Alignment of Business and Supply Chain Management. A Study of Medium-to-Large-Sized Internationalized German Companies

TABLE OF CONTENTS

1. INTRODUCTION
1.1 Background of the study
1.2 Research question, delimitations and objectives
1.3 Research perspective
1.4 Main concepts and definitions

2. BUSINESS STRATEGY
2.1 Defining corporate strategy, business strategy and competitive strategy
2.2 Overview of business strategies
2.2.1 Porter: Three generic strategies
2.2.2 Cohen and Roussel: Four primary strategies
2.3 Consolidation of the different business strategies

3. SUPPLY CHAIN MANAGEMENT AND SUPPLY CHAIN STRATEGY
3.1 Defining supply chain management
3.2 Supply chain functions
3.3 Supply chain strategies
3.3.1 Lean, agile and leagile SCs
3.3.2 SC classification models
3.4 Five configuration components for the supply chain strategy
3.5 Consolidation of supply chain strategies

4. ALIGNMENT OF BUSINESS STRATEGY AND SUPPLY CHAIN MANAGEMENT AND STRATEGY
4.1 Existing studies of supply chain alignment
4.2 Advantages of alignment of business strategy and supply chain management
4.3 Theoretical alignment of business strategy and supply chain management
4.4 Conclusion: Theoretical framework of the study

5. METHODOLOGY
5.1 Methodological approaches
5.1.1 Deductive and inductive research
5.1.2 Qualitative and quantitative data
5.2 Sample and data collection
5.2.1 Sampling
5.2.2 Data collection technique
5.3 Semi-structured interviews
5.4 Data analysis
5.5 Reliability and validity of the study
5.6 Background info for the cases

6. EMPIRICAL FINDINGS AND DISCUSSION
6.1 Lean supply chains
6.2 Agile supply chains
6.3 Project supply chains
6.4 Leagile supply chains
6.5 Capable supply chains
6.6 Risk-hedging supply chains
6.7 Conclusion: Alignment and effectiveness of the strategies
6.7.1 Changes in the strategies
6.7.2 Industry 3.0 and 4.0

7. SUMMARY AND CONCLUSION
7.1 Summary of findings
7.2 Practical implications
7.3 Limitations and suggestions for further research

LIST OF REFERENCES

APPENDIX. Semi-structured interview questionnaire (translated)

LIST OF FIGURES

Figure 1: Influence of research perspectives

Figure 2: Types of strategic decisions (Waters 2009: 61)

Figure 3: Context in which a competitive strategy is formulated (Porter 1980: xxvi). 21 Figure 4: Five forces driving industry competition (Porter 1980: 4)

Figure 5: Three generic strategies (Porter 1980: 39)

Figure 6: The five supply chain functions

Figure 7: The relationship inside the Strategic Optimum Area (Balasescu & Balasescu 2014: 14)

Figure 8: How demand/ SC characteristics determine SC strategy selection (Christopher et al. 2006)

Figure 9: Supply chain strategy framework (Sillanpää & Sillanpää 2014: 108)

Figure 10: Qualitative data analysis process according to Saunders (Based on Saunders 2009)

Figure 11: Development of industry 4.0 (Schrauf & Berttram 2016)

LIST OF TABLES

Table 1: Competitive priorities (Roh, Hong & Park 2008)

Table 2: Characteristics of supply chain strategies (Roh, Hong & Park 2008, adapted from Lee 2002 and Vonderembsee, Uppal Huang & Dismukes 2006)

Table 3: Summary of existing studies concerning the alignment of supply chain and business strategy

Table 4: Supply chain contribution to business strategy (Cohen & Roussel 2005: 22)

Table 5: Aligning supply chain practices with the basis of competition (Cohen & Roussel 2005: 52)

Table 6: Theoretical alignment of business strategy and supply chain strategy

Table 7: Main topics of the semi-structured interviews

Table 8: Background info for the cases

Table 9: Summary of most important interview results

Table 10: Companies and their respective SC strategy

Table 11: New framework

LIST OF ABBREVIATIONS

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ABSTRACT

In an increasingly globalized world, effective supply chain management and its alignment with a company's business strategy is seen as a firm's competitive advantage. Existing studies, which were conducted in internationally known companies, suggest three main strategies: Lean, agile and leagile supply chain strategies. Lean supply chain strategies in markets with a stable demand follow a cost-minimizing approach. Agile supply chain strategies in markets with an unpredictable demand focus on differentiation, innovation and flexibility in order to fulfill customer-specific demand. Finally, leagile supply chain strategies try to combine lean aspects for a base demand and agile aspects for more customer specification. This study researches internationalized medium-to-large-sized German companies with the purpose of understanding how companies can improve their supply chain management from an international business perspective. Results are based on the analysis of qualitative data collected through 14 semi-structured interviews with employees from the SC or business department. Findings suggest that lean, agile and leagile supply chains exist as described in the literature. Furthermore, the supply chain strategies called ‘project' SC and ‘capable' SC were found. Project SCs are used for a fixed period of time in order to conduct customer-specific ventures. They are a specialized version of agile SCs with the difference that they are constructed from scratch. Capable SCs are characterized by delivery reliability and speed and customer closeness in markets with predictable demand. They can be considered an advancement of leagile SCs. Furthermore risk­hedging SC management was researched. Moreover, the changes in strategies over the years were examined and the meaning of increased automation and usage of computerized systems in the context of industry 4.0 were questioned. The results show that changes and technology play different roles according to industry. In conclusion the findings cannot be generalized due to the small sample size. However, the results give an insight into current supply chain management strategies that can lead to the practical implication of integrating the customer more in the SC. In the future SCs could have increased transparency, flexibility, and simultaneity. Further quantitative research is recommended.

