Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)

Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)





There are two Areas where FSCM/SCF names are used but in different contexts.

  • Inter firm FSCM
  • Intra firm FSCM


Inter firm F-SCM

  • Trade Finance
  • Supply Chain Finance (SCF)
  • Value Chain Finance
  • Supplier Finance
  • Inter firm Finance
  • Reverse Factoring
  • Collaborative  Cash to Cash Cycles Management

During 2008 global financial crisis, the trade financing dried up resulting in decline in trade of goods and services.

Since the crisis, Financial De-globalization and Decline of Correspondent Banking has also made availability of financial credit harder.

Cash flow and working capital management is helped by inter firm collaboration among Suppliers and Buyers.

Financial Institutions which provide trade credit also benefit from inter firm collaboration.

 From SUPPLY CHAIN FINANCE FUNDAMENTALS: What It Is, What It’s Not and How it Works

What Supply Chain Finance is Not

The world of trade finance is complex and varied. There are numerous ways to increase business capital on hand and, in many cases, the differences are slightly nuanced. Given this landscape, it’s not just important to understand what supply chain finance is; it’s also important to understand what it is not.

It is not a loan. Supply chain finance is an extension of the buyer’s accounts payable and is not considered financial debt. For the supplier, it represents a non-recourse, true sale of receivables. There is no lending on either side of the buyer/supplier equation, which means there is no impact to balance sheets.

It is not dynamic discounting or an early payment program. Early payment programs, such as dynamic discounting, are buyer-initiated programs where buyers offer suppliers earlier payments in return for discounts on their invoices. Unlike supply chain finance, buyers are seeking to lower their cost of goods, not to improve their cash flow. Dynamic discounting and early payment programs often turn out to be expensive for both suppliers (who are getting paid less than agreed upon) and buyers who tie up their own cash to fund the programs.

It is not factoring. Factoring enables a supplier to sell its invoices to a factoring agent (in most cases, a financial institution) in return for earlier, but partial, payment. Suppliers initiate the arrangement without the buyer’s involvement. Thus factoring is typically much more expensive than buyer-initiated supply chain finance. Also, suppliers trade “all or nothing” meaning they have no choice to participate from month-to-month to the degree that their cash flow needs dictate. Finally, most factoring programs are recourse loans, meaning if a supplier has received payment against an invoice that the buyer subsequently does not pay, the lender has recourse to claw back the funds.


From Mckinsey on Payments



From Financial Supply Chain Management



From Best Practices in Cash Flow Management and Reporting






From Financing GPNs through inter-firm collaboration?
Insights from the automotive industry in Germany and Brazil

fscm 3


Intra Firm F-SCM

  • Working Capital Management
  • Cash Flow Management
  • Liquidity Management
  • Cash to Cash Conversion Cycle Management (C2C Cycle/CCC)
  • Financial Supply Chain Management (F-SCM) in Manufacturing companies
  • Financial Supply chain management in financial institutions
  • Supply Chain Finance
  • Accounts Payable Optimization
  • Accounts Receivable Optimization
  • Operations and Finance Interfaces
  • Current Asset Management (Current Ratio Analysis)

This is not a new subject.  Corporate Finance, Financial Controls, and working capital management have been active business issues.  Benefits of Supply chain management include increase in inventory turnover and decline in current assets.

There are many world class companies who manage their supply chains well and work with minimal working capital.  Lean Manufacturing, Agile Manufacturing, JIT manufacturing are related concepts.  Just-In-Time manufacturing developed in Toyota Corp. reduces inventory portion of C2C cycle.  Other examples include

  • Apple
  • Walmart
  • Dell

Currently, most of the Supply Chain analytics efforts unfortunately do not integrate analysis of financial benefits of operating decisions.

There are many studies recently which suggest that Cash to Cash Conversion Cycle is a better determinant of corporate liquidity.  C2C Cycle is a dynamic liquidity indicator and Current Assets is a static indicator of liquidity.  I would like to point out that none of the studies relate C2C cycle with Current Ratio.  Current Ratio is based on balance sheet positions of current assets and current liabilities.  C2C cycle is based on flows in supply chains.  Accumulation of flow results in Current assets (Stock).  To make it Stock-Flow Consistent, more work is required.


From Supply Chain Finance: some conceptual insights.


From Financial Supply Chain Management



From The Interface of Operations and Finance in Global Supply Chains















Call for papers: Supply Chain Finance

Call for papers for Special Topic Forum in Journal of Purchasing and Supply Management (Manuscript Submission:  March 31, 2017)

Supply chain finance is a concept that lacks definition and conceptual foundation.  However, the recent economic downturn forced corporates to face a series of financial and economic difficulties that strongly increased supply chain financial risk, including bankruptcy or over-leveraging of debt.  The mitigation and management of supply chain financial risk is becoming an increasingly important topic for both practitioners and academics leading to a developing area of study known as supply chain finance.  There are two major perspectives related to the idea of managing finance across the supply chain.  The first is a relatively short-term solution that serves as more of a “bridge” and that is provided by financial institutions, focused on accounts payables and receivables.  The second is more of a supply chain oriented perspective – which may or may not involve a financial institution, focused on working capital optimization in terms of accounts payable, receivable, inventory, and asset management.  These longer-term solutions focus on strategically managing financial implications across the supply chain.

Recent years have seen a considerable reduction in the granting of new loans, with a significant increase in the cost of corporate borrowing (Ivashina and Scharfstein, 2010). Such collapse of the asset and mortgage-backed markets dried up liquidity from industries (Cornett et al., 2011). In such difficult times, firms (especially those with stronger bargaining power) forced suppliers to extend trade credit in order to supplement the reduction in other forms of financing (Coulibaly et al., 2013; Garcia-Appendini and Montoriol-Garriga, 2013). The general lack of liquidity, in particular for SMEs, has directly affected companies’ ability to stay in the market, reflecting on the stability of entire supply chains. There are many other factors influencing liquidity and financial health that are critical to assess.

These trends and the continued growth of outsourced spend have contributed considerably to the need for and spread of solutions and programs that help to mitigate and better manage financial risk within and across the supply chain.  One of the most important approaches is what is being termed Supply Chain Finance (SCF) (Gelsomino et al., 2016; Pfohl and Gomm, 2009; Wuttke et al., 2013a). SCF is an approach for two or more organizations in a supply chain, including external service provides, to jointly create value through means of planning, steering, and controlling the flow of financial resources on an inter-organizational level (Hofmann, 2005; Wuttke et al., 2013b).  It involves the inter-company optimization of financial flows with customers, suppliers and service providers to increase the value of the supply chain members  (Pfohl and Gomm, 2009).  According to Lamoureux and Evans (2011) supply chain financial solutions, processes, methods are designed to improve the effectiveness of financial supply chains by preventing detrimental cost shifting and improving the visibility, availability, delivery and cost of cash for all global value chain partners.  The benefits of the SCF approach include reduction of working capital, access to more funding at lower costs, risk reduction, as well as increase of trust, commitment, and profitability through the chain (Randall and Farris II, 2009).

Literature on SCF is still underdeveloped and a multidisciplinary approach to research is needed in this area. In order to better harmonize contributions of a more financial nature with ones coming from the perspective of purchasing & supply chain, there is a need of developing theory on SCF, starting with a comprehensive definition of those instruments or solutions that constitute the SCF landscape. SCF has been neglected in the Purchasing & Supply Management (PSM) literature, although PSM plays a critical role in managing finance within the supply chain.  PSM uses many of the processes and tools that are part of a comprehensive supply chain financial program to better manage the supply base, in terms of relationships, total cost of ownership, cost strategies and pricing volatility (see for example Shank and Govindarajan 1992). Reverse factoring is a technique which is also widely used to manage the supply base (Wuttke et al, 2013a) as is supplier development and investment in suppliers.

