Article: Thursday, 18 July 2019
For supply chain partners to realise existing potentials, effective controls are necessary to serve as the underlying basis of relationship management. The design of control is traditionally thought to be based on the principle of matching, in which organisations install management control systems (MCS) that align with the transaction context. However, misaligned control structures commonly exist in practice – and this is often associated with negative performance implications. So why does misalignment happen? Dr Evelien Reusen, assistant professor in the department of accounting and control at Rotterdam School of Management, Erasmus University (RSM) gathered data from 119 companies involved in a ‘supply chain triad’. She demonstrated that buyers control their upstream suppliers partially by imitating how they are controlled by their own downstream customers. She noted that such copying behaviour – whatever the transaction context – was at the root of misalignment in management control systems.
Evelien Reusen says: “We know imitation is a common form of behaviour; when in doubt about what to do, people frequently look for cues in the actions of others. This decision heuristic is practiced in the most varied circumstances, from mundane everyday activities, to intricate organisational decisions.”
Decision-makers seek cues and inspiration particularly from their own immediate environment, and are often motivated to copy the decisions of others. Imitation saves costs and time because it avoids searching for and comparing alternatives. Choices are made based on other decision-makers’ actions. For the design of MCS, this implies that organisational decision-makers may look for inspiration about how to control their interfirm relationships by looking at how other firms controlled them: this is the phenomenon of MCS imitation in interfirm control.
Control in a supply chain context is aimed at aligning the interests of buyers and suppliers. It particularly refers to the mechanisms used by partnering firms to manage risk in the supply chain, and to gain control over their co-operative activities. Dr Reusen’s study focused on formal and informal interfirm control mechanisms that form part of the day-to-day management of supplier relationships. In line with the conceptualisation of MCS as a collection of control mechanisms, MCS imitation comprises the replication of a set or portfolio of controls.
One important implication of MCS imitation, however, is that it might result in the misalignment of controls. To be specific, whereas replicating a set of control practices with all the essential elements in place presents a reasonable strategy, the results of this study confirm the context-dependent nature of MCS. After all, by copying a set of control practices exactly, MCS maintain their internal structure, but this does not exclude the possibility of misalignment with the context of the transaction. Evelien Reusen explains: “We found that if companies imitate others when they choose their MCS, they might choose one that doesn’t fit the underlying transaction conditions. This is what gives rise to control misalignment.”
This misalignment imposes either insufficient MCS that exposes companies to substantial residual risks, or excessive MCS that imposes more control than is necessary given the transaction risks that the company faces. In either case, misalignment may result in weaker performance and, as an extreme, failures of the collaborative relationship.
Although imitation is a commonly used approach by managers to facilitate the decision-making process, there are barriers to spreading best practices.
Managers should be aware that every co-operation is different and that things may go wrong when imitating other companies’ practices without questioning their applicability to the specific context. To imitate appropriately and avoid situations of misalignment, managers should consider adapting and tailoring the control structure to meet the specific relationship needs.
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