January, 2012

Supply Chain Trust

Special Issue

Special Issue Introduction Supply Chain Trust This months special issue explores the state of research and practice pertaining to supply chain trust. The topic of trust is not new and has been extensively studied in the fields of psychology, sociology and even economics. Its study, however, has largely been focused at the individual level. Supply chain research on trust, however, extends the domain of applicability to that of the firm and this represents fertile ground for research that is relevant to todays business environment. While economists such as Williamson (1985) and Arrow (1974) lead the discussion on the impact of trust on firm behavior, research in a supply chain context only began in earnest about 15 years ago. The articles abstracted this month highlight varying dimensions of supply chain trust that have been researched over the past 15 years. While they are not an attempt to be all inclusive of this field of research, they represent the key ideas moving forward. Early in his academic career, Gulati (1995) empirically demonstrates that a repetitive alliance formation between two firms generates trust and that subsequent alliances are more likely to involve less formal and less complex contracts such as nonequity-based contracts. A more recent study by Gulati and Nickerson (2008) weighs in on the debate of whether trust serves as a substitute for contracts or whether it acts as a complement to contracts. The two authors find that both can be true and provide empirical support to this point. One of the challenges faced by researchers in this field is agreeing on a common definition and measurement system of trust. Two of the articles in this special issue deal with this topic: Jones et.al. (2010) and Laeequddin et.al. (2010). While Jones et.al. focus on the two most relevant dimensions of trust to supply chain management (trust in competence and goodwill), Laeequddin et.al. provide a more broad overview of trust research as found in the fields of not only business, but also of psychology and sociology. These two papers are solid reference articles for those embarking on supply chain trust research. Building on the Jones et.al. (2010) study, Ha et.al. (2011) explore the two dimensions of affective trust (goodwill) and competency trust and empirically show its impact on logistics efficiency. A more refined categorization scheme is presented by Fawcett et.al. (2004) wherein the authors suggest five dimensions of supply chain trust. While few would argue that supply chain trust yields positive results, the reality observed by empirical analysis confirms that this concept remains elusive for most firms. The question then becomes, why is it elusive? Why are firms struggling with the implementation of increased trust-based relationships? In their seminal 2008 paper, Fawcett et.al. (2008) present a framework that highlights the management change process that is required for firms to embrace supply chain collaboration. A key point in this article is the role that top management plays in moving such a transformation forward. This topic of supply chain leadership is further discussed in Fawcett et.al. (2010). Summarizing the state of supply chain relationship research over the past few decades, Daugherty (2011) highlights not only what has been done, but what ripe opportunities exist for further research in this area, including test-based research. We hope you enjoy this special issue on supply chain trust!

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Review of logistics and supply chain relationship literature and suggested research agenda Journal: International Journal of Physical Distribution & Logistics Management, 2011, Vol. 41, No. 1, pp. 16-31 Authors: Patricia A. Daugherty Key Words: strategic alliances, distribution management, partnership, supply chain management http://search.proquest.com/docview/846768440?accountid=130991 Overview: A general review of relationship-focused research in logistics and supply chain management areas is provided followed by suggested areas for further research. The author makes it clear that the review is not comprehensive, but tries to be chronological and thematic in addition to focusing on relationally governed situations (Rinehart et al. 2004). In the 1980s and 90s, partnerships and alliances began to be more prominent in supply chain research. Early research examined what contributes to successful alliances and partnerships. The focus on alliances and partnerships gradually evolved into the more general topic of collaboration. Initial research sought to define collaboration and establish its benefits. Empirical research followed that identified antecedents to collaboration and also the three constructs of behaviors, culture and relationship interaction. Though much has been done, Daugherty outlines numerous opportunities for further research. General ideas on the following topics are discussed below. 1. Partnerships/alliances/collaborative relationships Though many of these work, many others fail or fall short. Research needs to be done to identify if this is due to current models or external effects such as the economic downturn. It might be productive to look at more than just a one buyer-one seller relationship. Another potential topic is how relationships are maintained over time to ensure that they remain healthy and worthwhile. 2. Improving chances of success Selective matching is already known to be an important factor, but if personal relationships are important, how is this managed to ensure success? Is it better to make purposeful decisions regarding personnel or to create cross-firm teams? How do cultural differences influence success? 3. Has the issue of power gone away? Are there principles that can be used to safeguard the smaller partner and still encourage good relationships? 4. Metrics and monitoring What are the most important metrics in measuring trust? Are these static or variable over time? Monitoring requires accountability. Is it possible to develop a standard approach to monitoring relationships? If not, are there certain elements that contribute to success? 5. Innovation There is a surprising lack of literature on logistics-focused innovation. One area of potential interest is the science of service and service innovation (Ostrom et al 2010).

