FULLTEXT01

1997:29
LICENTIATE THESIS
A Conceptual and Empirical Examination of the

Management Concept Supply Chain Management
ULRIKA PERSSON
Department of Business Administration and Social Sciences

Division of Industrial Logistics
1997:29 • ISSN: 1402 - 1757 • ISRN: LTU - LIC - - 97/29 - - SE
Lic.uppsats 97/29 1 98-03-25, 08.19

A Conceptual and Empirical Examination of the Management
Concept Supply Chain Management
Ulrika Persson
Akademisk uppsats som för avläggande av teknologie licentiatexamen i industriell logis-

tik presenteras vid Luleå tekniska universitet i A109 den 17 oktober klockan 13.30.
Abstract
The thesis consists of two papers. The first paper examines the concept of supply chain
management in a management concept perspective in order to seek the essence of the
concept and to give some indication of its degree of novelty. The second paper starts
out from the essence of supply chain management identified in the first paper as a set of
fundamental beliefs and empirically examines the possibilities for practical use of the
fundamental beliefs in order to give some directions for the development of supply
chain management. In the first paper, An Examination of the Management Concept Supply
Chain Management, a method of five different examinations based on literature studies is
developed to examine supply chain management. Based upon the examinations the
conclusion is that supply chain management is a homogenous management concept
where its interpreters share common ideas and beliefs. However, in a comparison with
its forerunners it is revealed that the ideas and beliefs of supply chain management also
can be found in prior works. In the second paper, Empirical Examination and Some Direc-
tions for Development of Supply Chain Management, supply chain management is empiri-
cally examined in accordance with an abductive process. Firstly, by an overview of the
previous empirical examinations of supply chain management and secondly, the concept
is examined with respect to the iron ore industry. The first examination announces suc-
cessful applications of the concept in several different companies and industries. The
second examination shows that the fundamental beliefs of supply chain management
need to be less fundamentalistic to improve the possibilities for practical use of the con-
cept.
Licentiate Thesis: 1997:29

ISSN: 1402 - 1757
ISRN: LTU-LIC-97/29-SE
A Conceptual and Empirical Examination of the
Management Concept Supply Chain Management
Ulrika Persson
Division of Industrial Logistics
Luleå University of Technology
SE-971 87 Luleå, Sweden
Phone: +46 920 720 33
Fax: +49 920 722 23
E-mail: Ulrika.Persson@ies.luth.se
Licentiate Thesis
September 1997
Introduction to the Thesis
This thesis consists of two papers. The first paper examines the concept of supply
chain management in a management concept perspective in order to seek the
essence of the concept and to give some indication of the degree of novelty of the
concept. The second paper starts out from the essence of supply chain man-
agement identified in the first paper as a set of fundamental beliefs. Further, the
possibilities for practical use of the fundamental beliefs are empirically examined in
order to give some directions for the development of supply chain management.
In the first paper, An Examination of the Management Concept Supply Chain Man-
agement, a method of five different examinations based on literature studies is
developed to examine supply chain management. The examinations reveal the
stated objectives of supply chain management and a possibility to view supply
chain management as constituted by the following set of primitive fundamental
beliefs, coordination and integration along the material flow, win-win relation-
ships and end customer focus. Based upon the examinations the conclusion is that
supply chain management is a homogenous management concept where its
interpreters share common ideas and beliefs. However, in a comparison with its
forerunners it is revealed that the ideas and beliefs of supply chain management
also can be found in prior works.
In the second paper, Empirical Examination and Some Directions for Development of
Supply Chain Management, supply chain management is empirically examined in
accordance with an abductive process. Firstly, by an overview of the previous
empirical examinations of supply chain management which announces successful
applications of the concept in several different companies and industries. In con-
trast to those successful experiences, the second empirical examination with
respect to the iron ore industry, shows that the fundamental beliefs of supply
chain management needs to be developed to improve the concept’s possibilities
for practical use. With respect to the iron ore industry, the concept of supply
chain management would require fundamental beliefs with a less fundamentalistic
scope.
Acknowledgments
Here, finally, is the result of my long journey which started in a project to study
the logistics systems and inventory levels at LKAB and ended up in the world of
buzzwords. It was in the search for concepts of how to design competitive logis-
tics systems for iron ore products that I came across the concept of supply chain
management. I found the concept very appealing, but during the reading I was, as
usual, confronted with the creative skepticism of Eilif Hensvold, my supervisor. Is
supply chain management really something new, he said? Without you, Eilif, I
wouldn’t have become a doctoral student in the first place and without your
encouragement this thesis wouldn’t have become what it is. I haven’t always
agreed with you and your way of doing things, but every time you read my
manuscripts I was amazed, you always had some constructive criticism to give and
this gave me new perspectives on research. Keep on being the unconventional
person you are Eilif, you have a lot to teach those of us who are more
conventional.
I also wish to thank my friends and colleagues at the Division of Industrial Logis-
tics, especially Per, Micke and Svante. You have made my journey much more
enjoyable and competitive. I will especially remember the 1996 sailing race, both
for my victory and for the impact the day had on my private life.
Finally, I wish to thank the people I have been in contact with at LKAB and
those who have been involved in the final readings. My journey changed direc-
tion a couple of times, which must have been confusing for those I was in contact
with at LKAB, but I hope this thesis will give you something in return. I thank
you all, but a special thanks goes to Thomas Nordmark. In the final readings,
several people have been involved and I remember you all, particularly Thomas
Lager for his good work at the last seminar of my manuscript and Mark Wilcox
for his general comments on my (ab)use of the English language.
Now this journey has ended and I will travel on…
Luleå, September 1997

An Examination of the Management
Concept Supply Chain Management
by
Ulrika Persson
Abstract
The management concept “supply chain management” was introduced in early
1980s and since then the concept has received increasing attention within the field
of logistics. Supply chain management is viewed by many as a highly novel
management concept, but comparison with earlier work reveals similarities. The
main objective of this study is to examine the concept of supply chain manage-
ment in order to seek the essence of the concept. A subordinated objective is to
give some indication of the degree of novelty of supply chain management.
Supply chain management is viewed in this study as a management concept or

management theory and a method of five different examinations based on
literature studies is developed. Firstly, the “reference network”, the references
within the examined literature, is established and examined. Secondly, the stated
objectives and the stated fundamental beliefs are examined and thirdly, the stated
definitions and stated theory relations are examined. These three examinations lay
the foundation for the fourth, where the extent to which the different views of
supply chain management in the examined literature share a common set of ideas
and beliefs is examined. Finally, the extent to which the fundamental beliefs of
supply chain management can be distinguished from the ideas and beliefs of its
forerunners within logistics is examined.
The examinations reveal that it is possible to relate the stated objectives of supply
chain management to each other in a “hierarchical weave” and that it is also
possible to view the concept as constituted by a set of primitive fundamental
beliefs. Tentatively, the following set is identified as the primitive fundamental
beliefs of supply chain management, coordination and integration along the
material flow, win-win relationships and end customer focus. Further, the
examinations reveal that few stated definitions exist and that there are only
vaguely stated theory relations. The most common stated theory relation is
Porter’s value chain.
Based upon the examinations the conclusion is that supply chain management is a
homogenous management concept, where its interpreters share common ideas
and beliefs. However, the comparison with the forerunners shows that the ideas
and beliefs of supply chain management also can be found in prior works.
Accordingly, the degree of novelty is not judged as very high. Although most of
the ideas of supply chain management may be found in the work by its
forerunners it is concluded that their ideas are more fragmented and less apparent
than the ideas of supply chain management.
Table of Contents
1. INTRODUCTION ....................................................................... 1
2. ON MANAGEMENT CONCEPTS ................................................ 5

2.1 WHAT IS A MANAGEMENT CONCEPT? .......................................... 5
2.2 WHAT IS A THEORY? ................................................................. 8
3. METHOD ..................................................................................11
3.1 OVERVIEW OF THE METHOD .....................................................11
3.2 CHOICE OF LITERATURE REPRESENTING SUPPLY CHAIN
MANAGEMENT .........................................................................12
3.3 CONSTRUCTION OF THE REFERENCE NETWORK ..........................12
3.4 CHOICE OF EXAMINATION ASPECTS ...........................................13
3.4.1 Stated Definitions ...................................................................... 13
3.4.2 Stated Objectives........................................................................ 14
3.4.3 Stated Fundamental Beliefs ........................................................... 15
3.4.4 Stated Theory Relations............................................................... 16
3.5 CONVERGENT VALIDITY ...........................................................16
3.6 DISCRIMINANT VALIDITY..........................................................17
3.7 CHOICE OF LITERATURE REPRESENTING THE FORERUNNERS .........18
4. EXAMINATION OF THE REFERENCE NETWORK...................19
5. EXAMINATION WITH RESPECT TO STATED OBJECTIVES

AND STATED FUNDAMENTAL BELIEFS .................................23
5.1 STATED OBJECTIVES OF SUPPLY CHAIN MANAGEMENT .................23
5.2 STATED FUNDAMENTAL BELIEFS OF SUPPLY CHAIN MANAGEMENT 26
5.2.1 Establishing the sets of Primitive and Derived Fundamental Beliefs ........... 26
5.2.2 Examination of the Primitive Fundamental Beliefs ............................... 29
5.2.3 Examination of the Derived Fundamental Beliefs................................. 34
6. EXAMINATION WITH RESPECT TO STATED DEFINITIONS
AND STATED THEORY RELATIONS.......................................39
6.1 STATED DEFINITIONS OF SUPPLY CHAIN MANAGEMENT ...............39
6.2 STATED THEORY RELATIONS OF SUPPLY CHAIN MANAGEMENT ....41
6.2.1 Porter’s Value Chain .................................................................. 42
6.2.2 Marketing Channel .................................................................... 43
6.2.3 Industrial Organization Theory...................................................... 44
6.2.4 The Law of Industrial Dynamics .................................................... 44
6.2.5 Total Cost Concept .................................................................... 45
6.2.6 Inventory Management Theory....................................................... 46
7. CONVERGENT VALIDITY OF SUPPLY CHAIN MANAGEMENT47

7.1 STATED OBJECTIVES ................................................................47
7.2 STATED FUNDAMENTAL BELIEFS ................................................47
7.3 STATED DEFINITIONS ...............................................................48
7.4 STATED THEORY RELATIONS ....................................................48
7.5 CONCLUSION OF THE CONVERGENT VALIDITY ............................48
8. DISCRIMINANT VALIDITY OF SUPPLY CHAIN MANAGEMENT

COMPARED TO ITS FORERUNNERS ......................................51
8.1 EXAMINATION OF THE DISCRIMINANT VALIDITY .........................51
8.2 CONCLUSIONS WITH RESPECT TO THE DEGREE OF DISCRIMINANT
VALIDITY ...............................................................................55
9. CONCLUSIONS .........................................................................57
REFERENCES ...............................................................................59
1. Introduction
1. Introduction
The management concept “supply chain management” was introduced in the
early 1980s and has since received increasing attention within the field of logistics.
Supply chain management is viewed as a broad logistics concept that focuses on
integration of the total materials flow, from the supplier to the ultimate customer.
The main stated objectives are to lower costs and improve customer service.
Supply chain management is defined by Ellram and Cooper (1990) as:
“an integrative philosophy to manage the total flow of a distribution channel from the supplier to
the ultimate user” (Ellram & Cooper, 1990, p. 1)
Supply chain management follows a trend among management concepts empha-

sizing that an extended integration or coordination of separate activities or func-
tions will give rise to improved performance. Ellram and Cooper (1990) describe
the outset of this trend with respect to supply chain management.
“During the late 1970s and the 1980s, the notion of integrating functional areas within a firm
became popular among major US corporations…. Supply chain management extends this concept
of functional integration beyond the firm to all the firms in the supply chain, bringing the concept
of integration into the 1990s.” (Ellram & Cooper, 1990, p. 1)
Besides supply chain management, other examples of this integration trend among
management concepts are e.g., integrated logistics, concurrent engineering,
process management and business process reengineering. The original reference to
the term supply chain management dates back, according to Møller (1995), to the
early 1980s. At that time the management consulting firm Booz, Allen &
Hamilton was active in supply chain management and two of their consultants,
Oliver and Webber, published in 1982 the basic article, Supply-chain management:
logistics catches up with strategy.
In the logistics literature of the 1990s supply chain management has been widely
recognized as an important management concept for the future. It is stated, for
example, by Scott and Westbrook (1991) that supply chain management will be a
competitive necessity in the coming years.
1
1. Introduction
“Whilst in some highly fragmented industries, the traditional approach may still have relevance,
increasingly organisations in nearly all sectors will have to adopt the supply chain approach in order
to survive and prosper in an intensively competitive world.” (Scott & Westbrook, 1991, p. 30)
The importance of supply chain management is also understood by the practitio-

ners. In a survey of 260 companies conducted by the logistics consultancy P-E
International, over 80% of the companies believed that the concept of supply-
chain integration will become increasingly important over the next few years
(Szymankiewicz, 1994). In academic circle, many articles and conference papers
deal with different aspects of supply chain management. Further, the concept of
supply chain management has become an important subject in the standard lit-
erature of logistics. Bowersox and Closs (1996) have given their 4th edition of
Logistical Management the subtitle, The Integrated Supply Chain Process.
“To be fully effective in today’s competitive environment, firms must expand their integrated
behavior to incorporate customers and suppliers. This extension, through external integration, is
referred to as supply chain management” (Bowersox & Closs, 1996, p. 34)
In the 6th edition of The Management of Business Logistics by Coyle, Bardi and
Langley (1996) the first two parts of three are devoted to the Logistics Supply Chain
and the Logistics Supply Chain Processes. Accordingly, there seems to be an
understanding both within academic circles and among practitioners regarding the
importance of supply chain management. Since the concept has many interpreters,
with perhaps different views, it is a worthy task to seek the real essence of the
concept.
The advocators of supply chain management often describe the evolution of the
field of logistics as an increased awareness of the need for integration, which
finally led to the concept of supply chain management. For example Coyle et al.
(1996) describe this evolution in three stages. During the 1960s and 1970s com-
panies focused on physical distribution or outbound logistics systems. During the
1970s and 1980s companies began to realize the opportunities for savings by
integrating the inbound side with the outbound side. And finally, according to
Coyle et al. during the 1980s and 1990s the third and superior stage emerged,
namely, supply chain management. With supply chain management the focus
moved to integration of the total material flow from the supplier to the ultimate
2
1. Introduction
customer. Similar descriptions of the logistics evolution can be found in Anscomb

(1994), Hewitt (1994) and Gattorna and Walters (1996). The latter describe
supply chain management as originating primarily in physical distribution
management and later logistics management.
“In a very short space of time “physical distribution management” became “logistics manage-
ment”, and now, in the more forward-thinking companies, is developing into “supply chain man-
agement.” (Gattorna & Walters, 1996)
In contrast to the view of the logistics evolution described above it is interesting

to note that at least some of the ideas of supply chain management seem to have
been established before the concept was introduced. La Londe, Grabner and
Robeson in 1970 advocated a scope along the material flow and close relations
with suppliers in accordance with supply chain management.
“…a total approach to the management of the distribution process including all of those activities
involved in physically moving raw materials, in-process inventory, and finished-goods inventory
from point of origin to point of use or consumption. …firms have realized the potential for
joint cost savings by working closely with suppliers and customers on improving intra chan-
nel distribution efficiency.” (La Londe et al., 1970, p. 5 & 6)
Even earlier Henry Ford (1924) had expressed thoughts similar to those of supply
chain management on how to measure time.
“…the time element in manufacturing stretches from the moment the raw material is sepa-
rated from the earth to the moment when the finished product is delivered to the ultimate
consumer.” (Ford, 1924)
The similarities between the ideas of La Londe et al. (1970) and Ford (1924) and
supply chain management are evident. There are scholars who comment on these
similarities.
“The underlying concepts and rationale for supply chain management are not brand new.
In fact, logistics managers have been utilizing the underlying concepts of supply chain management
for many years.” (Coyle et al., 1996, p. 5)
“It must be recognized that the concept of supply chain management whilst relatively new, is in
fact no more than an extension of the logic of logistics.” (Christopher, 1992, p. 14)
We can conclude that there seem to be different opinions regarding the novelty of
the ideas of supply chain management. Scholars like Ellram, Cooper, Scott,
3
1. Introduction
Westbrook, Bowersox and Closs view supply chain management as a manage-

ment concept with a high degree of novelty while others like Coyle, Bardi and
Langley and Christopher question its ingenuity. Within the field of management
there is a tendency to introduce new management concepts with ideas similar to
those which preceded them. Whether or not that is the case of supply chain
management remains to be examined.
“Managerial needs are rarely if ever satisfied, due to the nature of organizational life. The search
for valuable ideas is in fact encouraged rather than diminished. The changes in fashion in ideas can
be explained with reference to the process of management fad displacement. The organizational
problems which create the needs remain broadly constant. Thus, the so-called “new” solutions
offered tend to be similar to those which preceded them. Thus, “old” products can be easily
displaced with little psychological pain to managers, because the new ones are so similar.”
(Huczynski, 1993, p. 268)
The degree of novelty of the ideas of supply chain management is an interesting

research question which complements the search for the essence of the concept.
The main objective of this study is to examine the concept of supply chain management in
order to seek the essence of the concept. A subordinate objective is to give some indication of
the degree of novelty of supply chain management.
4
2. On Management Concepts
In this study supply chain management is considered a management concept.
Consequently, some discussion of the nature of management concepts and theo-
ries is warranted and is, therefore, presented in this chapter.
2.1 What is a Management Concept?

One way to start discussing management concepts is to discuss the term
“management”. As pointed out by Drucker (1974) management is a difficult term,
especially for us non-Americans, because it can hardly be translated into any other
language and it can have many different meanings, for example it denotes a
function but also the people who discharge the function. Furthermore it denotes a
field of academic study. For the purpose of this study the interest is in
management as a function. There are several different apprehensions of man-
agement considered as a function, e.g.:
“Management is the process of planning, organizing, leading and controlling the efforts of organ-
izational members and of using all other organizational resources to achieve stated organizational
goals.” (Stoner & Freeman, 1989, p. 4)
“Managers achieve an organization’s or department’s goals for the most by arranging for others to
do things–not by performing all the tasks themselves. Management, then, involves planning,
organizing, leading, and controlling the people working in an organization to achieve the organi-
zation’s goals. Those goals give direction to the tasks and activities undertaken.” (Hellriegel &
Slocum, 1996, p. 5-6)
“The first definition of business management is that it is an economic organ… Every act, every
decision, every deliberation of management, has economic performance as its first dimension. The
second task of management is to make work productive and the worker achieving. The third task of
management is managing the social impacts and the social responsibilities of the enterprise.”
(Drucker, 1974, p. 40 & 41)
“The management of a system has to deal with the generation of the plans for the system. i.e.,
consideration of all the things we have discussed, the overall goals, the environment, the utilization
of resources, and the components. The management sets the component goals, allocates the
resources, and controls the system performance.” (Churchman, 1979, p. 45)
Based upon the apprehensions of management above it might be possible to say

that management’s task is to allocate the organizational resources in such a way
that the organizational goals are met.
5
According to Stoner and Freeman (1989) it was not until the industrial revolution
of the 18th and 19th centuries that attempts to develop management concepts
were first made. There are some management concepts which enjoy a unique
position. They are often referred to as the classical management concepts.
Different scholars have slightly different collections of “classics”. Stoner and
Freeman (1989), Bateman and Zeithaml (1990) and Huczynski (1996) nominate
the following management concepts as classics:
• Scientific management (Taylor)

• Human relations (Mayo)
• Administrative management (Fayol)
• Bureaucracy (Weber)
• Operations research/management science
During the last decades there has been a great interest in developing new man-
agement concepts and supply chain management can be seen as a result of this
interest. Some of the new management concepts and theories are denoted “guru
theories” by Huczynski (1996). According to Huczynski the concepts and theories
of management are an untidy hotchpotch of diverse offerings such as theories,
research findings, frameworks, propositions, beliefs, views, saws and suggestions.
Kramer (1975) writes that the aim of the management theories, concepts and
models is to guide and assist managers when deciding.
“Intricate theories, concepts and models of management have been developed to guide managers
in one of the most important areas of human activity, that of managing scarce resources more effec-
tively and efficiently toward the attainment of group goals and ultimately of society’s goals.”
(Kramer 1975, p. 47)
“…a [management] theory assists managers to analyze and explain the underlying causes
of a given business situation and predict the outcome of alternate courses of action.”
(Kramer 1975, p. 47)
Stoner and Freeman (1989) write that the management theories and principles
help managers to understand the underlying processes and based on that knowl-
edge the managers can decide what to do.
6
“The theories and principles of management make it easier for us to understand underlying
processes and, on that basis, decide what we must do to function most effectively as manag-
ers. Without theories, all we have are intuition, hunches and hope–all of which are of limited use
in today’s increasingly complex organizations.” (Stoner & Freeman, 1989, p. 33)
Based upon the apprehensions of the term management it was stated that man-
agement’s task is to allocate the organizational resources in such a way that the
organizational goals are met. Based upon the above statements of Kramer (1975)
and Stoner and Freeman (1989) it may be said that management concepts, theo-
ries, models and principles are supposed to be used by management as basic ideas
about how to act in order to reach the organizational goals. This is illustrated in
Figure 2.1. Supply chain management is, accordingly, one of the management
concepts that is supposed to influence managers in their task to reach the organ-
izational goals.
Management
Management
concepts
Organizational
goals
Resources & Activites
Organization
Figure 2.1 Management concepts are supposed to be used by management as basic ideas about
how to act in order to reach the organizational goals.
Different times and different cultures have their own commonly used manage-
ment concepts. Some management concepts achieve widespread popularity for a
long time, some never get any attention. Huczynski (1996) argues that for a
management concept to secure fame, fortune and immortality for its writer, it has
to meet the following five prerequisites:
7
“It has to be timely, it has to be brought to the attention of its potential audience, it has to
address organizational requirements in a way that meets the individual and concerns of the
managers, it has to possess the essential ingredients which allow potential users to perceive it as
relevant to meeting their needs, it has to be verbally presentable in an engaging way.”
(Huczynski, 1996, p. 1)
In the management literature the terms management concept, management the-

ory, management models and management principles are used rather inter-
changeably. This is also indicated in the references quoted in this section. But
there are undoubtedly occasions when the terms are used with different meanings.
In this study however, the terms management theory and management concept
are used interchangeably, so when examining supply chain management as a
management concept some discussion of the nature of theories is of interest.
2.2 What is a Theory?

