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Effective Supplier Selection - Boeing 787

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This is a Study of effective supplier selection using Boeing 787 as a case study

This is a Study of effective supplier selection using Boeing 787 as a case study

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  • 1. UNIVERSITY OF BRADFORD EFFECTIVE SUPPLIER SELECTION: BOEING 787 DREAMLINER Name : Uyoyo Edosio
  • 2. Contents 1 Introduction .................................................................................................................................................................2 2 Characteristics of an Effective Supplier Selection Process.............................................................................2 2.1 Process of Supplier Selection .......................................................................................................................2 2.1.1 Problem Definition/ Requirement Specification .............................................................................3 2.1.2 Criteria Formulation ..............................................................................................................................3 2.1.3 Criteria Formulation Models ...............................................................................................................4 2.1.4 Qualification............................................................................................................................................4 2.1.5 Decision Support Models for Supplier Selection............................................................................4 2.1.6 Final Supplier Selection........................................................................................................................5 2.1.7 Model for Final Supplier Selection......................................................................................................5 2.2 Benefits of Effective Supplier Selection ....................................................................................................6 2.3 Risk associated with supplier Selection .....................................................................................................7 2.4 Supplier Selection Strategy and Implementation Issues.........................................................................7 3 Case study on the supplier selection Process of Boeing 780..........................................................................8 3.1 Benefit of Boeing’s Supplier selection process ........................................................................................9 3.2 Implementation Issues................................................................................................................................. 10 3.2.1 Global Selection Strategy over Local Supplier selection created; Communication gap, higher overhead cost? ........................................................................................................................................... 11 3.2.2 Non uniformity of Technical Specification across Suppliers.................................................... 12 3.3 Risk Associated with Boeing Supplier Selection.................................................................................. 12 3.4 Other: Recommendations For Boeing in Future Aircraft Manufacture ........................................... 13 4 Conclusion .............................................................................................................................................................. 14 5 Appendix ................................................................................................................................................................. 15 6 References................................................................................................................................................................ 15
  • 3. 1 INTRODUCTION Since the aim of every organization is to increase revenue and reduce cost, developing effective supplier selection is one of the key strategies to achieve this feat. Using the right criteria and selection model a buyer/ manufacturer can easily identify suppliers that have flexible supply chain, good logistic management and Just In Time supply(Ghijsen, et al., 2010). Effective suppliers can proactively seek out techniques/ ways to deliver new ideas, processes, and products which will benefit manufacture and give competitive advantages to their manufactures. (Inemek & Matthyssens, 2012). This report, will highlight the key concepts, and models to effectively select a supplier. The report will also discuss risks and benefits associated with supplier selection. Finally this report will illustrate real life application supplier selection strategy using Boeing Company as a case study. 2 CHARACTERISTICS OF AN EFFECTIVE SUPPLIER SELECTION PROCESS 2.1 PROCESS OF SUPPLIER SELECTION According to (Arjan Van, 2010), Supplier selection involves all activities aimed at identifying the most competent supplier; these activities include six processes, which are: Define specification; Select supplier, contract agreement, ordering, expediting and evaluation. Some researchers state that in order to effectively select a supplier, an organisation should focus on four major processes to consider, which are: problem definition, formulation of criteria, qualification and choice (De Boer, et al., 2001). Out of these four processes, (Hong, et al., 2005) stated that the most important process for selecting a supplier are prequalification steps and final selection, as other steps are not as complicated. The Diagram below illustrates the methodology for selecting a supplier as addressed by Error! Reference source not found.. Figure 1: Supplier Selection Process Problem Definition /Requirement Specificatiom - Supplier Strategy Decision - Crirteria Formulation VendorQualification Final Vendor Selection  Assess organizational need.  