Kasap_Haciibrahim_0524792_Management

The importance of trading houses in
global supply chains
Kasap HACI IBRAHIM
0524792
Promotor: Michael DOOMS
Jury: Bruno HEYNDELS
Academic year 2015-2016
Master thesis submitted in partial fulfillment of the requirements for the diploma
Master of Science in Management
FACULTY OF ECONOMIC AND SOCIAL SCIENCES &
SOLVAY BUSINESS SCHOOL SCHOOL

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Abstract
This master dissertation explores the importance of global trading companies (GTCs) in
the global supply chains from different aspects. GTCs originated from Japan and other
Asia-Pacific countries are currently global main players whereas real historical origin of
GTCs was western. Strategic level managers from both GTCs and manufacturing firms
judged strategic priorities and GTCs’ contributions in the global supply chains. Based on
the data comprise survey results from 73 respondents, descriptive study was applied. The
importance of GTCs in global supply chains was identified in connection of GTCs’
substantial contributions with important strategic priorities of strategic managers.
Substantial contributions mainly in supplying raw materials and components detected
among the functions of GTCs. The results supported the hypothesis that GTCs are still
important in certain part of global supply chains.
Keywords: Global trading companies, GTCs, manufacturing firms, strategic priorities,
supply chain, contributions

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Contents
Abstract............................................................................................................................... 1
Contents .............................................................................................................................. 2
Tables and Figures .............................................................................................................. 3
CHAPTER 1 ....................................................................................................................... 4
1. INTRODUCTION ...................................................................................................... 4
CHAPTER 2 ....................................................................................................................... 7
2. LITERATURE REVIEW ........................................................................................... 7
2.1 Existence of trading companies ............................................................................ 7
2.2 Theories................................................................................................................. 8
2.3 Information and Finance..................................................................................... 11
2.4 Strategy and Marketing Implications.................................................................. 14
2.5 Supply Chain and Sourcing ................................................................................ 17
2.6 Culture................................................................................................................. 21
2.7 Conclusions......................................................................................................... 22
CHAPTER 3 ..................................................................................................................... 25
3. METHODOLOGY ................................................................................................... 25
CHAPTER 4 ..................................................................................................................... 29
4. STRATEGIC PRIORITIES IN THE SUPPLY CHAIN .......................................... 29
4.1 Details: The Importance of Strategic Priorities .................................................. 34
4.2 Wrapping-up importance of strategic priorities.................................................. 38
CHAPTER 5 ..................................................................................................................... 40
5. MAIN CONTRIBUTIONS FROM GTCs IN THE SUPPLY CHAIN .................... 40
5.1 GTCs’ substantial contribution areas.................................................................. 43
5.2 Wrapping-up GTCs’ main contributions ............................................................ 52
CHAPTER 6 ..................................................................................................................... 55
6. CONCLUSIONS....................................................................................................... 55
References......................................................................................................................... 58
Appendix 1: Survey Questions ......................................................................................... 62

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Tables and Figures
Table 1: Summary of Main Theories................................................................................ 11
Table 2: GTC’s strengths and merits to manufacturers in terms of offensive strategies.. 17
Table 3: Main clusters of the sample population.............................................................. 26
Table 4: Different aspects of the sample population ........................................................ 26
Table 5: Details about the respondents ............................................................................. 27
Table 6: Total mean for main categories - Importance of strategic priorities .................. 34
Table 7: Details of highly important items ....................................................................... 35
Table 8: GTCs’ substantial contribution items ................................................................. 44
Table 9: Relation matrix between GTCs’ substantial contributions and highly important
strategic priorities.............................................................................................................. 54
Figure 1: Importance of strategic priorities in the supply chain ....................................... 29
Figure 2: Importance of strategic priorities from the perspective of GTC managers....... 30
Figure 3: Importance of strategic priorities from the perspective of manufacturing firms’
managers ........................................................................................................................... 31
Figure 4: Importance of strategic priorities from the perspective of operational managers
........................................................................................................................................... 32
Figure 5: Importance of strategic priorities from the perspective of strategic management
people................................................................................................................................ 33
Figure 6: GTC contributions - consolidated results.......................................................... 40
Figure 7: GTC contributions – GTC respondents............................................................. 41
Figure 8: GTC contributions – Manufacturing firm respondents ..................................... 42
Figure 9: Parts flow comparison of individual supplier arrangement and GTC route...... 46

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CHAPTER 1
1. INTRODUCTION
Globalization is one of the most popular words among people especially after the end of
cold-war period. With the introduction of many different communication tools, global
communication became available to more and more people. It is seen as a chance in many
different fields of the life. Business is also getting more and more global the same as other
things. Almost all the players of business life want to take advantage of globalization by
implementing correct strategies.
Global free trade brings many gains to the economies of almost all countries which are
called dynamic gains (Grimwade, 2000). Grimwade (2000) presents these dynamic gains
mainly as:
a- reduction of cost per output through scale which enables firms to achieve optimum scale
of production
b- efficiency gains resulting from increasing competition which might be avoided in case
operating only in local market due to very little treat of new entrants
c- stimulus for capital investment for modernization of machinery to increase capacity and
to derive more output
d- technological innovations to minimize production costs and to introduce new products
e- reduction of inflation both by lowering prices and by exposing domestic monopolies to
more competition.
Since all of these dynamic gains are very valuable gains for all countries, global free trade
trend is promising in the global economy. And, executive managers at strategic
management level believe that globalization concept offers promising performance gains
(Trent & Monczka, 2003).
Having worked for more than 13 years in one of the most well-known Global Trading
Companies in the world, we have experienced that GTCs are highly performing in different
business models with Japanese and Asia-Pacific global manufacturing firms. On the other
hand, GTCs’ alignment in the business models of western manufacturing firms is very

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limited. Going through all the available literature around the subject of trading companies,
we could not identify comprehensive documents discussing which kind of strategies of
manufacturing firms might utilize GTCs in the global competition. We thought that before
going into such discussion, the question needs to be answered is whether manufacturing
firms really understand and value the collaboration with GTCs in their strategic
management. If so, in which aspects do they see that? Thus, this master dissertation aims
at identification of the importance of GTCs from the viewpoints of especially strategic level
management people. By using the word “importance”, we mean if those people who are
main decision makers for the strategic matters find substantial contribution from GTCs in
their business. And, what these contributions are.
Trading company is mainly the firm trading the goods and services of the companies who
are manufacturing those goods and services. Therefore trading companies are not in real
terms manufacturing any value by themselves but they are adding value in the value chain.
On the other hand, as a result of globalization, global competition brings its specific
conditions in many different fields. Manufacturing companies or any company willing to
be the part of this global business environment, needs to meet its conditions of competition.
Therefore, in the value creation pipeline of the manufacturing companies, sourcing raw
materials and components from global markets and delivering finished/semi-finished
products to global markets are among the key success factors to go out of national
boundaries. This is kind of pre-condition because the manufacturing companies have to
equalize themselves with their competitors within the competition from the beginning.
Sourcing at the beginning and supply at the end in addition to manufacturing in the center
are all crucial. So, being globally-connected is pre-condition of being part of global
competition. We think, GTCs with their strengths can offer substantial contribution to
manufacturing firms in the context of being globally connected.
In this study, we will first try to review the literature and investigate available theoretical
background of the subject. Certainly, there have been many different studies about trading
companies and also about strategies in the business which will provide us with inspirations
to approach from different perspectives. Literature review will construct basis of the study.

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Then, drafting from the literature, we are planning to use interviews and surveys with the
people from strategic management teams in manufacturing and trading firms.
In the conclusion chapter, the paper presents findings and identifies if from the perspective
of strategic management people, GTCs are really critical partners for manufacturing firms
willing to go global. And if they are, where in the value creation pipeline.

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CHAPTER 2
2. LITERATURE REVIEW
2.1 Existence of trading companies
To understand current situation, we thought it is important to look back in the history. Were
trading companies important for manufacturers in the history? What was the background
of trading companies and what were their traditional functions in the past?
Trading companies and later global trading companies have long history in the business
life. The existence of trade between Europe and Asia especially with India is very old.
Historical trading routes were operational like so called “silk road” in which mainly
animals like horses and camels were means of transportation. So, we can say that the roots
of global trading companies are going very deep in the history. Economic historians are
saying that multinational companies are European and particularly British development
(Carlos & Nicholas, 1988). While there are such findings about the multinationals; origins
of today’s global trading companies are chartered trading companies created by maritime
powers of Europe in the early seventeenth century (Ellis, 2003). In the early stages of their
existence, main function of trading companies was creating or making markets in addition
to increasing the efficiency which results in creation of gains (Ellis, 2003). Creation of the
markets for products and services from colonies were done by them. They were also
responsible for operating trading routes between colonies and the mainland. In the mid
nineteenth century, early chartered trading companies had largely disappeared as their basis
of trade on government monopolies was dismantled. But, the function of trading companies
in international trading has continued (Jones, 2002). During the Meiji restoration period
in Japan and following the opening up of Japan to international trading in 1859, with the
strong support from Meiji Government, GTCs started to perform important functions in
Japanese international trade (Sarathy, 1985) (Tanaka, 2012). Japanese global trading
companies are among the ones dominating biggest share of the world trade now
(Datamonitor, 2005) but the roots of these companies are the same as early European
merchants. We saw them just after Japan started to trade with other part of the world. As a
result, trading companies were born when and where trading itself was born in the world.

