Executive Briefings

Prize-Winning Economist's Lessons for the Supply Chain

In negotiating, you can be self-defeatingly muscular or benign, says Kate Vitasek, on the faculty of the Center for Executive Education at the University of Tennessee. Or you can be credible. That's a lesson supply chain managers can learn from Professor Oliver Williamson.

If you're wondering how the Nobel Prize winner's work in transaction cost economics, or TCE, is relevant to supply chain management, Vitasek has the answer.  She's even got a white paper on the subject at www.vestedoutsourcing.com.

"TCE is about the end-to-end cost of how we buy things," Vitasek says. "Williamson's widely followed in academia, but few supply chain practitioners know who he is. We felt they need to know his work, to unpack Oliver, so executives could apply those lessons."

She says the paper contains 10 top lessons from the economist, but her personal favorite involves negotiating style. There are three types: muscular, credible and benign.

The first, the muscular or the gorilla or pit-bull approach, can have obvious drawbacks. You push to hard, the deal doesn't work. The benign approach often leaves a poor impression as well. The best method is to be what Williamson says is "credible." It calls for being fair and wise and fact-based when you negotiate.

It's also important for a contract to have a flexible framework, Vitasek says. "Most contracts are too rigid. They paint the relationship into a box. Business is dynamic and it changes, so we need contracts that are flexible, not legal weapons. We want to be able to embrace change when things go wrong."

Vested outsourcing calls for that kind of flexibility between customers and suppliers. "We want a relationship in which we are vested in each other's success. If I'm not successful, you can't be either. We're working in each other's interest."

She says that Williamson's lessons apply to vested outsourcing because of the nature of legal relationships. "How can I have a real partnership if I can fire you at will in 30 or 90 days? It doesn't make sense."

To view this video interview in its entirety, click here.

If you're wondering how the Nobel Prize winner's work in transaction cost economics, or TCE, is relevant to supply chain management, Vitasek has the answer.  She's even got a white paper on the subject at www.vestedoutsourcing.com.

"TCE is about the end-to-end cost of how we buy things," Vitasek says. "Williamson's widely followed in academia, but few supply chain practitioners know who he is. We felt they need to know his work, to unpack Oliver, so executives could apply those lessons."

She says the paper contains 10 top lessons from the economist, but her personal favorite involves negotiating style. There are three types: muscular, credible and benign.

The first, the muscular or the gorilla or pit-bull approach, can have obvious drawbacks. You push to hard, the deal doesn't work. The benign approach often leaves a poor impression as well. The best method is to be what Williamson says is "credible." It calls for being fair and wise and fact-based when you negotiate.

It's also important for a contract to have a flexible framework, Vitasek says. "Most contracts are too rigid. They paint the relationship into a box. Business is dynamic and it changes, so we need contracts that are flexible, not legal weapons. We want to be able to embrace change when things go wrong."

Vested outsourcing calls for that kind of flexibility between customers and suppliers. "We want a relationship in which we are vested in each other's success. If I'm not successful, you can't be either. We're working in each other's interest."

She says that Williamson's lessons apply to vested outsourcing because of the nature of legal relationships. "How can I have a real partnership if I can fire you at will in 30 or 90 days? It doesn't make sense."

To view this video interview in its entirety, click here.