Int. J.

Production Economics 62 (1999) 133 } 144

A framework for designing e$cient value chain networks

Srinivas Talluri *, R.C. Baker , Joseph Sarkis
Department of Information Systems and Sciences, Samuel J. Silberman College of Business Administration, Fairleigh Dickinson University, 1000 River Road, Teaneck, NJ 07666, USA Department of Information Systems and Management Sciences, Box C 19437, The University of Texas at Arlington, Arlington, TX 76019, USA Graduate School of Management, Clark University, 950 Main Street, Worcester, MA 01610, USA

Abstract Strategic interorganizational networks aid organizations in gaining competitive advantages and improving production e$ciencies. Network organizations, virtual corporations, and value-adding partnerships are envisioned by many experts as the epitome of interorganizational networks for the 21st century. These multi-organizational structures are viewed as a solution for rapid introduction of products while maintaining high quality and minimal costs. One common key issue in designing these new forms of organizations is the partner selection process. The business processes, owned by organizational partners, must be e$cient both individually and as a collective group. This paper proposes a two-phase quantitative framework to aid the decision making process in e!ectively selecting an e$cient and a compatible set of partners. Phase 1 identi"es e$cient candidates for each type of business process (e.g. design, manufacturing, distribution, etc.) utilizing data envelopment analysis. Phase 2 involves the execution of an integer goal programming model to determine the best portfolio of e$cient partners based on a number of compatibility objectives. Model application and insights are evident through an illustrative example. 1999 Elsevier Science B.V. All rights reserved. Keywords: Value chain networks; Data envelopment analysis; Goal programming

1. Background Product life cycles for most products are becoming increasingly shorter. Customers are becoming more diverse in their demands, putting more pressure on product and service industries to respond to these demands. Manufacturers are constantly working towards meeting and balancing customer oriented performance measures such as high
* Corresponding author. Tel.: #1 201-692-7285; fax: #1 201692-7219; e-mail: talluri@alpha.fdu.edu.

product quality, short lead times, high product variety, and low cost. It is a monumental task for large or small organizations to accomplish all the aforementioned goals in a timely and e$cient manner. Large organizations are often very complex and slow to move, while small organizations su!er from a scarcity of resources. Network organizations (NOs), virtual corporations (VCs), and valueadding partnerships (VAPs) are envisioned by many experts as the solution for rapid introduction of a variety of products while maintaining high quality and low costs [1}6]. In this paper, we

0925-5273/99/$ - see front matter 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 5 - 5 2 7 3 ( 9 8 ) 0 0 2 2 5 - 4

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collectively refer to NOs, VCs, and VAPs as value chain networks (VCNs). Snow and Miles [6] have illustrated three types of network organizations: internal, stable, and dynamic. In an internal network, "rms own most of their assets and have limited exposure to outsourcing. A stable network organization engages in a moderate level of outsourcing. Usually, in this type of network, a set of vendors support a `leada "rm. Dynamic networks are formed by a group of independent companies. The lead "rm, acting somewhat as a broker, identi"es potential partners who own a large or sometimes the entire portion of the assets in the network. For example, at Galoob Toys, a handful of key executives select potential partners to design, manufacture, and sell children's toys. Thus, Galoob acts as broker in forming an e!ective VCN of highly e$cient partners. VCs are very similar to NOs. They are an alliance of independent business processes or enterprises each contributing `core competenciesa in areas such as design, manufacturing, and distribution to the corporation [1}3,5,7,8]. VCs are formed in the event of a market opportunity and are dissolved when the opportunity passes. Similar to NOs, they do not own any of the individual business processes that design, produce, and market the product. However, the VCs always indulge in temporary relationships to take advantage of a speci"c market opportunity. For example, Apple Computer and Sony Corporation engaged in a similar temporary alliance to manufacture PowerBook notebooks. TelePad Corporation collaborated with more than two dozen partners in bringing its pen-based computer to market. Similarly, IBM, Apple Computer, and Motorola have become involved in an inter"rm alliance to develop an operating system and microprocessor for a new generation of computers. According to Johnston and Lawrence [4], the VAPs are `a set of independent companies that work closely together to manage the #ow of goods and services along the entire value-added chaina. The primary di!erence between VAPs and VCs is that, the "rms in a VAP develop lasting ties with others in the value-added chain. For example, Japanese auto companies are a typical form of VAPs, producing only about 20% of the value of

