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The impact of geographical distance on the performance of
different governance types in global value chains
Master Thesis
Word count: 14,586
Melanie Marziw
Student No.: 2092611 (Groningen); 109211613 (Newcastle)
University of Groningen Faculty of Economics and Business
ewcastle University Business School
Dual Master in Advanced International Business and Management Supervisors:
Groningen: Dr. Miriam Wilhelm Newcastle: Dr. Stefanie Reissner
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Table of content
List of tables ... 3 List of figures ... 3 List of abbreviations ... 4 Acknowledgements ... 5 Abstract ... 6 Chapter 1: Introduction ... 71.1 Issues in global value chains ... 7
1.2 Rationale for research ... 8
1.3 The case: MTU Aero Engines ... 10
1.4 MTU and its worldwide supplier base ... 12
1.5 Methodology ... 13
Chapter 2: Theoretical background ... 15
2.1 Global value chains ... 15
2.1.1 Global value chain literature ... 16
2.1.2 Own approach to global value chains ... 18
2.2 Geographical distance ... 19
2.2.1 Forms of distance in global value chains ... 19
2.2.2 Macro-economic and strategic factors of geographical distance ... 19
2.2.3 The discourse on the importance of geography and distance ... 20
2.3 Supply chain governance ... 23
2.3.1 Types of governance ... 24
2.3.2 Transaction cost theory ... 24
2.4 Supply Chain performance ... 28
Chapter 3: Line of argumentation ... 29
Chapter 4: Methodology ... 30
4.1 Research philosophy ... 31
4.2 Case study method ... 31
4.3 Case selection ... 32
4.4 Data collection ... 34
4.5 Data analysis ... 35
4.6 Ethical considerations ... 36
Chapter 5: Results and Discussion ... 38
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5.1.1 The role of different dimensions in geographical distance ... 40
5.1.2 The role of IT in geographical distance ... 41
5.2 The importance of governance in relation to geographical distance ... 42
5.2.1 The role of governance for global value chain performance ... 43
5.2.2 The importance of distance in different governance styles ... 46
5.3 Differences in the importance of geographical distance in phases of value creation ... 48
5.4 Further important aspects in geographically dispersed chains ... 49
Chapter 6: Conclusion ... 52
Limitations and recommendations for further research... 53
References ... 54
List of appendices ... 60
List of tables
Table 1: Definition of terms ... 9Table 2: Characteristics of market and relational governance ... 33
Table 3: Characteristics of geographical distance ... 33
Table 4: Risks and obstacles related to high geographical distance ... 39
List of figures
Figure 1: MTU stock chart from 1/1/2007 to 4/10/2011 ... 11Figure 2: Import penetration and export ratio in selected industries ... 12
Figure 3: Geographically dispersed supplier base of MTU ... 13
Figure 4: Subject Category Frequencies in SCM ... 17
Figure 5: Complexity in supply chain networks ... 23
Figure 6: Transaction-specific governance structures ... 27
Figure 7: Conceptual Model ... 29
Figure 8: Research setting ... 30
Figure 9: On-time delivery performance ... 39
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List of abbreviations
GE General Electric
GVC Global Value Chain
IB International Business
ID Identification
IPO Initial Public Offering
IT Information Technology
MDAX Mid-Cap German stock index MNC Multinational Corporation MTU Motors- and Turbine Union R&D Research and Development
SC Supply Chain
SCM Supply Chain Management
TCT Transaction cost theory
US United States
WIP Work in Progress
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Acknowledgements
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Abstract
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Chapter 1: Introduction
The world economy has changed significantly in the last decades, for which some of the reasons are globalisation and technological change. The main features of globalisation and the new economy are international production and trade, which are the basis for global value chains (GVC) that derived from these changes in the world economy and are fuelled by growing worldwide expertise and capabilities (Gereffi et al., 2005). Companies build networks across borders and exploit advantages that specific countries and residing firms have to offer like lower production costs, specialised workers or access to different markets. However, globalisation has not only brought advantages in international business but also made the actual management of supply chains increasingly complex. Globally reaching value chains are more difficult to control and result in higher transportation costs, higher expenditure of time and are more likely to be affected by disruptions. Although the advances in international trade and production have a large impact on international management, the literature stream of global value chains in this area has surprisingly not found much interest. There is some literature on supply chain management and performance as well as the management of risk related to such a network (Trkman and McCormack, 2009; Tang, 2006; Faisal et al., 2006). However, the approaches largely avoid the global aspect of value chains that is important for multinational corporations (MNCs).
1.1
Issues in global value chains
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distant suppliers are managed plays a crucial role. This is the main argument in my work and the basis for my argumentation. The purpose, aims and contributions in this study are explained in the following section.
1.2
Rationale for research
9 Important terms for this thesis are defined as follows:
Term Definition Author Other names
Global value chain The sequence of productive
(i.e., value-added) activities leading to and supporting end use. Sturgeon (2001) - supply chain - commodity chain - production chain - global network
Governance Inter-firm relationships and institutional mechanisms through which non-market coordination of activities in the chain takes place.
Humphrey and Schmitz (2001)
_
Geographical distance
The physical distance between the organisation and its
suppliers. Awaysheh (2011) - Physical distance Supply chain performance
The extent to which goals in a supply chain are achieved, which are flexibility and the reduction of risks. Chow et al. (1994) _ Supply chain flexibility
‘The willingness and capability of trading partners to modify their initial arrangements to improve their adaptability to new changes and challenges in supply chains’.
