Southeast
Decision
Sciences
Institute

Wilmington, North Carolina

February 17-19, 2010
Quinton J. Nottingham
Program Chair
Virginia Tech

Albert E. Avery
Proceedings Editor
Towson University

Fortieth Annual Meeting


Incorporating Quality Management Tools into the Business Law Course
Pamela S. Evers
Cameron School of Business
University of North Carolina Wilmington
Wilmington, NC 28403

(910) 784-9413

ABSTRACT
Today’s business student needs to practice what the professors preach and this paper describes
how to incorporate quality management tools into the business law course. Even in the typical
lecture and case method format, business law teachers can incorporate these tools into the

coursework. While it does take a bit more time and creativity, the students benefit from these
tools by seeing quality management tools in operation. More importantly, using these tools in
the business law context allows students to see the critical connection between quality
management practices and risk management.
INCORPORATING QUALITY MANAGEMENT TOOLS INTO THE
BUSINESS LAW COURSE
The typical business law class is taught in the lecture format using the Langdellian case method
in which students are expected to derive legal rules from reading select cases by learning the
legal reasoning. This method is used in part because business law classes often are too large for
discussion formats and in part because most business law teachers are also lawyers educated in
this method (Gross, 2005; Rakoff & Minnow, 2007). Most business law classes, and certainly
business law textbooks, are theory-based and focus on substantive legal rules compartmentalized
into the traditional law school subject areas, such as torts, contracts, and property. Appellate
cases are presented to students as the primary method for learning these legal rules. The case
briefs always provide the procedural history, but unfortunately, the substantive context of each
case is missing since the case is edited to focus on a particular legal rule. Theoretically, if a
student understands the legal reasoning applied to the particular facts of a case, they will learn
the legal rule and be able to apply the rule to real-world situations.
There is nothing inherently wrong in the use of case studies and the methodology is useful for
developing critical thinking and engaging in active learning (Tellis, 1997). However, even law
schools are questioning the use of the traditional legal case study method common in business
law courses (Robbins, 2009; Stuckey, 2009). The problem with the traditional legal case
method for business students is that the business world is not compartmentalized into clear legal
issues, disputes do not arise spontaneously and with a clear statement of facts, and most cases
generally do not go to trial, much less reach the appellate level. Since most business students
take only one semester of law and the typical case method focuses on a specific legal rule,
students rarely have the opportunity to understand how a situation might develop over several
years before reaching the appellate level, how the dispute failed to resolve before trial, the
management lesson for minimizing risk, or the political and legal policies underpinning cases.


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Business law teachers need a better way to guide their students to an understanding of why a
dispute arises and how to resolve the dispute before it reaches the point of a lawsuit. In other
words, business law teachers need to connect the legal lesson to the management lesson.
This paper will offer some suggestions on how to incorporate quality management tools into the
business law course. The first section describes how to use quality management tools, such as
root cause analysis, to help explain how a management event, such as a slip and fall, develops
into a dispute and eventually into a lawsuit. The second section describes how to use quality
management tools, such as concept mapping, to analyze the context of a case in the larger
scheme of corporate activity. The third section describes how to use quality management tools
for business law class projects. The paper concludes by summarizing the relevant tools and
offering some resources for business law teachers.
USING QUALITY MANAGEMENT TOOLS TO ANALYZE A LAWSUIT
Quality management is based on a number of principles including customer focus, a process
approach, involving people, a factual approach to decision making, and continual improvement
(ISO 9000:2008). Operating under quality management principles generally improves the
bottom line (Freiesleben, 2004) and reputation (Freiesleben, 2006). Failure to meet quality
management principles risks lawsuits or administrative agency enforcement actions (Cable,
2007; White and Pomponi, 2003). Therefore, a business law class is a wonderful venue for
demonstrating that quality management practices can reduce risk in the form of business disputes
and litigation. Even in a large class, quality management practices can be demonstrated and
incorporated into the coursework. Several methods are relatively easy to incorporate into a
business law class, particularly Root Cause Analysis.
Root Cause Analysis

Root Cause Analysis is a tool for determining the origin of an event, such as a person's illness, an
automobile rollover, or a manufacturing plant explosion. The tool identifies not only the what
and how of an event, but why it happened (Rooney & Vanden Heuvel, 2004). The root cause of
a lawsuit generally is ignored in business law textbooks. Rather, business law textbooks tend to
provide some rudimentary facts that led a plaintiff to sue a defendant. While this may suffice for
law students learning legal principles and how to advocate for their clients, business students
need to become managers skilled in preventing disputes. Business students better understand
how they can minimize risk of disputes by knowing the origin(s) of management events and how
the event plus a company's response creates the context for a lawsuit.
In the courtroom, the root cause is an essential element of a case and is the point of origin for
liability. For example, if a product liability lawsuit is filed after a product design or
manufacturing defect causes injury, then lawyers hire experts to determine the root cause of the
product malfunction in order to prove (or disprove) the legal element of causation (Gooden,
2001). In addition, identifying the root cause may exclude some defendants or identify other
liable parties. Since root cause analysis will inevitably be used in expert testimony regarding
causation, students should learn this in their business law class.

