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Existence and Extent of Operations and Supply Management
Departmental Thought Worlds: An Empirical Study

Journal: Journal of Supply Chain Management
Manuscript ID: 13-07-3652.R3
Wiley - Manuscript type: Original Article
Keywords:
Behavioral Supply Management, Human Judgment and Decision Making,
Inventory Management (Inventory Systems)
Research and Statistical
Methods:
Case Studies, Structured Interviewing, Qualitative Data Analysis

Journal of Supply Chain Management
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EXISTENCE AND EXTENT OF OPERATIONS AND SUPPLY MANAGEMENT
DEPARTMENTAL THOUGHT WORLDS: AN EMPIRICAL STUDY

Abstract

Operations and supply chain management (OSM) solutions typically assume that the decision-
makers in different organizational roles know the key supply chain parameters equally well. Our
research questions this assumption by employing two detailed case studies. Study 1 develops the
OSM departmental thought worlds (DTW) construct and examines how and why they occur, with
reference to supply chain breakdown. Study 2 measures the extent of OSM DTW with reference
to total cost of ownership (TCO) of bought parts. We find that organizational roles indeed shape
perceptions of the task environment, and these perceptions follow a predictable pattern. An
insight into this influence of DTW is essential for OSM tools to work in practice. In particular,
model-based approaches must consider that even if different departments agree on the objective
function, the parameter values may differ across departments, leading to divergent solutions.

Keywords: behavioral supply management; case studies; departmental thought worlds; human
judgment and decision-making; total cost of ownership

Page 1 of 35 Journal of Supply Chain Management
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If () we accept the proposition that both the knowledge and the computational power
of the decision maker are severely limited, then we must distinguish between the real
world and the actors perception of it and reasoning about it. (Simon, 1986, p. S211)

INTRODUCTION
Mainstream analytical research literature in operations and supply chain management (OSM)
provides an abundance of normative solutions to optimize supply chain performance and drive
out inefficiencies (e.g., Cachon, 2003; Simchi-Levi et al., 2004). A central assumption implicit in
this literature is that managers understand and equally appreciate the cost elements involved in
the supply chain and thereby the financial outcomes of their decisions can be known across the
organization (e.g., Cachon & Lariviere, 2005).
The above assumption, however, is questionable. As such, there is not commensurate
research on how or whether managers estimate cost parameters and whether they estimate these
parameters uniformly. In fact, the majority of OSM literature typically treats inventory costs as
known [and] researchers use this and other relevant information to construct optimization models
and arrive at optimal inventory decisions (Eroglu & Hofer, 2011, p. 228). This assumption is
also increasingly coming under question by empirical scholars. For example, Waller and Fawcett
(2011, p. 212) exhort that additional research is needed to understand phenomena associated
with how people utilize costs in logistics decisions, why some costs are measured with great
accuracy and why others are completely ignored, how to get managers to utilize cost information
in a way that leads to better decisions, and how to get managers to seek to measure costs that
might be ignored.
Indeed, there is a good reason why we must investigate this aspect of OSM. If managers
within an organization perceive their costs differently, it is conceivable that when they optimize
their cost-centers (or use any other OSM tool) they will accordingly arrive at different optimal
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answers. This would result in supply chain inefficiencies, regardless of how good the OSM
systems and tools might be. Our study investigates the differences in perceptions, i.e.
departmental thought worlds (DTW) (Deshpand & Webster, 1989; Dougherty, 1992; Niranjan
& Rao, 2012), of managers across the organization, with reference to various costs affecting their
supply chain. We argue that an understanding of this is essential because uniformity of
underlying perceptions is an implicit, but rarely tested, assumption in the OSM literature. While
this approach has been taken before in the literatures of marketing (Frankwick et al., 1994;
Homburg & Jensen, 2007), strategy making and new product development (Dougherty, 1992;
Griffin & Hauser, 1996; Maltz, 1997), we study this question uniquely within the OSM context.
We choose to investigate the questions Do managers know the cost parameters affecting the
supply chain? If so, is this perception/knowledge uniform across departments? If not, what
causes these differences?
These are important questions to consider since they get to the heart of an assumption that
mainstream OSM literature has taken for granted for a long time now. If it emerges that there is
uniformity among managers with respect to their cost perceptions, then it would be validation of
an assumption that has largely gone unchallenged in a majority of the OSM literature (Eroglu &
Hofer, 2011). On the other hand, if it emerges that there is indeed non-uniformity in this area as
has been suggested recently (e.g., Waller & Fawcett, 2011), it would open a new avenue of future
research where scholars would have to consider this additional input when building prescriptive
or descriptive models of supply chains.
MULTI-DISCIPLINARY FOUNDATIONS OF OSM DTW
Differences in departmental world-views is one of the well-established problems facing
organizations (Dearborn & Simon, 1958; Shapiro, 1977). An extreme example of how roles
shape world-views or perceptions is the Stanford Prison Experiment (Haney et al., 1973). In this
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famous experiment, the subjects were assigned roles; some as prisoners and others as guards, and
they were placed in a simulated prison setting on the Stanford University campus. Their new
roles heavily influenced the subjects perceptions, and the subjects took their roles so seriously
that within a week of the experiments commencement they started violently attacking each
other, as if they were real prisoners and guards. Arguably, such influence of roles would be
stronger in the real world because the stakes are higher than in an academic setting.
Scholars from the areas of marketing (Deshpand & Webster, 1989; Homburg & Jensen,
2007), strategy and new product development (Dougherty, 1992; Frankwick et al., 1994; Griffin
& Hauser, 1996; Maltz, 1997) have recognized that managers think and perceive their
environment differently due to the existence of departmental thought worlds (DTW) (Deshpand
& Webster, 1989). Ellinger et al. (2006), for example, identified that marketing and logistics
managers (among others) tend to have strikingly different views about each others function.
Other researchers have alluded to different mindsets or thinking styles (Lapide, 2007) and the
importance of having cross-functional and inter-departmental understanding of key supply chain
issues (Lambert et al., 2005; Tatikonda & Montoya-Weiss, 2001).
Within the OSM field for example, single-echelon inventory management is an important
problem. The preponderant solution is to build normative models capturing the tradeoff between
keeping too much stock vs. keeping too little (e.g., Shih, 1980). For this, one typically assumes
the cost parameters (e.g., holding cost, backorder cost, profit margin) as given and arrives at
optimal solutions. An extension of this problem is when multiple parties are involved in the midst
of incentive misalignments and bounded rationality, such as in multi-echelon supply chains (e.g.,
Rudi, Kaur & Pyke, 2001). Irrespective of the type of inventory issue being considered, however,
a majority of the research addressing these kinds of problems (Forrester, 1961; Kouvelis et al.,
2006; Simchi-Levi et al., 2004; Tayur et al., 1999) typically assumes cost parameters as given.
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The advantage of assuming away the cost parameters (e.g., typically, denoting holding cost
as h and backorder cost as b) is that the research would be highly generalizable. However, unless
one sees solutions borne out of real-life parameters, increasingly sophisticated normative models
do not by themselves offer much useful insight to managers. An emerging approach behavioral
operations management explicitly studies human behavior in OSM contexts primarily through
empirical methods and redresses some of the limitations of analytical methods (e.g., Bendoly et
al., 2006; Gino & Pisano, 2008; Knemeyer & Naylor, 2011; Tokar, 2010). Following this latter
approach, we explicate a limitation inherent to extant normative OSM research: the ubiquitous
assumption that managers equally identify the dimensions of the problem and cost parameters of
their supply chains.
RESEARCH METHODOLOGY
Given the multiple facets to our research questions, from an operational standpoint we break the
questions into two sub-objectives. The first objective is to inductively develop the construct
OSM-DTW and its dimensions i.e. how and why. The second is to test the existence of DTW
and quantify it in a different context i.e. how much, and uncover any possible discernible
patterns in it. Studies 1 and 2 address these sub-objectives respectively.
When the human being is part of the OSM phenomenon to be studied, it is useful to adopt
constructivist approaches and qualitative research (Autry & Flint, 2010). On a continuum, we
would place the core ontological assumptions of Study 1, which aims to build a new construct
OSM DTW as reality as a contextual field of information, and man as information
processor (Morgan & Smircich, 1980). Study 2 builds on Study 1 and tests and quantifies OSM
DTW with a more positivist approach (reality as a concrete structure and human beings as
responding mechanisms (Morgan & Smircich, 1980)). The overall research design integrating the
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two studies can be viewed as one of replication over two cases, which can yield more complete
findings (Yin, 2009).

