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Supply Chain and Supply Chain Management

-
case study: a small specialised manufacture in
South China





By
Yuhua Liang
2008





A dissertation presented in part consideration Ior the degree oI MSc Operations Management
1
Abstract
Supply chain and supply chain management have been discussed a lot during these two
decades. Many Iirms in China would like to improve the supply chain management due to the
intensive global competition. Many methods can be implemented to improve the eIIiciency oI
the supply chain management, such as TQM, ISO 9000 series, Six Sigma, and third-party
Logistics, but only some oI them are practical in SMEs in China. Comparisons Ior these
methods are necessary. Managers need to Iind out the most suitable one Ior the companies.
Factory A is one oI the non-special SMEs in China. The problems exist in Iactory A are quite
typical Ior all other SMEs in China. Quality, delivery, and cost are the main concerns to
managers and all members in supply chain. How to improve these three aspects are the
important issues that managers Iace. Some methods, such as ISO 9000 series are available Ior
Chinese SMEs and managers can use these particular approaches to implement.














2
Table of contents
Abstract -------------------------------------------------------------------------------------------------- 1
Table of contents --------------------------------------------------------------------------------------- 2
Acknowledgements ------------------------------------------------------------------------------------ 4
List of figures ------------------------------------------------------------------------------------------- 5
Chapter 1 Introduction ------------------------------------------------------------------------------- 6
Chapter 2 Literature review------------------------------------------------------------------------- 8
Chapter 3 Methodology ----------------------------------------------------------------------------- 11
Chapter 4 Supply chain and supply chain management in the world --------------------- 12
4.1 History about supply chain and supply chain management in the world -------------- 12
4.2 Main concerns and relative methods ------------------------------------------------------- 16
4.3 Examples --------------------------------------------------------------------------------------- 21
Chapter 5 Supply chain and supply chain management in China ------------------------- 23
5.1 History about supply chain and supply chain management in China ------------------ 23
5.2 Main concerns and relative methods Ior Chinese Iirms ---------------------------------- 26
5.3 Examples --------------------------------------------------------------------------------------- 31
Chapter 6 Case Study - a small specialised manufacture in South China --------------- 33
6.1 Case description ------------------------------------------------------------------------------- 33
6.2 Reasons to improve the supply chain eIIiciency ----------------------------------------- 35
6.3 Approaches to implement ------------------------------------------------------------------- 45
6.4 DiIIiculties and challenges ------------------------------------------------------------------ 50
6.5 Expected results ------------------------------------------------------------------------------ 51
Chapter 7 General recommendation ------------------------------------------------------------ 53
3
Chapter 8 Conclusion ------------------------------------------------------------------------------ 55
References ------------------------------------------------------------------------------------------- 57
Appendix 1 ------------------------------------------------------------------------------------- 36 & 67
Appendix 2 ------------------------------------------------------------------------------------- 39 & 68
Appendix 3 ------------------------------------------------------------------------------------- 40 & 69
4
Acknowledgement
Thanks Ior my lovely Iather who supports me a lot and provides me this great opportunity to
study abroad. Father is the excellent mentally supporter in my liIe!
Thanks Ior my supervisor ProIessor Bart MacCarthy who gives me great suggestions
about this dissertation. Without his suggestions, I could not develop this paper well.
Thanks Ior my great Ilatmate who encourages me a lot during the whole year and also help
me a lot with my living in Nottingham.
Thanks Ior all my course mates in MSc Operations Management, Nottingham. They do help
me a lot Ior my study and teach me a lot.














3
List of figures
Figure 1 Management Process ----------------------------------------------------------------------- 33
Figure 2 The production & inIormation process in the supply chain --------------------------- 34
Figure 3 Fishbone` diagram Ior Iactory A --------------------------------------------------------- 41
6
Chapter 1 Introduction
The topic oI supply chain management has been discussed among the scholars and the
managers Ior several years. For one side, the scholars are willing to investigate this topic to
understand when and how did it develop, to have the Iull knowledge on the methods
managers use Ior supply chain management, to analyse the results. On the other hand, due to
the higher raw material price, managers have to Iind out cheaper raw materials in order to
reduce the cost; due to the higher and unstable customers requirements, managers have to
Iind out ways to satisIy this unstable demand and decrease the producing cycle time; due to
the intensive global competition, managers have to be more competitive and obtain more
competitive advantages. Supply chain management can help managers to solve with these
problems.
China was once called the World ManuIacturing Centre`. Chinese products are well known
Ior the cheap price but not the good quality. Foreign companies outsource in Chinese SMEs
are looking Ior the cheap cost in order to gain more price competition. However, with some
quality problems Ior the Chinese products these years, especially in toy industry (Dyer and
Mitchell, 2007), the Ioreign companies are asking Ior the high value products as well. That is
low cost but high quality products. What is more, since the competition is globally now,
Chinese SMEs` competitors are no longer insider China any more. The competitors will be in
Indonesia, etc.. The labour cost there are lower than it is in China now (People Web, 2007).
What is more, Chinese government launched new labour contract law at 29
th
June, 2007, and
will be eIIective at 1
st
January 2008, that protect workers` rights. It is noted Irom Chinese
government that the minimum labour wage need to be no lower than the city minimum labour
wage, and all workers need to sign in contracts. For those who have been with the companies
more than 10 years or those who sign the two-year Iixed contracts, managers need to give
them one month`s severance pay Ior every working year (Dyer and Mitchell, 2008). In this
case, all companies have to increase workers` salary which would be a huge amount. To
some extent, some companies collapsed aIter the rule was launched and eIIective, including
some Hongkongnese invested companies (Luquan City Environment Protect Department,
2008).With this it is easy to understand that SMEs are Iacing many challenges such as costs
and quality now.
Better quality, quicker deliver, and lower cost are three oI the objectives companies want to
achieve mostly. With the problems described above, managers have to Iace the problems and
7
Iind out ways to solve them out. In the western companies, managers there have used many
methods to deal with the problems and continue develop the supply chain to gain more
competition. What is more, managers in China also utilize some methods to deal with the
problems. However, whether these methods are also workable in Chinese SEMs is still
unpredictable. Structures and other Iactors in large Iirms are diIIerent Irom SMEs. Thus,
methods workable in large Iirms may probably not workable in SMEs.
There is a manuIacturing company in Southern China producing components oI luggages Ior
Ioreign companies. The manager in this Iactory is Iacing the problems described above
quality, delivery, and cost. Besides that, the Iirm is also Iacing other problems such as raw
material quality problem. Manager in this Iactory would like to develop its own supply
chainraw material suppliers, its outsourced small Iactories, and the large Iirm customer, in
order to be more competitive than other competitors, including other countries potential
competitors. For Iinding methods to implement in this Iactory, research in western companies
and local companies, including large Iirms and SEMS, is necessary.
There are other seven chapters in this paper. The next chapter is Literature Review, mainly
mention theories developed by scholars and what kind oI methods is eIIective Ior Iirms. The
third chapter is Methodology. There is a case study in this paper; thereIore, research and
investigation in this Iirm are important. Data is collected by a person who has investigated in
the Iirm Ior a month, with graphs and Ilow chats. The Iorth chapter is the supply chain
management in the world. In this session, it is going to describe the history oI supply chain
and supply chain management, specially Iocus on quality, delivery and cost. In addition, it
will discuss what kind oI methods do the companies use and what are the results. There are
also examples Ior Iurther illustrating the ways Ioreign companies use Ior developing the
supply chain management. The IiIth chapter is the supply chain management in China. In this
session, history about supply chain management in China will be mentioned, with the Iocus
on quality, delivery and cost too. What is more, comparison on methods used in companies
between western companies and Chinese local companies would be presented. Another
comparison would be the methods used in large Iirms and SMEs in China. The sixth chapter
is the case study. A small specialised manuIacture would be analysed in this session. It is
going to Iind out workable methods Ior manager to be more competitive. The seventh chapter
is general recommendation. In this session, recommendation will be shown to other industries
and large Iirms in the same industry. The Iinal chapter comes to the Conclusion.
8
Chapter 2 Literature review
As the topic oI supply chain management is becoming interesting to the scholars and
managers, many literatures are available with regards to this topic.
Lummus and Vokurka (1999) have mentioned that supply chain initiative` was original
named quick response` in the early beginning oI the textile industry and consumer
response` in the grocery industry. What is more, they also state that, supply chain
management was interesting to scholars in 1980s`. More speciIically, Smock (2003) states
that it was Thomas Stallkamp, the top buyer in Chrysler Corp., invented this phase in the
1980s. On the other hand, Ballou (2007) notes that supply chain management was stemmed
Irom logistics, while logistics becomes one oI the sub-processes oI supply chain management
now.
Many scholars try to deIine what supply chain is. Stevenson (2007) suggests that supply
chain can be called value chain sometimes, and deIines supply chain as the sequence oI
organizations that are involved in producing and delivering a product or service`. Davis and
Heineke (2005) deIine the supply chain Irom a larger view; they suggest the supply chain
would be a group oI organizations that perIorm the various processes that are required to
make a Iinished product`. Other scholars, like Slack et al. (2007), Heizer and Render (2006)
also have their own deIinitions about supply chain based on their opinions.
Most scholars who have deIined supply chain also deIine supply chain management. Such as
Davis and Heineke (2005), Stevenson (2007), they also mention what supply chain
management is. Others, like Chow et al. (2008) deIine supply chain management Irom a
strategic perspective. On the other hand, Nicholas et al. (1998) and Ellram and Cooper (1993)
deIine the supply chain management Irom a philosophy perspective. Mishra et al. (2007),
however, Iocus on the right product, right place, right price` when they deIine the supply
chain management.
Besides deIining supply chain and supply chain management, solving out problems in the
supply chain would be another interest to proIessors. Quality is one oI the problems and
Chow et al. (2008) have stated that having a better quality would leads to obtain more
competitive advantage. There are many ways to improve the product quality. Managers can
utilize Total Quality Management (TQM), Business Excellence Model (BEM), Balanced
Scorecard (BS), ISO 9000 (McAdam, 2000), Six Sigma (Antony et al., 2005). In addition,
9
Husband and Mandal (1999) suggest that Q-Base, Business Growth Through Quality, Core
Program etc. are suitable Ior Small and Medium size Enterprises (SMEs), while other
methods mentioned above would be much workable in Large Enterprises (LEs).
Delivery (Logistics) would be another problem in supply chain management. Since customers
requirement on time delivery, inbound logistics and outbound logistics become important Ior
all managers. Bowersox et al. (2002) argue that one oI the major parts oI the eIIicient supply
chain is the eIIicient logistics. Christopher (1998) also states that a good logistics
management has a positive eIIect on supply chain management. He continues state that a
better logistics can reduce the supply chain cost which makes the company be more
competitive. HandIield & Nichols (1999) note that logistics can be the competitive advantage
Ior the success supply chain. They also notice that companies who employ third-party
logistics have more competition than those who do not do.
Cost is also important Ior all managers in the supply chain. Muhlemann et al. (1992) deIine
several quality costs including internal Iailure costs, external Iailure costs, appraisal costs,
and prevention cost. These costs are those managers wish to decrease. They also give
suggestions to mangers how to eliminate those unnecessary costs in the companies and the
supply chain.
Turns to the supply chain and supply chain management in China, some scholars deIine them
and Iind out problems and related methods in Chinese perspective. Juran (1990a, b) states
that quality management has been existed in China Ior a long time. However, this
management was not dependent on the system but personal experience. The Iormal quality
management was introduced to China by Chinese Government in 1978.
In 1986, the government launched the rule that all medium and large state-owned companies
should implement Total Quality Control (Sun, 2000). With the quality problems exist in
China, Total Quality Control is crucial Ior manuIacturing companies in China, especially Ior
the SMEs since most oI the companies in China are SMEs (Lee, 2004).
Logistics has been developed quickly in China Ior several years. However, since the laws are
not perIect in China, as some authors argue that outsource logistics would be beneIit Ior
companies, (Mitra, 2006; Perrons and Platts, 2005; Rabinovich et al., 1999) the Chinese
managers are struggling whether to outsource the logistics. Trust is an important element
between the third party logistics part and the manuIacturing company (LaLonde and Cooper,
10
1989; Minahan, 1997; and Moore, 1998). What is more, whether the Iee Ior outsourcing
logistics is cheaper than it owns its logistics team would be argued by managers.
Cost is always the hot topic in Chinese companies. Low raw material price and low labour
cost are the attraction Ior Ioreign companies. How to continue reduce the cost by improving
quality is the most diIIicult question in Chinese managers now. TQM, ISO 9000 series, etc.
are the methods to improve the quality in order to reduce the deIected cost. A better
relationship with materials suppliers can get more discounts than others.

















