Abstract code 008-0055
Evolution of Supply Chain Theories: A comprehensive Literature review
Kayvan Lavassani1, Bahar Movehedi2, Vinod Kumar3
Sprott School of Business, Carleton University, 1-613-5202600,
1125 Colonel By Drive, Ottawa, Ontario, Canada
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Abstract.Until the early 2000s, academia was more concerned with the wording and definitions rather than providing theoretical support for supply chain management (SCM) (Seuring, 2003). Recently, more attention has been paid towards building theoretical frameworks around SCM and introducing this field of study as a discipline. Many authors in the area of SCM have published papers suggesting that more attention to be given to theory building in the area of SCM. In an approach to gain a better understanding of the supply chain theories this study presents an evolutionary review of the theories that can be applied in the field of supply chain management. This study specifically explores the development of the Transaction cost theory (view), Resource-based view (theory), Knowledge-based view, Strategic choice theory, Agency theory, Institutional theory, Systems Theory, and Network Perspective. Furthermore this paper provides rational for application of each theory in supply chain management studies.
Introduction
Few authors had previously tried to provide theoretical foundations for different areas related to supply chain (SC). Handfield and Melnyk (1998), Mears-Young and Jakson (1997), New (1995), and Brush (1997) are some authors who have provided theoretical frameworks for some functions of the supply chain management (SCM), such as logistics, total quality management (TQM), and outsourcing (Seuring, 2003). Mears-Young and Jakson (1997) and New (1995), in their studies on organizational logistics, mentioned the lack of theoretical support in SCM and presented some constructs for studies in this area. Brush (1997), in his studies on outsourcing, suggested the use of “agency theory” in the area of outsourcing. In the late 1990s and early 2000s, there were three dominant theoretical approaches in academic studies of SCM to help in explaining and understanding the existence, management, and boundaries of SCM studies. These three theories are: Transaction Cost Analysis (TCA), Network Perspective (NP), and Resource-based view (RBV). These approaches can be seen in the works of Skjoett-Larsen (1999) and Halldorsson et al., (2003). Halldorsson, et al., (2003) addressed the gap in SCM studies and explained that more work is required for developing theories that can explain different aspects of SCM studies. In response to this gap, Ketchen and Hult (2007) proposed a set of SCM theories and suggested that some organizational views and theories can provide a useful perspective for SCM studies. These views and theories are: RBV, Knowledge-based view, Strategic choice theory, Agency theory, Institutional theory, and Systems theory. The following sections will present and explain these theories and their application in the SCM studies. It is important to note that these theories present complementary – and not mutually exclusive – views for scientific research in this discipline(Halldorsson, et al., 2003), if we may call it a discipline. At the end, we will brief theapplication of SC theories in SCM studies.
Resource-based view (RBV)
Currently there is no consensus in academia about how to label this topic (Acedo et al, 2006). In academia, this topic has been studied as RBV as well as resource-based theory. Acedo, et al., (2006) in their study differentiated these two perspectives (Table 1). While some authors, such as Toms (2004), Priem and Butler (2001a, 2001b), (Foss, 1997a, 1997b), Conner and Prahalad (1996), and Miller and Shamsie (1996), discuss theoretical deficiencies in resource-based practices, few authors (such as Barney, 2001a, 2001b) believe that resource-based practice is scientifically developed enough to be called a theory. As we cannot yet draw a solid conclusion regarding the debate over the level of maturity of this approach in this study – nor is this our intention in this paper – we use the terms RBV and resource-based theory as two terminologies referring to one concept. Our understanding is that RBV in the area of SCM is currently developing to become recognized as a theory. This argument may be expanded to some other theories (or views) that we present in this paper.
