Solved by verified expert:Please read the below paper titled “global supply chain adaptationsto improve financial performance” and answer the following questions.1. Please describe the following theories in the paper• Contingency theory• Economic cluster theory2. What are main aspects and stages of the supply chain adaptation to China?3. What are the main factors affecting the decisions of each supplier’s entry to China?CASE ANALYSIS GUIDE:–Summary of a case (10%), case analysis (50%), and suggestions (40%) for the issues/problems should be included. The suggestions should include answers to the questions listed at the end of cases.–A report consists of a title page (include case title and names of the students), introduction (case summary), case analysis, and suggestions (or answers to questions). Format your report with double space and Times New Roman 12 (font size). Follow APA style guide for writing.–Minimum 4 pages and maximum 6 pages including the title page for each case report.You are encouraged to find other references for the project as well, but use my paper as your main reference.Please upload the MS Word file of your report.
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JMTM
22,2
Global supply chain adaptations
to improve financial performance
Supply base establishment and
logistics integration
204
Received November 2009
Revised April 2010
Accepted August 2010
Kun Liao
Department of Finance and Supply Chain Management, College of Business,
Central Washington University, Ellensburg, Washington, USA
Erika Marsillac
College of Business and Public Administration,
Old Dominion University, Norfolk, Virginia, USA
Eldon Johnson
Department of Finance and Supply Chain Management, College of Business,
Central Washington University, Ellensburg, Washington, USA, and
Ying Liao
School of Business, Meredith College, Raleigh, North Carolina, USA
Abstract
Journal of Manufacturing Technology
Management
Vol. 22 No. 2, 2011
pp. 204-222
q Emerald Group Publishing Limited
1741-038X
DOI 10.1108/17410381111102225
Purpose – The purpose of this paper is to understand and describe the conditions that compel and
underscore global supply chain (SC) adaptations.
Design/methodology/approach – Insights from contingency theory, Porter’s economic cluster
theory and international factory mapping are used to analyze the SC adaptations that follow when an
automotive firm moves from a domestic to a global SC.
Findings – An automotive global SC adaptation includes market entry considerations, the
establishment of a three-stage flexible time- and production-based supplier network plan, and the
integration of logistics partners.
Research limitations/implications – SC adaptations are an important consideration for any
manufacturing expansion effort, especially international ones. Varying production levels impact supplier
relationships and decisions and may result in varied supplier perspectives. Government regulations
influence entry and routine decisions, while logistics issues and costs play an integral role in supplier
perceptions and reactions.
Practical implications – With the rapid expansion of the Chinese auto market, entering
manufacturing firms need more information about how to strategically locate, and develop and support
supplier networks. A stepped supplier network establishment approach optimizes benefits for both
manufacturing firm and suppliers. Evaluating and integrating logistics issues also sets the stage for future
expansion efforts at optimal cost and supplier support.
Originality/value – The internationalization of the automotive SC involves adaptations that can
only be successful through advance planning, strategic supplier networking, and systematic logistics
integration.
Keywords Supply chain management, China, Automotive industry, Suppliers,
Distribution management, Globalization
Paper type Case study
Introduction
Put simply, today’s global automotive market is unstable. Traditional auto manufacturers
are struggling to survive financial and economic crises. At the same time, they must meet
explosive demand growth in new geographic regions and manage increasingly complex
supply chains (SCs), changing customer preferences, and evolving production changes.
The pull of customer demand from developing regions, such as China has fueled new
competitive business strategies by many non-Chinese automotive manufacturers who
wish to delve into this growing and profitable market.
When entering new markets, automotive firms must develop strategic supplier goals
that determine whether they will bring their current suppliers with them to new
geographic regions or develop relationships with new local suppliers. Either option
necessitates SC adaptations – to new governmental constraints, new policies, and cultural
differences. In some cases, such as with China, current government policies mandate that
firms must build relationships with available local automakers (original equipment
manufacturers (OEMs)) to establish joint ventures (JVs) and utilize local suppliers as part
of the JV’s supplier base (Hemerling et al., 2005).
