Emerald - RFID in the contemporary supply chain - multiple perspectives on its benefits and risks

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RFID in the contemporary supply chain: multiple perspectives on its benefits and risks Alan R. Cannon

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Department of Information Systems & Operations Management, College of Business Administration, The University of Texas at Arlington, Arlington, Texas, USA

Pedro M. Reyes Hankamer School of Business, Baylor University, Waco, Texas, USA, and

Gregory V. Frazier and Edmund L. Prater Department of Information Systems & Operations Management, College of Business Administration, The University of Texas at Arlington, Arlington, Texas, USA Abstract Purpose – This paper aims to point to established theory bases from other disciplines that may be used to illustrate the benefits, complexities and risks accompanying the adoption of radio-frequency identification (RFID) technology.

Design/methodology/approach – Three theory streams are explored with respect to RFID adoption at two levels: the level of the tagged unit; and the level of the adopting firm. Each theory stream is evaluated specifically with respect to RFID, and research questions are proposed.

Findings – A variety of theoretical disciplines bring to light tension between uncertainty that spurs RFID adoption and uncertainty that accompanies RFID adoption.

Practical implications – Insights are provided for managers wrestling with: the question of whether and/or how to adopt RFID; or concerns regarding the implications of their decision to adopt RFID. In addition, the theory bases explored in this research offer guidance regarding risks that accompany RFID adoption but are not commonly considered.

Originality/value – For those contemplating adoption of, or research into, RFID technology, the paper offers a detailed synthesis of valuable theory streams, as well as promising research questions.

Keywords Radio frequencies, Operations management, China Paper type Conceptual paper

Introduction In the coming few years more and more supply chains should begin to feature radio frequency identification (RFID) technology (Angeles, 2005). At its core RFID makes data acquisition and identification more efficient and makes possible more intensive information exchange among supply chain partners (Hou and Hung, 2006; Prater et al., 2005; Smith, 2005). RFID will probably be used to address a variety of coordination and control challenges, from enterprise resource planning (Gupta, 2000) to inter-organizational e-commerce initiatives such as continuous replenishment or vendor-managed inventory (Sma˚ros and Holmstro¨m, 2000). The most sought-after benefits being pursued via RFID adoption focus primarily on improvements in the efficiency, accuracy, and security of

International Journal of Operations & Production Management Vol. 28 No. 5, 2008 pp. 433-454 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570810867196

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material and information flows, whether across a supply chain or within a firm’s internal operations (Ka¨rkka¨inen, 2003; Kelly and Erickson, 2005; Delen et al., 2007; Reyes and Frazier, 2007).

The attention being paid to RFID is leading practitioners to anticipate ever-more accurate information on what is where in the supply chain, in addition to when and/or where it was produced (Dutta et al., 2007). Yet earlier coordination/control technologies such as materials requirements planning, computer integrated manufacturing and flexible manufacturing systems required firms to re-configure processes and infrastructure to fully realize promised benefits (Zammuto and O’Connor, 1992; Boyer et al., 1997), and it seems that RFID is poised to exert similar demands. At the extreme, RFID might prove to be a profoundly “competence-destroying” innovation (Tushman and Anderson, 1986) that forces organizations to re-invent core activities just to survive. Alternatively, RFID could play out as simply an incremental innovation of the type that requires minor to moderate reconfiguration of core competencies (Henderson and Clark, 1990).

Scholars and practitioners may ultimately find that many facets of RFID technology can be adequately examined with existing theory and empirical approaches.

Alternatively, other facets of RFID technology may lead to a variety of new research challenges that force scholars to build and test new theories (van de Ven, 1989). In either case, however, existing theory and methods can serve important roles, whether in economizing on effort and confusion in the former scenario (Amundson, 1998; Wacker, 1998), or in delineating points of departure in the latter (Dean and Bowen, 1994).

Theory is generally understood to be the linking of concepts or constructs and the specification of relevant limitations (Bacharach, 1989). Theory advances knowledge in a particular field, therefore, by specifying what constructs are in play with respect to a particular phenomenon, asserting how these constructs are linked, and providing an explanation for why they are related to one another (Whetten, 1989; van de Ven, 1989).

Such theory, buttressed by empirical support, informs both the study and practice of a discipline (van de Ven, 1989) and makes further progress easier.

As RFID use spreads across the global economy, firms will differ in when, how and why they adopt this technology. In this paper, we explore the roles played by uncertainty – whether it emanates from incomplete information regarding supply chain flows or imbalances of power across supply chain constituents – both in spurring and slowing RFID adoption. In these explorations, we will visit three bodies of theory, each of which may be used to provide insights regarding both short- and long-term implications of RFID. The theoretical frameworks we visit are rooted in parent disciplines such as sociology, economics and population ecology. Although they are only occasionally visited in the operations management literature (St John et al., 2001; Ketokivi and Schroeder, 2004), they point to important issues at play both before and after RFID adoption. Some of these issues are inherent in the technology itself, while others result from how the technology will probably be used. We chose these theory streams because they show great promise in understanding what appears to be a complex phenomenon – the diffusion of a technology whose roles span both internal processes and external interfaces with suppliers and customers.

