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.

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Operations and Technology

Over the past 30 years information technology has had an increasing presence in the operational side of most businesses. At the same time, approaches to the organisation of work and the management of people have changed and developed. Debate exists today around the role that information should play in operations. Some argue that IT can have a significant impact on operations while others argue that IT is being over used and that the focus should be on simplification.

This post traces the history of approaches to operations management and the role that information technology might play in these. Scientific management, human relations and socio technical systems are outlined. More recent approaches in lean operations and enterprise resources planning are considered, particularly the debate over the pursuance of a lean strategy and the role (if any) for ERP within this. The role that information technology takes in operations will depend on the overall operations strategy adopted. This will be influenced by beliefs about the motivation of people at work.

Scientific management and the human relations school were explained in the previous post.  In 1979 the United Nations’ International Labour Organisation described scientific management as:

“Under this system the operative is regarded as a person of a very low intellectual and educational level, a waster with an innate tendency towards low output, needing regular pacing to overcome habitual apathy, and requiring close supervision, but capable of positive motivation through payment by results.”

The human relations school was critical of scientific management and McGregor’s theory X and theory Y questioned the model of employee motivation that scientific management was based on:

Socio technical systems also emerged as an approach to operations in the 1950s. They expanded on human relations theory, arguing that it was too narrow. They argued that the human relations school assumed that the use of technology in operations was fixed and that activity to improve worker motivation could not change this. The socio technical school argued that work is a combination of social and technical systems and that both had to be optimised together to create a work environment that would maximise employee motivation and operational performance. The design of manufacturing environments should take both into account.

Many companies adopted a socio technical systems approach. Volvo, in their plants in Kalmar and Uddevalla in Sweden and, more recently, General Motors’ Saturn plant in the US were examples of this. Research evidence of the performance of socio technical systems vs. other manufacturing approaches is inconclusive – we don’t know if the socio technical approach produces better performing operations. The following video describes the use of socio technical systems by Volvo:

By the mid 1980’s there was a recognition that North American and European manufacturing performance was falling significantly behind that in Japan. Womack, Jones and Roos researched this and in 1990 published their very influential book, The Machine That Changed the World. Their research quantified the gap: 

Study of Japanese manufacturing identified a new approach to operations – Lean Manufacturing which was argued to be the reason for the gap. North American and European companies were urged to adopt this lean approach.

Writing in 1987, Voss described lean manufacturing as:

    “a disciplined approach to improving overall productivity and eliminating waste. It provides for the cost effective production and delivery of only the necessary quantity of parts at the right quality, at the right time and place, while using a minimum amount of facilities, equipment, materials and human resources.”

and argued that it required:

“total employee involvement and teamwork”

The main elements of a lean approach were described by Bhasin and Burcher in 2006 who argued that a lean approach was a new philosophy of operations management that had the following elements:

•Decisions at the lowest level
•Clarity of lean vision
•Strategy of change
•Clear responsibilities
•Supplier relationships based on trust and commitment
•Learning environment
•Focus on customer
•Lean leadership and metrics
•Maintain challenge of existing processes
•Maximise stability
•Assess fraction of employees operating under lean conditions
•Long term commitment

The following video provides a good introduction to lean operations:

Toyota are seen as one of the leaders in lean:

Lean has now been applied beyond the manufacturing environment, in most other parts of the economy. In service industries it has featured the introduction of problem solving groups, upgrades to housekeeping and quality, clarification of process flows, changes to equipment and process technologies etc. The following video looks at lean in an office environment:

The Lean Enterprise Research Centre at the University of Cardiff in Wales looks at how lean is applied in a variety of sectors:

Information technology has been applied in operations increasingly over the past thirty years. It has been applied in operational equipment and in more recent years information technology has been used to integrate operations. Computer integrated manufacturing focused particularly on the application of information technology to processing equipment:

Enterprise resources planning is described by PC World as:

“An integrated information system that serves all departments within an enterprise. Evolving out of the manufacturing industry, ERP implies the use of packaged software rather than proprietary software written by or for one customer. ERP modules may be able to interface with an organization’s own software with varying degrees of effort, and, depending on the software, ERP modules may be alterable via the vendor’s proprietary tools as well as proprietary or standard programming languages.

“An ERP system can include software for manufacturing, order entry, accounts receivable and payable, general ledger, purchasing, warehousing, transportation and human resources. The major ERP vendors are SAP, Oracle (PeopleSoft and J.D. Edwards), SSA Global (Baan) and Microsoft.”

The following video describes ERP:

The following grahic illustrates the latest generation of ERP that focuses on total integration of business processes:

There is debate about enterprise resources planning technology and lean operations. Some argue that a lean approach is not compatible with ERP. Lean focuses on simplifying processes and using shopfloor level visibility to control process flow.  ERP is based on using information technology to manage shopfloor activity and a wide range of other functions which is argued to work against the lean approach. They point especially to the use of pull systems of process flow in lean and push systems in ERP, as the following graphic illustrates:

Others argue that ERP is more appropriate than lean in managing operations. They accept that the approaches are incompatible and assert that ERP will produce better results.

A third group argue that a blended approach is possible with lean being used to control shopfloor operations and ERP being used to manage areas and activities beyond the shopfloor. The following graphic illustrates this:

The following video discusses the relationship between ERP and Lean:

This post has discussed the development of approaches to operations in organisations. A historical view is taken of this so that the progression of approaches that has led to current practices can be understood. Debate continues today on the approach that should be taken – that debate implies beliefs in human motivation.