Insert Table 1 here

Despite the paradigmatic differences, some common techniques were used, such as starting
research with grand tour descriptive observations (Spradley, 1979; Whitehead, 2005) in which
everything was generally observed in the setting before the specifics of the study began to
emerge. As noted by Pagell and Wu (2009, p. 43), The use of multiple respondents and multiple
types of data mitigates the biases of a single respondent. Accordingly at least one of the authors
(usually two) and one trained research assistant participated in each of our field research visits.
We carried out the interviews at the respondents workplace and audio-recorded them. Although
interviews merely elicit perceptions or memories that may not necessarily match the true state,
they are likely representative of the underlying [memory] structure with respect to both content
and organization (Lynch & Srull, 1982, p. 24), and may well influence future behavior because
people often make decisions on the basis of how they remember an experience versus how it
actually occurred (Flint, Woodruff, & Gardial, 2002, p. 104). We took field notes to record any
interesting reactions, response spontaneity, and other subtle behavior observed during the actual
interviews as well as during informal interactions over meals and refreshments.
After each interview, we transcribed the recordings and compared, discussed, and edited
the individual field notes within the research team. The transcripts were then studied thoroughly
before moving to the next interview. Often individual interviews provided new insights that
helped us to revise the interview guide, apart from sensitizing us to future interviews. The data
gathered through multiple sources such as interviews, informal discussions, field notes, on-site
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observations, and archive studies ensured data triangulation, helped to mitigate the researchers
biases, and increased the reliability and validity of our study (Yin, 2009; Pagell & Wu,, 2009).
STUDY 1: RADIANCE INDUSTRIES
1

With annual turnover of USD 150 million, Radiance Industries is Indias leading manufacturer of
oleochemicals and sells more than one hundred chemicals, edible oils, and fats to over 60
countries. Its products are broadly categorized into fatty alcohols, fatty acids, surfactants, and
glycerin. The market dynamics across the product range vary widely, with stiff competition in
some markets and near monopoly in others. The company currently operates two plants in
Western India: Wadia in Gujarat, and Sukhroli in Mumbai, Indias financial capital; a third plant
is also planned. We chose the Wadia plant, a modern, integrated-manufacturing facility for our
study.
The first step toward building the OSM DTW construct was to identify a focal OSM
problem to base our study on. We carried out exploratory plant visits and initial discussions with
the top management team (our key contacts being V.P., Manufacturing, who had the breadth of
knowledge, and Head, Human Resources, who had access to all key personnel, helped us in
problem identification), with the goal that the problem had to be of critical importance to the
company, and sufficiently broad and complex to bring out the DTW differences from across the
organization, and one that potential respondents could readily relate to. Given the capacitated
supply chain environment, timely supplies are of critical importance, and breakdown came out
as one of the pressing issues for the company. Breakdown, as used in the company parlance,
refers to delivery delays or failure due to any cause, such as lack of production capacity, raw
material unavailability, machine failure, mechanical or technical issues related to equipment and

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processes, byproduct management, issues with customer specifications, and transport vehicle
availability. The frequency of technical breakdowns is about once per month. Every machine-
related breakdown lasts a minimum of one day and can go as long as seven days.
While these were generic problems in this industry, of particular interest was the product
Soporic Acid, a fractionated fatty acid. Soporic Acid is of very high value and arguably the most
important product for the company. For this reason, the senior and middle level management
across all of the departments were familiar with it, more so than with any other product. This was
the key reason to focus our study on Soporic Acid.
Soporic Acid is frequently produced on the basis of forward buying contracts. Spot selling
allows higher margins to be charged but also makes production planning more challenging. With
limited capacity and almost no inventory buffers, any breakdown or supply issues result in non-
fulfillment of demand, dip in the market share, loss of goodwill, and sometimes even incur
penalties. The total installed capacity for this product is 1,500 tons per month (1,100 tons from
Wadia and 400 tons from Sukhroli). The raw material is rapeseed oil. A moderately profitable
byproduct Lubolic 30 is also produced. Divine Organics, located in the suburbs of Mumbai, is
the biggest customer for Soporic Acid, with a monthly requirement of about 1,200-1,300 tons.
The other major customer is AKZO Nobel, whose operations span the world. The final products
have application in the food and plastic industries.
Once the focal problem and product were identified, the next step was to choose the
respondents. After consulting the Head of Human Resources and the Vice President of
Manufacturing, we chose respondents from the marketing, logistics, and manufacturing functions
who were knowledgeable about the problem and product. All of these business functions are
considered to be part of supply chain management in the literature and practice (Cooper, Lambert
& Pagh, 1997). The profile of each interviewee is presented in Table 2.
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Insert Table 2 here

