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The misalignment cycle: is the management of your supply chain aligned?

Johan F. Lundin and Andreas Norrman
Department of Industrial Management and Logistics, Lund University, Lund, Sweden
Abstract
Purpose The purpose of this paper is to propose a framework for describing and analyzing misalignments in supply chain management related to changes in supply chain structures, processes and management components. Design/methodology/approach Based on the systems approach, a single-case study including several embedded cases from the same supply chain was deployed. This was done according to the abductive research approach, which is favourable when extending existing and developing new theory. Data were collected through observations, interviews and workshops, and later analyzed through pattern matching. The case studied was the Swedish cash supply chain, which was appropriate since it has gone through several changes in its supply chain structure and management. Findings A framework to describe and analyze misalignments in the supply chain was developed. The framework consists of three steps: rst, identify changes in the supply chain, second, Identify Misalignments, and third, identify symptoms. For each step, a specic and more detailed framework was developed in order to facilitate the identication processes. Originality/value Using the framework described in this paper a researcher or practitioner acquires a structured approach to mapping the management of a supply chain so that its current misalignments can be identied. Keywords Supply chain management, Sweden, Cash management Paper type Research paper

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1. Introduction Supply chain members are torn between making decisions based on a local (member) ` perspective vis-a-vis a global (supply chain) perspective, as measurements and incentives make them prioritize operative goals instead of the channel goal (Simatupang et al., 2000). A supply chain works well if its companies incentives are aligned, but most companies do not worry about the behaviour of their partners when designing supply chains (Narayanan and Raman, 2004). According to Lambert et al. (1997), there are intricate cause and effect relationships between the elements of supply chain management that we cannot observe. When changing structures, processes or capacity within supply chains, changes and investment must often be made in other positions and organizational units than the benets will reveal later. Hence, changes and investment to improve supply chain
First of all, the authors would like to thank the VINN Excellence Center called Next Generation Innovative Logistics (www.ngil.se), for funding this research. We would also like to thank the Riksbank (Swedish Central Bank), Kontanthanteringsradet (Swedish CSC Council), and its respective members for the opportunity to visit and interview them. They have provided us with the data that made this research possible, but also funded a part of this study.
International Journal of Physical Distribution & Logistics Management Vol. 40 No. 4, 2010 pp. 277-297 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600031011045307

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performance will not always be made, as the person taking the risk might not reap the benets (Norrman, 2008). Simatupang and Sridharan (2005) also argue that changes in one element, without considering its effect on other elements, can result in failure to attain potential benets or even result in reduction in performance. In other words, when one part of the supply chain management is changed, its dependence on the rest of the supply chain management could create a problem. Inspired by Narayanan and Raman (2004), we dene supply chain misalignments as what results when the elements of supply chain management are designed so that they counteract or do not support each other, leading to unintended or unwanted performance of the supply chain. Current research that focuses on the treatment of incentive problems in supply chain management includes Narayanan and Raman (2004). They present an approach (Figure 1) that consists of three steps: accept the premise, pinpoint the cause and align or redesign. To accept the premise is simply acknowledging that there is such a thing as incentive misalignment. The second step, to pinpoint the cause, is the process of identifying and describing what misalignment a supply chain suffers from. (Raman (1998) discusses this as well, arguing that it is important to identify the root cause.) The third step is the process of creating alignment in a supply chain, which they argue can be accomplished by three types of solutions: contract-based (re-designing incentives), information-based (sharing information) and trust-based (empowering trust). However, treatment must logically be preceded by the description, identication and analysis of the actual problem. Raman (1998) and Narayanan and Raman (2004) address this, but are vague in describing how it actually should be accomplished. No practical tools to perform an incentive audit are presented they do not describe the process of pinpointing the cause in a practical sense, such as a description of how one identies misalignments. One challenge is hence to understand when the elements of your supply chain management are aligned or misaligned, or what can be the trigger of misalignments. A structured approach or framework that could be used to nd, describe and analyze misalignments in supply chain management appears to be lacking.
Accept the premises

Pinpoint the cause: hidden action hidden information badly designed incentives

Figure 1. Narayanan and Ramans (2004) process for incentive alignment

Align or redesign: contract-based solutions information-based solutions trust-based solutions

Source: An interpretation from Narayanan and Raman (2004)

The purpose of this paper is to create a framework for nding, describing and analyzing misalignments in supply chain management. Next we briey discuss our theoretical framework, consisting of two areas (supply chain management elements and supply chain incentive alignment), followed by a note on methodology. Then we describe six examples of changes within a specic supply chain, followed by identication of misalignments. The framework proposed, and used in the study, is reected on, before the paper ends with concluding comments. 2. Frame of reference 2.1 Elements of supply chain management Lambert et al. (1997) argue that supply chain management consists of three separate elements, network structures, business processes and management components. Briey, network structures concern the arrangement of the members of the supply chain and their relations, business processes concern activities and ows in the supply chain, and management components concern the management of the other two. Other authors have pointed out similar constructs as key elements in business systems. Persson (1995) describes logistics systems in terms of operational characteristics, structural context and managerial context. Amit and Zott (2001) divide business models into content, structure and governance of transactions. Owing to the wide recognition of Lambert et al.s (1997) framework within the logistics community, and considering that the main constructs are similar to those found elsewhere, we have used this framework as one starting point. This framework has been further divided into sub elements, which can be seen in Table I. Lambert et al. (1997) suggest three primary aspects of a supply chains structure: (1) the members of the supply chain; (2) the structural dimensions of the network; and (3) the different types of process links across the supply chain. The rst aspect represents companies working in the same supply chain. The second concerns the structural dimensions of the supply chain, which are horizontal structure, vertical structure and horizontal position of the focal company. The nal aspect concerns different types of process links across the supply chain, describing the degree of integration between members or nodes across that specic process link, and that designation is used throughout this paper. Second, we have the process element. Lambert et al. (1997) suggest that this element comprehends eight different processes that are essential to supply chain management: customer relationship management, customer service management, demand management, order fullment, manufacturing ow management, procurement, product development and commercialization and returns. However, Davenport (1993) denes processes as a structured and measured set of activities designed to produce a specic output for a particular customer or market. He contends that a process is a specic ordering of operational activities across time and place, with a beginning, an end and clearly identied inputs and outputs, i.e. a structure for action that is a more general description that can always be applied when mapping processes. Lee (2000) suggests that a supply chain should be described using the three ows of product, information, and money. Together, the operational activities and the ows form a more general process element than Lambert et al.s (1997) predened supply chain processes.

