Supply Management Practices and Strategies

**References**

7916-2

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**6**

[1] Khan SAR, Dong Q. Impact of green supply chain management practices on firms' performance: An empirical study from the perspective of Pakistan. Environmental Science and Pollution Research. 2017;**24**:16829-16844. DOI:

*Modern Perspectives in Business Applications*

implementing green supply chain management towards sustainability: An empirical investigation of Indian automobile industry. Journal of Cleaner

Production. 2016;**121**:142-158

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[8] Gunasekaran A, Spalanzani A. Sustainability of manufacturing and services: Investigations for research and applications. International Journal of Production Economics. 2012;**140**(1):

[9] Mangla S, Madaan J, Chan FT. Analysis of flexible decision strategies for sustainability-focused green product recovery system. International Journal of Production Research. 2013;**51**(11):

[10] Omkareshwar M. Green marketing initiatives by corporate world: A study. Advances in Management. 2013;**6**(3):

[11] Zhu Q, Sarkis J, Lai KH. Green supply chain management: Pressures, practices, and performance within the Chinese automobile industry. Journal of Cleaner Production. 2007;**15**(11):

[12] Awasthi A, Kannan G. Green supplier development program selection using NGT and VIKOPR under fuzzy environment. Computers and Industrial

Engineering. 2016;**91**:100-108

[13] Hu AH, Hsu CW. Critical factors for implementing green supply chain management practice: An empirical study of electrical and electronics industries in Taiwan. Management Research Review. 2010;**33**(6):586-608

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[2] Khan SAR, Qianli D, SongBo W, Zaman K, Zhang Y. Environmental logistics performance indicators

[3] Khan SAR. Introductory chapter: Introduction of green supply chain management [online first]. IntechOpen. 2018. DOI: 10.5772/intechopen.81088. Available from: https://www.intechopen. com/online-first/introductory-chapterintroduction-of-green-supply-chain-ma

[4] Sarkis J, Zhu Q, Lai K. An

organizational theoretic review of green supply chain management literature. International Journal of Production Economics. 2011;**130**(1):1-15

[5] Andic E, Yurt O, Baltacioglu T. Green supply chains: Efforts and potential applications for the Turkish market. Resources, Conservation and Recycling.

[6] Khan SAR, Dong QL, Yu Z. Research on the measuring performance of green supply chain management: In the perspective of China. International Journal of Engineering Research in Africa. 2016;**27**:167-178. DOI: 10.4028/ www.scientific.net/JERA.27.167

[7] Luthra S, Garg D, Haleem A. The impacts of critical success factors for

affecting per capita income and sectoral growth: Evidence from a panel of selected global ranked logistics countries. Environmental Science and Pollution Research. 2017;**24**(2): 1518-1531. DOI: 10.1007/s11356-016-

**9**

**Chapter 2**

**Abstract**

Management

Role of Visibility in Supply Chain

*Zulkaif Ahmed Saqib, Khubaib Ahmed Saqib and Jin Ou*

**Keywords:** visibility, information sharing, manufacturing industries,

supply chain management, customers

the critical piece from its own business [2, 3].

**1. Introduction**

It is substantial for manufacturing industries to enforce and seek out new strategies regarding supply chain management to endure within the current competitive and capricious business climate which is critical. We try to underlie a policy for manufacturers to connect all operational issues related to the supply chain. This chapter suggests a concept of visibility that represents a beneficial role among business partners such as manufacturers, supplier, and customers. The categorization of several types for uncertainties in the supply chain such as demand, quality, broader variety, time, and customization of a product are related to the decision-maker. Management of uncertainties applicable with the help of sharing the information creates visibility among supply chain partners. Implementing supply chain visibility becomes easier just because of passing information about products globally which is more a matter of priorities and investment, which is not the case when sharing "official data" about people. As social technologies become more prominent, this may change over time. So, supply chain visibility is beneficial for supply chain partners.

Different appliances for manufacturer and distributor are facing at a crossbreed-

ing in the supply chain network. Throughout the years, the appliance producer haunted to build up a considerable connected network among supply chain partners to sustain its high criteria for customer support. Nevertheless, different manufacturing industries controlled neither visibility into nor control over how to sanctioned peculiar service center's operations [1]. The manufacturer ran out from an efficient and competent procedure for sharing data about replacement parts as well as warranty. The manufacturer has known that if it keeps further on its direction as regards worldwide growth, it had to discover new ways in favor of surviving in this competitive environment and need to increase its supply chain visibility with the help of sharing information and data to monitor, supervise, as well as amalgamate

Mostly, manufacturers' focus on several projects for supply chain visibility is to equipping more accurate, precise, faithful, and rigorous real-time portrait of demand, quality, and price indications or information about supplier's inventory levels [4]. However, manufacturers are the commencement to strengthen visibility while facing an increasingly complex directive climate which is a support to encounter compliance and obedience guidelines which are associated with different kinds

### **Chapter 2**

## Role of Visibility in Supply Chain Management

*Zulkaif Ahmed Saqib, Khubaib Ahmed Saqib and Jin Ou*

### **Abstract**

It is substantial for manufacturing industries to enforce and seek out new strategies regarding supply chain management to endure within the current competitive and capricious business climate which is critical. We try to underlie a policy for manufacturers to connect all operational issues related to the supply chain. This chapter suggests a concept of visibility that represents a beneficial role among business partners such as manufacturers, supplier, and customers. The categorization of several types for uncertainties in the supply chain such as demand, quality, broader variety, time, and customization of a product are related to the decision-maker. Management of uncertainties applicable with the help of sharing the information creates visibility among supply chain partners. Implementing supply chain visibility becomes easier just because of passing information about products globally which is more a matter of priorities and investment, which is not the case when sharing "official data" about people. As social technologies become more prominent, this may change over time. So, supply chain visibility is beneficial for supply chain partners.

**Keywords:** visibility, information sharing, manufacturing industries, supply chain management, customers

### **1. Introduction**

Different appliances for manufacturer and distributor are facing at a crossbreeding in the supply chain network. Throughout the years, the appliance producer haunted to build up a considerable connected network among supply chain partners to sustain its high criteria for customer support. Nevertheless, different manufacturing industries controlled neither visibility into nor control over how to sanctioned peculiar service center's operations [1]. The manufacturer ran out from an efficient and competent procedure for sharing data about replacement parts as well as warranty. The manufacturer has known that if it keeps further on its direction as regards worldwide growth, it had to discover new ways in favor of surviving in this competitive environment and need to increase its supply chain visibility with the help of sharing information and data to monitor, supervise, as well as amalgamate the critical piece from its own business [2, 3].

Mostly, manufacturers' focus on several projects for supply chain visibility is to equipping more accurate, precise, faithful, and rigorous real-time portrait of demand, quality, and price indications or information about supplier's inventory levels [4]. However, manufacturers are the commencement to strengthen visibility while facing an increasingly complex directive climate which is a support to encounter compliance and obedience guidelines which are associated with different kinds

of business practices, ecological mandates, forthcoming serialization approach, as well as track-and-trace laws and regulations. Classified and more conspicuous domains are important for sustainable development where the advanced shape of supply chain visibility intervenes as regards to play for ecological compliance [3, 5–8]. Rules, regulations, and laws for provisions like Evaluation, Registration, Restriction, and Authorization of Chemical Substances elicits the manufacturers toward responsibility in favor of monitoring and handling the hazardous chemical materials as well as substances.

These mandates might be entirely considerably costly to redesigns, discarded components, pluggable consignment, feasible consumer's disappointment, and perhaps extortionate charges as regard the implications for manufacturers that are not on top. Most manufacturers are remaining utilizing the manual processes to retrieve spreadsheets, even indigenous databases for domestic companies to accomplish and organize this data according to their supply chain network. On the other hand, a huge assortment of several products provided by enterprises from supply chain network which declared as suites or sets for product lifecycle management (PLM) that are appending functionality to promote manufacturers automate according to their processes. Moreover, a successful track system and controllable monitoring system might be enhancing the environmental performance of their products with the help of sharing information (visibility) as regards to supplying chain management.

In this chapter, we will try to explain the answers of questions which are related to visibility role in the supply chain. These questions are: What is visibility? How could all these terms on supply chain visibility, logistics, sustainability, traceability, planning, the inventory level of supplier, and execution be identified? Why is visibility important for the supply chain? What is the value of visibility for supply chain network? And lastly, what are the benefits of SCV?

### **2. Supply chain management terms**

Supply chain management (SCM) can help maximize customer satisfaction and boost profitability, but it is also rather complicated and requires collaboration across the entire enterprise and beyond. SCM covers the several kinds of processes in the supply chain from planning, controlling, organization, and procurement of raw material to production and distribution level to the final destination that is necessary to get a product out of the warehouse and to the customer most efficiently and effectively. Because SCM lies at the core of many businesses, it is crucial to have a strong understanding of the processes involved and how they differ. To start, we have compiled a list of seven supply chain management terms to be explained to both organizations and customers which they should be familiar with:


**11**

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

environment.

the lowest possible cost.

and receive updates.

all practices related to environmentally, social-friendly as well as to improve the encouragement as regards positive brand awareness within a competitive

3.*Traceability*: companies can benefit from implementing traceability, the ability to identify and track the components that make up a final product. It essentially allows a producer, distributor, or supplier to inspect for any issues that may arise before or after a product reaches the consumer. The recent contamination outbreak that was linked to romaine lettuce in the USA is a great example. This is the most accurate and efficient way to find out what went wrong and where and, in some cases, prevent the problem in the first place. Without proper traceability and best practices, companies especially larger businesses would not be at danger level of failure about millions in production costs, sales, different kind of charges, as well as legal bills, although all these businesses will necessarily put and invest to their final consumers at any level of danger as well. Fortunately, national and international laws address economic, health, or environmental concerns and enforce traceability across several industries.

4.*Planning*: supply chain planning is used to balance supply and demand, forecast future needs, and ensure adequate supply to meet those needs. It starts with a demand plan, which gathers all the necessary data and information in one place before translating it into the respective planning, execution, and distribution processes. Once approved, you can then create a master production schedule that will monitor items across the supply chain by location, inventory, order, production time, and quantity. Other critical elements of SCP that help the business plan for the future are consumer forecasting and supply collaboration.

5.*Inventory management*: tight control of inventory can be crucial to a company's success. By implementing inventory management software, you can keep detailed records of every product or material that goes in and out of the warehouse, whether it is new or returned. The lot and serial numbers, quantity of goods, and cost of goods are just some of the data employed in inventory management. There are also specific techniques or methodologies to inventory management such as stock review, just-in-time method, and ABC analysis that ensure you have the right amount of materials to meet demand at

6.*Execution*: one of the more common supply chain management terms, SCE, focuses on all of the actions needed to get a product to the customer before or on the estimated date of arrival. That includes the monitoring procedure for the goods as well as materials as they arrive and move through the warehouse and scheduling of transportation services to deliver the final product, as well as the financial transactions. By doing so, SCE applications, which are often connected to SCP systems, also give customers the ability to track a product

7.*Supply chain visibility*: SCV is one of the more valuable supply chain management terms because it offers companies and their customers more time and actionable information about their supply chain orders. Manufacturers and retailers can pull information from SCV software that they can share with customers so they can track their orders in real time. If there is a disruption or issue while a product is in transit to its final destination, SCV will quickly provide data that give manufacturers the fastest option to redirect the supply. *Modern Perspectives in Business Applications*

materials as well as substances.

of business practices, ecological mandates, forthcoming serialization approach, as well as track-and-trace laws and regulations. Classified and more conspicuous domains are important for sustainable development where the advanced shape of supply chain visibility intervenes as regards to play for ecological compliance [3, 5–8]. Rules, regulations, and laws for provisions like Evaluation, Registration, Restriction, and Authorization of Chemical Substances elicits the manufacturers toward responsibility in favor of monitoring and handling the hazardous chemical

These mandates might be entirely considerably costly to redesigns, discarded components, pluggable consignment, feasible consumer's disappointment, and perhaps extortionate charges as regard the implications for manufacturers that are not on top. Most manufacturers are remaining utilizing the manual processes to retrieve spreadsheets, even indigenous databases for domestic companies to accomplish and organize this data according to their supply chain network. On the other hand, a huge assortment of several products provided by enterprises from supply chain network which declared as suites or sets for product lifecycle management (PLM) that are appending functionality to promote manufacturers automate according to their processes. Moreover, a successful track system and controllable monitoring system might be enhancing the environmental performance of their products with the help of sharing

In this chapter, we will try to explain the answers of questions which are related to visibility role in the supply chain. These questions are: What is visibility? How could all these terms on supply chain visibility, logistics, sustainability, traceability, planning, the inventory level of supplier, and execution be identified? Why is visibility important for the supply chain? What is the value of visibility for supply

Supply chain management (SCM) can help maximize customer satisfaction and boost profitability, but it is also rather complicated and requires collaboration across the entire enterprise and beyond. SCM covers the several kinds of processes in the supply chain from planning, controlling, organization, and procurement of raw material to production and distribution level to the final destination that is necessary to get a product out of the warehouse and to the customer most efficiently and effectively. Because SCM lies at the core of many businesses, it is crucial to have a strong understanding of the processes involved and how they differ. To start, we have compiled a list of seven supply chain management terms to be explained to

information (visibility) as regards to supplying chain management.

both organizations and customers which they should be familiar with:

in the supply chain: transportation and warehousing.

1.*Logistics*: logistics and SCM are often used interchangeably, whereas SCM covers an extensive scope of operations and activities required to organize as well as produce life of a product's journey from the factory to the warehouse and then to the consumer; logistics only focuses on two essential constituents

2. *Sustainability*: supply chain sustainability focuses on the big picture about ecological, social, and economic issues, including legal issues related to supply chain. Organizations have to consider several problems that could affect SCS, such as air pollution, wastage of hazardous material, leakage of carbon footprint emissions (CO2 gasses, etc.), labor violations, and desertification related to health and safety issues of workers. The final intention is to implement

chain network? And lastly, what are the benefits of SCV?

**2. Supply chain management terms**

**10**

all practices related to environmentally, social-friendly as well as to improve the encouragement as regards positive brand awareness within a competitive environment.


To put it simply, SCV's main objective is to enhance as well as intensify the supply chain by providing accurate real-time data to all parties involved. Furthermore, manufacturers remain employing SCV to encounter conformity enforcement such as those associated with business practical exercises, environmental demands, upcoming serialization, and track-and-trace laws.

Today, all best practices for supply chain management are regarding the development of the imagination of the big picture as well as all sustaining deeds and actions required to comprehend that situation. Different objectives such as a prosperous aqueduct strategy, sustainability (environmental, social, and economic), as well as supply chain visibility are faultless models for accomplishments that are the impossible absence of a major rank of orchestration, instrumentation, collaboration, and leadership. A supply chain operating smoothly could also progressively incorporate complicated technology, machinery, as well as the methodology that could provide bigger insight, visibility with regard to sharing information, implementation, inventory management, planning, and traceability from the association of digital supply chain and manufacturing procedures to analytics.

*Visibility*: the strategic importance of supply chain for manufacturing sectors of an economy makes it paramount that companies measured their performance. Performance measurement in the context of the time, quality, and cost are of high importance to manufacturing companies [9]. Each manufacturing company competes with large companies within different industries such as textile, cement, sports, garments, furniture, auto, electronics, and agriculture. Competitive advantage is an arduous task for companies to gain within a competitive environment. There is increasing attention within the ground of supply chain management. Furthermore, also attention has deemed toward the importance of information sharing.

*Information sharing about components or products, raw material components, during carriage out to transit could be tracked from the manufacturer to their final destination or consumer called as visibility in supply chain or supply chain visibility (SCV).*

By collecting and sharing information from multiple organizations, information sharing (visibility) can present their members with a detailed picture of malicious activity taking place within a specific sector or geographic region. Member organizations can then use this information to individually and collectively block attacks they may not have known about otherwise. Organizations can get benefit from joining some information sharing activities in several different ways. By sharing and receiving actionable cyber threat information, organizations can gain an enhanced understanding of their threat environment and make better and more timely decisions about how to allocate cybersecurity resources to defend themselves [9–11].

The final destination of SCV turns into enhancement and effectiveness of the supply chain network by developing data directly accessible to all interested business parties, including the customers, suppliers, buyers, as well as producers. SCV contains additional momentous roles among companies. Companies should have delocalized different components for the whole supply chain as well as lost the control and the visibility achieved over what used to be part of operations. In supply chain network the visibility (information sharing), technology facilitates and quickly responds to the transformation which is allowing to favored users to take action and reshape product demand or divert supply. The integration of the chain, both internally and externally, through information sharing (visibility) could bring an improvement for the supply chain achievement. On the other hand, visibility becomes a fundamental thought for logistics activities according to supply chains; it establishes appropriate information sharing process among supply chain

**13**

**Figure 1.**

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

customer contact (final destination) approached.

*Supply chain management and visibility (information sharing).*

products that are located.

the goods could join.

managers such that it permits them to be experienced and knowledgeable to all appearances of trade. It enables the manufacturers, shippers, retailers, suppliers, as well as consumers to possess an opinion precisely about the supply chain and their

The concept of the exercise of new technology, methodology, and procedures to accomplish comprehensive visibility across the whole supply chain is not a new concept; because in 2000, all appearances were not initiated as regarding to the supply chain sustainability management and the exercise of a different kind technology get more control to maximum level. Furthermore, the development of these exercises related to different kinds of technologies showed up at about a point in time when each manufacturing company was searching a fresh supply chain technology, strategy, and process by means of resolution to the provision of world peace and world hunger [12]. Visibility within supply chain enables the suppliers, manufacturers, retailers, shippers, and even final consumers to have that concept of accurately where conjointly the supply chain their products positioned. At each indication point conjointly to the supply chain, the flow of information from the termination line of the raw material from the supplier side to the launching point of

A business instance about procurement in supply chain and visibility software requires to concentrate on alleviation torment queries in a specific supply chain management system in the business. For example, the basic preference in favor of a producer who makes basic arrangements according to agreements and commitments with the subcontracting condition could be obtaining perfect visibility into disruptions that might create a serious strike to product delivery, whereas the priority for a producer of wrapped finished goods could also be obtaining profile into supplier inventory shortages that could have a negative effect because of order fill rates (see **Figure 1**). Furthermore, visibility could be obtained from the convenience of economical sensors and connectivity through Internet components which have created supply chain visibility which is easier for producers in the last few years. Exactly, it's feasible to understand about the location, time, and surety. For example, in many cases consumer want to track at any time about where are goods, and what condition

In addition to offering a correct, real-time image of requirement indication as well as supplier's stock inventory levels, producers are utilizing the visibility concept as a strategy to help satisfy acquiescence instructions relevant to business practices and practical, ecological demands as well as forthcoming serialization and different kinds of track-and-trace laws. In various industries, supply chain visibility applications are arranged with misfortune healing plans. For instance, the consolidation of supply chain visibility of different techniques and new technologies as a resource for enhancing on-time delivery set out an apparatus that might be offered considerable achievements to consumers contentment and satisfaction level. In a latest research on supply chain superior methods for the survey, the results showed that to carry out 100% on-time delivery satisfaction, manufacturing firms had to have elevated inventory level in hand for several weeks [13]. The closing inventory is directly influenced the holding and operational costs overall. The fundamental perception as to whether or not visibility provides several resources for advancement as regards delivery time becomes very crucial to the supply chain industry with these

*Modern Perspectives in Business Applications*

supply chain and manufacturing procedures to analytics.

To put it simply, SCV's main objective is to enhance as well as intensify the supply chain by providing accurate real-time data to all parties involved. Furthermore, manufacturers remain employing SCV to encounter conformity enforcement such as those associated with business practical exercises, environmental demands, upcoming serialization, and track-and-trace laws.

Today, all best practices for supply chain management are regarding the development of the imagination of the big picture as well as all sustaining deeds and actions required to comprehend that situation. Different objectives such as a prosperous aqueduct strategy, sustainability (environmental, social, and economic), as well as supply chain visibility are faultless models for accomplishments that are the impossible absence of a major rank of orchestration, instrumentation, collaboration, and leadership. A supply chain operating smoothly could also progressively incorporate complicated technology, machinery, as well as the methodology that could provide bigger insight, visibility with regard to sharing information, implementation, inventory management, planning, and traceability from the association of digital

*Visibility*: the strategic importance of supply chain for manufacturing sectors of an economy makes it paramount that companies measured their performance. Performance measurement in the context of the time, quality, and cost are of high importance to manufacturing companies [9]. Each manufacturing company competes with large companies within different industries such as textile, cement, sports, garments, furniture, auto, electronics, and agriculture. Competitive advantage is an arduous task for companies to gain within a competitive environment. There is increasing attention within the ground of supply chain management. Furthermore,

*Information sharing about components or products, raw material components, during carriage out to transit could be tracked from the manufacturer to their final destination or consumer called as visibility in supply chain or supply chain visibility (SCV).*

By collecting and sharing information from multiple organizations, information sharing (visibility) can present their members with a detailed picture of malicious activity taking place within a specific sector or geographic region. Member organizations can then use this information to individually and collectively block attacks they may not have known about otherwise. Organizations can get benefit from joining some information sharing activities in several different ways. By sharing and receiving actionable cyber threat information, organizations can gain an enhanced understanding of their threat environment and make better and more timely decisions about how to allocate cybersecurity resources to defend themselves [9–11]. The final destination of SCV turns into enhancement and effectiveness of the supply chain network by developing data directly accessible to all interested business parties, including the customers, suppliers, buyers, as well as producers. SCV contains additional momentous roles among companies. Companies should have delocalized different components for the whole supply chain as well as lost the control and the visibility achieved over what used to be part of operations. In supply chain network the visibility (information sharing), technology facilitates and quickly responds to the transformation which is allowing to favored users to take action and reshape product demand or divert supply. The integration of the chain, both internally and externally, through information sharing (visibility) could bring an improvement for the supply chain achievement. On the other hand, visibility becomes a fundamental thought for logistics activities according to supply chains; it establishes appropriate information sharing process among supply chain

also attention has deemed toward the importance of information sharing.