their automobiles. Similarly, Chrysler's resurgence may be attributed to the creation of VAPs with its suppliers. Other concepts such as extended enterprises can also be categorized into VAPs [9]. A key factor, emphasized by researchers, in forming these new organizations is the selection of agile, competent, and compatible partners [3,6,7,10}13]. Although the issues of partnerships are discussed to a great extent in the literature, few, if any, formal decision making models have been developed for e!ective partner selection process. It is evident that without highly e!ective partners, these VCNs cannot work e$ciently. Therefore, not only is there a need for strong compatibility among the participants, but more importantly they need to be very e$cient in what they contribute individually and as a group. The partner selection process is therefore critical in the formation of a VCN.

2. Problem complexity and solution technique As discussed above, one of the key issues encountered in the formation of a VCN is the selection of partners. For example, consider a scenario in which a VCN with three types of business processes A, B, and C is to be formed. If there are 10 potential candidates for the type A process, 10 potential candidates for the type B process, and 8 potential candidates for the type C business process, then the total number of combinations under consideration is 800. Optimally, all these combinations need to be evaluated and the most desirable one identi"ed. This process is by no means a trivial assignment. It can be an extremely tedious and time-consuming process. Moreover, it is very di$cult to incorporate into one decision model both the internal decision variables for analysis of candidates of a given process type, and the external (compatibility) analysis of candidates for di!erent process types. This paper proposes and introduces a two-staged decision model for this problem environment. Phase 1 is a "ltering technique based on the internal relationship decision variables of the candidates. This technique identi"es `e$cienta candidates for each type of business process, which allows for screening and eliminating of the

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ine$cient candidates. This "ltration results in a reduced set of possible combinations that are considered in Phase 2 of the analysis. A speci"c data envelopment analysis (DEA) model referred to as the CCR (Charnes, Cooper, and Rhodes) model, developed by Charnes et al. [14], is applied in Phase 1. The CCR model is a fractional programming technique that identi"es e$cient candidates by incorporating a range of internal activity and performance measures into the model. Phase 2 utilizes an integer goal programming model, which is based on external decision variables (compatibility criteria), for selecting the ultimate combination of e$cient candidates to participate in the formation of the VCN. The following section provides a brief introduction to the CCR model, which is utilized in our decision making process.

The CCR model maximizes the e$ciency value of a target DMU k, from among a reference set of DMUs s, by selecting the optimal weights associated with the input and output measures. The maximum e$ciencies are constrained to 1. The formulation is represented in expression (2). O v Maximize E " W IW IW II I u V IV IV subject to E )1 DMU s, (2) IQ u , v *0. IV IW This non-linear programming formulation (2) is equivalent to the following linear programming formulation (3): Maximize E " II subject to E )1 DMU s, IQ I u "1, (3) IV IV V u , v *0. IV IW The transformation is completed by constraining the denominator of the objective function from (2) to a value of 1. This is represented by the constraint I u "1. V IV IV The optimal objective function value E* of forII mulation (3) provides the e$ciency of DMU k. If E* "1, then it means that no other DMU is more II e$cient than DMU k for its selected weights. That is, E* "1 has DMU k on the optimal frontier and II is not dominated by any other DMU. If E* (1 II then DMU k does not lie on the optimal frontier and there is at least one other DMU that is more e$cient for the optimal set of weights determined by Eq. (3). Formulation (3) is executed s times, once for each DMU. O v IW IW