11
Chapter 3 Methodology
For the generally inIormation about supply chain and supply chain management over the
world and in China, e-journal searching and books reading are used. Books are included
subjects like Operations Management, Supply Chain Management, Logistics Management
and Quality Management. These books are all available in the Business Library. E-journal
searching is majorly in websites like Emerald, Jstor and EBSCOhost, ProQuest. In order to
search as much as data, diIIerent key words were keyed in. Ior example, iI it is going to
search the history oI supply chain and supply chain management, key words are supply
chain, history` or supply chain management, history`. ThereIore, there are plenty oI data
available then. Other key words are supply chain management, quality`, supply chain
management, delivery`, supply chain management, logistics`, supply chain management,
cost`. What is more, SME, China`, SME, supply chain management`, SME, quality
management`, SME, delivery`, SME, logistics` and SME, cost` were used as well. Due to
lots oI data is available, selecting articles are based on the abstract` shown in the articles.
The major objective Ior this paper is going to investigate whether the supply chain
management would be eIIective Ior Chinese SMEs. The case study would be the speciIic
small-medium size enterprise located in Southern China, manuIacturing suite cases`
components Ior a large enterprise. Under a diIIicult time this year, manager in this Iactory is
wondering whether it can be survived by implementing supply chain management. Data Ior
this company is obtained by a person working in this manuIacturing Iirm. This people will
have some tables Ior obtaining inIormation. InIormation includes number oI workers, number
oI products, number oI moulds, product deIect rates, producing process, working process,
delivery times per day, late delivery rates, number oI over time working times per month, etc..
There are no questionnaires needed in this time. As data can be observed by looking at the
working process. In order to analyse the problems exist in the company, Iishbone analysis
method is used to Iigure out what are the problems.




12
Chapter 4 Supply chain and supply chain management in the world
4.1 History about supply chain and supply chain management in the world
Supply chain and supply chain management are signiIicantly important Ior scholars and
managers nowadays. Some companies, such as Hewlett-Packard, Whirlpool, Wal-Mart, etc.,
implemented supply chain management and developed the eIIiciency oI their supply chain
during 1980s and 1990s (Lummus & Vokurka, 1999). Managers in these companies all agree
that competition is no longer between individual companies but between supply chains
(Lummus and Vokurka, 1999). Thus, Ior the success oI companies, managing and
collaborating the supply chain would be the Iirst important issues Ior managers.
Based on the statement Irom those managers, it is apparently that supply chain and supply
chain management were not really popular Ior them at Iirst. Supply chain is not the attraction
point Ior managers beIore 1980s when they only Iocused on how to compete between
companies. In Iact, supply chain was call value chain` beIore, which indicates that the
Iinished valued products are produced by manuIacturing companies who have the not
expensive raw materials delivered Irom suppliers. The value chain adds value to the raw
materials and makes them into the valued products Ior customers. Supply chain was deIined
by the Supply Chain Council in 1997 Iinally:
The supplv chain a term increasinglv used bv logistics professional encompasses everv effort
involved in producing and delivering a final product, from the suppliers supplier to the customers
customer. Four basis processes plan, source, make, deliver broadlv define these efforts, which
include managing supplv and demand, sourcing raw materials and parts, manufacturing and
assemblv, warehousing and inventorv tracking, order entrv and order management, distribution
across all channels, and deliverv to the customer.`
Having the deIinition oI supply chain, supply chain management deIinition should not be
excluded. The concepts oI supply chain management was invented by a top buyer Thomas
Stallkamp working in Chrysler Corp. in 1980s (Smock, 2003). There are many reasons guide
people to concentrate on this new topic. According to Lummus and Vokurka (1999), three
reasons are deIined. Companies were not willing to produce products with their own
resources only. Rather, they would love to have some suppliers who can provide cheaper raw
materials with better quality. This requires a close relationship between suppliers and
manuIacturing companies. Thus, managing the supply chain is crucial then.
13
The second reason is the increasingly national and globally intensive competition. Companies
do experience that many items are stored in warehouse and the cash Ilow is quite slow. For
managers, however, storing items in the warehouse was necessary. BeIore, producing a
product required a long time Irom ordering materials to having the Iinished item on hand. The
time Ior ordering material was long, the time Ior producing products was long, and the
shipping time was long was well. For saIety, enough inventories or many inventories are
really important Ior them even though there would be many items can not be sold at the end.
However, since customers` requirements are changeable and their choices are much more
than beIore now, iI managers still did not change the way they employed beIore, there will be
no competition Ior the company at all. So in order to adopt the circumstance now, managers
have to be close with all suppliers and customers, try their best to satisIy the demand quickly.
The last reason is that, managers realize that good company perIormance can not only depend
on one department or Iunction in the company. Having the cheap raw materials and cheap
labour were the central strategies Ior the companies beIore. However, since the competition
has been changed, low cost will not guaranteed a better competition any more. In this case,
the Iocus in the purchasing department will be arranged to other departments in order to
obtain other competitions. Thus, Iully manage the supply chain will oIIer managers the
beneIits they want.
For Heizer & Render (2006), the reason why managers want to develop and manage the
supply chain is because oI the beneIits it oIIers. Supply chain management can help
companies to reduce the cost, including labour cost and raw materials cost; to customise
products with quick response; to oIIer high quality products with the closer relationship with
suppliers and manuIacturing companies. All these beneIits can lead the company to the
winner in the industry.
Supply chain management was original Irom logistics while logistics management is an
important Iunction in the supply chain management now (Ballou, 2007). Many people were
conIused with logistics management and supply chain management beIore. However, supply
chain management has a wider scope than what logistics management has. The Council oI
Logistics Management (CLM) deIines what logistics management is in order to distinguish
Irom supply chain management. For the members in the council, logistics management is a
part oI supply chain management, mainly Ior delivering materials and products, including
inbound logistics and outbound logistics.
14
There are many scholars try to deIine supply chain management. According to Hong and
Jeong (2006) supply chain management includes links upstream (e.g., supply and
manuIacturing) and downstream (e.g., logistics and distribution) value chain entities.` They
also summarise the deIinition Ior supply chain management Irom Chopra and Meindl (2001),
Lambert and Cooper (2002), and Zhao and Simchi-Levi (2002). They state that:
supplv chain management is a set of approaches utili:ed to effectivelv integrate suppliers,
manufacturers, logistics and customers for improving the long-term performance of the individual
companies and the supplv chain as a whole.`
Ten years aIter The Supply Chain Council deIined supply chain, The Council oI Supply
Chain Management ProIessionals (CSCMP) in 2007 deIined supply chain management as
below:
Supplv Chain Management is an integrating function with primarv responsibilitv for linking mafor
business functions and business process within and across companies into a cohesive and high-
performing business model.
There are many methods to manage the supply chain in diIIerent Iunctions. For quality, Six
sigma, Total Quality Management, etc. are quite useIul. For logistics management,
outsourcing the logistics Iunction such as the third-party logistics would be a good choice.
Implementing one or some oI these require better communication between managers and
staIIs, better linkage between suppliers and manuIacturers, higher employees` education, etc..
The number oI employees in SMEs is less than 250 usually (McAdam & Reid, 2001). SMEs
are usually the Iirst-tier or the second-tier oI manuIacturers and suppliers who have less
bargain power and less resource. They do not have enough resource, including employees,
Iinancial resource and raw materials (Cooper, et al., 1986).ThereIore; it is not easy to utilize
TQM in SMEs.
What is more, many studies are concentrating on the implementation oI supply chain
management in Large Enterprises rather than the Small or Medium Enterprises (Chopra and
Meindl, 2001; Kukalis, 1989; Lambert and Cooper, 2000). The deIinition oI supply chain is
usually based on the studies oI large enterprises. Thakkar et al. (2007) deIine the supply chain
Ior SMEs as below:
Supplv chain in SMEs is a set of business activities including purchase from open/spot market,
manufacturing or processing of subcomponents/subassemblv within the plant and deliverv to large
13
enterprises using hired transportation to enhance value of end product and in-turn to ensure long-
term regular purchase orders.`
This deIinition is based on the assumption Irom Porter, the guru in management. BeIore
managers paid attention to supply chain management, especially the SCM in SMEs, Porter in
1980 had already argued that there is more acquirement oI SMEs to implement the supply
chain management. Since the large organizations are going to manage the supply chain,
besides improving quality, reducing the cost is still one oI the targets in the companies. In
order to reduce the cost in those companies, managers will ask Ior a lower cost oI raw
materials with better quality Irom the suppliers. In this case, the SMEs will accept this
condition with their acquirement oI survivals. When they oIIer the valued raw materials, they
need to have proIit at least. So, managing SMEs supply chain, reducing the cost while
increasing quality, and increasing proIit would be the aims Ior the SMEs. And only supply
chain management can oIIer these beneIits to them.
Except quality, logistics and cost, technology is another attraction Ior managers to improve
the eIIiciency oI supply chain. Material Requirements Planning (MRP) and Electronic Data
Interchange (EDI) are important Ior all members in the supply chain now. MRP is a system
that oIIers managers data about the quantity oI materials needed, the duration Ior production,
the amount oI products inventory, etc.. With this system, managers can order materials when
the amount oI inventory is lower than a limit. The amount oI materials/products in or out
should be input into the system immediately in order to understand the amount oI products
and materials (Aghazadeh, 2003).
EDI is another diIIerent inIormation data system oIIering diIIerent beneIits to managers. It
gives a direct linkage between a manuIacturer`s database and the vendors` databases. The
manuIacturer oIten only set up links with several vendors. These vendors are usually all
within a close relationship with the manuIacturer (Davis & Heineke, 2005).II the
manuIacturer has the MRP system and EDI system, when the raw material lower than the
established lowest limit, workers will notice that and then order enough materials Irom
vendors, so vendor will delivery the required material to the manuIacturer immediately. It
makes sure that manuIacturer has the enough material to produce products, and prevents the
accident that there is no material in the warehouse but products are in an urgency to be
produced.
16
Supply chain and supply chain management have been developed around the world Ior
almost 30 years already. And with no doubt they will be still the centres oI the management
since the competition is between supply chains. Nowadays, with the leading oI Toyota, the
Iamous Japanese car company with successIully implementing TQM, many companies seek
to reduce the number oI suppliers (Davis & Heineke, 2005). They believe that better
relationships with suppliers can provide better quality oI materials and products. Except this,
increasing the consignment inventories is another trend in supply chain management (Davis
& Heineke, 2005). Each company preIerred to have its own warehouse beIore. Having a
warehouse with inventory, no matter is low or high, is a kind oI waste Ior company. It lowers
the cash Ilow and limits the proIits. II organizations in the supply chain share several
warehouses together, it can reduce the cost and increase the proIit Ior the entire supply chain.
Sharing the warehouse means several companies can store their Iinished products in the
warehouses. In addition, these warehouses will have another Iunction. Products can be under
the quality control process, can be packaged, and can be labelled in the warehouse. ThereIore,
Iirms in the supply chain can utilize the warehouses well without any waste.

