Decision Sciences

Volume 30 Number 4
Fall 1999
Printed in rhe U.S.A.

Modular Network Design:

Using Information and Communication
Technology to Allocate Production Tasks
in a Virtual Organization*
Martijn R. Hoogeweegen
Multimedia Skills B. V , J. van Oldettbarneveltlaan 34-36, 3818 HB Amersfoort,
The Netherlands, email: hoogeweegen @mms-nl.nl; Erclsmus University, Rotterdam
School of Management, P: 0. Box 1738, 3000 DR Rotterdam, The Netherlands,
email: m.hoogeweegen @fac.jbk.eur nl

Wim J. M. Teunissen and Peter H. M. Vervest

Erasmus Universitv, Rotterdam School of Management, PO. Box 1738, 3000 DR Rotterdam,
The Netherlands, email: wteunisseti @fac.jbk.euml,p.vervest@fac.fbk.eurn1

RenC W. Wagenaar
Free University Amsterdam and KPN Research, Leidschendani, The Netherlands,
email: E w.wagenaar@research.kpn.com

ABSTRACT
The increased interest in customer service and the trend towards customization gives
rise to new organizational forms such as the virtual organization. This paper introduces
the Modular Network Design (MND) approach to complement Mowshowitz (1997)
theory of virtual organization. This theory focuses on metamanagement of the virtual
organization and consists of four activities: (1) determine and analyze customer require-
ments, ( 2 ) track the possibilities for satisfying these requirements, (3) develop and allo-
cate production tasks among the members of the virtual orgnnization, and (4)assess and
adjust tasks and allocation procedures. The MND approach elaborates on this theory by
breaking down both the requirements and the production tasks into modular entities, and
by measuring the performance of the resulting virtual network in terms of operating
costs and throughput time. The major contribution of the MND approach lies in its abil-
ity to support the assessment of alternative allocations of production tasks among the
members of a virtual organization, using Information and Communication Technology
(ICT) as enabler. The assessment of such alternative designs is illustrated by an appli-
cation of M N D in the air cargo industry. The results show how the virtual organization
and its members can realize significant improvements in operating costs and throughput
times when applying ICT to link and reallocate their modular production tasks in
response to customized orders.

*The authors would like to thank KLM for their support and participation in the research described in
this paper.

1073
1074 Modular Network Design

Subject Areas: Business Process Reengineering, Information and Cornmunica-

tion Technology, Networks, and Process Design.

INTRODUCTION
Increasingly, organizations are forced to heighten thcir flexibility. Trends such as
the regained interest in customer service (e.g.. as noted by Ives & Mason, 1990)
and the demand for customized goods and services (see, e.g., Davis, 1987; and
Pine, 1993) require organizations to determine the individual customers prefer-
ences before actual production. This reversed way of working demands high levels
of agility and versatility, two important aspects of organizational flexibility
(Evans. 199 I : Bahrami. 1992; and Volberda. 1996). Agility refers to the ability to
move rapidly. change course to take advantage of an opportunity or to side-step
a threat . . . [and versatility refers to] . . . the ability to dodifferent things and apply
different capabilities depending on the needs of a particular situation (Bahrami,
1992, p. 35).
To deliver the required levels of flexibility, new organizational forms
emerge, all of which share the basic premise of produce-to-order rather than pro-
duce-to-stock. Examples include the dynamic network (Miles & Snow, 1992; and
Jarvenpaa & Ives. 1994). the virtual organization (Davidow & Malone, 1992;
Handy. 1995; Alexander, 1997: and Hardwick & Bolton, 1997), the boundaryless
organization (Hirschorn & Gilmore, 1992), and the network-organization (Ching,
Holsapple, & Winston. 1996). Common to these various types of organizational
forms (in the remainder of this paper referred to as virtual organization) is that
they combine core competencies of multiple organizations in temporary align-
ments in response to specific customer preferences. New alignments are formed as
customer requirements change. Thus, flexibility is extended beyond the single
organization into the area of multiple organizations.
Information and Communication Technology (ICT) enables organizations to
transform into flexibly operating participants of the virtual organization. The capa-
bilities of ICT to store. transmit, and process data (see Huber, 1990) help managers
to redesign their organizations. both in terms of structure and processes (see, e.g.,
Stebbins, Sena. & Shani. 1995).Davenport (1993) described I(C)T as the lever for
performance improvement in the I(C)T-Process-Productivity relationship. Many
authors have developed techniques and tools to assist managers in their search for
ways to leverage ICT effectively (see, for an extensive overview, Kettinger, Teng,
& Guha, 1997). A potent example is the Internet, allowing for direct, ubiquitous
links to anyone anywhere . . , and [the Internet] lets companies build interactive
relationships with customers and suppliers, and deliver new products and services
at very low cost (Ghosh, 1998. p. 126).
The question remains. however, whether the numerous contributions in the
field of ICT-enabled organizational change really provide management with suffi-
ciently concrete guidelines to transform organizations into virtual ones. A highly
related and equally important question is how to manage the daily operations of a
virtual organization. In this respect Mowshowitz ( 1997) proposed an interesting
theory on virtual organization as a way of structuring and managing goal-oriented
activities. According to Mowshowitz, the management of the virtually organized
Hoogeweegen, Teunissen, Vervest, and Wagenuar 1075

tasks, which he calls metamanagement, consists of four basic activities: (1) deter-
mining and analyzing customer requirements; (2) tracking the possibilities for sat-
isfying customer requirements; (3) developing and allocating production tasks
among network partners; and (4)assessing and adjusting tasks and allocation pro-
cedures.
In this paper we introduce the Modular Network Design (MND) approach to
complement Mowshowitzs (1997) metamanagement. Together they support man-
agers in their efforts to establish and operate a virtual organization. The MND
approach is based on the concept of modularity. The core concept here is that both
the virtual organizations product and services as well as its production processes
are described in modules. First, the customer specifies his or her requirements in a
set of producthervice modules, called service elements. Second, the virtual orga-
nization selects those process modules that together will produce and deliver the
requested service elements.
The paper is organized as follows. The management and operation of the vir-
tual organization is analyzed further in the next section. Then the MND approach
is introduced, followed by a discussion of how to deploy ICT in business process
redesign projects. This is illustrated by an application of MND in the air cargo
industry. Finally, conclusions are drawn.

