Determining the relationships between
supply risk, the expediting intensity and
the contractual performance:
A multiple case study in an engineering, procurement and
construction (EPC) company
Ing. R.C. (Remco) Nauta
S2587688 – B4061578
remconauta@gmail.com
MSc Thesis - Double Degree in Operations Management
2-1-2016
Word count: 15.277
Supervisors:
Dr. E. Ursavas
University of Groningen (UG)
Purpose – Expediting fulfils an important role in ensuring the contractual performance of suppliers.
This is especially true for construction companies which are coping with a significant high supply risk. However, expediting is not yet extensively researched by academics. Therefore, the purpose of this thesis is to examine the relationship between supply risk and the expediting intensity and the relationship between the expediting intensity and the contractual performance.
Methodology – A multiple case study in an engineering, procurement and construction company was
performed. For each case, semi-structured interviews were held with four respondents. These interviews were used to collect qualitative and quantitative data. In addition, background information was gathered by examining different types of company documents.
Findings – This thesis accomplished to provide several important results regarding the research topic.
First of all, new supply risk categories were found with respect to both the chance and the impact of a supply disruption. Moreover, it found that supply risk sources are interrelated with each other. Based on the impact characteristics of the supply disruptions, different information content is chosen to be shared. Furthermore, a higher risk leads to the need for a higher information quality / expediting intensity, which helps to achieve symmetric information conditions. This leads to a reduction of the chance of opportunism and therefore to a potentially higher contractual performance.
Research limitations – Generalizability of the results has to be carefully considered, since a limited
amount of cases was researched. Moreover, potential aspects of expediting outside the subject of governance mechanism did not have the focus of this research and therefore might have been missed.
Originality/value – This thesis is considered to be the first in determining expediting as a governance
mechanism. Therefore, newly derived insights especially extend the body of knowledge of expediting.
Managerial implications – This thesis provided insights that supply risk can be used as indication for
the criticality of products, which is considered to be the driver for an increasing expediting intensity. Therefore, procurement/supply chain managers are provided with an approach to make a more deliberate choice for a decreasing or increasing budget for expediting activities
Keywords: Supply risk, Expediting, Governance mechanisms, Information sharing, Information
asymmetry, Opportunism, Contractual performance, Construction industry
1 Introduction ...9 2 Theoretical background... 12 Supplier opportunism and governance mechanisms ... 12 2.1
Expediting as formal governance mechanism ... 15 2.2
Supply Risk ... 18 2.3
Summary of the literature and the conceptual model ... 21 2.4
3 Methodology ... 23 Research design and setting ... 23 3.1
Data collection ... 25 3.2
Data analysis ... 26 3.3
Reliability and validity ... 27 3.4
4 Results ... 28 The organizational division of expediting ... 28 4.1
The influence of the chance and impact of a supply disruption on supply risk ... 29 4.2
The influence of supply risk on the expediting intensity ... 34 4.3
The influence of the expediting intensity on the contractual performance ... 40 4.4
5 Discussion ... 43 The Organizational division of expediting... 43 5.1
The influence of the chance and impact of a supply disruption on supply risk ... 43 5.2
Supply risk and expediting ... 45 5.3
The influence of the expediting intensity on the contractual performance ... 46 5.4
Contributions to theory ... 46 5.5
Contributions to practice ... 47 5.6
Limitations and further research directions ... 47 5.7
Appendix B: Interview protocol ... 54
Appendix C: Risk identification form ... 56
Appendix D: Coding categories ... 58
Appendix E: Coding tree excerpt ... 59
Appendix F: Case narratives ... 60
Appendix G: Cross-case comparison ... 67
1 INTRODUCTION
Engineering, procurement and construction companies (EPC) are companies managing the making of large industrial goods such as industrial plants and processing plants (Masi et al. 2013). This type of contract form is one of the most important ones in the construction industry (Ranjan 2009; Towler & Sinnott 2008; Yeo & Ning 2002) and can be regarded as one of the extreme forms of the engineer-to-order environment (Micheli et al. 2008). These EPC projects are characterized by their unique product developments and are consisting of many interconnected subsystems and components (Yeo & Ning 2002). These subsystems and components are relatively high complex and high valued (Cagno et al. 2006; Yeo & Ning 2002). The value of project materials equals a significant share (80-97%) of the total revenue of the sector (Cagno et al. 2006). The supplier involvement and, therefore, the dependency on the suppliers in these projects is considerable high (Yeo & Ning 2002). In addition, EPC companies have no opportunity to hedge against poor performance from these suppliers with inventory (Bertrand & Muntslag 1993), since products are highly customized (Bozarth & Chapman 1996). This means that the performance of the supplier has a direct influence on the performance of an EPC project, either in increased troubleshooting activities or project delays. As a consequence, procurement has an important role regarding the competitiveness of EPC projects (Masi et al. 2013; Yeo & Ning 2002) by ensuring that suppliers will deliver according to the contract and prevent poor contractual performance. Although, thus far, the industry is confronted with poor performance and low-profit margins (Yeo & Ning 2006) which also can be seen in recent news items (see e.g. Offshore Energy Today 2015a; Offshore Energy Today 2015b).
anticipate all future events (Sánchez et al. 2013; Van Weele 2009; Williamson 1979). Van Weele (2009) outlined that suppliers might deviate from the contract in terms of costs (i.e. charging more than agreed), quality (i.e. not delivering the agreed quality) and delivery (i.e. delivering later than agreed). This results in a lower contractual performance.
Within the procurement process of Van Weele (2009), a separate process to ensure the contractual performance is established. This process is called expediting and is defined by Van Weele (2009) as “following up on a purchase order to make sure that the supplier is going to perform as it has confirmed through his purchase order confirmation” (Van Weele 2009, p.9). Expediting can be categorized as a governance mechanism preventing the supplier from opportunistic behaviour after contracting (i.e. ex-post opportunism). This will be further outlined in the theoretical background. The procurement process outlines that after contracting you should choose one of the four following expediting forms: exception expediting, routine status check, advanced status check and field expediting. These different expediting forms are originally defined by Kudrna (1975) and are differing in intensity. Van Weele (2009) explains that one should choose for a more intense expediting practice when the product is more critical for the company. However, no further insights are provided by Van Weele (2009) or other scholars. In fact, expediting, as one of the procurement processes, is a scarce topic in the literature. To provide more insights about expediting this thesis will research the relationship between the criticality of products and the intensity of expediting. Supply risk will be used to indicate the criticality of products. Both risks and expediting are concerned with a purchasing transaction and risks are often used in relation with critical (risky) supplies (See e.g. Käki et al. 2015; Fang et al. 2013; Tummala & Schoenherr 2011).
on how expediting could be better used in improving the contractual performance of the supplier. As mentioned, currently there is no framework or guideline available to establish the right expediting method. Hence, this will be the first this thesis to explore how this could be done.
