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Complementary theories to supply chain management

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DOI: 10.1108/13598540710759808

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Research paper

Complementary theories to supply chainmanagement

Arni Halldorsson

School of Management, University of Southampton, Southampton, UK, and University of Reykjavik, Reykjavik, Iceland, and

Herbert Kotzab, Juliana H. Mikkola and Tage Skjøtt-LarsenDepartment of Operations Management, Copenhagen Business School, Frederiksberg, Denmark

AbstractPurpose – The paper seeks to discuss and develop SCM as a scientific discipline using different theories from non-logistics areas to explain inter-organizational phenomena. It also attempts to establish a frame of reference that allows us to mitigate the gap between the current SCM research andpractice and the theoretical explanations of how to structure and manage supply chains.Design/methodology/approach – The paper introduces three different perspectives that together will contribute to a broader understanding of SCMin practice: an economic perspective; a socio-economic perspective; and a strategic perspective. The theoretical framework is applied to two importantresearch topics within SCM: third party logistics (TPL); and new product development (NPD).Findings – There is no such thing as “a unified theory of SCM”. Depending on the concrete situation, one can choose one theory as the dominantexplanatory theory, and then complement it with one or several of the other theoretical perspectives.Research limitations/implications – The way the four theories complement one another is explored on a conceptual basis, but further research intothis direction may explore more deeply how these alleged complementarities occur in practice, and how managers mould their decisions by these ideas.Practical implications – The four theories can provide normative support to important management decisions in supply chains, such as outsourcing,safeguards against opportunism, and alignment of incentives.Originality/value – The main contribution is that one cannot rely on one theoretical explanation when analyzing phenomena in SCM. It is neccessaryto consider several theories and how they may complement one another in order to provide a more comprehensive view of SCM.

Keywords Supply chain management, Product development

Paper type Research paper

1. Introduction

1.1 Starting-point of considerations

The practical field of supply chain management (SCM) is

constantly changing, as the competitiveness of international

companies is more and more dependent on their capability to

produce and deliver customized products and services fast

and efficiently all over the world. At the same time, an

increasing percentage of the value creation takes place outside

the boundaries of the individual firm (see, for example, Bruce

et al., 2004). This induces higher complexity and diversity

into management decisions regarding the structure of the

operations, the positioning of activities and processes, the role

and power of the participants, and the most efficient forms of

collaboration between all members in a transformation chain

between production and consumption, which we call a supply

chain. These issues also impact on research in the field of

operations management. In order to understand and to

explain decision-making and practices in a complex network

of collaborating firms (see also Rudberg and Olhager, 2003),

we need to draw on several behavioral and organizational

theories and frameworks in combination. Our approach is

therefore important, as this coupling of organizational

theories with SCM is not often discussed within the

audience of this journal.Lamming (1996) introduces the theory of SCM as an

extension of logistics, though referring to the extended need

of relationship issues to be considered in the theory of SCM.

However, the notions still remain on a more applied than

theory-building level. Larson and Halldorsson (2004) discuss

four unique perspectives on the relationship between logistics

and SCM. Tan et al. (1999, 2002), as well as Akkermans et al.

(1999), recognize the customer orientation as one important

ingredient as well as the simultaneous integration of

upstream, downstream and internal performance systems.

Also here we can identify implicitly an organization’s

behavioral backbone, which is not explicitly presented. This

also applies to Romano and Vinelli (2001), who try to

distinguish SCM from logistics, but fail to discuss the

theoretical ground for this type of inter-organizational

management. The importance of interactions between

different parties is presented and discussed by Salvador et al.

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[DOI 10.1108/13598540710759808]

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(2001). However, these interactions were rather accepted as a

given status than critically scrutinized.We presume the necessity of presenting and discussing

organizational theories for managing supply chains and will

therefore combine in this article four different theories:1 the principal-agent theory;2 transaction cost analysis;3 the network theory; and4 the resource-based view.

We will show that our choice is based on the assumption that

there might be no “right” theory for the management of

supply chains.

1.2 The research problem and objective of the paper

This paper looks into how theories from other disciplines canbe applied within SCM and ultimately used to develop SCM.

We follow Maaloee’s (1997) classification of theories, later

discussed in the context of logistics by Arlbjoern and

Halldorsson (2002), that explain a problem:. grand theories (particular science with specific concepts,

e.g. philosophy of science);. middle-range theories (worked connections between a set

of concepts represented by socio-economic theories

applied in various managerial disciplines); and. small-scale theories (limited number of concepts

presented as propositions, e.g. the “fit” model of

products and supply chain by Fisher, 1997).

In this paper, we will focus especially on Maaloee’s (1997)

suggestion that middle-range theories can be used to reflect

connections between a set of concepts that represent key

decisions of SCM. Only few contributions demonstrate how

to deal with the phenomena of SCM from a middle-range

theoretical perspective (New, 1997; Mears-Young and

Jackson, 1997; Olavarrieta and Ellinger, 1997; Handfield

and Melnyk, 1998; Logan, 2000; Arlbjoern and Halldorsson,

2002; Ketchen and Guinepero, 2004; Cousins, 2005).The objective of our article is to develop and discuss a

middle-range theoretical foundation of SCM based on

different notions of socio-economic theories trying to

explain inter-organizational phenomena. We use these

theories because we are interested in answering two questions:1 How to structure a supply chain when it is perceived as a

collaboration of institutions?2 What is needed to manage a particular structure?