KEYWORDS: Supply chain management, Business strategy, German companies

1. INTRODUCTION

This chapter gives an introductory overview of the study's topic, which divided into four parts. First, the background of the study is presented and the contribution of the research is demonstrated. Secondly, the research question and objectives are defined. Thirdly, the research perspective of the study is explained. Finally, the main concepts and definitions are introduced.

1.1 Background of the study

Nowadays effective supply chain management is seen as a firm's competitive advantage alongside networks and alliances. Actually, a typical industrial company spends more than 50% of every sales dollar on supply chain cost in the fields of sourcing, making and delivering. Furthermore, due to trends of outsourcing and downsizing, this percentage is rising (Dyer, Cho & Chu 1998: 57). This is why supply chain management and sourcing performance are important competitive advantages (Porter 1998). Moreover, companies invest a total of 20 billion dollars annually in information systems that are supposed to improve supply chain performance. However, almost half of all companies continue to be disappointed with their supply chain performance (Heckmann, Shorten & Engel 2003). This shows that not only technology, but also strategy and management are key drivers.

However, nowadays there are also trends of growing technological usage because the supply chain is the distinguishing competitive factor in an increasingly globalized world with a growing complex environment. Industry 4.0 has the objective to computerize manufacturing and to digitalize industries. It was originally implemented according to a high-tech initiative of the German government (Bundesministerium für Bildung und Forschung 2016). In order to be able to achieve this level of automation and digitalization, computerized systems continue to play an increasingly important role. The question is what are the changes that companies conducted over the years and which level of digitalization makes sense for companies in the future. Industry 4.0 in relation to supply chain management leads to the topic of end-to-end cross-linking, which is considered the SC of the future in order to be able to fulfill an increasingly complex customer demand.

Moreover, studies find that companies that synchronize their supply chain architectures and business objectives achieve an overall superior performance. The synchronized supply chains are easier implemented, operated and they can be redesigned quickly according to changing business needs (Cohen & Roussel 2005: 27). Hauguel and Jackson (2001) conducted a survey of 300 large European and US companies and found that 68% of the companies plan to improve their supply chain. This shows the importance that was and continues to be linked to supply chain management in the current management world.

This project will try to unify two important aspects of business studies - business strategy and supply chain management. Every business needs a business strategy in order to know what it operates for, how it builds up its competitive advantages and what it wants to achieve. The business strategy is the overall leading principle of a company's objectives. Moreover, every business needs to have some kind of supply chain strategy in order to obtain the supplies that are needed for its operations and to deliver with the required performance. Thus, the supply chain is seen as a unit that is responsible for a company achieving and maintaining a competitive advantage. This is why it is important to see these two important factors for a company's success in alignment.

Currently there are a lot of interesting new insights and changes concerning supply chain management (Global Supply Chain Institute 2013). There have been plenty of studies concerning supply chain management in the context of industrial economics (Sillanpää & Sillanpää 2014: 95). Furthermore, many studies claim that the supply chain strategy must reflect the business strategy (Schnetzler, Sennheiser & Schönsleben 2007; Harrison & New 2002; Christopher, Peck & Towill 2006; Chopra & Meindel 2007; Waters 2009). A survey by Harrison and New (2002) found that two-thirds of the respondents reckoned that their supply chain strategy was significant or highly significant in regards of the business strategy. However, there is still a research gap between these two strategies (Rose, Singh Mann & Rose 2012: 6). Thus, the study of the alignment of supply chain management and business strategy can lead to new findings and identification of potential improvements.

Researching German companies is relevant as Germany is one of the leading economic players. Furthermore, SC management specifically in Germany has not been researched yet. It may be possible to learn from the supply chain management that is conducted in German companies, as there are many internationally important companies. As a result this study could support firms in improving their supply chains to match them better to their business objectives. The next paragraph introduces the research question, delimitations and objectives of the study.

1.2 Research question, delimitations and objectives

The main issue is that companies’ supply chain strategies are not always tailored to suit their business strategies. Therefore the main goal is to understand currently used supply chain strategies and then to identify which supply chain strategy fits best to which business strategy. This will be achieved by combining empirical studies with a theoretical framework in order to get a deeper understanding of how to design supply chains according to the business strategy of companies. The delimitations of the study are to find out in which ways a company’s supply chain strategy can be aligned with a company’s business strategy and to examine which kind of alignment will achieve the best possible results. Searching for and interviewing people who are responsible for the supply chain management, operations and business of medium-to-large-sized companies that have a significant degree of internationalization will achieve this objective. These characteristics are selected to enable a comparison with results of existing studies. Furthermore, these features should allow obtaining significant results. Furthermore, the research perspective is the one of an international business student.

Thus, the research question is “How is the supply chain management/ strategy aligned with the business strategy in medium-to-large-sized internationalized German companies from an international business perspective?” The focus will be on both B2C and B2B as few of the existing studies specify if they concentrate on a company's B2B or B2C supply chain.

Sub-goals for the theoretical part are

- to collect and review the existing literature related to supply chain management and business strategy in order to obtain a comprehensive understanding of the terms,
- to analyze the literature concerning the alignment of supply chain management and business strategy and thus
- to develop a theoretical framework that visualizes which supply chain management strategy fits best to which business strategy.

Sub-goals for the empirical part are

- to question the superiority of the agile SC,
- to examine leagile supply chains and thus to research risk-hedging SCs and SCs which focus on operational excellence in order to define sub-categories or find new kinds of SCs and then
- to adjust the framework for German medium-to-large-sized companies from an international business student perspective.