4.2 Main concerns and relative methods
Since the business environment changed and people living standards improved, customers do
ask Ior more Irom companies. According to Chow et al. (2008), people need better and
cheaper products, shorter response times, more product lines, and higher service levels.`
Nuthall (2003) deIines Iour key objectives in supply chain. They are less operational cost,
quicker response, better customer service, and more proIits. Thus, managing the objectives oI
supply chain well, the customers` requirements would be IulIilled.
Stevenson (2007) mentions several problems exist in the general supply chain, such as high
inventory, late deliveries and quality problem like high deIects rate. These problems are
relative to the objectives mentioned above that managers want to obtain. Consequently, it is
important to apply methods to improve the eIIiciency oI supply chain.
4.2.1 Quality
According to Muhlemann et al. (1992), quality is the most important concern according to
customers. No one preIers a deIective product. Assume that there is a simple supply chain
with customers, large organization, manuIacturing companies, and materials suppliers. A
17
product`s quality is relative with the quality oI materials, the producing process, and Iinally
the packing and delivers process. Materials quality is relative with suppliers; producing
process is linked with the manuIacturing company and the packing and delivers process in
with the company itselI or the third-party logistics company.
Having better materials would be the Iirst success Ior companies. Based on the simple supply
chain mentioned above, the manuIacturing companies will order materials Irom the materials
suppliers directly. Most oI the manuIacturing companies are small or medium enterprises
(SMEs) while the organizations are usually large Iirms (LEs). Bargain powers Ior SMEs and
LEs are diIIerent while LEs has a stronger bargain power and SMEs have weaker one. Once
LEs have the strategy that increases the margin managers would ask Ior decreasing products
prices Irom SMEs. Consequently, the materials suppliers will be asked Ior reducing the price.
However, since the bargain power in SMEs is weak, decreasing price would lead to decrease
the quality oI materials. Or, iI the suppliers do not agree with decreasing the price, the
manuIacturing companies need to decrease the quality oI the products in the producing
process. Both oI them guide to the low quality oI the Iinal products. As a result, how to
maintain the best quality with the lowest cost is the important concern Ior all members in the
supply chain.
For companies order materials Irom suppliers, having a good relationship with the suppliers
would be a way to promise the good quality. A good relationship might mean to a stable
quality materials supplied (Anderson & Weitz, 1992). A good relationship might lead to
discounts Ior the good quality materials as well. ManuIacturing companies probably can sign
in contracts with the suppliers, stating the level oI materials and the price oI materials.
Additionally, companies that have less suppliers can usually have better materials (Nicholas,
1998). That is because Iewer suppliers can be easier managed. However, the price oI
materials, such as some plastics and metals, are not stable at not (Luquan City Environment
Protect Department, 2001). Prices can vary a lot. As a result, suppliers may be not willing to
sign the contract with the Iixed prices since they may not have proIits when the selling price
is low and the real price is high. In this case, the manuIacturing companies might have a
Ilexible contract or short term contract, stating that in this period the materials price would be
stick to this. For both sides, this method is risky. No one can predict how the price goes. Thus,
the suppliers might have more proIit than expect or they might lose proIit at the end.
18
Inside the companies, producing products is one oI the important processes Ior quality. Even
managers have the good quality materials, iI the producing process is bad; the products are
also not qualiIied. Managers do try many approaches to improve the products quality in the
producing process. However, diIIerent companies might be with diIIerent results even they
implement the same method.
For large Iirms, it is easier to implement the methods oI supply chain management than in
small Iirms with their enough resources (YusoI & Aspinwall, 1999, 2000; McTeer and Dale,
1994). Many approaches are available to LEs but not all oI them are really workable to the
LEs. Approaches include Six Sigma (Dasgupta, 2003), Total Quality Management (Sila et al.,
2006), and ISO 9000 (Romano, 2002) et al.. However, though large Iirms have enough
resources to implement the quality management and supply chain management, only some
companies really implement these methods improve the eIIiciency oI supply chain (Edwards
et al., 2001). Total Quality Management is the most acceptable approach to large Iirms
(McAdam, 2000). Large companies oIten utilize Business Excellence Model (BEM) (Brown
et al., 1999) and Balanced Scorecard (BS) (Kaplan and Norton, 1992, 1996) to develop the
TQM. Kanji and Asher (1993) and Ahire et al. (1996) deIine the reasons why TQM approach
is so successIul Ior large Iirms. They argue that:
TQM is strategicallv linked to the business goal, customer understanding and satisfaction are
vital, emplovee participation and understanding at all levels are required, the need for management
commitment and consistencv of purpose, and the importance of processes and measures.`
TQM can make members in supply chain into one group and ask the group to compete with
others.
For SMEs who have Iewer resources than Les have, implementing quality control models is
not easy at all. There are many models available Ior LEs while Iewer models are available Ior
SMEs. Six sigma is one oI the most Iamous models Ior manages in SMEs. Wilson (2004)
states Iive advantages Ior SMEs to employ Six sigma. These are stronger, more intimate
relationships with customers; a limited number oI sites; Iewer layers in the management
hierarchy; Iaster and eIIective internal communication, and strong owner inIluence.
The deIinition Ior Six sigma Irom Snee (2004) is:
19
six sigma is a well-established approach that seeks to identifv and eliminate defects, mistake or
failures in business processes or svstems bv focusing on those process performance characteristics
that are of critical importance to customers.
Six sigma provides managers with the linkages between the bottom line to the upper
managers with the same strategy, mission, tools and techniques, in order to improve the
quality oI the producing process. For Harry and Shroeder (2000), Pande et al. (2000), and
Adams et al. (2003), there are Iour important beneIits Irom implementing Six sigma Ior
SMEs. Firstly, implementing Six sigma can reducing cost Irom the bottom line. Second, six
sigma is quite useIul when it is going to link the human prospect and the process prospect.
Third, the tools and techniques, which are separate in most companies, can be together Ior
companies by implementing Six sigma. Last, master black belts, black belts, green belts and
yellow belts in Six sigma are available Ior companies to push them to improve.
On the other side, Spanyi and Wurtzel (2003) name six positive impacts on utilizing Six
sigma in SMEs. These are: visible management commitment; clear deIinition oI customer
requirements; shared understanding oI core business processes and their critical
characteristics; rewarding and recognizing the team members; communicating the success
and Iailure stories; and selecting the right people and the right projects`.
Achieving the master black belts would be the objective when companies try to implement
Six sigma approach. However, Rowlands (2004) suggests that obtaining the black belts is not
necessary Ior SMEs while resources are not enough. Davis (2003) agrees what Rowlands
says and suggests that apply yellow belts in SMEs would be much better since it costs less.
4.2.2 Delivery
Logistics is another concern Ior all companies. Customers require products delivered on time
with good quality. ThereIore, delivery between companies is important. Furthermore, the
transportation inside companies is also important. Managing both transportations is going to
make sure that delivery items at the right time with the right amount in order to minimize cost
and time (Lin, 2008, Stock and Lambert, 2001, Smock, 2003).
For the whole supply chain, logistics is one oI the Iunctions that all members need to
concentrate on. It can link the suppliers and customers, upstream and downstream, in order to
minimize the cost and maximize the supply chain value (Zhu et al., 2008). For these two
objectives, it is trendy to outsource the logistics Iunction. Also, outsourcing logistics Iunction
20
can increase the speed oI delivery to customers (Lieb and Miller, 2002) and obtain more
competitive advantages (Mitra, 2006; Perrons and Platts, 2005; Rabinovich et al., 1999).
Though outsourcing logistics Iunction may provide some beneIits to companies such as low
transportation cost and better service meanwhile (Meredith, 1987), some managers are still
not willing to have partnerships with the third-party logistics companies. Managers are aIraid
that they can not control the process oI logistics which the delivery might be late or not to the
right place. LaLonde and Cooper (1989), Minahan (1997) and Moore (1998) argue that the
only high level oI trust can provide the good quality oI logistics to managers. Moreover, the
high level oI logistics can reduce transaction and agency costs` (Beccerra and Gupta, 1999;
Dyer and Chu, 2000). This kind oI trust is similar with the trust between suppliers and
manuIacturing companies. Managers in companies believe that the suppliers will provide the
good materials with the right amount at the right time to the right place. Also, the managers
in the companies believe that the third-party logistics company has the ability to deliver the
right amount oI products to the right place at the right time under the good condition.
ThereIore, good relationship between the third-party logistics company and the company is
really important Ior on time delivery and good customer service.
4.2.3 Cost
In Iact, increase the products quality; deliver products on time with good condition; and so on,
have already reduced the cost. Costs can include materials cost, producing cost, inventory
cost, quality cost and so on. Since the materials cost and producing cost can not be changed a
lot, inventory cost can not be really calculated, deIective quality cost would be the central to
concern.
According to Omachonu et al. (2004), there are Iour types oI quality costs: prevention,
appraisal, internal Iailure and external Iailure. Prevention cost is the costs that avoid problems
arise inside the company. Appraisal cost is the cost to recognize all unqualiIied products
beIore deliver to customers. Internal Iailure cost is the cost relative with deIects recognized
beIore transporting to customers. And Iinally, external Iailure cost is the cost relative with
deIects recognized aIter delivering to customers.
Carr and Ponoemon (1994) set up a research on the quality cost and analyse their results.
Omachonu et al. (2004) summarise their Iinding as: internal Iailure is the most expensive and
prevention is the least expensive quality cost component, the combination oI internal and
21
external Iailure costs is always higher than prevention and appraisal costs, and the quality
reject rate decreases with increased volume output. From this summary, it is easy to
understand that try to eliminate the internal Iailure by preventing Iailure occur is the best
method to limit the quality cost. Moreover, it is important to limit the external Iailure cost. II
customers are much earlier than companies know that the products are deIective, they will be
reluctant to buy that product any more. Thus, customers are not satisIied; the reputation oI the
products quality Ior that company will be decreased immediately, and the image oI the
company is getting worse than beIore.
Bell et al. (1994) have estimated that the quality cost occupies 5 to 15 per cent oI the total
sales in manuIacturing industry. ThereIore, maintaining the best quality Ior all products can
save much proIit. It is better to control the quality issue at the beginning oI production.
Except controlling the materials quality, Iind out and prevent the quality problems at the Iirst
time would be the Iirst issues Ior the workers. When the quality problems can be Iound
beIore they turn up or the deIective problems can be taken out beIore delivered to customers,
the internal Iailure cost and external Iailure cost can be eliminated, which are the most
expensive costs during the Iour (Feigenbaum, 1992; Gryna, 1999; Harrington, 1987; and
Zhao, 2000).

