The Effects of Electronic Supply Chain Design (eSCD) on Coordination and Knowledge Sharing

Customization is a critical success factor in current business environment. One of the most important components that make fast and inexpensive customization possible is electronic supply chain design (e-SCD). e-SCD is a supply chain design which integrates and coordinates suppliers, manufacturers, logistic channels, and customers using information technology (IT). In this study, a model that shows the effects of e-SCD on the customization capability of companies is developed. From previous studies, the model identifies three major effects of e-SCD – electronic linkage effect, supply chain coordination effect, and co-engineering effect. The model also shows a process through which an electronic supply chain network is transformed from a simple infrastructure for data exchange into a knowledge-sharing network for fast response and customization. The model is tested using the data collected from automobile industry in Korea. The results show that e-SCD has significant effects on the supply chain coordination and co-engineering. This implies that e-SCD can be an effective management tool to deliver customized products with right timing and price. It is also shown that the ‘involvement’ of entities in a supply chain is a critical factor in converting a supply chain network from an infrastructure for data exchange to a knowledge-sharing network

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Keywords: supply chain, electronic supply chain design, customization, co-engineering, knowledge sharing 1. Introduction

Business environments are moving from mass-production toward customization. No longer do companies focus on producing standardized products or services for homogeneous markets. "Greater and greater variety" blends into "more and more customization". rapidly and at lowest cost possible. Customization is becoming one of the top priorities in any business.

Dell Computer Corporation has succeeded in e-business increasing both value and efficiency by providing customized computers fast and at a low price. Dell's primary advantage is its preeminent supply chain design, augmented with precise supply chain management [10]. In Japan, Toyota is reportedly offering customers five-day delivery. A customer designs his/her own customi zed car from modular options on a CAD system in a dealer showroom or in the customer's own home via traveling salesman. The designed car is manufactured, tested, and delivered in five days [28]. This new manufacturing system, named “Second Generation JIT”, is expected to reduce 37% of inventory and 28% of plant space.

These examples show that customization is becoming a feasible and necessary goal in supply chain management. However, customization increases complexities in supply chain, manufacturing, and logistics. The increase of comple xity entails longer set-up time, higher production costs, and more complications in supply chain. Therefore, it has been considered extremely difficult to achieve customization with low cost and fast fulfillment cycle time.

In virtual market, however, fast and inexpensive customization is becoming more and more feasible. Electronic Supply Chain Design (e-SCD) is one of the key components that make it possible. e-SCD is a supply chain design to integrate and coordinate suppliers, manufacturers, logistic channels, and customers using information technology (IT). IT can link all activities in a supply chain into an integrated and coordinated system that is fast, responsive, flexible, and able to produce a high volume of customized products at low cost.

A goal of this study is to develop a model that explains how e-SCD achieves the three core goals of customization – right products, in right time, and at right price. A conceptual model was developed to explain how e-SCD achieves efficient customization. The

developed model was tested using empirical data collected from a survey.

2. Current status of e-SCD

Electronic Supply Chain Design (e-SCD) is a process to build an electronic information network for transactions among supplier-manufacturer-retailer-custom er in virtual space using IT. When humans are involved, the risk of information inaccuracy increases. The e-supply chain makes it easier and less costly to manage suppliers [2]. e-SCD has several aspects that are distinguished from traditional supply chain management and information systems for individual firms.

First, as Pine [28] pointed out, customization cannot be achieved at an individual firm level. Every company in a large supply chain or distribution chain is dependent on each other. Moreover, cooperation of the customers, especially in identifying their needs, is necessary for a successful supply chain. Thus, the unit of value creation is shifted from individual firms to value-networks that consist of partner firms and their collaboration activities [9]. At the individual firm level, as opposed to the supply chain level, firms focus on the sub value-adding functions (R&D, design, manufacturing, etc) independent of other firms. In the inter-firm network level, however, the value-adding functions are distributed across the participating entities including customers and their activities are dynamically coordinated at the network level. e-SCD aims at optimizing the dynamic coordination using ITs. Therefore, the design of e-SCD must support these distributed functions and coordination.