Research on SCF from a PSM perspective needs further development. In particular, empirical evidence would prove useful for testing existing models and hypotheses, addressing the more innovative schemes and investigating the adoption level and the state of the art of different solutions. Research is also needed for the development of a general theory of supply chain finance.  There is also limited research that focuses on the link between supply chain financial tools and supply chain financial performance.  Finally, considering the plurality of solutions that shape the SCF landscape, literature should move towards the definition of holistic instruments to choose the best SCF strategy for a supply chain, considering its financial performance and the contextual variables (e.g. structure, bargaining power) that characterize it.

Potential topics

The purpose of this special topic forum is to publish high-quality, theoretical and empirical papers addressing advances on Supply Chain Finance. Original, high quality contributions that are neither published nor currently under review by any other journals are sought. Potential topics include, but are not limited to:

  • Theory development, concept and definition of SCF
  • Taxonomy of SCF solutions
  • Strategic cost management across the supply chain
  • Total cost of ownership
  • Life cycle assessment and analysis
  • Commodity risk and pricing volatility
  • Supply chain financial metrics and measures
  • Cost-benefit analysis
  • Relationship implications of supply chain finance
  • Tax and transfer pricing in the supply chain
  • Foreign exchange and global currency and financing risk
  • Financial network design and financial supply chain flows
  • The organizational perspective on SCF and the implementation process
  • Role of innovative technologies to support SCF ( (e.g. block chain, internet of things)
  • Supply chain collaboration for improved supply chain financial solutions
  • SCF adoption models, enablers and barriers
  • SCF from different party perspectives (especially suppliers and providers)
  • SCF and risk mitigation and management

Manuscript preparation and submission

Before submission, authors should carefully read the Journal’s “Instructions for Authors”. The review process will follow the Journal’s normal practice. Prospective authors should submit an electronic copy of their complete manuscript via Elsevier’s manuscript submission system ( selecting “STF Supply Chain Finance” as submission category and specifying the Supply Chain Finance topic in the accompanying letter. Manuscripts are due March 31, 2017 with expected publication in June of 2018.


Federico Caniato, Politecnico di Milano, School of Management,

Michael Henke, TU Dortmund and Fraunhofer IML,

George A. Zsidisin, Virginia Commonwealth University,


Cornett, M.M., McNutt, J.J., Strahan, P.E., Tehranian, H., 2011. Liquidity risk management and credit supply in the financial crisis. J. financ. econ. 101, 297–312.

Coulibaly, B., Sapriza, H., Zlate, A., 2013. Financial frictions, trade credit, and the 2008–09 global financial crisis. Int. Rev. Econ. Financ. 26, 25–38.

Garcia-Appendini, E., Montoriol-Garriga, J., 2013. Firms as liquidity providers: Evidence from the 2007–2008 financial crisis. J. financ. econ. 109, 272–291.

Gelsomino, L.M., Mangiaracina, R., Perego, A., Tumino, A., 2016. Supply Chain Finance: a literature review. Int. J. Phys. Distrib. Logist. Manag. 46, 1–19.

Govindarajan, Vijay, and John K. Shank. “Strategic cost management: tailoring controls to strategies.” Journal of Cost Management 6.3 (1992): 14-25.

Wuttke, D. A., Blome, C., Foerstl, K., & Henke, M. (2013a). Managing the innovation adoption of supply chain finance—Empirical evidence from six European case studies. Journal of Business Logistics, 34(2), 148-166.

Wuttke, D. A., Blome, C., & Henke, M. (2013b). Focusing the financial flow of supply chains: An empirical investigation of financial supply chain management. International journal of production economics, 145(2), 773-789.

Hofmann, E., 2005. Supply Chain Finance: some conceptual insights. Logistik Manag. Innov. Logistikkonzepte. Wiesbad. Dtsch. Univ. 203–214.

Ivashina, V., Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. J. financ. econ. 97, 319–338.

Lamoureux, J.-F., Evans, T.A., 2011. Supply Chain Finance: A New Means to Support the Competitiveness and Resilience of Global Value Chains. Social Science Research Network, Rochester, NY.

Lekkakos, S.D., Serrano, A., 2016. Supply chain finance for small and medium sized enterprises: the case of reverse factoring. Int. J. Phys. Distrib. Logist. Manag.

Pfohl, H.C., Gomm, M., 2009. Supply chain finance: optimizing financial flows in supply chains. Logist. Res. 1, 149–161.

Randall, W., Farris II, T., 2009. Supply chain financing: using cash-to-cash variables to strengthen the supply chain. Int. J. Phys. Distrib. Logist. Manag. 39, 669–689.



Please see my Related Posts.

The Collapse of Global Trade during Global Financial Crisis of 2008-2009

The Dollar Shortage, Again! in International Wholesale Money Markets

Economics of Trade Finance

Hierarchical Planning: Integration of Strategy, Planning, Scheduling, and Execution

Production and Distribution Planning : Strategic, Global, and Integrated

Integrated Macroeconomic Accounts, NIPAs, and Financial Accounts

Key Sources of Research:


SUPPLY CHAIN FINANCE FUNDAMENTALS: What It Is, What It’s Not and How it Works

Call for papers: Supply Chain Finance

Call for papers for Special Topic Forum in Journal of Purchasing and Supply Management (Manuscript Submission:  March 31, 2017)



Peter Kristofik, Jenny Kok, Sybren de Vries, Jenny van Sten-van’t Hoff




Supply chain finance: optimizing financial flows in supply chains

Hans-Christian Pfohl • Moritz Gomm




Supply Chain Finance: some conceptual insights.

Hofmann, E. (2005)

In: Lasch, R./ Janker, C.G. (Hrsg.): Logistik Management – Innovative Logistikkonzepte, Wiesbaden
2005, S. 203-214.



Financial Supply Chain Management – A review

Georgios Vousinas




Basic areas of management of finance flow in supply chains

Marlena Grabowska1

Częstochowa University of Technology





Motorola’s global financial supply chain strategy

Ian D. Blackman

Christopher P. Holland

Timothy Westcott



Erik Hofmann

Herbert Kotzab


Financial Supply Chain Management – Neue Herausforderungen für die Finanz- und Logistikwelt.

Pfohl, H.-Chr./ Hofmann, E./ Elbert, R. (2003):

In: Logistik Management 5 (2003) 4, S. 10-26


Financing GPNs through inter-firm collaboration?
Insights from the automotive industry in Germany and Brazil

Christian Baumeister
Hans-Martin Zademach



Die Financial Chain im Supply Chain Management: Konzeptionelle Einordnung und Identifikation von Werttreibern.

Franke, J./ Pfaff, D./ Elbert, R./ Gomm, M./ Hofmann, E. (2005):

In: Ferstel, O. K./ Sinz, E. J./ Eckert, S./ Isselhorst, T. (Hrsg.): Wirtschaftsinformatik 2005. eEcono‐my, eGovernment, eSociety. Heidelberg 2005, S. 567‐584



Ein generisches Modell zur Identifikation von Verbesserungspotenzialen

Donovan Pfaff
Bernd Skiera



The Effects of Cross-Functional Integration on Profitability, Process
Efficiency, and Asset Productivity

Morgan Swink and Tobias Schoenherr,%20Process%20Efficiency.pdf



Quantifying and setting off network performance

Erik Hofmann




Developing and discussing a supply chain-oriented model of collaborative working capital management

Erik Hofmann, University of St.Gallen, Switzerland
& Herbert Kotzab, Copenhagen Business School, Denmark




The link between Purchasing and Supply Management maturity
models and the financial performance of international firms

Fábio Pollice
Afonso Fleury



A Buyer-Centric Supplier Payables Financing Initiative

Martin Jemdahl
Lund, 2015



Supply Chain Finance: Optimal Introduction and Adoption Decisions

David A. Wuttke, Constantin Blome, H. Sebastian Heese and Margarita



The Value of Supply Chain Finance

Xiangfeng Chen and Chenxi Hu


Supply Chain Finance “Is SCF ready to be applied in SMEs?”

