A Supply Chain Paradox

A Supply Chain Paradox Anon Li The Univerity of Auckland Department of ISOM, Level 4, OGGB, 12, Grafton Rd, Auckland, New Zealand Telephone: +649 3737599 ext. 83730 Fax: +649 3737430 Email: akt.li@auckland.ac.nz Kambiz Maani The Univerity of Queenland, St Lucia Campu Level 5 Hartley Teakle building St Lucia, QLD 4067 Autralia Telephone: +61 7 3365 4815 Fax: +61 7 5460 1324 Email: k.maani@uq.edu.au Abtract Supply Chain Management i a critical paradigm for ucce in today capitalitic buine environment. Among the numerou upply chain theorie, however, a major theme of collaboration emerge. Should individual buinee in upply chain operate in a winner-take-all mode of capitalitic local optimiation, or hould they collaborate, cooperate, and co-exit a a communal and ymbiotic organiation where individual partner are willing to compromie and even acrifice in order to globally optimie for the whole upply chain? I there ome kind of tance between uch extreme that make better ene? Thi tudy explore the relationhip among upply chain partner through multiple perpective, including ytem theory, ytem analogie, and mini cae tudie. Model and framework developed in thi paper propoe a new reearch interet area in the dynamic of upply chain collaboration. Keyword: Supply chain management, collaboration, operation management, ytem archetype, buine cae. 1

Introduction Supply chain management (SCM) and collaboration i a critical ucce factor in today buine environment. Manager are well aware that, in order to deliver better cutomer value, the whole upply chain incorporating the extraction of raw material to the ale to end uer mut be well coordinated through ucceful collaboration. Thi popular idea, however, i not exactly in-line with mot capitalitic buine philoophie. While upply chain collaboration promote coordinated operation where it partner focu on optimiation at the global level for the whole upply chain, the individual partner are eentially independent buine entitie which inherently trive to maximie it own performance. Thi goe againt general ytem theory, which tipulate that global optimiation at the ytem level may not be achieved when the individual part are locally optimied with their own individual objective. Thi paper explore uch paradoxical phenomenon in upply chain collaboration uing ytem theory, analogie, and cae example. Dynamic of collaboration are portrayed uing ytem dynamic model. The outcome of thi paper hed light upon ytemic collaboration iue at multiple level of upply chain management. The Contemporary Perception on Supply Chain and Supply Chain Management Supply chain management i a popular management concept. Supply chain conit of group of buine entitie that proce, produce, and deliver particular product from it original material through to the point where the final product reache the cutomer. Due to the nature of upply chain, where a multitude of individually owned and operated companie are involved, their management and coordination i critical. Supply chain management (SCM) i generally defined a the management of activitie that procure material and ervice, tranforming them into intermediate good and final product, and delivering the product through a ditribution ytem. (Heizer et al. 2004). Thi illutrate the baic purpoe and nature of upply chain. Definition by other author, including Schroeder (2004), Raturi (2005), Gardiner (2006), Ruell et al. (2006), Krajewki et al. (2007) promoted alo the ignificance of information in upply chain management, that while phyical good and ervice move downtream along upply chain, a reliable flow of information regarding inventory, proce capabilitie and product pecification mut alo be facilitated uptream in order to coordinate the upply chain. A typical decription of a upply chain in action i hown in Figure 1 (Gardiner, 2006). 2

Raw Material Proceor Manufacturer Wholealer ditributor Information flow Product flow Retailer Figure 1 Product and Information Flow in Supply Chain The general concept of upply chain and their management are well complemented by other critical ingredient. Thee include idea uch a coordinating activitie acro the upply chain (Stevenon, 2005), integrated approach for global upply chain and ourcing (Gardiner, 2006), linking the company with the operation of it upplier, ditributor, and cutomer (Bozarth et al. 2006), interconnection of organization and holitic approache (Slack et al. 2007). Thee theorie highlight the fact that even though the buinee along the upply chain are independent entitie, they hould operate a partner who work in a coordinated manner in order to achieve a greater common good for the upply chain a a whole. A Paradox The notion of upply chain and upply chain management poe a paradoxical condition. A upply chain excel and optimie when all it partner are well coordinated to work toward the common goal of delivering the final product to the cutomer, in the mot efficient manner. Thi i the key objective of a upply chain. At the individual company level, all partner are, on their own, independent buinee. The uual key objective of buinee in capitalitic environment i to maximie their gain (profit, ale, market hare). According to ytem theory (Ackoff 1993), however, optimiation of any ytem a a whole i never achievable when all part are locally optimied. In the upply chain context, therefore, optimiation of the chain a a whole i not feaible if the individual buinee are buy maximiing their own profit, ale, and market hare, while working in iolation from the other partner. Supply chain tudie and anecdotal evidence ugget that effective upply chain coordination involve acrifice and compromie from it partner (epecially the maller-ized buinee) which divert their effort from their inherent objective to optimie their own performance. Thee include product deign/pecification impoed by buyer, and updating information ytem to accommodate compatibility with other 3

