Creating Strategic Value from Supply Chain Visibility - IEEE Computer

Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

Creating Strategic Value from Supply Chain Visibility- the Dynamic Capabilities View Hsiao-Lan Wei National Taiwan University of Science and Technology [email protected]

Eric T.G. Wang National Central University [email protected]

Abstract To understand the role of supply chain visibility in creating strategic value, this study applies the dynamic capabilities view to investigate the nature of supply chain visibility. This research identifies four important measurable constructs of supply chain visibility that are proposed to drive supply chain reconfigurability and improve supply chain performance. They are sensing for visibility, learning for visibility, coordinating for visibility, and integrating for visibility. Implications for better understanding the nature and the role of supply chain visibility are provided based on the research model and survey results.

1. Introduction Over the last few years, research topics related to e-procurement, e-SCM, business-to-business exchanges, and net-enabled organizations have emerged [3,7,20,32,40,42]. These studies claim that the web-based applications can provide many operating benefits, e.g. flexibility and time-to-market, than traditional inter-organizational systems (IOS), thus eventually leading to financial benefits [3,20,52]. The reason behind the superior Internet-enabled integration is the ability to improve information visibility across organizations. Supply chain visibility is viewed as the degree to which supply chain partners have on-hand information related to demand and supply for planning and control management [41]. Real time strategic and tactical information is important for supply chain members to lower uncertainty, improve coordination, and enhance customer satisfaction [3]. As supply chain visibility determines the ways that the physical and cash flows are carried out, it is central to the decision-making process in supply chains [34]. In particular, sharing timely information along the supply chain can dramatically reduce the demand distortion known as the ‘bullwhip effect’ [33].

This study investigates how supply chain visibility can provide strategic advantage in a turbulent environment.

2. Conceptual background Firms within rapidly changing environments tend to use supply chain management strategies to increase their capabilities to control external turbulence [51]. Although different theoretical perspectives focus on the different aspects of supply chain visibility and benefits, environmental uncertainty plays a key role in many studies. Greater environmental uncertainty calls for higher levels of supply chain visibility to realize the benefits of supply chain integration derived from closer relationships. Thus, supply chain visibility between supply chain members should be increased to reduce uncertainty and enhance supply chain performance [50]. To understand the role of supply chain visibility in a turbulent environment, this study applies the dynamic capabilities view, which addresses firm capabilities in rapidly-changing environments, to uncover the nature of supply chain visibility.

2.1. Supply chain visibility – the dynamic capabilities view The dynamic capabilities view focuses on exploiting internal and external firm-specific competencies and developing new ones to address changing environments [54]. Renewing competencies and reconfiguring organizational resources are two key aspects to achieve new forms of competitive advantage. Dynamic capabilities are the unique processes to integrate, reconfigure, gain and release resources [17,54]. Many specific routines or particular processes are identified as dynamic capabilities, e.g., product development routines, strategic decision making routines, knowledge creation routines, and

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Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

alliance routines [17]. The supply chain management process that integrates new resources into the firm from external sources can be viewed as an important dynamic capability because it may create the modification of operating routines in both the buying and the supplying firms. Moreover, dynamic capabilities need to rely on real-time information to quickly understand the changing situation and adjust actions [17]. Therefore, effective supply chain management typically involves the improvement of supply chain visibility. Based on the dynamic capabilities view, we can understand the nature and the important role of supply chain visibility in supply chain management. Dynamic capabilities are difficult to conceptualize, operationalize, and measure due to their complex and tacit nature [14], but they can be identified as a specific set of processes [17,44,60]. Accordingly, Pavlou [44] proposes reconfiguration as the deployment process to achieve new configuration, and four enabling processes to facilitate reconfiguration: (a) sensing the environment; (b) learning; (c) coordinating activities, and (d) integrating resources. Based on this framework, supply chain visibility consists of four important constructs: sensing for visibility, learning for visibility, coordinating for visibility, and integrating for visibility. 2.1.1. Sensing for Visibility. Sensing for visibility is important from the dynamic capabilities view as it represents a firm’s ability to sense and acquire real-time information about external, changing environments and to adjust its actions accordingly. In order to react to change, firms in supply chains need to obtain sensing for visibility in the following information areas: information about external-sensed events and information about supply chain change [20]. The most important external information in supply chains is market intelligence about customer needs. Market trend and customer demand information is critical for both responding to market changes and creating new opportunities. Sharing such information allows a firm to sense the needs of its partners and also communicate its own needs to the partners [20]. Firms that engage in broader information exchanges with current partners, including product changes, customer preference changes, and demand changes, are likely to be aware of new opportunities and may be able to sense and adapt to key supply chain events [36]. 2.1.2. Learning for Visibility. Learning for visibility represents the extent to which a firm can learn new information and knowledge from supply chain partners. As external knowledge is fundamental to

