Supply management must become external resource management
Kari Tanskanena, Kari Ilorantab, Aki Laihoc, Riikka Kaipiad, Sonja Salorantae
Aalto University, Department of Industrial Engineering and Management
Summary
Many scholars and practitioners have recognized that purchasing or supply management concepts do not well
capture firms’ new needs to extend their management outside the firm’s organizational boundaries. Many
companies need new knowledge and tools to manage and lead their external resources towards a key source of
competitive edge in the global competition. In this paper we summarize the lessons learned from a large Finnish
research program that focused on the research question “How can firms advance from supply management
towards management of external resources?” We also propose a research agenda that continues the research, and
aims at building a management model that synthesizes the current scientific knowledge about managing external
resources.
Key words: Supply management, external resource management, management cognition, social exchange,
integration mechanism
1 Introduction
Purchasing and its role in company management have been under constant debate,
redefinition and change. One of the major cornerstones in the evolution of purchasing and
supply management research and practice is the widely known 1983 article of Peter Kraljic in
Harvard Business Review entitled “Purchasing must become supply management” (Kraljic
1983). This article started a process in which supply management became gradually an
established concept describing the extended strategic role of purchasing function in firms.
In the 1990’s Andrew Cox and Richard Lamming proposed the “external resource
management” term when talking about the new strategic function in firms (Lamming 1993;
Cox 1996; Cox and Lamming 1997; Cox et al. 1998; Cox 1999). In their articles, they
contrasted external resource management (ERM) to the “traditional” purchasing, the clerical
function that purchasing had those days much more commonly than today. In their paper Cox
and Lamming (1997) approach future supply management through two insights:
- It is necessary to take a holistic total supply chain view, but the chain is an
unsatisfactory metaphor: the firm is part of a network
- The firm is an unsatisfactory unit of analysis: the flow of value takes place in a loosely
aligned array of assets and competencies over which no one commercial organization
has ultimate control.
Since the publication of Kraljic’s, Cox’s and Lamming’s articles, research has taken
quantum leap in describing and explaining various issues that are involved in the supply
management. Also many companies have had significant progress in developing their supply
management systems and practices.
1.1 Remarkable evolution in the business environment
The supply chains have become complex networks of organizations, where the number of
relationships is high, and stakeholders are keeping various positions and roles (Kim et al.,
a
Kari Tanskanen Full professor of industrial management at Department of Industrial Engineering and
Management (DIEM) of Aalto University, PB 15500, 00076 Aalto, Espoo, Finland, tel- +358505508008
(corresponding author)
b
Kari Iloranta – Doctoral student at DIEM of Aalto University
c
Aki Laiho - Doctoral student at DIEM of Aalto University
d
Riikka Kaipia – Post-doc researcher at DIEM of Aalto University
e
Sonja Saloranta – MSc (eng) researcher at DIEM of Aalto University
All authors e-mail: [email protected]
2011). This development is connected to the fast development of new technologies, the
increasing globalization of products and markets, and the appearance of new forms of
organizations that has made firms to adopt new ways of competing, for example by
specialization. This development seems to apply for different industries and supply chains,
although with different pace.
One consequence of this development is that firms are more and more dependent on their
various types of suppliers, contractors and partners. Supply networks have become important
sources of competitive advantage. Companies spend fifty to eighty percent of their turnover
on purchases of external goods and services, i.e. on utilization of external resources. The high
share makes supply, supply markets and supplier relationships a key area of management
interest (Van Weele, 2010; Gadde and Håkansson, 1994). An increasing part of the purchases
are different services, which have enjoyed growing interest of both marketing and supply
management researchers. Suppliers’ performance has a significant effect on the risk,
competitiveness, innovativeness, sustainable performance and costs of the focal company.
This means that the actual configuration of the interface between a buyer and a seller (service
provider) determines to a large extent what buyer is able to capture from a supplier in addition
to the actual product or service (Chen and Paulraj, 2004; Terpend et al., 2008).
Supply management has been raised to top management interest during a few latest years.
Many organizations are on relatively low levels of development of their capabilities on
effective utilization of all the opportunities of finding, selecting, guiding and managing their
various sets of suppliers. Many organizations have learned that effective utilization of supply
market opportunities does not mean just searching for more cost effective supply chains, but
as an equally important opportunity, also new innovative approaches to utilization of
resources and capabilities within local and national supply networks. However, many
companies need new tools to manage and lead the external resources, and utilize them as a
key source of competitive edge in the global competition.
1.2 ERM extends strategic supply management
An important challenge due to this grown dependency of suppliers is the management of
external supply relationships. The division between management of the internal issues of a
firm (hierarchy) and purchasing from external suppliers (market) has been clear in earlier
academic literature. Traditional management literature has focused on management and
leadership of the internal issues and activities, while traditional purchasing literature has
oriented on purchasing from competitive markets. Literature on supply management has tried
to address the management challenges of dependent relationships.
Due to the progress in academic research and practice, and the changing business
environment of the firms, it has become evident that supply management concept is becoming
insufficient, and it fails to capture firms’ new needs to extend their management outside the
firm’s organizational boundaries. Despite of the early remarks on the need of a new term, and
even use of the term ERM, the content of the concept remains unclear and undefined, or is
used as a substitution for supply management. For example the European Foundation for
Quality Management (EFQM) has already adopted the ERM term and published a
framework for managing external resources (EFQM, 2006). Their ERM framework is limited
into practical issues and quite much simply replaces the supply management term by external
resource management without giving much new content to the concept.
According to our current understanding, ERM extends strategic supply management at
least in three respects: the scope of various exchange and influencing mechanisms, the
organizational coverage and the focus of management. Traditional supply management is
based on expectation that market competition takes care of optimization of the overall
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efficiency of the supply and the suppliers are managed with contracts. Opportunism and
economic rationality are expected to be the key drivers of behavior. Cooperation as an
emerging form of mutual coordination has enjoyed interest both in firms and supply
management literature, but the concept itself is somewhat unclear. Practical implications of
cooperation have been inconsistent, although late research has shed light on the reasons of the
apparent inconsistency, e.g. through differentiating operative and strategic effects (Villena et
al 2010). ERM devotes interest on all the different forms of human social intercourse between
organizations, and regards also the often less visible non-negotiated, reciprocal exchanges. It
emphasizes the meaning of social forces (e.g. attractiveness) for influencing and being
influenced by other actors and expects, that these forces are important drivers for behavior in
interorganizational relationships.
Within the supply mangement concept supply related issues are expected to be taken care
by a dedicated functional organization and chief purchasing officer (CPO), whereas ERM
understands the meanings and roles of different levels of contacts, intercourses and
relationships across the organizations. Furthermore, while supply management focuses on
suppliers and supply markets, ERM focuses on all current and potential business partners that
provide us value or help us reaching our strategic goals. ERM looks internal and external
resources as equal alternatives, and thus unavoidably asks for top management active role.
However, the ERM paradigm is still in its infancy, and further research is needed. We see that
there is a call to the scientific community to develop theoretical constructs that would provide
a solid foundation for applying truly new management practices.
In this paper, we summarize the lessons learned from a large Finnish research program
that focused on the research question “How can firms advance from supply management
towards management of external resources?” We also propose a research agenda that
continues the research, and aims at building a management model that synthesizes the current
scientific knowledge about managing external resources. The ERM model will be built on the
needs of the companies that already have advanced supply management systems. The aim is
to show these firms the way forward to the next level of managing external resources. Our
ongoing ERM research has focused on the following themes:
1. Top management cognition related to the role, opportunities and management of
external resources.
2. Non-contractual exchanges in buyer-supplier relationships, including subthemes:
attraction and exchange asymmetry, congruence in perceptions of buyer-supplier
attraction, and supplier relational effort.
3. External integration mechanisms.
4. The management practices of ERM.
5. Planning and allocating resources for ERM.
Since the target has been developing theory, all studies in the research program have been
based on multiple cases. Six unique datasets were collected for studying these themes. Studies
of themes 2-4 were dyadic, including 3-9 dyads each. The study of the first theme had an
individual in the firm’s management board as the unit of analysis (30 individuals), and the
study of the last theme had purchasing category as the unit of analysis (4 categories in 2
firms). The study of each theme was founded on the theoretical frame that was most
appropriate for addressing the study’s research questions. Social exchange theory (SET),
cognition and mental models, as well as transaction cost economics (TCE) were among the
formal (general) theories applied in the studies. Supply chain integration, coordination theory,
purchasing organization, and portfolio models were the main thematic discourses that framed
the studies. Some results of these studies have already been published - one doctoral thesis,
several conference papers and master’s theses - and there are many journal articles, and three
doctoral theses in process.
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2 External resource management: the lessons learned in the SSOC research program
2.1 The role of top management
The issues, which enjoy active top management attention, are dependent on three groups
of factors, 1) individual mental models, 2) dominant logics of a company and industry and 3)
the reporting and measurement practices (Iloranta and Tanskanen, 2010).
Individual mental models are shaped by individual experience and education (Walsh,
1995). Until lately, supply management education and related business practices in average
companies have been purchasing oriented, i.e. focusing on sourcing, selection and bargaining.
A company is seen as a production unit. When the present business environment would
suggest looking at a firm as an integrator, ”nexus of contracts”, the traditionally oriented
mental models of top management hinder identification of opportunities related to network
forms of organisation, more complex relationships and effective use of external resources
(Iloranta and Tanskanen, 2010).
The dominant logics of management teams are often relatively rigid concepts of
competition and key performance factors within an industry, and as a consequence, within the
firm (Bettis and Prahalad, 1995 (1986)). A strong trigger is needed to make a management
team to break prevalent dominant logics. The traditional production focused business logics
tend to preserve the purchasing orientation and hinder identification of new opportunities.
Legislation on public reporting of companies has evolved slowly. It is based on a concept
of a firm as production unit, and reveals directly only direct, product related purchases.
Indirect purchases are fragmented as pieces of ”other costs”. Thus the total sum of external
resource usage cannot be directly seen in public reports. This tends to support the traditional
mental models and retard recognition of the total importance of external resources. The
cognitive view to accounting is “important, when it comes to implementing changes aimed at
influencing the resource-management behavior of the firm” (Busch, 1997).
The first lesson from previous research is:
1) The traditionally oriented cognitive models of top management must change to
promote effective utilization and management of external resources.
2.2 Non-contractual influence becomes important
Non-contractual exchanges are getting increasingly important in business relationships.
Even though buyer-supplier relationships have contracts, these contracts are always
incomplete. Firms also have an increasing need to influence other firms that are not suppliers
or customers, which might not ever been in direct contact with the firm. These firms migh for
example provide completing products and services, or develop technology that affects the
direction of the industry development. Therefore understanding non-contractual influence and
exchanges is of utmost importance.
Social exchange theory (SET) proposes that attraction is the force that inspires the parties
to voluntarily create value for each other. Attractiveness is also a resource that increases the
reward power in the inter-organizartional relationships. Reward power is structurally induced,
and unlike coercive power, reward power does not need to be used intentionally to be
effective (Emerson, 1962; Molm et al., 2000). In other words, when firm A is attractive in
the eyes of firm B, firm B voluntarily aims to provide value for firm A, even though firm A
does not ask firm B any favor. Therefore being an attractive business partner is an efficient
way to gain value from others, and to make them to progress to the desired direction.
One of the main foundations of SET is that attractiveness is an attribute of a relationship,
not of an actor (Emerson, 1976). Characteristics that make a firm attractive for some business
partners do not necessarily have any effect on other business partners. Therefore, a firm
4
should first identify which firms (suppliers, customers, among others) are the most important
for its future, and understand what are the characteristics that those firms find attractive. Our
study that focused on buyer-supplier relationships showed that the determinants of buyer
attractiveness and supplier attractiveness involve many of the same attributes. However, the
relative importance of these attributes differs between buyers and suppliers, and they interpret
many of the attributes differently. Even though many of the characteristics were found to be
unique to the relationship, we could identify some common determinants of both buyer and
supplier attractiveness. Specifically, as in previous studies (Christiansen and Maltz 2002;
Ellegaard et al., 2003; Harris et al., 2003; Hansen et al., 2008; Mortensen et al., 2008; Ramsay
and Wagner, 2009), communication, information sharing, innovation capability and growth
emerged in our research as the most important determinants of buyer attractiveness. In
addition, cost effectiveness, delivery capability, and innovation capability emerged as
common attributes of supplier attractiveness, as in previous studies.The second lesson is:
2) A firm should shape its attractiveness in the eyes of those business partners
that are important for its future
2.3 Orchestration of supply base becomes a cross-functional challenge
The management of a supply base is increasinly becoming an issue of orchestration of
value creation networks, consisting of different constellations of customers, suppliers and
other partners. The discussion of value network orchestration has been around for some time:
Impact of the new, emerging information technology on value chains was anticipated already
at mid-80´s when for example Porter and Millar (1985) saw that information technology was
greatly enhancing a company´s ability to exploit linkages between activities both within and
outside the company, and coordinate actions more closely with customers and suppliers. More
recently Dhanaraj and Parkhe (2006) defined orchestration as the capability to purposefully
build and manage inter-firm innovation networks. Traditional supply chains are expanding
into larger networks. Traditional arms-length relationships with competitors are evolving into
shifting alliances and consortia.
The raise of company-wide orchestration of the supplier base can be seen as a part of
changing management paradigm, focused on facilitating and stimulating the value creation
through a network of companies, suppliers in particular (Hayes, 2002). Involving suppliers in
innovation process relates to the observation that new product development process can
become more efficient as a result of integrating suppliers early into the process (Dyer and
Singh, 1998; Handfield et al., 1999). Companies are willing to leverage supplier technological
capabilities, know-how and expertise to improve time-to-market by more efficient use of
resources and ensuring that designs are right “the first time” (Wynstra, 2001).
There is a variety of integration points for suppliers to become involved in new product
development, ranging from idea generation to prototype building and testing. The level of
involvement may also vary from informal collaboration to supplier taking over complete
responsibility for new product development (Petersen et al., 2005), and be complemented
with exploration focused collaboration with a wider set of partners, including supply network
in open network forms of collaboration (e.g. Harryson et al., 2008).
Our research shows that with this new management challenge the capability to orchestrate
the networks and the capability to influence on single suppliers depends on ability to act
towards the suppliers in an integrated manner (Laiho, 2011). As an example, the effective
management of supplier innovation involves activities conducted by top management,
sourcing and procurement, R&D as well as marketing. We can argue based on our research
that the practices realetd to orchestration of external resources can be categorized to three
categories: First, to practices related to the positioning the network, second, to practices
5
related to network configuration and recruitment of network members, and third, practices
related to network management and leadership (Laiho, 2011). As the practices at all of the
categories are conducted by several of the traditional functions, and as internal integration and
cohesion arise in our research as a mandatory precondition, we can conclude the third lesson:
3) For effective management of external resources, a firm must integrate internally
and achieve consistency in actions across multiple functional boundaries
2.4 Selection of integration mechanisms
According to the information-processing perspective organizations need to adapt their
information processing capability to the uncertainty they face. In other words information
processing needs are created by uncertainty, which is broadly defined as the absence of
information or having information that is inadequate for performing the organizational task
(Galbraith, 1977, 35-57). To reach the fit between the information processing requirements
created by uncertainty and the information processing capacity, managers have a variety of
tools and practices (see Martinez and Jarillo, 1989). Vertical mechanisms build on
organizational authority, and include mechanisms such as centralization and standardization.
Lateral mechanisms, on the other hand, are based on communication rather than authority and
they may be formal or informal and include structures such as task forces, liaison and
integrator roles, boundary roles, and various team and meeting arrangements and integrative
units and can be both informal and formal in nature.
In contract manufacturing relationships the level of uncertainty rises (often discussed as
increased risks) (e.g. Fan, 2000; McIvor and McHugh, 2000).). A case based study revealed
that the case companies were putting much effort and adopted multiple parallel mechanisms
to manage the contract manufacturing relationship successfully (Kaipia et al., 2010). In the
context of category management different categories require different ways of integration
because of the individual nature of categories. To manage different categories efficiently
companies need to maintain different information-processing capacities and organisational
designs simultaneously (Trautmann et al., 2009). A study on category management in
manufacturing firms pointed out the role of formal team structures and matrix organizations
in managing cross-functional categories (Heikkilä and Kaipia, 2012). The study concluded
that the category management concept can be an enabler and success factor in meeting the
challenge of realising collaboration between the PSM function and company’s business
organisation. Therefore, the next lesson is:
4) The increased uncertainty in supply needs a simultaneous, but differentiated,
use of integration mechanisms in order to achieve the information processing
capability needed.
2.5 Resource allocation challenge
Companies are developing and implementing various tools and structures for managing
their external and internal resources. However, a study based on four cases in two companies
indicated that companies are lacking an integrated and systematic approach for planning and
allocating resources (Saloranta and Kaipia, 2012). The studied organizations had introduced
practices such as supplier segmentation, guidelines for cooperation with specific supplier
segment, category management, category strategies, key performance indicators, supplier
rating, and various team structures. Even though the study’s main focus was on purchasing
organizations, issues such as varying levels of cross-functional collaboration, lack of
management support, and imbalances in resource allocation between purchasing’s internal
and external interfaces were found.
6
In addition, to having an integrated approach towards resource planning and allocation for
ERM, the relevant resources across the organization need to be engaged in ERM practices.
According to Dubois and Wynstra (2005) purchasing processes cut across whole
organizations, and purchasing related tasks are increasingly performed outside the purchasing
department (Zheng et al., 2007). The case study showed that the need for cross-functional
collaboration in managing suppliers and also purchasing categories was recognized. However
the internal communications and cooperation was seen as challenging and resource
consuming in many cases.
The resources and capabilities for ERM are not utilized in full. In the studied cases
operational work was emphasized in terms of resource allocation; the development plans and
tools were seldom utilized. The implementation level of the developed tools and practices
seemed to vary, however lack of integration of the tools was evident in all the studied cases.
Interestingly also the suppliers’ capabilities and knowledge were somewhat overlooked due to
unclear responsibilities in managing the external interface. A unified approach for resource
planning and allocation is needed. The lesson on resource allocation is:
5) A firm should direct relevant resources for ERM across the organization and
utilize the tools for resource planning and allocation in an integrated manner.
3 Towards management model for ERM: a research agenda
3.1 The link to previous research
We have designed a two-year research program called ERMM (External Resource
Management Model). The ERMM project (Figure 1) aims at creating deep academic and
empirical understanding on the mechanisms that impact on the success of managing the
resource base of the firm. We are suggesting that a model for management and leadership of
external resources should be developed to cover the whole continuum from the purchases
from competitive markets up to the use of complex external services from suppliers. We see
that this model needs to cover management of both internal and external resource
management, as well as purchased goods and services.
Earlier research findings
ERMM Project
Project year 1
Project year 2
Environmental changes
Research stream 1
The impact of external
resources on firm
performance has grown
and ERM has been
identified as a strategic
issue
Cognitive mechanisms
 Drivers and triggers
 Hinders
Organizational learning
Research stream 2
Influencing mechanisms
Complexity grows in
supply network, includes
a growing share of
service purchases
 Direct
 Indirect
 Co-operation
Change from production
centric to integrator
centric operations model
Power dependence
mechanisms
Research stream 3
ERMM
External Resource
Management Model
 Framework
 Capabilities
 Organization
 Social power
 Psychological power
 Economic power
Figure 1. Structure of research project and its connection to earlier research.
7
How ERMM project links to the evolution of the ERM concept in illustrated in Figure 1.
We have identified three sets of mechanisms that need to be understood to form management
model for external resources. First, cognitive mechanisms cover both those triggers that wake
up the change in the mental models of management as well as the new managerial approaches
needed. Influencing mechanisms are the tools used to integrate, co-operate and affect the
supply base. Power dependence mechanisms may be based on traditional bargaining power,
but more and more often social or psychological mechanisms that exist and influence within
relationships and complex connections between firms.
3.2 Research questions and objectives
Objective of this research is to develop, describe and communicate a new management
model for internal and external resource management. The objective will be reached by
- Consolidating knowledge between research groups and forming a synthesis on the
previous findings
- Studying related disciplines to identify theoretical backgrounds or research approaches
to enhance understanding and to be applied for developing the management model
- Testing and sharpening the management model further with round-table meetings with
experienced company managers and experts from various disciplines
- International collaboration with selected universities to enhance understanding on the
phenomenon and to collaboratively contribute to the management model
The research studies how purchasing and supply management can be developed towards a
company-wide management model of internal and external resources. This is done by
addressing the following research questions:
1. Cognitive mechanisms
- What mechanisms hinder or retard the organization to recognize new challenges
and opportunities related to effective utilization of different types of external
resources?
- What are the key triggers, drivers and mechanisms of organizational learning related
to external resource utilization and management?
- What is the role of real crisis or creation of “burning platforms” in the learning
process?
2. Influencing mechanisms
- What mechanisms enable an organization to effectively influence of network of
external resources in different dependency situations?
- What are the contingencies that explain the influence through direct mechanisms vs
contingencies that explain the influence based on indirect, social mechanisms?
- What are the underlying, internal organizational capabilities that are necessary for the
effective use of different influence mechanisms?
3. Power dependence mechanisms
- What are the mechanisms that add voluntary commitment in buyer-supplier
relationship?
- What are means to balance the power –structure in buyer-supplier relationships?
- What are the antecedents and consequences of attraction in the buyersupplier relationship?
- How are we able to identify how attracted the buyer and the supplier are to each other?
- Does successful long-term customer-supplier relationship need mutual attraction?
The focus in the project is in deepening understanding on the factors, requirements,
dependencies, and solutions for ERM. This work is expected to provide new academically
8
valid findings. For companies, this research will provide new knowledge on how to actually
organize internal resources for the management of external resources. One viewpoint is the
capability needs for ERM, which question is of interest for companies.
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