The contribution of the study is to focus specifically on examining the alignment of business and SC strategy while other studies have analyzed these fields separately. Furthermore, German medium-to-large-sized companies are specifically researched. So far other studies have focused on the European continent, but not especially on German firms. Furthermore, the thesis aims to further examine leagile supply chains, as by now, studies have not found many distinguishing results. Examining leagile SCs in more depth can lead to a clearer definition of this kind of strategy. Moreover, further subcategories or new kinds of SC strategies could be found. Another goal is to examine the truthfulness of some researchers' claim of the superiority of the agile SC in comparison to other SC strategies. Then, as a result of the study, the theoretical framework is adjusted.

1.3 Research perspective

In this part the research perspective is explained. The main viewpoint of this thesis is from an international business (student) perspective. By selecting companies or subsidiaries that are internationally operating, both on national or foreign soil, the study gained an international background. Previous research, which was used in the theoretical part, has mostly been conducted by the economist and business strategist Michael Porter and the SC consultants Shoshanah Cohen and Joseph Roussel. These authors are well known for their contribution to academic research. Although the range of authors encompasses backgrounds of technology, technology management, (industrial) engineering, (international) logistics management, business, marketing, business consulting, economics, operations and supply chain, it does not specifically include a background in international business. In summary the authors have technology/ engineering-related and generally business - related backgrounds. Abrahamson and Rehme have had specifically an international background (in logistics). While Porter formulated fundamental business strategies with an international business and economic background in mind, he did not specifically examine SCM from these viewpoints. To examine both business strategy and SCM, the selected perspective in this thesis is the one of an international business student. Thus, the thesis gives a fresh view on the topic. The influence of the research perspective is illustrated in the following figure (figure 1). Afterwards the main concepts and definitions are explained.

1.4 Main concepts and definitions

The main concepts that are used in this study are shortly defined below:

CORPORATE STRATEGY - is the question of how a company adds value. The governing strategy is dependent on the size of the firm with bigger firms having a guiding corporate strategy and several business strategies and smaller firms having only one business strategy. In general the distinguishing competitive factor for a company is

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Figure 1: Influence of research perspectives. its corporate strategy (Waters 2009).

BUSINESS STRATEGY - is subordinated to the corporate strategy and the guiding strategy of a business unit. This term is often used interchangeably in literature with corporate strategy (Waters 2009). However, in this thesis the intention is to keep a clear distinction between the two terms.

SUPPLY CHAIN MANAGEMENT - is foremost responsible for linking the key business functions and processes within and across firms into a connected and well­functioning business model. “It involves planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities.” (CSCMP 2012). Moreover, it concerns the coordination and collaboration with channel partners (CSMP 2012).

SUPPLY CHAIN STRATEGY - is the strategy of supply chain management. Supply chain management seeks for a balance between an efficient and responsive strategy (Chopra & Meindl 2007). The main supply chain strategies found in literature are lean, agile or leagile strategies (explained below).

SUPPLY CHAIN FUNCTIONS - are mainly to plan, source, make, deliver and return (Sillanpää & Sillanpää 2014: 101).

LEAN - SCs are smooth, forecast-driven operations, which aim to minimize waste from production to delivery. Thus, they represent cost-efficiency (Goldsby et al. 2006; Cohen & Roussel 2005).

AGILE - SCs are demand-driven and react flexibly to unpredictable situations. They focus on understanding and meeting customer-specific needs (Cohen & Roussel 2005).

LEAGILE - SCs are basically a hybrid version of lean and agile SCs. They aim to combine lean aspects for a base demand and agile aspects for more customization (Cohen & Roussel 2005).

2. BUSINESS STRATEGY

The second, third and fourth chapter deal with building the theoretical framework based on the review of existing literature. The second chapter deals with business strategy, corporate strategy and competitive strategy. The structure of this chapter starts with a definition of the term business/ corporate strategy, then gives an overview of the existing business strategies by Porter (1980) and Cohen and Roussel (2005) and finally consolidates these approaches.

The choices of literature focus on two important books. First, it is and Porter's Competitive strategy: Techniques for analyzing industries and competitors (1980) and secondly Cohen and Roussel's book Strategic supply chain management (2005). Although Porter's book is originally from 1980, his theories are fundamental in business studies and are still in use in every day's business processes and management. Therefore they prove to be ongoing relevant these days. Moreover, the book is based on cross-industry observations and has been subject to significant empirical testing. Finally, Porter's article What is strategy (1996) is added.

2.1 Defining corporate strategy, business strategy and competitive strategy

Strategy can be found at different levels in a firm (see figure 2). The mission at the highest level represents the comprehensive function and objectives of the whole organization. Next, corporate strategy is also on the level of the whole organization and serves to show how to reach the mission. A corporate strategy is an essential part for a firm to be successful. It supports growth and helps a company to achieve its goals. In general, it concerns the question of how a company adds value. It is the overall governing strategy, often internationally oriented. Subordinated to the corporate strategy are the business strategies for each business unit. A business strategy should encompass the competitive strategy, meaning that the competitive strategy is an important part of the business strategy. All existing business strategies in one company should be transferred into a functioning business model. In the business model the business strategies link the three parts out of which it consists, which are customer value proposition, operating model and profit model. For the execution in order to achieve value-adding processes, a firm has to invest in resources, develop a business portfolio and design the structure, systems and corporate functions of the organization in order to have activities and skills transferred across the company (Sharer 2016). The topic of the thesis is to align the SC strategy with the business strategy in the respective business unit.

Ranked below the business strategies are the functional strategies for each functional unit. Depending on the size of the firm there might only exist one business unit and therefore only one corporate/ business strategy (Waters 2009). This is why corporate strategy and business strategy are used interchangeably in literature. However, in this research the intention is to have a clear distinction between the terms.