**12**

managers such that it permits them to be experienced and knowledgeable to all appearances of trade. It enables the manufacturers, shippers, retailers, suppliers, as well as consumers to possess an opinion precisely about the supply chain and their products that are located.

The concept of the exercise of new technology, methodology, and procedures to accomplish comprehensive visibility across the whole supply chain is not a new concept; because in 2000, all appearances were not initiated as regarding to the supply chain sustainability management and the exercise of a different kind technology get more control to maximum level. Furthermore, the development of these exercises related to different kinds of technologies showed up at about a point in time when each manufacturing company was searching a fresh supply chain technology, strategy, and process by means of resolution to the provision of world peace and world hunger [12]. Visibility within supply chain enables the suppliers, manufacturers, retailers, shippers, and even final consumers to have that concept of accurately where conjointly the supply chain their products positioned. At each indication point conjointly to the supply chain, the flow of information from the termination line of the raw material from the supplier side to the launching point of customer contact (final destination) approached.

A business instance about procurement in supply chain and visibility software requires to concentrate on alleviation torment queries in a specific supply chain management system in the business. For example, the basic preference in favor of a producer who makes basic arrangements according to agreements and commitments with the subcontracting condition could be obtaining perfect visibility into disruptions that might create a serious strike to product delivery, whereas the priority for a producer of wrapped finished goods could also be obtaining profile into supplier inventory shortages that could have a negative effect because of order fill rates (see **Figure 1**). Furthermore, visibility could be obtained from the convenience of economical sensors and connectivity through Internet components which have created supply chain visibility which is easier for producers in the last few years. Exactly, it's feasible to understand about the location, time, and surety. For example, in many cases consumer want to track at any time about where are goods, and what condition the goods could join.

In addition to offering a correct, real-time image of requirement indication as well as supplier's stock inventory levels, producers are utilizing the visibility concept as a strategy to help satisfy acquiescence instructions relevant to business practices and practical, ecological demands as well as forthcoming serialization and different kinds of track-and-trace laws. In various industries, supply chain visibility applications are arranged with misfortune healing plans. For instance, the consolidation of supply chain visibility of different techniques and new technologies as a resource for enhancing on-time delivery set out an apparatus that might be offered considerable achievements to consumers contentment and satisfaction level. In a latest research on supply chain superior methods for the survey, the results showed that to carry out 100% on-time delivery satisfaction, manufacturing firms had to have elevated inventory level in hand for several weeks [13]. The closing inventory is directly influenced the holding and operational costs overall. The fundamental perception as to whether or not visibility provides several resources for advancement as regards delivery time becomes very crucial to the supply chain industry with these

### **Figure 1.** *Supply chain management and visibility (information sharing).*

difficulties. Supply chain performance indication has an excellent function with respect to the company's strategies.

Moreover, the buyer's contentment is indispensable to the diplomatic practicability of a manufacturing firm and conventional to the ambitions for the buyers which could be offering a durable business association for a firm (see **Figure 1**). Part of congregation a consumer's anticipation includes harmonizing the output to measure the supplier performance with the strategic goals; this means if a consumer worth is unfluctuating delivery as distinguished from fast delivery, then it is essential as a supplier to have delivery done on time as distinguished from concentrating on short lead times [14]. Visibility (information sharing) in which buyer and suppliers share non-incident information, such as cybersecurity best practices, training opportunities, and unbiased product information, can help organizations develop more effective vulnerability mitigations and reduce the frequency and impact of security incidents., Visibility is all about sharing information. The central issue is people often of diverse business, demographic, or national cultures, working to find shared value. As we know, no information system can operate without people. Implementing any system requires change management. If policies are in place and people do not use the data, it is of no value.

**Why is supply chain visibility important?** You are unable to manage a business sightlessly or blindly in a competitive environment. Today, supply chain visibility is an essential instrument for the accomplishment of a company. However, deficiency of synchronization within the performance of the different tasks often occurs when the individuals within an organization did not completely understand and comprehend all activities, operations, production process, and work in process one level below or above their position within the supply chain network [10, 11]. Nevertheless, it is feasible from the enhancement of transparency and visibility throughout the whole phase of the supply chain. Produce opportunities and possibilities for individual's motivation within several departments to share ideas and collaborate [15]. Furthermore, there are several types of technology and tools that help to make it simpler and simple to the enhancement of supply chain visibility in an organization. However, we examine three different types of factors that might be helpful in the process:


**15**

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

an analyzable performance.

elsewhere.

sources is not visibility.

is environmental compliance.

*Gartner company.*

solution to continue at a high level of the respective task as well as accomplish

3.*Identify problems*: A basic consequence of supply chain is enlarged communication which will be improved by visibility correspondingly accommodating to industrial firms to understand someplace gaps occur in the structure. Sharing information between organizations and departments might offer an overall view of the entire process. In a competitive market, customers are less likely to tolerate delivery or product errors. Supply chain visibility is crucial in preventing order errors and will prevent customers from taking their business

Supply chain visibility guarantees that the company is enlightened about each feature of inventory as well as permit to better help consumers by enhancing the performance and minimizing all errors. The remitter in place and the correct infrastructure might be support to a manufacturing system among all parties to accomplish better supply chain visibility and consequently improve performance, reduce costs as well as identify problems, in conclusion improving company's growth and reputation. If producers are not sure about the flinch point, about inspection and analytics professional then who can analyses the current position in the supply

The term supply chain visibility is so widely used; it has almost lost its meaning, so some clarity is vital up front. When most people use the term, they mean interenterprise, current state, or real-time information about the product from creation and as it moves and transforms across the chain. Compiling data from potential data

Other characteristics of visibility may include transaction data-like purchase order

and source destination or metadata about the product, such as price, rev, part, or SKU number. Data about the supply chain, the supplier, the carrier, or customer may also be necessary. This data would be application- and user-specific to support the specific process needs. Today we can access a broader range of data about the supply chain provided by streaming location-based data such as GPS/GIS and temporal data, weather, temperature, and social events. That is important to understand how current

On the other hand, offering a better faithful, real-time picture of mandate indications or supplier inventory levels is the concentration of majority of the producer's projects for sharing information according to supply chain visibility. Nevertheless, in confronting increasingly complex regulatory surroundings, producers are the commencement to desire improved visibility among all parties to help meet compliance directives related to trade practices, environmental mandates, and upcoming serialization and track-and-trace laws. One of the more conspicuous regions where improved visibility in the supply chain arrives into play

*"Compliance is an up-and-coming factor, and manufacturers are expecting a lot more regulations for environmental compliance, around packaging for trade compliance and things like pedigree, for understanding where your product is coming from," said by Noha Tohamy, vice president of research at AMR Research, a* 

conditions interact and affect the operation of the chain or the product.

chain and who can implement a plan that suits to an organization.

**3. Achieving strong supply chain visibility**

*Modern Perspectives in Business Applications*

respect to the company's strategies.

people do not use the data, it is of no value.

helpful in the process:

effective service plan.

difficulties. Supply chain performance indication has an excellent function with

Moreover, the buyer's contentment is indispensable to the diplomatic practicability of a manufacturing firm and conventional to the ambitions for the buyers which could be offering a durable business association for a firm (see **Figure 1**). Part of congregation a consumer's anticipation includes harmonizing the output to measure the supplier performance with the strategic goals; this means if a consumer worth is unfluctuating delivery as distinguished from fast delivery, then it is essential as a supplier to have delivery done on time as distinguished from concentrating on short lead times [14]. Visibility (information sharing) in which buyer and suppliers share non-incident information, such as cybersecurity best practices, training opportunities, and unbiased product information, can help organizations develop more effective vulnerability mitigations and reduce the frequency and impact of security incidents., Visibility is all about sharing information. The central issue is people often of diverse business, demographic, or national cultures, working to find shared value. As we know, no information system can operate without people. Implementing any system requires change management. If policies are in place and

**Why is supply chain visibility important?** You are unable to manage a business sightlessly or blindly in a competitive environment. Today, supply chain visibility is an essential instrument for the accomplishment of a company. However, deficiency of synchronization within the performance of the different tasks often occurs when the individuals within an organization did not completely understand and comprehend all activities, operations, production process, and work in process one level below or above their position within the supply chain network [10, 11]. Nevertheless, it is feasible from the enhancement of transparency and visibility throughout the whole phase of the supply chain. Produce opportunities and possibilities for individual's motivation within several departments to share ideas and collaborate [15]. Furthermore, there are several types of technology and tools that help to make it simpler and simple to the enhancement of supply chain visibility in an organization. However, we examine three different types of factors that might be

1.*Reduce risks and costs*: visibility (information sharing) will guarantee that there are no stoppages within operations as regards the supply chain. Organizations would be possible to speedily answer all requirements across the whole supply chain, such as reorientation of supply. Subsequently, the implementation of visibility in supply chain will be guaranteed to all manufacturing companies which would create the possibility to re-evaluate portions of inefficiency and, in turn, minimization of all kinds of risks such as defective products and different kinds of faults as well as blunders. Supply chain visibility has been demonstrated to present a return on investment. Also, manufacturing firms that provide supply chain management would be able to find a reliable, trustworthy, as well as cost-

2.*Improve performance*: enhanced supply chain visibility will be helpful for the greater performance expectations and estimate future demands, ensuring an organization which can help out to meet future goals. The performance will be optimizing through communication among all partners throughout the supply chain network. Also, visibility in the supply chain will provide that firm is maintaining stride with modifications in rule, legislation, and control system approximately transportation and transmission services. Employing the up-to-date technology in supply chain management can provide a better

**14**

solution to continue at a high level of the respective task as well as accomplish an analyzable performance.

3.*Identify problems*: A basic consequence of supply chain is enlarged communication which will be improved by visibility correspondingly accommodating to industrial firms to understand someplace gaps occur in the structure. Sharing information between organizations and departments might offer an overall view of the entire process. In a competitive market, customers are less likely to tolerate delivery or product errors. Supply chain visibility is crucial in preventing order errors and will prevent customers from taking their business elsewhere.

Supply chain visibility guarantees that the company is enlightened about each feature of inventory as well as permit to better help consumers by enhancing the performance and minimizing all errors. The remitter in place and the correct infrastructure might be support to a manufacturing system among all parties to accomplish better supply chain visibility and consequently improve performance, reduce costs as well as identify problems, in conclusion improving company's growth and reputation. If producers are not sure about the flinch point, about inspection and analytics professional then who can analyses the current position in the supply chain and who can implement a plan that suits to an organization.

### **3. Achieving strong supply chain visibility**

The term supply chain visibility is so widely used; it has almost lost its meaning, so some clarity is vital up front. When most people use the term, they mean interenterprise, current state, or real-time information about the product from creation and as it moves and transforms across the chain. Compiling data from potential data sources is not visibility.

Other characteristics of visibility may include transaction data-like purchase order and source destination or metadata about the product, such as price, rev, part, or SKU number. Data about the supply chain, the supplier, the carrier, or customer may also be necessary. This data would be application- and user-specific to support the specific process needs. Today we can access a broader range of data about the supply chain provided by streaming location-based data such as GPS/GIS and temporal data, weather, temperature, and social events. That is important to understand how current conditions interact and affect the operation of the chain or the product.

On the other hand, offering a better faithful, real-time picture of mandate indications or supplier inventory levels is the concentration of majority of the producer's projects for sharing information according to supply chain visibility. Nevertheless, in confronting increasingly complex regulatory surroundings, producers are the commencement to desire improved visibility among all parties to help meet compliance directives related to trade practices, environmental mandates, and upcoming serialization and track-and-trace laws. One of the more conspicuous regions where improved visibility in the supply chain arrives into play is environmental compliance.

*"Compliance is an up-and-coming factor, and manufacturers are expecting a lot more regulations for environmental compliance, around packaging for trade compliance and things like pedigree, for understanding where your product is coming from," said by Noha Tohamy, vice president of research at AMR Research, a Gartner company.*

**Figure 2.** *Product life cycle management.*

The bifurcations for producers that are not on top of these demands might be entirely considerably expensive scrapped parts, redesigns, potential customer dissatisfaction, blocked shipments, and perchance steep extra charges (see **Figure 2**) [16]. Majority producers are peaceful utilizing manual processes, spreadsheets, even homegrown databases to redeem and supervise to handle this data with the whole supply chain. However, an assortment of manufacturing systems is inserted progressively functional capability to support all producer's computerization all manufacturing procedures as well as more efficiently track as well as enhance the environmental performance of their products. The supply chain offerings continuations related to product lifecycle management (PLM). Approaching the environmental rules and regulations approximately carbon emissions will be the authentic game changer for producers, redoubling the required for visibility resources for better solutions to assist in gathering acquiescence. For an instant, you look at what Walmart is demanding with regard to having to minimize the carbon footprint of the products that are provided in Walmart stores. On the other hand, visibility is a tremendous portion which has an opportunity to track that information because there are several parties engaged in producing carbon footprint from each product.

According to previous research, the Business Performance Management Forum and E2open, 42% of manufacturing firms have evaluated yet to take in the account about greenhouse gas emissions due to carbon footprint throughout their prolonged supply chain augmented by a supplier of on-demand supply chain management services. Furthermore, while conducting interview 76% of respondents declared to their consumers had not required such information, two-thirds anticipate them to required such information from a valid data forthcoming several years in future. Alongside ecological observance, new laws associated with the global business environment are a supplementary area where producers could get benefit from improved visibility in their supply chains [16]. Extensive business management clarifications like those from Management Dynamics, Oracle, and others automate the processes that allow producers to trade with high collaboration and efficiency throughout borders and also make sure that they pay the rectified amount of duty for the protection against penalties, fines, as well as the loss of business licenses.

### **4. The value of supply chain visibility**

We can see the visibility value in the supply chain as few parts of enterprise operations have transformed more radically over the years than supply chain as companies struggle to navigate globalized sourcing, the rise of just-in-time delivery

**17**

**Figure 3.** *Systems of system.*

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

ing in the business of any type [18].

to the end consumer.

models for manufacturing, and, most importantly, unprecedented customer expectations for product availability and speed of delivery [17]. To note as well, the supply chain has a "dirty underside" of fraud and theft. In these environments, owners or workers are resistant to implementing visibility solutions. We always recommend inspections and background checks of trading partners before engag-

Ironically, while companies are using extended supply chain networks and massive outsourcing to meet these challenges, the solutions they come up with create a significant new problem of their own in the form of lost visibility. As we will see in the post, lost visibility into your supply chain means lost value. The good news is that the right telematics and related technologies can help maintain great visibility and control over even the most complex supply chain networks in service today. Visibility creates value among the many impacts of the different store manufactures, supplier, etc., and the effect is the heightened demand for consumer visibility into availability and shipping logistics, from the first mile to the last. Not surprisingly, businesses see value in getting the right supply chain visibility to meet those customer expectations and ensure efficiencies in their operations [19]. The hurdles come in trying to implement in some severe supply chain use cases. For instance, think about the Amazon (book store) effect and the prototypical example of a book. Supply chain visibility into that book is one thing, but what if your supply chain involves highly volatile, highly valuable pharmaceutical cargo that is environmentally sensitive? You would want nuanced, real-time, and real-world data and analytics to keep that kind of sensitive cargo on track. Smart sensors and granular data mean we can provide real-time operational intelligence to not only reduce the risk of cargo theft and spoilage but also document compliance with regulations and drive operational efficiencies that benefit everyone, from shippers

Supply chain visibility is connecting systems for stronger solutions for problems.

Or many, additional possibilities come to life when you realize that, rather than scrap all your existing, limited capabilities in favor of some brand-new system, you can create new visibility by integrating and strategically augmenting many of the skills you already have. For instance, look at any tractor-trailer on the highway today, and you will likely see a telematics device in the cab to track location, a separate system that is monitoring cargo temperature and a third system for security to protect the valuable cargo from theft or tampering. That is a lot of duplication of systems and services for what remains silos of uncoordinated insight (see **Figure 3**). What if we instead choose to fold in point solutions and targeted capabilities

### *Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

*Modern Perspectives in Business Applications*

**Figure 2.**

*Product life cycle management.*

The bifurcations for producers that are not on top of these demands might be entirely considerably expensive scrapped parts, redesigns, potential customer dissatisfaction, blocked shipments, and perchance steep extra charges (see **Figure 2**) [16]. Majority producers are peaceful utilizing manual processes, spreadsheets, even homegrown databases to redeem and supervise to handle this data with the whole supply chain. However, an assortment of manufacturing systems is inserted progressively functional capability to support all producer's computerization all manufacturing procedures as well as more efficiently track as well as enhance the environmental performance of their products. The supply chain offerings continuations related to product lifecycle management (PLM). Approaching the environmental rules and regulations approximately carbon emissions will be the authentic game changer for producers, redoubling the required for visibility resources for better solutions to assist in gathering acquiescence. For an instant, you look at what Walmart is demanding with regard to having to minimize the carbon footprint of the products that are provided in Walmart stores. On the other hand, visibility is a tremendous portion which has an opportunity to track that information because there are several parties engaged in producing carbon footprint from each product. According to previous research, the Business Performance Management Forum and E2open, 42% of manufacturing firms have evaluated yet to take in the account about greenhouse gas emissions due to carbon footprint throughout their prolonged supply chain augmented by a supplier of on-demand supply chain management services. Furthermore, while conducting interview 76% of respondents declared to their consumers had not required such information, two-thirds anticipate them to required such information from a valid data forthcoming several years in future. Alongside ecological observance, new laws associated with the global business environment are a supplementary area where producers could get benefit from improved visibility in their supply chains [16]. Extensive business management clarifications like those from Management Dynamics, Oracle, and others automate the processes that allow producers to trade with high collaboration and efficiency throughout borders and also make sure that they pay the rectified amount of duty for the protection against penalties, fines, as well as the loss of business licenses.

**16**

**4. The value of supply chain visibility**

We can see the visibility value in the supply chain as few parts of enterprise operations have transformed more radically over the years than supply chain as companies struggle to navigate globalized sourcing, the rise of just-in-time delivery models for manufacturing, and, most importantly, unprecedented customer expectations for product availability and speed of delivery [17]. To note as well, the supply chain has a "dirty underside" of fraud and theft. In these environments, owners or workers are resistant to implementing visibility solutions. We always recommend inspections and background checks of trading partners before engaging in the business of any type [18].

Ironically, while companies are using extended supply chain networks and massive outsourcing to meet these challenges, the solutions they come up with create a significant new problem of their own in the form of lost visibility. As we will see in the post, lost visibility into your supply chain means lost value. The good news is that the right telematics and related technologies can help maintain great visibility and control over even the most complex supply chain networks in service today.

Visibility creates value among the many impacts of the different store manufactures, supplier, etc., and the effect is the heightened demand for consumer visibility into availability and shipping logistics, from the first mile to the last. Not surprisingly, businesses see value in getting the right supply chain visibility to meet those customer expectations and ensure efficiencies in their operations [19]. The hurdles come in trying to implement in some severe supply chain use cases. For instance, think about the Amazon (book store) effect and the prototypical example of a book. Supply chain visibility into that book is one thing, but what if your supply chain involves highly volatile, highly valuable pharmaceutical cargo that is environmentally sensitive? You would want nuanced, real-time, and real-world data and analytics to keep that kind of sensitive cargo on track. Smart sensors and granular data mean we can provide real-time operational intelligence to not only reduce the risk of cargo theft and spoilage but also document compliance with regulations and drive operational efficiencies that benefit everyone, from shippers to the end consumer.

Supply chain visibility is connecting systems for stronger solutions for problems. Or many, additional possibilities come to life when you realize that, rather than scrap all your existing, limited capabilities in favor of some brand-new system, you can create new visibility by integrating and strategically augmenting many of the skills you already have. For instance, look at any tractor-trailer on the highway today, and you will likely see a telematics device in the cab to track location, a separate system that is monitoring cargo temperature and a third system for security to protect the valuable cargo from theft or tampering. That is a lot of duplication of systems and services for what remains silos of uncoordinated insight (see **Figure 3**).

What if we instead choose to fold in point solutions and targeted capabilities

**Figure 3.** *Systems of system.*

together with more extensive "system of systems" integrations that create more sophisticated outcomes like the difference between assisted braking and full autonomous drive?

That last auto analogy is not random. Tesla took years of laying the sensors, telematics, actuators, and other infrastructure into its vehicles; the cars were preemptively designed to operate and engage these sophisticated systems that would not be enabled for more than a year into the future. That point in the future came when Tesla finally downloaded its first Auto-Pilot program to users who overnight were able to enable new capabilities from the underlying technology suddenly.

So, now that we realize we are not starting from scratch that we can use some of the same capabilities we might already have, but in more integrated and orchestrated ways, "how do we make this transition while keeping our business running?" In other words, once we realize we do not need to reinvent the wheel, we are still faced with having to change the wheels for supply chain visibility, while our business is moving at full speed. The best way to go about it is to focus on the infrastructure first and then introduce the capabilities when the time is right. Think back to our tractortrailer example: we are faced with having to pick the best system perhaps see whose contract is up for renewal or whose existing infrastructure is most interoperable and weighs everything as a business decision. One way or another, try to introduce some coordinated technical standards and interoperable infrastructure for the telematics throughout your supply chain. Through real-time event architected systems, you will learn information about what is happening now that might negatively affect the people, facilities, or products. That provides the value of supply chain visibility or the ability to respond and mitigate adverse effects or seize upside opportunities.

### **5. Conclusion**

Implementing supply chain visibility becomes easier just because passing information about products globally is more a matter of priorities and investment, which is not the case when sharing "official data" about people. As social technologies become more prominent, this may change over time. When you think about it, these ideas make total sense. So, why have not we seen more people connect the dots? My understanding is that sometimes you do not see an advanced solution until you have made enough progress in the industry to uncover the difficult business problem behind that solution, to begin with [20].

At least, that is why supply chain visibility is on our minds so much here. We are in a position as a market leader in telematics not only to see what connectivity and telematics can do today for supply chain visibility but also connect the dots on what those capabilities can be tomorrow if we bring the right vision, strategies, and tools to the market.

