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Cross-Functional Alignment in Supply Chain Planning Essay

Cross-Functional Alignment in Supply Chain Planning: A Case Study of Sales and Operations Planning Abstract In most organizations, supply chain planning is a cross-functional effort. Functional areas such as sales, marketing, finance, and operations traditionally specialize in portions of the planning activities, which results in conflicts over expectations, preferences, and priorities. We report findings from a detailed case analysis of a successful supply chain planning process. In contrast to traditional research on this area, which focuses on incentives, responsibilities, and structures, we adopt a process perspective and find that integration was achieved despite an incentive landscape that did not support it.

By drawing a distinction between the incentive landscape and the planning process, we identify process as an additional mediator beyond the incentive landscape that can affect organizational outcomes. Thus, organizations may be capable of integration while different functions retain different incentives to maintain focus on their stakeholders’ needs. Through iterative coding, we identified the requisite attributes of the planning process that drive planning performance—informational, procedural, and alignment quality— but hypothesize that achieving alignment in the execution of plans can be more important than informational and procedural quality. In addition to process attributes, we also identify social elements that influenced the performance of the planning process and place the information processing attributes within a broader social and organizational context. Keywords: Operations interface, sales and operations planning, supply chain planning, case study.

Introduction In most organizations, supply chain planning—the administration of supply-facing and demand-facing activities to minimize mismatches and thus create and capture value—is a cross-functional effort. In most cases, this means that each functional area, such as sales, marketing, finance, and operations, tends to specialize in its own portion of the planning activities. Such specialization is notorious for generating conflicts over differing expectations, preferences, and priorities with respect to how the matching of demand and supply should be accomplished (Shapiro, 1977). The reconciliation of these conflicts is generally referred to as coordination.

Coordination in the operations management literatures generally assumes some agreement in the assessment of the firm’s environment and on the options available for an organizational response: the challenge centers on the details of the organizational response. But supply chain planning requires something more: cross-functional collaboration to assess the state of the supply chain and the needs of the organization and then to determine an approach for creating and sustaining value based on that collaborative assessment. In other words, beyond coordination, organizations must define the problem, ascertain the options available for dealing with the problem, and create an agreeable solution with collaboration across differentiated functions.

Such an approach usually involves detailed evaluations, planning, and execution at the strategic, operational, and tactical levels (Anthony, 1965). Both the operations management and organizational behavior literatures refer to this type of collaboration as integration (Barratt, 2004; Ellinger, 2000; Griffin and Hauser, 1996; Kahn, 1996; Kahn and Mentzer, 1998; Lawrence and Lorsch, 1986). With increased competition and globalization creating new opportunities and challenges for supply chain planning (Raman and Watson, 2004) and fostering further differentiation within the organization, it is clear that firms will struggle even more with supply chain integration as they attempt to manage and respond to the increasing complexity of markets, suppliers, and investors.

We expect this type of integration in supply chain planning in a highly differentiated organization to require quite a broad and explicit cross-functional reach. Although particular cross-functional interfaces have been developed—e.g., marketing and logistics (Ellinger, 2000; Stank, Daugherty, and Ellinger, 1999), and purchasing and manufacturing (Fawcett and Magnan, 2002)—very few organizations have achieved the broader-reaching integration that consistently develops multi-functional plans that are executed in a coordinated fashion (Barratt, 2004; Fawcett and Magnan, 2002). While researchers have partially addressed the roles and infrastructure required for integration, most of their proposals result from attempts to address coordination (e.g., Celikbas, Shanthikumar, and Swaminathan, 1999; Chen, 2005; Porteus and Whang, 1991) or from organizational-level analysis across firms (e.g., Lawrence and Lorsch, 1986; O’Leary-Kelly and Flores, 2002).

Furthermore, very little empirical research has been done on functioning integration approaches (Malhotra and Sharma, 2002) and a detailed understanding of interdepartmental integration based on micro-level data has yet to be established (Griffin and Hauser, 1996; Kahn, 1996; Kahn and Mentzer, 1998). Therefore, a comprehensive understanding of cross-functional integration is lacking in the literature (Pagell, 2004). Given the lack of detailed frameworks for cross-functional integration, we decided to use case-based research to explore how a functionally-differentiated organization could achieve such integration for supply chain planning. We identified a highly differentiated organization with a successful supply chain planning process and used grounded theory development to identify the key drivers of successful cross-functional integration.

As we mapped the incentive landscape, we found a typical collection of different incentives and orientations motivating the different functional groups. What was interesting about our case study site is that such an incentive landscape would typically generate misalignment in planning and execution—and so it had, until the firm implemented a new supply chain planning process. That process resulted in significantly improved performance despite little change in the organizational incentive landscape. Since the locus of the intervention to improve planning performance in our research site was the creation of a new planning process, we adopted a process perspective—focusing on the sequence of activities that encodes an operational logic creating value within the organization—to make sense of our data.

