Organization Viewpoint Of Supply Chain

Organizational Viewpoint of the Relationships in Supply Chains Dr. Vojko Potocan, University of Maribor, Slovenia ABSTRACT In modern working relations, a company can improve its business dramatically, especially with formation and performance of suitable management. An important role in the whole management of a company also presents supply chain management (SCM), which represents the integrated concept of managing across the traditional functional areas of purchasing operations and physical distribution. SCM can be defined as “managing the entire chain of raw material supply, manufacture, assembly, and distribution to the end customer.” One of the main concerns about SCM is how much of the supply chain (SC) should be owned by each business. This is called the extent of vertical integration. But in the modern business environment, vertical integrations alone are not enough. The alternative to vertical integration is some other form of relationship, not necessarily ownership. In our contribution, we will examine the relationship between the links of the SC in terms of the flows between the operations involved. These flows may be transformed resources such as materials or transforming resources such as people or equipment. The term link to include all the different types of flow is exchange. This contribution discusses two theses: 1) How (different) relationships in supply chain impact organizing the SC and SCM, and 2) How (different) organizational forms impact SC and SCM. Key words: Organization of management, organization of supply chain, relationships in supply chain, supply chain management. INTRODUCTION Organizations in modern environment are able to assure their existence (and long-term development) with the entire satisfaction of needs and demands of end-customers. Producers can be competitive on the market (because offers predominate over demands) when they offer suitable price, quality, range, uniqueness, and contribution to sustainable development (as judged by customers) (Fly, Stoner, 2000; Cole, 2004; Potocan, 2004; Barry, Hansen, 2008). For this reason they are confronted with the constant dilemma, how to re-form their work (and behavior) to reach the desired target results. Entire and suitable (this is efficient and successful) organizational work can be assured on the following basis: permanent dynamic adaptation of intentions and aims, use of suitable business concept and innovative work (and behavior) (Tsoukas, Knudsen, 2003; Potocan, 2007; Barling, Cooper, 2008). Entire and innovative (understanding) forming and performing purchasing operations and physical distribution also have an important role in business (Nigel, 1996; Mentzen, 2001; Potocan, 2004; Hill, 2007). They define the (possible) level of suitability when assuring the needs (and demands) of end users. The use of logistic and material management in an organization enables (partly) improvement of work, but not (also) “optimization” of the whole production process of products and/or services (in which more organizations collaborate). To deal with the whole supply process many different integrated concepts of managing across the traditional functional areas of purchasing operations and physical distribution were developed (e.g., materials management, merchandising, logistic, supply chain management). SCM presents an ambitious and strategically significant concept, which can be defined as “managing the entire chain of raw material supply, manufacture, assembly, and distribution to the end customer” (Heitzer, Render, 2003; Murphy, Wood, 2004; Christopher, 2005; Ketchen, Hult, 2006; Coyle, 2008). SCM is the most developed integrated concept, but by its use, the organization meets some open dilemmas such as (Potocan, 2007): 1) what sort of connections exist among the part of SC?; 2) what is the role (meaning) of different units (e.g. parts) in the entire (SC)?; and 3) how can we optimize the parts of the entirety (to form structure) to reach “optimal results” of common work? Organizations in the modern business environment need the entity of vertical and horizontal integrations (e.g., relationships) if they wish to design and implement more holistic SC (and/or SCM). In this frame, the work of the SC (and/or SCM) participants can be innovated, especially with non-technological innovations, oriented into suitable organizational forming and organized work (Daft, Steers, 1986; Hatch, 1997; Handfield, Nichols, 2002; Potocan, Kuralt, 2007; Russell, Taylor, 2008).