Our work here is organized as follows. We first discuss RFID in the context of uncertainty reduction in the contemporary supply chain. We then describe the conceptual framework that informed our choice of theory bases to consider. We follow with detailed evaluations of the theory bases used to frame RFID adoption/implementation, introducing

in each case research propositions that illuminate intriguing perspectives on some fundamental challenges in RFID adoption. We conclude with discussions of potential directions for further research.

RFID and contemporary coordination/control The essential challenge of coordinating material flows is to accommodate either information or the lack of it (Comstock and Scott, 1977; van Dierdonck and Miller, 1980). When firms use safety stocks of raw materials or finished goods, for example, they are fundamentally responding to a lack of information about precisely when materials will be needed or available or when customers will make their demands known (Milgrom and Roberts, 1988, 1990). When this information does become available, the consequences often reverberate throughout a production system (Ho et al., 1995) and, by extension, that system’s supply chain (Wilding, 1998).

RFID is seen primarily as a new weapon in firms’ coordination/control arsenals, with early adopters focusing predominantly on reducing uncertainty in their supply chains (Dutta et al., 2007; Reyes et al., 2007). In particular, scholarly attention regarding RFID typically rests on three distinctions between it and current coordination/control technologies such as bar codes. First, it is argued, RFID can facilitate increased traceability for items, whether they are components, finished goods, containers or other equipment (Sheffi, 2004; Kelly and Erickson, 2005; Delen et al., 2007). Secondly, because RFID-tagged items can be scanned in situ, “real-time” inventory control becomes possible; item locations or quantities are much more easily updated, often without the need to bring the items into close proximity with a reader (Srivastava, 2004). Third, because tagged items will be more traceable and information about their status will be available almost constantly, this information could be shared by buyers and suppliers and lead to greater collaboration across a supply chain (Ka¨rkka¨inen and Holmstro¨m, 2002; Delen et al., 2007). In each of these cases, the adoption of RFID can be characterized as primarily an attempt to reduce uncertainty that results from incomplete or missing information regarding what is where in the supply chain.

An essential tradeoff lies at the heart of many perspectives on uncertainty reduction. Economists, for example, note diminishing returns from increased forecast accuracy; beyond a certain point, it is more cost effective to simply tolerate uncertainty by carrying inventory (Milgrom and Roberts, 1988, 1990). The same basic mindset can also be found in research grounded by, among others, agency theory (Jensen and Meckling, 1976) and decision theory (Mehrez and Stulman, 1982). The difficulty for practitioners and scholars alike is to accurately weigh RFID’s benefits – principally reduced uncertainty with regard to materials flows through a supply chain – against the challenges it potentially presents. Among these challenges is increased uncertainty resulting from RFID’s potential effects on firms’ relationships with buyers, suppliers and even competitors. Indeed, in some circumstances firms’ net benefit from RFID adoption could be an overall increase in uncertainty. This governing premise of our work is shown graphically as Figure 1, and this guides us throughout our theoretical explorations.

RFID adoption promises reduced uncertainty with respect to material flows in supply chains, an idea that has enjoyed the greatest attention from practitioners and scholars to date. As subsequent sections of this paper strongly suggest, however, a number of theoretical traditions point to the consequences (i.e. possibly increased

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uncertainty in different levels and manifestations) of adopting such a novel technology.

The theory bases we visit also suggest that these uncertainties are as relevant to how (or even if) RFID will be used as uncertainties in the supply chain are.

A guiding framework: uncertainty across contexts and levels The uncertainty toward which RFID technology is focused results both from internal processes and firms’ relationships with suppliers or buyers. As would be argued from the supply chain management (SCM) perspective, this uncertainty burdens both suppliers and customers with unnecessary costs and/or prevents them from being as responsive to opportunities as they might otherwise be (Wilding, 1998; Tan et al., 2002; Chen and Paulraj, 2004). Firms have been reluctant to adopt RFID, however, because of uncertainty regarding the payoff that will (or might) result from the adoption (Reyes et al., 2007; Dutta et al., 2007). Central to this uncertainty are risks accompanying adoption that can be grouped into two broad areas – uncertainty with regard to the requirements and capabilities of the technology itself, and uncertainty with regard to the effects of the technology on interorganizational relationships. We organized our efforts around the interplay of these uncertainties and risks and, so as to enrich and inform the early RFID literature, we addressed our RFID-related questions in an unusual way – namely by synthesizing theory bases that are outside the traditional operations management domain.

Ultimately, we chose three theory bases for exploration – resource dependency (RD) theory, transactions cost economics (TCE), and the resource-based view (RBV) of the firm.

We chose these theory bases, summarized in Table I, for a number of reasons. First, these perspectives, which we explore in detail in later sections, share a strong focus on uncertainty, but the locus and nature of uncertainty that is considered by each viewpoint varies substantially. Secondly, each brings to bear, in one way or another, perspectives on issues regarding both internal value-adding processes and extra-organizational relationships. And, finally, all three link performance with other contingencies – such as channel power or environmental complexity – that appear especially relevant in light of the broad consensus as to how and where RFID will be implemented.

