Designing supply chains in emerging markets

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(1)Designing Supply Chains in Emerging Markets -A Theoretical Research and Case Analysis-. Undergraduate Management Final Project by. Felipe Afanador Cortés Undergraduate Student. Tutor: Marcus Thiell, PhD Faculty Assistant Professor. May 2008 University of los Andes School of Management Bogotá D.C., Colombia. No part of this study may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without the permission in writing from University of los Andes. 1.

(2) Acknowledgments. I would like to thank all the members of University of Los Andes and School of Management, especially, Dr. Marcus Thiell, assistant professor, who was in charge of showing me the path to make this project real and giving me continuous encouragement and feedback. Thank you also to Berny Silberwasser, beer amateur and entrepreneur, for believing in me and opening his company doors. Moreover, there are so many people with whom I’m in debt that all these pages won’t be enough to express my gratefulness, and I really want to thank all my family members for their invaluable support, encouragement, and love. Without them all, this achievement wouldn’t be possible. Finally, I want to dedicate this work to my mother, for her endless love and passion.. 2.

(3) Table of Content. 1.. Introduction ................................................................................................................................. 8. 2.. Justification................................................................................................................................ 11. 3.. General objective ....................................................................................................................... 14 3.1. Specific objectives .............................................................................................................. 14. 4.. Methodology .............................................................................................................................. 15. 5.. Supply Chain .............................................................................................................................. 17 5.1 What is a supply chain? ............................................................................................................ 17 5.2 The importance of supply chain ................................................................................................ 20 5.3 The new paradigm of supply chain ............................................................................................ 22 5.4 Elements of a supply chain ....................................................................................................... 23 5.5 Types of supply chain ................................................................................................................ 25 5.5.1 Efficiency and responsiveness supply chains ...................................................................... 26 5.5.2 Push, pull and hybrid supply chain ..................................................................................... 27 5.5.3 Matching consumer buying behavior and demand uncertainty .......................................... 29 5.6 Main determinants of a supply chain ........................................................................................ 31 5.6.1 Consumer........................................................................................................................... 33 5.6.2 Market ............................................................................................................................... 34 5.6.3 Industry ............................................................................................................................. 35 5.6.4 Company............................................................................................................................ 37 5.6.5 Product .............................................................................................................................. 38. 6.. Supply chain design .................................................................................................................... 39 6.1 What is supply chain design? .................................................................................................... 39 6.2 Which is the importance of supply chain design? ..................................................................... 43 6.3 Supply chain design in-house determinants.............................................................................. 45 6.4 Factors for successful supply chain design ................................................................................ 48 6.4.1 Understand supply chain as strategic asset ........................................................................ 49 6.4.2 Dynamic alignment approach ............................................................................................ 50 6.4.3 Collaborative behavior approach ........................................................................................ 51 6.4.4 Appropriate mix of responsiveness and efficiency .............................................................. 52 3.

(4) 6.4.5 Five external variables that affect supply chain design ...................................................... 54 6.4.6 Evaluate the design in four different check points ............................................................. 56 6.4.7 Metrics to evaluate supply chain performance ................................................................... 57 7.. Supply chain design on emerging markets .................................................................................. 59 7.1 What is an emerging market? ................................................................................................... 59 7.2 Emerging markets determinants ............................................................................................... 62 7.3 Risks associated to emerging markets ....................................................................................... 66 7.4 Strategies to improve operational efficiency ............................................................................. 68. 8.. Supply chain design master plan ................................................................................................ 70 8.1 What is a supply chain design master plan? ............................................................................. 70 8.2 Tools description associated to the supply chain master plan ................................................... 73 8.3 Tool number four and five ......................................................................................................... 74 8.3.1 Determinants framework to evaluate market conditions and in-house situation ............... 74 8.3.2 How to use the dynamic tables? ........................................................................................ 75 8.3.3 How to interpret the graphs? ............................................................................................. 76 8.3.4 How to interpret the overall percentage (%) score? ........................................................... 78. 9. Implementation of the supply chain design master plan in a real company based on an emerging market. ............................................................................................................................................... 79 9.1 Market description.................................................................................................................... 79 9.2 Industry description .................................................................................................................. 81 9.3 Company description ................................................................................................................ 82 9.4 Supply chain design challenge .................................................................................................. 84 9.5 Supply chain master plan implementation ................................................................................ 85 9.5.1 Phase 1 .............................................................................................................................. 85 9.5.2 Phase 2 .............................................................................................................................. 86 9.5.3 Phase 3 .............................................................................................................................. 87 9.5.4 Phase 4 .............................................................................................................................. 89 9.5.5 Phase 5 .............................................................................................................................. 91 9.5.6 Phase 6 .............................................................................................................................. 93 9.5.7 Phase 7 .............................................................................................................................. 97 10.. Results.................................................................................................................................... 98. 10.1 General conclusions ................................................................................................................ 98 4.

(5) 10.2 Supply chain design master plan conclusions ....................................................................... 100 11.. Bibliography ......................................................................................................................... 101. 11.1 Books .................................................................................................................................... 101 11.2 Articles ................................................................................................................................. 103 11.3 Internet ................................................................................................................................ 104 11.4 Interview .............................................................................................................................. 104 12.. Annex ................................................................................................................................... 105. 5.

(6) Table list 1. Table no. 1 Matching type of product and type of supply chain ............................................ 26 2. Table no. 2 Push, pull and hybrid supply chain types ................................................................... 28 3. Table no. 3 Gattorna’s supply chain types and consumer buying behavior match......... 30 4. Table no. 4 Description of each dominant buying behavior ...................................................... 33 5. Table no. 5 Primary strategy to define company main competitive advantage ............... 37 6. Table no. 6 Type of product ....................................................................................................................... 38 7. Table no. 7 Determinants to evaluate in-house situation .......................................................... 46 8. Table no. 8 Determinants framework to evaluate in-house situation .................................. 47 9. Table no. 9 Determinants to evaluate market conditions ........................................................... 63 10. Table no. 10 Determinants framework to evaluate market conditions ................................ 65 11. Table no. 11 Nine risk categories that affect supply chain in emerging markets ........... 67. 6.