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Case Example
In the fall of 2007, dance instructor Stephanie Smith became severely ill with bloody diarrhea
and stomach cramps. Stephanie, only 22 years old, went to the hospital when her kidneys shut
down and seizures knocked her unconscious; she fell into a coma for nine weeks. Her illness,
which left her paralyzed from the waist down, was caused by a virulent strain of E. coli known as
O157:H7 and was traced to a hamburger she ate. In response to Ms. Smith’s story and 15 other

outbreaks of E. coli, the New York Times traced the story of the hamburger she had eaten and
published an exposé on the meat industry.
The New York Times exposé demonstrated that the hamburger patty, from a box labeled
“American Chef’s Selection Angus Beef Patties,” was manufactured by Cargill Meat Solutions
and contained “an amalgam of various grades of meat from different parts of cows and even
from different slaughterhouses” (Moss, M., 2009). Ms. Smith hired well-known attorney Bill
Marler to sue Cargill. The New York Times article provided an excellent graphic (Figure A)
depicting the origins of the contamination, which will undoubtedly prove useful in the litigation
against Cargill Meat Solutions and other defendants.
FIGURE A
New York Times Graphic: Anatomy of a Hamburger

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Root Cause Analysis may be used to show students how a defendant might approach a claim of
food poisoning (Figure B). Students who see how a plaintiff and defendant might view a fact
differently can better understand why the element of causation is so important, why experts are
required to prove a case, and why settlement of a dispute may not be the immediate response by
the parties involved.
FIGURE B
Root Cause Analysis of Cargill Food Poisoning Claim

This type of case analysis stimulates learning in two important ways. First, the subjects of the
case -- hamburger production, a severely injured person, a multi-national company -- provoke an
emotional response in the students and improves memory (Ramsden, 1992; Viadero, 1996;

Wiemer, 2002). Second, the "story" of the case engages the student and allows them to create
their own links to their own experience (Miley, 2009).
Using Root Cause Analysis, a teacher has the opportunity to further challenge students to think
how the problem event and resulting lawsuit might have been prevented; this is active learning
and requires critical thinking. How might this management event and resulting lawsuit be
prevented from occurring again? Would better training resolve the problem or is it a policy
matter? Is the underlying issue one that should be resolved by more regulation or was this a
company specific problem? Root Cause Analysis and follow-up questions not only allow the
student to learn the legal rules related to negligence and strict liability, but connect the legal
lesson to the management lesson.

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USING QUALITY MANAGEMENT TOOLS TO ANALYZE THE
CONTEXT OF A LAWSUIT
A management event, such as a person's illness, may be caused by a dangerous strain of bacteria,
but not all illnesses result in a lawsuit. One set of questions relate to why an illness developed
into a lawsuit:




Why did Stephanie Smith file suit?
Why didn't the parties settle?
Was there a better resolution than trial and verdict?


In this case, a process analysis tool is useful. Figure C provides an example of a simple
flowchart for the Cargill case. A student can see the various points at which the case could
have been resolved prior to trial. More events and decision points can be added for greater
detail and discussion by students.
FIGURE C
Flowchart of Process From Injury to Trial

Ms. Smith Injured,
Cause Identified

Settle?
No

Cargill Notified of
Impending Lawsuit
Discovery Reveals
Contamination Due
to Failed Inspection
Mediate
or Settle?
No

Case Filed,
Discovery Begins

Settlement
Conference & PreTrial Motions

Settle?

No

Trial Begins

In the case of Cargill, the questions that relate to the context of the Cargill case are numerous and
include:




What laws regulate the meat industry?
What government agency was responsible for regulating this food process?
Was there an impact on the company's employees, shareholders, and overall reputation?

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The themes or issues underlying these questions may be depicted visually by using an idea
creation tool such as an affinity diagram or concept map to better understand the context of a
lawsuit. Affinity diagrams are useful when confronted with complexity and/or apparent chaos.
Figure D provides an example of an affinity diagram for the Cargill case.
FIGURE D
Affinity Diagram for the Cargill Food Poisoning Case

State
Agencies


Laws

Courts &
Lawyers

Federal
Agencies

Employees

Cargill
Suppliers

Lawsuit

Grocery
Store

Cargill
Shareholders

Beef
Consumers

Stephanie
Smith

Figure D depicts for the student that the situation is more complex than a person becoming ill
after eating an infected hamburger; other people and institutions are involved, each with a special

interest in the situation. These other people and institutions might promote or hinder the
prosecution of a lawsuit and these entities certainly are affected by the outcome. A different
affinity diagram might depict the specific parties in the lawsuit, including plaintiffs, defendants,

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lawyers, and courts. Yet another might depict the relevant laws applicable to the meat industry.
Both teacher and student have ample opportunity to explore the full context of a lawsuit and
understand the linkages between law and policy, company and stakeholders, risk and risk
prevention.
USING QUALITY MANAGEMENT TOOLS FOR PROJECTS AND
COURSE PROGRESS
Many business law courses require students to engage in projects, either individually or in teams.
Most universities don't offer their students the software for Microsoft Project®, but tried and true
project management tools help students (a) keep on track, and (b) practice quality management
skills. One easily applied project management tool is the Gantt chart. Figure E depicts a very
simple example used for a business law class project completed by the tenth week of the
semester.
FIGURE E
Gantt Chart for Business Law Class Project
ACTIVITY / WEEK

1

2


3

4

5

6

7

8

9

10

Form Teams
Develop Company Concept
Submit First Progress Report
Draft Organizational Documents
Submit Second Progress Report
Draft Two Contracts
Submit Third Progress Report
Develop Response to Lawsuit
Present to Class

A variety of Gantt charts may be developed according to the specific needs of the project (Tague,
2004). The charts may include columns for the amount of time the task is expected to take, the
amount of time actually taken, monetary or personnel resources required for the task, or earned

value of the project per milestone. Microsoft Excel® provides an easy tool for creating Gantt
charts, but other software and templates are available for use (e.g., KIDASA Software, Inc.).
Another quality management tool for course progress or projects is the Plan-Do-Check-Act
Cycle used to monitor continuous improvement. While this tool is most beneficial for a teacher
for assurance of learning and course development, students can learn to use this tool to study for
tests and improve during the course, particularly if the teacher offers bonus points for
improvement during the semester. Figure F depicts a simple Cycle for exam preparation. While
showing this to students certainly won't ensure that students are prepared for each exam, it does
make them think about the process of exam preparation. This Cycle may be connected to a
Gantt chart to provide visual evidence of exam preparation.

