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OULU 2006

C 250

ACTA

Päivi Iskanius

U N I V E R S I T AT I S O U L U E N S I S

TECHNICA

C

AN AGILE SUPPLY CHAIN FOR A PROJECT-ORIENTED STEEL PRODUCT NETWORK

FACULTY OF TECHNOLOGY, DEPARTMENT OF INDUSTRIAL ENGINEERING AND MANAGEMENT, UNIVERSITY OF OULU

ACTA UNIVERSITATIS OULUENSIS

C Te c h n i c a 2 5 0

PÄIVI ISKANIUS

AN AGILE SUPPLY CHAIN FOR A PROJECT-ORIENTED STEEL PRODUCT NETWORK

Academic Dissertation to be presented with the assent of the Faculty of Technology, University of Oulu, for public discussion in Raahensali (Auditorium L10), Linnanmaa, on August 18th, 2006, at 12 noon

O U L U N Y L I O P I S TO, O U L U 2 0 0 6

Copyright © 2006 Acta Univ. Oul. C 250, 2006

Supervised by Professor Pekka Kess

Reviewed by Professor Petri Helo Professor Hannu Vanharanta

ISBN 951-42-8147-0 (Paperback) ISBN 951-42-8148-9 (PDF) http://herkules.oulu.fi/isbn9514281489/ ISSN 0355-3213 (Printed ) ISSN 1796-2226 (Online) http://herkules.oulu.fi/issn03553213/

Cover design Raimo Ahonen

OULU UNIVERSITY PRESS OULU 2006

Iskanius, Päivi, An agile supply chain for a project-oriented steel product network

Faculty of Technology, University of Oulu, P.O.Box 4000, FI-90014 University of Oulu, Finland, Department of Industrial Engineering and Management, University of Oulu, P.O.Box 4610, FI90014 University of Oulu, Finland Acta Univ. Oul. C 250, 2006 Oulu, Finland

Abstract

Agility ­ namely, the ability of a supply chain to rapidly respond to changes in market and customer demands ­ is regarded as the bearer of competitive advantage in today's business world. The need for agility has traditionally been associated with supply chains in high technology industry products. However, traditional industries also face similar challenges in terms of speed, flexibility, increased product diversity and customization. This study contributes to the discussion on agility in supply chain management (SCM) and provides a novel focus on the development of an agile supply chain in a traditional industry. The object of this study is the development of an agile supply chain in a steel product network in the Raahe area in Northern Finland. The case network is undergoing a shift towards project-oriented business, where quick responses are the priority and agility is recognised as the facilitating factor. Using a constructive approach, an agile supply chain for a steel product network, SteelNet system, is developed. SteelNet system functions through the Internet and agent software technology. In identifying the new challenges raised by advanced information and communication technologies (ICT) in the development of an agile supply chain, the study presents some valuable ICT options for SCM. Following a review of the current understanding of agility in SCM literature, the study identifies the key elements of agile supply chains and proposes a four-dimensional agile supply chain framework by which to assess levels of agility. Using the framework, the study describes how the key elements appear in the case network. The study assesses the change process, and the necessary improvement steps, towards agility. It is concluded that agile supply chains have a major role also in traditional industry, and comprehensive implementation of ICT throughout the chain is of utmost importance in the development of an agile supply chain. Further insights to the discussion on agility are provided, and these and the conclusions extend a drawbridge to other companies and business networks in traditional industry to consider the clear advantages to developing their own agile supply chains.

Keywords: agent technology, agile supply chain, agility, steel industry, supply chain integration, supply chain management

If we have a tradition it is this: everything can always be done better than it is being done (Ford 1922)

Acknowledgements

This dissertation is mine. I have written it myself, and I did it my way, and it has nothing to do with the Paul Anka version. But this thesis came to an end only with the support and advice of several people from academic and industrial circles. I will name the hundred and one most important ­ in my order. I warmly thank all the interviewees that I met during the years 2002­2005 in the industry sector. From the SME sector, I would like to name and give a big thanks to the following: Pekka Miilukangas (Miilukangas LPP), Pekka Kallio (Rannikon Konetekniikka Ltd), Pentti Aula (Iin Konepaja Ltd), Esko Heikkilä (Raahen Insinöörisuunnittelu Ltd), Timo Rytinki (Miilukangas LPP), Juha Rintala (Telatek Ltd), Teuvo Joensuu (Raahen Tevo Ltd), Pauli Korpi-Tassi (Pohjanmaan PPO Ltd), Kari Latvala (Miilukangas LPP), Kari Fingeroos (Rannikon Konetekniikka Ltd), Pekka Teppo (Telatek Ltd), Tuomas Tenkula (Telatek Ltd), Jukka Joensuu (Raahen Tevo Ltd), Jussi Miilukangas (Miilukangas LPP), Olli Mattila (Rannikon Konetekniikka Ltd/Miilux Ltd), Matti Hippeläinen (Miilukangas LPP), Pertti Oravisjärvi (Rannikon Konetekniikka Ltd), Juhani Paakkinen (Pohjanmaan PPO Ltd), Ilkka Ekoluoma (Miilukangas LPP), Vesa Haapaniemi (Pohjanmaan PPO Ltd), Pekka Kärenaho (Raahen Terästuote Ltd), Seppo Härkönen (Miilukangas LPP), Janne Kallioniemi (Pohjanmaan PPO Ltd), Paula Kerola (Raahen Tevo Ltd), Jari Kinnunen (Miilukangas LPP), Jouko Pyhäluoto (Raahen Tevo Ltd), Toni Grekula (Miilux Ltd), Marjatta Pyhtilä (Raahen Tevo Ltd), Reijo Suutari (ALTE Oy), Viljo Honkala (Vicetec Ltd), Simo Jutila (Keycast Ltd), Matti Yrjänä (Presteel Ltd), Seppo Koivuniemi (Finnblast Ltd), Kyösti Heikkilä (Kojaltek Ltd), Aarno Kylmänen (Pohjolan Automaatio Ltd), Juha Seppälä (Miilukangas LPP), and Veijo Miihkinen (Raahen Tevo Ltd). From Rautaruukki Ltd, I would like to name and thank: Ossi Lakkala, Eino Hartikka, Kalevi Salmela, Veli Saari, Matti Pajukoski, Eero Parviainen, Mauri Nivala, Osmo Marttila, Anitta Korkeamäki, Veikko Hintsanen, Harri Torvela, Antero Tamminen, Kai Tuomaala, Kari Kääriä, Hanna Immonen, Veikko Kyllönen, Esa Pallaspuro, Anna-Liisa Penttilä, Matti Haapakangas, Keijo Niiranen, Juhani Asunmaa, Seppo Kivilompolo, Hannu Turunen, Pekka Oja, and Esko Ahola.

From the software house TietoEnator, I would like to name and give my thanks to Jari Korjus, Eeva Alasaarela, Perttu Vilkuna, and Risto Raunio, and from YIT Industria Ltd my thanks to Olavi Maaninen and Juha Salminen. Warm thanks to the experts in the different organizations: Martti Saarela (Steelpolis), Mari-Selina Kantanen (Steelpolis), Esa Törmälä (Steelpolis), Hannu Vuoste (Finnvera), Juha Elf (TE-centre), Janne Göös (VTT), Taina Nurmos (TEKES), Jouko Paaso (University of Oulu), Pentti Vähä (VTT), Vesa Salminen (Technology Industries of Finland) and Risto Vuorensola (Tuloskunto Ltd). My research group in the Brain Center in Raahe gave me their ICT intelligence to use. These "secret agents" are Heli Helaakoski (VTT), Irina Peltomaa (VTT), Kaija Ojala (University of Oulu/Rautaruukki Ltd), Janne Kipinä (University of Oulu), Minna Latvastenmäki (VTT), Juha Tuikkanen, (VTT), and Alexander Smirnov (VTT). Thanks for your valuable work ­ I know you did the work and I just creamed off the results. For this 3½ year research period which I've spent in the Department of Industrial Engineering and Management in the University of Oulu, I warmly thank all of my colleagues who have made this work a reality. The first kick to my research career was given by Harri Haapasalo. The readers can in fact fully blame him for this thesis. He was my coach, co-researcher, chauffeur, and my comic relief (mostly lewd jokes). I wish you all could experience the memorable opportunity of hearing him mimic a moose. Really, it's worth it. Special thanks to my supervisor Pekka Kess, who realized early on, it was best to let me do this dissertation my way ­ not always the best way, and definitely not the simplest one. He guided me very diplomatically with long reins ­ I suspect he understood my dislike of authority in any form. Most of you will be relieved to hear that this thesis will be my last one, in particular, Petri Helo, (from the University of Vaasa), and Hannu Vanharanta, (from Tampere University of Technology), who gamely agreed to review my thesis. Thank you for your insight and valuable comments which put me on the right track. The main financial supporter of this research project is The Finnish Agency of Technology ­ TEKES. I am grateful for the funding it invested in this study, and my warm greetings to Heikki Kekäläinen (ELO program, Logistra Consulting Ltd) and Heidi Lindroth at TEKES. To finish the work I had the welcome support of the Foundation for Economic Education (Liikesivistysrahasto), and Konkordia-liitto, for which I am very grateful. You may have noticed that the people I have acknowledged are Finnish, and this dissertation is done in a Finnish way ­ that was my standard get-out reply to the questions about my methodology in the 12 international conferences I attended. I trust it will still stand up and get me through my defense. During my research period, I wrote 27 conference papers and 6 technical papers with my research colleges and got 5 journal articles accepted. Many thanks to my co-authors, in addition to those named above: Anna-Maija Alaruikka (University of Oulu/VTT), Marianne Mäntylehto (University of Oulu), Vesa Pikka (University of Oulu), Sari Uusipaavalniemi (University of Oulu), Tom Page (University of Loughborough, UK), and Mauri Lamminsalo (University of Oulu). A big thank to Heli Kilpala (University of Oulu) who, besides being my co-author, also wisely set the limits for this book. You are all witness to the fact that the main part of the thesis is, as promised, no more than 180 pages.

To Pekka Belt (University of Oulu), thank you for your valuable review and constructive comments. Conversations with you have made this thesis more reader-friendly ­ and almost half the length. Thanks to Hilary Keller (University of Oulu) for her language assistance and to Helena Saari and Ville Varjonen (University of Oulu) for the design and layout of this thesis. I have had nothing but expert assistance from the university library ­ there was a terrifying time when my library at home seemed to be as large as the university's. My thanks to all the staff, especially the staff in Tellus, for an excellent service. Also, I warmly thank our janitors, Lauri and Sauli in Tietotalo 1, for their cheerful "good morning!" when passing by. And then to Matti, every project has its start and its end. This project, for our part, ended on June 15, 2006. And as a prize for this work, I promised us the whole summer in Saimaa. I like to share our summer feelings with all readers of this best seller by citing Eliphalet Oram Lyte (1842­1913): "Row, row, row your boat, Gently down the stream. Merrily, merrily, merrily, merrily, Life is but a dream".

Oulu, 18th August 2006

Päivi Iskanius1

1.

Sometimes female researchers change their surnames - for non-scientific reasons. In this dissertation, Uutela is the same person as Iskanius.

List of abbreviations and definitions

Abreviations: ABC ABM ACL AP ATO B2B BPR BTO CAD CAM CTO COO DP DRP EAI ECR EDI I-EDI EE ERP FIPA GUI ICT IEM IOS ISO ITO JADE JIT LIS Activity-based costing Activity Based Management Agent Communication Language Agent Platform Assemble-to-order production mode Business-to-Business Business Process Re-engineering Buy-to-order production mode Computer-aided design Computer-aided manufacturing Customize-to-orderproduction mode Confirmation of Order Decoupling point Distribution Resource Planning Enterprise Application Integration Efficient Consumer Response Electronic Data Interchange Internet-based EDI Extended enterprise Enterprise Resource Planning Foundation for Intelligent Physical Agents Graphical user interface Information and communication technology Industrial engineering and management Inter-organizational system International Organization for Standardization Innovative-to-order production mode Java Agent Development Framework Just-in-Time Logistics information system

MRP MRPII MTO MTS OPP OSI PIM PTO QR RFQ SCM SCOR SME STO TCP/IP TQC TQM TBM VE VMI VOP Definitions:

Material Requirements Planning system Manufacturing Resource Planning system Make-to-order production mode Make-to-stock production mode Order penetration point Open System Interconnection Product Information Management Pack-to-order production mode Quick response Request for quotation Supply Chain Management Supply-Chain Operations Reference-model Small and medium size company Ship-to-order production mode Transmission Control Protocol/Internet Protocol Total Quality Control Total Quality Management Time-Based Management Virtual enterprise Vendor Management Inventory Value offering point

Agility is the ability of an enterprise to quickly respond to changes in an uncertain and changing environment Supply chain is a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer Supply Chain Management (SCM) is the integration of key business processes from end user through original suppliers that providers products, services, and information that add value for customers and other stakeholders E-business is the planning and execution of the front-end and back-end operations in a supply chain using the Internet Virtual enterprise is a temporary, cooperative alliance of independent member companies and indeed individuals, who come together to exploit a particular market opportunity

List of figures

Fig. 1. Fig. 2. Fig. 3. The business environment of the 21st century. . . . . . . . . . . . . . . . . . . . . . . . . 22 Shifting competitive paradigms (modified form Greis & Kasarda 1997) . . . . 23 From mass production towards customer-oriented business ­ from reliable steel production to the most preferred solution supplier . . . . . . (Rautaruukki 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The strategic movement of the Group (Tamminen 2006) . . . . . . . . . . . . . . . . 28 A typical supply chain of the steel project business (Elf 2004). . . . . . . . . . . . 29 Supply chain of the case business network in offshore business. . . . . . . . . . . 30 The supply network of a case focal company (modified from Lehtinen 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Structure of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Induction and deduction (Ghauri & Grønhaug 2002) . . . . . . . . . . . . . . . . . . . 43 The subjective-objective dimension (Burrell & Morgan 1979). . . . . . . . . . . . 44 Research approaches in the categories of business research (Neilimo & Näsi 1980, Näsi & Saarikorpi 1983, Kasanen et al. 1991). . . . . . 48 The elements of the constructive approach (Kasanen et al. 1993) . . . . . . . . . 51 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 The location of the research interest (modified from Szirbik & Jagdev 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Research steps of the supply chain modeling. . . . . . . . . . . . . . . . . . . . . . . . . . 60 The reference product ­ corner pipe of the hull. . . . . . . . . . . . . . . . . . . . . . . . 61 The supply network of the project product case. . . . . . . . . . . . . . . . . . . . . . . . 62 The supply network of the mass product case. . . . . . . . . . . . . . . . . . . . . . . . . 64 Management concepts behind SCM (modified from Soronen 1999). . . . . . . . 75 Strategic advantage positioning of companies (Christopher 1998). . . . . . . . . 79 Supply chain is a network. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SCOR ­ Supply chain model (Supply Chain Council 2005). . . . . . . . . . . . . . 83 Conceptual framework of agile supply chain (Lin et al. 2004). . . . . . . . . . . 102 Framework of an agile supply chain (modified from Christopher 2000 and van Hoek 2001). . . . . . . . . . . . . . . . . 104 OPP versus VOP (Christopher 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Fig. 4. Fig. 5. Fig. 6. Fig. 7. Fig. 8. Fig. 9. Fig. 10. Fig. 11. Fig. 12. Fig. 13. Fig. 14. Fig. 15. Fig. 16. Fig. 17. Fig. 18. Fig. 19. Fig. 20. Fig. 21. Fig. 22. Fig. 23. Fig. 24. Fig. 25.

Fig. 26. Fig. 27. Fig. 28. Fig. 29. Fig. 30. Fig. 31. Fig. 32. Fig. 33. Fig. 34. Fig. 35. Fig. 36. Fig. 37. Fig. 38. Fig. 39. Fig. 40. Fig. 41. Fig. 42. Fig. 43. Fig. 44.

Need for agility related on the different manufacturing modes (Wadhwa & Rao 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 OSI reference model (Machine Bus Corp. 2006) . . . . . . . . . . . . . . . . . . . . . 126 Traditional supply chain versus the digital supply chain (Greis & Kasarda 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 One step more advanced way by Internet and agile software technology. . . 130 The process of creating a VE (modified from Ollus et al. 1998). . . . . . . . . . 133 Theoretical compilation for the development of an agile supply chain. . . . . 138 Metal product industry and the relationship to other clusters (Elf 2004). . . . 139 The Finnish metal cluster in the global markets (TEKES 2002). . . . . . . . . . 140 Targets for the Finnish metal industry (modified from Jokinen & Kangasniemi 2006). . . . . . . . . . . . . . . . . . . . . . . 141 SWOT analysis of the Finnish steel product industry (Elf 2004, 2005, Vuoste 2004, 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Different process integration techniques (based on Salmi 2002). . . . . . . . . . 156 Operations in the SteelNet system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 The structure of the SteelNet system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 Tendering and order processing process (Helaakoski et al. 2006). . . . . . . . . 170 Order information in the SteelNet system.. . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Real-time manufacturing control (Helaakoski et al. 2006).. . . . . . . . . . . . . . 173 The status of manufacturing in the SteelNet system.. . . . . . . . . . . . . . . . . . . 174 Change process towards a full network with full system efficiency (based on Poirier& Bauer 2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Summary diagram of the functionality of the SteelNet system . . . . . . . . . . . 193

List of tables

Table 1. Key figures of Rautaruukki Ltd (Source: Annual reports of Rautaruukki 2000­2005).. . . . . . . . . . . . . . . . . . 26 Table 2. The basic information of the companies in Steelpolis (data from years 2003­2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Table 3. Key publications during the research process.. . . . . . . . . . . . . . . . . . . . . . . . 36 Table 4. The main methodological choices in this study. . . . . . . . . . . . . . . . . . . . . . . 52 Table 5. The steering group meetings ­ test the issues related to the study. . . . . . . . . 72 Table 6. Benefits of information sharing (Simatupang & Sridharan 2002). . . . . . . . . 92 Table 7. Definitions of agility in the literature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Table 8. Attributes of agility in literature (Sun et al. 2005). . . . . . . . . . . . . . . . . . . . 101 Table 9. Comparison between MTS/JIT and ETO manufacturers (Jones 2004). . . . 108 Table 10. Requirements for successful relationships of an agile supply chain.. . . . . . 113 Table 11. Benefits of e-business on supply chain integration (Lee & Whang 2001). . 122 Table 12. Firm-centric, industry-centric and cross-industry SCM (Grieger 2004a).. . 123 Table 13. Traditional supply chain versus digital supply chain (Bovet & Martha 2000).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Table 14. Development framework towards e-business (Poirier & Bauer 2000). . . . . 136 Table 15. Drivers towards agility in the case network (based on Goldman et al. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Table 16. Critical issues of the information flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Table 17. Agility attributes in the Steelpolis companies compared with the research done by Sun et al. (2005). . . . . . . . . . . . . . . . . . . . . . . . . 163 Table 18. The change process towards agility (based on Poirier & Bauer 2000). . . . . 175 Table 19. Summary of dimensions of research quality in the study. . . . . . . . . . . . . . . 192 Table 20. Relevance, novelty and practical utility of the SteelNet system.. . . . . . . . . 193

Contents

Abstract Acknowledgements List of figures List of tables Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Changes in the business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Case steel product network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Research problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Scope of the research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Research methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Industrial engineering and management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Scientific paradigms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Research strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Qualitative research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Case study research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Research approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Research approach for this study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1 Find a relevant practical problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.2 General comprehensive understanding of the topic . . . . . . . . . . . . . . . . 2.5.2.1 The current status of the business environment . . . . . . . . . . . . . 2.5.3 Construction and development of the solution idea . . . . . . . . . . . . . . . . 2.5.3.1 Modeling the case supply chains . . . . . . . . . . . . . . . . . . . . . . . . 2.5.3.2 ICT application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.3.3 Agile supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.3.4 Change process towards agility . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.4 Demonstration that the solution works . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.4.1 Testing the construct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.4.2 Evaluation of the research process . . . . . . . . . . . . . . . . . . . . . . .

21 21 25 32 37 38 40 40 43 45 45 46 47 49 52 54 56 57 58 59 65 67 69 69 69 71

2.5.5 Theoretical connections and research contributions . . . . . . . . . . . . . . . . 72 2.5.6 Examine the scope of applicability of the solution . . . . . . . . . . . . . . . . . 73 3 Agility in supply chain management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.1 Supply chain management (SCM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.1.1 SCM as a management concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.1.2 Competitive advantage through SCM . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 3.1.3 Supply chain performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.1.4 Supply chain integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 3.1.4.1 Information flow requirements . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.1.4.2 Benefits of information sharing . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.2 Agility as a competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.2.1 Agility paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.2.2 Attributes of agility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.3 Developing an agile supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.3.1 Conceptual framework of an agile supply chain . . . . . . . . . . . . . . . . . . 101 3.3.2 Key elements of an agile supply chain . . . . . . . . . . . . . . . . . . . . . . . . . 103 3.3.2.1 Agility related to the different manufacturing modes . . . . . . . 106 3.3.2.2 Relationships in an agile supply chain . . . . . . . . . . . . . . . . . . . 110 3.4 Information and communication technologies (ICT) for SCM . . . . . . . . . . . 113 3.4.1 Current information technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 3.4.1.1 Network technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 3.4.1.2 Agent software technologies . . . . . . . . . . . . . . . . . . . . . . . . . . 117 3.4.2 Impact of ICT on supply chain integration . . . . . . . . . . . . . . . . . . . . . . 121 3.4.2.1 Information system integration . . . . . . . . . . . . . . . . . . . . . . . . 125 3.5 Internet and agent-based agile supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . 127 3.5.1 Evolution of a digital supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 3.5.2 Principles adopted from a virtual enterprise . . . . . . . . . . . . . . . . . . . . . 130 3.5.3 Development roadmap towards agile supply chain . . . . . . . . . . . . . . . . 134 3.6 Theoretical summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 4 Current status of the business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 4.1 Trends of the Finnish steel product industry . . . . . . . . . . . . . . . . . . . . . . . . . 139 4.2 Special features of the Steelpolis companies . . . . . . . . . . . . . . . . . . . . . . . . . 145 4.3 Drivers towards agility in the case network . . . . . . . . . . . . . . . . . . . . . . . . . . 146 4.4 Key elements of agility in the case network . . . . . . . . . . . . . . . . . . . . . . . . . 149 4.4.1 Virtuality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 4.4.2 Market sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 4.4.3 Process integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 4.4.4 Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 4.5 Current status analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 5 Agile supply chain in the case steel product network . . . . . . . . . . . . . . . . . . . . . . . 161 5.1 Determining agility in the steel product industry . . . . . . . . . . . . . . . . . . . . . . 161 5.2 Agile supply chain ­ SteelNet system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 5.2.1 Ideal business process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 5.2.2 Principles of the SteelNet system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 5.2.3 Practices in tendering and order processing . . . . . . . . . . . . . . . . . . . . . 170 5.2.4 Practices in real-time manufacturing control . . . . . . . . . . . . . . . . . . . . 172

5.3 Change process towards agility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Analysis of the SteelNet system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusions and implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Theoretical contribution and managerial implications . . . . . . . . . . . . . . . . . . 6.2.1 Theoretical contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 Managerial implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Evaluation of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Future research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References Appendices

174 178 180 180 184 184 186 187 193

1 Introduction

This introductory chapter begins by shedding light on current trends in a business environment that lead companies to work together to achieve a higher level of agility in their supply chains. An agile supply chain is regarded as a dominant competitive advantage in the business of today. Chapter 1 proposes that, in order to achieve an agile supply chain, advanced ICT technologies are needed. Although the need for agility has traditionally been associated with a competitive advantage in the supply chains of high-clockspeed industries, Chapter 1 provides data enabling us to examine agility also in the supply chains of more slow-moving industries. After the background of the study is set out, the case steel product network is introduced. Data for the study was gathered both from the case network, and from a wider community known as Steelpolis companies. Thereafter, the research problem is stated and the research questions are formulated, followed by a discussion of the scope of the study. The chapter concludes with an overview of the structure of this thesis.

1.1 Changes in the business environment

At the beginning of the 21st century, companies have witnessed a period of changes unparalleled in the history of the business world in terms of technological innovations, globalization of markets, and more aggressive customer demand. Based on previous studies, Lin et al. (2006) have summarized and categorized the general areas of change in business-to-business2 (B2B) environment as follows: 1) market volatility caused by growth of the niche market, increasing new product introduction and product lifetime shrinkage; 2) intense competition caused by a rapidly changing market, increasing costs, international competitiveness and the short development of new products; 3) changing customer requirements caused by demand for customization, increased quality expecta2. This research is conducted in the business-to-business (B2B) environment that is defined as a transaction that occurs between a company and another company, as opposed to a transaction involving a consumer. The term may also describe a company that provides goods or services for another company. (Online Encyclopedia 2006.)

22 tions and quicker delivery times; 4) accelerating technological change caused by the introduction of new and efficient production facilities, and system integration (hardware and software); and 5) change in social factors caused by environmental protection, workforce/workplace expectations and legal pressures. Consequently, companies face a situation where they cannot really know what tomorrow will bring ­ tomorrow's requirements and challenges are unknown and will only become known tomorrow. Companies can no longer reliably predict the future and plan for it (Kidd 2001). The changes that affect the 21st century manufacturing companies are summarized in Fig. 1.

Accelerating technological change Changing customer's requirements Market volatility

Increasing cost pressure and Increasing new Introduction of quality product new and efficient Short introduction production Product lifetime development facilities of new shrinkage

Customer A Customer B

Factory Quicker delivery time Competitor A

System integration

Supplier B

Supplier A

Growth of niche markets

Environmetal protection and legal pressures

Workforce/ workplace Competitor B expectations International Change in competitiveness social factors

Rapidly changing markets Demand for customization Intense competition

Fig. 1. The business environment of the 21st century.

Change in business is nothing new. Throughout history, companies have always had to deal with continuous changes in their business environment in order to remain competitive (e.g. Thompson 1967, Drucker 1968). Significantly, change is occurring faster and more unexpectedly than ever before (e.g. Gattorna & Walters 1996, Zhang & Sharifi 2000). Surviving and prospering in these turbulent situations is possible if companies have the essential capabilities to recognize and understand their changing environments and respond in a proper way to every unexpected change. The ability to respond appropriately to changes is only achieved by changing the way companies look at their business and at their relationships with customers, suppliers, and competitors. (Goldman et al. 1995, Preiss 1997.) In the last decades, the business economy has shifted from the economics of scale towards the economics of scope. Earlier, the paradigms where business was managed were scale, cost (productivity), quality and time (delivery speed and reliability), whereas today, as the rate of product change and product introduction increases, flexibility and rapid innovation are more critical capabilities than ever before (Best 1990, Håkansson & Persson 2004, Monden 1989, Pine 1993, Ross 1998, Suri 1998, Voss 1995, Womack et al. 1996). In many industries competitive advantage today is increasingly depending upon a company's ability to rapidly respond to frequent and unpredictable changes whilst pro-

23 ducing customized products for customers' specific requirements (Goldman et al. 1995). Success today is based on creating and exploiting knowledge and innovation faster than competitors, and the economic value has shifted towards intangibles and, in particular, towards increasing value by incorporating knowledge into services and products (Auckland 2000). The emerging business paradigm agility3 addresses new ways of running companies to meet these challenges, and deploys a market driven innovative capability, which will be the main source of competitive advantage in the future (e.g. Goldman et al. 1995, Gunasekaran & Ngai 2005, Kidd 1994, Lin et al. 2006) (Fig. 2). According to Goranson (1999), agility is something separate from being better, faster, cheaper, or merely being profitable today; rather, it is the ability to be profitable tomorrow, by being better, faster, and cheaper in different ways. It relates to companies of all sizes and across all industry sectors (Goldman et al. 1995).

1970s Scale, Cost

1980s Quality

1990s Time

2000s Agility

Productivity Reliability

Delivery speed

Flexibility

Innovativeness

Fig. 2. Shifting competitive paradigms (modified form Greis & Kasarda 1997).

Based on a survey of past decade management literature, van Hoek et al. (2001) identify the two most significant lessons for achieving competitive advantage in the modern business environment. One lesson is that companies have to be aligned with suppliers, the suppliers' of the suppliers, customers and the customers' customers, even with the competitors, so as to streamline operations (c.f. Simchi-Levi et al. 2003). As a result, individual companies no longer compete solely as autonomous entities; rather, the competition is between rival supply chains, or more like closely coordinated, cooperative business networks (Christopher 1998, Lambert et al. 1998a). Another lesson is that within the supply chain, companies should work together to achieve a level of agility beyond the reach of individual companies (van Hoek et al. 2001). All companies; suppliers, manufacturers, distributors, and even customers, may have to be involved in the process of achieving an agile supply chain (Christopher 2000, Christopher & Towill 2001). An agile supply chain is seen as a dominant competitive advantage in today's business; however, the ability to build an agile supply chain has developed more slowly than anticipated (Lin et al. 2006). Developing agile supply chains does not mean small-scale continuous improvements, but radical changes ­ an entirely different way of doing business. Such changes are not easy to manage, as the challenges are huge. According to Prater et al. (2001), pursuing agility may necessitate increasing the complexity of management and

3. In this thesis, agility is defined as the ability of an enterprise to quickly respond to changes in an uncertain and changing environment (Goldman et al. 1995).

24 may also incur coordination costs. There are no guidelines on how much the uncertainty can be reduced or how much the complexity should be reduced. Companies have to make a compromise between vulnerability (increased by uncertainty and complexity) and supply chain agility (flexibility and speed in sourcing, manufacturing and delivery). This means that instead of aiming at full compliance with an initial definition of agility, companies should concentrate rather on some selected key aspects of an agile supply chain. (Prater et al. 2001.) Operations in supply chains are based on the interaction and transmission of information, therefore, information and communication technology (ICT) has an important role in business evolution. ICT has also a fundamental role in developing agility, as the notions of speed and flexibility would be inconceivable without it (Breu et al. 2001, Coronado 2003). The Internet and web technologies, called usually e-business4 technlogies, offer companies new possibilities for collaboration, access and sharing of information. The ebusiness approach allows companies to create new opportunities to rethink their business processes, business models, and relationships along a supply chain so that the roles and responsibilities of supply chain members may change, thus improving the overall supply chain efficiency (Brynjolfsson & Urban 2002, Closs & Kefeng 2000, Kalakota & Robinson 1999, Lee & Whang 2001). However, commonly, these innovative aspects of the new economy have not been fully exploited or have only been slowly understood by companies (Kidd 2001). As e-business technologies support agility in supply chains, the e-business approach highlights the need for agility. E-business is at a very early stage of development, and the rules are evolving. But the pace of change is quick and unrelenting. Knowing how to respond to the growth of the e-business and to unexpected and unpredictable change it adds in the business environment is a real difficulty. E-business is a structural change and this is the primary concern of agility ­ development of business practices that are designed to be able to cope with structural changes. (Kidd 2001.) The need for agility for competitiveness has traditionally been associated with the supply chains that provide and manufacture innovative products, such as high-technology industry products characterized by shortened life-cycles, a high degree of market volatility, uncertainty in demand, and unreliability in supply. Similarly, traditional, more slowmoving industries face such challenges in terms of requirements for speed, flexibility, increased product diversity and customization. The need for agility is becoming more prevalent. These demands come, typically, from further down the supply chain in the finishing sector, or from end customers (Oleson 1998). Some traditional companies have already elements of agility because the realities of a competitive environment dictate these changes (e.g. in sectors such as automobiles, food, textiles, chemicals, precision engineering and general engineering) (Christian et al. 2001, Oleson 1998). According to Christian et al. (2001), this is, however, usually outside any strategic vision and is approached in an ad-hoc fashion. The lack of a systematic approach to agility does not allow companies to develop the necessary proficiency in change, a prerequisite for agility.

4.

In this thesis, e-business is defined in the SCM context as the planning and execution of the front-end and back-end operations in a supply chain using the Internet (Lee & Whang 2001)

25 This study is done in the Finnish steel product industry, where the need for agility is increasing. Traditionally locally-operated companies find themselves in the global business, characterized by increasing uncertainty and competitiveness. The companies in the steel product industry are not sufficiently cost-effective for the international competition and they are losing business to more agile competitors. A manufacturer, with suppliers with a poor agile supply chain level (meaning poor collaboration and visibility in supply chains), will find it very difficult to provide high levels of products to customers even in stable environments. Place these companies in a more uncertain changing environment as is today's global business, and it will be eliminated from participation in the competitive game altogether. As the steel product industry is moving from traditional manufacturing to project-oriented business, where quick response is a key issue, agile practices are more necessary (Iskanius et al. 2004b). The concept of mass production can no longer respond to the challenges of a dynamic and complex worldwide business. Production is changing from the era of mass production to the era of mass customization, thus forcing companies to use new technologies and new manufacturing concepts, and combine them in different activities to avoid the risk of becoming less competitive or obsolete. As industry moves towards mass customization, agility will become even more necessary (Oleson 1998). The financial measures are also different today. The ``tonnage mentality'', which has long existed within the steel product industry, encouraged managers to focus on sales volume. Today the focus is on value-added (Iskanius & Haapasalo 2003a). In section 1.2, the case steel product network and the Steelpolis5 companies are introduced. How the business environment of the Finnish steel product industry is changing, and how the pressure towards agility in the case network is increasing, are presented in more detail in chapter 4.

1.2 Case steel product network

Finnish steel production and a significant amount of heavy metal reprocessing have concentrated in Northern Finland, in Northern Ostrobothnia and on the coast of the Gulf of Bothnia in Lapland. About 70% of the current Finnish steel production comes from this area. One main steel production center is situated in Tornio, where Outokumpu Ltd focuses on stainless steel production, and another is in Raahe where Rautaruukki Ltd focuses on carbon steel production and related pre-processing and services. Outokumpu Ltd and Rautaruukki Ltd are the two largest steel producers in Finland. In these areas, there is also a significant amount of subcontracting, industrial maintenance, and manufacturing of different metal products. The case network brings together a group of companies in the steel product industry in the Raahe area. Engineering workshops, industrial service providers and a global steel manufacturer ­ as the focal company ­ form the network. The steel manufacturer is a part of the Finnish Rautaruukki Group, the largest Scandinavian steel company with net sales

5. Steelpolis is a Centre of Expertise in heavy engineering and metal industries, and metal technology, with a special emphasis on steel structures and joint technologies.

26 of 3, 654 million in 2005, and a personnel of 11,684 in 2005. The Group has operations in 23 different countries, and it is listed on the Helsinki Stock Exchange. In Table 1, the key figures of the Group are presented for the period 2000­2005. The net sales have increased yearly, but in the last two years the leap is mainly a result of the international rise in the price of steel. The profit increase in the last two years has caused a price increase along with operational restructuring in the Group, i.e. reduction of personnel costs. The positive financial results have also had a positive effect on the price of share. The amount of value added has also noticeably risen, and the percentage of purchases and suppliers is steadily on the rise. The volume of steel production has decreased in the last year mainly due to the aforementioned organizational restructuring in the Group. Table 1. Key figures of Rautaruukki Ltd (Source: Annual reports of Rautaruukki 2000­ 2005).

Key figures of Rautaruukki Ltd Net sales, M Operating Profit, M Operating Profit, % of Net sales Return to capital employment % Equity ratio % Average price of share Personnel on average Steel production Mtn Creating Value added + Customers /Net Sales M ­ Suppliers/Purchases and other costs Value added 2000 2 708 156 5,8 8,7 34,1 4,83 13 176 4,3 2 708 1 885 823 2001 2 906 93 3,2 5,0 33,3 4,16 13 678 4,2 2 906 2 090 816 2002 2 884 6 0,2 0,6 31,1 4,26 13 325 4,3 2 884 2 108 776 2003 2 953 128 4,3 7,1 34,6 4,66 12 782 4,6 2 953 2 067 886 2004 3 564 493 13,8 26,0 41,7 7,16 12 273 4,5 3 564 2 344 1 225 2005 3 654 618 16,9 32,8 56,0 12,90 11 684 3,8 3 654

The Group has a wide range of standard and prefabricated products (about 2000 different steel grades) and related services for metal, such as hot-rolled, cold-rolled and coated plates and sheets made of low alloy steels, cut steel products, steel tubes, pipes and long steel products. The Group supplies metal-based components, systems, and integrated systems to the construction and mechanical engineering industries, which are seen as business segments with good growth potential. In 2005, a total of 68% of the Group turnover came from traditional steel production, and 28% from metal solutions (Rautaruukki 2005). The key customers of the Group concentrate on their own core businesses and look for highly competent, reliable partners who are strong component and system suppliers. The Group has implemented a new customer-oriented business strategy changing from mass production to a metal solutions business (Fig. 3).

27

Construction Construction Engineering Solutions Solutions Solutions Metal product Metal products Metal products Engineering

2004

2008­2010

Fig. 3. From mass production towards customer-oriented business ­ from reliable steel production to the most preferred solution supplier (Rautaruukki 2005).

According to Tamminen (2006), CEO of the Group, the solutions business has great potential and the new orientation has opened new opportunities. He sets out the strategic targets of the Group as follows: "A strengthened financial position makes us well placed to continue the development of our business model. Within the solutions business, we are focusing on the construction sector, where we will be a leading metal-based solution provider in the Nordic and Central European countries; and in the mechanical engineering industry, where we will be a leading solutions provider in Northern Europe. We are also strengthening the company's position as the leading and most efficient supplier of metal products in the Nordic and Baltic countries". At the starting point in 2004, the Group was very traditionally oriented and there was a clear need for change. The new aim is to build on the customers' needs. The Group has set the target of generating half of its revenue and earnings in 2007 via its solutions division (Ruukki Construction and Ruukki Engineering), and half via its steel production division (Ruukki Metals). Ruukki Construction contributes know-how particularly within construction project management, construction design and the fabrication of steel structures. Ruukki Engineering specializes in the manufacture of components and systems for lifting, handling and transporting equipment. Solutions division looks after the delivery of parts, components and systems to selected customer segments. The organic growth and the development of the solutions business is supported through acquisitions and increasing subcontracting. The Group's structural transformation is supported by divesting noncore units. (Rautaruukki 2005.) The Group is seeking new growth and improved profitability via their solutions business targeted at selected customer segments. The integrated solutions will be tailored to customers' needs in the form of various modules. The modules can consist of either the company's own products or those obtained through its supplier network, as well as components, systems and services. Apart from steel products, the modules can also comprise other materials, e.g. stainless steel, aluminium and other metals. In this way, customers

28 can be offered more extensive total solutions than heretofore. In Fig. 4 the strategic movement of the Group is presented.

FROM: Opportunities for big global players Trends in supply: Consolidation Globalization Up-streaming Service for volume markets - Investment intensive volume production - Maximising sales tonnes - Product oriented development and marketing - Diversified, independent profit centers - Multiple product and company names - Limited growth possibility in consolidating steel business TO: New business niches emerge Trends in customer demand: Down-streaming Outsourcing Product specialization New application segments - Margin driven and knowledge intensive - Solutions for construction and engineering - Focused market segments - Customer business process oriented development - Integrated, one unified company

Fig. 4. The strategic movement of the Group (Tamminen 2006).

The Group can take a wider role within the customers' value chain by turning its emphasis on specialized products, expanding the scope of service and launching new concepts. The new business model offers profitable longterm growth and reduces exposure to cyclical changes. The new business model is expected to create the following benefits (Rautaruukki 2005): ­ smoother and deeper cooperation with customers (customer benefits from integrating capabilities within the Group, the focus is on selected customer segments, delivery of a wider range of products and services and future solutions, boosting delivery of metal products to customers); ­ emphasis on business growth (increasing the share of solutions in sales, taking advantage of new materials in solutions); ­ improved profitability through the new structure (lowering the level of fixed costs, improving production cost efficiency, capacity management and flexibility); ­ new business models and structures provide the conditions for implementing the vision. Compared with the competitors in Western and Central Europe, the Group is a medium size player. The advantage of this is that the Group is flexible and fast and can produce even small batches of special products with short delivery times. Flexibility is based on small production units and highly advanced production automation. The Group paid greater attention to flexibility at the start of the 1980s, when customers began to demand

29 shorter delivery times. Special products are also more attractive because they show better margins, since there are fewer suppliers, and prices fluctuate less than those of mass-produced products. The demand is closely tied to the sales of the end product, and developments in the business cycles or changes in stock levels do not affect them so much. (Rautaruukki Investor Magazine 2002.) A typical supply chain of the steel project-oriented business is illustrated in Fig. 5. This kind of supply chain links several companies that together orchestrate delivery to the end customer.

Customer-oriented project management and SCM

Bending Welding Preprocessing Machining Finishing

Raw material

Equipments

Assembly

Subcontracting of semi-finished products and components

Testing and packaging

C u s t o m e r s

Fig. 5. A typical supply chain of the steel project business (Elf 2004).

The supplier network of the Group consists of 20 suppliers (in 2004); most of them are small and mediun size companies (SMEs)6. The manufacturing subcontractors in the supply network have their own core competence areas, e.g. flame cutting, welding, machining, bending, forming, and shape cutting. The supplier network includes also one engineering company, two testing companies and one logistics provider. Most of the suppliers are located within a 100 km radius of the Raahe steelworks, but there are also regular subcontractors in Sweden and in Denmark. The companies together are manufacturing high quality steel products in a distributed supply network. The Group has divided its suppliers into eight groups based on product segments (Lakkala 2003): 1. 2. 3. 4. 5. 6. 7. 8.

6.

Shape cutting and edge preparation; Bending and forming; Welding and machining; Quenched and tempered plate components; Design and engineering; Quality assurance services; Components for wind mill applications; Plate components for offshore applications.

Small and medium-sized enterprise (SME) is defined as non-subsidiary, independent firms that employ less than 250 workers, and have an annual turnover of 40 million or less and/or a balance-sheet valuation not exceeding 27 million (in the European Union).

30 The plate components for offshore applications is the product segment area to be researched in this thesis. The main markets for these components are the gas and oil industries. The total demand from this business line in Europe will be about 40 000­ 60 000 tons per year in the future, of which the volume share for the Raahe area is expected to be about 16 000 tons. In 2003, the volume was about 3000 tons. (Lakkala 2003.) To achieve that kind of volume growth and customer orientation, the case network needs to develop its processes more effectively, also by organizational cooperation and operational collaboration. This kind of volume increase requires efficiency improvements from each company in the business network. Each company in the supply chain has to manage its own optimization situation, i.e. reduce delivery time, lower production and logistics costs, and maintain a constant level of quality in the supply chain. The offshore supply chain of the case business network is presented in Fig. 6. In this supply chain, the Group normally prodives raw material for projects and it purchases also components, semi-finished products, and other equipments. The Group provides preprocessing work, such as plate cutting, beveling, and sandblasting. Manufacturing suppliers provide machining, bending and welding services, and also sub-assembling sevices. Testing companies provide testing services. Typically logistic providers manage transportation and packaging operations.

Material suppliers Case focal company Equipments Components Steel raw material

Preprocessing: cutting, beveling, sandblasting

Transaction

Shape cutting and preparation

Bending and forming Assembly Welding and machining Testing Quenching and heat treatment Packaging and shipping

C u s t o m e r s

Quality assurance services Suppliers

material flow information flow

Fig. 6. Supply chain of the case business network in offshore business.

31 Some of the information for this study is gathered in the wider business community called Steelpolis. In Raahe, the development organization Steelpolis was born in 1999 in order to secure the competitiveness and growth of the metal industries in Northern Finland. Steelpolis as an umbrella organization brings up together a group of 32 companies (in 2004) in Raahe and its surroundings (Table 2). The total number of employees in Steelpolis is ca 1800 and the turnover of 140 million . (Saarela 2005.) The numbers are counted without Rautaruukki Ltd, having ca 3200 employees in Raahe. Table 2. The basic information of the companies in Steelpolis (data from years 2003­ 2004).

Company name Alte Oy / Raahe unit Betamet Oy Finnblast Oy FSP Finnish Steel Painting Oy Hesec Ky Iin Konepaja Oy Inspecta Testing Oy JOT Rent Oy Keycast Oy Kojaltek Oy / Raahe unit Miilukangas Ky Miilux Oy Olkijoen Metalli Oy PikoTeknik Oy PK-Tekniikka Oy PLP- Metalli Oy Pohjolan Automaatio Pointo Raahe Oy Presteel Oy Pyhäjoen Teräsrakenne Oy Pyramet Oy Raahen Insinöörisuunnittelu Oy Raahen Konepajatyö Oy Raahen Terästuote Oy Raahen Tevo Oy Rannikon Konetekniikka Oy R-Taso Oy Telatek Oy Vilain Oy Visetec Oy YIT Industria Oy / Raahe unit Total (average) Year of foundation 1969 1991 1986 1964 1990 1980 2001 1991 1920 1987 1967 1999 1987 1989 1993 1997 2000 1953 1997 1974 1992 1981 1984 1970 1974 1988 1985 1976 1980 1989 2002 Number of persons 160 100 15 250 1­3 20 12 26­130 70 13 150 9 3 40 10 6­12 6­12 250 50 1 3 17 22 20 60 160 9 120 10­60 30 20­50 1800 Turnover /M 8,2 10 1 19,5 0,1 2,8 0,72 0,8­1,7 8 3,4 11 1,4 0,8 6 0,63 0,8 0,9 20 8 0,2 0,3 0,84 1,49 1,2 5 11 1,7 7,6 1,3­2,7 2 4,2 140

32

1.3 Research problem

The innovative business concept, Supply Chain Management7 (SCM), has received considerable attention from both researchers and practitioners in the last decade (e.g. Christopher 1998, Gattorna & Walters 1996, Handfield & Nichols 2002, Harrison & van Hoek 2005, Mentzer 2001, Schary & Skjøtt-Larsen 2001, Simchi-Levi et al. 2003). Companies today increasingly recognize that improved management of supply chains can be a source of competitive edge. However, according to Simchi-Levi (2005), recent SCM studies suggest that only 7% of companies today are effectively managing their supply chain, but these companies are 73% more profitable than other manufacturers. In addition to this, although the importance of SCM is broadly acknowledged, few senior executives are sure about how and where to direct their supply chain investments to maximize business results. This is clearly a critical malfunction. Simchi-Levi (2005) continues that the recent SCM studies found that only 10% of companies have mature planning systems and business processes, even though these companies enjoy 75% higher profits than other manufacturers. These companies benefit from high supply chain performance of lower inventory levels, a reduction in cash-to-cash cycle time and in obsolescence costs and a higherfill rate. According to Kidd (2006), these kinds of statistics are almost impossible to acquire in relation to agility. The reason, according to him, is that SCM is a fairly well defined topic, but agility is not so well defined. Agility can be something that companies achieve without realising it, or it can relate to issues that are difficult to quantify. The nature of the competencies implied by agility is such that they would be better considered as intangibles, similar to intellectual property, company specific knowledge, skills, expertise, etc. He suggests that, rather than trying to find statistics, it would be better to treat them as intangibles, and intangibles can be translated into numbers. In summary, SCM and agility combined are significant sources of competitiveness in the business world. Thus, it is no surprise that they are favoured research areas in the academic research world. In this context, ICT is regarded as a significant enabling and supporting tool. There is a considerable amount of literature dealing with the concept of agility and suggested methodologies for achieving agile supply chains (e.g. Backhouse & Burns 1999, Christopher 2000, Christopher & Towill 2001, Goldman et al. 1995, Goranson 1999, Gunasekaran 1999, Harrison et al. 1999, Kidd 1994, Lin et al. 2006, Mason-Jones et al. 2000a, Montgomery & Levine 1996, Naylor et al. 1999, Oleson 1998, Power & Sohal 2001, Prater et al. 2001, Sharifi & Zhang 2001, Swafford et al. 2006, Towill & McCullen 1999, van Hoek et al. 2001, Yang & Li 2002, Yusuf et al. 2003). Furthermore, an increasing amount of research has been published about the supporting role of ICT in the development of an agile supply chain (e.g. Andrews & Hahn 1998, Bovet & Martha 2000, Breu et al. 2001, Browne et al. 1995, Browne & Zhang 1999, Cameron & Gromley 1998, Chandrashekar & Schary 1999, Garcia-Dastugue & Lambert 2003, Gunasekaran et

7.

Supply chain management (SCM) is the integration of key business processes from end user through original suppliers that providers products, services, and information that add value for customers and other stakeholders (Cooper et al. 1997a, Lambert et al. 1998b)

33 al. 2002, Gunasekaran & Ngai 2004, Hewitt 2000, Lee & Whang 2001, Moberg et al. 2002, Poirier & Bauer 2000, Sherer 2005, White et al. 2005, Williamson et al. 2004). However, there is still space for research on real industrial applications where companies strive for agility and adopt new agile practices in their supply chains. Van Hoek (2005) states that there is no lack of appreciation of the benefits of agility, and that there is also a clear conceptual understanding of what an agile supply chain is. What has been lacking to date, according to him, are research and practices that actually help accomplish a vision of creating an agile supply chain. Also Sanchez & Nagi (2001), who examined 73 journal articles and conference papers on agility written in the period of 1991 ­ 2000, demonstrate that only a small amount of the research on agile manufacturing has contributed elements for upcoming agile organizations. In the research of Gubi & Johansen (2003), 71 doctoral studies conducted in the period of 1990 ­ 2001 in Scandinavia (Finland, Sweden Norway, and Denmark) in the field of logistics and SCM were reviewed in order to identify the main research topics in the field and to assess the future research recommendations. According to Gubi & Johansen (2003), the concepts "leanness" and "agility" have received a lot of attention in the management literature. However, they clarify that to gain a true lean and/or agile supply chain, it is necessary to explore these concepts more deeply in the SCM context. Also, because more activities in the supply chains are based on ICT, it would be interesting to see how ICT could enrich the SCM research field. Gubi & Johansen (2003) propose that one emerging topic area would be the integration of ICT systems, for example with a special focus on the implementation aspect. In addition, the investigation of possibilities and practicalities associated with new logistics and supply chain solutions would be an interesting area. Cao & Dowlatshahi (2005) argue that despite the growing importance of ICT in manufacturing operations, few examples in the literature have investigated the requirements of ICT to support agility. The findings of their study call for the drawing up of guidelines on ICT requirements to support agility. In Finland, some recent studies at doctoral level were conducted in the SCM context. From these studies, those listed next have affected this thesis most. Collin (2003) examines how to select the right supply chain for a customer in project-oriented business in the mobile communication infrastructure industry. Lehtinen (2001) focuses on the factors affecting the evolution of subcontracting and the impacts of subcontractors' manufacturing strategies on supply chain decisions, in the metal and electronics industry between 1980­2000. Heikkilä (2000) and Kaski (2002) study a demand-supply chain performance in the cellular networks industry. Lehtonen (1999) focuses on SCM in the process industry, Kämäräinen (2003), Punakivi (2003) and Yrjölä (2003) study SCM in the e-grocery industry, and Holma (2006) studies SCM in the saw-mill industry. Huiskonen (2004) presents several supply chain integration studies on linking customer responsiveness and operational efficiency in logistics policy planning. Småros (2005) discusses information sharing and collaborative forecasting in the interface between grocery retailers and consumer goods manufacturers. Further, Appelqvist (2005) contributes to the areas of operations strategy, demand chain management, focused supply chains, and product design for supply chain. Breite (2003) examines the effect of ICT, especially the Internet, on supply and value chain management in a dynamic business environment. Of the Finnish SCM PhD theses, as far the author has reviewed, only Helo (2001) has focused especially on

34 how to manage agility. His research is conducted in the context of the electronics industry, a good example of high-clockspeed industries. This study is done in the context of the steel product industry and, hence, it contributes to the discussion on agility in SCM in different industries. The study underlines the importance of ICT utilization in creating an agile supply chain. In the case network, the responsibilities in the supply chain are divided among different independent companies. In this way, controlling the logistics flows of material, information and finance becomes very complex. Controllability, as a higher-level aim, sums up the ultimate goals of SCM: namely to minimize costs, maximize customer satisfaction, and minimize asset levels (c.f. Ballou 1999, Christopher 1998). According to Christopher & Towill (2001) and MasonJones et al. (2000a), getting the right product to the end customer in the right place, at the right price, at the right time, and in the right conditions, is not the only key to competitive success, but also the basis for survival. Managing material flows is, however, no longer a serious back-breaking problem in the case network. It is a much larger, more confusing and intellectually challenging to understand and manage information and information flows (c.f. Lillrank 1997). For these reasons, for upcoming agile organizations it is more valuable to concentrate on information flow, instead of material flow. The main problems in the case network are in information management and in communication styles between the companies in the supply chains. Bowersox & Closs (1996) claim that the success of today's supply chains is to ensure that the right amount of the right kind of information is in the right place at the right time and for the right price. The information flows between the case steel manufacturer and the suppliers (see the dashed lines in the middle of Fig. 6) are relatively timely, and thus the greatest development effort lies with the information integration between the suppliers. In Fig 6, these flows are the small dashed lines between the shape cutting, bending and forming, and welding operations, etc. Certainly, the information management between the different business units of the case steel manufacturer also has other kinds of problems but, in this thesis, the focus is on inter-organizational information flow. Information exchange between companies currently occurs mainly via mail, e-mail, phone calls or company visits that do not give much visibility to the supply chain. A few companies have Enterprise Resource Planning8 (ERP) systems, and all of them are points-of-solutions. The majority of the companies have no advanced electronic information systems at all. As there is a lack of ICT capabilities in the case network which causes difficulties in the management of the information flow along the supply chain, the need for more comprehensive implementation of ICT is obvious. (Iskanius & Haapasalo 2004b.) To be competitive in the offshore business, the case network ­ led by the case steel manufacturer ­ is trying to make efficiency improvements in order to respond more quickly to changes in market demand, and to meet customer requirements faster in terms of changes in product volume, variety, or mix, without losing cost-efficiency. In projectoriented business, each project is unique in terms of design, manufacturing and technological requirements and precedence constraints. The high level of uncertainty, with respect to routines and processing times and uncertainly of customer orders, makes pro8. ERP (Enterprise resource planning) is management information system that integrates and automates many of the business practices and tracking orders associated with the operations or production and distribution aspects of a company engaged in manufacturing products or services (Wikipedia 2006).