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The business strategy determines the direction and look of a business. It helps determining priorities for the management and for each department, attracting a talented workforce, defining the target group, meeting customers’ expectations, allocating resources and maintaining a competitive advantage (FastTrac Kauffman Foundation 2016). In conclusion the business strategy gives a company the opportunity to win its specific target market (Favaro 2012). The following questions should be answered with the business strategy:

- Why is the company operating in business?
- What is the firm best at doing?
- What is the company’s target market? / Which customer segments should the company continue to serve or start serving?
- What is the value proposition to the customer?
- What are the essential capabilities that are required to deliver this value proposition?
- Which products/ services should the firm start offering, continue to offer, or stop offering?
- In what geographic markets should the firm operate?
- Why has the firm decided on these strategic directions?
- How does the company generate profits? (FastTrac Kauffman Foundation & Favaro 2012).

The competitive strategy determines the policies to achieve and maintain a leading position. Actually, the competitive strategy is an important part of the business strategy. Policies or actions of functional departments should be coordinated according to a common set of objectives. The following figure (figure 3) shows the four components that a company should consider when determining its competitive strategy. On the internal side of the company are its strengths and weaknesses meaning the company’s skills and assets on the one hand. On the other hand are the personal values of the key implementers, which mean the key players’ needs and motivations. The factors on the external side encompass the industry’s opportunities and threats on the one hand and the broader societal expectations like governmental policies and society’s concerns on the other hand (Porter 1980: xxvi).

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Figure 3: Context in which a competitive strategy is formulated (Porter 1980: xxvi).

Next, Figure 4 illustrates the five forces that drive industry competition. These five forces are the threat of new entrants, the bargaining power of suppliers and buyers and the threat of substitute products/ services, which finally lead to the rivalry among existing firms. This model shows that each company requires a unique construction according to these five forces (Porter 1980: 34).

Porter (1996: 1) also claims that a competitive advantage can only be achieved temporarily in the best case. Some researchers state that a strategy of positioning is considered too static as competitors can easily copy one's market position. Yet Porter states that companies that are not distinguishing clearly between operational effectiveness and strategy are the dominating cause for strong rivalry. The resulting need to improve all aspects of a company's business leads to less successful competitive positions. According to Porter (1996: 36), the operational area is the right place for ongoing change, flexibility and striving to be best in practice. The strategic area involves defining a unique position, making clear trade-offs and conducting a close fit.

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Figure 4: Five forces driving industry competition (Porter 1980: 4).

Furthermore, Porter explains that “positioning requires a tailored set of activities” (1996: 16) as it represents a supply side that always functions differently. Furthermore, trade-offs are decisive strategic factors in order to limit a company's range of offers (1996: 19). Next, exchange of information and coordination of activities are basic optimization techniques in order to avoid vain activities (Porter 1996: 25). After all, a competitive advantage is the result of an entire interconnected system of actions (Porter 1996: 26).

2.2 Overview of business strategies

There exist two models of business strategies with which companies compete against each other. The first model is called Porter's (1980) three generic strategies. It differentiates between overall cost leadership, differentiation and focus. The second one is by Cohen and Roussel (2005). It differentiates between the primary strategies of innovation, cost, service and quality. Furthermore, Roh, Hong and Park's model (2008) adds the strategy of flexibility. In the following part the models will be presented. Furthermore, they will be aligned to present a common ground as the basis for the alignment with supply chain management and strategies.

2.2.1 Porter: Three generic strategies

Broadly there exist three internally consistent generic strategies that can be used solely or combined in order to create a powerful position and to outperform the competition (Porter 1980: 35). These are overall cost leadership, differentiation and focus.

The first strategy is overall cost leadership. Porter (1996: 2) describes it as follows. “Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors.“ It is a useful strategy against rivalry and against powerful buyers who both try to drive down prices. Furthermore, this position allows flexibility of handling suppliers. Moreover, it is a useful strategy against substitutes. Scale economies and cost advantages provide entry barriers. Requirements for this position are features like having a relatively high market share or facilitated access to raw materials. Furthermore, products should be easy to manufacture by having related or standardized characteristics. Moreover, a market consisting of all main customer groups should be served in high volume. At the same time this strategy requires a high amount of up-front capital investment, modern equipment, tight control systems and incentives that are based on strict targets with aggressive pricing strategies, which in turn may often lead to short-term losses. Once the goal is reached, this position allows generating high margins that in turn can be reinvested (Porter 1980: 36). However, the need to keep pace with technological advancements and the strong focus on keeping costs low, impose significant risks (Porter 1980: 45).

Differentiation can take the forms of design or brand image, technology, features, customer service, dealer network etc. Porter (1996: 2) claims “differentiation arises from both the choice of activities and how they are performed.“ It is important for a firm to be able to differentiate concerning a number of dimensions (Porter 1980: 37). This strategy allows a company to have a strong position against rivalry and substitutes due to their customer’s loyalty and lowered price sensitivity. The uniqueness of the strategy of differentiation provides an entry barrier. Differentiation yields higher profit margins that allow power over suppliers and alleviates buyer power due to the decreased price sensitivity. However, a high risk factor is that buyers actually do not perceive a high need for differentiation (Porter 1980: 46). The requirements for this strategy encompass strong marketing and engineering skills, a corporate reputation and tradition for leadership, strong cooperation of internal channels and subjective incentives based on quality instead of on quantitative measures (Porter 1980: 41).

Focus strategy means concentrating on a particular segment of the product line, geographic market or buyer group. The strategy is based on the assumption that the firm can serve a particular target better than a more broadly oriented competitor by achieving better differentiation and/ or lower costs while serving the market (Porter 1980: 39). The highest risk factor is to maintain the advantages of the focused firm in contrast to the broader operating firm (Porter 1980: 46). The requirements encompass a combination of the ones needed for overall cost leadership and differentiation (Porter 1980: 41).

