To save content items to your account,
please confirm that you agree to abide by our usage policies.
If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account.
Find out more about saving content to .
To save content items to your Kindle, first ensure no-reply@cambridge.org
is added to your Approved Personal Document E-mail List under your Personal Document Settings
on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part
of your Kindle email address below.
Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations.
‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi.
‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
This chapter and the next four investigate hidden characteristic problems, from voting to used-car markets to kidney exchanges. In some cases market forces have fostered contracts and other devices that induce agents to reveal their hidden characteristics. This does not mean that the equilibrium outcome is efficient in each case, however. There are incentive schemes that do induce truthful revelation of the hidden information while at the same time bringing the system close to efficiency – the Vickrey auction of Chapter 6 for instance.
Markets can be very creative in circumventing hidden information problems – for instance, warranties on consumer durables. The producer of a shoddy appliance cannot afford to offer a substantial warranty: the point of producing a low-quality item is to get more profit by keeping costs down, but if appliances are being returned for replacement or repair then costs will be high, not low. A producer who deliberately sets out to profit by misleading consumers about the quality of the product will not be able to offer the same kind of warranty as the producer of a high-quality product. The latter is credibly signaling high quality to the consumer by offering a substantial warranty. Reputable manufacturers often make good on a warranty even after it has expired, as long as the appliance is returned a month or less after the expiration date.
Although not always delivering an efficient outcome, the market system often goes a long way toward eliciting the hidden information. The next section begins with a standard example of the hidden characteristic phenomenon.
It can be in society's interest to have the hidden information remain hidden. It is often essential for communication about financial transactions to be encoded so that eavesdroppers cannot profit fromthe information. Electronic messages are encoded using an asymmetric form of encryption: the recipient R of the message publishes the key to encoding the text that R will receive. This key is the product of two very large prime numbers p and q. But only the product is published. To decode the message it is necessary to know both p and q, and only R knows these prime factors. If they are sufficiently large, it will be well beyond the ability of even a huge network of computers to determine them in anyone's lifetime, even though the product is known.
It is a common expression, used chiefly in pious language, to speak of a person who is dying as going out of time into eternity.
This expression would in fact say nothing if eternity is understood here to mean a time proceeding to infinity; for then the person would indeed never get outside time but would always progress only from one time into another. Thus what must be meant is an end of all time combined with the person's uninterrupted duration; but this duration (considering its existence as a magnitude) as a magnitude (duratio Noumenon) wholly incomparable with time, of which we are obviously able to form no concept (except a merely negative one). This thought has something horrifying about it because it leads us as it were to the edge of an abyss: for anyone who sinks into it no return is possible (“But in that earnest place/ Him who holds nothing back/ Eternity holds fast in its strong arms.” Haller); and yet there is something attractive there too: for one cannot cease turning his terrified gaze back to it again and again (nequeunt expleri corda tuendo. Virgil). It is frighteningly sublime partly because it is obscure, for the imagination works harder in darkness than it does in bright light. Yet in the end it must also be woven in a wondrous way into universal human reason, because it is encountered among all reasoning peoples at all times, clothed in one way or another. – Now when we pursue the transition from time into eternity (whether or not this idea, considered theoretically as extending cognition, has objective reality), as reason does in a moral regard, then we come up against the end of all things as temporal beings and as objects of possible experience – which end, however, in the moral order of ends, is at the same time the beginning of a duration of just those same beings as supersensible, and consequently as not standing under conditions of time; thus that duration and its state will be capable of no determination of its nature other than a moral one.
Days are as it were the children of time, because the following day, with what it contains, is an offspring of the previous one.
Networks can be tiny – your circle of very close friends, for instance. They can be vast, as in the case of the individuals and institutions connected to you and to each other through the world wide web. The internet has not only given us an extraordinary increase in the number of sources from which we can obtain information. It has also increased the value of that information, in part because of the great increase in the number of sources of information available to the compilers of any web site that you visit. (Of course, the web has also greatly increased the number of sources of misinformation.) Until the arrival of the internet, an increase in the number of sources of information brought with it a substantial increase in the cost of widespread comparison shopping: one had to sacrifice a significant amount of time to visit rival retailers. By contrast, the web has vastly reduced the cost of acquiring information from any one source, and thus has made it possible to comparison shop extensively at almost no cost. (Transactions involving rare books have increased more than a hundred-fold since the advent of the internet, because search costs have virtually dropped to zero. In the previous century collectors of rare books had to wait for the arrival of annual catalogues. These catalogues were costly and infrequently updated because of the cost and the time commitment required of their compilers.)