Table 1
View or Perspective vs. Theory
Main theme / AuthorView or Perspective / Indicating the lack of sufficient basis for a complete and consistent theory of firm behaviour / Toms, (2004)
Indicating a lack of maturity and coherence among the different contributions / Priem and Butler (2001a, 2001b), Foss (1997a, 1997b)
Indicating a lack of predictive capacity / Conner and Prahalad, (1996); Miller and Shamsie, (1996)
Theory / Indicating a mature and scientific development status / Barney, (2001a, 2001b)
Regarding the roots of the RBV, a disagreement can be observed in the literature. Two schools of thoughts can be identified, which we name Classical and Modern schools of thought. While the Classical school of thought looks at the RBV mainly from an economics perspective (with a focus on resources, such as labour and capital), members of the Modern school of thought consider RBV as a strategy management tool (which aims at the growth of the organization). The members of the Classical school of thought – mostly economists – believe that the ultimate goal of organizations under RBV is to maintain sustainable competitive advantage through their rent advantage, which originates from their resources. For the members of this school of thought, the roots of RBV can be traced back to the seminal work of political economist David Ricardo (2004) on the theory of comparative advantage (Madhok and Li, 2003). In contrast, the Modern school of thought believes that the ultimate goal of organizations under the RBV is to clarify the process by which the firm grows (Rugman and Verbeke, 2002, 2004). This school of thought considers the seminal work of Edith Penroses (1959) – The Theory of the Growth of the Firm – as the main origin of this view. According to this perspective, “Penrose never aimed to provide useful strategy prescriptions for managers to create a sustainable stream of rents; rather, she tried to rigorously describe the processes through which firms grow. In her theory, rents were generally assumed not to occur” (Rugman and Verbeke, 2002). According to the RBV – whether it is rooted from the economic view or the strategic view of the firm theory – the tangible and intangible resources of the organization influence the creation, sustainability, and competitive advantage of the organization (Kor and Mahoney, 2004). These resources are valuable, rare, inimitable, and non-substitutable (Barney, 1991). The main contribution of the RBV as a theory that developed in the strategy discipline is that it considers the involvement of other disciplines, such as economics, industrial organization, and organization science. One of the main criticisms of the RBV is that this approach does not provide methods of gaining the resources that can lead organizations to gain a competitive advantage.
Transaction Cost Analysis (TCA)
TCA – also cited in the literature as transaction cost theory, and transaction cost approach – has been widely used in different areas, especially in economics and organizational studies. First, we will provide some background information about the roots of TCA and then we will discuss the application of TCA in SCM. The main idea here is that TCA theory can justify the existence of SCM. In the early 1970s, the mathematical economist, Williamson, incorporated TCA into the general equilibrium model and set up his transaction cost economics in the new theory of the firm. Oliver E. Williamson (2005) in a recent paper traced the origins of transaction cost economies to the works of Ronald Coase (Coase, R.H., 1937; The Nature of the Firm), Chester Barnard, and Herbert Simon, where they first explained why firms exist. Some other scholars (Scott, 2003) also include Commons (1924) as one of the seminal people in developing transaction cost economies. Williamson (1975, 1981) suggests that organizations can reduce their transaction costs by vertical integration and increasing the level of trust. However, it is important to note that an organizational supply chain can reduce transaction not only through vertical integration and increasing the level of trust among supply chain participants, but also though horizontal integration and economy of scale gained from the aggregation of supply and/or demand. The literature discusses criticisms of the TCA. One criticism is that it focuses mainly on dependent and independent economic factors and fails to include personal and social relations (Skjoett-Larsen 1999; Auramo Kamarainen, 2002). Also, TCA is not concerned with inter-organizational relationships and internal and external organizational changes over time (Yli-Renko 1999; Auramo Kamarainen, 2002). In other words, the transaction cost approach “ignores the power-based criteria in explaining inter-organizational linkages” (McNichols, and Brennan, 2006). For TCA to be applied in SCM we should be able to satisfy these criticisms.
