MMRCDISCUSSION PAPER SERIES

No. 385

Effective Supply Chain Configurations in theBusiness Context of China
YoungWon Park
Manufacturing Management Research Center, University of Tokyo
Junjiro Shintaku
Graduate School of Economics, Faculty of Economics, University of Tokyo
Paul Hong
College of Business Administration, University of Toledo, USA
February 2012

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
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Effective Supply Chain Configurations in the Business Context of China

Abstract
Increasingly, global Flat Panel Display (FPD) manufacturers for computer, monitor andTV face growing business opportunities with an expanding global market. At the sametime, with the continuous influx of competitors the overall prices of computer and TV
have showed downward trends. In this environment it is critical for FPD manufacturers tomanage efficiencies in terms of cost, delivery, and quality.
The realistic options for overall cost reduction in the value chains are: (1) manufacturing
productivity enhancement through workers’ learning curve; (2) product process
improvement through better operational systems; (3) effective outsourcing for the backend assembly and logistical processes.
This paper examined the strategic and operational issues related to efficient supply chain
configurations between set-makers and back-end suppliers. For this purpose, this paper
analyzed specific issues related to FPD manufacturers that operate in China according to
the Chinese government rules and operational constraints. Specifically, we haveexamined supply chain integration practices through Low Cost Module strategy which
includes the movement of its production facilities in China and integration of upstream
and downstream suppliers. In this way, case firm has achieved the geographicalintegration with its suppliers.
We also list key strategic challenges for supply chain configuration with suppliers in thisindustry and their practical options for their competitive advantages.
Key Words: Flat Panel Display manufacturers, Supply Chain Configurations; SetMakers and Back-End Suppliers; Business Context of China

1Effective Supply Chain Configurations in the Business Context of China
Youngwon Park 1*, Junjiro Shintaku 2, and Paul Hong 3

YoungWon Park
Manufacturing Management Research Center, University of Tokyo, Japan,
Kojima Hall 5F, 7-3-1 Hongo, Bunkyo-ku, Tokyo, Japan 113-0033

ywparkjp@gmail.com
Junjiro Shintaku
Graduate School of Economics, Faculty of Economics The University of Tokyo, Japan,
Kojima Hall 5F, 7-3-1 Hongo, Bunkyo-ku, Tokyo, Japan 113-0033
shintaku@e.u-tokyo.ac.jp

Paul Hong
Information Operations and Technology Management,College of Business Administration
University of Toledo, USA
Paul.Hong@Utoledo.edu

Submitted to:
The 5th International Symposium and Workshop in Global Supply Chains
March 8-10, 2012
University of Tokyo, Japan

Send correspond to:YoungWon Park
Manufacturing Management Research Center, University of Tokyo, Japan,
Kojima Hall 5F, 7-3-1 Hongo, Bunkyo-ku, Tokyo, Japan 113-0033

ywparkjp@gmail.com

2Effective Supply Chain Configurations in the Business Context of China
Youngwon PARK 1*, Shintaku Junjiro 2, Paul Hong 3
Manufacturing Management Research Center, The University of Tokyo, Japan 1
Graduate School of Economics, Faculty of Economics, The University of Tokyo, Japan 2
Information Operations and Technology Management, College of Business
Administration, University of Toledo, USA3