Determine if supplier is needed or not  Design Technical specification.  Make strategic decisions such as: multiple sourcing vs. single sourcing, global vs. local etc.  Choose selection criteria (e.g. price, quality etc.)  Score suppliers based on selected criteria  Prepare long list of qualified suppliers  Prepare short list of most competent suppliers  Select final suppliers  Prepare contract and terms of agreement based on strategic decisions
  • 4. 2.1.1 Problem Definition/ Requirement Specification According to (De Boer, et al., 2001), Problem formulation is the process in which an organization assesses the need for a supplier in the manufacture of a certain/ good or service. Before embarking on supplier sourcing an organization needs to answer the following questions:  What do we want to manufacture? and;  What resources do I have and what resources do I need?  Do we need a supplier?  Do we need to replace existing supplier?  How much do we need to manufacture? These questions are important, as they would help an organization consider if their internal capacity and resources are sufficient to manufacture a product and they can easily identify areas where supplier sourcing is required(De Boer, et al., 2001). After answering the above question, the organization needs to do the following:  Develop a comprehensive functional specification of problem requirement.  Prepare a document detailing the technical specification of any product.  Collaborate with expert in the fields to corroborate the specifications designed(Arjan Van, 2010) It is important to collaborate with experienced suppliers as well as the internal technical team while developing the technical specifications as most organizations do not understand the market as good as the supplier, hence the Problem formulation/ requirement specification document may not be clearly defined(John, et al., 2012). 2.1.2 Criteria Formulation After a company has clearly defined its needs; based on demand, a Supply Chain Manager should develop a list of criteria, which will guide the decision making process when selecting a supplier. This process is quite complex as a supplier is usually assessed using more than one criterion (Weber, et al., 1998). The Diagram in figure 2 displays these criteria, numbered in order of their priority. For instance, a vendor who can produce high quality clothing may not have the technical capacity to supply large quantities just-in-time. This supplier would pass the quality criteria, but fail delivery criteria. The individual scores for each criterion may be aggregated to obtain suppliers overall score (International Federation for Inforomation Processing, 2005). The Supply Chain Manager must select the supplier that best meets set criteria. Figure 2: Various Selection criteria, numbered from 1 to 12. Number one (1) is the highest important criteria and twelve is the least important criteria(Aguezzoul, 2011)
  • 5. 2.1.3 Criteria Formulation Models The foremost research on criteria formulation is that of Dickson in 1966(Mendoza, 2007). Dickson identified 23 criteria, which should be considered when selecting vendors(Mendoza, 2007). In recent times, there have been additions to these criteria; these additions have been developed to suit the dynamism of modern day business such as globalization and sustainable supply chain(Aguezzoul, 2011). 2.1.4 Qualification After identifying the supply need, developing a supplier criteria and determining the supplier selection strategy. A Supply Chain Manager can commence sourcing for a supplier. How to Source for Suppliers  Long List Qualification: This process involves inviting potential suppliers to bid for projects. Qualification is based on the supplier’s ability to meet terms, timelines and technical specification. The organisations explains the criteria’s in documents called a Request for Quote (RFQ )or Request for Tender (RFT) and sends it to potential vendors.(Arjan Van, 2010)  Short List /Prequalification This is the Process of streamlining the long list of potential suppliers received during the RFQ or RFT qualification phase(Mendoza, 2007). This phase involves identifying the most competent suppliers. 2.1.5 Decision Support Models for Supplier Selection According to(De Boer, et al., 2001)and (Mendoza, 2007) there are three basic models that can be adopted when prequalifying a vendor. They include:  Categorical Method  Data envelopment analysis (DEA)  Cluster Analysis Method The Diagram below presents a brief overview of the Decision Support models for supplier selection. Figure 3: Decision Support Models for Supplier Prequalification Categorical Method •This is the use of historical data to evaluate supplier •The results maybe "postive", "Neutral", "Negative" Data envelopment analysis •This method judges suppliers on benefit (output) and Cost(input) •The supplier ratings using this model are: "Efficient", "Inefficient", Cluster Analysis Method •Thus method involves making decisions by grouping similar suppliers into the same clusters.