(7) Graph list 1. Graph no. 1 Justification diagram................................................................................................ 12 2. Graph no. 2 Modern supply chain diagram ............................................................................... 18 3. Graph no. 3 Modern supply chain elements.............................................................................. 24 4. Graph no. 4 Determinants diagram ............................................................................................. 32 5. Graph no. 5 Identifying industry degree of demand uncertainty and economies of. scale ...................................................................................................................................................... 35 6. Graph no. 6 External variables that affect supply chain design diagram ......................... 54 7. Graph no. 7 Supply chain design master plan diagram ........................................................ 71 8. Graph no. 8 View of windows in Microsoft Excel .................................................................... 74 9. Graph no. 9 Dynamic tables ........................................................................................................... 75 10. Graph no. 10 Spider graph example of tool number four ..................................................... 76 11. Graph no. 11 Spider graph example of tool number five ...................................................... 77 12. Graph no. 12 Overall % score of the market determinants .................................................. 78 13. Graph no. 13 Elements of the supply chain design master plan ......................................... 86 14. Graph no. 14 Hybrid model ............................................................................................................ 88 15. Graph no. 15 Responsiveness market determinants spider graph for Bogotá Beer. Company.............................................................................................................................................. 89 16. Graph no. 16 Efficiency market determinants spider graph for Bogotá Beer Company. ............................................................................................................................................................... 90 17. Graph no. 17 Responsiveness in-house determinants spider graph for Bogotá Beer. Company.............................................................................................................................................. 92 18. Graph no. 18 Efficiency in-house determinants spider graph for Bogotá Beer Company. ............................................................................................................................................................... 92 19. Graph no. 19 Supply chain design for Bogotá Beer Company in emerging markets ..... 94. 7.

(8) 1. Introduction The current business arena for successful companies is evolving faster and tougher. It requires better practices to deliver products and services according to customers’ needs in more diverse and complex demand environments.1 Customers are expecting perfect synchronization with their suppliers and supply chain managers are looking forward to reducing risk impact and increasing performance. However, modern managers are recognizing that they may no longer be using the optimal supply chain design for their company requirements (Reeve, James & Srinivasan, Mandyam, 2005). In consequence, managers are starting to create synchronized, efficient and customeroriented flow of elements to deliver products or services. This market trend will demand supply chain managers to leverage and improve operational efficiency and responsiveness (Minnich, 2006). Therefore, supply chain design concepts have been moving forward in manager’s priorities, when running business. They have started to understand the potential and profitable advantage that could be given by designing the right supply chain and aligned with the overall corporate strategy.2 “It is widely accepted that the design of a product is responsible for more than 80 percent of its lifetime cost. In the same way, the design of a supply chain has a tremendous impact on the cost and value attributes of the product over its lifetime.”3. 1. Carter, Joseph & Slaight, Thomas & Blascovich, John (October 2007) Technology, collaboration, supply chain design, (pg. 44) Supply Chain Management Review. 2 Reeve, James M. & Srinivasan, Mandyam M., (May/June of 2005) Which supply chain design is right for you? (pg. 51) Supply Chain Management Review. 3 Reeve M. James & Srinivasan M. (May/June2005) Which supply chain design is the right for you? (pg. 50) Supply Chain Management Review. 8.

(9) On the other hand, companies entering into the world’s economy, based on emerging markets, will demand managers to be capable of integrating the world’s market arena by designing supply chains that can reach customers worldwide with the right balance strategy of responsiveness and efficiency.4 Although the term supply chain emerged on the business scene only about two decades ago5, it is currently a very important subject to merge different management concepts to improve competitiveness. For example, Mr. Rafael Flórez, GS1 Chief Director for Colombia6, argues that all private sectors on emerging market must recognize supply chains as part of their main strategy to effectively export products worldwide. According to Mr. Flórez, managers have started to understand and treat supply chain as a strategic asset for competitive businesses. According to Cavinatos (2002), most companies do not count with a supply chain strategy. Traditionally, these companies relate supply chain and networking as a cost, when the modern view suggests that this framework shall be considered as an investment. Traditional managers have to change their thoughts about supply chains as an operational task, they must think in term of a management task. There is another big issue related to literature about supply chain design. Most of its literature and authors have done their research under controllable and predictable conditions as developed economies. There is not that much literature about supply chain on emerging markets or market with higher risk associated. 4. Minnich, Dennis (July 2006) Balancing supply chain responsiveness and efficiency, (pg. 3) School of Business Administration, International University, Germany, Bruchsal. 5 Cavinatos, Joseph L. (May 1, 2002), What's Your Supply Chain Type?, Supply Chain Management Review. 6 Flórez Rafael, (2007) Diagnóstico de las empresas nacionales frente a la logística y las redes de valor, GS1 Colombia. 9.

(10) In contrast, this study presents the main foundations about supply chain design on emerging markets due to the lack of literature about how supply chain must be configured under environments with high risk, as developing economies. In order to find some answers and solutions that can help managers to develop more effective supply chains on emerging markets while improving performance; the main objective of the present study is to identify and analyze the main concepts, determinants and processes that enable an effective supply chain design on emerging markets. To develop the mentioned objective, the present study has been structured in three big main areas: the first part is about the theoretical background; the second part is about the architecture of a supply chain design master plan tool; and the third part is about the implementation of the last tool described and further conclusions.. 10.

(11) 2. Justification There are so many endogenous and exogenous variables to take into account when designing a supply chain. This makes business development more complex, demanding sophisticated, adaptable and dynamic solutions to get satisfied customers. These conditions push managers to survive in the corporate furious world, by creating and implementing much better, faster and effective supply chain solutions to improve operational efficiency and shareholders’ benefits guided by a customer-oriented culture (Gattorna, 2006). “Those companies that create supply chains that meet and exceed customer needs and service requirements will become the industry leaders.”7 Currently, supply chain leverage capability to maximize company efficiency and responsiveness is attracting managers’ view.. “Supply chain management is topping. boardroom agendas in the United States and abroad as a vital part of the race day capabilities required for successful mergers, acquisitions, and alliances”.8 For the last twenty years, continuous literature has been published about this topic. Nowadays, it is getting more relevant, there are more documents registered in principal data bases and new organizations born to study the subject. For example, in 2008, the Center for Latin-American Logistics Innovation (CLI)9 was established to research six main areas.10 One. 7. Carter, Slaight and Blascovich, M. (2007) Technology, Collaboration, Supply Chain Design, (pg. 45), Supply Chain Management Review. 8. Burt, David & Dobler, Donald W. & Starling, Stephen (2003) World class supply management: the key to supply chain management. (7th Edition) (pg. 7) New York, USA. McGraw-Hill Companies, Inc. 9. This center is created in 2008 through LOGyCA’s partnership with the Massachusetts Institute of Technology Center for Transportation & Logistics. For further information check the following website: http://www.clilogyca.org/. 11.

(12) of them is related to supply chains on emerging markets. Thus, this center demonstrates the importance of understanding supply chains for competitiveness. Nevertheless, to get done the right supply chain design on emerging markets, it is fundamental to understand supply chain main elements, determinants, and environment conditions. The understanding of these three elements will enable managers to reduce the risk of invest time and money into the wrong direction. If the design is wrong, the implementation will generate negative outputs and it will be more expensive and time consuming. For this reason, it is so important to understand the design phase of a supply chain. Graph no. 1 Justification diagram. Source: Author. 10. CLI’s main six research topics: Supply Chain Innovation in Emerging Markets, Sustainable Supply Chains, Measuring and Managing Supply Chain Risk, Enabling the Digital Supply Chain, Critical Infrastructure, Urban Transportation. 12.

