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ASIAN JOURNAL OF MANAGEMENT RESEARCH 452

Understanding the Concept of Elasticity in Supply Chain Relationships: An Agency Theory Perspective Maryam Zomorrodi 1 , Sajad Fayezi 2 1. Independent Researcher, Australia

2. School of Management and Marketing, Deakin University, Australia [email protected]

ABSTRACT

The issue of flexibility in supply chains has been receiving heightened attention by scholars and practitioners especially as business environment becoming more turbulent and uncertain. Notwithstanding, one of the important aspects of flexibility – relationship flexibility – which has the potential to proliferate responsiveness and postpone bifurcation in buyersupplier relationships has not been well understood and researched. Identifying this gap within the literature, this paper proposes a concept of elasticity as an important element of relationship flexibility in supply chains. It is argued that the tolerance threshold of coopering parties in presence of their sudden behaviour change will determine their state of relationship elasticity (i.e. elastic or inelastic). The theoretical development of this paper has been primarily based on review of the literature and insights from agency perspective. It is proposed that relationship governance mechanisms advocated by agency theory has the potential to influence elasticity status of principalagent relationships.

Keywords: Supply Chain Relationships, Relationship Elasticity, Flexibility, Tolerance Threshold, Business Uncertainty, Agency Theory

1. Introduction

As environmental uncertainty increases, organisations strive to cultivate, maintain and develop capabilities required to enhance their responsiveness against changes (Gunasekaran, Lai, & Edwin Cheng, 2008; Sheffi & Rice, 2005; Swafford, Ghosh, & Murthy, 2008). These capabilities such as flexibility need to be envisaged not only within the organisation boundaries but also across its supply chain partners (Stevenson 2007). This is essential as it has been widely acknowledged that today’s competition is among supply chains rather than individual firms (Christopher, 2005). Therefore, supply chain management (SCM) is an important strategy in order to sustain competitiveness of business (Gunasekaran, et al., 2008).

As supply chain entails multiple actors working together in a process of value creation, effective management of relationships among the actors is vital to the success of SCM (Christopher, 2005). In essence, there needs to be harmony among supply chain members – with diverse set of cultures, structures and behaviours – in order for them to achieve the synergistic effect of working together as a team. The importance of relationship within supply chains can also be seen


from the increasing number of publication in this and the relevant areas (see for example Cousins, 2002; Hoyt & Huq, 2000; Richey, Roath, Whipple, & Fawcett, 2010). Particularly, understanding the effect of various supply chain governance mechanisms in the extent of flexibility and agility of buyersupplier relationships is an emerging area of research (e.g. Handfield & Bechtel, 2002).

This paper aims to enhance our understanding of relationship flexibility in supply chain environments. Flexible buyersupplier relationships would be invaluable in times of crisis and when uninterrupted service to customers deemed essential (Braunscheidel & Suresh, 2009). In this regard, a concept of elasticity in buyersupplier relationships has been introduced and explained as an important element of relationship flexibility. Building on the concepts of zones of turbulence (M. Wilson, 2006) and tolerance of conflict (Pettersen & Rokkan, 2006), elasticity is viewed as a level of tolerance threshold of cooperating parties in face of their behaviour fluctuations. Review of the literature was used as a primary method for this investigation. Moreover, this study has utilised insights from agency theory in its theoretical development. So, governance mechanisms discussed within the agency theory have been argued as affecting elasticity state of buyersupplier relationships.

The paper proceeds by discussion around major theoretical tools which are used for the development of the argument. Then, the concept of relationship elasticity is defined and explored. This is followed by integration of the discussed constructs into a conceptual framework. Moreover, two important propositions coming from the conceptual framework are discussed. Finally, limitations and suggestions for future research constitute the conclusion section.

