The value of information in SCM

Supply chain management involves coordinating and integrating flows of products, finances, and information both within and among companies. A company may share data with its suppliers; these data are called 'upstream' data. On the company's other side, the client's side, data are 'downstream'. By providing an effective scheme for information management, SC can integrate procurement, operations and logistics from raw materials to customer satisfaction. !owever, building an information networ" across the companies on a supply chain is not easy. Any slip in the information networ" due to physical or logical defects on the networ" may lead to immediate and tangible losses to one or more members of the supply chain. Strategic information is vital to the supply chain as a whole; however, appraising the value of strategic information of individual members or of the entire chain is also difficult. #n practice, SC focuses on valuing tactical and operational information. $heoretically, information delivered across a supply chain should be ade%uate, reliable and delivered in a timely manner Coordination in a supply chain Coordination in a supply chain relies on the information lin"s and decisions that determine the flow of materials and services in order to match supply with demand throughout the supply chain. $raditionally, supply chain coordination has been the core activity of SC . &ithout coordination, local sub'optimi(ation of individual members in a supply chain will lead to sub'optimal results for the chain as a whole. $o promote the efficiency and effectiveness of the entire supply chain )termed 'global optimi(ation' in your te*tboo"+, coordination begins with a thorough understanding of the demand and supply of each member on the chain, resolving boundary

issues and prioriti(ation conflicts, and developing mechanisms to cope with perceived change in demand and supply. Obstacles to coordination in a supply chain Coordination in a supply chain is related to how each member in the chain "nows about the actual demand and how they might respond to that "nowledge. $here are always obstacles that hinder effective coordination in a supply chain. Chopra and eindl ),--.+ divide these ma/or obstacles into five categories '' incentive obstacles, information processing obstacles, operational obstacles, pricing obstacles and behavioral obstacles. 0ach of them is briefly e*plained below. .. Incentive obstacles '' 1ocal sub'optimi(ation is a common incentive, in which members of a supply chain ta"e actions to benefit themselves but not the entire chain. Another e*ample is that the efficiency of a sales force might be appraised by the %uantity of sales as compared with the companies ne*t in the downstream supply chain but not as compared with end'users )final customers+. #n this case, sales si(e is hardly related to actual customer demand. ,. Information processing obstacles '' A supply chain with poorly organi(ed or managed information channels leads to deterioration in information %uality )e.g. information on customer demand cannot reach members in a supply chain in a timely manner, or information is not available to some members who might need it+. 2. Operational obstacles '' Certain practices such as placing and filing orders may have adverse effects on coordination. 3or e*ample, orders of larger si(es, larger replenishment lead times, rationing and shortages can all mean orders are unable to reflect true customer demand. 4. Pricing obstacles '' Certain pricing practices and factors that affect pricing are also ways to detach orders from actual demand. 3or e*ample, a company may overbuy if its

supplier offers a discount on a larger lot of orders, or if its demand is e*ceptionally large, but members in the upstream supply chain can't rely on these sales figures to forecast future demand. 5. Behavioral obstacles '' #t is highly li"ely that members in the supply chain respond to local situations and neglect root causes. $hey may blame each other for fluctuations in local demand, resulting in loss of trust or even turning themselves into mutual enemies. The bullwhip effect $he bullwhip effect is the term used to describe the variability of the order pattern faced by a firm in a supply chain. #t refers to the amplification of the order pattern as one moves up the supply chain. #n other words, firms at the top of a supply chain face a much higher variance in orders than firms facing retail demand. 6eedless to say, in the real world, the bullwhip effect means those firms upstream in a supply chain are more li"ely to suffer from increased costs and poorer services !owever, the causes of the bullwhip effect can be eliminated by automating the passage of information across the chain. $he bullwhip effect is a symptom of a poorly coordinated supply chain. $he obstacles to coordination that we discussed in the last section definitely e*plain the bullwhip effect itself. alt( ),--.+ identifies, more precisely, four ma/or causes of the bullwhip effect7 Forecast problems '' 0ach member of a supply chain receives its customer's orders based on the customer's forecast but not its actual sales. Secondly, suppliers do their own forecasts for their operations and their suppliers. 3orecast errors are amplified with longer lead times. Order size/order cost tradeoff '' Customers tend to place orders of larger si(es as unit prices may thereby decrease, and order review and placement costs are lower as well. #f daily demand is accumulated to ma"e up larger

wee"ly orders, daily information will be lost and forecasts will become less accurate. Forward buying '' Customers tend to 'overbuy' when they are offered a discount, especially when prices change fre%uently. $his "ind of ordering does not reflect demand that is usually more stable. ew product game '' &henever new products are promoted, they are e*pected to yield higher profits. !owever, it is e*tremely difficult to ma"e accurate forecasts on such profits. Secondly, the technology of production may not yet be stabili(ed and supplies may be uncertain. Once again, orders will not reflect actual demand. alt( argues that all these problems can be solved by improving the information channels in a supply chain. !is suggestions are summari(ed in $able 4... Table !"# Causes of the bullwhip effect and their remedies ) alt( ,--.+