Each formal interview lasted between 45 and 90 minutes. A middle manager was tasked
with facilitating the interviews as a silent observer and served as an excellent sounding board for
corroborating our understanding. Once all the interviews had been completed, we began
interpreting the interviews and comparing them across the hierarchy, as well as across the
different departments. Whenever we encountered inconsistencies among the data sources or
noticed critical issues, we obtained the respondents clarifications through follow-up emails and a
second round of telephonic interviews. Three specific goals guided the data analysis: (a) to
identify the different dimensions of the DTW construct, (b) to categorize the responses according
to the dimensions and interpret the contextual meaning, and (c) to explain the categorized data
and their interpretations in light of DTW.
Through open coding we could categorize all of the managers breakdown-related
perceptions into five dimensions: Capacity-, Quality-, Availability-, Productivity-, and
Effectiveness-related differences. Capacity relates to production capacity and inventory status,
and we grouped all of the relevant perceived differences first to understand the response pattern,
then to link them to the respondents experience and managerial responsibilities, and finally, to
interpret the responses and explain the similarities and dissimilarities in light of DTW, both at the
individual and department level. For example, as illustrated in Table 3, when we asked DGM
(Deputy General Management) Production about the capacity issues and demand-supply
mismatch, he was confident that capacity and supply were enough to match the demand. Even
Manager, Production, had similar views.
When we asked the AVP Marketing the same question, he was quite concerned that
inadequate capacity would lead to a high probability of a demand/supply gap. In addition, DGM
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Production also clarified that there were no machine shutdowns leading to stoppage, while AVP
Marketing perceived such shutdowns to be one significant reason behind capacity issues. The
differences in their perceptions were shaped by their past experiences, varying responsibilities,
intra-departmental exposure and inter-department interactions. Table 3 provides details of the
responses and our interpretations explaining DTW differences related to Capacity.
In the same way, we grouped all responses related to raw material quality, final product
quality, and issues with meeting customers specification, under the category Quality. When
asked about the quality of the raw materials and products produced and what they do with poor
quality products, the production managers seemed satisfied with the quality of the raw materials
received. They emphasized that only quality products were produced and in cases of any
deviation, the products are blended with the higher quality products. Low-quality products are
never sold. Marketing managers however were skeptical about the quality, both of raw materials
and final products and claimed that the low quality products are sold to external customers. The
underlying interpretation is illustrated in Table 4. Similar differences in perceptions related to
Availability (which reflects raw material and transport vehicle availability) and Productivity
(which reflects machine utilization, lead time, byproduct utilization, and equipment maintenance
requirements) were observed in light of DTW as illustrated and interpreted in Tables 5 and 6,
respectively. Effectiveness is the overall understanding of customer satisfaction criteria, penalty
and detention (delay) cost, and influence of workplace layout. Organized along these themes, the
summary responses and why those responses might be occurring are presented in Tables 3-6.
Their individual cost perceptions are summarized in Table 7.

Insert Tables 3-7 here

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Key observations from the analysis follow. There are several costs that are interpreted by
the managers in different departments in different ways. As discussed above, quality as perceived
by the marketing team varies from the quality perceptions of the production team. To Production,
quality ideally means defect-free manufacturing whereas quality perceived by Marketing is
fulfilling individual customers specifications. Detention costs are the cost incurred out of delay
in shipping (including demurrage) and are interpreted by the production people as very low,
associating only direct costs due to the delay. However, Marketing sees this as a high cost
because it also affects the trust and confidence of the customers. In addition, they worry that the
customers might split the total contract amount between them and a competing firm, resulting in
loss of business; this has a high indirect cost impact. The transport vehicle availability is a critical
issue in a hand-to-mouth supply chain like that of Soporic Acid. A single days delay due to
unavailability of vehicles might have a low relevance to the production unit and they can still rate
it as an efficient system, yet this is viewed as a crisis and an inefficient system by Marketing.
These differences are along expected lines, because they seem to be linked to their daily work
responsibilities.
Apart from inter-department differences, the study also indicated a managers past
experience shapes his views and influences his decisions and priorities in his current role, as in
the case of AVP (Manufacturing), whose long previous experience in alcohol production tended
to carry forward to the acids division (see Table 3). Such biases can to lead to poor decisions.
The current environment also has a large influence on perceptions. When a manager joins
an organization, he tries to absorb the surrounding knowledge. With time he develops personal
relationships with his surroundings and unknowingly tends to develop biases based on his
understanding and the influence of others surrounding him. These biases shape his perceptions
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and affect his decision abilities and priorities. In this study, the logistics manager who worked
within the same premises as the production managers reflected similar perceptions.
A production manager is primarily concerned about the total production, which is directly
associated with the raw material availability. We may interpret part of his understanding as
absolute truth, where he is directly involved in the process and acquires knowledge through
observations and experiences. The other part of his understanding is primarily shaped by the
influence of the environment he is in and not through his personal experiences and observations.
These perceptions that he develops from his surroundings may not be absolute truth, and yet he
believes in all of it as part of the reality. This possible mismatch between reality and illusion
causes biases and is reflected in his decision priorities. A production manager is expected to
know about production capability, plant efficiency, and raw material requirements and
availability. However, he might not have first-hand information on customer satisfaction and may
perceive its level and significance from the indicators in the limited scope of his department and
perceptions of his colleagues. He might assume high customer satisfaction based on his
production efficiency and quality consistency.
Similarly, a marketing manager belongs to an environment where customer satisfaction is
of utmost concern. He estimates and experiences the severity of the problem when a customer
rejects an order, and his decisions reflect his priorities on meeting customers quality
requirements. He associates business profitability with his performance in selling. Predicting
demand and balancing quality supply with timely delivery is a challenge to him, and this makes
him more critical of the performance of the other departments down the value chain. His
perceptions tend to be shaped by his expectations and general estimations. These interpretations
thus explain how and why marketing personnel perceive transport availability, various costs
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involved in the supply chain, and product quality differently than their production and logistics
counterparts.
DTW in this context may have three possible impacts. First, the information/understanding
of the processes that each department is carrying is heavily dependent on the environment in
which the manager operates. Different departments have certain perceptions engrained within
that pass on person-to-person over time through any of several possible mechanisms (Nonaka &
Krogh, 2009). This prevents accurate evaluation of the entire business process, which is critical
for SCM. Second, managers are convinced of the high performance of their own departments and
attribute failures to other departments. For example, Marketing perceived production inefficiency
to be a major concern even when production-related delays were insignificant. This is not
necessarily capricious behavior; it was simply their perception. Third, difficulties arise when
managers, bound by their DTW, take actions to overcome the perceived difficulties. For example,
a marketing manager who perceives inefficiency in the production department might tend to
over-order to minimize production uncertainty risk; this mechanism has recently been referred to
as coordination stock (Croson et al., 2014). For the same reasons, he might well overestimate
transport requirements, or quality levels, or Production may overestimate raw material
requirements. All of these result in inefficiencies (for example, inventory pile-up in case the
inflated orders are fulfilled) and links DTW to its financial impact.
This first study developed the OSM DTW construct and established its presence in rich
contextual detail. The study did not, however, attempt to quantify it. Apart from quantification of
DTW, by case replication logic it might also seem worthwhile simply to study DTW in a
different context and in a different culture and organizational setting. With these objectives in
mind, we move to Study 2.
STUDY 2: MAADER
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In accordance with the second objective, which is to test and measure the existence of OSM
DTW in an independent context, we adopt a positivist approach. The case study chosen was
Maader, Iceland, a world-leading food processing industry equipment manufacturer. It was
chosen on the premise that we (the research team) ought to know the real world or true
parameters (to the extent possible, commensurate with the chosen research methodology) of a
key OSM problem facing the managers of the organization. This would allow us to compare the
actors DTW across departments and then compare it the real world. Maader operates 15
subsidiary companies spread across Australia, Europe, and North-America and had annual
revenue of 265 Million Euros. Our study focused on Maaders, Reykjavik, Iceland plant.
We were previously involved in a project aimed at advising Maader on their logistics
strategy whether to move from ocean to predominantly airfreight. The recommendations were
borne out of a detailed analysis of total cost of ownership (TCO) for purchased parts. Thus, we
knew the real world, i.e., actual cost parameters. This, and the fact that Maader was a B2B
industrial manufacturer like in Study 1, led us to choose this case study. The study involved
participant observation as a data collection technique (Platt, 1992) up to this stage, while
developing the intricacies of the TCO model (the findings of which were shared with the
company executives only after concluding Study 2, thus protecting its validity).
The key business processes in the company are: product development (from a concept to a
new product design), manufacturing (from receipt of production order to shipment), marketing
and sales (from marketing to acceptance at the customer site), and service (from customer service
request to sign-off). Production is engineer-to-order. It broadly follows the following sequence:
sales managers, armed with some prior knowledge of product features and delivery capabilities,
initiate the sales call and create a contract with customers with information regarding
specifications, price, and delivery time. The design team then prepares the design and the bill of
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materials (BOM) and delivers them to the purchase and manufacturing teams for further action.
Delivery dates for all the components are then set to meet the production schedule. The inventory
cell receives incoming goods and secures delivery of material to the support centers and
production cells. Once the final product is assembled, it is tested and shipped to the customer.
Sales expects that the whole process be carried out within the initial deadline. This means late
delivery from any of the steps will affect the time available for the subsequent process.
In this study we included middle/senior managers from all departments who would be
expected to be knowledgeable about the supply chain. This resulted in a pool of seven managers.
Armed with information of the real world as detailed previously, at this stage we administered
a structured interview to uncover the managers reasoning behind their choices about their
operational environment. The questions aimed to find out how different groups perceive
inventory-related cost. The questions were asked with respect to Sensor Lamp, which is a critical
component for Maader, and which all respondents were expected to be familiar with. All
interviews were conducted in English or Icelandic, with the interviewer being a native Icelandic-
speaker and a fluent English-speaker. Each interview lasted between 30-60 minutes and was in
addition to extensive informal interactions during the preceding months. The structured
interviews
2
were audio-recorded and transcribed to allow careful analysis by the whole research
team. Data triangulation was amply achieved because the qualitative data from structured
interviews complemented months of informal interviews, process mapping, and participant
observation carried out by a research assistant who was interning there.
We first report results of the interview with a logistics manager (denoted as M1) as an
illustration. Similar results are available for all seven managers, although for the sake of brevity
we are not including them here and present only the overall findings.