2. Theoretical background

Organisational theories have provided valuable insights into better understanding, explaining and predicting supply chain relationship dynamics (Flynn, Sakakibara, Schroeder, Bates, & Flynn, 1990; Ketchen & Hult, 2007a, 2007b). For instance, transactioncost theory discusses economical considerations in buyersupplier relationships (Grover & Malhotra, 2003) or relationalexchange theory is mainly concerned about relational aspects such as norms (Fontenot & Wilson, 1997). However, agency theory despite its explanatory power (Eisenhardt, 1989; Mitnick, 1973) has been limitedly used by supply chain scholars (for example see Agrell & Norrman, 2004; Mitnick, 1973; Norrman, 2008; Simatupang & Sridharan, 2002). Particularly, governance mechanisms advocated by this theory in relation to the uncertainty caused by dynamic changing environment have not been applied to the study of responsiveness in supply chains. Currently, majority of application of agency theory is limited to the study of risk within the supply chain. This is in contrast with Stock’s (1997) suggestion on the use of agency theory to investigate interorganisational relationships in logistics and supply chain systems (e.g. Halldorsson & SkjottLarsen, 2006; Logan, 2000). Consequently, this paper uses agency theory perspective in developing its argument about governance mechanisms and elasticity in buyer supplier relationships. In the preceding paragraphs agency theory, its governance mechanisms and their implication for studying elasticity in supply chain relationships have been discussed.


2.1 Agency theory

In the past four decades, agency theory has been actively discussed and used across diverse range of disciplines. This theory is relevant for the situations wherein one party (called principal) delegates authority in terms of control and decision making about tasks to another party (called agent) (Eisenhardt, 1989; Mitnick, 1973; Ross, 1973). Agency theory is being used in different disciplines such as economics/finance (e.g. Sappington, 1991), marketing (e.g. Tate, Ellram, Bals, Hartmann, & van der Valk, 2010), information systems (e.g. Mahaney & Lederer, 2003), and management (Eisenhardt, 1985, 1988). Agency theory has also been shown as an appropriate theoretical lens to study SCM issues such as risk (Zsidisin & Ellram, 2003; Zsidisin & Smith, 2005a), incentive alignment (Hornibrook, 2007; Norrman, 2008) and performance management (Nilakant & Rao, 1994; Ritchie & Brindley, 2007).

The key assumptions of agency theory are around human, organisational and informational characteristics. According to Eisenhardt (1989), agency theory assumes that individuals are self interested and risk averse while organisations have partial goal conflict among their members. Moreover, information about the agent is seen as a commodity which can be purchased (Eisenhardt, 1989; Nilakant & Rao, 1994). In light of these assumptions, “...the focus of agency theory is on determining the most efficient contract governing the principalagent relationship...” (Eisenhardt, 1989, p. 58). Therefore, the contract should minimise the agency costs such as specifying, rewarding, and monitoring and policing the agent behaviour (Fleisher, 1991). In this respect, the decision goes to the selection of behaviourbased or outcomebased contracts (or modes of control) for the governance of agency relationship (Nilakant & Rao, 1994). The issue is that which type of contract is most efficient given the relationship between principal and agent is exposed to the factors and variables such as: information balance, goal congruency, risk aversion, task programmability, outcome uncertainty, and relationship length (Eisenhardt, 1989; Zsidisin & Smith, 2005b).

This paper is mainly concerned about uncertainty and governance mechanisms discussed within the agency theory. The authors have explained these mechanisms by incorporating the extant interorganisational and supply chain relationships research. Hereafter, buyersupplier relationships will be referred as principalagent relationships.

2.2 Supply chain relationship governance

Relationships are valuable assets for any organisation (Ford & Berthon, 2002 cited in; Svahn & Westerlund, 2009). This is more intense in case of supply chains as SCM is about “...management of upstream and downstream [relationships] with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole” (Christopher, 2005, p. 5). In essence, The SCM approach promotes effective management of interorganisational relationships across the chain (Christopher, 2005). This is, among others, to enable supply chain members to improve their performance through reducing costs, improving customer satisfaction and eventually obtaining competitive advantage (Mentzer, et al., 2001). Supply chain relationships are as important as information, materials and finances flows (Brindley & Ritchie, 2004). Relationships can even determine the quality and quantity of exchanges between organisations. They can be simple or complex and contingent on factors,


such as, the type of product (commodities), the availability of suppliers and the sophistication of production (investment in productionrelated assets) (Ellram, 1992). Within the literature, several typologies for supply chain relationships can be identified (see Cooper & Gardner, 1993; Golicic, Broyles, & Woodruff, 2003; Lambert, Emmelhainz, & Gardner, 1996; Webster, 1992). According to Mentzer (2004), this has resulted in confusion over the lines of distinction among various types of relationships. However, a common facet among these typologies is recognition of arms length and vertical integration relationships as two ends of relationship spectrum.

