Supply Chain Management: Strategy and Organization

By Mikihisa Nakano

This book explains supply chain management (SCM) using the strategy–structure–process–performance (SSPP) framework. Utilizing this well-known framework of contingency theory in the areas of strategic management and organizational design, SCM is firmly positioned among management theories. The author specifically proposes a theoretical foundation of SCM that will be relevant to such areas as operations management, logistics management, purchasing management, and marketing.

Both the static and dynamic sides of SCM are reported. On the static side, supply chain strategies are divided into three patterns: efficiency-oriented, responsiveness-oriented, and the hybrid efficiency- and responsiveness-oriented pattern. For each strategy, suitable internal and external supply chain structures and processes are proposed. On the dynamic side, the big issue is to overcome performance trade-offs. Based on theories of organizational change, process change, and dynamic capabilities, the bookpresents a model of supply chain process change. On structure, the focus is on the role of an SCM steering department.

Illustrative cases are included from such diverse industries as automobiles (Toyota and Nissan ), personal computers (Fujitsu), office equipment (Ricoh), air-conditioning (Daikin), tobacco (Japan Tobacco), chemicals and cosmetics (Kao), and casual fashion (Fast Retailing and Inditex).The strategy and organization of SCM is systematically presented on the basis of the SSPP framework.

In particular, the relationships among three management elements—strategy, structure, and process—can be identified in an SCM context. From many of the cases contained in this volume, there emerges an understanding of how to analyze the success and failure factors of SCM using the SSPP framework. In addition, the reader sees not only the static side SCM such as process operation but also its dynamic side such as process innovation and process improvement.

• Language: English
• Publisher: Springer
• Release date: Jul 26, 2019
• ISBN: 9789811384790

Book preview

Part IIntroduction and Basic Framework

© Springer Nature Singapore Pte Ltd. 2020

Mikihisa NakanoSupply Chain Managementhttps://doi.org/10.1007/978-981-13-8479-0_1

1. What Is a Supply Chain?

Mikihisa Nakano¹  

(1)

Kyoto Sangyo University, Kita-ku, Kyoto, Japan

Mikihisa Nakano

Email: [e-mail]

Abstract

The focal organization of this book is a finished goods manufacturer. To understand the concept of a supply chain, some examples of internal supply chains (the relationships among procurement, production, logistics, and sales departments) and external supply chains (the relationships of suppliers, finished goods manufacturers, wholesalers, and retailers) are introduced.

1.1 Internal Supply Chain

Supply chain is a term first used by Banbury (1975) and describes a linkage of supply-related activities across multiple functions and organizations. Before learning about supply chain management (SCM), understanding the concept of a supply chain will aid in grasping SCM. This chapter uses examples of finished goods manufacturers, which are the focal organization in this book, to introduce the structure of an internal supply chain.

We focus on four supply-related functions: procurement, production, logistics, and sales. Individual functions typically link to other functions as shown in Fig. 1.1. For example, a manufacturer needs raw materials and parts to make finished goods; how much raw materials and parts the firm needs depends on the quantity of finished goods the firm makes (the relationship between procurement and production). Similarly, the quantity of finished goods the firm makes depends on the amount of finished goods the firm sells (the relationship between production and sales). In the case of non-durable consumer goods such as groceries, a manufacturer produces finished goods on the basis of its forecast and stores these in warehouses. To reduce excess inventory and avoid shortages, the manufacturer needs to make decisions and coordinate the amount and location of inventory, and when, what and the quantity of finished goods to transport from its factories to the warehouses (the relationship between logistics and production/sales). The logistics function may be in charge of storage and transportation of raw materials and parts (the relationship between logistics and procurement). In this way, the logistics function connects with the other three functions and plays the role of integrated management of the stock and flow of materials.

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Fig. 1.1

The relationships among procurement, production, logistics, and sales departments

The supply functions include procurement, production, and logistics, but sales, which is a demand function, is included in the supply-related functions. The reason is that the main roles of the sales function, such as creating and stimulating demand and satisfying customers, have great influence on the supply functions. For example, the sales department prefers a wide range of product lines, launches promotional programs, and accepts orders even if the delivery schedule required is tight. These demand-side activities introduce complexity, instability, and unpredictability to the supply side. Consequently, linking supply functions such as procurement, production, and logistics with demand functions such as sales is a characteristic of an internal supply chain.

