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Supply Chain Integration Strategies

I“ntegration is prerequisite for effective sharing and utilization of information between different companies in the chain

—Mike Raymond”

 

 

Elements of Supply Chain Integration

 

Supply chain is no more confined to a firm's internal operations. It has expanded outside the boundaries of the firm covering customers, suppliers and service providers. Firms are adopting seamless integration approaches between its supply chain partners. Firms are developing close relationships with profitable clients and improving relationships with its loyal suppliers. To work effectively together, manufacturing partners have developed tools for communicating with each other and managing inventory across the supply chain. Information technology has enabled companies and their supply chain partners to share information and integrate their business processes resulting in more efficient supply chain operations. The supply chain integration may be done manually but as the complexities increases, the use of technology makes the job easier and speedier.

INTRODUCTION

The development and manufacturing of products has become increasingly complex in today's global economy. Multiple suppliers are involved in product design and development, and these suppliers are spread over larger geographical areas. Without a central location or an integrated system of communication, it is difficult for decision-makers to identify problems in the production line or respond quickly to a change in customer demand.

To work effectively together, manufacturing partners should have some tools for communicating with each other and managing inventory across the supply chain. With a closely-managed inventory, the delivery of products can be automated based on predicted rates of end-customer sales and achieve greater efficiency and profitability. In such circumstances, supply-chain integration is a must to build a strong partnership. Manufacturers can reduce time to market, decrease costs, and manage inventory turns through supply-chain integration. The supply chain integration may be done manually. However, as the complexities increases the use of technology makes the job easier. Companies like SAP, Oracle, JD Edwards, Accenture and i2 have built software applications to help manufacturers collaborate with their supply-chain partners. These software help manufacturers to achieve the following:

• Total asset visibility: Inventory movement across the supply chain.
• Enhanced system integration: Integration amongst manufacturing, trading, and logistics service providers.
• Effective collaboration: Collaborative planning, forecasting, and replenishing inventory along the supply chain.

The objective of supply chain management is maximizing services to customers of choice at the lowest total cost. However, this requires a strong commitment to close relationships among trading partners. The integration amongst supply chain participants helps in lowering the operation cost and enhances service level. The integration comes through collaborations amongst the supply chain participants (both internal and external).

ROLE OF INFORMATION IN SC INTEGRATION

The emerging business models are based on inter-firm collaboration and integration. And in today's competitive marketplace, with increasing consumer power, it is competition between supply chains which matters. This understanding calls for an integrated approach towards management of critical supply chain functions and information is key to this integration. Information transparency is a prerequisite for optimum performance of the supply chain, because it enables firms to take decisions, which are aimed at superior supply chain performance.

One major obstacle to integration is the way in which firms are traditionally managed and owned. Traditionally, firms were inward looking, with business processes aligned towards the corporate goal of profit maximization or greater market share. Additionally, as firms grow in size, the organizational structure gets complicated with different functional silos, often in the forms of departments, developing within the firm. The usual consequence is a very fragmented organizational structure with very little inter-functional communication or synergy.

PUSH STRATEGY

In push strategy, the inventory is produced in advance based on past data about the market demand. By the time the inventory is produced, the actual demand changes and then manufactures pushes the inventory through middlemen offering more incentives. Hence, long-term forecast is at the base of a push strategy in the supply chain. The production and distribution decisions are made on forecasts. Hence, the accuracy of decision is dependent on accuracy of forecast. The production planning in general is done by manufacturer based on the orders he receives from the middlemen. His schedules are dependent on demand forecast. As the manufacturer has no direct contact with markets, he gets market information belatedly. If the supply chain is push based, he takes longer time to respond to the market. The demand forecast with its following characteristics has great impact on supply chain operations.

• Forecast is rarely correct because it is futuristic; hence, it is difficult to match supply and demand.
• Deviations are large with longer forecast horizon meaning that it is difficult to predict customer demand for a long period of time.
• Frequent updates by decision-makers based on his/her assessment of market forces him/her to update inventory levels, safety stock and order quantities. The non-uniformity amongst all decision points across supply chain either leads to shortfall or excess inventory commonly known as bullwhip effect. This means that variability of orders received from middlemen is much larger than variability in customer demand.
• Collaborative forecast tends to be more accurate. This is due to uniformity in inventory related decision at all decision-making points across the supply chain.