Major types of organisational relationships are arms length, partnerships, joint venture and vertical integration (Lambert, et al., 1996; Mentzer, 2004). In past, majority of buyersupplier relationships were arms length or transactional (Hoyt & Huq, 2000). In other words, organisations tend to manage risks associated with transaction uncertainty (e.g. asset specificity, supplier market conditions and risk aversion of organisations) through discrete exchanges (Dyer & Singh, 1998; Chiles & McMackin 1996 cited in Hoyt & Huq, 2000). According to Lambert et al. (1996), arms length relationships entail single or multiple transactions in an environment where trust and commitment has no place.

As M. Wilson (2006, p. 67) has commented, in partnership relationships organisations “... collaborate to various degrees due to commercial and mutuality reasons despite having no equity interest (or at least a passive equity interest) in each other.” In joint venture and vertical integration relationships organisations have some levels of shared ownership (Cooper & Gardner, 1993; Lambert, et al., 1996). As Cooper & Gardner (1993) have mentioned, vertical integration is normally achieved through mergers and acquisitions (M&A) or internal growth. In general, discussions around supply chain relationships are centred upon transactional and partnership relationships (see for example Dwyer, Schurr, & Oh, 1987; Hoyt & Huq, 2000; Whipple, Lynch, & Nyaga, 2010). Transactional relationships are prone to opportunistic behaviours while partnership relationships are prone to collaborative behaviours (Mentzer, 2004; Simatupang & Sridharan, 2002; M. Wilson, 2006). Notably, in order to govern these relationships formal contract is not always sufficient and relational mechanisms might be needed to mitigate risks such as opportunistic behaviours and distrust resulted by formal contracts (Norrman, 2008).

Table 1: Relationship Variables

Variables Authors Trust and commitment (Lambert, et al., 1996), (Fawcett, Magnan, & McCarter, 2008b),

(Barratt, 2004), (Spekman & Carraway, 2006), (Spekman, Kamauff, & Myhr, 1998), (Laeequddin, Sardana, Sahay, Waheed, & Sahay, 2009), (Cooper & Gardner, 1993), (Humphries & Wilding, 2004), (Min, et al., 2005), (Wilding & Humphries, 2006), (Matopoulos, Vlachopoulou, Manthou, & Manos, 2007), (SkjoettLarsen, Thernøe, & Andresen, 2003), (Hoyt & Huq, 2000), (Svensson, 2004)

Risk and reward sharing (Lambert, et al., 1996), (Simatupang & Sridharan, 2002; Simatupang & Sridharan, 2005a), (Barratt, 2004), (Laeequddin, et al., 2009), (Cooper & Gardner, 1993), (Matopoulos, et al., 2007)

Information sharing (Simatupang & Sridharan, 2002; Simatupang & Sridharan, 2005a), (Fawcett, et al., 2008b), (Barratt, 2004), (Cooper & Gardner, 1993), (Min, et al., 2005), (SkjoettLarsen, et al., 2003), (Hoyt & Huq, 2000), (Cannon & Perreault, 1999)

Communication (Lambert, et al., 1996), (Barratt, 2004), (Clements, Dean, & Cohen,


2007), (Humphries & Wilding, 2004), (Min, et al., 2005), (Clements & Wilson, 2009)

Relationshipspecific investment

(Lambert, et al., 1996), (Humphries & Wilding, 2004), (Min, et al., 2005), (SkjoettLarsen, et al., 2003)

Contract type (Lambert, et al., 1996), (Clements, et al., 2007), (SkjoettLarsen, et al., 2003), (Clements & Wilson, 2009)

Conflict resolution and goal congruence

(Simatupang & Sridharan, 2002), (Wilding & Humphries, 2006), (SkjoettLarsen, et al., 2003)

Integrated policies (Simatupang & Sridharan, 2002) Decision synchronization (Simatupang & Sridharan, 2002; Simatupang & Sridharan, 2005a),

(Fawcett, et al., 2008b), (Min et al. 2005) Mutual understanding (Cooper & Gardner 1993), (Min, et al., 2005) Longterm orientation (Spekman, et al., 1998), (Humphries & Wilding, 2004), (Wilding &

