managing trust and commitment in collaborative supply chain relationships

COMMUNICATIONS OF THE ACM June 2001/Vol. 44, No. 6 67

Much has been written abouthow enterprise resourceplanning (ERP) and supplychain management systemscan optimize the supplychain within and between

organizations, based on a set of pre-defined machine-

to-machine rules. ERP sys-tems and supply chainmanagement software areuseful in

optimizingmachine-to-

machine interac-tions about well-defined logisticsand payment terms for well-definedproducts and services (see the April2000 special section of Communica-tions “ERP Experiences and Evolution,” andwww.i2.com).

This article describes something different—howcomputer-based tools can enhance collaborativecommerce in uncertain, risky, and previously unde-fined inter-company human collaboration. Collab-orative commerce software, or interactiontechnology, coordinates human interaction in theuncertain business of inventing, designing, develop-ing, deploying, and supporting new products andservices, while negotiating the legal and financialconditions required by the transaction. Using inter-action technology, the collaborations between cus-

tomer and provider create real value for the cus-tomer. It is not that optimization is unimportant,but invention and innovation in the creation of cus-tom value for the customer always requires humanbeings and their intuition, experience, and judg-ment. ERP and traditional supply chain manage-ment systems can therefore be very useful inmanaging the simple interactions that ensue afterthe high value work in collaborative commerce isdone. Application-to-application technologies,such as supply chain software and ERP systems are

algorithmic—they provide informa-tion about the present and past.Conversely, person-to-person inter-action technologies provide infor-mation about the present and thefuture commitments people havemade to do work. Interaction tech-nologies promote trust, as people

see others regularly keeping their promises.Business-to-business (B2B) exchanges are

expected to provide buyers and sellers withunprecedented levels of market transparency viaonline exchanges, create an integrated chain ofcommerce by tightly linking all partners in thedemand and supply chain, automate collabora-tions between strategic partners thus lowering thecost of inter-company transactions, and closelysynchronize behavior of key partners via the Inter-net [9]. As early as 1988, Johnston and Lawrence[3] describe the competitive benefits of value-added partnerships between smaller companies,

Bill Welty and IrmaBecerra-Fernandez

�

MANAGING TRUSTAND COMMITMENT INCOLLABORATIVE SUPPLYCHAIN RELATIONSHIPSInteraction technology can enhance the interplay between trust and technology.

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This image was deleted from the electronic version of this article due to copyright restrictions.

each performing one part of the value-added chain,and coordinating its activities with the rest of thechain via computers and communication technolo-gies. In 1998, Malone and Laubacher [5] predictedthe shift to tiny, autonomous businesses (e-lancers)enabled by electronic networks to tap into the bestinformation, expertise, and financing that used to beavailable only to large companies.

The theoretical underpinnings of collaborativecommerce that fuels intercompany relationships inB2B partnerships are explained by the work byCoase [1, 2] and later by Williamson [10] in the the-ory of Transaction Cost Economics. TransactionCost Economics defines the conditions for firms todo some activities within the firm, and outsourcingothers to outside firms. According to Coase [1, 2],the conditions that define whether these activitiestake place in or outside of the firm are based ontransaction costs. When it is more cost-efficient toperform the activity within the firm, the activity isinternalized, and conversely, the market is used ifthat option is less costly. Buyers entering a markettransaction incur expenses determined by each ofthe transaction cost descriptors:

• Search costs; • Information costs; • Bargaining costs; • Decision costs; • Policing costs; and • Enforcement costs.

Buyers incur transaction costs by using the mar-ket because they need to compare purchase pricesplus transaction costs with the cost of producing the goods in-house, where not every interaction isnegotiated.

Williamson [10] extends Coase’s transaction costtheory by introducing the concept of opportunism.

Opportunism can lead to higher transaction costs,and can arise if information asymmetry among thetransacting parties exists, causing one party to takeadvantage of another. Furthermore, small numbersbargaining (the presence of a monopoly or oligopolyon either of the transacting sides) and also assetspecificity (products developed to satisfy a specificcustomer), can also lead to opportunism by oneparty, through control of the supply or the demand.In any case, opportunism is used by one of the trans-acting parties to take advantage of others; thereforesteps must be taken to counter opportunism andbehavioral uncertainty, or transaction costs willincrease.

