How Free Trade Zone concepts can be used as an operational tool for

developing a supply chain: A case study of Krusell Thailand Co. Ltd.

Tin-Tin Nilsson

Supervisor: Elisabeth Karlsson

Master Degree Project No.

Graduate School

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Abstract

Master’s thesis in Logistics and Transport Management

Title: How Free Trade Zone concepts can be used as an operational tool for developing a supply

chain: A case study of Krusell Thailand Co. Ltd.

Author: Tin-Tin Nilsson

Tutor: Elisabeth Karlsson

Date: June 1, 2014

Keywords: Logistics, Supply Chain Management, Free Trade Zones, Free trade agreements

Introduction:

Purpose:

Methodology:

Frame of reference:

Empirical Framework

Analysis of empirical study

Conclusion:

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Table of contents

1 Introduction ................................................................................................................................... 5

1.1 Background ............................................................................................................................... 5

1.2 Problem definition..................................................................................................................... 6

1.3 The purpose of the research ....................................................................................................... 6

1.4 The research questions .............................................................................................................. 7

1.5 The research limitations and implications .................................................................................. 7

1.6 Disposition ................................................................................................................................ 7

2. Methodology .................................................................................................................................. 9

2.1 Research strategy ...................................................................................................................... 9

2.2 Concepts of defining a qualitative study .................................................................................. 10

2.2.1 Ontological assumptions ................................................................................................... 10

2.3 Collection of primary and secondary data ................................................................................ 12

2.3.1 Primary data ..................................................................................................................... 12

2.3.1.1 Case studies ............................................................................................................... 12

2.3.1.2 Interviews .................................................................................................................. 13

2.3.2 Secondary data ................................................................................................................. 14

2.3.3 Epistemological assumptions and the definition of knowledge .......................................... 14

2.3.4 The Challenges of choosing objective data ........................................................................ 14

2.4 Analysis of empirical data ....................................................................................................... 16

2.5 Validity and reliability............................................................................................................. 16

3 Frame of reference ....................................................................................................................... 17

3.1 Choice of theories ................................................................................................................... 17

3.2 The underlying principle of developing regional and intraregional FTAs ................................. 17

3.3 The historical development of FTAs in Asia ............................................................................ 18

3.4 Prior research of Free Trade Zones .......................................................................................... 19

3.4.1 The application of Free Trade Zones for manufacturing companies ................................... 20

3.5 Strategic fit and scope within a supply chain............................................................................ 21

3.5.1 Understanding the customer and supply chain uncertainty. ................................................ 21

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3.5.2 Understanding the supply chain capabilities. ..................................................................... 22

3.5.3 Achieving the strategic fit. ................................................................................................ 23

3.6 Manufacturing strategies ......................................................................................................... 25

3.6.1 Rules of Origin ................................................................................................................. 26

4 The ASEAN-China FTA and the Thai logistics development..................................................... 28

4.1 The development of the ASEAN-China FTA ........................................................................... 28

4.2 The Thai logistics and business development ........................................................................... 28

5. Empirical framework.................................................................................................................. 30

5.1 Company information ............................................................................................................. 30

5.1.1 Krusell International AB ................................................................................................... 30

5.1.2 Brands and product line .................................................................................................... 31

5.1.3 Products manufactured in China ....................................................................................... 32

5.2 The company´s current supply chain........................................................................................ 33

5.2.1 Manufacturing in Thailand................................................................................................ 33

5.2.2 Inbound logistics to the bonded warehouse in Sweden ...................................................... 34

5.2.3 Bonded warehouse inbound processes .............................................................................. 34

5.2.4 Bonded warehouse outbound processes............................................................................. 35

6 Analysis of empirical study .......................................................................................................... 37

7 Conclusion .................................................................................................................................... 38

8 Appendix ...................................................................................................................................... 39

8 References .................................................................................................................................... 40

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1 Introduction

In this chapter, the authors present an outline related to the subject of this research which are supply chain management and

Free Trade Zone concepts. The problem definitions are given followed by the purpose of thesis. The chapter provides a research

limitation part in order to define the scope and to outline the research. Lastly, the author present the thesis disposition.

1.1 Background

During the last two decades, the economic growth in the Asia-Pacific region has boosted the

development of manufacturing, logistics, and supply chains activities. Furthermore, free trade

agreements both between the Asian countries and with the European Union has facilitated import and

export activities due to reduced tariffs. This had led to a growth in the number of multinational

companies that has shifted their manufacturing and logistics operations to Asia where they manufactures

goods to developed countries (Sohal & Rahman, 2013). Due to this, there has been a tremendous

development for businesses that specialize in managing logistic functions for companies’ i.e. third party

logistics (3PL) providers (Foggin, et al., 2004). 3PLs has during the last decades develop their services

to include activities such as warehousing and customs brokerage (Jharkhariaa & Shankar, 2007).

As industries is offshoring manufacturing activities, supply chain management (SCM) becomes a vital

activity in order to create an efficient supply chain in both time and financial means. It has come to be

a natural tool and common practice across industries as it can create relationships that extend individual

supply chains to become a unified flow of physical goods and information between connected

businesses. For example, long-term strategic alliance, supplier-buyer partnerships, cross organizational

logistics managements, and control of inventory and information sharing are just a few concepts that

supply chain management addresses (Banomyong & Supatn, 2011).

Developing countries has taken advantage of the offshoring trend and has offered Free Trade Zones

(FTZ) as a tool to incur foreign direct investments into the country. In return, they have offered lessened

regulations for import and export activities, tax, and duty reductions for companies. Because of this and

due to the economic growth in Asia during the last decades, labor and manufacturing intensive industries

from developing countries has moved into developing ones to reap the financial benefit of reduced labor

and manufacturing costs (Jayanthakumaran, 2006).

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1.2 Problem definition

Historically, multinational company executives has had a near undisputed view about wanting the

reduction of tariffs and duty costs. There has been solutions to this question such as with the

implementation of the free trade area of the European Community. Furthermore, many countries has

developed FTZs as a tool to attract foreign direct investments and to gain financial means to develop

domestic infrastructure (Papadopoulos, 1987). Traditionally, the role of FTZs has been a well-

researched topic in scientific literature and has had its scope on socio-economic matters and welfare

issues on a domestic level (Miyagiwa, 1993; Din, 1994; Facchini & Willman, 1999). FTZs has thus

become a socio-economic tool for countries, especially for developing ones in Asia (Wang, 2013). From

a company perspective, it has been as a tools for gaining financial benefit such as reduced or removed

duty on imported/exported goods and reduced labor costs (Papadopoulos, 1987; Jayanthakumaran,

2006).

The author would argue that the development of FTZs and SCM has had a similar rapid development

during the last decades but they have not fully been connected to each other. For example, as previously

mentioned, FTZs has had a focus on socio-economic matters where the host’s country and its connected

welfare and economic development has taken the spotlight. However, there is literature that presents a

company´s viewpoint on the matter, but they are very few in comparison to its focus on a countries view,

and often they give answers that opens up the possibility for own assumptions. For example, from a

company´s perspective, the words “reduced costs” often presents itself without any deeper analytic

thought of how the reduced costs manifests themselves in the organization.

Furthermore, the author would argue that the use of FTZs are often having a domestic application rather

than having it as a tool with a global reach. Moreover, in regards to how FTZs can benefit a company´s

supply chain efficiency such as reduced duty costs, lead times and/or transport costs, the literature is

slim at best. The literature review has shown that research in how the application of a FTZ concept can

affect the supply chain of a company and its potential results has not been thoroughly analyzed during

the recent decades and has taken a financial path instead. Therefore, in this thesis, the author argues that

there is a research gap in the connection of how FTZs can be used as an organizational tool in SCM for

creating a more efficient supply chain in regards to reduced lead times and costs.

This master thesis is researching on how a manufacturing company in Thailand can implement a FTZ

in their supply chain in order to reduce duty costs. The company has its primary production in Thailand

but has outsourced production of some goods to China. When exporting goods from China to EU, there

is a much higher duty costs than in comparison to an export from Thailand. Thus, the research aims to

evaluate the possibility of using Thailand as a transit-zone for semi-finished goods that is imported to a

FTZ in Thailand. There it will undergo “value added processes” so that the country of origin can be

defined as Thai. Thereafter, it will be exported from Thailand with reduced duty. The research will

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analyze what criterions that are needed for a change of origin and the benefits and implications that the

concept will bring in regards to lead time and transport costs.

