MMRCDISCUSSION PAPER SERIES

No. 478

What Determines the Range of Supply Chain Integration?:
Comparison of Korean and Japanese Steel Firms
Sungwoo Byun
Manufacturing Management Research Center,
Faculty of Economics, The University of Tokyo, Japan
Youngwon Park
Manufacturing Management Research Center,
Faculty of Economics, The University of Tokyo, Japan
Geoncheol ShinSchool of Management, Center for Global Innovation & Entrepreneurship,
Kyung Hee University, Seoul, Korea
November 2015

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
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http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

What Determines the Range of Supply Chain Integration? :Comparison of Korean and Japanese Steel Firms
Sungwoo Byun
Manufacturing Management Research Center,
Faculty of Economics, The University of Tokyo, Japan

Youngwon Park
Manufacturing Management Research Center,
Faculty of Economics, The University of Tokyo, Japan

Geoncheol ShinSchool of Management, Center for Global Innovation & Entrepreneurship,
Kyung Hee University, Seoul, Korea

Abstract
Supply chain integration is one of the key vocabularies in supply chain management research. Supply
chain integration seems to be a ‘must-have-virtue’ in supply chain literature. The effective and efficientmanagement of supply chain requires integration of business processes internally within a firm andexternally across suppliers and customers. Benefits of supply chain integration have been widely
researched and confirmed by a lot of research results. They include maximization of supply chain
performance, reduction of ordering cost, cycle time, inventory level, business uncertainty, to justname a few. However, to discuss the benefits of integration, it becomes necessary to define range of
integration. This range depends not only on the nature of business and product, but also on thecompetitive environment. In this paper, we examine SCI focusing on different range of integration.
More concretely, we will compare 3 steel firms’ integration strategies, 1 in Japan and 2 in South Korea,
and will compare what brought those differences in SCI range and patterns.

Keywords: supply chain integration, flexibility, uncertainty, steel industry01. Introduction
The term ‘integration’ is one of the key vocabularies in supply chain management research.
The effective and efficient management of supply chain requires integration of businessprocesses internally within a firm and externally across suppliers and customers. Supply chain
integration can be defined as a process of interaction and collaboration in which firms in a
supply chain work together in a cooperative way to get mutually acceptable outcomes (Pagell,2004). Benefits of supply chain integration (SCI) have been researched and confirmed by a lotof research results. They include maximization of supply chain performance, reductionofordering cost, cycle time, inventory level, business uncertainty, to just name a few. And someother researchers tried to examine the benefits of SCI from the perspective of diversification andcompetitive performance (Narasimhan and Kim, 2002).
According to Sabath (1995), non-integrated supply chain has at least two critical
disadvantages. First, at each echelon backwards in the supply chain, forecast accuracy will
decrease because of the increase in demand uncertainty as a result of the disconnected
information flows. Second, non-integrated supply chain usually reacts slowly to demandchanges because business processes are not seamlessly linked. And the disconnection across
supply chains is one of the main factors which cause bullwhip effect (Lee et al., 1997).
To discuss the benefits of integration, it becomes necessary to define range of integration.
This range depends not only on the nature of business and product, but also on the competitiveenvironment.
In this paper, we examine SCI focusing on different range of integration. More concretely,
we will compare 3 steel firms’ integration strategies, 1 in Japan and 2 in South Korea, and willcompare what brought those differences in SCI range and patterns.

2. Literature review and theoretical framework
SCI seems to be a ‘virtue’ in supply chain literature. That is, SCI is required internallywithin and across functions, as well as externally across suppliers and customers. And othertypes of integration include vertical integration and virtual integration. Virtual integration is
the integration across suppliers and customers based on long term collaborating relationshiprather than governing by capital.
To consider all different types of SCI, this paper has included internal integration, external1integration, vertical integration, virtual integration and customer integration.

