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March, 2012

Network Theory Special Issue


Special Issue Introduction – Network Theory in Supply Chain Research This month’s special issue is on Network Theory and its implications on supply chain research. Much of what has been learned in network theory has evolved in the biological and social sciences as these fields have studied the impact that relationships among life forms have on both the survival and development of those life forms. Learning, competition and evolution all play important roles in this field of study. Application to the field of business is a natural extension of this study and has been developed to a large extent in the strategy and organizational behavior fields. Recently, however, network theory has increasingly been finding its way into research in supply chain management. Herein, however, we find a dichotomy of research focus. On the one hand, relationship management research and economic analysis focus on either a focal firm or on a supply chain dyad as their unit of analysis. This focus is largely driven by the contract, which is negotiated and entered into by two parties. Thus how and why firms enter into certain contracts and how relationships are governed by various contractual mechanisms is a critical field of study. On the other hand, network theory focuses on the entire network as the unit of analysis and argues that the structure and dynamics that characterize the network have statistically significant implications on how that network performs. We argue that both points of view are critical to understanding high performing supply chains. Ultimately, it is two hands that shake hands and two firms that enter into purchasing agreements. How those firms behave in their negotiations, however, is largely determined not only by the dynamics of the dyadic relationship, but is also influenced by the dynamics that exist in their dealings with the supply chain network in general. Thus, a dual-pronged approach is best advised where theory and findings from both fields are shared and assimilated amongst each other. This level of research, however, is still in its nascent stage and much of what is published in supply chain research argues the virtues of one view over the other. In this special issue, however, it is our intent to expose the reader to exemplary articles from both fields of research. Of particular interest is the research written by Thomas Choi and Zhaohui Wu (2009) who advocate the triad as the unit of analysis germane to supply chain research. This research has merit in that it extends the view of dyadic relationship analysis, and is the first in supply chain research to try and bridge the gap between both fields; yet it falls short of fully comprehending the impact that other network properties may have on the dynamics within the triadic relationship. As supply chain researchers continue to leverage the learnings and expertise of network theory already developed in the biological and social sciences, new and important findings are likely to emerge. Given the richness in the blend of social and economic interactions that take place in supply chain relationships, it will not be unexpected when new theory emerges from supply chain research that may benefit even the biological and social sciences. We hope you enjoy this special issue.

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Title: Finding, Forming and Performing: Creating Networks for Discontinuous Innovation Journal: California Management Review, 2007, Vol.49 No.3, Authors: Julian Birkinshaw, John Bessant, Rick Delbridge Key Words: network management, relationship building, alliances, innovation Overview: A dynamic market generates the challenge of managing a supply base that can help a firm innovate for changing market needs. Oft times it becomes necessary to reconfigure the supply base in order to access new sources of innovation in order to remain relevant in the marketplace. This article discusses the challenges of conducting such a reconfiguration. It also outlines a typology that categorizes the search for a new supplier along two dimensions: 1) the difficulty in finding the new potential partner and 2) How willing the potential partner is to develop a new relationship with the search firm. The authors summarize their key take-aways in table 3 at the end of the article: •

Creating new networks involves two distinct activities: Finding the right prospective partners, and Forming relationships with those prospective partners.

There are substantial barriers to each activity. •

Where the challenges in finding and forming relationships are relatively low, approach potential new partners directly, and structure the relationship to minimize whatever obstacles separate you

Where the challenge is mostly around finding new partners, approach them through boundary spanners or scouts who specialize in such activities, and work very hard on building the capability to absorb insights from these partners

Where the challenge is mostly around forming new relationships with prospective partners, focus on the higher-order purpose that transcends your ideological differences, and try to identify cross-over individuals who can link the two sides

Where the challenge involves finding and forming new networks, be prepared to work with specialist and independent network-builders to bridge the gap, and look for ways of gradually breaking down barriers to enable some of the approaches identified above to work.

