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Mapping supply
Mapping supply chain strategy: chain strategy
an industry analysis
Barin Nag, Chaodong Han and Dong-qing Yao
E-Business and Technology Management, 351
Towson University, Towson, Maryland, USA
Received 5 June 2012
Abstract Revised 13 November 2012
Purpose – In manufacturing industries, the levels of inventories at all stages (i.e. raw material, 9 January 2013
10 January 2013
work-in-process and finished goods inventories) indicate the firm’s competitive positioning, strategies,
Accepted 13 January 2013
internal processes and relationships with suppliers and downstream customers. The authors identify
patterns of manufacturing industries based on levels of raw material and finished goods inventories to
classify inbound and outbound supply chain strategies.
Design/methodology/approach – The authors review literature on supply chain inventory
strategy and perform cluster analysis to analyze patterns of manufacturing industries based on
manufacturing industry data collected from US Census of Bureau. Following Porter’s Five Forces
Model, the authors perform in-depth case studies of four representative industries to analyze factors
driving supply chain strategies, including industry intensity of rivalry, threat of new entrants, threat
of substitutes, bargaining power of suppliers, and bargaining power of buyers.
Findings – This study identifies three streams of research on supply chain strategy: Fisher’s model
and its variations, lean and agile paradigms, and push/pull systems. It finds that whether an industry
shows low or high raw materials or finished goods inventories depending on its products, processes,
and the dynamics of all forces described in the Five Forces Model.
Research limitations/implications – This study is not able to include supplier selection,
production strategies, warehousing and distribution, and even product design into the analysis of supply
chain strategy due to data limitation. This study classifies industries based on average inventory levels
of raw materials and finished goods, while inventory levels and supply chain strategies for specific firms
may vary significantly within each industry.
Originality/value – This study contributes to the supply chain management literature by providing
a parsimonious framework of mapping inbound and outbound supply chain inventory strategies, and
the results based on the analyses of all US manufacturing industries provide a baseline picture for
supply chain management professionals with manufacturing firms.
Keywords Competitive strategy, Supply chain management, Cluster analysis, Manufacturing industry,
Inventory
Paper type Research paper

1. Introduction
In the era of global supply chains, the management of sourcing, production, and
distribution in partnerships with suppliers and distributors, has become a top priority
for manufacturing firms to gain competitive advantages in the marketplace
(Mabert and Venkataramanan, 1998). It has been observed that firms do not
compete individually but their supply chains do (Christopher, 2011; Lambert and
Cooper, 2000). An increasing number of industry supply chain mapping case studies Journal of Manufacturing Technology
have examined specific industry structural forces in shaping industry-specific Management
Vol. 25 No. 3, 2014
inventory strategies. Some examples are found in aerospace (Macdonnell and Clegg, pp. 351-370
2007; Bales et al., 2004), fashion (Cagliano et al., 2011; Sen, 2008), automotive q Emerald Group Publishing Limited
1741-038X
(Handfield et al., 2004; Veloso and Kumar, 2002), chemicals (McKinnon, 2004), DOI 10.1108/JMTM-06-2012-0062
JMTM electronics and semiconductor (Resolve, 2010; Kim et al., 1999), food, fresh produce and
25,3 grocery supply chains (AEA Technology Plc., 2009; Lowe and Gereffi, 2008; Fearne
and Hughes, 1999; Holmström, 1997), furniture industry (Kaplinsky et al., 2003), health
care supply chain (Aronsson et al., 2011; Danas et al., 2006), home appliance (Ahn et al.,
2010), paper (Lehtonen and Holmström, 1998), and steel mills supply chain (Jung and
Lee, 2006).
352 While industry-specific case studies may provide deep insights into a unique
industry, more effort remains needed to help build a generalizable strategic inventory
framework. Despite the increasing need for assessing the roles of industry structural
forces in driving supply chain inventory strategies, there is an apparent lack of
cross-industry analysis which would provide a broader, comparative perspective on the
formation of industry-specific inventory strategies. Furthermore, what is missing in
the current supply chain management literature is a parsimonious framework which can
be applied to inventory strategy formulation from a practical benchmark perspective.
In this research, we perform cluster analysis of a panel dataset of US three-digit North
American Industry Classification System (NAICS) manufacturing industries, collected
from US Census of Economics and Annual Survey of Manufactures over 1997-2008, to
analyze inbound and outbound supply chain patterns of manufacturing industries based
on raw material and finished goods inventories, respectively. Using Porter’s Five Forces
Model, we analyze factors driving supply chain inventory strategies, including industry
intensity of rivalry, threat of new entrants, threat of substitutes, bargaining power of
suppliers, and bargaining power of buyers. The remainder of this paper proceeds as
follows. We review relevant literature on supply chain strategy, introduce Porter’s Five
Forces Model as our research framework, describe the data collection process and the
measurement of variables, and present research methodology and results of cluster
analysis, followed by in-depth analysis of four representative industries to validate
findings from cluster analysis. We conclude the paper with managerial implications,
research limitations, and further research steps.

2. Supply chain inventory strategy

Porter (1996) defined strategy as sustainable positioning, making trade-offs, and
forging fit relationships among activities. As a critical component of business strategy,
supply chain inventory strategy should be aligned with and integrated into the overall
business strategy. In a practical application, UPS defines supply chain strategy as
“[t]he actual operations of [an] organization and the extended supply chain to meet a
specific supply chain objective” (Happek, 2005). A review of supply chain management
literature reveals three related streams of research on the formation of supply chain
inventory strategy:
(1) Fisher’s model and its variations;
(2) lean and agile paradigms; and
(3) push, pull and push-pull systems.
These are briefly described below.

