The theory is great… But will it work for you?
In the complex supply chain that links an enterprise with its supplier upstream and its customer downstream, coordination of planning, resources and processes between all three entities should result in less wastage, better margins and lower costs. End-to-end supply, transformation and distribution of goods has extended into a global, networked operation for many companies. At the same time, business system technology has evolved to help manage the multiplication of relationships and touch points. Collaboration should improve business performance by allowing supply chain partners to define mutually beneficial goals, and share processes and information.
As a bonus, information systems for supply chain are now moving into the cloud for anytime, anywhere access. But is that enough for collaboration to work?
Haunted by the Bullwhip Effect
Talk of collaboration in supply chains may be fashionable at the moment, the IT context encouraging, and the potential benefits alluring. It’s not just a question of carrots however. The stick of the Bullwhip effect still lurks in the background. In this case, a lack of collaboration can have a real negative effect on business. Uncertainty in demand and lead times and fear of stock-outs result in the inflation of order sizes and lead times further up the supply chain. Companies know that by improving management coordination and making information on end-customer demand available to all supply chain partners, they can reduce this effect. Now they need to know if increased efforts for collaboration will pay further dividends, and if so, how they should set about collaborating.
Where are the Opportunities for Collaboration?
Before delving into the suitability of collaboration for different companies, we should understand where the opportunities are.
Irrespective of the industry sector, these opportunities can exist at three levels: strategic, tactical and transactional. At the strategic level, supply chain partners may work together to make joint decisions on product design, marketing, pricing, production planning and distribution. Tactical collaboration involves demand forecasts, inventory, promotional pricing and levels of service. At a transactional or execution level, collaboration covers exchanges of data in the form of purchase orders, work orders, sales orders, point of sales information, invoices and payments.
Visibility is a Necessary Condition
It is necessary, but not sufficient. Transparency of the end to end demand pattern removes one obstacle to supply chain collaboration. However, it does not guarantee the absence of others. When supply chain partners mesh together, as in the vaunted Japanese manufacturing model, tight integration and collaboration can bring significant benefit. In other cases however, partners in a supply chain may still have diverging objectives; or it may be too complicated for an enterprise to leverage all the information it receives from upstream and downstream sources. For this reason, some large multinational corporations do not use the information received from partners to fine tune everyday activities, but prefer to store it in databases for offline analysis and performance evaluations.
The Role of Information Systems in Collaboration
Information technology and systems provide a means of translating collaboration concepts into reality.
In keeping with the three levels of opportunity described above, information systems (IS) can also be declined in three main categories. Message-based systems contribute to transactional collaboration, using email, EDI (Electronic Data Interchange), XML (Extensible Mark Language) messages or that old faithful, the fax machine. At a tactical level, electronic procurement hubs and marketplaces, and collaborative software applications including workflow and file sharing help with promotions, planning and forecasting. Strategic collaboration has its IT counterparts in predictive analysis software that allows for business model sharing between companies and their external partners.
These IS components underpin programs such as Efficient Consumer Response (ECR) in the fast moving consumer goods industry, Vendor Managed Replenishment (VMR, or Vendor Managed Inventory – VMI), and Collaborative Planning, Forecasting and Replenishment (CPFR).
So Does Supply Chain Collaboration Work?
If some of the preceding remarks appear to throw cold water on ideas about collaboration or at least temper enthusiasm, we should recognise that in some cases supply chain collaboration works well.
Pharmaceutical companies use collaborative product-tracking and RFID (radio frequency identification) techniques to prevent counterfeit goods from infiltrating their supply chains. Their reseller partners, the pharmacies, also benefit from RFID to improve stock management of products with shorter shelf lives. Real financial benefits can also be quantified in various cases. OfficeMax, the American office supplies retailer, collaborated with its supplier Avery Dennison to increase revenue by more than 22 percent, achieve product availability of more than 99 percent, decrease inventory by 34 percent, and save more than $11 million in logistics costs.
First, the Facts
The complexity of supply chains makes it difficult to start with abstract models and move to their practical manifestations afterwards. For that reason, much of the studies that are done on supply chains and on supply chain collaboration in particular start with real life cases and try to deduce underlying principles. One model developed by Matthias Holweg, Stephen Disney, Jan Holmström and Johanna Småros divides organisations into four categories or types: type 0 is the traditional, linear supply chain; type 1 is supply chain collaboration through information exchange; type 2 is vendor managed replenishment (VMR or VMI); and type 3 is supply chain synchronisation.
Mapping the Model onto the Real World
Using this classification and knowledge gathered from different industries, it is possible to suggest how different enterprises should aim to put supply chain collaboration into practice. For example, a company with high diversity of customers and distribution channels may in fact see no economic advantage in anything but type 0 operations, meaning no collaboration. However, companies that can clearly link up local demand with local supply may find the opposite; meaning that a type 3 collaboration with supply chain synchronisation makes sense. Type 2 (VMR/VMI) collaboration is often observed in manufacturing sectors for component parts, and in retailing for products that are non-perishable. Type 1 collaboration is suited to products supplied into many markets from central or regional manufacturing sites. The effort to collect the demand information should then translate into advantage through improved forecasting.
The authors of the Types 0 – 3 collaboration model give additional examples. A confectionery manufacturer with two production sites and most of its major accounts in its home market has much to gain from supply chain collaboration. On the other hand, a detergent manufacturer that produces centrally, but supplies all of Europe will find it harder to collaborate effectively. Seasonal products may oblige supply chain partners to carry larger buffer stocks to mitigate variations in demand: collaboration in this case is likely to be type 1, information sharing. Finally, supply chains for products with stable demand such as beer or toothpaste are often good candidates for synchronisation or type 3 collaboration.
Opportunities for supply chain collaboration and its benefits exist, but they depend on a number of factors. Geographical parameters, demand characteristics and the type of product or service being supplied are all to be taken into account. Information systems have evolved to provide highly effective support for collaboration, but they need to be applied after the potential for collaboration has been confirmed. It is the existence of favourable conditions for supply chain collaboration that drives any decision on investment in such solutions, not vice-versa.
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