(13) The above graph shows two main concepts, supply chain and supply chain design, to merge under emerging market conditions. However, all concepts come together in one subject that will propose a solution to the lack of literature in this particular aspect. Most of all international authors that have written about supply chain have done it under developed market conditions. They do research under very predictable and controllable variables. This means that there is a lack of literature about supply chain design under unpredictable and riskier situations. Markets where the risk and vulnerability are often involved in every situation and extra costs must be taken into consideration to mitigate risk. Therefore, the value added of this research is to reduce the gap of lack of literature about supply chain design on emerging markets by designing a tool to help managers to design the right supply chain.. 13.

(14) 3. General objective Identify and analyze the main concepts, determinants and processes that enable an effective supply chain design on emerging markets.. 3.1 Specific objectives. 1) Identify and understand the main elements and determinants of a supply chain; 2) Identify and understand the determinants of supply chain design and its importance to improve performance and reduce risk; 3) Identify main characteristics and factors on emerging markets when designing a supply chain; and 4) Determine and illustrate an effective process to design a supply chain on emerging markets.. 14.

(15) 4. Methodology To develop the present investigation, the author has gone through the following eight stages. 1. Define characteristics, objective and processes to develop the present study according to personal motivation and interests, under tutor’s guidelines. 2. Search literature in secondary sources: international data bases, journals, documents, specialized magazines and literature, academic books, governmental, nongovernmental and private organizations, management faculties, national and international associations, and tutor’s class work and study material. 2.1. Analyze and discuss the theoretical background 2.2. Align study structure with tutor’s comments and suggestions. 3. Organize, analyze and understand the data, to abstract key knowledge from secondary sources through deductive methods, as main inputs to generate further data. This means, that the study will move from general to specific aspects, or commonly called a top-down approach. 4. The data gathered will be analyzed through a deep qualitative analysis, as follows: 4.1. Organize information in categories according to main topics of research with flow diagrams. 4.2. Filtrate relevant information that enables to expand knowledge, in agreement with the study proposed objectives. 4.3. Compare data with an evaluation matrix that enables to identify definitions and main determinants.. 15.

(16) 5. Based on theoretical research and a top-down approach, data will be configured in order to make a business process model. 6. With the mentioned business process model, a company based on an emerging market will be selected to implement the model. As primary source, the general manager will provide open, clear and real information to research how the company current situation is and discover supply chain needs. 7. Implement the configured business model into the selected company and analyze the information. 8. After having the business model results analyzed, conclusions and further outlook will be presented.. 16.

(17) 5. Supply Chain 5.1 What is a supply chain? The term Supply Chain combines two words with different meanings to merge in one single concept. To understand the whole concept, it is very important to comprehend the semantic root of each term: supply and chain. By one way, the word “supply” comes from the Latin word supplere that means “to fill up”. According to the English Oxford dictionary, supply as a verb has three main explanations: 1) available to someone, 2) provide with something needed, and 3) be adequate to satisfy (a requirement or demand).11 On the other hand, chain comes from the old French word chaine, which comes from the Latin word catena. The English Oxford dictionary provides de following meanings to chain: 1) a connected series of metal links for fastening or pulling, or as jewellery, 2) a connected series, set, or sequence, and 3) a part of a molecule consisting of a number of atoms bonded together in a series.12 Having understood the semantic definition of each word, by putting them together (supply and chain) the modern concept is born. Modern supply chain could be defined as a “global network used to deliver product and services from raw material until the end customer through the flows of information, distribution and the money.”13. 11 12. Recovered from: http://www.askoxford.com, April 2008. Ibid.. 13. McCormack, Kevin P. & William, Johnson C. & Walker, William T. (2003) Supply Chain Network and Business process orientation. Advance strategies and best practices. (pg. 31) United States. St. Lucie Press.. 17.

(18) Modern supply chain is illustrated by Graph no. 2, which explains the network that has to be organized to make possible the flow and interaction of parties, information, processes and elements, which form a supply chain. Generally, managers confuse the term logistics with supply chains. However, each term refers to different concepts. According to Hugos (2003, pg. 24), “logistics typically refers to activities that occur within the boundaries of a single organization and supply chains refer to networks of companies that work together and coordinate their actions to deliver a product to market.” Graph no.2 Modern supply chain diagram. Source: Burt, David & Dobler, Donald W. & Starling, Stephen L. (2003) World class supply management: the key to supply chain management. (7th Edition). (pg. 9) New York, U.S.A. McGraw-Hill Companies, Inc.. 18.

(19) Thus, not only does supply chain definition mean to move products or raw material from point A to point B but it also involves a complex flow of synchronized elements from point of origin of raw material, until end customer and further product disposal and return. As shown in Graph no. 2. Modern view suggests that supply chains must get involved with suppliers of suppliers and customers of customers’ network. This characteristic enables a huge amount of information to flow, which enables to reduce uncertainty and improve operational efficiency. Modern literature offers different types of definitions for supply chain. The author has identified sixteen different definitions provided by different authors. (See annex table no.1) However, the author has produced its own definition, which will be used to define supply chain in the present study. The author has proposed the following definition for the purpose of integrating different complementary definitions from international authors that will lead to a more complex and dynamic definition. In the further course of this research supply chain will be defined as: A complex and synchronized network of elements that flow and interact between in-house processes and third parties to link and support company outputs with consumers demand behavior. This definition has been configured by the author to describe modern supply chain extended horizon, where networking goes way beyond suppliers of suppliers and customers of customers. It also describes process and interaction between third parties, because current modern supply chains must interact with all stakeholders to have the right balance of responsiveness and efficiency.. 19.

(20) 5.2 The importance of supply chain According to some authors14, most executives know something about the potential of supply chain; however, when they go on praxis, there is not that much understanding. For instance, the sales department from a retail store has said that one fourth of all customers interviewed went out of the store hands free, because the product that they were searching for was out of stock15. This means that there is a gap between theory and praxis, when it gets to apply supply chain concepts. The author has concluded a hypothesis about this phenomenon. The biggest issue is related to the way managers treat supply chains. Most companies treat supply chain exclusively under the operational and tactical level, when it must be treated (design and control) from the strategic level. Supply chains are involved in every single aspect of every company processes. It is the network that carries elements to generate revenue. Supply chains are dynamic, they “may seem like uncontrollable, inanimate beast, but they are in fact living systems propelled by humans and humans’ behavior.”16 For the purpose of this study, supply chain plays a main roll. It is the main stream of the whole document, due to the importance to develop a competitive advantage by implementing supply chain as part of the overall company strategy.. 14. i.e., John Gattorna (2005); Sunil Chopra & Peter Meindl (2007); and David Simchi-Levi (2007). Fisher, Marshall (March-April 1997). What is the right supply chain for you? Harvard Business Review. 16 Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want (pg 25). Edinburgh Gate, Great Britain. Pearson Education Limited. 15. 20.