2.1 Fisher’s model and its variations

Fisher’s model claims that supply chain inventory strategy may be formulated
according to supply lead time variability, product characteristics and demand variability.
Fisher (1997) developed two supply chain strategies which are matched with two product Mapping supply
characteristics. For functional products, characterized with a long lifecycle, limited chain strategy
variety, stable and predictable demand, high competition and low profit margin, the best
inventory strategy is “physically efficient supply chain”. The efficiency-oriented strategy
is able to improve capacity utilization, obtain scale economies, remove inventory waste
and non-value added activities, resulting in significant cost reductions. For innovative
products, characterized with a short lifecycle, greater variety, highly volatile and 353
unpredictable demand, and high profit margin, the best strategy is “market responsive
supply chain”. The responsiveness-oriented strategy focuses on speed, flexibility,
product availability and order accuracy through build-to-order, mass-customization, and
strategically positioned inventory buffers.
Based on supply and demand uncertainties, Lee (2002) proposed four supply chain
inventory strategies:
(1) efficient supply chains for functional products with low demand uncertainty
and stable process with low supply uncertainty;
(2) responsive supply chains for innovative products with high demand
uncertainty but stable process with low supply uncertainty;
(3) risk-hedging supply chains for functional products and evolving process with
high supply uncertainty; and
(4) agile supply chains for innovative products and evolving process.

While conventional management wisdom highly values efficiency and speed for
supply chain performance, Lee (2004) prescribed three essential qualities of great
supply chains as: agility (quick response to demand changes and supply disruptions),
adaptability (adjusting to structural shifts in markets and modifications of supply
networks to strategies, products and technologies), and alignment (aligning all supply
chain partners through shared costs, risks and benefits). The bottom line is that high
speed and cost-efficiency alone do not guarantee the competitive advantage. For
example, agility may require firms to hold inventory buffers for key components to
hedge against supply disruptions. Adaptability may require firms to evaluate the
needs of end customers, and not merely immediate customers; and alignment may
require firms to share information and knowledge freely with suppliers and customers.
Selldin and Olhager (2007) validated Fisher’s model using a survey of manufacturing
plants and confirmed that companies with matched strategies tended to have better
performance. Harris et al. (2010) provided partial validation of Fisher’s model based on
simulated benefits from aligned strategies. Lo and Power (2010), however, did not find
empirical support for Fisher’s model in an Australian manufacturing context and hence
suggested that firms may always pursue a mixed strategy due to complex product
characteristics and nonexistence of pure efficient or responsive strategies.

2.2 Lean and agile paradigms

Naylor et al. (1999) were among the first efforts to compare the lean and agile
manufacturing paradigms and propose a combination strategy which integrates both
paradigms. According to Mason-Jones et al. (2000a, b), in the hybrid combined lean and
agile paradigm, lean manufacturing is used with level scheduling upstream from
the decoupling point; while the agile paradigm is adopted to meet market demand
JMTM downstream from the decoupling point. Christopher and Towill (2000) argued that
25,3 whether to adopt lean or agile paradigms depends on the market requirements. Lean
paradigm favors low cost while agile paradigm favors high availability and
responsiveness to changes in product mix and volume. Christopher and Towill (2002)
developed the taxonomy of global supply chain strategies based on a combination of
binary gradation of three market variables: special or standard product, volatile or
354 stable demand, and long or short lead time. Three feasible supply chain strategies may
be formulated:
(1) lean strategy with offshoring for standard products with predictable demand;
(2) agile strategy with home manufacturing for special products with volatile
demand; and
(3) quick response strategy for top-up standard products with unexpected demand
requirements for color, size or volume.

Huang et al. (2002) proposed three supply chain designs – lean, agile and hybrid based
on product characteristics, respectively, standard, innovative and hybrid. Qi et al.
(2009) empirically validated the existence of lean, agile and combined paradigms using
a dataset of Chinese manufacturing firms and further linked matched supply chain
strategy with improved firm performance.

2.3 Push, pull and push-pull systems

In line with the lean, agile, and hybrid classifications, manufacturing supply chain
strategies may also be classified into push, pull, and push-pull systems (Simchi-Levi
and Simchi-Levi, 2003). In push supply chains, production and inventory decisions are
based on long-term forecasts of market demand. Due to inherent inaccuracy of
long-term forecasting and variability caused by the bullwhip effect, manufacturing
firms with push systems tend to carry excessive inventory to maintain desired
customer service level. In contrast, in pull supply chains production and inventory
decisions are made in response to real time market demand so that manufacturing
firms can hold minimum inventory and only produce to order. However, push systems
are not immune from disadvantages that include vulnerability to supply chain
disruptions and lack of economies of scale in terms of production and transportation.
Manufacturing firms with the best practices have adopted a hybrid push-pull system.
The inbound supply chain, raw materials, and component inventories, are push
systems, while the outbound supply chain is a pull system based on customer orders.
An example is Dell assembling to customer orders and able to hold zero finished goods
inventory, while using a push system to stockpile low levels of some key components,
including processors and memory chips through the product life cycle to mitigate
supply disruptions (Dell Computers Inc., 2011).
Inventory levels of a manufacturing firm are important indicators of its supply
chain environment and the strategy pursued in responding to its environment (Chasan,
2011; McKinsey & Co., 2008; Simchi-Levi et al., 2007). Procurement lead times, supplier
relationships, and other inbound supply chain factors affect raw material inventory,
while outbound supply chain factors, such as forecasts of market demand and
reliability of distribution, affect finished goods inventory (Oke and Szwejczewski,
2005). Therefore, raw material inventory is considered a strong indicator of inbound
supply chain strategy while finished goods inventory more indicative of outbound Mapping supply
supply chain strategy (Golini and Kalchschmidt, 2011; Han et al., 2008). chain strategy