MANAGING THE VIRTUAL ORGANIZATION

Mowshowitz (1 997) argued that the concept of virtual organization lacks a univer-
sally accepted definition. Indeed, many authors have provided their own definition
(see, e.g., Davidow & Malone, 1992; Englman, 1993; Wexler, 1993; Alexander,
1997; Eicher, 1997; Hardwick & Bolton, 1997; and Mowshowitz, 1997). From
these definitions, we derived the following description of a virtual organization to
suit our research purposes: a network of organizations from which temporary
alignments are formed to combine the specific core capabilities of its members in
order to quickly exploit a specific product or service manufacturing opportunity,
after which the temporary alignment is dissolved and the members become avail-
able for another virtual and temporary assignment.
Managing a virtual organization is extremely difficult and complex. On the
one hand, it operates in a highly uncertain environment where customers can no
longer be divided into a limited number of homogeneous groups, but must be con-
sidered as single entities with their own individual preferences. On the other
hand, whenever a product or service opportunity arises, the right members from
the network must be selected to form the temporary alignment (which we will
refer to as the Temporary Supply Chain or TSC). Obviously, this process must be
managed and controlled. The logical candidate for this role is the organization
that receives the customer order. In this paper we will refer to this member of the
virtual organization as the Temporary Supply Chain Coordinator, or TSCC. So,
by definition, the TSCC is responsible for the assembly of the TSC and the coor-
dination of production and delivery by the TSC. Upon completion of the order,
the TSC is dissolved and the TSCC may assume new activities and responsibili-
ties, not necessarily as TSCC but possibly as one of the subordinate participants
in a TSC.
1076 Mndulrir Network Design

The following four main phases of the operations management of virtual

organizations can be distinguished (see Figure 1). The first phase refers to the
receipt of a customer order. The second phase consists of the formation of the TSC
by the TSCC by selecting subcontractors (in Figure 1 these are A l , B3, and C2).
Subsequently, during the third phase the product or service is produced by the TSC
and delivered to the customer. Lastly, in the fourth phase the performance of the
TSC is analyzed, the result of which is used as input to improve, for instance, order
receipt or chain formation procedures.
This model may be elaborated using the approach taken by Mowshowitz
(1997). Mowshowitz defined the virtual organization as follows:
1 . The virtual organization is structured as virtually organized tasks. A vir-
tually organized task is a goal-oriented activity that is implemented by an
appropriate assignment of concrete satisfiers to the abstract requirements
of a task.
2. The function of virtual organization is the management of the virtually
organized tasks (referred to as metamanagement). It consists of four basic
activities:
a. Analyzing abstract requirements;
b. Tracking the possibilities for satisfying requirements;
c. Developing and maintaining the procedure for assigning (or allocat-
ing) satisfiers to requirements;
d. Adjusting the optimality (or satisficing) criteria of the allocation
procedure.
3. A virtual organization is a goal-oriented enterprise operating under meta-
management.
Basic to his three-part definition of virtual organization is the distinction
between abstract requirements and concrete satisfiers. Abstract requirements refer
to the needs (such as labor and tools) to complete a task; they are abstract in the
sense that the needs may be met in a variety of ways (for example by named indi-
vidual workers and designated tools 1. The concrete satisfiers refer to all possible
options that fit the abstract requirements. According to Mowshowitz (1997), man-
aging a virtual organization is managing the process of assigning satisfiers to
requirements. Mapped onto our own model, the activities of metamanagement are
performed by the TSCC and may be considered an elaboration of Phases 1.2, and
4 as presented in Figure 1. In our model, the TSCC analyzes the order in terms of
abstract requirements. Subsequently, all possibilities for satisfying the require-
ments are generated by the TSCC. This requires that the TSCC knows what each
of the members in the virtual organization can produce and deliver, thereby taking
into account aspects such as capacities and resource availability. Based on the pro-
cedure for assigning satisfiers to requirements, the TSCC then chooses one of
these possibilities, effectively composing the TSC. When the TSC has been
formed, the execution of the order may commence (starting Phase 3 in our model).
Upon completion of the order, data is collected on the performance of the TSC,
Hoogeweegen, Teunissen, Venlesr, and Wugenuar I077

Figure 1: The four phases of the virtual organization.

which may be expressed in terms of lead time, cost, producthervice quality, cus-
tomer satisfaction, etc. (this is Phase 4 of our model). Activity D of Mowshowitz's
metamanagement captures this feedback into the TSCC's information system.
Based on this feedback, the TSCC may adjust its optimality criteria of the alloca-
tion procedure, and/or modify the procedure for assigning satisfiers to require-
ments (activity C). Furthermore, the metamagement task of the TSCC may reveal
that organizations in the TSC need to change their operations and improve the
overall performance of the TSC. This results in a management framework of vir-
tual organization as depicted in Figure 2.
The management framework shows the relevant activities of the virtual orga-
nization in its proper context, emphasizing not only the managing organization
(the TSCC) but also the customer as well as the managed organizations (those that
form the TSC). In the next section the Modular Network Design approach (MND)
is introduced to show how a customer order is translated into concrete satisfiers.

MODULAR NETWORK DESIGN

The Modular Network Design (MND) approach is based on the concept of modu-
larity (see for a first introduction Hoogeweegen, 1997; and Hoogeweegen &
Vervest, 1998). Many authors have shown how organizations are able to deliver
customized goods by means of business modularity (see, e.g., Pine, 1993; Feitzinger
& Lee, 1997; and Eisenhardt & Brown, 1998). Moreover, the strategy of busi-
ness modularity is also an approach to produce customized products efficiently
(Venkatraman & Henderson, 1998, p. 37). Garud and Kumaraswamy (1993)
referred in this respect to the economies of substitution: In a modular process
1078 Modular Network Design

Figure 2: Management framework of the virtual organization.

