Report of Scma

Upstream Information Flow in the Supply Chain: The Case of Finnish
Manufacturers
Ogan Yigitbasioglu
M.Sc. Thesis in Accounting

The Swedish School of Economics and Business Administration
2004
HANKEN - Swedish School of Economics and Business Administration
Department: Accounting Type of Work:
Master of Science Thesis
Author: Ogan Yigitbasioglu Date: 10.05.2004
Title of Thesis: UPSTREAM INFORMATION FLOW IN THE SUPPLY CHAIN:

THE CASE OF FINNISH MANUFACTURERS
Abstract:
Collaboration between trading partners to reduce uncertainties and costs in the supply chain
has become a must for many companies in this highly competitive and globalized world.
Communication technologies have matured and with the recent emergence of Collaborative
Information Systems, supply chain partners are increasingly sharing more information with
each other on parameters such as product demand, inventory and production schedules. On
the other hand, the sharing of sensitive information may lead to undesired outcomes such as
information leakage and hold-up costs. Despite this common trend and risks, little is known
about how buyers and suppliers in the supply chain approach this issue, particularly on how
they decide what information to share with partners. Therefore, the objective of this thesis is
to identify the factors that influence Finnish manufacturers’ decisions as buyers on how much
information to share with suppliers. The thesis also aims to determine the extent and intensity
of information provided to suppliers along with whether companies have a formal policy
regarding this issue.
A questionnaire was sent to manufacturers in Finland to find out among others how relevant
the factors identified in the theoretical part of the thesis are in affecting buyers’ decisions.
According to the results, buyers in the Finnish manufacturing industry are fairly transparent
with respect to the extent of information they provide to their suppliers, especially on
forecasted demand for their products. Furthermore, transaction specific and relation specific
factors are considered to be most relevant whereas supplier specific and supplier’s market
specific factors are found not to be that relevant. Results also show that only a few companies
have a formal methodology for this purpose despite the fact that one third of the companies
are admitting that they are at risk because of information known to their suppliers.
Keywords: communication technologies, Supply Change Management, collaboration,
integration, Collaborative Information Systems, ERP, JIT, VMI, ECR, CPFR, APO, trust
ii
Table of Contents
Table of Contents………………………………………………………………….. iii

List of Figures……………………………………………………………………… vii
List of Tables………………………………………………………………………. viii
1. Introduction……………………………………………………………………. 1
1.1 Background on Collaboration……………………………………………….. 1
1.2 Research Objective………………………………………………………….. 2
1.3 Structure of the Thesis………………………………………………………. 3
2. Enterprise Applications……………………………………………………….. 5
2.1 Objective and Structure……………………………………………………… 5
2.2 Production and Resource Planning…………………………………………... 5
2.3 Materials Requirement Planning……………………………………………...6
2.4 Manufacturing Resource Planning……………………………………………8
2.5 Enterprise Resource Planning Systems……………………………………….9
2.6 Summary and Conclusion of this Chapter…………………………………… 13
3. Communication Technologies Enabling Integration and Collaboration……15

3.2 Electronic Data Interchange…………………………………………………. 15
3.3 Extensible Markup Language (XML)……………………………………….. 17
3.4 Web services…………………………………………………………………. 20
3.5 Electronic Business XML……………………………………………………. 24
4. Supply Chain Management Practices and Inter-enterprise Applications…. 28

4.2 Supply Chain Management (SCM)………………………………………….. 28
4.3 Just-In-Time…………………………………………………………………. 32
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4.4 Efficient Consumer Response……………………………………………….. 33
4.5 Advanced Planning and Scheduling………………………………………… 35
4.6 Business Process Optimisation……………………………………………… 37
4.7 Vendor Managed Inventory…………………………………………………. 38
4.8 Collaborative Planning Forecasting and Replenishment………………….… 39
4.9 Summary and Conclusion of this Chapter…………………………………... 43
5. Supplier Relationship Management………………………………………….. 44

5.2 Supplier Relationship Management (SRM)…………………………………. 44
5.2.1 Supplier Selection and Performance Measurement……………………. 45
5.3 SRM Solutions……………………………………………………………….. 48
5.3.1 Manugistics SRM……………………………………………………….48
5.3.2 ORACLE SCM………………………………………………………… 49
5.3.3 PeopleSoft SRM……………………………………………………….. 50
5.3.4 SAP SCM……………………………………………………………… 52
5.4 Main Features of SRM……………………………………………………….. 54
5.5 Implications of SRM and SCM on the degree of Information Sharing……… 55
5.5.1 Collaborative Supply Planning………………………………………… 55
5.5.2 Product and Product Design…………………………………………….58
5.6 Summary and Conclusion of this Chapter…………………………………….61
6. The Economics of Collaboration……………………………………………… 62

6.1 Objective and Structure.....................................................................................62
6.2 The Firm............................................................................................................62
6.3 Asset Specificity................................................................................................64
6.4 Product Innovation and the Role of Information.............................................. 66
6.5 Contracts........................................................................................................... 67
6.6 Strategic Core................................................................................................... 69
6.7 Efficient Boundaries of the Firm...................................................................... 70
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7. Previous Research……………………………………………………………… 74
7.1 Objective and Structure……………………………………………………….74
7.2 Previous Research……………………………………………………………. 74
7.2.1 Benefits of Collaboration……………………………………………… 74
7.2.2 Barriers to Collaboration: Trust and Risk……………………………… 75
7.2.3 The Case Study of Sainsburry ………………………………………….76
7.2.4 Upstream Information Flow…………………………………………… 76
7.2.5 Supplier Selection……………………………………………………… 77
8. Factors Affecting Collaboration………………………………………………. 80

8.1 Objective and Structure ………………………………………………………80
8.2 Factors Affecting Collaboration …………………………………………….. 80
8.2.1 Factors Related to Supplier's Characteristics…………………………... 80
8.2.2 Factors Related to Supplier's Market ………………………………….. 85
8.2.3 Transaction Specific Factors…………………………………………… 86
8.2.4 Factors Related to Product's Characteristics…………………………… 88
8.2.5 Factors related to Buyer's Products……………………………………. 88
8.2.6 Relational Factors……………………………………………………… 89
8.3 Collaboration as a Function of Factors………………………………………. 91
9. Research Methodology………………………………………………………… 94
9.1 Objective and Structure.………………………………………………………94
9.2 Research Methodology………………………………………………………..94
9.2.1 Sample…………………………………………………………………..94
9.2.2 Survey………………………………………………………………….. 96
9.3 Research Results……………………………………………………………... 99
9.3.1 Company Information and Suppliers…………………………………... 99
9.3.2 Information provided to suppliers………………………………………102
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9.3.3 Relevance of factors for upstream information flow………………….. 104
9.3.4 Decision Process/Method……………………………………………… 113
9.4 A Critical Evaluation of the Research……………………………………….. 117
9.4.1 Statistical Methods…………………………………………………….. 117
9.4.2 Research Bias………………………………………………………….. 118
10. Conclusion…………………………………………………………………….. 120

10.1 Objective and Structure……………………………………………………...120
10.2 Conclusion………………………………………………………………….. 120
10.3 Validity and Reliability……………………………………………………... 123
10.4 Recommendations for Further Research……………………………………. 124
References……………………………………………………………………….... 125
Appendix: The Questionnaire………………………………………………….... 133
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List of Figures
Figure 1.1: The Structure of the Thesis………………………………………….… 3

Figure 2.1: An MRP System…………………………………………………….… 7
Figure 3.1: UDDI core data structures…………………………………………..… 22
Figure 3.2: businessEntity Structure diagram……………………………………… 23
Figure 4.1: Integrated Supply Chain…………………………………………….… 29
Figure 5.1: Ballard Supplier Management Program…………………………….… 46
Figure 5.2: Ballard’s Preferred Supplier Characteristics………………………..… 47
Figure 5.3: Coupling and Information Flow…………………………………….… 57
Figure 5.4: Information flow on product characteristics………………………..… 60
Figure 6.1: Economies based in the strategic core.................................................... 71
Figure 8.1: The Interaction of Factors…………………………………………..… 92
Figure 9.1: Sector Distribution…………………………………………………..… 99
Figure 9.2: Firm Size Distribution………………………………………………..... 100
Figure 9.3: Core Suppliers……………………………………………………….… 101
Figure 9.4: Purchases from Core-suppliers…………………………………………102
Figure 9.5: Upstream Information Transfer……………………………………..… 103
Figure 9.6: Relevance of Supplier Specific Factors……………………………..… 105
Figure 9.7: Relevance of Factors on Supplier's Market………………………….… 106
Figure 9.8: Relevance of Transaction Specific Factors……………………………. 107
Figure 9.9: Relevance of Factors on Supplier's Products………………………..… 109
Figure 9.10: Certainty/Uncertainty of Demand………………………………….… 110
Figure 9.11: Relevance of Relational Factors……………………………………… 111
Figure 9.12: Method of Supplier Evaluation…………………………………….… 114
Figure 9.13: Methodology Design……………………………………………….… 115
Figure 9.14: Classification Capability of the Buyer's Methodology…………….… 116
Figure 9.15: Are buyers at risk?…………………………………………………… 117
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List of Tables
Table 2.1: Major ERP Vendors………………………………………………….… 10

Table 2.2: ERP’s main capabilities……………………………………………..…. 10
Table 4.1: Main tasks of SCM………………………………………………….…. 30
Table 5.1: Decision Criteria across Studies……………………………………….. 45
Table 5.2: Features of SRM solutions……………………………………………... 54
Table 5.3: Collaborative Supply Chain Planning components
of Business Solutions…………………………………………………… 55
Table 5.4: Coupling………………………………………………………………... 58
Table 5.5: Collaborative Design components of business solutions…………….… 59
Table 5.6: Coupling II……………………………………………………………… 60
Table 8.1: Factors determining the trustworthiness of a company………………… 81
Table 9.1 Sector Distribution…………………………………………………….… 100
Table 9.2: Firm Size Distribution………………………………………………..… 101
Table 9.3: Mean Values for Information Transfer…………………………………. 103
Table 9.4: Mean Values for Supplier Specific Factors…………………………..… 106
Table 9.5: Mean Values for Factors related to Supplier's Market…………………. 107
Table 9.6: Mean Values for Transaction Specific Factors………………………… 108
Table 9.7: Mean Values for Relational Factors………………………………….… 111
Table 9.8: Mean Values of all factors……………………………………………… 112
Table 9.9: Averages for Categories……………………………………………...… 113
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1. Introduction
1.1 Background on Collaboration
The management of a company's relationship with its suppliers and customers is as

critical to its success as the management of its internal operations. Thus, during the recent
years, Supply Chain Management has drawn a lot of attention mostly owing to rapid
developments in Information and Communication Technologies (ICT). New technologies
like Enterprise Resource Planning systems and management practices like Collaborative
Planning promise to cut costs and increase customer satisfaction which eventually leads
to increased market share and shareholder value. In fact back in year 2000, according to
Computer Sciences Corporations' Survey with 822 executives in 26 countries, connecting
to customers, suppliers, and/or partners ranked first among all the issues relating to
information systems (CSC 2001).
Supply Chain Management has evolved over the years in the light of the ever increasing
capabilities in the ICT to include new concepts like Customer Relationship Management
and Supplier Relationship Management. While a lot of emphasis has been placed into
customer relations in the past, research and applications have been relatively poor on the
supplier side. It is only now that Supplier Relationship Management is becoming an
equally important issue. A successful Supplier Relationship Management in place can
save a great amount of money. One of the advantages is increased visibility in the supply
chain which results in lower inventory levels. Also the automation of tedious tasks like
requests for proposal leads to faster procurement execution and thus to compressed cycle
times. Costs per unit are also likely to decrease as demand consolidation across multiple
business units can be performed with an integrated system.
As technology has become ubiquitous and with the availability of off-the-shelf supply
chain software solutions, many companies are increasingly opting for integration with
external parties. As these developments are taking place, we are led to believe that the
ultimate goal of firms should be to act as one firm with full information exchnage.
1
"However in the excitement about these software solutions, it is often overlooked that
creation and implementation of integrated supply chains requires tremendous resources, a
great deal of management time and energy, large organization-wide changes, huge
commitment from suppliers/partners, and sophisticated technical infrastructure" (Pant et
al. 2003). Furthermore integration also brings along new risks resulting from the
disclosure of sensitive information and not to mention that collaborative relationships are
suitable only under certain conditions depending on the market and/or the nature of the
product. Unlike in the past when collaboration was more of a strategic decision, today
collaboration and integration is at the tip of a finger. Collaboration is encouraged to firms
in order to stay competitive. In the light of these events, it is the firms that must decide
ultimately what kind of strategy to adopt; to what extent to collaborate or to share
information on each others business affairs. This study intends to find out if companies
do have competent decision mechanisms to deal with this issue, and also aims to identify
what factors are involved in these decisions. A buyer’s perspective is adopted to reduce
the scope and complexity of the research.
1.2 Research Objective
The objective of this thesis is to examine interorganizational collaboration mechanisms in

terms of the theoretical frameworks and applications that exist, and to find out how
Finnish manufacturing firms as buyers in the supply chain approach this issue.
2
1.3 Structure of the Thesis
The thesis, as can be seen from Figure 1.1, is structured as follows:
Supplier Buyer
SCM (CPFR,VMI, etc.)

Inter-enterprise systems:
Chapter 4
Enterprise Enterprise
Information Information
Systems: Chapter 2 Systems: Chapter 2
Communication Tecnologies:
Chapter 3
SRM/SCM
Collaboration and information flow between firms: Chapter 5,6
Factors influencing collaboration:

Chapter: 7, 8
Figure 1.1: The Structure of the Thesis
Chapter 2 introduces the information systems that most companies use today to run their
businesses. Their main functions, capabilities and limitations are presented here.
Chapter 3 presents the communication technologies that enterprise information systems

use to connect to each other.
In chapter 4, Supply Chain Management (SCM) as a concept is introduced along with its
motivation and evolution. The chapter also presents the new-generation of collaborative
inter-enterprise applications that emerged out of SCM. These applications use the
communication technologies explained in chapter 3 and are mainly extensions to the
existing information systems explained in chapter 2.
Supplier Relationship Management (SRM) as a complementary approach, emphasizing
3
the need for further collaboration, is presented in chapter 5 along with some examples of
applications based on SRM. This chapter also elaborates on the coupling requirements
between trading partners in terms of the types of information that needs to be exchanged
as a result of the new practices.
In chapter 6, the literature on transaction cost economics is reviewed, to understand the

motivation for integration and collaboration between firms from the theoretical
perspective.
Chapter 7 presents previous studies on collaboration and information exchange in the

supply chain.
Chapter 8 builds upon the previous chapter in so far as it identifies and discusses further
factors that may affect the degree of collaboration and information exchange between
supply chain partners.
In chapter 9, the research design is explained which includes the sampling method and
the questionnaire. The chapter also presents the data analysis and findings.
Chapter 10 evaluates the research findings and concludes the thesis.
4
2. Enterprise Applications
2.1 Objective and Structure
In this chapter, I shall present the basic systems that the advanced applications of today
are based on. In section 2.2, the reader is introduced to production and resource planning
in order to understand the core activities of manufacturing firms. Section 2.3 provides
information on MRP, the very first systems that attempted to automate some of the tasks
identified in section 2.2. Sections 2.4, 2.5 introduce Manufacturing Resource Planning
(MRPII) and Enterprise Resource Planning (ERP) Systems respectively. The motivation,
key features and some of the advantages and disadvantages of these systems are
discussed.
2.2 Production and Resource Planning
Manufacturing companies buy materials to produce goods that can be sold for profit. Two
core processes involved in this activity are procurement and manufacturing. It is an
important task to coordinate the inflow of materials so that production runs smoothly. A
shortage in supplies will halt production, if the necessary buffer stocks are not available.
This will have serious implications for a company, as demand cannot be met. Loss of
sales will translate into lost profits as well as reduced liquidity, not to mention the loss of
customers. Finding the solution in higher stocks is inefficient as it drives costs up. The
other process, manufacturing, also has to be carried out appropriately. Capacity plans
must be such that resources like machinery are not overused but at the same time are kept
profitable. Furthermore, action plans for the unexpected, such as machine breakdowns,
have to be available at all times. All the above-mentioned activities require detailed
planning and calculation as well as timely and accurate data on current processes.
The second half of the 20th century witnessed rapid developments in information
technology. Enterprises benefited from the new technologies, which enhanced data
processing capabilities and brought along new data acquisition techniques such as bar
5
coding. Networks connecting multiple terminals allowed the exchange of information on
various activities including logistics and production. In early 1970's, the first systems,
Materials Requirements Planning (MRP), arrived to shop floors to help the planning and
carrying out of certain tasks. These systems have then evolved into becoming the
complex information systems of today, used for the efficient management of enterprises
as well as enabling collaboration among them.
2.3 Materials Requirement Planning (MRP)
MRP emerged in the early 1970's as a software application to address inventory and
scheduling issues in manufacturing. It was the first of its kind as a system that applied
already known concepts such as order-point methods. MRP addresses questions like
which materials and components are needed, in what quantities and when. The system
consists of a set of logically related procedures and decision rules which uses as inputs
the demand information from the master production schedule (MPS), the inventory
status, and the product composition information (the bill of materials - BOM). The MPS
is a time phased production plan containing actual customer orders and forecasted
demand and is the driver of the entire system. Figure 2.1 illustrates an MRP system.
6
Customer Demand
orders forecasts
Master
Production
Schedule
Bill of
MRP Inventory
materials
program Status File
file
Outputs and
Reports
Figure 2.1: An MRP System (Coyle et al 2003, 252)
From the inputs, the system determines (1) quantities the company should order and
when, (2) the need to expedite or reschedule arrival dates or needed products and (3) the
canceled need for products. Thus, changes in customer requirements are easily dealt with
such a system as production and purchase plans are automatically revised when the MPS
changes.
Among the advantages of the system are its capability to maintain a reasonable amount of
safety stock and to minimize or eliminate inventories whenever possible. MRP -based
systems can also identify process problems and potential supply chain disruptions long
before they occur and take necessary corrective actions (Coyle et al. 2003, 255).
The drawbacks of MRP lie mainly in its assumptions of infinite capacity and fixed lead
times.
By late 1970's companies realized that information in an MRP could be also utilized in
other units of a business, which led to the development of MRP II.
7
2.4 Manufacturing Resource Planning (MRP II)
MRP II includes all the functionalities of an MRP and have the following added
capabilities (University of Cambridge 2003):
Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates

the feedback from previous run, which is the work already progressed on the shop floor.
This helps the system to regularly update all the levels of the schedule.
Resource Scheduling: During scheduling, the system also takes into account the plant
and equipment required to convert raw materials into finished goods. This is also the
reason why the initials now mean Manufacturing Resource Planning. Thus capacity is an
integral part of the system unlike in MRP, however it is only considered after scheduling
has been done. Due to this procedure, it may for example turn out that insufficient time
was allowed within the MRP schedule for the individual operations to be completed.
Batching: Also batching needs to be incorporated into the system if resources need to be
scheduled. 'Lot for Lot', ' Economic Batch Quantity', 'Part Period Cover' are the three
types of batching rules that are widely used by many software packages.
• Lot for Lot: In this scheme orders for materials exactly match production plans.
• EBQ: The Economic Batch Quantity is a method to balance the holding cost with
the set up cost for production.
• Part Period Cover: Here, batches are made to cover a fixed period of demand such
as a week.
Software Extension Programs: A number of software extensions are designed and are
available for MRP II to help the scheduling procedure. The most important is Rough Cut
Capacity Planning (RCCP). This was an attempt to match the order load to the capacity
available by pushing orders from overload periods to periods of underload.
8
MRP II helps management to use company resources more efficiently by providing
information based on the production plan to all the following functional areas or units:
Purchasing - purchase orders