Scholars are striving to develop theories which explain “the world” and its phe-
nomenon. Popper (1959) has vividly expressed his view of this by comparing
theories with nets.
“Theories are nets cast to catch what we call “the world”: to rationalize, to explain, and to master
it. We endeavor to make the mesh ever finer and finer.” (Popper, 1959, p. 59)
Within academic circles, the sciences, including mathematics, provide structures

and patterns for developing theories. Most theoretical thinking strives to apply
precepts applied in scientific fields.
“Perhaps the relationship between theory, law, and fact is best grasped in the context of a
deductive system. In a deductive system there are (1) a set of undefined and defined concepts, (2) a
set of assumptions, (3) a set of deduced theorems, and (4) instances of the theorems. The
assumptions constitute the theory, the theorems constitute laws, and the instances of the theorems
are the facts. In the construction of scientific theories the objective is to construct just such a
deductive theory.” (Ackoff, Gupta & Minas, 1962, p. 22)
“Theoretical constructs occur in the formulation of scientific theories. These may be conceived of, in
their advanced stages, as being stated in the form of deductively developed axiomatized systems.
…The extralogical terms used in a theory of this kind may be divided, in familiar manner, into
primitive or basic terms, which are not defined within the theory, and defined terms, which are
explicitly defined by means of the primitives. …The basic and the defined terms together with the
terms of logic constitute the vocabulary out of which all the sentences of the theory are constructed.
8
The latter are divided, in an axiomatic presentation, into primitive statements (also called postu-
lates or basic statements) which, in the theory, are not derived from any other statements, and
derived ones, which are obtained by logical deduction from the primitive statements.” (Hempel,
1965, p. 111)
According to Ackoff et al. (1962) and Hempel (1965) a theory is constituted by

assumptions or primitive statements which are not derived from other statements
and theorems or derived statements which are obtained by logical deduction from
the assumptions or primitive statements. Instances of the theorems or derived
statements are facts. Management concepts belong to social science and there are
scholars who comment on theories within social science.
“We have several works in sociology that combine lawlike propositions into systems, that is, theo-
ries.” (Zetterberg, 1965, p. 14)
“theory Principle or set of principles designed to explain the relationships between two or more
observable facts.” (Stoner & Freeman, 1989, p. 33)
For the purpose of this study we can conclude that a theory is a system of primi-
tive and derived statements designed to explain the relationships between two or
more observable facts, related to a certain class of phenomenon. Every theory is
affected by the paradigm under which it was born. A paradigm contains basic
conceptions of reality, understanding of reality, ideal of science, ethics and
esthetics. Normally, the theories do not relate themselves explicitly to the para-
digms, but rather to the phenomenon. Management concepts are a family of
theories that address a certain set of phenomenon namely organizations and
business. Supply chain management is one management concept within that
family.
The ideas or statements of a theory can be e.g., descriptive, explanatory, predic-

tive or improving. The latter category can be denoted normative theories. Nor-
mative theories relate to certain stated or implied objectives and give directions on
how to act in order to obtain the objectives. Supply chain management is here
considered a normative management concept.
Within management there hardly exists any “grand theory” which unifies or
dominates the field, but instead there are several partial theories. The term partial
9
suggests, according to Zetterberg (1965), that there are other accepted theories
which are not contradicted by, or identical with, the other partial theories. Supply
chain management is a partial management theory/concept coexisting with other
partial theories. Stoner and Freeman (1989) remark that the state of art in
management theory is to borrow principles from different theories as they best suit
one’s needs. In this light Huczynski’s (1996) reflection upon the theories and
principles of management as an untidy hotchpotch of diverse offerings is not sur-
prising.
This discussion of management concepts interchangeable with management the-

ory can be summarized by concluding that supply chain management is, in this
study, considered a normative management concept. Management concepts are
supposed to be used by management as basic ideas about how to act in order to
reach the organizational goals. This corresponds quite well with the definition of
theories which considers them systems of primitive and derived statements
designed to explain the relationships between two or more observable facts,
related to a certain class of phenomenon. The phenomenon of management con-
cepts has its origin in organizations and business.
10
3. Method
3. Method
In this chapter the method used to achieve the objectives of this study is dis-
cussed.
Finding data to analyze concerning a management concept like supply chain

management can be accomplished in many different ways, for example, by read-
ing texts written about the management concept, by listening to and interviewing
people who have knowledge in the specific management concept, or by
examining the concept in practice. In this study supply chain management will be
approached by reading texts about the concept. This method was chosen because
the interest in this study is to seek the essence of the concept according to its
interpreters. It is presupposed by this study that there is a management concept
called “supply chain management” which may be grasped by reading its
interpreters.
3.1 Overview of the Method

In order to examine the concept of supply chain management a method of five
different examinations based on literature studies has been developed. In Figure
3.1 the procedure of the study and the chapter directions are outlined.
Chap 4. Examination of 3.3 Construction of

the reference network reference network
Chap 5. Examination with respect

to the stated objectives and stated
fundamental beliefs
3.4 Choice of
3.2 Choice of literature Chap 6. Examination with respect Examination Aspects
representing SCM to the stated definitions and stated
theory relations
Chap 7. Examination of the 3.5 Discussion of

convergent validity convergent validity
3.7 Choice of literature Chap 8. Examination of 3.6 Discussion of

representing the forerunners the discriminant validity discriminant validity
Figure 3.1 The procedure of the study and chapter directions.
11
3. Method
3.2 Choice of Literature representing Supply Chain Management

The data which will be used to represent the concept of supply chain manage-
ment, is derived first of all from a survey of all editions from 1990 to 1996 of two
of the most significant publications in the field of logistics management, Interna-
tional Journal of Logistics Management and International Journal of Physical Distribution
& Logistics Management (Stock, 1995). Secondly, the data is derived from a survey
of the references in the articles found in the survey of the two publications. In the
second survey there are references to both articles and literature. Besides the data
found in the two surveys, a minor part is derived from a general literature survey.
In the sample only articles and literature which mention the specific expressions,
supply chain management or supply chain concept are included. The latter expression is
included in the data since it is fairly frequently used and is considered to be used
interchangeably with supply chain management. Some other concepts which are
less frequently used but sometimes used with similar meaning as supply chain
management, e.g., integrated channel systems, partnerships, strategic alliances,
quick response and strategic lead time management (Lambert & Stock, 1992;
Gattorna, Chorn & Day, 1991), are not included. The data selection came up
with 51 articles and extracts from literature. Throughout this study the data
representing supply chain management will be denoted, the basic set of articles
and literature. In the references of this study they are marked with S C M .
The basic set of articles and literature does not include all texts written about
supply chain management. But the selection is considered a satisfactory repre-
sentation of the concept of supply chain management, particularly in light of the
acclaim won by the two publications within the field of logistics.
3.3 Construction of the Reference Network

The first examination of supply chain management will be made by discussing the
relationships within the basic set of articles and literature. The examination will be
made by constructing the “reference network” of the basic set of articles and
literature. The construction of the reference network gives an illustration of all
connections in the form of stated references which exist within the basic set of
articles and literature. An examination of the reference network answers questions
12
3. Method
about among others which articles refer to which articles and who are the most
active scholars.
3.4 Choice of Examination Aspects

In the basic set of articles and literature different views of supply chain manage-
ment will be apparent. In order to grasp the central ideas and beliefs of supply
chain management some “aspects” will be examined. The different aspects will be
divided into a set of core aspects and a set of additional aspects.
3.4.1 Stated Definitions

The first interesting aspect to be examined is the existence and content of stated
definitions of the management concepts. The aim of definitions is to contribute to
improved communication. Føllesdal, Walløe and Elster (1993) have stated five
rules for good definitions: (1) the definitions ought to make the argument or
theories more clear, (2) the definiens ought to be at least as precise as the
definiendum, (3) the expressions which are used as definies ought to be expres-
sions already understood by the receiver, (4) the definitions ought not to be cir-
cular and (5) the definitions ought not to contain terms which have strong valuing
or emotional overtones. Explicitly stated definitions of management concepts are
rather uncommon, perhaps because of the difficulties encountered in obeying
rules such as those prescribed by Føllesdal et al.. Management concepts often take
much more effort to explain in a proper way than the form of definitions permits.
This makes definitions less comprehensive and relatively less important among
management concepts than in e.g., mathematics and other sciences. In these areas
the definitions are precisely determined and they are the starting point for a
deductive development of considerable importance.
Nevertheless, some stated definitions of a specific management concept normally

exist and are meaningful to relate to when examining the concept. However, as
discussed in this section, the definitions are not as significant as one might believe.
Examination of the stated definitions of supply chain management is, therefore,
considered part of the set of additional aspects in contrast to the set of core
aspects.
13
3. Method
3.4.2 Stated Objectives

The apprehensions of management concepts outlined in section 2.1 direct interest
toward organizational goals. It was stated that management’s task is to allocate the
organizational resources in such a way that organizational goals are met and
management concepts are supposed to be used by management as basic ideas for
acting. This makes it important to examine which objectives a specific manage-
ment concept is supposed to achieve in order to ensure that the organizational
goals and the objectives of the management concept correspond. Stated objectives
of a management concept are, therefore, considered part of the set of core aspects
of the examination of a management concept.
The real or overall objectives which are supposed to be achieved by a manage-

ment concept are, however, often difficult to reveal because of a tendency to state
subordinated and overall objectives in an unrelated and often confusing way. For
example, a management concept can emphasize that the objectives are both to
create customer satisfaction and to increase the company’s competitiveness
without relating the two objectives to each other or to possible superior objectives
like contributing to the “bottom line”. The problem is discussed by Churchman
(1979). He discusses the confusion about the word “objective”. He states that
there often exists several objectives with different aims and that it is difficult to
determine the real objectives of a system.
In order to reduce the confusion of unrelated coexisting objectives, the stated

objectives of supply chain management are in this study related to each other in a
hierarchical weave of objectives.
Goal 1
Goal 3 Goal 2
Goal 4
Figure 3.2 Illustration of a hierarchical weave of objectives.
14
3. Method
3.4.3 Stated Fundamental Beliefs

The discussion of theories in section 2.2 concluded that a theory can be seen as a
system of primitive and derived statements designed to explain the relationships
between two or more observable facts. The statements, here denoted fundamental
beliefs, are the cornerstones of the management concept, which makes it
significant to examine the fundamental beliefs of a management concept to reveal
its essence. Examining a management concept by finding its stated fundamental
beliefs is here considered as important as finding the stated objectives which put
both aspects in the set of “core aspects”.
Finding the fundamental beliefs in the basic set of articles and literature gives rise
to similar problems as with the objectives. The fundamental beliefs are often dif-
ficult to reveal because of a tendency to state beliefs of different significance in an
unstructured and unrelated manner. For the purpose of revealing the significance
of different fundamental beliefs, the fundamental beliefs will in this study be
divided into two sets of fundamental beliefs denoted, primitive and derived fun-
damental beliefs. The two sets are obtained from Hempel (1965) who asserts that
primitive statements are not derived from any other statements and that derived
statements are obtained by logical deduction from the primitive statements.
Primitive fundamental Primitive fundamental

belief 1 belief 2
Derived fundamental belief A
Derived fundamental belief B
Derived fundamental belief C
Figure 3.3 The fundamental beliefs of a management concept can be divided into primitive and
derived fundamental beliefs. From the two primitive fundamental beliefs 1 and 2 the
three derived fundamental beliefs A, B and C can be obtained by logical deduction.
15
3. Method
3.4.4 Stated Theory Relations

In section 2.2 it was stated that within management the concepts are partial,
which suggests that there are other accepted concepts which are not contradicted
by, or identical with, other partial concepts. The relation of supply chain man-
agement to other concepts or theories is therefore interesting to examine. The
stated theory relations tell us which theories, concepts or ideas the management
concept is linked to or emerges from. The examination of the stated theory rela-
tions is considered part of the set of additional aspects.
Stated theory relations is the final aspect of the examination of supply chain man-
agement. The final choice of examination aspects is summarized in Table 3.4.
Table 3.4 Chosen aspects for the examination of the concept of supply chain management.
Core aspects Stated objectives
Stated fundamental beliefs
Additional aspects Stated definitions
Stated theory relations
These aspects have been chosen for examining supply chain management, but it is
also possible and meaningful to consider them when examining any management
concept.
3.5 Convergent Validity

Although the interpreters of a management concept are supposed to lend
authority to the concept, it is not at all certain that their views of the concept
correspond. In a diverse set of expressions of a management concept it is necessary
to examine how well the different views of the concept correspond. Convergent
validity reflects the degree to which different views of a concept share a common
set of ideas and beliefs.
16
3. Method
SCM1
SCM2 SCM3
SCMconv
Management concepts
Figure 3.5 The convergent validity reflects the degree to which different views of supply chain
management (SCMi) share a common set of ideas and beliefs (SCMconv).
The convergent validity of supply chain management will be examined with

respect to the core aspects, stated objectives and stated fundamental beliefs and the
additional aspects, stated definitions and stated theory relations.
3.6 Discriminant Validity

One interesting way of examining a management concept is to compare it with
other management concepts. Such a comparison gives rise to what may be called
discriminant validity. Discriminant validity reflects the degree to which a specific
management concept can be reliably distinguished from another concept or set of
ideas. The examination of discriminant validity refers to the subordinated
objective of this study, to give some indication of the degree of novelty of the
concept of supply chain management. Therefore, the concept of supply chain
management will be compared to its forerunners within logistics.
Forerunners SCMconv
Management concepts
Figure 3.6 Discriminant validity reflects the degree to which the common set of ideas and beliefs
of the concept can be distinguished from its forerunners.
17
3. Method
3.7 Choice of Literature Representing the Forerunners

Literature to represent the forerunners of supply chain management within logis-
tics is selected from logistics texts written before the concept of supply chain
management was widely recognized, hence from the mid-1980s and earlier.
During this period several terms were used correspondingly to contemporary
logistics management, e.g, physical distribution, business logistics, physical supply,
materials management, market supply, logistics of distribution and total dis-
tribution.
“Various other authors and speakers have utilized different terms to describe what is primarily
called physical distribution in this book. The terms business logistics, physical supply,
materials management, market supply, logistics of distribution and total distribution are
commonly found in the literature dealing with this broad area of corporate activity.” (Bowersox,
Smykay, La Londe, 1968, p. 5)
The aim of the literature selection representing the forerunners was to capture a
handful of well-known logistics texts written before the mid-1980s. The texts
used are from three sources. Firstly, from a special issue of the International Journal
of Physical Distribution & Logistics Management (1993) containing, “those articles [from
International Journal of Physical Distribution & Logistics Management] which have made
a major impact on the subject of logistics, as is evidenced by the frequency of their citation by
later writers…” (Stock, 1993). Secondly, the texts used belong to a list considered
by Lambert and Stock (1993) as major events of the historical development of
logistics management and finally, articles from the book, Logistics-the strategic issues,
edited by Christopher (1992). Totally, this selection provided a set of 15 articles
and literature representing the forerunners dating from 1922 to 1985. In the
references of this study they are marked with L F . The basic set of articles and
literature representing supply chain management dates from 1982 and later.
18
4. Examination of the Reference Network

In this chapter the first examination of supply chain management is made by
constructing the reference network. The reference network is constructed by
illustrating to which articles and literature within the basic set of articles and lit-
erature each text refers.
Verwijmeren,
Lester-92
Metz van der Vlist &
Hall -91 Davis -93 -94 van Donselaar-96
Rees -92
Houlihan Stevens Davies &
La Londe &
-85 -90 Lee & Brito -96
Masters -94
Ellram Billington
Lambert
-91 -93
& Stock Bhattacharya,
-92 Coleman, Brace
Saunders
& Kelly -96
-94
Scott & Lee &
Schary &
Westbrook Billington
Cooper Skjøtt- McMullan
-91 -92
-93 Leenders, Nollet Larsen -95 -96
Ellram & & Ellram -94
Cooper-90 Grange
-92 Coyle, Bardi &
Langley -96
Ellram & Berry, Towill
Cavinato
Stevens- Cooper-93 & Wadsley-94
-92
89 Battaglia & Gentry
Tyndall-91 -96
Cooke- Fernie &
92 Turner Sandelands - Rees-95
Oliver
Houlihan -93 94 La Londe &
&Webber
-88 Gattorna, Armistead Pohlen -96
-82
Chorn & & Mapes
Jones &
Day-91 -92 Cooper &
Clarke-
Ellram -93 Giunipero
90
Jones & Christopher & Brand-96
Flickinger &
Riley-85 -92
Baker-95
Cavinato-
Jones-89 Anscombe
91 Atkin Johnson &
Langley& -94
-93 Wood-96
Holcomb-92
1983 1985 1987 1989 1991 1993 1995

1982 1984 1986 1988 1990 1992 1994 1996
Figure 4.1 The reference network of the basic set of articles and literature.
In the reference network we notice that the first article of supply chain manage-
ment in the basic set of articles and literature was published in 1982. The article
called, “Supply-chain management: logistics catches up with strategy”, was written by
Oliver and Webber, who were at the time working at the management consulting
firm, Booz, Allen & Hamilton. Though the article by Oliver and Webber (1982)
is the earliest in the basic set of articles and literature it is not well known. As
shown by the reference network, only Christopher (1992) refers directly to it.
The earliest articles which have been more widely recognized according to the
reference frequency are the articles by Houlihan (1985) and Jones and Riley
19
(1985). However, the two articles by Houlihan (1985 & 1988) and the article by
Oliver and Webber (1982) are almost identical in content without there being any
references between them or comments on this.
Some articles and literature concerning the concept of supply chain management
have, of course, gained more interest and widespread recognition than others.
One indicator of this is the reference frequency of each article and literature. The
article most referred to in the basic set of article and literature is Jones and Riley
(1985), “Using Inventory for Competitive Advantage through Supply Chain Manage-
ment”. There are 13 references within the reference network to their article.
Below is a summary of the articles most referred to within the basic set of articles
and literature and their number of references.
Table 4.2 Summary of the articles most referred to within the basic set of articles and literature
and the number of references to every article.
Jones & Riley (1985). Using Inventory for Competitive Advantage through Supply 13
Chain Management. International Journal of Physical Distribution & Materials
Management.
Houlihan (1985). International Supply Chain Management. International Journal 9
of Physical Distribution & Materials Management.
Ellram (1991). Supply Chain Management: the Industrial Organisation Perspective. 7
International Journal of Physical Distribution & Logistics Management
Stevens (1989). Integrating the Supply Chain. International Journal of Physical 7
Distribution & Materials Management.
Ellram & Cooper (1990). Supply Chain Management, Partnerships, and the 6
Shipper-Third Party Relationship. International Journal of Logistics Management.
Houlihan (1988). International Supply Chains: A New approach. Management 6
Decision.
Lee & Billington (1992). Managing Supply Chain Inventory: Pitfalls and 6
Opportunities. Sloan Management Review.
The most active scholars in the basic set of articles and literature according to the
reference network are Ellram and Cooper, who have contributed three articles
together (1990, 1993, 1993) and one additional article each (Ellram, 1991;
Cooper, 1993). Ellram has also participated in one article together with Leenders
and Nollet (1994). Besides Ellram and Cooper there are several scholars who have
20
contributed two articles each (Houlihan, 1985 & 1988; Cavinato, 1991 & 1992;
Stevens, 1989 & 1990; Jones, 1985 & 1989; Lee and Billington, 1992 & 1993).
The number of connections between the articles in the reference network indi-
cates that the interpreters of supply chain management are fairly acquainted with
each others work, although there are a couple of articles that have been published
unnoticed, or at least without any others referring to them. What the reference
network does not show is the “type” of references which exist. For example there
can be references which comment on the work by another interpreter or there
can be references just surveying the concept. Among the references in the basic
set of articles and literature remarkably few comment on or discuss the work by
others, the references are mainly of a surveying type. The lack of comments is
perhaps not surprising since the non-existence of criticism of others work within
the management concepts field has been recognized by several scholars.
“Settle (1971) argued that the key constituent of science was criticism. This critical-mindedness
appeared to be lacking in the field of management education. In the absence of a critical tradi-
tion (one in which error and weakness were sought out), erroneous systems are readily excused,
protected and perpetuated.” (Huczynski, 1993, p. 272)
“Business school academics, traditionally the producers of most management ideas are, according to
Koontz (1961), unwilling to understand each other. They are reluctant to criticize each
other’s ideas since it is not good selling practice to “ knock a competitor.” (Huczynski,
1993, p. 274)
The articles and literature in the reference network extend over a period of 14
years but no evident change of the concept of supply chain management has been
noticed during that time. There is no ongoing internal debate of the concept of
supply chain management in the basic set of articles and literature.
There are many interesting questions which can be examined with respect to the
reference network. Here, some overall considerations have been stated, for
example, that the first article in the reference network is from 1982, the most
referred to article is Jones and Riley (1985) and that the most active authors are
Ellram and Cooper. The lack of comments on the work of others has also been
discussed. Finally it may be concluded, that at least within the reference network,
21
no extensive survey and examination of supply chain management has been made
prior to this study.
22
5. Examination with Respect to Stated Objectives and Stated Fundamental Beliefs
5. Examination with Respect to Stated Objectives and

