Week 2

Inter-organizational Information and Communication Technology

• Improved supply chain integration

• Trust (because of high investment costs) and pressure from suppliers

  • However, such pressures could stem from a transaction perspective such as safeguarding against opportunism, or from a cooperative norms perspective such as interfirm integration of business activities, or from both perspectives

The transaction cost perspective has been used to explain drivers of information technology investments.

Transaction cost theory argues that asset specificity - firms making tangible investments specific to a buyer-supplier relationship without any residual value – could explain the motivation of firms that make substantial investments in IOICT

In the case of asset-specific investment, safeguards will be needed. Asset specificity is an incentive for relationship continuity because it gives rise to bilateral dependencies, while safeguards are required to mitigate the risk of opportunistic behaviour among trading partners. Traditionally, vertical integration was suggested as a safeguard when asset specificity was high which can be attained through information sharing as it fosters rich communication, and will motivate partners to act in congruence – as though they were extensions of the same firm.

• Information sharing is defined as the scope and intensity of exchanging both strategic (forecasts) and transactional (planning) information in a buyer-suppler relationship

• This paper considers information sharing as a safeguard towards logistics asset specificity for the key buyer. Together, asset specificity and safeguards make up for what we label in our framework as the contractual posture.

A contractual posture is defined as an inter-organizational relationship having both agreed-upon asset specificity (i.e., customized logistics assets) as well as safeguards (i.e., information sharing).

• IOICT implementation facilitates information exchange in a timely manner, which helps to reduce transaction risks

• Generally, IOICT can reduce coordination costs and risks as it helps to manage boundary spanning activities between connected partners digitally

• The relational exchange theory states that relational norms such as flexibility and solidarity remind cooperative parties that their relationship is holistic, and that they are expected to behave according to shared relational norms

• Strategic partners therefore aim for long-term relationships rather than short-term contracts. As relationships with suppliers are considered to be of strategic importance, suppliers are seen to be an integral part of the firm’s operations. Such a view comes with cooperative behaviors - attitudes and practices facilitated by trust - that are characterized by shared responsibility and flexibility in arrangements. Such flexibility can help deal with unexpected situations, and work out solutions for problems jointly

Such activities and behaviour can be associated with what we label as a relational posture, which is defined as a posture that considers a buyer-supplier relationship as being governed by relational norms and attitudes

A relational posture will encourage additional investments such as IOICT in order to extend and tighten the buyer-suppler linkages

differences in uncertainty and national culture make the relational or contractual posture more effective

• implementation of IOICT mainly improves two major dimensions of supply chain performance: i.e., cost and service relative to delivery (speed, dependability, and flexibility).

  • Cost is defined as a firm’s ability to minimize the costs associated with managing its supply chain operations including production, administration and cost of serving customers. Service refers to the level of buyer’s satisfaction with order quantities, compliance with special requirements, delivery lead times and advance notifications about late deliveries and stock-outs from the buyer

• IOICT enables effective and efficient information across organizational boundaries, which, in fact, establish communication standards to ease information flows between trading partners

• Better communication provides an effective platform enabling the focal firm to better predict demand and coordinate real time with supply chain partners along with reduced costs of serving and managing partners.

• Furthermore, production cost savings and reduction in inventory holding quantities can be realized due to improved communication accuracy and reliability, while savings in purchasing and transportation costs can also be enjoyed due to IOICT

• Through frequent sharing of information such as point of sales data and real-time inventory data, supply chain partners can more accurately predict or forecast demand, which subsequently improves service levels and delivery performance. IOICT implementation facilitates communication between partners, thereby reducing information processing lead time and reducing total lead time in a supply chain. The increased visibility of decision-making processes due to IOICT helps firms prepare for risk events and better allocate their resources to complex, and unexpected situations such as late deliveries.

A contractual posture is governed by a formal mechanism, or written contract, while the relational posture relies more on informal structures, and self-enforcement across parties. Firms usually pursue information system integration with their partners through a written, and more formalized contract.

