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Page 1: Applying hybrid system theory to supply chain · PDF fileApplying hybrid system theory to supply chain ... Concluding a case study illustrates the application ... its procurement market

Abstract no. 011-0268

Applying hybrid system theory to supply chain design

Volker Stich, Jan Christoph Meyer

Research Institute of Operations Management (FIR) at RWTH Aachen University

FIR at RWTH Aachen University, Pontdriesch 14/16, D-52062 Aachen

Email: [email protected]. Phone: +49 241 47705 427

POMS 20th Annual Conference

Orlando, Florida U.S.A.

May 1 to May 4, 2009

ABSTRACT

Supply Chain Management delivers a considerable amount of ideas and methods to design

the value stream. Each of these concepts may lead to significant cost reduction and higher

service levels. But the same concept does not work for different customers and their diverse

needs. Thus, a “one size fits it all” supply chain cannot lead to success. The key to overcome

this obstacle is the hybrid supply chain. This paper outlines the application of hybrid system

theory to supply chains. After a comprehensive overview of existing methods for the design of

supply chains is given, a methodology for a customer-to-customer oriented supply chain

design is presented. This approach adopts the hybrid system theory to supply chains which is

in a nutshell that hybrid systems use the advantages of its subsystems to reach a superior

result to one system alone. Concluding a case study illustrates the application of the

methodology.

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I. INTRODUCTION

In modern business, satisfying customer needs is a strategic factor of success. Nevertheless,

many companies are incapable of fulfilling logistic services as they are required by the

market. In consumer goods industry for instance, this deficiency results in out-of-stock-

situations and high sales losses (GRÜN et al. 2002, p. 7ff). Insufficient availability of goods,

at the point-of-sale or in any stage of the supply chain, is caused by inadequate service levels

of the suppliers, inaccurate forecasting, lack of information exchange and unpredictable

ordering behaviour of suppliers (BUNDESVEREINIGUNG LOGISTIK 2005, p. 99).

However, the underlying reason for insufficient availability of goods is best described by an

antagonism between the desire to minimize supply chain costs by raising efficiency, and the

wish to maximize availability by increasing the agilitiy of the supply chain. This can be

derived from the diverging goals of the entities and members of the supply chain: Whereas

demand-orientated, customer-focused entities focus on high flexibility, short delivery-time

and high availability, supply-side oriented entities value primarily the minimization of

production-, transport-, purchasing- and inventory costs (STRATTON/WARBURTON 2003,

p. 184). Diverging goals may exist even in a single company (e.g. between sales, procurement

and production departments) and are prevalent between different companies that are working

together in a supply chain. The antagonism between demand- and supply-side counterparts of

a supply chain leads to significant logistical deficits.

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Supply Side Demand Side

Just-In-Time ProductionKanban

Supplier Managed Inventory (SMI)

Konsignation

One-Piece-Flow

etc.

Efficient Consumer ResponseVendor Management Inventory (VMI)

Continous Replenishment (CR)

Cross Docking (CD)

Quick Response (QR)

etc.

Produrementcosts

Stock value

Productioncosts

Inventorycosts

Efficiency

RevenueFlexibility

ReadinessNever Out-of-Stock

Agility

ManufacturerSupplier Retail

Supply Side Demand Side

Just-In-Time ProductionKanban

Supplier Managed Inventory (SMI)

Konsignation

One-Piece-Flow

etc.

Efficient Consumer ResponseVendor Management Inventory (VMI)

Continous Replenishment (CR)

Cross Docking (CD)

Quick Response (QR)

etc.

Produrementcosts

Stock value

Productioncosts

Inventorycosts

Efficiency

RevenueFlexibility

ReadinessNever Out-of-Stock

AgilityRevenue

Flexibility

ReadinessNever Out-of-Stock

Agility

ManufacturerSupplier RetailManufacturerSupplier Retail

Fig. 1: Diverging goals in the supply chain

Although this antagonism is a persistent issue in praxis, to date neither industry nor science

has found adequate approaches to resolve this dilemma. Existing approaches try to solve the

problem either by implementing a more efficient asset management, or by introducing more

effective process design. They failed, for they lack any holistic contemplation of the entire

supply chain (WILDEMANN 2009, p. 1ff). Since hitherto existing approaches themselves are

focused either on the demand- or supply-side, they are unable to cover the above mentioned

antagonism (GOLDSBY et al. 2006, pp. 57ff). As an example, Just-in-time strategies