Jan H Jansen



Win-win and no-win situations in supply chain finance: The case of accounts receivable programs

Erik Hoffman


Introducing a financial perspective in Supply Chain Management: a literature review on Supply Chain Finance

Luca M. Gelsomino, Riccardo Mangiaracina,
Alessandro Perego, Angela Tumino



Towards A Theory Of Supply Chain And Finance Using Evidence From A Scottish Focus Group

R. de Boer, R. Dekkers, L. M. Gelsomino, C. de Goeij, M. Steeman Q. Zhou,
S. Sinclair, V. Souter





Nataliia G. Silaeva




Blockchain-driven supply chain finance: Towards a conceptual framework from a buyer perspective

Yaghoob Omrana, Michael Henkeb, Roger Heinesc, Erik Hofmann



Selecting financial service providers for supply chains: How cross-functional collaboration can improve effectiveness and efficiency

Judith Martin

Prof. Dr. Erik Hofmann



Supply chain finance as a value added service offered by a lead logistics provider

Careaga Franco, V.G.
Award date:




Mirela Amariei
Tiberiu Avram
Ionela Barbuta
Simona Cristea
Sebastian Lupu
Mihaela Mihaila
Andreea Nita
Adriana Screpnic




Linking corporate strategy and supply chain management

Erik Hofmann



Concepts and Trade-Offs in Supply Chain Finance

Kasper van der Vliet



Supply Chain Finance as a Value Added Service offered by a Lead Logistics Provider

Victor Gerardo Careaga Franco


Value Chain Finance: How Banks can Leverage Growth Opportunities for SME Banking Customers

Qamar Saleem, Global SME Banking and Value Chain Specialist, IFC

Dr. Eugenio Cavenaghi, Managing Director -Trade, Export & Supply Chain Finance, Banco Santander




Supply-chain finance: The emergence of a new competitive landscape




Fintechs and the Financial Side of Global Value Chains— The Changing Trade-Financing Environment





Global Supply Chain Management: Front and Center for Treasurers
Delivering Innovative Solutions that Integrate Financial and Physical Supply Chains

JP Morgan




Supply Chain Finance

Aberdeen Group





Supply chain financing: Using cash-to-cash variables to strengthen the supply chain

Wesley S. Randall

M. Theodore Farris II





Supply Chain Finance: ANew Means to Support the Competitiveness and Resilience of Global Value Chains

Jean-François Lamoureux and Todd Evans




Maximising the value of supply chain finance

van der Vliet, K.; Reindorp, M.J.; Fransoo, J.C.





The Interface of Operations and Finance in Global Supply Chains

Lima Zhao





Supply Chain Finance A conceptual framework to advance research

Kasper van der Vliet, Matthew J. Reindorp, Jan C. Fransoo
Beta Working Paper series 418




A. Ivakina, N. Zenkevich

# 9 (E) – 2017



A conceptual model for supply chain finance for SMEs at operational level ‘An essay on the Supply Chain Finance paradigm ….

Jan H Jansen




Cash Flow Management and Manufacturing Firm Financial Performance: A Longitudinal Perspective

James R. Kroes

Andrew S. Manikas





Sari Monto






Miia Pirttilä




Impact of Cash Conversion Cycle on Working Capital through Profitability: Evidence from Cement Industry of Pakistan

Afaq Ahmed Khan1, Mohsin Ayaz2, Raja Muhammad Waseem3, Sardar Osama

Bin Haseeb Abbasi4, Moazzam Ijaz




Cash Conversion Cycle and Firms’ Profitability – A Study of Listed Manufacturing Companies of Pakistan

1Raheem Anser, 2Qaisar Ali Malik




The Power of Supply Chain Finance

How companies can apply collaborative finance models in their supply chain to
mitigate risks and reduce costs

M. Steeman



Supply Chain Finance Payable and Receivable Solutions Guide


JP Morgan

A Conceptual Model of Supply Chain Finance for SMEs at Operational Level

 Jan H Jansen

21 November 2017’An_essay_on_the_Supply_Chain_Finance_paradigm_’_Vestnik_Chelyabinsk_State_University_Version_2_18_April_2017/links/5a17d84aaca272df0808ca79/A-conceptual-model-for-supply-chain-finance-for-SMEs-at-operational-level-An-essay-on-the-Supply-Chain-Finance-paradigm-Vestnik-Chelyabinsk-State-University-Version-2-18-April-2017.pdf



Cash-to-cash: The new supply chain management metric

M Theodore Farris II; Paul D Hutchison

International Journal of Physical Distribution & Logistics Management; 2002




Integrating financial and physical supply chains: the role of banks in enabling supply chain integration

Rhian Silvestro

Paola Lustrato





Integration of Finance and Supply Chain: Emerging Frontier in Growing Economies

(A Case Study of Exporting Companies)

Muhammad Ahmar Saeed

Xiaonan Lv


Research at the Interface of Finance, Operations, and Risk Management (iFORM): Recent Contributions and Future Directions

Volodymyr Babich

Panos Kouvelis






Interface of Finance, Operations, and Risk Management (iFORM) SIG





Cash to Cash Cycle with a Supply Chain Perspective

Can Duman
Sawanee Sawathanon




Monika Bolek, PhD




Does working capital management affect cost of capital?
A first empirical attempt to build up a theory for supply chain finance

Erik Hofmann, Judith Martin





Principle of Accounting System Dynamics – Modeling Corporate Financial Statements –

Kaoru Yamaguchi




Money and Macroeconomic Dynamics

Accounting System Dynamics Approach

Edition 3.2


Kaoru Yamaguchi Ph.D.

Japan Futures Research Center




Working Capital Management Model in value chains

Timo Eskelinen






Global Supply Chain Finance Forum





Pan Theo Große-Ruyken
Stephan M. Wagner
Wen-Fong Lee

Baltic Management Review

Volume 3 No 1





Best Practices in Cash Flow Management and Reporting

Hans-Dieter Scheuermann

Financial Supply Chain Management


Gantt Chart Simulation for Stock Flow Consistent Production Schedules

Gantt Chart Simulation for Stock Flow Consistent Production Schedules


I have knowledge of two software which do Gantt chart simulation for production scheduling.  These are used by top most companies in the world for production planning and scheduling now a days known as Supply Chain Management (SCM).

Production Schedules are stock flow consistent which means that starting inventories, and unused production of products result in cumulative inventory which is plotted for each of the product.

Production and Shipments (arrivals and dispatched) create Flows and Inventory levels indicate Stock level positions.

Gantt Chart simulators are excellent tools for operations management in plants.

The first Gantt chart was actually developed by Karol Adamiecki in Poland.  He called it a Harmonogram.  Henry Gantt in 1910 published first gantt chart which was later than publication by Karol Adamiecki.

These two charts below show Simulator window in which Gantt chart and inventory level plots are displayed.

Gantt Chart Simulator in Aspen Tech Plant Scheduler for Production Scheduling



Gantt Chart Simulator in Atlantic Decision Sciences Scheduler

Scheduling Board Single Chart

Key Sources for Research:


A Presentation by Chris Jones on Evolution of Graphical Production Scheduling Software

at the Cornell University Deptt of ORIE




Atlantic Decision Sciences



Aspen Technology



History of Gantt Chart



History of Production Scheduling



The harmonogram: an overlooked method of scheduling work.

Marsh, E. R. (1976).

Project Management Quarterly, 7(1), 21–25.


The Harmonogram of Karol Adamiecki

Edward R. Marsh


Karol Adamiecki

Production Chain Length and Boundary Crossings in Global Value Chains

Production Chain Length and Boundary Crossings in Global Value Chains


From Structure and length of value chains

In a value chain, value is added in sequential production stages and is carried forward from one producer to the next in the form of intermediate inputs. Value chains driven by the fragmentation of production are not an entirely new economic phenomenon, but the increasing reliance on imported intermediate inputs makes value chains global.

According to a 2013 report by the OECD, WTO and UNCTAD for the G-20 Leaders Summit, “Value chains have become a dominant feature of the world economy” (OECD et al., 2013).

Obviously, this dominant feature of the world economy needs measuring and analyzing. Policy-relevant questions include, but are not limited to:

  • what is the contribution of global value chains to economy GDP and employment? how long and complex are value chains?
  • what is the involvement and position of individual industries in global value chains? do multiple border crossings in global value chains really matter?

