UNIVERSITY OF GRONINGEN
Organizational
obstructions of hybrid
supply chain strategies
-
Censured -
Master’s Thesis
Business AdministrationOperations & Supply Chains
4/1/2009
Franciscus Josephus Savenije S 1654950
Supervisor: Prof. Dr. Dirk-Jan Kamann
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Preface
Almelo, April 1st, 2008
You are now reading my master’s thesis which is the end product of seven months of hard work and perseverance, as well as my almost seven year period as a student. I performed the research independently under dedicated supervision of Prof. Dr. Dirk-Jan Kamann and Dr. Gera Welker. The objective of the project was to enhance the successful adoption of hybrid lean and agile supply chain strategies; as the number of (failed) attempts is increasing.
Instead of just looking at the success stories, the problem has been approached from the other side. By analyzing the differences and contradictions between the leanness and agility, the conflicting objectives have been identified. Based on this, the way to successfully implement a hybrid strategy has been proposed. Apart from that, it was a perfect excuse to take a look into four totally different companies, which to me was very interesting.
I would like to thank everyone who contributed in the establishment of my thesis as well as my further education. Special thanks go to the gentlemen who were so kind to take the time to give an interview. Furthermore, I would like to thank both my supervisors, as without their positive feedback this thesis would not have been the same.
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Summary
An increasingly important part of the strategy concerns the management of the supply chain. The supply chain strategy determines the goals that must be achieved with supply chain management. Two well-known concepts in supply chain strategy literature are leanness and agility. Leanness is focused on maximizing efficiency and agility is focused on maximizing flexibility and speed. Nowadays, an increasing number of companies find their strategy unable to meet demand of the increasingly strenuous customer. Demand characteristics faced are becoming complex and cannot be dealt with by adopting a homogenous lean or agile supply chain strategy. The solution seems to be to adopt a combined lean and agile strategy. As practice shows, many companies have trouble
implementing such a successful hybrid supply chain strategy. It is the objective of this research to get a clearer view about the difficulties that occur when adopting such a strategy. The basic assumption is that these difficulties are caused by contradictions in performance objectives, organizational and supply chain design decisions.
This has resulted in the following research question being formulated:
What are the contradictions in market requirements, organizational and supply chain design
decisions between companies adopting a lean strategy and companies adopting an agile supply chain strategy?
Based on literature research, the differences in performance between both supply chain strategies have been translated into differences of organizational kind. These organizational issues have been divided in issues concerning organizational structure, organizational culture and the organizational interaction with the supply network. Several concepts have been used to characterize the
differences, based on which propositions have been formulated. The underlying assumption has been that the strategy of the organization is reflected in its design.
Consequently, the propositions have been tested in practice at four different companies, based on research of company literature (annual reports, websites) and by doing interviews.
The general conclusion of the research is that when clearly separating from each other the
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Contents
Preface ... 2 Summary ... 4 1 Introduction ... 8 2 Research Methodology ... 11 2.1 Literature Study ... 11 2.2 Field Research... 12 3 Theoretical Framework ... 143.1 General objectives of the supply chain strategy ... 14
3.2 Determinants of the supply chain strategy ... 16
3.3 Performance differences between Leanness and agility ... 18
4 Organizational design decisions ... 21
4.1 Performance dimensions... 21
4.2 Organizational Structure ... 22
4.3 Organizational Culture ... 25
4.4 Interaction with the supply network ... 28
4.5 Overview in Conceptual Model ... 30
5 Case studies ... 32
5.1 AKZO Nobel Industrial Chemicals ... 33
5.2 Fusebox... Fout! Bladwijzer niet gedefinieerd. 5.3 ESI Marine & Offshore ... 43
5.4 ASML ... 50
6 Analysis of results ... 57
7 Conclusion ... 64
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1
Introduction
In business, companies formulate a strategy with which they perceive they can optimally meet requirements of the market they serve, given their specific capabilities. In many cases, a focus is set on a certain group of customers with a coherent parcel of requirements. The requirements of these customers must be reflected in the organization. In the modern day market environment, companies must be able to meet demand of the increasingly strenuous customer. An increasingly important part of the strategy concerns the management of the supply chain. “The long-stressed importance of focusing on core competencies is resulting in the increased outsourcing of operations which is at the heart of Supply chain management” (2006, Kemppainen & Vepsäläinen, p.706). This has made the supply chain strategy an important derivate of the corporate strategy. Supply chain strategy determines the goals that must be achieved with supply chain management.
In literature, many definitions for supply chain management can be found. Some define it as “the coordination of resources and the optimization of activities across the value chain to obtain competitive advantages” (2008, Gunasekaran et al., p.550). The definition by Slack et al. (2004) is similar: “Supply chain management is concerned with managing the flow of materials and
information between the operations which form the chain of a supply network” (2004, Slack et al., p. 444). Simchi-Levy et al. (2007, p. 1) defines supply chain management as: “a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that
merchandise is produced and distributed, at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirements.” The core lies at increasing coordination and integration between the various companies in the supply chain. The general assumption is that this improves the performance of individual companies as well as the supply chain as a whole.
The execution of a supply chain strategy has implications for the way the organization is shaped. The company must be organized in such a way that it can best achieve its strategic goals. “The
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Figure 1.1: The conceptual model
The specific supply chain strategy that a company formulates depends on the market environment and essentially sets the required performance. There are many characterizations with which supply chain strategies have been described. One characterization is leanness and agility. “Lean works best in high volume, low variety and predictable environments (…) Agility is needed in less predictable environments where demand is volatile and the requirement for variety is high” (2000, Christopher, p. 39). Leanness essentially aims at cost minimization, where agility tries to meet customer demand in all its variety and variability. Companies with a lean supply chain strategy face different market requirements compared to their agile counterparts. Therefore, the organizational design decisions (structure and culture) are different well as the management of the suppliers.
The concepts of leanness and agility can be seen as useful guiding principles of how a company facing a certain market should be designed. However in practice, the demand characteristics faced are becoming complex and cannot be dealt with by adopting a homogenous lean or agile supply chain strategy. In many situations, demand faced by an organization is not met by either a lean or an agile supply chain strategy. The solution is to adopt a two-lane or hybrid strategy. “In that case, there will be some products where demand is stable and predictable, and some products where the converse is true (2000, Christopher, p. 40). The challenge is to combine objectives that might be mutually
contradicting into one organization. In literature, examples are available of companies that have successfully adopted hybrid strategies. Probably the best known example is Zara. This Spanish fashion chain manages to offer both demand driven fashionable goods combined with low-cost mass production generics (2007, Simchi-Levy et al.). The secret of the success seems to lay in a clear segmentation of goods offered. This way, contradicting objectives are delegated to different parts of the organization so that confusion about priorities will be eliminated. As practice shows, many companies have trouble matching the success that Zara exhibits. An example of a company that is having trouble adopting a hybrid strategy is Score. This company (a company active in the fashion retail industry) is failing to make a clear segmentation of the goods it offers and this has negative consequences for the effectiveness of its operation (2009, Hagen). The trouble that companies have with adopting hybrid strategies is underwritten by Kamann & Steller (2007). They state that, “the
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challenge for most companies may therefore be on an organizational nature” (2007, Kamann & Steller).
