Organization Viewpoint of Supply Chain

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The Journal of American Academy of Business, Cambridge * Vol. 14 * Num. 2 * March 2009

181

Organizational Viewpoint of the Relationships in Supply Chains

Dr. Vojko Potocan, University of Maribor, SloveniaABSTRACT

In modern working relations, a company can improve its business dramatically, especially with formationand performance of suitable management. An important role in the whole management of a company also presentssupply chain management (SCM), which represents the integrated concept of managing across the traditionalfunctional areas of purchasing operations and physical distribution. SCM can be defined as “managing the entirechain of raw material supply, manufacture, assembly, and distribution to the end customer.” One of the mainconcerns about SCM is how much of the supply chain (SC) should be owned by each business. This is called theextent of vertical integration. But in the modern business environment, vertical integrations alone are not enough.The alternative to vertical integration is some other form of relationship, not necessarily ownership. In our contribution, we will examine the relationship between the links of the SC in terms of the flows between theoperations involved. These flows may be transformed resources such as materials or transforming resources such as people or equipment. The term link to include all the different types of flow is exchange. This contribution discussestwo theses: 1) How (different) relationships in supply chain impact organizing the SC and SCM, and 2) How(different) organizational forms impact SC and SCM.

Key words

: Organization of management, organization of supply chain, relationships in supply chain, supply chainmanagement.

INTRODUCTION

Organizations in modern environment are able to assure their existence (and long-term development) withthe entire satisfaction of needs and demands of end-customers. Producers can be competitive on the market (becauseoffers predominate over demands) when they offer suitable price, quality, range, uniqueness, and contribution tosustainable development (as judged by customers) (Fly, Stoner, 2000; Cole, 2004; Potocan, 2004; Barry, Hansen,2008). For this reason they are confronted with the constant dilemma, how to re-form their work (and behavior) toreach the desired target results. Entire and suitable (this is efficient and successful) organizational work can beassured on the following basis: permanent dynamic adaptation of intentions and aims, use of suitable businessconcept and innovative work (and behavior) (Tsoukas, Knudsen, 2003; Potocan, 2007; Barling, Cooper, 2008).Entire and innovative (understanding) forming and performing purchasing operations and physicaldistribution also have an important role in business (Nigel, 1996; Mentzen, 2001; Potocan, 2004; Hill, 2007). Theydefine the (possible) level of suitability when assuring the needs (and demands) of end users. The use of logistic andmaterial management in an organization enables (partly) improvement of work, but not (also) “optimization” of thewhole production process of products and/or services (in which more organizations collaborate). To deal with thewhole supply process many different integrated concepts of managing across the traditional functional areas of purchasing operations and physical distribution were developed (e.g., materials management, merchandising,logistic, supply chain management).SCM presents an ambitious and strategically significant concept, which can be defined as “managing theentire chain of raw material supply, manufacture, assembly, and distribution to the end customer” (Heitzer, Render,2003; Murphy, Wood, 2004; Christopher, 2005; Ketchen, Hult, 2006; Coyle, 2008). SCM is the most developedintegrated concept, but by its use, the organization meets some open dilemmas such as (Potocan, 2007): 1) what sortof connections exist among the part of SC?; 2) what is the role (meaning) of different units (e.g. parts) in the entire(SC)?; and 3) how can we optimize the parts of the entirety (to form structure) to reach “optimal results” of commonwork?Organizations in the modern business environment need the entity of vertical and horizontal integrations(e.g., relationships) if they wish to design and implement more holistic SC (and/or SCM). In this frame, the work of the SC (and/or SCM) participants can be innovated, especially with non-technological innovations, oriented intosuitable organizational forming and organized work (Daft, Steers, 1986; Hatch, 1997; Handfield, Nichols, 2002;Potocan, Kuralt, 2007; Russell, Taylor, 2008).

The Journal of American Academy of Business, Cambridge * Vol. 14 * Num. 2 * March 2009

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Therefore we would like to shift attention from a general-based discussion about SC and/or SCM to a more practical issue: how to plan the organization of relationships in SC (and/or SCM). We offer some new suggestionsabout: development of integrated concepts for management of SC, types of relationships in supply chains, starting points of organizational structure, and organizational viewpoint of the relationships in SC.

