments, and resources that are not easily specified in advance (Barney 1992; Fiol 1991). It involves a learning curve in working together, various skills, and significant investments in time and effort. Its value is derived from its inimitable nature, due to the specific idiosyncracies of the interorganizational relationship and the difficulty by which the collaborative process is easily observed and duplicated by competitors (Dierickx and Cool 1989).³

This does not imply that members of the dyad or competitors could not form similar arrangements with alternative firms. The general process should not change significantly from one partner to the next; however, the specifics of each firm’s goals, capabilities, environmental demands, and human resources, will vary, making it virtually impossible to precisely duplicate. As such, these relationships in the supply chain can facilitate the achievement of sustainable, competitive advantages. These long-term close relationship structures and the ongoing management of them impacts key outcomes such as relationship satisfaction, performance, commitment, and overall relationship functioning. All of these are relevant to the long-term viability of supply-chain relationships.

RELATIONSHIP → TECHNOLOGY INTERFACE

The previous sections make clear that the relationship structure of buyer-supplier chains can systematically impact the mutual success and viability of the supply-chain members. In the sections to follow, I describe the interface between supply-chain relationships and emerging technologies, providing examples of ongoing research and marketplace examples of how these two aspects may work together to create competitive advantages. I begin with the notion that the nature of supply-chain relationships will impact the degree to which the members are able to leverage the technology investments between them. In other words, a deep understanding of the ongoing processes and activities of supply-chain relationships should guide the use of new, emerging technologies in order to improve the joint value of the supply-chain members and create competitive advantages.

To this end, I am currently involved in a study that seeks to identify critical problem-solving processes and hardwire these processes into the supply-chain structure. This project, which Rebecca Hamilton and I have dubbed web-enabled collaboration, considers how cross-functional teams generate options for mutual gain. This is both a negotiation and creative process, as tradeoffs often must be made among the parties’ interests as their joint payoffs increase. In this research, we examine how the process used to generate options influences the degree to which other team members’ interests are addressed by the options suggested.

For example, generating options in a group forum may lead to a wider range of options that reflects the interests of other members (cf., Hamilton 1999) than a private process. In a group forum, the members can make multiple offers simultaneously in order to create integrative agreements. This allows the members to communicate acceptable tradeoffs to others, signal flexibility, and collect more information about the other members’ interests (Bazerman and Neale 1992). Additionally, taking the perspective of other parties might also heighten the array of joint options relative to a private process because it puts people into problem-solving mode (Pruitt and Carnevale 1993) and leads to fairness judgments that favor others more (Drolet, Larrick, and Morris 1998).

The goal of this research is to determine the quality and range of options generated from these processes and to provide insight into when these option-generating processes should be used with various types of problems. Once identified, these processes can then be programmed into the interface of collaborative groupware, so that they might become a regular part of the ongoing interactions of supply chains. In this manner, key relationship processes—the regular identification of mutually beneficial options and solutions—can be built into the supply-chain infrastructure via Web-enabled technology. This is how relationships, and the processes associated with them, can inform the use of technology to improve the competitive position of relevant stakeholders in the supply chain.

Nordia Technologies is a market place example of how relationship activities can shape the use of technology. Nordia, which is the African term for standing tall, is an application services provider to multinational manufacturing conglomerates. By studying the coordination problems associated with having manufacturing facilities in multiple countries, Nordia has determined that there is a significant need in these firms to provide real-time communication and linkages among the various components of a factory floor: safety, maintenance, operations, engineering, procurement, and so on. Nordia then links the factory floor areas together with the firm’s enterprise resource planning and supply-chain communication systems. The duplication of this process across all the manufacturer’s factory floors around the world creates a communication web from which the firm is better able to share learning, improve forecasts, and facilitate operational efficiencies. By creating a global, floor-to-floor communication system that can interface with other major information technology systems throughout the firm, Nordia has created a Web-based, product offering that is responsive to the ongoing supply-chain and manufacturing activities of the firm, enabling the firm to improve its returns from these activities.

The management of interorganizational conflict is another common process that could be improved by emerging technologies. The National Initiative on Supply-Chain Integration is an example of one organization’s attempt to improve this process through electronic groupware. The founders of this organization reasoned that with better communication and management of expectations, conflicts could be resolved and the long-term buildup of resentment and misunderstanding could be avoided. Supply-chain members were asked to post requests of other members to an electronic space and then the members would rate their satisfaction with the encounter. For example, Jane might post a request directed toward Bob and after Bob responds to the request, Jane rates her satisfaction with Bob’s response and Bob rates how well he thinks he responded to Jane’s request. Their ratings would then be revealed to each other and the two individuals would have an opportunity to work through differences as they occur. In this way, the supply-chain members are able to monitor and manage their expectations of each other and improve the coordination of their activities and efforts through the Web-based technology.