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Elements of supply chain management Structures Members of the supply chain Structural dimensions (horizontal and vertical)

Description Members, roles, etc. Horizontal structure/position or vertical structure of members/nodes Degree of integration on arcs between members/nodes in the supply chain Flow of products between members/nodes Flow of information between members/nodes Flow of money between members/ nodes Type of activities Order between activities

280

Degree of integration (managed, monitored and none) Processes Flows

Product ow Information ow Monetary ow

Operational activities Management components Physical and technical Planning and control methods

Table I. Detailed elements of supply chain management

Measurements, performance metrics, key performance indicator (KPI), etc. Organizational structure Firm organization structure, interorganizational team work, etc. Responsibility (ownership, liability Ownership of product, liability of and operations) product, or responsibility of operations Managerial and behavioral Management methods Management methods, level of commitment, etc. Power and leadership structure Power structure and relations between members Risk and reward structure Contracts, fee structures, mechanisms, etc. Culture and attitude Culture, trust or attitude Sources: Adapted from Lambert et al. (1997, 1998)

Stock and Lambert (2001) argue that the management components of supply chain management are common, critical and fundamental across all business processes, members and relationships. The management components are divided into two separate categories where the rst are physical and technical components and the second are managerial and behavioural components. Being more visible, tangible, measurable and easy-to-change components characterizes the rst group and the second group is characterized by being the opposite. One can say that the managerial and behavioural components dene the organizational behaviour and inuence how the physical and technical management components can be implemented. The physical and technical management components are planning and control methods, organization structure, work ow/activity structure, communication and information ow facility structure, and product ow facility structure (Lambert et al., 1997). However, the latter three components are already covered by our suggested components in the process element

(product ow, information ow and operational activities), and are therefore removed from management components. Furthermore, when mapping processes and especially outsourcing events, the need to describe responsibility (including ownership of activities/goods, liability of activities/goods and operational responsibility) was felt important and therefore this component was added. The managerial and behavioural management components are management methods, power and leadership structure, culture and attitude, and risk and reward structure (Lambert et al., 1997). Management methods include the corporate philosophy and management techniques. If these are different between the members in the supply chain, the process of integration can be difcult. Power and leadership structure is an important force in the evolvement of the supply chain because the exercise or the lack of power can affect the level of commitment of other supply chain members. Culture and attitude include how employees are valued and incorporated into the management of the rm. Finally, risk and reward sharing concerns the mechanisms that can align interests and objectives across the supply chain. Risk and reward sharing is important for long-term focus and cooperation among the supply chain members (Cooper et al., 1997a, b). 2.2 Supply chain misalignments As discussed in the introduction, Narayanan and Raman (2004) and Simatupang et al. (2000) address problems arising when incentives and measurements are not aligned between companies in the supply chain. Resolving this dilemma depends on how the buyer and the supplier invalidate awed assumptions about their business relationship. This means aligning the elements of supply chain management with each other in order to eliminate misalignments. From Narayanan and Raman (2004), a misalignment can be interpreted as an occurrence in a system when its parts are designed in such a way that they counteract or do not support each other, which leads to unintended or unwanted performance of the system. Obviously inspired by agency theory, Narayanan and Raman (2004) argue that misalignments in the supply chain management are caused by hidden actions by partner rms, hidden information, and badly designed incentives. Hidden actions occur when companies cannot observe how other rms in the supply chain act, which may make it hard to persuade those companies to do their best for the supply chain. Hidden information occurs when one company has information or knowledge that others in the supply chain do not. Since suppliers in many normal situations insist on hiding information, supply chains may not function as efciently as they could. Finally, badly designed incentives occur when the incentives induce unwanted behaviour or results. Misalignments occur when changes in supply chain design lead to unintended effects, such as hidden actions, hidden information, and badly designed incentives. Alignment thus results when there are no misalignments due to the design of the supply chain management. Agrell et al. (2002) also build on agency theory, and maintain that misalignments could come from information asymmetry (Akerlof, 1970) and badly designed incentives. They add such reasons as opportunism and different business logic. Opportunism is the priority of ones own interests, which can naturally lead to problems from a supply chain perspective. Different business logic can exist between members of a supply chain, and this is related to different goals and measurements. One interpretation is that different companies have different ways of doing business or different business models, which leaves them with conicting objectives.

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Negative effects of supply chain misalignments can be more or less direct and visible. Therefore, the more direct and visible effects will henceforth be called symptoms, as they can be regarded as indicators of problems. According to Simatupang and Sridharan (2005), misalignments can lead to decreased efciency, increased costs and diminished service. Narayanan and Raman (2004) argue that misalignments can lead to poor customer service, reduced efciency, and excess inventory. Other symptoms mentioned are inhibited investments and production inefciency (Agrell et al., 2002; Simatupang et al., 2000). But even though misalignments could lead to these symptoms, there could be several other potential factors behind experienced performance reduction. Misalignment is just one of several potential factors. In summary, ve different misalignments have been identied (Table II): hidden action, hidden information, badly designed incentives, goal conicts, and different business logics. One way of treating misalignments is incentive alignment, or risk and gain sharing (Cooper and Ellram, 1993; Cooper et al., 1997a, b; Motwani et al., 1998; Mentzer et al., 2001; Simatupang et al., 2000; Lee, 2004; Narayanan and Raman, 2004). Several researchers suggest contracts to solve misalignment problems, e.g. Lee and Whang (1999), Cachon (2002), and Agrell et al. (2002). These researchers use an analytic approach with mathematical modelling in order to identify the optimal contract under which the supply chain operates. Researchers using a more qualitative approach, e.g. Cooper and Ellram (1993), also present techniques for sharing risk and rewards in a supply chain. They suggest that alignment can be reached in three ways cross-owning equity, incentive schemes and investments in joint assets (supply chain efciency investments such as radio frequency identication, electronic data interchange and bar coding systems). According to Cooper and Ellram (1993), the sharing of risks and rewards is common in certain parts of Japanese industry. In these cases, companies cross-own equity interests in each other. Thus, they are nancially tied beyond the bounds of an ordinary business relationship. If one company does well, the other cross-owning companies all benet directly. Narayanan and Raman (2004) argue that even though it sounds tempting to cross-own equity or jointly invest in assets, these kinds of solutions require long-term relations and an increase in tied up capital in order to properly function.
Misalignment Hidden action Symptoms References