INTEGRATED CONCEPTS FOR MANAGEMENT OF SC

They are many different ways in which the linkage involved in the flow of materials and services can beintegrated or grouped together (Pohlman et al., 2000; Rushton et al., 2001; Heitzer, Render, 2003; Hugos, 2006;Slack et al., 2006; Potocan, Kuralt, 2007). Four main concepts will be presented here. These have focused attentionon managing across the traditional functional areas of purchasing operation and physical distribution. They arematerial management, merchandising, logistics, and supply chain management (Waller, 2003; Cohen, Roussel,2004; Larson, Halldorsson, 2004; Blanchard, 2006; Halldorsson, 2007; Johnsson, 2008).

Materials management

: The concept originated from purchasing functions that took account of the importance of integratingmaterial flow in its supporting functions, both throughout the business and out to immediate customers. It includes the functionsof purchasing, expediting, inventory management, store management, production planning and control and physical distributionmanagement. At the time of its inception during the 1970s, material management was seen as reducing “total costs associatedwith the acquisition and management of materials.” Different stages in the movement of material through a multi-echelon systemtypically are buffered by inventory. Where material management is not in place as an integration concept, these different stagesoften are managed by different people, reporting to different senior managers within the organization. The result of this separatefunctional management of the material flow often is high inventory level. The lead time to move materials through the systems islong, the system is inflexible to change, and the whole material movement is difficult to control. Material management meansgiving responsibility for whole materials and information flow to one part of organization. It then becomes possible to makeimprovements that allow the coordination, reduction, and even removal to some intermediate inventories. With reducedforecasting, greater accuracy of schedules is possible, bringing about greater planning stability. All this leads to reduced costs,which was the original intention of the concept.

Merchandising:

In retail operations the purchasing task frequently is combined with the sales and physical distribution task into arole termed merchandising. Merchandising typically has responsibility to organize sales to retail customers, the layout of the shopfloor, inventory management, and purchasing. This is because retail purchase operations have to be linked closely to daily sales toensure the right mixture of goods available for customers to buy at any time.

Logistics:

Logistics originated during World War II when it related to the movement and coordination of troops, armaments, andmunitions to the required location. When adopted by the business world as a concept, it referred to the movement andcoordination of finished products. Many organizations have a logistics function that manages the total flow of finished goodsdownstream from the plant to the customers. Here the term logistic is being used as analogous to what we called earlier “physicaldistribution management.” However, logistic more recently has been extended to include more of the total flow of materials andinformation. Some authors adopt a definition of logistics which is identical to that of materials management. But there are somedifferences between materials management and modern understanding of logistics. Material management does not concentrate onthe physical distribution of finished product, but focused more on the planning and control of the processes inside an operation(including Material Requirements Planning - MRP and Just in Time - JIT). Logistics, on the other hand, tends to treatmanufacturing as a “black box,” but does provide an emphasis on physical distribution management. These differences, thoughnot great, are present because of the background of the two groups that have originated the concepts. The logisticians tend tocome from marketing, the material managers from operation management, particularly purchasing.

Supply chain management:

During the last twenty years, an even broader, more ambitious and strategically significant concept hasemerged - SCM. SCM includes the entire SC from the supply of raw material through manufacture, assembly, and distribution tothe end customer. It includes the strategic and long-term consideration of SCM issues as well as the shorter term control of lowthroughout the SC.

Basic objectives of SCM (Potocan, 2004; Potocan, 2007) are: to focus on satisfying end customers, toformulate and implement strategies based on capturing and retaining end-customer business and to manage the chaineffectively and efficiently. The focus on satisfying end customers is because SCM includes all stages in the totalflow of materials and information and thus it eventually must include consideration of the final customer. The finalcustomer has the only “real” currency in the SC. All the businesses in the SC pass on portions of that end customer’smoney to each other, each retaining a margin for the value it has added. To formulate and implement strategies based on capturing and retaining end-customer business, the key operation in a chain is the strongest business that isin a position to influence and direct the others, so that they work together in the common cause. It also sets thestandards and often determines the design of the infrastructure, such as the information systems used, which thedownstream dealer network must comply with. Managing the chain effectively and efficiently involves taking aholistic approach to open up opportunities for analysis and improvement. For example, in an SC for innovative products or services, the time for a new product to come to market may be critical. Analyzing the chain as a wholeto find out where most time delays currently occur allows the SC manager to focus attention on those “bottleneck” businesses in order to shorten the time to market.