3. The CCR model Productivity models have traditionally been used to measure e$ciencies of systems. The CCR model is a fractional programming technique that evaluates the relative e$ciencies of homogeneous decision making units (DMUs) in the presence of multiple input and output measures. For a given DMU, this model maximizes the output-to-input ratio. The CCR model and family of other DEA models have been used primarily to compare the e$ciencies of schools, hospitals, shops, bank branches, airlines, plants, and other areas where there is a relatively homogeneous set of units. Using the notation of Doyle and Green [15], the general e$ciency measure that is used by DEA can best be summarized by Eq. (1). O v E " W QW IW IQ I u V QV IV (1)

where E is the cross-e$ciency of DMU s, using IQ the weights of `targeta DMU k, where the target DMU is the unit whose e$ciency is to be evaluated, O the amount of output y produced by DMU s, QW I the amount for input x used by DMU s, v the QV IW weight assigned to output y by DMU k and u the IV weight assigned to input x by DMU k.

4. The decision framework for VCN design Fig. 1 depicts the phases and decision making process involved in the formation of a VCN. The

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Fig. 1. The framework for VCN design.

decision makers in this framework may be comprised of upper level management and executives acting as brokers. These brokers act as agents in selecting e$cient and compatible partners. For more information on broker-lead dynamic networks, see [6,16]. In the event of an identi"ed market opportunity for a product, and given various environmental factors, the brokers are expected to respond by creating a VCN and delivering the product at low cost, high quality, and small lead times. The stages in Fig. 1 are meant to represent a typical series of development and implementation stages that a VCN would go through. The second stage, which is the focus of this paper, is the analysis and decision stage of VCN formation. After this selection

stage, a set of partners is identi"ed. In the initial steps of the next phase, formalization of the relationships is an immediate goal. The next steps in this process will include some initial start-up operations, ramping up design, production, and pilot studies as necessary; full-#edged operations to actually manufacture the products; and "nally the delivery of the products to the market. Of course, a number of cyclical relationships may exist within the implementation phases as re"nements and incremental improvements are made to the products and processes. Additional issues related to whether new partners are selected and join in the process may depend on product life cycle issues encountered by the product family. The "nal stage, not detailed in the diagram, is dissolution. Some VCN

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characteristics include the relative impermanency of the relationships. The VCN must be prepared to dissolve, and plan to do so, once its market is no longer viable. We shall now detail the decision making process for the analysis and selection of the VCN.

4.1. Initial phase of the analysis and decision process This phase is initiated by the brokers identifying the business processes types required to ful"ll a market need. This step is followed by the identi"cation of potential candidates for each business process type. The input/output (I/O) measures for each business process type are also identi"ed within this stage. These I/O measures should be in alignment with the objectives, goals, policies, and procedures of the VCN. The inputs should encompass any resources utilized by the business processes, and the outputs should include a range of performance and activity measures [17]. Data on all of the identi"ed I/O measures is then collected, and the CCR model is used to evaluate all potential candidates for each process type. Those enterprises identi"ed as e$cient candidates, with a relative e$ciency score of 1, are considered for further analysis. The ine$cient candidates are dropped from further consideration because they are ine!ective even with their best possible weighting scheme. Some of the e$cient candidates identi"ed by the CCR model may not be good overall performers. They may achieve a relative e$ciency score of 1 by indulging in an inappropriate or unrealistic weighting structure. These types of DMUs heavily weigh few inputs and outputs that are most bene"cial to themselves, and completely ignore other inputs and outputs. These types of candidates are determined to be ineligible to participate in a VCN. To aid in the di!erentiation of such candidates from good overall performers, we utilize cross-evaluation measures in our research. Cross-evaluations [18] provide information on how well a candidate is performing with respect to the optimal CCR weights of other candidates of the same process type. The cross-e$ciency is de"ned by expression (1). This information can be e!ec-

