EXPLORING SUPPLY CHAIN MANAGEMENT IN EMERGING MARKETS

1EXPLORING SUPPLY CHAIN MANAGEMENT IN EMERGING MARKETSHarri Lorentz* *)Logistics, Turku School of Economics, 20500 Turku, Finland E-mail: harri.lorentztse.fi, Tel: +358 2 4814 244; Fax: +358 2 4814 280ABSTRACTPurpose of this paperTo explore the nature and implications of supply chain management in emerging markets (EM), (1) by elaborating on the theoretical construct of EM contextual supply chain constraint, (2) by proposing a classification of EM contextual supply chain constraints, and (3) by putting forth testable propositions related to the EM contextual supply chain constraints. Design/methodology/approachThe paper is conceptual in nature, while it additionally draws on the authors previous empirical research on the topic. The approach may be considered systemic in nature, as the relationships of firms supply chain processes with contextual characteristics and change processes are considered.FindingsThe paper proposes that EM contextual supply chain constraints spring either from the characteristics of institutions, networks or infrastructure. The degree to which a foreign company is affected by a constraint, depends on the role of supply chain management in the firms business model. EM contextual supply chain constraints are proposed to result in suboptimal supply chain configurations, delayed or cancelled internationalisation, and lower performance.Research limitations/implications Future research opportunities are proposed: the propositions should be validated and illustrated with further research in a variety of EMs. What is original/value of paperIt is argued that the attempt towards theory generating research on the nature and implications of supply chain management in EMs is novel. For the benefit of researchers, propositions are introduced and possible research agenda is presented.Keywords: supply chain management, emerging markets, constraints, internationalisation, propositions21.INTRODUCTIONAt the moment, relatively few companies attempt to take full advantage of the consumer potential in for example the markets of Brazil, Russia, India and China, i.e. the BRIC (McKinsey Quarterly, 2004). Fully tapping on these markets would for example mean a need to expand focus from the relatively easy strategy of establishing presence in the few major urban centres and serving the affluent minority. One of the few examples of attempts to broader market coverage is P&G, who has been induced to expand its already massive distribution network in China to cover the rural areas where the retail outlets are still small mom-and-pop stores (Roberts, 2007). Further, Nokias successful first-mover strategy in emerging markets has been facilitated by such essential supply chain management activities as product development and distribution. Emerging market oriented product features (dustproof keypads, attached flashlight) and distribution solutions (variety and density in points-of-sale, utilisation of bicycles, rickshaws, minivans in distribution and sales) have helped Nokia to generate sales of some 3.7 billion USD (2006) in India (Ewing, 2007a). Emerging markets provide lucrative opportunities for companies, but also present certain challenges in establishing operations and realising competitive strategy. For example Dell struggled to execute its customer oriented business strategy and its make-to-order direct-sales supply chain strategy in Russia, as rapid and reliable home delivery services were lacking. Consequently the company has opened brick-and-mortar stores in Moscow and other Central and Eastern European (CEE) countries to boost poor sales performance and market share in rapidly growing markets (Ewing, 2007b). The above mentioned anecdotes point out the fact that logistics and the SCM are among the critical success factors for companies operating in the international arena and specifically in emerging markets, as increasing complexity arises from wider range of products, shorter product life cycles, market growth, and the number of simultaneously required supply/marketing channels (Braithwaite & Christopher, 1991). Also, it seems that challenges pertaining to supply chains and their management in emerging markets may have an effect on the realisation of business strategies. This paper is about establishing and managing supply chains in emerging markets, effectively addressing the issue of whether business strategy may be facilitated with supply chain strategy in emerging markets. The reasonably novel research topic is addressed in an exploratory manner, drawing on some empirical evidence from the internationalisation of Finnish companies to the emerging market of Russia. The paper therefore aims towards building new theory through the inductive case study approach (Eisenhardt, 1989), with focus on understanding the phenomenon and its relationship with managerial decision making. In other words, the paper seeks to explore the nature and implications of supply chain management in emerging markets (EM), (1) by reviewing the relevant literature, (2) by elaborating on the theoretical construct of EM supply chain constraint, (3) by proposing a classification of EM supply chain constraints, and (4) by putting forth testable propositions related to the EM supply chain constraints. 