Stated Fundamental Beliefs
The second examination of supply chain management is carried out by discussing
the basic set of articles and literature with respect to the two core aspects from
section 3.3, stated objectives and stated fundamental beliefs.
5.1 Stated Objectives of Supply Chain Management

According to Cooper (1993) the original objective of supply chain management
was to minimize inventory within and across firms, but then the scope was
expanded to consider all aspects of coordination across firms including inventory
management, information systems, logistics, manufacturing and marketing. In the
basic set of articles and literature the most commonly stated objective of supply
chain management is to increase the customer service and simultaneously reduce
costs.
“The goal is to achieve improved customer service at reduced overall costs.” (Ellram, 1991, p.
17)
“…supply chain management shares the common goals of minimizing costs and meeting cus-
tomer service objectives.” (Gentry, 1996, p. 37)
“…supply chain management, which is seen as a key to delivering higher customer satisfaction
with reduced lead times and costs.” (Bhattacharya, Coleman, Brace & Kelly, 1996, p. 39)
In the most referred to article according to the reference network, Jones and Riley
(1985) state that the objective of supply chain management is to lower the total
amount of resources to provide the necessary level of customer service. They
specify the resources as inventory, transportation facilities and people.
“The objective of integrating the supply chain is to lower the total amount of resources required
to provide the necessary level of customer service to a specific segment. These resources comprise
inventory, transportation expenses, facilities and people.” (Jones & Riley, 1985, p. 20)
The original objective of supply chain management according to Cooper (1993), to

minimize the inventory level, is indeed still a current objective of supply chain
management in the basic set of articles and literature.
23
“… as a means of simultaneously meeting the firm’s customer service objectives while mini-
mizing inventory throughout the supply chain.” (Stevens, 1989 according to Ellram & Cooper,
1990, p. 1)
“The need to reduce levels of inventory in a particular system has been the primary force driving
companies to adopt supply chain management in practice.” (Gattorna, Chorn & Day, 1991, p. 5)
“The goal of a successful supply chain is to trade-off information for inventory wherever
possible, holding inventory in the location, quantity, and form that is optimal for the entire chain.
…” (Gentry, 1996, p. 37)
Influenced by Porter and his value-chain a few interpreters prefer to state the ob-
jectives as increased value to the customer instead of increased customer service
(Cavinato, 1991 & 1992).
“ …all with the quest of making the final product at overall lesser total cost and/or with a greater
set of values than competing sets of supply chain firms.” (Cavinato, 1992, p. 285)
Anscomb (1994) describes a “Fourth wave” in logistics improvement called “Maxi-

mising Value in the Supply-Chain”.
The objectives of supply chain management mentioned above are fairly cost-
oriented, but there is evidence of revenue-oriented objectives too pointing at
increased customer service, increased value to the customer and reduced lead-
times.
“…in almost every case the benefits [of supply chain management] are multiple: 1. improved cus-
tomer service, and 2. reduced total supply chain cost, and 3. growth in business and reve-
nues.”(Metz, 1994, p. 5)
“… there is a growing recognition that supply chain management operations can have a strong effect
on customer service levels, thereby enhancing revenues.” (McMullan, 1996, p. 79)
Instead of claiming the objectives that are either cost or revenue oriented some
interpreters address both sides at the same time by focusing on the competitiveness
of a single firm and some by focusing on the competitiveness of the whole supply
chain or industry.
“The ultimate objective is to improve a company’s competitive position in the global market-
place and to sustain that position in spite of intensive competitive forces and rapidly changing cus-
tomer needs.” (Coyle et al., 1996, p. 4)
24
“… to help build a competitive advantage for the channel.” (Cooper, 1993, p. 57)
“Supply chain management is aimed at achieving a competitive industry comprising competitive

businesses.” (Jones, 1989, p. 23)
Johnson and Wood (1996) and Cooper (1993) believe the objective of supply
chain management is to contribute to the company’s bottom line.
“ All the efforts at configuring or reengineering a supply chain must have the bottom line in
mind.” (Johnson & Wood, 1996, p. 49)
“ The short- and long-term results [of supply chain management] must contribute to the bottom
line.” (Cooper, 1993, p. 57)
Some interpreters state several of the objectives quoted above and some state only a
few of them. None of the interpreters in the basic set of articles and literature try to
relate different objectives to each other. This situation was foreseen in the dis-
cussion of stated objectives in management concepts in section 3.4.2. There, the
intention was to relate the stated objectives to each other in a hierarchical weave to
reduce some of the confusion concerning the coexistence of stated objectives. In
Figure 5.1 a tentative hierarchical weave of stated objectives of supply chain
management is presented.
Improved
bottom line
Increased
competitiveness
Revenue
Reduced costs
improvements
Increased
Efficient use of Reduced Reduced Increased
customer
resources inventory leadtimes values
service
Figure 5.1 A tentative hierarchical weave of stated objectives of supply chain management.
The overall objective of supply chain management presented in the hierarchical

weave in Figure 5.1 is to contribute to improvements in the company’s bottom
25
line or profitability both in a short and long term perspective. Another expression
of this same objective is perhaps the focus on increased competitiveness as a means
of improving profitability. To achieve improvements in the bottom line or in-
creased competitiveness the interpreters of supply chain management point at
reduced costs and improved revenues. Costs are reduced by reducing inventory and
by more efficient use of resources. Revenues are improved by increasing customer
service and value to the customer.
As shown in Figure 5.1 the different stated objectives of supply chain management,
although seldom related to each other, are rather easily placed in a hierarchical
weave of objectives. However, the stated objectives of supply chain management
seem to be rather general. Besides the logisticians focus on reduced inventory the
stated objectives of the concept might well be the objectives of almost any
management concept.
5.2 Stated Fundamental Beliefs of Supply Chain Management

In this section the basic set of articles and literature is examined in order to grasp
the fundamental beliefs of supply chain management. As discussed in section 3.4.3
the fundamental beliefs of a management concept can ideally be divided into a set
of primitive and a set of derived fundamental beliefs.
An examination of the fundamental beliefs of supply chain management is made by

tentatively establishing the two sets of fundamental beliefs and thereafter discussing
both the tentative primitive and the tentative derived fundamental beliefs in greater
detail.
5.2.1 Establishing the sets of Primitive and Derived Fundamental Beliefs

In the basic set of articles and literature the interpreters have not approached supply
chain management by identifying fundamental beliefs, though some have listed
“characteristics”, “elements”, “key aspects”, etc., of supply chain management.
Those lists are summarized in Table 5.2 and used as a starting point when estab-
lishing the sets of fundamental beliefs of supply chain management.
26
Table 5.2 Summary of the stated lists of “characteristics”, “elements”, “key aspects” etc. of
supply chain management in the basic set of articles and literature.
La Londe & Masters (1994), Elements

Oliver & Webber (1982), Houlihan
Coyle et al (1996), Characteristics

(1985 & 1988) Fundamentals
Schary & Skjött-Larsen (1995)

Elements for effectiveness
What is the supply chain?
Most important aspects

Johnson & Wood (1996),
Bhattacharya et al (1996),
Cooper & Ellram (1993),
Jones & Riley (1985),

Important changes
Anscomb (1994),
Characteristics
Key concepts
Jones (1989),
Channel-wide inventory management X X X X X X
Long time relationships X X X X X
Sharing of information X X X X X
Coordination/ integration X X X X X
End customer focus X X X X
Supply chain is viewed as a single entity X X X X
Win-win relationship X X X X
Reduction in supplier base X X
Strategic decision making X X
Joint planning X X
Outsourcing X
Channel-wide total cost approach X
Compatibility of corporate philosophies X
Channel leadership X
Speed of physical and information flows X
Reengineering X
Pull strategy X
Chain competitiveness X
There are several possibilities for combining different fundamental beliefs to form a
set of primitive fundamental beliefs by starting out from the lists in Table 5.2. In
this study, only one set of primitive fundamental beliefs will be suggested.
According to Table 5.2 the most common characteristics stated in the basic set of
articles and literature are channel-wide inventory management, long-time rela-
tionships, sharing of information, coordination/integration, end customer focus,
supply chain viewed as a single entity and win-win relationships. Among these,
three beliefs about how to reach the objectives are tentatively chosen as the
primitive fundamental beliefs of supply chain management., coordination and
integration along the material flow, win-win relationships and end customer focus. These
27
beliefs were suggested because from them it is believed that it is possible to

deductively derive the remaining beliefs. The set of tentative primitive fundamental
beliefs and a number of derived fundamental beliefs can be seen in Figure 5.3. The
number of primitive fundamental beliefs ought to be as few as possible, but from
them countless derived fundamental beliefs can be derived deductively. A number
of the characteristics from Table 5.2 were not considered either primitive or
derived fundamental beliefs. Those “outliers” are more general in character, rather
than pointing specifically at supply chain management.
Primitive fundamental beliefs
Outliers
Coordination and Win-win End customer
integration along relationship focus Strategic decision
the material flow making
Outsourcing
Derived fundamental beliefs
Long time
Supply chain is viewed Chain
relationships Pull strategy
as a single entity competitiveness
Sharing of Compatibility of Speed of physical and

Channel-wide
information corporate philosophies information flows
inventory management
Channel-wide Reduction in Reengineering

Joint planning
total cost approach supplier base
Channel
leadership
Figure 5.3 The tentative primitive and derived fundamental beliefs of supply chain management.
The “outliers” which were not considered either primitive or derived fundamental
beliefs are to the right.
The implication of the tentative primitive fundamental beliefs is, that in order to
achieve the objectives of supply chain management as examined in the previous
section, the individual companies should coordinate and integrate their activities
with other companies along the material flow. The coordination and integration
along the material flow shall focus on the end customer and the companies shall
cooperate in win-win relationships.
Further, a more detailed examination, first of the tentative primitive, then the
derived fundamental beliefs of supply chain management, will be made.
28
5.2.2 Examination of the Primitive Fundamental Beliefs

The three tentative primitive fundamental beliefs are summarized in Table 5.4.
They will be further examined according to what is stated in the basic set of articles
and literature in this section.
Table 5.4 Tentative set of primitive fundamental beliefs of supply chain management.
Coordination and integration along the material flow
Win-win relationships
End customer focus
Coordination and Integration along the Material Flow

Coordination and integration along the material flow was suggested as a primitive
fundamental belief of supply chain management. The belief is that coordination
and integration of activities along the material flow leads to improved performance
for all participants of the chain. As explained by Jones (1989), the result of
managing the supply chain system as a whole is greater than managing parts of it in
isolation.
“…managing the supply chain system as a whole will enable exploitation of emergent
properties or synergy i.e., two plus two equals five; management of parts of the supply chain in
isolation will not achieve this.” (Jones, 1989, p. 25)
To explain the importance of coordination and integration along the material flow
the company is illustrated by Johnson and Wood (1996) as several independent
silos performing different activities without coordination with each other. In supply
chain management the need of coordination and integration between the silos is
addressed. In a supply chain perspective the silos can, instead, illustrate different
companies in the chain.
“… the activities within silos were coordinated with each other. Supply-chain managers do not
think in terms of a separate silo for each function. Instead, they think of a long, continuous
flow designed mainly to please the customer.” (Johnson & Wood, 1996, p. 41)
The idea of integrating functional areas is not new, nor is it unique for supply chain
management. On the contrary, as discussed in the introduction, the benefits of
coordination and integration are a fundamental belief among several contemporary
29
management concepts. Within supply chain management, the belief has been
addressed at least since Oliver and Webber (1982).
“During the late 1970s and the 1980s, the notion of integrating functional areas within a firm
became popular among major US corporations…. Supply chain management extends this concept of
functional integration beyond the firm to all the firms in the supply chain, bringing the concept of
integration into the 1990s.” (Ellram & Cooper, 1990, p. 1)
“Finally, supply-chain management requires a new approach to systems: Integration not simple
interface, is the key.” (Oliver & Webber, 1982, p. 66)
The well-known authors Cooper and Ellram (1993) divide coordination into three
sets, across channel members, across management levels and across functions.
“Three kinds of coordination can be identified: across channel members, across management
levels, and across functions. In traditional, independent systems, the focus is on the specific trans-
action between buyer and seller. The supply chain management concept implies that most or all
members of the channel coordinate their efforts.” (Cooper & Ellram, 1993, p. 16)
All means of coordination are of interest in supply chain management. Schary and
Skjøtt-Larsen (1995) identify the importance of making the demand visible
throughout the chain.
“Coordination is the first task of supply chain management: to coordinate, making market
demands and customer orders visible once again throughout the chain. The tools are coordination
across organizational boundaries via liaison between operating managers and information systems in
order to share operating data with all parties involved in the flow process.” (Schary & Skjøtt-
Larsen, 1995, p. 21)
Cooke (1992) gives an example of a retailer and a manufacturer who can both
reduce costs by coordinating their activities. The day-to-day interactions are put
forward by Cooper and Ellram (1993) as being mostly between immediate com-
panies in the chain, but more remote companies are also supposed to interact in
supply chain management.
“Not only are the retailer and manufacturer able to reduce inventory levels, but both parties also
benefit from lower handling costs and even lower transportation costs. In addition, the manu-
facturer realizes lower production costs due to smoother manufacturing schedules, while the retailer
incurs lower transaction costs and improved customer service by virtue of having the right item
in stock at all times.” (Cooke, 1992, p.58)
30
“The supply chain management concept implies that most or all members of the channel coordi-
nate their efforts. For example, a manufacturer may work with the supplier’s supplier. While the
day-to-day interaction is most focused in immediate channel pairs, the goals of the entire channel
guide operations.” (Cooper & Ellram, 1993, p. 16)
In supply chain management it is desirable to coordinate and integrate activities less

immediate to logistics in order to improve the performance of the chain, for
example engineering and design changes (Johnson & Wood, 1996), research,
development and produce design (Cavinato, 1992) and technical information pro-
vision to support the end product (Jones, 1989).
“…it is acceptable, even desirable, to negotiate engineering and design changes in products
to make them more compatible with the needs of other chain members.” (Johnson & Wood, 1996,
p. 39)
“The supply chain view includes firms that cooperate in such areas as research and
development and produce design…” (Cavinato, 1992, p. 285)
“Supply chain management has been associated with primarily the flow of orders and materials
through the chain i.e., predominantly a logistics view. However, there are other important fea-
tures valued by end customers that are beyond the logistics arena; for example, technical
information provision to support the end product. It is important therefore that the supply
chain is managed to provide all the features that customers require… ” (Jones, 1989, p. 23)
Contrary to vertical integration, proponents of supply chain management believe

that integration and coordination along the material flow is best achieved without
ownership.
“Supply chain management is viewed as lying between fully-vertically-integrated systems and

those where each channel member operates completely independently.” (Cooper & Ellram,
1993, p. 13)
Accordingly, the tentative fundamental belief of supply chain management to

coordinate and integrate activities along the material flow are based upon the belief
that this leads to improved performance with respect to the stated objectives. The
coordination and integration not only concern immediate functions of logistics, but
also less immediate ones like product development and engineering.
31
Win-Win Relationships
The second tentative primitive fundamental belief of supply chain management is
win-win relationships. A win-win relationship is when each actor in the chain or
network looks out for the interests of the other actors as well as its own concerns,
when the individual companies do not try to gain advantage on behalf of the other
companies in the chain and when companies in the chain treat each other the same
way as they treat themselves. In supply chain management there is a fundamental
belief that win-win relationships are possible and necessary for achieving the
objectives of the concept.
“…[supply chain management] is focused on win-win relationships. It takes as its basic tenet
that all costs incurred in the supply-chain will inevitable be distributed amongst the partners in that
chain.” (Anscombe, 1994, p. 38)
“…a close relationship requires that channel members be willing to share risks and rewards over long
term. This implies a win-win situation over the life of the supply chain.” (Cooper & Ellram,
1993, p. 17)
“The firms work hard to develop high level of trust and commitment to the relationship. The goal is
to change the buying-selling relationship from an adversarial, winner-loser, bargaining-haggling,
arms-length exchange into a co-operative, team-oriented enterprise where each party is looking
out for the interest of the other party as well as its own concerns.” (La Londe & Masters,
1994, p. 38)
Basically antagonistic companies who want to sell expensive and buy cheap from
each other must, according to supply chain management, find a better way of
cooperating for their mutual best in win-win relationships. To reach a win-win
relationship the companies need to share costs, risks and rewards in the chain.
“There needs to be a negotiation over sharing the costs and the risks as well as the benefits…”
(Scott & Westbrook, 1991, p. 32)
“…a supply chain perspective requires sharing of risk” (Coyle et al., 1996, p. 11)
“A firm must think of its own bottom line, as well as the bottom lines of all other partici-
pants. Some concern must be shown for the partners’ bottom lines since they are unlikely to move
forward with new ideas unless they can be persuaded that their profitability will improve.” (Johnson
& Wood, 1996, p. 49)
Win-win relationships are considered a tentative primitive fundamental belief of

supply chain management because they are crucial for attaining lasting relationships
32
in the supply chain. Coordination and integration along the material flow demands
lasting relationships. The fundamental belief of win-win relationships is not based
on an increasing concern for the chain mates, but on traditional selfish thinking.
The novelty is that in supply chain management the idea is that the performance of
the individual company is dependent on the performance of the chain mates.
End Customer Focus

The third tentative primitive fundamental belief of supply chain management is
that all companies in the supply chain shall focus on the end customer in order to
obtain the best results. The rationale behind the focus on the final customer comes
from the derived demand. When the end customer buys a product from “your
chain” the demand will be spread upstream to all companies in the chain. All
companies in the chain are dependent on the demand of the end customer.
“…if the final customer does not select the OEM’s product, then none of the firms in that supply
chain will experience derived demand for their portion of the value-added that they provide to the
product or service.” (Cavinato, 1992, p. 289)
“These are the people [the end customers] who place the orders that trigger a chain reaction. This
chain reaction ultimately determines the requirements for materials being extracted, their processing,
their manufacture and assembly and their distribution to satisfy demand. For an industry to remain
competitive it must manage its total supply chain to ensure the end customer is satisfied.” (Jones,
1989, p. 23)
Accordingly, to satisfy the end customer the supply chain must be designed with
the cost and values of the end customer in mind.
“…the supply chain is optimized by focusing upon the final landed cost of the product. Landed cost
refers to the final total actual cost to the customer where they are going to use it…” (Coyle et
al., 1996, p. 10)
“Focusing on the consumer is not something new, but balancing customer value with cost
reduction across an entire supply chain represents an important new frontier in the management
process.” (La Londe & Pohlen, 1996, p. 10)
Somewhat exaggerated, it does not matter how good “customer service” we obtain
between the members of the supply chain if we not satisfy our end customer.
33
End customer focus is the third and final tentative primitive fundamental belief of
supply chain management. Starting off from the tentative primitive fundamental
beliefs, the derived fundamental beliefs can ideally be deductively derived.
5.2.3 Examination of the Derived Fundamental Beliefs

In this section the derived fundamental beliefs are examined from what is stated in
the basic set of articles and literature.
As mentioned before, the number of primitive fundamental beliefs ought to be as

few as possible, but from them countless derived fundamental beliefs can be
deductively derived. The ones found in the examination in section 5.2 are sum-
marized in Table 5.5.
Table 5.5 Some derived fundamental beliefs of supply chain management. Those examined in
this section are marked *.
Channel-wide inventory management *
Long time relationships
Sharing of information *
Supply chain is viewed as a single entity
Reduction in supplier base *
Joint planning
Channel-wide total cost approach
Compatibility of corporate philosophies
Chain competitiveness *
But added to these derived fundamental beliefs of supply chain management above,
the basic set of articles and literature contains lots of others. In this study only a
selection of the most frequently discussed and interesting derived fundamental
beliefs will be examined. They are marked in Table 5.5.
Channel-Wide Inventory Management