1.2 External Supply Chain

Next, we introduce an inter-organizational linkage. Generally, a finished goods manufacturer links to upstream raw materials and parts suppliers and downstream customers through the procurement and sales functions, respectively. In the following, we use data from Japanese annual security reports to introduce ten examples of external supply chains. Some data are slightly old because we are unable to obtain sufficient information about main suppliers and customers after fiscal year 2012; many companies have simplified their disclosure of nonconsolidated data, specifically in the breakdown of suppliers in accounts payable and customers in accounts receivable.

Figure 1.2 shows the upstream supply chain of Toyota, an auto manufacturer (the number in parentheses indicates annual sales). In FY 2011, Toyota had almost 450, 9000, and 30,000 tier 1, tier 2, and tier 3 suppliers, respectively.¹ According to the breakdown of suppliers in accounts payable in the annual security report (FY2011, nonconsolidated data), we can identify two tier 1 suppliers: Denso and JTEKT. These are members of Kyohokai, Toyota’s association of top suppliers, which was established in 1943. Denso is a world-wide mega supplier of auto parts that has several business areas: powertrain control systems, electronic systems, thermal systems, and information and safety systems. One of Denso’s main suppliers is Asmo (Toyota’s tier 2 supplier), a manufacturer of automotive small motors and wiper systems, and Nippon Wiper Blade (Toyota’s tier 3 supplier) is one of Asmo’s main suppliers. JTEKT is an auto-parts manufacturer of steering systems and bearings; one of JTEKT’s main suppliers is Daibea (Toyota’s tier 2 supplier), a manufacturer of various kinds of bearings. Tsubaki Nakashima (Toyota’s tier 3 supplier), a company that produces industrial precision balls used for bearings, is one of Daibea’s main suppliers. In Toyota’s supply chain, the upstream companies’ annual sales are smaller than the downstream companies’ sales.

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Fig. 1.2

Toyota’s upstream supply chain

Figure 1.3 shows the downstream supply chain for toiletry, cosmetics, and over-the-counter (OTC) drug (non-prescription drugs) companies. According to the breakdown of customers in accounts receivable in the annual security report (FY2011, nonconsolidated data), two focal organizations, Lion and Kobayashi Pharmaceutical, well-known Japanese toiletry and OTC drug companies, respectively, deal with the same wholesalers, specifically Paltac, Arata, Alfresa Healthcare, and Ohki. Hence, we can guess that these wholesalers are leading companies in these industries. Two other focal organizations, Kao and Shiseido, are leading toiletry and cosmetics companies, respectively, in the Japanese markets. A common point of these two companies is that they have a wholesale function in each group. Kao Customer Marketing and Shiseido Japan deal with several types of retailers, for example, drug store chains, convenience stores, and supermarkets. The advantage of direct relationships with retailers is the ability to obtain ordering data from the retailers. Lion and Kobayashi Pharmaceutical are not able to gather such data because they deal indirectly with the retailers via the wholesalers. Ordering data from retailers is not the same as point-of-sales (POS) data, but is closer to actual demand than ordering data from wholesalers. Kao and Shiseido can use this valuable data in their demand forecasting activities.

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Fig. 1.3

Downstream supply chains of toiletry, cosmetics, and OTC drug companies

Figure 1.4 illustrates a confectionery company’s supply chains. Focal organizations are well-known Japanese confectionery manufacturers: Morinaga, Ezaki Glico, and Calbee, and the breakdown of suppliers in accounts payable and customers in accounts receivable in the annual security report (FY2011, nonconsolidated data) offers additional insight. A common point regarding upstream supply chains is that packaging material manufacturers are their main suppliers; Dai Nippon Printing and Toppan Printing are large companies in this industry in Japan. Sanwa Kogyo manufactures moisture-proof packages for Calbee’s snack foods, and other suppliers include Fuji Oil (oils and fats maker) and Nagaoka (food flavors maker). The agricultural cooperatives of Shihoro-cho in Hokkaido, a prefecture in northernmost Japan, supply potatoes for Calbee to make snacks such as Potato Chips and Jagariko. In downstream supply chains, Morinaga deals with general wholesalers such as Mitsubishi Shokuhin, Nippon Access, and Kokubu, while Calbee deals with specialty confectionery wholesalers such as Yamaboshiya, Confex, and Takayama. Ezaki Glico deals with both general and specialty wholesalers. There are suppliers and customers in these supply chains with much larger annual sales than the focal manufacturers, unlike Toyota’s supply chain (see Fig. 1.2).