2
The interview protocol was provided during the peer review process and is available from the first author upon
request.
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M1 heads the shipping department that has two other employees and is responsible for
handling inbound and outbound transportation. As might be expected, she immediately identified
the transportation cost, documentation, and all of the costs that are directly related to her. She
also realized that there are other costs such as inventory holding cost. She rated the purchasing
price along with supplier selection as the most important cost-drivers, covering 90% of the costs.
She rated holding cost as being more important than transportation cost even though her main
responsibility is transportation cost (see Table 8).
We then asked M1 to identify cost-drivers in different departments in order to identify
opportunities for lowering costs. M1 identified only the purchasing department as adding costs
through their employees. Inventory holding cost was of some concern to her, and then in
particular the cost of warehousing and how this product needs special handling. M1 also
preferred buying the Sensor Lamp in small lots: I consider it to be more important to purchase
the Sensor Lamp in a batch of 3-5. It is obvious that M1 had some knowledge of the importance
of inventory holding costs, but it might be biased due to the knowledge of the high value of the
product compared to its transportation cost. Her knowledge of the high value of the product led
her to place emphasis on the high inventory holding rather than to focus on transportation costs.
Next, we asked M1 to estimate TCO of the product. E informed her that TCO includes the
purchase price, transportation cost, inventory holding cost, and cost of ordering the product and
asked her to rate the extent to which all of these cost-drivers contribute to the TCO. True to her
initial estimate of the value of the purchase price, she estimated it to constitute 90% of the TCO
while she considered transportation cost to be only 5%, inventory holding cost to be 3%, and
purchasing overhead at 2% (See Table 9). This comes as no surprise since her main concern
during regular work was with the transportation cost, and she realized how low the transportation
cost is compared to the purchase price of the product.
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Insert Tables 8,9 here

Similar interviews were carried out with the other six managers. Table 10 summarizes the
cost-drivers identified by various managers, and their importance ratings. The numbers in
brackets indicate the number of respondents who identified the items.

Insert Table 10 here

The results show that inventory holding cost was a relevant cost-driver for all managers,
but the level of importance was perceived quite differently. Another noticeable cost-driver was
transportation cost. It was mentioned in six out of seven interviews, but in almost all cases they
were considered to be of low importance and low value. Supplier relationship was also a popular
cost concern and all managers considered supplier relationship to be very important in lowering
the total cost of manufacturing. This seems to be the prevalent idea amongst all managers: most
of the problems can be traced to a bad supplier or a wrong supplier delivery. Next, the
respondents were asked to assign a few cost-drivers and identify those that could be improved in
order to lower the TCO. As Table 11 shows, there are many cost-drivers that can and need to be
improved in order to lower TCO.

