Trust, alliances, and innovation in supply chain management

HBS Working Knowledge: Operations: The Missing Link in Supply Chains: People

Research on (global) supply chain management has proven to be a great resource for my work, even though I concentrate on innovation rather than production. There are many similar issues in the two fields: the importance of alliances, the necessity to create trust between different organizations etc.

This panel discussion convened by the Harvard Business Review raises some of these issues. Particularly interesting is David Burt's proposal that trust can be established between organizations, not just individuals. I'm not convinced - and he concedes that he doesn't any evidence yet - but the idea is intriguing...

The panelists also point out that smart contracting is essentially the basis for building trust. Master contracts can avoid repeated drawn-out and possibly nasty negotiations, letting partners focus on cooperation. Another suggestion was to avoid penalties that simply punish the party that violates the agreement. Instead, have the violating party pay the money into an account that is then used for the benefit of the alliance. This way the alliance benefits from enforcement. Simple penalties just provide an incentive to 'catch out' the other person.

Robert Lynch brings up another issue of supply chain management: Buyers are rewarded for cutting costs, not for gaining innovation from the supply chain. He cites a study by Burt in which responding firms on average say that 35% of their innovation comes from the supply chain. He contrasts this number to the 60% that companies like Toyota achieve. Evidently, supply chain management can create strong incentives for suppliers to innovate - or not.