**Benefits of SCV:** on the upside, productivity and data accuracy can be enhanced significantly to benefit workers. I have worked in several plants where multiple languages were being spoken, and it was hard for workers to communicate their needs or work status. If one worker speaks Laotian and the other Spanish, they cannot explain their challenges or requests for more material to support their work centers, report quality issues, or route parts to another process. Simple scanning technologies can allow the systems to operate and the workers to communicate their needs [21]. As countries like China also become concerned about product quality and purity, they have shown a greater interest in implementing standards and technology for product trace and visibility. Global regulations in many industries have various requirements for data collection and reporting. Though collected, often, this data is not being made available for a visibility system.

**19**

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

The authors declare no conflict of interest.

Zulkaif Ahmed Saqib1,3\*, Khubaib Ahmed Saqib2

Shenzhen University, Shenzhen, China

provided the original work is properly cited.

1 Research Institute of Business Analytics and Supply Chain Management,

3 College of Management, Shenzhen University, Shenzhen, China

\*Address all correspondence to: zulkaifsaqib@outlook.com

2 Institute of Business Management Sciences, University of Agriculture Faisalabad,

© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

and Jin Ou3

visibility and transparency.

**Conflict of interest**

**Author details**

Pakistan

In conclusion, cultural acceptance or resistance to visibility can be national, social, or organizational. These are reflected in existence or not of local regulation or industry standards efforts. Within supply chains, profile and data sharing is more about current priorities as well as assessing the technology and its value. For the worker, consumer, and resource protection, supply chain visibility may be something we want to embrace. From preserving scarce resources and providing worker safety to making sure the products we use are safe, the trend is moving toward both

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

In conclusion, cultural acceptance or resistance to visibility can be national, social, or organizational. These are reflected in existence or not of local regulation or industry standards efforts. Within supply chains, profile and data sharing is more about current priorities as well as assessing the technology and its value. For the worker, consumer, and resource protection, supply chain visibility may be something we want to embrace. From preserving scarce resources and providing worker safety to making sure the products we use are safe, the trend is moving toward both visibility and transparency.

### **Conflict of interest**

*Modern Perspectives in Business Applications*

autonomous drive?

**5. Conclusion**

to the market.

together with more extensive "system of systems" integrations that create more sophisticated outcomes like the difference between assisted braking and full

That last auto analogy is not random. Tesla took years of laying the sensors, telematics, actuators, and other infrastructure into its vehicles; the cars were preemptively designed to operate and engage these sophisticated systems that would not be enabled for more than a year into the future. That point in the future came when Tesla finally downloaded its first Auto-Pilot program to users who overnight were able to enable new capabilities from the underlying technology suddenly.

So, now that we realize we are not starting from scratch that we can use some of the same capabilities we might already have, but in more integrated and orchestrated ways, "how do we make this transition while keeping our business running?" In other words, once we realize we do not need to reinvent the wheel, we are still faced with having to change the wheels for supply chain visibility, while our business is moving at full speed. The best way to go about it is to focus on the infrastructure first and then introduce the capabilities when the time is right. Think back to our tractortrailer example: we are faced with having to pick the best system perhaps see whose contract is up for renewal or whose existing infrastructure is most interoperable and weighs everything as a business decision. One way or another, try to introduce some coordinated technical standards and interoperable infrastructure for the telematics throughout your supply chain. Through real-time event architected systems, you will learn information about what is happening now that might negatively affect the people, facilities, or products. That provides the value of supply chain visibility or the ability to respond and mitigate adverse effects or seize upside opportunities.

Implementing supply chain visibility becomes easier just because passing information about products globally is more a matter of priorities and investment, which is not the case when sharing "official data" about people. As social technologies become more prominent, this may change over time. When you think about it, these ideas make total sense. So, why have not we seen more people connect the dots? My understanding is that sometimes you do not see an advanced solution until you have made enough progress in the industry to uncover the difficult business

At least, that is why supply chain visibility is on our minds so much here. We are in a position as a market leader in telematics not only to see what connectivity and telematics can do today for supply chain visibility but also connect the dots on what those capabilities can be tomorrow if we bring the right vision, strategies, and tools

**Benefits of SCV:** on the upside, productivity and data accuracy can be enhanced

significantly to benefit workers. I have worked in several plants where multiple languages were being spoken, and it was hard for workers to communicate their needs or work status. If one worker speaks Laotian and the other Spanish, they cannot explain their challenges or requests for more material to support their work centers, report quality issues, or route parts to another process. Simple scanning technologies can allow the systems to operate and the workers to communicate their needs [21]. As countries like China also become concerned about product quality and purity, they have shown a greater interest in implementing standards and technology for product trace and visibility. Global regulations in many industries have various requirements for data collection and reporting. Though collected, often,

problem behind that solution, to begin with [20].

this data is not being made available for a visibility system.

**18**

The authors declare no conflict of interest.

### **Author details**

Zulkaif Ahmed Saqib1,3\*, Khubaib Ahmed Saqib2 and Jin Ou3

1 Research Institute of Business Analytics and Supply Chain Management, Shenzhen University, Shenzhen, China

2 Institute of Business Management Sciences, University of Agriculture Faisalabad, Pakistan

3 College of Management, Shenzhen University, Shenzhen, China

\*Address all correspondence to: zulkaifsaqib@outlook.com

© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

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[2] Ali Z, Sun H, Ali M. The impact of managerial and adaptive capabilities to stimulate organizational innovation in SMEs: A complementary PLS-SEM approach. Sustainability. 2017;**9**(12):2157. DOI: 10.3390/ su9122157

[3] Brandenburg M, Rebs T. Sustainable supply chain management: A modelling perspective. Annals of Operations Research. 2015;**229**(1):213-252. DOI: 10.1007/s10479-015-1853-1

[4] Okhuysen GA, Eisenhardt KM. Integrating knowledge in groups: How formal interventions enable flexibility. Organization Science. 2002;**13**(4): 370-386. DOI: 10.1287/ orsc.13.4.370.2947

[5] Fahimnia B, Sarkis J, Gunasekaran A, Farahani R. Decision models for sustainable supply chain design and management. Annals of Operations Research. 2017;**250**(2):277-278. DOI: 10.1007/s10479-017-2428-0

[6] Jabbour CJC, Maria Da Silva E, Paiva EL, Almada Santos FC. Environmental management in Brazil: Is it a completely competitive priority? Journal of Cleaner Production. 2012;**21**(1):11-22. DOI: 10.1016/j. jclepro.2011.09.003

[7] Jabbour CJC, Neto AS, Gobbo JA, Ribeiro MDS, De Sousa Jabbour ABL. Eco-innovations in more sustainable supply chains for a low-carbon economy: A multiple case study of human critical success factors in Brazilian leading companies.

International Journal of Production Economics. 2015;**164**:245-257. DOI: 10.1016/j.ijpe.2014.11.015

[8] Marshall D, McCarthy L, Heavey C, McGrath P. Environmental and social supply chain management sustainability practices: Construct development and measurement. Production Planning and Control. 2015;**26**(8):673-690. DOI: 10.1080/09537287.2014.963726

[9] Francis V. Supply chain visibility: Lost in translation? Supply Chain Management. 2008;**13**(3):180-184. DOI: 10.1108/13598540810871226

[10] Diez JR. Innovative networks in manufacturing: Some empirical evidence from the metropolitan area of Barcelona. Technovation. 2000;**20**(3):139-150. DOI: 10.1016/ S0166-4972(99)00112-1

[11] Holcomb MC, Manrodt KB. The relationship of supply chain visibility to firm performance. Supply Chain Forum: An International Journal. 2011;**12**:32-45

[12] Mccrea BYB, editor, C. Putting the Spotlight on ERP. Logist. Manag. 2011

[13] Best Practices, L. Supply chain management best practices. Benchmarking Reports, ID OP-87. 2002

[14] Beamon BM. Measuring supply chain performance. International Journal of Operations & Production Management. 1999;**19**(3):275-292. DOI: 10.1108/01443579910249714

[15] Cao M, Zhang Q. Supply chain collaboration: Impact on collaborative advantage and firm performance. Journal of Operations Management. 2011;**29**(3):163-180. DOI: 10.1016/j. jom.2010.12.008

**21**

*Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

Fundamentals and methodology.

[17] Wu Z, Pagell M. Balancing priorities: Decision-making in

sustainable supply chain management. Journal of Operations Management. 2011;**29**(6):577-590. DOI: 10.1016/j.

[18] Burke J. Bangladesh Factory Fires: Fashion Industry's Latest Crisis. Bangladesh The Guardian. 8, 2013

[19] Tu Q, Vonderembse MA, Ragu-Nathan TS, Sharkey TW. Absorptive capacity: Enhancing the assimilation of time-based manufacturing practices. Journal of Operations Management. 2006;**24**(5):692-710. DOI: 10.1016/j.

Concurrent Engineering. 2001;**9**(4):309-325. DOI: 10.1177/1063293X0100900407

jom.2010.10.001

jom.2005.05.004

s10479-016-2158-8

[20] Fisher MSR, Cui JWL.

Environmental performance evaluation with big data: Theories and methods. Annals of Operations Research. 2016;**270**(2):459-472. DOI: 10.1007/

[21] Barratt M, Oke A. Antecedents of supply chain visibility in retail supply chains: A resource-based theory perspective. Journal of Operations Management. 2007;**25**(6):1217-1233. DOI: 10.1016/j.jom.2007.01.003

[16] Du X, Jiao J, Tseng MM. Architecture of product family: *Role of Visibility in Supply Chain Management DOI: http://dx.doi.org/10.5772/intechopen.87202*

Fundamentals and methodology. Concurrent Engineering. 2001;**9**(4):309-325. DOI: 10.1177/1063293X0100900407

[17] Wu Z, Pagell M. Balancing priorities: Decision-making in sustainable supply chain management. Journal of Operations Management. 2011;**29**(6):577-590. DOI: 10.1016/j. jom.2010.10.001

[18] Burke J. Bangladesh Factory Fires: Fashion Industry's Latest Crisis. Bangladesh The Guardian. 8, 2013

[19] Tu Q, Vonderembse MA, Ragu-Nathan TS, Sharkey TW. Absorptive capacity: Enhancing the assimilation of time-based manufacturing practices. Journal of Operations Management. 2006;**24**(5):692-710. DOI: 10.1016/j. jom.2005.05.004

[20] Fisher MSR, Cui JWL. Environmental performance evaluation with big data: Theories and methods. Annals of Operations Research. 2016;**270**(2):459-472. DOI: 10.1007/ s10479-016-2158-8

[21] Barratt M, Oke A. Antecedents of supply chain visibility in retail supply chains: A resource-based theory perspective. Journal of Operations Management. 2007;**25**(6):1217-1233. DOI: 10.1016/j.jom.2007.01.003

**20**

*Modern Perspectives in Business Applications*

[1] Moon LL, Mo Phyllis LY, Chan Rita KLK. Enterprise risk management: Insights from a textile-apparel supply chain. International Journal of Risk and Contingency Management. 2014;**3**(2):18-30. DOI: 10.4018/

International Journal of Production Economics. 2015;**164**:245-257. DOI:

[8] Marshall D, McCarthy L, Heavey C, McGrath P. Environmental and social supply chain management sustainability practices: Construct development and measurement. Production Planning and Control. 2015;**26**(8):673-690. DOI:

10.1016/j.ijpe.2014.11.015

10.1080/09537287.2014.963726

10.1108/13598540810871226

S0166-4972(99)00112-1

[10] Diez JR. Innovative networks in manufacturing: Some empirical evidence from the metropolitan area of Barcelona. Technovation. 2000;**20**(3):139-150. DOI: 10.1016/

[11] Holcomb MC, Manrodt KB. The relationship of supply chain visibility to firm performance. Supply Chain Forum: An International Journal. 2011;**12**:32-45

[12] Mccrea BYB, editor, C. Putting the Spotlight on ERP. Logist. Manag. 2011

[14] Beamon BM. Measuring supply chain performance. International Journal of Operations & Production Management. 1999;**19**(3):275-292. DOI:

[15] Cao M, Zhang Q. Supply chain collaboration: Impact on collaborative advantage and firm performance. Journal of Operations Management. 2011;**29**(3):163-180. DOI: 10.1016/j.

[13] Best Practices, L. Supply chain management best practices. Benchmarking Reports, ID OP-87. 2002

10.1108/01443579910249714

[16] Du X, Jiao J, Tseng MM. Architecture of product family:

jom.2010.12.008

[9] Francis V. Supply chain visibility: Lost in translation? Supply Chain Management. 2008;**13**(3):180-184. DOI:

[2] Ali Z, Sun H, Ali M. The impact of managerial and adaptive capabilities to stimulate organizational innovation in SMEs: A complementary PLS-SEM approach. Sustainability. 2017;**9**(12):2157. DOI: 10.3390/

[3] Brandenburg M, Rebs T. Sustainable supply chain management: A modelling perspective. Annals of Operations Research. 2015;**229**(1):213-252. DOI:

10.1007/s10479-015-1853-1

370-386. DOI: 10.1287/ orsc.13.4.370.2947

[4] Okhuysen GA, Eisenhardt KM. Integrating knowledge in groups: How formal interventions enable flexibility. Organization Science. 2002;**13**(4):

[5] Fahimnia B, Sarkis J, Gunasekaran A,

Farahani R. Decision models for sustainable supply chain design and management. Annals of Operations Research. 2017;**250**(2):277-278. DOI:

[6] Jabbour CJC, Maria Da Silva E, Paiva EL, Almada Santos FC.

Journal of Cleaner Production. 2012;**21**(1):11-22. DOI: 10.1016/j.

jclepro.2011.09.003

Environmental management in Brazil: Is it a completely competitive priority?

[7] Jabbour CJC, Neto AS, Gobbo JA, Ribeiro MDS, De Sousa Jabbour ABL. Eco-innovations in more sustainable supply chains for a low-carbon economy: A multiple case study of human critical success factors in Brazilian leading companies.

10.1007/s10479-017-2428-0

ijrcm.2014040102

**References**

su9122157

**23**

**Chapter 3**

**Abstract**

volume consignments.

ing all these criteria [2, 3].

inventory or increased mean inventory.

Sourcing and Manufacturing in

It has been a common practice to transfer making goods to faraway low-labor-

cost countries. For many managers, this seemed to make commercial sense. Sourcing in remote corners of the world takes advantage of reduced labor hour cost. This can be the most significant direct cost. This chapter focuses on the emerging trend to bring manufacturing back, via reshoring within the nation state or near(er) shoring where production is closer by taking advantage of lower cost neighboring locations. Financial analysis presented is based on differential wage rate and pipeline liability. The financial case analysis indicates overall profit that may be reduced due to labor cost; however, risk-free profit can be significantly higher. Four supply chain configurations can be determined using a simple two-bytwo matrix: long and short distances between supplier and plant, and between plant and market/customer. Typically, longer distances increase the end-to-end time that is taken and increase inventory. Activity-based cost models (ABCDM) and cases originally focused on internal plant operations now are applied along the supply chain. Long inbound supply and long outbound distribution increase pipeline liability risks and typically increase the inventory due to less frequent and larger

**Keywords:** local sourcing, risk to profit, reducing obsolescence risks

Some polluting or "dirty" industrial processes may be moved to other locations where environmental and health and safety legislation is not as strict [1]. Financial penalties for infringements may be inconsequential compared to massive margins. Businesses operate to create value and maximize contribution to profit. They should do so in an ethical, environmental, and resilient manner. It is purchasing responsibility to design new supply chains that enable work to be outsourced, while fulfill-

Purchasing is based on a dyadic contract between customer and supplier. Direct comparisons between vendors supplying the same products and specification tend to be restricted to price and confidence that the delivery will be made to schedule. Purchase price can be low when most of the direct cost of production is derived from low-cost labor. With thin margins, most suppliers demand high-volume orders from their customers in order to breakeven. This can imply significant surplus

Purchasing agents are rewarded by reducing purchasing spend. However, once

the good is bought, a significant proportion of purchase spend may end up as

**1. Price-based location decision and effects**

*David J. Newlands and Fawaz Baddar Al Hussan*

the Market Region

### **Chapter 3**

## Sourcing and Manufacturing in the Market Region

*David J. Newlands and Fawaz Baddar Al Hussan*

### **Abstract**

It has been a common practice to transfer making goods to faraway low-laborcost countries. For many managers, this seemed to make commercial sense. Sourcing in remote corners of the world takes advantage of reduced labor hour cost. This can be the most significant direct cost. This chapter focuses on the emerging trend to bring manufacturing back, via reshoring within the nation state or near(er) shoring where production is closer by taking advantage of lower cost neighboring locations. Financial analysis presented is based on differential wage rate and pipeline liability. The financial case analysis indicates overall profit that may be reduced due to labor cost; however, risk-free profit can be significantly higher. Four supply chain configurations can be determined using a simple two-bytwo matrix: long and short distances between supplier and plant, and between plant and market/customer. Typically, longer distances increase the end-to-end time that is taken and increase inventory. Activity-based cost models (ABCDM) and cases originally focused on internal plant operations now are applied along the supply chain. Long inbound supply and long outbound distribution increase pipeline liability risks and typically increase the inventory due to less frequent and larger volume consignments.

**Keywords:** local sourcing, risk to profit, reducing obsolescence risks

### **1. Price-based location decision and effects**

Some polluting or "dirty" industrial processes may be moved to other locations where environmental and health and safety legislation is not as strict [1]. Financial penalties for infringements may be inconsequential compared to massive margins. Businesses operate to create value and maximize contribution to profit. They should do so in an ethical, environmental, and resilient manner. It is purchasing responsibility to design new supply chains that enable work to be outsourced, while fulfilling all these criteria [2, 3].

Purchasing is based on a dyadic contract between customer and supplier. Direct comparisons between vendors supplying the same products and specification tend to be restricted to price and confidence that the delivery will be made to schedule. Purchase price can be low when most of the direct cost of production is derived from low-cost labor. With thin margins, most suppliers demand high-volume orders from their customers in order to breakeven. This can imply significant surplus inventory or increased mean inventory.

Purchasing agents are rewarded by reducing purchasing spend. However, once the good is bought, a significant proportion of purchase spend may end up as

obsolete goods. Some orders that are placed may have delivery cancelled late, resulting in payments to suppliers under supply chain *pipeline liability causes*. Contract clauses allow suppliers to have placed orders for materials and incurred costs prior to payment in order to fulfill the order. The agreement may include a maximum value of inventory, an agreed tooling cost, and incurred expenses that the customer is liable to pay for in event of a cancelation.

Less evident is for the corporations to require purchasing agents to make positive impacts on the top line, for example by helping to reduce the number of goods sold with discounted prices, and to change focus "from price to total costs of ownership" [4]. To do this, purchasing must reappraise their impact on each line of business' performance. Beyond financial return, purchasing may contribute economic and environmental performances that together are evaluated as overall enterprise performance [2, 3].

It remains the case that high labor requirements and high wages typically are major contributors to decisions to source goods from lower labor cost regions. A significantly lower labor hour cost may become the headline figure to justify switching supplier. This research shows this may be a folly because high volumes may be delivered infrequently, resulting in increased risk to profit. The thesis of this chapter is that although lower total profits may be achievable due to more frequent deliveries using JIT and higher wages in near(er) regions, the risk to these profits is lower than sourcing from low-labor-cost regions where delivery is much less frequent and consignment volumes are much larger.

Making purchasing decisions to source from any location around the world where the unit prices are lowest is a tantalizing proposition, in order to meet purchase spend on reduction targets. While low unit prices are attractive to the customer, the supplier typically compensates by demanding significant order quantities. The margin per unit may only be a few percent. Hence, to make a large profit from an order, large volumes provide many contributions to profit. The volumes demanded by the supplier may be inappropriate for the customer. They may have to stockpile finished goods and wait for orders to use up the inventory. Large corporations may force suppliers to produce and stock pile inventories for delivery on a specific date. Capacity constraints and the lead times to produce goods mean that production could have started more than half a year before the delivery date. This can create cash flow issues for the supplier. They have to buy materials, pay workers, and operating costs, while revenue is delayed by the delivery date and payment conditions that could push the payment back months.

While purchase price per unit is a headline metric, total pipeline liability based on a loaded inbound and distribution network represents a significant investment in working capital. Working capital represents the investment in materials and value-adding processes that increase the value of the material. Long pipeline lead times increase the cash-to-cash time. A related metric is inventory turns. This is the number of times inventory is bought and sold in a time period. Increased inventories reduce turnovers for a given demand per period. In order to increase the return on capital employed, managerial accounting prefers to increase inventory turns and reduce working capital. This may, however, be achieved at a higher total direct cost where labor is the most significant cost differentiator between local manufacture and outsourcing to low-labor-cost regions. The reduced profit margin may deter businesses from producing locally. Higher potential profits may be sought; however, these may be put at risk from significant obsolescence risks associated with slow end-to-end inventory turns. Profits also may not be as great as planned as a result of discounting residual inventory in order to raise revenue.

Outsourcing to low-labor-cost countries affects economies. The balance of payments (BOP) for a nation state is made up from exports and imports. The BOP can be either a surplus or deficit. Long-term excess of imports tends to weaken an

**25**

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

hour rate that attracted the orders in the first place.

economy. Long-term surplus can lead to economic prosperity. Workers may start to demand higher wages and a cycle of inflation can develop. Higher wages reduce the attractiveness of purchasing from such locations because it was their low-labor-cost

Economic development rates in many emerging countries are astounding; however, it is important to do so with low environmental impact [5]. Development of urban living and burgeoning middle classes increase mean labor cost and reduce the number of individuals available to do manual work. Low cost is relative and increasingly temporary. Catching the wave early requires maintaining a set of back-up plans based on alternate low-cost countries. Some regions in developing countries are more advanced than others. Seeking low-cost areas in these regions can raise the mean economic power of a nation or trading block. Cultural and linguistic differences between Western customers and Eastern suppliers, lack of language abilities, and long haul travel can increase the difficulty of doing business. Making in the home market avoids currency rate variations, cultural differences, and longdistance purchasing and expediting trips. Despite *McJob*-type work availability, federal legislation may set a minimum on the lowest cost labor available in a nation or region. This minimum may result in monthly wages many times higher than other countries. The British Chancellor has set a gradual increase over the current UK parliament term to raise the minimum wage. This could drive down manage-

ment appetite to reshore manufacturing and administrative jobs [6].

be suspended, and claw back penalties may be imposed.