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

6. Technology This includes research into how to prepare for future technologies and how to best use current ones in terms of increasing efficiency and cross-firm integration. It also involves investigating which technologies are the best in terms of improving performance. 7. Focus on service Many current models focus on products rather than services, yet many economies depend more on service related industries. Research could examine the pricing and valuing of service, service branding, creating a service culture, and all of the relationships involved in these processes. This area invites collaboration with researchers outside of the business department. Although much has been documented regarding relationships, there are clearly many more opportunities to do more.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Supply Chain Trust is Within Your Grasp Journal: Supply Chain Management Review, 2004, March, pp. 20-26 Authors: Stanley E. Fawcett, Gregory M. Magnan, Alvin J. Williams Key Words: trust, interorganizational relationships, supply chain management http://search.proquest.com/docview/221137287?accountid=130991 Overview: Trust is recognized as a key factor in improving supply chain collaboration. This paper argues that the gap between this recognition and its application is wide as evidenced by the consistent complexity of contracts between collaborators. Surveys and case studies provided the data for this research. The case studies were based on interviews with managers from various industries that represented all points along a supply chain. Through this process, the researchers sought to extract the participants views on trust and collaboration. From the responses, five dimensions of trust are explained offering a pathway to developing and strengthening trust in collaborations. The Performance Dimension For trust to exist, there must be performance. This means that companies must consistently fulfill commitments. Survey responses revealed that promises made by another company are often doubted and routinely reduced by a set amount before decisions are made whether or not to proceed in order to compensate for the tendency to overpromise. It is clear that keeping promises will increase trust. The Information-Sharing Dimension All information pertinent to a relationship or project must be openly shared for true trust to exist. This includes sharing sales data, forecasts, production plans and new product information. Some companies use quarterly business reviews or other opportunities to ensure that this happens regularly. The joint use of computer systems is not necessarily indicative of trust and can backfire if it is seen as an attempt to gain an advantage. The Behavioral Dimension Behaviors that foster trust include the sharing risks and benefits and investment in a partners capabilities, In fact, how well risks and benefits are shared is one of the most powerful indicators of trust. It is important that buyers treat suppliers well and assume some of the risk when certain expectations are laid out. Investing in supply chain partners demonstrates that the relationship is important. The Personal Dimension Trust inherently relies on personal relationships. Buyers and suppliers may not trust each others respective companies, but they must trust each other. These types of relationships can be encouraged through more one-on-one interaction, customer and supplier visits, and stable account management teams. The Two-Worlds Dimension This dimension describes the fact that suppliers are generally more dissatisfied with the level of trust than buyers. The reason? Power. When power is skewed, trust is harder to establish. For companies wanting to build trust these five dimensions can be applied using the following five behaviors: 1. Keep promises made. 2. Rely on open, not selective communication.
1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