Our chosen theory bases also are applicable at multiple levels, reflecting the broad assertions of the RFID literature base that focus on two “levels of theory” (Rousseau, 1985) most relevant for RFID-related research. By levels of theory, we mean the general “target (e.g. individual, group, organization) that a . . . researcher [would aim] to predict and explain” (Klein et al., 1994). We do not discount the likelihood that other levels are active in the RFID adoption/exploitation phenomenon. Indeed, RFID and its potential use raise questions at both the individual level and at broader levels such as an industry or economic sector, and we discuss these implications in our concluding section.

Uncertainty-Reducing Consequences

Supply Chain Uncertainty

Figure 1.

RFID adoption and uncertainty

Firm Uncertainty

RFID Adoption

Uncertainty-Increasing Consequences

Theory base

Key idea

Level

Resource-dependence Organizations seek to minimize dependence, reduce uncertainty vis-a`-vis scarce and valued resources

Firm

Given firms’ avoidance of opportunism, exchanges marked by high risk will be governed via hierarchy rather than market Resource-based view Sustained competitive advantage depends on the possession, exploitation of resources that are valuable, rare and difficult or costly to imitate

Firm

Transactions-cost economics

For questions involving . . .

Seminal/contemporary citations

Nature of relationships with upstream, downstream partners Focus of managerial activities

a

Vertical integration Interorganizational collaboration

Pfeffer and Salancik (1978) a Ulrich and Barney (1984) Christensen and Bower (1996) Hart and Saunders (1997) Miles et al. (1999) a Coase (1937) a Williamson (1975) a Williamson (1985) Young-Ybarra and Wiersema (1999) Levi et al. (2003)

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Industry Performance effects, aWernerfelt (1984) firm real or potential, of aBarney (1991) particular resources, Bharadwaj (2000) structures or Wade and Hulland activities (2004) Zhu (2004)

Note: aSeminal citation

However, because at present RFID is still in its infancy, the bulk of unanswered questions regarding its actual or potential use fall at the level of the supply chain. To facilitate fine-grained explorations, we break these questions out into those that are applicable at the level of the unit and those applicable at the level of the firm.

The term unit here is used to refer to items ranging from individual components to partially completed assemblies to finished goods to containers of components or finished goods. All have been asserted, by one RFID proponent or another, as prime targets for the application of this technology. Scholars exploiting theory at this level would do so to explain the nature of units – e.g. embedded cost, perishibility, security risks – that would make RFID tagging more attractive for some than for others. Alternatively, at this level researchers could explore the value of the additional information that results from RFID tagging as it relates to item-specific decisions such as determining when a product is transitioning into the maturity/decline of its product life-cycle.

Another promising level of theory is that of the firm. While theory at this level could be used to explore which firms will be likely to adopt RFID at some point, perhaps more valuable to the operations management field would be research into why or how RFID will be used. Ultimately these theories will address questions centering on why a particular firm or set of firms adopt RFID technology and/or what such firms are seeking

Table I. Theory overviews

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when they adopt it. Further, theory at this level would be useful in research aimed at explaining or predicting the firm-level consequences resulting from RFID adoption.

RFID and uncertainty: three theoretical views In the following sections, we explore theoretical perspectives on RFID adoption with regard to its relationship with, and effects on, supply chain uncertainty. We treat this uncertainty as having roots at two distinct but interrelated levels, that of the unit and that of the firm. Uncertainty in these areas, it is increasingly argued, leads to supply chains that either carry excessive inventory or are too inertia-bound to respond to the dynamics of a global economy (Wilding, 1998; Tan et al., 2002; Chen and Paulraj, 2004). This view, articulated strenuously by theorists and practitioners of SCM, depicts uncertainty and its effects as justifying a “holistic concept of ‘seamless, end to end’ . . . management” effected through “effort[s] to reach through the supply chain: upstream beyond the first tier suppliers, and downstream beyond a focal firm’s customers” (Storey et al., 2006, p. 763).

Although a variety of organizational theories address uncertainty – indeed, the accommodation of uncertainty has been put forward as the central question for organizations (Tushman and Nadler, 1982; Argote, 1982) – as we note earlier those we have chosen for exploration are especially applicable at the levels of primary interest, and each raises intriguing questions about uncertainty-related tradeoffs at play in the RFID adoption question.

Resource dependency theory RD theory shares with a number of theoretical frameworks a focus on those resources needed by organizations for survival and success (Chaffee, 1985). The resources themselves, however, are not strictly of interest in scholarship grounded by RD theory.

Rather, RD theory focuses on the fact that organizations must rely on exchange with others for critical resources, and in relying on others, these organizations become less independent and therefore less secure (i.e. their circumstances become more uncertain) (Scott, 1992).