Inventory management is a recurrent theme in supply chain management. Chan-
nel-wide inventory management is mainly derived from the primitive fundamental
belief of coordination and integration along the material flow. Inventory is seen as a
consequence of non-coordinated material flows in supply chain management.
34
“One purpose of inventory is to separate stages in the supply process, a slack variable. It gives to
each stage the autonomy to plan its own operations, but this is done at a cost, tying up capital that
can be used elsewhere. Coordination and inventory are opposite sides of the same coin; close
coordination can reduce the need for inventory in the system.” (Schary & Skjøtt-Larsen,
1995, p. 21)
Coordination and inventory management throughout the entire supply chain are
supposed to lead to lower inventory investment and simultaneously high customer
service. This approach to inventory management is referred to in the basic set of
articles and literature as a different perspective on inventory compared to the tra-
ditional approach.
“…supply-chain management provides a different perspective on inventories, which are

used as a balancing mechanism of last, not first, resort.” (Oliver & Webber, 1982, p. 66)
“Supply chain management differs from more traditional approaches to inventory control,
which focus on inventory either within the firm, or downstream in the channel of distribution,
between the manufacturing firm and the distributor. …Supply chain management focuses on the
control and management of inventories throughout the entire supply chain…” (Ellram & Cooper,
1990, p. 2)
Johnson and Wood (1996) claim that the supply chain literature tends to concen-
trate on changing the material flow pattern from one of stop and start to one of
continuous flow.
“Literature to date discussing the supply chain tends to concentrate on inventory management and
on changing the pattern from stop and start to one of continuous flow” (Johnson & Wood,
1996, p. 39)
The vast majority, like Coyle et al. (1996), claim that the objectives of the channel-
wide management of inventories is to minimize the inventory investments, but
Cooper and Ellram (1993) claim that the objective is to eliminate the redundant
inventories in the system.
“The level of inventory must be coordinated all along the supply chain to minimize inventory
investment and cost.” (Coyle et al., 1996, p. 10)
“… a supply chain management approach involves channel-wide management of inventories. This

approach does not necessarily seek to eliminate most of the inventory from the channel, …,
but only the redundant inventories in the system.” (Cooper & Ellram, 1993, p. 15)
35
The stated objectives of supply chain management are often cost-oriented and
reducing inventory is considered one way of reducing the cost. Redundant
inventory is seen as a consequence of non-coordinated material flows.
Sharing of Information
To obtain the tentative fundamental belief of coordination and integration along
the material flow and end customer focus, sharing of information between chain
members is fundamental according to the texts in the basic set of articles and lit-
erature.
“Suppliers, customers, and third-party logistics providers share the information and plans nec-
essary to make the channel more efficient and competitive. This sharing is more accurate and
detailed than in traditional, more adversarial buyer-seller relationships.” (Ellram & Cooper, 1990,
p. 1)
“…management of the streamlined supply chains should be underscored by more open and more
highly integrated partnership relationships, in which information sharing and trust is
paramount.” (Bhattacharya et al., 1996, p. 39)
The information shared consists of e.g., forecasts, stock levels and production plans.
An extended sharing of information will bring about huge quantities of real-time
information to be transferred (Johnson & Wood, 1996). Electronic Data
Interchange (EDI) is one technique commonly used (Anscombe, 1994).
“…it is in everyone’s best interest to reduce each others costs and improve each others efficiency.
This leads to increasing integration of information flows through swapping of planning and
sales information, and has been the motor behind the rapid growth in Electronic Data Inter-
change.” (Anscombe, 1994, p. 38)
One important objective of sharing information is to lower the inventory in the

supply chain. In their frequently cited article from 1990 Ellram and Cooper express
it as an “inventory versus information trade-off”.
“The sharing of information about anticipated demand, orders, production schedules, and so on,
forward and backwards reduces uncertainty and leads to lower safety-stock inventory.” (Coyle
et al., 1996, p. 10)
36
Reduction in Supplier Base

The coordination and integration between the companies along the supply chain
makes a reduction of suppliers a necessity according to the interpreters of supply
chain management.
“Most supply chains result in a reduction in suppliers.” (Cavinato, 1992, p. 286)
“Thus, the number of first tier suppliers in the new emerging supply chain structures are
decreasing… From among this narrowing supply base, the product owners are selecting single or
dual suppliers.” (Bhattacharya et al. 1996, p. 41)
This fundamental belief can be directly derived from the beliefs of coordination
and integration along the material flow and win-win relationships. Having few
suppliers permits not only coordination and integration along the material flow but
also win-win relationships.
“The supply chain management approach suggests that the supplier base be reduced so that the
firms can be more closely integrated. A reduced supplier base permits closer management and
coordination of a few relationships.” (Cooper & Ellram, 1993, p. 17)
When considering the metaphor of a chain one might expect a reduction of sup-
plier base is unnecessary because in a chain there is a one-to-one relationship
between the links. Several interpreters claim that the metaphor is an inappropriate
one. They view the chain as a network instead (Jones, 1989; Ellram, 1991; Chris-
topher, 1992; Lee & Billington, 1992; Saunders, 1994; Coyle et al., 1996; Davies &
Brito, 1996).
“…it is too simplistic to view the flow of goods and services as occurring through closely coupled links
in a chain of one to one connections. In fact they pass through a network of competing companies at
each level and frequent switches from one route (or chain) to another through that network will be
made.” (Jones, 1989, p. 23)
“The use of the term chain in supply chain management is an over-simplification. Supply chain
management really represents a network of firms interacting to deliver a product or service to the end
customer, linking flows from raw material supply to final delivery.” (Ellram, 1991, p. 13)
Supply chain management does not proclaim a reduction in the supplier base in
itself, but starting out from the fundamental beliefs of coordination and integration
along the material flow and even win-win relationships leads to this tentative
derived fundamental belief.
37
Chain Competitiveness
It is claimed that the focus of supply chain management is on the chain instead of
on the individual companies. In the basic set of articles and literature some inter-
preters even claim that the traditional competition between companies will in some
respects be superseded by competition between chains. The members of the supply
chains will cooperate to increase their competitiveness in comparison with other
chains.
“…in a global sense, supply chains, not individual companies, compete with each other.”
(Coyle et al., 1996, p. 9)
“…all with the quest of making the final product at overall lesser total cost and/or with a greater set
of values than competing sets of supply chain firms.” (Cavinato, 1992, p. 285)
The chains will act with the same selfishness towards other chains as individual
companies act towards each other. It is easy to see why Anscombe (1994) also calls
supply chains “Extended enterprises”.
All derived fundamental beliefs address ways of giving supply chain management a
concrete form. This examination of tentative derived fundamental beliefs of supply
chain management only included a selection of the existing ones. According to the
summary in Table 5.2, the first two derived fundamental beliefs examined in this
section are more frequently considered in supply chain management, than the
latter.
38
6. Examination with Respect to Stated Definitions and Stated Theory Relations
6. Examination with Respect to Stated Definitions and

Stated Theory Relations
The second examination of supply chain management will be carried out by dis-
cussing the basic set of articles and literature with respect to the two additional
aspects discussed in section 3.4, stated definitions and stated theory relations of
6.1 Stated Definitions of Supply Chain Management

As foreseen in section 3.4 there are few interpreters who explicitly define supply
chain management. In most cases the “definitions” are more implicit, so readers
will have to synthesize the text themselves. However, the seven explicitly stated
definitions of supply chain management which exist in the basic set of articles and
literature are examined in this section. A definition is here considered “explicitly
stated” when the word define is used when defining the concept of supply chain
management or citing some other author and stating it as a definition. The
explicitly stated definitions of supply chain management are the following:
“It [supply chain management] is defined here as managing the entire chain of raw material
supply, manufacture, assembly and distribution to the end customer (the end customer being
defined here as the last point at which a product differentiation decision is made).” (Jones, C.,
1989, p. 23)
“Supply chain management has been defined more broadly as an integrative philosophy to
manage the total flow of a distribution channel from the supplier to the ultimate user.” (Ellram &
Cooper, 1990, p. 2)
“Supply chain management is defined here as an integrative approach to dealing with the plan-
ning and control of the materials flow from suppliers to end-users.” (Ellram, 1991, p. 13 referring
to Jones & Riley, 1985)
“As previous defined, supply chain management is an integrative approach to using

information to manage inventory throughout the channel, from source of supply to end-user.”
(Ellram, 1991, p. 17)
“In its basic form, supply chain management is a strategic concept that involves understanding
and managing the sequence of activities–from supplier to manufacturer to customer–that add value
to the product supply pipeline.” (Battaglia & Tyndall, 1991, p. 42, quoted by Coyle et al.,
1996, as a definition)
39
“Integrative management of the sequential flow of logistical, conversion, and service activities from
vendors to ultimate consumers necessary to produce a product or service efficiently and effectively.”
(Stenger & Coyle, quoted by Coyle et al., 1996, p. 9 as a definition)
“…defined as: “the coordination or integration of a series of activities/processes which procure,

produce, and deliver products or services to customers.” (Metz, 1994, p. 2)
The stated definitions can be judged according to the five rules for good defini-
tions by Føllesdal, Walløe and Elster (1993) which were outlined in section 3.4.
The definitions may make the theory of supply chain management clearer, but a
problem is the preciseness of the definiens e.g., supplier and end customer.
However, three aspects are recurrent in the stated definitions of supply chain
management, the scope of supply chain management along the material flow, the
functions affected by supply chain management and the focus on integration.
The scope of supply chain management along the material flow is in the stated
definitions expressed in slightly different ways. Jones (1989) announces, “the entire
chain … to the end customer”, Ellram and Cooper (1990), “from the supplier to the
ultimate user”, Ellram (1991), “from source of supply to end-user”, Coyle et al. (1996)
announce both, “from supplier to manufacturer to customer” and “from vendors to ulti-
mate consumers”. Despite the different ways of expressing the scope all definitions
agree that supply chain management is concerned with the total material flow
from the supplier to the final customer. Except from Jones (1989) the definitions
define neither the origin, the supplier, nor the final customer more precisely.
Jones defines the end customer as, “..the last point at which a product differentiation
decision is made”. The lack of preciseness of the scope of supply chain management
is here considered a weakness of the concept. In the basic set of articles and
literature there is evidence of an extension of the supply chain scope to include
return/recycling of disused products.
“In fact, several companies (Xerox and Digital) go so far to include the after sales service and
the return/recycling of disused product in the scope of their supply chain management efforts.”
(Metz, 1994, p. 2)
“In fact, reverse product flows are likely to take on increasing importance in the future because of
environmental protection and related issues.” (Coyle et al., 1996, p. 9-10)
40
Every function in a supply chain or network is not necessarily affected by supply

chain management. Most definitions stress supply, manufacturing and distribution
as functions affected by supply chain management, e.g., Jones (1989), Battaglia
and Tyndall (1991) and Metz (1994). In the well-known article by Ellram (1991)
the author seems to consider supply chain management as focusing only on the
managing of inventory.
Besides the scope of and the functions affected by supply chain management,
there is a third common area discussed in the stated definitions, namely integra-
tion. Supply chain management is called, “an integrative philosophy” (Ellram &
Cooper, 1990) and “an integrative approach” (Ellram, 1991). The stated definitions
also mention, “integrative management” (Coyle et al., 1996) and, “the coordination or
integration of a series of activities/processes” (Metz, 1994). Accordingly integration
seems to be an important belief of supply chain management.
The few stated definitions of supply chain management which exist correspond
well with each other, particularly with regard to the three recurrent aspects, the
scope of supply chain management along the material flow, the functions affected
by the concept and the focus on integration. Two of those, coordination and
integration along the material flow and end customer focus, were also established
as tentative primitive fundamental beliefs of supply chain management in section
5.2.
6.2 Stated Theory Relations of Supply Chain Management

An important aspect of the examination of a management concept is to consider
the theories, concepts or ideas the interpreters cite as being closely linked to the
management concept or as sources from which it emerges. The most compre-
hensive discussions of theory relations in the basic set of articles and literature are
made by Ellram (1991) and Johnson and Wood (1996). In Table 6.1 the stated
theory relations found in the basic set of articles and literature are summarized.
Further in this section those stated theory relations of supply chain management
are examined.
41
Table 6.1 Stated theory relations of supply chain management

Porter’s Value Chain
Marketing Channel
Industrial Organization Theory
The Law of Industrial Dynamics
Total Cost Concept
Inventory Management Theory
6.2.1 Porter’s Value Chain

The value chain by Porter is the most common theory relation recognized in the
basic set of articles and literature (Anscombe 1994; Armistead & Mapes 1992;
Battglia & Tyndall 1991; Bhattacharya et al. 1996; Jones & Clarke 1990). The
value chain is recognized as an important contribution to the development of
supply chain management. Battglia and Tyndall (1991) even state that supply
chain management has derived from the value chain.
“supply chain management has derived from the excellent work by Michael Porter in describ-
ing the value chain as the basic method for disaggregating the entire firm (and its trading partners)
into all its activities in order to better understand total costs and sources of differentiation for strate-
gic purposes” (Battglia & Tyndall, 1991, p. 42)
The work by Porter is also recognized by Anscombe (1994) who says it provides
the framework for supply chain management and Jones and Clarke (1990) who
state that the value chain is the one methodology apart from supply chain man-
agement that focuses on the end customer and the supply chain.
“Although powerful and far reaching, the “Value Chain” approach has had limited impact on
day-to-day management. This stems from the difficulty in implementing a concept that simultane-
ously addresses all aspects of a business. However, when applied in a more focused way to the sup-
ply-chain, it provides the framework for the “Fourth Wave” [Maximising value in the supply-
chain] of logistics improvement.” (Anscombe, 1994, p. 40)
“With the exception of Porter’s value chain analysis, no other methodology explicitly focuses
on the end-customers and supply chains.” (Jones, C. & Clarke, J., 1990, p. 199)
Porter’s value chain is the most common theory relation stated in the basic set of
articles and literature, but the references do not thoroughly explain how supply
chain management is linked to or has emerged from it. A contradiction with
42
respect to the importance of the value chain for supply chain management is that
Porter’s value chain was published in 1985 and the earliest work of supply chain
management, according to the reference network, was published in 1982.
6.2.2 Marketing Channel

The concepts of marketing channels or distribution channels are discussed in some
texts in the basic set of articles and literature (Cavinato 1992; Ellram 1991;
Johnson & Wood 1996). The most exhaustive description of marketing channels
is made by Johnson and Wood (1996). In their book they explain the concept of
marketing channels before explaining supply chain management. They consider
the supply chain as an expansion of the marketing channel concept.
“Knowledge of marketing channels is useful prior to discussing the supply chain. …[supply chain
management] is an expansion of the [Marketing] channel concept” (Johnson & Wood,
1996, p. 30)
After having explained the concept of marketing channels Johnson and Wood
(1996) examine the difference between the concept of marketing channels and
supply chain management. The three major differences which they identify are,
(1) marketing channel focuses on the flow from the manufacturer to the consumer
while the supply chain focuses on the entire move from the supplier to the end
customer, (2) marketing channels concentrate on existing products and processes
while the supply chain appears to include more room for reengineering of
products and processes and (3) a marketing channel can function with daily or
hourly buy/sell transactions, while the supply chain argues for long-time rela-
tionships. Ellram (1991) also thinks marketing channel is closely related to supply
chain management.
“The competitive structure most closely related to supply chain management is a marketing chan-
nel.” (Ellram, 1991, p. 14)
The marketing channel theory is, in the basic set of articles and literature, merely
compared to supply chain management rather than cited as a theory from which
supply chain management has developed.
43
6.2.3 Industrial Organization Theory

In her well-known work according to the reference network Ellram (1991) asks,
“how can existing competitive theory in industrial organisation and transaction cost analysis
be used to support and develop a theory of supply chain management?” From the indus-
trial organization literature Ellram, together with Cooper (1993), uses the theories
of vertical integration and transaction cost, in the latter area especially, the type of
contractual relationships which Williamson defines as “obligational relationships”,
to explain the concept of supply chain management.
“Supply chain management as a competitive form brings together many advantages of obligational
contracts and vertical integration. Supply chain management positions each firm to do what is does
best, while spreading the risk of asset ownership, and reducing market risk through improved co-
ordination and communication. Building on the participant’s strengths, supply chain manage-
ment attempts to overcome some of the disadvantages of both vertical integration and
obligational contracting.” (Ellram, 1991, p. 18)
“Supply chain management is viewed as lying between fully-vertically-integrated systems and

those where each channel member operates completely independently.” (Cooper & Ellram, 1993,
p. 13)
Several interpreters compare supply chain management with vertical integration

and agree with Ellram and Cooper that supply chain management is an attempt to
combine the advantages of vertical integration and independent firms.
“The supply chain management strategy represents the recognition that most of the benefits of ver-
tical integration can be obtained simply by co-ordinating the logistics operations of independent
firms in the chain.” (La Londe & Masters, 1994, p. 39)
Vertical integration is often compared to supply chain management in the basic

set of articles and literature while the transaction cost theory is less frequently
cited.
6.2.4 The Law of Industrial Dynamics

The law of industrial dynamics shows that demand which is transmitted along a
series of inventories using stock control ordering will get increased demand
variation with each transfer. Berry, Towill and Wadsley (1991), of the Cardiff
School, start out from this phenomenon in a supply chain and investigate how
increasing demand variations may be avoided. Among the first to work with this
was Forrester (1961). The problems are also known as the “Forrester Effect” and
44
are due to time lags and distortion in material and information flow in dynamic
systems. Forrester’s work is also recognized in e.g., the well-known work by
Houlihan (1988) and by Armistead and Mapes (1992).
“The effects described by Roberts and Forrester have shed much light on how information and
data become distorted as they flow through decision processes in partitioned systems and organiza-
tions.” (Houlihan, 1988, p. 15)
“Forrester is perhaps the best known of the writers who have identified the problems of managing
individual stages independently.” (Armistead & Mapes, 1992, p. 12)
The law of industrial dynamics is used mainly in relation to supply chain man-
agement by scholars connected to the Cardiff School.
6.2.5 Total Cost Concept

Cavinato focuses in his articles from 1991 and 1992 on the role of total cost con-
cept in a supply chain. He recognizes the problems with the traditional use of the
total cost concept.
“Traditional total cost systems tend to be limited from two standpoints. Logistics analyses have
typically started with a completed product and extended throughout the firm’s distribution system.
These analyses usually ended at the final shipping point… In the 1980s, direct product profit-
ability (DPP) projected this analysis through to the final store sales point. This scope is limited
and tends to be static in application through periodic special studies at specific points in time.”
(Cavinato, 1992, p. 292)
Cavinato (1992) wants to develop the concept of total cost for supply chain man-
agement to be, “visible and easily usable to the manager on a daily basis”. He presents
a model that captures elements of cost to the firm, supply and distribution channel
members and ultimate customers, as well as value factors important to customers.
In the article from 1991 he focuses on how to act based upon a total cost analysis.
“…costs of the buying firm and costs of the selling firm are both compared to determine which firm
can perform which activity or function at lowest cost. The intent is to produce a combined product
or service that would be made up of the lowest cost elements of both firms in competition with two
or more other sets of firms competing in the same marketplace.” (Cavinato, 1991, p. 11)
Methods for cost measurements are also discussed by La Londe and Pohlen
(1996). They survey available tools for costing a supply chain and come up with
direct product profitability (DPP), activity-based costing (ABC), total cost of
45
ownership (TCO) and efficient consumer response (ECR). No single one of these
methods is satisfactory on its own, but La Londe and Pohlen combine them into a
new method named, Supply Chain Costing.
6.2.6 Inventory Management Theory

In many articles inventory management of the supply chain plays an important
role. There are also a few references to inventory management theories and
related concepts.
“It [supply chain management] borrows from the operations management literature in recogniz-
ing the role which inventory may play in balancing a system.” (Ellram & Cooper, 1990, p. 4)
Lee and Billington (1993) have developed a model for the management of mate-
rial flows within a non-centrally controlled supply chain. In work by them to
which frequent reference is made, inventory management is used. Verwijmeren,
van der Vlist and van Donselaar (1996) write about networked inventory man-
agement. They discuss four traditional decision systems for inventory manage-
ment: statistical inventory control, base stock control, material and distribution
requirements planning and line requirements planning.
“Networked inventory management is the integral management of inventories in the stock points
and intermediate processes that are spread out over different networked organizations. Networked
inventory management deals with the inventory aspect of supply chain management in the domain
of networked organizations.” (Verwijmeren et al., 1996, p. 19)
In summarizing the theory relations it can be concluded that several different

theories and concepts are stated in the basic set of articles and literature with
respect to supply chain management. Some have gained wide acceptance within
groups of supply chain management interpreters, e.g., the law of industrial
dynamics and inventory management theory theories. The vast majority are,
however, only recognized by a few interpreters each, with the exception of the
value chain by Porter, which is more widely recognized. The problem with most
theory relations is that their connection to supply chain management is only
explained in very general terms.
46
7. Convergent Validity of Supply Chain Management

The aim of this chapter is to discuss the degree of convergent validity between
different views of supply chain management with respect to stated objectives and
stated fundamental beliefs examined in chapter 5 and stated definitions and stated
theory relations of supply chain management examined in chapter 6. Convergent
validity reflects the degree to which different views of supply chain management
share a common set of ideas and beliefs.
7.1 Stated Objectives