It is the objective of this research to get a clearer view about the difficulties that organizations have when adopting a hybrid strategy. The basic assumption is that these difficulties are caused by contradictions in performance objectives, organizational and supply chain design decisions. Research question:
What are the contradictions in market requirements, organizational and supply chain design
decisions between companies adopting a lean strategy and companies adopting an agile supply chain strategy?
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2
Research Methodology
To get a clear view of the difficulties that companies face when pursuing a hybrid strategy, the differences between the paradigms must become clear. Based on literature, propositions have been come up with that exemplify the conflict points between leanness and agility. These propositions have been tested in a field research, where four different companies have been investigated.
2.1
Literature Study
To get a clear view of the current theoretical knowledge about the subject, a literature overview has been performed. Both books as well as scientific articles have been used. Books have been useful for the description of the concepts which aren´t subject to real development any more.
For the ‘mature’ concepts of organizational theory, the book by Jones (2007) has been found very useful, as it provided a clear overview of al the relevant theories of the subject. In addition the book of Slack & lewis has been used. Furthermore, books by Simchi-Levy et al. (2007), and Slack et al. (2004) have been used. The book by Womack et al. (2008), which describes the development of the Toyota Production System, was also found very useful for the understanding of the essentials of lean production. The subjects directly linked to supply chain management are much more in
development. Views on leanness and agility are still dynamic and there is yet still disagreement about certain details. By searching scientific internet databases Google Scholar, Emerald, Science Direct and EBSCO-host with terms like, supply chain management, supply chain strategy, leanness, agility, lean, agile, hybrid strategies, structure, culture etc, a large list of articles has been found. Journals in which these papers have been published are, among others, Supply Chain Management: an international journal, Journal of Operations Management, International Journal of Physical Distribution & Logistics Management, Journal of Business Logistics, Industrial Marketing Management, International Journal of Production Economics, California Management Review, International Journal of Retail &
Distribution Management and Harvard Business Review.
Among the papers used, some are focusing on a specific supply chain strategy, but also papers have been included that compare leanness and agility with each other. Furthermore, papers have been found that focus on a specific part of a supply chain strategy, e.g. employee agility, or lead-time reduction. In total, the papers used provide a complete overview of the relevant theoretical base of the subjects. This opinion is reinforced by the fact that a lot of theoretical overlap could be found between the several articles.
The literature overview has been initiated with providing an overview of the objectives that a company might have when formulating a supply chain strategy. This is useful because it sketches a view of the context in which supply chain strategies are situated, and it gives an impression of what objectives are pursued with these strategies. Furthermore, it illustrates the fact that there are a lot of common objectives pursued by supply chain strategies, whether lean or agile.
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performance dimensions were still well comparable. A particularly useful paper for this part of the research was Narasimhan et al. (2006). In this paper, a detailed comparison of the performance characteristics of low performers, lean performers and agile performers is given. This paper provides the relative performance of both paradigms on seven different performance dimensions. The distinction in market winners and market qualifiers by Christopher & Towill (2001) is much less detailed. The distinction by Naylor et al. (1999) hardly points out any clear differences. As the paper by Narasimhan et al. (2006) provides a clear overview in the performance differences between leanness and agility, this was the main paper used to characterize the differences. Where necessary or insightful, other papers have been used to clarify or exemplify differences.
Based on the literature research, the differences in performance capabilities and objectives have been translated into concrete organizational differences. The underlying assumption is that the performance differences must have their consequences on the way the organization has been designed. There were two important subjects of research. These are the design of the organization (organizational structure and culture) and the interaction with the suppliers. Based on articles, propositions have been formulated about the various organizational design decisions. The
propositions about the interaction of the organization with its suppliers have been almost entirely based on articles. In many papers, descriptions were given that give reason to propose a
characterization of how the interaction with the suppliers should be arranged by lean or agile companies.
The literature research has resulted in a theoretical framework that includes a description of the context in which supply chain strategies are formulated, a description of the performance differences between lean and agile companies, and propositions about how these differences have their effect on the design of the organization and the interaction with the supply network. The theoretical framework has been tested in a field research.
2.2
Field Research
In order to validate the propositions about lean and agile organizations in practice, they have been tested at four different companies; two of which pursue a lean strategy, and two pursue an agile strategy. The companies investigated are:
- Fusebox, (fake name)
- Akzo Nobel Industrial Chemical, Delfzijl
- Electronics Systems Integrator (ESI, fake name) - ASML, Veldhoven
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However, as the findings in all four companies walked in line with the propositions grounded in literature, it is safe to assume that the views of the respondents are conform reality.
At AKZO Nobel, ESI and ASML, one interview was conducted with people directly active in the purchasing function (respectively Site Purchasing Manager, Manager Procurement and Procurement Analyst). At Fusebox, two interviews have been conducted. The first interview has been conducted with a Program Manager Lean Production. As some questions were out of the field of expertise of the first respondent, a second interview was planned with the Purchasing Manager, who was well able to fill in the blanks left by the first respondent. Because of their every-day experience, the respondents were able to give a good description of the specific market circumstances in which their company was in. Furthermore, a proper indication of the organizational consequences of their supply chain strategy could be found. The views of the respondents are reflected in literature, and
The information generated at the companies combined resulted in a clear overview of the
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3
Theoretical Framework
In the introduction, the context of this research has been outlined and his has resulted in the formulation of the research question. An introduction has been given to the most important
concepts concerning this research such as supply chain strategies, leanness and agility. In this chapter the theoretical grounds will be further deepened. This chapter will first take some steps back to give a more detailed description of the theoretical context in which supply chain strategy issues can be placed. There are several objectives being pursued when a company formulates a supply chain strategy. These objectives are useful irrespective what supply chain the company pursues. There are market circumstances that require the supply chain strategy to pursue certain specific goals. These circumstances determine the specific objectives of the supply chain strategy; these are the
determinants of the supply chain strategy. In section 3.1, an overview will be given of the general objectives that are pursued when formulating a supply chain strategy. In section 3.2, the
determinants of the supply chain strategy will be treated. Furthermore, they will be linked to the lean and agile supply chain strategy. Finally, in section 3.3, more details about the differences between leanness and agility will be overviewed. Based on an analysis of the performance capabilities and the performance requirements, a better picture of the differences between the strategies is given. In section 3.4, the differences between the supply chain strategies will be translated into the consequences for organizational design. For both the lean and the agile supply chain strategy, the consequences for the adopting organization will be described.
