The Impact of Virtuality on the Manufacturing Networks Management: A Case Study

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1 The Impact of Virtuality on the Manufacturing Networks Management: A Case Study Claudia Aparecida de Mattos (FEI) claudia.mattos@poli.usp.br Fernando José Barbin Laurindo (USP) fjblau@usp.br Abstract The Internet and other integration tools, such as software for suppliers chain management (SCM), and electronic interactions between business players in the product s value chain, have transformed economy. This transformation has been described by a variety of names, including innovation economy, knowledge economy, network economy, digital economy and e-economy. As a result, information technology is beginning to have an impact on the structure and on the competitive dynamics of the global chains, as the vertically integrated value chain is being replaced by collaboration between firms. Thus, this article explores through a case study the phenomenon of interfirm collaboration and aims to analyze the nature of manufacturing virtual networks based on the model proposed by Shi (2002). The model, called GMVN (Global Manufacturing Virtual Network), is defined as a platform that establishes manufacturing configuration resources and represents a new type of manufacturing system whose capabilities are based on the infra-structure of the Internet and on the new collaboration models. Key-words: virtual organization, production chain, globalization. 1. Introduction When a multinational corporation integrates its geographically dispersed plants into a coordinated network, the resources are integrated, and also the suppliers chains. In this context, the management of interfirm networks becomes a great challenge, due to its complexity. According to Ferdows (1989), controlling an international network has become a challenging task. There are two important issues inherent in controlling an international manufacturing network. The first issue regards configuring the activities of the value chain across the international network of the plants. The second issue relates to the form of controlling the activities of the value chain in order to meet the demand and obtain advantages from the global network. In this context, it is important to provide managers with more options to organize manufacturing resources effectively and efficiently, as well as to understand interfirm collaboration and the nature of virtual networks. Shi (2002) suggests the model GMVN (Global Manufacturing Virtual Network), which represents a platform that defines the configuration of the chain s resources. According to Azevedo (2000), the intensification of the use of information technologies in all the sectors of economic activity has allowed the transition from competitiveness centered on factors of a tangible nature to competitiveness in which the emphasis is placed on 1

2 organizational questions, as well as on coordination and cooperation issues. In this context, the emergence of new factors of external and internal scope, such as markets globalization, the launch of new products in increasingly shorter periods of time, and technological proliferation in very heterogeneous areas, has caused profound alterations to organizations in order to stay competitive. Thus, the present work aims to explore, through a case study whose focus is a company with manufacturing plants located in different countries, the impact of virtuality on operations management based on the model proposed by Shi (2002). The model, called GMVN (Global Manufacturing Virtual Network), is defined as a platform that establishes manufacturing configuration resources and represents a new type of manufacturing system whose capabilities are based on the infra-structure of the Internet and on the new collaboration models. 2. Theoretical Framework 2.1 The Concept of Virtuality According to Azevedo (2000), the term virtual, in a manufacturing context, has its roots in Williamson s work, in In this work, the author mentions that industrial companies should externalize their activities whenever possible, no matter if they encompass products or services. Cohen (2002) mentions that virtualizing means having a new form of operating. It also means having a new conception of the supply chain a virtual supply chain. Virtual integration means gaining speed, agility and focus on competences. The characteristics that determine virtualization are the following: a) speed businesses are processed in minutes or hours, instead of weeks or months; b) strategy focused on competences and on the creation of links with suppliers, outsourced employees and partners, aiming to strengthen the business model with the competences of external organisms; c) customization through the relationship with customers via Web and with the established value chain; d) componentialized IT architecture in which several applications inter-relate aiming to link customers, suppliers, partners and internal functions, in order to optimize the capacity of systems, increase the robust storage capacity and integrate physical and digital infra-structures; and e) teams provided with communications tools and systems, guaranteed by a distinct culture which promotes quick answers, corporate quality and focus on the customer. To Evans & Wurster (2000), Information Economy disorganizes the physical value chain. Information, in turn, can recreate the value chain according to the new form acquired by the established business the virtual one. Virtualization is a condition that transcends the organization s physical aspect. Venkatraman & Henderson (1998) consider that virtuality is a characteristic that can be applied to any organization. However, this emerging architecture of virtual organizations is not possible or cannot be constituted without the significant power of IT. Considering that virtuality can be applied to any organization, these authors developed a model in which virtuality is defined as a strategy that reflects three distinct but interdependent vectors: Customer interaction vector; Asset configuration vector; Knowledge leverage vector. 2

