Lancaster University School of Management

Generation of risk in networks of organisations

J S BusbyR E AlcockLancaster University School of Management

Lancaster University School of Management

Background

‘Supply chain management’ an increasingly important discourse• Tendency to vertical disintegration/international cooperation (Chen & Paulraj 2004)

• Networks of firms with ‘reciprocal exchange relations’ (Andersen & Christensen 2005) • Now seen more as self- rather than focal firm-organised (_______) • A better unit of analysis for competition (Chen & Paulraj 2004)

• And for specialisation/competitive advantage (Dyer 1996)

• And perhaps then also for risk management• But prior supply chain ‘risk’ work on threat to supply chain (Harland et al 2003;

Kleindorfer & Saad 2005; Sodhi 2005)

Lancaster University School of Management

Purpose

To find out how networks of organisations generate (perceptions of) risk• Exploration of risks generated by ‘network-ness’• But not a test of whether networks cf firms increase risk

Two case studies• Hatfield rail crash: the ‘fragmentation’ issue• Sudan 1 contamination scandal: the ‘globalisation’ issue• Both centrally involved supply chains• Both led to a societal response that overshadowed physical harm

Analysis of press commentary• How risk was constructed by commentators around the two events• How ‘network-ness’ of the organisations was implicated

Lancaster University School of Management

Theory

Model of indirect capability• Economic theories of firm boundaries often concern risk • Transaction cost economics (Williamson 1993): risk of opportunism• Agency theories (Eisenhardt, 1989): agent-principal differences on risk• But these ignore communities of practice (eg Podolny and Page 1998)

• And the risk is purely internal• So theory of indirect capabilities (eg Araujo et al 2003) more promising • Knowledge from continued association within mutual specialisation• Eg about how to gain access to external capabilities • Resembles ‘heedfulness’ found in HROs (Weick and Roberts 1993)

Lancaster University School of Management

Methods

Analysis• Locate press articles over lifetimes of events to present (762 and 190)• Look at frequency over time• Plot sequence of events and conditions reported• Generate taxonomy of described deficits in indirect capability “…A replacement piece of track had been lying beside the line waiting to be fitted by 'renewal contractor' Jarvis since May. But it was left to sit there over the summer because Railtrack found it too difficult to persuade operators to cut back on the number of trains while it shut down the route…”

Lancaster University School of Management

Cases

Hatfield: main eventsJan 1999 Rail at Hatfield identified as suffering from fatigueOct 1999 Rail fracture at Aycliffe led to new guidelines Feb 2000 Rail again assessed as needing urgent replacementMar 2000 27-hour track possession scheduled but rail not arrived Apr 2000 Delivery completed; only time to re-rail partiallyMay 2000 Start of summer timetable with fewer maintenance slotsJun 2000 ‘Clock stopped’ on overdue repairsJul 2000 Ultrasound test classified as unreadableSep 2000 Grinding on railOct 2000 DerailmentOct 2002 Railtrack replaced by Network RailSep 2004 Corporate manslaughter charges droppedOct 2005 Infrastructure firm and contractor fined

Lancaster University School of Management

Cases

Hatfield: network of organisations

Franchising Director Rail Regulator

Passenger Train Operators

Rolling Stock Companies

Rolling Stock Maintenance Suppliers

Freight Train Operators

Infrastructure Company

Track Renewal Suppliers

Other Service Providers

Infrastructure Maintenance Suppliers

Subcontractors

Lancaster University School of Management

Cases

Hatfield: profile of press commentary

Caveat• Articles not all about Hatfield but eg law on ‘corporate killing’• Or later accidents, excessive pay for senior managers, privatisation…

Volume of reporting October 2000-2005Articles containing 'Hatfield' and 'rail'

-10

10

30

50

70

90

110

130

150

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Quarter

Vo

lum

e

Lancaster University School of Management

Cases

Hatfield: types of deficit in indirect capability

Type ExampleCommunity dissolution Failure to maintain continuous technical authorityContextualisation loss Failure to retain local experienceGlobal helplessness Failure to adapt to changed types of businessGoal narrowing Failure to moderate conflicting incentivesInformational impoverishment Failure to overcome commercial secrecyInterfacial under-control Failure to check workMember cascading Failure to manage cascaded tieringNorm gradient Failure to avert standards attenuation away from corePractice diversity Failure to achieve uniformity in serviceRelational credulousness Failure to accredit capabilityResponsibility diffusion Failure to achieve rigorous contracts

‘…train drivers had reported frequent 'rough rides' on that stretch of high-speed line... such is the complexity of the present system of management, it is almost impossible for one person to get a handle on any problems and make sure they are sorted out.’