Production - production scheduling and control, inventory control, capacity planning
Finance - financial resources needed for material, labor, overhead etc.
Accounting - actual cash flow projections, production costs, etc.
MRP II is also capable of making "what if" analysis. A production manager can for
example see the impact of changing the MPS on the purchasing requirements or capacity
usage. Thus, planning for unexpected events, like machine breakdowns, can be done
more realistically.
Although, a more superior system than MRP, it also has limited capability and flexibility.
Like MRP, it also assumes fixed lead times and similarly batch sizing rules are fixed.
Also the system was far too rigid to implement it across multiple locations and
production plants. Hence, the need for a more integrated and scalable system gave way to
the development of enterprise resource planning (ERP) system in the early 1990's.
2.5 Enterprise Resource Planning (ERP) Systems
ERP systems are large, complex and configurable softwares that integrate disparate
information systems into a single system. It enhances decision-making as the system
retrieves data in real time for analysis from its various modules. ERP systems are widely
used today and form the basis of many company-wide information systems. The leading
ERP vendor is SAP with a market share of 25% in 2002 (Midrangeserver 2003). Table
2.1 illustrates the major ERP vendors for large organizations and their market shares.
9
ERP Market
Vendors Share
SAP 25,1
Oracle 7
PeopleSoft 6,5
Sage 5,4
Microsoft 4,9
Others 51,1
Table 2.1: Major ERP Vendors (Midrangeserver 2003)
To explain the features and capabilities of an ERP system, it is useful to take an example:
SAP's ERP system. The SAP R/3 was released in 1992. Since then, SAP added new
functionalities to its product to become now the SAP R/3 Enterprise. SAP R/3 is an
important building block of the mySAP business suite family of applications. SAP R/3's
main modules are presented below to illustrate the capabilities of an ERP system
Module Function(s)
Sales and Distribution (SD) Supports sales and distribution activities, with
functions for pricing, order processing, and on-time
delivery. It has a direct interface with the MM and
PP modules that enables the system to check
customer credit, materials and capacity to meet
demand. When approved, orders are executed and
billed automatically.
Materials Management (MM) Supports the purchasing process through automated
supplier evaluation and integrated invoice
verification. Procurement and warehousing costs are
lowered with accurate inventory and warehouse
management.
10
Module Function(s)
Production Planning (PP) This module supports production planning,
execution of manufacturing processes, analysis and
control. Different manufacturing processes
including repetitive, make to order, assemble to
order and make to stock production are supported.
Financial Accounting (FI) Collects data relevant to financial accounting into
an integrated General Ledger. It provides
comprehensive and consolidated financial reports
that give an up to the minute "snapshot" of the
enterprise.
Controlling (CO) This module provides a set of planning and control
tools for enterprise control systems.
Treasury (TR) A module for financial management to ensure
liquidity and minimize risk.
Enterprise Controlling (EC) It continuously monitors metrics and performance
indicators on the basis of specially prepared
management information
Investment Management (IM) Offers integrated management of investment
projects from planning through execution to
settlement. Also pre-investment analysis and
depreciation simulations are provided.
Plant Maintenance and Service The planning, control and processing of scheduled
(PM) maintenance, inspection, special maintenance and
service management availability of operational
systems including plants and equipment delivered to
customers is thereby ensured.
11
Module Function(s)
Quality Management (QM) Monitors, manages and tracks all processes relevant
to quality assurance. Inspection and corrective
measured are initiated along the supply chain
through this module.
Project System (PS) All phases of a project is coordinated and controlled
in direct coordination with Purchasing and Control,
from quotation to design and approval, to resource
management and cost settlement.
Human Resources (HR) Supports the management of human resources and
streamlines HR transactions.
Table 2.2: ERP’s main capabilities (Stanford 2003)
Technological novelties and characteristics of ERP systems include the move to

relational database management systems (RDMS), the use of graphical user interfaces
(GUI), open systems and client-server architecture.
ERP systems are implemented based on a business process reference model. The model is
developed by the ERP vendor and incorporates best practices for that particular industry.
Often, organizations need to re-engineer their business processes in order to align them
with those of the software. Organizational structures may also mismatch with the
organizational structure implicitly promoted in the reference model. Thus ERP projects
become more complex when business processes must be re-engineered and when
softwares have to be reconfigured and modified to fit the organization.
During the 90's, many large enterprises implemented ERP systems. However, the
implementation of ERP systems seldom ran smoothly and indeed, a considerable number
of projects have failed in the past leading to firms’ bankruptcies in the worst case. ERP
projects may last up to several years and usually cost millions of dollars. Thus, a
successful project requires the long-term commitment of higher management, sufficient
resources and time.
12
ERP systems have disadvantages. They are designed to record events that have already
occurred. The lack of forward visibility limits their capability of making intelligent
decision-making. Thus, ERP systems are relatively inflexible in the face of
environmental changes.
ERP systems are continuously evolving to become more open, interoperable and to
include more advanced features. SAP, for example, incorporates new technologies such
as Java, Extensible Markup Language (XML), Light Weight Directory Access Control
Protocol (LDAP) and Wireless Markup Language (WML) for interoperability with
heterogeneous systems. Also many components and extensions to SAP R/3 Enterprise are
available such as the
Advanced Planner and Optimizer (APO), Supplier Relationship Management (SRM) and
Business Information Warehouse (BW). APO and SRM will be discussed in chapter 4
and 5 respectively as they enable collaboration among supply chain partners.
2.6 Summary and Conclusion of this Chapter
Companies need to make complex plans and calculations related to purchasing and
manufacturing. These plans and calculations do also require regular updates when for
example changes in customer orders or manufacturing capacity occur. Hence, this chapter
introduced the reader to MRP and MRP II, the very first information systems that
attempted to automate some of the tasks associated with manufacturing. MRP and the
more superiour system, MRP II, were widely used until the 90’s when they were replaced
by ERP systems for their limitations and weaknesses. ERP systems, which integrate
disparate information systems into a single system, were widely adopted in the 90’s and
now constitute the main building block of a companies information system. Thus their
features and capabilities were presented in this chapter. ERP systems can be reconfigured
so that new and more 'intelligent' systems or modules, such as APS, which will be
discussed in section 4.5, can be added to them. Indeed, with the emergence of the Internet
13
and the communication technologies discussed in the next chapter, these systems have
become more capable. With increased connectivity, it has become much easier to
exchange information and therefore to collaborate with partners.
14
3. Communication Technologies Enabling Integration and
Collaboration
Once enterprise systems were in place, it became necessary to make systems talk to each
other. Communication between disparate systems was required for both, intra-
organizational and inter-organizational purposes. For example the systems of a bank's
branches needed to talk to each other or talk to the bank's main server. Interorganizational
communication on the other hand was required for eliminating paper-work and speeding
up certain tasks such as ordering.
This chapter looks at the evolution of the different technologies facilitating

communication between distant computers. A popular and pre-Internet-era technology,
the Electronic Data Interchange (EDI) is discussed in section 3.2. In section 3.3, the
Extensible Markup Language (XML) is explained on which the Web services and
electronic business XML (ebXML) frameworks are based on. These two frameworks are
emerging as the two dominant technologies for Business-to-Business (B2B)
communication, integration and collaboration and are therefore presented in sections 3.4
and 3.5 respectively.
3.2 Electronic Data Interchange (EDI)
EDI is the organization-to-organization, computer-to-computer exchange of business data

in a structured, machine-processable format (Coyle et al. 2003, 464). It eliminates
paperwork related to various business processes such as, purchase orders, pricing, order
status, scheduling, shipping, receiving, invoice payments, contracts, production data,
marketing, sales and others. It also eliminates multiple data entry and improves the speed
and accuracy of information. The need for EDI was realized in the 1960's as a way to
reduce expensive communication means, time consuming paperwork and thus to remain
competitive in the industry. To achieve this objective, a standard focusing on the content
15
of the message, rather than the method of its transmission was then developed. The
Transport Data Coordinating Community (TDCC) in charge of this effort created the so-
called transaction sets for this purpose. They consist of several data segments that specify
the data elements like price, model number and carrier code. This followed American
National Standards Institute's authorization of another committee, the Accredited
Standards Committee (ASC) X-12, to develop a standard between trading partners based
on the TDCC structure in 1979. The internationalization of the EDI stationary was
completed in 1986 with UN's involvement to develop the standard called United Nations
Electronic Data Interchange for Administration, Commerce, and Transport
(UN/EDIFACT).
To use EDI, trading partners needed a special software and means for electronic
communication. Regarding electronic communication, companies had two options: to use
either direct transmission, that is, a dial-up or a dedicated line to directly connect to a
partner’s computer, or alternatively, a Value Added Network (VAN). VAN involved a
third party to provide the means of communication like Sonera and therefore was more
reliable but more expensive. VAN's however allowed to use different computer systems
between trading partners through a method called protocol conversion. Also, VAN's had
the advantage of reducing phone bills as the amount of data transmitted was charged
instead of the transmission distance.
EDI works by first translating (EDI Translation software) the document to be sent into a
standard format. Next, the connection is established, usually by dialing the phone number
of the VAN. The message is then sent to an electronic mailbox on the VAN. From the
electronic mailbox, the receiver's software will retrieve the file, interpret the message,
check for compliance with EDI standards and store it. Also a 'Functional Acknowledge' is
sent to the sender to inform if the message was received and if it complies with EDI
standards. Now, the message can be translated to produce a hard copy of the message or
transformed into a different format for further processing using the translation software.
A great disadvantage of using EDI was that it was very expensive to implement and
operate. Today, it can cost between 50.000 and 2 million US dollars to implement, which
represents a significant cost for especially small to medium sized businesses (IT Portal,
16
2003). Also trading partner agreements, vendor agreements, the role of lawyers and
auditors and security are some of the issues that add complexity to its adoption, not to
mention the adjustment time and skilled human resources required. The translation of
company data structures into EDI standards may also require manual intervention in the
process. Thus, its success is a matter of management support and commitment.
EDI is and was widely used in the past, as it was the only solution for fast data
transmission and processing. It compressed cycle times and reduced costs associated with
communication and paper. However the emergence of a much cheaper, flexible and
ubiquitous technology, the Internet, has reduced its popularity throughout the years. The
Extensible Markup Language (XML) was developed in the late 1990's to facilitate data
transmission over the Internet. XML will be covered in the next section.
3.3 Extensible Markup Language (XML)
“XML is a protocol for containing and managing information on the Internet. It is a

family of technologies that can do everything from formatting documents to filtering
data” (Ray 2001, 2). Despite its name, XML is not a markup language like the Hyper
Text Markup Language (HTML). “It provides a framework -the rules and the tools for
creating your own markup” (Fitzgerald 2001, 20). “A markup language is a set of
symbols that can be placed in the text of a document that enhances to demarcate and label
the parts of a document” (Ray 2003, 2).
To create an XML document, another file called, an XML Schema, is required. The
Schema defines all the rules that the document must adhere to and validates the
document. Once, the document is validated, a stylesheet is applied on the document so as
to output a desired format. Thus the content of the file is kept separately from its
presentation. “With this feature, it is easier to reuse and refit the content for various
needs” (Fitzgerald 2001, 37).
XML evolved mainly out of two markup languages, the Standard Generalized Markup
17
Language (SGML) and HTML. SGML was developed in the 1970's and became a
standard in 1980. Although, powerful and comprehensive, it never enjoyed broad
popularity due to its complexity (Fitzgerald 2001, 17). Consequently, HTML was
developed in the early 1990's as a very easy to understand, but at the same time,
inflexible, markup language in CERN. Despite HTML's success, Web's flourishment in
the 1990's demanded a more complex language to structure, store and transfer
information over the Web. Thus work on XML began in 1996 and continued until its
standardization in 1998 by the World Wide Web Consortium (W3C), a body formed to
standardize web-related technologies. Below are XML's features and advantages:
• XML is free
No proprietary rights exist over XML, so anyone can use XML for free.
• XML is structured
As text is expressed in a clear and logical way, softwares and humans can
organize, find and interpret documents and data quickly and accurately.
• XML is the basis for a file format

As XML is so well structured, XML documents can be shared between entirely
different computer and software systems. This will make XML, the backbone of
electronic commerce worldwide.
• XML is open
XML recommendations are managed by W3C. Unlike private firms, W3C shares
all drafts of XML-related working papers so that the community stays up-to-date
with future enhancements and prepare accordingly.
• XML is nonproprietary
It is not owned by a proprietary company or tied to a specific software or
hardware.
18
• XML is platform independent
Although some of the applications to create XML may not be platform
independent, XML itself is.
(Fitzgerald 2001, 20)
Also, XML compared to previous inter-enterprise communication technologies like EDI

has many advantages. XML is web based and therefore much cheaper to use compared to
VAN's. It is also in a human readable format, and new applications and businesses can be
easily added to the network (Remarkable eBusiness 2002). It is anticipated that XML will
not replace EDI entirely in the short run due to heavy investments in EDI infrastructure
but the superiority of XML is undeniable.
There are also translation softwares available on the market such as Vitria's
BusinessWare EDI module that convert EDI documents into XML and vice versa (Vitria
2003). The conversion is required when, for example, customer's online orders are
translated into purchasing orders by the vendor and sent to its supply chain partners using
the existing EDI infrastructure.
Due to the above-mentioned characteristics of XML, many businesses, today, use XML
and XML based technologies such as web services for inter-enterprise communication.
However XML has its own problems, mainly because of its high degree of flexibility.
Today, there is an abundance of XML based frameworks (vocabularies) that compete
with each other to become the standard for B2B communication. “For XML messages to
be interpreted by other businesses, the companies have to agree on an XML-based B2B
standard (mainly for schemas), which defines the document formats, allowable
information and process descriptions” (Rautajoki, T 2003, 26). So far, common standards
mostly exist in vertical industries. One example is RosettaNet, which is popular among
major information technology, electronic components, and semiconductor manufacturing
companies. Also the Open Travel Alliance's Standards (travel industry) enjoyed
19
somewhat broader adoption (Virevesi, J 2003). These standards however, only serve
specific industries and a cross-industry standard must be in place to facilitate global
communication. Web services and ebXML are two standards that are attempting to
achieve this objective during the last few years.
3.4 Web services
“Web services are software programs that use XML to exchange information with other
software via common Internet protocols” (Deitel, DuWaldt & Trees 2003, 23). These
softwares can send requests and possibly respond to other computers' requests. Although
the basic standards and ideas had existed for several years, Hewlett-Packard was the first
software vendor to introduce the concept of web services with its e-Speak product in
1999 (Deitel et al. 2003).
Web services can perform a great variety of tasks, often referred to as methods or
functions. A financial application for example might invoke a function on a remote
computer to return the current value of a certain stock.
The big advantage of web services is that they allow applications written in different
programming languages and on different platforms to communicate. This is possible
through the use of common XML standards. There had also been earlier attempts to
facilitate the communication of applications between disparate systems. OMG's Common
Object Request Broker Architecture (CORBA) and Microsoft's Distributed Component
Object Model (DCOM) were for example two technologies that allowed two applications
running in different locations to communicate (Deitel et al. 2003). The drawbacks of
these technologies were that they were proprietary and not interoperable.
Three technologies that are all XML-based constitute the core infrastructure of Web
services (Virevesi, J 2003). The Simple Object Access Protocol (SOAP), Web Services
Description Language and Universal Description, Discover and Integration (UDDI) are
the technologies that deliver Web services.
20
“The purpose of SOAP is to enable data transfer between systems distributed over the
network” (Deitel et al. 2003, 33). A SOAP message is sent by the requesting application
to invoke a method provided by a web service. The Web service uses the information
contained in the message to perform the function and may respond via another SOAP
message. SOAP consists of a set of standardized XML schemas and the messages have
three components: an envelope, header and body. The envelope wraps the header and
body elements; the header is an optional element that provides information regarding
topics such as security and routing; the body contains application specific data that is
being communicated (Deitel et al. 2003). SOAP is layered over an Internet protocol such
as HTTP or SMTP.
“WSDL is an XML based language through which a Web service can convey to other
applications the methods that the service provides and how those methods can be
accessed” (Deitel et al. 2003, 34). WSDL documents make Web services self-describing
which saves a lot of effort for the developers of applications aimed at using the services.
A WSDL document includes information regarding a particular Web service's
capabilities, location, the kind of messages it can send and receive, what Internet
protocols to use to connect and the information required to invoke a function. Although,
WSDL documents are complex, their generation is simple as many Web services
development tools generate them automatically when a Web service is developed.
UDDI is used to publish and locate web services on a network. Companies can use a
standard XML based format to describe their electronic capabilities and business
processes. The specification also provides a standardized method of registering and
locating the descriptions on a network such as the Internet (Deitel et al. 2003). Registries
maybe public or private, allowing only approved partners to access them. The largest and
most comprehensive public registry is the UDDI Business Registry (UDDI), which was
developed to facilitate the formation of new business relationships (Deitel et al. 2003).
UDDI's contain information in three levels of detail: white -, yellow - and green pages.
White pages convey the least information, that is, their contact information and a textual
description of themselves. Yellow pages provide classification information and details on
21
companies' electronic capabilities. Green pages list technical data relating to services and
business processes (Deitel et al. 2003).
UDDI V3, the latest specification consists of four core data structures as shown in Figure
3.1
Figure 3.1: UDDI core data structures (UDDI 2004)
The data structures contain information to describe the business, its capabilities and the
method of accessing its services. The businessEntity component includes information
about the type of business it is. The structure of a businessEntity is shown in Figure 3.2
22
Figure 3.2: businessEntity Structure diagram (UDDI 2004)
As the Figure illustrates, the businessEntity contains data on a business, its name,
description, contacts and so on. The description however does not contain any
information about the trustworthiness of an entity. Trust could be conveyed through
standardized, common notations such as ISO 9000, or through a common ranking
scheme.
For the deployment, management and execution of Web services, two distinct
architectures and technologies are competing for dominance. These are the Microsoft
.NET and Java Enterprise Edition (J2EE) application frameworks. They both support the
Web services standards and provide the platforms, tools, and programming environments
for their development and integration. The most striking difference between these
application frameworks is in their support for operating systems and programming
languages. The .NET Framework supports multiple languages such as C#, C++, Cobol
and Perl but runs only on Microsoft Windows Operating Systems. In contrast, J2EE can
run on any platform but supports only Java. Furthermore, whereas J2EE is an open
standard, .Net is a proprietary technology that is more tightly coupled and optimized to
23
run with Microsoft tools. It is anticipated that the two platforms will co-exist and that
neither of them will be the dominant technology because of their differences (Virevesi. J.
2003).
Web services are a promising new technology. However, because it is new, a set of issues
plague its widely adoption at this stage. First of all, the standards that Web services are
based on, SOAP, WSDL and UDDI, are still in development. So far, only SOAP has
managed to become the World Wide Web Consortium's (W3C) recommendation. Also
intellectual property claims by Microsoft and IBM, who significantly contributed to the
development of SOAP and UDDI threaten the free use of the technology. Other barriers
to adoption is the lack of security standards for Web services as well as their slowness for
high-performance (Deitel et al. 2003). Finally, the framework is “considered to be "light-
weight", as it leaves some of the technological elements open and to be solved by the
implementer” (Virevesi. J. 2003). Alternatively, ebXML provides a more sophisticated
and robust mechanism for complex business collaboration services which is presented in
the next section.
3.5 Electronic Business XML (ebXML)
ebXML is an open infrastructure that has similar objectives to those of web services.
“ebXML provides companies with a standard method to exchange business messages,
conduct trading relationships, communicate data in common terms and define and
register business processes” (ebXML 2003, 1).
Work on ebXML began in 1999, a joint effort by Organization for the Advancement of
Structured Information Standards (OASIS) and the United Nations Center for Trade
Facilitation and Electronic Business (UN/CEFACT).
24
The project delivered five layers of substantive data specifications, including XML
standards for:
• Business processes
• Core data components
• Collaboration protocol agreements
• Messaging
• Registries and repositories (ebXML 2003)
The Business processes specification provides a generic metamodel for businesses to

describe their processes. The specification, in its core, determines the trading partners'
role in the transaction, the exchanged documents, their sequence and the information
contained in them (Virevesi, J 2003).
The data items that are exchanged between businesses are referred to as core data
components. Data items are, typically, frequently used terms such as invoice. The term
invoice may however have a different meaning across industries. In one industry, invoice
may relate to a statement of charges, and in another, may be used to describe
international shipping (Virevesi, J 2003). Thus, this ebXML specification aims to
identify a set of common semantics to be used between businesses so as to enhance
information interoperability. Therefore businesses can re-use them across multiple
business situations without the risk of causing ambiguity.
Collaboration protocol agreements (CPA) seek to automate much of the process of