3 According to Rayport & Sviokla (1995), companies start to compete in two worlds: the physical and the virtual. In the physical world, information is used to control the chain, either in inventories, logistics or processes. In the virtual world, information is used to offer a new type of value to the customer. 2.2 New Concepts developed from Globalization onwards (Shi, 2002) With globalization, the nature and intensity of competition has radically changed. Thus, three concepts related to this new scenario have been developed by researchers to describe the manner in which the organizations have been responding, or should respond, to this change (Shi, 2002): The global manufacturing network (GMN); The international strategic alliance (ISA); The virtual organization (Vo). According to Shi (2002), GMN research has its roots in the production disciplines. This research attempts to extend the traditional limits of the manufacturing system to disperse and coordinated global networks. However, this research focuses on the interior of a multinational corporation (Flaherty, 1986, 1996; Ferdows, 1989, 1997; Shi and Gregory, 1997, 1998). ISA (International Strategic Alliance) refers to interfirm collaboration and has been considered a logical and opportune response to the intense and quick changes of economic activity, of technology, and of globalization (Doz and Hamel, 1998). This new business context indicates that companies, in order to compete in domestic or global markets, must search for alliances. The alliance between companies to give form to an international manufacturing network has become one of the most significant means to reach competitive advantage. Therefore, the question is: If strategic alliance is the business form of the next years, how can companies meet the demand with agility? According to Shi (2002), it seems probable that the virtual corporation will play this role. There are at least three main reasons why virtual organizations and, specifically, manufacturing virtual organizations are emerging: Many companies have found advantages in moving from being traditional manufacturers to acting as system integrators (Ross, 1998; Fuchs, 2000; Grady, 1994; Do leste, 1994). The second reason is partly a consequence of the first. Companies are looking for integrated solutions for their customers, and, therefore, are outsourcing part of the offered solutions; other companies, providing specialized manufacturing services, were able to emerge among the system integrators and raw materials suppliers. The third reason is anchored on the opportunities allowed by the new information and communication technologies (ICT). Virtualization is a condition that transcends the organization s physical aspect. The transparency provided by ICT allows that companies reposition themselves in the chain and collaborate dynamically with other companies with the purpose of optimizing their position in the business. 2.3 GMVN Model (Shi, 2002) 3

4 According to Shi (2002), the GMVN model can be considered as a synthesis along three basic dimensions, as shown by Figure 1: Global disposition and the evolution of manufacturing internationalization are represented in the manufacturing internationalization dimension G ; Value-oriented manufacturing activities are represented in the value, M ; Collaboration with other companies to formulate a strategic alliance is represented by the strategic alliance dimension V ; These three dimensions should be integrated by an N synthesis process, which must include the process of the network s strategy, the communication platform and operational mechanisms. Figure 1 Context of the Manufacturing System and the Position of GMVN (Shi, 2002) The GMVN model can provide manufacturing managers with more options to organize manufacturing resources effectively and efficiently. Manufacturing internationalization: the manufacturing system is no longer a single local factory. Decisions must be made regarding geographic expansion or re-positioning. In this process, a company must take into account its international plants in the context of expansion and of its history and must direct itself explicitly towards cultural integration. Value chain the manufacturing system and its tasks must be defined along the chain through configuration (defining the manufacturing activities required in the value chain), proposition (part of the value chain to be controlled directly by a company), and optimization (partners selection, grouping and disposition of the activities to internal and external manufacturing resources), in order to create value and competitive advantage. Strategic alliances a spectrum of potential modalities of collaboration, including intrafirm coordination and interfirm cooperation. Synthesis Process the three dimensions above cannot be considered independently in the environment of the global competitor. It is essential to synthesize the elements into an integrated manufacturing system supported by a systematic strategy process and by the most appropriate technology (internet platform). 4