Figure 5 provides an overview of the three generic strategies. The vertical axis differentiates between the industry-wide strategic targets versus particular segments. The horizontal axis differentiates between the strategic advantage of either uniqueness or low cost position.

2.2.2 Cohen and Roussel: Four primary strategies

While Porter discusses business strategies on a general high-level perspective, Cohen and Roussel (2005) use a more operative viewpoint. They already integrate implications for operation and supply chain. According to them, there are four typical strategies that companies use to compete: innovation, cost, service, and quality. These strategies are also known as a company’s basis of competition. Leading companies usually concentrate on one primary strategy (Cohen & Roussel 2005: 22).

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Figure 5: Three generic strategies (Porter 1980: 39).

Competing on innovation usually means to develop category killers that create consumer pull by branding or a unique technology, which allows these companies to charge a price premium. Here, an integration of the supply chain with the design chain that involves all innovatively acting parties is important in order to reduce the time to market. This should ultimately lead to a dedicated new product introduction supply chain (Cohen & Roussel 2005: 52). Additionally, an important feature is the time-to- volume advantage meaning that a strong demand, which was created, can be fulfilled (Cohen & Roussel 2005: 24).

Companies, which choose to compete on cost, offer lowest prices possible for cost­sensitive customers in a product category or maintain a share in a market of commodities. Conditions for this strategy are efficient, integrated operations and a low­cost supply chain. Furthermore, the metrics are efficiency-based. The standardization of process and product as well as production quality, sourcing quality and inventory control are important factors (Cohen & Roussel 2005: 22). Critical supply chain practices are the integration of factory planning and timing, the standardization of raw materials and manufacturing process and the design for order management, procurement and manufacturing (Cohen & Roussel 2005: 52).

Companies that compete on service, adjust their service offerings according to their customers’ needs and strive to have a reputation for superior customer service in order to buildup customer loyalty. Companies that lead in this field know how to segment their customers and determine the cost of customized service. With this information companies influence their customer service profitability (Cohen & Roussel 2005: 26). For this strategy, critical supply chain practices include customer collaborative planning, customer segmentation and service level management (Cohen & Roussel 2005: 52).

Products and services produced by companies competing on quality have a premium nature and a consistent and reliable performance. Product development and key supply chain processes are critical factors for quality. A key attribute is traceability, which means tracing a product back to its source (Cohen & Roussel 2005: 25). It allows tracing a product back to its origin, thus allowing full transparency of all production steps.

The following table (table 1) shows Roh, Hong and Park’s (2008) competitive priorities along with their respective organizational cultural elements. He differentiates between cost, quality, flexibility and innovation as competitive priorities. Roh, Hong and Park demonstrate that flexibility is another competitive strategy to consider while the other ones are equal to Cohen and Roussel’s strategies.

Table 1: Competitive priorities (Roh, Hong & Park 2008).

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In conclusion leading companies know how to differentiate themselves by focusing on their main competitive aspect, which they drive to perfection. This gives them the opportunity of achieving a competitive advantage. In this context the supply chain can support each aspect of the business strategy. Therefore, alignment of SC and business strategy should be prioritized.

2.3 Consolidation of the different business strategies

Both Porter (1980) and Cohen and Roussel (2005) define a strategy that focuses on cost, called ‘overall cost leadership' and ‘cost' respectively. These kind of strategies cope with cost advantages achieved by scale economies that use standardized, efficient and integrated operations for a range of standardized products. Furthermore, both models define a strategy for innovation, which is Porter's ‘differentiation' and Cohen and Roussel's ‘innovation' strategy. These strategies deal with higher margins, less price­sensitive consumers and innovative products that cause a strong consumer pull.

Cohen and Roussel (2005) further differentiate the business strategy of ‘service', which focuses on customers' needs and superior customer service to achieve customer loyalty. Furthermore, they define the strategy of ‘quality' concerning products with a premium nature that have a consistent and reliable performance. According to Roh, Hong & Park (2008), there is also the competitive strategy of flexibility that requires adaptation in an uncertain environment. Finally, Porter (2008) defines the competitive strategy called ‘focus’, which means for a company to concentrate on a particular segment of the product line, geographic market or buyer group to achieve better differentiation and/ or lower costs by focusing on a particular target. Focus can be used with any of the five strategies mentioned above.

Porter (2008) argues that the three generic strategies can be used either solely or combined while Cohen and Roussel (2005) recommend focusing only on one competitive aspect, which should be driven to perfection. However, they mention also to pay attention to the remaining strategies. Therefore it can be concluded that for each product should exist a focus on one or a combination of strategies depending on the market environment, but certainly all strategies should be considered in some way. The next chapters will give information about the important aspects of supply chain management.

3. SUPPLY CHAIN MANAGEMENT AND SUPPLY CHAIN STRATEGY

The third chapter deals with supply chain management and supply chain strategy. Thus, supply chain management will be defined first. Then supply chain functions, supply chain strategies and the five configuration components for the supply chain strategy will be explained. Finally follows the consolidation of the different SC strategies. For this topic, Cohen and Roussel's book about Strategic supply chain management (2005) was the main literature base. Furthermore, a number of articles and websites have been used to broaden the view.