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Fig. 1.4

Confectionery companies’ supply chains

Figure 1.5 shows analytical and measuring instruments companies’ supply chains. Focal organizations here are Shimadzu and Horiba, which are global precision instrument companies based in Kyoto, Japan. The breakdown of suppliers in accounts payable and customers in accounts receivable in the annual security report (FY2011, nonconsolidated data) helps identify the supply chain companies. Shimadzu has several business areas, for example, analytical instruments for life science, testing and measuring instruments from structures to nanoparticles, medical systems based on diagnostic imaging technology, aircraft equipment, and industrial machinery. Mitsubishi Heavy Industries and the Ministry of Defense are its main customers; another customer, Takeda Rika Kogyo, is an analytical and measuring instruments sales and service company. Horiba is a leading company in the field of automotive test systems, but also makes instruments for other fields, such as environmental, medical, and semiconductor devices. Its main customers are Hitachi High-Tech Solutions (a maker of several instruments and a solutions provider), Denso (world-wide mega supplier of auto-parts), and Fukuda Denshi (medical instruments maker). As seen by the types of customers, these two companies’ products do not often compete. In the upstream supply chains, Jamco, an aircraft components maker, is one of Shimadzu’s main suppliers, while Kounan, a precision parts maker, is one of Horiba’s main suppliers. A common supplier is Hamamatsu Photonics, which manufactures photomultiplier tubes, imaging devices, light sources, and opto-semiconductors. This company is well-known for supplying thousands of photomultiplier tubes that were used in the observation equipment for detecting neutrinos, Kamiokande, which led to a share of the Nobel Prize in Physics for professor Masatoshi Koshiba in 2002. The products of Hamamatsu Photonics have supported the product development activities of Kyoto-based precision instruments companies.

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Fig. 1.5

Analytical and measuring instruments companies’ supply chains

Figure 1.6 shows semiconductor production equipment companies’ downstream supply chains. Focal organizations are Tokyo Electron and SCREEN. These companies make several types of devices used for pre-processing in semiconductor manufacturing, and compete in some of these types of devices, for example, coat/develop track, wafer cleaning, and annealing. According to the breakdown of customers in accounts receivable in the annual security report (FY2011, nonconsolidated data), one of their main customers is Samsung Electronics, the second largest semiconductor maker both then (FY2011) and now (FY2017). Another primary customer is Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest dedicated semiconductor foundry. Intel (USA), Samsung, and TSMC are the three leading companies in the semiconductor industry; having two of these companies as customers implies that both Tokyo Electron and SCREEN are highly competitive. In addition to these customers, Tokyo Electron conducts many transactions with Toshiba and SK Hynix, while SCREEN deals with GLOBALFOUNDRIES Dresden. In September 2013, Tokyo Electron and Applied Materials, a U.S.-based semiconductor production equipment manufacturer, announced their business combination plan. However, the plan was terminated in April 2015 because the U.S. Department of Justice rejected their proposal. Intense competition in this industry will continue in the future.