35 duction planning and control difficult (Iskanius et al. 2004b). The manufacturing of this kind of product, with highly configurable and ever-changing customer requirements, is often referred to as manufacture-to-order (MTO)9 operations mode. Working with an MTO mode needs more agility than any traditional operations mode, e.g. make-to-stock (MTS)10 mode (Wadhwa & Rao 2003). The benefits that agility offers to MTO system in terms of flexibility, costs, lead times, efficiency, business volume and profitability, are very attractive and capable of ensuring a better competitive edge in meeting greater and serious challenges that lie ahead in the future (Hoover et al. 2001). The research problem of this study is stated as follows: How to develop an agile supply chain for a steel product network? The study identifies the key elements of an agile supply chain from a theoretical point of view. Furthermore, this study describes how these key elements seem to appear in the case steel product network. One interesting issue to be determined early in the study is how the steel product industry actually determines the paradigm "agility". In addition, based on the theoretical and empirical findings, an agile supply chain for the steel product network is developed by utilizing ICT application. Also, the change process towards agility is presented. The additional research questions can thus be formulated as follows: (R1) What are the key elements of an agile supply chain? (R2) How do these key elements appear in the steel product network? (R3) How is ICT utilized in the creation of an agile supply chain for the steel product network? The first research question (R1) is stated in order to determine the recent knowledge of agility in the management and SCM literature. The aim of the literature review is to understand how the current research delimits the agility paradigm and what key elements of an agile supply chain are highlighted. Based on this question, the author forms the theoretical compilation of key agility elements for further empirical analysis. The second research question (R2) is stated in order to find out how these key agile elements appear in the case network. The third research question (R3) is the consequence of the results from the previous questions (R1 + R2 > R3), and has arisen during the research period. The theoretical compilation of key agility elements shows that ICT utilization is the main priority in the supply chain development. In addition, the empirical study shows that there are major problems in the supply chains of the case network in the information management and the communication styles. Through the utilization of ICT, managing the information flow is becoming more relevant. One interesting aim, regarding this question, is to determine agility in a traditional industry, such as the case steel product network. Regarding this question, also, the change process towards agility is examined. Most of the results of this study have already been published and tested in international scientific conferences by the author, and some have also passed the reviewing process of international journals. The key prior publications are presented in Table 3. In total, 27

In the MTO ­ make-to-order operation mode, manufacturing starts until the order comes into the company or supply chain (Hoeksta & Romme 1992). 10. In the MTS ­ make-to-stock operation mode, manufacturing is done to stock (Hoeksta & Romme 1992). 9.

36 conference papers, 6 technical papers and 5 journal articles related to this study were written during 2002­2006 by the author. They all are listed in the references. Table 3. Key publications during the research process.

Key results Conference/Journal Publication Iskanius & Haapasalo (2003b) Current status of the business environment in ICIIL ­ International Conference on the steel product network Industrial Logistics 2003 Delpoying manufacturing philosophies in steel product network Implementing agility in supply chains of project-oriented business Agility drivers and the current status of agility in the steel product network

IMC ­ 20th International Manufactur- Iskanius & Haapasalo ing Conference (2003c) IAMOT ­ 13th International Conference on Management of Technology LRN ­ Annual Logistics Research Network Conference Iskanius & Haapasalo (2004b) Iskanius (2004d) Iskanius & Uusipaavalniemi (2004a)

Role of collaboration in the move towards an 13th Annual IPSERA Conference agile supply chain Critical issues and the development needs of supply chains in the move towards an integrated supply chain

NOFOMA ­ 16th Annual Conference Iskanius et al. (2004a) for Nordic Researchers in Logistics Iskanius et al. (2004b)

Shifting operational mode from mass produc- IRNOP VI ­ Project Research Contion towards project-oriented business, ference towards agility Requirements of ICT solutions to develop transparent information flow. Digital supply chains and development steps towards e-business Development towards e-business by agent technology solution Agile supply chain. Intensity of agility in steel product industry ICT in supply chain integration. Development steps towards e-business Agent technology for real-time SCM Virtual enterpise approach for development of an agile supply chain Digital supply chains ­ base for agile business. Implementation issues IEEE 2004 ­ International Engineering Management Conference 12 th International EurOMA Conference

Iskanius et al. (2004c) Iskanius et al. (2005c)

ICAM ­ International Conference On Iskanius et al. (2005d) Agility ICAM ­ International Conference On Iskanius et al. (2005e) Agility 1 st International Conference on Changeable, Agile, Reconfigurable and Virtual Production 14th Annual IPSERA Conference e-challenges Conference LRN ­ Annual Logistics Research Network Conference Iskanius et al. (2005f)

Helaakoski et al. (2005a) Helaakoski et al. (2005c) Iskanius & Kilpala (2005)

IJISM ­ International Journal of Inte- Iskanius et al. (2006a) Process integration perspective in supply chain integration. Critical issues and develop- grated supply management ment possibilities towards agile supply chain Agile business. Enablers of agile supply chain in the steel product industry Digital supply chains. Development steps towards e-business Agent-based approach for supply chain integration Agent technology for the SCM purpose IJASM ­ International Journal of Agile Systems and Management IJLRA ­ International Journal of Logistics Research and Application IJRCIM ­ International Journal of Robotics and CIM IJASM ­ International Journal of Agile Systems and Management Iskanius et al. (2006b) Iskanius & Kilpala (2006) Helaakoski et al. (2006a) Helaakoski et al. (2006b)

37

1.4 Scope of the research

Although the whole Finnish steel product industry forms the general framework for the study, the specific information sources and the interviews are taken from the companies in the Raahe area in Northern Finland. The ultimate goal is not to produce results that can be extrapolated to the whole industry. However, the study creates new insights for other companies and business networks into creating and developing an agile supply chain. The research context of this thesis is agility in supply chain development. The focus is on the management of information flow between the case steel manufacturer and its suppliers, and also between the suppliers themselves. The case network ­ led by the steel manufacturer ­ is moving from mass production to project-oriented business, and the companies are increasingly interested in agility practices. The case network is discovering that ICT utilization brings challenging improvement possibilities for their purposes. In order to succeed, they have to renew their business processes, develop their supply chain relationships, and eventually move towards the electronic business. The study underlines the importance of ICT in developing agile supply chains. Advanced information technologies for SCM purposes are introduced in this study briefly, and only for the understanding of benefits and requirements of ICT in the creation of an agile supply chain. In addition, the developed agile supply chain is introduced from its functional perspective only. Hence, the tehnological architecture, agent platforms, etc. remain outside the scope of this thesis. ICT, by itself, is not enough to fulfill the agile practices, a deep understanding of change management and management of competencies is also needed. The main theory in this study is based on the SCM and agile manufacturing literature. However, the author realizes that the change from traditional business towards project-oriented business cannot be achieved without Change Management11 and Business Process Re-engineering (BPR)12 principles. They involve a study of how the personnel in the companies use new agile practices effectively, how the business processes should be renewed, how the business relationships have to be developed, and how ICT tools can be implemented. All of these questions, and many others, also require knowledge of both Change Management and BPR. However, in this study these issues are considered only in relation to the SCM perspective. Later on in this thesis, the author uses the terms "focal company", "supplier network" and "supply network" (Fig. 7). In order to have a common understanding, these terms should now be defined. A supply network, called also an operations network, or a production network, is a set of inter-connected supply chains, embodying the flow of goods and services to end-users and customers (Lamming et al. 2000). A supplier network is a network formed by all the direct and indirect suppliers of the firm (Lamming et al. 2000). Finally, the focal company is the center of many possible connections with suppliers and

11. Change Management is the process of developing a planned approach to change in an organization. Typically the objective is to maximize the collective benefits for all people involved in the change and minimize the risk of failure of implementing the change. The discipline of change management deals primarily with the human aspect of change, and is therefore related to pure and industrial psychology. (Wikipedia 2006.) 12. Business Process Re-engineering (BPR) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed (Hammer & Champy 1993).

38 customers (Harrison & van Hoek 2005). In this thesis, the term "case focal company" is used specifically to refer to the role of the case steel manufacturer.

Supplier network

Supply chain

Case focal company

Supply network

Fig. 7. The supply network of a case focal company (modified from Lehtinen 2001).

In this thesis, the empirical study is conducted within both the supplier network and the steel manufacturer, i.e. the end customer side is outside the empirical study. SCM research is mostly based on a focal company's perspective, which is particularly relevant in terms of providing managerial guidance and tools (Lehtinen 2001). Moreover the strategic center, the focal company is responsible for value creation with its suppliers, as well as being a leader, role setter and capacity builder (Lorenzi & Baden-Fuller 1995). In this study, the role of the steel manufacturer as a case focal company is important, however, the study is designed so that the voice of all companies equally is heard. The essential dimensions for a supplier network are the degree of the focal company's influence on the network (power of the focal company), the dynamics of supply chain (internal and external), and the nature of products in terms of complexity and uniqueness. The longer the supplier network is, the more independent the businesses are and the supply is more difficult to coordinate (c.f. Johnsen et al. 2000).

1.5 Structure of the thesis

This study is divided into 6 chapters (Fig. 8). Chapter 1 introduces the motivation of the study, presents the research problem and formulates the research questions. The scope of the study is discussed. Thereafter, the structure of the thesis is presented. Chapter 2 explains the scientific research tradition of Industrial Engineering and Management. Thereafter, the methodological choices made in this study are presented. Chapter 2 also describes how the empirical research is carried out, i.e. how the research data was gathered and analyzed.

39 Chapter 3 presents the theoretical bases for the study. First, it presents the current SCM approach for businesses. Second, the chapter introduces a new manufacturing paradigm "agility", and discusses the development methods towards an agile supply chain. Also, the role of supply chain integration by ICT is discussed. Thereafter, the chapter presents advanced ICT solutions for SCM. The chapter gives the answers to the research question (R1) (What are the key elements of an agile supply chain?) and composes a theoretical summary of and agile supply chain. Chapter 4 provides the current state analysis of the case network. The chapter first provides an overview of the business environment of the Finnish steel product industry and presents the current drivers towards agility in the case network. Thereafter, the current agility level in the case network is analyzed. The chapter gives the answers to question (R2) (How do these key elements appear in the steel product network?). Chapter 5 first determines the agility paradigm in a steel product network. Thereafter, the chapter introduces the new construct: an agile supply chain, called also SteelNet system in this thesis. The agile supply chain is based on the technological application of the Internet and agent software technology. The ideal business process of an agile supply chain and the agile practices are presented. Thereafter, the chapter presents the change process towards agility. The chapter gives answers to the question (R3) (How is ICT utilized in the creation of an agile supply chain for the steel product network?). Chapter 6 provides the conclusions of this thesis and presents the theoretical and practical contributions of this research. Thereafter, the chapter evaluates the validity and reliability of the study. Finally, the chapter provides recommendations for future research.

Chapter 1: Introduction

Motivation for the research Research problem - Research questions Scope of the research

Chapter 2: Research Methodology

Methodological choices Research design Tradition of the research discipline Scientific paradigms Research strategies and approaches

Chapter 3: Agility in Supply Chain Management

Compilation of key agile elements Answer for the (R1) What are the key elements of an agile supply chain?

Chapter 4: Current status of business environment

Key elements of agility in the steel product network Answer for the (R2) How do these key elements appear in the steel product network?

Chapter 5: Agile supply chain in the steel product network

Determination of agility in the steel product network Agile supply chain Change process towards agility Answer for the (R3) How is ICT utilized in the creation of an agile supply chain for the steel product network?

Chapter 6: Conclusions and Implications

Conclusions Future research Theoretical and practical implications Validity and reliability of the research

Fig. 8. Structure of the study.

2 Research methodology

This chapter presents the methodological choices that have been made in this study. The chapter first provides the description of the research tradition of the Industrial Engineering and Management (IEM) discipline, within which this study is conducted. The chapter introduces the scientific paradigms, which are followed by a discussion of research strategies that are used as a basis for the research approach chosen in this study. Finally, the chaper describes how the empirical research is actually carried out.

2.1 Industrial engineering and management

Science can be defined as the systematic pursuit of new knowledge, covering general truths and regularities of nature, humans, and society (Niiniluoto 1984). There are also several other definitions but, above all, science is a process for gaining awareness and understanding that is useful in the formulation of explanations of the phenomena under study (Busha & Harter 1980). Science is traditionally divided into basic and applied science (e.g. Hameri 1990, Niiniluoto 1984). Basic sciences, such as physics, chemistry, or biology, for example, create new knowledge about the world as it is, without consideration of how the findings will be applied. A study undertaken primarily to acquire knowledge for its own sake, can be classified as basic research. Applied sciences, such as engineering sciences, agricultural and forestry sciences, medical sciences, or practical social sciences, describe the world as it should be and aim to solve practical problems or to produce new knowledge that can be utilized immediately in actual real-world situations (Busha & Harter 1980, Hameri 1990, Niiniluoto 1984, Näsi 1980, Olkkonen 1993). Applied science can be positioned between basic science and technology13 ­ a systematic development of new tools and artifacts (Hameri 1990, Niiniluoto 1984, Olkkonen 1993). In addition to the truth and novelty criteria, applied science aims to create both epistemic and practical utility by finding gener13. Instead of the term "technology", Eloranta (2005) uses the term "engineering" in order to emphasize the practical actions behind technology.

41 alizable laws for the phenomena under study (Eloranta 2005, Niiniluoto 1984). Furthermore, applied science can be divided into design science (or planning science) and predictive science (e.g. Olkkonen 1993). Predictive science answers the question of what the result is when a certain action or phenomenon occurs, whereas design science answers the question of what should be done in order to achieve a certain aim (Niiniluoto 1984, Olkkonen 1993). Applied science is positioned also according to time horizons; it belongs to the peculiar period called "eternal future", always directed towards the future and it can be also called the science of the future (Näsi 1980). Industrial Engineering and Management (IEM) is positioned as an applied science (Eloranta 2005, Olkkonen 1993), and most of the IEM research has the characteristics of design science (Olkkonen 1993). This study is carried out within the research tradition of the Department of Industrial Engineering and Management (DIEM) at the University of Oulu (UOulu). In the department, IEM is defined as "an applied science of productional operations such as technical, economic and behavioral phenomena" (Kess 2004). The essential focus of IEM research is an industrial enterprise, which is a multidisciplinary system (Olkkonen 1993). Thus, all research that aims to promote and improve the capabilities of industrial enterprises can be seen as IEM research (Hameri 1990). According to the Finnish IEM Research School (2004), IEM focuses on manufacturing and information-intensive enterprises and it studies the operation of enterprises and their networks as a comprehensive process from the perspectives of technology, economics and behavioral sciences. IEM combines principles, doctrines, theory and knowledge from a number of other disciplines such as technology, business economics, psychology and sociology. It seeks to promote the efficiency of the national innovation system in order to enhance the economy, enterprises, and employment. (Finnish IEM Research School 2004.) IEM studies the production process of conventionally manufactured products as well as that of information: the acquisition, integration, and rationalization of production factors, marketing, distribution, product development, and the functional and structural development of enterprises. Through research in these areas, IEM strives for the effective utilization and development of technology and economic management of an enterprise. Comprehensive insight into the operation of enterprises is needed to attain such goals. According to Hameri (1990), the researcher can test whether the study belongs to IEM research by asking how the study can be useful to the management. It is often impossible to handle the economic problems of information-intensive enterprises without understanding the properties of the technological processes involved. This applies to the production process, as well as to the marketing activities and the use of technological products and services. The production of knowledge, which can partly be implemented by technological means, is one starting point for the operation of information-intensive enterprises. While striving to achieve a systematic approach, IEM highlights the engineering sciences' objective of enhanced efficiency. Due to the significance of technology, technological development work and related research have an essential role in the field of industrial engineering and management. (Finnish IEM Research School 2004.) Based on the integration of knowledge in several fields, IEM produces doctrines and theories of its own for the efficient management and guidance of enterprises. As an applied study field, IEM creates conceptual frameworks needed for the investigation of information-intensive enterprises, analyzes their operation using its own theories or those obtained from other disciplines, and seeks to inform enterprises of how they could best

42 reach their goals and carry out their tasks. The criteria inherent in the discipline include productivity, efficiency, profitability, competitive ability, and quality. The ability of enterprises to utilize success factors is dependent on a balanced interaction between technology, economics and human actors. IEM research characteristically attempts to promote cooperation between the various parts of an innovation system in order to create favorable preconditions for technological, economic and social innovations. (Finnish IEM Research School 2004.) According to Eloranta (2005), the research in IEM has three characteristics: relevance, contribution and evidence. Relevance means high priority in the domain of business problems and potential value for practitioners. Contribution means novelty among the research community and identified in relation to a body of knowledge. Evidence requires confirmation based on rational and empirical reasoning. A deep understanding of phenomena under research enables the building of reasoning and an explanation about how and why utility is achieved. Because an industrial enterprise is by nature difficult to model exactly, and the business environment is changing continuously, none of the standard research methods ideally suit the research of IEM. Hameri (1990) argues that the concept of technical norm, presented by von Wright in 1965, can be used as a scientific foundation to constitute new knowledge in IEM. A technical norm is a factual statement about the relations between the means and ends, based on practical inference. A technical norm provides normative rules that extract an obligation to behave in a certain way from the pursuit of this interest as an end. In general terms, the technical norm can be stated as follows: "If you want A, and you believe to be in a situation B, you need to do X" In the design sciences there are two approaches for using the reasoning of technical norms. The first approach searches for a means [X], which should lead to an end [A] in a certain situation [B]. This approach follows the inductive reasoning logic (inductive strategy then starts from specific empirical findings that are generalized to induce a new theory), and is characteristic of the design sciences. According to the other approach, research is meant to find an end [A], when a means [X] occurs in a certain situation [B]. This latter approach is based on deductive reasoning logic (deductive strategy starts from a theory that is considered to represent the truth and deduces it to a specific problem or field of application), and is often applied in predictive sciences. (Olkkonen 1993.) Inductive and deductive strategies are presented in Fig. 9. Most often it is difficult to state which of these two approaches; deductive or inductive, is used. The reason for this is the complicated nature of the research work: there simply does not exist any "pure" inductive or deductive research, because every research work is a combination of these two approaches. However, at least an external observer should be able to tell which of these two approaches dominates in a particular situation (Hilmola 2003).

43

Induction

Laws and theories

Deduction

Facts acquired through observation

Explanations and predictions

Fig. 9. Induction and deduction (Ghauri & Grønhaug 2002).

2.2 Scientific paradigms

Kuhn (1962) introduces the concept of the scientific paradigm, which describes everything that the science holds, all its laws and beliefs, key concepts and methods, research designs and significant problems to be studied, everything upon which it bases its life. According to Burrel & Morgan (1979), a science paradigm can be defined as "a commonality of perspective, which binds the work of a group of theorists together". A paradigm also determines how the researcher creates new knowledge and thus guides in selecting methods that comply with a paradigm. The paradigm, in principle, means fundamentally different ways of doing research, making it impossible to understand, communicate or criticize research results to representatives of the competing paradigms. (Vafidis 2002.) Guba & Lincoln (1994) define a science paradigm as "a basic belief system" or worldview that guides the researcher, not only methodologically (what methods and approaches should be used), but also ontologically (the nature of reality) and epistemologically (the acquisition of knowledge). Besides these assumptions, Burrel & Morgan (1979) emphasize also the role of human nature, especially when conceptualizing social sciences such as IEM. Fig. 10 illustrates these four sets of assumptions on a subjectivist-objectivist dimension. Ontology refers to the existence of the essence and the phenomena under study, i.e. assumptions about the claims about what exists and what that which exists looks like, what units construct that which exist and how these units interact. Two extremes of ontology are nominalism and realism. The nominalist view perceives the world as a product of one's mind, whereas the realists perceive the world as given and external to the individual. (Burrell & Morgan 1979.) Epistemology examines the concepts, origins and varieties of knowledge of a phenomenon under study; it refers to where and how a researcher acquires his knowledge, and how valid is the knowledge which has been acquired (Burrell & Morgan 1979, Niiniluoto 1984). Two extremes of epistemology are hermeneutics and positivism. The hermeneutic view perceives knowledge as soft, often subjective and based on experience and insights of a personal nature, whereas the positivist perceives knowledge as hard and real, and consider it possible to transmit knowledge in a tangible form (Burrell & Morgan 1979).

44 Methodology focuses on how an inquirer can go about finding out whatever she or he believes can be known (Guba & Lincoln 1994). The two extremes of this methodology are ideographic and nomothetic. The nomothetic world is hard and external and reality is objective, and the research is often focused on identifying the various elements and the relationships between them in a measurable way, whereas an ideographic world is much softer, personal and more subjective in quality, and the research is focused on an explanation and understanding of what is unique and particular to the individual rather than general and universal. (Burrell & Morgan 1979.) Human nature assumption refers to the relationship between the human being and their environment and this assumption is one of the cornerstones in social sciences as human beings and their lives are the object as well subject of the research. Two extremes of human nature are voluntarism and determinism. The voluntarism view perceives the free will of humans to control their environment, whereas the deterministic view perceives humans as controlled by their environment. (Burrell & Morgan 1979.)

The subjectivist approach to social science Nominalism Hermeneutic Voluntarism Ideographic Ontology Epistemology Human nature Methodology The objectivist approach to social science Realism Positivism Determinism Nomothetic

Fig. 10. The subjective-objective dimension (Burrell & Morgan 1979).

Different ontologies, epistemologies and models of human nature guide the researcher towards different methodologies. All of these four sets of assumptions are interlinked and it would be difficult to focus solely on one aspect and not to address the other as well, if a comprehensive picture is to be given of the assumptions underlying any research. The four sets of assumptions outlined above have direct implications of a methodological nature. Each one has important consequences for the methodological decisions. According to Easterby-Smith et al. (2002), academic research is based basically on two main science paradigms: positivism and hermeneutics. They have different approaches to handling scientific knowledge, how to run scientific research, how to draw conclusions, although they both hold that science has its roots in empiricism (Niiniluoto 1984). Typically, positivism is often seen to be related to the natural (or nomothetical) sciences, which investigate large quantities of data and aim to explain generally the laws and regularities which govern the investigated phenomena. In contrast, hermeneutics is seen to be related to human (or idiographic sciences), aiming to understand the investigated phenomena per se. The human sciences are thus considered to be radically different from

45 the natural sciences: their goal is to not make objective explanations of the phenomena but rather to understand the phenomena through interpretation. (Arbnor & Bjerke 1997, Niiniluoto 1984, Olkkonen 1993.) Research done in the field of IEM, is based on both the described paradigms, although the academic community favors the positivistic paradigm over the hermeneutic paradigm (Gummesson 2000). However, according to Easterby-Smith et al. (2002) the strengths of the hermeneutic paradigm are its ability to look at the change process over time, to understand people's meanings, to adjust to new issues and ideas as they emerge, and to contribute to the evaluation of new theories. Also the methodology offers a way of gathering data that is seen as natural rather than artificial. Although positivism is typically associated with quantitative methods and hermeneutics with qualitative methods, both methods may be used simultaneously in any research paradigm (Guba & Lincoln 1994).

2.3 Research strategies 2.3.1 Qualitative research

Qualitative research, an umbrella term of several research strategies, can broadly be defined as the kind of research that produces findings not arrived at by means of statistical procedures or other means of quantification. According to Denzin & Lincoln (1994), qualitative research is a multi-method focus, committed to the naturalistic perspective and the hermeneutic understanding of human experience. This means that qualitative research puts an emphasis on processes, the unfolding and interconnections of events over time observed as they happened, and meanings that are not rigorously examined or measured (if measured at all), in terms of quantity, amount, intensity, or frequency. The idea of qualitative research is to describe a phenomenon in detail, to make a matter understandable, and to develop a new theory from the material which corresponds to the reality. Typically, qualitative research involves the use and collection of a variety of empirical materials ­ case studies, personal experience, introspection, life story, interviews, observational, historical, international, and visual texts ­ that describe the routine and problematic moments and meanings in an individual's or organization's life. (Denzin & Lincoln 1994.) The most fundamental of all qualitative methods is in-depth interviewing (Stake 1994). Interviews, structured, semi-structured or unstructured, are appropriate methods when it is necessary to understand the constructs that the interviewee uses as a basis for his/her opinions and beliefs about a particular matter or situation. Also one aim of the interview is to develop an understanding of the respondent's "world" so that the researcher might influence it, either independently, or collaboratively as in the case of action research (Easterby-Smith et al. 2002).

46

2.3.2 Case study research

Qualitative research in general, and case studies in particular, have a long and distinguished history in the social sciences such as IEM (Gummesson 2000). Case study research is increasingly applied in SCM and logistics research, and this trend seems to be much stronger in the Nordic countries than e.g. in the USA or Asia (Ojala & Hilmonen 2003). In the research of Vafidis (2002), it is also clearly documented. The case study research is used in many situations to contribute to the knowledge of individuals, groups, or organizations, of social, political and related phenomena (Yin 2003). Essentially the case study looks in depth at one, or a small number of organizations generally over time (Easterby-Smith et al. 2002). Yin (2003) defines the case study as an empirical study that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident, and in which multiple sources of evidence are used. According to Gummesson (2000), there are two types of case studies of particular interest. The first one attempts to derive general conclusions from a limited number of the cases, whereas the second type seeks to arrive at specific conclusions regarding a single case because this case history is particularly interesting. Yin (2003) distinguishes three types of uses for case study research: exploratory, descriptive, and explanatory. Gummesson (2000) adds two more types: theory generation and initiation of change. Typically all of these case study types overlap. Whatever the case study type is, an important advantage with the case study research is the opportunity to gain a holistic view of a process. The search for a holistic view of a specific phenomenon or series of events is a time-consuming job, and it is generally not possible to carry out more than one, or a very limited number of, in-depth case studies in a research project. For an in-depth understanding of the mechanisms of change one needs to study a large number of cases. (Gummesson 2000.) According to Eisenhardt (1989), the aim of the case study is to provide a description and test or generate theory. The final product can be concepts, a conceptual framework, propositions, or a mid-range theory. Case studies are especially applicable in the early stages of research on a topic or to provide a fresh perspective on a previously researched topic. The purpose of the case study is to seek out both what is common and what is particular about the case, and the end result regularly presents something unique. Uniqueness is likely to be pervasive, extending to (Stake 1994): the nature of the case, its historical background, the physical settings, other contexts, including economic, political, legal, and aesthetic, other cases through which the case is recognized, and those informants through whom the case can be known. The criticism of the case study research relates to the lack of statistical reliability and validity, the ability to generate hypotheses but not to test them, and generalizations cannot be made on the basis of case studies (Gummesson 2000). The case study is not a methodological choice, but a choice of object to be studied. A case study can usefully be seen as a small step towards grand generalization, but generalization should not be emphasized in all research. (Stake 1994.) According to Yin (2003) a case may be a phenomenon that is difficult to separate from the context. Although both quantitative and qualitative methods are used for data collection in case studies, the latter will normally predominate in the study of processes in which data col-

47 lection, analysis, and action often take place concurrently (Easterby-Smith et al. 2002, Gummesson 2000). According to Yin (2003) the case study method is applicable in situations where the research aims to provide answers to the "how" or "why" questions about a contemporary set of events, over which the researcher has little or no control. Yin (2003) identified six sources of evidence: documents (letters, agendas, progress reports), archival records (service records, organizational charts, budgets, etc.), interviews (typically open-ended, but also focused, structured and surveys are possible), direct observations (formal or causal; useful to have multiple observers), participant observation (assuming a role in the situation and gaining an inside view of the events), and physical artifacts.

2.3.3 Research approaches

Different kinds of classifications for research approaches have been presented in the literature. In Finnish research on IEM, two classifications of empirical research approach have been used in general. The first perspective is presented by Arbnor & Bjerke (1997), who have identified three main methodological approaches; the analytical approach, the system approach, and the actors approach. The analytical approach represents clearly explanatory knowledge (positivist view) with the assumption that the reality is objective. The actors approach represents understanding knowledge (hermeneutic view) with the assumption that the reality is socially constructed. The system approach is positioned between positivism and hermeneutics in the assumption that reality is objectively accessible. Another perspective adopted widely in the Finnish methodological discussion is the classification presented by Neilimo & Näsi (1980). They have developed a model for business research in a two dimensional framework: theoretic-empirical and descriptivenormative. Theoretical (or rational) research means reasoning, i.e. theoretical knowledge is a priori knowledge that is observable without experimenting, whereas empirical research means that the data is collected in the field or in a laboratory. Correspondingly, descriptive research aims to describe "what is" and "how is", i.e. emphasis is on describing, explaining and forecasting, whereas normative research is explicitly target oriented, i.e. it aims to recommend a way of acting in practical situations. In this framework the categories of conceptual, nomothetical, decision-orientated and action-orientated approaches can be found. Kasanen et al. (1991) add the constructive research approach (Fig. 14), which is both normative and empirical by its relation to this model.

48

Theoretical Research Conceptual approach Empirical Research Nomothetical approach Actionoriented approach Constructive approach

Descriptive Research

Normative Research

Decision-oriented approach

Fig. 11. Research approaches in the categories of business research (Neilimo & Näsi 1980, Näsi & Saarikorpi 1983, Kasanen et al. 1991).

The conceptual approach is the oldest research approach and can be found basically in all research (Neilimo & Näsi 1980). It is distinguished by its a priori basic nature; it produces new knowledge primarily through the method of reasoning, and aims to create theoretical concepts, concept entities and hypotheses (Kasanen et al. 1991, Kasanen et al. 1993). The nomothetical approach is clearly an implication of the positivist tradition that shows causal interdependence between different phenomena. It relies on substantial empirical data and the aim is to find general laws or regularities. Deduction, hypothesis, models and empirical testing play a key role in this approach. (Neilimo & Näsi 1980, Näsi & Saarikorpi 1983.) The action-oriented approach is an implication of the hermeneutic tradition, and as nomothetical, relies also on empirical data (Neilimo & Näsi 1980, Näsi & Saarikorpi 1983). The aim of this approach is to gain a profound understanding and relevant description of human phenomena in their real-world settings. This approach presupposes a thorough understanding of organizational processes in order to accomplish the intended changes in practice. The researcher acts as a change agent, who supports the members of the organization in their learning processes. (Kasanen et al. 1993.) The decision-oriented approach includes certain characteristics from positivism, namely a belief in rationality and causality, which are required by the aim of this approach to build a model. The emphasis is more on building a model than in expecting it to work in a specific situation, than in feeding empirical data relating to a practical case in order to solve a problem. The principles of logic and mathematics are often followed in this approach. (Neilimo & Näsi 1980, Kasanen et al. 1993.) The constructive approach means a problem-solving approach for producing innovative constructs, intended to solve problems through constructing a model and, by that means, to make a contribution to the theory of science in which it is applied. Constructs tend to create a new reality by producing solutions to explicit managerial problems. The constructs can vary from simple models, plans, and diagrams, to complex management systems, to manifestos of new ways of approaching and doing things in organizations. It is characteristic of constructs that they are invented and developed, not discovered. (Kasanen et al. 1993.) To sum up, the conceptual approach produces new knowledge through the method of reasoning, the nomothetical approach attempts to find general causal laws through empirical findings, the results of the decision-oriented approach, which also uses the method of

49 deduction, are meant to help management in running the firm, the action-oriented approach brings the human aspect into the focus of analysis, and the constructive approach is normative rather than descriptive and for the most part empirical rather than theoretical (Kasanen et al. 1993).

2.4 Research approach for this study

The suitable research paradigm for the study depends to some extent on the nature of the problem and on the context where the study is conducted. The main purpose of this study is to find the solution for the problem stated: "How to develop an agile supply chain for a steel product network?" Even though the positivistic paradigm is more popular in IEM research, the selected scientific paradigm for this study is hermeneutic. This study is carried out in a complex business network consisting of independent companies cooperating together to provide metal solutions for end customers. The companies are trying to make efficiency improvements by adopting agile methods in their supply chain. In this study, the information needed to solve the problem, develop a new agile supply chain, is gathered from individual people in the companies, by asking their opinions of the current status of the businesses, development possibilities, barriers for the shift from traditional way of doing business to something new, etc. The hermeneutic paradigm, and associated qualitative methods have their strengths in the ability to look at the change process over time to understand people's meanings, to adjust to new issues and ideas as they emerge, and to contribute to the evaluation of new theories (Easterby-Smith et al. 2002). The research period for this study is 3 years 5 months, from November 2002 to April 2006, thus the study has the nature of a longitudinal study. The chosen paradigm has its implications for the research approach but alone it does not simply determine it (Easterby-Smith et al. 2002). Comparing the classical distinction between inductive and deductive strategies, this study follows more deductive than inductive logic. Deduction uses some parts from formed theory, and tests them with empirical material, whereas inductive research tries to observe phenomena and, if possible, identify some general patterns to propose some modifications for current theories. An agile supply chain is deductively reasoned from existing theory, but the inductive reasoning is also needed for the empirical material. Yin (2003) discusses the role of the research question (aim of the study) and argues that it largely defines the applied research strategy. In this study, three research questions are formulated to solve the problem: 1. What are the key elements of an agile supply chain? 2. How do these key elements appear in the steel product network? 3. How is ICT utilized in the creation of an agile supply chain for the steel product network? The case study research can be described in two dimensions; the number of cases and the depth of information (Yin 2003). This study is a single case study because the study is done in one business industry which represents a typical example of a steel product net-

50 work in Finland. The single case study enables an intensive study of the particular phenomenon. Further, it allows a deeper analysis of the selected case area. This study also fulfills the main case study requirement (Yin 2003): the problem starts with the term "how", as do two of the case research questions. In this study, qualitative methods such as interviews, observations, questionnaires, and documents are used as data collection methods. Several data collection methods are essential because of the complex environment and the wideness of the researched issue. To answer the first question, the aim is to make a literature review in SCM and agile manufacturing literature. Cricical analysis of which elements are the most significant is done. Based on the theoretical findings, the framework for the analysis of an agile supply chain is modified. To answer the second question, several data collection methods is made. To find out how the key elements appear in the case network, interviews and observation methods are used and documents in company visits are collected. Also, comparison between theoretical and empirical findings is done. To answer the third question, several interview rounds and observations in the company visits are made. Also literature review related to ICT for SCM purpose is done to select the right technology solution for the new construct, an agile supply chain for the steel product network. The solution needs also technological software development. To determine agility in the steel product industry, web questionnaire is planned. At its best, case study research offers a dialog between theoretical and empirical elements (Juga 2003). In this study the dialogue between theory and empiria is strong, and several iteration data collection and data analysis rounds are carried out. According to the methodological classification of Arbnor & Bjerke (1997), the system approach would be appropriate for this thesis. The system approach is often used in logistics and SCM research in order to understand how the different components in the system interact in order to improve the effectiveness and efficiency of the system as a whole. However, the categorization of Neilimo & Näsi (1980) has been selected as the framework for the research approach selection (see Fig. 11). This study has some characteristics of action research, but considering the goal of this research (to develop an agile supply chain), the constructive approach is the most suitable approach for this study. In both cases, the direct and pragmatic empirical connections, and the application of the case study method, play a major role. The major difference lies in the fact that action-oriented studies typically aim at a careful description and thorough understanding of empirical phenomena without a problem-solving type of normative purposes, which is characteristic of constructive studies. Constructive research has also certain aspects of the decision-oriented approach. In both cases a theoretical analysis, such as thinking, plays an important role leading to the creation of a new entity. However, the decision-oriented approach typically uses the method of pure deduction, which always entails an attempt to explicitly test the practical usability of the constructed solution (Lukka 2003). This study has also strong characterictics of conceptual research, as the term agility is determined within the case steel product network. The constructive research approach is a research procedure which produces innovative construct, intended to solve problems faced in the real world and, by that means, to make a contribution to the theory of the discipline in which it is applied. The central notion of this approach, the novel construct, can be a model, diagram, plan, organization structure, commercial product, information system design, or a new agile supply chain as

51 in this study. It is characteristic that they all are invented and developed, not discovered. A successful constructive research project has to produce a new solution to the problem in question; otherwise there is no point in going on with the research (Kasanen et al. 1993). Also, it has to demonstrate that the solution is novel and actually works in practice, even though the practical functionality of the construct is not self-evident. It is characteristic of constructive research that the researcher's empirical approach is explicit and strong. A constructive study is thus experimental by nature: the development and implementation of the novel construct should be regarded as a test instrument in an attempt to illustrate, test, or redefine a theory, or develop an entirely new one. The constructive research approach is based on the belief, from a pragmatic philosophy of science, that by a profound analysis of what works (or does not work) in practice, one can make a significant contribution to theory (Lukka 2003). The constructive approach fulfills the three criteria (relevance, contribution and evidence) set for research in IEM by Eloranta (2005). Therefore, it has been the most popular research approach in IEM. The essential element in constructive research is to link both the problem as well as the solution to the accumulated theoretical knowledge. The research process is carried out based on the structured constructive research process of Kasanen et al. (1993). The phases of the constructive research process are as follows (Fig. 12): 1. find a relevant research problem (background); 2. general comprehensive understanding of the topic (preliminary studies for the construct); 3. construct and develop the solution idea (design an agile supply chain); 4. demonstrate that the solution works (testing the construct and evaluating the research process); 5. show the theoretical connections and the research contribution of the solution concept; 6. examine the scope of applicability of the solution.

Practical relevance of the problem and the solution Connection to prior theory

CONSTRUCT

Practical functioning of the solution Theoretical contribution of the study

Solution to the initial problem

Fig. 12. The elements of the constructive approach (Kasanen et al. 1993).

52 The fundamental concept of how the technical norm is applied in this thesis is presented as follows: "What is an agile supply chain [A] that can be developed by ICT [X] in a steel product network [B]". An overview of the methodological choices made is presented in Table 4. Table 4. The main methodological choices in this study.

Research discipline Theoretical base Research paradigm Research strategy and research approaches Research methods Industrial engineering and management (IEM) SCM and logistics, agile manufacturing, ICT and e-business Hermeneutics Qualitative case study, constructive approach, with some characterictics of the conceptual approach Qualitative methods: interviews, observations, questionnaires, documents

2.5 Research design

This study follows the constructive research process. The constructive study is a timeconsuming iterative process which includes the development of initial prototype ideas, their small-scale implementation, and thereafter a re-entry of the innovation phase with a revised belief and knowledge base (Lukka 2003). The four first iterative phases of this study are presented in Fig. 13. Each of the steps provides information about the next step and cumulatively increases the understanding of the author. The theory review and the comparison between theory and empiria are done during the entire research period. In the next sections the research process is presented in detail. In the appendix 1 the interviewees are presented and in the appendix 2 examples of the questions in the interviews and themes of the workshops are summarized.

53

Research steps

1. Find a relevant research problem Feasibility study Preunderstanding Reserarch problem Research questions

2. General comprehensive understanding of the topic Literature review

T h e o r y

Current state of the Finnish steel product industry

Complementary interviews Interviews for basic infromation Literature review Agility questionnaire Current state of the case business network Key agile elements Agile determination Analysis of the key agile elements

T h e o r y

3. Construct and develop the solution idea

T h e o r y

Interviews for case 1 Interviews for case 2

Case 1 supply chain modeling Case 2 supply chain modeling

Flowcharts of the case supply chains Critical issues of the information flow Development ideas Basic information for an agile supply chain ICT selection

Literature review

T h e o r y

Interviews for ICT application

Agile supply chain (SteelNet system)

Interviews for the construction 2 workshops Change process towards agility

T h e o r y

4. Demonstrate that the solution works Weak market test Field-test Research process evaluation

Validity, Reliability, Generalizability Relevance, Novelty, Practical utility

Construction testing

Process testing

Fig. 13. Research design.

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2.5.1 Find a relevant practical problem

The first phase of the research process is to find a relevant practical problem, which also has potential for theoretical contribution. The selection of the research topic is the most important choice in every study and should be seriously considered from both the practical and theoretical perspectives. The first contact with the case businesses happens on October 17, 2001, when the workshop of the VETO14 training course is arranged. The workshop is organized to discuss the select topics relating to the collaboration of the Steelpolis companies, the current status of the network, changes in the business environment, challenges to operating in a more collaborative way, and critical development possibilities of networking. These given topics are first analyzed through a SWOT analysis in four smaller groups and then discussed among the participants. A summary of the discussions is written together at the end of the workshop. In the workshop there are 41 participants from 15 different companies. Also 4 researchers from the University of Oulu and 2 representatives from Steelpolis participate in the workshop acting as leaders of the workshop. A short description of the special characterictics of the Steelpolis companies is presented in section 4.2 to illustrate the general nature of the case companies in the starting point of this research. The training course is an ideal start for development work in common. In the 12 workshops, key persons in the companies discuss the specific challenges in the network. The result is that people gained a better understanding of the benefits of cooperation and collaboration, and also realize the challenges of ICT in the logistics operations. One of the most important results of those collaborative studies is a reinforced commitment to the common development procedure within the companies. The author participates in every workshop, and by listening and discussing evolves her understanding of the businesses and the research field. However, her role is not as an active agent, but as an objective and passive data gatherer. The author also makes notes of the discussions and afterwards processes the notes as part of the reports of Uutela (2002) and Uutela & Haapasalo (2002). The data gathered in the workshops are stored for future analysis in this study. At the same time as the training course, the TOLVA15 preliminary research project starts. During the research, a wide survey of the literature is carried out on the networking possibilities of the Steelpolis companies. After the theoretical investigation, unstructured interviews (or short brainstorming sessions) are held. These conversations are free, and the main purpose is to identify the real problems and the real challenges of collaboration and operative cooperation. The first interview round is carried out in the 12 Steelpolis companies with 12 key persons during November 2001 and February 2002. The author makes notes of the interviews and afterwards processes them as a part of the feasibility study report of Uutela et al. (2002). The data gathered are stored for future analysis in this study. 16 Steelpolis companies took part in this preliminary work.

14. VETO training project was arranged by the University of Oulu during the period October 2001­May 2002. The training project consists of 12 one-day training sessions, where the key persons in the case companies studied areas such as networking, logistics and SCM skills, and ICT in SCM. The training project was financed by the European Social Found via the Ministry of Labor. 15. TOLVA research project was conducted in the period June 2001­February 2002. It was financed by the Finnish Funding Agency for Technology and Innovation (TEKES) in order to find out the critical development issues of networking in the steel manufacturing industry in the Raahe area.

55 The three critical research and development areas that arose are: 1. management of information flows (information sharing); 2. supply chain optimization and integration; 3. ICT infrastructure within and between the companies. Based on the data analysis, two company-related team tasks are given to the participants and specific questionnaires on the SCM area are given as a guide for the teamwork. In the first questionnaire, the development personnel in 8 companies form a working group and process their answers to 25 open-ended questions, covering areas such as how the changes in the business environment affect the customer base and their demands, competitors, technology and practices in the case network. The second questionnaire is circulated in 6 companies, where the company representatives (i.e. CEOs, development managers, quality managers) form a working group and process the answers to 34 openended questions covering areas such as information sharing, process integration and collaborative relationships in their business network. The author makes a summary of the data and afterwards processes them into the reports of Uutela (2002), Uutela et al. (2002), and Uutela & Haapasalo (2002). The data gathered from these two questionnaires are stored for future analysis in this study. Because of the significant need to improve the supply chain capabilities and ICT infrastructure, the decision is taken to concentrate on the development possibilities in the information flow. Also the theory supports the decision to focus on the information integration with supporting ICT (e.g. Bowersox & Closs 1996, Chandrashekar & Schary 1999, Chopra & Meindl 2001, Lee & Whang 2001, McGaughey 1999, Montgomery & Levine 1996, Shapiro 2001, Simchi-Levi et al. 2003). Furthermore, a review of the manufacturing and management literature (e.g. Goldman et al. 1995, Goranson 1999, Kidd 1994, Montgomery & Levine 1996, Oleson 1998), revealed that the business paradigm "agility" seems to be the element of success in terms of competitiveness in today's high tech industry. The case network is undergoing a shift from mass production towards project-oriented business. After reading the characteristics of the supply chains in the project-oriented business in Finland presented by Artto et al. (1998) and Kiianlinna (2001), the author is convinced that the agility paradigm and ICTbased development towards an agile supply in the steel product industry are pertinent for study. Consequently, the research problem is stated as; "How to develop an agile supply chain for a steel product network". Following the the model of Szirbik & Jagdev (2001), the research interest is situated within the manufacturing coordinates in Fig. 14.

56

[ICT integration level]

FOCUS

Agile supply chain

Traditional supply chain MTS Raw material Complex product

[Product complexity]

Simple product MTO

Turnkey systems, projects

[Production mode]

Fig. 14. The location of the research interest (modified from Szirbik & Jagdev 2001).

2.5.2 General comprehensive understanding of the topic

The second phase of the research process is to achieve a general and comprehensive understanding of the research problem. This part of the study is also meant to conceptualize the problem area so that useful communication between research parties could take place. A more detailed literature review of SCM, networking, agility, ICT technologies and ebusiness is carried out, as well as of scientific methodology to ground the theory of the research. Besides the theoretical ground-work, empirical ground-work is also carried out. In order to increase awareness about the empirical area, several data collection iteration rounds are held during the period November 2002 and April 2006. An understanding of the topic is also acquired by the author from SCM and logistics conferences, company visits, and interviews with the experts in the research area. Furthermore, the research environment included the Department of Industrial Engineering and Management (DIEM) and the Per Brahe Software Laboratory at the University of Oulu, VTT Electronics of the Technical Research Center of Finland, and case companies. According to Lukka (2003), it is important for the success of research that the major parties of the research project are committed to putting significant effort into the project. She continues that the success of the development of an innovative construct is teamwork, which has both practical and theoretical aspects. In this study, the situation is quite ideal. The research work is facilitated by two research projects, and the main members (UOulu and VTT) of both projects are committed by formal agreements to the research project. The first project is "SteelNet 116 ­ Software agent applications in steel product supply chain" and the second project is "SteelNET 217 ­ Supply chain management in value networks by multiagent systems", actually a continuation of the SteelNet 1. Both projects belong to the

57 ELO ­ E-business logistics technology program of TEKES, which is also the main funding body of the research projects. The purpose of the research projects is to improve the logistic processes in the case network by developing a common ICT system based on intelligent software agents.

2.5.2.1 The current status of the business environment

The description of the business environment of the Finnish steel product industry is based on a broad literature survey in the field of globalization, economy, ICT, networking and project oriented business (e.g. Airaksinen 1999, Artto et al. 1998, Hyötyläinen et al. 1997, Jokinen & Kärki 2000, Kiianlinna 2001, Koski et al. 1997, Luomaala et al. 2001, Punakivi et al. 2001, Ruokanen 2004, Vartia & Ylä-Anttila 2003). Several other reports published by the Research Institute of the Finnish Economy, TEKES, the Finnish Government, the Central Statistics Office of Finland, Technology Industries of Finland, and Confederation of Finnish Industries, are also reviewed in order to get a deeper understanding of the industry field. Later, in order to add to the understanding of the current situation of the Finnish steel product industry, also in the Raahe area, interviews with 3 experts are held. These experts continuously analyze the mega trends in the metal product industry and in its customer industry sectors in Finland. These discussions are stored on minidisk. The author makes the transcriptions of the interviews and afterwards processes the data for this study. In order to acquire the basic information of the case companies, the next interview round is carried out in 10 companies during the period November 2002 to January 2003. Semi-structured interviews are held with 19 key persons (such as CEOs and development persons in production and logistics) of the companies. Also, the objectives and methods of this research are discussed and the contact persons of the companies are named. 7 researchers are involved in this interview round. In the beginning of the interviews, the recommendation of Easterby-Smith et al. (2002) is observed. They emphasize that when interviewing owners or key persons of SMEs, the quickest way to open relationships is to first engage interviewees in general discussions about the business. This is something the interviewees know and understand, and whatever focus subsequent questions have, the answers have a context that is useful and they will be answered with much less formality. These first contacts with the case companies are very important in order to build trust and make it possible to get reliable

16. Research partners in SteelNet 1 (October 2002­November 2004) were DIEM, VTT Electronics, Polytechnic of Oulu, and Per Brahe Software laboratory. 11 Steelpolis companies (company names as they were early in 2004: Rautaruukki Ltd, TietoEnator Ltd, Rannikon Konetekniikka Ltd, Miilukangas LLP, Raahen Terästuote Ltd, Iin Konepaja Ltd, Telatek Ltd, Laadunvarmistus Ltd, Raahen Tevo Ltd, YIT Industria Ltd, Raahen Insinöörisuunnittelu Ltd) took part in the project. 17. Research partners in SteelNET 2 (September 2004­April 2006) were DIEM and Department of Electronic and Information Engineering at the University of Oulu, VTT Electronic, and Per Brahe Software laboratory. 7 Steelpolis companies (company names as they were in late 2004: Miilukangas LLP, Pohjanmaan PPO Ltd, Raahen Insinöörisuunnittelu Ltd, Rannikon Konetekniikka Ltd, Rautaruukki Ltd, Telatek Ltd, and TietoEnator Ltd) and Steelpolis as a representative of the Raahe District took part in the project.