2 THEORETICAL BACKGROUND
This chapter will address the theory used to define the theoretical framework of this thesis. In doing so, it follows the same line of reasoning as the introduction. It starts by outlining the concept of supplier opportunism and the related governance mechanism that are used to prevent this in more detail. This leads to an increased contractual performance. Next, the concept of expediting is explained where it will become clear how expediting can be interpreted as a governance mechanism. Lastly, this chapter provides more background information about supply risk and its usage in relation with the expediting intensity. After outlining the constructs, the information will be summarized and visualized by means of a conceptual model displaying the constructs and their relationship in the last paragraph of this chapter.
SUPPLIER OPPORTUNISM AND GOVERNANCE MECHANISMS
2.1
As outlined in the introduction, the supplier’s contractual performance has a direct influence on the performance of EPC projects. It increases the importance of the procurement function in ensuring that the supplier will deliver according to the agreements. Only, suppliers do not always deliver in the way that has been agreed in the contract. Van Weele (2009) outlined that suppliers might deviate from the contract in terms of costs, quality and delivery. Based on that, this thesis defines the contractual performance as the rate of achievement of the goals that have been specified in the contract between the buyer and supplier in terms of quality-, delivery-, and costs requirements.
Supplier opportunism can explain why suppliers deviate from their contractual obligations resulting in a lower contractual performance. Opportunism is explained by transaction cost economics as “self-interest seeking with guile” (Williamson 1975, p.6). Meaning that, in general, businesses and individuals occasionally will utilize the situation to their own advantage resulting in decisions that might harm these specific contractual agreements. But also, implicit agreements, made on an informal level (e.g. solidarity, flexibility), can be broken by the supplier. Breaking these agreements is described by Williamson (Williamson 1991) as “lawful opportunism” since no literal enforcement can be made by the contract. Therefore, the line of reasoning of Seiter (2008) is followed. Seiter (2008) considers opportunistic behaviour as the breaking of explicit and/or implicit contracts between the partners within the supply network. Ultimately, opportunism implicates that suppliers cannot be considered fully trustworthy (Clegg & Bailey 2007).
which is not available to all of the exchange parties (Hobbs 1996). This means that not all parties have the same level of information. Information asymmetry can lead to two different types of opportunism, namely ex-ante opportunism and ex-post opportunism. Ex-ante opportunism occurs when information is hidden prior to the transaction and ex-post opportunism occurs after signing the contract/purchase order (Hobbs 1996). The latter one is equivalent to the situation of expediting (i.e. following up on a purchase order). Ex-post opportunism, caused by information asymmetry, occurs because a supplier may have the incentive to act opportunistic when the actions are not directly observable by the buyer (Hobbs 1996). For example, when individuals have obtained travel insurance they take less care of their belongings during travelling since their behaviour cannot be fully monitored. Another source of increasing the chance of opportunism is asset specificity (Hobbs 1996). Asset specificity is present when a certain firm (A) has invested in resources in another firm (B) that are specifically for that buyer-supplier relationship and have little value in other usages. Hence, Firm A is “locked” into the relationship, which causes an increased chance that firm B will behave opportunistically. Since expediting is performed after contracting and is not related with investment decision regarding buyer-supplier relationships, it will not be taken into account within this thesis.
sharing and informal rules (Poppo & Zenger 2002; Abdi & Aulakh 2012) and are created over time (Dyer & Singh 1998; Das & Teng 1998).
Cau and Lumineau (2015) stated that the interplay between formal- and relational governance mechanism still is equivocal. Cooper et al. (1997) suggest that the use of relational governance mechanisms lead to a better performance. Though, Jaehne et al. (2009) oppose that formal governance mechanisms are needed for performance improvement. Some scholars argue that the different types substitute each other (Huber et al. 2013; Li et al. 2010; Lui & Ngo 2004). Thus, using one type of governance mechanism will reduce the use of the other. Although, others reason that the different types complement each other (Liu et al. 2009; Poppo & Zenger 2002; Mason-Jones & Towill 1999). Hence, this means that using one type increases the use and/or benefits the other.
Ultimately, the transaction cost theory describes that firms are creating governance mechanisms with minimal costs to ensure the right delivery of the supplier’s goods. In order to do so, firms use governance mechanisms that match the exchange conditions of the transaction (Poppo & Zenger 2002). Thus, as risks are increasing the safeguards must increase as well (Williamson 1985; Klein et al. 1978), which operate to minimize the costs and the losses in performance resulting from such risks (Heide 1994; Joskow 1988). Poppo and Zenger (2002) mention that these costs only will be incurred when the contractual performance has significant influence. An overview of the different concepts introduced in this paragraph is visually represented in Figure 1. Within this figure a line with an arrow represents a relationship and a line without an arrow indicates that one concept is a part of the other.
EXPEDITING AS FORMAL GOVERNANCE MECHANISM
2.2
As described in the introduction, Van Weele (2009) established expediting, in the procurement process, in order to ensure the contractual performance of the supplier, since the supplier might deviate from the contract. This function of expediting is in line with the objectives of governance mechanisms. Therefore, expediting can be seen as a governance mechanism to prevent supplier opportunism.