Wang and Wei, (2007, p. 648)
_
Table 1: Definition of terms
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importance of inter-firm relationships and governance in a global context. The study does not only shed light on the importance of distance and governance for the literature and studies in global value chains and for the researchers in this field; it is also conducted for practitioners to examine the importance of these aspects and how a global value chain can be managed. The study is based on the case of MTU Aero Engines, a German multinational corporation which is engaged in the manufacturing of turbines and other engine-components. Information on the company and reasons for selecting MTU as a case are demonstrated in the two subsequent paragraphs.
1.3
The case: MTU Aero Engines
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Figure 1: MTU stock chart from 1/1/2007 to 4/10/2011
MTU employs approximately 7900 people in total and, with several affiliates, has a worldwide presence in all significant regions and markets. The headquarter is located in Munich, Germany, controlling the company´s global network of R&D and maintenance activities located in China, Canada and Germany and subsidiaries in Germany, Poland and North-America (MTU Aero Engines, 2011a). The aerospace industry in one of the best examples for a case study on global value chains as this industry has one of the highest levels of import propensity and export ratios, which is shown in figure 2 (OECD, 2007).
MTU stock
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Figure 2: Import penetration and export ratio in selected industries
The aerospace industry has the third largest numbers in import penetration and second largest in the export ratio among OECD countries. The import penetration is hereby the degree of domestic demand satisfied by import and the export ration equals the share of exported production (OECD, 2007). The internationality of this industry, which applies to MTU as more detailed illustrated in section 1.4 of this chapter, affirms the choice of selecting the company in the case study of this thesis.
1.4
MTU and its worldwide supplier base
Due to the specificities in the aerospace industry, the requirements and demands for supply chain management are very high. The parties are located geographically dispersed around the globe. In particular, there is a high demand for interactions to secure a quality conform supply of parts. There is a high expenditure on transport, documentation and coordination in the global value chain. To give an example on one part, raw parts have to be shipped from the United States to Germany for inspection, sent to another US-based supplier for manufacturing and again back to MTU for final assembly. Approximately 80% of suppliers in the purchasing department managing the relational part used in this study are located abroad, mostly in the United States and some in Asia and Europe.
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Figure 3: Geographically dispersed supplier base of MTU
Considering the geographical distances in the supply chain of MTU as well as the need for well-established supplier relations in the aerospace industry, the German-based MNC is a perfect example to study global value chains and specifically the factors of physical distance and governance. MTU has an above-average expenditure on transport of goods and coordination, as often raw materials have to be inspected on site when delivered by foreign suppliers and afterwards sent to prefabricated component suppliers for machine processing and handling. In the process from raw material to a finished good, the parts are covering a very large distance leading to a high expenditure in documentation and coordination. In order to address the complex supply chain management and related risks at MTU, close monitoring on suppliers is done, especially regarding critical parts of new engine programmes. Furthermore, MTU representatives were seconded to locations close to critical and important suppliers in the United States and China.
1.5
Methodology
The data and valuable insights from practitioners were collected by means of interviews with key account managers at MTU, a MTU representative in the USA and sales managers of two foreign suppliers. This information is supported by quantitative data on supplier performance. The analysis of data was done in the format of matrices. Two part numbers with different governance styles and suppliers from different geographical areas were analysed that were prone to certain risks and disruptions. This is in order to investigate the
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Chapter 2: Theoretical background
There exists a considerable amount of literature on supply chain management. However, there is still no uniform definition of supply chains (Burgess et al., 2006). Reason are inter alia the discourse on supply chains and value chains and the amount of terms used interchangeably in academic research like global value chains, supply and value chains or supply and value networks. However, the terms often mean the same or something very similar: inter-firm interactions and relations in order to provide goods, services and information (Feller et al., 2006). Concluding and as already stated in table 1, the just mentioned terms are used interchangeable in this thesis. The concept of value chains in business studies was originated by Michael Porter (1985) in his work ‘Competitive Advantage’, in which the author describes a value chain as a set of categories of activities that are linked together in a certain way. These value chains grow internationally and as global competition increases, many companies rebuild their value chains to global, interconnected networks (Sturgeon, 2001). There are two main issues that are central to network methodology and analysis in this thesis. The first issue is the relational processes and structures in global value chains through which power is distributed and which are governed in a certain way. The second issue is the geographical scales in which these networks are embedded in and the physical distance that is evident in the global network (Dicken et al., 2001). Those two issues in global value networks are subject of this dissertation in relation to supply chain performance. Therefore, the following paragraphs address the literature stream of global value chains, the geographical distance in such networks, the chain governance as well as related performance.
2.1
Global value chains
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Transnational corporations are an ‘important driver of the development of coordinated global production’ (Humphrey, 2004, p. 3) with trade shifting from finished products to parts and components, resulting in an increasing interest of researchers and economists in fragmentation of production and vertical specialisation (Humphrey, 2004). These trends led to the emergence of so-called global value chains that tie several spatially separate companies together through their recurring collaborative activities.
2.1.1 Global value chain literature
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literature in international business and management on the topic of global value chains. Although there is much literature in political sciences, as just discussed, there is no application or discussion in international business (IB) so far and a gap in literature on this topic exists. There is an absence of a concept in IB on global value chains and how related risks like delivery failures can be managed. In the latest literature review of supply chain content by Soni and Kodali (2011), the global aspect of supply chains is not even mentioned although it is acknowledged that supply chains grow increasingly global. In the literature review by Guinpero et al. (2008), the lack of literature in the global SCM field is shown in figures. Only three per cent of the SCM literature or twelve out of 405 papers in frequencies from 1997 to 2006 deal with the issue of global supply chains.