3. Employ behaviors that show the other party is valued. 4. Build personal relationships. 5. Ensure that relationships are fair and mutually beneficial. An assessment of a companys culture of trust may also help direct future decisions. This must be done from and internal and external perspective to be valid. An outline of one way to carry out this type of assessment is shown in exhibit 2.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: A three-stage implementation model for supply chain collaboration Journal: Journal of Business Logistics, 2008, Vol. 29 No. 1, pp. 93-113 Authors: Stanley E. Fawcett, Gregory M. Magnan, Matthew W. McCarter Key Words: change management, transformational leadership, supply chain collaboration, qualitative study, in-depth interviews http://search.proquest.com/docview/212603139?accountid=130991 Overview: This article explores the key question of how a firm can successfully undergo the transformational process towards a supply chain orientation. Building on Lewins force theory, authors Fawcett et.al. depict a three-stage transformational process by which firms can achieve such transformation. The first stage is called unfreeze this includes the initial awareness of the need for change and a conscious willingness to do so. Often such awareness arises out of crises or leadership change. The second stage is called movement and is the unsteady, transformational state where a firm begins its initial foray into the change. Pilot projects are often used to vet out the pros and cons of the change and also generate the needed evidence so that management can more effectively evangelize the virtues of the proposed change. The third and final phase is called refreeze and is the process by which the change becomes institutionalized and refined. The authors conducted 51 in-depth interviews of firms across four different supply chain positions: retailers, finished-goods assemblers, direct material suppliers, and logistics service providers. The purpose of the interviews was to explore what practices firms used in pursuing successful collaborative relationships with their supply chain partners. A list of 25 of the top practices and requirements is published in the paper. The list is broken down into six key categories and include: management commitment, supply chain mapping and role definition, information sharing and system integration, people management and development, supply chain performance measurement and relationship management/trust building. While many of the firms were found to be engaged in implementing a number of the listed practices, most found the change management process challenging. The interviews suggested that the lack of collaboration is not a result of inadequate initiative, but rather a lack of maturity in managing the change process (pg.105). The findings of this paper hint that the key to success lies perhaps in better understanding the underlying corporate culture that drives the attitudes and perceptions of employees in implementing supply chain collaboration in their firms. A study of best practices alone may not yield the necessary explanations of what leads to success and what leads to failure in this endeavour. One key example related to this Ontario Institute special issue is the implementation of trust in business relationships. Any transformational efforts to increase the use of trust in business relationships is most likely going to require a cultural transformation as opposed to a more concerted effort to implement any specific practice. This article lays the groundwork for follow-on studies that may want to take a more focused approach on the role of culture in achieving supply chain collaboration transformation.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: The Indispensable Supply Chain Leader Journal: Supply Chain Management Review, 2010, September/October, pp. 22-29 Authors: Stanley E. Fawcett, Joseph C. Andraski, Amydee M. Fawcett, Gregory M. Magnan Key Words: trust, supply chain leader, cross-functional http://search.proquest.com/docview/903552556?accountid=130991 Overview: The authors introduce the concept of an indispensable supply chain leader, This individual possesses more than the requisite knowledge and skills to carry out supply chain processes. He also possesses a mindset and perspective that allow him to coordinate the supply chain effectively. This type of leader is extremely hard to find as interviews with 112 companies in Asia, Europe and the U.S. revealed. Four characteristics of these indispensable leaders are described. First of all, an indispensable supply chain leader can be described as a cross-functionalist. This involves more than just functional skills and encompasses the ability to lead a collaborative effort. This type of person is critical to improving supply chain collaboration in general. To develop cross functionalist employees, companies take one of several approaches keeping in mind that the goal is to provide exposure, experience, and responsibility along the entire supply chain. Some companies have long-term training programs where new hires are rotated to a new function or area with more supervisory authority after a period of 1-2 years. The drawback is that many firms do not have 10 years to fully invest in an employee. Another option is fast-track cross-experiencing that reduces the length of the program to 2 years. Other companies are trying out rotations that last 3-6 months and cover all the basic areas within the business. One more option is to involve managers in task forces and projects outside of his normal responsibilities. It is important to note that companies must beware of competitors that try to poach these supply chain leaders. Indispensable supply chain leaders are also choreographers; they are able to select the right personnel and get them to work together efficiently. Choosing the right people is a skill that many possess. Orchestrating the group is more difficult as it relies more on creativity and intuition. Another role of the indispensable supply chain leader is that of coach. This incorporates teaching and motivating as well as correcting. The ability to perform these tasks well relies on trust. In particular, those involved must trust that the coach has their best interests in mind. A person with this skill set is especially difficult to find today, but is critical to effective collaboration. Coaching must not be confused with control. The last character is that of champion. Supply chain champions possess a strong work ethic, creativity and personal influence based on credibility. Because of this, they are highly successful in teams or when delegating tasks to others. Successful champions share four behaviors. They scan constantly, take proactive risks, create safe harbors, and cultivate and celebrate successes. These behaviors lead to greater trust and better performance. Cultivating indispensable supply chain leaders may be a scary prospect, but it can be done. Many companies are taking steps to develop these types of employees. Doing so will lead to better collaboration, increased trust and improved performance.
