MMRCDISCUSSION PAPER SERIES
No. 451

Demand and Supply Chain Integration
Strategy for Emerging Market
Young Won Park
Manufacturing Management Research Center
Graduate School of Economics, The University of Tokyo
Ryosuke Sugie
Technological Development of Information-processing
September 2013

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

Demand and Supply Chain Integration Strategy for
Emerging Market

Young Won Park
Manufacturing Management Research Center
Graduate School of Economics, The University of Tokyo
E-mail: ywpark@mmrc.e.u-tokyo.ac.jp

Ryosuke Sugie
Technological Development of Information-processing
E-mail: rsk.sugie@gmail.com
Abstract: In this article, we discuss the challenges for global supply chain in emerging
markets. We also present a research model of demand and supply chain integration system(DSCIS) which responds to customer’s needs through the integrated information flows.
DSCIS synchronizes the key processes in terms of frontend development, product planning,product design, procurement, manufacturing, sales and marketing, maintenance activities
based on customer needs as process routines. We further explore the following researchquestions: (1) what SCM practices do firms consider for emerging market? (2) In the context
of emerging market, how are these SCM practices implemented?
This paper examines the SCM practices of electronic firms and auto-manufacturers that
operate in China. What is noted in this study is that those firms that implement the deeper
level of localization experience huge business successes. It is imperative for any global firms
to (1) understand the rapidly changing market reality (2) develop partnership with the local
governments for achieving effective market penetration. The scope of outsourcing is
extended to the local firms that are strategically aligned to assume specific aspects of global
supply chain management challenges. In brief, integration of both supply and demand chain is
crucial for emerging market markets.
Key Words: Supply Chain Management, Emerging Markets, Demand Chain, demand andsupply chain integration system (DSCIS)

1Park・Sugie

1. Introduction

In times of stiff global competition, firms construct supply chain that allows
customers to supply their products and services timely. Their practical challenges
are how to integrate both internal and external supply chain. Incresaingly, customers
consider not only functionality, quality and prices of the products but harmony of
their lifestyle as their basic purchasing criteria (Park et al., 2012). Final customers
expect the total packages of a product to be compatible with their value systems andlife styles. Thus customer’s purchasing decisions are based on the harmonious
integration of product functional requirements and customer cultural value
expectations.
This article aims to discuss the challenges for global supply chain in emerging
markets and present a research model of demand and supply chain integration system(DSCIS). Based on extant literature review the model specifies the changing supply
chain management practices for emerging market. DSCIS synchronizes the key processes
in terms of frontend development, product planning, product design, procurement,
manufacturing, sales and marketing, maintenance activities based on customer needs
as process routines. We further explore the following research questions: (1) what
SCM practices do firms consider for emerging market? (2) In the context of emerging
market, how are these SCM practices implemented?
For meaningful examination of these research questions, we employ case studies in
the context of China.

Firms that participate in the case studies are carefully chosen

to study both internal and external supply chain practices to meet the complex customer
requirements. Case findings suggest that successful global firms make their strategic
focus beyond supply chain and then move toward demand chain in the emerging market.

2. Literature Review

2.1 Supply Chain Management and Business PerformanceFirst of all, let us consider supply chain management (SCM) from the business2

Demand and Supply Chain Integration Strategy for Emerging Market

performance perspective. SCM intends to maximize customer satisfaction while
minimizing total costs of all the activities from securing raw materials to delivering
products and services to final customrs (Lambert and Cooper, 2000;Vicker et al., 2003).
To integrate all these activities to firms’ competitiveness requires reconfiguring
all the internal and external processes from the perspective of global optimization(Frohlich and Westbrook, 2001; Zhou and Benton, 2007). Thus, SCM is to approach all
the intra- and inter-business processes as a unified and integrative business process
for the purpose of enhancing total value added and sharing the total benefits among
the supply chain partners. From the logistics standpoint, SCM is to reduce any formsof wastes related to new product development time, procurement and manufacturing costs,
distribution and sales. This is to provide customers thee right products at the righttime at the right prices while reducing the overall inventory level low and minimizing
lead times, and maximizing the utilization of facilities and equipments. Thus, thecommon aspects of SCM are to (1) satisfy customers (2) achieve global optimization.