Once the new relationships have been formed, there are a number of things to keep in mind to turn them into high-performing networks: continually keep the network fresh and engaged, build trust and reciprocity across the network, understand your own position in the network, and learn when to “let go” of old relationships.

This articles helps shed light on the process of managing a dynamic supply chain network. Again, as seen in many of the articles in this month’s special issue, the theme of relationship management is central to a firm’s success in managing its supply chain network.

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Title: On Social Network Analysis in a Supply Chain Context Journal: Journal of Supply Chain Management, Spring 2009, pp. 1-17 Authors: Stephen P. Borgatti and Xun Li Key Words: Social network analysis, Supply chain management Full text available Overview: Social network analysis has proven to be applicable to many fields of research. In this article, the authors give a general overview of social network analysis and then discuss how it can be applied in a supply chain context. Essential to network analysis are the actors or nodes and the ties that link them and the assumption that actors are not independent. There are different types of ties that can exist simultaneously between the same actors, a condition called multiplexity. The basic unit of analysis is the dyad (two actors that are tied together), but network analysis takes into account all pairs of dyads and how the interactions between those dyads influence the other actors in the network. Sometimes rather than examining an entire network, it is more useful to look at the “ego” network. This is made of three parts: the focal actor or “ego,” the other actors who have ties to the “ego” called “alters,” and all ties between and among the ego and alters. All social network research tries to answer either homogeneity or performance questions. Three basic mechanisms contribute to social network analysis. First, the transmission mechanism can be simplified by picturing ties as pipeline or roads that transmit “traffic.” Second, the coordination or bonding mechanism pictures ties as bones or chemical bonds providing structure to otherwise independent parts. Third, the adaptive mechanism describes the idea that as in biology, actors respond and change based on their surroundings and when different actors are exposed to identical surroundings, similar response and change will take place. Several specific concepts are especially suited for research in the supply chain context. Selecting Nodes and Ties – Because of the complexity of networks, this is more a matter of definition with respect to what is being studied. Multi-tiered data collection can be problematic due to confidentiality or legal constraints, but can be overcome through several established methods e.g. aggregation. Structural holes – These describe the sparseness or density of ties surrounding an ego network. Sparseness can have positive or negative impacts depending on the type of tie and the flow between the actors. Hubs and Authorities – Hubs are nodes that point to popular sites (authorities). Authorities are “nodes that receive links from hubs. “ A typology of the supply chain context is presented that defines firms in terms of agility, procurement, sales, and comfort level based on hub and authority scores. Node Centrality – This is defined as “the importance of a node due to its structural position in the network as a whole. The concepts of closeness, eigenvector, and betweenness centrality are especially important here. ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

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Cohesive Subgroups – These are readily seen parts of a network that are highly cohesive. One example of cohesion is density. Equivalence – Knowledge of an entire network is not necessary to examine structural equivalence. Two firms are structurally equivalent if they have the same suppliers and customers. Regular equivalence is a less constrained notion that only requires equivalent alters. Both types of equivalence can be reduced to a blockmodel or reduced model of the network. Whole Network Properties – As in ecology, looking at the entire supply “web” rather than a supply chain may reveal interesting patterns of transitivity, cycles and reciprocity. Bipartite Graphs – This is a network where the nodes are naturally divided into two classes (i.e. buyers and sellers). Ties only exist between the classes not among them. When viewed from a whole network perspective, there may sometimes be nodes that serve as intermediary nodes linking the two classes that when removed reveal this bipartite behavior. It is important to examine both hard and soft ties as both have an impact on networks. Network analysis in other fields of social science lends itself to application in the supply chain setting. Embracing social network analysis in the supply chain context has the potential to unite the many forms of management research.