Knowledge-based view (KBV)
According to Robert M. Grant (1997) – one of the seminal authors who contributed in shaping the theoretical roots of KBV – in the post industrial era knowledge as a source of competitive advantage has created some sort of knowledge-based competition. This is the main source of competitive advantage and one of the major characteristics of the new knowledge-based economy. Grant (1997) mentioned a number of scholars as pioneers of KBV, including Bruce Kogut and Udo Zander, Ikujiro Nonaka, Gunnar Hedlund, Georg Von Krogh, Johann Roos, and J. C. Spender. The roots of KBV – which Grant pleads for as a theory – can be viewed from different perspectives (Grant, 1997). These roots can be traced back to the works of James March and Chris Argyris in organizational learning, Nelson and Winter’s work on evolutionary economics, Prahalad and Hamel’s work on organizational capabilities and competencies, and the works of many scholars such as David Teece, Kim Clark, and Steven Wheelwright and Rebecca Henderson on innovation and New Product Development (see Table 2).
Table 2
Roots of Knowledge-Based View in different Disciplines
Dimension / Major Contributing AuthorsOrganizational Learning / March and Chris Argyris
Evolutionary Economics / Nelson and Winter
Organizational capabilities – Competencies / Prahalad and Hamel
Innovation and New Product Development / David Teece, Kim Clark, Steven Wheelwright and Rebecca Henderson
Adopted from Grant (1997)
According to KBV, the exchange of knowledge facilitates the integration and performance of SC and enhances collaboration among inter-organizational SCs and within organizations. Subroto Roy (2003), in his study on e-commerce and centralized purchasing, described the application and importance of the KBV. He explained that in the knowledge-based view of the firm (as described by Grant and Badden-Fuller, 1995; Kogut and Zander, 1992; Nahapiet and Ghoshal, 1998; Spender, 1996; Tsai and Ghoshal, 1998) knowledge is different from the traditional economic resources such as land, labour, and capital. Knowledge can be a source of competitive advantage when it is shared, understood, and combined (Nonaka and Takeuchi, 1995). This knowledge – which is shared, understood, and combined – will create what Poppo and Zenger (1999) described as the common identity. Creation of this common organizational communication code will lower the cost of communication for future research and learning, and will facilitate the efficient dissemination and protection of knowledge in organization (Poppo and Zenger, 1999, p. 857). It can also reduce the transaction cost. Knowledge exchange will help organizations to “possess advantages in generating firm-specific language and routines that yield valuable capabilities” (Conner and Prahalad, 1996, p. 483).
Strategic Choice Theory (SCT)
The early empirical studies on the relationship between organizational structure and situational factors (such as technology) by Blau, Hage and Aiken, Hal, Lawrence, and Lorsch in the United States and Pugh and Woodward in Britain provided material for development of models that helped the SCT to advance (Child, 1972). According to these models, the goal of the organizations is to achieve high performance standards and increase the efficiency to the limits of economic constraints. In these studies, little attention was paid to situational (contextual) factors – environment, technology, and scale of operation – and the agency of choice – any agent in the organization who has the power to direct the organization, e.g. managers (Child, 1972). Strategic decisions in organizations have significant effects on organizational outcomes. Child (1972), in his seminal article on the role of strategic choice, provided a theoretical framework for this theory. SCT, according to Child’s perspective is less concerned with the functional operation of the organization and has more to do with the governance structure and political actions in organizations. Strategic choice emphasizes the importance of establishment of structural forms, the manipulation of environmental features, and the choice of relevant performance standards in achieving organizational goals (Child, 1972). According to the SCT, managers play an important role in achieving organizational outcomes through their decision making or leading the changes in organizations (Child, 1972; Ketchen and Hult, 2007). This strategic decision making functions at three levels: Top tier or long term planning, middle tier or functional level, and bottom tier at the individual level (Kochan, Katz and McKersie, 1986). SCT views managers as proactive agents who are down-stream decision-makers and mainly focus on directing major decisions and change processes in organizations. Change, or what Child (1972) calls “variation in organizational structure,” is caused by three contextual factors: environmental conditions, technology, and size. Employing new technologies and devices (such as RFID[1] tags, ERP[2] systems, etc.) is a form of technological change in organizations that requires decision making at the top tier lever and support at the top, middle, and bottom tiers.