design only parts of a process have to be substituted by other processes to produce

a different product. The concept of business modularity as presented in the litera-
ture generally refers to manufacturing processes and how to design a product using
modular building blocks (see, e.g., Langlois & Robertson, 1992; and Baldwin &
Clark. 1997). Pine ( 1993) stated, however, that modularity may also be applicable
in service-oriented markets.
MND facilitates the analysis of mapping modularly designed and custom-
ized products and services onto modularly designed processes for production and
delivery. For that purpose, three concepts are introduced that support the first three
phases of the virtual organization.
Phase 1 is supported by the concept of service elements. MND describes
modularly designed products and services in a portfolio of service elements. Ser-
vice elements reflect specific features of the total product and/or service range
offered by an organization. In different combinations, they describe different types
of products and services.
Phase 2 is supported by the concept of production elements. MND describes
the modularly designed production (or fulfillment tasks) in production elements.
Production elements also describe specific features of the product andor service range,
but they are formulated in terms of production tasks. The difference between service
elements and production elements can be explained by the model of Mowshowitz
(1997). Service elements refer to the abstract requirements (what has been asked by
the customer), while production elements refer to the satisfiers (what needs to be
done to fulfill the customers order). Service elements are visible to the end-cus-
tomer; production elements are only visible to the TSCC and its partners.
Phase 3 is supported by the concept of the process module. MND describes
modularly designed production and delivery processes in a portfolio of process
Hoogeweegen, Teunissen, Vervest, and Wagenaar I079

modules. A process module is defined as a standardized, not further divisible,

process step. Process modules can either refer to information processing or physi-
cal activities. The difference between production elements and process modules
can be explained by opposing the how question to the what question. Produc-
tion elements answer the question of what needs to be done to produce a specific
set of service elements. For instance, in response to the service element deliver
goods at point B, several production elements may be triggered, such as drive to
point A, collect goods at point A, and transport goods from point A to point
B. Process modules answer the question of how things will be done. For instance,
to fulfill the production element transport goods from A to B, several options
may be available such as routing (directly from A to B or via C, D, etc.) and type
of modality (road, rail, sea, or air). The generic procedure of MND comprises four
steps and is depicted in Figure 3.
The first step of MND is the receipt of the customer order by an organization
that automatically becomes the Temporary Supply Chain Coordinator (TSCC) for
this particular order. If the customer has not already formulated the order in terms
of service elements, the TSCC has to capture the order into service elements. This
step is similar to the first phase of the management framework of the virtual orga-
nization and to activity A of Mowshowitzs (1997) model.
The second step of MND is the translation (by the TSCC) of the selected ser-
vice elements into a set of production elements and the allocation of these elements
to subcontractors that together will form the Temporary Supply Chain (TSC)-
Organizations A l , B3, and C2 in Figure 3. The concept of production elements
enables the TSCC to perform the second phase of the management framework of
the virtual organization that corresponds to the activities B and C of Mowshowitzs
( 1997) model.
The third step of MND is the selection of the process modules by the subcon-
tractors to produce the requested production elements. Based on the interdepen-
dencies between the process modules, a Process Module Network can be designed.
This network indicates in what order the process modules need to be executed to
fulfill the customer order. In other words, the Process Module Network reflects the
production schedule for order production. By the assignment of resources to the
process modules, the Process Module Network will show when a production
resource is needed and how much of the resource is required. This step is similar
to the third phase of the management framework of the virtual organization, but
has no direct counterpart in Mowshowitzs (1997) model.
The fourth and last step is the calculation of operating costs based on the
Activity Based Costing (ABC) technique, and throughput time is computed with
the Critical Path Method (CPM). These figures are input for the last activity of
Mowshowitzs model: improve allocation procedure (activity D). This step
refers to the fourth phase of the management framework of the virtual organization.
The MND approach can be used to illustrate how the choice of a specific set
of service elements impacts the design of the fulfillment process (e.g., the Process
Module Network-PMN). Moreover, the associated costs and throughput time of
the chosen set of service elements can be calculated. The relationship between ser-
vice elements and process modules enables organizations to fully benefit from the
concept of modularity: tailoring product and service offerings to individual customer
1080 M o d r h r Network Design

Figure 3: The modular network design (MND) approach.

,_................... ........ I----------

A I End-
Service I customer
:.........................
requirements : Elements
0
,.. ............../
........

B
', Track satistiers 0
Phase 2 L............ Production
C Elements

\
\
\
Phase3 \

\
\
\
,.......................
D
Phase 4 , Improve allocatm
...... P~.Eedu!?.. ...

preferences (mass customization: Pine, 1993) while keeping costs and throughput
time low (efficient production: Venkatraman & Henderson, 1998). The approach
may also be used to evaluate suggestions for changing the allocation procedure
(activity D) in order to improve the design of' a particular PMN. For example,
based on the use of new ICT applications. the PMN may be simplified and
improved in terms of costs and throughput times. Based on such a comparison, the
management decision whether to implement a specific ICT application can be sup-
ported.
Before we turn to an example case of how MND may be applied in a real-life
context. we first briefly summarize the literature concerning the use of ICT as an
enabler for Business Process Change. This may help to focus the discussion of how
to improve the allocation procedure of the TSCC in order to design improved
PMNs.

ICT-ENABLED BUSINESS PROCESS CHANGE

The use of ICT enables organizations ( 1 1 to automate information storage, process-
ing, and exchange: (2) to redesign internal processes because information becomes
electronically and, therefore. sooner available; and ( 3 ) even to redesign the chain
of processes beyond their own organizational boundary. Figure 4 illustrates the
coherence of these three levels of ICT impact by placing them in the context of two
interrelated questions regarding the degree of ICT integration pursued by the chain
participants. These questions are: Does the proposed ICT implementation result in
( 1 ) a redesign of the internal processes, or stated in terms of MND, a change in the
design of a Process Module Network (PMN); and (2) a change in roles played
Hoogeweegen, Teunissen, VenJest,arid Wagenaar 1081

Figure 4: Three MND-based levels of ICT integration.

