The global effect

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Introduction

Globalization is a new contemporary stage of development of capitalism over the world. It is a process of change in which trade barriers are reduced. This break down of barriers is the result of transportation, increased trade and electronic communication. It also involves a process by which economies of different countries are oriented to a global market and are controlled by multinational corporations and global financial institutions. (Documentation for Action Groups in Asia – Christian conference of Asia) The aim of this chapter is to see how effective are the global supply chain practices within the auto industry and also around the world as these supply chain practices determine the ‘product reach'. The greater the product reach that too in alien market conditions the better chances of gaining market share if all other factors like reliability, durability, pricing, value for money are constant with the local market and appeals to the people. This is especially true in the automotive industry.

Reality of ‘Global' Market

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In today's world, globalization has created a large market where both the customer or dealer and the seller can offer and take more than they would actually few decades ago. Essentially, the concept of supply is more forward looking before we introduce demand. To offer the world market what previously was thought was not possible or not required is only half the work done. The other half is to survive and that is only possible if a product niche can be created. This can be seen under the light of having first mover advantage and selling their product against the short coming for a particular product which already exists in the market. Hence carving a niche market for itself in a global surrounding anywhere the product goes. This will be studied later for Toyota motors in USA market.

Strategic Decision Making

The purpose of this chapter is to discuss the impact of global supply chain in terms of both potential market and a source of manufacturing for large ‘auto manufactures'. To pursue a global reach corporate level strategies determine the operation methods for the entire organization that ‘comprises of different divisions that are also known as strategic business units (SBUs)' (Hines, 2004). These divisions can be divided in terms of product differentiation, manufacturing of the same product with different components or even based on geographic locations.

Stemming from the above concept of global market – where there is cut throat competition it is in best business interest to use competitive strategies and operational strategies that ‘focus on products and markets for effective use of organizations resources' (ibid.) that support the long term competitive strategy of the firm in targeting a global market.

Global Strategy

(Product emphasis)

Transnational Strategy

International Strategy

Multidomestic Strategy

(Area emphasis)

H

I

G

H

L

O

W

HIGH

HIGH

LOW

HIGH

PRESSURE FOR RESPONSIVENESS

P

R

E

S

S

U

R

E

S

F

O

R

I

N

T

E

G

R

A

T

I

O

N

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According to the above figure, for large auto manufacturers adopting a global strategy there is a need of high level of integration between the producers or suppliers and the auto manufacturers (components and/or raw materials). Automakers resort to the local trading market in providing a dealership to a local organization who then sells on behalf of the manufacturer. For example: Toyota Motors in the USA has dealers in all their states in the local cities. In Houston, Texas there are Fred Has Toyota Country and Don McGill Toyota Motors. There are more than one within each state to cover the entire geographic area and plus encourage healthy competition. The reason for this is because some of them are more products focused then customer focused even within their own organization.

Most manufacturing companies tend to have a global strategy so that they can have a greater share of the world market. Toyota Motors is one of them. Their products are manufactured for the entire world with some regional modifications if need arises. Therefore as you can see there is pressure for integration since manufacturing outside home country involves careful monitoring of who your suppliers are and how much autonomy do you have over them? These are some areas that I will cover in greater detail as we proceed.

Matching Demand and Supply

BAD

GOOD

GOOD

BAD

I

N

N

O

V

A

T

I

V

E

F

U

N

CTIONAL

RESPONSIVE

HIGH

EFFICIENT

HIGH

SUPPLY SIDE CAPABILITIES

M

A

R

K

E

T

R

E

Q

U

I

R

E

M

E

N

T

S

Above you see the perfect mix that should be possible depending on the type of market there is to which the organization caters. I will be using the automobile industry which is very responsive and hence needs to have an innovative market requirement that can meet the demand and be ahead of time.

Customer or dealer

Interaction Variable

Auto manufacturer

Product

Frequency of purchase, switching costs due to human and physical investment

Product

Industry Characteristics

Concentration, Number of alternative partners, Intensity of competition, Rate of technical change, Traditions and norms

Industry Characteristics

Company Characteristics

Relative Size, Preferred interaction style, Relative familiarity, Centralization of purchasing

Company Characteristics

Individual Characteristics

Relative familiarity, Preferred interaction style, Perceived importance of transaction, Risk aversion

Individual Characteristics

Table 4.1: Campbell Model (1985) – Source: Hines, 2004

Concept of Supply Chain

A basic web definition for the concept of supply chain is as follows, ‘The progression of businesses involved in the supply and purchase of materials and goods from raw materials to final product' (www.bbc.co.uk)

As you can see from the above table, if you look from the customer or dealer or the auto manufacturer side both display same characteristics that link them in terms of the structure of supply chain and how it plays an important role in the relationship between the customer or dealer and the auto manufacturer. Normally this is also true for all the different industries where raw materials are taken to be processed into finished goods. For example, in terms of the product: the frequency of repurchase suggests the strong relationship between the customer or dealer and the auto manufacturer that strengthens the supply chain.

