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Upstream Information Flow in the Supply Chain: The Case of Finnish
Manufacturers
Ogan Yigitbasioglu
M.Sc. Thesis in Accounting
The Swedish School of Economics and Business Administration
2004
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HANKEN - Swedish School of Economics and Business Administration
Department: Accounting Type of Work:Master of Science Thesis
Author:Ogan Yigitbasioglu Date:10.05.2004
Title of Thesis: UPSTREAM INFORMATION FLOW IN THE SUPPLY CHAIN:
THE CASE OF FINNISH MANUFACTURERS
Abstract:
Collaboration between trading partners to reduce uncertainties and costs in the supply chain
has become a must for many companies in this highly competitive and globalized world.
Communication technologies have matured and with the recent emergence of Collaborative
Information Systems, supply chain partners are increasingly sharing more information with
each other on parameters such as product demand, inventory and production schedules. On
the other hand, the sharing of sensitive information may lead to undesired outcomes such as
information leakage and hold-up costs. Despite this common trend and risks, little is known
about how buyers and suppliers in the supply chain approach this issue, particularly on how
they decide what information to share with partners. Therefore, the objective of this thesis is
to identify the factors that influence Finnish manufacturers decisions as buyers on how much
information to share with suppliers. The thesis also aims to determine the extent and intensity
of information provided to suppliers along with whether companies have a formal policy
regarding this issue.
A questionnaire was sent to manufacturers in Finland to find out among others how relevant
the factors identified in the theoretical part of the thesis are in affecting buyers decisions.
According to the results, buyers in the Finnish manufacturing industry are fairly transparent
with respect to the extent of information they provide to their suppliers, especially on
forecasted demand for their products. Furthermore, transaction specific and relation specific
factors are considered to be most relevant whereas supplier specific and suppliers market
specific factors are found not to be that relevant. Results also show that only a few companies
have a formal methodology for this purpose despite the fact that one third of the companies
are admitting that they are at risk because of information known to their suppliers.
Keywords: communication technologies, Supply Change Management, collaboration,
integration, Collaborative Information Systems, ERP, JIT, VMI, ECR, CPFR, APO, trust
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Table of Contents
Table of Contents.. iii
List of Figures vii
List of Tables. viii
1. Introduction. 1
1.1 Background on Collaboration.. 1
1.2 Research Objective.. 2
1.3 Structure of the Thesis. 3
2. Enterprise Applications.. 5
2.1 Objective and Structure 5
2.2 Production and Resource Planning... 5
2.3 Materials Requirement Planning...6
2.4 Manufacturing Resource Planning 8
2.5 Enterprise Resource Planning Systems. 9
2.6 Summary and Conclusion of this Chapter 13
3. Communication Technologies Enabling Integration and Collaboration15
3.1 Objective and Structure 15
3.2 Electronic Data Interchange. 15
3.3 Extensible Markup Language (XML).. 17
3.4 Web services. 20
3.5 Electronic Business XML. 24
3.6 Summary and Conclusion of this Chapter 27
4. Supply Chain Management Practices and Inter-enterprise Applications. 28
4.1 Objective and Structure 28
4.2 Supply Chain Management (SCM).. 28
4.3 Just-In-Time. 32
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4.4 Efficient Consumer Response.. 33
4.5 Advanced Planning and Scheduling 35
4.6 Business Process Optimisation 37
4.7 Vendor Managed Inventory. 38
4.8 Collaborative Planning Forecasting and Replenishment. 39
4.9 Summary and Conclusion of this Chapter... 43
5. Supplier Relationship Management.. 44
5.1 Objective and Structure 44
5.2 Supplier Relationship Management (SRM). 44
5.2.1 Supplier Selection and Performance Measurement. 45
5.3 SRM Solutions.. 48
5.3.1 Manugistics SRM.48
5.3.2 ORACLE SCM 49
5.3.3 PeopleSoft SRM.. 50
5.3.4 SAP SCM 52
5.4 Main Features of SRM.. 54
5.5 Implications of SRM and SCM on the degree of Information Sharing 55
5.5.1 Collaborative Supply Planning 55
5.5.2 Product and Product Design.58
5.6 Summary and Conclusion of this Chapter.61
6. The Economics of Collaboration 62
6.1 Objective and Structure.....................................................................................62
