Description
The development of ITC technology enables networked business models, where each player concentrates on its own core-competence area and collaborates with suitable partners. The role of supply chain management becomes even more important in such a business environment, because networks of customer-supplier relationships constitute the basic requirement for communication links.
Fast Growing High-Tech Start-ups: Efficient Network Operations
Require Knowledgeable Governance
J aana Auramo
TAI Research Center
Helsinki University of Technology
e-mail: [email protected]
Vesa Kämäräinen
TAI Research Center
Helsinki University of Technology
e-mail: [email protected]
Abstract
The development of ITC technology enables networked business models, where each player
concentrates on its own core-competence area and collaborates with suitable partners. The role of
supply chain management becomes even more important in such a business environment, because
networks of customer-supplier relationships constitute the basic requirement for communication links.
Technology-based start-up companies typically build business models based on network structures
around their core-competences. However, as yet there is limited empirical research conducted on
successful supply chain management practices in a networked business environment. The objective
of this paper is to identify some of the reasons preventing a working network structure. We present
our findings through a case study of a technology-based start -up company
Key words: transaction economics, core competence, supply chain management
Introduction
The development of ITC technology enables networked business models, where each player
concentrates on its own core-competence area and collaborates with suitable partners. The role of
supply chain management becomes even more important in such a business environment, because
networks of customer-supplier relationships constitute the basic requirement for communication links.
However, as yet there is limited empirical research conducted on successful supply chain
management practices in a networked business environment.
Technology-based start-up companies typically build business models based on network structures
around their core-competences (Hobday, 1994; Teece, 1986) and are therefore good objects for
empirical study. These core-competencies are often functions such as product development whereas
logistics and manufacturing are areas that most often are outsourced to third parties. Yet, a
networked business model with many outsourced activities requires some kind of “orchestration”
through out the whole supply chain. Different networked activities need to be connected into business
processes. For example, sales and marketing needs to be linked to manufacturing operations and
inventory management even though a different network partner governs each of the activities.
In reality, many start up companies have business models that do not support effective operations
management. This becomes evident particularly when the companies reach the fast growth phase. A
good example is Amazon.com that had difficulties in controlling its supply chain in the fast growing
phase: Amazons sales grew by 170 % from 1998 to 1999. However, at the same time, inventories
ballooned by 650 % and inventory turnover plummeted from 8.5 times to 2.9 times (Hof et al. 2000).
Many start up companies have had similar problems, when trying to control supply chain in the
growing market.
The objective of this paper is to identify some of the reasons preventing a working network structure.
We present our findings through a case study of a technology-based start-up company. Product
development and marketing are the core-competencies of our case company. It has outsourced
manufacturing, logistics operations and retailing to third parties. The company started its business in
the late 1990’s and is currently struggling to cope with growth.
The paper is organised as follows. First we review some selected supply chain management themes
related to the phenomenon we are interested in. Then we move to our case by first discussing briefly
about the methodology and empirical setting. The section thereafter discusses the results of the case
analysis and its implications. We conclude our paper by highlighting some potential reasons that
according to our case analysis could be hindrances to an effective business network.
What have others had to say about it? Relevant theoretical approaches
The supply chain management concept extends the view of operations from a single business unit or
a company to the whole supply chain. Essentially, supply chain management is a set of practices
aimed at managing and coordinating the supply chain from raw material suppliers to the end
customer. The objective of supply chain management is to improve the entire process rather than
focusing on local optimisation of particular business units. (Heikkilä, 2000)
In this paper we briefly summarize three different theoretical approaches related to academic studies
of supply chain management that are relevant to our case study: transaction cost economics,
resource-based management and the network perspective. In addition to these three approaches we
discuss the question: to be efficient, does a networked supply chain need an “orchestrator” that has a
strategic control point to set the rules for the supply chain?
Transaction costs were first introduced as an explanation of why firms exist (Coase, 1937).