Change of Process Module Network

Design
Yes

Automation Redesign

3
Business Network
Redesign
(BW

among the organizations, or in terms of MND, a change in the allocation of pro-

duction elements among subcontractors?
The three levels of ICT integration presented resemble the five levels that
have been proposed by Venkatraman (1994). The first level proposed in Figure 4,
called Business Process Automation, is a combination of the first two levels found
in Venkatraman, which are Localized Exploitation, the use of ICT within depart-
ments; and Internal Integration, the use of ICT to integrate localized ICT use
across the organization. The second level of Figure 4, called Business Process
Redesign, is identical to the third level of Venktraman, and refers to the use of ICT
to transform business processes. The third level identified in Figure 4, called Busi-
ness Network Redesign, combines the last two levels of Venkatramans frame-
work. These two levels are called Business Network Redesign, the use of ICT to
redesign processes and roles of organizations within a business network; and
Business Scope Redefinition, the use of ICT to realize new ways of doing busi-
ness.
ICT investment proposals in the category Business Process Automation
(BPA) will not affect the structure of current organizational processes (read: PMN)
nor the roles of each of the organizations involved (read: the allocation of produc-
tion elements). Here, ICT is used to automate existing processes and activities.
The second level of ICT integration refers to the redesign of business proc-
esses within a single organization. This level is usually termed Business Process
Redesign (BPR), but other frequently used terms are business process reengineer-
ing (Hammer, 1990), business process innovation (Davenport, 1993), and core
process redesign (Kaplan & Murdock, 1991). Many contributors to the field of
BPR have developed strategies (e.g., Earl, Sampler, & Short, 1995), tactics (e.g.,
Stoddard & Jarvenpaa, 1995), and general principles for process change (e.g.,
1082 Modular Network Design

Hammer, 1990; and Kettinger & Grover, 1995). Some have explicitly stressed the
enabling role of IT for BPR (e.g., the nine IT capabilities identified by Davenport
& Short, 1990).
With Business Network Redesign (BNR), the third level of ICT integration,
ICT is used to optimize the overall performance of a chain or network of organi-
zations by considering not only how internal processes can be redesigned, but also
how activities can be best distributed between the organizations (see also Clemons,
Reddi. & Row, 1993). Or. as Jarillo and Stevenson (1991) described it:
At each step of the value chain of the company, it has [to make] a conscious
choice as to whether that step should be performed inside or outside, seeking
always maximum cfficicncy in the attainment of its strategic goals, and
devising ways to reduce the problems that each decision entails. (p. 67)

MND APPLICATION IN THE AIR CARGO INDUSTRY

The MND approach has been applied in a number of industries. Here we will con-
centrate on an application of MND in the air cargo industry. The trend of custom-
ization is very apparent in this industry. Shippers ask for value-added services like
traceable. time-definite delivery and customized logistics solutions. This forces
forwarders and air carriers to, as Constance (1995, p. 113) formulated lure cus-
tomers with an ever-wider array of value-added distribution and logistics ser-
vices. Forwarders, air camers. and new entrants such as integrators are trying to
diversify their supply and develop new services. These companies no longer
present themselves as forwarders or air carriers, but as logistic service pro-
viders. The formation of (a) virtual organization(s) seems an appropriate response
to this trend because the industry is highly fragmented. The air cargo transporta-
tion chain is made up of a large number of organizations, ranging from (freight)
forwarders and brokers to airlines. Nelms ( 1994) argued that this fragmentation
creates a logistics industry Tower of Babel, indicating a negative impact on the
effectiveness of the industry as a whole. This multitude of (types of) organizations
allows numerous different virtual organizations to be formed, and many different
TSCs to be composed in response to every single shipment.
The MND has been applied to four transport orders placed by four shippers
at two different forwarders operating in the Schiphol (NL) community (see
Hoogeweegen, 1997). In this paper one of these orders will be discussed in more
detail to illustrate how the MND approach works. The focal order is placed by a
shipper, called Shipper, who wants to transport one single pallet of goods by air
from Schiedam (NL) to Detroit (US.).
The application of MND will be preceded by the definition of service ele-
ments, production elements. and process modules. Then, MND is used to model
the current situation: The requirements of the shipper are described in terms of ser-
vice elements and via the production elements translated into a Process Module
Network (PMN). With use of the Activity Based Costing technique and the Critical
Path Method, costs and throughput times are calculated to measure the overall per-
formance of the current situation. Second, scenarios are defined as propositions to
use ICT to improve the overall performance of the current TSC. Third, these scenar-
ios are modeled in the same way as the current situation. So, PMNs are constructed
Hoogeweegen, Teunissen, Vervest, and Wagenam 1083

and performance is calculated in terms of costs and throughput time. Ultimately,

these figures show whether the proposed ICT-enabled scenarios indeed lead to bet-
ter performing PMNs.

Definition of Service Elements, Production Elements, and Process Modules

Shipper contacts a forwarder for the arrangement of air transportation. This for-
warder, called Forwarder and located in Hoofddorp (NL), offers a number of ser-
vice elements. These service elements are based on the flower of service,
introduced by Lovelock (1995) and an application of this flower for Federal
Express (see Lovelock, 1991). The service elements are grouped in six categories
(as shown in Figure 5), which is only a subset of the set of elements that would rep-
resent the real-life situation.
The first category, order taking, determines the way Shipper places its order:
via telephone, facsimile, or electronically; for instance, via Electronic Data Inter-
change (EDI). The second category, logistics, refers to who will perform local
transportation from Shipper to the air carrier, called Aircarrier. Forwarder may be
asked to pick up the goods at the Shippers site (element S2.01), deliver the goods
to the air carriers site (element S2.02), or none of these two (element S2.03),
which means that Shipper will drive the goods to Aircarrier himself. Note that
when Shipper only asks for element S2.02, he will deliver the goods to For-
warders site, and Forwarder will take the further handling from there. The third
category, way of delivery, describes how Shipper will deliver the goods: They can
be packed loose, on a pallet, or on a Unit Load Device (ULD), the standard trans-
port boxes used in the air cargo industry. With the fourth category, supplies, addi-
tional services offered by Forwarder may be selected, such as labeling and
packaging of goods. The fifth category, documentation, allows the choice of having
Forwarder prepare the required transportation documents, such as CMR (the inter-
national road transportation consignment note bill), Air Way Bill (AWB-the inter-
national air transportation note bill), and customs documents. The sixth and last
category, contact, refers to the parties to be contacted on behalf of Shipper, for fur-
ther processing of the goods. Options in this category may be an air carrier (element
S6.01), customs department (element S6.02), and the consignee (element S6.03).
Production elements and process modules have also been defined. They are
not described in detail here, but are listed in the Appendix, Tables A2 through A5.
These tables comprise the production elements and process modules defined, the
relationships between service elements and production elements, between produc-
tion elements and process modules, and between the process modules (needed for
the preparation of Process Module Networks), respectively.
To illustrate the impact of different sets of service elements, we will now
model three different types of orders Shipper may consider.

