An Economic Efficiency of Korea as Supply Chain Hub in Asia

Size: px

Start display at page:

Download "An Economic Efficiency of Korea as Supply Chain Hub in Asia"

Carmel Doyle
5 years ago
Views:

1 , pp An Economic Efficiency of Korea as Supply Chain Hub in Asia Tran Van Quyet 1, Taikoo Chang 2* 1 Faculty of Economics, Thai Nguyen University of Economics and Business Administration, Vietnam, quyettv@yahoo.com 2 Professor, Department of Economics, Daegu University, Rep. of Korea * Corresponding Author: tkchang1@hanmail.net Abstract. The idea of this paper is to attain larger share of the world market by minimizing the transportation cost through establishing factories in Vietnam by Korean firms. Of course, we are going to establish warehouse in Vietnam because there is no need to have it far from factories located in Vietnam to escape the high transportation cost burden. But the factories might be placed in Korea because the need of factories located in home country of main firm is necessary condition of running business in general. But there is no need at all in having warehouse in the home country of business firm, since warehouse does not give big employment opportunity, and high technology is not needed in managing it. Therefore we have factories in Korea and Vietnam, warehouses in Vietnam, and markets worldwide. So the case of Korea as a supply chain means strategic or managerial notion, not the physical or geographical one only. The main target of this paper is to analyze the economic efficiency of Korea as a supply chain hub in real terms when it places production bases in Vietnam, its relevant economic partner, for minimizing the business cost and enlarging world market share. Key words: Logistics, Supply chain, Economic efficiency, Foreign direct investment, Linear programming. 1 Introduction The model tries to delineate the economic efficiency of Korea in logistics network as a real supply chain hub by establishing production facilities in Vietnam through foreign direct investment. Simulation method on the logistics network model for Vietnam and Korea with transportation data will be used to measure the cost saving effect of setting up relevant logistics network. 2 Logistics Network Model * This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2013S1A2A1A ). ISSN: ASTL Copyright 2015 SERSC

2 2.1 Data The distance data between Vietnamese and partner s seaports are gathered to use as a proxy of transportation cost. The main two seaports of Vietnam are presented in the Table 1. Ho Chi Minh City, and Haiphong near Hanoi, and main city or harbor of each country are presented to calculate the distance between factories and warehouses, or warehouses and markets. And it is assumed that the distance between Haiphong and Ho Chi Minh City is 700, and 100 from factories near Hanoi to Haiphong harbor, and from those near Ho Chi Minh City to Ho Chi Minh harbor. The gross domestic products (GDP) of main 6 countries are presented to figure out the size of markets selling the finished products after receiving them from warehouses. And GDP per capita of each country is shown for calculating the wage level to compare the intrinsic costs of logistic networks in Table 2. We have just focused on big 6 market, Germany, China, Japan, Rep. of Korea, USA, and UK which have GDP over 1 billion USD to measure the cost minimization through economically relevant logistics network planning. And to figure out the general cost savings in global logistics chain, it will be reasonable to replace GDP/Capita shown in Table 2 as unit cost, especially labor cost, not just comparing pure transportation cost. Table 1. The distance between Vietnamese and partner s seaports Partners Starting point Final destination Distance(Nautical miles) Germany Ho Chi Minh City Hamburg 9,145 China Haiphong Guangzhou 503 Japan Haiphong Tokyo 2,049 Rep. of Korea Haiphong Seoul 1,676 USA Ho Chi Minh City New Orleans 11,344 UK Ho Chi Minh City London 8,845 Table 2. The GDP and GDP per Capita of each country (year 2012) Countries GDP(bill. USD) GDP/Capita(USD) Germany 3,400 41,545 China 8,277 6,091 Japan 5,960 46,720 Rep. of Korea 1,129 22,582 USA 15,685 49,965 UK 2,435 38,514 Vietnam 142 1, Copyright 2015 SERSC

