Absorptive Capacity in Supply Chain Management - Essay Example

? What is absorptive capa and how can this be used within supply chain management to increase supply chain profitability and responsiveness? Subject Name and Section Professor’s Name Date Submitted Table of Contents Introduction…………………………………………………………………… 3 Knowledge of Supply Chain ……………………………….………………….6 Knowledge and its operational significance to supply chain…………………..8 Increasing Profitability and Response ………………………………………...9 Conclusion ………………………………………………………….…………13 Introduction Absorptive capacity is an organizational approach of maximizing or optimizing new information for commercial or corporate interests. Such include the determination of information’s usefulness and imperativeness to generate tangible results that may improve corporate production, increase effectiveness of interdependence, and improve organizational capacity in supply chain management (Ahuja, 2000, p. 317; Boisot, 1998, p. 10; Boer, Bosch, van den, & Volberda, 1999, p. 379) To increase this absorptive capacity, companies often undertake research studies to improve their prospects and to customize their research and development to make information genuinely helpful for the organization’s human resource and for business operational use. The data generated from research are targeted to be integrated in the operation services and in the production of goods for consumers to attain effective and efficient corporate performance (Calori, Johnson, & Sarnin, 1994, p. 437; Camerer & Vepsalainen, 1998, p. 115; Carlsson & Jacobsson, 1994, p. 235; Cohen & Levinthal, 1994, p. 227) Experts opined that absorptive capacity is aimed at adopting ideas to develop an innovative and bring about new engagement sparked by changing economy. The process includes the integration of information to maximize meaningful findings for organizational development and management decision-makings (Deeds, 2001, p. 29; Cohen & Levinthal, 1997, p. 1463). This paper aims to critically discuss the theory of absorptive capacity and how can this be used within supply chain management to increase supply chain profitability and responsiveness. The researcher will make use of secondary materials from peer-reviewed journals and books sourced from online and public library to substantiate the subject of this study. Researcher will likewise correlate the absorptive capacity of a company’s interest to leverage from its market competitors and delve into the critical effects of company’s absorptive capacity on product innovation, business operations, and profit maximization using the lens of knowledge-based view (KBV) as theoretical foundation. Figure 1. Supply chain leadership and its correlation to resource values and organizational absorptive capacity (Sharif & Irani, 2012, p. 57). Research and Knowledge Management Organizational development and its level of competitiveness are reliant not only on financial capital, human resources and strategic management but also of its absorptive capacity (Rebolledo, Halley & Nagati, 2009, p. 52). Knowledge, through its research and management, are major source of valuable, rare, and inimitable information to enhance strategic business management, improve customer-relation, expand business operation and sustain good relation with its suppliers (Rebolledo, et al., 2009, p. 53). The absorptive capacity of the organization will also facilitate the alignment of its human resources, corporate performance, and in enhancing its structures to align these with corporate strategies. Internally, it can also promote effective organizational management, increase marketing results, and reduce the impairment of supply chain relations. Through this part, an emphasis on the differences between the two facets of absorptive capacity will be highlighted: potential absorptive capacity that involves the corporate’s acquisition and assimilation of external knowledge, and realized such absorptive capacity that looks at the efforts made by the firm to transform and apply the acquired knowledge. Information and knowledge henceforth provide ideological and corporate meaning to redefine and reconstruct the overall business operation for competitive advantage. Recently, the meaning of absorptive capacity has been expanded to include real world application, by maximizing realized absorptive capacity (RACAP) and potential absorptive capacity (PACAP), to evaluate how an organization use knowledge and information to strategize the use of data for effective and efficient delivery of services and goods (WiseGeek, 2013, p. 1). Under Zahra and George theory, absorptive capacity has been categorized into four more elements: acquisition, assimilation, transformation, and exploitation (WiseGeek, 2013, p. 1). These categories deepened business evaluation and processes to hasten resolution to specific categories under organization’s absorptive capacity program (WiseGeek, 2013, p. 1). However, experts opined that the usefulness of organizational absorptive capacity is dependent on the ability and resourcefulness and innovativeness of employees in using multi-dimensional approach in supply chain management (WiseGeek, 2013, p. 1). It’s opined that while absorptive capacity is designed for specific purposes but the employees can only have limited view of the operation at the broader scale. Figure 2. Supply chain must be attuned to business strategies (UPS Supply Chain Solution, 2005, p. 2). The company’s absorptive capacity will determine the relationship of the company to