The Credit Crunch - A Supply Chain Perspective 12-14page

VOL 10 ISSUE 1 2009
Supply Chain
Perspectives
VOL 10 ISSUE 1 2009
THE CREDIT CRUNCH—A SUPPLY CHAIN
PERSPECTIVE

SUPPLY CHAIN PHYSICS?

THE TRANSFORMATION OF THE SOFTWARE
SUPPLY CHAIN

COLLABORATION AS A KEY COMPETENCE IN
THE 21ST CENTURY
SUPPLY CHAIN
INTEGRATION

SUPPLY CHAIN PERSPECTIVES
Upcoming NITL Learning Modules

All modules are part of NITL’s Executive Masters (which leads to the award of an M.Sc.) or SCM Develop‐
ment Programme (which leads to the award of a Post‐Experience Certificate or Diploma). However, all
modules are self‐contained and may be taken as one‐off short courses. They provide an ideal vehicle for
updating knowledge, skills and competencies in the areas in question. Each module runs as follows:
Thursday (1830 – 2100); Friday (0830‐1730); and, Saturday (0830‐1600).

For further information or to register for any module contact Antonio at adelinares@dit.ie or (01)
4024023.

Executive Masters Introduction to Supply Chain Management

Dublin
Introduction to Supply Chain Management ‐ 14th‐16th & 21st‐23rd May
Introduction to Supply Chain Management ‐ 8th‐10th & 15th‐17th October
Cork
Introduction to Supply Chain Management ‐ 5th‐7th & 12th‐14th November

Other M.Sc. Modules

Dublin
Transport and Distribution Management ‐ 21st‐23rd & 28th‐30th May
Partnership in SCM ‐ 11th‐ 13th & 18th ‐20th June
Simulation of Supply Chains ‐ 17th‐19th & 24th ‐26th September
Understanding Customer Service ‐ 8th‐10th & 15th ‐17th October
Human Resource Management in the Supply Chain ‐ 5th‐7th & 12th‐14th November
Project Planning Management and Control ‐ 3rd‐5th & 10th‐12th December

Cork
Production Planning and Control ‐14th ‐16th & 21st – 23rd May
Change Management and Organisation Development ‐ 11th‐ 13th & 18th – 20th June
Project Planning Management and Control ‐ 17th ‐19th & 24th – 26th September
Inventory Management ‐ 3rd‐5th & 10th‐12th December

Upcoming Dublin Modules for Certificate/Diploma in SCM

th th
Transport Management ‐ 7 ‐ 9 May
Financial Management Fundamentals ‐ 18th – 20th June
Partnerships in Supply Chain Management ‐ 10th ‐12th September
Introduction to Supply Chain Management ‐15th‐17th October
Information Technology in the Supply Chain ‐ 29th‐ 31st October
Production Planning and Control ‐ 26th‐ 28th November
2
VOL 10 ISSUE 1 2009
CONTENTS
4 16‐17

Editorial Supply Chain Physics?
Supply Chain Integration by Patrick Daly

5‐10 18‐23

Supply Chain The Transformation of
Management Forum the Software Supply
Chain: Challenges for
Digital Software Distri‐
bution
11 by Colm Ryan and
Dr Claudia Wagner
Useful Websites
by Erica Staller

24‐33

12‐15 Collaboration: A Key
Competence for Com‐
The Credit Crunch ‐ peting in the 21st Cen‐
A Supply Chain tury
Perspective by Umit Bititci, Peter
by Des Lee Butler, William Cahill
and Denis Kearney

3
Editorial
Editors:
Edward Sweeney
Claudia Wagner
W elcome to Issue 1 of NITL’s new web‐based magazine Supply Chain Per‐
spectives (SCP). SCP is a peer‐reviewed publication, which aims to create
awareness about leading edge supply chain management (SCM) and logistics

Assistant Editors: themes among practitioners in this field. It will also keep readers informed of
Pamela O’Brien key developments in NITL and in the wider Irish SCM community.
Antonio de Linares
Supply Chain Perspectives replaces Logistics Solutions which NITL published for
Editorial Contact Details:
Supply Chain Perspectives
almost a decade. Whilst the overall aim and audience of the new publication
NITL will remain similar the name change reflects a change in emphasis. Firstly, the
DIT new magazine will not be confined to purely transportation and logistics issues;
Bolton Street rather, it will adopt a wider SCM outlook. NITL regards logistics as just one ‐ al‐
Dublin 1 beit hugely important ‐ element in the supply chain. Secondly, the word
Ireland
Ph: +353 1 4023000
“Perspectives” has deliberately been included in the title to indicate that there
Fax: +353 1 4023991 are few “rights” and “wrongs” in relation to strategic SCM and logistics. Each
Email: nitl@dit.ie article’s contributor brings his/her own unique insights based on the nature of
Web: www.nitl.ie their experience. These insights of all of value and the challenge for the reader
ISSN: 2009‐2342 is to relate the different emphases and priorities inherent in these perspectives
Vol 10 Issue 1

to their own challenges and strategic imperatives.
For advertising details,
please contact: This issue has two interesting and topical “thinkpieces”. Des Lee’s article ex‐
NITL plains the credit crunch through the adoption of an SCM perspective. Patrick
DIT Daly’s article explores SCM through the prism of natural physics. Interestingly in
Bolton Street
Dublin 1
the current climate, his piece concludes that:
Ireland You cannot cut your way back to success; you are going to have to inno‐
Ph: +353 1 4023000 vate and be creative to thrive and prosper in the face of challenge.
Fax: +353 1 4023991 The two research‐based articles are both based on projects in which NITL has
Email: nitl@dit.ie had an involvement. Colm Ryan and Claudia Wagner explore the issue of digital
Web: www.nitl.ie

supply chains, with a specific emphasis on software distribution. This work has
its genesis in a successful project carried out by Colm as part of his M.Sc. studies
and it is an area in which NITL has an ongoing involvement. The second – by
Bititci et al ‐ reports on research which was funded through an EU Leonardo da
Vinci project with the objective of facilitating collaboration among European
SMEs.

In addition to these feature articles the Supply Chain Focus section covers
events and issues in NITL and in the wider Irish SCM community. We have also
included our popular website review section, written on this occasion by Erica
Staller of Arizona State University.

Finally, we are interested in hearing from you. NITL invites SCM academics, con‐
sultants and practitioners to submit ideas for articles and/or news features to
the magazine’s editor Edward Sweeney (edward.sweeney@dit.ie). All ideas will
be considered but those which relate to the role of logistics and SCM in the cur‐
rent volatile economic environment are particularly welcome.

Your NITL Team
4
VOL 10 ISSUE 1 2009
SUPPLY CHAIN MANAGEMENT FORUM
A Review of Developments at NITL and the World of SCM
NITL Announces Logistics Ireland 2009
NITL, along with its partners at The theme for this year is Sup‐ formance. It will be built around
the Chartered Institute of Logis‐ ply Chain Management and Lo‐ five keynote speakers and an
tics and Transport (CILT), re‐ gistics in a Volatile Global Econ‐ interactive Q&A session. Among
cently announced details of this omy. The recent economic tur‐ the speakers confirmed is Pro‐
year’s Logistics Ireland. Follow‐ bulence has sharpened the fo‐ fessor Martin Christopher of
ing the success of last year’s cus on the need for more robust Cranfield School of Manage‐
conference Logistics Ireland approaches to SCM in improving ment, UK, recognised as one of
2009 will again be held at the competitive advantage and the world’s leading experts in
Crowne Plaza Hotel, Dublin – achieving value for money. Lo‐ this field.
Northwood, on Tuesday Octo‐ gistics Ireland 2009 will intro
ber 20th. The event is Ireland’s duce participants to leading
premier supply chain manage‐ edge thinking in SCM and logis‐
ment (SCM) and logistics confer‐ tics with a view to optimising
ence. cost and customer service per‐
Diary Marker

Date: Tuesday October 20th 2009
Time: 8.30am – 2pm
Venue: Crowne Plaza Hotel, Dublin – Northwood
NITL’s Work Attracts Considerable Media Interest
Various aspects of NITL’s work Another recent series of articles that saves Ireland from the jaws
has attracted considerable me‐ in the Sunday Business Post of a particularly nasty recession.
dia interest in recent months. noted that SCM used to be seen
For example, a report on as something of an add‐on, but The interest of the media in
“Ireland’s Supply Chain” in the not something that was critical SCM issues is indicative of its
Irish Times in March was based to a business’s ultimate suc‐ critical role in tacking the chal‐
largely on contributions from cess. But many things that lenges presented by the current
NITL experts. The various arti‐ seemed superfluous in the past economic volatility. For further
cles covered customer service have proven to be absolutely information about NITL and
and technology issues, as well crucial to the present. Far from SCM in the media visit http://
as covering specific issues in re‐ being an add‐on service, exper‐ www.nitl.ie/
lation to ports and airports. tise in SCM could be something NITL_in_the_Media/
5
New SCM Book to be Published
Edward Sweeney of NITL has assembled a group of leading
signed an agreement with international academics who
Blackhall Publishing in Dublin will contribute chapters to the
for publication of a new book – new book. These include Prof.
Supply Chain Management and Martin Christopher, Prof. Rich‐
Logistics in a Volatile Global En‐ ard Wilding, Prof. Alan
vironment. This follows on from McKinnon and Prof. John Gat‐
the publication by Blackhall in torna. These and other con‐
2007 of Perspectives on Supply tributors have all collaborated
Chain Management and Logis‐ with NITL over the past decade.
tics: Creating Competitive Or‐ Their contributions will be
ganisations in the 21st Century. based on leading edge thinking
and research in their respective
The title of the new volume re‐ fields but aimed squarely at a
flects the volatility in the cur‐ largely practitioner readership.
rent economic and business en‐
vironment and the potential To purchase the earlier book
role of SCM and logistics in ad‐ visit
dressing some of these chal‐ www.blackhallpublishing.com.
lenges. NITL is delighted to have
NITL Welcomes New Programme Participants
In recent months NITL welcomed over 30 new participants to its Executive Masters programme. All ma‐
jor sectors in the Irish economy were represented with participants from a range of companies including
PepsiCo, Apple, DHL and Wyeth. The feedback from participants in relation to the “Introduction to SCM”
module was universally positive with comments such as:

 ‘Excellent balance of theory and practice’
 ‘The tutor’s style, passion and knowledge of the subject were particularly good points about the
module’
 ‘The pace was great with plenty of participation’
 ‘Great presentation style with obvious understanding of the subject matter by tutor’
 ‘This is exactly what I want to learn – thanks!’

NITL wishes all new participants well in their studies.

For further information about NITL’s learning programmes, contact Antonio at 01‐4024023 or
adelinares@dit.ie or visit http://www.nitl.ie/Learning/Default.9.html.
6
VOL 10 ISSUE 1 2009
NITL Student Awarded Posthumous M.Sc. in SCM
The degree of Master of Science warmth. The conferring took later the relationship became
(M.Sc.) in Supply Chain Manage‐ place at the HSE in Dr. Steeven’s somewhat more formalised
ment was conferred posthu‐ Hospital in Dublin with DIT/NITL when Jim joined NITL’s Execu‐
mously on James Kearney re‐ represented by Edward tive Masters Programme in Sup‐
cently by the Dublin Institute of Sweeney and Claudia Wagner. ply Chain Management. At the
Technology (DIT). Jim sadly conferring Edward Sweeney
passed whilst in the final stages NITL staff knew Jim since the commented that ‘Through par‐
of his Masters studies. He was a Institute’s inception in 1998, ticipation in programme mod‐
senior supply chain professional mainly as a result of his involve‐ ules Jim’s passion for the sub‐
in the HSE, a role to which he ment in the Irish Institute of ject shone through. During
brought his inimitable profes‐ Purchasing and Materials Man‐ modules he engaged vigour‐
sionalism, knowledge and agement (IIPMM). A few years ously, challenged the conven‐
tional wisdom and was partici‐
pative in manner which was ex‐
emplary. Of particular note was
Jim’s willingness to share his
wealth of knowledge and ex‐
perience with younger partici‐
pants.’ Ar dheis De go raibh a
anam.

Jim’s widow, Ann, his children
and a number of other family
members were in attendance at
the conferring, as were several
former HSE colleagues. NITL
would like to thank John Swords
of HSE for facilitating the event.
Claudia Wagner and Edward Sweeney of NITL at the Conferring Ceremony
NITL invited to support economic development in Naples
NITL has been invited to support tled ‘Supply Chain Management “Federico II”, University of
economic development in the and Logistics in the 21st Cen‐ Naples “Parthenope” and IRAT‐
City of Naples, with specific ref‐ tury’ to over 200 invited guests CNR (part of the the Italian Na‐
erence to SCM and logistical is‐ at the University of Naples tional Research Council) are
sues. During his recent visit to “Federico II” as part of the Ital‐ continuing their collaborative
Naples, Edward Sweeney met ian launch of his book Perspec‐ work with NITL in the areas of
the Mayor of Naples (Rosa tives on Supply Chain Manage‐ ICT in Extended Enterprises and
Russo Iervolino) and the Minis‐ ment and Logistics. He also led a the role of SCM in regional eco‐
ter for Economic Development research seminar on the theme nomic development. NITL looks
(Mario Raffa) to initiate this of ‘Extended Enterprise, SCM forward to further fruitful col‐
work. In addition to this work and Logistics’. Academic staff laboration in Italy in 2009.
Edward delivered a lecture enti‐ from University of Naples
7
Recent M.Sc. Graduates in Supply Chain
Sixteen graduates of NITL’s flagship M.Sc. programme in Sup‐
ply Chain Management were conferred recently in St. Pat‐
rick's Cathedral at the DIT Faculty of Engineering graduation
ceremony. Offering his congratulations to them on their
achievements, Edward Sweeney of NITL commented that,
“This is a significant achievement and places NITL at the fore‐
front of executive postgraduate education provision”. This
group of graduates represents a broad spectrum of Irish busi‐
ness and includes supply chain professionals from companies
such as EMC, Genzyme, Analog Devices and Boston Scientific.
The public sector was represented by the HSE and the De‐
fence Forces, with both of which NITL has longstanding rela‐
tionships.

Edward Sweeney of NITL photographed NITL wishes all graduates well in their future endeavours and
with Marita O’Connor at the graduation looks forward to a continuing association with them through
its alumni activity.
NITL congratulates its latest Ph.D. Graduate
NITL marked another important leading international academic dent population in the not too
milestone in its development journals. The foundation pro‐ distant future.
with the award by DIT of a Ph.D. vided by Dr Wagner’s thesis al‐
to Claudia Wagner who works lows for further robust investi‐
as a Senior Researcher at the gation in this field. Indeed, Dr
Institute. Dr Wagner’s research Wagner is carrying out some of
was undertaken at NITL under this work as part of her ongoing
the supervision of senior NITL research activity within NITL.
academic staff. Her Doctoral
thesis was entitled ‘The impact NITL views postgraduate re‐
of Business‐toBusiness E‐ search as a fundamentally im‐
Marketplaces as Extended Me‐ portant part of its overall port‐
dia in the Procurement Supply folio of activities as it enables
Chain of Airlines’. the Institute to make a positive
contribution to the body of
The primary contribution of this knowledge in the logistics and
work was to provide an original supply chain fields.
starting point for a more struc‐
tured focus to improve under‐ NITL would like to congratulate
standing of the adoption proc‐ Claudia on her fine achievement
ess and value creation of B2B e‐ and looks forward to further
Marketplaces. The work has re‐ success with its research stu‐
sulted in several publications in
8
VOL 10 ISSUE 1 2009
NITL at International IPSERA Conference
NITL staff recently attended the annual conference based in Cork. The title of their paper
of the International Purchasing and Supply Educa‐ was:
tion and Research Association (IPSERA). This year’s
event took place from April 5‐8 and was hosted by Digital Supply Chains: Towards a Framework for
the European Business School (EBS) located in the Software Distribution by Colm Ryan (Apple Inc),
Rhinegau Region in Southern Germany. Claudia‐Maria Wagner (NITL), Edward Sweeney
IPSERA is a multi‐disciplinary network of academ‐ (NITL), Emilio Esposito (University of Naples
ics and practitioners dedicated to the develop‐ “Federico II”) and Pietro Evangelista (University of
ment of knowledge concerning purchasing and Naples “Federico II”).
supply management. It is the world’s biggest and
most internationally oriented platform for re‐
searchers in this area. The annual conference pro‐ NITL sees continuous collaboration with industry
vides exposure to some of the most recent devel‐ and other leading academic institutions as a key
opments in this field. The conference theme element of its research endeavour. The paper pre‐
“Supply Management – towards an Academic Dis‐ sented at IPSERA is the result of ongoing joint re‐
cipline?” attracted around 250 researchers from all search activity between NITL and the software in‐
over the world. dustry, as well as with Italian academic partners.
NITL has a longstanding involvement in IPSERA and
was involved in hosting the event in 1999. We Further information about the event is available at
were represented at this year’s event by Dr Clau‐ http://www.ipsera.com
dia Wagner and Colm Ryan who is a graduate of
NITL’s Executive Masters programme and who
now works as a program manager at Apple Inc.
Delegates at the recent IPSERA conference in Germany
9
Irish companies see China as a land of opportunities
A business survey commis‐ an economic price). Being green chain risk increases, and with
sioned by supply chain services and commercially efficient this, the need to create more
specialist, SerCom Solutions, should not be mutually exclu‐ resilient supply chains becomes
highlights the strong interest sive. ever greater. Based on the sur‐
among Irish based companies in vey’s findings, over 75 per cent
developing trading links with While the majority of compa‐ of respondents stated that SCM
South East Asia and in particular nies surveyed (67 per cent) rate resilience issues will become
China. Despite the current eco‐ their company’s environmental more critical as businesses to‐
nomic recession, over 80 per performance as strong or very day increasingly need to grapple
cent of survey respondents see strong, almost 80 per cent agree with managing and mitigating a
China as an opportunity for that environmental and sustain‐ whole range of risk factors im‐
business as opposed to a threat, ability issues are likely to be‐ pacting on the business.
with 57 per cent of companies come more critical in the years
surveyed, currently doing busi‐ ahead. According to respon‐ This survey has attracted a lot of
ness in Asia, in some shape or dents of the survey, some of the media interest in recent
form. environmental/sustainability months. For example, there
initiatives likely to be intro‐ were reports in:
The survey, which was con‐ duced in the near future, in‐
ducted by the research team at clude the use of alternative en‐ Electric News
the National Institute for Trans‐ ergy sources such as bio‐fuels in 11th February 2009
port & Logistics (NITL), also set transportation and the introduc‐
out to gauge the need for sup‐ tion and use of more bio‐ Limerick Independent
ply chains that are both sustain‐ degradable materials in prod‐ 22nd February 2009
able (i.e. environmentally ucts.
friendly, with reduced CO² foot‐ EnviroSolutions
print, less damaging to natural As supply chains become more 23rd February 2009
resources) and resilient (i.e. complex as a result of global
commercially efficient, robust, sourcing and the continued Business and Finance
and meeting customer needs at trend to ‘leaning‐down’, supply March 2009
About SerCom Solutions