PULL STRATEGY

In a pull supply chain, manufacturer produces inventory based on actual demand rather than demand forecast. In a pull system (Exhibit 21.1), the firm produces inventory to the order thus reducing the impact of bullwhip effect and increasing service levels. However, for a manufacturer it is very difficult to implement pull strategy. In pull system, the information accuracy and speed play a key role in its implementation and success. For example, Wal-Mart used AITS (automated inventory tracking system) using satellite communication. The inventory movements are conveyed to suppliers on real-time basis so as to manufacture and replenish the inventory with least lead time. Here, availability of inventory plays the key role in successful implementation of pull strategy. The manufacture of inventory is based on real-time demand information.

Exhibit 21.1 Push-Pull Supply Chain

As the production decisions are based on actual and real-time demand, the firm cannot take advantage of economies of scale in pull strategy. Hence, the firm would go for batch production and not full truckload deliveries. This in turn leads to high costs. Looking into the pluses and minuses of both pull and push strategy, companies are looking for via media solutions or new supply chain strategy to take advantage of the best of the both. It may be called as two-in-one or push-pull strategy.

PUSH-PULL STRATEGY

This is a two-in-one strategy using both push and pull strategies in different stages of the supply chain. The back end processes in supply chain are operated in a push-based manner while the front end processes are operated in a pull-based manner. However, the firm has to decide the boundary between these two depending on its internal strength and product market configuration.

Typically, a TV manufacturer who builds to stock makes all production and distribution decisions based on forecast. Then liquidate the stocks through dealers’ network using push strategy. But in push-pull strategy, manufacturer assembles the final configuration of TV to order. This means he procures the components and parts based on forecasted demand. However, the final assembly is done in response to the request of a customer. In this example, the push part is a supply chain prior to assembly, while the pull part starts with assembly which is based on customer demand (time and specifications). The logic behind using combine push-pull strategy is that uncertainty in component demand is much smaller than uncertainty in finished goods demand. This helps the manufacturer to reduce the safety stock level.

Dell Computers is using push-pull supply chain strategy. Dell keeps inventory of components and only assembles when there is an actual order. In other words, the demand is pulled while the assembly is pushed. Many companies use the strategy of postponement, which is an example of a combined push-pull strategy.

The postponement strategy helps in reduction of finished goods inventory. This strategy is applicable, wherein the customer demand for a specific end product has a high level of uncertainty and product differentiation can be done in response to individual demand. Thus, for the front end of the supply chain starting from the time of differentiation, pull strategy is more appropriate. The push strategy is more applicable at the back end of supply chain during the process of procurement and creating sub assemblies.

The pull strategy is more appropriate to the portion of the supply chain where demand uncertainty and variability are high. Here, decisions are made in response to on-time demand. The aim of using push-pull strategy is to reduce inventory-related cost, as inventory is a real culprit is supply chain. However, the demarcation of boundary between push and pull territory has to be decided by the management.

Thus, from a whole supply chain viewpoint, deciding whether a particular supply chain is push or pull is often difficult and generally depends on the perspective of what constitutes the supply chain and where particular participants are placed in the chain. For example, the manufacture of Toyota automobiles is a leading example of a demand-driven supply chain. However, the mining of the iron ore or operation of blast furnaces that process the iron ore for ultimate manufacture of automobiles is not. At some point in most supply chains, in their widest sense, demand push meets demand pull, and at this point inventory accumulates. This point is referred to as the push-pull interface or supply chain decoupling point.

The advantages of operating to a pull model are very compelling for businesses because the planned level of production and/or service delivery is not dependent on forecasts with their inherent inaccuracies. A business operating in demand pull mode will strive to move the inventory decoupling point further upstream to its supplier or its supplier's supplier. The determinants of push or pull supply chain are economies of scale and uncertainty of demand. For example, designer custom-built car is made to order in response to specific customer demand. Here, clearly the inventory is very low. However, for standard models a large number of cars are made to capture scale advantages but at the risk of uncertain timing of purchase, the company needs to discount some for sale. A ’30-min-utes pizza’ at Dominos shop produces to specific demand pull to supply specific customized pizzas. However, there is an element of push in this instance. To enable responsiveness, the pizza bases and ingredients are built as inventory in advance of the customer order. The final assembly is delayed until there is a specific order. This is an example of postponement and is an excellent example of push and pull operating in the same business.