Humphries, 2006) Resource and capability sharing

(Barratt, 2004), (Fawcett, et al., 2008b), (Min, et al., 2005)

Power and dependence (Matopoulos, et al., 2007), (SkjoettLarsen, et al., 2003), (Svensson, 2004)

Cooperative norms (SkjoettLarsen, et al., 2003), (Cannon & Perreault, 1999)

As shown in Table 1, several relationship variables have been discussed within the literature. In this study, the authors have considered relational governance in terms of trust, commitment and information sharing. Moreover, contractual governance is seen as a package of risk/reward sharing, relationshipspecific investment and communication between principal and agent.

2.2.1 Relational governance

The underpinning of relational governance is a set of exchanges that form relational behaviour of cooperating parties. Trust, commitment, longterm orientation, mutual understanding, norms and information sharing are among relational exchanges discussed within the supply chain relationships literature (see Table 1). In the relational governance, social contract plays an important role as partners stand by a set of “prescribed standard or rule of conduct held for” their behaviour, i.e. norms (Mitnick, 1973, p. 5). As Arrighetti, Bachmann & Deakin (1997) have suggested, norms can be influential when dynamics of environment do not allow partners to detail all contingencies in their mutual contract. Organisations embracing relational governance mechanisms have longterm orientation to their relationships and better understanding about their cultural context (Spekman, et al., 1998). As mentioned before, we only consider trust, commitment and information sharing as the most often cited characteristics of the relational exchanges (Whipple, et al., 2010).

2.2.1.1 Trust

One of the most important aspects of effective SCM is building and developing trust between cooperating parties (Fawcett, Magnan, & McCarter, 2008a; Lee & Billington, 1992; Svensson, 2004). Trust facilitates collaboration in supply chains (Fawcett, et al., 2008b) and complements nonrelational controls (Sundaramurthy & Lewis, 2003). Furthermore, trust increases reliance of supply chain partners to each other and encourages risk, information and resource sharing among them (Fawcett, et al., 2008b). Some researchers have also pointed that trust is an opposite side of


risk (Laeequddin, et al., 2009; Spekman & Davis, 2004) where trust is implying the positive attitude and risk the negative (Cousins, 2002).

Trust is a multifacet construct which though much emphasised in the relationship literature but has not been well defined and operationalised (Cousins, 2002; Svensson, 2004). Dyer & Nobeoka (2000) state that “predictable behaviour and fair dealing” are main premises of trusting relationships. Moreover, Morgan & Hunt (1994, p. 23) consider trust as having confidence in cooperating party’s reliability and integrity. Sako (1991) argues that contractual, goodwill and competence trust can explain trusting relationship between buyer and seller. Some other definitions of trust can be seen in the following Table (Table 2).

Table 2: Definitions of Trust

Definition Authors "a generalized expectancy held by an individual that the word of another... can be relied on."

(Rotter, 1967, p. 651)

“the belief that a partner’s word or premise is reliable and a party will fulfil his/her obligations in the relationship.”

(Schurr & Ozanne, 1985, p. 940)

"the firm's belief that another company will perform actions that will result in positive outcomes for the firm as well as not take unexpected actions that result in negative outcomes."

(Anderson & Narus, 1990, p. 45)

“...a willingness to rely on an exchange partner in whom one has confidence.”

(Moorman, Deshpandé, & Zaltman, 1993, p. 82)

Trust has been conceptualised differently depending upon the context of studies it has been utilised. For instance, Swan, Trawick & Silva (1985) have studied trust in the relationship between industrial salespeople and customer. Their study has shown that customers will trust salespeople when they found them dependable, honest, competent, customeroriented and likable. Moreover, Wong & Sohal (2002) have investigated the impact of trust and commitment on salespersonstore relationship quality using similar measures such as reliability, honesty, responsibility and confidence. Therefore, this study considers trust as an important element of relational governance in supply chains.

