Group 4Christian Zerbin ID 4880613

Korakot Srisonchai ID 4980393Rohini Settheewongsakun ID 4980154

Sakulkaew Thipparuth ID 4980046

What is trust?Business and personal relationships is the core of the

extended enterprise. Trust is a condition necessary for the firm to work closely together.

Information will be shared, the partner will do as they say, and also risk and reward will be equally distributed through common goals and interests.

Trust faces two major challenges:1. Individual greed, financial improprieties, outright

fraud, theft, and management monopolized2. Contracts are the only way to manage when there

is no trust.Without trust, it is unlikely for the firms to achieve and

collaborate with each other.Contract is important, but the firms should not only

depends mostly on it. Contract ensures among things that both side understand

what has been agreed to.

Why trust is important?Separate companies negotiate separate bilateral

agreements and each acts in its own self-interest.The information are often delayed and incorrect and the

system is unstable because members of the firm usually strive for their own gain in the expense of others.

In the supply chain system, to make it non-error and deliver good and service to customer on time; the members should trust each other and share common goals and benefits.

Trust can lower the transaction costs which are cost to search for potential suppliers and cost associated with negotiating, monitoring, and enforcing contracts.

Trust help increases knowledge sharing and encourages partners to dedicate their assets on behalf of the others.

Trust also can creates economic value which is not based primarily on personal relationships. Instead, trust is based on predictable behavior and fair dealing.

Why trust is important? In retailing, building relationships still remain being a key

factor in the light of consolidation.For example the case of Kmart, it failed to communicate

openly with its key constituents such as suppliers, customers, and investors. As Kmart stopped communicating externally, suppliers stopped shipping goods, customer went to Wal-Mart, and investors lost confidence on it. Failure to acknowledge the importance of partnerships to the key constituents can led the business to a loss of trust.

As a result of being lack of trust, there are problems generated which are restricted flows of information, key data were not shared, and the perceive of protecting oneself is viewed as being opportunistic. The trust that existed was also seriously damaged.

When partnering, firms will also choose to focus on what they do best and to partner with others who can provide the capability and expertise needed in non-core activities. For example, HP partners with Solectron.

Why trust is important?To mange the cost and outcome on profitability of business,

the firm should look at supply chain management.Parties have to agree on one view of the truth in order for

the collaboration throughout the supply chain to work.Value of business can also being created through

relationships by having shared goals that reward suppliers for beating the targets, rely on innovation spawned from cross-company teams, and acknowledge the skills bought by all members in the supply chain.

Firms that have been successfully building a collaborative networks will have a reliable and accurate data shared and will have long-term relationships with key suppliers and customers.

For example of Dell and its partners, they have a seamless flows of goods, accuracy demand and supply forecasts, and a constant requirement to innovate that drive the process. This is because they have shared vision, a level of trust, and a commitment of performance measuring.

Why trust is important?Although trust lies at heart of collaboration, but there is a

school of thought that abides by the Russian proverb which is ‘trust but verify’.

For example, if the shared measurement is agreed upon by both sides, each side can conduct periodic audits to check the accuracy of forecasts, in-stock positions, and average selling price.

Moreover, without shared goals, vision, and planning process with partners; extended enterprise will be likely to crack and break down.

Trust is fragile and as friends can be competed, but trust can also be compromised.

Trust is EssentialThe dilemma surrounding any collaborations of supply chain

relationship is that one may acts towards its own self-interest to the expense of others.

Although trust can help reduce transaction costs but it can also increases monitoring costs if the buyer is worried about that other member of supply chain are not likely to be true to their word.

Partners often come to the relationship with history of past supply chain relationships that has gone bad. The largest barrier is appear to be organizational, rather than technical or financial.

One of the key problem is about ‘people costs’ which they might not able to fit with new environments. This results from a level of trust and open communications that might not being set in the individuals’ mind yet. Some employees might think that they should compete among individuals but that is not the idea because partners that come to relationships compete on the fact of supply chain process.

Trust is Essential If partners are to share sensitive information, they must ensure

that their information will be used as intended.Another aspects of trust is security which that each party must

act with the interests of all partners in mind. The final decisions must take into account the considerations of all members.