Decreased efciency, increased costs, unwanted behaviour and poor customer service Hidden information Decreased service, incorrect forecasts, increased costs, problems managing inventory, reduced efciency and reduced power Badly designed Increased costs, inhibited changes, incentives problems managing inventory, reduced productivity and unwanted behaviour Goal conicts Increased costs and reduced efciency Table II. Identied misalignments Different business logics

Narayanan and Raman (2004), Simatupang et al. (2000), Simatupang and Sridharan (2005) Agrell et al. (2002), Akerlof (1970), Narayanan and Raman (2004), Simatupang et al. (2000), Simatupang and Sridharan (2005) Agrell et al. (2002), Narayanan and Raman (2004), Simatupang et al. (2000), Simatupang and Sridharan (2005) Narayanan and Raman (2004), Simatupang et al. (2000) Agrell et al. (2002), Agrell and Norrman Production inefciency, risks of technological inefciency and reduced (2004) truthful information sharing

Therefore, they suggest that the contract-based solution is the best treatment to begin with. Nevertheless, they never explain how the supply chain should proceed with this approach to treat incentive misalignments, and therefore one problem is to acquire knowledge about how it might be done. Cachon (2002) is also convinced that an increase in supply chain performance can be achieved if the rms in the supply chain coordinate by contracting on a set of transfer payments such that each rms objective becomes aligned with the supply chains objective. Cachon (2002) presents several contract-based solutions that could be used to align the incentives. However, more advanced examples of contract coordination in supply chains seem rare in reality (Agrell and Norrman, 2004). The benet of contracts is moreover debated. Researchers like Poppo and Zenger (2002) and Seshadri and Mishra (2004) argue, e.g. that contracts and trust should be combined to increase performance, while Ghoshal and Moran (1996) and Macaulay (1963) among others argue that contracts may signal distrust of your exchange partner, undermining trust, and encourage, rather than discourage, opportunistic behaviour. So far, ve different remedies for misalignments have been identied: redesigning contracts, sharing information, empowering trust, cross-owning equity and investing in joint assets. 2.3 The supply chain misalignment cycle In summary, changes in the supply chain management elements might lead to misalignments, and misalignments could be observed by unwanted symptoms. We propose that these relationships could form a cycle, which will be referred to as the misalignment cycle (Figure 2). A change in one (or several) of the supply chain elements might lead to one of many different misalignments (e.g. hidden information, hidden action, badly designed incentives, goal conicts or different business logics), which can be identied by reduced performance or other type of unwanted behaviour (referred to as symptoms). If misalignments have been observed, normal behaviour is to try to cure the problem, which could be done by addressing any of the supply chain management elements. This could be successful (a better aligned supply chain) or unsuccessful (other misalignments occur). Of course, not all changes in the supply chain (Figure 2) lead to misalignments, but some changes create better-aligned systems. 3. Methodology The purpose of this study is to create a framework. Eisenhardt (1989) argues that case studies are especially helpful when building theories or frameworks. Case study research is further appropriate when boundaries between phenomenon and context are not evident (Yin, 2003). There are certainly unclear boundaries between phenomenon

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Change (structure, processes & management components)

Misalignment (hidden information, hidden action, badly designed incentives, goal conflicts, different business logics)

Figure 2. The misalignment cycle

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and context in both supply chain management (Mentzer et al., 2001) and in the particular area we address (Figure 2). An abductive research process was used for this study (Figure 3), based on the ideas of, e.g. Dubois and Gadde (2002) and Kovacs and Spens (2005). First, a problem was dened based on gaps in theory (lack of framework). Then a conceptual frame of reference was developed and, with this in mind, empirical data were collected and validated in workshops. Major changes in the supply chain were identied and grouped into six sub-cases, which formed a case study with an embedded design (Yin, 2003). Next, the frame of reference was revised and empirical data analyzed. Finally, the analysis of the empirical data was the platform for the development of the nal framework and some supporting hypotheses. The conceptual frame of reference used as the starting point for this study was the misalignment cycle, from which a number of propositions were derived. They served as means to explore how to revise and improve the originally proposed conceptual framework: P1. P2. Changes in a supply chains structure, processes, or management components could cause misalignments in the supply chain. Misalignments in the supply chain, such as hidden information, hidden action or badly designed incentives, could be identied by different symptoms in the supply chain (e.g. reduction in performance).

As Yin (2003) states, the conceptual framework is closely related to the unit of analysis, which for this study was changes in the supply chain management elements (relating either to structure, process or management components) and observed misalignments. This would make it possible to explore the cause-and-effect relationships between changes and misalignments. One supply chain that has gone through several changes in its supply chain management elements is the Swedish cash supply chain (CSC). It was chosen as a case for this reason, but also because of good access to information from supply chain ` actors involved. According to Barvell and Ericson (2004), the CSC consists of four different actors (Figure 4). The rst actor is the cash supplier that actually manufactures
Develop conceptual frame of reference Collect empirical data Develop framework and hypotheses Analyze empirical data

