INTERNATIONAL MARKETING International marketing takes place when a business directs its products and services toward consumers

in a country other than the one in which it is located. While the overall concept of marketing is the same worldwide, the environment within which the marketing plan is implemented can be dramatically different from region to region. Common marketing concernssuch as input costs, price, advertising, and distributionare likely to differ dramatically in the countries in which a firm elects to market its goods or services. Business consultants thus contend that the key to successful international marketing for any business whether a multinational corporation or a small entrepreneurial ventureis the ability to adapt, manage, and coordinate an intelligent plan in an unfamiliar (and sometimes unstable) foreign environment. Businesses choose to explore foreign markets for a host of sound reasons. In some instances, firms initiate foreign market exploration in response to unsolicited orders from consumers in those markets. Many others, meanwhile, seek to establish a business to absorb overhead costs at home, diversify their corporate holdings, take advantage of domestic or international political or economic changes, or tap into new or growing markets. The overriding factor spurring international marketing efforts is, of course, to make money, and as the systems that comprise the global economy become ever more interrelated, many companies have recognized that international opportunities can ultimately spell the difference between success and failure. "The world is getting smaller," concluded E. Jerome McCarthy and William D. Perreault Jr. in Basic Marketing. "Advances in communications and transportation are making it easier to reach international customers. Product-market opportunities are often no more limited by national boundaries than they are by state lines within the United States. Around the world there are potential customers with needs and money to spend. Ignoring those customers doesn't make any more sense than ignoring potential customers in the same town." While companies choosing to market internationally do not share an overall profile, they seem to have two specific characteristics in common. First, the products that they market abroad, usually patented, are believed to have high earnings potential in foreign markets. Second, the management of companies marketing internationally must be ready to make a commitment to these markets. This entails far more than simply throwing money at a new exporting venture.

Indeed, a business that is genuinely committed to establishing an international presence must be willing to educate itself thoroughly on the particular countries it chooses to enter through a course of market research. DEVELOPING FOREIGN MARKETS There are several general ways to develop markets on foreign soil. They include: exporting products and services from the country of origin; entering into joint venture arrangements; licensing patent rights, trademark rights, etc. to companies abroad; franchising; contract manufacturing; and establishing subsidiaries in foreign countries. A company can commit itself to one or more of the above arrangements at any time during its efforts to develop foreign markets. Each method has its own distinct advantages and disadvantages. New companies, or those that are taking their first steps into the realm of international commerce, often begin to explore international markets through exporting (though they often struggle with financing). Achieving export sales can be accomplished in numerous ways. Sales can be made directly, via mail order, or through offices established abroad. Companies can also undertake indirect exporting, which involves selling to domestic intermediaries who locate the specific markets for the firm's products or services. Many companies are able to establish a healthy presence in foreign markets without ever expanding beyond exporting practices. International licensing occurs when a country grants the right to manufacture and distribute a product or service under the licenser's trade name in a specified country or market. Although large companies often grant licenses, this practice is also frequently used by small and mediumsized companies. Often seen as a supplement to manufacturing and exporting activities, licensing may be the least profitable way of entering a market. Nonetheless, it is sometimes an attractive option when an exporter is short of money, when foreign government import restrictions forbid other ways of entering a market, or when a host country is apprehensive about foreign ownership. A method similar to licensing, called franchising, is also increasingly common. A fourth way to enter a foreign market is through a joint venture arrangement, whereby a company trying to enter a foreign market forms a partnership with one or more companies already established in the host country. Often, the local firm provides expertise on the intended 2