2.2 Supply Chain Management in Emerging Markets

This section is devoted to discuss SCM topics in Emerging Markets which include(1) integration between demand chain and supply chain, (2) product/service development
fitting emerging markets, (3) differation of supply management style and inventory
management, (4) consideration of marketing channels, (5) logistics strategy different
from advanced markets, (6) strategy considering local government policy andinstitutional rules such as FTA and TPP.

Supply chain management considers all the information exchange and the movement ofgoods from manufacturer, wholesaler, and retailer to all the suppliers on the extended
supply chain (Zhou and Benton, 2007). To successfully meet all the requirements ofcustomers, SCM applies total system in managing information, materials, and services(Chase, 1998; Sahin and Robinson, 2002; Li and Wang, 2007; Zhou and Benton, 2007; Parkand Hong, 2012).

It is possible for focal firms to reduce their innovation expenditures and minimize
3

Park・Sugie

risk factors through collaboration with the partners in a business-ecosystem (e.g.,
suppliers with unique technological and manufacturing capability even in othercountries). What is critical for competitive advantage is how such focal firms seek,find and involve these resourceful and competent suppliers in their network. They mustcombine knowledge assets of many suppliers in its network. Thus, integrating abilityof a focal firm is quite important in any network (Brusoni and Prencipe, 2001).

However, it is not sufficient to simply bring in such suppliers into a network andintegrating them as network members. Instead, sustainable competitive advantage
requires perpetual network coordinating capability. In this sense, coordinating
mechanisms of Japanese automobile manufactures (e.g., encouraging competition amongsuppliers while promoting long term trust relationships) have contributed to theformation of successful network (Asnuma, 1997). Li and Wang (2007) focus on
coordination mechanisms that influence on the goals of supply chain member. An
effective value chain management requires managing incentives within supply chain(Narayanan and Raman, 2006). Sahin and Robinson (2002) also discuss the value of
information and physical flow coordination.

In this paper, we present SCM issues in emerging markets. Merely selling products
to customers is no longer adequate in sastifying the growing demand of customers.
Instead, firms strive to plan integrative supply chain strategy that includes productconcept planning, product development and commercialization and after-services. Thesefirms focus on establishing global supply chains to stay competitive.

Increasingly,

these global firms not only move their manufacturing facilities but also theirmarketing/ sales and distribution functions. These firms implement integrative supply
chain management that synchronizes both internal and external business practices.
SCM

considerinter-organizational

networkmanagement

that

is

far

beyondorganizational specific practices. Firms no longer approache their product flows interms of their own product brand. Rather, they look into more deeply on examining all
thesupplychain

partners

and

move

forwarddemand

chain

in

the

globalmarkets—particularly emerging markets (Scannel, et al., 2000). Such changing market
reality requires building network capabilities that respond to the diverse customers
4Demand and Supply Chain Integration Strategy for Emerging Market

demands from global market (Korhonen et al., 1998; Demeter et al., 2006; Crook andCombs, 2007).

2.3 Research Framework

Figure 1 shows demand and supply chain integration model (DSCIM) based on streams
of customer needs.

Figure 1. Demand and supply chain integration model (DSCIM)

It responds to not only the known existing needs but also hidden needs (new customer
requirements) through foresight planning of design information (Park et al., 2011;
Park and Hong, 2012). It also identifies the key processes in terms of: (1) frontend
development deriving product concept; (2) product planning integrating customer
needs—expressed or unspoken--and design information; (3) product design visualizing
design information; (4) procurement and manufacturing transferring design information
throughmedia choices; (5) sales and marketing appealing customers by design

information; (6) maintenance activities managing design information as processroutines. Demand and supply chain integration model (DSCIM) needs to be linked withexternal related supply chain.
5Park・Sugie

3. Case Study

A crucial aspect of supply chain management is to share information beyond the firmboundaries. Thus, careful selection of suppliers and strategic partners is very
important. Careless bonding with the unfit partners has serious business implications.
Too often firms experience business failures instead of competitive advantage throughsupply chain management. In this section, we focus on how Apple Inc. and Sony integrate
their supply chains with Fox conn in China.