1. Introduction
Korea-based multi-national corporations are demonstrating their positional strengths inglobal market (including South East Asian countries) through the effective combinationsof their global marketing strategy, premium product image, localization initiatives,
rational pricing policy, outstanding quality and design. One of the representative products
is Liquid Crystal Display (LCD) product. LCD is used a variety of applications that
require high quality display--from mobile technologies to large TV. After 40 years ofexperiences with CRT (Cathode Ray Tube) TV customers are now rapidly switching to
LCD. Although early display technologies started in USA and Europe, Japanese firms
such as Sharp have attained its commercialization success. Korean firms, with theirrelative late entry, adopted aggressive strategy and successfully caught up with Japanese
forerunners. Korean LCD industry, represented by Samsung Electronics Co., Ltd and LG
Display Co., Ltd (from LG.Philips LCD Co., Ltd in Feb 2008) began their production in
1995. Within four short years Korean LCD panel makers now lead the global market(Shintaku et al., 2007). By 1998 Samsung’s global market share is No. 1 and by 1999 LG
follows as close No. 2. In this way Korean firms have positioned as global market leaderswith their sustainable competitive advantages over Japanese rivals (Shintaku et al., 2008).
However, LCD industry is experiencing rapid LCD panel price reductions in keeping
up with the downward price movement of the final finished products. In particular, global
Flat Panel Display (FPD) manufacturers for computer, monitor and TV face growing
business opportunities with an expanding global market. At the same time, with thecontinuous influx of competitors the overall prices of computer and TV have shown
downward trends. In this environment it is critical for FPD manufacturers to manage
efficiencies in terms of cost, delivery, and quality.
In these circumstances, a critical challenge for LCD panel firms is how to improve
efficiencies of module assembly processes. The realistic options for overall cost reductionin the value chains are: (1) manufacturing productivity enhancement through workers’
learning curve; (2) product process improvement through better operational systems; (3)effective outsourcing for the back-end assembly and logistical processes. This paper
examines the strategic and operational issues related to efficient supply chain
configurations between set-makers and back-end suppliers in LCD industry.

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LCD industry has three processes which are array and cell process (i.e., the front core
process) and module process (i.e., the backend process) (Shintaku et al., 2007; Shintaku
et al., 2008). Most of LCD firms including Korean firms handle the array and cellprocesses in their domestic plants and module process in oversea plants. This paper
focuses on relationships between the OEMs that assemble parts of module process andthe suppliers in China that produce Driver IC and Back Light Unit (BLU) in the form ofmodular processes of LCD panels. Our study examines how Korean multi-corporationstransfer these operations from Korea to China through vertical integration with the
suppliers according to the Chinese government rules and operational constraints.
In contrast to the dynamic market activities of Korean LCD industry in global market,
hardly any research paper is available in this area. This paper focuses on aggressive
global market strategy of two Korean firms and examines their supply chain practices.
Their global market strategy both involves panel operational process (i.e., frontend
process) in Korea and LCD module process (backend process) outside of Korea. Yet, thedifference is the strategic alliance details with their suppliers. This research shows thatthese Korean firms, although in the same industry from the same country, adopt different
manufacturing processes depending on their customer characteristics (i.e., either internalor external customers).
The literature review describes the unique competitive circumstances of this industry,prior research of collaborative patterns between set-makers and component suppliers, andemerging issues related to government regulations and competitive requirements. The
research model depicts the specific challenges from the standpoint of supply chain
management of this industry. This research model identifies how FPD manufacturers
achieve the premium value-added under the above mentioned business conditions andconstraints.
2. Literature Review
2.1 Supply Chain Integration and Product Architecture Theory
Many researches are available on offshore production of multinational companies(MNC). Classical international business approaches such as corporate advantage theory(Hymer, 1960), product cycle theory (Vernon, 1966), and OLI (Ownership, Location, andInternalization) approach (Dunning, 1979) explain the patterns of how MNCs expand
their operations in the oversea market.
First of all, we approach the MNCs’ foreign expansion from the perspective of theoryof comparative advantages. Transactions of information intensive management resources(IIMR) or intermediate goods across the national borders are possible because of three
economic advantage factors (Hasegawa, 1998; Hasegawa, 2002). First, economies ofmulti-plant suggest that the value of IIMR does not diminish with the use in multi-plants.
Therefore, the common use of IIMR in multiple plants instead reduces its overall averagecost. Second, joint ownership of IIMR may enhance the economies of scope andtherefore realize additional profit potentials in the form of brand recognition, customers’
trust and an extended distribution channel. Third, economies of specialization may alsoachieve a great level of overall network system productivity when diverse sets of
upstream/downstream processes within value chain are allocated to many countries4