partner. While buinee are well aware of the potential benefit, mot manager are reluctant to implement uch initiative due to the invetment involved and iue of enitive trade information being expoed. Thu, a paradox emerge. To collaborate, or not to collaborate? That i the quetion. An extreme analogy of uch paradoxe i a people commune in a communit tate, where all inhabitant work (eg. in field and factorie) toward the goal of maximiing output of the commune a a whole. All of the inhabitant are educated about how their contribution to the greater common good i critical, and that everyone get an equal hare of the reward at the end. However, a human being, all individual member of the commune have an intrinic nature of local optimiation, where they perceive that it i only fair to get more reward for harder work, and thu, will tend to refue contributing actively without extra direct reward and incentive. However, one hould not rule out the poibility of individual entitie working toward a greater common good, even when it involve acrifice and compromie. Thi i hown by the analogy of charity. At the individual level, mot people believe in getting a fair reward for their work, and that they hould maximie uch reward. However, charity i a common phenomenon in the modern world where people give up a portion of their hard earned money to upport people in their community. While thi eem contradictory to individual goal in monetary term, mot people would happily participate in charity. (Perhap the participation and knowing that they have made a difference i in itelf a reward to the individual). Thi paper aim to tudy the phenomenon of upply chain management through the len of uch paradox. What are the common view of collaboration in upply chain, and how do the different view impact the outcome? What are the long-term implication of different collaboration approache? Thee quetion are explored uing ytem theory and are further dicued in thi paper. Supply Chain a Sytem Among the literature urveyed in thi tudy, the definition of SCM by Chae et al. (1998) how a very comprehenive decription of the upply chain collaborative nature The idea [of SCM] i to apply a total ytem approach to managing the entire flow of information, material, and ervice from raw-material upplier through factorie and warehoue to the end cutomer. A ytem i defined by Maani et al. (2007) a a collection of part that interact with one another to function a a whole. However, a ytem i not the um of it part it i the product of their interaction (Ackoff, 1993). Thi mean that when a ytem i taken apart it loe it eential propertie and o do the part. When an engine i eparated from a car it loe it function and o doe the car (ie. Motion). A ytem ubume it part and can itelf be part of a larger ytem. Putting thi definition into the upply chain context, the upply chain a a ytem conit of a number of buine entitie (partner), which take the role of the part 4

that interact with one another o that the ytem of upply chain function a a whole. Moreover, the upply chain i not jut the um of all it partner. Intead, the proper functioning of a upply chain depend on it partner interaction. Once the upply chain i taken apart, it loe it propertie, and o do the individual partner. Therefore, it i reaonable to conclude that upply chain, a ytem, hould be managed properly with a total ytem approach (Chae et al. 1998). A total ytem approach may upport management iue from the individual company level up to the interaction among multiple upply chain (individual companie are ytem in themelve, and upply chain can in turn be part of bigger ytem). In the general SCM context, the bai of an appropriate ytem approach may be dicued uing the analogie of the perfect automobile and teenage uperheroe. i. The Perfect Automobile Mot operation management and SCM textbook and teaching ugget that one of the key ucce factor i to ource from quality and reliable upplier, rather than to bae upplier election entirely on cot. In a ytem perpective, however, the effective operation of the ytem i not only about how good the individual part are. The interaction among the part are more important. Conider the following example of a perfect automobile project (Ackoff, 1993), where a car manufacturer want to build the bet car ever, baed on revere engineering. The company acquired every ingle model of car that ha ever been manufactured, and have all of thee car thoroughly teted by engineer. At the end of the teting, the engineer reported that Model X of Brand A ha the bet engine, Model Y of Brand B ha the bet upenion ytem, Model Z of Brand C ha the bet tranmiion ytem, and o on. Baed on thee reult, the deign of the perfect automobile i finalied a a combination of all thee bet part from different model of different brand. It i a brilliant idea to put together all the bet part, but thi project will inevitably fail due to the fact that all thee individual part cannot be put together becaue they were not deigned to work together. The moral of thi analogy in a SCM context i therefore, it i not good enough to jut bring the bet upplier on board. It mut be enured that the partner along the upply chain can interact in an effective manner in order to proper. Thu, the ever o popular idea of collaboration along upply chain. ii. Teenage Superheroe (Power Ranger, Voltron, and other ) Sytem theory, a dicued above, ugget that the ytem a a whole may not be optimied when it individual part are independently optimied (the perfect automobile analogy). That mean, in order to optimie the ytem, ome of it part may have to compromie by performing ub-optimally to facilitate better interaction with other part. Thi counter-intuitive concept i illutrated by the following analogy. Conider children televiion how uch a the Power Ranger and Voltron (Figure 2). 5

Figure 2 Teenage Superheroe - Power Ranger and Voltron 1 Thee teenage uperhero how uually feature a team of five teenager, fighting againt alien evil to protect the planet Earth from harm. While fighting with alien monter, it i typical for the team to ummon their individual vehicle to their aid. Thee individual vehicle will eventually combine to form a robot (uch a the one depicted in Figure 2) which win the fight at the end. The robot, a a ytem, conit of five main part. The head and toro, the two arm, and the two leg. It i through the effective interaction among thee part that the robot win the fight. Notice that the part play different role. The two leg are reponible for movement, and they bare mot of the weight of the robot. The arm are reponible for attack and defence. They do mot of the hard work, and they utain mot damage while blocking blow to the head and toro, which houe the central control of the robot. The moral of thi analogy i that, for the ytem to optimie a a whole, ome of the part may have to work at ub-optimal condition, or to even acrifice their benefit a a compromie for other part. Thi ha alo been dicued earlier in the example of charity. In the upply chain context, one can apply imilar aumption, that even though the individual buine entitie along a upply chain are individual operation, uually with objective to optimie their performance in term of profit, ale, and market hare; there may come time when it i inevitable to compromie their performance for the optimality of the upply chain. An example of thi i een in a tudy by Croon et al. (2005), where a erie of computer imulation experiment howed that inventory information haring i effective in reducing the magnitude of bullwhip effect. Such benefit are only realied when information i hared up-tream. That i, 1 http://www.coloringdrawing.com/coloringpicture/coloringpowerranger/wallpaper-powerranger/wallpaper-power-ranger5.jpg http://www.oafe.net/yo/art/voltron13.jpg 6