Current Situation, Order 1

Step I
For Order 1, Shipper prepares all necessary documents, delivers the goods to For-
warders site, and has Forwarder deliver them to Aircarriers site. In terms of ser-
vice elements, Shipper chooses elements S 1.02, S2.02, S3.03, S4.03, S5.03, S6.0 1,
and S6.02.
I084 Mociulnr Network Design

Figure 5: List of service elements (see Table A8 in the Appendix for a list of
abbreviations used).

ORDER TAKING

LOGISTICS

WAY OF DELIVERY

SUPPLlES

DOCUMENTATION

CONTACT

Steps 2 and 3
Forwarder translates the requested service elements into production elements
(with the aid of Tables A2 and A3), dispatches them to subcontractors (see Table
A4). The subcontractors subsequently select process modules (see Table A5) to
design the Process Module Network. The subcontracted parties include AirCamer,
located in Schiphol (NL), and Forwarders own trucking department for road
transportation between its own site and the site of AirCanier. The Process Module
Network (PMN) for the first order is depicted in Figure 6. It shows the process
starting with the placement of the order by Shipper at Forwarder (see process mod-
ule number 1. I . 1. send order), up to the clearance of the goods and further cargo
handling (process module numbers 3.2.1 and 3.2.2) at Aircarriers site. The thick
line indicates the critical path. All abbreviations used are explained in Table A8 in
the Appendix. For instance, from S to F (process module number 1.2.2)refers to
the activity of road transportation from Shipper to Forwarder.

Step 4
Operating costs and (throughput) time are computed based on Tables A5 and A6.
Resource costs per unit (see Table A6) are fictional for reasons of confidentiality.
Costs and throughput time levels per participant are depicted in Table A7. Total
operating costs for the whole Temporary Supply Chain are $1 14.10, and total
throughput time is 167 minutes. Note that the amount of $1 14.10 is also fictional.

Current Situation, Order 2

Step 1
In Order 7. Shipper chooses to ask Forwarder to pick up the goods at his site. This
means that. compared to the previous order, the same set of service elements is
selected. with the addition of elenient S2.01.

Steps 2-4
For alternative 2, Shipper also chooses to ask Forwarder to pick up the goods at Ship-
pers site. The only difference between this order and the previous one is that Shipper
a

Figure 6: Process module network for order 1 .

Forwarder

;:;-----I;,
receive

Aircarrier
clear hhlmer
3.2.112

no longer needs to transport the goods to Forwarders site. The effect of this addi-
tional pick up service element leads to a new design of the PMN (see Figure 7).
Costs will decrease to $108.10, which is a reduction of $6 compared to the fust order,
and throughput time will decrease to 141 minutes, a reduction of 26 minutes.

Current Situation, Order 3

Steps 1-4
For Order 3 , Shipper even considers to ask Forwarder to prepare all necessary doc-
uments (elements S5.01 and S5.02 are added to the set of the second order). In this
case Shipper effectively outsources all activities to Forwarder, including the prep-
aration of the documents. The new PMN is depicted in Figure 8. Total operating
costs for the TSC are $1 10.10, which is $2 less compared with the second PMN.
Unfortunately, total throughput time increases by 44 minutes to 185, due to the
addition of the preparation of the documents to the critical path.

Summary of Current Situation

Figure 9 summarizes the results of the three alternatives available to Shipper. Ship-
per decides to place an order at Forwarder based on the third set of service ele-
ments, because he wants to minimize his own costs (apart from the costs
Forwarder will charge). In Order 3, Shippers contribution to the total cost level is
$8.70, compared to $79.20 for Order 1 and $25.20 for Order 2 (see also Table A7
in the Appendix). Using Order 3 as a point of reference, alternative PMNs, enabled
by ICT use, will be evaluated next.

Definition of Scenarios
Departing from the set of service elements selected in Order 3, Forwarder can now
search for opportunitiesto compose different sets of production elements to optimize
I086 Modular Network Design

Figure 7: Process module network for order 2.

Figure 8: Process module network for order 3.

Shipper

Forwarder

the Process Module Network (PMN) in terms of costs and throughput time. Three
scenarios will be formulated, one for each level of ICT impact defined in the pre-
vious section. The first scenario is a Business Process Automation (BPA) scenario.
ICT will be used to automate the exchange of information between Forwarder and
AirCanier (see the IT capabilities transactional and automational of Davenport
& Short, 1990). The current design of the PMN will not be changed, nor will the
roles the participants play. The second scenario is a Business Process Redesign
(BPR) scenario. This scenario presents a way to use ICT to reduce throughput time
(see capability sequential of Davenport & Short) without changing the roles of
the various participants. The third scenario is a Business Network Redesign (BNR)
Hoogeweegen, Teunissen, Vervest, arid Wagenaar 1087

Figure 9: Results of three alternative orders.

125 I

100

75

50

25

0
Order 1 Order 2 Order 3

200 ,

150

100

50

0
Order 1 Order 2 Order 3

scenario, in which a new allocation of the activities among the participants (i.e., a
change in the roles they play) will be defined and evaluated in terms of reductions
in costs and throughput time.

BPA Scenario
Steps 2-4
Observe that Step 1 is bypassed; we take the same set of service elements defined
for the third order of the current situation. The BPA scenario focuses on the use of
ICT to automate the information exchange between the different participants in the
TSC. For instance, Forwarder could use ED1 to electronically dispatch a pre-
arrival notification (PAN) to Aircarrier, for the customs department to clear goods
ahead of actual arrival. This will lead to a shorter critical path. The new set of
selected production elements is depicted in Table A4, with the new PMN in
Figure 10. Total costs decrease to $97.50, which is $12.60 less than the original
PMN of Order 3, a decrease of 1 1.4%.Total throughput time can be reduced to 133
minutes, a reduction of about 28%.

BPR Scenario
Steps 2-4
The BPR scenario builds upon the changes proposed in the BPA scenario. It focuses
on a further reduction of the critical path by executing some process modules
1088 Modular Network Design

Figure 10: New PMN in case of the BPA scenario.

simultaneously instead of sequentially. In this case, road transportation from For-

warder via Shipper to Aircarrier can be executed at the same time as the prepara-
tion of the documents and their electronic dispatch to AirCamer. The new PMN is
depicted in Figure 1 1 . The main focus of this BPR proposal is to shorten the critical
path, not to lower costs. This is reflected in the results: Costs are reduced to $95.90
(only $1.60 less compared to the BPA scenario), and throughput time can be
reduced to 119 minutes, which is a further decrease of 14 minutes compared to the
BPA scenario. and a decrease of 35.79 compared to Order 3 .