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Because, manufacturing of goods and services is very important but trading of those in
different markets is completely unique functionality separate from the manufacturing.
The world trade will keep its direction of more and more structuring around free trade and
globalization. Main drive is that in addition to the static gains coming from the efficiency
of resources utilization, there are many other gains called dynamic gains in the economy
and those dynamic gains are created through the implementation of free trade (Grimwade,
2000). For the economies of all countries, this is really important. Background of trading
firms proves that they were created whenever different countries started trading in between
and trading functions were required. The same as that, today’s global economic
environment strongly requires more advanced trading functions in complex trading
networks.
2.2 Theories
Ellis (2003) notes that the specific functions and operations of trading companies can be
reasoned by agency theory and transaction costs analysis theory. Sheard (1989) and many
others are also using agency theory and transaction costs analysis theory in their
explanations about the main functionalities and the reason of existence of trading
companies.
Fundamental definition of the agency theory is that one party hires another one to perform
one or several tasks (Eisenhardt, 1989) (Sharma, 1997). Of course this delegation is based
on the contract and the contract can be either on outcome basis or on behavior basis. But
in both cases, the principal shall find a way to make agent on its favor which can happen
automatically in the case of outcome basis contract whereas principal needs to have
information to verify the behavior of its agent in the latter (Eisenhardt, 1989). Global
trading as indicated in its name is the trade in a very wide scope and between
geographically very different locations. Customers and suppliers who are the main trading
partners are from very different cultures. Thus, when these trading partners are hiring GTCs
as their agent, main expectation from GTCs is being broker to provide risk reduction (Ellis,
2003). Sheard (1989) argues in his article also that the manufacturing companies taking

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trading firms as their agent are expecting risk sharing. Sharma (1997) stresses the
importance of information asymmetries between principal and agent. Because in case the
agent’s interest is conflicting with those of the principal, principal shall control its agent to
minimize the opportunistic approach from the agent. He says these control mechanisms
are:
a- self-control by the agent
b- control by the community
c- control by the client
d- bureaucratic control.
There are different tools of checks and balances to the issue of agent opportunism.
Principal’s involvement, well-defined framework of standards, professional supervisors,
alternative channels to reach relevant information and investments in assets by the agent
are among proposed practical checks and balances (Sharma, 1997). In the form of
agent/principal relation, trading firms can share risks with manufacturing firms.
Manufacturing firms can concentrate on their core manufacturing function and they can
still control their agent in different ways by using different tools.
We can define trading as an interchange of goods and services and this interchange can be
between two or more parties involved. Or, interchange of goods and services can be seen
as the unit of trade and it can be called as transactions. “Transactions cost theory has
provided a more realistic explanation of the growth of firms. This theory suggests that the
market is costly and inefficient for undertaking certain transactions, and for that reason
firms internalize activities in order to minimize transactions costs.” (Jones, 2002). Trading
companies are economizing these so called transactions thorough different ways of
coordination and this is one of the main reasons for their existence (Carlos & Nicholas,
1988). Even in the case those transactions are recurrent, GTCs can reduce total costs
through their efficiency which is difficult for manufacturing firms due to trading over
distances and/or across cultural and political barriers (Ellis, 2003). “More extensive and
complicated business ties must be established than would be necessary under the simple
seller-buyer or principal-agent relationship to protect investments of the transaction-
specific kind” (Shin, 1989). One of the key elements of transactions cost theory is

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implementation of correct way of governance based on the product characteristics. As for
the standardized products, trilateral governance and high commission rates are suggested
to GTCs due to the nature of occasional transaction with high level of commitment. In case
the product is handled in very large lots or repetitively, bilateral governance with small
commission is suggested. These products are standardized in characteristics in line with
the GTCs desire for high volume and repetitive structure. If GTC is handling products at
several stages of production, GTCs shall decide the governance and commission depending
on the situation at the manufacturing firm because GTCs costs will be compared to internal
costs of manufacturer. Finally for the products manufacturers need economies of scale,
GTCs are door opener to the world markets for manufacturing firms (Thomas Roehl, 1983).
Trading companies are called into existence due to recurrent transactions and risk hedging
by their administration. But, if the transacting in particular product is high and quality
assessment is difficult, then by vertical integration into the production, the functions of
trading companies are taken over (Carlos & Nicholas, 1988). Carlos & Nicholas (1988)
also argues that the problems of opportunism are also valid in transactions cost approach
but the companies tend to ensure quality and customer satisfaction or service levels to
handle this problem. In some cases the manufacturer might tend to depreciate quality but
trading company might prevent manufacturer from cutting quality either by direct
engagement into the quality control tools or by creating multiple sources of supply to secure
quality levels for its customers (Shin, 1989).
Agency theory and transactions cost theory are the main theories fitting explanation of
trading company functions in the business but another approach to mention about is the
structural holes theory. This describes the gap between complementary information,
resources, services or goods as a hole. And, suggests that the third party involving in this
gap who can fill such structural hole with its functions is creating competitive advantage.
Therefore in this theory of structural holes, main point is in essence a matter to access such
structural holes between economic transactions (Burt, 1992). And, GTCs are main
intermediaries accessing those structural holes between market transactions. Jones (2002)
in his article even relying on transactions costs theory more, he is clearly stating that main
reason why during the post-war period, Japanese trading companies have started to play

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very important role in Japan’s international trade was because of the existence of big
informational and cultural differences (gaps) between Japan and the West.
Table 1: Summary of Main Theories
Name of
The Theory
Main Functionality of
Trading Companies
Reason for Existence of
Trading Companies
Agency
 To perform one or several
tasks based on the contract
 Broker to provide risk
reduction
 Customers and suppliers
from very different
cultures
Transactions
Costs
 Economizing transactions
through coordination and
efficiencies
 Correct way of governance
based on product
characteristics
 Costly and inefficient
transactions due to trading
over distances &
cultural/political barriers
Structural Holes
 Access and fill the gap
(structural holes) between
market transactions
 Gap between information,
resources, goods and
services
Theoretical approaches in the literature supports the fact that global trading companies are
strategically important for manufacturers in terms of different aspects. That’s why, trading
companies exist. And main value of trading companies for the manufacturing firms is
connecting them with global markets in the most efficient and the least risky way.
Additionally, transactions costs theory further suggests manufacturing firms to economize
their internal recurrent transactions with trading companies.
2.3 Information and Finance
Information is very valuable asset for the business. GTCs are accumulating relation-
specific information relevant to trading they are in. And, by using this information they are
having flexibility (Tom Roehl, 2004). “Trading companies can be seen as reducing search,
negotiation, transaction, and information costs in international trade through their
specialist knowledge of markets and business environments.” (Jones, 2002). GTCs ties or
relationships are kind of natural channel to obtain information which has really important
value. If the same level of information is available to all companies, creation of highest
return from the individualized efforts might be very difficult. Reaching the information is

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not very easy and cheap for many of the companies whereas GTCs are observing their
relationships and obtaining valuable information about the markets and the environmental
changes around the markets. Furthermore, GTCs are operating in many different markets
with different products and the scope they can cover globally is very large. Such diversity
enables GTCs to transfer good/bad experiences between the markets. Market adaptation
can be eased with cooperation of GTCs since they can provide information about the
markets which is critical for that. By using its information pool and relations, GTCs can
also define the market for many new entrants. In addition, GTCs can suggests best way to
act in the market as well (Tom Roehl, 2004). “The trading firm makes up-front investments
in obtaining market information which can be used to handle goods supplied by several
manufacturers” (Shin, 1989). GTCs connections in some cases even attract manufacturing
firms to set up connection with diverse markets. Collected information by GTCs are also
helping to reduce uncertainties (Carlos & Nicholas, 1988). The nature of transactions is
occasional for some products like heavy industrial machinery. In such cases, construction
of trading channels to capture occasional demands in these markets is not so easy for the
manufacturing firms. Instead, reliance on trading company’s business connections in such
markets to discover potential deals shall be much attractive, easy and cost effective (Shin,
1989). The knowledge and contacts of trading companies are the major sources of their
competitive advantage (Jones, 2002).
On the other hand, economics, political science and organization science literatures predict
that the relationships of GTCs would lose their importance. Because, especially with the
changes of 1990s international markets become more and more increasingly connected to
domestic markets. As a matter of fact, it is argued that special institutions inside the firm
might replace such valuable offerings from trading companies. GTCs, being aware of this
direction change, are trying to find different means to further develop their ties with
markets and customers (Tom Roehl, 2004). Cross-border ties of trading companies are very
important as a source of free information (Rauch, 1996). But one of the core competencies
of trading companies is not only collecting information about the markets but using their
human resources formatted in such manner. Therefore, they are evaluating available
information in a way suits to manufacturers the best and they are creating opportunities for

