Trust, The Glue That Binds the Extended Enterprise

A chapter of trust faces 2 major challenges

Firstly, a pronounced loss of confidence in business

The second point is specifically relevant to the supply chain and it describes more on how business get done.

Why is trust important?

The traditional model of separate companies that negotiate separate bilateral agreements. This approach result to the delay and incorrect of data that cause the system is unstable because members only concern about their own interest and progress on the expense of others.

Why is trust important?Trust can:Lower transaction costs Increase knowledge sharingEncourage partner to dedicate asset on

behalf of othersCreate economic valueMore effective outsourcing that help increase

the profitCreate additional value though the

relationship between members of supply chains

Good quality of goods and servicesCreate stability of firms

Why is trust important?But trust can also be harmful. A trusted

supplier can become a severe competitor because trust is fragile.Ex. Dell

HP and Dell used to share information togetherHp merged with Compaq caused dell to fall to rank

number 2Dell decided to market its own brand of printer

alienating HPTrusted supplier can become direct competitors as

well

Trust Is Essential:Dilemmas surrounding any collaborative

supply chain relationship are the fear of supply chain partner becoming an opportunist, where the supply chain partner acts in its own self-interest and take advantage of the others.

Rationalizing a supply base can help reduce transaction cost (cost to process a purchase order) but it can also increase monitoring costs if the buyer is worry that the other members of the supply chain are not reliable.

There will be greater dependence with fewer options.Encourages redundant activities Ignores potential gains from other companies that

offer complementary skills.

Trust Is Essential:Supply chain partnership should be more flexible,

adaptive, and more innovative.A lot of the supply chain relationships failed due to

relationships gone bad or not living up to the supply chain partner’s potential.

Main problem is organizational rather than technical or financial.

Key obstacle is ‘People Cost’ resulting in:Old habits that must be changedCultural legacies that do not support new mindsetManagerial skills required to support the supply chain alliances

Changes required involvesDeveloping a climate that fosters trust and open

communicationsBuilds commitmentSupports a win-win orientationSet firmly in everyone’s mind the fact that supply chains

compete, individual firms do not

cInformation shared must be used as intended

toTrust can be seen as your word being your

bond – you say you will do something you partner knows you will do it.

Another aspect of trust is the security in knowing that each party will act with interests of all partners in mind. Ex. Sun Microsystems.

Reconsidered its relationships with its channel partners and began to focus on building their trust by not competing with the channel partners and their solutions provider partners.

Instead of controlling customer relationships, Sun shares their customer to in order to avoid conflicts with partners.

Trust Is Essential:Firms are dependent on networks because it

can help them share ideas and have interaction to enhance them to fulfill their mission.

Firms should not depend on contracts because contracts are limiting. Contracts breed compliance not commitment. Contracts do not assure that if conditions suddenly

change, the previous agreements would still be achieved.

Contracts are often used to protect against something bad happening to the firm and does not encourage creative thinking when problems arise.

Trust Is Essential:Understanding the differences in Contractual

Thinking and Alliance Thinking table 7.1:

The Role of Contracts and Trust: It is often said that, “Write the contract and put it in the

file cabinet; when you have to refer to it, you have big time problem.

However, most procurement organization relies heavily on contracts to manage their supplier relationships.

The challenge is to understand what the interplay is between contracts and the development of trust among members of the supplier chain. Ex. Dell and Ryder System (lead logistics manager for Dell)

Dell has a master agreement that specifies that Ryder can only use Dell’s information to serve Dell.

Ryder’s senior warns against placing too much faith in this in such agreements. Argues that partners don’t need contracts to collaborate. “Trust your partner or get different partners.”

Absent trust, contracts become important. Contracts play an important role when protecting intellectual properties. Relying too heavily on contracts will make you lose sight of other

equally important aspects of relationships.

The Role of Contracts and Trust: Extended enterprise consists of 3 major, intertwined

considerations: Managing the business Managing the relationship Understanding the underlying spirit of the relationship that guides the

development of roles and expectations. Contracts are used to codify the nature of relationships and

become useful in instances where partners have little past experience with one another.

Contracts reduce uncertainty by formally designating behavior and by adding predictability to the outcome of the exchange.

Cases with evergreen contracts or multiyear commitment exist, both parties may not view changes to the original agreement in the same light. Ex. US Army

Partnering program to initiated to foster better contract administration among military and its contractors.

With common goals and objectives, the partnering process attempts to eliminate the adversarial attitudes that governed past relationships

But the process focused on dispute avoidance and only briefly mentions trust and commitment as key benefits.

The Role of Contracts and Trust:

Important question is how best to leverage formal and informal contracts so that the supply chain accomplishes its objectives with minimal disruption and conflict.

Personal relationships might lead to awkwardness and/or conflicts.