According to Malone and Laubacher [5] theintroduction of information technology in businesstransactions reduces information asymmetry andtransaction costs in general, because it provides thecapability to:

• Transact at a distance, allowing the search fortransacting partners through a wider space;

• Match requirements to offerings through e-markets;

• Negotiate through electronic means; • Design contracts via software; and • Monitor compliance with technology.

To the extent that technology reduces transactioncosts more than it reduces in-house coordinationcosts, organizations will tend to transact more busi-ness with outsiders. Therefore, functions currentlyperformed within organizations will be outsourced,and because it is possible to communicate, collabo-rate, and coordinate using information technologies,business models will start changing, and we will con-tinue to see the emergence of more businessalliances.

An interesting spin on the evident move toward

68 June 2001/Vol. 44, No. 6 COMMUNICATIONS OF THE ACM

INFORMATION TECHNOLOGY ALLOWS ORGANIZATIONS TOINTERCONNECT, BUT TRUST IS JUST AS IMPORTANT. THEINTERPLAY BETWEEN TRUST AND TECHNOLOGY CANREDUCE TRANSACTION COSTS AND ENCOURAGE TRUSTAMONGST ORGANIZATIONS.

disintermediation (eliminating people as intermedi-aries) through the Internet is evident in the currenttrend of reintermediation (reintroduce intermedi-aries) [8]. Miles and Snow argue that broad-accesscomputerized information systems will become sub-stitutes for lengthy trust-building processes [6]. Incontrast, Kumar et al. studied the failure of thePrato experiment, which aimed to establish a sus-tainable interconnection of small textile manufac-turing firms in Italy [4]. The study points out thattrust is an alternate basis to technology for under-standing interorganizational relationships—coun-terbalancing the tendency toward opportunism.Therefore, while technology reduces transactionscosts, trust may do it faster.

Managing Commitment Mintzberg [7] observes that successful managersengage in many conversations in which they create,take care of, and initiate new commitments. Wino-grad and Flores [11] understand management as“taking care of the articulation and activation of anetwork of commitments, produced primarilythrough promises and requests,” and their workdefines commitment as an agreement with someoneto do something in the future.

While managers conducting transactions withinthe corporate boundary can pretty much tell theiremployees what to do (except perhaps in academiccircles), managing transactions across organizationsis quite different. Interorganizational transactionsare usually managed through requests that, uponmutual agreement, form the basis of commitments.Here we present a framework for electronic collabo-rative commerce that defines the participating rolesas being either a customer or a performer of anagreement. Commitment is defined here as an agree-ment between a customer and a performer, based ona set of conditions of satisfaction within a predefinedcycle time.

Winograd and Flores [11] describe a theoreticalbasis for interaction between negotiating parties inan agreement that Action Technologies (seewww.actiontech.com) has entitled the BusinessInteraction Model (see Figure 1). In this model, theperson making the requests takes on the role of thecustomer, while the person doing the work takes therole of the performer. The model is a “closed-loop”because the customer starts the loop of businessinteractions that becomes closed when the customerdeclares satisfaction. While traditional ERP systemsmanage enterprise processes such as order placementending with payment, collaborative commerce rede-fines business processes to include customer satisfac-

tion. The role of the customer decides and acceptswork as being complete, and satisfaction with thework done is evaluated against explicit conditions.The Business Interaction Model describes the rela-tions between customers and performers based onthe following concepts:

• A strong definition of roles—every agreementclearly defines who is the customer and who isthe performer.

• The context of all business interactions necessaryto achieve fulfillment of the customer request.This defines what actions come next and whodoes them.

• Conditions of satisfaction, which are explicitlyspecified so interactions are focused on com-pletely satisfying the customer.