58 results later on. These interviews are not recorded ­ the decision is made together between the interviewers and interviewees. That decision makes the interview situations more open and confidential. However, after the interviews, the interview protocols and field notes are carefully written up. Also other non-verbal ideas and observations are noted for subsequent case analysis. The summary report of the interviews is also written for the research group (Helaakoski et al. 2003a). During the visits, other material is also collected, e.g. company presentations and annual reports. The data is also gathered from the company www-pages and the magazine "Metalliosaajat", which is published by Raahe District. All the data collected are summarized, and the description of the case network (e.g. basic information of the companies, current level of co-operation, facilities for utilizing ICT tool, core competences as well as product and service offerings, and demand potential) is structured. The data are processed afterwards and the main results are presented as a part of chapters 1 and 4. After summarizing the current situation of the business environment, the agile drivers of the case network are determined. Goldman et al. (1995) categorize ten distinctive forces that drive towards agility in general. Based on this categorization, the reflections of these drivers are analyzed and illustrated in the case network. The summary of the agility drivers of the steel product network in presented in section 4.3. Before the development of an agile supply chain, it is important to examine how the case companies really understand the "agility" paradigm. In order to find out how the companies understand agility, a short web-questionnaire is designed. 36 agile attributes, which describe the agility paradigm from different perspectives, are collected from the literature research of Sun et al. (2005) and Kidd (2001), and other management literature (e.g. Goldman et al. 1995, Goranson 1999). The key persons of Steelpolis companies are asked to choose 5 attributes from the list of attributes which describe the agility paradigm best. 21 key persons answer the questionnaire. Thereafter, the answers are analyzed and compared with the theoretical findings. On this basis, the agility in the steel product network is determined. The determination is presented in section 4.1. The key elements of agility are identified in the literature survey and the compilation of agility is made. The modified four-dimensional framework based on Christopher (2000) and van Hoek (2001) is presented in chapter 3. This framework is used in order to examine the key agility elements as they occur in the case network, and to identify the main improvement potential. The empirical analysis is presented in section 4.4.

2.5.3 Construction and development of the solution idea

The third phase of the research process is to innovate a solution idea and develop a problem solving construct, which also has potential for a theoretical contribution. According to Lukka (2003), this phase of the research process is inherently creative and heuristic by nature, and therefore very little generic methodological advice can be offered. It is important to distinguish the constructive, innovation-oriented, research from a pure transfer of ready-made solutions. Pure implementation of an earlier designed construct should not be regarded as an application of the constructive research approach. The construct that is

59 developed in this research is an agile supply chain for the steel product network, called also SteelNet system in this thesis.

2.5.3.1 Modeling the case supply chains

Basic information for the development of an agile supply chain is collected through two case supply chain modeling studies. The first step is to model the case supply chain processes. Once the processes are modeled the debate could begin as to which elements of the processes can truly be described as value-adding (c.f. Christopher 1998). According to Aaltio-Marjosola (1999), it is not so important to examine too deeply the current situation and to model the case processes precisely, the more essential aim is to develop an ideal business process based on the information gathered on the modeling work. Monden (1993) divides supply chain activities into those that add value (value-adding, VA), those that do not but are necessary to support value-adding activities (necessary but on-value adding, NNVA), and those that do not add or enable value (non-value adding, NVA). The ideal business process is developed by eliminating all NVA factors. NVA factors can be eliminated by concentrating on those factors that contribute to adding value to the customer. In order for this to be undertaken, the value of the processes must be profoundly understood. Traditionally, activities such as warehousing, checking and the correction of the errors are recognized as typical NVA activities. The processes are modeled as flowcharts using the Microsoft Vision program. The flowcharts help to perceive the processes as a whole. Laamanen (2002) states that good process modeling has the following characteristics: ­ ­ ­ ­ ­ includes the critical issues relating to the process; presents the interdependences between different issues; helps understand the whole process; helps understand the individuals' own role in the process; contributes to the cooperation of the individuals in the process.

The modeling of the case supply chains is divided into three steps (as illustrated in Fig. 15): 1) data collection phase, 2) process modeling and analysis of critical issues (pattern matching), and 3) identification of possibilities for improvement.

60

THEORY 1. Data collection 2. Process modeling and analysis of critical issues 3. Seeking possibilities for improvement

Theme interviews

Process modeling

Contact person i

Case selection

Fig. 15. Research steps of the supply chain modeling.

The data collection phase is undertaken by thematic interviews with the operational staff in order to identify and illustrate the critical issues, the development needs, and the improvement possibilities of the processes. The objective is to collect enough data for the process modeling. With the results of the interviews, the case processes are mapped. Then, the major critical issues that slow down the process, cause unnecessary work, and ineffectiveness, are identified, and the development needs are defined. The debate can begin with which elements of the process could truly be described as value-adding. Finally, all such mappings, process models and critical issues collected are tested by the company staff and the factual errors and misreadings are checked after the interviewees' comments. The empirical findings are analyzed with respect to theoretical criteria. Thereafter, the ideal process is then modeled. After the SteelNet 1 steering board discussion on the 5th of November 2002, the first selection of the case supply chain is made. The offshore product supply chain is selected for study. This selection is made because of the fact that the practical processes in the supply network are not agile enough for the growing demand and variable customer requirements. Nor are they sufficiently cost-effective for international competition nor for the expected growth in the project-oriented business. The supply chain in this segment area represents the MTO (make-to-order) operation mode, where the manufacturing does not start until the customer order comes into the network. The order scheduling is done based on the customer's existing project plan. The requested delivery date of the order is calculated backwards from the estimated delivery date in the project plan. The case product to be followed is a large cylindrical steel plate pipe, one pipe part of the hub of the Mad Dog oil rig (Fig. 16).

Generation of development ideas

Analyzing

Testing

61

Truss spar hull: Height: Max hull diameter: Draught: Steel weight: 169.2 m 39 m 153.9 m ca. 19000 tons

11 anchors Target case project product 12 corner pipes of the hull: Diameter: 1.88 ­ 2.44 m Thickness: 38 mm and 60 mm

Fig. 16. The reference product ­ corner pipe of the hull.

The case supply chain is modeled by following through its value chain from the tendering to the point, where the finished products are transported to the end customer. In order to model the supply chain, the interview round is carried out in 5 companies during the period January 2003 and February 2003. Theme interviews are undertaken with 8 operative persons of the companies in total (such as sales persons, production manager, and representatives of order handling, transportation, and subcontractor management) in order to identify and illustrate the critical issues, the prior development needs, and the improving possibilities of the order-delivery process. 5 researchers are involved in this second interview round. These interviews are not recorded. The decision is made mutually, because the questions handle difficult issues and real-life problems in the operative work, and people feel more open and confidential without a recorder. However, the interview protocols and field notes are carefully written up and other non-verbal ideas and observations are noted for subsequent case analysis. During the visits, other material is also collected, such as documents relating to the operational work such as quotations, orders, confirmation of orders, dockets, and testing protocols. The objective of the interviews is to identify the current strengths of the order-delivery process, non-value-added stages and bottlenecks, and also distribution of the responsibilities and authorities. With the results of the data collected, the case process is flowcharted and the major critical issues, development needs and improvement possibilities are defined. The case supply network is presented in Fig. 17. The end customer is Technip Offshore CSO, the French Technip-Coflexip Group affiliate of BP. Technip Offshore Finland, which is part of the Technip Offshore Group, is responsible for the engineering, procurement, fabrication and delivery of the complete hull, moorings and riser system. The hull is built in the CSO Mäntyluoto Works manufacturing facility in Pori in Southern Finland. Mäntyluoto Works carries out the practical assembly and building work, although it usually subcontracts in this kind of large project 40% of the needed manpower of the project. The design work is usually handled by PI-Rauma, of which the French company owns

62 half. Typically, Rautaruukki Ltd and Technip Offshore CSO have project related agreements in steel material supply as well as in major pipe product production.

BP

Technip Offshore Finland

ORDER

Company C Testing

Technip

Offshore

PI-Rauma

Mäntyluoto

Works

Steel producer Raw material cutting and bevelling

Company A Bending

Company B Welding

Logistics provider

Customer side for the delivery

Supplier network for the delivery

Flow of material

Flow of information and know-how

Fig. 17. The supply network of the project product case.

The local supply network in this case comprises of the steel manufacturer, called later the case focal company, which provides raw material and prefabricated operations such as cutting and beveling: two subcontracting companies for bending, beveling, welding and sub-assembly; a quality testing company; and a logistics provider. The case focal company manages the information flow and all the project management operations within its information systems. Typically the case focal company is in contact with the end customer. Suppliers do not normally have such direct communication with the end customers. Communication with the testing company and the manufacturing subcontractors is carried out more or less manually by fax, email, phone and company visits. For the management of information flow with its suppliers, the case focal company has appointed people to be in charge of the different subcontractor areas (machining, welding, bending, quenching, and so on). The case focal company has a common information system with the logistics provider to manage the transportation and delivery information. The project oriented business is characterized by a long tendering process, in which the contractual specifications including technical and financial issues, and delivery time, are set out. Suppliers are not involved in the tendering process but are made aware of the situation. The first phase of the project product process after tendering is the order processing that starts after the steel producer receives the order from the customer by fax, email or by mail. The order processing is started by checking the capacity of the supply chain. During order processing, some technical details may vary because of the changing needs of the customer, and more technical negotiation with the customer and the subcontractors is needed (by email, phone and meetings). Furthermore, the scheduling and the production planning are undertaken with respect to the entire supply chain. This happens inside the

63 departments of the case focal company via its various information systems, and between the suppliers by email and/or fax. Typically, production starts after the customer order is received and order handling in the case focal company is complete. The first stage of the production is prefabricating work, such as cutting and beveling by the case focal company. After the prefabricating work, the employee responsible for bending operations organizes the transportation. In addition, this employee contacts, by email, the logistics provider company, who contacts the transport company for transportation by phone or by email. Subcontractor A procures the products in the scheduled time ­ if there is a delay, the employee responsible will call for a new schedule. After bending operations are finished, subcontractor A contacts the person responsible for bending by email (or by phone), who contacts the logistics provider, who contacts the transport company for transportation to subcontractor B. This is the moment, when the control moves from the employee responsible for bending to the employee responsible for welding. That person now is the contact person for the subcontractor B as well as for the end-customer. Welding and testing operations are aligned operations, and the testing company tests the welding seams in the production line of subcontractor B. After the welding operations are finished, subcontractor B contacts the person responsible for welding by email (or by phone), who contacts the logistics provider, who contacts the transport company for transporting the products directly to the customer. The data gathered by the different methods enables a detailed description of the case order-delivery process. In Appendix 3, the flowchart of the project product process is presented. The summary report of the interviews and the modeling work is written for use in the research group in Iskanius (2003), and, further, to the wider public in Iskanius (2004a). Based on the SteelNet 1 steering board discussion on May 28, 2003, the second case supply chain selection is made. The quenched and tempered plate component is selected for the study. Even though the case network is moving towards a project-oriented business and the need for the development of supply chains mainly arises there, most of the turnover still comes from the mass product production. Therefore, the supply chain of the mass product production is selected for study and it is modeled using similar methods as the first supply chain case. The supply chain in this segment area represents the MTS (made-to-stock) operations mode, where products are manufactured into the inventory, and the production is based on the demand forecasts. The selection is made because of the expected volume growth of the markets, the efficiency need and potential in the supply chain. Today the value-offering-point (VOP)18 is in the purchasing, that is a conventional arm-length buyer/seller relationship, but the aim is to move VOP upstream along the material flow. By carefully monitoring the customer's inventory level, the supplier can respond to the demand more efficiently for the customer. This kind of VMI19 development needs efforts, especially from the supplier (Hoover et al. 2001).

18. Value-offereing-point (VOP) is a point in the customer's demand chain where the supplier fulllfills demand (Hoover et al. 2001). 19. Vendor Managed Inventory (VMI) describes a family of business models in which the buyer of a product provides certain information to a supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location (usually a store). VMI makes it less likely that a business will unintentionally become out of stock of a good and reduces inventory in the supply chain (c.f. WalMart). (Wikipedia 2006.)

64 The case supply chain is modeled by following its value chain. The aim of the study is to model the quenched steel product supply chain process from the tendering process to the point where the finished products are transported to the end customer. First, two meetings to consider the case selection and the principles of the modeling work are held. Then, semi-structured interviews are held with the operational staff and key persons (such as sales person, production planners, and representatives of subcontractor management). This interview round is carried out in 3 companies during the period October 2003 and December 2003. In total, 7 different persons are interviewed by 2 interviewers. All interviews are recorded and the interview protocols and field notes are carefully written up. The decision to tape in this situation is easy to make because of the close relationships and greater trust between these case companies. The purpose of the interviews is to understand how the processes proceeds, the performance and quality of the process and the content of the information flow. With the results of the interviews, and company visits the case processes are flowcharted and the major critical issues and success factors of the supply chain are defined and analyzed as an entity. The second supply chain case consists of the steel manufacturer, called later the case focal company, which provides raw materials and prefabricated operations (cutting and beveling), one subcontracting company that undertakes quenching, and a logistics provider (Fig. 18). In the case supply chain there are five different information systems; the case focal company has access to all five to some degree. Furthermore, telephone, fax, email and personal visits are the core communication tools. The subcontractor does not have access to any other systems but its own, and is very dependent on personal communication. For managing information flow with the supplier, the case focal company has an employee (procurement or logistics) responsible for the subcontractor.

ORDER

Company A Quenching

End Customer

Steel producer Raw material and cutting and bevelling

Logistics provider

Customer side for the delivery Flow of material

Supplier network for the delivery Flow of information and know-how

Fig. 18. The supply network of the mass product case.

The first phase of the quenched steel product process is the tendering process. The case focal company estimates the amount and type of work required in manufacturing the product in response to a customer enquiry. This is done with respect to the availability of

65 the capacity regarding the whole supply chain, including the volume required and the delivery date of the order. All such issues related to the tender are then dispatched to the customer. The order processing starts after the case focal company receives the order from the end customer. In the case where the customer is unknown to the case focal company, the customer's credit history will be checked. If the credit history is deemed faultless, the order process is started by checking the feasibility of manufacture and the capacity of the supply chain. If the product is deemed to be possible to manufacture, the scheduling and the production plan is made. The quenching for the product is ordered via information systems: the case focal company puts the order directly into the subcontractor's information system. In the case of a delay, the subcontractor recalls the products from the steel factory to the quenching process. The subcontractor contacts the logistics provider, who arranges all the shipping documents required, organizes the transfers and contacts the transport company. For products that require quenching, the subcontractor sends an email to both the logistics provider and the case focal company's employee responsible for that subcontractor in order to inform them of the completion of quenching. Before the logistics provider can organize the transfer, the employee responsible for the subcontractor must report completion of quenching to the steel producer's information systems. The products are transferred either straight to the customers or to the case focal company for further processing. Further processing includes tasks such as painting, flame cutting, beveling, and bending. After further processing is completed, the plate products are transferred to the customer. In Appendix 4, the flowchart of the mass product process is presented. The summary report of the interviews and the modeling work was written for the use of the project group in Alaruikka et al. (2004), and later made public in Alaruikka (2004).

2.5.3.2 ICT application

Parallel to the case supply chain modeling activities, an iterative design process of the ICT solution for the construct is going on. First, the literature review of the different software and technology solutions is carried out and summarized for the use of the project group in the reports of Latvastenmäki & Kipinä (2003), Smirnov (2003a), Smirnov (2003b), Smirnov (2003c), and Smirnov (2004) and Helaakoski & Ojala (2004). Later on, new state-of-the-art reports are summarized in the area of web technology and agent technologies20 in Peltomaa et al. (2005b). As a result, the software solution based on the Internet and agent technology is chosen for further development. In Chapter 3, the main technological choices related to this study are presented. The software development process adapts to the principles of the agile software development of Beck et al. (2005). Therefore the continuous improvement and numerous iteration rounds are held in order to construct and develop the ICT software application. Also, besides the iterative prototyping, the user-friendliness, usability, and functionality of the

20. An agent is a computer system situated in a certain kind of environment, and it is capable of autonomous action in order to meet its designed objective (Jennings & Wooldridge 1998).

66 ICT application are especially considered. In order to achieve these goals, the application scenario and requirement specification is conducted in close cooperation with the case companies. Close cooperation between the researchers and company staff continues along the entire research process. In the previous interview rounds, the basic data for the design of the ICT application are also collected. The key persons are interviewed in order to collect enough information about the manufacturing processes to form a working knowledge and to produce a requirement specification for the ICT application. These findings are analyzed by comparing them with Bowersox & Closs (1996), Davenport (1997) and Parker (1998), which assess the requirements for the information and present the principles that must be taken into account when designing or evaluating an ICT application for logistics purposes. The data gathered are summarized for the use of the project group in the requirement specification report of Kipinä et al. (2003a). Based on the requirement specification, the first version of the ontology21 concepts is specified and the sample graphical user interfaces (GUI) were designed. Also, the system architecture is designed. These works are reported in the technical specification report of Kipinä et al. (2003b) and ontology specification report of Helaakoski & Ojala (2004). Later, the technical requirements are updated during the research period (Kipinä et al. 2004b, 2005a, 2005b). In total, 6 researchers during the period October 2002 ­ December 2005 concentrate on the software development of the ICT application. Also the integration possibilities of the ICT application with the companies' existing legacy systems are examined. The existing systems are studied and the similarities between them are sought to make the implementation as generic as possible. The unstructured interviews with the ICT staff (such as ICT managers, logistics managers) of three companies, who have extensive operation management systems, are carried out in June 2003. To gather more information about the data transferring and to gain sufficient knowledge about the technical environment are the essential aims of this interview round. 9 persons are interviewed and 3 researchers are involved in this interview round. After these interviews, the interview protocols are carefully written up in order to analyze them later on in this study. The ICT application is tested in the company-wide presentations during December 2003 and January 2004. 16 key persons and 3 researchers are involved in these demonstration sessions. The personnel of the companies themselves have a chance to test the prototype and they actively give feedback in the demonstrations. The feedback is then analyzed, categorized and prioritized and the most important changes are carried out. In the prioritization of the proposed amendments, the researchers take into account the functionality of the system, the research challenges, agreement of users, and usability. Due to the early involvement of companies in the requirement specification and early user interface tests only a few changes are needed. The feedback mainly concerns the user interface, but in addition, some improvements to the ontology are proposed, for example more

21. Although the term "ontology" derives from its philosophical origin, it has a separate and specific meaning in the field of computer science. In computer science, it means a data model that represents a domain and is used to reason about the objects in that domain and the relations between them. Ontologies are used in artificial intelligence, the semantic web, software engineering and information architecture as a form of knowledge representation about the world or some part of it. (Wikipedia 2006.)

67 possibilities to add free-form text to describe objects. The protocols of all the demonstration situations are carefully written up. The report is also written for the use of the project group (Peltomaa et al. 2004a). Additionally, for the help of the end users the report related to the user instructions of the SteelNet is written up in Peltomaa et al. (2004b). Later on, after more development work, the ICT application is introduced to the companies in the half-day workshop held on the 4th October in 2005. 11 key persons (e.g. CEOs, development managers, production managers, ICT experts) from 7 companies and other organizations test the ICT application The most positive feedback is given to GUI. The functions, which enable the use of free text fields to help people understand information in free format, and the ease of finding documents, receive especially positive feedback. Moreover, recommendations for some functional additions such as an electronic signature, the possibility to print documents as pdf22 and attach files (e.g. work instructions, drawings), are made for the future development. After the workshop, the comments are summarized in the report for the use of the project group in Peltomaa et al. (2005d). Afterwards the ICT application is tested again to verify the changes and the additions that have been made after the first demonstration round. The comments are mostly positive. The feedback mainly concerns the file transfer extension that is added to the system. The extension allows any file (for example CAD files, documents and pictures) to be attached to almost any ontology concept.

2.5.3.3 Agile supply chain

The agile supply chain, later called the SteelNet system, is based on the new technological solution. However, the focus of this study is not on the introduction of technological architecture or user interface capabilities of the SteelNet system. Instead, the focus is on the agile practices and on the way how companies cooperate when following agile principles. However, as the technological decisions give the framework for the SteelNet system, with its potentials and boundaries, the technological part in this thesis cannot be totally ignored. After the theoretical review, the author is convinced that virtual enterprise (VE) 23 design gives interesting features for developing the agile supply chain for the case network (e.g. Browne & Zhang 1999, Goldman et al. 1996, Kalliokoski 2001, Vesterager et al. 1998). Since the businesses, and products and services within the case network vary, the agile supply chain should support changes both in changing collaborating companies and in varying products. VE design offers these features.

22. PDF is a short for Portable Document Format, a file format developed by Adobe Systems. PDF captures formatting information from a variety of desktop publishing applications, making it possible to send formatted documents and have them appear on the recipient's monitor or printer as they were intended. To view a file in PDF format, you need Adobe Reader, a free application distributed by Adobe Systems. (Wekopedia 2006.) 23. Virtual enterprise (VE) is a temporary, cooperative alliance of independent member companies and indeed individuals, who come together to exploit a particular market opportunity (Browne & Zhang 1999).

68 For the research work, more empirical information is needed. Heretofore, the focus is on real-time tracking in manufacturing. The next step is to extend the focus to contain also tendering and order processing more specifically. For that reason, the next interview round is designed in order to gather more information related to the tendering and order processing, how these processes are managed in the companies, who is responsible for these processes, and what kind of ICT tools and cooperation styles the companies use with their suppliers and customers. A further aim is to find out the present tendering practices and critical development areas of the tendering process. The interviews for tendering and order processing are carried out in 7 companies during the period October 2004 and November 2004. Semi-structured interviews are held with 17 key persons (such as CEOs, ICT managers, project managers, and SCM development managers). 5 researchers are involved in this interview round. After the interviews, the interview protocols and field notes are carefully written up. The summary report of the interviews is also written for the use of the research group (Peltomaa et al. 2005a). Later on, all data gathered are summarized in the requirement specification report of Peltomaa et al. (2005c). Another interview round is held in order to gain a deeper understanding of the common practices and procedures in tendering and order processing. The principal aim of the interviews is to develop together with the company staff the procedure of the agile practices for the SteelNet system. The second aim is to gather more information for the ideal process modeling. The interviews are carried out in 6 companies during the period January to March 2005. 9 interviewees and 5 interviewers are involved in this interview round. These discussions are stored in the minidisk form. The author makes the transcriptions of the interviews and afterwards processes the data as a summary report for the use of the project group in Iskanius (2005a). According to Simchi-Levi et al. (2003), process modeling is not rational and linear, and therefore there is a need for an iterative process when developing ideal models. Previously in this study, two case supply chains are modeled and the critical issues and improvement possibilities are identified. Now, the critical issues related to digitalization in tendering and order processing are of particular interest. So, there are a lot of data and understanding for the ideal process modeling. Empirical findings are analyzed with respect to the theoretical criteria. The data are analyzed point-by-point and compared with the process modeling examples found in the literature (e.g. Ballou 1999, Burbridge 1989, Christopher 1998, Davenport 1993, Schary & Skjott-Larsen 2000, Simchi-Levi et al. 2003, Jahnukainen et al. 1997, Luhtala et al. 1994, Collin 2003). Finally, the ideal process modeling is carried out as benchmarking work based on the research of Kalliokoski (1998). The ideal process model is evaluated side by side with the evaluation of the ICT application. The ideal process model is presented in Appendix 5, and a description of the SteelNet procedure is presented in section 5.2. The instructions for users were formulated in more detail and summarized in Peltomaa (2006).

69

2.5.3.4 Change process towards agility

Developing agility is a time-consuming process. Instead of small-scale improvements, it means radical changes, i.e. an entirely different way of doing business. To make the significant change from the current way of doing business to a way that includes agility will require a disciplined and organizational process of managing the change (Oleson 1998). In this study the development framework of Poirier & Bauer (2000) is used to analyze the roadmap towards agility. Two workshops (on June 3, 2004 and August 17, 2004) are organized in order to initiate the e-business road map for the case network and to create a common vision of the development process towards agility. In these workshops, the companies actually commit themselves to the common development and start to build a roadmap towards agility. The analysis work is based on the vision that the case companies will continue to develop the SteelNet system, or a similar system, which will transfer logistics information between the network companies in the near future. It is notable that the analysis work is done with a positive attitude, so there is only a little criticism. The development roadmap and the description of the frame are presented in Section 5.3. 20 key persons from 9 different companies and other organizations gather together and position today's state-of-the-art situation in e-business (in 2004) and state the visions for the case network in the short and long term (to years 2006 and 2010). The data gathered is analyzed as an entity, and the summary report is written for the use of the project group in Iskanius (2004b).

2.5.4 Demonstration that the solution works

The fourth phase of the research process is to demonstrate that the solution really works. This phase is a double-test in an important sense: not only is the innovative construct tested in a "technical" manner, but also the "running" of the process is tested as a whole. Although this phase is demanding, if reached it does tell a positive story of the constructive research process and teamwork overall (Lukka 2003). In the next sections, the construct testing activities and the research process evaluation activities are presented.

2.5.4.1 Testing the construct

One of the primary criteria for constructive research is the demonstration of practical usefulness, including relevance, simplicity and ease of operation by the business community. Kasanen et al. (1991) propose a market-based validation to assess this aspect of a construct and have developed a market test based on the concept of innovation diffusion as follows:

70 1. Weak market test (the construct is applied in practice). Has any manager responsible for the financial results of his or her business unit been willing to apply the construct in question to his or her actual decision making? 2. Semi-strong market test. Has the construct become widely adopted by the companies? 3. Strong market test (the benefits from the construct in fulfiling the objective can be shown). Have the business units applying the construct systematically produced better financial results than those that are not using it? This study fulfils, at least, the weak market test criteria, that provide that at least one manager has decided to test the SteelNet system in a real business situation. In addition to that, the study partly fulfills also the semi-strong market test, because several company managers have made the same decision. However, the semi-strong and strong market tests require statistical analyses of a substantial amount of the implementation data. In this study, we have to be satisfied with the qualitative impressions of the end users gathered in interviews. The SteelNet system is also in the field-test phase during the period of November 2005 and March 2006. The main objective of the field test is to study the functionality of the ICT application, but also to collect information for further development and maintenance of the StelNet system. In addition, the field test gives the possibility to the network participants to acquaint themselves with the SteelNet system and to establish a shared practice. The field test is done within three companies. Based on the SteelNet steering board discussion (on November 4, 2005), the testing case is selected. The reference product is a pile anchor (length about 30 m, diameter 1829 mm, max plate thickness 63.5 mm, weight about 90 tons), a good example of a typical offshore product (see also Fig. 17). The material flow of the reference product is quite similar to the one presented in Appendix 3. The case focal company provides raw material and prefabricated operations such as precision cutting, sand blasting and beveling for the product. It also buys heat treatment services. There are also two subcontracting companies, one provides services such as bending and beveling, and the other provides beveling, welding and painting, and also manufacturing and welding services of accessories and additional special parts. The quality testing company does the required welding tests and the logistics provider manages the transportation services by trucks between the companies, and by ship to the end customer. In the beginning of the test period, the training courses are held in the companies to teach the staff to use the SteelNet system. A contact person is named from each company. That person is responsible to update the information on test orders in the SteelNet system. It is very important to update the information daily and regularly to get valuable information for future development. The status of the test order is checked every day by 7.30 am and the data was updated according to the situation. The updating could also be done even more often. After the testing period, a short web questionnaire is designed in order to assess the functionality of the SteelNet system and the experiences of the end users. 6 end users answer the questionnaire. The results are taken into account in the recommendations for future research. The web questionnaire and the results are presented in Appendix 6, and the main conclusions are summarized in section 6.3.

71

2.5.4.2 Evaluation of the research process

In this study, the research work is facilitated by the SteelNet research projects. Steering group meetings and project group meetings of the SteelNet projects are held regularly. During the research process, the steering meetings are testing situations for the research process. Actually, the steering meetings are not only evaluation situations for the research process, but also testing situations for the construct. In Table 5 the steering meetings are presented. The steering group consists of key persons in the participating companies, and other organizations (such as CEOs, managers, SCM and ICT development managers). Protocols of all the steering meetings are carefully written up and stored. The objective of the case steering group is to specify the research project targets and to supervise the research progress. It also decides on the publication of the results achieved during the project. The relationship between the researchers and practitioners is remarkably positive and beneficial in this case. In addition, the project group meetings are research-testing situations but, more importantly, they are motivational meetings for the author. Knowhow and understanding accumulates in the meetings, where researchers from different scientific fields meet and discuss the common problems. Also, the project management practices are good. All the interviews and technical studies are written up. Protocols, project reports, interview notes, etc., are all available on the Intranet.

72 Table 5. The steering group meetings ­ test the issues related to the study.

Evaluation theme Expert systems Intelligent technologies Basic information of case companies Basic information for ICT solution Project product process modeling Requirement specification for SteelNet Technical specification for SteelNet Electronic documents Modeling the mass product process Summary of demonstration sessions Development framework of e-business Web technologies Ontology specification Instructions for SteelNet Technical specification of the SteelNet solution (version 2) Road map towards e-business Tendering and order processing in case network State-of-art in agent and ontology technologies and tools Tendering and order process model The technical specification of the SteelNet solution (version 3) Requirement specification for SteelNet (updated) Summary of demonstration workshop The technical specification of the SteelNet solution (version 4) Instructions for SteelNet system (updated) Change Management report 10 6 10 7 Persons 9 8 7 7 6 8 9 Date 24.2.2003 28.5.2003 23.9.2003 2.12.2003 9.3.2004 15.6.2004 21.9.2004 Reports Smirnov (2003a) Smirnov (2003b) Helaakoski, et al. (2003a) Latvastenmäki & Kipinä (2003) Iskanius (2003) Kipinä et al. (2003a) Kipinä et al. (2003b) Smirnov (2003c) Alaruikka et al. (2004) Peltomaa et al. (2004a) Iskanius (2004b) Smirnov (2004) Helaakoski & Ojala (2004) Peltomaa et al. (2004b) Kipinä et al. (2004b) Iskanius (2004b) Peltomaa et al. (2005a) Peltomaa et al. (2005b) Iskanius (2005a) Kipinä et al. (2005a) Peltomaa et al. (2005c) 4.10.2005 8.12.2005 28.2.2006 15.5.2006 Peltomaa et al. (2005d) Kipinä et al. (2005b) Peltomaa (2006) Iskanius (2006)

8 9 9

2.12.2004 18.1.2005 31.5.2005 10.6.2005 5.6.2005

2.5.5 Theoretical connections and research contributions

The fifth phase of the research process shows the theoretical connections and the research contributions of the solution concept. From the academic point of view this is an inevitable and crucial phase of the research process: the researcher has to be able to explicate the theoretical contribution of the study, i.e. illustrate the findings in relation to (potentially existing) prior theory (Lukka 2003). In the case of constructive research, two major types of potential theoretical contributions are open (Lukka 2003). The first one is the novel construct itself. If the designed new construct is found to work in the primary case, it will provide a natural contribution to the earlier literature. It should be regarded as a new means of achieving certain ends, regarded as important by practitioners, and new means ­ ends relations will open as tar-

73 gets for further analysis. In constructive research, the empirical work is typically quite strongly geared towards achieving this part of the potential contribution. Another is the positive relationships behind the construct. In addition to the attempt to design new constructs and test their functioning, a constructive research project is an arena for both applying and developing the existing theoretical knowledge about the structural features and process emerging from the case. In the primarily pragmatic test of truth (i.e. whether the novel construct truly works or not) the underlining positive relationships are tested as well. The theoretical connections and some managerial implications of the study are discussed in Section 6.2.

2.5.6 Examine the scope of applicability of the solution

The final phase of the research process examines the scope of applicability of the solution. In this phase the researcher has to be able to step away from the empirical work, to ponder the learning process he or she has gone through, together with the target organizations. The key question here is to analyze the results or the study and its preconditions (Lukka 2003). According to Lukka (2003), if the innovative construct passes the primary market test (i.e. it produced the anticipated results), it is of course interesting to discuss, to what extent, and with what potential the construct might be transferable to other organizations. However, if the market test failed, there will be room for theoretical analysis, since it is probably worth discussing whether the cause of the failure could be avoided in other organizations. The scope of applicability of the study is discussed in Section 6.3.

3 Agility in supply chain management

This chaper presents the theoretical background to this thesis. The chapter first presents a discussion of Supply Chain Management (SCM) as a management concept. Second, the chapter introduces the new manufacturing paradigm agility as a competitive approach for today's business. Third, the chapter presents the framework of an agile supply chain, and introduces the main improvement elements of an agile supply chain in a project-oriented business. Thereafter, there is a discussion of the importance of information and communication technologies in the creation of an agile supply chain. Finally, the theoretical compilation of an agile supply chain is identified.

3.1 Supply chain management (SCM) 3.1.1 SCM as a management concept

Many definitions of Supply Chain Management (SCM) have been presented (e.g. Jones & Riley 1985, Houlihan 1988, Stevens 1989, LaLonde & Masters 1994, Bowersox & Closs 1996, Monczka et al. 1998, Lummus & Vokurka 1999). Frequently it is seen as a synonym for logistics, operations management, procurement or a combination of the three (Lambert et al. 2005), but today the broader definition determined by the Global Supply Chain Forum is generally accepted as the norm (Cooper et al. 1997a, Lambert et al. 1998b): "Supply Chain Management (SCM) is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders" Modern developments in the business environment all the time create new business approaches, concepts and methods. The result is the a rapid evolution of business systems and the creation of new manufacturing and operation management concepts. SCM merged many management concepts together, such as Just-in-Time (JIT), Total Quality Control (TQC), Total Quality Management (TQM), Time-Based Management (TBM),

75 Lean Thinking, Activity Based Management (ABM) and Business Process Reengineering (BPR). They all are based on analyzing and improving business processes (Fig. 19) (Laamanen & Tinnilä 1998).

Quality

1970 Total Quality Control Total Quality Management Lean Thinking Activity Based Management Business Process Reengineering 2000 Supply Chain Management

Time

Just-in-Time

1980

Time-Based Management

1990

Fig. 19. Management concepts behind SCM (modified from Soronen 1999).

The first signs of SCM were in Just-in-time (JIT) production as a part of the Toyota Production System (Monden 1998, Shingo 1998). JIT started as a manufacturing system that produces the units needed, at the time needed and in the quantity needed. But JIT is actually a broad management philosophy that seeks to eliminate waste that results from any activity that adds cost without adding value, by producing the right part in the right place at the right time. JIT, also known as the stockless production, in practice improves profits and return on investment by reducing inventory levels and cutting unnecessary inventory, reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs such as those associated with machine setup and equipment breakdown. (Krajewski & Ritzman 2000, Lambert et al. 1998a.) Further, in JIT production, the goal is not to reduce inventory, although that is an appealing side benefit. Rather, the goal is to streamline the entire production process (Zacharia 2001). JIT systems focus on reducing inefficiency and unproductive time in the production process to continuously improve the process and the quality of the product and service. The companies produce goods and services as needed and to continuously improve the value-added benefits of operations. (Krajewski & Ritzman 2000.) Companies following JIT principles operate with very low levels of inventory, and close relationships with the suppliers are necessary. JIT production requires JIT supply. Supply and production JIT can only be obtained if there is relative stability of demand in the short term, i.e. typically a month. (Toone 1994.) JIT logistics focuses on three areas: reducing the number of suppliers, using local suppliers, and improving supplier relations (Krajewski & Ritzman 2000). Doing things just-in-time ­ neither too early nor too late ­ has had a profound influence on the way supply chains are managed. The JIT approach to material control is

76 based on the view that a process should operate only on a demand signal from the end customer. The supply chain can be seen as a chain of customers, where each link is coordinated with its neighbors by JIT signals. This principle is a pull system, where parts are pulled through the chain only in response to demand from the end-customer. (Schonberger 1986.) This contrasts with a push system, in which products are made whenever resources (people, material, and machines) become available in response to a central plan or a pre-set schedule, regardless of whether the next process needs them at the time (Harrison & van Hoek 2005). A Kanban system is a pull signaling system, in which the kanban card is used to pulling parts to the next production stage when they are needed. On the other hand, an MRP (Material Requirement Planning) system (or any schedule based system) is a push system, in which a detailed production schedule for each part is used to push parts to the next production stage when scheduled. The weakness of a push system (MRP) is that customer demand must be forecast and production lead times must be estimated. Bad guesses (forecasts or estimates) result in excess inventory and the longer the lead time, the more room for error. The weakness of a pull system (Kanban) is that following the JIT production philosophy is essential, especially concerning the elements of short setup times and small lot sizes. (Krajewski & Ritzman 2000.) Quick Response (QR), later documented as time-based competition, is mostly considered as a retail sector strategy which combines a number of tactics to improve inventory management and efficiency, while speeding up inventory flows (Suri 1998). Most QR is between the manufacturer and retailer only. When fully implemented, QR applies JIT principles throughout the entire supply chain, from raw material suppliers through ultimate customer demand (Lambert et al. 1998a). Efficient Consumer Response (ECR) is the grocery answer to QR, and combines several logistics strategies in an effort to improve the competitiveness by cutting waste in the supply chain (Lambert et al. 1998a). Vendor Management Inventory (VMI) strategy rests the responsibility for the replenishment of a customer's inventory with the supplier who manages the whole process (van Hoek 2005). Time-based management (TBM) seeks to reduce the time needed to take a product from development to delivery to the customer along a supply chain. Essentially, TBM attempts to reduce unproductive time by reducing development times, lead times, waiting times, unnecessary movement, overproduction, poor quality and waste, set-up times, and bottlenecks. By reducing time in these areas, TBM reduces costs and increases the speed with which an enterprise can respond to its customers ­ and therefore its competitiveness. Effective TBM involves just-in-time production and stock control, simultaneous engineering (in which procedures not depending on each other are carried out simultaneously) and shorter product development times. (Stalk & Hout 1990.) The western alternative for the JIT is Lean production, or Lean Thinking, which seeks to describe radically different approach to running the business from the traditional mass production (Womack et al. 1996). The common view is that JIT and Lean Thinking work best where demand is relatively stable ­ and hence predictable ­ and where variety is low. Lean Thinking is a cyclical route to seeking perfection by eliminating waste in all aspects of a business, from the shop floor to all manufacturing areas, and from manufacturing to new product development and SCM, and thereby enriching value from the customer perspective, also briefly defined as a creation of more value with fewer resources. (Harrison & van Hoek 2005.)

77 Lean thinking offers a way of specifying value and line up value-creating actions in the best sequence. It allows these activities to be conducted without interruption, and performed more and more effectively, whenever someone requests them. Lean thinking also provides a way of making work more satisfying by offering immediate feedback about everyone's efforts to convert waste into value. Unlike process reengineering, presented later, it provides a way of creating new work rather than simply destroying jobs in the name of efficiency. Value is the critical point of departure for this approach. But, it is value as defined by the customer, and that is only meaningful when expressed in terms of a specific good that meets the customer's needs at a specific price and time. (Womack et al. 1996.) Another stimulus for SCM originated in the field of quality control. According to Feigenbaum (2005), quality is a fundamental way of managing, because without quality, customers, whether industrial or consumer, are simply not going to buy from the business. Total Quality Control, presented by Feigenbaum (2005), is an effective system for integrating the quality development, quality maintenance, and quality improvement efforts of the various groups in an organization so as to enable production and service at the most economical levels which allow full customer satisfaction. A further developed management concept, Total Quality Management (TQM), is the business philosophy that seeks to encourage both individual and collective responsibility to seek quality at every stage of the production process from initial design and conception through to after sales service. TQM has three principles: customer satisfaction, employee involvement, and continuous improvements in quality. (Krajewski & Ritzman 2000.) TQM involves being proactive in performing the right activity in the right way the first time, rather than the need to fix problems after they emerge or fester, and continuing to perform it to the required level (Lambert et al. 1998a). The Kaizen philosophy of continuous incremental improvements, that lies behind TQC and TQM, is an operational strategy to continually, and incrementally, change and improve every aspect of operational components; equipments, procedures, skills, throughput time, quality, supplier relationships, products and service design and so on. Key elements of Kaizen are quality, effort, involvement of all employees, willingness to change and communication. (Krajewski & Ritzman 2000.) Activity Based Management (ABM) focuses on the management of activities as a way to improve customer value and profit. ABM includes cost driver analysis, activity analysis, and performance measurement. With ABM, businesses can make dramatic improvements in measuring product and process costs, and more importantly customer profitability. ABM uses detailed economic analyses of important business activities to improve strategic and operational decisions. ABM increases the accuracy of cost information by more precisely linking overheads and other indirect costs to products or customer segments. Traditional accounting systems distribute indirect costs using bases such as direct labor hours, machine hours or material dollars. ABM tracks overhead and other indirect costs by activity, which can then be traced to products or customers. Activity-based costing (ABC), the accounting tool in this concept, has given businesses process-based financial information that is much more useful than the traditional organization-based (or function-based) cost accounting in designing integrated processes. (Plowman 2001, Morrow 1992.)

78 According to Teng et al. (1994), in recent years, increased attention to business processes is largely due to TQM. Today, Business Process Reengineering (BPR) is introduced as a management concept of the critical analysis and radical redesign of existing business processes to achieve breakthrough improvements (Davenport & Short 1990, Teng et al. 1994). BPR is the fundamental reconsideration and radical redesign of organizational processes, in order to achieve cost reduction and improved efficiency and effectiveness (cost, service and speed). Value creation for the customer is the leading factor for BPR and information technology typically plays an important enabling role. (Hammer & Champy 1993.) Davenport (1993) notes that TQM (or continuous improvement), refers to programs and initiatives that emphasize incremental improvement in work processes and outputs over an open-ended period of time. In contrast, BPR (or process innovation), refers to discrete initiatives that are intended to achieve radically redesigned and improved work processes in a bound time frame. Teng et al. (1994) conclude that both TQM and BPR share a cross-functional orientation. Comparing BPR with Kaizen, BPR is more technology-oriented, enables radical changes but requires major changes in management skills. These early management concepts focused on productivity and cost-reduction objectives inside an individual company. The essence of SCM, on the other hand, can be seen in the continuous formation and permutation of the companies into temporary alliances that, by leveraging the core competencies of each company, can successfully respond to any marketplace opportunity with superior competitive advantage. SCM can be seen, above all, as a business philosophy that enables individual companies, as well as supply chain members to achieve high levels of productivity, profit, and growth. SCM is also dynamic, because today's business environment is intrinsically dynamic. (Ross 1998.)

3.1.2 Competitive advantage through SCM

Throughout the 1970s and early 1980s, companies tried to achieve a competitive advantage by improving productivity and reducing costs. As the 1980s unfolded, competitive advantage meant delivering flawless product quality, while in the 1990s, providing superior customer service became the objective of leading-edge firms. However, this discussion highlights two points regarding competitive advantage. First, even the most successful advantages lose their individual determinacy over time so that yesterday's competitive advantage becomes today's minimum acceptable standard. Second, the window of opportunity for any given strategic innovation may be relatively narrow, so organizations must constantly be searching for new ways to meet their customers' needs better than their competitors can. In the 2000s, the source of competitive advantage is a thorough understanding of the customers and the additional value that they seek. As Drucker (2002) states, business has only one goal, that is to create value for customers. In addition, companies must have internal skills (competences) necessary to exploit that knowledge in ways that no rival can duplicate (Gourdin 2001). For 15 years, the answer to the question how do we keep our customers happy, expand our business, and increase profitability, has been SCM ­ the concept, which has tried to be the panacea for poor customer service, poor communication, poor relationships - poor

79 everything. SCM by definition is about creating value ­ value for customers and suppliers, and stakeholders of the company. SCM controls the time value and the place value in products and services, through material and information flows. Products and services have no value until customers get them, if they are in the possession of customers when (time) and where (place) do they wish to consume them. Each activity in the supply chain contributes to the process of adding value. (Ballou 1999.) Today SCM is important but instead of focusing on optimizing individual links, the emphasis is on the supply chain integration from raw material provider to finished-product customer. A competitive advantage built upon a well-planned and executed SCM strategy can be sustainable because it is very difficult for the competitor to copy. (Gourdin 2001.) Because it is broadly considered as a philosophy of management, SCM is never totally attained by any company or group of companies, nor can the elements of success enjoyed by one supply network be transferred to another with the expectation of identical levels of performance. Today, the competitive advantage belong to those supply chains that can activate concurrent business processes and core competences that merge infrastructures, share risks and costs, leverage the shortness of today's product lifecycle, reduce time to market, and gain and anticipate new vistas for competitive leadership. (Ross 1998.) In the competitive context, the successful companies either have a productivity advantage (or cost advantage) or they have value advantage, or ideally, a combination of these two (Christopher 1998, McKinnon 2001). These strategic options are represented by a simple matrix showing four combinations for cost and added value (Fig. 20).

Value advantage

SCM leverage opportunities: - tailored services - reliability - responsiveness etc.

Service leader

Cost and service leader

High

Low

Commodity market

Low

Cost leader

High Productivity advantage

SCM leverage opportunities: - capacity utilization, - asset turn - co-makership/schedule integration - etc.

Fig. 20. Strategic advantage positioning of companies (Christopher 1998).

80 Companies that find themselves in the bottom left hand corner supply undifferentiated, low-value, products at relatively high cost (McKinnon 2001). These are typical commodity market situations, and ultimately the only strategy is either to move to the right on the matrix, i.e. to cost leadership (minimizing cost), or upwards towards service leadership (maximize value) (Christopher 1998, McKinnon 2001). Often the cost leadership route is simply not available, particularly, in the case of mature market where substantial market share gains are difficult to achieve. New technology may sometimes provide a window of opportunity for cost reduction but in such situations the same technology is often available to competitors. Cost leadership strategy, in the bottom right hand corner, has traditionally been based upon the economics of scale, gained through sales volumes, that is why market share is considered to be so important in many industries. An increasingly powerful route to achieving a cost advantage comes not necessarily through volume and the economics of scale but instead through SCM. (Christopher 1998.) The other way is to seek a strategy of differentiation through service excellence. Customers in all industries are seeking greater responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-time delivery and value-added services that enable them to serve better their customers. SCM can play a key role in enhancing customer lifetime value through increasing customer satisfaction and thus customer retention. To achieve this will require the development of systems and the supporting coordination processes to ensure that customer service goals are met. (Christopher 1998.) The companies who are the leaders in the markets of the future are in top right corner, producing high value, well-differentiated products at relatively low cost (McKinnon 2001). This position is also the strategic challenge to SCM, the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and yet at lower costs. In other words, to achieve the goal of competitive advantage through both cost reduction and service enhancement (Christopher (1998).

3.1.3 Supply chain performance

To understand SCM more deeply, it is a prerequisite to further clarify the term "supply chain". In academia, the term was adopted in the late 1980s when the first journal articles were published, such as Jones & Riley (1985), Houlihan (1988), Stevens (1989), and later such as Scott & Westbrook (1991), Oliver & Webber (1992), Lee & Billington (1993), Cooper & Ellram (1993), La Londe & Masters (1994), Cox et al. (1995), Lambert et al. (1998b), Cooper et al. (1997a). Typically several independent companies are involved in providing products and services to fulfill the customer requests. Raw material and component suppliers, manufacturers and product assemblers, distributors, wholesalers, retailers, transportation companies, end customers, and even competitors, are the members of a supply chain (Mentzer et al. 2001). Likewise, the supplier's suppliers and customer's customers have an impact on the supply chain performance (Simchi-Levi et al. 2003). The supply chain concept deals with the management of material, information and financial flows. Information on customer demand flows upstream from the market-

81 place, and ultimately, to the raw material supplier, and material flows downstream, ending up as physical products satisfying end-customer demand (Towill & McCullen 1999). In reality, the term "supply chain" is a misleading term as a chain typically implies linear, sequential relationships from one link to the next. According to Sherer (2005), there are two problems with this term. First, not all products flow sequentially. Some supply chains involve concurrent material flow. For example, Dell's monitors ship concurrently with its computers. Second, the information flow does not always flow sequentially. For example, with new information systems, information can be shared with many companies at once in real-time. (Sherer 2005.) When the term was coined, sequential information processing existed due to information systems limitations. But these limitations no longer exist. Hence, most supply chains are actually networks, since there are normally multiple suppliers and, indeed, suppliers' suppliers (upstream) as well as multiple customers and customers' customers (downstream) to be included in the total system (Cox 1997, Christopher 1998, Mentzer et al. 2001, Chandra & Kumar 2001). According to Christopher (1998), instead of the term "supply chain", it would be more accurate to use the terms "supply network" or "supply web" to describe the net-structure of most supply chains. He emphasizes the network-nature of his supply chain definition: "Supply chain is a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer". Fig. 21 illustrates the idea of a firm being at the center of the network of suppliers and customers. An important point here is that the supply network should be viewed as a system. All processes within the network need to be understood in terms of how they interact with other processes. No organization is an island: its inputs and outputs are affected by the behavior of the other players in the network. One powerful player can make life very difficult for everyone else, or on the contrary, can significantly benefit the entire network.

information flow

S U P P L I E R S

Firm

material flow

C U S T O M E R S

Supply ­ demand fulfillment

Demand signal

Fig. 21. Supply chain is a network.

82 The traditional view has been that at the end of the supply chain is the customer, and the better the supply chain is servicing this customer, the more value will be created. The objective of the supply chain is to maximize the overall value generated in each step of the chain. The value is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer's request (Chopra & Meindl 2001). Thus, instead of the term "supply chain", the term "value chain" is usually used to emphasize the value added process (Jansson et al. 2001). The notion of value chains has its origins with Michael Porter, almost 20 years ago. In recent years the term "supply chain" was confronted with some criticism that the notion does not describe its customer-oriented focus well enough (e.g. Christopher 1998, Hoover et al. 2001). Therefore, the term "demand-supply chain" is used today when it is necessary to emphasize that the chain is market-driven, not supplier driven (Hoover et al. 2001). A demand chain transfers demand information from end customer markets to suppliers, whereas a supply chain creates products and services that are transferred from suppliers to end customers. Together they create the demand-supply chain, which is an endto-end network where demand knowledge is passing from markets to supply sources and value offerings are passed from supply sources to customers (Collin 2003). Moreover, the term "order-delivery chain" is used when focusing on the supply chain processes from ordering to delivery (Jahnukainen et al. 1996, Jahnukainen et al. 1997). In this study, all of these elements (network-nature, value-added and demand-driven) are in the term "supply chain", and the focus is on the activities of the supply chain process from tendering to delivery. According to Bovet & Martha (2000), a supply chain includes activities such as material sourcing, production scheduling, and the physical distribution system, backed up by the necessary information flows. Procurement, manufacturing, inventory management, warehousing, and transportation are typically considered part of the supply chain organization. Marketing, sales, finance, and strategic planning are not. Product development, demand forecasting, order entry, channel management, customer service, and accounts payable and receivable lie in a grey area; in theory, they are part of the supply chain process, but they are seldom included within the supply chain organization. Importantly, it also embodies the information systems so necessary to monitor all of those activities. (Bovet & Martha 2000.) Today, many companies have recognized the Supply-Chain Operations Referencemodel (SCOR) as a powerful and robust tool to describe, analyze, and improve the supply chain (Fig. 22).

