Involvement of Asian SMEs in Global and Regional Supply Chains: A Case Study

Supply chain management integrates suppliers, manufacturers, and distribution centers to get the right products to the right place at the right time and in the proper condition (Christopher and Towill 2001). As the management of supply chains improves, the potential of integrated global supply chains is starting to be realized. Eventually, raw materials will be harvested at the source, manufacturing will be performed in the locations providing the highest processing value-added, and products will be sold in the markets offering the highest prices—regardless of the geographical locations of the various members in the supply chain.

A number of theories have been tested to determine how firms could devise efficient and effective global supply chain strategies (Naylor, Naim, and Berry 1999). Despite these developments, many supply chains fail to meet their performance objectives (Fisher 1997). Moreover, as illustrated in the following case study, some firms have been able to successfully compete by employing strategies that oppose those recommended for lean and agile supply chain design.

In this case study, part of the global supply chain of a US automotive seat supplier is examined. This global supply chain sourced raw materials from approved vendors in the US, transported them over a 28-day period to a cut-and-sew operation in the Northeast of Thailand, returned the completed leather seat covers to the US over another 28-day period, and delivered them to a seat assembly plant that ultimately fed into a JIT auto assembly plant in Detroit, Michigan. Despite substantially increasing the supply chain cycle time to over 12 weeks (including a two-week holding of safety stock in both the US and Thailand), the supply chain had a competitive advantage over similar operations in maquiladoras located near the US-Mexico border that had only a three-day transit time to the seat assembly plant.

Maquiladoras were originally formed in 1964 when the US cancelled a program that admitted Mexican workers into the US to provide labor in agriculture. Mexico initiated the Border Industrialization Program in order to replace the lost economic value of the exported labor, providing an incentive for American factories located in the US to move to Mexico to take advantage of lower labor costs. These maquiladoras enabled Mexico to accelerate its economic growth through the provision of cheap labor located in border areas (Fullerton and Barraza de Anda 2003).

Maquiladoras import at least 90% of the raw materials for components that they process. These companies assemble components into finished or semi-finished goods and then reexport them back to the US, mostly to the industrial Midwest states (Fullerton and Barraza de Anda 2003). NAFTA was expected to spur additional growth in maquiladoras, and the number has indeed increased rapidly since 1994, when the agreement went into effect. However, while NAFTA was blamed for relocating US jobs to Mexico, the primary economic force behind the rapid growth of maquiladoras was the devaluation of the peso at the end of 1994, which effectively cut labor costs (in US dollar terms) by more than 40% (Gruben 2001). Maquiladoras have been incorporated into the “lean” paradigms of automobile suppliers to provide labor cost savings while maintaining proximity to auto assembly plants based in the US Midwest.

The competitive cost advantage in the case study supply chain was achieved through a supplier in Thailand that produced leather seat covers of higher quality (with a direct economic benefit of higher yields) and at a lower labor cost than maquiladora operations in Mexico. These benefits helped offset the additional costs of safety stock, freight between the US and Asia, and potential inventory obsolescence due to a longer supply chain.

As supply chain strategies continue to be developed and refined, the characteristics of the product itself (e.g., size vs. cost), as well as the value of the labor input (e.g., quality and efficiency vs. cost), need to be incorporated into the global supply chain design and management decision-making framework in order to facilitate optimum performance.

One of the main motivations for a firm to look at suppliers outside of its home country is to secure a competitive advantage through lower costs and/or higher quality products. This might be in the form of unit price reductions for items produced in low-wage markets (Trent and Monczka 2003) or of a source of products not available locally (Mansfield 2003). As an example, a significant industry relying on procurement from international sources is the US clothing industry, in which apparel and footwear are produced in low-wage regions including Asia and South and Central America. The global aspects of these supply chains include only the final link: the product may be produced entirely in the low-cost region and then shipped to distribution centers or directly to retailers in North America or Europe (Cho and Kang 2001).

“Agile” supply chains attempt to leverage the advantages of global suppliers. Industries that rely on agile supply chains require the flexibility to meet rapidly changing customer expectations, or to stay ahead of changing technologies that may quickly become obsolete. Examples of products in these industries include semiconductors and computers, for which innovation drives customer demand and responsiveness is a primary requirement (Christopher and Towill 2001). Supply chain systems for semiconductors and computers may link manufacturers and subcontractors in multiple locations in Asia or Europe to customers in the US (Brown, Hau, and Petrakian 2000; Bhatnagar and Viswanathan 2000).

Under a different paradigm, “lean” supply chains seek to stabilize the supply of raw materials and manufactured components, while eliminating waste in the supply chain. In lean supply chains, the primary driver of the system is cost. As a result, every effort is made to shorten transit times and eliminate in-process inventory or safety stock (Womack, Jones, and Roos 1990). The automobile industry, first in Japan and now also in the US, has focused on developing lean systems, categorizing suppliers based on strategic importance and requiring key firms to make regular deliveries as often as every two hours. Suppliers might relocate to Mexico to reduce labor costs while remaining within two to three days shipping time from major assembly plants in the US Midwest. More distant global sources would not be considered if the management's goal is to create a lean supply chain.

It has also been observed that the advantages of lean and agile strategies are not mutually exclusive. Hybrid or “leagile” strategies use lean methods for high volume lines, while maintaining agility for more specialized products. These strategies make use of lean concepts up to a decoupling point in the supply chain (Naylor, Naim, and Berry 1999; Banomyong, Veerakachen, and Supatn 2008), after which agile processes are applied. Alternatively, they use lean methods in situations where demand is demonstrably stable and agile principles for the more unpredictable aspects of operations (Christopher and Towill 2001).