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Inherently, supply chain management can be taken as an extension of the assembly line process in a wider perspective where each auto manufacturer is like a next person in assembly line production. Each of the suppliers within the auto industry contributing their own respective parts in a timely, cost effective manner so as to achieve the best possible results of an efficient production line that produces enough to sustain the global level of demand.

The term supply chain has a tautological problem over its definition in the literature. According to Kim (2006) supply chain refers to the flow of goods from very first process encountered in the production through to the final sale of to the customers. Researchers like Harland (1997) have suggested that the term supply chain refers to a number of differing concepts. These concepts according to the researcher include the processes inside the organization; procurement and supply management; the total chain; and the total company's network. Stuart (1997) has argued that the focus of supply chain management and its literature has shifted towards more systematic involving relationships. Rich & Hines (1997) has provided a distinction between external and internal supply chains of any firm. According to them the external supply chain includes the relationships with customers and the auto makers (in this case - Toyota), while the internal supply chain includes the conversion processes between different departments.

Handfield & Nichols (1999) defined supply chain as a concept that includes the activities associated with the flow of goods from raw material through the end customer. Michael (2001) suggests that supply chain includes a large range of the suppliers (auto manufacturers) and customers not just immediate first tier ones. The purpose of supply chain management has been explained by Kaufman (1997) as to “remove communication barriers and eliminate redundancies.”

It has been suggested in the literature that supply chain management can be the source of competitive advantage for the companies and therefore there has been a class of literature that is dedicated on the subject. Christopher (1992) has suggested that “nowadays competition among companies is becoming keen and no longer between companies and companies, but supply chains to supply chains”. Therefore companies have adopted offensive or defensive strategies to increase their organizational effectiveness through effective and efficient supply chain management. During the last decade the optimization, integration and excellence of supply chain has been the focus and goal of many firms around the globe. Drawing upon (AMR, 1997) strengthening the supply chain management can result in enhancing customer satisfaction and enabling superior financial performance for firms.

It became apparent during the review of literature that earlier supply chain management and logistics research has been concentrated on operational and financial aspects (Lee, 2000). Major problem that were identified by the researchers as well as the practitioners were inventory management, network optimization, facility layout and demand forecast. This thinking was changed towards the “flow thinking” with the evolution of the concept (Arlborjorn & Halldorsson, 2002). By emphasizing on the flow thinking theorists means that research should be focus on inter organizational level and treat supply chain as one system. Furthermore, more recently it has been suggested that theories from other disciplines like Anthropology, Philosophy, Computing and Economics be applied to the supply chain management concept and practice (Stock 2002). According to Amit & Subhash (2005) have provided a quantitative and qualitative analysis of the research papers published in the last five years and has recommended that in future, research should not overlook these points to make effective and efficient customer services.

The evolution of supply chain management has been discussed by (Chandra & Kumar 2000) and has been divided into different time periods. According to the study during 1960 – 1975 the corporations had vertical structures and optimization of processes was concentrated on functions. The typical focus of this time period has been manufacturing systems like material requirement planning etc. The second time period has been mentioned as 1975 – 1990, where corporations were vertically aligned with process mapping operations. The time period was focused on quality management like TQM and ISO Standards for all auto manufacturers. Lastly 1990s till date, where firms started to look for competitive advantage in the supply chains rather than products and services. For example; Toyota would have a perceived competitive advantage in having the most economical auto spare parts then other manufactures. This holds true also for most Japanese auto makers. This period can be characterized with information technology tools like enterprise resource planning, distribution requirements, electronic commerce, product data management and collaborative management.

Global Supply Chain

‘With globalization and integration of the world economy, the concept of extended enterprise has taken root, leading to an increasingly important role played by the supply chain management including procurement, logistics and distribution of consistently high degree of customer satisfaction in terms of quality, delivery, service and cost.' (Mehta, 2004)

Supply chain management is turning the world of business on edge, figuratively and literally. Figuratively because it has blurred traditional functional and corporate boundaries, and presented challenges not imagined during the quality process trend of the 1980s.