The ActionWorks Metro software is the technol-


Acceptance:The customer evaluates the work and declares satisfaction

Customer

Performance:The performer performs the work and reports completion

Preparation:The customer proposes workto be done by the performer

Business Interaction ModelNegotiation:The customer and performer come to agreement about thework to be performed

Conditions of Satisfaction

Satisfying commitmentsof who, what, and when

Performer

Figure 1. Action Technologies businessinteraction model.

email

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•workflow

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Figure 2. The trade-off between flexibilityand structure in business interactions.

ogy used to manage the collaborative interactions inan interorganizational business process. Figure 2illustrates the trade-off between structure and flexi-bility in business interactions. Traditional workflowsystems (including ERP and supply chain manage-ment) offer complete structure and no flexibility,while email offers complete flexibility and no struc-ture for working toward a commitment. In the mid-dle of these two is business collaboration technologysuch as ActionWorks Metro. Consider for examplethe case of managing the interactions between agraphics account manager specialist (AMS) and asupplier. As the AMS (in this case the customer)

negotiates prices and terms with a supplier (the per-former) to produce a component, a commitment isformed between the AMS and the supplier, for thesupplier to provide the component (the what) by anagreed due date (the when). The software is used tomanage the interactions using commitments tocoordinate the efforts and email as the means ofnotification. Figure 3 illustrates this interaction.

The Collaborative CompanyIn 1998 the R.R. Donnelley & Sons Company, aleading North American communications services,publishing, and logistics company, realized one of


Figure 3. Interaction between account management specialist and supplier.

Holly Ross requested on 12/12/2000 02:25 PMHello Kathryn,We need to create a new custom gift book for our customers and we would like you to bid on it. We need 14,000 books chronicling the history and growth of the Pirelli Tire Company. We'd like each book embossed (on the front cover) with the image of the Pirelli P6 tire with a Borrani wire wheel. Each of our North American tire dealers will be getting one of these. Please see the attached photo file and history archive file as well as the specs on the wheel design. Our budget is $140,000 and we need them by March 22, which is the date of our North American dealer meeting. Can you do it under these conditions? Holly

Due date set to 13/Dec/00 05:00PStart date set to 13/Dec/00 09:00AEffort set to 60 hours

Kathryn McGovern commented on 12/12/2000 02:48 PMWe'd love to get a chance to work with you on this exciting project. We will need to look carefully at the drawings, text, and color pictures; with our current backlog and your deadline, we will need to work overtime to get this done. I can say the minimum price would be $215,000 and that's still conditional to our full agreement.

Holly Ross followed-up on 12/12/2000 02:49 PMIf you can do it for that price, and to our specifications, I have received the extra budget. However, I can't go any higher.

Due date changed to 22/Mar/01 05:00P

Kathryn McGovern agreed on 12/12/2000 02:53 PMWe'd be happy to do it at that price and delivery date.

30 additional hours requested

Kathryn McGovern reported work done on 3/12/2000 02:57 AMThis is done. Please note that we did not emboss the books.

Due date changed to 22/Mar/01 05:00P80 hours reported for manufacturing on 12/Dec/00

Holly Ross did not accept work done on 3/13/2001 07:59 PMThe due date of this work item is closed; please consider it in your plans.I'm sorry Kathryn, but this will not work. We need the books embossed as agreed. We did not agree on eliminating the embossing. We consider this to be a key design feature for the book.

Kathryn McGovern reported work done on 3/17/2001 07:24 AMSorry for the oversight, I have embossed the books as you specified. We are losing money on this contract but it was our fault. Even so, we want you to be satisfied and to continue to do business with us.

20 hours reported for Re-work on 12/Dec/00

Holly Ross accepted work done as-is on 3/18/2000 09:04 AMThanks, Kathryn!I received them today and I am completely satisfied. You can be sure you will be our primary supplier of high-end, four-color gift books.

their divisions was facing a growth challenge. R.R.Donnelley’s educational book-publishing customerswere asking the Graphics Management division toproduce custom educational projects with greatercomplexity than projects produced in previous years.When launching a packaging or kit project, an AMSat Graphics Management works with the customerto define the scope of the project and the manufac-turing specifications for each of the project’s compo-nents. The AMS is a project manager and serves asthe coordinator for both the customer and the sup-plier. Upon customer approval of a project’s scopeand specifications, the AMS begins a bidding processto obtain quotes from a selection of suppliers foreach of the project’s components. Throughout thisbidding process the AMS receives bid information

for project components from multiple suppliers and,based upon those bids, quotes a price for the entireproject to the customer. Upon approval of thequotes, the AMS manages the manufacturing andfulfillment processes to create the complete kit.These processes have become much more complex asthe number of components for each project hasgrown. In addition, because Graphics Managementis ISO-certified, it must obtain bids from at leastthree suppliers for each component quote—addingyet another layer of complexity to the process.