3.1
General objectives of the supply chain strategy
As stated in the introduction (chapter 1), companies are increasingly relying on their suppliers for the achievement of their strategic goals. “A key feature of present day business is the idea that it is supply chains that compete, not companies, and the success or failure of supply chains is ultimately defined in the marketplace by the end customer” (2001, Christopher & Towill, p. 235). This has been underwritten by other authors. “It is stressed that the role of supply chain as a whole in maximizing the total economic yield will increase” (2006, Kemppainen & Vepsäläinen, p. 705). “The effectiveness of an organization’s response to rapidly changing market conditions will be largely determined by the capabilities of trading partners” (2001, Power et al., p. 248). “Supply chain management has been considered as the most popular operations strategy for improving organizational competitiveness in the twenty-first century” (2008, Gunasekuran et al., p. 549). “The long-stressed importance of focusing on core competencies is resulting in the increasing outsourcing of operations which is at the heart of SCM” (2006, Kemppainen & Vepsäläinen, p.706).
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strategies how to increase the effectiveness of the supply chain. These strategies might have multiple objectives, which together increase the competitiveness of the supply chain. Naylor et al. (1999) makes a distinction between six objectives, these are: The use of market knowledge, supply chain integration, lead time compression, elimination of waste, rapid reconfiguration, robustness, and smoothened demand.
Use of market knowledge
“All businesses in any supply chain must focus on the end-user. (…) If market knowledge is not exploited and the supply chain is to be made more responsive then the members of the supply chain run the risk of, for example, producing too wide a variety of products at short notice when there is insufficient demand to justify the extra cost”. It is becoming increasingly important to communicate market knowledge throughout the supply chain. According to Kemppainen & Vepsäläinen,
“information sharing and collaboration are praised everywhere as the new dominant operating mode” (2006, p. 705). Bessant et al (2003) as well stress the influence of learning and communication throughout the supply chain. Multiple authors mention the communication of real-time point-of-sale data upstream in the supply chain in retail chains (1999, Perry et al., 2004, Christopher et al., 2006, Kemppainen & Vepsäläinen). Market sensitivity is one of the key features of agility (1999, 2000, Christopher, 2004, Christopher et al., 2007, Masson et al.). The extent to which information about real demand is communicated upstream, is still subject to discussion. According to Mason Jones & Towill, (1999, p. 68), “In the information enriched supply chain each player, no matter how far upstream, receives the marketplace data directly”. Masson et al. (2007, p. 252) challenges this statement. “The somewhat advanced notion of a virtual web-based real time demand shared across the supply chain, at least down to the clothing manufacturers, seemed still some way un the future. While there were close partnership relationships between retailers and the intermediaries there was little if any relationship between the retailers and the garment manufacturers. Many of the retailers literally did not even know who manufactured their products and this left them vulnerable to occasional scandals on the use child labor in some far-east countries.”
Supply Chain Integration
No matter what paradigm is adopted, it is important for businesses to work together to form an integrated supply chain focusing on meeting the demands of the end-user or final customer of the supply chain. Although the terminology differs the essence is the same. According to Frohlich & Westbrook (2001, p. 185), “The most successful manufacturers seem to be those that have carefully linked their internal processes to external suppliers and customers in unique supply chains”. In order to ease the flow of material, cash, resources and information, all boundaries must be removed. With the integrated supply chain the information flows will be simplified, streamlined and optimized reducing waste and lead times. (1999, Naylor et al.) This also counts for the flow of information. Also Christopher (2000) stresses the need for the integration of business processes.
Lead time compression
“In recent times lead time compression has become a major order winner” (1999, Naylor et al., p. 110). There are two different objectives that are served by a reduction of lead times. It lowers costs and it increases the speed and responsiveness of the supply chain. The reason for lead time
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Elimination of waste
A major objective of any strategy is to achieve cost savings. For supply chain strategies this isn’t any different. The supply chain is analyzed as a whole in order to identify all non-value adding activities and remove them. Mason-Jones & Towill (1999) make a distinction between eight types of waste. These are:
- Waste of time - Waste of materials - Waste of labour - Waste of capacity
- Waste of computing power - Waste of management effort - Waste total cycle time - Waste information flow
The decision if a certain activity is considered as waste depends on whether it is valued by the market place thus, whether customers are willing to pay extra money for it. Therefore, some companies might consider a certain inventory level necessary while companies active in another market environment call it waste. The focus of lean companies lies on minimization of every type of waste as it lowers total costs. For agile companies, the focus lies on the reduction of the total cycle time and the acceleration of information flows. Total cycle time is the elapsed time between
customer enquiry and customer need being met. The enriched information supply chain refers to the communication of real time end-customer demand upstream in the supply chain.
Rapid reconfiguration
Another objective of a company is to be able to respond quickly to changes in information from the market. “This requires lead time compression in terms of flow of information and material and the ability, at short notice, to change to a wide variety of products. Therefore, the ability to ‘rapidly reconfigure’ the production process is essential”. From the objective of cost reduction, rapid reconfiguration is a sensible objective as well as the ability to change products quickly is also important. Any time wasted in changing over to a new product is muda and therefore should be eliminated. The ability to reconfigure quickly has impact upon the ability to be flexible to meet changes in the market (1999, Naylor et al.).
3.2
Determinants of the supply chain strategy
Where the previous objectives can be seen as complementary and mutually reinforcing, the final two are contradicting. A company either has the objective to create a level schedule, or pursue
robustness. The sensibility of the objective depends on the specific market characteristics that the company faces. In this section, an overview will be given of these characteristics, which can be seen as determinants of the supply chain strategy. Furthermore, the objectives will be linked to the supply chain strategies leanness and agility.
Level Scheduling - Leanness
Based on demand characteristics, Fisher (1997) makes a distinction between functional and innovative products. “Functional products (…) satisfy basic needs, which don’t change much over time. They have stable, predictable demand and long life cycles. But their stability invites
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and emphasizes the predictability of demand which is caused by the low variety and variability of the product and the high volume in which it is sold. According to Lee (2002), the predictability of demand depends on characteristics of the supply market as well. A stable supply process has a mature manufacturing process and underlying technology. Furthermore, the supply base is well established (lee , 2002). Together, these characteristics make the environment a stable, predictable setting. The uncertainty that does occur can easily be fit in forecasts and that is what the company should do. Based on forecasts, efficient schedules can be made that maximize utilization of assets and therefore minimize costs per product. Furthermore, uncertainties are further removed by pursuing the general objectives described in section 3.1.