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FIGURE F
Plan-Do-Check-Act Cycle for Exam Preparation

Plan study
times for Exam

Assess Study
Method & Time
Alloted; Revise
for
Improvement
on Next Exam


Take Exam

One Hour Daily
Study

Two Four Hour
Study Sessions
Week Before
Exam

CONCLUSION
The quality management tools described above are visual methods for engaging students in
critical thinking about the cause, development, and context of a legal case, as well as methods for
tracking their progress on a particular project or in a particular course. The traditional case
study method used in business law courses should not necessarily be set aside, but should be
augmented by quality tools that enhance student learning and retention.
The quality tools presented in this paper are, by no means, the only tools available for use in a
business law class and most students learn a variety of these tools in their first operations
management course. Many more tools are carefully explained in Tague's book, The Quality
Toolbox, and in various print and online publications of the American Society for Quality.
Lynn and Kalfayan (2006) describe the process of barbecue using quality tools and the
complexity of the process seems to tempt fate and a tortious event. One can think of countless
lawsuits and product recalls that would be impressive if quality tools were applied to explain the
context of and how the cases developed: the Exxon Valdez, the Bhopal disaster (Union Carbide
and Dow Chemical), Enron, AIG, Vioxx, silicone gel breast implants, lead-coated toys and
contaminated peanut butter, to name only a few.
The most important reason to use quality management tools to enhance business law classes is to
engage students in active learning (Stuckey, 2009; Wiemer, 2002) and deep learning (Houghton,


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2004). The expected result is that students will link new concepts to principles and experiences
already known, move new concepts to long-term retention, and apply the knowledge to solving
problems in new situations.
REFERENCES
Cable, J. (2007). Keeping lawyers out. EHS Today. Retrieved 1/6/2010,
/>Freiesleben, J. (2004). The economic effects of quality improvement, Total Quality
Management & Business Excellence, 16 (7), 1-8.
Freiesleben, J. (2006). What are quality reputations worth, Quality Progress, 35-40.
Gooden, R. (2001). How a good quality management system can limit lawsuits, Quality
Progress, 55-59.
Gross, K. (2005). Process reengineering and legal education: An essay on daring to think
differently, New York Law School Law Review, 49.
Houghton, W. (2004). Engineering Subject Centre Guide: Learning and Teaching Theory for
Engineering Academics. Loughborough: HEA Engineering Subject Centre.
ISO (International Organization for Standardization). ISO 9000:2005, Quality management
systems fundamentals and vocabulary. Retrieved 1/6/2010,
/>tm.
Lambert, M., & Carpenter, M. (2005). Visual learning: Using images to focus attention, evoke
emotions, and enrich learning, MultiMedia & Internet@Schools, 12 (5).
Lynn, L., & Kalfayan, J. (2006). Documenting the process -- With a side of cole slaw, Quality
Progress, 50-63.
Miley, F. (2009). The storytelling project: innovating to engage students in their learning,
Higher Education Research & Development, 28 (4), 357-369.

Moss, M. (2009). E. coli path shows flaws in beef inspection, New York Times, A1. Retrieved
10/4/2009, />Rakoff, T., & Minow, M. (2007). A case for another case method, Vanderbilt L. Rev., 60 (2),
597-597.
Ramsden, P. (1992). Learning to teach in higher education. London, New York: Routledge.
Robbins, I. (2009). Best practices on "best practices": Legal education and beyond. 16 Clinical
L. Rev. 269 (2009).
Rooney, J., & Vanden Heuvel, L. (2004). Root cause analysis for beginners, Quality Progress,
45-53.
Sousa, D. (1998). Is the fuss about brain research justified? Education Week. 18 (16), 35.
Stuckey, R. (2009). "Best practices" or not, it is time to re-think legal education, 16 Clinical L.
Rev. 307 (2009).
Tague, N. (2004). The Quality Toolbox, Second Edition, ASQ Quality Press.
Viadero, D. (1996). Brain trust, Education Week, 16 (5), 31-33.
Weimer, M. (2002). Learner-centered teaching: Five key changes to practice. San Francisco:
Jossey-Bass.
White, T., & Pomponi, R. (2003). Gain a competitive edge by preventing recalls, Quality
Progress, 41-49.

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Return on Investment for Supply Chains Partners
Richard E. Crandall, Professor
Appalachian State University
College of Business, Raley Hall
Boone, NC 28608

TEL: 704-262-4093
FAX: 704-262-6190
E-mail:
Oliver Julien, Lecturer
Appalachian State University
College of Business, Raley Hall
Boone, NC 28608
TEL: 704-262-7445
FAX: 704-262-6190
E-mail:

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Return on Investment for Supply Chains Partners
Abstract
Supply chains are evolving from tightly coupled vertically integrated configurations to tightly coupled
collaborative configurations. In the first configuration, one company owned or directly controlled the
major portions of the supply chain and could allocate costs and benefits through transfer pricing
mechanisms. In the second configuration, companies depend on each other to achieve a smooth flow of
goods and services from their origin to the ultimate consumer. The second configuration could be termed
virtual integration.
It is probably safe to say that most supply chains are somewhere in between the extremes described
above. But where are they? How are companies dealing with the problem of moving from the security of
vertical integration to the uncertainty of tightly coupled globally dispersed independent operations? This
paper describes a third configuration – a loosely coupled supply chain composed of individual entities

working together in often informal relationships.
Introduction
One of the more difficult problems facing supply chain members is how to fairly divide responsibilities
and proceeds from the supply chain operation. In the past, individual businesses could calculate the
return on investment for its own operation. In this age of supply chains, where the success of individual
companies is dependent on the success of the supply chain in which they operate, there is a need to
share the common pain and gain.
To date, there is not a lot of evidence to indicate that companies, and supply chains, are working to
share the net proceeds of their combined efforts. However, as supply chains mature, more companies
will search for ways to do it. In order to share benefits and costs, supply chain members must develop
an integrated supply chain. Much of what has to be done involves supply chain learning. Unless the
supply chain partners share their knowledge and understand its implications, there is little likelihood they
will agree on the positive proceeds from the supply chain and how to distribute them among the
members.
In an attempt to “gain insight into supply chain competence and the factors that enhance its
development,” Spekman, Spear and Kamauff (2002) posed the following requirements for supply chain
learning:
•

There must be trust between partners and they must be committed to the concept of SCM.

