Managing Supply Chain Risk With Esi

A Case Study And Research Proposition

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Mirza Muhammad Qayyum Baig Muhammad Umar Hammad Mahmud butt Shoiab Malik

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Introduction to ESI Benefit and Drawbacks of ESI An agency theory perspective of ESI Variables of ESI Rolls-Royce background ESI at Rolls-Royce Propositions for future research Managerial implication Conclusion

Early supplier involvement (ESI) highly effective

supply chain integrative techniques. - Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques. Objective of ESI: Management of supply chain risk in new product development and the upstream supply chain •Vertical cooperation – design & concept – Reduce development time – Better product quality – Improved costs – RISKS: sequencing, shortages, incapable suppliers

• Reduce the product life cycle cost • Improve the product quality • Utilization of supplier technological expertise • Management of cost • Competitive edge • High level of creativity and innovation

• Increase of product and development cost • Improper sequencing of task • Incorrect level of supplier involvement • Organization resistance • Selection of incapable supplier

Definition:An agency relationship is said to exist between two parties when one, designated as the principle, engages another, designated as the agent to perform some service on their behalf, which involves delegating some decision making authority (Eisenhardt 1988, Jensen & Meckling 1976, Levinthal 1986)

Assumptions:

Individuals are:

- Bounded rational (they are unable to process all information available) - Self interested (the work principally for their own benefit) - Prone to opportunism (they are effort averse) - Risk averse (they prefer safety over uncertainty)

Uncertainty Graphic Agency theory representation: based model

Moral hazard Adverse selection

Risk averse Goal conflict behaviour Solutions: Two broad types of governance mechanisms are used to resolve agency problems: - Investing in information to verify the agent’s behavior - Engaging in optimal contracting that aligns the interests of agents and principals Outcome based Behavior based contracts contract

(e.g. salary, hierarchical governance): Most efficient when the behavior of the agent is observable or easy to verify through information systems*

(e.g. bonus, performance based/variable pay): Most efficient when the behavior of the agent is difficult to observe or expensive to verify (info asymmetry)*

• Single case study • Face to face interview • Telephone conversation • Conducting structural interview

Civil

Defence

Marine

Energy

• A global business • £24bn order book • £6.6bn annual sales • £663m R&D • 36,000 employees • 7,600 engineers • Supporting four market sectors

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• ROLLS ROYCE Aerospace Industry is cost and reliability and required extensive R&D – New product development 3-4 years – ESI 1999 – Total investment before return $500-600 million – 80 % of product cost are locked in during the design phase – SUPPLY COST REDUCTION: • Reduced threat of excessive costs, easier to handle changes • Reduced legal liabilities, fewer quality problems • Less supplier capacity constraints, shorter development time Pan Pacific Conference 2008

Risk source • • • • • • •

Excessive cost Legal liabilities Quality problem Supplier capacity constraints Extended product development times Inability to handle design Supplier organization leadership issues

Outcome uncertainty Task programmabi lity

ESI

Goal congruenc y Adverse selection Supplier performan ce

Product failure reduction Excessive cost Extended product design

Supplier failure reduction Quality problem Technological expertise Leadership issues

• ESI reduce risk in new product development from product failure by managing outcome uncertainty • ESI reduce risk in new product development from supplier failure by programming and monitoring supplier task and accomplishment • ESI reduce risk in new product development from supplier failure by creating goal congruency between the purchasing and supplier organization. • ESI reduce risk in new product development from supplier failure by avoiding adverse selection and moral hazard. • ESI reduce risk in new product development from supplier failure by allowing firm to better monitor supplier activates.

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Reducing outcome uncertainty Creating task programmability Creating goal congruency Avoiding adverse selection and moral hazards • Monitoring supplier performance

• Critically analyze ESI • Build capacity for organizational ESI initiative • Detection of potential risk stemming both product design and supplier performance • Reducing cost implementation of ESI • Development of effective monitoring and collaborative relationship • Keep in mind Risk management point of view