Another approach to determining the appropriate supply chain strategy is based not on customer requirements (e.g., responsiveness vs. low cost), but on the type of product. Using this method, agile supply chains would be used for innovative products with unpredictable demand, while functional products, with their mature life cycles, would benefit more from lean supply chains that minimize waste (Fisher 1997).

The case study presented below illustrates a deliberate, competitive supply chain strategy that involved accepting an eight-week transit time over a one-week transit time, plus an increased safety stock of four weeks, in order to utilize a more distant supplier (i.e., in Thailand instead of Mexico) offering better quality at a lower cost. This decision seems to go against the prevailing body of knowledge pertaining to lean and agile supply chains that dominates the literature today. As such, this case study can be considered an appropriate part of the iterative process in understanding the theory of globally integrated supply chain management (Eisenhardt 1989).

4.1 The Case Study

In most modern automobile assembly operations, the assembly process is limited to forming body panels and welding vehicles frames. All other components—engines, seats, instrument panels, and other electrical, mechanical, and decorative items—are supplied from external sources and then bolted onto the vehicle as it moves down the production line.

One of the most expensive and complicated subassemblies supplied to the automobile is the seat. Seats are supplied in a wide variety of colors and materials, and many other options (e.g., heaters and air bags) are available for any given vehicle model. To be able to respond to the range of permutations that are required by automakers, seat manufacturers have assembly operations that mirror the automobile assembly plants that they supply. Their operations are usually located within 30 minutes of the automobile assembly plant and are tied to the plant via EDI. The same job order that triggers the production of the automobile triggers the assembly of the seat. During the two hours it takes the vehicle to travel from welding shop to final assembly, the seat must be built with all the required options and sent directly to the correct location at the auto assembly plant to be installed in proper sequence in the correct automobile.

Similar to the auto plant, the seat-making operation performs little manufacturing other than forming the seat frames. All other components, such as molded foam, electromechanical parts, and seat covers, are delivered in batches and used on an as-needed basis. As a second tier supplier (supplying the first tier seat plant), the operation in Thailand was of a type referred to in the automobile industry as a “cut and sew” or “trim” operation. This refers to the process of cutting and sewing together cloth, foam, leather, vinyl, and other soft materials to form one component of an automobile seat; in this case, the seat cover.

Raw materials had to be produced by approved suppliers, who were primarily located in the greater Detroit area, or in the states adjoining Michigan. The one exception was the leather supplier, which produced and shipped its components from Omaha, Nebraska, a center of beef production and a source of raw hides. All materials were shipped in full containers and packed at the respective suppliers' locations, with the exception of a small number of items, such as thread and fasteners. Overland transportation in the US averaged three to five days from the Midwest to a west coast port, and sea shipments to Thailand took approximately 24 days, with the entire transit time averaging four weeks in one direction. The supply chain system was set up so that deliveries were made every week (see Figure 3 [ PDF 21.2KB | 1 page ]). At any one time, therefore, there was one shipment that was about to arrive in Thailand, two shipments in transit between Asia and North America, and one shipment just leaving suppliers in the US. Finished seat covers flowed back to the seat assembly plant in the Detroit area in a similar pipeline, also within a four-week timeframe.

Safety stock was maintained in both Thailand (in the form of raw materials) and the US (in the form of completed seat covers awaiting assembly) as a contingency against a delayed shipment, and was strictly controlled to two weeks' supply. This stock level was determined based on the strategic assumption that a problem in transit could occur that might delay any one shipment, but not two consecutive shipments. Therefore, two weeks supply of inventory would be enough to maintain production until the next shipment arrived the following week.

The key competitive advantage for the Thailand operation was in the processing of leather. Leather is a natural product varying in grain and appearance, and contains many imperfections that cannot be used in seat covers. Each hide had to be inspected for imperfections before patterns for the various pieces could be cut in order to avoid the imperfections. The leather cutting process is time consuming and requires considerable judgment and skill by the leather cutters. The leather cutters in the Thailand operation had many years' experience and were heavily relied upon for their expertise.

The Thai plant achieved an average yield of 70%, or about 5% better than the best suppliers from Mexico, giving the Thai plant a US$14 cost advantage per seat cover over its competitors as a result of better utilization of leather. At the same time, lower wages gave the Thai plant an additional US$73 cost advantage, contributing to an overall advantage of US$87 per seat cover. Meanwhile, additional freight, inventory, an obsolescence allowance, and more durable packaging offset the cost advantage by US$39, for a net positive contribution of US$48 per seat cover (see Table 3 [ PDF 10KB | 1 page ] for a complete breakdown of the logistics costs involved).

The difference in production cost seems to be the main driver behind the selection of the Thai supplier; however, cost cannot be the only factor as other variables need to be included in the decision-making process of selecting suppliers. Production cost needs to be understood within the total cost framework. It is this total cost approach that illustrated the cost competitiveness of the Thai plant.

4.2 Case Study Summary

The supply chain literature focuses on how customer requirements and market demand determine supply chain strategies that are responsive (i.e., agile), efficient (i.e., lean), or a combination of the two (i.e., leagile). However, the case study presented above suggests that market-driven factors alone may not be sufficient to determine the optimum supply chain strategy.

Product characteristics have considerable influence over transportation options and, therefore, over supply chain strategies. For example, the size of the product with respect to its value influences whether air freight or sea freight is the most viable option, which in turn affects supply chain strategy.

The expertise, efficiency, and cost of labor as a resource in the supply chain must be considered when supply chain strategies are being determined. A labor advantage in one location relative to another—e.g., better skills or lower wages—may offset additional transportation costs so that a supply chain that uses a more distant labor source could offer advantages over one that employs labor closer to the customer market, as illustrated in the case study above.

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