83

Plan Plan Plan

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Supplier's supplier

Supplier

Your Company

Customer

Customer's customer

Internal or External

Internal or External

Fig. 22. SCOR ­ Supply chain model (Supply Chain Council 2005).

Based on the SCOR approach, the Supply Chain Council (2005) defined a supply chain as follows: "The supply chain encompasses every effort involved in producing and delivering a final product, from the supplier's supplier to the customer's customer. Fiver basic processes ­ plan, source, make, deliver and return ­ broadly define these efforts, which include managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer." The supply chain involves five distinct basic processes, as the Supply Chain Council has defined. These processes are (Supply Chain Council 2005): plan (processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements), source (processes that procure goods and services to meet planned or actual demand), make (processes that transform product to a finished state to meet planned or actual demand), deliver (processes that provide finished goods and services to meet planned or actual demand, typically including order management, transportation management, and distribution management, and return (processes associated with returning or receiving returned products or their parts, such as pallets, for any reason). The SCOR model is actually a process reference model that has been developed and endorsed by the Supply Chain Council as the cross-industry standard diagnostic tool for SCM. It is the only supply chain framework found that links performance measures, best practices, and software requirements to a detailed business process model (Supply Chain Council 2005).

84

3.1.4 Supply chain integration

To stay competitive, companies strive to achieve greater coordination and collaboration among supply chain partners in an approach called supply chain integration (Lee & Whang 2001). Towill (1997) defines an integrated supply chain as a "seamless supply chain" where territorial boundaries between trading partners are eliminated allowing them to operate effectively as if they were part of one organization. Sohal et al. (2003) claim that the basic components of integration typically include cooperation, collaboration, information sharing, trust, partnership and shared technology. It is noticeable that integration can be applied to almost anything and at any level of the organization (Grieger 2004a). Several definitions for the term supply chain integration exist in the literature (e.g. Bowersox et al. 1999, Lee 2000, Stevens 1989). The most widely accepted is, however, the process integration perspective. Christopher (1998) and Lambert et al. (1998a) define supply chain integration as following: "Supply chain integration is process integration upstream and downstream in the supply chain". According to Lambert et al. (1998a) there are seven key business processes24 that could be integrated across the supply chain: customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, procurement and product development and commercialization. The number of processes that should be integrated or would be advantageous to integrate varies. In some cases linking just one key process is enough and in others linking multiple or all business processes is required. Thus, it should be carefully analyzed which business processes to integrate in a supply chain. (Lambert et al. 1998a.) Supply chain integration is difficult for two main reasons (Simchi-Levi et al. 2003): First, different companies in the supply chain may have different, conflicting objectives (e.g. suppliers' desire for long production run in stable volumes against manufacturer's desire for flexibility). Second, the supply chain is a dynamic system that evolves over time. Customer demand, supplier capabilities, and relationships in the supply chain evolve over time (e.g. customer's increasing power pressure to produce an enormous variety of high-quality products, ultimately, to produce customized products). Empirical studies, such as Fawcett & Magnan (2002) and Baghi et al. (2003) have shown that the reality of supply chain integration seldom is equivalent with or even close to the theoretical ideal. According to Fawcett & Magnan (2002), even companies are familiar with the supply chain mantra of "suppliers' suppliers to customer's customer", actually few companies are engaged in such extensive supply chain integration. Almost 60% of the companies have, as a primary focus, established world-class processes within their own four walls. Backward integration with valued first-tier supplier is the most common integration form between companies. Forward integration with valued first-tier customers has little application, and if it has, ultimately, the focus is one-tier forwards on key customers. Complete forward and backward integration is quite rare, more like theoretical

24. Business processes are the activities that produce a specific output or value to the customer (Lambert et al. 1998a).

85 idea that a reality. Companies on this level have closed the gaps that existed among the various internal functions and are simultaneously working to extend integration efforts up and downstream. These companies have identified key customers, evaluated these customers' competitive requirements and critical success factors, and are striving to build processes back into first-tier suppliers that will deliver quality and responsiveness at the lowest possible total landed cost. (Fawcett & Magnan 2002.) According to Lee & Whan (2001), supply chain integration has four different perspectives: 1. Information integration refers to sharing information about important supply chain parameters among the supply chain members. This comprises any type of data (e.g. demand data, inventory data, capacity plans, production and schedules, promotion plans, and shipment schedules) that could influence the actions and performance of the supply chain members; 2. Planning synchronization relates to the joint design and execution of plans for product introduction, forecasting and replenishment. In essence, it defines what is to be done with the information that is shared: it is a mutual agreement along the members of the supply chain as to specific actions based on that information. Ideally, all order fulfillment plans are coordinated so that all replenishments are made to meet the ultimate customer demand; 3. Workflow coordination refers to streamlined and automated workflow activities between supply chain members. In contrast to planning synchronization, it defines not just what the firms should do with the shared information, but what should be done with the information that is shared (e.g. procurement activities from a manufacturer to a supplier can be tightly coupled so that efficiencies in terms of accuracy, time, and cost, can be achieved. Product development activities involving multiple companies can also be integrated to achieve similar efficiencies. In the best-case situation, supply chain partners would rely on technology solutions to actually automate many or all of the internal and cross-company workflow steps); 4. New business models. Adoption of e-business models to supply chain integration includes more than just efficiency progress. Firms are realizing whole new ways of doing business and new business opportunities, which were not previously possible. Logistic flows may change and/or roles and responsibilities of supply chain partners may shift in order to improve overall supply chain efficiency. The focus of this thesis is on information integration. However, while initially Lambert et al. (1998b) place the information integration at the top of the supply chain integration, the integration cannot be complete without organizational integration, that is, tight linkage of the organizational relationships between companies in the supply chain. The critical questions of the supply chain integration are the choice of actors, with whom it is critical to link, the choices of processes, which need to be linked with each of these actors, and the level of integration to each process link (Lambert et al. 1998a). Organizational integration is achieved when a unified supply chain - where ideas, skills and culture are shared - is formed. The decision makers in multiple chain organizations are committed to collaborate in order to achieve common goals set for the supply chain (Cooper et al. 1997b). Managing coordination among supply chain members, therefore, assumes significant importance. Bagchi & Skjøtt-Larsen (2002) argue that organizational integration can

86 also be a catalyst for information integration. The flatter organizations work better than cumbersome hierarchical ones (Cooper et al. 1997b) and they are easier to link together electronically by ICT applications (Bowersox & Closs 1995). In addition, ICT also provides an impetus for organizational structures. Information integration encompasses the sharing of relevant knowledge and information among members of a supply chain. Hence, the requirements for information in SCM context are presented along with a discussion of the benefits of information sharing.

3.1.4.1 Information flow requirements

Traditionally SCM has focused on the efficient flow of materials through the supply chain, whilst the information flow was often overlooked because it was not viewed as having a perceived value to customers. In the past, information flow was largely paperbased and resulted in slow, unreliable, and error-prone information transfer. Presently, timely and accurate information is recognized as a critical objective for effective SCM. Information is a key ingredient not just at every stage of a supply chain, but also within each phase of supply chain decision-making ­ from the strategic phase to the planning phase to the operational phase (Chopra & Meindl 2001). According to Bowersox & Closs (1996), customers perceive that information about order status, product availability, delivery schedules and invoices are important elements of customer service. For example, any item of information, which is mismanaged, will result in customer dissatisfaction (Singh 1996). Bowersox & Closs (1996) continue that with the goal of reducing total supply chain inventory, it has been realized that information can effectively reduce inventory and human resource requirements. In particular, requirements planning using the most current information can reduce inventory by minimizing demand uncertainty. Also, information increases flexibility with regard to how, when, and where resources may be utilized for strategic advances. The terminology of information is confusing. Widely-used terms "data", "information", and "knowledge" have different meanings, they are even used so that they overlap. FOLDOC Dictionary (2004) specifies that data on its own has no meaning, only when it is interpreted by some kind of data processing system it has a meaning and becomes information. Orna (1990) states, that data may become information when it is suitably organized and acted upon. Drucker (1995) claims that data only become information on receiving managerial attention. Data, such as alphanumeric, audio or text data can be processed to become information for example by calculating, updating, adding, or sorting (Boardman 1999). Shapiro & Varian (1999) use the term information broadly, i.e. anything that can be digitalized is information. According to Lillrank (1997), when data is being put in a meaningful context and processed, it becomes information. Lillrank (1997) further adds that information is transformed into a component of knowledge, when it is analyzed critically. According to Orna (1990), information becomes knowledge, when information is absorbed, understood and applied by people. In sum, data is a standardized symbolic representation of states and events, information is data in the context of meaning, and knowledge is the understanding about how something works in relation to some-

87 thing else. The utility of information is realized when it is communicated and received in a meaningful context. (Lillrank 1997.) Information as a substitute for inventory is a common theme in the SCM literature (Closs et al. 1997), where the widely-used slogan is: "In the modern supply chain, information replaces inventory". But, for example Simchi-Levi et al. (2004) consider it to be vague, after all, at some point, customers need products, not just information. Nevertheless, information strongly affects the design and operation of supply chains. As SimchiLevi et al. (2004) state, information changes the way a supply chain can and should be managed - more efficiently than ever before - and these changes may lead to, among other things, lower inventories. Indeed, information should be readily available to all companies in a supply chain and business processes should be structured in a way to make full use of this information and that is the key question in designing the agile supply chain (Christopher 2000). Davenport (1997) proposes six characteristics that determine the value of information in business organizations: ­ Information has to be accurate to be perceived as valuable and to be used with confidence. In addition, if an employee, who receives the information, does not trust the source, the data is of questionable accuracy; ­ Timeliness means that information must be up to date to be of any use at all. However, the definition is very situation-specific. For strategic planning, information that is several years old can still be considered timely, whereas at production level may have to be updated hourly to be useful. If the information is too difficult or time-consuming to obtain, it may not be worth the effort to use; ­ Accessibility refers to connectivity or the ability to one computer to access data on another computer over network. But connectivity only refers to physical access, it makes no guarantee that the actual end user of the information will get what he or she wants from the information. Certain form of information is also more accessible than others. Information, no matter how valuable it is otherwise, must be noticed to be useful; ­ The information impact is a measure of engagement, how the information engages a potential user through its format, medium, presentation, or other means. Engagement is also the least generalizable characteristic of information; each organization, even each employee, pays attention to different things. Information that is thoroughly engaging to one company may seem completely unremarkable to another; ­ When information can be directly used to solve a business problem or support a business decision without extensive rearranging or further analysis, it is applicable, which obviously makes it relevant to the user, as well as valuable; ­ Given that information often conveys power, and that information environments are inherently political, rarity may make all the difference to a given piece of information's value. It is well-accepted that information is a unique resource because it does not lose value if given to others. But while it is true that not all information has to be rare to be valuable, if the information can be obtained and used by others easily, then it may well have less value to the company.

88 Sharing information has to be both efficient and secure (Sun et al. 2005). The most important issues in security in general are to protect the information's confidentiality, integrity, authenticity, and availability in all information handling circumstances from creation to the time when the information, data, is no longer accurate and can be destroyed completely (Pirilä 2004). Parker (1998) emphasizes the security approach of information by his six secure elements: ­ Availability: Usability of information for a purpose. This ensures that information and vital services are available to users when required. The synonym for availability is usability; ­ Utility: Usefulness of information for a purpose. The format and mode of the information is such that it can be used easily in everyday use without any special skills or tools. The synonym for utility is usefulness; ­ Integrity: Completeness, wholeness, and readability of information and quality being unchanged from a previous state. The information is no self-generated and selfdestroyed, that is, you do not know, who has generated and destroyed information. Information is precisely original during the lifetime and in different stages of the data processing. The synonym for integrity is completeness; ­ Authenticity: Validity, conformance, and genuineness of information. The used information is original and it is not forged. The authenticity and the real source of the information can be authenticated using technical checking methods when needed. The synonym for authenticity is validity; ­ Confidentiality: Limited observation and disclosure of knowledge. This means that information is available only for those who need it and the information will be protected against unauthorized use. The synonym for confidentiality is secrecy; ­ Possession: The holding, control, and ability to use information. This describes how a person is able to use and process company information. The synonym for possession is control. Information in the SCM context provides raw material for decision-making and an understanding of logistic flows and operations management. Information should be considered as a resource to be utilized for decision-making that subsequently enhances logistical effectiveness, efficiency and flexibility (Closs et al. 1997). The information, which is most often shared, comprises the availability of resources (e.g. capacity, inventory, funds, and capability); the status of performance (e.g. time, quality, costs, and flexibility); the status of processes (e.g. forecasting, ordering, delivering, replenishing, and servicing); and the status of contract (Simatupang & Sridharan 2002). The common forms of logistics information in supply chains include e.g. customer and replenishment orders, inventory requirements, warehouse work orders, transportation documents, and invoices (Bowersox & Closs 1996). Information management systems for logistics purposes, called usually logistics information systems (LIS), have become popular in sharing logistics information, in streamlining the logistics processes, and in integrating the supply chains. LISs provide access to each others' business and manufacturing systems. Suppliers gain access to the manufacturer's production and can reduce their reliance on uncertain forecasts. Also manufacturers obtain early warning about possible disruptions of supply due to unforeseen events faced by the suppliers, and can reschedule their plans and avoid these costly disruptions. These and other similar uses of the LISs

89 ensure a smooth information flow pertaining to order, product design and development, market intelligence, production scheduling, payments, and any other information flow for managing coordination among various supply chain members. (Bagchi & Skjøtt-Larsen 2002.) Bowersox & Closs (1996) present six essential principles of logistics information that must be taken into account when designing or evaluating the LISs: ­ Availability. Logistics information must be readily and consistently available to all that need it. Rapid availability is necessary to respond to customers and improve management decisions. Information availability can reduce operating and planning uncertainty. The decentralized nature of logistics operations requires that information be capable of being accessed and updated in anytime-anywhere principle; ­ Accuracy. Logistics information must be accurate reflecting both current status and periodic activity for measures such as customer orders and inventory level. Accuracy means that there is consistency between physical counts or status and LIS reports. Increased information accuracy decreases uncertainty and reduces inventory requirements; ­ Timeliness. Logistics information must be timely to provide quick management feedback. Timeliness refers to the delay between when an activity occurs and when the activity is visible in the LIS. Timely information reduces uncertainty and identifies problems, thus reducing inventory requirements and increasing decision accuracy; ­ Appropriately formatted. LIS Reports and screens should be appropriately formatted, meaning that they contain the right information in the right structure and sequence; ­ Exception-based. LIS should be strongly exception-based in order to highlight problems and opportunities that require management attention. If the system can identify the exception situations, which are not a part of a normal process, planners are then able to focus their attention on situations that require the most attention; ­ Flexibility. LIS should be flexible to be able to meet both system users' and customers' needs. Systems should be able to provide data tailored to specific customer requirements. According to Jansson et al. (2001), real-time information exchange is of particular importance in fast-growing and fast-changing industries. However, also in the other industries with a project-oriented business, where typically several companies are involved in the supply, the role of open information sharing is the key issue. The information transfer must be in real time, not only inside the own organization, but also between all the companies and partners in the supply chain. During a project there are many things happening simultaneously, creating a lot of information that needs to be distributed and handled in real time. (Kiianlinna & Simula 2004.)

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3.1.4.2 Benefits of information sharing

Information sharing is defined as a voluntary act of making information available to others (Davenport 1997), and it can be considered both within the organization (intra-organizational) as well as across organizations (inter-organizational). Inter-organizational information sharing along the supply chain provides mutual competitive advantages by enabling supply chain members to make better decisions in their operations leading to increasing customer value, better resource utilization and lower supply chain costs (Simatupang & Sridharan 2002). Huang et al. (2003) divide shared information into six categories: products (product structure), processes (material lead time, lead time variance, order transfer lead time, process cost, set-up costs, quality and shipment), available resources (capacity and capacity variance), inventory (inventory level, holding cost, backing cost, and service level), orders (demand and demand variance, order batch size, order due data and demand correlation) and planning (demand forecast, order schedule, forecasting model and time fence). Sharing information requires clear understanding not only about what to share, but also with whom to share, how to share, and when to share. That means the right information has to be delivered to the right recipients in the right way and at the right time. The question "with whom to share information?" can be approached from different perspectives. First, how far should information be shared both upstream and downstream in the supply chain? And second, which partners at each stage of the supply chain should be involved? These decisions are related to the structure of the supply chain, that is, how companies are arranged to form a supply chain and how all the activities are linked. As an individual company can participate in a number of supply chains, companies need to determine carefully with which partners they should be closely integrated. The level of integration depends on various factors including the company capabilities, complexity of products, corporate culture, and geographical location of the partners. (Cooper et al. 1997b.) Simatupang & Sridharan (2002) present the three levels of information sharing: ordering information sharing (the supply chain members communicate through ordering data for transactions), partial information sharing (allows selected data, such as sales and inventory data, to be available for the upstream members for the better planning and controlling of activities), and strategic information sharing (includes visibility of strategic information, such as market research, category management and cost-related data). Sharing information can obviously be a problematic issue as the companies in a supply chain may not be prepared to share for example their production data and lead times, especially when those companies are independent of each other. It is often that supply chain members do not disclose private information about demand conditions completely and faithfully with all other members owing to the economic value of such information. As a consequence, the supply chain suffers from misunderstandings concerning the mutual efforts of collaboration, difficulty in dealing with market uncertainty, sub-optimal decisions, and opportunistic behavior. (Simatupang & Sridharan 2002.) Opportunistic behavior stems from the self-interest of the supply chain members by which each of them attempts to maximize individual advantages and avoid costs. According to Haapanen & Vepsäläinen (1999), especially in a competition situation, companies protect against the other members and keep their information and the forecasts confidential. In these situa-

91 tions, open and free information sharing does not work and it is easy to blame the other members of the supply chain for the problems occurring. On the other hand, if there is no information sharing, then decisions are made based on the best estimation of available data. Such decisions can be biased and prevent the individual chain member from attaining the optimal solution. The chain members easily slip into misunderstanding about the mutual efforts of collaboration because they have different positions in the supply chain and thereby have different aims, strategies, and roles. Unless they share the sensitive information required to develop mutual goals and strategies, they become involved in conflict about conflicting objectives, decision rights, and responsibilities. This conflict may lead to unproductive allocation of resources, and redundant or overlapping activities. (Simatupang & Sridharan 2002.) It is also noticeable that implementation of information sharing is not costless (Lee & Whang 2001) and may require significant changes in companies' business operations (Lee et al. 2000). Also, not all the companies benefit from information sharing, and each supply chain member obtains different benefits from information sharing. Ideally, all supply chain members should share the benefits equally but members with a monopoly may obtain most of the benefits. Several studies emphasize the role of information sharing in influencing the supply chain performance, especially reducing the bullwhip effect (e.g. Barrat 2004, Lambert & Cooper 2000; Lau & Lee 2000, Lee & Whang 2001, Lee 2004, Sahin & Robinson 2002, Yu et al. 2001). Furthermore, better management of information flows allows companies to be more responsive to customers' demands (Lee 2000). In fact, as Mason-Jones & Towill (1997) argue, information sharing is a prerequisite for successful coordination of the operations within the supply chain. Generally, information sharing provides substantial benefits to participating members (Simatupang & Sridharan 2002). The main benefits of information sharing in supply chains are achieving contractual clarity, dealing with market uncertainty, facilitating supply chain coordination, and reducing opportunism (Table 6).

92 Table 6. Benefits of information sharing (Simatupang & Sridharan 2002).

Challenges Opportunities Illustrative benefits Improved consensus on mutual competitive advantages on customer and shareholder values, system-wide performance measures, integrated policies, and shared responsibilities Improved forecast accuracy, reduces markdown, reduces inventory and out-of-stock, increased responsiveness Improved customer service, improved capacity utilization, improved rates for procurement and transportation contracts, reduced inventories Improved customer service, improved use of resources (capacity, employees, inventory), reduced total inventory, increased responsiveness, reduced material handling Reduced time-to-market, improved product life cycle management, increased reliability of available to promise Reduced risk of underperformance, improved customer service, increased use of resources, reduced transaction costs, improved data confidentiality Improved customer service, reduced monitoring costs, improved data accuracy, reduced inventory speculation, improved data confidentially Achieving mutual understanding of cusCoping with mispertomer behavior and system-wide supply ception or ambiguity of collaborative supply chain chain initiatives Coping with demand uncertainty Coping with logistics and decision-making complexity Sharing customer data at point of purchase, buying patterns, and customers' tastes to improve forecast accuracy Synchronizing logistics decision horizon for forward-looking planning

Consolidating multi-party logistics processes in the short and medium-term such as matching of price and resource availability and matching of shippers and carriers Integrating functional scope such as product development, logistics, and marketing Dealing with vulnerability of opportunistic behavior to protect individual interest Dealing with adverse selection: improved truthful information sharing (signaling) and matching of capabilities and requirements (e.g. auction) in ensuring excellent performance Dealing with moral hazard: improved performance monitoring, improved resource commitment, and mitigating manipulation

To take full advantage of information sharing, some significant organizational changes need to be implemented once information sharing in place. Companies should collaborate with their partners to achieve the common goals of supply chain efficiency based on a high level of trust between companies. The supply chain members need to redesign their information sharing systems so that they can provide the required information to the decision makers. The willingness of supply chain companies to share their information with trading partners and collaborate in the supply chain is one main initiative of visibility, that is, at having the right information in the right place and the right time in the right format. The other, perhaps even more important, is the effective use of ICT, with which the real time data management can be achieved. Since technology costs are declining and usage is easier, such ICT applications offer companies the capability to more efficiently, effectively, and rapidly move and manage information electronically. (Bowersox & Closs 1996.)

93

3.2 Agility as a competitive advantage 3.2.1 Agility paradigm

Agility was first introduced as a management paradigm in 1991, when the Iacocca Institute of Lehigh University, USA, released its report "21st Century Manufacturing Enterprise Strategy: An Industry-Led View" (Kidd 1994). The report described how US industrial competitiveness will ­ or might ­ evolve during the next 15 years. It proposed that significant changes were needed in manufacturing companies in order to achieve or improve their ability to cope with continuous and unanticipated changes in the business environment, and proactively capture opportunities from the turbulent business environment. Thus, from the start, agility has been a change-proficiency paradigm. As a result of the report, an industry-led organization, the Agile Manufacturing Enterprise Forum (AMEF) has been created within the Iacocca Institute and charged with developing the original vision further and disseminating it widely in US industry. Some years later, in 1995, the European Agility Forum was set-up by Paul T. Kidd and is operated by Cheshire Henbury. Agility has been expressed in different ways. First, agility has its roots in time-based competition (Stalk & Hout 1990), and fast-cycle innovation (Tidd et al. 1997), and it is built on a foundation of some, but not all, of the practices common to lean thinking (Womack et al. 1990). Second, agility has been introduced as a total integration of business components (people, technology, and other organization and business elements) (Kidd 1994, Montgomery & Levine 1996). Third, agility has been represented as the flexibility of the above-mentioned business components working towards a common goal (Christopher & Towill 2001, Montgomery & Levine 1996, Goranson 1999). Moreover, some other expressions such as concurrency, adaptability, use of information systems and technologies, and diverse combinations of all the above mentioned have been used in defining agility (Kidd 1994, Booth 1996, Youssef 1992). Also some definitions, such as virtual organization, emphasize the importance of different enterprises communicating and coordinating with another via sophisticated electronic systems (Montgomery & Levine 1996). According to Preiss (2005), the following definition is comprehensive and accurate: "Agility is a comprehensive response to the business challenges of profiting from rapidly changing, continually fragmenting, global markets for high-quality, high-performance, customer-configured goods and services. It is dynamic, context-specific, aggressively change-embracing, and growth-oriented. Agility is a comprehensive response to new competitive forces that have undermined the dominance of a massproduction system". However, Preiss (2005) admits that the definition is mouthfull and requires analysis of every phrase, and it is too much for many executives. Thus, the wide-accepted simpler definition is presented by Goldman et al. (1995): "Agility is the ability of an enterprise to quickly respond to changes in an uncertain and changing environment".

94 Agile enterprise, in this respect, is defined as (Kidd 2001): ``An agile enterprise is a fast moving, adaptable and robust business. It is capable of rapid adaptation in response to unexpected and unpredicted structural changes and events, market opportunities, and customer requirements. Such a business is founded on processes and structures that facilitate speed, adaptation and robustness and that deliver a coordinated enterprise that is capable of achieving competitive performance in a highly dynamic and unpredictable business environment that is unsuited to current enterprise practices''. These three definitions suggest that agility is the ability to respond quickly to changes in the market demands and to meet customer demands sooner ­ be they changes in volume, variety or mix, but at an acceptable cost (Christopher 2000, Christopher & Towill 2001, Gunesakaran 1998). The concept has also been extended beyond the traditional boundaries of the individual organization to encompass all the operations of the supply chain within which the organization operates (Power & Sohal 2001). The European Agile Forum (2000) defined agility as follows: "Agility is the ability of an enterprise to change and reconfigure the internal and external parts of the enterprise - strategies, organization, technologies, people, partners, suppliers, distributors, and even customers in response to chang,e unpredictable events and uncertainty in the business environment". A single organization may not be able to respond quickly to changing market requirements. According to Sharp et al. (1999), agility of an organization is a paradox, in that an agile company has to be lean, flexible and able to respond quickly to changing situations; yet it is recognized that no one company will have all the resources to meet every opportunity. Also Harrison & van Hoek (2005) emphasize the extended enterprise nature of the concept by defining agility as: "Agility is a supply-chain-wide capability that aligns organizational structures, information systems, logistics processes and, in particular, mindsets". However, the definition of agility is still fuzzy, mainly because it largely deals with things already being addressed by industry and which are covered by existing research projects and programs. Also, people often fail to recognize that there are new issues and items on the agenda, and questions about the future relevance of "current practices" are not addressed. (Kidd 2001.) Agility means different things to different enterprises in different contexts. As changes and pressures faced by companies may be different, the degree of agility required by individual companies will be different. Moreover, the circumstances for doing business are changing; the more agile the organization needs to be in order to respond to the changes positively. (Sharifi & Zhang 2001.) By considering the practical situation in industry, Sharifi & Zhang (2001) have concluded that the concept of agility contains two main factors: 1) the ability of responding to changes (anticipated or expected) in proper ways and due time, and 2) the ability of exploiting changes and taking advantage of changes as opportunities. In the research of Jin-Hai et al. (2003), the principal elements of the different agility definitions that capture its essential concept are response to continuous and unpredictable change and uncertainty, building core competencies, supply high customized products, synthesis of diverse ICT technologies, and intra-enterprise and inter-enterprise integration.

95 Kidd (2001) has summarized the main points of the agility paradigm: ­ Agility is about the basis of competition, business practices, and corporate structures in the 21st century; ­ Agility is not about developing more technology, although technology will play an important role; ­ Agility is not another way of referring to leanness, flexibility, computer integrated enterprises, or other current buzzwords; ­ Agility is a strategic response, not tactical, and involves building defense against primary competitive forces through cooperation; ­ Agility is a holistic concept; ­ Agility is primarily about adaptability which is achieved through reconfiguration capability. Processes, structures, organization, people, implementation capabilities, etc are the key issues; ­ Agility is a paradigm shift; ­ Agility is a step change innovation not an incremental innovation; ­ Agility holds the promise of a world based on cooperation. Table 7 presents the summary of the other agile definitions ­ different views of the paradigm. According to Jin-Hai et al. (2003), this kind of summarizing table also shows how the paradigm has evaluated during the years. Since the introduction of the agility paradigm, the potential benefits of implementing it in companies were soon widely recognized by researchers and industry (Sun et al. 2005). The paradigm, in its various forms, in now recognized as a winning competitive advantage (e.g. Christopher 2000, Christopher & Towill 2001, Dove 1994, Goldman et al. 1995, Goranson 1999, Kidd 1994, Naylor et al. 1999, Oleson 1998, Sharifi & Zhang 2001, Swafford et al. 2000, van Hoek et al. 2001, Vokurka & Fliedner 1998, White et al. 2005, Yusuf et al. 2003, Zhang & Sharifi 2000). An increasingly accepted norm is that agility will be the manufacturing paradigm of the 21st century (e.g. Dove 1996, Gunasekaran 1999, Kidd 1994). However, agility does not fully exist in any company today (Kidd 2001). The challenge for the future is to create agile companies using technologies, organizational forms and people to develop a new form of manufacturing that transcends existing mindsets that are becoming increasingly dominated by the latter manufacturing dogma.

96 Table 7. Definitions of agility in the literature.

Author Iacocca Institute (1991) Definition Agility is a manufacturing system with extraordinary capabilities (internal capabilities: hard and soft technologies, human resources, educated management, information) to meet the rapidly changing needs of the marketplace (speed, flexibility, customers, competitors, suppliers, infrastructure, responsiveness). A system that shifts quickly among product models or between product lines, ideally in real-time response to customer demand. Agility is synthesized use of the developed and well-know technologies and methods of manufacturing. That is, it is mutually compatible with lean manufacturing, CIM, TQM, MRP, BPR, employee empowerment, and OPT. Being agile means being proficient at change - and allows an organization to do anything it wants to do whenever it wants to. Agility is dynamic, context specific, aggressively change embracing and growth oriented. It is not about improving efficiency, cutting costs, or battening down the business hatches to ride out fearsome competitive storms. It is about succeeding and about winning profits, market share and customers in the very centre of competitive storms that many companies now fear. Agile manufacturing is a vision of manufacturing that is natural development from the original concept of "lean manufacturing". In lean manufacturing, the emphasis is on cost-cutting. The requirement for organizations and facilities to become more flexible and responsive to customers led to the concept agility as a differentiation of leanness. Agility is a new expression that is used to represent the ability of a producer of goods and services to thrive in the face of continuous change. These changes can occur in markets, in technologies, in business enterprise. It requires one to meet the changing market requirements by suitable alliances based on core competencies, organizing to manage change and uncertainty, and leveraging people and information. Agility is about casting off the old ways of doing things that are no longer appropriate ­ changing patterns of traditional operations. In a changing competitive environment, there is a need to develop organizations and facilities to be significantly more flexible and responsive than current existing ones. Agility is the capability of reacting to unpredictable market changes in a cost-effective way, simultaneously prospering from the uncertainty. Agility is the ability to produce and market successfully a broad range of low cost, high quality products with short lead-times in varying lot sizes, which provide enhanced value to individual customers through customization. Enterprise's ability to make things better, faster, and cheaper today says nothing, or very little, about the ability to change, in a fast and cheap way, and to make something else better, faster, and cheaper, or to respond in other respect to unanticipated changes, in the future. Agility means mobility in an organization's behavior towards the environment and can therefore be understood as an extensive answer to continually changing markets. Agile companies are in a process of constant re-determination, or self-organization, self-configuration, and selfteaming. Agility is successful exploration of competence bases (speed, flexibility, innovation, proactivity, quality and profitability) through the integration of reconfigurable resources and best practices in a knowledge-rich environment to provide customer-driven products and services in a fast-changing market environment. Agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace. Agility is an enterprise-wide response to any competitive and changing environment, based on four cardinal principles: enrich the customer, maser change and uncertainty, leverage resources and cooperative to compete.

Kidd (1994) Dove (1994) Goldman et al. (1995)

Booth (1996)

Devor et al. (1997)

Gould (1997)

Gunasekaran (1998) Vokurka & Fliedner (1998) Goranson (1999) Bullinger (1999)

Yusuf et al. (1999)

Naylor et al. (1999) Bajgoric (2000)

97 Table 7. Continued

Author Definition Meredith & Agility is the organization's capability to gain competitive advantage by intelligently, rapidly Francis (2000) and proactively seizing opportunities and reacting to threats. Huang et al. (2000) Christopher (2000) Kidd (2001) Agility is a measure that indicated how well a system can adjust itself while also seeking help from other system enterprises. Agility is a business-wide capability that embraces organizational structures, information systems, logistics processes and in particular, mindsets. Agility is the ability to adapt to structural changes occurring in the business environment.

There are several competitive objectives of manufacturing, e.g. low cost, quality, dependability, speed, volume flexibility, product customization and leadership in new technology. Low cost is the most basic competitive objective. It seeks cost savings through economics of scale, baseline products with relatively stable life cycles, standardized machines, regular equipment maintenance, maximum labor utilization, lower overhead costs, long product runs, and right first time practices. The quality objective follows low cost. It emphasizes product confidence through quality assurance, parts availability, serviceability, user serviceable designs, guarantees, warrantees, and incremental additions to product feature. (Ezekiel 2002.) It is noticeable that typically the company itself racks up the benefits of quality work, not the customer. Next to cost and quality is dependability. It means adherence to and compliance with the terms and conditions earlier agreed with or expected by the customer. While it is important for manufacturers to deliver on low cost, quality and dependability objectives, unprecedented instability in the business environment has focused attention on speed and product customization. Speed means the timely fulfillment of scheduled orders and developing new solutions ahead of competitors. Closely related to speed is the competitive objective of product customization that seeks to satisfy unique customer's needs, accommodate design change at ease, and support a wider range of product configurations as means of competing in mass and niche markets. For product customization to be profitable and sustainable, it needs to be complimented by two related competitive objectives of volume flexibility and leadership in new technology. Competence in volume flexibility depends on factory floor efficiency and flexibility, especially on workers skills and the ease of mobilizing, shedding and reconfiguring vital production resources. The most important are routing and batching flexibility so that customer orders can be processed in parallel. Leadership in new technology improves information processing to enhance product customization. (Ezekiel 2002.) In the light of changes in market requirements, relative emphasis placed on competitive objectives is crucial to business performance (Vokurka & Fliedner 1998). Ideally, a company would strive towards simultaneous attainment of a wide range of competitive objectives. Ultimately, a company should improve its agility in terms of enhancing its ability to compete on all fronts simultaneously.

98

3.2.2 Attributes of agility

What it really means to be "agile", as opposed to just being efficient, effective, lean, customer-focused, able to add value, quality-driven, proactive rather than reactive, etc., has been the source of considerable debate and academic conjecture (Power & Sohal 2001). Christopher (2000) makes a clear distinction between speed (meeting customer demand in the context of shortened delivery lead times), leanness (doing more with less), and agility (responding quickly to changes in demand in terms of both volume and variety). Naylor et al. (1999) go further in stating that agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace. A comparison between agility and lean has received a lot of attention in the SCM literature (e.g. Christopher 2000, Naylor et al. 1999, Christopher & Towill 2001, MasonJones et al. 2000a, Harrison & van Hoek 2005). Whilst leanness may be an element of agility in certain circumstances, by itself it will not enable the company to meet the precise needs of customers more rapidly (Christopher & Towill 2000). Agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace, whereas leanness means developing a value stream to eliminate all waste, including time, and to enable a level schedule (Naylor et al. 1999). Both agility and leanness demand a high level of product quality. They also require minimum total lead-times defined as the time taken from a customer raising a request for a product or service until it is delivered. The total lead-time has to be minimized to enable agility, as the demand is highly volatile and thus difficult to forecast. If a supply chain has a long lead-time then it will not be able to respond quickly enough to exploit marketplace demand. The essence of the difference between leanness and agility in terms of the total value provided to the customer is that service is the critical factor for agility whilst cost, and hence the sales price, is crucial for leanness. (Aitken et al. 2002, Christopher & Towill 2001.) In addition, lean is a collection of operational techniques focused on a productive use of resources. Agility is an overall strategy focused on thriving in an unpredictable environment. Focusing on the individual customer, agile competition has evolved from the unilateral producer-centered customer-responsive companies inspired by the lean manufacturing refinement of mass production to interactive producer-customer relationships. (Goldman et al. 1995.) However, instead of a "pure" agile and pure lean supply chain, there will often be situations where a combination of the two may be appropriate, i.e. a hybrid strategy, that is, a mixed portfolio of products and markets, there will be some products, where demand is stable and predictable, and some products where the converse is true (Christopher 2000). As Fisher (1997) points out, it is important that the characteristics of demand are recognized in the design of supply chains. Also, it is not necessarily that a supply chain should be either lean or agile. Instead, a supply chain may need to be lean for part of the time and agile for the rest. Naylor et al. (1999) and Mason-Jones et al. (2000b) present the term "leagility" - the combination of the lean and agile paradigm within a total supply chain strategy positioning the decoupling point, so as to best suit the need for responding to a volatile demand downstream yet providing level scheduling upstream from the decoupling point. Wadhwa & Rao (2003) state that one important perception of agility is that it is a combination of speed and flexibility. The speed aspect is deeply involved in the different defi-

99 nitions of agility from the beginning (Kidd 1994), and time-based competition and flexibility converge in agile manufacturing. Christopher & Towill (2000), and later Swafford et al. (2006), observe that the key characteristic of agility is flexibility, and in that respect, the origins of agility as a business concept lie in flexible manufacturing systems (FMS). Initially it was thought that the route to manufacturing flexibility was through automation to enable rapid change, i.e. reduced set-up times, and thus a greater responsiveness to changes in product mix and volume. Later this idea of manufacturing flexibility was extended into the wider business context, and the concept of agility as an organizational orientation was born. (Christopher & Towill 2000.) Several authors view agility as an extension of flexibility. It is now an accepted assumption that flexibility is a requirement for the competitive markets of today, but on its own, will not deliver agility. Flexibility should be regarded as a necessary condition, which does not include agility (Wadhwa & Rao 2003). Besides the necessity of being flexible in order to be agile, Kidd (1994) points out the distinctions between agility and flexibility. Agility is originally defined as being quick moving, nimble and active. This is not the same as flexibility, which implies in the manufacturing sense, adaptability and versatility. Flexibility and agility differ in terms of their scope. The major distinction between flexibility and agility is on managing the change. The distinctive focus of flexibility is on managing the predictable change with the help of both predetermined as well as an innovative response, whereas agility focuses on managing the unpredictable change using more of an innovative response supported by certain predetermined strategies and technologies. Flexible changes are responses to known situations where the procedures are already in place to manage the change, whereas agility extends the capability of flexibility by requiring the ability to respond to unpredictable changes in the market or customer demands. While the distinctive focus of flexibility is in individual systems, e.g. manufacturing system, agility focuses on a group of systems, e.g. supply chains. Furthermore, there is a rate of change element also, and the literature indicates that agility is more focused on a higher rate of change than flexibility. (Wadhwa & Rao 2003.) In a broader sense, flexibility puts relatively more emphasis on variety, while the literature on agility indicates it puts a greater emphasis on responsiveness to change. What is ideally needed is a simultaneous improvement in both agility and flexibility. Wadhwa & Rao (2003) refer to this as flexagility. The term flexagility may emphasise achieving simultaneously a greater variety with a greater responsiveness to change. With a flexagility view, companies can move towards mass customization that ideally will be as flexible as one-of-kind system and as efficient as the mass production system. Adaptability is, in turn, part of the term flexibility, which means that some degree of adaptability is required for a system to be flexible. Besides flexibility, some other interrelated concepts that belong to the agile manufacturer's toolbox are presented. The concept of reconfigurability centers on the development of modular hardware and software to adapt to market demands. By integrating or removing single functional elements, the manufacturing system may be adjusted to exact capacity and technology requirements. This concept is typically focused on the technical aspects of manufacturing, whereas organizational issues are not considered. The concept of changeability, used especially in German literature, can be defined as an ability to

100 change and adapt the company to new circumstances with the minimum costs and time. It is a wider concept than reconfigurability, because it focuses on the whole production system (management, operation and information systems), and wider than flexibility because a changeable company can adapt also to unexpected change. (Zäh 2005.) On the one hand, agility is the ability to quickly respond to changes in an uncertain and changing environment, but on the other hand agility is a way of even bringing about changes that are favorable to the organization (Sharifi & Zhang 2001). In a business environment that is characterized by stability, certainty and predictability, i.e. where structural change is slow or negligible, agility is of little interest. However, when stability, certainty and predictability give way to a regime of constant structural change, uncertainty and unpredictability, as is happening as a result of e-business, agility assumes great importance. (Kidd 2001.) Thus, Kidd (2001), who considers agility as a weapon against structural change, such as e-business, defines agility as the ability to adapt to structural changes occurring in the business environment. In the SCM and Operation management literature, the research also discusses the attributes of agility to explore the possible ways to achieve agility from various perspectives. Kidd (2001) summarizes the key words and phrases linked with the agile paradigm: ­ Fast - a very high speed of response, for example, to new market opportunities; ­ Adaptable - the capability to change direction with ease, for example, to enter completely new markets or product areas; ­ Robust - avoiding and withstanding variations and disturbances, for example, products that lose market appeal owing to changes in customer preferences; ­ Virtual corporations - the combining of talents between companies through (short term) joint ventures; ­ Reconfiguration - the ability to very quickly reconfigure corporate structures, facilities, people, organization and technology to meet (often) unexpected and (probably) short lived market opportunities; ­ Dynamic teaming - actively looking for and building the creative and innovative talents of other team members; ­ Transformation of knowledge - explicitly transforming raw ideas into a range of capabilities which are then embodied in both products and services. Sun et al. (2005) have reviewed several essential journal articles and books to summarize the ranking list of agility categories and how many times the attribute is cited in the literature source (Table 8). "Cost-effectiveness" was the most cited attribute, but not far behind came attributes such as "flexibility", "virtual enterprise", "customer responsiveness". Also attributes such as "speed", "reconfigurability", "total enterprise integration" and "technology innovation" were quite widely cited.

101 Table 8. Attributes of agility in literature (Sun et al. 2005).

Attributes of agility Cost-effectiveness Flexibility; Customer responsiveness Virtual enterprise; Speed; Reconfigurability; Total enterprise integration; Technology innovation Supplier relationships; Customer relationship; Knowledgeable, Empowered, Valued people; Total quality; New product introduction; Strategic management Knowledge-driven enterprise Adaptability; Open organization architecture; Information system/technology; Short life cycle; Concurrency; Providing solutions and products Environmentally benign Times of citation 7 6 5

4

3 2

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3.3 Developing an agile supply chain 3.3.1 Conceptual framework of an agile supply chain

Parallel developments in the areas of agility and SCM led to the introduction of an agile supply chain (e.g. Harrison et al. 1999, Christopher 2000). While agility is accepted widely as a winning strategy for growth, even a basis for survival in certain business environments, the idea of creating agile supply chains has become a logical step for companies (Ismail & Sharifi 2005). Agility in a supply chain, according to Ismail & Sharifi (2005), is the ability of the supply chain as a whole and its members to rapidly align the network and its operations to dynamic and turbulent requirements of the customers. The main focus is on running businesses in network structures with an adequate level of agility to respond to changes as well as proactively anticipate changes and seek new emerging opportunities. Compared with the general definitions af agility, agility in a supply chain context might be defined simply as (Sharp et al. 1999): "Agility is the ability of a supply chain to rapidly respond to changes in market and customer demands". In the 1990s, the research interest was focused on finding systematic ways for manufacturers to approach agility in their supply chains. Van Hoek (2005) observes that three characteristics of supply chain operations can be earmarked as directly related to becoming agile: 1) mastering and benefiting from variance, 2) rapid responsiveness, and 3) unique or small volume responsiveness. In addition, many researchers provide conceptual overviews, different reference and mature models of agility (e.g. Kidd 1994, Dove 1994, Preiss et al. 1996, Goldman et al. 1995, Gunasekaran 1999, Sharp et al. 1999, Christopher 2000, Sharifi & Zhang 2001, Yusuf et al. 2001, Weber 2002). Based on a

102 review of the normative literature, Lin et al. (2006) designed a conceptual framework of agile supply chain, culminating in many research propositions (Fig. 23).

Agile drivers - Changes in business environment - Marketplace - Competition criteria - Customer requirements - Technological innovation - Social factors

Determine required agility level

Agility capability: - Responsiveness - Competency - Flexibility - Quickness

Agile supply chain goal: Enrich and satisfy customers - Cost - Time - Function - Robustness

Agility enablers / pillars: - Collaborative relationships (strategy) - Process integration (foundation) - Information integration (infrastructure) - Customer/marketing sensitivity (mechanism)

Fig. 23. Conceptual framework of agile supply chain (Lin et al. 2004).

The ultimate goal for an agile supply chain is to enrich and satisfy customers. In the framework of Lin et al. (2006), the customer-satisfied objective is illustrated in four paradigms; cost, time, function and robustness. The main driving force behind agility is change (e.g. Kidd 1996, Yusuf et al. 1999). Agility drivers are the changes or pressures in a business environment that force a company to search for new ways of running its business in order to maintain its competitive advantage. Change drivers are the starting point for the conceptual work. The change drivers can be characterized by five elements that initiate change (Zhang & Sharifi 2000, Sharifi & Zhang 2001): 1) changes in marketplace (e.g. growth of niche market, increasing rate of change in product model, product life-time shrinkage), 2) changes in customer requirements (e.g. demand for individualized products and services, quicker delivery time and time-to-market, quality expectation increasing), 3) changes in competition criteria such as formation of new organizations, co-operation methods (e.g. increasing pressure on cost, increasing rate of innovation, increasing pressure of global market competition), 4) changes in technology such as new products, materials, manufacturing methods, design

103 tools (e.g. introduction of more efficient, faster and economic production facilities, introduction of new software technologies, introduction of new materials), and 5) changes in social factors such as people's welfare and standard of living, politics, legislation (e.g. environmental pressures, social contract changes, workforce/workplace expectations, cultural problems). How these external and environmental changes affect the company's willingness, or need, to develop its organization, processes, people, etc., towards agility could be examined by the benchmarking criteria list presented by Goldman et al. (1995) which lists the ten distinctive forces that drive towards agility. These are: 1) Market fragmentation, 2) Production to order in arbitrary lot sizes, 3) Information capacity to treat masses of customers as individuals, 4) Shrinking product lifetimes, 5) Convergence of physical products and services, 6) Global production networks, 7) Simultaneous inter-company cooperation and competition, 8) Distributed infrastructures for mass customization, 9) Corporate reorganization, 10) Pressure to internalize prevailing social values. Based on the conceptual framework of Lin et al. (2006), an agile supply chain requires various distinguishing capabilities in order to enrich and satisfy customers. These main capabilities include four main elements: responsiveness, which is the ability to identify changes and respond to them quickly, reactively or proactively, and also to recover from them; competency, which is the ability to efficiently and effectively realize enterprise objectives; flexibility/adaptability, which is the ability to implement different processes and apply different facilities to achieve the same goals; and quickness/speed, which is the ability to complete an activity as quickly as possible. Lin et al. (2006) continue that to become a truly agile supply chain, key enablers are classified into four categories: 1) collaborative relationship: as the supply chain strategy, 2) process integration: as the foundation of the supply chain, 3) information integration: as the infrastructure of the supply chain, and 4) customer/marketing sensitivity: as the mechanism of the supply chain. These elements are examined more closely in the next section.

3.3.2 Key elements of an agile supply chain

The key elements of an agile supply chain can be examined more closely based on the widely-accepted framework of van Hoek (2001) and Christopher (2000). Originally they proposed the four-dimension agile supply chain framework that reflects the more general aspects of agility applied to the supply chain operating environment (market sensitive, process integration, network based, and virtual) (c.f. Lin et al. 2006). An underlining assumption of this framework is that of open relationships between the supply chain participants, the sharing of information and the use of technology to create connectivity (i.e. ability for organizations to share information in real-time). This framework of the agile supply chain has been widely cited and reinforced as a key competitive ambition and supply chain best practice aspiration, for example by Christopher (2004) and Lee (2004). There has been quite a clear vision of the benefits of creating an agile supply chain. However, there is a shortage of studies and cases of companies actually turning the vision or ambition into reality, let alone tools that they use to do so (van Hoek 2005).

104 The modified framework presented in Fig 24 is based on the Christopher (2000) and van Hoek (2001) framework. In this framework, the author has added the key elements of an agile supply chain found in the literature review.

ICT utilization

Information integration downstream and upstream

Virtual

Internal for supply chain, external for companies

Building core competences

Network based

Modular design and modular manufacturing processes

Process integration

Speed, cost-efficiency and quality

Customizated and value-added products

Market sensitive Responsive and flexible

Orchestration of supply chain with real business interest

Fig. 24. Framework of an agile supply chain (modified from Christopher 2000 and van Hoek 2001).

First, the truly agile supply chain must be customer responsive, or market sensitive. Market sensitive means that a supply chain is capable of reading and responding to real customer needs and also flexible enough to master change and uncertainty. Thus, an agile supply chain is demand-driven instead of forecast-driven. Most companies have little direct feed-forward from the marketplace as actual data on customer requirements, and they are forced to make forecasts based upon past sales or shipments and convert these forecasts into inventory. (van Hoek et al. 2001, Christopher & Towill 2001, Christopher 2000.) Market sensitivity is measured in terms of the product/service proposition offered in the market, in particular, the amount of customization and responsiveness to volatile and demanding markets. As an additional measure scale sensitivity was included. This was done for the reason that scale, as a characteristic of traditional make and sell organizations, might not be favorably responsive to individual end consumers and narrow windows of opportunity because of longer lead times, less customization, etc. in logistics, production and purchasing. The measure thus indicates that companies should avoid the negative consequences of scale in order to raise market sensitivity. (van Hoek 2001.) Agility can only be achieved within a supply chain by concentrating as much attention on information flow as is traditionally devoted to material flow (Mason-Jones & Towill 1999). Information is the driving force behind an agile supply chain, coordinating actions, while freeing them from time and space whilst inviting suppliers and customers to become more involved in the demand-supply process. The most significant enabler of an agile supply chain is the virtual element (van Hoek et al. 2001, Christopher & Towill 2001, Christopher 2000). Mason-Jones & Towill (1999) emphasize virtuality by suggesting that agile supply chain can also be called as an information-enriched supply chain. In

105 the information-enriched supply chain each player, no matter how far upstream, receives the demand data directly, simultaneously. Companies can make decisions based on the actual market demand as well (Mason-Jones & Towill 1999). The use of data, captured by ICT, on demand directly from the point-of-sale, is now transforming the company's ability to hear the voice of the market and to respond directly to it. Thus, an ability to use ICT to share data between buyers and suppliers creates a virtual supply chain, the second element of an agile supply chain. A virtual supply chain, also called as information-driven supply chain, is information-based rather than inventory-based. The virtual element is perhaps the greatest innovation in agile concept, but is largely absent in most supply chains. (van Hoek et al. 2001, Christopher & Towill 2001, Christopher 2000.) Virtual integration is measured using two practice areas. The first is internal to downstream (with customers and third parties) information integration, the second internal to upstream (with suppliers) information integration. This also points at specific practice areas (both transactions and planning) and a supply chain wide scope of action. (van Hoek 2001.) Shared information between supply chain partners can only be fully leveraged through process integration, which is the third element of an agile supply chain. Process integration means collaboration between buyers and suppliers, joint product development, common system design, and shared information. The factors that come with process integration include joint strategy determination, buyer-supplier teams, transparency of information, and even open-book accounting. (van Hoek et al. 2001, Christopher & Towill 2001, Christopher 2000.) Process integration is measured using two areas that reflect the ability to leverage information and market signals through processes into innovations. Innovations in areas as wide as processes, products and management systems represent another fundamental contingency of organizations, similar investments, strategy formation, etc. (van Hoek 2001). This form of cooperation in a supply chain becomes more prevalent as companies focus on their core competences while other functions or services are produced by their partners. The relationships between companies along the supply chain may become more complex, relying on the use of cross-organizational teams, information sharing, resource sharing, and risk sharing. Each of these aspects needs to be set up on the basis of trust. This idea of the supply chain as a confederation of companies linked together as a network provides the fourth element of a agile supply chain. In the network, companies have a common goal to collaborate together in order to respond to end customer needs. That means whoever can better structure, coordinate and manage the relationships with their partners are the winners in the agile competition. (van Hoek et al. 2001, Christopher & Towill 2001, Christopher 2000.) Network integration is measured using structural practice and capability areas of shared investments, joint planning and strategy development in areas as wide as logistics, purchasing and production. These measures go beyond lipservice to partnering and cooperation and ask for the actual in-depth involvement of outside supply chain players in strategy, etc. along the functional areas in the supply chain. (van Hoek 2001.) According to Huang et al. (2002), the purpose of an agile supply chain is to understand customer requirements by interfacing with the market and being adaptable to future changes, aim to produce in any volume and deliver to a wide range of market niches concurrently, and provide customized products at short lead times (responsiveness) by reducing the cost of variety. An agile supply chain also puts a lot of emphasis on reducing the

106 lead times. To hedge against the uncertainty of supply and demand, significant stocks of parts and excess buffer capacity are deployed in the chain. When choosing suppliers for an agile supply chain, the attributes that count are speed, flexibility and quality. In products, a modular design is used in order to postpone product differentiation for as long as possible. Hence, in the next section, agility related to the different manufacturing modes is presented. Also, business relationships in an agile supply chain are discussed.