•

Partners must share their combined knowledge and understand its portent.

•

Relationships between partners must be co-mingled to enhance knowledge transfer.

•


Decision-makers must be flexible, adaptive and ready to learn.

•

The cultures must be trusting and open to facilitate learning.

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•

Partners must believe in and support a win-win orientation.

Knowledge sharing is a necessary prelude to financial sharing.
Supply Chain Configurations
Supply chains evolved from tightly coupled vertically integrated configurations to tightly coupled
collaborative configurations. In the first configuration, one company owned or directly controlled the
major portions of the supply chain and could allocate costs and benefits through transfer pricing
mechanisms. In the second configuration, companies depended on each other to achieve a smooth flow
of goods and services from their origin to the ultimate consumer. The second configuration could be
termed virtual integration.
It is probably safe to say that most supply chains are somewhere in between the extremes described
above. But where are they? How are companies dealing with the problem of moving from the security of
vertical integration to the uncertainty of tightly coupled globally dispersed independent operations? This
paper describes a third configuration – a loosely coupled supply chain composed of individual entities

working together in often informal relationships. Figure 1 shows a supply chain that moves toward the
ultimate consumer through loosely coupled links that work at varying levels of effectiveness and
efficiency. It gets the job done, and the individual companies may be operating at high performance
levels. The opportunities for improvement are in the inter-company links. While these improvements are
real, they are difficult to evaluate. It is even more difficult to assign credit for the individual contributors.

Figure 1. Loosely Coupled Supply Chain without Uniform Directional Focus

The preceding discussion showed that integrated supply chains are complex and somewhat
disjointed, making sharing of proceeds difficult. In the remainder of this paper, we describe some of the
approaches used to bridge these difficulties.
We first describe programs developed in the past two decades that require close supply chain
relationships. We then describe a process whereby supply chain members can attempt to determine the
return on investment (ROI) in a supply chain. After that, we outline some possible ways in which the
supply chain members can divide the net proceeds among themselves. We also discuss the role of the

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prime mover company in a supply chain, because it is likely that a single company will exert the greatest
influence and, as a leader, must take responsibilities that other participants need not assume. Inasmuch
as supply chain relationships are dynamic and apt to change over time, we describe some ways in which
these transition periods can be handled. We include four case studies to provide examples of
approaches to the distribution of supply chain proceeds among its members. Finally, we suggest some
possible areas of future research.
Programs Requiring Close Supply Chain Relationships

Global competition is forcing companies to improve – or go out of business! Successful companies
continue to search for some competitive advantage, whether it is in price, quality, flexibility or, more
recently, in response times. Just as they strive to reduce costs and improve quality, companies are trying
to reduce the time it takes to get an order from the supplier to the customer and to get new products to
the market. It is no longer good enough to be low cost and high quality; you must be responsive and
flexible, too.
Some programs have evolved over the past two decades to reduce the lead times demanded by
customers, mostly retailers who have tipped the balance of power from the manufacturers to retailers,
such as Wal-Mart, Home Depot and Kroger. While these programs have individual identities, they are
gradually being absorbed under the umbrella of supply chain management.
Programs
The programs described below were designed to reduce lead times from supplier to customer. The
primary thrust was to remove the excess inventories from the supply chain so the needed inventory could
flow smoothly and quickly. This faster flow provided other benefits such as reduced costs, improved
quality and greater flexibility in responding to changes in volume and mix. Other programs, such as JIT,
Lean, TQM and Six Sigma also helped to reduce excess inventories; however, their primary goals were to
reduce cost and improve quality.
Quick Response Systems (QRS). In the early 1980s, a group of interested manufacturers and
retailers, in the textile and apparel industries, hired Kurt Salmon Associates to recommend a program that
would reduce the number of stockouts at the retailers by providing a closer matching of demand and
supply. The program was to provide a way to reduce lead times for stock replenishment orders from
manufacturer to retailer and reduce the lead times for introducing new products. There were a number of
components to the program but the essential ingredients were willingness, and a capability, to
communicate quickly actual demand data from the retailer to the supplier who could have time to prepare
for orders from their downstream customers. Another goal was to reduce the bullwhip effect by placing
orders on a more regular and predictable schedule.
The potential was high; how did it do? Alan Hunter (1995) reported, “In the 10 years since its
formulation, quick response has made only limited progress despite its well-demonstrated benefits to the

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apparel industry.” He listed the expected benefits as reductions in pipeline inventories; greater probability of
garment designs and colors being acceptable to the consumer; ability to re-estimate stock keeping unit (SKU)
demand at retail, and greater competitiveness for domestic producers facing increased levels of imports.
Some of the problems that have delayed the widespread adoption of QR include:
ƒ

Naivety – participants didn’t realize the magnitude of the task

ƒ

Difficulty in creating “partnerships;” the retailers got the benefits while the suppliers incurred the costs

ƒ

Structural issues, such as the staggering number of unique SKUs (1.2 to 1.4 million at a department
store every four months); overwhelming effect of fashion – shelf lives are decreasing; and the make-up
of the pipeline – retailers and textile companies dominate; apparel manufacturers are small

ƒ

Technical problems, including inadequate accuracy of bar codes, inadequate storage and
manipulation of inventory and sales data; and lack of standards in information transmission (EDI)