4.3 Example
Supply chain management is attractive to managers with its beneIits to companies. Inside
supply chain management, there are many methods to deal with the quality, delivery and cost
problems.
Hewlett-Packard, one oI the Iamous computer companies in the world, implemented the
logistics management in the company in the early 1990s Ior improving the eIIiciency oI
transportation (Hammell and Kopczak, 1993). Managers in HP tried to link the transportation
management with the production management. What is more, they changed the distribution
route inside the departments Ior products, and set up a new logistics system called
distribution requirements planning` (DRP) system. According to Lummus and Vokurka
(1999), the DRP system nets customer orders with Iorecasts and serves as the beginning pull
in the supply chain.` All these work make the inside logistics and outside logistics more
eIIicient and satisIy customers demands well.
22
Whirlpool, another well known big company in the world, implemented more methods in the
company around 1990s to improve the production ability. Whirlpool employed Iour
approaches to improve its supply chain. First, Whirlpool employed a new vice-president oI
logistics. Whirlpool realised that transportation is important between departments and
companies. Having a good logistics Iunction can help the supply chain run more smoothly
which can improve the perIormance oI supply chain. Second, Whirlpool concentrated on its
core products with the new cross-Iunctional team. Core competence and competitive
advantages are important Ior companies who want to have major positions in the belated
industry and in the whole business. Continuing Iocus on and improve the core competence
can help the company have more power. Third, Whirlpool asked suppliers to sign in contracts
stating that the each supplier can only oIIer the resources to Whirlpool. Additionally, the
contract also states that the suppliers should support Whirlpool with the product design. Last,
Whirlpool established the EDI system with the purpose oI easy communicates with its
suppliers. With these actions, there are several improvements in Whirlpool (Lummus and
Vokurka, 1999).The products lead time has been reduced to 5 days, the inventories have been
cut by 15 to 20 percents, and the product availability has been increased to 90 -95 percents.
Wal-Mart, a super super-market in the world, also implemented supply chain management.
Wal-Mart tried to work closer with its suppliers (Johnson and Davis, 1995). It required all
suppliers to manage Wal-Mart`s warehouse oI their products, named vendor managed
inventory (VMI)`. That means all products in the warehouse, which belongs to Wal-Mart
indeed, are controlled by the suppliers. Moreover, Wal-Mart asks Ior 100 per cent order
IulIilment, which asks Ior closer relationships with its suppliers. Only closer relationships
with suppliers can lead to quicker order IulIilment. In addition, when the suppliers are
responsible Ior the inventory, Wal-Mart, on the other hand, is gain proIits with the Iewer
inventories cost. For Wal-Mart, there is less inventory risk than what the suppliers have.
Orangebox Ltd is a small-medium oIIice seating and Iurniture manuIacturing company based
in Hengoed, South Wales. It had implemented TQM approach and ISO 9000 series already.
However, as to reduce the deIected percentage, managers in Orangebox Ltd decide to apply
Six sigma as well. Managers use the original Iive steps to develop the approach, which is
DMAIC DeIine, Measure, Analyse, Improve, and control. Managers also use the Iishbone
diagrams to analyse the potential Iactors that impact the joint integrity and Iailure
characteristics. By using the Six sigma approach, the variables Ior products and processes
reduce, and company also save more than ten thousands pounds (Thomas & Barton, 2006).
23
Chapter 5 Supply chain & supply chain management in China
5.1 History about supply chain & supply chain management in China
Until now, supply chain and supply chain management has been noticed by scholars and
managers almost 30 years in the world, especially Ior the Western companies. However,
China, one oI the main developing countries in the world now, was not Iocusing on supply
chain and supply chain management until the early oI 1990s. Consequently, documents Ior
supply chain and supply chain managements are limit.
BeIore 1978, the manuIacturing industry in China was very weak compared with it in other
countries. At that time, China was just Iinished the revolution oI industry. No one understood
what supply chain and supply chain management were. Products were not produced by pull`
system but push` system, which was pushed by the raw materials available (People Web,
2005). This did not satisIy customers` requirements. In this situation, consumers could not
purchase what they want, while companies could not really have enough proIit.
During 1979 and 1992, it was the time Open Door` policy launched by government.
Economy reborn in China and customers began to ask Ior more. During this period, with the
realization that customers dislike products decided by companies, companies changed their
strategies Irom push` system to pull` system (People Web, 2005). With the pull` system,
managers tried to manage and control the whole business activities.
AIter 1993, the Chinese economy has been developing quickly with around 10 per cent
annual GDP growth, which is amazing Ior other countries. What is more, in this period, the
economy system changed Irom planning economy system toward market economy system,
which is much easier adaptable and helpIul Ior people (People Web, 2005). However, under
this development speed, many problems are coming out. Products oIIered are more than
demand which might push the prices lower than the original cost; the real quality oI products
is lower than the expected one which decreases the competitive ability; producing cost is
increasing by higher labour cost and unstable raw materials cost, which make the total cost
not low enough to be the core competence. These problems push managers to begin to
operate their own supply chain to gain beneIits. They initially managed their materials
suppliers Ior improving the eIIiciency oI supply chain. This is the beginning oI Chinese
supply chain management.
24
As it can be seen, the beginning oI Chinese supply chain management Ior companies was
Irom the collaboration with their raw materials. However, there are other members in the
supply chain except raw materials suppliers, such as logistics companies, retailers and
customers. Only pay attention on managing and controlling the raw materials suppliers does
not mean the real supply chain management. And it does not mean the managers treat the all
members in the supply chain as the whole, either.
In 2001, a document named Logistics Terminology, published by government and is the
standard oI logistics and supply chain words, deIined supply chain as the link Ior all members
related with the products and service which are going to provide to customers in the
production and the transportation processes. And the supply chain management is: using
internet techniques to plan, organize, coordinate, control and manage the commercial Ilow,
transportation Ilow, inIormation Ilow, and cash Ilow (Netease Web, 2008).
In 2004, Chinese Logistics and Purchasing department established a questionnaire about
supply chain management development and the situation in China (Netease Web, 2008). The
department analyse the Ieedback Irom companies in China. There are some conclusions Irom
these questionnaires: Iew scholars and students in this academic area; companies Iocus on
managing suppliers; using several methods to choose suppliers in order to have the best ones;
and the internet techniques (IT) is not strong than it is in the western countries.
The report Irom the department also named that, customer service in China is still weak by
not really Iocusing on what customers want (Netease Web, 2008). Even though it always say
that customer is god`, without correctly predict and Iully understand the customers`
requirement, the requirements can not be IulIilled by the products.
More and more companies are outsourcing logistics management to other companies (He, M.
K., 2004). It shows that the logistics management is becoming important to the supply chain
management. However, the contract between manuIacturing company and the third-party
logistics company is usually short-term only. Consequently, it can be said that the real
relationship between manuIacturing company and the logistics companies does not set up
entirely.
The supply chain Ior Chinese Iirms is usually within China when the western companies have
outsourced their suppliers or manuIacturing companies in some developing countries.
23
ThereIore, in terms oI this, managing the Chinese supply chain is a bit easier than the world
supply chain.
The supply chain is still not eIIicient enough by some late deliveries but high order
complement. Reaction oI members in the supply chain vary, even diIIerent supply chains.
Though some companies do outsource the logistics management to the third-party logistics
company, the duration Ior logistics is still long. What is more, in the supply chain, cash Ilow
is not short with the long payment time.
Based on the problems Iound Irom the questionnaires, the department also give companies
some suggestions (Netease Web, 2008). It suggests that, companies need to have some
changes based on the changes in the business environment; having and training some
proIessional staII in the supply chain management is crucial; use suitable methods to select
the right partners Ior the entire supply chain to have the real good relationships.
Easton (2003) investigates the Chinese supply chain management and Iinally deIines six
challenges Ior the Chinese supply chain management: Geographical diIIerences,
InIrastructure, Customs and Excise department`s eIIiciency and transparency, Government
agencies and rules and regulations, Phenomenon oI Fake and Shoddy, and Cultural and
Commercial constraints.
There are many unsolvable problems exist in supply chain Ior a long time. First, the demand
can not be predicted. Suppliers need to prepare many items in case the organization asks Ior
products suddenly. The inventories in the suppliers are high which also mean to serious
bullwhip phenomenon. On the other hand, since the demand can not predicted correctly, the
organizations also do not understand whether their suppliers can provide the right products
with the right amount at the right time. As a result, organizations may have several suppliers
which mean the relationship with suppliers is not close enough. With the high inventory risk,
while suppliers are willing to share the inventory with the organization, the organization is
not going to share the risk with them.
Second, plans Ior production, delivery, etc. can not be correct with the unstable and unclear
demand. The actions oI all departments in the organization or even in the supply chain
towards the changeable demand are slow, which reduce the high customers` satisIactions.
26
Third, the inventory is high. The supply chain is not running smoothly. Orders can not be
received on time; inIormation can not be transIerred on time; Iorecast is not correct. These all
make the inventory high in suppliers` warehouse.
Forth, the usage oI internet techniques (IT) is low. EDI is Iamous in Western companies.
Until now, 90 per cent oI the inIormation transIerred is with EDI in Western companies.
However, Chinese companies are still using Iax, telephone and human to transIer inIormation
(Zhang, et al., 2003). There are two major reasons that Chinese managers are reluctant to
utilize EDI. On one hand, iI company is going to employ EDI, the initiate investment is quite
high. On the other hand, EDI is only a communication technique Ior Chinese managers.
There are no other values Ior managers to implement this expensive system. As a result, EDI
is not popular in China.

5.2 Main concerns and relative methods Ior Chinese Iirms
Supply chain and supply chain management have around 20 years history in China only,
which are 10 years younger than they are in the world generally. Chinese Iirms are well
known Ior cheap manuIacturing with only acceptable quality to some extend. There are still
some quality problems in the manuIacturing processes in companies in China (Miyagawa &
Yoshida, 2005).
India is another large and great developing country and it has a large GDP growth during
1990s as well (GOI, 2005). Other countries like Indonesia are also going to develop quickly.
Their labour costs are related low as well (People Web, 2007). In this situation, iI the Chinese
Iirms still want to keep their competitive advantages in the Iuture, they should apply methods
to obtain more competence except the low cost, but valued products, on time delivery, and
high customers` satisIaction.
Quality management is one oI the big issues in all companies in China. Value product means
relevant low cost and high quality. It might be diIIicult to understand that how can a high
quality product be sold in a low price. UnIortunately, that is what customers want now and in
the Iuture. OI course, the luxury goods are still with the high price. But most consumers are
still looking Ior valued items. Try the best to satisIy the requirements are the challenges Ior
companies.
27
In the quality side, cost is included. Beside these two, customers would want to have the item
when they want to have. So delivery item at the right time is also really crucial Ior companies
now. It can be imagined that iI customers can not receive the item on time they will tell
Iriends about their bad experience. In this case, Ieedback Irom this customer is bad and the
company image will be damaged.
5.2.1 Quality
When companies want to increase the selling prices Ior products, customers do not accept
that the deIective products are expensive. They are only willing to purchase products which
can be used Ior a long time. Thus, quality would be the bargain power to increase the selling
price.
Cost and quality are usually with the positive relationship. That means when increasing the
quality, cost will be relatively increased. It seems that; improve the quality need more people
to control the production process which make the total labour cost grows. And it seems it also
needs more advanced technologies, which need many initiate investment, to make sure that
products are qualiIied. This is the major problem the Chinese manuIacturing companies Iace
now. Whether it is possible to improve the quality but reduce the cost is always under
managers` considerations. Deming (1986) suggests several beneIits Irom improving quality,
like lower unit cost, greater productivity, larger proIit, and price Ilexibility. From this,
improving the product will not cut the proIit but expand it.
Green (1990) suggests that at least 10 per cent oI the manuIacturing items are deIective in
China. Later, Frazer (1999) continues state that it is not an easy job to improve products
quality in China due to the lack oI qualiIied operations manager and the un-educated workers.
These two arguments were Ior the period between 1980s and 1990s. On the other side, Zhao
et al. (1995) do not agree with them. In Iact, they Iind that the eIIorts Ior quality improvement
in developing countries, like China, India and Mexico, are not as low as what people assume.
However, what Zhao et al. Iocus on are the large companies such as some international
business, while the two mentioned above are mostly Iocused on SMEs.
Chinese government did try to persuade companies to implement TQM. In 1986, Chinese
government asked all medium and large state-owned organizations to implement Total
Quality Control (TQC) (Sun, 2000). AIter that, the Chinese government continued asked
companies to try to implement TQM and ISO 9000 series (Tuan and Ng, 1998). Government
28
hopes that with the implementation oI TQM the organizations in China would be more
competitive and have some strong positions in the world business market (Miyagawa &
Yoshida, 2005).
ISO 9000 series are Iamous to many Chinese companies. They consider the ISO 9000 series
as the milestone to quality management and towards international business (Brown et al.,
1998). Based on the research by Jeng (1998), however, most SMEs in do not only dependent
on the beneIits to quality improvement by implementing ISO 9000 series. Rather, they will
also implement TQM which is the long-term quality improvement strategy. As a result, ISO
9000 serious is the Iirst choice to managers when they are considering improving the quality,
while TQM is the right choice Ior long-term strategy to improve quality.
Another important quality management approach is Six sigma. Six sigma is the approach the
mainly Iocus on controlling the amount oI product deIects. There are several levels oI six
sigma: Master Black Belt, Black Belt, Green Belt and Yellow Belt. Most oI scholars agree
that SMEs would be greatly beneIicial Irom observing Yellow Belt, or Green Belt, when
consider the cost and time. Burton (2004) even posts diIIerent steps Ior SMEs to implement
the six sigma approach. The eight steps are: 1. A six sigma strategy and overarching
inIrastructure is developed. 2. Implementation planning is completed. 3. Team Iormation and
the education plan begin concurrently. 4. Executives complete Champion education where
they learn about the six sigma process, methodology, and tools. 5. Selected individuals
complete Green Belt certiIication (e.g., a group oI 25 individuals over a 2-3 months period). 6.
Other team members complete Yellow Belt certiIication (e.g., 25-50 individuals over a 2-4
week period). 7. Later in the liIecycle, individuals are transitioned to the next level oI six
sigma achievement. 8. In all cases, certiIication is by achievement, not attendance.
Besides the quality problems in manuIacturing process, other Iactors would have eIIects on
the quality, such as supply-related Iactors, economic Iactors, political/legal Iactors,
cultural/social issues. The supply-related Iactors contain supply availability (Erel and Ghosh,
1997; Lee et al., 2000; Maheshwari and Zhao, 1994), deIective level oI suppliers (Zhao et al.,
1995), and the number oI vendors selling supplies (Zhao et al., 1995). Materials are the Iirst
step to control the quality problems. Even though the manuIacturing process is perIect Ior
producing items, iI the materials are wrong, the products are also unqualiIied. As a result,
having some good suppliers with quality materials would be the great beneIit Ior
29
manuIacturing Iirms. Closer relationship and contracts would be the best steps to obtain those
beneIits.
Economic Iactors are market expectations (Maheshwari and Zhao, 1994), level oI
competition (Erel and Ghosh, 1997). These Iactors can not be changed by companies but only
can be improved by government.
Political/legal Iactors include the quality regulations launched by government, role oI public
sectors. Government has a major impact on quality management. When government pays
attention to the products quality and try to improve quality Ior its all products, the quality
regulation will be quite strict to companies. In this case, companies who want to survive need
to Iully Iollow the regulations and even need to do more than the regulation in order to be the
winner.
Turns to culture/social aspect, labour turnover, education level oI workIorces, communication
between managers and workers, attitude to Ioreign partners, and so on are signiIicant Ior
quality. When the labour turnover is high, the products quality can not be guaranteed due to
the diIIerent labours. Quality improvement and the quality techniques need people educated,
so iI most oI the workers are only graduated Irom high schools or even middle school, the
quality improvement plan can not be explored. Some Ioreign partners required items with
higher quality levels, so understanding these high standards oI quality will be necessary to
develop the business between you and the Ioreign partners. Last, the communications
between staIIs and between manages and staIIs are also important Ior company. Managers
need to Iully understand what quality is and express it clearly to their staIIs. StaIIs, on the
other hand, need to have at least basic knowledge oI quality and Iollow the steps to improve
the quality. In terms oI this, managers and staIIs need to communicate Iluently with their own
speciIic languages. OIIices in companies can be open Ior all workers in order to easily
communicate.
5.2.2 Delivery
Delivery can be the transportation between departments and between companies. Having the
eIIicient delivery in the company needs the good arrangement oI machines and departments.
Machines and departments should be arranged in orders. This can save the transportation time
and the cost as well. Machines can be located by production processes in the department. In
the warehouse, materials and products can be located by Pareto principle (also called the
30
80/20 rule`), which mean 20 per cent oI materials and products, which are used Irequently,
should be put near the main gate or the place where they can be easily reached (Juran, 1954).
The rest can be put in the places where are less easily reached. This can save time Ior staIIs to
Iind materials and products most Irequently used and save budget to transport them between
departments.
Turns to the delivery between companies, large organizations might have other
manuIacturing companies in other cities where are Iar Irom the large Iirms, or even in other
countries. In this case, a good transportation team is really crucial Ior customers` satisIactions.
Many Iirms still have their own logistics team belongs to the company itselI. Reason why
Iirms are not willing to hire the third-party logistics company is because oI the trust between
company and the logistics company, which is the same reason why some western companies
still own the logistics team.
Logistics service is still a new industry in China. It was developed when China became a
member oI the World Trade Organization (WTO) (Lin, 2008).Until now; this industry has
been developing well with some mature Iacilities like Logistics Park, distribution centres and
so on. Third-party logistics is also one oI the major components oI logistics service. The
demand Ior third-party logistics is increasing but the regulation oI this is not developed well.
Firms would like to employ this service in order to have more proIessional service. However,
as the problem exists in western countries as well, trust is the major gap between the
manuIacturing Iirms and the logistics companies. Especially in China when the regulation has
not been established well, damages to both sides oI partners are signiIicant. The logistics
Iirms probably do not complete the job perIectly, which is lower the manuIacturing Iirm`s
expectation. Since this logistics service is not as good as it is in the developing countries,
Iirms would be better to consider it seriously beIore using it.
What is more, most oI the supply chains in China are not long, and the Iirms in the supply
chain are not distantly. Distance between Iirms in the Chinese supply chain would be only
several hours by car. In this case, companies need to consider whether it is really necessary to
outsource the logistics service. Comparison on cost between outsourcing logistics service and
owning the logistics team is important.