Cause Forecast problems

Information remedy

$anagerial remedy

8isibility to final demand Single responsibility for forecast throughout the supply chain and fulfillment, e.g. vendor' managed inventory Blan"et purchase orders with %uantity pricing; freight customers and locations

Order size/ order cost tradeoff

Same as above, plus electronic lin"ages and

computer'aided ordering consolidation across multiple

Forward buying 8isibility to final

1evel pricing; active development of producers for demand and early notice obsolete parts of product obsolescence 8isibility to new product Contracts with limited 'upside'

ew product

manufacturing schedules fle*ibility

game

%trategic alliances
$he functioning of the supply chain also relies on the cross'supply'chain business relationships that are based on mutual trust and openness, and shared ris" and rewards. #f it succeeds, a supply chain can yield a strategic competitive advantage for all its members and result in business performance greater than any one member could achieve individually.

Companies do not develop strategic alliances overnight. $hey approach each other with care, and close relationships are built step'by'step. 3or e*ample, three such steps might be7 Step The alliance conceptualization '' Staff must "now about the . alliance. Open communication and internal training programs will help solve problems that may occur. At this stage, the management needs to cope with the firm's fear of change and the inability to relin%uish traditional business practices. Step The definition of the new alliance strategies '' 9sually urged , by the firm that initiates the alliance, a detailed company profile )including staff and manager capacity, cost structure, strategies, etc.+ of the potential alliance members should be assessed to set an alliance strategy for the supply chain. $he written form of the alliance is a contract that specifies how to deal with power imbalances, conflicts in the supply chain, allocation of net benefits, and matches between members.

Step Formation of &oint ventures and pro&ects '' :ossible /oint 2 investments or pro/ects are considered, as is the possible need for more investment in physical resources and human resources. $he success of the alliance can be evaluated by a performance measurement system to ensure that all members are operating according to e*pectations and are meeting the ob/ectives as stated in the alliance agreement. $he so'called 'relationship'oriented levers' help management to build cooperation and trust within the supply chain.

#n each of the three steps discussed, namely alliance conceptuali(ation, definition of alliance strategies and formation of /oint ventures and pro/ects, a business alliance can only be tied together with an e%uivalent amount of trust established on all sides. Chopra and eindl ),--.+ elaborate Step , )from the previous

subsection+ as comprising four separate issues7 a. assessing the value of the relationship; b. identifying operational roles and decision rights for each party; c. creating effective contracts; and d. designing an effective conflict resolution mechanism. 'ssessing the value of a relationship $o build a strategic alliance, companies involved must study carefully what they need and what their partners can provide. $here are three ma/or tas"s within this assessment issue7 to identify mutual benefits; to identify criteria for evaluating the relationship and

contribution of each party '' commonly such criteria include total profits and ()uity; and to clarify the benefits that will accrue to each party '' this involves studying the role and contribution of each party, and seeing how the increased profits are shared between contributing parties. 6ote that 0%uity is the first step to building trust among partners. &ithout ensuring the management of partner companies that the resulting increase in profits will be shared e%uitably, the supply chain relationship is bound to fail.

Identifying operational roles and decision rights for each party #f parties in an alliance have to wor" as a team, the operational role of each party must be identified. #n particular, how tas"s are allocated among different parties has a direct conse%uence for the operational management of each company. &ithout careful planning and leveraging, a company may find that other companies design tas"s that depend on its tas"s. Such over'dependence is a source of conflict in later days. Chopra and eindl ),--.+ describe two "inds of tas" allocation7

Se%uential interdependence '' activities of one party precede the others. ;eciprocal interdependence '' all parties come together and e*change information and inputs in both directions.

ost supply chains rely on reciprocal interdependence to ma*imi(e their profitability. !owever, this re%uires more careful management, greater mutual trust and increased interaction among all parties involved.

Creating effective contracts Business alliances can occur in many forms )e.g. Consortiums, &oint ventures, license agreements and service<product agreements+ and can be finali(ed by creating contracts which detail effective governance and contingency information. !owever, Chopra and eindl suggest that it is almost impossible to

design a contract with all contingencies included. #t is more important to develop a relationship that allows trust to compensate for gaps in a contract. $rust supports informal understanding and commitment; and these informal arrangements can be solidified by being added to new contracts when they are drawn up later on.

*esigning an effective conflict resolution mechanism Conflicts in supply chains are inevitable because the future value of its relationships is un"nown. !owever, an effective mechanism to resolve conflicts can strengthen relationships and nurture trust among members in a supply chain. Chopra and eindl indicate that an initial formal specification of

rules and guidelines for financial procedures and technological transactions can help develop trust between members. Sharing information, which is essential for effective coordination, helps move the relationship from deterrence'based trust to process'based trust. $hese two "inds of trust are e*plained below. =eterrence'based trust '' parties involved rely on rules and regulations written on formal contracts to ensure cooperation. $hey act in a trusting manner only for their self'interest. :rocess'based trust '' trust and cooperation are built as a result of a series of interactions between parties involved.