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manufacturing firms which in returns creates opportunities for themselves (Sarathy, 1985).
International marketing experience of trading companies cannot be developed from scratch
in a short period of time (Sarathy, 1985).
Tom Roehl (2004) claims that conventional financial role of GTCs is not so much
important anymore whereas financial relations cut across several different markets still
offer opportunities. One of the main function benefits manufacturing firms by having GTC
in the middle among their single physical transaction lies mainly in the insurance against
financial risks. And, trading company in between is like a trustful creditor for manufacturer
and the supplier (Sheard, 1989). Sheard (1989) points out that only in the case the GTC
fails to perform financially, then the risk is still there for the manufacturing firms. But, as
far as GTC is a credible company, manufacturing firms are protected for financial risks in
addition to the fact that having GTC in between decreases the financing period for these
manufacturing firms due to very long physical lead times. In addition, especially for the
small firms who are specialized in some products having high volume potential but with
low margins, certain level of capitalization is necessary and trading companies are
providing such possibilities to create win-win by give-take reasoning (Sarathy, 1985).
Sarathy (1985) introduces the importance of ease of trading companies’ access to capital
in addition to their role of being financial intermediary in between.
Trading companies intermediation is sometimes not for direct trading of the goods but still
has valuable functions for consulting, introducing, sourcing or in some cases facilitating
the business (Thomas Roehl, 1983) (Rauch, 1996). Information and financing role of
trading companies mainly serve to perform such functions not only in a qualitative but also
to some extend in a quantitative way. As introduced by Ellis (2003), trading companies are
not only market makers and value creators but also they are closing the information gap
between buyers and sellers. They are reducing risks and exploiting the price differentials
between the markets.

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2.4 Strategy and Marketing Implications
In general, almost all the literature says that the firms willing to expand abroad to capture
economies of scale opportunities or to achieve economies of scope are facing with some
basic structural conditions that must be met. One of the initial conditions these firms shall
comply to is of course finding customers for their products or services in the target markets.
Furthermore, they have to promote their products in these markets in a way that the
customers can recognize the value of their products and services. In some markets,
according to the local conditions of the markets, products are needed to be adapted to the
customer needs. Supply chain management, sourcing and after sales services are all must
be strategically considered by such firms. And companies need to invest very valuable time
into these activities.
GTC’s presence in many different markets, the volumes they are delivering and the
varieties of the products they are dealing in these different markets are most of the time
much more and much larger than those of manufacturers. Looking into an example of
Japan’s 5th
biggest trading house, we see that this trading house has global presence in more
than 74 countries and in more than 150 cities with its more than 900 subsidiaries in the
world. In addition, this same trading house is operating in 8 different main business units
varying from textile products and energy to automotive and construction machinery. Thus,
in terms of scale or scope of economies, use of trading firm’s brand in such situation is
expected to bring additional advantage to manufacturers. This typical situation with
reduction of risks in the complex international market environment through trading
companies attracts manufacturers who are willing to take advantage of economies of scale
(Shin, 1989). In line with this argument from Shin, Sarathy (1985) claims that in the case
of Japan’s increase of exports, trading companies had played the key role in two ways.
First, trading companies by vertical integration into the manufacturing firms’ structure
enabled manufacturing companies to keep all the profit in the value chain within their
pocket. Second, utilizing the core competencies of trading companies in terms of
international market intelligence, manufacturers could achieve economies of scale for the
products with slim profit margins.

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Economies of scope is another key topic discussed in the literature in addition to economies
of scale. Kotobe & Murray (2004) clearly states that “Global competition suggests a
drastically shortened life cycle for most products and no longer permits companies a
polycentric, country-by-country approach to international business. If companies that have
developed a new product do follow a country-by-country approach to foreign market entry
over time, a globally oriented competitor will likely overcome their initial competitive
advantages by blanketing the world markets with similar products in a shorter period of
time. Indeed, it is imperative for companies to continuously create and acquire capabilities
that would help generate a sustainable competitive advantage over their rivals”. The
information about clients in many different markets requires initial investment and this
investment can be called the investment for building up ties. Companies need such
information to achieve economies of scope. Building up ties investment cost matters for
manufacturing companies a lot compared to the cost of maintaining existing ties. It can be
clearly claimed that trading companies cannot offer cost advantage to manufacturing firms
on maintaining ties cost because manufacturing firms, knowing their products and their
existing customers, does not need to worry about maintaining such ties so much. On the
contrary, building-up ties with the new customers is really important and difficult for them.
Trading companies through diversification across different industries and through global
presence in specialized industry can overcome such disadvantage and even turn it into
advantageous positon for manufacturing firms willing economies of scope (Rauch, 1996).
Diversification is one of the ways to achieve economies of scope as well. In his article
Jones (2002) discussed about the successful and unsuccessful diversification strategies. He
said that the time and place is key determinant of the success of diversification strategies
because the degree of the success of diversification strategy depends heavily on the fact
whether the firm had the competences to manage the opportunities available in different
areas. And he adds that the region specific information and expertise of the trading
companies are reducing the set-up costs for market creation in the entirely new business.
This results in the fact that trading companies can exploit economies of scope by
diversification into new business units. Diversification is seen also as defensive strategy
against market specific risks. Shoei Utsuda, the president of Mitsui, believes the sogo
shosha are relatively safe in the economic downturn. "We have diversity in our industries

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and in our geographies, so we are protected," he says in 2008 (Anonymous, 2008). Rather
than playing the middleman role, trading companies are also themselves trying to use the
information from one market to penetrate into adjacent areas in the business (Anonymous,
2008).
In the market where trading company has strong presence and brand, the name of the
trading company involved in the transaction is taken as assurance in terms of different
business aspects like quality, reliability…etc. This position of trading company in the
market eases penetration of manufacturing firms into such markets. Additionally, bilateral
governance of trading companies to serve large variety of customers in the markets where
manufacturing firms are isolated from has enormous value for manufacturers especially in
terms of time management to deliver goods and services (Tom Roehl, 2004). Around this
subject, Egan & Mody (1992) raise the issue of marketing mix adaptations in the new
market expansions and they are suggesting that marketing mix adaptation to local
variations takes very long time. It is simply because of the trial-and-error nature of the
process. They argue that intermediaries including trading companies provide this service
to manufacturers saving on the time needed in case of learning through trial-and-error
process. Thus, trading companies can contribute manufacturers to run faster to their
competitors who are trying to achieve marketing mix adaptations by long trial-and-error
process (Hennart, 2014). As the traditional markets are already very mature and the
competition in the traditional markets is very difficult, companies are increasingly looking
for niche sectors within the industry to gain in the competition by means of early entry to
those relatively immature fields. Early identification of niche and untouched areas in the
markets is one of the key success factors for companies targeting those niches. Scope of
trading companies is very important to identify business opportunities through the
commercialization of emerging technologies such as nanotechnology, biotechnology or
environmental technology.

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Table 2: GTC’s strengths and merits to manufacturers in terms of offensive
strategies
Main Strategic
Item
Strength of GTC Merit for Manufacturer
Economies of
Scale
 Reaching global markets
for demand creation
 Equating supply and
demand
 Minimize cost per output
(cost competitiveness)
Economies of
Scope
 Global network and
presence in global markets
 Minimize cost for
building-up ties and
maintaining those ties in
global markets
Market
Penetration
 Identification of correct
penetration strategies in
existing markets
 Information about
opportunities in the
adjacent areas of the
existing business
 Reduce set-up cost for
market creation
 Having strategic partner
who can be taken as
assurance in different
aspects of business like
quality, reliability…etc.
Marketing-mix
Adaptation
 International market
intelligence
 Avoid long lasting and
costly trial-and-error
process of adaptation
Diversification
 Diversification through
different industries and
different markets
 Being in right time, at
right place and with right
products
 Reduction of risks in
complex global market
environment
2.5 Supply Chain and Sourcing
As the business landscape is characterized by global competition and in the global
competition all the competitors are under the pressure of minimal cost, these factors are
motivating companies to verify their supply markets in the global perspective. Especially,
as far as so called low-cost countries like China provides room for cost reduction in
sourcing, everyone tries to capture merits of sourcing from those countries (Nassimbeni &
Sartor, 2007) (Christopher, Peck, & Towill, 2006). Atmosphere of global competition
offers all competitors not to focus on only in the reduction of production costs but also
focus on all other components of costs in the complete value chain including sourcing of
raw materials and components. Otherwise, while the firm can reduce manufacturing costs,
this can be traded off with the impact coming from higher costs of logistics or longer lead