Foreign automotive firms have only begun producing in the Chinese market within
the last 25 years. In 1984, Volkswagon (VW) began a JV with Shanghai Automobile
Company to produce 30,000 cars each year. In 1987, VW began a second JV with the
first automobile company to produce the higher status Audi. Since 1987, General
Motors, Mazda, Isuzu, Daewoo, Fiat, Iveco, and Ford have entered the Chinese market
through JVs with various Chinese automakers. By 2004, Toyota Motor Corp., along
with its partner Guangzhou Automobile Group, announced an investment of US$461
million to boost automotive capacity in China and catch up with other established car
plant rivals in the country (China Daily, 2004). More recently, Daimler AG and an
established Chinese automaker, Chery Automobile Company announced JV plans
(Chavez, 2007).
Following it is entry to the WTO in December 2001, China began complying with
WTO policies by reducing complete automobile tariffs to an average rate of 25 percent
and reducing import auto part tariffs to an average rate of 10 percent. These tariff
reductions, in combination with booming local automotive market demand, resulted in
a 64 percent annual growth rate of passenger cars from the end of 2001 to the end of
2004 (Hemerling et al., 2005). Although the 2007 annual growth rate of passenger cars
had diminished somewhat to 21.8 percent and by 2008 had dropped to a relatively low
6.7 percent due to the global economic downturn, sales volume in 2008 remained strong
at 9.38 million units (China Daily, 2009). Due in part to slumping US sales, China
currently represents the world’s largest auto market, with sales of 13.6 million units in
2009, with the sales of 13.6 million units (Reuters, 2010). Based on this considerable
growth, significant business opportunities exist for foreign automotive manufacturers.
Three major Japanese automakers, Toyota, Honda, and Nissan, recently announced
that they would roughly double Chinese-based production capacity over the next three
years to approximately 1.5 million units from the present 700,000. As a result, they
are currently focusing intense efforts on growing their production lines in China.
However – growth needs have necessitated significant adaptations to their usual
business processes and expectations (Rose-Anderssen et al., 2009).
Historically, despite positive production growth projections and the associated
benefits of local market entry, many foreign companies have experienced significant
Global supply
chain
adaptations
205
JMTM
22,2
206
difficulties gaining desired market access in China. The Chinese Government and
already-established companies have not extended an overly welcoming hand for
foreign investments into China. To explore this unique situation, we use a Japanese
company (renamed ABC Company in this research) to illustrate the entry of a foreign
automaker to the Chinese automotive manufacturing market. We examine ABC’s SC
development and its integration into the Chinese business environment.
The remainder of this paper is organized as follows. A brief literature review is
presented, followed by a description of research methodology. Then, three sections are
presented which introduce the major stages of SC adaptation: market entry
preparation, supplier network establishment, and logistics integration, respectively.
Analyses and implications and future study are presented, and the paper concludes
with a summary and limitations of the research.
Literature review
As a relatively young discipline and in large part due to its dynamic nature, supply chain
management (SCM) theory is comprised of several complementary theory streams, yet is
without an agreed upon, all encompassing theory base (Halldorsson et al., 2007). Although
Chen and Paulraj (2004a, b) have developed a comprehensive framework of SCM theory,
for now, progress remains slow. Despite this lack of a unifying theory base, contingency
theory has been successfully utilized to explain several SCM phenomena (Buttermann
et al., 2008; Hult et al., 2007; Stonebraker and Afifi, 2004; Svahn and Westerlund, 2007;
Wagner and Bode, 2008).
Contingency theory emphasizes the importance of internal and external factors
in constraining organizations; and suggests that firms should adapt themselves to
changing environments to optimize their structure and performance (Lorsch, 1965;
Lawrence and Lorsch, 1967, 1986). SC or supplier networks have been proposed as
complex adaptive systems, which show improved performance when firms balance
their management of control (e.g. enterprise resource planning and just in time (JIT))
and emergent autonomy (Choi et al., 2001). When establishing a SC in another country, a
firm may discover that previously effective management structures and procedures
from the home office may not be successful or optimal in the new country. As such,
contingency theory posits that the SC structure should be adapted to the new country
environment.
