Theories of Supply Chain Management
C.L.Yee
Centre for Research
Universiti Putra Malaysia
january 2010
Abstract
With the rise of supply chain management (SCM), traditional way of managing individual business unit, with little concern for the impact from SCM, is no longer appropriate today. Recent development in the management of supply chain has significant impact on the success of a manufacturer. Thus, in order to sustain competitiveness, manufacturers must always take into consideration supply chain issues and consider various strategic decision options that go beyond an organisational boundary. This paper aims to briefly review some theories of Supply Chain Management. Seven theories are reviewed and discussed. Understanding of these theories enable further work in SCM can be carried out more effectively.
(a) Transaction Cost Economy Theory
(b) Resource Dependence Theory (Network Perspective Theory)
(c) Resource Based Theory (Resource Based View)
(d) Strategic Choice Theory
(e) Stakeholder Theory
(f) Learning Theory
(g) Institutional Theory
(a) Transaction Cost Economy Theory
Transaction Cost Economy (TCE) explaining how a firm should organise its boundary-spanning activities so as to minimise transaction costs. Transaction costs of a manufacturing firm are mainly affected by its expenses incurred through arranging, managing and monitoring transaction activities across organisational boundary (Williamson, 1985).
Previous research works on TCE have basically identified two modes of organising boundary-spanning activities: pure market and vertical integration (Gulati et. al, 2000). In a pure market environment, it is typically cheaper to buy from suppliers because firms are free to trade commodity as low price as possible (Peter, 1996). However, market failure (i.e. transaction cost at prohibitive prices) forces a firm to internalise the production processes even though its production costs are higher than its suppliers. With this vertical integration decision, firm will gain full control over resources, reduce uncertainty and avoid opportunistic behaviour. However firm has to trade off flexibility, and are facing higher risk of technological obsolete and high capital investment (Ellram, 1988).
According to transaction cost theory, without some form of governance mechanism or agreements, organisations in “pure market” environment will always be subjected to risk and opportunistic behaviour (Cannon and Perreault, 1999; Barringer and Harrison, 2000). Buyer can easily terminate the existing supplier and switch to another supplier when the existing supplier failed to meet his requirement (Hoyt and Huq, 2000). On the other hand, this governance mechanism can also help avoid the need for a firm to internalise processes that may not aligned with its distinctive competencies or may be difficult and costly to manage (Bruce and Jeffrey, 2000). In short, these studies revealed that some form of governance mechanism or agreements such as network partnership helps firm to avoid problems in both “pure market” and “vertical integration” but continuously managing its boundary-spanning activities effectively.
The studies of TCE have also discovered that developing inter-organisational relationship is an alternative decision to pure market and vertical integration. Inter-organisational relationships have the capability to improve transaction costs and retain strategic freedom and flexibility of the firm (Macbeth and Chan, 1994).
(b) Resource Dependence Theory (Network Perspective Theory)
Network perspective is based on the assumption that individual firm depends on resources controlled by other firms. The firm gains access to resources through interaction with other firms. According to network theory, a firm’s relations with other firms often constitute its most valuable resource. Access to complementary resources in other firms such as tacit knowledge (also referred to as invincible assets) plays an important role in gaining competitiveness. These invisible assets are often created through external relations and cannot be separated from the partnership. If the network is broken, the invisible assets disappear at the same time. This is the reason why firms are motivated to sustain network relations (Skjoett-Larsen, 1999).
Resource dependence theory explains that firms can gain power through the control of external resources. Firms acquire control over critical resources can decrease dependence to others and increase the dependence of others on them. Resource dependence theory focuses on resources that must be obtained from external sources. Those external sources may be obtainable from suppliers, customers, financial institutions, or even competitors (Bruce and Jeffrey, 2000).