according to the differences in factor costs and economies of scale. The relationshipbetween upstream and downstream processes is also quite interactive. For example,
outputs of upstream processes are usually added into downstream processes. At the sametime, information and knowledge from downstream processes are reversely put into use
through the information feedback mechanisms and change the nature of upstream processcharacteristics. In this way, dynamic flows of intermediate goods and IIMR occur in theinternational value network. From the standpoint of supply chain integration it might bedesirable to locate upstream and downstream processes in the same location. However,
the theory of comparative advantages recognizes the values of utilizing the differences offactor costs and economies of scale through international transactional arrangements.
In this sense, Shintaku’s product architecture theory (2006) that explains the catch-up
model of Asian firms is receiving an increasing research attention. He points out that
cellular phones adopt modular product architecture which allows easy entry ofcompetitors to the market. It is quite challenging to maintain competitive advantages incellular phone industry which experiences an intense price competition and rapid changes
in product design. Naturally, the speed of production transfer from leading nation tofollowing nation is relatively fast. Theories such as the development theory of flying
geese pattern (Akamatsu, 1962) and product cycle (Vernon, 1966) explain the patterns of
production mode transfer from leading nations to following nations but not the speed ofsuch transfers. One contribution of product architecture theory is to give the traditional
theories with the axis of technology transfer speed in the change of product architecture.
That is the theory of product architecture articulate why and how changes in productarchitecture accelerate the production transfers from USA to Japan, Japan to other Asian
nations in case of products that adopt modular, not integral, architecture (Shintaku et al.,2006; Fujimoto, 2006; Shintaku et al., 2008). It is observed even in case of the identicalproducts that integral component products are from advanced countries and modular
components from developing nations. Figure 1 shows how past catch-up model haschanged to catch-up model based on product architecture and that modular products areeasily transferred to the developing countries because of easy knowledge transfer on the
production of equipment and component parts (Fujimoto, 2006; Shintaku et al., 2007;
Shintaku et al., 2008).

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Figure 1: Foreign production transfer model by the theory of product architecture
Source：Shintaku et al.(2006)

The other contribution of product arichitecture theory is to give a systemic view to see
the integration and division of production processes of targeted products. Architectures
are formed by different levels. Even though the final product layer is modular
architecture, the component layer could be integral one. For example, PCs are
representative products with modular architecture, whereas HDDs are products withintegral architecture, where their sub-components are highly integrated each other.
Let us examine the product architecture of LCD TVs and panels which are the main
products of this paper. LCD related products have three levels of architecture: upstream
component parts, LCD panels in the middle and downstream LCD TVs (Shintaku et al.,2007; 2008). There are also three processes of LCD panels which are array and cellprocess (i.e., the front core process) and module process (i.e., the backend process)(Shintaku et al., 2007; Park et al., 2008). Figure 2 shows the three processes of LCD
panel from the perspective of product architecture. Most of LCD firms including Korean
firms handle the array and cell processes in their domestic plants and module process inoversea plants. Here, the array and cell processes of LCD panel are close to integral
architectecture in that these processes are complex and hidden (i.e., black box mode). On
the other hand, the module processes are easy to transfer to foreign plants because they
adopt modular architecture.
However, in the 2000s, as competition became severe, panel firms in LCD industry
tried to push the integration of downstream component manufacturers as well as the
upstream components suppliers. Integration of backend processes of LCD panels is about
combining Driver IC and Back Light Unit (BLU). Korean LCD industry focused on
assembly and finished products in economies of scale and therefore there is very little
room for technological differentiation other than cost reduction (LG Economic Institute,2007). Particularly, module processes of the back end are mainly simple component
assembly operations and therefore the cost pressures on them are enormously high. How
to deal with the problems of vertical integration or disintegration of back end processes inforeign production sites under the competitive pressure of cost reduction and volume
change is the main issue of this paper.