2.2.1.2 Commitment

Commitment is a crucial aspect of exchange relationships that ensures relational continuity of cooperating parties (Dwyer, et al., 1987, p. 19). Within the literature, researchers have tendency to discus commitment in conjunction with trust. In this regard, D. Wilson (1995) remarked that commitment results from trusting relationship. Moreover, Morgan & Hunt (1994, p. 23) have commented that “...cooperation arises directly from both relationship commitment and trust”. Kwon & Suh (2004, p. 7) have also pointed out that “unless trust is translated into actionable commitment, no measurable economic gains would be attained from supply chain management”. Further to these remarks, Kwon & Suh (2004) found that there is a significant positive relationship between level of trust and degree of commitment between supply chain partners.


Clements, Dean & Cohen (2007) have maintained that perceptions to the commitment construct are very contextdriven. Generally, commitment between exchange partners manifests when one party believes “...that an ongoing relationship with another is so important as to warrant maximum efforts at maintaining it; that is, the committed party believes the relationship endures indefinitely” (Morgan & Hunt, 1994, p. 23). When supply chain partners are committed to each other, they will provide all necessary resources to show their loyalty to continuation of their relationship (Kumar, 1996; Cann, 1998 cited in Clements, et al., 2007; Fontenot & Wilson, 1997). Therefore, trust and commitment which constitute relational behaviour act as glue that hold collaborating parties together by creating social ties among them. Hence, establishment and maintenance of commitment is an integral part of any relational governance efforts.

2.2.1.3 Information sharing

Information sharing is an oftcited attribute of partnership relationships (see Table 1). When organisations share their knowledge about current state of affairs – with respect to demand, order and inventory – they would be in far better position to harmonise their service and activities (Simatupang & Sridharan, 2002). In essence, relational governance is heavily depended on the mutual exchange of sensitive information among trading partners (Norrman, 2008). However, selfinterest attitude of many organisations stops them from sharing these information as they become anxious about the opportunistic behaviour of their partners (Simatupang & Sridharan, 2002). Apart from benefits of information sharing at the operational level, sharing information at the tactical and strategic levels could also contribute to supply chain managers’ better understanding of the extended supply chain as well as mitigating uncertainly within and between organisations (Simatupang & Sridharan, 2002).

However, information sharing is not only about willingness to share critical information but also connectivity among trading partners (Fawcett, Osterhaus, Magnan, Brau, & McCarter, 2007). Therefore, technology that can facilitate information sharing among organisations is important in any collaborative initiatives. Majority of collaborationbased initiatives such as efficient consumer response (ECR) or vendormanaged inventory (VMI) are based on the premise that an integrated technology for information sharing can improve performance. This is what Barratt & Oke (2007) have empirically shown that is information sharing leads to better supply chain performance through enhancing its visibility.

2.2.2 Contractual governance

Agency theory postulates that organisations are selfinterested and risk averse (Eisenhardt, 1989). Consequently, they will behave and act in a way that is more of benefit to their own welfare (Eisenhardt, 1989). However, effective SCM require congruent interests amongst cooperating parties (Simatupang & Sridharan, 2002). In this regard, many researchers have maintained that contractual control is an important mechanism in order to reduce the opportunistic behaviour of supply chain partners especially in an uncertain environment (T. K. Das & Teng, 1998; Parkhe, 1993; Provan & Skinner, 1989). Basically, when organisations undertake contractual mechanisms their primary intention is the bottomline (Celly & Frazier, 1996; Zsidisin & Ellram, 2003). Aligning incentives between organisation and investing in relationshipspecific activities


are among important contractual governance mechanisms that can moderate the opportunistic behaviour of organisations (Hornibrook, 2007).

2.2.2.1 Risk and reward sharing

As Lambert et al. (1996) have commented, both risks and rewards must be shared in order to achieve a sustainable partnership relationship. Sharing both risks and benefits can reinforce the practices of information sharing and joint decisionmaking as organisations become motivated to align their internal affairs with those needed for mutual objective achievement (Simatupang & Sridharan, 2005a, 2005b). Furthermore, appropriate incentive alignment systems can help buyers to discipline their suppliers’ behaviour and mitigate their potential opportunism (Eisenhardt, 1989; Nilakant & Rao, 1994). The incentive systems can be based on performance or effort of the partners (Simatupang & Sridharan, 2005b).