Transaction costs consists of search costs, contracting costs, monitoring costs and enforcement
costs (Williamson, 1985). According to Williamson (1981:155) asset specificity is the most important
dimension for describing transactions. Supply chains are characterized by inter-firm specialization
where individual firms concentrate in a narrow range of activities that together form a complex chain
of input -output relations with other firms. Transaction cost economics is concerned with the
governance structures of economic transactions and the factors influencing the choice of governance
structure. However, the theory is often criticized for focusing entirely on economic issues (Johansson
& Mattsson 1987,McGee & Dowling1994), and for failing to include personal and social relations
(Skjoett-Larsen 1999). It does not give an explanation how interorganizational relationships evolve
and change over time (Yli-Renko 1999). Many recent empirical and theoretical studies applying
transaction cost economics have therefore sought to expand the framework by combining it with other
theories, especially with the resource-based view.
The key idea of the resource-based view is that firm-specific skills, competences and other tangible
and intangible resources are viewed as the bases for the competitive advantage of a firm (Peteraf
1993, Prahalad & Hamel 1990). Traditionally the research has been focused on the internal resources
of the firm but has more recently moved to the analysis of interorganisational relationships of firms
(Dussage & Garrette, 1999, Eisenhardt & Schoonhoven 1996, Hitt et al. 2000).
The resource-based view has important implications for the formation and performance of
interorganizational relationships of technology-based start-up companies. Access to resources is an
important reason for these start-up companies to engage in interorganisational relationships with
other organizations (DeMeyer 1999, Eisenhardt & Schoonhoven 1996). Alliances may give small
firms, like start-up companies, access to complementary assets that are often necessary to
commercialise innovations (Hobday 1994, Teece 1986) especially in technology intensive industries
(Forrest & Martin 1994, Pisano & Mang 1993). Teece (1986) argued that innovating firms without the
necessary manufacturing and related capacities might die, even though they are the best at
innovation. Resources obtained through interorganizational relationships may include access to
distribution channels, production facilities or other resources needed to create, produce and distribute
the products competitively.
It is a fundamental assumption in the network perspective that the individual firm is dependent on
resources controlled by other firms. Firms gain access to these resources through interaction with
other firms and industrial networks are developed over time. The players invest in relationships with
other players, thereby gaining knowledge of their network partners. The relationships develop through
distinctive phases: pre-relationship phase, the early phase, the development phase, the
institutionalised phase and the break -up phase (Dwyer et al 1987). In other words, relationships
change over time and their characteristics vary along dimensions such as distance, mutuality,
relationship specific investments, trust, commitment, particularity, information sharing, and other
types of bonds binding the interacting partner together. (Ford, Håkansson & Johansson 1986).
According to the network perspective the network has a built-in tendency to make the relations
stronger and more stable over time (Skjoett-Larsen, 1999).
Interdependence exists in a network when one actor does not entirely control all of the resources
necessary for achievement of an action or a desired outcome. Network theory helps us to understand
the dynamics of interorganizational relations by emphasizing the importance of trust that builds
through positive long-term cooperative relations and the mutual adjustment of routines and systems.
(Skjoett-Larsen, 1999). Trust includes two essential elements (Kumar et al 1995): (1) trust in the
partner’s reliability (does the partner stand by its word, fulfil promises and is sincere), and (2) trust in
the partners benevolence (is the partner interested in the company’s welfare and will not take
unexpected actions that will negatively affect the firm).
In addition to trust and interdependence, commitment and communication behaviour are important
elements of a working network. Commitment refers to the willingness of network partners to exert
effort on behalf of the other members of the network. Communication behaviour is related to the
information and knowledge that is being exchanged between the network partners. There are three
aspects of communication behaviour that addresses the extent to which the information exchanged is
effective in a partnership: information sharing, level of information quality and information
participation. (Monczka et al. 1998). A supply network is characterized to be “communication-rich”
(Nohria and Eccles, 1996) if there is a lot of informal communication inside the network. The
members of the network have a lot of interaction within and between network partners,
communication is informal, and employees on different levels of the network are in contact directly,
not through their supervisors.