SerCom Solutions acts as a global outsourcing partner to many of the world’s lead‐
ing ICT companies. These companies are increasingly outsourcing key aspects of
their supply chain in order to achieve shorter lead times to market, reduced inven‐
tory levels and more cost effective and efficient distribution.
Established since 1978, SerCom Solutions delivers a comprehensive range of out‐
sourced supply chain services, covering kitting, supply chain planning, order and
warehouse management, product sourcing, procurement services, distribution and logistics management.

For further information, please contact:
Frans Van Cauwelaert, WHPR
Tel: +353 1 669 0030 or Mobile: 087 9476743
Email: frans.vancauwelaert@ogilvy.com
10
VOL 10 ISSUE 1 2009
USEFUL WEBSITES
By Erica Staller
Materials Management and Distribution— www.canadianmanufacturing.com/mmd/
Materials Management and Distribution claims to be
Canada’s authoritative supply chain management maga‐
zine. MM&D’s goal is to educate and inform readers
about current trends and effective practices in supply
chain management. The website allows access to past
issues of MM&D’s publication, a free e‐newsletter, infor‐
mation about new products and services on the market
and a career resource center. While some of the current
events presented in the e‐newsletter and the publica‐
tion are geared towards those with Canadian business
interests, many of the articles present information that
is much more generally applicable concerning trends in
supply chain management.
Material Handling Management — www.totalsupplychain.com
Material Handling Management is a magazine which provides inspi‐
ration, knowledge and information for professionals involved in ma‐
terial handling. The website provides access to daily features, the
monthly publication and archived articles, information about new
products, case histories, white papers, events and a career center.
The articles are well written, informative, provide useful tips and
keep up with current trends in SCM. The website itself has a pleas‐
ing layout and is easy to navigate. Searching for information about a
specific topic is easy as well; there is a list of popular and specific
topics on the left of the page or a search function that returns rele‐
vant results. It is $100 for a print subscription of this magazine, $20
for an online subscription and the e‐newsletter is free.
Inbound Logistics — www.inboundlogistics.com
The idea behind Inbound Logistics is to give supply chain profes‐
sionals the tools and information they need in order to find solu‐
tions and create wealth for their companies. The website is de‐
signed to complement the magazine. The magazine features case
histories, industry overviews, current issues and trends in SCM and
opinion pieces by industry professionals. There is also a how to
section designed to give best practices and answer questions. The
website on its own features a 3PL decision support tool, career ser‐
vices and information on market leaders. While this magazine is
geared towards keeping North American companies competitive
globally, there is still a lot of useful information for those who do
not do business in North America. The digital edition of Inbound
Logistics is free.
Erica Staller is based at Arizona State University and is a former visiting researcher at NITL. 11
The Credit Crunch – A Supply Chain Perspective
Des Lee
Dramatic changes in the world‐ The story of the credit crunch jority of funding for most banks.
wide financial system continue starts with the banks. Banks have a permanent ten‐
to ripple through the global sion between the timescale of
economy affecting credit in all A bank acts as a distributor of their funding (mostly short
its forms to individuals, small money and is an integral part of term) and the timescale of their
and medium sized companies, the financial supply chain; it lending (mostly long term). As a
large corporations and even takes in cash from its suppliers result, they have a constant
governments. The credit crunch and distributes loans and other need for new short term fund‐
can be viewed as a supply chain financial products to its custom‐ ing as existing funding matures.
failure. In this case, the finan‐ ers. The sources of supply (the
cial supply chain has succumbed sources of money) are retail de‐ Figure 1 below shows the banks,
to systemic failure, despite most posits (bank accounts of people their sources of funds and their
of the elements of that supply like us); commercial bank ac‐ assets i.e. loans.
chain being compliant, careful counts (of companies), long
about risk and reasonably pru‐ term debt (which typically ac‐ Banks are commercial organisa‐
dent in the conditions that pre‐ counts for a small amount of tions that are owned by share‐
vailed. The fact that finance is the overall funding) and whole‐ holders who expect a return on
the most globalised supply sale funding (from money mar‐ their investment. Banks make
chain should give us all pause kets, other banks, companies loans (and sell other products)
for thought. Here is a simplified with excess cash, etc.). Whole‐ at a rate of interest and the dif‐
guide to how it happened. sale funding is short term, with ference between the cost of
maturities from overnight to 12 funds and the interest rate on a
months and represents the ma‐ loan is the bank’s margin.
Figure 1: Bank Balance Sheet
12
VOL 10 ISSUE 1 2009
A bank’s balance sheet has growth of lending and there