From the RD perspective, while exchange leads naturally to dependency, not all exchange is equal with respect to uncertainty. Exchange is more likely to lead to dependence, and therefore uncertainty, when it involves resources (with resources broadly defined to include production approaches) that are unique (Pfeffer, 1978; Ulrich and Barney, 1984) and/or scarce (Leblebici et al., 1991; Sherer and Lee, 2002). RD theory predicts that firms with such needs actively seek out ways of reducing either the uncertainty that results from resource dependence or by reducing the dependence itself (Griffin and Dunn, 2004). The pursuit of uncertainty reduction typically leads to organizations’ tying themselves closely to critical exchange partners (Pfeffer and Salancik, 1978), while reducing dependence generally involves seeking out substitute resources whose uncertainty effects are smaller (Sherer and Lee, 2002). The former perspective was incorporated by Handfield (1993) in his study of just-in-time purchasing, while the latter was evident in Klassen and Whybark’s (1999) research into the choice of environmentally friendly production technologies.

The RD perspective suggests, therefore, that new technology is evaluated not only on its technical merits, but also on whether it promises more or less exchange uncertainty for the adopting firm (Ulrich and Barney, 1984; Finkelstein, 1997; Scott, 1992). How might RFID technology figure in such a RD-grounded calculation? At the

unit level, it is instructive to visit research on quality and its effects on firms’ bargaining positions vis-a`-vis their suppliers. An extensive body of research points to the importance of considering the total cost of a particular item as more than simply the price paid per unit of that item; partnering with a relatively small number of suppliers, it is argued, enables firms to drive down this total cost by focusing on related costs such as those involved in coordinating material or information flows (Powell, 1995). On the other hand, there often are limits to the number of suppliers capable of doing business in such a way (Zsidisin, 2003; Metty et al., 2005). That is, while the inputs themselves might be widely available, there can be scarcity with regard to the number of suppliers who can supply these inputs in a tightly coordinated manner.

As noted earlier, when there is scarcity with regard to a critical input, those who depend on that resource find their circumstances more uncertain as a result of the bargaining power enjoyed by those who control it (Porter, 1980). Faced with such uncertainty, RD theory predicts, those who are vulnerable tend to seek out ways to reduce their dependence (Sherer and Lee, 2002; Leblebici et al., 1991). If there is a scarcity of firms that are capable of supplying inputs in a tightly coordinated manner, then those firms that depend on such coordination – and are vulnerable to those who provide it – will search for alternative sources for their needs. One way of accomplishing this is to “qualify” – perhaps by their adopting new technology – previously “unqualified” suppliers (Metty et al., 2005). This line of thought leads to our first two propositions, shown graphically in Figure 2.

One of RFID’s central promises is a more level playing field with respect to the ability to coordinate material flows (Hou and Hung, 2006). That is, with RFID the difference in coordinating capabilities between the previously “qualified” and the previously “unqualified” is expected to diminish substantially over time. If an industry exhibits scarcity with respect to “qualified” suppliers, then, it is likely that there will be substantial pressure placed on the “non-qualified” within that industry to adopt this scarcity-reducing technology (Zsidisin, 2003; Metty et al., 2005). This would particularly be the case when the cost of the “qualifying” development (i.e. the RFID technology) is small relative to the cost of the units being sourced:

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P1a. “Qualified” supplier scarcity will be positively related to the rate of RFID adoption.

Further, for units whose traceability is vitally important – e.g. foodstuffs, medical products, safety-related components – RD theory would predict even more rapid RFID adoption, since its ability to reduce “qualified” suppliers’ bargaining power can be

Qualified Supplier Scarcity

Rate of RFID Adoption

Pla

Plb Importance of Traceability

Figure 2.

RD theory insights at unit level

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expected to be particularly strong (Caves and Porter, 1977). This results from the combined effect of two factors: (1) the nature of scarcity (relatively few suppliers capable of supporting traceability); and (2) the relative ease with which RFID enables traceability.

P1b. The more important that unit traceability is in creating “qualified” supplier scarcity, the more powerful “qualified” supplier scarcity’s effect on the rate of RFID adoption will be.

At the level of the firm, exploring RD theory’s premises with respect to RFID is more straightforward, since RD theory is primarily focused on interorganizational relations and RFID technology is largely being championed as a technology that will facilitate (but not guarantee) better interorganizational material and information flows. As noted earlier, RD theory predicts that when organizations are dependent on others for critical resource flows, such dependence leads to power asymmetry that affects a broad range of interorganizational relations (Pfeffer and Salancik, 1978; Scott, 1992). Having more power in a buyer-supplier relationship enables a firm to dictate to a greater degree the terms under which exchange will take place, and such influence can extend in either direction in a supply chain (Frooman, 1999). When RFID is introduced into a supply chain, therefore, RD theory would suggest that such introduction will take place at the behest of the more powerful supply chain entities, with the introduction tailored primarily toward the needs of that entity with channel power. That is, supply chain constituents with channel power have the wherewithal to impose their particular needs/wants on the tailoring of RFID implementation (O’Callaghan et al., 1992; Kauffman and Mohtadi, 2004; Barratt and Choi, 2007): P2a. The more powerful channel partner will dictate, to a greater degree, how RFID will be implemented.