Firms are dependent on networks to fulfill their mission which these networks encourage informal interaction and idea sharing. On the other hand, networks will allows firms to have good relationships that open the flows of information among each members.

Networks such as extended enterprise depend on trust because some obligations will not be met. The firm could not rely solely on contract because it can only takes limited action as a reason that contract is agreed upon compliance not commitment. Also, contract does not assure that when conditions changed, previously-agreed-to will still be achieved.

Trust is EssentialThere are differences between alliance-like thinking and

contractual thinking which are summarized as followed:- Alliance-like thinking:

+ Value creation+ Facilitation and collaboration+ Expansive, flexible, adaptive+ Balance legal logic with common sense

- Contractual thinking:+ Risk mitigation (Risk alleviation)+ Overzealous protection and fear+ Narrow and rigid interpretation+ Emphasis on legal correctness

Contract is the written agreement that help protect against something bad happening to the firm not to encourage creative thinking when problem arise. And it also cannot easily address exigencies of problems that today’s world business is facing.

The challenge is to understand what the interaction between contracts and the development of trust among members of a supply chain. Without trust, contracts become important. Contracts are used to codify the nature of the relationship and become useful in case where partner have little past experience with one another.

Extended Enterprise consists of 3 major elementsManaging the businessManaging the relationshipUnderstanding the core spirit of the

relationship

Decomposing Trust into its Core DimensionsDefinition of trust converges on a confidence

in others’ intention and motivation. Trust is the belief that one’s alliance partner

will act in a predictable manner, will keep his or her word, and act in a way that wills not negatively affect the others.

Different Dimensions of trustTrust Components Implication

Character-based

Integrity – honesty and principlesMotivation – What intention areConsistency of Behavior - reliable and dependableOpenness – willingness to share informationDiscretion – holds in confidence

There element relate to the qualitative aspects of partners’ operating philosophies and culturesDifficult to ascertain and are often known by experienceThe glue that bind partners If motive are not shared and confidentiality violated, problems arise

Competence-based

Specific – specialized area of expertiseInterpersonal – skills in relating and working with othersBroad-based – general expertise being recognized fieldJudgment – decision-making ability

Problem solving was a key elementAlthough judgment is important at the level of the relationship, at the firm level there was less confidence

Building TrustArea in which trust is essential:

Supplier development Early step in developing an integrated supply chain

Also relevant in Internet business & B2B exchanges

Supplier Development:Supplier development is a process to improve

the performance of a firmʼs key suppliers so that the buyerʼs goals are better met.

Often, 2 goals are sought:1. Strategic: Focus on improving the

supplierʼs technical capability, product development skills, management skills etc...

2. Performance oriented: Focus on quality, cost, delivery and service improvements.

Supplier Development:To reach goals:

Either Supplier assessment: Evaluation, Certification and feedback, through :training, site visits and other activities

Or: using competitive pressure to motivate suppliers

Supplier Development:Problem:

Goals are only used to reduce costs for the buyer and damage trust building for long- term success

Supplier Development:Better: Do not focus on Cost-reduction

only !

Example: Honda Honda works with suppliers to meet jointly

developed cost targets : Cost reductions are achieved through “Analysis of Inefficiencies” and not taken from Supplierʼs profits!

Hondaʼs Best Partner Programm ( BP ) Productivity gains: +47% Quality improvement:

+30% Cost reduction: +7.25%

Supplier Development:Example: Solectron

Solectron looks first at capabilities, then at total costs to select key-supplier development opportunities.

Supplier performance is tied to profitability.

Supplier Development:Example: Sun and Cisco

Sun/Cisco identified their supply chains and the manner in which they are managed.

Each company has a well-articulated roadmap for success and willingly shares this roadmap with its supply base.

Supplier Development:Purpose:

1. Shows in a logical and consistent manner how all the parts create value for customers.

2. Commitment to the supply base and involvement in the planning process.

3. Trust is built through the entire strategy-planning and implementation process --> Nosurprises and all parties understand how risks and rewards are shared.

E-commerce, Supply Chains and TrustE-commerce is a growing part of business but

many companies may not be prepared to deal with the pressures of extraordinary demand.