when the top of the upply chain ha acce to inventory information of every down-tream operation. Under uch arrangement, general bullwhip effect from thee experiment i ignificantly dampened acro the upply chain (Manufacturer and Wholealer), with the mot benefit going toward the top end of the upply chain. Thi i apparently a good initiative for the upply chain a a whole. However, while the down-tream operation have to give up their information without getting anything in return from up-tream, they do not enjoy much of the overall benefit a well. It i the uptream operation that gained mot information (without having to give out much), and reaped mot of the benefit through their dampened bullwhip effect. The down-tream operation have become the arm and leg of the Voltron robot, where they had to compromie and contribute for the greater common good of the upply chain, without getting much in return at the individual level. Thi gave rie to the idea of equity in upply chain operation, and initiative uch a profit haring among upply chain partner. Collaboration and Optimiation Collaboration i a central theme to effective upply chain management, a dicued in previou ection with reference to upply chain ytemic nature and the ytem approach. In order to facilitate effective collaboration, upply chain partner mut undertand their role a part in the ytem. They mut be ready to interact with the other partner in a ytemic manner, and they may have to compromie by performing ub-optimally at time to facilitate global optimiation at the upply chain level. A urvey of upply chain literature (textbook, in particular) in the pat decade doe how an emerging theme of collaboration in SCM. Partnerhip among upply chain partner are being encouraged, with common tactic including information haring, long-term relationhip, joint deciion-making, planning, and deign. Such tactic hould be baed upon trut and the haring of rik and reward (Schroeder 2004, Raturi et al. 2005, Krajewki et al. 2007, Bozarth et al. 2008, Heizer et al. 2008, Ruell et al. 2009, Slack et al. 2009). Thee tactic and idea, however, are often portrayed in linear context. For example, mot theorie and tudie ugget that long-term buyer-upplier relationhip lead to higher reliability, quality, and flexibility. While thee are credible claim, they lack in detail, including how uch tactic may be implemented to achieve the benefit, and the underlying dynamic of uch implementation, epecially in the long run. A literature example that addre uch hortcoming in theorie i Krajewki et al. dicuion on upplier relation (2007), in which the variou upply chain collaboration tactic were dicued with repect to two extreme mode of buyer-upplier relationhip. A competitive and a cooperative orientation. The competitive orientation view negotiation between buyer and upplier a a zeroum game. That i, whatever one ide loe, the other ide gain. In uch a mode of collaboration, the buyer and the upplier work cloely under uch arrangement. The buyer may force the upplier price down in return for buine opportunitie, while the upplier may pre for higher price for better level of quality and flexibility. The author ugget that purchaing power determine the clout that a firm ha to bargain 7

a better deal. In hort, buyer and upplier in uch relationhip work cloely in an adverarial tance. The ultimate objective for the company with the upper-hand i it optimiation at the local level. In contrat, the cooperative orientation feature buyer and upplier working cloely a partner. Krajewki et al. (2005) highlighted the fact that partner in uch relationhip are helping the other a much a poible with long-term commitment, joint work on quality, and upport by the buyer of the upplier managerial, technological, and capacity development. Under uch arrangement, the number of upplier are often limited, which then give rie to increae in order volume, which allow the upplier to gain repeatability, and thu moving toward high-volume operation at low cot. A cooperative orientation alo mean that the buyer hare more information with the upplier on it future buying intention, thu allowing upplier to make better forecat of future demand. Buyer may alo ugget and ait in upplier improvement, which may reult in future reduction in inpection and quality problem for the buyer. The relationhip theory by Krajewki et al. how a pectrum of different mode of upply chain collaboration, with the purpoe to achieve local or global optimiation. A hown in the example above, collaborative tactic may be implemented in very different manner, and thu reulting in very different outcome. The up-coming ection of thi paper aim to explore uch implementation iue uing two buine cae, followed by a dicuion on the dynamic of different implementation tyle, and their archetypical implication in the long run. 8

The Exploitative and Cooperative Continuum Baed on ytem theory and Krajewki et al. (2005) theory in buyer-upplier relationhip, thi tudy explore the upply chain paradox and the implementation of upply chain collaboration tactic uing a continuum of approache. The extreme of thi continuum are defined a Exploitative collaboration and Cooperative collaboration (Figure 3). Exploitative Collaboration Cooperative Collaboration Figure 3 The Collaboration Continuum. - Exploitative Collaboration The exploitative collaboration approach take the perpective of one particular buine entity in a upply chain, and contemplate from it point-of-view about how it hould collaborate with it upplier and cutomer. The primary objective for thi extreme i to maximie cutomer value through local optimiation. Supplier may compete for order, uually with pricing incentive. Innovation of upplier may alo be exploited, with minimum loyalty (Slack et al. 2009). Furthermore, Ruell et al. (2009) promoted the idea of upplier teamwork, where the ability of upplier to deliver on-demand i conidered important in a upply chain relationhip, with the objective to minimie inventory at the buyer end. Supplier are alo expected to help their cutomer lower product cot by lowering the price of it good and ervice. Other reponibilitie of upplier include upplying information, contributing in deign, fat repone, meeting demand for quality, lowering inventory, and prompt delivery. In hort, upplier in the chain are reponible to upport the end retailer to maximie cutomer value. - Cooperative Collaboration At the other end of the continuum, cooperative collaboration take a more ytemic perpective in managing the two-way relationhip and interaction between upply chain partner. Heizer et al. (2006) in particular dicued in depth about managing upply chain with uch an approach. Central to thi idea i the fact that upply chain activitie happen among eparate and often very independent organization. A a reult, eriou inefficiencie may happen. Supply chain iue hould be handled by managing two-way relationhip between upplier and cutomer. Any partner action hould be mutually beneficial, and that aitance between each other, uch a information exchange, mut be reciprocal (Stevenon, 2005). The primary objective of the cooperative collaboration approach i to facilitate an integrated upply chain. The iue of local optimiation and the member inclination to focu on maximiing local profit or minimiing immediate cot 9