3.3.2.1 Agility related to the different manufacturing modes

A big strategic question for many companies is how the supply chain should be structured to be competitive in the markets. Lean methodologies, with which the companies are quite familiar today, can be powerful contributors to the creation of an agile supply chain. In particular, where the product range can be separated according to volume and variability, and/or where the decoupling point concept can be applied, a real opportunity exists for employing hybrid lean/agile strategies (Christopher & Towill 2001). Fisher's (1997) distinction between functional and innovative products as a basis for devising the appropriate supply chain for a product also provides a handy basis for discussion the lean/agile debate. He argues that functional (or commodity) products are characterized by predictable demand patterns, relatively long product life cycles, low margins and low product variety. Innovative products are characterized by unpredictable demand, short product life cycles, relatively high margins and big product variety. Accordingly, supply chains can be divided into physically effective supply chains and market-responsive ones, i.e. agile supply chains. A physically efficient process supplies predictable demand efficiently at the lowest possible cost, whereas a market responsive process responds quickly to unpredictable demand in order to minimize stock-out, forced markdowns and obsolete inventory. However, Fisher (1997) recognizes that companies could turn traditionally functional products into innovative products in order to achieve higher profits and that the very newness of innovation products forces companies to introduce steady stream of newer innovations. Nevertheless, according to Ezekiel (2002), little is known about the turning point at which a company should transit from functional products to innovative products and subsequently migrate from a lean supply chain to the responsive and agile supply chain. In this migration from lean to agile supply chain, the most important issue is where to position inventory, capacity and core value adding activities. Typically, all processes in a supply chain fall into one of two categories, depending on the timing of their execution to customer demand. The `pull' process is the concept where demand at the end of the delivery pipeline pulls products towards the market and behind those products the flow of components is also determined by the same demand. This contrasts with the traditional `push' process where products are manufactured or assembled in batches in anticipation of demand and are positioned in the supply chain as `buffers' between various functions and entities. (Christopher 1998, Krajevski & Ritzman 2000.) A push/pull view of the supply chain categorizes processes based on whether they are initiated in response to customer orders (pull) or in anticipation of customer orders (push) (Chobra & Meindl 2001).

107 This view is very useful when considering strategic decisions relating to supply chain design. More recently the concept of order penetration point (OPP) has been used to customize the supply chain for the individual customer (Collin 2003). According to Hoover et al. (2001), OPP is a point in the supply chain where customer demand (and order) is allocated to the product. In the current literature, the decoupling point (DP) is used instead of OPP as a point at which the real demand penetrates upstream in a supply chain. However, the issue is not how far the order penetrates, but how far real demand is made visible (Christopher 2000). The challenge to SCM is not only to develop lean strategies up to the OPP, but agile strategies beyond that point. Hoover et al. (2001) also discuss the value offering point (VOP) that is a point in the the customer's demand chain where the supplier fulfills the demand. In Fig. 25, the connections of OPP and VOP are presented.

Supply chain

OPP is a point where the customer order (or demand) is allocated to the product. Order Penetration Point OPP

Fig. 25. OPP versus VOP (Christopher 1998).

VOP is a point where the supplier fulfills demand Customer's demand chain

Value Offering Point VOP

Suppliers are already experimenting with both the OPP and the VOP to improve their supply chains. But the question is that how a supplier can find a solution that will help increase customer value and supplier efficiency at the same time. Time is the key to finding win-win configurations. Moving the OPP back in the supply chain will cut supplier costs, but increase the time needed to fulfill a customers' order, and moving the VOP opens up opportunities for the supplier to increase sales, and also increases the time available to respond. (Hoover et al. 2001.) Based on the structure of the product and the speed of the manufacturing process, it is necessary to decide where to locate the OPP (or DP) and design the complete operational mode around that. Upstream of this point everything is driven by a forecast and downstream by real customer demand (orders). The OPP also dictates the place in which inventory is held. In the buy-to-order (BTO) mode, the OPP is located at the supplier. This means that capacity - not components, semi-fabricates, nor finished goods - needs to be available. In make-to-order (MTO) mode components need to be ready, and there must be capacity for manufacturing, assembly, packaging, and shipping. These two modes can also be described as a customize-to-order (CTO) mode that emphasizes the customatization principle for each individual customer. The manufacturing does not start until the real demand (or order) comes into the supply chain. In the assemble-to-order (ATO) mode, a semi-fabricated product and assembly capacity are needed, and in the pack-to-order (PTO) mode, a semi-fabricated product and package capacity are needed. In make-to-stock (MTS) mode,

108 products are ready for delivery, and finally, in ship-to-order (STO) mode, only shipping capacity and finished goods inventory are required. (Hoekstra & Romme 1992, Hoover et al. 2001.) In a project-oriented business each project is unique in terms of design, manufacturing and technological requirements and precedence constraints. The processing times are highly uncertain. The high level of uncertainty, with respect to routings and processing times and uncertainly of customers orders, makes the production planning and control problem a difficult one (Babu 1999). Manufacturing of that kind of product, with highly configurable and ever-changing customer requirements, is often referred to as BTO mode, MTO mode, and the additional ATO mode, culminating in the engineering-to-order (ETO) mode. Unlike traditional MTS mode, where identical products are repeatedly ordered with no modifications, ETO manufacturers have the following characteristics. (Jones 2004.) Jones (2004) compared ETO production mode with MTS/JIT mode in Table 9. Table 9. Comparison between MTS/JIT and ETO manufacturers (Jones 2004).

MTS/JIT manufacturer MTS/JIT manufacturer refers to a price list MTS/JIT manufacturer makes standard products MTS/JIT manufacturer receives a sales order MTS/JIT manufacturer refers to standard cost MTS/JIT manufacturer purchases material to stock MTS/JIT manufacturer ships from finished goods MTS/JIT manufacturer's product lead times may be days or weeks MTS/JIT manufacturer invoices on delivery MTS/JIT manufacturer's inventory is based on part number MTS/JIT manufacturer makes few engineering changes MTS/JIT manufacturer looks at cost variances from the standard ETO manufacturer ETO manufacturer gets estimates and quotes for a project ETO manufacturer makes unique products ETO manufacturer receives a job order ETO manufacturer calculates actual cost ETO manufacturer purchases material to a project ETO manufacturer ships from work-in-process (WIP) ETO manufacturer's product lead times may be months or years ETO manufacturer makes progress billing by milestone ETO manufacturer's inventory is based on job order ETO manufacturer makes a significant number of engineering changes ETO manufacturer looks at cost variances from the original estimate

ETO manufacturing can be defined in terms of the products that ETO manufacturers produce, i.e. products whose customer specifications require unique engineering design or significant customization. Each customer order results in a unique set of part numbers, bills of material and routings. The interaction between an ETO manufacturer and its suppliers is more critical than the interaction between the repetitive manufacturer and its suppliers. In many instances, the materials requested by ETO enterprises are unique to particular jobs or applications at hand and are ordered infrequently. Lead times are typically compressed, with tight scheduling and no margin for error. (Jones 2004.) Thus, the emerging environment is leading towards an ETO situation where new products are engineered to order by modifying the existing designs. The fundamental assumption of this approach is that designs are readily available and variety can be accomplished

109 simply by building flexibility into the manufacturing systems. However, the real competence for customization lies beyond it, that is, in the ability to quickly and efficiently design new products using available competencies and development of new competencies wherever required. Wadhwa & Rao (2003) call this an innovative-to-order (ITO) production environment. The future companies are required to operate and compete in this new environment. Moving from the MTS situation towards the ITO situation level, the requirements for agility increases. This is coupled with the new challenges of responsiveness. Thus future competitiveness is likely to involve both variety and responsiveness challenges. This will require increasing the focus on proactive knowledge and innovation management in future enterprises. There is a growing need for innovative concepts that enrich the notion of agility (Wadhwa & Rao 2003). A major problem in most supply chains is their limited visibility of real demand. Because supply chains tend to be extended with multiple levels of inventory between the point of production and the final market place, in the future companies must be more demand-driven than forecast-driven. By integrating in a single system such functions as transportation, production, and planning, a supply chain becomes truly demand driven. The means of making this transition will be through the achievement of agility across the supply chain. The aim of the agile supply chain should be to carry inventory in a generic form, that is, standard semi-finished products awaiting final assembly or localization. A key concern of SCM should be to seek to identify ways in which the OPP can be pushed as far upstream as possible, that is, to find the furthest point to which information on real demand penetrates. (Christopher 1998.) The OPP is closely connected to the other logistic related concepts, such as two timeoriented forces that operate in the supply chain: postponement and speculation strategies (Pagh & Cooper 1998). Speculation is the act of producing and placing inventory close to the market at the earliest possible time to reduce supply chain costs. Postponement, or delayed configuration, is the act of delaying changes in product form or identity until the last possible moment (Schary & Skjott-Larsen 2001). Postponement is based on the principle of seeking to design products using common platforms, components or modules, but where the final assembly or customization does not take place until the final market destination and/or customer requirement is known (Christopher 2000). It can contribute to agile capabilities through its contribution to (van Hoek 2000): customization of products/ services (customized and localized assembly, etc.); use of customer order information throughout the supply chain (supply chain operations linked to the customer order, etc.); cross functional efforts involved in assembling products in the distribution channel, closeness to the customer (linking manufacturing and distribution, potentially even product design through the redesign of products around modularity and commonality); critical role of supplier networks in postponement; the need for availability of generic modules and parts before customized assembly. Whatsmore, inventories can be eliminated by managing the operations based on the real customer demand, not on the orders. VOP should be moved from the purchasing department at least to the customer's inventory, which allows the supplier to follow the changes in customer demand itself. (Hoover et al. 2001.) Fig. 26 illustrates the increasing need for agility inthe different manufacturing modes, and different locations for the OPP.

110

MARKET DEMAND

Standard products Customized products

Avaiable in stock

NO

YES

Can be assembled from stock

NO

High technology products and services

YES

Can be produced using available design

NO

YES

Existing designs can be modified

NO

MTS ATO MTO ETO

YES

Can be designed using available competencies

NO

ITO Delivery Assembly Production

YES

Design and New products Development modifications and services of new design using competencies & available variants

competencies

Increasing need for agility requirements

Fig. 26. Need for agility related on the different manufacturing modes (Wadhwa & Rao 2003).

3.3.2.2 Relationships in an agile supply chain

One of the key issues to achieve an agile response to fast-changing markets lies in the quality of the supplier relationships. It is often the lead time of the suppliers that limits the ability of the case focal company to respond rapidly to customer requirements. Correspondingly, the introduction time of the new product or service can be dramatically reduced through the involvement of suppliers in the innovation process. To be competitive from an agility standpoint, companies must adapt their supply chains efficiently and build strong relationships with customers and suppliers more quickly. A company cannot become agile unless its relationships with the supply chain are also agile. (Christopher 2000.) Although the large companies have acknowledged the importance of the relationships that exist between themselves and their suppliers and customers, the whole supply

111 network has recently been recognized as a critical source of strategic advantage (Ross 1998). In a business network, tasks that are not the core competence of a company can be outsourced to some network partners who have the competence for doing them better. Outsourcing in general can be one means of increasing the supply chain agility. For instance, Mason et al. (2002) state that outsourcing the actual manufacturing to contract manufacturers in electronics manufacturing supply chain has increased the agility of the supply chain. Outsourcing increases efficiency as each player in the supply chain can specialize in its own competence area. Additionally, outsourcing offers flexibility and scalability which are important aspects when developing agility in the supply chain (Bovet & Martha 2000). Outsourcing also creates external supply chains. Instead of internalizing activities to manage them within a single company, they are performed by other companies, with less direct control over the outcomes. It requires both careful selection of business partners and a need for inter-organizational management. (Schary & Skjøtt-Larsen 2001.) In a business environment two basic approaches for handling relations are possible: competition or cooperation. In business networks, cooperation is argued to be the dominant approach, since resources owned by a particular company are needed by another and vice versa. Network cooperation also enables a company to undertake operations that would otherwise be impossible for this company alone. Strong network cooperation also prevents outside parties from sharing a network's resources. The common trend with the suppliers is towards deeper co-operation, partnerships and strategic alliances. Strategic alliances such as partnerships, while necessary and beneficial, are costly in terms of the time and effort required. It is important to ensure that the scarce resources are dedicated only to those relationships that will give true benefit. According to Fisher (1997), suppliers should be chosen for their speed and flexibility, not for their low cost. Typically, the benefits that accrue to all members of the network are high profitability, improved long-term planning, greater understanding of the objectives of the other partners, predictable transactions and cash flow, and improved forecasting (Gattorna & Walters 1996). However, not every so-called strategic alliance and partnership are successful. One reason for this is that at least one of the parties has impractical expectations regarding the structure or outcomes of the relationship. It is also important for the supplier relationship to have a successful commercial orientation. If both parties do not gain from the relationship, the incentive to be in the relationship will diminish and it will likely dissolve. (Croxton et al. 2001.) In project business (i.e. companies that have consciously decided to band together and develop the activities of the overall subcontracting network to produce a final product) companies are realizing the importance of moving away from transactional (or armlength) relationships towards deeper, long term co-operation. Many modern and successful companies base their activities precisely on this mode of operation. (Artto et al. 1998.) A focal company can structure its supplier network in two different ways. One way is according to how the suppliers can be organized, and the other is according to the number of suppliers (Gadde & Håkansson 1993). The current trend to get more competitive advantage is to decrease the amount of suppliers with which the focal company is directly dealing. In decreasing the amount of suppliers, the focal company can make the collaboration deeper with the few, carefully selected subcontractors and that way achieve cost savings, mainly from rationalization in the administration, ordering, manufacturing, and

112 raw material costs. Also the focal company benefits from the increasing level of technological improvement in products and processes. (Gadde & Håkansson 1993.) Furthermore, one benefit of having fewer suppliers, according to Dyer & Ouchi (1993), is the positive effect on quality. Variation increases and reliability decreases when more suppliers are used for one component. In addition to the trend towards fewer key suppliers, a large amount of information should be shared with the suppliers. This means especially sharing real-time demand information and leveraging information systems. A sense of commonality between the customer and supplier companies should be created. This is achieved through information sharing and cross-functional teams. (Christopher 2000.) Suppliers, typically SMEs, have two networking strategies with the focal companies: 1) direct bilateral co-operation with the focal companies (often via subcontracting agreements) and 2) cooperation with a group of small companies, who together fill in an order from the focal company, whereas individually they would be unable to do so. The typical economic logic of SMEs subcontracting with focal companies lies in the fact that large companies can do some things better than small ones, but other things less well. The smaller companies' limitations, which make assistance and collaboration of the focal company important, typically fall in the areas of access to technological information and guidance on quality control, access to finance, assistance in purchase of materials and equipment, in workplace organization, in financial management or in the other determinants of effective performance, and market stability (security of demand over a period of time) (Berry 1997). Cameron & Gromley (1998) present two different networking methods for constructing an agile supply chain; building a community of supply chain members and using a logistics integrator capable of constructing an agile supply chain. They expect supply chains to develop from inter-organizational integration via supply chain collaboration to communities of compatible supply chain partners. They also believe that sometime in the near future innovative companies will go beyond integration and form or join small supply chain communities. The size of these communities could be up to 20 companies and one company would play the dominant role. Cameron & Gormley (1998) further state that the most suitable companies to be members in the same supply chain would be the companies with the same ERP (Enterprise Resource Planning) applications, because they share similar data definitions and application interfaces. It is likely that similarities in process structures and in the whole approach to business is at least as important as easily connectible information systems. According to Narus & Anderson (1996), forward-looking companies develop adaptive supply chains. They believe that companies can develop adaptive supply chains by sharing capabilities with others, possibly competing organizations. This view can be seen as building a supply chain community, the members of which can be direct competitors. A company can develop an agile supply chain also by buying supply services from a logistics integrator. By doing so, a company has access to a large amount of supply capacity, and capital is not tied into the capacity. However, the logistics integrator itself must possess the ability to construct agile supply chains. This can be done by having such amounts of capacity of different supply operations that it is plentiful in any conditions, or forming a supply community with other service providers. (Mason et al. 2002.) In developing a supply network, the focal company and its suppliers need a shared vision and equally understood aims, goals and objectives about interdependency and the

113 principles of cooperation. Efforts focus on providing the best end customer value regardless of where, along the supply chain, the necessary competences exist. Relationship integration requires a willingness of the supply chain partners to create structures, frameworks, and metrics that encourage cross-organizational behavior. In the literature, some common characteristics crucial for developing and maintaining a successful and agile supply chain relationship are recognized. The summary of these requirements is presented in Table 10. Table 10. Requirements for successful relationships of an agile supply chain.

Requirement Individual excellence Clear expectations Common interest, commitment and benefit sharing Open information sharing Focus on joint developments, cross-company and cross-functional co-operation Controlled implementation (leadership) Technology choice Benefits realization Trust, integrity Reference Gattorna & Walters (1996) Mentzer (2001) Bowersox & Closs (1996), Mentzer (2001), Gattorna & Walters (1996) Bowersox & Closs (1996), Nesheim (2001), Mentzer (2001), Gattorna & Walters (1996) Nesheim (2001), Mentzer (2001), Gattorna & Walters (1996) Bowersox & Closs (1996), Mentzer (2001) Mentzer (2001) Bowersox & Closs (1996) Mentzer (2001), Gattorna & Walters (1996)

3.4 Information and communication technologies (ICT) for SCM

The accelerating rate of change in business environment will continue to be driven by the increasing growth and global availability of information, technologies, and technologybased infrastructure. By utilising information and communication technology (ICT) for SCM, companies are able to better control the logistic flows of material, information and finance. Since operations in a supply chain are based on interaction and transmission of information, ICT has an important role in supply chain integration (e.g. Simchi-Levi et al. 2003). Furthermore, ICT is one of the key elements of increasing agility in supply chains (e.g. Oleson 1998).

3.4.1 Current information technologies

Significant investment in ICT generally, and in internet and web technologies in particular, are being targeted specifically at the area of SCM. According to Mentzer (2001), with the right technology choice, a company can communicate along the supply chain with its suppliers and customers at all levels, can help break down barriers between companies, speed up information flows, and turn data into useful collaborative information; in other

114 words, make a supply chain visible. The advanced information technologies related to this research is discussed next. Organizations are encouraged to integrate horizontally and vertically in their supply chains and to establish direct, electronic links with their suppliers and customers (Young et al. 2002). When discussing the use of information systems for SCM, we examine the use of inter-organizational systems (IOS) which are used for information sharing and/or processing across organizational boundaries. In this study, the focus is on IOS systems, however, also some intra-organizational ICT systems are presented. Since Electronic Data Interchange (EDI) was first implemented in the late 1960s, it has formed the backbone of many industries' SCM strategy (Iacovou et al. 1995). EDI is defined as the electronic, computer-to-computer exchange of business information in a structured format between business trading partners or between various units within an organization (Emmelhainz 1993). EDI is not simply the exportation of data from one ICT system to another, but the actual interaction between ICT systems (Fürst & Schmidt 2001). EDI allows trading partners to ship electronic transactions instead of paper when performing purchasing, shipping and other transactions. These transactions will typically be between two ICT systems in different companies. However, the "one-to-one", specific nature of traditional EDI has been replaced by the "one-to-many", "many-to-one", and "many-to-many" capabilities of the Internet. There are a number of new technological approaches which threaten to replace traditional forms of EDI for communication between firms, for example Internet-based EDI (I-EDI). The use of I-EDI may prove to have a dramatic impact on EDI adoption rates. I-EDI has the potential to change supply chains to supply networks. (Fu et al. 1999.) EDI has been acknowledged as contributing benefits such as reduced order lead-time, improved level of service to customers, reduced labour costs, fewer errors in ordering, end even more efficient business processes (Iacovou et al. 1995). However, companies still have problems in implementing EDI successfully. The fact is that only the large companies have benefited from EDI. EDI has proved to be prohibitively costly for many SMEs. Indeed, one of the most common reasons for SMEs adopting this kind of bilateral system is of an unfortunate strategic necessity pressure from another, typically larger trading partner. (Hughes et al. 2003.) According to Davenport (1998) the most important development in the use of ICT for SCM has been the introduction of Enterprise Resource Planning (ERP) systems in 1990s. ERP dates back to Material Requirements Planning systems (MRP), the first systems to use a computer for planning the material and capacity. As the computer resource continued to add more power, the idea came to integrate the material and capacity resource plan with the financial resources of the organization. The next step towards ERP was the Manufacturing Resource Planning (MRPII) systems. ERP systems came into the markets when computer technology continued to grow more in their processing capacity and less in size. (Chen 2001.) ERP systems have become popular especially among large corporations, as a total enterprise-wide application. ERP systems cover business processes throughout the entire organization, and integrate different functional areas of the enterprise (Kalakota & Robinson 2000). In the literature survey of Helo & Szekely (2005), ERP is defined as a business management system made up a collection of applications that integrates marketing, finance, human resources, sales, manufacturing, logistics, etc. of the company into a common database. These sys-

115 tems are designed to solve the fragmentation of information in large business organizations, and to integrate all information flows within a company (Davenport 1998, Shapiro 2001). ERP systems provide the transactional tracking and global visibility of information from any part of a company and its supply chain. Besides allowing a company to track items throughout the system, ERP systems allow a company to automate processes that increase the efficiency and reduce costs. Companies should review their processes before implementing ERP systems. However, ERP systems serve as a catalyst for a company to redefine its processes to make them more effective. (Chopra & Meindl 2001.) As ERP system adoption needs considerable investments in terms of time, money and effort, the decision to acquire an ERP system has major implications for the adopting organization. In large organizations, ERP system implementation may last several years, particularly if the system is heavily customized to make it better suit the needs of the adopting organization (Davenport 1998). ERP systems are very especially expensive for SMEs to consider, requiring a lot of funds, ICT knowledge, installation and training time for ERP implementation, typically taking 18-48 months (Hemilä 2002). The great effort and difficulties related to ERP implementation, as well as the associated organizational change, have given ERP adoption projects a somewhat notorious reputation. All in all, the decision to acquire an ERP system is a long-term commitment and a considerable investment having a significant impact on the company. Most large corporations worldwide have already adopted an ERP system and SMEs have started to follow their lead. Due to resource poverty typically characteristic of SMEs, the adoption of information systems, and thus, ERP systems, can be seen to represent a greater resource commitment and risk for them than for their larger counterparts (Hemilä 2002). ERP is maybe the most known information system related to the intra-organization management, great at telling a company what is going on in the supply chain, because it is operationally focused, but it falls short in helping a company determine what ought to be going on in the supply. Instead, Supply Chain Management (SCM) systems are networkwide and provide analytical decision support in addition to the visibility of information. (Chopra & Meindl 2001.) SCM systems are aimed at providing a higher level of business planning and decision-support related to activities that involve the coordination and execution of multi-organization-wide production and distribution processes. These systems include acquisition (source), manufacturing (make) and logistics (deliver), but there could be also warehousing (store), and market (sell). As these software systems have matured, their capabilities and features have begun to overlap, based on normal product enhancements as well as business acquisitions and mergers. We now are seeing the emergence of integrated ERP/SCM solutions (Ball 2002). In addition to EDI, ERP, SCM systems, etc., some other enabling production technologies are critical to successfully accomplishing an agile supply chain. These include robotics, automated guided vehicle systems, numerically controlled machine tools, computeraided design (CAD), computer-aided manufacturing (CAM), and rapid prototyping equipment (Jin-Hai et al. 2003).

116

3.4.1.1 Network technologies

The development of ICT, and in particular, the Internet and other network technologies, has offered new possibilities for companies to manage their supply chains. Communication over the Internet is characterized by easy accessibility, low-cost usage and speed (Shapiro 2001). The global Internet economy is expected over time to give rise to increasingly agile practices where new supply chain arrangements are dynamically set up in response to changing business conditions and demands for highly customized products and services. In fact, the Internet can redefine the way, in which some back-end operations, such as product development, procurement, production, warehouse management, fulfillment, post-sales support and even marketing, are managed. In each process, the Internet can change the role and type of relationships between the various players, creating new organizational structures and developing new digital supply chains (Muffatto & Payaro 2004). The word "e-business" can be used to describe the use of the Internet to reach the goals of SCM (Kalakota & Robinson 1999). Although e-business is often associated with the WWW (World Wide Web), this is only one aspect of the subject. In fact, e-business technologies cover a wide range of technologies and applications, e.g. web sites, browsers, electronic procurement software, desk top video conference tools, intelligent database search engines, computer supported cooperative working packages. The Internet itself can be seen just as a collection of computers working together using public telephone lines, leased lines or other equipment. (Kidd 2001.) Information networks can be classified by their extension and target group (global network), Intranet (for information sharing inside an organization), and Extranet (for a specified target group outside the organization). Internet technology is the common technology foundation for Intranets and Extranets. They all use the same TCP/IP network protocol (Transmission Control Protocol/Internet Protocol), email, and WWW standards, that make it possible to share data and information in the form of text, graphics, audio, and video, thereby supporting a wide range of individual and group processes that once required on-site, face-to-face communications (McGaughey 1999). Internet applications are designed to be compatible with the complex environment that can utilize a wide variety of technologies, such as web browsers and servers, secure file transfer servers, customer account management systems, remote administration tools, directory servers and databases, authentication systems, commerce systems, messaging systems and fire walls and proxies (Hemilä 2002). Internet is a global network of networks using TCP/IP protocols or interacting with networks via gateways, providing users with electronic mail messaging, remote login, file transfer, network news, WWW, and other related services and tools (Laudon & Laudon 2000). The value of the Internet lies in its capacity to provide immediate access to information, and information suppliers can distribute up-to-date information dynamically from databases and other repositories (Shapiro & Varian 1999). The Internet is an efficient electronic link between different entities, and has proven to be an ideal platform for information sharing. The power of the Internet stems from open standards, permitting easy, universal, yet secure, access to a wide audience at a low cost. Because the Internet is open, standard-based and virtually ubiquitous, companies using the Internet gain visibility across their extended network of trading partners which helps them respond quickly to

117 changing conditions such as customer demand and resource availability. (Lee & Whang 2001.) Intranet is like a mini-size Internet, a private network usually inside one organization within a limited geographical area that uses Internet technology for sharing information internally, but does not necessarily function through the Internet. Access is limited only to employees or organization members. Geographically limited means that the Intranet is not global, but could cover multiple locations. For example a company that has different factories in different locations could have the same Intranet. Intranet can be run as a completely internal network. It is placed on the server of the organization and only accessible on the internal network or a partly external network, where people located at other geographical locations can access the Intranet via a dial-up network or the Internet. (Hemilä 2002.) Extranet can be considered as something between an Intranet and the Internet. However, today the difference between extranet and intranet is quite fuzzy. An extranet is determined as a private network that securely shares certain part of company's information or operations with its suppliers, vendors, partners, customers, or other companies over the Internet. An extranet can be viewed as part of a company's intranet that is extended to users outside the company. By granting authorizations to pre-specific persons or groups through the use of passwords, it is possible to vary the degree of access to the Extranet. (Hemilä 2002.) Internet technology can assist firms in their efforts to achieve agility. Internet technology helps to enrich customers in a variety of ways from monitoring customer needs to better supporting customer processes. Internet technology provides the communications infrastructure that enables communications, in a variety of forms and formats, among individuals, groups and organizations to facilitate the intra- and inter-organizational cooperation necessary to achieve agility. Internet technology provides a flexible communications infrastructure that can support the constantly changing intra- and inter-organizational relationships that are necessary for success in an environment of rapid change. Internet technology leverages the impact of people and information. The value of information is leveraged when it is available to those that need it, when they need it, where they need it and in a form useful to them. People are leveraged when they are empowered with the knowledge and information they need to make decisions and perform job-related tasks. Internet-technology provides the vehicle for delivering information and for delivery of education and training that expands the knowledge of workers, both of which help to empower individuals and groups to act in ways that contribute to agility. (McGaughey 1999.)

3.4.1.2 Agent software technologies

The Internet enables the use of other supporting technologies, which not only transmit information but also share information based on the intended meaning, the semantics of the data (Davies et al. 2003). One of these technologies is agent software technology, which has been considered as an important approach for developing industrial distributed

118 systems (e.g. Jennings et al. 1995, Jennings & Wooldridge 1998, Qinghe et al. 2001, Shen et al. 2003). Agent technology enables a flexible and dynamic coordination of distributed entities in business networks. It changes the metaphor for human-computer interaction from direct manipulation by the user to indirect management of background agent processes because intelligent agents can autonomously perform a lot of coordination and everyday tasks on behalf of their users (Fischer et al. 1996). There is no one, exact and universally used definition for the term "agent". The definition depends on the environment and the use of agents. The concept of agent is usually defined as follows (Wooldridge 1999, Jennings & Wooldrdge 1998): "An agent is a computer system that is situated in some environment, and that is capable of autonomous action in this environment in order to meet its design objectives." The two important aspect of agents are their ability to operate asynchronously, act independently on behalf of the user, and that they co-operate, communicate with each other as needed using a specific language (Fox et al. 2000). They are dedicated to a specific purpose and carry out some set of operations in order to accomplish tasks (Franklin & Graesser 1996). In order to be flexible, the agents in the software system must have the following properties (Wooldridge 1999, Jennings & Wooldridge 1998): ­ Autonomy: agents operate without the direct intervention of humans and have some kind of control over their actions and internal state; ­ Social: agents interact when appropriate, with other artificial agents and humans via some kind of agent communication language in order to complete their own problem solving and to help others with their activities; ­ Responsive: agents perceive their environment (which may be the physical world, a user, a collection of agents, the Internet, etc.) and respond in a timely fashion to changes that occur in it; ­ Proactive: agents do not simply act in response to their environment; they are able to exhibit opportunistic, goal-directed behavior by taking the initiative where appropriate. When developing and evaluating information systems for SCM, based on agent technology, some terms and functions have first to be clarified. According to the Foundation for Intelligent Physical Agents, FIPA (2006), agents are autonomous software components, which communicate with each other through an agent platform. An agent Platform (AP) provides the physical infrastructure, computational environment in which the agent operates. An AP combines one or more service capabilities for agents. It consists of an agent support software and agent management components. The most important services that should be provided by an AP are the message transport and parsing, interaction protocols, and ontology. There are several APs available either commercially or as an open source. Most of the AP's are based on the Java language. The platform where an agent originates is referred to as the home platform, and is the most trusted environment for an agent. One or more hosts may comprise an AP, and an AP may support multiple locations or meeting places where agents can interact. (FIPA 2006.)

119 Agents communicate by using an Agent Communication Language (ACL). For an ACL to be effective in an open environment like the Internet, it must support security, privacy, integrity of data, and authentication of an agent's identity. A very common communication language is FIPA ACL. To establish communication between agents, there is a need for the context of the message to determine how that particular message is interpreted. Ontology is used to define the vocabulary that agents must use to maintain knowledge and the behavioral rules. One definition to ontology by Grüber (1993) is that ontology is a formal, explicit specification of a shared conceptualization. Formal means that ontology is defined as readable by the machine. Conceptualization refers to abstract phenomenon and it identifies relevant information of the phenomenon. This means that the types of concept and constraints for the concept are defined explicitly. If the ontology is shared among agents in an environment, then the vocabulary can be used for communication between these agents. To be able to communicate with agents in another platform, there should be communication channels available between these platforms. Nowadays the Internet is widely used for this communication channel. The usage of agents and agent systems via the Internet has increased. Agent communication within the same platform is called intra-platform communication, and on many different platforms, the communication is called inter-platform communication. (FIPA 2006.) Java Agent Development Framework (JADE) is a software framework fully implemented in Java language. It simplifies the implementation of multi-agent systems through a middleware that complies with the FIPA specifications and through a set of graphical tools that supports the debugging and deployment phases. The goal of JADE is to simplify development while ensuring standard compliance through a comprehensive set of system services and agents. JADE can be considered an agent middleware that implements an AP and a development framework. A JADE platform can be distributed among several network hosts. JADE is free open source software and is distributed by Telecom Italia Lab and the latest official version is available from their web-site. (JADE 2006.) Agent-based systems have been used in several application areas, such as manufacturing, process control, electronic commerce, and business process management (Blake & Gini 2002, Collins et al. 2002, Karageorgos et al. 2002, Luck et al. 2003). These examples show that it is possible and even profitable to use agent technology in business operations in different areas. In multi-agent e-business environment, agents can be organized into different categories depending on their functionality and competencies. Agent technology makes it possible to merge distributed computing, mobility and inference in one package. Agent technology has also been used as an integration system for existing legacy systems where agents encapsulate existing software systems to solve legacy problems and integrate manufacturing enterprises activities, such as design, planning, scheduling, simulation execution and product distribution (Fox et al. 1993, Barbuceanu & Fox 1997). Agent software technology is also one of the most promising technologies for SCM enabling flexible and dynamic coordination of distributed entities in supply chains. Firstly, the autonomous nature of independent agents is suitable for SCM where a single company cannot govern the whole supply chain co-ordination. Secondly, the `intelligence' of each agent, which is supported by many tools and techniques from artificial intelligence, can help the various planning activities in SCM. Thirdly, agents can form dynamic collaboration networks for turbulent supply chains through contracts or negotiations that are supported by agent interaction protocols. (Ahn & Lee 2004.)

120 The new software architecture for managing the supply chain at the tactical and operational levels has emerged. It views the supply chain as a set of intelligent (software) agents, each responsible for one or more activities in the supply chain and each interacting with other agents in planning and executing their responsibilities (Fox et al. 2000). Agents can be used to encapsulate existing software systems to solve legacy problems and integrate manufacturing enterprises' activities such as design, planning, scheduling, simulation execution and product distribution with those of their suppliers, customers and partners into an open, distributed intelligent environment via networks (Fox et al. 1993, Barbuceanu & Fox 1997). In business networks agents can carry out several tasks since B2B transactions consist of several typically repeated chains of events like the requisition of resources, a request for quotes from candidate business entities, vendor selection, order enactment and delivery, relationship management among businesses, and product life cycle management. These events are relevant to the functions of several business networks, mentioned in Blake & Gini (2002). The agents can support the delivery of supply chain information by providing support for users' daily activities. They transmit logistic information automatically between networked companies; therefore the information sharing is not based on user's memory. Furthermore, agents can propose solutions for a user's decision-making and help the decision-making process. These features provided by agents are valuable when a delivery time has to be increased in a network environment. (c.f. Helaakoski et al. 2005.) According to Papazoglou (2001), intelligent business agents are the next level of abstraction in model-based solutions to e-business application. By building on the distributed object foundation, agent technology can help bridge the remaining gap between flexible design and usable applications. The opportunities for using intelligent agents in an ebusiness application are enormous. For example, they can be used for real-time pricing and auctioning, involving different parties in a supply-chain network. Suppliers can present their products on the Web and collect real-time price bids from multiple customers. Intelligent software agents can carry out work on behalf of human knowledge workers both on the supplier's and customer's behalf. A vision of how agent-enabled, business-to-business e-commerce could provide an unprecedented level of functionality to people and enterprises is described in Papazoglou (2001). Fox et al. (2000) present the next generation agent-based ICT system for SCM purposes. It has to have all of the following characteristics: ­ Distributed. The functions of SCM are divided among a set of separate, asynchronous software agents; ­ Dynamic. Each agent performs its functions asynchronously as required, as opposed to in a batch or periodic mode; ­ Intelligent. Each agent is an "expert" in its function. It uses artificial intelligence and operations research problem-solving methods; ­ Integrated. Each agent is aware of and can access the functional capabilities of other agents; ­ Responsive. Each agent is able to ask for information or a decision from another agent - each agent is both a client and a server;

121 ­ Reactive. Each agent is able to respond to events as they occur, modifying its behavior as required, as opposed to responding in a preplanned, rigid, batch approach; ­ Cooperative. Each agent can cooperate with other agents in finding a solution to a problem; that is, they do not act independently; ­ Interactive. Each agent may work with people to solve a problem; ­ Anytime. No matter how much time is available, an agent can respond to a request, but the quality of the response is proportional to the time given to respond; ­ Complete. The total functionality of the agents must span the range of functions required to manage the supply chain; ­ Reconfigurable. The SCM system itself must be adaptable and support the "relevant subset" of software agents. For example, a user who wants to schedule only a plant should not be required to use or have a logistics component; ­ General. Each agent must be adaptable to as broad a set of domains as possible; ­ Adaptable. Agents need to quickly adapt to the changing needs of the human organization. For example, adding a resource or changing inventory policy should be quick and easy for the user to do; ­ Backwards compatible. Agents need to have a seamless upgrade path so that the release of new or changed features does not compromise existing integration or functionality.

3.4.2 Impact of ICT on supply chain integration

Supply chain integration is not new. Many companies have already pursued it as a way to gain competitiveness. However, ICT, especially the Internet and other web technologies, has now emerged as perhaps the most compelling enabler for supply chain integration both in vertical (with suppliers and customers) and horizontal (with competitors) integration (e.g. Grieger 2004b, Gunasekaran & Ngai 2004, Kalakota & Robinson 1999, Lee & Whang 2001, Poirier & Bauer 2000, Timmers 1999). With ICT, companies can enhance supply chain efficiency by providing real-time information regarding product availability, inventory level, shipment status, and production requirements. In addition, companies can realize dramatic returns through efficiency improvements, better asset utilization, faster time to market, reduction in total order fulfillment times, enhanced customer service and responsiveness, penetrating new markets, a higher return on assets, and ultimately, higher shareholder value (Lee & Whang 2001). ICT also facilitates collaborative planning among supply chain partners by sharing information on demand forecasts and production schedules that dictate supply chain activities. (Gunasekaran & Ngai 2004.) According to Alter (1999), Speakman et al. (1998) and Lee & Whang (2001), e-business is the highest level in supply chain integration. While companies begin to realize the promise of e-business-enabled supply chain integration, they often discover entirely new ways of pursuing business objectives, developing strategies and business models that were neither apparent nor possible prior to the Internet. E-business is not only integration between two different enterprises - it also allows new types of businesses among the integration. Lee & Whang (2001) present the impact of e-business on supply chain integration in Table 11.

122 Table 11. Benefits of e-business on supply chain integration (Lee & Whang 2001).

Dimension Information integration Elements ­ Information sharing and transparency ­ Direct and real-time accessibility Benefits ­ ­ ­ ­ Reduced bullwhip-effect Early problem detection Faster response Trust building

Synchronized planning Workflow coordination

­ Collaborative planning, forecasting and replenishment ­ Joint design ­ Coordinated production planning and operations, procurement, order processing, engineering change and design integrated, automated business processes ­ ­ ­ ­ ­ Virtual resources Logistics restructuring Mass customization New services Click-and-mortar models

­ Reduced bullwhip-effect ­ Lower cost optimized capacity utilization improved service ­ ­ ­ ­ ­ ­ ­ ­ ­ Efficiency and accuracy gains Fast response Improved service Earlier time-to-market Expanding networks Better asset utilization Higher efficiency Penetrate new markets Create new products

New business models

Grieger (2004a) presents a totally different view to supply chain integration, actually first introduced in Nambisan (2000). He identifies three emerging integration forms of SCM enabled through Internet applications: firm-centric, industry-centric, and crossindustry (Table 12). In this sense, supply chain integration is not limited to firms within one supply chain ­ as described, for example, by Lee & Whang (2001) ­ it also emerges beyond the boundaries of a supply chain and beyond the boundaries of industry fields.

123 Table 12. Firm-centric, industry-centric and cross-industry SCM (Grieger 2004a).

Key feature Key features of SCM Firm-centric SCM ­ Static supply chain ­ case focal company drives the supply chain ­ Integration primarily at the information level ­ Provide Internet-based connectivity between enterprise systems of multiple firms ­ Support coordination across two links in the supply chain ­ Driven by case focal company ­ Minimal business redesign requirements ­ Rapid benefits realization Industry-centric SCM ­ Dynamic supply chain ­ Development of industrylevel SCM standards ­ Integration mainly at the coordination level ­ Provide industry standard ebusiness environment ­ Facilitate dynamic selection of supply chain partners ­ Support coordination across more than two links in the supply chain ­ Driven by the industry and trade organizations ­ Significant internal business redesign requirements ­ Benefits accruable to all entities in the supply chain Cross-industry SCM ­ Synergy in multi-industry SCM ­ Development of crossindustry SCM standards ­ Emergence of generic SCM service provider ­ Multi-layer e-business architecture that supports cross-industrial standards ­ Support integration at organizational linkage level ­ Driven by third party SCM service agencies ­ Transaction-or-subscription-based service costing

Key features of e-business applications

Nature of e-business technology adoption

In firm-centric SCM, activities are dominated by a single organization, i.e. a case focal company drives the entire supply chain. Firm-centric SCM is static and the linkages between the participants tend to be long term and fixed. In addition, it is characterized by a limited scope and minimal business redesign requirements. Thus, it is argued that development and implementation of these applications at this level may be rapid and the benefits can be realized relatively quickly. The key weakness of these applications is the limited flexibility due to the incorporation of business rules peculiar to the case focal company during implementation. In addition, most such systems focus on only two links in the supply chain. In industry-centric SCM, partners are selected and their linkages defined from a set of companies (suppliers, manufacturers, logistics service providers, etc.) dynamically based on market conditions. Accordingly, the supply chain is more extended or ultimate in nature. Supply chain activities are more decentralized and not concentrated in a single company, as in the previous case. The extent and the dynamic character of the supply chain indicate a higher level of uncertainty, and hence, require a higher level of coordination. Industry-centric SCM resembles a web or network form, rather than a chain. One step further on, the cross-industry SCM is an open environment where supply chain services can be traded among participating members belonging to multiple industries with little loss of efficiency. At first sight, it is difficult to understand why companies should reach this highest level of integration with companies outside the supply chain and even share strategic information with them. But the fact is that an increasing number of companies are outsourcing supply chain activities and new types of companies are offering such supply chain services. One of these new types of companies is a third-party logistics provider. (Grieger 2004a.) Despite the benefits of e-business applications in SCM, the deployment of ICT solutions is not free from drawbacks. Some of these drawbacks are a lack of funds, a disparity of trading partners' capability, lack of trust, fear of ICT breakdowns, etc. (Jharkharia

124 & Shankar 2005). Shaw et al. (2000) have noted that security and access privileges are the two most important barriers in implementing Internet technologies in a supply chain. In addition, unauthorized access and tampering of information by the competitors may lead to disasters (Jharjharia & Shankar 2000). In this regard, Warren & Hutchinson (2000) have advised that companies should consider the security aspects while using ICT tools in their supply chain. Implementation of a cross-organizational ICT system is costly, timeconsuming and risky. Supply chain partners may not agree on the adoption and specifications of the technical system to be used in a supply chain. Poor ICT infrastructures act as a barrier in the supply chain integration, mainly because of a lack of funds and a lack of awareness and commitment of the top management to the use of ICT. It has to be said that linking different ICT systems takes years to achieve success. (Warren & Hutchinson 2000.) The success of ICT lies in the willingness of companies to share information for their mutual benefits. Still, many companies are reluctant to share information with their trading partners (Lee & Whang 2001). This reluctance again acts as a barrier to ICT enabling SCM. As the ICT-enabling supply chain is a strategic and capital-intensive issue, mutual trust for long-term relationships and the confidentiality of information are the important issues (Jharkharia & Shankar 2005). Furthermore, to communicate electronically, companies must have compatible ICT tools. However, disparities of the supply chain members with respect to size and policies may inhibit the process of ICT supported supply chain integration (Cox 1999) Moreover, issues such as weak infrastructure outside the companies and small size of trading companies hinder ICT implementation. ICT-enablement causes changes in work cultures and the nature of work of some employees. Sometimes the organizational hierarchy needs to be changed. Jharkharia & Shankar (2005) summarize the drawbacks of ICT supported supply chain integration: ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ Lack of awareness about use of ICT in SCM; Disparity of trading partners' capability; Lack of funds; Poor information infrastructure facilities; Threats of information security; Lack of trust in supply chain linkage; Fear of supply chain breakdowns; Fear of information system breakdown; Low priority by the management, Low level of supply chain integration; Resistance to change to ICT-enabled SCM.

125

3.4.2.1 Information system integration

One perspective on ICT-based supply chain integration is information system integration (Hasselbring 2000). Instead of system integration, several other terms are used in the literature to define the information system integration area, for example, application integration (Sprott 2000), value chain integration (Yang & Papazouglou 2000), and e-business integration (Linthicum 2000). Information system integration means unrestricted information sharing between two or more enterprise applications, a set of technologies that allow the movement and exchange of information between different applications and business processes within and between organizations (Themistocleous & Irani 2001). Typically, an enterprise has existing legacy applications and databases, and continues to use them while adding or migrating to a new set of applications that exploit the Internet, e-commerce, extranet, and other new network technologies. (Lee et al. 2003.) Information system integration is no simple task. Many challenges must be faced, especially in the areas of connectivity, reliability, network management, and flexibility. The challenge when connecting various systems is to support communication among disparate technologies. Different sites, for example, may use different types of media operating at varying speeds, or may even include different types of systems that need to communicate. Because companies rely heavily on data communication, information integration must provide a certain level of reliability. Furthermore, network management must provide centralized support and troubleshooting capabilities. Configuration, security, performance, and other issues must be adequately addressed for the communication to function smoothly. Security is essential. Many people think of network security from the perspective of protecting the private network from outside attacks. However, it is just as important to protect the network from internal attacks, especially because most security breaches come from inside. Networks must also be secured so that the internal network cannot be used as a tool to attack other external sites. (Cisco 2006.) Open System Interconnection (OSI) is a standard reference model for messages being sent between any two points in a telecommunication network. OSI describes how information from a software application in one computer moves through a network medium to a software application in another computer. The model was developed by the International Organization for Standardization (ISO) in 1984, and it is now considered the primary architectural model for intercomputer communications. (Machine Bus Corp. 2006.) The OSI model divides the tasks involved with moving information between networked computers into seven smaller, more manageable task groups. A task or group of tasks is then assigned to each of the seven OSI layers. Each layer is reasonably self-contained so that the tasks assigned to each layer can be implemented independently. This enables the solutions offered by one layer to be updated without adversely affecting the other layers. (Cisco 2006.) The following list details the seven layers of the OSI reference model (Fig. 27).

126

Application

Upper layers: Application

Defines communication partners, type and service, and security. Converts data from one format to another, such as from a text file to a popup window displaying that text. Opens, coordinates, and ends conversations and exchanges of data between two applications. Manages error checking and verifies that packets are delivered. Routes and forwards data to the proper destination. Builds data packets and synchorizes network traffic. Conveys the actual bit stream across the network. Manages the hardware and the mechanical process for sending and receiving data.

Presentation Session Transport Network

Lower layers: Data transfer

Data link Physical

Fig. 27. OSI reference model (Machine Bus Corp. 2006).

The upper layers (related to application) of the OSI model deal with application issues and generally are implemented only in software. The highest layer, the application layer, is closest to the end user. Both the user and application layer processes interact with software applications that contain a communications component. The functions of the application layer typically include identifying communication partners, determining resource availability, and synchronizing communication. When identifying communication partners, the application layer determines the identity and availability of communication partners for an application with data to transmit. When determining resource availability, the application layer must decide whether sufficient network resources for the requested communication exist. In synchronizing communication, all communication between applications requires cooperation that is managed by the application layer. The lower layers (related to data transfer) of the OSI model handle data transport issues. The physical layer and the data link layer are implemented in hardware and software. The lowest layer, the physical layer, is closest to the physical network medium (the network cabling, for example) and is responsible for actually placing information on the medium. (Cisco 2006.) In today's agile approach, the development focus is on application integration (Helaakoski 2006). This study proposes an agile-based framework for intelligent enterprise integration and, thus, concentates on the upper layers (See Fig. 27). In the middle of the 1990s, an approach to information system integration known as Enterprise Application Integration (EAI) was introduced. From a business perspective, EAI means providing unrestricted sharing of data and business processes among connected applications and data sources in the enterprise (Linthicum 2000). In practice this means that software applications within an enterprise share information among other external systems, such as an information system in another enterprise. EAI brings the

127 interaction between systems and allows the business process to be automated also when the information flows between the organisations. (Helo & Szekely 2005.) EAI makes it possible to create extended supply chains involving applications of customers, partners, and suppliers, for example through the Internet. It also makes it possible to adopt new applications in a flexible way and thereby makes it possible to quickly create new products and services or change the existing ones. The basic concept of EAI is mainly in its externality of enterprise integration with lower costs and less programming using existing applications. EAI may involve developing a totally new outlook of an enterprise's business and its applications, determining how existing applications fit into the new view, and then devising ways to efficiently reuse what already exists while adding new applications and data. (Lee et al. 2003.) In practice, EAI can be implemented on four different levels (Lee et al. 2003): 1. 2. 3. 4. Expanding traditional data integration within a common framework; Linking business processes and data at the application interface layer; Sharing business logic throughout the enterprise at the component level; Leveraging the user interface as the basis for integration.

A number of enabling technologies drive the demand for EAI, in particular Internet and enterprise software packages. The Internet provides an environment that can link a company's customers, suppliers, partners, and its internal users. Enterprise software packages offer an integrated environment for supporting business processes across the functional divisions in organisations. Some packages, such as ERP, manage back-office requirements, while other packages provide front-office capabilities, e.g. customer services. (Linthicum 2000.)

