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A Guide to Building an International Supply Chain

January 7th, 2019

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International Business Supply Chain

How does a firm looking to expand internationally build an effective global supply chain network from scratch?

Masaaki ‘Mike’ Kotabe, Washburn Chair Professor of International Business and Marketing at the Fox School, addresses this question by studying the strategies employed by Uniqlo, a Japanese apparel firm which successfully built a world-class global supply chain network in a relatively short period of time.

In his article, ”A Dynamic Process of Building Global Supply Chain Competence by New Ventures: The Case of Uniqlo,” which was published in the Journal of International Marketing, Kotabe proposes a dynamic model on how new firms can create a flexible supply chain network internationally. “By effectively developing partnering flexibility and exerting competitive pressure on partner suppliers,” Kotabe says, “new and small firms can overcome initial business challenges associated with the lack of local reputation, limited capacity for large orders and the presence of locally established competitors.”

Historically, major Japanese manufacturers invested significantly in manufacturing activities with advanced technologies and building close-knit suppliers. But with the rapidly changing global markets in the 1990s and 2000s, these relationships turned out to be a major financial burden with huge fixed costs.

Newly internationalizing Japanese firms began to develop more “asset-light” flexible relationships with local suppliers. But Kotabe says, “They still faced serious gaps due to the lack of initial large-scale production capability and bargaining power with local suppliers.”

However, Kotabe notes a transformational change in the strategy employed by new Japanese companies like Uniqlo. “They focus primarily on building relationships with their suppliers by providing them economic and technological rewards frequently,” Kotabe says. “They also maintain flexibility in their partnership by avoiding suppliers’ over dependence on the relationship.”

By examining Uniqlo’s successful supply chain development, Kotabe proposes a three-stage model that can serve as a guideline for small companies looking to build competitive advantages while expanding internationally.

In the first stage, building close relations with suppliers is crucial. “Suppliers are more cooperative when the partnering firm rewards them with large volume orders,” says Kotabe. By limiting not only the number of suppliers but also the variety of products to be manufactured, companies can ensure that every chosen supplier has a satisfactory share of the business, along with a large volume order per variant.

The second stage focuses on developing collaborative relationships with the suppliers by helping them build their competencies. Uniqlo hired a team of retired experts skilled in Japan’s textile industry to provide technical support to their suppliers’ factories. Kotabe says, “This move was key to Uniqlo’s success story as it helped in building trust and avoiding conflicts with its suppliers.”

“By receiving both economic and technological rewards continuously in the first and second stages of the process,” Kotabe notes, “the partners’ attitude toward the principal firm stays positive and cooperative.”

In the last stage, companies need to create flexibility in their supply chain by encouraging their suppliers to have other secondary customers. This allows them to grow their own business volumes independently and prevents excessive dependency on the partner. “Uniqlo enforced a compulsory non-exclusivity arrangement,” Kotabe says.”Therefore, even when Uniqlo canceled a transaction with a partner supplier, the supplier could easily find new clients.”

With more companies becoming involved in international markets to achieve better product quality and lower costs, it is important to effectively devise strategies to stay competitive. Kotabe’s study serves as detailed guidance for firms with limited international business experience to build a flexible global supply chain network from scratch.

For further reading on a similar topic, check out “What Is the Role of International Business Researchers?

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