Figure 4: Subject Category Frequencies in SCM
The limited global supply chain analysis in the literature is one major shortcoming of SCM research (Guinpero et al., 2008). The interest in global value chains is yet developing with the modification from basic commodity chains to value chains due to increasing industrial capabilities and real-time integration of activities supported by IT (Sturgeon, 2008). Most existing approaches however point out the advantages and disadvantages of globalisation and global economic integration (Bair, 2005; Sturgeon, 2008; Sturgeon and Memedovic, 2010), the creation of multinational corporations (MNC) as well as policy-making, particularly in regards to developing countries (Humphrey, 2004). However, the complexity
95 74 66 16 13 0 20 40 60 80 100
Supply Chain Management Strategy
SCM Frameworks Alliances/Relationships Supplier Development International/Global
Supply Chain Management Subject Category Frequencies, 1997-2006
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of global value chains is further important in designing supply chains regarding facility selection, production and shipment quantities or supplier selection (Meixell and Gargeya, 2005) as well as in their management. The existing literature on the management of GVCs regarding for instance transportation and coordination is discussed in section 2.2 on geographical distance. In attempting to explain the lack of literature in global supply chains it can be argued that although supply chains per se have existed for several decades, their value for an organisation´s growth and performance has been realized rather recently with the emergence of GVCs and advances in IT (Jain et al., 2010). Global supply chains become increasingly complex and therefore the modelling of such networks becomes a difficult, ‘multifaceted task’ (Jain et al., 2010, p. 20). How this task in a global value chain is attempted by practitioners and which role governance plays has not been researched so far and is therefore addressed in this dissertation.
2.1.2 Own approach to global value chains
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2.2
Geographical distance
Companies operate globally and therefore distance between companies in a supply chain increased. There are different forms of distance which are explained in the subsequent section of this thesis. Regarding geographical distance in global value chains, this topic has not yet been discussed in IB literature. Again, much literature on this topic stems from the stream of political economy. Approaches on geographical distance are illustrated in the following chapter as well as the discourse on the importance of geography and distance stemming from a discussion on the role of information technology (IT) and other advances.
2.2.1 Forms of distance in global value chains
A company having a global value chain has to deal with different forms of distance that have an impact on performance. These forms are cultural, organisational and geographical distance (Awaysheh, 2011). Cultural distance is defined as the differences in culture between the home countries of each party, expressed in how managers deal with challenges and develop relationships in a supply chain (Awaysheh, 2011). Organisational distance is the difference in departments or functions of employees and processes between companies (Armstrong and Cole, 2002). These distances become even more complex to manage the more companies with different cultural and organisational backgrounds are part of one supply chain. Research has been done on several factors of distance, especially on cultural distance for MNCs and in inter-firm relations (Tihanyi et al., 2005; Griffith and Myers, 2005; Williams et al., 1998). However there is a lack of literature regarding the geographical factor of distance, including time differences. Supply chain components are located at geographically different locations which is likely to have significant implications for the management of global value chains (Stock et al., 2010). In the following section, literature on the geographical aspect of distance is discussed.
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(Nachum et al., 2008). For example, companies choose a location for manufacturing often according to the amplitude of demand in different regions (Krugman, 1991) or the availability of knowledge and qualifications in human resources. In the constellation of worldwide suppliers, those aspects of knowledge availability and human resources are especially important considering that there is a negative effect of distance on knowledge transfer (Ambos and Ambos, 2009; Bell and Zaheer, 2007). When choosing suppliers in developing countries, which is often the case due to cost efficiencies, the knowledge and capabilities in the supplier base can be insufficient and have to be improved. Impacting the results and the product delivered by the supplier, a lack of knowledge and experience in dealing with countries from developing countries can further evoke uncertainty in supply chains and increase the probability of disruptions. If transfer of knowledge is necessary, the process can be complicated, especially in industries with high demands on quality and technology. Findings of studies suggest that geographical distance increases not only the costs for communication and transportation but have a great impact especially on high R&D intensive companies (Berry et al., 2010). The examples show that ‘geographic distance is a central component of global strategy’ (Zaheer and Hernandez, 2011, p. 110) which plays an important role in the international business of MNCs. These rather macro-economic or strategic approaches as well as the aspect of cultural and organisational distance are an important factor in globally reaching value chains and their impact is acknowledged in this paper. However, the physical distance in global value chains is the focal point of this study in examining the role of governance on the impact of global value chain risks and supply chain performance.
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meaning how the network is managed according to certain governance styles - is crucial in global value chains and is discussed in the next section.
2.3
Supply chain governance
In global value chains, the topic of governance plays a crucial role as it implies how a supply chain is managed and can indicate a supply chain´s performance. According to Humphrey and Schmitz (2001, p. 3), ‘the concept of ‘governance’ is central to the global value chain approach’. The authors define the term governance as the settlement and/or enforcement of parameters by buying firms in a value chain ‘under which others in the chain operate’. These parameters are the questions what, how, when and how much is to be produced, for which governance structures are required. The form of governance is furthermore a determinant for the supply chain flexibility in how fast an organisation can respond to unpredictable changes and disruptions (Hoyt and Huq, 2000). A change in governance styles has been observed during the last couple of years. While more than a decade ago firms were executing a hierarchical style and striving for a one-dimensional value chain entity, supply chains have evolved to strategic partnerships in a fragmented network (Bitran et al., 2006). Such a fragmented network however is complex in management.