Recent research on supply chain management has been focused on the conditions of so called win-
win partnerships where close long-term co-operation simultaneously increases the value produced by
the supply chain and decreases the overall costs of the chain (Heikkilä, 2000). The themes discussed
above: commitment, communication behaviour, interdependence and trust are all elements of a win-
win partnership. In addition to these themes a question: does an effective networked supply chain
need an “orchestrator” that has a strategic control point to set the rules for the supply chain and
creates the necessary co-ordinating power for the network? is receiving increased attention in the
research community at the moment (Eloranta, 2002; Anderssen, 2002).
This paper focuses on the conditions that are necessary for a start-up company when creating an
effective business network that supplements its core competences. It is clear that a start -up company
needs complementary assets in areas outside its own expertise. However, there seems to be a
dilemma when talking about start -up companies and their networks. Effective governance of
networked resources (orchestration) needs experience and know-how that start -up companies often
lack. Thus, many start-ups end up sourcing necessary transaction based resources and neglect the
investments in relationships with their network partners. There is a gap that needs to be researched
to increase our understanding about the phenomenon.
The Case: Data and Method
The objective of this paper was to identify some of the reasons why technology-based start-up
companies have difficulties operating with networked supply chain structures. We adopted a single
representative case perspective (Alasuutari, 1997) to study the phenomenon. The case company,
Utech, is a technology start-up company that started its business in the late 1990’s. Utech is a
newcomer in the area that already has several major players with relatively large and stable market
shares. The company has built a business network where most of the supply chain activities are
outsourced. Utech’s core competences are in the areas of product development and marketing.
Manufacturing of the products as well as the logistics operations have been outsourced. The
manufacturer delivers the products directly to the nominated logistics service provider according to
the orders coming from Utech. The role of the logistics service provider includes the following tasks:
?? Inventory management of incoming products and support materials
?? Assembly of the end user product according to the orders received from Utech.
?? Product delivery to the retailers.
Utech sells its products through a retailer network that consists of several hundred retail outlets.
Retailers order the products from Utech to be forwarded to the logistics service provider that delivers
the products to the retailer network. Figure 1 describes Utech’s supply network. As can be seen from
the Figure 1, Utech has outsourced the entire physical material flow related to its product delivery.
Figure 1: Utech’s supply network
Utech came to the market with an aggressive product launch and used active marketing campaigns
to win market share from its more established competitors. During the second year Utech realised
that everything was not right with its supply chain operations. There had been a serious shortage of
one of the key components of the product that created probl ems in meeting the market demand. At
the same time the company realised that the inventory levels had ballooned in the retailer network.
Utech’s IT system did not provide sufficient visibility to the network and the company was not able to
control the inventory levels downstream in the supply chain.
Thus the company decided to audit its supply chain. The target of the audit was twofold: 1) to analyse
how the supply network functions and 2) to identify the possible reasons why Utech’s supply network
was not able to function satisfactorily. During the process a total of 18 thematic interviews were
conducted in seven different companies that are the major players in the case company’s business
network. In addition to the interview results we received historical sales data from the case company
and product supply data from the logistics service provider.
Key findings
The audit findings related to Utech’s supply network reveal both transaction related issues as well as
resource related problems. We will concentrate on the topics that are related to the possible reasons
why Utech’s supply network was not able to function satisfactorily. Our findings are presented in
italics and the supporting comments can be found under each finding.
Transaction related findings
1. Communication in Utech’s business network was transaction oriented.
?? Communications related to the supply network operations had been built around single
transactions between two parties.
?? There was no established channel how network partners could inform Utech about other
business related matters outside transactions related to the product deliveries. Especially
the lack of a “strategic level” communication link between the logistics service provider
and Utech was seen as problematic.
LOGISTICS
SERVICE
PROVIDER
RETAILERS
COMPONENTS
END USER
UTECH
SUPPORT
MATERIAL
LOGISTICS
SERVICE
PROVIDER
RETAILERS
COMPONENTS
END USER
UTECH
SUPPORT
MATERIAL
2. There was a lack of trust among network partners relating to the supply operations.
?? The major component supplier saw itself as a partner whose input was necessary for
successful operations. Some members at Utech saw the relationship simply as a buyer-
seller relationship and expected the component supplier simply to fulfil all the
requirements coming from Utech.