3.1 Defining supply chain management

The term ‘supply chain management' (SCM) was first used by consultants in the 1980s. Some researchers see it as the unit that is responsible for developing and maintaining a competitive advantage (Rose et al. 2012: 6). There are various definitions for supply chain management, but most of them focus on similar issues. In the following part, some important definitions will be compared to each other. The Council of Supply Chain Management Professionals (CSCMP) in the United States (2012) defines SCM as “the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities.” Moreover, according to the definition, SCM encompasses coordination and collaboration with channel partners who consist of customers, suppliers, intermediaries, and other mediators who provide service. In summary, SCM has the task of coordinating supply and demand management within and across countries (CSCMP 2012). The Ohio State University Global Supply Chain Forum' s definition is often used as the norm: “SCM is the integration of key business processes from end user through original suppliers that provides products, services and information that add value for customers and other stakeholders.” (Lambert, Cooper & Pagh 1998). To put it simply, SCM is the management of multiple relationships and the flow of goods and services (Lambert et al. 1998: 1).

SCM has an integrating function and is foremost responsible for managing the interfaces of the key business functions and processes within and across firms into a connected and well-functioning business model (CSCMP 2012). The ultimate goal of an effective SCM is said to be the reduction of inventory while the availability of products is ensured when demand arises. Furthermore, SCM can be divided into three kinds of flows: the product flow, the information flow and the financial flow. The product flow consists of sourcing goods, moving them from supplier to customer plus caring for any customer returns or service needs. The information flow involves sending orders and updates on the delivery status. Finally, “the financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements” (Rouse 2010).

Market developments, which are caused by globalization and outsourcing, lead to challenges for SCM. These challenges encompass an increase of competition, demand variability, product variety, customization and shortened product life cycles (Hilletofth 2009: 16 - 17). This is why every product or market needs a tailored supply chain strategy for its supply, operation and distribution parts, as there does not exist one standardized solution. Next will follow the explanation of supply chain functions.

3.2 Supply chain functions

The five main supply chain functions are to plan, source, make, deliver and return (Sillanpää & Sillanpää 2014: 101). Planning concerns the collection of information in order to facilitate decision-making. Sourcing means procuring raw materials. Making is defined as converting a good into a finished condition to fulfill planned or actual demand. Delivering is bringing the finished products to the customer. Returning refers to the processes related to returning or receiving handed back products and the handling of complaints (Iskanius 2006). These functions offer a company opportunities for optimization like planning, the possibilities to create competitive advantages and the reduction of cost and networking capital. At the same time these functions also give a company the chance to create differentiators (Sehgal 2009). In the following part, the five main supply chain functions, listed in the order of plan, source, make, deliver and return with their important features and their best practices are explained in more detail. The functions of planning and returning concern all other functions, as visualized in the following figure (figure 6).

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For the planning process a good forecast is the key factor. The usage of accurate and timely information is important. Furthermore, planning should aim for simplicity and a balance between the goals of sales and finance department. Overall an integration of all departments is important for a good planning process. Finally, the creation of explicit accountabilities and actions is critical (Cohen & Roussel 2005: 78 - 79).

An important element in the stage of sourcing is aiming for the lowest total cost of ownership by considering both direct and indirect costs involved. Furthermore, procurement strategies should be set according to “supply-market complexities and business impacts” (Cohen & Roussel 2005: 81). Next, an enterprise-wide point of view along with the management and measurement of performance are important (Cohen & Roussel 2005: 81).

In the stage of making, the focus should be on business priorities. The objective of this function can be speed and flexibility, not only a focus on low cost. Furthermore, quality standards should be set and controlled and all manufacturing activities should be synchronized (Cohen & Roussel 2005: 83).

For the process of delivering, the balance of service with the cost of serving is critical. Next, costs and time can be reduced with straight-through processing. This means that simultaneous execution can take place by making order information constantly accessible to all involved departments. Furthermore, end-to-end tracking and traceability should be established. Finally, data should be constantly and accurately updated (Cohen & Roussel 2005: 85).

Return can be seen as a reverse supply chain process and usually deals with small volumes of many different components in varying frequency. It is important to establish a distinct supply chain for return. Moreover, there should be timely feedback on return. Next, return policies should be adapted to the total costs of the return. Finally, the revenue opportunities should be maximized through disposal paths that can generate revenue (Cohen & Roussel 2005: 87 - 88). It is important to mention that complaint management is an essential tool for customer retention. Next follows the introduction of different supply chain strategies.

3.3 Supply chain strategies

Chopra and Meindl (2007) developed a framework that states that supply chain management seeks for a balance between efficiency (cost-leadership) and responsiveness (differentiation). In order to achieve this objective a firm must select the right mix of the three logistical (facilities, inventory and transportation) and three cross­functional drivers (information, sourcing and pricing). Other theories differentiate between ‘efficient’ relating to costs and productivity (lean) or ‘responsive’ (agile) supply chains, e.g. Morash (2001) differs between operational excellence (lean) and customer closeness (agile).

3.3.1 Lean, agile and leagile SCs

On the one hand, lean supply chains aim for smooth, forecast-driven operations while minimizing waste from production to delivery. This idea stems from Toyota's lean production that became popular in the 1980s and 1990s. Toyota defined ‘waste' in its production system as “1) defects in production, 2) overproduction, 3) inventories, 4) unnecessary processing, 5) unnecessary movement of people, 6) unnecessary transport of goods, and 7) waiting by employees and 8) goods and services that fail to meet the needs of customers” (Goldsby et al. 2006: 58 - 59). Waste can be minimized by the elimination of paperwork, by the reduction of inventories, lot-size or supplier base, by evaluating suppliers according to quality and delivery performance or by establishing long-term relationships with suppliers (de Treville, Shapiro & Hameri 2004). Basically it is all about the elimination of non-value-added processes (Kumar B.R., Agarwal & Sharma 2016: 313). However, Perez (2013: 5) claims that Toyota's strategy was actually a mix between agile and efficient models. Therefore, he states “an efficient model uses a ‘make to forecast' order penetration point, Toyota Production System uses an ‘Assembly to order' order penetration point“. Yet he admits that the both models have a cost-minimizing goal, which might lead to the confusion. Yet most other researchers see Toyota's model as the first lean one and consequently it will be considered as such in this thesis as well.