Nathan Rothschild added millions to his fortune when the news of Wellington's victory over Napoleon at Waterloo reached him, via carrier pigeon, before any other stock trader (Malkiel, 2003, p. 196). The installation of a telegraph cable on the ocean floor in the nineteenth century allowed London to communicate with Australia in four days. It had taken seventy days by surface mail (Fulcher, 2004, pp. 82–83).
The internet may be the network that comes to mind first, but it is probably not the most important one. That is obviously the case in parts of the third world where there is no access to the web. Instead, networks that rely on information transmission by word-of-mouth are used to locate sources of safe drinking water, to provide access to birth control information, and for AIDS prevention campaigns, to name but a few crucial examples.
To become a morally good human being it is not enough simply to let the germ of the good which lies in our species develop unhindered; there is in us an active and opposing cause of evil which is also to be combatted. It was especially the Stoics who among the ancient moralists called attention to this through their watchword virtue, which designates courage and valor (in Greek as well as in Latin) and hence presupposes the presence of an enemy. In this respect the name virtue is a glorious one, and the fact that people have often boastfully misused and derided it (as of late the word “Enlightenment”) can do it no harm. – For to require courage is already halfway to instilling it; whereas the lazy and timid way of thinking (in morality and religion), which has not the least trust in itself and waits for external help, unharnesses all the forces of a human being and renders him unworthy even of this help.
However, those valiant men [the Stoics] mistook their enemy, who is not to be sought in the natural inclinations, which merely lack discipline and openly display themselves unconcealed to everyone's consciousness, but is rather as it were an invisible enemy, one who hides behind reason and hence all the more dangerous. They send forth wisdom against folly, which lets itself be deceived by inclinations merely because of carelessness, instead of summoning it against the malice (of the human heart) which secretly undermines the disposition with soul-corrupting principles.
Considered in themselves natural inclinations are good, i.e. not reprehensible, and to want to extirpate them would not only be futile but harmful and blameworthy as well; we must rather only curb them, so that they will not wear each other out but will instead be harmonized into a whole called happiness. Now the reason that accomplishes this is called prudence. Only what is unlawful is evil in itself, absolutely reprehensible, and must be eradicated. And the reason which teaches this, all the more so when it also puts it in actual practice, alone deserves the name of wisdom, in comparison to which vice may indeed also be called folly, but only when reason feels enough strength within itself to despise it (and every stimulation to it), not just to hate it as something to be feared, and arm itself against it.
Learning is perhaps one of the most widely used, but also the most misunderstood, words. In this chapter, we first define learning in a more concrete way and elaborate on the meaning of learning perspective. Learning is one of the fundamental concepts in management. But, it is also an elusive one – it is difficult to clearly define the concept. In this book, we approach the issues of supply chain management from a learning perspective. As such, we have already used the term several times, assuming that there would be no confusion, although the concept has not been formally defined. But now we can no longer delay defining the concept, since we need a finer understanding in order to deal with issues specifically related to the learning processes in SCM. In this chapter, we delve into learning and its dynamics in operations management, in particular, SCM. We define and elaborate more on the learning propensity model (LPM). We also examine how the learning process influences the performance of a supply chain system.
Key Learning Points
• Learning in operations is a process through which the company identifies, analyzes, and internalizes complex cause-and-effect relationships among key factors in management.
• Learning capability is the company's ability to enhance its performance through applying its understanding of those cause-and-effect relationships to solving real-world managerial problems.
• Three representative operations or managerial capabilities are controllability (i.e., efficiency), flexibility, and integrating capability.
• There is a trade-off relationship between efficiency and flexibility.
• It is the integrating capability that enables the company to mitigate the trade-off.
• Chain of capability postulates that three capabilities, basic – process – system-level capability, are dynamically linked with each other.