?? The logistics service provider was seen as a scapegoat for inventory problems rather
than a key partner in the supply network. Utech did not trust the inventory level
information it received from the logistics service provider.
?? There were mistakes in retailers’ commissions due to the inadequate follow-up system,
which created unnecessary mistrust towards Utech in the retailer network.
3. Utech’s internal organisation was a functional organisation with limited communication across
various functions.
?? Marketing and purchase functions, which should form an integral part of the supply chain
management process, had no established formal communication.
?? Also often significant informal communication links were insufficient to substitute for the
lack of formal communication.
4. There were too many (independent) sub processes in Utech’s supply operations
?? It was possible to identify over 10 different sub processes, and depending on the sale
channel and product the number of variations doubled.
5. Information flow related to the supply network was not optimised.
?? There was too much double work and too many manual routines related to the
information flow within the supply network.
Resource related findings
1. There was no supply network management function established in Utech’s business network
?? Utech was the central node in its supply chain, but it was not clear how the outsourced
activities should be linked to its network and how the supply chain should be managed.
?? Utech did not have a clear picture about the interrelationships between sales and
marketing and logistics operations.
?? The demand forecasting operation did not utilise the total expertise of the network.
?? Component deliveries to the logistics service provider were not synchronised. Lack of
one of the components unnecessarily delayed product shipments to the retailers.
2. The relationship management within the supply network was not sufficient.
?? There were no partnership agreements with key partners that would specify the operating
principles or follow up procedures.
?? It was not clear who was in charge of developing the key relationships from the
transaction level towards a more partnership type relationship within the supply network.
3. Outsourced logistics operations were under-utilised.
?? Utech’s personnel did many routine tasks in the supply operations area that could be
moved to the logistics service provider.
4. Data from different data systems was not comparable.
?? There were several independent data systems that were not comparable. For example
information about retailers’ sales history and information about product supplies to the
retailers were in different data systems and it was impossible to compare the data of
products shipped to a single retailer to the sales history of that same retailer.
Concluding comments
The objective of this paper was to identify some of the reasons preventing a working network
structure. According to our case analysis a business network where many supply chain activities are
outsourced needs well -designed communication links throughout the whole supply chain. If a
technology-based start up company builds its business concept around transactions between various
network partners without understanding how the supply chain functions as a holistic entity and does
not pay attention to the evolutionary nature of the business relationships within its supply chain, the
company will most likely face problems once it reaches the fast growth phase.
Our case company, Utech, was clearly the central node in its supply chain, and it should have set the
overall rules as to how the supply chain operates, and how it is being managed. However, Utech’s
supply chain lacked an orchestrator with a strategic control point to set the rules for the network and
create the necessary co-ordinating power for the network An orchestrator needs to understand how
the supply network functions as an entity and it should necessitate optimal communication links to
guarantee successful co-operation within the supply network. In order for a new technology start-up
company to create successful business using a network business model it has to understand its role
in the network, be an orchestrator if necessary and understand the communication needs within the
network and facilitate the necessary communication practices.
During the audit process in our case company, it also became evident that Utech did not have the
necessary tools or know-how to manage a business network in practice. Business processes in a
network environment overlap traditional organisational boundaries and there seems to be a need for
managerial tools a technology-based start -up company could utilise to enable a working network
structure that also takes into account the evolutionary nature of the business relationships.
As discussed in the theory part of the paper, trust is a crucial element of a successful business
network. Kumara (1995) talked about trust in a partner’s reliability and trust in a partner’s
benevolence. Is there also a need for a system that guarantees the trust, similar to the banks, which
do not trust their individual lenders, but they trust the system that ensures that lenders fulfil their
requirements? Another question that must be asked is: if such a system is needed, who should create
the system in a business network? Is it the role of an orchestrator or will it be possible to create
networks that have an inbuilt mechanism that would guarantee the trust?