6.2 The Firm............................................................................................................62
6.3 Asset Specificity................................................................................................64
6.4 Product Innovation and the Role of Information.............................................. 66
6.5 Contracts........................................................................................................... 67
6.6 Strategic Core................................................................................................... 69
6.7 Efficient Boundaries of the Firm...................................................................... 70
6.8 Summary and Conclusion of this Chapter 73
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7. Previous Research 74
7.1 Objective and Structure.74
7.2 Previous Research. 74
7.2.1 Benefits of Collaboration 74
7.2.2 Barriers to Collaboration: Trust and Risk 75
7.2.3 The Case Study of Sainsburry .76
7.2.4 Upstream Information Flow 76
7.2.5 Supplier Selection 77
7.3 Summary and Conclusion of this Chapter 78
8.Factors Affecting Collaboration. 80
8.1 Objective and Structure 80
8.2 Factors Affecting Collaboration .. 80
8.2.1 Factors Related to Supplier's Characteristics... 80
8.2.2 Factors Related to Supplier's Market .. 85
8.2.3 Transaction Specific Factors 86
8.2.4 Factors Related to Product's Characteristics 88
8.2.5 Factors related to Buyer's Products. 88
8.2.6 Relational Factors 89
8.3 Collaboration as a Function of Factors. 91
8.4 Summary and Conclusion of this Chapter 93
9. Research Methodology 94
9.1 Objective and Structure.94
9.2 Research Methodology..94
9.2.1 Sample..94
9.2.2 Survey.. 96
9.3 Research Results... 99
9.3.1 Company Information and Suppliers... 99
9.3.2 Information provided to suppliers 102
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9.3.3 Relevance of factors for upstream information flow.. 104
9.3.4 Decision Process/Method 113
9.4 A Critical Evaluation of the Research.. 117
9.4.1 Statistical Methods.. 117
9.4.2 Research Bias.. 118
9.5 Summary and Conclusion of this Chapter 118
10. Conclusion.. 120
10.1 Objective and Structure...120
10.2 Conclusion.. 120
10.3 Validity and Reliability... 123
10.4 Recommendations for Further Research. 124
References.... 125
Appendix: The Questionnaire.... 133
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List of Figures
Figure 1.1: The Structure of the Thesis. 3
Figure 2.1: An MRP System. 7
Figure 3.1: UDDI core data structures.. 22
Figure 3.2: businessEntity Structure diagram 23
Figure 4.1: Integrated Supply Chain. 29
Figure 5.1: Ballard Supplier Management Program. 46
Figure 5.2: Ballards Preferred Supplier Characteristics.. 47
Figure 5.3: Coupling and Information Flow. 57
Figure 5.4: Information flow on product characteristics.. 60
Figure 6.1: Economies based in the strategic core.................................................... 71
Figure 8.1: The Interaction of Factors.. 92
Figure 9.1: Sector Distribution.. 99
Figure 9.2: Firm Size Distribution..... 100
Figure 9.3: Core Suppliers. 101
Figure 9.4: Purchases from Core-suppliers 102
Figure 9.5: Upstream Information Transfer.. 103
Figure 9.6: Relevance of Supplier Specific Factors.. 105
Figure 9.7: Relevance of Factors on Supplier's Market. 106
Figure 9.8: Relevance of Transaction Specific Factors. 107
Figure 9.9: Relevance of Factors on Supplier's Products.. 109
Figure 9.10: Certainty/Uncertainty of Demand. 110
Figure 9.11: Relevance of Relational Factors 111
Figure 9.12: Method of Supplier Evaluation. 114
Figure 9.13: Methodology Design. 115
Figure 9.14: Classification Capability of the Buyer's Methodology. 116
Figure 9.15: Are buyers at risk? 117
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List of Tables
Table 2.1: Major ERP Vendors. 10
Table 2.2: ERPs main capabilities... 10Table 4.1: Main tasks of SCM.. 30
Table 5.1: Decision Criteria across Studies.. 45
Table 5.2: Features of SRM solutions... 54
Table 5.3: Collaborative Supply Chain Planning components
of Business Solutions 55
Table 5.4: Coupling... 58
Table 5.5: Collaborative Design components of business solutions. 59
Table 5.6: Coupling II 60
Table 8.1: Factors determining the trustworthiness of a company 81
Table 9.1 Sector Distribution. 100
Table 9.2: Firm Size Distribution.. 101
Table 9.3: Mean Values for Information Transfer. 103
Table 9.4: Mean Values for Supplier Specific Factors.. 106
Table 9.5: Mean Values for Factors related to Supplier's Market. 107
Table 9.6: Mean Values for Transaction Specific Factors 108