• The principle of “chain of capability” helps the manager understand and reconcile the contrasting relationship between incremental and radical changes in the organization.
Wisdom Box 2.1
Wisdom and Insights
Confucian Wisdom – Three Ways to Learn
It is known that Confucius taught three ways for a man to learn wisdom. The first was through reflection, the noblest way. The second was through imitation, the easiest way. Finally, one could get wisdom through his own experience, the bitterest way! In modern business terminology, reflection compares to analysis (e.g., experimentation, simulation, and the like), imitation to benchmarking, and experience to “learning by doing.”
What is value? Value is the defining concept that drives the whole subject of supply chain management (SCM). Let's start with defining and discussing the meaning of value and value creation, since these are the key concepts which underlie our study on supply chain management in this book – Supply Chain Management: A Learning Perspective. When we believe a product or service has value for us, it means we are satisfied or happy with the product or service. That is, the product or service gives us great utility, which we as consumers cherish and are willing to pay for. Since each of us can be quite different in terms of feeling satisfied or happy, however, value is subjective and difficult to measure accurately without taking into account unique circumstances each of us is facing. Therefore, ultimately value should be defined and espoused by each customer or consumer who is using or consuming the product or service.
Key Learning Points
• A firm exists to earn profit. In turn, the firm maximizes its profit by creating value for the market.
• The more the customer is involved, the more the company is service-oriented. If this rule is applied, every company has both manufacturing and service attributes to a certain extent.
• Value can be defined from the customer's perspective: it is a function of utility and cost.
• Supply chain management provides an integrating perspective to create the value by analyzing and managing resources, processes, and capabilities across the companies that share the same value chain (i.e., supply chain) together.
• From a supply chain management perspective, value is also a function of responsiveness and efficiency.
• Value life cycle (VLC) is a framework that integrates new product development process and supply chain management, i.e., dealing with the entire process from developing a new product to managing the supply chain throughout the product life cycle (PLC).
• Out-of-the box strategy enables the company to overcome critical trade-offs. But, it requires energetic coordination from all of the participants sharing the same supply chain, i.e., suppliers, manufacturers, distributors, and even the customers.
Wisdom Box 1.1
Wisdom and Insights
Strawberry and Its Value
As human beings, we all consume products and/or services all the time. This morning you woke up and ate your breakfast, e.g., eggs, milk, bread, fresh fruits, and the like.
In this chapter, we show what a supply chain is, what supply chain management (SCM) is all about, and why it is important to grasp the fundamentals of SCMin creating real value for the customers. We try to understand these issues from a learning perspective, i.e., a dynamic and systemic viewpoint. First, we draw a supply chain and define key decision dimensions and considerations associated with it. By doing so, we can better appreciate the dynamic interrelationship between key factors in SCM, and develop our own capability of designing a well-balanced SCMstrategy. Since we view the SCMissues from the learning perspective, it is necessary for us to refer to qualitative concepts like organizational capability, learning dynamics (e.g., single-loop versus double-loop learning), and how these capability factors interact with each other to develop an effective SCMstrategy. Note that we already defined “operations management” in Chapter 1: “Operations management is about how to manage the three fundamental building blocks (i.e., resources, processes, and capabilities) effectively to optimize value creation. Traditional operations management has focused on a single company's boundary. That is, traditional operations management approaches the value creation from a single company's perspective.” Although most of the theories and principles in operations management are also valid for supply chain management, SCMis fundamentally different fromtraditional operations management in that it approaches the operations issues from the value chain perspective, i.e., coordination among supply chain or value chain partners sharing the same supply chain or value chain should be at the center of any SCM.
Key Learning Points
• Supply chain management is about how to manage the supply chain in an optimum way to create the maximum value for the customers.
• Over time, the boundary of supply chain management has expanded to encompass the entire value chain and now it seems very natural to use the two terms, supply chain and value chain, interchangeably.
• The structural dimension of supply chain management consists of such structural or physical elements as configuration, connection, inventory, and logistics.
• The infrastructural dimension of supply chain management is coordination or collaboration among supply chain partners.
• In order to be competitive in the market, the firm should achieve fit between its operations strategy and corporate strategy.