In trusting supply chains, a social contract emerges that begins to frame how the parties will interact and what is acceptable behavior.

Supply chain partners are willing to go beyond the letter of contract.

The spirit of the relationship reflects the psychological contract that guides all interaction in the supply chain and sets the most basic understanding of what is means to partner within the extended enterprise.

Partners will often test the limits of trust by asking for certain concessions or engaging in actions that will call for a degree of flexibility or adaption that pushes the boundaries of the contract.

Decomposing Trust Into Its Core Dimensions:With the uncertainty that surrounds any business

decision today, it is unlikely that a formal contract can address each possible outcome.

When there is trust, partners will meet the implied purpose of the relationship with the knowledge that the additional cost will be acknowledged and future considerations will be made.

If we only follow the contract, there is little incentives to change or adapt, conflicts arises, and the relationship will be jeopardized.

Trust is belief that one’s alliance partner will act in a predictable manner, will keep his or her words, and will act in a way that will not affect others negatively

Decomposing Trust Into Its Core Dimensions:

Table 7.2 shows the different dimensions of

trust and shows the insight into how powerful a concept it is and why it must be a fundamental part of any extended

enterprise relationship.

Decomposing Trust Into Its Core Dimensions:There are doubts on the saying that supply

chain partners would work closely in an atmosphere of trust. Doubts arise from buyers and sellers have

traditionally not shared the same objectives, nor have they experienced a balance in power (one partner is more powerful than the other).

AMR Research suggested that technology could be used to equalize the differences. Having a single platform on which the collaboration is built can help these processes.

Tools that can educate and transfer knowledge across supply chain should be developed.

Building

Trust is a concept that is quite fragile, which is also the glue that holds the extended enterprise together.

Trust is important in the supplier development area, which can be an early step in developing an integrated supply chain.

Supplier Development2 goals sought

Improving the supplier’s technical capability, product development skills, management skills and the like

Improve of product and service - Performance-oriented and converges on quality, cost, delivery, and service improvements

Supplier DevelopmentProcesses:

Supplier assessment – formal evaluation, certification, and feedback are used.

Direct involvement – buyer will be involved in training, site visits and other proactive activities to remediate suppliers’ weaknesses.

Competitive pressure – used to motivate suppliers; business allocates depending on performance of suppliers

Supplier DevelopmentPrice-basis – keep key suppliers at arm’s

length, limit the bilateral flow of information and insisting on very formal contracts (threat to long-term relationship)

3 level of building trust:Level one: show the purpose how supplier

development creates value for customers. Level two: demonstrate a commitment to the supply

base and given them voice in the planning process. Level three: trust is built through the entire process;

all parties understand how risks and returns are shared.

Supplier DevelopmentNote:

o Emphasis on continuous improvement and not cost reduction

o Price-basis – could lead to no trust and no long term relationship. It might steal the profit of the other parties and that will put trust into jeopardy.

o Trust is built on relationship management; it could reduce long-term competitiveness of supply chain.

o The process is based on communications and senior management commitment to the entire process.

E-Commerce, Supply Chains, and TrustHigher growth of e-commerce business

nowadays increasing the access to the market, which is lead to higher demand of the product

Many business success in creating demand but fail to serve those demand due to huge problem of logistic management.

Trust, in the world of e-commerce, means reliability – it is used to guarantee the transaction will be completed, to mean the level of fulfillment assured in an online exchange.

E-Commerce, Supply Chains, and Trust

‘Trust Broker’ – company that develop “objective” scales and rating schemes to quantify suppliers’ reputations by gather all the business-related data of the company that operating through e-commerce.

As long as the business go well, relationship is less important.

A close relationship is essential when business is suffering.

Approaches to Building Trust

How to combine resources and skills among partners to create value

Assessment of how the finances associated with the value created are appropriated among channel partners. (Are benefits divided equally?) In this approach, trust in very important.

Know the Components of TrustTrust is built by understanding of the impact of

its components.Character-based trust: Good reputation makes

the firm trustable.Knowing your partner – searching and learning

others’ experiencesWhy work with these firms?

Market power and the hold the firms haveThese supply chains should be less

competitive in the long termHave mutual interest

Know the Components of TrustIt’s important that mutual Benefit should be

stressed, all partners are given voice and their strategic interests become part of the overall plan for the supply chain network.

Avoid ‘Seasick syndrome’ – Buyers’ action and word do not go together.

Trust can be built among the members of the network who will work closely to implement the plan.

Understanding the Relationships between Trust and Control

Trust takes on a more important role in managing the nature of the relationship between supplier and buyer. In supply chain relationships where joint learning and technological discovery are goals, formal control mechanisms become less relevant.

Flexibility and adaptability become important in relationship that might be twists and turns. However, in less uncertainty case, stricter contract is used.