market, while the exporting firm tends to general management and marketing tasks. Use of this method of international investing has accelerated dramatically in the past 25 years. The biggest incentive to entering this type of arrangement is that it reduces the company's risk by the amount of investment made by the host-country partner. A joint venture arrangement allows firms with limited capital to expand into international arenas, and provides the marketer with access to its partner's distribution channels. Contract manufacturing, meanwhile, is an arrangement wherein an exporter turns over the production reins to another company, but maintains control of the marketing process. A company can also expand abroad by setting up its own manufacturing operations in a foreign country, but capital requirements associated with this method generally preclude small companies from pursuing this option. Large corporations are far more likely to embrace this alternative, which often allows them to avoid high import taxes, reduce transportation costs, utilize cheap labor, and gain increased access to raw materials. INTERNATIONAL MARKETING FACTORS Although firms marketing abroad face many of the same challenges as firms marketing domestically, international environments present added uncertainties which must be accurately interpreted. Indeed, there are a host of factors that need to be researched and evaluated when preparing an international marketing strategy. Key aspects of any potential foreign market include: demographic and physical environment; political environment; economic environment; social and cultural environment; and legal environment. Demographic and Physical Environment. Elements that needs to be assessed that fit under this category include population size, growth, and distribution; climate factors that could impact on business; shipping distances; time zones; and natural resources (or lack thereof). Economic Environment. Factors in this area include disposable income and expenditure patterns; per capita income and distribution; currency stability; inflation; level of acceptance of foreign businesses in economy; Gross National Product (GNP); industrial and technological development; available channels of distribution; and general economic growth. Obviously, the greater a nation's wealth, the more likely it will be that a new product or service can be introduced successfully. Conversely, a market in which economic circumstances provide only a 3

tiny minority of citizens with the resources to buy televisions may not be an ideal one for a television-based marketing campaign. Social and Cultural Environment . This category encompasses a wide range of considerations, many of which canif misunderstood or unanticipatedsignificantly undermine a business's marketing efforts. These include literacy rates; general education levels; language; religion; ethics; social values; and social organization. "The ability of a country's people to read and write has a direct influence on the development of the economyand on marketing strategy planning," observed McCarthy and Perreault. "The degree of literacy affects the way information is deliveredwhich in marketing means promotion."Attitudes based on religious beliefs or cultural norms often shape marketing choices in fundamental ways as well. As Hiam and Schewe noted,"cultures differ in their values and attitudes toward work, success, clothing, food, music, sex, social status, honesty, the rights of others, and much else." They observed that even business practices can vary tremendously from people to people. "For instance, haggling is never done by the Dutch, often by Brazilians, and always by the Chinese." The company that does not take the time to make itself aware of these differences runs the risk of putting together an international marketing venture that can fail at any number of points. Legal Environment. This includes limitations on trade through tariffs or quotas; documentation and import regulations; various investment, tax, and employment laws; patent and trademark protection; and preferential treaties. These factors range from huge treaties (North American Free Trade Agreement-NAFTA, General Agreement on Tariffs and TradeGATT) that profoundly shape the international transactions of many nations to trade barriers erected by a single country. Political Environment : Factors here include system of government in targeted market; political stability; dominant ideology; and national economic priorities. This aspect of an international market is often the single most important one, for it can be so influential in shaping other factors. For example, a government that is distrustful of foreigners or intent on maintaining domestic control of an industry or industries might erect legal barriers designed to severely curtail the business opportunities of foreign firms.