The factors necessary for growth of Quick Response include the need for UPC/EAN compliance and

standardization; the clarification and acceptance of the role of VANs; and the need to find a way to extend
EDI to smaller manufacturers.
Kurt Salmon Associates (1997) expanded the scope of Quick Response programs to include product
development and product sourcing, as well as product distribution. Despite its slow beginning, QRS
programs provided a model for other industries to follow and for subsequent programs to build upon.
Continuous Replenishment Programs (CRP). Closely allied with QRS, CRP programs were
designed to encourage automatic replenishment ordering so that the customers would automatically
place an order when their inventory management system indicated a need for a reorder. (Lummus and
Vokurka 1999).
Efficient Consumer Response (ECR). Encouraged by the positive results in the QRS programs, in
1992, several grocery executives formed a voluntary group, known as the Efficient Consumer Response
Working Group, and commissioned a study by Kurt Salmon Associates “to identify opportunities for more
efficient, improved practices in the grocery industry.” The consultants returned in early 1993 claiming that
the industry could reduce inventory costs by 10 percent, or $30 billion. (Frankel 2002). In addition to
efficient replenishment, this group added the requirement of category management, consisting of efficient
new product introduction, efficient store assortment, and efficient promotion. The program included
collection of demand (sales) data with point-of-sales (POS) terminals, and feedback of this data to
suppliers with electronic data interchange (EDI). Suppliers could then avail themselves of a variety of
techniques, such as cross docking, to move the product more quickly to the customer.
Vendor Managed Inventory (VMI). Some retailers decided that, inasmuch as the suppliers had the
consumer demand data, they (suppliers) could assume the responsibility of managing their (retailer)
inventory. While the idea of suppliers managing a retailer’s inventory was not new – rack jobbers and
service merchandisers did it in the health and beauty aids categories years before – it did have the added
element of rapid feedback of demand information. One study reviews the information technology
challenges, especially the effects of information delay and accuracy. (Angulo et al. 2004). Another study

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concludes that, even for products with stable demand, a partial improvement of demand visibility can increase
production and inventory control efficiency. (Smaros 2003).

Sales and Operations Planning (S&OP). This program has been around for at least 30 years and
was originally intended to get marketing and production to collaborate on a production schedule within a
company. S&OP represents a way to get companies to talk with one another and smooth the flow of
goods along the supply chain. In a recent survey, it was identified as the No. 2 initiative of global
companies, following strategic sourcing of direct materials. (Poirier and Quinn 2004).
Collaborative Planning, Forecasting and Replenishment (CPFR). In 1997, voluntary inter-industry
commerce standards (VICS) created a sub-committee to develop CPFR as an industry standard. The following
year, VICS issued the first document on CPFR: "VICS CPFR Guidelines", which has been constantly updated
since then (see www.cpfr.org, VICS 2000). While QRS and ECR provided the flow of demand information

from the retailer upstream to suppliers, it was the responsibility of the supplier to anticipate demand and
the retailer (except in VMI) to actually do the ordering. CPFR attempted to eliminate uncertainty by
advocating both the customer and the supplier collaborate to plan a joint demand forecast and
replenishment schedule.
Barratt and Oliverira (2001) list several issues they believe were addressed for the first time with
CPFR, including:
ƒ

the influence of promotions in the creation of the sales forecast (and its influence on inventory
management policy);

ƒ

the influence of changing demand patterns in the creation of the sales forecast (and its influence on

inventory management policy);

ƒ

the common practice of holding high inventory levels to guarantee product availability on the shelves;

ƒ

the lack of co-ordination between the store, the purchasing process and logistics planning for retailers;

ƒ

the lack of general synchronization (or co-ordination) in the manufacturer's functional departments
(sales/commercial, distribution and production planning);

ƒ

the multiple forecasts developed within the same company (marketing, financing, purchasing, and
logistics).

They also provide an excellent summary of benefits, barriers to implementation, and enablers of the
CPFR process, and conclude that trust and good information technology must be present for success.
Present Status
How are companies doing in their quest to reduce response times? A simplistic answer is that the
programs work but few companies are getting the full benefit of the programs because of incomplete
implementations. There are three key components to any program of this type: technology, infrastructure
and change management. The technology, primarily in the form of electronic data collection, with POS
terminals, and data transmission, with EDI or the Internet, is good and getting better. The infrastructures
– organization, systems, and functional relationships – are inconsistent among companies and industries,
but improving. Managing change is a continuing problem, particularly in the area of company culture and


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trust. How much do you trust? Which customers/suppliers do you trust? Almost every study finds trust is
not only essential for success, but also often lacking in many programs.
Crum and Palmatier (2004) list the following reasons why demand collaboration programs have not
realized their potential:
ƒ

The pace of adopting new ways of doing business is slow.

ƒ

Demand information supplied by customers is used in trading partners' own demand, supply, logistics,
and corporate planning in an integrated manner.

ƒ

Demand management and supply management processes are not integrated, and sales and
operations planning is not utilized to synchronize demand and supply.

ƒ

There is lack of trust among trading partners to share pertinent information and collaborate on decision
making.


ƒ

Participants desire to partner but do not commit to executing the communicated plans.

ƒ

Some view demand collaboration as a technology solution and the current technology is too complex.

Most companies think of CPFR as a technology; however, it is the business process supported by the
internal culture that makes CPFR successful. Computer Sciences Corp., in conjunction with Supply Chain
Management Review, recently concluded its second annual Global Survey of Supply Chain Progress. Their
findings suggest that some companies understand the advantage of leveraging the buy across a more strategic
supply base, while others are content to pursue more limited, tactical improvements. Despite the progress
needed in some areas, most companies pursuing the various supply chain initiatives are generally happy with
the results. However, only 28% said that an awareness of the need to increase customer satisfaction ratings
was a main factor in the success of their initiatives. (Poirier and Quinn 2004).

