Strategic Supply Chain Management - Coursework Example

Strategic Supply Chain Management: Car manufacturers and their assembly plants Introduction Current business world is extremely globalized compared to that in the past. Therefore, it is impossible for modern organizations to gain competitive advantage with the help of traditional business strategies. It is easy for modern organizations to do international business just like domestic business, because of the huge interests shown by many countries in recent times in boosting foreign direct investments. All countries, irrespective of developed, developing or underdeveloped, are currently in the run for attracting FDI as much as possible. Companies on the other hand, are looking for cheap labour oriented countries when they wanted to produce something and wealthy countries when they wanted to sell something. For example, many companies are currently selecting India and China as their manufacturing destinations and America and Europe as their selling destinations. Under such circumstances, strategic supply chain management is getting prominence in the business world at present. Even though industries and academia are giving huge importance to supply chain management (SCM), strategic supply chain management (SSCM) and its principles are taken lightly by the business world until recent times. The definition of SCM is quite familiar to the business world; however, same thing cannot be said about the definition of SSCM. According to Ming-Hon Hwang (2010), “SSCM refers to a situation in which its members always realize the whole direction and strategy when a supply chain carries out various functional activities to achieve a competitive advantage and long-term profit-making position among supply chains in the same industry”(p.127). Automobile industry, especially car industry is currently facing heavy competition. In order to overcome the competition, car manufacturers have to make strategic long-term decisions regarding the location of their principal assembly plants. Such decisions have to account for many factors including, for example, markets, production sequencing, levels of investment and relationships with suppliers. This paper provides a critical assessment of the facility location decisions car manufacturers have to make regarding assembly plants and the level of importance attributed by the manufacturers to the location of their suppliers. Facility location decisions car manufacturers have to make regarding assembly plants “Supply chains are value-adding relations of partially discrete, yet inter-reliant, units that cooperatively transform raw materials into finished products through sequential, parallel, and/or network structures” (Hult et al., 2007, p.1035). When it comes to taking decisions about manufacturing destinations, companies often consider labour cost in the destination country as major criteria. For example many of the Japanese and German car makers are currently shifting their assembling units to India and China like cheap labour oriented countries. It is impossible for car makers to establish manufacturing units in America or Europe and compete effectively in international market because of the higher labour costs in those countries. Abundant manpower in domestic market is helping Indian and Chinese car makers to reduce the prices of their products in international market. Foreign car makers on the other hand, are struggling to do so because of the higher labour cost in their domestic market. Therefore many of the foreign car makers have already shifted their assembling units to India and China like countries. Honda, Toyota, Mitsubishi, Nissan, BMW, Benz etc are some of the car makers which have already established assembling units in India and China. These car makers are not only selling the finished goods in Indian and Chinese markets, but also exporting them to neighbouring markets. However, car makers should make sure that the transportation cost should not be exceeded beyond certain limits while exporting products from India or China. In other words, exporting cars assembled in India or China to the neighbouring market would be beneficial to the car makers. However, it may not be that much beneficial if those cars were exported to distant markets because of the problems in managing the supply chain effectively. In short, car makers should select locations for car assembling, not only based on the facilities offered by the location, but also based on the possibilities of managing the supply chain effectively. “Structural contingency theory suggests that the value of a resource depends on the context within which it is deployed” (Hult et al., 2007, p.1039).The word contingency refers to having a backup plan in place, often referred to as a “Plan B" (Long, 2013). For example, prominent Indian car maker TATA has recently introduced world’s cheapest ($2000) car NANO in Indian market. This car was primarily intended for Indian market. TATA calculated that average Indian people may accept this car with both hands because of the cheaper price. However, this car failed to make much impact in Indian market. TATA is trying to execute plan B now. They are currently trying to export NANO to neighboring countries. According to Society of Indian Automobile Manufacturers (SIAM), “Tata Motors exported 498 NANO units in March 2011 (Tatas begin export of Nano car, 2011). TATA has not disclosed the names of the countries to which NANO has been exported. However, it is assumed that TATA has exported NANO only to India’s neighboring countries. It is difficult for TATA to export this product to distant places and sell it for $ 2000. So, they are currently trying to establish NANO assembling units either in Latin America, South East Asia or Africa (Tatas begin export of Nano car, 2011). It should be noted that many countries in Latin America, South East Asia and Africa are rapidly growing. TATA wanted to exploit the opportunities in these markets. According to Wakolbinger & Cruz (2011), least supply chain disruptions should be a criteria while car makers take decisions about establishing assembling units in a particular location. (p.4063). There is no point in establishing car assembling units in underdeveloped regions even if the manpower cost is cheap. Factors such as political, cultural and economic problems can cause disruptions in supply chain. For example, Pakistan is a country in which cheap labour is abundant. However, car makers are not much interested in establishing assembling units there because of lack of economic growth and increased political problems. “Today, organizations that wish to carry on the sustainable growing need a robust strategic performance measurement and evaluation system because of changing demands of consumers, reduced product life cycle, competitive and globalised markets” (Zeydan et al., 2011, p.2741). Car industry is extremely globalized and hence competition is getting stiffer in car markets all over the world. The intrusion of Japanese and German cars is causing big problems to the American automakers. Same way, the