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Figure 2 Front end and back end modules of LCD panels
Source: Park et al.(2008)

2.2

Research ModelIn this paper, our analysis is centered on module processes, one of the three LCD
panels’ processes mentioned above, which the foreign plant operations mostly adopt.
Since array and cell processes are mostly classified as integral architecture because theprocess details are kept in “black box”, the domestic plants handle them. On the other
hand, module processes are close to modular architecture and they are easy to transfer tooverseas plants. As stated above, LCD back-end sub-processes could be integrated toform one module. However whether oversea factories integrated these processes or not is
an issue to be explored. We will see the internalization decision of Back Light Unit
(BLU) by the oversea plants.

7

Figure 3 Domestic and overseas factory of LCD panel production
We think whether the oversea plants integrate the upstream process (BLU) or not
depends upon their downstream strategies. Since China is “factories of the world”, thedownstream product demands tend to fluctuate more than in other countries. Therefore
how to respond to the wide demand fluctuation and how to prepare the flexibility of local
supply chains for it are major subjects for factories in China. There are two opposite
strategies at this issue. One is mitigating the demand fluctuation, and the other is adapting
to it. Depending on them, we could hypothesize different models of value chain.
The first strategy is straightly adapting to the demand fluctuation of major products. In
this strategy, firms focus on large market segments and a few customers (sometimes
internal customers, downstream integration) of major products. Since the markets
fluctuate widely and customers demand low cost and large volume, firms tend to outsorce
some of the upstream modules. In this situation, it is risky for firms to internalize allprocesses, considering low cost and large volume with wide fluctuation. Therefore firms
seek for the ways to make vertical disintegration with upstream suppliers. How to movesuppliers in home country to places close to the local factory in the same industrial
clusters is essential to respond to the fluctuation of product demands. We will examine
this model in Firm-A.
The second strategy is to mitigate the demand fluctuation as much as possible bymaking market and/or customer portfolios. To do this, firms make a mixture of markets
and customers and create the capabilities to deal with the demand diversity andcomplexity in local supply chains. In this strategy, the flexibility is related with thedemand diversity and complexity rather than quantitative fluctuation itself. ThereforFirms will deal with external customers more aggressively (i.e., downstream
8disintegration) and try to create these internal capabilities mainly inside the local factoryand related firms (i.e., upstream integration). Forming the cohesive organizational
capabilities based on multi-task trained employees is one way to tackle the demand
diversity. We will see this model in Firm-B.
Firm
Firm-A

Firm-B

Customers (Downstream)
Local Supply Chains (Upstream)
A few large customers,
Vertical disintegration with major
including internal ones
suppliers, using the external capabilities(vertical integration)
A variety of customers,
Vertical integration and creating theincluding external ones
internal organizational capabilities(vertical disintegration)
Figure 4: Local Supply Chains: Upstream and Downstream

Thinking about Firm-A model, which subsets could be outsorced to external suppliers
depends upon the process architecture of LCD panels (in this case, the architecture of
LCD module processes). Since we focus on production activities of overseas LCD panel
plants, we analyze supply chain process configuration of LCD module processes fromstandpoint of process architecture. Process architecture is also classified into the two
types—modular or integral 1 . If the manufacturing processes are close to modular
architecture, then it is quite feasible to divide the entire process into different subsets andthus firms move certain processes to other countries or use outsourcing instead. It isshown that standardised components can be outsourced to unspecific suppliers, because
simple parts are often produced with specific technologies (Hatani, 2009).
For example, even in case of automobile, a representative integral architecture,
standardized or specific components such as sheets, harnesses, and micro-chips could beoutsourced. On the other hand, the focal company does not necessarily choose
outsourcing for the components contributing the premium value enhancement sincetechnological excellence affects the user’s life and value components (Nolan, 2001). Or
in that case, the focal company will choose the technological alliances with those
suppliers.
We could introduce the architecture theory to interpret the local value chains of LCD
modules in Korean multinational corporations in China. In vertical supply chains,integration or internalization could be formed when the architectural integrity isnecessary, and disintegration or externalization could be found when the arichitecturalmodularity is necessary. For example, in case of Firm-A, they will choose thedownstream integration because the architectural integrity is necessary in their productstrategies, and will choose the upstream disintegration because the modularity of theirproduct architectures allows it. In case of Firm-B, they will choose the downstream
disintegration because they utilize the modularity of LCD modules, and will choose theupstream integration because they stress the importance of organizational integrity for

