agile supply chain management - 17-11-04

Dr. Leonidas Baziotopoulos 17-11-04

AGILE SUPPLY CHAIN MANAGEMENT

Author:

Dr. Leonidas Baziotopoulos (BA. MBA, PhD)

Introduction

Successful supply chain management requires cross-functional integration and marketing must play a crucial role. The challenge within the supply chain is to determine how to successfully accomplish this integration. Business management has entered the era of inter-network competition (Lambert and Cooper, 2000). Instead of brand versus brand or store versus store, it is now suppliers-brand-store versus suppliers-brand-store, or supply chain versus supply chain. In this emerging competitive environment, the success of the single business will depend on management’s ability to integrate the company’s network of business relationships (Bhattacharya, 1996). Supply chain management offers the opportunity to capture the synergy of intra-and inter-company integration and management .With the advent of business-to-business (B2B) electronic commerce and increasingly complex and dynamic competitive markets, companies are exploring alternative long-term relationships with their suppliers in order to improve supply chain agility. The relationship between value creation and inter-organizational relationships has been explored in transaction cost economics (Williamson, 1985), resource-dependence theory (Handfield, 1993), marketing channel theory (Achrol, 1997; Dobler et al., 1990; Johnson, 1999), and relationship governance (Dyer and Singh, 1998; Monczka et al., 1999). Companies as wide as raw materials suppliers, manufacturers and retailers may need to be involved in the process of achieving an agile supply chain (Hoek, et al., 2001). Firms operating in an international environment face a host of uncertainties that make it difficult to meet deadlines reliably. To be reliable in an uncertain and changing environment, companies must be able to quickly respond to several changes. The ability to do this in a useful time is called agility (Prater, et al., 2001). Unfortunately, measures taken to increase agility often lead to increases in complexity and uncertainty, which works against agility. Turbulent and volatile markets are rapidly being increased, as life cycles shorten and global economic and competitive forces create additional uncertainty (Christopher, 2000).Moreover, changing customer and technological requirements force manufacturers to develop agile supply chain capabilities in order to be competitive (Hoek et al., 2001). Therefore, several firms are stressing flexibility and agility in order to respond, real time, to the unique needs of customers and markets. It is therefore imperative for companies to co-operate and leverage complementary competencies, because resource competencies are often difficult to mobilize and retain by single companies ( Yusuf et al., 2003).

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Hence, legally separate and spatially distributed companies are becoming integrated through Internet-based technologies. Businesses and institutions through the Internet now share common databases and collaborate ever than before (US Internet Council, 2000). Therefore, companies submit joint bids for contracts and attribute responsibilities for design and manufacture of complex products, based on their relative competencies (Upton and McAfee, 1996). The drivers of supply chain integration include advances in information technology, complex customer requirements, intense global competition, and the desire to be the first to market with innovative products (Yusuf et al., 2004). Furthermore, the significance of time as a competitive weapon has been recognized for some time (Stalk, 1988). The ability to be able to meet customer demands for ever-shorter delivery times, and to ensure that supply can be synchronized to extended demand is very crucial in the era of time-based competition (Stalk, 1990). To become more responsive to the needs of the market requires more than speed. It also requires a high level of maneuverability that today has come to be termed agility (Christopher, 2000).

An overview of supplier-buyer relationships

At the beginning of the 20th century, inter-organizational transactions were the domain of marketing and distribution personnel (Handfield and Bechtel, 2002). Because material specifications were much more standard, cost was the primary factor in transaction decisions. Inter-organizational alliances or partnerships between buyers and sellers were not present among early 20th century companies (Fearon, 1989). Instead, vertical integration was usually used to eliminate supply uncertainty in the supply chain. The first truly “long-term” inter-organizational relationships evolved in Japan, which established the new type of integration known as “keiretsu”, characterized by informal but strict cooperation among members (Ouchi, 1980; Prescutti, 1992). Early studies of interactions among supply chain participants in the keiretsu noted that cycle times were lower than those for American counterparts (Nishiguchi, 1994). Since then, a series of shocks to the global economy have driven North American managers to consider alternative forms of relational governance. These shocks included: 1) The globalization of the world economy, 2) the evolution of the World Wide Web and new forms of B2B e-commerce solutions, and 3) increasing requirements for customer responsivess (Handfield and Bechtel, 2002).

Trends towards supply chain networks

Early 1990s companies began to identify their business environment from the supply chain perspective and to build effective supply chains that operate according to the best supply chain management (SCM) practices (Houlihan, 1987; Stevens, 1989; Davis, 1993). Also, operations were typically analyzed and problems were identified from the viewpoint of material flow efficiency (McMullan, 1996). Although, supply chain collaboration extended only to the closest partners, and in many cases second-, third,- and nth-tier suppliers and customers were not even identified. Information was collected from the customer side but was not shared to upstream (Kemppainen and Vepsalainen, 2003).

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A major trend in the emerging supply chains appeared to be that each company focused on their first-tier suppliers and customers. Today supply chain collaboration extends better beyond first-tier suppliers and customers (Meja and Wisner, 2001). Organizations are more aware of the complexity and the increasing uncertainty of business operations, and inter-firm relationships are no longer tailored and fit into simplified supply chain illustrations despite of the continuous attempt to reduce the number of suppliers (Yusuf et al., 2004; Christopher, 2000; Prater et al., 2001). As Bensaou (1999) describes, good practice is to manage effectively portfolios of buyer-supplier relationships adapted to product and market conditions. Industrial companies are also learning to listen to customer needs, and both standardization and modularization are implemented to enable cost-efficient mass customization (Kemppainen and Vepsalainen, 2003). Fawcett and Magnan (2002) state that chain-wide transparency has not realized and only few firms completely understand their supply chains even though more and more are working to make processes and relationships transparent and workable.Furthermore, the view of the future reveals the expected impact of SCM- Anderson and Delattre (2002) assign to SCM the best part of service revolution; Monczka and Morgan (2002) address the growing specialization and interdependence as the major trend at the beginning of the 21st century; and Bowersox et al. (2000) outline the emerging foundations of business relationships and promoting value management. Kemppainen and Vepsalainen (2003) address the following significant issues:

Collaboration will be the most strategic capability in the extended supply chains Service and support will become as important as the product itself Organizations will improve their service capabilities to adapt in turbulent

environment Assets and functions not at the core of value delivery are to be divested.