Through iterative coding, we identified the attributes of the planning process that drive planning performance. The constructs resulting from this analysis—informational, procedural, and alignment quality— share some characteristics with distinctions made in decision making and information-processing theories (Daft and Lengel, 1986; Galbraith, 1973; MacKenzie, 1984; Simon and Newell, 1972). In addition to process attributes, we also identify social elements that influenced the performance of the planning process and place the information-processing attributes within a broader social and organizational context. The rest of the paper is structured as follows: In Section 2, we review the relevant literature and provide motivation for our research.

In Section 3, we describe our research site and methodology. In Section 4, we describe the supply chain planning process that was implemented at our research site, the organizational and structural changes that accompanied its implementation, and summarize the performance improvement resulting from the implementation. The analysis of the implemented process is presented in two stages. First, in Section 5, we identify the drivers of integration by exploring the process attributed that supported effective integration. Then, in Section 6, we locate the quality of the planning process within other behavioral dynamics that contribute to overall performance. We conclude (§7), by discussing the implications of our findings for practitioners and researchers interested in supply chain integration.

Literature Review Most operations management research on coordination across supply chains and within organizations takes its cue from the economics literature, which explores coordination in terms of how incentives, information flows, and hierarchy affect the allocation of resources (see for example Cachon, 2003; Lariviere, 1999). This approach assumes target or optimal system objectives to which allocation decisions should be aligned. Lack of coordination occurs when decentralized decision makers have incomplete information or conflicting incentives. Much research concerns how actors should be compensated, given the informational and hierarchical structure (see Eliashberg and Steinberg, 1993; Sahin and Robinson, 2002; Whang, 1995, for surveys).

Coordination mechanisms for internal alignment include accounting-based cost schemes (Celikbas et al., 1999; Porteus, 2000; Watson and Zheng, 2005), improved contract design (Chen, 2005; Gonik, 1978; Li and Atkins, 2002), decision making hierarchies such as first-movers (Kraiselburd and Watson, 2007; Li and Atkins, 2002), and internal markets (Kouvelis and Lariviere, 2000). Many researchers, however, observe that only in theory would an incentive-compatible scheme or an information scheme induce the actors to implement system-wide optimal behavior (Chen, 1999; Porteus, 2000; Watson and Zheng, 2005). In practice, operations managers are limited by their decision making capabilities and may commit errors in their replenishment decisions (see Croson, Donohue, Katok, and Sterman, 2005; Sterman, 1989, for evidence of poor replenishment decision-making performance even under conditions of reduced complexity).

To address these limitations, the recommended coordination mechanisms are broadened to include better information-sharing among functional decision makers (Dougherty, 1992; Shapiro, 1977; Van Dierdonck and Miller, 1980), such as the use of enterprise information systems (AlMashari, Al-Mudimigh, and Zairi, 2003); assessment of the cognitive burden imposed by the evaluation and incentive systems (Kouvelis and Lariviere, 2000; Porteus, 2000; Watson and Zheng, 2005); support for complex decision making, whether from quantitative models (Yano and Gilbert, 2003) or decision-support systems (Crittenden, Gardiner, and Stam, 1993); and outsourcing planning to competent third parties (Troyer, Smith, Marshall, Yaniv, Tayur, Barkman, Kaya, and Liu, 2005). Within the operations management literature, we find little attention paid to the process for coordination.

Even when the above recommendations are considered to have some implications for the process dimension, they are usually only directionally suggestive, rather than appropriately prescriptive, with respect to process. So, while researchers have addressed some potential requirements for integration, most of their proposals result from attempts to address coordination. Furthermore, with very little empirical research done on functioning organizational or supply chain planning integration approaches (Malhotra and Sharma, 2002), a detailed understanding of interdepartmental integration based on micro-level data has yet to be established (Griffin and Hauser, 1996; Kahn, 1996; Kahn and Mentzer, 1998).

Within the organizational behavior literature, the focus on general integration within firms has a longer and better-established tradition, which more explicitly incorporates the behavioral dynamics of the key actors. Classic research suggests that the effort required to achieve integration increases with the level of differentiation in the organizational environment (Galbraith, 1977; Lawrence and Lorsch, 1986; Lorsch and Allen, 1973; Thompson, 1967), differentiation being defined as “differences in the cognitive and emotional orientation of managers in different functional departments” (Lawrence and Lorsch, 1986, p. 11). Differences amongst various functions’ cognitive and emotional orientations—not only their goals and incentives but also their perspectives on time and relationships—create short-term conflicts and deemphasize long-term organizational goals.