(c) Resource Based Theory (Resource Based View)
A firm’s resources and capabilities include all physical, financial, human, and organisational assets used by a firm to develop, manufacture, and deliver products to its customers. Resource based view (RBV) asserted that rare and difficult to imitate resources can create a sustainable, competitive advantage. From network perspective, resources can be obtained internally or externally. Resources can lead to sustainable competitive advantage only if they are rare, valuable, difficult or costly to imitate, and non-substitutable (Hoyt and Huq, 2000; Skjoett-Larson, 1999).
A study of Japanese auto-makers have discovered that firms need to develop, maintain, and improve its own capabilities to effectively co-ordinate diverse activities both externally with supplier and internally within its own organisation in order to out-perform competitors. Building these capabilities involve long-term efforts, and thus it is difficult for competitors to imitate (Takeishi, 2001). This perspective motivates firms to work closely with its supply network partners to build inimitable resources.
(d) Strategic Choice Theory
Strategic choice theory (perspective) argues that firms pursue partnerships or co-operative agreement to increase competitiveness or market power. There are a number of strategic reasons that motivate partnership formation. For example, partnerships are formed to increase efficiency and market power; to neutralise competitors’ movement; to maximise ability to offer attractive products; to reduce costs; to gain fast access to new technologies and new markets; to gain economies of scale; to share risks of operations that are beyond the scope of the capabilities of a single firm; and to increase competent that are located outside the boundaries of the firm (Bruce and Jeffrey, 2000).
Firm partner with a foreign company as a means of entry into foreign market. The selection of a foreign local partner may be a strictly strategic decision, based upon how this partner can enhance the firm’s competitiveness in a foreign market, rather than on resource dependency needs or transaction costs considerations.
(e) Stakeholder Theory
Network stakeholders are any group of individuals who can affect or are affected by the network. They can be suppliers, customers, competitors, investors, employees, social or governmental agencies. This perspective asserted that network organisation should give simultaneous attention to the legitimate interests of all relevant stakeholders. In other words, network organisations are vehicles for co-ordinating all stakeholder interests. This co-ordination can be a powerful mechanism for aligning stakeholder interests and can also help a firm reduce environmental uncertainty. Two examples of the stakeholder theory are agency theory and stewardship theory. In short, stakeholder theory is based on the rationale that partnership are formed in supply network to facilitate goal congruence among a group of stakeholders (Bruce and Jeffrey, 2000).
(f) Learning Theory
Learning theory is based on the rationale that firms will always try to acquire more technical skills and management techniques to enhance its competitiveness. Learning in term of accessing and acquiring critical information, technical know-how, or capabilities from partner is often stated to be one of the foremost motivation for network formation (Kale, et. al, 2000). There are two important issues in learning theory: exploration and exploitation. Exploration is associated with discovering new innovation, new invention, or new market. Exploitation is associated with increasing the productivity of capital and firm assets through improving existing capabilities and reducing costs. Exploitation is associated with current viability while exploration is pursued to ensure future viability. Both are costly and compete for scare resources. As a result firms often pursue network as a means of sharing the costs of exploration and exploitation with their partners. Besides that, absorptive capacity is defined as firm’s ability to recognise the value of new, external knowledge, assimilate it, and apply it. Firms that have a greater capacity to learn are in better position to form network partnership, and this motivate them to do so instead of others alternative form of strategies (Bruce and Jeffrey, 2000).
(g) Institutional Theory
Institutional theory suggests that institutional environment impose pressures on organisations to conform to social norm. It motivate firms to pursue activities that will increase their legitimacy and cause them to appear to be in agreement with the prevailing rules, requirements, and norms of their business environments. For example, small firms participate in network partnership with a large firm can increase its visibility, reputation, and image (Bruce and Jeffrey, 2000).
Conclusion
Each theory offers a unique perspective on the formation of network. Researchers can be benefited from the understanding of each paradigm when designing their research methodologies, exploring the network situation, and testing their research framework.
In fact, blending all the theoretical paradigms together in the studies of supply chain management provide more complete understanding of the whole environment and thus helpful in guiding research work especially in this cross discipline area.
References
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