Furthermore, a lean SC is a strategy for functional products according to Fisher (1997). He divides products into functional and innovative ones, while the former should be supplied with (cost-) efficient SCs in contrast to the latter, which requires responsive SCs. Moreover, a lean SC requires high production efficiency. Thus, using this strategy encompasses building a separated production line for each product and avoiding exchanges of products, which usually leads to high utilization (Sillanpää & Sillanpää 2014: 103). Furthermore, a lean SC uses economies of scale for production processes and inexpensive models for transportation (Balasescu & Balasescu 2014: 13).

On the other hand, agile, demand-driven supply chains are constructed to react to unpredictable situations and profits from these kind of situations by providing fast delivery and having flexible manufacturing systems for short lead times. The objective of agile SCs is to match demand and supply in unpredictable markets. They strongly focus on understanding and meeting customer needs. Therefore, the risk lies in failing to meet customer demand. By using information systems and technologies this SC strategy can process information quickly and make improved decisions (Sillanpää & Sillanpää 2014: 103 - 104). It is a strategy for innovative products (Fisher 1997) that came up under turbulent market conditions in the 1990s (Mason-Jones, Naylor & Towill 2000a).

The best application of an agile SC is reached with achieving a strategic optimum. The strategic optimum area represents increased uncertainty of the competitive strategy to which the supply chain strategy reacts with a growing responsiveness (agility) (see figure 7). Achieving a strategic optimum is possible when serving only one market segment, but difficult to obtain when serving several market segments. To achieve a strategic optimum, the distribution responsiveness and the supply and demand default must find a common point. To be more exact, a firm must construct a logistic channel that best serves the requirements of different consumer segments. Moreover, with a changing competitive environment, a company must adapt its competitive strategy and logistic strategy to maintain a strategic optimum (Balasescu & Balasescu 2014: 15). The reason is that in general globalization leads to the development of an increasing variety of products, a higher price pressure on companies and an increasing variability of demand. Furthermore, companies have to deal with handling an increasing amount of supply opportunities to decrease response time and to control prices (Balasescu & Balasescu 2014: 15).

Finally, a hybrid version, the so-called leagile supply chain is also an option. The advantages of leagile supply chains are the ability of customization, even ‘mass­customization’ due to a higher level of variety at lower costs when customizing locally, less inventory and obsolescence costs, higher flexibility and facilitated forecasting abilities. An important prerequisite for this strategy is a reliable supplier network (Hilletofth 2009: 21 - 22).

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Three distinct leagile supply chains can be differentiated. The first one is based on the Pareto rule, claiming that 80% of the firm’s revenue is gained by 20% of the firm’s products. This would mean that these dominating 20% of the product assortment should be managed in a lean supply chain (Goldsby et al., 2006) while the other 80% are managed in an agile manner (or depending on the company these 80% should be further examined to determine which management strategy suits best). The second hybrid is based on the idea of a base demand that should be managed in a lean manner while surplus demand in form of demand peaks due to seasons or promotions can be managed in an agile manner (Goldsby et al. 2006). The third version is based on the idea that risk and uncertainty costs are caused by differentiation. In this version exists a decoupling or order penetration point. Upstream of this order penetration point, the supply chain follows lean principles as long as production is according to schedule. Downstream of the order penetration point the supply chain follows an agile principle responding to customer demand. By postponing activities or by moving the customer order point upstream in the supply chain until demand is there, risk can be lowered. Another name for this strategy is postponement strategy as customization is delayed in order to react quickly to a changing market demand (Sillanpää & Sillanpää 2014: 104 - 105). Postponement can take place in form of delaying assembly (Assembly-To-Order, also called Configure-To -Order), production (Make-To-Order), sourcing (Sourcing-To- Order) or design (Engineer-To-Order). In the following paragraph SC classification models are introduced.

3.3.2 SC classification models

Christopher et al. (2006) developed a classification model with three parameters, which are type of products (standard or special), type of demand (stable or volatile) and replenishment lead-times (short or long). On the one hand a specialized product is characterized by low volume, volatile demand, a short life cycle and high customization. On the other hand a standardized product has the characteristics of a more stable demand, a longer life cycle and non-existing or a limited level of customization. The following matrix (figure 8) suggests four generic supply chain strategies using the dimensions of replenishment lead-time and predictability. Replenishment lead-time influences responsiveness and predictability that is in close relation to the product type. The first SC has predictable demand and short replenishment lead times leading to a lean (continuous replenishment) strategy. Secondly, the opposite situation that has an unpredictable demand and long replenishment lead times requires a leagile SC strategy. Thirdly, long lead times and a predictable demand, lead to a lean SC strategy, e.g. make and source before demand. Fourthly, unpredictable demand and short lead times result in an agile SC strategy representing rapid response. Furthermore, Christopher et al. (2006) claim that each cell of the model can be adapted to a standardized or a specialized product. For example, postponement for a specialized product refers to manufacturing while for standardized products it refers to distribution.

Perez (2013) developed the following generic supply chain models: efficient, fast, continuous replenishment, agile, leagile and flexible supply chain. Furthermore, Lee (2002) developed a demand and supply uncertainty framework that concerns four types of SCS: efficient, risk-hedging, responsive and agile. In the following part, Lee's framework will be presented and Perez' model, especially flexible, fast and continuous replenishment strategies will be compared to it.

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Figure 8: How demand/ SC characteristics determine SC strategy selection (Christopher et al. 2006).