building capabilities, a firm can extend its knowledge base from supply chain relationships and explore the external sources of knowledge to improve performance [17,31,54]. Zollo and Winter [60] suggest that dynamic capabilities arise from learning and emerge from three important learning mechanisms: experience accumulation, knowledge articulation, and knowledge codification. For building dynamic capabilities through learning from supply chain partners, firms need to exchange information related to their specific domain experience, discuss different ideas and viewpoints, and share performance evaluation and valuable knowledge for improving supply chain performance. Complementary knowledge from external linkages may involve into important sources of new ideas and improve performance [12,13,48]. Frequent contacts and regular meetings among supply chain members can increase the amount of complex knowledge transferred and facilitate the sharing of different interpretation of information. In these interacting processes, people are forced to reflect on how they understand their work and articulate their tacit knowledge as explicit knowledge. The explicit knowledge can then be combined into more complex and systematic sets of new knowledge [43]. 2.1.3. Coordinating for Visibility. Coordinating for visibility is central for effective decision-making in a supply chain [46]. Complete information to support specific decision-making can align all decisions to accomplish global system objectives and improve supply chain performance by effective resource allocation. This shared information provides visibility to coordinate the flow of products in the supply chain [49]. Malone and Crowston [39] propose a general definition of coordination: “coordination is managing dependencies.” Three kinds of dependencies need to be coordinated in supply chain management: prerequisite constraints, transfer, and usability [39]. According to coordination theory, coordinating for visibility is able to provide critical information for managing different kinds of dependencies in supply chain relationships. Managing prerequisite dependency is the most common coordination in supply chains. Christiaanse and Kumar [10] indicate that upstream flows of customer orders and downstream flows of shipping information coordinate the operations of supply chains. One way of managing transfer dependency about storage is to share information for controlling the timing that items are delivered and used, such as through just-in-time practices [39]. Another way is to establish stocks of inventory to buffer between two dependent activities. Therefore, some planning related information like

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material requirements plans, order forecasts, production schedules, and transportation schedules can help firms manage transfer dependency. For usability dependency, organizations must realize the product characteristics that customers want. This can be done by market research or by participatory design [39]. Supplier involvement in new product design helps manage this kind of dependency in supply chains.

have adopted new supply chain practices to deliver better products/services to customers, such as postponement strategies, virtual integration, JIT purchasing, vendor managed inventory (VMI), collaborative planning, forecasting and replenishment (CPFR) programs [37,45,55,58]. These practices reconfigure supply chain processes as a whole by integrating physical and information flows of collaborative firms.

2.1.4. Integrating for Visibility. Integrating for visibility emphasizes the information that can help arriving at collaborative goals and building up a collective identity for a supply chain. The integration of external activities and technologies is important for creating strategic advantage [54]. Dyer [15] asserts that developing a collective identity of a supply chain is very important in supply chain management. Therefore, a strategic mind-set with regard to supply chain partners and a collective identity of a supply chain are important characteristics of supply chain integration. To develop a strong supply chain identity, requires that supply chain members share understanding of key features in a supply chain. Information sharing facilitates the creation of collective meanings and consensus on actions among partners [20]. It provides the understanding of each firm’s capabilities, strengths, goals, and skills and helps achieve goal congruence in a supply chain [29]. As goals become increasingly aligned, the perceived accomplishment of common goals is an important facilitating condition to achieve strategic outcomes. Long-term, collaborative relationships utilizing data exchange will display greater level of integration [18]. In this sense, integrating for visibility can help create a supply chain identity and reach a consensus on supply chain goals and actions

Prior research illustrates different supply chain configurations from different theoretical perspectives. Distinct configurations are based on different logics of coordination and provide their own ways to deal with environmental uncertainties. Supply chain management strategy may involve choosing a unique value creation logic for different situations. From the information processing view, Bensaou and Venkatraman [6] describe a set of supply chain configurations with different ways to develop effective interorganizational relationships and match the information processing needs. Thus, organizations need to create their own means to balance the needs and capabilities for information processing. In their research of supply chain partnership configurations, Malhotra et al. [38] propose five different supply chain configurations based on the integrative interorganizational processes and partner interface-directed information systems. As distinctions among the configurations can predict performance differences, moving to a higher level performance will require efforts to change supply chain processes and investment in new IT resources [38]. For instance, only those firms that can effectively undertake a new configuration to better match the environment will be able to achieve to greater supply chain performance.

