P1: IML/FFX P2: IML/FFX QC: IML/FFX T1: IML
WL040-44 WL040/Bidgolio-Vol I WL040-Sample.cls September 14, 2003 18:8 Char Count= 0
404 SUPPLYNETWORKS:DEVELOPING ANDMAINTAININGRELATIONSHIPS ANDSTRATEGIESto left (clearly, there will be many situations of overlap),
have increasing degrees of commitment. Below the line
the legal status can be viewed. Again, we have the situation
where to one extreme we have ownership and to the other
we have a market transaction. Differing arrangements are
then depicted (moving from right to left) as the legal obli-
gations become more onerous and long-term. We need
to consider some of the forces driving decisions regard-
ing whether to retain activities in-house (make) or rely on
market transactions (buy).Reasons for Adopting a Particular
Network Relationship
First, management and organizational theory is subject to
a number of trends—the operations management field is
no exception. As we have seen, operational focus to retain
scale and experience benefits was an extremely effective
strategy before the need for greater variety. At this time,
it made sense to retain activities in-house and to exercise
control over core competencies. As demand for variety
increased, firms began to realize that it was impossible
to maintain expertise in everything. Better efficiency and
operational effectiveness could be achieved by concentrat-
ing on a few core capabilities and outsourcing the rest to
experts in that particular field. This has proved a popu-
lar strategy and one that was aggressively pursued for a
number of decades. However, at the time of writing, we are
beginning to see something of a reversal. It would seem
that such enthusiastic outsourcing resulted in a loss of
control of some vital functions, leading to higher costs.
Further, it ignored the important maxim that the link-
ages between activities are a key source of competitive
edge.
The second reason for adopting a particular network
relationship concerns a reduction in transaction costs.
The recent trend toward core, “preferred” vendors, in
theory, reduces complexity, increases control, saves time,
lowers transaction costs, and generally allows more time
to devote to a joint partnership.
Third, and closely related to the above, organizations
are now recognizing the value of close linkages in a supply
network. These can be managed by using closer, longer
term strategic alliances with fewer suppliers that can
leverage higher performance in the whole system.Advantages and Disadvantages of Relationship Types
Vertical integration describes the extent to which a firm
owns the network of which it is a part and is, perhaps,
the closest form of partnership relationship. Integration
can be vertical or horizontal and is a strategic move to
secure resources, products, or access to a market. Owner-
ship is not always the sole reason for integration; such
decisions can be taken to increase capacity and to en-
sure the correct network balance. Integration has a num-
ber of advantages: (a) It secures a dependable supply of
goods and services, controlling sources of key materials,
components, or services in-house rather than trusting the
vagaries of the market. (b) It helps reduce costs. A firm
may have the skills, technology, or specialist processes
in-house and can utilize these at a much cheaper rate than
buying such services. (c) It can improve the quality of a
service or product. Specialist knowledge of a product orprocess is kept in-house to protect a unique innovation.
(d) It helps build and advance knowledge of the market.
Ownership of certain activities will help firms continue
to understand demand and keep in touch with the value
sought by customers.
Many firms will choose less formal supply network re-
lationships and will tend to prefer to rely on market-based
transactions due to the following disadvantages: (a) It cre-
ates a monopoly market. Customers may be faced with
little choice as prices increase and service and/or quality
decline. (b) It creates an inability to exploit economies of
scale. Use of specialist suppliers dedicated to a particu-
lar product or process will offer economies of scale be-
cause they can produces higher volumes and, thus, lower
prices. c) It creates a loss of flexibility. Heavily integrated
firms will be committed to particular investments in re-
sources and technology—they will have difficulty chang-
ing direction and offering different products and services
if market forces alter. (d) It creates a lack of innova-
tion. New product and service flexibility can be reduced,
as the firm may have heavily invested in certain activi-
ties, processes, and technologies, as part of an integra-
tion move, and may find it hard, both economically and
emotionally, to justify a switch in direction. In addition,
the firm will also lack the creative input of suppliers and
customers. (e) It creates a distraction from core capa-
bilities. The more integrated a firm becomes, the more
activities it will have to undertake—needing to be “all
things to all people”—thereby neglecting its core com-
petencies, which are a key determinant of competitive
advantage.
Table 2, summarizes how different types of external
supply network relationship involved differing implica-
tions.Components and Classification of Supply
Network Relationships
In general terms, a supply network relationship can be
conceptualized as containing three main components
(the degree of emphasis placed on each will differ, de-
pending on the situation and the purpose of the rela-
tionship).Strategic business components: The strategic expectations
and longer term objectives sought by the relationship.
Operations strategy components: Medium- to long-term as-
pirations and decisions regarding the capabilities of
the network at an operational level.
Operational components: The tactical, operational activi-
ties that firms in a network are required to undertake
to provide products and services.The Benefits of a Supply Network Perspective
Increasingly, especially in fast-moving consumer sectors,
operations and their accompanying strategies must be
viewed from a network relationship perspective. This has
a number of strategic implications. The first is knowl-
edge. Thinking at a network level encourages a broader
perspective regarding the supply system. This builds
strategic thinking beyond the firm itself and its im-
mediate suppliers and customers. The interconnections,