Apple and Sony maintain their core competences within. Yet, they pursue supply chain
integration in the other business areas that requires supplier collaboration. These
two firms maintain strategic alliance with Foxconn which is a leading firm in the global
electronics manufacturing services (EMS). In general, manufacturing firms establish
strategic alliance with EMS firms for three reasons: (1) production side--prepare forchanging requirements of mass production or demand fluctuations, (2) cost side: attaincost advantage through reducing maintenance expenses, administrative and inventory
costs. (3) global production responsiveness—choose production locations close to thecustomers. Thus, EMS plays an important role for effective supply chain management
in emerging markets.

3.1. Electronic Industry Case: Apple and Sony in China

3.1.1. Apple and Fox Conn

Apple Inc., which has maintained No.1 position in achieving supply chain
effectiveness according to AMR Review from 2008-2010, has collaborative with Foxconn,
a leading EMS firm. The market share of Apple Inc., the number one customer of Foxconn,
is 16% in China. Apple uses Foxconn to open a new market segment in any of the Chinese
deep interior regions and thus achieve very effective logistical configurations in
the long term. Apple has fascinated the global customers through its innovative productdesign and features (e.g., iphone and ipad). However, these advantages do not guarantee
6Demand and Supply Chain Integration Strategy for Emerging Market

sustainable competitiveness in the environment of rapidly changing customer
requirements. The success factors of Apple include more than refreshing design andinnovative features. Rather, Apple’s supply chain management provides its crucial
competitive advantage in the market (Nikkei, 2012).

Apple does not maintain any manufacturing plants of iphones in USA. Apple’s
manufacturing strategy is through outsourcing, not having its own manufacturing
facilities (i.e., fables methods). The merit of fabless methods is to avoid risks
related to capital investment and maintenance costs for massive manufacturing
facilities.

Instead,thestrategic

focus

is

in

its

design/development/marketing/distribution. Thus, speedy management is quite possible
with such arrangements. Fabless approach requires careful selection of strategic
partners for global SCM.

Apple entrusts production to Foxconn, a Taiwan-based EMS, for several reasons.
First of all, it is needed to mention that in addition to low labor costs in China
than in USA, component parts of iphones are mostly concentrated in Asia. According
to component parts list by Apple, more than 70% of all component parts are procuredin Asian countries including Japan and Korea. From the logistics standpoint, it issensible to utilize Foxconn in China from effective management of SCM that covers all
the business processes from procurement of component parts to manufacturing and final
assembly. In this way, collaboration between Apple and suppliers achieves maximum
benefits of global SCM by combining its strong product concept/design planning andmarketing/distribution network along with Foxconn’s procurement and production
capabilities.

Disadvantages of fables approach are worthy to mention here as well.

Since Apple

does not involve in the entire production process control, series of issues may arisein the form of inadequate inventory management, increasing surplus of certain
component parts, and long-term fixation of specific lead time for manufacturing andlogistics.

However, Apple proactively handles these potential problems. Appleapplies product lifecycle management (PLC) which ensures minimum inventory in the7Park・Sugie

final manufacturing assembly and distribution process. Thus, with such tight inventory
control system the prevailing perception of consumers is that when the current models
have no more stocks to sell, Apple soon introduces new product models. Apple
distributes its products through direct sales by Apple Stores. Apple implements SCM
through direct sales to its products to the customers and consistent after-sales
services. By using only limited distribution channels Apple maintains its productbrand image to the loyal customers. Through Apple Stores customers experience superb
after sales services and gain access to exclusive product related information, Apple
also monitors the precise level of inventory of its product lines and manages theoverall inventory management through advance production planning.

Competitive advantage in emerging markets requires effective demand management.
Apple listens to the customers and uses their feedback to the better development of
new products. The information and knowledge gap between Apple and its customers is
reduced through show rooms in the direct sales network. Apples’ 357 stores worldwide(as of September 2011) generate $14.1 billions in sales (13% of total sales of $108.2
billions). Average sales per store are $43.3 millions. This is 49 times of that ofUnicron, a leasing retail outlet in Japan (Nikkei Newspaper, 2011). Thus, Apple plans
to increase the size of distribution channel in Hong Kong and Mainland China from thecurrent level of six (2011) to twenty five in the following years (Nikkei Industrial
Newspaper, 2011). In this way, Apple reaps the benefits of fables production throughFoxconn and effective product design and rich customer contacts through direct sales
outlets and effective marketing/distribution channels.