Limitations of global marketing

Internet marketing requires customers to use newer technologies rather than traditional media. Low-speed Internet connections are another barrier: If companies build large or overlycomplicated websites, individuals connected to the Internet via dial-up connections or mobile devices may experience significant delays in content delivery. From the buyer's perspective, the inability of shoppers to touch, smell, taste or "try on" tangible goods before making an online purchase can be limiting. However, there is an industry standard for e-commerce vendors to reassure customers by having liberal return policies as well as providing in-store pick-up services. A survey of 410 marketing executives listed the following barriers to entry for large companies looking to market online: insufficient ability to measure impact, lack of internal capability, and difficulty convincing senior management.[2] Market forces and development Over the last few decades internationalism has grown because of a number of market factors which have been driving development forward, over and above those factors which have been attempting to restrain it. These include market and marketing related variables. Many global opportunities have arisen because of the clustering of market opportunities worldwide. Organisations have found that similar basic segments exist worldwide and, therefore, can be met with a global orientation. Cotton, as an ingredient in shirtings, suitings, and curtain material can be globally marketed as natural and fashionable. One can see in the streets of New York, London, Kuala Lumpar or Harare, youth with the same style and brand of basketball shirts or American Football shorts. Coca Cola can be universally advertised as "Adds Life" or appeal to a basic instinct " You can't beat the Feeling" or "Come alive" as with the case of Pepsi. One can question "what feeling?", but that is not the point. The more culturally unbounded the product is, the more a global clustering can take place and the more a standardised approach can be made in the design of marketing programmes. This standardised approach can be aided and abetted with technology. Technology has been one of the single most powerful driving forces to internationalism. Rarely is technology culturally bound. A new pesticide is available almost globally to any agricultural organisation as long as it has the means to buy it. Computers in agriculture and other applications are used universally with IBM and Macintosh becoming household names. The need to recoup large costs of research and development in new products may force organisations to look at global markets to recoup their investment. This is certainly true of many veterinary products. Global volumes allow continuing investment in R & D, thus helping firms to improve quality. Farm machinery, for example, requires volume to generate profits for the development of new products. Communications and transport are shrinking the global market place. Value added manufacturers like Cadbury, Nestl, Kelloggs, Beyer, Norsk Hydro, Massey Ferguson and ICI find themselves "under pressure" from the market place and distributors alike to position their brands globally. In
5

many cases this may mean an adaption in advertising appeals or messages as well as packaging and instructions. Nestle will not be in a hurry to repeat its disastrous experience of the "Infant formula" saga, whereby it failed to realise that the ability to find, boiled water for its preparations, coupled with the literacy level to read the instructions properly, were not universal phenomenon. Marketing globally also provides the marketer with five types of "leverage" or "advantages", those of experience, scale, resource utilisation and global strategy. A multi-product global giant like Nestle', with over 10 billion turnover annually, operates in so many markets, buys so much raw material from a variety of outgrowers of different sizes, that its international leverage is huge. If it consumes a third of the world's cocoa output annually, then it is in a position to dominate terms. This also has its dangers. The greatest lift to producers of raw agricultural products has been the almost universal necessity to consume their produce. If one considers the whole range of materials from their raw to value added state there is hardly a market segment which cannot be tapped globally. Take, for example, oranges. Not only are Brazilian, Israeli, South African and Spanish oranges in demand in their raw state worldwide, but their downstream developments are equally in demand. Orange juice, concentrates, segments and orange pigments are globally demanded. In addition the ancillary products and services required to make the orange industry work, find themselves equally in global demand. So insecticides, chemicals, machinery, transport services, financial institutions, warehousing, packaging and a whole range of other production and marketing services are in demand, many provided by global organisations like Beyer, British Airways and Barclays Bank. Of course, many raw materials are at the mercy of world prices, and so many developing countries find themselves at the mercy of supply and demand fluctuations. But this highlights one important global lesson - the need to study markets carefully. Tobacco producing countries of the world are finding this out. With a growing trend away from tobacco products in the west, new markets or increasing volumes into consuming markets have to be prospected and developed. Many agricultural commodities take time to mature. An orange grove will mature after five years. By that time another country may plant or have its trees mature. Unless these developments are picked up by global intelligence the plans for a big profit may be not realised as the extra volume supplied depresses prices. This happened in 1993/94 with the Malawian and Zimbabwean tobacco companies. The unexpected release of Chinese tobacco depressed the tobacco price well below expectations, leaving farms with stock and large interest carrying production loans. A number of suppliers of agricultural produce can take advantage of "off season" in other countries, or the fact that they produce speciality products. This is the way by which many East African and South American producers established themselves in Europe and the USA respectively. In fact the case of Kenya vegetables to Europe is a classic, covering many of the factors which have just been discussed-improved technology, emerging global segments, shrinking communications gaps and the drive to diversify product ranges.

Michael Porter Five Forces Model

Wanting to incorporate Michael Porter's Five Forces Model into your marketing strategy?

Business Insight will do this for you automatically.

Michael Porter described a concept that has become known as the "five forces model". This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed. We used the five-forces model as a basic structure and built on it with concepts from the works of many other authors. The result was a model with over 5,000 relational links.