Based on definitions of leanness that can be found in literature, it can be safely stated that a lean supply chain strategy is appropriate to ensure a level schedule. According to Slack et. al. (2004, p. 519) leanness means “moving towards the elimination of all waste in order to develop an operation that is faster, more dependable, produces higher quality products and services and, above all, operates at low costs” According to Naylor (1999), “leanness means developing a value stream to eliminate all waste, including time, and to ensure a level schedule.” “The focus of the lean approach has essentially been on the elimination of waste or ‘muda’” (2001, Christopher & Towill). Achanga et al. (2006) view lean manufacturing primarily as a tool to improve productivity. The stability of the market reduces the opportunities for companies to distinguish themselves from competitors. The best way to do this is by being the cheapest. This declares the emphasis on the reduction of costs throughout the supply chain.
Robustness - Agility
The opposite of functional products are innovative products (1997, Fisher). Innovative products have very unstable, unpredictable demand and because of their short product life cycles, innovations must keep on happening. The uncertainty and unpredictability of demand as well as the low demand volume that these products have, requires an organization that is able to cope with this (2000, Christopher). Lee adds supply uncertainty to these characteristics. An ‘evolving’ supply process has a manufacturing process and underlying technology which is still under development. Furthermore, the supply base may be limited in size and experience (2002, Lee). These market circumstances are fundamentally different compared to the circumstances in which level schedule is appropriate. Here the demand uncertainty is that high that it is impossible to come up with workable forecasts. Instead, the company should strive to be able to meet demand as soon as it is noticed. Then the company is able to meet the specific demands of the customer and deliver on time. The company should have a pro-active attitude towards the market and be able to meet demand in al its variety and variability. The company should be in a position to take advantage of these fluctuations to maximize their profits.
An agile supply chain strategy fits an unpredictable market environment. According to Slack et. al. (2004, p. 448) “agility is a type of responsive flexibility. (…) [It] incorporates an emphasis on market focus and leanness (where it does not interfere with flexibility) as well as fast movement of goods and services through the supply chain and shared information along the chain. What the concept of agility brings is the increased emphasis on exploring creative ways of adapting to market
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Agility is also described as: “using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace” (1999, Naylor et. al. p. 108, 1999, Mason-Jones & Towill, p. 61). “The essence of an agile supply chain is its ability to respond quickly and efficiently to a volatile marketplace” (1999, Mason-Jones & Towill, p. 67). An agile supply chain strategy copes with the volatility of the market by enhancing the flexibility and the responsiveness of the supply chain. The high market uncertainty and demand volatility would require large safety stocks in order to guarantee acceptable delivery reliability. However, the short product life cycles and large product variety would make this highly risky, as the risk of obsoleteness would be very high. Therefore, by being flexible and responsive, the organization tries to be robust to sudden changes in the marketplace.
The most fundamental difference between lean and agile supply chain strategies is how they approach their environment. Lean companies view their market environment as stable, and accept this environment as a fact. The organization is designed in such a way that the environment is met optimally. The products that customers demand are offered in exactly the variety and variance that is demanded. By constantly improving processes, efficiency of production is increased. Agile companies approach their environment different. The environment is viewed as constantly changing and it is not possible to change the organization constantly along. The solution is to design the organization in such a way, that it is able to meet demand even as it is changing. It is the objective to meet customer demand in all its variety and variability. A clear illustration of the differences between the market approach of leanness and agility can be found in Christopher et al. (2004, p. 368): “conventional wisdom holds that the way to cope with uncertainty is to improve the quality of the forecast. Yet, by definition, the volatility of demand and the short life-cycles found in many fashion markets make it highly unlikely that forecasting methods will ever be developed that can consistently and accurately predict sales at the item level. Instead ways must be found of reducing the reliance that
organizations place upon the forecast and instead to focus on lead-time reduction.”
3.3
Performance differences between Leanness and agility
In the sections above, the differences in the objectives between lean and agile supply chain
strategies have been overviewed. The definitions of leanness and agility clarified the differences even more. However it is hard to, just based on what has been said so far, propose concrete organizational design decision. There must be a more detailed overview of the differences between leanness and agility. The way by doing this is by getting a better picture of the performance differences between leanness and agility. Based on literature (Naylor et al., 1999, Narasimhan et al., 2006) the
performance capabilities as well as the performance requirements will be described.
Performance capabilities
19 Low performers value value improvement (compared to low) value improvement (compared to low) performance difference (between
Lean and Agile)
Cost -0,296 0,178 0,474 -0,073 0,223 0,5
Conformance quality -0,936 0,146 1,082 0,463 1,399 1,3
Design quality -1,08 0,199 1,279 0,483 1,563 1,2
Delivery reliability -0,639 -0,164 0,475 0,757 1,396 2,9
Delivery speed -0,669 -0,213 0,456 0,861 1,53 3,4
New product flexibility -0,334 -0,1 0,234 0,42 0,754 3,2
Process flexibility -0,322 -0,176 0,146 0,538 0,86 5,9
Lean performers Agile performers
Table 3.1: overview of performance of strategies. Based on Narasimhan et al. (2006)
The column ´low performers´ of the table is taken as benchmark to compare the relative
performance improvements of the lean and agile performers. This is how the table works: when looking at the performance dimension ´cost´, one can see that performance of the low performers is -0,296. Performance of the lean performers is 0,178, which is an improvement of 0,474. The agile performance improvement is 0,223. In the last column, the relative difference between the lean and agile performers is given. Here, the agile improvement is divided by the lean improvement. By dividing 0,474 by 0,223 one gets 0,5 (rounded figure). For the other performance objectives, calculations are done the same way.
Figure 3.1: Graphic overview of findings. Source: Narasimhan et al. (2006)
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Performance requirements
Now the performance capabilities of lean and agile companies have been outlined, it is also wise to gain insight in what performance is wished for by customers. Slack & Lewis (2002) give insight in the principle of order qualifiers and order winners by Hill (1993): “Qualifying factors may not be the major competitive determinants of success, but (…) they are those aspects that of competitiveness where the operation’s performance has to be above a particular level just to be considered by the customer” (2002, Slack & Lewis, p. 51). “Order-winning factors are things that directly and
significantly contribute to winning business. They are regarded by customers as key reasons for purchasing the product or service. They are, therefore, the most important aspects of the way a company defines its competitive stance” (2002, Slack & Lewis, p. 51). Christopher and Towil (2001) have translated these concepts into market qualifiers and market winners, but it means the same. In figure 3.2, it is has been overviewed which performance dimensions are considered market qualifiers or market winners.