Figure 5: Complexity in supply chain networks
(Source: Bitran et al., 2006, p. 6)
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therefore play an important role in the issue that goods have to be moved along greater distances quickly and efficiently (Stock et al., 2000). The main reason in this paper why governance matters is the influence on supply chain flexibility, which has been the unit of analysis in several studies (Wang and Wei, 2007; Wathne and Heide, 2004) as well as on the limitation of risks in global value chains.
2.3.1 Types of governance
There are different types of supply chain governance, which are for instance expressed by the degree of interdependence between partners. Gereffi et al. (2005) divided forms of governance into five different types, namely the market, captive, modular, hierarchical and relational style of governance. In a supply chain with a market type of governance there is no relationship with the suppliers, or at least not a strong one. The customer can rather easily switch between suppliers and does not depend on one in particular. In the last couple of years there has been a change in governance forms with the interest and importance of relational styles increasing (Bitran et al., 2006). In a supply chain with relational structures, the interdependence and relations between companies are strong and buyers and suppliers arise as strategic partners (Gereffi et al., 2005). The captive, hierarchical and modular types of governance are intermediates that contain aspects of market and/or relational forms. As this study cannot account for all five types of governance, the two extremes of market and relational chains were chosen. When comparing two extremes of governance forms, differences in the impact of geographical distance and on performance can be illustrated more clearly. In the following chapter, specifications of both types are explained in taking the transaction cost theory as a basis.
2.3.2 Transaction cost theory
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high
low
Figure 6: Transaction-specific governance structures
Due to opportunism, there is higher uncertainty involved in a supply chain with highly specific parts. In the case of opportunistic behaviour of one party, a switch to other sources of supply or demand is more difficult for very specific than for standard parts where for instance no special machinery or tooling is needed. A high frequency of transactions on highly specific parts does furthermore increase the need for control mechanisms. Concluding, a relational governance structure for highly specific parts has to be built in order to lower the transactions costs and increase the efficiency which further minimizes the level of opportunism and the problem of bounded rationality (Powell, 1990). Comparing highly specific parts with standard parts, more relation-specific investments are carried out, leading to idiosyncratic relationships that bind companies. Applying the TCT to the context of this thesis, a certain governance style and efficient supplier relationships can reduce the overall uncertainty in a complex network that are induced by for instance high geographical distances and further reduce the costs evoked by transactions (Sheth and Sharma, 1997). On the other hand in a market form of governance for standard parts that are sourced globally, the impact of geographical distance, especially in the occurrence of disruptions, will have a negative impact on performance. What performance in this context entails and how
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performance relates to the framework of this dissertation is discussed in the following section.
2.4
Supply Chain performance
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Chapter 3: Line of argumentation
Regarding the framework of global value chain analysis by Sturgeon et al. (2008), an analysis highlights three features of an industry, which are the geography and character of linkages, how power is distributed among companies in the global network and the role of institutions in structuring global value chains. It is argued that geographical distance and governance, meaning the geographic linkages and distributed power as the structure of the supply chain may have an impact on supply chain performance. Furthermore, external institutions can matter in this context for example regarding customs in the transportation across geographic boundaries. As already mentioned in chapter one, performance is defined as the assurance of flexibility and limitation of risk in supply chains. Flexibility is an important variable for supply chain performance, especially in the event of disruptions. Governance in this scenario may act as a mediating factor to limit the impact of risks and disruptions and therefore, according to the definition, enhance supply chain performance. If a buyer-supplier relationship is managed accordingly, for instance through close collaboration and communication, providing important information and timely reaction after the occurrence of disruptions, the impact of risks can be limited. The main argument in this dissertation is that the structure of a value chain (geographical distance) and the quality of how the value chain is managed (governance) can have an impact on supply chain performance, meaning the extent of risks and supply chain flexibility.
Figure 7: Conceptual Model
30 Interviewee: MTU Representative USA
Chapter 4: Methodology
Research was conducted using a case study on MTU Aero Engines, a Germany-based company that operates globally. The subject of analysis is the supply side of MTU’s global value chain, i.e. the inter-linkages between suppliers and the customer. Qualitative data were collected in five interviews with two managers of a market chain (one from MTU and one from a foreign supplier) as well as three managers of a relational chain (one from MTU, one from a foreign supplier and a MTU purchasing representative from the US). In each of the four supply chains (SC), the supplier was analysed on the performance. In order to investigate the importance of geographical distance, one supplier of each governance type is located close to MTU in Germany, whereas the other two suppliers are located in the US and India. Furthermore, quantitative data on supply chain performance was collected, i.e. on-time delivery figures of suppliers, to support the interview data. In the following figure, the just explained research setting is visually depicted.
Figure 8: Research setting
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4.1
Research philosophy
The rationale for studying geographical distance in GVCs originated when comparing practical experiences in global SCM with studies in this area of interest. Almost no papers addressed the actual management of global value chains. Disruptions in global supply chains of MNCs occur often and it is an important issue to establish how well customers can cooperate with suppliers to overcome disruptions and limit an impact on performance (e.g. avoid a standstill in production). As companies are interested in exploiting the advantages of globalization in order to stay competitive, problems in global supply chains need to be managed more effectively. Hence, studies of the impact of governance on the importance of geographical distance and performance in global value chains have long been overdue. In taking a constructivist perspective in ontology, assumptions about the ‘nature of social reality’ or in this case how global value chains function, what units make them up and how they interact, were made (Blaikie, 2000, p.8). The management of global value chains and if they are resistant to risks does largely depend on social actors and their interactions. Complex networks are in a continual state of revision, are developing and depending on external as well as to the network internal circumstances. The importance of individual actors for the management and success of global supply chains is evident and testified in this thesis. With interpretivism as an epistemological position in the dissertation, subjectivity of involved participants is not only suspected but also desired as the quality of this research and its findings are related to the experiences of practitioners (Grix, 2002). The study does not only contribute to the IB literature but is also conducted for practitioners and therefore personal experiences and opinions are required.