5 3. Case and Results The chosen method for the development of this research was Case Study. According to Yin (1994), Case Study, or the central tendency of all types of Case Study, is that they aim to clarify one decision or a set of decisions: why have they been made? How have they been implemented? What results have been achieved? The present study was carried out through semi-structured interviews with three professionals from the company (logistics manager, IT professional and the production director) and through secondary data obtained from the organization. Case Description Company X The studied company has a leading position in the sector of technology and engines manufacturing. The start-up of its operations in Brazil was in In 1995 it started its internationalization process with the opening of a plant outside the country. Later on, the company did a joint venture and in 2001 the control was handed to an international group. Nowadays, the company has three industrial units in Latin America and two in the USA. The plants are prepared to compete globally. The company mentions that the decision to install the plants in Latin America aimed to meet the needs of the customers in the region and to work as a basis for the export of products to the entire world. Supply and distribution flow Figure 2 shows the supply and distribution flow of the products of the analyzed company. It is possible to observe that the plants are installed in Latin America and in the USA, and besides the customers in Brazil, it has customers in the USA, England, Germany, France, Spain, and Italy. Managed by the EDI process (Electronic Data Interchange), the logistics guarantees just-in-time deliveries of the engines, that is, in the configurations and sequence programmed by the plant to decrease costs and inventories. The studied company synthesized the elements into an integrated manufacturing system by means of the use of the web platform. A portal was developed, aiming to support the processes of supply chain planning and control. 5

6 Figure 2-Configuration of the Company s Chain Chain Management WEB Platform 150 thousand dollars were invested in the platform for managing the operations along the production chain. The implementation of the project lasted 2 years. The main reasons for the development of the web platform for managing the production chain were: extremely fragile execution control process (large influence of the human factor), need of more reliability and lower response time, need of collaboration in the planning process, and demand volatility (volume and mix). The functionalities of the proposed portal are: Portal s Functionalities Schedule of supplier s deliveries Collaborative Planning: Schedule Acceptance (Aceite) Advance Shipment Notice (ASN) Payments to Suppliers Description - On-screen visualization, Print of schedule; - Download of files in Acrobat Reader format; - EDI in standard Anfavea format, automatic notices by at each new schedule; - Updates Purchase Orders according to the received acceptance, reduces negotiation time; Supplier informs shipment via: - Record on a WEB screen - Upload of RND (Text file in standard Anfavea format); Control via web of payments to suppliers Other Functionalities Distributors Table 1 Portal s Functionalities for the Chain Management 6