  • 6. 2.1.6 Final Supplier Selection Final selection is the stage where a supplier selects vendors (usually more than one) to supply good(s)or service(s). There are models that can guide a supply chain manager in selecting a vendor. 2.1.7 Model for Final Supplier Selection According to (Erdem & Göçen, 2012), the supplier selection process can be broadly categorized into 5 models; These models include: Linear Weight modelling, Mathematical programming, artificial intelligence, Statistical, and Total cost of ownership model. The table below list gives an overview of the types of Models in supplier selection, as well as a brief description of each of the models Table 1: the types of Models in supplier selection, and a description of each of the models S/N Supplier Selection Model Types of the Model Description 1 Linear Weight Modelling analytic hierarchy process (AHP) Each criteria is given a weight. The total score of a supplier is the product the suppliers score on each criteria and the weight of the criteria (International Federation for Inforomation Processing, 2005) Interpretive structural modeling (ISM) fuzzy set theory (FST 2 Mathematical Programming linear programming (LP) This is the use of mathematical formulas when selecting a supplier. The model focuses use of mathematical formulas to maximising profit and minimising expenses. (De Boer, et al., 2001) mixed integer programming (MIP) Goal programming (GP) data envelopment analysis (DEA) 3 Artificial Intelligence Case Based Reasoning (CBR) This is the use of a computer based software, when making supplier selection decisions. The computer software is programmed to make informed decision based on historical data stored over time (Mendoza, 2007). Genetic Algorithm (GA) Neural Network (NN) Expert systems (EX). 4 Statistical/ probabilistic models Not Applicable This model tackles the issue of vagueness and uncertainty that relates to selecting a vendor. (De Boer, et al., 2001) 5 Total cost of ownership Not Applicable It is the sum total of all the cost associated with a particular vendor choice. It can be
  • 7. S/N Supplier Selection Model Types of the Model Description models grouped into pre -transaction cost and post transaction cost. (De Boer, et al., 2001) Out of all the models stated above, AHP model is a most commonly adopted model for supplier selection. The model makes use of both qualitative and quantitative approaches when determining a vendor choice. It is a very flexible model and it is the most ideal model to adopt when selecting a supplier based on a combination of more than one criteria (Erdem & Göçen, 2012) 2.2 BENEFITS OF EFFECTIVE SUPPLIER SELECTION 1) Better Innovation:Nowadays, suppliers have evolved from being just an operational arm in a supply chain. Effective suppliers are proactively seeking out techniques/ ways to deliver new ideas, processes, and products which will benefit manufacture. For instance if a supplier can innovatively redesign its production cycle in a manner that will reduce production time. This will be a great benefit to the manufacture as it will reduce the turnaround time of delivering products to customers. (Inemek & Matthyssens, 2012) 2) Higher Responsiveness: Effective supplier selection can improve the responsiveness of a product. Using the right criteria and selection model a buyer/ manufacturer can easily identify suppliers that have flexible supply chain, good logistic management and Just In Time supply. A combination of all these factors directly influences the responsiveness of a product. This can give manufacturers a competitive advantage. The supplier can also maintain a long term relationship with the supplier, for sustainable supply chain.(Ghijsen, et al., 2010) 3) Reduction of Cost through benefits globalization of Suppliers: If a manufacturer adopts an effective supply chain, with a major criteria to reduce cost ( For instance a manufacturer design its supplier selection process in such a way that suppliers are sourced from countries with low minimum wage, cheaper suppliers, who can deliver quality products); this may directly reduce cost incurred on worker wages significantly. Hence, supplier can effectively apply the mathematical model of reducing cost and maximizing profit by so doing.(Inemek & Matthyssens, 2012)
  • 8. 2.3 RISK ASSOCIATED WITH SUPPLIER SELECTION The following are the risk associated with supplier selection: 1. Turnaround time risk: Poor supplier selection can create a lag in the production time for a good. This can lead customer dissatisfaction due to delay in product delivery(Russill, 2010) 2. Financial risk: When suppliers are not effectively selected, an organisation may spend more than budgeted(Christopher & Lee, 2004). 3. Non-performance Risk: Suppliers that are ineffective may not be able to deliver agreed output or in some cases may deliver low quality output. This can directly reduce the competitiveness of a product in the market(Russill, 2010). 4. Communication / Coordination risk: This is the risk of suppliers mismanagement due to poor communication or lack of proper oversight on the supplier (Christopher & Lee, 2004). 5. Environmental Risk: An effective supplier chain can be affected by environmental disasters like earth quakes, floods or volcanoes. This may impede the production life cycle if a supplier is affected. To mitigate this risk a manufacturer should have at least two suppliers supplying similar products(Christopher & Lee, 2004). 2.4 SUPPLIER SELECTION STRATEGY AND IMPLEMENTATION ISSUES The supplier selection strategy can directly influence the value derived from a supplier relations, as strategic decisions can help an organization reduce total cost of manufacturing a product (logistics, labour, technology etc.) and increase profitability(Arjan Van, 2010). The table below describes some of the strategic decisions taken when selecting a supplier: Table 2: Some Strategic decisions to be considered when selecting a supplier(Arjan Van, 2010) S/N Sourcing Strategy Implementation Issues 1 Single Vs. Multiple Sourcing The organisation needs to critically assess if it requires a single or multiple supplier (Arjan Van, 2010). According to (Sawik, 2010) Single Sourcing tends to be cheaper overall, but a delay in production will affect the manufacturer adversely. While multiple sourcing mitigates this risk, and it is usually more expensive. 2 Global Sourcing Vs. Local Sourcing The organisation has to ascertain if a supplier is need globally or locally. Global Supplier may be considered if:  A manufacturer is purchasing in bulk (Arjan Van, 2010).  A manufacturer requires buy at reduced cost (Supply Management and Purchasing Website, 2008). Local Supplier maybe considered:  Highly responsive products.  High tech products