2.2. Supply chain benefits

2.2.2 Supply chain performance. Supply chain performance has received substantial attention in supply chain management. Different aspects of time-based performance including delivery speed, new product development time, delivery reliability, manufacturing lead-time, and customer responsiveness are proposed as critical supply chain benefits [23,30,57]. From a more systematic perspective, Beamon [5] argues that three types of performance measures must be included in any supply chain performance measurement system: resource measures (e.g., costs and inventory), output measures (e.g., fill rate, on-time delivery, and customer response time) and flexibility (e.g., volume flexibility, mix flexibility, and new product flexibility). Moreover, Gunasekaran et al. [21] classify a list of key supply chain performance measures at the strategic, tactical,

2.2.1. Supply chain reconfigurability. Supply chain reconfigurability is an important dynamic capability in a supply chain for generating competitive advantage in changing environments. Pavlou [44] suggests that reconfigurability is the ability to deploy new configurations that match the environment and to reconfigure resources with timeliness and efficiency. A new configuration of competencies relates to the innovative redeployment of existing resources as well as to the novel synthesis of existing resources into new applications Therefore, different supply chain configurations may exhibit different levels of operational efficiency and market knowledge creation [38]. It is important for a supply chain to quickly reconfigure its resources into the right combination to address shifting market opportunities. Many firms

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Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

and operational levels. Craighead et al. [11] also indicate that the benefits of supply chain management systems can be oriented as strategic or operational. In this regard, Ho et al. [24] suggest that a supply chain performance measure must be tied to the strategy reflected in the choice of competitive priorities including cost, quality, flexibility, and delivery.

3. Theoretical framework and hypotheses This section discusses the research model and develops the hypotheses to be tested. In the research model illustrated in Figure 1, the dynamic capabilities view provides the overarching theory base. As discussed in the previous section, supply chain visibility is proposed as an important factor enabling supply chain reconfigurability, an important dynamic capability in supply chains. From the dynamic capabilities view, firms need to respond to uncertain environments through reconfiguring supply chain resources. The nature of supply chain visibility, based on the theory, consists of four important constructs: visibility for sensing, learning for visibility, coordinating for visibility, and integrating for visibility based on the dynamic capability framework of Pavlou [44].

Supply Chain Visibility -Sensing for Visibility -Learning for Visibility -Coordinating for Visibility -Integrating for Visibility

H2

Supply Chain Performance

H3

H1

Supply chain Reconfigurability

Figure 1 Research model

3.1. Supply chain visibility and supply chain performance Reconfiguration requires the ability “to scan the environment, to evaluate markets and competitors, and to quickly accomplish reconfiguration and transformation ahead of competition” [54]. For instance, sensing for visibility is prerequisite to an ability of enterprises to quickly adapt to change [20]. Only after sensing the need for change in current process configuration will firms be able to develop mechanisms for dealing with change and reconsider

alternative resource combinations. Better visibility allows firms to reconfigure their channel to customer needs, so that supply chain members can make appropriate arrangement of products [20]. The broad range and reach of market information provided by supply chain partners opens up the possibilities for rapidly reconfiguring the supply chain to respond to customer demand for value [10]. Learning for visibility has been proposed as a strategic resource [26]. The supply chain relationship is a flexible resource because it renews a firm’s knowledge base necessary for using and reconfiguring existing resources [59]. Learning for visibility is important for facilitating supply chain change and creating new configurations. Sharing each other’s experience in a supply chain can extend the partners’ knowledge base and this new knowledge will be combined with existing knowledge to create an innovative resource configuration. Further, discussing different ideas in supply chain meetings is an important knowledge articulation effort and reduces the causal ambiguity of supply chain performance, resulting in adaptive adjustments to the existing configuration or in enhanced resource reconfiguration for more fundamental change [60]. For effectively allocating and using disperse resources in a supply chain, coordinating for visibility can help organizations recognize the value of their existing resources and synchronize activities in new configurations [28]. Modern information technology, which provides a broad range of information communication and coordination channels, facilitates supply chain redesign [10]. For example, IT makes it possible to detach information flows from physical flows and this allows firms to anticipate and prepare for the arrival of a physical shipment. Consequently, firms can create many different new ways of rapidly reconfiguring supply chains to respond to the market under a broader solution space enabled by greater coordinating for visibility. Any single firm cannot execute the implementation of a new supply chain configuration. Supply chain integration is essential for developing new logic for accomplishing architectural innovations in a supply chain. Integrating for visibility can help build a shared understanding, create a common ground, and develop a new perceptual view among supply chain partners. It therefore contributes to reaching consensus and mutual goals at the strategic level, thus facilitating supply chain reconfigurability. Accordingly, we propose the following hypotheses: H1: Supply chain visibility is positively associated with supply chain reconfigurability. H1a: Sensing for visibility is positively associated with supply chain reconfigurability.