3.5 Internet and agent-based agile supply chain 3.5.1 Evolution of a digital supply chain

Metes et al. (1998) use the term "agile networking" to describe the union of agility and network technologies. According to McGaughey (1999), Internet technology can play a prominent role in helping companies to become more agile. Different, interrelated concepts that emphasize the network-nature and the supply chain digitalization, as well as agility, can be found in the literature, i.e. "virtual supply chain" (Chandrashekar & Schary 1999), "demand satisfaction community" (Hewitt 2000), "value net" (Bovet & Martha 2000), "value web" (Andrews & Hahn 1998), "value chain constellation" (Poirier & Bauer 2000), "information hub" (Lee & Whang 2001), "extended enterprise" (Browne et al. 1995), "virtual enterprise" (Browne & Zhang 1999), and "agile enterprise" (Greis & Kasarda 1997). While each of these concepts differs in particular details, they all represent the new form of the digital supply chain, where information flows play an integral role within the network. Digitalization can be executed by different technologies, especially by the Internet. Internet-based supply chains are frequently referred to as "e-commerce supply chains" (Gunasekaran et al. 2002). These

128 "e-supply chains" ­ chains that use Internet and web technology ­ can be seen simply as processes necessary to transfer the goods sold over Internet to the customers, but an esupply chain is broadly a wide-ranging topic related to the supply chain integration (Poirier & Bauer 2000). The common factors of all these digital supply chains distinguish a novel business structure which provides a competitive advantage over a traditional structure which relies on supply chain thinking. When establishing digital supply, companies need to learn new ways of relating to customers and suppliers, to reengineer their internal processes and digitize them as well. The work of some functions may have to be eliminated or outsourced. (Bovet & Martha 2000.) When comparing the digital supply with the traditional supply, several benefits can be found (Table 13). Table 13. Traditional supply chain versus digital supply chain (Bovet & Martha 2000).

Traditional supply chain One size fits all Arm's length and sequential Rigid and inflexible Slow, static Analog Digital supply chain Customer-aligned Collaborative and systemic Agile and scalable Fast-flow Digital

Traditionally a supply chain is typically structured as a chain consisting of consecutive actions following each other. Material flows downstream from suppliers to the final assembly and information flows upstream from customer to suppliers. Information does not reach every participant simultaneously; every participant of the chain receives the information from the previous phase of the process. This inhibits the visibility and the flexibility of the process, and ability to react to customer demand in real-time. Greis & Kasarda (1997) explain the differences of traditional supply and digital supply shown in Fig. 28.

Traditional supply chain

Raw material

Digital supply chan

Distribution Distribution

Manufacturing

Assembly

Assembly

Logistics Retail sales sales

Warehousing Warehousing

Manufacturing Order information

-

Marketing Selling

& Marketing & Raw materials materials

Retail sales sales

Material

Customer Customer

CUSTOMER ORDER

Information

Fig. 28. Traditional supply chain versus the digital supply chain (Greis & Kasarda 1997).

129 The digital structure of the supply chain captures customer's real choices in real-time and transmit them digitally to other participants within the network. This kind of structure emphasizes simultaneous communication between different parties and the total supply chain integration, as well as communication between the consecutive phases of the process. Seamless material flows are achieved by replacing the notion of a sequential and linear chain of information exchange with the set of simultaneous information exchange that span the members of the supply chain. Material flows can be coordinated spatially and temporally from multiple sites. For example, shipments of customized components produced by suppliers at several locations can be arranged for concurrent delivery as required as the customer. In addition, the information about status of orders can be monitored continuously by multiple parties, including the customer. As depicted in the Fig. 29, information flows electronically around the network. Instead transmitting information to nearest neighbor, it is essential to be able to interconnect simultaneously with all network members. (Bovet & Martha 2000.) The customer dominates the supply chain and the chain is organized around the customer order. In the transaction web, different transactions, such as ordering and paying, can be undertaken in one place and at one time. It is no longer just about the supply ­ it is about creating value for customers, the company, and its suppliers. Nor is it a sequential, rigid chain. Instead it is a dynamic, high-performance network of customer - supplier partnerships and information flows. It is agile and scalable, accommodating short-term fluctuations and long-term growth. It produces speed ­ both in bringing new products to market and in delivering orders to end customers. And it uses ICT to create new information flows that span layers of production and distribution, thus eliminating aging inventory. It operates at the speed needed to satisfy real customer demand. It reliably and precisely delivers on promises made to customers. Finally, it responds flexibly to changes in customer or market requirements. As speed, reliability, convenience, and customization become increasingly important to customers across industries, an increasing number of companies is realizing how the digital supply can please both customers and stakeholders (Bovet & Martha 2000, Chandrashekar & Schary 1999, Greis & Kasarda 1997). The digital supply chain of Greis and Kasarda (1997) does not define how the communication should be organized; parties can communicate with each other in a numerous different ways. In addition, their supply chain structure still emphasizes the bilateral way of information sharing, achieved e.g. by EDI. A novel and more advanced way is presented by the author in Fig. 29.

130

EDI-based digital supply ­ bilateral information exchange Internet and agent-based digital supply agile supply chain

Distribution Distribution Assembly Assembly Manufacturing Marketing & Selling Raw materials Retail sales Manufacturing Logistics

Distribution Distribution Assembly

HTTP HTTP

Logistics Logistics

Retail sales

Internet

HTTP HTTP

HTTP

CUSTOMER ORDER

Marketing & Selling Raw materials

CUSTOMER ORDER

Fig. 29. One step more advanced way by Internet and agile software technology.

This new agile supply chain is based on the possibilities the Internet and agent technology provide for supply chain design. The agile supply chain illustrates the communicating around "the round table", which emphasizes the cross-functional communication in the supply chain (c.f. Sakki 2003). According to O'Brien (1995), a messy, complex way of communication should be replaced by richer, faster and more stable communication. With the help of agent system, communication can be made centralized and more stable. Especially when there are many parties involved in the supply chain, cross-functional communication will be more effective, when information requests can be made via one common platform.

3.5.2 Principles adopted from a virtual enterprise

In order to develop an agile supply chain for the case project-oriented steel product network, virtual enterprise design is chosen for closer examination. It is of special interest in this thesis, because if an organization is so well staffed, equipped, organized, and motivated that the option of creating a virtual enterprise structure for a project is routinely available to it, then by virtue of that very fact all the other elements of agility, are likely to be present and functional in that organization (Goldman et al. 1996). A Virtual enterprise (VE), or more accurately, an enterprise with a virtual organizational structure, is one of many forms in which agile cooperation can happen. VE, also referred to as an agile, outsourced, or seamless organization, has been variously defined in the literature (Weber 2002). Greis & Kasarda (1997) define VE as a legally separate but operationally interdependent company focused on responding to a market opportunity. Fitzpatrick & Burke (2000) widen the definition to supply chain level and state that VE attempt to create a network or coalition of suppliers, manufacturers, and administrative services to accomplish specific objectives. VE describes almost any association of people

131 who are linked, not by face-to-face relationships but by sharing information through electronic networks (Weber 2002). Browne & Zhang (1999) determine VE as follows: "Virtual enterprise is a temporary, cooperative alliance of independent member companies and indeed individuals, who come together to exploit a particular market opportunity". VE institutionalizes organizational change, and demonstrates a focused strategic direction and purpose, thus enabling individuals to optimize their potential to contribute, by creating new forms or shapes, developing dynamic communication, and creating cultures which support continual organizational adaptation (Hale & Whitlam 1997). The attraction of VEs lies in their promise of minimizing development time, costs, and risks while creating mutually valuable interactive relationships among the participating companies. VE promotes adaptability, flexibility, and the ability to react quickly to changes in the markets. It may also provide higher productivity and greater satisfaction or both employees and customers because they provide a means to create focus on integration (Weber 2002). The boundaries between manufacturers and customers, manufacturers, suppliers and vendors, are becoming increasingly blurred. Furthermore, what is designed, and produced, is determined by the individual customer. The customers buy, instead of discrete products, variable combinations of physical products, services, and information. (Goldman et al. 1995.) VE companies assemble themselves based on cost-effectiveness and product uniqueness without regard to organization size, geographic location, computing environments, technologies deployed, or processes implemented. They are linked by information technology to share capabilities, capacities, costs and risks to fulfill specific customer demands. The formation of the VE materializes through a configuration of the core competencies available in the network and possibly through the inclusion of additional, required competencies provided by non-network participants. Through being comprised by competencies from various partners, the VE appears to the customer as one, unified, and attuned enterprise. (Vesterager et al. 1998.) Khalil & Wang (2002) argue that advanced ICT has made it possible to manage the complexity of a VE environment more efficiently and effectively. The success of the VE depends on intensive information sharing, and it is enabled by sophisticated information technology, which makes business information transparent, seamless and easily accessible at any time and at any place (Browne & Zhang 1999). Time to market is greatly reduced through quick response manufacturing with integrated and coordinated product design and manufacturing from all the participants. According to Zhang (1998), VE is frequently project based, and requires quick-creating and quick-dissolving organization, whose operation especially depends fast and accurate information transactions. Barriers of distance and time, which in the past have created unacceptable delays, costs, or sheer impossibilities, are no longer constraints. According to Magretta (1998), Michael Dell envisioned that virtual integration may become a new organizational model for the information age. VE is usually compared with the "extended enterprise" (EE) that is defined as a kind of enterprise, which is represented by all those organizations or parts of organizations, customers, suppliers and sub-contractors, which are engaged collaboratively in the design, development, production and delivery of a product to the end user (Browne et al.

132 1995). The significance of the EE as distinct from the conventional subcontracting relationship is in the extent of information flows that facilitate the tightening of manufacturing design and production. The opportunities of using the specialist skills and knowledge of the supplying partners in enhancing the design of the new products are immense. The supplying partners own the processes and are at the forefront of their particular field of expertise. (Vesterager et al. 1998.) EE is responsible for the whole product life cycle, from material procurement to component production and manufacturing, to final assembly, further to distribution and customer service, and in an increasing number of cases, to the disposition and, where possible, recycling of end-of-life products (Browne & Zhang 1999). Although the challenge of creating and operating an EE is primarily managerial and concerned with the design and implementation of appropriate business processes, the efficiency of the organization, once formed, is greatly determined by the speed and efficiency with which information can be exchanged and managed among business partners. The similarity between VE and EE lies in the fact that they both pursue enterprise partnerships in order to achieve business success in a very competitive environment. Also, VE pursues enterprise partnerships in order to achieve business success in a very competitive environment (Browne & Zhang 1998). According to Zhang (1998), these two designs also differ in some important respects. First, EE is based on long-term trust and mutually dependent relationships between partners, while in the VE independent partners create temporary relationships for the purpose of creating new products and services. Also, EE focuses on the product value chain with the intention to coordinate the total product life cycle, while VE is frequently project based. Then, EE requires organizational stability and enduring relationships across the value chain, while VE is a quick-creating and quick-dissolving organization, whose operation especially depends on fast and accurate information transactions. VE companies can be seen as a group of companies that are organized as a network. The companies in the network have quite close relationships and they have realized that they can achieve competitive advantage if they work closely together and act as a network. VE is a set-up for the tangible business task, for example, customer projects, delivery projects or product development projects, and the consistence of the VE depends on the needs and it includes only the best possible competences from each company in the network. The establishment, operation and dissolution of the VE are depicted in Fig 30. (Kalliokoski 2001.)

133

1.

Customer order or inquiry

2.

Group of companies reorganize themselves as a VE for customer order accomplishment that co-operate in the network

3.

After customers order delivery VE dissolves and companies continue their ordinary business activities

Group of companies that co-operate in the network

If necessary they can seek competence outside their current network

Fig. 30. The process of creating a VE (modified from Ollus et al. 1998).

In this VE model, in the first phase, the driving force for creating a VE comes from a customer order or inquiry. The customer contacts one of the companies in the network either to order products or services or just to request a quotation. The company that is contacted by a customer may not have all the resources and capability that are needed for the customer order accomplishment, so it has to seek the resources and competence from a current network. This phase can be seen as the VE formation impulse. In the second phase, the VE is created and the companies in the network re-organize to accommodate the new VE structure. This VE is created from a current network for customer order accomplishment and the companies in the VE are selected, for instance, according to their capability and current capacity situation. The companies can seek the needed competence or capacity also outside the current network if necessary. As an example, project business typically acts as a VE concept (Ollus et al. 1998). After a VE is created, all companies operate as a unit of the VE and produce the needed sub-part of the customer order or part of the project for which the VE is created. In the third phase, the VE is dissolved and the customer order or project is delivered to the customer. After dissolution of the VE, companies will continue their ordinary business activities and co-operation with the network companies. The core idea of a VE is that the network companies can be re-organized fast and flexibly in a VE for some special assignment and, if necessary, seek competence and capacity outside the current network. (Kalliokoski 2001.) There are different kinds of modeling methods for the VE concept, such as the lifecycle model and business process model (Kalliokoski 2001). The main purpose of these models is to clarify the processes that are related to VE planning, operating and management, and through that to give valuable input for the functional specification of the ICT system supporting the VE. The lifecycle model gives a rough description of the VE operations from the establishment process to final disposal and organizational learning. The VE process starts with the bidding phase where some of the companies start to look for resources from the network

134 for some special customer order. A customer's inquiry or order is usually the driving force that activates VE establishment process. Usually VE concept is related to project business or one-of-a-kind production, which means concurrent engineering, takes place as well. After this engineering, or concurrently with it, production starts in the VE units. The next phase is delivery of the product or the sub-product, and after the delivery, inspection is usually done by the customer. It can also be seen that learning and experience are matters that remain in the network and companies after dissolution. (Ollus et al. 1998.) Measurement of the learning is not very simple to evaluate (Kalliokoski 2001). Business processes can be modeled on different levels and the precision of a model depends on the processes modeled. The highest level usually contains only activities like rough order processing, while lower ones may also contain shop floor production processes and work activities. The main purpose of the business process model is to help one to understand the completeness of the business that needs to be modeled (Savolainen et al. 1997). In general, it can also be seen that models help the involved people to communicate with each other because with the help of the business process model they can use a common language. With business process modeling it is possible to identify and eliminate needless processes to improve business performance. The VE concept may be complex because several companies with their own organizational structure and business processes are involved in the customer order accomplishment process. (Kalliokoski 2001.)

3.5.3 Development roadmap towards agile supply chain

Different development roadmaps towards e-business, e-supply and agile supply can be found in the literature, such as Timmers (1999), Punakivi et al. (2001), Kalakota & Robinson (1999). After reviewing a wide range of SCM and e-business literature, the framework of Poirier & Bauer (2000) is chosen in this thesis to be the development framework towards an agile supply chain. The most significant benefit of the framework of Poirier & Bauer (2000) is in its comprehensiveness. The framework does not just focus on the ICT development; instead, there are eight different business applications that will be impacted by the impending force of agile activities. Even though this thesis focuses on the ICT approach, the framework gives potential to continue and extend the research to other business activites. SCM requires a company to take an external view of its business environment. A focal company, a nucleus firm, as termed by Poirier & Bauer (2000), is a company that assumes the central role in bringing an external orientation to a supply chain and offers help to willing business partners up and downstream, so a full effort can be generated. The nucleus firm is typically the company, which manages the customer service, and has a well-known brand. Also companies, which manage R&D and engineering, can start to orchestrate the logistics flows. One possibility for the SME suppliers is to use the communication opportunity offered by the Internet. In that way, SMEs can discuss directly with the end customer and pass over intermediaries, and provide a totally new service and offering concept. Poirier & Bauer (2000) identify four levels on the fully integrated network:

135 1. Internal supply chain optimization (level I/II) as a basic level, where the companies are internally focused and is the area where most companies currently find themselves; 2. Network formation can be characterized as a "get going" phase (level III), where the application of advanced supply chain management techniques is used to create the electronic network. This is a time when there will be a fair amount of probing, discussion, and partial sharing, as a need for trusting the selected partners quickly becomes apparent. There is no network, just the idea that one can be formed and the benefits can be mutual for all participants; 3. Value chain constellation can be characterized as a "get real" phase (level IV), where the network members begin sharing resources and utilizing joint assets to enhance the network. The case focal company and its key members both up and downstream have developed a better level of trust and are ready to get serious about the use of e-business, and determined to become a digitalized network; 4. Full network connectivity can be characterized as a "get business" phase (level V), which is achieved as the use of the Internet is pervasive and the network is prepared to do business in a digital economy. Now the fruits of the effort go beyond saving money to finding new revenues together, by actively using e-business capability across a supply network. A trip to the most advanced level must proceed through each of the preceding levels as stages cannot be skipped. In the framework (Table 14), along the vertical axis, there are the various business processes (information technology, design and development, product and service introduction, purchase, procurement and sourcing, marketing, sales, customer service, engineering, planning, scheduling, manufacturing, logistics, customer care and human resources) that will be impacted by the impending force of e-business activities. The horizontal axis represents the progress from the starting point (level I/II) to the most advanced (level V) capability.

136 Table 14. Development framework towards e-business (Poirier & Bauer 2000).

Progression Business application Information technology Design, development product/ service introduction Purchase, procurement, sourcing Marketing, sales, customer service Engineering, planning, scheduling, manufacturing Logistics Level III Level I/II Network Formation Internal Supply Chain Optimization Point solutions Inform Internal only Linked intranets Interact Selected external assistance Level IV Value Chain Constellation Intern-based Extranet Transact Collaborative design ­ enterprise integration and PIM Key supplier assistance, web-based sourcing Collaborative development for focused consumer base Collaborative network planning ­ best asset utilization Best constituent provider ­ dual channel Level IV+ Full Network Connectivity Full network communication system Deliver Business functional view ­ joint design and development Network sourcing through best constituent Consumer response system across the value chain Full network business system optimization Total network, dual-channel optimization

Leverage business unit volume Internally developed programs, promotions MRP MRP II DRP Manufacturing push-inventory intensive Customer service reaction Internal supply chain training

Leverage full network through aggregation Customer-focused, data-based initiatives ERP internal connectivity Pull system through internal/ external providers Focused service ­ call centers Provide network resources, training

Customer care

Segmented response Matched care ­ cussystem, customer rela- tomers care automation tionship management Inter-enterprise resource utilization Full network alignment and capability provision

Human resources

3.6 Theoretical summary

Chapter 3 explores several essential issues in the area of SCM and agility. In section 3.1 the basic knowledge of SCM, supply chain structure and supply chain integration are discussed, and the importance of the role of information flow in the further supply chain development is highlighted. Section 3.2 explores the agility paradigm from different perspectives. The summary in Table 7 traces the evolution of agility definitions from the beginning of its introduction in 1991. Agility in supply chains is defined as the ability of a supply chain to rapidly respond to changes in market and customer demands (Sharp et al. 1999). The literature cited provides a theoretical basis for the ground-work in the empirical study on how persons in the case companies understand the agility paradigm. In the section 3.3, the development of an agile supply chain is discussed. The conceptual framework of Lin et al. (2004) is proposed as a quideline for development work towards an agile supply chain (Fig. 23). According to the framework, to enrich and satisfy customer, the changes or pressures from the business environment that push companies

137 towards agility should first be examined. The categorization of agility drivers of Goldman et al. (1995) is proposed as benchmarking criteria in analyzing the business environment of the case study. Thereafter, the conceptual framework of Lin et al. (2004) provides four key enablers to be truly agile. These key elements of an agile supply chain are presented within the widely-accepted agile supply chain model of Christopher (2000) and van Hoek (2001). The author has modified the model by adding in other key elements of agility found in the SCM and industrial management literature (Fig. 24). In the empirical study, this framework is used as benchmarking criteria to analyze the current level of agility. In section 3.4, ICT is seen as a key enabler for the development of an agile supply chain, thus, the most interesting ICT technologies for SCM are presented in the fourth section. ICT, especially the Internet, provides new possibilities for companies to manage their supply chains. Companies can create new organizational structures that necessitate simultaneous communication along the supply chain and total supply chain integration. The Internet enables the use of other supporting technologies, such as agent software technology, also presented in this section. The ultimate goal for this study is to develop an agile supply chain for a steel product network based on the selected advanced technologies. Internet and agent software technology are seen as a promising ICT tool for agile SCM. The Internet and agent-based supply chain, which is introduced in the fifth section 3.5, provides effective cross-functional communication along the supply chain and enhances the companies' capability to respond quickly to customers changing requirements increases. This kind of digital supply chain structure (Fig. 29) is the basis for the further empirical development. The principles and methods of VE also give information for this development work. The development framework of Poirier & Bauer (2000) is used to examine the change process and move towards agility of the case network (Table 14). Fig. 31 illustrates the theoretical structure of the development of an agile supply chain used in the empirical study.

138

Enablers of agility (Christopher 2000, van Hoek 2001)

Network based

Virtual

Process integration

Drivers towards agility (Goldman et al. 1995)

Digital supply chain based on the Internet and agent technology (Iskanius et al. 2006a)

Distri

Market sensitive

ICT in SCM > AGILITY

Agile drivers - Changes in business environment - Marketplace - Competition criteria - Customer requirements - Technological innovation - Social factors

-

Logi stics Re sal tail es

Change process (Poirier & Bauer 2000)

Agile supply chain goal: Enrich and satisfy customers Cost, Time, Function, Robustness

Determine required agility

SteelNet system

Legacy System

Transportation Manufacturing Process Planning Production Scheduling Production Status Reporting

Agility capability: - Responsiveness - Competency - Flexibility - Quickness

Legacy System

Product Design Company A Company B Resource Management Manufacturing Execution

SteelNet System

Agility enablers / pillars: - Collaborative relationships (strategy) - Process integration (foundation) - Information integration (infrastructure) - Customer/marketing sensitivity

Transportation Information Flow Material Flow Company C

Conceptual framework (Lin et al. 2004)

Company D

Transportation

Legacy System

Legacy System

Fig. 31. Theoretical compilation for the development of an agile supply chain.

4 Current status of the business environment

This chapter provides an overview of the business environment of the Finnish steel product industry. The structural changes that dominate the field, and put pressure on manufacturing companies to rethink their business process operations, are discussed. A general overview is also presented in order to situate the problem in the wider perspective. Thereafter, the chapter presents the drivers that put pressure on the case network to move towards agility. Finally, the current agility elements of the case network are defined and analyzed.

4.1 Trends of the Finnish steel product industry

According to Preiss et al. (1996), a company's capability to understand its business environment and changes taking place there, the attributes, enabling technology and infrastructure, and finally the business processes that should be recognized in the further actions of the organization, are the most important steps in order to achieve agility. Thus, before discussing agility drivers, enablers and capabilities in the case network, it is worth taking a closer look at the trends in the Finnish steel product industry sector. In Fig. 32, the position of the metal product industry (where the steel product industry is the major part) and its connections to other metal industry sectors are illustrated (Elf 2004).

Basic metal industry

Mining industry Steel industry Non-ferrous metal industry

Metal product industry System supplier

Assembly and design Logistics

Customer industries: Construction Metal cluster

Mechanical and equipment engineering Other process industry Transportation

Steel service centers

Wholesalers Pre-processing firms

Component supplier

Machining and finishing

Forest cluster Tele cluster

Fig. 32. Metal product industry and the relationship to other clusters (Elf 2004).

140 When analyzing the Finnish steel product industry sector, it is noticeable that its trend follows the industry sectors such as basic metal production, metal product industry and mechanical and equipment engineering, and some other customer industry sectors. The metal product industry operates between the basic metal production industry and customer clusters, such as mechanical and equipment engineering, construct, forest and telecommunication clusters. The development of the steel product industry can also be analyzed through its main products and services, and how they are positioned in the global markets. Fig. 33 presents the main products and services of the Finnish steel cluster in the global markets. The law of economic growth is, obviously, towards the upper right corner. In the recent analysis, project business is the strongest growing sector (TEKES 2002).

Fast

Logistics

Growth of the global markets

Trans port Electrical apparatus and equipments

Project business Finish steel cluster

Machines, equipments and services

Slow Decrease

Construction

Metal production

Increase Global market share

Fig. 33. The Finnish metal cluster in the global markets (TEKES 2002).

In Fig. 34, Jokinen & Kangasniemi (2006) present the essential vision of the Finnish steel industry sector. According to them, Finland needs more large focal companies operating in the global markets offering total solutions for end customers. In their enthusiasm of outsourcing, focal companies need system and component suppliers, which have similar capabilities as the focal company has had before outsourcing. The size of the suppliers is typically quite small. In addition, the potential suppliers have lack of long-term visions, desire and resources of risk-taking, educated staff, willingness to grow, and know-how of the customers. According to Elf (2005), if the Finnish companies cannot meet the challenge, first, low value-added production will be outsourced to the developing countries near the markets. In the second wave, global system suppliers will enter the Finnish volume markets with their own international subcontractors. Jokinen & Kangas-

141 niemi (2006) assess the future in the Finnish metal industry as follows: 20 new global focal companies, 100 strategic partners, 200 growth-oriented companies aiming to be system suppliers, and 500 small and medium size companies (SMEs) to become specialized members of internationally operating networks.

Project-oriented business / production networks

Globalization increases

20 global focal companies

Turnover increases

100 strategic partners 200 growth-oriented companies

500 specializers

Fig. 34. Targets for the Finnish metal industry (modified from Jokinen & Kangasniemi 2006).

The main customers of the steel product industry are merging and internationalizing. Similarly, the size and power of raw material providers are increasing. Between these two giants, steel product industry firms can lose their negotiation power. Therefore, the companies in the steel product industry have started to merge at regional and national levels. The companies in different continents have made cooperative loose alliances. The European steel industry follows their customers to USA and vice versa, and alliances with Asian companies have already started. (Norberg 2002.) Besides the international integration of the markets, the internationalization of production is also a part of globalization. That means, in practice, decentralization of production and other operations globally. Companies have to be near the markets. Production costs have to be lowered. Also, the main customers force companies to follow them abroad because of production, logistics, or technological reasons. (Valtioneuvosto 2004.) Companies are located wherever there are the best conditions for success. For example, low tech production is located in the areas of cheap labor, or there can be special know-how that tempts production into the area, for example R&D operations. Large-scale Finnish industrial companies are moving near growing markets, especially in Asia, but also in Eastern Europe, Russia and Estonia. Intensive price competition forces companies to low-cost countries, but nowadays it is not only a question of decentralization of mass production, but also the production of more specialized products and services, and R&D is moving away from Finland. (Mäenpää 2004.) On the other hand, the common Euro-

142 pean currency, the Euro, and transparency of prices will lower the costs also in Finland (Norberg 2002). Even though internationalization begins in the large companies; it extends to the SMEs, because subcontractors and contract manufacturers, and specialized technology firms have to move where their customers move (Reilly & Ylä-Anttila 1999). That is because multinational companies outsource manufacturing to their suppliers, and at least some of the production and related services are managed by subcontractors. The production of Finnish companies is increasingly moving abroad but, on the other hand, more and more companies today are foreign-owned, either directly or through the stock exchange (Vartia & Ylä-Anttila 2003). Thus, even if a Finnish company does not expand to the global market, it has to face up to the global competition at home (Ahokangas & Pihkala 2002). The steel product industry has to compete for international investors with other industry sectors. Typically investors are not attracted to such a traditional industry, but they favor companies that exploit new technology, and are successful. Technological development in the steel product industry lowers the threshold to establish new companies. (Norberg 2002.) Specialized and knowhow-intensive Finnish companies can base their growth only on the expanding international markets (Vartia & Ylä-Anttila 2003). The most successful firms move smoothly into international markets. Furthermore, these firms react to changes, renew their businesses, and they can piggyback into new technology solutions (Valtioneuvosto 2004). The trend in the business environment of today is towards more value-added products, total solutions that are customized to the individual customer needs. That is also the trend in the steel product industry, which is moving from mass production towards supplying systems and turnkey deliveries of one-of-a-kind products, in other words, towards project-oriented business. The steel producers, which typically have concentrated on basic steel producing, are now integrating upstream of the supply chain in order to raise the value-added of their products. According to the statistics of Central Statistics Office of Finland (2005), the increase in value-added in metal production in Finland from 2002 to 2003 was 9%. At the same time as large companies outsource their operations at an accelerating rate, there is a shortage of medium size companies that can take care of more comprehensive outsourced operations. One solution is to network small and medium size companies (SMEs) on an equal basis. Specialized SMEs networking together can achieve the benefits of the economics of scale and enter into international markets. However, this carries great uncertainty about the network distribution and stability. (Luomala et al. 2001.) It seems more likely that SMEs would be involved in the network of the large company, i.e. focal company. SMEs are typically component suppliers or service providers to the focal company. Companies of today can be divided into two groups (Metalliteollisuuden keskusliitto 1999): 1) companies operating in international markets with a focus on R&D, assembly and marketing of the final product, and 2) local subcontractors with the focus on the manufacturing of parts, components and products. Large companies outsource manufacturing activities and focus on brand building, customer service management, and management of supplier network. Good project management skills are important in improving cost efficiency. Material management and purchasing are also essential elements affecting the cost efficiency. Quality, price and delivery time are important in the purchasing, but even more important in the future will be thecapability of

143 the subcontractor/supplier network to increase its role and take more responsibility for the development of products, manufacturing and logistics. (Elf 2005.) The R&D and development activities were before in the hands of large companies, but today they are increasingly the responsibility of SMEs. Large companies affect the capabilities of subcontractors to develop their production. The fact is that in most industrial countries, large companies dominate the business despite all the aims and programs to improve the status and the role of SMEs (Luomala et al. 2001). The fast development of technology is the most important change factor in the business environment of firms today. It is commonly believed that the pace of change will further accelerate and that the follow-up of technology will become a more and more important competitive factor (Sjöholm 2001). Information and communication technology (ICT) makes it possible to effectively control the product information over the whole product life-time, and it changes the practices and business models in every organization. The impact comes from two different directions. On one hand, new technology creates possibilities for new practices and on the other hand new practices need new technological solutions. (Jansson et al. 2001, Luomala et al. 2001.) ICT reduces the relevance of time and place making business globalization easier, and the effective geographical and organizational distribution of production is possible only using modern ICT (Jansson et al. 2001). Electronic commerce has been common in Finland from the mid 1990s onwards (Mallat et al. 2004). The e-commerce functions include the selling of a company's own products using ICT networks, purchasing products, getting new customers or partners, finding new markets, and the follow-up of production, transportation and stocks. When analyzing the whole manufacturing industry in Finland, a clear majority of companies are using, at least to some degree, new technologies in all these functions. Most of the electronic business practices are expected to grow during the coming few years. The development of SMEs is divided: some of them are quickly adopting new technologies, while the others are clearly lagging behind the general trend. As the forms of e-commerce are becoming more and more versatile, dropping out of the development means a refusal of cooperation and markets. (Mallat et al. 2004.) Technology can, depending on the enterprise and business sector, act as a development engine for the sector. For example, the high utilization of ICT is typical of the bank and insurance sectors. The car industry and shops have, for a long time, been controlling the delivery chain using information systems. The same development is coming to traditional industry, such as the steel product industry, where it is typical to build different production systems. The electronics sector in Finland is a forerunner, but the traditional sectors are lagging behind. The experiences of the forerunners can be utilized as service models and the practices in sectors and individual companies are becoming uniform. (Riihimaa & Ruohonen 2002.) Elf (2004, 2005) and Vuoste (2004, 2005) have summarized the features of the Finnish steel product industry, shown in Fig. 35.

144

Strengths: ­ Skilled personal ­ Economic revival of the main customer industries (e.g. construction and mechanical engineering) ­ Cost efficiency, delivery reliability, logistics, quality ­ Internationally known strong focal companies ­ Internationally competitive manufacturing and automation methods ­ World-class know-how ­ Investments to increase production capacity - Strong market share in Scandinavia Opportunities: ­ Opportunity to develop real knowledge organization ­ Develop system and component suppliers ­ Networking and specialization ­ More value added and cost efficient products and services ­ Diversification ­ New products by international licenses ­ Corporate cooperation with international partners ­ New customers and new products by investing in R&D and engineering ­ International financial possibilities (e.g. WB, EBRD, EU, EIP) ­ International markets through deeper cooperation between SMEs and globally operating focal companies - The possibilities of ICT

Weaknesses: ­ Low marketing management skills ­ Few customer-oriented business plans ­ Lack of the own products ­ Lack of system suppliers ­ Low image; not attractive to investors or to international firms ­ Poor capability to long-term cooperation ­ Poor project management skills of the international projects ­ No expanding plans in the firms ­ More expensive raw material than in competitor countries ­ Small investments in R&D Threats: ­ Investments in R&D less than 1% of turnover ­ No investments and confidence in the project business ­ Low value-added production moves to lower labor cost regions and nearer the markets ­ Shortage of capacity in short-term creates cheap imports ­ Unexpected recession of main customer industries ­ Shortage of system- and component suppliers ­ Low image ­ Ageing staff and lack of skilled employees ­ New international competition (e.g. Poland) ­ High raw material and oil prices ­ Uncertain economic situation

Fig. 35. SWOT analysis of the Finnish steel product industry (Elf 2004, 2005, Vuoste 2004, 2005).

145

4.2 Special features of the Steelpolis companies

Steelpolis companies show similar features to the SWOT analysis of the Finnish steel product industry shown in Fig. 35. However, there are some special features to show. Operative competence is one of the main strengths, but the companies cannot accurately define why or how. The steel producer operates in global markets and it has strong strategic visions on the development of the entire metal product industry cluster. The case steel producer has in-depth knowledge of the material, and its automation level of production is high. In addition, operative competence is at a good level also in the other Steelpolis companies. However, on average, production automation and the digital communication level is not high. Several companies have made investments in recent years in order to increase their capacity and make production more flexible and employees more multiskilled. Additionally, quality, effectiveness and value added issues of the supply chain have been under development work. However, change is the only constant variable in the business of today and therefore core competencies today may be the core rigidities tomorrow. In order to survive, companies should also have plans to further develop their competencies, and especially methods of sharing these competencies. Even though the operative competence is at a good level, in some companies there is a lack of project management and ICT skills. (Iskanius & Haapasalo 2003a, 2004a.) In order to enhance the cooperation and to create visibility within the supply chains of the companies, there is a need for trust. The persons in the Steelpolis companies have done business together for 20 years and, thus, have created good, trustworthy relationships. Whatsmore, the possibilities to create trust between the companies, and thus a more effective supply, are good. Because of the good social relationships and trust between the key persons, there is an opportunity for the rational selection of partners and a basis for future cooperation. In the complex and dynamic environment, long-term relationships can remove insecurity and increase productivity and innovativeness. However, some small companies feel the negotiation power of a steel producer against the smaller players is unfair. For example, the price of steel seems to be the critical issue to discuss. Also, the small companies are occasionally competitors, whereas on other occasions they are partners. (Iskanius & Haapasalo 2003a, 2004a.) The companies are quite closely located (in a radius of 100 km) and connected with good transportation links. The geographical position, near the competence, is an important strength. Even though the companies are situated in Northern Finland, international markets can be reached directly by ship from the port of Raahe. Although the transportation connections are good, one threat is that key customers and raw material sources are far away and also the competitors are nearer the markets (e.g. in Asia and on the Barents Sea). Good logistics, especially railway connections through Northern Finland, direct to the Artic Ocean or Russia, could open new market opportunities for the companies. One of the main weaknesses is the unattractiveness of the metal industry. It may be difficult to get competent and skilled employees in the future because the engineering and metal industry is not as trendy as some others. The work is hard and physical compared, for example, with the software industry. Current workers are ageing and the younger ones are anxiously looking for other industry sectors. Also the migration from the region is a serious problem. Companies are competing between each other for the same scanty labor force. Also, some small companies have difficulties in offering competitive salaries or

146 career possibilities. (Iskanius & Haapasalo 2003a, 2004a.) The utilization of ICT may make the industry more attractive, but the development of technology requires investment and training of the personnel. However, employees coming from Estonia and Poland may solve the staff problem. One problem is that the networking and cooperation are just beginning (Iskanius & Haapasalo 2003a, 2004a). Companies are competing for the same orders causing problems for cooperation. The trend towards project-oriented business is increasing and the companies are capable, for example with the steel producer as a leader, of providing total deliveries, systems and integrated systems. It is an opportunity for the large companies to increase the value added and for smaller companies to get in on bigger deliveries to new customers. It also gives a possibility to smaller companies to develop their competences and specialize. Specialization may create new growth in new market sectors. Thus, there is an opportunity window open for cooperation. In the same region there is another development organization, Softpolis, which provides consultation services in the implementation and utilization of communication and manufacturing automation technologies. This ICT competence in the region may be an opportunity for the future. Software technology will continue to grow in the areas not yet imagined and, in the future, the Steelpolis companies could provide extended products by combining software and steel construction. ICT may create possibilities to increase the degree of automation in companies and, in that way also, make the industry sector more attractive. If the metal companies continue to wait, they run the risk of falling further behind other industry sectors. Customer orientation will also increase due to e-commence while various possibilities for services are available. Fast technological development will change the operational environment. A typical product feature today is one in which several independent technologies are integrated. That creates possibilities but also threats for the companies. It can be a challenge for small companies to react to new investment possibilities. Technology management will become important. However, senior metal industry labor is not culturally comfortable with ICT use. Also, the industry is not attractive to younger engineers who would push the ICT adoption.

4.3 Drivers towards agility in the case network

The thesis reflects on the importance of agility in the supply chains of the case network. In fact, when analyzing the background of our case business environment, most of the ten distinctive forces that drive towards agility - according to Goldman et al. (1995) - can be seen quite clearly. Thus, the need to move towards agility within this case network is evident. The companies in the case network have realized that agility in supply chains can offer strategic advantages, especially in a project-oriented business, which seems to be the growing business field with a lot of new market opportunities. Goldman et al. (1995) have categorized ten distinctive forces that drive towards agility in general, these drivers in the case business network are illustrated in Table 15.

147 Table 15. Drivers towards agility in the case network (based on Goldman et al. 1995).

Drivers towards Drivers towards agility in the case network. agility according to Goldman et al. 1996 Market fragmentation ­ In the new business model, the Group is adopting more customer-oriented way of operating and is becoming the provider of metal solutions instead of being only a steel producer. The whole supplier network is moving towards project-oriented business, providing solutions to customers and that way maximize the value of the customers. ­ The main customer segments are construction, mechanical engineering, and metal fabrication. The Group concentrates on the certain customer segments, and the strategic intent is to be a leading metal based construction solution provider in Nordic and CEE countries, a leading solution provider for specific engineering customers in Northern Europe, and a leading metal production supplier in Nordic & Baltic countries. ­ The Group is pricing the same raw material differently depending on the markets. ­ The customers demand smaller quantities of products, and the proportion of project type orders is increasing. ­ The network is following MTO (make-to-order) operation mode, they produce to order instead of to forecast. ­ Customers demand more customized products and more specialized material (besides steel, also other metals and materials). ­ Customers are involved in the product development phase in project oriented business. Individual needs are taken in account i.e. by agents who operate physically in the customer company. ­ Accelerating product development and definition make customization possible. Flexibility and speed as the success factors of the network become more important. ­ The Group develops closer relationships, such as partnerships, with their key suppliers ­ seamless processes improve operational competence. ­ The Group develops their relationships with their key customers, which help them to understand the customers' real needs. ­ Customers of the Group, and also of the whole supplier network, are more and more international companies. Customers demand global presence from the Group. ­ Strong trend towards networking in the field (besides production also in collaborative R&D and marketing efforts). ­ Opening borders, new members in EU will be the new international market area, but also production area in the future. The Group has bought manufacturing companies also outside of Finland. ­ The suppliers of the case network are sometimes competing against each other to get project orders; and at the same time cooperating with each other in other projects. That is because several suppliers provide similar services and the specialization to their core competences is only in the beginning. ­ Suppliers have collaborative development projects related i.e. operational excellence, quality, ICT. ­ The Group is increasingly concentrating on its core competence and outsourcing more and more activities such as manufacturing and logistics to other members of the network. ­ By acting as a collaborative network it will be possible to deliver customized solutions to the global customers ­ Companies of the network are independent and have no plans to merge, although some enterprise integration has already taken place: the logistic services of the Group have been outsourced to the logistics provider, and 5 manufacturing suppliers have established a common marketing company towards offshore business. ­ The Group is increasingly buying companies, who provide prefabrication and manufacturing services to evolve downstream towards customer along the supply chain. ­ The personnel of the companies have attended regional development and education projects of Steelpolis and other education, training and research providers. ­ Companies are involved intthe operation of Steelpolis and together develop the development infrastructure.

Production to order in arbitrary lot sizes

Information capacity to treat masses of customer as individuals Shrinking product lifetimes

Global production networks

Simultaneous inter-company competition and co-operation

Distributed infrastructures for mass customization Corporate reorganization

Pressure to internalize prevailing social values

148 One expert who regularly follows the trends in the metal industry characterised the situation of the steel industry field in Raahe area as follows: "The steel industry business started in the Raahe area, to a great extent, from maintenance work for Rautaruukki. Afterwards, the activities of the local metal engineering works have developed into a more comprehensive subcontracting business. Typically, these companies do not have products of their own. They mainly operate in subcontracting business in the domestic market. The future of these firms depends on the capability of the domestic system supplier and on the case focal company to get contracts in the international markets. If an order for an oil rig or a ship is won by a large Finnish firm, it will also have an impact on the firms in the Raahe area. The nature of subcontracting is such that if the system supplier is foreign, the threshold for using a Finnish subcontractor is high. The competitiveness of component and part suppliers must be so good that it is wise for both national and international system suppliers to use them. The firms in Raahe should develop their activities so that they are, in a specific field, competitive in the international markets." Another expert who worked in the development organization continued the same subject as follows: "Small and middle size engineering works have a possibility to enter international markets through focal companies. If these focal companies are not capable of getting into international markets, then it is difficult to see a positive future for the traditional heavy industry. When entering international markets, there are two important issues, specializing and networking. A multipurpose engineering works needs to focus, delimit its activities and develop them in a narrower area. The practices need to supplement each other and the firms need to form networks and learn to cooperate. There are pretty good examples in Finland of firms that have specialized, developed new products, practices and the skills of personnel etc. and that have succeeded well in the global markets. We, in Raahe, need to strive for the same direction. The cutting edges of this network in the international markets could be e.g. heavy welded constructions and maintenance materials, where we have special know-how." One expert further illustrated some main barriers of the cooperation as follows: "The metal engineering works in the Raahe area are not capable of winning international contracts on their own. The work has been sliced into so big pieces that a middle-sized works in Raahe is not able to handle it alone. A comprehensive delivery can only be offered through a network. We must be able to cooperate to meet the customer requirements on big comprehensive deliveries. It is challenging. A drag on cooperation can result in a 15-year-old problematic issue that slows down the development of new things. On the other hand there are cooperation efforts in Raahe in their initial stage to do something together. To build up cooperation like this is a challenging task, how to share the work and profits, how to agree on practical issues, who is responsible for what. A mutual trust is important and the chemistry of the decision makers must coincide. Such a thing cannot be achieved overnight." What are the possibilities for these firms to succeed in a more internationalized market place? How can they cope with the China phenomenon? One expert answered as follows:

149 "We must invest in increasing the degree of processing and in production efficiency to make the firms successful in the future. If we continue with work with a low degree of processing, like welding and other similar production technology, we will not succeed. Every firm and every country can handle such work. When we raise the degree of processing, we'll also raise the degree of difficulty and we need higher and higher technology. Many Finnish firms are pretty good at that and they are likely to succeed." One expert described the vision for the future development as follows: "When the production technology and logistics of the subcontractors have developed further, we'll be able to offer larger entities to the end customer. The subcontractors have integrated themselves into a part of the case focal company and there is intensive development going on between the firms. Shared data systems are an important step towards integration." In addition to these targets, in the Raahe area, where companies typically provide subcontracting services, one clear target is productization. The CEO of one supplier put it as follows: "It is high time to develop our own products. If you are all the time a subcontractor, the markets will continue to squeeze in on you making the future difficult for you."

4.4 Key elements of agility in the case network

The case network is commencing its journey towards agility. Based on the framework presented in Fig. 24, the enablers and capabilities of an agile supply chain are identified. In this section, the agility level of the case network is analyzed for these elements: ­ Being information driven (or virtual) (virtual supply chains are based on information rather than inventory); ­ Market sensitivity (or demand-driven) (through the capturing and transmission of point of sale data); ­ Having integrated processes (collaboration between buyers and suppliers: joint product development, common system design, shared information); ­ Being network-based (confederations of partners linked together as against "stand alone" organizations). The qualitative analysis is based on van Hoek (2001). The analysis provides a status quo report on progress in moving closer to the agile supply chain and offers practical approaches that might support the movement, also the implementation of a further developed agile supply chain.

150

4.4.1 Virtuality

Virtual integration is measured using two practice areas. The first is internal to downstream (with customers) information integration, the second internal to upstream (with suppliers) information integration. Several different measures can be found in order to analyze virtual integration, e.g. (van Hoek 2001): ­ Information integration in the supply chain with customers, distributors, and logistics service providers; ­ Information integration with suppliers and raw material providers; ­ Transactional internal systems; ­ Internal planning systems. As Christopher (2000) states, visibility is a key feature of an agile supply chain. Good information management is the driving force behind supply chain agility, coordinating actions, while freeing them from time and space, and potentially involving customers in the supply chain processes. The primary issue of the information management is what information should be transferred, which information is significant, which information can safely be ignored, and how information should be analyzed and used. (Alshawi 2001.) The starting point of the research is that the supply chains in the case network are not sufficiently transparent. The information flows in the case network are not seamless because the ICT systems used in the supply chains are incompatible, and some of the companies do not have ICT systems at all. The companies do not receive the information about the customer's order in real-time and simultaneously. This is mainly due to the fact that the degree of capacity utilization is not always clear; the follow-up of the material flow is difficult; and the information about the previous phase of the process being late does not show in the following phases of the process. There are occasions when information must be rewritten in the ICT system and reporting is duplicated because of the interfaces between different parties. Another critical success factor occurring in the processes was unnecessary data processing. Communication and information sharing between the case companies is basically based on mail, e-mail, phone calls or company visits that do not provide much visibility to the supply chain. Few companies have ICT systems and the majority has no advanced information management systems at all. All ICT systems in the case network work independently as point solutions. The case focal company has many business units, which have their own ICT and operation management systems, and the units manage their business processes independently. They are for the purpose of different functional activities, e.g. order processing, manufacturing, logistics, quality control. From the software point of view, one company may have several interfaces within the network and there can be problems in integrating software applications between companies. (c.f. Iskanius & Uusipaavalniemi 2004a.) There are situations when action does not bring any value to the process and can be removed easily (duplication), but on the other hand, there are also some necessary nonvalue adding (NNVA) actions, which cannot be removed in order to maintain the process working. For example, duplication occurs with the invoicing between the supplier and the case focal company; both parties check the price. Although the double work could be eliminated in one check, the NNVA activity would remain. Some other examples of

151 unnecessary data processing occur for example with the reporting, and in the manual ordering of the quenching. The information flow was noticeably delayed because of some physical bottlenecks, which occurred especially with the tendering and the order processes. The production must be started as soon as possible so all the bottlenecks slowing down the order processing must be eliminated. Updating records within the system and the manual ordering of the subcontracting are some other examples of the delaying factors of the order-delivery processes. All kinds of changes can deteriorate the effectiveness of the process. It is common that the customers need to change the time of delivery or there might be some problems in the production processes, which can cause delay and changes to the schedule. In these cases, it is integral that all the parties involved in the process are informed about the new plans. Otherwise, it is impossible to react in advance to the changes and minimize the disadvantages caused by the change. The critical issues of the information flow, founded during the supply chain modeling work, are summarized in Table 16. Table 16. Critical issues of the information flow.

Critical issues Interfaces in the supply chain Consequences ­ Customer order does not reach simultaneously all the members of the supply chain ­ Information of the capacity is insufficient ­ Delays in transportation arrangements and unclear distribution of work ­ Unofficial practices ­ Several different contact levels between companies ­ Unnecessary information handling and unnecessary, or double, checking ­ Manual work (order handling, invoicing) ­ Double work between buyer and seller ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ Transportation arrangements Stages between tendering and order processing Manufacturing reportage into ICT system Delay of parts in the production. Entire order is waiting for delivery. No real-time information for all members at the same time Difficulties in the management of the version system Unclear roles of the members in the change situations People do not know the interdependences of the actions in supply chain

Bottlenecks

Change management

Alternative suppliers

No visual control points and ignorance about control variables Partial optimization Delays create uncertainty and make other orders difficult to manage Order information is not available in production ­ orders disappear on the suppliers' side ­ Lack of process knowledge and ICT knowledge ­ Difficult to make changes ­ Different communication culture of the companies

Based on these findings, according to the literature, there are two possible ways of improving and developing the situation: 1) digitize the information, and 2) replacing the manual transfer of information by real-time electronic data. By changing the format of the data and information handling from a manual transfer of data to the digitized information sharing between all parties can greatly enhance and make the processes more effective than before.

152 Companies have separate electronic solutions to some separate functions and also a limited number of Internet solutions. The companies use information systems mainly for their internal information transfer and communication only. For example, the case focal company has an Internet solution for the inter-organizational communication that provides the staff with company presentations etc. The case focal company also has an electronic marketplace; e-Rautaruukki, which provides registered customers with the ability to follow services 24-hours-a-day: such as: e.g. follow-up of orders and deliveries, access to product catalog, bid handling data, availability data, and feedback handling data. Also, the case focal company has large EDI applications. EDI is still seen as an effective e-solution, especially for handling of mass orders and routine transactions. The information integration that enhances virtuality between companies has been organized in different ways. For example, it is imperative that the current manual paper invoicing is replaced by electronic invoicing: suppliers can supply the invoices directly to the customer's systems or the invoices are sent to the customer electronically. Another significant improvement, especially for the sales department', is to automate the capacity information. Frequently changing information must be digitalized in order to be reliable and in real-time, which is vital when processing orders and working with customers. However, these kinds of examples represent bilateral integration solutions, not network solutions. Integration with the customers has been done in several ways. For example, one supplier has been given access to the key customer via its ICT system, and tendering, ordering, and process control is managed electronically. Another supplier has web-based access with its key customer and manages communication there. Another consists of direct access between two ICT systems, where both companies can see the status of the production. Furthermore, some companies have developed an EAI application, where their ERP-systems are linked. These systems are based on automatic messages between two systems. There is potential for virtuality in the case network and companies have realized the importance of more open information sharing and collaborative ICT development. Increased project-oriented business puts pressure on companies to develop their ICT capabilities. In the case network, the case focal company has strongly advised its key suppliers to invest in their own ERP systems which can be integrated with its main systems. The pressure on suppliers to develop their own ICT systems comes also from other key customers. The question who to serve best, that is, with whom to integrate, seems to be one factor in investment decisions. Some of the firms in the network are deliberately developing their information system together with the main customer, so that easy interfacing with the system of the customer is a key factor. Additionally, the case focal company can interact actively with its suppliers when the infrastructure is developed. The case focal company is, generally, in charge of the project management, and needs to communicate with the suppliers at all levels. Recently, an organization-wide decision was taken to invest in an SAP system to be implemented within the next four years. In addition, an extensive ICT project has been started, according to a new business model, the purpose of which is to set guidelines for ICT throughout the whole production system.