Acknowledging the current operating modes of industrial companies the trends outlined above cannot be considered radical, because a majority of those are being implemented. For example, component suppliers are transforming into module suppliers, providing not only a narrow manufacturing expertise but a holistic service solution, and product manufacturers not only selling the product but services such as financing, maintenance, and replenishment (Wise and Baumgartner, 1999). Also, information sharing and collaboration are praised everywhere as the new dominant operating mode.Consequently, the importance of focusing on core competencies is resulting in the increasing outsourcing of operations which the major issue within the SCM. How then, will ongoing outsourcing and specialization affect the supply chain structure and practices? The problem expected first was potential loss of control (Kemppainen and Vepsalainen, 2003).The term “hollow corporation” was coined early on (Jonas, 1986) to remind of the risks of losing both assets and talents as an outcome of outsourcing of manufacturing operations and coordinating product flows to markets. Although, the slump of the economy taught the virtues of coordination soon enough, and new business models were justified using innovative coordination mechanisms (e.g. Lambert and Cooper, 2000; Christopher, 2000; Yusuf et al., 2004). In addition to data sharing enabled by the Internet, the new models address the role of routines and incentives in the supply chain.

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Drivers of Supply Chain Integration

Today, where turbulent and volatile environment exist, there are pressures on companies to improve their operational efficiency for enhanced competitiveness and overall business performance. Such pressures include competition from foreign products, new product introduction by competitors, falling product life cycles, unpredictable customer shifts, and advances in manufacturing and information technology (Browne et al., 1995). Other pressures include the privatization of public enterprises, economic downturns and agitation by shareholders for higher returns on investment (ROI). Moreover, the most difficult challenge facing manufacturers today is how to integrate the upstream outsourcing functions and the downstream delivery functions with product design and manufacture ( Helena, 1997). Integration would enable the value creation and transfer process, from the supplier to the end customer to operate as a seamless chain along which information, knowledge, equipment and physical assets flow as if water (Gunasekaran and Yusuf, 2002; Yusuf et al., 1999). Seamless flow of physical and non-physical assets amongst firms would lead to enabling synergy and optimization of tangible and intangible assets that are potentially available to the individual firms (Kasarda and Rondinelli, 1998; Upton and McAfee, 1996).However, advanced information technology (IT) is a major driver of supply chain integration. Through the Internet, a single data file can be accessed simultaneously by spatially distributed entities ( Yusuf et al., 2004). As well, companies’ growth vertical integration and search for new markets in different countries has given rise to large administrative structures. Hence, the need to process and transfer large volumes of data in the form of designs, plans, budgets, and reports across several administrative and operation units becomes even more necessary (Yusuf et al., 2004). In addition, companies allying to become integrated global businesses needed mutual access to data on cost, personnel, stocks, sales and profit profiles. This is in addition to being able to monitor several alliance conditions such as compliance, contribution and attribution. This business scenario necessitate advanced IT applications, with greater functionality than electronic data interchange (EDI) (Christopher, 2000). Nevertheless, market turbulence arising from factors such as rapid introduction and customization of products, difficult design specification and customer shifts make continuous contact with customers and suppliers through supply chain integration most important (Russ and Camp, 1997; Davenport, 1998). Also, as competition intensified, efforts to reduce cost through just-in-time (JIT) purchasing, scheduling and distribution, led to more frequent monitoring of specified and delivered quality, schedules and other customer expectations as a routine process (Yusuf et al., 2004). The process of conception design, manufacture and delivery are therefore becoming a relay race between legally separate firms, who work with equal vigour and commitment to add the greatest value to end customer continually (Badaracco, 1991; Lee and Lau, 1999; Soliman and Youssef, 2001). In this regard, sharing of design and manufacturing knowledge between companies who work and operate in the same supply chain is a vital tool of competition.

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The notion of Agility

According to Christopher (2000) agility is a business-wide capability that embraces organizational structures, information systems, logistics processes, and, in particular, mindsets. A key feature of an agile organization is flexibility. Indeed, the origins of agility as a business concept lies in flexible manufacturing systems (FMS). Available literature on agility has provided conceptual overviews (Gunasekaran, 1999; Sharifi and Zhang, 1999; Yusuf et al., 1999; Sharp et al., 1999; Naylor et al., 1999; Anderson and Pine, 1997; Youssef, 1991).However, agility should not be confused with leanness (Christopher, 2000). According to Christopher, lean is about going more with less. The term is often used in connection with lean manufacturing to imply a “zero inventory” just-in-time (JIT) approach (Womack et al., 1990). While leanness may be an element of agility in certain circumstances, by itself it will not enable the company to meet the precise needs of te customer more rapidly (Christopher, 2000). There are certain conditions where a lean approach makes sense, in particular where demand is predictable for variety is low and volume is high (e.g. Japanese industry-Toyota). Although, the requirement for variety is high and, consequently, volume at the individual stock keeping unit (SKU) level is low (e.g. Western industry).According to Christopher (2000), agility can be defined as the ability of a company to respond rapidly to changes in demand, both in terms of volume and variety. The market conditions in which many companies find themselves are characterized by volatile and unpredictable demand; hence, the increased urgency of the search of agility (Fig. 1).

Figure 1: Agile or Lean (Christopher, 2000).