While each industry involves all of these factors, the relational strengths vary. Business Insight uses input from the user to create a unique model of their industry. Then thousands of "rules" are applied to evaluate hundreds of marketing and business concepts as they relate to the user's unique circumstances. This results in a set of analyses, including:

a success potential rating in eleven key areas a list of strategic strengths and weaknesses observations on strategic inconsistencies a written critique of your strategy a graphic analysis of key marketing concepts a written draft of a marketing plan

Organisation for Economic Co-operation and Development

The Organisation for Economic Co-operation and Development (OECD, in French: Organisation de coopration et de dveloppement conomiques, OCDE) is an international economic organisation of 33 countries. It defines itself as a forum of countries committed to democracy and the market economy, providing a setting to compare policy experiences, seeking answers to common problems, identifying good practices, and co-ordinating domestic and international policies of its members. The OECD originated in 1948 as the Organisation for European Economic Co-operation (OEEC), led by Robert Marjolin of France, to help administer the Marshall Plan for the reconstruction of Europe after World War II. Later, its membership was extended to nonEuropean states. In 1961, it was reformed into the Organisation for Economic Co-operation and Development by the Convention on the Organisation for Economic Co-operation and Development. Most OECD members are high-income economies with a high Human Development Index (HDI) and are regarded as developed countries (Chile being the only OECD member which is also a member in the organisation of developing countries, the Group of 77). The OECD's headquarters are at the Chteau de la Muette in Paris, France.

Objectives and activities

The OECD defines itself as a forum of countries committed to democracy and the market economy, providing a setting to compare policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic and international policies.[10] Its mandate covers economic, environmental, and social issues. It acts by peer pressure to improve policy and implement "soft law"non-binding instruments that can occasionally lead to binding treaties. In this work, the OECD cooperates with businesses, trade unions and other representatives of civil society. Collaboration at the OECD regarding taxation, for example, has fostered the growth of a global web of bilateral tax treaties. The OECD promotes policies designed:

to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as nonmember countries in the process of economic development; and to contribute to the expansion of world trade on a multilateral, nondiscriminatory basis in accordance with international obligations.

[edit] International investments and multinational enterprises

Between 1995 and 1998, the OECD designed the Multilateral Agreement on Investment, which was abandoned because of a widespread criticism from civil society groups and developing countries. In 1976, the OECD adopted the Declaration on International Investment and
8

Multinational Enterprises, which was rewritten and annexed by the OECD Guidelines for Multinational Enterprises in 2000. Among other areas, the OECD has taken a role in co-ordinating international action on corruption and bribery, creating the OECD Anti-Bribery Convention, which came into effect in February 1999. It has been ratified by thirty-eight countries.[11] The OECD has also constituted an anti-spam task force, which submitted a detailed report, with several quite useful background papers on spam problems in developing countries, best practices for ISPs, e-mail marketers, etc., appended. It works on the information economy[12] and the future of the Internet economy.[13]

Structure
The OECD's structure revolves around three major bodies:

The OECD member countries, each represented by a delegation led by an ambassador. Together, they form the OECD Council. Member countries acts through the meetings. The OECD Secretariat, led by the Secretary-General (currently Angel Gurria). The Secretariat is organised in directorates. There are some 2,500 agents in the OECD Secretariat. The OECD committees, one for each work area of the OECD. Committee members are typically subject-matter experts from member and non-member countries. The committees commission all the work on each theme (publications, task forces, conferences, and so on). The committee members then relay the conclusions to their capitals.

Meetings

Delegates from the member countries attend committees' and other meetings, principally organised by the secretariat. Former Deputy-Secretary General Pierre Vinde estimated in 1997 that the cost borne by the member countries, such as sending their officials to OECD meetings and maintaining permanent delegations, is equivalent to the cost of running the secretariat.[18] This ratio is unique among inter-governmental organisations. In other words, the OECD is more a persistent forum or network of officials and experts than an administration. Noteworthy meetings include:

The yearly Ministerial Council Meeting, with the Ministers of Economy of all member countries and the candidates for enhanced engagement among the countries. The annual OECD Forum, which brings together leaders from business, government, labour, civil society and international organisations. This takes the form of conferences and discussions and is open to public participation. Thematic Ministerial Meetings, held among Ministers of a given domain (ie. all Ministers of Labour, all Ministers of Environment, etc.).