1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Interorganizational trust, governance choice, and exchange performance Journal: Organization Science, 2008, Vol. 19 No. 5, pp. 688-708 Authors: Ranjay Gulati and Jack A. Nickerson Key Words: interorganizational relations, supply chain trust, transaction cost economics, case study, switching regression http://search.proquest.com/docview/213831780?accountid=130991 Overview: Williamson (1991) argued that firms organize their resources according to a myriad of determinants that include the costs associated with supplier search, contract generation and contract enforcement. Firms can choose one of three methods: buy product x from the market, ally with a firm (alliance or joint venture) to make product x or make product x internally. Williamson recognized that interorganizational trust could serve to reduce the costs associated with developing and enforcing contracts associated with the three options. Since Williamsons early work, many studies have been conducted that empirically confirm Williamsons theory of transaction cost economics. These studies have also given rise to an interesting debate: some argue that trust can serve as a substitute for contracts while others argue that trust serves as a complement to contracts. In this article, Gulati and Nickerson explore the two sides of the trust debate and hypothesize that trust can serve as both a substitute and as a complement to contracts under certain conditions. At the condition where a firm is marginally disposed towards one of the three organization structures, trust may reduce transaction costs sufficiently to sway the decision to another structure. In this case, trust serves as a substitute. Further, the authors argue that irrespective of governance choice, all interorganizational relationships benefit from trust given the reduced operating costs and risks assumed. In this sense, trust is a complement to contracts as it improves the operational efficiency of the dyad by decreasing cost. In order to test their hypotheses, Gulati and Nickerson use data from a survey of 222 sourcing arrangements at 2 large automotive OEMs (Ford and Chrysler). Additionally, the authors conduct indepth case studies to refine their survey instrument. Using switching regression, they find empirical support for their hypotheses and confirm that trust can serve both as a substitute and a complement to contracts bv min interorganizational relationships.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Suppliers affective trust and trust in competency in buyers Journal: International Journal of Operations & Production Management, 2011, Vol. 31, No. 1, pp. 56-77 Authors: Byoung-Chun Ha, Yang-Kyu Park, Sungbin Cho Key Words: trust, suppliers, buyers, supply chain management, korea http://search.proquest.com/docview/817162326?accountid=130991 Overview: This study examines trust and its effect on supply chain collaboration and logistics efficiency. It differs from previous studies in two ways. First, trust is examined from the viewpoint of supplier not buyers. Second, trust is divided into two categories: affective trust and trust in competency. Affective trust encompasses the emotional aspects of a long-term, inter-personal relationship such as openness, positive mutual understanding, honesty, and respect. Trust in competency refers to the expectation of certain behaviors based on the knowledge, and expertise of the other party. This includes business capability, a willingness to accept partners expertise, and unique knowledge/skills. The construct of logistics efficiency was used to measure overall performance and collaboration based on five categories: order fill rate, order fulfillment lead time, operations flexibility, inventory turnover, and total logistics cost. Data was collected using surveys of supply chain managers within Korean companies that functioned as suppliers. These companies represented many different industries. Path analysis, using PROC CALIS was applied to examine the effects of affective trust and trust in competency on the three dimensions of supply chain collaboration, which are joint decision-making, information sharing, and benefit/risk sharing. Then, the effect of these three dimensions on logistics efficiency was investigated. All constructs satisfied the condition of the standardized Cronbach alpha value being greater than or close to 0.7 thus showing them to be reliable. Confirmatory factor analysis indicated that the proposed model was valid. Data analysis showed that affective trust had a significant impact on supply chain collaboration with respect to information sharing. Trust in competency had an effect on joint decision-making. Both types of trust influenced benefit/risk sharing. Joint decision making and information sharing in turn affected logistics efficiency. The three relationships between affective trust and joint decision-making, trust in competency and information sharing, and benefit/risk sharing and logistics efficiency were shown to be insignificant. These results are not general since the scope of the study was limited to a particular region. Further analysis is required to see if the model applies generally. Other potential areas of research would take into account cultural effects and power relationships between suppliers and buyers.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Benchmarking trust signals in supply chain alliances: moving toward a robust measure of trust Journal: Benchmarking: An International Journal, 2010, Vol. 17 No. 5, pp. 705-727 Authors: Stephen L. Jones, Stanley E. Fawcett, Amydee M. Fawcett, Cynthia Wallin Key Words: trust, supply chain management, collaboration, measuring trust http://search.proquest.com/docview/749474395?accountid=130991 Overview: This paper accomplishes three main objectives: 1) it provides an overview of how interorganizational trust has been measured in past supply chain research, 2) it proposes two different dimensions of trust that have previously been combined into a single construct, and 3) it empirically highlights five different signals that firms can use to build trust with supply chain partners. Authors Jones et.al. first discuss the two key dimensions of trust: competence and goodwill. Competence trust exists when a firm believes in the capabilities of another firm to execute according to contract. This belief is either supported or weakened through repeated delivery and payment performance that either confirms or disconfirms the initial belief. Goodwill trust, however, concerns the belief of a firm that the other firm desires fairness in all outcomes and will work to maintain that fairness irrespective of the opportunities that exist to do otherwise. These dimensions are considered orthogonal and should be measured separately. Jones et.al. list five prior supply chain papers published that mix these dimensions of trust and argue that future research in supply chain trust should incorporate this consideration. The authors present a 2X2 matrix that has as its axes the two dimensions of trust where each dimension is divided into two groups, adequate and outstanding. They discuss the relevance of each of the quadrants. Of key interest is the quadrant where both competence and goodwill trust are outstanding. This scenario, the authors argue, is what is needed to achieve the breakthrough collaborative trust that so few firms are able to achieve. Trust signals are presented as actions that firms can take in order to increase trust in the relationship. These signals include: 1) performance to promise, professional relationships, openness, benevolent collaboration and empathy. A survey of 189 firms is used to empirically assess the general areas of strength and weakeness across these five signals. The authors confirm that collaborative trust remains elusive and is best achieved when firms develop both dimensions of trust using all signals. The two signals that set the top performers apart are benevolent collaboration and empathy. This paper presents some important considerations for those engaged in supply chain trust research, however the paper is not without some weakness. The paper does not pull from the rich knowledge base already developed in sociology and economics on the role of trust in business relationships. It could be strengthened by this theoretical exploration. Additionally, while descriptive statistics are provided on the survey results, no correlation or covariance matrix is provided thus not enabling readers to study the data for themselves.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