BNR Scenario
Steps 2-4
Finally, a BNR scenario is considered. In this scenario the costs of executing road
transportation and preparation of documents is compared between Forwarder and
Aircarrier. As a result, Forwarder is disintermediated in this particular TSC,
because AirCarrier is found to be cheaper in the execution of these activities. But
this would mean that Aircarrier becomes the TSCC (see also the IT capability
disintermediation of Davenport & Short. 1990). Note that this scenario is a
hypothetical one: In the previous scenarios, Forwarder was the TSCC, and it is
unlikely that the TSCC chooses a scenario in which it has no part. Still, the sce-
nario illustrates the potential reductions in cost and throughput time, a conclusion
that may be useful to Shipper when selecting a supplier for a possible second ship-
ment of this type. The new PMN is depicted in Figure 12. Total cost increases to
$101.90. but throughput time can be further reduced to 107 minutes.

Summary of Scenarios
All costs and throughput time levels of the three scenarios are summarized in Fig-
ure 13. The figure illustrates that the BPR scenario results in the lowest total costs
whereas the BNR scenario results in the lowest throughput time.
Hoogeweegen, Teunissen, Vervest, and Wagenaar 1089

Figure 11: New PMN in case of the BPR scenario.

Shipper

Aircarrier

Figure 12: New PMN in case of the BNR scenario.

In addition to these totals, it is interesting to analyze how benefits are distrib-

uted among the participants. Figure 14 shows the reductions in costs compared to
the original PMN of Order 3. Only the reductions for Forwarder and Aircarrier are
depicted; the cost level of Shipper remains the same in the BPA, BPR, and BNR
scenarios because the set of service elements does not change in these scenarios.
Furthermore, the differences are not depicted for the last scenario (BNR) because
in that case Forwarder does not contribute to the order fulfillment anymore.
Figure 14 shows that, in the BPR scenario, AirCarrier makes additional costs
of $3 compared to the BPA scenario. Thus, when Aircarrier prints the electronically
1090 Modular Network Design

Figure 13: Summary of the results of the scenarios.

125

Order 3 Order 3 , Order 3, Order 3 ,

BPA BPR BNR

200 ,

Order 3 Order 3 , Order 3 , Order 3 ,

BPA BPR BNR

received documents (hard copies are required, for instance, by the customs depart-
ment), as evaluated in the BPR scenario, it increases its own cost level, while For-
warder is able to save $4.60. Obviously, Forwarder will be far more enthusiastic
than AirCanier, even though the major improvement of throughput time originates
from the removal of the process module customs clearance from Aircarriers
critical path.
The results show that benefits are unequally distributed among the members
of the supply chain and that they are interdependent (the savings Forwarder could
generate depend on the willingness of AirCarrier to cooperate). For ED1 invest-
ments, similar results were reported by Riggins and Mukhopadhyay (1994) and
Hoogeweegen, Streng, and Wagenaar (1998). Based on the above results, the par-
ticipating organizations might decide not to implement any of the scenarios. How-
ever, it is in the interest of the shipper, and therefore of all the participants, to
further explore how to increase the attractiveness of these scenarios. A possibility
would be to re-allocate the savings among the participants. Alternatively, they may
pursue other improvements based on ICT and develop new scenarios.

CONCLUSION
Based on the theory of Mowshowitz ( 1 997) on virtual organization, a manage-
ment framework has been introduced. It describes how the activities of the virtual
Hoogeweegen, Teunissen, Vervest, and Wagenaar 1091

Figure 14: Differences in reductions of cost levels for Forwarder and AirCarrier.

organization are triggered by customer demand and in what order these activities
need to be executed to fulfill customer orders. This framework has been operation-
alized in the Modular Network Design (MND) approach. MND can be used to
model both customer requirements and the satisfiers, or processes, that will deliver
the requirements.
The case study demonstrates the applicability of MND in terms of how to
match requirements (the service elements) to satisfiers (the production elements
and Process Module Networks) and how to improve these satisfiers by means of
ICT use. We showed how changes made in the selected set of service elements
impact the design of the Process Module Network, as well as its cost and through-
put time levels. We also illustrated how ICT can be used to further improve a Proc-
ess Module Network, once a set of service elements has been selected. This was
demonstrated by selecting different sets of production elements, resulting in dif-
ferent Process Module Networks, that all produce the same set of service elements
(read: customer order).
MND enables managers to consider how virtual organizations could operate
and how to process individual customer orders within such an organization or net-
work. It works as a facilitator to rethink current business operations and to consider
Business Process Change trajectories to meet the trend of customization.
[Received: January 16, 1998. Accepted: August 1, 1999.1
I092 Modular Network Design

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APPENDIX:
DATA FOR MND APPLICATION IN AIR CARGO INDUSTRY
Table A l : Selected service elements.
~

Category Service Element Order 1 Order 2 Order 3

Sl Order taking S 1.01 Telephone
S 1.02 Facsimile 0 .
S 1.03 ED1
S 2 Logistics S2.01 Pick up .
. . .
0

S2.02 Delivery
S2.03 None
S3 Way of delivery S3.01 Loose
S3.02 Pallet 0 0 .
S3.03 ULD
S4 Supplies S4.01 Labeling
S4.02 Packaging
S4.03 None . .
S5 Documentation S5.01 CMR & AWB
S5.02 Customs
S5.03 None
S6 Contacts 56.01 Air Carrier .
S6.02 Clearance
S6.03 Consignee
Hoogeweegen, Teunissen, Vervest, and Wagenaar 1095

Table A2: List of production elements.

