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Purpose The paper seeks to discuss and develop SCM as a scientific discipline using different theories from non‐logistics areas to explain inter‐organizational phenomena. It also attempts to establish a frame of reference that allows us to mitigate the gap between the current SCM research and practice and the theoretical explanations of how to structure and manage supply chains. Design/methodology/approach The paper introduces three different perspectives that together will contribute to a broader understanding of SCM in practice: an economic perspective; a socio‐economic perspective; and a strategic perspective. The theoretical framework is applied to two important research topics within SCM: third party logistics (TPL); and new product development (NPD). Findings There is no such thing as “a unified theory of SCM”. Depending on the concrete situation, one can choose one theory as the dominant explanatory theory, and then complement it with one or several of the other theoretical perspectives. Research limitations/implications The way the four theories complement one another is explored on a conceptual basis, but further research into this direction may explore more deeply how these alleged complementarities occur in practice, and how managers mould their decisions by these ideas. Practical implications The four theories can provide normative support to important management decisions in supply chains, such as outsourcing, safeguards against opportunism, and alignment of incentives. Originality/value The main contribution is that one cannot rely on one theoretical explanation when analyzing phenomena in SCM. It is neccessary to consider several theories and how they may complement one another in order to provide a more comprehensive view of SCM.
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Research paper
Complementary theories to supply chain
management
Arni Halldorsson
School of Management, University of Southampton, Southampton, UK, and University of Reykjavik, Reykjavik, Iceland, and
Herbert Kotzab, Juliana H. Mikkola and Tage Skjøtt-Larsen
Department of Operations Management, Copenhagen Business School, Frederiksberg, Denmark
Abstract
Purpose The paper seeks to discuss and develop SCM as a scientific discipline using different theories from non-logistics areas to explain inter-
organizational phenomena. It also attempts to establish a frame of reference that allows us to mitigate the gap between the current SCM research and
practice and the theoretical explanations of how to structure and manage supply chains.
Design/methodology/approach The paper introduces three different perspectives that together will contribute to a broader understanding of SCM
in practice: an economic perspective; a socio-economic perspective; and a strategic perspective. The theoretical framework is applied to two important
research topics within SCM: third party logistics (TPL); and new product development (NPD).
Findings There is no such thing as “a unified theory of SCM”. Depending on the concrete situation, one can choose one theory as the dominant
explanatory theory, and then complement it with one or several of the other theoretical perspectives.
Research limitations/implications The way the four theories complement one another is explored on a conceptual basis, but further research into
this direction may explore more deeply how these alleged complementarities occur in practice, and how managers mould their decisions by these ideas.
Practical implications The four theories can provide normative support to important management decisions in supply chains, such as outsourcing,
safeguards against opportunism, and alignment of incentives.
Originality/value The main contribution is that one cannot rely on one theoretical explanation when analyzing phenomena in SCM. It is neccessary
to consider several theories and how they may complement one another in order to provide a more comprehensive view of SCM.
Keywords Supply chain management, Product development
Paper type Research paper
1. Introduction
1.1 Starting-point of considerations
The practical field of supply chain management (SCM) is
constantly changing, as the competitiveness of international
companies is more and more dependent on their capability to
produce and deliver customized products and services fast
and efficiently all over the world. At the same time, an
increasing percentage of the value creation takes place outside
the boundaries of the individual firm (see, for example, Bruce
et al., 2004). This induces higher complexity and diversity
into management decisions regarding the structure of the
operations, the positioning of activities and processes, the role
and power of the participants, and the most efficient forms of
collaboration between all members in a transformation chain
between production and consumption, which we call a supply
chain. These issues also impact on research in the field of
operations management. In order to understand and to
explain decision-making and practices in a complex network
of collaborating firms (see also Rudberg and Olhager, 2003),
we need to draw on several behavioral and organizational
theories and frameworks in combination. Our approach is
therefore important, as this coupling of organizational
theories with SCM is not often discussed within the
audience of this journal.
Lamming (1996) introduces the theory of SCM as an
extension of logistics, though referring to the extended need
of relationship issues to be considered in the theory of SCM.
However, the notions still remain on a more applied than
theory-building level. Larson and Halldorsson (2004) discuss
four unique perspectives on the relationship between logistics
and SCM. Tan et al. (1999, 2002), as well as Akkermans et al.
(1999), recognize the customer orientation as one important
ingredient as well as the simultaneous integration of
upstream, downstream and internal performance systems.
Also here we can identify implicitly an organization’s
behavioral backbone, which is not explicitly presented. This
also applies to Romano and Vinelli (2001), who try to
distinguish SCM from logistics, but fail to discuss the
theoretical ground for this type of inter-organizational
management. The importance of interactions between
different parties is presented and discussed by Salvador et al.
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Supply Chain Management: An International Journal
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qEmerald Group Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/13598540710759808]
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(2001). However, these interactions were rather accepted as a
given status than critically scrutinized.
We presume the necessity of presenting and discussing
organizational theories for managing supply chains and will
therefore combine in this article four different theories:
1 the principal-agent theory;
2 transaction cost analysis;
3 the network theory; and
4 the resource-based view.
We will show that our choice is based on the assumption that
there might be no “right” theory for the management of
supply chains.
1.2 The research problem and objective of the paper
This paper looks into how theories from other disciplines can
be applied within SCM and ultimately used to develop SCM.
We follow Maaloee’s (1997) classification of theories, later
discussed in the context of logistics by Arlbjoern and
Halldorsson (2002), that explain a problem:
.grand theories (particular science with specific concepts,
e.g. philosophy of science);
.middle-range theories (worked connections between a set
of concepts represented by socio-economic theories
applied in various managerial disciplines); and
.small-scale theories (limited number of concepts
presented as propositions, e.g. the “fit” model of
products and supply chain by Fisher, 1997).
In this paper, we will focus especially on Maaloee’s (1997)
suggestion that middle-range theories can be used to reflect
connections between a set of concepts that represent key
decisions of SCM. Only few contributions demonstrate how
to deal with the phenomena of SCM from a middle-range
theoretical perspective (New, 1997; Mears-Young and
Jackson, 1997; Olavarrieta and Ellinger, 1997; Handfield
and Melnyk, 1998; Logan, 2000; Arlbjoern and Halldorsson,
2002; Ketchen and Guinepero, 2004; Cousins, 2005).
The objective of our article is to develop and discuss a
middle-range theoretical foundation of SCM based on
different notions of socio-economic theories trying to
explain inter-organizational phenomena. We use these
theories because we are interested in answering two questions:
1 How to structure a supply chain when it is perceived as a
collaboration of institutions?
2 What is needed to manage a particular structure?
To gain insights into the institutional set-up of SCM
arrangements, we have established a frame of reference that
allows us to look at SCM from an institutional and socio-
economic perspective. We have chosen transaction cost
analysis (TCA) and the principal-agent theory (PAT) to
answer the first question, as these theories are typically used
to identify the best structure of and within institutions (e.g.
Croom, 2001; Eisenhardt, 1989; Williamson, 1985, 1999;
Coase, 1937). The second question will be answered by
adapting the RBV and the network perspective (NT), because
these theories look at institutions’ use of resources to stay
competitive and the dynamics of inter-organizational
relationships. All the selected approaches are well
recognized in non-logistics disciplines, such as organization
economics (TCA, PAT), marketing and purchasing, and
strategic management (RBV), but so far their explanatory
force has been sparingly applied in SCM (see Croom, 2001;
Logan, 2000; Skjoett-Larsen, 1999). All four theories, each of
which touches upon specific issues related to SCM, have a
much longer history in business management than the
concept of SCM itself.
On this basis, we will show how the developed frame of
reference can be applied to two SCM research domains:
1 third party logistics (TPL); and
2 new product development (NPD).
These two areas have been chosen for several reasons. First,
both are of strategic importance for managing the supply
chain. Second, both are important elements in the SCM
concept. Third, both areas imply the creation of a long-term,
inter-organizational arrangement that not only aims to
promote operative improvements, but also to guide or lead
the strategic direction of companies. Fourth, they represent
two distinctive functional streams in a supply chain that are
gaining increasing importance, both within academia and
companies:
1 service; and
2 research and development (R&D).
Although the strategic impact of NPD has always been a part
of SCM, only recently has it received more attention in the
literature, especially under the topics of early supplier
involvement in NPD (see Dowslatshahi, 1998; Wynstra
et al., 2001; Ragatz et al., 1997; Wasti and Liker, 1997), mass
customization (see Duray et al., 2000; Salvador et al., 2002;
Pine, 1993; Mikkola and Skjøtt-Larsen, 2004), and
postponement (see van Hoek, 2001; Pagh and Cooper,
1998; Feitzinger and Lee, 1997; Ernst and Kamrad, 2000).
This is not surprising, as many high-tech industries are facing
increasing challenges imposed by shorter product life cycles,
increasing customization of products, and supply chain
integration. Not only are these firms contemplating
outsourcing their NPD activities, they also have to maintain
sustainable growth and stay profitable. Many firms, such as
Volkswagen, Lego, Sony and Philips, are coping with these
challenges through platform strategies to meet their
customers’ needs while protecting their core competencies.
When product innovation is perceived as the source of
competitive advantage, product architecture design strategies
through modularization and related outsourcing decisions
become a central issue in SCM. Component and NPD
outsourcing decisions are typically made concurrently with
the decomposition of product architectures, from which
recombinability, substitutability, commonality, and
distinctiveness possibilities are determined (Mikkola,
2003b). The success of NPD activities depends on the
amount of transaction costs incurred, resource allocation,
power propensity among the members of the supply chain,
and inter-organizational dependencies shared between all
members in the supply chain.
TPL is also progressively representing multiple facets that
share some important features of SCM relationships. More
importantly, its managerial practice consists of logistics
operations performed by a TPL provider on behalf of their
customers. According to Berglund et al. (1999), TPL
represents a “separate industry” creating value for their
customers, not only in terms of costs but also in terms of
developing the customer’s business processes. These
companies are often themselves organized in a network of
operators with various skills representing multiple locations
(Hertz and Alfredsson, 2003). TPL, or outsourcing of
Complementary theories to supply chain management
Arni Halldorsson et al.
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logistics activities, is increasing both in terms of number and
type (see, for example, Larson and Gammelgaard, 2001). In
addition to conducting the make-or-buy decision, the process
of purchasing logistics services, which includes acquiring
resources and competencies, may take years to conduct
(Andersson and Norrman, 2002). Beyond the acquisition of
services and development of the particular solution is the
management of relationships between buyers and logistics
providers, which often takes the form of a close, long-term
relationship in which trust may serve as a coordination
mechanism in addition to the formal contract (Skjoett-
Larsen, 2000). Empirical evidence demonstrates that TPL
arrangements have become an important feature of the
buyer’s attempt to exploit, leverage, and develop logistics
resources and competencies through inter-firm relationships
(see, for example, Halldorsson and Skjoett-Larsen, 2004).
The article is structured as follows. After an introduction,
which includes an argument for the need of this research, we
present our understanding of SCM and theory building. In
the third section, we introduce the four theories that are
developed outside SCM thinking and practice, but which
nevertheless can be useful in structuring and analyzing
management decisions in supply chains. The paper concludes
with a summary of our efforts and a critical outlook on future
research.
2. The theoretical foundations of SCM
The supply chain encompasses organizations and flows of
goods and information between organizations from raw
materials to end-users (Handfield and Nichols, 2002). The
supply chain is a meta-organization built up by independent
organizations that have established inter-organizational
relationships and integrated business processes across the
borderlines of the individual firms. A supply chain can also be
characterized as a borderless organization (e.g. Picot et al.,
2001), a value net (Bovet and Martha, 2000), a virtual supply
chain (Chandrashekar and Schary, 1999), an interactive firm
(Johansen and Riis, 2005), a multi-organization/single-site
coordinated operations network (Rudberg and Olhager,
2003), or an extended enterprise (Davis and Spekman,
2004; Boardman and Clegg, 2001). Management of such an
arrangement refers to inter-organizational relationship
management with the objective of improving the overall
profitability of the activities and/or organizations involved.
The current literature on SCM seems to agree on the nature
of the phenomena (e.g. Persson, 1997).
Although SCM has existed for almost 25 years, it still lacks
a socio-economic theoretical basis that may be used to explain
and understand this particular form of inter-organizational
arrangement. Initially, two consultants from Booz, Allen and
Hamilton (Oliver and Webber, 1982) introduced the SCM
concept. Several authors have traced the theoretical
foundations of SCM. Thus, Svensson (2002) found that the
theoretical foundation of SCM and Alderson’s functionalist
theory (Alderson, 1957) have many similarities. Mentzer et al.
(2004) presented a unified theory of logistics based upon
logistics capabilities as a source of competitive advantage.
Recently, academics have presented valuable contributions,
enhancing our understanding of the concept of inter-
organizational management of different flows of products
and/or information (e.g. Ballou et al., 2000; Heikkila¨, 2002;
Monczka and Morgan, 1997; Srivastava et al., 1999; Frazier,
1999; New and Westbrook, 2004). The majority of
contributions focus on definitions and concepts from a
functional point of view (e.g. logistics, operations, marketing,
and purchasing), providing pragmatic recommendations on
how to improve a firm’s performance and implementation of
postponement by supply chain reconfiguration. Prominent
examples of such approaches can be found in Mentzer et al.
(2001), Cooper et al. (1997), Cigolini et al. (2004), Lambert
et al. (2005) and Croxton et al. (2001). Current frameworks
of SCM present solutions on how to design and manage
particular relationships between various stages in a chain, but
they do not address the economic, strategic, and socio-
economic theoretical rationales behind them (e.g. Min and
Mentzer, 2004; Chen and Paulraj, 2004a, b).
The next section discusses SCM from the four chosen
inter-organizational theories, and makes a cross-comparison
based on specific characteristics of the theories.
3. Developing a middle-range theoretical base for
SCM
3.1 Fundamental issues of SCM
The literature supports the view that the integration of key
business processes within and across companies that add
value for customers and other stakeholders can be called
SCM (see Cooper et al., 1997; Bechtel and Jayaram, 1997).
Definitions of SCM originate from the operations
management literature referring to issues such as NPD,
customization and distribution of goods, including the
balancing of demand needs and capacity requirements in
the transformation of raw materials into final products
delivered to customers (e.g. Lee, 1993). Within the logistics
discipline, Cooper and Ellram (1990, p. 2) define SCM as an
“integrative philosophy to manage the total flow of a
distribution channel from supplier to the ultimate user”.
Both Harland (1996) and Christopher (1998) reach another
conclusion. Instead of managing flows, SCM is seen as the
management of a network. Harland (1996, p. 64) defines
SCM as “the management of a network of interconnected
businesses involved in the ultimate provision of product and
service packages required by end customers”. Rather than
looking at SCM as the management of a vertical pipeline of
inter-linkedfirms,Harland(1996)considersSCMas
management of a complex network of organizations involved
in exchange processes. Christopher (1998) argues that the
word “chain” should be replaced by “network”, since the total
system normally includes multiple suppliers and customers as
well as multiple suppliers to suppliers and customers’
customers. Some scholars (e.g. Christopher, 1998; Heikkila¨,
2002) also suggest that “supply chain management” should
really be termed “demand chain management” to reflect the
fact that the chain is driven by the marketplace to satisfy the
needs of the end-users. Another argument is that within
marketing SCM is presented as one of the core business
processes, which includes purchasing and physical
distribution activities (e.g. Srivastava et al., 1999).
However, all attempts refer to one specific “setting”, which
is the management of relations of independent organizations
in a particular structure. Consequently, we understand such
management as the coordination and interaction of decision
makers (i.e. human beings) from economic institutions within
a system based on division of labor (Go¨bel, 2002). In that
sense, we develop a middle-range theoretical frame of
Complementary theories to supply chain management
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Volume 12 · Number 4 · 2007 · 284– 296
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reference to explain SCM based on TCA, the PAT, the RBV
and the NT. We do not claim that these theories are the only
ones that can be used to establish a theoretical framework of
SCM. But since we understand supply chains as
interconnected socio-economic institutions, we argue that
these theories are most useful to explain both structure and
management issues of supply chains. Other theories and
frameworks that focus on other aspects of SCM include
relational contracting theory and resource dependency theory
from the organizational sciences (e.g. MacNeil, 1980; Pfeffer
and Salancik, 1978), the political economy frameworks (e.g.
Stern and Reve, 1980), the dynamic capabilities framework
(Teece et al., 1997; Eisenhardt and Martin, 2000), and the
evolutionary theory of economic change (Nelson and Winter,
1982). These supplementary aspects include power regimes
in supply chain relations (Cox et al., 2001), dynamic design,
redesign of the firm’s chain of capabilities (Fine, 2000), and
the importance of path dependence and organizational
routines (Nelson and Winter, 1982). However, it is beyond
the scope of the current paper to discuss these supplementary
aspects.
3.2 The logic of the selected set of inter-organizational
theories
3.2.1 SCM mitigating agency problems the principal-agent
theory (PAT)
Based on the separation of ownership and control of
economic activities between the agent and the principal,
various agency problems may arise, such as asymmetric
information between the principal and the agent, conflicting
objectives, differences in risk aversion, outcome uncertainty,
behavior based on self-interest, and bounded rationality. The
contract between the principal and the agent governs the
relationship between the two parties, and the aim of the
theory is to design a contract that can mitigate potential
agency problems. The “most efficient contract” includes the
right mix of behavioral and outcome-based incentives to
motivate the agent to act in the interests of the principal
(Eisenhardt, 1989; Logan, 2000).
The alignment of incentives is an important issue in SCM.
Misalignment often stems from hidden actions or hidden
information. However, by creating contracts with supply
chain partners that balance rewards and penalties,
misalignment can be mitigated (Narayanan and Raman,
2004; Baiman and Rajan, 2002).
3.2.2 SCM as coordination of transferred rights of disposals
transaction cost analysis (TCA)
TCA offers a normative economic approach to determine the
firm’s boundaries and can be used to present efficiency as a
motive for entering inter-organizational arrangements
(Williamson, 1975, 1985, 1996). A company may reduce its
total transaction costs (ex ante and ex post costs of contact,
contract, and control) by cooperating with external partners.
The key question is: why do firms exist? In the context of
SCM, this question is addressed as: which activities should be
performed within the boundary of each firm, and which
activities should be outsourced? SCM relationships are
represented by the hybrid mode of governance between
markets and hierarchies. Asset specificity (limited value in an
alternative application of, for example, physical, site, human,
and dedicated assets) is the most influential attribute of the
transaction (Rindfleisch and Heide, 1997). Behavioral
assumptions of bounded rationality and the risk of being
subject to opportunistic behavior from a partner also
influence the transaction costs. Bounded rationality may
result from insufficient information, limits in management
perception or limited capacity for information processing.
Mechanisms for mitigating the risk of opportunism include
safeguards and credible commitments such as long-term
contracts, penalty clauses if a partner fails to fulfill the
contract, equity sharing, and joint investments. According to
Williamson (1996), trust between the parties is based on
“calculated risk” and not on personal trust between
individuals.
TCA has often been used in make-or-buy decisions in
supply chains. Examples are outsourcing of logistics activities
(Maltz, 1993; Andersson, 1997; Halldorsson, 2002), buyer-
supplier relationships (Mikkola, 2003b; Bensaou, 1999;
Stuart and McCutcheon, 1996), and restructuring of supply
chains(Croom,2001).Inessence,TCAisauseful
instrument to decide whether a transaction should be
performed in the marketplace or in-house.
3.2.3 SCM as reciprocated interactions between institutions
the network perspective (NT)
The performance of a firm depends not only on how
efficiently it cooperates with its direct partners, but also on
how well these partners cooperate with their own business
partners. NT can be used to provide a basis for the
conceptual analysis of reciprocity (Oliver, 1990) in
cooperative relationships. Here, the firm’s continuous
interaction with other players becomes an important factor
in the development of new resources (Haakansson and Ford,
2002). Relationships combine the resources of two
organizations to achieve more advantages than through
individual efforts. Such a combination can be viewed as a
quasi-organization (Haakansson and Snehota, 1995;
Haakansson, 1987). The value of a resource is based on its
combination with other resources, which is why inter-
organizational ties may become more important than
possessing resources per se. Thus, the resource structure
determines the structure of the supply chain and becomes its
motivating force. The network theory (NT) contributes
profoundly to an understanding of the dynamics of inter-
organizational relations by emphasizing the importance of
“personal chemistry” between the parties, the build-up of
trust through positive long-term cooperative relations and the
mutual adaptation of routines and systems through exchange
processes. Through direct communication, the relationships
convey a sense of uniqueness, ultimately resulting in supply
chains as customization to meet individual customer
requirements. The parties gradually build up mutual trust
through the social exchange processes. A network does not
seek an optimal equilibrium, but is in a constant state of
movement and change. Links between firms in a network
develop through two separate, but closely linked, types of
interaction: exchange processes (information, goods and
services, and social processes) and adaptation processes
(personal, technical, legal, logistics, and administrative
elements) (Johanson and Mattsson, 1987).
NT is descriptive in nature and has primarily been applied
in SCM to map activities, actors, and resources in a supply
chain. The focus has been on developing long-term, trust-
based relationships between the supply chain members.
Examples of issues include buyer-supplier relationships
(Gadde and Haakansson, 2001), third party logistics
Complementary theories to supply chain management
Arni Halldorsson et al.
Supply Chain Management: An International Journal
Volume 12 · Number 4 · 2007 · 284– 296
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(Halldorsson, 2002), and management roles in supply
networks (Harland and Knight, 2001).
3.2.4 SCM as coordination of relational assets the resource-
based view (RBV)
Only a few articles have applied the resource-based view
(RBV) to the field in focus in order to obtain the sources of
competitive advantage through SCM (Lewis, 2000; Pandza
et al., 2003; Rungtusanatham et al., 2003; Carr and Pearson,
2002) or to analyze the structure of chains and industrial
clusters (Miller and Ross, 2003; de Olivera Wilk and
Fensterseifer, 2003).
The RBV deals with competitive advantages related to the
firm’s possession of heterogeneous resources (financial,
physical, human, technological, organizational, and
reputational) and capabilities (combination of two or more
resources) (Grant, 1991; Penrose, 1959; Prahalad and
Hamel, 1990). These resources and capabilities constitute
the core competence of the particular firm and serve
ultimately as its source of competitive advantage. The static
stream of research focuses on attributes that contribute to the
heterogeneity of resources and capabilities. Four barriers may
prevent competitors from imitating a firm’s resources and
capabilities:
1 durability;
2 transparency;
3 transferability; and
4 replicability (Prahalad and Hamel, 1990).
These attributes may also apply to inter-organizational
arrangements (Jap, 2001). The more dynamic aspects of the
RBV consider a firm’s core competence to be its ability to
react quickly to situational changes and build further
competencies (Prahalad and Hamel, 1990) or dynamic
capabilities (Eisenhardt and Martin, 2000). Hence, a firm’s
competitiveness is associated with the configuration of
resources and capabilities as the markets evolve. However,
inter-organizational relationships may also facilitate and
advance the learning processes of individual firms. As such,
relationships are not only output-oriented but also learning-
oriented. Efficiency may not only be explained in terms of
productivity or operational measures, but also in terms of the
opportunity to access another firm’s core competencies
through cooperative arrangements as an alternative to
building such competencies in-house (Haakansson et al.,
1999).
The RBV is an implicit assumption in many supply chain
decisions. Often, outsourcing decisions are based on the idea
of focusing on core competencies and outsourcing
complementary competencies to external partners. TPL and
outsourcing of standard components and processes to
subcontractors are examples. However, outsourcing of
design, NPD, or software development is often a way to
gain access to other supply members’ core competencies
through inter-organizational collaboration.
Table I summarizes and compares the specific
characteristics of the four selected theories, which should
be viewed as complementary and not mutually exclusive.
The PAT stresses issues of inter-firm contracting and
ultimately the notion of supply chain transparency. The
TCA considers hybrids such as integrated supply chains as
the result of a market failure, whereas the NT and the RBV
see the supply chains as a means to access resources and
competencies outside the focal firm (Skjoett-Larsen,
1999). Easton and Araujo (1993) assert that the RBV
poses a “narrow conceptualization of the firm as a business
entity” indicating that this stream of research may benefit
from both the network approach (NT) and the vision of
SCM.
In the following sections, we demonstrate how the four
theories can contribute to answering our two questions
adapted to two selected fields of application within SCM:
1 third party logistics (TPL); and
2 new product development (NPD).
4. The theoretical framework applied to
third-party logistics (TPL)
Within the realm of SCM, the case of TPL illustrates the
efficient governance structure for the “make-or-buy” decision
depending on the characteristics of the transactions. Table II
provides an overview of how the four theories can be applied
to TPL. The four theoretical approaches increase our
understanding of TPL by offering a complementary view of
why TPL relationships exist (TCA), just as they guide inter-
firm interactions based on contracts (PAT) into long-term
relationships (NT) supporting a firm’s core competence
(RBV).
4.1 The principal-agent theory and TPL
Balancing the need of the shipper and the capability of the
TPL provider is a well-known managerial issue (e.g. Hertz
and Alfredsson, 2003) that explicitly implies the risk of
agency problems. The PAT suggests an “inter-firm
contracting perspective” on TPL, focusing on the design
of an efficient contract between the buyer and seller of
logistics services. The idea is to develop the most efficient
combination of outcome and behavioral incentives in the
contract between the shipper and the TPL provider. The
extent to which the TPL provider’s performance can be
measured and controlled has a great effect on whether the
provider is paid by actual performance (e.g. number of
orders picked, packed, and shipped to the customers) or
according to behavioral outcomes (e.g. salaries, hours, and/
or miles). Not all aspects can be covered ex ante in the
contract. Therefore, the issue of contracting should be a
revisiting issue in TPL relationships.
4.2 Transaction cost analysis and TPL
By reducing the supplier base of transport firms and entering
into close and long-term cooperation with a few key
operators, a firm may reduce the transaction costs related to
collecting information about numerous suppliers, the costs of
negotiating and writing a contract, and the enforcement costs
after the negotiation of a contract. However, close
cooperation also involves the risk of opportunistic behavior.
Therefore, it might be necessary to incorporate “safeguards”
and “credible commitments” into TPL agreements, such as
penalty clauses related to poor delivery performance, joint
investments in dedicated warehouses or equipment, joint
training programs, and exchange of employees between the
firms.
4.3 The network perspective and TPL
To TPL, the NT presents openness and trust between the
parties as a condition for gaining the best possible results
from cooperation. Over time, mutual adjustments improve
Complementary theories to supply chain management
Arni Halldorsson et al.
Supply Chain Management: An International Journal
Volume 12 · Number 4 · 2007 · 284– 296
288
administrative and logistical systems, making them more
efficient. Examples of adjustment processes might be an
electronic data interchange (EDI) connection between the
client and the TPL operator or the implementation of a
quality control system. By entering into close cooperation
with TPL providers who possess complementary
competencies, the individual firm is able to utilize
resources and skills controlled by other players. In close
and long-term cooperation, the parties are able to establish
mutual and strong relations of trust, which may result in the
disappearance of cost-consuming, contractual safeguards.
Thus, firms with efficient, cooperative arrangements might
gain competitive advantage over firms that have to bear
transaction costs to prevent their transport firms from acting
in an opportunistic way.
4.4 The resource-based view and TPL
Similar to TCA, the RBV applies a stringent perception to the
firm’s boundaries. Resources and capabilities can only be
acquired from the market to a limited degree. Under certain
circumstances, firms in the supply chain interact closely on a
long-term basis exchanging confidential information. Hence,
TPL is both a means of improving the logistics services of the
TPL buyer and a way to achieve a mutual transfer of logistics
experience. A long-term mutual commitment and
adjustments as well as a customized rather than
standardized solution contribute to the uniqueness and
heterogeneity of logistics resources and capabilities. Besides
the static dimensions of heterogeneity (inimitable attributes of
resources and capabilities), RBV can help us to understand as
to how to use TPL to shortcut an upcoming need for
Table I Comparison of the principal-agent theory, transaction cost analysis, the network perspective, and the resource-based view
Characteristics PAT TCA RBV NT
Behavioral
assumptions
Bounded rationality
Asymmetric information
Goal conflicts
Bounded rationality
Opportunism
Bounded rationality
Trust
Bounded rationality
Trust
Problem
orientation
Contract design: what is the most
efficient contract?
Efficient governance structure: why
do firms exist?
Internal competence development:
why do firms differ?
Dyadic relationships
embedded in networks
Time dimension Static Static Static/dynamic Dynamic
Primary focus of
analysis
Contracts and incentives Transaction attributes (e.g. asset
specificity)
Resource attributes Inter-firm relations
Function of
relationships
Efficient division of labor
(ownership/control)
Market failures Access to complementary resources Access to heterogeneous
resources
Primary domain
of interest
Alignment of incentives in dyads Exchange and transaction Production and firm resources/
capabilities
Exchange and adaptation
processes
Source: Adapted from Skjoett-Larsen (1999, p. 46) and Madhok (2002, p. 540)
Table II The theoretical framework applied to third-party logistics
Characteristics PAT TCA RBV NT
Behavioral
assumptions
Asymmetric information
between shipper and TPL
provider
Goal conflicts
Calculative trust
Safeguards, specific
investments or long-
term contracts
Personal trust
Joint learning
Transfer of knowledge
Personal trust
Information-sharing
Win-win situation
Problem orientation Performance measurement
ABC costing, open-book,
incentives
Which activities should
be outsourced to TPL
provider?
Development of competencies
internally and between shipper
and TPL provider
Development of
relations
Communication and
interaction
Time dimension Static Static Dynamic Dynamic
Unit of analysis Formal TPL contract TPL services
Transaction costs
Logistics performance
Resources and capabilities
shared by shipper and TPL
provider
Relations between
shipper and TPL
provider
Nature of relations Adversarial relations
Contract influences both the
number and nature of
outsourced activities
Arm’s-length relations
Regular tenders to test
the TPL market
Focus on cost-efficiency
Short-term contracts
Complementary resources
Creating new competencies
through TPL relations
Voice relations
Access to resources
possessed by TPL firms
Evergreen TPL contract
Primary domain of
interest
Alignment of behavioral and
outcome-based contracts
Investment in specific
assets (warehouses, IT,
personnel)
Minimizing transaction
costs
Development of new
competencies (e.g. batch-
monitored shipments, merge-
in-transit, track-and-trace)
Mutual adaptation of IT
systems, processes,
routines
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Arni Halldorsson et al.
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289
competence configuration (building and development)
(Halldorsson and Skjoett-Larsen, 2004). The focal point of
discussion is the ability of TPL to create venues through
learning, either jointly or from each another, which may
support the building of a core competence. This approach is
similar to the view of TPL as a means to configure logistics
competencies (Halldorsson, 2002).
5. The theoretical framework applied to new
product development (NPD)
Within the realm of SCM, we focus our discussion on
modularization of product architecture design strategies (see
Mikkola, 2003a, b; Momme et al., 2000) and how supplier-
buyer relationships impact such NPD decisions (see Wasti
and Liker, 1997; Dyer et al., 1998; Hsuan, 1999). The four
theoretical approaches provide us with additional insights
connecting NPD to SCM, as shown in Table III.
5.1 The principal-agent theory and NPD
Firms’ NPD activities are often proprietary in nature, which
makes firms reluctant to involve suppliers in their activities.
Product architecture designs suggest which NPD tasks might
be performed by suppliers and how. Hence, specific assets
shared with the suppliers have to be determined. Specialized
assets (in contrast to general assets) often have a narrow range
of potential applications and are difficult to deploy (Christy
and Grout, 1994). Co-specialized investments, on the other
hand, increase the principal and agent’s interdependence and
serve as an economic rationale for cooperative, long-term
relationships. Furthermore, shared standards reduce
specificity and provide a form of embedded control
(Sanchez and Mahoney, 1996), reducing search,
monitoring, and enforcement costs, which allows firms to
make efficient exchanges with multiple partners. Such a cost
reduction will subsequently lessen a firm’s incentive to
integrate activities internally and free it to pursue the
advantage of flexibility when there are high levels of input
and demand heterogeneity (Mikkola, 2003c).