2.1 Types of Supply Chain Integration
It is necessary to integrate all the supply chain players for the effective management of all the
supply chain internally and externally (Vlachos et al., 2008). For this supply chain integration,
integrating capability of supply chain should be considered in all supply chain networks(Bidhandi, et al., 2009; Braunscheidel & Suresh, 2009; Flynn et al., 2010; Zhao et al., 2011;
Park & Hong, 2012). In particular, the capability to seek the right partners for the supply chain
integration for the integrating knowledge within the supply chain network and directing thegoals of the supply chain network is extremely crucial (Erhun et al., 2008; Singh and Chand,2009; Meehan and Bryde, 2011; Tomino et al., 2012). All key supply chain stakeholders suchas the suppliers, manufacturers and customers need to be integrated with each other usingsynchronization of supply chains (Singh and Chand, 2009).
First, internal and external integration are necessary for SCI. Internal supply chain process
involves multiple functions within companies such as product development, production,
distribution and sales. It is obvious that a company's performance would be enhanced by the
integration of these functions. Even though, there has been no consensus on how integration is
to be defined, Basnet (2013) suggests three dimensions of internal integration were identified,that is, coordination, communication, and affective relationship.
Second, vertical integration is also essential for SCI. Virtual integration is the integration
across suppliers and customers based on long term collaborating relationship rather thangoverning by capital. The enabling factors for supply chain integration include not only
integration of internal functions, but also extension beyond organizations’ boundaries
incorporating their whole supply chains (Vlachos et al., 2008; Meehan and Bryde, 2011;
Tomino et al., 2012). Relating to vertical integration, virtual integration can be mentioned. For
example, Michael Dell has sought how to combine the individual pieces of the strategycustomer focus, supplier partnerships, mass customization, just-in-time manufacturing.
Technology is enabling coordination across company boundaries to achieve new levels of
efficiency and productivity, as well as extraordinary returns to investors. Magretta (1998)
defines that virtual integration harnesses the economic benefits of two very different businessmodels. It offers the advantages of a tightly coordinated supply chain that have traditionallycome through vertical integration. At the same time, it benefits from the focus and2specialization that drive virtual corporations. The initial business model within the computerindustry essentially had to create all the components themselves. They had to manufacture
disk drives and memory chips and application software; all the various pieces of the industry
had to be vertically integrated within one firm. As a small start-up, however, Dell couldn’t
afford to create every piece of the value chain. He thought it was better off to leverage theinvestments others have made and to focus on delivering solutions and systems to customers.
Through collaboration and utilization of a variety of supply chain players, virtual integration
can be attained.

2.2 Factors Affecting Supply Chain Integration
There are a number of factors affecting SCI and this is another stream of research.
Uncertainty has been identified as one of factors. As explained by the Transaction Cost Theory,high level of business uncertainty tends to drive firms towards a vertical integration strategy(Williamson, 1975). Dealing with uncertainty has been one of the critical issues also in
business strategies field (Barney, 2002). It is particularly important under conditions of highuncertainty to retain ‘flexibility’ as strategic alternatives. When there is no uncertainty, in thissetting, a firm can apply the strategic tools to anticipate the competitive implications of its
decisions. In this setting (no uncertainty), retaining flexibility is unnecessary. However, in thereal world, uncertainty is a main reason for a firm to think and act strategically.
Flexibility does not come without costs. As previously mentioned case, indeed in that
extreme case, if there are any costs associated with retaining flexibility, not retaining
flexibility will be preferred over retaining flexibility. Because there are significant costs
associated with implementing a strategy of flexibility, an important question becomesbalancing costs related to retaining flexibility and relaxing environmental uncertainty as total.
Before we move to SCI as a strategic alternative, defining ‘flexibility’ is required. According
to Upton(1994) and Simchi-Levi(2011), flexibility is an ability to respond to change without
increasing operational and supply chain costs and with little or no delay in response time. In
this definition, change refers to change in demand volume and mix, commodity prices, laborcosts, exchange rates, technology, equipment availability, market conditions, or the production
and logistics environment. And this definition includes the three keywords which are change,
cost, and time. Ceteris Paribus, implementing flexibility should help the firm reduce long run
operational costs or improve response time or both. The flexibility gained can create a source3

of competitive advantage by improving along multiple dimensions. They can be operationalcost, response time, service levels and ultimately customer experience.
In retailing, flexibility cures a merchant’s two biggest headaches: having too little of the rightproducts and too much of the wrong ones(Fisher, 2010). The grocery industry has formulated aconcept called CPFR(collaborative planning, forecasting, and replenishment) that offers
guidelines for cooperating to forecast demand and plan supply. Also retailers in otherindustries can work with their suppliers to create the some sort of flexibility. Our definition
focuses on the fact that ‘flexibility comes at a cost’. Flexibility is a strategic option to respondto change. And this ‘change’ is uncertainty a firm recognize, which means this change may
occur under the certain circumstances but we do not know exactly when it occurs. A firm can
respond to uncertainty by SCI.
The most important question is that ‘how much flexibility a firm needs’. Creating a flexible
supply chain requires a big commitment of effort over a long period of time. As Simchilevi(2011) pointed out, long supply chains perform better than many short supply chainsbecause they ‘pool’ more plants and products and thus deal with uncertainty more effectively
than short chains. In our discussion, longer chain can be translated into SCI from amanufacturer, distribution centers, and forward, possibly customers too. According to Jordan
and Graves(1995), flexibility can be achieved through system design. If each plant is focusedupon on one product family, plants typically are far from market demand, which increases
costs. Though this system design concept is based on plant and product, we think longer
chains from a different point of view, SCI. This discussion leads us to SCI as an important
strategic tool.