An important issue with regard to the incentive alignment is about its fairness and stimulating power (Simatupang & Sridharan, 2005b). Fairness deals with equitable distribution of benefits of collaboration between partners. Moreover, effective incentive systems must stimulate the innate desire of partners to align their internal decision with shared objectives such as total profit improvement (Simatupang & Sridharan, 2005b). Provision of risk and reward sharing can be made through both contractual and social relationships (Norrman, 2008).

2.2.2.2 Relationshipspecific investment

Collaborative relationships of supply chain partners can be strengthened and supported by means of financial or nonfinancial investments related to their specific relationship (Humphries & Wilding, 2004; Lambert, et al., 1996; Min, et al., 2005). These investments are the “non retrievable commitment of a firm’s resources to joint investments that will have joint worth, but only while the relationship continues” (M. Wilson, 2006, p. 118). Relationshipspecific investments can be in different forms (e.g. time, people, money, training and technology) (Min, et al., 2005; M. Wilson, 2006) and have the potential to provide social and economical ties for cooperating parties.

There is an important concern about this type of risk behaviour in collaborative relationships. This is about potential opportunistic behaviour of the party that has less invested (M. Wilson, 2006). This again goes back to the risk behaviour of partners which can be altered through aligning incentives and developing trust. In collaborative relationships partners are willing to ignore shortterm benefits for the sake of longterm payoffs (Stump & Heide, 1996 cited in M. Wilson, 2006). Risk behaviours such as relationshipspecific investment and incentive alignment can help collaborating parties to increase their levels of risk threshold. This also helps partners to keep up their relationships commitment as they are enjoying both social and economical balance.

3. Relationship elasticity

Managing relationships across the supply chain is a critical facet for cultivating flexibility, agility and visibility in supply chains (Fayezi, Zutshi, & O'Loughlin, 2010). Disciplines such as strategic management and relationship marketing have provided valuable insights into the


understanding of supply chain relationships (see for example Donaldson & O’Toole, 2000; Dwyer, et al., 1987; Fontenot & Wilson, 1997; Heide, 1994; Whipple, et al., 2010). However, there is still need to explore other dynamics of exchange relationships such as elasticity. Relationship elasticity can be considered as an important concept for managing harmony and enhancing flexibility of supply chains (S. K. Das & AbdelMalek, 2003). Supply chains are replete with principalagent relationships (Ketchen & Hult, 2007a), hence understanding the elasticity of these dyads can provide a good indication of the total supply chain elasticity.

Flexibility is a multidimensional construct and can be considered at shop floor, plant, firm and network levels across firm and its immediate suppliers and customers (Stevenson & Spring, 2007). Slack (1983, p. 8) defined flexibility as “the range of states a system can adopt, the cost of moving from one state to another, and the time which is necessary to move from one state to another”. Supply chain flexibility provides the ability for firms to adjust their speed and adapt to changes in a quick manner (Duclos, Vokurka, & Lummus, 2003; Swafford, Ghosh, & Murthy, 2006). Within the literature, flexibility in areas such as sourcing, product development, delivery, production and relationship discussed as critical to the responsiveness of the supply chain (S. K. Das & AbdelMalek, 2003; Pujawan, 2004; Zhang, Vonderembse, & Lim, 2002). As noted earlier, this latter type of flexibility – relationship – is of main concern in our study.

Within the SCM literature, the concept of relationship elasticity has been poorly understood. Perhaps, a major speculation in this regard is the proximity of other concepts to the elasticity that has hindered attention of scholars around its theoretical discussion and development. For instance, resilience (Christopher & Peck, 2004; Hoyt & Huq, 2000) and tolerance (Pettersen & Rokkan, 2006; M. Wilson, 2006) have been partially addressed in relation to buyersupplier exchange relationships. Although Das & AbdelMalek (2003) have modelled elasticity of buyer supplier relationships in terms of procurement price fluctuations in varying supply condition but their view to elasticity is too narrow. However, theoretical discussion of M. Wilson (2006) about the zones of tolerance in exchange relationships can provide good foundation to the articulation of relationship elasticity concept in its broader sense.