The bi-annual World Forum on Statistics, Knowledge and Policies, which does not usually take place in the OECD. This series of meetings has the ambition to measure and foster progress in societies.

Member countries
There are currently 33 members of the OECD, and the number is expected to increase to 34 after Estonia joins the organisation. Founding members of OEEC (1948):

Austria Belgium Denmark France Greece Iceland Ireland Italy Luxembourg Netherlands Norway Portugal Sweden Switzerland Trieste, Anglo-America zone (until 1954) Turkey United Kingdom

Admitted later to OEEC (listed chronologically with year of admission):

Germany, Federal Republic of (1955) Spain (1959)

Admitted when reformed as OECD (1961)

Canada United States

Admitted later to OECD (listed chronologically with year of admission):

Japan (1964) Finland (1969) Australia (1971) New Zealand (1973) Mexico (1994) Czech Republic (1995) 10

Hungary (1996) Poland (1996) Republic of Korea (South Korea) (1996) Slovakia (2000) Chile (2010) Slovenia (2010) Israel (2010)

Country invited (on 10 May 2010[7]) to join the OECD, but not yet a member:

Estonia

The European Commission participates in the work of the OECD alongside the EU Member States.[21]

Relations with non-members

OECD members Accession candidate countries Enhanced engagement countries

Currently, 25 non-members participate as regular observers or full participants in OECD Committees. About 50 non-members are engaged in OECD working parties, schemes or programmes. The OECD conducts a policy dialogue and capacity building activities with nonmembers (Country Programmes, Regional Approaches and Global Forums) to share their views on best policy practices and to bear on OECD's policy debate. The OECD's Centre for Cooperation with Non-Members develops and oversees the strategic orientations of the relations with non-members. The OECD explores the possibilities for enhanced co-operation with selected countries and regions of strategic interest to the OECD, giving priority to South East Asia with a view to identifying countries for possible membership.

Criticism
The OECD has been criticised by several civil society groups and developing countries. The main criticism has been the narrowness of the OECD because of its limited membership to a select few rich nations.[22] In 19971998, the draft Multilateral Agreement on Investment was heavily criticized by several non-governmental organisations and developing countries. Many critics argued that the agreement would threaten protection of human rights, labor and environmental standards, and the least developed countries. A particular concern was that the MAI would result in a 'race to the bottom' among countries willing to lower their labor and environmental standards to attract foreign investment. Also the OECD's actions against harmful tax practices has raised criticism. The primary objection is the sanctity of tax policy as a matter of sovereign entitlement.[14]

11

World Economic Forum:

The World Economic Forum (WEF) is a Geneva-based non-profit foundation best known for its annual meeting in Davos, Switzerland, which brings together top business leaders, international political leaders, selected intellectuals and journalists to discuss the most pressing issues facing the world, including health and the environment. Beside meetings, the WEF produces a series of research reports and engages its members in sector specific initiatives.[1] WEF also organizes the "Annual Meeting of the New Champions" in China and a series of regional meetings throughout the year. In 2008 those regional meetings included meetings on Europe and Central Asia, East Asia, the Russia CEO Roundtable, Africa, the Middle East, and the World Economic Forum on Latin America. In 2008 it launched the "Summit on the Global Agenda" in Dubai.