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Therefore we would like to shift attention from a general-based discussion about SC and/or SCM to a more practical issue: how to plan the organization of relationships in SC (and/or SCM). We offer some new suggestions about: development of integrated concepts for management of SC, types of relationships in supply chains, starting points of organizational structure, and organizational viewpoint of the relationships in SC. INTEGRATED CONCEPTS FOR MANAGEMENT OF SC They are many different ways in which the linkage involved in the flow of materials and services can be integrated or grouped together (Pohlman et al., 2000; Rushton et al., 2001; Heitzer, Render, 2003; Hugos, 2006; Slack et al., 2006; Potocan, Kuralt, 2007). Four main concepts will be presented here. These have focused attention on managing across the traditional functional areas of purchasing operation and physical distribution. They are material management, merchandising, logistics, and supply chain management (Waller, 2003; Cohen, Roussel, 2004; Larson, Halldorsson, 2004; Blanchard, 2006; Halldorsson, 2007; Johnsson, 2008). Materials management: The concept originated from purchasing functions that took account of the importance of integrating material flow in its supporting functions, both throughout the business and out to immediate customers. It includes the functions of purchasing, expediting, inventory management, store management, production planning and control and physical distribution management. At the time of its inception during the 1970s, material management was seen as reducing “total costs associated with the acquisition and management of materials.” Different stages in the movement of material through a multi-echelon system typically are buffered by inventory. Where material management is not in place as an integration concept, these different stages often are managed by different people, reporting to different senior managers within the organization. The result of this separate functional management of the material flow often is high inventory level. The lead time to move materials through the systems is long, the system is inflexible to change, and the whole material movement is difficult to control. Material management means giving responsibility for whole materials and information flow to one part of organization. It then becomes possible to make improvements that allow the coordination, reduction, and even removal to some intermediate inventories. With reduced forecasting, greater accuracy of schedules is possible, bringing about greater planning stability. All this leads to reduced costs, which was the original intention of the concept. Merchandising: In retail operations the purchasing task frequently is combined with the sales and physical distribution task into a role termed merchandising. Merchandising typically has responsibility to organize sales to retail customers, the layout of the shop floor, inventory management, and purchasing. This is because retail purchase operations have to be linked closely to daily sales to ensure the right mixture of goods available for customers to buy at any time. Logistics: Logistics originated during World War II when it related to the movement and coordination of troops, armaments, and munitions to the required location. When adopted by the business world as a concept, it referred to the movement and coordination of finished products. Many organizations have a logistics function that manages the total flow of finished goods downstream from the plant to the customers. Here the term logistic is being used as analogous to what we called earlier “physical distribution management.” However, logistic more recently has been extended to include more of the total flow of materials and information. Some authors adopt a definition of logistics which is identical to that of materials management. But there are some differences between materials management and modern understanding of logistics. Material management does not concentrate on the physical distribution of finished product, but focused more on the planning and control of the processes inside an operation (including Material Requirements Planning - MRP and Just in Time - JIT). Logistics, on the other hand, tends to treat manufacturing as a “black box,” but does provide an emphasis on physical distribution management. These differences, though not great, are present because of the background of the two groups that have originated the concepts. The logisticians tend to come from marketing, the material managers from operation management, particularly purchasing. Supply chain management: During the last twenty years, an even broader, more ambitious and strategically significant concept has emerged - SCM. SCM includes the entire SC from the supply of raw material through manufacture, assembly, and distribution to the end customer. It includes the strategic and long-term consideration of SCM issues as well as the shorter term control of low throughout the SC.

Basic objectives of SCM (Potocan, 2004; Potocan, 2007) are: to focus on satisfying end customers, to formulate and implement strategies based on capturing and retaining end-customer business and to manage the chain effectively and efficiently. The focus on satisfying end customers is because SCM includes all stages in the total flow of materials and information and thus it eventually must include consideration of the final customer. The final customer has the only “real” currency in the SC. All the businesses in the SC pass on portions of that end customer’s money to each other, each retaining a margin for the value it has added. To formulate and implement strategies based on capturing and retaining end-customer business, the key operation in a chain is the strongest business that is in a position to influence and direct the others, so that they work together in the common cause. It also sets the standards and often determines the design of the infrastructure, such as the information systems used, which the downstream dealer network must comply with. Managing the chain effectively and efficiently involves taking a holistic approach to open up opportunities for analysis and improvement. For example, in an SC for innovative products or services, the time for a new product to come to market may be critical. Analyzing the chain as a whole to find out where most time delays currently occur allows the SC manager to focus attention on those “bottleneck” businesses in order to shorten the time to market.