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Title: Triads in Supply Networks: Theorizing Buyer-Supplier Relationships Journal: Journal of Supply Chain Management, 2009, Vol.45 No.1, pp.8-25 Authors: Thomas Y. Choi and Zhaohui Wu Key Words: network analysis, supply chain relationship management, triads, purchasing strategies Full text available Overview: Choi and Wu argue in this conceptual article that the supply chain triad is the basic unit of analysis in a supply chain network analysis. A triad here is defined as two suppliers and one buying company. The argument is made that a dyadic relationship may be significantly influenced by the relationship dynamics associated with a third party and that to better understand supply chain relationships one must understand how these dynamics play out. The study is based on the theoretical groundwork of balance theory, which was established in the field of sociology during the 1950’s. Balance theory looks at the status of relationships among three parties and defines the triadic relationship as either stable or not stable. It is predicted that the “not stable” relationships will tend to migrate towards a stable state. This theory is applied to buyer-supplier-supplier relationships in order to better understand the dynamics that take place in an industrial purchasing context. The first “stable” state is one in which a buyer has a positive relationship with both suppliers A and B and the suppliers in turn have a positive relationship with each other. This is considered a highly collaborative triad where even suppliers will work together given the trust and good relationships already established with the buyer. The second “stable” state is one which a buyer has a positive relationship with one supplier, a negative relationship with the other supplier, and a negative relationship exists between the suppliers. While this situation may not be strategically ideal, it is in a state of balance from a perceived equity standpoint. One supplier is favored over the other and the suppliers in turn do not form a strong alliance with each other. If the suppliers did share a positive relationship, then a perception of inequity would most likely arise, resulting in either a propensity for the suppliers to be at odds once again, or for the positive supplier to turn against the buyer. In fact, a sense of perceived equity is a critical theoretical foundation that is cited in all of these scenarios. The third “stable” state is one in which the buyer has a negative relationship with both suppliers and in turn both suppliers have a positive relationship with each other. This arises as the suppliers realize that they both share a common adversary and a feeling of mutual understanding could lead the suppliers to establish an alliance in dealing with the buyer. This article provides an interesting bridge between a full network analysis approach to analyzing supply chain management and the more common dyadic approach. While the dyadic approach allows for a more rich analysis of relationship dynamics as they actually unfold, it typically does not consider the influence that network structure has on how entities in the dyad behave. Given the importance of understanding the dynamics of relationships in supply chain management, study of the triad as advocated may give us the best of both worlds.

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Title: The Severity of Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities Journal: Decision Sciences, 2007 Vol.38 No.1, pp. 131-156 Authors: Christopher Craighead, Jennifer Blackhurst, M. Johnny Rungtusanatham, Robert B. Handfield Key Words: risk management, network analysis, supply chain disruptions, resilience Full text available Overview: This conceptual article explores the factors that contribute towards the severity of supply chain disruptions. What is unique in this paper, is the focus on network level variables and the message that in order to more fully understand supply chain risk, one must look not only at individual nodes in a supply chain, but must also analyze the entire network. Authors Criaghead et.al. discuss three distinct supply chain network design characteristics: density, complexity and node criticality. First, density is defined as the level of physical concentration of various entities in the supply chain. A supply chain where suppliers are clustered near one another has a higher density than a supply chain where the suppliers are spread apart geographically. The authors argue that a more dense supply chain will experience more severe disruptions as compared to supply chains that are less dense. This is logical given examples from recent natural disasters where a single disruptive event could impact many nodes in a supply chain if those nodes are clustered near one another. Complexity is the next design characteristic discussed. Complexity is the summation of the number of nodes in a supply chain and the number of ways in which those nodes are connected with both material and information flow. It is posited that a supply chain characterized by a high level of complexity will experience a higher level of severity during a disruption as compared to a supply chain with a lower level of complexity. This arises from the fact that a disruption at one node may have a far reaching impact across multiple nodes in a complex supply chain where numerous interdependent relationships exist. Finally, node criticality also plays an important role in anticipating severity in a supply chain disruption. The more critical a node is, the more severe would be the consequences in the event of a disruption. Case in point is the comparison of an antennae supplier (automotive industry) versus a wheel supplier (automotive industry). A disruption from an antennae supplier would not necessarily stop an automotive production line since vehicles can be retrofitted with antennas after general assembly. A disruption from a wheel supplier, however, could have a devastating impact on an automotive assembly operation since vehicles cannot be driven off the assembly line without wheels. The case of the later illustrates the increased severity associated with a more critical node.