Recently, a financial services firm considered how it might improve its selling process through electronic channels. The firm had thousands of institutional investors with whom it could not afford to develop a relationship through a human sales rep. Yet the firm recognized that the sales from these investors could be grown with an improved service approach. The firm determined that it needed an electronic interface with deep personalization, one that would mimic the suggestive qualities of a sales rep and provide the customer with information about alternative products in the firm’s portfolio. It is important to note that this effort began first with an understanding of the sales relationship process, which then informed the firm’s choice and use of technology.

All of these examples reflect the common theme of first recognizing and understanding the activities and processes associated with relationships and then allowing this to guide the use of technology in such a way as to improve the competitive position of the firm and members in the supply chain. This illustrates the ordering of Relationships → Technology.

Caveats. While these examples may seem relatively straightforward, it is surprising how many firms fail to conceptualize the use of technology in this manner. There are several common mistakes that are made. The first is the failure to carefully map how the relationship process operates in the supply chain to a Web-based technology that is supportive of the process. For example, it may be that a firm determines that the interpersonal relationship between a sales rep and a customer is an important aspect of the selling process. It then invests in creating an intranet that allows the sales rep to post information for the customer on a regular basis. However, the site only allows one-way communication; it may not allow opportunity for customer feedback and may not contain any personal cues, both of which are key aspects of developing interpersonal relationships. In this way, the firm fails to understand what the critical benefits of the interpersonal relationship process are and how those benefits ought to be manifested in electronic interfaces with the customer.

A second common mistake is the failure of the firm to educate and incent its own employees to use the technology. Often, top management makes a judgment that Web-based technologies will be the platform of competition into the future and then makes a significant investment in emerging technologies. The software is deployed to the sales force, but the potential value of the Web-based solution is not demonstrated to them. There is no training beyond a paper manual. And even worse, the use of the technology is not tied to any performance-based or outcome-based incentives. If the sales force is incented to perform sales activities in a specific manner, then the use of Web-based technologies ought to be included and specified in that process. If the sales force is evaluated based on its volume or revenue performance, then the use of the new technologies ought to be traceable to these outcomes. By failing to make the firm’s employees aware of how emerging technologies should be used and incenting them to use it, the firm loses an opportunity to improve its competitive position via these new technologies.

A third mistake is to fail to fully leverage the Relationship → Technology opportunity because of poor follow-through. Consider the earlier example of the financial services firm. One possible evolution is that the firm invests considerable resources into developing an electronic interface with deep personalization and is successful in generating incremental sales volume through cross-selling the institutional customers. The next important step may be human follow up. Hence, it may be that along with tracking the incremental sales through the electronic channel, the firm could also recognize those investors whose purchase patterns are particularly promising and provide these leads to its human sales force. In this way, the firm can further leverage the opportunity that is created through the emerging technologies by using the electronic interface not just as a sales channel, but a screening device for more close, strategic relationships. Many firms fail to execute this last step, not realizing that the complementary electronic and human interaction can be an extremely powerful experience for customers.

TECHNOLOGY → RELATIONSHIP

Another path by which supply-chain relationships and technology become interdependent occurs when the firm’s choice of technology impacts or fundamentally changes how buyers and suppliers coordinate their activities and ongoing interactions. In other words, the Technology → Relationship interface is a critical concern that should also be systematically considered. I am currently trying to understand this ordering of relationships and technology in the context of reverse auctions with a single buyer and multiple suppliers. Many procurement auctions have been dubbed reverse to reflect the fact that sellers bid instead of buyers, and the price falls instead of rises. These online auctions are becoming increasingly popular in many industries and differ from physical auctions in several distinct ways: rapid information sharing and feedback, reduced cost of contact with bidders, compressed negotiation time and preparation, and bidder anonymity. These characteristics significantly impact the dynamics of online auctions, making them fundamentally different from the manual auctions used in the past. As many firms increase their reliance on and use of these auctions, it raises the issue of how these auctions might impact their exchange relationships with suppliers. Essentially, my goal in this work is to inform our understanding of questions such as:

•How will online auctions change the way that buyers and suppliers exchange with each other?

•Do they deliver on savings and how do they affect the supplier’s perceptions and strategic position toward the buyer?

•How do these outcomes differ across various types of bid formats?

•Does the relational impact of these auctions differ for new or current suppliers? In other words, how does relationship history color the way perceptions and strategic decisions are formed?