Theoretical part

Define problem

Revise frame of reference

Figure 3. The abductive research Empirical process used in this study part

Figure 4. The four actors in the CSC

Cash supplier

Central bank

Cash-in-transit companies

Cash customers

Source: Based on Barve and Ericson (2004) `ll

cash. In Sweden, two companies do this (Crane AB manufactures notes and AB Myntverket manufactures coins). The next actor is the wholesaler buying cash from the manufacturer and selling it to the retail step. In Sweden, the wholesaler is represented by the central bank (the Riksbank). The next actor is the logistics service provider, whose role is to deliver the cash from the wholesaler to the retail step, the customers. They carry out most of the operational activities in relation to cash (transports, sorting, counting, packaging, etc.). In Sweden, the logistics service providers are represented by organizations referred to as cash-in-transit (CIT) companies (e.g. Loomis AB, Group 4 Securicor AB, Panaxia AB). The fourth actor in the framework is the cash customer. The customers role is to provide the public with the demanded cash. In Sweden, cash customers are primarily represented by banks, but traditional grocery retailers also provide cash to the public. The public is the nal consumers, which were not studied. In the beginning, the Riksbank could be seen as a supply chain captain having both a role as authority and being involved in the ow of operations, but as changes occurred this role changed. The CSC and its changes were mapped and its supply chain management elements described in detail. Using a case study protocol based on the frame of reference, the Swedish CSC was mapped using interviews and documents. The respondents were chosen on the basis of their afliation to members and positions within the Swedish CSC (Table III). Owing to the nature of the studied material ow (cash) and its problems with security and robbery, the Swedish police department was also an important source of information and data (high security is one of the most important performance attributes for this supply chain). In order to validate the data, respondents were chosen from several different organisations from each member (e.g. respondents from four different banks were interviewed). The choice of respondents has also been differentiated on the basis of their positions so that the collected data gained a perspective from different hierarchical levels in the different actors (e.g. analysts, managers and chief executive ofcers). Interviews of a focused nature were conducted with both individuals and groups, meaning that sources of data were triangulated. An example of a major focus group interview was a

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Member Banks Cash users CIT companies The police The Riksbank Others Total Banks Cash users CIT companies The police The Riksbank Others Total

Number 10 5 9 3 7 9 43 7 7 2 3 11 13 43

Share (%) 23.3 11.6 20.9 7.0 16.3 20.9 100.0 16.3 16.3 4.7 7.0 25.6 30.2 100.0

Table III. The respondents distribution according to member afliation and position

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workshop that was held with several of the most important respondents (conducted 2007-06-15 in Stockholm), where the description was validated. 4. Changes in the Swedish CSC For the Swedish CSC, six major groups of changes (Cases A-F) were identied.

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Case A banks outsource their cash handling operations In the early 1980s, several of the large Swedish banks decided to outsource parts of the cash handling operations to CIT companies (logistics service providers), which was an example of a change in the processes. The motive behind the outsourcing was economies of scale. The banks believed that one organization performing the operations of several companies could achieve this. However, this set-up was not the typical outsourcing, as instead of only letting CIT companies perform the cash handling operations the banks also gave them ownership of the products. This changed the CIT companies business models, as they would not only charge for the services they performed. Instead the banks demanded a bundled product that included the face value of cash as well as processing, packaging and delivering cash to the customer. Hence, the banks wanted to buy cash off the shelf and not worry about, nor pay explicitly for, the cash handling operations needed to make cash usable and available. The outsourcing of the banks cash handling operations affected CIT companies in a way that transformed them from being cash transporters to cash traders and distributors, which was a structural change. This extended the CIT companies responsibilities in the cash ow, including ownership, liability and operations (management components). As this development proceeded, the CIT companies grew larger and acquired a more powerful role in the CSC. Another structural change concerned the integration between the banks and the Riksbank. Before the outsourcing, they had a close contact with the Riksbank on questions concerning cash handling. After the outsourcing, the banks reduced their interaction and collaboration. Instead, the CIT companies took over this role and became the contact organization with the Riksbank. The CSCs process element was also affected by the CIT companies new role. Since they took over parts of the ownership of cash, they also took control over the oat[1]. In other words, the banks lost their prots from the oat, which the CIT companies gained. Case B the Riksbank change their cash handling structure The Riksbank had, and still has, an ambition to reduce its operative involvement in the CSC to benet the development of private actors. Instead of using taxpayers money to secure the CSC, the Riksbank believes that private companies that have the need to use cash should carry the associated cost. That is why the Riksbank strives to reduce its cash handling operations to a minimum. Reducing the cash handling structure, e.g. the number of branch ofces, is one change that the Riksbank has conducted in order to reduce their cash handling operations (from 24 to two ofces in a couple of years). This change involved several other changes in the CSC. Although the Riksbank reduced the number of branch ofces, cash counting facilities were still needed, as well as some actor to assume the role that the Riksbank once had. Since the banks vision also was to outsource their cash handling operations,

the only actor left was the CIT companies. They took advantage of the development to grow larger, and increased their number of cash counting facilities. The process element was affected by the change in CSCs structure (fewer existing cash warehouses and consolidation of branch ofces), including changes in both the product ow and the monetary ow. First, the transports between the Riksbanks branch ofces and the private cash warehouses became fewer and with higher ll rates. This was due to the need to consolidate the transports because of the increasing travel distance between the branch ofces and the private cash warehouses. This led to difculties in levelling out the imbalances of cash between private warehouses (which may have led to an increased level of cash in society). In the monetary ow, there was a shift in costs between the Riksbank and the private sector. Owing to the reduction of branch ofces, the Riksbank reduced its costs associated with cash operations. Since the private sector had to ll the Riksbanks role, it also took over its costs (shifting the cost structure between public and private). Case C the Riksbank creates PSAB The third case consists of two changes initiated by the Riksbank, one in the CSCs structure and one in the management components. One motive was to reduce its costs for cash handling. Another, more important, motive was to make the private actors within the CSC take over the cash handling operations. The Riksbanks strategy was to convert its operative cash handling into a company, which they planned to sell later to the private actors, specically the banks. The Riksbank thought that the banks were less involved in the cash handling than they should be. The Riksbank wanted the banks to take more responsibility for the supply of cash to society because banks were, and are, those who actually need cash (to enable their customers to withdraw money from their accounts). The Riksbanks change in the CSC structure was the introduction of Pengar i Sverige AB (PSAB), a new member (Figure 5). PSAB was the result of the Riksbank converting its operative cash handling into a company. PSAB operated as a private prot driven actor in the supply chain. This change affected several other elements in the CSC, e.g. the organizational structure. Also the product ow was affected, as it had to pass another member in the supply chain. The second change was the introduction of a new fee structure (management component), which was a part of PSABs organization. Banks were now charged an infrastructure cost, which was a change in the CSCs risk and reward structure. This changed the monetary ow, as the banks previously were not charged any fee. The idea behind the fee was to cover PSABs cash handling costs. Even though the Riksbank began competing with CIT companies, PSAB still kept the value dating[2] in-house, which became an important competitive advantage for