Category Production Element
PI Order taking P1.01 S sends order (tel)
PI .02 S sends order (fax)
P1.03 S sends order (EDI)
P1.04 F receives order S (tel)
P1.05 F receives order S (fax)
P1.06 F receives order S (EDI)
P1.07 AC receives order S (tel)
P1.08 AC receives order (fax)
P1.09 AC receives order (EDI)
P1.10 F sends suborder AC (tel)
P1.11 F sends suborder AC (fax)
P1.12 F sends suborder AC (EDI)
P1.13 AC receives suborder F (tel)
P1.14 AC receives suborder F (fax)
P1.15 AC receives suborder F (EDI)

P2 Logistics P2.01 prepare loading

P2.02 RT S + F
P2.03 RT: F -+ AC
P2.04 RT: S -+ AC (F)
P2.05 RT: S + AC (AC)
P2.06 RT F + S
P2.07 RT: AC + S

P3 Way of delivery Not used in case

P4 Supplies Not used in case

P5 Documentation P5.01 make docs (S)
P5.02 make docs (F)
P5.03 make docs (AC)
P5.04 print e-docs (F)
P5.05 print e-docs (AC)
P5.06 send e-docs (F)
P5.07 receive e-docs (AC)
P5.08 PAN
P6 Contacts P6.01 A T SPL + USA
P6.02 customs clearance
P6.03 customs clearance with PAN
1096 Modidcrr Network Design

Table A3: Relationships of service elements with production elements.

Service Element Production Elemcnt
S 1.02Facsimile P1.02 S sends order (fax)
P1.05 F receives order (fax)
P1.08 AC receives order (fax)
PI.11 F sends suborder (fax)
P1.12F sends suborder (EDI)
P1.14 AC receives suborder (fax)
P1.15 AC receives subordcr (EDI)
S2.01 Pick up P2.06R T F + S
P2.07 RT: AC -+ S
S2.02 Delivery P2.02RT: S -+ F
P2.03RT:F -+ AC
P2.04R T S -+ AC (F)
P2.05 R T S -+ AC (AC)
S3.03ULD P2.01 prepare loading
S4.03None
S5.01 C M R & AWB P5.02 make docc (F)
S5.02Customs P5.03make docs (AC)
P5.04print e-docs (F)
P5.05 print e-docs (AC)
P5.06 cend e-docs (F)
P5.07receive e-docs (AC)
P5.08PAN
S5.03 None P5.01 make docs (S)
S6.01 Air Carrier P6.01 AT: SPL -+ USA
S6.02Clearance P6.02customs NL,paper
P6.03customs N L with PAN
Hoogeweegen, Teunissen, Vervest, arid Wagenaar 1097

Table A4: Production elements dispatched to participants (per order and per
scenario).
Order 1 Order 2 Order3 BPA BPR BNR
I098 Modular Network Design

Process Modules
Table A5: Process modules.
L

Production Process Process 2

L
n
0
0
Element Module Module 0
Number Number Name Organization R1 R2 R3 R4 R5 R6
PI .02 1.1.1 Send order Shipper 2 - 1 -
PI .05 1.1.1 2.1.1
2.1.1 Receive order Forwarder 2 - - 1 - - 2.1.2
2.1.2 Process order Forwarder 5 -
P1.08 1.1.1 3.1.1
3.1.1 Receive order AirCarrier 2 - - 1 - - 3.1.6
3.1.6 Process order AirCarrier 5 -
P1.ll 2.1.2 2.1.3
2.1.3 Send order to Forwarder 2 - 1 -
AC
P1.12 2.1.2 2.1.6
2.1.6 Send e-order Forwarder 1 - - 1 -
to AC
P1.14 2.1.3 3.1.1
3.1.1 Receive order AirCarrier 2 - - 1 -
P1.15 2.1.6 3.1.2
3.1.2 Receive AirCanier 1 -
e-order
P2.0 1 1.1.1 1.2.1
1.1.2 1.2.1
1.2.1 Prepare Shipper 15 -
loading
P2.02 1.2.1 1.2.2
1.2.2 From S to F Shipper - 60 -
P2.03 1.2.1 2.2.2
1.2.2 2.2.2
2.1.3 2.2.2
2.2.1 2.2.2
2.2.2 Receive Forwarder 5 - - 2.2.3
goods
2.2.3 From F to Forwarder - 20 - - 2.2.5
AC
2.2.5 Deliver Forwarder 5 -
shipment
Hoogeweegen, Teunissen, Vervest, and Wagenaar 1099

Table A5: (continued) Process modules.

Production Process Process

Element Module Module
Number Number Name Organization R1 R2 R3 R4 R5
P2.04 1.2.1 2.2.2
1.2.2 2.2.2
2.1.3 2.2.2
2.2.1 2.2.2
2.2.2 Receive Forwarder 5 - - 2.2.4
goods
2.2.4 From S to AC Forwarder - 40 - - 2.2.5
2.2.5 Deliver Forwarder 5 -
shipment
P2.05 1.2.1 3.2.4
3.2.3 3.2.4
3.2.4 Receive Aircarrier 5 - - 3.2.5
goods
3.2.5 From S to AC AirCarrier - 40 -
P2.06 2.1.1 2.2.1
2.1.3 2.2.1
2.1.5 2.2.1
2.2.1 From F to S Forwarder - 60 -
P2.07 3.1.5 3.1.7
3.1.7 Docs to driver AirCarrier 4 - - 3.2.3
3.2.3 From AC to S AirCarrier - 40 -
P5.01 1.1.1 1.1.2
1.1.2 Make docs Shipper 30 - 3
P5.02 2.1.3 2.1.4
2.1.4 Make docs Forwarder 30 - 3 2.1.5
2.1.5 Give docs to Forwarder 4 -
driver
P5.04 2.1.6 2.1.7
2.1.7 Print e-docs Forwarder 4 - 2 2.1.5
2.1.5 Give docs to Forwarder 4 -
driver
P5.05 3.1.6 3.1.5
3.1.4 3.1.5
3.1.5 Print e-docs AirCarrier 4 - 3
P5.06 2.1.6 2.1.9
2.1.9 Send e-docs Forwarder 1 - 1
P5.07 2.1.9 3.1.4
3.1.2 3.1.4
3.1.4 Receive AirCarrier 1 -
e-docs
1l o o Modular Network Design

Table AS: (continued) Process modules.