Understanding the Relationships between Trust and Control

Behavioral control affects on how people interact and sets boundaries for certain behaviors through reporting systems, assignments, and training.

Competence trust-building is based on transparency of information and ability to access and analyze data about the skills, capabilities, and expertise of the partners.

Both Competence-based trust and Character-based trust benefit greatly form social control.

 Summary Table between trust and control

Trust Control Environment Interaction between trust and control Character-based Formal More Certain

Integrity Motivation Consistent Behavior Openness Discretion Goodwill

Output Behavioral

When outputs are more clear and specified the interaction is subject to less interpretation and is mutually understood

Trust (character-based) might help bring the partners together. Both formal and output control become more relevant. Such a context might be more contractual in nature and a need to build a deep sense of trust can be supplanted by a contract

Competence-based Informal More Uncertain Specific Interpersonal Broad-based Judgment

Social When outputs are less clear and the nature of the interaction is subject to uncertainty

Trust becomes more critical Formal control mechanics become less useful Social control helps bolster trust

1. Begin with a Plan

Plan helps firms set up their objectives, demonstrate goals and measure the outcomes.

A basis of the discussion with potential supply chain members so that a common set of objectives, purposes and goals can be established.

1. Begin with a PlanWhat are the mutual benefits to be realized by the

different supply chain partners?Are partners treated fairly and equitably? Do risks and

rewards balance?Do all partners have a voice and are they heard?Have we taken the time to mesh strategies from each

of our partners into supply chain strategy?How does this supply chain meet customers’ needs and

provide a sustainable competitive advantage?What roles does each partner play? Are the roles clearly

understood and accepted by each supply chain member?

Why were partners asked to be part of this supply chain? What is each one’s unique contribution?

During the planning process, have we included considerations for managing the relationship and the business?

Is there senior management support and commitment?

2. Ensure Open Lines of Communication

2. Ensure Open Lines of Communication

Do you communicate only when there are problems or is there an ongoing dialogue among supply chain members?

Do you ten to speak the same language and see issues from each other’s perspective?

Is there a tendency to keep partners aware of new developments and potential problems before they occur?

Does information flow with equal ease throughout the supply chain?

Do supply chain members have open discussions that are fact-based?

Is there agreement among partners regarding operating principles and “rules of engagement?” Does everyone understand the rules?

Do members work hard to keep others involved in decisions that affect the supply chain?

3. Establish an Appropriate Governance StructureTo become a collaborative supply chain,

the ‘KEY’ is “Mutual Respect”:

3. Establish an Appropriate Governance Structure

Are problems that arise treated as “your” or “our” problems?Are there conflict-resolution mechanisms built into the

operating principle or do members rush to a legal remedy?Do members genuinely work toward common goals and a

shared vision?Are outcomes viewed as supply chain-wide and linked to the

success of the network, rather than to individual members?Can partners articulate the norms and values that guide

acceptable supply chain behavior?To what extend are members comfortable with

interdependence and the fact that the success of the supply chain is linked to partners working for the good of all members?

Do members value and respect the contribution, input, and differences that each partner brings to the supply chain?

Are performance outcomes tied to hard objective measures only?

4. Keep Your Eye on What Matters

Self-serving behavior create weakness

The important point of alliances is to compete with OTHER supply chains

“Without trust, our supply chain will fail– plain and

simple.”

5. Walk in Your Partners’ Shoes• Take your partners’ perspective and

understand what drive their decision processes.

6. Partner Assessment and Determining Trustworthiness

The aspects of the firm and its management that might reflect the behaviors, attitudes, decision-making style, organizational processes and procedures.

The “like” that would support or inhibit the thinking and actions in the extended enterprise.

6. Partner Assessment and Determining Trustworthiness

What is the supplier’s level of commitment to us? What has the level of commitment with past supply chain partners been?

What do past/current customers say about this supplier? Has it kept its promises to others? Does its management speak of us as a team or do they use “I” and “you”, not “we?” What is this supplier’s view of the future? How long have past supply chain relationship lasted? Is this supplier willing to share its new ideas and future plans with us? Do its systems and structures permit informal communications across levels, divisions, and

functions? Are its people empowered to act? Do all decisions and information flow to the top where action

is initiated? Does the supplier use multifunctional teams to solve problems and address issues? Do contractual concerns loom large in the conversation we have held? Are attorneys present at

every meeting? Do management personnel seem flexible and appear to be willing to change, or are they rigid in

their thinking? Does this supplier seem to know our business and is it willing to contribute to our mutual

success? What kinds of assurances does the supplier want from us? Dies it appear that this supplier will

hold us to the letter of the contract? Does this supplier insist that everything must be spelled out and put in writing?

Is everything business or is time taken to initiate a personal relationship?

Summary

Thank You!!