(WOMACK/JONES 2004, p. 161) address only production- or supply-oriented parts of a

supply chain, while both Efficient Consumer Response (ECR) or Category Management

(CM) (MAU 2003, p. 22ff) intend to optimize the interface between customer and

manufacturer. As a result, supply chains are often managed in a contradicting way – both in

terms of sales activities and taking into account production and procurement goals

(cp. Fig. 1). Failure of the value stream, out-of-stocks and revenue losses are the outcome.

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Risk-hedging Cost Complexity Cost

Cost

Degree of Individualization

Customer-oriented

Supply Chain

„One size fits all“Supply Chain

Number ofSupply Chains

Minimal Supply Chain Cost

Risk-hedging Cost Complexity Cost

Cost

Degree of Individualization

Customer-oriented

Supply Chain

Customer-oriented

Supply Chain

„One size fits all“Supply Chain

„One size fits all“Supply Chain

Number ofSupply Chains

Number ofSupply Chains

Minimal Supply Chain Cost

Minimal Supply Chain Cost

Fig. 2: The optimal number of supply chains

To solve this dilemma, an end-to-end orientation towards the customer is required. In terms of

the marketing perspective, the extension and diversification of the assortment of goods is

understood by striving for a higher customer orientation (STEPHAN 2007, p. 3). Reverse, this

is also valid for a specification of the supply chain itself. The first step, a different design of

supply chains in different branches, is already implemented in many industrial segments, e.g.

Fast Moving Consumer Goods (FMCG) Industry is focusing on optimising their distribution,

whereas Automotive Industry continuously increases the integration of their suppliers. But

only very few companies have recognized that a diversification of the supply chain within one

single branch of business does not only lead to further reduced costs (ATKEARNEY 2004,

p. 1), but will solve the described antagonism between demand- and supply-side. Executive

managers in modern industry therefore have to take a two-fold decision: Which type of supply

chain is suitable for their customer needs, and how many supply chains are necessary, yet

affordable under economic reasons (cp. Fig. 2).

II. ESTABLISHED APPROACHES FOR SUPPLY CHAIN DESIGN

As a first approach, Fisher (FISHER 1997, p.106ff) contrasts different types of goods and

their associated demand predictabilities with their respective supply chains. On the basis of

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two generic product types – functional products with high demand predictability and long life-

cycles (e.g. diapers) and innovative products with low demand predictability and short life-

cycles (e.g. cellular phones) respectively – he defines two corresponding supply chain types to

meet the distinct requirements of these product types. For functional products, the primary

goal of supply chain design is cost reduction with respect to predictability and reliability. In

contrast, innovative products require supply chains that are designed to minimize the lead

time between order and delivery. According to Fisher, these requirements result in two

distinct types of supply chains, which he names “Efficient Supply Chain” and “Responsive

Supply Chain” (FISHER 1997, p.106ff; ALICKE 2005, p. 144; CHILDERHOUSE/TOWILL

2006, p. 361f).

Christopher, Towill and Mason-Jones, based on Fisher’s suggestion, propose the “Lean

Supply Chain”, “Agile Supply Chain” and “Leagile Supply Chain” (MASON-JONES et al.

2000, p. 4061ff; CHRISTOPHER/TOWILL 2001, p. 5; AITKEN et al. 2005, p. 75f). While

the Lean Supply Chain �ocuses on cost reduction for standardized mass-products, the Agile

Supply Chain aims for high availability of goods and short lead times. Both supply chain

types are similar to the ones described by Fisher, while the Leagile Supply Chain is an

extension of the two former types (MASON-JONES et al. 2000, p. 4061ff). It is defined as a

combination of Lean and Agile Supply Chains by different authors, introducing a point-of-

decoupling (OLHAGER 2003, p. 319ff) to separate Lean (upstream) from Agile

(downstream) processes. Extended by Christopher and Towill to what they call “hybrid

strategies”, this approach is able to model parallel processes (Lean and Agile) in a single

supply chain.