STRATEGY IMPLEMENTATION

Depending on the location of a push-pull boundary in its supply chain, a firm can implement push-pull strategy. The boundary of supply chain starts with suppliers and ends with customers. It is also called as time line. The company shifts its strategies along with this time line. The push-pull point is located along the time line where the firm switches from managing the supply chain using a push strategy, to managing it using a pull strategy.

There are potential locations for the push-pull boundary together with industries that implemented it at various locations. For instance, furniture manufacturers locate the boundary at the production point while online shopping and delivery services like Amazon.com and Peapod locate the boundary at their distribution centres.

Evidently, as products move along the supply chain time line, their value increases, that is, the value of components at the procurement stage is smaller than after assembly and this is again smaller than the value of the same product at the store.

This implies that it is better to keep inventory in earlier stages of the supply chain rather than in later stages, since the cost of holding one unit inventory increases as the unit moves in the supply chain. However, in a push-pull strategy, the closer the boundary to the beginning of the supply chain time line the longer the delivery lead-time, that is, the time that elapses from receiving a customer order until the customer receives the product.

Thus, locating the boundary at assembly time, as is done by Dell computers, is not appropriate for products with long assembly or transportation lead-times. In this case, it is more appropriate to move the boundary towards the end of the supply chain time line. Consider for instance the car industry, an industry known for its long transportation lead-times. Prior to its latest effort to change its business model to the make-to-order strategy, there were previous attempts in the car industry to implement a push-pull strategy. In 1998, M&M changed its distribution strategy. Dealers could order vehicle they did not have in their lot from the distribution centre and these would be delivered within 24 hours. Thus, M&M employed a push-pull strategy in which inventory at their regional distribution centre was managed based on long-term forecasts while delivery to dealers was based on realized demand.

The demand pull business should be developing business processes and infrastructure that allows it to produce products or services in direct response to customer demand in the shortest time. The demand pull business emphasizes technologies and processes and relationships that reduce time to respond to customer demand. The demand push business focuses on having tight business processes and a capability to respond to uncertain customer demand. They include demand planning and sales and operations planning (S&OP), planning technologies, excellent warehouse management systems and safety stock, and customer service policies. The demand pull strategy calls for reserve production capacity and blending processes to manage uncertainty. Supply relationships tend to be most critical because often production is highly dependent on the quality and continuity of raw materials, whereas inventory buffers variability on the demand side.

The other element of integration is collaboration. It is a collaborative process of decision-making among interdependent parties in the supply chain. It calls for joint ownership of making decisions and collective responsibility for better results. The success of collaboration depends upon the ability and willingness of supply chain decision-makers to build meaningful relationships and create trust amongst the partners.

For collaboration at an operating level, the firms have to deviate from their traditional (secretive) thinking to more transparency in information flow. This collaboration requires significant change from standard business practices and the success depends on information exchange. This approach calls for sharing of data, operating plans, and even some financial information. This new approach is called as collaborative planning, forecasting, and replenishment (CPFR). In this, trading partners jointly develop long-term demand projections rather than relying upon separate, independently generated forecasts. The projections are constantly updated, based upon continuous flow of information from market. This helps in matching supply and demand with greater accuracy.

Cost-effectiveness plays a key role in gaining competitive advantage. The cost advantage is short-term as it can be copied by the competitors. Hence, the firm has to go for some differential strategies to outperform its competitors. Customized services with value addition would be the solution to gain competiveness. This can be done through collaboration with service providers. The internal core competency coupled with the expertise of external service providers helps firms to tailor service offerings to customer preferences and requirements. However, to achieve this, the firm has to be more focused internally, so that it may better respond to customer expectations and accommodate customer needs. Here, the quality of relationships with collaborators or service providers is key to the success of the push-pull strategy. The pre-requisites of collaborations are process synergies, transaction transparency and information sharing. Collaborations are known as an opportunity for improving operational efficiency in supply chains. Through better coordinated business processes across supply chain and increased sharing of more timely and accurate information, intercompany collaboration can help integrate information and material flows and reduce wastes.

