A Case Study And Research

Proposition
• Mirza Muhammad Qayyum Baig
• Muhammad Umar
• Hammad Mahmud butt
• Shoiab Malik
• Introduction to ESI
• Benefit and Drawbacks of ESI
• An agency theory perspective of ESI
• Variables of ESI
• Rolls-Royce background
• ESI at Rolls-Royce
• Propositions for future research
• Managerial implication
• Conclusion
Early supplier involvement (ESI) highly effective
supply chain integrative techniques.
- Key suppliers become more involved in the internal
operations of the firm, particularly with respect to new
product & process design, concurrent engineering &
design for manufacturability techniques.
Objective of ESI:
Management of supply chain risk in new product development and the
upstream supply chain
•Vertical cooperation – design & concept
– Reduce development time
– Better product quality
– Improved costs
– RISKS: sequencing, shortages, incapable suppliers
• Reduce the product life • Increase of product
cycle cost and development cost
• Improve the product • Improper sequencing
quality of task
• Utilization of supplier • Incorrect level of
technological expertise supplier involvement
• Management of cost • Organization
• Competitive edge resistance
• High level of creativity • Selection of incapable
and innovation supplier
Definition:An agency relationship is said to exist between two parties
when one, designated as the principle, engages another, designated
as the agent to perform some service on their behalf, which involves
delegating some decision making authority
(Eisenhardt 1988, Jensen & Meckling 1976, Levinthal
1986)

Assumptions: Individuals are:

- Bounded rational (they are unable to process all

information available)
- Self interested (the work principally for their own
benefit)

- Prone to opportunism (they are effort averse)

- Risk averse (they prefer safety over uncertainty)

 Moral hazard
Uncertainty Adverse
Graphic Agency theory selection
representation: based model
Risk averse
Goal conflict behaviour
Solutions: Two broad types of governance mechanisms are used
to resolve agency problems:
- Investing in information to verify the agent’s
behavior
- Engaging in optimal contracting that aligns the
interests of agents and principals
Behavior based Outcome based
contracts contract
(e.g. salary, hierarchical (e.g. bonus, performance
governance): Most efficient based/variable pay): Most
when the behavior of the agent efficient when the behavior of
is observable or easy to verify the agent is difficult to observe
through information systems* or expensive to verify (info
asymmetry)*
• Single case study

• Face to face interview

• Telephone conversation

• Conducting structural interview

• A global
business

Defence
Civil
• £24bn order
book
• £6.6bn annual
sales
• £663m R&D

Energy
• 36,000 Marine

employees
• 7,600 engineers
• Supporting four
market sectors
12
• ROLLS ROYCE Aerospace
Industry is cost and reliability and required
extensive R&D
– New product development 3-4 years
– ESI 1999
– Total investment before return $500-600 million
– 80 % of product cost are locked in during the
design phase
– SUPPLY COST REDUCTION:
• Reduced threat of excessive costs, easier to
handle changes
• Reduced legal liabilities, fewer quality problems
• Less supplier capacity constraints, shorter
development time
Pan Pacific Conference 2008
Risk source
• Excessive cost
• Legal liabilities
• Quality problem
• Supplier capacity constraints
• Extended product development times
• Inability to handle design
• Supplier organization leadership issues
 Outcome
uncertainty Product
failure
reduction
Task
programmabi Excessive cost
Extended product
lity design
ESI Goal
congruenc
Supplier
y failure
Adverse reduction
selection Quality problem
Technological
Supplier expertise
performan Leadership issues

ce
• ESI reduce risk in new product development from
product failure by managing outcome uncertainty
• ESI reduce risk in new product development from
supplier failure by programming and monitoring
supplier task and accomplishment
• ESI reduce risk in new product development from
supplier failure by creating goal congruency between
the purchasing and supplier organization.
• ESI reduce risk in new product development from
supplier failure by avoiding adverse selection and
moral hazard.
• ESI reduce risk in new product development from
supplier failure by allowing firm to better monitor
supplier activates.
• Reducing outcome uncertainty
• Creating task programmability
• Creating goal congruency
• Avoiding adverse selection and moral
hazards
• Monitoring supplier performance
• Critically analyze ESI
• Build capacity for organizational ESI initiative
• Detection of potential risk stemming both
product design and supplier performance
• Reducing cost implementation of ESI
• Development of effective monitoring and
collaborative relationship
• Keep in mind Risk management point of view