These and related questions generated a considerable amount of investigations proposing new measures of exports and production to account for global value chains. Some of those were designed to re-calculate trade  flows in value added terms, whereas other provided an approximation of the average length of production process.

A relatively new stream of research focuses on a deep decomposition of value added or final demand ( rather than exports or imports ) into components with varied paths along global value chains and measurements of the length of the related production processes. Consider, for example, a petrochemical plant that generates some value added equal to its output less all intermediate inputs used. We would be interested to know which part of this value added, embodied in the petrochemicals, is used entirely within the domestic economy and which part is exported.

We would also inquire how much of the latter satisfies final demand in partner countries and how much is further used in production and, perhaps, in exports to third countries and so on. We would be interested, in particular, in counting the number of production stages the value added in these petrochemicals passes along the chain before reaching its final user.


From Structure and length of value chains




From Structure and length of value chains

A natural question is whether this method can be applied to the real economy with myriads of products, industries and dozens of partner countries? It can surely be applied if the data on inter-industry transactions are organized in the form of input-output accounts, and the computations are performed in block matrix environment. In fact, the measurement of the number of production stages or the length of production chains has attracted the interest of many input-output economists. The idea of simultaneously counting and weighting the number of inter-industry transactions was formalized by Dietzenbacher et al. (2005). Their “average propagation length” (APL) is the average number of steps it takes an exogenous change in one industry to affect the value of production in another industry. It is the APL concept on which we build the count of the number of production stages from the petrochemical plant to its consumers in our simplified example above. The only difference is that Dietzenbacher et al. (2005), and many authors in the follow-up studies, neglect the completion stage. First applications of the APL concept to measure the length of cross-border production chains appear in Dietzenbacher and Romero (2007) and Inomata (2008), though Oosterhaven and Bouwmeester (2013) warn that the APL should only be used to compare pure interindustry linkages and not to compare different economies or different industries.

Fally (2011, 2012) proposes the recursive definitions of two indices that quantify the “average number of embodied production stages” and the “distance to final demand”.  Miller and Temurshoev (2015), by analogy with Antras et al. (2012), use the logic of the APL and derive the measures of “output upstreamness” and “input downstreamness” that indicate industry relative position with respect to the nal users of outputs and initial producers of inputs. They show that their measures are mathematically equivalent to those of Fally and the well known indicators of, respectively, total forward linkages and total backward linkages. Fally (2012) indicates that the average number of embodied production stages may be split to account for the stages taking place within the domestic economy and abroad. This approach was implemented in OECD (2012), De Backer and Miroudot (2013) and elaborated in Miroudot and Nordstrom (2015).

Ye et al. (2015) generalize previous length and distance indices and propose a consistent accounting system to measure the distance in production networks between producers and consumers at the country, industry and product levels from different economic perspectives. Their “value added propagation length” may be shown to be equal to Fally’s embodied production stages and Miller & Temurshoev’s input downstreamness when aggregated across producing industries.

Finally, Wang et al. (2016) develop a technique of additive decomposition of the average production length. Therefore, they are able to break the value chain into various components and measure the length of production along each component. Their production length index system includes indicators of the average number of domestic, cross-border and foreign production stages. They also propose new participation and production line position indices to clearly identify where a country or industry is in global value chains. Importantly, Wang et al. (2016) clearly distinguish between average production length and average propagation length, and between shallow and deep global value chains.

This paper builds on the technique and ideas of Wang et al. (2016) and the derivation of the weighted average number of border crossings by Muradov (2016). It re-invents a holistic system of analytical indicators of structure and length of value chains. As in Wang et al. (2016), global value chains are treated here within a wider economy context and are juxtaposed with domestic value chains. This enables developing new indices of orientation towards global value chains. The novel deliverables of this paper are believed to include the following. First, all measurements are developed with respect to output rather than value added or final product  flows. This is superior for interpretation and visualization purposes because a directly observable economic variable ( output ) is decomposed in both directions, forwards to the destination and backwards to the origin of value chain. It is also shown that at a disaggregate country-industry level, the measurement of production length is equivalent with respect to value added and output. Second, the decomposition of output builds on a factorization of the Leontief and Ghosh inverse matrices that allows for an explicit count of production stages within each detailed component. Third, the system builds on a refined classication of production stages, including final and primary production stages that are often neglected in similar studies. Fourth, the paper re-designs the average production line position index and proposes new indices of orientation towards global value chains that, hopefully, avoid overemphasizing the length of some unimportant cross-border value chains. Fifth, a new chart is proposed for the visualization of both structure and length of value chains. The chart provides an intuitive graphical interpretation of the GVC participation, orientation and position indices.

It is also worth noting that both Wang et al. (2016) and this paper propose similar methods to estimate the intensity of GVC-related production in partner countries and across borders. This is not possible with previous decomposition systems without explicitly counting the average number of production stages and border crossings.


 Key Terms:

  • Average Propagation Length
  • National Boundaries
  • Networks
  • Value Chains
  • Supply Chains
  • Upstreamness
  • Downstreamness
  • Structure of Chains
  • Smile Curves
  • Vertical Specialization
  • Fragmentation of Production
  • Shock Amplifiers
  • Shock Absorbers
  • Production Sharing
  • World Input Output Chains
  • WIOD
  • Counting Boundary Crossings
  • Production Staging
  • Slicing Up Value Chains
  • Mapping Value Chains
  • Geography of Value Chains
  • Spatial Economy

Key Sources of Research:



Characterizing Global Value Chains

Zhi Wang

Shang-Jin Wei

Xinding Yu and Kunfu Zhu

Background Paper Conference

Beijing, 17-18 March 2016



The Great Trade Collapse: Shock Amplifiers and Absorbers in Global Value Chains

Zhengqi Pan





Zhi Wang
Shang-Jin Wei
Xinding Yu
Kunfu Zhu
March 2017




Characterizing Global Value Chains

Zhi Wang
Shang-Jin Wei,
Xinding Yu and Kunfu Zhu

September 2016,%20Zhi.pdf





International Bank for Reconstruction and Development/The World Bank




Global Value Chains




4-5 December 2012
The OECD Conference Centre, Paris




Structure and length of value chains

Kirill Muradov


Production Staging: Measurement and Facts

Thibault Fally

August 2012





Robert Koopman
Zhi Wang
Shang-Jin Wei

November 2012





Robert Koopman
William Powers
Zhi Wang
Shang-Jin Wei

September 2010




Measuring the Upstreamness of Production and Trade Flows

By Pol Antràs, Davin Chor, Thibault Fally, and Russell Hillberry





Using Average Propagation Lengths to Identify Production Chains in the Andalusian Economy



Production Chains in an Interregional Framework: Identification by Means of Average Propagation Lengths





Vertical Integration and Input Flows

Enghin Atalay

Ali Hortaçsu

Chad Syverson





The Rise of Vertical Specialization Trade

Benjamin Bridgman

January 2010





David Hummels
Jun Ishii
Kei-Mu Yi*

March 1999



Accounting for Intermediates: Production Sharing and Trade in Value Added

Robert C. Johnson

Guillermo Noguera

First Draft: July 2008
This Draft: June 2009

First Draft: July 2008
This Draft: May 2011





Robert C. Johnson
Guillermo Noguera

June 2012




Can Vertical Specialization Explain The Growth of World Trade

Kei-Mu Yi





Kei-Mu Yi

Federal Reserve Bank of Philadelphia
June 2008
This revision: November 2008




Global Value Chains: New Evidence for North Africa

D. Del Prete, G. Giovannetti, E. Marvasi





Slicing Up Global Value Chains

Marcel Timmera Abdul Erumbana Bart Losa
Robert Stehrerb Gaaitzen de Vriesa

Presentation at International Conference on Global Value Chains and
Structural Adjustments,

Tsinghua University, June 25, 2013




On the Geography of Global Value Chains

Pol Antràs

Alonso de Gortari

May 24, 2017



Counting Borders in Global Value Chains

Posted: 12 Jul 2016

Last revised: 29 Aug 2016

Kirill Muradov



Determinants of country positioning in global value chains

Kirill Muradov

May 2017










On the fragmentation of production in the us

Thibault Fally

July 2011

A New Measurement for International Fragmentation of the Production Process: An International Input-Output Approach

Inomata, Satoshi

Output Upstreamness and Input Downstreamness of Industries/Countries in World Production

Ronald E. Miller

Umed Temurshoev


Date Written: July 9, 2015

Input-Output Calculus of International Trade

Kirill Muradov


Date Written: June 1, 2015

Posted: 9 Sep 2015 Last revised: 5 Oct 2015




 Made in the World?