All approaches that were introduced to this point are focused on the demand-side of the

supply chain. They become extended to the supply-side by Lee (LEE 2002, p. 93ff), who

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considers a distinction between stable and evolving supply processes. Stable processes are

characterized by fully developed technologies and manufacturing techniques, as well as by a

reliable procurement market. On the contrary, an evolving process is not fully developed and

becomes subject to permanent change, its procurement market is limited relating to volume

and experience. Considering the supply-side, Lee yields a “Risk-Hedging” and an “Agile”

supply chain in addition to Fisher’s Efficient and Responsive supply chains. The former is

capable of pooling and sharing capacities and resources, e.g. different companies save storage

cost by pooling their stocks of certain critical goods. The Agile Supply Chain is defined

according to Christopher’s Towill’s and Mason-Jones’ Leagile Supply Chain, namely as a

combination of the Responsive and the Risk-Hedging type.

Corsten and Gabriel (CORSTEN/GABRIEL 2004, p. 245) propose another attempt to extend

Fisher’s approach, without taking Lee’s approach into account. They define four supply chain

strategies – a lean supply chain, a flexible supply chain, a fast supply chain and an aligned

supply chain. The first three types match the Lean, Leagile and Agile supply chains of

Christopher, Towill and Mason-Jones, but the aligned supply chain represents a true extension

of the concept. Designed for efficiency, the aligned supply chain is focussing on the

optimization of internal processes, unlike the lean supply chain, which tries to further

integrate suppliers into the supply chain process.

Childerhouse and Towill summarize all depicted approaches for supply chain modelling as

“market-oriented supply chains” (CHILDERHOUSE/TOWILL 2006, p. 357ff). On the basis

of Christopher and Towill (CHRISTOPHER/TOWILL 2001, p. 235ff), they establish a

“migratory model” to describe supply chain development. This model subdivides four distinct

phases, a “product oriented push”, “market oriented push”, “aggregate market pull” and

“individual consumer pull”. While Childerhouse and Towill define a high scale of integration

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as a desirable goal in migratory models in general, no such goal exists with respect to market

orientation. Instead, the desirable goal is to meet the requirements of market and customer

completely. Supply chain segmentation and the design of parallel, segment-specific supply

chains according to customer and market needs is the adequate means to achieve this goal

(SCHNETZLER et al. 2006, p. 1ff).

III. SUPPLY CHAIN SEGMENTATION

Individualization of customer needs and subsequently the individualization of production and

of supply chains themselves is a 21st-century-phenomenon (CHILDERHOUSE/TOWILL

2006, p. 357ff, SCHMIDT et al. 2008, p. 841ff). To meet this challenge, a classification of

supply chains, as well as precise knowledge of customer needs, is required. Comprehensive

systems for classification of supply chains are necessary to find the appropriate answers to the

questions “How many supply chains?” and “What kind of configuration?”

(CHILDERHOUSE/TOWILL 2006, p. 357ff). However, current approaches offer basically

just very generic support to companies that are trying to configure and improve their supply

chains (SCHNETZLER et al. 2006, p. 1ff).

Originated in marketing, segmentation intends to increase the focus on the customer, while

coping with the enhancement of complexity generated by the ongoing individualization of

demands (SCHNETZLER et al. 2006, p. 4). Homogenous segments implemented in a supply

chain allow customers to be addressed in a more distinguished way (BRUHN 2007, p. 58).

Supply chain segmentation therefore proposes a “customer-to-customer orientation” and at

the same time determines the number of required supply chains. The customer-to-customer

orientation reflects the supply chain’s orientation towards the customer, whose different

buying attitudes, individual expectations towards service and variable willingness to pay

different prices (BARRATT 2004, p. 30ff) determine the end-to-end design of the supply

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chain (cp. Fig. 3). Based on this individualized input, separated supply chain segments are

formed and segment-specified phenotypes are deduced, all to meet customers demands in the

best possible way.