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PSAB The riksbank CITcompanies -Loomis -G4S

Banks The public Cash consumers

Figure 5. An illustration of the Swedish CSCs structure considering Case C

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PSAB and led to unfair competition (monopolistic power) in the CIT industry. Keeping value dating within PSAB meant a lower cost of capital for them, which in this case was a lower capital cost of cash. Case D the Riksbank divides PSAB and change fee structure Case D consists of two changes initiated by the Riksbank. The background was PSABs unfair competitive advantage (value dating), which had upset the other CIT companies to an unacceptable level. The complaints from the private actors made the Riksbank understand the intolerable situation. Therefore, it decided to divide PSAB into two companies, one (PiS) performing activities associated with CIT operations, and another (SKAB) exercising the authority, such as value dating. This was a change in the organizational structure of PSAB. Hence, PiS did not inherit an unfair competitive advantage and power position due to the value-dating ability. The rst change, structural, was that the Riksbank replaced PSAB with SKAB and PiS. Hence, the members of the supply chain were changed, which affected the horizontal dimension of the CSC (Figure 6). The second change was to replace PSABs infrastructure fee by two new fee structures (management component), one for PiS and one for SKAB. PiS introduced a fee structure for their CIT services that was very similar to other competing CIT companies (e.g. Loomis and G4S), so PiS became just another CIT company. On the other hand, SKAB introduced a completely new fee structure directed towards the CIT companies, whereas PSAB previously charged the banks the infrastructure fee. This was a large change in the supply chains risk and reward structure. SKAB started to charge CIT companies for their visits at their cash depots. A visit occurs when a CIT companys vehicles come to one of SKABs cash depots either to collect new cash or to return used cash (or often perform these two activities during the same visit). The visiting hours at SKABs cash depots ranged between 7:30 am and 3:30 pm, divided into three periods. The periods between 7:30 am and 10 am, and 2 pm and 3:30 pm were high trafc periods, meaning that CIT companies were charged 8,000 SEK per every 15 minutes they visited the depot. The third period (between 10 am and 2 pm) was a low trafc period where they were only charged 4,000 SEK per every 15 minutes. The reason for the differentiation was that SKAB wanted to create incentives to prevent over-day cash withdrawals from their depots, as this created unnecessary and ineffective visits from their perspective. These incentives led to fewer and larger cash deliveries to SKAB, a change in the product ow (processes) driving higher insurance costs for transports due to the larger volume of cash transported in each car. This also led to the reduction of the total product ow to SKAB. Another effect of SKABs fee structure was that the Riksbanks revenues from its cash operations decreased. The changed fee structure nally led to a change in CIT companies delivery process to SKABs cash depots. As the new fee structure promoted shorter visits, the CIT
Banks

288

Figure 6. An illustration of the Swedish CSCs structure considering Case D

The riksbank

SKAB

CIT-companies -Loomis -G4S -Pis Cash consumers

The public

companies optimized their delivery process regarding time in order to pay the smallest fee possible. Case E fee structure affects product ow Case E concerns a group of changes triggered by external events. Between 2004 and 2005 there was a large increase in the number of attacks (such as robberies) on Swedish CIT companies. Therefore, several organizations analyzed potential actions in order to prevent these attacks. The Riksbank, for example, found it necessary to take action and found that SKABs fee structure towards the CIT companies induced unwanted behaviour (process) that might have increased the risks associated with cash transports to their depots. Therefore, they decided to change their fee structure (management component) to one that would promote transports with small cash volumes instead of promoting transports with large cash volumes. The new fee structure was based on the cash volume instead of the duration of the visit. This meant that the CIT companies paid 8,000 SEK for their cash deliveries if the volume per transport was over 30 MSEK, and if it was lower they paid 4,000 SEK. The time per visit was hence no longer a problem, which changed the CIT companies delivery process to SKABs cash depots. However, now the cash volume became an important factor since loads over 60 MSEK became cheaper per MSEK transported than loads under 30 MSEK. Case F the establishment of a private depot structure The Riksbanks discussion about opening a private depot structure began with an ` investigation (Barvell and Ericson, 2004) that concluded that the Riksbanks goal for the further development of the Swedish CSC was to prepare for such a thing. One motive was the belief that private actors in the CSC would perform the cash supply more efciently than the Riksbank because they had the necessary means. Another motive was that the Riksbank wanted to push more of its costs towards the private actors so that cash handling would be subsidized to a lesser extent by the Swedish government. One of the changes was a new role (structure) for banks and CIT companies. Previously, CIT companies had been suppliers of cash to banks, but due to the private depot structure, they became providers of cash handling and transport services. Hence, the CIT companies had to change their business models in order to reckon with the new structure. This change was driven by the fact that only banks had the possibility to establish private depots, which they did through depot companies. These companies were responsible for establishing private depots on the banks behalves. However, the depot companies acted only as depot owners, which mean that they contracted CIT companies to be depot operators. Another change in the members of CSC (structure) was the closing down of SKAB and PiS. The Riksbank closed down PiS since no bank was interested in buying it and since it was not protable. Later, the tangible assets from PiS were sold to a CIT company and Svensk Kassaservice, SKAB, was closed down and integrated into the Riksbanks organization. Owing to the private depot structure and existing contracts between CIT companies and banks, levelling cash imbalances between CIT companies and banks became a problem. Since one company could have a constant cash decit and another one could have a constant cash surplus, the result was a need to balance cash between them. However, this became a problem because it was possible to retrieve more cash from the