its supply chain. As such, apart from the depth of relationship between the firm and its suppliers and its customers, the management must also use information and knowledge in the acquisition, creation, integration, application, and storage of strategic knowledge (Amir & Zahir, 2012, p. 57; Wellborn, 2007, p. 2; Grigore, 2007, p. 66). If the system is organizationally acculturated, it will become part of the organizational routines of a company to acquire, assimilate, transform, and exploit knowledge from external sources (Rebolledo, et. al, 2009, p. 54) and become part of its repositories as standard operating procedures codified as an internal policy or an institutionalized approach in dealing with organizational issues (Knoppen, Saenz & Johnston, 2013, p. 4; Jones & Ostroy, 1984, p. 1; Kickert, 1985, p. 4). Generating information and knowledge can be acquired formally and informally. Formal knowledge is gained through education while the informal ones are gathered through painstaking research and through training or seminars. Through these, organizational transformation can be assimilated to the system if the management opt for transformational learning processes and exploit it for operational use or for strategic advancement of an institution, thus, motivate them to undertake institutional refinement, efficiency, and effectiveness of execution (Knoppen, Saenz & Johnston, 2013, p. 4.). Figure 3. Elements influencing knowledge transfer from and through a local innovation approach adopted by a company for product development processes (Saari & Haapasalo, 012, p. 37.) Knowledge and its operational significance to supply chain Knowledge management and transfer are essential in business operations and in strategically managing the supply chain. Knowledge is paramount in the delivery of services and development of products, that without it, the company can be considered outmoded and bereft of business economics analysis (Saari & Haapasalo, 2012, p. 39). Knowledge is also what keeps the operation systematic, logical, and it provides the impetus in the recognition of new value and new information from raw supplies sources and to the production aspect of goods (Saari & Haapasalo, 2012, p. 39). The application of knowledge, use of technology, maximization of human resources (embed with the technical skills and information) are optimized in organizational management to produce money or profit (Saari & Haapasalo, 2012, p. 39). Hence, knowledge is essential in business operations and keeps its human resources intellectually stable to keep business administration sustainable and at a constant competitive leverage (Saari & Haapasalo, 2012, p. 39). When business operations are made efficient and systemic, it is always possible for the organization to achieve a balance costs with revenue to gain the highest net operational profit (Saari & Haapasalo, 2012, p. 39). A company therefore can sustain supply chain management if it has sufficient knowledge, information, and database. This information will encourage the management to strategize it business relations and commercial interest—hence, prompt them to design, deliver and produce the services or product deemed to needed in the market. All companies are reliant on its supply chains to be able to complete their production or to produce the necessary goods and services they needed to deliver to their clienteles. The rapid changes and uncertainty in the market can only be delivered when the organization has database of its suppliers and their customers through which they can strategize how they can advance and leverage in market trends (Sanchez & Perez, 2005, p. 10; Sanchez, Perez & Lummus, 2003, p. 6; Sapir, 2003, p. 2) As such, the management must constantly undertake business intelligence analysis to determine its strength, weaknesses, opportunities and threats (SWOT) as well as their capacity to respond to the changes within its environment. By these changes, the management must sustainably study the political, economic, social, technological, logistical and environmental (PESTLE) developments and find analysis or analogies for improved business and operational management. These are all significant to align its supply chain to its organizational goals and to its targeted outcome or to its targeted customers or retailers of products (Lambert, Stock, and Ellram, 1998, p. 10) Moreover, supply chain encompasses not only of fulfilling customer request but also matters relating to transportation, warehousing, retailing, and customers relations (Chopra & Meindl, 2001, p. 12). It is also about the network of facilities and distributors that perform procurement necessary for the acquisition of materials for the production of goods and for its distribution to customers (Ram & Harrison, 1995, p. 10). The strategizing on how supply chain can be managed to influence the targeted result of business operation through coordination and collaboration to attain long-term performance of the company (Mentzer, DeWitt, Keebler, Min, Nix, Smith, & Zacharia, 2001, p. 18). Increasing Profitability and response in supply chain From the preceding discussion, supply chain management correlates with absorptive capacity of the organization because the latter is essential in the coordination and collaboration of production and distribution or transportation of goods to retailers or to directly to consumers. The success of supply chain management, through corporate absorptive capacity, is hoped to improve return of investment and to maintain corporate