Academic journal article SAM Advanced Management Journal

The Hazards of Sole Sourcing Relationships: Challenges, Practices, and Insights

Academic journal article SAM Advanced Management Journal

The Hazards of Sole Sourcing Relationships: Challenges, Practices, and Insights

Article excerpt

To be more competitive and improve responsiveness to customer needs, companies today work with fewer and fewer suppliers--sometimes sole-sourcing a particular input. By examining a particular case of sole-sourcing, the authors highlight potential drawbacks even when trust is intact and both parties focus on the long term. A major danger is "boundary drift"--a change or blurring of decision-making realms. This, in turn, can impede a firm's innovation, reduce autonomy, and thwart implementation of new strategic goals. Overall, firms should think twice before sole-sourcing any activity that is crucial to its ability to produce a product or service consistently and profitably.

Introduction

Fueled by advances in information technology, supply chain management has moved from a back office administrative function to a board room imperative. Today, companies work more closely with their suppliers to be more responsive to customers' changing needs and to build competitiveness. Many firms have significantly reduced the number of suppliers they use, sometimes to a single, trusted source to enable tight integration between firms. Operations management scholars continue to examine the effects of tight supplier integration and often point to the positive relationship between integration and performance (Handfield, Ragatz, Peterson, and Monczka, 1999; Kulp, Lee, and Ofek, 2004; Rosenzweig, Roth, and Dean Jr, 2003). With a relationship built on a foundation of trust, single supplier relationships potentially offer many benefits. The buyer and a single supplier can better coordinate shipments and production, share technological knowledge to integrate the input into production, and communicate design changes to mutual benefit. Multiple sourcing, in contrast, may weaken the ties between the firm and its suppliers making communication, control, and standardization more difficult.

Though the potential benefits of single sourcing and tight integration are many, the strategy has its drawbacks. For example, Horwitch and Thietart (1987) uncovered the costs of coordination, compromise, and rigidity that may follow from especially tight firm-supplier relationships. Similarly, Das (2006) argued that the increased virtual span of control stemming from tight integration may lead to coordination costs that offset savings incurred from single-sourced relationships. In addition to the explicit costs of integration, Sorenson (2003) focused on other costs of tight integration that were less measurable, such as the absence of learning that may come from limiting a firm's contact with its external environment. Clearly, management scholars disagree about the utility of developing tight firm-supplier relationships, such as those that might arise from sole sourcing strategies.

Against this backdrop, this paper offers two core contributions. First, while grounded in a real life case study of a large consumer products company, it offers a theoretical explanation of the perils of single-sourcing relationships. In doing so, it shows the actual drivers of boundary drift, a term we develop to represent the change in organizational boundaries that result from sourcing decisions. Furthermore, we show how such a phenomenon can lead to unintended, and potentially detrimental, strategic outcomes. Second, by following the focal firm as they design a new sourcing strategy, we offer important insights for practicing managers who might face similar challenges. In the next section, we provide a theoretical explanation of boundary drift including drivers and consequences. We then discuss the methodology that guided this study before applying the theoretical lens to the case and illustrating the six-step process used by the focal firm to re-design their sourcing strategy. We conclude with a summary of contributions, limitations, and opportunities for future research.

Drivers of Boundary Drift: Trust, efficiency, and asset ownership

Governing the single-source relationship Interorganizational relations, including sole-sourcing supplier relationships, are intermediate forms of organizing, resting somewhere between pure markets and pure hierarchies. Like other forms of organizing, they are governed along three dimensions: incentives, authority, and ownership (see Makadok and Coff, 2009). Incentives include not only the rewards available for good performance, but also the measures that define good performance. Authority is the power or right to control how one conducts an activity and what activities to engage in. Organizational hierarchies establish authority relationships and determine-through official norms-which activities fall under the control of which positions within the firm (Thompson, 1956). Asset ownership grants property rights to determine when and how critical assets are used. While seemingly overlapping, control and ownership of key assets may be allocated in different ways given the relative financial strength and capabilities of the two firms (Elfenbein and Lerner, 2003). At one end of the spectrum, for example, in a typical market-based, buyer-supplier relationship, suppliers determine how to do the work, own the key assets to conduct the work, and are rewarded according to their output. At the other end, in a typical hierarchy, the employees performing the work are subject to their superior's authority on which activities to perform and how, do not own the key assets, and are rewarded based on the inputs they provide. Single-supplier relations incorporate to varying degrees each of these dimensions to create a supply-chain solution helping both firms reach agreed upon goals.