M. Wilson (2006) has conceptualised the zones of tolerance employing chaos theory perspective. He also discussed about system changes and the need for adaptation in order to mitigate the probability of relationship bifurcation occurrence. In addition, Pettersen & Rokkan (2006) have specifically investigated tolerance of conflict in crossnational buyersupplier relationships. They have defined the tolerance of conflict as “the intention to discontinue the business relationships with the current partner given conflict situations” (Pettersen & Rokkan, 2006, p. 214). This study underlines the role of cultural knowledge, cultural adaptation and communication as a means of increasing buyer’s tolerance of conflict. Considering these studies, it is the authors’ contention that elasticity of principalagent relationships can be better understood by looking at the principal (or the agent) tolerance threshold in exchange relationships under uncertainty and turbulence conditions.


a) Elastic Relationships b) Inelastic Relationships

Figure 1: Relationship Elasticity Source: Adapted from (M. Wilson, 2006)

Therefore, drawing on the meaning of elasticity in economic theory and the concepts of zones of turbulence and tolerance of conflict the authors have defined relationship elasticity in supply chains. The principalagent relationship is elastic (see Figure 1.a) when agent’s (principal’s) relationship response to changes in principal (agent) behaviour is less severe, that is, the threshold level of agent’s (principal’s) tolerance is high and less sensitive to the principal’s (agent’s) behavioural variations. Contrary, in inelastic relationships (see Figure 1.b) the threshold level of agent’s (principal’s) tolerance is low hence changes in behaviour of the principal (agent) might cause severe relationship response from the agent (principal). In this definition behaviour variations have been seen as negative and undesirable changes for the principal or agent to accept and adapt with. For example, in an inelastic principalagent relationship, sudden changes in a quantity demanded by principal – which could be due to demand surge – can be counteracted by severe negative relationship response from the agent such as relationship relegation or even dissolution (Vaaland et al., 2004 cited in Pettersen & Rokkan, 2006). As such, the level of relationship elasticity might be seen as a measure for assessing vulnerability of supply chains (Ritchie, Brindley, & Armstrong, 2008; Svensson, 2004).

It is important to note that behaviour changes might also be towards a positive direction. In this case, for instance, the loyalty of one partner in hard moments can significantly increase the threshold level of the other partner’s tolerance and even move the relationship into a more intimate level. Furthermore, It is important to consider principalagent relationship level and development stage in relation to its elasticity (for more information see Clements, et al., 2007; Lambert, et al., 1996). In this context, for example, D. Wilson (1995) proposed an integrated framework of relationship variables and development stages to emphasis the changing role of relationship variables along different stages of relationship development. Similar sentiments can be hypothesised for the relationship elasticity.

Relationship Level

Relationship Duration

Transactional

Partn

ership

Tolerance Threshold

Relationship Level


Transactional

Partn

ership

Tolerance Threshold


Figure 2: Relationship Elasticity Matrix

Figure 2 provides an initial classification for exchange relationship from the elasticity perspective. Four types of exchange relationships are proposed: transactional, competitive, forced and partnership relationships. In essence, the new element of elasticity gives new insights into the understanding of oftdiscussed transactional and partnership relationships. It is shown that transactional exchange relationships have the inelastic attribute in addition to other attributes such as opportunism, selfinterest and shortduration (Dwyer, et al., 1987; Hoyt & Huq, 2000). In the same vein, partnership relationships are considered as more elastic in addition to their longevity, trust, commitment and interdependence aspects (Simatupang & Sridharan, 2002; Wilding & Humphries, 2006).

Moreover, competitive exchange relationship refers to those principalagent relationships wherein collaboration and competition exists simultaneously, for instance, when two principals that are being served by a unique agent (e.g. latent networks) (Cheng & Kam, 2008). Finally, forced exchange relationships points toward assetspecific relationships in which one party has higher level of dependency to its partner and hence exposed to forced elasticity. In each of these four relationships elasticity has different levels either from the principal or agent perspective. This implies dynamic nature of tolerance threshold of cooperating parties along the relationship continuum. Therefore, it is important that future investigations around antecedents and consequences of elasticity be concentrated on various types of relationships.