2.3 Supply Chain Integration as a strategic alternative
Two keywords, flexibility and uncertainty in supply chain literature have broad meaning. We
will look into those two concepts briefly to develop suitable definition.
It is already widely known that uncertainty is not equal to risk. Risk is only a part ofuncertainty when it comes to results. From the perspective of SCI, especially the need tointegrate across supply chain, uncertainty can be translated into uncertainty of both demandside and supply side. For example, uncertainty of demand side includes changing price andquantity of products as results of negotiation with customers. And uncertainty of supply sidemeans changing or fluctuating price and quantity of parts or raw materials from suppliers.
4For those uncertainties, the actions a firm takes can create more than one type of flexibility.
One of the costs associated with retaining flexibility may be the limited ability to differentiate
one’s products or services. In a supply chain, typically ‘flexibility’ can be understood as
number of channels through which a firm sells its products, number of products, and of course,
number of customers or suppliers.
The important part of this uncertainty and flexibility, not all firms recognize their uncertainty
in the same way and take strategic alternatives. And that means not every firm recognizes thesame cost required for flexibility. Some firms prefer longer supply chains over short chainseven though it entails more costs.
Longer supply chain, by which we mean SCI across supply chain members, sometimes
requires huge investment. In extreme case, a manufacturer vertically integrates distribution
centers, and customers themselves. Longer supply chain possibly contributes to mitigating theuncertainty ‘that firm recognizes’ but because this type of SCI dedicates to a few customers, itbrings low flexibility. In some cases, it causes ‘lock-in problems’, because a manufacturer isdedicated to certain customers.

Compared with this, shorter supply chain has advantages ininvestment costs(fewer investments in SCI) and flexibility in numbers of distribution channels,
however, this type of supply chain can be more vulnerable to uncertainty(change in demand
volume and mix).

2.4 Research Framework
Overall review indicates that high level of uncertainty tends to drive firms towards a vertical
integration strategy, and high level of flexibility requires more investments. The key question
to answer is what determines the range of supply chain integration. In other words, the level of
uncertainty a firm recognize can bring the different range of SCI to deal with uncertainty. The
problem is that more integration of supply chain, which means a longer supply chain is
directly related with less flexibility since it requires more investments in vertical integrationand sometimes lock-in problems. Uncertainty has a trade-off relationship with the cost offlexibility and because firms’ balancing between uncertainty and flexibility are strategic
options, there can be various ranges of SCI. Fig. 1 depicts our research framework and in next
section we will look into three types of SCI in steel industry.

<Fig. 1 Research framework>53. Case Studies
In this section, we will elaborate on 3 case studies of steel companies in Korea and Japan,
and compare those companies, more concretely three different types of SCI.
The supply chain of steel industry is typically very long, time consuming and hascomplicated structures. Since it deals with heavy weight products, division of works andcooperation among supply chain members are important. We focus on supply chain membersof steel industry which are a steel manufacturer, a steel processing center, and a customer. The
data collection for this research is carried out through a series of semi-structured interviews
and field research. Table 1 shows profiles of case study companies.

<Table 1. Profiles of the three case study companies>
Company

Nationality

Position in

Establishedsupply chain

Production
volume(million
tonne as of
2014)