Table 9.7: Mean Values for Relational Factors. 111
Table 9.8: Mean Values of all factors 112
Table 9.9: Averages for Categories... 113
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1. Introduction
1.1 Background on Collaboration
The management of a company's relationship with its suppliers and customers is as
critical to its success as the management of its internal operations. Thus, during the recent
years, Supply Chain Management has drawn a lot of attention mostly owing to rapid
developments in Information and Communication Technologies (ICT). New technologies
like Enterprise Resource Planning systems and management practices like Collaborative
Planning promise to cut costs and increase customer satisfaction which eventually leads
to increased market share and shareholder value. In fact back in year 2000, according to
Computer Sciences Corporations' Survey with 822 executives in 26 countries, connecting
to customers, suppliers, and/or partners ranked first among all the issues relating to
information systems (CSC 2001).
Supply Chain Management has evolved over the years in the light of the ever increasing
capabilities in the ICT to include new concepts like Customer Relationship Management
and Supplier Relationship Management. While a lot of emphasis has been placed into
customer relations in the past, research and applications have been relatively poor on thesupplier side. It is only now that Supplier Relationship Management is becoming an
equally important issue. A successful Supplier Relationship Management in place can
save a great amount of money. One of the advantages is increased visibility in the supply
chain which results in lower inventory levels. Also the automation of tedious tasks like
requests for proposal leads to faster procurement execution and thus to compressed cycle
times. Costs per unit are also likely to decrease as demand consolidation across multiple
business units can be performed with an integrated system.
As technology has become ubiquitous and with the availability of off-the-shelf supply
chain software solutions, many companies are increasingly opting for integration with
external parties. As these developments are taking place, we are led to believe that the
ultimate goal of firms should be to act as one firm with full information exchnage.
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"However in the excitement about these software solutions, it is often overlooked that
creation and implementation of integrated supply chains requires tremendous resources, a
great deal of management time and energy, large organization-wide changes, huge
commitment from suppliers/partners, and sophisticated technical infrastructure" (Pant et
al. 2003). Furthermore integration also brings along new risks resulting from the
disclosure of sensitive information and not to mention that collaborative relationships are
suitable only under certain conditions depending on the market and/or the nature of the
product. Unlike in the past when collaboration was more of a strategic decision, today
collaboration and integration is at the tip of a finger. Collaboration is encouraged to firms
in order to stay competitive. In the light of these events, it is the firms that must decide
ultimately what kind of strategy to adopt; to what extent to collaborate or to share
information on each others business affairs. This study intends to find out if companies
do have competent decision mechanisms to deal with this issue, and also aims to identify
what factors are involved in these decisions. A buyers perspective is adopted to reduce
the scope and complexity of the research.
1.2 Research Objective
The objective of this thesis is to examine interorganizational collaboration mechanisms in
terms of the theoretical frameworks and applications that exist, and to find out how
Finnish manufacturing firms as buyers in the supply chain approach this issue.
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1.3 Structure of the Thesis
The thesis, as can be seen from Figure 1.1, is structured as follows:
BuyerSupplier
EnterpriseInformation
Systems: Chapter 2
SRM/SCMCollaboration and information flow between firms: Chapter 5,6
SCM (CPFR,VMI, etc.)Inter-enterprise systems:
Chapter 4
Communication Tecnologies:Chapter 3
Factors influencing collaboration:Chapter: 7, 8
EnterpriseInformation
Systems: Chapter 2
Figure 1.1: The Structure of the Thesis
Chapter 2 introduces the information systems that most companies use today to run their
businesses. Their main functions, capabilities and limitations are presented here.