The integration can bring cost savings to the entire supply chain, but the savings come at the expense of the buyer's firm. While in some situations the savings can be significant, there are also situations where it is better for all the firms to develop their production schedules independently. It was found that savings are more significant when (1) inventory holding cost is low, (2) supplier lead times are short, (3) forecasts are accurate and (4) the suppliers’ flexibility of accommodating schedule changes higher.

High service levels require building inventory that is in direct conflict with the objective of reducing system wide cost. By contrast, a focus on cost reduction in the supply chain forces the firm to cut inventory and thus, may lead to low service levels.

Push-pull strategy allows the supply chain partners to achieve both objectives. Indeed, the push part of the supply chain is applied to the portion of the supply chain where long-term forecasts have small uncertainty and variability. Thus, service level is not a big challenge and the focus is on cost reduction. On the other hand, the pull part is applied to the portion of the supply chain where uncertainty and variability are high and hence the focus is on matching the demand and supply. Consider, for instance, a supplier of fashion skiwear such as Sport Obermeyer. Every year the company introduces many new designs, or products, for which forecast demand is highly uncertain. One strategy used successfully by Sport Obermeyer is to distinguish between high-risk and low-risk designs. Low risk products, that is, those for which uncertainty and price are low, are produced in advance using long-term forecasts and focusing on cost minimization, a typical push-based strategy. But, decisions on production quantities for high-risk products are delayed until there is a clear market signal on customer demand for each style, that is, a pull strategy. Since fabric lead-times are long, the manufacturer typically orders fabric for high-risk products well in advance of receiving information about market demand and based only on long-term forecasts. Therefore, in this case, the manufacturer takes advantage of aggregate forecasts which are more accurate. Since demand for fabrics is an aggregation of demand for all products that use that fabric, demand uncertainty is low and thus fabric inventory is managed based on push strategy. The analysis thus implies that Sport Obermayer uses a push-pull strategy for all the high-risk products and a push strategy for all low-risk products.

INTERNET AND SC INTEGRATION

On the Internet, not only buying and selling but also servicing customers and collaborating with business partners is done with ease and speed. Internet technology has helped business firms to redefine their business models to improve the enterprise performance. The Internet has had a great impact on supply chain performance. It has helped companies to move away from the traditional push strategy employed by most supply chains.

The appropriate supply chain strategy depends on the industry, the company and individual products. If uncertainty in customer demand is higher, then its supply chain should be managed based on a pull strategy. Similarly, the higher the delivery cost, relative to the unit price, the more important it is that parts of the supply chain be managed based on a push strategy.

In the computer industry, there is high uncertainty and low delivery cost. In this industry, the larger part of the supply chain is managed on a pull strategy. However, for products with low demand, uncertainty and high delivery costs, for example, in grocery industry (soft drinks, staple food, etc.) a pull strategy is not appropriate. In this case, a push strategy works well. The reason is managing an inventory based on long-term forecast does not increase the inventory holding costs, while delivery costs are reduced due to economies of scale.

In some product categories, there is a mismatch between the demand uncertainty and delivery cost. In such cases, uncertainty suggests the supply chain to have ’push’ structure while delivery cost suggests a ’pull’ structure. Books and CDs fall in this category. There are products and industries for which uncertainty in demand and delivery costs are high.

To stay competitive, companies have gone for greater coordination and collaboration among supply chain partners in a bid to integrate the supply chains. The growth in Internet and information technology has played a key role in the supply chain integration process. The Internet has helped in redefining the way the processes such as product design and development, procurement, production, inventory, distribution, after-sales service support and marketing are conducted. It has also helped in redefining the roles and relationships between partners in supply networks.

IT had a significant impact on supply chain integration. New business models are continuously being developed based on Internet technology. The companies have resorted to e-business approaches for supply chain integration. They have realized that with e-business approach they would get efficiency improvements, better asset utilization, speed to market, reduction in total order fulfilment time, enhanced customer service and responsiveness, higher return on assets, and ultimately lower operational cost with improved customer service.

E-BUSINESS SC INTEGRATION

There are four key dimensions by which e-business has impacted supply chain integration. These are: information integration, planning synchronization, workflow coordination and new business models.

Information Integration

This means sharing of information among all partners of the supply chain. The information sharing has great impact on the performance of other members of the supply chain. For example, M&M allows its suppliers to have access to the production schedules available on M&M's website to plan their production (parts, components and sub-assemblies) on a real-time basis.