Organization
The WEF is headquartered in Cologny, Geneva, Switzerland. In 2006 it opened regional offices in Beijing, China and New York City. It strives to be impartial, and is not tied to any political, partisan or national interests. It is "committed to improving the State of the World".[9], and has observer status with the United Nations Economic and Social Council, and is under the supervision of the Swiss Federal Government. Its highest governance body is the Foundation Board consisting of 22 members, including former British Prime Minister Tony Blair and Queen Rania of Jordan. During the five-day Annual meeting in 2009, over 2,500 participants from 91 countries gathered in Davos. Around 75% (1,170) were business leaders, drawn principally from its members, 1,000 of the world's top companies. Besides these, participants included 219 public figures, including 40 heads of state or government, 64 cabinet ministers, 30 heads or senior officials of international organizations and 10 ambassadors. More than 432 participants were from civil society, including 32 heads or representatives of non-governmental organizations, 225 media leaders, 149 leaders from academic institutions and think tanks, 15 religious leaders of different faiths and 11 union leaders.[10]
[edit] Membership

The WEF is funded by its 1000 member companies, the typical company being a global enterprise with more than five billion dollars in turnover, although the latter can vary by industry and region. In addition, these enterprises rank among the top companies within their industry and/or country and play a leading role in shaping the future of their industry and/or region. As of 2005, each member company pays a basic annual membership fee of CHF 42,500 and a CHF 18,000 Annual Meeting fee which covers the participation of its CEO at the Annual Meeting in Davos. Industry Partners and Strategic Partners pay CHF 250,000 and CHF 500,000 respectively allowing them to play a greater role in the Forums initiatives.[11][12] In addition, these enterprises rank among the top companies within their industry and/or country (generally based on turnover in millions of US dollars; for financial institutions the criteria is
12

based on assets) and play a leading role in shaping the future of their industry and/or region, as judged by the Forum's selection committee
Regional meetings

Every year ten regional meetings take place, enabling close contact between corporate business leaders, local government leaders and NGOs. Meetings are held in Africa, East Asia, Latin America and the Middle East The mix of hosting countries varies from year to year, but China and India have hosted consistently over the past decade.[33]
Social Entrepreneurs

Since 2000 the WEF has been promoting models developed by the world's leading social entrepreneurs in close collaboration with the Schwab Foundation for Social Entrepreneurship.[38] The WEF highlights social entrepreneurship as a key element to advance societies and address social problems.[39][40] Selected social entrepreneurs are invited to participate in the regional meetings and the Annual Meetings of the Forum where they have a chance to meet chief executives and senior government officials. At the Annual Meeting 2003, for example, Jeroo Bilimoria met with Roberto Blois, deputy secretary-general of the International Telecommunication Union, an encounter that produced a key partnership for her organization Child Helpline International.[41]

G33 (developing countries)

The G33 is a group of developing countries that coordinate on trade and economic issues. The name is similar to that of the G8. It was created in order to help a group of countries that were all facing similar problems. The G33 has proposed special rules for developing countries at WTO negotiations, like allowing them to continue to restrict access to their agricultural markets.

Members
Despite the name, there are currently[citation needed] 44 member nations.

Antigua and Barbuda Barbados Belize Benin Botswana China Cote d'Ivoire Cuba Democratic Republic of the Congo 13

Madagascar Mongolia Mozambique Nicaragua Nigeria Pakistan Panama Peru Philippines

Dominican Republic El Salvador Grenada Guyana Guatemala Haiti Honduras India Indonesia Jamaica Kenya Laos Mauritius

Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Senegal South Korea Sri Lanka Suriname Tanzania Trinidad and Tobago Turkey Uganda Zambia Zimbabwe

14

Importance of coordination in supply chain:

INTRODUCTION A supply chain consists of many organizations acting together, with each organization dependent on the performance of other organizations in the chain. Coordination within a supply chain is a strategic response to the challenges that arise from these dependencies. A coordination mechanism is a set of methods used to manage interdependence between organizations. By definition, there are a number of different people, entities, and processes that interact in order to execute supply chain objectives. Coordination mechanisms, then, provide tools for effectively managing these interactions. The importance of coordination cannot be overemphasized. Indeed, supply chain management (SCM) is commonly defined based on coordination: "SCM is the planning and coordination of activities, from procurement to production, through ... distribution" (Arunachalam, Sadeh, Eriksson, Finne and Janson 2003). As time-based competition increases, in part due to e-commerce, the Internet, and improved information systems, there are greater pressures for organizations to improve response times. Arunachalam et al. (2003) also observes the importance of corporations forming alliances in order to best exploit market conditions and improve competitiveness. Given the increasing importance of high-performance (rapid response, high quality) supply, and the advantages to be gained through supply chain coordination, the challenge to an organization is how to select the appropriate coordination mechanism. Coordination mechanisms may be differentiated on the bases of four attributes: resource sharing structure, decision style, level of control, and risk/reward sharing. Given that the selection of a coordination mechanism is often based on minimizing relative costs, transaction cost theory (TCT) can be used to classify the three types of costs associated with coordination: coordination cost, operational risk cost, and opportunistic risk cost. This facilitates relating each coordination mechanism attribute to a type of cost. Finally, organizations do not operate in a vacuum. The environment in which an organization operates will influence the coordination mechanism selected. Three environmental factors will be considered: the interdependence between organizations, uncertainty, and information technology. Moreover, the objective of this work is to develop a framework that enables organizations to select appropriate coordination mechanisms, based on relative costs and the characteristics of their specific operating environment. BACKGROUND This section provides background on previous work in general dependency classifications and specific supply chain dependencies. Dependencies Between Actors and Dependencies Between Activities Traditionally, dependency is classified as either arising between organizations (actor-to-actor dependencies) or between activities. For actor-to-actor dependencies, the research describes different patterns of interdependence between organizations and discusses coordination based on the type of interdependence. Thompson (1967) is

15

representative of early work in this area. The author identifies different coordination mechanisms that are used to respond to different levels of interdependencies between organizations, and categorizes these inter-dependencies as pooled, sequential, or reciprocal (listed in order of increasing strength of interdependency). Corresponding to each kind of interdependence, Thompson (1967) identifies three kinds of coordination mechanisms: standardization, plan, and mutual adjustment. Van de Ven, Delbecq and Koeing (1976) extends the Thompson framework by adding a fourth type of interdependency: team arrangement, in which partners work jointly and simultaneously. In their research, the authors identify three kinds of coordination mechanisms--impersonal (plans and rules), personal (vertical supervision), and group (formal and informal meetings)--and observe that as the level of interdependence increases (from pooled to team arrangement), so too does the need for group coordination. Viewing dependency as a relationship between activities originated in the field of artificial intelligence. From this perspective, coordination is defined as a "process of managing dependencies between activities" (Malone and Crowston 1994). This alternative perspective led to a new set of coordination mechanisms defined by dependencies between activities. Dependencies and the Supply Chain Dependency theories were first applied to SCM in the 1990s. In addition to interdependency, later work attempted to identify other factors related to coordination mechanisms. For example, Nassimbeni (1998) maps different network structures to different interdependencies and identifies different coordination mechanisms for each kind of supply chain network structure. Simatupang, Wright and Sridharan (2002) use a similar approach. The authors define coordination mechanisms along two dimensions: the focus of coordination (operational or organizational linkages) and the mutuality of coordination (complementary or coherency), which results in four coordination modes: logistics synchronization, information sharing, incentive alignment, and collective learning. Finally, they relate these modes to supply chain performance. More recent work in supply chain coordination focuses on quantitative models for revenue sharing (Giannoccaro and Pontrandolfo 2004; Cachon and Lariviere 2005) and decision-support models for specialized systems (Boyaci and Gallego 2004; Wang and Benaroch 2004; and Xiao, Yu, Sheng and Xia 2005). For each type of dependency, there are many coordination mechanisms available. Coordination theory does not generally provide guidance for selecting coordination mechanisms, nor does it consider the operating environment of the organization. The objective of this paper is to

16

Bullwhip Effect in Supply Chains

We review a range of methodological approaches to solving the bullwhip problem. The bullwhip problem is a dynamic consequence of supply chain structures and replenishment policies. The roles of the structure of the demand process, the treatment of time (continuous v discrete), forecasting techniques and lead-times will be reviewed. In practice, and in the theory, a variety of techniques have been used to smooth the dynamics of supply chains. These include, the use of sophisticated forecasting, pooling of demand and inventories, proportional feedback controllers and full-state feedback systems. Multi-echelon supply chains also present a number of interesting innovations. From the traditional, arms-length trading relationships, information sharing, vendor managed inventory and echelon stock policies can be developed. More sophisticated collaboration and co-ordination mechanisms may also lead to altruistic behaviour and result in superior performance. The impact of these procedures will be examined. Finally thoughts on new directions in bullwhip research is presented.