HIGH

Variety/ Variability

LOW LOW HIGH

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AGILE(Agility is needed in less predictable environments where demand is volatile and the requirement for variety is high)

LEAN (works best in high volume, low variety and

predictable environments)


The operating environment of agility

Customer responsiveness is key to success in today’s markets. Agility is all about creating that responsiveness and mastering the uncertainty (Hoek et al., 2001; Handfield and Bechtel, 2002). The agile mindset questions such stability, instead of locking up the manufacturing game plan for such long periods, why not loosen it up? This does not mean a return to the production chaos which characterized so many traditional engineering companies: it will actually depend on using new learning and capabilities (Hoek et al., 2001).The relevance of agility depends on the operating environments of the supply chain in which a company operates. Fisher (1997) suggests two specific operating environments. Functional products with predictable demand benefit most from “physically efficient” supply chain operating structures; innovative products demand “market responsive” supply chain processes that are focused on speed and flexibility rather than on cost. Also, Figure 2 shows Fisher’s supply chain matrix: efficiency has been defined in “lean” terms of productivity and quality. A different approach to production scheduling called accurate response (Fisher et al., 1994) is proposed to distinguish stable demand items from unpredictable items.In addition (Figure 3) to the two dimensions used by Fisher, in this comparative positioning of operating environments a further dimension has been introduced, that of “economic trade-offs”. Economic trade-offs based on physical assets, labor, capital and land are most relevant in the functional, lean, environment that is focused on eliminating waste in operational processes (Fisher, 1997). Trade-offs, also, based on time, information and knowledge are more relevant in the innovative agile environment.

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Figure 2 & 3: Fisher’s supply chain matrix.

Efficiency focus

Responsivenessfocus

Efficiency focus

ResponsivenessFocus

Agile Supply Chain Framework

Having insights from existing literature, Figure 4, shoes what might represent the dimensions of agility in the supply chain (Hoek et al., 2001). According to Hoek et al., (2001), customer sensitivity includes market understanding and customer “enrichment”, but also includes initiatives such as customization, postponement and rapid response. It also means that collaborative initiatives should be driven by quick response to customer requirements (Yusuf et al., 2004). Virtual integration relates to leveraging information, but now has a focus on the wider supply chain. It also envisages access to information, knowledge and competencies of companies through Internet. Also, process integration relates to mastering change and uncertainty internally, but now, through managing the supply chain as a whole, to mastering change across organizations. Network integration relates to cooperating to compete, and the broader critical issue of

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Match Mismatch

Mismatch Match

Physical trade-offs

Knowledge trade-offs


supply chain governance. It requires that companies in the chain have a common identity, which can range from commitment to agile practices, compatibility of structure, information architecture and tradable competencies.Measurement is added as a separate element, given the focus on measuring agility in the supply chain as well as its all-round relevance for the specific dimensions.

Figure 4: Elements of an agile supply chain (Hoek, Harrison and Christopher, 2001).

The aim of the integration

The aim of integration is to ensure commitment to cost and quality, as well as achieving minimum distortion to plans, schedules and regular delivery of small volumes of orders (Yusuf et al., 2004). Supply chain agility can be discussed in terms of three inter-dependent dimensions of supply chain maturity (Venkatraman and Henderson, 1998). The three dimensions are shown in Figure 5 as customer interaction, asset configuration and knowledge leverage. The challenge of an agile supply chain will be to improve and ensure balance across the three dimensions.According to Venkatraman and Henderson (1998) model (Figure 5), on customer interaction, the first stage of remote experience of products includes attempts to reach out to customers through sales catalogues, television demonstrations etc. By remotely reaching out to spatially distributed customers through virtual teams, a company can identify clusters of unique preferences for dynamic customization (stage 2). Also,

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Agile supply chain

Customer sensitivity

Network integration

Virtual integration

Process integration

measurement


dynamic customization can be targeted at communities of customers (stage 3), who have strong commitment to customer-specified product upgrades rather than variety as an end in itself. As for customer interaction, the asset configuration dimension matures from emphasis on commercial outsourcing of materials and components, to business process inter-dependence. This means delegating critical business processes to members of a supply chain. Eventually spatially distributed business processes mature into resource coalitions. At this stage, firms will contribute and share knowledge and competence within global networks of resources, and focus on limited areas of the value creation processes where comparative advantage is higher. On the third dimension of knowledge leverage, supply chain agility requires advance from emphasis on individual job competencies and structures, to teaming and free flow of knowledge across work units. Also, a company aims to leverage competencies not only internally amongst its own employees and teams, but also within a globally linked professional community of experts. Across the three stages, performance objectives would mature from operating efficiency through economic value added, to enhanced survival prospects (Venkatraman and Henderson, 1998).Figure 5: Three dimensions and stages of supply chain maturity (Venkatraman and Henderson, 1998).

Why agility is so important then ?

Leveraging supplier relations is one of the keys to achieving agile response to fast-changing markets which lies upsertream of the company in the quality of supplier relationships (Christopher, 2000). Today, many companies have not realized the competitive advantage that can be obtained from closer relationships with key suppliers (Hines, 1994). To really leverage the ability for greater agility through closer supplier relationships requires several important factors.According to Christopher (2000) one factor is that it is inevitable that the supplier base be rationalized. It is not possible to create close relationships through process integration with multiple suppliers. Agile companies have realized the need to identify a small number of “strategic” suppliers with whom they can work as partners through linked

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Dimensions of supply chain

agility

Customer interaction

Asset configuration

Knowledge leverage

STAGE 1 STAGE 2 STAGE 3

Remote experience of products

Dynamic customization

Customer communities

Outsourcing

Work unit experrtise Professional

experts communityCorporate asset

Process interdependence

Resource coalitions


systems and processes. Opportunities for establishing information-based, paperless systems utilizing concepts of vendor-managed inventory (VMI), for instance, are greater whtn both buyer and supplier look each other as vital links.Another factor for the creation of a more agile supplier base is a high level of shared information. Particularly, there has to be clear visibility of downstream demand; data on real demand needs to be captured as far down the chain as possible and shared with upstream suppliers as well as the information systems technology to make the transfer of information possible (Christopher, 2000). Also, there needs to be a willingness between the partners to put aside any past mistrust and to create a clean trustable environment in which information can easily flow in both sides is very vital.According to Christopher (2000), the most important factor is the need for a high level of “connectivity” between the company and its suppliers. That means not just the exchange of information on demand and inventory, but multiple, collaborative working relationships across the organizations at all levels (Kalafatis, 2000). It is very important today in volatile and turbulent environments for companies to establish supplier development teams that are cross-functional (Lewis, 1995). However, in today’s more challenging business environment, where volatility and unpredictable demandhave become the norm, it is crucial tha the importance of agility be more effeciently recognized. Figure 6 shows tha concept of supplier and customer partnership.