Synchronized Planning

It includes joint design and execution of plans for product introduction, forecasting and replenishment. Planning synchronization means with shared information the supply chain partners initiate specific actions simultaneously. This helps SC partners to have their procurement, manufacturing, replenishment and distribution plans coordinated to meet the common objective of cost reduction and customer service.

Workflow Coordination

This means all activities in supply chain should have coordination amongst them like an Olympic relay race. The supply chain should have streamlined and automated workflow activities between supply chain partners. The coordination between activities can be organized in a better way using the technology platform. In fact, many internal work flow steps can be seamlessly coordinated with automation so as to reduce the cycle time.

New Business Models

Many companies are designing new business models based on Internet technology. With the new models they are creating new business opportunities which were not previously possible. With joint efforts of partners and using technology platform, companies are redefining logistics flows so that the roles and responsibilities of members may change to improve overall supply chain efficiency. With the supply chain network companies may jointly create new products, pursue mass customization, and penetrate new markets and customer segments. Here to achieve success, channels of communication must be well defined and maintained, with roles and responsibilities clearly articulated. In addition, performance measures for partners in the supply chain also need to be clearly defined in quantitative and qualitative terms and should be monitored on a continuous basis.

COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT

The positive value of information sharing in supply chain management is well appreciated by leading firms and this has led to various industry initiatives to encourage firms to develop a framework for collaboration for mutual advantage. One such industry initiative is known as CPFR (collaborative planning forecasting and replenishment) systems. This is a software system which allows retailers and manufacturers to share information on past sales data and future price, and promotion measures. This is a relatively new development but is gaining popularity across the industry.

One of the main issues inhibiting increased supply chain performance today is the lack of visibility into down-stream demand. This lack of demand and inventory visibility leads to lost sales and high inventory levels for both retailers and manufacturers.

Most companies forecast future demand based on historical customer orders or shipment levels and patterns. However, actual consumer demand may be very different from the order stream. Each member of the supply chain observes the demand patterns of its customers and in turn produces a set of demands on its suppliers. But the decisions made in forecasting, setting inventory targets, lot sizing and purchasing distort the demand picture. Thus, demand supply mismatch creates a bullwhip effect. The distortion of the demand picture imposes high supply chain costs in the form of sub-optimal customer service levels, high inventories and low returns on asset. By providing business partners the visibility into inventory on shared forecast of customer demand, supply chain partners can positively create value across supply chain processes.

CPFR represents an innovative business model that extents vendor-managed inventory principles by taking a holistic approach to supply chain management among a network of trading partners. CPFR has the potential to deliver improvement in sales, system efficiency, cash flow and return-on-assets (ROA) performance.

The CPFR process model represents voluntary guidelines aimed at structuring and guiding supply chain partners in setting up their relationship and processes. This business scenario shows how enterprises can carry out collaborative supply chain planning activities with their business partners over the Internet. By sharing information over the Internet, the buyer and seller develop a single dynamic forecast. The result is more accurate forecasting with lower inventory levels. These benefits save time and money.

REVIEW QUESTIONS

1. What is supply chain integration and how is it achieved?
2. What are the different barriers to the supply chain integration and how are these overcome?
3. Explain why coordination and cooperation are essential in supply chain management and how information helps achieve them.

INTERNET EXERCISES

1. The supply chain management information portal provides access to focused, concise and unbiased information on various SCM topics. This portal is sponsored by the Supply Chain Resource Cooperative (SCRC) at North Carolina State University as a service to the supply chain field. Visit http://www.scm.ncsu.edu/public/about/, for tutorial on SC topics such as CPFR, inventory management, SC integration, procurement, etc.
2. Identify the role of information in CPFR, visit http://www.cpfr.org

VIDEO LINKS

1. Supply chain integration http://www.youtube.com/watch?v=S_yMW2b0kNk&feature=related.
2. Integration through technology in Ford Manufacturing Supply Chain http://www.youtube.com/watch?v=qyO9QSo0FjU

PROJECT ASSIGNMENT

1. Supply chains of companies in FMCG and retail sectors are quite complex. Select a firm in one of the above industry sectors and study the supply chain integration strategies implemented by the company. Find out the benefits the company is enjoying after implementing SC integrative strategies.