The organizational behavior research on integration has concentrated on the responsibilities and structures supporting integration. Here, “responsibilities” refers to the distribution of decision rights among participants in the collaborative effort. Lawrence and Lorsch (1986), for example, recommend for highlydifferentiated settings the role of integrators for coordinating functional efforts. These integrators act as translators, mediators, and integrative goal-setters, helping guide the various functions, which have differing cognitive and emotional perspectives, into collective efforts (Brown and Duguid, 1991; Hargadon and Sutton, 1997; Orlikowski, Yates, Okamura, and Fujimoto, 1995; Yanow, 2000).

“Structures,” in this literature, refers to the accompanying formal (and social) systematic arrangements, relationships, and infrastructure that regulate the interaction among the participants in the collaboration effort. Examples of structural recommendations include the formation of work groups (Galbraith, 1977) and the use of boundary objects (Carlile, 2002; Star, 1989). This literature, however, also pays little attention to the process perspective. Even in the case of work groups or groups whose identities are conceivably based on what they do and how they interact, more attention is focused on the fact that they act and interact than on how they act and interact (Brown and Duguid, 2001). In both the operations management and the organizational behavior literatures, therefore, process is one of the lesser-understood components of integration.

For the organizational behavior literature, with its broad organizational overview, the lack of focus on this context- and operations-specific dimension is expected. Although processes are a touchstone of the operations management community, recommendations for coordination have favored quantitative modeling—the discipline’s dominant research approach—with very little empirical research done on functioning supply chain planning integration approaches (Holweg and Pil, 2008; Malhotra and Sharma, 2002; Pagell, 2004). 2.1. A Process Perspective on Integration By process, we mean a sequence and interdependency of activities designed to achieve a goal.

Processes systematize and standardize certain organizational learning at the micro-level of particular decisions and actions—and reap the benefits of that learning—in ways that are not easily matched by approaches based on responsibilities and structure or by contracting or market-based interventions (Cyert and March, 1963; Nelson and Winter, 1982). Thus, a process perspective could complement the macro-level focus of the approaches from the organizational behavior and operations management literatures. This complementarity could materialize in scenarios where all approaches, including the process approach, are directly supportive of integration. However, given process’s potential intermediate position between, on one hand, the macrolevel interventions explanations and, on the other, organizational performance, it could also act as a modifier of the effects of these macro-level interventions on performance.

Therefore, we expect that the process perspective can shed some much-needed light on the challenges of functional integration in supply chain planning and, in so doing, extend the focus in supply chain management from coordination to integration, which for many practitioners more closely represents the challenges they face. Our expectations have their precedent in the operations management literature and we are not the first to affirm a process perspective in this way. It is arguable that a focus on the effect of process on the integration of R&D and manufacturing in the new product development literature has revolutionized both the academic field and practice (Wheelwright and Clark, 1992). A focus on processes and their implications for organizational design has already been recommended in the information technology literature. Malone and Crowston (1994; 1999) emphasize the management of interdependencies among resources and activities and seek to develop a coordination theory by characterizing various kinds of interdependencies and identifying the mechanisms that can be used to manage them. That perspective does not, however, capture the traditional focus on the actors and their natural differentiation seen in the work of organizational theorists (e.g., Lawrence and Lorsch, 1986; Thompson, 1967).

The collaborative planning processes we examine in our case study are referred to in the practitioner literature as sales and operations planning (S&OP) processes (Bower, 2005; Lapide, 2004; 2005). Among the primary roles of S&OP processes is to facilitate master planning, demand planning, and the flow of information between them. Master planning is primarily concerned with the coordination of the supply side of the organization and seeks the most efficient way to fulfill demand forecasts over the medium term (Stadtler, 2005), facilitating finer levels of planning such as purchasing and materials requirements, production, and distribution planning. Demand planning is concerned with the customer-facing side of the organization, predicting future demand from scheduled customer orders or extrapolating demand from prevailing market conditions or from the demand-influencing activities (e.g., promotions and new product launches) of the organization or its competitors.

A basic S&OP process facilitates the transfer of information from demand planning to master planning. Practitioners and academics alike argue that this transfer process can move beyond the superficial synchronization of master and demand planning to sophisticated joint planning (Chen, Chen, and Leu, 2006; Lapide, 2005; Van Landeghem and Vanmaele, 2002). The fact that little empirical micro-level data exists for supporting the development of a process perspective on supply chain planning sets the expectation that, at least initially, such a perspective should be based on empirical studies such as ours.

Furthermore, processes such as the S&OP process, which are the objects of ongoing research speculation on their potential integrative capabilities but are also practitionerinspired, make good candidates for empirical observation and analysis. Finally, given that the organizational behavior literature possesses a richer and longer tradition of focus on integration than does the operations management literature, there is also an expectation that the process perspective may need to draw on theory from both disciplines.

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