effect of governance structure on performance: A case study of efficient consumer response, The

Whipple, Judith Schmitz

The grocery industry has undergone significant change with the advent of the Efficient Consumer Response (ECR) initiative. In spite of the promised benefits of ECR, much remains to be done in order to reach the goal of true supply chain integration in the food system. While the foundation for ECR implementation has been provided in theory, the reality is that many firms do not understand how to make the practice of ECR work. One step in better translating ECR theory to practice is to examine manufacturer-material/logistical service supplier relationships in the food chain. We provide a framework for determining how performance can be improved for the entire supply chain by better managing inbound supply relationships. Specifically, we discuss the effect of asset specificity and information application on governance structure to achieve ECR performance.

In the last two decades, the grocery industry has been significantly affected by many changes. These include increased competition due to substantial industry consolidation and alternative distribution/retail formats; threatened profit margins; altered consumer demographics, lifestyles, and demand patterns; and recognized inefficiencies, such as excessive inventories, inaccurate information, and unnecessary administrative activities.1 These problems encouraged the grocery industry to reexamine the food system for potential improvements. One result was the creation of the efficient consumer response (ECR) initiative, which began in the early 1990s.

ECR is defined as "a grocery industry strategy in which distributors and suppliers are working closely together to bring better value to the grocery consumer."2 The main philosophy is that all channel members should be integrated and focused on creating an efficient and effective supply system. While supply chain integration pertains to various industries, ECR extends beyond such integration to include not only more efficient replenishment, but also more efficient store assortment, promotion, and new product development. Expected benefits include lower total system inventories and costs, enhanced consumer value in choice and quality of products, and more successful development of consumer-driven products. For example, it is estimated that inventory can be reduced by 41 % to provide savings of $30 billion, and dry grocery lead times can be reduced from 104 days of supply to 61 dayS.3 While it is argued that the figure of $30 billion may be inflated 4 it is still widely acknowledged that improvements in inventory performance are certainly possible throughout the food system.

A core requirement for achieving the benefits of ECR is to establish better relationships, such as alliances, with supply chain partners. This encourages hybrid-integrative governance to develop throughout the supply chain. Essentially, a hybrid-integrative governance structure incorporates the main strength of vertical integration (control) with the main strength of market exchange (production benefits from outsourcing).

Hybrid-integrative governance structures use contracts and/or close relationships to safeguard specific investments in physical and human assets, as well as to adapt better to uncertain conditions! Through such structures, partners expect increased supply chain efficiency and effectiveness, and, they are willing to modify their traditional business practices in order to improve the overall system.

While marked improvements have been shown in the industry, the ECR initiative has not yet fully realized its expected benefits. What appears to be holding the industry back is a lack of integration throughout the supply chain.6 This is particularly true with respect to supply chain inventory, which has not decreased to the anticipated levels due to (1) continued forward buying and diverting practices; (2) poor communication among retailers, manufacturers, and suppliers (especially with respect to promotions); and (3) a lack of implementing technologies and software that offer real-time information exchange.7 ECR has also remained primarily focused on outbound movements in the supply chain (i.e., from the manufacturer to the retailer). As stated by Mathews8 in reviewing the 64th Annual Report of the Grocery Industry, "the bottom line is that the perceived direct benefits of ECR have failed to trickle down through the industry, making ECR still more a matter of promise than performance (p. 26)."

In order to achieve trickle-down effects, ECR must include inbound movements between manufacturers and material suppliers as well as enlist expertise from logistical service suppliers. This expanded focus will require that manufacturers move some portion of their inbound relationships from pure transactional exchanges to hybrid-integrative forms of governance. The problem for many manufacturers is that they are not sure how to determine which relationships should be transactional and which should be hybrid-integrative.

Achieving a seamless inbound relationship is further complicated by the inherent differences between material suppliers and logistical service suppliers. These differences surround the degree of simultaneity involved in the business exchange. Simultaneity refers to the production and consumption of benefits. When benefits are "sold, produced, and consumed" concurrently, simultaneity is high. In this case, production and consumption of the product and/or service are considered inseparable.9 For example, logistical services are performed when consumed, so simultaneity is high. Conversely, material suppliers provide a tangible good that enables a gap to develop between production and consumption. This gap is formed when inventory is committed in the supply system. As such, simultaneity can be relatively low in a transaction between a manufacturer and a material supplier. The degree of simultaneity directly affects transaction costs (e.g., the costs of adapting to uncertainty, safeguarding against opportunism, and measuring performance) as well as supply chain efficiency and effectiveness.

Given these conditions, our focus is on how manufacturers can best govern their material supplier and logistical service supplier activities. Specifically, our purpose is to: (1) examine the governance structures available to manufacturers trying to achieve the benefits of ECR; (2) examine how governance structures affect efficiency and effectiveness in relationships with material and logistical service suppliers; (3) explore the trade-off between cost and performance based on the governance structure selected; and (4) discuss the managerial implications of using governance structures to improve supply chain integration in an ECR environment.

The first section reviews supply chain governance structures and provides a framework for analysis. The second section examines the relationship between governance structure and performance assessment. The third section considers the managerial implications of the framework. Finally, future directions for research and concluding comments are provided.

SUPPLY CHAIN GOVERNANCE STRUCTURES

Under ECR, the goal of delivering value to consumers is based on providing a seamless delivery of products at a low total cost. This means that firms must decide how to coordinate the supply chain vertically. A well-established framework for examining the options of supply chain governance is transaction cost analysis (TCA).