tively represented and aggregated into a matrix. An element in the ith row and jth column of such a matrix represents the cross-e$ciency score of candidate j when using the optimal CCR weights of target candidate i. A candidate is considered a good overall performer if it achieves several high e$ciencies along its column in this matrix. The column means can be computed as an index to e!ectively discriminate between good overall performers and poor performers. In addition, there may be ine$cient candidates with relative e$ciency scores close to 1 that did not pass the initial "ltering process. It is advisable to test such borderline candidates in the cross-evaluation process because they may have high column means. If an ine$cient candidate with a high column mean occurs, the decision to drop or include such candidates from further analysis is left to the decision maker. Usually, those candidates that result in high mean cross-e$ciency scores are the ones indulging in good operating practices. These are the types of candidates that are desired when forming a VCN. The CCR model with the cross-evaluations, reduces the complexity of the problem by minimizing the number of combinations that are to be analyzed in the "nal phase of the analysis and decision process, the multi-criteria decision making (MCDM) phase. Also, the candidates considered in the next phase of the analysis are e$cient in an overall sense, i.e., they are indulging in good overall practices, which is a key for participating in a VCN.

4.2. The MCDM phase of the analysis and decision process An integer goal programming model is used to select an e!ective combination of candidates to participate in the formation of a VCN. The combinations identi"ed in the earlier phase are evaluated with respect to compatibility criteria. Some of the compatibility issues addressed in the literature concerning the linkages among the participating business processes are: e!ective communication networks, cultural compatibility, frequent interactions, trust, and goals in alignment with the vision of the enterprise [11,13]. By incorporating some of these factors into the decision making process,

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selection of an e!ective combination of partners is completed, thereby insuring that the participating candidates are e$cient individually and as a group. In this research, we assume that the following goals have been identi"ed by the brokers as important in the formation of the VCN (this is just an exemplary group, other goals may be developed as well). Goal 1: Minimizing the costs associated with the relationship formation. These may be technical hardware and software costs, new equipment costs, new employee costs and other costs associated with the formation of the linkage. Goal 2: Minimizing the distances among the participating candidates. To maximize the frequency of interactions among participants, and in order to respond quickly to the changing needs of the customer, it would be preferable to have the participating candidates geographically close to each other. This goal assists in improving the frequency of interactions and manages in maintaining lower transportation costs. Goal 3: Minimize the inception time of the <CN. The inception time is de"ned as the time taken for a VCN to be operational. To capture the market opportunity at the earliest, it is necessary to have relatively low inception times. Goal 4: Maximize the cultural compatibility among the participating candidates. Culture is one of the most vital ingredients for a successful partnership. It in#uences the behavior, values, and goals of the employees. An empowered work force, Total Quality Management, and concurrency are some of the critical attributes used in evaluating culture [20]. Of the four goals mentioned above, the tangible ones (costs, distances and inception times) can be measured in quantitative units. The intangible one (culture) can be measured on a numerical scale of 1 to 10 units, where 1 and 10 represent low and high cultural compatibility, respectively. Goal programming (GP) was "rst introduced by Charnes and Cooper [21] for evaluating infeasible linear programming problems. The technique has been expanded to deal with a variety of problems in areas such as "nance, marketing, production planning, corporate planning, medicare planning, etc.; for more information on GP, see [19]. Although goal programming re#ects complex reality and allows