1

The former resembles one-to-one relationships such as the relationships among the function, structure,and process of a system, while the integral type indicates complex relationships between (1) the function
and structure of a system, (2) the structure and process of a system, (3) the function, structure, and processof a system, (4) and the function and process of a system (Tomita, Park, & Hong, 2011).

9

tackling the demand diversity and complexity. These are our main hypotheses in our casestudies.
The paper focuses on the factories and suppliers in China that produce Driver IC andBack Light Unit in the form of modular processes of LCD panels. Our study examines
how Korean multinational corporations transfer these operations from Korea to China
and what type of local supply chains they form through the vertical
integration/disintegration with customers and suppliers according to local operational
constraints and Chinese government rules.
3. Case Study
3.1 Methodology
Over the years manufacturing firms have experienced process architectural changes in
LCD panel productions. The focus of our qualitative study is to examine (1) the oversea
transfer process of manufacturing plants, (2) backend production processes in China, and(3) operations management and customer responsiveness.
Emerging economies such as China are an attractive market and is currently one of themost important targets for direct investment (Li and Zhou, 2010). China provides a richcontext for research on supply chain such as outsourcing management given that China is
the most important recipient of direct investment by MNCs among emerging economies(Li, 2011).
We adopted field-study methods and conducted in-depth executive interviews in the
period between December 2007 and March 2010. Appendix shows the interview scheduledetails. For Firm A, the total three plants visits (both Korea and China) involved ten
hours of interviews with the executives. For Firm-B the total seven times of plant visitsthat took 22 hours of actual executive interviews. The interview participants weremanagers, all the key functional directors that include production, HR, finance,purchasing, R & D, and plant.
3.2. Case Firm Descriptions
3.2.1 Firm-A
Firm A first completed the cell processes of panels in Korea and then move them toChinese plants via sea and air transport. In Chinese plants Firm A engages backend
assembly processes. Firm A’s major products are notebook PC and mid-sized TV panels.
Recently, it increases the module production volume of large LCDTV. The production
position in China belongs to the same cluster with its other affiliated firms that produce
notebook PC lines for the upstream integration of the final products. Such production
position is based on the unique nature of notebook PC industry market. The majority of
its production is primarily to serve its internal customers.
3.2.2 Firm-B

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Firm B transports most of cell-completed panels from Korea via ship and does backend
module assembly processes of LCD panels in Chinese plants. Similar to Firm A, Firm B
also produces notebook PC and monitor-based panels. Firm B’s module production
volume of large LCDTV in China is fairly small. Firm B’s LCD monitor and TV
assembly plants are in the same industry cluster. However, notebook PC panel has verysmall portion of internal customers and instead it has large external customer base.
3.3

