The Notion of the Supply Chain of a Particular Product or Service

New (1997) suggests that “supply chain” can be understood as the physical flow of a particular product or service. This notion seems to be straightforward as the flow of one piece of material through several sequential value-adding stages can be adequately described as a supply chain. It remains to be seen whether this notion is useful, too.

Many non-trivial products in the manufacturing context consist of several components which are assembled in a series of value-adding stages and

even-20“Integration” appears to be one of the tenets of SCM

tually make up the final product. Many of the different components originate from different sources (i.e., suppliers). A tier-3 supplier may receive a variety of components which are then put together and delivered to the tier-2 supplier.

The tier-2 supplier, in turn, will combine the components delivered by several tier-3 suppliers to a semi-finished good which will be delivered to a tier-1 sup-plier. The tier-1 supplier, again, integrates a variety of components received from various tier-2 suppliers before supplying the OEM for final assembly. The material flow of each individual component can be described as a supply chain;

each individual supply chain will merge with another on the various tiers. For such a supply configuration, the supply chain model seems to be no particularly good representation of reality.

In contrast to the sequence of supply and assembly that has been described in the previous paragraph, there are products which are not combined with other products on the various value-adding stages. Some products are processed and thus are transformed while the “chunk” remains the same. Other products are delivered through a chain of carriers not for reasons of product transformation but for logistical purposes as in some complex international trade with a variety of different traders and distributors who take care of transportation, tariffs, and country specific legal obligations. Examples are some agricultural products and (illegal) drugs. The supply chain notion can be useful to describe the physical flow of such products the core or chunk of which remains the same through several value-adding stages.

In the manufacturing context where on many value-adding stages components are processed and integrated with other components before they are delivered to the next supplier, the supply chain notion captures only a peripheral part of the whole picture which would be more adequately described as a network. There is reason, however, to switch to a supply chain perspective if one particular components becomes the object of interest. Such a situation would emerge, for instance, in cases of part shortages where the bottleneck for the supply of one particular component is to be resolved. Part shortages often exist for one particular component and channeling an increased amount of attention to the part in short supply is prudent. For the sake of practicality one may want to talk

about the supply chain for, e.g., glass panels, leather, or microchips to clarify where a part shortage has emerged.

Whereas the notion of supply chains for particular products or services seems to be well established in business parlance, it seems to be of no great use when identifying and eliminating bottlenecks. The reasons for the emergence of bot-tlenecks in supply can often be found outside the direct supply chain of the part in short supply. In fact, it may be difficult to understand the origin of the part shortage unless one adopts a network perspective as the following points shall demonstrate.²¹

Conflicting Requirements on Suppliers Suppliers normally have more than one customer. Each customer may expect a supplier to adopt specific pro-cesses, use certain software tools, employ and commit to standards. Also, cus-tomers may expect supplier to commit to certain capacity reserves and perfor-mance targets. In order to meet all requirements imposed by customers, suppli-ers sometimes have to dedicate significant resources. The resources dedicated to fulfill requirements from one customer may be missing when attempting to fulfill requirements from another customer. Also, certain rules imposed by one customer may conflict with rules imposed by another customer.

Competition for Supplier Capacity Depending on their product line, sup-pliers may have several customers from the same or similar market segments.

That is, several customers may follow similar demand patterns as their market segment is growing or declining. Suppliers producing for BMW’s 5-series may also supply Audi for the A6 and Mercedes-Benz for the E-Class. Accordingly, suppliers may face increasing capacity utilization when market demand for lux-ury sedans is growing and several customers simultaneously increase their or-ders. This tendency is fortified when several customers are supplied from the same tools or the same assembly line. Additionally, one or several customers may have market power that allows them to command guaranteed delivery ––

21The following arguments have been published in Beer et al. (2012). The original paper draws on evidence from the automobile industry; the general implications, however, are likely to be valid in a variety of manufacturing industries.

on the expense of other customers. While suppliers would certainly hesitate to admit that this happens, some customers are certain about their being disadvan-taged with delivery of parts in short supply due to other (competing) customers negotiation power (Beer 2011).

Cultural Influence and Loyalty Supply for many products is organized on a global basis. The reasons are diverse; cost pressure may play a role for global sourcing decisions, but sometimes specific production capabilities are only available in certain regions. Such regions may have a certain cultural code that differs from the cultural code of the customers. Much of the electronics in-dustry, for instance, produces in Asian countries, predominantly China, Japan, and South Korea. Leading Western electronics firms focus on the invention, de-sign, and marketing of products while outsourcing the entire production process (Sturgeon 2002). The relationships between firms in Asian countries like Korea and Japan are influenced by different cultural patterns than they are in Europe or the United States (Hofstede 1984, 1993, Bhappu 2000) and their organizational culture differs accordingly (Schein 1990, 2009). Interorganizational constructs like the Japanese Keiretsu have attracted much attention from researchers as the implications for business can be significant (Teece 1996). Trust, possibly fortified by institutional and societal sanctions, is one of the outstanding char-acteristics of relationships within these networks (Hagen & Choe 1998). There is reason to expect that firms embedded in such networks are not independent in their decisions but that they are constrained due to their interorganizational rela-tionships (Granovetter 1985) which – measured by the standards of the Western observer – are often maintained for long periods of time. While this reduces uncertainty for partners within such networks, it does increase uncertainty for firms maintaining business relations with firms from within a Keiretsu while not being part of it themselves.²² In cases of short supply, it can be expected that

22Uncertaintyis an inherent characteristic of most transactions and is (essentially) due to incom-plete information. It can be further divided into environmental uncertainty and behavioural uncertainty. Environmental uncertaintyis caused by difficulties of predictability in general and bybounded rationalityin particular (Rindfleisch & Heide 1997). Bounded rationality is one of the key concepts of Transaction Cost Economics (TCE) and refers to the assumption that actors do not have complete information and thus are limited in their rationality. The

firms embedded within an interorganizational network like a Keiretsu – or even just within the same cultural sphere – are more likely to find a solution for their supply problems if the producer of the scarce parts in demand is also part of the network.