Insert Table 11 here

There seems to be a common understanding of which cost-drivers within the company
could be improved regarding supplier relationship, freight cost, carrying cost and planning. These
are all easy-to-identify cost-drivers, some of which have high leverage on improvement
opportunity. However, as Table 9 shows, a mere acknowledgement by managers of the existence
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of certain cost-drivers is not an indication that they all agree on the relative importance of these
cost-drivers; they can disagree substantially!
When they were asked if they consider transportation costs or inventory holding cost more
important, the answers were always towards inventory holding cost. But two respondents said
that the inventory holding cost on a Sensor Lamp was very little due to high turnover rate on the
specific product.
There seems to be an overall concern from the managers on the high inventory holding cost
at Maader. This concern is reflected in both component stockouts and lack of cash flow coming
from high investments due to high inventory value. Most of them agree that increasing the
purchasing turnover rate by increasing their DHL shipping would result in lower inventory cost
and almost all of them consider holding cost higher than transportation cost.
The managers were asked to estimate TCO comprised of four cost-drivers: product price,
purchasing, transportation, and inventory holding cost. Table 9 reveals the general perception
among respondents that the product price is by far the highest of the cost components, which is
consistent with the actual figures we (the research team) had calculated. Estimates of
transportation cost are rather similar, with all responses lying in the low range of 3-7.5%. What is
more interesting is that the managers have quite a different perception of the inventory holding
cost, ranging from 3% to 35%. The standard deviation at 13.4 can be considered very high, which
shows how the perception of inventory holding cost varies a lot between managers. These results
support the insight from Table 10.
The results indicate that the inventory manager and the transportation manager perceived
their costs differently. The transportation manager perceived the inventory holding cost to be less
important and of less value than did the inventory manager. They both were still very concerned
that the inventory turnover rate should be higher than today, and they were both aware of how
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they would proceed in order to increase the turnover rate. Both of them mentioned that in order to
reach the goal of increasing the turnover rate they need to make sure that the supplier
relationships are strong and that they can support such change. This is in line with current OSM
literature, which argues the need for improved supplier relationships in order to enhance overall
supply chain efficiency and reduce associated costs (Lambert, 2004).
Based on these results, we can conclude that managers with different functional
responsibilities perceive costs differently in the organization. Managers who were closer to the
customer perceived inventory holding cost to be less relevant to the TCO, while managers who
were closer to the suppliers perceived the cost to be much higher, plausibly because they had a
more accurate image of the inventory holding cost. Interestingly, all of the managers had rated
different cost-drivers the most important (Table 10). From this it can be argued that ceteris-
paribus, organizational roles influence perception of reality systematically.
We would expect the financial managers response to be more balanced (i.e., not tilted
toward either the customer-centric metrics or the supplies/supplier-centric factors), but it appears
that he was quite concerned about the inventory value, and he considered inventory management
of high importance. A possible explanation for this is that investment cost was directly related to
inventory holding cost, whereas customer-centric matters (e.g., delayed deliveries to customers)
would translate into financial figures only after a long delay. Such behavior is consistent with
salience/immediacy bias (Camerer & Loewenstein, 2003).
The differences in DTW, operationalized through cost-perceptions in this study, can be
summarized as follows. All managers responded similarly that increasing turnover rate would
decrease backorders but this would work only if the suppliers were up to the task and delivered as
promised. Most of them also considered maintaining strong supplier relationships as the best way
to decrease backorders. Almost none of them considered increasing inventory levels to be a good
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way to reduce backorders, and almost everyone thought that the focus should instead be on
improved supplier relationships first and foremost, which would in turn facilitate increasing
frequency of shipments. Top management considered manufacturing efficiency to be of very high
importance. Lack of items and consequent production disruptions were attributed to lack of
planning and coordination with suppliers.
In summary, the results show that managers within the same organization can perceive the
costs drastically differently. Even when everyone verbally agreed that inventory holding cost is
an important cost-driver to Maaders operations, differences in their true perceptions manifested
when we asked them to rank or quantify them.
DISCUSSION
Analytical OSM literature pays scant attention to how managers perceive problems in their
supply chain or their cost parameters. It simply assumes managers know these things. Is this
premise tenable in the real world? Simon (1986), who introduced the notion of bounded
rationality, argues it is not. Today most researchers would agree with him that managers have a
limited view about their world, and the real world is simply too complex for managers to
assimilate in its entirety (Simon, 1986; Sterman, 2000). That being the case, the advanced model-
based solutions in mainstream research literature would only be relevant to the extent that the
assumption that cost parameters are known uniformly organization-wide was correct. In this
research, through two independent studies featuring different problems (breakdowns and TCO),
we have shown that managers differ significantly in their OSM DTW. From this, we recommend
that analytical OSM scholars explicitly factor in the managerial perception of problem parameters
instead of relying on assumed values.
Study 1 develops the OSM DTW construct and demonstrates a methodology to
operationalize the construct. This may help future researchers by pointing out how and where to
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start identifying and measuring DTW in their chosen organizations. In brief, the methodology we
adopted in Study 1 (and Study 2) was to identify an important problem facing the organization.
The problem must be such that all major managers would have thought about it at length, so that
they are in a position to give informed, if not instant responses. The problem must then be broken
down into its dimensions. A good starting point would be the company top management, who
would frequently be involved in permitting access to the company. By treating them as research
partners (as we did), one is likely to get a good overview of the problem context.
It may be useful to position our study within the behavioral operations body of knowledge
explicitly, to allow for easier comparison with prior literature. In the Intentions-Actions-Reactions
framework (Bendoly et al., 2006), it is noted, in inventory management, a common objective is
to minimize the sum of expected holding and stockout costs [an intention]. In reality, the decision
maker may not evenly weigh the cost of holding inventory with the cost of stockouts. For
example, he may weigh stockout costs less since these are more difficult to track, or he may
weigh holding cost less since this it less visible to his colleagues in sales (Bendoly et al., 2006,
p. 740). Even worse, different managers may weigh these costs differently depending on their
current organizational roles. It is clear that the perceptual differences found in the present study
fall within the Intentions category; our contribution is the OSM DTW construct, which suggests
that the common objective may itself vary across individual managers/departments, and even if
they converge on the objective function, the parameter values may differ across departments
leading to divergent solutions. Within the intentional vs. unintentional biases framework (Oliva
& Watson, 2009), the perceptual differences fall under unintentional biases, since the managers
truly perceived reality differently.
From a managerial standpoint, our results suggest that first and foremost, it is important to
recognize the existence of DTW and mitigate it. If left to itself, it can lead to undesirable
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outcomes such as the development of functional silos, which means a lack of appreciation for
and integration between various functional areas (Cooper et al., 1997; Navarro, 2008). DTW
could possibly be reduced by redefining the work of individuals in such a way that discourages
its development, at least that part, which is engendered by incentive misalignments. This can be
achieved by introducing key performance indicators (KPIs) based on organizational-level
outcomes rather than department-level outcomes.
It is often thought that better quality information sharing between departments is desirable.
Our study shows that sharing, by itself, does not necessarily help unless the information shared (it
could be cost information, or more generally, any other operational cost parameter) is closer to
the true value than the information that the recipient already has. One way to resolve the
differences is by sensitizing the managers to other roles. Facilitating cross-functional experience
when coupled with communication fosters learning and can significantly improve performance
(Wu & Katok, 2006). Facilitating grapevine (informal communication) at the workplace is
another specific step the top management could take toward this direction.
This may be an interesting line of inquiry for future research to test if the differences in
perceptions indeed reduce post-intervention. Note that contrary to common expectation, the mere
absence of, or reduction in, DTW is neither necessarily a good or bad thing. Different
orientation between marketing and sales managers has a positive impact on market performance
whereas different competencies have a negative impact (Homburg & Jensen, 2007). We
conjecture that a similar pattern would hold across different functions. Thus, a more nuanced
understanding is required about what kinds of differences help, and what kinds hamper. This
could be a fruitful area for further research.
Another observation from our studies is the striking contrast between Marketing and OSM
personnel in both companies, leading us to wonder if Marketing are from Mars and OSM are
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from Venus. The former were far more articulate and forthcoming in sharing their views, and
the interviews were usually much more organized and productive than with Production.
Production personnel spend most of their time in their plant silos and have a close understanding
of the process and efficiency. They tended to give technically detailed responses, many of which
were not necessarily relevant to our study. It is likely that these DTW differences cause some
dysfunctional interactions during inter-departmental meetings and joint decision-making as well.
From a research methods perspective, this study then reveals the important insight: simply
asking individual interval scale questions to elicit organizational data, as survey researchers often
do, may not reveal the truth. Managers at Maader prima facie recognized the importance of
inventory cost and rated it very highly yet differed widely when asked to quantify their responses.
Similar results were obtained at Radiance (Table 7). What is surprising, as revealed by the current
study, is that this problem persists even when questions are objective and have precise, correct
answers. Indeed then, our study strengthens the argument that survey-type research may need to
use multiple respondents across departments to get to the truth.