These requests for custom work caused the divisionto experience a challenge in managing the expandedworkload. One reason Graphics Management hadtrouble managing the production process was that themajor contributors to projects, the suppliers, were


Figure 4. Commitment management plan for the account management specialist.

xPirellli Book - Microsoft Internet Explorer

Define specificationsGet budget approvalGet bids

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outside of R.R. Donnelley’s control. Suppliersadhered to their own business processes, which weredifferent from Graphics Management’s. Since thedivision had a commitment to their customers forproducing the final project, the division was ulti-mately responsible for the suppliers completion of thecomponents. Graphics Management couldn’t easilycollaborate and manage commitments made withsuppliers, which became even more critical if unan-ticipated changes or problems occurred. For instance,when a customer requested a modification of a book’scover design, Graphics Management needed to rene-gotiate with a supplier. The current system was time-consuming, paper-intensive, and cumbersome for theproject management team, preventing it fromresponding to change orders effectively and easily.The increase in complex, multiple-component proj-ects magnified the pain of unanticipated changes.

In order to meet the new demands of customizedmultiple component projects, it became crucial forR.R. Donnelley to adopt an innovative businessprocess system enabling internal staff to collaborateand track commitments and changes, as well asnegotiate with customers and suppliers. UtilizingActionWorks Metro, the system gives R.R. Donnel-ley the power to involve suppliers and customers incollaborative commerce. Collaborative commerceembraces the Web’s capacity for rich interaction,allowing participants to collaborate, negotiate, andmanage commitments. One of Graphics Manage-ment’s goals was to build an application supportinginternal and external users. The system supportscustomers and suppliers as well as multiple internaldepartments including design, account project man-

agement, finance, sales, andquality management. The appli-cation’s online tracking of allinteractions regarding the pub-lisher’s production—from kitdesign and specs, to request forquotes, to inventory of compo-nents, to production status—delivers optimal inventorymanagement, online access toISO-certified suppliers, andreduced administrative time andcost. Thus the software hasallowed the AMS at GraphicsManagement to create a collab-orative commerce applicationthat improves the efficiency ofgetting bids from suppliers, cre-ates quotes for customers, andenables interaction among geo-

graphically distributed team members (see Figure 4). Graphics Management has experienced benefits

such as better quoting capability and reduction inerrors. With each bid a supplier submits, the AMSteam lets the supplier know if they won or lost thebid. The suppliers not selected are given feedbackabout why they were not chosen, helping themadjust future bids to try to win business from R.R.Donnelley. The feedback loop has resulted in bidsthat are more accurate for R.R. Donnelley. Suppli-ers have recognized additional benefits, reportingthat they too are experiencing noticeable productiv-ity gains within their organizations and improvedaccuracy of initial quotes. The business objectivesof R.R. Donnelley for the project were to create durable e-business relationships with both customers and suppliers and to improve pro-ductivity to help build profitable business growth.Originally, the team estimated the system wouldenable a 12% gain in productivity. Since April2000, early post-project completion review is prov-ing the productivity gain will be in the 14% to 16%range—surpassing Graphics Management’s originalestimates. R.R. Donnelley has experienced lowertransaction costs and has benefited from a reduc-tion in errors and rework costs. The increase in pro-ductivity will enable R.R. Donnelley’s business togrow. Graphics Management can now managemuch larger projects (in the million-dollar range)and AMS team members can accept more complexprojects per year. AMS members could previouslyhandle approximately six to 10 complex compo-nents; now they work in teams and can work withmore than 24 unique components, and manage


Collaboration between AMS andsupplier may include:

C=Customers

S=Suppliers

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C C C C

S S S S-Request bids online-Receive online bid-AMS Search library for quotes-Answer questions (Supplier may want to offer alternative solution in packaging/design)-Confirm deadline-Confirm shipping-Modify deliverable-Rate performance of supplier

AM

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Figure 5. User interactions in the collaborative commerce application at R.R. Donnelley (AMS=account managementspecialist at R.R. Donnelley's Graphics Management department).

-Manage negotiations if customer wants to initiate a change order-Check inventory of a product-Confirm customer deadline-Confirm and check status of shipping

Collaboration between AMS andcustomer may include:

more projects at once. Achieving much greaterleverage of their AMS staff lays the foundation forGraphics Management to grow.