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Riksbank and not return any. Therefore, the cash level in Swedish society momentarily increased due to the difculties of balancing between companies. Hence, those companies that were stuck with a cash surplus would have an increase in costs (e.g. insurance, warehousing and handling). Previously, the Riksbank would have absorbed this cost, but with the private depot structure the private actors have to account for it. This was reected in the price for a bundle of cash, which increased due to the implementation of the private depot structure. The private depot structure also affected the management components. First, the business models concerning cash have changed for both banks and CIT companies. Second, the Riksbank removed the fee structure for buying and delivering cash. Third, the banks received interest compensation for the cash that they held in the private depot structure. 5. Identication of misalignments This section analyzes the cases in order to identify misalignments using pattern matching. The purpose of this is to see if there exist relations between changes in supply chain management elements and misalignments, and, if so, to establish the reasons behind them (see Table IV for a summary of the ndings). Case A banks outsource their cash handling operations In Case A, banks outsourcing of their cash handling operations to CIT companies led to a misalignment (Mis1). This was a change that affected several elements of the CSC, but most inuential was a change in the processes, more specically, a change in the operational activities: the CIT companies took over operations of several processes and activities in the CSC, and they changed the operational activities so that the banks could no longer monitor or supervise the processes. The banks thereby lost control over actions and information in major parts of the CSC. This change in the CSCs processes and management components led to hidden actions and hidden information between the banks and the CIT companies. Case B the Riksbank changes its cash handling structure When the Riksbank reduced the number of cash depots, the private actors had to develop a replacement structure of depots. This increased the private actors costs for cash handling, for which the Riksbank did not compensate. In other words, the Riksbanks change in structure forced costs on the private actors in the CSC, which from the private actors point of view was a case of badly designed incentives (Mis2). The Riksbanks purpose with this change was to induce a more cost effective behaviour in the CSC and to redistribute the supply costs, but the result included imbalances in cash levels between depots. Case C the Riksbank creates PSAB When the Riksbank began charging fees from the banks in order to cover its cash supply costs, they created a misdirected incentive because the CIT companies actually were the ones inducing the Riksbanks costs. This misalignment (Mis3) derived from a change in the risk and reward structure between the Riksbank and the banks. This was clearly a case of badly designed incentives because the CIT companies were not exposed to the costs that they induced.

Elements of supply chain management Structures Members of the supply chain

Description of change Add a new supply chain member or change roles for existing an one Reduce the number of nodes Add a new supply chain member

Misalignment Case Different business logics Case C

Mis Mis4

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Structural dimensions (horizontal and vertical)

Goal conicts Case F Case B Badly designed incentives Case C Different business logics Badly designed incentives Case F

Mis9 Mis2 Mis4

Processes Flows

Product ow

Operational activities

Changed rules regarding product ow conict with existing contracts Outsource a process so that it is unobservable Implement demands on a suppliers process that are unobservable Outsource a process so that it is unobservable Compensate a supplier for holding inventory Charge fees from another supply chain member for service that its supplier uses create wrong incentives Changed incentives to induce the number and the duration of transports led to higher risks Changed incentives to induce the number of transports led to higher risks

Mis10

Case A Hidden information Hidden action Hidden action Case E Hidden Case A information Hidden action Case A Hidden action Case F Badly designed incentives Case C

Mis1 Mis7 Mis1 Mis1 Mis9 Mis3

Management components Responsibility Physical (ownership, and liabilityandoperations) technical Managerial Risk and reward structure and behavioral

Badly designed incentives Badly designed incentives

Case D

Mis5

Case E

Mis8

Table IV. A summary of where misalignments occurred and from which cases they derive

Another misalignment (Mis4) derived from a change in the members of the supply chain and the structural dimensions. When the Riksbank created PSAB, they created a CIT company with an unfair competitive advantage deriving from the value-dating rule. It was obvious that PSAB and the private CIT companies had different non-complementary business logics, because the competition was unbalanced.

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Case D the Riksbank divides PSAB When the Riksbank adopted a time-based fee structure (management components: risk and reward structure) in order to reduce the over-day loans, this led to unwanted behaviour by the CIT companies. Since this fee structure promoted shorter visits with larger cash volumes, the CIT companies had to modify their delivery process so that it would be optimized for the smallest fee possible, which was an example of badly designed incentives (Mis5). Case E fee structure affects product ow A third misalignment (Mis6) followed a change in the risk and reward structure (management components) between the Riksbank and the CIT companies. The Riksbank changed its fee structure from being time-based into being volume-based. The volume-based fee structure caused unwanted behaviour by CIT companies, which was an example of badly designed incentives. Case F the establishment of a private depot structure The rst misalignment (Mis7) derived from a change in the product ow (process) between the Riksbank and the CIT companies. The Riksbank forbade the return of t cash during most parts of the year. This meant that CIT companies, which relied on the Riksbank in order to balance their cash levels, found themselves in a tough situation. This was due to the existing contract structure between the banks and the CIT companies that were not changed to t the new structure, which resulted in cash imbalances between CIT companies due to badly designed incentives (non-aligned management components). The second misalignment (Mis8) derived from a structural change in the members of the CSC. The change was a new supply chain member that was added by the banks, which is referred to as the joint depot structure. The companies that handled the joint depot structure began competing with the CIT companies because there was a goal conict between them. 6. Reections This section summarizes and discusses the proposed framework for describing and analyzing misalignments in a supply chain. 6.1 Changes in the supply chain This paper proposes a framework based on Lambert et al. (1997) that can be used to describe changes in the supply chain. The foundation of the framework is the three overriding supply chain elements: structures, processes and management components. Similar overriding elements have previously been presented by other researchers such as Persson (1995) and are not considered controversial. However, the subdivision in the framework for describing changes is more controversial and original. Previously, Lambert et al. (1997) subdivided the three elements in order to describe the integration in a supply chain. In our framework, the subdivision is used to describe changes. Therefore, the original framework presented by Lambert et al. (1997) was modied in order to t the new purpose. In the present case, the subdivision has fullled its purpose to nd, describe and sort changes, and we think it would probably do so for other cases as well. However, it could