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doc_329277427.pdf
The development of ITC technology enables networked business models, where each player concentrates on its own core-competence area and collaborates with suitable partners. The role of supply chain management becomes even more important in such a business environment, because networks of customer-supplier relationships constitute the basic requirement for communication links.
Fast Growing High-Tech Start-ups: Efficient Network Operations
Require Knowledgeable Governance
J aana Auramo
TAI Research Center
Helsinki University of Technology
e-mail: [email protected]
Vesa Kämäräinen
TAI Research Center
Helsinki University of Technology
e-mail: [email protected]
Abstract
The development of ITC technology enables networked business models, where each player
concentrates on its own core-competence area and collaborates with suitable partners. The role of
supply chain management becomes even more important in such a business environment, because
networks of customer-supplier relationships constitute the basic requirement for communication links.
Technology-based start-up companies typically build business models based on network structures
around their core-competences. However, as yet there is limited empirical research conducted on
successful supply chain management practices in a networked business environment. The objective
of this paper is to identify some of the reasons preventing a working network structure. We present
our findings through a case study of a technology-based start -up company
Key words: transaction economics, core competence, supply chain management
Introduction
The development of ITC technology enables networked business models, where each player
concentrates on its own core-competence area and collaborates with suitable partners. The role of
supply chain management becomes even more important in such a business environment, because
networks of customer-supplier relationships constitute the basic requirement for communication links.
However, as yet there is limited empirical research conducted on successful supply chain
management practices in a networked business environment.
Technology-based start-up companies typically build business models based on network structures
around their core-competences (Hobday, 1994; Teece, 1986) and are therefore good objects for
empirical study. These core-competencies are often functions such as product development whereas
logistics and manufacturing are areas that most often are outsourced to third parties. Yet, a
networked business model with many outsourced activities requires some kind of “orchestration”
through out the whole supply chain. Different networked activities need to be connected into business
processes. For example, sales and marketing needs to be linked to manufacturing operations and
inventory management even though a different network partner governs each of the activities.
In reality, many start up companies have business models that do not support effective operations
management. This becomes evident particularly when the companies reach the fast growth phase. A
good example is Amazon.com that had difficulties in controlling its supply chain in the fast growing
phase: Amazons sales grew by 170 % from 1998 to 1999. However, at the same time, inventories
ballooned by 650 % and inventory turnover plummeted from 8.5 times to 2.9 times (Hof et al. 2000).
Many start up companies have had similar problems, when trying to control supply chain in the
growing market.
The objective of this paper is to identify some of the reasons preventing a working network structure.
We present our findings through a case study of a technology-based start-up company. Product
development and marketing are the core-competencies of our case company. It has outsourced
manufacturing, logistics operations and retailing to third parties. The company started its business in
the late 1990’s and is currently struggling to cope with growth.
The paper is organised as follows. First we review some selected supply chain management themes
related to the phenomenon we are interested in. Then we move to our case by first discussing briefly
about the methodology and empirical setting. The section thereafter discusses the results of the case
analysis and its implications. We conclude our paper by highlighting some potential reasons that
according to our case analysis could be hindrances to an effective business network.
What have others had to say about it? Relevant theoretical approaches
The supply chain management concept extends the view of operations from a single business unit or
a company to the whole supply chain. Essentially, supply chain management is a set of practices
aimed at managing and coordinating the supply chain from raw material suppliers to the end
customer. The objective of supply chain management is to improve the entire process rather than
focusing on local optimisation of particular business units. (Heikkilä, 2000)
In this paper we briefly summarize three different theoretical approaches related to academic studies
of supply chain management that are relevant to our case study: transaction cost economics,
resource-based management and the network perspective. In addition to these three approaches we
discuss the question: to be efficient, does a networked supply chain need an “orchestrator” that has a
strategic control point to set the rules for the supply chain?
Transaction costs were first introduced as an explanation of why firms exist (Coase, 1937).