Expediting is the fifth step in the procurement process of Van Weele (2009). It is preceded by the ordering step and succeeded by the evaluation step. The procurement process is visualized in Figure 2. Expediting is defined as “Following up on a purchase order to make sure that the supplier is going to perform as it has confirmed through his purchase order confirmation” (Van Weele 2009, p.9). Expediting is originally developed by Kudrna (1975) and is often named in several purchasing and supply chain management books as a part of the procurement process (See e.g. Lysons & Farrington 2008; Van Weele 2009; Monczka 2010) or it is simply mentioned in journal literature without any further explanation (See e.g. van der Vaart et al. 1996). Only Van Weele (2009) provided further details about what expediting entails. Other journal literature is treating expediting as part of inventory models (See e.g. Özsen & Thonemann 2015). It regards expediting as the option to speed up deliveries of goods by using alternative transportation modes or speeding up production rates in order to reduce open orders and back orders. Therefore, it is not useful for this research, since this research considers expediting as safeguarding function. In addition, other keywords, such as: order monitoring, order control, order follow-up and purchasing follow-up, were also used in the literature search. However, it did not deliver additional relevant information.
Van Weele (2009) explains the four following types of expediting activities of Kudrna (1975): exception expediting, routine status check, advanced status check and field expediting. Exception expediting is a form of reactive expediting since the action will be taken when the products have not been delivered on the agreed delivery date. This after-the-fact system is not a recommended one by Van Weele (2009) because, on this short notice, the impact of these potential disruptions might not be prevented anymore. The routine status check consists of a request for confirmation from the supplier of the agreed delivery date, a few days before the actual delivery in order to prevent undesired surprises. A more intensive one is called advanced status check. The advanced status
check is considered to be relevant for critical products and/or critical suppliers. The buyer will monitor the progress of the supplier at a regular interval, which can be based, for example, on a time-based work schedule from the supplier. When necessary, the buyer can perform inspections at the supplier’s site and/or perform a factory acceptance test. If the buyer is fully deployed at the supplier, to perform intensive monitoring on the progress of the order, it is called field expediting.
These types of expediting are relatively superficial. Expediting is rather explained by a description of the activities than by explaining the variables of expediting, since the variables that can explain the different types of expediting are not becoming clear. As mentioned, literature regarding expediting is scarce. Consequently, there is not a description of the variables that make up the different types of expediting. Therefore, there is a need for another approach to explain these variables. What the descriptions do explain is that expediting consists of supplier monitoring. More specifically, there is indicated that there are different intensities of supplier monitoring, and therefore the expediting intensity. In general, the purpose of monitoring is to reduce information asymmetry between the buyer and supplier (Wathne & Heide 2000; Lal 1990). As outlined in the previous paragraph, information asymmetry is an incentive for opportunistic behaviour. In practical terms, monitoring increases the ability of the buyer to detect opportunism from the supplier by making information available/sharing information (Stump & Heide 1996). Therefore, this thesis argues that expediting is working as an information sharing function to reduce information asymmetry since information sharing grants both parties to have symmetric information (Liu et al. 2009). This also means that the difference in the expediting intensity must lead to a different information sharing intensity.
information between the parties involved meets the needs of these parties (Petersen 1999). Based on the information of Zhou and Benton Jr. (2007), the following aspects can be associated with information quality: accuracy, availability, timeliness, completeness, relevance, accessibility, and update frequency.
There is expected that a higher information sharing intensity/expediting intensity, where intensity is meaning a high degree (OED Online 2015), is caused by having a higher degree of information quality, since this is the only variable that can be explained in terms of having more or less. This difference in information quality can be explained in the following way: When the routine status check is performed, which means having contact by phone just before the delivery, the information quality is lower than when field expediting is performed. This can be explained by the frequency of updated information (i.e. ones compared to full-time). Because of that the timeliness is also considered higher (i.e. knowing information earlier). Additionally, the accuracy is also higher since the information is seen with own eyes. Based on these differences between the expediting activities it leads to the following identifications of information sharing intensity of the expediting types, as represented in Table 1.
Table 1 – Overview of the intensities of the expediting practices Expediting practice Information sharing intensity
Exception expediting Low Routine status check Medium Advanced status check High
Field expediting Very high
SUPPLY RISK
2.3
The previous paragraph explained that expediting is differing in the rate of information sharing intensity. As outlined before, transaction cost economics prescribes that when the risk in the exchange between firms is increasing, the governance mechanisms must increase as well. In line with this, Van Weele (2009) also mentioned that with critical (riskier) products/suppliers, a higher expediting intensity is needed. Because of that, an indication for the criticality of the supplied goods is needed. Supply risk is often used in relation with critical products (See e.g. Käki et al. 2015; Fang et al. 2013; Tummala & Schoenherr 2011). In addition, both, supply risk and expediting, are concerned with a purchasing transaction. Therefore, there is expected that with the use of supply risk more insights will be found in the relationship between the criticality of products and the expediting intensity.
Supply risk is a part of the broad concept of supply chain risk (Ho et al. 2015). This is an emergent topic which has gained increasingly more interest by scholars and businesses (Sodhi et al. 2012). Supply chain risk can be divided into macro- and micro risks (Ho et al. 2015). Macro risks consist of adverse and rare external events (e.g. war, terrorism and natural disasters). Micro risks are events resulting from internal activities and/or relationships within in the supply chain, which are also called operational risks (Sodhi et al. 2012; Tang 2006). Supply risk is seen as a subcategory of micro supply chain risk. Other subcategories within micro risks are manufacturing-, demand- and infrastructural risks (Ho et al. 2015).
Different definitions have been used to describe what supply risk exactly is (see e.g. Manuj & Mentzer 2008; Harland et al. 2003). This thesis will use the latest definition, which is defined by Hoffmann et al. (2013). They defined supply risk as “the chance of an undesired event associated with the inbound supply of goods and/or services which have a detrimental effect on the purchasing firm and prevent it from meeting customers’ demands within anticipated cost and time.” (Hoffmann et al. 2013, p.201).
These undesired events, or supply disruptions, can arise from different factors. Zsidisin (2003a) argued, based on seven empirical cases, that supply risk tend to originate from supplier characteristics and from market characteristics. Another case study research of Zsidisin (2003b), also exploring supply risk, found the same themes, but also found that product/item characteristics is a theme where supply risk can originate from. This research will follow Zsidisin’s latest framework consisting of these three supply risk categories: market-, supplier- and product characteristics (Zsidisin 2003b). Although, the framework already exists for several years, it shows to remain relevant. Researching these categories is considered to be important for supply chain risk management (Ghadge et al. 2012). Additionally, it is still recently used or cited by different scholars (Gualandris & Kalchschmidt 2014; Tazelaar & Snijders 2013; Micheli et al. 2009).
