The Effects of Customization on Cost Reduction in Electronic Supply Chain: an Empirical

The Effects of Electronic Supply Chain Design (e-SCD) on Coordination and Knowledge Sharing: An Empirical Investigation.

Ki-Chan Kim

Il Im[*]

Abstract

Customization is a critical success factor in current business environment. One of the most important components that make fast and inexpensive customization possible is electronic supply chain design (e-SCD). e-SCD is a supply chain design which integrates and coordinates suppliers, manufacturers, logistic channels, and customers using information technology (IT). In this study, a model that shows the effects of e-SCD on the customization capability of companies was developed. From previous studies, the model identifies three major effects of e-SCD – electronic linkage effect, supply chain coordination effect, and co-engineering effect. The model also shows a process through which an electronic supply chain network is transformed from a simple infrastructure for data exchange into a knowledge-sharing network for fast response and customization. The model was tested using the data collected from automobile industry in Korea. It was shown that e-SCD has significant effects on the supply chain coordination and co-engineering. This implies that e-SCD can be an effective management tool to deliver customized products with right timing and price. It was also shown that the ‘involvement’ of entities in a supply chain is a critical factor in converting a supply chain network from an infrastructure for data exchange to a knowledge-sharing network.

Keywords: supply chain, electronic supply chain design, customization, co-engineering, knowledge sharing

1. Introduction

Business environments are moving from mass-production toward customization. No longer do companies focus on producing standardized products or services for homogeneous markets. "Greater and greater variety" blends into "more and more customization". Customization is to fulfill individuals’ needs most rapidly and at lowest cost possible. Customization is becoming one of the top priorities in any business.

Dell Computer Corporation has succeeded in e-business increasing both value and efficiency by providing customized computers fast and at a low price. Dell's primary advantage is its preeminent supply chain design, augmented with precise supply chain management [10]. In Japan, Toyota is reportedly offering customers five-day delivery – from the time the customer personally designs his/her own customized car from modular options on a CAD system in a dealer showroom or in the customer's own home via traveling salesman, through order processing, scheduling, manufacture, testing and delivery [27]. This new manufacturing system, named “Second Generation JIT”, is expected to reduce 37% of inventory and 28% of plant space. Motorola can manufacture any type of pager from 2,900 possible models within 20 minutes and deliver it within 1 hour from the order.

These examples show that customization is becoming a feasible and necessary goal in supply chain management. However, customization increases complexities in supply chain, manufacturing, and logistics. The increase of complexity entails longer set-up time, higher production costs, and more complications in supply chain. Therefore, it has been considered extremely difficult to achieve customization with low cost and fast fulfillment cycle time.

In virtual market, however, fast and inexpensive customization is becoming more and more feasible. Electronic Supply Chain Design (e-SCD) is one of the key components that make it possible. Information technology (IT) can link all activities in a supply chain into an integrated and coordinated system that is fast, responsive, flexible, and able to produce a high volume of customized products at low costs. e-SCD is a supply chain design to integrate and coordinate suppliers, manufacturers, logistic channels, and customers using IT. With an e-SCD, active electronic communications for information exchange/integration take place in each phase of fulfillment, which coordinate the activities of suppliers according to the needs of customers.

A goal of this study is to develop a model that explains how e-SCD achieves the three core goals of customization – right product, in right time, and at right price. A conceptual model was developed to explain how e-SCD achieves efficient customization. The developed model was tested using empirical data collected from a survey.

2. The concept and current status of e-SCD

Electronic Supply Chain Design (e-SCD) is a process to build an electronic information network for transactions among supplier-manufacturer-retailer-customer in virtual space using IT. A key advantage of streamlined supply chain is accurate information. When humans are involved, the risk of inaccuracies increases. The e-supply chain makes it easier and less costly to manage suppliers [2]. e-SCD has several aspects that are distinguished from traditional supply chain management and information systems for individual firms.

First, as Pine [27] pointed out, customization cannot be achieved at an individual firm level. Every company in a large supply chain or distribution chain is dependent on each other. Moreover, cooperation of the customers, especially in need of identification and fulfillment, is necessary for a successful supply chain. Thus, the unit of value creation is shifted from individual firms to value-networks that consist of partner firms and their close collaboration [9]. At the individual firm level, firms focus on the sub value-adding functions (R&D, design, manufacturing, etc) independent of other firms. In the inter-firm network level, however, the value-adding functions are distributed across the participating entities including customers and their activities are dynamically coordinated at the network level. e-SCD aims at optimizing the dynamic coordination using ITs. Therefore, the design of e-SCD must support these distributed functions and coordination.

