Download Supply Chain for the Synchronization of Production and Distribution*

Osaka Keidai Ronshu, Vol. 53 No. 3 September 2002
307
Supply Chain for the Synchronization
of Production and Distribution*
Hisao Fujimoto
[Abstract]
This paper presents an introductory conceptualization of the synchronization of
production and distribution. Based upon two theories, strategic network theory and
postponement-speculation theory, the evolutionary process of the supply chain
management in the convenience store system is explained.
Seven Eleven Japan, which is one of the large convenience store chains, has been
developing its advanced system for several merchandise categories. This system is
beyond the boundary of convenience store chains. The synchronization of production
and distribution is persistently being aimed under the condition of the instantaneous
consumption.
1. Introduction
The business network and the strategic alliance have been a widely discussed issue in
recent business and marketing literature. It also has provided firms with new competitive
advantages. These competitive advantages will be gained not from the single firm, but
from the network. Further, the dimension of recent competition has moved to the dimension of time and speed with the lean manufacturing and logistic systems. The members of
distribution channel are aiming for the lean supply chain without reducing the consumer
benefits.
This paper presents an introductory conceptualization of the synchronization of produc-
＊This research was funded by the special research program of Osaka University of Economics
in 2000.
Osaka Keidai Ronshu, Vol. 53 No. 3
308
tion and distribution. Based upon two theories, strategic network theory and postponement-speculation theory, the evolutionary process of supply chain in the convenience
store system is explained.
Despite of the emerging development of the electronic commerce and virtual mall, many
retailers still have been holding merchandises in their stores as inventories. For selling
these merchandises, retailers have to find customers by their marketing efforts. It means
the demand or market creation. In addition to this positive action, retailers are also estimating and forecasting the customers’ demands or purchasing behaviors based on the past
purchasing data. Given the probabilistic estimation of consumers’ purchasing behaviors,
retailers have been trying to minimize inventories and/or keep the proper level of inventories. This is, however, the passive adaptation strategy adjusted by the backward inventory holdings. It has a possibility to emerge the order backlog and out-of-stock for the
good sellers, and the excessive inventories for the poor sellers.
Seven Eleven Japan, which is one of the large convenience store chains, has been developing its advanced system for several merchandise categories. This system is beyond the
boundary of convenience store chains. It has been including many suppliers as merchant
wholesalers and manufacturers. The inventory compression can be attained on the interorganizational system with these suppliers. It is aiming for the synchronization of the production of manufactures, the logistics, and the inventory holdings with the consumers’
purchasing behaviors.
2. Characteristics of Convenience Store System
Development of Efficient Consumer Response
In Japan, the past strategic alliances were between large retailers and small manufacturers for developing low price private brands, which were in inferior to national brands.
Recently, however, strategic alliances between large retailers and large manufacturers,
e. g. P & G and Wal-Mart in USA and Kao and Jusco in Japan, have appeared. Large convenience store chains also have been grappling with this issue. The main items of convenience store are daily foods, beverages, groceries and magazines. The first three items
are included in the merchandise categories related to the Efficient Consumer Response
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(ECR).
One of the remarkable developments of marketing channels in merchandise categories
of foods and grocery may be ECR. Under the concept of ECR, the distribution channel
flows, which include merchandises, inventories, transactions, and information, have to be
integrated and adjusted to the final consumer needs. As Schmitz Whipple, Frankel, and
Anselmi (1999) indicate, ECR extends beyond supply chain integration to include not only
more efficient replenishment, but also more efficient store assortment, promotion, and
new product development. There needs the integrated system to attain the rapid and
proper flow of merchandises. This can be possible on the information technology, which
enables to advance communication capabilities of the transmission of information and data.
It attains the strategies of cost minimization, value-added maximization and control / flexibility enhancement (Bowersox and Daugherty 1995 ; Lewis and Talalayevsky 1997).