Figure 4 is a visual representation of the framework of Zsidisin (2003b) and displays clearly the aggregation level of the different risk categories. Firstly, there are supply risks related to market characteristics. These consist of issues and problems past a single supplier or the buyer-supplier relationship and relate to the market structure, -configurations and the environment of the firms competing in the market (i.e. number of suppliers, market capacity, and globalization). Secondly,
there are the risks related to issues and problems that arise from the individual supplier and include the interactions between the buyer and supplier (i.e. quality problems, supplier capacity and supplier flexibility). Lastly, there are risks related to product/item characteristics. These consist of issues and problems arising due to the nature of the product (i.e. product design changes and product customization). Table 2 provides an overview of the risk factors considered to be relevant for this research, including an explanation. This overview is based on the two articles from Zsidisin (2003a; 2003b), since this is the used framework has been developed based on these risks.
Table 2 – Overview of supply risks factors
Factor Description/Explanation Sources
Market characteristics Number of available suppliers
The risk of a supply disruption caused by an increased dependency on a certain supplier(s) because of monopoly, oligopoly conditions, patents etc.
Williamson (1979); Kraljic (Kraljic 1983); Steel and Court (1996); Zsidisin (2003a); Ho et al. (2015)
Number of qualified suppliers
The risk of a supply disruption caused by increased dependency on a certain supplier(s) because of
qualification certification or the lack of knowledge of the supplier’s production processes.
Zsidisin (2003a); Zsidisin (2003b); Ho et al. (2015)
Global sourcing
(geographically dispersed sourcing)
The risk of a supply disruption caused by reduced visibility of the supply network and reduced responsiveness caused by long lead times.
Zsidisin (2003b); Norrman and Jansson (2004); Christopher and Holweg (2011); Ho et al. (2015)
Market capacity constraints
The risk of a supply disruption caused by the inability of the market to produce a certain output quantity in a particular time period.
Zsidisin (2003b)
Market price increases (Raw materials)
The risk of a supply disruption due to variability in the price of (the supplier’s) raw materials caused by the demand and supply price equilibrium.
Zsidisin (2003b); Ho et al. (2015)
Market material shortages
The risk of a supply disruption due to material shortages in the market which makes it impossible for the suppliers to satisfy all of the demand.
(Zsidisin 2003a)
Supplier characteristics Capacity constraints
The risk of a supply disruption caused by the inability of the supplier to produce a certain output quantity in a particular time period.
Lee et al. (1997); Zsidisin (2003b); Ho et al. (2015)
Volume and mix requirements changes (supplier flexibility)
The risk of a supply disruption caused by the inability of system to produce a certain product (inadequate production flexibility) for a particular period of time.
Zsidisin (2003b); Ho et al. (2015)
Incompatible information systems
The risk of a supply disruption caused by the incapability of the supplier to communicate effectively
Lee et al. (1997); Krause and Handfield (1999); Zsidisin (2003b); Ho et al. (2015)
Unpredictable lead times The risk of a supply disruption caused by the uncertainty in the predicted delivery date.
Zsidisin (2003b); Ho et al. (2015)
Long lead times (responsiveness)
The risk of a supply disruption caused by the reduced responsiveness of suppliers due to the long lead times
resulting a lesser ability to configure products at later moments.
Christopher and Holweg (2011); Ho et al. (2015)
Financial instability
The risk of a supply disruption caused by the supplier’s profitability trends in cash flow, taking into account the existence of financial guarantees, which could lead to insolvency.
Krause and Handfield (1999); Steel and Court (1996); Ho et al. (2015)
Quality problems
The risk of a supply disruption caused by the supplier’s lack of ability to guarantee the demanded quality specifications of the product.
Noordewier et al. (1990); Zsidisin (2003a); Zsidisin (2003b); Ho et al. (2015) Product characteristics
Newness of product application/degree of customization
The risk of a supply disruption caused by the newness of products due to a lack of experience from which to make accurate risk assessments and therefore can lead to unexpected problems.
Zsidisin (2003b); Ho et al. (2015)
Product design changes
The risk of a supply disruption caused by changes in product design after contracting leading to a new determination of fit between the supplier’s ability and product requirements.
Noordewier et al. (1990); Stump (1995); Zsidisin (2003a); Zsidisin (2003b); Ho et al. (2015)
Because a lot of different levels regarding risk literature are introduced a short overview of these levels is represented in Table 3. It provides the name of differences levels, which will be used when there is referred to a certain risk level, and an example.
Table 3 – Overview of different levels in risk literature
Level Name Example
1 Risk concept Supply risk
2 Supply risk category Market characteristics 3 Supply risk factor Number of available suppliers
SUMMARY OF THE LITERATURE AND THE CONCEPTUAL MODEL
2.4
In line with transaction cost economics, Van Weele (2009) explains that critical products/suppliers should have a higher expediting intensity. A higher expediting intensity can be clarified by having a higher degree of information quality. The criticality of products/suppliers can be indicated by various characteristics of supply risk, a category of supply chain risks. Supply risk is subdivided into market characteristics, supplier characteristics and product characteristics. Altogether, it results in the conceptual model as displayed in Figure 5, showing the two main researched relationships in this thesis. Namely, how does supply risk influence the expediting intensity and how does this subsequently influence the contractual performance.
3 METHODOLOGY
This chapter describes the used methodology. Therefore, firstly, the design and the setting of the research will be outlined. It explains why this particular type of research is chosen and how this is applied into the research setting. This includes a short description with background information on the used cases. There will be continued with an explanation on the data collections method and how the data analysis was performed. Lastly, there is an overview presented of the used measures that increased the reliability and validity of the research.
RESEARCH DESIGN AND SETTING
3.1
The chosen design for this research is a multiple case study design. According to Leonard-Barton (1990), a case study is a history of a past or current phenomenon derived from evidence coming from multiple sources. This research shows characteristics that direct into a research from exploratory nature. Expediting is not yet fully understood, since specific literature regarding expediting is lacking an explanation for the underlying variables. Case study research is especially useful for new research areas that require exploration (Eisenhardt 1989b; Yin 2013). The theoretical background provided insights in suggested variables which are used to research the two stated relationships. Case study research provides the possibilities to answer the posed ‘how’ research question by getting a relatively full understanding of the nature and complexity of the researched phenomenon (Karlsson 2009). With case study based research, a case represents a distinctive experiment where the case itself serves as an analytical unit (Eisenhardt & Graebner 2007). The unit of analysis is therefore equal to the case and is derived from the research question. Therefore, a case represents the expediting activities performed with a certain supply risk during a certain transaction.