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times resulting higher working capital investments and higher inventory holding costs
(Christopher et al., 2006). Therefore comprehensive approach to complete value chain is
consistently stressed in the literature. In addition, speed of respond to hold opportunities
offered in the markets is playing important role not only for classical manufacturing
companies but the innovators as well. This proves time being the important competitive
variable for competition to increase agility of the manufacturers as the markets are
becoming more and more demand driven. We can argue that global supply chain solutions
are available to all competitors. Correct identification of best fitting supply chain solutions
based on the needs and product/market characteristics in addition to the implementation of
these solutions through appropriate management makes the difference (Christopher et al.,
2006). Trent & Monczka (2003) claims more wider perspective about global sourcing in
their study that many companies can capture the benefits of globalization from global
sourcing approach. This approach shall involve not only component sourcing from
different markets but also shall involve the worldwide integration of many other functions
like engineering, operations and procurement centers within the upstream of supply chain.
Otherwise, the firms’ captured benefits are too much limited compared to the potential
benefits offered. Their finding is that the companies successfully implement global
sourcing strategies can achieve 15 percent savings in average compared to local or regional
sourcing practices. They are also stressing several challenges. Those challenges Trent &
Monczka (2003) identifies are first of all identification of potential global suppliers in
foreign markets especially if the manufacturing firm does not have operating site in the
subject market and if the company does not have familiarity with the suppliers by any
means. Secondly, the nature of global suppliers’ structure makes the things even more
complicated for manufacturing firms as they often ship from many different shipping points
and the standards vary on different aspects between different manufacturing and shipping
bases of the global suppliers. In addition to those, in their article Nasimbeni & Sartor (2007)
provides the information that many European companies have decided to source from their
own market even though cost opportunities of sourcing from low-cost markets. Because,
in a social, cultural and legal context such low-cost markets are so different from that of
Europe and European companies foresee that they are likely to encounter numerous
obstacles when creating and managing a supply flow from such markets especially from

19
China. At this point of the discussion in the literature, it is important that Global Trading
Companies are mentioned to be playing innovative role in developing supply of resources
and also in the expansion of supplies at global level (Jones, 2002). Of course unit price
reduction is the key driving force pushing manufacturing firms who are located in relatively
high-cost markets for their sourcing of raw materials and components to consider sourcing
from more competitive low-cost markets (Trent & Monczka, 2003). In the same time, Trent
& Monczka (2003) have suggested also that most of the worldwide purchasing activities
or sourcing from low cost countries does not always produce gains for the companies
because there are associated hidden costs with increased lead times or different and difficult
level of administration. Furthermore, they are confirming that average one-quarter of the
savings from the unit costs are spent for such additional factors associated with it.
Nasimbeni & Sartor (2007) are adding low level supply chain satisfaction to that either.
Another topic getting more and more attention from all global manufacturers especially
after experiencing sharp downturns at global level is also how to keep efficiency in the case
of recession. That is essential to keep unit costs at stable levels and to be able to keep strong
position in the global competitive environment. Thus, lean manufacturing concept was
taken by most of the global manufacturers which was the concept created and well
implemented by Toyota originally. Main philosophy of this concept is following
supermarket logic in the manufacturing. That means to order or to produce the parts
whenever the output is taken out from the shelf of the supermarket (Ohno, 1988).
Therefore, Toyota Production System approach is based on elimination of waste which was
called muda in production, process, waiting, transportation, inventory and defects handling.
Elimination of muda aims at the efficient use of all resources through level scheduling.
This is very important concept and affecting the approach of almost all global
manufacturers while they are planning their sourcing of raw materials and components
from low-cost markets as well. Thus, all the manufacturers accepting the importance of
lean manufacturing approach have started to focus on achieving just in time availability of
all resources whenever and where those resources are needed including their raw material
and components (Kotabe & Murray, 2004). Kotabe & Murray in the same time says that
just-in-time (JIT) production was adopted by a growing number of companies either the

20
firm is sourcing from its subsidiaries on an “intrafirm” basis or from outsider companies &
suppliers on a “contractual” basis. This was done through strategic partnership or arm’s
length relation. Global sourcing strategy requires close coordination of many different
activities on a global basis which is essential to exploit competitive advantages. Therefore,
they see the ability of the firms’ global sourcing as the critical competitive competency in
global competitive atmosphere. Finally, Kotabe & Murray (2004) summarizes that,
“Globally operating companies need to be in constant search of methods to ‘kill two birds
with one stone,’ or meeting supply-side and demand-side counteracting forces head-on for
their sustainable competitive advantage.”. “Such sourcing requires relationship-handling
competencies, which is best catered for by engaging local agents or establishing
purchasing offices in China. This means that creating a supply network, characterized by
proper task distribution, utilization of different types of competencies and collaboration
among the actors could generate efficiency, cost effectiveness and agility.” (Bygballe, Bø,
& Grønland, 2012) which was also in a same way argued by Nasimbeni & Sartor (2007).
This activity of global sourcing together with outsourcing of many activities either to
subsidiaries, or to suppliers or to the other 3rd
parties including trading companies, agents
or logistic partners bring significant changes in administration costs. According to the
investigation (Engblom, Solakivi, Töyli, & Ojala, 2012), compared to other changes of the
costs, changes in the administration costs was significant and it was proven that among the
changing cost components subject to investigation, administration costs could be
considered the most inelastic of them. Mentioned administration costs for coordination and
collaboration among various suppliers and various pick-up locations is the essence of the
success for exploitation of gains from pooled interdependencies logistically. Management
of many different suppliers and optimal consolidation is needed to minimize logistics costs.
Administration of pooled interdependencies logistically in such a way sounds simple but
in fact it is important task because the manufacturing firms still needs to ensure their agility
and flexibility to respond customer demands at the same time (Nassimbeni & Sartor, 2007).
Finally, the tendency of the outsourcing among the manufacturing firms is also interesting
and important in the literature. Most of the studies have proven that manufacturing firms
highly tend to outsource transportation-related functions at the top of their outsourcing list

21
(Solakivi, Töyli, & Ojala, 2013). And most often mentioned reason and judgment by
manufacturers for this tendency according to the same investigation is claimed as cost
cutting and concentration on core activities (Solakivi et al., 2013). In detailed examination
among manufacturing and trading companies about the motives for outsourcing, flexibility
was founded out to be the number-one motive which was expected to be cost-saving. And
during the investigation among trading and manufacturing companies, other strong
concerns about the logistics outsourcing were listed differently. Trading companies listed
customer service level and maintenance of market share at the top of the list whereas
manufacturers listed efficiency at the top (Solakivi et al., 2013).
As a summary of the literature on the supply chain and sourcing, we can clearly claim that
manufacturing firms are searching for:
 the ways such as lean manufacturing, logistics outsourcing…etc where they can
ensure minimum cost of operating complete supply chain
 in the same time, they want to ensure that their customer satisfaction is not traded
off by losing their flexibility in the supply chain
Therefore, working with trading companies in the parts of supply chain where they need
very effective governance and administration gives them opportunity to focus on their core
functions to satisfy their customer base.
2.6 Culture
It worth to mention several discussion topics about the trading companies’ culture
especially knowing from all the literature that Asia-Pacific originated trading companies
are dominating this field at global level (Datamonitor, 2005). One of the arguments about
the reasons of Japanese trading companies’ critical role in the global integration of Japan
market with international environment is Japanese cultural tendency of specialization
through which Japanese manufacturers are achieving economies of scale (Sarathy, 1985)
(Tanaka, 2012). According to the report of Japanese Foreign Trade Council headed by Prof.
Takayuki Tanaka (2012), 18 out of top 21 GTCs are Asia-Pacific originated and 11 of those
18 GTCs are Japanese. Sarathy (1985) states that Japanese manufacturers focus on their
core competency of production and technical advancement while trading companies bring

22
all their knowledge, connections and international marketing experiences. With vertical
integration of trading companies to manufacturing firms, Japanese companies can operate
whole system without sacrificing the profits and opportunities.
Maruyama (1988) introduces the impact of different mindscapes between successful
practices for trading companies in complex global environment. He mentions the
importance of the practice of G-type mindscape rather than that of H-type in an
environment involving many countries. Different countries are involving for different
functions like sourcing of design, technology, equipment, raw materials and labor. On top
of that, there are high-risk factors and some uncertainties. And, he argues that such
environment requires contextual, relational and simultaneous perception as well as
situational and flexible judgment which are impossible in case of H-type mindscape
practices where the lines are drawn more visibly in structured manner. Main characteristics
of G-type mindscape are its heterogenistic components, interactive relation among those
components in morphogenetic process. Whereas, in case of H-type mindscape, components
are homogenistic and their relations are hierarchical in classificational process (Maruyama
et al., 1980). Maruyama (1988) claims that most of the American and Western Companies
practice H-type mindscape. And the important point in the original theory is that most of
the mindscapes are learned and that is extremely difficult to change (Maruyama et al.,
1980).
2.7 Conclusions
Many of the literature says that competitive advantages or gains from the services and
functions of trading companies are crucial and very valuable at the initial stage of the
trading company-manufacturer relation (Ellis, 2003) (Jones, 2002) (Shin, 1989). Most of
these literatures suggest also that by the time manufacturers and customers become more
and more informed about the markets, trading conditions, trade connections, supply and
demand conditions. Therefore at the initial set-up phase trading companies offer attractive
services for manufacturing firms in their offensive strategies and also in terms of risk
sharing or risk minimization in global competition. Increased level of globally connected
position of manufacturing firms weakens trading company competitive position very much.