loans as assets; and deposits as were opportunities to further
liabilities – the reverse of most lending as well as funds avail‐
companies. Note that for a able; but only if the reserve re‐
bank, money is both a measure‐ quirement could be got over. A
ment of value and profit, as well class of financial products know
as of inventory. as Asset Backed Securities en‐
abled this to happen. Banks
There are two sets of regulatory created securities (financial
limits on bank activities: one is products) from pools of assets
called capital adequacy, the (loans), split the resulting pool
other is a reserve requirement. into pieces, and sold them to
Capital adequacy requires that eager investors. In an example agencies are paid by the organi‐
capital and reserves from the US, 2710 mortgages sation that is issuing the prod‐
(shareholders’ funds) must be a with a total value of $450m uct (a clear conflict of interest).
minimum percentage of the were packaged as a property Mortgage backed securities
overall balance sheet – cur‐ investment and sold in, say, were rated highly – they looked
rently about 6% but will proba‐ 1000 parts, each worth very safe due to the spread of
bly rise. Note that as asset val‐ $450,000. The bank takes a fee mortgages within each package
ues fall, and loan values are for selling the product and for and the seemingly unlikely
written down, this capital is continuing to administer the event of default by a large pro‐
eroded. The second restriction, mortgages (payments, etc.). portion of mortgage holders.
the reserve requirement, re‐ The investors get controlled ex‐
quires the banks to keep a cer‐ posure to the property market The investment rules of many
tain percentage of their depos‐ with a perceived low risk. The organisations restrict them to
its in cash or securities – they other major advantage for the buying only investment grade
cannot lend all their deposits. bank is that selling these securi‐ products (those with a high
These limits are intended to re‐ ties removes the loans from the credit rating). Mortgage backed
strict imprudent behaviour by bank’s balance sheet and allows securities received high credit
the banks that would jeopardise the money to be recycled to ratings and were bought in large
depositors’ money. For more create further loans and further quantities by pension funds,
than 10 years, wholesale money profits. public bodies, universities
markets around the globe have trusts, local authorities, etc. on
been awash with cheap money There is a risk involved in any the basis that they were a safe
– interest rates have been at financial product whose value is investment with a good return
historical lows and there have based on a promise to repay – and with a spread of risk. Asset
been many sources of excess the possibility that the repay‐ backed securities were also held
cash e.g. petrodollars, trade sur‐ ment may not occur. Financial by the banks themselves, who
pluses from China, savings from loan‐based products can be as‐ also bought similar products
Asian depositors and elsewhere. sessed for risk by a rating from other banks and from
This easy availability to the agency. There are three global other parts of the world. The
global banking system encour‐ rating agencies – Moody’s, Stan‐ returns were attractive and they
aged the loosening of lending dard & Poors, and Fitch ‐ who were seen as diversifying risk
standards – the more money assess the likelihood of default away from a bank’s core coun‐
that was lent, the more profit (non‐payment) and assign a try/sector, etc. ‐ Figure 2 shows
could be made. But, the reserve code e.g. AAA, to denote the securitisation, credit rating and
requirement restricts the quality of the debt. The rating purchase of ABS.
13
Investors
Rating
Agency
Loans
To companies, credit Issue of Asset
cards, house buyers, etc. Backed Security
Bank
Figure 2: Securitisation
Due to the amount of cheap fixed “teaser” rates started to to pay, the counterparties
money available, and to the reset to more normal (higher) (those on the other side of the
ability of the banks to remove rates. The result was a huge contract) faced an avalanche of
loans from their balance sheet rise in default on sub‐prime demands. This put an end to
through securitisation, lending lending and a sharp downturn in Bear Stearns and to AIG (then
grew at an unprecedented rate. house prices – US house prices the largest insurance company
The drive for further profits and are down well over 20% from in the world).
the sheer amount of cash avail‐ their peak and still falling!
able led to a reduction in loan Due to the enormous appetite
quality – sub‐prime mortgages The management and reduction for asset backed securities and
and “liar” loans (with self certifi‐ of risk was a key focus in the the financial products derived
cation of income) abounded. entire financial sector and many from them, many individuals,
These were then packaged and fancy derivative products were organisations, funds and banks
sold on. Many of the loans had developed to offset risk. As de‐ engaged in borrowing to pur‐
low “teaser” rates for the first faults rose (and are still rising) in chase these assets. The banks
couple of years before resetting sub prime loans, the risk reduc‐ were, thus, removing risk from
to a much higher rate. Every‐ tion derivatives (for example, their balance sheets by selling
thing seemed fine and vast prof‐ credit default swaps) were asset backed securities; while at
its accrued until US interest called in. A credit default swap the same time they were buying
rates started to rise. Between (CDS) is a contract that protects similar securities from other
2004 and 2006, US rates in‐ the buyer from default on a sources as well as lending so
creased by more than 2% on loan and acts very much like an that others could buy similar
inflation fears. At the same insurance policy but without the assets. Risk was being removed
time, the US economy reached normal reserves required in the by one means, and coming back
its peak and started to slow insurance industry. As defaults via another. The complete cycle
while many mortgages with rose and the CDS’s were forced is shown in Figure 3.
14
VOL 10 ISSUE 1 2009
Figure 3: The Whole Sorry Mess!
As the value of asset backed securities and their by putting additional capital into the banks.
derivatives has fallen (due to defaults and declin‐ As banks write off or write down the
ing asset values), the financial system has become value of loans on their books, their capital
much more cautious. The vast pool of cash that is eroded, which leads the banks to re‐
fuelled the boom has been withdrawn. No one is duce their assets (loans) to comply with
willing to lend money while they are unsure if they capital adequacy. Governments do not
will be repaid. The financial institutions do not want banks to withdraw credit.
know what they own, nor do they know the true
value of many of these assets. Until that becomes So far it hasn’t quite worked. Short term interest
clear, lending to a bank (via the wholesale mar‐ rates have dropped from the heights of Septem‐
kets) will remain difficult. The wholesale money ber, but are still well above normal rates. Credit
markets that many financial institutions relied on has been reduced and the excesses made possible
effectively seized up completely at the end of Sep‐ by easy credit (mostly in higher asset prices) are
tember 2008 following the collapse of Lehman being unwound. But falling asset values makes
Brothers (one of the large US investment banks), loans more risky and harder to roll over or repay.
and are still operating much more sluggishly that Many companies have high debt levels and will
heretofore. struggle to repay in a recession. The latest at‐
tempts to free up the financial supply chain com‐
Governments have attempted to address the prob‐ bine selective nationalisation of the banks; pur‐
lem in three ways: chase or insurance on toxic (doubtfully valuable)
by pumping hundreds of billions into the assets; and, as a final resort, the central banks
wholesale money markets – if banks have now started buying government and com‐
won’t lend to each other to cover short mercial loans as a means to get money circulating
term needs, then government will step in. again.
This has been in the form of short term
funds, readily available. Des Lee is MD of Futurscope and is module leader
by guaranteeing deposits to prevent retail for a number of NITL’s postgraduate and post‐
customers from withdrawing their money experience learning modules.
– no bank can withstand a sustained run
on its deposits; and
15
Supply Chain Physics?
Patrick Daly
You may well wonder what on and I will explain. fects shifting an organisation
could be the possible connec‐ from liquid and flowing to fro‐
tion between the world of natu‐ The really curious thing about zen rock solid in the blinking of
ral physics and the world of sup‐ water freezing is that close to an eye.
ply chain management. Well, the critical point of 0 degrees
there is a fascinating new field centigrade, a very small Understandable as it may be
of study called “social physics” change in temperature can given the current economic en‐
that is actively examining the cause the whole system to shift vironment, the tendency
application of the laws of natu‐ very quickly and completely to batten down the
ral physics to the affairs of hu‐ from one state or phase to an‐ hatches, suspend all change and
man beings. Philip Ball's recent other. In effect it is either en‐ action, cut investment across
book "Critical Mass ‐ How One tirely liquid or entirely solid ice ‐ the board and become intro‐
Thing Leads to Another" gives a there is nothing in between and spective and defensive could be
fascinating insight into the sub‐ the change from one to another fatal at this time. This approach,
ject matter and discusses the happens all at once in response in my opinion, will lead to a
science in some detail (Philip to an imperceptibly small but significant cooling in
Ball, Arrow Books, ISBN small change in temperature. organisational temperature
9780099457862). that, close to the critical thresh‐
Similarly today, under the strain old as we are, could cause
As Ball explains, one of the most of recession many businesses things to freeze up catastrophi‐
curious of the phenomena that and indeed entire supply chains cally.
occur in natural physics is what are moving into regions where
is known as a Phase Transition. the organisational
This happens when, for exam‐ "temperature" is getting peril‐
ple, water freezes to ice or boils ously close to its own particular
to vapour. These phase transi‐ critical point. And what would
tions for water happen at natural physics tell us about the
what are called critical points in conditions close to a critical
temperature. For water, as we point? It would tell us that very
all know, the critical points are 0 small changes in this organisa‐
degrees centigrade for the solid tional temperature could cause
to liquid transition and 100 de‐ a dramatic and sudden phase
grees centigrade for the liquid transition.
to gas transition.
The concerning thing is
"So what?" you may be saying that this would be a phase tran‐
to yourself. "I am a supply chain sition between survival and
manager or a logistics manager, prosperity on the one hand and
or a company director or what‐ failure and ruin on the
ever, what relevance do phase other. Close to the critical point
transitions in natural phys‐ small changes in the organisa‐
ics have for me". Well the an‐ tional temperature in the wrong
swer is ‐ quite a lot in fact ‐ read direction will now have big ef‐
16
VOL 10 ISSUE 1 2009
On the other hand, if the current challenges are  Use the recession as an accelerant for action
viewed as a call to action to create a sense of ur‐ and pull forward planned restructuring
gency, if they can be a catalyst to get things done  Seek out multiple opportunities for produc‐
now to make operations more efficient and pro‐ tivity improvement
ductive, more effective in delivering value to the  Drive innovation harder and faster
customer and more focused on bolstering cash  Streamline processes, removing non value
flow, this will maintain the organizational tem‐ added activities and excess inventories
perature above the critical point. This energy will  Improve focus on measurement systems and
keep things flowing, guarantee liquidity and pre‐ key performance indices
pare the business well to emerge stronger than  Focus Cap‐Ex investments on initiatives with
ever from the tough times ahead. short‐term paybacks in the 12‐month range
 Maximize flexibility and protect cashflow
Those businesses and those supply chains that do  Don't lose site of longer‐term investment
successfully stay above the critical point and learn plans for future growth
to thrive in the face of challenge will emerge
leaner, fitter and stronger than at any time in the And remember, you cannot cut your way back to
past. To be among them, the time to act is now, it success, you are going to have to innovate and be
is a time to be bold, a time to look for opportuni‐ creative to thrive and prosper in the face of chal‐
ties, a time for conviction, for leadership and for lenge.
action.
Patrick Daly is MD of Alba Logistics
Here are some of the things that you can do to (www.albalogistics.com) .
keep your organisational temperature above the
critical point:
17
The Transformation of the Software Supply Chain: Challenges
for Digital Software Distribution
Colm Ryan and Claudia‐Maria Wagner
Introduction product: software. An extensive literature review
and a number of in‐depth, one‐on‐one interviews
As a discipline, supply chain management (SCM) were held with software distribution practitioners
has traditionally been primarily concerned with in 8 companies to address these issues.
the procurement, processing, movement and sale
of physical goods. However an important class of Characteristics of Digital Products
products has emerged ‐ digital products ‐ which
cannot be described as physical as they do not Before outlining differences and challenges of digi‐
obey commonly understood physical laws. They do tal supply chains, the nature of digital products by
not possess mass or volume, and they require no itself need to be defined. Digital products don’t
energy in their manufacture or distribution. With have physical forms or structures and cannot be
the Internet, they can be distributed at speeds uni‐ physically consumed (Choi et al., 1997). Whinston
maginable in the physical world, and every copy et al. (1997) identifies three key properties of digi‐
produced is a 100% perfect duplicate of the origi‐ tal goods:
nal version. Furthermore, the ease with which digi‐
tal products can be replicated has few analogues  Indestructibility (the tendency of a digital prod‐
in the physical world. uct to maintain its form ad‐infinitum);
 Transmutability (the ease by which a digital
Little is known about the effects of the non‐ product can be modified); and
physicality of certain goods in relation to SCM  Reproducibility (the ease by which digital prod‐
practice. This article explores the challenges that ucts can be reproduced, stored and trans‐
arise when managing the supply chain of one such ferred).