**2. Location, location, location**

materials and parts themselves.

Making in the home region may reduce pipeline liability at the most; however, margins may be squeezed too much due to labor rates. Buying from lower labor cost neighbor states can reduce unit costs in comparison with making in the market region where wage rates are much higher. Ultimately, quality of goods is a higher priority than cost. If lower cost goods are made to lower specifications and these are identified by customers, lower prices will be demanded to compensate. Otherwise, volume demand may reduce for consumer purchases. B2B purchases may reduce or

Where should a company be? This question affects owned and subcontract plants. Final assembly entrepreneurs like Henri Ford, Soichiro Honda, Sir James Dyson, Sir Richard Branson, and Lord Alan Sugar grew their businesses initially inside their home economy. Ford corporation rapidly expanded internationally. Ford initially opened Dagenham and Frankfurt plants as assembly sites that were supplied with kits from Detroit. Rapidly it became clear to Ford that it was more efficient to establish end-to-end integrated product manufacture and assembly campuses. Despite the theoretical and actual efficiency performance, it was noted [7] that internal suppliers were more expensive, were of lower quality, and were less efficient than external, independently owned vendors. Vertical integration, where the corporation owned supplies, ensures that those suppliers are isolated from competitive pressures. Meeting budget rather than being an efficient and well-run business become the norm. As a result, many companies decided not to make all

Outsourcing companies are focusing on their core competencies. This may be a form of "cherry-picking" whereby they choose to specialize on their strengths and competitive advantages. Other activities that are required become noncore competencies. These may be obtained from other companies that focus on providing such benefits to their clients. Specialization can reduce unit cost as a result of increased economies of scale. Companies may provide their goods and services to many clients. *Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

*Modern Perspectives in Business Applications*

is liable to pay for in event of a cancelation.

frequent and consignment volumes are much larger.

conditions that could push the payment back months.

discounting residual inventory in order to raise revenue.

obsolete goods. Some orders that are placed may have delivery cancelled late, resulting in payments to suppliers under supply chain *pipeline liability causes*. Contract clauses allow suppliers to have placed orders for materials and incurred costs prior to payment in order to fulfill the order. The agreement may include a maximum value of inventory, an agreed tooling cost, and incurred expenses that the customer

Less evident is for the corporations to require purchasing agents to make positive impacts on the top line, for example by helping to reduce the number of goods sold with discounted prices, and to change focus "from price to total costs of ownership" [4]. To do this, purchasing must reappraise their impact on each line of business' performance. Beyond financial return, purchasing may contribute economic and environmental performances that together are evaluated as overall enterprise performance [2, 3]. It remains the case that high labor requirements and high wages typically are major contributors to decisions to source goods from lower labor cost regions. A significantly lower labor hour cost may become the headline figure to justify switching supplier. This research shows this may be a folly because high volumes may be delivered infrequently, resulting in increased risk to profit. The thesis of this chapter is that although lower total profits may be achievable due to more frequent deliveries using JIT and higher wages in near(er) regions, the risk to these profits is lower than sourcing from low-labor-cost regions where delivery is much less

Making purchasing decisions to source from any location around the world where the unit prices are lowest is a tantalizing proposition, in order to meet purchase spend on reduction targets. While low unit prices are attractive to the customer, the supplier typically compensates by demanding significant order quantities. The margin per unit may only be a few percent. Hence, to make a large profit from an order, large volumes provide many contributions to profit. The volumes demanded by the supplier may be inappropriate for the customer. They may have to stockpile finished goods and wait for orders to use up the inventory. Large corporations may force suppliers to produce and stock pile inventories for delivery on a specific date. Capacity constraints and the lead times to produce goods mean that production could have started more than half a year before the delivery date. This can create cash flow issues for the supplier. They have to buy materials, pay workers, and operating costs, while revenue is delayed by the delivery date and payment

While purchase price per unit is a headline metric, total pipeline liability based on a loaded inbound and distribution network represents a significant investment in working capital. Working capital represents the investment in materials and value-adding processes that increase the value of the material. Long pipeline lead times increase the cash-to-cash time. A related metric is inventory turns. This is the number of times inventory is bought and sold in a time period. Increased inventories reduce turnovers for a given demand per period. In order to increase the return on capital employed, managerial accounting prefers to increase inventory turns and reduce working capital. This may, however, be achieved at a higher total direct cost where labor is the most significant cost differentiator between local manufacture and outsourcing to low-labor-cost regions. The reduced profit margin may deter businesses from producing locally. Higher potential profits may be sought; however, these may be put at risk from significant obsolescence risks associated with slow end-to-end inventory turns. Profits also may not be as great as planned as a result of

Outsourcing to low-labor-cost countries affects economies. The balance of payments (BOP) for a nation state is made up from exports and imports. The BOP can be either a surplus or deficit. Long-term excess of imports tends to weaken an

**24**

economy. Long-term surplus can lead to economic prosperity. Workers may start to demand higher wages and a cycle of inflation can develop. Higher wages reduce the attractiveness of purchasing from such locations because it was their low-labor-cost hour rate that attracted the orders in the first place.

Economic development rates in many emerging countries are astounding; however, it is important to do so with low environmental impact [5]. Development of urban living and burgeoning middle classes increase mean labor cost and reduce the number of individuals available to do manual work. Low cost is relative and increasingly temporary. Catching the wave early requires maintaining a set of back-up plans based on alternate low-cost countries. Some regions in developing countries are more advanced than others. Seeking low-cost areas in these regions can raise the mean economic power of a nation or trading block. Cultural and linguistic differences between Western customers and Eastern suppliers, lack of language abilities, and long haul travel can increase the difficulty of doing business. Making in the home market avoids currency rate variations, cultural differences, and longdistance purchasing and expediting trips. Despite *McJob*-type work availability, federal legislation may set a minimum on the lowest cost labor available in a nation or region. This minimum may result in monthly wages many times higher than other countries. The British Chancellor has set a gradual increase over the current UK parliament term to raise the minimum wage. This could drive down management appetite to reshore manufacturing and administrative jobs [6].

Making in the home region may reduce pipeline liability at the most; however, margins may be squeezed too much due to labor rates. Buying from lower labor cost neighbor states can reduce unit costs in comparison with making in the market region where wage rates are much higher. Ultimately, quality of goods is a higher priority than cost. If lower cost goods are made to lower specifications and these are identified by customers, lower prices will be demanded to compensate. Otherwise, volume demand may reduce for consumer purchases. B2B purchases may reduce or be suspended, and claw back penalties may be imposed.

### **2. Location, location, location**

Where should a company be? This question affects owned and subcontract plants. Final assembly entrepreneurs like Henri Ford, Soichiro Honda, Sir James Dyson, Sir Richard Branson, and Lord Alan Sugar grew their businesses initially inside their home economy. Ford corporation rapidly expanded internationally. Ford initially opened Dagenham and Frankfurt plants as assembly sites that were supplied with kits from Detroit. Rapidly it became clear to Ford that it was more efficient to establish end-to-end integrated product manufacture and assembly campuses. Despite the theoretical and actual efficiency performance, it was noted [7] that internal suppliers were more expensive, were of lower quality, and were less efficient than external, independently owned vendors. Vertical integration, where the corporation owned supplies, ensures that those suppliers are isolated from competitive pressures. Meeting budget rather than being an efficient and well-run business become the norm. As a result, many companies decided not to make all materials and parts themselves.

Outsourcing companies are focusing on their core competencies. This may be a form of "cherry-picking" whereby they choose to specialize on their strengths and competitive advantages. Other activities that are required become noncore competencies. These may be obtained from other companies that focus on providing such benefits to their clients. Specialization can reduce unit cost as a result of increased economies of scale. Companies may provide their goods and services to many clients. They in turn compete in the market place, despite having many of the same basic elements. From the perspective of small- and medium-sized enterprises, providing services and related goods to satisfy customer contracts, will find it easier to locate close to their key account customer' sites. For purely durable, shelf-life product-based contracts, where there is no service element, production can be located offshore.

Offshoring: materials can be bought and delivered to virtually any site with minimal price differences due to transportation. Some materials import and export duty that may be charged, including value-added tax (VAT) and port taxes. The trade war between US President Trump and China has seen the US impose 25% duty on a wide range of goods, with threats to impose tariffs on billions of dollars more of goods.

Energy may cost different rates in different locations due to the abundance of gas, coal, nuclear and noncarbon-based electricity generation. Some governments subsidize energy. Other governments levy higher prices and supplementary charges that create higher gross prices for energy. Despite the presence of open market competition in energy sectors, net prices tend to be the result of many influences including the ability to buy at higher prices. The bill of materials and energy costs of production can be insignificant in some products. Labor hour rates, therefore, become a major consideration when deciding to move production to lower cost countries. Purchasing price paid for products with high labor requirements can be reduced consecutively by undertaking searches for suitable vendors in order to buy from suppliers located in the other locations where labor is found to be cheaper. Landed piece price is the top line issue for management attention and decision making. Optimizing the price-paid criteria, purchasing typically continues to search and monitor the situation, switching whenever necessary to access the cheapest offer.

It seems counter-intuitive, and therefore illogical, to make the decision to purchase from suppliers that are located considerably closer, that have much higher labor cost, that purchase higher cost energy, and that are located in high-cost industrial locations. The United States is determined to become the low-cost manufacturing country. Allen [8] reported US customers are increasingly choosing onshore suppliers. Some national governments are concerned by the de-industrialization associated with outsourcing to low-cost countries. Donati [9] found more emphasis on maintaining existing industry than on encouraging reshoring.

### **3. Supply chain designs: Dell versus Hewlett-Packard**

Friedman [10] reported on differences in strategy between Dell Corp and HP. Dell Corp established final assembly plants for laptops and desktop blocks close to major population regions. For mature markets where most customers already tend to have a computer to order replacements, Dell focuses on final builds using an "assemble and configure to order strategy." Suppliers for variant modules are geographically close enough to produce and deliver overnight for next day assembly. Standard modules can be mass produced in a range of lower labor cost countries. From OEM suppliers of major modules including processors and memory systems, Dell's supply chain can flow end to end in 11 days. The customer typically can place orders for products 8 days after the OEM released the new iteration or specification. Dell's distribution system collects a set of boxes for delivery to the customer. Dell does have mass production facilities for emerging mass markets like India. This market by and large is made up of first-time computer purchasers.

By contrast, Hewlett Packard's supply chain for consumer units exclusively relies on production of the core computer unit in China. End-to-end supply chain flow of similar OEM parts to point of sale is in the order of 85 days. CNN reviewed the train journey taken by HP computers from China to Germany. Just that train journey

**27**

and quality problems.

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

updates can reduce mean revenue.

**4. Defining re- and nearshoring**

exporters to nonaffiliated countries.

**5. Nearshoring cost justifications**

Europe are sent to China rather than sourcing there.

takes 17 days (CCTV [11]). To reduce transport empty train returns, parts made in

HP's end-to-end time leaves Dell with a virtual monopoly on a specification release for 74 days. The net effect of this is that Dell can sell at a higher price to early adopters. HP brings the same specification to market later as a standard product made to forecast rather than assembled to order. Price decay and fewer product

Reshoring focuses on bringing manufacturing back to the brand's country of origin. This does not require the corporation to move back to the same city and region. Lower cost areas in the country can be identified that still yield the legitimacy of being made in that nation. Tax holidays and other capital investment subsidies may be on offer. A reverse bidding war may ensue as regions offer more and more incentives and benefits. The federal government may intervene, in much the same way as Mrs Thatcher's government offered Nissan land to build plants and a supplier campus. Nearshoring focuses on locating capacity within economic zones. The aim is to benefit from tax-free border crossings and relatively faster distribution than remote manufacturing. Goods can be distributed from comparatively lower cost locations to markets in neighboring countries that are members of the same economic region. As an example, new plants established in any EU country compete against existing plants and imports for orders in the common market and as

It is possible to offshore and near- or reshore simultaneously [12]. Some work that has been done abroad may be reintroduced. Some work that currently is done

Uncompetitive prices within a market ensure that the work remains overseas. Full cost analyses and strategic responsiveness to market fluctuations and technology sales window closures can focus CFO's attention on costs stemming from pipeline liability—the amount of inventory in the supply chain that has contractually to be paid for regardless of sale demand and may become obsolete. Total cost of acquisition takes into account many factors, not just the absolute lowest labor costs. Total cost can be reduced by buying from low-cost locations that geographically and logistically are nearer the market. Making fast-moving consumer goods in Eastern Europe for Western European consumption, and making in Mexico's Yucatan for NAFTA sales are examples of production inside the trading region. These strategies take advantage of integrated logistics and distribution to deliver materials to plants and distribute finished goods across the economic zone. The relative lower costs in the production region compared to the sales region as a whole enable purchase prices per unit to be kept low, while ensuring minimized pipeline liability that is a risk to profit from obsolescence

Nearshoring can aid in reducing duty overheads and charges. An example of this is Ford Motors opening of an engine assembly plant in Russia. The company aims to purchase at least 60% of requirements in the country in order to qualify for duty exemption on imported parts (Automotive [13]). Adil Shirinov, Ford Sollers' Chief Operating Officer reportedly stated "Our main target in line with our long-term

in-house or locally may be relocated to locale with lower costs.

*Modern Perspectives in Business Applications*

They in turn compete in the market place, despite having many of the same basic elements. From the perspective of small- and medium-sized enterprises, providing services and related goods to satisfy customer contracts, will find it easier to locate close to their key account customer' sites. For purely durable, shelf-life product-based contracts, where there is no service element, production can be located offshore.

on maintaining existing industry than on encouraging reshoring.

market by and large is made up of first-time computer purchasers.

Friedman [10] reported on differences in strategy between Dell Corp and HP. Dell Corp established final assembly plants for laptops and desktop blocks close to major population regions. For mature markets where most customers already tend to have a computer to order replacements, Dell focuses on final builds using an "assemble and configure to order strategy." Suppliers for variant modules are geographically close enough to produce and deliver overnight for next day assembly. Standard modules can be mass produced in a range of lower labor cost countries. From OEM suppliers of major modules including processors and memory systems, Dell's supply chain can flow end to end in 11 days. The customer typically can place orders for products 8 days after the OEM released the new iteration or specification. Dell's distribution system collects a set of boxes for delivery to the customer. Dell does have mass production facilities for emerging mass markets like India. This

By contrast, Hewlett Packard's supply chain for consumer units exclusively relies on production of the core computer unit in China. End-to-end supply chain flow of similar OEM parts to point of sale is in the order of 85 days. CNN reviewed the train journey taken by HP computers from China to Germany. Just that train journey

**3. Supply chain designs: Dell versus Hewlett-Packard**

Offshoring: materials can be bought and delivered to virtually any site with minimal price differences due to transportation. Some materials import and export duty that may be charged, including value-added tax (VAT) and port taxes. The trade war between US President Trump and China has seen the US impose 25% duty on a wide range of goods, with threats to impose tariffs on billions of dollars more of goods. Energy may cost different rates in different locations due to the abundance of gas, coal, nuclear and noncarbon-based electricity generation. Some governments subsidize energy. Other governments levy higher prices and supplementary charges that create higher gross prices for energy. Despite the presence of open market competition in energy sectors, net prices tend to be the result of many influences including the ability to buy at higher prices. The bill of materials and energy costs of production can be insignificant in some products. Labor hour rates, therefore, become a major consideration when deciding to move production to lower cost countries. Purchasing price paid for products with high labor requirements can be reduced consecutively by undertaking searches for suitable vendors in order to buy from suppliers located in the other locations where labor is found to be cheaper. Landed piece price is the top line issue for management attention and decision making. Optimizing the price-paid criteria, purchasing typically continues to search and monitor the situation, switching whenever necessary to access the cheapest offer. It seems counter-intuitive, and therefore illogical, to make the decision to purchase from suppliers that are located considerably closer, that have much higher labor cost, that purchase higher cost energy, and that are located in high-cost industrial locations. The United States is determined to become the low-cost manufacturing country. Allen [8] reported US customers are increasingly choosing onshore suppliers. Some national governments are concerned by the de-industrialization associated with outsourcing to low-cost countries. Donati [9] found more emphasis

**26**

takes 17 days (CCTV [11]). To reduce transport empty train returns, parts made in Europe are sent to China rather than sourcing there.

HP's end-to-end time leaves Dell with a virtual monopoly on a specification release for 74 days. The net effect of this is that Dell can sell at a higher price to early adopters. HP brings the same specification to market later as a standard product made to forecast rather than assembled to order. Price decay and fewer product updates can reduce mean revenue.

### **4. Defining re- and nearshoring**

Reshoring focuses on bringing manufacturing back to the brand's country of origin. This does not require the corporation to move back to the same city and region. Lower cost areas in the country can be identified that still yield the legitimacy of being made in that nation. Tax holidays and other capital investment subsidies may be on offer. A reverse bidding war may ensue as regions offer more and more incentives and benefits. The federal government may intervene, in much the same way as Mrs Thatcher's government offered Nissan land to build plants and a supplier campus.

Nearshoring focuses on locating capacity within economic zones. The aim is to benefit from tax-free border crossings and relatively faster distribution than remote manufacturing. Goods can be distributed from comparatively lower cost locations to markets in neighboring countries that are members of the same economic region. As an example, new plants established in any EU country compete against existing plants and imports for orders in the common market and as exporters to nonaffiliated countries.

It is possible to offshore and near- or reshore simultaneously [12]. Some work that has been done abroad may be reintroduced. Some work that currently is done in-house or locally may be relocated to locale with lower costs.

### **5. Nearshoring cost justifications**

Uncompetitive prices within a market ensure that the work remains overseas. Full cost analyses and strategic responsiveness to market fluctuations and technology sales window closures can focus CFO's attention on costs stemming from pipeline liability—the amount of inventory in the supply chain that has contractually to be paid for regardless of sale demand and may become obsolete. Total cost of acquisition takes into account many factors, not just the absolute lowest labor costs. Total cost can be reduced by buying from low-cost locations that geographically and logistically are nearer the market. Making fast-moving consumer goods in Eastern Europe for Western European consumption, and making in Mexico's Yucatan for NAFTA sales are examples of production inside the trading region. These strategies take advantage of integrated logistics and distribution to deliver materials to plants and distribute finished goods across the economic zone. The relative lower costs in the production region compared to the sales region as a whole enable purchase prices per unit to be kept low, while ensuring minimized pipeline liability that is a risk to profit from obsolescence and quality problems.

Nearshoring can aid in reducing duty overheads and charges. An example of this is Ford Motors opening of an engine assembly plant in Russia. The company aims to purchase at least 60% of requirements in the country in order to qualify for duty exemption on imported parts (Automotive [13]). Adil Shirinov, Ford Sollers' Chief Operating Officer reportedly stated "Our main target in line with our long-term

localization strategy was to launch engine production with a significant level of localization ... We are fully committed to this strategy which is key for our business in the current environment" (Ibid).

Reshoring: this strategy involves bringing manufacturing back to the brand's home nation. They do not necessarily need to return to the same sites or cities they previously had shed. Near- and reshoring choices can carry significant risks or can provide competitive advantages. Tactics can be used to mitigate direct risks to the company. Reshoring does not imply bringing activities back in-house. As a result, capital investments can be avoided because suitable vendors already exist that can supply at lower cost, higher quality, and more responsively than internal suppliers would be able to achieve. Suppliers take the risk that demand is volatile. If they have alternate customers, this may enable released capacity to be used for such accounts.

### **6. Purchasing and logistics**

Traditional purchasing focuses on purchase price paid. Lower unit prices are demanded by purchasing. To achieve this, suppliers typically require much higher volumes in order to generate viable margins. This creates an imbalance between the rate the goods are produced and the rate consumed by the customers. Large volumes ensure transportation costs that are spread across the goods. For high-value goods, transportation costs may be less than a quarter of 1%.

Price of landed goods is the prime metric many purchasing departments use. This omits a significant issue: pipeline liability. Pipeline liability relates to the total amount of investment in working capital inventory, work in process, and finished goods, made by suppliers on behalf of their customer. If materials are bespoke for a client's products, the supplier's supplier, or lower tier materials producer, will have invested in producing and storing materials for a specific client. The immediate buyer may be tier one or tier two suppliers. Typically, it is tier one suppliers that have to reserve materials at their highest value prior to part production and subassembly. Pipeline liability is the total amount of financial exposure the brand owner has against the commitments made on their behalf by their suppliers.

Purchasing also wants to reduce the purchase spend. Price paid may reduce at a constant rate each month during production window. Sales price may decay equally fast. It is vital for companies to pay and ensure that they do not buy too much too early and, therefore, be left with high-cost finished goods that are commanding lower sales prices. Spot purchases at lower and lower prices can offset lowing constant spot sales prices. While price decay at the point of sale is noted, B2B contracts over as much as a 10 year horizon tend not to permit any price rises. In many cases, the aim is to reduce price per unit via total quality, supplier development, reengineering, scrum, and any other improvement scheme that is "flavor of the month." The argument here is that by eliminating unnecessary costs, these benefits may be divided between the participants that helped achieve them. Customers that help their suppliers reduce costs can agree to share half or third of these reductions.

Logistics aims to transport materials and goods at the lowest cost per unit. Cost of transport for small, high value, goods can be in the order of <0.3% of the cost of the goods being transported. More costs of transportation per unit maybe incurred by the consumer going to the retail point of sale and returning home than the goods' entire logistics costs incurred through the supply chain. In the pursuit of ever lower logistics costs per unit, greater volumes are required in order to divide the administrative and transport service costs to the desired level.

**29**

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

In effect, people can outperform robots.

be held pending the dispatch.

advance.

to emerge.

policy.