Efficiency goals

The nature of these goals becomes a critical point in the incentives provided to the employees and managers responsible for implementing the relationship. Firms enter into close relationships with other organizations for a multitude of reasons: to lower costs and improve efficiency (e.g., Williamson, 1985), to gain power over external resources (e.g., Pfeffer and Salancik, 1978), to build legitimacy and prestige (Baum and Oliver, 1991), and to learn from others (Doz, 1996). Here, we argue, once the relationship is established, managers of these relationships tend to focus on efficiency gains, putting the firm at odds with other motives.

Efficiency measures how well the relationship improves the focal firm's ability to meet its output objectives given the resources it consumes. A single-supplier strategy can improve the buyer's efficiency through standardized inputs that allow the focal firm to have a more consistent end-product and a more standardized process for creating it. In the face of uncertainty about consistent suppliers, a firm may find locking-in a durable relationship with one firm to be preferable than procuring the input on the market. While efficiency is often a key motivator to initiate a relationship, without continual reexamination, most relationships will feel the pull of efficiency goals. "Efficiency" has a taken-for-granted value in society; adjustments made for the sake of efficiency are rarely questioned for their motivation (Meyer and Rowan, 1977). Furthermore, efficiency goals are relatively user-friendly for the line manager. Most organizations maintain records of their expenses and their production, so they have data to determine how much was produced at what cost. While strategic concerns may consider what to produce, line managers tend to focus on how much they produce and at what expense. In most cases we should expect that during implementation most interorganizational relationships will begin to focus on the efficiency of the assets and activities engaged.

Hierarchy and trust

Trust is a fundamental component of successful sole-sourcing relationships. While the responsibilities of each party may be determined at the formation of the relationship, once the relationship begins to operate, repeated interactions and shared goals between both organizations and employees builds an expectation that the other can fulfill its obligations (Anderson and Weitz, 1989) and will act fairly even with the possibility of opportunism (Anderson and Narus, 1990; Bromiley and Cummings, 1995). While the possibility of betrayal is always present, trust between the employees and organizations can reduce conflict and facilitate mutually agreeable adjustments to the relationship. Ultimately, trust should improve the relationship performance in terms of supplier price, delivery, quality, and flexibility (Zaheer, McEvily, and Perrone, 1998). As the relationship meets expectations and trust develops, line managers seek ways to improve the relationship's efficiency. The relationship's initial hierarchy granted authority to coordinate activities and routines in their current form. Yet, when units are asked to cooperate to resolve issues requiring new routines, the hierarchy may prove too rigid (Adler, 2001; Bums and Stalker, 1994). Instead, trust between the buyer and supplier may offer a better coordinating mechanism allowing those with the most ability and knowledge to take over the task (Adler, 2001). To implement, managers decompose the relationship into activities. Actively or passively, they re-allocate those activities according to the relative capabilities (or eagerness) of the two firms. Under efficiency goals, the steps taken to improve performance are valid as long as they increase production or lower costs. Thus, we see boundary drift as a natural outcome of the focus on organizational efficiency and interorganizational trust.

The boundary between any two organizations reflects an atomistic and evolutionary process. As Santos and Eisenhardt (2005) note, under the logic of efficiency, boundaries result from a series of decisions about which activities to conduct and which to let others conduct. As an organizational concern, it can be described as "logical incrementalism" in which incremental changes are made in response to opportunities (Quinn, 1978). Managers aware of boundaries take purposeful steps in their sphere of influence to improve performance.