3.1.2. Sony and Foxconn

Sony is a Japan’s leading electronic firm. Sony targets the global markets withits diverse products including TV, PC, and video games. Sony, in spite of poor negative
profit performance in 2011, has recently shown remarkable innovation in its supply
chain management practices.

This section focuses on Sony’s production and marketing practices. Sony has
8Demand and Supply Chain Integration Strategy for Emerging Market

developed cell production methods (CPM) which is an improvement of Toyota’s Kanban
methods. For CPM one or several workers take care of the entire processes startingfrom components selection, manufacturing assembly, inspection and product release(i.e., cross-disciplined and multi-task trained workers method). The production
process involves U-shaped cells that handle all the component parts necessary for the
specific process sequences. CPM is quite effective for small scale production forcustomized diverse product features. Production volume control and labor requirements
are fairly easy with this method.

Sony has seven factories in China and the total number of employees is 48,000 (Asof 2010). Sony is different from Apple in that it maintains its own manufacturing
facilities in China. However, it is worthy to consider if such Sony’s CPM (directly
imported from Japan) is quite fitting to the large and rapidly growing Chinese market.
It seems that Apple’s EMS through Foxconn might be better meet the Chinese market
requirements through mass economies of scale production and extensive application of
automation in manufacturing processes.

Recently, Sony is building up network capabilities in view of growing volume demandin Chinese market. Sony set the sales target for LCD TV (2 millions) and video games(4 millions) in 2010. Sony also established strategic alliance with Foxconn for greater
manufacturing and logistics capabilities. Such strategic move is based on theprediction that China would be the world’s largest LCD TV market in 2011. Thus, Sony’s
SCM integrates the upstream processes (i.e., product design and development and brandmanagement by Sony) and downstream processes (i.e., manufacturing and logistics by
Foxconn), and attain cost reductions in production and logistics processes.

Sony cancelled the joint venture agreements with Korean Samsung and sold off TV
assembly plants and downsized its overall manufacturing production network. Sony isnegotiating with High Sense, Chinese large household electronics firm, for production
and distribution network configurations (Sankkei Newspaper, 2012). This is Sony’s
response to Chinese government’s policy directive of household electronics goods
distribution in rural areas. Sony’s strategic intent is to strategic alliance with9

Park・Sugie

Chinese firms for rapidly expanding China’s huge interior market. In China Sony sells
its products through Vaio Shop which is Sony’s direct distribution outlet managed
by third party distributor approved by Sony. For Vaio Shop, Sony’s motto is, “Deliverto the extent what is sold”.

Sony determines the safety stock level and delivers

to the extent of sales recorded by each individual Vaio Shop on regular basis. Sonysells 70% of Vaio (PC) and 50% of digital cameras in Vaio Shops in China. Thus, Sonyuses Vaio Shops for inventory control, logistics and marketing functions. Sony adopts
different marketing methods for different products. In this way, Sony understands thepurchasing patterns of Chinese customers of diverse regions by products as well anddevelops appropriate marketing plans.

Sony’s SCM, therefore, integrates both supply and demand side through integratingproduct design, manufacturing/logistics and distribution channels.

Sony positions

itself as a market leader based on its brand power and value chain infrastructure (i.e.,
integration of supply and demand chain) for the growing Chinese demand for its broad
range of household electronics goods.

3.2. Case of automobile manufacturers: Toyota and Hyundai in China

3.2.1. Toyota’s global SCM strategy

The superior market position of Japan’s Toyota is quite contrast to its performancein China.

Toyota’s sales in China are somewhat modest—8th among auto-manufacturers

in Chinese market with 506,000 cars sold in 2011. Toyota is not so doing well in theemerging economies—particularly in China. Toyota’s Chinese market strategy is tooffer its finished cars through three plants in China. Toyota’s partnership (50:50
ownership ratios) with First Train (Chinese auto-manufacturer) resulted in theestablishment of Tianjin Nikki Toyota Train and Sichuan Nikki Toyota Train andGuangzhou Toyota Train. Each firm produces a different product line of Toyota. Tianjin
Nikki Toyota specializes in small car Vios, Corolla, and mid-sized car, Crown. Sichuan
Nikki Toyota focuses on the large car line--Land Cruiser.