3. Theoretical framework
As the unit of analysis in this study is industry and supply chain inventory strategy
involves upstream suppliers and downstream customers, we use Porter’s Five Forces 355
Model as an appropriate theoretical framework to examine how industry structural
factors may have impacted inbound and outbound inventories. This is similar to
Adewole (2005) who analyzed the competitive nature of the UK clothing manufacturing
industry based on Porter’s Five Forces Model and showed how IT investment could
help small and medium manufacturers manage supply chain challenges.
In his seminal works, Porter (1985) analyzed how the attractiveness and average
profitability of an industry may be affected by the dynamic interactions of five forces:
(1) competition between rivals within the industry;
(2) threat of new entrants – defense against threats of new rivals entering the
industry;
(3) threat of substitutes – defense against the threat of potential customers using
substitute products;
(4) supplier power – the power of suppliers in negotiating and maintaining raw
material supply parameters; and
(5) buyer power – the power of buyers in determining finished goods availability
and supply parameters.

The factors described in the Five Forces Model may have direct impacts on raw
materials and finished goods inventories. The competitive environment ensures that
successful firms within the industry follow similar best practices in inventory
management. A firm with slow inventory turns may become a loser. Typically, the
threat of new entrants or substitution implies a “push” inventory system with adequate
finished goods inventory to entice customers and satisfy demand from customers who
may shop elsewhere. The same logic can be used to describe buyer power in terms of
finished goods, although buyer power includes other aspects in terms of product
quality and price. Supplier power often means that the manufacturer bends to supplier
demands and may have to carry a larger raw material inventory.
Considering the enabling and supporting roles of supply chain inventory strategy in
driving overall business strategy, the five forces may also have an indirect effect on
supply chain inventory strategy. Porter (1980) described three generic business
strategies: product differentiation, cost leadership or focus on a niche market. Based on
internal strengths and weaknesses in adapting to the five forces, firms may be able to
obtain competitive advantages by pursuing one of the generic business strategies
(Nordin, 2008). Different business strategies may have different implications for supply
chain inventory strategies. For example, the product differentiation strategy may
prefer an agile supply chain, which may require firms to hold inventory buffers for key
components to hedge against supply disruptions, while the cost leadership strategy is
best supported by a lean supply chain, which focuses on reducing inventory waste and
costs. We summarize our research framework as follows (Figure 1).
JMTM 4. Data collection and measurement of variables
25,3 The dataset is collected from US Census of Economics and Annual Survey of
Manufacturers over 1997-2008 with industries being classified according to the NAICS.
NAICS is widely used by government and business to classify manufacturing
establishments based on manufacturing activities and the production processes used in
the USA, Canada, and Mexico. US Census Bureau collects information on manufacturing
356 activities at the plant level but reports data at different aggregated levels based on the
number of digits used. Reported data include dollar values of inventories at all three
stages (raw material, work-in-process and finished goods inventories), total cost of raw
materials, value added, and total value of shipments (equivalent to the sum of raw
materials and value added), the number of employees, manufacturing hours, payroll
costs and other operational information. With a focus on industry sectors, we choose the
most aggregate three-digit NAICS industry as the unit of analysis in this study (Table I).
Because work-in-process inventory more reflects a firm’s internal operations, we
focus on raw material inventory, a strong indicator of inbound supply chain, and
finished goods inventory, more indicative of outbound supply chain. In this study,
we first obtain inventory ratios according to Rajagopalan and Malhotra (2001) and then
multiply inventory ratios with 365 (assumed for a typical year) to derive inventory in
days of supply as follows:

Business Inbound (Raw Material Inventory)

Industry Supply Chain
Strategy Inventory
Figure 1. Structure
Research framework Strategy
Outbound (Finished Goods Inventory)

NAICS code Industry

311 Food
312 Beverage and tobacco product
313 Textile mills
314 Textile product mills
315 Apparel
316 Leather and allied product
321 Wood product
322 Paper
323 Printing and related support activities
324 Petroleum and coal products
325 Chemical
326 Plastics and rubber products
327 Nonmetallic mineral product
331 Primary metal
332 Fabricated metal product
333 Machinery
334 Computer and electronic product
335 Electrical equipment, appliance and component
Table I. 336 Transportation equipment
NAICS three-digit 337 Furniture and related product
industries 339 Miscellaneous manufacturing
 Raw Material Inventory Mapping supply
For raw material inventory; RAW ¼ 365*
Total Cost of Material chain strategy
Finished Goods Inventory
For finished goods inventory; FG ¼ 365*
Total Cost of Material þ Value Added

Days of inventory supply is an intuitive, time-supply measure of inventory (Johnson

and Malucci, 2011). Based on the actual demand and supply dynamics, very large
357
inventory supply suggests excessive inventory and possibly inefficient operations,
while very small inventory supply may indicate a lean operation, a potential risk of
stockout, or both.