Transaction costs consists of search costs, contracting costs, monitoring costs and enforcement
costs (Williamson, 1985). According to Williamson (1981:155) asset specificity is the most important
dimension for describing transactions. Supply chains are characterized by inter-firm specialization
where individual firms concentrate in a narrow range of activities that together form a complex chain
of input -output relations with other firms. Transaction cost economics is concerned with the
governance structures of economic transactions and the factors influencing the choice of governance
structure. However, the theory is often criticized for focusing entirely on economic issues (Johansson
& Mattsson 1987,McGee & Dowling1994), and for failing to include personal and social relations
(Skjoett-Larsen 1999). It does not give an explanation how interorganizational relationships evolve
and change over time (Yli-Renko 1999). Many recent empirical and theoretical studies applying
transaction cost economics have therefore sought to expand the framework by combining it with other
theories, especially with the resource-based view.
The key idea of the resource-based view is that firm-specific skills, competences and other tangible
and intangible resources are viewed as the bases for the competitive advantage of a firm (Peteraf
1993, Prahalad & Hamel 1990). Traditionally the research has been focused on the internal resources
of the firm but has more recently moved to the analysis of interorganisational relationships of firms
(Dussage & Garrette, 1999, Eisenhardt & Schoonhoven 1996, Hitt et al. 2000).
The resource-based view has important implications for the formation and performance of
interorganizational relationships of technology-based start-up companies. Access to resources is an
important reason for these start-up companies to engage in interorganisational relationships with
other organizations (DeMeyer 1999, Eisenhardt & Schoonhoven 1996). Alliances may give small
firms, like start-up companies, access to complementary assets that are often necessary to
commercialise innovations (Hobday 1994, Teece 1986) especially in technology intensive industries
(Forrest & Martin 1994, Pisano & Mang 1993). Teece (1986) argued that innovating firms without the
necessary manufacturing and related capacities might die, even though they are the best at
innovation. Resources obtained through interorganizational relationships may include access to
distribution channels, production facilities or other resources needed to create, produce and distribute
the products competitively.
It is a fundamental assumption in the network perspective that the individual firm is dependent on
resources controlled by other firms. Firms gain access to these resources through interaction with
other firms and industrial networks are developed over time. The players invest in relationships with
other players, thereby gaining knowledge of their network partners. The relationships develop through
distinctive phases: pre-relationship phase, the early phase, the development phase, the
institutionalised phase and the break -up phase (Dwyer et al 1987). In other words, relationships
change over time and their characteristics vary along dimensions such as distance, mutuality,
relationship specific investments, trust, commitment, particularity, information sharing, and other
types of bonds binding the interacting partner together. (Ford, Håkansson & Johansson 1986).
According to the network perspective the network has a built-in tendency to make the relations
stronger and more stable over time (Skjoett-Larsen, 1999).
Interdependence exists in a network when one actor does not entirely control all of the resources
necessary for achievement of an action or a desired outcome. Network theory helps us to understand
the dynamics of interorganizational relations by emphasizing the importance of trust that builds
through positive long-term cooperative relations and the mutual adjustment of routines and systems.
(Skjoett-Larsen, 1999). Trust includes two essential elements (Kumar et al 1995): (1) trust in the
partner’s reliability (does the partner stand by its word, fulfil promises and is sincere), and (2) trust in
the partners benevolence (is the partner interested in the company’s welfare and will not take
unexpected actions that will negatively affect the firm).
In addition to trust and interdependence, commitment and communication behaviour are important
elements of a working network. Commitment refers to the willingness of network partners to exert
effort on behalf of the other members of the network. Communication behaviour is related to the
information and knowledge that is being exchanged between the network partners. There are three
aspects of communication behaviour that addresses the extent to which the information exchanged is
effective in a partnership: information sharing, level of information quality and information
participation. (Monczka et al. 1998). A supply network is characterized to be “communication-rich”
(Nohria and Eccles, 1996) if there is a lot of informal communication inside the network. The
members of the network have a lot of interaction within and between network partners,
communication is informal, and employees on different levels of the network are in contact directly,
not through their supervisors.