ManufacturerSupplier RetailCustomerneeds

Customer-to-Customer Orientation

Customer characteristics

Supply Side Demand Side

Customersatisfaction

ManufacturerSupplier RetailCustomerneeds

Customer-to-Customer Orientation

Customer characteristics

Supply Side Demand Side

Customersatisfaction

Fig. 3: Customer-to-customer orientation in the supply chain

IV. IDENTIFYING HOMOGENOUS SUPPLY CHAIN SEGMENTS

Customer needs as well as the true customer characteristics must be analysed and categorized

in order to identify the significant segments of a supply chain in a customer-to-customer

sense. The deduction of these categories is based on certain attributes and their respective

values (KNOBLICH 1969, p. 143), allowing for the classification of customer needs in the

area of the conflict between agility vs. efficiency and the description of the true customer

characteristics in terms of predictability.

To accurately describe the needs and expectations of the customer, a basis of criteria is given

by the framework of “order qualifiers” and “order winners” proposed by Hill

(HILL 2000, p. 50ff). While order qualifiers describe the fulfilment of requirements that are

necessary to be competitive at all, order winners are criteria that make a difference between

competing companies. In the sense of supply chain segmentation, different criteria may be

identified as qualifiers or winners for different customers. Following, different criteria

describing the customer needs can be deduced by means of the essential target objectives in

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supply chain management (cp. Fig. 4). Among these are, expected service levels, expected

delivery reliability, expected lead time, expected flexibility, price expectations and

consignment requirements. Categorization and description of these requirements can be

achieved by defining their attributes and corresponding values.

Supply Chain Performance

Assets

To-Be

As-Is

Service LevelReliabilityOrder Cycle TimeFlexibility

Production costsProcurement costsWarehousing costsInventory costs

Inventory value

Supply Chain Costs

Supply Chain Performance

Assets

To-Be

As-Is

Service LevelReliabilityOrder Cycle TimeFlexibility

Production costsProcurement costsWarehousing costsInventory costs

Inventory value

Supply Chain Costs

Fig. 4: SCM Target System (cp. MEYER, SANDER, 2007, p. 54ff)

The definition of the customer’s characteristics may result on the basis of attributes that

describe either past time relationship to the customer or are the result of an external analysis

of a first-time customer, resulting in a re-configuration or an initial configuration of the

supply chain respectively. Such attributes may be demand volatility, seasonality, impact of

trends, information exchange, order-change behaviour and sourcing-strategies.

V. SUPPLY CHAIN PHENOTYPES

These attributes and their respective values are the basis for the supply chain segmentation. In

combination, they yield a 4-fold matrix, whose quadrants represent the distinct segments of

the supply chain that has to be designed. Each segment can be allocated to a distinct supply

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chain phenotype, according to customer needs and characteristics: “cost-efficient”,

“responsive”, “accurate” and “agile” (cp. Fig. 5).

Quadrant I and IV form a homogenous pattern with respect to customer needs and customer

characteristics. A predictable behaviour of the customer allows high planning accuracy and

therefore enables the most efficient design of the involved processes (quadrant I). Meeting the

demands of unpredictably acting customers requires high agility (quadrant IV). In contrast,

quadrants II and III describe a heterogeneous situation. The customer’s desire for an agile

supply chain while acting predictable, requires the highest accuracy in the planning processes,

to guarantee the required availability and flexibility (quadrant III). However, customers acting

highly unpredictable, but demanding high cost efficiency, can only be satisfied by a highly

responsive supply chain (quadrant II).

Agi

lity

Effi

cien

cyCus

tom

erN

eeds

Customer characteristics

Predictable Non-predicatable

Cost-efficient

Accurate

Responsive

Agile

I II

III IV

Agi

lity

Effi

cien

cyCus

tom

erN

eeds

Customer characteristics

Predictable Non-predicatable

Cost-efficient

Accurate

Responsive

Agile

I II

III IV

Fig. 5: Supply chain segments and supply chain phenotypes

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VI. HYBRID SUPPLY CHAINS

Supply chain segmentation allows companies to classify their customers and allocate them to

the four segments described above. The corresponding supply chain phenotypes constitute the

initial point to adjust all supply chain activities. To supply customers according to their

respective requirements, it is recommendable for companies to establish four supply chains, if

their portfolio of customers is heterogeneous, or less if a more uniform type of portfolio is

present. By this approach, all customers can be satisfied, while supply chain agility and

efficiency are respected. Simultaneous operating of different supply chains, in which

customers are being allocated accordantly, is therefore the next consequential step in supply

chain management. The mentioned antagonism of a “one size fits all” approach and its

divergent goals can be resolved by introducing the described approach which is called “hybrid

supply chain”.