discovering and establishing partnerships, especially in situations where the businesses
have not collaborated before (Virevesi, J 2003). A CPA is created through a
Collaboration Protocol Profile (CPP). This is an XML document that describes
businesses, both, technological and business capabilities and is stored in an ebXML
repository. From repositories, potential trading partners can search for these documents
and establish trading relationships. Once parties agree on the terms to do e-business, the
CPA becomes legally binding.
25
Messaging refers to a secure and reliable method of sending information over a network.
Technical issues relating to the packaging, transferring and routing of messages over the
web are addressed in this specification. The technology is based on SOAP but it provides
higher security through the use of strong cryptographic techniques and digital signatures.
Registries and repositories provide a way for potential business partners to submit and
search a variety of documents with the intention of enabling collaboration. Documents
relating to business capabilities of businesses including CPA's, can be queried in order to
find a business partner.
The Registry Information Model of ebXML dictates all classes and attributes a registry
may have. Within the model, "slots" are used to add arbitrary attributes to RegistryObject
instances (ebXML 2004). This feature allows companies to add arbitrary attributes to
their descriptions. Thus, certain attributes could be used here to convey trust such as
certificates and standards (e.g. ISO 9000). A common notation for such attributes must be
in place however in order to make queries involving such attributes more efficient.
The registry can be also be used for the submissions of schemas that define industry-wide
messages and vocabularies as well as industry-specific business models (Virevesi, J
2003).
Overall, ebXML offers a more comprehensive and reliable framework compared to Web
services. It takes collaboration to a higher level through valuing business process
semantics and document content standardization as fundamental enablers of successful
business collaborations (Virevesi, J 2003). Finally, ebXML is a vendor independent
technology (unlike Microsoft’s BizTalk framework for XML) which functions across all
platforms and therefore seeks to achieve maximum interoperability also at the technical
level. Also, the recent approval of the four ebXML OASIS Standards (which now
includes the ISO 1500 annotation) by the International Standards Organization (ISO) is
likely to have a reinforcing effect on the effort to promote an open and reliable
framework for communication and collaboration in the future.
26
This chapter focused on the communication technologies used today to connect disparate
information systems together. EDI is the oldest among them and is still being widely
used. However XML and XML based frameworks such as Web services and ebXML that
use the Internet are becoming more popular. New features that EDI lacks include the
automation of searching and finding of new business partners. For this purpose, registries
and repositories (specific databases) with descriptions of businesses can be queried
according to desired criteria. Between the two frameworks, ebXML is more advanced
and could allow attributes that can convey a degree of trust to a potential business
partner. EDI compared to XML as a technology is more mature but also more expensive
to use. XML on the other hand is much cheaper to use as it utilizes the existing Internet
infrastructure but there is still not a worldwide common standard for XML. This is due to
XML's overflexibility from which it draws its power at the same time. Without a
dominant standard however, some firms are reluctant to invest in XML.
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4. Supply Chain Management Practices and Inter-enterprise
Applications
Theories looking beyond companies’ boundaries to optimize the entire value chain have
started to emerge in the 60's (Coyle, Bardi, Langley 2003). The theories have stressed the
importance of collaboration and information sharing within a supply chain. These ideas
and theories have evolved throughout the years to become a concept known as Supply
Chain Management (SCM).
The objective of this chapter is to present the milestones in the evolution of collaboration
in the supply chain. Thus, this chapter is going to present SCM as a management
philosophy and the theoretical frameworks and applications that emerged out of it.
The chapter is structured in the following manner: section 4.2 introduces SCM. In
Section 4.3, JIT is explained. ECR, as a movement that advocated collaboration is
presented in section 4.4. Advanced Planning and Scheduling (APS), as the first truly
enterprise software solution for SCM is explained in section 4.5. Sections 4.6, 4.7, and
4.8 focus on BPO, VMI and CPFR respectively, as further SCM approaches and present
some of the applications based on them.
4.2 Supply Chain Management
Supply Chain Management (SCM) as a concept came into the domain of management in
the early 1990's in the face of increasing competition. Coyle et al. (2003) defines a supply
chain as "an extended enterprise that crosses over the boundaries of individual firms to
span the logistical related activities of all the companies involved in the supply chain.
This extended enterprise attempts to execute or implement a coordinated, two-way flow
of goods/services, information, and financials (especially cash)". The main idea here is to
take into account all the activities in the supply chain, beginning with the supply of raw
28
materials all the way to the ultimate consumer, rather than at the organizational level.
Figure 4.1 depicts the structure of a simple supply chain.
Retailers/
Vendors Wholesalers Manufacturers Wholesalers
Customers
Product/Services
Information
Finances
Figure 4.1: Integrated Supply Chain (Coyle et al., 2003, 18)
Suppliers provide raw materials to wholesalers, which keep them in stock and sell them
later to manufacturers. Manufacturers use these materials to produce end products, which
are then transported to wholesalers. Finally, the goods are distributed to retailers, who
then sell them to end customers. In reality, supply chains are more complex as multiple
connections between nodes exist and the number of intermediaries may be
overwhelming.
The flow of goods and services has always been the main focus of management.
Customers expect their orders to be delivered on time and without damage. Its flow is
two-way as the more products become sophisticated and customized, the more goods are
returned and thus the importance of reverse logistics is hereby indicated. The information
flow plays a vital role in the success of supply chain management. Prior to this concept,
information flow was viewed as flowing to the opposite direction of products. Usually
this information consisted of only sales data and/or demand. As information was not
shared, demand data became only available to adjacent nodes in the supply chain. With
the new approach, information on typically sales become available in real time to all the
involved parties so that uncertainties in the supply chain can be reduced and production
29
along with logistics can be arranged more properly. The third flow -financials indicates
the impact of supply chain management on cash flows, which are now much faster as it
leads to supply chain compression and faster order cycle times. A good example of this
phenomenon is Dell, the computer manufacturer. It keeps 4 days of supplies in its
inventory (Dell 2003). This development has a tremendous impact on profits and the cost
of doing business.
The goal of supply chain management is to meet customer demand for customized
products with minimum lead-time and cost. To achieve this objective, visibility in the
supply chain has to be high. Information on demand forecasts and production plans need
to be shared so as to reduce bullwhip effects: “Relatively small fluctuations in the actual
demand among consumers are magnified through the logistics chain and cause larger
amplifications, with consequent negative effects on the planning of the production and
logistics systems in the earlier stages” (Knolmayer, Mertens & Zeier 2002, 7). The Beer
Game developed in the 1960's by MIT does also demonstrate the importance of an
integrated approach to managing the supply chain; it particularly demonstrates the value
of sharing information across various supply chain components (Li 2002). The game,
later also computerized, simulates the supply chain for beer manufacture and
demonstrates the systems' dynamics; how the patterns we create in our relations with the
world around us sometimes give unexpected and undesired results (MASystems 2003).
Through such coordination, the supply chain can be entirely optimized and unnecessary
stocks eliminated. Table 4.1 sums up the main tasks of Supply Chain Management:
Orientation Strategic Operative

Internal Focus • Strategies for Product and • Internal Quality assurance
process development Intra-plant transport
• Strategies for providing • Intra-plant storage
products and services • Determination of ordering
• Make or buy decisions quantities and lot sizes
30
Orientation Strategic Operative
• Quality management • Optimization of schedules
and sequences
• Intra-plant IS for planning
and controlling of order
management
External Focus • Development of an SCM • Internet appearance
mission • Research about procurement
• Procurement and marketing and sales markets
strategies • Evaluation and selection of
• Supplier and customer suppliers
management • Sales forecasts
• Recycling strategy • Control of the sales force
• Definition of an SCM
controlling and
benchmarking system
Dual Focus pooling of • Supplier and customer • Managing the organizational
interests structure policies and system interfaces
• Coordination of SCM • Definition of communication
strategies with business relationships with business
partners partners, paying special
• Legal basis for SCM attention to IS
partnership
• Joint pursuit of improved
business processes
Table 4.1: Main tasks of SCM (Knolmayer et al. 2002, 6)
The ultimate goal of Supply Chain Management is to operate the whole supply chain as if
it were a single organization. To achieve this goal however, information sharing does not
solely suffice. Collaboration among supply chain partners must be present in all decision
making. In general, the decisions companies and their units take are categorized as
strategical, tactical, or operational. Partners need to provide visibility in all these levels in
order to achieve a full unity. It is from this idea that the Collaboration and Forecasting
Requirement approach was initiated. This concept is explored in section 4.8.
31
The developments of new management practices and needs fostered new generation of
information systems that attempt to optimize the supply chain like advanced planning and
scheduling (APS) softwares described in section 4.4.
4.3 Just-In-Time (JIT)
JIT as a management philosophy has attracted much attention since the creation of the
idea, which is credited to Kiichiro Toyota, the founder of Toyota Motor Corporation,
during the 1930's (Factorylogic 2004). JIT does not promote collaboration like SCM
explicitly but SCM is somewhat of a pre-requisite for a successful JIT implementation. I
therefore find it useful and interesting to include it in this chapter.
JIT aims to eliminate waste. Waste results when an activity adds cost without adding
value. The unnecessary moving and storing of goods are examples for such activities.
JIT, which is also known as lean production, aims to improve profits and return on
investment by reducing inventory levels. improving product quality, reducing production
and delivery lead times. In a JIT system, underutilized (excess) capacity is used instead of
buffer inventories to hedge against problems that arise (Ashland 2003). An important
concept in JIT is kanbans which is a technique based on replacing material that has been
used but has no forward visibility (Phil Robinson 2003). Thus JIT is a pull system in
contrast to for example Materials Requirements Planning (MRP), which is a pull system.
In a pull system, parts are pulled to the next production stage when they are needed
whereas in a push system, they are pushed according to the schedule. The main goal of
the JIT system is to achieve a balanced flow of parts throughout the work centers with the
minimum queues and lot sizes. In general, the JIT approach is favorable when production
processes are uniform in terms of frequency and parts and components produced. A
successful JIT system requires low set up times, flexible work force, supplier quality
assurance and better maintenance for equipment (Ashland 2003).
The implementation of JIT has become rather simple as many systems and softwares
32
today allow real-time information sharing. JIT as a standalone practice does not promote
collaboration in terms of sharing information on e.g. demand forecasts for a buyer's
products. Orders of materials from suppliers are only placed when demand for the buyer's
products actually arise. Thus JIT as such differs from the other practices in this chapter in
so far as not to promoting the sharing of information between trading partners explicitly.
Lastly, it was mentioned above that supplier quality insurance is required for a successful
JIT system. Without a substantial degree of collaboration however, buyers cannot be sure
if the supplier has materials readily available whenever demanded. Thus JIT does
implicitly require SCM in order to ensure a lean flow of materials from suppliers.
4.4 Efficient Consumer Response (ECR)
ECR was initiated in 1992 as an industry-wide voluntary effort in US to improve the

supply chain in the grocery industry (FMI 2003). The movement was based on an earlier
general merchandise effort in US, the Quick Response (QR).
QR had focused on shortening the retail order cycle, which also meant lower inventory
levels. The adoption of technologies like EDI and bar codes that made data entry and
ordering easier significantly took days out of the order cycle time. Order cycles were
further reduced through what were called "strategic partnerships," where retailers and
manufacturers would work together as a team to set up ways of achieving performance
goals that exceeded existing industry practices" (FMI 2003).
ECR uses similar methods, which is technology and collaboration, but addresses a much
wider scope of issues. These include new product introductions, item assortments and
promotions. Accurate point of sale data (POS) and other relevant information is passed
on to trading partners by EDI so that products are manufactured according to actual
consumer demand. The movement produced many reports on best practices on topics like
computer assisted ordering, direct store delivery, integrated EDI, continuous
replenishment, transportation, category management, and large-scale organizational
change.
33
The ECR includes the following components:
• Efficient Store Assortment - addresses how many items to carry in a category,

what type of items and in what sizes/flavors/packages, and how much space to
give to each item. This is closely linked to category management.
• Efficient Replenishment - focuses on shortening and eliminating costs in the order

cycle, starting with accurate point-of-sale data. Includes efficiencies to be gained
by using continuous replenishment programs, EDI, cross docking, computer
assisted ordering and new receiving techniques.
• Efficient Promotion - addresses inefficient promotional practices that tend to

inflate inventories and practices, whose effects may not be fully passed through to
consumers to influence their purchase decisions.
• Efficient New Product Introduction - addresses improving the entire process of

introducing new products, which is subject to high failure rates, thereby bringing
extra costs into the system.
(FMI 2003)
ECR, as evident from its methods and objectives, takes a rather complete approach to
supply chain management. Here, collaboration between trading partners in terms of
sharing information related to e.g. sales (POS), promotions and plans is encouraged.
Therefore ECR from the outset, that is 1992, was an initiative that comes close to today's
supply chain management practices.
In so far as to how much to collaborate between trading partners, the ECR literature does
not provide any information. ECR’s purpose is to improve the supply chain and therefore
promotes information exchange without bringing up issues like its risks and trust.
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4.5 Advanced Planning and Scheduling (APS)
Advanced Planning and Scheduling is a new-generation software, developed in the end of

90's. They are first of their kind because some of their components incorporate
collaboration. APS systems aim at optimizing the supply chain and have far more
capabilities than ERP systems. These capabilities are presented below (Knolmayer et al.
2002, 130):
• Network Planning
• Sales and Operations
• Demand Planning and communication
• Supply Planning
• Available/Capable to promise
• Distribution Planning
• Manufacturing planning and scheduling
• Deployment Planning
• Warehouse Management
• Transportation Planning and Scheduling
APS compared to an ERP system is more "intelligent" owing to its complex optimization
procedures and heuristics. The Capable to Match feature for example is a popular
heuristics, which operates with either bucket-oriented demands or individual customer
orders. It does this by taking into account order priorities and categorized sources of
supply such as stock on hand and production capacity. However, handling capacities and
warehouse and transport resources are not considered. A much more advanced function is
the Available to Promise (ATP), which investigates whether a promised delivery can be
made, and if so when. An ATP can handle very complex tasks such as (Knolmayer et al.
2002, 147):
1. An article that cannot be delivered on time may be replaced by a superior for the
same price ("upgrading").
35
2. When a reservation is canceled in favor of another customer, the additional profit
from the customer order has to be weighed against any disadvantages (e.g.,
contract penalties) likely to result from the deferred delivery date for the other
order.
3. Inventory may be obtained from another warehouse; however, this results in
additional costs and may break into decentrally planned safety stocks at the
delivering location.
4. Partial deliveries from different locations are bundled to form a complete order,
with a consequent increase in cost.
5. Although a part-delivery can avoid too much disappointment for the customer,
higher overall cost results.
“Other features of an APS include task specific interfaces, different levels of aggregation
and planning accuracy and mechanisms to deal with exception situations” (Knolmayer et
al. 2002, 132). Another dominant feature of these systems, as in the case of SAP's
Advanced Planner and Optimizer (APO) software, is that different planning methods
operating with different time horizons (operational, tactical and strategic) are provided.
The supply chain is optimized with the help of sophisticated modeling and statistical
techniques. The system combines forecasted demand with different cost parameters in
order to generate a production and transportation plan. This involves the use of complex
algorithms and heuristics that also take into account the interdependences between the
different types of costs and between the relevant constraints.
SAP's APO possesses several features for collaboration among supply chain partners.
The Collaboration Engine serves this purpose. It contains joint forecasts and also offers a
platform where bids or bid invitations can be searched, by both, suppliers and buyers
through an interface. Overall, APS tools generate a high rate of return by enhancing
visibility of production plans and schedules, improving and speeding forecasts, and
taking real time decisions in the face of demand and supply fluctuations rather than batch
processing.
36
Similarly to ECR, also the literature on APS does not give any information on the risks of
collaboration and the issue of trust. Users of APS systems however must configure their
systems to provide the most appropriate level of detail on their businesses to their
partners. To do this, they must evaluate their partners efficiently and be able to
distinguish between them.
APS systems have been very popular but enterprises soon realized that the success of
APS does also depend on the efficient functioning of all the processes involved in
delivering a product. Hence software producers eventually moved from APS tools which
mostly focus on manufacturing, distribution and transportation, to a complete set of
software or business process optimization.
4.6 Business Process Optimization (BPO)
Many software companies like SAP, Manugistics and i2 have developed and continue
developing business process optimization softwares (BPO). They use, like APS, a set of
intelligent methods and techniques to cover a variety of areas in the supply chain.
Normally, the system leverages the existing infrastructure to collect data from the
enterprise (e.g., from the ERP system). Typically, its components include the following
(Manugistics 2003):
• Supply Chain Management, which includes

network design and optimization, manufacturing planning and scheduling, sales
and operations planning, fulfillment management, collaborative VMI and CPFR,
private trading networks, and logistics management
• Customer Relationship Management, which includes

product configuration, pricing optimization administration, promising (Available
to Promise - ATP), fulfillment, monitoring and alerting, and settlement
37
• Supplier Relationship Management, which includes
collaborative design, spend analysis and optimization, strategic sourcing and
contract management, procurement execution, collaborative supply planning
As evident from above, BPO includes all aspects of a company’s operations. Supply
chain management, as a topic on its own right has been covered greatly so far. Also as
Customer Relationship Management is out of the scope of this thesis, I will focus on the
supplier relationship side of the supply chain, which will be covered in chapter 5 in
detail.
4.7 Vendor Managed Inventory (VMI)
VMI is yet another concept that attempts to optimize the supply chain through increasing
collaboration in the ordering process. Normally, when a buyer needs a product, it places
an order to a supplier. With VMI, it is the supplier who decides when and how much to
order and who maintains the inventory plan. In VMI, a partnership is formed between the
supplier and buyer, in which the supplier takes care of the orders and replenishing. To
accomplish this, the supplier gets regularly information on the inventory level and sales
data of the buyer via the web or Electronic Data Interchange (EDI). Thus, when inventory
for example drops below a certain level, orders are generated automatically on behalf of
the buyer. In this case, it is the supplier who creates and manages the inventory plan.
VMI is sometimes referred to as Supplier Managed Inventory (SMI). The difference
between the two is where the software is run (Ahmed 2004). In VMI, the software
physically runs on the supplier's premises, where data relating to demand and inventory is
entered into the system. In VMI, the software is run by the buyer or a third party and to
which the supplier has access through typically a web browser.
There are many software companies that provide VMI/SMI solutions. They increasingly
come bundled or as an integral part of similar solutions like Supplier Relationship
Management and/or Supply Chain Management solutions.
38
In VMI/SMI, as evident, the supplier has full information about the buyer's inventory. In
addition to that, we can presume that from the rate of inventory usage, the supplier can
make rather accurate estimates on the buyer's capacity, production schedules, logistics,
and the demand for its end products. Therefore, VMI requires a very high degree of trust
between the supplier and the buyer. How trust is formed and maintained as well as the
risks associated with VMI are not elaborated in the literature.
4.8 Collaborative Planning Forecasting and Replenishment (CPFR)
Collaborative Planning Forecasting and Replenishment (CPFR) is the term for a business
model that encourages the integration and collaboration between supply chain partners.
Its goal is to reduce the bullwhip effect resulting from uncertainties in the demand. Also
through more coordination among supply chain partners, it is possible to reduce costs
associated with administration. For example, the elimination of duplicated tasks such as
planning and forecasting can reduce both time and money. To achieve this objective,
suppliers and customers jointly administer information and manage processes that result
in win-win situations. The CPFR framework is also supported by the Voluntary Inter-
industry Commerce Standards, an organization that embodies the CPFR Committee.
“Enterprise software providers like SAP use the Committees “CPFR Voluntary
Guidelines” as a principal reference source in this area” (Knolmayer et al. 2002, 123).
The CPFR model is divided into three levels (planning, forecasting, and replenishment)
and comprises nine steps.
Step 1: Develop front-end agreement
In this first step, the involving parties develop the rules for the cooperation. Here,
partners exchange their expectations and define the necessary resources. “To accomplish
this, the buyer and seller co-develop a general business arrangement that includes the
overall understanding and objective of the collaboration, confidentiality agreement, data
to be shared and the empowerment of resources (both actions and commitment) (CPFR
2003). Also the criteria and metrics to measure the effectiveness and success of the CPFR
39
process are identified here. For example parties may set 96% retail in stock, six turns at
retail, less than 15% forecast error and less then 20% order forecast error as their
objective. The outcome of this step is a blueprint for companies to begin the collaborative
relationship or to redefine it in accordance with CPFR standard.
Step 2: Create joint business plan
In Step 2, the seller and buyer exchange information about their corporate strategies with
the goal of developing a joint business plan. Also, for every retailer/manufacturer
scenario, a partnership strategy with all the roles, objectives and tactics is defined. This
results in item management profiles where for each collaborated item certain rules are
established (e.g., on minimum ordering quantities, lead times, and ordering intervals).
Issues such as marketing and sales promotions, e.g. advertising campaigns or temporal
price reductions that may have a large impact on demand, are also disclosed here.
Step 3: Create Sales Forecast
This step involves the creation of a method to derive a sales forecast. Point of Sales
(POS) data and information on other effecting factors mainly from Step 2 are used to
produce a sales forecast. The CPFR guidelines do not define a particular method to be
used for a joint forecast but considers four scenarios where the manufacturer, retailer and
distributor have different weights. According to Knolmayer et al., (2002) participants in
the Supply Chain use their "in house" systems to prepare individual forecasts, which are
integrated to give a joint forecast. Forecasts can be made by using arithmetic averages,
weighted arithmetic averages according to sales volumes or the quality of past forecasts,
or the most pessimistic/optimistic forecasts.
Step 4: Identify exceptions for sales forecast
This Step determines those events where the actual requirements differ from the forecast
by more than a specified tolerance threshold set in Step 1. The causes may not only lie in
40
wrong forecasts but external disturbances, such as reduction in manufacturing capacity
resulting from a strike or machine failure.
Step 5: Resolve/collaborate on exception items
This phase requires a high degree of communication in which exceptions are analysed,
new events are reported, and forecasts are adjusted accordingly.
Step 6: Create order forecast
Step 6 involves the combination of sales forecasts, inventory information and other
casual information to predict what orders will be received. Here, the agreements reached
in Step 1 on issues like safety stock, order quantities and lead times must be taken in to
account also. The result of this step is a time phased order forecast in which the short
term-portion of the forecast is used for order generation, while the longer-term portion is
used for planning.
Step 7: Identify exceptions for order forecast
In this step, similarly to Step 4, order arrivals that fall outside the order forecast
constraints are identified. There could be for example demand that cannot be met in the
available time because of inadequate production capacities.
Step 8: Resolve/collaborate on exception items
Order forecast exceptions are investigated in this step through querying shared data and
communication. The resulting changes are submitted as an adjusted forecast and causes
are eliminated in case they arise from miscommunication. At this stage, it has to be also
determined if exceptions can be ignored or, if, not, what action should be taken for
compensation. It might be for example necessary for the buyer to order from a supplier
outside the supply chain.
41
Step 9: Order Generation
This step involves the transformation of the order forecast into a committed order. The
task of order generation can be fulfilled by either of the parties depending competencies,
systems, and resources. In this final stage, it is expected that the created order to consume
the forecast.
The importance and benefit of this management philosophy has led more recently to the
development of CPFR softwares. SAP with its Collaborative Replenishment Planning
(CRP) solution attempts to capture and implement the CPFR framework in the form of a
software.
CPFR requires a high level of collaboration. The CPFR framework does neither address
the issue of trust between trading partners nor issues such as how far to collaborate and
even when to collaborate. It presumes that collaboration is beneficial in any case. Despite
that, the following two questions are posed to the reader of the CPFR framework (CPFR
2004):
• Are your trading partners ready for CPFR?