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TABLE 1
Research Paradigms/Stances Taken in Studies 1 and 2*
Relativism (Study 1) Positivism (Study 2)
Order However much knowledge is gained, we will
never reach a definitive understanding of the
world order. Nevertheless we can attempt to
explore the various dimensions of DTW and
develop it as a construct.
There is a conviction that the universe has some
kind of order. We can find out the links between
events and their causes and thus understand 'the
rules of the game.' This then allows us to make
predictions.
External
Reality
Our (researchers) perceptions of the world
are uniquely individual. The world we
actually perceive does not consist of a series
of stimuli that we interpret through our senses
and make sense of logically in a void.
Therefore we reflect upon the data and muse
about possible explanations for what we see.
The positivists rely on the assumption that
knowledge is shareable and verifiable: that is, you
see the same as I do when, say, looking down a
microscope.
The core thesis of DTW is that our subjects
perception of reality will NOT be the same.
However, the point is, DTW can still be studied by
positivist methods (e.g., Homburg and Jensen
2007) so long as we admit that people sharing a
certain thought world think more or less alike.
Reliability We cant always believe our senses, and our
memory can fool us. However, our skills of
reasoning must be taken as a reliable method
of organizing data and ideas, even though
there may be several ways of interpreting
data. This stance, especially when used by a
team of researchers drawing conclusions
independently and then discussing, can result
in a more comprehensive understanding of
the phenomenon.
Human intellect and perceptions are reliable. You
can depend on your senses and methods of
thinking. This means we can rely on responses to
interview questions and reliable estimates of the
subjects true opinions, and this matches the
researchers estimate of those very measures.

Generality Owing to the uniqueness of each person and
the uniqueness of each event it is very
difficult to predict what may happen in the
future under similar conditions; it is
dangerous to generalize from studied cases.
We do not even attempt to claim generality.
It is no good if the results of one experiment are
only relevant to that one case, at that particular
time, in that particular place. We take the more
moderate position taken by positivist case
researchers and are satisfied with achieving
theoretical generalization (Yin 2009).
* Adapted from Walliman (2014). Italicized words are ours, and they refer specifically to our study.
TABLE 2
Profile of Interviewees

Branch Interview Partners
Total Experience
in the Plant
Wadia, Gujarat Associate Vice President, Manufacturing 24 Years
Wadia, Gujarat Deputy General Manager, Production 22 Years
Wadia, Gujarat Manager, Production 1.5 Years
Wadia, Gujarat Manager, Logistics 10 Years
Sukhroli, Mumbai Associate Vice President, Sales 22 Years
Sukhroli, Mumbai Manager, Marketing 20 Years

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TABLE 3
Capacity-Related Perceptions

Responses Related to Capacity Our Explanation of the Responses
Department: Production
Associate Vice President
There is a high demand for Soporic Acid
and a new plant is being set up to resolve
the capacity issue.
The situation is not hand-to-mouth.
A relatively high finished-goods
inventory is maintained.
As a senior executive, he reflects that over the long term, with the new plant in
operation, capacity will not be a critical issue for Soporic Acid.
However, his long previous experience with Fatty Alcohols makes him generalize
the attributes of fatty alcohol to other products. We knew Soporic Acid had a hand-
to-mouth supply chain. The high finished goods inventory is basically kept in fatty
alcohols and not in Soporic Acid!
Deputy General Manager
Capacity is enough to meet internal
consumption. Only a small percentage of
the product is sold, so no demand-supply
gap exists.
No inventory is kept, neither raw
material nor finished product.
No machine shutdown leading to
stoppage, continuous production
Through his long experience in Manufacturing, and being in charge of both fatty
acid and alcohols, he understands that Soporic Acid is an ingredient of alcohol.
This shapes his perception that a large proportion of Soporic Acid produced is
consumed internally. His role is limited to the production, packing, and dispatch.
Tracking the fate of the product is out of his scope. Actually most of it is sold; only
some is consumed internally.
Stoppage is not common as they go for preventive maintenance and have standby
equipment.
Manager
Capacity is enough to meet internal
consumption.
Demand is stable and no inventory (raw
material or finished product) is kept.
His perception is also shaped by the same belief and understanding as DGM
Production, with whom his office is co-located. Since the demand is stable, there is
no need for inventory. Only a small proportion is sold outside and rest is consumed
internally.
Department: Marketing & Sales
Inadequate capacity is a major issue.
No knowledge about the internal
consumption of Soporic Acid.
Believe there is some inventory
Believe there are regular machine
shutdowns for maintenance leading to
production stoppage.
Being in direct contact with the customers, he feels the capacity constraints but
he has no idea about the internal consumption possibilities. The hand-to-mouth
supply chain shapes his perceptions that a reasonable amount of raw material as
well as finished-goods inventory is kept for emergencies.
Strongly believes that Wadia plant also has regular stoppage and maintenance.
However, preventive maintenance with standby equipment obviates such
stoppages, as is the case in Wadia.
Manager
Soporic Acid faces capacity shortage. Capacity barely exceeds demand. The system cannot handle variability, and delay
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Plant stoppage due to machine failure has
very high impact over customer
satisfaction
in delivery hurts customer trust. Production people, however, cannot see this and
perceive the capacity to be adequate.
Since the capacity is limited and the supply chain is in a hand-to-mouth situation,
with high demand, any failure leads to delay.
Department: Logistics
Manager
To adjust the excess demand with limited
capacity, some of the production
processes are outsourced.
Minimum inventory is kept for safety.
Being in logistics, he is responsible for moving the materials to the other plants for
the outsourcing process and delivering the semi-finished product back to the plant.
While Production does not realize capacity limitations and marketing perceives
production to be plants concern, they seem ignorant about the overall outsourcing
process.