Traditionally, two governance options have been considered using TCA: vertical integration and market exchange. Vertical integration is not a realistic option for most food manufacturers, given the vast and complicated grocery supply chain that moves from "seed to supermarket." The market exchange option is also not without difficulties. Operating on a transactional basis does not allow for the same level of control as vertical integration.

Between these polar extremes lies an intermediate governance form referred to as hybridintegrative, as shown in Figure 1. It has been investigated by a number of researchers.'o Williamson discusses this form of governance as a "credible commitment."" Credible commitments involve reciprocal acts to safeguard a relationship. As an example, a supplier may offer a lower price in exchange for the manufacturer's promise of long-term business. Credible commitments also may be required for customized investments (e.g., tooling, information systems, dedicated equipment). Williamson described this as a "calculative" decision whereby each party strategically decides what it expects to gain in exchange for what it will give. 12 Williamson proposes that the method for protecting the commitment is a contractual agreement." Ahighly detailed contract should contain specific language that (1) outlines expectations and performance measures to be used to verify compliance; (2) lists punitive responses when/if performance fails to meet expectations; and (3) provides methods for modifying the agreement should environmental conditions alter the exchange.

An additional perspective examines hybrid-integrative governance structures as relying less on calculative steps protected by a contract and more on building commitment through close relationships, such as alliances. In this respect, the relationship becomes the binding contract that safeguards the commitment. A written contract, if it exists, may be little more than a legal formality. 14 In essence, hybrid-integrative structures create a dependency whereby both parties become reliant on the other. The dependency may develop in two ways: (1) unilaterally when a highly specific contract is signed that attempts to provide greater control than the "invisible hand" of pure market exchange or (2) bilaterally when a trusting, alliance relationship is developed that serves as a contract to bind the two parties.

Transaction costs are used to determine which governance option is best by measuring the "cost" of each strategy. Specifically, transaction costs include the direct cost of safeguarding a relationship as well as the opportunity costs of making a less-than-optimal governance decision." These costs depend on (1) human behavior and (2) the type of transaction. Given that our purpose is to examine governance structures that manufacturers can use to achieve full ECR benefits, only market exchange and hybrid-integrative structures will be examined. Elements that affect transaction costs will be discussed with respect to how they influence a manufacturer's decision to outsource to a material and/or logistical service supplier.

Market Exchange Governance

Two problems are associated with human behavior under market exchange: (1) bounded rationality and (2) opportunism. Bounded rationality limits cognitive capabilities such that information is not processed completed or communicated effectively." In other words, there is a limit to how much information humans can accurately process within a reasonable time which means that decisions are not always made with "full" knowledge. Thus, humans often make decisions that are not optimal because all scenarios cannot be processed, evaluated, or even included in each decision-making process. As an example, a manufacturer cannot always evaluate each potential supplier given the global outsourcing opportunities available (e.g., the buyer may not have the time to assess each supplier or even be aware of every potential supplier). Bounded rationality affects the exchange both ex ante and ex post.

Prior to an exchange, a manufacturer faces bounded rationality because information is either limited or too expensive or time consuming to gather. As an example, a manufacturer purchasing a commodity product may not have the capability to understand what may happen to the price of that commodity over the next six months. In this case, the manufacturer may "lock in" a year's purchase of that commodity at a specific price, only to have the price drop significantly six months later. If no provisions for price adjustments were made at the beginning of the transaction, then the manufacturer is held to the original agreement.

After the exchange, the manufacturer is also subject to bounded rationality, as performance cannot always be easily verified." Suppose a manufacturer outsources logistical capabilities (e.g., warehousing, transportation, and inventory management) to a logistical service supplier. If the supplier provides performance data (e.g., on-time delivery rates), there is an opportunity to provide only positive data. This illustrates the second problem with human behavior - opportunism It occurs when people act in their own self-interest at the expense of another." If the service supplier is not performing as expected, the manufacturer may have limited options for requiring compliance (e.g., few alternative service suppliers). As such, uncertainty in human behavior affects not only verification of performance but also compliance with performance expectations.

Two potential problems are associated with the type of transaction in the exchange: (1) asset specificity and (2) uncertainty. If the transaction contains assets that are specific to one particular relationship or transaction, then substitutability is low. High asset specificity creates the problem of sunk costs that will have little value outside the particular relationship. " Any of the following types of assets may fit into this category: site, physical, human, dedicated, and temporal specificity." The relationship between a manufacturer and logistical service supplier, for example, certainly could have transaction-specific assets with respect to the supplier's location (e.g., cross-dock facility near key customers), information technology (e.g., satellite tracking), hardware/software (e.g., inventory management systems), and dedicated assets (e.g., personnel and equipment). As a greater degree of the logistical system is outsourced to a third party, the degree of asset specificity increasingly creates a "replaceability" problem.

The second problem associated with this type of transaction is uncertainty. Any external factor that changes the circumstances of the exchange relationship can become problematic. Volatility and production seasonality impose capacity, labor, and competitive constraints that are difficult to foresee. Unpredictable weather events that severely affect agriculture can have serious ripple effects throughout the food supply chain.