be further developed and improved. Some of the components have not been validated by any of the cases (for instance culture and attitude and management methods), and other components might be added later on. On the whole, the framework and the principles behind it appear to function. The framework should be applied when mapping and describing changes in a supply chain. The intention was that the framework could also be applied in order to understand what type of change might be causing an identied misalignment. But these kinds of causal relationships could not be found for this specic case, as, e.g. badly designed incentives were found as consequence from changes in all overriding elements. Hidden information, hidden action and different business logic were seen as consequences of changes in at least two different elements. The aim for the future is to develop the framework for application to the process of mitigating misalignments and their symptoms, in order to understand what type of change will solve different problems. However, this involves the whole framework and not just the framework for describing changes. 6.2 Misalignments in the supply chain Misalignments can be identied either by mapping changes in the management of a supply chain to see if problems occur, or by looking for supply chain problems and reduced performance and trying to relate them to changes in supply chain components. Together, misalignments and supply chain components create a framework indicating relationships between them. Several examples of misalignments were identied in the empirical evidence and later matched with the misalignments found in theory. In general, the framework was useful in describing and analyzing misalignments, and covered all of the empirically identied ones. However, as discussed above, more research is needed to be able to nd strong relationships. The framework could, from a practitioners point of view, either be applied during the consideration of new changes in the supply chain, in order to predict potential misalignments and try to avoid them, or be applied when the supply chain experiences reduction in performance (also referred to as symptoms), in order to determine whether misalignments might be causing the symptoms. 6.3 The misalignment cycle The misalignment cycle (Figure 7) represents continuous loops, thinking that it might be able to trace loops between changes in supply chain elements and identied

The misalignment cycle 293

Change (structure, processes and management components)

Symptom (cost, tied-up capital, delivery accuracy, lead time, delivery quality, responsiveness, agility, etc.)

Misalignment (hidden information, hidden action, badly designed incentives, goal conflicts, different business logics)

Figure 7. The misalignment cycle presenting the proposed relationships between changes in the supply chain, misalignments and symptoms

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misalignments in order to understand how different changes induce misalignments, how different misalignments lead to different symptoms, and how misalignments lead to new changes. Examples of this have been seen in the cases. To further make this explicit, we propose to add a third component to the cycle, namely the symptoms. Symptoms could, to start with, be viewed as reduced performance in the KPIs for the supply chain (e.g. cost, tied-up capital, delivery accuracy, lead time, delivery quality, responsiveness and agility). For this specic case, security was one of the key indicators (but risk related measures might also be of value for other supply chains). Other potential symptoms might be reluctance to implement changes. However, it is important to understand that this framework does not yet give any normative advice on how to mitigate symptoms of changes in the supply chain management. This framework is purely explanatory, i.e. it tries to describe and explain relationships between the three steps in the framework. In order to express the relationships between them, the sub-frameworks can be used for describing each of the steps in detail. 7. Conclusions This case illustrates a number of supply chain changes and misalignments that occurred when a supply chain captain (the Riksbank) tried to centralise structures and reduce its involvement in the processes, but still keep its role as authority. Misalignments in the supply chain can be identied, described and analyzed by using the proposed framework, including a description of the different types of misalignments. However, this could be difcult without any previous experience with the concept of misalignments. A supplementary approach to identify misalignments in the supply chain is to investigate changes using the framework to describe changes and see if they have led to such symptoms as reduced performance. This study has provided illustrations of where changes have resulted in decreased performance, explained by misalignments that the supply chain partners then tried to address with additional changes in supply chain elements. This behaviour creates a cycle of actions, which we summarize in the supply chain misalignment cycle. To further strengthen the framework, more explicit relationships between specic changes in supply chain elements, misalignments and symptoms are needed. Additional case studies could support this, as well as properly designed survey studies. The challenge will be to isolate different causes and effects: not all supply chain changes result in misalignments, and far from all symptoms (reduced performance) are due to misalignments. Currently the level of detail is deepest regarding the supply chain elements, which makes it difcult to nd causal relationships with a much smaller, and less detailed, number of misalignments. Hence, further research could also centre on developing subcategories of misalignments. In future, further research on how misalignments can be treated would be interesting, which is the natural step after they are identied in the supply chain management. Several researchers (such as Cachon, 2002) present different types of treatments for misalignments using different types of contracts. To be able to be normative, there is a need to conduct research on how to choose the right type of treatment based on what type of misalignment has been identied. Further research could hence focus on matching more detailed types of misalignments with different types of treatments.

Notes 1. Float occurs when there is a delay in the clearing of a payment between banks or other companies. One of the most obvious types of delay arises when a person makes a purchase by check (which is almost non-existent in Sweden, however). Let us say that you hand over a check as payment in a shop. The shopkeeper takes the check and brings it to his bank to redeem it. Then his bank credits the corresponding amount to his account, on the assumption that your bank will transfer money to cover the amount of the check. The shopkeepers bank contacts your bank, which withdraws this amount from your account and transfers it to the other bank. During the time it takes for your bank to transfer the money to the shopkeepers bank, you and the shopkeeper actually have the same money on your accounts. This is commonly called a oat. 2. Value dating occurs when the Riksbank removes cash from its volume of banknotes in circulation, which entails that the cash loses its nominal value. Then the Riksbank credits an amount corresponding to the cash to an account with the Riksbank belonging to the party having delivered the cash. References Agrell, P.J. and Norrman, A. (2004), Understanding supply chain risk sharing: a three-tier principal-agent approach, in Aronsson, H. (Ed.), NOFOMA 2004. Challenging Boundaries with Logistics, Conference Proceedings from the 16th Annual Conference for Nordic Researchers in Logistics, Linkoping University, Linkoping, Sweden, 7-8 June, pp. 17-33. Agrell, P.J., Bogetoft, P. and Tind, J. (2002), Incentive plans for productive efciency, innovation and learning, International Journal of Production Economics, Vol. 78 No. 1, pp. 1-11. Akerlof, G.A. (1970), The market for lemons: quality uncertainty and the market mechanism, The Quarterly Journal of Economics, Vol. 84 No. 3, pp. 488-500. Amit, R. and Zott, C. (2001), Value creation in e-business, Strategic Management Journal, Vol. 22 Nos 6/7, pp. 493-520. ` ll, K. and Ericson, M. (2004), Oversyn av kontanthantering i Sverige, Working Paper Barve DNR 2004-197-MOP, Sverige Riksbank, Stockholm, 19 August. Cachon, G.P. (2002), Supply chain coordination with contracts, in Graves, S. and de Kok, T. (Eds), Handbooks in Operations Research and Management Science: Supply Chain Management, North-Holland, Amsterdam, Ch. 6. Cooper, M.C. and Ellram, L.M. (1993), The relationship between supply chain management and keiretsu, International Journal of Logistics Management, Vol. 4 No. 1, pp. 1-12. Cooper, M.C., Ellram, L.M. and Gardner, J.T. (1997a), Meshing multiple alliances, Journal of Business Logistics, Vol. 18 No. 1, pp. 67-90. Cooper, M.C., Lambert, D.M. and Pagh, J.D. (1997b), Supply chain management more than a new name for logistics, International Journal of Logistics Management, Vol. 8 No. 1, pp. 1-14. Davenport, T.H. (1993), Process Innovation. Reengineering Work Through Information Technology, Harvard Business School Press, Boston, MA. Dubois, A. and Gadde, L.E. (2002), Systematic combining: an abductive approach to case research, Journal of Business Research, Vol. 55 No. 7, pp. 553-60. Eisenhardt, K.M. (1989), Agency theory: an assessment and review, Academy of Management Review, Vol. 14 No. 1, pp. 57-74. Ghoshal, S. and Moran, P. (1996), Bad for practice: a critique of the transaction cost theory, Academy of Management Review, Vol. 21 No. 1, pp. 13-48.

