A Case Study And Research Proposition

• Mirza Muhammad Qayyum Baig• Muhammad Umar• Hammad Mahmud butt• Shoiab Malik

• Introduction to ESI• Benefit and Drawbacks of ESI• An agency theory perspective of ESI• Variables of ESI• Rolls-Royce background• ESI at Rolls-Royce• Propositions for future research• Managerial implication• Conclusion

Early supplier involvement (ESI) highly effective supply chain integrative techniques.

- Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques.

Objective of ESI:Management of supply chain risk in new product development and the upstream supply chain•Vertical cooperation – design & concept

– Reduce development time

– Better product quality

– Improved costs

– RISKS: sequencing, shortages, incapable suppliers

• Reduce the product life cycle cost

• Improve the product quality• Utilization of supplier

technological expertise• Management of cost• Competitive edge• High level of creativity and

innovation

• Increase of product and development cost

• Improper sequencing of task

• Incorrect level of supplier involvement

• Organization resistance• Selection of incapable

supplier

Definition:Definition:An agency relationship is said to exist between two parties when one, designated as the principle, engages another, designated as the agent to perform some service on their behalf, which involves delegating some decision making authority

(Eisenhardt 1988, Jensen & Meckling 1976, Levinthal 1986)

Assumptions: Individuals are:

- Bounded rational (they are unable to process all information available)

- Self interested (the work principally for their own benefit)

- Prone to opportunism (they are effort averse)

- Risk averse (they prefer safety over uncertainty)

Graphicrepresentation:

Solutions: Two broad types of governance mechanisms are used to resolve agency problems:

- Investing in information to verify the agent’s behavior- Engaging in optimal contracting that aligns the interests of

agents and principals

Behavior based contracts (e.g. salary, hierarchical governance): Most efficient when the behavior of the agent is observable or easy to verify through information systems*

Behavior based contracts (e.g. salary, hierarchical governance): Most efficient when the behavior of the agent is observable or easy to verify through information systems*

Outcome based contract (e.g. bonus, performance based/variable pay): Most efficient when the behavior of the agent is difficult to observe or expensive to verify (info asymmetry)*

Outcome based contract (e.g. bonus, performance based/variable pay): Most efficient when the behavior of the agent is difficult to observe or expensive to verify (info asymmetry)*

Agency theory based model

Agency theory based model

Goal conflictGoal conflict

UncertaintyUncertaintyAdverse selectionAdverse selection

Moral hazardMoral hazard

Risk averse behaviour

Risk averse behaviour

• Single case study

• Face to face interview

• Telephone conversation

• Conducting structural interview

12

• A global business • £24bn order book• £6.6bn annual sales• £663m R&D• 36,000 employees • 7,600 engineers• Supporting four

market sectors Mar

ine

Civi

l

Defence

Energy

Pan Pacific Conference 2008

• ROLLS ROYCE AerospaceROLLS ROYCE AerospaceIndustry is cost and reliability and required extensive R&DIndustry is cost and reliability and required extensive R&D

– New product development 3-4 years– ESI 1999– Total investment before return $500-600 million– 80 % of product cost are locked in during the design phase– SUPPLY COST REDUCTION:

• Reduced threat of excessive costs, easier to handle changes• Reduced legal liabilities, fewer quality problems• Less supplier capacity constraints, shorter development time

Risk source• Excessive cost• Legal liabilities• Quality problem• Supplier capacity constraints• Extended product development times• Inability to handle design• Supplier organization leadership issues

ESI

Supplier performance

Supplier failure reduction

Product failure reduction

Adverse selection

Goal congruency

Task programmability

Outcome uncertainty

Excessive costExtended product design

Quality problemTechnological expertise

Leadership issues

• ESI reduce risk in new product development from product failure by managing outcome uncertainty

• ESI reduce risk in new product development from supplier failure by programming and monitoring supplier task and accomplishment

• ESI reduce risk in new product development from supplier failure by creating goal congruency between the purchasing and supplier organization.

• ESI reduce risk in new product development from supplier failure by avoiding adverse selection and moral hazard.

• ESI reduce risk in new product development from supplier failure by allowing firm to better monitor supplier activates.

• Reducing outcome uncertainty• Creating task programmability• Creating goal congruency• Avoiding adverse selection and moral hazards• Monitoring supplier performance

• Critically analyze ESI• Build capacity for organizational ESI initiative• Detection of potential risk stemming both product design

and supplier performance• Reducing cost implementation of ESI • Development of effective monitoring and collaborative

relationship• Keep in mind Risk management point of view