31
5.2.3 Cost
Most oI the companies have the similar kinds oI costs, especially Ior the quality cost.
Methods Ior reducing the quality cost would be the methods to improve the quality, and
methods Ior reducing the late delivery pension would be the methods to improve the on time
delivery rate. Adams and Goldsmith (1999) state that partnerships based on trust should
reduce the cost Ior companies. ThereIore, having a strong trust Ior relationship will help
companies to have more margins.
Inventory is also a type oI cost which slows down the cash Ilow. Products in warehouses do
not have proIits at all. Vendor Management Inventory (VMI) is one oI the useIul methods to
improve the eIIiciency oI warehouse. Members in the supply chain share one or several
warehouses together. Suppliers transport the materials or components to the warehouse
directly based on the orders, other members can pick them up when they require. Sharing the
warehouse can save the warehouse investment, and the costs are shared by all members in the
supply chain as well, which decrease the cost Ior each company. However, Chinese Iirms do
not do well on VMI. Commonly, people consider it is the suppliers` problems. Conversely,
the problem is because oI the Entry` problems. For some Chinese Iirms, materials need to be
purchased overseas. In this case, iI the products need to be examined in the Customs
Department or other organizations Ior a whole day, this whole day can not be eliminated
(Zhang & Sun, 2005). ThereIore, the large Iirms will have the opportunities that can not have
the materials on time because oI the regulation. As a result, having some preIerential beneIits
Irom government will reduce the delivery duration and decrease the cost oI delivery and
inventory.

5.3 Example
Lenovo is the Iamous Chinese computer manuIacturing company. It purchased IBM`s PC
unite in 2005 and become Iamous worldwide (Dickie & Kwong, 2007). Lenovo utilizes
several approaches to limit the inventories Ior diIIerent components. For some components
outsourced Irom other countries with changeable prices, Lenovo asks the Hong Kong
International Purchasing Centre to be responsible to purchase them. For some accessory
materials, like covering and the package materials, Lenovo employs JIT approach and asks
suppliers to delivery materials based on the orders at the right time. For the other materials,
32
which are approximately 90 per cent oI all materials, Lenovo establishes the Vendor
Management Inventory (VMI) approach (Zhang & Sun, 2005). There are several warehouses
between Lenovo and suppliers, and suppliers deliver materials to the materials directly,
Lenovo will pick them up when it wants. These approaches decrease the needed inventories
Irom 14 days to 5 days only (Zhang & Sun, 2005).
What is more, Ior the transportation, Lenovo also employ the third-party logistics company to
help the logistics Iunction in the company. Lenovo computers will be delivered to overseas;
outsourcing logistics management to other company can increase the delivery speed and
maximize the proIit (Zhang & Sun, 2005).
















33
Chapter 6 Case study - a small specialised manufacture in South China
6.1 Case description
ManuIacturer A is a metal company located in a small city in South China. It was set up in
1990 and has been developed into a well-known company in that city. The Iactory has more
than 500 kinds oI products, vary Irom sizes and usages. Some oI them are improved Irom the
previous ones. Most oI them are the components oI luggage suitcases. This manuIacturer A
provides products to several companies located in South China as well. The largest and the
most important customer company B invested by Taiwanese and Japanese is near Iactory
A with around one and a halI hours by car.
There are 3 departments in the Iactory: the oIIice, the operation department, and the
warehouse. Approximately 60 workers, 3 oIIicers and 2 managers are working there. One oI
the oIIicers is the assistant oI managers, another one is the warehouse oIIicer, and the other
one is the head in the operation department. However, with some automated machines
installed, the number oI workers has been reduced to 45. The business hours in the Iactory are
7:30 11:30, and 13:30 17:30 weekdays. Overtime working and weekend working in the
non-peak time are seldom due to the high productivity with the automated machines now.
Figure 1: Management process

















Job arrange materials arrange
Manager Manager
Manager
Assistant
Leader oI
Workers
Warehouse
OIIicer
The 45 workers
34
There is a large Ireight vehicle in Iactory A. Delivery time usually begins in the aIternoon at
around 13:45 14:00. Components that have been transported to Company B will be under
the quality check by samples immediately. The annual peak time Ior business is Irom March
to May and September to November. Overtime working two or three days per week, 19:30-
21:30, were usual during these several months. Number oI delivery times is also increased to
twice or more per day. Components will be Iinished packing in the evening one day beIore
and located in the warehouse. In the morning next day, boxes oI components will be put in
the car then delivered to the Company B at around 8:00. The quality checking will be also
undertaken. The unqualiIied products will be reverse delivered to the ManuIacturer A. In this
case, iI there are two delivery requirements per day, Iactory A can still aIIord it since the the
two drivers can drive the car twice a day. However, iI company B asks Ior three time a day,
Iactory A need to ask Ior help Irom other logistics companies.
Figure 2: The production and inIormation process in the supply chain












Factory A will get pieces oI paper about the annual general production planning at the
beginning oI the year. It receives orders almost daily mainly Irom Company B. Each order
The production process:
The inIormation process:






Factory A delivers InI. about Factories C & D
products to quantity deliver products
Iactories C and D & due date back to Iactory A
Suppliers ManuIacturing
companies
Suppliers Factory A
Company B
Painting Iactory-Iactory C
&
Electroplating Iactory Iactory D
Customers Retailers
33
might contain several products with the same delivery time shown on the order. DiIIerent
orders might have the same delivery date. The order might be maximum 2 months ahead
Irom the delivery time. Quantities oI products ordered vary, Irom Iive to thousand, which
depend on the products. Factory A will produce exactly amount that company B requires.
AIter receiving orders, manager assistance will arrange the orders based on the order series
code. II there is an order with diIIerent delivery date then re-arrange that order to a Iile and
wait Ior orders with the same delivery date. This oIIicer also input data, includes order series
code, production code and name, delivery date and amount, to computer system Iollowing the
order series code. OIIicer then Iorward the arranged orders to the head oI workers and the
warehouse oIIicer. The head oI workers will organize the production bases on the producing
cycle time, submits a piece oI paper about that then ask Ior signatures Irom managers. This
oIIicer also will send a paper to the warehouse oIIicer, stating the types and quantities oI
materials required. The warehouse oIIicer will calculate how many materials need to be
purchased and then Iorward to the managers. Managers will purchase materials, bases on the
requirement, Irom diIIerent suppliers. But since the materials prices are unstable, managers
will also purchase them in advanced when the prices are acceptable low enough then store in
warehouse. Some products need to be painted or electroplated in the painting and the
electroplating Iactories. Products will be under the quality control process in warehouse then
are packed into boxes which will be delivered to customers including company B.
Warehouse oIIicer will have the required materials on time usually. He will locate them in
diIIerent place depend on what the material is. Workers ask Ior materials need to Iill in a
Iorm and hand it in to the warehouse oIIicer. Some products need to be painted or
electroplated. The Factory A will delivery those products to the painting Iactory C and the
electroplating Iactory D. AIter Iinishing painting and electroplating, these two companies
will transport back the components to Iactory A. Components will be under quality check
with samples in Iactory A. The unqualiIied ones will be taken back to the outsourced
Iactories to be re-worked.