Different from Japan,

Toyota in China focuses on small product lines in mass production.
10

Demand and Supply Chain Integration Strategy for Emerging Market

Toyota also applies JIT in China as well. This is to produce cars at the right timeat the right volume and thus minimize inventory level. This method also requires
multi-skilled workers that handle complex production processes. This production
method has serious implications on SCM as well. In this section we examine practicalissues related to this production method.

In China, demand patterns are quite uncertain because government policy changes are
frequent and customer tastes and preferences are somewhat less predictable. In 2009
Chinese government reduced automobile sales tax by 5% for the engine size smaller than1600 cc. That year Toyota’s Vios and Corolla showed impressive sales records. However,with inaccurate demand forecast Toyota experienced frequent stockouts as well. From
January to April 2009, Toyota showed negative growth compared to that of 2008 at thesame period (Economic Information, 2009). In the rapidly growing Chinese market, whatis crucial is not inventory reduction but to avoid sales loss opportunities.

It is not realistic to expect the same extent of success in China with the identical
Toyota production methods that have been applied in Japan. Chinese national culture,value systems, educational backgrounds and customer preferences are quite different
from those of Japan. Compared to Japan, Japan’s car demand is fairly stable and thedemand forecast is relatively easy. However, market turbulence in China is quite highand Toyota’s traditional production and marketing methods are not quite applicable
to Chinese market. For global SCM, securing right amount of component parts at theright time is quite important. Toyota’s component parts localization target is 70%(Corolla and Crown), 85% (Camry) and even the long-term goal is no more than 90%. At
present, more than 15%-30% of component parts are shipped from Japan. Thus, serious
earthquakes in the month of March 2011 had serious supply chain disruptions in China.
Toyota experienced more than 35% of reduction in their new car sales in 2011 comparedto the 2010 records. It is critical for Toyota to increase the localization ratio for
reducing total costs, production and logistics lead time. When Chinese automobile
market experiences certain level of stability and maturity, Toyota’s traditional
methods would be more fitting. Until then, Toyota needs to make some modifications
11

Park・Sugie

in the ways they approach overall supply chain management including production andinventory control methods, timely market responsive action programs and sensible
strategic approach to changing government policy initiatives.

3.2.2. Beijing Hyundai’s Global SCM Strategy

Hyundai, Korea’s major global auto manufacturer established Beijing Hyundai
through joint venture (Hyundai and Beijing Train both 50 to 50% ownership) with Beijing
Train (a Chinese firm) on October 2002. By 2003, Hyundai sold 52,000 cars in China
and thus showed quite rapid sales growth in China. In 2010, the annual sales volume
was 703,000 which recorded No. 4 auto manufacturer in China—better than any otherJapanese automobile manufacturers (e.g., Toyota and Honda). The key reason why Hyundai
could achieve such speedy growth in China is its global SCM that integrates

R &D, procurement, sales and marketing.

Beijing Hyundai focuses on extensive research on Chinese market. In 2011 it
established Automobile Management Research Center in China. A senior Hyundai manager
said, “Information on US auto-industry data and statistics is available andaccessible. However, securing timely information on Chinese market is not that easy.
It is crucial to be aware of to date Chinese government’s industrial policies andchanging market reality.

This is why we establish this research center.”(Dongyang

Economic Daily, 2011). Thus, Beijing Hyundai’s tremendous growth is based on thecomprehensive road map that includes quality market research of the emerging market,
clarity of market goals, translation of marketing and sales. Through market research
Hyundai management understands the unique and specific Chinese customer requirements
and government directives and then carefully reflects them in their new products andservices.

Beijing Hyundai adopt mass customization for total cost reduction. Hyundai increased
both production volumes and product scope according to the market requirements.
Hyundai’s product development processes consider changing customer tastes andpreferences. Beijing Hyundai adopts Make-To-Stock (MTS) as a key manufacturing
12Demand and Supply Chain Integration Strategy for Emerging Market

practice. MTS is to forecast customer demand in advance and produce required volumes.
MTS allows speedy response to the changing customer requirements and reduce the risk
for lost sales opportunities. Inaccurate forecast of customer demand, of course, would
result in a huge level of unsold inventory. In this sense, Hyundai’s approach is quite
in contrast to that of Toyota that focuses on low level of inventory.