Lubrizol is the world’s largest independent spe-cialty chemical manufacturer for the transportationindustry. It achieved this position by acceptingrequests to produce custom lubricant formulationsfrom a wide range of transportation industry cus-tomers. Producing custom chemicals generatedhigh returns for Lubrizol and, not surprisingly, highreturns invite competition. With increasing com-petitive pressures in the specialty chemical business,Lubrizol had to sharpen its analysis of the revenuesand expenses it could expect from new productdevelopment requests. In response to these businesschanges, Lubrizol decided to create a powerful newproduct approval process using ActionWorksMetro, which takes a customer request for a newspecialty chemical compound through planning,design, development, regulatory approval, manu-facturing development, finance, and manufacturingprior to acceptance. At any stage of the process, thecustomer’s request may be declined or an alternativeproposed by Lubrizol. The work management sys-tem eliminated superfluous communication, addedtimely access to business intelligence, and addedprocess loops to insure customer satisfaction. Thisresulted in greater process efficiency, better deci-sion-making and lower operational costs. Finally,response time to customers has improved markedly.In sum, Lubrizol has retained its speed advantageover competitors, while increasing its selectivityaround new products requests.

Implications for Building Trust The implications for collaborative commerceimplementations are clear: information technologyallows organizations to interconnect, but trust isjust as important. The interplay between trust andtechnology can reduce transaction costs andencourage trust in and amongst organizations.Technology can reduce transaction costs by manag-ing opportunism, helping to build alliances byincreasing the opportunities for outsourcing, andincreasing trust between organizations through theuse of interaction technology such as ActionWorksMetro. Interaction technology can help if no his-tory of experience-based trust exists. People learn totrust others by noting their behaviors; for example,promising to do something and fulfilling thepromise earns trust between transacting parties [8].ActionWorks Metro enables trust building byrepeatedly asking the customer, “Are you satisfiedthat we (the supplier) have met the conditions we

agreed on at the time we negotiated this agree-ment?” This explicit and recurrent questioning, forevery interaction, exposes shortcomings in the rela-tionship, creates opportunities to repair dissatisfac-tion, and produces relationships that are built ontrust.

E-business is about connections. Connectingwith outsiders means lower transaction costs andtransaction costs can be reduced by trust, built by acombination of experience and by interaction tech-nologies. But transacting parties need to choose asuitable combination of experience-based trust andtrust enabled by interaction technology. The choicedepends on the initial level of trust, the social capi-tal, and the minimum level of trust necessary totransact—the trust threshold. As time passes, themix might change, therefore organizations need tobe ever vigilant and constantly adaptive.

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Press, Chicago, 1988.2. Coase, R.H. The nature of the firm. Economica 4 (1937), 386–405. 3. Johnston, R. and Lawrence, P. Beyond Vertical Integration—The

Rise of the Value-Adding Partnership. Harvard Business Review,(July–August 1988), 94–100.

4. Kumar, K., van Dissel, H., and Bielli, P. The Merchant of Prato—Revisited: Toward a Third Rationality of Information Systems. MISQuarterly, (June 1998), 100–226.

5. Malone, T. and Laubacher, R. The Dawn of the E-Lance Economy.Harvard Business Review, (September–October 1998), 145–152.

6. Miles, R. and Snow, C. Organizations: New Concepts for New Firms.California Management Review 28, 3 (1986), 62–73.

7. Mintzberg, H. The Nature of Managerial Work. Harper and Row, NewYork, 1973.

8. Olson, J. and Olson, G. i2i Trust in E-Commerce. Commun. ACM43, 12 (Dec. 2000), 41–44.

9. Phillips, C. and Meeker, M. Collaborative Commerce, The B2B Inter-net Report. Morgan Stanley Dean Witter, (Apr. 2000).

10. Williamson, O.E. Markets and Hierarchies. Free Press, New York,1975.

11. Winograd, T. and Flores, F. Understanding Computers and Cognition.Addison-Wesley, MA, 1986.

Bill Welty ([email protected]) is the president of ActionTechnologies, Inc. Irma Becerra-Fernandez ) is an assistant professor at theDepartment of Decision Sciences and Information Systems at FloridaInternational University’s College of Business Administration inMiami, FL.

ActionWorks is a registered trademark of Action Technologies, Inc.

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