6.2 Reasons to improve the supply chain eIIiciency
Small or medium manuIacturing companies are really common in China, so as the metal
SMEs. Factory A is located in a city industry area where Iull oI metal and plastic SMEs. In
36
terms oI Iactory A itselI, it does not have many advantages due to the high competition
between companies. It is Iacing many competitions outside and inside the industry. There are
many reasons Ior Iactory A to develop its own supply chain. Porter`s Iive Iorces can analyse
the external environment Ior Iactory A, to see what the main competitions Iactory A Iacing
are. Using PESTEL can analyse what the political issues are eIIecting Iactory A to improve
the supply chain eIIiciency. Besides the macro-environment analysis, micro-environment
analysis should also be undertaken. Cause and eIIect diagrams will be employed in order
to understand the problems in the supply chain.
6.2.1 Porter`s Iive Iorces
Porter`s Iive Iorces include the Potential entrants, Substitutes, Buyers, Suppliers, and the
Industry competitors ( Porter, 1980, 1985). The relationships between each other can be seen
in the graph below.
Appendix 1: Porter`s Five Forces











Source: Porter, M. E., 1980. Competitive Strategy: Techniques Ior analyzing industries and competitors. New
York: Free Press


Threat oI
new entrants
Bargaining power Bargaining power
oI suppliers oI buyers




Threat oI
substitutes


Potential entrants
Suppliers
Industry competitors




Intensity oI rivalry
Substitutes
Buyers
37
There are not many companies provide similar products to Company B, but many in other
cities nearby. Factory A is producing the components oI luggage suite cases, including the
handles and so on. Though the small town where Iactory A located in is called the metal
manuIacturing area, the number oI Iactories Ior components oI luggage suite cases is not
large. However, among these several competitors, most oI the products provided to company
B are similar. In this case, the competition inside the city is already high even though no
many competitors.
What is more, company B also has suppliers in other cities nearby. When Iactory A delivers
products to company B everyday, workers oIten can see many cars Irom other cities to
deliver the similar products. The distance between company B and the Iactories in other cities
is also approximately 1.5-3 hours by car.
Besides these, there is another Iactor that can prove the rivalry is intensive in this industry.
Luggage suite cases are not the Iashion products. Products Iactory A and company B produce
can be kept Ior a long time. Each product they produced has been under the examinations to
make sure products can be used Ior a long time. Under this good condition, customers would
not like to purchase another one when the old one is still available to be used. Thus, the
market is not growing very Iast compared with the Iashion market.
In terms oI the potential entrants, company B might outsource the manuIacturing process to
other countries since the producing cost is going up in China. Other countries, like Indonesia,
and even Mexico, the employee wages are low and the living standards there are lower than
some Chinese cities. What is more, products in company B are usually exported to western
countries, like USA and European countries. Only little part oI the products can be sold in
China. ThereIore, Ior the transportation cost, company B might outsource the manuIacturers
in Mexico.
The other potential entrants are Irom the local metal manuIacturing companies in China. The
Iactories that do not produce the luggage components today do not mean that they will not
join to this industry tomorrow. Machines Ior producing the luggage components can be used
Ior other products as well. The only diIIerence is the mould. Most metal Iactories do have the
techniques to produce the luggage components. And Ior the existing metal manuIacturing
companies, they do not need to have a huge investment but only some relationships with their
Iuture customers the luggage companies. ThereIore, there are many potential entrants.
38
Turns to the suppliers` powers, they can be divided into two parts Ior Iactory A. The Iirst part
is the materials suppliers. Factory A has long relationships, around 10 years already, with 6
materials suppliers. All these suppliers are the important parts in the metal suppliers industry.
These 6 suppliers have almost controlled all the materials in the small town. As a result,
almost all the metal manuIacturers need to purchase materials Irom them. Prices are still
negotiable Ior Iactory A because oI the long relationship. The delivery time is within halI
hour. There are also many materials suppliers in the city and outside the city. However, the
delivery time is more than one hour iI Iactory A asks Ior materials Irom them. And Iactory A
does not have a strong relationship with them which can lead to increase the price and
decrease the quality oI materials. In this case, Iactory A has to purchase materials Irom these
6 suppliers.
The second part is the painting and the electroplating suppliers. Factory A does not have the
ability and capacity to paint and electroplating products, so outsourcing these two parts would
be the only method now. Factory A does also have long relationships with these two Iactories,
around 10 years already. These two small Iactories understand what company B wants and
can produce the right products Ior Iactory A. However, since the environment issues are
becoming much important than beIore, there are many striking Ior painting and electroplating
industries. They all need to pass some environmental regulation in order to let the products
can be sold in western companies. The Iactory C and Iactory D are the qualiIied Iactories in
the small town. ThereIore, their prices are a bit higher than others.
In terms oI the buyers, company B is the major customer Ior Iactory A. Company B has more
than 500 employees, and the products can be purchased all over the world. Company B also
has partnerships with some Ioreign companies in France, Germany, and others. Compared
with company B, the Iactory A is a really small organization. For Iactory A, 90 per cent oI
the monthly sales are Irom company B, and company B has many similar suppliers which
mean that Iactory A is not that important iI the products are not valueable. In this situation,
company B usually asks Ior prices decreased immediately, especially when the managers in
company B know that the materials prices decrease. However, when the materials prices
increase, and managers in Iactory A ask Ior raise the selling prices, it is rather diIIicult to
increase the prices immediately. Company B will show that it can change the suppliers when
Iactory A is not going to reduce the price. Managers do consider developing other large Iirms
Ior partnerships. However, many Iactors need to be considered, such as the Iuture oI the
companies, the payment period and the ability to pay money to Iactory A, etc.. AIter
39
considering these, managers in Iactory Iind that it is not saIe to totally swiIt to other
companies. They only begin to develop other partnerships and wait Ior the development with
them.
There are no substitutes in this industry. All components can not exchanged by others.
Luggage suite cases need to be under examinations to ensure that the suite cases can support
the heavy weight. The metal components need to have the ability to support the whole
luggage.
6.2.2 PESTEL
PESTEL contains Political, Economic, Socio-cultural, Technological, Environmental, and
Legal (Boddy, 2005). Here, it is going to utilize PESTEL approach to analyse the Political
Iactor (the regulation) and the Economic Iactor (the labour costs).
Appendix 2: PESTEL

Source: Boddy, D., 2005. Management: An Introduction. London: Prentice Hall. P.88
At the beginning oI this year, Chinese government launched a set oI laws the New Labour
Contract Law which makes many companies bankrupted (Luquan City Environment
Protect Department, 2008). The regulations are about to increase the minimum employees`
wages and to require all employees to sign the Iixed contracts to protect all workers. The
regulations also stated that, Ior those who have worked in the company more than 10 years or
those who have signed the two years Iixed contracts, companies need to give one more month
40
salary to them at the end oI each year. It also requires all workers need to sign with the
contracts.
Many companies, includes some large companies collapsed suddenly (Luquan City
Environment Protect Department, 2008). Some oI them were even the Ioreign invested
companies. AIter this set oI laws comes out, the labour cost Ior companies, especially the
SMEs, increases signiIicantly. Most oI the employees in SMEs are not educated with most oI
them are only graduated Irom high school or even middle schools. They do not have any
technical abilities and usually apply jobs in every SMEs and wait Ior the simple jobs. When
they do not Ieel like going to work, they will quite jobs. And some oI them will work in the
company without any contribution. Employers beIore will Iire them immediately when
managers Iind that they are doing nothing. Some nice employers might give this kind oI
workers some extra money but some will not. AIter this set oI laws comes out, all workers
are protected. Employers can not hire and Iire employees with their willing. This problem
will be much more seriously when the peak time comes. Usually, manages will employ some
part-time` workers to complete the heavy orders in the peak time, then Iire these part-time`
workers aIter the peak time. However, with this regulation, the mangers can not Iire them
immediately and need to pay more to them.
6.2.3 The problems need to deal with: cause and eIIect diagrams (Fishbone` diagram)
Porter`s Iive Iorces and PESTEL can show us the external environment oI the company and
supply chain, while Iishbone` diagram can illustrate the internal environment oI the
company and supply chain (Dale, 2006).
Appendix 3: Fishbone` diagram

Source: Dale, B. G., 2006. Managing Quality. 4
th
ed. OxIord: Blackwell Publishing. P.328
41
The general problem Ior Iactory A/supply chain would be the ineIIicient supply chain`.
EIIicient supply chain can mean a lot. For Iactory A, it means right amount oI materials under
the right process to be produced into the quality products, which will be on time delivered to
the right place with the suitable price.
In terms oI Iactory A, there are several perspectives that lead to the ineIIicient supply chain.
These are Quality (inside Iactory A) Iactor, Cost Iactor, Suppliers Iactor, Delivery Iactor, and
the two outsourced companies Iactor. Each Iactor contains several problems that make the
supply chain does not practice well. All Iactors and the related problems can be seen below in
the Iishbone` diagram.












Injection moulding Iaults are the major quality problem in Iactory A. Based on the
observation and talking with the workers in Iactory A, around 80 per cents oI the injection
molding Iaults are: having sink marks, poor welds, and deIective surIace, the other 20 per
cents are the material discoloration, and sticking in the sprue.


Some delayed Quality Injection moulding
deliveries
Less quality Price Package process
materials


Peak season Wastage
Wrong quantity Workers` wages
Some late deliveries Unstable materials` prices



Figure 3: Fishbone` diagram Ior Iactory A
IneIIicient
supply chain
Outsourced
two SMEs
Suppliers Quality
Delivery Cost
42
The sink marks might be because oI the incorrect injection pressure, the wrong injection
Iorward time, the wrong boost time, and the injection speed (Rubin, 1972). In terms oI
temperature, the sink marks might be stem Irom the too hot or too cool materials. The wrong
temperature might leads to excessive shrinkage, incomplete Iilling and packing, material on
the wall can not set up quickly enough, and preventing incomplete Iilling (Rubin, 1972).
There are mainly three reasons that cause the poor welds, also called Ilow marks. These three
Iactors are temperature problems, moulding problems, and mould problems. Temperature
problems are too low cylinder temperature, too low nozzle temperature, too low mould
temperature, too low mould temperature at spot oI weld, and uneven melt temperature. Either
injection pressure too low or injection Ieed too slowly can cause the moulding problems.
There are also many reasons Ior mould problem, mainly are insuIIicient venting at the weld,
insuIIicient venting oI the piece, runner system too small, gate system too small, and so on
(Rubin, 1972).
There are 8 Iactors can make the deIective surIace happen. Contamination, wetness oI
hygroscopic material and water condensed on non-hygroscopic pellets, nozzle drool which is
picked up by the incoming material and deposited in the mould, degraded and burnt material,
jetting, splay marks or blushing at the gate caused by melt Iracture, excessive lubricant, and
pressure deIects which cause characteristic ripples and pit marks (Rubin, 1972).
Besides the injection moulding problems, package process will be another place Ior quality
problems. In Iactory A, the problems might be qualiIied aIter Iinishing producing, however,
during the packing period, workers might not be careIul enough to pack the sensitive
products. Some products are really easy to be scratched. When workers are not aware oI this,
products will be damaged even though they were qualiIied beIore. Additionally, except
packing process, the unIinished products might be damaged when they are delivered between
departments and between Iactory A and Iactory C and D. Products with scar are useless. Thus,
Iactory A needs to produce some more to replace the useless ones.
The Iollowing one is the cost problems. Wastage, increased workers` wages, and unstable
materials` prices are the reasons Ior the high cost in Iactory A. Wastage includes the materials
wastage, and the wastage in the oIIice in Iactory A. Inside Iactory A, workers who need
materials to produce items have to Iill in enquire Iorm to obtain the raw materials Irom the
warehouse. However, even though managers have tried this method to limit the wastage, the
wastage is still high because the workers do not treat the materials well. They obtain the
43
materials Irom warehouse, and then put them into the mold and the machines. During the
putting process, materials will not Iully into the mold or the machines but some oI them are in
the Iloor. Materials on the Iloor sometimes can not use again due to the quality condition.
ThereIore, in this case, materials are wasted by workers.
Wastages in oIIice might be the paper wastages and the resources wastages, such as
electricity and water wastage. OIIicers, even the managers, will use the paper in one side only.
ThereIore, these oIIice supplies are in great demand which can be reduced into a smaller
quantity. These all wastages make the costs increase.
Prices and quality oI materials are the central problems according to the raw materials Ior
Iactory A. As described above, the several materials suppliers in the small town have
controlled most oI the metal materials. Their bargain powers are much larger and stronger
than Iactory A. What is more, though it does not mean that outsourcing the raw materials in
other nearby cities is impossible, the price, quality and the deliver time are the major
concerns Ior Iactory A. Those major metal suppliers usually have the similar prices with
acceptable quality. What is more, when the materials prices decrease in some period, the
selling prices Irom those materials suppliers will be not reduced signiIicantly. The only great
beneIit by ordering materials Irom these several suppliers is quick delivery. When Iactory A
orders materials Irom those suppliers, materials will be available in 2 days. II the quantity is
small, it will be available even in the aIternoon when it is ordered in the morning. And the
deliver time is only with halI an hour. It saves time in the supply chain.
Talking about the delivery, problem will be signiIicant when the peak time comes. During the
non-peak time, one day one car delivery should be enough generally. However, during the
peak time, the minimum transportation times are twice. Sometime it comes to three times. In
Iactory A, there is only one Ireight vehicle. This vehicle can IulIil the general demand to
transport most products on time to company B. Usually in the non-peak time, products will
be delivered to other companies in the morning; and in the aIternoon products will be
delivered to the company B. In the peak time, this is a bit chaos while the demand Irom
company B is quit large, and the delivery times increase to twice or even three times a day.
Factory A does not have enough vehicles and drivers to satisIy this demand. However, iI
Iactory employ one more driver and purchase another Ireight vehicle, these two will be
useless during the non-peak time.
44
In this situation, asks help Irom logistics companies would be a better way. However, since
the logistics service has only developed Ior less than 15 years, the regulations in this industry
are not perIect which can not protect the payees and the payers. Sometime, products will be
damaged when they are arrived in other companies. The logistics providers might pay Iactory
A back with some amount oI money but Ior Iactory A, the reputation Ior Iactory A will be
deIinitely decreased.
The incorrect quantity to the partners would be another delivery problem. Workers might be
careless to put more or less products to the destinations. That means the products are not
under then right quantitative. Probably more than the required amount is better than less than;
at least Iactory A has IulIilled the requirement. What is more, there might be some wrong
products the unordered products delivered to the customers. There are two impacts Irom
this. First, the unordered products might have not been Iinished yet; thereIore, deliver to the
customers will lower the production time. Second, customers might consider Iactor A as the
careless company where there might be lots oI Iaults Irom. In this case, orders Irom
customers might be reduced.
The last problem is the two outsourced companies. Factory C and Iactory D are the small
Iactories that had obtained some certiIicates that production process will not pollute the earth.
Factory A has around 10 year`s relationships with these two Iactories. The major problems
Irom these two companies are some delayed deliveries and some less qualiIied products.
These two Iactories will deliver the Iinished products to Iactory later than the estimated time
sometimes, which delays the production process time. This also directly aIIects the on time
delivery Irom Iactory to other customers. In addition, quality is another problem. Though
these two companies have been qualiIied Ior some green production certiIicated, the
company B requires more than that sometimes. ThereIore, these two Iactories might do not
Iully understand the requirements Iorm company B and then produces the un-qualiIied
products to Iactory A and company B. Company B will ask Ior re-work when products are
under the requirement. It makes the entire production process last a long time.