System: Hybrid Engine

Subsystem 1: Combustion Engine Subsystem 2: Electric Engine

Indended Purpose: Propulsion

+ High velocity+ High Range+ High Torque- Emission - Bad Energy Balance

+ Zero-Emission- Low Velocity - Low Range

+ High Velocity+ High Range+ Reduced Emission + Improved Energy Balance

System: Hybrid Engine

Subsystem 1: Combustion Engine Subsystem 2: Electric Engine

Indended Purpose: Propulsion

+ High velocity+ High Range+ High Torque- Emission - Bad Energy Balance

+ Zero-Emission- Low Velocity - Low Range

+ High Velocity+ High Range+ Reduced Emission + Improved Energy Balance

Fig. 6: Hybrid engine as an example of a hybrid system

The joint use of different supply chain phenotypes equates on the definition of a hybrid

system (BROCKE 2004, p. 13f), for which a hybrid engine is an adequate analogy

(cp. Fig. 6). The hybrid engine covers all the advantages of a single combustion engine (high

moment of torque, high final speed, high cruising range) and an electric motor (zero-emission,

both exhaust and noise) by simultaneously minimizing their disadvantages (emission and bad

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energy balance of combustion, low speed and low range of electric), thus reaching a far better

performance than any of its subsystems alone. The deduced supply chain phenotypes

constitute, in analogy to the subsystems of a hybrid engine, the different “devices” of a hybrid

supply chain, that are employed according to well-defined rules and standards, that is to say,

the segmentation.

VIII. CASE STUDY

In order to proof the practicability of the shown concept of hybrid supply chains, a short case

study is illustrated. A company with more the 50.000 employees and subsidiaries in about 100

countries worldwide served different markets by a “one-size fits all”-supply chain. The

different market segments across all business units are semiconductor, assembly, aerospace,

construction, surface treatment, flexible packing, consumer goods, paper converting, coating,

tobacco, automotive, steel and coil and metal packaging. Indeed, the supply chain

performance did not meet the needs of the different market segments perfectly. The situation

of the “one-size fits all”-supply chain lead to insufficient customer satisfaction, because their

divers requirements had not been mapped to the supply chain. To resolve this obstacle, the

company decided to implement the hybrid supply chain approach.

First, the company accomplished a comprehensive analysis of each customer’s needs and

characteristics resulting in about 20 homogenous customer types across all business units.

According to the identified needs and characteristics, each customer type, and by this means

the corresponding customers, had been allocated to a supply chain segment in the described 4-

fold Matrix (cp. Fig. 7).

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BUA Direct Customers S/MBUA Key Account LBUB Direct CustomersBUB DistributorsBUC Direct Customers S/MBUC Distributors ElectronicsBUC Distributors AerospaceBUD Direct Customers High MarginBUD Direct Customers Low MarginBUD Key Account High MarginBUD Key Account Low MarginBUD Distributors WholesalersBUE Direct Customers S/MBUE Key AccountBUE Distributors/MaintenanceBUF PartsBUF Loctite ProductsBUF PVCBUF MPTBUF Teroson Products

Customer characteristics

Cus

tom

er N

eeds

predictable Non-predictable

Agi

lity

Effi

cien

cy

Agile Supply Chain

Accurate Supply Chain

Responsive Supply Chain

Cost-efficient Supply Chain

BUA Direct Customers S/MBUA Key Account LBUB Direct CustomersBUB DistributorsBUC Direct Customers S/MBUC Distributors ElectronicsBUC Distributors AerospaceBUD Direct Customers High MarginBUD Direct Customers Low MarginBUD Key Account High MarginBUD Key Account Low MarginBUD Distributors WholesalersBUE Direct Customers S/MBUE Key AccountBUE Distributors/MaintenanceBUF PartsBUF Loctite ProductsBUF PVCBUF MPTBUF Teroson Products

