Information Technology and the Supply Chain

This week we look at how information technology is impacting the supply chain:

We will first discuss what supply chain management is and then consider two approaches to supply chain strategy. We will look at the impact of supply chain information technology and in particular the value of and issues with supply chain collaboration. Finally we look at supply chain and trust. Supply chain focuses on how organisations (suppliers, manufacturers, distributors and customers are linked together. The following graphic illustrates:

Martin Christopher of the Cranfield School of Management defines supply chain management as:

“planning and coordinating the materials flow from source to user as an integrated system rather than, as was so often the case in the past, managing the goods flow as a series of independent activities… the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and yet at lower cost. In other words to achieve the goal of competitive advantage through both cost reduction and service enhancement.”

Modern supply chain strategies arise from study of the Japanese approach to supply chain. This features close relationships across the supply chain and collaboration to maximise supply chain performance. This is in contrast with previous approaches that sought simply to minimise cost. Now it is recognised that cooperation that focuses on the overall performance of the whole supply chain enables higher levels of performance to be achieved.

The new approach requires a willingnes to share supply chain information between organisations and is often facilitated by internet based technologies.

The Hitachi Consulting company states that the following tends are evident in supply chain managementy today:

Demand planning: Working to influence demand so that it aligns with productive capacity.

Globalisation: Increasingly global supply chains with emphasis on the issues involved with working on a global level.

Increased competition and price pressures: Brought about by global competition and economic recession.

Outsourcing: Sourcing of products and services from outside the firm, often in lower wage economies.

Shortened and more complex product life cycles: Increased competition is leading to products with shorter life cycles and this increase supply chain complexity.

Closer integration and collaboration with suppliers: Necessary in this faster moving, global environment.

The Bullwhip Effect

The Bullwhip effect theory is another argument for supply chain collaboration. It is based on the amplification of the impact of a changes in customer buying behaviour as it moves up the supply chain, as suppliers attempt to respond to the changes in customer orders. The following graphic illustrates the bullwhip effect:

While the following video, with Professor Hau Lee, explains it further:

IT and the Supply Chain

In 1990 Michael Hammer wrote about the transformative role that IT would have in organisations through the use of Business Process Engineering. The following video introduces IT and supply chain:

According to Hammer, only 10 % of all major corporations have used IT to transform their value creation process. He says that their IT efforts had a focus on the technology and not on its impact on business processes. Information technology allows information to be shared across the supply chain and for activity to be coordinated. Today, many companies do this, with frequently used examples including Amazon, Dell, Honda, Procter and Gamble and Walmart.

Supply chain technologies focus on a number of areas including:

Network and inventory optimisation

Product life cycle management

Sales and operations planning

Manufacturing optimisation

Logistics optimisation

RFID (Radio frequency identity devices)

Procurement

Business intelligence

The following video describes RFID and raises some, at times irrational, concerns:

Supply Chain Collaboration

Supply chain collaboration involves a number of elements. It requires sharing of information between supply chain partners, congruence of goals across the supply chain, synchronisation of decision making, alignment of incentives and sharing of resources. Collaborative communication is required to facilitate this along with the creation of joint knowledge. Professor Richard Wilding discusses supply chain collaboration:

The sharing of supply chain information can lead to stronger supplier performance, better supply chain relationships and new forms of collaboration. Performance improvements are seen in lower costs, faster new product development, shorter order fulfillment lead times and greater flexibility and agility in the supply chain.

Thus far collaboration has proved difficult for many organisations. In the following video Mark Williams talks to Supply Chain Brain about the current state of supply chain collaboration:

Many companies have struggled with the application of information technology to supply chain. It is argued that this is due to their focus on the technology and not its operational impact. It is not simply the application of technology that is important but rather, how it is used. So, investment in technology is not enough. The following chart illustrates a process for exploiting IT investments for collaborative advantage:

Supply chain collaboration faces many barriers. Organisations have traditionally operated in separate organisational functional silos with turf guarded carefully – collaboration breaks this down and creates insecurity. Poorly aligned goals and measures discourage cooperation and a general lack of trust between supply chain partners based on past traditional relationships is often evident. Managerial support for collaboration can be weak for these reasons.

Trust

Trust is critical to supply chain collaboration. There are two types of trust. Affective trust is based on emotion and on the personality of the person being trusted. Trust in competency is based on competence and rationality. Both of these types of trust are important in benefit / risk sharing. More trust will mean more sharing.

Affective trust is more important in information sharing – do you believe that the other person will respect the confidentiality of the information?

Competency is more important in joint decision making which is important in developing the effiiciency of the supply chain. Do you beleive that sharing your information in joint decision making will actually result in improvement? So, organisations need to ensure that people in joint decision making roles are competent. The following video argues for the importance of trust:

Conclusion

This week we have looked at the application of information technology to the supply chain. It has been argued that supply chain performance can be improved with technology if its use is consistent with a modern supply chain approach. Collaboration is critical to achieving performce improvement and it requires trust to work.