5. Cluster analysis and results

To discern the patterns of industry inbound and outbound supply chains, we perform
cluster analysis of industry average raw material and finished goods inventories, one
of the most widely-used data mining tools which groups the data entities into clusters
(Shmueli et al., 2011). The entities in each cluster are most similar to one another, with
their attribute values having the smallest distances to the center of the cluster.
Conversely, these distances are larger to the centers of other clusters. Cluster analysis
was used to examine manufacturing industry characteristics and measure
manufacturing performance (Gomes et al., 2011) and was also described in the
analysis of the span of integration in supply chain integration (Kannan and Tan, 2010).
The algorithm used in this research is k-means clustering, which is non-hierarchical
and robust to outliers. The algorithm starts with a user-defined number of k initial
clusters. Each record is assigned to the cluster with a centroid at the least distance. As a
cluster loses or gains a record, the centroid is recalculated and records are reassigned.
The algorithm stops when moving any more records increases cluster dispersion.
In this study, we have performed cluster analysis for each year using two inventory
variables: days of raw material inventory (RAW) and days of finished goods
inventory (FG). We found that industries have been largely consistently classified into
each of the four clusters formed by low and high levels of raw material and finished
goods inventories for industries over 1997-2008 (Table II).
For the purpose of brevity, Table III shows the four-cluster distribution of
14 industries, which are mostly consistently classified in the same clusters over
1997-2008. Note that primary metal (331) deviated from Clusters 3 to 2 in 2005 over
1997-2008. Furniture and related product (337) was classified in Cluster 4 in 1997 and
then moved into Cluster 2 over 1998-2008, while beverage and tobacco (312) stayed in
Cluster 4 from 1997 to 2005 but shifted to Cluster 2 over 2006-2008.

5.1 Analysis of Cluster 1 (low RAW, low FG)

Food, petroleum and coal, and transportation equipment industries all have shown low
finished goods inventory and low raw material inventory over the period 1997-2008,
with finished goods inventory averaging 17 days of supply and raw material inventory
averaging 30 days of supply. The four largest industries in the food manufacturing
category include animal slaughtering and meat processing, dairy products, starch and
vegetable fat and oil, and animal food manufacturing.
The overall competition for food is high with largest four companies accounting for
only 14.8 percent of the total market share and a Herfindahl Hirschman Index (HHI)
JMTM
Year Cluster 1 Cluster 2 Cluster 3 Cluster 4
25,3
1997 311, 324, 336 314, 315, 316, 322, 325, 326, 327, 313, 321, 323, 331 312, 337, 339
332, 333, 334, 335
1998 311, 324, 336 314, 315, 316, 322, 325, 327, 332, 313, 321, 323, 326, 331 312, 339
333, 334, 335, 337
358 1999 311, 323, 324, 332, 333, 334, 337 313, 314, 315, 316, 321, 322, 325, 312, 339
336 326, 327, 331, 335
2000 311, 323, 324, 322, 332, 333, 334, 335, 337 313, 314, 315, 316, 321, 325, 326, 312, 339
336 327, 331
2001 311, 323, 324, 332, 334, 335, 337 313, 314, 315, 321, 322, 325, 326, 312, 316, 333,
336 327, 331 339
2002 311, 313, 323, 332, 334, 335, 337 314, 315, 316, 321, 322, 325, 326, 312, 333, 339
324, 326 327, 331
2003 311, 324, 336 316, 322, 327, 332, 334, 335, 337 313, 314, 315, 321, 323, 325, 326, 312, 333, 339
331
2004 311, 324, 336 315, 316, 322, 327, 332, 333, 334, 313, 314, 321, 323, 325, 326, 331 312, 339
335, 337
2005 311, 324, 336 322, 327, 331, 332, 334, 335, 337 313, 314, 321, 323, 325, 326 312, 315, 316,
333, 339
2006 311, 324, 336 312, 332, 333, 334, 335, 337 313, 314, 321, 322, 323, 325, 326, 315, 316, 339
327, 331
2007 311, 324, 336 312, 332, 333, 334, 335, 337 313, 314, 315, 321, 322, 323, 325, 316, 339
Table II. 326, 327, 331
Cluster results based on 2008 311, 324, 336 312, 314, 321, 327, 332, 333, 334, 313, 322, 323, 325, 326, 331 315, 316, 339
FG and RAW (1997-2008) 335, 337

Finished goods High Cluster 3: textile mills, wood product Cluster 4a: beverage and tobacco,
inventory and primary metal medical equipment and supplies,
sporting goods
Low Cluster 1: food, petroleum and coal, Cluster 2: fabricated metal product,
transportation equipment computer and electronics,
electrical equipment, appliance and
component, and furniture
Low High
Raw material inventory
Table III. Notes: aBeverage and tobacco (312) was classified in Cluster 4 from 1997 to 2005, but shifted to
Cluster distribution Cluster 2 over the period 2006-2008; medical equipment and supplies, and sporting goods are part of
of industries the miscellaneous manufacturing industry