Beijing Hyundai first understands the buying habits of Chinese customers and thenexecutes MTS method of mass production. This is effective in view of China’s large
market size. This is in accordance with the preference of Chinese customers who would
rather purchase cars of their own choices instead of waiting after they place orders.
Since each product line with sufficient size can achieve economies of scale, overall
cost of production is also quite competitive. Hyundai’s production method does not
require multi-skilled but simple-skilled workers. For example, the rates of automationof various proceses are: (1) press and assembly of car body 100%, (2) stamping 60%,(3) final assembly 10%. Manufacturing lines rarely stop. The utilization rate is on
average 99.5% (Plant 2 rate, 2009) and 98% (Plant 1 operation rate)(Toyama, 2010).
In Hyundai, the tendency is to trust high process technology more than human touch.
It is not their strategic priority to develop cross-trained workers who would engage
in problem solving through Kaizen activities. Thus, discovery of quality problems is
mostly by inspectors and problem resolution is expected by managers and production
staff personnel (Oh, 2009; Park et al., 2012). Hyundai’s production is characterized
by work simplification through modular division of complex work processes rather thanhighly skilled workers’ Kaizen activities. Hyundai’s total work processes areusually twice of those of Japanese counterparts. Thus, any foreign workers that havevery little communication ability can be deployed in the production processes. The
total education and training time required is fairly short and thus the overall
manufacturing process productivity in its oversea plants is very high (Inoue, 2011).
In this way, Hyundai’s production methods are quite fitting to the work environment
in China where worker turnover rates are very high.

Beijing Hyundai use 94% of component parts from China and the amount of import from
Korea is no more than 6% (Toyama, 2010). Hyundai’s global production system utilizes
13Park・Sugie

its strategic partners with their concurrent entry in China as well as localizationof component parts through Chinese suppliers (Park et al., 2012). Routine component
parts are all procured through Chinese suppliers for cost reduction effects. For
strategic component parts Hyundai focuses on stable supply and high quality
performance (Jung, 2005).

Hyundai Beijing takes market segmentation through rigorous classification ofcustomer needs by different regions. It allows the operations of service dealers andsatellite sales dealerships. Thus, Hyundai covers not only first rate customers in
the coastlines but also penetrate medium and small cities with its low priced products(Lee, 2011). In 2009 Chinese government reduced automobile sales tax rates by 5 percent
according to its rural automobile distribution policy. Hyundai’s extended sales anddistribution network is quite in line with such government policy changes and thus
by 2009 Hyundai achieved noteworthy sales growth in Chinese market as a whole.

Insummary, Hyundai’s comprehensive demand and supply chain integration (DSCI)
considers external environmental changes (e.g., government automobile distribution
and tax policy), devises right manufacturing processes (e.g., make to stock throughhigh degree of automation), and configures distribution and marketing network
channels.

4. Conclusion

This paper examined the SCM practices of electronic firms and automotive
manufacturersinChina.

Successful

firms

implement

comprehensive

level

of

localization that includes staying vigilant on the changing market reality, savvy ingovernmental relations and adapt well to the competitive challenges. The supply anddemand base includes the active participation of local firms through strategic
outsourcing. With the extensive IT capabilities global firms achieve effective
information flows on various levels. Even so, great deal of customer value translation
requires compatible business environments that offer price competitive, time
sensitive and quality superior products and services.

14

Demand and Supply Chain Integration Strategy for Emerging Market

Apple Inc., for example, regards refreshingly attractive design as its corecompetence and thus outsources its production functions and thus achieves costadvantage. In contrast, the core competence of Japanese firms is in their manufacturing
capabilities. Clarity of strategic priorities is a must for these Japanese firms. Evenin the areas of upstream R & D and product development, Japanese firms find the examplesof Korean firms (e.g., Hyundai Motor Co) that achieve both quality and speed. Strengthsof Korean firms is in their global supply chain management that is based on effective
target market research, manufacturing capabilities and information integration acrossfront- and back-end value chains.

In the coming years, as more global firms turn theirattention to the western regions of China, it is all the more interesting to see how
successful global firms in China implement their supply and demand chain straggles.

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