To gain insights into the institutional set-up of SCM

arrangements, we have established a frame of reference that

allows us to look at SCM from an institutional and socio-

economic perspective. We have chosen transaction cost

analysis (TCA) and the principal-agent theory (PAT) to

answer the first question, as these theories are typically used

to identify the best structure of and within institutions (e.g.

Croom, 2001; Eisenhardt, 1989; Williamson, 1985, 1999;

Coase, 1937). The second question will be answered by

adapting the RBV and the network perspective (NT), because

these theories look at institutions’ use of resources to stay

competitive and the dynamics of inter-organizational

relationships. All the selected approaches are well

recognized in non-logistics disciplines, such as organization

economics (TCA, PAT), marketing and purchasing, and

strategic management (RBV), but so far their explanatory

force has been sparingly applied in SCM (see Croom, 2001;

Logan, 2000; Skjoett-Larsen, 1999). All four theories, each of

which touches upon specific issues related to SCM, have amuch longer history in business management than theconcept of SCM itself.On this basis, we will show how the developed frame of

reference can be applied to two SCM research domains:1 third party logistics (TPL); and2 new product development (NPD).

These two areas have been chosen for several reasons. First,

both are of strategic importance for managing the supplychain. Second, both are important elements in the SCMconcept. Third, both areas imply the creation of a long-term,inter-organizational arrangement that not only aims to

promote operative improvements, but also to guide or leadthe strategic direction of companies. Fourth, they representtwo distinctive functional streams in a supply chain that aregaining increasing importance, both within academia and

companies:1 service; and2 research and development (R&D).

Although the strategic impact of NPD has always been a part

of SCM, only recently has it received more attention in theliterature, especially under the topics of early supplierinvolvement in NPD (see Dowslatshahi, 1998; Wynstraet al., 2001; Ragatz et al., 1997; Wasti and Liker, 1997), masscustomization (see Duray et al., 2000; Salvador et al., 2002;Pine, 1993; Mikkola and Skjøtt-Larsen, 2004), andpostponement (see van Hoek, 2001; Pagh and Cooper,1998; Feitzinger and Lee, 1997; Ernst and Kamrad, 2000).

This is not surprising, as many high-tech industries are facingincreasing challenges imposed by shorter product life cycles,increasing customization of products, and supply chainintegration. Not only are these firms contemplating

outsourcing their NPD activities, they also have to maintainsustainable growth and stay profitable. Many firms, such asVolkswagen, Lego, Sony and Philips, are coping with thesechallenges through platform strategies to meet their

customers’ needs while protecting their core competencies.When product innovation is perceived as the source ofcompetitive advantage, product architecture design strategiesthrough modularization and related outsourcing decisions

become a central issue in SCM. Component and NPDoutsourcing decisions are typically made concurrently withthe decomposition of product architectures, from whichrecombinability, substitutability, commonality, and

distinctiveness possibilities are determined (Mikkola,2003b). The success of NPD activities depends on theamount of transaction costs incurred, resource allocation,power propensity among the members of the supply chain,

and inter-organizational dependencies shared between allmembers in the supply chain.TPL is also progressively representing multiple facets that

share some important features of SCM relationships. Moreimportantly, its managerial practice consists of logisticsoperations performed by a TPL provider on behalf of theircustomers. According to Berglund et al. (1999), TPLrepresents a “separate industry” creating value for theircustomers, not only in terms of costs but also in terms ofdeveloping the customer’s business processes. Thesecompanies are often themselves organized in a network of

operators with various skills representing multiple locations(Hertz and Alfredsson, 2003). TPL, or outsourcing of

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Arni Halldorsson et al.

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logistics activities, is increasing both in terms of number and

type (see, for example, Larson and Gammelgaard, 2001). In

addition to conducting the make-or-buy decision, the processof purchasing logistics services, which includes acquiring

resources and competencies, may take years to conduct

(Andersson and Norrman, 2002). Beyond the acquisition ofservices and development of the particular solution is the

management of relationships between buyers and logistics

providers, which often takes the form of a close, long-termrelationship in which trust may serve as a coordination

mechanism in addition to the formal contract (Skjoett-Larsen, 2000). Empirical evidence demonstrates that TPL

arrangements have become an important feature of the

buyer’s attempt to exploit, leverage, and develop logisticsresources and competencies through inter-firm relationships

(see, for example, Halldorsson and Skjoett-Larsen, 2004).The article is structured as follows. After an introduction,

which includes an argument for the need of this research, we

present our understanding of SCM and theory building. Inthe third section, we introduce the four theories that are

developed outside SCM thinking and practice, but which

nevertheless can be useful in structuring and analyzingmanagement decisions in supply chains. The paper concludes

with a summary of our efforts and a critical outlook on future

research.