Costs of organizing a container movement from low-labor-cost manufacturing base to distribution center or customer in the market region can vary, typically in the region of €9000–€15,000. These costs typically include carriage and insurance elements. These costs are carried as part of the resale price or as a separate transportation contract agreed between sender and receiver. INCO terms will be agreed in

With potentially <10% of the pipeline liability—cost of materials in the supply chain, and many smaller deliveries, transportation costs can rise dramatically as a *percentage* of costs of materials in the supply chain. However, percentage is misleading. The real saving as a result of lean manufacturing is the 90%+ reduction in pipeline liability. Lean aims to reduce risk to profit, rather than increasing profit *per se*. The result of outsourcing to low-labor-cost countries is to turn the operation located in the original country into a reseller. Goods printed with the US' stars and stripes, and the UK's union flag may be made in China or other Asian countries. Moves to change the law to ensure Nations' flags are printed only in the nation start

The Government of the nation, with massive spending power, may change purchasing policy. They may insist that purchases made on behalf of the people for the benefit of the people should have proven local content. "Local jobs for purchased goods that service local needs" can become a mantra, political, and fiscal

Lean manufacturing focuses on eliminating waste by minimizing effort, movement, space, raw materials, work-in-process materials, finished goods, human effort, rework, and scrap. There is a vast difference between lean processes and a lean supply chain. Lean processes have very small material waiting buffers, produce rapidly without defects, and have very small buffers that have undergone the process. These goods are moved to the next process in very small lots, typically one at a time. To achieve this, they may be transferred via robots, conveyors, or gravity feed. Goods may be produced in the sequence they are required, rather than produced in batches. Key to this is the ability to change the setup economically between units. Single minute exchange of dies (SMED) may be used, combined with computer numerical control (CNC) part production program direct feeds from a synchronizing controller. Use of fully integrated flexible manufacturing cells has become relatively rare. The investment cost of automated cells and systems reduces the return on investment. Use of robots continues as a means of learning how to manipulate and orientate parts. Once learned, these lessons maybe taught to people in order that they may become more efficient. Learning does not stop there. The workers in time will develop their own ways of doing the work with less effort.

From a cost perspective, employing low-labor-cost employees has been considered by offshoring proponents as a means of reducing unit costs. If suppliers exist in low-labor-cost regions, then the investment on new plant and equipment can be

Each unit produced may have a very slight margin between costs and price they are sold for. In order for suppliers in such locations to generate profit for themselves, they must rely on multiplying the margin per unit. This is achieved by requiring their customers to place very large orders. A consequence of this strategy is that there are a lot of products to ship. This in turn requires efficient packaging and space utilization in containers and other types of vessels. The benefits of efficient interprocess movements using one-piece flow within lean manufacturing plants can be written off against the huge volumes of finished goods that are stock piled because the customer does not want delivery yet. Months of production output can

avoided. Unit costs come closer to the variable cost element as a result.

*Modern Perspectives in Business Applications*

in the current environment" (Ibid).

**6. Purchasing and logistics**

transportation costs may be less than a quarter of 1%.

accounts.

localization strategy was to launch engine production with a significant level of localization ... We are fully committed to this strategy which is key for our business

Reshoring: this strategy involves bringing manufacturing back to the brand's home nation. They do not necessarily need to return to the same sites or cities they previously had shed. Near- and reshoring choices can carry significant risks or can provide competitive advantages. Tactics can be used to mitigate direct risks to the company. Reshoring does not imply bringing activities back in-house. As a result, capital investments can be avoided because suitable vendors already exist that can supply at lower cost, higher quality, and more responsively than internal suppliers would be able to achieve. Suppliers take the risk that demand is volatile. If they have alternate customers, this may enable released capacity to be used for such

Traditional purchasing focuses on purchase price paid. Lower unit prices are demanded by purchasing. To achieve this, suppliers typically require much higher volumes in order to generate viable margins. This creates an imbalance between the rate the goods are produced and the rate consumed by the customers. Large volumes ensure transportation costs that are spread across the goods. For high-value goods,

Price of landed goods is the prime metric many purchasing departments use. This omits a significant issue: pipeline liability. Pipeline liability relates to the total amount of investment in working capital inventory, work in process, and finished goods, made by suppliers on behalf of their customer. If materials are bespoke for a client's products, the supplier's supplier, or lower tier materials producer, will have invested in producing and storing materials for a specific client. The immediate buyer may be tier one or tier two suppliers. Typically, it is tier one suppliers that have to reserve materials at their highest value prior to part production and subassembly. Pipeline liability is the total amount of financial exposure the brand owner

Purchasing also wants to reduce the purchase spend. Price paid may reduce at a constant rate each month during production window. Sales price may decay equally fast. It is vital for companies to pay and ensure that they do not buy too much too early and, therefore, be left with high-cost finished goods that are commanding lower sales prices. Spot purchases at lower and lower prices can offset lowing constant spot sales prices. While price decay at the point of sale is noted, B2B contracts over as much as a 10 year horizon tend not to permit any price rises. In many cases, the aim is to reduce price per unit via total quality, supplier development, reengineering, scrum, and any other improvement scheme that is "flavor of the month." The argument here is that by eliminating unnecessary costs, these benefits may be divided between the participants that helped achieve them. Customers that help their suppliers reduce costs can agree to share half or third of

Logistics aims to transport materials and goods at the lowest cost per unit. Cost of transport for small, high value, goods can be in the order of <0.3% of the cost of the goods being transported. More costs of transportation per unit maybe incurred by the consumer going to the retail point of sale and returning home than the goods' entire logistics costs incurred through the supply chain. In the pursuit of ever lower logistics costs per unit, greater volumes are required in order to divide the

has against the commitments made on their behalf by their suppliers.

administrative and transport service costs to the desired level.

**28**

these reductions.

Costs of organizing a container movement from low-labor-cost manufacturing base to distribution center or customer in the market region can vary, typically in the region of €9000–€15,000. These costs typically include carriage and insurance elements. These costs are carried as part of the resale price or as a separate transportation contract agreed between sender and receiver. INCO terms will be agreed in advance.

With potentially <10% of the pipeline liability—cost of materials in the supply chain, and many smaller deliveries, transportation costs can rise dramatically as a *percentage* of costs of materials in the supply chain. However, percentage is misleading. The real saving as a result of lean manufacturing is the 90%+ reduction in pipeline liability. Lean aims to reduce risk to profit, rather than increasing profit *per se*.

The result of outsourcing to low-labor-cost countries is to turn the operation located in the original country into a reseller. Goods printed with the US' stars and stripes, and the UK's union flag may be made in China or other Asian countries. Moves to change the law to ensure Nations' flags are printed only in the nation start to emerge.

The Government of the nation, with massive spending power, may change purchasing policy. They may insist that purchases made on behalf of the people for the benefit of the people should have proven local content. "Local jobs for purchased goods that service local needs" can become a mantra, political, and fiscal policy.

Lean manufacturing focuses on eliminating waste by minimizing effort, movement, space, raw materials, work-in-process materials, finished goods, human effort, rework, and scrap. There is a vast difference between lean processes and a lean supply chain. Lean processes have very small material waiting buffers, produce rapidly without defects, and have very small buffers that have undergone the process. These goods are moved to the next process in very small lots, typically one at a time. To achieve this, they may be transferred via robots, conveyors, or gravity feed. Goods may be produced in the sequence they are required, rather than produced in batches. Key to this is the ability to change the setup economically between units. Single minute exchange of dies (SMED) may be used, combined with computer numerical control (CNC) part production program direct feeds from a synchronizing controller. Use of fully integrated flexible manufacturing cells has become relatively rare. The investment cost of automated cells and systems reduces the return on investment. Use of robots continues as a means of learning how to manipulate and orientate parts. Once learned, these lessons maybe taught to people in order that they may become more efficient. Learning does not stop there. The workers in time will develop their own ways of doing the work with less effort. In effect, people can outperform robots.

From a cost perspective, employing low-labor-cost employees has been considered by offshoring proponents as a means of reducing unit costs. If suppliers exist in low-labor-cost regions, then the investment on new plant and equipment can be avoided. Unit costs come closer to the variable cost element as a result.

Each unit produced may have a very slight margin between costs and price they are sold for. In order for suppliers in such locations to generate profit for themselves, they must rely on multiplying the margin per unit. This is achieved by requiring their customers to place very large orders. A consequence of this strategy is that there are a lot of products to ship. This in turn requires efficient packaging and space utilization in containers and other types of vessels. The benefits of efficient interprocess movements using one-piece flow within lean manufacturing plants can be written off against the huge volumes of finished goods that are stock piled because the customer does not want delivery yet. Months of production output can be held pending the dispatch.

### **7. Plant location as a key factor**

Governments represent their electorate in constituencies located in their national boundaries. It is in the individual representative's own self-interest to ensure that existing plants and businesses located within their constituencies remain viable and employment opportunities are not lost due to outsourcing. Corporations typically are managed by professionals that aim to maximize returns for their investors. Other stakeholders, including local and state government (tax revenue) and employees (salaries and wages) may be secondary to the commercial exploitation of opportunities.

Outsourcing all value-adding activities including part production, subassembling, and final assembly to low-cost countries can reduce the unit cost. Content sourced from the final market may be significantly reduced as a result. The knock-on effect of outsourcing final assembly to low-cost countries halfway round the world can also be to transfer part production work undertaken by suppliers in the market to suppliers closer to the new low-labor-cost manufacturing center. The effect is to strip out many of the supply chain jobs that had existed. If the economy is fully open for business, new jobs will emerge to replace the old ones. Entire regions may undergo periods of deindustrialization, depression, and then regeneration.

Intellectual property (IP) rights in the form of knowledge process may be transferred to franchisees, only to be disseminated locally without consent of the IP owner. Other risks become apparent when outsourcing to countries that have widely divergent cultures. Quality expectations may differ. Entire batches may be written off due to defects introduced by the subcontractor. To ensure they follow orders and comply with specifications, entire teams may need to jet off frequently to review what is going on and to bring the supplier back on track. Local representatives that are "on our side" and speak both languages may be recruited to undertake this vital role. Their salaries increase the overhead element on top of the purchase price. The company must aim to identify other factors that put the commercial viability at jeopardy. Risks to be mitigated include wage rises, lack of literate and skilled employees, language barriers, dishonest and unethical behavior, transport failure including train derailment, fire, ships sinking, new trade barriers, incoming border inspections, and administrative compliance issues that lead to refusal to admit the consignment.

A further factor that needs to be considered is the ability of the organization to respond to changes in volume demanded and sudden emergences of rival technologies and new competitor products. This can lead to significant discounting in order to sell the goods available, consignment recalls, and enforced upgrading activities. Lean aims to reduce the pipeline liability and obsolescence risk in the supply chain. If the goods are heavily discounted, revenue decreases. If they cannot be sold, their value must be paid for from profit and the goods are written off as obsolete. This can significantly reduce the viability of any business. To counter this, companies may mitigate the effects by producing a range of goods. Distance from market incurs logistics distribution time. Time-sensitive priced goods suffer from price erosion. It is necessary to ensure that goods are made, distributed, and sold as quickly as possible in order to minimize the stock holding cost associated with reducing prices. Companies like to reduce the time between placing orders with suppliers and receiving the goods. This is because the earlier they buy the parts, the higher the price that would have been paid for them. If purchase prices are high because orders were placed too early, and sale prices have dropped due to price erosion, then margins will be squeezed.

To reduce the price erosion, design teams should be included throughout the production life cycle in order to supply a constant stream of product upgrades. Each variant or iteration is only produced for a short period of time. All of the goods should be designed to be produced using the same production processes and

**31**

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

may be permitted.

alongside the producer.

assembly sequence. This avoids constant plant redesigns. An optimum sequence from supplier to customer should be identified in each plant. Designers should be instructed to design future iterations that fit that forward flow sequence from raw materials to finished goods. Group technology concepts including rank order clustering and to/from techniques can be used to identify the most efficient process sequence. Creating manufacturing cells can allow some backward flow without incurring overly long walks between the processes; (if we are walking, we aren't working). Minimizing the distances between processes eliminates the space beside each process to put work-in-process. One-piece flow can then be created where the material is walked from machine to machine. Some conveyor and robot movements

Plant location is a vital issue. Land cost, energy prices, average labor hour wages, and staff salaries, tax rates, transportation duration, and costs are vital pieces of the puzzle. Honda Corporation's motto can be summed up as "make where you sell, buy where you make" (adapted from [14]). In effect, it is necessary to identify major markets, make there, and buy from suppliers that are already there or can be encouraged to install themselves there as a global partner that sets up transplants

Different locations have different ethical and responsible business practices. Emphasis may range from strict compliance through completely lacking on environmental protection, emissions control, pension contributions, healthcare schemes,

Ford Motor Company initially set up assembly plants in East London and Germany. These plants were supplied with kits from Detroit. It soon became apparent that it was more efficient to establish complete part and subassembly facilities to supply the final assembly plants. Ford's Dagenham plant had the largest brand dedicated iron and steel foundry in Europe. It was industrial disputes, repeated strike action, and union demands for higher equal pay for women that led to Dagenham's

Four basic supply chain configurations are possible. Using a two-by-two matrix, we can map long and short inbound supply chains and outbound logistics: (1) Long inbound, long outbound is mass production; (2) Short inbound, long outbound is just in time; (3) Long inbound, short outbound is just in time; (4) Short inbound

Strategic financial commitment may be less than expected if most or all of the value-adding activities are undertaken in subcontractors. Empirical testing using a supply chain game [15] showed lower initial investment with JIT3, which reduces the volume required to breakeven. While salaries may be higher closer to the market, they should be few in number. Initial starting stock of 10% is achieved and maintained. Overall cost savings in terms of lower space, working capital, and cost of inventory offset the higher salaries. Profitability of a JIT3 operation is higher due to lower total costs and lower lost sales to competitors. Agile/mass production applied to the game using JIT3 enabled significantly increased capacity with the same number of people involved in JIT3, together with about 4% of the starting stock of mass production. Higher overall average revenue is achieved via more

Many managers today believe it is cheaper to buy parts from low-labor-cost countries, import the goods, produce the finished product, and export these to the market that may be in high-labor-cost countries. Products with infinite inventory

frequent product upgrade releases that maintain the sales price.

employee training and education, and employee family education.

assembly plant being shut and production sent to Spain.

**8. Supply chain configurations**

and short outbound is just in time 3.

### *Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

*Modern Perspectives in Business Applications*

**7. Plant location as a key factor**

exploitation of opportunities.

Governments represent their electorate in constituencies located in their national boundaries. It is in the individual representative's own self-interest to ensure that existing plants and businesses located within their constituencies remain viable and employment opportunities are not lost due to outsourcing. Corporations typically are managed by professionals that aim to maximize returns for their investors. Other stakeholders, including local and state government (tax revenue) and employees (salaries and wages) may be secondary to the commercial

Outsourcing all value-adding activities including part production, subassembling, and final assembly to low-cost countries can reduce the unit cost. Content sourced from the final market may be significantly reduced as a result. The knock-on effect of outsourcing final assembly to low-cost countries halfway round the world can also be to transfer part production work undertaken by suppliers in the market to suppliers closer to the new low-labor-cost manufacturing center. The effect is to strip out many of the supply chain jobs that had existed. If the economy is fully open for business, new jobs will emerge to replace the old ones. Entire regions may

undergo periods of deindustrialization, depression, and then regeneration. Intellectual property (IP) rights in the form of knowledge process may be transferred to franchisees, only to be disseminated locally without consent of the IP owner. Other risks become apparent when outsourcing to countries that have widely divergent cultures. Quality expectations may differ. Entire batches may be written off due to defects introduced by the subcontractor. To ensure they follow orders and comply with specifications, entire teams may need to jet off frequently to review what is going on and to bring the supplier back on track. Local representatives that are "on our side" and speak both languages may be recruited to undertake this vital role. Their salaries increase the overhead element on top of the purchase price. The company must aim to identify other factors that put the commercial viability at jeopardy. Risks to be mitigated include wage rises, lack of literate and skilled employees, language barriers, dishonest and unethical behavior, transport failure including train derailment, fire, ships sinking, new trade barriers, incoming border inspections, and administrative compliance issues that lead to refusal to admit the consignment. A further factor that needs to be considered is the ability of the organization to respond to changes in volume demanded and sudden emergences of rival technologies and new competitor products. This can lead to significant discounting in order to sell the goods available, consignment recalls, and enforced upgrading activities. Lean aims to reduce the pipeline liability and obsolescence risk in the supply chain. If the goods are heavily discounted, revenue decreases. If they cannot be sold, their value must be paid for from profit and the goods are written off as obsolete. This can significantly reduce the viability of any business. To counter this, companies may mitigate the effects by producing a range of goods. Distance from market incurs logistics distribution time. Time-sensitive priced goods suffer from price erosion. It is necessary to ensure that goods are made, distributed, and sold as quickly as possible in order to minimize the stock holding cost associated with reducing prices. Companies like to reduce the time between placing orders with suppliers and receiving the goods. This is because the earlier they buy the parts, the higher the price that would have been paid for them. If purchase prices are high because orders were placed too early, and sale prices have dropped due to price erosion, then margins will be squeezed. To reduce the price erosion, design teams should be included throughout the production life cycle in order to supply a constant stream of product upgrades. Each variant or iteration is only produced for a short period of time. All of the goods should be designed to be produced using the same production processes and

**30**

assembly sequence. This avoids constant plant redesigns. An optimum sequence from supplier to customer should be identified in each plant. Designers should be instructed to design future iterations that fit that forward flow sequence from raw materials to finished goods. Group technology concepts including rank order clustering and to/from techniques can be used to identify the most efficient process sequence. Creating manufacturing cells can allow some backward flow without incurring overly long walks between the processes; (if we are walking, we aren't working). Minimizing the distances between processes eliminates the space beside each process to put work-in-process. One-piece flow can then be created where the material is walked from machine to machine. Some conveyor and robot movements may be permitted.

Plant location is a vital issue. Land cost, energy prices, average labor hour wages, and staff salaries, tax rates, transportation duration, and costs are vital pieces of the puzzle. Honda Corporation's motto can be summed up as "make where you sell, buy where you make" (adapted from [14]). In effect, it is necessary to identify major markets, make there, and buy from suppliers that are already there or can be encouraged to install themselves there as a global partner that sets up transplants alongside the producer.

Different locations have different ethical and responsible business practices. Emphasis may range from strict compliance through completely lacking on environmental protection, emissions control, pension contributions, healthcare schemes, employee training and education, and employee family education.

Ford Motor Company initially set up assembly plants in East London and Germany. These plants were supplied with kits from Detroit. It soon became apparent that it was more efficient to establish complete part and subassembly facilities to supply the final assembly plants. Ford's Dagenham plant had the largest brand dedicated iron and steel foundry in Europe. It was industrial disputes, repeated strike action, and union demands for higher equal pay for women that led to Dagenham's assembly plant being shut and production sent to Spain.

### **8. Supply chain configurations**

Four basic supply chain configurations are possible. Using a two-by-two matrix, we can map long and short inbound supply chains and outbound logistics: (1) Long inbound, long outbound is mass production; (2) Short inbound, long outbound is just in time; (3) Long inbound, short outbound is just in time; (4) Short inbound and short outbound is just in time 3.

Strategic financial commitment may be less than expected if most or all of the value-adding activities are undertaken in subcontractors. Empirical testing using a supply chain game [15] showed lower initial investment with JIT3, which reduces the volume required to breakeven. While salaries may be higher closer to the market, they should be few in number. Initial starting stock of 10% is achieved and maintained. Overall cost savings in terms of lower space, working capital, and cost of inventory offset the higher salaries. Profitability of a JIT3 operation is higher due to lower total costs and lower lost sales to competitors. Agile/mass production applied to the game using JIT3 enabled significantly increased capacity with the same number of people involved in JIT3, together with about 4% of the starting stock of mass production. Higher overall average revenue is achieved via more frequent product upgrade releases that maintain the sales price.

Many managers today believe it is cheaper to buy parts from low-labor-cost countries, import the goods, produce the finished product, and export these to the market that may be in high-labor-cost countries. Products with infinite inventory

shelf lives could achieve a sustained sales price. However, overall sales volume per period may stagnate. Cost of holding the inventory may counter the savings from sourcing from low-labor-cost countries.

**Figure 1** shows dyads from supplier to assembler and assembler to client. Many supply chain tiers can exist that can require many inbound and outbound kilometers. Mass production is induced by long inbound and distribution chains. To make long journeys, a viable option, large volumes are transported. Large loads deliver more volume than immediately required. Lean philosophies consider this to be a waste.

Lean supply chains can be setup in three configurations that enable inbound JIT, outbound JIT, or both. These correspond to JIT1, JIT2 and JIT3.

JIT1 is typified by Toyota City. This was developed following Toyota engineer's extensive study tours at Ford's Crystal Palace. Suppliers are encouraged to be "close by the plant" [16]. The issue Japan had, when they were the workshop of the world from the 1970s through the 1990s, was that they produced goods in a far-away country. Japan had to import much of the ore and energy required to produce basic engineering materials. Just-in-time deliveries were achieved from part producers, through module assemblers, and on to final assembly plants. They also required huge fleets of ships to transport their goods to markets, particularly in North America and Europe. In effect, only inbound just in time was used. Downstream distribution used large container ships full of finished goods. The key metric for distribution is not just in time. Instead the metric is *just on* time, where the just changes meaning to "only." Ships are expected at the docks neither too early, nor too late. If they are early, they have to wait until the current ship is off-loaded and new cargo is loaded. If they arrive too late, they use time reserved to service the next ship.

In a JIT2 scenario, the factory is close to the market, including locations with much passing trade and key account high-volume customers. McDonalds is a good

**33**

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

a result of radical supply chain reengineering.