baed on their limited knowledge (Heizer et al. 2006) hould be minimied with a good ytemic perpective on the upply chain a a whole. Example of tactic in thee two approache are dicued below, baed on cae tudie on two companie. Toyota Motor Corporation, a Japanee car manufacturer, and Walmart, an American retail chain. Toyota and Wal-Mart Supply Chain Collaboration Philoophie Toyota and Wal-Mart, different in their background, product pecialtie, and operating philoophie, are both renowned a pioneer in upply chain management, in term of their innovation, trategie, and practice (Ireland et al. 2005, Iyer et al. 2009). Both companie have a common objective to maximie cutomer value and atifaction through effective and efficient upply chain management. There are certain commonalitie and difference between the two companie SCM approache. To tart with, both companie aim to collaborate with it upplier, and thu limit the number of upplier they purchae from. Both companie aim to reduce cot along the upply chain in order to create better value for cutomer, and in order to upport that, both companie promote efficient information haring with it upplier. Looking deeper into thee common apect, however, the approache to achieve thee goal are ignificantly different. The following ection outline example of Toyota and Wal-Mart upply chain management approache, baed on cae tudie of thee two companie. Toyota Motor Corporation The key to ucce in Toyota Production Sytem i the careful management of relationhip along the upply chain. Thi i reflected in Iyer et al (2009) decription of Toyota operating philoophy, where cutomer value and the tability of it upply chain go hand-in-hand. While Toyota aim to maintain tability in it upply chain through limiting the number of variant in it product range, a reaonable level of product value mut be offered to cutomer in order to compenate for the lack of choice. Given the large role played by upplier in Toyota upply chain, uch value creation mut begin at the upplier. According to Tereko (2006), Toyota upplier collaboration target value in both vehicle pre-launch and pot-launch ituation. Prior to the launch of a particular model (about two or three year), upplier collaboration focue on identifying and olving potential problem to the mutual benefit of both partie. Key iue at thi tage are uually focued on product deign. For example, the packaging of new part. Even though a minor iue, getting the packaging deign right in a collaborative manner ave a lot of future cot throughout the upply chain. Conideration in thi apect include how the packaging interface with the upplier proce, product hipment and finally with how the part move into production at a Toyota plant the packaging of a purchaed part can produce winning reult in every venue not only on Toyota aembly line. Such poitive reult encourage Toyota and it upplier to further offer viibility about their operation (Iyer et al. 2009). With higher viibility and 10

clearer information uch a Toyota annual volume goal, both have a better idea about whether plan and target are feaible, and adjutment can thu be made accordingly. A whole different lot of iue in collaborative work urface once the product i launched (Tereko, 2006). The focu at thi tage i on making it eaier and le cotly for the upplier to maintain and even improve that low defect rate for delivered part. Tereko treed that There more value to be gained by collaborating with a upplier than by merely haraing them on cot. Bearing uch an important role in Toyota operation, Toyota upplier are generally carefully choen with a long-term perpective. Choen upplier are met with active upport and other collaborative effort from the car manufacturer. For intance, Toyota objective in upplier management i to minimize the number of upplier and create long-term partnerhip by nurturing exiting upplier to expand and grow with Toyota intead of growing the number of upplier to induce competitive price bidding. (Iyer et al., 2009). Supplier evaluation criteria include aement of management attitude, production facilitatie, quality level, and reearch and development capabilitie. During the election proce, it i not uncommon for Toyota to viit the candidate ite, make obervation, and comment on improvement. A upplier mut meet extremely tough condition to qualify. While ome of the propective upplier are driven away by the tringent requirement impoed by Toyota, other conider that requirement wa to their advantage and held that the advice on improving quality and competitive factor provided by the technician aved the cot of employing outide conultant. Iyer et al. illutrated thi idea with an example of Toyota propective upplier that reulted in a win-win outcome: Toyota aked it potential upplier to provide evidence that they could cut cot immediately with improved deign. One upplier came up with a deign that wa not only cheaper but impler and better than that of Toyota own Japanee upplier. The component wa a imple gear tick knob coting pennie, but the Britih found a way of making it in two platic part intead of four, a in Japan. Given the trict election criteria and upportive advice from Toyota, the upplier undertand that they are entering into a long-term and loyal relationhip with the car manufacturer once they are choen. Supplier are offered table order commitment by Toyota, and in return the upplier are expected to ue thi opportunity to develop uperior quality product and achieve productivity improvement. Such quality and cot improvement are then reflected in improved cutomer value. (Iyer et al. 2009). Toyota manage it upplier and maintain their relationhip with certain policie that provide upport, while at the ame time enuring that the upplier performance are up to tandard. A key trategy i to etablih policie that prevent unilateral action to change volume or commitment. The ue of a conenu approach, fotered by viibility acro the upply chain, minimize action that reult in additional cot at different part of the upply chain. (Iyer et al. 2009). In managing ome of the more important upplier, Toyota would aborb a part of the buine rik or even invet in equity poition in them. An example of thi i Deno, a key electronic upplier of Toyota (Tereko, 2006). 11