• Can your trading partner relationships characterized as open and trusting?
Thus, companies are faced with adopting CPFR due to its benefits but may be somewhat
confused in so far as to not knowing how much to collaborate and what decisions they
have to make.
42
This chapter covered SCM and its different management approaches such as VMI and
CPFR. SCM requires the collaboration of trading partners through the sharing of
sensitive information. The exchange of information reduces uncertainty in the supply
chain and eliminates excessive inventory. Enterprise software vendors such as SAP and
Manugistics are increasingly incorporating these management philosophies into their
enterprise applications and solutions. The effective and risk free implementation of SCM
and use of its systems, however, necessitates the existence of sound decision mechanisms
and careful system configurations. The literature on the approaches and applications
discussed do not address sufficiently such issues.
Supply chain planning, which enables partners to collaboratively forecast demand has
become an integral part of enterprise vendor's SCM and/or Supplier Relationship
Management (SRM) solutions. Therefore in the next chapter, we will look at SRM and
elaborate on its implications for firms.
43
5. Supplier Relationship Management (SRM)
Having discussed SCM in the previous chapter, this chapter's objective is to analyze the
practices in particularly the supply side of the supply chain. Thus section 5.2 introduces
the concept of SRM to the reader. Section 5.3 presents some of the more popular SRM
solutions on the market today by explaining their main features and characteristics.
Section 5.4 sums up their main features and sets out the implications of these systems on
the buyer.
5.2 Supplier Relationship Management
Many companies find today that profits are being squeezed in the face of increased
competition. Customers are more demanding in terms of quality, delivery speed and
flexibility. This owes mostly to the fact that the world has become more transparent
enabled through the recent advancements in Information and Communication
Technologies. Customers today have more choice in finding the right product at the right
place in the right time. With increased options, customers no longer have to accept the
monopolies of certain sellers and therefore can exercise greater pressure on companies.
Hence, companies in turn look at other ways of increasing profits. A solution to this
problem is at the other end of the supply chain. If the cost associated with purchases can
be reduced, profitability can be boosted. Initiated from this simple idea, companies now
try to re-arrange their relationships with their suppliers. Just as Customer Relationship
Management is intended for customers, through Supplier Relationship Management,
companies are increasingly leveraging technology to manage their relationships with their
suppliers and to optimize procurement. A successful SRM in place can save a great
amount of money. Among SRM advantages is increased visibility in the supply chain
which results in lower inventory levels. Also the automation of tedious tasks like request
for proposal leads to faster procurement execution and thus to compressed cycle times.
Cost per unit is also likely to decrease as demand consolidation across multiple business
44
units can be performed with an integrated system. It should be mentioned that SRM is not
a stand-alone concept but is a part of the supply chain management philosophy as CRM
is.
5.2.1 Supplier Selection and Performance Measurement
Supplier selection and performance monitoring are very important tasks in an

organization regarding procurement. An efficient supplier selection process helps to
initiate and build trust between trading partners. The monitoring of supplier performance
through metrics as part of firms’ SRM and/or SCM schemes help them to maintain and
increase efficiency and trust on the other hand.
Supplier selection is performed through a careful supplier selection process in which

suppliers are evaluated according to different criteria. The supplier selection literature has
long held that product quality, delivery, price and servıce are the key attributes that are
used to assess the performance capabilities of vendors (Bharadwaj 2003). The importance
of the respective decision criteria has changed over time and while earlier studies
reported that delivery and price were most important, later research found that quality had
become most prominent (Bharadwaj 2003). Table 5.1 illustrates the relative importance
of the criteria over time.
Table 5.1: Decision criteria across studies (Bharadwaj 2003)
To understand what companies today demand from their suppliers, I shall use the
45
documentation of Ballard, a leading company which produces fuel cells for transportation
and power generation applications (Ballard 2003). The company is highly innovative and
seems to be relying more on collaborative relationships rather than spot markets.
Figure 5.1 illustrates Ballard's Supplier Management Program, which is a process to

evaluate and categorize a supplier. Evaluation is performed through gauging supplier's
characteristics against some pre-defined criteria, which are presented in Figure 5.2.
Figure 5.1: Ballard Supplier Management Program (Ballard 2003)
As seen from Figure 5.1, after determining a potential supplier whose product may be of
interest to Ballard, the product is tested for a period of time. During this period, Ballard
makes sure that the supplier conforms to Ballard's quality and environmental standards.
Once the supplier is approved and all performance metrics are met, Ballard may decide to
46
enter in a strategic partnership with the supplier, which leads to long-term commitment.
According to Figure 5.2, delivery, quality, service, integrity and value are the
characteristics of an “ideal” supplier for Ballard. Thus, we can claim that, Ballard should
not hesitate to implement for example VMI and/or CPFR with a supplier if all these
characteristics are met. However, it remains an issue to explore, how Ballard would
configure its systems such as APO, CPFR and SRM, to provide the most appropriate
level of detail on information about its business to suppliers. Furthermore, Ballard may
wish to also have a collaborative relationship with not preferred suppliers. Thus, Ballard
needs to have an efficient approach to determine how much information to provide to
different types of suppliers so as to configure its systems.
Figure 5.2: Ballard’s Preferred Supplier Characteristics (Ballard 2003)
47
5.3 SRM Solutions
There is today an abundance of off-the-shelf SRM software products on the market like
mySAP SRM and Manugistics SRM. It is useful to look at some examples in order to
understand exactly what kind of collaboration between organizations is possible. Thus in
the following subsectionss I am presenting 4 SCM/SRM solutions: Manugistics SRM,
Oracle SCM, PeopleSoft SRM and mySAP SCM. Information on the solutions is based
on their websites.
5.3.1 Manugistics
Manugistics is a leading software provider that is best known for its supply chain
management solutions. Manugistics also offers, among others, SRM solutions. The
features of its software are presented below (Manugistics 2003).
Manugistics SRM
Collaborative Design
Manugistics Collaborative Design creates an environment where suppliers and partners

have access to product conceptualization, design and manufacturing. Hence, with the
product data being readily available to external parties during its development and
production, their feedback can be utilized for better decision-making. Demand for new
products and changes to existing products occur at a rapid pace. Thus transparency in the
supply chain can trigger corrective actions in real time when for example a change to the
bill of material occurs.
Spend Analysis and Optimization
This feature offers a variety of tools to analyze procurement activities. It consolidates all
data and eliminates redundant suppliers. The system also keeps track of supplier
performance and identifies areas for potential purchasing savings. Another striking
48
feature is to determine whether to make or buy a part.
Strategic Sourcing and Contract Management
With a centralized portal, configured for the user, sourcing managers can execute supplier
selection and allocation more quickly. Flexible RFP/RFQ (Request for Proposal and
Quote) and auction templates as well as the automated storing of contracts once a
supplier has been chosen do also contribute to reduced sourcing time.
Procurement Execution
Buyers workbench and suppliers portal provide the necessary infrastructure to reduce
transactions and streamline the purchasing process by consolidating enterprise-wide
purchases and sharing order details with suppliers. Among other features are the
monitoring of contract compliance and the detection and resolution of unexpected events.
Collaborative Supply Planning
This solution provides visibility across the extended enterprise for demand and supply of
materials. Parties can plan collectively on material, manufacturing and logistics as well as
on unexpected events.
5.3.2 ORACLE
Oracle is best known for its relational databases. The company is one of the leading
companies in IT and offers today a variety of products and solutions including servers,
developer suits and enterprise applications. Oracle's SCM solution allows to effectively
collaborate with supply chain partners. Its functionalities are described below.
49
Oracle SCM
Design: The Product Lifecycle Development component is a collection of applications

that gives the user a centralized repository of product and project information. This helps
to manage product activities collaboratively, identify the most profitable products,
maximize the value of product portfolio, and to understand where to place future
investments (Oracle 2004).
Planning: The Supply Chain Planning component provides tools for planning activities
including Demand Planning, Collaborative Planning, Inventory Optimization,
Manufacturing Scheduling, and Global Order Promising.
Procurement: The Procurement module offers similar functionalities as other vendor's

equivalent products such as tracking spend and supplier performance and automation of
certain tasks.
Manufacturing: Oracle Manufacturing is a set of collaborative applications that

optimize production capacity, beginning with raw materials through final products,
regardless of the manufacturing methodology used (Oracle 2004).
Fulfillment: Order Fulfillment aims to deliver products accurately and on time.
5.3.3 PeopleSoft
PeopleSoft is world's second largest enterprise application provider. Initially, the

company was known for its human resources solution. PeopleSoft today offers a wide
range of products and with the acquisition of JD Edwards, another enterprise software
provider, has become a major player in the market. Both, PeopleSoft and JD Edwards
have SCM and SRM solutions. However, I will present only PeopleSoft’s SRM solution
here.
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PeopleSoft SRM
Source: PeopleSoft SRM helps making better supplier selection through balancing
multiple criteria such as pricing, warranty terms, quality, and on-time delivery. It also
enables key sourcing activities to be automated and streamlined. Strategic sourcing
enables the sourcing process through RFx's (request for quote, information, bid, or
proposal), and auctions which are then dispatched to selected suppliers online. Buyers
can also create reverse auctions or open RFx's and make them publicly available on the
Internet (PeopleSoft 2003).
Engage: The "engagement” is performed through the PeopleSoft Supply Chain Portal
Pack where strategic information is delivered to suppliers. This portal connects
collaborative applications with back-end applications. PeopleSoft also offers a great
variety of other systems: A catalogue management system (Cohera), the Direct Connect,
which allows buyers to connect to suppliers' catalogues, e-marketplaces, which provides
access to different marketplaces and therefore to new suppliers, the Trading Partner
Management, which provides an interface to identify, invite and register partners and the
Integration Broker, which secures transactions between parties.
Procure: Information, rules and processes connected to procurement is organized and

managed by PeopleSoft Purchasing. Requisitions can be automatically generated from
other PeopleSoft applications such as Projects, Enterprise Planning, Order Management
and Inventory. The system enables the supply manager to source by a variety of factors
including payment terms, pricing rules, landed costs and blanket orders. Also the built in
workflow easily molds into companies spending control requirements and automates the
routing process for approval. Finally, orders are dispatched to suppliers online and in the
preferred format. PeopleSoft also recognizes the importance of services in total spend and
hence provides a tool for the procurement and management of contract services.
PeopleSoft Services Procurement allows the searching for services by different criteria
such as skills, roles and project work and automates the related processes. Through this
tool, services suppliers can be hold to the same standards as for goods suppliers.
51
Settle: PeopleSoft eSettlements helps the settlement process to run smoothly where
information among the parties is exchanged in real time. Suppliers can open a browser
for invoicing, matching, dispute resolution and payment information. Suppliers can self-
invoice and bill electronically. eSettlements lets also integrate with any account payables
and receivables software.
Design: PeopleSoft SRM allows collaboration with suppliers on product life cycles in
real time over the web. Thus information can be exchanged on expertise as well as on
each other’s unique capabilities, possibly leading to products with longer life cycles and
grater profit potential. Changes to product specifications can be shared with suppliers
immediately so as to prevent delays and problems related to shipments.
Analyze: The Supply Chain Warehouse allows better decision-making optimizes

procurement and supplier performance. It pulls information from all part of the supply
chain and analyzes all the interrelationships that drive profits, cost and, organizational
value. Thus, suppliers can view online, at any time and up to the minute ratings on their
performance and similarly metrics that rate the companies’ own effectiveness in areas
such as procurement, warehouse and shipping operations and inventory.
5.3.4 SAP
SAP is world's third largest independent software supplier. SAP is especially renowned
for its ERP systems and has taken the lead in the market. The company throughout the
years has continuously extended the range of its products and today offers a variety of
solutions including Supply Chain Management, Customer Relationship Management and
Supplier Relationship Management under its so called mySAP Business Suit family of
business solutions. Below are the features and capabilities of SAP's SRM, which are
organized under four headings (SAP 2003).
52
mySAP SCM
Strategic Sourcing
Sourcing Analytics and Supplier Evaluation features allow to identify redundant supply
relationships and to eliminate inefficiencies through supplier performance measurement
tools. Also a variety of electronic auctions and bidding tools that match supplier
capabilities with sourcing requirements are provided. Contract Management ensures that
purchases are in compliance with negotiated terms and conditions. Also a centralized
contract management allows the reuse of preexisting contracts by different purchasing
departments.
Operational Procurement
Procurement is easily performed through a Web-based shopping cart that enforces

compliance with corporate purchasing policies. Through a decentralized approach,
overheads are reduced and emphasis is put on relations rather than on transactions.
Furthermore purchasing of materials for core business processes can be streamlined and
automated through its integration with a supply chain management system.
Supplier Enablement
Supplier relations are enhanced through empowering suppliers to connect to internal

processes. A cost effective Web-based portal serves this purpose and provides features
like catalogue management and data analysis like inventory turnover. Also access to the
internal management system can be granted to suppliers for processing orders or updating
specifications electronically.
Content Management
This feature performs the consolidation of enterprise wide purchases by mapping and
53
cleaning commodity and vendor information. This information is distributed to internal
systems, electronic catalogues and data warehouses. Visibility into enterprise-wide
procurement activities is thereby achieved.
5.4 Main Features of SRM
As it can be seen from the section 5.3, SRM solutions have a wide set of features. Table
5.2 briefly summarizes these features.
Feature Explanation
Spend analysis Tracking global spend by supplier, category, product
across locations. Supplier Performance Measurement
Tools, Benchmarking.
Contract Management Ability to share global contracts with local purchasing
organizations Elimination of redundant contracts.
Content Management Standardizing content and schemas Management of the
master data (consistency).
Procurement automation Enforcement of contracts and identifying inefficient
purchases that are not in compliance with agreed
contracts.
Supply base optimization Elimination of redundant suppliers Infrastructure to run e-
procurement
Product design Collaboration in the design and development of new
products
Collaborative Supply Collaborative demand and production planning
Planning
Table 5.2: Features of SRM solutions
One point to note here is that demand planning is not always considered to be a part of
SRM by some vendors. For example Manugistics has the Collaborative Supply Planning
54
component in its SRM solution, whereas SAP has its similar solution in mySAP SCM.
5.5 Implications of SRM and SCM on the degree of Information

Sharing
SRM and SCM solutions require a wide range of information sharing among partners.
This is the pre-requisite for collaboration. I shall now explain what information is shared
and describe a way to measure the degree of coupling between suppliers and buyers.
5.5.1 Collaborative Supply Planning
Collaborative Supply Planning refers to solutions that companies use to plan production
jointly. The collaborative planning feature is included in either SRM or SCM solutions.
Table 5.3 illustrates the corresponding components for collaborative supply planning for
some of the vendors' solutions.
Solution Component
Manugistics SRM Collaborative Supply Planning

Manugistics SCM: Collaborative VMI & CPFR
ORACLE e-business suit SRM Not available

ORACLE e-business suit SCM Supply Chain Planning
PeopleSoft SRM Not available

PeopleSoft SCM Advanced Planning
mySAP SRM Not available

mySAP SCM CPFR and VMI
Table 5.3: Collaborative Supply Chain Planning components of business solutions
55
Central to collaboration in supply chain planning is information on demand. Thus
demand forecasts are to be shared or prepared jointly so that partners know how much is
going to be demanded in the next period. When demand for future periods is known,
parties can adjust production plans, inventory requirements and replenish inventories on
time, reducing bullwhip effects. Plans on activities that may affect demand significantly,
such as promotions and campaigns need also be shared with partners. The success of this
scheme is dependent on the continuous, accurate and multi-tier (not only between
subsequent partners) flow of data between partners.
The paper by Barut, Fasisst & Kanet (2002): Measuring Supply Chain Coupling: an
information system perspective, is useful to refer to for taking a further step on
information sharing. The paper, as its title suggests measures the degree of information
sharing as well as its use in planning activities among supply chain partners. It should be
noted that the paper measures coupling for both with suppliers and customers. I shall
therefore explain what is relevant to the supply side. To measure coupling, the
information extent (IE) and information intensity (II) are determined. IE has two
components: si; the total number of levels toward the ultimate supplier the company has
in its supply chain and sj; the number of levels of supplier information the company uses.
II on the other hand refers to the type and detail of information as well as its time
horizon. Information on demand, inventory, capacity and production schedules is taken
into account. The level of detail of information is established through the frequency of
information exchange and whether data is aggregated into classes or groups. The time
horizon is expressed in days and the level of aggregation is also significant for the
analysis. The methodology then assigns weights to the different values and computes IE
and II for coupling with suppliers. The direction of flow of information according to the
methodology is illustrated in Figure 5.3:
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demand
inventory
Supplier capacity Buyer

schedule
bi-directional: own assumption
Figure 5.3: Coupling and Information Flow
In the original methodology by Barut, Fasisst & Kanet (2002) information flow is one
way. For my own analysis, I assume that information flow is bi-directional as illustrated
with elongated arrowheads in Figure 5.3. I think that this should be the case for at least
inventory, schedule and perhaps capacity. This is also the case in the SRM and SCM
solutions presented in the previous section. Information on inventory needs to flow also
from the buyer to supplier if the benefits of collaboration want to be enjoyed fully. In the
extreme case (VMI), all replenishment is in the control of the supplier, which was
explained in section 4.7. In other cases, the monitoring of buyer's inventory data can be
used to adjust suppliers’ activities relating to production scheduling and logistics. Data on
production schedule also requires to flow upstream as production schedules dictate how
much inventory is going to be required in the coming periods. It should be noted that
information on demand might not always reflect schedule faithfully, as some production
may be due to stocking or the push system. Finally, information on capacity may also be
transmitted to suppliers in order to reduce stock build-ups.
Having determined what kind of information flows and in which direction, it is also
important to identify the degree of coupling. To this purpose, it is useful to refer to Barut
et. al. (2002). Below is the required information for demand, inventory, capacity and
schedule, to determine the degree of coupling from the buyer's side.
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Variable Detail
Demand forecasts • the frequency of transmitting
• whether aggregated into product
classes/groups and if, what fraction of
demand is aggregated to product groups time
horizon
• number of time aggregations (if any)
Inventory • frequency of transmitting
Capacity • Frequency of transmitting
Schedule • Frequency of transmitting

• Time horizon
• Number of time aggregations (if any)
Table 5.4: Coupling
Hence, firms can be very tightly coupled if information flows regularly in high level of
detail.
5.5.2 Product and Product Design
SRM and SCM solutions also include a feature that allows the sharing of information on
products such as its design and components. In fact these solutions also allow products to
be designed collaboratively so that partners can receive feedback on their designs as well
as help in the form of expertise and know-how. Table 5.5 illustrates the corresponding
components for collaborative design for some of the vendors' solutions.
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Solution Component
Manugistics SRM Collaborative Design
ORACLE e-business suit Product Life Cycle Management

SCM
PeopleSoft SRM Design
mySAP mySAP Product Life Cycle

Management*
*a separate module and not included in neither SRM nor SCM solutions
Table 5.5: Collaborative design components of business solutions
To design products jointly, the product life cycle has to be shared, although not uniformly
among partners. However I shall look at the supplier side due to the subject of my thesis.
Collaborative design requires the sharing of information relating to a product's concept,
specifications, design and Bill of Material (BOM). The BOM is also important for
demand planning and procurement. A change in the components that go into the BOM
can trigger the necessary adjustments by the supplier on time. Also information in the
form of feedback from the buyer on the products bought is provided to the supplier. The
feedback may for example contain issues relating to quality, new requirements and better
design. Another type of information flowing from the buyer to supplier is on new product
plans. The plans if shared will allow suppliers to adjust demand forecasts appropriately.
Finally, information on technological innovations and know-how can also be shared
between partners. The flow of information is illustrated in Figure 5.4:
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BOM
Feedback
Supplier New Products Buyer
Innovations
Figure 5.4: Information flow on product characteristics
The level of detail of this information can be used to determine the degree of coupling
from the buyer's side. The information required to measure coupling is presented below.
Variable Detail
Product Detail • level of detail
• frequency of transmitting
Feedback • frequency of transmitting
New Products • level of detail