I consider these issues by examining the impact of these auctions on (1) financial performance (that is, the buyer’s cost savings from the auction), (2) supplier perceptions of the buyer (that is, suspicions of opportunism), and (3) the supplier’s strategic position toward the buyer (that is, willingness to make idiosyncratic investments). This is done via a longitudinal field experiment involving the auctioning of $500 million of purchasing contracts in six product categories in the automotive industry. Three of these auctions used an open-bid format and the others used a sealed-bid format. The results indicate that the use of these auctions has three effects. First, the savings incurred from an open-bid format where the suppliers have an opportunity to view their competitor’s bid and respond to it is greater than the savings incurred in a sealed-bid format. Second, the open-bid format exacerbates the supplier’s beliefs that the buyer is acting opportunistically toward the supplier. Third, the supplier’s willingness to make specific investments toward the buyer is increased in a reverse auction, as suppliers desire to improve its competitive position and gain bargaining power with the buyer through enhanced value offerings. Thus, we see that the buyer’s decision to use Web-based technologies can systematically impact its relationship with suppliers and fundamentally change how they organize themselves and coordinate activities between them.

In the marketplace, ECumulate.com is an example of a Web-based firm whose business model will fundamentally change the structure and organization of activities in a supply chain. ECumulate.com aggregates the purchases of small, fragmented customers and then puts the volumes out for bid in a reverse auction. It then coordinates with the distribution channel for product delivery to the customers. In this manner, the company exploits the contact and reach efficiencies offered by the Internet to increase sales and improve service efficiency of managing a highly fragmented customer base. Suppliers are able to reward their preferred distributors with incremental volume, while distributors gain sales and service efficiencies. Customers experience significant gains on the large purchases they make on a routine basis. Thus, ECumulate’s use of technology fundamentally changes the supply-chain structure of an industry and improves the returns and efficiencies of all the supply-chain members. This is yet another example of how emerging technologies can impact the structure and activities of the supply chain.

Caveats. While these are ideal scenarios, there are ample opportunities for poor understanding and execution of the Technology → Relationship interface. The first common mistake is the failure to carefully consider the long-term effects of deploying Web-based technologies into supply-chain relationships. All technologies are not created equally harmless. For example, online auctions have become extremely popular, as they promise (and deliver) immediate, short-term savings into the buyer’s pocket. However, many firms have become fixated on these immediate savings without realizing that there may be long-term tradeoffs that are implicitly being made with each online auction that they conduct. If the supplier continues to suspect the buyer of acting opportunistically via these auctions and this belief crystallizes in the long run, it can have a detrimental effect on the performance and overall functioning of the relationship (Jap and Anderson 1999). Moreover, if the price in the supply base continues to drop and suppliers are unable to sustain this pricing pattern, then they will either exit the industry or consolidate, in which case the buyer may lose viable alternatives and even worse, face a very powerful supplier in the long-term.

The second mistake is to fail to see and capitalize on the opportunities created by new emerging technologies. For example, my research on auctions indicates that the suppliers are willing to increase their dedicated investments toward the buyer. This is a powerful signal of their desire to commit to a long-term exchange with the buyer. By coupling this willingness with joint coordination efforts and reciprocal investments, the buyer can leverage this opportunity to form close relationships with its suppliers and expand the pie of benefits for themselves and their suppliers (Jap 1999). However, many buyers may fail to capitalize on this opportunity to jointly create incremental value through their supply-chain relationships after deployment of these auctions in their sourcing activities.

The third mistake that many firms make is to fail to carefully consider how the new technologies will change the incentives for each player in the supply chain. This was a critical issue for ECumulate.com. In order for the firm to introduce itself as a viable player in the supply chain, it had to have a deep understanding of the needs, goals, dynamics, and incentives of suppliers, distributors, transportation providers, and customers in the existing network. Then it had to carefully consider what incentives each of these players would have to interact with or support the value that ECumulate offered through its Web-based model. Company executives studied the stakes of each player and carefully formulated a selling proposition to each player. It then had extensive discussions with suppliers, distributors, transportation providers, and customers, to educate them on the value of their new model. This took considerable time, effort, and energy, but was a critical step for the company. The failure to do this would have jeopardized any possibility of the firm’s future existence.

Managing and exploiting the Technology → Relationship interface is a complex task, primarily because it typically involves the execution of a business model for which there are no existing standards or common practices. It involves creative thought and careful consideration of the unknown, which is difficult to do. It is often impossible to predict how new business models will impact the incentives, value-added activities, and strategic positions of other interdependent organizations in the supply chain, yet this is a critical step in leveraging both relationships and technology in organizational networks.