for multidimensionality of the objective function, it has some limitations. Primarily, the decision maker must either set priorities to goals, which is di$cult to do, or assign weights to deviations which is usually a subjective exercise. In this model formulation, we propose to determine cardinal relationships among the compatibility criteria by making the assumption of linear relationships among them. Conversion factors can be determined between cost ($) and the remaining three goals; frequency of personal interactions (distance in miles used as a surrogate measure), inception time (days), and cultural compatibility (units). These conversion factors are used as weights in the objective function. The conversion scale between cost ($) and distance (miles) can be identi"ed by estimating the cost incurred in covering a mile of distance. The relationship between cost ($) and inception time (days) can be determined by estimating the cost of lost sales for each day of delay in the inception process. Finally, the association between cost ($) and cultural compatibility (units) can be determined by estimating the costs involved in empowering the work force (training programs) and implementing philosophies such as Total Quality Management (TQM) to achieve a cultural compatibility of 10 (on a scale of 1}10). Although the following binary GP formulation is proposed for three business process types and four goals, it is easily extensible to any number of processes and goals. The combination of enterprises and organizations that minimizes the sum of the weighted deviations from the `besta goal compatibility measure is selected as the VCN. Minimize subject to x "1, GHI c x !v "c , GHI GHI   d x !v "d , GHI GHI    R wv R R

G H I G H I G H I

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139

G H I

t x !v "t , GHI GHI   c x #v "k , GHI GHI  

5. Illustrative example The following example illustrates the decision process involving the formation of a VCN that is considering relationships to form an organization comprised of two processes, a supply process and a manufacturing process. In this example, seven suppliers and seven manufacturers are considered for the analysis. Phase 1 of the analysis identi"es the e$cient suppliers and manufacturers, and Phase 2 selects an e!ective supplier}manufacturer combination. The supplier and manufacturer I/O measures considered in Phase 1 of the analysis are: Supplier inputs 1. Average operating costs/period (AOC) } These are the costs associated with equipment purchasing and maintenance, holding costs, order costs and other operating costs. 2. Number of employees (EMP) } The total number of employees involved in the supply process. Supplier outputs 1. Product quality (PQ) } The quality level of the supplied product expressed as a percentage. 2. On-time deliveries/period (OTD) } The percentage of on-time deliveries by the supplier. Manufacturer inputs 1. Average operating costs/period (AOC) } Costs associated with the manufacturing process such as equipment costs, maintenance costs, order processing costs, holding costs, etc. 2. Number of employees (EMP) } The number of employees involved in the manufacturing process. Manufacturer outputs 1. Product options (PO) } The number of product options provided by the manufacturer. 2. Overall quality level (OQL) } The overall quality level of all the product options expressed as a percentage. 3. Average throughput rate (ATR) } The average number of units produced per unit time.

G H I x "0 or 1, GHI v *0, R where a is the total number of e$cient candidates of business process type A. b is the total number of e$cient candidates of business process type B. c is the total number of e$cient candidates of business process type C. i"1 through a. j"1 through b. k"1 through c. x "1; implies that the combination of ith e$GHI cient candidate of process type A, jth e$cient candidate of process type B and kth e$cient candidate of process type C was selected for the VCN. c is the cost associated with the formation of GHI combination ijk. d is the distance associated with combination GHI ijk. k is the cultural compatibility unit for combiGHI nation ijk. t is the estimated inception time associated GHI with combination ijk. c is the cost bound derived from the minimum  cost combination. d is the distance bound derived from the min  imum distance combination. t is the time bound derived from the minimum  inception time combination. k is the cultural bound derived from the max  imum cultural compatibility combination. w is the weight derived from the conversion R factor for deviations from the goal target t. v is the deviation from the `besta goal compatiR bility measure for the goal target t. The solution to the integer goal programming model identi"es an e!ective combination of e$cient candidates to participate in the formation of a VCN. The two stages of the analysis and decision process, using hypothetical data, is illustrated in the following sections.

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S. Talluri et al. / Int. J. Production Economics 62 (1999) 133 } 144 Table 2 Supplier cross-evaluations S2 Target S2 Target S4 Target S7 Mean score 1.00 1.00 0.87 0.96 S4 0.77 1.00 0.50 0.76 S7 1.00 0.91 1.00 0.97

These inputs and outputs, whose values are shown in Tables 2 and 3, respectively, are not intended to be exhaustive, they simply provide some general measures to consider when evaluating the performance of the supply and manufacturing processes. Other performance measures such as work-in-process (WIP) levels, utilization ratios, and di!erent types of #exibility measures can be incorporated into these models, depending on what performance measures the competitive environment considers the `order winnersa.