Figure 6: Building stronger partnerships through multiple linkages (Christopher, 2000).

CustomerManagement Customer

management

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R & D Marketing

Production Operations

Marketing Business

Development

Information Information systems systems


A proposed agile supply chain framework

The understanding of supply chain management has been re-conceptualized from integrating logistics across the supply chain to the current understanding of integrating and managing key business processes across the supply chain (Cooper and Lambert, 1997). Logistics, as defined by the Council of Logistics Management (1986)1 always represented a supply chain oreintation “from point of origin to point of consumption”. Then why is so confusing? As Lambert and Cooper (2000) state it is probably due to he fact that logistics is a functional silo within the management of material and information flows across the supply chain.Moreover, there is a degree of complexity required to manage all suppliers back to the point of origin and all products services out to the point of consumption. Lambert and Cooper (2000) state that it is probably easier to understand why executives want to manage their supply chains to the point of consumption, because whoever has the relationship with the end user has the power in the supply chain.In the past years, marketing channel researchers such as Wroe Alderson (1950) and Louis Bucklin (1966) conceptualized the key factors for why and how channels are created and structured. Although, for the last 25 years many channels researchers ignored two critical issues (Lambert and Cooper, 2000). First, they did not build on the early contributions by including suppliers to the manufacturer and thus neglected the significance of an overall supply chain perspective. Second, they focused on marketing activities and flows across the channel and overlooked the need to integrate and manage multiple key processes within and across companies.Despite the marketing channels literature, a profound weakness of the SCM literature is that the authors appear to assume that everyone knows who is a member of the supply and what are its responsibilities. However, many companies within a supply chain did not pay particular attention on who trully are their strategic partners and what precisely they could be able to deliver. There has been little effort to identify specific supply chain members, key processes that require integration or what management must do to successfully manage the supply chain.Therefore, the author proposes a more comprehensive framework towards an integrative supply chain (based on the framework of Hoek et al.,) with key characteristic the particular issue of agility (as discussed above). Also, the author has examined several key frameworks from the existing literature (each of these frameworks has been separately identified, described and drawned by the researchers), before making his final decision to the proposed framework (Figure 7) (e.g. Lambert and Cooper, 2000; Christopher, 2000; Hoek et al., 2001; Prater et al., 2001).

1 Logistics is the process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods, and related information flow from point-of-origin to point-of-consumption for the purpose of conforming to customer requirements (Council of Logistics Management, Oak Book, Illinois, 1986).

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Figure 7: Four-Square circulation model (F-S)

Measurement -external Measurement- external Environment internal internal environment Environment Environment

Internal internal Measurement environment environment Measurement external environment external environment

The conceptual framework emphasizes the interrelated nature of SCM and the need to go through several key step stages to design and successfully manage an effective agile supply chain. The SCM framework consists of four closely linked interrelated elements: 1) the supply chain network structure integration, 2) the supply chain business processes integration, 3) the supply chain management components integration, and 4) the supply chain behavioral vulnerability limitation (BVL).In general terms, the supply chain network structure consists of the member companies and the links amongst these companies. Business processes are the activities that generate a particular output of value to the customer. The management components are the managerial variables by which the business processes are integrated and managed across the supply chain. The behavioral vulnerability limitation is the process that companies attempt to implement practices in order to eliminate uncertainty and complexity, and thus to increase flexibility into the supply chain (internally and/or externally).

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AGILE SUPPLY CHAIN

Supply Chain Business Process

Integration

Supply Chain network structure

integration

Supply Chain Management Components Integration

Supply Chain Behavioral

Vulnerability Limitation (BVL)


1) Supply Chain Network integration

Nowadays, all companies are being involved in a supply chain, from the raw materials to the ultimate customer. How much of this supply chain needs to be managed depends on various key elements including the complexity of the product, the number of available suppliers, and the availability of raw materials (Lambert and Cooper, 2000). For most manufacturers, the supply chain seems like an uprooted tree, where the branches and roots are the extensive network of customers and suppliers (Cooper et al., 1997). The point is how many of these branches and roots need to be characteristically and effectively managed.The relationship between buyers and suppliers in the supply chain differ. Management will need to choose the level of partnership and contracts of particular supply chain links (Lambert et al., 1996). However, not all links throughout the supply chain are closely coordinated and integrated. The most appropriate relationship is the one that best fits the particular set of circumstances (Cooper and Gardner, 1993).Moreover, is crucial companies to have a strong knowledge and understanding of how the supply chain network structure is configured (Lambert and Cooper, 2000). The three primary aspects of a company’s network structure are : a) the members of the supply chain, b) the structural linkages of the network, and c) the different types of process links across the supply chain.

a) Identifying supply chain members : Including all types of members may cause the overall supply chain network to be more complex (Cooper et al., 1997). To integrate and manage all process links with all members across the supply chain would be counter-productive, if not impossible. The key point is to identify some basis for distinguishing which members are strategically critical to the success of the firm and the supply chain, and, thus, should be given managerial importance.Marketing channels researchers identified members of the channel based on who partakes in the various marketing flows including product, payment, title, information and promotion flows (Stern, 1995). The members of a supply chain, also, include all firms with whom the focal company communicates directly or indirectly through its customers or suppliers, from point of origin to point of consumption (Lambert and Cooper, 2000). Although, to make a very complex network more workable and manageable, it is important to distinguish primary and secondary members. Primary members of a supply chain are all those strategic business units who deliver value-adding activities (operational and/or managerial) in the business processes to generate a particular outcome for a particular customer or market (Lambert and Cooper, 2000). Secondary members are companies that provide resources, knowledge or assets for the primary members of the supply chain (e.g. banks lending money to a customer, an owner of vehicles that provide them for hire purposes, shipping owner companies that provide ships for hire etc.). Also, the point of origin of the supply chain occurs where no previous primary suppliers exist. All suppliers to the point of origin members are solely secondary members. The point of consumption is where no further value is added, and the product/or service is consumed (Lambert and Cooper, 2000).