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Fig. 1.6

Downstream supply chains of semiconductor production equipment companies

Figure 1.7 shows the relationships between convenience store chains and ready-to-eat meal suppliers. Seven-Eleven is the largest convenience store chain in Japan with more than 20,700 stores as of December 2018; FamilyMart is the second largest. One days’ sales per store for Seven-Eleven (about 650 thousand yen = about 5.9 thousand USD) was overwhelmingly higher than FamilyMart’s (about 510 thousand yen = about 4.6 thousand USD) in fiscal year 2016. Moreover, this difference has existed for a long time. One of the reasons is that Bento meal boxes, Onigiri rice balls, and side dishes sold in their store are supplied by their ready-to-eat meal suppliers, for example, Warabeya Nichiyo and Shinobufoods. In the segment information in the annual security report (FY2015, consolidated data), the figures in parentheses indicate sales to a customer/total annual sales = the ratio of sales to that customer. Apparently, Warabeya Nichiyo has a higher degree of dependence on its main customer than Shinobufoods. According to Nikkei Newspaper,² Seven-Eleven has many dedicated supplier factories: more than 90% of 180 factories. On the other hand, only 70% of 88 factories for FamilyMart are dedicated. These data indicate that Seven-Eleven has built closer relationships with the ready-to-eat meal suppliers than FamilyMart. Since Warabeya Nichiyo and Seven-Eleven began trading in 1978, Seven-Eleven has continued to increase the value of its original daily sales of products supplied by Warabeya Nichiyo, such as Onigiri rice balls. Such a long-term, collaborative relationship with its ready-to-eat meal supplier is one of the sources of Seven-Eleven’s sustainable competitive advantage.

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Fig. 1.7

Relationships between convenience store chains and ready-to-eat meal suppliers

Figure 1.8 presents the relationship between Walmart and a Japanese supplier, Funai Electric. Funai is an original equipment manufacturer (OEM) for Walmart, which is the largest retailer in the world, and has supplied audio visual products such as LCD TVs and DVD/BDs of some OEM brands (Philips, SANYO, and Magnavox). Funai started trading with Walmart in 1997. Funai’s president says that The requirements of quality, cost, and production volume from Walmart are stringent, but we can acquire capabilities through responding to them (Nikkei Ryutsu 2002). In other words, Funai regards Walmart as a dojo (training hall). Thus, Funai increased its transactions with Walmart and Walmart is now Funai’s largest customer. According to the segment information in the company’s annual security report (FY2016, consolidated data), 58.6% of its sales are to Walmart. In 2017, Funai began to exclusively supply FUNAI brand LCD TVs to Yamada Denki, the largest consumer electronics retailer in Japan. Further, Funai is scheduled to undertake production of Yamada Denki’s electric vehicles that will be launched by 2020, a new challenge made possible because of the capabilities acquired during its long-term relationship with Walmart.

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Fig. 1.8

Relationship between Walmart and a Japanese supplier

Figure 1.9 shows the relationship between Apple and its Japanese suppliers. It is well-known that many Japanese manufacturers supply key parts for Apple’s products, especially for the iPhone. Some examples include Japan Display (liquid crystal panel), Minebea Mitsumi (LCD backlight), Japan Aviation Electronics Industry (telecommunication connector), Foster Electric Company (headphones), and NISSHA (touch sensor). The figures in parentheses indicate sales to Apple/total annual sales = the ratio of sales to Apple. According to the segment information in their annual security reports (FY2016, consolidated data), more than 10% of the sales of these companies are related to Apple; in short, Apple is their largest customer. Among these companies, Japan Display is heavily dependent on Apple. According to Nikkei Newspaper (2015), Apple announced its adoption of organic electro-luminescence (OEL) displays for the iPhone 2018 model but actually implemented it ahead of schedule. Specifically, Apple used an OEL display exclusively supplied by Samsung Electronics for its high-end iPhone 2017 model (iPhone X). As a result, Apple’s orders to Japan Display were reduced, and the company announced an expected operating loss for FY2017.³ Japan Display has increased its research and development expenditures for OEL and aims for mass production in 2019. According to Nikkei Newspaper,⁴ the ratio of Japanese parts in the manufacturing cost of iPhones is expected to be reduced from about 30% in 2007 to about 15% in 2017. Global competition to supply iPhone parts will be increasingly intense for Japanese suppliers in the future. Incidentally, the iPhone’s application processor, which is the heart of a smartphone, was developed by Apple itself.