5.1. Phase 1 results and discussion Of the seven suppliers considered, the CCR model identi"ed suppliers 2, 4, and 7 to be e$cient with a relative e$ciency score of 1. The relative e$ciency scores of suppliers 1, 3, 5, and 6 are 0.83, 0.73, 0.66, and 0.55, respectively. These suppliers are not considered for further analysis because given the choice of their best possible weighting scheme they exhibited low relative e$ciency scores. These results are shown in Table 1. The relatively e$cient suppliers (2, 4, and 7) are further investigated to examine whether they are good overall performs. The matrix shown in Table 2, indicates that supplier 2 exhibited fairly high cross-e$ciency scores of 1 and 0.87 with the optimal CCR weights of suppliers 4 and 7, respectively. The cross-e$ciency mean score for supplier 2 is 0.96 (column mean). Supplier 7 also

Table 1 Input/output values and relative e$ciency scores of supply organizations Supplier Inputs Outputs Relative e!. ( )

AOC ($) EMP (C) PQ (%) OTD (%) 1 2 3 4 5 6 7 50 000 45 000 60 000 40 000 65 000 80 000 50 000 30 20 35 30 45 40 18 0.95 0.99 1.00 0.95 0.96 0.98 0.98 0.80 0.95 0.75 0.83 0.90 0.90 0.98 0.83 1.00 0.73 1.00 0.66 0.55 1.00

exhibited high e$ciency scores of 1 and 0.91 with the optimal weights of suppliers 2 and 4, respectively. The mean score for supplier 7 is 0.97. Supplier 4 exhibited low e$ciency scores of 0.77 and 0.50 with the optimal weights of suppliers 2 and 7, respectively. The mean score for supplier 4 is 0.76, which is signi"cantly low compared to the mean scores of suppliers 2 and 7. Thus, supplier 4 is a poor overall performer. Consequently, suppliers 2 and 7 are not only considered to be relatively e$cient based on the CCR model results but also as `competitivelya e$cient when compared to other relatively e$cient suppliers. Supplier 4 is dropped out of further analysis, and suppliers 2 and 7 are considered for the next phase of the analysis. Of the seven manufacturers considered, manufacturers 1, 3, 4 and 6, shown in Table 3, were identi"ed by the CCR model to be e$cient with relative e$ciency scores of 1. Manufacturers 2, 5 and 7 were identi"ed to be ine$cient with relative e$ciency scores of 0.69, 0.81, and 0.82, respectively. These manufacturers are not considered for further analysis for the same reason provided in the supplier analysis. The relatively e$cient manufacturers are further analyzed using the cross-evaluations shown in Table 4. It is evident from the matrix that manufacturer 3 exhibited low relative e$ciency scores of 0.71, 0.25, 0.82 with the optimal weights of manufacturers 1, 4, and 6, respectively. Manufacturer 6 also exhibited low relative e$ciency scores of 0.54, 0.77, and 0.40 with the optimal weights of 1, 3, and 4, respectively. The mean cross-e$ciency scores for manufacturers 3 and 6 are 0.69 and 0.68, respectively. These manufacturers are identi"ed as poor overall performers, and are not considered for further analysis. Manufacturer 1 exhibited fairly high relative e$ciency scores of 0.95, 0.71, and 1 with

S. Talluri et al. / Int. J. Production Economics 62 (1999) 133 } 144 Table 3 Input/output values and relative e$ciency scores of manufacturer organizations Manufacturer Inputs AOC ($) 1 2 3 4 5 6 7 90 000 120 000 110 000 95 000 110 000 70 000 84 000 EMP (C) 37 55 35 35 50 43 52 Outputs PO (C) 6 4 2 8 7 4 2 ATR (units/sec) 0.067 0.056 0.045 0.050 0.040 0.042 0.033 OQL (%) 0.99 0.95 0.99 0.97 0.96 0.93 0.92 1.00 0.69 1.00 1.00 0.80 1.00 0.82