Asset ownership

Throughout this process, asset ownership may remain constant. Asset ownership provides some protection for boundary drift, as the owner can always "take his ball and go home." Yet, focusing on asset ownership may provide a partially false sense of security and obscure the true shift in organizational boundaries. First, current theory suggests that homogenous, marketable assets will not be a source of sustainable performance advantages (Barney, 1986). Rather, the activities built in the firm and the firm's processes lead to long-term performance advantages (Teece and Pisano, 1994). Therefore, reallocating control of an activity outside of the firm's hierarchy may provide short-term efficiencies but lead to a long-term "hollowing out" of the firm's ability to compete.

Second, a focus on asset ownership may obscure the true shift in organizational boundaries. Companies tend to define the boundaries of their firm by the assets they own. This makes sense because describing boundaries is difficult, and ownership laws provide perhaps the cleanest way to describe where one firm ends and the other one begins. Still, this definition can be troubling. When employees go to work at another's site, are they still part of their original firm? While one firm may pay their salary and have them under contract, the more they interact with another's employees, the more they identify with the other firm (Ashforth and Mael, 1989).

Boundary drift and strategic rigidity

As the structure of the single-source relationship evolves through trust and efficiency goals, the boundaries of the firm may shift. Trust and efficiency goals become the necessary conditions for boundary drift, as motivated by the manager's drive for better performance. As opportunities appear to improve the buyer's efficiency by replacing its authority over an activity with trust in the supplier, some of those opportunities may run counter to other strategic goals of the relationship. After returns from efficiency-based initiatives begin to lessen or level off for the buyer, the goals of the relationship often change. Strategic goals often expand from efficiency-based to innovation-based, as the buyer looks for new ways to enhance its competitive position. If vendors do not perceive innovation practices as potentially profitable, the following issues may arise: reduced autonomy, reduced competencies, and reduced identity.

Reduced autonomy. Efficiency gains may not take into account current or future sources of strategic uncertainties that influence performance (Pfeffer & Salancik, 1978; Thompson, 2007). Firm boundaries define the activities over which the firm has influence. For activities that are unimportant to the firm's ability to reach its goals, outsourcing may make sense. But other activities are critical to the firm's ability to consistently produce its product or service, namely, those that create significant value to the final customer, are necessary steps in the production process, and have no alternatives. These must be controlled by the firm so that it does not become dependent on the supplier. Without power over the relationship, the firm is at the mercy of its supplier's continued goal alignment and trustworthiness. Reduced competences. Efficiency gains may not take into account current or future sources of firm-specific, resource-based advantages (Chandler, 1993; Penrose, 1995). Firm boundaries define the organizational resources and capabilities that make it unique and provide potential competitive advantages (Barney, 1991; Wemerfelt, 1984). Boundary drift changes the portfolio of the firm's resources. Decisions over which activities to engage in and which to outsource should take into consideration the value of the portfolio, including not only the value of the activity but also how that activity complements others. While a supplier may be able to perform any given activity more efficiently than the buyer, re-allocating the activity to the supplier may erode the buyer's abilities in other activities. In the future, these activities, too, may be logically outsourced, further reducing the firm's potential advantages.

Reduced identity. Efficiency gains may not take into account how organizational members define the firm and their identity. Recent studies in organizational theory shed light on the importance of the organization's identity, which can both categorize it within an industry and distinguish it from competitors. For external audiences, the firm's identity helps in assessing its value and future performance (Porter, 1998; Zuckerman, 1999, 2000). For managers and employees, the firm's identity can inspire emotional attachment and commitment (Kogut, 2000). Within the organization, Elsbach (1999) suggests that values and activities are intertwined; "who we are" defines "what we do" and vice versa. Outsourcing particular activities may lead to identity inconsistencies affecting employee motivation (Kogut, 2000) and managerial decision-making.