of 102 according to US 2007 Economic Census. Most food products tend to have short
shelf lives and finished goods inventory is typically low in food manufacturing.
Most suppliers to food manufacturers are located in the early stage of supply chains
and are relatively scattered across the country. Thus, these suppliers have less
bargaining power, and food manufacturers are able to push back raw material
inventory to suppliers through the establishment of long-term supply contracts, and
are able to hold less raw material inventory on their own books. Food manufacturing
is subject to heavy regulation, resulting in a medium level of the entry barrier.
Industry profit margins are low and therefore keeping low inventory is critical for Mapping supply
businesses to cut costs and stay competitive. chain strategy
Petroleum refineries are the largest business in the petroleum and coal sector.
The overall competition for petroleum and coal is medium with the largest four
companies accounting for 45 percent of the total market share and a relatively high
HHI of 735 according to US 2007 Economic Census. Crude oil is the key input to the
industry. However, since the price of crude oil is highly volatile, it is important for 359
refineries to keep low raw material inventory to manage the price risk. The demand for
petroleum and oil products is volatile and depends on the level of economic activities.
For example, economic recessions generally result in a low demand. Low finished
goods inventory is a necessity from considerations of the risk factor. As refinery
margin is thin under pressure, maintenance of low finished goods and raw material
inventories helps the viability of petroleum and coal manufacturing.
Automobile manufacturing is the largest business in transportation equipment.
The overall competition for automobile manufacturing is low with the largest four
companies accounting for 68 percent of the total market share and a high HHI of 1,449
according to US 2007 Economic Census. Automobile manufacturing has a complex
supply chain with multiple tiers of suppliers. Since the supplier market is very
competitive, original equipment manufacturers (OEM) tend to have strong bargaining
power over suppliers and are able to push raw material inventory back to suppliers,
resulting in low raw material inventory on their own books. Since inventory holding
costs are high for new models of automobiles and old models are subject to deep
discounts at dealerships, industry needs to maintain a low level of finished goods
inventory. The margin is low due to high material and labor costs. In summary,
automobile manufacturing needs to control costs through lowering inventories. In fact,
real time supply chain and lean manufacturing are common strategies in automobile
supply chains.

5.2 Analysis of Cluster 2 (high RAW, low FG)

Fabricated metal product, computer and electronic product, electrical equipment,
appliance and component, and furniture industries all have shown relatively low
finished goods inventory but relatively high raw material inventory over the period
1997-2008.
According to the US 2007 Economic Census, the fabricated metal product industry
is highly fragmented with 56,808 companies, most of which are machine shops.
The largest four companies accounted for less than 4 percent of the total market share.
The overall concentration is extremely low with an HHI of 9, indicating a very high
level of competition within the industry. Machine shops industry has low bargaining
power over suppliers, which provide steel and other raw materials, and over
downstream customers, including automobile, aviation and machinery manufacturing.
With a low entry barrier, a mature product life cycle, medium capital intensity
requirement, and high competition, the fabricated metal product industry has thin
profit margins and needs to cut costs to survive. As revenue is volatile due to changing
demand, industry may be better off keeping low finished goods inventories. Despite
increasing prices in steel, machine shops have not been able to pass on a significant
portion of the rising costs to downstream users. To manage its supply risk, this
industry has to carry a medium level of raw material inventory.
JMTM Like fabricated metal product, computer electronics is also fragmented with 12,836
25,3 companies. The largest four companies accounted for 17 percent of the total market
share. The overall concentration is low with HHI of 137. Semiconductor, search and
navigation, and telecommunications and networking devices are the largest subsectors.
Due to offshoring and outsourcing, US manufacturing capacities have been significantly
reduced and hence become more dependent on global contract manufacturing, as for
360 example, Singapore-based Flextronics and China-based Foxconn. However, computer
manufacturing includes desktops, laptops, storage systems, and servers. It is quite
concentrated with only a few large players, such as HP, Dell, IBM, Apple and Oracle.
In contrast, the computer peripheral industry is fragmented. Due to short product life
cycles, computer electronic products tend to have low finished goods inventory. Using
build-to-demand supply chain strategy, Dell holds raw material inventory only for key
components based on forecasted demand while final assembly is done only in response
to customer orders, resulting in low finished goods inventory.
Electrical equipment, appliance and component industry is fragmented with the
largest four companies accounting for less than 15 percent of the total market share.
The overall concentration is low with HHI of 105. The largest subsectors include bulbs
and tubes, lighting fixtures, and electrical equipment. Light bulbs and lighting fixtures
primarily serve construction needs for commercial and residential buildings and public
infrastructures. This industry is in the declining stage of its life cycle. For the period
under examination, this industry faces fierce competition from imports, especially from
China, leading to a downward trend in the sale prices for final products. Domestic
manufacturing has been offshored to emerging markets, including China and Mexico,
for lower labor costs. Therefore, US firms are better off keeping low finished goods
inventory. Purchases of raw materials (glass, metal wire, plastics, and rubber) are the
largest costs for this industry accounting for nearly half of the manufacturing costs.
To control rising material costs the industry may need to save procurement costs
through large volume purchases, which could lead to a relatively high level of raw
material inventory. For example, Datta (2008) noted that while large volume purchases
benefit manufacturers with economies of scale and discounts, manufacturers may end
up with excessive raw material inventory when demand fluctuates.
Furniture industry is fragmented with a total of 20,926 companies and the largest
four companies accounting for 11 percent of the total market share. The overall
concentration is low with HHI of 62, indicating a high level of competition. This
industry serves home builders, furniture retailers and home improvement stores,
including Home Depot and Lowe’s. The largest subsectors include kitchen cabinets and
countertops, household furniture, and office furniture. The primary inputs of materials
are lumber and wood products, the largest component of production costs. The wood
commodity prices fluctuate. To reduce procurement costs the furniture industry has
established long-term relationships with key suppliers and achieved cost savings for
bulk purchases leading to a relatively high level of raw material inventory. In addition,
to facilitate build-to-order operations while keeping low finished goods inventory,
furniture manufacturers may also desire to maintain a relatively high level of raw
material inventory. In contrast, furniture industry is able to keep a relatively low
finished goods inventory for two reasons. On the one hand, too much finished goods
inventory may add a high cost to warehousing and operations; on the other hand,
furniture manufacturers may be able to build to order when customers tend to order Mapping supply
from floor samples or catalogs and are willing (or have) to wait an extended period. chain strategy
5.3 Analysis of Cluster 3 ( low RAW, high FG)
Textile mills, wood product and primary metal industries all have shown relatively
high finished goods inventory but relatively low raw material inventory over the
period 1997-2008. 361
The largest four companies in the textile mills industry accounted for 20 percent of
the total market share. The overall industry concentration is low with HHI of 160. The
largest subsectors include fiber, yarn and thread mills, and nonwoven fabric mills that
spin yarn from fibers to make woven and non-woven fabrics, and manufacture window
curtains and drapes. This industry has been in decline in the USA due to large-scale
outsourcing to low cost countries. In addition, downstream customers, e.g. apparel
manufacturers, have offshored their operations and even the entire supply chain
resulting in low demand for domestic text mills. Sluggish demand leads to low inventory
turns for finished products. Fierce competition among domestic suppliers may force
firms to increase availability of finished goods inventory. In fact, one of the key success
factors is to locate manufacturing facility within the proximity of key suppliers so that
supply is secured without having to hold high level of raw material inventory.
Wood product industry is highly fragmented with 14,817 companies. The largest four
companies in wood product industry accounted for 9 percent of the total market share.
The overall industry concentration is low with HHI of 38, suggesting a highly competitive
industry. The largest subsectors include sawmills and wood preservation, veneer and
plywood, and millwork. The largest end-user for wood products is the construction sector,
the residential construction in particular. However, due to the slowdown of housing starts
in the past five years, this industry has experienced sluggish growths, resulted in a high
level of finished goods inventory. On the other hand, increased availability of finished
goods could help companies to achieve prompt delivery to the downstream customers.
The major raw material is timber which is provided by logging companies. To reduce
transportation costs, firms in wood product are generally located within the proximity
of heavily forested regions, which in turn could lead to a relatively low raw material
inventory due to perceived stability in raw material supply.
Primary metal industry is also fragmented with 3,746 companies. The largest
four companies in primary metal accounted for 22 percent of the total market share.
The overall industry concentration is low with HHI of 181. The largest subsectors include
iron and steel mills, ferroalloy manufacturing, and alumina and aluminum production and
processing. Key material inputs include iron ore and coking coal, accounting for nearly half
of industry’s revenue. Rising prices in commodities, including ore and coal, have been a treat
to industry profits. Firms are likely to keep a reasonable level of raw material inventory to
ensure a smooth supply. Downstream customers are automobile manufacturing and
commercial construction. The demand has been volatile due to economic uncertainties in the
past five years. High fixed investment and inventory costs have cut industry’s profits. To
maintain profitability, many firms have moved their operations to foreign low cost countries.