The property of reproducibility in particular makes
digital products different from physical products.
This property has huge consequences so long as
there is sufficient storage and bandwidth available
to copy, move and transport product – an increas‐
ingly valid assumption ‐ (Grochowski, 2003). No
raw materials or energy need to be sourced or
used up in the process. Replication is instantane‐
ous and no manufacturing facility is required.
Thus, economists refer to digital products as hav‐
ing an almost zero marginal cost (Shapiro 1999).
However, Shivendu (2008) outlines that while digi‐
tal products have negligible marginal costs of pro‐
duction, they usually have very large product de‐
velopment costs. However, due to the ease of re‐
producing digital products, piracy and the protec‐
tion of embedded intellectual property represents
a major challenge.
18
VOL 10 ISSUE 1 2009
Successful software distribution low cost producers have served Other challenges affecting soft‐

is highly dependent on band‐ to reduce these costs greatly. ware supply chains are outlined
width on the Internet (Hui and Open source software, the most in Figure 1. Globalisation chal‐
Chao, 2002). Thus, bandwidth prominent of these models, em‐ lenges represent legal issues
constraints remain very signifi‐ ploys free software expertise in and national considerations,
cant when distributing digital the production of very competi‐ such as embargos and licensing
products. Some software prod‐ tive products. This serves to in various countries, as well as
ucts are very large, occupying push commercial software issues concerning version and
many gigabytes of disk space prices down, challenging incum‐ configuration issues. With re‐
(Chaffey, 2007). Bandwidth typi‐ bents to experiment with new gards to software deployment a
cally requires large investment means of generating revenue strong preference towards the
costs and particularly with soft‐ (Young, 1999). use of engineers and consult‐
ware products in excess of 2‐ ants is prevalent in enterprise‐
gigabyte technical problems Copyright protection and soft‐ focused software companies
rapidly increase. ware piracy is another major while installations for consum‐
challenge. Software piracy is ers tend to be automatic. Tech‐
While zero marginal cost of digi‐ defined as the unauthorized nological compatibility has fur‐
tal products is an advantage use, duplication, and distribu‐ ther been identified as a critical
from the direct cost standpoint, tion or sale of commercially challenge. There is a key differ‐
it also means that market forces available software (Moores and ence between digital and physi‐
will continually act to reduce Dhillon, 2000). What is surpris‐ cal goods in that goods such as
the price to zero, thus putting ing, however, is that a signifi‐ software cannot exist without a
pressure on profit margins cant number of companies physical support infrastructure
(Messerschmitt and Szyperski, seem to have relatively relaxed (i.e. hardware) or other soft‐
2003). Significant costs are par‐ approaches to limiting piracy, ware products to be present
ticularly incurred in the produc‐ and that some have no techno‐ before it can work properly
tion of the first software prod‐ logical anti‐piracy mechanisms (Messerschmitt, 2003). Partner‐
uct, however competition from whatsoever.
0% 20% 40% 60% 80% 100% 120%
Globalisation 100%
Physical Distribution 86%
Bandw idth 86%
Softw are Deployment 86%
IP Protection 71%
Partnering 71%
Availability 57%
Technological Compatibility 57%
Product Lifecycle Management 43%
Management Buy-in 43%
Update / Defect management 43%
Customer Data Management 29%
Free Softw are 14%
Sustaining Demand 14%
Building Market Share 14%
Figure 1: Challenges for Software Distribution
19
‐ing is emphasising on long‐term cally flowing through the supply well as the final product rollout.

relationships. Further chal‐ chain. In a software supply Finally, marketing and distribu‐
lenges are website availability, chain, for example, a significant tion, as well as retailing efforts
product lifecycle management, proportion of the supply chain is to sell the software ensue.
management buy‐in, update comprised by only one entity,
and defect management, while which is usually one single com‐ In the increasingly digitised soft‐
customer data management, pany handling the design, devel‐ ware industry supply chain, the
free software, sustaining de‐ opment and production of a flow of material is declining in
mand and building market share software product. It is usually at importance, due to the avail‐
have been cited less frequently the distribution stage that a ability of the Internet as a free
as major challenges. software company might en‐ distribution medium. Research
gage the services of another has elicited that a digital prod‐
company to market its product. uct can be characterised as a
The Supply Chain and Distribu‐ Moreover, channel coordination movement of value instead.
tion of Digital Software Prod‐ policies such as returns are not Thus, key flows represent infor‐
ucts applicable in the digital world. mation, ideas and innovation,
from requirements into devel‐
The traditional software prod‐ opment, from release through
Managing the supply chain in uct is supplied by physical to distribution and finally to the
traditional markets mainly pro‐ means, such as a CD. Chou and end‐consumer. As such, infor‐
vides challenges related to cost‐ Ruchika (2006) have identified mation is shared mainly through
effectiveness and physical barri‐ several stages of a software electronic means within and
ers. By contrast, in a digital mar‐ planning and production proc‐ outside of an organisation.
ketplace supply chain manage‐ ess. A cycle time up to three Moreover, network technolo‐
ment encounters barriers that years could be required. The gies have the potential to trans‐
are not physical but rather stra‐ first three stages of the process form the supply chains of many
tegic in nature (Nath, Saha and involve design and development industries because of the aboli‐
Salehi‐Sangari, 2007). Chou and and testing of the software. The tion of the trade‐off between
Ruchika (2006) argue that a digi‐ next three stages involve pre‐ richness and reach of informa‐
tal software‐focused supply paring the support infrastruc‐ tion, which means that every‐
chain is a supply chain where ture that accompanies the main body can communicate with
the digital product (software) software product. This might everybody at almost zero cost,
constitutes a significant part of include a user‐guide or docu‐ without constraints on the rich‐
the total value of the product mentation, media production ness of information. (Graham et
and where goods are not physi‐ and other add‐on features, as al., 2004 cite Evans and
Figure 2: Software Supply Chain Activities and Processes
20
VOL 10 ISSUE 1 2009
Wurster, 1997). Richness of information includes (2) Free distribution

characteristics such as bandwidth, customisation,
and interactivity. Reach is defined as the connec‐ In the second approach, few or no controls are im‐
tivity, and is the number of agents involved in ex‐ posed on the distribution of software. Some or all
changing information. Before the Internet, to versions of the software are distributed to users
reach large numbers of people with rich informa‐ with few control mechanisms in place. Although,
tion was a costly and time‐consuming process. Tra‐ 50% of respondents offered free distribution of
ditionally, information could only be transferred in some sort, a number of different approaches were
the form of a physical carrier such as a document, used:
book, CD, etc; it could not travel by itself. There‐
fore, costs and physical constraints limited the size The total‐service based model. In this model,
of the audience to which the information could be the software is free to distribute and in‐
sent and the nature of the information itself stall. However, associated services such as
(Graham et al., 2004). consultancy, bug fixing, hardware, training,
technical support and customer support (all
The Internet has an important impact on how soft‐ limited in supply) are available to the cus‐
ware is distributed. Through the interviews three tomer for a fee.
major distribution characteristics could be identi‐ The customised model. In this case, the soft‐
fied: (1) Physical and pseudo‐physical distribution; ware is freely distributed. However, the
(2) free distribution; (3) no distribution. nature of the software is that without ex‐
tensive customisation, it has little value ex‐
(1) Pseudo‐physical distribution cept to the customer for which it is in‐
tended. The companies involved deliver
37.5% of the interviewed companies have chosen large‐scale system installations, where the
to pursue the first approach: born out of supply software requires extensive modification
chains, legacy infrastructures and a competitive before it can be useful to the customer.
landscape that was designed to deal with physical The complementary model. In this case the
product manufacture. Companies pursuing this software is provided to enhance the value
strategy act to limit supply through technological of a physical product such as computer
copy protection measures backed up by legal en‐ hardware.
forcement. The customer’s use of the software is The premium enticement model. While basic or
impaired from the outset by highly restrictive li‐ limited copies of a version of software are
censes that need to be agreed to before the prod‐ made available at no cost, an incentive is
uct can be used at all. Then, copy protection meas‐ provided enticing users to upgrade their
ures such as activation keys are included in the software to a premium version that is
software to prevent duplicate copies being made. charged at a cost. This premium version
Complex supply chains need to be developed to may contain limited supply features (e.g. a
support many of these initiatives. For instance, an 24x7 support hotline).
infrastructure may be required to distribute activa‐
tion keys in a secure fashion to the correct custom‐
ers. These processes are complicated where third
parties (distributors or resellers) need to be in‐
volved. Billing mechanisms may need to be inte‐
grated with the distribution mechanisms. Such
processes require significant customer support
overhead.

21
(3) No distribution physical product distribution.