I-

Production Process Process sM

0
Element Module Module 0
Number Number Name Organization R1 R2 R3 R4 R5 R6 2
P5.08 2.1.5 2.1.8
2.1.9 2.1.9
2.1.8 SendPAN Forwarder 1 - - 1 -
P6.0 1 2.2.5 3.2.2
3.2.1 3.2.2
3.2.5 3.2.2
3.2.6 3.2.2
3.2.2 Further AirCarrier 5 -
handling
P6.02 2.2.5 3.2.1
3.1.1 3.2.1
3.2.1 Clear goods AirCarrier 25 -
P6.03 2. I .8 3.1.3
3.1.2 3.1.3
3.1.5 3.1.3
3.1.3 Receive PAN AirCarrier 1 - - 3.2.6
3.2.6 Cleargoods AirCarrier 25 -
(PAN)

Table A5 defines the relationships between production elements and process mod-
ules; the relationships among process modules and the resource consumption of
the process modules. As the table indicates, each production element invokes one
or more process modules and a number of relationships among these modules. For
instance, the production element P2.0 1 invokes process module number 1.2.1,
prepare loading. When production element P2.02 is selected, process module
number 1.2.2 is selected, which stands for the road transportation by the same
organization that executes process module number 1.2.1 (that is, Shipper). In this
case, process module number 1.2.1 is related to process module number 1.2.2. On
the other hand, when production element p2.04 is selected, instead of P2.02, proc-
ess module numbers 2.2.2, 2.2.4, and 2.2.5 will be selected: Road transport is out-
sourced to a third party (Forwarder). In this case process module number I .2.1 is
linked to process module number 2.2.2. Thus, production elements P2.02 and
P2.04 are mutually exclusive, and it depends on which one of the two production
elements is selected as to which process module number 1.2.1 is linked.
Table A5 also indicates how many units per resource are consumed by the
process modules. The types of resources are: labor (indicated in table as Rl),
trucking (R2), send fax (R3), receive fax (R4), send ED1 message (R5), and make
AWB, CMR, and customs (R6). The resource costs per unit are listed in Table A5.
Hoogeweegen, Teunissen, V e n w t , and Wagenaar 1101

Resources
Table A6: Resource cost per unit.
Category Number Name Unit cost
R1 RI-1 Labor (S) Minute 0.5
R1-2 Labor (F) Minute 0.5
R1-3 Labor (AC) Minute 0.4

R2 R2- 1 Truck (S) Minute 0.9

R2-2 Truck (F) Minute 0.6
R2-3 Truck (AC) Minute 0.9

R3 R3- 1 Send fax Piece 0.2

R4 R4- 1 Receive fax Piece 0.2
R5 R5- I Send ED1 Piece 0.4
R6 R6- 1 Make documents Piece 0.5

Six types of resources are distinguished: labor, trucking, send fax, receive fax,
send EDI, make AWB, CMR, and customs. The different levels of cost per unit are
depicted in the table below (costs are in U.S. dollars).

Comments:
Send and receive fax (R3 and R4) are computed as follows: Two pages of
paper are required at $0.05 plus $0.15 transmission cost.
ED1 message exchange is based on sender-pays model; therefore, only
send EDI is adopted as a resource.
In the case study, the following trucking times are used: (1) between Ship-
per and Forwarder: 60 minutes; (2) between Shipper and Aircarrier: 40
minutes; and (3) between Forwarder and Aircarrier: 20 minutes.
1102 Modular Network Design

Table A7: Results.

Total Total Critical
Shipper Forwarder AirCanier Costs Time Time
Cost in USD
ORDER 1 79.2 21.9 13.0 114.1
ORDER 2 25.2 69.9 13.0 108.1
ORDER 3 8.7 88.4 13.0 110.1
BPA 8.7 76.0 12.8 97.5
BPR 8.7 71.4 15.8 95.9
BNR 8.7 0 93.2 101.9

Time in minutes
ORDER 1 107 39 32 178 167
ORDER 2 47 1 I9 32 198 141
ORDER 3 17 153 32 202 185
BPA 17 127 32 176 133
BPR 17 119 36 174 I I9
BNR 17 0 130 147 I07

Table AS: Overview of abbreviations used in case study.

Abbreviation Explanation
AC Air Canier
AWB Airway bill
CMR Consignment note waybill for international road transport
Electr. Electronically
F Forwarder
Min Minutes
NL The Netherlands
No. Number
PMN Process Module Network
S Shipper
SUC. Successor
TSC Temporary Supply Chain
TSCC Temporary Supply Chain Coordinator
ULD Unit Load Device
USD United States Dollar
Hoogewvegen, Teunissen, Vervest, and Wagenaar 1103

Martijn Hoogeweegen received his PhD in general management from Erasmus

University Rotterdam (NL). The title of his thesis is Modular Network Design:
Assessing the Impact ofEDZ. He recently joined Multimedia Skills, an international
consultancy group specializing in project and change management, technical and
business skills in telecommunications and multimedia. He has written several
articles and conference papers on ED1 and interorganizational process redesign.

Wim Teunissen is senior consultant and partner of Herrewijn & Heeren, a Dutch
consultancy firm offering management services mainly in the area of information
systems management. Currently he is project manager of the KnowledgeNet
(Dutch: KennisNet) pilot project, aiming to connect all (primary and secondary)
schools to the Internet using the cable television network infrastructure. Wim
Teunissen is also a part-time assistant professor of information technology at the
faculty of Business Administration of the Erasmus University Rotterdam. He holds
a PhD in computer science and a Bradford (UK) MBA. He has written several
articles on ICT as enabler for business change and on information systems
management.

Peter Vervest is an experienced business professional with extensive management

and educational exposure. He is managing director of Multimedia Skills, an
international consultant group in project and change management, technical and
business skills in telecommunications and multimedia. He is also a Professor of
Telecommunications Management at the Erasmus University Rotterdam (NL), and
lectures and publishes regularly for international audiences. He has published
several books.

RenC Wagenaar works in consultant strategy at KPN Research, the R&D group of
the Royal PTT Netherlands (KPN). He also holds the part-time chair on the
Economics of Tele-informatics at the Faculty of Economics of the Free University
Amsterdam. Before he joined KPN, he worked as associate professor at the Faculty
of Business Administration of the Erasmus University Rotterdam. He started his
career in 1984 at the Data and Telecommunications Systems division of Philips
Netherlands NV. He holds a PhD in physics and a bachelors in economics. Prof.
Wagenaars current activities concern KPNs strategy and business planning for
Electronic Commerce services. He has written numerous articles and conference
papers in this field and is a frequent speaker at seminars and conferences on issues
concerning E-commerce. He is a member of the programme Council of the
Telematics Top Institute in the Netherlands and consultative expert of the G7
Initiative in Electronic Commerce for SMEs.