One seemingly simple problem is the need for consistency in product data identification and
transmission. UCCnet, a nonprofit unit of the Uniform Code Council standards organization, established
a global online registry that requires product data with as many as 151 attributes, or descriptors, about 40
of which are mandatory. One well-known company found that it was transmitting information by phone,
E=mail, fax, CDs, EDI, PDFs, spreadsheets, Web sites, and printed price pages. The same survey found
that the percentage of companies that felt they have the business processes in place to take full
advantage of real-time information varied from 20% in the construction and engineering industry to
slightly over 70% in the logistics and transportation industry, with the overall average of all industries
around 45%. (Sullivan and Bacheldor 2004).
Another nagging question is the relative benefits between retailers and suppliers. Corsten and Kumar
(2005) studied the question of “Do collaborative relationships with large retailers benefit suppliers?” They
found that, while suppliers benefit in the economic sense and in capability learning, they believe suppliers

bear more of the burden and receive less of the benefits they deserve.
Some activities are increasing the response times, most notably the offshore outsourcing movement.
An Industry Week study (Vinas 2005) observes that the route to cheaper supplies from overseas sources
may look like a clear path, but supplier lead times are elongating, a step back from the improvements
wrought from years of lean implementations. “Some companies may find the payoff worth it. Others may

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find themselves with cheaper raw materials and components, but fewer customers.” It just takes longer to
get product from another country. The costs may be lower but the response times and uncertainty of
supply are higher. Balancing the trade-offs, such as between supplier responsiveness and order stability,
requires a great deal of skill. (Hutchison 2006).
Future of Improvement Programs
What does the future hold? No doubt, the pressure to clean out excess inventories in supply chains
and gain a better matching of supply with demand will continue. Individual programs, such as those
described above, are losing their focus, as they become a part of more general programs such as supply
chain management and integrated demand-driven collaboration systems. A survey of over 60 retailers in
the United States, Europe and Asia found that the persistent problem of out-of-stock to be their biggest
inventory challenge. To combat this, “the best of these retailers are poised to move past spreadsheets
and into SKU/store-level automated planning and replenishment systems as their tools of choice. Within
the next 24 months, more than 80% of retailers surveyed will have implemented automated systems to
support virtually all aspects of their planning, allocation, and replenishment operations.” (Rosenblum
2005). Another study suggests that retail exchanges, stemming from improved IT, may provide part of
the answer. (Sparks and Wagner 2003).


Whatever the program, companies must integrate their communication systems and develop
sufficient trust with one another to collaborate effectively and to gain the benefits of their efforts. If they
do, they can hope to succeed. If they do not, they face an uncertain future.
The programs described above contributed positively to the supply chains used by the participating
companies. Individual companies were able to reduce inventories, shorten stock replenishment times,
and provide improved service levels to customers. In most cases, participating companies were able to
see tangible benefits from the programs. However, these programs were not designed to allocate costs
and benefits among the supply chain participants.
Benefits of Supply Chain Programs
How do companies quantify the return on investment for an entire supply chain? It is unlikely that it
can be done by starting with the total income and investment of a company, as often reported in a
company’s annual report. This is a macro number that is the result of numerous variables, many well
beyond the scope of the workings of the supply chain. Rather, we believe that the evaluation of the ROI
for a supply chain requires a project analysis approach where the effects of individual, incremental
actions are considered. In this approach, we will consider both tangible and intangible benefits and costs.

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Direct benefits
It follows that the term “tangible” implies that dollar values are readily available. (We will use dollars
for our discussion; however, any unit of currency applies.) Unfortunately, this is not the case. Even
where there are tangible benefits, it may be difficult to assign a dollar value, even indirectly.
Reduced inventory
One of the most obvious benefits from supply chains is reduced inventory. This is a prime objective
of a supply chain, so it follows there should be a reduction in the total inventory over time. Although none

of the approaches are easy, it should be possible to establish the total inventory related to the supply
chain operation at some point in time. Periodically, then, the total inventory in the supply chain can be
reported to see how much the total inventory has decreased. By using a carrying cost percentage (one
that is accepted by other supply chain members), it is possible to calculate a dollar savings.
Reduced cycle times
Another objective is to determine how much the supply chain reduces the total cycle times for moving
the product along the supply chain to the consumer. This time can be expressed in days or weeks and,
when compared to a base period, a cycle time reduction can be calculated. Converting a reduction to
cycle time into dollar savings requires someone to assign a value to the reduction in response time. Does
the reduction in cycle time result in increased sales or reduced costs? Are there other factors to
consider? Does this calculation duplicate some of the savings for reduced inventory?
Improved customer service
Improved customer service also has some tangible features, such as increased percentage of ontime deliveries, reduced stockouts, and reduced errors in invoicing. As with cycle times, customer service
performance indicators are tangible but may also be difficult to convert to dollar increase in sales.
Improved quality
Improved quality means fewer defects, reduced inspections, reduced repairs or reworks, and fewer
ruined products downstream in the supply chain. However, the costs of quality have been elusive and
few accounting systems are set up to measure how these improvements relate to reduced costs or
increased sales.
Indirect benefits
A number of intangible benefits have been attributed to the successful integration of supply chains.
We will describe four of these benefits to illustrate that they probably exist and they are very elusive to
quantify.
Integrated flow of goods and services
Achieving an integrated supply chain should mean that there is an improved flow of goods and
services through the supply chain. But how does a company measure the benefits? Do they consider
the benefit to be primarily in the reduced response time? Suppose at the same time they are reducing
the response time, the supplier is required to increase the variety of products they supply. This added

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requirement may cause an increase in response time, but it is difficult to know the extent of the benefit if
the average response time does not change.
They could also consider the benefit to be a reduction in suppliers. However, suppose they increase
the volume and variety of products purchased, thereby needing more suppliers. They end up with the
same number of suppliers; does that suggest no progress?
Faster resolution of problems
Integrated supply chains should make it easier, and faster, to identify and resolve problems that may
occur between customer and supplier. Is the benefit the reduced time required of the participants in the
problem-solving effort? On the other hand, is it in the result of the solved problem that makes it possible
to get a shipment in time to complete, and ship, a critical order? How much of the value of the total
shipment should be assigned to the solved problem?
There may be an even knottier situation. Suppose the problem arises from trying to decide how an
operation that was previously done by the customer, say, a retailer, is to be transferred to its supplier, a
wholesaler. The problem would not have occurred if the companies were not trying to integrate the
supply chain; therefore, should there be any benefit to solving a problem created in this fashion?
Match customer wants with products provided
Most would agree that an integrated supply chain should make it possible to more closely match the
products provided with what the customer wants. How do you measure this? Can you assume that an
increase in percentage of orders filled measures this improvement? If so, what about all of the other
actions that helped to increase the fill rate? How do you allocate the benefits and costs among all of the
factors involved?
Reduced excess capacity along the supply chain
Another benefit of integrated supply chains is a reduction in excess capacity along the supply chain,
because of reduced demand variability. Suppose, at the same time, the supply chain’s effectiveness