Both Lee and Perez introduce efficient supply chains (ESC) that have according to Lee (2002) features like lean supply chains, which are usually used in mature markets. The competitive advantage is mainly achieved through low cost and economy of scale. Efficient supply chains are used for the efficient production of quality products (Lee 2002). Uncertainties are generally low as it is characterized by regulations and standardization. Its characteristics are total cost reduction along with reliability and supply efficiency. This means that a firm following a cost leadership strategy constantly searches for opportunities to minimize costs and erase intermediate production steps. Suppliers are selected based on costs of reliability and ease of doing business while operations and logistic systems strive for efficiency and a zero defect rate (Gupta, Gollakota & Srinivasan 2009: 88). Perez characterizes efficient supply chains for highly competitive markets and for long life cycle products with predictable demand. Furthermore, they have a high asset utilization rate and a customer orientation towards low costs. However, the researcher does not see lean and efficient SCs as one category and emphasizes that they only share the goal of cost minimization. (Perez 2013: 5).

Next, risk-hedging supply chains (RHSC) are used under uncertain conditions for the supply while the demand is predictable and stable. This SC is used in the retail industry and dealerships. Examples of companies using this SC are hydroelectric power companies and a number of food producers. Supply uncertainties are leveraged by keeping stock of core products or components while trying to share the costs for stocking with other firms by pooling and sharing resources. ESC and RHSC are both used for functional products (Lee 2002).

Perez (2013: 7) identifies capacity and inventory pooling for the ‘flexible SC' as well. Additionally, he finds outsourced capacity for this kind of SC, “which is supported in sharing information of capacity and inventory with suppliers, customers and inclusive, competitors“ (Perez 2013: 7). Furthermore, the ‘flexible SC' is customer-oriented and deals with disruptive supply and unpredictable customer demand. Thus, it seems to be more like an agile SC. As an example Perez lists “companies oriented to corrective maintenance as flood control, in which own equipment could be insufficient and companies must share equipment with suppliers, customers or inclusive competitors“ (2013: 7).

Next, a responsive supply chain (RSC) exists when a company offers various products that are of high quality and performance and that aim for scope economies, which is often performed through product innovation and improvement. In this supply chain the production of the final form of the product is postponed as long as possible due to uncertain demand conditions e.g. in the fashion apparel, computers and pop music industries (Lee 2002). This is comparable to what is described above as one of the forms of a leagile SC, the so-called postponement strategy, which uses an order penetration point (Sillanpää & Sillanpää 2014: 104 - 105). The features of a RSC are a high level of value-added customer service, proactive ensuring of quality and a collaborative relationship with the customer. The aim of improving customer satisfaction is constantly pursued by trying to add value to the value chain. One part of this kind of SC is vendor-managed inventory (VMI)/ supplier-managed inventory meaning when the supplier cares for the inventory replenishment process of the customer (Waller, Johnson & Davis 1999: 183). The ultimate goal is to go from customer service to customer satisfaction to customer success and become part of the customer organization by providing high levels of help, support and interactive advice (Gupta et al. 2009: 89).

Perez calls the RSC ‘fast supply chain' due to the fast “concept to production process” (2013: 5) that is required to react quickly to the fast changes in customer demand. He further distinguishes the ‘continuous replenishment SC', which is characterized by “predictable and stable demands, long life cycle products, low supply disruption risk, low market mediation cost, and principally customers oriented to process efficiency, especially low working capital“ (2013: 6). Thus, Perez sees supplier-managed inventory as a new category of SC strategies instead of as a sub-category of responsive SCs.

Finally, the both Perez and Lee define the agile supply chain (ASC). Lee sees it as the most market-oriented and flexible SC because it has to deal with uncertain demand and supply conditions. Thus, it requires fast adjustment to volatile conditions, e.g. in high- end computer and semiconductor industries. RSC and ASC are both used for innovative products. To respond to these pre-conditions, this SC provides a variety of products with high quality, high performance and high customer service. Furthermore, the company hedges supplier risk by creating opportunities for flexibility with this SC (Lee, 2002).

Perez sees products made for postponed design and extra production capacities as the two main characteristics of the agile SC. The agile SC is for short life cycle products and generally to fulfill unpredictable demand quickly (Perez 2013: 6). Additionally, Perez defines the ‘LeAgile SC' dealing with unpredictable demand that has to be fulfilled fast in a strongly competitive market with a medium risk of disruption. It is used to manufacture long life cycle products. According to the researcher it is “the most demanding model, because it requires agility with low cost” (Perez 2013: 6). It is used in apparel, computers and automobile industries. Table 2 summarizes the characteristics of all four types of Lee's supply chains. In the next paragraph the five SC configuration components are defined.

3.4 Five configuration components for the supply chain strategy

A firm cannot follow a one-size-fits-all strategy, but has to select a specific strategy. According to Cohen & Roussel there are five critical configuration components for a company's supply chain strategy, which are operations strategy, outsourcing strategy, channel strategy, customer service strategy and asset network. These strategies will be explained further in the following.

There are four kinds of operation strategies. First, make to stock is used for standardized products that sell in big quantities. This strategy helps lowering manufacturing costs and keeps inventory levels of stock to fulfill customer demand quickly. Secondly, make to order is for customized products or products that are infrequently demanded. It allows low inventory and higher service levels. Thirdly, configure to order is for products that are completed at a generic level and completely finished when obtaining a customer order, as there are many modifications of the final product. This strategy allows low levels of inventory, many different kinds of product variations and simpler planning. Finally, engineer to order is a similar strategy like ‘make to order' for industries producing complex products and services according to particular customer demand. Adjusting the operations strategy can lead to advantages such as decreasing inventory and improving service (Cohen & Roussel 2005: 11 - 12).

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