The subject was researched by using a case study of the company Krusell (including the Swedish

company Krusell international AB and its Thai counterpart Krusell Thailand Co Ltd.) as a frame of

reference.

1.3 The purpose of the research

This master thesis is researching on how a manufacturing company in Thailand can implement a FTZ

concept in their supply chain where goods can undergo transformation and gain a new origin status in

order to reduce duty costs.

Therefore the research aims on how FTZs can as an organizational tool for developing logistics and

supply chain efficiency measures in their current supply chain. Efficiency measures are defined as; duty

costs, transport costs and lead times.

1.4 The research questions

What are the pros and cons of the presented FTZ concept and in what way does it affect the

company´s supply chain efficiency? Will either physical or non-physical activities in the supply

chain be altered by these concepts?

Will the reduction of duty be enough to justify an increase in lead time and manufacturing cost

in Thailand?

1.5 The research limitations and implications

The research in this thesis will limit itself to goods that are manufactured in Thailand and exported

worldwide. Therefore, goods that Krusell is manufacturing outside Thailand including sub-brands are

excluded from the research.

1.6 Disposition

In order to present the disposition of the thesis, the author is presenting Figure 1 as schematic view of

the thesis structure.

Chapter 1

Introuction and purpose

Chapter 2

Frame of references

Chapter 3

Methodology

Chapter 4

Empirical Study

Chapter 5

Analysis of the empirical

study

Chapter 6

Conclusion

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Figure 1: Outline of the thesis

Chapter 1 –

Chapter 2 –

Chapter 3 –

Chapter 4 –

Chapter 5 –

Chapter 6 –

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2. Methodology

In this chapter the author explains the contextual choice of research strategies and approaches that is

applied in this thesis. These methods are defined and described as the concept they are but are also

depicted in the way that they are used in the research. Lastly, the chapter ends with a discussions about

data collection and the quality of the thesis.

2.1 Research strategy

Researching is a central activity in both business and academic activities and there are numerous

methodologies that can be used in the field or researching. However, even though it is a common tool

for both businesses and academics, there is no real consensus in the literature that aims to depict “the

one best way” in regards to how a research should be defined. For example, this is partly due to the fact

that there is a broad spectrum in regards to what can be researched, thus the possibilities of researching

are almost unlimited (Collis & Hussey, 2009). One could ask themselves, about what is and should be

defined as an academic research and how the thesis becomes a work within the framework and ideals

that the scientific and academic community formulates. One could argue that the central guideline (as a

researcher) is to discover a gap in existing research and creating a research orientation that aims to fill

that particular gap (Ekengren & Hinnfors, 2006).

Furthermore, it comes down to the structural integrity of the research and the appropriate methods used.

A question that rises is if the research should be a quantitative, qualitative, or a mix of both and the

philosophical assumptions that are connected to these tools. The author would argue that in this thesis

the aim is to define and develop a qualitative study as the main framework of the thesis. It helps to depict

and produce data that is rich, subjective (the author will discuss the subjectiveness on the matter later

on in this chapter), and produces findings with high validity that can be generalized to from one setting

to one that is similar in nature (Collis & Hussey, 2009).

The main research interest in this thesis is to identify and describe how FTZ concepts can be applied as

an organizational tool for developing logistical efficiency measures in a supply chain. Efficiency

measures are in this thesis defined as shortened lead times and transport costs. It leads to the exploration

of how these concepts affects a company and in what way these concept will affect its physical or non-

physical activities in the company´s supply chain.

To give the reader a preview of the research strategy outline in this thesis, the author has conducted a

case study on the company Krusell (including the Thai company Krusell Thailand Co Ltd. and its

Swedish counterpart Krusell International AB). The author would argue that one characteristic that a

researcher wants to achieve is that the research can be put in a different context and evaluated in another

environment i.e. the research can be generalizable. However, this is a feat that is hard to achieve. For

instance, even though FTZs in Thailand are almost equal as its global counterparts, the generalizability

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of this thesis is low. This is because of the context that the FTZ is applied in. In this thesis, the author

has aimed to apply FTZ concepts into a Thai company that manufactures mobile accessory goods. In

this case the FTZ concept is a constant whereas the context where it as applied in is a variable. The

results gained will differ depending both on the type of company evaluated and the geographical and

political environment it is derived in.

Data collection is collected by numerous sources, both from Krusell, governmental parties such as;

customs, board of investments, industrial zones and 3PLs. This includes both primary and secondary

sources. Moreover, an analysis of the validity and reliability of the data in the thesis are provided. This

will be further discussed later in this chapter.

2.2 Concepts of defining a qualitative study

Qualitative research has been defined as “…The collection, analysis, and interpretation of

comprehensive narrative and visual data in order to gain insights into a particular phenomenon of

interest. The purposes of qualitative research are broad in scope and center around promoting a deep

and holistic or complex understanding of a particular phenomenon, such as an environment, a process,

or even a belief” (Gaytan, 2008, p.109). Conducting a qualitative research aims to develop a rich,

interpretive, and verbal description of a chosen matter. It is often used as a tool for researchers that

intents to explore and understand a certain group or a phenomenon. The exploration aims to uncover

data that is hard to be retrieved from a quantitative study (Gaytan, 2008).

When conducting academic research there are several different methodological concepts that can be

used and that will directly affect the process and outcome of the conducted research. Firstly, there are

quantitative and qualitative research methods that I previously described briefly and there are also

philosophical assumptions i.e. ontological and epistemological, and the paradigms positivism and

interpretivism. These concepts are interlinked with each other and help to define how research is

conducted. For example, a researcher can choose a positivistic or interpretivistic approach for their

research and complements with the philosophical beliefs of the ontological or epistemological

assumptions (Collis & Hussey, 2009).

The goal and scope that a researcher wishes to have on its research will define the mindset and approach

of it. For example, it should be noted that positivism is primarily used when conducting a quantitative

study while interpretivism is used for qualitative studies (Collis & Hussey, 2009). The author will give

the reader a description of these concepts and how it is applied in the thesis.

2.2.1 Ontological assumptions

Ontological assumptions are based on the relationship of the researcher and the nature of reality (Collis

& Hussey, 2009). For example, according to Hudson and Ozanne (1988) all research in social science

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make ontological assumptions of the relationship of reality and social beings. This can both be adopted

within a positivistic or interprivistic context.

In the positivistic viewpoint, it is believed that there can only exist one reality that is objective and

external to the researcher and his research question. Both the social and physical world exists

independently of the researcher´s perception of it and is defined as an unchanging structure. This means

that the single objective reality exists independently of what individuals perceive as reality (Hudson &

Ozanne, 1988). Therefore, due to its objectiveness, it is believed that the data gained is not altered or

affected by the researcher when conducting an investigation (Collis & Hussey, 2009). Therefore,

theoretically a researcher could take a person from its natural context and study it in a laboratory and

the results would be same as if the research would have been done in the person’s natural context

(Hudson & Ozanne, 1988). However, according to Collis and Hussey (2009, p.56), “…it is impossible

to separate people from the social context in which they exist” and “…people cannot be understood

without examining the perceptions they have of their own activities”.

In the interprivistic point of view, it is believed that “…social reality is subjective because it is socially

constructed” (Collis & Hussey, 2009, p.59) therefore, contrary to the positivistic viewpoint, reality is

constructed by a person’s own sense of reality, thus creating multiple realities. Moreover, Hudson and

Ozanne 1988 p.509, argues that “…all human knowledge is developed, transmitted, and maintained in

social situations”. Therefore, the author would argue that the data gained from conducting research

would be different depending on the context where the data is measured and obtained.

In this thesis, a positivistic view is not suited for the conducted research. The author would argue that

the view of one objective and external reality is an intangible vision rather than a physical concept,

especially in a country such as Thailand that is connected with both administrative and political activities

that gives “flavor” to the research. For instance, if the research have been conducted without a case

study and taken the path of creating a theoretical company that is uncoupled from the harsh environment

in the real world, one could argue that a positivism would have been well suited for the research.