results in an increase in demand, so there is no change in overall capacity. We have experienced two
significant benefits but we cannot measure the net effect on investment costs represented by the plant
capacity.
Increased Knowledge
As indicated earlier, most managers would agree that increased knowledge should lead to improved
performance, including increased financial returns along the supply chain. However, few managers
would be willing to quantify the exact relationship between increased knowledge and increased income.
To make the waters even murkier, one study found learning appears to have a positive impact on
performance measures relating to end-customer satisfaction and being a more market-focused supply chain.
Learning does not appear to affect supply chain performance related to cost. The authors conclude that tacit

knowledge (knowledge that resides in the minds of people) is more difficult to transfer than implicit
knowledge (knowledge documented in policies and reports). (Spekman, Spear and Karnauff 2002).
The challenges affecting supply chain learning include:

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•

The natural tension that exist among partnerships regarding cooperation versus competition

•

The need to ensure that learning happens throughout the supply chain at the supply chain
enterprise, the firm and the individual.


•

The need to have a flexible structure to enhance learning

For supply chains to develop a sustainable competitive advantage, the partners must focus on the
end-use customer. Learning does have a positive impact on end-use customer focused performance
metrics. (Spekman, Spear and Karnauff 2002)
A theoretical model illustrates the increased difficulty of achieving mutual benefits from supply chain
improvements. This model identified a requirement for four coordination modes that would lead to supply
chain integration. These modes are:
•

Logistics synchronization – the value creation loop

•

Information sharing – the facilitation loop

•

Incentive alignment – the motivation loop

•

Collective learning – the capability loop

The model builders believe the successful simultaneous implementation of these integrative loops will
help to synchronize interdependent activities, increase visibility to match supply and demand, align the
supply chain partners in actions that lead to supply chain profitability, and acquire new capabilities with

the supply chain. As a result, all of the participants will recognize a need for matching processes,
information, incentives and capabilities, in order to combine their efforts in activities that will benefit the
entire supply chain. (Simatupang, Wright and Sridharan 2002)
Costs of Supply Chain Programs

Direct costs
In order to achieve some of the benefits described above, companies incur some tangible costs.
Some of the more likely costs are described below.
Communications (IOS)
One of the primary costs in setting up an integrated supply chain is in designing and implementing an
interorganizational communications system (IOS). An IOS requires not only hardware and software but
also ongoing consulting and maintenance services. There may be a need for software upgrades and
modifications. Often IOS systems require years to fully implement and it is more difficult to accumulate
project costs over a multi-year period. However, an IOS will be one of the major costs in setting up
integrated supply chains.
Retraining internal employees
Retraining employees in the use of new systems can be time consuming and frustrating, for both the
employee and the trainer. Formal training classes take time away from the job and may be considered

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non-productive; however, they are necessary if the new system is ever to work at a fraction of the level for
which it was designed.
Restructure supplier network
Identifying and organizing the supplier network takes time. Companies must identify the companies

they want to include in the supply chain they are designing. These are companies that make a significant
contribution to the supply chain; they should be rewarded for their participation. Not every supplier will be
included because some will not have a large enough role to make it worthwhile to include them. For
those that are included, it will be necessary to identify the key representatives of the organization that will
be involved in the eventual distribution process of the proceeds.
Some costs involved in restructuring the supplier network includes the cost of compiling information,
meeting with representatives from supplier organizations to develop supplier agreements, time to monitor
adherence to the agreements, and other costs that can be directly assigned to this effort.
Design customer network
Designing a customer network will be at least as costly as designing the supplier network because
customers may not be as willing to cooperate in designing a supply chain that shares among its
members. Today, many retailers are the largest entities in a supply chain and they may believe that they
should command the major share of the benefits, by receiving lower prices from their upstream suppliers.
Any suggestions that suppliers should share in the benefits may not be well received by the retail
establishment.
Capital investment
There may be a need for capital investment. For example, in implementing RFID, there is a need to
buy equipment for attaching and reading tags. When the investment is required by the same company
that gains the benefits, there may not be a problem. However, when the company that gains the benefit,
such as a retailer, is not the same as the company that incurs the investment cost, such as a supplier, an
imbalance needs correction. Even if chain-level benefits are obvious, an innovation may not go forward if
a key participant does not believe it is sharing appropriately in the benefits. (Wouters 2006)
Indirect costs
By definition, the indirect costs are those costs that are less obvious when trying to create an
integrated supply chain. Some examples of these costs include the following.
Meetings required to organize customer and supplier relationships
Under direct costs, we listed meetings where the costs of transportation, lodging, and wages can be
directly assigned. However, other costs will be less direct, such as informal meetings with other
functional areas, telephone conversations or e-mail messages with supplier representatives, and time
spent thinking about building the relationship. Usually companies do not try to record these costs and

assign them to specific activities.