23
Manufacturers become capable of performing and enjoying all benefits by themselves and
they tend to deal directly with the customers. In addition to that, increased level of
globalization brings its own conditions like complexity of specification (Sarathy, 1985)
(Jones, 2002), difficulty of quality assurance, stability of supply & demand and high
volumes. These are listed to be the factors encouraging manufacturing firms to trade
directly by themselves without having any intermediaries including trading companies. Of
course, the manufacturers are also willing to secure establishment of their brand name for
some of the products in the new markets before risking their relations with trading
companies for the subject market (Shin, 1989). Thus, “Long-term survival and growth for
trading firms relies, therefore, on their ability to create new and often diverse
opportunities, and to maintain a widely dispersed network of business.” (Ellis, 2003). And
trading companies shall find ways to protect themselves from being excluded easily by
manufacturing firms. Therefore trading companies are investing in new activities and
involving more in production functions. This situation eventually claimed to be driving
force for many trading companies to become rather than pure trading company into hybrid
companies over the time. Or, their further evolution to become manufacturing type of firm
in some of the industries (Jones, 2002).
We have not identified strong arguments about the current situation of trading company
and manufacturing firm relations from strategic perspective in the supply chain. Although
many different contributions from trading company functions are explained in details in
the literature and projections for the future was given, the meaning for manufacturing firms
to work with trading companies in current business environment is not clearly identified.
The existence of trading companies begins with the start of the exchange of goods and
services between different parts of the world. Therefore, trading companies cannot survive
unless there are no goods and services produced and delivered to different markets. The
global markets attracts many manufacturers but as for trading companies, the way
manufacturing firms want to connect themselves with those global markets is the key point.
Because, as far as manufacturing firms can keep all the functions and all the profit coming
from those functions in the complete supply chain, they tend not to share such potential
with trading companies. The main question is why manufacturing firms still need to

24
cooperate with trading companies. But, the literature does not give very clear answer to
that. We think the answer lies in where at the complete supply chain, trading company can
still provide contributions perceived important by manufacturing firms. Financial
contributions are seen as the most valuable ones but sometimes other functions like
administration, communication, governance, risk management, operations…etc are more
valuable. This paper will try to clarify the strategic importance of trading company in the
complete global supply chain and will therefore focus on evaluation from strategic
management people.

25
CHAPTER 3
3. METHODOLOGY
As indicated at the end of literature review, in this paper, we will try to understand if trading
company functions are valued in the strategic management of manufacturing firms. And,
if so, exactly where in the complete supply chain?
Strategy makers are normally the people who are positioned in management of the
manufacturing firms. Depends on the size of the manufacturing firm, managers or the
people above the level of managers are key people for strategy creation. Following this
situation, this paper will try to clarify and understand if creators of strategies are
considering any of the functions from trading companies while making their strategies.
Methodology of our investigation will be descriptive study and based on measuring certain
aspects (Sekaran & Bougie, 2013). And, our study setting is non-contrived as we directly
collect information from the usual working environment of manufacturing and global
trading companies.
Survey research was performed with closed questions based on the interval scale. Almost
all strategic management people has to focus on certain aspects while creating their
strategies for the short term and also for the long term. Some of those aspects shall be more
important compared to some others. Understanding of each strategic management aspects
shall be very important to determine main area of focus by strategic management people.
Without this clarification, we cannot argue clearly whether the contribution from trading
firms are substantial or not. In our survey, firstly the survey is trying to clarify this point
from the perspective of strategic management people. In the second part, the survey
questions are based on evaluating the contribution of GTCs for each strategic items.
To define survey questions in the importance of strategic items, Porter’s Value Chain
Analysis (Porter, 1998) was taken as reference and main categories were listed mainly by
following that.

26
Another important point for the methodology of this study is the sampling technique.
Probability sampling technique was implemented mainly because of the fact that
representatives are critical for the study. The cluster of “managers or above” in the subject
companies was the target population as it is shown in below Table 3.
Table 3: Main clusters of the sample population
Clusters Size
1. Managers 14 respondents
2. Senior and General
Managers
41 respondents
3. Top Management 18 respondents
So, homogeneity of the cluster was the titles being only “managers or above” positions but
heterogeneity among the group is the fact that those respondents (managers or above) were
from different manufacturing and global trading companies, located in different countries
and acting in different industries…etc as it is shown in below Table 4. In detail, the
sampling model is cluster sampling and through the survey research on this sample, the
study is trying to understand the generalizability of the discussion topic (Sekaran & Bougie,
2013).
Table 4: Different aspects of the sample population
Aspect Details
1. Business Category 2 different categories: Trading & Manufacturing
2. Nationalities 14 different nationalities
3. Countries 14 different countries
4. Business Units 19 different units of business
The respondents are from 14 different countries and they are from different organizations
in those countries as shown in Table 5.

27
Table 5: Details about the respondents
Country Number of Respondents Number of Organizations
Belgium 14 5
China 1 1
France 2 2
Germany 1 1
India 1 1
Italy 8 6
Japan 4 1
Poland 1 1
Singapore 1 1
South Africa 2 2
Thailand 1 1
Turkey 22 19
UK 13 6
USA 2 1
In the investigation, targeting 95% of confidence interval with maximum of 5% error level,
population of 83 people was selected for survey. Expectation of returned surveys was from
70 units of the selected population. Finally, valid responses were collected from 73 units
of the population which corresponds 4.1% of error level with 95% of confidence interval.
Content of the survey was checked in advance. After creation of the survey,
understandability of the survey was checked by performing trial with several different
people. Those people selected for trial survey were from out of the sample population.
Based on the feedbacks of trial surveys, tune adjustments were done.
Before sending out survey to the population, sample population was verbally informed
either face-to-face or over the telephone about the content of the survey. Where necessary,
background of the investigation was explained to each respondents. Afterwards, survey
questions were delivered mainly by e-mail communication and survey results were
collected within 15 days by return mails. Internet based survey portals were not utilized.
Author was the main instrument to deliver surveys and to collect survey results from the
respondents.

28
After collection of the surveys from units of the sample population, data tables were
prepared and checked for errors before data analysis were carried out.
Finally, collected data was analyzed in line with the main research questions.

29
CHAPTER 4
4. STRATEGIC PRIORITIES IN THE SUPPLY CHAIN
Understanding strategic priorities in the supply chain from the perspective of people
creating and implementing strategies is very important as the basis of discussion. In fact,
all the items in the supply chain can be claimed as important. But, here the aim is to
understand which items are evaluated more critical to others.
Figure 1: Importance of strategic priorities in the supply chain
(Source: Author’s survey results performed in May 2016, valid responses: 73)
Above Figure 1 shows how strategic priorities were evaluated by 73 people involving in
strategic management at GTCs and manufacturing firms. Two main aspects evaluated
very highly important compared to other main categories were
 supply of raw materials and components
 delivery of products and services
0
4
6
10
25
25
3
0
0
2
11
28
30
2
0
1
0
11
26
30
5
0
0
0
2
16
37
18
0
0
0
2
16
38
17
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
LEVEL OF PERCEIVED IMPORTANCE
*ratings obtained from a seven-point scale of “7:very important” and “1:not at all important”
STRATEGIC PRIORITIES
Production Marketing&Sales Corporate Supply Delivery

30
Both of these main categories are following almost the same trend line. 55 of the
respondents has rated these two aspects at the level of 6 and 7 which corresponds 75% of
valid responses.
Corporate functions such as management of HR, finance, currency and risk factors are
following top two categories and about 48% of the respondents has rated corporate
functions at the level of 6 and 7. We think that most of the strategic management people
are also responsible for corporate governance in their companies. Therefore, corporate
functions are critical for them. Production was evaluated slightly below all the other main
categories.
To understand better the perspectives from the GTC respondents and respondents from
manufacturing firms, please see below Figure 2 and Figure 3.
Figure 2: Importance of strategic priorities from the perspective of GTC managers
0
3
6
5
6
7
0
0
0
0
8
10
9
0
0
0
0
4
10
10
3
0
0
0
1
6
13
7
0
0
0
1
8
13
5
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
STRATEGIC PRIORITIES-GTC

31
GTC managers were evaluating importance of production lower to other main categories
because production is not in the core of their business flow. As GTC main business model
is either supplying to their customers or delivering goods to global markets from suppliers,
these two items are perceived highly important by strategic management people. Following
supply and delivery, they tend to focus more on corporate functions. Global supply chain
management needs very efficient and organized corporate functions. Thus, strategic
management people in those companies are keen on corporate functions in their ratings.
Figure 3: Importance of strategic priorities from the perspective of manufacturing
firms’ managers
Strategy makers in manufacturing firms might be expected to rate production at the top if
their list. But those people in manufacturing firms do not evaluate importance of production
the highest. Parallel to the managers from GTCs, their top priorities in the list were supply
and delivery categories. Of course, their evaluation for the importance of production was
higher compared to that of GTC managers. But, still the importance of production stays
below supply and delivery and it is balanced with other main categories.
0
1
0
5
19
18
3
0
0
2
3
18
21
2
0
1
0
7
16
20
2
0
0
0
1
10
24
11
0
0
0
1
8
25
12
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
STRATEGIC PRIORITIES-MANUFACTURERS