4.2
Case study method
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employees. Valuable and multiple details can be collected from case studies, especially when considering that human behaviour in work relations is much more meaningful and complex than theories that are governed without practical insights (Flyvbjerg, 2006). Furthermore, the topic of geographical distance in relation with governance in global value chains has not been researched so far and there is a gap in the literature on this issue which highlights further the appropriateness of a case study. It is not known how the variables which are analysed in this study interplay in relation to global value chains. According to Yin (1994), a single case study is appropriate for a relatively new field of study to open up a new area of research, which is the case in this work. To minimize internal validity in case studies, not only qualitative but also quantitative data is collected to investigate the performance in the supply chain. An explanatory case study in hereby used, testing if the already explained theories of the death of distance and the diminishing importance of geography in a globalized world in the age of technology will hold true. This research was done on MTU Aero Engines in a multiple case study on four different supply chains, as in this way the research offers a deep understanding of the material and a rich theory construction (Thomas, 2004).
4.3
Case selection
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Market Relational
No relation-specific investments Specific investments in the relationship (e.g. in toolings, IT systems)
Standard part Highly specific part
Minimal information exchange/transactions Very frequent information exchange/transactions Separable technological and functional
systems (low degree of interdependence)
Shared technological and functional systems (high degree of interdependence)
Table 2: Characteristics of market and relational governance
Secondly, the sourcing strategy is dual sourcing in both the relational and market chain which means that there is one part delivered by two suppliers. The two suppliers for each part number differed strongly in the physical distance to MTU to investigate the importance of geographical distance. The suppliers of the relational chain are located in Germany and the United States whereas the suppliers of the market chain are located in Germany and India. Concluding, a comparison of supply chains with different geographical distances within the same governance style can be conducted to be able to draw conclusion on the importance of geographical distance. Furthermore, a comparison between the relational and the market chain is possible in contrasting the impact of governance as a moderator on the relationship between geographical distance and SC performance. The geographical distance in table 3 is given in kilometres and air-line.
Characteristics Part 1 – Relational Part 2 - Market Supplier A Supplier B Supplier C Supplier D
Home country Germany United States Germany India Geographical distance
in km
60 km 6000 km 70 km 7000 km
Dimension of distance Low High Low High
Means of transportation
Land transport (road)
Aviation and land transport (road)
Land transport (road)
Aviation and land transport (road) Time difference 0 hrs. 6 hrs. 0 hrs. 4.5 hrs.
Table 3: Characteristics of geographical distance
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in Europe with considerable distance to MTU. A supplier with low distance is located very close to MTU whereas a supplier with high distance on a different continent. As the dimension of distance of the German suppliers and the foreign suppliers to MTU is quite similar, especially due to the same means of transport necessary, no differences in the extent of geographical distance between the two different chains were made. Thirdly and lastly, parts were selected that were suspect of disruptions in the last 12 months for instance caused by quality problems or disruptions in transportation. The reason for this criterion of part selection is to apply for differences in supply chain flexibility and the management of risks. In summary, four different supply chains of one company were studied and compared in a multiple case study. How the data was collected is explained in the subsequent section.
4.4
Data collection
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form. All participants were particularly knowledgeable in the area of interest, validating the method of purposive sampling applied in this thesis (Engel and Schutt, 2010). The questions were sent to the participants more than one week before the interview in order to provide time to think questions through and ask questions beforehand. All interviews were held in English. Those with key account managers were conducted on-site at MTU and with sales managers and the purchasing representative in telephone conferences. At the beginning of the interviews, the content and aim of the study as well as the structure of the interview was introduced to the participants. Structured interviews were conducted and if necessary follow-up questions were asked. The interviews lasted up to one hour with key account managers and approximately thirty minutes with sales managers. Governance and inter-linkages in global value chains consist of a complex field of control and coordination which can be best analysed in interviews that include personal experiences of practitioners dealing with such issues on a daily basis (DeVault and McCoy, 2001). Regarding the measurement of performance, the data relies both on qualitative, subjective as well as quantitative measurement. Therefore, quantitative data is provided to support the evaluation of key account managers in interviews regarding the performance in a supply chain. The delivery performance of each part number of each supplier was calculated for the time period from January 2011 to November 2011. This data was accessed through the database at MTU that provides key performance indicators like on-time delivery. On time delivery is a statistics reflecting the deviation between the delivery date and quantity communicated to the supplier in weekly delivery schedules and the actual delivery date and quantities. How the quantitative as well as qualitative data was analysis is explained in the following paragraph.
4.5
Data analysis
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hereby a ‘crossing of two lists, set up as rows and columns’ (Miles and Huberman, 1994, p. 93). To encourage a systematic analysis and comparability, a within-case analysis matrix was chosen suitable to explore a new domain when only certain key variables are known however not the inter-linkages (Miles and Huberman, 1994). Such a within-case analysis provides an initial overview of collected data and information and in single tables clearly illustrates every important aspect related to the research question. An additional cross-case analysis was done to give an illustration on how the variables used in this study are linked and interact together. On every aspect related to the research question, a final comparison and analysis was made to better discover the importance of geographical distance and the role of governance for supply chain performance. The analysis of the quantitative data on delivery performance has been conducted in direct comparison with the evaluations on the performance of the key account managers. In this way, the analysis can offer valuable insights into the importance of governance for supply chain performance. As the quantitative figures on performance do not include relation-specific aspects or performance aspects in risk management or flexibility, differences between the perceived performance and the quantitative performance can explain the role of governance and personal relationships between the partners. The findings of the thesis are illustrated and discussed in chapter 5.