Second, supply chain design (SCD) focuses more on the dynamic flow and interactions. SCD consists of choosing what work to outsource from suppliers (make vs. buy), selecting suppliers to use and negotiating contracts– both the legalities and the culture of the supply chain relationships. Fine [10] noted that more emphases had been on the “static” material inventory management than the “dynamic” flow within a supply chain. In 1990s, many companies in competitive high technology industries such as automobile, semiconductor, computer, and software failed even though they had high level of capabilities. On the other hand, some companies such as Dell Computer accomplished competitive advantages based on a new supply chain design that enables the players in the supply chain to dynamically adapt themselves to the changing technology and market. These successes and failures imply that the “dynamic capability” – the capability to rapidly integrate, design, and coordinate internal and external capabilities in response to the changes in technology and market environments – is becoming more critical for success. Only a few studies have examined the “dynamic capabilities” of supply chain. For example, Gosain et al. [12] investigated the factors that affect the dynamic capabilities that they termed ‘plug and play.’ Still, more research is needed in this area.

Third, for the optimization of a supply chain, it is critical to coordinate and integrate the whole supply chain in virtual space through information exchange, sharing, and integration. Although some studies approached supply chains as a whole [11][23], past studies in supply chain have mainly focused on the uncertainty of supply chain environment, the relationships of the supply chain participants [22], and inventory/lead time in physical space. Gurbaxani and Whang [13] posit that IT can facilitate the coordination necessary between business partners by nurturing cooperative relationships, which reduce market transaction costs. e-SCD integrates physical supply chain with ITs and optimizes the activities of participants to overcome physical and geographical constraints. It has become possible because IT enables information exchange and interaction simultaneously.

2.1. e-SCD in automobile industry

A car is a system product that consists of 20,000 parts on average. Thus, the automobile industry has a long and hierarchical supply chain. Hierarchical supply chain is a supply chain that has several levels of suppliers – the manufacturer out-sources part modules (e.g. dashboard, seat, etc) from primary suppliers who out-source the sub-parts from secondary suppliers, and so forth. In a hierarchical supply chain, information exchange takes long time and causes frequent errors if it is done through fax or paper documents. Moreover, the hierarchical structure has the “bull-whip” effect – the fluctuation in inventory level is amplified along the supply chain [23][10]. As a result, the long and hierarchical supply chain in automobile industry causes inefficiencies in various areas – design, development, procurement, manufacturing, and logistics – throughout the supply chain.

Thus, automobile industry has a high potential for business-to-business (B2B) electronic business (e-business) [21]. In US, the automobile industry is one of the first industries where B2B electronic supply chain networks are being utilized. We define electronic supply chain network, (here called e-SCN) as “a network structure that enables, using ITs, electronic transactions and information exchange between manufacturers and suppliers in a virtual space.” Through B2B e-SCNs, the participants of a supply chain can exchange and share information that is critical for the efficiencies of the supply chain.

industry

For a certain type of e-SCNs, new e-business infrastructure is necessary because of the security and reliability problems of the Internet and the compatibility and accessibility problem of proprietary network. In US, a new B2B e-business infrastructure, ANX (Automotive Network exchange), for electronic market place for procurement and part supply is being built. ANX is a TCP/IP protocol based e-business network infrastructure that has high security, re liability, and stability. Since January 1999, US ANX has initiated a Global ANX (GNX) project that would be a global standard network in the automobile industry. Similar regional networks are also emerging – for example, ENX in Europe, JNX in Japan, and KNX in Korea [20].

2.3. B2B e-business in automobile industry

In 1999, General Motors and Ford built their e-marketplace separately on their own Internet-based procurement networks. GM, allied with Commerce One, developed TradeXchange, and Ford, partnered with Oracle, developed Auto-Xchange. However, their suppliers had problems because of the incompatibility between the two e-marketplaces. In February 2000, the Big Three – GM, Ford, and Chrysler – agreed to build a unified e-marketplace based on ANX. The result was Covisint, the biggest e-marketplace in the world. In Covisint, various types of services – auction, quoting, demand forecasting, production planning, automated transaction, financial services, payment, and logistics – are provided. The transaction volume by the Big Three is expected to be about $240 billion a year.

In this study, a conceptual model that explains the effect of e-SCD is developed. The effects of e-SCD would become larger as it is integrated with the processes of the participating companies. Gurbaxani and Whang [13] argue that IT in an organization has multiple roles: a) it increases scale efficiencies of the firms operations; b) it processes basic business transactions; c) it collects and provides information relevant to managerial decisions and even makes decisions; d) it monitors and records the performance of employees and function units; e) it mai ntains records of status and change in the fundamental business functions within the organization and maintains communication channels. Although these roles are in the context of organization, it is expected that IT will have similar effects also in supply chain. The effects of e-SCD are conceptualized along two dimensions – linkage effect and coordination & co-engineering effect. These effects are expected to change the customization capability of a supply chain. In the following sections, the two effects of e-SCD are examined and how these effects change the customization capability is also discussed.