Innovations • level of detail
Logistics • level of detail
Table 5.6: Coupling II
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This chapter continued from where chapter 4 had left, that is the analysis of solutions
beyond SCM. The chapter covered SRM, a concept that takes collaboration a further step.
SRM aims to reduce costs associated with purchasing. This is achieved through the
reduction of inventory levels, the rationalization of purchases and the automation of
routine tasks. SRM also includes features like supplier selection and supplier
performance measurement. Several examples of SRM solutions were presented along
with their characteristics and capabilities. In section 5.5, I discussed the kind of
implications these solutions have on firms, particularly on the information sharing
requirements between firms. Hence, the type of information along with its direction of
flow and level of detail was described. SRM as SCM requires the exchange of sensitive
information.
Therefore the effective and risk free implementation of SRM and its supporting
applications necessitates the existence of sound decision mechanisms as well as careful
system configurations.
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6. The Economics of Collaboration
The objective of this chapter is to look at the motivation for collaboration beyond the
simple reason of cost cutting. To this purpose, I will review the literature on the firm and
particularly on transaction cost economics. Thus section 6.2 provides some background
information on the firm as an organization. Section 6.3 presents asset specificity, a
concept that explains the motivation for vertical integration or collaboration. The role of
information sharing in innovation is explained in section 6.4 along with some of the
disadvantages of close relationships. The characteristics of contracts in the sense that they
are in most cases incomplete is explained in section 6.5. Finally, sections 6.6 and 6.7
discuss the strategic core as a firm’s most valuable asset and its impact on the firm's
existence.
6.2 The Firm
The science of economics assumed transaction costs to be non-existent for a lengthy

period of time. The focus was mainly on production costs. Their importance and
significance in economic relations were shown mainly by the work of Williamson in the
1970's ( encycogov.com 2003). He argued that under certain conditions, it is more
reasonable to integrate or to collaborate with trading partners rather than to let
transactions be governed by market forces. Transaction cost economics, today, plays an
important role and many phenomena can be explained through the theories behind it.
Williamson's interest on this issue was initiated with Coase's work in the early 20th
century. Coase was interested in studying vertical and lateral integration. He published a
paper in 1937 on “The Nature of the Firm”. His purpose was to develop a theory of the
firm that is both realistic and tractable (Williamson & Winston 1993, 3 ) . It is useful to
quote a passage from this paper:
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Outside the firm, price movements direct the production, which is co-ordinated through a
series of exchange transactions in the market. Within a firm, these markets transactions
are eliminated and in place of the complicated market structure with exchange
transactions is substituted the enterprenuer co-ordinator, who directs production. Yet,
having regard to the fact that if production is regulated by price movements, production
could be carried on without any organization, well might we ask, why is there any
organization?
(Coase 1937, 19)
Coase explains the reason for establishing a firm to organize production through the cost
of using the price mechanism. These are the costs (marketing costs) of information (about
prices), of negotiation and contracting for each exchange and sales tax (Coase 1937).
Coase also argues that a firm is likely to be formed when long-term contracts among
buyers and suppliers are favored over short-term contracts. Long-term contracts could
avoid renegotiation costs but with the length of the contract, its terms become looser.
This owes to the fact that with the increasing length of the contract, future demands of
services and goods are less desired to be specified by the buyer. Hence the direction of
resources becomes dependent on the buyer, however, within the limits of the contract
(Coase 1937) .
The firm supercedes the price mechanism as long as the enterprenuer can do this at a cost
lower than the market transactions. This follows the question of what forces determine
the size of the firm. The firm will “tend to expand until the costs of organizing an extra
transaction within the firm become equal to the costs of carrying out the same transaction
by means of an exchange on the open market or the costs of organizing in another firm”
(Coase 1937, 23). Incentives for expansion are slowed down by the so called
“diminishing returns to management”; as more transactions are organized, their nature
and location tend to be more different. Coase explains that technological developments
however like the telephone and telegraph would reduce the cost of organizing spatially.
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Furthermore, the size of a firm does also depend on the number of products produced
according to Coase as it may be less costly to organize the exchange transactions of a
new product than to organize further exchange transactions of the old product. Thus, the
moving equilibrium with firms getting smaller and larger owe to the cost of marketing
and organizing according to Coase.
Coase's paper “The Nature of the Firm” had little or no influence for 30 or 40 years after
it was published and its development was hampered due to the weaknesses in his
exposition (Williamson & Winter 1993). However his ideas greatly inspired the works of
many economists there after such as that of Williamson.
6.3 Asset Specificity
Williamson published a paper in 1975, Markets and Hierarchies in which he explained

the motives for different institutional arrangements like vertical integration and joint-
ventures. His work also had implications for antitrust policy, as it helped to understand
why in market economies such outcomes, associated with monopoly power, occur.
“In the approach developed by Williamson, the market relation can create 'high powered'
incentives, but vertical integration can reduce transaction costs in the presence of
complexity/uncertainty, opportunistic behavior, and small exchange numbers” (Lundgren
1990, 113). According to Williamson (1985), investment in firm specific assets is the
most important factor in explaining vertical integration. Asset specificity refers to the
degree of investment made by the supplier of goods and/or services for a specific buyer.
These investments can be in the form of (Joskow 1993, 126):
• Site specificity: To minimize inventory and transportation costs, buyer and supplier
establish themselves in proximity. Once sited, assets become highly immobile
• Physical asset specificity: It is the case when investments are made for machinery and
equipment that are specific to a particular transaction with a buyer and when these
investments yield lower return when applied elsewhere
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• Human asset specificity: Investment on relation specific human capital which often
arises through learning by doing.
• Dedicated Assets: Investments by suppliers that require the sales of a significant
amount and that losses would be incurred if contract would be terminated prematurely.
Monteverde and Teece (1982) examined this tendency for the car industry and approved
that the hypothesis: “The greater is the application of engineering effort associated with
the development of any given automobile component, the higher are the expected
appropriate quasi-rents, and therefore, the greater is the likelihood of vertical integration
of production for that component”, holds (Joskow 1993, 127).
Also another motive for vertical integration is to eliminate the possibility of hold-up
costs, that is the potential for opportunistic behavior. An example is given with the case
of GM and Fisher Body from 1919 (Klein 1993, 214) .
Fisher Body supplied specific automobile bodies for General Motors (GM), which
needed an initial investment by Fisher Body. This had put Fisher Body in a vulnerable
position as it become dependent on GM to buy its customized parts. GM could have
taken advantage of this dependency and demanded Fisher Body to reduce the price of its
parts or threaten to buy less. To avoid the hold-up potential, Fisher Body made a long
term-contract with GM. It was a 10 year contract requiring GM to buy all its body parts
from Fisher Body. The contract attempted also to prevent Fisher Body to charge higher
prices to GM through the provision of most favored nation so that the price could not be
greater than charged to other customers for similar products. However due to uncertainty
and the difficulty of specifying all elements of performance, their contract was imperfect
as most contracts are. The price was set at a margin above labor and transportation costs.
Thus Fisher Body took advantage of this arrangement by adopting a relatively inefficient
, highly labor-intensive technology and by refusing to locate the body-producing plants
adjacent to GM's assembly plant. The profit upcharge was to cover Fisher's anticipated
capital costs, which may have been hard to isolate and measure for GM's shipments. The
contract gradually became deficient rather than imperfect when demand increased
significantly in the following years. Had demand been not so high, Fisher's reputation
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combined with most favored clause may have been sufficient to prevent Fisher's
opportunistic behavior. Although Fisher Body and GM did not vertically integrate, this
example also demonstrates the impact of asset specificity on its likelihood.
6.4 Product innovation and the Role of Information
Kurt Lundgren (1990) also relates vertical integration to product innovation. He explains
this motive with a case where a Swedish ball bearing producer Svenska Kullagerfabriken
(SKF) acquired the steel mill Hofors in 1916 (Lundgren 1990, 116). In this case, SKF,
after long research developed a better understanding of the shortcomings of steel.
However to eliminate them, more scientific control was needed in its production process.
Hofors however had no incentive of producing higher quality of steel as it could easily
find markets without being forced to satisfy quality demands. Anticipating a rise in
demand for high quality steel in the future, and therefore an increase in its price, SKF
decided to acquire Hofors. By doing so, SKF firstly eliminated the haggling over prices
and quality. Furthermore, the transfer of knowledge and know-how, which had to be
transferred to the mill was kept within the company.
Lundgren (1990) argues if alternatives to vertical integration may have been possible.
One way to avoid the leakage of valuable knowledge and therefore protect their
competitiveness, was to patent the process of producing steel. However, to patent, it
needed to be an innovation but in this case, it was more of a combination of “obvious
findings” and know-how. Also, patenting does not protect knowledge as the findings
must be published, “and in many cases the costs for prosecuting encroachments on
process technology patents are prohibitive.” A more recent example for this kind of
behavior can be shown with Intel. The chip maker has made an innovation preventing the
the leakage of electrons in chips. However, “it is considering not filling patents on the
process in order to avoid disclosing details of the discovery in patent application
documents, preventing others from developing a workaround solution (FT 2003, 19).
The findings of Lundgren (1990) from this case, does not justify Williamson's motives
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for vertical integration. Information was in the role of asset specificity, but was generally
applicable. Thus Lundgren claims that specificity is not a necessary condition for vertical
integration.
He also emphasizes the need for close cooperation among suppliers and buyers due to a
process he calls “learning by using”. This process refers to the fact that many significant
characteristics of products are generally revealed only after it has been extensively used.
Thus product improvements, or innovations are mostly accomplished with the help of
users. In some cases however, providing information to supplier may have adverse
effects. It may be that the supplier is vertically integrated with one of its competitors.
Therefore, the supplier may sell these products to also competitor firms. Lundgren (1993)
mentions two mechanisms to prevent this from happening: Brand name, that is the
reputation of the producer and the repetition of transactions. An opportunistic behavior
could cost in the loss of the value of the brand name of both, that of the partner and also
the subsidiary. This will translate in the loss of sales. With one time transactions, the
producer can benefit from opportunistic strategy but if the transactions could be expected
to be repeated, a cooperative behavior would be more beneficial.
The loss of external user information due to vertical integration can be demonstrated with
SKF. SKF sold Volvo, a subsidiary, and half of its shares of Hofors in order to be able to
co-operate with its buyers. First of all, this eliminated buyers to communicate with SKF
without fearing that confidential information is transferred to their competitors. Secondly,
it allowed Volvo and Hofors to interact with other car and steel producing customers.
6.5 Contracts
Vertical integration is also studied from the perspective of contracts. In fact, the term
'nexus of contracts' is sometimes used to describe the modern business firm (Fama &
Jensen 1983). According to Reve (1990), transaction costs arise because of contractual
hazards between opportunistic actors under uncertainty, bounded rationality, small
numbers, information impactedness (assymetry), and asset specificity. Reve (1990)
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separates these characteristics as such:
Primary Factors producing transactional difficulties include:
1. Bounded Rationality (cognitive and perceptual limitations)

2. Opportunism (self interest)
3. Small number bargaining (e.g. Oligopoly conditions)
4. Information impactedness (asymmetrical information)
Transactional difficulties and transaction costs increase when transactions are

characterized by:
1. Asset Specificity
2. Uncertainty (ambiguity as to transaction definition, and performance)
3. Infrequency (seldom transactions)
According to him, under competitive conditions organizations will seek governance

structures that economize on transaction costs. Thus the structure of governance is
dependent on the properties of the transaction. The properties of transactions and their
outcomes are shown below:
Asset specificity and uncertainty low, frequent transactions:

-transactions will be governed by markets
High asset specificity and uncertainty:

-transactions will be internalized
Medium asset specificity:

-bilateral relations, co-operative agreements: joint ventures, licensing, franchising, and
other types of coalitions or agreements
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6.6 Strategic Core
In Reve's (1990) analysis of the firm, the strategic core plays a very important role. “The
strategic core of a firm is represented by assets of high specificity which are necessary to
attain the firm's strategic goals” Reve 1990, 139). He argues that these assets have to be
governed internally because the strategic core is the raison d'etre of the firm. The
strategic core is translated into strategic skills. Some of these skills are visible to the eye
like physical assets but some are simply in the minds of the employees and in firm's
organizational routines and culture. These skills are what Williamson described as asset
specificities; site specificity, physical asset specificity, human asset specificity and
dedicated assets. However Williamson's human asset specificity differs with the one here.
In the latter case, this asset is not relationship or transaction specific. Thus the control of
this asset becomes problematic when employees leave the firm and can apply their
knowhow elsewhere.
The business idea with which the firm competes in the market originates from these
skills. Firms usually put great emphasize on them in order to distinguish themselves from
competitors. When, for example, IBM uses the slogan 'IBM means service', the service
system is regarded as a core asset, putting them into advantage over other computer
manufacturers. Therefore, it would be unreasonable for IBM to leave service into the
hands of others as presumably in most cases, IBM's high standards cannot be met by
other service providers. As technology and market change, it is well possible that the
strategic core of a firm shifts. To demonstrate this case, Reve (1990) uses the example of
AKER, a traditional Norvegian shipbuilder which had shipyards, specialized docks and
skilled workers as its strategic core. Throughout years, shipbuilding, however, was taken
over by the Japanese and later the South Koreans. As AKER's strategic core was no more
unique to the firm, AKER entered the offshore oil industry. To do that, it redefined its
strategic core in terms of the management of large projects with dedicated engineers and
experienced project managers.
However, time, price and quality can also be strategic core skill builders. A good
example is Dell, the computer systems manufacturer. Dell offers its customers powerful,
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richly-configured systems at competitive prices and in very short delivery times.
6.7 Efficient Boundaries of the Firm
It is also interesting to understand how the strategic core is developed, protected and
renewed. Once this is understood, the efficient boundary of the firm can be determined.
“Firms come to existence through some type of innovation where assets are combined in
novel ways” (Reve 1990, 141). One way that cooperations attempt to protect these assets
is to invest more and more into the specific core skills, while decreasing the value of the
same skills in the external labor market. The evolution of the core strategy is argued to be
either the result of a careful planning as strategy textbook suggest, or a combination of
that with random elements and experimentation. In any case, “competitive forces increase
the adaptive ability of an organization, leading a firm to re-examine it's strategic core as
economic performance signals are obtained form the market” (Reve 1990, 142).
As mentioned earlier, vertical integration can be useful when assets of high specificity
exist. However, strategic alliances with bilateral governance may produce same desired
outcome. Let us look what kind of economies can be obtained from the strategic core.
There are four types of strategic expansion paths for a firm as illustrated in Figure 6.1;
downstream vertical integration, upstream vertical integration, horizontal integration and
diversification.
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Economies
of Scope
Economies of Strategic Economies of

Upstream Core Downstream
Integration Integration
Economies
of Scale
Figure 6.1: Economies based in the strategic core (Reve 1990, 147)
The first two strategies are vertical integrations. It is to achieve control in the supply
chain. Downstream integration refers to developing ties with customers. It is performed
when customers represent the critical factor in the firm's success. This is often the case
and explains why customer relationship management as a concept has drawn so much
attention in the past. Upstream integration on the other hand is desired when the inputs of
a firm are in short supply or when they are specifically adjusted to fit the firm's
production processes. The other two strategies are achieved through mergers &
acquisitions (economies of scale) and the broadining of operations (economies of scope)
as in the case of AKER.
Vertical integration should not be performed always but instead corporate agreements
may be preferred as Reve (1990) explains in the following.
“Vertical control can be obtained through ownership but full vertical integration ties up
capital resources and creates considerable management problems as the firm gets
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involved in successive stages of production and distribution where it has very little
experience” (Reve 1990, 147).
Internal transactions are governed by internal contracts whereas interorganizational

transactions are governed by external contracts. In principle internal contracts rely on
hierarchical controls, and external contracts rely on relational controls. For internal
contracts, authority can be used but external contracts require negotiations and consensus.
Usually, a mixture of hierarchical and relational elements are present in both cases.
Internal contracts are subject to the principal-agent problem. It is when the principal who
hires an agent to perform tasks on his behalf cannot ensure that the agent performs them
in precisely the way the principal would like (Tutor2u 2003). The degree of shirking and
unproductive behavior can be effectively controlled if performance can be measured.
Result-based incentives like piece-rate wage systems, profit-based bonuses and stock
options plans can be used to reduce opportunism. Promotions, and participation in
decision making are among the other incentives for agents especially when performance
measurement is difficult. The building of a common set of values that make up the
organizational culture are of significance from the contract point of view. Once, this is
achieved, trust can replace monitoring and control, leading to a more cost-efficient
governance structure.
In the case of external contracts, the agency problem is of a more complex nature. The
hierarchical governance model cannot be applied here as such as a well defined authority
relation does not exist. Two types of relations are dominant in alliances: economic and
behavioral (Reve 1990). In the first case, a solution to increase joint-profits is chosen.
Transactions have to be protected by safeguards, and relations are impersonal and
unstable. Game theory can be used to analyse this kind of relation. The behavioral type
on the other hand is a longer lasting contractual arrangement where trust and solidarity
come forward rather than pure self-interest. When it comes to bargaining, in the first
case, the pattern of dependence between the parties is often the dominant factor allowing
parties to exploit fully their game position. Though behavioral relations do also take
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advantage of bilateral exchange, it is trust and future prospects that play more important
role in bargaining. The pattern of dependence in the economic relation may cause an
imbalance of power which may allow the use of authoritive and organization-like
incentives. In the behavioral relation, shared values and exchange norms tend to develop
interorganizational incentives.
6.8 Summary and Conclusion of the Chapter
In this chapter, literature on the firm and transaction cost economics was reviewed. The
literature and theory in these areas is very rich and therefore, only the most relevant
material could be presented here. A number of concepts have been identfied that may
lead to collaboration or even to integration between firms. Transaction costs, asset
specificity and incomplete contracts are among the most important factors that determine
the type of relationship among suppliers and buyers. Thus, in the presence of high
transaction costs, high asset specificity and incomplete contracts, which introduces the
potential of hold up costs, the market exchange mechanism is likely to be replaced by an
arrangement, typically based on collaboration and/or integration. Overall, the chapter
helped the reader to better understand the economic relations between firms addressing
various issues including trust and risks.
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7. Previous Research
This chapter reviews previous studies on collaboration, particularly recently published

papers on information exchange, trust and other related issues.
The chapter is organized in the following manner: In subsection 7.2.1, previous studies
on the benefits of collaboration are presented briefly. Subsection 7.2.2 introduces the
reader to studies on the barriers to collaboration. In subsection 7.2.3 the case study of
Sainsburry, a supermarket chain that implemented a Collaborative Information System, is
presented. Subsections 7.2.4 and 7.2.5 refer to studies on upstream information flow and
supplier selection respectively. Finally, section 7.3 summarizes and concludes this
chapter.
7.2 Previous Research
The subject of this research brings together several areas from multiple disciplines such
as economics, management, logistics and information systems. A large number of studies
that relate to the subject of this thesis have been done over the past years.
7.2.1 Benefits of Collaboration
A popular area that has been widely researched is SCM. Many studies explain the
benefits of collaboration (Ovalle & Marquez 2003; Dejonkcheere, Disney, Lambrecht
&Towill 2004) as well as barriers to success (Akintoye, McIntosh & Fitzgerald 2000).
Collaboration leads to higher supply chain visibility, which in turn can be translated, into
lower costs (Ovalle & Marquez 2003). The benefits of collaboration have already been
discussed in detail in previous chapters and therefore do not need more explanation.
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7.2.2 Barriers to Collaboration: Trust and Risk
According to Akintoye et al. (2000), barriers to success include workplace culture, lack
of senior management commitment, inappropriate support structures, and a lack of
knowledge of SCM philosophy. Several studies use supply chain modeling (Ovalle &
Marquez 2003) and value chain analysis (VCA) (Dekker 2003) to support and test their
hypothesis. Dekker explains that Activity Based Costing (ABC) models can be used for
Value Chain Analysis but adds that only partners with sufficient trust or control and
confidence about each other's intentions are likely to engage in cost management
practices due to the sensitivity of data involved. Dekker's paper, which is based on
Porter's work (Competitive Advantage 1985), talks about the hazards of VCA and points
to the risks of collaboration. "When buyers and suppliers open their books to each other
and exchange cost and performance information, concerns may arise about their
bargaining position and information spillovers to competitors" (Dekker 2003). The
concepts of opportunistic behavior (Williamson 1985), interdependencies between firms
(Thompson 1967; Gulati & Singh 1998) and trust (Gulati 1995) are brought up in this
context.
Akkermans, Bogerd, Doremalen & Travail (2004) explain the difficulty of implementing
collaborative planning (CP) and presents a case study in which several firms adopt CP.
The paper stresses the need for high information transparency and trust. "....trust and
transparency can be attained only through a great deal of hard work by all people
involved. Once this is accomplished, supply chain partners will find themselves in a
virtuous cycle of steadily improving supply chain performance leading to even higher
levels of trust which in turn will improve performance even further." Thus, the paper
emphasizes the role of trust in supply chain collaboration and that it takes time for parties
to be fully transparent about each other's processes.
Lee & Whang's paper titled Information sharing in supply chain also sheds light on the
benefits of sharing various information between supply chain partners. However, they
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also point out the risks. According to Lee & Whang (2000), for example, the sharing of
cost and pricing data with suppliers and customers may lead to pressure to lower prices
and thus to lower profits. Furthermore, the risk of a customer's demand forecast data
leaking to a competitor via the supplier is also mentioned (iienet.org 1999).
7.2.3 The Case Study of Sainsburry
Dekker’s (2003) paper also presents a case study in which Sainsburry, the British
supermarket chain, re-arranged its relations with its 4000 suppliers. As part of this
initiative, in 1998, Sainsburry launched a comprehensive management information
system on the Internet called, Sainsburry Information Direct (SID), to coordinate
activities with suppliers. This solution included a set of tools for information exchange
such as web-EDI, joint promotion planning, performance measurement systems and
communication systems. For my purpose, it is interesting to see that Sainsburry
distinguished between 3 types of suppliers: core suppliers, middle-large suppliers and
small suppliers. The 24 core suppliers accounted for 30% of products sold to Sainsburry
and used SID. Transaction volume and the strategic importance of their products for
Sainsburry were the decisive criteria for qualifying suppliers as core supplier. With other
suppliers, the web-EDI as an alternative to the costly EDI for exchanging information on
orders, production planning forecasts and invoices was used. An important point to note
here is that Sainsburry decided not to collaborate with the "non-strategic" partners due to
the high costs involved to justify the improvements. Since 1998 however, many new
technologies and softwares have become available to justify collaboration with all types
of suppliers. Neither the paper nor the solution provider's case study (www.equos.com)
does give a detailed account on the criteria Sainsburry chose to evaluate suppliers for
collaboration purposes.
7.2.4 Upstream Information Flow
Kaufman & Mohtadi (2003) try to answer the question of "how and under what
circumstances does a firm that plays the role of a buyer in the supply chain decide to
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share information on key variables, such as point-of-sale consumer demand data with its
supplier, up the supply chain". The question is explored using a sequential game-theoretic
framework that emphasizes the central role of buyer uncertainty with respect to final
consumer demand in a retailing supply chain setting. The authors conclude that
information sharing and information withholding might take place depending on the
degree of uncertainty about market demand. The authors also claim that whereas in the
short-run, information withholding may be beneficial for the buyer, in the long-run it
might find itself locked-into a less efficient outcome, as upstream firms along the supply
chain are able to infer downstream firm's sensitive information. This argument is also
consistent with Nakayama's survey (2000), who finds that "there is evidence that power
shifts towards suppliers with EDI links" He claims that accurate and timely information
on buyers product promotions and on their partner’s operational status in general,
positively affects the bargaining power of suppliers.
Another study that is interesting and important to review is the work by Milliou (2003).
The paper titled Vertical Integration and R&D information flow: is there a need for
'firewalls? studies the effects of vertical integration on the flow of information. Milliou's
paper, in particular, aims to find out whether a 'firewall' preventing nonpublic
information to flow within a vertically integrated firm reduces innovation incentives and
welfare in an industry. The case in which the information flows from a downstream non-
integrated firm to the downstream division of a vertically integrated firm via its upstream
subsidiary is considered. Milliou concludes that "unless information spillovers are high,
goods are close substitutes, and R&D is very costly, 'firewalls' decrease welfare.
7.2.5 Supplier Selection
Also various papers on transaction cost economics and supplier selection exist and should
be mentioned here. Gurbaxani and Whang (1991) in their paper titled The impact of
information systems on organizations and markets give a good insight into the effects of
lower transaction costs on procurement as a result of advancements in ICT. From the
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point of transaction cost economics, lower transaction costs would lead to higher
utilization of markets. The authors note however that that the shift has empirically been
in the direction of long-term contracting with only a few suppliers, rather than continuous
recontracting on the spot market. This seeming paradox is explained by Bakos and
Brynjolfsson (1993) through the existence of coordination costs and the incentives for
suppliers to make non-contractible relationship-specific investments. The authors claim
that buyers accept higher prices and limit the supplier base so as to encourage non-
contractible relationship-specific investments. Therefore, once again the paper proves the
role of asset specificity as a driver for collaboration.
Valuri & Croson (2003) develop upon the above ideas and take an agent based approach
to study the performance of a supplier selection model. The model was originally
proposed by Croson and Jacobides [Small Numbers Outsourcing] and displays a
complicated reward and punishment profile under incomplete information. The agent-
based model, which incorporates bounded rationality unlike game theoretical models,
uses a reinforcement model to determine the optimal number of suppliers for a product.
Extensive simulations indicate that sellers capable of producing high-quality goods can
be distinguished from sellers capable of only producing low-quality goods; and be forced
to produce at high-quality levels. Also, simulations show that "it is optimal for the buyer
to outsource to only a relatively small number of suppliers, as any more or fewer would
result in a decrease in the buyer's total surplus" Valuri & Croson (2003).
Many studies on Supply Chain Management, Collaborative Information Systems and