4.6
Ethical considerations
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Chapter 5: Results and Discussion
1The findings of this study support the assumptions made in the line of argumentation of governance being a mediating factor in the impact of geographical distance on performance. The findings show variations in the importance of geographical distance which can be explained with differences in governance types. However, the importance of distance as well as the number and extent of risks vary not only between different forms of governance but also between stages in the value creation within one type of governance. In the proceeding chapter, the reasons for differences in the importance of geographical distance and the resulting impact on performance are explained. However first of all, the importance of geographical distance in general is discussed in the following section. The propositions created in the following paragraphs are assumptions based on collected data and insights from their analysis. Propositions were not tested but imply recommendations for future research.
5.1
Geographical distance in global value chains
There are many obstacles and risks involved and related to geographical distance in global value chains. In the following table risks related to geographical distance are illustrated that have been mentioned in the interviews.
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Hereinafter, answers given by the key account managers of MTU are referred to as ‚MTUrelational‘ for the
relational chain and ‘MTUmarket’ for the market chain. Answers given by the representative are referred to as
‘MTUrep’ as well as ‘Suppliermarket’ and ‘Supplierrelational’ for each foreign supplier of the market and relational
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Kind of risks/obstacles - Transportation costs and time
- Loss and damage of parts and packaging during shipment
- Trouble with insurance companies in the case of loss and damage - Documentation
- Cancelations or delays in airfreight
- Time loss in shipments, storage or customs - Time differences in urgent cases
- Incidents at major shipping ports (disruptions, natural disasters) - Issues with regulations, customs, export licenses/regulations and
payment
- Transmission of information but not the understanding - Speed of receiving information and solutions
- Restrictions in problem solving (costs and time) - Tracking of deliveries with many forwarders involved - Availability of raw material
- Infeasible transport costs and time when rework is required
Table 4: Risks and obstacles related to high geographical distance
Regarding the role of distance for performance, the collected data of this study show that geographical distance in comparison to local proximity has an impact on supply chain performance in general.
Figure 9: On-time delivery performance
In the figure it can be seen that the overall delivery performance (i.e. the percentage of parts delivered on-time according to previous delivery schedules) is much lower for the foreign
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Germany USA Germany India
Relational Relational Market Market Supplier A Supplier B Supplier C Supplier D
On-time delivery
Delivery performance supplier Evaluated delivery
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suppliers than for the local suppliers to MTU. The same trend can be seen for the performance provided by quantitative data as well as for the evaluated performance of suppliers by sales managers. Although it has to be taken into account that especially the American supplier is still in the development phase of the part number in the relational chain and the delivery performance for the particular part number is therefore lower as the average and total delivery performance of the supplier, the performance is still not comparable to the performance of German suppliers. The evaluations of the key account managers support this view. However not only numbers regarding on-time delivery show a lower performance of suppliers with high geographical distance compared to German suppliers that are local; in the interviews with key account managers, higher numbers of disruptions were related to foreign suppliers than to local suppliers, for both the relational and the market chain of governance. These insights gained from data analysis suggest that with a higher geographical distance, more delivery failures can be suspected that result in lower performance regarding on-time delivery. This proposition highlights the importance of geographical distance for further examinations by researchers and implications for managers. Practitioners should take notice and react on distance factors, for example in building a resistant supply chain, as they might influence SC performance.
Proposition 1.1: With higher geographical distance in global value chains, a higher number of delivery failures or disruptions and lower on-time delivery performance can be expected.
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It can be assumed that medium and high distances matter to the same extent for involved managers in governing a global value chain.
MTUrelational: ‘To be honest, for me it does not make a big difference if I have to go to for example the US or to Sweden. I mean it makes a difference if the supplier is just around next door so that you can visit him within an hour or two.’
Besides the aspect of transportation, a supplier for instance located in Sweden also has to be contacted by phone or Email just as much as an American supplier. If a personal meeting is required, as it can be seen in the above quote, the time and cost expenditure in flying to the US or to Sweden does not make a big difference anymore. Answers given in the interviews suggest that advantages can be gained if a supplier has a local proximity to MTU however that there are little differences in obstacles related to distance on one continent or between two. Although findings support in this regard that the country of origin does not play an important role, the results of the interviews concerning the Indian supplier suggest that the country of origin does matter regarding for example culture and other country-specifications like the degree of development. These issues are discussed in section 5.2.
Proposition 1.2: While advantages can be gained from low distances, there is no difference in the importance of geographical distance for medium and high distances.
5.1.2 The role of IT in geographical distance
As already discussed in chapter 2 of this thesis, information technology does certainly play a role in the importance of geographical distance. The findings of this study partly support the view by several authors claiming for a diminishing importance of distance due to communications technology (Brunn and Leinbach, 1991). At least in the sense that there are not many obstacles left in communicating along high geographical distances.
MTUrelational: ‘Geographical distance does not really matter in regards to communication as
through Email and telephone it has been made really easy to communicate’.
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that allow permanent availability. According to all managers involved in the study, geographical distance does not really matter in communication.
MTUrep: ‘As almost everyone has a Blackberry here, we even receive Emails from the supplier on Saturdays in the evening. I would say regarding availability, the time difference does not play a critical role’.