Trust and collaboration $he competitive advantages of Collaborative SC is that it lets

companies share data that were previously only internal such as daily sales reports, production schedules, product designs and logistics details. $rusting that the supply'chain partners will respond to that information in an agreed manner is critical to the success of the collaborative supply chain. But gaining others' trust is not easy. Obviously, distrust violates the spirit of collaboration and brings the entire supply chain down. $o brea" the ice, a supply chain needs something more than SC software and demand planning tools. Change management and strong leadership are often regarded as the impetus behind successful collaboration. $hat is, companies need to prepare for changes in organi(ational structure, corporate culture, and organi(ation process and measurement. Careful planning and good leadership are essential to ma"ing these changes happen. Information and communication technologies for %C$ A sound system of information capture, processing, storage, retrieval and passing is a "ey to the success of SC . $his system must be able to connect each member on a supply chain, to maintain information in a distributed environment, and to deliver information in a timely manner. #n the #nternet era, information does not travel in a linear way as in traditional supply chains. Companies and their information systems are #nternet'connected and information is e*changed in a networ"ed and non'se%uential manner. #n general, the evolution of supply chains )or more specifically the evolution of the traditional supply chain into the e'supply chain+ goes through four stages7 .. 3unctional coordination '' #$ is harnessed to first build intra' organi(ational information systems for collaboration between departments. 1ater, inter'organi(ational systems

may be built to coordinate activities among a firm and its suppliers and customers. ,. Spatial integration '' inter'organi(ational systems emerge to allow companies to do /oint planning and scheduling with their business partners across vast geographical areas. Activities such as purchasing, manufacturing and distribution are planned for the entire supply chain. 2. #nter'temporal integration '' e*change of information on the #nternet among companies in a supply chain, irrespective of the si(e of the companies, urges each firm to reconsider its operational, tactical and strategic plans. 4. 0nterprise integration '' further deployment of information systems to integrate supply chain activities with local demand and corporate financial management. $hat is to say7 a supply chain begins by integrating information systems of different members on the chain. #C$ always plays a "ey role in such coordination. &ith the advent of #nternet technology, supply chains of today rely on message e*changes on the #nternet, and SC is often called e'SC or i'SC to highlight the importance of the #nternet. (+%C$ and e+business strategy &e have seen the development of various forms of #C$s to improve the performance of supply chains. &e have also emphasi(ed that the use of #C$s doesn't necessary convert a traditional supply chain into an e'supply chain. $he essence of e+%C$ lies in the ability of supply chain partners to integrate and cooperate in their business processes to form a seamless path for the smooth delivery of goods and products from suppliers, manufacturers, distributors and retailers into the hands of customers. &e have introduced a number of #C$s that can be deployed for the purpose of information sharing and wor"flow coordination between supply chain partners. Before embar"ing on the use of any #C$, a company must ma"e a complete evaluation of

its own needs and capabilities so that it can develop an appropriate strategy for the adoption of the correct #C$. According to the white paper '0'business and supply chain integration' published by the SC namely7 #" information integration, -" planning synchronization, ." wor/flow coordination, and !" new business models" 3or the first dimension of information integration, we have studied how the sharing of information among SC eliminate the bullwhip effect. $he emergence of e'business has created new electronic channels such as the #nternet for sharing information and creating transparency among supply chain partners. $he use of enterprise systems such as 0;: has also facilitated the information sharing capabilities of supply chain partners. partners can guru ! 1 1ee, there are four dimensions in which we can see the impact of e'business on SC ,

$he ! 1 1ee white paper proposes one approach for #nternet'based SC , the information hub as shown in 3igure 4.4. $he overall networ" forms a hub'and'spo"e system with the supply chain partners' 0;: systems being the spo"es.

Figure !"! An information hub $he following case indicates how efficient information sharing can lead to continuous replenishment for the C8S :harmacy' c>esson demand chain. Once an information sharing framewor" has been established between supply chain partners, planning synchronization can be

carried out by establishing rules and agreement on what critical actions should be ta"en to achieve the full integration of the supply chain based on the shared information. $he final ob/ect of planning synchroni(ation is to have a common forecast and replenishment plan all the way from the beginning to the end of the supply chain so that variance '' and the bullwhip effect '' can be completely eliminated. $he following case is e*tracted from the 8#CS site and demonstrates the C:3; pilot underta"en by :rocter ? @amble. :ay particular attention to how #nternet'based data e*change technologies assist the planning and replenishment processes between the business $he #nternet permits companies to ta"e collaboration one step further, from planning synchroni(ation to fully integrated wor"flow coordination. 0or/flow coordination allows supply chain partners to establish fully integrated business and manufacturing activities that may include procurement, order e*ecution, engineering and manufacturing optimi(ation and even necessary financial data e*changes.

$his tight integration of all critical business and manufacturing processes across all partners is vital to the success of businesses such as those in high'tech industries where the product cycle is very short and mar"et demand is highly unpredictable. 3inally, as the techni%ues in SC reali(e the value of e'SC shifting traditional SC evolve, companies have begun to doesn't merely mean

strategy to the overall success )or

sometimes survival+ of e'businesses. 0'SC

activities to the electronic channels; it also

often leads to entirely new ways of doing business, developing new business strategies and new e+business models"