Vikerly, Calantone, and Droge (1999) suggest two types of flexibility. The first is product
flexibility. It has to be immediately visible to the customer and is the ability to handle difficult, nonstandard orders, to meet special customer specifications. The second is volume
flexibility. It is the ability to effectively increase or decrease aggregate production in response to customer demand. Their dimensions of supply chain flexibility incline to the
manufacturing aspects (cf. Frazier, Spekman, and O’Neal 1988). Along with our discussion of retailers, these two types of flexibility have to include the proper assortments of
merchandises for customers’ needs. The basic concepts of ECR, “proper place, proper
volume, and proper timing”, have to be reminded.
Instantaniety of Consumption
Convenience stores have to make a decision, which attains the ideal merchandise assortments in the limited shelf space. It will be easy to be attained in the situation that the
production and stocking can be carried out after the settlement of consumers’ demands.
However, these have to be carried out in advance on the estimation of consumer’s shopping behavior. First, this effort has crucial importance for the competitive advantage of
convenience store, because of the efficiency that comes from the minimization of inventory and the total logistic system. Secondly, convenience stores are demanded to respond
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to the instantaneous consumption, which means the short lead-time of consumer needs.
The purchasing and consuming process of consumers can be divided three phases. The
first phase is the decision making, which is the stage to determine what the consumer buy.
The second phase is the actual purchasing, which is the stage to go shopping trip to get
merchandises. The third and last phase is the consuming, which is the stage to consume
the purchased merchandises. Each phase may have its inherent time to perform the task.
The time for consumers consists of the total time of these three phases. It may vary
among merchandises and consumers. The instantaneity of consumption means the case in
that the total time for consumers is very short. Convenience stores are corresponding to
this instantaneity of consumption (cf. Yahagi 1994) . As a result, main good seller items of
convenience stores are the merchandises corresponding to the instantaneity of consumption. Convenience stores are aiming for the assortment of merchandises and services,
which corresponds to the short cycle of consumer needs. Consumers are very sensitive
to the freshness of merchandises, which convenience stores hold as inventories. The ultimate, and probably ideal, goal is to pursuit the synchronization of production, supply, logistics, and purchasing in the storefront.
3. Postponement Strategy for Retailers
Concepts of Postponement and Speculation
Retailers are usually doing business with the merchandise inventory. They cannot avoid
a risk from the inventory holding, because the inventory consists of merchandise with the
uncertainty of sales. For retailers, holding inventory means that they have to order and
stock the uncertain merchandise speculatively. Recently, however, there have been appearing retailers who attempt to build “the postponement-oriented system”. This system
is aiming for postponing the risk by holding inventory until the latest possible time.
As Alderson (1957) proposed, “the principle of postponement requires that changes in
form and identity occur at the latest possible point in the marketing flow ; and changes in
inventory location occur at the latest possible point in time”. (p. 424) By the arrangement
of the steps in the marketing process in the most effective sequence, the efficiency of the
marketing process will be increased.
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Toward a modification of the principle of postponement for applying it to the study of
distribution channels, Bucklin (1965) proposed the principle of speculation. This principle holds “that changes in form, and the movement of goods to forward inventories, should
be made at the earliest possible time in the marketing flow in order to reduce the costs of
the marketing system”. (p. 27) Combining this principle with the principle of postponement, he suggested the reduction of the various types of costs and how the inventory
holder would be determined in the marketing system.
These two principles explain the postponing and / or speculative decisions of product
forms and inventory locations in the marketing system on the dimensions of time and
space. In the context of this paper, holding inventory until the latest possible time (the
postponement of inventory holding) means that the decision to order is moved nearer to
the time of the consumers’ purchase, assuming the given inventory holding time for retailer. The postponement strategy of retailer is successful where the store manager can
postpone his decision to the nearest possible point of purchase according to the reduced
delivery lead-time based on the technological development of information and physical distribution.
Importance of Network with Vendors
As the postponement strategy of retailer is advanced, the risk of inventory holding that
used to been taken by retailer has to be laid on wholesalers and / or manufacturers. This
may give rise to serious problems depending on their transactional relationships.