Case Analysis

3.3.1 Local production system in China
3.3.1.1 Firm A’s Local Production System
A-Firm started Chinese operation in 2002. Upon completion of the cell process for thepanel components they are brought to China via sea or air transportation. This Chineseplant is responsible for the back-end processes of the panel components. The major
product items are medium size panels for notebook PC and monitor. Recently, LCD TV
modules are added. For the downstream integration of the final products, notebook PC
business is in the same cluster. The primary mission of Chinese operation is SCM
integration for Chinese customers.
Firm A’s effort to achieve additional production efficiency for cost reduction has reachedits limit. For integration purpose it outsources some of module processes (e.g., BLU
assembly, final inspection and packing) to the external suppliers. In the past Firm A
handled all the production processes within its plants with the BLU that its suppliers
provided. From the second half of 2007, Firm A adopts low cost module by selecting
three suppliers which are entrusted for assembly process, final inspection and packing
process. In the future, Firm A intends to strengthen its LCM strategy further by
expanding BLU integration of upstream, achieves production cost reduction and stablecomponent parts supply through BLU supplier integration. Firm A’s internal operation
focuses on high premium value processes (i.e., from PAD clearing to Driver IC).
3.3.1.2 Firm B’s local production system
However, Firm B is moving toward internalization of BLU within its plants instead of
implementing LCM strategy. Thus, it is doing more or less assembly of LED for LED TV
in the second floor of the plant. In this respect, Firm A and Firm B shows difference inexternalization and internalization of BLU assembly processes.
3.3.2 Insourcing and outsourcing Flexibility for the integration with their customers
3.3.2.1 Firm A’s Outsourcing: Integration efforts with BLU business operations
Figure 4 shows the flow of the module processes of LCD panels in China. This includes
PAD Cleaning (or Polarizer attachment), OLB Process (PCB bonding), Assembly
Process (B/L inspection and BLU assembly), Aging Process, Final test Process, andPacking Process. A-Firm is in the process of complete component parts localization. The
sourcing percentages of component parts in China are very high.

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A-Firm has formed a cluster in China (i.e., A-Firm China) for the simultaneous market
entry with the downstream notebook business. In view of the crowding market condition,
A-Firm has been aggressively seeking the diversification strategy of customer
segmentations. Over the years A-Firm China’s operation is closely related to other final
notebook PC makers and monitor manufacturers. Through the integration with notebook
PC’s downstream business, A-Firm China currently supplies panel components to about
85% of notebook panel manufacturers in the same industrial complex.

Figure 4: Flow of Module Processes
A-Firm China has now exhausted all the production improvement efforts for any further
cost reduction. The SCM integration efforts include outsourcing some of module
processes such as BLU assembly, Aging process, Final test process and packing process
to external suppliers. Previously, A-Firm China received BLU from Chinese local
suppliers and then processed them through its manufacturing assembly operations. Fromthe second half of 2007, A-Firm China chooses three BLU suppliers and arranges them totake care of all these assembly processes after BLU. This so called LCM (Low Cost
Module) enabled A-Firm China to achieve more than 30% of cost reduction. For the
reliable product quality A-Firm China sends its own inspection team to BLU suppliers
regularly. In this way, the tasks of managing external suppliers are becoming quite
important as much as ensuring excellence for its own internal operations.
Table 2: A-Firm’s LCM Production Model and Integration Period with Suppliers
A-Firm’s LCM
BLU Integration
Time DistanceIntegration Time
Production Model
Suppliers
Between A-Firm and
BLU Supplier
One millions
Supplier C-Firm
15 Minutes
July 2007
Supplier D-Firm
40Minutes
January 2008
Supplier E-Firm
40Minutes
July, 2008
A-Firm China intends to strengthen LCM strategy further by expanding the integration
efforts to the upstream BLU as well. Thus, A-Firm China expects to achieve continuous
production cost reductions and reliable supply of BLU component parts. A-Firm Chinathen focuses its front operations such as CP Process and OLB (Outer Lead Bonding)
Process which has greater premium values than the assembly operations that areoutsourced.
On the other hand, from the integration perspective both Firm A and Firm C maintainclusters with their downstream customers and yet their operational responsive patterns fortheir key products are somewhat different. Firm A is in the same cluster with notebook