  • 9. S/N Sourcing Strategy Implementation Issues 3 Partnership Vs. Competitive Sourcing The organisation will determine whether or not to enter into partnership with their suppliers. The risk of choosing a partnership include: disclosure of sensitive information to suppliers. Leakage of such information may lead to loss competitive advantage. However partnership is much more long-term oriented and can endear better research and development in the production life cycle, due to commitment of the vendor. While the competitive supplier sourcing involves requesting for tenders or quotes and evaluating them to select the best vendor. 3 CASE STUDY ON THE SUPPLIER SELECTION PROCESS OF BOEING 780 Brief Overview of Boeing Company Boeing is one of the leading aerospace company in the world. They are involved in the manufacture of:  Commercial jetliners ,  Defense Jetliners,  Commercial and Military Aircrafts,  Space and security systems,  Weapons and,  Satellites Boeing has more than a 100 customers located globally. The company has offices in 70 countries, with its corporate headquarters in Chicago (Boeing Public Relations, 2013). According to (Market Watch, 2013), the company made a total sales revenue of $81.7 billion in 2012; this represented 18.86% sales growth between 2011 and 2012. Today, Boeing is one of the most innovative aerospace company; it has rapidly developed their IT systems, research and development, and supplier training. Boeing started out as merely a fabrication company, currently Boeing has a very complex supply chain, involving global suppliers and partners. (Nolan, 2012). The table below highlights the evolution of Boeing to a highly innovative company. Figure 4: Overview of Boeing (Market Watch, 2013), (Boeing Public Relations, 2013).
  • 10. Figure 5: Supply chain strategy of Boeing from 1916 to 2000 based on (Nolan, 2012) Boeing commercial aircraft include; 737, 747, 767 and 777 and the latest is Boeing 787 Dreamliner, and the 747-8. (Boeing Public Relations, 2013). For the purpose of this case study, we will review the supplier selection process in the manufacture of the Boeing 787 Dreamliner. 3.1 BENEFIT OF BOEING’SSUPPLIER SELECTIONPROCESS The major benefit of Boeing supplier selection process during the manufacture of the Dreamliner 787 is : Better Innovation:According to (Inemek & Matthyssens, 2012) suppliers can partner with manufacturers (through reseach and developmet) to develop more innovative and competive products. This was the case with Boeing; the company partnered with 50 different suppliers globally during the manufacture of the Dreamliner 787 and outsourced 70% of the manufacturing operations to suppliers around the globe. The aim of this was to reduce the cost of development from $10 to $6 billion(Denning, 2013)( Thomson Reuters, 2011). Although there was more than 3 years delay in manufacturing; Boeing was successful able to develop the innovative Dreamliner 787 with the help of its global suppliers (see Appendix 1 for details of the suppliers). 1916-1963 Boeing purchased parts and fabricated aircraftsfrom start to finish 1940-1945 Boeing began outsourcing engine production 1955-1960 Boeing broaden its group of US based outsources. The company launched 707 1970-1980 Boeing commenced global outsourcing 2000's- to Date Boeing commenced Global strategic partnership/ Global outsourcing
  • 11. Benefits of the Dreamliner Before the design of the Dreamliner 787, Boeing stakeholders were faced with a dilemma on whether to design a fuel efficient airplane or an airplane with better speed. However, after the terrorist attack on 11 September 2001, fuel priced increased, and the cost of transportation equally became higher. This event led Boeing to choose the option to develop a fuel efficient, light weighted airplane called the Dreamliner (Norris & Wagner, 2009). The Dreamliner 787 has the advantages:  One of the greatest advantages of the Dreamliner 787 is the fact that is manufactured using of composites materials. Composite materials are lighter, cheaper, unlike metals have lesser corrosion, and the component materials improve pressure inside the cabin (Brosius, 2007).  The Dreamliner is 20% more fuel efficient than airplanes that are the same size with the Dreamliner(Norris & Wagner, 2009).  It creates better customer experience using composite materials like fuselages that have low cost of maintenance.( Boeing Company, 2013)Brosius, 2007).  And 15% lower cash operating cost( Boeing Company, 2013). 3.2 IMPLEMENTATION ISSUES In 2007 Boeing reported that the forecasted bolts and screw needed for the manufacture of the Dreamliner 787 was not sufficient, this lead to a delay in production time(Lunsford & Glader, 2007). In 2008, the workers went on a 58 day strike. Most recently the Boeing has been experiencing battery over heating which has caused series of fire incidents(Brinson, et al., 2013). The diagram below presents an overview of the various implementation issue faced during the manufacture of the Boeing 787.