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Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

H1b: Learning for visibility is positively associated with supply chain reconfigurability. H1c: Coordinating for visibility is positively associated with supply chain reconfigurability. H1d: Integrating for visibility is positively associated with supply chain reconfigurability. Supply chain visibility not only can enhance supply chain reconfigurability but also improve supply chain performance directly. Firms would have better performance if their network relationships maximized diverse information access [4]. The flexibility created from new knowledge stocks obtained from external partners can enhance supply chain performance because it gives the supply chain the ability to handle customized orders, to rapidly adjust production capacity, and to respond to target markets [56]. These new knowledge sources prevent firms from overemphasizing existing knowledge and being trapped in limited organizational actions [59], thus enhancing the creation of innovation. Therefore, we present the following hypotheses: H2: Supply chain visibility is positively associated with supply chain performance. H2a: Sensing for visibility is positively associated with supply chain performance. H2b: Learning for visibility is positively associated with supply chain performance. H2c: Coordinating for visibility is positively associated with supply chain performance. H2d: integrating for visibility is positively associated with supply chain performance. Rapidly shifting environments force firms to respond quickly to changing competitive priorities [22]. Time-based capabilities thus become extremely important in order for firms to capture the benefits of flexible response to changing conditions [25,27]. Firms who are able to respond quickly to changes rely on new strategies such as vendor management inventory, just-in-time delivery, and postponement within supply chains. These strategies often require supply chain redesign and resource reconfiguration to achieve cycle time reduction as well as customer satisfaction. From the dynamic capabilities view, supply chain reconfigurability helps recombining existing resources to develop superior new configurations in supply chains. Thus, reconfigurability creates favorable innovations to better match market needs and prevent the obsolescence of outdated configurations with rigidities [35,44]. Empirical evidence also shows that this dynamic capability can influence product quality and cycle time [28]. Therefore, we present the

following hypothesis: H3: Supply chain reconfigurability is positively associated with supply chain performance.

4. Methodology 4.1. Data collection A cross-sectional mail survey was administrated for collecting data from manufacturing firms in Taiwan. A draft survey was developed largely based on measures that were identified in the literature as suitable for the current study. After compiling the English version of the questionnaire, the survey items were first translated into Chinese by a bilingual research associate and verified and refined for its translation accuracy by one MIS professor and two senior doctoral students. The Chinese version of the draft was then pre-tested with 35 senior managers (including purchasing, operation, material management, supply chain management, sales, marketing managers, and CEOs) for reliability and validity, resulting in modifications of the wording of some survey items. Nine hundred and eighty five survey packages were mailed to the senior purchasing manager of the companies from the directory of the 2002 Top 1000 largest firms in Taiwan published by Common Wealth Magazine. 187 surveys were returned, with 181 completed surveys available for subsequent analysis, yielding an effective response rate of 18.4%. The average working time of the informants is 13.4 years in their respective firms, indicating the informants should have sufficient knowledge to answer the survey. Non-response bias was assessed by verifying that early and late respondents did not significantly differ in their demographic characteristics [2]. The respondents were divided into two halves based on the dates of return. Early respondents were identified by selecting those that responded in the first few weeks (n=105). The comparison on company capital and employee numbers between the two groups showed no significant differences based on the independent sample t test (p = 0.60 and 0.58, respectively). Accordingly, non-response bias should not be a problem in this study.

4.2. Measures Supply Chain Visibility includes four important concepts based on the dynamic capabilities view [44]: sensing for visibility, learning for visibility, coordinating for visibility, and integrating for visibility. The measure of sensing for visibility

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Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

consists of four items that focus on product changes, marketing plans, market trends, and demand or customer preference changes [20]. We assessed learning for visibility with six items based on the three learning mechanisms for dynamic capability building, i.e. experience accumulation, knowledge articulation, and knowledge codification [60]. The measure of coordinating for visibility consists of nine items pertaining to notification (e.g. ordering and shipping information), planning (such as material requirements and production schedules), and requirements (e.g. customer needs and product specification). Integrating for visibility is measured with six items that focus on business planning, strategic issues, competencies, business processes, and shared understanding. Supply Chain Reconfigurability is the ability to deploy new supply chain configurations to match a changed environment and to reconfigure supply chain resources timely and efficiently. We assessed it with a three-item scale that focused on reconfiguring resources to generate new assets, to better match the market, and to create novel combinations [44]. Supply Chain Performance focuses on strategic benefits from supply chain relationships. Strategic benefits are related to learning about customers and markets, new product creation, and business opportunities [53], and were measured .with three items.