2. The theoretical foundations of SCM

The supply chain encompasses organizations and flows ofgoods and information between organizations from raw

materials to end-users (Handfield and Nichols, 2002). The

supply chain is a meta-organization built up by independentorganizations that have established inter-organizational

relationships and integrated business processes across theborderlines of the individual firms. A supply chain can also be

characterized as a borderless organization (e.g. Picot et al.,2001), a value net (Bovet and Martha, 2000), a virtual supplychain (Chandrashekar and Schary, 1999), an interactive firm

(Johansen and Riis, 2005), a multi-organization/single-site

coordinated operations network (Rudberg and Olhager,2003), or an extended enterprise (Davis and Spekman,

2004; Boardman and Clegg, 2001). Management of such anarrangement refers to inter-organizational relationship

management with the objective of improving the overall

profitability of the activities and/or organizations involved.The current literature on SCM seems to agree on the nature

of the phenomena (e.g. Persson, 1997).Although SCM has existed for almost 25 years, it still lacks

a socio-economic theoretical basis that may be used to explain

and understand this particular form of inter-organizationalarrangement. Initially, two consultants from Booz, Allen and

Hamilton (Oliver and Webber, 1982) introduced the SCM

concept. Several authors have traced the theoreticalfoundations of SCM. Thus, Svensson (2002) found that the

theoretical foundation of SCM and Alderson’s functionalist

theory (Alderson, 1957) have many similarities. Mentzer et al.(2004) presented a unified theory of logistics based upon

logistics capabilities as a source of competitive advantage.Recently, academics have presented valuable contributions,

enhancing our understanding of the concept of inter-

organizational management of different flows of productsand/or information (e.g. Ballou et al., 2000; Heikkilä, 2002;Monczka and Morgan, 1997; Srivastava et al., 1999; Frazier,

1999; New and Westbrook, 2004). The majority of

contributions focus on definitions and concepts from afunctional point of view (e.g. logistics, operations, marketing,and purchasing), providing pragmatic recommendations onhow to improve a firm’s performance and implementation ofpostponement by supply chain reconfiguration. Prominentexamples of such approaches can be found in Mentzer et al.(2001), Cooper et al. (1997), Cigolini et al. (2004), Lambertet al. (2005) and Croxton et al. (2001). Current frameworksof SCM present solutions on how to design and manageparticular relationships between various stages in a chain, butthey do not address the economic, strategic, and socio-economic theoretical rationales behind them (e.g. Min andMentzer, 2004; Chen and Paulraj, 2004a, b).The next section discusses SCM from the four chosen

inter-organizational theories, and makes a cross-comparisonbased on specific characteristics of the theories.

3. Developing a middle-range theoretical base forSCM

3.1 Fundamental issues of SCM

The literature supports the view that the integration of keybusiness processes within and across companies that addvalue for customers and other stakeholders can be called

SCM (see Cooper et al., 1997; Bechtel and Jayaram, 1997).Definitions of SCM originate from the operationsmanagement literature referring to issues such as NPD,customization and distribution of goods, including thebalancing of demand needs and capacity requirements inthe transformation of raw materials into final productsdelivered to customers (e.g. Lee, 1993). Within the logisticsdiscipline, Cooper and Ellram (1990, p. 2) define SCM as an“integrative philosophy to manage the total flow of adistribution channel from supplier to the ultimate user”.Both Harland (1996) and Christopher (1998) reach anotherconclusion. Instead of managing flows, SCM is seen as themanagement of a network. Harland (1996, p. 64) defines

SCM as “the management of a network of interconnectedbusinesses involved in the ultimate provision of product andservice packages required by end customers”. Rather thanlooking at SCM as the management of a vertical pipeline ofinter-linked firms, Harland (1996) considers SCM asmanagement of a complex network of organizations involvedin exchange processes. Christopher (1998) argues that theword “chain” should be replaced by “network”, since the totalsystem normally includes multiple suppliers and customers aswell as multiple suppliers to suppliers and customers’customers. Some scholars (e.g. Christopher, 1998; Heikkilä,2002) also suggest that “supply chain management” shouldreally be termed “demand chain management” to reflect thefact that the chain is driven by the marketplace to satisfy the

needs of the end-users. Another argument is that withinmarketing SCM is presented as one of the core businessprocesses, which includes purchasing and physicaldistribution activities (e.g. Srivastava et al., 1999).However, all attempts refer to one specific “setting”, which

is the management of relations of independent organizationsin a particular structure. Consequently, we understand such

management as the coordination and interaction of decisionmakers (i.e. human beings) from economic institutions withina system based on division of labor (Göbel, 2002). In thatsense, we develop a middle-range theoretical frame of

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reference to explain SCM based on TCA, the PAT, the RBVand the NT. We do not claim that these theories are the onlyones that can be used to establish a theoretical framework ofSCM. But since we understand supply chains asinterconnected socio-economic institutions, we argue thatthese theories are most useful to explain both structure andmanagement issues of supply chains. Other theories andframeworks that focus on other aspects of SCM includerelational contracting theory and resource dependency theoryfrom the organizational sciences (e.g. MacNeil, 1980; Pfefferand Salancik, 1978), the political economy frameworks (e.g.Stern and Reve, 1980), the dynamic capabilities framework(Teece et al., 1997; Eisenhardt and Martin, 2000), and theevolutionary theory of economic change (Nelson and Winter,1982). These supplementary aspects include power regimesin supply chain relations (Cox et al., 2001), dynamic design,redesign of the firm’s chain of capabilities (Fine, 2000), andthe importance of path dependence and organizationalroutines (Nelson and Winter, 1982). However, it is beyondthe scope of the current paper to discuss these supplementaryaspects.

3.2 The logic of the selected set of inter-organizational

theories3.2.1 SCM mitigating agency problems – the principal-agenttheory (PAT)Based on the separation of ownership and control ofeconomic activities between the agent and the principal,various agency problems may arise, such as asymmetricinformation between the principal and the agent, conflictingobjectives, differences in risk aversion, outcome uncertainty,behavior based on self-interest, and bounded rationality. Thecontract between the principal and the agent governs therelationship between the two parties, and the aim of thetheory is to design a contract that can mitigate potentialagency problems. The “most efficient contract” includes theright mix of behavioral and outcome-based incentives tomotivate the agent to act in the interests of the principal(Eisenhardt, 1989; Logan, 2000).The alignment of incentives is an important issue in SCM.

Misalignment often stems from hidden actions or hiddeninformation. However, by creating contracts with supplychain partners that balance rewards and penalties,misalignment can be mitigated (Narayanan and Raman,2004; Baiman and Rajan, 2002).

3.2.2 SCM as coordination of transferred rights of disposals –transaction cost analysis (TCA)TCA offers a normative economic approach to determine thefirm’s boundaries and can be used to present efficiency as amotive for entering inter-organizational arrangements(Williamson, 1975, 1985, 1996). A company may reduce itstotal transaction costs (ex ante and ex post costs of contact,contract, and control) by cooperating with external partners.The key question is: why do firms exist? In the context ofSCM, this question is addressed as: which activities should beperformed within the boundary of each firm, and whichactivities should be outsourced? SCM relationships arerepresented by the hybrid mode of governance betweenmarkets and hierarchies. Asset specificity (limited value in analternative application of, for example, physical, site, human,and dedicated assets) is the most influential attribute of thetransaction (Rindfleisch and Heide, 1997). Behavioralassumptions of bounded rationality and the risk of being

subject to opportunistic behavior from a partner also

influence the transaction costs. Bounded rationality may

result from insufficient information, limits in management

perception or limited capacity for information processing.

Mechanisms for mitigating the risk of opportunism include

safeguards and credible commitments such as long-term

contracts, penalty clauses if a partner fails to fulfill the

contract, equity sharing, and joint investments. According to

Williamson (1996), trust between the parties is based on

“calculated risk” and not on personal trust between

individuals.TCA has often been used in make-or-buy decisions in

supply chains. Examples are outsourcing of logistics activities

(Maltz, 1993; Andersson, 1997; Halldorsson, 2002), buyer-

supplier relationships (Mikkola, 2003b; Bensaou, 1999;

Stuart and McCutcheon, 1996), and restructuring of supply

chains (Croom, 2001). In essence, TCA is a useful

instrument to decide whether a transaction should be

performed in the marketplace or in-house.

3.2.3 SCM as reciprocated interactions between institutions –the network perspective (NT)The performance of a firm depends not only on how

efficiently it cooperates with its direct partners, but also on

how well these partners cooperate with their own business

partners. NT can be used to provide a basis for the

conceptual analysis of reciprocity (Oliver, 1990) in

cooperative relationships. Here, the firm’s continuous

interaction with other players becomes an important factor

in the development of new resources (Haakansson and Ford,

2002). Relationships combine the resources of two

organizations to achieve more advantages than through

individual efforts. Such a combination can be viewed as a

quasi-organization (Haakansson and Snehota, 1995;

Haakansson, 1987). The value of a resource is based on its

combination with other resources, which is why inter-

organizational ties may become more important than

possessing resources per se. Thus, the resource structuredetermines the structure of the supply chain and becomes its

motivating force. The network theory (NT) contributes

profoundly to an understanding of the dynamics of inter-

organizational relations by emphasizing the importance of

“personal chemistry” between the parties, the build-up of

trust through positive long-term cooperative relations and the

mutual adaptation of routines and systems through exchange

processes. Through direct communication, the relationships

convey a sense of uniqueness, ultimately resulting in supply

chains as customization to meet individual customer

requirements. The parties gradually build up mutual trust

through the social exchange processes. A network does not

seek an optimal equilibrium, but is in a constant state of

movement and change. Links between firms in a network

develop through two separate, but closely linked, types of

interaction: exchange processes (information, goods and

services, and social processes) and adaptation processes

(personal, technical, legal, logistics, and administrative

elements) (Johanson and Mattsson, 1987).NT is descriptive in nature and has primarily been applied

in SCM to map activities, actors, and resources in a supply

chain. The focus has been on developing long-term, trust-

based relationships between the supply chain members.

Examples of issues include buyer-supplier relationships

(Gadde and Haakansson, 2001), third party logistics

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(Halldorsson, 2002), and management roles in supply

networks (Harland and Knight, 2001).

3.2.4 SCM as coordination of relational assets – the resource-based view (RBV)Only a few articles have applied the resource-based view

(RBV) to the field in focus in order to obtain the sources ofcompetitive advantage through SCM (Lewis, 2000; Pandza

et al., 2003; Rungtusanatham et al., 2003; Carr and Pearson,2002) or to analyze the structure of chains and industrial

clusters (Miller and Ross, 2003; de Olivera Wilk andFensterseifer, 2003).The RBV deals with competitive advantages related to the

firm’s possession of heterogeneous resources (financial,

physical, human, technological, organizational, andreputational) and capabilities (combination of two or more

resources) (Grant, 1991; Penrose, 1959; Prahalad andHamel, 1990). These resources and capabilities constitute

the core competence of the particular firm and serveultimately as its source of competitive advantage. The static

stream of research focuses on attributes that contribute to theheterogeneity of resources and capabilities. Four barriers may

prevent competitors from imitating a firm’s resources andcapabilities:1 durability;2 transparency;3 transferability; and4 replicability (Prahalad and Hamel, 1990).