Methodology

This study was guided by an action research methodology, which is an iterative process combining theory and practice by bringing researchers and practitioners together to create learning that is actionable and useful to organizations (Avison et al., 1999). Action research has the dual objective of contributing to the practical concerns of people in an immediate problematic situation while at the same time advancing the current state of knowledge in management science (Rapoport, 1970). We realized early on in our collaborations with the focal firm, a large consumer product goods company that we call MultiBrand, that its current situation--where existing tight linkages with suppliers were inhibiting innovation--presented a perfect opportunity to contribute to practice and management research simultaneously. With our research experience in relational governance and process innovation, we sought to help MultiBrand managers design new relational linkages with the firms that made up their supply base for poly wrap, the clear plastic wrap that covers many of MultiBrand's paper products. In the spirit of action research, we sought to work collaboratively with MultiBrand's management team to design and implement a multi-phased intervention that would help alleviate some of the company's problems associated with its current sourcing strategy. In turn, we observed the intervention's effects on the performance of the poly wrap sourcing function.

Research roles and approach

In action research, the researcher and the client collaboratively pursue intervention design and research activities (Rapoport, 1970), the client not only learns about implementing existing practices, but also contributes to theory building in a particular discipline (Whyte, Greenwood, and Lazes, 1989). In a traditional sense, researchers are seen as the expert and are in charge of research design, data collection, and analysis, whereas in more collaborative situations, these duties are shared among the researcher and the client (Ltischer and Lewis, 2008). Since one member of our research team was part of the strategic sourcing team in the focal firm, he acted as the liaison between both groups, playing a crucial role in bridging the objectives of both teams. Our study started when the focal firm realized it was in a conspicuous place relative to its existing sourcing strategy and needed to make some important changes to increase future competitiveness. At this point, we began to hold weekly and often biweekly meetings with the person who was a member of both the strategic sourcing team at the focal firm and of our research team. Meetings focused on describing details of the situation as it was evolving in practice, reflecting on theoretical explanations of current observations, and discussing useful design elements to improve the existing situation. As the intervention was implemented, the conversations shifted to issues of efficacy and ongoing evaluation to create an important feedback loop to aid learning. In the following section, we utilize the theoretical framework developed in the prior section to describe the boundary drift and strategic rigidity that occurred at MultiBrand.

Boundary Drift and Strategic Rigidity at MultiBrand

According to MultiBrand sourcing executives, the clear packaging (poly wrap) that covers many MultiBrand products, such as paper towels and toilet paper, plays a surprisingly important role in the overall profitability of a given product set. First, poly wrap packaging plays an important role in top-line growth, as it has a large effect on brand equity and identity. In fact, poly wrap is often considered more important than the actual product to drive sales and create brand equity; it shapes purchasing decisions in retail stores, as the messaging and graphics are often what customers remember and rely on during repeat purchases. Second, it plays an equally important role in bottom-line initiatives, because it not only has an obvious impact on direct material costs but also affects indirect costs resulting from rework and associated opportunity costs resulting from downtime (i.e., no packaging = no product output = no sales). According to MultiBrand executives, though poly wrap only represents about 2% to 5% of the finished product cost, out-of-stock poly (resulting from the wrong poly, defective poly, no poly) would halt production and lead to tens of thousands of dollars every hour in opportunity costs. Third, in addition to the sales and marketing significance, packaging represents one of the most complex components of MultiBrand's global supply chain due to a plethora of product SKUs with unique and often changing requirements. For these reasons and more, poly wrap is seen as a strategically important component of MultiBrand's global supply chain.

A focus on efficiency and asset allocation As MultiBrand continued to focus more intently on packaging as a core element affecting its competitive performance, it strives to achieve high degrees of standardization (of poly wrap) across both products and locations. Standardization provided an opportunity to cut costs through greater economies of scale and also helped ensure consistency across product groups, which enhanced the overall quality of the MultiBrand brand. As a result, MultiBrand standardized the available colors product groups could choose among, as well as the look and feel of the packaging across numerous locations throughout the corporation. To achieve such brand standardization and consistency across its many product groups and manufacturing facilities, MultiBrand pursued another strategic initiative: it slowly reduced the number of suppliers from about 10 in 1995 to about four in 2001. As the reduction in its supply base continued, MultiBrand chose to move business from smaller suppliers to WrapCo due to WrapCo's superior performance in quality, consistency, and delivery. As a result, WrapCo benefitted mightily as its sales to MultiBrand increased from about $15 million in 1995 to nearly $40 million by 2001.