In order to provide protection from these potential problems, the TCA framework recommends using vertical integration when the transaction cost of market exchange exceeds the production cost advantages. As stated previously, however, most manufacturers in the grocery industry are not capable of vertical integration because of the complexities of the inbound supply chain. As such, when transaction costs are high, the next best option for manufacturers may be hybrid-integrative governance rather than market exchange.

Hybrid-Integrative Governance

A hybrid-integrative governance structure may create a culture that supports firms working together for mutual benefit as self-interest gives way to common interest. 2' This approach requires that firms have complementary goals and work to reduce bounded rationality and the likelihood of opportunism. If either party's actions distract from the common goals, then both party's benefits are reduced and the action is counterproductive.

Two safeguards can be used with hybrid-integrative governance structures: supplier qualification programS22 and long-term reward programs. Supplier qualification programs help reduce bounded rationality by prequalifying potential suppliers before developing an exchange relationship. This limits the number of potential suppliers and the amount of information that requires processing. As an example, a manufacturer may state that it will not purchase materials from suppliers who are not EDI capable. Similarly, a manufacturer may require that logistical service suppliers meet a certain level of technological sophistication with respect to software (e.g., inventory management systems) or equipment (e.g., satellite tracking capability).

Long-term reward programs (e.g., promotional opportunities, bonuses) are one strength of vertical integration, as firms can offer incentives to their employees to reduce the chance of opportunism.23 Under hybrid-integrative relationships, manufacturers can establish joint cost-reduction programs that share some or all of the generated savings with the supplier. In additional, personnel from a supplier may be included in a manufacturer's reward programs (e.g., profit sharing) .24

It would seem that a manufacturer would want hybrid-integrative relationships with all suppliers, as this type of governance provides greater control than market exchange. In reality, however, these relationships require more work to develop, implement, and maintain than market exchange relationships. For example, one drawback to an alliance is the cost of establishing the necessary levels of trust that encourage joint commitment.25 The question then becomes: Is it feasible to have all supply relationships in the hybrid-integrative governance category; If not, how should a manufacturer determine the appropriate governance strategy? A framework for classifying governance options, based on transaction-specific assets, is provided in Figure 2.

Figure 2 shows that when a relationship has low transaction-specific assets, the appropriate form of governance is market exchange; safeguards, such as detailed contractual provisions, are not required and would only add costs to the exchange relationship. Low asset specificity in material supply situations could involve commodity purchases, such as flour or sugar, for which quality levels are difficult to differentiate, supply is generally stable, and suppliers are easily substituted. This also assumes that the supplier is not providing services (e.g., special packaging/delivery programs) that differentiate it from other commodity providers. Another market governance scenario is a manufacturer who uses a logistical service supplier on a limited basis for easily substitutable functions (e.g., transportation on a routine traffic lane or short-term public warehousing).

High asset specificity creates very different conditions and these are better suited for hybridintegrative governance. For example, a manufacturer may want a specific form of packaging for an end product which requires special tooling that is patented with one supplier. Once the tooling is made, the manufacturer is locked in to the relationship. This dependency creates the need for safeguards either through a detailed contract or a close relationship. Similarly, many logistical service suppliers provide customized, value-added services that exceed traditional offerings." For example, a manufacturer may outsource its warehousing operations to a logistical service supplier who provides precise product rotation, specialized bar coding, customized fulfillment, and sequencing. This relationship involves significant asset investment and, therefore, requires safeguarding through a hybrid-integrative governance structure.

GOVERNANCE STRUCTURE AND PERFORMANCE ASSESSMENT

Using asset specificity to determine how a manufacturer can vertically coordinate the supply chain addresses the issue of transaction cost, but does not directly address the issue of performance. Given that a primary goal of ECR is to achieve a seamless integration of the supply chain, all channel members must perform their specialized activities as efficiently and effectively as possible.

Efficiency is the ability to "do things right" with minimal resources. This often means conforming to an internal standard (e.g., lowest total cost). Effectiveness means "doing the right thing" regardless of the resources required. This suggests a conformance to external standards of an exchange partner (e.g., 100% on-time delivery).

Several scenarios are possible with respect to efficiency and effectiveness. A firm can be efficient without being effective by minimizing resources to the point at which it cannot provide a level of service that satisfies customers. For example, suppose a firm sets a minimum purchase quantity on its products to encourage truckload volume and minimize logistical costs (increasing efficiency). Customers who want to purchase in less-than-truckload volumes will be dissatisfied, as they will view the selling firm's policy as ineffective.

The reverse can occur. A firm may be highly effective without being efficient. For example, if it offers a 100% on-time delivery guarantee for its orders it may use premium carriers (e.g., air delivery) if an order will be late with normal delivery (e.g., standard ground transportation). The customer is satisfied because the order arrived on time (effective), but the additional transportation costs reduces efficiency.