POSCO

South

steel

Korea

manufacturer

Hyundai

South

steel

Steel

Korea

manufacturer

NSSMC

Japan

steel

1968

41.4

1953

20.6

1934

49.3

manufacturer

Before we move to case studies, it is worth to take a look at supply chain structure of steel
industry. As Fig 2 Shows, in a supply chain of steel industry, there are three supply chain
6

members which are a steel manufacturer, steel processing centers(or coil centers) andcustomers such as automobile manufacturers, ship building companies, construction
companies, etc. Of course, before steel manufacturers, there must be suppliers who supply the
raw materials to make steel, for example, iron ore and coal. Out of those three supply chain
members, steel processing centers may require more explanation.
Steel processing center plays the role of push-pull boundary point because steel manufacturer
switches its supply chain strategy at this point. The portion of supply chain prior to steel
processing center operates based on the push supply chain strategy. To minimize cost andmaximize efficiency, a steel manufacturer pushes out its products based on long-term demand
forecast to this point. In this stage, finished goods are not yet done in physical shape from
customers. Customer demand for a specific end product typically has higher level of
uncertainty than aggregate demand. Demand for the generic product is an aggregation ofdemand for all its corresponding end products, forecasts are more accurate, and inventory
levels are reduced. The differentiation in steel product’s physical shape (size, width, length,etc.) is delayed until there are requests for those specifications. Thereby manufacturers deploy
push supply chain strategy by the point of steel processing center, and then steel processing
centre employs pull supply chain strategy by coordinating with true customer demand rather
than forecast demand. Automobile manufacturers request processing service to fit to their
specific size, width and length. Hence, from steel processing center, steel manufacturer’s
supply chain strategy shifts over to pull strategy. As soon as automobile manufacturer orders
certain specs, then steel processing center starts processing steel coils to specific shape likedoors of a car. In this stage, steel manufacturer’s objective is also changed over maximizing
service level, that is, responsiveness and order fulfilment. If customer’s production is just-intime system based, steel processing center should focus on responsiveness. Steel processing
center as push-pull boundary is depicted schematically in Fig 2.

<Fig 2. Supply Chain Structure of Steel Industry>

3. Case Studies
7

3.1 NSSMCNSSMC(Nippon Steel and Sumitomo Metal Corporation) is a Japanese steel manufacturer
and one of the oldest in Asia. With its long history(the company established in 1934, howeverits business started around early 1900s) and reputation in high quality products, most ofJapanese automobile manufacturers including Toyota has long been its main customers.
NSSMC has very strong reputation in high grade steel, for example, steel sheets forautomobiles and electronic appliances(hot-dip coated steel sheets, electroplated steel sheets,
electrical steel sheets and etc.) and steel plate for shipbuilding(Thermo-Mechanical Control
Process etc.) . However, NSSMC’s products are not constrained to high grade ones, it has
almost a full spectrum of steel products a steel manufacturer can have. In addition to steel
plates and steel sheets, NSSMC manufactures bar and rod materials, structural steels, pipe andtubes, titanium, stainless steel and even steels for rail ways and machinery parts.
From the point of view of supply chain structure, NSSMC is a highly focused manufacturer,
literally it focuses in manufacturing not in steel processing centers(coil centers). Distributions
and processing of steel products are not main jobs of NSSMC although there exist high levelof cooperation among supply chain members, Japanese trading companies own and operate
processing centers. Almost no vertical integration can be observed in NSSMC’s supply chain,but high level of partnership and cooperation among supply chain members known as ‘virtual
integration’(Byun & Lee, 2015).
From flexibility point, full spectrum of product lines brings high level of flexibility. NSSMC
can possibly respond to most of demand mix. And also, since there are many supply chain
partners of distribution and processing, complicated distribution channels leads to manycustomers regardless which industries they belong.
NSSMC’s strategic choices are keeping high level of flexibility in product mix to deal withdemand uncertainty and almost no supply chain integration(at least no or very few capitally
integrated one).

3.2 POSCOPOSCO(Pohang Iron and Steel Company) is the biggest steel manufacturer in South Korea
and as of 2014, POSCO is the 5th biggest steel manufacturer in the world. Manufacturing
quality steel products is not the only management purpose of POSCO. What POSCO is
8emphasizes is ‘solution marketing’ which means that POSCO supplies not only products but
also ‘how to use them’ knowledge to customers. To do this, POSCO deploys most ofprocessing centers nearby customers manufacturing sites in overseas market. Placing own
processing centers nearby customers has couple of strategic importance and this also
contributes to differentiate POSCO from other steel manufacturers. It requires vertical
integration from POSCO to processing centers but POSCO can listen to customers’ voices andfeedbacks directly and applies this valuable information to product development and quality
improvement. Second, it also contributes to lower product price since there exist no
commission fees for the 3rd party of processing and shorter delivery time due to direct
monitoring on production process.
From flexibility point, since POSCO vertically integrates processing centers aroundworld(almost 50 processing centers around worlds exist, mostly in China, Japan and ASEANarea), distribution channels are quite focused on specific markets and customers. Product mix
is almost same level or slightly less than NSSMC.