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SCM also can be improved with a suitable organization that enables coordination of cooperation of all participants when satisfying the needs (and demands) of end customers. TYPES OF RELATIONSHIPS IN SUPPLY CHAINS The relationship between the links of the SC will be examined in more detail in terms of flows between the operations involved (Daft, Steers, 1986; Nigel, 1996; Hatch, 1997; Pohlman et al., 2000; Handfield, Nichols, 2002; Daft, 2003; Waller, 2003; Cohen, Roussel, 2004; Murphy, Wood, 2004; Blanchard, 2006; Slack, 2006; Potocan, 2007; Coyle, 2008; Jonsson, 2008). These flows may be of transformed resources such as materials or of transforming resources such as people or equipment. The term used to include all different types of flow is exchange. The exact nature of the relationship between the different linkages within the SC can be viewed on a continuum which goes from highly integrated at one extreme to temporary and short-term trading commitments at the other. The different relationship types that we will present briefly are: integrated hierarchy, semi-hierarchy, cocontracting, coordinated contracting, coordinated review links, long-term trading commitment, medium-term trading commitment, and short-term trading commitment. Integrated hierarchy: What is known as an integrated hierarchy is a fully vertically integrated firm that houses all activities in the SC, from raw material source to dispatch to end customers, as well as all their support activities on one site. In an integrated hierarchy, there is no inter-company exchange of orders, information and materials because the entire SC is “under one roof.” Examples of totally vertical integrated chain are rare. Semi-hierarchy: In a semi-hierarchy organization the firms in the SC are owned by the same holding company or are part of the same group, but they operate as separate business units. Both integrated hierarchy and semi-hierarchy are examples of vertical integration, as ownership is by the same firm in both cases. In semi-hierarchy, however, there is an exchange process between different organizations where materials, services and money change hands between the separate business units. Co-contracting: Co-contracting is a term used to describe an alliance between organizations that have a long-term relationship (e.g., co-contracting as partnership or lean supply) but which, for various reasons, do not merge but do transfer some equipment (ownership), technology, people, and information, as well as goods and services. These alliances typically do not include the whole supply chain. A type of co-contracting receiving significant attention is partnership. In partnership, the supplier is a stakeholder in the customer’s organization. Partnership is a long-term process and should not be viewed as an instant costsaving exercise but rather as an investment in which future returns are possible but only in the medium to long term. SCM literature also proposed a model of customer-supplier relationship that moves beyond simple partnership, which it calls lean supply. Whereas in partnership relationship the supplier still is a junior partner in lean supply, both supplier and customers are equal partners. However, the partners do not lose their own legal identity, as by mergers or acquisitions. Coordinated contracting: Coordinated contracting involves a prime contractor who employs a set of subcontractors, with whom a long-standing relationship exists over several contracts. They are used on a contract basis of each specific job but there is no continuing relationship between jobs. In coordinated contracting, the contractor usually provides the specifications and instructions for the production of goods and services to be exchanged. It may provide materials and usually will take responsibility for planning and control of all the subcontractors. The subcontractors often will provide the necessary tools and equipment required for their trade or profession. Coordinated revenue links: Coordinated revenue links are used primarily for licensing and franchising and are a form of relationship that transfers ownership to other, usually smaller, firms while still retaining a guaranteed income for the licensor or franchiser. This type of relationship is common in many services, especially those with very high customer contact. These operations need many small local sites that can be located for the convenience of their customers. Rather than manage all the sites themselves, the original owners of the service concept will license out each individual operation to separate owners. Medium-/long-term trading commitment: It is not uncommon for businesses to trade with each other for twenty years or more but never exchange formal long-term contracts that legally tie them together. However, where this medium- to long-term trading takes place, some commitment beyond each delivery of a different type can be made. One example is what is called a “blanket order.” This is an agreement for the purchasing organization to buy a total volume over a period of time at a price determined by the total, rather than the individual daily, weekly or monthly purchased quantity. Short-term trading commitment: In situations in which there is no interdependence beyond one order, all that is transferred between the parties to the transactions are the order one way and goods and services the other. The agreement is reached after a market search, sometimes competitive tendering, and often price negotiation. Once the good or service is delivered and payment is made, there may be no further trading between the parties. Short-term relationships may be used when

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companies are being considered as more regular suppliers. Many purchases made by all operations are one-off or very irregular. Some public sector purchasing of goods and services still is based on short-term contracts. This is mainly because of the need to prove that public money is being spent as judiciously as possible. However, this short-term, price-oriented type of relationship can have a downside in terms of ongoing support and reliability.