Within the available time frame, two cases were selected from an EPC company, located in the southern part of the Netherlands and active in the offshore industry. This number of cases provides greater in-depth insights compared to researching more cases when resources are constraint (Karlsson 2009). In addition, there is chosen to select two extreme cases. Extreme cases produce more easily observable contrasting patterns in the data and therefore it leads to a more evident pattern recognition (Eisenhardt & Graebner 2007). This approach might benefit in trying to achieve a better understanding of expediting as phenomenon.
steel is one of the main products used in the offshore industry. The cases are varying in the different risk categories to provide a basis for replication logic. This is used in case study research to predict similar (i.e. literal replication) and contrary (i.e. theoretical replication) results (Karlsson 2009). As mentioned, there are two extreme cases selected. Case A consists of low risk on each of the supply risk subcategories and Case B is rated as high on all of these categories. Therefore, there is expected to have contrary results, since theoretical replication is applied. Literal replication is done on the level of product groups, since both cases are done within steel product group.
Table 4 - Case selection overview Case variables Case A Case B Market characteristics Low High Supplier characteristics Low High Product characteristics Low High
Case A consisted of the expediting activities performed during one of the purchasing transactions for project A. Project A concerned the construction of a 600 ton steel jacket1 and a 400 ton topside2 (see appendix A for a visualization). The purchasing concerned the delivery of standard offshore steel plates from stock and involved the focal company and supplier A, located in the southern part of the Netherlands. The steel plates have various applications in the jacket and the topside. Buying steel plates from stock is more expensive compared to buying them from the steel mill. On the other hand, delivery lead times are significantly shorter since the steel plates are already produced. The characteristics of project A led to the decision to buy steel plates ex-stock since ordering them from the steel mill would have taken too much time.
Case B consisted of the expediting activities performed during one of the purchasing transactions of project B. Project B concerned the construction a 6.500 ton jacket (see appendix A for a visualization). The transaction was concerning the delivery of the so called bracings. Bracings are the structural reinforcement tubulars made from steel plates, which are constructed between the legs of the jacket. These particular bracings needed additional stiffeners to increase the stiffness of the bracings at certain locations. The production of the bracings with the additional stiffeners (hereinafter referred to as bracings) was awarded to supplier B, who is located in the eastern part of
1 Steel jackets make up the lower half of an offshore platform structure providing the support for the topside.
They are made from tubular steel members and are usually piled into the seabed.
2
Germany. The supplier is a well-known supplier by the focal company. Supplier B had to deliver the bracings to the subsidiary in Poland who then performed a subassembly. Thereafter, they had been sent to the subsidiary in the Netherlands for the assembly into the jacket.
DATA COLLECTION
3.2
Data collection was done by using multiple sources and methods. First of all, eight semi-structured interviews were conducted. Conducting semi-semi-structured interviews provided the opportunity to gather rich data content, since there is a possibility for new topics to arise and to be discussed. This is particularly suited for exploratory research (Yin 2013). In dialogue with the supply chain manager, there was determined which respondents were suited to provide the best information from different perspectives. For every case four respondents have been interviewed. Each of the respondents occupied a different role regarding the expediting activities which were performed during the purchasing transaction. The respondents chosen for each case were: the buyer, the project manager, the quality control manager, and the project engineer. The buyer, respondent #1, was responsible for the purchasing activities in both cases and therefore has been interviewed twice.
By using different organizational roles as respondents, multiple perspectives on the same case were collected and information of the different respondents could be complemented to increase the richness of data per case (Karlsson 2009). Furthermore, this reduced respondent biases and subjectivity (Karlsson 2009; Voss et al. 2002). Interview questions were determined beforehand and documented in an interview protocol. This interview protocol is added in appendix B. The interview protocol enables to compare the answers between the different respondents and therefore increases the reliability of the study (Karlsson 2009). All interviews were fully transcribed in order to increase the accuracy of data (exactness). Moreover, respondents have been given the possibility to review the transcribed documents in order to make changes when necessary. This was done to increase the construct validity (Karlsson 2009). Interviews were held in Dutch, since this was the native language of all respondents. Therefore, interview data, used in the report, has been carefully translated into English. Before conducting the interviews, respondents were informed about the goal of the research and how was going to be processed. In addition, permission was asked for recording the interview.
qualitative explanation on the risk factors that were applicable in the cases. Respondents were asked to rate the different risk factors on a Likert scale from 1, meaning none risk, till 5, meaning very high risk.
Lastly, additional background information was subtracted from company specific documents, such as process descriptions, site visit reports and meeting minutes. By using these different sources and methods, triangulation of data was reached. This led to an increase of the reliability of the data (Voss et al. 2002). Table 5 provides an overview of the data sources and the average length of the interviews.
Table 5 – Overview data sources
Case A Case B
Respondents #1 (lead buyer), #2 (project engineer), #3 (quality control manager),
#4 (project manager)
#1, (lead buyer) #5 (project engineer), #6 (quality control manager),
#7 (project manager)
Average length of
interview 45 min 66 min
Additional data
sources Procurement planning, process
descriptions, intranet, procedures, customer specifications
Procurement planning, meeting minutes, process descriptions, intranet, procedures, process description, customer specifications,
site visit reports, inspection and test plan
DATA ANALYSIS
3.3
case, which enabled to find similarities and differences between the cases. This overview is presented in Appendix G. Cross case analysis is essential for the generalizability of the conclusions drawn from each case (Eisenhardt 1989b). In combination with the discussion, which compared the results against current literature, this resulted in more valid conclusions.