However, since the author is using a case study approach, one could argue that social reality is developed

and defined by its own sense of reality, thus the data collection is objective and defined by the person

or institution that has put it there in the first place. For example, it will be argued that a positivistic

ontology and it´s assumption that the nature of reality is unchanging and thus not affected by the

perception of the researcher is correct in regards to quantitative data. When the author is conducting data

collections that aims to depict quantitative data e.g. financial figures, statistical data, laws, criterions and

conditions one would argue that this data is objective and cannot be altered by the researcher’s

perception of it. How this manifest itself in the primary and secondary data collection will be discussed

further on.

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2.3 Collection of primary and secondary data

The author will present here a preview of the underlying thought about how and why certain data has

been collected and the challenges that it brings. In this thesis, the author uses two main areas of data

collection. First is in regards to primary data i.e. the case study and interviews. The secondary data is

comprised of academic literature such as; books, journals, publications, databases and data from

numerous websites. Both primary and secondary data collection methods will be explained below.

2.3.1 Primary data

Primary data are data that is generated from an original source. In this thesis, the author has chosen a

case study approach and complementing that method with interviews as a valuable source of primary

data. Analyzing qualitative data gives both positivists and interpretivists a number of challenges. Often

in the academic literature it’s often hard to distinguish how an author has summarized countless of

sources to arrive at his findings (Collis & Hussey, 2009).

2.3.1.1 Case studies

A case study is a research method that is used to explore a phenomenon in its natural setting. The case

study uses a variety of methods to obtain in-depth knowledge so that the researcher can both explore the

certain phenomena but also understand it within a particular context (Collis & Hussey, 2009).

The reason why the author decided that a case study would benefit the thesis has two reasons. First and

foremost, the least relevant reason (in regards to the research itself) is that the author was offered a

trainee position abroad. Merging work and research was founded as a natural ground for both the author

and his employee, and this offering manifested itself as a feasible research and thesis topic, thus a thesis

idea was born. The second reason why a case study would benefit the thesis is that it gives the possibility

to research a “real” and “tangible” topic. For instance, the author could have presented a theoretical

company with a connected supply chain, and researched the possibilities in a secure environment.

However, that research would have been uncoupled from the real world and sheltered from both country

specific aspects such as political and administrative activities that might unintentionally hinder or slow

down certain aspects of the research. For instance, the author had several challenges in regards to

obtaining accurate data from Thai institutions where they often gave different answers to the same

question. The mindset of the contacted institutions followed a popular figure of speech that often is

connected to Thailand i.e. “same same but different”. Therefore, a case study benefits the research by

adding environmental variables that might be hard to notice or even understand without conducting real

life research.

The author has conducted a case study that both includes Sweden and Thailand. The case study started

in Sweden that comprised of an introductory trainee week at the Krusell International AB headquarters

in Mölndal, Sweden including a field trip to the bonded warehouse managed by the 3PL Aditro

Logistics. The case study continued during March to June 2014 in Thailand and was made at the head

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office in Bangkok and at the factory in the Ayutthaya province. The mentioned case study aims to be a

descriptive and illustrative i.e. it aims to describe and illustrate practices adopted by Krusell in regards

to their supply chain.

2.3.1.2 Interviews

The author have used three different interview methods as one of the main tools of gathering primary

data. Interviews complements the case study and fills the informational gaps that academic literature

can´t fill. According to Collis and Hussey (2009) there are three types of interviews;

Structured interviews aims to have questions that are likely to be closed questions. Each of

the questions has a set of predetermined answers.

Semi-structured interview has pre-determined questions but the interviewer is able to add

additional questions in order to obtain more detailed information from the interviewee.

Unstructured interviews does not have any pre-determined questions completed prior to the

interview. They are likely to contain open ended questions that enables the interviewee to

answer more in depth.

In regard to the interviews in the thesis, the author would argue that both the interviewee and the

interviewer is subjective and is being affected by social constructions and norms. Social contexts and

reality is constantly multiplying as it is born in the individual’s mind thus creating multiple realities

(Hudson & Ozanne, 1988). For example, an issue that might arise from this is when conducting

interviews with employees where the researcher asks the interviewee about opinions on a specific

subject. When conducted outside the workplace the interviewee might provide information that has its

origin and birth from the non-work related environment. However, if conducted at the workplace there

might be fear of criticizing or talking constructively about specific topics due to potential reprimands.

The author would argue that this might indirectly affect the answers and preferences of the interviewee,

thus the positivistic assumption of one reality is incorrect.

The author has used both structured and semi-structured interviews that has been conducted via email

and face to face. For example, structured interviews with the Thai and Swedish customs authority, and

the Thai Board of Investment has been conducted via email. Furthermore, a semi-structured interview

approach was used face to face with Ms. Andreasson, Client manager for the bonded warehouse in

Sweden. Pre-determined questions were used during the interview and offered her to answer open ended

at them. Unstructured interviews has been seen to work best in the work environment in connection to

interviewing fellow employees. What the author has seen is that the open ended questions has enabled

the interviewees to give answer with more depth than the other interview methods. For example, during

the author´s introductory week at Krusell´s headquarters in Mölndal, Sweden both Mr. Jerkhagen and

Mr. Wikström were kind enough to participate in an unstructured interview.

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The intention of the conducted interviews with the staff at Krusell (Thailand and Sweden), the Client

Manager at the bonded warehouse in Sweden, and the Thai and Swedish customs authority has been to

give both the author and its readers the benefit of understanding the existing supply chain and how each

actor in the chain has its own role and activities in it. Interviews that has been conducted face to face

has lasted between 20-40 minutes and in connection to this email has been a complementing part in the

interview process as mentioned earlier. A summary of the conducted interviews that includes contact

information to the interviewees is given in the appendix.

2.3.2 Secondary data

Secondary data is data that is gained from existing sources, literature, databases and internal company

records (Collis & Hussey, 2009). The author has gathered data from Krusell’s website and quarterly

report. The data can be defined as a trusted resource since both the Krusell in Sweden and Thailand is a

listed company and is obligated to provide financial figures to investors with auditors verifying the data.

Furthermore, internal documents from both Krusell and the 3PL Aditro Logistics has been provided to

the author to gain insights in the daily supply chain operations.

Websites that has been used in this thesis are websites regarding FTZ in Thailand and connected

concepts. However, the authors has had several challenges in regards to gaining accurate secondary data.

For instance, the Thai governmental websites often present different answers to the same question that

contradicts itself. Furthermore, websites regarding import/export matters and customs has been used to

complement the data gained from the interviews. The University of Gothenburg’s database has been

used to find scientific journals and articles that depicts supply chain and Free Trade zone matters.

2.3.3 Epistemological assumptions and the definition of knowledge

The epistemological assumption is concerned about what a researcher can accept and define as

knowledge. Positivists believe that data can only be defined as knowledge if it is observable and

measureable. Moreover, positivists try to maintain an objective and independent relationship with the

research i.e. uncouples himself from what he is researching to gain an independent and objective

standpoint. However, interpretivists attempts to minimize the uncoupling of the researcher and what is

researched. This means that they interact with what they are researching and that the researchers “belief”

is what defines knowledge. Therefore, the main differences between a positivistic and interpretivistic

standpoint is that the former tends to be used when producing quantitative data while the latter is used

in a qualitative manner (Collis & Hussey, 2009).

2.3.4 The Challenges of choosing objective data

In this thesis the author has both used positivistic and interprivistic epistemology. In regards to defining

knowledge, there are several issues that is worth noting. To elaborate on the positivistic epistemology,

the assumption that only things “…that are observable and measurable can be validly regarded as

knowledge” (Collis & Hussey, 2009 p.59) induces challenges when conducting an academic research.

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A question that rises is how strict the definition in regards to observable and measureable data being

valid knowledge. For instance, primary data such as interviews are both observable and measureable but

not in a statistical way. The knowledge gained from an interview can have a volatile nature and change

at any moment depending on the subjects preferences. However, since positivism is mainly aimed a

quantitative studies the author would argue that the assumption states that only tangible data

(quantitative data) can be regarded as knowledge whereas intangible data such as interviews cannot be

regarded as measurable or observable (at least not in an efficient way).

In this thesis the author would argue that a mixture of both interprivistic and positivistic epistemology

has been used. The reason why is because the author believes that the assumption that observable and

measurable matters can only be defined as valid knowledge so a researcher can gain an objective

standpoint is contradictory to itself. According to Fellman and Popp (2013 p.10), there was for a long

time an assumption that archives was defined as positivistic i.e. ”…the documents have come about as

a result of ”natural” processes and activities, not from the perspective of some outside reader, and,

moreover, that they reflect these activities accurately and in a neutral way”. Therefore, the data in an

archive was defined as both measurable and observable. The author would argue that this assumption

does not only extend to archives but also to other quantitative areas such as databases.