Problem:Managing the logistics of such a huge

magnitude, firms can conduct global transactions BUT they canʼt fulfill these orders easily !

E-commerce, Supply Chains and TrustExample:

UPS has begun to manage supply chains for its customers through a subsidiary that integrates all the parts of the process.

E-commerce, Supply Chains and TrustInternet business:

“Trust is now defined as reliability” - it is the guarantee that the transaction will be completed

A number of services developed in recent years to provide independent assurances that the goods ordered will be received :

”SGSonSITE” “TradeCard ” “eCredit.com”

E-commerce, Supply Chains and TrustThere are 2 opposing views :

1.Contra: In the Internet age, “Trust has be trivialized to mean transactions have been certified to be accurate and reliable” only.

2.Pro: Given the tools available on the internet, it will improve the effectiveness of collaboration by augmenting co-located, face-to-face teams.

E-commerce, Supply Chains and TrustHowever, trust in the traditional sense seems

to be lost by internet transactions, because: Bids are shopped and contracts renegotiated every

6 months or so. The lowest bid always wins -> Bad for Innovations

that cost research anddevelopment. Firms can buy good reputations through advertising

expenditure. Buyers lose interest to really know about their

suppliers. As soon as business suffers, important relationships

to suppliers are missing, resultingin unfavorable market conditions for buyers.

Approaches to build trustOne element of value creation:

“Determining how different supply chain partners combine resources and skill to create value”

Second element of value creation: Assessment of how the finances associated with the

value created are appropriated among the channel partners :

Are benefits divided equitably or equally? How to decide if a channel partner receives a fair

share of the price paid by the customer?

Know the Components of Trust“Trust can be built by understanding the

impact of its components”

Character-based trust is important because firms have various choices:

Researching on the internet and press for companies who have not collaborated successfully

Know the Components of TrustExample: Software Industry

Some companies are known for willfully expropriating technologies from their partners. Why should firms chose to work with them?

Other firms are more emphatic :“Without a clear and mutual interdependence, it will be very difficult to attain the degree of supply chain integration needed to compete favorably”

Know the Components of TrustOne question that should be asked:

“What would you want your supply chain partner to say after the relationship ends?”

Partners must agree on the goals and purpose of the extended enterprise which lays foundation of mutual interest and the need to collaborate

Know the Components of TrustImportant topics:

Demonstrating the importance of the partnership Gains to all parties Consequences of not collaborating Mutual gains must be stressedAll partners are given a voice Strategic interests become part of the overall

plan for the supply chain networkFrom these points, trust can be built among the members of

the network in order to work closely to implement the plan.

Seasick Syndrome

Sending mixed signals of “partnership and collaboration” on the on side , but also doing price pressuring and the use of leverage to extract lower prices on the other.

Table 7.3 : Evidence of the Seasick Syndrome and the Inconsistency between Buyer and Seller

Understanding the Relationships between Trust and ControlAs goals and objectives become less tangible, trust

takes on a more important role in managing the nature of the relationship between supplier and buyer.

Flexibility and adaptability become essential when there is joint learning and technological discovery as a goal.

Under conditions of less uncertainty, contracts become more important and a variance in behavior is less tolerated.

Understanding the Relationships between Trust and Control

From theory to practice: Developing an atmosphere of trust

Begin with a planEnsure open lines of communicationEstablish an appropriate governance

structureKeep your eye on what mattersWalk in your partners’ shoesPartner assessment and determining

trustworthiness

Begin with a plan

Without a plan, objectives cannot be set, goals cannot be formed and outcomes cannot be measured.

A plan is the basis of the discussion with potential supply chain partners

Begin with a planWhat are the mutual benefits to be realized by the different

supply chain partners?Are partners treated fairly and equitably? Do risks and

rewards balance?Do all partners have a voice and are they heard?Have we taken the time to mesh strategies from each of

our partners into the supply chain strategy? How does this supply chain meet customer’s needs and

provide a sustainable competitive advantage?What role does each partner play? Are the roles clearly

understood and accepted by each supply chain member?Why were partners asked to be part of this supply chain?

What is each one’s unique contribution?During the planning process, have we included

considerations for managing the relationship and the business?