Between 2001 and 2004, MultiBrand realized much greater consistency in its poly wrap sourcing initiatives and was very satisfied overall with the performance of WrapCo. Consequently, in 2004, when the end of contracts with its suppliers drew near, MultiBrand made another bold decision to continue on the path of increasing operational efficiencies. Instead of distributing its business across four suppliers, MultiBrand decided to give it all to one, WrapCo. After intense negotiations with WrapCo, they agreed on the following objectives:

* MultiBrand moved all the flexible packaging production to WrapCo, thereby increasing the business to $80 million annually.

* WrapCo invested in two new W&H flexographic printing presses to offer a consistent quality to MultiBrand.

* WrapCo guaranteed to provide MultiBrand with any help necessary to expedite orders.

* WrapCo agreed to work closely with the mills to provide them any necessary support and to improve the overall process of supplying flexible packaging to the mills.

Increasing trust and changes in hierarchy As WrapCo became their only poly wrap provider, MultiBrand gradually allowed it to take on more operational responsibility in coordinating with the manufacturing mills. An indication of this was that MultiBrand relinquished tight control over the poly film specifications within each manufacturing facility (e.g., coefficient of friction, dart, tensile, strength, etc.). Therefore, just a few years after pursuing a singular sourcing strategy, MultiBrand stopped keeping track of these specifications altogether. It shifted its attention away from the operational aspects of the packaging process and instead focused on the innovation and design of new packaging strategies. To WrapCo's credit, the company worked continuously on refining the specifications for each mill in an effort to achieve a high level of efficiency. After a few years, WrapCo's knowledge of the overall packaging process and how it integrated with MultiBrand's global supply chain operations far outweighed MultiBrand's knowledge of its own processes. Ultimately, WrapCo became the owner of the specifications and managed interactions with each mill independently without a corporate-wide MultiBrand liaison. The mills still retained bits and pieces of information, but, collectively, MultiBrand had fully outsourced these interactions to WrapCo. Printing standards, such as delta-E, densities, and dot gain, were managed by WrapCo, thereby delivering the quality needed. Furthermore, WrapCo directly worked with the mills and their specific setups and issues and was responsible for implementing changes at all MultiBrand locations.

Efficiency gains were realized in several ways as WrapCo worked closely with the mills. Lead times for new SKUs were reduced from four to five weeks to two to three weeks. Rush orders could be filled in three to four days where the standard lead time was three weeks. Technical support was available within 24 hours, and WrapCo even handled vendor-managed inventory programs at three MultiBrand locations. As a result, MultiBrand achieved faster and cheaper SKU changeovers along with improved quality.

The onset of strategic rigidity

Despite the early successes of its sole-sourcing strategy, MultiBrand began to face some challenges after several years of the new contract. In 2004, when establishing WrapCo as the sole supplier of poly wrap, MultiBrand identified "down-gauging" as a key area where it expected WrapCo to deliver improvements and innovations. Down-gauging is the process of reducing the thickness of the wrap while still maintaining or improving its strength. This is not only a cost-saving benefit but is also more eco-friendly, an important aspect of MultiBrand's sustainability initiatives. Unfortunately, despite continuous questioning from MultiBrand sourcing executives, WrapCo did not fulfill this down-gauging obligation. Much to their dismay, MultiBrand discovered that its gauge was about 30-40% higher than competitors for some SKUs. Furthermore,

MultiBrand learned that WrapCo was innovating with other customers on down-gauging initiatives and had actually made some technological advances in printing that would have enabled higher-quality plastic wrap with reduced costs. Despite the fact that WrapCo was at the leading edge of these technological advances in the mid-2000s, MultiBrand did not receive any of the benefits.