Organization in general stress the benefits of collaboration (Ovalle & Marquez 2003;
Dejonkcheere, Disney, Lambrecht &Towill 2004). Studies also often refer to the issue of
trust between collaborating partners, as collaboration requires the sharing of sensitive
information between trading partners (Akintoye et al. 2000; Akkermans et al. 2004;
Dekker 2003 Lee & Whang 2000). Researches on supplier selection (Bakos and
Brynjolfsson 1993; Valuri & Croson 2003) and on information flow between firms
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(Kaufman & Mohtadi 2003) do give some insight into how firms go about collaboration.
However, studies that give a detailed account on the factors that influence the decision on
how much information to share with trading partners and the organizational processes
involved within have not been found. The case of Sainsburry, a supermarket chain, which
implemented a Collaborative Information System, demonstrates an example for the need
of a better understanding on how firms behave (or should behave) when faced with the
issue of collaboration.
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8. Factors affecting Collaboration
The objective of this chapter is to identify and discuss factors that could affect the
decision on how far firms collaborate. Some factors were already identified from the
reviewed literature presented in the previous chapters. Others factors are selected based
on my own opinion. These factors are presented within different categories and thus
within different subsections.
Subsection 8.2.1 presents factors relating to the characteristics of the supplier that could
affect upstream information flow. Similarly, subsections 8.2.2, 8.2.3, 8.2.4, 8.2.5 and
8.2.6 explain the factors that are related to supplier's market, transactions, product
characteristics, buyer’s products and relationship respectively. Section 8.3 gives an
overview of the factors presented in this chapter and demonstrates how they interact with
the buyer. Finally, section 8.4 summarizes and concludes this chapter.
8.2 Factors affecting Collaboration

In the following subsections, I will refer to factors that may affect collaboration between
companies. Some have already been mentioned in the previous chapters but I shall
present them here explicitly and from the point of the buyer. Please note that the term
collaboration includes information exchange and here in this study refers to upstream
information flow especially.
8.2.1 Factors Related to Supplier's Characteristics
First of all, before any transaction is made, buyers need to get to know suppliers in terms
of who they are, their capabilities and perhaps most importantly, if they can trust them.
Negotiations should begin only after buyers can be reasonably sure that it is safe to
engage in business with the suppliers in question. It is useful to define trust (Rosseau et
al. 1998, 395):
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Trust is a psychological state comprising the intention to accept vulnerability based upon
positive expectations of the intentions or behavior of another.
Perhaps the most important benefit of trust is that it facilitates co-operation. If there is
trust, people can engage in spontaneous interaction without the need to spend too much
effort in looking for hidden opportunism, deciding who is formally responsible for what
and risks of disclosing information (Kadefors 2001). In Table 8.1, the factors that
determine the trustworthiness of a supplier, in my opinion, are presented.
Attribute Examples
Company Ownership state, public, wide, single, subsidiary
Size: employees, sales
Financial Strength strong, weak
Extent of Operations: global, domestic
Image: brand
Technological Leadership leader, follower
Historical Information: favorable, unfavorable
Quality, Standards high, low
Information Systems: secure, vulnerable
Sub-contractor better, worse than supplier himself
Performance
Critical Ownerships owning a competitor/vertical
integration
Table 8.1: Factors determining the trustworthiness of a company
I shall, in the following, discuss the importance of these factors and also propose methods
to measure their existence.
Company Ownership: The first factor refers to the type of ownership of a company. A
company may be owned by the state or by individuals. If it is owned by individuals, it
may be a public company whose shares can be freely traded on the stock exchange(s) or
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be privately owned. In private ownership, only one or more individuals own the
company. In normal circumstances, a stately owned enterprise can be highly trusted. In
developing countries or underdeveloped countries, where political instability may exist,
state companies are less trusted. However, Finland is a politically stable country and
therefore a company owned by the Finnish State can be considered to be highly trustful.
Also, a publicly owned company, I think, is equally trustworthy as they tend to be large,
transparent and dependent on a good reputation. On the other hand a privately owned
company can be assumed to be somewhat risky as they tend to be less transparent and
smaller in size. Furthermore, I would also assume that confidence in a company gets
higher with the number of shareholders increasing. Therefore, whereas a stately or
publicly owned company should be trusted most, a privately owned company having a
single owner should be trusted least given that the owner of the company is not another
company.
Size: The size of a company refers to the number of workers it employs and total sales. A
company that is large in size will tend to have a better reputation, perhaps be a brand, and
therefore convey a more positive message to the buyer. For determining the size of a
company, employee numbers and total annual sales are used. The numbers will be
relative to the market and can then be used to translate into a scale from 1 to 5 with 5
representing a large company.
Financial Strength: The financial strength of a company reflects its success as a

company and its ability to supply. Therefore, it would be reasonable to assume that the
stronger a company performs financially, the more credible and trustworthy it is. The
financial strength of a company can be measured on a scale from 1 to 5 with 5 being
highly strong.
Extent: Another factor that may affect the decision or the degree of collaboration in the
supply chain is related to whether the company acts globally or only domestically (a local
company). A global company will tend to have a larger customer base, be more known
(possibly a brand), and may have a better reputation. However, it may also be the case
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that foreign companies may not be trusted as much as local. Thus the affect of extent may
be positive or negative and may well depend on the origin of the supplier and the culture
of the buyer. The extent of the operations of a company can be measured on a scale from
1 to 5 with 5 being most international.
Image: "A company image is the combination of the thoughts, feelings, beliefs, opinions
and visions people have about....your company " (Onlinewbc 2003). The image of a
company in the eyes of a buyer is determined through many factors including those
mentioned in this section. An established brand for example is likely to signal quality and
reliability. Therefore, I would assume that the better the image of a company is, the
likely, the buyer would be willing to collaborate and provide information. The image of a
company can be measured on a scale from 1 to 5 with 5 representing the best image a
company can have.
Technological Leadership: A company may be a leader in its field in terms of

technology and innovation like IBM or simply follow the technology and imitate like
many firms in developing countries do today. I think that companies that engage more in
Research & Development (R&D) are likely to be more trustworthy. My reasoning stems
from the assumption that only large and rich companies are likely to invest in R&D and
that these companies are more likely to have a better organizational structure to better
safeguard their assets. Innovative companies also tend to have high reputation and
therefore are expected to respect their customers more. Also since an innovative company
knows the value of confidentiality, a buyer could trust such a company more and be
willing to share more about its own R&D. The leadership of a company in innovation can
be measured on a scale from 1 to 5 with 5 being most innovative.
Historical Performance: A company is likely to be a good partner if it has a good track

record. Historical data regarding its past performance in ability to meet orders, finance,
relationships with other buyers and other relevant information can prove how much it is
worth to engage in business with this company. The past performance of a company can
be measured on a scale from 1 to 5 with 5 having the best performance.
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Quality Standards: The quality of a supplier in terms of its business processes may not
be always obvious to the buyer. Thus to assure business partners, companies are
increasingly acquiring standards issued by organizations such as the International
Organization for Standardization (ISO). Therefore, if a company is accredited by an
internationally recognized organization(s), it is likely to be more credible. The quality of
a company can be measured on a scale from 1 to 5 with 5 representing the highest quality
possible.
Information Systems: Most collaboration, today, is performed through the use of some
type of information systems that are connected to each other. First of all, these systems
need to be able to meet the requirements of collaboration (capabilities, flexibility etc.).
However, they must also be secure and reliable. Unreliable systems may cause
production disruptions as well as data leakage. The quality of a company's information
systems can be measured on a scale from 1 to 5 with 5 representing the best possible
quality.
Sub-contractor Performance: Many companies use sub-contractors to produce certain

parts that are not profitable to produce in-house. Some data needs to be shared related to
buyers and quality of produced parts will depend on the quality of the sub-contractor.
Therefore, companies' decisions on collaboration need to take account on the
characteristics of the sub-contractor(s), in case any is involved. Although sub-contractor
performance is a part of suppliers overall performance, I find it useful to mention it here
separately.
Critical Ownerships: The final factor in this category that needs to be taken into account
when considering collaboration with suppliers is related to whether a supplier has an
ownership in a company that may cause a conflict of interest Milliou (2003). A
subsidiary of the supplier for example may well be a company that is competing with the
buyer. Thus sensitive information from the buyer for example on its customers may leak
to a competitor via the supplier. When such ownerships exist, collaboration must be
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carried out more carefully. The potential of this risk can be expressed on a scale from 1 to
5 with 5 representing the highest risk.
8.2.2 Factors Related to Supplier's Market
It is also important to look at the market of the supplier when considering close
collaboration. This is important due to the exchange of critical information between
parties involved and it was discussed in Chapter 6 to a great extent. Nevertheless I shall
point out how the 3 factors below can influence decisions on collaboration and also
propose a method to measure them.
Market Share: The market share of a company can convey information to outside
parties on its quality, image, success as well as size. In normal circumstances, a market
leader becomes the market leader because it provides the best products and services given
that it operates in a competitive market. Even though, market leadership does not have to
be credited for the perceived quality of an organization, I still would like to assume that
there exists a positive relationship between market share and reliability. Thus, I can claim
that a market leader is more reliable than a company with a small market share. The
market position of a company can be represented on a scale from 1 to 5 with 5 standing
for market leadership and 1 indicating a small market share.
Buyer Numbers: The number of customers a supplier has can be a significant indicator
on its quality and characteristics. A supplier with many customers normally leads to the
belief that customers are satisfied. Thus since satisfied customers are less likely to change
their suppliers, a reliable company is more likely to have a relatively large customer base.
The number will be relative to the market and can be used to translate into a number on a
scale from 1 to 5 with 5 representing a large customer base.
Buyers and their Characteristics: The characteristics of the company's other customers
may be relevant as one or more of them may be competing in the same market as the
buyer, that is, its goods can be close substitutes. As discussed in chapter 6, valuable
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information in connection with the buyer can leak to competitors (as in vertical
integration). This information may be any of those identified in section 5.5 (e.g. demand,
R&D). The potential of such a danger can be measured on a scale from 1 to 5 with 5
representing the highest possible confidentiality.
8.2.3 Transaction Specific Factors
The characteristics of the transactions with the supplier are also an important determinant
on the incentives for collaboration. To understand the nature of orders made to the
supplier, it is useful to look at the volume, frequency and supplier performance. These
factors are discussed below in so far as to understand how they might influence the
decision on collaboration. Also methods to measure these factors are proposed.
Volume: The volume of transactions between a buyer and supplier can be measured by
the average number of parts ordered over a period, or more simply, by its value in
monetary terms over a period. It can be assumed that the larger the volumes are, the more
incentive there is for the buyer to collaborate with the supplier. The benefits of
collaboration will be enjoyed more, when transactions are large.
Frequency: Frequency refers to the number of orders per period. Frequency can be
measured by the average number of orders per period. Also here, it can be assumed that
the higher the frequency of orders, the higher the incentive for collaboration. Again, the
benefits of collaboration can be enjoyed more, when orders are made more frequently.
Performance: Supplier performance refers to the fulfillment of an order. Three factors

determine the efficiency of fulfilling an order. These factors are discussed below and
methods to measure them are proposed.
a) On-Time Delivery: On-time delivery refers to the delivery of goods when promised.
Late deliveries can disrupt production especially when the buyer engages in JIT
production. The demand for better delivery times and shorter lead-times may require
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closer collaboration. Thus, the mode of production of the buyer, lead-times, as well as the
percentage of late deliveries can influence the incentives for collaboration. Measuring
late deliveries is important for determining supplier performance. It can be expressed as a
percentage of all the deliveries.
b) Defective Material: A defect in the material supplied means that it must be returned.
This results in a much later delivery, the repetition of certain processes such as re-
ordering, the adding of new processes such as problem solving and may even cause
machine breakdowns in some cases. A reduction in defective material may require closer
collaboration with the supplier. This factor can be expressed as a percentage of all
deliveries.
c) Accuracy: Accuracy refers to the delivery of the right goods to the right location and
with the correct quantity. Wrong parts will have a similar affect to defective materials
delivered and must be returned. The delivery of goods to the wrong location will increase
the lead-time, cost of transportation and add new processes. Wrong quantity will also
have an adverse effect on the organization. In case materials supplied are short,
production may halt. Also correct actions have to be taken to offset this mistake, adding
to costs. When too much is supplied, storage problems may arise and the costs associated
with inefficient order quantities will emerge. The returning of goods on the other hand
will equally add to costs. Therefore, accuracy is an important determinant of a supplier’s
performance and a closer collaboration may be required to improve it. Also, this factor
can be expressed as a percentage of all the deliveries.
d) Documentation: Documentation by suppliers, such as order confirmations, order

numbers, and position numbers may also be defective. "Nonconformities like this result
in for example waiting, problem-solving, and rework in various functions of the factory."
(Seppälä 2003) Thus, meeting the demands of the buyer, may require closer
collaboration. The quality of documentation in terms of incomplete, inaccurate, missing
or wrong documentation, from the buyer’s point of view, can be measured as a
percentage of all the documentation.
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8.2.4 Factors Related to Product's Characteristics
Collaboration with suppliers will depend largely on the type of products bought. A more
'complex' product, which is harder to find on the market, will provide more incentives for
collaboration than a mass product that is easy to find and buy. Two factors are identified
below that characterizes a product and methods to measure them are proposed.
Asset Specificity: Asset specificity was discussed to a great extent in chapter 6. It

remains to say that the greater asset specificity is, the more incentive there is for
collaboration (Williamson 1985). Measuring asset specificity can be problematic but
nevertheless, the strength of the factor is vital for any decision on collaboration. Asset
specificity can be measured on a scale from 1 to 5 with 5 representing the highest degree
of asset specificity. When determining the value (1-5) of asset specificity, a weighted
approach towards the components of asset specificity (site, physical, human, dedicated)
can be used to emphasize their relative importance within.
Marketing Costs (I): Although marketing costs are not directly related to products
themselves, they still should be mentioned. Their significance will influence the incentive
for collaboration (Coase 1937). These costs refer to the trouble of searching for a supplier
who can supply the exact good(s) sought. Whether the same or similar product can be
bought from another supplier is also an important factor that is likely to influence the
decision for collaboration. Thus because a scarce product on the market is also relatively
harder to find, search costs will also likely to be big. Therefore, marketing costs can be
represented as a single Figure, on a scale from 1 to 5 with 5 representing a scarce and
difficult to find product.
8.2.5 Factors related to Buyer's Products
Kaufman & Mohtadi (2003) found out that the certainty/uncertainty of demand for
buyers’ products do affect how much information buyers provide on forecasted demand
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for their products to suppliers. To elaborate on this, it is useful to refer to Nakayama
(2000). Nakayama claims that with EDI, power shifts to suppliers. Accurate information
about buyers, allows suppliers to monitor partners operations such as purchase
requirements, promotions and so forth more closely. This somewhat increases buyer’s
dependency on the supplier, thereby shifting the bargaining power in favor of the
supplier. Furthermore, when periodical demand for a buyer’s product(s) is certain,
suppliers can infer buyers demand over time as Kaufman & Mohtadi suggest. Thus
information withholding strategy is not useful as the supplier can infer demand by its own
means. However, when demand is uncertain, the buyer with better means to forecast
demand through POS data, may want to withhold information (information asymmetry)
in order to preserve its bargaining power. Therefore, we would see the level of
certainty/uncertainty of demand affect the detail of information provided to suppliers
with more uncertainty leading to less information provided to suppliers.
8.2.6 Relational Factors
Firms may engage in short-term contracts, long-term contracts or simply buy on spot
markets. The type of relationship between suppliers and buyers will depend on a number
of factors including trust, marketing costs, and/or the pattern of dependence. The issue of
trust has been discussed in section 7.2 already and is implicit. Thus the other remaining
factors will be presented here as well and methods for measuring them will be proposed.
Contracts
Contracts were discussed in chapter 6 to a great extent but nevertheless, I shall point out
how they may influence the decision to collaborate with suppliers. The issue of contracts
will be dealt with from two perspectives, their duration and incompleteness.
a) Duration: The duration of a contract can range from a one-time transaction to a period
of several years, if not decades. A long-term contract means a long-term commitment. A
close cooperation and collaboration will benefit parties involved as long as it lasts. Thus
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long-term contracts that assure long-term business between suppliers will have a positive
affect on the incentives for collaboration. Therefore, it can be assumed that the longer the
contracts are with a particular supplier, the more collaboration will be sought. Duration
can be measured in days, months, and years or indicated on a 1 to 5 scale with 5
representing the longest duration for contracts.
b) Incomplete Contracts: As discussed in chapter 6, contracts are in most cases

incomplete, or made incomplete on purpose (Reve 1990). Incomplete contracts could
bring along hold-up costs that can adversely affect the parties involved. Thus, the
presence of such contracts or the potential of hold-up costs will strengthen the incentives
for a tighter collaboration. It is rather difficult to measure the strength of this factor.
However a scale from 1 to 5 can be used with 5 representing the highest potential for
such contracts and/or the potential for opportunistic behavior.
Marketing Costs (II)
The other type of marketing costs that were not mentioned in relation to products has to
do with the transaction costs for negotiating and contracting (recontracting).
a) Negotiating: Once the supplier is identified, or when a contract has to be renewed,

costs in relation to the time and effort by individuals to come up with acceptable terms
for both parties will arise (Coase 1937). The greater the costs are, the less it is desired to
renegotiate, which will lead to longer contracts. Expressing these costs in monetary terms
is not very practical and therefore a scale from 1 to 5 with 5 representing the highest
negotiation costs could be more useful.
b) Contracting (Recontracting): Once negotiations have been successful, it is necessary

to formalize it through a binding agreement that is enforceable by law. Contracting,
similarly to negotiation, requires time and effort (Coase 1937). Thus the greater these
costs are, the less it is desired to re-contract and therefore the longer the contracts. Again,
due to impracticality of expressing it in monetary terms, a scale from 1 to 5 can be used
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with 5 representing the highest costs.
Pattern of Dependence: This factor refers to how dependant the buyer is on the supplier.
Materials supplied may be such that alternative suppliers cannot be considered.
Thompson (1967), describes this situation as sequential dependence. This issue was also
discussed in subsection 8.2.4, on products' characteristics. When dependence is high,
more incentives for collaboration may exist. Measuring dependence can be done using a
scale from 1 to 5 with 5 representing highest dependency.
Length of Relationship: It usually takes time until trust is established between a buyer
and a supplier. In the beginning, a buyer may be skeptical whether the supplier can
deliver goods, exactly as wanted. Also parties will be reluctant to collaborate, as they
cannot be sure if they would protect each other’s interests. However, throughout time, if
not from the outset, trust will build, given that parties act 'properly'. Therefore, it can be
assumed that, the longer the relationship exists between the parties, the more likely it is
for them to collaborate, provided that parties are satisfied with each other (Akkermans et
al. 2004).
Reciprocity: A final factor that might affect the amount of information provided to a
supplier will most likely depend on the information it receives from that supplier about its
own operations, plans and other matters that might have an impact on their business
relationship. Therefore, parties will provide as much information as the other, which is
the principle of reciprocity.
8.3 Collaboration as a Function of Factors
We have identified the various factors that drive collaboration. It is the interaction of
these factors with the buyer that determines how much companies will collaborate and
share information with each other. Figure 8.2 gives an overview of the factors presented
in this chapter and their interaction with the buyer.
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Transactional
Suppliers Market Volume:

Supplier’s Products Frequency
Market Share Performance:
Buyer Numbers Asset Specificity a) On-Time Delivery
Buyers and their Marketing Costs (I) b) Defective Material
Characteristics c) Accuracy
d) Documentation
Supplier Collaboration - Information Buyer
Supplier’s Characteristics Relational
Company Ownership Contracts Certainty/