(21) “Managers are facing a new business era, where the world is getting flat”, wrote journalist, Thomas Friedman (2005), in his book “The World is Flat.” He has discovered ten flatteners that are shrinking the World.17 Flattener number seven is called “supply chaining.” This flattener is related to supply chain effects to improve companies performance. Markets around the world are demanding better practices to get the product or services to the right customer with the lowest possible cost. (Gattorna, 2006). This will demand companies to shape their supply chain in perfect synchronization with consumer buying behavior. Therefore, companies will have to discover new ways of innovation to link all elements needed to transform inputs into outputs with the highest possible quality, customization, responsiveness and lowest cost. These types of companies, fully integrated with supplier and customers, and being recognized by having the right price, the right product and service, will have an advantage place. (Marcus, 2005) Enterprises that involve supply chain as a main area of development will create a competitive advantage. (Most enterprises do not take into account supply chains as part of the strategic plan).. 17. Friedman’s flatteners: 1: Collapse of Berlin Wall, 2: Netscape, 3: Workflow software, 4: Open sourcing, 5: Outsourcing, 6: Off-shoring, 7: Supply chaining, 8: In-sourcing, 9: In-forming, 10: "The Steroids". 21.

(22) 5.3 The new paradigm of supply chain According to Gattorna (2006), modern supply chain paradigm suggests that networks must be designed in agreement accordance with customer requirements, not in function of the product requirements. “The secret is to segment customers by their dominant buying behaviors, then consider what this means for the design and operation of the corresponding supply chain.”18 Therefore, he proposed a classification or segmentation of consumer buying behavior based on a physiological theory supported four types of buying behavior: collaborative, efficiency, demanding and innovative. The first one is about a friendly relationship with consumer with a very predictable demand. The second one is about focusing on low cost and large predictable demands; however, consumers are very price sensitive. The third one is about quick response to unpredictable supply and demand conditions. The last one is about new ideas from suppliers, where customers are not price sensitivity. Managers must start to understand the roll of customers in their supply chain, because according to customers’ needs, the supply chain has to be designed to bring products and solutions to fulfill those needs. Gattorna (2006) called this modern supply chain view “dynamic alignment”, defined as: “framework that an enterprise needs to be aligned with its customers or markets in the context of the prevailing operating environment. The essential for a successful dynamic alignment is a comprehensive understanding of customers’ fundamental need and matching dominant buying behavior.”19. 18. Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (pg. 36) Edinburgh Gate, Great Britain. Pearson Education Limited. 19 Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (pg. 34) Edinburgh Gate, Great Britain. Pearson Education Limited. 22.

(23) 5.4 Elements of a supply chain Not only do managers need to understand the definitions and get an overview of what it is a supply chain but they must also understand and know the main elements of a supply chain to be able to configure one. Identify and recognize the elements that are in a supply chain or network will enable managers to comprehend where elements go, flow and interconnect among one other. According to Gattorna (2006) modern view suggests that the main group of elements is: human behavior, systems technology and infrastructure.20 He also argues that managers that understand the importance of supply chain to improve performance must treat supply chain “as cells that can be quickly reconfigured and realigned to change customers buying behavior.”21 Another point of view if drawn from Chopra and Meindl (2007), they proposed to classify supply chain elements in two main categories: 1) logistics and 2) cross functional. The first category is sub-divided in: facilities, inventory, and transportation. The second category is sub-divided in: information, sourcing and pricing.. 20. Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (pg. 5) Edinburgh Gate, Great Britain. Pearson Education Limited. 21. Gattorna, John (2006). Living supply chains. How to mobilize the enterprise around delivering what your customers want. (pg. 258) Edinburgh Gate, Great Britain. Pearson Education Limited. 23.

(24) Although literature recognizes different elements of a supply chain, for the purpose of this study, the author based on Chopra & Meindl (2007), Gattorna (2006) and Hugo (2003) has conclude and recognized that managers must know at least six main elements to be able to configure a modern supply chain. These elements are: mother earth, raw material extractors, suppliers and sourcing, converters, intermediaries and distributors and customers. (See Graph no. 3). In addition, managers must also have in mind some factors that support an effective design and selection of the last six elements. These factors are: in-house knowledge and know-how, in-house and out-house culture, environmental conditions, funds and money, macro and micro economy, information system technology, in-house and out-house infrastructure, transportation, product, metrics, pricing and product disposal and recycling. The author has also proposed a definition for element of a supply chain, enabling a more accurate definition in accordance with the interpretation given to elements as cells that can easily be reconfigured. The author has defined element of a supply chain as: basic main cell or unit that enables to link and configure any kind of supply chain, in order to transform inputs into outputs by arranging them according to companies and customers’ needs and requirements. Graph no. 3 Modern supply chain elements. Source: Author 24.

(25) 5.5 Types of supply chain Modern authors22 offer different typology frameworks to reference supply chain types. However, it must be clear that every supply chain is a dynamic, different and unique system. Managers that understand supply chain typology will be able to benchmark their companies, by identifying their current and desired position and aligned to market requirements. This will lead to shape managers strategic thoughts about how to design and select the right supply chain type, according to company and customer’s needs. “The supply chain manager must continuously fine-tune planning and execution systems and the software that supports them to match evolving industry dynamics.” The author has identified in literature the following three main supply chain types, which are the most common supply chains that managers have to take into consideration when doing business. These supply chain types create a framework as reference point when designing supply chains. The supply chain types are: 1. Efficiency and responsiveness supply chains. (Fisher, 1997); 2. Push, pull and hybrid supply chains. (Simchi-Levi, David, & Kaminsky, Philip, 2004); and 3. Matching consumer buying behavior and demand uncertainty. (Gattorna, 2006).. 22. As Gattorna 2006 and Chopra & Meindl 2007. 25.