43
6.3 Approaches to implement
6.3.1 Methods available and the comparison
As describe in the chapter 4 and chapter 5, the most popular approaches Ior quality
improvement are ISO 9000 series, Six sigma, and Total Quality Management (TQM). And
Ior the SMEs, ISO 9000 and Six sigma are much better than TQM which require less
investment and are the short-term policies. Improving the quality can utilize three oI them in
diIIerent stages. However, it is better to have one suitable method at the Iirst step. ThereIore,
comparison between these three methods is important Ior choosing the right one to
implement.
For Iactory A, there is so called three methods Ior improve the delivery: having the own
transportation team; have the Third-Party Logistics, or combine both oI them. ThereIore, in
this part, it is not going to compare these three as they have been compared above in chapter
4 and 5.
For Iactory A, the quality cost is the major part oI the cost. As a result, improving the product
quality will relevantly reduce the cost. Thus, here again, it is not going to use other methods
to reduce the cost when the quality problem is the major issue in Iactory A.
ISO 9000 series have 4 parts: ISO 9000, ISO 9001, ISO 9004, and ISO 19011. ISO 9000 is
the Ioundation oI other three parts which provides the guideline documents Ior them. ISO
9001 is the requirements Ior the quality improvement across the company. ISO 9004 is Ior
the holistic perspective. And ISO 19011 is Ior the environment and quality improvement.
There are Iive main elements in ISO 9001: Quality management system; Management
responsibility; Resource management; Product realization; and Measurement, analysis and
improvement (Dale, 2006).
Companies want to implement ISO 9000 series should Iully understand why they need to
improve the products quality and what the objectives are with the implementation. When they
are going to implement the ISO 9000 series, they should prepare to write down each process
oI producing each product. The production procedures should be written down by workers
and each worker should be responsible with their jobs. What is more, ISO 9000 series enquire
all employees, including managers and staIIs, to Iully understand this series and contribute in
the implementation process. People who do not understand this series will be given training.
46
There should be one or more internal auditors inside the company in order to examine
whether the implementation is successIul or not.
Having the ISO 9000 series can improve the quality Ior companies, enlarge the commitment
oI employees, reduce the percentage oI deIectives, enlarge and clear the responsibilities Ior
each employee (Dale, 2006). Additionally, companies implement the ISO 9000 series usually
also ask their suppliers or customers to implement it as well. This is quite useIul when the
quality is not so good in the suppliers` sides. However, there are also some limits Irom having
this approach. It is wrong that iI a company treats having ISO 9000 series as the milestone oI
obtaining TQM approach. ISO 9000 series are not the Ioundation oI TQM approach.
ThereIore, having ISO 9000 series can not help companies to implement TQM. Second,
implement a strategy usually require a long time and the proIit during the implementation
period might be getting worse that the managers will be scared oI it. They might cancel the
project because oI the sales lose.
Six sigma allows only 3.4 deIects per million products. This regulation can Iully satisIy
customers` requirements and maximize the proIits. The General Electric (GE) Company is a
good example Ior implementing the Six sigma approach (Henderson & Evans, 2000). There
are Iour levels oI implementing Six sigma approach: Master Black Belt, Black Belt, Green
Belt, and Yellow Belt. Large companies can have the Master Black Belt and Black Belt with
their enough Iinancial supports and resources. For SMEs , with the limit oI Iinancial supports
and resources, Green Belt and Yellow Belt would be the better choices.
Green Belt is a level higher than the Yellow Belt. So iI company wants to have a higher
standard, Green Belts would be better. All employees will be under the training to understand
the Six sigma approach. There are mainly three kinds oI staIIs need to be capable in the
Green Belt level: Managers, Six sigma project team members, and Green Belt project leaders
(Dale, 2006). Though all staIIs need to be under the Six sigma training, there is a special team
called Six sigma project team. Members in this team will be under more training, and use
their knowledge to Iollow the Iive steps in implementing Six sigma approach: DeIine,
Measure, Analyze, Improve and Control (DMAIC) (Dale, 2006). What is more, the managers
and the team leader would be better understood this approach rather than the team members.
Author recommends that the team members Ior deploy the Six sigma approach would be
better Irom the company itselI but not outside the company. In this case, team members
already have clear ideas about the running and production processes in the company. This is
47
the major advance Ior them compared with the outside team members. There is a major
limitation in this approach. Team members chosen might only concentrate on the deployment
but not producing products any more. The number oI available workers decreases since some
oI them need to set up the Six sigma implementation process. Companies might need to hire
more workers to raise the production rate which is costly.
Total Quality Management is the long-term strategy companies want to deploy as well. TQM
has more important elements compared with the other two: Commitment and leadership oI
the chieI executive oIIicer; Planning and organization; Using tools and techniques; Education
and training, Involvement; Teamwork; Measurement and Ieedback; and Ensuring that the
culture is conducive to continuous improvement activity (Dale, 2006). TQM approach also
requires all employees in company to be under training in order to have the clear idea oI it.
Employees need to utilize tools to analyse problems exist in company. Tools include
Checklists, Flowcharts, Tally Charts and Histograms, and so on.
Fully implement TQM approach is not an easy job, and it takes a long time to obtaining it.
There are several awards related to TQM. Deming Application Prize, The Malcolm Baldrige
National Quality Award and The European Quality Award (EQA) are the most Iamous ones
(Dale, 2006).
6.3.2 Approaches implementation
Quality
Based on the discussion in the chapters above, ISO 9000 series would be the best choice Ior
Iactory A to improve the quality problems. There is a model developed by McTeer and Dale
(1995) Ior SMEs to implement the ISO 9001 approach.
It contains Motivation, Resources, InIormation, and Planning. Motivation means the desires
that all employees want to achieve ISO 9001 and want to learn more about the customers`
requirements. According to McTeer and Dale (1994), motivation would be the most
important part when companies implement this approach. It is this motivation that push
company Iorward. Employees should be selI-motivated to improve the products quality but
not being asked by other people.
InIormation means the education and training according to McTeer and Dale (1994). For
Iactory A, education and training would be the most important at the Iirst step when
48
managers want to implement ISO 9001, rather than the motivation. Most employees in
Iactory A are only graduated Irom high school or middle school, some oI them are even Irom
primary school especially the women. In this case, all oI them do not understand what the
ISO 9001 is and the reasons Ior improving quality. Asking them to understand this advanced
approach would be diIIicult Ior managers and Ior them as well. In addition, most oI them do
not understand how to use computers even now.
Resources are time, Iinance, and person. Enough time is important when company is going to
implement ISO 9001 and the daily production. Finance includes the cash Ilow and the
company saving. In SMEs, the company saving can not be compared with the one in large
Iirms. What is more, in Iactory A, cash Ilow is not really smoothly while the payment time is
every 3 months Irom company B. When Iactory A would like to have ISO 9001, managers
should prepare some amount oI money to develop this approach. This amount oI money is
not interrupted by other businesses in Iactory A. It is only Ior developing the ISO 9001
approach. Person would be also the crucial point. All person need to be under the training
course Ior ISO 9001, computer study and basic learning, no matter which degree are they
Irom. Classes can be opened in the evening in order to separate the training section and the
production.
BeIore deploying the ISO 9001 approach, managers should have the plan/schedule about
when and how to implement. They should understand the process oI it. At Iirst, managers
should ask each employee to write down what are their responsibilities and what do they do
everyday, what is the processes oI their jobs. AIter that, the oIIicers in Iactory A should read
all these papers, and summarize each process with the easy understanding words, then copy
them to each employee. Each employee should Iollow these regulations when they are doing
the jobs. This ensures all the steps oI each job are correct. For example, papers include how
to inject a mould into a machine, what should be aware, and how to prevent the deIects.
Planning would be the central oI these three Iactors. Managers need to have good plans in
terms oI these three aspects. The materials planning, human resources planning, delivery
planning, and reducing cost planning should be all Ior workers in Iactory A. StaIIs need to
Iollow these planning in order to achieve the goal: improve the quality.


49
Delivery
Due to the logistics service development in China, it is not good to entirely outsource the
delivery part to the Third-party logistics companies. However, during the peak time, it is
impossible not to outsource. ThereIore, the best method until now is: outsource the
transportation when the peak time comes by using the own transportation team in the whole
year. When searching the third-party logistics service companies, managers can ask Ior
opinions Irom other similar companies and then choose the best one. When using the
outsourced logistics company, Iactory A needs to sign contracts stating the delivery time,
delivery rate, the payment time, the quality assurance, and so on. That is in order to protect
Iactory A.
Cost
Quality cost can be eliminated by improving products quality. For the oIIice cost, managers
should launch the regulation that all papers need to be used by both sides except the oIIicial
documents, such as contracts, invoice, and so on. OIIicers who will leave the oIIice Ior a long
time should turn oII the computer, and the last people who leave oIIice should turn oII all
electricity. For workers, they need to be responsible with the materials they use. Wastage is
not permitted any more. When workers Iill in the Iorm to take materials, they need to
estimate how many products will be produced and ask Ior signature Irom the warehouse
oIIicer. By this method, it is minimizing the materials wastage.
Suppliers` and the two outsourced companies` relationship
Since the raw materials suppliers are the dominant ones in the small town where Iactory A is
located in, it is better to have a better relationship with them. Or the managers need to be
aware with the price moving. When the price is going down, managers should purchase more
than usual in order to reduce the materials cost. Having a contract with suppliers is
impossible while the prices are unstable at all. For the two outsourced companies, having
better relationships are also important. Sharing some inIormation with them would be one oI
the practical methods. Factory A should let those Iactories know how many products need to
be painted and electroplated, and when is the Iinal due date Ior those products. This can help
these two companies to arrange the production time in order to try to IulIil the requirements
Irom Iactory A. Signing contract would be a better choice Ior these three Iactories. Since the
30
prices are stable to some extend, contracts can protect these three Iactories. Due date, price,
payment, quality level, and so on, should be stated in the contracts.