Manufacturers who take the push strategy in their distribution channels may want retailers hold large inventories. Although retailers demand the postponement of their inventory
holdings, manufacturers may refuse it except for their benefit. The focal problem is how
retailers can reduce the possible risk of inventory holding with the vendors’ agreement.
In the recent turbulent and competitive environment, many retailers and manufacturers
in the marketplace are inclined to adopt postponement strategies. The successful implementation of postponement strategy heavily depends on the ability to form and coordinate
the network organization (Van Hoek, Commandeur, and Vos 1998). It also depends on
the clarity of roles and shared norms based on the information technology (Deeter-
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Schmeltz 1997). As for the organizational systems, information technology has become a
key issue for interorganizational systems. Recent developments of EDI reflect the competitive importance of information technology in channel relationships (Walton 1994 ;
O’Callaghan et al. 1992). It is capable to make a breakthrough and take a competitive advantage in several aspects for channel partners (Wang and Seidman 1995 ; Holland et al.
1991). This means EDI has become a basic infrastructure or a must for firms in the 1990s
(Williams et al 1998). The development of EDI may certainly continue with a higher information technology in the 2000s.
Development Process of Convenience Store System
The development process of Seven Eleven Japan, which differs definitely from seven
Eleven in USA, is the fact that Seven Eleven Japan has been developing the system involving its vendors (Kawabe 1994). The first step for developing the system started with the
reforming of its distribution and logistics system. It resulted to construct the frequent and
small-lot delivery system of multi-items. The introduction of the electronic ordering system, the intensification of relationships with vendors, the collaborated logistic system, and
the introduction of the point of sales system were attained in this new system.
The second step was the alliances with manufacturers in merchandise categories of
daily foods. Fresh lunch boxes, rice balls, sandwiches, and delicatessen were included in
these merchandise categories, which were correspond to the instantaneity of consumption
aforementioned. While all of alliances have not been in success, almost alliances have
brought the compression of inventories, the reduced loss of sales opportunities, and
product developments and assortments in response to consumers’ needs, all of which were
base on information sharing with manufacturers and suppliers.
It also has reduced two types of risk. The first type is from the excessive holding of inventories. In past, Japanese retailers believed that the more inventories they had, the
more sales they could attain. For them, retailers holding small amount of inventories reflected their weak competitive powers and passive strategies. The second type of risk is
from the out-of-stock of merchandises. This brings the sales opportunity loss for retailers,
and the disappointment and dissatisfaction for customers. For Seven Eleven Japan, the
Supply Chain for the Synchronization of Production and Distribution
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higher accuracy of ordering was thought to bring the reduction of two types of risk and increased customer’s satisfaction. In this sense, the convenience store system of Seven
Eleven Japan has been a trial to combine the just-in-time assortments for customers and
the just-in-time supplies from vendors. This also means the postponement strategy and
reduced inventories in the total supply chain and storefront.
4. Concluding Remarks
The finding from a case study is that the total supply chain in the convenience store system is an evolutionary new system. The synchronization of production and distribution is
persistently being aimed under the condition of the instantaneous consumption. The
physical inventories have been compressed and substituted with information. The accurate information may absorb uncertainties without inventories (Yahagi 1996). For this
purpose, the information sharing with vendors is necessary. The vendor managed inventory (VMI) and the automatic replenishment program (ARP) are also adopted for ECR in
supply chains. This means the vendor monitors the buyer’s inventory levels and controls
the randomness and uncertainty of demands by his own decision-making (cf. Waller,
Johnson, and Davis 1999 ; Daugherty, Myers, and Autry 1999). While the innovative aspect of this evolutionary system will provide convenience stores with competitive advantage, it also has several managerial difficulties. It resulted in that all network alliances
which convenience stores pursued to construct could not be in success facing with the resistance and refusal of vendors. There lays the fundamental conflict between retailers and
manufacturers.
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