S. Miroudot

Hakan Nordstrom

Date Written: September 2015




The Average Propagation Length Conflicting Macro, Intra-industry, and Interindustry Conclusions

October 2013
Jan Oosterhaven

Maaike C. Bouwmeester




Accounting Relations in Bilateral Value Added Trade

Robert Stehrer

May 2013

Whither Panama? Constructing a Consistent and Balanced World SUT System including International Trade and Transport Margins

Robert Stehrer

Quantifying International Production Sharing at the Bilateral and Sector Levels

Zhi Wang, Shang-Jin Wei, Kunfu Zhu

NBER Working Paper No. 19677
Issued in November 2013, Revised in March 2014

Measuring Smile Curves in Global Value Chains

Ming YE, Bo MENG , and Shang-jin WEI

August 2015





by Alessandro Borin and Michele Mancini


Intra Industry Trade and International Production and Distribution Networks

Intra Industry Trade and International Production and Distribution Networks


Inter Industry Trade is known as One way Trade.

Intra Industry Trade is known as Two way Trade.


Intra Industry Trade (IIT)

  • Can be Intra Firm or Inter Firm (Arms’ Length)
  • Can be Vertical or Horizontal (VIIT and HIIT)

Intra Industry Trade is measured using G-L Index among other indices.

Import and Export of Parts and Components (Intermediate Goods) causes measurement issues of IIT.


From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry

Intra-industry trade is defined as the simultaneous export and import of products, which belong to the same statistical product category. According to Kol and Rayment (1989), three types of bilateral trade flows may occur between countries: inter-industry trade, horizontal IIT and vertical IIT. Historically, the international trade between countries has been inter-industry form, which is described as the exchange of products belonging to different industries. Traditional trade models, such as Heckscher-Ohlin model or Ricardian model, have tried to explain this type of trade based on comparative advantage in relative technology and factor endowments. However, a significant portion of the world trade over the last three decades took the form of the intra-industry trade rather than inter-industry trade. As a result, the traditional trade models has been considered to be inadequate in explaining this new trade pattern because in these models there is no reason for developed countries to trade in similar but slightly differentiated goods.


From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry

Horizontal IIT has been defined as the exchange of similar goods that are similar in terms of quality but have different characteristics or attributes. The models developed by Dixit and Stiglitz (1977), Lancaster (1980), Krugman (1980, 1981), Helpman (1981), and Helpman and Krugman (1985) explain horizontal IIT by emphasizing the importance of economies of scale, product differentiation, and demand for variety within the setting of monopolistic competition type markets. In these models, IIT in horizontally differentiated goods should be greater, the greater the difference in income differences and relative factor endowments between the trading partners.


From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry

In contrast, vertical IIT represents trade in similar products of different qualities but they are no longer the same in terms unit production costs and factor intensities.5 Falvey (1981) and Falvey and Kierzkowski (1987) have shown that the IIT in vertically differentiated goods occurs because of factor endowment differences across countries. In particular, Falvey and Kierzkowski (1987) suggest that the amount of capital relative to labor used in the production of vertically differentiated good indicates the quality of good. As a consequence, in an open economy, higher- quality products are produced in capital abundant countries whereas lower-quality products are produced in labor abundant countries. This will give rise to intra-industry trade in vertically differentiated goods: the capital abundant country exports higher-quality varieties and labor abundant country exports lower-quality products. The models of vertical IIT predict that the share of vertical IIT will increase as countries’ income and factor endowments diverge.

From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry

Various ways of calculating intra-industry trade have been proposed in the empirical literature, including the Balassa Index, the Grubel-Lloyd (G-L) index, the Aquino index. The most widely used method for computing the IIT is developed by Grubel and Lloyd (1971). However, beside aggregation bias, the traditional G-L index has one major problem often cited in the empirical literature. The unadjusted G-L index is negatively correlated with a large overall trade imbalance. With national trade balances, the level of IIT in a country will be clearly underestimated. To avoid this problem, Grubel and Lloyd (1975) proposed another method to adjust the index by using the relative size of exports and imports of a particular good within an industry as weights.


From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry



From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry



From:  World Trade Flows Characterization: Unit Values, Trade Types and Price Ranges





Key Terms:

  • Intra Industry Trade
  • Inter Industry Trade
  • Horizontal IIT
  • Vertical IIT
  • Ricardo’s Theory of Comparative Advantage
  • Factor Inputs
  • Factor Endowments
  • Factor Prices
  • Heckscher-Ohlin Model of Trade
  • Stolper-Samuelson Theorem
  • Grubel – Lloyd Index
  • Fontagné and Freudenberg index (FF)
  • New Economic Geography (NEG)
  • Spatial Economy
  • SITC Codes
  • Balassa Index
  • Acquino Index
  • Bilateral Trade Flows


Please see my related posts:

Understanding Trade in Intermediate Goods

Trends in Intra Firm Trade of USA

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

Relational Turn in Economic Geography

Understanding Global Value Chains – G20/OECD/WB Initiative



Key Sources of Research:



International Production and Distribution Networks in East Asia:  Eighteen Facts, Mechanics, and Policy Implications

Fukunari Kimura





The Formation of International Production and Distribution Networks in East Asia


Mitsuyo Ando and Fukunari Kimura



“The mechanics of production networks in Southeast Asia: the fragmentation theory approach”

Fukunari Kimura

July 2007




“Fragmentation in East Asia: Further Evidence”

May 2006

Mitsuyo Ando

Fukunari Kimura




Modern International Production and Distribution Networks: the Role of Global Value Chains

Fukunari Kimura





Two-dimensional Fragmentation in East Asia: Conceptual Framework and Empirics

Fukunari Kimura and Mitsuyo Ando




Deepening and Widening of Production Networks in ASEAN

Ayako Obashi

Fukunari Kimura



Global production sharing and trade patterns in East Asia

Prema-chandra Athukorala

June 2013,%20Ali_Reading2_Global%20Production%20Sharing%20and%20Trade%20Patterns%20in%20East%20Asia.pdf





Laike Yang





International Production Networks:  Contributions of Economics to Policy Making

Fukunari Kimura






Production networks in East Asia: What we know so far

Fukunari Kimura and Ayako Obashi

No. 320
November 2011


Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry

Kemal Turkcan and Aysegul Ates





Vertical Intra-Industry Trade: An Empirical Examination of the U.S. Auto-Parts Industry

Kemal TÜRKCAN and Ayşegül ATEŞ

(This version October 2008)




Intra-industry trade, fragmentation and export margins: An empirical examination of sub-regional international trade

Yushi Yoshida



A Practical Guide to Trade Policy Analysis





Intra-Industry Trade between Japan and European Countries: a Closer Look at the Quality Gap in VIIT

Yushi Yoshida, Nuno Carlos Leitão and Horácio Faustino



Evolving pattern of intra-industry trade specialization of the new Member States (NMS) of the EU: the case of automotive industry

Elżbieta Kawecka-Wyrzykowska









Globalizing Production Structure and Intra-Industry Trade: The Case of Turkey

Emine Kılavuz

Hatice Erkekoğlu

Betül Altay Topcu





On the Measurement of Vertical and Horizontal Intra-Industry Trade: A Geometric Exposition

A.K.M. Azhar Robert J.R. Elliott




 Determinants of United States’ Vertical and Horizontal Intra-Industry Trade





World Trade Flows Characterization: Unit Values, Trade Types and Price Ranges

Charlotte Emlinger & Sophie Piton


Understanding Trade in Intermediate Goods

Understanding Trade in Intermediate Goods


One of the key source of International Trade statistics is a document published by the UNCTAD since 2013:

Key Statistics and Trends in International Trade

Please see references below to access reports for 2015 and 2016.