The third approach avoids the need to involve While this research reveals that physical and
product replication at all. In this case the “infinite pseudo‐physical distribution approaches remain
availability” of software is comparable to a re‐ important in the software distribution process,
source such as electricity or water and is made ac‐ two new supply chain scenarios are emerging.
cessible whenever and wherever the user desires Both scenarios assume that manufacturing and
it. In the Software‐as‐a‐Service (SaaS) type model, distribution are of minor importance in the world
a single instance of software is shared amongst of digital products, and that the right software is
multiple users. Replication is therefore not re‐ instantly available whenever it is required.
quired. This model is gaining currency over the
past few years as bandwidth (speed and market  Hybrid physical / digital / service supply chains.
penetration) has increased and concerns over data In this scenario, the supply or availability of
security are addressed. However, just one com‐ digital product becomes integrated into a more
pany among the interviewed firms was using this comprehensive supply chain strategy involving
approach. physical supply and service‐based elements.
Figure 3: Changes in SCM requirements over the spectrum of digital distribution approaches
Discussion and Conclusions Hybrid distribution leverages the advantages of
digital products to improve the performance of
The research has identified three different classes more traditional supply chains.
of software distribution models: one, which tends  Innovation Cycle Management. In this scenario,
to rely on traditional physical infrastructures and the focus moves from the flow of product to
paradigms, and two others that better exploit the the flow of innovation (e.g. ideas, software
properties of the digital products. Approaches, code, executables, feature suggestions) from
which are comparable to physical distribution, first conception, to development, to release,
tend to require significant management overhead and distribution into the hands of the cus‐
(forecasting, inventories, copy‐protection, license tomer. It is seen as a cycle because the flow of
management, bandwidth management, etc.), feedback back from customers (a kind of re‐
whereas less traditional management processes verse logistics process in the digital world) is
are required for free and uncontrolled distribution crucial to further innovation and new releases
over the Internet. In other words, from a tradi‐ of product. The focus of SCM migrates from
tional SCM standpoint, there is a variation in com‐ operational concerns to product development
plexity according to the degree to which digital and lifecycle management considerations. This
product distribution is made to resemble physical challenge is complex because development is
22
VOL 10 ISSUE 1 2009
increasingly fragmented amongst different Institute of Technology.

groups (in‐house developers, off‐shore devel‐  Moores, T.T., Dhillon, G. (2000). Software pi‐
opers, contractors, specialists etc.), and cus‐ racy: A view from Hong Kong. Communications
tomers can vary enormously in terms of their of the ACM, 43, 12, 88‐93.
requirements, processes and feedback mecha‐  Nath, A. K., Saha, P., Salehi‐Sangari, E. (2007).
nisms. Transforming Supply Chains in Digital Content
Delivery: A Case Study in Apple. in IFIP Interna‐
To summarise, digital products such as software tional Federation for Information Processing,
will affect the practice of SCM greatly over the Volume 255, Research and Practical Issues of
coming years. While pseudo‐physical distribution Enterprise Information Systems II Volume 2,
strategies, such as the use of copy‐protection, are eds. L. Xu, Tjoa A., Chaudhry S. (Boston:
unlikely to disappear in the near term, it is likely Springer), 1079‐1089.
that companies will leverage the free replication  Shapiro, C. & Varian, H. (1999). Information
properties of digital products to enhance their cur‐ Rules. Boston: Harvard Business School Press.
rent supply chains, and that they will put greater  Shivendu, S. (2008), Digital Product Supply
focus on the management of innovation cycles to Chain: Contracts and Investments in Infrastruc‐
drive the maximum amount of differentiation and ture, CRITO Research Presentation, 25th Decem‐
value from their products. ber, 2008.
 Whinston, A., O., D., & Choi, S. (1997). The Eco‐
References nomics of Electronic Commerce. New York:
Macmillan Publishing Company.
 Chaffey, D. (2007). E‐Business and E‐Commerce  Young, R. (1999). How Red Hat Software Stum‐
Management. Englewood Cliffs: Prentice Hall. bled Across a New Economic Model and Helped
 Choi, S. Y., Stahl, D. and Whinston, A. B. (1997). Improve an Industry. The Journal of Electronic
The Economics of Electronic Commerce. Indian‐ Publishing, 4, 3, 9773.
apolis: Macmillan Technical Publishing,.
 Chou, M., Ruchika, A. (2006). An in‐depth study Colm Ryan is a program manager at Apple Inc.
of the software supply chains. IEEE Interna‐ Operations Europe, based in Cork, and a graduate
tional Conference on Industrial Informatics. of NITL’s Executive Masters programme.
 Evans, P.B., Wurster, T.S. (1997). Strategy and
the new economics of information. Harvard Dr Claudia‐Maria Wagner is a Senior Researcher
Business Review, Sept‐Oct, 69‐82. at NITL.
 Graham, G., Burnes, B., Lewis, G., Langer, J.
(2004). The transformation of the music indus‐
try supply chain: a major label perspective. In‐
ternational Journal of Operations and Produc‐
tion Management, 24, 11, 1087‐1103.
 Grochowski, W. & Halem, R. D. (2003). Techno‐
logical Impact of magnetic hard disk drives on
storage systems, IBM Systems Journal, 42, 2,
338‐346.
 Hui, K.L., Chao, P.Y.K. (2002). Classifying Digital
Products. Communications of the ACM, 45, 6,
73‐79.
 Messerschmitt, D. & Szyperski, C. (2003). Soft‐
ware Ecosystem: Understanding an Indispensa‐
ble Technology and Industry. Massachusetts
23
Collaboration: A Key Competence for Competing in the 21st
Century
Umit Bititci, Peter Butler, William Cahill and Denis Kearney
Introduction ing resources, information and The Global Landscape
risks. However, despite the fact
It is now an accepted fact that that collaboration has signifi‐ In the 21st century, industry will
in the 21st century competition cant benefits, earlier studies continue to be about the crea‐
will be between networks of report high failure rates tion of value through innovation
organisations and individuals, amongst collaborative compa‐ and improvement of products
which efficiently and effectively nies (Lewis, 1990; Elmuti and and processes. However, the
integrate their competencies Kathawala, 2001; Zineldin and value content of manufactured
and resources in order to com‐ Bredenlow, 2003). These works artefacts (goods) will be rela‐
pete in a global economy (Bititci identify many factors as the tively small compared to the
et al, 2004). Similarly the drivers for success and failure value of the service and/or
SME’2000 conference, which (Ohmae, 1992; Kanter, 1994; knowledge content associated
was held in Bologna, concluded Das and Teng, 1998; Kalmbach with the artefact.
that “SMEs belonging to net‐ and Roussel, 1999; Huxham and
works are often more competi‐ Vangen, 2000; Daniels and It is also considered that the na‐
tive and innovative than those Radebaugh, 2001; Child, 2001). ture of retail will change and
operating in isolation. When some manufacturing activities
working together, SMEs can in‐ The objective of this article is will start moving into retail op‐
crease their focus through spe‐ two‐fold: erations – for example, with re‐
cialisation in functions that are 1. Explain in simple terms what tail outlets configuring products
complementary within their net‐ collaboration means, its bene‐ to customer specification, con‐
works”. fits, reasons for failure and criti‐ tinuously driving towards mass
cal factors that need to be con‐ customisation. This will lead to
In today’s global economy, com‐ sidered in creating and manag‐ the blurring of lines between
panies are trying to re‐invent ing collaborative enterprises. manufacturing and retail.
their businesses and maintain 2. Share the results of a survey
their competitive advantage conducted among European Manufacturing will have to deal
through collaboration by shar‐ SMEs to understand the state of with greater degrees of com‐
collaborative arrangements and plexity, uncertainty and change
elicit their experiences with re‐ as product lifecycles become
gards to collaboration. shorter, multi‐science products
start to emerge (products with
The research reported in this knowledge, IT, biotech, chemi‐
article was funded through an cal, mechanical, electrical, etc.,
EU Leonardo da Vinci project content); thus sustainability of
with an objective to facilitate the productive system
European SMEs to collaborate (including product design, recy‐
(see www.SMECollaborate.com cling, returns management) and
for further information on the agility become major chal‐
project) lenges. Industry and retail will
24
VOL 10 ISSUE 1 2009
have to deal with end‐to‐end fulfilment processes span across enterprises and these global teams

