The development of radical and incremental products in the context of supply chain relationships is changing the competitive paradigms for individual firms. The knowledge required for innovation is no longer the sole responsibility of a single firm. As firms use their supply chain’s knowledge stocks to innovate and develop products, the decisions regarding its internal and joint resource investments, the types of innovation, and how the firm and the supply chain respond to market turbulences must also change. In order to understand the dynamic behavior of this complex system, a System Dynamics simulation model of a focal firm, a supplier firm, and their joint area is developed and tested.
This study is an initial effort to develop and model a framework of dynamic supply chain relationships based on the radical and incremental innovation investments of a focal and supplier firm and knowledge transfer within the supply chain. The model is validated and tested across 16 diverse scenarios that contain 40 unique runs and 640,000 iterations. The model is also extended to two different industries utilizing market based purchases of product innovations. Using this extensive testing, we create a dynamic learning environment to explore the effects of knowledge transfer and innovation investment strategies on the profits of firms and supply chains. The creation of this learning environment provides a major contribution to the literature by being the first to analyze innovation strategies and knowledge transfer in a dynamic supply chain relationship.
The extant literature focuses on recommending an initial set of conditions for supply chain members, but does not provide an understanding of the reactions of the supply chain after the change in strategy has been made. This study fills this gap by including the feedback mechanisms of the investment strategies, which provides firms and supply chains with both the initial set of recommendations and the reactions of the supply chain partners to the changes. The reactions of the supply chain partners are critical to developing a richer understanding of supply chain relationships because investment decisions can have negative impacts on the supply chain and create reinforcing feedback loops. Through the learning environment, several negative aspects are identified and recommendations are provided that enable firms and supply chains to avoid these issues.