The examination of the stated objectives of supply chain management showed
that there are several coexisting objectives of supply chain management in the
basic set of articles and literature. The objectives span from improved bottom line
to reduced lead-times. The existing objectives of supply chain management were
presented in a hierarchical weave of objectives in Figure 4.1. When presented as a
hierarchical weave of objectives, the objectives may be seen to be quite easily
related to each other. No objective is contradictory to the others and all objectives
address similar “kinds” of objectives. This leads to the conclusion that the stated
objectives of supply chain management have high convergent validity.
7.2 Stated Fundamental Beliefs

As discussed in section 5.2 the interpreters of supply chain management in the
basic set of articles and literature have not approached supply chain management
by identifying fundamental beliefs. The summary of the stated characteristics of
supply chain management in table 5.2 showed that the different interpreters agree,
on the whole, on several of the stated characteristics. Starting with these agreed
characteristics, three tentative primitive fundamental beliefs of supply chain
management were proposed, coordination and integration along the material flow, win-
win relationships and end customer focus. These imply that in order to achieve the
objectives of supply chain management individual companies shall coordinate and
integrate their activities with other companies along the material flow. The
coordination and integration along the material flow shall focus on the end
customer and the companies shall cooperate in win-win relationships. From the
primitive fundamental beliefs, it is possible to deductively derive several derived
fundamental beliefs. Due to the fact that it was possible to view supply chain
47
management as constituted by a set of primitive and derived fundamental beliefs

and that the examination of those beliefs showed no contradictions, the
convergent validity with respect to the fundamental beliefs is considered to be
high.
7.3 Stated Definitions

The stated definitions of supply chain management examined in section 6.1 all
agree on the scope of supply chain management along the material flow, from
supplier to end customer. The functions affected by supply chain management are
commonly stated in the definitions as supply, manufacturing and distribution.
Integration is, moreover, a common focus of the stated definitions. The conver-
gent validity with respect to the stated definitions of supply chain management is
considered high, but the number of attempts at expressing supply chain man-
agement in the form of a stated definition is low.
7.4 Stated Theory Relations

The examination of stated theory relations of supply chain management showed
that there are few discussions of theory relations in the basic set of articles and
literature, but there are at least two groups of researchers who use a common
theory reference as their basis. One group of researchers is the Cardiff School,
who start out from the law of industrial dynamics by Forrester. The other group is
denoted here as the Inventory Management Group, which uses the theories of
inventory management when approaching supply chain management. Apart from
the Cardiff School and the Inventory Management Group the number of texts
referring to the same theory is limited, although, several interpreters claim the
importance of Porter’s value chain. The stated theory relations of supply chain
management are few and fragmented, thus there is little evidence of a high degree
of convergence.
7.5 Conclusion of the Convergent Validity

The discussion of the convergent validity of supply chain management may be
concluded by stating that different views of the concept are evident in the basic
set of articles and literature, but the differences are not to be overstated. When the
objectives were arranged in a hierarchical weave they were easily related to each
48
other and when the primitive fundamental beliefs, coordination and integration
along the material flow, win-win relationships and end customer focus, were
established they brought order into the diverse set of characteristics of supply
chain management. Based upon the examinations it may be concluded that supply
chain management is a homogenous management concept, where its interpreters
share common ideas and beliefs. However, the difficulty in discerning that
homogeneity and common ground is a weakness of the concept which may, at
first, lead the reader to believe that there is no coherent concept.
49
50
8. Discriminant Validity of Supply Chain Management Compared to its Forerunners
8. Discriminant Validity of Supply Chain Management

Compared to its Forerunners
As stated at the outset of this study, a subordinate objective is to give some indi-
cation of the degree of novelty of the concept of supply chain management. In
this chapter the discriminant validity between supply chain management and its
forerunners within logistics is examined. Discriminant validity reflects the degree
to which a specific management concept can be reliably distinguished from
another concept or set of ideas.
8.1 Examination of the Discriminant Validity

One of the tentative primitive fundamental beliefs of supply chain management
which was identified in section 5.2.1 was end customer focus. This fundamental
belief can also be found in the articles and literature of the forerunners, e.g., in
Clark (1922) who pictured the physical handling of wheat and flour, from grower
to consumer. His main concern was to show that the physical handling includes
several different elements which focus on the end consumer. A couple of years
later Borsodi (1927) stated that the true cost of distribution was to sum all costs
from the raw material producer to the ultimate consumer. Further, Converse
(1954) stated that the second half of marketing dealt with the handling of goods
from the farm and mine to the consumer.
“It is the sum of all transportation, storage and marketing costs involved in moving goods from the
producers of the raw material to the ultimate consumer and making them available when and
where they are needed and desired that gives us truly the entire cost of distributing any product.”
(Borsodi, 1927, p. 32)
“The other part deals with the physical handling of goods, transporting them from farm and
mine to mill and factory and from factory to processing plant to the consumers and storing
them when and where necessary.” (Converse, 1954, p. 23)
The same scope along the material flow was expressed by La Londe, Grabner and
Robeson (1970) when defining business logistics and by the National Council of
Physical Distribution Management, present Council of Logistics Management,
when defining logistics in 1976 according to Shapiro and Heskett (1985).
51
“Business logistics may be defined as: a term which denotes a total approach to the management of
the distribution process including all of those activities involved in physically moving raw materials,
in-process inventory, and finished-goods inventory from point of origin to point of use or con-
sumption.” (La Londe et al., 1970, p. 5)
“the integration of two or more activities for the purpose of planning, implementing and controlling
the efficient flow of raw materials, in process inventory and finished goods from point of origin to
point of consumption” (National Council of Physical Distribution Management according to
Shapiro & Heskett, 1985, p. 1)
When the scope of logistics extends beyond the own business the legal boundaries
between companies may be seen as an obstacle, but both Drucker (1962) and
Bowersox, Smykay and La Londe (1968) stress that the legal boundaries between
companies are no obstacle to the scope of the logistics activities.
“ …distribution policy and distribution system must take into account the entire flow of the
product regardless of lines of ownership and legal responsibility.” (Drucker, 1962, p. 265)
“…physical distribution of a product does not end once ownership transfer occurs. It does not
end when the product is turned over to the next level or firm in the distribution channel or even
when it is delivered to a buyer unless all conditions of the transaction are satisfied. Ultimate
responsibility for physical distribution does not end until the product in question is totally
accepted by the person, family, or firm that utilize it.” (Bowersox et al., 1968, p. 36)
The competitiveness and reputation of a company was recognized by Drucker

(1962) to be more dependent on events outside the own company than inside.
This may represent an early recognition of the importance of the “supply chain”
for the individual company.
“The competitive position of industry and company, the reputation and availability of its prod-
ucts, and the use the customer makes of them, all depend more on events outside the legal
business boundaries than on what the manufacturer does within his legal four walls.” (Drucker,
1962,p. 265)
Integration and coordination between companies along the materials flow was
identified as a tentative primitive fundamental belief of supply chain management
in section 5.2.1. This was also a theme in the articles and literature of the fore-
runners. For example, Bowersox et al. (1968) were of the opinion that joint
activities between firms were insufficiently highlighted in the definition of physi-
cal distribution by the National Council of Physical Distribution Management.
52
“A term employed in manufacturing and commerce to describe the broad range of activities con-
cerned with efficient movement of finished products from the end of the production line to the
consumer, and in some cases includes the movement of raw materials from the source of
supply to the beginning of the production line.” (National Council of Physical Distribution
Management according to Bowersox et al., 1968, p. 4)
“The NCPDM definition also neglects to place proper emphasis upon the joint activities
between firms linked together in physical distribution of a single assortment of products.
… Paramount to the management of physical distribution is the concept of integrated planning
and administration.” (Bowersox et al., 1968, p. 5)
Bowersox made in 1969 a historical survey and concluded that integration had by
then already become a core aspect of logistics.
“The basic belief that integrated system performance can and most often will produce an
end result greater than possible from non-coordinated performance rapidly became a focal
point in development of the physical distribution concept.” (Bowersox, 1969, p. 64)
Accordingly, the logisticians at that time had identified a potential for improving
the companies’ performance by integrating and coordinating. The direction of the
coordinating and integrating activities was the same as in supply chain man-
agement, along the material flow. Bowersox (1969) denoted the “chain” a
“vertical marketing systems” and Bowersox et al. (1968) denoted it a “single sys-
tem”.
“The majority of physical distribution systems have been studied from the vantage point of verti-
cally integrated organizations. A more useful viewpoint is that physical distribution activities and
related responsibilities seldom terminate when product ownership transfer occurs. Many
significant costs of physical distribution are experienced between firms linked together in
cooperative vertical marketing systems.” (Bowersox, 1969, p. 65)
“To obtain a maximum integration of all activities related to physical distribution, it is desirable
to consider total physical flow as a single system. (Bowersox et al., 1968, p. 101)
Integrated planning and an extended sharing of information were considered to be

derived fundamental beliefs of supply chain management in section 5.2.1 and
those areas were also recognized by Bowersox et al. (1968). The forerunners,
indicated by La Londe et al. (1970), did not advocate a reduction of the number
of suppliers as in contemporary supply chain management but stressed a closer
relationship with the suppliers and customers.
53
“Physical distribution planning must be channel-wide in perspective.” (Bowersox et al., 1968,

p. 36)
“For a physical distribution system to function properly it must enjoy timely and accurate dis-
semination and feedback of distribution information.” (Bowersox et al., 1968, p 4)
“The functions of customer and vendor distribution programs have grown in importance as more
business firms have realized the potential for joint cost savings by working closely with
suppliers and customers on improving intra channel distribution efficiency.” (La Londe et al.,
1970, p. 6)
In the beginning the objective of logistics was primarily to reduce costs, but in the
historical survey of Bowersox (1969), a shift towards demand cultivation and to
the overall corporate vitality was noted.
“Attention was now directed to issues of demand cultivation and to the overall importance of
physical distribution to corporate vitality on other than a purely cost orientation that dominated
earlier treatments.” (Bowersox, 1969, p. 65)
Several of the theory relations of supply chain management identified in section

6.2 were recognized also in the work of forerunners. The most common theory
reference of supply chain management, the value chain by Porter, is not discussed
because it was not published until 1985, but several of the other stated theories are
rather old. The total cost concept arises from an article by Lewis, Culliton and
Steele in 1956 and has gained recognition among the forerunners.
“The concept of total cost has gained wide usage in perfecting the integration of activity areas
into an integrated system.” (Bowersox et al., 1961, p. 116)
Another early work, the law of industrial dynamics by Forrester, published in

1961, was recognized early on as an important observation, likewise the systems
approach.
“…the Forrester treatment dramatically illustrated the impact of information dynamics upon
fluctuations in inventory accumulations.” (Bowersox, 1969, p. 65)
“…the significant point is the development of a philosophy of operation that stimulates all levels of
management within a firm to think and act in terms of integrated physical distribution capabilities
and economics. Such a philosophy is found in the systems approach.” (Bowersox et al., 1961,
p. 103)
54
Accordingly, there are similarities between the ideas of supply chain management
and the forerunners with respect to e.g., the scope along the material flow, the
end customer focus and the importance of integration and coordination along the
material flow.
8.2 Conclusions with Respect to the Degree of Discriminant Validity

Some interpreters in the basic set of articles and literature e.g., Schary and Skjøtt-
Larsen (1995) and Christopher (1992), have claimed that the difference between
supply chain management and logistics is the scope along the material flow. They
state that the scope of logistics spans the organization and the scope of supply
chain management spans the entire material flow from source to final customer.
“we define logistics to be oriented primarily to the processes of a single firm and its supporting
logistics service organizations. It has an orientation from inside the firm, coordinating activities and
the flow of materials into the organization and the movement of products outward the market. In
contrast, the supply chain embraces the entire set of processes and organizations from
source to final customer.” (Schary, P & Skjøtt-Larsen, 1995, p. 18)
“The scope of logistics spans the organization, from the management of raw materials through
to the delivery of the final product. … Equally, there is a crucial requirement to extend the logic
of integration outside the boundaries of the firm to include suppliers and customers. This is
the concept of supply chain management.” (Christopher, 1992, p. 10 & 12)
After discussing the forerunners’ ideas we can conclude that their scope along the
material flow was as extended as in supply chain management. The examination
of the forerunners shows that there are similarities between their ideas and the
ideas of supply chain management. By reading the forerunners it can be argued
that, at least since Clark (1922) and Borsodi (1927), the understanding of
improved performance by not only focusing on the own company, but also
examining the affects of the whole chain, from raw material to consumer, has
been recognized. Other fundamental beliefs of supply chain management, for
example, the integrated planning and closer relationships with suppliers, were also
recognized by the forerunners.
It is surprising how developed the ideas of the forerunners were early in the 20th
century. It was stated in the examination of the reference network in chapter 4
that no evident change of the concept of supply chain management could be
55
noticed during the period of 14 years over which the basic set of articles and lit-
erature extends. This strengthens the impression from the examination of the
forerunners. The area of logistics is not going through a rapid change and the
ideas and beliefs of supply chain management can be found in works prior to the
establishment of supply chain management as a management concept. Accord-
ingly, the degree of discriminant validity and the novelty of supply chain man-
agement cannot be considered very high. This conclusion is in line with the
comment by Huczynski (1993) which was quoted in the introduction. He wrote
that the new management concepts tend to be similar to those which preceded
them.
Although most of the ideas of supply chain management may be found in the
work by the forerunners, their ideas are much more fragmented and hard to find
compared to the ideas of supply chain management. Supply chain management
embodies a coherent and condensed set of ideas. Complementary to the exami-
nation of the discriminant validity of supply chain management in comparison
with its forerunners, it might also have been interesting to examine supply chain
management in comparison with other management concepts such as TQM
(Total Quality Management), JIT (Just-In-Time) and BPR (Business Process
Reengineering). A guess is that the discriminant validity with respect to those also
would be low.
The examination of discriminant validity was the final examination of the concept
of supply chain management in this study. Remaining are the final conclusions.
56
9. Conclusions
9. Conclusions
As shown in the reference network, a great number of scholars have written about
the logistics management concept supply chain management. Based upon the
examinations in this study it was concluded that supply chain management is a
homogenous management concept but its degree of novelty low.
The hierarchical weave of stated objectives showed that the overall objective of
supply chain management is to contribute to improvements in the company’s
bottom line or profitability. Related objectives, which are stated, are to reduce the
costs mainly by reducing the inventory level and to increase the revenues by
improving customer service. A set of tentative primitive fundamental beliefs of
supply chain management was established, coordination and integration along the
material flow, win-win relationships and end customer focus. These imply that in
order to achieve the objectives of supply chain management individual companies
should coordinate and integrate their activities with other companies along the
material flow in win-win relationships and focus their joint effort on the end
customer.
The examination of the reference network showed that no evident change of the
concept of supply chain management could be noticed during the period of 14
years over which the basic set of articles and literature extends, nor could any
evident change be noticed in the examination of the difference between the
forerunners’ ideas and the fundamental beliefs of supply chain management. Based
upon those examinations the degree of novelty of supply chain management was
considered low. But, the ideas of supply chain management was considered more
coherent and condensed than the ideas of the forerunners.
57
58
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Bedminister Press.
66
Empirical Examination and Some Directions
for Development of Supply Chain Management
by
Ulrika Persson
Abstract
The logistics management concept supply chain management has gained increas-
ing attention in academic circles during the past 15 years. Up until now the focus
of research concerning the concept has been on conceptual works rather than on
empirical examinations of the concept. The overall objective of this study is to
give some directions for the development of supply chain management based
upon empirical examinations.
Starting by viewing the development of management concepts as an abductive

process, the concept of supply chain management is empirically examined in two
ways. Firstly, by giving an overview of previous empirical examinations of the
concept and secondly, by empirically examining the conditions for the concept in
the iron ore industry and the influences of the concept at the Swedish iron ore
producer LKAB. The latter examination starts out from the set of fundamental
beliefs of supply chain management identified in a previous study, coordination
and integration along the material flow, win-win relationships and end customer
focus.
The overview of the previous empirical examinations of supply chain manage-

ment announces successful applications of the concept at several different com-
panies and industries. The conclusions from those examinations do not indicate
any need to modify the concept of supply chain management. In contrast to those
successful experiences, the impression from the iron ore industry is that the
fundamental beliefs of supply chain management must be less fundamentalistic and
more realistic to improve the possibilities for practical use of the concept. In the
iron ore industry it is for example difficult to see the realism in focusing on the
end customer. It is therefore proposed that the concept would benefit from a
more limited scope along the material flow. A modification of the fundamental
belief of end customer focus would also affect the scope of the other two primi-
tive fundamental beliefs. It is finally proposed that vertical integration should be
considered as one possible way of achieving integration and coordination along
the material flow.
Table of Contents
1. INTRODUCTION ....................................................................... 1
2. CONCEPTUAL FRAMEWORK - SUPPLY CHAIN

MANAGEMENT ......................................................................... 3
3. METHOD ................................................................................... 5
3.1 MANAGEMENT CONCEPT DEVELOPMENT ..................................... 5
3.2 METHOD OF THE STUDY ............................................................ 6
4. OVERVIEW OF PREVIOUS EMPIRICAL EXAMINATIONS OF

SUPPLY CHAIN MANAGEMENT ............................................... 9
4.1 OVERVIEW OF PREVIOUS EMPIRICAL EXAMINATIONS ..................... 9
4.2 DIRECTIONS FOR DEVELOPMENT OF SUPPLY CHAIN MANAGEMENT
IN THE PREVIOUS EMPIRICAL EXAMINATIONS ..............................12
5. CONDITIONS FOR SUPPLY CHAIN MANAGEMENT IN THE

IRON ORE INDUSTRY .............................................................14
5.1 OVERVIEW OF THE IRON ORE INDUSTRY ....................................14
5.1.1 The Supply Chain Links between the Mines and the Steel Mills.............. 14
5.1.2 International Trade of Iron Ore ...................................................... 16
5.1.3 Historical Overview of the Relationship between the Iron Ore Producers and the
Steel Mills........................................................................................ 17
5.1.4 Downstream the Steel Mills........................................................... 18
5.1.5 Upstream the Mines.................................................................... 19
5.2 EXAMINATION OF THE CONDITIONS FOR SUPPLY CHAIN
MANAGEMENT IN THE IRON ORE INDUSTRY ................................20
5.2.1 End Customer Focus ................................................................... 20
5.2.2 Coordination and Integration Along the Material Flow.......................... 21
5.2.3 Win-Win Relationships............................................................... 22
6. INFLUENCES OF SUPPLY CHAIN MANAGEMENT AT THE
SWEDISH IRON ORE PRODUCER LKAB .................................24
6.1 OVERVIEW OF LKAB................................................................24
6.1.1 The LKAB Supply Chain Link between the Mines and the Steel Mills..... 24
6.1.2 LKAB’s Customers.................................................................... 27
6.2 EXAMINATION OF THE INFLUENCES OF SUPPLY CHAIN MANAGEMENT
AT LKAB AS SEEN IN THE ANNUAL REPORTS ..............................28
6.2.2 Coordination and Integration along the Material Flow........................... 29
6.2.3 Win-Win Relationship................................................................ 31
6.3 EXAMINATION OF THE INFLUENCES OF SUPPLY CHAIN MANAGEMENT
AT LKAB WITH RESPECT TO INTERVIEWS WITH SOME MANAGERS .32
6.3.2 Coordination and Integration along the Material Flow........................... 33
6.3.3 Win-Win Relationships............................................................... 35
6.4 SUMMARY OF THE EXAMINATIONS OF THE INFLUENCES OF SUPPLY
CHAIN MANAGEMENT AT LKAB ................................................37
7. SOME DIRECTIONS FOR DEVELOPMENT OF SUPPLY CHAIN