Recent research on supply chain management has been focused on the conditions of so called win-
win partnerships where close long-term co-operation simultaneously increases the value produced by
the supply chain and decreases the overall costs of the chain (Heikkilä, 2000). The themes discussed
above: commitment, communication behaviour, interdependence and trust are all elements of a win-
win partnership. In addition to these themes a question: does an effective networked supply chain
need an “orchestrator” that has a strategic control point to set the rules for the supply chain and
creates the necessary co-ordinating power for the network? is receiving increased attention in the
research community at the moment (Eloranta, 2002; Anderssen, 2002).
This paper focuses on the conditions that are necessary for a start-up company when creating an
effective business network that supplements its core competences. It is clear that a start -up company
needs complementary assets in areas outside its own expertise. However, there seems to be a
dilemma when talking about start -up companies and their networks. Effective governance of
networked resources (orchestration) needs experience and know-how that start -up companies often
lack. Thus, many start-ups end up sourcing necessary transaction based resources and neglect the
investments in relationships with their network partners. There is a gap that needs to be researched
to increase our understanding about the phenomenon.
The Case: Data and Method
The objective of this paper was to identify some of the reasons why technology-based start-up
companies have difficulties operating with networked supply chain structures. We adopted a single
representative case perspective (Alasuutari, 1997) to study the phenomenon. The case company,
Utech, is a technology start-up company that started its business in the late 1990’s. Utech is a
newcomer in the area that already has several major players with relatively large and stable market
shares. The company has built a business network where most of the supply chain activities are
outsourced. Utech’s core competences are in the areas of product development and marketing.
Manufacturing of the products as well as the logistics operations have been outsourced. The
manufacturer delivers the products directly to the nominated logistics service provider according to
the orders coming from Utech. The role of the logistics service provider includes the following tasks:
?? Inventory management of incoming products and support materials
?? Assembly of the end user product according to the orders received from Utech.
?? Product delivery to the retailers.
Utech sells its products through a retailer network that consists of several hundred retail outlets.
Retailers order the products from Utech to be forwarded to the logistics service provider that delivers
the products to the retailer network. Figure 1 describes Utech’s supply network. As can be seen from
the Figure 1, Utech has outsourced the entire physical material flow related to its product delivery.
Figure 1: Utech’s supply network
Utech came to the market with an aggressive product launch and used active marketing campaigns
to win market share from its more established competitors. During the second year Utech realised
that everything was not right with its supply chain operations. There had been a serious shortage of
one of the key components of the product that created probl ems in meeting the market demand. At
the same time the company realised that the inventory levels had ballooned in the retailer network.
Utech’s IT system did not provide sufficient visibility to the network and the company was not able to
control the inventory levels downstream in the supply chain.
Thus the company decided to audit its supply chain. The target of the audit was twofold: 1) to analyse
how the supply network functions and 2) to identify the possible reasons why Utech’s supply network
was not able to function satisfactorily. During the process a total of 18 thematic interviews were
conducted in seven different companies that are the major players in the case company’s business
network. In addition to the interview results we received historical sales data from the case company
and product supply data from the logistics service provider.
Key findings
The audit findings related to Utech’s supply network reveal both transaction related issues as well as
resource related problems. We will concentrate on the topics that are related to the possible reasons
why Utech’s supply network was not able to function satisfactorily. Our findings are presented in
italics and the supporting comments can be found under each finding.
Transaction related findings
1. Communication in Utech’s business network was transaction oriented.
?? Communications related to the supply network operations had been built around single
transactions between two parties.
?? There was no established channel how network partners could inform Utech about other
business related matters outside transactions related to the product deliveries. Especially
the lack of a “strategic level” communication link between the logistics service provider
and Utech was seen as problematic.
LOGISTICS
SERVICE
PROVIDER
RETAILERS
COMPONENTS
END USER
UTECH
SUPPORT
MATERIAL
LOGISTICS
SERVICE
PROVIDER
RETAILERS
COMPONENTS
END USER
UTECH
SUPPORT
MATERIAL
2. There was a lack of trust among network partners relating to the supply operations.
?? The major component supplier saw itself as a partner whose input was necessary for
successful operations. Some members at Utech saw the relationship simply as a buyer-
seller relationship and expected the component supplier simply to fulfil all the
requirements coming from Utech.