3.1. Linkage effect of e-SCD

Linkage effect of e-SCD is an instant gain due to the electronic transaction and electronic information sharing. Once a network for B2B transactions takes place, the efficiencies between manufacturers and suppliers increase instantly because they can exchange information and process transactions electronically. The cost savings by direct linkage such as EDI have been shown in past studies [25]. Another short-term effect is the new competition among the suppliers. The network will enable the manufacturer to search alternatives for current suppliers, which will intensify the competition

among the suppliers. The competition will press down the procurement costs of the manufacturers in the short-term. Figure 1 shows the linkage effect of e-SCD.

3.2. Supply chain coordination effect and co-

engineering effect of e-SCD

e-SCD will have more profound effects in mid to long term. As an e-SCD is more utilized, the participants invest and involve more in the supply chain. As the participants invest and involve more in the supply chain, they share more knowledge and coordinate more of their activities to optimize the whole supply chain. This will have more fundamental effects in those industries such as automobile industry where ‘tightly coupled’ product development and manufacturing among the firms in the supply chain is critical for success.

3.2.1. Investment and involvement of suppliers. Customized investments of the suppliers transform the e-SCN from a network for simple information exchange into a network for customized product development. The customized investment means the customization in site, physical, and human assets [7]. The customized investment is an indicator of involvement. Involvement refers to “the implicit or explicit pledge to continue the relationship between the transaction parties” [17]. Dyer [6] showed that the customized investments of Japanese automobile suppliers increased their involvement because of the increased switching costs.

The importance of ‘site asset specification’ (physical location) has generally decreased due to the advancement of communication technologies. However, the physical location is still important for customized product design and production process engineering. Especially, when the product is a system product that requires continuous coordination in design phase, it is most efficient when engineers are collocated [10][18].

The efficiency of customized product development will increase as the suppliers invest more in manufacturer-specific CAD/CAM facilities (physical asset specification). The efficiency of customized product development will also increase as the interaction between the employees in manufacturer and suppliers – for example, the engineers from the suppliers participate in product design and development – increases. As the interaction increases, the suppliers can design customized parts more efficiently and at a lower cost (human asset specification). An empirical study [4] found that information distortion decreased when the engineers from manufacturer and suppliers design the product together, increasing the quality of the product.

As the customized investment and suppliers’ involvement increases, the e-SCNs will evolve from a network for electronic data exchange into a network for information sharing and integration. The latter was referred to as “Knowledge-sharing network” by Dyer and Nobeoka [5]. The knowledge-sharing network enables the coordination of the network at whole supply chain level.

3.2.2. From ‘electronic linkage’ to ‘knowledge sharing’. The electronic linkage makes it possible to overcome time, space, and relationship limitations in a network through electronic communication and electronic information integrations. Networking provides a mechanism for transferring information, knowledge, and technology [14]. The three main effects of electronic market [24] – electronic communication, brokerage, and integration – are closely related to the “knowledge creation cycle” coined by Nonaka [26]. Nonaka’s “knowledge creation cycle” shows the process through which simple information transfer evolves into information sharing/integration and ultimately into knowledge for coordinating value chain activities. In the “knowledge creation cycle,” involvement is a moderating variable of the sharing/integrating of the transferred information and it is also a necessary condition of participation and motivation. Without involvement, an e-SCN is simply a network for mechanical data exchanges and critical information such as product development, inventory, contract, etc is not shared. Dyer and Nobeoka [5] found that valuable information was shared in a network when the suppliers were actively participating. Therefore, involvement of participants is crucial for B2B e-SCNs to evolve from electronic linkage into electronic coordination. Process of the evolution is further examined below.

1) Information exchange. Information of individual firms is transmitted through electronic communication process. Electronic linkage makes it possible to accurately transmit information farther and with less time/cost, eliminating physical distance barriers. This is the “ electronic communication effect” [24] and also Nonaka’s “externalization” process through which tacit knowledge is transformed into explicit knowledge [26]. 2) Information brokerage. The information transferred through e-SCNs is stored in databases and becomes available to the participants of the supply chain. This is the “electronic brokerage effect” [24] and also Nonaka’s “combination” process through which explicit knowledge i s combined with other explicit knowledge [26]. Transferred information is combined and merged to create more value.

3) Information integration effects. In the network, the transferred/combined information is integrated through dynamic learning processes. This is the “electronic integration” [24] and also Nonaka’s “internalization” and “socialization” processes [26]. Internalization refers

to the process that explicit knowledge is transmitted to others and they learn it to create their own tacit knowledge. Socialization refers to the process that tacit knowledge is transmitted to others and they make it their own tacit knowledge. In the information integration process, some “data mining” is usually done on the collected data to find and create valuable information, which is a process of converting information into knowledge. For a successful conversion process, the experiences, knowledge, and technology of participants should be exchanged, shared, and combined, which requires high involvement of suppliers.