153

4.4.2 Market sensitivity

Market sensitivity is measured in terms of the product/service offerings in the market and, in particular, the amount of customization and responsiveness to volatile and demanding markets. Several different measures can be used to analyze market sensitivity, e.g. (van Hoek 2001): ­ ability to respond to demand with new product variants without overstocks and lost sales; ­ products are customized rather than standardized; ­ products are easy to adjust to demand rather than "take-it-or-leave-it" packages; ­ specific customer demands are included as part of the offering as a standard practice without additional costs; ­ added value of base product proposition is expanded through additional services. Market-oriented companies often segment the markets and differentiate products and services to create and retain satisfied customers and overtake the competition. Together with its supplier network, the case focal company focuses on offering total solutions for its key customer segments in construction and engineering. The customers demand more and more turnkey deliveries ­ customized products and value-added solutions for their problems. In order to respond to customers' changing demands, the case companies, led by the case focal company, have moved the operational mode from push type traditional maketo-stock (MTS) mode, where companies in the traditional way manufacture products to inventory, towards pull type make-to-order (MTO) mode, or to engineering-to-order (ETO) mode, where engineering does not start until the real demand or customer order comes into the network. That kind of postponement, the act of delaying changes in product form or identity until the last possible moment, can greatly improve the flexibility and contribute agile capabilities of the companies that employ it (Schary & Skjott-Larsen 2002, van Hoek et al. 2001). Generally scale in purchasing, logistics and production, has a negative impact on the speed of response to consumers, the ability to specify products and the ability to meet specific investment needs (van Hoek 2001). Typically for this kind of project-oriented business, it is difficult to predict the customer requirements and specifications, and manufacturers who actually sell services cannot keep material or capacity inventory. The case focal company provides prefabricated steel material for the projects, and the delivery time of the material to the project varies from 2 to 4 weeks depending on the material (2 weeks for standard steel material, 4 weeks for special steel material). The case focal company has low safe buffers for standard raw materials and normally the customer order is a signal to start the prefabricating work (such as cutting, bevelling). If the project needs special material, the customers order is a signal to make raw material. It can be concluded that efforts towards a more market sensitive approach in the case network have been made. Nevertheless, achieving market sensitivity requires achieving more information transparency in the entire supply chain, so this aspect of agility is also interconnected with the aspect of virtuality and thus can only be fully realised through increasing the virtuality as well. Overall, the paradigm shift from mass production mode to project orientation makess huge demands on the management system itself.

154 According to Huang et al. (2002), the purpose of an agile supply chain is to understand customer requirements by interfacing with the market and by being adaptable to future changes, aim to produce in any volume and deliver to a wide range of market niches concurrently, and provide customized products at short lead times by reducing the cost of variety. An agile supply chain is one that utilizes strategies aimed at being responsive and flexible to customer needs, while hedging the risks of supply shortages and disruptions by pooling an inventory or other capacity resources (Lee 2000). The success factors of the case network are its flexibility and speed, exactly the two aspects needed to develop an agile supply chain. However, customers appreciate lower prices, which put pressure on the case network to reduce its total production costs. Responsiveness of the case network is good, but empirical analysis reveals that flexibility stems more from the effort of the workers rather than from an efficient operational structure. In other words, the nature of flexibility needs to shift away from the personnel to the implementation of a system which is truly agile. Market sensitivity in the case network is growing slowly, and when the case focal company has its new business model motoring on full throttle, it certainty should gain more speed. The significant organizational and strategic changes inside the case focal company have affected the development work towards an agile business. However, market sensitivity can still be achieved to a higher level, by adjusting the existing organization, thereby bypassing some of the problems of traditional organizations.

4.4.3 Process integration

Process integration is measured both on the ability to generate and use information and market signals through processes and the ability to develop processes, products and management systems. Several different measures can be found in order to analyze process integration, e.g (van Hoek 2001): ­ ­ ­ ­ ­ the ability to generate and use market information in processes; the ability to generate and use customer information in processes; the ability to develop process-innovations; the ability to develop product-innovations; the ability to develop management-innovations.

Shared information between supply chain partners can only be fully leveraged through process integration. Process integration enables collaborative working between buyers and suppliers, joint product development, common systems and shared information. This form of cooperation in the supply chain is becoming more prevalent, as companies focus on managing their core competences and outsource all other activities (Christopher & Towill 2001). The starting point for process integration in the case network is when the processes are not cost-effective and agile enough to undermine their competitors. The most critical factors are the interfaces between different units which create problems for the management of the processes. The case companies have different ways of doing business and checking how the business is proceeding. That is why it is difficult to build a shared vision of how

155 to integrate, with whom to integrate, and what level to integrate within the case network. In addition, the lack of clarity in the process integration is confusing for companies. However, the concept of process integration has been adopted by many companies. The number of processes that should be integrated, or it would be advantageous to integrate, varies. In some cases, linking just one key process is enough, and in others, linking multiple or all the business processes is required. Thus, which business processes to integrate in a supply chain should be carefully analyzed. The most critical points of integration are the interfaces of operations. In modular design and manufacturing processes there can be certain fluctuations inside operations, but interfaces should be strictly defined. In the case network, there is a clear need to improve the material, information and financial flows between all the participants. Synchronizing the manufacturing and transportation operations between the companies is of prime importance. Tendering and order processing are a secondary priority in this respect. Managing material flows is no longer a serious problem; even though there still is a lot of work to be done with the transportation. Instead, the focus is on understanding and managing information and information flows. Thus, instead of the material flow, companies focus on information integration, to speed up lead-times, improve quality of processes, and also save costs. Project deliveries include very different types of processes often requiring different actions at every action stage. In order to develop the processes, it has been found necessary to analyze the functionality of different operations, the subcontracting network and job descriptions of the personnel, so that development actions can be made. In the current situation, the volume increase in component products requires a determined development of operations to be able to profitably deliver what the customer has requested. According to Hines et al. (2000), visibility throughout the entire supply chain is fundamental in order to be able to eliminate all NVA factors from the processes. Changing the ways the information is processed can strongly affect the efficiency of the order-delivery process. Developing the order processing is one of the most crucial targets for the improvement when considering the way information is handled. The process can be made more efficient by establishing an order-processing team, which takes care of the order processing, so that the time spent on transferring the order between different parties can be minimized. Another way to improve the methods of data processing and the information flow is to eliminate non-essential personnel from the process, for example a person who only takes care of e reporting in the systems. Process integration has been organized in several ways in the case network; typically they are bilateral arrangements between two companies. It is quite far away from the target of full orchestration of a supply chain with real business intent. On the basis of supplier-customer cooperation there can be a supply agreement with rules for additional deliveries/replenishments: upper and lower limits for stocks, and how the supplier gets information about consumption and demand. Additionally, the supplier has a clear view of the stock balance, sales figures and forecasts of the customer. There is also a manual system for accessories, and the supplier can check that the stock status is adequate. In Fig. 36, there are different examples of supply chain integration between a customer and its suppliers, typical also of the case network (based on Salmi 2002).

156

Supplier The case focal company Customer

Customer forecasts

Real-time order & confirmation

Customer inventory data Vendor management inventory

Cooperation in production planning optimization 12/11 19/11

Point-of-sales POS

Conformatioin of delivery time or proposal for another product

Production control synchronization

Delivery time synchronization Distribution channel optimization

Fig. 36. Different process integration techniques (based on Salmi 2002).

For example, the Value Offering Point (VOP) could be moved from the purchasing department to the customer's inventory, which would permit the supplier to follow the changes in customer demand (Hoover et al. 2001). Also a Vendor-Managed Inventory (VMI) is an efficient replenishment practice designed to enable the supplier to respond directly to actual demand without distortion and delay in decision-making in the customer's purchasing organization (Holmström 1998). VMI provides the supplier with more time to react to the customer's demand, makes the demand more constant, and loads the production more evenly (Hoover et al. 2001). These models are good examples of practices in an integration of supply network and they emphasize the role of information. Process integration in the case network is in its infancy. Only bilateral integration examples exist. Companies have modeled their inside business processes, but the entire process that is needed to deliver - e.g. an offshore project - is not well-defined. In Iskanius (2003), the preliminary state-of-the-art model is presented, but in that model, there are no quantitative figures involved, e.g. lead-times, capacities needed, prices, etc. That is because companies are not ready to share that kind of information with each other.

4.4.4 Networking

Network integration is measured using the structural practices and capability areas of shared investments, joint planning and strategy development in areas as broad as logistics, purchasing and production. Several different measurements can be found in order to analyze networking integration and cooperation, e.g (van Hoek 2001):

157 ­ the importance of shared investments in purchasing, logistics and production; ­ the importance of joint planning and strategy development in purchasing, logistics and production; ­ the importance of close supplier relations. The process integration cannot be complete without a tight linkage of the organizational relationships between the companies ­ the success of any integration task is predicated on close collaboration inspired by a perception of mutual benefit (Mentzer 2001). The companies in the case network have realized that they do not have to possess all the competences needed for providing the end customer with the products and services, but instead they can collaborate and utilize the complementary competences provided by the other members in the case network. The case focal company focuses on its core business and outsources other business activities, like machining, welding, testing, and logistics activities, to its key suppliers and other service providers. Outsourcing encourages both the case focal company and its suppliers' competitive ability and enhances their mutual dependency. The case focal company has started to develop long-term relationships, such as partnerships and other strategic alliances, with key suppliers and treats them as important business partners. However, most of the agreements are still based on four levels of contractual relationships, namely: 1. 2. 3. 4. cooperation agreements concerning certain contractual products; annual agreements; case by case fixed orders; cost per hour invoicing in certain work capabilities, not on long-term partnership agreements.

The case focal company has analysed the structure of its supply base and where the different suppliers fit in the supply chain. The case focal company has developed its own criteria for categorizing its suppliers. The criteria is based on the suppliers' growth and stability, required service level and sophistication and compatibility of the suppliers' implementation process, the suppliers' technological capabilities and compatibility, the volume, the capacity available from the suppliers and the suppliers' anticipated quality level. Suppliers normally do not have direct contact with end customers in the international project business, such as in the offshore business. In those projects, manufacturing in the case network does not start until the customer orders are received and order processing by the case focal company is done. Today, the case focal company's goal is to try to reduce the number of suppliers the company is dealing with directly. This can be achieved by forming system suppliers and suppliers in different tiers. This would mean that the case focal company has regular contact with fewer suppliers, which are those in the first tier. These suppliers then deal with the suppliers in lower tiers and the first-tier suppliers are finally responsible for delivering a whole system to the steel producer. The actual practice of the steel producer in network management centres around some specific performance measurement tasks for the supplier network, such as regular meetings with each supplier, a development plan for each partner relationship, and annual network meeting including general communication and feedback, a common understanding of trends and requirements in the future. (c.f. Iskanius & Pikka 2004, Iskanius et al. 2005a.)

158 The suppliers of the case focal company are divided into eight product segment groups. The supply chain model is presented from the percpective of the case focal company, however, there are also vertical connections between these product segments and one supplier can be present in several segments. The suppliers are directly connected with the case focal company, and also with each other, in one way or another, by serving different kinds of products or services. The network structure of the case network is stable but not static: network actors are active, and within the existing network structure, current relationships change, new relationships are formed and some relationships are terminated. The basis for a virtual enterprise developed for temporary project business can be seen. The future structure target of the network can be described as follows: the case focal company is responsible for the marketing, selling, design (with the engineering company and/or customers) and delivery of the end products to customers. Suppliers in the first tier are responsible for component development, systems undertakings and JIT delivery. They are in close cooperation with the case focal company and these suppliers communicate most frequently with the case focal company compared to the suppliers on other tiers. Second tier suppliers are more specialized in a narrower field of expertise. They work with, for example, processing and/or production and have a narrower range of products. Suppliers, who are less sophisticated in terms of activities and competence, can be found on the third tier. On the fourth tier one can find very small companies. (Iskanius et al. 2005a.) It seems that networking has been successful among the case companies, since there is a clear trend to build core competencies and concentrate on more focused areas of the supply chain. The case focal company has set its targets for networking (Lakkala 2003): 1) supporting high reliability in deliveries by increasing cost effective flexibility in capacity, 2) servicing key customers by widening the scope of additional features in customized products, and 3) providing added value and profit to deliveries by increasing volumes in deliveries of plate components and the scope of the product portfolio. However, when following agile practices, companies have to build their capacity so that the response to customers' changing requirements can occur with ease. That means flexibility and free capacity requirements from the supply chain. The question is who is going to pay all this reservoir of people, machines, and other resources. Today, the case network still does not have common rules for sharing risks, costs, and profit, but there are some good company-to-company examples of benchmarking and learning.

4.5 Current status analysis

This chapter provides a description of the current status of the steel product business environment. The SWOT analysis of the Finnish product industry is based on a review of the literature and interviews with the experts in the field. According to the industry experts, the steel product industry is undergoing a phase of change. The case network, or the industry sector as a whole, is shifting towards project-oriented business (ETO ­ engineering-to-order manufacturing mode), downstream (nearer to customers), networking (deeper suppliers relationships) and ICT utilization (production automation and businesswide applications), which are the components of agile manufacturing. The agility drivers

159 in the steel product network from the analysis done based on Goldman et al. (1995) clearly show the need for agility. Even though the steel product industry is a slow-moving industry, there are special factors that increase the need for agility. Most of the requirements come from the customers. Also, in this kind of a disperse supply chain, the key lies in the communication and cooperation between a manufacturer and its suppliers, and among suppliers themselves. The different agile elements, which can be seen in the case network, are analyzed based on the agile supply chain framework modified from Christopher (2000) and van Hoek (2001) (Fig. 24). Emphasizing some of the key findings, the conclusions are set out below. Virtual integration, which means shared information across supply chain members, scores relatively low and needs a lot more work and progress to be successful. However, there is potential for virtuality in the case network and companies have realized the importance of more open information sharing and collaborative ICT development. However, putting virtuality into the supply chain through ICT systems involves more than implementing software. In this way, collaborative ICT development would increase the visibility by developing and integrating processes as well. Market sensitivity is already clearly demonstrable in the case study. The case network is closely connected to end-user trends. In fact, the nature of project business is to facilitate collaborative design and engineering. In order to be truly agile, external responsiveness is achieved through internal flexibility, however, the flexibility should be based on operations not just taken from the personnel. Smooth processes and flexible personnel are a feature of a mature organization. To enhance, or maintain, flexibility and quick response, the case focal company needs free capacity in its supplier network. This means that suppliers should avoid full capacity utilization. However, this is difficult to manage. In order to achieve this, companies in the case network have to make decisions about sharing resulting risks and profits to ensure a balance. Process integration in a supply chain requires a switch in mindsets. The transformation from internal process to external process brings huge challenges, where the entire internal business process should be part of the whole order delivery process. Companies now understand their processes as an integration of functions (from local optimization to global optimization). They should start to optimize the chain as a continuum (from local to global), not just looking to their own processes. The network-based nature is clearly demonstrable in the case network. Companies in the case network have realized that they do not have to possess all the competences needed to provide the customer with products and services, but instead they can collaborate and utilize the competences provided by the other members in the network. Flexibility is gained by using the strengths of specialist companies. Improving the trust and openness in the network by sharing information, i.e. divergences, risks and benefits, increases the ability to be one big player, not just the sum of individual companies. This is seen as a major issue in the case network. In addition, the development towards long-term business relationships, such as partnerships and strategic alliances, is ongoing. To be truly agile, a supply chain must be demand-driven, virtually operating and network-based in its communication systems, and it must demonstrate process integration. In the case network, some aspects of agility, such as the formation of a network-based entity and a move towards a more market sensitive approach are clearly already demonstrable.

160 In other aspects there remains much work to be done in the supplier network, for example to bring process integration to its full potential, as well as the ability to demonstrate real and virtual communication lines within the network.

5 Agile supply chain in the case steel product network

This chapter first describes the agility paradigm in the steel product network as a basis for further discussion. Thereafter, the chapter introduces the new agile supply chain, called SteelNet system. The principles of the SteelNet system and the ideal business process are presented, followed by a description of agile practices in tendering and order processing, as well as in manufacturing. Thereafter, the chapter introduces the change process towards agility in the case network. Finally, the chapter presents the analysis of the SteelNet system.

5.1 Determining agility in the steel product industry

Before developing the agile supply chain, in this study, the agility paradigm is defined. Reasearch on agility is mainly done in the high-tech industry, so the characteristics of agility come mainly there. In the traditional industry, the challenges are different and the business is not so fast-moving, therefore the general understanding of the agility paradigm may also differ. When something applies as broadly as agility, however, it is difficult to define it out of context. It is more useful to talk about agility in specificic circumstances. Agility in the supply chain context is the ability of a supply chain to rapidly respond to changes in market and customer demands (Sharp et al. 1999). As a feature of business, companies must respond effectively and, on the other hand, the response must be reactive. Today, the response is increasingly seen as a capability. Companies must expect and prepare for unexpected change by anticipating it. (Oleson 1998.) To the question: what are the competitive advantages of the case network in the future, one expert answered as follows: "Cost-effectiveness, quality and time, they are fundamental for companies, however, in the future, especially dependability brings competitive advantage. It will play an even more important role than before. It is worth the effort for companies to invest in it."

162 The development manager of the case focal company said as follows: "In this network the success factors are speed and flexibility. Delivery time is important. To improve cost-effectiveness is an important issue related to the entire supply chain. It is a lifeline to keep our price competitive against global competitors." He continued on the subject of the agility paradigm as a competitive advantage: "Agility, whatever it is, in our case it has to fulfil the nature of cost-effectiveness and customer satisfaction. We are in the global solution business, which is not so fast moving as the high tech industry. However, quick responsiveness for us also is important. For example, the tendering process in our business is long, complex, and has lot of iterative rounds. There we have a lot of improvements to do. By better integration and coordination of our own processes, but also those of our suppliers, we can faster execute the tendering process, in time, and right at once. For this we need more open information sharing. We also recommend our suppliers to invest in ICT capabilities compatible for our ICT systems." In Table 17, the conceptions about the agility paradigm of the persons of the case network are summarized. Based on these results, agility in the steel product industry is further defined, and this new definition is later compared with the literature review. It is, and has been, widely accepted that flexibility is an important aspect of agility, even at the origins of agility (e.g. Backhouse & Burns 1999, Christopher 1998, Goldman et al. 1995). It is also commonally used as a synonym of agility, although the concepts of flexibility and agility have different meanings. Thus, agility can be defined as an ability to quickly respond to changes in an uncertain and changing environment, whereas flexibility is taken to mean the ability of companies to respond to a variety of customer requirements which exist within defined constraints (Backhouse & Burns 1999). In the case network, agility is very well understood in its flexibility feature. 63% of the respondents choose the attribute "flexibility" to describe the agility paradigm. In the case network, the second most commonly used attribute to describe the agility paradigm is "nimble", that means moving quickly and lightly. The companies in an agile supply chain have to be nimble and react quickly to changes in the marketplace (e.g. Aitken et al. 2002, Christopher 2000, Mentzer 2001). SMEs are especially nimble and quick in terms of responding quickly to customer requirements, their ability to respond quickly to technologies, markets and trends; their customer focus; and their efficiency is often due to flat organisational structures (Levy & Powell 2000). 38% of the respondents chose the attribute nimble to describe the agility paradigm and 29% of them chose the attribute "fast" to describe an agile supply chain. Also other attributes related to speed are visible. 21% of the respondents chose "rapid introduction of new products", 13% of the respondents chose "speed to market" and 17% of the respondents chose "customer responsiveness" to characterize the agility paradigm. However, the fact is that time compression is a major order winning criterion in business (e.g. Naylor et al. 1999, Stalk 1998).

163 Table 17. Agility attributes in the Steelpolis companies compared with the research done by Sun et al. (2005).

Agility attributes Steelpolis companies Times of citation 16 9 8 7 7 6 6 6 5 5 4 4 4 4 4 4 3 3 3 2 2 2 1 1 1 1 1 1 1 SteelNet companies % of citation 63 38 33 29 29 25 25 25 21 21 17 17 17 17 17 17 13 13 13 8 8 8 4 4 4 4 4 4 4 5 3 2 2 2 1 4 4 4 2 6 5 4 4 7 4 4 6 5 2 4 5 2 Research of Sun et al. (2005) Times of citation 6

Flexibility Nimble Product customization Fast Providing solutions Knowledgeable Reconfigurability Adaptability Information sharing Rapid introduction of new products Empowerment Customer responsiveness Transformation of knowledge Dynamic teaming Dependability Cost-effectiveness Speed to market Customer relationship Volume flexibility Supplier integration Robust Virtual enterprise Technology innovation Focus on core competences Valued people Total quality Strategic management Open organization architecture Delivery capability (something else) Team-based organization Total enterprise integration Productization Knowledge-driven enterprise Concurrency Short life cycle Leadership in ICT Environmentally benign

164 Business has only one goal: to satisfy customers, that is, to create value for the customer (Drucker 2002). In the agile business, value is added by increasing the bottom-line enrichment to the customer. Companies can enrich their customers by lowering the customers' cost of operations, inventory, or other infrastructure items, or by enhancing the customers' market penetration, market share or ability to open up new markets (Goldman et al. 1996). Customer enrichment through mass customization has been articulated as a means of adding value to current products and customers (Anderson & Pine 1997). It involves tracking and devising unique solutions for individual customer requirements. In other words, mass customization means offering a wide range of product options in parallel and targeting them to different niche markets and customers. In the case network, 33% of the respondents chose "product customization", and 29% of them chose the "providing solutions" attribute to characterize the agility paradigm. These two attributes emphasize the importance of customer satisfaction. Indirectly, that means the evident movement downstream along a supply chain, and towards a project-oriented ETO business mode. Adaptability is the ability to change direction with ease, for example, to enter completely new markets or product areas, and reconfiguration is the ability to very quickly reconfigure corporate structures, facilities, people, organization and technology to meet (often) unexpected and (probably) short lived market opportunities. In the case network, these attributes are used typically in relation to a supported ICT system, rather than the agile business. 25% of respondents chose the terms "reconfigurable" and "adaptability" to characterize the agility paradigm. Interestingly, little attention was given to the fact that most of them were ICT experts. One of the greatest innovations in an agile supply chain is its virtual element, although it is largely absent in most supply chains (van Hoek et al. 2001). In the case network, "information sharing" scores quite high, 21% of respondents chose it to characterize agility. 17% chose "transformation of the knowledge" to characterize agility. However, the more conceptual model of information and knowledge sharing and integration, "virtual enterprise", is not so well-known. Only 8% of respondents chose it to characterize agility. Empowerment can be discussed from three dimensions: training that targets work content improvement, teaming that fosters joint authority, and responsibility for decisions and actions in work groups. The third one is involvement in decision-making, including methods of work and motivation, as well as determination of remuneration and other prerequisites. Total empowerment can be defined as a work system that relies on the dignity and ingenuity of employees and therefore empowers them through training, teaming, involvement and commitment (Ezekiel 2003). In the case network, 17% or the respondents chose "empowerment" to characterize agility. 25% chose "knowledgeable" and 17% chose "dynamic teaming", attributes that also are related to staff characteristics. The attribute "cost-effectiveness" was surprisingly less-valued. Even in many interviews, the importance of cost-savings came up, especially from the case focal company's side. Still, in the questionnaire, only 17% chose it to characterize agility. Comparing the results in the steel product industry with the survey research of Sun et al. (2005), the largest differences are in the attributes: cost-effective, virtual enterprise and total enterprise integration. According to the research of Sun et al. (2005), "costeffectiveness" is the most cited attribute in the literature, but in the case network it appears in quite a low position. It is possible that cost savings are a too obvious competitive objective in the case network. The attribute "virtual enterprise" is in a low position in

165 the case network, even though in the literature it is in second position. Virtual is a difficult word to understand and also the nature of a virtual enterprise may be far removed from the thoughts of traditional business personnel. Surprisingly no one chose the attribute "total enterprise integration". Based on the empirical results and also on some analysis in the interviews, the definition of agility in the steel product industry can be composed as follows: "Agility is the ability to rapidly respond to customers' changing requirements by providing innovative metal-based systems and components and comprehensive solutions, in a dependable and cost-effective way. This is achieved by having empowered and multi-skilled dynamic teams, a flexible production with increasing productivity and operational efficiency, an in-depth knowledge of customer requirements, and a product range which is diverse, customised and customer-oriented. With respect to information and knowledge transfer, the organizations use advanced ICT tools enabling them to interact in a reconfigurable and adaptable way to create a virtual enterprise."

5.2 Agile supply chain ­ SteelNet system 5.2.1 Ideal business process

The ideal business process for the SteelNet system is developed on the basis of the framework of Kalliokoski (2001). The critical issues of the current processes are examined in two case processes. Also, optimization and integration improvements are made, for example, the elimination of parallel activities, standardization of digital documents, and definition of user roles. In Appendix 5 the ideal business process is presented in detail. A typical offshore project process can be divided into 6 phases (c.f. VE life cycle model in Kalliokoski 2001): 1. Tendering (including contracting activities and order processing); 2. Engineering (including project planning); 3. Production (including inspections related to production, and transportation between companies); 4. Delivery and after sales (including packaging, transportation to a customer, and documentation delivery); 5. Control (final inspection by the customer); 6. Learning (final project meeting). An offshore project process begins by a tendering phase, in which a contract is drawn up with a customer dealing with the following basic items: price, specification, quantity, quality, schedule, and commissioning of delivery terms and documentation. Contracts with suppliers are made if the companies do not have annual contracts or partnership agreements. The result is that a VE is established to execute a particular project. The tendering phase ends when a final order is accepted or rejected. In the tendering phase, both commercial and technical issues such as component lists, material lists, working phases,

166 etc. are examined and specified along with the main engineering part. In this phase, project planning also commences which means the project group is named, the tasks are delegated to persons and organizations required to execute the project according to the contract requirements. It is important to bear in mind that budget and quality requirements are applied and followed throughout the whole project. The third phase of the process is production, inside the case focal company and its suppliers. Production includes the production of raw material, purchasing, prefabrication, assembly, as well as transportation, warehousing, and inspection checks. After production, the product is delivered to a customer to check. In the end, there is a learning phase in the final project meeting, where the success of the project is evaluated together with the companies involved the project.

5.2.2 Principles of the SteelNet system

The SteelNet system functions on the technological application of Internet and agent software technology. In the SteelNet system information sharing is based on agent architecture, where agents transmit logistic information between collaborative companies, seamlessly and transparently. This information is used for supply chain coordination, which is achieved by the means of task specific combination of agents. The combination is tailored to the particular business network process that needs to be supported and to the various tasks that need to be fulfilled. Agents represent the major tasks of a company (e.g. manufacturing, planning of work and transportation). The aforementioned division of agent responsibilities leads to a multi-agent system, where each company has several agents with different objectives and which communicate with their counterparts in the collaborating companies as well as with the agents in their own company (Fig. 37). Agents are able to communicate and collaborate within the company, and likewise, with other companies' agents via the Internet. This enables a seamless information flow along the supply chain from tendering to delivery inside the companies, and also through the business network as a whole. Improved information control by means of agents strengthens the competitiveness of the case network.

167

Company A

Manufacturing Marketing Management

Company C

Management

Company B

Planning Management Manufacturing

Sales and invoicing Manufacturing

Fig. 37. Operations in the SteelNet system.

An agent-based system is suitable since it offers both flexibility and problem solving services. In addition to enabling the real-time tracking of logistics information, the SteelNet system includes the following basic services: ­ web application server to provide user interfaces; ­ user administration service; ­ an alarm service and an information management service. In the case network, even the case focal company is a major customer for other members of the network; each company also has other customers and partners. The SteelNet system, in its nature, is open shared information system between multiple companies, where each company has equal rights and responsibilities in a supply chain and each company can act as a project owner or as a supplier to other company. In other words, each company can independently request quotes or make orders in the Steelnet system, unlike traditional subcontractor systems which are typically designed for the case focal company and for the supplier management. The SteelNet system can be easily connected into the companies' own legacy systems. This requirement has been approached in three different ways. First, the SteelNet system can communicate with the company's own ERP-system by transmitting mutually agreed information. The SteelNet system can be used via a web browser, while the agent container is situated in the company's own server, and finally, the SteelNet system is used via a web browser, while the agent container is situated in the service provider's premises. Fig. 38 presents the structure of the SteelNet system.

168

Legacy System

Transportation

Legacy System

Product Design Company A Company B Resource Management Manufacturing Execution

Manufacturing Process Planning Production Scheduling Production Status Reporting

SteelNet System

Transportation Information Flow Company D Material Flow Company C

Transportation

Legacy System

Legacy System

Fig. 38. The structure of the SteelNet system.

In the SteelNet system, companies can do the following tasks electronically: ­ send and receive tenders and requests for tenders in the net. Controlled transparency needs to be taken into account (the request for tender is sent to all companies or to selective ones only); ­ the changing of tendering data into order data is possible for the network members; ­ sending work orders to all member firms simultaneously using the Internet; ­ follow-up of products under production is possible in different firms within the network in real time; ­ centralized documentation handling for the whole network. Support for document handling of orders; ­ reservation of free resources through the net. Resources can mean persons, equipment or services; ­ usage reports for the firms: volumes of usage, usage times, services used, change management, etc. Bowersox & Closs (1996), Davenport (1997) and Parker (1998) presented earlier requirements for ICT systems for SCM purposes to adequately support enterprise planning and operations. The SteelNet system seems to fill almost all of these requirements. All of these features increase agility. The first requirement for the content of agent-transmitted information is that it has to be real-time, since efficiency in the whole supply chain relies on that. In SCM real-time information can include information about product availability, inventory level, shipment status, production requirements, demand forecasts and production schedules. Therefore, real-time information has to be available to all the companies involved in the particular project. As the implementation of a general cross-organisational ICT system is costly, time-consuming and risky, the adoption and use of the system has to be easy and profitable without high investment. The SteelNet system enables the interoperability of the

169 companies' own legacy systems via agent messaging or web browser without any extra work. Information in the SteelNet system is also accurate, as intelligent agents deliver the information through the Internet. When the information has been written into the system, it flows through the entire supply chain. Information is also exception-based in order to highlight problems and opportunities. Intelligent agents are capable of reasoning based on the rules given by the user or knowledge learned from an open environment. In addition, an agent system is flexible and it can be organized according to different control and connection structures. (c.f. Iskanius et al. 2004f.) The functionality of the SteelNet system is verified in two cases, in the procurement process and real-time manufacturing follow-up in the business network. Therefore, the content of the information is restricted to these two domains and the combination of agents is limited to these cases. Security and access privileges are the two most important barriers in implementing Internet and extranet technologies in a supply chain (Shaw 2000). In the SteelNet system authorization of each user is controlled and the information transmission is conducted via Secure Socket Layer (SSL). Each company controls the level of user rights of their own employees. Therefore only authorized users share information about a certain supply chain in the SteelNet system. Every company via the SteelNet system has real-time information available from the tendering phase. The production phase itself can start even half a year later than the tendering process. All companies in the supply chain can improve and, in the long term, plan their own activities based on real customer orders, not on forecasts. Using the SteelNet system, it is possible to share information about the tendering situation and potential orders, giving a real picture of the demand. This is a way to avoid the distortions caused by fluctuations in demand, i.e. the bullwhip effect. The principles of the SteelNet system are summarized as follows: ­ Companies with different levels of ICT have an opportunity to participate in the system. The SteelNet system is easy to integrate into a company's own legacy system or companies can use a web browser; ­ Support Plug-and-play, access to and withdrawal from the SteelNet system are effortless; ­ The SteelNet system is easy to reprogram; ­ Companies join and leave the SteelNet system easily, and still it ensures the data security; ­ All companies have equal rights and responsibilities in the SteelNet system. The system support different roles of companies; ­ The SteelNet system enables seamless information flow between companies and controlled information transparency; ­ The SteelNet system has an automatic alarm system to automatically ensure that information really reaches the right recipient; ­ The SteelNet system has good security and access control to prevent and control data seepage; ­ The SteelNet system is scalable, flexible, and cost-effective; ­ The SteelNet system is easy to customize ­ related to the customers' needs and product variations;

170 ­ The SteelNet system offers the right service level ­ it has modularization possibilities; ­ The SteelNet system is exception-based so as to highlight problems and opportunities.

5.2.3 Practices in tendering and order processing

The SteelNet system covers the management of a supply chain from tendering to delivery. The ICT system has two modules; the module for managing tendering and order processing, and the module for manufacturing control. Basic documents in the system are Request for Quotation (RFQ), Quotation, Order and Confirmation of Order (COO). Through these digital documents, the system receives all the information needed for tendering and order processing, as well as for manufacturing control. The SteelNet system has its own web pages for each document type, in which it is possible to create, edit, list, store and delete documents. In this section, the practices of the SteelNet system are presented regarding the tendering and order processing activities. The SteelNet system gives equal rights to every company in the case network. In that way, each of them can get an RFQ from a customer both inside and outside the system as Fig. 39 shows.

Fig. 39. Tendering and order processing process (Helaakoski et al. 2006).

An RFQ can come to a firm from a customer outside the network by email, post or fax, or directly from the network itself through the SteelNet system. When a firm within the network receives an RFQ, the firm, later called the system supplier, feeds it into the system, and starts to plan a quotation. Every person and company has its own password and profile, e.g. observer, supervisor, etc. After receiving an RFQ, the system supplier calculates the amount of raw materials and components needed, defines the work stages, their price, and makes an estimate for the delivery time based on the free capacity. If the received RFQ contains elements that

171 require subcontracting from other members of the network, the system supplier sends an RFQ on this subcontracting to other members, called 2nd level suppliers. The SteelNet system warns selected suppliers about the change, by email, or alternatively in the future, also by sending SMS text messages. These suppliers send their quotations on the subcontracting part to the system supplier that selects the actors for this particular project. If the suppliers have no capacity or resources to respond to the sub-quotation, they can also send their rejections via the system. The system supplier may have price information based on annual agreements, and use that information to calculate the subcontracting costs. After this, the system supplier gathers the total quotation and sends it to the customer. If the quotation is accepted, the customer sends the order to the system supplier. The tendering process may, obviously, contain several iteration rounds. The system supplier sends confirmation to the customer and confirmation to the selected 2nd level suppliers about the coming order. Fig. 40 presents a case order handling page. In the pages, there are several possibilities: to create a new document, list and edit a previously created document, and create a new version of the document (edit). All the documents in the SteelNet system can be listed according to a customer, company, or the code or number of the document. The status of the documents in the SteelNet system (RFQs, quotations, orders or COOs separated or together), the last editor, version numbers, can be seen in this page. The status is illustrated also in a green-blue-red colour code system, where "green" means the document has been received, "blue" means that the document is WIP (work in process), and "red" means there are interruptions in the process (by a customer or by the system).

172

Fig. 40. Order information in the SteelNet system.

5.2.4 Practices in real-time manufacturing control

In the case network, several companies in different locations contribute to the completion of a certain project, ande each company has its own resources and resource management. The host of the project, system supplier, determines the project plan, and the production plan, which includes manufacturing and purchasing, inspections, transportations and working schedules. The 2nd tier suppliers determine their production plans based on the requirements of the project schedule. The production schedule is typically planned so that each of the manufacturing steps between the companies are synchronized. In this section, the practices of a real-time manufacturing control process are presented (Fig. 41).

173

Fig. 41. Real-time manufacturing control (Helaakoski et al. 2006).

The aim of the SteelNet system is to share real-time information about delivery among contributing companies. Through efficient information sharing, all involved companies are aware of the stages and location of a particular product or project. In case of sudden or unexpected changes, the companies can re-plan their operations and resources according to this information. Unexpected changes are, for example, material delays, manufacturing defects or machine breakdowns, and in each case the real-time information sharing can remarkably reduce additional expenses. The SteelNet system enables agent-mediated information sharing through the company's own ERP system or via a web browser. Before manufacturing, the following process is followed in the supply chain: a RFQ is received (from inside or outside the network), a quotation is made (together with the other companies) and sent to the customer. The customer accepts or rejects the quotation, and if it is accepted, the order is received and confirmed. The COO is sent to the customer. On receipt, the order and the order information are direcltly transmitted to manufacturing control. However, it also is possible to write an information manual. In the latter case, the work phase planning takes place only after the realization of the order. The 2nd tier suppliers receive the infromation of the confirmed orders via the SteelNet system. The firm has a page, shown in Fig. 42, displaying the production status of all the orders to date. A firm can see only those orders in which it is participating, as a system supplier or 2nd tier supplier. Each work phase has an agreed schedule, and by using the system it is possible to follow the real situation. On this page, the SteelNet system gives a green-yellow-red color code to show the status of the order in question. "Green" means that the work phase is ahead of its schedule, "yellow" means on time, and "red" means that the work phase is late.

174

Fig. 42. The status of manufacturing in the SteelNet system.

5.3 Change process towards agility

To make the significant change from the way we do business today to the way that includes agility practices will require a change process that follows a disciplined and organized roadmap towards agile supply. The process of getting from where we are now to where we want, or need, to be in the future is not simple. It starts with the understanding of where a company or a supply chain is and determines whether this status will be satisfactory in the future. The development roadmap defines the level of agility and necessary change elements. The roadmap determines the targets, improvements and methods needed to convert them into reality. In this study the development framework of Poirier & Bauer (2000) is used as the basis for the case network in its change process towards agility. In the framework, there are four different e-business levels, in which agility intensity increases step by step. The levels are (See also Table 14): 1. 2. 3. 4. Internal supply chain optimization, (level I/II); Network formation (level III); Value chain constellation (level IV); Full network connectivity (level V).

175 The state-of-the-art situation (in 2004) and the normative development steps towards levels III and IV in the near future (in 2006), and in the long-term future (in 2010), are presented related each business application. Noticeable in this analysis is the highest level of the framework, "full connectivity", which, according to the companies, is not realistic, at least not in the targeted period. (Table 18). Table 18. The change process towards agility (based on Poirier & Bauer 2000).

Progression Business Application Information technology Design, development, etc. Purchase, procurement, sourcing Marketing, sales, customer service Engineering, planning, etc. Logistics Customer care Human resources 2004 2004 Level I/II Internal Supply Chain Optimization 2004 2004 2004 2006 2010 2004 2006 2004 2010 2006 2004 2006 2006 2006 2010 2010 2010 2010 Level III Network Formation 2006 2006 Level IV Value Chain Constellation 2010 2010 Level V Full network connectivity

The starting point of the development process is level I/II (Internal supply chain optimization), which is determined as the current situation (in 2004). Almost all the business applications are at this level. Only logistic activities are positioned one step further, mainly because of the nature of the project-oriented business (customer-driven pull system, not inventory-intensive push system). At this level, there is no real collaboration in the network, it is just being created. Also, information sharing between companies is shifting from manual (phone, company visits) to digital use (email, ICT point solutions), thus, there is no real visibility in the supply chain. Companies have set up some development teams to consider and make recommendations about how to share best practices and begin to build the future digital supply chain. Interaction at this level is more about sharing best practices that individual companies have developed separately. These teams appear as a nodule on the interaction circle in Fig. 43.

176

2004

Network Network

2006

Agile supply chain

2010

Network

Information sharing

System use and integration

Total system efficiency

Supply chain Loose ICT connections

Network incubation Emerging ICT-based supply chain

Collaborative network design Intranet-based full network cooperation

Fig. 43. Change process towards a full network with full system efficiency (based on Poirier& Bauer 2000).

The arrows outside the circle indicate that there is much learning to share, but it will come at first in the form of point solutions, not network collaboration. At this level, the most important strategic tasks have to be done and are: ­ Decision-making and commitment on collaborative development work in the highest managerial level (in every key company); ­ The case focal company has to make a decision about taking the active role as a strategic engine; ­ Establishment of a development team for ICT purposes that actively shares ideas about how to build an agile supply chain; ­ Nomination of persons from case companies responsible for the development work. The first step in the movement towards e-business and agile practices, to level III (networking formation), is planned for 2006. Level III is actually the starting level for developing a real cooperative and collaborative network, which has an integrated supply and utilizes ICT solutions in its supply chain operations. Almost all the business applications are at this level in 2006. Only the purchase and marketing activities were still positiond at level I/II, which was surprising. However, according to the case companies, with their limited resources, more advantage would be received from the development of others business applications. At this level, the engine company takes a more active role and starts bilateral and multilateral ICT development projects with other companies in order to enhance agile practices, but especially first to develop the ICT capabilities (systems and skills). Eventually, each key company in the case network has its own ICT system, e.g. ERP, which can communicate with the shared LIS system in order to share logistic information. In case a company does not have its own ICT system, it has to have possibilities of transmitting information to other companies by using the LIS system via the Internet.

177 In Fig. 43, the network moves from a nodule to a band around the interaction, signifying the formation of a network focus. Recommending discussions in the development teams moves beyond telling each other how the best competencies can be used to gain a network advantage. Symbolically, the arrow points are now more inside the circle of interaction, indicating that the level of knowhow being shared has greatly increased. At this level, the most important strategic tasks have yet to be completed, and are: ­ identify and determine the ICT systems of the case companies; ­ decide about investing in ICT systems or developing old legacy systems so that they can be integrated together; ­ make a comprehensive commitment to the collaborative ICT development; ­ priorizing the ICT development projects and make a strict schedule for development work; ­ decide about the SteelNet system utilization and further development; ­ the development of SAP system of the case focal company has to be taken into consideration in the development work. The second step in the development towards e-business and agile practices, from level III to level IV (value chain constellation), is planned for 2010. Almost all the business applications are at this level in 2006. The marketing activities still lag, but they have been positioned at level III. Only the purchase activities are still at the starting point. However, according to the case companies, with their limited resources, more advantage would be obtained from the development of other business applications. At this level, all the key suppliers have ERP systems of a different level, which can be integrated together. Most of the key companies are integrated in the SteelNet system, and so are the logistics provider, distributors and key customers. Mobile technology applications are functioning within the SteelNet system, for example, in the information exchange between the logistics provider and transportation companies. Real-time information for engineering, production and transportation can be transferred along the whole supply chain. Also the customer's demands and orders are moving transparently through the network. The companies in this level understand the e-business methods and try suitable alternatives. Furthermore, the case network has common business processes and models. In Fig. 43, this kind of agile supply chain is the outer circle that encloses the full effort. In this study, the progression of business application towards e-business and agile practices is set out in Table 18. The analysis has been carried out from the perspective of the case network. As changes and pressures faced by the companies in the case network may be different, the degree of agility required by individual company will also be different. Ii is important for the case focal company to take a leading role in the change process. Also key suppliers need to take actions to become agile but not as urgent agenda. It is noticeable that all companies do not need to be agile. It is typical in the offshore business that the supply chain acts as a leagile supply chain, which is together both lean and agile. In the leagile supply chain, the case focal company and its first tier suppliers follow agile practices, and the second tier suppliers and other small subcontractors follow more lean practices. However, each company is agile enough to respond to the changes it might face in the future. Once the agility level is determined for a company, the next step is to assess the current agility level. The gap between the level of agility required and that which the

178 company already has may then be analyzed. Finally, the improvement requirements are considered. In order to build an agile supply chain, the following steps should be followed through: 1. Determine which company will take the role of the engine in the development work; 2. Form a focus development team of supply chain members (the most trusted and reliable suppliers, distributors and key customers) to begin the agile supply chain development; 3. Thoroughly analyze the current situation to determine the network versus potentially more advanced companies or leading networks in the industry; 4. Collaboratively develop a vision of an agile supply chain and secure the highest management commitment (endorsement and enthusiastic sponsorship); 5. Determine the gap between current situation and desired agile supply level, and begin to develop the list of initiatives that will close that gap and establish the desired future advantages; 6. Select some actions from a list to begin creating short-term improvements that will provide the best input/output result; 7. Complete the roadmap of an agile supply chain; 8. Select a business unit for piloting the actions determined necessary by the focus development team; 9. Establish a time frame for a pilot implementation, and develop a list of specific actions to be taken, the necessary resources to execute the plan, the expected deliverables from those actions, and the metrics that will validate the results; 10. Review the results, amend the map, plan, and model, and then begin a replication in another business unit. Reward the designers.

5.4 Analysis of the SteelNet system

The companies in the case network have taken a tangible step towards agile supply by taking part in the development process of the SteelNet system. The SteelNet system is a digital supply chain that is based on the Internet and agent software technology. The agent technology is a new ICT solution, in which there have been modest applications in the logistics and SCM area so far, but it seems to be clear that improved information control by means of agents increases the competitiveness of the case network by better information management. At the moment, agent-based systems are used in the several application areas, such as manufacturing, process control, electronic commerce, and business process management (Luck et al. 2003, Karageorgs et al. 2002, Collins et al. 2002, Blake & Gini 2002). Today, agent technology has been recognized as a promising approach for system integration of the manufacturing enterprises (Shen et al. 2003). With the SteelNet system companies can do several activities electronically from tendering to delivery. The ICT infrastructure varies in different companies; therefore the SteelNet architecture is designed to be flexible in order to be used, in both large companies and in SMEs. Furthermore, the SteelNet system can be easily connected to different ERP systems of the network companies.

179 Intensive cooperation between the personnel of the companies and researchers has created a system that meets their daily requirements. However, it is still noticeable that the SteelNet system is only a prototype, not a commercial solution. It has been challenged in several testing situations and also in the field test, but there is a lot of work to do to make it applicable to real-life business operations. The results of the field test, which were collected via personal interviews, were positive. The first impression of the field test was that the end users found the system easy and convenient to use. In further discussions, the end users found that the system could ease their work by saving time in information sharing. Also, several parallel activities could be eliminated. It was also mentioned that the information transparency may help to reduce the lead-time of mutual deliveries, since the companies can react faster to sudden changes in the sub processes of the other companies. The SteelNet system has the characteristics of a virtual enterprise (VE), which is one of the many forms of an agile approach. According to Goldman et al. (1995), if a company or a business network have created a VE structure, then all the other elements of agility are likely to be present and functional in that company. In the SteelNet system, a company may join or leave the business network or an entire business network may merge with another business network. It provides flexibility and problem solving services. Flexibility is important in the project-oriented business network, as the combination of companies varies according to the project. Thus, the SteelNet system is seen as a typical VE even though it has some characteristics of an extensive enterprise (EE) as well, for example,in its long-term business relationships, and organizational stability and enduring relationships. The change process towards agility is a long journey, and on that journey, there are several steps to be climbed. In this study, the analysis of change process towards agility is based on the development framework of Poirier & Bauer (2000). As the result of two workshops, the change process is presented in section 5.3. A summary diagram of the time steps is presented in Table 18. It has to be concluded that companies are not eager to share information unless there is positive proof that sharing information is equally beneficial for all members of the supply chain. The withholding of information by just one member in the supply chain can lead to a loss of trust and dysfunctional behavior among all the members in the chain, leading to a situation where even the best technology is not adequate. Yet it is important to note that the implementation of a new ICT system poses a number of challenges for the companies in the network. Particularly among the small manufacturing companies, process reengineering and integration is a very challenging task and the development resources are limited in SMEs. However, companies of all sizes participating in the development of the SteelNet showed determination and willigness to learn about the benefits of the SteelNet system. Interestingly, the personnel at the operational level were in many cases the first to realize the benefits of the new system and practices.

6 Conclusions and implications

In this chapter, the main findings of this study are presented and the theoretical contributions and practical implications of the thesis are assessed. Furthermore, the reliability and validity of the study are evaluated. Finally, the implications of the study are discussed and some recommendations for further research are proposed.

6.1 Conclusions

This study concentrates on the area of IEM research and the main focus is on agility in the SCM context. There is a significant amount of literature on agility, written from different perspectives, both from the SCM perspective and from the manufacturing, leaderhsip, and software design perspectives. Agility in SCM is an interesting research issue today and several reports have been published during the last decade. However, agility in SCM in the context of traditional industry is still a novel phenomenon. Some companies in traditional industry have started to adopt elements of agility, often not in a systematic way, but ad-hoc and through operational decisions rather than strategic long-term planning. In addition, the focus has typically been on the intra-organizational level rather than inter-organizational level. This study bears witness to the development towards agility as a long-term journey, one which needs rigorous planning to be successful. The shift from traditional manufacturing to a project-oriented manufacturing business, where quick response is a key issue, has increased the call for agility. Leading companies are implementing a supply chain strategy designed with agility in mind. These seem to be the companies that will be best equipped for survival in the uncertain markets of the 21st century. The case study is done in the steel product industry and hence it contributes to the discussion on agility in SCM in different industries. This kind of real industrial application provides new knowledge for this wide issue. The research problem is assessed as follows: How to develop an agile supply chain for a steel product network? The study identifies the key elements of an agile supply chain from a theoretical point of view. Furthermore, this study describes how these key elements seem to appear in the

181 steel product network. One interesting issue is how the steel product network actually determines the paradigm agility. In addition, based on the theoretical and empirical findings, an agile supply chain for a steel product network is developed through the use of ICT. Also, the change process towards agility is presented. The first research question in this study is: (R1) What are the key elements of an agile supply chain? The key elements of an agile supply chain are usually illustrated based on the widelyaccepted models of Christopher (2000) and van Hoek (2001). The author summarizes the key elements of an agile supply chain found in the literature survey and provides a modified framework of an agile supply chain, presented in Fig. 24. This framework is used as the analysis framework in the empirical research. The framework has four main elements, based on Christopher (2000) and van Hoek (2001): market sensitive, network-based, virtual and process integration, which affect each other. According to Christopher (2000), the virtual element is a key feature of an agile supply chain. The interconnectednesses of the key agile elements are presented by van Hoek (2001). In his framework, the impact of the virtual element is also emphasized as an initiator to activate the other elements. Based on the literature review, the author identifies that the greatest development challenge towards agility, i.e. increasing visibility and collaboration, is the utilization of ICT. ICT gives new possibilities to integrate processes and to develop a new network-based, virtually operating agile supply chain that responds quickly to customers' changing demands. This framework underlines the open relationships between the supply chain members, the sharing of information and the use of technology to enable total supply chain integration. In the modified framework of an agile supply chain, besides these four elements, several other complementary agile elements are added. In the network-based supply chain, information integration downstream and upstream is essential. Especially in project-oriented business, where typically several companies are involved in the manufacturing and delivery of the products, and many activities happen simultaneously, information transfer must be in real time not only inside the focal organization, but also between all the companies along the supply chain. In an agile supply chain, the skills, knowledge, expertise and information are shared between supply chain members. Companies focus on strengthening their core competences and outsource non-core competences. Outsourcing, by offering flexibility and scalability, in general, is one means of increasing the supply chain agility. However, it requires both a careful selection of business partners and a need for inter-organizational management. Deeper relationships with fewer companies seems to be one trend in the network-based business. A market sensitive, demand-driven agile supply chain is driven by a real business interest. In order to satisfy customers changing requirements, customization and value-added products are offered. Mass customization needs modular design and modular manufacturing processes. In an agile supply chain, postponement methods are used and the OPP is pushed as far upstream as possible along the supply chain. The results of the process integration are increased speed, cost-efficiency and quality.

