Research Background

In the first half of 1900s, the enterprises faced a slow-moving market. Most of the industry’s upstream and downstream members operate individually, market information pass from downstream marketplace to upstream members tardily. Therefore, there exists a lag to the suppliers in responding market demand. Some manufacturers attempt to fully control much of their upstream resources and downstream sale channels. Take Ford motor company for example, it owned and operated iron mines, steel mills, farms, sawmills, parts plants, car assembly plants and retail showroom. From the raw materials to finished products, Ford motor company took part in every stage of the production activities. This is also known as vertical integration, to gain maximum efficiency through economies of scale (Betz, 2003). Today, rapid pace of technological progress forces organizations to face highly competitive markets. In the fast-moving markets of present economy, companies are required to have more flexibility and responsiveness. As organization grows bigger, globalization becomes inevitable for some reasons such as resources availability and market accessibility. It would be far beyond the control for enterprises to involve in every stage of manufacturing, distributing and marketing. A company’s competitive strategy defines the set of customer needs that it seeks to satisfy through its products or services. In order to fulfill the customer’s request, it will be a better way for different companies to work through the whole process and every one of them focuses on their

‘core competence’ and outsources the rest.

Supply chain represents product moves from supplies to manufacturers to distributors to retailers to customers along a chain (Chopra and Meindl, 2001). Ayers (2001) defines supply chain management as: “Life cycle processes comprising physical, information, financial, and

knowledge flows whose purpose is to satisfy end-user requirements with products and services from multiple linked suppliers.” The primary purpose for the existence of supply chain is to fulfill various customers’ needs. In any given supply chain, there are some combinations of enterprises that perform different functions, such as manufacturers, distributors or wholesalers, retailers. However, the fact is that market demands fluctuate all the time. As market demand changes, the upstream supply chain members would suffer the so-called ‘bullwhip’ effect. The more upstream they are, the more impacts they face. Nevertheless, supply chain members concern about their own benefits, even some of them are conflict each other. Promising high service levels to customers would cause over inventory, meanwhile, such action would increase holding costs and decrease operating efficiency. It is necessary to take a system approach to understand and coordinate the different member’s activities. The system approach that provides the framework to coordinate the flow of products and services to best serve the end customers is so-called supply chain management.

Supply chain management arouse in the late 1980s and widespread in the 1990s.

Business used term such as “logistics” before that time. There are distinct differences between the concepts of supply chain management and traditional logistics. Traditional logistics focus on activities such as procurement, distribution, and inventory management. Supply chain management embraces all of the traditional logistics, but adds activities such as marketing, product development, finance, and customer service. The main idea of the supply chain management is to employ a systematic framework, integrating the upstream and downstream members in the industry by common goals and shared information, to lessen the lead time of production and respond the market demand promptly. The goal of supply chain management is to facilitate high throughput while simultaneously reducing both inventory and operating

expenses, keeping overall supply chain profitability. Ballou et al. (2000) has mentioned the coordination is a central lever of supply chain management. Li and Zhang (2008) also emphasize information sharing helps to improve supply chain profits.

As globalization and multinational corporations emerge, supply chain management are widely adopted by managers and applied in diverse industries. Johnson (2006) points out globalization and technology continually presented the world with new supply chain challenges and opportunities for further progress.

Studies in supply chain have demonstrated that in many industries retailers have increased their power relative to the manufacturer’s power over the last two decades (Messinger and Narasimhan, 1995). Manufacturers that had dominated their retailers in the past are finding that many retailers now hold the upper hand. In the past, the Procter and Gamble company (P&G) would act as the leader and dictate to their downstream retailer such as Wal-Mart. P&G’s decides what products would sell to Wal-Mart at what prices and under what terms. Besides, P&G used to limit the quantities of high demand products they would deliver to Wal-Mart, insist that Wal-Mart carry all sizes of a certain product, and asks that Wal-Mart participate in promotional programs.

But the situation somehow seems to be different (Li et al., 2002). Some retailers have grown to the point where the revenues are many times than their upstream supply chain members.

Now, Wal-Mart, the retailer giant running over 9,000 stores across 15 countries with a remarkable revenue record of U$405 billion in 2010, is the most famous retailer reaching and retaining its success by a totally price reduction policy (Hesterly, 2010). In order to keep its promise to customers, Wal-Mart’s competitive strategy and supply chain strategy must fit together.

Wal-Mart owns the superiority to bargain with its suppliers. Retailers, with the enormous scale

relative to their upstream suppliers, would require the suppliers to coordinate in related operations, such as inventory level, quantity discount, advertisement, terms of payment, or slotting fees. If the products do not sell well as expected, the suppliers will face the threat of moving products to poor shelf location or even to be dropped. Some suppliers who are lured by the big volumes to deal with Wal-Mart, but there are even cases that some suppliers eventually have no choice to disconnect with Wal-Mart for they can not keep the pace with the low price strategy (Norman, 2004).

Wal-Mart has strong impacts on a community and country in many wide aspects. Hicks (2006) concludes the so-called Wal-Mart effect in 3 types: (1) The income effect states that the lower retail prices may allow consumers to increase purchases, hence leading to higher employment and income in the retailer sector. Goetz and Swaminathan (2006) indicate that there exists a statistically significant increase effect of each Wal-Mart store on the United States’

countywide family-poverty rate with an average of 0.099%. However, a smaller reduction in the family-poverty rate, which might possibly be derived from the policy of minimizing the worker’s wage, is also found in places that had no stores. The estimate of the overall income effect must offset the above two effects. (2) The cluster effect refers to the geographic firm network naturally formed to share a common labor market, transportation, and the technologies of Wal-Mart, which bring a net increase of employment, wages, and firms as a consequence. (3) The productivity effect refers to the overall economic growth resulting from the new inputs (more workers, more natural resources, and more machinery) and the more intensive production process for workers to produce more goods or services with the same inputs. It is found that Wal-Mart’s price policy does not remain only in its store, but spills over to bring domestic retail prices down in the product markets it enters. Basker (2005) shows evidence that price decline is

economically large, 1.5-3.0%, in the short run and four times as much in the long run and is statistically significant.

Since the supply chain members’ power has shifted from upstream to downstream to certain extent, it would be interesting to survey how the impact to the supply chain member’s benefits. Whether the supply chain operates more efficient or customers gain the benefits from the change under the downstream firm-led structure are explored. In this study, we are going to discuss the supply chain in the game theoretic view.