32.REVIEW OF LITERATURE2.1.Emerging markets as a conceptEmerging market is one of the central concepts in this paper, and therefore it is given a brief treatment and definition here. The International Financial Corporation coined the emerging market term (more specifically: Emerging Financial Markets) in 1981, to describe certain countries that were included in standardised stock indices (Sakarya et al., 2007). The novel term replaced the use of developing country, as the new category of countries aimed towards liberalisation of markets. Since then, the use of emerging market as a term to describe assets based in markets with long-term growth opportunity, has broken out of the financial market context, and become a term to reflect business opportunities in less competitive markets with increasing disposable incomes, large populations of young consumers and economic liberalisation, and essentially with such characteristics as high-growth, high-potential, and high-risk (Sakarya et al., 2007). Many use the term emerging market economy or emerging economy, to describe countries with the previously presented characteristics (Kula & Tatoglu, 2003; Rahman & Bhattacharyya, 2003).This paper employs the term emerging market, and concurs with above presented definitional characteristics of the concept. A position is also taken to underline the relevance of cost-benefit analysis in terms of business operations in emerging markets: relatively high transaction costs are usually present due to possibly underdeveloped infrastructure and market economy institutions (North, 1990), while the potential capture of business opportunities for serving the vast and lucrative market define the potential benefits. So even though actual production costs may be relatively low, induced costs due to uncertainty and risks may off-set savings. Also, the emerging markets entail certain types of challenges for business opportunity capture, in many cases different from the ones companies experience in more mature markets. The chosen point of view with the term emerging markets, focuses on the business opportunities, in addition to the cost element due to challenges, rather than on the phases of development, e.g. in terms of industrialisation (newly industrialised countries term would be used), or transition from planned to market economy (transition economies term would be used). 2.2.Supply chain uncertainty in international contextsSupply chain uncertainty is a key construct in supply chain management theory. Most of the literature on supply chain uncertainty acknowledges Davis (1993) influence on the subject with sources of uncertainty in the supply chain defined as supplier performance, manufacturing process, and customer demand. Wilding (1998) describes the dynamic behaviours in supply chains, of which an example is the bullwhip amplification effect (Forrester, 1961; Lee et al., 1997), which underlines the role of demand dynamics in uncertainty generation (Prater et al., 2001). Geary et al. (2002) add control uncertainty to the earlier identified supply, demand, and own process uncertainties, emphasising the role of information flow in transforming customer orders to production targets and further into supplier raw-material requests. The complex material flow is argued to be the leading indicator of supply chain uncertainty among other symptoms by Childerhouse and Towill (2004). Applying certain rules for the simplification of the flow, holds key to the integration of the supply chain (Childerhouse & Towill, 2003), and the reduction of safety stocks in incumbent companies (Christopher, 1998). 4The role of environment and the related supply chain uncertainty is considered in number of studies. For example Bhatnagar and Sohal (2005) consider environmental factors as separate from supply chain uncertainty in relation with facility location decisions, while Prater et al. (2001) consider vast geographic expanses, border crossings, and varying polical/regulatory contexts in international supply chains as sources of supply chain uncertainty. Van der Vorst and Beulens (2003) consider characteristic features of the chain and exogenous phenomena as sources of imbalance in the system, i.e. the supply chain. Supply chains that cross borders, function in diverse operating and cultural settings, or are subjected to deficits in the institutional environment in developing and transitional markets, require a great deal of management skill, flexibility and resilience in order to generate supply chain wide cost reductions, marketing synergies, and smooth performance (Harvey & Richey, 2001; Kotabe & Murray, 2004; Narasimhan & Mahapatra, 2004).The insights from a