Chapter 3 presents the communication technologies that enterprise information systems
use to connect to each other.
In chapter 4, Supply Chain Management (SCM) as a concept is introduced along with its
motivation and evolution. The chapter also presents the new-generation of collaborativeinter-enterprise applications that emerged out of SCM. These applications use the
communication technologies explained in chapter 3 and are mainly extensions to the
existing information systems explained in chapter 2.
Supplier Relationship Management (SRM) as a complementary approach, emphasizing
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the need for further collaboration, is presented in chapter 5 along with some examples of
applications based on SRM. This chapter also elaborates on the coupling requirements
between trading partners in terms of the types of information that needs to be exchanged
as a result of the new practices.
In chapter 6, the literature on transaction cost economics is reviewed, to understand the
motivation for integration and collaboration between firms from the theoretical
perspective.
Chapter 7 presents previous studies on collaboration and information exchange in the
supply chain.
Chapter 8 builds upon the previous chapter in so far as it identifies and discusses further
factors that may affect the degree of collaboration and information exchange between
supply chain partners.
In chapter 9, the research design is explained which includes the sampling method and
the questionnaire. The chapter also presents the data analysis and findings.
Chapter 10 evaluates the research findings and concludes the thesis.
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2. Enterprise Applications
2.1 Objective and Structure
In this chapter, I shall present the basic systems that the advanced applications of today
are based on. In section 2.2, the reader is introduced to production and resource planning
in order to understand the core activities of manufacturing firms. Section 2.3 provides
information on MRP, the very first systems that attempted to automate some of the tasks
identified in section 2.2. Sections 2.4, 2.5 introduce Manufacturing Resource Planning
(MRPII) and Enterprise Resource Planning (ERP) Systems respectively. The motivation,
key features and some of the advantages and disadvantages of these systems are
discussed.
2.2 Production and Resource Planning
Manufacturing companies buy materials to produce goods that can be sold for profit. Two
core processes involved in this activity are procurement and manufacturing. It is an
important task to coordinate the inflow of materials so that production runs smoothly. A
shortage in supplies will halt production, if the necessary buffer stocks are not available.
This will have serious implications for a company, as demand cannot be met. Loss of
sales will translate into lost profits as well as reduced liquidity, not to mention the loss of
customers. Finding the solution in higher stocks is inefficient as it drives costs up. The
other process, manufacturing, also has to be carried out appropriately. Capacity plans
must be such that resources like machinery are not overused but at the same time are kept
profitable. Furthermore, action plans for the unexpected, such as machine breakdowns,
have to be available at all times. All the above-mentioned activities require detailed
planning and calculation as well as timely and accurate data on current processes.
The second half of the 20th century witnessed rapid developments in information
technology. Enterprises benefited from the new technologies, which enhanced data
processing capabilities and brought along new data acquisition techniques such as bar
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coding. Networks connecting multiple terminals allowed the exchange of information on
various activities including logistics and production. In early 1970's, the first systems,
Materials Requirements Planning (MRP), arrived to shop floors to help the planning and
carrying out of certain tasks. These systems have then evolved into becoming the
complex information systems of today, used for the efficient management of enterprises
as well as enabling collaboration among them.
2.3 Materials Requirement Planning (MRP)
MRP emerged in the early 1970's as a software application to address inventory and
scheduling issues in manufacturing. It was the first of its kind as a system that applied
already known concepts such as order-point methods. MRP addresses questions likewhich materials and components are needed, in what quantities and when. The system
consists of a set of logically related procedures and decision rules which uses as inputs
the demand information from the master production schedule (MPS), the inventory
status, and the product composition information (the bill of materials - BOM). The MPS
is a time phased production plan containing actual customer orders and forecasted
demand and is the driver of the entire system. Figure 2.1 illustrates an MRP system.