Size a) Duration
Uncertainty
Financial Strength b) Incomplete Contracts
Marketing Costs (II):
for Buyer’s
Extent of Operations
Image a) Negotiating products
Technological Leadership b) Contracting
Historical Performance (Recontracting
Quality, Standards Pattern of Dependence
Information Systems Length of Relationship
Sub- contractor Performance Reciprocity
Critical Ownerships
Figure 8.1: The Interaction of Factors
As seen from Figure 8.2, 6 sets of factors dictate the degree of collaboration between the
supplier and buyer. In the extreme case, the buyer would provide no less information to
the supplier than to internal parties. However, in most cases (unless vertically integrated),
information provided to the supplier will be up to the point where the marginal benefit
from providing the information to the supplier is equal to marginal cost. It is however
extremely difficult to quantify the costs and benefits of some of the factors such as
pattern of dependence and marketing costs. Furthermore, some of these factors such as
company size and length of the relationship do not have a material value but rather
represent trust/risk and the worthiness of collaboration. Thus, I proposed in section 8.2 to
assign relative values for some of the factors, typically, through a scale from 1 to 5 with 5
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representing for example very high asset specificity. Once the values of the factors are
known as well as their relationship to costs and benefits, the optimum level of
collaboration can be determined and necessary adjustments made to transparency. A
weighted approach towards these factors could also be useful as some of the factors may
only be trivial to the buyer, whereas others may be extremely important. Thus in the
survey, which is explained in the next chapter, the significance of some of the factors will
be researched. In addition to that, the survey also aims to find out about the decision-
making processes of buyers’ concerning what information to share and to what extent
with suppliers.
This chapter presented the reader, factors, that may influence the decision and extent on
collaboration under normal circumstances, that is when collaboration is not encouraged
explicitly such as for R&D, acquisition purposes and so forth. The factors were
categorized into 6 classes depending on their relevance to the characteristics of the
supplier, the supplier's market, supplier’s products, transactions, buyer’s products and the
relationship between the buyer and seller. Also the significance of their existence were
explained and discussed in terms of how they are likely to influence the decisions on
collaboration. Finally, in section 8.3, these factors were summarized and were brought in
to the context of my survey, presented in the next chapter.
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9. Research Methodology
The objective of this chapter is to explain the research methodology and to present the
findings.
Thus, in subsection 9.2.1 the research sample is explained, particularly why and how the
sample was chosen. Subsection 9.2.3 presents the questionnaire used in the survey. In
section 9.3, data is analysed and results are assessed in the light of the theory and
expectations.
9.2 Research Methodology
9.2.1 Sample
To conduct the survey, a sample of firms was required. As the objective of this thesis is
to study buyers' attitude towards information sharing, only certain types of firms in
Finland were considered to be appropriate to study. The method of sampling is explained
below.
The primary distinction between firms was made according to whether they provide
goods or services to their customers. Companies that provide services were considered
not to be appropriate for the study, as it can be assumed that most of them are likely to
have only a few suppliers. For example, the financial or media industry has suppliers that
are not strategically important in the sense that mostly goods of low asset specificity are
purchased from them. These are goods that can be readily obtained from almost any type
of supplier such as ink and paper. Thus, service companies do not fit into the definition of
a supply chain partner, which typically relies on rather specific supplies. Another
criterion for the sample was to choose firms that are likely to have a great number of
suppliers. Therefore, firms that are for example in the mine, oil & gas industries were left
out the sample as they are at the beginning or too far up in the supply chain. A further
criteria sought was that the chosen companies were required to engage in some type of
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manufacturing or assembling so that issues like capacity planning and production
schedules would apply to them as well as some degree of R&D. Therefore, retailers and
wholesalers were not included in the sample either. Hence, only companies in the
Automotive, Chemicals, Consumer Products, Engineering, Construction, High Tech,
Industrial Machinery & Components, Mill Products and Telecommunications industries
were included in the sample. A final criterion for firms in question was the annual
turnover to be of minimum 5 million euros. The goal for setting this criterion was to
eliminate companies that have relatively low procurement activity, which in turn
translates into little information to share with suppliers.
To retrieve a list of Finnish companies that fulfil the above-mentioned criteria, the Voitto
database available on the server of the Swedish School of Economics and Business
Administration was used. The query returned over 300 firms. After reviewing the list, a
number of firms were eliminated. These were firms that either do not exist anymore due
to some reasons (e.g. merging) or firms that provide more services than goods. After the
up-date of the list, a total of 199 firms remained.
A choice regarding the means of sending the questionnaire to companies and eventually
receiving them back had to be made. Among the options were post, e-mail, and an online
questionnaire. The first two options were similar: to send and receive the questionnaire
by post or by e-mail. The third option on the other hand would have had to involve an e-
mail or letter to the company that includes the web address of the online survey.
However, to be able to send the survey or link by e-mail (second and third option), the
exact e-mail address of the person who could supposedly answer the questions had to be
found out. Sending the mail to the corporate e-mail address was not desired, as it would
have had to involve several persons (e.g. public relations) before it reached the right
person. Thus the probability of the e-mail reaching the right person without being
discarded as junk mail was considered fairly low. Therefore, for the e-mail option to be
viable, firms would have had to be called individually to find out the e-mail addresses of
the right persons (e.g. the purchasing manager). Reasons for not choosing this option
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were time and cost considerations. Also as the survey was designed to be anonymous,
returning it by e-mail would have had in many cases revealed the identity of the person
and company. Thus, the e-mail option, which involved the returning of the questionnaire
by e-mail, was eliminated. Similarly, providing the link of the online survey, through e-
mail was not considered to be an option thereafter due to the same reason, that is the
inconvenience of identifying the e-mail addresses of persons. The link for the online
survey could have been sent by post on the other hand, however, switching the user from
paper to e-mail was not considered practical due to certain unpractical tasks such as the
typing of the questionnaires web address. Therefore, the first option was chosen.
Questionnaires in envelopes, addressing the purchasing manager, were sent by post and
firms were asked to return them also by mail with the provided envelope.
Taking into account the costs involved in sending out the questionnaire to firms in terms
of envelopes, paper and stamps, I decided to limit the sample size to 150. Thus,
altogether, 150 out of 199 firms were selected randomly and were sent the survey.
9.2.3 Survey
The survey aimed to find out how Finnish manufacturing companies approach
collaboration. I think that most companies, today, are aware of the benefits of
collaboration. Therefore, it was not my intention to find out the opinion of companies
about collaboration but rather how they implement it. Particularly, the factors that
influence the degree of upstream information flow were interesting to investigate.
In the first part, because the questionnaire was anonymous, some facts from the company
were gathered. These related to the industry the company is in and how much annual
turnover the company has. Also information on suppliers were asked in terms of the
number of suppliers the company has, how many of those are core-suppliers and what
percentage of supplies they constitute.
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In part II, companies were inquired about the type of information they provide to
suppliers. Thus questions 6 to 12 asked whether companies provide information to their
suppliers regarding their forecasted demand, inventory, production schedules, capacity,
logistics, product compositions, and R&D. The questions were also designed such that
the level of detail of information provided could be determined. Thus, to measure the
level of detail, a scale from 1 to 5 was used with the value 1 for no information and 5, for
detailed information provided to suppliers. Thereby, not only the type of information
provided could be found out, but also how detailed it was. Although not an elaborate
method, as the one suggested in chapter 5.5 (Barut et al. 2002), this method was still
going to provide a sufficient understanding of firm's tendencies about choosing the level
of detail they provide to their suppliers. The reason for not implementing the coupling
methodology as such was that it would have made the survey unacceptably long.
Part III was structured so as to find out what factors companies find relevant when
deciding for the kind of information to provide to their suppliers. Again here, for
answers, a scale from 1 to 5 was used to determine companies’ approach towards these
factors. For example, 5 meant that the company finds the corresponding factor highly
relevant. Thus, the decision about how much information to provide to suppliers would
fully take into account the factor in question. Some of the factors for the purpose of the
survey however were left out. These are listed below:
• Image
• Historical Performance
• Information Systems
• Sub-Contractor Performance
Image was not included in the questionnaire as its relevance can be deducted to some
extent from the relevance of some of the other factors that make it up such as the
financial strength, technological leadership and size of the supplier. The historical
performance of the supplier, we can assume, is highly relevant for buyers, and therefore
needed not to be asked. Similarly, the information systems of suppliers, I assume, is also
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considered to be highly relevant by buyers. A reliable and secure system for
communicating is a pre-requisite for interorganizational collaboration. Finally, sub-
contractor performance, in case applicable, should certainly be an issue that should be
taken into account. However, sub-contractor performance does not have to be treated
separately, as its performance should be reflected in the overall performance of the
supplier itself.
In part IV, some questions were asked to find out about the decision mechanism(s), (in
case one exists) that determine what and how much information to share with suppliers.
The first question asked whether companies evaluate suppliers for information sharing
purposes. In case, they do, they were then asked to indicate whether the policy or
methodology was developed in-house or by another party such as consultants. The next
question, question 17, was designed to understand how the methodology/policy works.
Finally, the last question asked if companies had some experience where information
known about them by the supplier was perceived to be a threat.
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9.3 Research Results
The number of responses received after a period of more than a month totalled 22. All of
the responses were usable except for some of the questions within the questionnaire,
which were left unresponded or were unclear. The results and findings are presented in
the following subsections.
9.3.1 Company Information and Suppliers
Based on the very first question of the survey, which was to identify the sector of the
respondent companies, the distribution for the 22 companies is illustrated below.
Sector Distribution
Auto.
Chem.
Con. P.
E. & C.
H. T.
I.M. & C.
M. P.
Tele.
Figure 9.1: Sector Distribution
We see from the distribution that Industrial Machinery & Components,

Telecommunications and Chemistry have the biggest shares in terms of the sectors
respondent companies are representing. There were 5 companies in each of the
mentioned sectors. Table 9.1 presents the exact distribution.
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Sector Number of
Companies
Auto. 2
Chem. 5
Con. P. 1
E. & C. 2
H. T. 2
I.M. & C. 5
M. P. 0
Tele. 5
Table 9.1: Sector Distribution
Based on the responses for question 2, Figure 9.2 and Table 9.2 present the distribution of
respondents’ annual turnover in million euros. For this question, 21 responses were
received.
Firm Size
Less than 10
10 – 100
100 -500
More than 500
Figure 9.2: Firm Size Distribution
100
Turnover (m. euros) Number of
Firms
smaller than 10 4
10 - 100 7
100 - 500 7
larger than 500 3
Table 9.2: Firm Size Distribution
As we see from Table 9.2, almost half of the respondents are small to medium sized
companies and the other half are large companies with an annual turnover of more than
100 million euros.
Question 3 asked how many suppliers the company has. Answers varied significantly
from as low as 5 to as high as 5000. Question 4 was related to question 3, in so far as to
asking how many of their suppliers, could be considered as their core-suppliers. Taking
the average for all 22 companies, core suppliers account for only 17% of all suppliers.
Figure 9.3 shows a detailed distribution of core suppliers as a percentage of total number
of suppliers.
Core-suppliers as a percentage of total supliers
10 and below
11 – 20
21 – 30
31 – 40
40 and above
Figure 9.3: Core Suppliers
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Also question 5 was a follow up question to 3 and 4 asking what percentage core
suppliers constitute to their total purchases. On average, 67% of total purchases are made
from core suppliers. Figure 9.4 presents a detailed distribution of purchases from core-
suppliers as a percentage of total purchases from all suppliers.
Purchases from core-suppliers as a percentage of total purchases
70 and above
40 – 69
39 and below
Figure 9.4: Purchases from Core-suppliers
9.3.2 Information provided to suppliers
In Part II, respondents were asked what type and the level of detail of information they
provide to some of their suppliers. A scale from 1 to 5 was used to determine the level of
detail of information. Score 5 stood for “detailed information", 4 for “substantial
information” 3 for “some information and 1 represented "no information". Figure 9.5
illustrates the responses according to their distribution and Table 9.3 ranks them by their
mean values.
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Information Transfer
11
10
7 Choice 1
Choice 2
6 Choice 3
5 Choice 4
Choice 5
4
3
0
F. D. Inv. Prod. S. Cap. Log. P. Comp. R&D
Figure 9.5: Upstream Information Transfer
Category Mean
Value
F. D. 4
Prod. S. 3,55
Inv. 3,18
Cap. 2,91
R&D 2,91
Log. 2,73
P. Comp. 2,71
Table 9.3: Mean Values for Information Transfer
According to Table 9.3, upstream information flow is highest on forecasted demand with
a mean value of 4, representing a substantial level. This result is along the line of my
expectations because forecasted demand is the variable upon which most importance is
placed in for example CPFR and in SCM in general. In fact out of 22 companies, 9
indicated that they provide "detailed information" to some of their suppliers. Next highest
information flows are in production schedules (3.55) and inventory (3.18). Having the
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two variables ranking close to each other is not surprising, as they are fully compatible;
production schedules indicate expected inventory levels in the future. Altogether, four
respondents marked 5 for inventory and also 4 have marked 5 for production schedules.
Three of those 4 who marked 5 for inventory and 5 for production schedules are the same
firms. This suggests that some firms might have VMI and overall, that firms are fairly
transparent with respect to their inventory and production schedules. For the rest of the
variables, the level of information provided to suppliers is less than 3, which stands for
"some information". However, if we look at the distribution of product composition and
R&D, we can clearly see that some companies are also very transparent in those areas.
R&D is very costly and collaborating on know-how and in research activities in general
can save a great amount money and lead to synergy.
Overall, responses show that many firms are highly transparent with respect to certain
variables like forecasted demand and inventory. We can conclude that there is an
advanced level of SCM in Finland and that approaches like CPFR and supporting
applications (SCM/SRM) are applied and used to some extent.
9.3.3 Relevance of Factors for Upstream Information Flow
In Part III, companies were asked to indicate the relevance of a number of factors for the
determination of upstream information flow. Similar to Part II, a scale from 1 to 5 was
used to measure relevance. A score of 5 stood for "very relevant”, 4 for “relevant”, 3 for
“quite relevant”, 2 for “weakly relevant and 1 for "non-relevant".
Supplier specific factors
The very first 8 factors were related to supplier's characteristics. Figure 9.6 illustrates the
responses in terms of their distribution and Table 9.4 ranks them according to their mean
values. Responses indicate that organisational quality and standards such as ISO 9000
certificates are most important for companies in determining how much information to
provide to suppliers (mean value: 4.05). The next most important factors are
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technological leadership, financial strength and critical ownership with mean values of
3.76, 3.68 and 3.64 respectively. The extent of operations, company ownership and size,
on the other hand, do not seem to play such a big role for companies as there mean values
are only slightly above 3. This result suggests that local suppliers, small in size and with
different ownership structures are not at a disadvantage compared to large multinational
corporations. Conversely, small firms, if competent and adequate, can perhaps gain
buyers trust more easily. They might be able to offer more customized products as
smaller firms tend to be more flexible in accommodating new requirements. Also, with
smaller firms, it is possible to establish a more personal relationship.
Supplier Specific
12
11
10
9
8
Choice 1
7 Choice 2
6 Choice 3
Choice 4
5
Choice 5
4
3
2
1
0
Company Size Financial Extent of Technologic Quality , Critical
Ownership Strength Operations al Standards ownerships
Leadership
Figure 9.6: Relevance of Supplier Specific Factors
105
Factor Mean
Value
Quality & Standards 4,05
Tech. Leadership 3,76
Financial Strength 3,68
Critical Ownership 3,64
Extent of Operations 3,18
Company Ownership 3,09
Size 3,09
Table 9.4: Mean Values for Supplier Specific Factors
Factors related to supplier's market
The second set of factors related to the supplier's market: to its market share, buyer
numbers and buyer's characteristics. Figure 9.7, depicts the distribution of responses. The
mean scores are presented in Table 9.5
Supplier's Market
8
Choice 1
5
Choice 2
Choice 3
4
Choice 4
Choice 5
3
0
Market share Buyer numbers Buyers characteristics
Figure 9.7: Relevance of Factors on Supplier's Market
106
Factor Mean
Value
Buyers Characteristics 3,14
Market Share 3
Buyer Numbers 2,57
Table 9.5: Mean Values for Factors related to Supplier's Market
From the responses, we can conclude that factors referring to supplier's market are not
considered very relevant. The mean values are around 3, with the buyer's characteristics
being most relevant, a mean score of 3.14. However, my expectation for especially
buyer's characteristics was fairly higher; that is buyers would consider more about the
other customers of their suppliers. Information leakage can arise when the supplier also
supplies to the buyer’s competitor.
Transaction specific factors
The third set of factors that were asked to companies to understand there reasoning was
on transaction specific factors. Figure 9.8 illustrates the distribution of responses and
Table 9.6 their mean values.
Transaction Specific
14
13
12
11
10
9 Choice 1
8 Choice 2
7 Choice 3
6 Choice 4
Choice 5
5
4
3
2
1
0
Frequency Volume On-time delivery Perc. of Accuracy of Documentation
def. material delivery
Figure 9.8: Relevance of Transaction Specific Factors
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Factor Mean
Value
On-time delivery. 4,5
Accuracy 4,27
Perc. of Def. 4,14
material
Documentation 4,14
Volume 3,71
Frequency 3,6
Table 9.6: Mean Values for Transaction Specific Factors
According to the responses, all factors but two have mean values over 4; that is, they are
considered to be more than "relevant". For the other two, which are frequency and
volume, the mean values are 3.6 and 3.71. This result is highly satisfactory. Although
incentives for collaboration between firms get larger with increasing frequency and
volume of transactions, their relative weak relevance in this case (information flow)
suggests that buyer's distinguish the two concepts. They do not provide information to
their suppliers, solely on the volume and frequency basis. Also, from the respect of the
survey design, it gives evidence that questions were correctly understood, that is, not as
factors determining collaboration incentives but as determinants of information flow. On
the other hand, as the Table 9.6 illustrates, factors relating, to on-time delivery,
percentage of defective material, accuracy of delivery, and documentation, all have a
high relevance. This result can be interpreted in the following way. Factors like on-time
delivery of products, percentage of defective material, accuracy of delivery build up trust.
It shows that the supplier respects the buyer and operates efficiently. Therefore, if the
supplier desires to increase trust, it must pay high attention to these factors. With
increasing trust, firms will share more information, which will benefit both the buyer and
supplier.
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Factors related to supplier's products
The section on the factors relating to supplier's products included only 2 factors; on asset
specificity and marketing costs (I) (search cost). Figure 9.9 illustrates the distribution of
responses.
Supplier's Products
8
5 Choice 1
Choice 2
Choice 3
4
Choice 4
Choice 5
3
0
Asset specif icity Marketing costs (1)
Figure 9.9: Relevance of Factors on Supplier's Products
The mean values for these factors are 3.82 and 3.76 for asset specificity and marketing
costs respectively. Furthermore, 7 out of 22 respondents have indicated 5 for asset
specificity and 8 out of 21 for marketing costs. Therefore these two factors do play a
rather important role in determining the level of information to provide to suppliers.
Factors related to buyer's products
A further factor that was measured for relevance was about the certainty/uncertainty of
the demand for buyers’ products as Kaufman & Mohtadi (2003) suggested in their study,
described in section 7.2. Results show that the mean value is 3.95 with Figure 9.10
illustrating the responses. Thus, we can conclude that this factor is relevant in the
decision making process of buyers about the information to provide to suppliers. This
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result is consistent with the study of Kaufman & Mohtadi (2003) who claim that
information sharing and information withholding might take place depending on the
degree of uncertainty about market demand. In other words, if market uncertainty is high,
the buyer may want to withhold information in order to prevent a shift of bargaining
power from the buyer to supplier
Certainty/uncertainty of demand
8
5 Choice 1
Choice 2
4 Choice 3
Choice 4
3 Choice 5
0
Distribution
Figure 9.10: Certainty/Uncertainty of Demand
Factors related to the relationship between buyer and supplier(s)
Finally, the last set of factors in the survey were related to the particular relationship
between the buyer and its suppliers. Figure 9.11 shows the distribution of responses and
Table 9.7 their mean values. According to the responses, we see that most factors are
considered to be relevant. Here, duration, flexibility, length of relationship and
transparency have all a mean of approximately 4 and negotiating and contracting have the
least, around 3.5. Thus, although, costs associated with negotiating and contracting are
very important in transaction cost economics in determining the type of relationship
(collaboration, vertical integration etc.), results suggest that they are not as relevant in
determining the level of information to provide to suppliers.
110
Relational Factors
10
6 Choice 1
Choice 2
5 Choice 3
Choice 4
4 Choice 5
3
0
Duration Flexibility Negotiating Contracting Pattern of Length of Transparency
dependence relationship
Figure 9.11: Relevance of Relational Factors
Factor Mean
Value
Flexibility 4,05
Duration 4
Length 3,95
Transparency 3,95
Pattern of Dependence 3,65
Contracting 3,59
Negotiating 3,45
Table 9.7: Mean Values for Relational Factors
It is also useful to rank factors on a general level, to see which of them are more relevant
independent of the category they fall within. Table 9.8 illustrates the descending mean
values of all factors.
111
Factor Mean
Value
On-time delivery 4,5
Accuracy of delivery 4,27
Percentage of defective material 4,14
Documentation 4,14
Quality & Standards 4,05
Flexibility of Contracts 4,05
Duration of Contracts 4
uncertainty of demand 3,95
Length of relationship 3,95
Transparency 3,95
asset specificity 3,82
Technological Leadership 3,76
Marketing costs (I) 3,76
Volume 3,71
Financial Strength 3,68
Pattern of Dependence 3,65
Critical Ownerships 3,64
Frequency 3,6
Contracting 3,59
Negotiating 3,45
Extent of Operations 3,18
Buyers Characteristics 3,14
Company Ownership 3,09
Size 3,09
Market Share 3
Buyer Numbers 2,57
Table 9.8: Mean Values of all factors
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Furthermore, it was useful to rank the different categories within which the factors fall in.
Therefore, the average of mean values in every category (e.g. supplier specific, relation
specific) were taken and ordered descendingly by category in Table 9.9
Category Average
Transaction Specific 4,06
Certainty for Demand 3,95
Relation Specific 3,8
Product Specific 3,79
Supplier Specific 3,5
Supplier's market Specific 2,9
Table 9.9: Averages for Categories
As seen from Table 9.9, transaction specific factors seem to be most relevant to buyers
when deciding about how much information to share with their suppliers. On the other
hand, factors that solely relate to the characteristics of the supplier such as its size and
market are considered to be less important relatively.
9.3.4 Decision Process/Method
Part IV of the survey aimed to find out more about the decision process and method for
identifying the content of upstream information. The first question asked the respondent
whether they have a formal policy or a strategy at all. Figure 9.12 presents the responses.
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Supplier Evaluation
11
10
9
8
7
No
6 Infor mall y
5 Polic y
4
3
2
1
0
Distribution
Figure 9.12: Method of Supplier Evaluation
Accordingly, 7 out of 22 do not consider exclusively, how much information to provide