Planning Horizon for Production Capacity In industries that produce on a large scale – such as automotive – sales forecasts provide valuable informa-tion for suppliers to plan producinforma-tion and adjust producinforma-tion capacity. Different customers, however, tend to provide forecasts for differing time horizons, and these differences can be significant. While some OEMs may provide forecasts for, e.g., nine months, others provide forecasts for, e.g., only three months. In addition to variances in time horizon, interviews with automotive suppliers have shown that there are also variances in forecast quality between different cus-tomers (Beer 2011).²³ The consequence is that suppliers can have difficulties planning their production capacity; accordingly, they may turn into bottlenecks and some customers may face part shortages in spite of their providing their suppliers with the necessary information on sales. The interviews showed that suppliers seem to generally try not to let any particular customer down even when their short planning horizon or unreliable data have led to perturbations,

TCE concept of bounded rationality thus contradicts the notion of rational decision-makers as proposed in neoclassical economic theory. Because actors are limited in their rational-ity they are unable to create and conclude contracts that provide for all contingencies, that is, there will always be a certain amount of uncertainty remaining which can lead to higher transaction costs. Looking at it the other way around, actors will have problems to create and concludecomplete contractsbecause the environment is uncertain and may change which may make adaption of contractual agreements necessary and thus leads to increased trans-action costs; Williamson (1979) asserts that “long-term contracts are necessarily incomplete (by reason of bounded rationality)” (p. 241).Behavioural uncertaintyrefers to the difficulty of predicting and assessing behaviour of other actors (Rindfleisch & Heide 1997 call this a

“performance evaluation problem”). Part of the problem isopportunistic behaviourwhich TCE assumes to be a characteristic of human individuals and groups of individuals (organi-zation). Williamson (1979) defines opportunism as “seeking advantage” or “self-interest in guile”, which obviously implies incomplete information on the part of the contract partner if successful.

23Also, there are differences in forecast quality for the same customer for different components, which can create additional planning problems. In an earlier paper – Beer & Liyanage (2011) – adjustment of production capacity flexibility rates for supplied parts with certain character-istics was proposed.

so capacity problems may impact all customers, even the most reliable ones, if they arise (Beer 2011).

Indirect Demand from Competitors and Other Industries Many prod-ucts share certain components although they may be from completely different industries as high-tech components become part of everyday life in a variety of ways. Cars, for instance, could be circumscribed as “computers on wheels” as no modern car would be functioning without real-time data processing for en-gine control and advanced driver assistance systems. Likewise, household ap-pliances, air conditioning, security systems, and other devices and systems have computerized components that, in their core, often build on the same technology as cell phones or laptop computers. Accordingly, suppliers of microchips, glass panels, human interface devices, etc., have acquired customers that traditionally have not been part of their customer base; vice versa, OEMs have to manage suppliers that traditionally have not been part of their supplier base.

For suppliers, a broad variety of customers from different industries can make capacity planning even more challenging. For customers, unexpected part short-ages may emerge when suppliers face capacity constraints and decide to fo-cus their efforts on those fo-customers that, for instance, pay the highest margins.

While some industries demand cutting-edge technology with product life cycles shrunk to only some months, other industries demand relatively low-tech com-ponents for their products as product life cycle extends over several years. The first category of customers often pays high margins and constantly demands im-provements in product performance whereas the second category of customers will be supplied with the same product for several years. An example for the first is consumer electronics, an example for the latter automotive. Accordingly, supplying automotive firms is less attractive for some electronics production firms than supplying consumer electronics firms such as Apple or Sony. Indi-rect demand from consumer electronics, for instance, could therefore lead to part shortages for automotive firms, especially when global production capacity is limited, as it has been the case for semiconductor production in the wake of the economic recovery after the 2007-2009 crisis.

Supplier Ownership In their search for capital, some firms open up to in-ternational capital markets. Additionally, large companies are looking to invest their their capital internationally. Increasingly many lucrative German SMEs, for instance, have been acquired by Chinese companies in recent years (Eis-ert 2013-04-13). In some industries such as automotive, strong consolidation among suppliers has taken place (Semmler & Mahler 2007). The ownership structure of suppliers may not always be obvious at first glance and OEMs may unwittingly source to suppliers owned by competing firms. Even if ownership structure is known suppliers may be contracted for good reasons such as cost competitiveness or unique quality promises. Conflicts of interest may arise if suppliers have to allocate resources while several customers – the company owner among them – are in short supply. The German automotive supplier Angell-Demmel, for instance, had faced capacity shortages due to internal pro-duction bottlenecks and was unable to meet the demand from several of its cus-tomers, among them some German OEMs such as Mercedes-Benz and Audi.

Angel-Demell is owned by Faurecia, a large French automotive supplier, whose largest share is held by the Peugeot Société Anonyme (PSA), the producer of Peugeot and Citroën cars. With regards to complicated cross-ownership struc-tures in some Japanese Keiretsus or multi-faceted industrial conglomerates in other Asian countries such as China or South Korea, disadvantages in capacity allocation are a possible threat to supply reliability, which may be fortified by cultural influence and loyalty as described above.

2.5.4.3. The Notion of Supply Chain as a Synonym for Purchasing,