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b) Linkages of the network

b1): A more comprehensive conceptualization of a supply chain integration may include three critical dimensions that strengthen linkages between companies occupying different positions in the supply chain (Vickety et al., 2003). The vertical linkages and practices foster horizontal linkages between the various functional areas within the company, and the horizontal position of the focal company within the end points of the supply chain.The vertical dimension refers to the number of suppliers/customers represented with each tier and include two major categories for first tier suppliers (Lambert and Cooper, 2000). The first category is amongst tier suppliers and their suppliers, who are second tier in the overall supply chain hierarchy. The second is amongst first tier suppliers and their customers, who are the original equipment manufacturers (OEM). Two major here practices are supplier partnering and closer customer relationships (Vickery et al., 2003). Supplier partnering threats the supplier as a strategic collaborator. A partnership amongst a buying and supplying company is a mutual relationship that involves a great level of trust, commitment over time, long-term contracts, joint conflict resolution, and the sharing of information, risks and rewards (Ellram, 1990; Heide and John, 1990; Kern and Willcocks, 2000; Spekman et al., 1998; Cox, 1999). Hence, supplier partnership may enable companies to achieve a competitive stature and might entail early supplier involvement in product design or access to superior supplier technological capabilities (Narasimhan and Das, 1999).In addition, closer customer relationships can be viewed as a downstream counterpart to supplier partnering initiatives (Vickery et al., 2003). Closer customer relationships depend on a company’s strategic ability to distinguish its customers’ requirements and the degree of its commitment to meet those requirements (Powell, 1995). It also enables companies to proactively seek information on customer demands and needs and then become more responsive.On the other hand, horizontal linkages refers to the number of tiers across the supply chain, and the most cited practice in the literature is the use of cross-functional teams (Bishop, 1999; Guzzo and Dickson, 1996; Cohen and Bailey, 1997; Henke et al, 1993; Parker, 1994). The supply chain may be long, with various tiers, or short, with few tiers (Vickery et al., 2003). The objective of cross-functional teams is collaboration-the forging of linkages among people and departments (who may have competing interests) to reach win-win results (Jassawalla and Sashittal, 1999). Cross-functional teams are typically employed to achieve the integration needed across internal functions to ensure the quality or innovation objectives are realized (Hitt et al., 1999; Clark and Wheelwright, 1992).Finally, the company’s horizontal position within the supply chain is positioned at or near the initial source of supply, be at or near to the ultimate customer, or somewhere between these end points of the supply chain (Vickery et al., 2003; Lambert and Cooper, 2000).In summary, the effects of marketing/logistics collaborative integration on logistics performance to competitors highlights the significance of cross-functional teams for internal integration (Stank et al., 1999). For an integrative supply chain both intra-firm and inter-firm integration is vital, since the internal functions comprising a firm are as much a part of the supply chain as are the external members.

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b2) Integrative information technologies:

Integrative information technologies increase the flow of relevant information amongst process participants to facilitate the integration of processes that transcend functional and firm boundaries (Vickery et al., 2003). For first tier suppliers in the automotive industry, key information technologies are: 1) computerized production systems; 2) integrated information systems; and 3) integrated electronic data interchange (EDI). Sheombar (1992), Walton and Marucheck (1998), Narasimhan and Carter (1998), Bowersox and Daugherty (1995), Lewis and Talayevsky (1997), and Van Hoek et al., (1998) support the inclusion of these technologies in defining a macro-level IT construct.More specifically, computerized production systems serve to integrate manufacturing activities into an overall planning system that stretches beyond the boundaries of the manufacturing unit (Hammel and Kopczak, 1993). Also, integrated information systems enable all functional areas within the company to access and transmit information from one area to another engendering horizontal or cross-functional integration within a firm. EDI systems integrate electronic documents into business systems with no manual intervention, providing a system for sharing information among related companies and facilitates the ease, accurate and speed of routine interactions (Mukhopadhyay et al., 1995). By enabling supply chain members to interact effectively, integrated EDI facilitates vertical integration, both upstream and downstream (Vickery et al., 2003).

2) Supply chain business process integration

a) Supply Chain Business Processes:

Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes. The purchasing department placed orders as requirements became appropriate and marketing, responding to customer demand, interfaced with several distributors and retailers and attempted to satisfy this demand. Shared information between supply chain partners can only be fully leveraged through process integration (Christopher, 2000). Process integration means collaborative working between buyers and suppliers, joint product development, common systems and shared information. According to Lambert and Cooper (2000), operating an integrated supply chain requires continuous information flows, which in turn assist to achieve the best product flows. However, in many companies, such as 3M, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business. The key supply chain processes stated by Lambert and Cooper (2000) are:- customer relationship management- customer service management- demand management- order fulfillment- manufacturing flow management- procurement

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- product development and commercialization- returns

Customer relationship management: The initial step toward integrated SCM is to justify key customers or customer groups, which the company aims as critical. Customer service teams work with customers to further identify and eliminate sources of demand variability (Lambert and Cooper, 2000; Handfield and Bechtel, 2001). Performance evaluations are undertaken to analyze the levels of service provided to customers (Vickery et al., 2003). Also, supplier investment in human and site-specific assets, however, are increasingly becoming requirements for suppliers who wish to conduct business in global supply chains (Handfield and Krause, 1999; Handfield and Nichols, 2002). Dedicated customer investments represent a requirement that buying company managers may choose to apply as a means to structure a supplier relationship. These supplier investments may include people with special skills or highly specialized machines that are specific to a particular customer.