For ECR to satisfy consumer demand, the grocery supply chain must provide value in price and value in choice to consumers. Value in price requires the supply chain to operate efficiently by reducing total system cost. Value in choice requires the supply chain to operate effectively by supplying high-quality, consumer-demanded products in a seamless manner. The ECR philosophy mandates that integrated supply chain performance reflect both efficiency (a measure of resource utilization) and effectiveness (actual goal accomplishment)." Therefore, in terms of ECR performance, efficiency can be described as lowest total cost (and hence optimal resource use) and effectiveness can be described as seamless integration that enables optimal replenishment of demanded products. Depending upon the degree of simultaneity, material suppliers and logistical service suppliers have different effects on efficiency and effectiveness. The differences are discussed below. Simultaneity and Performance Assessment

The core value of material suppliers to manufacturers is product based. This means a material supplier can operate at low levels of simultaneity by using inventory as a buffer between production and consumption. Material suppliers can provide manufacturers with time and place specificity by using inventory to protect against environmental fluctuations (e.g., seasonality, volume uncertainty). Inventory used in this manner gives the appearance of seamless integration. In actuality, however, effectiveness is not achieved because inventory only serves to hide problems and bottlenecks. In this scenario, the manufacturer and material supplier develop a "similarity of selfish interest"' as inventory is committed to the manufacturer. The supplier is hesitant to eliminate inventories for fear of being perceived as ineffective. This approach may fulfill the manufacturer's short-term demand, but it is unproductive in the long run.

In the case of logistical service suppliers, their value is primarily service oriented (e.g., transportation, warehousing, and related support services) and largely intangible. They cannot use inventory as an adaptive mechanism and/or as a safeguard to serve manufacturers. The inseparability of production and consumption forces the manufacturer into intimate contact with the service supplier's process,29 which restricts the supplier from using inventory as a buffer. In comparison to material suppliers, who can use inventory to appear integrative, logistical service suppliers are more effective in providing seamless integration within their individual capacity constraints.

The degree of simultaneity also affects efficiency. In the case of material suppliers, using inventory as a buffer between production and consumption comes at a cost. In the long run, someone must pay for holding inventory, and this cost reduces efficiency. Of course, not all inventory is "bad" or can be eliminated. While seasonal products (e.g., grain, produce) are subject to buffered inventory, safety stock due to nonseasonal complications can be reduced. For example, inventory held "justin-case" the manufacturer places an order can be eliminated when uncertainty is reduced. Uncertainty, in this example, is due to a lack of communication between the manufacturer and material supplier (e.g., production schedules, promotion plans). This illustrates another factor that influences performance assessment: information application.

Information Application and Performance Assessment

Research on channel management increasingly focuses on communication within the supply chain.10 Specifically, the goal is to go beyond technological infrastructure to store/manipulate data and move toward the ability to manage information to make better decisions." Information application, employed in an ECR environment, allows for increased levels of efficiency and effectiveness if three conditions exist: (1) appropriate and accurate information is available; (2) the information moves across the supply chain in a timely fashion; and (3) the business process supports and is capable of using the information in making decisions." In this context, information application refers to both the content shared (e.g., quantity and quality/accuracy) as well as the level of technological sophistication (e.g., real time) involved in the exchange process.

Essentially, information application allows manufacturers and material suppliers to exchange information about inventory, thus reducing the commitment of inventory and lowering the risk of demand uncertainty. Several investments are required to support information application. An investment in technology (e.g., software, hardware) needs to occur to allow for real-time information exchange. In addition, there needs to be an investment in developing a trusting and open relationship with supply partners such that the necessary information can be willingly shared. Finally, there often needs to be an investment in reengineering the business process so the way information is exchanged can be enhanced. Companies will realize the greatest payback to information application by "reexamining and reengineering their internal business processes and their external dealings with trading partners."33

Information application, while increasing efficiency and effectiveness, can be costly to achieve (e.g., software design, development or purchase, human resources). The high investment may discourage manufacturers from using a sophisticated information exchange process with suppliers. If, however, the supplier has a demonstrated competency with respect to information technology, the development cost to a manufacturer is significantly reduced. This is particularly true for logistical service suppliers who, as a prerequisite for business, have often already incurred the technological investments necessary.34

Thus, efficiency and effectiveness are affected by two factors. First, the degree of simultaneity affects the ability to monitor performance compliance; low simultaneity enables inventory to safeguard uncertainty, giving the appearance of an effective supply chain. Second, the level of information application affects performance by allowing greater integration and reduced speculative commitment of inventory. From a manufacturer's perspective, consideration of these two factors and the effect on governance structure are critically important. Figure 3 illustrates supply chain governance structures (and the resulting performance outcomes) given the degree of simultaneity and the level of information application available from the supplier.

Figure 3 reveals a strategic assessment that can be made by manufacturers to improve supply relationships. The figure suggests which supply situations are best suited for market exchange relationships and which are amenable to hybrid-integrative governance structures (e.g., through detailed contracts or alliances), The figure also illustrates potential performance outcomes with respect to efficiency and effectiveness.

Cell I illustrates a manufacturer-material supplier relationship with a low level of simultaneity. When Figure 3 is transposed on Figure 2, this cell also indicates a situation in which supplier transaction-specific assets are low, such as with easily substitutable commodity products. In addition, there is a low degree of information application, indicating that little information is shared between the parties and/or information is transmitted without real-time capability. As such, the selected form of governance is market exchange. An example is the purchase by a food manufacturer, such as Hershey's, of several tons of sugar on the commodity market. There is little need to develop a relationship with the individual sugar producers since quality can be verified by the commodity market, and little information is needed to secure the purchase.

Cell I indicates when inventory (e.g., held for seasonal fluctuations) may offer the lowest cost solution to the manufacturer. Inventory, while reducing efficiency, provides effectiveness by buffering the system to protect against demand uncertainty. If the relationship was moved to a hybridintegrative form of governance, investments would be required in (1) human resources to increase relationship trust and joint commitment and/or (2) sophisticated information technology. These investments would create transaction-specific assets that would increase the transaction and development costs of the relationship. The outcome is that the cost of a hybrid-integrative relationship, as opposed to market exchange, would be greater than the "inefficiency" costs of carrying additional inventory.