32
Finally, we want to look in below Figure 4 and Figure 5 whether the perspective of strategic
management team is very different to that of operational management people in their
organizations. We find this clarification important for generalization of our finding about
the top strategic priorities for strategy makers. The managers who are in charge of only
single department or single business unit are taken as operational managers. Whereas the
managers who are the part of top management in the companies or who are in charge of
broad area of responsibilities with titles such as Senior Manager, General Manager …etc
are taken as part of strategic management team.
Figure 4: Importance of strategic priorities from the perspective of operational
managers
Based on above Figure 4, operational managers have rated supply and delivery categories
at the top of their list as well if we look at the total of points 6 and 7.
0
1
0
1
6
4
2
0
0
0
3
3
8
0
0
0
0
2
5
5
2
0
0
0
1
1
8
4
0
0
0
1
2
8
3
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
STRATEGIC PRIORITIES-OPERATIONAL MNG

33
Figure 5: Importance of strategic priorities from the perspective of strategic
management people
Figure 5 also shows that supply and delivery items are very critical for their companies in
terms of strategic management.
As a result of our survey analysis from different perspectives, we can clearly conclude that
supply and delivery items were evaluated top-two items in terms of their importance in
strategic management of GTCs and manufacturing firms. We think this result is in line with
the global environment and increasing level of globalization. Because, in global
environment of competition, managers think sourcing from global markets through best
fitting supply routes is very important to minimize costs without sacrificing other aspects
of competitive advantages like quality. On the other hand, in the offensive side of the
supply chain, delivering final products and services to global markets are clearly key
success factors to be able to enjoy opportunities from economies of scale and scope. In
Table 6, we want to present total means for each main categories we have surveyed.
0
3
6
9
19
21
1
0
0
2
8
25
22
2
0
1
0
9
21
25
3
0
0
0
1
15
29
14
0
0
0
1
14
30
14
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
STRATEGIC PRIORITIES-STRATEGIC MNG

34
Table 6: Total mean for main categories - Importance of strategic priorities
MAIN CATEGORY TOTAL MEAN*
SUPPLY 6.16
DELIVERY 6.12
CORPORATE 5.57
MARKETING & SALES 5.49
PRODUCTION 5.28
4.1 Details: The Importance of Strategic Priorities
As explained we have surveyed each main items in details. Although we can conclude from
our survey two main categories were rated very high compared to others in terms of
strategic priorities of strategy makers, we want to look closer into the details of each item
referring individual means. Our aim is to identify if any specific item under the main
category is very critical for strategy makers to reach reliable conclusion in terms of
weighting importance of strategic priorities.

35
Table 7: Details of highly important items
MAIN CATEGORY ITEM DETAILS
INDIVIDUAL
MEAN*
NUMBER OF
RESPONDENTS
RATED 6 OR 7
SUPPLY
Sustainable supply routes 6.36 64
Logistics (efficiency, management) 6.34 67
Inventory management (JIT/Lean) 6.08 61
Operations management (JIT/Lean) 6.06 60
Internal communication 6.17 61
Cost reduction on purchasing 6.11 62
Supply risks 6.01 58
DELIVERY
Distribution (Delivery speed) 5.99 57
Communication with customers 6.66 70
CORPORATE
Quality (management and risks) 6.14 60
Finance (power and cost) 5.88 57
PRODUCTION Product quality 6.25 61
MARKETING&SALES
Sales 6.11 60
Agility & Flexibility (Adaptation) 5.95 53
Competition on costs 5.85 57
In the Table 7, specific items which have individual mean higher to average mean are listed.
4.1.1 Supply Items
Logistics efficiency and management of logistics is very important. This item is one of the
key items since it is actually starting point of the supply chain and affecting many of the
other items in the chain. Together with just-in-time and lean management of operations,
logistics efficiency and management can support companies to get and maintain the
benefits from global supply chains. Otherwise, even GTCs and global production
companies can reach to globally low cost sources for raw materials and components, all
the savings from competitive sourcing can be easily taken off by the extra costs caused by
failing in these two items. In order to achieve efficiency in logistics management and just-
in-time in operations management, internal communication within the global organization
and so called philosophy of “respect for people” is very important (Christopher, 1998) as
far as sustainable supply routes. Because in this approach final aim is to have whole value

36
creation pipeline as lean as possible. As clearly detailed in the article of Kotobe&Murray
(2004), very high level of alignment of supply to the production is the key to achieve it.
Therefore, the risks of supply are also very critical.
We think one of the important factor why for strategy makers supply items overall are very
important is due to the fact that manufacturing firms and GTCs can perform mostly in the
supply items to create competitive advantage. Because the global conditions of the
economy is forcing more and more towards perfectly competitive market conditions,
performance at the supply side and excellence to minimize costs are really key elements to
maximize profit in such market environment ( Mankiw, 2011, pp. 66–67). It can be claimed
from the findings of our survey that, the biggest room for performance from the perception
of strategic management people still stays in the supply side of the complete supply chain.
4.1.2 Delivery Items
The same as in the supply items, in the delivery items, main focus of strategic level
management is creation of competitive advantage against their competitors. Distribution
channels are keys to meet customer demands better than the competition. Speed is very
important for the customers and strategic management teams are evaluating it very
important capability as well. Not surprisingly, communication with customers has over
6.66 of individual mean at the top of the detailed items in all main categories. This shows
us clearly that the discussion about agency theory in the literature is very important in terms
of GTC and manufacturer relations. Because in the case manufacturing firms are not in
direct communication with their customers, the strategic management people are very keen
on having best agent to bridge communication in between (Eisenhardt, 1989). In addition
to that, for strategy makers, gaps of communication with their customers shall be
minimized as it is also essential for good communication with customers (Burt, 1992).
GTCs’ one of the critical role can be identifying such gaps and helping manufacturing firms
to fill in them.
4.1.3 Corporate Items
Corporate items in details are also important items from the perspective of especially
strategic level management people as shown in Figure 5 lagging behind supply and delivery

37
categories. Among corporate items most important ones are financial power and finance
cost reduction. This is very understandable because in global environment of supply and
delivery, as a result of longer transit times, financing this transit period becomes very
important. In addition, capability to pick up best finance cost rates from different markets
and flexibility at global level is one of the possibilities in global environment. Global
company with high financial power can get easily between 1 to 2 per cent interest rate from
its network in European market; whereas best possibility to get the same finance from
China is about 4 to 5 per cent. Thus, not only having financial power itself but also having
flexibility to pick best option from global finance markets is very important. Quality is also
listed among high strategic priority items in line with the fact that quality perception of
customers is getting more and more importance. This is also becoming one of the
determinants for acceptance in new markets. Strategy makers want to win in the cost
competition but they do not want to depreciate so much their product quality. This point is
not important only for manufacturing firms but also for GTCs as far as they are facing end
customers and they want to keep performing long term in global markets. Quality and cost
balance is really critical point to manage strategically (Shin, 1989).
GTCs cannot avoid involving in product quality assurance against final customers even
they are not real manufacturer of those products. Due to this situation, GTCs shall find
ways to satisfy customer needs in terms of quality while protecting themselves from quality
risks out of their control in the supply chain. Additionally, efficient financing solutions are
very important due to nature of long financing periods in the global supply chains due to
longer transit times.
4.1.4 Production Items
In parallel to the argument under the category of corporate items, product quality is
essential for management and hedging quality risks in global market environment. On the
other hand, product or industry diversification items are not seen at the top of the strategic
priorities of strategic management people. These two items can be seen more important for
risk diversification but even top management of production company people rated these 2
items relatively lower than the average.

38
4.1.5 Marketing & Sales Items
Without having strong sales, it is impossible to turn the cycle of delivery-production-supply
with high efficiency. And through quick adaptation by means of agility and flexibility to
respond the demand from the global markets, sales can be maintained at requested level.
Again in line with the discussion for supply category items, strategy makers stress the
importance of competition on costs side as they see more room there to improve.
4.2 Wrapping-up importance of strategic priorities
Main point in this chapter was to identify most critical items among the strategic priorities.
Therefore the discussion focused on identification of items given importance level of the
point 6 and 7 in the author’s survey. And such items are tried to be investigated from the
different aspects of the respondents. By looking only at the main categories of value chain,
the items identified more important to the other categories are:
 Supply
 Delivery
Looking deeper into the details of all categories, as shown in Table 7, highly important
strategic management items in all categories are:
1. Sustainable supply routes
2. Logistics (efficiency, management)
3. Inventory management (JIT/Lean)
4. Operations management (JIT/Lean)
5. Internal communication
6. Cost reduction on purchasing
7. Supply risks
8. Distribution (Delivery speed)
9. Communication with customers
10. Quality (management and risks)
11. Finance (power and cost)
12. Product quality
13. Sales

39
14. Agility & Flexibility (Adaptation)
15. Competition on costs
As our investigation is trying to identify importance of trading houses in global supply
chains, we want to refer this chapter as a basis of our further discussion. In case, we can
identify really substantial contribution from GTCs to the items listed in this chapter, we
can claim GTCs being important for subject items in the global supply chains. Otherwise
the discussion of importance might remain very subjective. The following chapter therefore
will focus on investigating main contributions of GTCs in global supply chains and
identification of their connection with strategic priorities.