recent World Bank report confirm this (Arvis et al., 2007). The Logistics Performance Index (LPI) allows the comparison of countries in terms of the ease of arranging international trade logistics in relation to a specific country. Indeed great variation in countries performance was detected, indicating a gap for example between high GDP and low GDP countries. Supply chain predictability and reliability is of primary concern to international traders, even more than direct freight costs. Long supply chains that involve a number of national borders, modal changes and many involved parties can be slowed down by only one weak link in the chain that performs poorly in terms of the LPI for example. These breakdowns potentially induce other costs, such as the costs of hedging against unreliability, higher inventories, and non-delivery in general. These induced costs may be very high, and may effectively eliminate the savings in direct costs that are sought after by sourcing from low cost countries. In summary it may be stated that conditions and characteristics of various national markets and international environments cause supply chain uncertainty. Emerging markets are no exception, and most probably imply relatively greater levels of uncertainty due to institutional deficits and other development gaps. Specific supply chain constraints may be seen as the primary reason for these uncertainties, and further, for induced costs in the supply chain. 2.3.Key theoretical construct: contextual supply chain constraintIn supply chains, the concept of constraints is highly relevant. Production lines, warehouses, transportation equipment or facilities in general, have capacity constraints that determine the maximum level of physical goods flow in a supply chain (Chopra & Meindl, 2001, 6). Often the capacities are a subject of long term planning as they cannot be changed overnight, but require lengthy investment planning procedures or negotiations for outsourcing. Decisions concerning the strategy, design, and planning policies, therefore set the parameters or the constraints for optimisation that the company must subject its operations to. Naturally the context where the company operates in may set specific contextual constraints for supply chains, by limiting the general availability of capacity for production and logistics, either in-house or as an outsourced service. Simatupang et al. (2004) utilise the theory of constraints approach (e.g. Goldratt, 1990) in the analysis of the supply chain collaboration issue, a crucial component in the realisation of SCM and improved performance. The dilemma of supply chain collaboration is presented, with the objective of maximising the benefits of the collaboration. The requirements for that is (1) the maximisation of revenue of supply chain from sales to end customers, and (2) the protection of profitability of each individual member of the supply chain. The prerequisites of the 5requirements create the dilemma, as they essentially mean that decisions should be made on supply chain wide measures in the first case, but should be link-centric in the second (Simatupang et al., 2004, 59), i.e. a conflict between local optimisation vs. system optimisation. Twofold approach is suggested to solving the dilemma that constrains the profit generating ability of the supply chain: engineer collaborative replenishment policies, e.g. vendor managed inventory, and implement collaborative and supply chain wide performance metrics (Simatupang et al. 2004, 59). Collaboration is the common denominator in this approach, and therefore business culture, practices, orientations etc. that inhibit collaboration in important supply chain relationships, may also be coined as supply chain constraints that are affected by the context. It is argued here that constraints oriented thinking has particular relevance to understanding SCM in emerging markets, or in that matter, any management activity in the chosen context. The fundamental difference between home country and emerging market SCM of an established manufacturing firm may be, as is proposed here, the degree, number and type of constraints that are encountered, especially externally to the firm. Therefore, supply chain practices and strategy, or indeed the whole business model or strategy of a firm, may have to be rethought, re-engineered and adapted for the specific emerging market the company wishes to enter or expand in. The interaction of constraints with managerial decision making in terms of internationalisation is also quite interesting, as for example Khanna et al. (2005) suggest three strategic choices for multinational companies in dealing with institutional voids in emerging markets: adapt strategy, change context, or stay out. 3.METHODOLOGYThis paper aims to introduce new theory that aid in understanding supply chain management in emerging markets. The work of Eisenhardt (1989) is therefore relevant, as she has written about the process of building theories