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Fig. 1.9

Relationship between Apple and its Japanese suppliers

Figure 1.10 shows Tesla’s battery supply chain. Tesla has adopted lithium-ion batteries made by Panasonic, a major Japanese electronics company, for their electric vehicles (EV), specifically Model S, Model X, and Model 3. According to Nikkei Newspaper,⁵ Sumitomo Metal Mining, which is a Japanese nonferrous metal manufacturer, has almost exclusively supplied the cathode materials used in the batteries. These materials are key parts that influence the performance of the batteries, which have been jointly developed with Panasonic. This company’s strength is its three businesses: mineral resources, smelting and refining, and materials. They are able to mine nickel, which is one of the raw materials in cathodes, refine it, and then process it themselves. According to the segment information in the annual security report (FY2016, consolidated data), Panasonic is the second largest customer of this company, comprising over 10% of the company’s sales (the figure in parentheses) as a result of the increase in Tesla’s EV production volume. Sumitomo Metal Mining plans to invest 20 billion yen (about 182 million USD) and increase its production capacity for cathode materials. In general, buyers that adopt single sourcing face high procurement disruption risk. Whether Tesla will maintain its battery and materials sourcing strategy or change to multiple sourcing in the future is something to watch.

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Fig. 1.10

Tesla’s battery supply chain

Figure 1.11 shows Hirata Corporation’s downstream supply chain. Hirata is a production equipment maker headquartered in Kumamoto prefecture, which is located at the center of Kyushu Island in the southwest part of Japan. The company’s sales are not extremely large (FY2016 sales: 80 billion yen = about 727 million USD). However, they manufacture and deal in production systems for various fields, including automotive, semiconductors, home electronics, medical, and chemistry. In fact, a number of major Japanese and foreign companies are listed as their main customers on the company’s home page. For example, Hirata manufactured the production systems for Dyson’s vacuum cleaner motor in Singapore. This implies that Hirata has technological capabilities that create production systems for a wide range of equipment fields around the world. As a result, Hirata is not dependent on a specific customer, and builds equal-distance relationships with its customers. This is a prominent example showing that even a small local company can deal with giant customers.

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Fig. 1.11

Hirata’s downstream supply chain

As the discussion so far shows, there are several types of external supply chains depending on the strength, dependence, power balance and other aspects of the relationship between buyer and seller. In external supply chains, a seller generally wants to receive orders as steadily as possible and make/deliver the orders efficiently. On the other hand, a buyer wants to procure its required products in the required amounts when they are needed. Linkages between sellers and buyers that have dissimilar principles is a characteristic of external supply chains.

1.3 Case: Strategic Partnership of UNIQLO and Toray

Fast Retailing Co., Ltd. (hereafter Fast Retailing) is a Japanese holding company that owns fashion brands such as UNIQLO, GU, and Theory. Its sales volume is the world’s third largest, next to Inditex with its Zara brand and Hennes & Mauritz (H&M). The consolidated net sales of the fiscal year ending in August 2018 is 2130 billion yen (approximately 19.3 billion USD). The head office is in Yamaguchi, which is located at the western edge of the main island of Honshu.

As illustrated in Fig. 1.12, Fast Retailing has experienced rapid growth since 2000. In particular, its growth has been driven by the domestic and international sales of the UNIQLO brand, which accounts for over 80% of the company’s total sales. According to its homepage, as an SPA (specialty-store retailer of private-label apparel) that controls the entire clothes-making process from design through manufacturing to retail, UNIQLO offers high-quality casual wear at reasonable prices, and products that other companies are unable to offer. They define such products as LifeWear. For example, since its launch in 2003, the total sales quantity of HEATTECH products, their line of heat-generating clothing, grew to one billion units by September 2017. HEATTECH products are those that offer new and unique value to customers by commercializing Japanese fiber technology. Specifically, HEATTECH products have transformed winter from a cold, heavy clothes season to a warm, lightweight dress season.

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Fig. 1.12

Fast Retailing’s net sales and number of stores

HEATTECH products were jointly developed by UNIQLO and Toray industries, Inc. (hereafter Toray), the largest Japanese textile manufacturer. Similarly, other mega-hit items such as BRATOP (the top with support cups built in, launched in 2008), Ultra Light Down (thinner coats and jackets, launched in 2009), and AIRism (spring/summer innerwear for men and women, launched in 2012) were also developed through the combination of UNIQLO’s marketing and merchandising capabilities and Toray’s world-class textile technologies, high quality, and worldwide production network. We next examine the journey of the strategic partnership between UNIQLO and Toray.