intrusion of foreign car makers into the Indian car market is causing headaches to the domestic car makers such as Maruti and TATA. In fact these two companies were successfully controlled or monopolized Indian car market until now. The scenario is changing rapidly now. SSCM is necessary for car makers to excel in overseas market. For example, expensive cars may not taste success in Indian market whereas moderately priced cars may excel there. Moreover, Indian roads and traffic rules are extremely different from that in other countries. Supply chain managers of foreign car makers in India should make sure that they supply cars suitable for Indian conditions. Importance attributed by the car manufacturers to the location of their suppliers Todays carmakers are under an enormous price and cost pressure arising from both increasing competition and complexity of operations. One way to deal with this challenge is to outsource value creation to the supply network (SN), which then assumes the responsibility for producing variant-specific modules and delivering them just-in-sequence (JIS). This results in tightly coupled buyer–supplier relationships that operate with short reaction times and are characterized by high time dependency and minimal buffers. It increases the risk exposure of buyers to disturbances in their SNs and failures propagate quickly, causing production disruptions (Wagner & Silveira-Camargos, 2012, p.52) As in the case of other industries car making industry also has many suppliers. Even prominent car makers use different parts made by other companies. Location of the parts suppliers is important when car makers decide about the location of assembling units. Assembling units should be nearer to the supplier location as much as possible, so that the car manufacturing cost could be reduced considerably. A study conducted by Chiu (2011) among 15 auto parts manufacturers in Chinas largest passenger car manufacturing group, found that sales volume, number of employees and nationality of the joint venture partners have nothing to do with the evolution or development of Supply Chain Management (SCM) systems. Instead, it was found that this development was only dependent on the nature of the auto parts industry (p.1). Automotive parts industry comprises original equipment (OE) and accessories. Manufacturers of auto parts are mainly headquartered in countries such as United States, Canada, Europe, Japan, and Korea (Automotive Products Industry Assessment, n. d., p.2). It should be noted that “The quality of the supplied components ultimately decides the quality of the end product” (Nauhria & Kulkarni, 2011, p.12). United States, Canada, Europe, Japan, and Korea are highly developed countries in terms of car making technology. So, car makers from other countries import car parts from these countries. Therefore, car assembling units should not be far away from these countries or regions. Ramachandran (2001) pointed out that demand uncertainty in the car manufacturing industry is causing big problems to the parts suppliers (p.11). Recent recession has caused big problems in car manufacturing industry. These problems were affected the car parts manufacturers also. Since parts needed to be made much before the actual assembling of cars, parts manufacturers cannot make adjustments in production, based on the car demands in the market. In other words, car makers can control their inventory effectively based on demand whereas parts manufacturers may not get that facility. Demand fluctuation in supply chains or bullwhip effect has been well described in literature over many years (Klug, 2013, p.303). “The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer” (What is the Bullwhip Effect? Understanding the concept & definition, 2012). Bullwhip Effect can be understood with the help of the following illustration. (What is the Bullwhip Effect? Understanding the concept & definition, 2012) Suppose a car retailer gets orders for 10 cars of a particular brand or model. He will order 10 cars from the distributor or supplier. The distributor may order 20 from the manufacturer to keep sufficient inventory all the time to satisfy the retailers. Manufacturer on the other hand may produce 40 units to ensure economy of scale in production to meet demand. It should be noted that the car manufacturer may order parts needed for 50 or 60 cars from the part suppliers. In short, demand for 8 cars may end up in the production of 40 cars and supply of parts needed for 50 or 60 cars. In other words, a small increase in demand for a particular brand of car may end up in big demand for its parts. Therefore, supplier location is very much important for the car makers. Even Japanese car makers operating in Japanese soil, are currently struggling because of the problems in getting components from suppliers. Prominent Japanese car makers such as Suzuki, Mitsubishi and Toyota forced to close down some of their production units in Japan because of the problems in getting car components (James, 2011, p.60). Recent tsunami attack caused huge damages to component suppliers and hence car making is extremely low in Japan at present. Many of the car makers all over the world are relying Japanese components for car making. All such car makers are facing problems in car making at present. The report "Success and Failure in the UK Car Manufacturing Industry" published in March 2007 by MPs on the Commons Trade and Industry Select Committee says that ageing and inflexible plants, supply chain problems and labour costs, are causing big problems to British car makers (Cervi, 2007, p.14). In fact, Britain’s prestigious car maker land rover and jaguar were acquired by India’s automaker TATA group recently. In order to revive British car manufacturing industry, a car scrappage scheme was introduced recently in Great Britain. This scheme is similar to the cash for clunkers scheme introduced in America by Obama. “The scheme was implemented to improve performance of the car industry and its supply chain”(UK scrappage scheme boosts car manufacturing, 2009, p.19). After the introduction of car scrappage scheme, British car manufacturing industry is back in the growing phase now. This scheme is encouraging car users in Britain to exchange their old car for new ones. British government is providing many incentives to the consumers if they take part in this scheme. Conclusions Strategic supply chain management or SSCM came into prominence only in recent times even though SCM was in place for a long time. The core principle or objective of SSCM is to reduce the production cost and transportation cost as much as possible. In car making industry this objective is met by car makers by establishing car assembling plants in cheap labour oriented countries. While selecting the location of the car assembling units, car makers consider the supplier location also. It is illogical to establish car assembling units far away from raw material or parts suppliers. References Automotive Products Industry Assessment, N.d. 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