(26) 5.5.1 Efficiency and responsiveness supply chains Fisher (1997, pp.108-110) wrote about how to identify the right supply chain in function of product attributes. He concluded that most enterprises were having serious problems identifying their product demand patterns and matching them with their supply chain.23 He has suggested classifying product type in two main groups: functional or innovative. Functional products are related to satisfy basic needs and innovative products are related to more sophisticated products with higher differentiation. After choosing which type of product, the next step is to match the right supply chain. Whether it is a functional product, its supply chain is physically efficient or responsive to the market supply chain. This type of supply chain is aimed at cost reduction and predictable demand patterns. But, if it is an innovative product, its supply chain is an efficient supply chain. This type of supply chain is oriented to consumer satisfaction and unpredictable demand patterns. (See Table no. 1). Table no. 1 Matching type of product and type of supply chain Type of Product Functional. Innovative. Type of Supply Chain. Characteristics. Efficient. Satisfy basic needs, long life cycles, lower unpredictable demand and low margins.. Responsiveness. Enable a company to achieve higher profit margins, short life cycle, and higher unpredictable demand.. Source: Adapted from Fisher, Marshall L. (March-April 1997) What is the right supply chain for your product? (pg. 106) Harvard Business Review.. 23. Fisher, Marshall L. (March-April 1997) What is the right supply chain for your product? (pg. 116), Harvard Business Review. 26.

(27) 5.5.2 Push, pull and hybrid supply chain Simchi-levi, David & Ksmindky, Philip (2004) offer a very friendly framework to identify two traditional supply chain types and a third one that merges from the first two types. The traditional supply chain types are push and pull. The push based supply chain is “where production and distribution decisions are based on a long term forecast. Typically, the manufacturer bases demand forecast on orders received from retailer’s warehouses.” 24 It takes more time to react. While in a pull based supply chain, “production and distribution are demand driven so that they are coordinated with true customer demand rather that with forecast.”25 The third type, called a hybrid supply chain type is composed of the benefits of the pull and the push model. In this supply chain type, called the hybrid model or the pushpull strategy, some stages of the supply chain, typically the initial stage, are operated in a push based manner, where the end stage employs a pull based strategy.26 The area where this two different supply chain types get together is called the push-pull boundary. This buffer area is where the pull strategy is divided from the push strategy. However, this model main objective is to take advantage of both traditional models. To illustrate each supply chain definition see Table no. 2. It offers a brief description of characteristics to each supply chain type.. 24. Simchi-levi, David & Kaminsky, Philip (2004). Managing the supply chain: the definitive guide for the business professional. (1st Edition) (pg. 42) New York, USA. McGraw-Hill Companies, Inc. 25 Ibid. 26 Simchi-levi, David & Kaminsky, Philip (2004). Managing the supply chain: the definitive guide for the business professional. (1st Edition) (pg. 44) New York, USA. McGraw-Hill Companies, Inc. 27.

(28) Table no. 2 Push, pull and hybrid supply chain types Type of supply chain. Description. Characteristics Inability to meet changing demand patterns. The obsolescence of supply chain inventory as demand for certain products disappears.. Push. Pull Hybrid. Production and distribution Excessive inventories due to the need for large decisions are based on a safety stock. long term forecast. Larger and more variability sized production batches. Unacceptable service levels. Increased transportation cost. High manufacturing cost. Decrease in lead times. Better anticipate incoming orders. Production and distribution Decrease in inventory levels. decisions are based in Decrease in variability. demand driven, only Demands ability to manage resources. respond to specific orders. Difficult to take advantage of economies of scale. Takes advantage of both. Initial stage push based manner and the rest pull based strategy.. The interface between the push stages and the pull stages. Source: Adapted from Simchi-levi, David & Kaminsky, Philip (2004). Managing the supply chain: The definitive guide for the business professional. (1st Edition) (pg. 42) New York, USA. McGraw-Hill Companies Inc.. 28.

(29) 5.5.3 Matching consumer buying behavior and demand uncertainty Gattorna (2006) has defined four main supply chains that can be aligned to consumer buying behavior and demand uncertainty. His model is a very useful way to identify four mainstream supply chain types ranging from the most predictable demand until the highest level of unpredictable demand. His model also helps in a very simple way to clearly understand the most common possible supply chain types that a manager have to take in consideration when designing supply chains Gattorna’s model (2006, pp. 111-179) suggest four desirable match between supply chain types and consumer buying behavior. These supply chains response in how to bring products and services according to consumer buying behavior, not in function of product type that companies want to bring to consumers. Therefore, fully flexible chains must respond to innovative consumers; agile chains must answer to demanding consumers; lean chains must respond to efficiency consumers; and continue replenishment chains must react to collaborative consumers. (See Table no. 3). 29.

(30) Table no. 3 Gattorna’s supply chain types and consumer buying behavior match Flow description Unplanned demand exceptional request Surge, until the last possible moment Semi-wave, regular pattern of demand, quite predictable Base, very predictable demand from known customers. Supply chain type. Consumer buying behavior. Fully flexible. Innovative. Agile. Demanding. Lean. Lean. Continous replenishment. Collaborative. Source: Adapted from Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition). Edinburgh Gate, Great Britain. Pearson Education Limited.. The first supply chain type is “continuous replenishment supply chain”: It requires collaboration with customers. It is the mirror image of customer collaborative buying behavior. The second supply chain type is “lean supply chain”, focusing on efficiency by removing cost wherever is possible. It requires collaboration with suppliers on the supply side. “It is not how low you can go, but how lean you can be.”27 The third supply chain is “agile supply chain”. It’s all about responsiveness to customer in unpredictable demand situations. However, the appropriate agile response almost always involves building in redundant capacity along the supply chain in the form of inventory, labor and production. The fourth supply chain type is “fully flexible supply chain”; an extreme example of an agile supply chain. It demands the capability to mitigate risk and ensure business continuity. It requires creative thinking, innovative behavior and a high cost associated.. 27. Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition) (pg. 136) Edinburgh Gate, Great Britain. Pearson Education Limited. 30.

(31) 5.6 Main determinants of a supply chain Managers that are designing supply chains need to understand the main determinants that affect their supply chain design, according to market and consumer buying behavior requirements. This will enables them to decide which supply chain architecture they must design. Managers, when designing supply chains on emerging markets, must identify what variables from the market they are working at, are affecting each determinant positively or negatively. Every market is unique and has special characteristics that demands specific requirements in response to particular market conditions. The author, for the purpose of identifying which are the main factors that determines the nature of a competitive and effective supply chain design on emerging market, has searched literature about what the key determinants that enable an effective configuration and performance of a supply chain are. After the research, the author has proposed the following determinants as key generators of competitiveness for supply chain design: consumer, market, industry, company and product. These five determinants will enable to understand how forces shape the supply chain configuration and how managers create the right architecture to minimize risk and improve performance, while having satisfying consumers. (See Graph no. 2). The following pages will explain each determinant in deep analysis and some theoretical tools associated to each determinant to evaluate the impact in the overall supply chain design. 31.

(32) Graph no. 4 Determinants diagram. Source: Author. 32.