However, archives was later defined with an interprivistic nature i.e. data in an archive is consciously

chosen by the person that wants to preserve the past. He or she has the power to silence unpopular

thoughts that is seen as marginal or slim at best (Fellman & Popp, 2013). Therefore, the contradiction is

that the data itself has an interprivistic origin, where an individual has consciously put documents in an

archive based on that individual’s perception of reality i.e. what is important for him. Therefore, the

positivistic approach to see data derived from archives as measurable and observable (thus enabling the

researcher to be objective) is conflicting due to its subjective interprivistic origin. The assumption that

positivism aims the researcher to be independent of what is being researched is therefore inaccurate

since (at least) the quantitative material used has been defined, observed, and measured from an

interprivistic ontological standpoint.

The contradiction that has been presented above also affects this thesis. For instance, secondary sources

that has been used such as; books, literature, websites, databases etc. might all have had the objective to

provide a positivistic i.e. objective standpoint. But due to the “human error”, personal preferences and

opinions often merges itself with data and creates a subjective nature to it. The author would argue that

this does not mean that the data retrieved in this thesis is bad due to its subjective nature but it is worth

noting and understanding that no data is truly objective since all that retrieves it will define and

understand it from his or her owns perception of reality.

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2.4 Analysis of empirical data

2.5 Validity and reliability

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3 Frame of reference

This chapter presents the frame of reference related to the chosen theories which are used throughout

this thesis.

3.1 Choice of theories

This chapter aims to present the underlying principle of developing regional and intraregional FTAs and

how they affect the multilateral trading system that the WTO is sustaining Secondly, the author presents

theories about strategic fit in supply chains and the paradoxes of building to stock or building to order.

Thirdly, theories will be present about how free trade zone concepts has developed and were it has had

its focus during the last decades.

3.2 The underlying principle of developing regional and intraregional FTAs

Free trade agreements (FTA) has become a prominent tool in the world trading system. In 1990, 27

FTAs had been reported to the GATT and by 2008 this number had increased to 421 (Matsushita, 2010).

As of January 2014, the World Trade Organization (WTO) had received 583 notifications of regional

trade agreements (RTA). Of these notifications 377 were in force and 90 percent of them were FTAs

and partial scope agreements, while 10 percent accounted for customs unions (WTO, 2014). More than

90 percent of the members in the WTO are participants in FTAs and the proliferation of it is partly the

reason why the percentage is so high (Matsushita, 2010). Moreover, regionalism is sweeping the world

trade system like an epidemic whereas trade negotiations at the WTO is advancing at a glacial rate. This

unconditional relationship is often used as a suggestion that the increasing regionalism in the world is a

threat to the multilateral trading system that the WTO is aiming to develop and sustain (Baldwin, et al.,

2012).

Matsushita (2010) argues that the proliferation of FTAs has become the bane that has brought failure of

several trade negotiations at the WTO. And in connection to this, the share of world trade in FTAs has

increased tremendously during the last decades. As of 2010, the four FTAs; the EU, NAFTA,

MERCOSUR, and ASEAN has accounted for 57 percent of total export and 63 percent of the total

import in the world. An FTA may be seen as an easy substitution for slow pacing multilateral trade

agreements. Often nations with close geographical proximity has similar traits. For instance, common

elements in culture, religion, language, history, and economic system might connect countries across

regional borders by the establishment of FTAs. This can be seen in the EU member states that share

both a geographical closeness between each other but is also characterized by similar traits such as

historical background and linguistic closeness.

Moreover, another line of thinking is that the proliferation of FTAs brings a domino effect. This argues

that the development of one FTA between member parties can discriminate excluded parties. Since a

FTA is a preferential trading system for member parties it is essentially a discriminatory system in

18

regards to outside parties (Matsushita, 2010; Baldwin, et al., 2012). As a result, this can induce excluded

parties to sign new FTAs that has previously been shunned as a mean to counteract the discriminatory

act that a neighboring country might have brought with its connected FTA (Baldwin, et al., 2012). On

one hand, if a FTA is successful, the trade in that area is regionalized and the zone of free trade is

expanded. This development may promote economic development of the region by increasing the

economic efficiency and this becomes an incentivizing act for businesses outside the region in regards

to trade and investment. Furthermore, it can accomplish trade liberalization in areas in which the WTO

are not successful in such as; direct investments and competition. However, on the other hand the

proliferation of FTAs brings a systemic problem and failure to the WTO regime. As FTAs exists as a

parallel being to the multilateral trading system the discriminatory act that it brings creates an imbalance

in the competitive conditions in the global trading market, thus causes unfairness and inequity in trading

relations (Matsushita, 2010).

3.3 The historical development of FTAs in Asia

With the opening up of China in the 1980s and the expansion of ICT in the world, this has facilitated

the offering of production abroad and foreign direct investments. China´s integration in the world

economy has led to major changes. During the 1980s and 1990s, Chinese exporters has gained

considerable market shares in the production and export of labor intensive products. During mid-1990s

the country specialized its production in knowledge and technology intensive goods (Yeo, 2009; Geest,

2004). This has in turn resulted in a growing number of multinational companies that has established

manufacturing and logistics operations in the Asia-Pacific regions. Many of the manufacturing

companies in the Asia-Pacific region has adopted a business concept to export manufactured products

and components to developed economies (Sohal & Rahman, 2013).

The Association of Southeast Asian Nations (ASEAN) was established in 1967 by five member

countries; Thailand, Indonesia, Malaysia, Singapore, and Philippines. During 1980s to late 1990s

Brunei, Vietnam, Laos and Myanmar, and Cambodia joined. ASEAN´s main aim is to promote intra-

regional trade by bilateral agreements that reduces tariffs between member states. For example, in 1992,

the “Framework Agreement on Enhancing Economic Cooperation” including scheme of the “Common

Effective Preferential Tariff” (CEPT) within the Asian Free Trade Area (AFTA) was established. This

contributed to the elimination of tariff and non-tariff barriers among the member countries. Significant

progress has been med within the CEPT scheme and during 2004 more than 99 percent of all products

CEPT Inclusion List of ASEAN-61 had received a reduction of duty to a 0 – 5 percent tariff range.

Moreover, the average tariff for ASEAN-6 has under the CEPT scheme been reduced from 12.76 percent

to 1.51 % in 2009 (Günter & Zhu, 2009).

1 Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand.

19

For the last thirty years, the cooperation between the EU and ASEAN has its ups and downs. The first

dialogues between the parties took place during the early 1970s to 1980s with the goal of creating trade

relations and to evaluate areas of cooperation’s such as; joint ventures and mobilizing capital for

financing ASEAN projects. This manifested itself into a framework agreement during the 1980s with

focus on economic cooperation and development such as; preferential duty on exports (Günter & Zhu,

2009). Moreover, the development within ASEAN has during the last decade focused on opening up

trade policy regimes and reducing tariffs of imports to EU from ASEAN member parties. However, this

also includes export to ASEAN For example, Singapore has during the last decade imposed a zero

percent tariff on almost all imported goods (excluding some alcoholic beverages) (Geest, 2004).

The ASEAN countries in Southeast Asia has become an integral parts of the region’s economic

development. For instance, Singapore, Korea, Taiwan, and Hong Kong are newly industrialized

economies and Thailand has developed itself from an agricultural economy to a dynamic manufacturing

one with sustained growth and industrialization (Park, 2007). For the last decades, free trade agreements

(FTA) has thrived in the Asian regions. As of last year, there are more than 30 regional trade agreements

(RTA) of which 14 of are intraregional that ties together members in East Asia. The decentralization

that the FTAs has brought in East Asia has primarily been led by ASEAN and in particular by the

ASEAN Free Trade Area (AFTA) that is an agreement that eliminates all import duty on products that

is defined in the normal track for the ASEAN-6 member parties. Furthermore, 60 percent of the products

defined in the inclusion list received an elimination of import duties in the end of 2006 and this increased

to 80 percent during 2008. By 2010, the ASEAN development continued to eliminate tariffs that resulted

in that 99 percent of the total tariff lines was eliminated (Hayakawa, et al., 2013). Over the past two

decades, activities such as; manufacturing, logistics, and supply chain in the Asia-Pacific region has

witnessed a massive growth. During the 21st century, manufacturing activities has developed and does

not only include advancements in technologies but also in the sourcing of locations and resources

(human and materials). For the last decades this has affected development in countries such as; China,

India, Malaysia, and Singapore (Sohal & Rahman, 2013).

