Download - Maintaining the quality focus in the business-to-business auction model

SystemsResearchandBehavioralScienceSyst. Res.21, 651^661 (2004)DOI:10.1002/sres.545

& ResearchPaper

Maintaining the Quality Focus in theBusiness-to-Business Auction Model

Mahmoud M. Yasin1, Andrew J. Czuchry2* and Paul E. Bayes3

1Department of Management and Marketing, East Tennessee State University, Johnson City, Tennessee, USA2College of Business and College of Applied Science and Technology, East Tennessee State University,Johnson City, Tennessee, USA3Department of Accountancy, College of Business, East Tennessee State University, Johnson City,Tennessee, USA

The growth of business-to-business auctions presents the quality-focused businessorganization with many opportunities and some serious challenges. In this context, theabsence of a well-designed organizational e-business auction-based strategy has thepotential to promote business practices which may erode organizational quality gains.This article presents a conceptual open system approach designed to improve the qualityfocus of business-to-business auctions practices. The open system approach advocated inthis article is quality focused and supply-chain sensitive. Copyright # 2004 John Wiley &Sons, Ltd.

Keywords business-to-business auction model; organizational quality efforts; strategicchallenges and opportunities

INTRODUCTION

The technological revolution being experiencedby today’s information-intensive business orga-nizations is resulting in a significant growth inbusiness-to-business and e-commerce businessactivities and practices. On the other hand, in thelast two decades, many business organizationsall over the globe have made quality-basedstrategies such as Total Quality Management(TQM) and Continuous Improvement (CI) theirstrategic choice. The focus of these quality-based

strategies and associated initiatives is on enhan-cing the quality of products and services deliv-ered to customer. However, the results of thesequality improvement strategies and initiativeshave been less than desirable for some organiza-tions (Miller, 1992; Hoover, 1995; Lackritz, 1997).The lack of understanding of the different facetsof quality and their costs may have contributedto this apparent failure of quality improvementefforts (Feigenbaum, 1990; Yasin et al., 1999a;Czuchry and Yasin, 1999; Carr and Ponemon,1994). In this context, approaching qualityimprovement from a closed system organiza-tional perspective, which promotes a piecemealorientation rather than an organizational-widestrategic orientation, is behind this apparentfailure. The closed system focus fails to capitalize

Received 9 October 2002Copyright # 2004 John Wiley & Sons, Ltd. Accepted 26 February 2003

* Correspondence to: Dr A. J. Czuchry, College of Business andCollege of Applied Science and Technology, East Tennessee StateUniversity, P.O. Box 70552, Johnson City, TN 37614-1707, USA.E-mail: [email protected]

on the resources and contributions of thedifferent subsystems of the business organiza-tion. Furthermore, the closed system focusignores the role of suppliers and customers inthe quality improvement efforts.

Through the years, management’s view ofquality and the cost of quality has evolved froma closed system orientation, where the return onthe quality initiatives is not fully realized orunderstood, to an open system orientation,where the cost of quality information is used asa managerial tool in operational and strategicdecision making (Shank and Govindarajan,1994). The practical benefits derived from theopen system orientation to quality managementinclude strategic, operational and customer-related benefits (Czuchry et al., 1999). However,the increased use of the Internet and web-basedtechnologies threatens to turn the clock back onthe open system quality management orientationand in the process compromises its organiza-tional benefits. Nowadays, more and moresuppliers are being enticed into a price-onlyconsideration through auction-based business-to-business practices. Such practices have thepotential to comprise the quality focus achievedthrough extensive investment and organiza-tional efforts in recent years.

In light of the growth of auction-based busi-ness-to-business practices, the objective of thisarticle is to present a conceptual approach aimedat maintaining and improving the quality focusof these auction-based business-to-businesspractices. The approach advocated in this articlecapitalizes on an open system orientation topromote and improve the quality of auction-based e-business practices throughout the sup-ply chain. In this context, the advocatedapproach attempts to create synergy betweenthe organizational quality initiatives and infor-mation technology-based innovative businesspractices.

COST OF QUALITY

For the quality improvement initiatives in formsof TQM and CI to be effective, the organizationmust have a formal cost of quality (COQ) system.

In addition, the organization must determinewhat costs should be tracked by this system.Thus, a critical facet of an organization’s TQM orCI effective utilization is its ability to measure,monitor and document costs related to quality.As Armand Feigenbaum (1990) states withregard to COQ, ‘unless it can become measur-able, it cannot be manageable.’