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Title: Studying Supply Chains From a Social Network Perspective Journal: Journal of Supply Chain Management, January 2011, vol. 47, no.1, pp. 4-7 Authors: Joseph Galaskiewicz Key Words: Social network analysis, Supply chain management, Small-world network, Dynamic network visualization Full text available Overview: In this article, Galskiewicz addresses how social network analysis can contribute to the study of supply chain management and organizational theory. Pointing out that social networks are present at the boundaries of interorganizational networks, he argues that the relationships that make up these social networks help explain how interorganizational networks are created and destroyed and also why they succeed or fail. He makes a few points of clarification essential to his argument. First, the study of social networks in the context of his essay relies on behavioral psychology theories that have been applied to organizations. Second, rather than looking at the movement of content, social network analysis seeks to model the relationships and context of interactions. Network theory is applicable to supply chain management with some caveats. The challenge of identifying a single function, the fact that different stages along the supply chain produce and encounter different issues, the pairing of different functional areas, and the variability of governance over interorganizational relationships make it difficult to write an all-encompassing SCM network theory. One more key factor whenever networks and relationships are involved is trust. Trust can be the lubricant that mitigates risk and allows information to flow more freely, but there are concerns. Ties that are too strong can cause problems. In addition, networks tend to be local entities while supply chains may be complex and long. The essential message for supply chain researchers is that social networks at the boundaries of a supply chain are a key part of building trust leading to better information exchange, cooperation and coordination. Particular issues that lend themselves to network analysis center around how to build networks that encourage trust in spite of a complex supply chain. This would incorporate the transportation costs and transaction costs due to the lack of social networks. One idea is to look at the supply chain as a smallworld network. These tend to be highly clustered groupings, with short paths and can be very efficient. Two strategies are required: amalgamation (uniting nodes “under one cultural or normative system�) and decoupling (making the product or idea agile enough to move from cluster to cluster). Finally, the author presents dynamic network visualization as a new methodology for this type of research. In particular, he describes Social Network Image Animator (SoNIA) that go beyond looking at snapshots of networks to watching how they change in real time. He cautions researchers to not overlook the importance of the social relationships that underpin networks and foster trust as they incorporate social network analysis.

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Title: The Amplified Enterprise: Using Social Media to Expand Organizational Capabilities Journal: MIT Sloan Management Review, November 2011, pp. 1-5 Authors: Mark McDonald and Anthony Bradley Key Words: Social Media, Purpose, Collaboration Full text available Overview: In this article, David Kiron, executive editor of SMR, interviews Mark McDonald and Anthony Bradley from Gartner, Inc. to discuss the observations they share in their book The Social Organization: How to Use Social Media to Tap the Collective Genius of Your Customers and Employees. Gartner is an information technology research and advisory company. They argue that though many companies have embraced social media, they miss the most beneficial aspects by focusing solely on marketing and/or communication. Through their work, they noticed that many companies implemented social media with the hope of seeing results, but those results never materialized. In addition, the policies almost always centered on fear – fear of negative repercussions should an employee make a mistake and fear that users would fail to be responsible. Examining the myth and reality, they certify that to take advantage of social media is not effortless and cheap. Another myth is that popularity is all-important (i.e. the number of “likes”). The truth is that when done correctly, social media has the power to create communities within the company that are more efficient and productive and are not just limited to communication initiatives. The key here is to have purposeful intent. To overcome misplaced attitudes, Bradley and McDonald discuss the Six F’s. Fear Folly and Flippant are attitudes that limit the power of social media. Formulating, Forging and Fusing attitudes enable social media to engender greater collaboration. Some examples of successful implementation of social media are described as peer-to-peer collaboration, or a company wide blog and can cover a range of areas such as engineering, supply-chain management, and organizational change. It does not seem to matter who drives the initiative within the company. The one key to success is purpose. The social communities must be centered on a single purpose. Identifying a purpose that employees have a direct interest in will have a greater impact than requiring participation. This is different than focusing on the technology of social media. The process of initiating this type of collaborative change may seem overwhelming, but when done stepby-step it is possible to create social communities that are personal, foster interaction with customers and colleagues, and allow individuals to be part of the process.