RELIABILITY AND VALIDITY
3.4
To assure the quality of the research, several actions were taken to ensure the reliability and the validity. Reliability and validity in case research consists of four dimensions: construct validity, internal validity, external validity and reliability (Yin 2013). Construct validity is the level of correct establishment for the used measures. This was guaranteed by letting the respondents review the transcribed interviews in order to validate the obtained information. Moreover, it was assured by gathering data from multiple respondents having different organizational roles and using multiple methods (i.e. interviews, document analysis, and the risk identification form). Internal validity is the degree to which a causal relationship can be established. This was assured by performing pattern matching (i.e. finding empirical evidence for the expected causal links) and explanation building (i.e. inducing theory from case examples to explain causal links) during the data analysis. External validity is the extent to which the research findings can be generalized beyond the performed case study. This was ensured by using replication logic, as it is explained in the case selection (i.e. theoretical and literal replication). Lastly, reliability is the extent to which the research can be repeated producing the same results. This was guaranteed by developing a case study protocol, outlining which questions were asked to the respondents, and by building a case study database. Table 6 provides a short overview of the measures that were taken to ensure the quality of the research.
Table 6 – Used measures to ensure the research quality Aspects Measures
Construct validity Letting respondents review the transcribed interviews, the use of multiple sources
of evidence and achieving triangulation of research methods
Internal validity Using pattern matching and explanation building during data analysis
External validity Using replication logic in the selection of the multiple cases
Reliablity The use of an Interview protocol, the development of a case study database and
4 RESULTS
This chapter outlines the results that have been found based on the within case analysis and the cross-case analysis of the two cases. Full case narratives, providing more detailed information about the events and background of the two cases, can be found in appendix E. New and unexpected results have been found, which have been structured according to four different sub-headings. Firstly, it is explained how the different expediting activities are organized within the focal company since a clear division in the expediting activities was found. Subsequently, the second paragraph describes how the overall supply risk is divided into the chance of a supply disruption and the impact of the supply disruption. Additionally, it describes newly found sources that increase the chance or impact of a supply disruption. Next, the relation between the overall supply risk and the expediting intensity is explained by describing how the relationship is working. Lastly, an explanation is provided on how the expediting intensity is potentially leading to a better contractual performance of the supplier.
THE ORGANIZATIONAL DIVISION OF EXPEDITING
4.1
The performed expediting activities can be divided into two categories. These categories, which also correspond with the different topics of contractual performance, are quality and delivery. Each category had an organizational department carrying the responsibility for those activities. The quality of the sourced products was the responsibility of the quality control department, whereas the on-time delivery of the sourced products was the responsibility of the procurement department. This is reflected in the following two quotes by respondent #1 about the organizational division: "Quality control is responsible for ensuring that the product is good and that all procedures are followed.” and “the expeditor3 (from the procurement department) is accommodating the planning with both the supplier and the focal company”. Reflected in these quotes, is the explicit link between the expeditor, performing the expediting activity, and the safeguarding of on-time delivery. This indicates that expediting is solely seen as a mechanism to ensure that suppliers comply with the contractual due date. The safeguarding of the quality, on the other hand, is seen as a separate aspect and is also performed by another organizational discipline. As confirmed by respondent #6: “In this company, these (protecting on-time delivery and protecting product quality) are two different things”
The organizational division of these expediting activities can be related back to the corresponding capabilities needed to fulfill the activities of the two functions. Respondent #6 and #7 both explained
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that one of the functions cannot fulfill the other function due to a lack of knowledge of that particular discipline. Respondent #6 explained: “Often the expeditor does not have the technical knowledge to check if the quality standards are met”. Respondent #7, explained the same, from the purchasing point of view, when mentioning why an additional person was needed, next to the man from the quality control department: “Because this man did not have the qualities to truly expedite, so to really see where something is located.” In addition, respondent #5 confirmed this by stating: “You still can do that many expediting efforts, but you first have to know where you are talking about when you are expediting”.
Figure 6 is a visual representation of the division between expediting related to quality and expediting related to delivery (product progress).
Figure 6 - Organizational division of expediting
THE INFLUENCE OF THE CHANCE AND IMPACT OF A SUPPLY DISRUPTION ON SUPPLY RISK
4.2
4.2.1 THE CHANCE OF A SUPPLY DISRUPTION
Many responses, during the identification of existing supply risk in the cases, reflected the influence of the market-, supplier- or product characteristics on the chance of having a supply disruption. For example, respondent #3 from case A mentioned the following when explaining the quality performance expectations of the stockholder’s supplier: “The supplier has a very good reputation in the industry and they are not throwing that away, just like we do not want to do when delivering a project. Those guys are driving on their quality they provide, so the risk is much lower.” This quote suggests that a chance of a supply disruption is very low, since the reliability of the quality performance, a supplier characteristic, is very high. Also, the following quote from respondent #2 exemplifies the consideration of the likelihood of market material shortages, a market risk factor, rather than the impact of the shortages: “Market material shortages will not happen because it is already in stock.” The respondent further explained that this reason for a supply disruption is unlikely because the steel plate already finished the processes where the problems can occur since the steel plate is already produced and in stock. The respondent also used the same explanation for other supplier characteristics (e.g. quality problems).
The same holds for case B. Respondent #1‘s quote reflects the increased chance of having a disruption due to the dependency on the second tier supplier: “The specifications clarified that there was only one steel plate mill where they could get the steel from. So, therefore, they were very dependent on that steel mill. If the steel mill messed things up or delivered late, it automatically would result in a late delivery of the pipes.” Similar to the other quotes, it reflects the chance of having a supply disruption, where in this case the sole sourcing of the supplier’s supplier increased the risk. In addition, respondent #5 indicated the same (an increasing chance) when speaking about the capability of the suppliers: “When people know where they are talking about, when they are certified, then you have less risk that it will go wrong.” There is suggested that there is a lower chance of a disruption due to the supplier capability.
customer influenced the choice for buying ex-stock because of the shorter delivery lead time. Therefore, it decreased the chance of having a supply disruption, as indicated by responded #1. The following was mentioned: “With project A we had, because of the short delivery time, not enough time to buy it ex-mill. Therefore, we had to buy it from stock. Therewith, the risk of supply becomes fairly small”.