TABLE 4
Quality-Related Perceptions

Responses related to Quality Our Explanation of the Responses
Raw material quality is a concern but
minor deviations are knowingly accepted
with a rebate.
Production never goes out of
specifications.
After stoppage, onece the machine is
restarted, it takes time to reach stable
temperature, but it does not affect quality
of the product.
Quality is never compromised. Inferior
quality product is never sold.
Being the head of the Production unit, he is able to see the larger picture and
understand the difficulty in actually detecting quality of material. Customer-
demand being high, he also has to trade off sometimes and accept materials with
minor quality variations as any such rejection delays the entire supply chain.
Design changes are made as and when customers experience variations and
impurities in the products and update the production team.
Being in Production, he can see such design changes happening and this makes
him realize that there is no other problem. However new quality issues are reported
by the customers to the marketing team which might not be reported to production
immediately.
Being in production, he sees quality as an absolute criterion where inferior good
are rejected. However, standard products with minor variations with defined
standards of specific customers may be sold to other customers which marketing
and sales may decide.
Raw material quality is always good.
No problems with the production
process, only quality products are
produced, always meet the specifications.
In case quality of product deviates, it can
He gets a continuous flow of raw materials to produce quality products. However,
to satisfy some customer specifications, it may require some variation to the usual
raw materials, probably of a higher quality, which he might not perceive to be quite
relevant.
The production process being robust and recently redesigned to cater to customer
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be blended with the good quality
products.
specification, he perceives that the specifications are always met and there is no
quality issue.
Manager
Quality Control ensures that raw material
quality is always good.
No problems with the production
process, only quality products are
produced.
Being new in the department, he had not himself seen any major issues with the
raw materials and trusts the quality control process. In reality, there are problems
that quality control team cant detect.
Being in the production silo, he is also unaware of some of the specific customer
requirements. He thinks in terms of absolute quality whereas marketing sees
quality as defined by individual customers in their technical specifications.
When production deviates from customer
specifications, alternatives are thought of.
Production people try to understand
quality only through their existing
knowledge.
Some solutions are identified but it is up
to the capability of the production to
implement and rectify.
Low quality for one customer might be right quality for another, depending on
specifications. Once a customer rejects a product, Marketing looks for other
customers or blends it with better quality product.
Being in the Marketing team he sees quality through the lens of customers
requirements, which vary from one customer to another. Thus unlike the
production team, it is difficult for him to conclude that there are no quality issues
with the product.
Being distant from the actual customers production people often find difficulty in
understanding the quality requirement and build on their existing knowledge to get
the best solution instead of rethinking over critical issues as unknown impurities
and anomalies.
Manager
Raw material quality varies.
Variations from the desired specifications
lead to rejection by targeted customers.
In such cases, sell rejected products to
other customers.
Marketing people look at problems from their experience and general interactions
with production people as well as the customers. He understands the magnitude of
specification related dissatisfaction among the customers and tries to rationalize by
visualizing through his self-constructed reasoning of the apparent problem. He also
realizes that Quality is a relative term, where low quality only means that it does
not meet a particular customers specification and thus on rejection tries to find
new customers whose requirements meet the on-hand rejected product. Production
views low quality and rejection on an absolute term and strongly reflects that no
low quality product is sold. In case there is a low quality issue it is either internally
consumed or blended.
Manager
Raw material is mostly OK, and material
rejection is rare.

His perceptions are largely shaped by his role and influence of the production
department as his office is located in the same premises as DGM and Manager
Production. Being in charge of logistics he is not very well qualified to understand
quality, especially through the marketers lens and from the informal discussion
with the production team perceives quality in absolute scale and blending to be the
only solution.

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TABLE 5
Productivity-Related Perceptions

Responses Related to Productivity Our Explanation of the Responses
Product and byproduct balance is done well by
the Marketing department.
Marketing fears that increasing demand for Soporic Acid leads to
accumulation of the byproduct, with high storage cost. However, those
working under him fail to appreciate this dilemma.
Byproducts are internally consumed, so disposal
or selling of the excess byproducts formed in the
process of producing more Soporic Acid to cater
to high customer demand is not an issue.
Machine failure does not occur and corrosion is
not a problem as its a new product, and the
equipment is new.
The byproduct is also internally consumed. Production is aware of this but
hold the view that they should focus on only Soporic Acid not on the
byproduct, as it will be consumed in other products.
Machine corrosion is a problem in old machines and equipment. Soporic
Acid plant being relatively new, no such issues arise.
Manager
Byproducts from the production of Soporic Acid
are internally consumed.
Machine failure never happens and corrosion is
not a problem.
Like his senior, he too had no clue about the dilemma of balancing the
production in relation to byproduct.
Being relatively new in the company he has never witnessed any machine
failure or corrosion issues and thus perceives that all work well.
Difficult to get the right balance as more Soporic
acid production leads to more byproduct
production leading to an additional pressure of
finding more customers for the byproduct.
Plant stoppage due to maintenance is a regular
phenomenon.
His primary objective is to maximize revenue. He worries that failure to
sell all the byproduct will incur storage cost and may as well add on to the
opportunity cost, due to its much smaller demand.
With his limited scope and exposure into production operations, he does
not realize that the plant has preventive maintenance and standby machines
help avoid any plant stoppage specifically for Soporic Acid. However his
observation is true for some of the other products.
Manager
Stoppage due to Maintenance is about three
weeks per year.
Corrosion is an issue.
From his experience in other plants he tends to generalize reality and reach
a false conclusion. The production plant for Soporic acid being relatively
new, they dont have such maintenance issues or corrosion.