Cell 2 illustrates a manufacturer-material supplier relationship with low simultaneity. As Figure 2 suggests, when transaction-specific assets are high, the selected form of governance is hybridintegrative. Cell 2 in Figure 3 shows a condition in which material supplier capability is characterized by a high degree of information application. An example is a manufacturer who forms an alliance with a packaging supplier that provides dedicated equipment and personnel to customize promotional/specialty display packs (e.g., holiday designs, two-for-one packs, giveaways). The supplier's equipment and personnel are transaction-specific assets tailored to meet the manufacturer's demand. The services create a dependency that makes it difficult for the manufacturer to switch suppliers. The customized packaging requires a high degree of information application. The information not only needs to be exchanged in real time (e.g., new package designs, expected volumes) but also needs to be accurate in order for inventory commitment to be minimized.

This arrangement is more effective than the relationship in cell I because "unnecessary" inventory can be removed from the system, allowing for a seamless flow of product. Efficiency (e.g., less material waste, higher quality, more timely production runs, less risk of obsolescence) is also increased due to a better awareness of supply chain plans (e.g., production, promotion). The improved level of efficiency and effectiveness outweighs both the costs of developing the relationship and the transaction costs associated with high asset specificity.

Cell 3 illustrates a relationship between a manufacturer and a logistical service supplier with high simultaneity. As Figure 2 suggests, when transaction-specific assets are low (such as spot transportation or short-term public warehousing), the selected form of governance is market exchange. In this case, there is a lack of sophisticated information application that compromises the level of efficiency/effectiveness. For example, if a manufacturer requires an emergency delivery to a customer that its regular carrier cannot provide, it may ship via a premium mode. A great deal of information does not need to be exchanged beyond delivery pickup and drop off status, so information application is irrelevant. Using a premium mode adds to the cost of the delivery, but the manufacturer is willing to forgo some level of efficiency in order to be effective without requiring transaction-specific assets. Again, the cost of a hybrid-integrative relationship is greater (due to relationship development costs and transaction costs) than the cost of performance inefficiency.

Cell 4 illustrates a relationship between a manufacturer and a logistical service supplier with high simultaneity. As Figure 2 suggests, when transaction-specific assets are high (such as with dedicated or fully integrated logistics services), the selected form of governance is hybrid-integrative. An example is with Tri-Valley Growers (TVG), a cooperative that processes fruits, vegetables, and tomatoes. TVG decided to focus its core competencies on growing, canning, and marketing, which meant outsourcing its entire logistics operation. Outsourcing would enable TVG to provide unique systems for local, national, and international deliveries. TVG formed an alliance with three companies (RISS Logistics, Ryder Integrated Logistics, and Wilson UTC, Inc.) in order to gain each partner's unique competitive advantage while increasing efficiency and reducing costs." These relationships are characterized by a high degree of information application. Performance is also high due to advanced information exchange. Again, when transaction-specific assets are high, there is a risk associated with opportunism (e.g., transaction costs) and the cost of developing and maintaining a relationship that supports high information application. In this case, however, the risk is justified, as performance benefits outweigh the associated costs.

MANAGERIAL IMPLICATIONS

Figures 2 and 3 can help manufacturers identify which supplier relationships should be structured under a market exchange or hybrid-integrative form of governance.They also reveal how asset specificity, simultaneity, and the degree of information application affect governance decisions. Yet, a supply relationship may not fit neatly into one particular category. As an example, where does a supplier fit that has low asset specificity but a high degree of information sophistication? In that situation, the. category of governance is not easy to determine. Options for managing supply chain relationships are perhaps better seen as a continuum from market exchange to hybrid-integrative governance rather than as a simple two-option categorization.36

The framework suggests that market exchange relationships provide a lower level of efficiency and/or effectiveness. Some of these relationships could evolve to hybrid-integrative governance in order to improve performance. Yet, some hybrid-integrative relationships unnecessarily incur additional transaction and relational development costs. If these relationships were governed by market exchange, a lower level of performance would result, but it might be the lowest total cost alternative to the manufacturer.

Table I illustrates the continuum of possible exchange relationships and provides a guide for manufacturers in assessing their current relationships with material and logistical service suppliers. The table enables a manufacturer to determine the trade-offs between "management costs" (e.g., relationship development and transaction costs) and "performance costs" (e.g., cost of efficiency and effectiveness). It also pinpoints relationships in which manufacturers may be better off accepting lower levels of performance in order to avoid the costs associated with developing hybrid-integrative relationships.

The end points in the "Governance Strategies" column of Table 1 represent pure market exchange and hybrid-integrative relationships. In a market exchange relationship, low asset specificity and low information application dominate. The cost of developing the relationship as well as the transaction costs are low. The performance outcome is lower in terms of efficiency and effectiveness. Yet, the net result of this governance strategy can be positive if the cost of developing and transacting the relationship is less than the cost of reduced performance.

At the other extreme, the hybrid-integrative relationship is best used when asset specificity and information application are high. This requires a greater investment to build and maintain the relationship, such that development and transaction costs are high. This form of governance enables greater levels of efficiency and effectiveness, thereby improving performance. Again, this strategy is justified when performance enhancement outweighs relationship development and transaction costs.