Fig 3.2: the distribution of market qualifiers and market winners (2001, Christopher & Towill)
The terminology of the performance dimensions slightly differs from the one used by Narasimhan et al. (2006). The terms ‘service level’ refers to the level of customer support, product service, product support, flexibility to meet customer demands and flexibility to meet market changes (1999, Naylor et. al.). This dimension can be seen as a combination of the dimensions ‘delivery reliability’, ‘new product flexibility’ and ‘process flexibility’. For the rest, the dimensions are similar. When comparing the performance capabilities on the dimensions with the respective importance (shown in figure 3.2), one can say that, in general, performance is best where it is best appreciated. For lean supply chains, a low cost-level is the market winner. All other dimensions are qualifiers. Not coincidently, this is the dimension where lean companies outperform their agile counterpart. For agile supply chains, the order-winner is service level. Again, the product and process flexibility, as well as delivery reliability are un-equalized. Another dimension on which agile supply chain perform superior is speed (lead time). This however is not considered to be a market winner.
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4
Organizational design decisions
In this chapter, the organizational implications for the pursuit of either a lean or an agile supply chain strategy will be proposed. Based on the theoretical research carried out in the previous chapter 3, the differences in performance objectives will be translated into different organizational design differences. The flexibility that agile companies exhibit, must have its origin somewhere in the organization; just as the superior efficiency must have its reflection in lean organizations. It would be too shortsighted to just look at one company. As for organizations, “effectively managing the supply chain is vital to the organizational success” (2007, Ketchen & Hult), it is important to include the suppliers in the analysis. “A supply network is an interconnection of organizations which relate to each other through upstream and downstream linkages between the different processes and activities that produce value in the form of products and services to the ultimate customer” (2002, Slack & Lewis, p. 181). However, in this research only the supply side of the supply network is taken into account. Thus when the term supply network is mentioned somewhere in this paper, a
reference is made to the suppliers of the organization. The basic assumption of this research is an organization that plays a leading role in its supply network. This company has adopted the lean or agile paradigm and this has had its influence on the organization as well as its suppliers. In order to achieve the performance requirements appropriate for the lean or agile paradigm, the organization and the supply network have been arranged in a certain way. The conceptual framework (figure 1) gives an overview of the environment in which an organization adopts its supply chain strategy. In the closing of this chapter, for both strategies, the conceptual framework will be filled in.
4.1
Performance dimensions
In paragraph 3.3, performance dimensions have been used to describe the performance capabilities (Narasimhan et al., 2006) and the performance requirements (Naylor et al., 1999) of lean and agile supply chain strategies. The papers by Narasimhan et al. (2006) and Christopher & Towill (2001) both used different characterizations of performance dimensions. Dimensions by Narasimhan et al. (2006) are very extensive, but hard to use in an interview, as it takes too much time to explain the
distinction between the various dimensions. The dimensions used by Christopher & Towill (2001) are somewhat oversimplified and furthermore, the paper lacks a clear clarification of the dimensions. Therefore, the choice has been made to use the performance dimensions as described by Slack et al. (2004). Then, a distinction is made between five widely known and accepted performance
dimensions. Furthermore, it is easy to explain them. The performance objectives are (Slack et al., 2004, p. 44):
- Quality, do things right - Speed, do things fast
- Dependability, do things on time
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Based on the literature treated in section 3.3, the following propositions can be formulated: Proposition: For companies pursuing a lean supply chain strategy, the order-winning criteria are on the cost-dimension.
Proposition: For companies pursuing an agile supply chain strategy, the order-winning criteria are on the dimensions speed and flexibility.
The market requirements faced by the organization might either require a lean or agile supply chain strategy. In this chapter it will be investigated what specific organizational design decisions a company adopting a lean or agile supply chain strategy would make. In other words, based on literature, the answers on two questions will be proposed:
- What should an organization and its supply network pursuing a lean supply chain strategy look like?
- What should an organization and its supply network pursuing an agile supply chain strategy look like?
The organization must be able to perform on the levels required by the market. As literature
suggests, one company should have a dominating role in the supply chain. “Effective management to achieve competitive advantage includes the ability of one of the players to manage, or orchestrate, the often complex network as a whole and ideally to focus on, or make the best use of, the core competencies and strengths of the individual network suppliers” (2007, Masson et al., p. 239-240). This player is called the supply chain coordinator. The necessity of a supply chain orchestrator is underwritten in literature about leanness as well as agility. In the book of Womack et al (1991), plenty examples and anecdotes can be read that confirm the orchestration of the supply network by Toyota. According to Christopher et al. (2004, p. 371), “in an agile network there is a tendency for the focal firm to act as the ‘orchestrator’ of the network.” The focal company in the conceptual
framework is assumed to be the supply chain orchestrator. This research is focused on the company having the dominating role in the supply network. Subject to analysis will therefore primarily be the adopting organization and the interaction of that company with its suppliers.
4.2
Organizational Structure
According to Jones (2007), the design of the structure of an organization involves the formal system of task and authority relationships that controls how people are to cooperate and use resources to achieve the organization’s goals. The organizational structure controls coordination and motivation; shapes behavior of people and the organization. It is a response to contingencies involving
environment, technology, and human resources. Furthermore, the structure evolves as organization grows and differentiates. When the structure of an organization is being designed, decisions are made that shape the organization. When looking in the dictionary for a definition of structure, one can read: “anything composed of parts arranged together in some way; an organization” (2009, http://dictionary.reference.com). It is not relevant to describe the structure of an entire
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- Choosing the levels of horizontal and vertical differentiation - Balancing differentiation and integration
- Balancing centralization and decentralization - Balancing standardization and mutual adjustment
The relevance of these organizational design decisions is underwritten by literature about supply chain management. According to Butterman (2008), the organizational structural barriers in a supply chain context include logistical staff specialization, internal cross-functional integration, formal control, and centralization. “These variables are consistent with specialization, integration
formalization, and centralization as classic dimensions of organizational design” (2008, Butterman et al., p. 956). “Differentiation is the distribution of work to people and departments. A distinction can be made between horizontal and vertical differentiation. “Vertical differentiation is the way an organization designs its hierarchy of authority and creates reporting relationships to link
organizational roles and subunits. (…) Horizontal differentiation is the way an organization groups organizational tasks into roles and roles into subunits (functions and divisions)” (2007, Jones, p. 88-94). When differentiation is applied in an organization, people perform different tasks that eventually must lead to the achievement of the strategic goals. In order to achieve this, tasks, functions and departments must be integrated. “Integration is the process of coordinating various tasks, functions, and divisions so that they work together and not at cross purposes” (2007, Jones, p. 96). When the organization becomes vertically differentiated, authority to make decisions gets distributed across the organization. The distribution can be limited to the top of the organization. The decision whether to keep authority centralized or to decentralize it to lower parts of the organization is also an
important decision (2007, Jones, p. 101). It has to be specified how employees are to perform their organizational roles. “Standardization is conformity to specific models or examples – defined by sets of rules and norms – that are considered proper in a given situation. (…)Mutual adjustment is the process through which people use their judgment rather than standardized rules to address
problems, guide decision making, and promote coordination” (2007, Jones, p. 103). There has to be found a balance between the two, so that some actions are predictable and basic goals are achieved, yet it gives employees the freedom to behave flexibly so that they can respond to new and changing situations creatively.