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Title: Learning From Collaboration: Knowledge and Networks in the Biotechnology and Pharmaceutical Industries Journal: California Management Review, Spring 1998, pp. 228-240 Authors: Walter W. Powell Key Words: Collaboration, network management, innovation, biotech industry Full text available Overview: The biotechnology and pharmaceutical industries present an interesting platform for examining collaboration. In highly technical fields, it is the ability to learn that defines competitiveness and this is often done through both formal and informal collaboration. A rapidly increasing knowledge base, distance between experts, and high uncertainty drive firms to collaborate more with outside groups. This process introduces some key issues that change how competition is defined. First, barriers to entry change. These can be higher due to the high caliber of the collaborators and thus more exclusive or if collaboration is broad, may be more inclusive. Second, collaboration between firms increases the rate of technical innovation, especially when a firm refrains from exclusive agreements but instead pursues many projects with many partners. Third, collaboration increases the potential that all participants will be transformed in some way. This arises from recognizing that value does not depend on exclusive ownership. Fourth, competition begins to be defined by the degree of collaboration. This is spoken of in terms of a portfolio of relationships or collaborative efforts. From these observations, it is clear that being linked to a collaborative network and managing collaboration are key components of successful business strategy. The history of biotechnology followed this process as dedicated biotechnology firms (DBFs) partnered with pharmaceutical companies throughout the 1980’s and 90’s. Universities, nonprofit organizations, government groups and others joined in the efforts as well. These fields are especially suited to collaboration because the skills and organization required to be successful are not found within a single entity. Also, because knowledge grows quickly and expertise is spread out, collaboration is necessary to have access to that knowledge base. The way both smaller biotech firms and global pharmaceutical companies collaborate varies greatly with some organizations benefitting more than others. Collaborative profiles of these different types of companies reveal different motives and needs. These profiles have their roots in small decisions and follow different paths. The key is to be able to move from information to knowledge and then from individual-level-learning that relies on experienced personnel, to organizational-level-learning, where the necessary relational skills are part of the routines and procedures. The ability of a company to “learn” depends on its ability to develop these routines. This is the best way to ensure that knowledge transfer is sufficient enough to influence future actions. One important step when managing collaboration is to make sure that the takeaways from one project are applied to other relationships. The use of databases and informal seminars are some ways this can be accomplished. Whatever the format, it must be open so that information can be transferred. Both formal and informal means of communication must be pursued as both have pros and cons. The biotechnology and pharmaceutical industries were able to capitalize on collaboration by learning from it and simultaneously learning how to do it. The challenge is to then transfer knowledge and continue that transmission throughout the company. ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