Secondly, RD theory provides a means of evaluating whether RFID-enabled buyer-supplier coupling will be beneficial (i.e. a net reducer of uncertainty) in the long run. RD theory suggests that the fundamental question centers on how RFID technology and its use evolve over time. Some technologies evolve into a “dominant design,” with installation and use common to a wide variety of applications (Abernathy, 1976; Abernathy and Utterback, 1978; Tushman and Murmann, 1998).

Other technologies, however, remain fragmented, with their implementation and use tailored to specific applications or business sectors (Utterback and Suarez, 1993; Tushman and Murmann, 1998). If RFID technology follows the latter paradigm, then RD theory would suggest that coupling with a powerful customer/supplier carries with it short-term benefits but substantial long-term risks (Figure 3). This would be because the weaker party would shore up its access to that resource it needs, but at a price of even more subservience in the future since its fortunes would be tied to a more specific resource pool (Pfeffer, 1978; Ulrich and Barney, 1984): P2b. The lack (emergence) of an RFID “dominant design” will increase (reduce) long-term resource-dependence risks that result from RFID adoption.

Short-Term Uncertainty

Relative Supplier/Buyer Power

P2a

Nature of RFID Implementation P2b

Emergence of RFID Dominant Design

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Long-Term Uncertainty

Transaction cost economics Like RD theory, TCE is a powerful tool for exploring uncertainty’s role in shaping interorganizational exchange relationships. It shares with RD theory a view of organizations as predominantly “avoiders of uncertainty,” and in a broad sense this shared assumption leads to similar predictions about the structuring of exchange relationships. TCE differs from RD theory, however, in its treatment of the motivation behind the search for uncertainty reduction – a reduction in exchange uncertainty is seen as attractive only insofar as it reduces the “costs resulting from planning, adapting, and modifying (agreements) in the presence of a continuing trading relationship” (Hesterly et al., 1990) – and this difference leads to intriguing insights vis-a`-vis RFID at the level of the firm.

The great bulk of TCE-grounded research emphasizes the role of the firm as an attractive mechanism by which transaction costs can be minimized (Conner, 1991).

This body of thought is largely concerned with explaining preferences in structuring particular exchanges, with high-transaction costs making internal – i.e. within-firm – coordination increasingly attractive relative to market-based – i.e. across-firm – coordination (Coase, 1937; Williamson, 1975). That is, TCE theory is largely focused on using transaction costs to explain whether or not a particular exchange will be governed via hierarchy (i.e. within a firm).

In actuality, it is not the cost of transacting per se that draws the attention of the TCE theorists (Grover and Malhotra, 2003). Rather, certain exchanges involve a heightened risk of opportunism – that is, one party reneging on agreed-upon exchange terms when it is advantageous to do so (Coase, 1937). Opportunism risk is particularly high when one partner (partner A) must invest in an asset that is specific to its exchange relationship with another (partner B). In such a situation, partner A has few venues for relief should partner B attempt to restructure the exchange relationship on more favorable terms (Williamson, 1975). Partner A’s relationship-specific investment (that is, its “asset specificity”) is even riskier when: . its relationship with partner B is expected to be long in duration; and/or . there is great uncertainty about the environment in which the relationship will be pursued.

In either of these circumstances, partner A is less capable of writing a contract that would protect its investment ex ante simply because the number of contingencies

Figure 3.

RD theory insights at firm level

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that could emerge ex post is overwhelming (Williamson, 1975, 1979). These interrelated issues lead to our propositions involving RFID implementation at the level of the firm, shown in Figure 4.

As a variety of preliminary research studies have shown, most firms evaluating RFID are doing so primarily to satisfy the needs or wants of their most important customers (Barratt and Choi, 2007). Indeed, much recent interest in RFID was stimulated by Wal-Mart’s initial requirement that every unit (with units defined as cases or pallets of items) from its top 100 suppliers be RFID tagged by the end of 2006 (Ferguson, 2006). This dynamic – with powerful “initiators” nudging their “adopters” along (Chatfield and Yetton, 2000) – is reminiscent of earlier technologies such as electronic data interchange (EDI) some 20 years ago (Riggins et al., 1994). Research in EDI and similar technologies has indicated that powerful supply chain constituents tend to prefer proprietary mixes of technology and infrastructure when filling their information-processing needs (O’Callaghan et al., 1992; Kauffman and Mohtadi, 2004).

Should that be the case with RFID – currently implementations spurred by mandates from Wal-Mart or the US Department of Defense are heavily skewed toward those organizations’ particular needs (Ferguson, 2006) – less-powerful suppliers could be vulnerable to risks posited by TCE theory.

The mere presence of information systems (IS) hardware and software does not necessarily imply that such technology is central to the organization (Orlikowski, 1992). In many organizations, the IS merely automates routine tasks, adding little to those firms’ competitive repertoires (Swanson, 1994). These firms stand in stark contrast to those with IS integrated or “embedded” with other functions to serve as a foundation of competitive advantage (Chatfield and Yetton, 2000; Kettinger et al., 1994).