Next, two examples will show how a manufacturer, with relationships along the continuum, may evaluate its supply situations and select a governance strategy. The first example involves a material supplier and the second, a logistical service supplier.

Material Supplier Example

Suppose a food manufacturer is purchasing a commodity from a material supplier with a plant in close proximity to the manufacturer. The supplier has a sales representative dedicated specifically to managing the relationship with the manufacturer. This indicates some degree of asset specificity in the relationship (e.g., site and human assets). Yet, since the product is relatively easy to substitute, asset specificity is not considered to be particularly high.

The material supplier is not EDI capable, but the food manufacturer and the supplier do exchange a high degree of information (e.g., production schedules are faxed on a weekly basis, but no promotional data are provided). This indicates that a moderate level of information application exists.

In this situation, efficiency and effectiveness can be improved if information is exchanged on a real-time basis and if better information integration occurs. To allow for real-time exchange, the material supplier needs to invest in EDI technology, and data will need to be exchanged under an EDI format. In order for more integrated information exchange to occur, the business process probably needs to be reengineered. As an example, if daily production changes and promotional data are provided, the supplier can reduce speculative inventory which would improve efficiency and effectiveness. Of course, there is a cost associated with enhanced information application (e.g., technology and business process reengineering).

If information application is improved, asset specificity will increase as the relationship becomes more dependent on the service provided (e.g., information exchange, EDI, supplier managed inventory), which is not easily replaced, and less dependent on the product provided, which is easily substituted. This means that transaction costs increase. In addition, development costs increase as the relationship moves closer to a hybrid-integrative governance structure.

The food manufacturer needs to determine whether this increase in "management" costs is worthwhile relative to the potential for increased performance. If better performance will provide cost reductions that are equal to or greater than the "management" costs, the suggested move to a hybrid-integrative governance structure is valuable. This relationship is a prime candidate for improvement, as some level of trust already exists between the manufacturer and material supplier, given the high degree of production information that is exchanged. The main investment required to improve this relationship is in technology, One reason ECR is difficult to achieve is that solutions "are 80 percent people, policies and processes B and 20 percent technology."17 In this example, the majority of the human investment has been made, so the primary investment required is in technology. This situation is less risky than if the technology already existed but the relationship needed to be developed.

Logistical Service Supplier Example

Suppose a food manufacturer works with a trucking company periodically. The trucking company has satellite tracking capability, high-quality service, and experience redesigning manufacturers' operations to improve inventory management. The manufacturer has only worked with the trucking company for a short time, so the relationship is relatively new. In this example, information application and asset specificity are mid-range. The supplier certainly meets all prerequisites for information technology, but the level of information shared is not particularly high because business is conducted sporadically. The result is a compromised level of performance in exchange for a lower level of relationship development and transaction costs.

Given that the logistical service supplier has reengineering expertise, the food manufacturer should consider how these services can be used to enhance performance. This relationship may be a good candidate for moving closer to a hybrid-integrative governance structure. Again, in making this shift, many changes are required. First, the manufacturer may want to request dedicated equipment/personnel from the service supplier in exchange for more regular volume. In addition, the service supplier's expertise can be used to improve the distribution process. Both activities will increase asset specificity (e.g., human and equipment assets) and information application (as the need to exchange more information grows). This raises the cost of developing the relationship as well as transaction costs. Again, the expectation is that the resulting improvement in performance will override the increased costs of moving toward a hybrid-integrative relationship.

In this example, the relationship itself needs to be developed. This is a much riskier and longer term proposal than in the material supplier example. If the food manufacturer already has a hybridintegrative relationship with a different trucking company and is using this particular service supplier for overflow capacity, then the relationship may be better positioned as it is; closer to market exchange.

FUTURE RESEARCH

We have proposed a framework that manufacturers can use to assess and better position their inbound supply relationships. While the framework is theoretical in nature, it draws heavily upon practical concepts from the marketing/organizational behavior literature, and it is easily illustrated with examples of supply situations commonly found in the grocery industry. This framework seeks to help firms transition from ECR concepts to ECR practice." One step toward making this difficult transition is to form more productive inbound relationships.

An initial avenue for future research would be to investigate relationships governed under both structural forms discussed here. This would involve surveying a broad range of manufacturers in the grocery industry to examine their use of governance strategies with inbound suppliers. Each supply relationship could be measured in terms of asset specificity, information application, efficiency, effectiveness, relationship development costs, and transaction costs. Statistical comparisons could be made to determine if performance is indeed higher and costs are lower with hybrid-integrative relationships.

Further work could test the framework we suggest. The following is a list of propositions for assessing it:

P1 The greater the level of relationship asset specificity, the greater will be the manufacturer's propensity to engage in hybrid-integrative governance.

P2 The greater the level of information application, the greater will be the manufacturer's propensity to engage in hybrid-integrative governance.

P3 The greater the commitment to hybrid-integrative governance, the greater will be the performance outcome measured by efficiency and effectiveness.

P4 The greater the commitment to hybrid-integrative governance, the greater will be the cost of developing and managing the relationship.

P5 The greater the commitment to hybrid-integrative governance, the greater will be the transaction costs associated with the relationship.

A second research direction would be to determine how governance decisions are made. Questions could include the following: Is a strategic assessment really conducted by manufacturers in their purchasing decisions? What criteria, in addition to asset specificity and information application, are included in this decision? At what organizational level are governance decisions made?