The different types of relationship and the main elements of exchange in the relationship are summarized in Table 1. Relationship type Integrated Hierarchy Semi-hierarchy Co-contracting Coordinated contracting Coordinated revenue links Long-term trading commitment Medium-term trading commitment Medium-term trading commitment

Exchange elements People, materials, goods and services, technology, information, money, equipment People, materials, goods and services, technology, information, money, equipment, centralized control, divisional reporting Medium-/long-term contract, technology, people, materials, good, service, knowledge Specification, payment, planning and control information, materials Contract, performance measures, specification of processes and products/service, brand package, facilities, training Reservation of future capacity, goods, and services, payments, demand information Partial commitment to future works, reservation of capacity, goods, specification Goods and services, payment, order documentation

Examples Single product of firms, e.g., paper Multi-division firm, holding company, e.g., chemicals, food Co-maker ship, joint venture e.g., automotive Projects, e.g., construction Licensing, franchising, e.g., fast-food chains Single and dual source, blanker order, e.g., electronics Preferred supplier, e.g., defense Spot orders, e.g., stationery purchase

Table 1: Exchange in different types of relationship

Represented types of relationships and SC can be formed in different ways. For that reason, we use different starting points and organization forms. From the whole problematic of organizing different types of relationships and SC, we are going to represent (chosen) important starting points to form organizational structure meant for their work. STARTING POINTS FOR CREATION OF ORGANIZATIONAL STRUCTURE Managers (or influential participants) deal with two basic problems when forming the organizational structures of different types of relationships in SC (Daft, 2001; Harmon, 2003; Tsoukas, Knudsen, 2003; Cole, 2004; Jones, 2004; Potocan, 2007; Barling, Cooper, 2008; Barry, Hansen, 2008). The first represent the fact, that the structure follows the organizational strategy and reflects it. For that reason, we are not able to talk about proper structure without previous (and whole) suitable (and recognizable) defined strategy. Thereby, the organization can choose for its (chosen) strategy different types of organizational structure, which enable the required coordination of activities to reach its aim and intention (see also: Potocan, 2004; Potocan, 2007). On the other side, we can use single organizational structures in different situations, which at the same time are suitable to satisfy different needs and demands of an organization (see also Potocan, 2004; Potocan, 2007). Both viewpoints of the problem – choosing the proper structure – are partly solved by the contingent access, which is based on the presumption that by forming organizational structure, all managers have to consider specific needs and demands of an organization and specific (contextual) characteristics of its work (more about contingent access in Daft, Steers, 1986; Fly, Stoner, 2000; Tsoukas, Knudsen, 2003; Barry, Hansen, 2008). Because of what is mentioned in organizational and management theory (and business practice), general valid solutions for organization of different types of relationships in SC do not exist (see Potocan, 2004; Potocan, 2007). On the first view such a statement is contrary to cognitions of different other disciplines, as for example law, economy, etc. Companies act to define different possible forms of organizing companies, and with that also forms of organizing companies, which are based on different types of relationships in SC. Different forms are especially general rules of organizing, which refer to ownership relations, principles of management, etc. Organizing work and the choice of the organizational structure are (to a great extent) independent from the chosen legal form of organizational structure. But in reality, the owners and other influential participants have

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(direct) influence on the organization and the choice of the organizational structure. The basic dilemma of the planners is to search (and assure) the balance between the vertical mastering and horizontal coordination of organizational work in accordance with the organization’s needs and demands (Potocan, 2007; Potocan, Kuralt, 2007). Vertical dealing is connected with aims of efficiency and stability. Horizontal coordination is connected with aims of success, innovation, and flexibility. Figure 1 shows the relation between the organizational structure (and chosen forms of organizational structure) on one side and the organizational needs for efficiency and success on the other (adapted from Daft, 2003). Different organizational structures can be defined as vertical or horizontal (Hatch, 1997; Harmon, 2003; Tsoukas, Knudsen, 2003; Cole, 2004; Potocan, 2004; Potocan, 2007; Barling, Cooper, 2008). Their basic characteristics are: Vertical (or functional) organizational structure is suitable to handle the organizational work, when the work is based on vertical hierarchy and when efficiency is important to reach the aims. Such structure (can) work on the basis of an exact specialization and enable the efficient use of the mentioned organizational sources. But its use limits the possibilities to increase the flexibility and innovation of work. The horizontal structure is suitable for the organizational work, which needs more coordination between functions, when reaching innovation and work success. Such organizational structure enables the performance of interior differentiation of work and improvement of its response (quicker reacting) to environmental changes.