3.2.3. The effect of “knowledge sharing network” on supply chain coordination. Toyota has a system to increase its suppliers’ involvement, share valuable knowledge, and prevent free riders in its supply chain [5]. It was found that in the Toyota system, the suppliers were developing a “dynamic learning capability” that improved their competitive capabilities. This type of network – a network where manufacturers and suppliers are highly involved in the interactions and learning – is referred to as “knowledge sharing network.” The effects of knowledge sharing network on the coordination of supply chain and product customization are as follows.

1) Savings in procurement and transaction costs. Technology, know-how, and human resource integrated through e-SCNs increase efficiency (alignment effect). Alignment effect is the efficiency increase by aligning material specification, low cost suppliers, and leveraging of volume scale. The information integration effect also saves costs of information search, evaluation, transaction, and administration [24]. Despite the required investment in specialized assets for B2B e-SCNs [31], savings in transaction cost can be obtained. Studies on the US and Japanese automobile companies found that Japanese companies had lower transaction costs in spite of their higher relationship-specific investments [8]. The lower transaction costs of Japanese companies were because of the economies of scale and economies of scope due to the repeated transactions with a small number of suppliers, wide range of information exchange/sharing to reduce the information asymmetry, long-term performance orientation, and investments in the co-specialized assets. Therefore, if e-SCNs lead to a similar transaction relationship, transaction cost savings will be possible.

2) Alleviation of the “bull-whip effect” and lower inventory. The “bull-whip effect” occurs due to the time lag between demand and order and the differences of the demand and order amount [23]. Bull-whip effect is amplified as it goes upstream of the supply chain farther from market. That’s why it is also called “the law of volatility amplification” [10]. Electronic information integration can reduce the “bull-whip effect” because the participants can access demand information faster and information distortion or delay is reduced.

3) The effect of R&D support and co-engineering. As e-businesses in e-SCNs evolve, co-engineering for modularization and customized product development advances and the cost savings become larger. Specialized investment and involvement will push co-design and co-engineering in the network further. The co-engineering infrastructures enable the firms in the supply chain to provide customized products, without significant sacrifice of costs and efficiency, based on customers’ characteristics, needs, and requests. This is the “R&D support effect” in network [1]. R&D support effect can lead to an effective development of customized products and shorter new product development cycle.

The above discussions on the coordination and co-engineering effects of e-SCNs are shown in figure 2.

3.3. Customization

Customization can be defined as a new perspective in competition to fulfill each customer’s needs without sacrificing efficiency or cost. A practical definition of customization is “leveraging flexible processe s and organizational structure to provide various individualized products and services at low cost in a standardized mass production system” [15].

In this study, customization is defined as “providing products and services that individual customers need without sacrificing price or delivery time.” Customization can be achieved in three main dimensions – right product, right timing, and right price.

In product dimension, customization can be implemented in features, services, quality, after service, and delivery timing. Right timing includes the cycle time from the order from customers to delivery. Thus, compressing the cycle time of the whole value chain, as well as manufacturing cycle time, is a key success factor of customization. For example, in the automobile industry the capability of the suppliers to develop and deliver parts fast is one of the most crucial success factors [7]. Price of a product includes costs of parts, manufacturing, marketing, R&D, delivery, and inventory. For example, the cost of an automobile consists of product development (7%), m anufacturing (17%), upstream supply chain cost (44%), OEM overhead (7%), and order to delivery (25%) [21].

For an effective customization in a supply chain, there exist several necessary conditions. First, various types of information – order, inventory, delivery, etc – should flow seamlessly between participants of the supply chain. Smooth information flow and communication (electronic linkage) is a basic requirement for customization. Second, an effective coordination between suppliers and manufacturers is necessary. In many industries, such as automobile industry, suppliers produce and deliver modularized

parts to manufacturers. In this case, the production process needs to be coordinated for effective customization and cost savings. Just in time (JIT) production system is a good example of supply chain coordination. Finally, in product development phase, collaboration or co-engineering by people from different organizations is critical for successful development [18]. Co-engineering is also important for customization in a supply chain because it would reduce development time and cost. Co-engineering will also help the participating engineers consider customization at earlier stage of the development. Therefore, the three effects of e -SCD – electronic linkage effect, supply chain coordination effect, co-engineering effect – will be related to customization capability of a supply chain. Figure 3 shows the factors that would affect customization capability.