3.4 Prior research of Free Trade Zones

Since the 1970s many developing countries has developed and introduced free trade zones (FTZs) into

their economies as an economic strategy for the country. It enabled them to attract foreign investors that

brought capital to the country stimulating both employment and growth (Miyagiwa, 1993). Although

the concepts of free trade zones, export processing zones, duty free zones has existed for many decades,

one could argue that its application of logistics and supply chain management in literature has been

lacking.

The published literature during the last decades regarding FTZs and its connected concepts is rather

linked and applied to social development and welfare rather than logistics and supply chain matters. A

20

literature review illustrates that during the 1980´s and 1990´s, literature has focused on how FTZs has

affected the host countries welfare. This was due to diminishing returns on imports that affected the

countries as a whole (Hamilton & Svensson, 1982; Hamilton & Svensson, 1983; Young & Miyagiwa,

1987; Din, 1994; Facchini & Willman, 1999). One reason for this could be that the contemporary

outsourcing wave and the first oil crisis in 1974 became a trigger to the focus on socioeconomic research

during the 1980s due the latter’s reduction in the economic growth of the OECD countries from four to

a two percent figure (Normann, 2001). Moreover, the 1990s literature of the matter has been

characterized by the geographical application of FTZ i.e. rural versus urban options of locating FTZs

(Miyagiwa, 1993) and how export processing zones may become a catalyst for domestic companies to

export commodities outside the host country (Johansson & Nilsson, 1997) and the creation of

international strategies (Papadopoulos, 1987). Furthermore, literature from the 21st century takes rather

a focus on a political agenda in regards to economics, inter and intra-regional trade and free trade

agreements further neglecting the pure logistics part of the concept (Magee, 2008) (Wang, 2013).

3.4.1 The application of Free Trade Zones for manufacturing companies

The Shannon FTZ in Ireland was established in 1959 and is commonly recognized as the first export

processing zone (EPZ). Within literature, FTZs has several different names such as; export processing

zones, industrial free zones, special economic zones, technology and science parks, financial service

zones, free ports, duty free zones and bonded warehouses. These names all refer to similar concepts but

has slight variations in the financial and operational gains (Jayanthakumaran, 2006). For example, the

concepts of EPZ and duty free zones (DFZs) are used synonymously in the literature. They are areas

where domestic and foreign companies can locate their production facilities for manufacture, assembly

or processing of goods (Din, 1994). FTZs allows firms to establish themselves in countries in

geographical areas that are isolated from the domestic economy. In other words, a portion of the country

is coupled with a foreign market while leaving other parts of the country with regulations regarding

tariffs and control (Hamada, 1974) (Jayanthakumaran, 2006). Specific differences between the different

zones and how they affects a company will be further discussed during the empirical chapter.

The traditional view why countries decided to develop FTZs was to attract foreign direct investments

that in turn enables a country to reap the benefits of employment of labor, an increase in exporting goods

and the absorption of learning new technology (Hamada, 1974) (Din, 1994). In regards to learning new

technology, it gives the domestic country the know-how to master production, marketing, distribution

that gives them an advantage when exporting goods (Johansson & Nilsson, 1997). Furthermore, it paves

the way for the development of industrialization and can stimulate domestics sectors through

connections with the rest of the country´s economy (Din, 1994). Within the areas of FTZ, export-

oriented manufacturing activities can be operated with incentivizing government controlled programs

that can give; reduced taxation, streamlined regulations, reduced customs barriers, and limited

interference from the state. In return for the incentives, companies operating in these areas are expected

21

to operate without negatively interfering or affecting the domestic economy. Moreover, the host country

often provides advanced infrastructure such as; ports & railway access, communications services, and

subsided utilities (Jayanthakumaran, 2006).

Traditionally, there has been three main types of advantages that has attracted businesses to use FTZs.

The first one is to achieve financial gains e.g. improving the company´s cash flow that arises from the

duty-free status that most zones offer. Furthermore, lower insurance premiums due to a lower net value

of goods and the option for using manufactured goods in the zone as collateral for loans or to obtain

export related incentives are measures that improves the company´s cash flow. The second advantage is

the availability of an inexpensive work force and/or nearby natural resources that can be used in the

manufacturing process. This is particularly noticed if the company has moved their manufacturing from

a developed to a developing country and if the manufacturing is either resource or labor intensive. The

third advantage is operational convenience e.g. companies that imports goods are able to store them

temporarily while deciding what to do with them. For example, this can be the use of a bonded

warehouse. (Papadopoulos, 1987).

3.5 Strategic fit and scope within a supply chain

The starting point in designing a supply chain is to evaluate it on the basis of strategic fit and scope. A

supply chains responsiveness and efficiency are tied to its demand. High uncertainty in demand requires

a responsive supply chain while certain demand emphasizes the need of a highly efficient supply chain

(Farahani, et al., 2009). For any business to be successful, its supply chain strategy and competitive

strategy must fit together. There must be a consistency between both strategies i.e. between the customer

priorities that the competitive strategy aims to satisfy and the supply chain strategy capabilities that the

supply chain strategy aims to build (Chopra & Meindl, 2010). According to Chopra & Meindl (2010)

there are three steps for achieving strategic fit:

3.5.1 Understanding the customer and supply chain uncertainty.

Step 1 aims to identifying the needs of the customer segment that is being served and the uncertainty of

demand. In regards to customers’ needs, these needs manifests themselves in a company’s

manufacturing and supply chain processes. For example, depending on the customer type, for instance

if it’s a business to business partner or an end consumer, the quantity of the products needed in each

shipment might vary drastically. This is in connection to supply chain response times that customers are

willing to accept. If the market where the customer is residing in is affected by a fluctuating demand the

result might be that the customer might demand high response from the manufacturer in regards to

frequent production and fast transports. Moreover, high service level and price are also attributes that

affects the customer preferences. The customer needs that has been mentioned above are all attributes

that makes demand uncertain. The uncertainty of demand can be divided into two parts; demand

uncertainty and implied demand uncertainty. Demand uncertainty reflects the uncertainty of a customers

22

demand for a specific product whereas implied demand uncertainty is the uncertainty that exists due to

the specific portion of customer demand that a supply chain is required to meet. Low or high implied

demand uncertianty is affected by the manufactured product. For example, margins tends to by high in

regards to products that has uncertain demand. They are often less mature and have less direct

competition. Forcasting models are often more accurate when demand is predictable. However,

increased implied demand uncertainty often leads to discrapencies when matching supply with demand.

This results in either higher rates of stockout or oversupply of products. Furthermore, high implied

demand uncertainty leads to increased markdowns as oversupply increases (Chopra & Meindl, 2010).

Table 2.1 Correlation Between Implied Demand Uncertainty and Other Attributes

Low Implied Uncertainty High Implied Uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%

Average stockout rate 1% to 2% 10 % to 40%

Average forced season

end markdown

0% 10% to 25%

Source: Table cited from (Chopra & Meindl, 2010, p.4)

3.5.2 Understanding the supply chain capabilities.

Step 2 aims to define the best way a company can meet demand in an uncertain environment. It all

comes down to the creation of a supply chain strategy that can meet the demand on a market that the

company aims to supply given the uncertainty that resides there. A supply chain strategy is based on a

balance between responsiveness and efficiency (Chopra & Meindl, 2010). Responsiveness refers to the

overall ability of the supply chain to react to significant changes within an appropriate time (Statler &

Kilger, 2008). A supply chains responsiveness includes for example; responsiveness to wide ranges of

demanded quantity, short lead times, handling a large variety of products, high service level, and

handling supply uncertainty (Chopra & Meindl, 2010).

23

Figure 2.4. Cost responsiveness efficient frontier. Source: Chopra & Meindl, 2010

However, responsiveness in a supply chain strategy comes at a cost. As depicted in figure X high supply

chain responsiveness correlates with high costs. For example, to adapt manufacturing processes to cope

with wider ranges of quantities demanded comes with increased costs especially if this results in higher

levels of stock. Therefore, if businesses aims to develop responsive supply chain strategies there are

additional costs that will lower the overall efficiency that comes with it. Furthermore, businesses that

aims to develop highly efficient supply chains will reduce costs at the expense of lower responsiveness.