In the context of quality management, thedevelopment and utilization of a formal organi-zational COQ system which gathers and inte-grates information from accounting, operations,and marketing, then makes it available tomanagement, has significant operational andstrategic benefits to the business organization.Through the utilization of such a system, opera-tional quality can be linked to strategic effective-ness (Greising, 1994). In this context, a COQsystem provides the means for monitoringoperational performance relative to establishedbenchmarks and identifying areas for improve-ment with respect to costs (Metzer, 1993). Thus, itcan facilitate the identification and elimination oforganizational non-value-added activities whichdo not provide or enhance quality from acustomer’s perspective. In the process, sourcesof hidden costs, which may amount to as muchas 20–30% of revenues (Carr, 1994; Greising,1994), are uncovered and dealt with. In addition,the information generated from a COQ systemmay be used to determine the financial impact ofquality and its costs on products, services, andprocesses failure. Such financial benchmarks, inturn, may be used to generate support andprovide financial justification for future qualityimprovement initiatives. Thus, they serve as abasis for furthering organizational quality invest-ments throughout the operational system(Metzer, 1993; Corradi, 1994).

COQ has also been credited with the ability tobestow many strategic benefits to the organiza-tion. The information generated by such a systemmay serve as a baseline by which improvementsmay be measured against strategic targets. Thus,information from a COQ system can become avaluable input to the organizational strategicplanning processes. Such information may beused to conduct analyses pertaining to thereturn on quality enhancement expenditures

RESEARCH PAPER Syst. Res.

Copyright � 2004 John Wiley & Sons, Ltd. Syst. Res. 21, 651^661 (2004)

652 Mahmoud M.Yasin et al.

(Campanella, 1990; Greising, 1994). Other strate-gic benefits of a COQ system include theidentification of time lags in relation to qualityinvestments pay-off. Also, further insights intothe nature of the relationships between qualitycost categories can be gained through theutilization of such information (Campanella,1990). In this context, when the COQ system isutilized to augment the existing accountingpractices, it can provide top management witha guide for making cost-related, fact-basedstrategic decisions (Corradi, 1994). Therefore,the design of the COQ measurement systemshould be consistent with the metrics of CIefforts. Such consistent design contributes toorganizational synergy, as it facilitates theeffective generation and utilization of quality-related information throughout the organization(Czuchry et al., 1995). It is to be noted that theoperational and strategic benefits of a formalizedCOQ system are emphasized and reinforced inseveral quality documents and specifications,including the Baldrige National Quality Program(2002), MIL-Q-9858A, and the ISO quality systemstandards.

When the design of the COQ system is faulty,return on the quality investments, as well as thecosts of failure to meet quality standards and/orcreate customer satisfaction, will not be fullyrecognized or understood by management(Shank and Govindarajan, 1994). This leads toan inspection approach to quality managementas illustrated in Figure 1. Under this approach toquality, the engineering, manufacturing, andlogistics support functions act autonomously.Such system performance specifications become

the driving consideration, while producibility,maintainability, logistics support and life-cyclecosts considerations are neglected or given onlytoken consideration. This approach to qualitymanagement is consistent with the closed systemview of the organization. In this context, aninternal, operational efficiency focus is prevalent,with little, if any, emphasis on external andstrategic interactions with vendors and custo-mers.

In contrast to the traditional paradigm, thenew quality paradigm is based on a philosophyof CI and meeting customer expectations. Underthis approach, management understands thatproducing for quality can be cost-effective, sincethe benefits of delivering quality products andservices, in many cases, far outweigh up-frontexpenditures. Responsibility for quality restswith everyone in the organization, not just thequality subsystem. Quality is designed andbuilt into products and services from the bottomup, and emphasis is placed not only on conform-ing to standards but also outperforming them.Under this approach, the cost of a quality systemis designed with a broader organizationalperspective in mind. Thus, it is an integratedsystem.

A design approach to quality, as illustrated inFigure 2, promotes quality, product design, andlogistics support design to a status equal to thatof a system performance. Furthermore, the totalsystem design makes its management in anintegrated fashion relatively easier. Finally, thecustomer plays an important role in this opensystem orientation, as illustrated in Figure 3.From an information exchange viewpoint, a

Figure 1. An inspection approach to quality

* A piecemeal approach to the cost of quality* The cost of quality is an afterthought and lacks systemic integration* Functionally each organization acts autonomously* System performance specifications are the driving consideration* Producibility, maintainability, logistics support, and/or life-cycle costs are rarely considered

Syst. Res. RESEARCH PAPER


Maintaining Quality Focus in B-2-B Auction Model 653

partnership approach encourages the organiza-tion and customers to exchange informationunique to each because of their inherent anddifferent core competencies.