Customer service management process: Customer service provides the source of customer information. It also provides the customer with real-time information on promising dates and product availability through interfaces with the company’s production and distribution operations (Lambert and Cooper, 2000; Kern and Willcocks, 2000; Lewis and Talalayevsky, 2004).

Demand management process: Essential inventory includes work-in-process in factories and products in the pipeline transferring from area to area. Customer demand is by far the largest source of variability and it stems from irregular order patterns (Lambert and Cooper, 2000; Yusuf et al., 2003). A good demand management system uses point-of-scale and key customer data to reduce uncertainty and provide efficient flows across the supply chain (Davis, 1993; Yusuf et al., 2003; Vickety et al., 2003; Christopher, 2000; Prater et al., 2001).

Customer order fulfillment process: The key to effective SCM is meeting customer need dates (Lambert and Cooper, 2000). Performing the order fulfillment process requires integration of the company’s manufacturing, distribution, and transportation plans. Alliances, also, should be created with key supply chain members and carriers to meet customer demands and eliminate overall delivered cost to the customer.

Manufacturing flow management process: The manufacturing process is produced and supplied products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes, and must accommodate mass customization (Lambert and Cooper, 2000). Orders are processes on a just-in-time (JIT) basis in minimum lot sizes (Christopher, 2000; Prater et al., 2001; Kalafatis, 2000; Yusuf et al., 2003). Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency of demand to customers (Handfield and Bechtel, 2001)..

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Procurement process: Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend globally, sourcing should be managed on a global basis (Prater et al., 2001; Bozarth et al., 1998; Yourdon, 1998). The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development is achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to faster transfer possible requirements (Vickery et al., 2003).

Product development and commercialization: Here, customers and suppliers must be united into the product development process, thus to reduce time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched in ever shorter time-schedules to remain competitive (Lambert and Cooper, 2000; Kern and Willcocks, 2000; Lynch, 2003; Porter, 1985). According to Lambert and Cooper, managers of the product development and commercialization process must: a) coordinate with customer relationship management to identify customer-articulated needs; b) select materials and suppliers in conjunction with procurement, and c) develop production technology in manufacturing flow to manufacture and integrate into the best supply chain flow for the product/market combination (Gunasekaran and Ngai, 2004; Romano, 2003; Lewis and Talalayevski, 2004).

3) Supply Chain Management Components Integration

The management components of SCM:

The SCM management components are the third element of the four-square circulation framework. The level of integration and management of a business process link is a function of the number and level, ranging from low to high, of components added to the link (Ellram and Cooper, 1990; Houlihan, 1985). Consequently, adding more management components or increasing the level of each component can increase the level of integration of the business process link.The literature on business process reengineering (Macneil ,1975; Williamson, 1974; Hewitt, 1994), buyer-supplier relationships (Stevens, 1989; Ellram and Cooper, 1993; Ellram and Cooper, 1990; Houlihan, 1985), and SCM (Cooper et al., 1997; Lambert et al., 1996; Turnbull, 1990) suggests various possible components that must receive managerial attention when managing supply relationships. Lambert and Cooper (2000) identified the following components which are:

- planning and control- work structure- organization structure- product flow facility structure- information flow facility structure- management methods- power and leadership structure- risk and reward structure

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- culture and atttude

Planning and control: of operations are important aspects to moving a company or supply chain in a desired direction. Different components may be highlighted at different times during the life of the supply chain, but planning transcends the phases (Ellram and Cooper, 1993). The control aspects can be operationalized as the best performance metrics for measuring supply chain success (Spekman et al., 1998). Planning and control might include key aspects such as demand planning; capacity planning; virtual batching; enterprise resource planning (Browne et al., 1995; Kehoe and Boughton, 2001). Also, collaboration (Anderson and Narus, 1990; Bhote, 1987; Ellram, 1990) has become a popular topic as an integral facet of supply chain management sourcing strategies. Collaborative behavior engages partners in joint planning and processes beyond levels reached in less intense trading relationships. It suggests that the procurement function can transcend its traditional role of contributing to “cost leadership” and can support other revenue-enhancing strategic initiatives (Spekman et al., 1998).

Work structure: shows how the company performs its tasks and activities. The level of integration of processes across the supply chain is a measure of organizational structure (Prater et al., 2001).

Organizational structure: can refer to the individual company and the supply chain. The use of cross-functional teams would suggest more a process approach (Yusuf et al., 2004, Christopher, 2000). When these teams cross organizational boundaries, such as in-plant supplier personnel, the supply chain should be more integrated. Also, this aspect refers to the type of relationship between buyers and suppliers (e.g. partnership). Concrete examples are just-in-time (JIT) concepts to the purchasing function by having a representative of the supplier located at the buying company’s facility (Stock and Lambert, 2001), specific account managers dedicated planners for one buyer, and the creation of quasi-firms (Lamming, 1993).

Product flow facility structure: refers to the network structure for sourcing, manufacturing, and distributing across the supply chain (Yusuf et al., Andersen and Buvik, 2000; Lambert and Cooper, 2000). Since inventory is necessary in the system, some supply chain members may keep a dis-proportionate amount of inventory.

Information flow facility structure: Integrative practices with respect to information and communication technology (ICT). Examples are EDI and bar coding (Vickery et al., 2003). Also, the kind of information passed among channel members and the frequency on information updating has a great influence on the efficiency of the supply chain.

Management methods: include the company’s philosophy and management techniques (Porter, 1985; Lynch, 2003; De Wit and Meyer, 2001). It is very difficult to integrate a top-down organization structure with a bottom-up structure. Many companies have different management methods arising from traditional to modern ones (e.g. Marks & Spencer, Easyjet, Beautyshop etc.).