3.3 Hyundai SteelHyundai Steel is one of the youngest steel manufacturers in the world, but its growth in steelmarket is worthy of attention. Since it started making iron and steel from 2010, Hyundai steel
became the 14th biggest steel manufacturer in the world as of 2014. There can be two
explanations for this. The first one is that Hyundai Steel is a ‘completely’ vertically integrated
steel manufacturer. It owns steel processing centers as well as customers, Hyundai automobile,
Hyundai construction and other Hyundai group companies. Though Hyundai Steel is not
capitally related, Hyundai Heavy Industry is another huge customer of steel plates forshipbuilding. This ‘already-there-customers’ is the powerful source of stable operation of steel
manufacturer, and also it’s been one of the ideal condition not only from steel manufacturer
but also from automobile manufacturers. This reminds us of Ford who was once totally
integrated company from steel, glass, rubber to automobile manufacturing. The second
explanation for the rapid growth of Hyundai Steel is that it focuses on certain products(at least
for the time being). Steel sheets for automobile and steel plates for shipbuilding andconstruction are main product mix.
From flexibility point, Hyundai Steel is highly focused to its specific customers, whichmeans almost no other customers. In that meaning, flexibility is the lowest of three case study
9companies, and there exists ‘lock-in problem’. Hyundai Steel has longest supply chain, highest
level of SCI and as a result, lowest uncertainty in demand. To deal with this low flexibility,
Hyundai Steel is focusing on certain product items and targets of maximizing production
efficiency.

3.4 Summary of Case Studies
Table 2 summarizes our finding in case studies. First of all, when it comes to the range of
SCI, Hyundai Steel is totally vertically integrated. Its SCI covers manufacturing, processing
and distribution and customers. On the other hand, NSSME’s SCI is minimal. It only has
manufacturing function and other supply chain members work cooperatively. In the middle
position, POSCO comes. POSCO’s SCI stops at processing centers.
Secondly, we can summarize the level of flexibility in two points, one is the product number
and mix, the other is the number of customers. Compared with other two steel manufacturers,
Hyundai Steel’s customers are very limited, Hyundai affiliated companies. This can be thesource of lock-in problem. To deal with this low flexibility, Hyundai Steel strategicallyconcentrates on certain products to maximize production efficiency. On the other hand,
NSSMC has full spectrum of products and various customers, which we translate into highflexibility, however definitely this strategy has higher uncertainty in demand than Hyundai
Steel’s case. POSCO has as many products as NSSMC or less than it, and the number ofcustomers is alike. Fig 3 compares the range of SCI among three companies.

<Table 2. Summary of Findings>
range of SCI

NSSMC

numberminimal(almostof numberof numbercustomerschannels

products

variousvarious(trading highlynocompanies’

integration with

steel

other

processing

supplychain members)
POSCO

channel)moderate(vertical various
integration

diversified

of moderatesteel processing

or moderate(ownsteelprocessing

10

moderately
diversifiedofcenter)Hyundai Steelchannel)wide(total

Hyundai

verticalaffiliatedlimitedlimited(onpurpose)integration)<Fig 3. Comparison of SCI in the three steel firms>

4. Implications
How much flexibility is enough for a firm? To answer this question, one should consider
three keywords in the same context as well as at the same time in supply chain; flexibility,
uncertainty and integration. And there exists trade-off relationships between the cost offlexibility and uncertainty. The question ‘how much flexibility a firm wants’ is the samequestion of ‘how much uncertainty a firm recognizes’ and those answers depends on strategic
choice of that firm. As a result, that strategic choice shapes and determines the range of SCI as
we have seen in three companies.
Without question, SCI is one of the most important management issues in supply chain
literature. It almost sounds like ‘must-have-virtue’ in this research stream, but what is more
important is that the explanation for different types of SCI, even in the same industry.
Balancing supply chain flexibility and uncertainty comes at a cost, and like we reviewed,
Ford-reminding vertical integration can be also a strategic result. Though they are not all, thispaper contributes to explain some of the important determinants of the range of SCI, and thiscan be applied to other industries.
Of course, the benefits of SCI have multiple dimensions. Though this study considered
flexibility and uncertainty only, there also can be response time, service levels, and ultimately
customer experience. Those keywords lead to future research.

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