(33) 5.6.1 Consumer This determinant is related to which type of customer is buying the products and what segmentation strategy the company is using to classify customers. In conformity with Gattorna (2006), this is related to consumer buying behavior. He has classified consumers in four different categories: collaborative, efficiency, demanding and innovative. Table no. 4 offers a brief description of each consumer buying behavior. He also has concluded that collaborative consumer buying behavior must be aligned with a continuous replenishment supply chain; that efficient consumer buying behavior must be aligned with a lean supply chain; that demanding consumer buying behavior must be aligned with an agile supply chain; and innovative consumer buying behavior with fully flexible supply chain. These last four quoted matches are the perfect way to synchronize the supply chain type in function of the consumer buying behavior, based on Gattorna’s (2006) research. (See pg. 30) Table no. 4 Description of each dominant buying behavior Dominant Buying Behavior. Description. 1 Collaborative. Close working relationships for mutual gain. Mostly predictable. Price not an issue.. 2 Efficiency. Consistent low cost response to largely predictable demands. Efficiency los cost focus. Very price sensitive.. 3 Demanding 4 Innovative. Quick response to unpredictable supply and demand conditions. Price aware. Supplier led development and delivery of new ideas. No price sensitivity.. Source: Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition) (pg. 36) Edinburgh Gate, Great Britain. Pearson Education Limited.. 33.

(34) 5.6.2 Market This determinant is all about having a good understanding of how macro and micro company environment is developing and evolving. It is also about understanding the marketing mix around company products, to benchmark with other companies. According to marketplace conditions it will require a specific supply chain type.. 34.

(35) 5.6.3 Industry This determinant is related to understanding major industry trends as recent technology solutions; new certifications; industry standards and environmental requirements; and degree of interconnectivity, among others. According to Simchi-levi, David & Kaminsky, Philip (2008), there are two main variables that can be identified to determine the right supply chain strategy. These are demand uncertainty and economies of scale. Some industries have a low or high demand uncertainty and low or high requirements of economies of scale. Depending on the industry, the supply chain design can turn into a push, pull or hybrid approach to deliver products. See graph No.5 for some examples of industry position. Graph no. 5 Identifying industry degree of demand uncertainty and economies of scale. Source: Simchi-levi, David & Kaminsky, Philip (2008) Designing and managing the supply chain: Concepts, strategies and case studies. (3rd Edition) (pg. 191) New York, USA. McGraw-Hill Companies Inc.. The above matrix is characterized by a model of four quadrants. Vertical axis describes the level of demand uncertainty and the horizontal axis the level of economies of scale. The explanation of each quadrant is:. 35.

(36) In quadrant one, when the demand uncertainty is high, but the economies of scale are low, it is a pull-based supply chain strategy is appropriate. In quadrant two, when there is a high level of demand uncertainty and high economies of scale, the recommended strategy is a pull-push based supply chain. In quadrant three, where economies of scale are high and demand uncertainty low, a push-based retail strategy is appropriate. Last but not least, in quadrant four, where there is a low demand uncertainty and low economies of scale, a supply strategy requires a more detailed review, because low demand indicates a push based supply chain and low economies of scale suggest a pull-based supply chain strategy. .. 36.

(37) 5.6.4 Company This determinant is related to knowing the company in-house capabilities, know-how, funds, and core business areas that customers value the most. This means that each and every company requires a main strategy to compete against main competitors. According to Cohen, Shonah & Roussel, Joseph (2005) framework, managers must define the company primary competitive advantage among the following four options: cost, innovation, service or quality. Table no. 5 offers a brief description of each primary strategy. Given the competitive strategy decided by the company, it will lead to a different kind/type of supply chain type with different configuration between responsiveness and efficiency. Competing in the cost will lead to more efficiency supply chains; while competing in innovation, service or quality will demand different sophisticated levels of supply chain responsiveness. Table No.5 Primary strategy to define company main competitive advantage. Source: Cohen, Shonah & Roussel, Joseph (2005) Strategic supply chain management. The five disciplines for top performance. (pg. 52) United States. McGraw-Hill Companies Inc. 37.

(38) 5.6.5 Product This determinant is about understanding product typology to identify the most suitable supply chain type. In agreement with Fisher (1997) there are two possible options two group different types of products to decide the right supply chain type, functional or innovative. (See Table no. 6)So if the product is classified as a functional product, the correspondent supply chain type is efficient. This supply chain is aimed at low cost and satisfying basic needs. On the other hand, if the product is classified as an innovative product, the correspondent supply chain type is responsiveness. This supply chain is directed to service and short response time. (See pg. 26) Table no. 6 Type of product Type o product. Description. Functional. Products that satisfy basic need with predictable demands.. Innovative. Products with low predictable demands and higher margins.. Source: Adapted from Fisher, Marshall L. (March-April 1997) What is the right supply chain for your product? (pg. 106) Harvard Business Review.. 38.

(39) 6. Supply chain design 6.1 What is supply chain design? The term itself has different meanings, however let’s begin with understanding design itself. Design is used in many different ways in accordance with the context that is being used. Nevertheless, the Oxford dictionary offers the following definition for design: “A plan or drawing produced to show the look and function or workings of something before it is built or made.”28 Mitchell Kapor, founder of Lotus Development Corporation, defined design as: “it’s where you stand with a foot in two worlds —- the world of technology and the world of people and human purposes — and you try to bring the two together”. Other authors refer to design as: “the progression of an abstract notion or idea to something having function and fixed form. The desired levels of quality and reliability must be engineered during the design phase of the new product.” 29 When combining supply chain and design, a new concept evolves. Design will be focus on supply chain architecture. However, the goal when designing a supply chain network is to maximize the firm profits while satisfying customer’s needs in terms of demand and responsiveness (Burt, David & Dobler, Donald & Starling, Stephen, 2003).. 28. Recovered from: http:www.askoxford.com, April 2008.. 29. Burt, David & Dobler, Donald & Starling, Stephen L (2003) World class supply management: the key to supply chain management. (7th Edition). New York, USA. : McGraw-Hill Companies, Inc.. 39.

(40) Terry P. Harrison (2001), from the Management Science and Information Systems Department, at Penn State University, defined supply chain design as: “the process of determining the supply chain infrastructure — the plants, distribution centers, transportation modes and lanes, production processes, etc. that will be used to satisfy customer demands. These studies are strategic in scope, use a time horizon of months or years, and typically assume little or no uncertainty with the data.” Chopra & Meindl (2007), defined supply chain design as: “decisions include the assignment of facility role, location, and manufacturing, storage, or transportation related facilities and the allocation of capacity and markets to each facility.” Cohen, Shonah & Roussel, Joseph (2005) defined supply chain design as: “architecture details the process, applications, and information needed to improve and evolve your supply chain. It integrates rules about the process relationships between business entities and ensures alignment between process and supply chain infrastructure (information technology and physical assets, such as warehouses, factories, etc.).” For the purpose of this study, the author has created a new supply chain design definition, because none of the quoted definitions comprise a broad spectrum of the main function of the concept involving third parties as customers. Then, Supply chain design is: a management task that arranges and aligns in a coordinate and synchronized sequence the flow of elements entailed in a supply chain in a non-real scenario, capable of generating effective solutions to satisfy demanding customers’ customized solutions with the right balance of responsiveness and efficiency.. 40.

