July/August 2013, eSide Supply Management Vol. 6, No. 4
The concept of network theory can be applied to supply management, encouraging practitioners to examine the industry network in which they and their suppliers operate.
One of the most important decisions supply management practitioners make is choosing a strategic supplier that their organization wants to collaborate with in a new companywide venture. It's a decision that involves a great deal of behind-the-scenes homework coupled with in-depth meetings and negotiations.
A common guideline supply management organizations use to gauge whether the potential partner is the correct fit for the company is the partner's stability and credibility. Supply management practitioners examine the financial statements of the prospective firm and try to determine its past performance in other partnerships in an effort to measure credibility. While past performance is important, I believe it's also important to examine the potential partner's network.
The network theory in supply chain management-related research questions the validity of supply management functioning like a supply chain. It encourages supply management practitioners to take a step back and examine the whole industry network in which the supplier exists. For example, in the pharmaceutical industry all of the companies that supply the manufacturers, and all of the second-, third- and fourth-tier suppliers constitute the upstream component of the pharmaceutical industry network.
Extending beyond the manufacturer, the retailers that sell to the consumers are also part of the network, particularly the downstream component. Thus, the network view must encapsulate all downstream and upstream participants.
Let's look at wood, for example. Wood is harvested, then sold to a manufacturer for the production of furniture. The manufacturer sells the furniture to a distributor that subsequently sells those goods to a retailer for consumers to purchase. The concept of a supply chain implies a linear and all-encompassing relationship as the wood moves from raw material to finished product. In today's global business environment, the chain concept may be too simplistic. That's because we can assume the raw materials supplier has its own network of suppliers it can turn to in the case of a stockout. Additionally, the manufacturer likely has numerous sources and suppliers it uses in designing and manufacturing the furniture, and most likely sells to more than one distributor. When examining manufacturing or services in this context, it becomes apparent that rather than a supply chain, there is a supply network.
With the network concept in mind, let's examine how a supply chain practitioner might evaluate a potential supplier. First, the practitioner delves into the structure or composition of the supplier's network, assessing the number of competitors and suppliers of the potential partner. Equally, if not more important, is to determine the companies and business partners of the supplier's lower-tier suppliers, and how those second-, third- and fourth-tier suppliers are connected to one another, as well as to the rest of the firms in the network.
The second key step is determining how embedded the company is within its industry. For example, in the pharmaceutical industry, it is reasonable to assume that a company that has product patents is an important player within the supply network when compared to competitors that don't hold patents. Other examples would be a raw materials supplier that controls a majority of the supply in a particular industry, or a company that has a competitive advantage around its supply management practices, such as a distribution system that is highly efficient. Operational efficiencies can lead to significant advantages and subsequently a higher degree of embeddedness in the network.
Within the concept of a supply network, it's not just one company that matters, it is that company's larger network of sources and supply that also must be considered. Business partners and suppliers can no longer be considered in isolation. While financial strength and a firm's previous transactions matter; executives must also consider their potential partner's relationships in the network.
Following are some examples of how network theory can deepen supply management practitioners' understanding of key players in the supply chain.
Connectedness. Procurement practitioners can use network theory to better assess the way in which their tier-one suppliers are related or connected to one another by determining how central the company is relative to the rest of the network and all of its players. In the automotive industry, for example, if a company continues to supply to all the major OEMs, then relative to its competitors, the company is central in the network.
Innovation spread. Through network theory, practitioners can better understand the way and the patterns by which key innovations arise within their industries. Furthermore, the relationships between clusters of firms, those firms that are tightly connected in some way, can emerge, offering further insight into the spread of innovation in an industry.
Power. Network theory can offer insight into the powerful suppliers/buying companies within a network. Similar to the way in which innovation is assessed, measuring power in networks can allow for better insight when negotiating.
By leveraging other issues such as how large the company's network is, the supply management practitioner can get a more precise understanding of how dependent the supplier is on others within the network.
Understanding a company's network can help supply management practitioners make sourcing decisions and provide them with more insight into the reliability and credibility of partners or potential partners with whom the manager is considering doing business.
After looking deeply into a potential supplier's network, a supply management practitioner could gain information about the supplier's previous business relationships and partnerships. By tracking the way in which the company's network position has either improved or declined becomes simple. Furthermore, based on careful analysis of a company's movement within the network, the credibility and perhaps likelihood of future success can be better evaluated.
Additionally, supply chain practitioners can look to network research to better understand the flow of information within and among suppliers throughout a network. In an industry with high intellectual property use and knowledge transfer, such as the semiconductor industry, having information on how frequently and with what duration other companies have contracted with the potential partner in the past becomes a vital source of information. Building on this example, a supply management practitioner may be able to understand the depth of the company's intellectual property and its potential value.
Supply management practitioners should be aware that network structure and relationships are key factors that impact other companies' decisions regarding collaborative ventures. Network connections also can be an important risk-assessment tool that will help supply chain practitioners dig deeply into their network of suppliers and other business partners.
Steven Carnovale, is a supply chain management doctoral candidate at Rutgers Business School in Newark, New Jersey. For more information, send an email to email@example.com.
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