Generally speaking, the customer has moredetailed knowledge of the logistics supportenvironment, while the organization possessesfundamental design and manufacturing exper-tise. Therefore, transparency encourages thisknowledge to be freely exchanged and resultsin an iterative process which is win–win based.In this context, design specifications can benegotiated to obtain the appropriate balancebetween system performance, manufacturability,supportability and life-cycle costs.

Under this approach to quality management,supplier’s selection is based on informationregarding total life-cycle costs, not just the initialcosts. Adjustments and alignments are made tothe cost accounting and cost managementsystems in order to enhance the validity andavailability of COQ data. Finally, under the newparadigm, the COQ information is used as amanagerial tool in assessing cost-related expen-ditures, for tracking costs, and to augment otherforms of information utilized as inputs tooperational and strategic decision-making pro-cesses (Shank and Govindarajan, 1994). Thisapproach is consistent with the open systemview of the organization. Such a perspective

Figure 2. A design approach to quality

* The cost of quality system utilizes an organization-wide integrated approach* The performance, product, and logistics support system design problems are treated in an integrated/combined manner

Figure 3. The role of the customer

* From an information viewpoint the interesting consideration is what is exchanged and what changes or iterations arepossible

* The cost of quality system integrates both internal and external information to achieve a quality and a customer focus




promotes interactions with customers and sup-pliers, as the organization attempts to improveinternal efficiency and external strategic effec-tiveness.

WEB-BASED BUSINESS PRACTICES ANDQUALITY

With the above discussion as a backdrop,consider the impact of web-based technologyon the information flow between the customersand organizations competing for market share.Figure 4 illustrates a simplified value chainmodel for an organization interested in imple-menting both supply chain management (SCM)and customer relationship management (CRM).Ideally, the organization evaluates sources forraw material, parts, and major subsystems withimportant benefits to the customer as measuredby customer, satisfaction with products andservices in mind. When dealing with complexemerging technologies, customers often have anincomplete set of product specifications andsomewhat vague requirements. In order tocapitalize on the potential for technical innova-tion throughout the value chain, care must betaken to avoid compromising long-term businessrelationships for near-term gains. In this context,this risk is likely to become more pronouncedwhen the depersonalizing nature of rapid web-based transitions is involved.

When dealing with SCM in complex markets,business relationships that rely on trust are veryimportant (Handfield and Bechtel, 2002). Theextent to which the Internet and web-basedinformation and communications technologiespromote trust in a business relationship isperhaps dependent on the manner in whichbusiness is conducted in relation to this informa-tion technology mode. To illustrate this point, theauthors show the framework in Figure 4, using abusiness-to-business auction model to identifypotential pitfalls. Next, examples are cited tosuggest ‘good and bad’ Internet business prac-tices in the context of long-term businessrelationships. Finally, the discussion ends withsome managerial implications regarding theapplicability of auction-based e-business models.

Organizations implementing SCM and CRMappear to be increasingly dependent upon web-based technologies to accelerate transactions.However, before organizations implement web-based SRM and CRM approaches, a moresystematic evaluation of operational efficiencyand strategic effectiveness implications shouldbe considered. For example, product suitability isan important variable in determining the attrac-tiveness of sell-side e-commerce (Doherty andMcAulay, 2002). Similarly, the need for technicalinnovation on the supply-side should be assessedprior to implementing supply-side auctionmodels.

Figure 4. The web-based business context




Figure 5 illustrates an auction-based business-to-business model. Notice that this businessmodel inhibits the exchange of informationbetween the customer and the supplier. As thecomplexity of products increases, such a busi-ness model is in danger of causing the qualitypendulum to swing towards a price-only acqui-sition strategy. Given this strategic change,organizations will be reluctant to share innova-tive design approaches, quality enhancementsand product cost savings with customersbecause the web provides their competitors withthis knowledge and compromises the organiza-tion’s competitive edge. Furthermore, the onlyway that suppliers can offer their innovativesolutions under this approach is to take excep-tions to the product specifications and make anon-responsive bid. This often is not practical.Thus, the fundamental objective of SCM isapparently violated.

Although the company gains a short-termadvantage, everyone loses over the long run.As the complexity of products increases, coupledwith the increasing pace of technological change,suppliers are forced into fixed price developmentcontracts or forced out of business. Historydemonstrates that this strategy was neithereffective for the government, nor was it effectivefor defense contractors in the 1980s. Today’sbusiness organizations, such as GE, are in dangerof the same pitfall with regard to their auction-based business-to-business practices.