BUA Direct Customers S/MBUA Key Account LBUB Direct CustomersBUB DistributorsBUC Direct Customers S/MBUC Distributors ElectronicsBUC Distributors AerospaceBUD Direct Customers High MarginBUD Direct Customers Low MarginBUD Key Account High MarginBUD Key Account Low MarginBUD Distributors WholesalersBUE Direct Customers S/MBUE Key AccountBUE Distributors/MaintenanceBUF PartsBUF Loctite ProductsBUF PVCBUF MPTBUF Teroson Products

Customer characteristics

Cus

tom

er N

eeds

predictable Non-predictable

Agi

lity

Effi

cien

cy

Agile Supply Chain

Accurate Supply Chain

Responsive Supply Chain

Cost-efficient Supply Chain

Customer characteristics

Cus

tom

er N

eeds

predictable Non-predictable

Agi

lity

Effi

cien

cy

Agile Supply Chain

Accurate Supply Chain

Responsive Supply Chain

Cost-efficient Supply Chain

Agile Supply Chain

Accurate Supply Chain

Responsive Supply Chain

Cost-efficient Supply Chain

Fig. 7: Allocation of the customer types to the supply chain segments

In a second step, each of the supply chain phenotypes has been detailed by standard supply

chain strategies. The “Cost-efficient Supply Chain” aims for highest capacity utilization in

production and distribution to create the cost efficiencies in the supply chain. Therefore a

combination of a make-to-order and make-to-forecast strategy has been applied. The

“Responsive Supply Chain” pursues aggressive make-to-order strategies to be responsive and

flexible to changing orders. The “Accurate Supply Chain” strives for optimized inventories by

keeping the pipeline flowing to reduce the risks of supply short-ages. Thus, a pure make-to-

stock strategy has been utilized. Finally, the Agile Supply Chain is carried out by a

combination of make-to-order and make-to-(buffer) stock strategy to be responsive, while

reducing the risks of supply short-ages.

In a third step, each supply chain phenotype has been aligned with distinct supply chain

performance levels. The essential key performance indicators of the supply chain that are

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service level, reliability, order cycle time and flexibility and costs have been defined

according to the customer needs and characteristics for each supply chain segment. Thereby,

it is obvious that the “Agile Supply Chain” is subject to the highest performance level,

whereas the “Responsive Supply Chain” leads to minimal supply chain costs.

By the application of the hybrid supply chain approach the company reach a major impact on

the customer satisfaction as well as the diverging goals of the demand- and supply-side have

been aligned.

VIII. CONCLUSION

To satisfy heterogeneous customer needs, “one size fits all” supply chains turn out to be

neither effective nor efficient. The pictured antagonism between demand- and supply-side

yields significant availability problems which in turn cause eminent sales losses. This conflict

can be solved by an end-to-end orientation to the customer, while diversified requirements

and characteristics can best be met by a segmented supply chain.

Any attempt to utilize such “hybrid” supply chains for industry will first have to further

develop the approach of supply chain segmentation to substantiate the supply chain

phenotypes. According to the SCOR-model (SUPPLY CHAIN COUNCIL 2006, p. 2;

BOLSTORFF/ROSENBAUM 2003, p. 2) one has to allocate supply chain management

concepts according to the requirements of the high level processes source, make and deliver in

order to attain a detailed reference configuration for each supply chain phenotype,.

It is the aim of current research, to develop the supply chain segmentation approach further

and to build a framework for hybrid supply chains, in order to support executives in industry

in answering the question of number and configuration of supply chains and to assist them to

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overcome the conflict between the market- and production-oriented sides of the supply chain.

Hybrid supply chains offer an efficient and likewise powerful way to face growing

requirements and increasing dynamics of markets, as well as the individualization of customer

needs. The final goal is therefore the extension of supply chain management by including

hybrid supply chains.

IV. ACKNOWLEDGEMENTS

The depicted research has been funded by the German Research Foundation DFG as part of

the Cluster of Excellence "Integrative Production Technology for High-Wage Countries".

More information about the Cluster of Excellence can be found on the World Wide Web

(www.production-research.de) or by contacting the authors of this publication.

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