A comparison of an efficient and response supply chain can be viewed in the appendix (Chopra &

Meindl, 2010).

Figure 2.5. The responsiveness spectrum. Source: Chopra & Meindl, 2010

3.5.3 Achieving the strategic fit.

Step 3 consist of ensuring that the supply chain strategy is consistent with the market that is targeted

and the uncertainty of the supply chain. The company that is developing its supply chain strategy must

understand the uncertainty demand spectrum that was described in step 1 in connection to the tradeoffs

of having a responsive or efficient supply chain in step 2. Figure X shows that the depending on where

a company places its supply chain strategy there are tradeoffs and implications that arises. The goal is

to find the “sweet spot” i.e. the strategic fit (Chopra & Meindl, 2010).

24

Figure 2.6: Cross zone of strategic fit. Source: Farahani, et al., 2009

However, there are several issues that affects the strategic fit of a supply chain strategy. Multiple

products and customer segments and the products life cycle all affects the strategic fit. Companies often

manufacture multiple products that attract different customer segments. These customer segment can

reside in different demand uncertainty spectrums. It can be in regards to high end contra low end

products or standardized contra customized products. This in turn results in wide spectrum of implied

demand uncertainty. A company must then find the balance between responsiveness and efficiency

given its product portfolio. There are several ways that a company can adapt its supply chain to cope

with the balancing of responsiveness and efficiency. For example, a manufacturing company can set up

independent supply chains that aims to serve different product or customer segments. However, this is

only feasible if each segment is large enough to sustain a dedicated supply chain and this strategy often

fails to gain any economies of scope. Moreover, a preferable strategy is to tailor the supply chain in

regards to manufacturing and supply chain. For instance, all manufactured products might be produced

at the same location but depending on the level on responsiveness that the customers are demanding

some products might be transported using a high-speed mode of transport e.g. air whereas products that

are not affected by the same level or responsiveness might be transported by e.g. sea. It is also worth

noting that a products life cycle affects the strategic fit of a supply chain and changes the demand

characteristics and needs of the marker that is aimed to be served. When a product is launched and is in

early stages of its life cycle demand is often uncertain, margins are high and time is crucial to gain sales.

Costs are often a second consideration for customers during this stage. However, when a product

matures demand becomes more certain and predictable, margins are lower due to increased competition

and price becomes a factor in customer choice (Chopra & Meindl, 2010).

25

Figure 2.7: Finding the zone of strategic fit. Source: Chopra & Meindl, 2010

To summarize, as demand is uncertain during the beginning stages of a products life cycle a responsive

supply chain would best serve this market. However, as the product matures and demand becomes easier

to predict, a shift from a responsive to efficient supply chain would benefit the overall performance of

the supply chain (Chopra & Meindl, 2010).

3.6 Manufacturing strategies

Manufacturing companies often tries to ensure a balanced level of service for products that are both built

to order and built to stock. This challenge has a wide reach in several industries e.g. ranging from

consumer product manufacturers, manufacturers of concrete cutting tools and plastic molding firms

(Rajagopalan, 2002). The decision of choosing between build to order and build to stock is an intricate

matter. Manufacturing firms are often faced with the challenges of offering customers quick orders as

well as large variety of products. However, being able to both offer a variety of products and quick

manufacturing times are often conflicting. Traditionally, industries where fast response times has been

vital, the scope and focus of manufacturing processes has lied within a limited product portfolio which

are stocked ahead of demand and shipped when customers’ demands it. However, producing against

stock can become costly when the number of products offered increase. Traditionally, as the product

portfolio increases, industries has often adapted their manufacturing processes and focused on build to

order instead. As this strategy helps to eliminate finished inventories and exposure to financial risk there

is an increased customer lead time (Gupta & Benjaafar, 2000). Industries must determine which products

that are going to be made to stock and create an appropriate inventory strategy for them. For products

that are made to order they need to have a developed supply chain that reduces customer lead times.

However, if these manufacturing strategies utilizes common production resources this can result in

reduced system performance (Kaminsky & Kaya, 2009).

26

During the last decades an alternative to both build to stock and build to order has gained popularity.

The alternative is delayed differentiation and is a hybrid strategy where a common product platform is

built to stock. When demand is realized the built to stock products undergoes differentiation and is

assigned product specific features and components. Hence, this hybrid strategy undergoes two stages,

the first one is the make to stock stage were single undifferentiated products are manufactures, and a

make to order stage where product differentiation takes place in response to customers’ demands.

Delayed differentiation carries several benefits. A manufacturing company can maintain stock of semi-

finished goods that reduces order fulfillment delays and led times when compared to a pure make to

order system. It reduces risk associated with holding finished goods in inventory that might not gain any

demand. Furthermore, it also benefits companies with reduced unit holding costs, since less value is

associated with the stocked inventory. Delayed differentiation also carries costs. The hybrid build to

stock / build to order strategy includes the costs of product and process redesigns that are needed for the

new manufacturing processes. This can also lead to less efficient processing if the common processing

leads to greater yield losses or the use of less specialized manufacturing equipment (Gupta & Benjaafar,

2000).

Table 2.2 Comparison of manufacturing strategies

Used Advantages Disadvantages

Build to order When the product

portfolio increases

Eliminates finished inventories and

exposure to financial risk

Increases customer lead times

Build to stock When customers

demand fast response

times

Decreased customer lead times Costly when number of products

increases and increase inventory

costs.

Delayed

differentiation

When a company wants

to use a hybrid build to

order and build to stock

strategy

Decreased customer lead times in

comparison to build to stock.

Costs of redesigning product and

manufacturing processes.

Source: Authors own. Data retrieved from (Gupta & Benjaafar, 2000)

3.6.1 Rules of Origin

Industries´ that conducts import and export activities are affected by country specific and bilateral trade

agreements between member states in regards to financial costs such as duty. The country of origin of a

product defines the level of duty that needs to be paid when goods are transferred outside the domestic

market. The rules of origin have been developed so that industries are prevented from developing their

manufacturing and supply chains in order to gain a favorable origin on their goods. This is in regards to

establishing simple assembly and packaging activities in order to gain a preferred origin status. The

origin for a product can be defined in two ways. It can either be wholly obtained in a country or it can

be produced in one country where it later on is exported to a new one where it will undergo a “substantial

transformation” (Wakamatsu, 2004).

27

Within the ASEAN member states and the CEPT scheme, the rules of origin has been defined by a

“Regional Value Content” (RVC) of 40 percent. This means that the final processes of the imported

goods must undergo a substantial transformation that incurs a value increase of at least 40 percent in

order to be qualified for a change in origin. Parts and raw material that are procured from ASEAN

member states is included in the local procurement rate and is termed “ASEAN cumulative content”

The calculation of RVC differs between the member states due to regulations stating that each party can

decide their calculation method. However, this choice is limited to either a direct or indirect method.

However, for the ACFTA, the RVC is calculated by (Wakamatsu, 2004):

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑁𝑜𝑛 𝐴𝐶𝐹𝑇𝐴 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑜𝑓 𝑈𝑛𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑜𝑟𝑖𝑔𝑖𝑛

𝐹𝑂𝐵 𝑝𝑟𝑖𝑐𝑒× 100 < 60%

The FOB price includes the regional; direct labor cost, direct overhead cost, profit, and inland transport

costs x 100%. The value of non-ACFTA or of undetermined origin should be calculated by its CIF value

at the time of the importation of the materials. It can also be calculated by using the price paid for the

materials from the undetermined origin in the region where the working or processing of the material

took place (Wakamatsu, 2004).

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4 The ASEAN-China FTA and the Thai logistics development

In this chapter the author will present a background to the ACFTA and the Thai intraregional logistics

development.

4.1 The development of the ASEAN-China FTA

4.2 The Thai logistics and business development

In regards to Thai SMEs2, research has indicated that most owners and managers of local SMEs has

lacked some empirical knowledge that has led to an disadvantage regarding business practices and

entrepreneurship capacity (Banomyong & Supatn, 2011). For example, social and cultural norms,

government support, and access to financial support are factors that is hindering entrepreneurial activity

in Thailand (Thanaphol & Hunt, 2008). Furthermore, a recent trend during the last years in Thailand is

that the fear of failure rate has increased as a factor hindering entrepreneurial activity (Sapprasert, et al.,

2011). Moreover, regarding companies that wants to establish themselves in Thailand, factors such as;

education and training, research and development (R&D), and intellectual property rights are factors

that hinder this development (Thanaphol & Hunt, 2008).