**9. Pipeline liability trumps low labor cost**

that may be sold with a higher margin.

into finished goods.

frequency is low.

come from Atlanta.

example of this strategy. Food must be fresh for people to eat it. Hence, the company cooks and assembles Big Mac's only a few meters from where they are bought. While in most cases, to reduce the purchase spend, suppliers may be faraway in low-labor-cost countries, but this is not the strategy taken by McDonalds. McDo' buy in UK and Ireland for that market. They buy in France/Belgium for that market, etc. Only two ingredients for the European market are imported in bulk. They are the sesame seeds on the buns from Mexico and the syrup for sodas that

JIT1 and JIT2 reduce pipeline stock and the number of people involved typically by half. However, this is not the 90%, *order of magnitude* [17] reduction hoped for as

To achieve the 90% reduction in inventory espoused by just-in-time advocates, JIT3 is used. JIT3 is based on buying and making close to the point of sale. Many SMEs do this. A small-family-run bar or shop for example typically buys from cash

This chapter proposes that a loaded supply chain is a risk to profit. This risk trumps low labor costs when demand for the product can be switched off rapidly. To sell remaining products, companies typically reduce the price. A key performance indicator is how much of total volumes ordered are sold at less than the full price. This represents over-ordering or late deliveries to points of sale. If we take Christmas trees as an example, it takes years to grow each unit. They start to have value at the beginning of October. Peak sales price is sought from November 1 through December 24. No one is buying on December 25. They have zero value from December 26. Any residual inventory in the pipeline is 100% obsolete. Consumers may discard their tree in the street as trash. Remaining inventory must be paid for from the high margins made from goods sold. This reduces trader's overall contribution to profit. Traders may store long-term nonperishable goods in anticipation of demand build up during next season. However, they will have incurred holding costs and the older goods shall compete against the new inventory

Pipeline liability is the value of stock loaded into a supply chain. Orders placed with suppliers are translated into orders they then place on their suppliers. They in turn place orders with their suppliers. Despite this loading, in many cases, materials can be used for other orders and other clients. If this is not the case, the client will be liable for orders placed on their behalf up to a maximum level. The brand owner may buy materials directly and act as an agent to sell their materials to suppliers. They then buy back the finished units. They therefore can control supplier's material costs and can gauge the supplier's ability to efficiently transform materials

In just in time three (JIT3), suppliers are close to the factory and the factory is close to the market. The resulting reduction in pipeline inventory, and hence reduction in risk to profit, can support higher wages. German auto workers earn ~37€/hr., compared to equivalents in Poland on 7€/hr. (Automotive News Europe). Making in Poland is "nearshoring." Goods made there could be transported to European sales regions within 1 or 2 days, with delivery on a regular basis. Other costs including plant costs, taxes, and indirect managerial overheads significantly may be more advantageous than German sites. Achieving apparently lower unit prices by outsourcing in relatively near lower labor cost countries can become a fallacy if delivery

and carry outlets. They may add value in their location and sell there.

**Figure 1.** *Four general supply chain configurations.*

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

*Modern Perspectives in Business Applications*

sourcing from low-labor-cost countries.

shelf lives could achieve a sustained sales price. However, overall sales volume per period may stagnate. Cost of holding the inventory may counter the savings from

**Figure 1** shows dyads from supplier to assembler and assembler to client. Many supply chain tiers can exist that can require many inbound and outbound kilometers. Mass production is induced by long inbound and distribution chains. To make long journeys, a viable option, large volumes are transported. Large loads deliver more volume than immediately required. Lean philosophies consider this to be a waste.

Lean supply chains can be setup in three configurations that enable inbound JIT,

JIT1 is typified by Toyota City. This was developed following Toyota engineer's extensive study tours at Ford's Crystal Palace. Suppliers are encouraged to be "close by the plant" [16]. The issue Japan had, when they were the workshop of the world from the 1970s through the 1990s, was that they produced goods in a far-away country. Japan had to import much of the ore and energy required to produce basic engineering materials. Just-in-time deliveries were achieved from part producers, through module assemblers, and on to final assembly plants. They also required huge fleets of ships to transport their goods to markets, particularly in North America and Europe. In effect, only inbound just in time was used. Downstream distribution used large container ships full of finished goods. The key metric for distribution is not just in time. Instead the metric is *just on* time, where the just changes meaning to "only." Ships are expected at the docks neither too early, nor too late. If they are early, they have to wait until the current ship is off-loaded and new cargo is loaded. If they arrive too late, they use time reserved to service the next ship.

In a JIT2 scenario, the factory is close to the market, including locations with much passing trade and key account high-volume customers. McDonalds is a good

outbound JIT, or both. These correspond to JIT1, JIT2 and JIT3.

**32**

**Figure 1.**

*Four general supply chain configurations.*

example of this strategy. Food must be fresh for people to eat it. Hence, the company cooks and assembles Big Mac's only a few meters from where they are bought. While in most cases, to reduce the purchase spend, suppliers may be faraway in low-labor-cost countries, but this is not the strategy taken by McDonalds. McDo' buy in UK and Ireland for that market. They buy in France/Belgium for that market, etc. Only two ingredients for the European market are imported in bulk. They are the sesame seeds on the buns from Mexico and the syrup for sodas that come from Atlanta.

JIT1 and JIT2 reduce pipeline stock and the number of people involved typically by half. However, this is not the 90%, *order of magnitude* [17] reduction hoped for as a result of radical supply chain reengineering.

To achieve the 90% reduction in inventory espoused by just-in-time advocates, JIT3 is used. JIT3 is based on buying and making close to the point of sale. Many SMEs do this. A small-family-run bar or shop for example typically buys from cash and carry outlets. They may add value in their location and sell there.

### **9. Pipeline liability trumps low labor cost**

This chapter proposes that a loaded supply chain is a risk to profit. This risk trumps low labor costs when demand for the product can be switched off rapidly. To sell remaining products, companies typically reduce the price. A key performance indicator is how much of total volumes ordered are sold at less than the full price. This represents over-ordering or late deliveries to points of sale. If we take Christmas trees as an example, it takes years to grow each unit. They start to have value at the beginning of October. Peak sales price is sought from November 1 through December 24. No one is buying on December 25. They have zero value from December 26. Any residual inventory in the pipeline is 100% obsolete. Consumers may discard their tree in the street as trash. Remaining inventory must be paid for from the high margins made from goods sold. This reduces trader's overall contribution to profit. Traders may store long-term nonperishable goods in anticipation of demand build up during next season. However, they will have incurred holding costs and the older goods shall compete against the new inventory that may be sold with a higher margin.

Pipeline liability is the value of stock loaded into a supply chain. Orders placed with suppliers are translated into orders they then place on their suppliers. They in turn place orders with their suppliers. Despite this loading, in many cases, materials can be used for other orders and other clients. If this is not the case, the client will be liable for orders placed on their behalf up to a maximum level. The brand owner may buy materials directly and act as an agent to sell their materials to suppliers. They then buy back the finished units. They therefore can control supplier's material costs and can gauge the supplier's ability to efficiently transform materials into finished goods.

In just in time three (JIT3), suppliers are close to the factory and the factory is close to the market. The resulting reduction in pipeline inventory, and hence reduction in risk to profit, can support higher wages. German auto workers earn ~37€/hr., compared to equivalents in Poland on 7€/hr. (Automotive News Europe). Making in Poland is "nearshoring." Goods made there could be transported to European sales regions within 1 or 2 days, with delivery on a regular basis. Other costs including plant costs, taxes, and indirect managerial overheads significantly may be more advantageous than German sites. Achieving apparently lower unit prices by outsourcing in relatively near lower labor cost countries can become a fallacy if delivery frequency is low.

### **10. Fast-moving consumer clothing case**

The example provided in **Table 1** compares "as it is in Asia and Morocco" and a modified version of Moroccan initial conditions that result from supplier development and a changed ordering philosophy. The Asian purchase model uses the mass production supply chain configuration of long inbound supply pipelines and long outbound distribution. It requires suppliers to produce goods for 9 months with a single delivery date scheduled before the most significant seasonal sales period. The Moroccan supply chain initially takes the same delivery schedule as Asia. Modifying this to a short lead time and frequent delivery mode significantly reduces pipeline liability.

North Africa offers a relatively low-labor-cost alternative that logistically is near Europe. Moroccan workers in a clothing company were reported by a client to earn 3.80€/hr., whereas Asian workers about 1.30€/hr. Moroccan labor initially was 20% less efficient than Asian counterparts. Thus, more workers were required at a higher wage rate. This motivated the client to source from Asia, based on a single "headline" budget line. Various minor import and export duties apply to Asia and Morocco that negate these charges. Making goods in Morocco appears expensive by comparison. Making in Poland, with labor at around 7€/hr. seems to double the cost compared to Morocco. Making in Germany at 37€/hr.—*hell is not that stupid*? The simple answer to that, from a total cost perspective, is a counter intuitive *No*. Better training is required to improve workers' efficiency. That is half the issue. The other is pipeline liability and the consequent risk to profit.

This research found that using JIT3, companies could cover wages and costs up to 60€/hr. and still make a profit, provided that productivity is equivalent to the best and providing pipeline liability dramatically is reduced. To achieve the labor productivity, benchmarking and activity training are required, together with known productivity targets.

Given a JIT3 supply chain structure, greater productivity can be achieved by better line balancing. This enables JIT3 to double productivity over mass production. Using JIT3 as a basic supply chain structure, modular product assembly to reduce hand time, sharing some assembly work with suppliers and some customer coproduction, and agile mass production, therefore, may double productivity *again*. This enables more revenue from more products being made and sold in less time. As a result, labor cost per unit is significantly reduced. Simultaneously, capacity per time period can be raised. Capacity utilization can be increased prior to major sale seasons. This approach avoids stockpiling finished goods that have been made months in advance, because capacity has not been created or is not available to respond to actual market demand.

Full cost analysis beyond pipeline liability, direct cost, and taxation should include other factors such as plant space costs, management overhead differential costs, legal administrative requirements and bureaucracy, healthcare and pension overheads, site security, and maintenance. These arguments are not well understood by operations managers, and even less so by managerial accountants/CFOs. This article aims to explain the logic of "making where you sell and buying where you make." By contrast, KPMG [12] perspective is that near- and reshoring is to set up facilities near the corporate headquarters. They suggest "an 'in country for country' approach that encompasses not just manufacturing, but the location of product management and R&D functions." That article is from the headquarters' perspective of where the market is. Based on research for this article, advice proposed is "produce within or close to both large and rapidly expanding markets." In summary, "buy, make, and sell locally."

**35**

**11. Conclusions**

risk)

**Table 1.**

the markets are rather than on the headquarters.

*Summary of mass to JIT3 financial comparisons for fast-moving consumer goods.*

Buy locally, make locally, and sell locally—the so-called "Glocal" strategy operates by making the goods tailored for local markets. The focus should be on where

Total margin clear of stock risk € 7,296,285 € 8,880,991 € 19,344,363

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

Total number of stock pipeline liability

Avg. human time needed to prepare

Total margin (excluding any sales or

Number of work days/year 286 Total number of days worked/year 365 Working hours per day 8 Number of work days/week 5.5 Efficiency factor of Asia over EU 0%

Daily production volume 19930

Annual production demand 5,700,000 units

volume

one unit

Customer assembler order window (w) 40 15 1.6

Customer assembler order window (d) 280 105 11.2

Material BOM cost € 4.02 € 4.38 € 4.38 Transport cost percentage € 0.10 € 0.06 € 0.06 Transport cost unit € 0.10 € 0.06 € 0.06 Tax % 10% 0% 0% Total material cost € 22,433,286 € 9169,605 € 978,091 Total transport cost € 558,041 € 125,559 € 13,393 Total tax € 2,243,328 € 0.00 € 0.00 Total mat cost + transport + tax € 25,234657.34 € 9295165.38 € 991,484.31 Number of employees 1287 1545 1287 Mean cost per labor hour € 1.29 € 3.86 € 3.86 Total labor cost € 3,786,428 € 13,634,845 € 11,359,285 Working capital € 26,777,757 € 22,930,011 € 12,350,770

**Asia pacific Morocco Morocco improved**

5,580,420 2,092,657 223,217

€ 29,729,571 € 18,046,894 € 20,322,454

61% 68%

122% 265%

31 mins

weeks

days

### *Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

*Modern Perspectives in Business Applications*

reduces pipeline liability.

known productivity targets.

respond to actual market demand.

"buy, make, and sell locally."

**10. Fast-moving consumer clothing case**

is pipeline liability and the consequent risk to profit.

The example provided in **Table 1** compares "as it is in Asia and Morocco" and a modified version of Moroccan initial conditions that result from supplier development and a changed ordering philosophy. The Asian purchase model uses the mass production supply chain configuration of long inbound supply pipelines and long outbound distribution. It requires suppliers to produce goods for 9 months with a single delivery date scheduled before the most significant seasonal sales period. The Moroccan supply chain initially takes the same delivery schedule as Asia. Modifying this to a short lead time and frequent delivery mode significantly

North Africa offers a relatively low-labor-cost alternative that logistically is near Europe. Moroccan workers in a clothing company were reported by a client to earn 3.80€/hr., whereas Asian workers about 1.30€/hr. Moroccan labor initially was 20% less efficient than Asian counterparts. Thus, more workers were required at a higher wage rate. This motivated the client to source from Asia, based on a single "headline" budget line. Various minor import and export duties apply to Asia and Morocco that negate these charges. Making goods in Morocco appears expensive by comparison. Making in Poland, with labor at around 7€/hr. seems to double the cost compared to Morocco. Making in Germany at 37€/hr.—*hell is not that stupid*? The simple answer to that, from a total cost perspective, is a counter intuitive *No*. Better training is required to improve workers' efficiency. That is half the issue. The other

This research found that using JIT3, companies could cover wages and costs up to 60€/hr. and still make a profit, provided that productivity is equivalent to the best and providing pipeline liability dramatically is reduced. To achieve the labor productivity, benchmarking and activity training are required, together with

Given a JIT3 supply chain structure, greater productivity can be achieved by better line balancing. This enables JIT3 to double productivity over mass production. Using JIT3 as a basic supply chain structure, modular product assembly to reduce hand time, sharing some assembly work with suppliers and some customer coproduction, and agile mass production, therefore, may double productivity *again*. This enables more revenue from more products being made and sold in less time. As a result, labor cost per unit is significantly reduced. Simultaneously, capacity per time period can be raised. Capacity utilization can be increased prior to major sale seasons. This approach avoids stockpiling finished goods that have been made months in advance, because capacity has not been created or is not available to

Full cost analysis beyond pipeline liability, direct cost, and taxation should include other factors such as plant space costs, management overhead differential costs, legal administrative requirements and bureaucracy, healthcare and pension overheads, site security, and maintenance. These arguments are not well understood by operations managers, and even less so by managerial accountants/CFOs. This article aims to explain the logic of "making where you sell and buying where you make." By contrast, KPMG [12] perspective is that near- and reshoring is to set up facilities near the corporate headquarters. They suggest "an 'in country for country' approach that encompasses not just manufacturing, but the location of product management and R&D functions." That article is from the headquarters' perspective of where the market is. Based on research for this article, advice proposed is "produce within or close to both large and rapidly expanding markets." In summary,

**34**


### **Table 1.**

*Summary of mass to JIT3 financial comparisons for fast-moving consumer goods.*

### **11. Conclusions**

Buy locally, make locally, and sell locally—the so-called "Glocal" strategy operates by making the goods tailored for local markets. The focus should be on where the markets are rather than on the headquarters.

Mass production configuration supply chains are operated because it seems to be obvious. Buy cheap and sell expensive. However, pipeline liability from loaded inbound supply and outbound distribution chains creates increased end-to-end times. This reduces the flexibility to respond to market changes. If the good is stable in terms of technology and design specification, with high demand and unrestricted supply, the strategy may enable organizations to achieve viable cash flow. Taking an end-to-end perspective, working capital is excessive and represents a significant risk to profit if the sales window closes.

JIT1 and JIT2 reduce the amount of goods in the supply chain approximately halfway between mass production and JIT3. JIT1 can make use of low-cost material and labor to produce a finished good. Logistics infrastructure may be used to transport finished goods to other regions where premium sales prices justify the extra risk from a loaded distribution network. If the goods are made and supplied to other corporations as part of agreed volume contracts, the risk to profit is minimized.

JIT2 can use low-cost parts from low-cost countries. Using nearshoring for final assembly and offshoring for part production is a strategy noted near Monterrey, Mexico. Between the city center and the airport, the majority of the companies are Chinese owned. Parts are produced in China. Finished goods are assembled in Mexico from these parts. Since the majority of the value add is undertaken in NAFTA, duty among Mexico, the USA, and Canada is avoided.

Risk to profit needs to be minimized. This is achieved by sacrificing a loaded supply chain that is filled with millions of examples of cheap goods. Instead, emphasis is placed on productive labor that is comparatively cheap compared to home markets, but may be much more expensive compared to remote lowlabor-cost countries. In Europe, the highest salaries tend to be within the triangle Liverpool, Hamburg, and Paris. The further East and South the production site is located, the lower the general factory wage tends to be. A one-day distribution circumference can determine likely "nearshore" production locations. While total cost per unit may seem to increase, focusing on doubling the productivity and doubling it again should be primary design team and operations' objectives. This can be achieved by simplifying the product, reducing hand time to make them, worker training, supplier, and customer co-production.

A fast-moving consumer goods case supplying own-branded sport clothing outlets is presented. Reduced end-to-end pipeline times were achieved via adopting buy, make, and sell close to market point of sales. Now, redundant continental and regional distribution centers can be converted from cost centers to profit centers by undertaking "late configurability" value-adding activities. The products must be designed to permit this and must become part of the market offering. Premium prices may be commanded, for example, The Bear Factory.

The summary shown in **Table 1** is an example of financial effects of JIT3 versus mass production provided in Section 9 "Pipeline liability trumps low labor cost." Financial analysis is shown highlighting critical factors that need to be managed that are *force multipliers* for the supply chain configurations.

The analysis given in **Table 1** shows the ability of the client to reallocate work to Morocco from Asia. They have understood the potential risk to profit from having a loaded supply chain, and significant discounting that was required to sell remaining goods after the end of the sales window. Total margin clear of stock risk is significantly higher for the baseline Morocco "near–production" scenario. The revised plan with more frequent deliveries doubles more than that. The client adopted JIT3 strategies, making closer to reduce pipeline inventory yet not too close that skyrocket labor wages. JIT3 can be enhanced with agile/mass customization approaches. This can enable the corporation to delay the point of variation and facilitate assemble-to-order strategies.

**37**

**Author details**

David J. Newlands\* and Fawaz Baddar Al Hussan

provided the original work is properly cited.

\*Address all correspondence to: d.newlands@ieseg.fr

IÉSEG School of Management (LEM, CNRS 9221), Lille, France

© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

exclusively for export to other, richer, markets.

and remote regions.

productivity are consistent.

Making in country, or trading region, primarily for sales, does not prohibit sales abroad, except where they are contractually bound to do so by intellectual property owners. Excess production beyond local market absorption may be exported to other market regions. This approach differs from make in low-cost countries

Specification and legal compliance in sales regions imposes two options: comply with each market requirement separately or supersede requirements of both home

Mass production could yield higher margins; however, this strategy has higher potential risk of obsolescence that would yield the smallest total margin. The amount of profit free from pipeline obsolescence risk is significantly higher than JIT3 supply chain configurations. Mass production in remote low-labor-cost countries would suit "pile 'em high and sell 'em to everyone." This also suits undeveloped markets and monopoly technology scenarios. The results in the table indicate that nearshoring in inefficient plants yields the smallest total margin, while ensuring more than 20% higher minimum margin as a result of reduced pipeline liability. Optimizing nearshoring performance maximizes risk-free total margin, at least 250% more than the mass production model. The strategic choices must be re-evaluated as BOM cost approaches zero and as BOM costs become significantly more than total labor costs. This model is static rather than stochastic. Static models are viable when distance to market, order-fulfilment lead time, delivery duration, and price and

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

*Modern Perspectives in Business Applications*

risk to profit if the sales window closes.

Mass production configuration supply chains are operated because it seems to be obvious. Buy cheap and sell expensive. However, pipeline liability from loaded inbound supply and outbound distribution chains creates increased end-to-end times. This reduces the flexibility to respond to market changes. If the good is stable in terms of technology and design specification, with high demand and unrestricted supply, the strategy may enable organizations to achieve viable cash flow. Taking an end-to-end perspective, working capital is excessive and represents a significant

JIT1 and JIT2 reduce the amount of goods in the supply chain approximately halfway between mass production and JIT3. JIT1 can make use of low-cost material and labor to produce a finished good. Logistics infrastructure may be used to transport finished goods to other regions where premium sales prices justify the extra risk from a loaded distribution network. If the goods are made and supplied to other corporations as part of agreed volume contracts, the risk to profit is minimized. JIT2 can use low-cost parts from low-cost countries. Using nearshoring for final assembly and offshoring for part production is a strategy noted near Monterrey, Mexico. Between the city center and the airport, the majority of the companies are Chinese owned. Parts are produced in China. Finished goods are assembled in Mexico from these parts. Since the majority of the value add is undertaken in

Risk to profit needs to be minimized. This is achieved by sacrificing a loaded supply chain that is filled with millions of examples of cheap goods. Instead, emphasis is placed on productive labor that is comparatively cheap compared to home markets, but may be much more expensive compared to remote lowlabor-cost countries. In Europe, the highest salaries tend to be within the triangle Liverpool, Hamburg, and Paris. The further East and South the production site is located, the lower the general factory wage tends to be. A one-day distribution circumference can determine likely "nearshore" production locations. While total cost per unit may seem to increase, focusing on doubling the productivity and doubling it again should be primary design team and operations' objectives. This can be achieved by simplifying the product, reducing hand time to make them, worker

A fast-moving consumer goods case supplying own-branded sport clothing outlets is presented. Reduced end-to-end pipeline times were achieved via adopting buy, make, and sell close to market point of sales. Now, redundant continental and regional distribution centers can be converted from cost centers to profit centers by undertaking "late configurability" value-adding activities. The products must be designed to permit this and must become part of the market offering. Premium

The summary shown in **Table 1** is an example of financial effects of JIT3 versus mass production provided in Section 9 "Pipeline liability trumps low labor cost." Financial analysis is shown highlighting critical factors that need to be managed

The analysis given in **Table 1** shows the ability of the client to reallocate work to Morocco from Asia. They have understood the potential risk to profit from having a loaded supply chain, and significant discounting that was required to sell remaining goods after the end of the sales window. Total margin clear of stock risk is significantly higher for the baseline Morocco "near–production" scenario. The revised plan with more frequent deliveries doubles more than that. The client adopted JIT3 strategies, making closer to reduce pipeline inventory yet not too close that skyrocket labor wages. JIT3 can be enhanced with agile/mass customization approaches. This can enable the corporation to delay the point of variation and

NAFTA, duty among Mexico, the USA, and Canada is avoided.

training, supplier, and customer co-production.

prices may be commanded, for example, The Bear Factory.

that are *force multipliers* for the supply chain configurations.

facilitate assemble-to-order strategies.