In return for Toyota upport, upplier bear reponibilitie other than the baic requirement in term of cot and quality performance and cutomer value. Thee include recapitaliing on order tability to maintain delivery performance and productivity improvement. All upplier to Toyota are expected to hare their innovation with other upplier that upply imilar product. (Thu, being a upplier bring along with it an opportunity to receive idea generated acro the upply network) (Iyer et al. 2009). Amongt the committed upplier of Toyota, many of them carry pecialtie including wide range of patent for pecific procee and the flexibility to adjut for demand change in a timely and efficient manner. At the occaion of problem olving upport, whether from Toyota or from the upplier, peronnel from both partie may dedicate ubtantial period of time (up to month) working cloely together. Such approache tap into the knowledge bae of the upplier network effectively. In term of contract and price commitment, Toyota uually review price with it upplier every ix month, but the contract award i kept in place over the model life. (Iyer et al. 2009). While a long-term contract i offered, upplier are kept under preure to perform. Cot minimiation i a key objective. Thi i uually achieved by practiing efficiency enhancing initiative outlined by the Toyota Production Sytem, including quality improvement, wate minimiation, and jut-in-time delivery. In the cae of major problem in the upply chain, Toyota and it upplier make hort and long term meaure in order to reduce immediate damage, and to maintain the utainability of the olution impact. For example, with an immediate upplier problem uch a a harp drop in profit, expert from Toyota viit the upplier, oberve, and ugget improvement. Such improvement get quick reult but do not enure that the upplier ha imbibed the underlying principle. On the other hand, le urgent or long-term iue call for fundamental olution. For example (Iyer et al. 2009), during the receion in Japan, only three of [Toyota ] main upplier aw profit increae, while 57 aw profit and revenue decreae. Toyota reponded by creating a kaizen promotion ection within it purchaing department. The group worked with upplier to decreae pay and cut invetment and thu enable recovery of lo. In addition, upplier were able to enhance their longterm capability. All of thi work on an informal, peronal level the upplier i permitted to keep the gain from improvement due to Toyota aitance. On the whole, Toyota upplier management approach how key theme of mutual upport, long-term perpective, and the utainability of reult. Stability in the upply chain i critical, in order to promote the focu on creating cutomer value. Wal-Mart Another featured upply chain management pioneer i Wal-Mart, a major retail chain in the USA. Ehring (2006) pointed out that Wal-Mart became the bet upply chain operation of all time by following two fundamental trategie: 1. It leverage it cale in multiple way to create operational efficiencie that drive ignificant competitive advantage. 12

2. It ue it cale to create additional competitive advantage through bet execution and upply chain invetment. Wal-Mart ha alway focued it operating philoophy on cutomer atifaction (Ireland et al. 2005). The chain executive undertood, a early a in the mid 1980, that effective upply chain management and collaboration would enable the company to be more cutomer centric. Benefit for cutomer uch a lower price and reliable delivery can reult from an effective upply chain. Further benefit for the buine uch a cutomer loyalty would thu be within reach. Wal-Mart undertand that if it doe not take care of the conumer, then a competitor will. Wal-Mart managed it operation a an extended enterprie (Ireland et al. 2005), an idea imilar to upply chain management that wa novel in the 1980. One particular focu of Wal-Mart collaboration approach i on information viibility. According to Ireland et al., Wal-Mart challenged the prevailing mind-et about the mitrut and the adverary relationhip between retailer and their upplier. The retail chain undertood that if information uch a point-of-ale conumption and future cutomer demand are hared with upplier, both partie can effectively reduce inventory and other wated activitie, and thu cot could be minimied, and the aving can be paed along to the conumer. Information haring, of coure, i not uncommon among trading partner in buinee in general. However, mot retailer (uch a Kmart), offered operational information for a price (Ireland et al. 2005). Such information i typically ued by upplier a market intelligence that aided deciion about marketing program and promotion. Wal- Mart, on the other hand, provide uch information free of charge to it upplier. For ome major upplier, uch a Procter and Gamble, the extent of information haring went a far a both partie invetment of proprietary knowledge and procee into each other to improve quality and drive cot out of the buine (Ehring, 2006). A quoted by Fihman (2003), a Wal-Mart pokeperon claimed that The fact i Wal- Mart, perhap like no other retailer, eek to etablih collaborative and mutually beneficial relationhip with our upplier. Through it collaboration approach, Wal- Mart aim to improve it upplier performance. The chain make it upplier more efficient and focued, leaner and fater. Wal-Mart itelf i known for continuou improvement in it ability to handle, move, and track merchandie. Le experienced upplier are encouraged and urged to coordinate uch improvement, with the help of a upplier development team, a free reource deigned to enhance their capabilitie to forge enduring relationhip with Wal-Mart manager and buyer. A recent example of Wal-Mart collaborative initiative for coordination and efficiency i it announcement in 2003 that it top 100 upplier mut tag their product cae and pallet with RFID tag. It wa enviioned that all of the mega-retailer upplier will fall under thi directive by the end of 2006 (Boland, 2005). Given the advancement and novelty in Wal-Mart upply chain management philoophie, it approache have met major criticim, epecially in term of upplier relationhip management. For intance, Ehring (2006) pointed out that Wal-Mart i notoriou for leaning on it upplier to drive down price. Fihman (2003) alo claimed that Wal-Mart ha the power to queeze profit-killing conceion from vendor. 13