(41) It is well known that that the design of a supply chain is responsible in more than 80 percent for its lifetime cost.30 Professor Charles H. Foine of MIT wrote that “supply chain design is the meta-core competency for organizations.”31 Supply chain design is a very important part of the road map to change. Design is commonly associated to processes architecture. “Developing and executing the roadmap can be time consuming and resources intensive but is the key to supply chain maturity and is well worth the effort.”32 “Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm.”33 Thus the importance of this subject, if the design of flows has been created with deficiencies, the whole chain will work poorly. Supply chain design must be always used by managers to develop effective business that enables information sharing over the whole network. It is a very important tool for managers, which enables them to arrange synchronizedly all the elements involved in a supply chain. Network design decisions are very important for modern managers, because they determine supply chain configuration (Chopra & Meindl, 2007).. 30. Reeve, James & Srinivasan, M. (2005) Which supply chain design is the right for you? (pg. 50) Supply Chain Management Review.. 31. Charles H. Fine. (1998) Clockspeed: Winning Industry Control in the age for temporary advantage. (pg. 220) Reading, Ma. Persus Books.. 32. Cohen, Shonah & Roussel, Joseph (2005) Strategic supply chain management. The five disciplines for top performance. (1st edition) (pg. 230) United States. McGraw-Hill Companies Inc.. 33. Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 8) New Jersey, USA. Pearson Education, Inc. 41.

(42) “The impacts of a good supply chain design are enormous, resulting in lower costs, better coordination and improved customer service.”34 Supply chain design enables to take into consideration all possible elements and scenarios entailed in a supply chain, according to consumers buying behavior and marketplace conditions. “The appropriate design of the supply chain depends on both the customer’s needs and the roles played by the stages involved.”35 Supply chain design comprises taking expensive decisions for a long term, which must be taken seriously, because it is how the company structures the supply chain over next several years. This means “that the firm must ensure that the supply chain configuration supports its strategic objectives and increases the supply chain surplus.”36. 34. Harrison P. Terry, (2001) Global Supply Chain Design, Management Science and Infomartion System Department, Penn State University.. 35. Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 5) New Jersey, USA. Pearson Education, Inc. 36 Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 9) New Jersey, USA. Pearson Education, Inc. 42.

(43) 6.2 Which is the importance of supply chain design? It is well-known that the design of a supply chain is responsible in more than 80 percent for its lifetime cost.37 Professor Charles H. Foine of MIT wrote that “supply chain design is the meta-core competency for organizations.”38 Supply chain design is a very important part of the road map to change. Design is commonly associated to processes architecture. “Developing and executing the roadmap can be time consuming and resources intensive but it is the key to supply chain maturity and is well worth the effort.”39 “Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm.”40 Thus the importance of this subject, if the design of flows has been created with deficiencies, the whole chain will work poorly. Supply chain design, must be always used by managers to develop effective business that enables information sharing over the whole network. It is a very important tool for managers, which enables them to arrange synchronizedly all the elements entailed in a supply chain.. 37. Reeve, James & Srinivasan, M. (2005) Which supply chain design is the right for you? (pg. 50) Supply Chain Management Review.. 38. Charles H. Fine. (1998), Clockspeed: Winning Industry Control in the age for temporary advantage. (pg. 220) Reading, Ma. Persus Books.. 39. Cohen, Shonah & Roussel, Joseph (2005) Strategic supply chain management. The five disciplines for top performance. (1st edition) (pg. 230) United States: McGraw-Hill Companies Inc.. 40. Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 8) New Jersey, USA. Pearson Education, Inc. 43.

(44) Network design decisions are very important for modern managers, because they determine supply chain configuration (Chopra & Meindl, 2007). “The impacts of a good supply chain design are enormous, resulting in lower costs, better coordination and improved customer service.”41 Supply chain design enables to take into consideration all possible elements and scenarios comprised in a supply chain, according to consumers buying behavior and marketplace conditions. “The appropriate design of the supply chain depends on both the customer’s needs and the roles played by the stages involved.”42 Supply chain design entails taking expensive decisions for a long term, which must be taken seriously, because it is how the company structures the supply chain over the next several years. This means “that the firm must ensure that the supply chain configuration supports its strategic objectives and increases the supply chain surplus.”43. 41. Harrison P. Terry, (2001) Global Supply Chain Design, Management Science and Information System Department, Penn State University.. 42. Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 5) New Jersey, USA. Pearson Education, Inc. 43 Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (pg. 9) New Jersey, USA. Pearson Education, Inc. 44.

(45) 6.3 Supply chain design in-house determinants The importance of supply chain design has been presented to create successful networks. Supply chain design is the preparation phase that must be understood and done correctly to be able to execute without mistakes. However, to be able to design the right supply chain, there are two dimensions that managers must research to understand how they affect the supply chain. The first dimension is in-house determinants and the second dimension is market condition determinants. Inhouse determinants are variables that affect directly company performance. However, these determinants can be manipulated, while the others are related to exogenous variables. These determinants help to effectively decide how the company wants to align its supply chain strategy to the overall company strategy. The author has compiled from Chopra, Sunil & Meindl, Peter (2007) and Gattorna (2006) thirteen determinants that affects company performance and supply chain design. (See table no. 7) These determinants are grouped in two areas. The first one is related to efficiency and the second one related to responsiveness.. 45.

(46) Table no. 7 Determinants to evaluate in-house situation. Responsiveness. Efficiency. Determinants. Description Capacity to reduce input and increase output. Productivity Information. Availability of information over the whole chain. Product availability. Make to stock or make to order. Product variety Transportation. Different types of configurations Level of cost and difficulty to move products. Predictability of demand. Level of demand uncertainty. Velocity processing orders. Velocity of product delivery. Product innovation. Short or long life product cycle. Customer experience. The product or services require specialized staff support. Customization level. Products make according to customers specific needs. Price toleration. Customers toleration to price changes. Flexibility. Capability to change in real time Level of required relationship with customer and collaborative communication. Relationship with customer. Source: Author. Table no. 8 offers a complete framework to make the diagnosis of the company inhouse situation in consideration. Each determinant can be evaluated from high to low level of impact in the supply chain design by checking the white box of each item. When all determinants are checked, managers can clearly view which determinants have a high or low impact. According to this, they will have to align the supply chain design to mitigate risk, improve performance and secure supply.. 46.