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Outputs andReports
MRPprogram
Bill ofmaterials
file
InventoryStatus File
Master
ProductionSchedule
Customerorders
Demandforecasts
Figure 2.1: An MRP System (Coyle et al 2003, 252)
From the inputs, the system determines (1) quantities the company should order and
when, (2) the need to expedite or reschedule arrival dates or needed products and (3) the
canceled need for products. Thus, changes in customer requirements are easily dealt withsuch a system as production and purchase plans are automatically revised when the MPS
changes.
Among the advantages of the system are its capability to maintain a reasonable amount of
safety stock and to minimize or eliminate inventories whenever possible. MRP -based
systems can also identify process problems and potential supply chain disruptions long
before they occur and take necessary corrective actions (Coyle et al. 2003, 255).
The drawbacks of MRP lie mainly in its assumptions of infinite capacity and fixed lead
times.
By late 1970's companies realized that information in an MRP could be also utilized in
other units of a business, which led to the development of MRP II.
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2.4 Manufacturing Resource Planning (MRP II)
MRP II includes all the functionalities of an MRP and have the following added
capabilities (University of Cambridge 2003):
Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates
the feedback from previous run, which is the work already progressed on the shop floor.
This helps the system to regularly update all the levels of the schedule.
Resource Scheduling: During scheduling, the system also takes into account the plant
and equipment required to convert raw materials into finished goods. This is also the
reason why the initials now mean Manufacturing Resource Planning. Thus capacity is anintegral part of the system unlike in MRP, however it is only considered after scheduling
has been done. Due to this procedure, it may for example turn out that insufficient time
was allowed within the MRP schedule for the individual operations to be completed.
Batching: Alsobatching needs to be incorporated into the system if resources need to be
scheduled. 'Lot for Lot', ' Economic Batch Quantity', 'Part Period Cover' are the three
types of batching rules that are widely used by many software packages.
Lot for Lot: In this scheme orders for materials exactly match production plans.
EBQ: The Economic Batch Quantity is a method to balance the holding cost with
the set up cost for production.
Part Period Cover: Here, batches are made to cover a fixed period of demand such
as a week.
Software Extension Programs: A number of software extensions are designed and are
available for MRP II to help the scheduling procedure. The most important is Rough Cut
Capacity Planning (RCCP). This was an attempt to match the order load to the capacity
available by pushing orders from overload periods to periods of underload.
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MRP II helps management to use company resources more efficiently by providing
information based on the production plan to all the following functional areas or units:
Purchasing - purchase orders
Production - production scheduling and control, inventory control, capacity planning
Finance - financial resources needed for material, labor, overhead etc.
Accounting - actual cash flow projections, production costs, etc.
MRP II is also capable of making "what if" analysis. A production manager can for
example see the impact of changing the MPS on the purchasing requirements or capacity
usage. Thus, planning for unexpected events, like machine breakdowns, can be done
more realistically.
Although, a more superior system than MRP, it also has limited capability and flexibility.
Like MRP, it also assumes fixed lead times and similarly batch sizing rules are fixed.
Also the system was far too rigid to implement it across multiple locations and
production plants. Hence, the need for a more integrated and scalable system gave way to
the development of enterprise resource planning (ERP) system in the early 1990's.
2.5 Enterprise Resource Planning (ERP) Systems
ERP systems are large, complex and configurable softwares that integrate disparate
information systems into a single system. It enhances decision-making as the system
retrieves data in real time for analysis from its various modules. ERP systems are widely
used today and form the basis of many company-wide information systems. The leading
ERP vendor is SAP with a market share of 25% in 2002 (Midrangeserver 2003). Table
2.1 illustrates the major ERP vendors for large organizations and their market shares.
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ERP
Vendors
Market
Share
SAP 25,1
Oracle 7
PeopleSoft 6,5
Sage 5,4
Microsoft 4,9
Others 51,1
Table 2.1: Major ERP Vendors (Midrangeserver 2003)
To explain the features and capabilities of an ERP system, it is useful to take an example:
SAP's ERP system. The SAP R/3 was released in 1992. Since then, SAP added new
functionalities to its product to become now the SAP R/3 Enterprise. SAP R/3 is an
important building block of the mySAP business suite family of applications. SAP R/3's
main modules are presented below to illustrate the capabilities of an ERP system
Module Function(s)
Sales and Distribution (SD) Supports sales and distribution activities, with
functions for pricing, order processing, and on-time
delivery. It has a direct interface with the MM and
PP modules that enables the system to check
customer credit, materials and capacity to meet
demand. When approved, orders are executed and
billed automatically.