responsibility or credibility to its clients. It is likewise targeted at reducing uncertainty in demand and using information technology to improve exchanges, trading relations, or corporate relations or sharing (Vickery, Calantone, & Droge, 1999, p. 2; Vokurka & O’Leary-Kelly, 2000, p. 23). Experts pointed that better profitability is experienced if company work in a multi-relational structure to fulfill customer satisfaction (UPS Supply Chain Solution, 2005, pp. 1-5). When business intelligence is integrated in its organizational capacity, the company can develop commercial approaches to encourage retailers orders or make usual costumers adopt volume-based quantity, and design pricing strategies of goods that can encourage retailers that can reduce daily promotions (with reduced prices) and build strategic partnership with clienteles. The latter can also help management reshape supply chain relationship using mutual cooperation and trust. And thus, goals can be attained with great incentives if more income is derived and such open collaboration will improve information sharing within the chain (UPS Supply Chain Solution, 2005, pp. 1-5). Having high absorptive capacity therefore will make the company maintain high level of customer service and high level inventory to balance all market demands. It was also pointed that effective supply chain management requires simultaneous improvements in both customer service levels and the internal operating efficiencies of the companies in the supply chain satisfaction (UPS Supply Chain Solution, 2005, pp. 1-5). Customer service at its most basic level and should maintain consistently high order fill rates and high on-time delivery rates with the aid of information technology and social networks. The company must maintain internal efficiency for organization’s return of investment and can lower its operating and sales expenses satisfaction (UPS Supply Chain Solution, 2005, pp. 1-5). Optimizing its pricing strategies can also improve company’s responses like how Amazon company offer variant prices for the nature of the products sold to fit in the financial capacity of the customers; offering both fixed and menu prices. Further, the organization must be able to make decisions both individually and collectively in the production of good s it wanted to market; on the inventory of stocks from raw to finish products; on the location of the facilities where production is undertaken (including its transportation); and, the information that should be collected and shared . The sum of the decisions of the decisions undertaken will define the strategic capacities and effectiveness of decisions within the supply chain. Expert economists further explicated that the supply chain must interdependently link the suppliers, production and distribution based on market forecast is inherently. The company could only discern the value of the supply chain provided they have the standard measure of control and mechanism because absorptive capacity is path-dependent on empirical knowledge for operational innovation (Sunil & Meindl, 2001, p. 1). It is also equally significant if the company is able to forecast the common obstacles in supply chain management so that leaders can strategize on how to respond to increasing variation of products; increasing demands of the customers; fragmentation of supply chain, challenges embed in liberalized economy and in coping with new business strategies (Sunil & Meindl, 2001, p. 1) Conclusion An organization with better absorptive capacity will therefore be more pliant on addressing problems on economic, political, exchange rate problems, and of demand risks. The company can also develop better strategies in its business structures if it intends to have offshore, local cost source, server, contributor, outpost or simply a lead facility where its operations are based. This will also determine how effective the management in meeting demands based on its capacity to match human resources with skills and offered jobs. Further, with research and use of information technology useful for advancing business interest, the company will be able to improve its cooperative and collaborative action for efficient corporate operation. Research and acquisition of necessary knowledge support best the supply chain management and hence would contribute to internal business intelligence of the company including the determination of operations cost for production (Sunil & Meindl, 2001, p. 1). Knowledge empowers organizational decision-makers and it’s also through it that they are able to develop an inter-organizational relationship with the market forces with total quality management (Rebolledo, Halley & Nagati, 2009, p. 54). Business leaders must therefore rerun aggregate plan as new information emerges in as much as the market and its condition rapidly changes and is truly unpredictable. Managers must also internally strengthen HR commitment and reciprocity to create a favorable business environment. Business experts however opined that to perfect supply chain management, administrators must have the following (UPS Supply Chain Solution, 2005, pp. 1-5): 1. A fact-based supply chain modeling where independent participants can assert facts in decision-making and in operational management (UPS Supply Chain Solution, 2005, pp. 1-5); 2. Target of research and knowledge acquisition should be aligned to business objectives and strategies (UPS Supply Chain Solution, 2005, pp. 1-5); 3. The company must maintain its corporate