5.4 Analysis of Cluster 4 (high RAW, high FG)

Beverage and tobacco industries showed high finished goods and high raw material
inventories from 1997 to 2005, a pattern similar to miscellaneous duration goods,
JMTM an industry that includes medical equipment, jewelry, sporting goods, toys and office
25,3 supplies. There are 3,232 companies operating in the beverage and tobacco industry
with the largest four companies accounting for 39 percent of the total market share,
and the largest 50 companies accounting for 85 percent of the total market share.
The overall concentration is relatively high with HHI of 555. Soft drinks and tobacco
manufacturing are the largest subsectors. As the industry sells to wholesalers,
362 retailers, and food services, the demand is directly affected by consumer consumption.
Since beverage and tobacco products are high value-added products with high profit
margin, maintaining high finished goods inventory is key to retaining customers and
avoiding losses of sales to competitive or substitute products. Soft drink syrup
concentrate and plastic bottles are the most important raw materials for beverage
industry. The price increase in raw materials has been outpaced by the price change
in soft drinks over the past decade, and firms have been willing and able to hold more
raw material inventory as a buffer against supply disruptions. Tobacco manufacturers
purchase raw materials from tobacco growers, paper manufacturers, and other tobacco
processors such as redriers. US cigarettes manufacturers use both domestic and
imported tobacco leaf. Raw materials are inexpensive because of ample supply
and easy processing, and holding a high level of raw material inventory is preferred in
the maintenance of a stable supply.
There are 30,934 companies operating in the miscellaneous duration goods industry
that includes medical equipment, jewelry, sporting goods, toys and office supplies.
In this industry the large four companies accounting for 10 percent of the total market
share. The overall concentration is low with HHI of 52. The largest subsectors include
medical equipment and supply and sporting goods, which are in the growth phase
of their life cycle stage. High value-added and profit margins make it desirable to hold
high finished goods inventory. A high level of raw material inventory is also important
to ensure a reliable supply.
Note that beverage and tobacco industry shifted from Clusters 4 to 2 over 2006-2008
due to reduced finished goods inventory over this period. This shift was caused by an
increased demand for tobacco when people needed to relieve stress during economic
recessions as indicated by layoffs, foreclosures, and tumbling stock prices. Economic
factors revived the tobacco consumption that had been declining for the years before
economic recession due to increased awareness of the dangers of smoking.

6. Case analysis
To examine the validity of our cluster analysis, we perform in-depth analysis of four
industries: food industry from Cluster 1, computer electronics industry from Cluster 2,
wood product industry from Cluster 3, and medical equipment from Cluster 4. These
are samples of the involved industries where extensive data was available to illustrate
the impacts of Porter’s Model and the forces that were the prime focus of the study.

