Tailoring Supply Chain Visibility to Cooperative Term Length

In another post last month I mentioned that the supply chain is an information economy, where information is created, valued, and exchanged. In that blog post I also discussed the impact supply chain governance has on the information economy, particularly information asymmetry and value-sharing. Josh Bryan, an artificial intelligence researcher and long-time friend, had feedback on the post which prompted me to create a more complete discussion on the supply chain’s information economy.

Is the Supply Chain a Zero-Sum game?

One of the important questions that affect information value, and supply chain value in general, is whether the supply chain is a zero-sum game. The simplest answer to this question seems to be “yes”; there is always a limited amount of value to be shared by the supply chain members. For example, when I purchase a bicycle for $100 the supply chain members have fixed amount which must be divided. From the point of sale backwards, there is no question that value is limited and therefore the negotiations on sharing it are zero-sum in nature.

Innovation, demand-inflation, and the future in general…

Of course, the future revenue is not zero-sum. Actions taken by the supply chain, particularly around innovation, can increase the initial revenue value. My $100 bicycle purchase might have been (or might be again in the future) a larger figure, say $120, if innovative activities are successful. Even if the price paid doesn’t change, there may be more customers or customers paying ongoing fees for longer than expected. In other words, the unknown and unknowable future is a counter-weight to treating all supply chain engagements as zero-sum in nature.

Why does it matter anyway?

Probably a fair number of readers are wondering why it even matters if a supply chain interaction is treated as zero-sum or not. If you get nothing else out of this article you should at least learn this: it makes a great deal of difference to rational choices. I believe the best example of this is when supply chain partners are facing bankruptcy or other forms of threats to their existence. Those supply chain professionals who have lived through such periods know what happens when it is clear there will no longer be a future product, a future chance for more revenue, etc. In these moments the supply chain interaction is resolutely zero-sum, and things get nasty.

Not my Fucking Problem

As a real-life example, often times when a company is believed to be facing the end of its existence the partner organizations will simply take every advantage they have to remove value from it. In 2009 when Saab faced bankruptcy its customers simply stopped paying their invoices which Saab was owed. When asked by Saab why they had stopped paying, the customers remarked that they believed Saab would fail and didn’t see why paying would be to their personal benefit. Suppliers of Saab likewise switched to producing other customer’s components, sometimes after already being partially paid for products which Saab ordered. Again, their message to Saab was that it was no longer meaningful to them to consider whether something would be good or bad for Saab. In short, it wasn’t their fucking problem. I’ve personally heard many similar examples in my career when businesses all over the world hit hard times.

To be more specific, the reason these companies start behaving this way is that they know they won’t have to deal with the weak partner again. That means the value equation is very short-sighted, basically looking at today and only today. If today you have Saab’s money and they won’t be around tomorrow, what is the value in being honest? What is the downside to robbing them? We see this in personal behavior all the time, where individuals trash a plane bathroom because they will be disembarking soon, or don’t bother too much about pushing the engine too hard on their rental car.

There is a lesson to be learned in game-theory about what happens when the “end” becomes visible, demonstrated in the Iterative Prisoner’s Dilemma (link goes to Wikipedia article). This is a modification of the prisoner’s dilemma where the players continue to play for an unknown period of time. Unlike in the one-off Prisoner’s Dilemma, the players have an incentive to cooperate because their partner can “punish” them for reneging by doing the same in the next round. This potential for losing value in the future results in better partnership alignment in the current phase.

Zero-Sum and the Information Economy

All this has a major impact on how organizations approach visibility initiatives. Visibility initiatives require investment to be achieved and a time-period to payback and earn returns. But game-theory shows that cooperative solutions to iterative prisoners dilemma (with unknown or infinite horizon) only arise if all players have sufficiently low discount for future rewards.  If players discount the future too much (don’t have long term vision), then the only rational solutions to the game are defection, even if the number of iterations is unknown. In other words, if everyone in the industry “believes” they are playing a zero sum game, then they “are” playing a zero sum game.

In supply chain terms, this goes directly to the heart of why visibility initiatives are launched and why they fail. In an earlier post I discussed the inherent instability of visibility initiatives that increase information asymmetry in the supply chain and accumulate value to one member at the expense of others. In this blog post, I’d like to add another factor which supply chain leaders should consider as a risk factor for visibility initiatives: the partnership time horizon.

Visibility Initiatives Should Adapt to the Cooperation Timeframe

The failure to implement supply chain visibility is rarely a technological failure, but a failure of business strategy or alignment. One failure-point is in timeframes for cooperation or engagement. If two supply chain members engage in a one-off business interaction, with no hope of ever working together again, their behaviors towards information sharing will reflect this. Likewise, visibility initiatives for long-term arrangements will reflect those arrangements. Being more specific, the supply chain’s information economy adapts to the new arrangements by differentially valuing information. As a basic example, consider this situation.

Widget Manufacturer and Shanghai Expo form a one-off partnership. Shanghai Expo will purchase 100 widgets a week for nine months. Any widgets that don’t sell at the end of the nine months are returned to the manufacturer for a direct rebate. The deal is concluded, with no ability to change price or delivery terms. Once the deal ends, neither company will work together again. Part of Shanghai Expo’s requirements are to have production-information for widgets, including the Bill of materials (BOM), production schedule, and supplier names. The Shanghai Expo company will use the visibility information to increase sales, meaning better information will enrich both the Shanghai Expo company and Widget Manufacturer.

This example actually exactly mimics an arrangement I’ve seen for a specialized sportswear company. Consider the value of the visibility initiative, for the supply chain as a whole and also for the individual parties. Certainly the arrangement increased information asymmetry, but because of the incentives and one-off nature of the deal there is actually no negative impact to the Widget Manufacturer. Unlike the example in a previous post, this arrangement increases information asymmetry without causing one supply chain member to extract value from the other.

But now consider the same example with a change to the time-frame for partnership. Specifically, imagine if the two parties were to renew their business arrangement with new negotiated prices after the first nine months. This small change in circumstances would cause ripples in the supply chain information economy. Specifically, the value of the information being handed to the Shanghai Expo company increases, without a corresponding value flow going back to the Widget Manufacturer. In future negotiations, the Shanghai Expo company will be in an advantaged position. This change in time-frame for supply chain partnership places us back into the situation discussed in the earlier post. Namely, that the Widget Manufacturer now has a significant incentive to undermine the data quality it shares, since higher data quality leads to a weaker negotiating position for them.

Monday Morning Wrap-Up

As with any strategic discussion, I’d suggest we close this post with some summary of how these ideas are applicable to the supply chain leader on Monday morning at the office. What we discussed in this post suggests the following be kept in mind:

  • Visibility initiatives tap into the information economy of a supply chain
  • The value of information in a supply chain is intimately tied to the perceived time-frame for cooperative partnerships
  • Perceived time-frame for cooperative partnerships, together with information value, shape incentives of supply chain members to sabotage visibility with poor data quality
  • Supply chain members can discount the value of future interactions enough to turn any supply chain exchange into a zero-sum game, with repercussions to the value of information and to the willingness to participate in information collection
  • All this suggests that both at onset and after any major event or change, supply chain leaders should evaluate their expected cooperation term with supply chain partners as a risk factor for visibility initiatives.

 

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