7 The company developed a portal for the distributors. Its main functions are: inflow, monitoring and cancellation of orders to the manufacturer, as well as detailed consultations about the status of the orders. Half of the distributors network is connected. This will reduce the amount of customers calls about the status of their orders. Analysis of the Results Analyzing the results according to the theoretical framework, it is possible to observe that the studied company adopted virtualization using the Internet as the main tool. The organization started its virtualization process with the implementation of the chain management portal, offering the following on-line processes: Collaborative Planning, Payment to Suppliers, Monitoring of Shipments and Schedule of Supplier s Deliveries. In this context, the study indicates that the WEB platform represented a means of integrating the elements of the manufacturing system. Each movement of origin and destination is electronically monitored by EDI, providing the customers and the involved operators with a complete view of the operation. In this context, Information became the main conductor, allowing a virtual integration of the members, independently of their location. Analyzing the manufacturing system of company X based on the Model proposed by Shi (2002), it can be verified that theory adheres to practice: analyzing the company in light of the model, it was possible to observe that the organization presents an evolution concerning manufacturing internationalization, with the installation of plants in other countries. The company also focuses on the dimensions of strategic alliances and value chain, through the alliances with logistic operators and suppliers. Although the analyzed company indicates adherence to the Model, the study did not clarify whether the company developed a process or used a model to define the manufacturing configuration resources with capabilities based on the Internet infra-structure and on the new collaboration models. The study indicated that the configuration and utilization of the web platform emerged in the company due to internal and external factors. Conclusion The study indicates that virtualization extended the company s limits to all its suppliers and customers, allowing the management of the operation as a whole. Each movement of origin and destination is electronically monitored, so that the customer and the involved operators have a complete view of the operation. The Portal enabled the communication, collaboration and trade between many users and geographical regions. And, more importantly, it joins suppliers and global partners using a single, standardized, flexible and open architecture, allowing improvements in productivity, vision and dialog, with a lower number of connections to be maintained. The transparency allowed by IT provides insights for repositioning in the chain and means for collaboration between companies, with the purpose of optimizing their position in the business. In this context, IT becomes the basis for the synthesis of the three dimensions: manufacturing internationalization, strategic alliances and value chain, as discussed in the Model proposed by Shi (2002). These dimensions cannot be considered independently in the environment of 7

8 the global competitor. It is essential to synthesize the elements into an integrated manufacturing system supported by a systematic strategy process and by the most appropriate technology (for example, the web platform). Finally, the formalization of the manufacturing operations management through a model as the one proposed by Shi (2002) allows to understand the variables of the process and in this context it becomes possible to configure the manufacturing system aiming at greater competitiveness and productivity. It is important to mention that many research possibilities are opened by the present study, involving both theoretical and empirical aspects. If virtuality is a central element in the coordination of manufacturing networks, as this work defended, it is interesting that more investigations would be conducted, since this study focused on only one case study in a company from the technology and engines sector. References AZEVEDO,A. A emergência da empresa virtual e os requisitos para os sistemas de informação. v. 7 n. 3p. Gestão & Produção p , COHEN, MAX F. Alguns aspectos do uso da informação na economia da informação. Ci. Inf. [online]. set./dez. 2002, vol.31, no.3 p Disponível na World Wide Web: < ISSN DOZ, Y. AND G. HAMEL Alliance Advantage: the art of creating value through partnering Havard Business Review, 1998 EVANS, PHILIP B.; WURSTER, THOMAS S. A explosão dos bits: blown to bits. Rio de Janeiro: Campus, FERDOWS, K. Mapping International Factory Network, in Ferdows, K. (ed), Managing International Manufacturing, North-Holland, New York, NY, FLAHERTY, M.T., Coordinating International Manufacturing and Technology, in M. E. Porter (Ed), Competition in Global Industries, Harvard Business School Press, FLAHERTY, M.T., Global Operations Management, McGraw-Hill, New York, 1996,. FLEURY, A,C. C. ; FLEURY, M. T. L. Competitive strategies and core competencies: perspectives for the internationalization of industry in Brazil. Gestão & Produção ago. 2003, vol.10, no.2, p ER, M; MACCARTHY, B. Configuration And Co-Ordination In International Supply Chains: The 6th International Symposium on International Manufacturing 9th - 11th September 2001 RAYPORT, J.F. SVIOKLA, J.J. Exploiting the Virtual Value Chain. Harvard Business Review, v.73, n.6, p.75-85, Nov./Dec., SHI, Y., FLEET, D. AND GREGORY, M.J. Global Manufacturing Virtual Network and its Position in Manufacturing Systems, in M. J. Gregory and Y. Shi (eds) 7th Annual Cambridge International Manufacturing Symposium Proceedings, Cambridge, UK SHI, YONGJIANG. Internationalisation of Manufacturing System: business evolutions, new system dimensions and platform The 6th International Symposium on International Manufacturing 9th - 11th September,

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