1.3.1 Before the Strategic Partnership

After opening its first UNIQLO store in Japan in 1984, Fast Retailing⁶ built a chain of suburban roadside stores. In 1998, they began opening UNIQLO stores in urban locations and ran a large campaign for fleece products. The products were offered at significantly lower prices (1900 yen = about 17.3 USD), and as a result, 2 million units were sold. Continuing its boom with fleece products throughout Japan, the company sold 8.5 million units in 1999. Because its fleece products were such a mega hit, UNIQLO needed to procure a large amount of its main material, polyester spun yarn. UNIQLO selected Toray as a supplier because its raw materials were the best in the world. Mr. Tadashi Yanai, the founder and president of Fast Retailing, directly negotiated with Mr. Katsunosuke Maeda, known as Toray’s restorer and the president at that time, without going through any trading companies.⁷ This was the beginning of a close relationship between UNIQLO and Toray.

The following year, in May 2000, Toray established a dedicated organization called GO (global operation) team in the fibers and textiles division. This was the first time, not only for Toray but also in the industry, that an organization was set up to be in charge of a particular customer (Asahi Shimbun 2008). On this occasion, the two companies began joint product development. The first products were lighter and warmer jackets using Air Tech, an original inner cotton,⁸ which was launched in October 2000. After that, UNIQLO and Toray developed new products one after another, including HEATTECH items and BRATOP.

1.3.2 Forming the Strategic Partnership

In March 2006, UNIQLO and Toray first reached an agreement to develop a strategic partnership. Their common goal is to develop a revolutionary business model rarely seen in the world to date. Based on that partnership, in June, 2006, they announced the direction of a mid- and long-term cooperative relationship to work closely on new product development. Under the mid- and long-term relationship agreement, Toray was expected to supply UNIQLO with materials and products in excess of 200 billion yen (about 1.8 billion USD) over the 5-year period through 2010; deals on this scale were very rare in the textile industry. The two companies set up a project team called the Next Generation Material Development Project. The project team picked out themes in 73 areas and worked on material development.

A typical example is the improvement in the fibers used in HEATTECH. Specifically, adding to the three previous fibers, rayon, polyester, and polyurethane, they adopted a micro-acrylic fiber developed by Toray for HEATTECH in 2006.⁹ This fiber is one-tenth the thickness of a human hair. By spinning these together, combining the unique properties of micro-acrylic and rayon in a single yarn, they have functions of both heat generating and heat retaining. This improvement became the turning point for its subsequent mega-hit. In December 2006, Toray’s Ishikawa factory set up an exclusive production line for yarn, bundling these four fibers together.¹⁰

The first joint creation, launched in 2007, was Stylish White, a less transparent women’s summer pant. This product was born through a combination of customer requirements gathered by UNIQLO; for example, I want to wear white pants in summer, but would not want my underwear to show through, and Toray’s textile technology, specifically the technology cultivated in the development of a white swimsuit that is opaque.¹¹ In addition, they jointly developed Silky Dry, which is spring/summer innerwear for men and the forerunner of AIRism, introduced earlier, Machine Washable Sweaters in 2008, and Ultra Light Down in 2009.

1.3.3 Second and Third Five-Year Plan Under the Strategic Partnership

UNIQLO and Toray entered into an agreement for a second five-year (2011–2015) plan for the strategic partnership in July 2010. This means that the first five-year (2006–2010) plan was a mutually beneficial collaboration. In fact, the amount of the first five years’ transactions between the two companies was 250 billion yen (about 2.3 billion USD), more than expected. Under this agreement, Toray established a flexible production system based on its global production network. In particular, Toray built a dedicated production facility in Bangladesh that integrated knitting, dyeing, and sewing of UNIQLO products, which began operating in August 2010.¹² Further, in April 2014, Toray upgraded the GO team to the GO department and gave the department authority over budget and personnel management (Nikkei Business 2014). It is said that the department’s members talk with UNIQLO’s merchandizers and marketers in the UNIQLO office