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Power and leadership structure: The lack of power can affect the level of commitment among the supply chain members (Zineldin and Johnson, 2000). Trust and commitment grow when two parties share a variety of experiences over time, thereby improving each other’s ability to predict the other’s behavior (Doney and Cannon, 1997). It is imperative for a successful relationship among supply chain members (partners) to communicate and cooperate in an atmosphere of trust, debate, interdependence, and mutual positive expectations so that mutual benefits and satisfaction may be achieved (Lewicki and Bunker, 1995; Zineldin, 1998). Also, non-coercive bases of power increase the value of the relationship through team support and common interests as well as promoting collective goals (Skinner, 1992; Johnson and Zineldin, 2003).

Culture and attitude: are very important aspects within a supply chain. Compatibility of corporate culture across channel members cannot be undervalued. Sometimes, meshing cultures can be time consuming, as language and cultural differences often lead to serious misunderstandings on a project between two or more supply chain members, and without full commitment on the part of all client’s participants, it just won’t work (Yourdon, 1998).

4) Supply Chain Behavioral Vulnerability Limitation (BVL)

At this point, the author would like to distinguish and explain what behavioral vulnerability limitation (BVL) really means. Also, he addresses this aspect of BVL by separately explaining what behavioral stands for, and how vulnerability limitation is regarded.

a) Vulnerability limitation

Despite the obvious benefits of agility, companies that operate in complex and volatile environments, such as international markets, confront challenges in implementing the measures necessary to increase their agility. These challenges stem from the expense associated with the complex operations and management structures appropriate to enhance the desire results. For instance, it may be difficult for a multinational operating company that ships components by sea to serve niche markets with individualized goods (Prater et al., 2001). In an international environment, the supply chain usually is the part of a company that is most likely affected by several changes. The company’s international supply chain performance frequently limits performance along many traits often related with agility. For instance, it may be difficult to adjust the structure or geographical establishment of a supply chain to respond to changes in the political environment if the company has branches in more than one continent. As the issues and the dimensions regarding agility discussed earlier, which are importantly related with speed and flexibility that enhances success within a supply chain, therefore, a firm can to a certain extent make up deficiencies in the speed or flexibility. For instance, the delivery part of the supply chain may be inherently inflexible, such as is found in sea transportation (i.e. the speed is low) (Prater et al.,

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2001). As the speed in outbound logistics is inflexible, speed and flexibility in manufacturing and sourcing could help compensate for this slowness.According to Prater et al., (2001), if a deficiency is serious to limit supply chain agility, the company becomes vulnerable to competitors and customers. Two types of vulnerability exist:

1) internal vulnerability; and 2) external vulnerability

Internal vulnerability is an outcome of a lack of internal supply chain agility (Houlihan, 1987; Forrester, 1962). That is, the manufacturing segment of the supply chain. External vulnerability the result when inbound and outbound logistics part of the supply chain, as it is a major element determining the extent of agility of companies operating in international environment. Although, the extent of external vulnerability is affected by two critical factors; the complexity of sourcing and delivery and uncertainty in demand or forecasting (Kern and Willcocks, 2000; Andersen and Buvik, 2000; Yusuf et al., 2003; Hoek et al., 2001).In order to understand more the impact of demand or forecasting uncertainty, we can consider the “bullwhip effect” (Lee et al., 1997). Firm A supplies components for final assembly to the factory B. Factory B estimates demand considering on various factors, such as past and current sales. Also, supplier A forecasts its demand based on factory B’s orders. Although, there is an error in forecasted demand. The error is greater in supplier A’s forecast than in factory B’s forecast. Additionally, the less precise B’s forecast is, the more inaccurate is A’s forecast. So, the more parties are involved in the supply chain, the greater the impact of forecasting errors. Moreover, a typical response to uncertainty is to build flexibility into the supply chain, and thus adjust a firm’s ability to quickly respond to supply chain changes. The potential to increase flexibility, although, depends on environmental, organizational and technical factors (Prater et al., 2001; Yusuf et al., 2003; Johnson and Zineldin, 2003; Spekman et al., 1998; Andersen and Buvik, 2000; Handfield and Bechtel, 2002).In addition, measures taken to increase flexibility, however, may be very expensive. Most significant, if these measures also necessitate an increase in complexity of management, coordination costs may increase (Levy, 1992; Forrester, 1962; Prater et al., 2001). International supply chains are complex systems that are subject to large time-lags and variability in delivery. Complexity may arise from physical distances. Long distances often increase transportation and order lead and the order lead times and decrease the reliability of demand forecasts (Stank, 1997; Ho, 1992). In fact, this increases the uncertainty with respect to production schedules, orders to suppliers, and the likelihood of meeting demand at the right time (Swenseth and Buffa, 1991). Increasingly, large multinational companies in an effort to simultaneously provide loval responsiveness and global integration, are developing complex differentiated network structures (Norhai and Ghoshal, 1997). Large manufacturing firms have even argued that they are “hostage to complexity” with regard to the their supply chain structure (Davis, 1993). In other words, companies realize that they can not manage all eventualities, particularly in an international environment. Instead, by focussing on the most important and feasible aspects of an agile supply chain, they choose a realistic level of complexity

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that reflects an adequate extent of supply chain agility (Wilding, 1998). This focus also allows them to better deal with uncertainty of their international business logistics environment.As Prater et al., (2001), Christopher (2000), and Wilding (1998) suggests, the company has the choice of:

a) dealing with the resulting uncertainty;b) implementing costly coordination mechanisms (i.e. increasing flexibility); c) limiting complexity by reengineering the supply chain; d) development of a human resource strategy that leads to multi-skilling and encourages

cross-functional working.e) Removing chaos by focusing on the customer; communication demand information as

far upstream as possible, using simple lean approaches.