Next to that, the customer characteristics also influenced the supply network of the focal company. This subsequently influenced the market characteristics. Namely, customer A outlined that three steel mills could be used. This was outlined in the customer specifications. Thereby, the customer influenced the second tier suppliers, a supply network characteristic. Consequently, this meant that the stockholders had to have steel plates from those mills. Therefore, the supply network characteristics influenced the market characteristics, since the number of qualified suppliers, a market characteristic, was determined by the qualified second tier suppliers. In this case, a stockholder was chosen which is a subsidiary of one of the approved steel mills. Likewise, case B was influenced by the customer characteristic. The previous quote from respondent #1, about the increased dependency of the steel mill, also indicates the influence of the customer on the supply network. Namely, also, customer B specified the steel mills that were allowed. Respondent #7 clarified in more detail why the customer does this and why the customer does not allow the use of stock plates, as respondent #7 answered: “Customer B wants to be present at the birth of the child4 […] so they do not believe the provided certificates unless there was done some quality assurance.” It, more or less, represents the same situation as in case A, since the customer had specified which second tier suppliers were allowed to be used. Thus, the focal company was again limited in the amount of first tier suppliers at which they could order. In addition, the focal company could not use steel plates from stock. In this case, the focal company ordered their bracings at a company which indeed used steel plate’s ex-mill instead of ex-stock from an approved supplier.
Lastly, the mentioned supply risk categories are not self-contained in the way they are influencing the chance of a supply disruption. In fact, they are intertwined and influence one another. Previous quotes from both cases already reflect the influence of customer characteristics on other characteristics, such as the supply network. The supply network thereafter influenced the market characteristics. Also, other categories were not self-contained. From case A, the following was mentioned by respondent #2 when answering why the performance was the way it was: “This steel plate is just on the shelf. At the moment the buyer says, I want to have this steel plate, they only have
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to ride it on the forklift and on the truck and therewith only a few things can go wrong”. The low level of customization of a steel plate from stock (i.e. product characteristics) is in this case related with the supplier characteristics (i.e. long lead times, unpredictable lead times, quality problems). Because, as explained by respondent #2, the low level of customization is making them readily available on stock. Subsequently, because these plates are then already a finished product, lead times are significantly shorter. This also reduces the unpredictability in these lead times.
The interrelationship between the supply risk categories are also clearly displayed in case B. The following quote from respondent #1 is denoting the customization of the bracing (i.e. product characteristic) and quality problems of the supplier (i.e. supplier characteristic): “The greatest quality risks are mainly in the additional services”. It states that the additional services (product customization) lead to a higher chance of quality problems. This is partly reflected in the similar results of the risk scores on these two risk factors per case (see Table 7). Extensive results of these risk factors scores are provided appendix H.
Table 7 - Overview risk scores quality problems and product customization
Average Standard
Deviation Range
Risk factor \ Case A B A B A B
Quality problems 2.0 4.3 0,71 0.83 1-3 3-5
Product customization 1.8 3.8 0,83 1.09 1-3 2-5
Risk scale: from 1, meaning no risk, till 5, meaning a very high risk.
4.2.2 IMPACT OF A SUPPLY DISRUPTION
increases the need for an on-time delivery and the latter driver increases the need to ensure the required quality rate of the product. These two characteristics will now be explained in further detail.
The delivery characteristics of the supply disruption impact, involves the secondary consequences if a product will not be delivered on-time. With respect to case A, respondent #1 described the following about the impact with respect to delivery: “These plates were already one month in advance at the yard, so that's perfect.” Furthermore, respondent #1 explained why this is perfect: “a month is not enough to order plates ex-mill; for the plates from stock, it is more than sufficient”. This indicates that the time until the required on-site date was longer than the lead time of the product, providing slack time for having a supply disruption without any consequences. Additional information from case B indicated the underlying reasons for a required on-site date. In the earlier quote from respondent #6, there was mentioned in a clear way that the building sequence and the interrelationship with other products are influencing the required on-site date. That quote stated that some products do not intervene with other products, meaning that other products do not have to wait for that product to be installed. Therefore, the impact of a late delivery is lower compared to a product which does intervenes with other products because these products cannot be installed without this missing product. In combination with the building sequence of the jacket or topside, it is determined when certain products need to be on site. This building sequence, but also the product interrelationship, is reflected in the following quote from respondent #6, where the coffee cup was used as an example. “You may order a coffee cup, which is easy to make, but if that coffee cup is, let’s say, the starting point for us to build, then the risk for us is increasing enormously. In this example, there was assumed that all other products only can be assembled when the “coffee cup” is assembled. This means that without the “coffee cup” the project cannot start, since the “coffee cup” is the starting point. Would the “coffee cup” be needed halfway the project, then there would be more slack time reducing the impact of a supply disruption.
happens with failing? When a hand railing breaks down, it is only annoying, In this situation, the whole platform would not tear down.” A higher design class would be the situation sketched by the previous quote from respondent #4 about the platform integrity.
To provide an overview of the whole paragraph, results are visualized in Figure 7.
Figure 7 - The chance and impact categories of supply risk
THE INFLUENCE OF SUPPLY RISK ON THE EXPEDITING INTENSITY
4.3
The results presented in the previous paragraph revealed that the chance and the impact of a supply disruption were evaluated separately when determining the extent of the supply risk. This paragraph elaborates on how the supply risk influences the expediting intensity. In the theoretical framework, it was outlined that expediting consists of the information content, the information quality and the information sharing method. The results showed that the supply risk has a distinct relationship with the information content and a relationship with the information sharing quality, leading to a certain needed information sharing method. Therefore, firstly, the relation with the information content is addressed. Next, it is explained how supply risk influences the information quality and subsequently the information sharing method. Lastly, it is described that a higher supply risk does not always lead to a higher expediting intensity, by providing some insights in the contextual factors.
4.3.1 QUALITY AND DELIVERY RELATED INFORMATION CONTENT
topics, quality and delivery, were also seen in the type of supplier information that was shared. The information shared related to the delivery consisted of information associated with production planning progress of the product, whereas the information related to the quality of the product consisted of information associated with product specifications and production procedures. Additionally, the supplier’s supplier was found as a new information content category.
In case A, information was shared, containing information about the material certificates, that provided detailed specifications about the steel plate. These specifications were checked with the provided requirements by the customer. These certificates contained proof for the quality of the steel plates by providing information about different tests results (i.e. tensile strength, yield strength, Charpy impact test) and chemical analysis (i.e. % carbon, silicon, nickel etc.) of the product. This was explained by respondent #3: “You check what the composition is, that is your chemical analysis. Then you really are looking where the material is made from” and “they perform some tests. So, these are your tensile tests and hardness tests”. Since no expediting related to the delivery of the product was performed, no information content related to that topic was found in case A.