Introduction: The bullwhip effect in supply chains The bullwhip effect is a dynamical phenomenon in supply chains. It refers to the tendency of the variability of orders rates to increase as they pass through the echelons of a supply chain towards producers and raw material suppliers. A classic example of the effect is baby nappies or diapers. Babies are fairly regular in their use of nappies - they have a new nappy (almost) every time they feed. Sure, there is seasonal variation in the birth rates as more babies are conceived in spring (when male sperm count is significantly higher than in any other season; however this is not globally consistent and the there is some debate over the role of both temperature and the day length [1]). Neither-the-less, this seasonal variation is small compared to the widely fluctuating and erratic production rates experienced by the diaper manufacturer after the orders have passed through the supermarkets and distribution centres. There are various measures of the bullwhip effect proposed in the literature [2]. The most common measure is the ratio of the variance of the order rate to the variance of the demand rate, see equation (1). It is the measure that we will focus on herein, and works best for stationary, stochastic, discrete time demand processes. However there are other measures. Standard deviations could be used instead. Indeed, as we will reveal later, this is more natural when the economics of the bullwhip (and inventory) are considered. Another (practical) measure is ratios of the co-efficient of variation ( COV=variance/mean) of order and demand rates. This is a useful measure when there are multiple products going through multiple routes to market and some comparison is needed across different products, businesses or routes to market.

(1)

17

Bullwhip creates unstable production schedules. These unstable production schedules are the cause of a range of unnecessary costs in supply chains. Companies have to invest in extra capacity to meet the high variable demand. This capacity is then under-utilised when demand drops. Unit labour costs rise in periods of low demand, over-time, agency and sub-contract costs rise in periods of high demand. The highly variable demand increases the requirements for safety stock in the supply chain. Additionally, companies may decide to produce to stock in periods of low demand to increase productivity. If this is not managed properly this will lead to excessive obsolescence. Highly variable demand also increases lead-times. These inflated lead-times lead to increased stocks and bullwhip effects. Thus the bullwhip effect can be quite exasperating for companies; they invest in extra capacity, extra inventory, work over-time one week and stand idle the next, whilst at the retail store the shelves of popular products are empty, and the shelves with products that arent selling are full. There are various causes to the bullwhip effect. Lee, Padmanabhan and Whang (1997) made ground-breaking contributions and re-ignited interest in the subject . Their main contribution was to analyse four different causes of the bullwhip effect; batching, shortage gaming, lead-times and demand signal processing. However, there are other sources of the bullwhip effect . Together demand signal processing (the way that replenishment decisions are made) and the impact of lead-times have previously been called the Forrester Effect . We will mainly focus herein on the bullwhip problems generated by the so-called Forrester Effects. Methodological approaches to solving the bullwhip problem The biggest decision to make is whether to study the bullwhip problem in discrete or continuous time. In discrete time, system states (demand rates, inventory and WIP levels) and replenishment orders are made at the equally spaced moments of time. In between these moments of time, nothing is known about the system. In continuous time the systems states are monitored at all moments of time and the order rate is continuously adjusted. Neither representation of time is incorrect; it is just that one representation of time may be more suitable for a given situation than the other. For example, in a grocery supply chain, supermarkets total up demand that has occurred during the day, a replenishment order is generated and a delivery is despatched from the distribution centre overnight. This scenario is very suitable for a discrete time analysis. A petrochemical plant, on the other hand, may be able to continuously adjust its production of different grades of product to reflect the current demand rates for each grade. This type of scenario is more amenable to a continuous analysis.

18