4. Conceptual framework

The preceding sections were devoted to theoretical discussion on the relational/contractual governance and the relationship elasticity in supply chains. Integrating these constructs, this paper suggests that supply chain governance mechanisms are among important factors that affect the relationship elasticity (whether it is elastic, inelastic on even semielastic) of the supply chains partners. This is illustrated in a conceptual framework for relationship elasticity management within supply chains (see Figure 3). Specifically, elasticity of principalagent relationships is proposed to be affected by relational and contractual governance mechanisms. As mentioned before, the authors have considered relational governance as behaviourbased management techniques that are predominantly based on trust, commitment and information sharing between cooperating parties. However, in contractual governance the focus is mainly on

Competitive Partnership

Transactional Forced

Inelastic Elastic

Short

Long



the bottomline hence cooperating parties are largely concerned about economic aspects of relationship (distribution of risk/reward) and their interdependency level (relationshipspecific investment).

Figure 3: Conceptual Framework

As indicated earlier, the authors see elasticity in relation to supply chain flexibility. It is argued that elasticity is a function of the tolerance threshold of principal and agent in relationship with each other and can be identified based on their relationship responsebehaviour change interactions. When uncertainty and turbulence increases, flexible supply chains have more capacity to absorb the potential changes (Stevenson & Spring, 2007). It is argued that the concept of elasticity can better explain the relationship flexibility state of coopering parties with respect to their unexpected and sudden behaviour changes. Therefore, managing relationship elasticity is critical to the responsiveness of the supply chains. In this context, the authors have proposed that:

P.1: Relational governance mechanisms based on trust, commitment and information sharing significantly influence the relationship elasticity of cooperating parties.

P.2: Contractual governance mechanisms based on risk/reward sharing and relationship specific investment significantly influence the relationship elasticity of cooperating parties.

As discussed before, agency theory advocates relational (noncontractual) and contractual mechanisms in order to align incentives and goals between principal and its agent. The argument developed in this paper and specifically the propositions set out above leverages the impact of governance mechanisms into elasticity of principalagent relationships. As the focus of agency theory is on efficiency in relationships, hence alignment of governance mechanisms with elasticity situation of the principalagent relationship could contribute to agency cost reduction. This theoretical debate is subject to empirical validation by future research.

Relational Governance

Contractual Governance

Relationship Elasticity

P1

P2

Trust

Commitment

Information Sharing

Risk/Reward Sharing

Relationship Investment

Relationship Response

Behaviour Change

Tolerance Threshold


5. Conclusion

This paper introduced and explained the concept of relationship elasticity as an import dimension of relationship flexibility in supply chains. In doing so, the authors have reviewed the literature in supply chain relationships, supply chain flexibility and relationship marketing and employed agency theory as the theoretical lens. The authors have also defined relationship elasticity by integrating insights from the economic theory and concepts such as zones of tolerance (M. Wilson, 2006) and tolerance of conflict (Pettersen & Rokkan, 2006).

It is suggested that relationship elasticity as an emerging concept within SCM research needs to be further investigated. This study can be considered as an early effort to explore, define and emphasise the importance of this concept. The authors have also taken one step further and proposed the governance mechanisms (relational/contractual) suggested by agency theory as potential means of managing relationship elasticity within supply chains (see Figure 3). In addition, the relationship elasticity matrix (see Figure 2) has been theorised. This matrix offers a new angle to exchange relationship taxonomies from both the elasticity and longevity viewpoints. Based on this matrix, two types of relationship elasticity have also been suggested and explained, i.e. competitive and forced elasticity.

There are still many more questions around the concept of relationship elasticity that need to be answered. For instance, what other factors (e.g. agent’s characteristics) impact elasticity of principalagent relationships?; what is the pathway to transit from one type of elasticity to another one?; and, how can we quantify relationship elasticity? Addressing these questions can provide invaluable insights into the understanding of relationship flexibility in supply chains. It is evident that there is need for future empirical research in different supply chain environments in order to contribute to the theory of relationship elasticity, its antecedents as well as outcomes.

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Biographical Notes

1. Mrs. Maryam Zomorrodi is an Industrial Engineer and had received her MBA from Multimedia University. Presently she is working as an independent researcher on areas such as supply chain risk management, green supply chain and healthcare governance. She can be reached at [email protected]

2. Mr. Sajad Fayezi is an Industrial Engineer and had received his MBA from Multimedia University. Presently he is pursuing his PhD studies at Deakin University, Melbourne, Australia. Mr. Fayezi’s research interest are but not limited to SCM, SC flexibility/agility and interorganisational relationships. He is the corresponding author and can be reached at [email protected]

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