The logistics and business development in Thailand has followed a similar economic growth and

development as compared to its neighboring countries in the Asia-Pacific region. In order to facilitate

development of logistics activities, Thailand started a logistics project in 2007 named “Thailand’s

Logistics Development Strategy” that aimed to enhance the trade facilitation by increasing cost

efficiency, customer responsiveness, reliability and security, and to create added value for logistics and

supporting industries in the country. One of the key performance indicators that was used was to lower

the total logistics cost as a proportion of GDP from 19 percent in 2005 to 16 percent by 2011 (NESDB,

2007).

Thailand’s total logistics costs (transportation costs + inventory holding costs + administration costs)

as a proportion of the GDP has since 2001 decreased from 19.6 percent to 14.5 percent in 2011. A slight

increase of the total costs was seen during the global financial crisis during 2007 – 2008. However, the

increase in logistics cost was mitigated during 2009 where the logistics costs continued to decline

(Paijitprapapon, 2013; NESDB, 2010). This was due to the global financial crisis that caused the Thai

economy to recess and negatively affected production levels in various sectors. This in turn resulted in

reduced volumes of transported goods and inventory levels. In addition, the Minimum Loan Rate (MLR)

was reduced to cope with the levels of liquidity on the market. During the same time domestic businesses

attempted to improve production efficiency, warehousing and inventory management and created costs

2 A small and medium sized enterprise is defined in Thailand as when it has less than two hundred employees and/or a fixed capital of less than

60 million USD (Banomyong & Supatn, 2011).

29

saving measures to reduce their logistics costs due to the declining consumer demand and to be able to

survive during the recession (NESDB, 2010).

Thailand total logistics costs in 2010 illustrates that one third of the costs are connected to the industrial

sector. The structure of industrial logistics costs indicates that inventory carrying cost (55 percent) and

transportation costs (35 percent) are the largest logistics costs for the industry whereas warehousing

costs only counts for 1 percent. During the last four years (2010 – 2013) this has generated logistics cost

reductions of 26.7 million USD (Paijitprapapon, 2013). The “Thailand’s Logistics Development

Strategy” appears therefore to have been successful as its goal of having total logistics costs as a 16

percent share of the GDP was met and even surpassed by 1.5 percent in 2011.

30

5. Empirical framework

This chapter presents the empirical framework with an introduction of the company group Krusell. The

author will present an overview of the current supply chains from Thailand and China and how they are

conducted within the company.

5.1 Company information

The company Krusell is a Swedish company founded in 1991 with headquarters located in Mölndal,

Sweden. It is part of a business group that includes: Krusell United AB, Krusell International AB,

Krusell Thailand Co ltd, and Krusell Industrial Co Ltd. The company´s business idea is to manufacture

and globally distribute exclusive accessories for mobile electronic equipment. This includes products

such as; cases for digital cameras, mobile phones, laptops, MP3-players, and GPS. The cases or made

of both plastic and leather. Moreover, the company is also manufacturing screen protectors for mobile

phones and has ventured into a collaboration with a company producing audio products.

Figure 3: Krusell´s company group. Data retrieved from: (Krusell International AB, 2014) (author´s

own figure).

5.1.1 Krusell International AB

Krusell International AB, has had an annual production of over three million cases and employs over

500 employees worldwide. There are only around twenty employees at the headquarters in Mölndal,

Sweden (Wikström, 2014). Since 2011, the company has a cooperation with 7000 retailers worldwide

and is a subcontractor for Sony, Samsung, Sanyo, Honda, Toyota, and LG (Krusell International AB,

2014). In regards to the company´s financial standpoint Krusell International AB has during the last

three years3 increased its write offs vs turnover from 2.8 per cent to 6.3 percent4. This resulted in a 4.6

million SEK in write offs during 2013. However, it should be noted that the company has increased its

Stock Keeping Units (SKUs) from 201 individual products to 558 products in 2013 (Jerkhage, 2013).

Moreover, during 2011 and 2012 the company had a profit of 8.7 and 5.8 million SEK (Annual Report,

2012). One of the reasons that the write offs has increased is partly due to the annual increase in SKUs

3 2013 only includes Jan-Oct 4 This excludes OEM and Audio products

Krusell

Krusell United AB Krusell International AB Krusell Thailand Co ltd Krusell Industrial Co Ltd

Company group

31

but also in regards to the different color schemes that each SKU has. For example, colors such as; black,

red, and brown had a write off vs turnover per color ratio that was under 5 per cent last year. However,

yellow had a write off vs turnover per color ratio that was almost 107 per cent (Jerkhage, 2013).

5.1.2 Brands and product line

Krusell International AB has during the last years acquired two companies as a part to expanding their

product range. These companies are “Motörheadphönes” and Walk on Water (Jerkhage, 2014a).

“Motörheadphönes” is a collaboration with Krusell International AB and the rock band Motörhead and

was launched during 2012. The company´s business idea is to manufacture and distribute audio products

such as headphones globally (Claesson, 2013b).

During 2013, the company “Walk on Water” (WoW) was acquired by Krusell International AB. WoW

sells products such as; laptop bags, laptop skins, and wallets (Claesson, 2013a) (Jerkhage, 2014a).

During the same year, Krusell International AB ventured into an accessory program with Nokia that is

named “Works with Nokia”. This program states to consumers that Krusell´s cases are designed to be

fully compatible with Nokia´s products (Claesson, 2013c) (Wikström, 2014).

Company Brand Type of goods Country of Manufacture

Krusell Laptop Cases China

Tablet cases Thailand & China

Mobile cases Thailand & China

Covers Thailand & China

Screen protectors Taiwan

OEM Thailand

Walk On water Laptop/tablet sleeve Thailand, China & Vietnam

Motörheadphönes Headphones China

Earphones (in-ear) China

Cases Thailand

Table 3: Krusell International AB product portfolio and country of manufacture. Data retrieved from:

(Jerkhage, 2014a) (Wikström, 2014) (author´s own table)

The company´s product portfolio has several manufacturing locations around the world. For example,

headphones made under the label “Motörheadphönes” is manufactured by two subcontractors in China.

Screen protectors labeled under the company´s own brand is made in Taiwan. Moreover “Walk on

Water” products is manufactured by subcontractors in China and Vietnam whereas Krusell’s mobile

cases in leather is made in Thailand (Jerkhage, 2014a) (Wikström, 2014).

32

5.1.3 Products manufactured in China

Krusell Thailand Co. Ltd has outsourced the manufacturing of 31 different product categories to China.

These products are directly transported to the bonded warehouse in Sweden. The majority of the product

categories contain several different color and size options. It is worth noting that the tariff level is fixed

per product category and does not change per color or size. There are a total of 167 products that is

manufactured in China (see table X for the product groups).

Table X. Product groups of goods manufactured in China

Product group HS Code product name HS Codes

Plastics and articles thereof. Other 3926909790

Articles of leather; saddler and harness; travel goods,

handbags and similar containers, articles of animal gut

(other than silkworm gut).

Executive-cases, briefcases,

school satchels and similar

containers 4202121100

Other 4202129190

Of plastic sheeting 4202221000

Other 4202229090

Other 4202310090

Of plastic sheeting 4202321000

Other 4205009000

Articles of iron or steel. Other 7326909890

Electrical machinery and equipment and parts thereof;

sound recorders and reproducers, television image and

sound recorders and reproducers, and parts and

accessories of such articles. Other 8518309590

Data retrieved from: (Jerkhage, 2014b; Swedish Customs, 2014)

In regards to exporting the products to the EU, the highest tariff rate that affects the manufactured

products is at 9.7 percent. The duty cost is included in 39.5 percent (66 products) of all manufactured

goods in China. These products are manufactured with faux leather and plastic/polyurethane that is

affected by a high tariff level. The average duty cost for all manufactured products in China are 7.28

percent when exported to EU.

The tariffs for exporting goods from China to Thailand are 0 percent for all 167 manufactured products

due to the ACFTA (FTA, 2014). If the products would undergo a substantial transformation in Thailand

and gain a Thai origin, the maximum tariff rate for exports to the EU would only be 3.3 percent.