RELATIONSHIPS ↔ TECHNOLOGY

Until this point, I have primarily considered unidirectional orderings of how relationships and technology may be related, for the sake of simplicity. The reality is that their relation is not recursive, but is in fact, nonrecursive. They are reciprocal processes that may occur in both directions over time. It is critical that firms understand this and recognize that it is not sufficient to consider only one direction of Relationships ↔ Technology; both directions should be systematically considered.

Consider the example of the Web-based firm, Channelwave. This firm began with understanding a critical organizational process. It discovered that more than 50 percent of the sales leads that enter into the firm fail to reach an individual who is capable of acting upon it. So they produced a Web-based solution that improves the lead tracking process and insures adequate follow-through of each opportunity. This is the Relationship → Technology ordering. The next step is to then consider the Technology → Relationship effects. How does the Web-based solution fundamentally impact the firm? Can it be extended to interorganizational contexts and if so, how does it affect the incentives, satisfaction, and long-term expectations of the players in these chains? Following this should be an ongoing consideration of how the relationship process has evolved and what opportunities are created that can be further exploited by emerging technologies. This is the Relationship → Technology effect, revisited as a future iteration. In this way the interdependence that exists between supply-chain relationships and technology can be systematically considered and exploited, so as to create and sustain mutual, sustainable competitive advantages among supply-chain members over time. While many firms may consider the unidirectional effects of relationship-technology, it is a more complex task to examine and consider it systematically as technologies, supply-chain activities, customer demands, and competitive environments change over time.

The Relationship-Technology interface is a path to the achievement of sustainable, competitive advantages in the supply chain. The theoretical writings of Barney (1986) and Dierickx and Cool (1989) and my empirical work on collaboration (Jap 1999) collectively indicate that the successful implementation of a strategy that achieves or protects a privileged market position may require nonappropiable and idiosyncratic investments. Nonappropriable assets include the intangible aspects of relationships that are cultivated over time and not easily acquired in open markets: loyalty, trust, coordination processes, commitment, and a solid reputation. Idiosyncratic investments are differentiated inputs, which allow supply-chain members to achieve a unique competitive position and enable them to provide product and service offerings for specific purposes. When technology offerings are customized to support a specific supply-chain relationship, the technology becomes idiosyncratic to the firms and there remains a potential for creating unique value. It is the creative intermingling, or customization of the intangible aspects of relationships with emerging technologies that can enable the supply chain to achieve a unique market positioning and allows them an advantage over competing supply chains.

How are these positions of advantage maintained over time? There are several dynamics that contribute to their preservation, including the passage of time, the achievement of success, the reduced cost of maintenance, the complementarities of activities and investments, and the difficulty of external identification and imitation of the relationships between these factors (Dierickx and Cool 1989). The passage of time in supply-chain relationships reflects the fact that some benefits can only be accrued over time and cannot be compressed into a shorter period with the same effects. For example, maintaining a given rate of technology spending into a supply-chain relationship will produce more Relationship-Technology know-how than maintaining twice this spending over half the time interval. In other words, the learning that is accumulated over a one-year effort is not equivalent to a two-year effort, even if all of the necessary inputs are doubled. As supply-chain members achieve success in one aspect of the Relationship-Technology interface, for example, Relationship → Technology, then they are in a better position to evaluate and exploit the Technology → Relationship effects, which now provide opportunity for further breakthroughs to add to their existing Relationship-Technology know-how and strengthens their joint position.

As experience and learning is accumulated in the supply-chain interface, the value of this will decay over time. However, the costs of maintaining the efficiencies that are gained over time are much lower than earlier in the relationship when the firms are still learning each other’s needs, goals, objectives, and contemplating how to best work together. In the initial stages, there is more uncertainty about the future direction of the relationship and the firms may need to spend significant amounts of time, energy, and effort in determining how to best structure the exchange between them. The interconnectedness of relationships and technology creates a more complex process for managing and coordinating the activities of supply-chain members. However, the complementarity of these two aspects together creates a unique source of differentiation that is difficult for competitors to observe and duplicate. Indeed, as the supply chain systematically exploits the Relationship ↔ Technology interface, it becomes virtually impossible to duplicate the intangible and idiosyncratic investments in this exchange and to interconnect and organize these in such a way as to exactly imitate and duplicate these aspects. The competitive advantages that are created within the exchange interface between a buyer and supplier is a function of the unique characteristics of each firm, their efforts together, and the natural dynamics of how relationships, learning, and resulting know-how develop with the passage of time.

IMPLICATIONS FOR MANAGEMENT

The purpose of the preceding discussion is to highlight the interdependence that exists between supply-chain relationships and emerging technologies. This means that the firm needs to carefully consider how it uses and deploys technology as well as its long-term and short-term effects in the supply chain. This