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PC firms while Firm B is in the same cluster with the firms that assemble TV andmonitors. Firm A diversifies its customer base with its increasing market saturation andyet it is still in the same cluster with its customers that supply notebook PC panels.
3.3.2.2 B-Firm’s Insourcing: Internal production of BLU parts
For Firm B, the main products are LCD panel for note PC, the downstream firms in thesame cluster target external customers by with their assembly focus of LCDTV andmonitor. Therefore, Firm B (compared to Firm A) achieved better integration withdownstream products and thus its downstream customer base is more stable. Recently,
Firm B increases production volumes of monitor and TV panels as well as panels fornotebook PC. For securing their stable customer base, Firm B’s responses are quite
flexible to its downstream customer demands. For example, its customer (Firm T), a TV
manufacturer, is originally TV OEM assembler. From five years ago, it operates some ofmodular production lines similar to those of Firm B and thus demands a few additional
options for module assembly in their backend processes. Thus, Firm B offers threeassembly options to Firm T.
Firm B, therefore, takes care of the subsequent process of the panels that are completed in
Korean plant and provides one of the three following options in response to the customer
requirements: (1) Panels from Korea + Flat Panel Display (FPD) assembly products (2)Panels from Korea + Flat Panel Display (FPD)＋products up to Driver IC Assembly(30Panels from Korea + Flat Panel Display (FPD) ＋Driver IC＋ From BLU Assembly to
Packaging. On examining the integration with downstream customers, Firm A and Firm
B show differences in their strategic division of key operational processes. Figure 3
summarizes the key differences of these two firms.
Integration between Upstream and Downstream industry
UpStream
Firm A(LCM Strategy)

Firm B(Insourcing of BLU)

DownStream
Internal customer requirements

Flexible Response to the external
Customer Requirements

Figure 3: Integration of Upstream and Downstream Industry
3.3.3 Constraints of LCM (Low Cost Module) Strategy
Unexpected issues arose in the course of A-Firm’s supplier integration processes. The
key issue is about passing through Chinese government customs. As shown in Table 2,
this case analysis focuses on integration process with B-Firm which happens to be theclosest among the three suppliers. B-Firm is the most reliable among the three BLU
suppliers. Since 2004 it prepared for local production and by 2006 the plant was

13completed to fulfill A-Firm China’s localization goals. From July 2007 in keeping up
with LCM(Low Cost Module) strategy, the core of A-Firm China’s supply chain
integration strategy, B-Firm produces 500,000 units and supplies to the final productmanufacturers (i.e., notebook and monitor makers) after passing Chinese government
custom and completing BLU back-end assembly processes of the component parts fromthe front-end of panel module processes. By time distance, it is no more than fifteen
minutes between A-Firm China and B-Firm. However, the passing processes (i.e., checkthe weight and inspect the products) of Chinese government custom takes more than five
hours firm. Thus, lead time is being extended. Undesirable inventory problems add theoverall production costs. The panel semi-completed products may leave A-Firm China in
the early morning and then they arrive in the late afternoon at B-Firm. For example,
during this process the inventory level goes up from a desirable level of 5,000 to an
undesirable level of 15,000.
If the customer process is delayed, then the component parts may arrive by 5:00 P.M., not
1:00 P.M. Then, the total inventory level easily increases up to 20,000 per day. Two daysof inventory then becomes more than 40,000. With the wage differences between A-Firm
China and B-Firm, 30% of production cost reduction was possible. It is a critical businesschallenge to overcome excessive inventory problems with the custom processes.
4.

Discussion

In this paper, we have examined A/B-Firm’s supply chain integration practices through
LCM (Low Cost Module) strategy which includes the movement of its production
facilities in China and integration of upstream and downstream suppliers.
The concluding remark is briefly summarized in Figure 5. Firm-A’s internal customer
focus requires cost efficiency in operations and thus use outsourcing strategy. On theother hand, Firm B with its heavy focus on external customers adopts insourcing strategy
in order to respond to the customer requirements with their organizational capabilities.

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Figure 5: Comparison of Firm A and B Operational Process Analysis
In this way, A-Firm China has achieved the geographical integration with its suppliers.
Figure 6 shows how supply chain configurations of A-firm with BLU suppliers havechanged.

