Security extension through integration mechanisms in export supply chains: case study analysis of four authorized economic operators in Indonesia

Security in supply chain requires participation from all supply chain members (Jüttner et al., 2003, Martens et al., 2011, Thun and Hoenig, 2011). The focal firms have vested interests in security along their supply chains and must, therefore, extend their security interests to their chain partners. As firms engaged in importing and exporting commonly outsource their logistics functions to external logistics service providers, supply chains are increasingly complex and the risks to the supply chain security (SCS) are amplified. Thus, SCS extension, or compliance of relevant security standards at every function of the supply chain from the focal firms to their chain partners, is paramount. The relationship between the focal firms and chain partners involve mechanisms of supply chain integration (SCI) characterized by ownership, contracts, operational interdependence and information sharing (Robinson, 2009). Achieving SCI in export supply chains requires the careful coordination of activities and collaboration among the partners. Many firms are, however, failing in their attempts at SCI (Jayaram and Tan, 2010, Robinson, 2015) and thus risks are posed to SCS. Therefore, this research examines the relationship between SCI and SCS, and how integration mechanisms facilitate security extension from the focal firms to their chain partners. This research was focused on the Authorized Economic Operator (AEO) program, which is promoted by the World Customs Organization (WCO) with the overarching principle of integration to ensure security in an end-to-end supply chain (WCO, 2012). The implementation of the AEO program in Indonesian export supply chain provided the research context on the export leg from the manufacturers to the ports of export. Using a multiple case study approach of four newly awarded AEO exporters and their chain partners operating in an Indonesian port environment, the relationship between SCI and SCS was examined. Agency theory underpinned this research to examine efforts of security extension from the AEOs to their chain partners. Data were collected via semi-structured interviews and in situ observations at the Indonesian ports. The data were thematically analyzed to map supply chain structures, and identify integration mechanism practices, security risks, and measures related to security extension. Subsequently, a cross-case analysis was conducted to produce topography of integration mechanisms and security extensions across the case studies. The results demonstrate that contractual agreements facilitate direct relationships between the AEOs and the chain actors, including extended tier partners. Such agreements allow for a wider span of control and opportunities to implement security standards in the whole chain. The benefits of having wider security extension throughout the chain outweigh the agency costs of control and coordination in the principal-agent relationships between the AEOs and their chain partners. This research makes significant theoretical and practical contributions. The theoretical model developed to analyze the SCI-SCS relationship reveals that SCI is critical to achieving the required security levels within every segment of the supply chain. Improving the understanding of this relationship at the intersection of SCI-SCS has made a significant contribution to the integration literature, specifically in the context of export supply chains in the Indonesian port environment. The use of agency theory in resolving the conflicts and uncertain outcomes in principal-agent relationships also offers a new perspective on the complexity of multiple-tier relationships. Practically, the research findings will help AEOs, logistics service providers and customs administrations realize the significance of integration mechanisms for extending security standards effectively in export supply chains