Therefore, the global SC adaptation described in this study is defined as a dynamic
and convergent process where a firm establishes its supplier network in another
country by both utilizing suppliers from its home location and using local suppliers in
its destination country. The foundation theories of this process include entry mode
theories (Elango, 2005), adaptive supplier network (Choi et al., 2001), SC integration
(Chen and Paulraj, 2004a, b; Stonebraker and Liao, 2006; Swink et al., 2007; Furlan et al.,
2006; Aryee et al., 2008), and contingency theory in the context of Chinese culture
and regulations (Lorsch, 1965; Lawrence and Lorsch, 1967, 1986; Jiang, 2002; Zhao
et al., 2008).
Using a knowledge-based framework, Elango (2005) showed that manufacturing
firms expanding into the USA preferred using greenfield operations if they had heavy
physical capital investments. However, if the firms had heavy human capital
investments, they preferred acquisitions to greenfield operations. Based on his research,
Elango argued that knowledge and competencies transfer is easier in physically
centered investments than it is in human centered investments, specifically when there
is need to learn and adapt to host country requirements. However, Elango’s conclusion
was based solely on firms entering the USA, and as such, may not be generalizable to
entry to the Chinese automotive industry. Since the Chinese Government requires
foreign automakers to establish JVs with local firms, in this context, host nation
restrictions force the automakers’ hands.
Other entry, mode theories focus on individual firms entering foreign countries
(Horst, 1971; Caves, 1982; Elango, 2005), but do not particularly deliberate on the
broader impact of an entire SC entering a foreign country. As an example, in the case of
an OEM, one OEM may have tens or hundreds of suppliers. In entering a foreign
market, an OEM would need to redesign its entire SC network to include new supply
networks in the new country. This supply network entry would require extensive
adaptations (i.e. modification of the SC network structure in response to the changes in
markets, strategies, products, and technologies) (Nolan and Zhang, 2002; Lee, 2004;
Liao and Hong, 2007). Yet, little current research has considered an entry mode that
addresses issues related to the adaptation of SC network.
The management of SC networks, or inter-connected smaller groups of SCs, has
historically been extremely complex. Requiring coordination of efforts for information
flows, inventory management, and partner relationships, the holistic management of a SC
network can certainly contribute to significant profit, but poses significant challenges to
manage successfully (Svahn and Westerlund, 2007). The emergence of global SC networks
has emphasized the inter-connected dependencies of these individual SCs to each other, as
well as the dynamism of global markets (Mattsson, 2003; Power, 2005). This complexity of
global exchanges brings with it elements of challenge and risk, yet also opportunity
(Houghton et al., 2002). Proper management of the SC and its partners can allow a firm to
develop innovative technological advances, leverage current supplier capabilities, cut
costs, and develop collaborative relationships that can support a long-term competitive
advantage (Houghton et al., 2002).
A critical factor contributing to a successful global SC network is the geographic
location of each SC node. Porter’s (1998) economic cluster theory provides theoretic
guidance in managing the physical locations of each firm within a SC. Economic cluster
theory suggests that utilizing and encouraging geographic concentrations of related
businesses in a particular field (i.e. clusters) can increase a company’s competitive
national or global advantage (Porter, 1998). By utilizing suppliers in close regional
proximity, firms’ entire SCs incur predominantly lower transportation costs and also
promote complementary benefits such as knowledge sharing, quick responses, and
greater availability of experienced workers.
The logistics performance of a firm’s SC has been indirectly linked to positive
financial performance (Green et al., 2008). Logistics integration reflects the perspective
that a manufacturing entity extends beyond its mere physical site boundaries to
include its suppliers interactions (Chen and Paulraj, 2004a, b). Supplier inclusion
results in greater cooperation and coordination between the manufacturer and supplier
partners, as well as more shared information and blurred boundaries between entities.
Most research on SC integration agrees that SC integration results in improved and
sustained firm performance (Kim, 2006). Therefore, by integrating and improving
logistics processes, firms are able to enhance their SC processes and create efficiencies,
which in turn ultimately improve firm performance (Stonebraker and Liao, 2006).
Global supply
chain
adaptations
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JMTM
22,2
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In the context of China, the Chinese Government encourages foreign firms to buy
greater and greater numbers of components from local suppliers (including both
Chinese- and foreign-owned suppliers) by giving tax benefits for local purchases ( Jiang,
2002). Subsequently, OEMs will then ask their component suppliers to enter into China
en masse to ensure financial stability and lower risk for the OEM (Jiang, 2002; Liao and
Hong, 2007).