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SCM also can be improved with a suitable organization that enables coordination of cooperation of all participants when satisfying the needs (and demands) of end customers.

TYPES OF RELATIONSHIPS IN SUPPLY CHAINS

The relationship between the links of the SC will be examined in more detail in terms of flows between theoperations involved (Daft, Steers, 1986; Nigel, 1996; Hatch, 1997; Pohlman et al., 2000; Handfield, Nichols, 2002;Daft, 2003; Waller, 2003; Cohen, Roussel, 2004; Murphy, Wood, 2004; Blanchard, 2006; Slack, 2006; Potocan,2007; Coyle, 2008; Jonsson, 2008). These flows may be of transformed resources such as materials or of transforming resources such as people or equipment. The term used to include all different types of flow isexchange. The exact nature of the relationship between the different linkages within the SC can be viewed on acontinuum which goes from highly integrated at one extreme to temporary and short-term trading commitments atthe other.The different relationship types that we will present briefly are: integrated hierarchy, semi-hierarchy, co-contracting, coordinated contracting, coordinated review links, long-term trading commitment, medium-term tradingcommitment, and short-term trading commitment.

Integrated hierarchy:

What is known as an integrated hierarchy is a fully vertically integrated firm that houses allactivities in the SC, from raw material source to dispatch to end customers, as well as all their support activities on one site. In anintegrated hierarchy, there is no inter-company exchange of orders, information and materials because the entire SC is “under oneroof.” Examples of totally vertical integrated chain are rare.

Semi-hierarchy:

In a semi-hierarchy organization the firms in the SC are owned by the same holding company or are part of the same group, but they operate as separate business units. Both integrated hierarchy and semi-hierarchy are examples of vertical integration, as ownership is by the same firm in both cases. In semi-hierarchy, however, there is an exchange process between different organizations where materials, services and money change hands between the separate business units.

Co-contracting:

Co-contracting is a term used to describe an alliance between organizations that have a long-termrelationship (e.g., co-contracting as partnership or lean supply) but which, for various reasons, do not merge but do transfer someequipment (ownership), technology, people, and information, as well as goods and services. These alliances typically do notinclude the whole supply chain. A type of co-contracting receiving significant attention is partnership. In partnership, the supplier is a stakeholder in the customer’s organization. Partnership is a long-term process and should not be viewed as an instant cost-saving exercise but rather as an investment in which future returns are possible but only in the medium to long term. SCMliterature also proposed a model of customer-supplier relationship that moves beyond simple partnership, which it calls leansupply. Whereas in partnership relationship the supplier still is a junior partner in lean supply, both supplier and customers areequal partners. However, the partners do not lose their own legal identity, as by mergers or acquisitions.

Coordinated contracting:

Coordinated contracting involves a prime contractor who employs a set of subcontractors,with whom a long-standing relationship exists over several contracts. They are used on a contract basis of each specific job butthere is no continuing relationship between jobs. In coordinated contracting, the contractor usually provides the specifications andinstructions for the production of goods and services to be exchanged. It may provide materials and usually will takeresponsibility for planning and control of all the subcontractors. The subcontractors often will provide the necessary tools andequipment required for their trade or profession.

Coordinated revenue links:

Coordinated revenue links are used primarily for licensing and franchising and are a formof relationship that transfers ownership to other, usually smaller, firms while still retaining a guaranteed income for the licensor or franchiser. This type of relationship is common in many services, especially those with very high customer contact. Theseoperations need many small local sites that can be located for the convenience of their customers. Rather than manage all the sitesthemselves, the original owners of the service concept will license out each individual operation to separate owners.

Medium-/long-term trading commitment

: It is not uncommon for businesses to trade with each other for twentyyears or more but never exchange formal long-term contracts that legally tie them together. However, where this medium- tolong-term trading takes place, some commitment beyond each delivery of a different type can be made. One example is what iscalled a “blanket order.” This is an agreement for the purchasing organization to buy a total volume over a period of time at a price determined by the total, rather than the individual daily, weekly or monthly purchased quantity.

Short-term trading commitment:

In situations in which there is no interdependence beyond one order, all that istransferred between the parties to the transactions are the order one way and goods and services the other. The agreement isreached after a market search, sometimes competitive tendering, and often price negotiation. Once the good or service isdelivered and payment is made, there may be no further trading between the parties. Short-term relationships may be used when

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