In case B, more information was shared between the two parties and furthermore a clear distinction between product quality information and product progress information was seen. Expediting related to the delivery (product progress) was done by an employee who was externally hired, the expeditor. Respondent #1 indicated the following regarding the information sharing content: “the expeditor is accommodating the planning with both the supplier and the focal company” In addition, respondent #7 stated: “In this case, I actually asked for a matrix per week to see what they eventually had done.” This production planning matrix was used to inform the expeditor who then could check if this information was correct. With respect to product quality information, the following information content can be distinguished from the interviews. Respondent #1 stated: "Quality control is responsible for ensuring that the product is good and that all procedures are followed.” This quote reflects that information, regarding product procedures, needed to be shared. Some more detailed information about the procedures and the quality of the product was mentioned by respondent #6 by answering the question what kind of inspections were done. “Visual inspections, product dimensions, you can also monitor parameters of the production process and check if they correspond with what was agreed, if all of the checks afterwards have been performed, if it is performed correctly and if everything is documented.” All these aspects reflect information regarding product quality.
monitor if the supplier could start on time in the already tight schedule. This is reflected in the following quote of respondent #7: "[…] before someone (the supplier) is going to say, I cannot begin because I do not have my steel plates, I want to make sure that I know where those plates are."
4.3.2 THE INFORMATION QUALITY AND INFORMATION SHARING METHOD
The previous subparagraph explained how the supply risk determines the information content that was shared during the expediting activities. This subparagraph outlines the two other aspects of expediting: the information quality and the information sharing method. The theoretical background outlined that the information quality explains the information sharing intensity and that different information sharing method provides a different information quality. There was found that the higher the risk, the higher the need for information quality. Furthermore, the information quality is intertwined with the information sharing method, since the method provides a certain information quality.
is not needed with these risks. As explained, the expediting activities performed were done upon receipt, while supplier visits would be performed before delivery. Thus, timeliness (i.e. knowing information earlier), an indicator of information quality, is lower.
Case B showed a different rate in the supply risk, as well as in the expediting intensity, compared to case A. Overall, the supply risk was higher and this also was the case for the expediting intensity. On average, the supply risk was rated with a 3.5 (Std = 0.35, Range = 3.2-4). Initially, the following expediting activities were planned for this transaction and to some extent they were also performed. Related to the product progress, respondent #1 noted the following: “From the start, we had the idea to use an expeditor to do field expediting. Field expediting, is actually more or less checking at a certain interval.” In addition, the following information was given about the activities, as there was mentioned: “He visits them (the supplier) once in every two weeks to see the progress of the project and he is also consulting about the planning. In addition, respondent #7 explained that there was more information sharing by means of exchanging documents, whereby this information was somewhat confusing in showing the actual product progress: “In this case, I really asked per week for a matrix displaying what they had done. There were five bracings in hall one, there were three in hall four, I was thinking, well, do they do that on purpose? Thus, it is quite difficult to check the progress in this way” Moreover, respondent #7 explained that this production planning matrix (received from the supplier) was used as input for the visits at the supplier: To our external employee (the expeditor) I said, this is going to be ready at the end of the week. I also want to see it and hear from you that it is true. Thus, if there is still a bracing in an unfinished state laying somewhere, then it is not true.” Especially the statement, “I also want to see it and hear from you that it is true”, indicates that the focal company wanted to have a higher information quality (i.e. the accuracy of information). Since the production planning matrix could not provide this, they choose to do the supplier visits. In addition, compared to case A, a higher update frequency (i.e. information quality aspects) can be recognized. In case A, with respect to product progress, zero times information was shared. In comparison to this case, the supplier was visited once in the two weeks and also a production planning matrix was shared on a regular basis. In addition, respondent #1 explained that a more complete understanding (i.e. higher information quality) is achieved by visiting the supplier in comparison to information sharing from a distance, by mentioning the following as a benefit of the performed visits: “[…] you have a much better sense of what is happening, what is going on.”
procedures and additionally you can go there to see if they follow these procedures.” These actions were all combined in the so-called ‘inspection and test plan’. Regarding these supplier visits, respondent #7 mentioned: “We only did a final inspection […]” The inspection and test plan confirmed this, by only having one visit planned at the supplier. This was the inspection of the bracing when production was finished and before shipping. Compared to case A, significant different activities were performed. This led to a different information quality by differing in the following information quality aspects. A higher timeliness of information in case B is reflected by sharing information about the procedures, as well as performing the supplier visit. Because, both activities were performed before the delivery of the product, where the reviewing of procedures even occurred before the production of the bracings, compared to the information sharing after the delivery in case A. In addition, a higher degree of completeness of information and accuracy of information is recognized by performing a supplier visit compared to doing no visit in case A. Especially, the accuracy of information is a motivation to visit the supplier as outlined by respondent #6. “If you ask someone on the phone if they are following procedures, then the person will say off course, yes we do.” This indicates especially that the accuracy is significantly difficult to estimate when information is shared from a distance.
The reason for conducting these expediting activities is explained by the quote from respondent #1 when referring to case B: “[…] in a situation where we are letting something to be built by others, you have a fairly long lead time and a late delivery has a lot of influence on our production. It also costs a lot of money when it will be delivered to late, thus, you just have to incur the extra costs […]”. This quote explains that, because of the long lead time and the impact of late delivery, the more intensive and more costly expediting activities, to prevent poor performance, are acceptable and increasingly appropriate. Moreover, the relation between supply risk and the expediting intensity becomes clear by the examined organizational procedure that indicates when to make an inspection and test plan. This decision is driven by the failure consequences (i.e. impact of the supply disruption) and the chance of a supply disruption of the purchased product. This means that, with a lower impact and lower probability, such as in case A, no inspection and test plan is needed. However, with a higher probability and a higher impact, such as in case B, there is chosen to use an inspection and test plan.
4.3.3 CHANGING EXPEDITING INTENSITY DUE TO FEWER RELATIONAL GOVERNANCE MECHANISMS