To better understand the situation, MultiBrand's strategic sourcing group did some competitive analysis and found that other companies were using the down-gauged film for their processes but that these firms actually had older assets than MultiBrand's. Through continuous inquiry, MultiBrand sourcing executives basically determined that WrapCo was unwilling to innovate within this relationship for the following reasons:

* Down-gauged film means "less" flexible film, which would effectively reduce annual revenue at WrapCo, and as its margins were proportional to annual revenues, downgauged film would mean fewer profits, too.

* Down-gauged film would require WrapCo to make some technological advancements, as the variability in its current process would not allow the company to produce the downgauged film without significant problems.

* Therefore, from WrapCo's perspective, MultiBrand was asking the company to invest more money into the relationship to earn fewer profits.

MultiBrand's inquiry generated a greater understanding of WrapCo's lack of interest in investing in the relationship, but it also provided insight into other aspects of the relationship that created some metaphorical red flags for MultiBrand executives. MultiBrand found that WrapCo was unwilling to share important information related to key process specifications, because it realized MultiBrand would likely use this information for benchmarking purposes as it pursued future requests for proposals (RFPs) with new suppliers. Furthermore, the executives learned that WrapCo was actually in control of the interface to MultiBrand's internal processes. For example, MultiBrand's strategic sourcing group approached a few manufacturing locations to compare certain efficiency and quality specifications with other companies, and to its surprise, the locations were not even sure of the actual film that was being run on their manufacturing lines. The mill supervisors repeatedly directed the team back to WrapCo saying "WrapCo knows our specifications better than we do." MultiBrand had lost control; they were feeling the effects of strategic rigidity.

Six Steps to Change: Re-designing their Sourcing Strategy

As the first step to gain control of the situation, MultiBrand established a center of excellence for flexible packaging. This group was led by the strategic sourcing group and involved other relevant functions, such as marketing, graphics, packaging engineering, production planning, product supply functions, and manufacturing operations. A group of about 12 professionals from all the groups was established to form the Packaging Transition Team (PTT).

MultiBrand decided to utilize the following six-staged strategic sourcing process framework to redesign its sourcing strategy (see Figure 2):

Step 1. Assess current situation

The PTT started the strategic sourcing process by assessing the current situation to understand the various requirements for flexible packaging across the company. Assessing the current situation included various stages to analyze spend and volume across the entire system; to analyze the various SKUs by each brand, manufacturing mill, etc.; and to analyze the packaging specifications that meet manufacturing and marketing requirements. As discussed, the PTT faced tremendous challenges in this initial step of the process, as WrapCo was in total control of the situation and had no incentive to share information. According to the MultiBrand sourcing team, a process that should have taken about a week took about four to five months for the PTT to complete.

Step 2. Evaluate supply base

The PTT evaluated the supply base by issuing a request for information (RFI) to more than 100 suppliers in the market to understand supplier capabilities related to the following key strategic attributes:

* Supply assurance

* Quality performance

* Service history and commitment

* Cost position and structure

* Innovation capability

* Sustainability commitment

Step 3. Determine sourcing strategy

MultiBrand established an RFI combined with reverse auctions as the suitable sourcing strategy to get the best pricing from the market for the required specifications. The strategy was to segment all the requirements into different market baskets by "brand type," such as premium, mainstream, and economy. This enabled MultiBrand to convey the different levels of quality requirements. A detailed RFI was issued, which included all the SKUs for the MultiBrand portfolio with volume information. About 52 suppliers were selected to move to the next round of the bidding process after scoring and assessing each on the above dimensions.

Steps 4-6. Engage, negotiate, and implement

Based on the results from the auctions, the top-performing suppliers were invited for negotiations. Pricing was set from the reverse auctions, but the negotiations ensured commitment around quality, supply assurance, service, and other requirements. Even before the negotiations ended, the PTT was preparing for the implementation of new suppliers. Thus, as soon as the auction ended, the team performed several trials with the "potential" suppliers' films.