6.1 Food industry

The food industry has low raw materials and low finished goods. Focusing on
prepared food and baking mix manufacturing, frozen food production, and animal food
production in this category, we aim to reveal the inventory mechanism of this industry.
Food typically has very short life cycle and mostly is standardized. As such, the
finished goods inventory is low. In addition, in manufacturing food items such as
prepared food and baking mix, there exist long-term contracts with reliable suppliers Mapping supply
on key raw materials such as wheat, corn, and yeast. These contracts can significantly chain strategy
reduce supply volatility, and thus allow buyers to hold low raw materials. Effective use
of supply chain contracts, e.g. option contracts, can guarantee fixed price and minimize
total supply chin cost and help plan production. In the frozen food production buyers
often develop and maintain strong relationships with upstream suppliers to guarantee
availability to high quality raw materials and ingredients and reduce raw material 363
inventory. On the other side, food manufacturers establish strong relationship with
downstream distributors such as retail stores, who are willing to share demand
information and even develop collaborative forecasting plan with manufacturers.
Thus, food manufacturers such as Campbell Soup can adopt supply chain strategies
such as efficient consumer response (ECR) to reduce finished good inventory and meet
customer demand at the same time.
Technology plays another important role in reducing raw materials and finished
goods in food industry. Advancements in inventory tracking technologies such as
sensory and radio frequency identification (RFID) help food industry eliminate
“phantom” inventory and reduce safety stock needed to meet certain customer service
level. Furthermore, emerging new inventory tracking/management technologies enable
food manufacturers to be more responsive to both supply and demand volatilities.
For example, one major food manufacturer adopted multi-echelon inventory optimization
technique, and successfully reduced its days of inventory supply by 26 percent.

6.2 Computer electronics industry

This sector includes semiconductor, computer and peripheral equipment,
communications equipment, audio and video equipment, and navigational and control
instruments. According to the 2007 Economic Census, this sector produced $396 billion
in total value of output. The average raw material inventory was 45 days in supply while
the average finished goods inventory was nine days in supply. The largest two
subsectors include semiconductor and related device manufacturing and computer
manufacturing.
Semiconductor sector and related device manufacturing totaled $72 billion in
according to the 2007 US Census. The products include integrated circuits, memory
chips, microprocessors, diodes, transistors and other optoelectronic devices. This sector
procures components from global suppliers while serving downstream computer
manufacturers. Due to fierce competition and short product lifecycle, the product prices
have been declining. Firms have to keep low finished goods inventory. Meanwhile,
potential disruptions resulting from global supply chain apply pressure on companies to
store a relatively high level of raw material inventory. For example, in 2007 this sector
averaged 33 days in raw material inventory while averaging six days in finished goods
inventory.
The computer manufacturing sector was a $43 billion business in 2007. Computer
companies manufacture, design or assemble personal computers, laptops, handheld
computers and servers. The OEM’s procure computer components such as memory
chips, graphics cards and motherboards from contract manufacturers in
semiconductor and circuit manufacturing sectors. Due to the standard assembly
process and components, computer products are largely considered commodities with
less differentiation. Industry growth was slow with 0.9 percent annual growth rate
JMTM while PC prices fell 11.6 percent annually since 2005, resulting in razor-thin gross profit
25,3 margins. Companies shifted away from PC business to more profitable server
manufacturing and computing services. For example, IBM sold its PC computer
manufacturing business to China-based Lenovo in 2005. Successful companies use
build-to-order strategy to reduce finished goods inventory, which averaged only one and
half days in 2007. Due to increasing levels of outsourcing and offshoring, the number
364 of computer manufacturing plants and workforce has shrunk in USA while supply chain
has been extended globally. To manage global supply chain risks, computer industries
maintained 21 days in raw material inventory supply, much higher than the finished
goods inventory level.

6.3 Wood product industry

Saw mills are the largest subsector in the wood product industry with $22 billion in
total output according to the 2007 Economic Census. This sector primarily saws
dimension lumber, boards, beams, poles and siding while manufacturing wood chips
from logs or bolts. Depending on the downstream millwork and construction sectors
that use wood materials to produce wooden doors, windows, and planed lumber,
this sector has been volatile in terms of product prices and industry growth. While
expanding dramatically between 2003 and 2005 due to housing booming, the industry
experienced severe challenges since the start of housing downturn. In general, the saw
mill industry is in the mature stage of its economic life cycle, with decreasing number
of firms and shrinking profit margins.
The logging industry is the major supplier to the saw mills sector with the bulk of raw
materials, including hardwood and softwood logs and bolts. Also, the saw mill industry
purchases wood preservation chemicals from organic chemical manufacturing to treat
hardwood and softwood, and procure plastic, resin and rubber for application to sawn
wood for preservation and product finishing. Since raw materials can be sourced
domestically and are generally commodities, the wood industry is able to maintain a
relatively low raw material inventory. The raw material inventory averaged 27 days in
supply for saw mills, 17 days in supply for wood preservation.
Wood industry serves the construction sector through lumber wholesaling and
do-it-yourself builders, which pressures wood producing companies to hold relatively
high level of finished goods inventory. For example, in the saw mill subsector, finished
goods inventory averaged 20 days in supply while in the wood preservation subsector,
finished goods inventory averaged 35 days in supply.