With low IT embeddedness, extracting significant value from RFID would first require nurturing an environment that more fully integrates IS into ongoing decision making (Powell and Dent-Micaleff, 1997; Chatfield and Yetton, 2000). From the TCE theory perspective, however, this would be analogous to investing in a transaction-specific asset since the specific benefits being pursued are linked inextricably with a specific RFID Adoption

Firm-Levels IS Embeddedness

P3a

Adoption in Supply Chain vs Adoption for Internal Operations

P3b

Figure 4.

TCE insights

Lack of RFID Standards

seller-buyer relationship (Kauffman and Mohtadi, 2004). This asset specificity makes it less likely that such a pursuit would ever be initiated: P3a. Firms with relatively low IS embeddedness will be less likely to adopt RFID for supplier-buyer coordination.

Yet, while TCE theory paints a pessimistic picture of the likelihood of a great many firms making the investments necessary to fully integrate RFID into their supply chains, it can also be used to explain situations in which RFID would initially be adopted internally as a means of stimulating process improvement. DaimlerChrysler, for example, has added RFID technology to a number of its plants with an eye toward streamlining assembly operations. DaimlerChrysler’s efforts are entirely consistent with the tenets of TCE theory in that the firm’s upstream and downstream partners have been reluctant to adopt RFID in the absence of broad industry standards (i.e. faced with investments that are likely to be transaction-specific) (Wessel, 2006). DaimlerChrysler’s pattern of RFID usage – embracing the technology internally while struggling to incorporate it across the firm-firm boundary – is indicative of what TCE would label a “market failure” (Williamson, 1971), in which high-transactions costs make governance through hierarchy more attractive than governance through markets: P3b. In the absence of widely accepted RFID standards, firms are more likely to adopt RFID to streamline and improve internal processes than they are to adopt it to coordinate across firm boundaries.

The resource-based view Although uncertainty is central to both RD theory and TCE theory, the uncertainty in question typically centers on something perceptible. In RD theory, for example, the uncertainty results from partner A’s dependence on partner B with regard to a critical resource. Alternatively, TCE theorists are drawn to the risks that result from one partner’s investment in a resource needed to facilitate exchange with another. What both of these theoretical perspectives do, then, is address circumstances in which the locus or source of the uncertainty is perceived. The RBV of the firm, however, focuses on uncertainty inherent in resources whose importance is unclear or unknown. Indeed, it is precisely this uncertainty with regard to resources’ role vis-a`-vis performance that draws many RBV theorists’ attention. “From its inception, the resource-based view stressed . . . the importance of causal ambiguity” (Powell et al., 2006), with causal ambiguity generally seen as “uncertainty regarding the causes of (performance) differences among firms” (Peteraf, 1993).

A primary element of the RBV is the idea that firms’ success depends principally on their development and exploitation of valuable and unique resources over time (Wernerfelt, 1984; Barney, 1991). For RD or TCE scholars, the essential organizational challenge is the avoidance of dependency or contracting risk; in the RBV, however, the ultimate organizational goal is a “sustained competitive advantage” (Barney, 1991).

Such advantage is only possible, it is asserted, when it is grounded in resources that meet certain conditions, among them imperfect imitability (Wernerfelt, 1984; Barney, 1991).

Imitability becomes substantially more difficult – and resource endowments become much more advantage-sustaining – when resources’ true values are uncertain (Lippman and Rumelt, 1982).

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It is important to note that the RBV defines “resources” very broadly. That is, the RBV does not restrict its attention to traditional production factors such as raw material or component inputs. In fact, the RBV emphasizes that advantages in such areas rarely lead to anything other than short-term performance boosts (Spanos and Lioukas, 2001), since markets for these resources tend to be transparent and substitutes for them readily developed (Mahoney and Pandian, 1992). Advantage-sustaining resources under the RBV, then, tend toward firm-specific approaches to solving problems of production (Schoemaker, 1990) or developing/exploiting knowledge about customers and their needs and wants (Rungtusanatham et al., 2003). To view RFID through the lens of the RBV, then, requires a focus not on the specifics of the technology itself, but rather on RFID’s effects on either a firm’s internal operations or its supply chain coordination.

Such a focus leads to a pair of intriguing insights, shown in Figure 5, both pointing to less-than-obvious competitive consequences of the adoption of RFID. As we noted earlier, a primary element of the RBV is an emphasis on causal ambiguity, which refers to there being no clearly perceived cause and effect relationship between a particular resource and its performance consequences. On the one hand, causal ambiguity limits the ability of outsiders to imitate advantage-sustaining resources (Wernerfelt, 1984; Barney, 1991): “[a]mbiguity in business actions and outcomes creates a barrier to competitive imitation” (Reed and de Fillippi, 1990). On the other hand, if the relationship between an organizational resource and the organization’s performance is not clear, it could be difficult, if not impossible, for decision makers to exploit the resource to its fullest extent (Reed and de Fillippi, 1990; King and Ziethaml, 2001): “[i]n some cases causal ambiguity may make it impossible for a firm to evaluate its resources or even to identify them” (Peteraf, 1993).

