Collaborative Supply Chain
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Collaborative supply chain initiatives can increase effectiveness of an organization and its competitive capabilities. Increased profitability, improved responsiveness to market requirements and customer needs, well developed managerial practices, and diminished rates of competition are generally associated with effective collaborative efforts. Collaboration within supply chain management involves different practices; outsourcing is one of the most frequently utilized approaches. Today, the majority of companies outsource the greatest part of their production and distribution operations.
However, inappropriate models of partnership between parties, unclearly stated agreements on targets, responsibilities, and accountabilities, absence of transparency, sharing data on business performance, and commitment to brand aspirations, and poorly designed structure of relationships can negatively influence business performance. Collaborators should trust each other, contact each other to share information on their strategies, plans, and business performance in order to balance the collaboration situation and business efficacy.
Collaboration between New Balance, a global athletic footwear manufacturer, and Horace Chang, the company’s top supplier in China, failed due to mismanagement within supply chain. Although Chang’s practices appeared to be profitable, they contradicted the primary collaborative supply chain initiatives, agreements between the parties, and New Balance strategy of production and distribution of high quality sports footwear.
Collaborative Supply Chain
Collaboration is generally associated with aligned business processes and practices, yielded profits, joint efforts, clearly stated agreements between partners, and their common objectives, tasks, and strategies. While collaborating, two or more entrepreneurs share manufacturing, distribution, warehousing, logistics services, etc. of a single business. Collaboration within a supply chain encompasses legal agreements of parties on business planning and decision-making, participatory shares in profits, investments, areas of responsibility, logistics services, distribution, procurement, staffing, conflict resolution, and what steps will be taken to dissolve agreements when needed.
Implementation of effective collaborative supply chain efforts mitigates potential risks, leverages business performance, and ensures long-term relationships between parties. Therefore, in order to subdue internal and external pressures, reduce costs, increase responsiveness to market requirements, anticipate customer needs, and achieve goals of growing revenues and profits, companies currently tend to implement such large-scale collaborative supply chain initiatives as Vendor Managed Inventory (VMI), the Efficient Consumer Response (ECR), 3PL/ 4PL services, outsourcing, Collaborative Planning, Forecasting and Replenishment (CPFR), Just-in-Time, etc.
All forms of collaboration within a supply chain have their advantages and disadvantages; these involve expected profits and potential losses. Furthermore, while collaborative supply chain efforts are universally recognized as effective strategies, collaboration can destroy further expansion of organizations, threaten performance of their business operations, and result in such complications as occurrence of disagreements and power struggles, liabilities, financial losses, and business failures.
In order to assess a certain company’s collaborative supply chain effort, it is essential to know its background, mission, operational principles, and its position in the international market.
New Balance is a Boston-based athletic footwear manufacturer. The company has produced all widths and sizes of footwear and athletic apparel since 1906 when the New Balance Arch Company started as a manufacturer of orthopedic shoes and arch supports. New Balance uses its well-developed professional management and advanced technology to provide high-quality products for their customers nationwide and all over the world. The company utilizes its flexible design services to be more competitive in the market and build trust with their partners and customers in order to improve its rank in the global athletic footwear industry. Steadily expanding its assortment and developing supply chain management, New Balance has become one of the major global footwear manufacturers (Kotler 2007). The company’s strongest competitors are Nike, Reebok, and Adidas. New Balance owns factories in Boston, Lawrence, Norway, Norridgewock, and Skowhegan; it involves 2,508 US associates and 1,400 international associates, selling its shoes, clothing, and accessories in 140 countries (New Balance 2010).
Although New Balance asserts its strong commitment to domestic manufacturing and American workers, today, approximately 75% of the company’s footwear, apparel, and accessories are produced overseas, specifically in China, Vietnam, and Indonesia. In order to successfully compete in both domestic and international arenas, reduce prices for customers, and raise profits, New Balance first implemented collaborative supply chain efforts in the form of outsourcing in the early 1980s (Parloff 2006; Kotler 2007; Terry 2007). “Outsourcing or contracting out is the transfer of services, and where applicable, the associated staff and assets to a specialized service provider, and then for the duration of the contract, the receipt of services at an agreed level of quality and an agreed financial compensation structure” (Wijers & Verhoef 2009, p. 1). Today, the majority of companies outsource the greatest part of their production and distribution (Kotler 2007; Wijers & Verhoef 2009).