that include product development, supply chain will be multicultural and spread across multiple
management, reuse, recycling and end of life dis‐ time zones. Consequently, a new social system will
posal. Mass customisation will become more emerge.
widespread, especially enabled through scalable The above changes will be partly fuelled and partly
technologies. driven by emerging technologies in all areas of sci‐
ence and engineering, but particularly by develop‐
All of these developments will lead to the emer‐ ments in information and communication tech‐
gence of knowledge‐based collaborative enter‐ nologies, such as exponential increases in band‐
prises. width, standardisation of interfaces and develop‐
ment of more open systems architectures.
In this context, collaborative enterprises refer not
just to supply chains but also to networks and clus‐ What is Collaboration? And Why do Companies
ters, including collaboration in technology devel‐ Collaborate?
opment (technology chain), product development
(design chain) and product support (support In simple terms collaboration literally means
chain). The collaborative enterprise concept ex‐ “working together”. Bititci et al, (2004) offers a
tends the current thinking on supply chains and more formal definition of collaboration as “a num‐
strategic alliances, where each enterprise tries to ber of autonomous organisations working to‐
maximise its own performance—in a truly collabo‐ gether, pooling and sharing resources, informa‐
rative enterprise the performance of the whole tion, systems and risk for mutual benefit”.
system is optimised and gains are shared between
the partner enterprises. In collaborating, organisations share resources,
share & exchange information and complement
Knowledge‐based collaborative enterprises will each other’s weaknesses. Literature (Golicic et al.,
compete, not based on the ability of making a spe‐ 2003 and Parung and Bititci, 2005) defines differ‐
cific artefact but based on its competencies and ent levels of collaboration that are associated with
capabilities in developing a product, marketing and different levels of resource, risk and benefit shar‐
selling the product, making the product, packaging ing. These are:
it within a service proposition and customising it to
specific customer needs. The collaborative nature Coordination – information sharing with little
of an enterprise together with the need for mass mutual adjustment
customisation will lead to the development of Cooperation – resource sharing with moderate
more distributed industrial systems. mutual adjustment
These changes will also affect the distribution of Collaboration – risk and benefit sharing with
labour and the social systems. Industry and com‐ high levels of mutual adjustment
merce as we know them today will change. Proc‐
esses will be global and inter‐enterprise, conse‐ Literature also provides numerous sources on the
quently teams (operational and management) will benefits of collaboration, which are summarised in
25
Reduced… Increased…
 Risks  Market share
 Costs  Assets utilization
 Time to market  Quality
 Delivery time  Flexibility and responsiveness
 Inventory  Skill and knowledge
 Critical mass
Lewis, 1990; Kanter, 1994; Huxham, 1996; Parker, 2000; McLaren, Head and Yuan,
2002; Sahay, 2003; Stank et al., 1999; Holmberg, 2000; Lummus and Vokurka, 1999;
Ireland and Bruce, 2000; Kanter, 1994
Table 1: Typical benefits of collaboration
Based on how the literature defines and classifies of the individual objectives and expectations of
collaborative business relationships and the associ‐ one another, which are consistent with the
ated benefits of such relationships, it is clear that competencies and contribution of each partner,
collaboration provides a mechanism by which risks as well as the additional value and competitive
are shared (thus minimised) and opportunities advantage to be delivered through the collabo‐
maximised by bringing together the right mix of ration.
competencies and creating critical mass to en‐ Failure to achieve Operational Synergy – to en‐
hance an organisation’s competitive advantage. sure that each partner’s internal management
difficulties are understood and resolved, and
Why do Collaborative Ventures Fail? that customer focused operational systems ex‐
tend across organisational boundaries.
Evidently, many studies report that, although the Failure to achieve Cultural Synergy – to ensure
number of collaborative enterprises is increasing, that the mindsets, organisational culture and
70% of collaborative enterprises end up in failure management styles are compatible between
(Lewis, 1990; Harbinson and Pekar, 1998; Zineldin partners and that there is sufficient trust and
and Bredenlow, 2003). commitment among partners.
Failure to achieve Commercial Synergy – to en‐
The literature contains a number of examples that sure that the short and long term expectations,
typify why collaboration fails. The most commonly benefits and risks are understood and appropri‐
quoted examples include: Honeywell and Ericsson ate agreements have been put in place with re‐
(Zineldin and Bredenlow, 2003); Ikea and its sup‐ gards to the distribution of risks, as well as
pliers (Zineldin and Bredenlow, 2003); NWA and benefits arising from collaboration.
KLM (Elmuti and Kathawala, 2001; Zineldin and
Bredenlow, 2003); GM and Daewoo (Zineldin and The literature makes it clears that collaborative
Bredenlow, 2003), Volvo and Renault (Bruner and relationships between businesses provide a
Speckman, 1998; Elmuti and Kathawala, 2001). mechanism for quickly responding to global
changes and pressures whilst building competitive
Previous research (Bititci et al, 2004) identified advantages for competing in this rapidly changing
several reasons that may cause a collaborative en‐ global economy. It is also recognised that, while
terprise to fail. These reasons are categorised as large companies can rely on internal resources for
follows: technology, product, market and competency de‐
velopment needs, SMEs, with their limited re‐
Failure to achieve Strategic Synergy – to ensure sources, need to work with others in order to de‐
that participants have a common appreciation velop competitive positions in a global environ‐
26
VOL 10 ISSUE 1 2009
What do European SMEs say pated in some form of collabo‐ ority areas were for potential
about Collaboration? ration but with unfavourable collaboration with others. Three
results. 1% of the respondents areas stand out – anything that
In 2007, a survey of European reported that they have no ex‐ will help increase sales; the abil‐
SMEs was conducted by Part‐ perience and that they were not ity to be able to access new
ners in the SMEcoll project interested in collaboration markets; and the capacity to
(www.smecollaborate.com). (Figure 1a). develop new products. Access‐
The survey was conducted in ing technological capability and
two stages. The first stage in‐ Respondents were asked what new skills were also seen as im‐
volved the completion of a types of partnerships were pre‐ portant, while general improve‐
questionnaire to establish the ferred. Four different types ment projects, e.g. productivity
collaborative profile of the were defined, each of which in‐ or quality improvement, were
population. This was followed volves deeper levels of involve‐ less important.
by face‐to‐face interviews with ment:
selected SMEs from these When asked of the location of
states. In this section we pre‐ Cooperation involves being a their collaborative partners,
sent the results of this survey. ‘good neighbour’ and sharing 45% reported relationships
information. within national boundaries, 35%
Questionnaire Survey Coordination involves resource reported relationships with
and systems sharing, such as North American and Western
The questionnaire was distrib‐ European companies, 7% had
joint marketing.
uted by post and email post to relationships in Eastern Euro‐
approximately 500 SMEs across Collaboration involves interde‐ pean with 13% reporting rela‐
the five European countries that pendency with risk and bene‐ tionships with the rest of the
participated in the project. In fit sharing, such as new prod‐ world, including the emerging
some countries the question‐ uct development. low‐cost economies (Figure 1d).
naires were followed up with Vertical Integration involves a
telephone calls to elicit re‐ tight partnership, such as in When asked to categorise their
sponses. In total, 108 usable sectoral supply chains. level of satisfaction with col‐
responses were returned (28 laboration projects that they
from Ireland, 11 from UK, 9 had undertaken, respondents
from Germany, 42 from Italy It was not surprising that coop‐ expressed generally good satis‐
and 18 from Sweden). eration was deemed as the faction with the overall results,
most important (33%). Signifi‐ the collaboration process used,
When asked of their experience cantly, collaboration was almost the quality of their own contri‐
of collaboration, 82% of the re‐ as important (30%) among the bution and that of their partners
spondents reported positive ex‐ respondents. Co‐ordination was and the overall level of goal
periences, implying that they deemed as of lesser importance achievement. (Figure 1e). Simi‐
had participated in some form (22%), while Vertical Integration larly, when questioned on more
of collaboration and, as a result, was of lower priority (15%). measurable and tangible per‐
they had positive experience of (Figure 1b). formance drivers (such as im‐
collaboration. 16% indicated pact on sales, costs, productiv‐
that they had no experience of Respondents were asked to se‐ ity, quality and so on) the re‐
collaboration but were inter‐ lect from a list of business proc‐ spondents reported general sat‐
ested in finding out more. 1% esses or business areas what isfaction with the results, al‐
reported negative experience, their primary and secondary pri‐ though this was not universal.
implying that they had partici‐ (Figure 1f).
27
General Attitude to Collaboration
Experience and Interest in Collaboration Type of Partnering
Type of Collaborative Relationship
1% Positive experience Cooperation
1%
16% 15%
Negative experience 33%
Co‐ordination
30%
82% No experience but 22% Collaboration
interested
No experience and Vertical
not interested
Integration
(a) (b)
Drivers for Collaboration Location of Partners
Partner Location
60%
50%
40%
30%
20%
10%
0%
West
Europe / Eastern Other
Local National Others
North Europe Low‐cost
America
As a Supplier 52% 52% 41% 10% 10% 3%
As a Customer 39% 39% 27% 4% 8% 5%
(c) (d)
Partnering Success
Partnering Success Success against Targets
Success against specific targets
70%
80%
60%
Sales
60% Results 50% Cost Reduction
40% Process 40% Productivity Improvement

Quality Improvement
30%
20% Own contribution Access New Technology
20%
0% Partner contribution Access New Markets
10% Skills Improvement
1 2 3 4 5 Goals delivery 0% New Products / Services
Level of Satisfaction (1=Low, 5 = High) Exceeded Fully Met Satisfactory Did not Failed
meet
(e) (f)
Figure 1: Collaborative profile of European SMEs
Interview Survey collaboration. In addition, a Italy, 4 in Sweden and 2 in Swit‐

number of other companies zerland). The key messages that
From the analysis of the results from outside of this group that emerged from these interviews
of the questionnaire survey, a did not believe in collaboration are illustrated in Table 2.
select number of companies were also interviewed.
were interviewed from each
country. These were primarily In total, interviews were carried
those organisations that had out with 24 companies (5 in Ire‐
exhibited good experience in land, 5 in UK, 3 in Germany, 5 in
28
Key Issue Trust Relationships Communications Culture Setting up Operation Problem Solving
There is a clear need The need to establish The need for man‐ The need to be In setting up the The need for opera‐ The need for a
for mutual trust to good working rela‐ aged and clear com‐ aware of and over‐ partnership there is a tional tools to make shared approach to
make collaborations tionships munication come cultural differ‐ need for structured collaborations work problem solving
work ences and proven methods