**36**

Making in country, or trading region, primarily for sales, does not prohibit sales abroad, except where they are contractually bound to do so by intellectual property owners. Excess production beyond local market absorption may be exported to other market regions. This approach differs from make in low-cost countries exclusively for export to other, richer, markets.

Specification and legal compliance in sales regions imposes two options: comply with each market requirement separately or supersede requirements of both home and remote regions.

Mass production could yield higher margins; however, this strategy has higher potential risk of obsolescence that would yield the smallest total margin. The amount of profit free from pipeline obsolescence risk is significantly higher than JIT3 supply chain configurations. Mass production in remote low-labor-cost countries would suit "pile 'em high and sell 'em to everyone." This also suits undeveloped markets and monopoly technology scenarios. The results in the table indicate that nearshoring in inefficient plants yields the smallest total margin, while ensuring more than 20% higher minimum margin as a result of reduced pipeline liability. Optimizing nearshoring performance maximizes risk-free total margin, at least 250% more than the mass production model. The strategic choices must be re-evaluated as BOM cost approaches zero and as BOM costs become significantly more than total labor costs.

This model is static rather than stochastic. Static models are viable when distance to market, order-fulfilment lead time, delivery duration, and price and productivity are consistent.

### **Author details**

David J. Newlands\* and Fawaz Baddar Al Hussan IÉSEG School of Management (LEM, CNRS 9221), Lille, France

\*Address all correspondence to: d.newlands@ieseg.fr

© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

[1] Khan SAR. Introductory Chapter: Introduction of Green Supply Chain Management [Online First]. Rijeka: IntechOpen; 2018. DOI: 10.5772/ intechopen.81088. Available from: https://www.intechopen.com/onlinefirst/introductory-chapter-introductionof-green-supply-chain-management

[2] Khan SAR, Dong Q, Zhang Y, Khan SS. The impact of green supply chain on enterprise performance: In the perspective of China. Journal of Advanced Manufacturing Systems. 2017;**16**(3):263-273

[3] Khan SAR, Dong Q, Zhang Y. Role of ABC analysis in the process of efficient order fulfilment: Case study. Advanced Engineering Forum. 2017;**23**(7):114-121

[4] Khan SAR, Zhang Y. Introductory Chapter: Purchasing and Supply Management [Online First]. Rijeka: IntechOpen; 2019. DOI: 10.5772/ intechopen.85380. Available from: https://www.intechopen.com/onlinefirst/introductory-chapter-purchasingand-supply-management

[5] Brad S, Bogdan M, Emilia B, Mircea F. Environmentally sustainable economic growth. Amfiteatru Economic Journal. 2016;**18**(42):446-460. The Bucharest University of Economic Studies, Bucharest. ISSN: 2247-9104

[6] Robert P. New Minimum Wage Too High, Business Owner Says; 12 August 2015. Available from: http://www. bbc.com/news/business-33885991 [Accessed: 12 August 2015]

[7] Lamming R. Beyond Partnership: Strategies for Innovation and Lean Supply. London: Prentice Hall International; 1993

[8] Andrew A. Companies increasingly turning to US cities for their outsourcing locations. 2015. Available

from: http://www.supplymanagement. com/news/2015/companiesincreasingly-turning-to-us-cities-fortheir-outsourcing-locations [published 28 May, Site Accessed: 28 May 2015]

[9] Marino D. Keeping Manufacturing in the UK Even More Important than Reshoring'. 2015. Available from: http://www.supplymanagement.com/ news/2015/keeping-manufacturingin-the-uk-even-more-important-thanreshoring?utm\_source=Adestra&utm\_ medium=email&utm\_term [published 16 May, Site Accessed: 18 May 2015]

[10] Friedman TL. The World Is Flat: The Globalized World in the Twenty-First Century Paperback. 2Rev ed. Penguin; 2007

[11] CCTV News. Trans-Eurasia Railway Connects China with Europe. 2013. Available from: https://www.youtube. com/watch?v=5Z0kT8P6XDE

[12] KPMG. Production's Coming Home: What Companies Need to Know About Reshoring. 2014. Available from: http://www.kpmg.com/Global/en/ IssuesAndInsights/ArticlesPublications/ ConsumerCurrents/Pages/productionscoming-home.aspx

[13] Automotive News. Ford Opens Engine Plant in Russia to Reduce Dependency on Imports. 2015. Available from: http://europe.autonews.com/ article/20150904/ANE/150909931/ ford-opens-engine-plant-inrussia-to-reduce-dependency-onimports?cciid=email-ane-daily

[14] Nelson D, Mayo R, Moody P. Powered by Honda: Developing Excellence in the Global Enterprise. New York: John Wiley & Sons; 1998

[15] Newlands D. Supply Chain Games, Operations Management, Vol 38, No. 4, Toyota Beefs up U.S build. August Purchasing, 15 December 1994. 2012

**39**

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

[16] Treece J B. Nissan Purchasing Boss Embraces Common Sense. Heresy! Quoting Interview Text from Rebecca Vest; North American Purchasing Head; 3 August 2011. Available from: http:// www.autonews.com/article/20110803/

BLOG06/308039990/1129

[17] Hammer M, Champy J. Reengineering the Corporation: A Manifesto for Business Revolution. London: Nicholas Brealey Publishing

Ltd; 1993

*Sourcing and Manufacturing in the Market Region DOI: http://dx.doi.org/10.5772/intechopen.87073*

[16] Treece J B. Nissan Purchasing Boss Embraces Common Sense. Heresy! Quoting Interview Text from Rebecca Vest; North American Purchasing Head; 3 August 2011. Available from: http:// www.autonews.com/article/20110803/ BLOG06/308039990/1129

[17] Hammer M, Champy J. Reengineering the Corporation: A Manifesto for Business Revolution. London: Nicholas Brealey Publishing Ltd; 1993

**38**

*Modern Perspectives in Business Applications*

[1] Khan SAR. Introductory Chapter: Introduction of Green Supply Chain Management [Online First]. Rijeka: IntechOpen; 2018. DOI: 10.5772/ intechopen.81088. Available from: https://www.intechopen.com/onlinefirst/introductory-chapter-introductionof-green-supply-chain-management

from: http://www.supplymanagement.

increasingly-turning-to-us-cities-fortheir-outsourcing-locations [published 28 May, Site Accessed: 28 May 2015]

[9] Marino D. Keeping Manufacturing in the UK Even More Important than Reshoring'. 2015. Available from: http://www.supplymanagement.com/ news/2015/keeping-manufacturingin-the-uk-even-more-important-thanreshoring?utm\_source=Adestra&utm\_ medium=email&utm\_term [published 16 May, Site Accessed: 18 May 2015]

[10] Friedman TL. The World Is Flat: The Globalized World in the Twenty-First Century Paperback. 2Rev ed. Penguin;

[11] CCTV News. Trans-Eurasia Railway Connects China with Europe. 2013. Available from: https://www.youtube.

com/watch?v=5Z0kT8P6XDE

coming-home.aspx

[12] KPMG. Production's Coming Home: What Companies Need to Know About Reshoring. 2014. Available from: http://www.kpmg.com/Global/en/ IssuesAndInsights/ArticlesPublications/ ConsumerCurrents/Pages/productions-

[13] Automotive News. Ford Opens Engine Plant in Russia to Reduce

[14] Nelson D, Mayo R, Moody P. Powered by Honda: Developing Excellence in the Global Enterprise. New York: John Wiley & Sons; 1998

[15] Newlands D. Supply Chain Games, Operations Management, Vol 38, No. 4, Toyota Beefs up U.S build. August Purchasing, 15 December 1994. 2012

Dependency on Imports. 2015. Available from: http://europe.autonews.com/ article/20150904/ANE/150909931/ ford-opens-engine-plant-inrussia-to-reduce-dependency-onimports?cciid=email-ane-daily

2007

com/news/2015/companies-

[2] Khan SAR, Dong Q, Zhang Y, Khan SS. The impact of green supply chain on enterprise performance: In the perspective of China. Journal of Advanced Manufacturing Systems.

[3] Khan SAR, Dong Q, Zhang Y. Role of ABC analysis in the process of efficient order fulfilment: Case study. Advanced Engineering Forum. 2017;**23**(7):114-121

[4] Khan SAR, Zhang Y. Introductory Chapter: Purchasing and Supply Management [Online First]. Rijeka: IntechOpen; 2019. DOI: 10.5772/ intechopen.85380. Available from: https://www.intechopen.com/onlinefirst/introductory-chapter-purchasing-

and-supply-management

[5] Brad S, Bogdan M, Emilia B, Mircea F. Environmentally sustainable economic growth. Amfiteatru Economic Journal. 2016;**18**(42):446-460. The Bucharest University of Economic Studies, Bucharest. ISSN: 2247-9104

[6] Robert P. New Minimum Wage Too High, Business Owner Says; 12 August 2015. Available from: http://www. bbc.com/news/business-33885991

[7] Lamming R. Beyond Partnership: Strategies for Innovation and Lean Supply. London: Prentice Hall

[8] Andrew A. Companies increasingly

outsourcing locations. 2015. Available

[Accessed: 12 August 2015]

turning to US cities for their

International; 1993

2017;**16**(3):263-273

**References**

**Chapter 4**

**Abstract**

Rental Market

new functions was roughly—5%.

obsolescence, cohort effect

**1. Introduction**

**41**

production and pricing analysis

*Takeshi So and Chihiro Shimizu*

Supply Management of Rental

Changes in the Quality of Housing

The Tokyo housing market is considered to be one of the fastest evolving markets in the world. In recent years, functions such as TV intercoms, bathroom dryers, system kitchens, and toilets with washlets, which are not often seen in European and US houses, have spread and become common in Japanese houses. Under such circumstances, the importance of various equipment ancillary to housing, together with the location and quality of the building, is increasingly a factor for determining the value of housing in Tokyo. This is because when a new product appears, the old product is ordered to be withdrawn from the market, or its commodity value is greatly depreciated. This study measured the economic value of improving the quality of housing with new equipment in the Tokyo rental housing market and clarified the extent of economic depreciation that is occurring due to obsolescence. According to the obtained results, new functions are being added sequentially to the Japanese rental housing according to the age of the building, and these functions are non-negligible in the determination of housing rent, even when compared with location and building structure. The effect of obsolescence due to the addition of

**Keywords:** quality change, housing equipment, hedonic approach, depreciation,

In the past, Japanese houses were ridiculed as being "rabbit hutches" as they were smaller in scale, lower in quality, and shorter in average service life than those of Western countries, and examples were often given illustrating Japan as having the worst residential environment among major advanced countries. However, after

**JEL classification:** R31—housing supply and markets; R32—other spatial

Equipment in the Tokyo Housing

Housing Facilities: Effect of

### **Chapter 4**

## Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing Equipment in the Tokyo Housing Rental Market

*Takeshi So and Chihiro Shimizu*

### **Abstract**

The Tokyo housing market is considered to be one of the fastest evolving markets in the world. In recent years, functions such as TV intercoms, bathroom dryers, system kitchens, and toilets with washlets, which are not often seen in European and US houses, have spread and become common in Japanese houses. Under such circumstances, the importance of various equipment ancillary to housing, together with the location and quality of the building, is increasingly a factor for determining the value of housing in Tokyo. This is because when a new product appears, the old product is ordered to be withdrawn from the market, or its commodity value is greatly depreciated. This study measured the economic value of improving the quality of housing with new equipment in the Tokyo rental housing market and clarified the extent of economic depreciation that is occurring due to obsolescence. According to the obtained results, new functions are being added sequentially to the Japanese rental housing according to the age of the building, and these functions are non-negligible in the determination of housing rent, even when compared with location and building structure. The effect of obsolescence due to the addition of new functions was roughly—5%.

**Keywords:** quality change, housing equipment, hedonic approach, depreciation, obsolescence, cohort effect

**JEL classification:** R31—housing supply and markets; R32—other spatial production and pricing analysis

### **1. Introduction**

In the past, Japanese houses were ridiculed as being "rabbit hutches" as they were smaller in scale, lower in quality, and shorter in average service life than those of Western countries, and examples were often given illustrating Japan as having the worst residential environment among major advanced countries. However, after the period of high economic growth since the chaotic postwar period, this environment has already greatly improved. In recent years high-performance housing stock has accumulated, and housing with functions not found in other countries have become common.

strengthened, thereby rapidly increasing the performance requirements of

the stock as a whole has been shortened over a long period.

summarize the results by way of a conclusion.

**43**

Japanese houses and have greatly improved household living standards.

This history is also closely related to the shortness of service life, which is a characteristic of the previously ridiculed Japanese houses. Several reasons can be envisaged to explain the short service life of Japanese houses, but the two most influential factors are considered to be the urgent task of promoting the renovation of low-quality housing stock that was built to temporarily compensate for the housing shortage after the war and the fact that the stock renewal was promoted by strengthening public regulations due to large-scale earthquakes and other disasters. In addition, the high urban renewal rate can also be cited as a reason. In the rapid economic growth of postwar Japan, the main industrial structure shifted from primary to secondary industry in a single stroke, and urbanization was promoted throughout the country in the 1970s by developing highway and railway networks across the country, known as "Japanese archipelago remodeling." In the 1980s, a policy was developed to transform the industrial structure, which was centered on secondary industry to tertiary industry. The transformation of Tokyo into an international financial center was a symbolic policy, and against this background, redevelopment rapidly advanced in major cities. Under such circumstances, the conversion of building use of even physically usable housing into offices, commercial facilities, and so on was promoted through rebuilding, and the advancement of land use was promoted [1]. As a result, it can be said that the average service life of housing seen throughout

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing…*

In addition to these features, it should be noted that the speed of technological innovation in Japanese housing is fast. "Technological innovation" here refers not only to the improvement of productivity on the manufacturing side but also the significant improvement of household welfare levels through the release of new products developed by R&D. In recent years, smart houses utilizing IOT and so on have become symbolic of advancing technology, but functions such as TV intercoms, bathroom dryers, system kitchens, and toilets with washlets, which are not often seen in European and American houses, have become common functions in

However, in a market where products with such new features arrive so quickly, the speed of obsolescence also increases. In these markets, when a new product appears, the old product is ordered to be withdrawn from the market, or its commodity value is greatly depreciated, that is, the service life of products is shortened. This study aims to measure the economic value of the functions of housing with new quality in the rental housing market in Tokyo, where technological advancement has been the greatest, and to clarify how much economic depreciation is occurring due to obsolescence. In Section 2, we present the model and the framework for empirical analysis together with the data, and in Section 3, we present the estimated results. According to the obtained results, new functions are being added sequentially to Japanese rental housing according to the age of the building, and these functions are non-negligible in the determination of housing rent, even when compared with location (LC) and the building structure (ST). The effect of obsolescence due to the addition of new functions was roughly—5%. In Section 4, we

<sup>5</sup> In response to major disasters, the Japanese Building Standards Law was revised. The first major revision of the Building Standards Law was in 1991, and the revision strengthened the earthquake resistance standards. After that, following the two great earthquakes, the standards strengthened.

housing.<sup>5</sup>

*DOI: http://dx.doi.org/10.5772/intechopen.86163*

Needless to say, when attempting an analysis of a housing market, it is necessary to fully understand the characteristics of the country. Below, we set out the reasons that have led to the false perception of Japanese housing still belonging to the era when they were ridiculed as rabbit hutches.

Although commonalities can be found in many parts of the Japanese housing market in comparison with the European and US housing markets, the following heterogeneity is conceivable as the postwar historical origin is different. It is possible that these are the cause of many misunderstandings.

In Japan, many houses were destroyed due to the large-scale air raids during the Second World War, not only in metropolitan areas but also in regional cities. In particular, a large number of houses were destroyed in the Tokyo metropolitan area,<sup>1</sup> and very-low-quality houses were built in a disorganized manner to satisfy the urgent housing demand in the chaotic postwar period. In the so-called high economic growth period that began in the mid-1950s, such houses were rapidly upgraded as large numbers of apartment buildings came up throughout Japan.<sup>2</sup> In addition, the drastic change in Japanese lifestyle through the rapid economic growth triggered the renewal of old housing stock by Westernizing the traditional housing style of Japan.

The private sector led construction to realize such a large-scale housing supply because the public sector was saddled with the large financial burden of postwar reconstruction. In particular, the government established a personal loan system to promote housing investment by households, and as a result, the ownership rate in postwar Japan significantly increased in comparison to before the war. Furthermore, as the supply of public housing was limited, a dedicated housing market for single-person renters formed in the rental housing market, which was rarely seen in Europe and the United States.

As a result of these short-term housing renewals, Japanese housing was brought into a state where their style, quality, and housing equipment were greatly different depending on the period of construction. In addition, due to natural disasters such as the Great Hanshin earthquake<sup>3</sup> and the Great East Japan earthquake,<sup>4</sup> housing earthquake resistance and other legal regulations have been successively

<sup>1</sup> The Bombing of Tokyo was a series of firebombing air raids in Second World War. This was conducted on the night of 9–10 March 1945, 16 square miles (41 km<sup>2</sup> ) of central Tokyo were destroyed, leaving an estimated 100,000 civilians dead and over 1 million homeless.

<sup>2</sup> Although the improvement of low-quality stock developed during the postwar reconstruction period has been carried out in many areas, some areas remain in which stock has not improved, referred to as "high density wooden structure areas." Since these areas are vulnerable to earthquake disasters and so on, improvement is urgently required.

<sup>3</sup> The Great Hanshin earthquake, or Kobe earthquake, occurred on January 17, 1995 in the southern part of Hyōgo Prefecture, Japan, when combined with Osaka, known as Hanshin. Up to 6434 people lost their lives.

<sup>4</sup> The Great East Japan Earthquake occurred on March 11, 2011. The report from the Japanese National Police Agency report in 2018 confirms 15,896 deaths, 6157 injured, and 2537 people missing across twenty prefectures.

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing… DOI: http://dx.doi.org/10.5772/intechopen.86163*

strengthened, thereby rapidly increasing the performance requirements of housing.<sup>5</sup>

This history is also closely related to the shortness of service life, which is a characteristic of the previously ridiculed Japanese houses. Several reasons can be envisaged to explain the short service life of Japanese houses, but the two most influential factors are considered to be the urgent task of promoting the renovation of low-quality housing stock that was built to temporarily compensate for the housing shortage after the war and the fact that the stock renewal was promoted by strengthening public regulations due to large-scale earthquakes and other disasters.

In addition, the high urban renewal rate can also be cited as a reason. In the rapid economic growth of postwar Japan, the main industrial structure shifted from primary to secondary industry in a single stroke, and urbanization was promoted throughout the country in the 1970s by developing highway and railway networks across the country, known as "Japanese archipelago remodeling." In the 1980s, a policy was developed to transform the industrial structure, which was centered on secondary industry to tertiary industry. The transformation of Tokyo into an international financial center was a symbolic policy, and against this background, redevelopment rapidly advanced in major cities. Under such circumstances, the conversion of building use of even physically usable housing into offices, commercial facilities, and so on was promoted through rebuilding, and the advancement of land use was promoted [1].

As a result, it can be said that the average service life of housing seen throughout the stock as a whole has been shortened over a long period.

In addition to these features, it should be noted that the speed of technological innovation in Japanese housing is fast. "Technological innovation" here refers not only to the improvement of productivity on the manufacturing side but also the significant improvement of household welfare levels through the release of new products developed by R&D. In recent years, smart houses utilizing IOT and so on have become symbolic of advancing technology, but functions such as TV intercoms, bathroom dryers, system kitchens, and toilets with washlets, which are not often seen in European and American houses, have become common functions in Japanese houses and have greatly improved household living standards.

However, in a market where products with such new features arrive so quickly, the speed of obsolescence also increases. In these markets, when a new product appears, the old product is ordered to be withdrawn from the market, or its commodity value is greatly depreciated, that is, the service life of products is shortened.

This study aims to measure the economic value of the functions of housing with new quality in the rental housing market in Tokyo, where technological advancement has been the greatest, and to clarify how much economic depreciation is occurring due to obsolescence. In Section 2, we present the model and the framework for empirical analysis together with the data, and in Section 3, we present the estimated results. According to the obtained results, new functions are being added sequentially to Japanese rental housing according to the age of the building, and these functions are non-negligible in the determination of housing rent, even when compared with location (LC) and the building structure (ST). The effect of obsolescence due to the addition of new functions was roughly—5%. In Section 4, we summarize the results by way of a conclusion.

the period of high economic growth since the chaotic postwar period, this environment has already greatly improved. In recent years high-performance housing stock has accumulated, and housing with functions not found in other countries have

Needless to say, when attempting an analysis of a housing market, it is necessary to fully understand the characteristics of the country. Below, we set out the reasons that have led to the false perception of Japanese housing still belonging to the era

Although commonalities can be found in many parts of the Japanese housing market in comparison with the European and US housing markets, the following heterogeneity is conceivable as the postwar historical origin is different. It is possi-

In Japan, many houses were destroyed due to the large-scale air raids during the Second World War, not only in metropolitan areas but also in regional cities. In particular, a large number of houses were destroyed in the Tokyo metropolitan area,<sup>1</sup> and very-low-quality houses were built in a disorganized manner to satisfy the urgent housing demand in the chaotic postwar period. In the so-called high economic growth period that began in the mid-1950s, such houses were rapidly upgraded as large numbers of apartment buildings came up

throughout Japan.<sup>2</sup> In addition, the drastic change in Japanese lifestyle through the rapid economic growth triggered the renewal of old housing stock by Westernizing

The private sector led construction to realize such a large-scale housing supply because the public sector was saddled with the large financial burden of postwar reconstruction. In particular, the government established a personal loan system to promote housing investment by households, and as a result, the ownership rate in postwar Japan significantly increased in comparison to before the war. Furthermore, as the supply of public housing was limited, a dedicated housing market for single-person renters formed in the rental housing market, which was rarely seen in

As a result of these short-term housing renewals, Japanese housing was brought into a state where their style, quality, and housing equipment were greatly different depending on the period of construction. In addition, due to natural disasters such

as the Great Hanshin earthquake<sup>3</sup> and the Great East Japan earthquake,<sup>4</sup>

housing earthquake resistance and other legal regulations have been successively

<sup>1</sup> The Bombing of Tokyo was a series of firebombing air raids in Second World War. This was conducted

<sup>2</sup> Although the improvement of low-quality stock developed during the postwar reconstruction period has been carried out in many areas, some areas remain in which stock has not improved, referred to as "high density wooden structure areas." Since these areas are vulnerable to earthquake disasters and so

<sup>3</sup> The Great Hanshin earthquake, or Kobe earthquake, occurred on January 17, 1995 in the southern part of Hyōgo Prefecture, Japan, when combined with Osaka, known as Hanshin. Up to 6434 people lost their

<sup>4</sup> The Great East Japan Earthquake occurred on March 11, 2011. The report from the Japanese National Police Agency report in 2018 confirms 15,896 deaths, 6157 injured, and 2537 people missing across

) of central Tokyo were destroyed, leaving an

become common.

when they were ridiculed as rabbit hutches.