6.4 DiIIiculties and challenges
Speaking is much easier than doing. Theoretically, methods can be implemented well, but
practically or realistically, there are many issues disrupt the implementation. And all methods
are generally available Ior all companies in the world but are not speciIied Ior one company.
ThereIore, Ior Iactory A itselI, there are some diIIiculties and challenges when it implements
the methods above, even though the ISO 9001 method is already Ior SMEs only.
There are 50 people in Iactory A includes 2 managers, 3 oIIicers, and 45 workers. The two
managers were graduated Irom high schools and had attended some diplomas. The manager
assistance and the warehouse oIIicer were graduated Irom colleges and the head oI workers
was Irom middle school with more than 10 years working experience in Iactory A. The other
45 workers, 18 oI them are Irom high schools, 20 oI them are Irom middle schools and the
others are even Irom primary schools. All oI them are legal to work. With this low educated
level, it is rather diIIicult to train them about the Six sigma theory. In this case, probably the
Iirst Ior training should not be the Six sigma approach but the basic education. What is more,
it is important to train the two managers in advanced. The two managers are the major
persons in Iactory A. Thus, when these two persons Iully understand what Six sigma is, they
can entirely committee into it and guide all workers toward this approach.
For the raw materials suppliers, it is not easy to sign the contract with the Iixed materials
prices. Prices are Irustrated during the whole year. Suppliers will be reluctant to give the
Iixed prices since it is not beneIicial Ior them. What suppliers want is to maximize the proIit.
ThereIore, they will try to increase the selling prices when the materials costs are high. What
is more, managers might not have the ability to predict the price moving correctly. So they
may purchase materials without a lowest price which make the company cost increase.
Turns to the Third-party logistics service, how to have the Ilexible contract during the peak
seasons would be the diIIiculties. Having a trustworthy logistics company would be the
challenge Ior Iactory A as well. There are not many logistics companies in the small town, so
the choices are limited. What is more, most oI them are also SMEs that services might be not
as good as the own team`s. In this situation, it seems outsourcing the transportation part
31
during the peak time is a bit risky. What is more, the staIIs in the logistics company might not
be aware oI the products which are a bit sensitive and are easy to be broken. In this case,
Iactory A needs to communicate well with the third-party logistics company to make sure that
staIIs there understand that products are important and valued.
For the two outsourced small Iactory C and Iactory D, there are also diIIiculties and
challenges. Usually it is not easy to control the outsourced operations. Because they are not
under your managers and the companies are separated. Quality will not be under control to
some extend. The quality standards in Iactory C and Iactory D might be diIIerent with they
are in Iactory A and company B. Products pass the quality control in Iactory C or D might
Iail in Iactory A and company B. As a result, with the diIIerent quality standards, re-work
would be common to some extend. Sharing the same quality standards would be the most
important issue among these companies.

6.5 Expected results
By implementing ISO 9001, third-party logistics, and other small actions, Iactory A would
like to at least improve the products values, and try to Iully satisIy customers` needs.
By writing down each production process, managers want to make sure each worker Iollows
the same process to produce the products. Workers can understand which parts oI their
production are wrong based on the right production processes. With these correct statements,
workers can correct mistakes when they make them happen. Managers do hope that the rate
oI deIective products will decrease by 70 per cent at least with the original average deIective
rate is 2º. Many problems are occurred during the injection moulding period. II workers can
be care about the temperature oI the machines and the environment, the humid oI the mould,
and other Iactors according to the machines and the moulds, the products deIective rate will
decrease signiIicantly.
By educating and training all staIIs in Iactory A, staIIs are asked to accept the ISO 9001
quickly. Though most oI the staIIs are under low level education, it is still important Ior them
to learn inIormation about ISO 9001 to improve the products quality. Also, by learning ISO
9001 and understand it, managers hope that staIIs can contribute on the quality development
and the improvement. Commitments are important when the theory is deploying and
developing. Managers can not require staIIs to work with the ISO 9001 without their willing.
32
Workers should love to implement the ISO 9001 and have the same objectives Ior the
company`s Iuture development.
By having a better relationship with the raw materials suppliers, managers want to have
valued materials. The 6 raw materials suppliers are already the major parts oI the materials
providers industry, it is not easy to bargain with them since Iactory A is only a SME.
Contract is also impossible. So the better relationship with those suppliers would be a better
choose. The better relationship will help the managers in Iactory A obtain the latest news
about the price moving. In addition, iI managers have better relationships with those suppliers,
suppliers might give some discounts to managers when it is going to purchase a large amount.
Relationship is important in China, so as Iriendship. This better relationship will help
managers to save the cost.
By recruiting the third-party logistics service, managers in Iactory A want to increase the
delivery times during the peak season. Twice deliveries a day is the common times during the
peak season, three times a day would be not surprise. But with the limitation oI Ireight
vehicles and drivers, hiring the third-party logistics team would be the only one choice. The
third-party logistics service will help Iactory A satisIy company B maximized.
By using papers both sizes, turning oII lights and computers when the oIIice is empty, and
Iilling Iorms speciIied how many products will be produced, Iactory A can save a lot Irom
the costs. What is more, using papers both sizes can be an environmental action which make
the earth much healthier. The temperature Ior air conditions should be set to around 26 degree
only in order to save money.
All these are the expected results. Workers need to really contribute to the company
development. All staIIs should be involved into these developments to ensure that this project
can be completed perIectly. Workers are the decisive Iactors in this project.





33
Chapter 7 General recommendation
As it is said, ISO 9000 series are more suitable Ior SMEs in the world, while Six sigma and
TQM are more suitable Ior large Iirms. For all SMEs, quality is the major concern and
improving quality would be the Iirst action when companies want to have more competitive
advantages. ISO 9000 series are less costly than Six sigma and TQM so are more adaptable
Ior SMEs. However, ISO 9000 series are about the short-term development only, so as Six
sigma, while TQM is more towards long-term perspective. Companies, especially large Iirms,
want to develop the long term beneIits should implement the TQM but not ISO 9000 series.
Another reason to push SMEs to adapt ISO 9000 series is the investment. ISO 9000 series
require less initial investment rather than Six sigma and TQM, but the disadvantage Ior that is
the beneIits are not as apparent as those in Six sigma and TQM. The later two approaches
require large amount oI initial investment which stops SMEs to go ahead. ThereIore, SMEs
can achieve the ISO 9000 series standards Iirst, and large Iirms can look Iorward the Six
sigma or even TQM Ior quality improvement.
For SMEs, having the third-party logistics service will not provide much more beneIits to the
companies with several reasons. First, the output oI SMEs is not so large with some increase
during the peak season. In this case, the SMEs can have their own transportation team to
delivery items themselves. It is not so easy to hire the logistics service with low delivery
Irequency. Second, SMEs usually have at least one small Ireight vehicle which is totally
enough Ior the daily delivery. The small Ireight vehicle has many Iunctions such as delivery
items to customers or even having materials Irom suppliers sometimes. In this case, there is
no need to hire another car to send items to customers. However, during the peak time,
delivery Irequency increases so having the Ilexible third-party logistics service would be
beneIicial. For large Iirms, the output is much larger than it is in SMEs, thereIore, it is better
to employ the third-party logistics service otherwise large organizations need to obtain many
Ireight vehicles and drivers. What is more, large companies may have customers around
China or even around the world; planes and ships can not be purchases by a large amount. As
a result, having the transportation team outsourced can save the investment.
Saving cost is the priority issues that all companies concern. There are several ways to reduce
the cost by improving the quality to reduce the deIective cost, by reducing the oIIice cost.
Improving quality can be made by using ISO 9001 Ior SMEs, and Six sigma and TQM Ior
large Iirms. Reducing the oIIice cost can be made by decreasing the air condition temperature
34
Ior all departments, and use papers in both sides. These methods can be used by large Iirms
and SMEs as well.





















33
Chapter 8 Conclusion
Quality, delivery, and cost are the important issues Ior managers. There are inter-
relationships among them. Improving the quality and delivery can reducing the cost. This is
the most apparent relationship among them. When approaches are going to be implemented,
cost may increase Ior a while, but aIter a period, the positive eIIect can be seen Irom the cost
saved. Managers need to be patient when methods are implementing.
SMEs are much smaller then large Iirms with the size oI departments, the number oI workers,
the education level oI staII, and so on. The resources are limited in SMEs so they may not
implement methods which can be used by large Iirms, such as TQM. SMEs may still use
TQM or Six sigma approach, but the cost will be a huge abandon Ior those managers. The
cash Ilow will decrease immediately with the large initial investment. When the cash Ilow
decreases, the companies will have Iinancial problems. ThereIore, it is still not recommended
to implement TQM or even Six sigma, especially the Master Black Belt and Black Belt, in
SMEs.
Quality and cost are the most important concerns according to Chinese SMEs. Chinese Iirms
are Iamous Ior the low cost production so cost would be the competitive advantage Ior all
Chinese Iirms. However, since people are more concerning quality now, quality is becoming
the Iirst Iactor to eIIect customers` choice. Improving the quality can help Chinese Iirms to
obtain more competitive advantages rather than low cost only. What is more, the cost in
Chinese Iirms is not the cheapest one nowadays since the industry development in some
small Asian countries, like Malaysia, Indonesia. Good quality would be the major bargain
power Ior all Chinese Iirms Irom now on.
Logistics Iunction is still developing in China as the service is getting better and better now.
Companies seek Ior third-party logistics Iunction need to be careIul with the service level
they provide.
In the world, supply chain and supply chain management have developed Ior more than 20
years already, and many large Iirms in the world are developing their quality by
implementing advanced methods such as TQM and Six sigma, and so inIormation techniques
like inIormation sharing. For them, sharing inIormation can eliminate the barriers between
suppliers and customers which can increase the eIIiciency between them. However, managers
in China are still scare to share inIormation, especially the Iinancial inIormation.
36
Logistics industry is also Iamous Ior the world Iamous large organizations and most oI them
are using the third-party logistics Iunction to develop the transportation team. The large Iirms
in the world have suppliers in other countries usually and customers are worldwide. As a
result, outsourcing the logistics would be much more convenient.
DiIIerent industries might have diIIerent standards Ior delivery. However, the basic ones
would be on time, and with right amount. So these two Iactors are the important aspects to
consider whether the logistics suppliers are good or not. Companies who are searching the
logistics companies can compare those logistics companies with these two Iactors.
There are still many Iactors need to be consider to develop the supply chain, so Iurther study
in supply chain and supply chain management is also required. The Iactory A is only a small
sample in south China, producing some metal products. Probably many Iactors will be
diIIerent Irom other industries, such as plastic industry. ThereIore, though some methods can
be used by other industries, managers still need to investigate in terms oI situations and
conditions Ior their own companies.
Further studies should be continued due to the lack resources on implementing supply chain
management in SMEs. SMEs are the major productivities in the world; thereIore, scholars
and managers need to more Iocus on the SMEs supply chain management.










37
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67
Appendix 1 Porter`s Five Forces


Threat oI
new entrants
Bargaining power Bargaining power
oI suppliers oI buyers




Threat oI
substitutes

Source: Porter, M. E., 1980. Competitive Strategy: Techniques Ior analyzing industries and competitors. New
York: Free Press
Potential entrants
Suppliers
Industry competitors



Intensity oI rivalry
Substitutes
Buyers
68
Appendix 2 PESTEL

Source: Boddy, D., 2005. Management: An Introduction. London: Prentice Hall. P.88
69
Appendix 3 Fishbone` diagram

Source: Dale, B. G., 2006. Managing Quality. 4
th
ed. OxIord: Blackwell Publishing. P.328

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