Be an ‘Open Book’ Build a strong rela‐ Use all possible Cultural differences Use available tools to Clear traceability Do not blame – it is
Do not undermine tionship between communications will always be help find partners among partner‐ easy, but is de‐
partner’s business the internal cham‐ channels to build present Ensure size compati‐ ship. structive to the
No hidden agendas pions in each part‐ trust Develop an early bility Train the collaborat‐ relationship
Everyone needs to ner Be willing to share understanding of Ensure goal congru‐ ing team in team‐ Need a clear way to
be a winner Ensure strong in‐ information cultural differ‐ ence work and social identify problems
VOL 10 ISSUE 1 2009
Start relationship volvement by each ences Understand partners’ skills to and to tackle them

with something partner Work with partners goals & problems Invest effort to make Identify problems
simple to mitigate against Ensure clarity the partnership early
Avoid adversarial cultural differ‐ through measur‐ work Be up‐front with
Dos relationship ences able targets Strong should men‐ problems
Do not take advan‐ Use written agree‐ tor the weak Focus on solution
and tage of partners ments Act as if working for first and then look
Each partner should the same business at how to prevent
Don’ts understand and treat people them re‐occurring
other’s roles and accordingly
competencies Share personnel if
Understand limita‐ possible
tions of each part‐ Spend time in each
ner other’s organisa‐
Combined compe‐ tions
tencies should
give something
greater than the
sum
Do not underesti‐
mate the man‐
management ef‐
fort required
Ensure the pace of
collaboration de‐
velopment suits all
partners

Table 2: Key messages emerging from the interviews
29
Overall Conclusions of the Survey The SMEcoll Project

Based on the responses to the questionnaire to‐ SMEcoll is funded by the Leonardo da Vinci pro‐
gether with the face‐to‐face interviews held, the gramme within the European Commission to help
following are the principal conclusions: SMEs to collaborate in today's increasingly vola‐
tile global economy. The objectives of SMEcoll is
Although European SMEs seems to be familiar to facilitate SMEs to identify partners, locally and
with business to business collaboration (82%), globally, explore collaborative opportunities and
mostly with positive results, many of these develop collaborative relationships through
seems to be cooperative or coordinating rela‐ proven methods, tools and techniques, as well as
tionships rather than full collaboration (30%) providing a secure environment for managing col‐
where risks and benefits are shared. laborative workflows.

European SMEs seem to be aware of the poten‐ The project has eleven partners throughout
tial benefits of collaboration, particularly those Europe, including Switzerland, Germany, Ireland,
relating to increasing market opportunities and Italy, Scotland (UK) and Sweden.
new product development.
SME Collaborate, together with its predecessor
Most European SMEs seem to prefer forming SMEexcel, has developed the following methods
collaborative relationships within national and tools:
boundaries (45%) or with partners in Western
Europe or North America (35%). In contrast, the The Synergy Model – for assessing the collabo‐
survey reported a low level of relationships with rative readiness of an organisation.
other parts of the world (20%). From our inter‐ Collaborative attitude assessment tool
views, the primary reason for this is the priority The SME Excel methodology for facilitating and
given to trust and relationships by SMEs, com‐ developing collaborative relationships. This
bined with the need to operate in an open and takes an organisation through the Attraction,
blame‐free way. This emphasises the need to Identification, Formation, Implementation and
put effort into finding the right partners and un‐ Evaluation phases of the collaboration lifecycle.
derstanding their needs, as well as constructing A number of on‐line application tools or simple
sound operational processes with clear and fo‐ spreadsheets for evaluating the attractiveness
cused goals, and good communications backed of particular collaborative opportunities
up by measurement and reporting systems. A secure web‐based ICT platform where col‐
laborating organisations can manage their col‐
Based on the data collected there does not laborations through a one‐stop web‐based in‐
seemed to be a significant difference between terface. Collaborations across different regions
the attitudes of SMEs in different European and time zones can access the collaboration
states. However, the interviews did display an web space on a 24/7 basis. The ICT platform
increasing tendency for SMEs from Ireland to offers the following facilities:
develop relationships with low cost production
economies (such as Eastern Europe and China).
A similar tendency is noticed between Northern
Italy and Romania. We expect that these trends
will accelerate.
30
VOL 10 ISSUE 1 2009
 Share documents and information
 Managing workflows to facilitate their col‐
laborative business processes. For example,
collaborative preparation of a quotation for a
given request for quotation
 Share a common collaboration calendar
 Manage collaborative projects using simple
project management tools
 Link to additional resources for collaboration
 Display ongoing announcements specific to
the collaborating companies

In addition to the above, SMEcoll has developed
educational materials and programmes specifically
targeted at managers, directors and owners of
SMEs. For further information, visit
www.smecollaborate.com

The following insets contain two case studies on
collaboration amongst SMEs facilitated through
the SME Collaborate project.
Case of Houston Co‐Pack and JW Hardie

Houston Co‐Pack is a bonded warehousing and contract packaging operations that specialises in taking
the difficult to do jobs from the spirits industry and packages these for major customers, such as Allied,
Pernod and Diageo. It identified the need for larger facilities and investment in a modern bottling line as
a key priority for growth but could not invest alone due to associated risks.

JW Hardie are owners and managers of well known whisky brands, such as Talisman, Tomatin and Anti‐
quary and were looking for reliable and dependable bottling facilities but could not justify investing in a
full new facility due to limited volumes.

Houston Co‐Pack was interested in exploring collaboration to grow its business. Facilitated through the
SME Collaborate project, Houston Co‐Pack identified two potential partners, JW Hardy and Company X,
through their industry network. The three organisations were facilitated through the Attraction and Iden‐
tification phase of the SME Collaborate methodology that resulted in one partner dropping out. Houston
Co‐Pack and JW Hardy were facilitated through the Formation and Implementation phases of the col‐
laboration process.

As a result Houston Co‐Pack installed a new bottling facility to produce 100% of JW Hardie’s production.
JW Hardie contributed 50% towards the costs of a new manufacturing facility. Houston would also pro‐
cure dry‐goods (bottles, labels, etc) for Hardie, in effect becoming and extension of Hardie’s business
whilst maintaining autonomy and freedom to win business from other customers.
Repetition.
31
Case study of RTR Electronics and Quanta

RTR Electronics is a knowledge‐based Company, which provides specialised Electronic Manufacturing,
Rework Test and Support Services to OEMs globally. RTR’s mission is to provide the Electronics Industry
with a Best‐in‐Class Manufacturing, Rework and Repairs Services, which is of high quality, flexible and
cost effective. It has a highly skilled workforce, which includes Technicians and IPC Certified Rework Op‐
erators.

Today, Quanta Computer is the largest notebook computer ODM company in the world. With leading
technology and strong R&D, Quanta has become a leader in hi‐tech markets.

RTR and Quanta’s Irish operations collaborate on the quick turnaround of screening and testing flat panel
computer displays for integration into notebook computers for an OEM based in Europe.

Initially, the RTR/Quanta collaboration tested out a pilot version of the SME‐Collaborate platform. The
pilot version consisted of a collaboration web space where both companies could share documents,
manage their contacts and manage their quotation and reporting processes. The quotation and reporting
processes were managed through workflows developed specifically for this collaboration. The workflows
included automatic email alerts to notify each person in the process of tasks that required action.

The results of the initial testing concluded that the collaboration platform does provide a useful base for
collaboration and that the workflows are good for traceability and data management. The pilot testing
also concluded that the users were satisfied with the reliability and error free nature of the platform, as
well as the compatibility with other systems and applications. The initial testing also concluded that the
platform is a good tool for SMEs.
Conclusions laborative relationships, particularly with partners

in developing economies. The SMEcoll project of‐
It is clear that collaboration among SMEs is going fers a set of methods, tools and techniques to fa‐
to be a key requirement for developing and sus‐ cilitate such support.
taining competitive advantage in the 21st century.
European SMEs seem to recognise this; however
they also seem to be nervous about entering col‐ References
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National Institute for Transport and Logistics
Dublin Institute of Technology
Bolton Street
Dublin 1
Phone: + 353 1 402 4023
Fax: +353 1 402 3991
Email: nitl@dit.ie
34
Web: www.nitl.ie

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VOL 10 ISSUE 1 2009

A bank’s balance sheet has growth of lending and there

Successful software distribution low cost producers have served Other challenges affecting soft‐

0% 20% 40% 60% 80% 100% 120%

‐ing is emphasising on long‐term cally flowing through the supply well as the final product rollout.

Wurster, 1997). Richness of information includes (2) Free distribution

increasingly fragmented amongst different Institute of Technology.

have to deal with end‐to‐end fulfilment processes span across enterprises and these global teams

40% Process 40% Productivity Improvement

Interview Survey collaboration. In addition, a Italy, 4 in Sweden and 2 in Swit‐

Start relationship volvement by each ences Understand partners’ skills to and to tackle them

Conclusions laborative relationships, particularly with partners

 Daniels, D. J. and Radebaugh, L. H. (2001), Inter‐ information’”, Production and Inventory Man‐

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