Supply Chain Design Thomas Y. Choi Bebbling Professor in Business Professor of Supply Chain Management W. P. Carey School of Business Arizona State University Prepared for Laurier Center for Supply Chain Management Wilfrid Laurier University October 2007

Overview Supply Chain As Complex Adaptive System Snap Shot of Supply Networks Supply Base As Visible Portion of SN Basic Relational Units Buyer-Supplier Dyads Supplier-Supplier Dyads Buyer-Supplier-Supplier Triads

(A manager from a leading automaker) “A few years ago, our engineers mapped a supply chain of a small assembly [by] tracing it all the way back to the mine. From that exercise, we demonstrated the benefits of supply chain management, and we set out to manage the supply chain as a system. Frankly, we have not been able to do it. The problem was, as soon as we came up with a strategy for managing the chain, the chain changed on us—we got new suppliers and new relationship configurations. It took a lot of effort to map one supply chain, and we could not possibly map it every time something changed.” (A manager from a leading automaker)

Initial Observations Supply chains or networks were there before we tried to manage them. No one company can possibly orchestrate the whole supply networks. Supply networks are a self-organizing and emergent system. CAS is a system that emerges over time into a coherent form, and adapts and organizes itself without any singular entity deliberately managing its totality.

Supply Network as Complex Adaptive System Co-Evolution How the internal mechanisms and the environment interact and evolve together Internal Mechanisms Environment How a system operates Dynamics outside a system

Key Lessons: Control and Emergence Deterministic approach Reduction of dimensionality Deviation correcting mode Proactive Emergence Wholistic approach Increasing dimensionality Deviation amplifying mode Reactive/Adaptive

What might a supply network look like in the real world?

First Attempt at an Empirical Study The goal was to map the complete supply network and to study the structure therein—what’s controlled and what emerges? Honda Accord, Acura CL/TL, and Chrysler Grand Cherokee Data collection done over three years Funded by the National Science Foundation

Supply Chain Mapping Select focus of the study—the center console assembly BOM’s and identification of suppliers From final assembler From top-tier supplier Reconciliation of differences Interviews with select second- and third-tier suppliers

Accord’s SN

Acura CL/TL’s SN

Grand Cherokee’s SN

Comparison of Honda and Chrysler Manages more suppliers in second- and third-tiers Supply network more complex Expends more corporate resources Takes less risk in supply chain stability Chrysler Manages less suppliers in tertiary level Supply network less complex Spends less corporate resources on supplier management Takes more risk in supply chain stability

What would you call the suppliers that are being "controlled" by the focal company?

Supply Base A group of suppliers within the reach of the “visible hand” of the focal company The portion of the supply network within the purview of the focal company Suppliers actively managed by the focal company Not all suppliers in the supply base are top-tier suppliers.

Focal Company and Its Supply Base The Focal Company Supply Base

And Beyond…. Story of a man looking for his key…. Story of Toyota and its Phoenix supplier…

Supply Base Management Number of Suppliers Number of current suppliers with enduring business relations Differentiation of Suppliers Degree of different characteristics among suppliers (e.g., culture, operating practices, etc.) Links among Suppliers Supplier-supplier relationships

Supply Base Management and Performance Implications Transaction cost + Supply base management Supply risk  Number of Suppliers Differentiations Inter-Relationships - Supplier responsiveness  Supplier innovation

What might be the basic relational building blocks within a supply base?

Basic Building Blocks Buyer-Supplier Dyads Supplier-Supplier Dyads Buyer-Supplier-Supplier Triads

Buyer-Supplier Dyads Competitive Cooperative Deep Adversarial New Adversarial Cooperative Information and resource sharing Common goals Deep Understanding Tough love

Supplier-Supplier Dyads Competitive Cooperative Co-Opetitive

Competitive Supplier-Supplier Dyads: From the Buyer’s Perspective Pros Maintaining leverage power Control of information exchange between suppliers Cons Lack of supplier synergy High administrative and transaction cost

Cooperative Supplier-Supplier Dyads: From the Buyer’s Perspective Pros Information and knowledge sharing Capacity flexibility Cons Potential for supplier collusion Forward integration by suppliers

Co-Opetitive Supplier-Supplier Dyads: From the Buyer’s Perspective Pros Opportunity to gain advantage of both competitive and cooperative relationships Low supplier switching cost Cons Relationship uncertainty Risk of suppliers’ opportunistic behaviors

What do we get if we put buyer-supplier and supplier-supplier dyads together?

Triads The “Real” Fundamental Building Block Three States of Buyer-Supplier-Supplier Triads Balanced States Unbalanced States Structural Hole States

Balanced States and Unbalanced States All positive relationships One positive and two negative relationships Unbalanced States All negative relationships Two positive and one negative relationships

Balanced States and Unbalanced States Buyer + S2 S1 Balanced State 1 S1 S2 - + Buyer Balanced State 2 S2 S1 + - Buyer Balanced State 3 + - S2 S1 Buyer Unbalanced State 1 S2 S1 + - Buyer Unbalanced State 2 S2 S1 - Buyer Unbalanced State 3

Future Research Control and emergence—supplier-supplier relationship as the interface between control and emergence; positive feedback or deviation amplifying loop Other triads beyond B-S-S triads such as B-S-B’s customer or B-B-S Tetrads B-S relationship as embedded in larger network Triads in service outsourcing—Bridge transfer and bridge decay Social network analysis of Supply Networks Simulation of supply base as CAS using cellular automata Econometric studies of CAS using archival data

Questions?

Thank you!

The presentation slides have been built based on following published/unpublished articles “Supply Networks and Complex Adaptive Systems: Control Versus Emergence,” Journal of Operations Management 19 (2001) 351-366, Thomas Choi, Kevin Dooley, and Manus Rungtusanatham “Unveiling the Structure of Supply Networks: Case Studies in Honda, Acura, and DaimlerChrysler,” Journal of Operations Management 20 (2002) 469-493, Thomas Choi and Yunsook Hong “Supplier-Supplier Relationships and Their Implications on Buyer-Supplier Relationships,” IEEE Transactions on Engineering Management, 49, 2, May (2002), Thomas Choi, Zhaohui Wu, Lisa Ellram, and Balaji Koka “Building Deep Supplier Relationships,” Harvard Business Review December (2004), Jeffrey Liker and Thomas Choi (Reprint R0412G) “Supplier-Supplier Relationships in the Buyer-Supplier Triad: Building Theories from Eight Case Studies,” Journal of Operations Management 24 (2005) 27-52, Zhaohui Wu and Thomas Choi “On the Dark Side of Strategic Sourcing: Experiences from the Aerospace Industry,” Academy of Management Executive, (2005) 19, 1, Christian Rossetti and Thomas Choi “The Supply Base and Its Complexity: Implications for Transaction Costs, Risks, Responsiveness, and Innovation,” Journal of Operations Management 24 (2006) 637-652, Thomas Choi and Daniel Krause “Triads in Supply Networks: Interpretation through Balance Theory and Structural-Hole Concept,” Under review, Thomas Choi and Zhaohui Wu