In 2014, out of USD 18.5 trillion in global trade, about USD 8 trillion was in intermediate goods.



Introduction: the international dimension of the exchange of intermediate inputs

1. Trade in intermediate inputs has been steadily growing over the last decade. However, despite the internationalisation of production and the increasing importance of outsourcing and foreign investment, some studies have found little rise in intermediate goods trade as a share of total trade1. More than half of goods trade is however made up of intermediate inputs and trade in services is even more of an intermediate type with about three quarters of trade flows being comprised of intermediate services. Trade in intermediate goods and services thus deserves special attention from trade policymakers and so far few studies have investigated how it differs from trade in consumption goods or services.

2. An intermediate good can be defined as an input to the production process that has itself been produced and, unlike capital, is used up in production3. The difference between intermediate and capital goods lies in the latter entering as a fixed asset in the production process. Like any primary factor (such as labour, land, or natural resources) capital is used but not used up in the production process4. On the contrary, an intermediate good is used, often transformed, and incorporated in the final output. As an input, an intermediate good has itself been produced and is hence defined in contrast to a primary input. As an output, an intermediate good is used to produce other goods (or services) contrary to a final good which is consumed and can be referred to as a “consumption good”.

3. Intermediate inputs are not restricted to material goods; they can also consist of services. Thelatter can be potentially used as an input to any sector of the economy; that is for the production of the same, or other services, as well as manufacturing goods. Symmetrically, manufacturing goods can be potentially used to produce the same, or other manufacturing goods, as well as services.

4. An important question we can ask is how to identify inputs among all goods and services produced in an economy. Many types of goods can be easily distinguished as inputs, when their use excludes them from final consumption. Notable examples include chemical substances, construction materials, or business services. The exact same type of good used as an input to some production process can however be destined to consumption. For instance, oranges can be sold to households as a final good, as well as to a factory as an input for food preparation. Telecommunication services can be sold to individuals or to business services firms as an intermediate input for their output. The United Nations distinguish commodities in each basic heading on the basis of the main end-use (United Nations, 2007). It is however recognized that many commodities that are traded internationally may be put to a variety of uses. Other methodologies involve the use of input-output (I-O) tables to distinguish between intermediate and consumption goods.

5. The importance of intermediate goods and services in the economy and trade is associated with a number of developments in the last decades. Growth and increased sophistication of production has given birth to strategies involving fragmentation and reorganisation of firm’s activities, both in terms of ownership boundaries, as in terms of the location for production. In what follows, the international dimension of the exchange of intermediate goods and services is explored by clarifying terms and concepts as well as the links between trade in intermediate inputs and FDI.

From Key Statistics and Trends in International Trade 2015



From Key Statistics and Trends in International Trade 2015


 From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015


From Key Statistics and Trends in International Trade 2015

Trade networks relating to global value chains have evolved during the last 10 years. In 2004, the East Asian production network was still in its infancy. Most trade flows of parts and components concerned the USA and the European Union, with a number of other countries loosely connected with these two main hubs. As of 2014 trade of parts and components was much more developed. The current state is characterized not only by the prominent role of China, but also by a much more tightly integrated network with a much larger number of countries many of which have multiple connections to different hubs.

From Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy


Key sources of Research:



OECD Trade Policy Working Paper No. 93
by Sébastien Miroudot, Rainer Lanz and Alexandros Ragoussis




An Essay on Intra-Industry Trade in Intermediate Goods

Rosanna Pittiglio




The Rise of International Supply Chains: Implications for Global Trade




Growing Trade in Intermediate Goods: Outsourcing, Global Sourcing or Increasing
Importance of MNE Networks?

Jörn Kleinert
October 2000




Imported Inputs and the Gains from Trade

Ananth Ramanarayanan
University of Western Ontario
September, 2014




Key Statistics and Trends in International Trade 2015

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development




Key Statistics and Trends in International Trade 2016

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development



Integration of Trade and Disintegration of Production in the Global Economy

Robert C. Feenstra
Revised, April 1998





OECD, WTO and World Bank Group
Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014



Trade in Value Added: Concepts, Estimation and Analysis

Marko Javorsek* and Ignacio Camacho




The Similarities and Differences among Three Major Inter-Country Input-Output Databases and their Implications for Trade in Value-Added Estimates

Lin Jones and Zhi Wang, United States International Trade Commission Li Xin, Beijing Normal University and Peking University Christophe Degain, World Trade Organization

December, 2014



Advanced Topics in Trade
Lecture 9 – Multinational Firms and Foreign Direct Investment

Heiwai Tang – SAIS
April 8, 2015



Efforts to Measure Trade in Value-Added and Map Global Value Chains: A Guide

Andrew Reamer

May 29, 2014




Global Value Chains for Value Added and Intermediate Goods in Asia

N Shrestha





Global Value Chains: The New Reality of International Trade

Sherry Stephenson
December 2013



Asia and Global Production Networks Implications for Trade, Incomes and Economic Vulnerability

Benno Ferrarini

David Hummels




Participation of Developing Countries in Global Value Chains:
Implications for Trade and Trade-Related Policies

Przemyslaw Kowalski, Javier Lopez Gonzalez, Alexandros Ragoussis
and Cristian Ugarte




João Amador
Sónia Cabral



World Intermediate goods Exports By Country and Region


WITS World International Trade Statistics



Trade in global value chains





The Rise of Trade in Intermediates: Policy Implications

  • February 10, 2011



International trade with intermediate and final goods under economic crisis

Elżbieta Czarny, Warsaw School of Economics
Paweł Folfas, Warsaw School of Economics
Katarzyna Śledziewska, Warsaw University




Trade in Intermediate Goods: Implications for Productivity and Welfare in Korea

Young Gui Kim

Hak K. PYO

Date Written: December 30, 2016



Growing Together: Economic Ties between the United States and Mexico




Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy

Timothy J. Sturgeon
Olga Memedovic


India’s Intermediate Goods Trade in the Inter Regional Value Chain:
An examination based on Trade data and Input Output Analysis

Simi Thambi


Global Supply Chains



Global value chains in a changing world

Edited by Deborah K. Elms and Patrick Low


Production and Distribution Planning : Strategic, Global, and Integrated

Production and Distribution Planning : Strategic, Global, and Integrated


Multiple Perspectives on production and distribution planning

  • Plant and Distribution Center Location problem – Strategic – Structural and Design
  • Procurement problem – where to source from – Tactical – Allocation, Assignment
  • Production and Distribution Scheduling – Operational  – Managing Flows
  • Multi Echelon Inventory Management- Operational – Managing Stocks
  • Supply Chain Integration, Collaboration, Coordination – Hierarchical Planning

Normally, production and distribution planning are handled separately in firms.  Integrated planning of production and distribution can add significant value to a company, particularly, in strategic decisions.


From Facility Location and Supply Chain Management – A comprehensive review

Since, in the literature, model objectives change as a function of the planning horizon length, we consider it opportune to define the features of each horizon in order to contextualize the parameters chosen for the models’ comparison. According to [14], the planning horizons of the supply chain can be clustered as follows:
Strategic planning: this level refers to a long-term horizon (3-5 years) and has the objective of identifying strategic decisions for a production network and defining the optimal configuration of a supply chain. The decisions involved in this kind of
planning include vertical integration policies, capacity sizing, technology selection, sourcing, facility location, production allocation and transfer pricing policies.
Tactical planning: this level refers to a mid-term horizon (1-2 years) and has the objective of fulfilling demand and managing material flows, with a strong focus on the trade-off between the service level and cost reduction. The main aspects considered in tactical planning include production allocation, supply chain coordination, transportation policies, inventory policies, safety stock sizing and supply chain lead time reduction.
Operational planning: this level refers to a short term period (1 day to 1 year) and has the objective of determining material/logistic requirement planning. The decisions involved in programming include the allocation of customer demands, vehicle routing, and plant and warehouse scheduling.