Materials Management (MM) Supports the purchasing process through automated
supplier evaluation and integrated invoiceverification. Procurement and warehousing costs are
lowered with accurate inventory and warehouse
management.
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Module Function(s)
Production Planning (PP) This module supports production planning,
execution of manufacturing processes, analysis and
control. Different manufacturing processes
including repetitive, make to order, assemble to
order and make to stock production are supported.
Financial Accounting (FI) Collects data relevant to financial accounting into
an integrated General Ledger. It provides
comprehensive and consolidated financial reports
that give an up to the minute "snapshot" of the
enterprise.
Controlling (CO) This module provides a set of planning and control
tools for enterprise control systems.
Treasury (TR) A module for financial management to ensure
liquidity and minimize risk.
Enterprise Controlling (EC) It continuously monitors metrics and performance
indicators on the basis of specially prepared
management information
Investment Management (IM) Offers integrated management of investment
projects from planning through execution to
settlement. Also pre-investment analysis and
depreciation simulations are provided.
Plant Maintenance and Service
(PM)
The planning, control and processing of scheduled
maintenance, inspection, special maintenance and
service management availability of operational
systems including plants and equipment delivered to
customers is thereby ensured.
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Module Function(s)
Quality Management (QM) Monitors, manages and tracks all processes relevant
to quality assurance. Inspection and corrective
measured are initiated along the supply chain
through this module.
Project System (PS) All phases of a project is coordinated and controlled
in direct coordination with Purchasing and Control,
from quotation to design and approval, to resource
management and cost settlement.
Human Resources (HR) Supports the management of human resources and
streamlines HR transactions.
Table 2.2: ERPs main capabilities (Stanford 2003)
Technological novelties and characteristics of ERP systems include the move to
relational database management systems (RDMS), the use of graphical user interfaces
(GUI), open systems and client-server architecture.
ERP systems are implemented based on a business process reference model. The model is
developed by the ERP vendor and incorporates best practices for that particular industry.
Often, organizations need to re-engineer their business processes in order to align them
with those of the software. Organizational structures may also mismatch with the
organizational structure implicitly promoted in the reference model. Thus ERP projects
become more complex when business processes must be re-engineered and when
softwares have to be reconfigured and modified to fit the organization.
During the 90's, many large enterprises implemented ERP systems. However, the
implementation of ERP systems seldom ran smoothly and indeed, a considerable number
of projects have failed in the past leading to firms bankruptcies in the worst case. ERP
projects may last up to several years and usually cost millions of dollars. Thus, a
successful project requires the long-term commitment of higher management, sufficient
resources and time.
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ERP systems have disadvantages. They are designed to record events that have already
occurred. The lack of forward visibility limits their capability of making intelligent
decision-making. Thus, ERP systems are relatively inflexible in the face of
environmental changes.
ERP systems are continuously evolving to become more open, interoperable and to
include more advanced features. SAP, for example, incorporates new technologies such
as Java, Extensible Markup Language (XML), Light Weight Directory Access Control
Protocol (LDAP) and Wireless Markup Language (WML) for interoperability with
heterogeneous systems. Also many components and extensions to SAP R/3 Enterprise are
available such as the
Advanced Planner and Optimizer (APO), Supplier Relationship Management (SRM) and
Business Information Warehouse (BW). APO and SRM will be discussed in chapter 4
and 5 respectively as they enable collaboration among supply chain partners.