3 2.2 Model The main company can arrive at physical distribution cost minimization from production to sales through utilizing overseas production or warehouse bases on logistics network system. For the cost minimization purpose, it is needed to use linear programming of logistics network model, that is, Minimize {1676x(p1,w1) x(p1,w2) + 100x(p2,w1) + 700x(p2,w2) + 700x(p3,w1) + 100x(p3,w2) x(w1,c1) + 503x(w1,c2) x(w1,c3) x(w1,c4) x(w1,c5) x(w1,c6) x(w2,c1) x(w2,c2) x(w2,c3) x(w2,c4) x(w2,c5) x(w2,c6)}, subject to x(p1,w1) + x(p1,w2) <= 18418, x(p1,w1) + x(p2,w1) + x(p3,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3) + x(w1,c4) + x(w1,c5) + x(w1,c6), x(p1,w2) + x(p2,w2) + x(p3,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3) + x(w2,c4) + x(w2,c5) + x(w2,c6), x(w1,c1) + x(w2,c1) = 3400, x(w1,c2) + x(w2,c2) = 8227, x(w1,c3) + x(w2,c3) = 5960, x(w1,c4) + x(w2,c4) = 15685, x(w1,c5) + x(w2,c5) = 2435, x(w1,c6) + x(w2,c6) = 1129, and all flows from factories to warehouses, warehouses to markets be greater than or equal to zero. The x(pi,wi) denotes product volume flowing from factory to warehouse, x(wi,ci) is volume from warehouse to market. And specific numbers on the right side of constraints, like 18,418, are the limits which cannot be overwhelmed by flowing amount represented of the left hand side volume. Each number of main cost minimization equation represents the transportation cost between factory and warehouse, or warehouse and market, in other words distance between them. 3 Results of Data Analysis 3.1 Cost Effectiveness We tried the three cases on the logistics network analysis, limit on Korean factory capacity 18,418 half of total production amount, on Vietnamese factory 18,418 as a whole, and lastly on Hanoi and Ho Chi Minh City factory 9,209 each. The total cost of transportation was shown 252,487,240, 283,685,408, 289,210,808 respectively, which means no restriction on Vietnamese factory capacity brings about biggest cost effectiveness of physical distribution. Especially if there is strict limits on each regional factory, 9,209 on Hanoi factory and Ho Chi Minh factory respectively, the total cost arrives at highest amount compared to other cases. With these data analysis results, it is shown that free streaming of production, storage, sale gives better Copyright 2015 SERSC 109

4 economic efficiency. In other words, any public or private limitation on global logistics network might harm the cost saving logistics network. And in the case of limiting Korean factory capacity, the limit has not practical meaning on the production amount of Korean company since it is assumed that Korea uses the warehouse located in Vietnam because of labor cost effectiveness and geographical advantages. Then if there is no any special circumstances, production of Korean factory will not happen. But it might be supposed that the company headquarter decide to limit the production amount in overseas factories because of technological improvement with developer and quality control with technician domestically. Therefore the limitation on Vietnamese factory as a whole or each factory is levied with a practical business point of view. But when the limitation was imposed on Vietnamese factory, the limit was used up, 18,418 as a whole, and 9,209 on Hanoi and Ho Chi Minh City factory respectively. The production, storage, sale, and delivery amount analysis shows that when limit is imposed on Korean factory, production is taken place 15,316 at Hanoi factory, 21,520 at Ho Chi Minh City factory, each of the production amount of the two regions being delivered to near warehouse. The production amount of each factory is not same because transportation distance between markets and warehouses are different, that is, the products delivered to Hanoi warehouse is transported to China, Japan, and Korea market, whereas products stored in Ho Chi Minh City warehouse is delivered to Germany, USA, and UK markets on the basis of cost savings. When the production limitation of 18,418 is levied on Vietnamese factory as a whole, the production is done in Ho Chi Minh factory only since Hanoi has not the production and storage advantage in terms of delivery cost. But the 15,316 product units of Korean factory is transported to Hanoi warehouse which is just enough to deliver to China, Japan, Korean markets, and 3,102 to Ho Chi Minh warehouse added to the total amount to deliver to Germany, USA, and UK markets for cost saving. And finally when production limitation of 9,209 is imposed on Hanoi and Ho Chi Minh factory respectively, the total production amount of two regional factories are delivered to Ho Chi Minh warehouse to save transportation cost as a whole, factory to warehouse and warehouse to market. 3.2 Sensitivity Analysis With reduced cost it is reasoned that the productivity, in terms of cost savings, of Korean factories should be increased by 1,576, delivering products to warehouse in Hanoi, or by 2,276, delivering to warehouse in Ho Chi Minh City, which means the intensive competition in production and logistics in worldwide economy to keep or enlarge market share. The geographical situation cannot be overcome itself, therefore technological or managerial advancement are major requirement to keep production or logistics facility domestically, especially for the employment increase. And the allowable increase or decrease amount shows that geographical distance play a key role in determining the production amount. Like the case of reduced cost analysis above, the productivity improvement is necessary condition to keep domestic production facility and employment level. And to run the logistic facility domestically, that is warehouse here, the total managerial cost of it should be saved by more than 110 Copyright 2015 SERSC