6.4 Medical equipment

According to the cluster analysis, the industry of medical instruments and supply
manufacturing has relatively high raw material and high finished inventory compared to
other industries. The aging population, coupled with higher diabetic rates and obesity,
has increased the need for medical equipment. Medical equipment manufacturers
expect an upward trend of medical equipment demand resulting in overstocked medical
equipment. Although medical device manufacturers aim to go “lean” by reducing
inventories whenever possible, the more important mission of medical supply chain,
often involving a matter of life and death, is to meet high customer service level rather
than cost efficiency. Since it is a challenge for medical equipment manufacturers
to manage their supply chain requirements, e.g. order fulfillment, warehousing,
distribution, etc. by maintaining very low inventory (Mouser, 1997), they tend to hold Mapping supply
more finished goods inventories for most critical products to ensure high service levels. chain strategy
Further, medical industry has relatively long manufacturing lead times and high service
requirements from downstream partners, both resulting in higher raw material
inventory.
Finally, with lowest margins due to economic downturn and rising number of
uninsured and insurance costs, downstream customers in the medical supply chain, such 365
as hospitals and clinics, are unwilling to carry high inventory levels, which force medical
manufacturers to take different supply chain inventory strategies. For example, medical
equipment manufacturers have to move towards vendor-managed inventory (VMI) or
consignment inventory system. Both VMI and consignment systems actually push
inventory upstream. For example, in consignment inventory system, hospitals will pay
medical manufacturers for their products only when these products are actually sold,
which allow hospitals to take related inventory off their books entirely.

7. Conclusion, managerial implications, limitations and future research

steps
In this study, we conduct cluster analysis of industries and assess the inbound and
outbound supply chain inventory strategies of an industry based on the factors
described in Porter’s Five Forces Model. An industry shows low or high raw materials
or finished goods inventories depending on its products, processes, and the dynamics
of all forces described in the Five Forces Model, including competitive landscape,
relationships with upstream suppliers and downstream customers, and threats of
substitutes and new entrants.
To the best of our knowledge, this research is the first effort to classify all US
manufacturing industries based on an analysis of raw materials and finished goods
inventories. Theoretically, we contribute to the supply chain management literature by
providing a parsimonious framework of mapping inbound and outbound supply chain
inventory strategies. We also examine structural factors based on Porter’s Five Forces
Model which may drive supply chain inventory strategies. In practice, the results
based on analyses of all US manufacturing industries provide a baseline picture
for supply chain management professionals with manufacturing firms. Our insights on
structural factors may assist management in deciding on firm-level supply chain
strategies.
This study is subject to several limitations and hence provides opportunities for
further research. First, while we adopt Porter’s Five Forces Model as a theoretical
framework to analyze structural factors which may drive industry inventory strategies,
we realize that supply chain management theories have evolved in response to fast
changing business and technology environments since the model’s birth. Nowadays
businesses are dealing with total decentralization, co-existence, high rate of business
substitution to achieve resilience and competitive advantages. Future research shall
extend Porter’s Five Forces Model to better reflect this new reality. Second, despite that
we are aiming for a parsimonious framework using two key inventory variables – raw
materials and finished goods inventory to evaluate inbound and outbound supply
chain, we are aware that a more complete supply chain strategy also includes
other components, including supplier selection, production strategies, warehousing and
distribution, and even product design. Future research can refine this framework with
JMTM more details when relevant data become available. Third, the four-cluster design is
25,3 predetermined by researchers based on the dichotomy of raw materials and finished
goods inventory: high or low level of inventory in days of supply. We are also aware that
the high-low dichotomy is relative within the current dataset. Future research using more
layers, as for example a high-mid-low classification, might result in nine clusters and
may enhance our understanding of supply chain inventory strategies across different
366 industries. Fourth, while case analysis is employed in this study as a supplementary
method to validate findings from cluster analysis, we believe that a well-designed,
multiple-case study of representative industries shall be able to provide deeper insights
into differences and commonalities of industry characteristics and inventory strategies.
Fifth, our analysis is based on three-digit NAICS industry sectors, which can be further
broken down to four-, five- or six-digit industries. While more aggregate level analysis is
helpful in describing an overall pattern of inbound and outbound supply chain strategies
across all US manufacturing industries, large industry subsectors may dominate within
a particular three-digit sector. Since firms may compete in a more narrowly defined
industry, future research based on more disaggregate industry classifications can
generate a more refined picture. Last, our study classifies industries based on average
inventory levels of raw materials and finished goods. While the research aims at industry
comparison, inventory levels and supply chain strategies for specific firms may vary
significantly within each industry. It is to be considered that industry leaders always do
better than the average. Therefore, managerial interpretation may be cautioned.

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About the authors

Dr Barin Nag has over 50 publications in operations management and information technology
and artificial intelligence applications. He has a degree in electrical engineering and work
experience in electronics manufacturing and systems engineering. Barin Nag is the
corresponding author and can be contacted at: bnag@towson.edu
Dr Chaodong Han received his PhD in logistics and supply chain management from
Robert H. Smith School of Business, University of Maryland, College Park. Dr Han’s research has
JMTM focused on globalization, supply chain management and manufacturing industries. His research
has been published in Production and Operations Management Journal, International Journal of
25,3 Production Economics, International Journal of Physical Distribution and Logistics Management,
and Journal of Computer Information Systems.
Dong-qing Yao is a Professor of College of Business and Economics at Towson University.
He received his BS in industrial engineering from Suzhou University, and a MS in systems
engineering from Shanghai Jiao Tong University, China. He received his PhD in management
370 science from the University of Wisconsin-Milwaukee. His research interests are in the areas of
supply chain management. He has published in journals such as IIE transactions, European
Journal of Operational Research, International Journal of Production Economics, Journal of
Business Research, and OMEGA.

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