  • 12. Figure 6: implementation Issues faced by Boeing during the manufacture of the Boeing 787 from 2007 to 2013 (based on (Brinson, et al., 2013),(Lunsford & Glader, 2007),(Marsh, 2009) and (Peterson, 2011)) 3.2.1 Global Selection Strategy over Local Supplier selection created; Communication gap, higher overhead cost? Boeing chose to adopt a combination of “Global supplier sourcing strategy” and “partnership supplier sourcing strategy”. Boeing chose to outsource over 70% of the manufacturing operations to suppliers around the globe. The aim of this was to reduce the cost of development from $10 to $6 billion(Denning, 2013).Boeing radically changed it traditional supply chain which was between 35% to 50% outsourcing , to adopt over 70% outsourcing(Tang, et al., 2009). According to (Denning, 2013) such drastically dispersed supply chain can lead to tribal risk. Different countries speak different languages and hence may interpret data differently. The Company partnered with 50 different suppliers globally during the manufacture of the Dreamliner 787 ( Thomson Reuters, 2011).  Also Boeing adopted the use of multiple source supplier strategy when designing the engines of the plan. Customers select either a Rolls- Royce Trent Engine or a General Electric GEnx Engine (Marsh, 2009).  The supply chain of Boeing was structured such that preassembled goods are supplied to Boeing by Teir one suppliers.
  • 13. Figure 7: Boeing 787 Supply Chain Process based on (Marsh, 2009). 3.2.2 Non uniformity of Technical Specification across Suppliers According to(Nolan, 2012), prior to the manufacture of the Dreamliner 787, Boeing the technical specification team is usuallya group of 100 and 200 people. The team composition includes, Boeing engineers, Boeing Suppliers and contractors. This group of people collaborates to develop a comprehensive airplane design. This design is then sent to allBoeings suppliers, who will formulate a detailed design and engineering drawing. This process was called “build to print”. However, Boeing chose to scrap this process of “Build to print” and adopt the “build to performance” during the manufacture of Dreamliner 787. In this case Boeing will only list performance criteria and each partner (Teir 1 Supplier) was tasked with designing detailed engineering drawings of the Boeing 787. 3.3 RISK ASSOCIATED WITH BOEING SUPPLIER SELECTION Boeing selected Suppliers based on trust and confidence in thesuppliers because they felt the suppliers were very experienced in their fields(Gates, 2013) . Boeing did not maintain proper oversight on their suppliers. From research it appears that Boeing specifically selected suppliers with good market reputation in the various services required. Boeing took a drastic step to suddenly change its traditional supplier selection sourcing to a global supplier selection, also they decided to form partnership with tier one suppliers. This partnership included sharing of risk between Boeing and its tier one supplier. This changes were met with some repercussions, as follows: Tier Three Tier Two Tier One Boeing Supplies Preassemble and Supplies Preassemble and Supplies Boeing Final Assembly of parts from all Tier one supplier
  • 14.  Communication Risk :  Vought Incorporated, (a Tier one supplier of Boeing responsible for the design of the fuselage)outsourced the Automation Integrator Technology to a tier two supplier. Vought experienced severe communication gaps between its Tier two and three suppliers (including AIT which was very crucial to integrate the systems). The Tier three and two suppliers did not enter accurate and timely information in their web based communication system called Exostar(Tang, et al., 2009).  