Title: Measuring trust in supply chain partners relationships Journal: Measuring Business Excellence, 2010, Vol. 14 No. 3, pp. 53-69 Authors: Mohammed Laeequddin, B.S. Sahay, Vinita Sahay, K. Abdul Waheed Key Words: trust; measurement; supply chain management, conceptual http://search.proquest.com/docview/746317478?accountid=13099 Overview: This conceptual article proposes a methodology for analyzing trust based on a riskmanagement framework. The papers key tenant is that trust is the assumption of acceptable risk and where risk is not acceptable, trust should not exist. Where no risks exist, perfect trust can exist. Where risk exists but is at an acceptable level (anticipate benefits exceed anticipated negative repercussions) then the situation can be considered worthy of trust, or in the authors words, trust-worthy. Where risk exceeds anticipated benefits, no trust should exist. The authors propose taking the multiple categories of trust and scoring each from a scale of 1 10 and then categorizing them in the three groupings just discussed. A major strength of this paper is its review of the extant literature across various fields such as psychology, sociology and economics. The authors provide over 40 unique definitions and statements regarding trust including their respective citations. This is perhaps one of the best definitional surveys published on this topic. In addition to the definitional survey, the authors also provide a table that lists 12 different papers that measured trust and the exact measure used for those studies. The analysis of trust through the lens of risk management is an interesting proposition and has merit of consideration in future supply chain management research. The focus, however, that trust can be quantified has its limitations. What the authors do not recognize is that very few, if any business managers will actually sit down to run a calculation to determine whether or not they should trust a supply chain partner. Behavioral economics has offered this same challenge to traditional economics and the concept of bounded rationality and other behavioral considerations have an important place in such a debate.

1 Dundas Street West, PO Box 64, Suite 2704 Toronto, Ontario M5G 1Z3 Tel. 416-977-7566 Fax. 416-977-4135 info@oipmac.ca www.oipmac.ca

ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA