Business aspect

Business aspect

Mehandjiev, N., Grefen, P. W. P. J., Fessl, K., Bittner, W., & Ristol, S. (2010). Business aspect. In N.

Mehandjiev, & P. W. P. J. Grefen (Eds.), Dynamic business process formation for instant virtual enterprises (pp. 27-38). Springer.

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Business Aspect

Nikolay Mehandjiev, Paul Grefen, Kurt Fessl, Wolfgang Bittner, and Santi Ristol

This chapter discusses the business requirements of technology to be developed in support of VEs. It first describes new business directions that have come into existence in the manufacturing industry like the automotive domain. Next, it treats new criteria that have to be met by industries to become or remain successful in new market situations. Finally, new business structures are discussed that (have to) emerge as a consequence of the new directions and criteria.

3.1 New Business Directions

To succeed under the competing market forces discussed in Chapter 1, businesses need to develop strategies delivering cost-effective market advantage based on low costs and guaranteed standards of quality. Figure 3.1 (copied from Chapter 1 for convenience) shows the conflicting nature of changes in product complexity and accelerating change.

Indeed, Galbraith [4] highlights Speed and Change as two of his “Organization Shapers”, forces which shape the contemporary organization. The other four are Buyer Power, Variety and Solutions, the Internet and Multiple Dimensions. Out of these four, we focus on the Buyer Power, since it has given rise to several influential trends in recent years.

One of the most vivid examples of such a trend is found in the domain of auto-motive manufacturing, where OEMs are attempting to simplify supply chains by dealing with fewer providers of larger systems, as shown in the MAN case study in Chapter 11. The general supply chain shape of the automotive industry is shown in Fig. 3.2. It is often seen as a pyramid with the OEM (Original Equipment Manufacturer – e.g. BMW) on top. The OEM assembles cars by putting systems like the cockpit, motor, etc. together. These systems are manufactured by Tier 1 suppliers which get the components from Tier 2 suppliers.

N. Mehandjiev (B)

University of Manchester, Manchester, UK e-mail: n.mehandjiev@manchester.ac.uk

27 N. Mehandjiev, P. Grefen (eds.), Dynamic Business Process Formation for Instant

Virtual Enterprises, Advanced Information and Knowledge Processing, DOI 10.1007/978-1-84882-691-5_3,CSpringer-Verlag London Limited 2010

Product Market increased complexity increased competition shortened life cycles short-lived opportunities ICT Progress Accelerating change Fig. 3.1 Contemporary

forces in product and market development

OEM

Raw materials, standardized parts (Tier 3)

mould making

tooling machine and plant

construction

IT services engineering

logistics

Fig. 3.2 General setup in automotive manufacturing

This is an idealized description, since the OEMs do not actually interact with Tier 1 suppliers only, but also with many suppliers from the lower tiers, providing some components which are part of the final assembly at the OEM.

The increased competition and the importance of variety and configurability cause OEMs to move towards the idealized situation where they are outsourcing more and more of their activities to Tier 1 suppliers. In the process they are reduc-ing their interactions with suppliers from the lower tiers, and only dealreduc-ing with Tier 1 suppliers. This trend is illustrated in Fig. 3.3.

Because the OEMs are Buyers in relation to the Tier 1 and Tier 2 companies and exercise their Buyer Power, proximity to them is seen as vital in the long term for the automotive manufacturers at all levels. This has the effect of increasing both competition and the complexity of the systems delivered by the “chosen few” sup-pliers. Becoming one of these “chosen few” is hardly feasible for an SME, since it requires an ever-increasing level of up-front investment.

One way to reduce these up-front investment costs is to share them with a set of peer companies, each company specializing in a narrow area of technology and the set of companies acting as a single VE. This solution addresses the “increased complexity” dimension in Fig. 3.1, yet the current timescales involved in setting up

- 9 - 14 - 15 - 12 - 3 2002 25 % 25 % 1 % 4 % 10 % 13 % 54 % _{75 %} 55 % _{75 %} 64 % 68 % 90 % 87 % 36 % _{32 %} 96 % 45 % 46 % 99 % pre-development module-assembling module-production Δ internal activities OEMs (%) serial-development vehicle-manufacturing Supplier OEM 2015 Supplier OEM –9 –14 –15 –12 –3 35,3 % 22,5 % 25 % 25 % 1 % 1 % 4 % 4 % 10 % 10 % 13 % 54 % _{75 %} 55 % _{75 %} 64 % 68 % 90 % 87 % 36 % _{32 %} 96 % 45 % 46 % 99 % Δ internal activities OEMs (%) average internal activities OEMs Supplier OEM Supplier OEM

Fig. 3.3 Shift of activities from OEM to suppliers (taken from [6])

a VE are too long. This has negative effect on the company’s ability to success-fully address the “shortening of the life cycles” and the “decreasing windows of opportunity” dimensions of the matrix.

There are thus two trends, which pull in opposite directions: Increased com-plexity and costs stimulate the formation of VEs, whilst the need to ensure agility and rapid reaction to business opportunities implies delegating control and flattening communication and decision-making structures. The formation of a VE is delaying the addressing of a new market opportunity compared to the swift reaction possible within a single company, so we need to speed up the creation of flatter and more agile enterprises.

3.1.1 Formation of Virtual Enterprises

VEs combine expertise by specialized companies, but forming them is compara-tively slow and costly to set up under the current state of practice. The costs of setting up and operating a set of carefully designed collaboration patterns, pro-cesses and rules to coordinate the work of independent companies can reverse the cost–benefit equation of setting up a VE. To alleviate the negative effects of these “transaction” costs, we can automate the search for new partners and coordinating their work, making these two activities both faster and cheaper in an IVE.

The type of inter-organizational integration which is appropriate for a VE is determined from the strength of the coordination and the degree of dependence between the VE participants, as visualized in Fig. 3.4. This is used by Galbraith [4] to determine the appropriate type of relationship (from market-based interaction to outright ownership) for a VE.

Relationships Relative_Strength Coordination Dependence Value Capture

Ownership Strong Great Deal Very high High

Equity Great Deal High

Sourcing and alliance Substantial Moderate

Contract Occassional or some Minimum

Market Weak None Zero Low

Fig. 3.4 Virtual corporation relationships (taken from [4])

Keeping in mind the high dependence and coordination observed in the coop-erative work of VE partners, we can see that the appropriate type of relationship would be sourcing and alliance for the central core of companies, or contract-based collaboration for companies at the periphery of the VE.

To determine if forming a VE would be preferable to other means of achieving the same output, for example one company purchasing another, we need to model the balance between costs and benefits as a function of the expected duration of the opportunity to supply the output to the markets. Companies may indeed join forces by one of them buying the other one, thus establishing the “ownership” relation. Setting this up is a longer-term process, which is not easily reversible, yet it results in a better integration without inter-organizational transaction costs. At the other extreme, market-based interactions and contract-based relations are geared towards shorter-term partnerships and opportunities, yet they are characterized with fairly high transaction costs.

3.1.2 Delegation of Control

To speed up decision making, control and decisions should be delegated further down the control hierarchy. The idea is that individuals or companies who are closer to the work being performed and the problems being faced can be empowered to make decisions without engaging in long communications with people or organi-zations at the higher levels of the control hierarchy. At the same time we need to ensure consistency of any local decisions with overall strategic goals of the com-pany. IT support can help to speed up communications, or it can be used to check consistency of local decisions with global policies.

The effects of IT support on facilitating communication and coordination activi-ties across VE partners have been a subject of academic discourse for a while now, for example, the work of MIT on coordination [7]. Reducing coordination costs and barriers to effective inter-organizational transactions is expected to favour the shift to flatter coordination structures, for example, moving to electronic markets and away from hierarchical forms of organization. Naturally these effects are moder-ated by the attributes of the target service or product to be delivered by the VE, and

complex products with highly specific means of production (machines and conveyor belts for automobiles) are unsuitable for market-based coordination.

The developments in IT support for cross-organizational transactions and coor-dination activities would influence decisions about the architecture of an IVE. The results indicate an overall move to flatter, peer-to-peer communication and coordination structures to increase agility and speed up VE setting up and evolution.

New market conditions and increased product complexity demand collabora-tive business networks and models with delegated control. This is of particular relevance to SMEs, which by nature need collaborative networks to deal with the complexity of contemporary products.

3.2 New Business Criteria

The business forces described above inform the current trends in business strategy and organizational structures by setting high requirements towards the company’s effectiveness and efficiency.

In terms of effectiveness, companies are expected to become global players by increasing their geographical reach and to continuously explore new opportunities and market niches by developing new product lines and new service offerings. Small and medium companies aim to establish themselves as the provider of choice in a particular market niche, whilst larger enterprises aim to capture market segments. A key element of this is maintaining constantly high standards of quality. In certain industry, achieving high quality standards is not only the best guarantee of continu-ous return custom, but also a basic qualifying parameter – those who do not maintain the highest quality will be replaced as supply chain partners.

In terms of efficiency, companies are expected to reduce their overall production and service delivery costs and also their reaction times to market changes. If com-panies succeed in increasing their throughput whilst keeping the product or service quality at a high level and their fixed costs stable, this will result in reducing of the “per unit” production costs and in competitive advantage for the company when larger quantities are required along the supply chain.

We now expand each of these in turn, and conclude by reviewing the role IT can play in supporting the achievement of these new business criteria.

3.2.1 Effectiveness Requirements

The following requirements for success have been formulated in relation to the automotive industry [2, 3], yet their relevance to the more general domain of manufacturing and even services is also quite clear:

• OEMs are opening production facilities across the globe, their suppliers also need

to follow in the pursuit of well-coordinated supply networks and the search for new market coverage.

• Innovative products and services are required, which should be tuned to the needs

of the target customer segments. The innovation can come from the OEM as the head of the supply chain, or it may also emerge from the suppliers proposing new materials and innovative combinations of functionality at system level.

• The role of suppliers is changing since they are asked to manage their part of

the supply chain, including the integration and testing of sub-components plus organizing the logistics to the OEM. Suppliers need to increasingly develop new capabilities to satisfy the new competence requirements.

• We need to maximize the visibility and common understanding of partners about

the state of the overall work and business processes.

• Companies need to maintain high quality standards in order to participate in

the contemporary manufacturing supply chains, with very high accuracy and reliability parameters and documented quality processes.

Overall, the developments point at increasing requirements to Tier 1 and Tier 2 suppliers in terms of developing new competences and opening up new facilities, whilst having to compete on costs under strict quality thresholds. It is thus no sur-prise that suppliers seek collaborations within VEs to address these requirements. In creating these new business partnerships, the dimensions of collaboration and trust are becoming increasingly important [10].

3.2.2 Efficiency Requirements

In addition to the requirements for developing new capabilities and undertaking new responsibilities, suppliers are also expected to reduce their production costs and to establish processes allowing them to shorten their reaction times to market changes.

• Minimizing the production costs should not adversely impact maintaining the

quality of production.

• Indeed, suppliers are expected to deliver best results with the lowest possible cost,

and this means gathering a team of sub-suppliers, which is optimized in terms of complementarity, effectiveness and costs of services.

• Speeding up the response to market changes means we should minimize the setup

time for a partnership to underpin a dynamic virtual enterprise.

• Increasing the agility and decreasing operation costs both require devolving

of decision making and minimizing inter-organizational synchronization during enactment to reduce coordination overheads and transaction costs.

In conclusion, if a company succeeds in increasing their throughput whilst keep-ing the product or service quality at a high level and their fixed costs stable, this

results in reducing the “per unit” production costs and in competitive advantage for the company when larger quantities are required along the supply chain.

3.2.3 The Role of IT

IT has a clear role in addressing the effectiveness and efficiency requirements above, in terms of supporting operational efficiency, seamless communication and the systematic formation and evolution of VEs. Overall, the following factors are amongst those known to have contributed to successful collaborative relationships [10]:

• Innovative business models involving profit sharing between collaborating

orga-nizations;

• End-to-end visibility of mutually agreed performance objectives;

• Open communication between and within partners in terms of continuous

performance review and process optimization;

• Joint planning and business systems supported by transparency in information

access.

IT can support innovative business models by streamlining communication and enabling close relationships with customers and their precise profiling. It also allows VE participants to explore alternative configurations of processes and logistic dependencies using simulation and optimization techniques.

In terms of visibility and communication, the role of IT in supporting the flow of data and measurement information is well accepted given appropriate safeguard-ing of business-sensitive data. IT advances in the area of service computsafeguard-ing and e-business platforms also enable the establishment of joint planning and business control systems, providing transparency of information across the VE.

To summarize, the role of IT for success is evident, through supporting free flow of information, visibility and collaborative planning of business activities. IT can also support systematic exploration of novel team and process configurations and the testing of innovative business models.

The new business requirements of improved effectiveness and increased effi-ciency inform the need to use IT in supporting the planning, formation and operation of VEs. Such support should ensure fast and systematic VE forma-tion to increase the number of market opportunities a company may explore in a short period of time.

3.3 New Business Structures

Realizing an IVE depends upon, and also suggests, certain innovations in business structures. These are motivated by the partnering strategy and choice of external

links [4]. We observe three main new structures in the field we are address-ing: dynamic partner selection, contract-driven partnerships and multi-tier business design. We discuss each of these below.

3.3.1 Dynamic Partner Selection

Traditionally, VEs have a more or less stable character over time – partnering is static in the sense that it takes place between fixed sets of organizations under conditions stated in long-term contracts. In modern e-business settings, however, organizations have to shift their priority to flexibility and ability to change if they want to survive [8]. In a market, players and competitive situations change fast. Adaptation to change is crucial, not only in the internal organization of a business entity, but also in the choice of collaboration partners. In this context, we see the emergence of dynamic virtual markets (or dynamic digital markets), in which part-ners are selected for short to medium timescale collaboration [9]. Consequently, a highly dynamic approach is required to VE formation in order to create or retain a competitive position for a commercial organization. This means that the busi-ness goals at the moment of setting up a busibusi-ness collaboration determine which partners to use in the enactment of the business processes, so that those goals can be acheived. We call this dynamic virtual enterprise creation, leading to IVEs. This paradigm implies dynamic selection, contracting, coupling and executing of business processes of the selected partners.

The dynamic VE creation implies that many more tasks need to be performed with respect to business setup than in the “old-fashioned” static VE case; this is for two reasons. Obviously, the setup stage is performed more frequently – possibly much more frequently depending on market circumstances. But, the setup stage also needs to be more explicit; as collaborations become more flexible, organizations can rely less on pre-established knowledge of their partners. This means that the information exchanged and processed in the setup stage must be more self-contained than in a static virtual enterprise context. Both effects lead to a more demanding setup stage that has to be completed faster. Hence, there is a clear need for automated support for this stage.

Often, the dynamic selection of partners presumes the presence of a special “association” of companies, where skill sets are formally specified and communica-tion between members is encouraged by workshops. The Automotive Associacommunica-tion of Upper Austria, for example, sets up workshops amongst its members – SMEs from Upper Austria that supply automotive parts and systems to larger manufacturers and Tier 1 suppliers. In its approach to this from 2004, for example, the Automotive Association facilitated the formation of consortia by analysing requests for quo-tations provided by OEMs, shortlisting candidate SMEs and selecting a “system integrator” organization. This organization will then gather suppliers in a workshop so that the details of such a quote can be organized and the list of companies to be involved in the quote can be finalized.

3.3.2 Contract-Driven Partnerships

As we have seen above, dynamic setup of VEs implies explicit, self-contained setup of partnerships. The partnerships need to be described precisely, not only in oper-ational terms, but also in business and legal terms. The operoper-ational terms specify what has to be done when (and possibly how). The business and legal terms specify the conditions under which the operational aspects are performed. To obtain this complete specification, contracts are used as the basis for the partnerships. In other words, they drive the execution of a partnership.

An example of contract-driven partnership is when an organization outsources one of its functions, for example, the cleaning function [4]. The activities of the cleaning contractors can be specified precisely, and since the time periods are often disjoint, there is no need for close operational coordination of activities between the client organization and the cleaning organization. The contract provides a clear and formal basis for the partnership and allows the organization providing cleaning services to be continuously assessed and replaced, if necessary. This example is paper-driven, yet the speed of setting up contemporary VEs means that we cannot rely on traditional, paper-based contracts that are established between lawyers of the involved organizations; this would imply both too much throughput time and far too high costs. Therefore, we have to take a turn to electronic contracting, which offers both contracts in digital form as well as (partly) automated processes for establishing contracts [1].

Electronic contracting, or e-contracting in short, provides several paradigms to allow fast contracting, cheap contracting, precision contracting and enactment contracting [5]. Fast contracting allows the formation of just-in-time virtual enter-prises. Cheap contracting allows the establishment (and disposal) of large numbers of contractual relationships (such as virtual enterprises) without much contract-ing overhead in terms of costs. Precision contractcontract-ing is required when contracts do indeed become more complex because of the fact that they need to be com-pletely self-contained. Enactment contracting does not only support establishing a contract by automated means, but also provides automated means for the subsequent enactment of that contract based on the operational information contained in it.

In an example from the automotive industry, Magna Intier manages relation-ships with its numerous suppliers using specially assigned procurement managers and strict contracts embedded in project definitions. When a business opportunity appears, Magna advertises it to its own branches and to external suppliers, and the responses are considered on their merit and match to the specifications.

3.3.3 Multi-tier Business Design

Contemporary products are often so complex that they cannot be produced by a single organization, but require a complex supply chain structure. In this structure, we can often observe multiple business tiers. Each tier is responsible for a part of

the overall production process, may get input from a lower tier and supplies output to a higher tier.

The nature of the target product to be produced (i.e. its structure and func-tionality) determines the structure of its manufacturer. The business structure in the automotive industry shown in Section 3.1 can be matched to the structure of the car as the final product – OEMs manufacture cars, Tier 1 suppliers manufac-ture car subsystems and suppliers of Tiers 2 and 3 manufacmanufac-ture the components of subsystems.

One contemporary trend in this area referred to earlier is driven by the “Buyer Power” factor shaping this multi-layer business design. In the automotive industry, OEMs such as MAN are trying to reduce the interactions they have with Tier 2 and 3 suppliers by redesigning the processes in their supply chains. Tier 1 suppliers are made responsible for a complete subsystem; so they do not only assemble the subsystem but are also responsible for the supply chain feeding their production, including selection and even training of suppliers, organizing the logistics, etc. To achieve this, MAN runs supplier development workshops, where the skills of Tier 1 and Tier 2 suppliers are analysed, improvement actions are identified and supply chain processes are redesigned to accommodate the new organizational shape.

3.3.4 Integrating the Three Principles

The dynamic partnering and contract-driven partnership principles are illustrated in Fig. 3.5, which introduces the concept of a “role”. A role is a set of responsibilities and obligations within an organization, which requires a number of competences (skills). A role acts as a placeholder, and is used to implement dynamic partner selection by matching the competences required by a role with the competences of potential candidate organizations. The main two types of roles are supplier and integrator [4].

Instant Virtual Enterprise

Business Opportunity

Role in IVE Role in IVE

Role in IVE Role in IVE

Co ntr

act Contract

The figure 3.5 also illustrates the organizing role of the contracts in implementing IVEs. Contracts determine inter-role interactions and thus define material depen-dencies and communication routes through the organization. In principle, IVEs can be formed at multiple levels of a multi-tier business structure as outlined in the third principle above. In that case, an “upper-level” IVE may provide a business opportunity for a “lower-level” IVE.

The target product determines the business structure, and the speed of operations allows partners to be selected at the point of need.

3.4 New Business Forms for the New Business World

The new business environment motivates trends of increased organizational agility and devolution in decision making. It also stipulates a number of effectiveness and efficiency criteria, which can be addressed by the use of IT systems to facilitate oper-ations and communicoper-ations (better flow of information, visibility across the supply chain), and also the design and formation of a virtual organization.

These trends and success factors give rise to three new business structures: dynamic selection of partners; contract-driven partnerships and multi-tier business design. In our interactions with companies within the automotive domain, we have observed the emergence of these new business structures and the importance of IT-based support for their effective and efficient operation.

New market conditions and increased product complexity demand collabo-rative business networks with delegated control. This is more so for SMEs, which by nature need collaborative networks to deal with the complexity of contemporary products.

VEs emerge to deal with these challenges. To increase the number of market opportunities a company may explore and use in a short period of time, VEs must be formed faster, better and with less human intervention.

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