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Structural Holes and Supply Chain Orchestration
N. ViswanadhamIndian Institute of Science
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Indian Institute of ScienceBangalore- 560012
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AgendaAgenda
Social Networks and Social CapitalGl b l S l Ch i N k
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xcel Global Supply Chain Networks
Formation , Governance, Coordination and ExecutionExample: Li & FungConclusions
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el Social Networks and Social Social Networks and Social CapitalCapital
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Social NetworkSocial NetworkA social network is a social structure made up of a set of actors (such as individuals or organizations) and the dyadic
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xcel actors (such as individuals or organizations) and the dyadic
ties between these actors. Social network sites are web-based services that allow individuals to construct a public or semi-public profile articulate a list of other users with whom they share a connection.
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e“Small World” Phenomenon“Small World” Phenomenon
People at great geographic distance can communicate with
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xcel People at great geographic distance can communicate with
one another through surprisingly few intermediaries because of bridges between social worldsMilgram found that letters had passed through, on average, six individuals en route—thus the phrase ‘six degrees of separation’ The corollary is that we live in a “small world”.
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The Strength of Weak Ties: Mark Granovetter
Ego has a collection of close friends-a densely knit clump of
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g y psocial structure. Ego also has a collection of acquaintances, few of whom know one another. Each of these acquaintances have their own closely knit clump of social structure, but one different from Ego's. The weak tie between Ego and his acquaintance bridges two
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upp The weak tie between Ego and his acquaintance bridges two densely knit clumps of close friends.
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eStructural HolesStructural Holes
People focus on activities inside their own group, which creates holes in the information flow between groups. Structural hole refers to the social gap between two groups.
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g p g pStructural holes often are the weak connections between clusters of densely connected individuals.Holes are buffers, like an insulator in an electric circuit. People on either side of a structural hole circulate in different flows of information.Success in innovation depends on the ability to interact with outside organizations and third parties. Networks with an abundance of structural holes create opportunities for
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the new combination and recombination of ideas.Brokers focus on establishing ties between disparate or disconnected groups, exploiting the structural hole, so they can connect members of the two groups.
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The Social Capital of BrokerageThe Social Capital of BrokerageRobert and James have the same number of connections, six strong ties and one weak tie. James is connected to people within group B who are densely connected with one another.
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xcel who are densely connected with one another.
Robert is also tied to everyone within group B. In addition, his strong relationships with contact 7 and 6 who are conduits for information on groups A and C. Robert is positioned to benefit from differences between people who vary in their behavior and opinions. People whose networks bridge the structural holes between groups have access to a broader
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diversity of information and also have experience in translating information across groupsThese holes in social structure i.e. structural holes create a competitive advantage for an individual whose network spans the holes.This is the social capital of brokerage
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eFinancial Human & Social Capital
A person has three kinds of capital:
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xcel 1. Financial capital which is cash on hand, reserves in the bank;
assets.etc2. Human capital: natural abilities, health, intelligence, looks combined
with education and experience to excel in certain tasks 3. Social capital which is relationships with other players who get
opportunity to use his financial and human capital.
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Social CapitalCertain people, or certain groups of people, do better by receiving higher returns to their efforts. Some people enjoy higher incomes,
i kl b i t d l d i t t j t
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xcel quickly become prominent and lead more important projects.
The human capital explanation of the inequality is that the people who do better are more able individuals; they are more intelligent, more attractive, more articulate, more skilled.Social structure is a kind of capital that can create for individuals or groups a competitive advantage in pursuing their ends. Better connected people enjoy higher returns.
fi d li li d b h ld b i k
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upp In a firm some deliver quality product but there could be rain makers who deliver clients. The former does the work but the latter makes it possible to benefit from the work.
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eInterInter--Organizational NetworksOrganizational Networks
An inter-organizational network consists of multiple organizations linked through formally established multilateral ti th t f ilit t hi t f l
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xcel ties that facilitate achievement of a common goal.
Network members can be linked by many types of connections and flows, such as information, materials, financial resources, services, and social support. Relationships among network members are primarily nonhierarchical, and participants often have substantial
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Connections may be informal and totally trust based or more formalized, as through a contract.
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InterInter--Organizational Networks: Some Organizational Networks: Some CharacteristicsCharacteristics
Fragmentation and structural holes: Are all or most network members connected, either directly or indirectly (i.e., through another organization),
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xcel or is the network broken into fragments of unconnected organizations,
dyads, and cliques? Fragmented networks may exhibit connections among organizations that are themselves unconnected or only loosely connected to other clusters of connected organizations i.e. network has many structural holes.Governance: What mechanism is used to govern and/or manage the overall network? Self-governance, or hub-firm or lead-organization
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upp governed, or a network administrative organization (NAO) model.Network effectiveness is the network level outcomes that could not be achieved by individual organizational participants acting independently.Partner Networks bring Competitive Advantage
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Global Supply Chain NetworksGlobal Supply Chain Networks
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Global Supply Chain NetworksGlobal Supply Chain Networks
Global supply chains consist of a number of
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xcel Global supply chains consist of a number of
independent companies, each concentrating on its core businesses, forming an alliance towards a specific goal. GSN is an Inter-organizational networkPartner network is becoming the competitive
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eBrokerage or ClosureBrokerage or Closure
In the literature two types of hub firms have been identified: the tertiusgaudens and the tertius iungens.
– A sparse network is a network with structural holes, defined as the absence of connections among nodes in the network (Burt, 1992).
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xcel connections among nodes in the network (Burt, 1992).
– Dense networks are networks were most nodes in the network have ties with most other nodes in the network.
Literature debates the performance of companies bridging structural holes (brokerage) vs. those with tighter network relations (closure) .
– According to the closure perspective the tertius iungens gains from long-term intimate relations, because such relations stimulate knowledge exchange between the partners. The high level of trust in a closure network stimulates companies to share their skills and know-how. Hence companies in a closure network obtain important benefits.
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– Keiretsu in Japan, Chaebol in Korean, guanxi in China are examples– By positioning itself between two unconnected firms in a structural holes network it has
access to two different unrelated sources of knowledge. Consequently the tertiusgaudens, a person who brokers between two groups is better informed than other companies, which gives it a competitive edge.
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Tension between Weak and Strong Ties
Strong ties promote commitment but also restrict firms’
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g pfreedom to access new frontiers.– The buyers may socially obligate themselves to partners with obsolete
capabilities & ignore potential new partners with lower costs or better technologies
Weak ties (arm length relationships) – Incentivizes partners to be on the cutting edge in cost and innovation
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eStructural Holes in Global SCN Context
Networks do not act, they are a context for action. One needs to understand the information arbitrage by which people acting as brokers harvest the value buried in structural holes
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xcel as brokers harvest the value buried in structural holes
How does one describe a hole between two organizations: a supplier in China and a OEM in USA. We can notionally call this as Chasm or the distance which includes geographic, institutional , infrastructural, logistical and resource dependent barriers.The broker need to bridge differences in culture, laws and regulation, and in organizational practices and resource regulations and practices (power , water, clusters, human, financial) and also in delivery infrastructure. The
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Chasm or distance created by these pillars of separation differ in their degree of formalization and tacitness.
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Orchestrator- Supply Chain Network
Orchestrator is highly embedded in the supply chain, almost all the
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xcel actors will interact with it and its
betweenness centrality highlights its importance to the success of the supply chain.The relationship between the focal firm and the O represents a strong tie in the sense of providing access t l bl th t i thi
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to valuable resources that in this case are the benefits arising from O know-how and relationships.
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Governance, Coordination & Execution
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Formation, Governance, Coordination & Execution
Formation: Collection of the data of all the supply chain
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xcel players, Taxes & regulation changes in their countries,
Possible natural , political & economic risks, etc Governance (Structural & Relational) involves selection of partners for the particular orderCoordination is planning and informing all the players their role and delivery schedules of the quality product
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Network Governance, Coordination and Network Governance, Coordination and ExecutionExecution
OtherAgencies
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Governance
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Three Types of Network Governance Three Types of Network Governance
The network may be brokered or may follow participant shared model.
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xcel shared model.
In the participant shared governance model members divide responsibilities among themselves (Cooperatives)Network governance could be through a single organization– Highly Centralized Network External Broker (Li & Fung)– Participant Shared Network Governance With a Lead Player
Producer-driven (Cisco And Nike)
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Buyer-driven (Wal-Mart, Carrefour, Levi)
All three governance forms are in practice & none proved superior.
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Formation and Governance: Formation and Governance: Partner SelectionPartner Selection
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De
Institutions
The Basic The Basic EcosystemEcosystemTransits from a Chain to a NetworkTransits from a Chain to a Network
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Resources
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Service Chains
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Investment Climate
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eTransaction Cost Economics and Governance
Transaction costs are defined as the costs which are made in order to coordinate and connect all links in the global supply chain.Transaction costs relate to finding a suitable trading partner, negotiating,
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xcel setting up and signing a contract, monitoring compliance with the contract,
and imposing fines if the agreements are violated. – Observable costs such as transport costs, import duties and formal
trade barriers such as customs tariffs– Soft costs which include making and monitoring contracts,
information costs, costs due to cultural differences and miscommunication, unwritten laws, trust building, networking, risk
d f l i d i i
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The hard observable costs decrease with trade liberalization and decreasing transport costs , the soft costs gain relative importance
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Transaction CostsTransaction Costs
Three characteristics of transactions that affect the size of transaction costs: asset specificity, uncertainty and
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Transaction Cost Economics (TCE) posits that when transaction cost are low, the transaction will be carried out through the governance structure spot market, and when transaction costs are high, it becomes efficient to set up an organizational structure (hierarchy in the terminology of
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eAsset Specificity Asset Specificity
Supply chain specific assets– Good relationships between members of network or cluster– Assets such as specific dies, molds, and tooling for the manufacture
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xcel Assets such as specific dies, molds, and tooling for the manufacture
Resources: The human, clusters, financial institutions etc. ports and airports, Location specific assetsInstitutions create specificities giving companies several benefits in terms of taxes and tariffs with special regulations, creating special economic zones, special universities for training manpower, etcDelivery Infrastructure and Mechanisms: Ports, Airports, Rail roads, Highways Special trucks for carrying finished vehicles (outbound logistics) and also special trucks and ships for delivering heavy power plant equipment such as
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boilers(Inbound logistics), Temperature controlled warehouses, refrigerated vehicles, Sophisticated forklift trucks, guidance systems, etc. Some of these costs are irrecoverable: manpower trained , 3 PLs, Software providers
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Frequency and UncertaintyFrequency and Uncertainty
“Frequency of interactions” between the buyer and supplier is important for reasons of economies of scale
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xcel is important for reasons of economies of scale
– for the specialized mechanisms created, – for transfer of tacit knowledge in customized exchanges– for establishing relations with partner’s network partners
"Environmental uncertainty" can come from suppliers, customers, competitors, regulatory agencies, unions, or financial markets. Understanding the sources of uncertainty
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Transaction CostsTransaction Costs
Delivery Shipping, Inventory,
Hard & Soft Infrastructure
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Institutions
Clusters, Human, Financial, Power
Water
Taxes, Tariffs, SEZs, FTAs,
Social groups
Transaction Cost
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Supply ChainProduction,
Quality, Transport
Coordination Costs Broker fees
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CoordinationCoordination
Coordination is to bring different elements of a complex activity or organization into a harmonious or efficient
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y grelationship.The coordination includes– For every order, selection of suppliers; assigning functions to them
such as what to supply, how is it to be produced (e.g., product tolerances and process standards), the production and delivery schedules , etcId tif i k t h th d t ifi ti th
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technology and the quality systems, labor and environmental standards along with the targeted price and communicating to the chain partners.
– Ensuring that all partners follow Governmental and international organizational regulations on product design and manufacture for ensuring consumer safety, environment and child &women labor
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eExecution : Online Supervisory Control
Penske Logistics provides trucking services in USAGenpact workers in India and Mexico
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p– arrange for titles and registrations for the trucks leased by Penske in
USA – Assign trucks and drivers to the pick up. Monitor the truck once it is
on the road. If the truck gets stuck at a weigh station, failing to fulfill some permits, the truck driver would call the BPO staff . They transmit the necessary documentation to the weigh station and the payments made through credit card.
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After the trip, the driver’s log would be shipped to Genpact .
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Example: SME orchestrationExample: SME orchestration
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The Logistics EcosystemThe Logistics Ecosystempl
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Example: Li & FungExample: Li & Fung
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eLi & Fung Business ModelLi & Fung Business Model
Li & Fung “orchestrates” the production of goods by others, drawing on a vast global network of highly focused providers to arrange for
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xcel private-label manufacturing, primarily on behalf of US and European
clothiers. For a specific product or client, Li & Fung assembles a customized set of specialized providers to handle everything from product development to the sourcing of raw materials, production planning and management, and, eventually, shipping .If glitches pop up at any stage of the intricate process along the
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another.
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Order Flow at Li & FungOrder Flow at Li & Fung
Order for x
Yarn procurement fromKorea
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European retailer
Li & Fung’s division
garmentsOrder processing• Procurement • Production & control• Logistics
Weaving and dyeing in Taiwan
Zippers from JapanAnd ChinaZippers from JapanAnd China
Useful materialAnd accessoriesfrom other partsof Asia
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Manufacturing in Thailand
Plant 1 Plant 2 Plant 3
Delivery to customer
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Interaction with various participants in the Supply Chain
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Design Material Sourcing Factories Quality control
Logistics
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Production Process
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Li &Fung offers to clients: Network, Li &Fung offers to clients: Network, Relationships & KnowledgeRelationships & Knowledge
Relationships with factory owners and managers: Suppliers often gave priority to orders from Li & Fung customers, because they knew they would pay on-time and not reject finished goods for spurious reasons.
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p y j g pConnections (“government contacts in Hong Kong and Beijing,”, “ability to reduce impact of quota restrictions”)Li & Fung has in depth Knowledge of the manufacturing capabilities, special skills, and business practices of each country and each supplier and can help customers choose among the manufacturing options its network provided. Li & Fung managers keep themselves informed of the
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– changing labor costs in different countries and allocate production to least expensive countries.
– different trade restrictions each country imposes, such as tariffs or quotas, or imports from each of its trading partner and free trade agreements.
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eOrchestrator Business ModelOrchestrator Business Model
Governance, Coordination and Overall Responsibility
CustomerOrdersOrchestrator
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OperationalStatus
Plans
Payment
Orchestrator
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Supplier 2 & 3 PLs ContractManufacturer
ExecutionMaterial Flow
Service
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Governance Model Li & Fung
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eConclusions
Dispersed Small Player Service/ Supply networks require Formation Governance Coordination
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xcel require Formation, Governance, Coordination
and Execution for efficient & profitable product/service deliveryTheory development needs Integration of Social networks, Inter-organizational theory, Machine learning Optimization Game theory with SCNs
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