• ftr_soc1
  • ftr_soc2
  • ftr_soc3
  • ftr_soc4
  • ftr_soc5

The Impact of Trust on Supply Chain Efficiency

By Jesus David Cano Romano
October 16, 2017
Supply Chain Efficiency

In any business, a certain amount of communication must be in place to ensure efficiency, especially supply chain efficiency and accuracy within the company. In most situations trust is key to ensuring effective and honest communication, especially when dealing with foreign firms.  In order to examine the impact that trust has on supply chain transactions between Chinese and American associates, MIT Sloan assistant professor Karen Zheng conducted a study that had students pose as manufacturers and retailers.

The experiment had students from Tsinghua University in China pose as suppliers for goods that students from University of Texas at Dallas were buying, and vice-versa. The Chinese were originally not very trustworthy of the Americans, with production that largely ignored demand predictions, resulting in an average 10% loss in supply chain efficiency. However, in repeated transactions, the Chinese trust continued to build until it exceeded that of the Americans. The most striking conclusion of this study was that if the relationship had been maintained for long enough, the Chinese were willing to ignore the offense imparted when inaccurate or inflated data from the Americans was provided and a high standard of trust was maintained.

Professor Zheng places the concept of Guanxi as the main reason that events in the study played out the way they did. In the study, both cultures displayed strong pull-to-center bias, evidenced when they tried to avoid under or overstocking at the expense of being prepared for high or low demand. When faced with repeated interactions, however, the concept of Guanxi kicked in and the Chinese were more receptive to demand forecasts from the Americans. The study goes on to conclude that because Guanxi is so vital to American-Chinese business relations, rotating managers is a move that can damage relations. Zheng goes further and says that Guanxi benefits heavily from positive actions unrelated to day-to-day business, such as assisting with charitable causes and helping to eliminate poverty and inequality in an associated area.