standards and commitment for better corporate management performance and customer satisfaction (UPS Supply Chain Solution, 2005, pp. 1-5); 4. Improve ethical standards to maintain credibility in the market satisfaction (UPS Supply Chain Solution, 2005, pp. 1-5). In this regard, it can be inferred that absorptive capacity directly and positively affects a manufacturer’s supply chain management (Roth, Kristal & Johnson, 2010) and align the firm’s products and services with its customer’s needs and corporate goals. Profitability from production would be increased with cost-efficient operation (Roth, Kristal & Johnson, 2010). Appendices Appendix A: Absorptive Capacity Theoretical Framework Appendix B: Strategic Acquisition of Knowledge References Ahuja, G. (2000), The duality of collaboration: inducements and opportunities in the formation of interfirm linkages. Strategic Management Journal, 21 (3), 317-343. Amir, S. M. & Zahir, I. ( 2012).Supply Chain Leadership, International Journal of Production Economics, Elsevier, vol. 140(1), pages 57-68. Boer, M. de, Bosch, F.A.J. van den, and Volberda, H.W. (1999), Managing Organizational Knowledge Integration in the Emerging Multimedia Complex. Journal of Management Studies, 36 (3), 379-398. Boisot, M.H. (1998), Knowledge Assets. Oxford: Oxford University Press. Calori, R., Johnson, G. and Sarnin, Ph. (1994), CEOsi Cognitive Maps and the Scope of the Organization. Strategic Management Journal, vol. 15, 437-457. Camerer, C. and Vepsalainen, A. (1988), The economic efficiency of corporate culture. Strategic Management Journal, vol. 9, 115-26. Carlsson, B. and Jacobsson, S. (1994), Technological systems and economic policy: The diffusion of factory automation in Sweden. Research Policy, vol .23 (3), 235-249 Cohen, W.M., and Levinthal, D.A. (1994), Fortune favors the prepared firm. Management Science, vol. 40, 227-251. Cohen, W.M., and Levinthal, D.A. (1997), Reply to comments on fortune favors the prepared firm. Management Science, vol. 43, 1463-1468. Cliff Welborn, C. (2007). Supply Chain Management Overview: A Global Team Effort, Tennessee's Business, Middle Tennessee State University, Business and Economic Research Center, vol. 16(3), pages 2-4. Douglas, M., James R. Stock, and Lisa M. Ellram, (1998), Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill. Deeds, D.L. (2001), The role of R&D intensity, technical development and absorptive capacity in creating entrepreneurial wealth in high technology start-ups. Journal of Engineering and Technology Management, vol. 18, 29-47. Ganeshan, R. & Harrison, T. (1995). An Introduction to Supply Chain Management, Department of Management Sciences and Information Systems, 303 Beam Business Building, US: Penn State University. Grigore, S.D. (2007). Supply chain flexibility, Romanian Economic Business Review, Romanian-American University, vol. 2(1), pages 66-70. Jones, R.. & Ostroy, J. (1984),Flexibility and uncertainty, Review of Economic Studies, Vol. 51. Kickert, W.J. (1985), The magic world of flexibility, International Studies of Management and Organization, Vol. 14 No.4. Knoppen, D. Saenz, M. & Johnston, D., n.d. Relational Absorptive Capacity: Preliminary Empirical Evidence for a Relational Theory of Absorptive Capacity in Supply Chains. [Online]. Schulich School of Business. Available at: . [Accessed 12 April 2013]. Mentzer, J. T., DeWitt, W., Keebler, J.S., Soonhong Min, N.W. Nix, C., Smith, D. & Zacharia, Z. G. (2001), Defining Supply Chain Management, Journal of Business Logistics,Vol. 22, No. 2, p. 18. Rebolledo, C. Halley, Alain & Nagati, Haithem, 2009. The Effects of Absorptive Capacity on Operational Performance within the Context of Customer-Supplier Relationships. [Online] Supply Chain Forum. Available at: [Accessed 12 April 2013]. Roth, A. Kristal, M. & Johnson, T. (2010). The Effect of Supply Chain Absorptive Capacity on Customization, Product Innovation and Business Performance. [Online]. POMS 21st Annual Conference. Available at: . [Accessed 12 April 2013]. Saari, S. & Haapasalo, H. (2012), Knowledge Transfer Processes in Product Development —Theoretical Analysis in Small Technology Parks, Technology and Investment, vol 3, pp. 36-47. Sanchez, AM. & Perez, M.P. (2005). Supply chain flexibility and firm performance, International, Journal of Operations & Production Management, Volume 25 Number 7. Sanchez, A.M., Perez, MP., Lummus, RP. ( 2003), Industrial Management & Data Systems, Journal of Operations & Production Management, Volume 103, Number 6. Sapir, D. BM., (2003). Flexibility in logistic systems-modeling and performance evaluation, International Journal of Production Economics, Vol. 85, No.3. Schmidt, T., n.d.What Determines Absorptive Capacity?[Online] Centre for European Economic Research. Available at: . [Accessed 12 April 2013]. Sunil, D. & Meindl, P. (2001), Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ: Prentice-Hall, Inc. UPS Supply Chain Solution, (2005). Supply Chain Value – Three principles to obtain more from your supply chain initiatives, US: United Parcel Service of America Inc. Vickery, S., Calantone, R., & Droge, C. (1999), Supply chain flexibility: an empirical study, The Journal of Supply Chain Management, Vol. 35, No.3. Vokurka, R.J. & O’Leary-Kelly, S. (2000). A conceptual model of supply chain flexibility, Journal of Operations Management, Vol. 1103 Number 6. Wisegeek (2013). What is absorptive capacity? WiseGeek, US: Conjecture Corporation, p. 1. Retrieved: http://www.wisegeek.com/what-is-absorptive-capacity.htm Read More