From the existing literature, many researchers have addressed several key mechanisms of dealing with complexity and uncertainty, and thus, increasing flexibility (Prater et al., 2001; Johnson and Zineldin, 2003; Spekman et al., 1998; Kern and Willcocks, 2000; Andersen and Buvik, 2000; Handfield and Bechtel, 2002; Yusuf et al., 2003; Hoek et al., 2001; Vickery et al., 2003; Wilding, 1998; Nohrai and Ghoshal, 1997; Davis, 1993; Christopher, 2000). Unfortunately, the literature does not give helpful advice on how to deal with supply chain vulnerability. While some research deals with complexity issues pertaining to general logistics, the results of that research are not always applicable to planning an agile international supply chain.However, as flexibility and complexity distinguish the external vulnerability of the supply chain, they essentially limit the degree of agility a company can and should try to achieve. Thus, as external vulnerability increases, supply chain agility should decrease to limit complexity and uncertainty. Wilding (1998) refers to the relationship between external vulnerability and supply chain agility as “supply chain exposure”. That means the indication of the degree to which an agile supply chain is “overextended” and, hence, should be restructured, improved, or adjusted in length. According to Wilding (1998), the degree of supply chain exposure depends on a number of factors, that a company operates in developing countries and it may not have the information systems or other connections it would need. The factors that relate to exposure are:

a) Extent of geographic areas covered by the supply chainb) Political areas and borders crossedc) Number of transportation modes and their speedd) Technical infrastructure and its degree of use, ande) Random occurences.

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b Suppliers-buyers Behavior in the Supply Chain

As it discussed above uncertainty and complexity are important aspects when supply chain members face when operating in international supply chain turbulent environments. Hence, their operating behavior is obviously affected by these two negative aspects.Earlier and recent research studies has been addressed to the concept of “behavioral uncertainty” and “environmental uncertainty” as two critical determinants of inter-firm coordination (Heide and John, 1990; Anderson and Schmittlein, 1984; Anderson, 1988; John and Weitz, 1989; Williamson, 1985; Stump and Heide, 1996; Johanson and Vahlne, 1997; Mohr and Spekman, 1996; Anderson and Narus, 1990; Brunard and Kleiner, 1994; Kumar, 1996; Anderson and Buvik, 2001; Gatignon and Anderson, 1988; Klein et al., 1990; Hill et al., 1990; Aulakh and Kotabe, 1997; Klein, 1989; Heide and John, 1990).Behavioral uncertainty implies strategic distortion of information by taking advantage upon a specific situation (Williamson, 1985). In international settings, behavioral uncertainty is more viable and makes specification and evaluation of trade performance and fulfillment of contract terms far more complex (Anderson and Buvik, 2001). Also, trade partners in international trade are expected to be less familiar with foreign terms of trade and trade custody and exposed to greater adaptation problems (Harrigan, 1985; Vernon, 1982). This view is supported by international sbusiness literature (e.g. Kogut and Singh, 1988), where higher behavioral uncertainty in international settings has been explained by the lack of experienced knowledge (Johanson and Vahlne, 1997), and socio-cultural differences between home and host cultures (Anderson and Gatignon, 1986; Gatignon and Anderson, 1988; Erramilli and Rao, 1993).Moreover, the negotiation process with a foreign exchange partner is expected to be more time consuming and should induce substantial bargaining costs (Bradley, 1995; Campell et al., 1988). Also, the costs of acquiring information needed to measure and evaluate the performance of an exchange partner are expected to be higher in international trade than between domestic exchange partners (Eriksson et al., 1997; Root, 1987).In general terms, behavioral uncertainty arises from the difficulties associated with the monitoring of the contractual performance of an exchange partner when bounded rationality is present (Williamson, 1985). Behavioral uncertainty is expected to increase the problem of performance evaluation and induce measurement costs, performance evaluation costs (e.g. product quality assessment), adjustment costs (e.g. change orders), and bargaining costs (e.g. negotiations of prices) (Anderson and Buvik, 2001). Also, transaction costs (see Williamson, 1985) associated with performance evaluation could be reduced by vertical integration (Weiss and Anderson, 1992) or by implementing hybrid governance strategies (Heide and John, 1990l Christopher, 1990).On the other hand, “environmental uncertainty” refer to as unanticipated changes in circumstances surrounding an exchange (Noordewier et al., 1990). High environmental uncertainty enforces the problems of writing a priori comprehensive contract, which in turn create adaptation problems (Williamson, 1985). While the unanticipated nature of the external environment has been examined in domestic buyer-seller relationships studies (Heide and John, 1990; Stump and Heide, 1996). Some research contributions posit an interaction between buyer-seller as follows: High environmental uncertainty coupled with high asset specificity demands vertical integration, while environmental

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uncertainty in the absence of asset specificity favours market transactions (Anderson, 1985). Therefore, uncertainty about buyer-seller relationships will prevail when an agreement is being executed (e.g. technological changes) along with high complexity and performance ambiguity. Under such circumstances profound on-going coordination attempts are warranted in order to handle the subsequent problems of both adaptation and information assymmetry (Anderson and Buvik, 2001). As long as supply chain members engaged in excessive commitment, trust and cooperation in their relationships (e.g. outsourcing), it would be beneficial and high demanding outcomes can be easily obtained and analyzed for the good of both parties. Either party’s commitment to the relationship is a clear indication that the party is serious about achieving success and is willing to exert effort on behalf of the relationship (Mohr and Spekman, 1996). Commitment in an outsourcing relationship might be measurable by the supplier’s allocation of specific people to the contract, the regularity with which the service team interacts with the client, the frequency with which the service team might change and any other adaptations. Trust grows with commitment, and it starts with taking the risk to trust the other party (Anderson and Buvik, 2001). Hence, satisfaction in the outsourcing relationship will come about naturally with the achievement of the client’s expectations. The expectations are partly defined by the service level agreements, the contract and the firm’s initial outsourcing strategy terms, but will also depend on how the supplier will react and respond to demands and changes made by the client’s end-users. It can be summarized, that commitment, trust, and satisfaction are the key elements of eliminating behavioral uncertainty and environmental uncertainty, when companies and partners are involved in international supply chains where turbulent environments exist. The complexity experienced in the supply chain can be viewed, therefore, as a threat and something that needs to be avoided or reduced, and thus it may force companies to innovate, learn and develop new structures or patterns of behavior.

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agile supply chain management - 17-11-04

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