These attributes may also apply to inter-organizationalarrangements (Jap, 2001). The more dynamic aspects of the

RBV consider a firm’s core competence to be its ability toreact quickly to situational changes and build further

competencies (Prahalad and Hamel, 1990) or dynamiccapabilities (Eisenhardt and Martin, 2000). Hence, a firm’s

competitiveness is associated with the configuration ofresources and capabilities as the markets evolve. However,

inter-organizational relationships may also facilitate andadvance the learning processes of individual firms. As such,

relationships are not only output-oriented but also learning-oriented. Efficiency may not only be explained in terms of

productivity or operational measures, but also in terms of theopportunity to access another firm’s core competencies

through cooperative arrangements as an alternative tobuilding such competencies in-house (Haakansson et al.,1999).The RBV is an implicit assumption in many supply chain

decisions. Often, outsourcing decisions are based on the ideaof focusing on core competencies and outsourcing

complementary competencies to external partners. TPL andoutsourcing of standard components and processes to

subcontractors are examples. However, outsourcing ofdesign, NPD, or software development is often a way to

gain access to other supply members’ core competenciesthrough inter-organizational collaboration.Table I summarizes and compares the specific

characteristics of the four selected theories, which should

be viewed as complementary and not mutually exclusive.The PAT stresses issues of inter-firm contracting and

ultimately the notion of supply chain transparency. TheTCA considers hybrids such as integrated supply chains as

the result of a market failure, whereas the NT and the RBVsee the supply chains as a means to access resources and

competencies outside the focal firm (Skjoett-Larsen,

1999). Easton and Araujo (1993) assert that the RBV

poses a “narrow conceptualization of the firm as a businessentity” indicating that this stream of research may benefit

from both the network approach (NT) and the vision ofSCM.In the following sections, we demonstrate how the four

theories can contribute to answering our two questions

adapted to two selected fields of application within SCM:1 third party logistics (TPL); and2 new product development (NPD).

4. The theoretical framework applied tothird-party logistics (TPL)

Within the realm of SCM, the case of TPL illustrates the

efficient governance structure for the “make-or-buy” decisiondepending on the characteristics of the transactions. Table II

provides an overview of how the four theories can be appliedto TPL. The four theoretical approaches increase our

understanding of TPL by offering a complementary view ofwhy TPL relationships exist (TCA), just as they guide inter-firm interactions based on contracts (PAT) into long-term

relationships (NT) supporting a firm’s core competence(RBV).

4.1 The principal-agent theory and TPL

Balancing the need of the shipper and the capability of the

TPL provider is a well-known managerial issue (e.g. Hertzand Alfredsson, 2003) that explicitly implies the risk ofagency problems. The PAT suggests an “inter-firm

contracting perspective” on TPL, focusing on the designof an efficient contract between the buyer and seller of

logistics services. The idea is to develop the most efficientcombination of outcome and behavioral incentives in the

contract between the shipper and the TPL provider. Theextent to which the TPL provider’s performance can bemeasured and controlled has a great effect on whether the

provider is paid by actual performance (e.g. number oforders picked, packed, and shipped to the customers) or

according to behavioral outcomes (e.g. salaries, hours, and/or miles). Not all aspects can be covered ex ante in thecontract. Therefore, the issue of contracting should be arevisiting issue in TPL relationships.

4.2 Transaction cost analysis and TPL

By reducing the supplier base of transport firms and enteringinto close and long-term cooperation with a few key

operators, a firm may reduce the transaction costs related tocollecting information about numerous suppliers, the costs of

negotiating and writing a contract, and the enforcement costsafter the negotiation of a contract. However, closecooperation also involves the risk of opportunistic behavior.

Therefore, it might be necessary to incorporate “safeguards”and “credible commitments” into TPL agreements, such as

penalty clauses related to poor delivery performance, jointinvestments in dedicated warehouses or equipment, joint

training programs, and exchange of employees between thefirms.

4.3 The network perspective and TPL

To TPL, the NT presents openness and trust between theparties as a condition for gaining the best possible results

from cooperation. Over time, mutual adjustments improve

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administrative and logistical systems, making them more

efficient. Examples of adjustment processes might be an

electronic data interchange (EDI) connection between the

client and the TPL operator or the implementation of a

quality control system. By entering into close cooperation

with TPL providers who possess complementary

competencies, the individual firm is able to utilize

resources and skills controlled by other players. In close

and long-term cooperation, the parties are able to establish

mutual and strong relations of trust, which may result in the

disappearance of cost-consuming, contractual safeguards.

Thus, firms with efficient, cooperative arrangements might

gain competitive advantage over firms that have to bear

transaction costs to prevent their transport firms from acting

in an opportunistic way.