Moreover, 60.5 percent (101 products) of the manufactured products would gain zero duty tariffs when

exported to EU. The total average duty costs for all manufactured products would be 1.32 percent. This

translates to a duty cost reduction of 5.96 percent in comparison to the China – EU exports (Jerkhage,

2014b).

33

Table X China to EU Thailand to EU China to Thailand

Duty Costs

Highest 9.7% (affects 66 of

167 products)

3.3% (affects 67 of

167 products)

0% (affects 167 of 167

products)

Lowest 2% (affects 10 of 167

products)

0% (affects 101 of 167

products)

0% (affects 167 of 167

products)

Mean 7.28% 1.32% 0%

Data retrieved from: (Swedish Customs, 2014; Jerkhage, 2014b; FTA, 2014)

5.2 The company´s current supply chain

This chapter will present the current supply chain that is used by Krusell International AB. This includes

the manufacturing plant in Thailand, the bonded warehouse concept in Sweden and transportation to the

end customer.

5.2.1 Manufacturing in Thailand

Krusell Thailand Co. Ltd has the responsibility several of Krusell International AB´s products (see table

X in 4.1.3 for an overview of the product categories). The production is located in the Ayutthaya

province in Thailand. The production that takes forth in the manufacturing plant are products that goes

under Krusell International AB own product portfolio (excluding Motörheadphönes and WoW).

Krusell Thailand Co. Ltd manufactures goods in two ways. The first is the Asia stock that provides the

Asian regions with goods. This goods is stored in a warehouse in Thailand. The second one is

manufactured and sent to the bonded warehouse in Sweden. This warehouse aims to serve the remaining

markets with goods. The lead time starting with a purchase order to a finished product is about 3 – 4

weeks. For goods sent be air the lead time is around 2 – 3 days. For sea shipments 5 weeks needs to be

added to the total lead time.

34

Manufacturing Day of

export

Day of arrival Inbound

delivery

Outbound

delivery

Total days of

lead time5

2-4 weeks Monday Wednesday Thursday Friday 5 (14-28)

Wednesday Friday Monday Tuesday 7 (14-28)

Friday Monday Tuesday Wednesday 6 (14-28)

Table 6: Lead time for air transport from the factory in Thailand to the bonded warehouse in Sweden.

Data retrieved from: (Jerkhage, 2014a) (Wikström, 2014) (author´s own table).

If the goods are not in stock in either the bonded warehouse in Sweden or in the warehouse in Thailand,

the manufacturing lead time for producing goods at the manufacturing plant varies between two to four

weeks due to reassignment of machinery and tools (Wikström, 2014).

All purchase orders that Krusell Thailand Co. Ltd receives from Krusell International AB in Sweden is

produced to order. However, the ambition from Krusell International AB is to always offer ongoing

items to their customers from stock, thus they are focusing their purchase order strategy on producing

to stock instead of producing to customer order. However, there are some products that are exclusively

made to order such as; products with the prefix “Classic”. They are being discontinued and is produced

to order for a specific customer in Germany that has received the contract of exclusively selling the

“Classic” line from his company (Jerkhage, 2014a).

5.2.2 Inbound logistics to the bonded warehouse in Sweden

The majority of goods manufactured in Ayutthaya is forwarded by the logistics partner United Parcel

Service (UPS) by air transports. A minimal share of the manufactured goods are shipped by sea in

containers to specific customers that has demanded that particular mode of transport (Jerkhage, 2014a).

If the goods are already manufactured, the lead time from Thailand to the borders of Sweden is two

days. It will take one extra day to be delivered to the bonded warehouse (Wikström, 2014).

5.2.3 Bonded warehouse inbound processes

When goods are transported from the manufacturing plant in Thailand to the bonded warehouse in

Sweden Krusell International AB sends an inbound transport confirmation to the 3PL Aditro Logistics

via EDI. The inbound transport confirmation is generated in Krusell´s business system GARP. This

procedure is done when the export date from Thailand has been confirmed. In regards to inbound air

deliveries, information is sent from Krusell International AB to 3PL Aditro Logistics whereas

5 In the parentheses is the lead time for the manufacturing of goods.

35

information regarding sea shipments is sent by the forwarder 1-2 days prior to inbound delivery to the

warehouse (Andreasson, 2014a). An inbound delivery file is also sent to Damco that contains

information about an incoming transmission i.e. including name and address, invoice number, item,

quantity, price, country of origin. This data is then used in the customs declaration when the goods are

sent outbound (Tarawi, 2014).

During the unloading of goods at the bonded warehouse Aditro Logistics has the responsibility to inspect

if there is any discrepancies between the physically delivered goods and the included waybills. Any

discrepancies are notified to Krusell and noted on the waybill. Larger discrepancies or even damages is

documented with pictures and sent to Krusell for evaluation (Andreasson, 2014b).

Storing goods into the bonded warehouse takes <7 hours if the goods arrives prior to 09:00 am at the

loading dock. Later deliveries will take an additional day to be managed. The arrived goods are

compared to the inbound transport confirmation that was sent from Krusell International AB prior to the

inbound delivery. The comparison aims to find any discrepancies in regards to quantity and article

numbers. Furthermore, information about the shipment is given to the bonded warehouse staff that

opens, sorts, and stores the packages on the correct pallets and shelves. Aditro Logistics generates a

report via EDI that tells Krusell that the packages has been delivered into the bonded warehouse. This

is done once every hour during the same time as the products are being sorted and palletized. The report

states purchase order number, article number, quantity and discrepancies (Andreasson, 2014b).

Figure 5: Krusell bonded warehouse process chart. Data retrieved from: (Jerkhage, 2013).

5.2.4 Bonded warehouse outbound processes

Krusell International AB sends and order for outbound shipments once per day that is generated from

their business system GARP. If the order is received by Aditro Logistics before 06:00 am it will be ready

to be dispatched to the customer during the same day. If the order is sent after the deadline it will take

36

an additional day to process it. Outbound shipments can be sent one day after Aditro Logistics has

processed stored the goods in the bonded warehouse. Goods that are sent from the factory in Thailand

are packed in 5/20/80 pcs per package depending on what is in the packages. These packages are opened

and re-packaged depending on the customer´s order specification (Wikström, 2014). The original

package material are often re-used for the outbound shipments. Krusell uses several different forwarders

depending on the shipments destinations. For domestic shipment the forwarders DHL and Schenker are

used. For Finland, Schenker Direct is used and for the remaining countries both inside and outside the

EU UPS is used (Andreasson, 2014b).

When Krusell International AB receives an order from a customer there are several procedures in regards

to customs that needs to be conducted. Data is sent from Krusell International AB to Aditro Logistics

with information about the order so they are able pack and process it for dispatch (Wikström, 2014). An

outbound delivery file sent to Damco that contains data about the outbound shipment i.e. recipient's

name and address, item, quantity, sales price, the invoice number. The data is then used in the export

declaration when they notifies the Swedish Customs department about the outbound shipment (Tarawi,

2014). Regarding outbound shipments that are for customers outside the EU, Aditro Logistics can finish

the packaging of the shipments but are prohibited to load the goods onto a truck until Damco has notified

Krusell International AB that the goods has been approved by the Swedish Customs department.

(Andreasson, 2014b). When the shipment is cleared by the Swedish Customs and Damco has notified

Krusell International AB about this, they sends an approval for dispatch to Aditro with information that

the shipment is ready to be sent to the customer (Wikström, 2014).

37

6 Analysis of empirical study

38

7 Conclusion

39

8 Appendix

Table X. Duty tariffs of manufactured products in China

HS Codes Tariff China –

EU

Tariff Thailand –

EU

Tariff China -

Thailand

Number of

unique products

3926909790 6,5% 0,0% 0,0% 79

4202121100 9,7% 3,3% 0,0% 14

4202129190 3,7% 0,0% 0,0% 2

4202221000 9,7% 3,3% 0,0% 24

4202229090 3,7% 0,0% 0,0% 1

4202310090 3,0% 0,0% 0,0% 3

4202321000 9,7% 3,3% 0,0% 29

4205009000 2,5% 0,0% 0,0% 3

7326909890 2,7% 0,0% 0,0% 2

8518309590 2,0% 0,0% 0,0% 10

Mean Mean Mean Total

5,32% 0,99% 0,0% 167

(Swedish Customs, 2014; Jerkhage, 2014b; FTA, 2014; Swedish Customs, 2014)

40

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