The collaborative supply chain initiative in the form of outsourcing was implemented by New Balance and Horace Chang, its former contractor from Taiwan, in the early 1990s due to the following contributing factors:
The intense competitiveness in the industry. New Balance trailed behind Nike, Adidas, and Reebok in the global athletic footwear market, selling production at prices equal to its competitors (Kotler 2007).
High domestic labor costs. According to the findings of financial investigations pursued by Corton (2011), “the current US minimum hourly rate varies across the country, but it is in the range of $7.25 to $9.92, compared to a typical Chinese company, which pays around $1.19 per hour” and even less in Vietnam. Moreover, the production of athletic footwear and apparel is a significantly labor-intensive process.
A decrease in demand for the companies’ production due to diminished incomes of buyers.
The need for lower prices. Decreased technology costs would allow stakeholders to reduce wholesale and retail prices of sports footwear, apparel, and accessories (Robbins & Coulter 2009; Kotler &Keller 2011).
A wide range of substitutes made in China posed potential threats to the company’s profitability.
The need to reduce production time on athletic footwear and apparel, cut down the time taken from a retailer’s order to delivery, and increase responsiveness to customer demands.
In conformity with the data on the company’s sales, before its collaboration with Horace Chang, the USA annual sales of New Balance comprised:
In 1991 – $95 million;
In 1992 – $95 million.
The company’s worldwide sales totaled:
In 1991 – $210 million;
In 1992 – $221 million.
In the early 1990s, the company’s suppliers from Taiwan initiated manufacturing athletic footwear in China. The first Chinese-located factory was built in Yang Jiang City (the province of Guangdong) by Horace Chang. In addition, in 1995, Horace Chang was licensed by New Balance to distribute the company’s products to the Chinese domestic market (Parloff 2006). New Balance was not concerned about the government policies or cultural differences when choosing and appointing its supplier and collaborator. Horace Chang was a highly motivated professional who had enthusiasm to work together. He shared and followed the company’s key competencies focused on high quality, innovations, and customers’ satisfaction.
Approximately 4,000 Chinese workers were employed to produce New Balance athletic footwear for export. “Mr. Chang was one of New Balance top China suppliers for many years, first in Taiwan and then in China, until their troubles began in 1998” (Kotler 2007). However, financial statistics provided by the company testify to profitability of the collaboration between New Balance and Horace Chang from 1993 to 1998 (New Balance 2010). The US annual sales, as well as the company’s worldwide sales, had been steadily growing during that period and totaled the following sums:
The US annual sales:
1993 – $104 million;
1994 – $130 million;
1995 – $151 million;
1996 – $201 million;
1997 – $265 million;
1998 – $346 million.
The worldwide sales
1993 – $258 million;
1994 – $316 million;
1995 – $380 million;
1996 – $474 million;
1997 – $550 million;
1998 – $630 million.
Nearly 58,000 pairs of sneakers were sold in the Chinese domestic market due to effective Mr. Chang’s business operations in 1998. Although Horace Chang, the company’s official sales partner in China, had success in production and distribution of classic athletic footwear and the company’s revenue increased, New Balance terminated his license to manufacture and distribute sneakers in December 31, 1999.
In 1999, at the company’s mid-year conference in Boston, Horace Chang announced his project of manufacturing and selling 250,000 pairs of footwear that year; it was approximately four times more than he had sold the year before (Parloff 2006). However, his business proposal was not supported by New Balance executives because “his Chinese domestic sales were in low-end Classics models, not the high-technology premium lines that NB needed to anchor their brand image in a struggle to overtake Adidas and Reebok for second place in the industry, after Nike” (Kotler 2007). In order to avoid jeopardizing the brand’s reputation, New Balance top-managers strongly recommended Mr. Chang to reduce the proposed volume of production and distribution of Classic athletic footwear in China (Parloff 2006; Kotler 2007).
However, while collaborating with New Balance, Horace Chang did not follow the assigned directions. In accordance with analytical information provided by Kotler Marketing Group (2007), Mr. Chang launched the following activities despite the global strategy of the organization:
He acquired supplementary materials to manufacture 450,000 pairs.
Horace Chang increased the manufacturing rate of low-end Classic models and opened several retail stores in China.
Chinese warehousing facilities and stores contained much more inventory of low-end Classic models than New Balance arranged to distribute and sell.
Horace Chang distributed low-end Classic models to Japanese, German, Italian, and Taiwanese markets.
Horace Chang launched “a competing line of classic-style sneakers under his own brand”; though they were called “Henkees” and supplied with a new logo, Chang’s athletic footwear looked like New Balance Classic models (Parloff 2006).