Other examples provide lessons derived fromweb-based strategies that help to identify pat-

terns for good and not-so-good business prac-tices. Levi Strauss utilized the web to initiatedirect sales with their customers. However, theysoon reversed this policy when major customerssuch as J. C. Penny’s complained this was inconflict with the established distribution chain.Others such as Furniture.com failed to identify ifthere was a market for furniture over theInternet. One pet food company failed to analyzethe cost of providing pet food over the Internetcompared to that purchased in stores. Afterestablishing the business, they discovered thattheir costs including shipping charges werehigher than that of local purchases. Anotherexample of bad business practices is that ofInsight, a virtual enterprise which is a directseller of hardware and software. They advertise,as do others, products for sale, but warehouse-limited number of items. Thus, they act as a‘front’ for the producer and have items dropshipped from the producer’s warehouse. Otherexamples show the failure to develop a completeinformation strategy to prevent problems. BothH & R Block and Hallmark made informationaccessible to external parties. However, resultswere not as anticipated, as they apparentlysuffered from misuse of the data. Boeing’s failureto have a disaster recovery plan underscores theimportance of strategic information policiesbeing fully integrated into corporate businessmodels and strategies.

However, organizations such as Eastman Che-mical Company take a different approach. Draw-ing upon the Baldrige criteria for performance

Figure 5. A simplified B-2-B auction model

* The formal cost of quality system is often ignored




excellence, Eastman conducts periodic face-to-face meetings with suppliers to share customerrequirements and company-planned capitalexpenditures. Web-based technologies are imple-mented to enhance effectiveness, eliminate errorsand redundancies, and expedite transactions sothat everyone in the supply chain benefits.

A PROPOSED AUCTION-BASED QUALITYFRAMEWORK

Although the literature suggests many ways tocapitalize on B-2-B processes with a focus onpurchasing, production, promotion, distributionand other market interfaces, a framework forcapitalizing on technical innovation in the con-text of an open-transparent system appears to belacking. Examining the B-2-B auction from aknowledge perspective provides additionalinsight. Customers have the knowledge to defineproduct and service preferences for commoditiesand known technologies, and also understandthe logistics support environment for specificapplications. Suppliers and organizations in thevalue chain invest in research and developmentand generate technical innovations. However,with a pure auction model, technically innova-tive organizations are experiencing difficultymoving these technical and quality innovationsthrough the supply chain to the eventualcustomer. The root cause of this problem has todo with the fact that the auction model does notallow specifications to be modified withouthaving a non-compliant bid.

A two-step acquisition process is suggested forovercoming the difficulty underscored above.System complexity is suggested as a variable fordescribing products ranging from commoditiesto high-value-added products. In this context,complexity is defined as the difference betweenthe customer’s and the supply chain’s detailedknowledge of system design and quality char-acteristics. As this gap widens, the supply chainis less able to utilize an integrated designapproach to appropriately balance performanceand quality considerations. This in turn leads tosuppressed supplier innovation, because the B-2-B auction business model cannot reward these

value-added propositions. As a result, each partyin the supply chain is less likely to trust the nextbecause technical and quality innovations are nottranslated into bottom-line profits.

A conceptual framework for maintainingquality, cost and performance innovations in B-2-B business auctions is suggested in Figure 6.Two major characteristics for modeling theacquisition process are (1) Supply Chain Trans-parency shown on the bottom axis of Figure 6and (2) Level of Integration and Utilization ofCost of Quality (which is related to the opportu-nity for technical innovation, quality improve-ments, and cost reduction) on the vertical axis.These characteristics are modeled as rangingfrom low to high along each axis. Based on that,four major strategies emerge. These are (1)supply chain transactions with low desire forinnovation coupled with low supply chaintransparency; (2) supply chain transactions withlow desire for innovation coupled with highsupply chain transparency; (3) supply chaintransactions with high desire for innovationcoupled with high supply chain transparency;and (4) supply chain transactions with highdesire for innovation coupled with low supplychain transparency. Using the Baldrige Criteriafor Performance Excellence (Baldrige NationalQuality Program, 2002) and the practical experi-ence of the authors, the framework in Figure 6suggests a major strategy and best practice foreach of the four major acquisition situations.