Successful IOICT implementation depends on systematic arrangements between partners to provide resources, and facilitate data transfer

• The idea that firms in more mature and developed markets are more likely to rely on arm’s length relationships and formal communication modes

• Empirical results confirm prior research that the contractual posture is a key element to be considered for IOICT implementation.

Blockchain is, essentially, a distributed database system that records transactional data or other information, secured by cryptography and governed by a consensus mechanism. It is a data structure that combines data records, called blocks, in a chain. The chain is an electronically distributed ledger or list of entries that users or participants maintain via a network of computers. Specifically, blockchains use cryptography to process and verify transactions on the ledger

• distributed system in a commercial context, where no single entity has control, is that it resolves problems of disclosure and accountability between individuals and institutions where the interests of the parties are not necessarily aligned. Data that are important to all parties can be updated in real-time, removing the need for laborious, error-prone reconciliation processes with each party’s internal records

• It can be a source of big data, which is of great benefit to organisations and supply chains, and therefore now receiving significant research attention from OSCM scholars (e.g. Kache and Seuring, 2017). The data encryption and coding in a blockchain improves transparency, efficiency and trust in information sharing

• distributed and synchronised across networks

  • it encourages businesses to share data and is therefore ideal for multi-organisational business networks, such as supply chains or financial consortia. Second, blockchains contain

• smart contracts

  • an agreement made between participants in advance and stored in the blockchain

• P2P networks

  • there must be agreement between all relevant parties that a transaction is valid, which serves to keep inaccurate or potentially fraudulent transactions out of the database

• Immutability of the data

  • agreed transactions are recorded and not altered. This provides provenance of assets, which means that for any asset it is possible to tell where it is, where it has been and what has happened throughout its lifetime.

• Concerns have been raised about both the cost to switch to a blockchain system and about its environmental impact given that computational energy can be high, especially in the case of large-scale public blockchains

• Smart contracts are only as good as the people who write them

• it may become possible for manufacturing companies to improve how quickly they trace problems with a specific product, component or material manufacturer (Angrish et al., 2018). Moreover, it helps to increase product safety and authenticity, improve service levels and decrease the cost of maintenance

• It can autonomously trigger other transactions when key milestones are met, such as goods being issued (creating a shipment), pickup confirmed (activating a sensor) or proof of delivery (issuing an invoice)

• Blockchain technology has been hyped as a solution to the sub-supplier transparency problem in multi-tier supply networks

e-SCM, where the internet facilitates the optimal coordination of links in the supply chain for better performance, provides adopters with several operational and strategic advantages (like ERP, EDI etc)

They can become beholden to each other. They can experience loss of objectivity and suffer from knowledge redundancy, relational inertia, and the like. If these negative outcomes overtake the benefits of collaboration, the relationship performance suffers.

• Social capital is defined as a valuable asset stemming from access to resources available through social relationships. It has three dimensions: relational, cognitive, and structural

  • The relational dimension refers to trust, friendship, respect, reciprocity, and personal interaction;

  • the cognitive dimension represents shared vision and common values;

  • the structural dimension involves patterns of connections between parties. Some scholars argue that social capital offers benefits (i.e., access to information) but also warn about its potential risks and costs associated with its maintenance

• trust, reciprocity, respect, friendship, and personal interactions

• Trust can lower transaction costs, permit privileged access to resources, provide incentives to share risks, and reduce conflicts

• Reciprocity and respect can facilitate cooperation, while friendship enhances relationship strength, facilitates communication, and brings loyalty, honesty, and commitment to the relationship

• the buyer and supplier may become similar in their thinking and operating principles and resist novel ideas

• buyer may lose objectivity. It may become complacent and overlook the importance of due process when managing suppliers.

• buyer may become more reluctant to switch the supplier even when it should. The buyer with a strong attachment favors the continuity of an existing relationship, preferring to work with the proven supplier and fearing the loss of relationship-specific assets

formal governance mechanisms can complement informal governance mechanisms (for a review, see Cao and Lumineau (2015)). Each has its limits, and thus, the combination may deliver greater relationship performance than either could in isolation. Thus, these findings encouraged us to further explore formal governance mechanisms that can enhance relational capital’s value

Contractual explicitness

Challenging goals

Expectation of continuity

the extent to which a formal contract articulates roles and responsibilities to be performed determines outcomes to be delivered and incorporates contingency plans

• Buying firms need to state clearly contractual terms and contingency plans based on actual experiences so such terms can serve as mechanisms of control and coordination. It results in buying firms having a mechanism through which objectivity can be preserved to counter against dysfunctional events.