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Title: A Supply Chain View of the Resilient Enterprise Journal: MIT Sloan Management Review, Fall 2005, pp. 41-48 Authors: Yossi Sheffi and James B. Rice Jr. Key Words: Resiliency, Flexibility, Redundancy, Disruption, Vulnerability Full text available Overview: Basing their arguments on supply chain disruption research from the MIT Center for Transportation and Logistics, the authors make the case that supply chain resiliency must be a key part of the business strategy and that it can be created in two ways: redundancy and flexibility. Companies involved in the study were either committed partners involved in the Center’s Exchange Program, or companies who had suffered disruptions. Surveys, interviews, conferences and public information provided the data. A disruption and the ensuing response from a company can be broken down into eight phases: 1. Preparation – This phase may vary in length depending on the type of disruption and the amount of warning given. 2. The Disruptive Event – natural or financial disaster, strike, etc. 3. First Response – This usually attempts to contain the situation as much as possible. 4. Iniial Impact 5. Full Impact – This is often delayed. Performance decreases. 6. Recovery Preparations – Sometimes this phase starts before the disruption occurs or at least with the first response. 7. Recovery 8. Long-Term Impact It is helpful to conduct a vulnerability assessment, which aims to identify potential threats, the probability that those threats will occur, and what would happen if they did. There is no one “metric” for vulnerability; instead, it is more useful to look at a vulnerability framework based on a grid that depicts consequences as being light or severe, and disruption probability as being low or high. Vulnerability maps help to visualize overall vulnerability by plotting threats in one of the four quadrants of the framework. When its vulnerability is well understood, a company can begin to design resiliency. One way is to create redundancy. Essentially this consists of having a reserve (i.e. multiple suppliers or safety stock) and represents a cost or investment. A more productive way to increase resiliency is to increase flexibility. Understanding that a supply chain has five elements, supplier conversion process, distribution channels, systems and corporate culture, these elements can be used to design flexibility. ONTARIO INSTITUTE OF THE PURCHASING MANAGEMENT ASSOCIATION OF CANADA

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Supply and Procurement – Making sure that the corporate-supplier relationship aligns with the procurement strategy is the key. Single supplier strategies require committed relationships. Multiple supplier strategies are not so demanding. Conversion – This hinges on whether or not a company can use its own facilities to mitigate a crisis and relies on interoperable facilities and standardized operations. Distribution and Customer-facing Activities – When disruption occurs and demand cannot be met, there must be a process for determining which customers are served first. It is essential to preserve relationships and often they are strengthened through crisis. Communication is critical. Control Systems – These aim to identify disruptions early, even potential disruptions, and then to trigger a proactive response. Some options include shipment visibility or radio frequency ID systems. The Right Culture – Employees must be able to respond to situation and site-specific circumstances when disruptions occur. This is facilitated by a culture where decision-making authority is dispersed. Because vulnerability is growing in the current business climate, companies stand a much better chance of weathering disruptions and remaining competitive if they concentrate on developing resiliency, especially when that resiliency is based on flexibility.

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Title: The Dark Side of Buyer-Supplier Relationships: A Social Capital Perspective Journal: Journal of Operations Management, 2011, Vol.29 No.1, pp.8-25 Authors: Veronica H. Villena, Elena Revilla, Thomas Y. Choi Key Words: collaboration, supply chain relationship management, relationship risks, social capital Overview: Much research has already established that developing social capital within a supply chain network is beneficial to performance. Additionally, some research has emerged highlighting that there are potentially negative consequences to an over-investment in supply chain social capital. Such consequences may include loss of objectivity, opportunistic behaviors, poor decision making, wasted resources and frustration. In this article, authors Villena, Revilla and Choi study how investment in social capital influences both the operational and strategic performance of a firm. Social capital has been categorized into three separate dimensions: structural, cognitive, and relational. Structural social capital refers to the benefits derived from the strength and configuration of the personal ties in a network. Cognitive social capital refers to the benefits derived by shared goals, vision and culture, while relational social capital refers to the benefits derived by the existence of trust, loyalty, and reciprocity commitments in a relationships. Using survey data of 132 Spanish firms, the authors use hierarchical regression to test their hypotheses that investment in each of the three dimensions of social capital will have an inverted curvilinear relationship with operational and strategic performance. Curvilinear in this sense indicates an initially positive relationship that eventually decreases and becomes negative. Results support the hypotheses with the exception that cognitive social capital appears to have a positive linear relationship rather than a curvilinear relationship with both operational and strategic performance. Similarly, structural capital has only a linear relationship with strategic performance and does not exhibit a curvilinear relationship as hypothesized. While empirical evidence of the “dark side� of social capital was limited, it did seem that return on investment leveled off to some degree. As such, managers that undertake investments in social capital would be well advised to carefully weigh both the costs and benefits before embarking on such investments.

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