182 The second research question (R2) is stated in order to find out how these key agile elements appear in the steel product network. The second research question in this study is: (R2) How do these key elements appear in the steel product network? According to the conceptual framework of Lin et al. (2006), the first step to begin development towards agility is to examine changes or pressures of the business environment that nudge companies towards agility. The current situation in the the Finnish steel product industry is summarized in Fig. 35, where the SWOT analysis based on the theoretical and empirical survey is presented. In this study, the categorization of agility drivers of Goldman et al. (1995) is used as a benchmarking criteria when analysing the case steel product network. The findings are presented in section 4.3. They clearly show the need for agility. The supply chains under ETO environment need agility more than others in more traditional, inventory-based production modes. The benefits that agility can offer to the case network are flexibility, cost-efficiency, decreased lead times, business volume, and profitability. The key agile elements, which can be demonstrated in the case network, are analyzed based on the modified agile supply chain framework (Fig. 24). The findings are presented in detail in section 4.4. Drawing on the key findings, by way of conclusion, it can be said that seamless integration with complete information sharing between all supply chain participants is still in the future. Since a number of autonomous companies belong to the case network, it is imperative to draw up a common group mission, with goals and objectives for the group as a whole, which can still be compatible with independent policies at an individual member's level. This scenario offers interesting further opportunities for designing, modeling and implementing the future supply chain networks for maximum effectiveness, efficiency, and productivity in dynamic environments. Without a strategic focus it is difficult to achieve agility. The case study shows that collaboration, integration and synchronization remain the province of prescriptive literature rather than the reality of insightful practice in the steel product industry. Even though the case network is setting out on its journey towards adopting the methods of ICT, the need to improve the level of information integration by ICT is widely recognized in the case network. The third research question (R3) is formulated in order to find out how ICT should be utilizad in creating an agile supply chain for a steel product network. The third research question in this study is: (R3) How is ICT utilized in creating an agile supply chain for the steel product network? The theoretical compilation of key agility elements shows that ICT utilization is the main rallying point. In addition, the empirical study shows that the major problem in the supply chains of the case network is in the information management and in communication styles. Through the utilization of ICT, managing the information flow is becoming more critical. It becomes clear that new and different kinds of companies are needed for agility, but such companies will not begin to emerge until people really understand what agility actually is about. In this study, the agility paradigm in the steel product industry is determined as follows:

183 "Agility is the ability to rapidly respond to customers' changing requirements by providing innovative metal-based systems and components and comprehensive solutions, in a dependable and cost-effective way. This is achieved by having empowered and multi-skilled dynamic teams, a flexible production with increasing productivity and operational efficiency, an in-depth knowledge of customer requirements, and a product range which is diverse, customised and customer-oriented. With respect to information and knowledge transfer, the organizations use advanced ICT tools enabling them to interact in a reconfigurable and adaptable way to create a virtual enterprise." The comprehensive determination of agility in the case steel product industry has quite similar elements to the several different definitions provided in the literature (see section 4.2). The main difference between the literature and the empirical findings of the case study was the pronounced emphasis by the case personnel of the elements such as "provide solutions" and "customized products". The movement towards project-oriented business is very acute in the case network, so this kind of emphasis is quite natural. This data came from the key persons of the case companies, thus it is easy for the author to argue that the agility determination she has made is relevant in this context. However, because of the general nature of the case network (in its industry sector), it is claimed that the determination can be extrapolated to the entire industry sector. However, more case studies would increase the validity of such a claim. The detailed findings of the attributes of agility in the steel product industry are presented in section 5.1. The new agile supply chain, the SteelNet system, is presented in section 5.2. Some general agile practices are highlighted as an example, but it is not reasonable, however, to present all the functions of the system in this thesis. For example, just the summary report "The SteelNet Instructions" is more than 80 pages (Peltomaa 2006). The change process towards agility is a long journey and on that journey there are a lot of steps to be climbed. In this study, the analysis of change process towards agility is based on the development framework of Poirier & Bauer (2000). The change process is presented in section 5.3. A summary diagram of the timeline (2004-2006-2010) and the steps is presented in Table 18. The starting point of this change process towards agility was in 2004. The goals identified in 2004 have not yet been realized at the time of writing (2006). The longer term goals for 2010 may also be delayed. However, some progress has been made, e.g.: 1. The focal company is aggressively following the new business plan towards projectoriented business by buying manufacturing companies (downstream), developing relationships with the key suppliers (outsourcing, specialization), development of business processes which integrate ICT applications (virtuality), etc.; 2. 5 suppliers in the case network have established a joint marketing company to promote their services in the oil and gas industry (market sensitive). They have successfully extended their operations to new markets; 3. The suppliers are investing in ICT systems and are employing new ICT specialists (added knowhow); 4. The further development of the SteelNet system has been examined and confirmed.

184 Although the results obtained are relevant and beneficial to the participating companies, this study is nevertheless subject to a number of limitations. As stated earlier, companies should concentrate on a few selected aspects of agility in their attempt to develop an agile supply chain. Thus, in other types of supply chains, the aspects of agility worth pursuing might differ from those highlighted in this study. Similarly, some of the forces acting as drivers for agility in the case study might not have such a strong impact on other supply chain contexts, and vice versa. To conclude, this thesis produced novel and interesting results about supply chain development, its network-nature and capability to enable agile practices. The case agile supply chain could be used in subsequen research as well as in practice. This research calls for continuation and it is not complete without strong model design efforts and emphasis on productization. Movement towards agility is a long-term journey, full of difficult decisions and full of operations to change. In the words of Paul T Kidd, one of the founding fathers of agility, "if agility does not scare you, then you have not fully understood what it is about". On the basis of this study, it can be further added that the alarm bells for agility are now ringing in traditional industry too.

6.2 Theoretical contribution and managerial implications 6.2.1 Theoretical contribution

The contribution of management research consists of its theoretical contribution and managerial implications (Easterby-Smith et al. 2002). According to Lukka (2003), in the case of constructive research, the researcher has to be able to explicate the theoretical contribution of the study, i.e. reflect the findings back to (potentially existing) prior theory. The theoretical contribution of this study concentrates on the theories of SCM and agile manufacturing. This study merges these two theories together and throws new insight on the theory of an agile supply chain. At present, the theories of agility in SCM typically deal with the conceptual understanding of agility and methodologies or models to achieve an agile supply chain. In addition, agility in SCM has been typically examined from one organization's point of view; only a small portion of industrial research has concentrated on the extent at enterprise level. (van Hoek 2005, Sanchez & Nagi 2001, Gubi & Johansen 2003.) This study introduces a real industrial application and brings new insight into how to support companies to accomplish a vision of creating an agile supply chain. The study also shows how ICT could enrich SCM research and provides guidelines for the identification of ICT requirements in order to support agility. Moreover, current theories provide theories on agile supply chains mainly from the point of high-clockspeed industries rather than traditional slow-moving industries, which have long lead time manufacturing dealing with the ETO type of products. This study is done in the context of project-oriented steel product industry, and hence, it adds contribu-

185 tion to the discussion on agility in SCM of different industries, and also instead of one company, from the network point of view. In this study, there are three important results. First, the agility paradigm is determined in the context of the steel product industry. Second, a new framework to help the analysis of an agile supply chain level is defined. Finally, a new agile supply chain is constructed. These results clearly increase the understanding of the agility in SCM in project-oriented steel product environment, and thus contribute to the current SCM theories. In this study, the theoretical fields are discussed in chapter 3. Agility in SCM context is discussed widely and the key elements of an agile supply chain is compiled. Technological applications for SCM are introduced with a special interest in the Internet and agent technology. In the end, applying the agility paradigm, the agile chain performance and technological possibilities, an agile supply chain - the SteelNet system - is developed. This novel construct provides a real and practical contribution to the prior literature. The starting point of the development work is to determine the paradigm agility in the steel product industry. Heretofore, agility has been typically researched in the high-tech industry (e.g. Helo 2004, Mason 2002, van Hoek 200) and also e.g. in the clothing industry, especially among the UK researchers (e.g. Bruce et al. 2004, Christopher et al. 2004, Stratton & Warburton 2003). Thus, the determinations presented in the literature to date have the characterictics of the industries with fast clock frequency, short life-cycles, high volatility, and low predictability. The proposed determination of agility in steel product industry adds a general conceptual understanding about the agility paradigm in other industry sectors. It gives also a practical approach to the paradigm. However, it should be added that it is more productive to define agility in specific circumstances rather than trying to make generalize too broadly about the the issues. The second contribution of the study is to provide the elements for the development of an agile supply chain. This kind of real industrial application study, that actually helps to accomplish a vision of creating an agile supply chain, is quite rare. First, the drivers in the business network that nudge companies towards agility were studied based on Goldman et al. (1996), and then the key agility elements were summarized based on the models of van Hoek (2001) and Christopher (2000). The measurements of van Hoek (2001) were used as a guide for analysis. In the research of Power & Sohal (2001), an interesting finding was that "more agile" companies, which are characterized as more customer-focused and apply ICT technology in order to meet customer requirements, also regard the involvement of suppliers in this process as being crucial to their ability to attain highest level of customer satisfaction. On the contrary, "less agile" companies can be characterized as more intenally focused with a bias towards internal operational outcomes. Comparing these findings with those of the case study, which also extends the perspective to an entire supply chain of several companies, the case network can be seen as a potential agile enterprise with its customer-focused attitude and ambitions for deeper relationships with each other. The third contribution of the study is to provide a real-life case study in the research of ICT in SCM. This study focuses on the challenges that ICT can give to the development of an agile supply chain. According to Gubi & Johansen (2003), the research of ICT and SCM are quite interesting research areas today, separately. However, more work is required in the combination of ICT and SCM. The reseach of ICT in SCM is a recommended research field, because more and more activities in the supply chains are based

186 on ICT. Also an emerging topic area for researchers is ICT integration, for example with a special focus on the implementation aspect. Even though the implementation of ICT in SCM is not relatively new, according to Lee (2000) and Gunasekaran & Ngai (2004), few studies exist on the empirical research on the Internet and, especially, agent technology solutions in logistics operations. In the literature, there is some research on agent-based enterprises in SCM, e.g. Jun et al. (2004), Ahn & Lee (2004), Fox et al. (2000). This study broadens the view of the development of an agent-based agile supply chain in the context of an entire business nework, not only one company, and thus adds value to the discussion of ICT in SCM. However, the SteelNet system is not a solution emerging only from the theory. It has developed based on significant data collection and data analysis iterations rounds in the case steel product network. In a different context, the SteelNet system may be different. The novelty of this study is a new construct, an agile supply chain, the SteelNet system, which is developed for the purpose of logistics information sharing in a business network. The SteelNet system is the ICT solution, but also includes the new agile practices and integrated business processes that companies have to adapt in order to fully receive agile benefits. This kind of digital supply chain also requires several improvements from the companies' operational practices and strategic decision-making. The SteelNet system is also new from the technological perspective, because it is based on new ICT solutions, the combination of the Internet and agent software technology. There are no such commercial applications available for SCM purposes. Furthermore, it is noticeable that the SteelNet system is suitable for the use of large companies as well as small companies. Typically ICT systems are developed for either large companies or for the needs of small ones.

6.2.2 Managerial implications

The practical utility of this study consists of a new construct and a synthesis of existing theory. In practice, this study helps managers to better understand the benefits that agility in supply chains can bring, with a special emphasis on the characterictics in the traditional industry in ther shift towards project-oriented business. The study provides managers one practical example of how to develop an agile supply chain. This study reflects the importance of developing agility in the supply chain of steel product network. The need for agility, in order to be competitive, has been realized in the case network. From the start, the development of an agile supply chain for competitiveness was quite an obvious solution for the development persons of the case focal company and, gradually, the issue extended to the key persons of suppliers. Actually, after a 4 year research period and hard sell of the benefits of agility, in the SteelNet steering group meeting in December 2005, one CEO jumped up after an oft-repeated presentation on the virtues and benefits of agility, and yelled (not verbatim): "YES, agility is just what we need in our company to be competitive! Why have we not seen that before?"

187 As managers gradually become aware of the existence and the primary features of the benefits of an agile supply chain, it is to be hoped that they will also start to be more aware of the practical benefits of agility in their every-day work. The SteelNet system has been tested in practice and the comments were positive. Implementation and productization emphases are strong and the descision for further development has been taken. First, market research in the metal industry field is going to be carried out and, second, market research in another industry sector will be done. For the end of the managerial implications, the author has concluded the final SteelNet steering group discussion on May 28, 2006: "According to the experience gained from the collaboration with companies and the development process of the SteelNet system, it has clearly come out that there is a lot of work to be done; not only in the development of technical solutions but also to clarify a working model for the business networks and strengthen the trust between companies. The SteelNet system will be further developed according to the results gathered from the test case. The positive results motivate the continuation of the development and testing processes."

6.3 Evaluation of the study

Gummesson (2000) suggests that the challenges in social research, such as IEM, are the researcher's access to reality, preunderstanding and understanding, and the quality of research. The access to reality deals with the issues of how the researcher has access to real world situations. In the case study, the question is how to contact the right persons and how to interview them about the issues that, in many cases, belong to the sphere of critical and confidential issues. In this study, the direct contacts with the key persons of the companies at operational and managerial level were organized well. Every company had a contact person, who introduced the interviewers to the other professionals in the company. Also, the atmosphere during several company visits was (surprisingly) open and rewarding. According to Lukka (2003), it is important that the development of the innovative construct should be seen as cooperative teamwork to which both the practitioners and researchers contribute. At the beginning of this study, the research areas with the greatest need for improvement were identified through the joint efforts of the research group and the participating companies. Also, there was mutual agreement about the construct of an agile supply chain, and all the stakeholders of the study had an opportunity to air their views and expectations for the construct. The concept of preunderstanding refers to the researcher's insight into a specific problem and social environment before they start research work ­ it is an input (Gummesson 2000). The author had good theoretical experience of the problem under study, because of her academic background having graduated with a Licentiate in Technology (Mechanical Engineering) and an Executive MBA. The theses in both degrees focused on the case business network on its networking and business processes. Also, the author has had prac-

188 tical work experience in Rautaruukki Ltd. However, compared to those researchers who actually work in a business and research a problem in this business, the author, as a fulltime researcher, lacks some knowledge of daily operations. On the other hand, by being an outsider, the author was more open-minded about new innovative solutions and neutral about different requirements coming from different sources. Understanding refers to the insight gained during the research work ­ it is an output (Gummesson 2000). This study covers all together about a four-year-period of development work, in which the author was involved full-time. In this thesis, in the previous reports, and in the several scientific articles written during the research work, it can be clearly seen how the understanding of the author has increased cumulatively. However, in order to gain sufficient understanding of the business for this study,this involved several company visits and numerous discussions with the company personnel. Without the strong support of the companies involved in this research, this kind of arrangement would be more difficult and would also affect the validity and reliability of the results. Research quality is about reliability, validity, objectivity, relevance, and so on ­ the list of criteria is ambiguous (Gummesson 2000). In the social sciences, such as IEM, widely used criteria to establish the quality of the research are validity, reliability and generalizability. According to Easterby-Smith et al. (2002), in hermeneutic research validity means that the study clearly gains access to the experiences of those in the research setting, reliability means that there is transparency in how sense was made of the raw data, and generalizability means that the concepts and constructs derived from this study have relevance to other settings. The requirement of generalization may be either descriptive, where the aim is to demonstrate that the characteristics of one setting are similar to those in other settings, or it can be theoretical, where the aim is to demonstrate that the ideas developed within one context are relevant and useful in a very different context (Easterby-Smith et al. 2002). Validity in sciences is based on how well the researcher solves problems or poses new problems and its inclusion of the following properties: objectivity, criticalness, autonomy and progressiveness. In constructive research, the validity can be evaluated on the basis of a market test (Kasanen et al. 1993). It can also be evaluated more extensively on the basis of a case study. In a case study, there are three main kinds of validity (Yin 2003): 1. construct validity (establishing correct operational measures for the concepts being studied); 2. internal validity (establishing causal relationships whereby certain conditions are shown to lead to other conditions. Rarely has major role in the case study); 3. external validity (establishing the domain to which a study's findings can be generalized). Yin (2003) states that a key suggestion for dealing with construct validity is to have multiple sources of evidence; for internal validity he stresses the importance of building cases over time in order to eliminate alternative explanations, and for the external validity he points out that the case studies rely on analytic rather than statistical generalizations. Reliability is about demonstrating that the operations of a study ­ such as the data collection procedures ­ can be repeated, with the same results, by another researcher, and it

189 thus aims minimizing errors and bias during the research process (Yin 2003). Thus, documentation has to be collectedand stored very carefully during the research process. Yin (2003) introduces two alternative ways for generalization; statistical and analytical. In the case study, the latter is more common, and generalization is formed already in the phase of theory development (Yin 2003). However, according to Saunders et al. (2000), generalization is not of crucial importance. The business world is changing ­ and the change is accelerating ­ so the circumstances today may not apply in the near future and then some value of the generalization is lost. Also, besides of being complex, each business network is unique, which is a result of two factors: the uniqueness of each individual relationship and the unique combination of the quantity of relationships in each network ­ that too render the generalization less valuable (Cunningham & Culligan 1988). The researcher should not commit to generalize or create theory too much, because it is important to understand the case itself. The researcher has to make a strategic choice in deciding how much and for how long the complexities should be studied (Stake 1994). One approach to increase the research quality, both its validity and reliability, is to use triangulation, a use of a variety of data sources and multiple perspectives to interpret a single set of data, the use of several researchers and evaluators, and the use of multiple methods to study a single problem (Janesick 1994). There are four types of triangulation: 1) data triangulation, 2) investigator triangulation, 3) theory triangulation, and 4) methodological triangulation (Yin 2003). According to Yin (2003), and Eisenhardt (1989) casestudy research is used when phenomena and context do not have exact boundaries. This is why it tries to achieve iterative triangulation by using multiple sources such as a literature review, case evidence and intuition. The preferred methodological tool of this qualitative case study is the interview, and a lot of different interviews were carried out. In order to get a higher validity and generalisability of the results, extended interviews with several key people within the different companies in the case network were held. When different data gathered from different companies, from different viewpoints, indicates the same features to be significant, that increases the reliability. One or two interviews may give misleading results of the phenomenon, but several interviews, also with the same persons, make the material more accurate, and increases validity. In this study, the main data collection method was individual face-to-face interviews, held in the 11 companies and in 5 other organizations. Besides individual interviews, also group interviews were held as a data gathering method, and also for triangulation purposes. Group interviews have the advantage of being data rich, flexible, stimulating to respondents, cumulative and elaborative, over and above individual responses (Fontana & Frey 1994). Even though all the interviews were not rigidly structured situations, there was always, however, an agenda to follow. In some interviews, a fixed question list was talked through with the interviewees, in others, the same main topics were discussed, and sometimes the sessions were more like free brainstorming situations. However, extensive notes were taken during each interview, and several interviews and workshops were recorded. In most of the interviews there was more than one interviewer involved, and after the interviews, the protocols were carefully written up, usually jointly in the research group. According to Eisenhardt (1989), the use of multiple investigators is justifiable as it enhances the creative potential to study and the convergence of observations from multiple investigators enhances confidence in the findings.

190 However, in this study, other methods were also used to collect data, such as questionnaires, observations, documents and the Internet, which increased the validity of the study. There have been some main criticisms leveled against observation in the area of validity and reliability (Adler & Adler 1994), but as a complementary method in this study, it gave good insight into the practices in the companies. During the company visits, other material was also collected, e.g. company presentations, annual reports, and other documents. Several workshops were arranged in order to gather key persons of the companies together to discuss given theme areas and test the new construct. It is important when examining and developing practices in the business network, these companies need to be under the same roof. Some of the workshops were general learning situations for the participants, some of them were data gathering situations for the researcher, and some of them testing situations for the construct. The selection of two supply chain cases under modeling work made more validity and reliability for the results. According to Yin (2003), the empirical results have more validity, the more the cases are. Also, it is noticeable, that the case supply chains are described from different perspectives by interviewing people from different levels in the companies; e.g. managers, logistics personnel, marketing, sales, physical distribution, etc. The data collected in this study, such as recordings, protocols, notes, documents, agendas used in the workshops, etc. are stored carefully for later use. Also, the question lists used in the interviews, questionnaires, and agendas of the workshops are stored. The protocols and transcriptions were useful during the writing of the thesis. They served as reminders of the main points of the interviews and to organize the focus of the main topics even though, in this thesis, direct citations are not widely used. Besides the interview protocols, several reports and scientific publications were also written jointly in the research group. In total, the results and analyses of this study have been partially presented in four academic theses (Alaruikka 2004, Ignasi 2002, Iskanius 2004a, Pirilä 2004), in two reports in DIEM (Alaruikka et al. 2004, and Iskanius 2004b), and in 27 conference papers, 6 technical papers and 5 journal articles. Also, 25 project reports were written for the use of the project group and participating companies. They are all listed in the references. Data analysis consists of examining, categorizing, tabulating, testing, or otherwise recombining both qualitative and quantitative evidence to address the initial propositions of a study (Yin 2003). Three basic ways of analyzing qualitative and case study data have been introduced; 1) content analysis, 2) pattern matching and 3) grounded theory (Easterby-Smith et al. 1991, Yin 2003). For the case study analysis, pattern matching logic was the most desirable technique; even some analyses have the nature of grounded theory analysis. Such logic compares an empirically based pattern with a predicted one. If the patterns coincide, the results can help a case study to strengthen its internal validity (Yin 2003). However, in hermeneutical, qualitative research, there is no clear separation between data collection and data analysis. It is a more iterative process where the analysis takes place while the data collection is in progress, and these understandings are incorporated into future data collection situations to check out the emergent ideas and understandings (Easterby-Smith et al. 2002). The several iteration laps and different analyses in examination make the understanding deeper and more accurate and therefore increase the reliabil-

191 ity of the analysis. In this study, the new construct was developed throughout the research by iterating the data collection tool and method development, data collection, data analysis and comparison of the findings with the existing theoretical literature on the subject. No matter what specific analytic strategy or techniques have been used, it is important to make sure that the analysis is of the highest possible quality. At least the following four principles should be taken into account (Yin 2003) the: ­ ­ ­ ­ analysis should show that all the evidence has been attended; analysis should address all major rival interpretations; analysis should address the most significant aspect of the study; researcher should use her own prior, expert knowledge.

The quality criteria dimensions of this study are analyzed based on the summary criteria list in Table 19. Essential for the constructive research is to test the empirical feasibility of the construct. Some ideas about the functionality of the SteelNet system were identified in the field-test phase. The field test gave the possibility to the network participants to acquaint themselves with the SteelNet system and to establish a shared practice. After the testing period, a short web questionnaire (see Appendix 6) was designed in order to record the experiences of the end users. In Fig 44, a summary diagram is presented.

192 Table 19. Summary of dimensions of research quality in the study.

Quality criteria Measures Construct validity Use multiple sources of evidence. Measures taken to ensure quality in this study Several experts from different companies (case focal company and its suppliers) and organizations, also coming from different level of business, were interviewed in order to gain different perspectives for the development work.

Use multiple data collec- Several data collection methods were used: interviews, docution methods. ments, questionnaire, and observations. Use of multiple investigators. Establish a chain of evidence between research questions, evidence and conclusions, and respondent review of draft case description Have key informants to review draft case study report. Several researchers were involved the study, having their own expertise, and looking at the problem from own individual perspective. A lot of work done to derive the new construct from the existing body of theory and practical knowledge. Also, the research explicitly follows a research protocol and scientific reasoning. Agendas in the interview rounds were similar to all.

The SteelNet project steering group (6-10 persons) and the research group (4-6 persons) reviewed the main reports and tested the construct. They also gave active feedback. Also, several scientific articles and conference papers were reviewed at international level. Matching the data to the predicted data. Done The decision about the development of the construct was taken after an extensive literature review, parallel to the empirical work. Also other improvement alternatives were examined in order to achieve an agile business. Even the construct has been developed based on the requirements of this particular business network; it is also generalisable to other networks, and also to the other industry fields as well.

Internal validity

Pattern matching Grounded analysis Do explanation-building Comparison with conflicting literature.

External validity

Use replication logic in multiple case studies

Comparison with similar Analytical generalization by reflecting enfolding literature. There literature. was a wide theory knowledge basis for the development of the construct. Also several PhD studies and journal articles were reviewed. Strong description for the The literature review and the analysis of the work, all decisions reader's own judgment made based on the researcher's own judgment. Follow a rigid protocol Reliability This study rigidly follows the constructive research protocol.

Prepare a database where There is a well-structured digitalized database that includes all the raw data is entered as documentation: flowcharts, protocols, notes, reports, agendas, and name lists, etc. well as all the data and documents that the researcher produces. Use of case study protocol The rigid research protocol was followed. Project management was in high level.

193

5

4,69 3,7 3,56 3,29

4

3,31

3,67

3

2

1 Average

Easy of use

Useability

Pleasantness

Trust

Demand

In total

Fig. 44. Summary diagram of the functionality of the SteelNet system.

According to Eloranta (2005), the evaluation criteria for constructive research are: 1) Relevance of the construct (theoretical relevance and practical relevance), 2) Novelty of the construct and 3) Practical utility of the construct (difficulty to assess the practical adequacy of any new construct prior to its implementation). The practical relevance of the problem is clearly visible in this study, while the initial request for the development work has come from the participating companies. In Table 20, some issues about relevance, novelty and practical utility are presented. Table 20. Relevance, novelty and practical utility of the SteelNet system.

Evaluation criteria Relevance Novelty Practical utility Construct The problem how to respond to the changing business environment is acute today in the industry. An agile supply chain is seen as a new competitive advantage in the businesses. The new construct is based on the new technology Internet and agent software technology. Also these kinds of digital supply chains are new to companies in traditional industry. The companies have tested the construct and have given positive feedback. The weak market test has been done and plans for the construct productization have been made. Further development decisions have been made.

6.4 Future research

This study is a single case study, in which the new innovative construct is designed for SCM in the steel product network. The new construct is an agile supply chain, the SteelNet system, which represents one kind of digital supply chain, e-supply solution. This new structure of the supply chain highlights simultaneous communication and supply chain integration. The first requirement for the development of the construct is that it

194 enhances agility. Although the results obtained are relevant and beneficial to the participating companies, this study is nevertheless subject to a number of limitations. During this study, there are several research questions for future research that have arisen. The agility paradigm in the steel product network is determined in the study. However, agility means different things to different companies in different contexts. Thus, one future research area would be to continue to examine how the different companies or business networks in different industries understand the agility paradigm. Also, the cultural issues of agility would be interesting to examine. According to the literature, the definition of agility evolved within the US and UK industries. It would be interesting to find out what kind of special characterictics further studies in different countries and in different continents can bring to the issue. This kind of practical studies would provide more in-depth information on this fuzzy paradigm. As recommended in the study, companies should concentrate on a few selected aspects of agility in their attempt to develop an agile supply chain. This study examines how agility can be achieved by ICT. Even though ICT is the most important facilitator of agility; it is not the only one. There are also other improvement possibilities that would be worth studying. The SteelNet system is based on the ICT applications of the Internet and agent technology. Even in the literature, agent-based networks seem to be an interesting research issue; few real industrial practices have been reported. In the other types of supply chains and in other business cultures, the aspects of agility worth examining might differ from those highlighted in this study. Similarly, some of the forces acting as drivers for the agility might not have as strong an impact on other supply chain contexts or the other way around. As changes and pressures faced by companies may be different, the degree of agility required by individual companies will be different. Thus, one research area would be to define, which degree of agility the supply chains should actually pursue and achieve to improve their competitiveness and which aspects of agility are considered the most imperative ones in these particular types of supply chains. Measurement of agility is a problematic issue, especially in the supply chain level. Agility is needed across companies and sectors, so one company's agility can be another's waste of resources. Agility can be something that companies achieve without realising it, or it can involve issues that are difficult to quantify. The nature of the competencies implied by agility are such that they would be better considered as intangibles, similar to intellectual property, company specific knowledge, skills, expertise, etc. Further research issues include how the intangibles can be measured and translated into quantifiable figures. The future research issues include a study of the full implementation of the SteelNet system both in the case network, and in other businesses. The SteelNet system has been field tested and the agile practices were trialed in the case network. This study reports these experiences of a new agile supply chain. The reports are positive but, limited to experiences only from one case order and also to the test run between three companies. Thus, more field tests have to be done in the case network in order to fully assess the functionality of the SteelNet system and how it really enhances the intensity of agility. One interesting research issue is how the benefits divide along the supply chain. From the technical perspective, the SteelNet system is in its infancy and it needs future development in order to become a commercial product. Thus, more technical work should be undertaken. Even though the SteelNet system is developed based on the requirements of

195 the steel product network, it is also generalisable to other networks, and to other industry sectors as well. How to implement The SteelNet system in different business networks and in different industries would be interesting to examine. In the case network, a new marketing company has been established by five SME companies. How the SteelNet business system can be implemented there would be a worth monitoring both from the practical perspective, and from the theoretical perspective because of its extension to areas such as the marketing and sales. How to integrate 3P logistics providers and transporter companies into the SteelNet sytem would be another angle of research, as that would also bring new technological requirements to the SteelNet system, e.g. mobility. The steel product network is moving towards project-oriented business, towards ETO operations production mode, thus downstream along the supply chain. In fact, the Finnish steel product industry is also doing so as a whole. Future research could take a closer look at the new roles and responsibilities of companies in the supply chain and examine how the companies really have to develop their businesses in order to take a step nearer the customer. One significant problem in the case network is that few companies have their own products. Thus, how to design their own products and evolve as a system supplier or component supplier is another potential research area. Related to this, further research could be done on what this change in business requires from the personnel, how their knowlege and skills have to change, and how their practices and roles in the company will change. The role of the focal company is a much examined role of the supply chain, even some research groups concentrate only on this aspect in SME research. Therefore, the impact and power of the focal company in a supply chain in initiating and implementing the move towards project-oriented business, where need for agility is increasing, would be a research angle worth investigating. One obvious research area is the extension of the research in the supplier network to examine the research problem from the end customers' perspective. In the future, more research into the development process of an agile supply chain, especially in traditional industry sectors should be carried out. Future research should consider in more detail the developmental conversion of SMEs from arms-length relationships into the systems supplier, or components supplier, of a a globally operating focal customer. However, as networking is a common trend in today's business and industry practice, maybe tomorrow's competitive advantages lie elsewhereent. Therfore more research in the IEM area would provide a greater understanding of the success factors in o industry. In the end, this study provides answers to its research questions and raises numerous research questions for future research.

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Appendices

Appendix 1. Interviewees Appendix 2. Questions in the interviews Appendix 3. Flowchart of project product process Appendix 4. Flowchart of mass product process Appendix 5. Ideal business process of SteelNet system Appendix 6. Results of the functionality questionnaire

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Appendix 1. Interviewees

Interviewers: Iskanius Päivi, Resarcher, University of Oulu. Alaruikka Anna-Maija, Researcher, University of Oulu Helaakoski Heli, Project Manager, Technical Research Centre of Finland Kipinä Janne, Research Engineer, Oulu Polytechnic Latvastenmäki Minna, Research Engineer, Technical Research Centre of Finland Ojala Kaija, Assistant, University of Oulu Peltomaa Irina, Research Engineer, Technical Research Centre of Finland Smirnov Alexander, Research Engineer, Per Brahe Software Laboratory Tuikkanen Juha, Research Trainee, Technical Research Centre of Finland Interviewees/participants/survey respondents/steering group member, position, and company Alasaarela Eeva, Manager, Tietoenator Ltd Ahola Esko, Business IT Manager, Rautaruukki Ltd Asunmaa Juhani, Manager, Technical support, Rautaruukki Ltd Aula Pentti, CEO, Iin Konepaja Ltd Ekoluoma Ilkka, Supervisor of prefabrication, Miilukangas Lp Elf Juha, Expert in Metal Structure, TE Centre Fingeroos Kari, Data Administration Manager, Rannikon Konetekniikka Ltd Dates 17. 8.2004 12.10.2004 Questionnaire 4.12.2002 6. 2.2003 12.12.2003 6. 4.2005 7.11.2002 12. 6.2003 16.12.2003 22.11.2004 21. 1.2005 3. 6.2004 Questionnaire 4.10.2005 Steering group 29. 8.2003 9.10.2003 Questionnaire Steering group 9. 1.2003 4. 2.2003 10. 3.2003 10.12.2003 Questionnaire 17. 1.2003 29. 3.2005 Questionnaire 17. 8.2004 11. 1.2005

Grekula Toni, Miilux Ltd Göös Janne, Group Manager, VTT Haapakangas Matti, Rautaruukki Ltd Haapaniemi Vesa, Product Development Manager, Pohjanmaan PPO Ltd Hartikka Eino, Production Planner, Rautaruukki Ltd

Heikkilä Esko, CEO, Raahen Insinööritoimisto Ltd Heikkilä Kyösti, Kojaltek Ltd Hintsanen Veikko, Supply Chain Manager, Rautaruukki Ltd

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Interviewees/participants/survey respondents/steering group member, position, and company Hippeläinen Matti, Administration Assistant, Miilukangas Lp Honkala Viljo, Managing Director, Vicetec Ltd Härkönen Seppo, Miilukangas Lp Immonen Hanna, Project Manager, Rautaruukki Ltd Joensuu Jukka, Automatic Data Systems, Raahen Tevo Ltd Joensuu Teuvo, Managing Director, Raahen Tevo Ltd Jutila Simo, President and CEO, Keycast Ltd Kallio Pekka, CEO, Rannikon Konetekniikka Ltd Dates 2.11.2004 Questionnaire Questionnaire Questionnaire Questionnaire 16. 1.2003 28. 1.2004 16. 1.2003 28. 1.2004 Questionnaire 7.11.2002 12. 6.2003 16.12.2003 17. 8.2004 22.11.2004 21. 1.2005 4.10.2005 Steering group 4.10.2005 3. 6.2004 17. 8.2004 12.11.2004 Questionnaire 28. 1.2004 12.12.2003 4.10.2005 Questionnaire 3. 6.2004 Steering group 21. 1.2003 3.11.2004 Steering group 3.10.2003 Questionnaire 13.11.2002 3. 6.2004 17. 8.2004 12.10.2004 Steering group

Kallioniemi Janne, Pohjanmaan PPO Ltd Kantanen Mari-Selina, Project Manager, Steelpolis

Kerola Paula, Personnel Administration, Raahen Tevo Ltd Kinnunen Jari, Work Planner, Miilukangas Lp Kivilompolo Seppo, Business Manager, Rautaruukki Ltd Koivuniemi Seppo, Managing Director, Finnblast Ltd Korjus Jari, Vice President, Tietoenator Ltd Korkeamäki Anitta, Sales Representative, Rautaruukki Ltd Korpi-Tassi Pauli, CEO, Pohjanmaan PPO Ltd Kyllönen Veikko, Rautaruukki Ltd Kylmänen Aarno, Managing Director, Pohjolan Automaatio Ltd Kärenaho Pekka, CEO, Raahen Terästuote Ltd Kääriä Kari, Manager, Technology management, Rautaruukki Ltd

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Interviewees/participants/survey respondents/steering group member, position, and company Lakkala Ossi, Supply Chain Development Manager, Rautaruukki Ltd Dates 1.11.2002 9. 1.2003 2. 4.2003 10. 6.2003 29. 8.2003 3.10.2003 12.10.2004 3. 6.2004 17. 8.2004 4.12.2005 Steering group 2.11.2004 21.11.2005 Steering group 17. 1.2003 Questionnaire 1.11.2002 7.11.2002 29. 8.2003 14.10.2003 Questionnaire 16. 1.2003 12.11.2002 2. 4.2003 12. 6.2003 2.11.2004 4.10.2005 Questionnaire Steering group 12. 1.2002 21.12.2003 12.10.2004 10. 2.2005 4.10.2005 17. 8.2004 Steering group 29. 8.2003 12. 6.2003 3. 6.2004 3.11.2004 Steering group 1.11.2002 10.12.2003 10. 2.2005 Questionnaire 21.10.2003 28. 1.2004

Latvala Kari, Sales Engineer, Miilukangas Lp Lindroth Heidi, Senior Technology Adviser, TEKES Maaninen Olavi, Project Manager, YIT Industria Ltd Marttila Osmo, Development Manager, Information management, Rautaruukki Ltd Mattila Olli, Production Manager, Rannikon Konetekniikka Ltd (later Mill Manager, Miilux Ltd)

Miihkinen Veijo, CEO, Raahen Tevo Ltd Miilukangas Pekka, CEO, Miilukangas Lp

Miilukangas Jussi, Manager, Miilukangas Lp Niiranen Keijo, Rautaruukki Ltd Nivala Mauri, Rautaruukki Ltd

Nurmos Taina, Senior Technology Adviser, TEKES Oja Pekka, Rautaruukki Ltd Oravisjärvi Pertti, Production Manager, Rannikon Konetekniikka Ltd Paakkinen Juhani, Pohjanmaan PPO Ltd Paaso Jouko, Professor, University of Oulu Pajukoski Matti, Purchasing Manager, Rautaruukki Ltd Pallaspuro Esa, IT Manager, Rautaruukki Ltd Parviainen Eero, Project Manager, Rautaruukki Ltd Penttilä Anna-Liisa, Transport Planner, JIT Trans Oy Pyhtilä Marjatta, Export Assistant, Raahe Tevo Ltd

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Interviewees/participants/survey respondents/steering group member, position, and company Pyhäluoto Jouko, Production Manager, Raahen Tevo Ltd Raunio Risto, Director, Tietoenator Ltd Dates 28. 1.2004 8.11.2004 4.10.2005 Steering group 16. 1.2003 26.10.2004 7. 2.2005 Questionnaire 12.11.2002 13. 2.2003 12. 6.2003 12.12.2003 2.11.2004 3. 6.2004 17. 8.2004 4.10.2005 Questionnaire

Rintala Juha, Quality Manager, Telatek Ltd

Rytinki Timo, Production Manager, Miilukangas Lp

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Appendix 2. Questions in the interviews

Examples of the questions in the interviews and themes of the workshops in the different phases during the research period:

Examples of the questions related to the business environment:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. How do you determine the steel product industry? What companies in the Raahe area belong to this line of business? How do you see the future of this line of business? What are the main mega trends in this line of business? What are the investments in this line of the business? Who are the customer industries of the steel product industry? What are the requirements of current customers? Networking ­ how do these companies cooperate? What is the real level of networking? Strategic alliances and partnerships ­ what kind of agreements do the companies have? Trust ­ what is the level of trust among the companies? Core competencies ­ What are the real core competences (tacit know-how)? Know-how ­ What know-how is needed in the future? SCM ­ how do you see the meaning of SCM for competitiveness? ICT ­ what is the challenges of ICT? ICT in the companies ­ problems ­ development possibilities? Integration with different industries ­ can you see this in the business environment? Movement from traditional manufacturing towards turnkey solution ­ what is reality? Productivity ­ how to improve productivity? SWOT-analysis of the steel product industry

Questions related to the basic information of companies:

1. Basic information of the companies ­ number of persons, turnover, the year of foundation, line of business, main products and main customers 2. Knowhow ­ Core competence of the company, tacit know-how? ­ What competencies does the company outsource to other companies in the network? ­ What untapped competencies does the company have to provide other companies? ­ What other competencies does the company need in the future? 3. The level of cooperation ­ With which companies in the case network are you cooperating and what kind of cooperation is it? ­ What is the level of cooperation today and what is the need for cooperation in the future? ­ What kind of problems do you have in cooperation? 4. Information systems ­ What kind of ICT systems does the company have? ­ How does the exchange of inter-organizational information exchange happen? ­ What problems do you have in information management? ­ What requirements are needed to integrate ICT systems?

Questions related to the business process modelling and agile practices:

The most important customers /suppliers? The share of turnover of key customers? How much (and what) your company is buying from suppliers? Organization of the tendering and order handling processes: persons and representatives of the tendering process in different phases? 5. Do you know the costs of the tendering and order handling processes? 1. 2. 3. 4.

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6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. How do you measure the tendering and order handling processes? What information is in the RFQ/quotation/order/COO? In which phase of the process information of RFQs/quotations/orders/COOs is used? How (and in which form) does the RFQ/order come into the company? Is it different if the customer is new? How long is the RFQ/quotation normally valid? What kind of negotiations take place before the offer is confirmed a) with the customers, b) with the suppliers, and c) what kind of agreement is made at that stage? What kinds of commitment (e.g. annual agreements) influence the tendering process? What information is the subcontractor given by the focal company during the tendering process? And vice versa? Do the focal company give information (and if what kind of information) to the subcontractors about the tendering negotiations with the end customer? When is the quotation/order put into electronic form/open to all? How are the different versions of the documents stored and updated throughout the process? Is there sufficient information available when necessary? If not, where are the gaps? Is there any information which you need but cannot acquire?

Getting and sharing information:

a) Forecasting: Do you get enough information about the demand, orders from the end customers (and if so, how often and from where)? Is this information useful? Do you get the information regularly, or only when you ask for it? How do you share information with others in the supply chain? Can you suggest any areas for improvement? b) Inventory: Do you get information from your suppliers about inventory? Is this information useful? How often and from where do you get the information? Do you share information with the others in the chain, and with customers? Do you have suggestions for improvement? c) Capacity: Do you get information from your suppliers about capacity? Is this information useful? How often and from where do you get the information? Do you share information with the others in the chain, and with customers? Do you have suggestions for improvement? d) Time schedules: Do you get information from your suppliers about time schedules? Is this information useful? How often and from where do you get the information? Do you share information with the others in the chain, and with customers? Do you have suggestions for improvement?

Process modeling:

1. Do you have modeled a tendering/order handling/production processes? (Information flows, material flows, financial flows) 2. What are the strengths, weaknesses, options and threats of the processes? 3. Do you have any suggestions for improvement of the process model? What are the critical points in the process? 4. What kind of mistakes are there in the documentation process, such as information transfer, and material transfer, etc. 5. What problems can you identify in the process and how do they arise? 6. What suggestions for improvement can you make? 7. What improvements is the company planning to make in the short-term, and in the long-term? 8. Are the employees involved in the improvement process? 9. Manufacturing control: manufacturing actions, critical actions and connections

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Data and information:

­ ­ ­ ­ ­ ­ ­ ­ Terminology of information flow; Content of information; Minimum information needed; Essential information in the network; How specific information has to be (order information, production information, ets.) Rights to use information (roles of the users, rules and limitations of persons) Unnecessary information Version management? (history of information)

Themes related to the change process towards agility

Date: 3.6.2004, Raahe ­ Current state of the case network (in 2004) ­ Visions for 2006 and 2010 Position the level of e-business where the network is based on the development framework of Poirier & Bauer (2000): 1. 2. 3. 4. a) b) c) Current situation ­ Where is the network today? What are the organizational or operational characteristics to choose this particular level? Why is the network at the upper level? 2006 ­ Where is the network in 2006? What should be done to achieve the level? 2010 ­ Where is the network in 2010? What should be done to achieve the level? How to continue the development work? What can do Steelpolis SteelNet project Companies together ­ Required development steps to enhance agility What kind of development improvements is needed to achieve the positioned e-business level in 2006 and in 2010? The starting point is the level positioning in the last workshop. Evaluate also the interpretation done based on the results of the last workshop.

Date: 17.8.2004,Raahe

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Appendix 3. Flowchart of project product process

Supply chain of the project product

Materiaali- ja informaatiovirta asiakkaan ja toimitusverkoston välillä

Customer

Make an invitation of tenders Invitation of tenders Tender Tender to customer

Give an order

Order

Accept an order

Confirmation of the order

Documentation files

Transportation

Acceptance inspection

Steel Steel producer Producer Sales Production

Order processing, Production planning

Documentation collection Inspection report Inspection report

Inspection report

Material order Order of subcontracting

Material processing

Prefabrication

Supplier A

Bending

Supplier B

Order of subcontracting

Welding

Logistics provider

Order of subcontracting

Transportation

Transportation

Transportation

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Appendix 4. Flowchart of mass product process

Supply chain of a mass-produced product

Customer

Tender

Possible order

Receiving order

Person Steel factory responsible for Order handler subcontractor

Tendering process, tender to customer

Order processing

Subcontracting order

Prefabricated operations, rolling

Further processing

Subcontractor

Quenching for the product

Forwarding company

Transferring steelplate

Transportation to customer or steel factory

Transportation to customer

Appendix 5. Ideal business process of SteelNet system

Ideal business process

Information flow

Customer

Send RFQ

Send complementations

Receive quotation

negotiations

Buyer

Receive RFQ (entering into the system) Send sub RFQs Get sub quotations

Processing of preliminary information of RFQ negotiations

Send preliminary information of RFQ

Processing of RFQ and supplier mapping

Production planning and processing of quotation

Combination of quotation

Send quotation

225

1st tier supplier (partners)

Get preliminary information of RFQ Get sub RFQ

Preliminary information handling

Production planning and processing of sub quotation

Send sub quotation

If needed

If needed

2nd tier supplier

Get sub RFQ

Production planning and processing of sub quotation

Send sub quotation

Logistics provider

Get sub RFQ

Logistics planning and processing of sub quotation

Send sub quotation

Ideal business process

Information flow

Customer

Analyzing quotation Receive COO Contract signing

If accepted

Send order

Buyer

Receive order Send COO

Send sub order information Contract signing Resource reservation Project management activities

Project organization establishment

226

1st tier supplier (partners)

Get sub order information

Contract signing

Resource reservation

Project organization establishment

If needed

If needed

If needed Project organization establishment

2nd tier supplier

Get sub order information

Contract signing

Resource reservation

Logistics provider

Get sub order information

Contract signing

Resource reservation

Project organization establishment

Ideal business process

Information flow

Customer

Accept project plan

Needed supporting and information

Buyer

Project plan for own operation Engineering

Resources synchronizing process Project plan acceptation Material procurement Production process

Reporting process/ monitoring

227

1st tier supplier (partners)

Project plan for own operation Engineering

Resources synchronizing process Project plan acceptation Material procurement

Production process

Reporting process/ monitoring

If needed

2nd tier supplier

Project plan for own operation Engineering

Resources synchronizing process

Project plan acceptation

Material procurement

Production process

Reporting process/ monitoring

Logistics provider

Project plan for own operation

Resources synchronizing process

Project plan acceptation

Transportation activities

Reporting process/ monitoring

Ideal business process

Information flow

Customer

Customer control

Reporting of errors

Buyer

Delivery of order

Project analyzing (learning process) Project organization dissolution

228

1st tier supplier (partners)

Delivery of order

Project analyzing (learning process) Project organization dissolution

2nd tier supplier

Delivery of order

Project analyzing (learning process)

Project organization dissolution

Logistics provider

Delivery of order

Transportation activities

Project analyzing (learning process)

Project organization dissolution

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Appendix 6. Results of the functionality questionnaire

The SteelNet functionality questionnaire was sent to the representatives of the companies to be filled out on the internet. The questionnaire consisted of 17 questions divided into the following sections: ease of use, utility, user-friendliness, trust and the need for such a system. There were 5 options which were from: completely disagree (1) to completely agree (5), the sixth option was `don't know' (0). 1 Easy of use 2 0 0 0 0 0 0 1 1 1 3 3 0 0 0 0 0 2 1 0 0 3 4 1 1 2 1 5 1 0 1 2 4 5 3 3 2 3 11 1 1 2 0 4 0 1 1 1 1 4 0 1 1 2 4 Average 4,75 4,75 4,50 4,75 4,69 3,20 2,75 4,00 3,33 3,3,1

First-time use of the application was easy

The use of the application was easy The application functioned well There were enough user instructions Total Utility The information obtained was useful The information was useful for my work The information was sufficiently specific The application enhanced the information flow Total User-friendliness The application was user-friendly Moving within the application pages was easy Use of the application was a learning experience

0 0 0 0 0 1 1 0 0 2

0 0 0 0 0 0 0 0 0 0 1

0 0 0 0 0 1 0 1 0 0 0 0

1 2 3 6 0 1 1 2 1 1 1 3

2 2 0 4 3 2 1 6 1 0 1 2

1 0 1 2 0 0 0 0 0 1 0 1

1 1 1 3 2 1 3 6 3 3 2 8

4,00 3,50 3,50 3,67 4,00 3,25 3,50 3,56 3,50 4,00 2,67 3,29

Trust

I was not worried about the information security I trust that the validity of the information in the system I was willing to share information Total Need for the system I would like to use this system in the future I am willing to use others connected systems in the future I need this kind of system daily in my work Total

Total

1

1: Totally disagree, 2: Partially disagree, 3: 50-50, 4: Partially agree, 5: Totally agree 0: Don't know

ACTA UNIVERSITATIS OULUENSIS

SERIES C TECHNICA

234. 235. 236. 237. 238. 239. 240. 241. 242. 243. 244. 245. 246. 247. 248. 249.

Laitinen, Risto (2006) Improvement of weld HAZ toughness at low heat input by controlling the distribution of M-A constituents Juuti, Jari (2006) Pre-stressed piezoelectric actuator for micro and fine mechanical applications Benyó, Imre (2006) Cascade Generalized Predictive Control--Applications in power plant control Kayo, Olga (2006) Locally linear embedding algorithm. Extensions and applications Kolli, Tanja (2006) Pd/Al2O3 -based automotive exhaust gas catalysts. The effect of BaO and OSC material on NOx reduction Torkko, Margit (2006) Maatilakytkentäisten yritysten toimintamalleja. Laadullinen tutkimus resursseista, kehittymisestä ja ohjaustarpeista Hämäläinen, Matti (2006) Singleband UWB systems. Analysis and measurements of coexistence with selected existing radio systems Virtanen, Jani (2006) Enhancing the compatibility of surgical robots with magnetic resonance imaging Lumijärvi, Jouko (2006) Optimization of critical flow velocity in cantilevered fluidconveying pipes, with a subsequent non-linear analysis Stoor, Tuomas (2006) Air in pulp and papermaking processes György, Zsuzsanna (2006) Glycoside production by in vitro Rhodiola rosea cultures Özer-Kemppainen, Özlem (2006) Alternative housing environments for the elderly in the information society. The Finnish experience Laurinen, Perttu (2006) A top-down approach for creating and implementing data mining solutions Jortama, Timo (2006) A self-assessment based method for post-completion audits in paper production line investment projects Remes, Janne (2006) The development of laser chemical vapor deposition and focused ion beam methods for prototype integrated circuit modification Kinnunen, Matti (2006) Comparison of optical coherence tomography, the pulsed photoacoustic technique, and the time-of-flight technique in glucose measurements in vitro Distributed by OULU UNIVERSITY LIBRARY P.O. Box 7500, FI-90014 University of Oulu, Finland

Book orders: OULU UNIVERSITY PRESS P.O. Box 8200, FI-90014 University of Oulu, Finland

UNIVERSITY OF OULU P.O. Box 7500 FI-90014 UNIVERSITY OF OULU FINLAND

A C TA

U N I V E R S I TAT I S

O U L U E N S I S

S E R I E S

E D I T O R S

A B C D E F G

SCIENTIAE RERUM NATURALIUM Professor Mikko Siponen HUMANIORA

Professor Harri Mantila

TECHNICA

Professor Juha Kostamovaara

MEDICA

Professor Olli Vuolteenaho

SCIENTIAE RERUM SOCIALIUM Senior Assistant Timo Latomaa SCRIPTA ACADEMICA Communications Officer Elna Stjerna OECONOMICA Senior Lecturer Seppo Eriksson

EDITOR IN CHIEF

Professor Olli Vuolteenaho

EDITORIAL SECRETARY Publication Editor Kirsti Nurkkala

ISBN 951-42-8147-0 (Paperback) ISBN 951-42-8148-9 (PDF) ISSN 0355-3213 (Print) ISSN 1796-2226 (Online)

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An agile supply chain for a project-oriented steel product network

233 pages

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