Thus, although Chang’s practices appeared to be profitable, they contradicted the initial collaborative supply chain efforts, agreements between parties, and New Balance strategy of production and distribution of high quality sports footwear. One of the main principles of New Balance performance is to utilize innovative fabrics and features, an attractive color palette, and timeless designs of athletic footwear applying innovative methods in manufacturing processes (New Balance 2010). New Balance’s attempts to come to a collaboration settlement failed. Therefore, the company initiated the litigation against Horace Chang. “At New Balance’s request, the provincial divisions of China's Administration of Industry and Commerce (AIC) seized about 100,000 pairs of Chang’s shoes from his stores and factories” (Parloff 2006).
Evaluating collaboration between New Balance and Horace Chang, Kotler (2007) claims that both parties made mistakes while implementing their collaborative supply chain efforts:
They did not act as partners.
They did not share a common strategy.
They did not determine the strategic needs of their collaboration.
They did not design detailed agreements concerning manufacturing, distribution, and sales.
They did not comprehensively negotiate how to share profits and risks in their supply chain collaboration.
They did not seek optimal benefits to each other, “but maximum profit just for themselves”.
Collaborators should trust each other, contact each other to share information on their strategies, plans, and business performance in order to balance the collaboration situation. However, according to Kotler (2007), “a large part of the blame lies with the Boston-based company”. Their mistakes involve the following mismanagement activities:
Having made a decision to enter the Chinese domestic market, experts of New Balance did not assess cultural differences in Chinese demographics, customers’ priorities, environmental conditions, and external threats and opportunities. Retailing goods to China at prices appropriate in the American and European markets, they did not consider purchasing abilities and incomes of the Chinese.
The relationship between Mr. Chang and New Balance was not properly structured. The company’s informal caution on limited production of low-end athletic footwear was not perceived by Mr. Chang as a regulatory guideline.
New Balance senior managers and executives did not engage Horace Chang in discussions about the company’s mission, strategic plans, incoming quality, and corporate responsibility. They did not coordinate their cross-functional initiatives with Mr. Chang. Thus, New Balance collaborative supply chain efforts were not transparent.
The selection of an empowered candidate was not properly conducted to choose a person who could reflect and implement New Balance strategic aspirations.
New Balance did not develop effective communication channels to provide their main supplier with opportunities to report real -time performance data.
“They erred in designating their top supplier as also their exclusive distributor. Mr. Chang has no power of distribution into the channels they need. Instead, he opened twenty retail outlets of his. There are a host of conflicts of interest between production and distributor, which the company chose to ignore when they gave Mr. Chang the distribution agreement in 1995” (Kotler 2007).
New Balance experts and senior managers did not perform adequate tracking procedures to monitor the process of manufacturing and distribution of footwear in China.
New Balance applied “an outworn model of relationship between production, brand and retail distribution. It was a model no longer suited to outsourced production and distribution in global markets, as well as branding flexibility in global markets of different price ceilings” (Kotler 2007).
However, the following Mr. Chang’s actions and operations made a negative impact on this collaborative supply chain initiative:
Mr. Chang did not report his collaborators on an increase in production of low-end Classic models on time.
He overestimated his authority while initiating an increase in production of low-end Classic models.
He founded retail stores without New Balance’s official permission.
He did not coordinate his operations with his collaborators but “invested in expanding production capacity and supply purchase” to sell footwear in larger volumes (Kotler 2007).
An enormous inventory of low-end Classic models was created.
Mr. Chang did not completely identify the brand strategy and business aspirations of New Balance.
He illegally used the intellectual property of New Balance (the footwear design, drawings, specifications, blueprints, and manufacturing processes) while launching his own production of athletic footwear.
In conclusion, the collaboration between New Balance and its main supplier and distributor collapsed due to an inappropriate model of partnership between the parties. New Balance, its suppliers, and distributors, as well as every professional involved in collaboration, must work jointly in order to produce high quality products, deliver them on time and at a suitable price. In today’s economic environment, achieving lower costs, increasing revenues, improving quality, and meeting customer needs require an unprecedented level of cooperation between partiers.
Collaborative supply chain initiatives can increase effectiveness of an organization and its competitive capabilities. Thus, when creating strong relationships, collaborators must clearly state mutual agreements between parties, identify patterns and models of coordination and supervision, determine and admit brand strategy, and specify the scope of powers. In order to ensure competitiveness, success, and profitability of an organization, its organizational structural elements and collaborative supply chain processes should be adjusted to determined strategies. “If this is accomplished, then the unique strengths of U.S. brands and the strengths of Chinese production and its domestic market can be melded into a great bilateral power”.
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