Is there senior management support and commitment?

Ensure open lines of communicationInformation should flow openly among the

members of the supply chain. Partners should be comfortable exchanging

sensitive information. Flows are encouraged to be less formal and

not follow the chain of command. Partners share an understanding of what the

scope and depth of information content is that should be exchanged and agreed that certain information might be considered out of bounds

Ensure open lines of communicationDo you communicate only when there are problems or

is there an ongoing dialogue among supply chain members?

Do you tend to speak the same language and see issues from each other’s perspective?

Is there a tendency to keep partners aware of new developments and potential problems before they occur?

Does information flow with equal ease throughout the supply chain?

Do supply chain members have open discussions that are fact-based?

Is there agreement among partners regarding operating principles and rules of engagement? Does everyone understand the rules?

Do members work hard to keep others involved in decisions that affect the supply chain?

Establish an appropriate governance structure

The governance structure addresses issues related to roles and performance among supply chain partners, assigns responsibility for activities and participation in decision making for supply chain-wide issues, ensures equitable treatment of all partners as it relates to sharing both risks and rewards, and attempts to build a sense of shared commitment to the broader, mutually agreed up, supply chain vision.

Control is contractually based and limits the level of commitment and trust

Establish an appropriate governance structureAre problems that arise treated as ‘your’ or ‘our’ problems?Are there conflict-resolution mechanisms built into the

operating principle or do members rush to a legal remedy?Do members genuinely work towards common goals and a

shared vision?Are outcomes viewed as supply chain-wide and linked to the

success of the network, rather than to individual members?Can partners articulate the norms and values that guide

acceptable supply chain behavior?To what extent are members comfortable with

interdependence and the fact that the success of the supply chain is linked to partners working for the good of all members?

Do members value and respect the contribution, input, and differences that each partner brings to the supply chain?

Are performance outcomes tied to hard objectives measure only?

Keep your eye on what mattersNormally companies will act in their own self

interest. Self serving behavior renders the supply chain weak. Members must constantly be reminded that what is important is that supply chains compete with other supply chains.

The challenge is that managers are comfortable with control and uncomfortable with the notion of trust.

Effort should align structures, processes, policies, and procedures system wide

Walk in your partners’ shoesTaking your partners’ perspective and

understanding what drives their decision processes is important. Thinking in terms of your partner means one is careful of the signals that are sent

To some degree, managing trust can be seen as a virtuous circle. Partner choice is an important first step but the relationship must be built, sustained, and managed to survive the difficulties that come with doing business

Walk in your partners’ shoes

Walk in your partners’ shoesThe figure provides insight into how building

a trusting atmosphere that is indispensable to maintaining economic ties among alliance members

Partner assessment and determining trustworthinessIt is common that a good supplier does

not necessarily make a good partner. Questions of competence, state-of-the-art technology, innovativeness, cost-competitiveness and quality of management are valid.

In addition, mutuality of goals, purpose and shared vision and values are also important things to consider. Aspects of the firm and its management that reflect the behaviors, attitudes, decision making style, organizational processes and procedures are also important to this point

Partner assessment and determining trustworthiness What is the supplier’s level of commitment to us? What has the level of

commitment with past supply chain partners been? What do past/current customers say about this supplier? Has it kept its

promises to others? Does its management speak of us as a team or as individuals, not we? What is this supplier’s view of the future? How long have past supply chain

relationships lasted? Is this supplier willing to share its new ideas and suture plans with us? Do its systems and structures permit informal communications across levels,

divisions, and functions? Are its people empowered at act? Do all decisions and information flow to the

top where action is initiated? Does the supplier use multifunction teams to solve problems and address

issues? Do contractual concerns loom large in the conversations we have held? Are

attorneys present at every meeting? Do management personnel seem flexible and appear to be willing to change, or

are they rigid in their thinking? Does this supplier seem to know our business and is it willing to contribute to

our mutual success? What kinds of assurances does the supplier want from us? Does it appear that

this supplier will hold us to the letter of the contract? Does this supplier insist that everything must be spelled out and put in writing?

Is everything business or is time taken to initiate a personal relationship?