Functional structure

Functional with cross-functional teams, integrators

Matrix structure

Horizontal structure

Horizontal:

PROCESS STRUCTURAL

Divisional structure

Dominant approach

Vertical:

- Coordination -Effectiveness - Flexibility - Inovativeness

- Control - Efficiency - Stability - Reliability

Figure 1: Relationship of structure to organization’s need for Efficiency vs. Effectiveness

Figure 1 also represents how the organization (on single levels of work) is able to use different organizational structures to balance the needs after vertical control and efficiency on one side and innovation and success on the other. The figure shows different possible forms of organizational structures, which appear in the process of transformation from vertical to horizontal structure. Management (and other influential participants) therefore has to improve the process of transformation of organizational structure all the time. The needs and demands of an organization can be supported more suitably with the structure when we also consider the important connections of the organization. HOW TO ORGANIZE RELATIONSHIPS IN SC Organizing can be improved when we also consider (and research) the comprehensive (needed) connections (of work and behavior) of an organization (See Daft, 2001, Daft, 2003; Tsaukas, Knudsen, 2003; Potocan, 2004; Potocan, 2007; Potocan, Kuralt, 2007; Barry, Hansen, 2008). When an organizational form does not

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suit the informational needs of an organization, the participants will not have enough information or will occupy themselves with processing unnecessary information. The basic problem by forming a comprehensive informational flow of each organization (and structure of organizations, which are based on different relationships in SC) is (“natural”) opposition between the vertical and horizontal informational flow and informational connections that they include (Potocan, 2004; Potocan, 2007). The vertical connections are formed (especially) to assure work control and behavior of an organization. Horizontal connections are meant to assure and perform cooperation and coordination, which consecutively lowers (the level and extent) of control. The organization can use to form a desired structure: 1) a traditional plan of organizational structure which is based on vertical communication and control and is oriented to reach the aims of work efficiency, and 2) modern planned of organizational structure, which is based on horizontal communication and coordination and is oriented to reach the aims of work success. Figure 2 represents the relation between organizational forms and different structure accesses to its forming (adapted from Daft, 2003). Vertical Organization Designed for Efficiency

Horizontal Organization Designed for Effectiveness

Horizontal structure is dominant

Dominant Structural Approach

- Shared tasks, empowerment - Relaxed hierarchy, few rules - Horizontal communication, face-to-face - Many teams and task forces - Decentralized DM Vertical structure is dominant - Specialized tasks - Strict hierarchy, many rules - Vertical communication and reporting system - Few teams, task forces, or integrators - Centralized DM

Figure 2: The relationship of organization design to vertical vs. horizontal structure

In traditional organizational structures, the following is influence the aim when we try to reach the desired level of control: work and task specialization, higher hierarchy, authority, (exact) rules and regulations for work, use of formal informational systems, individual work performance, and centralized decision making. On the other hand, the working success of modern organizational structure is based on division of work and tasks, lower hierarchy, minor use of rules and regulations, introduction of direct (individual) communication, group work, and informal —not decentralized—decision making. Each organization has to form a structure that includes balanced integrity of vertical and horizontal informational connections. From the problematic – when discussing integrity of informational connections of an organization – we present the chosen starting points and basic characteristics of vertical and horizontal informational connections. CONCLUSIONS A supply chain is a strand, or chain, of operations that passes through an organization’s supply network. Many different terms (and the concepts described by them – e.g., purchasing and supply management, physical distribution management, logistics, merchandising, material management, and SCM), some of which overlap are used to describes various parts of the SC. They represent an increasing degree of integration among the SC linkages.

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SCM is a broader and strategically more significant concept that includes the entire SC, from the supply of raw materials through manufacture, assembly, and distribution, to the end customer. It includes the strategic and long-term consideration of SCM issues as well as the shorter term control of flow throughout the SC. The exact nature of the relationship among the different linkages within the SC can be viewed on a continuum that goes from highly integrated at one extreme to temporary and short-term trading commitments at the other. The organization tries to define the totality of working tasks, their mutual relationships, connections and synergies, as well as mechanisms for the suitable connection and coordination of organizational factors. For the formation of the working structure, the organization is able to use different starting points. Modern conditions of work demand that organizations include into the structure plans the characteristics of the informational process needed for the realization of organizational aims. The organization can use the traditional or modern plan for the formation of the structure. The traditional access to the formation of the structure is based on considering vertical informational connections. But for most organizations, the vertical connections are not enough, so they fulfill them with horizontal connections. For the formation of the organizational structure, the organization can use functional grouping, divisional grouping, grouping with more viewpoints, and horizontal grouping. Different structures in the frame of functional, divisional, and horizontal structures define different levels of coordination and integration of an organization. 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