Communications of the ACM

Communications of the ACM

Managing Trust and Commitment in Collaborative Supply Chain Relationships

By Bill Welty, Irma Becerra-Fernandez
Communications of the ACM, June 2001, Vol. 44 No. 6, Pages 67-73
10.1145/376134.376170
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Much has been written about how enterprise resource planning (ERP) and supply chain management systems can optimize the supply chain within and between organizations, based on a set of pre-defined machine-to-machine rules. ERP systems and supply chain management software are useful in optimizing machine-to-machine interactions about well-defined logistics and payment terms for well-defined products and services (see the April 2000 special section of Communications "ERP Experiences and Evolution," and www.i2.com).

This article describes something different—how computer-based tools can enhance collaborative commerce in uncertain, risky, and previously undefined inter-company human collaboration. Collaborative commerce software, or interaction technology, coordinates human interaction in the uncertain business of inventing, designing, developing, deploying, and supporting new products and services, while negotiating the legal and financial conditions required by the transaction. Using interaction technology, the collaborations between customer and provider create real value for the customer. It is not that optimization is unimportant, but invention and innovation in the creation of custom value for the customer always requires human beings and their intuition, experience, and judgment. ERP and traditional supply chain management systems can therefore be very useful in managing the simple interactions that ensue after the high value work in collaborative commerce is done. Application-to-application technologies, such as supply chain software and ERP systems are algorithmic—they provide information about the present and past. Conversely, person-to-person interaction technologies provide information about the present and the future commitments people have made to do work. Interaction technologies promote trust, as people see others regularly keeping their promises.

Business-to-business (B2B) exchanges are expected to provide buyers and sellers with unprecedented levels of market transparency via online exchanges, create an integrated chain of commerce by tightly linking all partners in the demand and supply chain, automate collaborations between strategic partners thus lowering the cost of inter-company transactions, and closely synchronize behavior of key partners via the Internet [9]. As early as 1988, Johnston and Lawrence [3] describe the competitive benefits of value-added partnerships between smaller companies, each performing one part of the value-added chain, and coordinating its activities with the rest of the chain via computers and communication technologies. In 1998, Malone and Laubacher [5] predicted the shift to tiny, autonomous businesses (e-lancers) enabled by electronic networks to tap into the best information, expertise, and financing that used to be available only to large companies.

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Information technology allows organizations to interconnect, but trust is just as important. The interplay between trust and technology can reduce transaction costs and encourage trust amongst organizations.

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The theoretical underpinnings of collaborative commerce that fuels intercompany relationships in B2B partnerships are explained by the work by Coase [1, 2] and later by Williamson [10] in the theory of Transaction Cost Economics. Transaction Cost Economics defines the conditions for firms to do some activities within the firm, and outsourcing others to outside firms. According to Coase [1, 2], the conditions that define whether these activities take place in or outside of the firm are based on transaction costs. When it is more cost-efficient to perform the activity within the firm, the activity is internalized, and conversely, the market is used if that option is less costly. Buyers entering a market transaction incur expenses determined by each of the transaction cost descriptors:

• Search costs;
• Information costs;
• Bargaining costs;
• Decision costs;
• Policing costs; and
• Enforcement costs.

Buyers incur transaction costs by using the market because they need to compare purchase prices plus transaction costs with the cost of producing the goods in-house, where not every interaction is negotiated.

Williamson [10] extends Coase's transaction cost theory by introducing the concept of opportunism. Opportunism can lead to higher transaction costs, and can arise if information asymmetry among the transacting parties exists, causing one party to take advantage of another. Furthermore, small numbers bargaining (the presence of a monopoly or oligopoly on either of the transacting sides) and also asset specificity (products developed to satisfy a specific customer), can also lead to opportunism by one party, through control of the supply or the demand. In any case, opportunism is used by one of the transacting parties to take advantage of others; therefore steps must be taken to counter opportunism and behavioral uncertainty, or transaction costs will increase.

According to Malone and Laubacher [5] the introduction of information technology in business transactions reduces information asymmetry and transaction costs in general, because it provides the capability to:

• Transact at a distance, allowing the search for transacting partners through a wider space;
• Match requirements to offerings through e-markets;
• Negotiate through electronic means;
• Design contracts via software; and
• Monitor compliance with technology.

To the extent that technology reduces transaction costs more than it reduces in-house coordination costs, organizations will tend to transact more business with outsiders. Therefore, functions currently performed within organizations will be outsourced, and because it is possible to communicate, collaborate, and coordinate using information technologies, business models will start changing, and we will continue to see the emergence of more business alliances.