141

Relative E!. ( )

Table 4 Manufacturer cross-evaluations M1 Target M1 Target M3 Target M4 Target M6 Mean score 1.00 0.95 0.71 1.00 0.91 M3 0.71 1.00 0.25 0.82 0.69 M4 0.79 0.98 1.00 1.00 0.94 M6 0.54 0.77 0.40 1.00 0.68

Table 5 Supplier}manufacturer combination compatibility criteria Combination Cost ($) 8000 7000 4000 5000 Distance Culture (miles) 500 800 1000 700 8 3 7 6 Time (d) 30 15 22 20

M2}S1 M2}S4 M7}S1 M7}S4

the optimal weights of manufacturers 3, 4, and 6, respectively. Manufacturer 4 also exhibited high relative e$ciency scores of 0.79, 0.98 and 1 with the optimal weights of manufacturers 1, 3, and 6 respectively. The mean cross-e$ciency scores for manufacturers 1 and 4 are 0.914 and 0.943, respectively. These two manufacturers are the ones identi"ed as both relatively e$cient based on the CCR model results and `competitivelya e$cient when compared to other relatively e$cient manufacturers. Based on these results, the combinations S2}M1, S2}M4, S7}M1, and S7}M4 are considered for the next phase, where `Sa stands for supplier and `Ma stands for manufacturer.

combinations resulting from Phase 1. Table 5 shows the hypothetical data on the evaluating criteria used in the model. The integer goal programming model is solved by using the following conversion factors. 5.2.1. Conversion factor between cost ($) and distance (miles) Consider the supplier}manufacturer combination that is 500 miles apart. The cost for covering this distance is assumed to be $200. So the conversion factor between cost and distance is $0.4 per mile per interaction. If the estimated number of interactions during the life of VCN is 20 then the total cost/mile is $8. Thus, deviation v is given  a weight of 8. Because of the highly variable costing structures used in the transportation industry this cost/mile would obviously vary for the four combinations. However, for the purpose of this example we assume this factor to be the same for all four combinations.

5.2. Phase 2 results and discussion This phase identi"es an e!ective supplier} manufacturer combination from the four possible

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5.2.2. Conversion factor between cost ($) and inception time (days) To derive this conversion factor, the expected sales ($) of the VCN must be estimated and this value should be divided by the estimated VCN life span. This ratio provides a dollar "gure of sales per day. For example, assume total sales are estimated to be $180 000 for an estimated VCN life span of 180 days. The ratio provides a conversion factor of $1000/day, which is considered to be the cost of lost sales for every day of delay in the inception process of the VCN. The value 1000 is used as the weight for the deviation v .  5.2.3. Conversion factor between cost ($) and cultural compatibility (units) The cultural compatibility of combinations is given a score of 1}10 based on the values of employees, motivation to partner, and commitment to partnership. The costs associated in achieving a score of 10 units are estimated. These costs include empowering the work force with training programs, implementation of philosophies such as Total Quality Management (TQM) and other projects that improve the cultural compatibility of the participating business processes. For this example, if these costs are assumed to be $20 000 for a score of 10 units. Thus, the conversion factor is $2000 per unit of cultural compatibility. A weight of 2000 is used for the deviation v . Although an extensive  estimation process is required in deriving the conversion factors in a real world problem, they are more objective than some of the other methods utilized in solving GP problems. The integer goal programming problem shown below was solved by using a commercial software package. The conversion factors derived above are used as weights to the deviations in the objective function. Minimize Z"v #8v #1000v #2000v     subject to: x #x #x #x "1,     8000x #7000x #4000x #5000x !v      "4000,