Second, supply chain design (SCD) focuses more on the dynamic flow and interactions. SCD consists of choosing what work to outsource from suppliers (make vs. buy), selecting suppliers to use and negotiating contracts – both the legalities and the culture of the supply chain relationships. Fine [10] noted that more emphases had been on the “static” material inventory management than the “dynamic” flow within a supply chain. In 1990s, many companies in competitive high technology industries such as automobile, semiconductor, computer, and software failed even though they had high level of capabilities. On the other hand, some companies such as Dell Computer accomplished competitive advantages based on a new supply chain design that enables the players in a supply chain to dynamically adapt themselves to the changing technology and market. These successes and failures imply that the “dynamic capability” – the capability to rapidly integrate, design, and coordinate internal and external capabilities in response to the changes in technology and market environments – is becoming more critical in competition. Only a few studies, have examined the “dynamic capabilities” of supply chain. For example, Gosain et al. [12] investigated the factors that affect the dynamic capabilities that they termed “plug and play.” Still, more research is needed in this area.

Third, for the optimization of a supply chain, it is critical to coordinate and integrate the whole supply chain in virtual space through information exchange, sharing, and integration. Although some studies approached supply chains as a whole [11, 23], past studies in supply chain have mainly focused on the uncertainty of supply chain environment, the relationships of the supply chain participants [22], and inventory/lead time in physical space. Gurbaxani and Whang [13] posit that IT can facilitate the coordination necessary between business partners by nurturing cooperative relationships, which reduce market transaction costs. e-SCD integrates physical supply chain with ITs and optimizes the activities of participants to overcome physical and geographical constraints. It has become possible because IT enables information exchange and interaction simultaneously.

2.1. e-SCD in automobile industry

A car is a system product that on average consists of 20,000 parts. Thus, the automobile industry has a long and hierarchical supply chain. Hierarchical supply chain is a supply chain that has several levels of suppliers – the manufacturer out-sources part modules (e.g. dashboard, seat, etc) from primary suppliers who out-source the sub-parts from secondary suppliers, and so forth. In a hierarchical supply chain, information exchange takes long time and causes frequent errors if it is done through fax or paper documents. Moreover, the hierarchical structure has the “bull-whip” effect – the fluctuation in inventory level is amplified along the supply chain [23, 10]. As a result, the long and hierarchical supply chain in automobile industry causes inefficiencies in various areas – design, development, procurement, manufacturing, and logistics – throughout the supply chain.

Thus, automobile industry has a high potential for business-to-business (B2B) electronic business (e-business) [21]. In US, the automobile industry is one of the first industries where B2B electronic supply chain networks are being utilized. We define electronic supply chain network, (here called e-SCN) as “a network structure that enables, using ITs, electronic transactions and information exchange between manufacturers and suppliers in a virtual space.” Through B2B e-SCNs, the participants of a supply chain can exchange and share information that is critical for the efficiencies of the supply chain.

2.2. B2B network infrastructure in automobile industry

For a certain type of e-SCNs, new e-business infrastructure is necessary because of the security and reliability problems of the Internet and the compatibility and accessibility problem of proprietary network. In US, a new B2B e-business infrastructure, ANX (Automotive Network exchange), for electronic market place for procurement and part supply is being built. ANX is a TCP/IP protocol based e-business network infrastructure that has high security, reliability, and stability. Since January 1999, US ANX has initiated a Global ANX (GNX) project that would be a global standard network in the automobile industry. Similar regional networks are also emerging – for example, ENX in Europe, JNX in Japan, and KNX in Korea [20].

Table 1. B2B Electronic Supply Chain Networks in Automobile Industry

2.3. B2B e-business in automobile industry

In 1999, General Motors and Ford built their e-marketplace separately on their own Internet-based procurement networks. GM, allied with Commerce One, developed TradeXchange, and Ford, partnered with Oracle, developed Auto-Xchange. However, their suppliers had problems because of the incompatibility between the two e-marketplaces. In February 2000, the Big Three – GM, Ford, and Chrysler – agreed to build a unified e-marketplace based on ANX. The result was Covisint, the biggest e-marketplace in the world. In Covisint, various types of services – auction, quoting, demand forecasting, production planning, automated transaction, financial services, payment, and logistics – are provided. The transaction volume by the Big Three is expected to be about $240 billion a year.

3. The effects of e-SCD in supply chain

In this study, a conceptual model that explains the effect of e-SCD is developed. The effects of e-SCD would become larger as it is integrated with the processes of the participating companies. Gurbaxani and Whang [13] argue that IT in an organization has multiple roles: a) it increases scale efficiencies of the firms operations; b) it processes basic business transactions; c) it collects and provides information relevant to managerial decisions and even makes decisions; d) it monitors and records the performance of employees and function units; e) it maintains records of status and change in the fundamental business functions within the organization and maintains communication channels. Although these roles are in the context of organization, it is expected that IT will have similar effects also in supply chain. The effects of e-SCD are conceptualized along two dimensions – linkage effect and coordination & co-engineering effect. These effects are expected to change the customization capability of a supply chain. In the following sections, the two effects of e-SCD are examined and how these effects change the customization capability is also discussed.