MANAGEMENT ........................................................................38
REFERENCES ...............................................................................40
APPENDIX A
Interview Guide
1. Introduction
1. Introduction
The logistics management concept supply chain management has gained increas-
ing attention within academic circles during the past 15 years. Its prevalence is, for
example, evidenced by the fact that approximately thirty percent of the sessions at
the most recent annual conference of the Council of Logistics Management was
devoted to some aspect of the concept (Cooper, Ellram, Gardner & Hanks, 1997).
The concept of supply chain management focuses on integration of the total
material flow, from the supplier to the end customer, to achieve improved
performance. In an earlier examination, the following primitive fundamental
beliefs of the concept were established, coordination and integration along the material
flow, win-win relationships and end customer focus (Persson, 1997). The primitive
fundamental beliefs imply that in order to achieve the objectives of supply chain
management individual companies should coordinate and integrate their activities
with the other companies along the material flow in win-win relationships and
focus their joint efforts on the end customer. Despite the extensive academic
interest in supply chain management there are still few examples of its application
in practice. However, more and more companies are recognizing the importance
of the concept for their own competitiveness (Szymankiewicz, 1994).
A management concept like supply chain management is used by management as

a basic idea about how to act in order to reach the organizational goals (Persson,
1997). Management concepts are developed by a more or less everlasting alterna-
tion between the previous concept, empirical examinations and adjustments of the
(previous) concept. The field of management concepts is, however, criticized by
e.g., Korman and Vredenburgh (Huczynski, 1993) for tending not to replace
weak concepts and for continuing to write about and be influenced by, concepts
with little or no empirical evidence.
“Korman and Vredenburgh (1984) pointed to the failure of the “self-correcting characteristics of
scientific theory-hypothesis-testing model” in management research whereby the process of ongoing
research disconfirmed existing weak theories, and replaced them with better ones. They wrote that
management theories which were supported with little or no evidence continued to dominate the
management literature and continued to be written about and to influence the thinking of students
or practitioners.” (Huczynski, 1993, p. 273)
1
1. Introduction
To some extent the criticism by Korman and Vredenburgh is relevant to the

concept of supply chain management too, because up until now the focus has
been on conceptual work rather than on empirical examinations of the concept.
The number of empirical examinations is increasing and this study will contribute
an additional empirical examination of supply chain management, which together
with previous empirical examinations of the concept will be the basis for giving
some directions for the development of supply chain management.
The previous empirical examinations of supply chain management address several

different industries including, department stores, the automotive industry and
transportation providers. Since supply chain management is not limited to those
industries, this study will examine the concept in an additional industry, the iron
ore industry and a company within that industry, the Swedish iron ore producer
LKAB. The iron ore industry is interesting with respect to supply chain man-
agement due to its position far back in the supply chain of many industries, its
high portion of logistics costs due to a low-worthy product per ton and global
trade and its material flow structure with several more or less independent
organizations involved in the supply chain.
The overall objective of this study is to give some directions for the development of the con-
cept of supply chain management.
The overall objective will be addressed by an overview of previous empirical

examinations of supply chain management and by examining the conditions for
and influences of the concept in the iron ore industry respectively at an iron ore
producer - Swedish LKAB.
2
2. Conceptual Framework- Supply Chain Management
2. Conceptual Framework - Supply Chain Management

The management concept supply chain management was introduced in the early
1980s and since then the concept has received increasingly more attention within
the field of logistics. In this chapter the essence of supply chain management is
presented according to an earlier examination, based on a literature study of the
concept by Persson (1997).
The essence of the concept was found in Persson (1997) by examining the articles
and literature with respect to foremost, stated objectives and stated fundamental
beliefs. The different stated objectives of supply chain management were related
to each other in a “hierarchical weave” of objectives which showed that the
overall stated objective of supply chain management is to contribute to
improvements of the company’s bottom line or profitability. Other stated objec-
tives are to reduce the costs mainly by reducing the inventory level and to
increase the revenues by improving customer service.
Improved
bottom line
Increased
competitiveness
Revenue
Reduced costs
improvements
Increased
Efficient use of Reduced Reduced Increased
customer
resources inventory leadtimes values
service
Figure 2.1 Hierarchical weave of stated objectives of supply chain management. (Source:
Persson, 1997)
Moreover it was suggested that a management concept like supply chain man-
agement can be viewed as constituted by a set of primitive and derived funda-
mental beliefs, which direct management on how to reach the objectives of the
management concept. The primitive fundamental beliefs are the core of the con-
cept and cannot be derived from any other belief. The derived fundamental beliefs
3
2. Conceptual Framework- Supply Chain Management
are obtained by deduction from the primitive ones. The following set of primitive
fundamental beliefs was suggested with respect to supply chain management:
coordination and integration along the material flow, win-win relationships and
end customer focus. These beliefs imply that in order to achieve the objectives of
supply chain management individual companies should coordinate and integrate
their activities with other companies along the material flow in win-win
relationships and focus their joint efforts on the end customer. By deduction,
several derived fundamental beliefs can be developed from the primitive ones.
Primitive fundamental beliefs
Coordination and Win-win End customer

integration along relationship focus
the material flow
Derived fundamental beliefs

Supply chain is viewed Chain Long time
relationships
as a single entity competitiveness
Sharing of Compatibility of
Channel-wide
information corporate philosophies
inventory management
Channel-wide Joint planning Reduction in

total cost approach supplier base
Figure 2.2 Primitive and derived fundamental beliefs of supply chain management (Source:
Persson, 1997).
In this study the concept of supply chain management will be represented by the
primitive and derived fundamental beliefs outlined in Figure 2.2.
4
3. Method
3. Method
Since the overall objective of this study is to give some directions for the devel-
opment of supply chain management, this chapter introduces management con-
cept development according to Alvesson and Sköldberg (1994). The chapter ends
with an outline of the method of the study.
3.1 Management Concept Development

Since management concepts are used by management as basic ideas about how to
act in order to reach the organizational goals, they address real conditions in the
forms of organizations, business, markets, competitors, costs, etc. (Persson, 1997).
The development of management concepts can be viewed as an abductive proc-
ess. Abduction was put forward by Alvesson and Sköldberg (1994) as a more
applicable and realistic way to develop concepts in contrast to the two commonly
described ways, induction and deduction. Induction starts out from empirical
observations with, ideally, no pre-understanding and deduction starts out from
concepts. Abduction, like induction, starts out from empirical observations but
does not deny the possibility of combining observations with a pre-understanding
of e.g., previous concepts and empirical observations. Starting from empirical
observations combined with knowledge of previous concepts, generalizations and
preliminary statements (hypothesis) are made of empirical regularities. The
preliminary statements must then be further empirically tested before they can be
used as new components of a concept. The abductive research process is
consequently alternating between previous concepts, empirical examinations and
adjustments of the (previous) concepts.
Deduction Induction Abduction
Concept/Theory
(Deep Structure)
Empirical Regularities
(Shallow Structure)
Empirical
Observations
Figure 3.1 Deduction, induction and abduction (Source: Alvesson & Sköldberg, 1994).
5
3. Method
3.2 Method of the Study

This study will be part of an abductive process and will give some directions for
the development of supply chain management. With a pre-understanding of the
concept of supply chain management, examined in an earlier study (Persson,
1997) and outlined in chapter 2, supply chain management will in this study be
empirically examined in the iron ore industry and at the Swedish iron ore pro-
ducer LKAB. Further, the study will give an overview of previous empirical
examinations of supply chain management. The previous and the additional
empirical examinations will be the basis for giving some directions for the devel-
opment of supply chain management.
Previous theory
See Persson (1997)
Empirical examination
Previous empirical examinations
and examinations in the iron ore
industry and at LKAB
Theory
Some directions for the
development of SCM
Figure 3.2 The abductive development of supply chain management in this study.
The previous empirical examinations are derived from the basic set of articles and
literature used in Persson (1997). The basic set of articles and literature was
derived from a survey of all editions from 1990 to 1996 of, International Journal of
Logistics Management and International journal of physical distribution & Logistics Man-
agement and from a survey of the references in the articles found in the survey of
the two publications. Among the 51 articles and extracts of literature found in that
study a set of 20 studies included empirical examinations of supply chain
management and will be examined in this study. The overview of previous
empirical examinations will focus on the directions for the development of supply
chain management.
The empirical examination of supply chain management in the iron ore industry
will include an overview of the industry and an examination of the conditions for
6
3. Method
supply chain management in the industry. The overview of the industry will focus
on the supply chain link adjacent to the iron ore producer, the iron ore producer,
the steel mills, the transportation providers and the relationships between the iron
ore producer and the steel mills.
Further, the influences of supply chain management at the Swedish iron ore pro-
ducer LKAB will be examined. LKAB is a small iron ore producer, but firmly
established in the global market. The empirical examination will include an
overview of the LKAB supply chain link and examinations of the influences of
supply chain management with respect to the LKAB annual reports from 1982-
1996 and with respect to interviews with managers. Interviews were held with
Birger Norberg, LKAB Vice President, Logistics, Jan-Ivan Johansson, Quality
manager, ore processing department at LKAB and Tomas Nordmark, Manager
rolling stock and loading equipment at MTAB (LKAB’s transport company). The
interviews were conducted in July 1997 and followed an interview guide which is
outlined in Appendix A.
7
8
4. Overview of Previous Empirical Examinations of Supply Chain Management
4. Overview of Previous Empirical Examinations of

Supply Chain Management
In this chapter an overview of previous empirical examinations of supply chain
management is presented. The overview is followed by a summary of the direc-
tions for development of supply chain management in the previous empirical
examinations.
4.1 Overview of Previous Empirical Examinations

The previous empirical examinations of supply chain management are summa-
rized in Table 4.1. As shown in the summary, empirical examinations have been
made in several different industries.
Table 4.1 Summary of empirical examinations of supply chain management (SCM).

Reference Industry/company Focus
Atkin (1993) Food industry/Cour- Describes improvements by an extended sharing of
taulds Packaging information between film, packaging and food manu-
facturers.
Berry, Towill, & UK Electronics industry Estimation of the benefits to be excepted from an
Wadsley (1994) implementation of SCM by dynamic simulation.
Bhattacharya, European automotive Describes the development of the supply chain struc-
Coleman, Brace industry tures by focusing on outsourcing and vertical integra-
& Kelly (1996) tion.
Cooke (1992) Kmart, Kodak, Lee Describes the use of quick response and continuous
Apparel replenishment and its advantages.
Davies & Brito Margarine industry Comparison of the costs of different supply chains of
(1996) margarine.
Davis (1993) Hewlett Packard Description of a framework for modeling supply
chains.
Ellram & Shippers, warehouses & Examined the potential risks and benefits of SCM
Cooper (1990) transportation providers. relationships for shippers and service providers.
Fernie & Rees National Health Service Impact of legislative and organizational changes on
(1995) SCM.
Rees (1992)
Flickinger & Chemical industry/ Description of a program to reengineer supply chains
Baker (1995) BASF Corp including e.g., decision-support tools.
Gentry (1996) Transportation providers Reports on the nature and degree of carrier involve-
ment within buyer-supplier strategic partnerships
Giunipero & Members of the Determine of the extent of SCM adoption by
Brand (1996) National Association of purchasers.
Purchasing Managers
9
Reference Industry/company Focus

Johnson & Dupont Toothbrush General description of the supply chain of a tooth-
Wood (1996) brush.
Jones & Riley Manufacturing compa- Case studies of supply chain techniques.
(1985) nies
Jones (1989) Automotive industry Example of a supply chain model.
La Londe & Target stores Implementation of quick response.
Masters (1994)
Lee & Billington Hewlett Packard Develop a model for the management of material
(1993) flows within a noncentrally controlled supply chain.
McMullan Companies in the Asian Examines responses to competition and strategies to
(1996) Pacific region enhance management of the supply chain.
Metz (1994) 12 major companies Measuring performance, implementing & organizing
SCM
Oliver & Pharmaceutical company Making SCM work.
Webber (1982) & confectionery division
The objectives of the previous empirical examinations of supply chain manage-

ment vary from examining strategies for management of the supply chain to
simulating the concept’s performance. However, most of the examinations have
examined the effects when using the whole concept or parts of it.
Among the set of examinations studying the effects of using the whole concept of
supply chain management are Metz (1994), Davis (1993) and Lee and Billington
(1993). In the workshop by Metz 12 major American companies (among others
AT&T, Digital Equipment, Procter and Gamble and Unilever), with experiences
of supply chain management ranging from 6 months to 3 years, stated that they
have achieved simultaneous improvements in customer service, reduced costs,
improved return on assets and increased revenues by applying supply chain
management. They concluded that supply chain management is a productive
approach to improving business processes with the potential for great rewards.
Hewlett Packard also believes, according to the study by Davis (1993), that by
approaching problems with a supply chain management view great savings can be
obtained. Moreover, the study by Lee and Billington (1993) was conducted at
Hewlett Packard. They developed a model for the management of material flows
within a noncentrally controlled supply chain.
10
Other empirical examinations of effects when using supply chain management

focus on some parts of the concept (Gentry, 1996; Ellram & Cooper, 1990; Atkin,
1993). Gentry studied the nature and degree of carrier involvement within buyer-
supplier partnerships. Her research provided evidence of increased operating
performance when carriers were more involved in the buyer-supplier partnerships.
Gentry concluded that a further integration of the carrier in the buyer-supplier
planning and communication processes increases the likelihood of maximizing
supply chain efficiency. Ellram and Cooper (1990) surveyed the potential risks and
benefits of supply chain management relationships for both the shipper and the
service provider. They considered an understanding of the risks of entering a
supply chain management relationship to be as important as understanding the
benefits of involvement. Atkin (1993) described the improvements which
occurred by an extended sharing of information between film, packaging and food
manufacturers and conclude that to benefit from the supply chain the buyer and
seller must form a joint strategy which support the customer’s strategy as far
upstream and downstream the material flow as possible. Atkin showed in his study
that some simple actions can lead to substantial benefits and point the way to
closer partnerships.
Giunipero and Brand (1996) studied the extent of supply chain management
adoption by purchasers. The studied purchasers perceived top management sup-
port to be moderate due to lack of understanding of the concept. The purchasers
had, however, themselves made initial efforts towards supply chain management
e.g., by developing strong relationships with their key suppliers, and realized sev-
eral benefits including improved coordination, shorter lead times, greater pro-
ductivity and lower inventory. McMullan (1996) studied strategies for manage-
ment of the supply chain by companies in the Asian Pacific region. Her conclu-
sion was that to maintain a competitive advantage firms must enhance their ability
to plan the whole material flow from supplier to customer as an integrated process
rather than as a series of discrete functions. Davies and Brito (1996) compared the
cost of different supply chains of margarine and conclude that the supply chain
costs are dominated by the internal costs of the members of the supply chain,
rather than costs caused by lack of coordination between the members, which is
one of the fundamental beliefs of supply chain management.
11
“What we will be illustrating is that further, substantial, cost reductions in grocery product supply
chains will in the future only be achieved within the members of the supply chain. Supply chain
management, we propose, should refocus its attention, in the case of grocery products at least,
towards the cost structure of the supply chain as a whole and, increasingly, away from any further
cost efficiencies that might be gained by better co-ordination between supply chain members.”
(Davies & Brito, 1996, p. 50)
Berry, Towill and Wadsley (1994) made a survey and a simulation of the UK
electronics products industry. The simulation showed substantial reductions in
demand application by reengineering the supply chain in accordance with supply
chain management.
4.2 Directions for Development of Supply Chain Management in the

Previous Empirical Examinations
None of the previous empirical examinations have stated the objective of giving
directions for the development of supply chain management. In this section,
however, the conclusions from the previous examinations will be interpreted with
respect to development of supply chain management.
The overview of the previous empirical examinations gave evidence of an over-

whelming success when using supply chain management. The workshop by Metz
(1994) included 12 major American companies which stated that they used the
concept with great success, as did Hewlett Packard, according to Davis (1993).
Gentry (1996) stated that operating performance increases when carriers are more
involved in the buyer-supplier partnerships. Atkin (1993) described the
improvements which occurred by an extended sharing of information. The only
examinations which showed some doubts were the studies by Ellram and Cooper
(1990) and Davies and Brito (1996). Ellram and Cooper considered that there are
also risks in entering a supply chain management relationship. Davies and Brito
even recommend a refocus of supply chain management towards the cost struc-
ture of the supply chain as a whole and away from cost efficiencies by better
coordination between the supply chain members.
12
However, on the whole, the previous empirical examinations of supply chain

management announce successful use of the concept and do not signal any need
to modify the concept.
13
5. Conditions for Supply Chain Management in the Iron Ore Industry
5. Conditions for Supply Chain Management in the

Iron Ore Industry
In this chapter the conditions for supply chain management in the iron ore
industry are examined through an overview of the structure of the industry.
5.1 Overview of the Iron Ore Industry

The overview of the iron ore industry is focused on the supply chain links adja-
cent to the iron ore producers.
5.1.1 The Supply Chain Links between the Mines and the Steel Mills
The iron ore supply chain links between the mines and the steel mills differ in
design and involved actors mainly dependent on the distance between and the
location of the mines and the steel mills. A typical design of the supply chain link
is seen in Figure 5.1.
Direct Sea Transport
Pipeline
Stockpile Stockpile Stockpile Stockpile Stockpile
Mining Processing Delivering Receiving Railway Steel Mill

Sea Processing
Railway Harbor Transport Harbor Transport
sintering
Other Iron Ore Transport Shipping External Railway
Producer or External Company Company
Steel Mill
Producer
Iron Ore
Figure 5.1 Typical supply chain link between the mines and the steel mills.
Iron ore is mined mostly in open pits, however the mines in Sweden are under
ground. The mined ore generally needs some crushing and processing before it
can be used. Iron ore is converted into basically three products, fines, pellets and
lump. Pellets and lump can be put directly in a blast furnace at a steel mill, while
fines must be further processed (sintered), usually at the steel mill, before use.
Since there are no major iron ore mine sites close to the sea, the iron ore is usually
transported by railway to a harbor. The often remote locations of the iron ore
mines have made it necessary for many iron ore producers to build their own, or
14
use each others, railways and harbors. Instead of railways, a few iron ore producers
use pipelines to transport the iron ore from the mine site to the harbor.
The internationally traded iron ore is usually sold FOB (free-on-board), implying
that the iron ore producer is responsible for the ore transportation to the harbor,
the storing at the harbor and the loading, while the steel mill is responsible for the
contracting of ships and the transportation from the delivering harbor to the steel
mill. Typically, the contracting of ships starts by the steel mill contacting a
shipping company which has free capacity. The shipping company states when
they can have a ship in the specified harbor and thereafter the steel mill contacts
the iron ore producer who decides if it is possible to load the ship on the desired
date. The ship must announce its arrival to the delivering harbor a couple of days
before its planned arrival. The dominating part of the seaborne iron ore trans-
portation is by large bulk ships over 50,000 ton and 40% is by ships above 150,000
ton (Sv Sjöfartstidning, 1996). Within the dry freight market, contract freight is
increasing. The ships which are used in these relationships are working under long
time contracts. A shipping company and an industry group agree on the volumes
and the frequencies which shall be transported from one point to another, with a
ship of a certain size and at a certain price per ton. Large shipping companies
combine several contracts to reduce the number of empty freights (Sv
Sjöfartstidning, 1996).
The steel mills situated close to the sea can ship the iron ore directly to the steel
mill. If the steel mills are located further away from the harbor the final transport
to the steel mill is typically by externally owned railways. A few steel mills use
barges instead of railway. When the mines and the steel mills are geographically
close to each other the iron ore is transported by e.g., trucks or conveyors directly
from the mine site to the steel mill. The trucks or conveyors are typically owned
by either the iron ore company or the steel company. Historically, this design was
more common due to the fact that mine sites and steel mills were geographically
closer to each other. In some supply chain links the iron ore is transported by
railway all the way to the steel mill. This design of the supply chain link can be
found e.g., between the Ukrainian mines and the steel mills in Eastern Europe and
in Sweden. Typically, the railway then is not owned by the iron ore producer or
15
steel mill. The iron ore is stored at a number of places along the material flow.
Normally there are stockpiles at the mine site, at the delivering harbor, at the
receiving harbor and at the steel mill.
5.1.2 International Trade of Iron Ore

Iron ore is a crucial product for the steel mills. Besides iron ore, scrap is the only
major raw material for making steel. If iron ore-based steel mills run out of iron
ore they have to shut down their blast furnaces, which is very expensive. It is not
easy to change iron ore supplier, since differences in the product quality from
different iron ore suppliers leads to expensive adjustments.
In 1995 the major iron ore producing countries in the world were Brazil, Aus-
tralia and the former Soviet Union. Due to recession in the former Soviet Union,
iron ore production in that region is rapidly diminishing. China is also a major
producer, but due to a low content of iron its figures are not comparable with
those of other producers. The three largest iron ore companies are, CVRD in
Brazil and Hamersley and BHP in Australia, see Table 5.2.
Table 5.2 The major iron ore producing countries in the world and deliveries from some larger
export companies (Source: Iron Ore Review, 1995).
Country Production Mine company 1995 Country
1995 (Mt) (Mt)
China 250.4 Hamersley 59.6 Australia
Brazil 178.4 BHP 49.8 Australia
Australia 145.6 Robe River 26.5 Australia
Former Soviet Union 135.0 CVRD 82.0 Brazil
USA 62.5 MBR 24.6 Brazil
India 62.0 Ferteco 12.5 Brazil
Canada 38.3 QCM 15.9 Canada
South Africa 32.7 IOC 15.0 Canada
Sweden 21.7 Goa 14.7 India
Venezuela 13.9 SNIM 11.5 Mauritania
Mauritania 11.3 ISCOR 18.2 South Africa
Others 65.7 LKAB 21.4 Sweden
CVG Ferrominera 17.7 Venezuela
Among the major iron ore producing countries, it is only in China, the former
Soviet Union and the USA, where most iron ore produced is consumed domes-
tically. The global market for iron ore can be seen as divided in two markets - the
16
European and the Asian market - having Germany and Japan as the major
importers on each respective market. The imbalances between supply and demand
of iron ore in different countries mean that iron ore is transported long distances
to its markets. But it has not been until recent years that iron ore trade has
become global. Historically, the difficulties of transporting the cheap but dense
iron ore brought about the use of small and poor local deposits for the production
of steel. Only in the second half of the 20th century did technical progress make it
economically possible to ship iron ore long distances and in large quantities. In
Figure 5.3 the trade of iron ore is illustrated, in 1950 30 Mt iron ore was
internationally traded and in 1993 380 Mt was traded.
Figure 5.3 Trade of iron ore in 1950 and in 1993 (Source: Hedberg, 1978; Iron Ore Review).
The present dominating trade routes are from Brazil to Western Europe (56.8 Mt)
and from Australia to Japan (58.7 Mt), but iron ore is also shipped in the other
direction, from Brazil to Japan (27.1) and from Australia to Western Europe (23.1
Mt). Two other important routes are from the former Soviet Union to East
Europe (27.8 Mt) and from Australia to China (22.9 Mt) (Iron Ore Review,
1995).
5.1.3 Historical Overview of the Relationship between the Iron Ore