Jiang (2002) also identified two cluster model types of foreign SCs in China:
export-focused and domestically focused clusters. Export-focused clusters use
components imported to China while domestically focused clusters focus on developing
relationships with local suppliers. In this context, and with increased demand, there is an
evolving trend from utilizing mainly export-focused clusters to quasi-export focused
clusters to mainly local-focused clusters. This evolution is realized by moving suppliers to
China or by developing local qualified suppliers.
Research methodology
This case study was developed predominantly through telephone interview
methodology. ABC Company was chosen for the study because:
.
it was in the process of an international expansion effort which required SC
modifications; and
.
it is extremely successful in China in terms of increasing sales, profit, and brand
reputation.
When working with an Asian company, the issues of trust and shared personal
relationships are critical. In this case, ABC Company members were familiar with one
of the coauthors and were therefore willing to share company information and insights.
The telephone interview methodology involved three stages. The first stage was
initiated by identifying and detailing research questions via phone interviews between
one coauthor and a senior SC manager of the ABC Company. The senior SC manager
was chosen for the interviews because the manager position requires in-depth
knowledge about the interactions between the manufacturer and its suppliers. In the
position, the manager has important access to the perspectives and communications
that take place between the two. In addition, the senior SC manager had comprehensive
knowledge of ABC and ABC’s SC and was able to elucidate several areas of company
interest and divulge company expansion strategies to the coauthor. This manager has
been working on establishing and maintaining the SC in China since ABC began its
expansion there, and is the best candidate for this research. During the research
process, we also reviewed related secondary data (reports/documents) to decrease the
risk of making subjective conclusions based solely on the viewpoints of this manager.
Interestingly, some of the factors the manager identified as critical for ABC’s SC
adaptation were not found in literature or have only been superficially addressed in
literature. For example, the dynamic process of ABC’s SC adaptation as highly related
to production volume of the manufacturer is rarely addressed in literature.
After the initial contact, three additional phone interviews followed. The focus of
interviews at this stage was to comprehend the overall perspective of ABC’s international
expansion as well as understand its supplier network establishment process that would
support the expansion. Each interview lasted between 1.5 and 2 hours.
Over the course of the first-stage interviews, the SC manager described the growth of
the ABC Company, its supply base development, and how it managed its SC logistics.
During the interviews, several areas of interest emerged repeatedly, appearing both as
significant to ABC Company and as potentially valuable to the academic and
practitioner communities. These areas of interest eventually coalesced into the following
research questions:
RQ1. How does a foreign automaker establish a facility in China?
RQ2. What are the main aspects and stages of a SC adaptation to China?
RQ3. What are the main factors affecting the decisions of each supplier’s entry to
China?
The second stage of the telephone interview methodology involved theory
identification. The authors performed extensive literature reviews to find theory and
cases which were applicable to what had been described by the SC manager. The
second stage also resulted in identification of conceptual factors and the development
of a conceptual model. Two additional two-hour interviews were conducted with the
same senior SC manager. The interviews focused on gathering the manager’s views of
critical factors that had been identified through the literature review, as well as
capturing his views of any additional factors he thought were important for SC
adaptation in ABC’s case.
Having worked at several management positions throughout ABC’s SC, this
manager was able to discuss both the larger picture of ABC’s SC and also detail
significant experiences with major suppliers. At this stage, many quantitative (i.e. the
rate of local purchases) and qualitative (i.e. the types, timing, and production levels of
suppliers establishing facilities in China) data were collected through the interview
process. After the two second-stage interviews, a draft of the case was developed.
The third stage of the telephone interview methodology involved information
updates, case illustration and identification of future directions. Two 30-minute
interviews were conducted at this stage with the same senior SC manager to confirm
accurate information and up to the time of case study submission, several additional,
but shorter interviews were completed to ensure current information and the most
accurate description of the case.
Market entry preparation
In addressing the RQ1, ABC Company initially prepared to enter the Chinese market
through a direct acquisition. ABC then developed its entire entry plan and positioning
from that acquisition experience. In addressing the RQ2, ABC Company developed a
structured entry plan that involved three steps: market entry, the establishment of a
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