3.1. Linkage effect of e-SCD

Linkage effect of e-SCD is an instant gain due to the electronic transaction and electronic information sharing. Once a network for B2B transactions takes place, the efficiencies between manufacturers and suppliers increase instantly because they can exchange information and process transactions electronically. Another short-term effect is the new competition among the suppliers. The network will enable the manufacturer to search alternatives for current suppliers, which will intensify the competition among the suppliers. The competition will press down the procurement costs of the manufacturers in the short-term. 오류! 책갈피가 자신을 참조하고 있습니다. shows the linkage effect of e-SCD.

Figure 1. Linkage Effect of e-SCD

3.2. Supply chain coordination effect and co-engineering effect of e-SCD

e-SCD will have more profound effects in mid to long term. As an e-SCD is more utilized, the participants invest and involve more in the supply chain. As the participants invest and involve more in the supply chain, they share more knowledge and coordinate more of their activities, to optimize the whole supply chain.

3.2.1. Investment and involvement of suppliers

Customized investments of the suppliers transform the e-SCN from a network for simple information exchange into a network for customized product development. The customized investment means the customization in site, physical, and human assets [7]. The customized investment is an indicator of involvement. Involvement refers to “the implicit or explicit pledge to continue the relationship between the transaction parties” [17]. Dyer [6] showed that the customized investments of Japanese automobile suppliers increased their involvement because of the increased switching costs.

The importance of site asset specification (physical location) has generally decreased due to the advancement of communication technologies. However, the physical location is still important for customized product design and production process engineering. Especially, when the product is a system product that requires continuous coordination in design phase, it is most efficient when engineers are collocated [10, 18].

The efficiency of customized product development will increase as the suppliers invest more in manufacturer-specific CAD/CAM facilities (physical asset specification). The efficiency of customized product development will also increase as the interaction between the employees in manufacturer and suppliers – for example, the engineers from the suppliers participate in product design and development – increases. As the interaction increases, the suppliers can design customized parts more efficiently and at a lower cost (human asset specification). An empirical study [4] found that information distortion decreased when the engineers from manufacturer and suppliers design the product together, increasing the quality of the product.

As the customized investment and suppliers’ involvement increases, the e-SCNs will evolve from a network of electronic linkage into a network for information sharing and integration. The latter was referred to as “Knowledge-sharing network” by Dyer and Nobeoka [5]. The Knowledge-sharing network enables the coordination of the network at whole supply chain level.

Figure 2. Asset Specifications and Involvement

3.2.2. From ‘electronic linkage’ to ‘knowledge sharing’

The electronic linkage makes it possible to overcome time, space, and relationship limitations in a network through electronic communication and electronic information integrations. Networking provides a mechanism for transferring information, knowledge, and technology [14]. The three main effects of electronic market [24] – electronic communication, brokerage, and integration – are closely related to the “knowledge creation cycle” of Nonaka [25]. Nonaka’s “knowledge creation cycle” shows the process through which simple information transfer evolves into information sharing/integration and ultimately into knowledge for coordinating value chain activities. In the “knowledge creation cycle,” involvement is a moderating variable of the sharing/integrating of the transferred information and it is also a necessary condition of participation and motivation (see Figure 3). Without involvement, an e-SCN is simply a network for mechanical data exchanges and critical information such as product development, inventory, contract, etc is not shared. Dyer and Nobeoka [5] found that valuable information was shared in a network when the suppliers were actively participating. Therefore, involvement of participants is crucial for B2B e-SCNs to evolve from electronic linkage into electronic coordination. The process of evolution from the electronic linkage into electronic integration and knowledge creation is further examined below.

1) Information exchange

Information of individual firms is transmitted through electronic communication process. Electronic linkage makes it possible to accurately transmit information farther and with less time/cost, eliminating physical distance barriers. This is the “ electronic communication effect” [23] and also Nonaka’s “externalization” process through which tacit knowledge is transformed into explicit knowledge [25].

2) Information brokerage

The information transferred through e-SCNs is stored in databases and becomes available to the participants of the supply chain. This is the “electronic brokerage effect” [23] and also Nonaka’s “combination” process through which explicit knowledge is combined with other explicit knowledge [25]. Transferred information is combined and merged to create more value.

3) Information integration effects

In the network, the transferred/combined information is integrated through dynamic learning processes. This is the “electronic integration” [23] and also Nonaka’s “internalization” and “socialization” processes [25]. Internalization refers to the process that explicit knowledge is transmitted to others and they learn it to create their own tacit knowledge. Socialization refers to the process that tacit knowledge is transmitted to others and they make it their own tacit knowledge. In the information integration process, some “data mining” is usually done on the collected data to find and create valuable information, which is a process of converting information into knowledge. For a successful conversion process, the experiences, knowledge, and technology of participants should be exchanged, shared, and combined, which requires high involvement of suppliers.