Lancaster University School of Management

Cases

Sudan 1: main events

May 2003France informed EC of Sudan I in Indian chilli productsJuly 2003 UK implementation of EC emergency measures

UK FSA issues 1st ‘food alert’Jan 2005 FSA by now issued 56 alerts involving > 200 products Feb 2005 Premier Foods informed FSA of positive test in Worcester Sauce

Actions of 2003 failed to locate 5 tonne consignment at Premier FoodsProcured from Unbar Rothon, East Anglia Food, EW Spices, Gautam

Exports FSA issued press release and placed 360 products on websiteFSA added 60 products to list and issued second press releaseFSA added 146 more products, taking total to 474

May 2005FSA recalled foods contaminated with Para Red found in tests for SudanContaminated spice from Ramon Sabater (Spain), originally UzbekistanEU member states agreed detection limit/extended certification

Lancaster University School of Management

Cases

Sudan 1: network of organisations

Spice supplier Exporter Importer Spice Merchant/Processor

Seasonings & Colourings Blender/Manufacturer

Food Manufacturer

Food/Meal Manufacturers

Food/Meal Retailers

Lancaster University School of Management

Cases

Sudan 1: profile of press commentary

Volume of reporting February 2005-January 2006 Articles containing 'Sudan', 'dye' and 'food'

020406080

100120140160180

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Fortnight

Vo

lum

e

Lancaster University School of Management

Cases

Sudan 1: types of deficit in indirect capability

Type ExampleActor precipitateness Failure to manage reaction lagGeographical diffusion Failure to stop proliferation of potential contaminantsDiversity reduction Failure to manage vulnerability of ‘narrow point’ Exchange complexity Failure to manage trace quantitiesGoal narrowing* Failure to manage effects of ‘beauty pageants’Hazard proliferation Failure to limit transmission of contaminantInformational impededness* Failure to disseminate instruction rapidlyInventory legacy Failure to manage the latency risk in inventoryMember cascading* Failure to control quality in a cascaded supply chainNorm gradient* Failure to maintain integrity in testing upstreamRelational credulousness* Failure to maintain fiduciary artefacts

Lancaster University School of Management

Findings

Network-ness creates objective and subjective risk• Apparent consensus on failure of ‘controls’ leading to physical hazard• Consistent criticisms of ‘recreancy’ (Freudenberg 2003) in managing relations• ‘Fragmentation’ and ‘globalisation’ lend cases iconic status

Nuances of responsibility in networks contribute to unease• X admitted to responsibility but not guilt, as local actors were ‘guilty’• others argued he was ‘guilty’ of running the organization that allowed it• extent of Y’s ‘responsibility’ for its supply chain hard to pin down

Attribution often to network ‘architects’• Especially Hatfield • Including architects’ behaviour within their networks eg of consultants

Lancaster University School of Management

Findings

Network-ness not just a threat• Organisational boundaries allow diversity and inter-monitoring• Thus conceptual slack/requisite diversity (Schulman 1993; Weick 1987)

• But undermined by eg collusion to ‘derogate’ standards at Hatfield• So a positive capability needed to retain/exploit this diversity

Relation between risk and network-ness not a contingency• Not clear that outsourcing/globalisation better/worse in certain situations• Instead network-ness generally requires important indirect capabilities

‘Signal’ risks made indirect capability more important than direct• Hatfield ‘demonstrated’ how one accident could impede a whole railway• Sudan 1 ‘demonstrated’ how terrorism could exploit network-ness