Abstract for: A System Dynamics Model of Evolving Supply Chain Relationships and Inter-firm Trust

Inter-firm trust is an essential element in supplier relationship that shapes the collaboration and coordination between suppliers and buyers. In this paper, we use system dynamics as an approach and perspective to analyze the evolutionary process of supply chain collaboration. Use a valve manufacturing firm as an illustrative case, this paper illustrates how a buyer firm in a networked supply chain unexpectedly harmed the inter-firm trust between the buyer and its suppliers that further resulted in the collapse of the relationships among them. Based on the quantitative system dynamics model developed, this paper argues and shows that supply chain relationships may be more complex than the consideration of transaction costs. Path dependency of the make or buy decision may exist and drive a supply chain to evolve over time. Buyers and suppliers’ rational decisions to reduce their own risks and to optimize efficiency may not only interfere with the benefits of the other side but also entrap a long existed supply chain to collapse. From the economic perspective, how to balance the time required for capacity expansion and the time for suppliers to develop new customers is of the essence in such a vulnerable supply chain setting.