40
CHAPTER 5
5. MAIN CONTRIBUTIONS FROM GTCs IN THE SUPPLY CHAIN
As discussed, the word “importance” remains subjective without relating it to any certain
facts. Therefore, we tried to identify the items seen very important by strategy makers by
using interval scale till now. Following the understanding about the strategically important
items in the previous chapter, in this chapter, we will try to investigate in details main
contributions from GTCs into global supply chains. The alignment of GTCs’ contributions
with the important strategic priorities discussed in chapter 4 shall explain importance of
GTCs in the global supply chain.
During the investigation, contribution from GTCs mainly categorized in three main fields:
 Supply side contributions
 Demand side contributions
 Additional contributions: these are mainly about finance, quality, risk hedging,
governance and strategic partnerships. So we can say that additional contributions
are more about corporate functions.
Figure 6: GTC contributions - consolidated results
2
2
14
13
22
19
1
1
3
6
10
28
23
2
0
2
5
9
32
25
0
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
LEVEL OF CONTRIBUTION
*ratings obtained from a seven-point scale of “7:substantial contribution” and “1:no
contribution”
GTC CONTRIBUTIONS IN SUPPLY CHAIN
DEMAND-SIDE CORPORATE SUPPLY-SIDE

41
Figure 6 shows that GTCs’ contributions were rated closer to the center of the curve. All
the main categories we have surveyed were having the peak in the point of “5” in the
interval scale from 1 to 7. The contributions in supply side and corporate were more
substantial compared to demand side. One of the main points from this picture is that
especially for supply of raw materials and components, GTCs are still offering valuable
services according to strategy makers. On the other hand, GTCs are not crucial player in
demand side of the complete supply chain. We have to look into details of corporate items
to understand which items were pushing its curve to the right side. In the discussion around
this topic, it can be thought that the samples from production companies were under
evaluating the GTCs’ contributions in their supply chain. Therefore, it is better to see how
the same figure was shaped according to responses from GTC respondents and
manufacturing firms.
Figure 7: GTC contributions – GTC respondents
0
1
6
5
10
4
1
0
0
1
6
13
6
1
0
0
1
4
15
7
0
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
contribution”

42
Figure 8: GTC contributions – Manufacturing firm respondents
In comparison of Figure 7 and Figure 8, it is clearly seen that the representatives from
manufacturing firms evaluated the contributions from GTCs into their supply chains more
substantial compared to GTCs’ representatives on all three main categories. Whereas the
peak points of the curves from GTC samples were closer to the center at point “5”, those
of manufacturing firm samples were at point “6”. This finding is very important because
through this finding it can be said that the perspectives from the representatives of
manufacturing firms were not biased against the functions of GTCs in the supply chain.
OR, the respondents from GTCs were not rated their contribution in the global supply
chains very high.
Generally speaking based on these results from survey and discussions beforehand, we can
argue that strategy makers in the companies appreciate contributions to ease their supply
of raw materials and components. And therefore, they are more ready to delegate those
functions to third parties. On the other hand, they want to keep their direct contact with the
customer markets. High importance results for supply and delivery items in line with highly
substantial contribution results in the supply-side, GTCs sounds to be important for the
2
1
8
8
12
15
0
1
3
5
4
15
17
1
0
2
4
5
17
18
0
1 2 3 4 5 6 7
NUMBEROFRESPONDENTS
contribution”

43
supply of raw materials and components. And, GTCs shall focus on this part of the global
supply chains.
5.1 GTCs’ substantial contribution areas
Substantial contributions from GTCs into global supply chains were in generally
appreciated more in supply side and in corporate items rather than those of demand side.
This result is confirmed by both manufacturing firm samples and trading company
representatives in terms of main categories. We want to understand more in details the
specific GTC contributions in the global supply chains rated higher than the average in
order to clarify which functions from GTCs were seen critical by strategy makers. Average
rating results obtained from a seven-point scale of “7: substantial contribution” and “1: no
contribution” for main categories were as follows:
 Supply-side – 5.21
 Corporate functions – 5.01
 Demand-side – 4.60
Going into details of these main categories, we have seen specific items listed in below
Table 8 were rated higher to average in each main categories.

44
Table 8: GTCs’ substantial contribution items
Where Item
Means*
Total
(n:73)
GTC
Samples
(n:27)
Manufacturing
Firm Samples
(n:46)
SUPPLY-SIDE
Materials & components supply 5.66 5.62 5.68
Communication with suppliers 5.42 5.66 5.28
Coordination of different
suppliers 5.23 5.23 5.22
Logistics efficiency and
consolidation 5.74 5.79 5.71
Order and inventory management 5.51 5.49 5.53
Lead time management 5.39 5.27 5.45
Just in time delivery/production 5.58 5.57 5.58
Emergency management 5.51 5.49 5.53
Communication with global
subsidies 5.05 5.36 4.87
CORPORATE
Providing global network 5.56 5.70 5.48
Financial power 5.48 6.01 5.17
Hedging financial risks 5.19 5.75 4.87
Overall profit maximization 5.11 5.01 5.17
Improving communication 5.07 5.27 4.95
DEMAND-SIDE
Reaching/entry to global markets 4.95 4.97 4.95
Adaptation to foreign markets 5.15 5.31 5.05
*ratings obtained from a seven-point scale of “7:substantial contribution” and “1:no contribution”
5.1.1 Supply-side items
Except the items of communication with suppliers and communication with global
subsidies which were evaluated highly substantial contribution by GTC samples compared
to manufacturing firm samples, representatives from both GTCs and manufacturing firms
were sharing similar point of views about the level of contribution from GTCs’ functions.
The reason why manufacturing firms did not rate high in communication items is that most
of the manufacturing companies are using automated communication tools. Based on
interviews with senior and top management members from global manufacturing firms,
our understanding is that the communication type is shifting more and more pulling type
relation. Therefore global production companies in managing their communication with
supply side feel easier rather than that of customer side. Using MRP (Material Resourcing

45
Program) software and EDI (Electronic Data Interface) with the supply side, global
production companies feel comfortable in managing their suppliers. Most of the global
manufacturing companies are using so called self-billing system to accept and pay raw
materials and components from suppliers. Suppliers willing to be aligned to global
manufacturing firms for their long term relations are not against to be integrated into such
kind of systems introduced or imposed to them. On the other hand, once GTCs involved in
supply chain, they are dealing with many practical issues to set up supply route. The people
from GTCs feel their function is contributing a lot to the production companies since they
are solving such practical issues for setting up supply route. GTC samples are mostly
missing the point that, in the case of global manufacturing firm does not cooperate to any
GTC to set up this supply route and they are talking direct with the suppliers, many of the
difficult arrangements at supply side is either delegated to the supplier itself or to the
forwarders operating their supply routes. Especially in western production companies, the
understanding and mindset of “customer power” prevails. That’s why, it is very normal to
ask their suppliers to be integrated to their management systems of supply base. Same
mindset is applied when those same companies are themselves supplier for any customer
in the supply chain. This is proven in the previous chapter with the results showing that
manufacturing company people puts communication with customers at top of their strategic
priorities.
Other items which were rated as highly substantial contribution from GTCs are mainly
about setting up supply networks and efficient management of these networks. Global
networks of GTCs are their main competitive advantage against most of the manufacturing
companies. And this competency of GTCs was correctly recognized and evaluated by
production company representatives. GTCs who have capability to utilize their global
network at origin of the supply routes and at the destination, are contributing much in terms
of not only improving efficiency but also management of supply routes. They create big
advantage to manage emergency cases in the global supply routes, too. In order to illustrate
such contribution of GTCs, we want to show below Figure 9. As seen in this figure, without
GTC involvement, many complex transit routes have to be operated between origin and
destination due to individual arrangement of each supplier and each plant. In addition, in

46
some cases, parts shall move from one plant to another after arriving at destination.
Without capability of consolidation and coordination of cargo volumes from many
different suppliers, efficiency would be very low in the global supply chains. If
manufacturing firms try to reach optimum logistic efficiency by arranging full loads from
each of their suppliers, they will end up with additional concerns due to not leveled
incoming cargo volumes. Those concerns are mostly related to fluctuating stock levels such
as stocking space, shelf life…etc. Due to these concerns, we have identified that some of
the manufacturing firms who does not have their own facilities at the source of their
supplier base are trying to create consolidation centers. All of these concerns can be
managed easily by GTCs due to their global network by involving branch of GTC at the
origin.
Figure 9: Parts flow comparison of individual supplier arrangement and GTC route
Ak
In GTC route, since volumes from different suppliers are consolidated at the origin country
before the port of export, levelled and standard delivery frequency can be possible in
parallel to the shipping calendar of the liners. One of top managers of the GTC operating
similar supply routes from far-east to Europe explained that by consolidating volumes of
around 200 customers in Europe from around similar number of suppliers in Japan, they
are managing supply route on weekly sea shipment basis. In this kind of operation, since
European customers are receiving levelled quantities for their monthly orders every week,
GTC operation offers many merits for the management of lean-JIT production. In addition,
GTC who is managing supply route in this scheme contributes efficient order and inventory
GTC RouteSupplier Arrangement
Supplier A
Supplier B
Plant A
Plant B
Supplier A
Supplier B
Plant A
Plant B
GTC
Plant CSupplier C Supplier C Plant C