3.4. A model on the effects of e-SCD

Based on the discussions above, a model for the effect of electronic linkage and coordination, shown in Figure 2, were developed. The electronic linkage effect mainly influences the cost and transaction performance while electronic coordination effect affects the structural performance such as process, manufacturing, production, and design. Figure 3 shows the effects of e-SCD on the customization performance and this is the conceptual framework for the effect of e-SCD on customization.

4. Empirical Study

The conceptual model in Figure 3 is a comprehensive model for long-term research. It is,

however, too big to be tested in a study. Thus, it was simplified for empirical test in this study as shown in Figure 4. The model in Figure 4 consists of three effects of e-SCD – electronic linkage effect, supply chain coordination effect, and co-engineering effect. The relationships from a to g were tested using the data collected from suppliers in the automobile industry in Korea. A pilot test was conducted using the initial operational variables developed from the model. The purpose of the pilot test was to test the validity of the measures. The operational variables and measures were modified based on the pilot test results.

4.1. Data collection

A survey was administered for the primary suppliers of the two major automobile companies in Korea. A questionnaire was surveyed through mail and also in-person visits between December 1998 and September 1999. A total of 202 responses were collected and the descriptive statistics of the respondents are shown in Table 1.

4.2. Methodology

The constructs of the model in Figure 4 were measured using operational variables. A ‘1 to 7 scale’ system was used for the operational variables. The reliability of the operational variables was tested by Cronbach ? coefficients. In exploratory studies such as this study, the threshold of Cronbach ? coefficient is usually set to 0.6 [26]. In this study, the operation variables that have Cronbach ? coefficient lower than 0.6 were discarded. The final operation variables of the

Info Exchange and Sharing( Internalization, Socialization)

Electronic Linkage Effects

Knowledge Creation/ Sharing(Combination)

on-line Linkage

effect

Electronic Communication Effect

Electronic Brokerage Effect

Integration Effect

Figure 4. A test model of the effects of e -SCD on customization

constructs are shown in Table 2. The average of the operational variables of a construct was used as the final measure for the construct.

4.3. Analysis results

Regression analyses on the relationships in Figure 4 were conducted. The regression analysis results are summarized in Table 3. As shown in the table, all regression coefficients are significant at ? = 0.01 level. First, electronic linkage between the suppliers and automobile manufacturers increases exchange of information. The information exchanged between partners is about transaction processing, new product, purchasing, sales, and inventory. Second, if the involvement of the participants is high and the contact between suppliers and automobile manufacturers is intensive, the exchanged information is shared and transformed into valuable information. Third, the exchanged information is integrated and used for supply chain flow control, supply chain problem solving, and expediting the supply chain activities if the involvement of the participants is high and contact between suppliers and automobile assemblers is intensive. Finally, integrated information increases the extent of coordination/co-engineering – collaborative programs and effective divide of roles – among the firms in the supply chain.

5. Conclusions

In this study, it was shown that e-SCD has significant effects on the supply chain coordination and collaboration. This implies that e-SCD can be an effective management tool to deliver customized

The empirical analysis provides several implications for future e-SCD. First, e-SCD needs to focus on the information and knowledge sharing rather than cost savings through electronic data exchange. Efficient customi zation can be achieved by transforming the e-SCN into a “knowledge-sharing network” through the information intermediation and integration effects.

Second, the empirical results show that the involvement of suppliers is one of the most critical factors for an e-SCN to evolve into a “knowledge-sharing network.” Therefore, the manufacturer – for example, automobile manufacturing company in automobile industry – should be a champion who organizes, integrates, and develops the features of customized products. The result also implies that firms need to carefully develop trust-building mechanisms, such as fair profit allocation rules, to develop mutually trusting relationships. If e-SCD destructs the relationship between manufacturer and its suppliers, then the B2B e-SCN would become a simple medium to exchange transaction data and search for low price commodity goods.

Third, the “knowledge-sharing network” will be more effective if it extends to B2C area. When e-SCD is integrated with B2C network, a complete “build to order” will be realized. Information on individual customer preferences, purchase/service history, and products fast.

e-SCD can yield economies of scale [29], economies of scope [19], economies of speed [3], and economies of networking [16]. Economies of networking in supply chain means a network of companies from the final consumer downstream to the suppliers. An ultimate goal of supply chain may be the economies of knowledge [30] in “knowledge sharing network.” e-SCD will be a key player that helps a supply chain achieve ‘economies of knowledge’ as well as ‘economies of network.

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Acknowledgement: This research was partially supported by NJIT SBR (Separately Budgeted Research) Grant.