When supply chain transactions occur withlow desire for innovation coupled with lowsupply chain transparency (lower left-handquadrant in Figure 6), a strategy of seeking lowbids to detailed specifications is appropriate.This strategy can be translated into a B-2-Bauction model with low risk as long as otherbest business practices are also implemented.Experience indicates that some organizationsappear to depart from normal best practiceswhen implementing web-based strategies. Forexample, the best practice normally would be touse a sealed-bid request for proposal with adetailed specification. However, when utilizingthe web, some organizations continue the processwith a second look or repeat bidding process.Such a practice is in danger of destroying




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trust relationships with suppliers and shouldbe avoided if longer-term business relationshipsare desired. Therefore, organizations can imple-ment B-2-B auction models in this quadrant.However, these organizations should not allow asecond look at prices bid by suppliers who arecompeting.

When supply chain transactions occur withlow desire for innovation coupled with highsupply chain transparency (lower right-handquadrant in Figure 6), a win–win strategy ispossible if implemented in two steps. The firststep in the strategy is to allow for specificationsto be negotiated. The second step is to finalize thenegotiated specification and implement a sealed-bid approach. If care is taken to protect suppliers’intellectual property, specifications can bealtered to allow for what would have beenotherwise non-responsive bids. This shouldresult in incremental cost, quality, and perfor-mance improvements consistent with continuousimprovement policies. In practice web-basedcommunications can be used to accelerate theprocess of negotiating specifications. Ensuringthe intellectual property is protected, specifica-tions are revised and a final sealed-bid procure-ment package is issued using a B-2-B auctionmodel. In this manner, innovations can migratethrough the supply chain to everyone’s benefitwhile maintaining the trust relationships thatsupport supply chain transparency. Therefore,organizations can implement B-2-B auctionmodels in this quadrant, but make this thesecond step. However, these organizationsshould not share competitors’ intellectual prop-erty and should also avoid a second look atprices that are submitted during the auctionstep.

When supply chain transactions occur withhigh desire for innovation coupled with highsupply chain transparency (upper right-handquadrant in Figure 6), a two-step acquisitionprocess can be implemented with mutual bene-fits. The strategy is to first promote quality, cost,and performance innovations throughout thesupply chain by conducting a technical competi-tion for integrated quality, performance, and costenhancements or breakthroughs that displacecurrent technologies. This generally requires

some risk balancing by either ensuring the firstproduction phase contract to the supplier inreturn for ownership of the intellectual propertyand production know-how resulting from theinnovation and proof-of-concept phase; or lettingthe supplier maintain the intellectual propertyand face that competition in the market place.Therefore, organizations should use the web toaccelerate the acquisition process but implementthis process with two distinct steps. However,these organizations should not be tempted toshare the intellectual property gained during thefirst step with supplier competitors, unless clearcontractual relationships are spelled out duringphase one.

When supply chain transactions occur withhigh desire for innovation coupled with lowsupply chain transparency (upper left-handquadrant in Figure 6), the two-step acquisitionprocess can be implemented with mutual bene-fits. With less supply chain transparency, it isgenerally difficult to negotiate specificationswithout contractual relationships because sup-pliers generally have not refined their customerrelationship management systems to effectivelymarket their technical innovations. One practiceto overcome this shortfall is to issue a detailedspecification for review and comment. Instructsuppliers not to supply trade secrets and/orintellectual property during this phase. How-ever, request that specification changes bedirectly related to potential cost, quality, andperformance benefits. Ask for sensitivity ana-lyses relating the percentage change in specifica-tions to the percentage change in cost, quality,and/or performance benefit. Then finalize thespecification and implement the B-2-B auctionmodel. Therefore, organizations should use atwo-step process. However, ownership of intel-lectual property should remain with the suppli-ers during the acquisition process.

The two-step acquisition process is comprisedof a technical negotiation of specifications and/or technical competition to develop the inte-grated specification and an initial productioncontract award. The second step consists ofprocurements to the proven, balanced specifica-tion in the form of the B-2-B auction businessmodel. In this context, technical innovation




should still provide a competitive edge in a formof higher quality and performance.

CONCLUDING REMARKS

In recent years, business organizations haveinvested generously in an effort to re-engineertheir cultures, systems, strategies and structuresto become more conclusive to a quality focus anda customer orientation. As business organiza-tions venture into the uncharted waters of e-business practices, they must not overlook therole of quality. The lack of a systematic, quality-focused approach to govern auction-based e-business strategies and practices may result incompromising the quality gains and achieve-ments of business organizations. This articleadvocates an open system approach towardsmaintaining the quality in the auction-based e-business standards and practices. The approachpresented in this article is consistent with soundquality practices and the evolving e-businesspractices, which are increasingly leaving theirmarks on the supply chain.

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