In order to achieve it objective to maximie cutomer atifaction, Wal-Mart adhered to it promie to offer everyday low price. A a reult, epecially on baic product, the price Wal-Mart will pay, and will charge hopper, mut drop year after year. (Fihman, 2003). Part of uch reduction i of coure achieved by the continuou improvement in it upply chain operation that drive down cot. However, the preure from Wal-Mart toward it upplier to imply reduce price play an important part, and it i not uncommonly heard. Fihman (2003) in an invetigative report, outlined ome of the negotiation cae between Wal-Mart and it upplier. Strategie uch a threat to lower price or to loe Wal-Mart buine, and the trict 30 econd delivery window for upplier, were dicued. It generally commented that Wal-Mart, in it collaboration with it upplier, i legendary for quite traightforwardly telling them what Wal-Mart will pay for their good. It i alo typical for Wal-Mart to tell it upplier to redeign everything from their packaging to their computer ytem, in order to be compatible with Wal-Mart operation. When particular upplier cannot perform to Wal-Mart requirement, the retail chain will ource from ome other companie, or they will produce the product themelve. Some upplier are eventually forced to ource off-hore where reource are cheaper, or imply forced into bankruptcy, which negatively impact the US local job and economy. Mufon (2010) preented comment from China expert, that Wal-Mart guideline to it Chinee upplier could be more important than the order from the Chinee Government. Through uch tringent collaboration approache, Wal-Mart i ucceful in maintaining low price while keeping cloe to upplier who are up to the challenge. Fihman (2003) quoted one of the upplier that Wal-Mart doe not cheat upplier, it keep it word, it pay it bill brikly they are tough people but very honet; they treat you honetly. And thu, in order to do buine with Wal-Mart, vendor have to be a relentle a and a microcopic a Wal-Mart i at managing their own cot. A particularly ucceful example of collaboration and the reulting improvement i Levi cae, where according to Fihman (2003), Levi couldn t have qualified to ell to Wal-Mart. It computer ytem were antiquated, and it wa notoriou for delivering clothe late to retailer. Levi admitted it on-time delivery rate wa 65%... Getting ready for Wal-Mart ha been like putting Levi on the Atkin diet. It ha helped everything cutomer focu, inventory management, peed to market. It ha even helped other retailer that buy Levi, becaue Wal-Mart ha forced the company to replenih tore within two day intead of Levi previou five-day cycle. The example in thee two pioneer, Toyota and Wal-Mart, illutrated a wide pectrum in approache and tactic in effective upply chain collaboration, both within and acro companie and indutrie. Clear extreme of upply chain collaboration tactic were een in the Toyota and Wal- Mart cae. According to Iyer et al. (2009), the Japanee model of upply chain collaboration encourage cloe relationhip, competition over quality, delivery, engineering capability, high level of information exchange, high level of commitment, long-term relationhip, and working with exiting upplier to reolve problem. The US model, in contrat, involve adverarial relationhip, eay witching among upplier, low commitment, price baed competition for upplier election, and a earch 14

for new upplier when problem arie. Thi i conitent with Tereko claim in 2006 that the Japanee model focue on building and maintaining collaborative upplier trategie, while the US approach in general howed upplier relationhip hinging on cot-cutting demand. There are of coure exception to uch generaliation. A een in the dicuion above, Wal-Mart cloe collaboration with P&G how dedication and commitment between the two companie, while Toyota admit that it relationhip with ome of the recent upplier outide Japan are no longer a cloe a before due to the rapid expanion by the manufacturer (Anonymou, 2010). A uggeted by Ehring (2006), no company can invet in an unlimited et of relationhip. All in all, both Toyota and Wal-Mart approache and tactic toward upply chain collaboration fall along the collaboration continuum a follow, while Toyota lean more toward the cooperative end, Wal-Mart poition i cloer to the exploitative ide (Figure 4). Both companie have achieved phenomenal ucce in upply chain management in their own way. Exploitative Collaboration Cooperative Collaboration Wal-Mart Toyota Figure 4 Toyota and Wal-Mart Along the Collaboration Continuum Dynamic of the Supply Chain Collaboration Strategie The Underlying Philoophie Both chool of upply chain collaboration trategie have hown their outtanding performance in the cae of Toyota and Wal-Mart. According to Iyer et al. (2009), Toyota upplier performance i conitently uperior compared to it counterpart 2, and Wal-Mart till reign a the world larget retailer and employer (Forbe.com, 2011). The baic dynamic of the exploitative and collaborative approache are portrayed in the following caual loop model (Figure 5): 2 Thi claim i baed on a Working Relation Index which rank buinee over 17 criteria, including upplier trut of the OEM, open and honet communication, timely information, degree of help to decreae cot, extent of late engineering change, early involvement in the product development proce, flexibility to recover from cancelled or delayed engineering program. In 2005, the working index value for Toyota, Honda, and Nian wa between 298 and 415. The index for Chryler, Ford, and General Motor (GM) wa between 114 and 196. Eighty-five percent of the upplier to the Big 3 OEM characterize their relationhip a poor, with around half the upplier claiming they would prefer not to do buine with the OEM. (Iyer et al. 2009). 15