Outcomes of intervention

As a result of this intervention, MultiBrand achieved a number of important objectives. First, the company realized tremendous cost savings of about 18-20% annually, providing a great benefit to bottom-line cost savings. Second, MultiBrand eliminated full dependence on one supplier, awarding business to three new suppliers to reduce the dependence on WrapCo. Third, it regained control of internal specifications and knowledge, as the trial and qualification of the new suppliers further improved MultiBrand's internal knowledge base. Fourth, through gain-sharing arrangements, MultiBrand ensured that new suppliers would bring innovative ideas to the relationship, which would translate to both cost savings and quality improvement. Finally, by regaining control of specifications and introducing capable new suppliers into its sourcing strategy, MultiBrand ensured that it would keep abreast of the flexible packaging market.

Conclusion, Implications, and Limitations

We began by asking: How do single-source relationships go wrong? Conventional wisdom holds that single-source supplier relations require trust and a long-term view of the relationship to be successful. As we saw in the case of MultiBrand, trust allows for reduced monitoring, thus enhancing efficiency and reducing the operational costs of the relationship. Despite the benefits of trust and efficiency gains, both if left unchecked as drivers of relational performance may sow the seeds of the single-source relationship's future discontent. As trust develops and managers seek greater efficiencies, the firm's boundaries shift in ways that may eventually lead to strategic dependence and rigidity. This we called boundary drift. Over time, firm boundaries shift in ways that improve current efficiencies but may lead to longer-term reduction of autonomy, growth, and coherence.

At the heart of boundary drift are managers making operational decisions. Given the developing trust those managers have with managers from the partner, efficiency-seeking managers deconstructed the relationship into activities, and reallocated them accordingly. In our case, managers faced with the challenge of integrating two firms delegated responsibility for production to those who designed the input, basically integrating the poly wrap product rather than the knowledge itself, allowing the supplier to tackle the integration issue internally. Rather than fixing the integration issue, the firm aggravated the problem by pushing the required knowledge further out of reach. This meant that any kind of direct influence through authority was no longer possible. Even an attempt to change the incentives would be more complicated, because they had to fit with the supplier's organizational goals for the relationship.

Nevertheless, despite the negative ramifications that may result from boundary drift and strategic rigidity, our study showed that through intentional redesign sourcing strategies can provide efficiencies and flexibility through a focus on learning. After recognizing that boundary drift had led to dependence on the single supplier, our company unwound the relationship and shifted to a multi-supplier sourcing strategy. Companies in mature markets still require efficiency gains through standardization, but these gains may be available through a multi-partner knowledge-sourcing strategy. A successful knowledge-sourcing strategy requires a deep understanding of one's own capabilities and needs, particularly as they relate to the industry environment. A knowledge-sourcing strategy also requires a careful selection of partners including a clear understanding of their capabilities and needs. Once in place, knowledge from multiple suppliers may still lead to standardization efficiencies, but it requires the firm to focus less on leveraging the partner's abilities and more on learning, integrating, and internalizing knowledge from across partners. Managers should be aware of the signals of potential boundary drift and be prepared to act upon early detection (see Table 1 for signals of potential boundary drift).

As with all studies, this one has limitations. Studying only one relationship can lead researchers away from general trends, focusing instead on issues and events particular to a given situation (Markus et al., 2006). As a result, generalizing the findings is always a potential issue with single case studies. However, to develop new insights into designing sourcing strategies, this study was purposefully organized as a form of action research. According to Van de Ven (2007), "The status quo approach to social research has many variations, but it tends to reflect an unengaged process of inquiry." Instead, we followed Van de Ven's guidance and organized this study around one core principle: A deep form of knowledge related to the firm-supplier relationships would only result from close and ongoing interaction between academic and practicing members of the research team.

Before joining academia, Dr. Lewis was a business analyst with IBM Global Services. His research, which has been published in various journals, now focuses on the strategic use of information technology within global supply chains and on patterns of collective action in and among organizations. Dr. Hayward's research focuses on the intersection of economic geography and innovation, and he uses case studies and interviews to examine the management of inter-organizational relationships. Dr. Kasi, a manager at AT Kearney's Supply Chain Practice, specializes in global sourcing. He has published widely in technology--and supply chain-related journals and conferences.