A third area of research would involve more detailed examination of information application. We considered it in terms of content shared and technological sophistication of the exchange process. It would be interesting to expand the notion of interorganizational communication flows and their role in governance strategy. For example, information flows may be considered in terms of frequency (e.g., amount of contact between parties), bidirectionality (e.g., extent of two-way flows of input and feedback), and formality (e.g., extent of structure and planning) within supply chain relationships.' The importance of these characteristics would provide insight into the effect of information application on supply chain integration.

CONCLUSION

There has been much discussion about how ECR can benefit the grocery industry, but ECR still remains more a promise than a reality. One step for a manufacturer in implementing the ECR concept is to examine relationships with material and logistical service suppliers. Our framework for conducting that examination is aimed at determining how performance can be improved via a change in governance strategy. We posit that some relationships are best managed at a hybrid-integrative governance level when conditions of high asset specificity and high information application exist. This form of governance provides the greatest potential for ECR performance, as efficiency and effectiveness can be maximized. Certain supply situations (e.g., low asset specificity, low information application) call for a trade-off between performance and low total relationship management and transaction costs.

Our focus is the food industry, but the ideas can be applied to various industries. Manufacturers with supply relationships along the continuum (e.g., mid-range asset specificity and information application) can analyze which governance option will have the best overall outcome by balancing the cost of managing the relationship against the cost of lower performance levels. The relationship can then be positioned along the continuum to improve performance (e.g., a move toward hybridintegrative govermancc) ce) or reduce, management costs in lieu of improved performance (eg., amos toward market exchange).

NOTES

'Kurt Salmon Associates, Inc., Efficient Consumer Response: Enhancing Consumer Value in the Grocery Industry (Washington D.C.: Food Marketing Institute, 1993).

'Same reference as note 1, p. 1. 'Same reference as note 1, p. 3.

'Richard De Santa, "ECR Breakthroughs! A-a-a-a-ny Day Now," Supermarket Business, 52, No. 7 (July 1997):7,10.

'Jan B. Heide and George John, "Alliances in Industrial Purchasing: The Determinants of Joint Action in Buyer-Seller Relationships," Journal ofMarketing Research, 27 (February 1990): 24-36.

'Katherine Doherty, "Road to Nowhere?" Food Logistics, No. 9 (March 1998): 30-36.

'Ryan Matthews, "ECR Phase II: The Challenge Lies Ahead," Progressive Grocer, 74, No. 2 (February 1995): 58-59; Ryan Mathews, "In the Trenches," Progressive Grocer, 74, No. 3 (March 1995): 30-36; Ryan Mathews, "Is ECR Dead?" Progressive Grocer,75, No. 9 (September 1996): 28; and Joshua M. Greenbaum, "Efficient Consumer Response: How Software Is Remaking the Consumer Packaged Goods Industry," Software Magazine, 17 (June 1997): 38-48.

'Ryan Mathews, "ECR: More Promise than Performance," Progressive Grocer- 64th Annual Report of The Grocery Industry, (April 1997): 26-28.

1J. Rathmell, "What Is Meant by Service?" Journal ofMarketing, 30, No. 4 (October 1966): 3226; Leonard Berry, "Services Marketing Is Different," Business, 30, No. 3 (1980): 24-29; Christian Gronroos, Service Management and Marketing: Managing the Moments of Truth in Service Competition, (Lexington, MA: Lexington Books, 1990); and Sak Onkvisit and John J. Shaw, "Is Services Marketing >Really Different?" Journal of Professional Services Marketing, 7, No. 2 (1991): 3-17.

"Ian R. MacNeil, The New Social Contract.- An Inquiry into Modem Contractual Relations (New Haven, CT: Yale University Press, 1980); Russell Johnson and Paul R. Lawrence, "Beyond Vertical Integration B The Rise of the Value-Adding Partnership," Harvard Business Review, 66 (JulyAugust 1988): 94- 101; Robert E. Spekman, "Strategic Supplier Selection: Understanding Long-Term Buyer Relationships," Business Horizons, 31, No. 4 (July-August 1988): 75-81; and Jan. B. Heide, "Interorganizational Governance in Marketing Channels," Journal ofMarketing, 58 (January 1994): 71-85,

"Oliver E. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985), p. 167.

"Oliver E. Williamson, "Calculativeness, Trust, and Economic Organization," Journal ofLaw and Economics, 36 (April 1993): 453-86.

"Same reference as note 11.

"Robert Frankel, Judith Schmitz Whipple and David J. Frayer, "Formal Versus Informal Contracts: Achieving Alliance Success," International Journal of Physical Distribution and Logistics Management, 26, No. 3 (1996): 47-63.

"Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrst Implications (New York: The Free Press, 1975); Oliver E. Williamson, "Transaction Cost Economics: The Governance of Contractual Relations," Journal ofLaw and Economics, 22 (October 1979): 233-61; and Aric Rindfleisch and Jan B. Heide, "Transaction Cost Analysis: Past, Present, and Future Applications," Journal of Marketing, 61 (October 1997): 30-54.

"Same reference as note 15.

"Same references as note 15.

"Same reference as note 15.

"Same reference as note 15.

Oliver E. Williamson, "Comparative Economic Organization: An Analysis of Discrete Structured Alternatives," Administrative Science Quarterly, 36 (June 1991): 269-96.