from case studies, described as inducting theory. This process is seen as highly iterative and tightly linked with data. The usefulness of case study research in exploratory research is underlined, and as a result testable theory, hypotheses and propositions, and/or new theoretical constructs may be presented. The papers approach may be considered systemic in nature (Arbnor & Bjerke, 1997), as for example the relationships of firms supply chain and internationalisation processes with contextual characteristics and change processes are considered (Meyer & Gelbuda, 2006). The empirical research that this article draws from, has previously been published in journal articles and conference papers written by the author individually, or collectively with other authors (Hilletofth et al., 2007; Hilmola et al., 2008; Lorentz et al., 2006; Lorentz et al., 2007; Lorentz & Ghauri, 2007; Lorentz 2008). Based on these researches, this paper draws some general conclusions and introduces additional theoretical insight. As the research designs have been described at length in the previously mentioned articles, detailed elaboration will not be attempted here. Only concise summaries are given in the next section. However, a timeline, depicting the iterative process between theory and empirical data is presented, providing also a way to evaluate the research process (Figure 3.1).Although the process seems to start from a theoretical base, the origins most probably lie in empirical experience, as the author was involved in Finnish food industry operations in Russia and the Baltic States in 2002 and 2003. Since that time, theoretical and secondary information based pre-understanding was developed (see Lorentz et al., 2006), in order to prepare for the pilot case study conducted in St. Petersburg in late 2005, analysing foreign food 6manufacturers distribution in Russia and elaborating on the implications to supply chain management and demand planning specifically. The refined and more in-depth results of this endeavour have been reported in Lorentz et al. (2007). Half a year later the author was involved in a project financed partly by the Finnish Ministry of Forestry and Agriculture (MFA), which led to the understanding of the role of supply chain factors in food industry location decision making (Lorentz, 2008). Encouraged by the so far gathered data, the author engaged in conducting a multiple case study that targeted three Finnish food manufacturers in the Russian market. Interviews and other data gathering took place in both Russia and Finland, with significant iteration in late 2006. Preliminary and theoretically oriented conclusions of this research have been published in Lorentz and Ghauri (2007), and empirical results are forthcoming. The conclusions of this work point out the varying success rate in establishing and developing supply chains in Russia and as a result, the capturing of business opportunities in the market. In general, this inductive and iterative research process has resulted in the development of several supply chain constraint related propositions about SCM in emerging markets. TheoreticalEmpirical20042005200620072008Pre-understanding towards pilot studyPilot case-study (Rus)MFA project Case-study (Rus)Theoretical refinement Discussion and correspondence with industry and country expertsCase-studies (Fin)Theory-data reflectionConclusions (propositions)Figure 3.1 Stylised depiction of the inductive research process in time4.PROPOSITIONS CONCERING SUPPLY CHAIN CONSTRAINTS IN EMERGING MARKETSOne of the main conclusions of the previously described research process is that the inability to transfer supply chain strategy and SCM advantages from home/mature markets across national borders to emerging markets, may be a relevant problem (Cuervo-Cazurra et al., 2007), and accentuated in those cases where SCM is the core, or a crucial component of the firms business model. That is, supply chain strategy has a vital role in facilitating business 7strategy. As was elaborated on previously, the implications of these situations in general business management level, have been explored by Khanna et al. (2005), leading to disinvestment at worst. As a result of this exploratory research, propositions, applicable to perhaps emerging markets in general, are presented that pertain specifically to the causes of the inabilities, i.e. constraints, and their possible implications to company decision making in terms of internationalisation, as well as to supply chain design and planning (configuration and policies). Proposition 1: Emerging markets as an operating environment imply diverse, and external to the internationalising firm, contextual supply chain constraints that affect supply chain strategy implementation and execution. These constraints may be classified into three categories, namely institutions, networks and infrastructure (contextual supply chain constraint classification). The empirical research that has preceded this pape