4.4 The resource-based view and TPL

Similar to TCA, the RBV applies a stringent perception to the

firm’s boundaries. Resources and capabilities can only be

acquired from the market to a limited degree. Under certain

circumstances, firms in the supply chain interact closely on a

long-term basis exchanging confidential information. Hence,

TPL is both a means of improving the logistics services of the

TPL buyer and a way to achieve a mutual transfer of logistics

experience. A long-term mutual commitment and

adjustments as well as a customized rather than

standardized solution contribute to the uniqueness and

heterogeneity of logistics resources and capabilities. Besides

the static dimensions of heterogeneity (inimitable attributes of

resources and capabilities), RBV can help us to understand as

to how to use TPL to shortcut an upcoming need for

Table I Comparison of the principal-agent theory, transaction cost analysis, the network perspective, and the resource-based view

Characteristics PAT TCA RBV NT

Behavioral

assumptions

Bounded rationality

Asymmetric information

Goal conflicts

Bounded rationality

Opportunism

Bounded rationality

Trust

Bounded rationality

Trust

Problem

orientation

Contract design: what is the most

efficient contract?

Efficient governance structure: why

do firms exist?

Internal competence development:

why do firms differ?

Dyadic relationships

embedded in networks

Time dimension Static Static Static/dynamic Dynamic

Primary focus of

analysis

Contracts and incentives Transaction attributes (e.g. asset

specificity)

Resource attributes Inter-firm relations

Function of

relationships

Efficient division of labor

(ownership/control)

Market failures Access to complementary resources Access to heterogeneous

resources

Primary domain

of interest

Alignment of incentives in dyads Exchange and transaction Production and firm resources/

capabilities

Exchange and adaptation

processes

Source: Adapted from Skjoett-Larsen (1999, p. 46) and Madhok (2002, p. 540)

Table II The theoretical framework applied to third-party logistics

Characteristics PAT TCA RBV NT

Behavioral

assumptions

Asymmetric information

between shipper and TPL

provider

Goal conflicts

Calculative trust

Safeguards, specific

investments or long-

term contracts

Personal trust

Joint learning

Transfer of knowledge

Personal trust

Information-sharing

Win-win situation

Problem orientation Performance measurement

ABC costing, open-book,

incentives

Which activities should

be outsourced to TPL

provider?

Development of competencies

internally and between shipper

and TPL provider

Development of

relations

Communication and

interaction

Time dimension Static Static Dynamic Dynamic

Unit of analysis Formal TPL contract TPL services

Transaction costs

Logistics performance

Resources and capabilities

shared by shipper and TPL

provider

Relations between

shipper and TPL

provider

Nature of relations Adversarial relations

Contract influences both the

number and nature of

outsourced activities

Arm’s-length relations

Regular tenders to test

the TPL market

Focus on cost-efficiency

Short-term contracts

Complementary resources

Creating new competencies

through TPL relations

Voice relations

Access to resources

possessed by TPL firms

Evergreen TPL contract

Primary domain of

interest

Alignment of behavioral and

outcome-based contracts

Investment in specific

assets (warehouses, IT,

personnel)

Minimizing transaction

costs

Development of new

competencies (e.g. batch-

monitored shipments, merge-

in-transit, track-and-trace)

Mutual adaptation of IT

systems, processes,

routines

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competence configuration (building and development)

(Halldorsson and Skjoett-Larsen, 2004). The focal point of

discussion is the ability of TPL to create venues throughlearning, either jointly or from each another, which may

support the building of a core competence. This approach is

similar to the view of TPL as a means to configure logisticscompetencies (Halldorsson, 2002).

5. The theoretical framework applied to newproduct development (NPD)

Within the realm of SCM, we focus our discussion on

modularization of product architecture design strategies (seeMikkola, 2003a, b; Momme et al., 2000) and how supplier-buyer relationships impact such NPD decisions (see Wasti

and Liker, 1997; Dyer et al., 1998; Hsuan, 1999). The fourtheoretical approaches provide us with additional insights

connecting NPD to SCM, as shown in Table III.

5.1 The principal-agent theory and NPD

Firms’ NPD activities are often proprietary in nature, whichmakes firms reluctant to involve suppliers in their activities.

Product architecture designs suggest which NPD tasks might

be performed by suppliers and how. Hence, specific assetsshared with the suppliers have to be determined. Specialized

assets (in contrast to general assets) often have a narrow range

of potential applications and are difficult to deploy (Christyand Grout, 1994). Co-specialized investments, on the other

hand, increase the principal and agent’s interdependence and

serve as an economic rationale for cooperative, long-termrelationships. Furthermore, shared standards reduce

specificity and provide a form of embedded control

(Sanchez and Mahoney, 1996), reducing search,

monitoring, and enforcement costs, which allows firms to

make efficient exchanges with multiple partners. Such a cost

reduction will subsequently lessen a firm’s incentive to

integrate activities internally and free it to pursue the

advantage of flexibility when there are high levels of input

and demand heterogeneity (Mikkola, 2003c).

5.2 Transaction cost analysis and NPD

In a TCA perspective, it is argued that modularization

reduces transaction costs. Modular systems lower the

transaction costs of information about the parts available

(for a firm) and imply economies of scale in assembling the

package (for a consumer) (Langlois and Robertson, 1992).

Product architectures made up entirely of standard

component would favor market governance. One incentive

to devise modular product architectures is to have

components with standardized interfaces to enable

competition between suppliers on technology innovation. To

reduce transaction costs, firms may outsource product

development and manufacturing activities of certain

components to qualified suppliers. Firms naturally try to

find the optimal trade-offs between switching costs and

performance between partners, which will depend on the

length of relationships shared between the buyer and its

suppliers.