47
management by providing standard lead times. Since vessel frequency is weekly and
shipment volumes are levelled, in case of emergency cases of shortage, due to the
availability of the parts in transit, customers are automatically provided with additional
safety.
In the survey and interview process, we have identified innovative solutions from GTCs to
respond just in time delivery requirement for big components (like the seats or bumpers in
the car production). One of these solutions is that GTC sets up the warehouse physically
very close to production plant of its end customer. And, this warehouse is connected to end
customers’ production systems with EDI. GTC is collecting such big components into its
warehouse from their manufacturers and delivering those components in line with
production sequence of the end customer in high frequencies. Most common frequency
identified was delivery per production shift of the end customer’s plant but in case of more
complex and large parts like car seats, delivery frequency is increasing to every 30 minutes
or 20 minutes depending on the requirement from end customer. In terms of commercial
set up of such operation, GTC is acting either like tier-1 supplier for the end customer by
involving in commercial route or only operating such warehouse logistically. Of course
such flexibility of the operations creates strong winning business scenario for everyone
especially if location of production plants are very far from each other in the supply chain.
We have also identified more advanced business model in Czech Republic applied by one
of the biggest GTCs in the world. In that application GTC is doing final assembly operation
based on the requirement from end-user to create just in time delivery. That operation is
concerning final bumper assembly for the car production under the control of main bumper
maker. Bumper supplier is still fully responsible for bumpers delivered to car manufacturer
and bumper maker can still keep its connections with that car manufacturer. But that
bumper maker wins the business against the competition who has closer bumper plant to
the subject car manufacturer by collaboration with the GTC based on specific contracts.
They explained that, number of cars to be produced is well forecasted by car maker but
exact specifications in details for the daily production is informed just shortly before the
production day. Therefore bumper maker itself cannot provide just in time delivery in such
a short notice. But, bumper maker delivers certain stocks of bumpers to GTC warehouse

48
close to the end user. Other components at certain stock levels are also delivered to the
same GTC warehouse. And, GTC is doing final assembly based on the model specification
(like sports model or classic model) or the production color sequence of the cars in its
warehouse. This kind of operation gives full flexibility in the supply chain in terms of just
in time delivery for such big components like bumpers, although the location of the bumper
maker is far from the car maker. Bumper maker also shows innovative and proactive
solution to its important customer together with GTC.
Global manufacturing companies are mainly producing their products continuously and
trying to regulate their production. This is very important not only for the management of
overall supply chain from input to the output but also for the efficiency of many internal
aspects from cash flows to human resources planning and investments. One key success
factor is lean organization, lean operation and lean management. GTCs, in the supply chain,
can standardize as explained above many operations and flows by means of their global
network, flexibility and financial strengths. By working with GTCs, production companies
can also minimize their hidden costs blanketed because of inefficiency of operations. And,
many fixed costs included in GTCs pricing structure can be returned into variable costs for
production companies which mean 100% visibility and management of these cost items.
Therefore overall profit maximization mainly results from:
 Increased efficiencies by GTC operations to minimize costs in the supply chain
 Lean operation and management of the supply chain
Finally we want to talk about GTCs’ contribution for emergency management which was
rated very high from in the survey. Regarding this item, we have interviewed several top
management people from GTCs and also from manufacturing firms. Emergency situations
during day to day operation mainly stems from fluctuation of production quantities or
quality defects…etc are somehow delegated to suppliers by the manufacturing firms. In
this respect manufacturing people does not have big concerns for themselves. But in the
recent years, there have been several big incidents affecting global supply chains such as:
 In 2010 – volcanic eruption in Iceland which has stopped flights in Europe
 In 2011 – big earthquake and nuclear incident afterwards in Japan

49
 In 2012 – big explosion in Evonik factory in Germany.
During such events, GTCs working closely with manufacturers helped much to overcome
supply problems and to organize alternative sources or emergency deliveries. Even one of
the GTCs performed reactivity level check for the parts coming from Japan after nuclear
disaster following big earthquake. Now most of the manufacturers are joining global
networks of industry communities to reach global supplier information to be prepared for
similar emergency cases. But, GTCs with strong global networks still provides big
contribution in the supply chain from the viewpoints of strategy makers for emergency
management. We find this function of GTCs very important to have sustainable global
supply routes.
5.1.2 Corporate items
Global network of GTCs was discussed already and it was recognized by sample
population. Especially financial power of GTCs and importance of financial risk hedging
by utilizing GTC are important items. Financial power of GTCs is especially important to
minimize finance costs in the supply chain in addition to easing initial set up of the
business. GTCs have capability to use best interest rates from global markets to finance
any global business. One of the big GTCs in Europe explained that in case of sourcing from
China, manufacturing firms are mainly financing this route either at origin or at the
destination. If the finance is done at the origin, manufacturing firm shall employ high level
of working capital in this supply chain since the parts in such long transit have to be
financed. And, depends on the production company’s financial power, interest rates differ
in Europe. In case Chinese supplier bears the finance costs, somehow Chinese supplier
needs to add finance costs somewhere in the supply chain with much higher interest rates
in China (approximately 4% higher to Europe). But if GTC is operating this route, GTC
can pay Chinese supplier at origin and GTC can finance this whole supply route even
including safety levels in Europe by the best interest rates from global markets. And,
financial power is one of the strengths of almost all GTCs. Knowing this situation, some
of the global production companies who have also very high financial power are
introducing “factoring” solution to their Chinese suppliers to minimize finance costs in the
supply chain. But in this case, the risk factors taken by financing banks are not too low

50
either. GTCs financial power is important advantage also for production companies trying
to improve their financial health through working capital minimization in the supply chain.
Of course they are aware that they have to pay GTC for their service but considering
opportunity costs and efficiency savings, some of the companies welcome GTC to their
supply chain mainly because of financial power.
In addition to the creation of financing merit, another important function from GTCs to
hedge financial risks comes from reduction of business set-up cost in destination country
where the end customer is located. There are many cases on this subject. During another
interview with one GTC manager in Germany, he has explained this situation with one
clear example from his business. One Japanese engine component manufacturer has
targeted one of the very famous German car makers and this Japanese manufacturer
decided to cooperate with subject GTC to approach to German car maker to hedge financial
risk of setting up such business. Because German car makers are not cooperating and
committing long term relation to their suppliers contrary to Japanese car makers. Mainly
due to that Japanese supplier did not want to spend so much initial set up cost. On the other
hand, German car makers are very important players in automotive industry with their
technological innovations, shaping industry trends and brand powers. Therefore, for
Japanese component manufacturer it is very important business even though they cannot
100% secure long term volumes. Under these conditions, it was very important strategic
concern for Japanese supplier whether to set up this business with their own people and
with their own company. Due to possibility to risk big setting up cost in a short while, this
Japanese manufacturer decided to supply parts produced in Japan through supply route of
GTC by using existing network of the GTC in Germany. Thus, Japanese manufacturer
secured this business without any financial risk just by sharing their margin with GTC. Of
course in the long term, GTC manager is aware that Japanese manufacturer can penetrate
strongly with its products into German market and achieve feasible volumes to go into this
market by themselves. And, rather than sharing their margin with GTC, they might consider
setting up their own network in Germany but he is not afraid of such risk. Through this
business, GTC is also setting up his own network inside subject German car maker and

51
GTC believes that as far as German car maker is satisfied with GTC’s performance, GTC
is secured in the long term relation with this customer.
Last point we want to mention about GTC contributions into corporate functions is that, as
seen in the above Table 8, GTC representatives in general rated their contribution in this
area higher to manufacturing firm respondents.
5.1.3 Demand-side items
Figure 6 shows that GTCs’ contribution in the demand side is evaluated the lowest among
the main categories. On the other hand, as indicated in Table 8, respondents of our survey
think GTCs are important to reach and to adapt to global markets. Global network of GTCs
really important for manufacturing firms in some of the specific industries to reach to
customers from many different regions. For example, in construction machinery or similar
type of industries, the goods are produced and delivered to specific demands from
customers. Thus, creation of such demand only by the manufacturer itself is very difficult.
But the GTC who has network in such markets where the demand and potential exists can
reach many customers. We have interviewed one GTC representative who is based in
Uzbekistan and he has explained to us that Uzbekistan is very big cotton producer in the
world. But, the capacity in Uzbekistan to process cotton in the country is very limited. And,
subject GTC is now collecting demand from potential customers in this market to introduce
to cotton processing machinery manufacturers. During another interview with one of the
world famous CNG (compressed natural gas) tank manufacturer in Italy, he has stressed
importance of GTC for himself in demand side from different perspective. He has
explained that his company knows huge natural gas potential in India. He said, they have
Indian contacts for this market as well. But, since the market situation and government
policies in the country are completely different to Europe, they need GTC who has strong
networks in this market to correctly understand demand in the market and to develop
correct strategies in this market.
Adaptation to the markets with innovation and with creation of market standards is one of
the key elements at demand side. In addition, understanding of trends in specific markets
is only possible if manufacturers are able to understand drivers of global markets. Europe

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