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Mark O. Lewis, Appalachian State University

Scott D. Hayward, Appalachian State University

Vijay Kasi, AT Kearney's Supply Chain Practice

Table 1. Signals of Boundary Drift

Signals              Description          Questions to Ask

1. Imbalanced        Relational           * Do we have a
goals                governance           mix of both
                     should balance       short-term (0-
                     short-term           12 months) and
                     (efficiency          long-term (1-3
                     oriented) and        years)
                     long-term            objectives?
                     (strategically
                     oriented) goals      * How has the
                     and objectives.      relative
                                          importance of
                                          short term and
                                          long-term goals
                                          and objectives
                                          changed
                                          throughout the
                                          relationship?

2. Diminished        Capturing low        * How have cost
returns              hanging fruit        savings changed
                     by improving         as a percentage
                     operational          of relational
                     efficiency is        expenditures
                     fine, but pay        over time?
                     attention to
                     the trajectory       * Has the
                     of returns. If       relationship
                     returns              hit a "brick
                     continue to get      wall" in terms
                     smaller and          of value that
                     smaller and a        is being
                     pat-tern is          created for
                     obvious, use         both firms?
                     this as a red
                     flag that the
                     emphasis may
                     weigh too
                     highly on
                     efficiency
                     metrics.

3. Reduced           Control and          * Do we need
autonomy             decision             our supplier's
                     authority is         consent when
                     important, and       setting the
                     who has it can       procurement
                     change and           budget?
                     become
                     allusive over        * Do we know
                     time.                and decide how
                     Intentional          and where that
                     awareness and        money is
                     purposeful           actually spent?
                     reflection are
                     necessary for        * Who
                     keeping issues       determines the
                     of power and         work and
                     control in           production
                     check.               schedules?

                                          * How much
                                          consent do we
                                          need from our
                                          supplier?

4. Decreased         The building         * Core--do we
competency           blocks of an         employ groups
                     organization         of people with
                     are its              the critical
                     resources,           knowledge or
                     capabilities,        routines for
                     and                  working
                     competencies         together that
                     that enable it       drive our sourcing
                     to create value      effectiveness?
                     for stakeholders.
                     Such
                     competencies         * Product--do
                     can grow or          we employ
                     attenuate over       groups with key
                     time, and            knowledge and
                     organizations        routines for
                     need to              making and
                     continually          improving the
                     assess their         product?
                     evolution
                     across core          * Market--do we
                     dimensions           employ groups
                     (core, product,      with the
                     market,              knowledge and
                     internal             routines
                     coordination,        driving
                     external             customer
                     coordination,        satisfaction
                     etc.).               and market
                                          development?

                                          * Internal
                                          coordination--
                                          do we have
                                          routines that
                                          encourage and
                                          monitor
                                          information
                                          flows across
                                          activities
                                          within the
                                          firm?

                                          * External
                                          coordination--
                                          do we have
                                          routines that
                                          encourage and
                                          monitor
                                          information
                                          flows across
                                          organizational
                                          boundaries with
                                          our supplier?

5. Confused          The firm's           * Employee
identity             identity can         self-
                     both group it        perceptions--
                     within an            do our
                     industry and         employees
                     distinguish it       believe our
                     from competitors.    firm acts in
                     For                  ways and does
                     internal             things that
                     employees it         match their own
                     also provides        sense of who
                     boundaries to        they are and
                     clarify "who we      what they want
                     are" relative        to do?
                     to other firms
                     within a given       * Employee
                     ecosystem. When      expectations--
                     such boundaries      do our
                     become blurred,      employees
                     employee             believe our
                     motivation can       company acts in
                     take a hit, as       ways and does
                     the firm's           things it
                     identity can         should to
                     stimulate            fulfill our
                     emotional            mission?
                     attachment and
                     cultivate
                     commitment.
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