Mechanistic versus organic structures
The organizational design decisions described above can be merged into the two concepts of
mechanistic and organic structures. “Mechanistic structures are designed to induce people to behave in predictable, accountable ways. Decision-making authority is centralized, subordinates are closely supervised, and information flows mainly in a vertical direction down a clearly defined hierarchy. In a mechanistic structure the tasks associated with a role are also clearly defined. At the functional level, each function is separate, and communication and cooperation among functions are the
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As lean organizations face a stable environment, they function best when organized on a mechanistic way (2007, Sherehiy et al). The predictable demand makes it possible to totally adapt the
organization to the products and services the organization offers. Production facilities can be focused on exactly the volume and mix of products which are currently offered and there is no need for additional flexibilities that lower efficiency. New product introductions occur rarely, and when they do, the company has time to adapt the organization.
Proposition: Companies with a lean supply chain strategy have a mechanistic organization. “Organic structures are at the opposite of the organizational design spectrum from mechanistic structures. Organic structures promote flexibility, so people initiate change, and can adapt quickly to changing conditions. Organic structures are decentralized so that decision-making authority is distributed throughout the hierarchy; people assume the authority to make decisions as
organizational needs dictate. Roles are loosely defined and people continually develop new kinds of job skills to perform continually changing tasks. Each person performs multiple tasks, and the result is joint specialization and increased productivity. As employees from different functions work together to solve problems, they become involved in each other’s activities. As a result, a high level of
integrations is needed so that employees can share information and overcome problems caused by differences in subunit orientation. The integration of functions is achieved by means of complex mechanisms as task forces and teams. Coordination is achieved through mutual adjustment as people and functions negotiate role definitions and responsibilities, and informal rules and norms emerge from the ongoing interaction of organizational members. Over time, in an organic structure, specific norms and values develop that emphasize personal competence, expertise, and the ability to act in innovative ways. Status is conferred by the ability to provide creative leadership, and not by any formal position in the hierarchy” (Jones, 2007, p. 107).
“Organizations that operate in the unstable, changing and unpredictable environment usually have an organic design, which is less formal, less hierarchical, and less mechanistic” (2007, Sherehiy et al., p. 446). This is particularly applicable to agile organizations. Therefore, the following proposition can be formulated:
Proposition: Companies with an agile supply chain strategy have an organic organization.
The organic and mechanistic concepts are useful in characterizing the differences between lean and agile organizations. Leanness is focused on standardization. In order to deal with it, the variability and variety that does occur in the organization and its environment is buffered and smoothened. The basic principle is that everything which interacts with the organization is adapted to that
organization. On the contrary, agile organizations accept the wide variety and variability of demand and take that as a starting point. Then, the key is to make the organization able to develop along with changing demand and to always have an answer to the changing customer requirements.
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because they use the same resources (2002, Slack & Lewis, 2007, Jones,). Each function (production, marketing, logistics, finance) has its own department. As organizations grow in size and diversify in activities or markets, a divisional structure becomes relevant. This is a structure in which functions are grouped together around certain products, markets or customers” (2007, Jones, p. 150). What is similar to all these structures, is that there is a clear hierarchy and there are vertical lines of
communication (top-down). The clear division of responsibilities enhances the efficiency of the organization. Therefore, a company pursuing a lean supply chain strategy would particularly benefit the use of traditional, unitary organizational structures.
Proposition: companies with a lean supply chain strategy use functional structures
The clear division of authority and communication enhances the efficiency of the organization (2002, Slack & Lewis). An important drawback is that such a structure limits open communication between al levels in the organization and this is an important enabler for flexibility and innovativeness. “Agility will largely be a function of the ability of disparate functions to cooperate by working as teams with common goals” (2001, Power et al., p. 251). Therefore, agile supply chain strategies are helped by organizational structures that enhance this. “A matrix structure is a structure in which people and resources are grouped in two ways simultaneously: by function and by project or product” (2007, Jones, p. 164). The advantage of a matrix structure is that employees of various specializations work together in various subunits. Furthermore, vertical communication is enhanced and specialized knowledge can be applied where necessary. At agile companies, the short product life cycles force the organization to maximize innovativeness and the speed of new product introductions. The drawbacks, which are the costs, complexity and risks of role ambiguity (2002, Slack & Lewis), do not outweigh the advantages.
Proposition: Agile companies employ matrix-type organizational structures to enhance innovativeness of the organization
4.3
Organizational Culture
Just as the organizational structure must be designed and managed to optimally meet market requirements, so must organizational culture as well. The culture of an organization involves (Jones, 2007) the set of shared values and norms that controls organizational members’ interactions with each other and with people outside the organization. It controls coordination and motivation; shapes behavior of people and the organization. The culture is shaped by people, ethics and organizational structure. Just as structure, organizational culture isn´t stable either, it evolves as organization grows and differentiates. In the following paragraphs the appropriate organizational design decisions for lean and agile companies will be proposed. First the structural issues will be treated, after which the cultural issues.
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organizational members and other stakeholders what kinds of values and ethical standards it wishes its members to use in their decision making. So that members understand instrumental values – that is, the modes of behavior that they are expected to follow as they pursue desired end states – an organization develops specific norms, rules and standard operating procedures that embody its instrumental values. Norms are defined as standards or styles of behavior that are considered acceptable or typical for a group of people (2007, Jones. P. 177)”. Other authors add features to the concept of culture. According to Jungbae Roh et. al. (2008), there are three levels of organizational culture: artifacts, the espoused values, and the basic underlying assumptions. An organization derives its visible artifacts from the values, and the values are based on the basic assumptions about the outside world that the organization makes.
Jungbae Roh et al. (2008) provides a framework that suggests a culture for a certain supply chain strategy. The framework is based on the demand and supply characteristics provided by Lee (2002). For each situation, a suitable organizational culture is suggested. For each of the four supply chain archetypes a proper culture has been suggested. The supply chain strategies in combination with the suggested culture have been overviewed in figure 4.1. In table 4.1, the features of each culture are outlined.
Figure 4.1: overview of supply chain cultures in combination with supply chain strategy (2008, Jungbae Roh et al.)
Table 4.1: organizational culture and supply chain strategy (2008, Jungbae Roh et al.)