Producers and the Steel Mills
According to a historical overview by Faria (1994) the 1950s, in terms of iron ore,
were characterized by a predominance of regional trade and by vertical integration
of the steel sector into the mining sector.
During a few years in the early and mid-1960s more than 100 Mt of new iron ore
capacity was created when the steel mills offered long contracts to the iron ore
17
producers to secure supplies. The basis for the borrowing of capital for those
mines was different forms of long-term contracts. Many of the contracts extended
over very long periods, usually 15 years, but also contracts of more than 40 years
were agreed upon. Those long contracts guaranteed a market for iron ore which
supported investments in new mining projects (Hedberg, 1978). Another factor
which affected the emergence of a seaborne iron ore market was the introduction
of large bulk ships.
The 1970s and its oil crises reduced the demand for steel and thereby iron ore.
Captive mines became less important and began to be substituted by minority
stakes and participation in joint ventures with iron ore companies. In the 1970s
iron ore price negotiations for long-term contracts began to take place on an
annual bases. The price on iron ore is set once a year in negotiation between the
major suppliers and major users in the two markets, Europe and Asia. The
resulting price from these negotiations is set as the world market price for the
coming year. The prices are set as FOB prices in cents per % Fe content on a dry
basis for fines. All FOB prices are then adjusted so that, in principle, all C&F
(seller pays for costs and freight to a named harbor) prices are equalized (Hellmer,
1997).
The close relations between the steel mills and the iron ore companies continue to
exist. For example, the enormous Brazilian iron ore company CVRD has recently
built pelletizing plants in joint ventures with the Spanish steel company Ensides,
Italian Ilva, Japanese Nippon Steel and Kawasaki and Korean Posco (Wäingelin,
1995).
5.1.4 Downstream the Steel Mills

The end products from the steel mills are relatively simple forms of steel such as
sheet, plate and profiles which are used in a various industries. In Table 5.4 some
statistics of the steel mill customers are outlined.
18
Table 5.4 The iron ore-based and the scrap-based steel mills’ customers. (Source: American Iron
Institute, 1996; Eurostat, 1992).
Shipments of Steel Mill Steel Consumption by
Products by Market Classifi- consuming branch 1992
cation 1995 Building and civil engineering 15.5%
Steel Service Centers and 24.4% Steel tube industry 12.2%
Distributors Vehicles and other transports 10.0%
Construction and Contrac- 15.3% Metal goods 9.3%
tors Products Struct. Steelwork 7.8%
Automotive 15.0% Mechanical engineering 6.3%
Steel for Converting and 10.7% Cold rolling and forming 5.5%
Processing Other consuming industries 4.8%
Others 34.6% Forging, drop forging 4.5%
Boilers drum and vessels 4.2%
Electrical engineering 3.1%
Steel Casting 2.9%
Cans and metal boxes 2.9%
Ship building 1.1%
Table 5.4 shows that the steel mills sell large shares of their products through
distributors, which in their turn sell the steel further. Industries which buy large
shares of the steel are the building and construction industry and the automotive
industry. Moreover, after being used the steel products are the input, in the form
of scrap, to the scrap-based steel mills. The material flow of iron ore is accordingly
more or less endless.
5.1.5 Upstream the Mines

For the extraction and processing of iron ore the iron ore producers are supplied
with, among other things, rock drills and equipment, explosives, energy and
additives e.g., olivine, bentonite, coal. The iron ore producers are, accordingly,
not the ultimate start of the supply chains they are acting in.
19
5.2 Examination of the Conditions for Supply Chain Management in

the Iron Ore Industry
In this section the conditions for supply chain management in the iron ore
industry are examined in the light of the previous overview. The examination
starts out from the primitive fundamental beliefs of the concept outlined in
chapter 2, end customer focus, integration and coordination along the material
flow and win-win relationships.
5.2.1 End Customer Focus

The first primitive fundamental belief of supply chain management examined is
end customer focus. This fundamental belief implies that all companies in the
supply chain shall focus on the end customer in order to achieve the best effects.
If the iron ore producers acted in accordance with this fundamental belief of
supply chain management they would focus on the end customers of the iron ore
e.g., those who buy cars and white goods. The logic behind the fundamental be-
lief is, of course, relevant for the iron ore producers, as almost all other industries,
but for the iron ore producers, one difficulty in practicing end customer focus is
the dispersed connection between iron ore and e.g., white goods. The iron ore
industry produces a bulky product with a limited product range which is con-
verted into steel of many different qualities and forms, which are in turn used in
masses of end products. Even downstream the steel mills there are several proc-
essing levels left when producing an end product out of the simple steel forms
produced by the steel mills. This makes the conditions for practicing a funda-
mentalistic end customer focus more difficult for the iron ore producers.
Out of the primitive fundamental belief of end customer focus the derived fun-
damental beliefs channel-wide total cost approach and chain competitiveness can
be derived. The channel-wide total cost approach implies that all actors in the
supply chain should consider the costs of the total supply chain. In the iron ore
industry the cost of the iron ore producers, the transportation providers and the
steel mills will ultimately affect the cost of the end product. Since it seems unre-
alistic for the iron ore producers to focus on the end customers in a fundamen-
20
talistic supply chain management interpretation, the total cost approach seems to
be more realistic with a more limited scope. The actors in the supply chains are
viewed in supply chain management as extended companies which compete
against each other. Different sets of iron ore producers and steel mills cooperate in
competition with other sets. There are, however, no one-to-one-relationships
between the iron ore producers and the steel mills. The steel mills typically buy
iron ore from several suppliers and the iron ore producers sell iron ore to several
customers. A chain of one-to-one-relationships seems unrealistic in the iron ore
industry. Events beyond the control of the iron ore producers would then jeop-
ardize the supply of iron ore to the steel mills. Instead of viewing the iron ore
supply chain as a chain it is more realistic viewing it as a network.
Summarizing this discussion, an extended, but not fundamentalistic interpreted

focus along the material flow seems realistic for iron ore producers. Likewise, a
total cost approach with respect to a part of the total supply chain is appropriate.
5.2.2 Coordination and Integration Along the Material Flow

Coordination and integration along the material flow is the next primitive fun-
damental belief of supply chain management. This fundamental belief implies that
coordination and integration of activities along the material flow lead to improved
performance for all participants of the chain.
Improving the performance by integration and coordination along the material

flow seems possible in the iron ore industry. Several more or less independent
actors such as the iron ore producers, the transportation providers and the steel
mills are involved in the supply chain, which would suggest that the fundamental
belief can be relevant in the iron ore industry. As outlined before, it seems unre-
alistic for the iron ore producers to focus too far downstream the material flow.
Accordingly, integration and coordination seem to have the best prerequisites for
development between more adjacent companies in the chain. Coordination and
integration may be achieved by an extended sharing of information, joint planning
and channel-wide inventory management. Normally, the main obstacle to
integration and coordination along the material flow is lack of trust. The long-
21
term close relationships which characterize the iron ore and steel industry is a
promising basis for achieving this.
In supply chain management coordination and integration are best achieved

without ownership. The historical overview of the relationships between the iron
ore producers and the steel mills in section 5.1.3 showed that in the 1950s and
1960s the steel mills integrated vertically into the iron ore industry to secure
supply of iron ore. In the 1970s this changed to joint ventures between the steel
mills and iron ore companies. The joint ventures have continued up to the pres-
ent. Due to the location of the mines, some iron ore producers have built and
own the railways from the mine sites to the harbors. The ownership interests in
the railways are stable or increasing, in contrast to the sea transports where the
iron ore producers have reduced their ownership interest since the steel crisis in
the mid-1970s. Consequently, there is a tendency that the iron ore industry is
moving away from vertical integration towards relationships in accordance with
To conclude, the primitive fundamental belief of coordination and integration

along the material flow seems to be relevant from the perspective of the iron ore
producers. There are several more or less independent actors involved in the
supply chain adjacent to the iron ore producers who would benefit from a coor-
dination and integration of their activities.
5.2.3 Win-Win Relationships

The final primitive fundamental belief of supply chain management is win-win
relationships. Win-win relationship are believed to be necessary for preserving
participation in a supply chain management relationship. A win-win relationship
occurs when each actor in the chain or network is looking out for the interests of
the other actors as well as of its own concerns.
According to supply chain management, neither the iron ore companies nor the
steel mills gain in the long term through egoism. A relevant situation for prac-
ticing this in the iron ore industry is in price negotiations. In a win-win rela-
tionship there is no point for the iron ore companies striving to obtain prices so
22
high that the steel companies cannot sell their products. In the long run this will
affect the iron ore producers too. The fundamental belief of win-win relationships
is, however, vague with respect to how money from the end customer should be
distributed along the chain. When, for example, the iron ore producers and the
steel mills negotiate the price there is some money afforded for every company to
cover its costs and to get a satisfactory surplus but if it then is money left
presuming those are not considered by supply chain management. This vagueness
is a general problem of supply chain management and is not specific to the iron
ore industry.
An area of great egoism affecting the iron ore industry is the spot market of sea
transports. If a win-win approach were practiced both the iron ore producers and
the transportation providers would gain, according to supply chain management.
This seems realistic, because if the shipping companies were given longer con-
tracts the possibilities for both the shipping company and the iron ore producer to
plan their activities better would improve and cost reductions would result. In a
win-win relationship one company can increase its cost in order to enable a
greater decrease of costs of another company. They will then balance the results
between them through pricing. The present pricing in the iron ore industry can
then be an obstacle to win-win relationships because there is typically no differ-
entiation in the pricing of iron ore between specific iron ore producers and steel
mills. Moreover, for a win-win relationship trust is crucial. As stated earlier, long-
term close relationships typically exist between the iron ore producers and the
steel mills, but distance and the cultural difference may be an obstacle to trust.
In conclusion, examination of the conditions for the fundamental belief, win-win

relationships suggests that there are areas affecting the iron ore industry where it
seems realistic to strive for win-win relationships, e.g., the contracting of the sea
transports. Long-term close relationships between the iron ore producers and the
steel mills is a prerequisite which would enable win-win relationships. However,
adopting this fundamental belief would also have an affect on the contemporary
pricing procedure of iron ore.
23
6. Influences of Supply Chain Management at the Swedish Iron Ore Producer LKAB
6. Influences of Supply Chain Management at the

Swedish Iron Ore Producer LKAB
As a complement to the examination of the conditions for supply chain man-
agement in the iron ore industry, the concept is empirically examined at the
Swedish iron ore producer LKAB. This chapter presents an overview of LKAB
and examines the influences of supply chain management at LKAB according to
the annual reports and interviews with some managers.
6.1 Overview of LKAB

The overview of the Swedish iron ore producer LKAB focuses on the supply
chain link between the mines and the steel mills.
6.1.1 The LKAB Supply Chain Link between the Mines and the Steel
Mills
LKAB has been owned since the 1950s by the Swedish State and is the only major
supplier of iron ore in Europe. World iron ore production in 1995 was in the
region of one billion tonnes. With a total production of 21.7 Mt of finished
products and exports of 17.1 Mt, the Swedish iron ore producer LKAB had shares
of:
• 2% of world production
• 3.9% of total world trade
• about 8% of iron ore imports to the EU-12
Unlike most iron ore producers, LKAB mines under ground but the LKAB sup-
ply chain link, presented in Figure 6.1, does not differ particularly from those
presented in the overview of the iron ore industry in section 5.1. LKAB has two
mine sites, one in Kiruna and one in Malmberget. Processing plants are situated
both in Kiruna and in Malmberget, but there is also a pelletizing plant in Svap-
pavarra. From the processing plants the ore is transported by rail to two ore har-
bors, Narvik, on the Atlantic coast of Norway and Luleå, on the Gulf of Bothnia.
Most of the products delivered via Narvik come from Kiruna and Svappavarra
and most of the products delivered via Luleå come from Malmberget.
24
Direct Sea Transport
Mining Processing
Delievering Receiving Steel Mill
Kiruna, Railway
Kiruna & Harbors Railway
Malmberget, Transport Sea Transport Harbor Processing
Malmberget Svappavarra Narvik & Transport
sintering
MTAB, The Swedish and Luleå E.g. JIT-trans
E.g. Deutsche
Norwegian National Rail Bundesbahn
Administration
Steel Mill
LKAB
Figure 6.1 The LKAB supply chain link between the mines and the steel mills.
The railway from Narvik to Luleå is owned by the Swedish and Norwegian State
and up until 1996 the transportation of ore was controlled by the Swedish and
Norwegian National Railways. On July 1st 1996 LKAB assumed control of the
transportation of the ore. Two new companies were formed to control the ore
transportation in Sweden and in Norway respectively, MTAB and its subsidiary
MTAS. LKAB owns a controlling interest in MTAB, which makes the company
a subsidiary of LKAB.
Thanks to the Gulf Stream, the harbor at Narvik is ice-free all year-round. Ship-
ping capacity at Narvik is 25 million tonnes per year and vessels up to 350,000
tons can be loaded. The harbour includes a terminal for ore trains, stockpiles of
the different ore products and quay facilities. About 240 ships are loaded with ore
each year. Via Narvik, products to the EU's North Sea countries and the direct
reduction market are delivered.
In Luleå LKAB has built a new ore harbor which was put in operation in 1996.
The old ore harbor at Luleå has been in use since 1963, but due to environmental
problems because of its nearness to the city center it has been moved further out.
The project was a joint effort between LKAB and the Municipality of Luleå.
Luleå can only take ships up to 65,000 dwt and during the winter months ice-
class vessels carry shipments. Via Luleå, products for customers in the Baltic Sea
market are delivered, mainly to Sweden and Finland.
The iron ore from LKAB is sold FOB to the customers at the ore harbors in Luleå
and Narvik, except to the steel mill in Luleå, the Swedish special steel
25
manufacturer SSAB. The unloading for SSAB Luleå is integrated with the plant’s
internal material flow system. Via Luleå the transportation to SSAB’s second steel
mill in Oxelösund and Finnish Rautaruukki are carried out by a pusher-barge
system. The ore transportation via Narvik to the North Sea customers is typically
designed in accordance with the transports to LKAB’s biggest customer outside
Sweden, German Preussag Stahl AG (formerly Peine-Salzgitter). The ore to
PSAG is delivered via Narvik by sea to PSAG’s harbor Hansaport at Hamburg.
From Hamburg the ore is transported 200 km by the German railway Bundes-
bahn to Salzgitter (Autio, 1994).
LKAB has stockpiles of iron ore at the mine sites in Kiruna and Malmberget, at
the pelletizing plant in Svappavarra and at the harbors in Narvik and Luleå. The
customers typically have stockpiles at the receiving harbor and at the steel mill.
The stockpiles vary over time, with season and with prices.
In 1993 LKAB sold all the products it was able to produce and in addition
reduced its stocks to 0.9 Mt. The inventory thus reached the lowest level in
recent history (Wyllie, 1994). The inventory level is a constant concern for
LKAB, since the company suffered in the 1970s from great losses due to the steel
crisis in the European steel industry. In one year -1975 - LKAB lost one third of
its deliveries due to a collapsed market for high phosphorus ore. LKAB’s strategy
then was to produce to stock. At most, LKAB had 15 Mt iron ore stored, more
than six months production (LKAB Annual report, 1991).
30
25
20
Mt
15
D eliveries
Inventories
10
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Figure 6.2 LKAB deliveries and inventories 1977-1996 (Source: LKAB Annual Reports)
26
6.1.2 LKAB’s Customers

The major markets of LKAB are the Nordic countries, the EU's North Sea
countries and the direct reduction market. LKAB covers more than 90% of Swe-
den's iron ore demand and 60% of Finland's. The market share in The Nether-
lands is about 21%, in Germany it is 13% and of world trade in direct reducing
pellets, LKAB commands a 14% share.
LKAB’s single biggest customer is the Swedish special steel manufacturer SSAB.
SSAB takes nearly 20% of LKAB’s production, mainly for its blast-furnace plant in
Luleå, but also for its blast-furnace plant in Oxelösund (Wyllie, 1994). SSAB
manufactures steel sheet with many different properties. Important consumers of
steel sheet are found within the automotive, engineering and construction
industries. SSAB delivers 60% to Scandinavia and 40% to the rest of the world. As
mentioned above, German Preussag Stahl AG is LKAB’s biggest customer outside
Sweden. PSAG has been an LKAB customer since 1963. Under the new 5-year
contract, LKAB will supply PSAG with approximately 2 million tonnes of blast
furnace pellets per year during the period 1997 to 2001.
27
6.2 Examination of the Influences of Supply Chain Management at

LKAB as seen in the Annual Reports
In this section the influences of supply chain management at LKAB are examined
according to the annual reports from 1982 to 1996. The examination has as its
starting point the primitive fundamental beliefs of the concept outlined in chapter
2, end customer focus, integration and coordination along the material flow and
win-win relationships.

In the annual reports LKAB does not state any strategy of end customer focus.
The company’s customers are, throughout the reports, referred to as steel mills. In
1986 LKAB formed a logistics unit which was given the responsibility for the
material flow from loading to trains at the mines to the loading at the port. The
focus further down the material flow is limited to a few fragmented examples of
e.g., the level of activities in industries which demand large shares of steel.
LKAB’s focus upstream the material flow, according to the annual reports, is
generally not mentioned, except from a prevailing concern for the supply of
energy.
“LKAB’s main customers, the European steel producers, are still in a structural crisis...”
(LKAB Annual Report 1987, p. 5)
“The centralized Logistics unit has been given operational responsibility for the whole dis-
tribution chain, from loading into trains at the mine to loading into ships at the
port.” (LKAB Annual Report 1989, p. 16)
“The largest production increases were in the northern member states, the principal market for
LKAB’s products. The main factor behind this was a strong domestic market, in turn supported
by the positive development of the car industry, increased investments in machinery and an
active construction industry, particularly in West Germany, France, Belgium and Great Brit-
ain.” (LKAB Annual Report, 1988, p. 6)
The demand for iron ore is approached in all the annual reports by extensive
general descriptions of the last year’s steel market, the steel mill’s results, strategic
decisions and problems. All annual reports also comprise forecasts of the future
steel demand. The forecasts are general and focused upon the demand of different
countries in contrast to specific steel mills.
28
With respect to the view presented in the annual reports LKAB may be consid-
ered to have a limited supply chain management approach concerning end cus-
tomer focus. Instead of focusing on the end customer, the buyer of a car for
example, LKAB focuses on its immediate customers, the steel mills.
6.2.2 Coordination and Integration along the Material Flow

Coordination and integration along the material flow is the primitive fundamental
belief which is most recognized in the LKAB annual reports. The strategy to
reduce demand fluctuations in the material flow and gain control of the trans-
portation system is evidence of the recognition of the fundamental belief at
LKAB.
One way to improve performance is to reduce the demand fluctuations by coor-

dination and integration along the material flow. The steel and iron ore industries
are sensitive to volume changes and greatly affected by business cycle fluctuations
and LKAB has since 1981 stated in its market strategy that stocks will not be used
to even out the cyclical ups and downs, but the company will, instead, strive to
reduce the fluctuations by long-term customer relationships and by working only
with customers that buy a large portion of their ore needs from LKAB. This
strategy has been very successful for LKAB and the company has enjoyed full
capacity utilization the last 10 years.
“LKAB’s operations are sensitive to volume changes, owing to the high amount of tied-up capital.
The marginal effect of changes in volume is relatively high. LKAB’s strategy is to even out volume
and business cycle fluctuations by cultivating long-term customer relationships. Today, most
deliveries by far, are under long-term contracts. From the mid-1980s up to 1996, LKAB has
enjoyed full capacity utilization and has sold all of its production.” (LKAB Annual Report
1996, p. 28)
To reduce freight costs, LKAB has since 1991 stated in the annual reports that the
company strives to obtain control of the transportation chain from the mine to
customer. In 1988 LKAB analyzed the logistics system along the railway and
concluded that a coordinated management would mean considerable cost savings
(LKAB Annual Report, 1988). The railway from the mines to the harbors was
built and in the beginning operated by the iron ore producers, but its management
29
was later transferred to LKAB together with the Swedish and Norwegian National
Railways. In 1996 LKAB assumed control of rail transport of ore via the
subsidiary company MTAB. In contrast to supply chain management integration
was achieved through ownership. According to a previous examination put
forward in the 1991 annual report, this control would entail cost reductions
resulting from the concentration of operations in one company.
“LKAB is therefore striving to obtain full control over the transportation chain from the
mine to customer.” (LKAB Annual Report 1992, p. 4)
“The cost reductions stem from the fact that LKAB would only have to pay the prime costs for the
transports, and from rationalization gains due to the fact that operation of the ore train
would be concentrated to one company. … The companies have separate administrations as
well as duplicate maintenance resources, traffic control and so on.” (LKAB Annual Report 1991,
p. 9)
In a long-term perspective LKAB is also interested in taking control of the sea

transports. In the 1991 annual report they state that systematized transports, i.e.,
regularly scheduled sea transports, would result in considerable improvements in
efficiency for both LKAB and its customers.
“LKAB also has a long-range interest in assuming control of a portion of the sea trans-
ports, which would mean that the ore would be sold C&F (including freight cost). Regular
scheduled transports to the customers using unit loads and shuttle vessels would radically reduce
the need for buffer stocks in both the shipping and receiving ports. This would provide
opportunities for costs reductions for both LKAB and its customers.” (LKAB Annual Report,
1991, p. 9)
Ideas in this direction are, however, not new. In 1984 LKAB had ideas of inte-
grating sea transports. The idea was to use self-unloading vessels for deliveries to
European customers. This idea was, however, not realized.
The conclusion of this discussion of the influences of the fundamental belief,

coordination and integration along the material flow, as evidenced by the LKAB
annual reports is that this fundamental belief is used successfully at LKAB, mostly
as a means of reducing costs.
30
6.2.3 Win-Win Relationship