Figure 5 Baic Dynamic of the Extreme Approache With an exploitative collaboration approach, a buine (Company A) tend to work cloely with it upplier with the main objective to improve cutomer value (for example, to drive down cot). Thi objective i achieved by impoing preure on upplier to cut cot, often through demand for improvement in efficiency, production cot cutting, and even out-ourcing. Company A may alo require it upplier to conform and align with company A operation to further leverage efficiency. A key example of thi i, Wal-Mart 30-econd delivery window for certain upplier, and it deign requirement for upplier packaging to conform with Wal- Mart operation (Fihman, 2003). The outcome of uch approach (with tringent performance policie) i an increae in upplier performance. Supplier endeavour to perform up to the required tandard in order to continue upplying Company A. A a reult of the cot-cutting and performance improvement from the upplier, the benefit for company A increae, thu further encouraging the ucceful exploitative approach. Thi i een in the more recent initiative at Wal-Mart where upplier are required to further conform to it policie in RFID implementation (Boland, 2005) and environmental/utainability compliance (Turner 2010, Mufon 2010). The cooperative collaboration approach how a imilar dynamic, with a lightly different pattern of outcome. Company B believe in cooperative collaboration with it upplier. The upplier are carefully elected baed on their potential for criteria uch a quality, delivery, and continuou improvement. Once the upplier are choen, Company B commit fund, invetment, time, and effort into thee upplier, by the mean of collaborative deign, aitance in problem olving, and invetment for improvement, with the viion of product and proce quality improvement, cot reduction through coordination and elimination of wate, and cutomer value enhancement. Such effort reult in improvement in the upplier performance after a delay (time taken for nurturing the upplier). Such improvement provide benefit for Company B, which may reinforce further practice of imilar approache toward upplier collaboration. 16

The reinforcing dynamic hown in the caual loop model are the bai of both the exploitative and the cooperative approache of collaboration, toward the objective of more efficient upply chain management and better cutomer value. Dynamic Over Time Looking at the upply chain environment of Wal-Mart, it i apparent that the retail chain i following it collaboration philoophy all along, with reinforced action uch a continued focu on price reduction from upplier, impoing new and more tringent policie on upplier in term of packaging, tock keeping (ue of RFID tag), and environmental/utainability initiative. While uch improvement initiative are, according to Fihman (2003), effective encouragement for ome upplier to continuouly improve (cae uch a Procter & Gamble and Levi ), for the maller upplier, the on-going demand from Wal-Mart to cut cot and improve ha proved to be a burden. For example, with Wal-Mart new directive toward environmental concern, upplier were forced to get eriou about pollution. Wal-Mart ay if you re over the compliance level, you re out of buine. (Mufon, 2010). In term of forced cot cutting, ome maller upplier had to lay off employee and cloe US plant in favour of outourcing product from overea. (Fihman, 2003). There are claim that many American job were lot, due to thi effect, to low-wage countrie uch a China. Wal-Mart ha doubled it import from China between 1998 and 2003. All in all, a ummaried by Fihman (2003), doing buine with Wal-Mart can give a upplier a fat, heady jolt of ale and market hare. But that fix can come with longterm conequence for the health of a brand and a buine [and the local economy]. The phenomenon dicued above how a ignificant ide-effect of the exploitative collaboration approach. The exploitative model i extended accordingly (Figure 6). 17

Extended Exploitative Collaboration Model Cot & Preure on Supplier Exploitative Approach by A Benefit for A o Performance of upplier Figure 6 Extended Exploitative Collaboration Model The extended model above i baed on the baic exploitative collaboration model. The baic model howed all three variable (Exploitative Approach by A, Performance of upplier, and Benefit for A) with exponential increae pattern over time. In thi extended model, however, a new variable with two link are introduced. Exploitative approach by Company A ha a ide effect of impoing cot and preure on upplier. Thi effect become ignificant after a delay. With the increaed cot and preure on upplier, their performance in term of quality and even the capability to upply will be reduced. Company A may opt to witch upplier, but the capabilitie of new upplier are alo quetionable, ince they would not have been Company A firt choice in the earlier election proce. With the deterioration of the upplier performance, the benefit for Company A i jeopardied, and hopefully thi negative impact will reult in le exploitative collaboration approache by Company A. Notice that the additional Balancing dynamic ha changed the original behaviour over time. The benefit for Company A are no longer reinforced, and thu, the incentive for further exploitative tactic i dicouraged. The cot and preure on upplier will eventually reach a plateau (when the exploitative action are reduced), and it may eventually tail off. In the cooperative collaboration cae, the baic model how a reinforcing long-term upportive relationhip, with objective imilar to the exploitative mode (continuouly improving efficiency and minimiing cot, improving cutomer value). Even though the baic dynamic how alo reinforcing benefit for the company and the upplier, a main diadvantage of uch an approach i the delay in reaping uch benefit. While 18

Company B in the model invet and ait in improving it upplier, the improvement on the upplier end may not be realied until after a ignificant period of time. Iyer et al. (2009) pointed out that a typical improvement project for Toyota and it upplier can take at leat one and a half year. In one particular cae, Toyota committed two to four conulting peronnel to the upplier after the improvement project on a regular bai for the next five year. Therefore, a ide effect of the cooperative collaboration approach i the initial invetment into new relationhip, and the potential hindrance in the company own performance before improvement are een at the upplier. An example of thi i the recent chain of product failure and reulting recall in Toyota automobile. Anonymou (2010) quoted the chairman of Toyota Motor Corp., Akio Toyoda, that in it puruit of growth [Toyota] tretched it lean philoophy cloe to breaking point. A a reult, Toyota became increaingly dependent on upplier outide Japan with whom it did not have decade of working experience. Initial grooming of upplier in committed relationhip require commitment of reource, which may be diverted from normal operation. Thi i a major rik for thi approach, epecially in time of rapid growth. In light of uch phenomenon, the baic model i extended to incorporate the other impact from a cooperative collaboration approach (Figure 7): Extended Cooperative Collaboration Model Performance of B o Support for Supplier by B Benefit for B Performance of Supplier Figure 7 Extended Cooperative Collaboration Model The cooperative upport for upplier by Company B ha a direct negative impact on it own performance, due to the time, money, and effort inveted in it upplier (a dicued in Toyota cae above). Such impact may in turn dicourage further upport for upplier. However, the cooperative collaboration approach aume that the upply 19