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characterized by standardization, internal efficiency and organizational routines. This hierarchical culture naturally supports efficient SCS practices that are built on mechanistic and internal control mechanisms. (…) Agile supply chains (both high in demand uncertainty and supply uncertainty) operates in developmental culture. Developmental culture, adopting the open system model, is characterized with creativity and passion for innovative problem-solving mechanisms.
Developmental culture supports ASC practices that are high on resource acquisitions, product leadership and entrepreneurship”. Although providing some interesting insights, the descriptions fall short in comprising the entire lean and agile paradigms. For the lean paradigm, the focus lies too much on the efficiency objectives. The quality improvements, (which for certain are an important element of leanness) are under exposed. The agile paradigm is only focusing on the innovativeness, while the flexibility dimension is not covered by the description.
In table 4.2, Jungbae Roh et al. (2008) feigns to link several organizational culture elements to certain competitive priorities.
Table 4.2: Competitive priorities and appropriate cultural elements (2008, Jungbae Roh et al.)
However, only structural elements are mentioned. Jones´ (2007) description of culture is not reflected in the elements, as no set of shared values or norms is mentioned. The visible artifacts or underlying assumptions as described by Jungbae Roh et al. (2008) itself, are also left omitted. This illustrates the difficulties that scientists seem to have with characterizing organizational culture. All together the elements provide an idea of what an organization should look like, but one could only guess the culture. Sadly enough there are no alternatives and therefore, it should do.
Looking at Narasimhan et al. (2006) greatest performance improvements of the lean paradigm is achieved on the quality dimension. Apart from that, the various definitions of leanness (see section 3.2) stress the focus on the lowering of costs. The quality dimension is best helped by knowledge work/sharing, skill acquisition and development, continuous improvement, teamwork and
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Proposition: A culture appropriate for lean supply chain strategies enhances employee involvement in attempts to achieve cost savings and quality improvements.
According to Narasimhan et al. (2006), Agile supply chains have superior flexibility performance (see table…). Furthermore, the innovativeness of agile companies has also been praised (Fisher, 1997). An agile strategy therefore contains elements that enhance flexibility and innovativeness. In order to be flexible, the workforce must be able to adapt to changing customer demands. With creativity, the unpredictable environment must be encountered. According to Sherehiy et al. (2007, p. 453), “the most important factors for workforce agility are speed of developing new skills; responsiveness to changes in customer needs and market conditions; and speed of acquiring the skills needed for business process change”. The organization must have a structure that increases the ability to learn and innovate. To be innovative creativity needs to be stimulated; open communication and
continuous learning throughout the organization must enhance this. As a combination of these two objectives, the following agile culture could be proposed:
Proposition: a culture suitable for agile companies would embrace a workforce that is creative, open minded and adaptive to the changing environment. Continuous learning is very important.
4.4
Interaction with the supply network
An important factor in modern business is the management of the supply network. As the
outsourcing rate of companies tends to get higher, interaction between the company and its supply network becomes increasingly important. By integrating processes, companies try to enhance
effectiveness and efficiency of the supply chain. There is consensus among the authors (1997, Cooper et.al. 2002, McAfee et. al. 2005, Mello & Stank, 2008, Jungbae Roh et. al.) about the fact that
intensity of the supply chain relationships differs among relationships. Cooper et. al. (1997) mentions the development from dyadic management, which means the focus on just the immediate partners in the supply chain, to keireitsu which means being a partial owner of each of the supply chain members. McAfee et al. (2002) calls this the transaction-relationship continuum. At one extreme, businesses act in a transactional fashion and at the other extreme there are long-term relationships that include partnering, strategic planning, vertical marketing systems and a willingness to overlook short-term views.
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For lean companies the need for innovation is much less present. Product life cycles are longer and therefore, the product development process is not a part of every day activities. Therefore,
communication with the supply network does not need to be as intensive. As every action of lean companies is focused on increasing efficiency (while maintaining quality levels), so will probably be the interaction with the supply network. Therefore, the interaction of a lean company with its supply network is probably aiming at maximizing efficiency.
Proposition: Lean companies use the suppliers to maximize efficiency.
It is to be expected that the answer to the proposition would be, that communication between an agile company and its supply network is more intensive compared to its agile antithesis. As Sherehiy et al. (2007, p. 453) states, “the strongest association with workforce agility was found for virtual teams within and across organizations, and communities of practices”.
These differences in everyday communication can be illustrated by the diamond and bow-tie concept.
Figure 4.2: Bow-Tie vs. Diamond perspectives (1997, Cooper et al.)
“The bow-tie approach has the majority of the two firms’ functions far from each other in terms of communication and interaction. The diamond occurs when the triangles are rotated so that two sides are together. Now all of the functions can talk with each other across firms.”
This leads to the following propositions:
Lean companies have a bow tie approach for every day communication Agile companies have a diamond approach for every day communication
Cultural influence on supply chain effectiveness
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partners. “Employees and channel members not only know what to expect from the organization, but also agree about how these expectations are to be met, and they act accordingly” (2002, McAfee et al, p. 3). This means that on the long term, relationships are only successful if both companies know what to expect. “As such, the firm must determine to what extent it can develop a common culture between employees and those of the supply chain member” (2002, McAfee et. al., p.14). Mello & Stank (2005) also investigated the role that cultural orientation plays in the successful implementation of SCM. “In particular, the research acknowledges the need for cultural dimensions to be consistent through both horizontal and vertical levels of an individual firm as well as across key supply chain partner firms” (2005, Mello & Stank, p. 551). This implies that difficulties arise as companies with large cultural differences try to work together intensively. Thus, in order to establish a successful long-term relationship with a supplier, there must be cultural consistency.
Proposition: cultural consistency between the company and its supply network is a prerequisite to have a successful supply network relation.
4.5
Overview in Conceptual Model
With the propositions formulated above, the conceptual model as described in chapter one (figure 1) can be filled in for each of the supply chain strategies. The market requirements have been
expressed in the order winners as described in paragraph 3.3. Based on Naylor et al. (1999) it has been ascertained which performance dimension(s) were valued most by the market (market winners). Based on and Narasimhan et al. (2006) it has been stated what was performed best on by the specific supply chain strategy. Based on these considerations it can be stated that efficiency (costs) is the most important performance dimension for the lean supply chain strategy and that flexibility and speed (service level) are the order winners for agile supply chains.