Although we, like many scholars exploring RFID technology, are primarily drawn to its role in streamlining and improving flows of materials and information between firms, RFID’s potential as a catalyst for internal process improvements should not be minimized. As has long been argued, data on how a process is actually performing is a fundamental first step of any successful improvement effort (Westphal et al., 1997), and firms from automakers to dairies are pursuing RFID as a means of accessing these data. From an RBV perspective, these types of implementations are especially intriguing if the implementations are associated with resources whose inherent competitive value remains unclear. RFID-enabled clarity, the RBV would argue, would

Short-Term Advantage P4a RFID Implementation

Causally Ambiguous Resources P4b

Figure 5.

RBV insights

Long-Term Advantage

be associated, at least in the short run, with competitive advantage (King and Ziethaml, 2001): P4a. In the short run, adopters of RFID will see greater benefits when their implementation clarifies the link between advantage-supporting resources and performance.

We deliberately emphasized the short run in developing the previous proposition because the RBV clearly spells out long-term risks that accompany reductions in causal ambiguity. When resources are causally ambiguous, attempts by outsiders to imitate them are misdirected or incomplete (Barney, 1991). Indeed, even opportunistic insiders might find it difficult to “export” – to competing firms, for example – causally ambiguous resources (King and Ziethaml, 2001). Reducing the uncertainty that surrounds advantage-supporting resources, therefore, carries with it significant long-term risks. This would be more likely, we argue, when technologies such as RFID are used for supply chain coordination.

The success of firms such as Wal-Mart and Dell rests solidly on their ability to create and exploit knowledge through information generated in their supply chain relationships (Rungtusanatham et al., 2003). This knowledge is not easily appropriated by competitors, however, since it is embedded within a broad range of other organizational activities. Indeed, the more “embedded” such efforts are, the less likely it is that they will be imitated and their contribution to advantage eroded (Wernerfelt, 1984). This dynamic, referred to as “enacted complexity” (Schoemaker, 1990), isolates resources from imitation (Mahoney and Pandian, 1992) and preserves their ability to support competitive advantage (Rungtusanatham et al., 2003).

As we discuss throughout this paper, RFID technology promises, both to internal decision makers and to external constituents, increased transparency with regard to organizational processes. This would be particularly true with read-write RFID technology, in which tags can accumulate information as they move through a supply chain (Brewer et al., 1999). Use of such technology would align supply chains more closely with the “extended enterprise” ideal (Hsu et al., 2007), in which information and knowledge are readily available to a large number of interdependent organizations.

With increased transparency, however, comes the risk that a resource that is advantage-sustaining but causally ambiguous will no longer be isolated. If partner A, for example, discovers the competitive value of one of its resources through the use of RFID, partner B (and, to a lesser degree, others both within and beyond the supply chain) may be in a position to gain and act on this knowledge, sometimes to the detriment of partner A: P4b. In the long run, RFID adoption makes competitive advantage less sustainable if the adoption involves resources that: (i) are central to competitive advantage; and (ii) heretofore exhibited no clear cause-effect link with performance.

This risk would be less of a concern in supply chains that conform to the SCM “ideal” (Storey et al., 2006), since members of such supply chains would tend to focus less on their “local optima” and more on the needs of the supply chain as a whole (Akkermans et al., 1999). Further, since from such a perspective competitive advantage manifests itself not at the level of the firm but rather at the level of the supply chain, a supply

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chain’s competitive advantage – some SCM scholars refer to this as “collaborative advantage” (Chen and Paulraj, 2004) – could serve to bind member firms closely to that supply chain (i.e. it tempers member firms’ selfish impulses). Without such mechanisms to ensure joint action, the RBV suggests that, all else being equal, a firm’s long-term competitive advantage is less likely with RFID than it is without it.

Conclusion Over the last few decades the operations management field has broadened its understanding of firm success to include more than simple competence in core transformations. Information, useful and widely available on both a within- and across-firm basis, is now seen as a key building block in creating and sustaining the knowledge necessary to be competitive in a dynamic and global business environment (Mabert and Venkataraman, 1998; Rungtusanatham et al., 2003). It is no surprise, then, that the RFID phenomenon has captured the interest of both scholars and practitioners.

Our aim in this research effort was to contribute to the RFID conversation by pointing to established theory bases that raise interesting questions regarding the adoption of this new technology.

What makes a question or an insight “interesting”? Davis (1971) argued that theories and theoretical insights are interesting when, among other things, they illustrate that a phenomenon is more complex or involves more factors than is generally known or understood: “[t]hese theories implicitly articulate . . . routinely taken-for-granted assumptions . . . and then deny these presumptions in the name of some higher – or more fundamental – truth.” Our theoretically grounded propositions rest on a widely held view of the value of RFID technology – principally that it promises to be a powerful tool for reducing uncertainty in supply chains – yet they also strongly suggest an ironic possibility: in adopting RFID, firms might find themselves confronted with more rather than less uncertainty, albeit at different levels and in different manifestations.