5.3 The network perspective and NPD

In many industries, such as the PC and bicycle industries,

there is a large variety of interchangeable components readily

available. Interchangeability of components in modular

systems encourages vertical specialization, leading to the

Table III The theoretical framework applied to new product development

Characteristics PAT TCA RBV NT

Behavioral

assumptions

Supplier and buyer may have

conflicting interests

Calculative trust

Safeguards by product

architecture control

Trust of key suppliers for co-

development of new components

Personal trust and information

sharing

Win-win situation

Problem

orientation

How does product architecture

control impact the degree of

supplier involvement in NPD?

How many NPD tasks can be

outsourced to suppliers?

How are resources related to

product architecture designs

managed?

How do modular product

architectures enhance competition

and/or collaboration among the

actors of the network?

Time dimension Normally an ex anteconsideration

Normally contracts are not

drawn up until the product

architecture specifications are

set

Short-term contracts for

standard components

Long-term contracts for

development of new

components

New capabilities are created by

combining and reusing existing

capabilities

Short-term relationships for

standard components

Long-term relationships for co-

development

Unit of analysis Formal contracts for

development of new

components

Patents

Number of components

Degree of modularization

Number of firms

Heterogeneity of inputs required to

produce a product architecture

Number of components

Degree of modularization

Relationship between the buyer

and its suppliers

Nature of

relations

Adversarial relationships

Contract influences both the

number and type of outsourced

components

Arm’s-length relationship for

standard components

Strategic partnerships for co-

development of components

Complementary resources

Creating new competencies by

collaborating

Strategic relationships for co-

development of components

Learning

Primary domain

of interest

Alignment of behavioral and

outcome-based contracts

Investment in specific assets

(tooling, patents, technology

know-how)

Development of new competencies

(modular product architecture,

component design, outsourcing)

Mutual adaptation and sharing of

information

Personal contacts

Development of trust

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creation of networks. One force speaking for verticalspecialization is the dissimilarity among production stages.When resources are recombined in new ways, a number ofinterfaces with other resources need to be considered.Components and systems have to be designed so they areeasy to assemble and transport. Handling this complexity hasbecome increasingly important due to the ongoing changes ofactivity structures in industries. Furthermore, an increasingreliance on outsourcing leads to substantial interdependenciesbetween the activities of different firms. One way to solve thiscomplexity is through modularization and product platformdesigns (Mikkola, 2003c).

5.4 The resource-based view and NPD

Modularity management of product architectures can beviewed as the management of a firm’s resources. It takes timeand money to develop the capabilities associated with productarchitecture designs, and the subsequent market success (orfailure) of the firm is dependent on the architecture’sconfiguration (i.e. heterogeneity of resources and causalambiguity), the extent of certain technologies andcomponents’ (i.e. resources and assets) inimitability bycompetitors, and the management of resources that must beshared with suppliers, especially when complementary assetsare involved (Teece, 1986).

6. Frame of reference for SCM

Since supply chain thinking emerged, researchers fromdifferent disciplines have been in search of a theoreticalfoundation for the phenomenon. Chen and Paulraj (2004a,b), Croom et al. (2000), Svensson (2002), Mentzer et al.(2004), and Ganeshan et al. (1998) have pointed to differentbodies of literature and management problems relating tosupply chain management (SCM). Recently, Cigolini et al.(2004) presented SCM as resulting from a specific set ofmanagement and supporting tools that may be formed toachieve successful management of different supply chains. Butnone of these authors have presented a theoretical analysis ofthe phenomenon SCM.As we interpret SCM as a network of socio-economic

institutions, we have chosen a set of relevant theories that canbe applied to the management and structuring of specificSCM arrangements (see Figure 1). The upper part of thefigure includes the four different theories that we havecombined to answer our two research questions:1 How to structure a supply chain of collaborating

organizations?2 How to manage a particular structure?

The lower part of the figure illustrates the managerial arena ofSCM, including the key elements (Lambert et al., 1998), theprerequisites, and the outcome.One of the contributions of the paper is the attempt to

mitigate the gap between the current SCM research andpractice and the theoretical explanations of how to structureand manage supply chains. The lower part of Figure 1illustrates the characteristics often related to SCM. The leftpart lists a number of preconditions, which can be found inmost theoretical and empirical studies of inter-organizationalrelationships, such as trust, long-term collaboration, mutualcommitments, and willingness to share costs and benefits.The middle section shows the interactions between structure,processes, and management, which constitute the core of the

SCM concept. The right side shows the expected effect on

SCM performance measured in terms of higher cost efficiency

internally or in the interfaces between the SCM participants,better customer service, and higher flexibility and

responsiveness towards changes in the customers’ needs andexpectations. The upper part of Figure 1 shows the “missing

link” – a theoretical framework to analyze and explain thephenomena in the management arena of SCM.

7. Managerial implications

In this paper, we have proposed four different theories to beapplied when making decisions on the structure and the

management of supply chains:1 transaction cost analysis (TCA);2 the principal-agent theory (PAT);3 the network theory (NT); and4 the resource-based view (RBV).