"Robert R Dwyer, Paul Schurr, and Sejo Oh, "Developing Buyer Seller Relationships," Journal ofMarketing, 51 (April 1987): 11-27; Donald J. Bowersox, "The Strategic Benefits of Logistics Alliances," Harvard Business Review, 68, No. 4 (1990): 36-45; and Robert E. Spekman and Kirti Sawhney, "Toward a Conceptual Understanding of the Antecedents of Strategic Alliances," Marketing Science Institute, Report No. 90-114 (August 1990).

"Same reference as note 5.

"Same reference as note 15, Rindfleisch and Heide.

14Judith M. Schmitz, Robert Frankel, and David J. Frayer, ECR Alliances: A Best Practices Model (Joint Industry Project on Efficient Consumer Response, 1995).

"Louise C. Young and Ian F. Wilkinson, "The Role of Trust and Cooperation in Marketing Channels: A Preliminary Study," European Journal ofMarketing, 23, No. 2 (1989): 109-22; and Robert M. Morgan and Shelby D. Hunt, "The Commitment-Trust Theory of Relationship Marketing," Journal ofMarketing, 58 (July 1994): 20-38.

"Donald J. Bowersox, Patricia J. Daugherty, Cornelia Dr6ge, Dale S. Rogers, and Daniel L. Wardlow, Leading Edge Logistics: Competitive Positioning for the 1990s (Oak Brook, IL: Council of Logistics Management, 1989).

"John T. Mentzer and Brenda Ponsford Konrad, "An Efficiency/Effectiveness Approach to Logistics Performance Analysis," Journal of Business Logistics, 12, No. 1 (1991): 33-62.

"Ian R. MacNeil, "Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a >Rich Classification Apparatus,"' Northwestern Law Review, 75, No. 6 (1981): 1018-63.

"James M. Carman and Eric Langeard, "Growth Strategies for Service Firms," Strategic Management Journal, 1 (1980): 7-22; and M. Krishna Erramilli and C.P. Rao, "Service Firms' International Entry-Mode Choice: A Modified Transaction-Cost analysis Approach," Journal of Marketing, 57 (July 1993): 19-38.

3'Jakki J. Mohr and Ravipreet S. Sohi, "Communication Flows in Distribution Channels: Impact on Assessments of Communication Quality and Satisfaction," Journal of Retailing, 71, No. 4 (1995): 393-416.

"Rashi Glazer, "Marketing in an Information-Intensive Environment: Strategic Implications of Knowledge as an Asset," Journal ofMarketing, 55 (October 1991): 1-19.

"Infrastructure Core Technologies Subcommittee, ECR Technology Operating Committee, and Andersen Consulting, ECR Technology Guide: An ECR Best Practices Report (Joint Industry Project on Efficient Consumer Response, 1995).

"Integrating EDI Workgroup, ECR Best Practices Operating Committee, and Deloitte and Touche LLP, ECR-Integrating EDI. Purchasing Order through Payment (Joint Industry Project on Efficient Consumer Response, 1994).

"Andrew Kaplan, "Shopping for Solutions," Food Logistics, No. 6 (October-November 1997): 29-36.

11R. Lishinsky, G.D. Eyring, M.D. Perry, and H.P. Kinn, "3x3PL: Working with Multiple Strategic Partners," presentation given at the Council of Logistics Management, Anaheim, CA, 1998. 16James C. Anderson and James A. Narus, "Partnering as a Focused Market Strategy," California

Management Review, 33 (Spring 1991): 95-113; same reference as note 20 Dwyer et al.; Jan B. Heide and George John, "Do Norms Matter in Marketing Relationships?" Journal ofMarketing, 56 (April 1992): 32-44; and Robert F. Lusch and James R. Brown, "Interdependency, Contracting, and Relational Behavior in Marketing Channels," Journal ofMarketing, 60 (October 1996): 19-38.

"Same reference as note 32.

"The Joint Industry Project on Efficient Consumer Response was formed with representatives from the food industry and thirteen trade associations (e.g., Food Marketing Institute, Grocery Manufacturers of America) to provide research monographs on all aspects of ECR as well as to compile lists of additional ECR publications. A variety of monographs are available on ECR topics ranging from ABC Costing to Alliances to Cross-Docking. These monographs are available through the partnering trade associations, including the two mentioned in this note.

"Same reference as note 30.

Judith Schmitz Whipple Michigan State University

Robert Frankel

East Carolina University

and

Kenneth Anselmi

East Carolina University

ABOUT THE AUTHORS

Judith Schmitz Whipple is Associate Professor of Food Industry Management in the Department of Agricultural Economics at Michigan State University (Ph.D. Michigan State University). She has published in numerous marketing and logistics journals and conference proceedings. Her research interests include strategic alliances, supply chain integration, and customer service with a focus on the agri-food system.

Robert Frankel is Assistant Professor of Marketing in the Department of Marketing at East Carolina University (Ph.D. Michigan State University). He has published in a number of marketing and logistics journals. His research interests include strategic alliances, supply chain management, transportation, and international marketing and logistics.

Kenneth Anselmi is Assistant Professor in the Department of Marketing at East Carolina University (Ph.D. Nebraska). His research interests focus on channel governance, relationships, and strategy. He has published in various marketing and business journals. His industry background includes positions as Director of Marketing and Vice-President of Operations at packaged-goods and industrial corporations.

Copyright Council of Logistics Management 1999
Provided by ProQuest Information and Learning Company. All rights Reserved