Vought was not able to accurately disseminate problems faced by these suppliers in time. This problem caused a delay of the Boeing Dreamliner by six months (Greising & Johnsson, 2007)  Financial Risk:  The delay described above, cost Vought Technology a lot of money to rectify the problems with its tier two and tier three suppliers. Vought did not have the financial capacity to continue the manufacture of the fuselage. Hence,Boeing bailed Vought out by purchasing $1 billion worth of shares from Vought to become a controlling Shareholder (Marsh, 2009).This was an unbudgeted cost for Boeing and hence is a financial risk.  Boeing had to incur the overhead cost of transporting air plane parts, they had to design an aircraft called Dreamlifter. This was cost ineffective, if Boeing had selected their suppliers locally or in countries which are nearby they would have reduced the cost of logistics (Tang, et al., 2009).  Coordination risk:  Due to the pressure to meet stipulated delivery dates, a lot of suppliers were delivering unfinished products to one another. Boeing only noticed these problems during the assembly of the preassembled airplane components from Teir one suppliers(Marsh, 2009).  Boeing officials did not notice this issue until the testing phase due to the fact that they did not monitor the activities of each of the suppliers closely. 3.4 OTHER: RECOMMENDATIONS FOR BOEING IN FUTURE AIRCRAFT MANUFACTURE The production of hi tech products, manufacturers should be weary of using global suppliers. These products are highly responsive and may require flexible supply chain, where things can be quickly returned to the suppliers(Sako, 2003). Boeing should develop a supplier park (a supplier pack is a constellation of key suppliers inside or close to a final assembly plant(Reichhart & Holweg, 2008).). This will help Boeing:  Reduce overhead cost of transporting parts across the 50 suppliers across the globe,  create flexible supply chain,  Have better oversight and better communication amongst suppliers.  Suppliers will be able to discuss manufacturing issues amongst themselves.
  • 15. Above all they will be able to achieve a shorter manufacturing cycle (Just-in-time delivery) by adopting a supplier park(Sako, 2003) . 4 CONCLUSION Effective supplier selection is key, as it can directly impact the profitability of a particular product. However, to select an effective supplier, management must make key strategic decisions, of Where? How? And What supplier to select?. After deciding on a strategic direction, the management must set clear criteria, which will be considered when shortlisting suppliers. As mentioned above, there are different decision support models that can guide a supply chain manager to pick the best supplier. However, supply chain managers should avoid cheaper cost of labour as a priority. In the case of Boeing the major supplier selection criteria was to cut cost, hence, they radically outsourced highly sensitive manufacturing operations. Boeing ended up spending more than budget and ran into huge loss during the manufacture of the Boeing 787.
  • 16. 5 APPENDIX Appendix 1: Overview of Boeing Global supplier selection and their roles in the manufacture of the Boeing 787 6 REFERENCES Boeing Company, 2013. DreamLiner Advantage. [Online] Available at: http://www.newairplane.com/787/design_highlights/#/exceptional-value/dreamliner- advantages/dreamliner-advantages [Accessed 11 November 2013]. Thomson Reuters, 2011. A wing and A prayer: Outsourcing at Boeing,: Thomson Reuters. Aguezzoul, A., 2011. Overview on supplier selection of goods versus 3PL selection. In: Logistics (LOGISTIQUA), 2011 4th International Conference on, pp. 248-253. Arjan Van, W., 2010. Decision Making in Purchasing. In: Purchasing and Supply Chain Management 5th Edition.:Thomas Rennie, pp. 29-33. Boeing Public Relations, 2013. About Us: Boeing In Brief. [Online] Available at: http://www.boeing.com/boeing/companyoffices/aboutus/brief.page [Accessed 12 November 2013]. Compton, H., 1979. Selecting Supply Sources. In: Supplies and Materials Management Second Edition. Plymouth: Macdonald and Evans, pp. 222-223. Danese, P., 2013. Supplier integration and company performance: A configurational view. Omega, Issue 41, pp. 1029-1041.
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