• Contracts can serve as both control and coordinating mechanisms

• Clear contingency plans in a contract can help buying firms manage suppliers’ emerging negative behaviors and outcomes.

Considerable attention and resources can be consumed, even at the risk of signaling to the supplier that the buying firm may not have embraced a working environment that is becoming more cooperative due to growing relational capital (Wuyts & Geyskens, 2005). While clear contractual terms reduce the risks to which a BSR is exposed, such terms can also interfere with getting things done

Formally stated objectives that are difficult to attain, that promote continuous experimentation and new idea creation, and that seek the highest performance

• resistance from a supplier with whom is building a collaborative relationship when it sets a very demanding goal.

• when pursuing more attainable goals, a buying firm builds on the emerging relational capital with much less anxiety and uncertainty. The buying firm can readily meet attainable goals in cooperation with its supplier. Therefore, when less challenging goals are pursued, the performance gains may rise more gradually with increasing relational capital.

• Challenging goals foster a work environment in which pushing one another becomes the norm as they disrupt inertia and promote new ways of thinking and acting

• A buying firm pursuing challenging goals would likely monitor market changes closely (e.g., new technological advances) and, thus, push its supplier to keep abreast of such market changes in order to create new ideas.

• Establishing challenging goals may also result in questioning, re-evaluating, and adjusting established bilateral routines

• the extent to which a buying firm expects that the relationship with its supplier will remain viable for the long term

• Having high expectations of future exchange can encourage the buying firm to make relationship-specific investments (Heide & Miner, 1992), even at the risk of being locked-in. Because of such investments and the potential long-term benefits, the buying firm would likely address issues arising from current interactions with its supplier promptly

• Expectation can bring some stability to the relationship and incentivize both parties to overcome emerging negative behaviours

• High expectation of continuity also creates pressures on buying firms to make long-term investments within the relationship. Such investments may raise buying firms’ uncertainty, particularly if relational capital is just starting to build within the relationship.

• when expectation of continuity is low, performance gains may rise more quickly as relational capital increases

Objectivity loss is contained because high expectation of continuity encourages both the buying firm and the supplier to excel in their current performance to ensure future profits

While contractual explicitness and challenging goals help mitigate the declining performance associated with high relational capital, they also increase the overall gains for buying firms that have a low-to-moderate level of relational capital (see the left side of Figures 2 and 3). On average, the performance values were consistently superior for high (as compared to low) contractual explicitness and challenging goals

• The expectation of continuity might not work (a) when both parties do not share the same vision and (b) when there is financial stress. It could be that buying firms simply do not practice what they preach; they may profess long-term but actually act in a short-term manner.

• Under a financial stress, interviewed buyers admitted that they might consider severing existing collaborative supplier relationship or that they might tend to be more opportunistic with collaborative suppliers giving in to the overwhelming pressure on cost reduction

To avoid a cozy relationship between the boundary spanners from both sides. Among the benefits, rotation makes the BSR less dependent on personal relationships. It also creates a healthy competition among assigned procurement personnel—a procurement manager has more incentive to outperform when working with the supplier because his/her firm could readily compare supplier performance across rotating procurement managers.