The market requirements require certain features of the organization. The design of the organization must be adapted to the market requirements. When pursuing a lean supply chain strategy, the organization is required to maximize efficiency. The need for control over processes makes the organizational design mechanistic. A traditional organizational structure secures an efficient
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Figure 4.3: the lean supply chain strategy
Figure 4.3: the agile supply chain strategy
Market Requirements - Flexibility - Speed Focal Company Organizational Structure - Organic structure - Matrix organization Organizational Culture - Stimulate innovativeness Suppliers - Leverage innovative power of suppliers Market Requirements - Costs Focal Company Organizational Structure - Mechanistic Structure - Functional division of labour
Organizational Culture - Stimulate quality and
efficiency
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5
Case studies
In the previous chapter, the theoretical framework was established. This theoretical framework describes the determinants of a supply chain strategy (market characteristics, performance
objectives) and the organizational (structural and cultural) implications as well as the implications for the interaction with the suppliers for a company adopting a lean or agile supply chain strategy. The different market environments describe different supply chain strategies. Despite the fact that both strategies pursue several similar sub-objectives (see section 3.1), the main objectives are
fundamentally different (efficiency versus speed and flexibility). Furthermore, literature research suggests that the design of the organization and the interaction of the supply network differ between both strategies as well.
In this chapter, by doing case studies at four organizations, it will be investigated to what extent the theoretical framework applies in practice. The companies investigated are AKZO Nobel Fusebox, ESI Marine Group and ASML. These companies represent a wide variety of industries (chemistry, electrical engineering, electronics and semiconductor), but all at least perform some manufacturing activities. From the beginning, it was the objective to investigate two companies pursuing a lean supply chain strategy and two companies pursuing an agile supply chain strategy. Based on investigation of corporate websites and annual reports it has been ascertained whether a clear supply chain strategy was pursued and if so, which. Based on this investigation it has been
established AKZO Nobel and Fusebox pursue a lean strategy, and that ESI and ASML pursue an agile supply chain strategy. Also after the interviews have been taken place, this still can be confirmed. Most information about the companies was gained during interviews; which were held with people responsible for procurement issues of their company. Because of their position they were able to make a clear description of market environment in which their company is in, their organization and the relationships with their suppliers. The initial investigation of corporate websites and annual reports already gave a picture of the company. Therefore it was possible to move to the in-detail, research-specific questions almost right away. This made the website- and annual report
investigation combined with the interview an efficient and effective way to gain information about four different companies.
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5.1
AKZO Nobel Industrial Chemicals
General introduction
AKZO Nobel Industrial Chemicals in Delfzijl produces salt and energy, chlor-alkali products, and derivatives such as monochloracetic acid. It is Europe’s largest producer of vacuum salt and a leading supplier of chlorine, caustic lye, and MCA (Monochloroacetic Acid), used in the chemical, detergent, construction, food, pulp and paper, and plastic industries. Its products are essential in daily life and are used in the manufacture of, for example, vehicles, glass, pharmaceuticals, and textiles, and in disinfectants for swimming pools. Joint ventures operated with Dutch energy companies enable Akzo Nobel to make efficient use of combined heat and power (cogeneration) to assist in the production of chlorine and vacuum salt” (2008, AKZO Nobel 2007 Annual Report).
At the location in Delfzijl, AKZO Nobel employs approximately 350 FTE. The combined activities generate sales of an estimated € 200 million. Because of the large share of internal sales, a large share is based on transaction prices. The activities of Akzo Nobel Industrial Chemicals in Delfzijl have been overviewed in the figure5.1 . Below an explanation is given of all the activities performed in Delfzijl. Basically, AKZO Nobel is located on the beginning of the supply chain. End products are generated by extracting raw materials out of the ground and transforming them into basic chemical substances. These substances are used as raw material at companies downstream in the supply chain, which for a large part consists out of other AKZO Nobel subsidiaries.
Figure 5.1: overview of the supply network of AKZO Nobel Industrial Chemicals
Description of activities
Salt winning
AKZO Nobel is located on a chemistry park in Delfzijl. On this park, more companies are located but these are practically all former subsidiaries of AKZO Nobel. The location has been chosen because at about 1100 meters under ground, there is an enormous amount of salt. This salt is harvested by AKZO Nobel by drilling a hole and pumping water down to the salt. When the salt mixes with the water, it disolves and it can be pumped up to the surface. When the fluid is brought to the surface, it is heated. After the water has damped, the salt remains. This results in very clean salt compared to
Akzo Nobel Industrial Chemicals
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competing ways of production, where salt is harvest by simply chopping it out of the soil (rock salt). The salt is almost solely used for the production of chloride.
The fact that AKZO Nobel is located on top of a virtually endless amount of salt can be seen as the competitive advantage of the company. The mining and damping process carried out by AKZO has resulted in AKZO Nobel’s 80% market share in the delivery of salt for electrolysis. There is no other location in the world where salt of such a high quality can be won on the same price level. The downside of the process is that it consumes a considerable amount of energy. Therefore, in case of extremely high energy prices (oil-prices above $ 200 a barrel) rock-salt could become a serious threat. So far, this has never been the case.
Chlor-Alkali
The Chlor-Alkali business produces chlorine, caustic lye, and hydrogen by performing electrolysis on water with disolved salt. Electrolysis causes a chemical reaction which transforms the water and salt into chlorine, caustic lye, and hydrogen. This process benefits by very clean salt, because it leaves less sludge in the electrolysis basins, which results into fewer cleaning shutdowns needed. As a result, the basins in which the electrolysis is performed are in process 96%-98% of the time, twenty-four/seven. When using rock salt, the basins would get muck more often which would result into more downtime.
Chlorine is very dangerous and this makes it expensive to store and often illegal to transport.
Therefore, it is fabricated near the location of use and used almost immediately after production. On the contrary, salt is not dangerous at all and very easy (and cheap) to store or transport. Therefore, AKZO Nobel in Delfzijl only produces the amount of chlorine used at the chemistry park. The rest of the salt is sold and shipped to other companies, where it is transformed into chlorine. These can be other AKZO Nobel subsidiaries but also competitors. Roughly, in Europe, there are four producers of Chlorine. These are: AKZO Nobel, Ineos, Dow Chemical and Bayer. Of these players, AKZO is second after Ineos. Most of the chlorine is used as raw material for the production of PVC, of which it is the most important ingredient. At the chemistry park in Delfzijl, chlorine is used for the production of MCA which is also produced by AKZO Nobel. Furthermore, Chlorine is used as a raw material at external companies located on the Chemistry Park.
MCA
In order to be able to provide the market with more customized chemicals, AKZO Nobel operates an MCA plant since 2006. MCA stands for Mono-chloreatic Acid. These are conversions of Chlorine into other chloride-based chemicals. In general these are chemicals that have specifications which make them useful in a certain sector. MCA are used in the chemical, detergent, construction, food, pulp and paper, and plastic industries. Its products are essential in daily life and are used in the
manufacture of, for example, vehicles, glass, pharmaceuticals, and textiles, and in disinfectants for swimming pools (2008, AKZO Nobel 2007 Annual Report).