*Modern Perspectives in Business Applications*

the traditional housing style of Japan.

Europe and the United States.

on, improvement is urgently required.

lives.

**42**

twenty prefectures.

on the night of 9–10 March 1945, 16 square miles (41 km<sup>2</sup>

estimated 100,000 civilians dead and over 1 million homeless.

ble that these are the cause of many misunderstandings.

<sup>5</sup> In response to major disasters, the Japanese Building Standards Law was revised. The first major revision of the Building Standards Law was in 1991, and the revision strengthened the earthquake resistance standards. After that, following the two great earthquakes, the standards strengthened.

### **2. Empirical analysis: data and estimation model**

### **2.1 Literature review**

A technique known as the hedonic approach is effective to decompose prices of commodities corresponding to different qualities. Since the hedonic approach theoretically depicts the behavior of suppliers and consumers in a market with diverse quality and presents a framework for empirical analysis, it is possible to approximately measure the household limit shadow price for new functions and to identify economic deterioration accompanying obsolescence [2, 3].

functionality such as *environmental performance* differs greatly when taking the

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing…*

As can be understood from these facts, attention must be given to the kind of variables that are used in estimating the hedonic function. According to Nelson [14], housing characteristics to be considered in function estimation are classified as follows. Excluding characteristics related to traffic convenience, Nelson [14] considers it possible to categorize the positional characteristics of housing into *housing equipment* and *location*. Of these, "housing equipment" is variable and depends on the owner of the house, and "location" is an element that cannot be changed. Meanwhile, Chau and Chin [15] and Shimizu [11] add *neighborhood characteristics*. In addition to location and building structure, this study classifies housing equipment into equipment ancillary to the room (room equipment (RE)) and to the building (building equipment (BE)) and also takes the conditions of the contract into account to estimate their marginal price effect by estimating the hedonic function and to estimate the extent of obsolescence caused by the appearance of

Since the latter half of the 1990s, the use of the Internet for real estate advertising has expanded rapidly in Japan, and websites dealing with a large amount of rental advert data have been developed. This study uses the data on homes managed

Multiple real estate companies post concurrent advertisements for the same property on the real estate website, so we eliminated the duplicates from the data by grouping them by the criteria of address, property name, and room number.<sup>7</sup> Furthermore, we independently assigned daytime railway travel time from Tokyo station to the nearest station to the property (minutes), which was not included in

Since the aim of this study is to identify the effect due to the addition of new functions over time, we hypothesize that the price structure will change according to the period of construction.<sup>8</sup> Data were segmented into the following three stocks:

<sup>6</sup> It should be noted that the data used are only for adverts appearing as of October 2018, and do not

<sup>7</sup> Analytical data were prepared using the following conditions. (a) The average and standard deviation of the rent was calculated, and data of a value that is the average plus twice the standard deviation (249,000 yen) were deleted. At the same time, data on rents of 30,000 yen or less that market

participants recognize as the lower limit of market rent were deleted (this level is a value larger than the average minus twice the standard deviation). (b) Data on floor area less than 15 m2 (rental housing of floor area less than this is generally considered unsuitable for habitation) or over 100 m<sup>2</sup> (generally housing of over 100 m2 is for the very wealthy) were deleted. (c) Data on housing exceeding 50 years of

<sup>8</sup> When the market structure changes, it is necessary to construct a model to absorb the change [16, 17]. In addition, Karato et al. [18] propose an estimation method to discriminate between aging, period of construction, and time effects. In this research, we avoided these problems by using cross-sectional data

by LIFULL Co., Ltd. which is a major real estate portal site.<sup>6</sup>

household's annual income into account.

*DOI: http://dx.doi.org/10.5772/intechopen.86163*

products with new performance.

the data posted on the portal.

• Old stock: built between 1968 and 1981

• Main stock: built between 1982 and 1999

• New stock: built between 2000 and 2018

age (built before 1967), which were exceedingly few, were deleted.

and simply classified it into three period categories according to age.

represent the situation of the entire housing stock.

**2.2 Data**

**45**

Generally, the construction of household selection models in the residential market faces many difficulties compared to regular commodities and service markets. Not only is consumption expenditure high for housing, but consumers are also troubled by its highly nonuniform nature. Even when located in the same place, prices vary depending on the quality of housing, and even if the buildings are of the same quality, prices vary depending on the location. Furthermore, since housing has durability, depreciation has to be taken into consideration.

In such a market, the law of one price assumed by traditional pricing theory cannot be applied. Furthermore, the application of a model that deals with differentiated products as analyzed by Lancaster [4] is not effective both theoretically and in empirical analysis. Accordingly, Rosen [5] theoretically clarified the type of market mechanism that is generated when commodity price data are a bundle of such attributes. Specifically, the relationship between the offer function of the commodity supplier, the bid function of the commodity consumer, and the market price function established by the equilibrium of these is closely examined, and the market price is characterized from the behavior of consumers and producers [6].

However, when attempting to estimate the hedonic function, we face various difficulties. The first is the existence of unobservable variables, the so-called omitted variable bias problem [7]. In general, in the estimation of a hedonic function for the housing market, only the location and building attributes, which are easy to obtain, are taken into consideration. However, it is also easy to envisage that the actual market price of housing will change depending on the environment surrounding the house and the various kinds of performance of the building.

As for variable selection in the estimation of hedonic functions in Tokyo's rental housing market, Nishi et al. [8] have conducted an exhaustive survey of the previous research. Nishi et al. [8] pointed that the housing amenities used in hedonic analyses are categorized as "location or accessibility," "housing features," and "site advantages." This paper is focused on housing features, because they can be reflected in the rent due to the technological progress in the information systems and supply management.

Accessibility is defined as the "main accessibility related to commuting." Housing features are defined as "amenities that can be changed by landlords." Accessibility and housing features are the basic characteristics used as explanatory variables in hedonic models and are widely used in previous studies [2, 6, 9, 10].

Site advantages have also been researched recently using variables calculated using geographical information system or GIS [11, 12]. Shimizu [11] demonstrates that the environment surrounding housing is important in the case where house prices are determined by building use conditions and the *characteristics of neighboring residents* and suggests that in the case such variables are not taken into consideration and the estimated statistics of the hedonic function lack robustness. Nishi et al. [8] also show that there is a similar problem with estimated statistics when housing equipment is not taken into consideration. Fuerst and Shimizu [13] show that in the new condominium market in Tokyo, the offered value for highly novel

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing… DOI: http://dx.doi.org/10.5772/intechopen.86163*

functionality such as *environmental performance* differs greatly when taking the household's annual income into account.

As can be understood from these facts, attention must be given to the kind of variables that are used in estimating the hedonic function. According to Nelson [14], housing characteristics to be considered in function estimation are classified as follows.

Excluding characteristics related to traffic convenience, Nelson [14] considers it possible to categorize the positional characteristics of housing into *housing equipment* and *location*. Of these, "housing equipment" is variable and depends on the owner of the house, and "location" is an element that cannot be changed. Meanwhile, Chau and Chin [15] and Shimizu [11] add *neighborhood characteristics*.

In addition to location and building structure, this study classifies housing equipment into equipment ancillary to the room (room equipment (RE)) and to the building (building equipment (BE)) and also takes the conditions of the contract into account to estimate their marginal price effect by estimating the hedonic function and to estimate the extent of obsolescence caused by the appearance of products with new performance.

### **2.2 Data**

**2. Empirical analysis: data and estimation model**

*Modern Perspectives in Business Applications*

economic deterioration accompanying obsolescence [2, 3].

durability, depreciation has to be taken into consideration.

A technique known as the hedonic approach is effective to decompose prices of commodities corresponding to different qualities. Since the hedonic approach theoretically depicts the behavior of suppliers and consumers in a market with diverse quality and presents a framework for empirical analysis, it is possible to approximately measure the household limit shadow price for new functions and to identify

Generally, the construction of household selection models in the residential market faces many difficulties compared to regular commodities and service markets. Not only is consumption expenditure high for housing, but consumers are also troubled by its highly nonuniform nature. Even when located in the same place, prices vary depending on the quality of housing, and even if the buildings are of the same quality, prices vary depending on the location. Furthermore, since housing has

In such a market, the law of one price assumed by traditional pricing theory cannot be applied. Furthermore, the application of a model that deals with differentiated products as analyzed by Lancaster [4] is not effective both theoretically and in empirical analysis. Accordingly, Rosen [5] theoretically clarified the type of market mechanism that is generated when commodity price data are a bundle of such attributes. Specifically, the relationship between the offer function of the commodity supplier, the bid function of the commodity consumer, and the market price function established by the equilibrium of these is closely examined, and the market price is characterized from the behavior of consumers and producers [6]. However, when attempting to estimate the hedonic function, we face various difficulties. The first is the existence of unobservable variables, the so-called omitted variable bias problem [7]. In general, in the estimation of a hedonic function for the housing market, only the location and building attributes, which are easy to obtain, are taken into consideration. However, it is also easy to envisage that the actual market price of housing will change depending on the environment surrounding the house and the various kinds of performance of the building.

As for variable selection in the estimation of hedonic functions in Tokyo's rental housing market, Nishi et al. [8] have conducted an exhaustive survey of the previous research. Nishi et al. [8] pointed that the housing amenities used in hedonic analyses are categorized as "location or accessibility," "housing features," and "site advantages." This paper is focused on housing features, because they can be reflected in the rent due to the technological progress in the information systems

Accessibility is defined as the "main accessibility related to commuting." Housing features are defined as "amenities that can be changed by landlords." Accessibility and housing features are the basic characteristics used as explanatory variables in hedonic models and are widely used in previous studies [2, 6, 9, 10]. Site advantages have also been researched recently using variables calculated using geographical information system or GIS [11, 12]. Shimizu [11] demonstrates that the environment surrounding housing is important in the case where house prices are determined by building use conditions and the *characteristics of neighboring residents* and suggests that in the case such variables are not taken into consideration and the estimated statistics of the hedonic function lack robustness. Nishi et al. [8] also show that there is a similar problem with estimated statistics when housing equipment is not taken into consideration. Fuerst and Shimizu [13] show that in the new condominium market in Tokyo, the offered value for highly novel

**2.1 Literature review**

and supply management.

**44**

Since the latter half of the 1990s, the use of the Internet for real estate advertising has expanded rapidly in Japan, and websites dealing with a large amount of rental advert data have been developed. This study uses the data on homes managed by LIFULL Co., Ltd. which is a major real estate portal site.<sup>6</sup>

Multiple real estate companies post concurrent advertisements for the same property on the real estate website, so we eliminated the duplicates from the data by grouping them by the criteria of address, property name, and room number.<sup>7</sup> Furthermore, we independently assigned daytime railway travel time from Tokyo station to the nearest station to the property (minutes), which was not included in the data posted on the portal.

Since the aim of this study is to identify the effect due to the addition of new functions over time, we hypothesize that the price structure will change according to the period of construction.<sup>8</sup> Data were segmented into the following three stocks:


<sup>6</sup> It should be noted that the data used are only for adverts appearing as of October 2018, and do not represent the situation of the entire housing stock.

<sup>7</sup> Analytical data were prepared using the following conditions. (a) The average and standard deviation of the rent was calculated, and data of a value that is the average plus twice the standard deviation (249,000 yen) were deleted. At the same time, data on rents of 30,000 yen or less that market participants recognize as the lower limit of market rent were deleted (this level is a value larger than the average minus twice the standard deviation). (b) Data on floor area less than 15 m2 (rental housing of floor area less than this is generally considered unsuitable for habitation) or over 100 m<sup>2</sup> (generally housing of over 100 m2 is for the very wealthy) were deleted. (c) Data on housing exceeding 50 years of age (built before 1967), which were exceedingly few, were deleted.

<sup>8</sup> When the market structure changes, it is necessary to construct a model to absorb the change [16, 17]. In addition, Karato et al. [18] propose an estimation method to discriminate between aging, period of construction, and time effects. In this research, we avoided these problems by using cross-sectional data and simply classified it into three period categories according to age.

Earthquake resistance standards were greatly revised in 1981 according to the *Building Standards Act*, which stipulates building quality in Japan, and the earthquake resistance of buildings differs greatly according to whether they were built in or before 1981 or in or after 1982; buildings were therefore categorized using 1981 as a basis. There was also a major change in earthquake resistance standards in 2000, so this was also used as the standard for a category. In addition, the data used are for the 23 wards of Tokyo where a large volume of housing stocks was supplied due to a large population inflow.

As a result of this process, 53,550 data points were acquired as data for analysis.<sup>9</sup>

### **2.3 Estimation model**

A general hedonic model can be expressed as

$$y = \log p = \sum\_{i} \beta\_i \mathbf{x}\_i + a\mathbf{\#} \tag{1}$$

**3. Verification analysis**

(m<sup>2</sup>

**3.1 Descriptive statistics for analysis data**

*DOI: http://dx.doi.org/10.5772/intechopen.86163*

depending on the period of construction:

Number of observations (all) = 53,550

**Table 1.**

**47**

*Descriptive statistics.*

Before analysis, we calculated the descriptive statistics of the data to be analyzed

(**Table 1**). From the descriptive statistics, there are several features as follows,

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing…*

**Variable Type Mean Std. dev. Min. Max.** Monthly rent All 94,779 34,873 30,000 249,000 (JYE) Old stock 84,968 30,631 30,000 240,000

Floor space All 31.3 13.4 15.0 100.0

Monthly rent/m<sup>3</sup> All 3192 806 988 8134 (JYE) Old stock 2717 668 1076 6528

Age of unit All 18.5 12.7 0.0 50.0 (year) Old stock 42.3 3.8 37.0 50.0

Time to the nearest station All 7.7 4.6 0.6 41.0 (minutes) Old stock 7.4 4.4 1.0 41.0

Time to Tokyo station All 27.2 8.6 1.0 48.0 (minutes) Old stock 26.5 8.3 4.0 48.0

) Old stock 32.5 12.4 15.0 91.4

Main stock 85,305 32,566 30,000 249,000 New stock 103,040 34,994 45,000 249,000 New/old 121.3% 114.2% 150.0% 103.8%

Main stock 32.0 15.3 15.0 100.0 New stock 30.6 12.1 15.0 99.5 New/old 94.3% 97.7% 100.0% 108.9%

Main stock 2864 701 988 7535 New stock 3501 766 1165 8134 New/old 128.9% 114.8% 108.3% 124.6%

Main stock 27.4 4.4 19.0 36.0 New stock 8.3 5.5 0.0 18.0 New/old 19.7% 144.0% 0.0% 36.0%

Main stock 8.1 4.8 1.0 40.0 New stock 7.4 4.4 0.6 38.0 New/old 99.4% 98.8% 62.5% 92.7%

Main stock 28.8 8.1 4.0 48.0 New stock 26.2 8.8 1.0 48.0 New/old 99.1% 105.4% 25.0% 100.0%

where *y* is the explanatory variable, *p* is the housing rent, *xi* is the explanatory variable (housing characteristic), and *β<sup>i</sup>* and *α* are the estimation parameters.

In this study, in addition to the commonly used *location* and *building structure*, housing equipment was added to the estimation of the hedonic function for the housing market. Specifically, we classified housing equipment into equipment ancillary to the room (*room equipment*) and equipment ancillary to the building (*building equipment*) and took the *conditions of contract* (CC) into account to construct a hedonic function.

Eq. (1) can be rewritten as follows:

$$\log p = \alpha + \sum\_{j} \beta\_j^{LC} \text{LC}\_j + \sum\_{k} \beta\_k^{ST} \text{ST}\_k + \sum\_{l} \beta\_l^{RE} \text{RE} + \sum\_{m} \beta\_m^{BE} \text{BE}\_m + \sum\_{n} \beta\_n^{CC} \text{CC}\_n \# \tag{2}$$

Here, the actual estimation formula can be expressed as follows:

$$\begin{aligned} \#\log p\_{it} &= \beta\_0 + \beta\_1 \cdot \text{Age}\_{it} + \sum\_{j=1}^3 \beta\_{2j} \cdot \text{ST}\_{jit} + \beta\_3 \cdot \text{S}\_{it} + \beta\_4 \cdot \text{TS}\_{it} + \beta\_5 \cdot DT\_{it} \\ &+ \sum\_{k=1}^5 \beta\_{6k} \cdot \text{Str}\_{kit} + \sum\_{l=1}^{23} \beta\_{7l} \cdot W\_{lit} + \sum\_{m=1}^2 \beta\_{8m} \cdot TR\_{mit} \\ &+ \sum\_{n=1}^{20} \beta\_{9n} \cdot RE\_{mit} + \sum\_{p=1}^{15} \beta\_{10p} \cdot BE\_{pit} + \sum\_{q=1}^9 \beta\_{11q} \cdot CC\_{qit} + \varepsilon\_{it} \end{aligned} \tag{3}$$

In Eq. (1), *ln pit* represents the log rent for *i* property at time *t* (October 2018). *Ageit* is the years since construction, *STjit* is the period of construction dummy (old/ main/new), *Sit* is the floor area, *TSit* is the number of minutes on foot from the nearest station, *DTit* is the number of minutes by train from Tokyo station, *Strjit* is the structure dummy, *Wmit* is the ward dummy, *TRhit* is the high-rise condominium and ground floor room position dummy, *REkit* is the room equipment dummy, *BEkit* is the building equipment dummy, *CCkit* is the contract condition (CC) dummy, *β*<sup>0</sup> is a constant term, and *εit* is an error term.

<sup>9</sup> The number of old stock data for 1968–1981 was relatively small at 4868, the number of properties built between 1992 and 1999 was 19,982, and the number of properties built between 2000 and 2018 was 28,700.

*Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing… DOI: http://dx.doi.org/10.5772/intechopen.86163*

### **3. Verification analysis**

Earthquake resistance standards were greatly revised in 1981 according to the *Building Standards Act*, which stipulates building quality in Japan, and the earthquake resistance of buildings differs greatly according to whether they were built in or before 1981 or in or after 1982; buildings were therefore categorized using 1981 as a basis. There was also a major change in earthquake resistance standards in 2000, so this was also used as the standard for a category. In addition, the data used are for the 23 wards of Tokyo where a large volume of housing stocks was supplied due to a

As a result of this process, 53,550 data points were acquired as data for analysis.<sup>9</sup>

*i*

where *y* is the explanatory variable, *p* is the housing rent, *xi* is the explanatory

In this study, in addition to the commonly used *location* and *building structure*, housing equipment was added to the estimation of the hedonic function for the housing market. Specifically, we classified housing equipment into equipment ancillary to the room (*room equipment*) and equipment ancillary to the building (*building equipment*) and took the *conditions of contract* (CC) into account to con-

*βixi* þ *α*# (1)

*<sup>m</sup> BEm* þ ∑

*β*11*<sup>q</sup>* � *CCqit* þ *εit*

*β*2*<sup>j</sup>* � *STjit* þ *β*<sup>3</sup> � *Sit* þ *β*<sup>4</sup> � *TSit* þ *β*<sup>5</sup> � *DTit*

*β*8*<sup>m</sup>* � *TRmit*

2 *m*¼1

> 9 *q*¼1

*n βCC*

*<sup>n</sup> CCn*# (2)

(3)

*y* ¼ log *p* ¼ ∑

variable (housing characteristic), and *β<sup>i</sup>* and *α* are the estimation parameters.

*<sup>k</sup> STk* þ ∑

Here, the actual estimation formula can be expressed as follows:

3 *j*¼1

> 23 *l*¼1

> > 15 *p*¼1

*l βRE <sup>l</sup> RE* þ ∑ *m βBE*

*β*7*<sup>l</sup>* � *Wlit* þ ∑

In Eq. (1), *ln pit* represents the log rent for *i* property at time *t* (October 2018). *Ageit* is the years since construction, *STjit* is the period of construction dummy (old/ main/new), *Sit* is the floor area, *TSit* is the number of minutes on foot from the nearest station, *DTit* is the number of minutes by train from Tokyo station, *Strjit* is the structure dummy, *Wmit* is the ward dummy, *TRhit* is the high-rise condominium and ground floor room position dummy, *REkit* is the room equipment dummy, *BEkit* is the building equipment dummy, *CCkit* is the contract condition (CC) dummy, *β*<sup>0</sup>

<sup>9</sup> The number of old stock data for 1968–1981 was relatively small at 4868, the number of properties built between 1992 and 1999 was 19,982, and the number of properties built between 2000 and 2018 was

*β*10*<sup>p</sup>* � *BEpit* þ ∑

large population inflow.

*Modern Perspectives in Business Applications*

**2.3 Estimation model**

struct a hedonic function.

*j βLC*

log *p* ¼ *α* þ ∑

28,700.

**46**

Eq. (1) can be rewritten as follows:
