2.2
Theoretical review
The theoretical review helps to identify theories about
the study already existing, the relationships between them, to what degree the
existing theories have been investigated and to develop new hypotheses to be
tested.
2.2.1 Transaction Cost
Theory
Transaction cost economics states that organization encounter
the challenge of opportunism when they are in a situation bargaining with a
small number of other organizations.
Hence then having more suppliers reduces this risk and affords
the organization the ability to negotiate better procurement deals as the buyer
is less dependent on any particular supplier (Dedrick et al.., 2008). The same
author states that the number of suppliers chosen by an organization
encompasses an optimal balance among the following key transaction factors:
fit, coordination costs and risk opportunism. Information technology has the
potential of reducing coordination costs as procurement processes are
standardized and automated, thus reducing the cost of working with more
suppliers. This mostly benefits the buying organization especially for
commodity items such as copper pipes.
Information technology allows organization to reduce the
number of suppliers and focus on low-cost suppliers of standard goods and
consolidated their purchases to obtain volume discounts (Dedrick et al., 2008)
The use of information technology (IT) facilitates the reduction of
coordination costs. For example, electronic market places, facilitated through
IT, reduce the cost of searching and obtaining information about product prices
and offerings (Bakker et al, 2008). Collaboration facilitates information
sharing by lowering transaction costs as companies can reduce supply chain
uncertainty and thus the cost of contracting. For example, if a supplier is
unable to accurately predict the price of its product inputs, it will be
reluctant to enter into a contract, which locks it into a fixed price for an
extended period of time (Arrowsmith, 2002). Uncertainty in the context of
supply chain, and more specifically in manufacturing, is caused by new product
development uncertainty, demand uncertainty, technology uncertainty and supply
uncertainty (Koufteros, 1999). Supply uncertainty relates to unpredictable
events that occur in the upstream part of the supply chain. Among the causes to
supply uncertainty are late deliveries and shortages of materials. Clearly,
supply uncertainty can disrupt manufacturing and have an adverse effect on
sales where distributors and retailers down the chain are also affected. Demand
uncertainty can be defined as unpredictable events that occur in the downstream
part of the supply chain (Koufteros, 1999).
Demand uncertainty (or demand risk) can result from new
product adoptions, short product life cycles (PLCs), seasonality or volatility
of fads (Johnston, 2005). Another uncertainty related to manufacturing is new
product development which stems from unpredictable events during the process of
product prototyping, product design, and market research. Finally, technology
uncertainty refers to the fuzziness in the selection of a suitable technology
platform (Koufteros, 1999). An example is the trade-off between a fool-proof
manufacturing technology (perhaps dated), compared to a prospective technology
offering better price to performance but whose viability is uncertain (Klein,
2007).
Furthermore, uncertainty can also arise from social
uncertainties (such as strikes), natural (such as fire, earthquake), and
political (such as fuel crisis) (Johnston, 2005) The concept of uncertainty is
the key to TCE, which assumes that individuals act opportunistically and have
bounded rationality. The early transaction cost literature did not make a
distinction between different forms of uncertainty. More recent literature has
disaggregated the construct of uncertainty (Melville et al, 2004). For example,
(Wendin, 2001) built on Khalifa & Shen, (2008) and distinguished between
primary and secondary (behavioral) uncertainty. Primary uncertainty refers to
the underlying transaction and arises from mainly exogenous sources such as
technology, uncertainty relating to natural events, consumer preferences,
regulations, and uncertainty relating to natural events (Sulek et al., 2006).
Primary uncertainty may lead to coordination problems,
technological difficulties, and communication problems that can as a
consequence adversely effect the execution of transactions. Secondary
uncertainty on the other hand refers to the risk of opportunism on transactions
that are executed through incomplete contracts.Similarly, Sulek et al., (2006)
classified uncertainty as primary, supplier and competitive uncertainty.
Primary uncertainty is consistent with Wendin, C. (2001) and refers to the lack
of knowledge of states of nature (Sulek et al, 2006).
Competitive uncertainty arises from the strategic actions of
potential, actual competitors or innocent actions (McManus, 2002). Supplier
uncertainty is basically behavioral uncertainty and refers to possible
opportunism by upstream or downstream partners. In organizational theory
uncertainty refers to environmental uncertainty (Trent, 2007) and includes a
number of factors such as uncertainty regarding suppliers and competitors'
actions, as well as uncertainty in technology and regulations, which captures
both primary and secondary uncertainty. The presence of demand uncertainty and
the lack of information sharing in the supply chain led to problem known as the
bullwhip effect: which is the amplification of demand variability as orders
move up the supply chain (Featherman& Pavlov, 2003).
Johnson and Whang,(2002), provides evidence for this finding
from the food industry, whereas Nagle et al, (2006) reports on the bullwhip
effect in the automotive sector. The bullwhip effect can be alleviated through
sharing demand information in the supply chain, which reduces information
uncertainty and asymmetry (Lee et al., 2003). Therefore, limiting uncertainty
through information sharing reduces companies' internal risk as companies
optimize capacity planning, production and inventory.
Although, information sharing seems to bring with it many
benefits, it can simultaneously increase transaction risk, as higher levels of
business transparency leads to opportunistic behavior. Nevertheless,
uncertainty as a factor might affect companies' initiatives to share
information. This also agrees with contingency theory, which states that the
rate of change in an environment and amount of uncertainty affects the
development of internal features in organizations (Larsson et al, 2008).
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