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Programs to change internal culture
Time will be required to change the internal culture of an organization. While it may be possible to
document the costs of formal orientation meetings of groups within the organization, many companies
may not consider this necessary or even desirable. Informal meetings of small groups or individuals are
even less likely to be documented; however, a considerable amount of time will be required to be sure
that the internal employees are on board with the changes being made in the relationships with
customers and suppliers, especially if any employee has direct contact with these external entities.
Changes in organization structure
Changing the organization structure may be easier than changing the culture, but it will take time to
consider the changes required, design the revised organization, effect the changes, retrain the affected
employees in their new responsibilities, and monitor ongoing operations to assure the new organization
structure is working effectively. It is unlikely that any company could, or even try to, accumulate an
accurate record of the costs involved in this activity.
Realignment of roles of supply chain participants
In addition to the realignment of roles within a company, it will also be necessary to realign the roles
between companies. A review of individual practices may uncover duplication of effort that can be
reduced, or omissions that have to be covered. It takes time to identify what needs to be done, negotiate
the agreement of where the activity will be performed, and decide what changes will be required in the
day-to-day operations.
Cash flow and time value of money considerations
The preceding discussion shows that quantifying the value of benefits and costs is difficult, if not

impossible, at least impractical, in many cases. Some benefits and some costs will occur over a multiyear period; this suggests the use of time value of money, or discounted cash flow, calculations.
However, how do you track cash flow in a multi-unit supply chain? This would appear to be even more
difficult than quantifying the individual benefits or costs. Where a company may be involved in multiple
supply chains or have operations not directly connected with a known supply chain, the situation
becomes even more muddled.
One of the problems may be there are changes in both costs and capital requirements. This makes
the redistribution task more difficult. For example, direct costs may decrease but capital investment
increases.
An equally daunting task is to factor in changes and realignments of the supply chain over time. New
customers enter, old customers leave, new suppliers are added, and old suppliers are discontinued. The
start and stop dates do not necessarily correspond with known accounting or calendar periods.
Consequently, it is unlikely that the effect of these changes can be considered at all in the total scheme of
things.
We described the difficulty of quantifying indirect benefits and indirect costs above. Even more
difficult is trying to quantify what might be called intangible costs. While companies may suspect they

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exist, they may not always be sure. Determining some of the intangible costs of integrating a supply
chain may be as elusive as determining the benefits.
Loss of confidential information
One of the dangers of integrating supply chains and beginning to exchange information is the
potential for the loss of confidential information. While there is also the opportunity to gain confidential
information, it is difficult to assign a value to either type of transaction. If the information were sold, a
value could be implicitly assigned; however, when the information exchange is informal, perhaps not even

known, no explicit value is present.
Increased awareness of inequitable treatment among participants
Closer relationships in integrated supply chains may expose inequitable treatment among
participants. This may be in the form of discounts allowed, reduced inspection requirements, or the
exchange of birthday cards. Whatever the form and magnitude, someone may object and require
mollification. Even if they do not object openly, they may silently worry about it to the point of providing
diminished service.
Discrepancy between contribution and payoff among participants
One extension of the equitable treatment idea mentioned above may be that a member of the supply
chain may believe that they are not getting a fair return on their contribution to the welfare of the supply
chain. This may cause them to reconsider the desirability of continuing in the supply chain. If they are an
important member, a disgruntled member may adversely affect other participants.
Legal Actions
As supply chains become more geographically dispersed and complex, formal written agreements
become more necessary to clarify the terms and conditions of exchange, especially when participants are
in different countries. Globalization increases the need for documentation and, at the same time,
increases the risk of legal actions when disagreements arise. (den Butter and Linse 2008) While the
costs of legal actions are very tangible, the likelihood of it becoming a reality is nebulous. Sharing these
costs along a supply chain could become a fascinating, but perhaps fruitless, exercise
We have discussed a number of factors that make it difficult to determine the net benefits of an
integrated supply chain and the relevant contribution of each member. This does not suggest no attempt
should be made to determine the benefits and costs; it does suggest that doing it will be difficult. Later,
we describe some cases where dyads of companies made a definite effort to determine the net benefits
and find a way to distribute these benefits. However, successes in determining and allocating net
benefits are still rare.
Considerations for Equitable Distribution among Members
In this section, we describe some of the things to consider when organizing to distribute benefits
among the supply chain participants.

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How organize?
How do you organize supply chain members to develop a cost/benefit distribution system? A
facetious answer would be “very carefully.” However, it is a delicate question and one that many supply
chains have not yet dealt with. Supply chains have organized carefully to physically move goods and
services from the point of origin to the point of consumption. They have also organized to share
information, as well as move funds from the point of consumption upstream through the supply chain.
However, few have attempted to organize to share benefits.
Do all members participate equally? If not, how do you decide? Is it based on company size? Or
amount of goods sold in the supply chain? Or the absence of problems? Or the level of innovation
displayed? There are a number of measures that could be used; however, selecting them and measuring
them offers a challenge.
Should the participants elect or appoint a steering committee to establish policies and procedures to
clarify and prevent, or at least reduce, disputes? Do large companies get more votes?
Is there a need for formal contracts among participants? If the proceeds to be distributed are
significant, it is unlikely that informal agreements will suffice. Consequently, there will be a need for
formal contracts that spell out the accumulation and distribution process.
Is there a need for a third party to reconcile differences? Suppose the participants cannot agree or
do not have written guidelines to follow. Maybe there is a need to have an arbitrator or mediator to work
with the parties to come up with a reasonable way to proceed. If so, there will be a need to select the
arbitrator. Will the supply chain representatives vote or, in some way, arrive at a consensus?
How distribute?
If the supply chain participants can arrive at a consensus figure for the net benefit amount, how would
these benefits be distributed? One approach would be to distribute the proceeds according to some
predetermined weight based on performance. But how do you measure performance, especially the

relative performance of different participants? Is it based on effort, or results? Most would vote for
results, but this takes us back to the difficulty of determining the identity and value of the results. There
seems to be no end of difficulties in determining the financial amounts that may have accrued as the
result of effective supply chain integration.
Once determined, how can the benefits be distributed? Should it be in the form of direct payments
from one entity to another? How often should the payments be made? Should paper debits and credits
be maintained indefinitely? Perhaps participants should make payments into a central pool with
distributions to be made at designated intervals.
There is no simple, or objective, answer. It is inevitable that determination and distribution of the
proceeds must include judgment and negotiation – judgment as to what should be included and the
related amounts – and negotiation as to how the proceeds should be distributed. If the participants try to
develop a verifiable methodology, it may take an exhaustive amount of time and erase all of the benefits
that could accrue from making the distribution.

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