5.2 Transaction cost analysis and NPD
In a TCA perspective, it is argued that modularization
reduces transaction costs. Modular systems lower the
transaction costs of information about the parts available
(for a firm) and imply economies of scale in assembling the
package (for a consumer) (Langlois and Robertson, 1992).
Product architectures made up entirely of standard
component would favor market governance. One incentive
to devise modular product architectures is to have
components with standardized interfaces to enable
competition between suppliers on technology innovation. To
reduce transaction costs, firms may outsource product
development and manufacturing activities of certain
components to qualified suppliers. Firms naturally try to
find the optimal trade-offs between switching costs and
performance between partners, which will depend on the
length of relationships shared between the buyer and its
suppliers.
5.3 The network perspective and NPD
In many industries, such as the PC and bicycle industries,
there is a large variety of interchangeable components readily
available. Interchangeability of components in modular
systems encourages vertical specialization, leading to the
Table III The theoretical framework applied to new product development
Characteristics PAT TCA RBV NT
Behavioral
assumptions
Supplier and buyer may have
conflicting interests
Calculative trust
Safeguards by product
architecture control
Trust of key suppliers for co-
development of new components
Personal trust and information
sharing
Win-win situation
Problem
orientation
How does product architecture
control impact the degree of
supplier involvement in NPD?
How many NPD tasks can be
outsourced to suppliers?
How are resources related to
product architecture designs
managed?
How do modular product
architectures enhance competition
and/or collaboration among the
actors of the network?
Time dimension Normally an
ex ante
consideration
Normally contracts are not
drawn up until the product
architecture specifications are
set
Short-term contracts for
standard components
Long-term contracts for
development of new
components
New capabilities are created by
combining and reusing existing
capabilities
Short-term relationships for
standard components
Long-term relationships for co-
development
Unit of analysis Formal contracts for
development of new
components
Patents
Number of components
Degree of modularization
Number of firms
Heterogeneity of inputs required to
produce a product architecture
Number of components
Degree of modularization
Relationship between the buyer
and its suppliers
Nature of
relations
Adversarial relationships
Contract influences both the
number and type of outsourced
components
Arm’s-length relationship for
standard components
Strategic partnerships for co-
development of components
Complementary resources
Creating new competencies by
collaborating
Strategic relationships for co-
development of components
Learning
Primary domain
of interest
Alignment of behavioral and
outcome-based contracts
Investment in specific assets
(tooling, patents, technology
know-how)
Development of new competencies
(modular product architecture,
component design, outsourcing)
Mutual adaptation and sharing of
information
Personal contacts
Development of trust
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creation of networks. One force speaking for vertical
specialization is the dissimilarity among production stages.
When resources are recombined in new ways, a number of
interfaces with other resources need to be considered.
Components and systems have to be designed so they are
easy to assemble and transport. Handling this complexity has
become increasingly important due to the ongoing changes of
activity structures in industries. Furthermore, an increasing
reliance on outsourcing leads to substantial interdependencies
between the activities of different firms. One way to solve this
complexity is through modularization and product platform
designs (Mikkola, 2003c).
5.4 The resource-based view and NPD
Modularity management of product architectures can be
viewed as the management of a firm’s resources. It takes time
and money to develop the capabilities associated with product
architecture designs, and the subsequent market success (or
failure) of the firm is dependent on the architecture’s
configuration (i.e. heterogeneity of resources and causal
ambiguity), the extent of certain technologies and
components’ (i.e. resources and assets) inimitability by
competitors, and the management of resources that must be
shared with suppliers, especially when complementary assets
are involved (Teece, 1986).
6. Frame of reference for SCM
Since supply chain thinking emerged, researchers from
different disciplines have been in search of a theoretical
foundation for the phenomenon. Chen and Paulraj (2004a,
b), Croom et al. (2000), Svensson (2002), Mentzer et al.
(2004), and Ganeshan et al. (1998) have pointed to different
bodies of literature and management problems relating to
supply chain management (SCM). Recently, Cigolini et al.
(2004) presented SCM as resulting from a specific set of
management and supporting tools that may be formed to
achieve successful management of different supply chains. But
none of these authors have presented a theoretical analysis of
the phenomenon SCM.
As we interpret SCM as a network of socio-economic
institutions, we have chosen a set of relevant theories that can
be applied to the management and structuring of specific
SCM arrangements (see Figure 1). The upper part of the
figure includes the four different theories that we have
combined to answer our two research questions:
1 How to structure a supply chain of collaborating
organizations?
2 How to manage a particular structure?
The lower part of the figure illustrates the managerial arena of
SCM, including the key elements (Lambert et al., 1998), the
prerequisites, and the outcome.
One of the contributions of the paper is the attempt to
mitigate the gap between the current SCM research and
practice and the theoretical explanations of how to structure
and manage supply chains. The lower part of Figure 1
illustrates the characteristics often related to SCM. The left
part lists a number of preconditions, which can be found in
most theoretical and empirical studies of inter-organizational
relationships, such as trust, long-term collaboration, mutual
commitments, and willingness to share costs and benefits.
The middle section shows the interactions between structure,
processes, and management, which constitute the core of the
SCM concept. The right side shows the expected effect on
SCM performance measured in terms of higher cost efficiency
internally or in the interfaces between the SCM participants,
better customer service, and higher flexibility and
responsiveness towards changes in the customers’ needs and
expectations. The upper part of Figure 1 shows the “missing
link” – a theoretical framework to analyze and explain the
phenomena in the management arena of SCM.