“Literally because the supply chain concept cuts horizontally across a business world that heretofore has been organized vertically by functional "silos" such as manufacturing, finance, marketing and logistics.” (Businessweek, 1999)

Lean versus Agile Supply Chain:

Due to the increase in the importance of supply chain management during the past decade there have emerged two schools of thoughts i.e. lean school and agile school. Womack & Jones (1996) have developed the concept of lean enterprise as a group of individuals and companies legally separate but operationally synchronized. On the contrary Karlsson & Ahlstrom (1997) have suggested that the lean supply chain management can only be applicable to small and medium sized companies. On the other hand, it has been argued by Iacocca Institute (1991) that in turbulent environments the firms should design agile supply chains to provide a competitive advantage. Similarly Hiebelar et al (1998) proposed agile supply chain management where minimum lead times are required to be able to meet market demands. Harrison et al (1999) has suggested the importance of information technology in the successful agility of supply chain of a firm.

The literature has criticized the concept of ‘forward buying' as a contingency arrangement to take advantage of lower unit prices. Hill (2000) has estimated that such a practice usually account for 50% of distribution and logistics inventory. This effect of forward buying has been termed as ‘bullwhip effect' and results in either increased cost for customers or decrease in profit for producer (Levary, 2000).

The evolution in the supply chain literature and the external pressures on the business today has resulted in a moderate school of thought which suggest that both lean and agile features in the supply chain management of a firm should be present and be aligned with the overall corporate objectives (Van Hoek, 2000). “Legile” a combination of both lean and agile has been found in literature for the optimal management of supply chain management for firms operating in any kind of environment. Drawing upon Mason-Jones et al (2000), the advantages of using this moderate approach that fits the overall corporate strategy includes cost effectiveness and high service levels in volatile marketplace.

Supply Chain Structures

It is imperative that we have an effective communication network between different suppliers to the auto manufacturers that contribute towards the final product. This is necessary because a smooth flow of operations will only determine the effectiveness of the supply chain model used by the organizations.

These relationship factors that constitute the structure of the supply chain include the following:

  • Industry Structure and Characteristics

  • Competitive Rivalries

  • Number of the auto manufacturers and Customer or dealers

  • Nature of products and services

  • Industry and organizational culture

Purpose of Supply Chain

The entire process should be cost effective and very agile to meet the changing global demands because customers' expectations are dynamic and ask for change on regular basis. A constantly reviewed supply chain process becomes part of the business strategy and improving on such supply chain practices can help achieve greater economies of scale. Below are various reasons to have an efficient supply chain:

  1. Transparency of business processes.

  2. The entire operations are broken down into smaller parts that make it easier to account for the costs and input variables that go into the production of goods and services that are part of a supply chain.

  3. Outcome and task oriented.

  4. The process is outcome oriented and each the auto manufacturer performs according to the goal predefined by the main producer.

  5. Linking parallel activity in a natural order.

  6. The natural order of production – starting with basic supplies of raw material to the final packaging of the products is always prominent.

  7. Easy to trace the problem to source.

  8. In times of a problem situation, it is easy to trace the root cause and thus the problem can be resolved in an efficient and effective manner.

  9. Possibility to manipulate processes.

  10. Many tasks can be multiplied at a single time to increase production.

  11. Treat geographically dispersed areas as a centralized unit.

  12. This is more important in terms of global supply chain where you need to coordinate with the auto manufacturers under a single business strategy of the organization.

  13. Drive out inefficiencies.

It helps out to remove redundancies and improve on better cost effective methods hence improving production methods.

(http://www.ltdmgmt.com/mag/july2002.htm)

Summary

From the above we can decipher that supply chains have an impact on the global trade patterns and the process is defined precisely according to the convenience of both parties (the start point of good transfer and end point of good receivable). In terms of planning, it is a strategic decision to coordinate your entire supply chain in an effective manner to achieve maximum benefit. This will only be possible if the demand and supply of that particular good is adequately matched together. This is very making a strategic business decision lies in the hand of the management. Not only to make the decision but also to make sure it is implemented successfully.

Combination of lean and agile supply chain is the way forward. It makes it easier for the small or medium sized firms to take advantage of swift supply chain techniques and at the same time it gives them the comfort of matching their resources and opting for best combinations that propel their growth. Whereas for the large firms, a ‘leagile' (combination of lean and agile) supply chain management allows them to meet targets with the budget constraints that weigh a lot when it comes to executing a business decision.

The combination of supply chain will make way to understand more closely the logistics operations in depth. It will allow us to have a wider and deeper understanding why organizations choose to do what they do. This will help us understand the operations of Toyota better as a case study in the forthcoming chapter and explain what they do and what their ‘logical' reason behind their actions and what triggers such decision making.