From  Integrated Location-Production-Distribution Planning in a
Multi products Supply Chain Network Design Model



Key words:

  • ‘supply chain strategic design’,
  • ‘supply chain planning’,
  • ‘supply chain optimization’,
  • ‘supply chain network design’,
  • ‘supply chain production planning’,
  • ‘supply chain delocalization’,
  • ‘logistic network design’,
  • ‘facility location’,
  • ‘distribution network design’,
  • ‘production-distribution systems’,
  • ‘location-allocation problem’,
  • ‘supply chain linear programming’
  • ‘supply chain mixed-integer programming’.

From  From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy

Over the past fifty years, manufacturing has changed from individual companies producing and distributing their own products, to a global network of suppliers, manufacturers, and distributors. Efficiency, price, and quality are being scrutinized in the production of each product. Because of this global network, manufacturers are competing on a worldwide scale, and they have moved their production to countries where the costs of labor and capital are low in order to gain the advantages they need to compete.

Today, the complex manufacturing environment faces many challenges. Many products are manufactured in environments where supplies come from different parts of the world. The components to be used in supply chain manufacturing are transported across the globe to different manufacturers, distributors, and third party logistics (3PL) providers. The challenges for many manufacturers have become how to track supply chain costs and how to deal with manufacturing costs throughout the production of goods. Software vendors, however, are now addressing these manufacturing challenges by developing new applications.

Global competition has played a key role in industrialized countries shifting from being production-oriented economies to service-based economies. Manufacturers in North America, Western Europe, and other industrialized nations have adapted to the shift by redesigning their manufacturing production into a distribution and logistics industry, and the skills of the labor force have changed to reflect this transition. Developing countries have similarly changed their manufacturing production environments to reflect current demands; they are accommodating the production of goods in industries where manufacturers have chosen to move their production offshore–the textile industry being a prime example of this move.

A report from the US Census Bureau titled Statistics for Industry Groups and Industries: 2005 and another from Statistics Canada titled Wholesale Trade: The Year 2006 in Review indicate that wholesalers are changing their business models to become distributors as opposed to manufacturers. Between 2002 and 2005, overall labor and capital in the manufacturing sectors decreased substantially. US industry data (from about 10 years ago) indicates that the North American manufacturing industry was engaged in 80 percent manufacturing processes and only 20 percent distribution activities. Today, however, these percentages have changed dramatically; the current trend is in the opposite direction. Manufacturing processes account for around 30 percent of the industry processes, and wholesale and distribution activities, approximately 70 percent.

In addition, a report from the National Association of Manufacturers indicates that the US economy imports $1.3 trillion (USD) worth of manufactured goods, but exports only $806 billion (USD) worth of goods manufactured in the US. This negative trade balance is a clear indication of the changing economic trend toward the manufacturing of goods in low-cost labor nations.

The main reason for this huge manufacturing shift is the increasing operating costs of production in industrialized countries. These rising costs are forcing manufacturers to move their production to developing nations because of the low cost of labor in these countries. This includes Asian countries (such as China and Indonesia) as well as Eastern European countries (such as the Czech Republic and Slovakia).

The number of workers (in percentages) in specified industries in G7 countries, and uses 1980 as the base year with 100 percent full employment in each industry. The industries with relatively constant rates of employment are the food and drink and the tobacco industries. Since 1995, all other industries have been maintaining less and less manufacturing employees, as indicated by the declining slopes in the graph. The shift in the textiles and leather, metals, and other manufacturing industries is moving toward production of goods in low-wage, developing countries.

Manufacturing is a global industry, and although a manufacturing company may be based in an industrialized country, it may have the bulk of its manufacturing facilities in a developing country. Producing goods in such a country reduces wage and capital costs for the manufacturer; however, some manufacturing control is lost in offshore production. Shipping, distribution, and rental costs, for example, are often difficult to track and manage, and quality control can be compromised in a production environment that is not local.

Two main outcomes can be seen within the manufacturing industry because of this manufacturing shift: manufacturers have a sense of having relinquished control of their production to low-cost labor nations, and supply chain management (SCM) has now become the answer to manufacturing within industrialized nations.

Suppliers that provide components to manufacturers often have issues with quality. Being part of a large network of suppliers, each supplier tries to offer the lowest prices for its products when bidding to manufacturers. Although a supplier may win the bid, its products may not be up to standard, and this can lead to the production of faulty goods. Therefore, when using offshore suppliers, quality issues, product auditing, and supplier auditing become extremely important.

Because the manufacturing model is changing, manufacturing has become more of a service-based industry than a pure manufacturing industry. Even though the physical process of manufacturing hasn’t changed, the actual locations of where the goods are being produced have. This fact is now compelling industrialized countries to engage in more assembly driven activities–a service-based model. The manufacturing process has transformed into obtaining parts and reassembling them into the final product. The final product is then redistributed throughout the appropriate channel or to the consumer. SCM methods are now reacting to this change as well; they are taking into account final assembly needs, and they are distributing particular products to consumers or manufacturers.

SCM is becoming the norm for manufacturers in the industrialized world. Offshoring is now standard practice, and methods such as SCM have been set up to deal with these economic and logistical business realities.

The economic shift happening in both industrialized and developing countries is dramatic. As the level of management knowledge increases, better methods of constructing offshore products are available in SCM solutions. In both types of economies, the changes in the labor force skill sets and manufacturing environments have consequently led to new software solutions being developed in order to manage this dramatic change.

Within the software industry, many SCM and enterprise resource-planning (ERP) vendors are following the economic shift. They are developing new functionality–ERP-distribution software–to meet the recent demands and needs of the changing manufacturing and distribution industries.

SCM and ERP software are converging to better address these new demands in the manufacturing industry. In the enterprise software market, ERP software vendors have reached a point of saturation; their installs are slowing down and they are seeing a reduction in sales. Therefore, ERP providers are developing new functionality in order to remain competitive with other ERP vendors, in addition to looking for new opportunities. ERP vendors are trying to adapt to the changing market in order to increase their revenues. They are integrating SCM functionality into their ERP offerings, creating ERP-distribution software that can span the entire production process across many continents (if necessary), and that is able to track final goods, components, and materials.

Traditional ERP solutions included some SCM functionality, which was needed to distribute the companies’ produced goods. These systems also allowed components and parts to be imported in order to assemble these goods. But offshore manufacturing and expansion into new markets has required SCM functionality in ERP software to be extended. Some larger vendors have acquired other companies in order to meet these changing demands. For example, Oracle acquired G-Log, a transportation management systems (TMS) vendor, and Agile, a product lifecycle management (PLM) vendor; and Activant acquired Intuit Eclipse.

SCM software vendors, in contrast, have felt encroached upon by ERP vendors. The situation has posed a real threat to SCM providers in the market, forcing them to extend their ERP functionality to compete with ERP vendors and to try to gain new clients in the distribution and logistics industry.

ERP-distribution software has integrated SCM functionality into its existing functionality to navigate through the complex global manufacturing environment. SCM software maps five processes into one solution: planning, sourcing (obtaining materials), producing, delivering, and returning final products if defective. These processes help to track and manage the goods throughout their entire life cycles. In addition, ERP solutions are used to manage the entire operations of an organization, not only a product’s life cycle. This gives users the broad capability to manage operations and use the SCM functionality to manage the movement of goods, whether components or finished product.

With the ability to gain accurate inventory visibility and SCM production, ERP-distribution software is able to see the whole chain of manufacturing and distribution events, from supplier to manufacturer, all the way to the final consumer.

There are three business models.

  • The first is the SCM model, which includes the manufacturing process.
  • The second is the retail model, which is the distribution of final products to the consumer, business, or retailer.
  • The third model is a combination of the first two business models, joined by the ERP-distribution software solution into one seamless process.

Within the SCM process, goods can either be brought in (imported) through foreign manufacturers, or acquired locally. The goods are then given to a distributor, 3PL provider, or wholesaler in order to reach the final client.