Both TCA and the PAT have their roots in neo-classical

economic theory and are especially valuable when it comes tothe issue of how to structure the supply chains. Important

management decisions include, for example:1 Which activities should the firm keep in-house, and which

activities should preferably be outsourced to externalpartners in the supply chain?

2 What should be the roles, positions, and responsibilities of

the participants in the supply chain?3 How can the firm safeguard against the risk of

opportunism from the other participants in the supplychain?

4 How should the incentives be aligned internally andbetween the participants in order to further the outcomes

of the supply chain?

However, TCA and the PAT have limitations due to the

embedded assumptions about human behavior and the staticview of the firm’s boundaries. Therefore, it is necessary to

apply complementary theories, which can explain the

dynamics in governance structures and inter-organizationalrelationships. Here, we have examined such challenges with

the following two complementary theories: the NT and theRBV. The NT is basically a descriptive theory that examines

how interacting companies in a supply network adapt theirprocesses and systems to each other by exchange processes,

and how they can develop trust and confidence in inter-organizational relationships over time. Trust is an important

precondition in SCM. This is especially true in NPD, which

often involves early supplier involvement in order to speed uptime-to-market or to gain access to the latest technology.

Trust can also serve as a governance mechanism in hybridorganizations, in line with price in the market and authority in

the hierarchy (Bradach and Eccles, 1989).The RBV complements TCA by considering the resources,

capabilities, and competencies both inside the individual firmand in the linkages between the firms in a supply chain. The

resources and capabilities of the firms play an important role

in boundary decisions, as discussed by Barney (1999). WhereTCA explains the boundary of the firm by characteristics

related to the transactions (e.g. asset specificity anduncertainty), the RBV looks at the capabilities of the firm

and the capabilities of potential partners in the supply chainswhen deciding which activities should be outsourced and

which should be kept in-house. Combs and Ketchen (1999),

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however, warns that firms should be careful with the selectionof theory used to explain inter-firm cooperation, as theysometimes come up with contradictory explanations. Theirempirical findings showed that firms do not simply respond tothe logic of only RBV or TCA, but rather react tocontingencies identified by both. Barney (1999), forexample, argues that the normative implications of TCAand RBV, respectively may differ; despite the circumstances ofhigh asset specificity and risk of opportunistic behavior, inwhich TCA would recommend a “in-house” solution, whileRBV would prescribe circumstances where outsourcing wouldbe necessary. Cousins (2005) discusses this theoreticalintersection further and suggests that supply andrelationships modes must align with strategies of the firm.

8. Research implications

The research implication of this eclectic approach to SCM isthat we cannot rely on one theoretical explanation (e.g. TCAor the RBV) when analyzing phenomena in SCM. We have toconsider several theories and how they may complement eachother in order to provide a more comprehensive view of SCM.Depending on the concrete situation, we can choose onetheory as the dominant explanatory theory, and thencomplement with one or several of the other theoreticalperspectives. The four theories selected in this paper aresupported by empirical evidence provided mainly by theliterature, both in general and also to some extent within therealm of SCM. The way the four theories complement eachother is explored on a conceptual basis, but further researchinto this direction may explore more deeply how these allegedcomplementarities occur in practice, and how managers

mould their decisions by these ideas. In so doing, the

theoretical development of SCM may reach beyond a mere

battle of intellectual territories urging managers to operate in

a wider, or almost infinite, domain. The main message in this

paper is therefore that there is no such thing as “a unified

theory of SCM”.

9. Conclusions

The starting-point of our considerations focused on two the

attempt of explaining two research questions:1 How to structure a supply chain?2 How to manage a particular structure?

These questions are important, as many decision makers in

business practice as well as in academia address these issues

more often than to think of new possible definitions on the

phenomena of inter-organizational management of

transformation flows between production and consumption.We have presented an argument that builds on organization

theories in order to answer our questions, and this can be seen

as an attempt to diminish the gap between current SCM

research and practice and existing theoretical descriptive and

prescriptive explanations.We have therefore developed a general framework where we

combine the managerial SCM arena with four different

organization theories in order to explain our two research

questions, and we use our framework for looking at two

different problem areas within SCM:1 third-party logistics; and2 new product development.

Figure 1 A middle-range theoretical frame of reference for SCM

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We find that we cannot rely on one unified theory to explain

inter-firm governance structure and management decisions in

a supply chain, but have to apply complementary theories.Furthermore, we can show that building a unified theory of

SCM might be difficult, as many problems can occur whose

solution might depend on different theoretical backgrounds.

In that sense we have shown how our theoretical choice has

shown different results depending on the observation

perspective.We suggest that further empirical and theoretical research is

needed in order to find out the contingencies for choosing a

specific combination of theories that adequate explains

management decisions related to configuring and managing

supply chains.

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Corresponding author

Tage Skjøtt-Larsen can be contacted at: [email protected]

Complementary theories to supply chain management

Arni Halldorsson et al.

Supply Chain Management: An International Journal

Volume 12 · Number 4 · 2007 · 284 – 296

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Wk 4 Discussion (Due in 2 days) Urgent/Reflecting on theory development in sustainable supply.pdf

• Reflecting on theory development in sustainable supply chain management
• 1 Introduction
• 2 Identifying the conceptual core
• 3 Reflecting on the conceptual elements
• 4 How to move on in SSCM?
• 5 Conclusion
• A personal acknowledgement
• Declaration of Competing Interest
• ack9
• Acknowledgement
• References