5 the cost caused by distance difference, through renovation or innovation. The shadow price analysis explains the relationship between increase of commodity amount and cost of it. But there is shown minus shadow price value, which means that 1 unit increase of production in Vietnamese factory bring about 2,276 decrease of total cost, even though it is transportation cost here. So the loosening of the production amount limitation gives relatively big cost savings as a whole, and conclusively larger market share worldwide. And it is -1,676 shadow price of Hanoi factory, and -2,276 of Ho Chi Minh City factory, resulting different cost saving depending on the location of factory. It is because of the distance difference resulting from vicinity of Ho Chi Minh City to world big markets. And the allowable increase value explains the importance of limitation or loosening production capacity in evaluating the total cost of running. 4 Conclusion To be supply chain hub Korea need to establish warehouse as well as production facility for total cost minimization as a whole, therefore this paper assumed to have warehouse facility in Vietnam utilizing its labor cost and geographical easiness to the world markets. But the limit on production facility of both country s factory are imposed to accept the actual situation of technological and managerial importance in the product development and testing of products in domestic market. The total logistics network cost is shown to increase gradually as limitation on production amount is levied nationally, and regionally, that is Vietnamese factories as a whole, and Hanoi and Ho Chi Minh factory respectively. When the production limitation was imposed on Korean factory only, the production had taken place in Vietnamese factory only. And when the limits was levied on Vietnamese factory as a whole or its regional factories respectively, the production amount limited were used up to facilitate the cost minimization target. This analysis results mean that the less the limits on production facility imposed, the bigger the logistics network cost savings brought about. In other words, Korean companies could utilize the merit of supply chain hub through freeing the shackles of production amount on specific location as much as possible even though there is need of somewhat limit for high quality production control when they move overseas their production facility through FDI, the foreign direct investment. And it is shown that each country s factory delivers its products produced to respective warehouses on the basis of total transportation cost saving by itself, as expected theoretically. In the sensitivity analysis it is concluded that the total unit cost should be decreased by more than transportation cost disadvantage to have at least 1 unit of production amount when there was no production happened before. This means that any country having higher transportation cost compared to other countries should have to try overcome the disadvantage through technological or managerial advancement to decrease the total cost or market price up to worldwide competitive level. And in the shadow price analysis the data showed that the lessening of limit on production amount creates cost savings as much as delivery cost, which reassure the importance of efficient logistics network planning. Now the time is arrived to analyze Copyright 2015 SERSC 111

6 not only production cost itself but transportation cost, for minimum total cost, to play as a competitive supply chain hub of Korea through establishing production and storage bases worldwide on the basis of economic efficiency. References 1. Byrne, M. P.: Best Practice in Global Operations, Presentation at the 2006 MIT Manufacturing Conference, (Dec. 6, 2006) 2. Cachon, G. P.: Supply Coordination with Contracts, In Handbook in Operations Research and Management Science, ed. Steve Graves and Ton de Kok, Amsterdam: North-Holland, (2002) 3. Cela Daiz, F.: An Integrative Framework for Architecting Supply Chains, MS Thesis, Massachusetts Institute of Technology, (2005) 4. Lawrence, John A. Jr. and Barry A. Pasternack: Applied Management Science: Modeling, Spreadsheet Analysis, and Communication for Decision Making, John Wiley & Sons, Inc., (2002) 5. Martinez de Albeniz, V. and D. Simchi-Levi: Competition in the Supply Option Market, Working paper, Massachusetts Institute of Technology, (2005) 6. Schrader, C.: Speeding Build and Buy Processes across a Collaborative Manufacturing Network, ASCET 3, 82-88(2001) 7. Simchi-Levi, David, et al.: Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies, Mcgraw-Hill, (2009) 8. Simchi-Levi, et al.: The Logic of Logistics: Theory, Algorithms and Applications for Logistics and Supply Chain Management, 2 nd ed. Springer-Verlag, New York, (2004) 9. Troyer, C., and R. Cooper: Smart Moves in Supply Chain Integration, Transportation & Distribution 36, 55-62(1995) 112 Copyright 2015 SERSC

Service Quality and Its Effects on Customer Satisfaction with Deposit Services in the Banking Industry

, pp.18-23 http://dx.doi.org/10.14257/astl.2015.102.05 Service Quality and Its Effects on Customer Satisfaction with Deposit Services in the Banking Industry Tran Van Quyet 1, Nguyen Quang Vinh 2, Taikoo