Figure 6: Change of supply chain configurations of A-firm with BLU suppliers
However, Chinese custom issue raises some difficult operational challenges.
Chinese cultural characteristics, the country's regulation system, and increasingly intense
market competition make it difficult for firms to achieve strategic goals in the Chinese15

market (Kang et al., 2011; Bao et al., 2011). One central challenge for foreign firms
engaging in business activities within China is managing Chinese outsource providers ina dynamic environment (Li, 2011). Social control as a governance mechanism can be“generally understood to include people or social based mechanisms that enhance open
communication and the sharing of information, trust, dependence, and cooperation”(Hoetker and Mellewigt, 2009).
For these challenges, DELL Computer’s effective handling of Chinese customer issues
might be worthy to study for Firm-A China (Tanikaga et al., 2004). In November 2000
Dell Computer built plants which are 800 meters away from Dakasaki Airport in Fújiàn
Shěng of Southern China. DELL’s business model is zero inventory management throughproduction-on-demand. However, it takes at least ten days from the point of order receipt
to Chinese government custom processes that include evaluation of Overseas Economic
and Trade Commission (OETC), custom registration (CR) and operation document
permission (ODP). Chinese government applied new custom system to support DELL’s
business operations. It is to link customer management system (i.e., finished goods export
management system and electronic custom inspection system) and DELL”s management
system (order receipt and fulfillment system) through IT infrastructure.
With this arrangement the above mentioned customer processes (i.e., OETC, CR andODP) are simplified with electronic management system. DELL also shared the list of
their component parts with Chinese Custom Authority and the time required for custom
processes was greatly reduced. Chinese custom also applied F custom system to DELL. F
Custom refers to fast custom process. Firm’s custom information is handled via
electronic evaluation, not by custom personnel manually. Therefore, export and importapproval is done electronically. Through this fast custom process, DELL China could
fulfill orders from nearby Japan within 4-7 days.
DELL also requires its suppliers JIT delivery. One supplier that provides up to 70% ofcomponent parts arranged its operation in tax free industrial complex. The custom
process in this area adopts so called “Concentration Custom” which allows orderfulfillment within two hours from order receipt from DELL’s plant. Concentration
Custom is about custom process for the global firm operations in China (i.e., sole, joint
investment and partnership arrangement) and the component manufacturers (component
parts assembly, compensation trade) for which export invoice is adequate for custom
evaluation decisions. Different from DELL, Firm-A and Firm-B experience custom
issues because semi-completed products are delivered to suppliers for manufacturing andassembly operations for finished goods. This is a new form of supply chain issues.
Therefore, it is critical for Firm A to promote understanding and support of Chinese
government to facilitate the custom process with great efficiency. Future research may
explore further through case studies how intermediate products are effectively transferredto the suppliers that assemble and market the finished products.

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Appendix: Interview Participants List
Date

Firm

Department

12/10/2007
12/11/2007

Firm-A
Firm-B

Korea LCD Fab.
Korea LCD Fab.

11/7/2008

Firm-B

Korea LCD Fab.

3/25/2009

Firm-A

China LCD Fab.

9/3/2009

Firm-B

China TV Fab.

9/3/2009

Firm-B

China LCD Fab.

9/4/2009

Firm-A

China LCD Fab.

11/4/2009

Firm-B

Korea TV Fab.

3/24/2010
3/25/2010

Firm-B
Firm-B

Korea TV Fab.
Korea LCD Fab.

Position

Timerequired(hours)Assistant Procurement Manager
3
Production Director, HR Director, 3Purchasing
Director,
Plant
Director
Production Director, HR Director, 2Purchasing Director
President, Production Director, 4Purchasing
Director,
Plant
Director
President, Production Director, 3.5
HR Director, Finance Director, R& D Director, Purchasing
Director, Plant Director
President, Production Director, 3.5
HR Director, Finance Director
Purchasing
Director,
Plant
Director
President, Production Director, 3
HR Director, Plant Director
Production Director, HR Director, 4Plant Director
Production Director
3
AssistantHR
Director, 3Purchasing Director

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