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Table 6
Availability-Related Perceptions

Responses Related to Availability Our Explanation of the Responses
Raw materials are imported, so there are
some availability limitations.
The company has contracts with the
transporters, so vehicle availability for
finished products is a non-issue.
His thoughts are largely influenced by the attributes of alcohols (in which he
worked previously) and he unknowingly generalizes those attributes to other
products including Soporic Acid. Raw materials for Soporic Acid are locally
supplied and usually availability is NOT a problem.
He seems satisfied with the existing contracts and is overlooking the frequent
problems in actual delivery. Temporary unavailability or delay of 1-2 days does
not mean much to him. However, for Marketing even a few hours delay is a
significant loss.
Raw material availability is not a
problem due to having multiple suppliers.
All deliveries are pre-planned and
logistics is not a problem.
Being in a senior position in production, continuously producing Soporic Acid, he
understands that raw material availability is majorly balanced with dependence on
multiple suppliers.
Similar to the AVPs view, noted above
Manager
Long-term relationship with suppliers
and raw material availability means,
there is no problem.
Transport vehicles are always available.
His past experiences shape his views of single suppliers with long-term
relationships for effective control over supplies, whereas there are multiple smaller
short-term suppliers who cater on need-basis for Soporic Acid.
Quite similar to AVP and DGMs views noted above
Suppliers of the right quality are scarce.
Transport vehicle availability is an issue.
His customer orientation makes him worry about the right raw material and hence
product quality, far more than that Production does.
Transport vehicle availability to him means at that moment. Any deviation from
this is a concern to him.
Manager
Raw material availability is an issue but
managed well.
Transport vehicles are always available.
The co-located production department influences his perceptions.
Being logistics in-charge he too finds vehicle availability not to be a problem,
however the same explanation that the meaning and priority of always available
for him is different from that of the marketing people.

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TABLE 7
Summary of Perceptions of Various Costs with Reference to Soporic Acid

Inventory
Cost
Transportation
Cost
Maintenance
Cost
Production
Cost
Detention
Cost
Production Department
AVP
Low inventory.
Perceives low cost
Low compared to
production cost.
Low, it being a new
plant
High Low, relative to total
revenue
DGM
Thinks no
inventory exists;
hence zero cost.
Same as above Same as above Same as above Same as above.
Mgr
Same as above. Same as above Same as above Same as above Same as above
Logistics Department
Mgr
There will be a
small inventory
It is neither very
low nor very high.
Medium, influenced
by production people
Unaware of the cost
structure
Low, relative to total
revenue
Marketing and Sales Department
AVP
Some inventory is
required given the
demand
fluctuations.
It is neither very
low nor very high
Relatively high as he
faces quality issues
Perceives it to be
low as for other
products
High, as delays affect
customer satisfaction
Mgr
Same as above Same as above Same as above Same as above Same as above

TABLE 8
Maader (Study 2) Managers Responses to Cost-Drivers

Cost-drivers (grouped): (M1) (M2) (M3) (M4) (M5) (M6) (M7)
Purchasing price/Ordering/Unit price 50% 10% 12.5% 5% 12%
Supplier selection /Supplier relationship
/Contracts/supplier coordination / Risks
40% 25% 15% 30% 18%
Inventory costs/Inventory
management/Holding cost/ Handling
2.5% 20% 10% 15% 50% 20% 18%
Stockout price/Loss of customers 2.5% 35% 12.5% 10%
Freight cost /Transportation cost 2.5% 5% 20% 12.5% 5% 1%
Handling 2.5% 30%
Product design/Development cost 50% 15%
Interest cost 30% 18%
Delivery time 35%
Problems with quantity 12.5%
Manufacturing (rework) 30%
Service (after sales) 18%
Total 100% 100% 100% 100% 100% 100% 100%

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TABLE 9
TCO for Sensor Lamp with Different Frequencies of Ordering

M1 M2 M3 M4 M5 M7
Real world
values
@ 1x/year
Statistics of responses
Cost components
1x
year
1x
year
12x
year
1x
year
12x
year
1x
year
1x
year
1x
year
12x
year
1x
year
12x
year
Min Max Mean
Coeff.
Var.
Product price 90% 62% 88% 65% 80% 89% 70% 60% 87% 70% 95% 60% 90% 74% 0.18
Transportation cost 5% 1-2% 4% 3% 7% 5% 7.5% 3% 5% 1% 2% 1-2% 7.5% 5% 0.44
Inventory cost 3% 30% 3% 30% 8% 5% 20% 35% 5% 29% 3% 3% 35% 19% 0.72
Purchasing overheads 2% 5% 5% 2% 5% 1% 2.5% 2% 3% 0% 0% 1% 5% 3% 0.45
Note: 1x refers to sea freight; small, frequent orders 12x refer to the proposed airfreight mode. Some managers declined to answer for 12x year (which was a
hypothetical question), citing inability to answer

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TABLE 10
Cost-Drivers of Sensor Lamp

Importance
Cost-
driver
Very High High Med Low
Product design [1] Purchasing price [1] Inventory holding [3] Transportation cost [4]
Inventory holding [1] Supplier selection [1] Stockout cost [2] Handling [1]
Delivery time [1] Supplier relationship [4] Forecasting [1] Purchasing overheads [2]
Investment cost [2] Transportation [2] Stockout cost [1]
Manufacturing yield [1] Purchasing overheads [1] Inventory holding [1]
Loss of customer [1]
Inventory holding [2] Design cost [1]

TABLE 11
Cost-Drivers Regarding Improvement Possibilities within Each Department

Cost-Drivers at Maader
Purchasing Logistics Inventory Manufacturing
Supplier relationship
[M2,6,7 ]
Freight cost [M1-4,6] Number of SKUs [M6] Planning [M1-7]
Supplier selection [M1-
4,6,7]
Efficiency [M4] Unit price [M7, M4] Education [M7]
Cheap unit price [M3-6] Planning [M6] Safety stock [M7] Production system
Handling [M1,2,3,7] Handling [M1,M2] Turnover rate [M2] Redesign [M4]
Reorder cost[M7] Customs [M1] Investment [M4] Yield [M1, M3]
Supplier base [M4, M5] Documentation [M1] Carrying cost [M1-7] Work in process [M3]
Service [M7] Transportation [M3, M5] Stockout cost [M5]
Contracts [M2, M4] Cash flow [M3, M4]
Order quantity [M5] Housing [M1, M3]
Quality [M3] Special handling cost [M1-3]
Efficiency [M7] Slow moving items [M6]
Time of staff [M1]

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