Agency theory (AT)
The AT is an effort to explain the negative (traditional AT) and positive (contemporary AT) relationships between two parties when one party delegates some of its authority to the other one. The roots of AT can be traced back to the works of Max Weber in the area of economics (Beckert, and Zafirovski, 2006). Since then, AT has moved from economics to other disciplines such as finance, accounting, marketing organizational behaviour, political science, sociology, and, more recently, operational management. According to the traditional AT – as described by Max Weber – under normal conditions, political master or ruler (or the principal as used in management and sociology literature) has to delegate authority to agents (or state officials in political science literature) in order for his/her policies (or strategies) to be implemented. Max Weber explains that in this situation, conflict of interest between principals and agents occurs when the principal finds him/her self in the position of the dilettante standing against the now expert trained officials (agents) who stand within the management of administration. In the relationship between these two parties (agent and principals) agents will acquire the advantage of informational asymmetries (Wood & Waterman, 1994, p. 25; Jens Beckert and Milan Zafirovski, 2006). “Knowledge that agencies acquire by continuous attention to particular functions puts them in an especially advantageous position to influence policy when the facts they gather cannot be subject to independent verification or disproof” (Rourke, 1984: p15). The roots of negative (traditional) AT can be found in the neoclassical view of the firm, where organizations are viewed as black boxes of production function with the goal of profit maximization in free markets, under the assumption that contracts were perfectly monitored and enforced at zero cost. Beckert and Zafirovski (2006) explain that this view “left neoclassical economics with no theory of relationship between incentives and performance within firms.” In response to this dilemma the “new institutionalism” view of the organizations provided a different view of organizations outside the neoclassical view of organizations. The traditional negative agency theory was born under the neoclassical economic model, while the new contemporary positive agency theory was developed in the context of the new-institutionalization school of thought. The new-institutionalism scholars opened the black box of organizations and viewed organization as an institution among other institutions in the environment. According to this view, profit maximization is a win-lose game, as the ultimate organizational goal gives its place to collaboration and competition among other firms in a win-win game. Competition for the limited resources gave way to coordination and collaboration in the environment for creating more value. Agency theory can be applied to SCM studies from two perspectives: the positive collaboration view and the negative conflict view. In the traditional negative AT, the theory states that the conflict between agents and principals can create an abusive relationship in which the agent abuses its power – acquired by informational asymmetries and knowledge – throughout supply chains (Eisenhardt 1989, Ketchen and Hult, 2007). According to this view vertical integration of organizations should be through internalization of forward and backward linkages. The Ford Motors vertical supply chain expansion in the early twentieth century, which was based on internalization of first and second tier suppliers from steel manufacturing to soybean farms, can be best explained by the traditional (negative) view of agency theory. Under the traditional view of AT, this theory “might help us understand under what conditions a supply chain member is likely to attempt to exploit other members” (Ketchen and Hult, 2007). The contemporary (positive) view of agency theory, as we explained, could justify the opportunistic behaviour under a rational system perspective. In the new institutionalism environments the ultimate goal of organizations is survival and value creation through collaboration, and agents have a rather open system perspective, which seeks to gain competitive advantage through coordination with their environment. Operations throughout the supply chain of organizations are no longer seen merely as isolated functional institutes or what Beckert and Zafirovski (2006) described as black boxes; rather they are processes through which their integration creates a higher value-added for all participants. The early works on SC viewed SC as merely a network of functions (black boxes) while the more recent definitions view SC as process integrated with other organizations. Thanks to advancements in new technologies – especially communication technologies – the black box has been opened and collaboration has been introduced as one way to gain higher competitive advantage. Combs and Ketchen (1999) explained that the positive theory of agency also has implications in RBV (Barney, Mike Wright, David J. Ketchen, 2001). From this perspective, collaboration with the institutional environment can be viewed as resources that provide competitive advantages for organizations.