An interesting spin on the evident move toward disintermediation (eliminating people as intermediaries) through the Internet is evident in the current trend of reintermediation (reintroduce intermediaries) [8]. Miles and Snow argue that broad-access computerized information systems will become substitutes for lengthy trust-building processes [6]. In contrast, Kumar et al. studied the failure of the Prato experiment, which aimed to establish a sustainable interconnection of small textile manufacturing firms in Italy [4]. The study points out that trust is an alternate basis to technology for understanding interorganizational relationships—counterbalancing the tendency toward opportunism. Therefore, while technology reduces transactions costs, trust may do it faster.

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Managing Commitment

Mintzberg [7] observes that successful managers engage in many conversations in which they create, take care of, and initiate new commitments. Winograd and Flores [11] understand management as "taking care of the articulation and activation of a network of commitments, produced primarily through promises and requests," and their work defines commitment as an agreement with someone to do something in the future.

While managers conducting transactions within the corporate boundary can pretty much tell their employees what to do (except perhaps in academic circles), managing transactions across organizations is quite different. Interorganizational transactions are usually managed through requests that, upon mutual agreement, form the basis of commitments. Here we present a framework for electronic collaborative commerce that defines the participating roles as being either a customer or a performer of an agreement. Commitment is defined here as an agreement between a customer and a performer, based on a set of conditions of satisfaction within a predefined cycle time.

Winograd and Flores [11] describe a theoretical basis for interaction between negotiating parties in an agreement that Action Technologies (see www.actiontech.com) has entitled the Business Interaction Model (see Figure 1). In this model, the person making the requests takes on the role of the customer, while the person doing the work takes the role of the performer. The model is a "closed-loop" because the customer starts the loop of business interactions that becomes closed when the customer declares satisfaction. While traditional ERP systems manage enterprise processes such as order placement ending with payment, collaborative commerce redefines business processes to include customer satisfaction. The role of the customer decides and accepts work as being complete, and satisfaction with the work done is evaluated against explicit conditions. The Business Interaction Model describes the relations between customers and performers based on the following concepts:

• A strong definition of roles—every agreement clearly defines who is the customer and who is the performer.
• The context of all business interactions necessary to achieve fulfillment of the customer request. This defines what actions come next and who does them.
• Conditions of satisfaction, which are explicitly specified so interactions are focused on completely satisfying the customer.

The ActionWorks Metro software is the technology used to manage the collaborative interactions in an interorganizational business process. Figure 2 illustrates the trade-off between structure and flexibility in business interactions. Traditional workflow systems (including ERP and supply chain management) offer complete structure and no flexibility, while email offers complete flexibility and no structure for working toward a commitment. In the middle of these two is business collaboration technology such as ActionWorks Metro. Consider for example the case of managing the interactions between a graphics account manager specialist (AMS) and a supplier. As the AMS (in this case the customer) negotiates prices and terms with a supplier (the performer) to produce a component, a commitment is formed between the AMS and the supplier, for the supplier to provide the component (the what) by an agreed due date (the when). The software is used to manage the interactions using commitments to coordinate the efforts and email as the means of notification. Figure 3 illustrates this interaction.

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The Collaborative Company

In 1998 the R.R. Donnelley & Sons Company, a leading North American communications services, publishing, and logistics company, realized one of their divisions was facing a growth challenge. R.R. Donnelley's educational book-publishing customers were asking the Graphics Management division to produce custom educational projects with greater complexity than projects produced in previous years. When launching a packaging or kit project, an AMS at Graphics Management works with the customer to define the scope of the project and the manufacturing specifications for each of the project's components. The AMS is a project manager and serves as the coordinator for both the customer and the supplier. Upon customer approval of a project's scope and specifications, the AMS begins a bidding process to obtain quotes from a selection of suppliers for each of the project's components. Throughout this bidding process the AMS receives bid information for project components from multiple suppliers and, based upon those bids, quotes a price for the entire project to the customer. Upon approval of the quotes, the AMS manages the manufacturing and fulfillment processes to create the complete kit. These processes have become much more complex as the number of components for each project has grown. In addition, because Graphics Management is ISO-certified, it must obtain bids from at least three suppliers for each component quote—adding yet another layer of complexity to the process.

These requests for custom work caused the division to experience a challenge in managing the expanded workload. One reason Graphics Management had trouble managing the production process was that the major contributors to projects, the suppliers, were outside of R.R. Donnelley's control. Suppliers adhered to their own business processes, which were different from Graphics Management's. Since the division had a commitment to their customers for producing the final project, the division was ultimately responsible for the suppliers completion of the components. Graphics Management couldn't easily collaborate and manage commitments made with suppliers, which became even more critical if unanticipated changes or problems occurred. For instance, when a customer requested a modification of a book's cover design, Graphics Management needed to renegotiate with a supplier. The current system was time-consuming, paper-intensive, and cumbersome for the project management team, preventing it from responding to change orders effectively and easily. The increase in complex, multiple-component projects magnified the pain of unanticipated changes.