On the surface this line of reasoning may seem in conflict with research conducted along the SCM paradigm. From the supply chain perspective, unit- and firm-level uncertainties and risks are subsumed by the overarching integration of activities across buyers and suppliers. These efforts are undertaken, it is argued, so as to reduce the supply chain’s total cost and/or enable the supply chain to achieve higher end-customer satisfaction (Wilding, 1998; Tan et al., 2002; Chen and Paulraj, 2004).

And it is reasonable to anticipate that in supply chains coordinated in this way some of the firm-level risks we describe could be offset by the security of long-term, collaborative relationships. For example, a firm would be more likely to make transaction-specific RFID investments if its supply partners are trustworthy (that is, their histories or reputations would lead one to conclude that their likelihood of behaving opportunistically is low) (Williamson, 1971; Akkermans et al., 1999; Hobbs, 1996). Similarly, trust in supply chain relationships makes partners more inclined to collaborate, as they are less concerned that their partners will appropriate or “export” knowledge gained through collaboration for selfish benefit (Dollinger et al., 1998; Akkermans et al., 1999). At the level of the supply chain, therefore, the degree to which the supply chain is “ideal” – i.e. jointly and cooperatively coordinated across multiple buyer-supplier links (Storey et al., 2006) – would influence the degree to which individual supply chain members experience more, rather than less, uncertainty as the result of RFID adoption.

We limited our explorations to theory bases and levels that most dramatically illustrated the interplay between the uncertainty that spurs RFID adoption and the uncertainty that might result from it. Other theoretical bases and units of analysis could also lead to intriguing research thrusts. For example, agency theory (Jensen and Meckling, 1976), focusing on divergent interests in parties to a relationship, would be useful in explorations of RFID’s value or effects at the level of the individual. Such work might encompass studies into how RFID facilitates more accurate monitoring of employee effort. Or, RFID might be seen as an effective mechanism to prevent managers’ propensity to create personal “slack” (van der Stede, 2000) with production or sales targets massaged to ensure continued managerial employment at the expense of organizational performance.

The RFID phenomenon also calls for research at the population level, that of industries or broad economic sectors. It is generally accepted by organizational ecologists that populations of similar firms – i.e. industries – reflect successful adaptations in a changing environment (Hannan and Freeman, 1977). Yet whether these adaptations were deliberate – that is, the result of conscious, directed action on the part of organizational decision makers – is a matter of some controversy (Betton and Dess, 1983). This controversy is rooted in the idea that firms are so burdened with inertia and bounded rationality – that is, the fact that key decision makers either do not have all relevant information or cannot possibly process all the information that is available (Levinthal and March, 1993) – that effective response to major environmental change is impossible. RFID, with its promise of richer, timelier data on the environment, raises the possibility that at least some bounded rationality might dissipate. Thus, if bounded rationality can be reduced by the use of RFID, organizational ecologists would anticipate its being used earliest in industries in which the risk of organizational failure is both large and widespread, particularly in those marked by resource scarcity and/or turbulence (Dess and Beard, 1984).

Our work here is not without its limitations, chief among them our focus on only one source of uncertainty – that resulting from missing or incomplete information regarding material flows in a supply chain – as an impetus to RFID adoption. Other uncertainty sources and uncertainty dynamics surely are at play in the adoption question, however, and exploring these in the future could lead to a richer picture of the RFID phenomenon. As a next step in the RFID research agenda, the propositions we advance in this paper should be articulated more specifically to particular research settings so that they can be tested empirically. Results of these tests can then be used to guide further research into the adoption of RFID (and similar) technologies. Such tests also would clarify ways in which other theory bases could inform the RFID adoption question.

Throughout this research our aim was to illustrate the value of theory from other organizational disciplines in understanding RFID and its implementation. We did so not because we are sceptical about RFID’s possible effects on firms’ operations and supply chains, but rather because established theory bases from other disciplines seem particularly suited to some of the most pressing questions – at least from the perspective of RFID’s “target market” – with respect to RFID. We were also motivated

by Amundson’s (1998) warning to operations scholars to avoid “painfully re-inventing the wheel” by ignoring theory that has been developed and tested by other disciplines.

Because RFID will be implemented in such crucial areas as firms’ value-adding

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processes or their interfaces with suppliers and customers, the pain to which Amundson (1998) refers seems all the more likely; without established theory upon which they can depend, researchers run a much greater risk of being “dazzled by the full-blown complexity” (Hall and Lindzey, 1957) of it all.

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Further reading Melnyk, S.A. and Handfield, R.B. (1998), “May you live in interesting times . . . the emergence of theory-driven empirical research”, Journal of Operations Management, Vol. 16 No. 4, pp. 311-9.

Corresponding author Alan R. Cannon can be contacted at: acannon@uta.edu

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