Although communication across geographic boundaries, along high distances and with considerable time differences is not a major obstacle regarding normal communication, it still matters in the case of disruptions when an on-time and sudden decision is required. The role of IT in transportation and global logistics however is not as important, as there are many obstacles (Levy, 1995) that cannot be solved with IT. In general, the results support the line of argumentation made in chapter 2 on the discourse on geographical distance. Although advances in IT allow for global business operations, especially in transportation of goods around the globe there are many issues for which IT does not exist or fails in application.
MTUmarket: ‘Another risk is the tracking of deliveries of parts because there are a lot of
forwarders involved and even with a tracking number it is difficult to figure out where the parts are and sometimes we have issues with the documents and export regulations where they will stop and store the parts in a warehouse of the forwarder and you don´t know if the parts are in the US, India, in France or somewhere in Germany’.
IT limits obstacles in communication but there are still many risks when transporting goods along medium and high distances. What is most important is that geographical distance has been proven to be a crucial factor to consider in governing a global value chain as it has an impact on supply chain performance. In the following section, the role that governance plays in relation to geographical distance and supply chain performance is demonstrated.
Proposition 1.3: While IT can bridge geographical distance in general communication, it does not solve issues regarding transportation.
5.2
The importance of governance in relation to geographical
distance
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of suppliers. First of all, a general impact of governance on performance is shown and explained in comparing quantitative data in the subsequent paragraph. Furthermore the reasons for differences in the perceived importance of geographical distance and the impact on performance are explained in the ensuing section, referring to the transaction cost theory.
5.2.1 The role of governance for global value chain
performance
In analysing the quantitative as well as qualitative data on the performance and relationship with the German suppliers, in both cases – the relational as well as market supply chain – the performance was very high. On the other hand, results show differences in performance when adding high geographical distance. These results have already been shown in section 5.1, however the impact of distance cannot only be seen between a local and a foreign supplier but also between different types of governance. The findings suggest not only a high importance of geographical distance but further that the perceived importance has been evaluated higher in the market chain than in the relational chain. In answering the question on to what extent geographical distance in a global value chain matters, managers of the market chain pointed out that it matters to a large extent:
MTUmarket: ‘It does matter a lot when a supplier is located far away regarding for example
bureaucracy’ and ‘the transport of goods is more complicated’.
Whereas in the relational chain, all managers were in the opinion that it does not matter that much:
Supplierrelational: ‘I am in the opinion that geographical does not matter, specifically if we have the appropriate amount of capacity’.
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numbers of delivery performance and by the key account managers evaluated performance. In the relational chain, the supplier is underperforming regarding numbers on on-time delivery, however is rated relatively high in the perceived performance by the key account manager. In the market chain, the perceived and evaluated performance of the foreign supplier is rated lower compared to the performance shown in figures.
Figure 10: Differences between perceived and statistical performance
A possible explanation for this phenomenon is the governance type as described in chapter 2, section 2.3. In the evaluations by key account managers also relational aspects of performance as well as personal experiences play a role and therefore can explain the differences in the perceived performance of suppliers. In the description of a disruption by a MTU manager of the relational chain, the problem was solved jointly and the impact was limited due to a good relationship and a high degree of flexibility on each side. In two very critical cases, even other parties of the supply chain like a different supplier or the customer of MTU helped in solving problems in the supply chain. An example for a disruption related to global value chains was a snowstorm in the USA that led to a power outage and a production stop at the suppliers´ site. In order to make up for the delay in shipping parts, the supplier ran extra shifts.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Germany USA Germany India
Relational Relational Market Market Supplier A Supplier B Supplier C Supplier D
On-time delivery
Delivery performance supplier Evaluated delivery
45
MTUrep: ‘There are situations like snow storms or power outages that a customer just has to accept. However that the supplier should do everything to make up for the delay should be and is clear to everyone. However the customer has to consider that this is not as easy task to do’.
In this example, a cooperative, trusting relationship is shown that helps reducing risks related to such occurrences in global value chains. In the market chain however, a problem with the Indian supplier led to a delivery failure as the problem was discovered after the parts were already delivered to MTU.
MTUmarket: ‘We have to make the supplier more aware of the criticality of such issues’; ‘We
have to push him to go deeper into the details of where the mistake originated from’.
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and therefore the established propositions might be of interest especially for just mentioned researchers. Furthermore, the misperception of performance by managers depending on governance has implications for practitioners. They should stay objective in evaluating relations with suppliers in order to develop and improve relationships and performance.
Proposition 2.1: In market supply chains, the supplier relations and perceived performance are highly dependent on whether suppliers are locally clustered or globally dispersed. Proposition 2.2: A market governance style negatively moderates the relationship between geographical distance and perceived performance of geographically distant suppliers.
Proposition 2.3: A relational governance style positively moderates the relationship between geographical distance and perceived performance of geographically distant suppliers.
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minimized due to a close relationship including high communication frequency. Furthermore, there are representatives of MTU located close to the supplier in the US. Due to that, restrictions that are imposed by geographical distance under normal circumstances and uncertainty can be decreased with having a contact person close to the suppliers’ site.
MTUrelational: ‘In urgent cases and disruptions we have representatives on the East and West
coast in the US so if we have a special problem we can send them on site at the supplier to solve the issue’.