5. Result 5.1. Measurement model The psychometric properties of the scales were assessed in terms of item loadings, discriminant validity, and internal consistency. Item loadings and internal consistencies (also known as composite reliability) greater than .70 are considered acceptable [19]. From the factor analysis results, all the items loaded highly (>.70) on their respective construct. All the constructs also exhibited good internal consistency as evidenced by their composite reliability scores, which were all greater than .90. Discriminant validity was assessed by two criteria [9]: (1) items should load more highly on the construct that they are intended to measure than on other constructs (i.e. loadings should be higher than cross-loadings) and (2) the square root of the average variance extracted (AVE) should be larger than the inter-construct correlations. Cross-loadings were computed by calculating the correlations between a latent variable’s component scores and the manifest indicators of the other latent constructs [1,9]. Without

exception, all items loaded more highly on their own construct than on other constructs. Also, by comparing the inter-construct correlations and the square root of AVE (shaded leading diagonal) as shown in Appendix A, the square root of the AVE for each construct was greater than 0.707 (i.e. AVE > 0.50) and also greater than the correlations between the construct and other constructs, indicating that all the constructs share more variance with their indicators than with other constructs. Overall, the self-report measurement instrument exhibited sufficiently strong psychometric properties to support our subsequent test of the proposed structural model.

4.2. Structural model The PLS structural model and hypotheses were assessed by examining path coefficients (similar to standardized beta weights in regression analysis) and their significance levels. The significant path coefficients and explained variances for the model are shown in Figure 2. All of the constructs were modeled as reflective. Following Chin [9], bootstrapping (with 200 resamples) was performed to obtain the estimates of standard errors for testing the statistical significance of path coefficients using t test. Table 1 summarizes the model-testing results. For Hypothesis 1, we find that supply chain visibility is positively associated with supply chain reconfigurability in some aspects. Learning for visibility (t = 4.72, p < 0.01), coordinating for visibility (t = 2.00, p < 0.05), and integrating for visibility (t = 3.25, p < 0.01) have significant impacts on reconfigurability, supporting H1b, H1c, and H1d. However, the direct effect of sensing for visibility on reconfigurability is insignificant (t = 0.17, p > 0.1), thereby H1a is not supported. Hypothesis 2, which posits that supply chain visibility would influence supply chain performance, is only partially supported. Sensing for visibility (t = 2.13, p < 0.05) and integrating for visibility (t = 1.88, p < 0.1) have a significant effect on strategic performance, thereby partially supporting H2a and H2d. The direct effects of learning for visibility and coordinating for visibility on supply chain performance are insignificant, thus H2b and H2c are not supported. As for Hypothesis 3, we find that, supply chain reconfigurability is positively associated with supply chain performance (validating H3, t = 4.78, p < 0.01). Supply chain visibility explains 64% of the variances in supply chain reconfigurability. Explained variances for supply chain performance are 62%.

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Proceedings of the 40th Hawaii International Conference on System Sciences - 2007

Sensing for Visibility

.17(H2a) Supply Chain Performance (R2=.62)

Learning for Visibility

.42(H1b)

.19(H2d) .15(H1c)

.40(H3) Supply chain Reconfigurability (R2=.64)

Coordinating for Visibility .30(H1d)

Integrating for Visibility

Only supported links are showed with coefficients

Figure 2 PLS results for research model Table 1 PLS results of path significance Hypothesi Path T-value Significance s 0.17 No SVISШSCR (H1a) SCVШ SCR (H1) LVISШSCR (H1b) 4.72*** Yes 2.00** Yes CVISШSCR (H1c) 3.25*** Yes IVISШSCR (H1d) SVISШSPER (H2a) 2.13** Yes SCVШ SPER No LVISШSPER (H2b) 1.29 (H2) No CVISШSPER (H2c) 1.24 IVISШSPER (H2d) 1.88* Yes 4.78*** Yes SCRШSPER (H3) SCRШ SPER (H3) SCV=Supply Chain Visibility; SVIS=Sensing for Visibility; CVIS= Coordinating for Visibility; LVIS= Learning for Visibility; IVIS= Integrating for Visibility; SCR= Supply Chain Reconfigurability; SPER= Supply Chain Performance Note: *, **, *** indicates significant at p