Inter-organizational relationships

• One is contractual governance, which highlights the importance of contracts between firms and its formal rules to safeguard against opportunism and conflict. Contractual governance may define outputs to be delivered, specify monitoring procedures, and detail duties, rights, and contingencies

• It is shown that relational governance, trust in particular, is another type of governance to mitigate exchange hazards associated with uncertainty and transaction-specific investments and coordinate IORs

Contractual governance, also called “formal contract”, “legal contract”, “explicit contract”, or “legal safeguards”, refers to the extent to which one IOR is governed by a formal and written contract which explicitly stipulates the responsibilities and obligations of each party. By specifying each party’s rights and duties, contractual governance may reduce opportunism and safeguard IOR

• First, contracts may be incomplete. Because of human being’s bounded rationality, it is impossible to write a complete contract that anticipates all possible events and clarifies the appropriate actions of each part. It therefor lags functionality as a safeguard

• contracts may signal a lack of trust, which is detrimental for the cooperative IORs

• the application of contracts may be mismatched between cooperative parties. Some firms use contractual terms more rigidly while other firms use the terms more flexibly. The mismatch of the contract application between cooperative parties may generate conflicts and degrade cooperation. It is suggested that the rigid application of contracts may not only negatively impact the flexibility of cooperation but also lead to disputes and trust deterioration

Relational governance, also named “relational mechanism” or “social control”, refers to the extent to which one IOR is governed by social relations and shared norms. Different from contractual governance relying on formal structure and third party enforcement, relational governance relies on informal structure and self-enforcement of each party

• In the existing literature, trust and relational norms are two of the most frequently discussed relational governance types.

• Trust refers to the confidence in the partner’s integrity, credibility, and benevolence in a risky exchange relationship

• Relational norms refer to shared expectations about the behaviors of each party in IORs

While it takes extensive time and resources to develop, it can be easily destroyed. It is also threatened by its ambiguous nature and is likely to be abused by opportunism

• Social exchange theory (SET) maintains that trust is essential for stable social relations. The basic elements of social exchange are unspecified obligation and reciprocity.

• To prove that they are trustworthy, exchange parties will regularly discharge their obligations and invest in the relationship to show their commitment to the relationship. Cooperative parties are also required to follow the rules of reciprocity; otherwise, they will be punished by social relationships

• RET provides another mechanism to analyze the behaviors that are expected in IORs. Relational norms such as flexibility, information exchange, and solidarity remind cooperative parties that their relationship is whole, and they are expected to behave according to the shared relational norms.

• Relational norms are also considered an effective type of governance in existing IOR governance literature

contracts could not complement them to suppress opportunism because contracts are not significantly related to opportunism

Overall, contractual and relational governance tend to complement rather than substitute each other. Contracts no longer have a control function. When contracts also support coordination, they may not signal a lack of trust but a commitment to the relationship. Thus, contracts or the contracting process could be valuable in facilitating mutual understanding and improving trust

• Contracts, trust, and relational norms complement each other in decreasing opportunism and improving satisfaction and relationship performance. The findings provide evidence for the complementary joint effects of contractual and relational governance in reducing opportunism and improving satisfaction and relationship performance.

• By supporting the incentive structures of contracts, reducing the costs of contract execution, and facilitating more flexible adaptation to environmental changes, relational governance may improve the impacts of contracts on satisfaction and relationship performance

• By making each party’s behaviors more observable, reducing information asymmetry, and improving justice perception, contracts may strengthen the impacts of relational governance on satisfaction and relationship performance

• the legal system and power distance negatively moderate and collectivism positively moderate the contracts–trust relationship. Contracts could be a substitute for the control function of relational governance when the legal system is effective

• when the legal system becomes less effective, the coordination function of contracts may be more likely to be used to complement trust

• institutional environments with a high power distance, partners are less likely to be treated as equals and contracts are relatively more likely to be interpreted as control instruments

Contractual and relational governance are complementary in vertical IORs but independent in strategic alliances and cross-border IORs

• relationship length positively, rather than negatively, moderates the contracts-trust relationships. When relationship length is short, cooperative parties mostly rely on calculative logic and use contracts more to control opportunism

• repeated interaction gives each party enough time to familiarize itself with each other and possible contingencies around their relationships

• contracting becomes both less costly and more efficient when the relationship length is long. Furthermore, long-term interaction gives both parties opportunities to signal their commitment and intent to continue the relationship by displaying collaborative behaviors like revising obsolete contract clauses or making relationship-specific investments.

Successful IOICT implementation is an outcome that is mainly traced to a relational posture (Cheng, 2011). The findings of this paper also highlight the fact that IOICT implementation can benefit from an integrated view that includes both the contractual posture and relational posture