(47) Efficiency Responsiveness. Velocity of product delivery Short or long life product cycle The product or services require specialized staff support Products make according to customers specific needs Cutomers toleration to price changes Capability to change in real time Level of required relationship with customer and collaborative communication. Velocity processing orders Product innovation Customer experience Customization level Price toleration Flexibility Relationship with customer. Different types of configurations. Make to stock or make to order. Availability of information over the whole chain. Capacity to reduce input and increase output. Description. Level of demand uncertainty. high. Predictability of demand. medium. Level of cost and difficulty to move products. low. Transportation. Product variety. Product availability. Information. Productivity. Determinants. Level of impact to the in-house supply chain design. Table no. 8 Determinants framework to evaluate in-house situation. Source: Author. 47.

(48) 6.4 Factors for successful supply chain design After having explained up the endogenous determinants that affect supply chain design, there is another important subject that managers must know when designing supply chains. Although, each supply chain design is different and unique to every company, the author has determined the following seven factors that managers must have to take into account to check the quality of the supply chain design. These factors are: 1. Managers must understand supply chain as a strategic asset; 2. The design must have been done with dynamic alignment approach; 3. The design must have been done with a collaborative behavior approach; 4. The design must have an appropriate mix of responsiveness and efficiency; 5. The design must have considered the seven external variables that affect supply chain design; 6. The design must be evaluated in four different check points; and 7. The design must have metrics to evaluate supply chain performance. (The above seven successful factors will be explained in detail in the following pages.). 48.

(49) 6.4.1 Understand supply chain as strategic asset Understanding supply chain as a strategic asset is a very important factor to design successful supply chains. Managers must be totally convinced about the power of supply chain. It must be treated as a strategic asset. Generally, supply chains are treated as an operational and tactical activity, but currently, modern theories suggests that supply chains must be part of the overall company strategy map. “Each company now focuses on its core competencies and partners with other companies that have complementary capabilities for the design and delivery of products to market.”44 For example, Wal-Mart has included in its core values supply chains as a main factor of competitive advantage.. 44. Hugos, Michael (2003) Essentials of Supply Chains. (pg. 17) Hoboken, New Jersey. John Wiley & Sons, Inc.. 49.

(50) 6.4.2 Dynamic alignment approach Managers must have in mind the current modern view of supply chains to clearly identify the elements that make supply chains capable of adapting to current business needs. Therefore, dynamic alignment is a modern approach to align business processes to consumer buying behavior. “Managing supply chain actually involves understanding the interaction between human behavior, information technology and infrastructure. This is the antithesis of what happens in business today.”45 Dynamic is all about interpreting supply chains as living networks in a continuous evolution environment. Mainly worked by human beings and integrated by different elements, supply chains are largely driven by people power, either in customer or employee capacities. (Gattorna, 2006). Dynamic alignment means “treating your supply chain as a living being, not as a mechanical beast. It is all about energy, execution and dynamism of people and movement.”46 Gattorna (2006) explains the traditional paradigm, with a positive relationship between logistic costs and customer satisfaction; while the new paradigm reflects an improved alignment between enterprises and their marketplace with a negative relationship between logistic cost and customer satisfaction. Managers must also change the old paradigms of being totally closed to information sharing. Simchi-levi, David & Kaminsky, Philip (2004) showed the importance of sharing information, specially inventory, forecasting, demand, market demand and prices.. 45. Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition) (pg. 28) Edinburgh Gate, Great Britain. Pearson Education Limited. 46. Gattorna, John (2006. Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition) (pg. 26) Edinburgh Gate, Great Britain. Pearson Education Limited. 50.

(51) 6.4.3 Collaborative behavior approach Collaborative supply chains stand for modern supply chain looking forward to sharing and opening their frontiers to intercommunicate with other supply chain agents to share qualitative and quantitative information along the whole supply chain. Information sharing provides advantage to modern supply chains to react in less time and reduce cost of inventory. Responsiveness can be increased and cost reduced or in other words performance can be improved. This can be achieved by having synchronized the whole network from end to end. (Gattorna, 2006).. 51.

(52) 6.4.4 Appropriate mix of responsiveness and efficiency According to Fisher (1997, pg. 109), an appropriate balance of responsiveness and efficiency are factors that customers always take into account when assessing/ a supply chain. An average customer evaluates the effectiveness of a supply chain, in agreement with the degree of service delivered in any supply chain. “The right combination of responsiveness and efficiency in each of these drivers allows a supply chain to “increase thoroughly while simultaneously reducing inventory and operating expense.”47 On the other hand, customers are rational individuals searching for optimal solutions to how to expend their money; how to obtain a major benefit and a better cost/benefit ratio. Managers can effectively match these needs with an appropriate balance of responsiveness (velocity) and efficiency (cost). The level of satisfaction perceived by customers when buying a product can be subjective and unclear. For some customers, good service could be high efficiency and low responsiveness or the other way around. The idea is to build an appropriate mix of responsiveness and efficiency in conformity with the target customer. “Successful organizations understand that building a more responsive, customer-focused supply chain is the key to the future.”48. 47. Hugos, Michael (2003) Essentials of Supply Chains. (pg. 17) Hoboken, New Jersey. John Wiley & Sons, Inc.. 48. Gattorna, John (2006) Living supply chains. How to mobilize the enterprise around delivering what your customers want. (1st Edition) (pg. 28) Edinburgh Gate, Great Britain. Pearson Education Limited.. 52.

(53) Gattorna (2006) has defined a very powerful way of organizing customers’ expectations of what a good service will be. This will lead to configure the supply chain according to customers’ criteria of what they expect. He has grouped customers in four themes. The first one is titled as understand me, related to a good customer service as empathy, understanding, relationships. The second one is named as surprise me, which refers to a good customer service as innovative, creative response to unique needs. The third one is called as consistent, in connection with a good customer service as reliability, predictability, consistency. The fourth one titled as respond, is related to a good customer service as responsiveness in a commercial way. Following these four categories, in agreement with Gattorna (2006, pg. 28), managers can conclude that the concepts of responsiveness and efficiency are “not about doing one thing well, but rather having the capability to do several things well.” In accordance with Chopra & Meindl (2007, pg. 94), a balanced supply chain in responsiveness and efficiency is capable to do the following six things: 1) respond to a wide range quantities demanded, 2) meet short times, 3) handle a large variety of products, 4) build highly innovative products, 5) meet a high service level, and 6) handle supply uncertainty. The more of these characteristics remarked a supply chain has the more responsiveness it has. However, responsiveness comes with a cost, while efficiency is associated to how supply chain can work fluently with the lowest cost possible. “Supply chain efficiency is the inverse of the cost of making and delivering a product to the customer, increase in cost lower efficiency.”49. 49. Chopra, Sunil & Meindl, Peter (2007) Supply chain management: strategy, planning, & operation. (3rd Edition) (pg. 30) New Jersey, USA. Pearson Education, Inc. 53.