?? The logistics service provider was seen as a scapegoat for inventory problems rather
than a key partner in the supply network. Utech did not trust the inventory level
information it received from the logistics service provider.
?? There were mistakes in retailers’ commissions due to the inadequate follow-up system,
which created unnecessary mistrust towards Utech in the retailer network.
3. Utech’s internal organisation was a functional organisation with limited communication across
various functions.
?? Marketing and purchase functions, which should form an integral part of the supply chain
management process, had no established formal communication.
?? Also often significant informal communication links were insufficient to substitute for the
lack of formal communication.
4. There were too many (independent) sub processes in Utech’s supply operations
?? It was possible to identify over 10 different sub processes, and depending on the sale
channel and product the number of variations doubled.
5. Information flow related to the supply network was not optimised.
?? There was too much double work and too many manual routines related to the
information flow within the supply network.
Resource related findings
1. There was no supply network management function established in Utech’s business network
?? Utech was the central node in its supply chain, but it was not clear how the outsourced
activities should be linked to its network and how the supply chain should be managed.
?? Utech did not have a clear picture about the interrelationships between sales and
marketing and logistics operations.
?? The demand forecasting operation did not utilise the total expertise of the network.
?? Component deliveries to the logistics service provider were not synchronised. Lack of
one of the components unnecessarily delayed product shipments to the retailers.
2. The relationship management within the supply network was not sufficient.
?? There were no partnership agreements with key partners that would specify the operating
principles or follow up procedures.
?? It was not clear who was in charge of developing the key relationships from the
transaction level towards a more partnership type relationship within the supply network.
3. Outsourced logistics operations were under-utilised.
?? Utech’s personnel did many routine tasks in the supply operations area that could be
moved to the logistics service provider.
4. Data from different data systems was not comparable.
?? There were several independent data systems that were not comparable. For example
information about retailers’ sales history and information about product supplies to the
retailers were in different data systems and it was impossible to compare the data of
products shipped to a single retailer to the sales history of that same retailer.
Concluding comments
The objective of this paper was to identify some of the reasons preventing a working network
structure. According to our case analysis a business network where many supply chain activities are
outsourced needs well -designed communication links throughout the whole supply chain. If a
technology-based start up company builds its business concept around transactions between various
network partners without understanding how the supply chain functions as a holistic entity and does
not pay attention to the evolutionary nature of the business relationships within its supply chain, the
company will most likely face problems once it reaches the fast growth phase.
Our case company, Utech, was clearly the central node in its supply chain, and it should have set the
overall rules as to how the supply chain operates, and how it is being managed. However, Utech’s
supply chain lacked an orchestrator with a strategic control point to set the rules for the network and
create the necessary co-ordinating power for the network An orchestrator needs to understand how
the supply network functions as an entity and it should necessitate optimal communication links to
guarantee successful co-operation within the supply network. In order for a new technology start-up
company to create successful business using a network business model it has to understand its role
in the network, be an orchestrator if necessary and understand the communication needs within the
network and facilitate the necessary communication practices.
During the audit process in our case company, it also became evident that Utech did not have the
necessary tools or know-how to manage a business network in practice. Business processes in a
network environment overlap traditional organisational boundaries and there seems to be a need for
managerial tools a technology-based start -up company could utilise to enable a working network
structure that also takes into account the evolutionary nature of the business relationships.
As discussed in the theory part of the paper, trust is a crucial element of a successful business
network. Kumara (1995) talked about trust in a partner’s reliability and trust in a partner’s
benevolence. Is there also a need for a system that guarantees the trust, similar to the banks, which
do not trust their individual lenders, but they trust the system that ensures that lenders fulfil their
requirements? Another question that must be asked is: if such a system is needed, who should create
the system in a business network? Is it the role of an orchestrator or will it be possible to create
networks that have an inbuilt mechanism that would guarantee the trust?
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