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Kovacs, G. and Spens, K.M. (2005), Abductive reasoning in logistics research, International Journal of Physical Distribution & Logistics Management, Vol. 35 No. 2, pp. 132-44. Lambert, D.M., Cooper, M.C. and Pagh, J.D. (1997), Supply chain management: more than a name for logistics, International Journal of Logistics Management, Vol. 8 No. 1, pp. 1-14. Lambert, D.M., Cooper, M.C. and Pagh, J.D. (1998), Supply chain management: implementation issues and research opportunities, The International Journal of Logistics Management, Vol. 9 No. 2, pp. 1-19. Lee, H.L. (2000), Creating value through supply chain integration, Supply Chain Management Review, Vol. 4 No. 4, pp. 30-6. Lee, H.L. (2004), The triple-a supply chain, Harvard Business Review, Vol. 82 No. 10, pp. 102-13. Lee, H.L. and Whang, S. (1999), Decentralized multi-echelon supply chains: incentives and information, Management Science, Vol. 45 No. 5, pp. 633-40. Macaulay, S. (1963), Non-contractual relations in business: a preliminary study, American Sociological Review, Vol. 28 No. 1, pp. 55-67. Mentzer, J.T., DeWitt, W. and Keebler, J.S. (2001), Dening supply chain management, Journal of Business Logistics, Vol. 22 No. 2, pp. 1-26. Motwani, J., Larson, L. and Ahuja, S. (1998), Managing a global supply chain partnership, Logistics Information Management, Vol. 11 No. 6, pp. 349-54. Narayanan, V.G. and Raman, A. (2004), Aligning incentives in supply chains, Harvard Business Review, Vol. 82 No. 11, pp. 94-103. Norrman, A. (2008), Supply chain risk sharing contracts from buyers perspective: content and experiences, International Journal of Procurement Management, Vol. 1 No. 4, pp. 371-93. Persson, G. (1995), Logistics process redesign: some useful insights, International Journal of Logistics Management, Vol. 6 No. 1, pp. 13-26. Poppo, L. and Zenger, T. (2002), Do formal contracts and relational governance function as substitutes or complements?, Strategic Management Journal, Vol. 3, pp. 707-25. Raman, A. (1998), Towards nding the perfect match matching supply with demand in supply chains, in Gattorna, J. (Ed.), Strategic Supply Chain Alignment Best Practice in Supply Chain Management, Gower, Aldershot, pp. 171-87. Seshadri, S. and Mishra, R. (2004), Relationship marketing and contract theory, Industrial Marketing Management, Vol. 33 No. 6, pp. 513-26. Simatupang, T.M. and Sridharan, R. (2005), An integrative framework for supply chain collaboration, International Journal of Logistics Management, Vol. 16 No. 2, pp. 257-74. Simatupang, T.M., Sridharan, R. and Wright, A.C. (2000), Information and incentives in a supply chain, Proceedings of the 7th Annual New Zealand Engineering and Technology Postgraduate Conference, Massey University, Palmerston North, New Zealand, 23-24 November, pp. 269-74. Stock, J.R. and Lambert, D.M. (2001), Strategic Logistics Management, 4th ed., McGraw-Hill, New York, NY. Yin, R.K. (2003), Case Study Research, Design and Methods, Sage, Newbury Park, CA.

Further reading Simatupang, T.M. and Sridharan, R. (2002), The collaborative supply chain, International Journal of Logistics Management, Vol. 13 No. 1, pp. 15-30.

About the authors Johan F. Lundin is a PhD student at the Department of Industrial Management and Logistics at Lund University, Faculty of Engineering. He holds a BSc in Engineering and a MSc in Industrial Management and Engineering from Lund University. He has been a Fulbright Scholar visiting the H. Milton Stewart School of Industrial and Systems Engineering at the Georgia Institute of Technology. His research interests are supply chain management, supply chain design, and incentives problems in supply chains. Johan F. Lundin is the corresponding author and can be contacted at: johan.lundin@tlog.lth.se Andreas Norrman received his PhD in Linkoping University and he is a Professor in Supply chain structure and organization at Lund University, Faculty of Engineering, Sweden. He is head of the Department of Industrial Management and Logistics, and was active in establishing the National Excellence Centre Next Generation Innovative Logistics, www.ngil.se. He has had visiting positions at the Turku School of Economics, Finland, and Universite Catholique de Louvain, Belgium. He has worked as a management consultant at A.T. Kearney with supply chain management and sourcing issues. His research, e.g. regarding supply chain risk management, has appeared in numerous journals including International Journal of Physical Distribution & Logistics Management, International Journal of Logistics Management, International Journal of Production Economics, International Journal of Procurement Management, European Journal of Purchasing and Supply Management, and International Journal of Risk Assessment and Management.

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