7. Managerial implications
In this paper, we have proposed four different theories to be
applied when making decisions on the structure and the
management of supply chains:
1 transaction cost analysis (TCA);
2 the principal-agent theory (PAT);
3 the network theory (NT); and
4 the resource-based view (RBV).
Both TCA and the PAT have their roots in neo-classical
economic theory and are especially valuable when it comes to
the issue of how to structure the supply chains. Important
management decisions include, for example:
1 Which activities should the firm keep in-house, and which
activities should preferably be outsourced to external
partners in the supply chain?
2 What should be the roles, positions, and responsibilities of
the participants in the supply chain?
3 How can the firm safeguard against the risk of
opportunism from the other participants in the supply
chain?
4 How should the incentives be aligned internally and
between the participants in order to further the outcomes
of the supply chain?
However, TCA and the PAT have limitations due to the
embedded assumptions about human behavior and the static
view of the firm’s boundaries. Therefore, it is necessary to
apply complementary theories, which can explain the
dynamics in governance structures and inter-organizational
relationships. Here, we have examined such challenges with
the following two complementary theories: the NT and the
RBV. The NT is basically a descriptive theory that examines
how interacting companies in a supply network adapt their
processes and systems to each other by exchange processes,
and how they can develop trust and confidence in inter-
organizational relationships over time. Trust is an important
precondition in SCM. This is especially true in NPD, which
often involves early supplier involvement in order to speed up
time-to-market or to gain access to the latest technology.
Trust can also serve as a governance mechanism in hybrid
organizations, in line with price in the market and authority in
the hierarchy (Bradach and Eccles, 1989).
The RBV complements TCA by considering the resources,
capabilities, and competencies both inside the individual firm
and in the linkages between the firms in a supply chain. The
resources and capabilities of the firms play an important role
in boundary decisions, as discussed by Barney (1999). Where
TCA explains the boundary of the firm by characteristics
related to the transactions (e.g. asset specificity and
uncertainty), the RBV looks at the capabilities of the firm
and the capabilities of potential partners in the supply chains
when deciding which activities should be outsourced and
which should be kept in-house. Combs and Ketchen (1999),
Complementary theories to supply chain management
Arni Halldorsson et al.
Supply Chain Management: An International Journal
Volume 12 · Number 4 · 2007 · 284– 296
291
however, warns that firms should be careful with the selection
of theory used to explain inter-firm cooperation, as they
sometimes come up with contradictory explanations. Their
empirical findings showed that firms do not simply respond to
the logic of only RBV or TCA, but rather react to
contingencies identified by both. Barney (1999), for
example, argues that the normative implications of TCA
and RBV, respectively may differ; despite the circumstances of
high asset specificity and risk of opportunistic behavior, in
which TCA would recommend a “in-house” solution, while
RBV would prescribe circumstances where outsourcing would
be necessary. Cousins (2005) discusses this theoretical
intersection further and suggests that supply and
relationships modes must align with strategies of the firm.
8. Research implications
The research implication of this eclectic approach to SCM is
that we cannot rely on one theoretical explanation (e.g. TCA
or the RBV) when analyzing phenomena in SCM. We have to
consider several theories and how they may complement each
other in order to provide a more comprehensive view of SCM.
Depending on the concrete situation, we can choose one
theory as the dominant explanatory theory, and then
complement with one or several of the other theoretical
perspectives. The four theories selected in this paper are
supported by empirical evidence provided mainly by the
literature, both in general and also to some extent within the
realm of SCM. The way the four theories complement each
other is explored on a conceptual basis, but further research
into this direction may explore more deeply how these alleged
complementarities occur in practice, and how managers
mould their decisions by these ideas. In so doing, the
theoretical development of SCM may reach beyond a mere
battle of intellectual territories urging managers to operate in
a wider, or almost infinite, domain. The main message in this
paper is therefore that there is no such thing as “a unified
theory of SCM”.
9. Conclusions
The starting-point of our considerations focused on two the
attempt of explaining two research questions:
1 How to structure a supply chain?
2 How to manage a particular structure?
These questions are important, as many decision makers in
business practice as well as in academia address these issues
more often than to think of new possible definitions on the
phenomena of inter-organizational management of
transformation flows between production and consumption.
We have presented an argument that builds on organization
theories in order to answer our questions, and this can be seen
as an attempt to diminish the gap between current SCM
research and practice and existing theoretical descriptive and
prescriptive explanations.
We have therefore developed a general framework where we
combine the managerial SCM arena with four different
organization theories in order to explain our two research
questions, and we use our framework for looking at two
different problem areas within SCM:
1 third-party logistics; and
2 new product development.
Figure 1 A middle-range theoretical frame of reference for SCM
Complementary theories to supply chain management
Arni Halldorsson et al.
Supply Chain Management: An International Journal
Volume 12 · Number 4 · 2007 · 284– 296
292
We find that we cannot rely on one unified theory to explain
inter-firm governance structure and management decisions in
a supply chain, but have to apply complementary theories.
Furthermore, we can show that building a unified theory of
SCM might be difficult, as many problems can occur whose
solution might depend on different theoretical backgrounds.
In that sense we have shown how our theoretical choice has
shown different results depending on the observation
perspective.
We suggest that further empirical and theoretical research is
needed in order to find out the contingencies for choosing a
specific combination of theories that adequate explains
management decisions related to configuring and managing
supply chains.
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Corresponding author
Tage Skjøtt-Larsen can be contacted at: tsl.om@cbs.dk
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296
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