500x #800x #1000x #700x !v "500,      30x #15x #22x #20x !v "15,      8x #3x #7x #6x #v "8,      x "0 or 1,  x "0 or 1,  x "0 or 1,  x "0 or 1,  v , v , v , v *0.     The solution to the above problem was found to be the combination S7}M4. This combination resulted in the minimum value for the objective function (11 600). The basis variables in the solution are x "1, v "1000, v "200, v "5, and v "2.      Thus, Supplier 7 and Manufacturer 4 are selected for participating in the VCN. In addition, post optimality (sensitivity) analysis in Table 6 indicates that the current solution (S7}M4) remains optimal for the following coe$cient ranges of the deviations: 3.34)w )45,  300)w )1760,  733.34)w )3400.  For a value of w greater than 45 the most  e!ective combination can be shown to be S2}M1, and for a value less than 3.34 the combination S7}M1 should be selected. An increase of w over  1760 results in S2}M4 becoming the best combination, and a decrease to below 300 results in S7}M1 becoming the best combination. Likewise, a value of w greater than 3400 results in S7}M1 becoming 
Table 6 Objective function coe$cient ranges in which the basis is unchanged Variable Current coe!. 8 1000 2000 Allowable increase 37 760 1400 Allowable decrease 4.66 700.00 1266.66

v  v  v 

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the most e!ective combination, and a value less than 733.34 results in S2}M4 becoming the best choice. This type of post optimality analysis, allows the decision maker forming the VCN to have a much better feel for the strength of the "nal selection. Also, these ranges indicate as to which of the estimated weights are most sensitive. This information can be used by the decision makers in improving the estimation process, as required.

6. Limitations There are certain concerns that may arise from an actual application of this methodology. One major concern deals with the initial "ltering process. If initial data is "ltered in an optimization procedure, then the solution to the problem may be sub-optimal. This is also true for the proposed analysis. In the initial screening process, some units that are dropped out of the analysis due to ine$ciency may in fact have better compatibility characteristics when analyzed in the subsequent phase. To alleviate the severity of this problem, the borderline candidates could be considered in the cross-evaluations for possible inclusion in Phase 2 of the analysis. The cuto! point for inclusion of these candidates in Phase 2 of the analysis is a subjective decision, which depends on the objectives, policies, and procedures of the VCN. A decision maker must make an astute decision in selecting such a cuto! point. Another issue is that the actual determination of which input and output factors to consider may be a substantially di$cult endeavor. The broker has much responsibility in this area and must be well aware of the market forces and other environmental factors to make sure that factors selected in the evaluation process will meet the objectives of the VCN and the market.

of the VCNs are addressed in this paper. A quantitative model is proposed to aid the decision making process in the formation of an e$cient VCN. The CCR model is utilized to identify the e$cient business processes, and a MCDM model is utilized to select an e!ective combination of the e$cient business processes. Further extensions such as restricting weights in the initial "ltering process can be very e!ective in di!erentiating between good overall performers and poor performers. These weight restrictions must be in alignment with the objectives, policies and procedures of the VCN. To make the initial "ltering process more robust, other I/O measures such as availability of advanced technologies and #exibility of the processes need to be incorporated into the evaluation process. While the analysis in this paper is performed from the standpoint of brokers, it can also be performed from the standpoint of a lead business process. In such a situation, before becoming involved in the formation of a VCN, the lead business process must evaluate its e$ciency relative to other similar business processes and implement process improvement techniques to become e$cient, if necessary. In the formation of the VCNs, there are other issues to be considered such as VCN workers dividing their loyalty and responsibility between this new venture and their parent corporation, which may not be feasible in some types of networks. Also, the possibility of losing con"dential information through the alliance channels is a key deterrent to the e!ectiveness of these VCNs. In spite of all these and other problems, many companies around the world are becoming involved in such networks to capture a speci"c market opportunity. References
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7. Conclusions E$cient VCNs are envisioned as the solution to meet the constantly changing needs of the customer at low cost, high quality, small lead times and high variety. Some of the critical issues in the formation

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