Within the retail model, the products are taken from a distributor, 3PL provider, or wholesaler, and are distributed to the appropriate person. Note that there is a “shift” for the consumer. This is to indicate that through the Internet or other forms of technology, consumers are now able to buy directly from distributors. The power of the consumer has changed; where manufacturers once provided products to consumers, consumers are now creating demand, and manufacturers have to meet that demand.

SCM solutions focus on the relationship between the supplier and manufacturer. However, ERP- distribution software has taken functionality from SCM software and combined it with retail software (such as point-of-sale and e-commerce solutions); it is now able to span across the entire supply chain and to track goods along the complete manufacturing process.

This is a simplified view of the complexities of today’s manufacturing processes. These complexities have made it crucial for trading partners to unite with manufacturers in order to help alleviate the frustrations that can occur within this global network. Specifically, trading partners are coming together with manufacturers to unite services, products, and customer experience so that business processes (such as manufacturing and distribution) become more efficient and that goods can move through these processes with minimal problems.

SCM can be thought of as the management of “warehousing processes,” in which the movement of goods occurs through multiple warehouses or manufacturing facilities. Tracking the costs of moving products and components through the maze of warehousing and manufacturing facilities is a tricky process, and many organizations lose money at each warehousing step.

Within the flow of goods in the manufacturing sector, the warehouse is a crucial part of the supply chain. Traditionally, the warehouse has been a source of frustration because the manufacturer or supplier pays for the use of the warehouse (whether owned or rented by the company). This leads to two possible scenarios: 1) the costs of the warehouse are incurred by a 3PL or manufacturing company, or 2) the costs are passed from one warehouse to another warehouse, and the original warehouse charges for these costs.

The typical warehouse process includes the following steps: receiving, put away, picking, kitting, packing, repacking, cross-docking, and shipping. ERP-distribution software is able to track costs across the entire organization and to aid companies in reducing costs that were previously tough to track.

ERP-distribution system encompasses the entire production of the final good. The ERP- distribution system is able to include inventory visibility from points “A to Z” (start to finish) and to track each warehouse cost from supplier to manufacturer to user, whether consumer, business, or retailer.

The Final Word: ERP-distribution software has been developed to meet the growing needs of the manufacturing and distribution industries. The capabilities incorporated into the software work across entire organizations, and even across continents.

Because of the economic shift in the manufacturing industry, the emergence of new software has been vital for businesses to stay competitive, meet the industry demands and emerging shift, and to keep business processes efficient to gain better profit margins.

ERP-distribution software is able to track the processes of manufacturing goods and distributing components, even if the manufacturer has facilities in North America and the Far East. With the SCM component in ERP software, manufacturing and tracking goods becomes manageable. Distributors and manufacturers can now work together in order to better meet customer requirements.

In addition of factors for domestic location selection analysis, other factors in international location selection are:

  • Exchange Rates
  • Taxes and Tariffs
  • Transfer Prices

How do companies in Computers, Automotive, Apparel, Electronics, Consumer Goods, Machinery manage their supply chain planning functions?  What software do they use for forecasting, planning, and scheduling?

I know of these software solutions for Network Design and Optimization:

Key Sources of Research:


Combined Strategic and Operational Planning – An MILP Success Story in Chemical Industry

Josef Kallrath



Planning in the Process Industry

Josef Kallrath


Solving Planning and Design Problems in the Process Industry Using Mixed Integer and Global Optimization

Josef Kallrath



Mathematical Programming Models and Formulations for Deterministic Production
Planning Problems

Yves Pochet


Supply Network Planning and Plant Scheduling in the Chemical-Pharmaceutical Industry – A Case Study Investigation

Gang Yang, Martin Grunow and Hans-Otto Guenther



Advanced Planning and Scheduling Solutions in Process Industry

Editors: Günther, Hans-Otto, van Beek, Paul (Eds.)


Advanced Planning and Scheduling in Manufacturing and Supply Chains

Authors: Mauergauz, Yuri



Centralised supply chain master planning employing advanced planning systems

Martin Rudberga* and Jim Thulin



Planning and Scheduling in Supply Chains: An Overview of Issues in Practice

Stephan Kreipl • Michael Pinedo



Sales and operations planning in the process industry

Sayeh Noroozi

Joakim Wikner



Optimal planning in large multi-site production networks

Christian H. Timpe, Josef Kallrath



Mixed Integer Optimization in the Chemical Process Industry –
Experience, Potential and Future Perspectives

Josef Kallrath


Planning and scheduling in the process industry

Josef Kallrath



Modeling and design of global logistics systems: A review of integrated strategic and tactical models and design algorithms

Marc Goetschalckx  Carlos J.Vidal, Koray Dogan



Strategic Analysis of Integrated Production- Distribution Systems: Models and Methods

Morris Cohen and H Lee




Integrated production/distribution planning in supply chains: An invited review

Sß. Selcßuk Erengucß a, N.C. Simpson b, Asoo J. Vakharia




A Review of Integrated Analysis of Production-Distribution Systems

Ana Maria Sarmiento, Rakesh Nagi



Managing Perishability in Production-Distribution Planning: a discussion and review

P. Amorim H. Meyr C. Almeder
B. Almada-Lobo



Input-Output Analysis For Multi-location Supply Chain Management Control:
A Theoretic Model

Wang Lu, Tong Rencheng



Using Operational Research for Supply Chain Planning in the Forest
Products Industry

Sophie D’Amours

Mikael Ro¨nnqvist

Andres WeintraubâAmours_Sophie.pdf?sequence=1



Mathematical programming models for supply chain production and
transport planning

Josefa Mula *, David Peidro, Manuel Díaz-Madroñero, Eduardo Vicens




Formation of a strategic manufacturing and distribution network
with transfer prices

Renato de Mattaa, Tan Millerb




Marc Goetschalckx, Carlos J. Vidal and Javier I. Hernández



Integrated Strategic Planning of Global Production Networks and Financial Hedging
under Uncertain Demands and Exchange Rates

Achim Koberstein,
Elmar Lukas,
Marc Naumann




The Design of Robust Value Creating Supply Chain Networks:  A Critical Review





Global supply chain design: A literature review and critique.

Meixell, M. J. and Gargeya, V. B.


Transportation Research Part E: Logistics and Transportation Review, 41(6): 531-550.




A strategic model for exact supply chain network design and its application to a global manufacturer

C. Arampantzi, I. Minis, G. Dikas



Sequential Vs Integrated Optimization:  Production, Location, Inventory Control and Distribution

July 2017



Measuring Cost Efficiency in an Integrated Model of Production
and Distribution: A Nonparametric Approach

Subhash C. Ray




Optimization/simulation modeling of the integrated production- distribution plan: an innovative survey





Strategic Planning and Design of Supply Chains: a Literature Review

Alessandro Lambiase, Ernesto Mastrocinque, Salvatore Miranda and Alfredo Lambiase




The design of production-distribution networks: A mathematical programming approach

Alain Martel



Process industry supply chains: Advances and challenges

Nilay Shah



Strategic, Tactical and Operational Decisions in Multi-national Logistics Networks:
A Review and Discussion of Modeling Issues

Gunter Schmidt
Wilbert E. Wilhelm;jsessionid=5BA6B353BBCA48D0859B902AC3F2610D?doi=

Strategic production-distribution models: A critical review with emphasis on global supply chain models



Dynamics of Global Supply Chain Supernetworks


(Received and accepted November 2002)





Integrated supply chain planning under uncertainty using an improved stochastic approach

Hadi Mohammadi Bidhandi a,⇑, Rosnah Mohd Yusuff



Optimizing the Supply Chain of a Petrochemical Company under Uncertain Operating and Economic Conditions

Haitham M. S. Lababidi,*,† Mohamed A. Ahmed,‡ Imad M. Alatiqi,† and Adel F. Al-Enzi§



A strategic model for exact supply chain network design and its application to a global manufacturer

C. Arampantzi, I. Minis, G. Dikas



Sequential versus Integrated Optimization: Lot Sizing, Inventory Control and Distribution

Maryam Darvish*, Leandro C. Coelho




Samuel H. Huang, Ge Wang

John P. Dismukes



A review and critique on integrated production–distribution planning models and techniques