to suppliers. Furthermore, 4 companies have some sort of an informal policy, without
supposedly any guidelines of doing so. It is most probably done through an individual's
own judgement, e.g. by the purchasing manager. The other half of companies, that is 11,
indicate that they have a formal policy and method for evaluation.
The second question in this part, question 16, asked those who have a
methodology/policy, how it was developed. The question applied to 14 companies. As
seen from Figure 9.13, only 2 indicated that an external party, e.g. SRM vendor or
consultants, developed it. A low percentage of external involvement could be interpreted
in two ways: Companies perhaps consider themselves more competent and
knowledgeable with this issue. It may also be the case that consultancy on this issue is
not readily available to companies. For the latter case, it would be interesting to find out
if and how much assistance SCM consultants and SRM/SCM vendors can provide.
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Design
12
11
10
9
8
7
In-house
6 Other
t
5
4
3
2
1
0
Distribution
Figure 9.13: Methodology Design
Question 17 also related to methodologies companies use to determine the intensity of

information provided to their suppliers. It asked whether it is possible to classify
suppliers with this methodology so that suppliers within the same category receive the
same type of information. Companies had 3 options to chose from; a b and c. Out of 15
responses (as the question didn't apply to those answered "no" in 15), 9 indicated that
they do classify suppliers. Five indicated that they don't, that is, each supplier is evaluated
individually, and one company chose "a" for not being possible. Figure 9.14 illustrates
the responses.
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Classification Capability
9
6
No
5
Unique
Categorized
4
0
Distribution
Figure 9.14: Classification Capability of the Buyer's Methodology
Furthermore, those who had answered "yes" were asked to indicate the number of
categories they have. For this part of the question, 7 responses were recorded. Responses
varied and ranged from 3 (for 3 companies) up to 20 categories. Although, this is not
sufficient to make any type of conclusion, it does give some idea about companies’
schemes.
Finally, question 18 aimed to find out whether the companies have ever felt/been at risk
because their supplier possessed too much information about them. As seen from Figure
9.15, 7 out of 22 responded with a "yes", meaning that they were at some risk. For this
question, 2 comments were received, one relating to the risk of supplier going to
customer directly (loss of business) and other to copying and to business processes
confidentiality.
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Risk
15
14
13
12
11
10
9
No
8
Yes
7
6
5
4
3
2
1
0
Distribution
Figure 9.15: Are buyers at risk?
A result of one third of the companies being or feeling at risk indicates that this issue
deserves attention.
9.4 A Critical Evaluation of the Research
9.4.1 Statistical Methods
Data analyses in this chapter were made using descriptive statistics. Although, the
research could have also benefited from inferential statistics, particularly from t-tests and
regression analyses, 22 responses were considered not to be sufficient for carrying out
more intensive analyses on the data. Meaningful conclusions from inferential statistics
can only be made with sufficient data. However, had more data been available, t-tests
could have been used to identify if for example any differences exist between large and
small firms with respect to the degree of information shared with suppliers and/or the
relevance of factors. Also multiple regression analyses could have been utilized to take
account of any correlation between the sectors of firms and the relevance of factors
and/or information shared.
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9.4.2 Research Bias
Data used in the analysis was obtained from a questionnaire with a 15% rate of response.
Although this kind of response rate is very common for mailed questionnaires, we must
consider the likelihood of bias in responses. The aim of the questionnaire, among others,
was to find out whether manufacturing firms in Finland have a defined policy on how
much information to share with their suppliers. Thus firms who did not have a policy at
all were less likely to respond to the questionnaire than those who had some kind of a
policy. Therefore, if we take the possibility of bias into account, then we should also
consider its likely impact on research results. Although, I do not think that it will have
much effect on the relevance of factors (their relative importance), it is very likely to
affect part IV of the questionnaire on decision processes and method. Therefore, we can
conclude that if it was possible to analyse the entire sample (or a more faithful
representation of the sample), results could have showed for example that the percentage
of companies without a policy is higher than determined here. This strengthens even
more the need for firms to take action.
In this chapter data obtained through the survey was analysed. Descriptive statistics was
used to identify what information is transmitted to suppliers and which factors are most
relevant in determining the level of detail of upstream information. According to the
results obtained from 22 companies in Finland, information on forecasted demand,
production schedules and inventory are transmitted to suppliers in rather high level of
detail. On the other hand, least information to suppliers is provided on logistics and
product compositions. For the relevance of factors, within a categorical ranking,
transaction specific and relation specific factors are considered to be most relevant
whereas supplier specific and supplier’s market specific factors are found not to be that
relevant. However when we look at factor’s individual mean scores, some factors in the
supplier specific and supplier’s market specific category such as quality & standards and
technological leadership do play an important role. In section 9.4, the reasoning for not
118
using inferential statistics was explained, which was due to the insufficiency of data to
reach any meaningful conclusions through inferential statistics. Finally the possibility of
bias in the research was addressed and its possible impact on results was discussed.
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10. Conclusion
The objective of this final chapter is to conclude the thesis. It is structured in the
following manner: In section 10.2 the main results of the study are presented. This
section also explains why a better insight into collaboration is required. The validity,
reliability and limitations of this research are discussed in section 10.3. Finally section
10.4 gives recommendations for future research.
10.2 Conclusion
The rich literature on the benefits of collaboration coupled with the more recent
emergence of Collaborative Information Systems have a profound impact on the
initiatives of firms to collaborate more tightly with their trading partners. However,
despite the popularity of this subject, little information was available on how companies
actually go about collaboration. Therefore, through this research, I sought to gain an
insight into both, the factors that influence firms’ decisions to collaborate (share
information) with trading partners, and the organizational descision-making mechanisms
involved. The buyer’s perspective was adopted, especially to keep the questionnaire used
in the empirical part relatively short. A review of the theoretical frameworks (e.g. CPFR),
technologies (e.g. ebXML) and applications (e.g. SCM/SRM) was useful to understand
the current capabilities in collaboration. An extensive review of the theory and recent
studies in the field, on the other hand, helped me to identify the present state of
knowledge on collaboration. Finally, the empirical part of the thesis allowed me to make
comparisons between theory/expectations and actual results.
The study shows that buyers in the Finnish manufacturing industry are fairly transparent
with respect to the extent of information they provide to their suppliers, especially on
forecasted demand for their products. Thus we can infer that supply chain management
120
practices such as CPFR, and the utilization of the supporting applications like SRM
solutions, described in chapters 4 and 5, are at an advanced stage. However, stronger
collaboration, in also other areas such as inventory and R&D could generate further
savings to both parties. Opportunities for collaboration in the light of new theories and
applications are almost limitless. However, despite the numerous supporting theories and
availability of its enablers, collaboration, relies very much on trust between supply chain
partners. The factors that were measured according to their relevance give a good insight
into what matters most for buyers. Supply chain partners need to take action upon those
factors with high relevance, if collaboration is to be enhanced. The study also illustrated
to some extent how companies cope with collaboration in practice, whether they have
strict policies about how much information to provide to suppliers. In Finland, results
show that a only a few companies have a formal methodology for this purpose despite the
fact that one third of the companies are admitting that they are at risk because of
information known to their suppliers.
A globalized world with increased competition requires a tighter collaboration between

firms in order to reduce costs. On the other hand, it increases interorganizational
dependence. It takes time to form a trustful relationship with high degree of information
exchange between parties. Once established, it becomes less desirable and more difficult
for buyers to switch to other suppliers. This lock-in in the long run, along with the
findings of Nakayama (2000) and Kaufman & Mohtadi (2003), may lead to supplier's
advantage. An upward shift of power along the supply chain could therefore ruin the
entire purpose of the supply chain management effort. Although, price increases could be
prevented through price fixing agreements, it will be likely that trust will reflect as a
premium on prices in the long run.
On the other hand, with e-market places and procurements auctions becoming common, it
will be much easier to find new and cheaper suppliers through initiatives like web
services and ebXML, described in chapter 3. However supply chain partners will be
reluctant to share information for collaboration purposes as trust can be conveyed
limitedly in the electronic environments mentioned above. One solution to build trust into
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the exchange is by introducing additional data into business descriptions such as ISO
certificates, or some kind of ratings.
Responsibility also falls on SCM consultants, SRM/SCM application vendors and

organizations that advocate collaboration such as the CPFR Committee. They must be
able to provide assistance to their customers by identifying different collaboration
strategies for different supply chains. As in the case of industry specific reference models
in business processes reengineering, also for collaboration, a reference model could be
developed. Also SCM/SRM application providers must develop reliable and secure
systems. Especially, security is very important as much of the confidential company data
such as on products, inventory, and financials is on networks and is communicated over
the Internet.
New management philosophies and software applications as discussed in previous

chapters are promising to cut all kinds of costs. Companies however must think twice
before opening their accounts and information systems to outside parties. This can be
somewhat compared to the dotcom bubble: Companies invested and engaged in e-
business simply because the technology was available. However, little was known about
the dynamics of these newly emerging markets along with its risks. At the end, large
sums of money were lost, due to unprofitable investments, mainly into IT. Thus, the same
mistake should not be repeated and companies must not blindly follow the hypes created
by collaborative software vendors. Collaboration does have great benefits but must be
carried out carefully and in some cases step by step. Losses will not result from sunk
costs as in the dot-com bubble case but will be in the form of lost business, information
leakage, hold up costs and perhaps fraud. In the future, information sharing between
firms is likely to be more intense. Therefore companies with the right trust factor and
appropriate systems will distinguish themselves. This will likely have a positive effect on
the industry standards in terms of rising quality and trust within the industry. However
product differentiation as a "trusted partner" may lead to increased prices.
With this study, I demonstrated the extent supply chain management practices have taken
122
off in Finland. Also, I hope that I was able to shed some light on buyers’ attitude towards
collaboration, particularly on whether they are sufficiently aware about its risks and also
whether they have the appropriate mechanisms to deal with this issue. The relevance of
the factors identified should also serve as guidelines for suppliers who wish to build more
trust into their relationships with their customers.
10.3 Validity and Reliability

Data for the research was obtained through a questionnaire sent out to 150 companies in
Finland. The response rate was about 15%. Although 22 responses were adequate to
make conclusions, a larger response rate would have strengthened the validity of this
research. Also as discussed in detail in section 9.5, a bias in the responses may have been
the case. This should not affect the research results significantly (especially the relevance
of factors) but there is likelihood that data is reflecting companies with a policy on
information sharing more than those without.
As for the reliability of the survey, an iterative correction process with the help of my
supervisor Professor Anders Tallberg ensured the clarity of the questions.
To gain a deeper understanding into firm's attitude and approach to collaboration,

interviews could have been carried out. Also interviews with SCM/SRM consultants
would have led to more knowledge on industry practices. Furthermore, a close inspection
of softwares used for collaboration could have revealed their flexibility in terms of
customisability and the ability to change settings.
As for the generalizability of the study, first of all, the study was restricted to the national
borders of Finland. However, I believe that similar results could be obtained for the
Nordic countries or for Western Europe and US, although the degree of information
exchange may vary.
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10.4 Recommendations for Further Research
Theory and literature on collaboration is rich. However much of the theory, especially, in
economics relates to the era of Non-Collaborative Information Systems. This indicates
that there are many opportunities for further research, particularly on issues like how far
theories still apply to this era.
Focusing upon this study, as I mentioned in section 10.3, interviews with purchasing
managers and a close inspection of companies’ information systems, could have led to an
even better understanding of the decision processes and the configurability/flexibility of
their systems. Therefore a qualitative study or perhaps a case study on a company can
provide more in depth knowledge on certain aspects.
Also, as the study focused on upstream information sharing (especially in the empirical
part), it would be equally interesting to research downstream information sharing. Results
can then be compared with the results of this research.
Furthermore, a study could also use the data and methods identified here (measuring the
magnitude of factors (chapter 8), assigning weights to them by relevance (chapter 9),
level of detail of information (section 5.5)) to develop a decision tree/algorithm
(application) that determines the optimum level of information to share with trading
partners.
124
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Appendix: The Questionnaire
A survey on the factors that influence the intensity of information provided to

suppliers for collaboration purposes.
Instructions and definitions:
The following survey aims to find out how firms as buyers approach collaboration in the
supply chain. Particularly a better insight into the mechanisms that dictate what and how
much information to share with suppliers is sought. To this purpose, it would be also
extremely valuable to provide your personal comments where you find appropriate.
It is useful to define the key terms used within the context of the survey to ensure the
clarity of questions and to avoid confusion.
Collaboration refers to the pattern of decision making, communications and interactions

among supply network members, which helps to plan, monitor and align the multiple
flows associated with the exchanges of materials, components, services, information,
money, people and ideas supporting the key business process across the supply network.
Supplier: A supplier is a firm that provides materials, such as raw materials or product
components, to your company to be used in the manufacturing of your products. Also, in
the context of this survey, a supplier is considered to be an independent entity with a
different ownership and management.
Part I - Company Information and Suppliers:
1. What is the industry in which your company is operating?

Please cross where appropriate.
Automotive……………………………..
Chemicals……………………………….
Consumer Products……………………..
Engineering, Construction………………
High Tech………………………………..
Industrial Machinery & Components……
Mill Products…………………………….
Telecommunications…………………..
133
2. Which of the following apply to your company in terms of annual turnover?
Please cross where appropriate.
less than 10…………………………….
10 – 100………………………………..
100 – 500………………………………
more than 500………………………….
million euros
3. How many suppliers do you have approximately?
------
4. About how many of those are your core-suppliers?
------
5. What is the percentage of products/raw materials supplied to you by your core-

suppliers?
------%
Part II - Information provided to suppliers
Instructions: Please indicate the detail of information you provide.
1 no information -- 2 little information -- 3 some information -- 4 substantial information

5 detailed information
6. Do you provide information to some of your suppliers on forecasted demand for your
products?
12345
7. Do you provide information to some of your suppliers on inventory levels of the

products/raw materials purchased from them?
12345
8. Do you provide information to some of your suppliers on your company's production

schedules that plan to use up the products/raw materials purchased from them?
12345
134
9. Do you provide information to some of your suppliers on your capacity of production
and therefore the rate of usage of the products/raw materials purchased from them?
12345
10. Do you provide information to some of your suppliers on your logistics, that is what
kind of a fleet you have and their capabilities for transporting and distributing the
products/raw materials purchased from them?
12345
11. Do you provide information to some of your suppliers on product compositions (e.g.
Bill of Materials).
12345
12. Do you provide information to some of your suppliers on your R&D (e.g. new
products, new technology, know-how)?
12345
Part III - Factors that influence the decision on how much information to share with
suppliers
13. How relevant are the factors below for determining the kind of information and level
of detail you provide to your suppliers?
1 not relevant -- 2 weakly relevant -- 3 quite relevant -- 4 relevant -- 5 very relevant
Factors related to supplier's characteristics
Company Ownership:……………………………… 1 2 3 4 5
Size:…………………………………………..….… 1 2 3 4 5
Financial Strength: ………………………………… 1 2 3 4 5
Extent of Operations:………………………………. 1 2 3 4 5
(e.g. local, international)
Technological Leadership:…………………………. 1 2 3 4 5
Quality, Standards:………………………………….1 2 3 4 5
(e.g. ISO certificates)
If supplier has critical ownerships in other
companies (e.g. your competitors)…………………. 1 2 3 4 5
135
Factors related to supplier's market
Market share:………………………………………..1 2 3 4 5
Buyer numbers: ……………………………………. 1 2 3 4 5
Buyers and their characteristics:…………………….1 2 3 4 5
(e.g. producing goods that are close
substitutes to your products)
Transaction specific factors
Frequency of transactions: 12345

Volume: 12345
Supplier Performance
a) on-time delivery: ……………………………….. 1 2 3 4 5
b) percentage of defective material:……………….. 1 2 3 4 5
c) accuracy of delivery:……………………………. 1 2 3 4 5
d) documentation:………………………………….. 1 2 3 4 5
(conformance of supplier documentation
to your requirements)
Factors Related to supplier's products
If the supplier made special investment into

machinery etc. to be able to supply the product(s)
to you. 12345
How easy/difficult it is to find another supplier

that could provide you the same material. 12345
Factors related to YOUR products
Certainty/Uncertainty of
demand for YOUR Products 12345
Factors related to your relationship with the supplier
Contracts
a) Duration: 12345
b) Flexibility of contracts 12345
Costs related to time, effort and money of:
136
a) Negotiating: 12345
b) Contracting (Recontracting): 12345
Pattern of Dependence: 12345

(the existence of dependence between
you and your supplier)
Length of Relationship: 12345
Transparency of supplier
(information provided by supplier to the buyer 12345
on its own operations, plans etc.)
(Comment?:)
14. Please indicate below what other factors are relevant for determining the intensity of
information you provide to your suppliers.
---------
---------
---------
Part IV - Decision Process/Method
15. Do you evaluate suppliers so as to determine the intensity of information you provide
to them?
a) no (please proceed to question 18)

b) yes, informally by e.g. rule of thumb (Comment?:)
c) yes, we have a policy, methodology etc.
16. How was the methodology/policy developed?
a) in-house
b) other party: e.g. SRM, SCM vendor, consultants
17. Does this approach/methodology allow you to classify suppliers so that suppliers
within the same category receive same type of information at the same level of detail?
a) no
b) no, every supplier receives different type of information at different levels of detail
based on their unique characteristics
c) yes, suppliers within the same category receive the same type of information
Please explain how it works:
if yes, how many supplier categories do you have? -----------
137
18. Have you ever felt/been at risk because your supplier possessed too much information
about your company?
a) no
b) yes
(Comment?:)
Thank you very much again!
Please return the questionnaire with the envelope provided.
138

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Upstream Information Flow in the Supply Chain: The Case of Finnish

M.Sc. Thesis in Accounting

Title of Thesis: UPSTREAM INFORMATION FLOW IN THE SUPPLY CHAIN:

Table of Contents………………………………………………………………….. iii

3. Communication Technologies Enabling Integration and Collaboration……15

4. Supply Chain Management Practices and Inter-enterprise Applications…. 28

5. Supplier Relationship Management………………………………………….. 44

6. The Economics of Collaboration……………………………………………… 62

8. Factors Affecting Collaboration………………………………………………. 80

10. Conclusion…………………………………………………………………….. 120

Figure 1.1: The Structure of the Thesis………………………………………….… 3

Table 2.1: Major ERP Vendors………………………………………………….… 10

1.1 Background on Collaboration

The management of a company's relationship with its suppliers and customers is as

1.2 Research Objective

The objective of this thesis is to examine interorganizational collaboration mechanisms in

The thesis, as can be seen from Figure 1.1, is structured as follows:

SCM (CPFR,VMI, etc.)

Factors influencing collaboration:

Figure 1.1: The Structure of the Thesis

Chapter 3 presents the communication technologies that enterprise information systems

Supplier Relationship Management (SRM) as a complementary approach, emphasizing

In chapter 6, the literature on transaction cost economics is reviewed, to understand the

Chapter 7 presents previous studies on collaboration and information exchange in the

Chapter 10 evaluates the research findings and concludes the thesis.

2.1 Objective and Structure

2.2 Production and Resource Planning

2.3 Materials Requirement Planning (MRP)

Figure 2.1: An MRP System (Coyle et al 2003, 252)

Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates

Purchasing - purchase orders

2.5 Enterprise Resource Planning (ERP) Systems

Technological novelties and characteristics of ERP systems include the move to

2.6 Summary and Conclusion of this Chapter

3.1 Objective and Structure

This chapter looks at the evolution of the different technologies facilitating

3.2 Electronic Data Interchange (EDI)

EDI is the organization-to-organization, computer-to-computer exchange of business data

3.3 Extensible Markup Language (XML)

“XML is a protocol for containing and managing information on the Internet. It is a

• XML is the basis for a file format

(Fitzgerald 2001, 20)

Also, XML compared to previous inter-enterprise communication technologies like EDI

3.4 Web services

Figure 3.1: UDDI core data structures (UDDI 2004)

3.5 Electronic Business XML (ebXML)

• Core data components

• Collaboration protocol agreements

• Registries and repositories (ebXML 2003)

The Business processes specification provides a generic metamodel for businesses to

Collaboration protocol agreements (CPA) seek to automate much of the process of

4.1 Objective and Structure

4.2 Supply Chain Management

Figure 4.1: Integrated Supply Chain (Coyle et al., 2003, 18)

Orientation Strategic Operative

Table 4.1: Main tasks of SCM (Knolmayer et al. 2002, 6)

4.3 Just-In-Time (JIT)

4.4 Efficient Consumer Response (ECR)

ECR was initiated in 1992 as an industry-wide voluntary effort in US to improve the

• Efficient Store Assortment - addresses how many items to carry in a category,

• Efficient Replenishment - focuses on shortening and eliminating costs in the order

• Efficient Promotion - addresses inefficient promotional practices that tend to