Although endogenous uncertainty2 to some degree exists, especially in the development and qualification phase of parts and the supplier, endogenous but especially exogenous uncertainty and risks related to geographical distance can be limited in a relational chain. According to the transaction cost theory, a market supply chain is characterized by low uncertainty. However, as the findings of this study show, the degree of uncertainty varies depending on the geographical distance of suppliers. There is almost no uncertainty with the German supplier:
MTUmarket: ‘With the German supplier there is no weekly telephone conference’ or generally
no scheduled communication in any way. We do not need to monitor him or ask for information’.
There is a high degree of endogenous as well as exogenous uncertainty with the foreign supplier and key account managers have to control if parts arrive in time.
MTUmarket: ‘We check the delivery dates beforehand, the tracking numbers and the reception
of the goods’.
This higher uncertainty and expenditure on information exchange in market chains with high geographical distance, which are usually very low according to the TCT, cause higher transaction costs. When there is a high geographical distance, the way how this distance is perceived depends highly on uncertainty in a supply chain. It can be argued that trust and different degrees of uncertainty impact the perceived performance and importance of geographical distance. This aspect is of great matter for managers of GVCs for their ability to save costs. High uncertainty increases transaction costs which can be evoked due to high geographical distances. Concluding, managers should adapt their governance in order to minimize uncertainty.
2
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Proposition 2.4: In market supply chains with a low level of trust, geographical distance increases uncertainty, inducing higher transaction costs.
Proposition 2.5: In relational supply chains with a high level of trust, geographical distance is less important, lowering uncertainty and transaction costs.
5.3
Differences in the importance of geographical distance in
phases of value creation
The study further revealed that the importance of distance differs between steps of the value creation process within one type of governance style. Subdividing the different steps in value chains, first of all there is a phase of development and qualification of parts, a phase of production and the logistics to get the part to the customer. It is argued that the importance of distance depends on the different stages in the value creation processes in a form of governance. In a relational chain, the importance of geographical distance is higher in the development phase and decreases proportionally in the subsequent phases in the value chain. In the development and qualification phase of highly specific parts, higher coordination and communication expenditure as well as the need to transmit knowledge and convey the understanding of the information is required.
MTUrep: ‘If there is an issue at MTU the engineers can just go to the assembly line and directly work on the problem. This is of course not the case with suppliers in the US, where Emails are sent back and forth, pictures are taken, and documents submitted etc., which slows the whole process down’.
However in the phase of logistics, distance does not play an important role as possible obstacles are compensated by the relational form of governance.
MTUrep: ‘Regarding deliveries geographical distance does not matter’.
On the contrary, in a market chain the importance of distance in the qualification phase is lower, as the expenditure on standard parts in comparably low. However the perceived importance increases in the phase of production and logistics due to obstacles that can arise in high geographical distance which are not managed accordingly due to market specifications in the chain.
MTUmarket: ‘The transport of goods is more complicated with customs, documentation and
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Concluding, the importance of distance can play a higher or lower role in between one governance type, depending on the current phase in the value chain.
Proposition 3.1: The importance of geographical distance in between one governance style depends on the phase in the processes of a value chain.
5.4
Further important aspects in geographically dispersed chains
As illustrated in the first section of this chapter, geographical distance was found to matter to a large extent and have an impact on the performance in global value chains. In the ensuing section, different forms and specifications of governance related to the transaction cost theory were identified as varying in the importance of geographical distance. In this paragraph, aspects of geographical distance and its importance that could not be captured in the theoretical framework of this thesis are explained. One aspect is for example the role of boundary spanners, which are the managers on each end of supply chain interfaces (Charvet and Cooper, 2010). The contact person on the other side of the globe is decisive in the management of global value chains.MTUrelational: ‘I think what is more important is the other person sitting on the other side of the line – if this person is cooperative and good in communication then geographical distance does not make a big difference to me’.
Comparing both supply chains with high geographical distance, the perceived performance of the supplier depends largely on the performance of the sales manager. In the case of the relational chain, the contact person at the supplier is the CEO of the company. The relationship with the CEO has been perceived as being very good; the CEO himself was evaluated as being highly responsible, knowledgeable, trustworthy and in general as being highly professional.
MTUrep: ‘It is easier to get in contact with the CEO who is a lot more concerned with the whole supply chain’.
Supplierrelational: ‘Even in the case of disruptions, the CEO is available 24/7’.
In comparison to the market chain, the contact person has been evaluated as being obliging and a personal relationship can be shown, however the performance and trustworthiness of the sales manager was not rated very high.
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Risks can be avoided more easily if the manager on the suppliers´ side communicates all information in time and is generally efficient to work with. However if the manager is not suitable for the job due to for instance a lack in motivation, knowledge or even just personal differences, this can harm the performance in a supply chain, even though a governance style between companies has been established. The perceived importance of geographical distance does furthermore depend on specifications of a supplier´s home country like the culture and knowledge base. For example, problems in communication are not rated very high in countries where managers are available around the clock due to their work ethics. This does especially hold true for companies from developing countries that have to compete with firms from developed countries.
MTUmarket: ‘It is still ok to handle the time differences even in times of disruptions. It is also
helpful that the managers in India are ‘busy bees’, they are available nearly around the clock so in urgent cases they will be able to answer’.
Suppliermarket: ‘When we have an issue, the whole team has to stay in the office until late at night to get a hold on the right people’.
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Suppliermarket: ‘A major problem with geographically dispersed suppliers and customers is the technological support’.
Concluding it can be argued that specifications of the home country of suppliers like culture and the knowledge-base have an impact on the perceived importance of distance.
Proposition 4.1: Characteristics of individual managers (boundary spanner) have an impact on the perceived importance of geographical distance.
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Chapter 6: Conclusion
53
Limitations and recommendations for further research
54
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