Figure 5. User interactions in the collaborative commerce application at R.R. Donnelley (AMS=account management specialist at R.R. Donnelley's Graphics Management department).

In order to meet the new demands of customized multiple component projects, it became crucial for R.R. Donnelley to adopt an innovative business process system enabling internal staff to collaborate and track commitments and changes, as well as negotiate with customers and suppliers. Utilizing ActionWorks Metro, the system gives R.R. Donnelley the power to involve suppliers and customers in collaborative commerce. Collaborative commerce embraces the Web's capacity for rich interaction, allowing participants to collaborate, negotiate, and manage commitments. One of Graphics Management's goals was to build an application supporting internal and external users. The system supports customers and suppliers as well as multiple internal departments including design, account project management, finance, sales, and quality management. The application's online tracking of all interactions regarding the publisher's production—from kit design and specs, to request for quotes, to inventory of components, to production status—delivers optimal inventory management, online access to ISO-certified suppliers, and reduced administrative time and cost. Thus the software has allowed the AMS at Graphics Management to create a collaborative commerce application that improves the efficiency of getting bids from suppliers, creates quotes for customers, and enables interaction among geographically distributed team members (see Figure 4).

Graphics Management has experienced benefits such as better quoting capability and reduction in errors. With each bid a supplier submits, the AMS team lets the supplier know if they won or lost the bid. The suppliers not selected are given feedback about why they were not chosen, helping them adjust future bids to try to win business from R.R. Donnelley. The feedback loop has resulted in bids that are more accurate for R.R. Donnelley. Suppliers have recognized additional benefits, reporting that they too are experiencing noticeable productivity gains within their organizations and improved accuracy of initial quotes. The business objectives of R.R. Donnelley for the project were to create durable e-business relationships with both customers and suppliers and to improve productivity to help build profitable business growth. Originally, the team estimated the system would enable a 12% gain in productivity. Since April 2000, early post-project completion review is proving the productivity gain will be in the 14% to 16% range—surpassing Graphics Management's original estimates. R.R. Donnelley has experienced lower transaction costs and has benefited from a reduction in errors and rework costs. The increase in productivity will enable R.R. Donnelley's business to grow. Graphics Management can now manage much larger projects (in the million-dollar range) and AMS team members can accept more complex projects per year. AMS members could previously handle approximately six to 10 complex components; now they work in teams and can work with more than 24 unique components, and manage more projects at once. Achieving much greater leverage of their AMS staff lays the foundation for Graphics Management to grow.

Lubrizol is the world's largest independent specialty chemical manufacturer for the transportation industry. It achieved this position by accepting requests to produce custom lubricant formulations from a wide range of transportation industry customers. Producing custom chemicals generated high returns for Lubrizol and, not surprisingly, high returns invite competition. With increasing competitive pressures in the specialty chemical business, Lubrizol had to sharpen its analysis of the revenues and expenses it could expect from new product development requests. In response to these business changes, Lubrizol decided to create a powerful new product approval process using ActionWorks Metro, which takes a customer request for a new specialty chemical compound through planning, design, development, regulatory approval, manufacturing development, finance, and manufacturing prior to acceptance. At any stage of the process, the customer's request may be declined or an alternative proposed by Lubrizol. The work management system eliminated superfluous communication, added timely access to business intelligence, and added process loops to insure customer satisfaction. This resulted in greater process efficiency, better decision-making and lower operational costs. Finally, response time to customers has improved markedly. In sum, Lubrizol has retained its speed advantage over competitors, while increasing its selectivity around new products requests.

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Implications for Building Trust

The implications for collaborative commerce implementations are clear: information technology allows organizations to interconnect, but trust is just as important. The interplay between trust and technology can reduce transaction costs and encourage trust in and amongst organizations. Technology can reduce transaction costs by managing opportunism, helping to build alliances by increasing the opportunities for outsourcing, and increasing trust between organizations through the use of interaction technology such as ActionWorks Metro. Interaction technology can help if no history of experience-based trust exists. People learn to trust others by noting their behaviors; for example, promising to do something and fulfilling the promise earns trust between transacting parties [8]. ActionWorks Metro enables trust building by repeatedly asking the customer, "Are you satisfied that we (the supplier) have met the conditions we agreed on at the time we negotiated this agreement?" This explicit and recurrent questioning, for every interaction, exposes shortcomings in the relationship, creates opportunities to repair dissatisfaction, and produces relationships that are built on trust.

E-business is about connections. Connecting with outsiders means lower transaction costs and transaction costs can be reduced by trust, built by a combination of experience and by interaction technologies. But transacting parties need to choose a suitable combination of experience-based trust and trust enabled by interaction technology. The choice depends on the initial level of trust, the social capital, and the minimum level of trust necessary to transact—the trust threshold. As time passes, the mix might change, therefore organizations need to be ever vigilant and constantly adaptive.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2001 ACM, Inc.

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