In the LKAB annual reports, the fundamental belief of win-win relationships is
most identified with respect to market strategy and product development. Some
fragments of concern for the result of the steel mills can also be found in con-
nection with discussions of the pricing of the iron ore. LKAB seems to be at least
partly aquatinted with the idea that their success is in accordance with the success
of their customers.
According to the 1991 annual report, LKAB has been striving for long-term
customer relationships since 1981. LKAB expresses beliefs similar to those of win-
win relationships when they state that, “long-term customer relationships entail a
positive and mutual assumption of responsibility”. LKAB even states that the company
does not seek relationships with customers who do not have the potential to
become long-term customers.
“… long-term customer relationships entail a positive and mutual assumption of responsibil-

ity. This also means that LKAB - especially during industrial boom periods - refrains from
taking advantage of delivery opportunities that do not have the potential of becoming long-
term.” (LKAB Annual Report 1991, p. 5)
Product development is an example of a win-win relationship between LKAB

and the steel mills, especially SSAB in Luleå. The purpose is to develop products
which provide better economy in blast-furnace operation and LKAB uses the
customers’ blast furnaces for full-scale experiments. Full-scale experiments at the
premises of customers has been conducted at least since 1981.
“The work of developing a new generation of pellets is taking place in close cooperation with the
steel mills, and in particular with SSAB. The purpose is to create a pellet product that provides
better economy in blast-furnace operation through increased productivity, reduced coke con-
sumption and smaller slag quantities.” (LKAB Annual Report, 1986, p. 11)
From the annual reports it can be concluded that LKAB does not express any
direct win-win relationships strategy. There are, however, elements of the fun-
damental belief in their market and product development strategies. They state
that they are striving to achieve long-term customer relationships and provide
better economy in blast-furnace operations.
31
6.3 Examination of the Influences of Supply Chain Management at

LKAB with respect to Interviews with some Managers
In this section the influences of supply chain management at LKAB are examined
with respect to interviews with a manager of the logistics department, a manager
at the production department and a manager at LKAB’s railway transportation
company MTAB. These examinations also have as a starting point the primitive
fundamental beliefs of the concept outlined in chapter 2, end customer focus,
integration and coordination along the material flow and win-win relationships.

According to the interviews with the three managers at LKAB and MTAB their
focus downstream the material flow is on the steel mills. None of those inter-
viewed expressed any focusing further downstream the material flow than the
steel mills and none focused further upstream than the immediate suppliers. The
interviewed managers were fully aware of LKAB’s dependence upon its steel mill
customers. The manager at MTAB also pointed out that MTAB is equally
dependent upon LKAB, without whom MTAB would not exist.
When the interviewed managers at LKAB and MTAB described the supply chain
of which their companies are a part, they expressed it differently, depending on
which department they belonged to. The managers at the logistics department and
MTAB mainly focused downstream the material flow and the managers on the
production department focused more upstream.
“MTAB’s customer is sometimes LKAB and sometimes the steel mills.” (Nordmark, 1997)
“There are at least as many “offshoots” backwards as forwards in the chain.” (Johansson,
1997)
The managers stated that the customers - the steel mills - are typically not recog-
nized individually because of the number of steel mill customers. Still, in Malm-
berget and at the pelletzing plant in Svappavarra the customers are more visible
due to the fact that they have a few customers who buy a large portion of their
iron ore deliveries. Also, at MTAB there is a notable knowledge of the depend-
ence upon the steel mills. This consciousness was stated to be one of the main
32
advantages of the new subsidiary MTAB compared to when the railway was
operated by the Swedish and Norwegian National Railways.
“At MTAB they are fully aware of the dependence of LKAB and the steel mills. There
would not be any MTAB without LKAB. This awareness is one of the major advantages of
MTAB as opposed to the management of railway transports under Swedish National Railways
and Norwegian National Railways They did not work in the same way to increase LKAB’s com-
petitiveness.” (Nordmark, 1997)
To conclude, the interviewed managers expressed similar thoughts concerning the

focus downstream the material flow as was stated in the annual reports. LKAB is
not focusing further down the material flow than on its adjacent customers, the
steel mills. There is, however, full awareness both at LKAB and MTAB of the
dependence upon the derived demand along the material flow.
6.3.2 Coordination and Integration along the Material Flow

The interviews support the contention that LKAB’s vision is to integrate along
the material flow by controlling the transportation system from the mines to the
steel mills. LKAB has already obtained control of the railway transports by vertical
integration and is now focused on integrating with the further material flow
downstream. MTAB is even considering integrating activities with the material
flow downstream the harbors if it would benefit LKAB.
Control of the railway transports was obtained with MTAB and now LKAB is
working with the sea transports. According to Norberg and Nordmark the future
vision is to extend the C&F (seller pays for costs and freight to a named harbor)
selling and even free to steel mills, storing in receiving harbors and a more differ-
entiated pricing. In the interview with Nordmark, the opinion was expressed that
it is most interesting for the supplier to integrate downstream due to increased
yield. The railway operator MTAB would even consider integrating further, to
the transportation of steel, if the steel mills initiated such an arrangement.
“The raw material producer can integrate forward, in this case LKAB and MTAB can inte-
grate forward to the steel mills and the steel mills forward to their customers. It is most interesting
to integrate forward because the revenues increase.” (Nordmark, 1997)
“It is also possible to integrate further forward in the chain, to the transport of steel, but it
would then occur on the steel mills’ initiative in joint-ventures.” (Nordmark, 1997)
33
The LKAB vision is based upon earlier experiences from the so-called pusher-
barge system between Luleå, Oxelösund and the Finnish steel mill Rautaruukki,
shuttle vessels to Germany and from an earlier project where LKAB rented storage
in Antwerpen and chartered the ships themselves. These experiences showed that
there are considerable improvements in efficiency for both LKAB and its
customers with an implementation of systematized sea transports, i.e., regularly
scheduled sea transports. According to Norberg, it would give opportunities to
better coordinate the transports. Several products could be loaded in the same
ship, which lowers the order quantities and leads to a reduction in inventory level.
Apart from a reduction in inventory level, LKAB believes that costs for overtime
and weekend work would be reduced due to a more even and predictable
demand. Today the demand of iron ore is fluctuating with respect to the supply of
ships. Another important aspect of a reduction in the level of inventory, according
to the managers, is that storage facilities in Narvik, which must be built in because
of environmental problems, would be cheaper to build.
“More extensive systematized transports would reduce the problems which occur when subor-
ders do not occur as planned. Now LKAB is dependent on the customers’ chartering of ships.
The stocks in the harbor fill up and the marketing department has to try to find a market for the
products.” (Nordmark, 1997)
“The customers think they are making a killing and charter ships cheap on the spot market,
but during a limited period which gives LKAB short of time, which can lead to laytime and
demurrage.” (Norberg, 1997)
“Centralized inventories and common ships to several customers would reduce the steel mills’
administration, reduced inventories, increased flexibility in the logistics, increased possi-
bilities to optimize the logistics, increased possibility of make-to-order production,
reduced tied-up capital and fewer costly disturbances.” (Norberg, 1997)
At first, LKAB is trying to get the steel mills in the Netherlands and Belgium to
start with systematized sea transports. Other preliminary discussions have been
about MTAB operating the rail transport from receiving harbor to an European
steel mill. In line with the fundamental beliefs in supply chain management an
extended integration along the material flow would not lead to any buying of
ships, according to Norberg. Instead LKAB is considering joint ownership. In the
1970s LKAB owned ships, but due to the oil- and steel crisis that came to an end.
34
The further integration would also lead to a centralized planning according to the
managers. LKAB is implementing a new information system which will make it
possible to see the inventory levels both at LKAB and at the steel mills, shipping
schedules and quality analysis of every shipment. The logistics manager stated that
the customers are uncertain about more centralized planning at LKAB. They feel
they are getting the best contracts with the shipping companies. To gain further
response to these integration plans LKAB must work more towards top level
management at the steel mills, according to Norberg.
“The customers are doubtful about moving the planning to LKAB, among other reasons, because
of their connections with the shipping companies. They think they get the best contracts. LKAB
seems to have been working too low in the organizations of the steel mills to gain favour for cen-
tralized planning.” (Norberg, 1997)
To conclude, with respect to the primitive fundamental belief coordination and

integration along the material flow, the interviews are in line with the annual
reports. It may be concluded that LKAB is actively working to integrate down-
stream the material flow. The company’s past experiences have shown this to be a
successful strategy. The expected effects are in accordance with those stated in
6.3.3 Win-Win Relationships

In the interviews the managers stated that the basic belief behind product devel-
opment and the integration along the material flow was win-win relationships
between LKAB and its customers. The two managers who had been involved
with the work prior to forming MTAB felt that win-win relationships are difficult
to obtain when there are many actors involved. A common belief in the actions
taken by LKAB is to reduce the number of actors, as well as reducing the number
of suppliers. There is also a tendency for the steel mills to reduce the number of
iron ore suppliers.
The most apparent area for win-win relationships stated by the managers was
product development. LKAB has for many years developed products in coopera-
tion with customers, especially SSAB. But the integration further in the material
35
flow was also considered to be based upon a win-win situation. Both LKAB and
the steel mills would gain by reducing capital and operating costs.
“They are striving for win-win relationships with the steel mills. In the plans for a further
integration forwards LKAB would reduce its tied-up capital and operative costs (less overtime and
demurrage among others) and the customer would benefit from lower transportation costs with long
contracts.” (Norberg, 1997)
In the work prior to the start of MTAB they felt at LKAB that there was a
problem finding win-win situations when there were many participants. This was
shown e.g., by the project which studied an investment in the railway which
would make it possible to use 30 tonne axle weight. The costs for maintenance of
the railway of the National Rail Administration would increase and the transport
costs of MTAB would decrease.
“It is difficult with win-win when several actors are involved, this can also apply to depart-
ments within a company. It is difficult to realize an investment when others take the yields. A
common feature in the changes lately is that LKAB have tried to reduce the number of actors in
the material flow. MTAB replaces LKAB, the Swedish National Railway and Norwegian
National Railways.” (Nordmark, 1997)
Considering the number of participants in the LKAB supply chain or network,

which is probably a better description, all of the interviewed managers discard the
reduction of suppliers. The steel mills are reducing their number of iron ore
suppliers and LKAB is reducing the number of suppliers and customers. They
thought, though, that the number of iron ore suppliers will not be much further
reduced due to the risks of disturbances when the inventory levels are so low.
“The steel mills buy from fewer and fewer iron ore suppliers. If they previously used 5-6
suppliers they now use 3-4. The steel mills do not want to be too small an iron ore customer
because they then risk running out of ore in a boom. The steel mills do not use even fewer suppli-
ers partly because today’s low inventory levels jeopardize delivery service if just relying on only one
supplier.” (Nordmark, 1997)
Summarizing the final discussion of the influences of the primitive fundamental

beliefs of supply chain management at LKAB the interviews have demonstrated
that LKAB is striving towards win-win relationships in practice, especially with
36
the transportation providers and the steel mills. The company seems less interested
in win-win relationships upstream the material flow.
6.4 Summary of the Examinations of the Influences of Supply Chain

Management at LKAB
The concept of supply chain management is not expressively used at LKAB. Both
the annual reports and the interviews gave in hand that the end customer focus at
LKAB ends at the steel mills. The focus upstream the material flow is limited to
adjacent suppliers. Coordination and integration along the material flow is
considered the primitive fundamental belief which has gained most recognition at
LKAB. The company’s work to gain control of the supply chain link from the
mines to the steel mills is one example of that. However, in contrast to the ideas
in supply chain management LKAB has integrated into the railway transports
through ownership. Moreover, LKAB does not announce any all-embracing win-
win relationships strategy, though some actions taken can be interpreted as being
based upon the fundamental belief e.g., product development and integration
downstream the material flow.
In summary, the impression is that LKAB neither states explicitly that it uses the
concept of supply chain management, nor that it is particularly influenced by the
ideas of the concept. In general terms, however, fragments of the ideas do appear
to influence LKAB.
37
7. Some Directions for Development of Supply Chain Management
7. Some Directions for Development of Supply Chain

Management
The overview of the previous empirical examinations of supply chain manage-
ment showed evidence of an overwhelming success when using supply chain
management. But the example of the iron ore industry shows that supply chain
management needs some development with respect to its fundamental beliefs if it
is to improve the possibilities for practical application of the concept. The objec-
tives of the previous empirical examinations of supply chain management seem to
have been more focused on confirming and giving evidence of the usefulness of
the concept than on finding its weaknesses.
With respect to the iron ore industry it is difficult to see the realism in focusing
on end customers such as buyers of cars and white goods. A more realistic and
limited scope along the material flow would preserve the logic of the fundamental
belief and at the same time be more realistic to implement. A modification of the
fundamental belief of end customer focus would also affect the other two
primitive fundamental beliefs, coordination and integration along the material
flow and win-win relationships. Just how far downstream and upstream the
material flow the scope of supply chain management should be extended is an
interesting question for future supply chain management research.
Moreover, according to supply chain management, the integration and coordi-

nation along the material flow shall be achieved without ownership to achieve
best performance. In the case of LKAB, the company achieved integration along
the material flow both through ownership (the railway) and by contracts (the sea
transports). It is here proposed that vertical integration should be considered as
one possible way of achieving integration and coordination along the material
flow in supply chain management. Further, the vagueness of the fundamental
belief of win-win relationships is recognized with respect to how money from the
end customer should be distributed along the chain.
The final remark of this study is that the fundamental beliefs of supply chain
management have the prerequisites for successful implementation, but they have
38
7. Some Directions for Development of Supply Chain Management
to be developed in a way that enables adjustment in different industries. With

respect to the iron ore industry, the concept of supply chain management would
require further developed fundamental beliefs with a less fundamentalistic scope.
39
References
References
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References
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References
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43
Appendix A
Interview Guide to the study “Supply Chain Management in

the Iron Ore Industry - overview and case study”
Name……………………………………………………………………………
Company ……………..…………………………………………………………
Position……………………………………………………………………………
Function/work tasks ………………………………………………….…..………
Views upon the Fundamental Ideas of SCM (own opinions)
Describe the supply chain/network your company is situated in (actors/compa-

nies), upstream and downstream? …………………………………………
……………………………………………………………………………………
Do you have long-term relationships with the other actors in your supply chain?
Number of years? ………………………………………………………………
……………………………………………………………………………………
Which legal connections do you have to the other companies in your supply
chain? .…………………………………………………………………………
…………………………………………………………………………………
1
How do you consider the operations and results of a company are affected by the
other actors/companies in their supply chain? …………………………………
……………………………………………………………………………………
How far downstream and upstream in the supply chain do you consider it
rewarding to focus a company’s/department’s work on? …..……………………
……………………………………………………………………………………
How can a company coordinate/integrate its operations with other companies in
a supply chain? ……………………………….………………..….…………
……………………………………………………………………………………
Do you consider it correct to strive towards win-win relationships in relation to
other companies in the supply chain? Give examples. …………………………
……………………………………………………………………………………
Can you imagine a situation where one company would increase its costs to
benefit another company in the supply chain (extended total cost perspective)?
..…………………………………………………………………………………
Would you consider viewing the industry you are working in as constituted by a
number of competing supply chains? If yes, describe some of those? Do you
consider this metaphor meaningful? ………………………………………..…….
……………………………………………………………………………………
The company’s influences of SCM ideas (the actions of the company)
End Customer Focus

Which companies or actors in the supply chain does your company/department
focus its work on? Why particularly these? ……………………………………
……………………………………………………………………………………
Is the demand for your products fluctuating? How? Why? ..…………………….
……………………………………………………………………………………
Coordination and Integration along the Material Flow

Information systems? Which information do you get from the other actors/
companies in your supply chain? …………………………………………………
……………………………………………………………………………………
2
Which information do you give to the other actors/companies in your supply
chain? ……………………………………………………………………………
……………………………………………………………………………………
Do you plan together (on your initiative or someone else’s) with some actors/
companies in your supply chain? If yes, what kind of planning, e.g., storage,
transport, production? ……………………………………………………………
……………………………………………………………………………………
Which gains are attained through common planning? ……..……………………
……………………………………………………………………………………
How do you consider your number of suppliers? Do you strive to reduce the
number of suppliers? Of yes, why? ….……………………………………………
…………………………………………………………………………………….
Win-Win Relationships
When you plan an investment or the like do you then consider which conse-
quences it will have for the other companies in your supply chain? If yes, which
companies? How? …………………………………………………………
……………………………………………………………………………………
How do you divide the gains and risks of a “common” investment, a new design
for transportation e.g., where several actors/companies are involved in making it
come true? ………………………………………………………………………
………………………………………………...…………………………………
Give examples of decisions/ways in which you used/use SCM ideas? ……….
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………

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1997:29

A Conceptual and Empirical Examination of the

Department of Business Administration and Social Sciences

1997:29 • ISSN: 1402 - 1757 • ISRN: LTU - LIC - - 97/29 - - SE

Lic.uppsats 97/29 1 98-03-25, 08.19

Akademisk uppsats som för avläggande av teknologie licentiatexamen i industriell logis-

Licentiate Thesis: 1997:29

Now this journey has ended and I will travel on…

Luleå, September 1997

Supply chain management is viewed in this study as a management concept or

2. ON MANAGEMENT CONCEPTS ................................................ 5

4. EXAMINATION OF THE REFERENCE NETWORK...................19

5. EXAMINATION WITH RESPECT TO STATED OBJECTIVES

7. CONVERGENT VALIDITY OF SUPPLY CHAIN MANAGEMENT47

8. DISCRIMINANT VALIDITY OF SUPPLY CHAIN MANAGEMENT

Supply chain management follows a trend among management concepts empha-

The importance of supply chain management is also understood by the practitio-

customer. Similar descriptions of the logistics evolution can be found in Anscomb

In contrast to the view of the logistics evolution described above it is interesting

Westbrook, Bowersox and Closs view supply chain management as a manage-

The degree of novelty of the ideas of supply chain management is an interesting

2.1 What is a Management Concept?

Based upon the apprehensions of management above it might be possible to say

• Scientific management (Taylor)

Resources & Activites

In the management literature the terms management concept, management the-

2.2 What is a Theory?

Within academic circles, the sciences, including mathematics, provide structures

According to Ackoff et al. (1962) and Hempel (1965) a theory is constituted by

The ideas or statements of a theory can be e.g., descriptive, explanatory, predic-

This discussion of management concepts interchangeable with management the-

Finding data to analyze concerning a management concept like supply chain

3.1 Overview of the Method

Chap 4. Examination of 3.3 Construction of

Chap 5. Examination with respect

Chap 7. Examination of the 3.5 Discussion of

3.7 Choice of literature Chap 8. Examination of 3.6 Discussion of

Figure 3.1 The procedure of the study and chapter directions.

3.2 Choice of Literature representing Supply Chain Management

3.3 Construction of the Reference Network

3.4 Choice of Examination Aspects

3.4.1 Stated Definitions

Nevertheless, some stated definitions of a specific management concept normally

3.4.2 Stated Objectives

The real or overall objectives which are supposed to be achieved by a manage-

In order to reduce the confusion of unrelated coexisting objectives, the stated

Figure 3.2 Illustration of a hierarchical weave of objectives.

3.4.3 Stated Fundamental Beliefs

Primitive fundamental Primitive fundamental

Derived fundamental belief A

Derived fundamental belief B

Derived fundamental belief C

3.4.4 Stated Theory Relations

3.5 Convergent Validity

The convergent validity of supply chain management will be examined with

3.6 Discriminant Validity

3.7 Choice of Literature Representing the Forerunners

4. Examination of the Reference Network

1983 1985 1987 1989 1991 1993 1995

5. Examination with Respect to Stated Objectives and

5.1 Stated Objectives of Supply Chain Management

The original objective of supply chain management according to Cooper (1993), to

Anscomb (1994) describes a “Fourth wave” in logistics improvement called “Maxi-