chain partner are willing to compromie or to even acrifice it own optimality to purue optimiation acro the upply chain, uch dicouragement can be conidered a minimal. Eventually, the upplier performance tart to increae (after the delay). Once thi ha become apparent, the reulting increae in Company B performance can further reinforce the cooperative upport toward Company B upplier, and thu promote utainable improvement. Notice that two loop have been introduced in thi extended model. The behaviour over time dynamic remain unchanged from the baic model, and the Performance of B (new variable) how a wore-before-better behaviour over time. Key Dynamic In Thee Approache The dynamic dicued above imply that the two approache in collaboration reult in ditinctive behaviour over time in term of the companie performance. For company A, it exploitative approach reult in a better-before-wore dynamic, while for company B, it cooperative approach reult in a wore-before-better behaviour. The dynamic of both approache howed their benefit and diadvantage. Baed on thee idea, a general portrayal of the dilemma between exploitative and cooperative collaboration can be decribed uing a model baed on the ytem archetype of Shifting the Burden (Maani et al. 2007) (Figure 8). The baic model outlining the dynamic of both extreme approache in the context of a ingle company i preented in Figure 9: Shifting the Burden Dynamic of the Two Approache Exploitative Collaboration A Company' Performance in Supply Chain Cooperative Collaboration Figure 8 Shifting the Burden Figure 9 Combined Dynamic of the Two Approache 20

In general, both collaboration approache hare the ame objective, to maximie cutomer value through better upply chain management. Both approache are effective in enhancing the company performance. With an exploitative approach (the top loop), the company can quickly and effectively reduce cot and impoe other requirement on it upplier to work for it own need. Thi reult in immediate benefit, which reult in a reinforcing dynamic for the company to further purue benefit with thi approach (for example, after pricing policie, the company may impoe other policie on packaging, environmental iue, and other). Thi i of coure baed on the aumption that the company ha ignificant influence over it upplier, uch a it ize, market, and brand image. The main diadvantage of thi approach, a dicued above, i that the benefit are not utainable. On the other hand, the company can alo take a cooperative approach, where improvement in performance are achieved through long-term, dedicated, and upportive relationhip with it upplier. The cutomer value i eventually increaed through the betterment of all operation along the upply chain. The main diadvantage of thi approach, a dicued above, i that the benefit take a long time to realie (there i a delay in the bottom loop dynamic). That i, it doe not provide a quick olution, and it uually involve ignificant initial invetment. The two extreme approache, exploitative and cooperative collaboration, correpond to the quick fix and fundamental olution of the hifting the burden archetype. Thu, according to ytem theory, there i a tendency for the company to rely on the quick fix (that i, the exploitative approach) for quick olution. Thi i conitent to the theme of modern capitalitic buine model, which i to locally optimie operation to enure that the company benefit are maximied. In Wal-Mart cae, they can continually enforce their tringent policie upon their upplier to work in Wal-Mart bet interet. For Toyota, in the proce of achieving rapid expanion, they have teamed up with unfamiliar upplier which reulted in initial quick benefit. Eventually, a dependency i formed for the company to utilie the exploitative approach, intead of the other option. Thi i portrayed in the model in Figure 10. 21

Dependence on Quick Fix Exploitative Collaboration A Company' Performance in Supply Chain Dependence on Exploitative Collaboration Cooperative Collaboration o Figure 10 Dependence on Quick Fix With a higher dependence on the quick fix option, the fundamental olution become even le appealing. According to the cae tudie of Toyota and Wal-Mart, however, the above model doe not eem to capture all of the major dynamic. A een in the cae where Toyota regret the quick fix approache, and how Wal-Mart tart to develop cloer relationhip with major upplier uch a Procter & Gamble (refer to earlier ection on the cae tudie), ome of the negative impact of the exploitative approach eem to have an impact in promoting the fundamental olution, which i cooperative collaboration. In order to reflect thi, the paradox model i further extended by another loop that outline the eventual tendency toward collaborative collaboration in Figure 11. 22

The Supply Chain Paradox Exploitative Collaboration A Company' Perf ormance in Supply Chain Dependence on Exploitative Collaboration Detrimental Impact along Supply Chain Cooperative Collaboration o Figure 11 The Supply Chain Paradox The extended loop in the model in Figure 11 ugget that the detrimental impact reulted by exploitative collaboration can eventually have an encouraging effect on the puruance of the fundamental olution of cooperative collaboration. Evidence in thi extenion of the model, however, i not commonly een in exiting reearch. The upply chain dynamic model dicued in thi paper propoe a new reearch interet area in upply chain collaboration trategie and tactic. Concluion Supply chain management i a paradoxical philoophy. On one hand, upply chain are made up of capitalitic buine entitie, whoe main objective i to optimie it performance, including ale, profit, and market hare. On the other hand, the ucce of a upply chain relie on effective collaboration acro all buinee along the chain, where every partner i reponible for upporting each other for optimiation of the upply chain a a whole. 23