2.6 Summary and Conclusion of this Chapter
Companies need to make complex plans and calculations related to purchasing and
manufacturing. These plans and calculations do also require regular updates when for
example changes in customer orders or manufacturing capacity occur. Hence, this chapter
introduced the reader to MRP and MRP II, the very first information systems that
attempted to automate some of the tasks associated with manufacturing. MRP and the
more superiour system, MRP II, were widely used until the 90s when they were replaced
by ERP systems for their limitations and weaknesses. ERP systems, which integrate
disparate information systems into a single system, were widely adopted in the 90s andnow constitute the main building block of a companies information system. Thus their
features and capabilities were presented in this chapter. ERP systems can be reconfigured
so that new and more 'intelligent' systems or modules, such as APS, which will be
discussed in section 4.5, can be added to them. Indeed, with the emergence of the Internet
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and the communication technologies discussed in the next chapter, these systems have
become more capable. With increased connectivity, it has become much easier to
exchange information and therefore to collaborate with partners.
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3. Communication Technologies Enabling Integration and
Collaboration
3.1 Objective and Structure
Once enterprise systems were in place, it became necessary to make systems talk to each
other. Communication between disparate systems was required for both, intra-
organizational and inter-organizational purposes. For example the systems of a bank's
branches needed to talk to each other or talk to the bank's main server. Interorganizational
communication on the other hand was required for eliminating paper-work and speeding
up certain tasks such as ordering.
This chapter looks at the evolution of the different technologies facilitating
communication between distant computers. A popular and pre-Internet-era technology,
the Electronic Data Interchange (EDI) is discussed in section 3.2. In section 3.3, the
Extensible Markup Language (XML) is explained on which the Web services and
electronic business XML (ebXML) frameworks are based on. These two frameworks are
emerging as the two dominant technologies for Business-to-Business (B2B)
communication, integration and collaboration and are therefore presented in sections 3.4
and 3.5 respectively.
3.2 Electronic Data Interchange (EDI)
EDI is the organization-to-organization, computer-to-computer exchange of business data
in a structured, machine-processable format (Coyle et al. 2003, 464). It eliminates
paperwork related to various business processes such as, purchase orders, pricing, order
status, scheduling, shipping, receiving, invoice payments, contracts, production data,
marketing, sales and others. It also eliminates multiple data entry and improves the speed
and accuracy of information. The need for EDI was realized in the 1960's as a way to
reduce expensive communication means, time consuming paperwork and thus to remain
competitive in the industry. To achieve this objective, a standard focusing on the content
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of the message, rather than the method of its transmission was then developed. The
Transport Data Coordinating Community (TDCC) in charge of this effort created the so-
called transaction sets for this purpose. They consist of several data segments that specify
the data elements like price, model number and carrier code. This followed American
National Standards Institute's authorization of another committee, the Accredited
Standards Committee (ASC) X-12, to develop a standard between trading partners based
on the TDCC structure in 1979. The internationalization of the EDI stationary was
completed in 1986 with UN's involvement to develop the standard called United Nations
Electronic Data Interchange for Administration, Commerce, and Transport
(UN/EDIFACT).
To use EDI, trading partners needed a special software and means for electronic
communication. Regarding electronic communication, companies had two options: to use
either direct transmission, that is, a dial-up or a dedicated line to directly connect to a
partners computer, or alternatively, a Value Added Network (VAN). VAN involved a
third party to provide the means of communication like Sonera and therefore was more
reliable but more expensive. VAN's however allowed to use different computer systems
between trading partners through a method called protocol conversion. Also, VAN's had
the advantage of reducing phone bills as the amount of data transmitted was charged
instead of the transmission distance.
EDI works by first translating (EDI Translation software) the document to be sent into a
standard format. Next, the connection is established, usually by dialing the phone number
of the VAN. The message is then sent to an electronic mailbox on the VAN. From the
electronic mailbox, the receiver's software will retrieve the file, interpret the message,
check for compliance with EDI standards and store it. Also a 'Functional Acknowledge' is
sent to the sender to inform if the message was received and if it complies with EDI
standards. Now, the message can be translated to produce a hard copy of the message or
transformed into a different format for further processing using the translation software.
A great disadvantage of using EDI was that it was very expensive to implement and
operate. Today, it can cost between 50.000 and 2 million US dollars to implement, which
represents a significant cost for especially small to medium sized businesses (IT Portal,
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2003). Also trading partner agreements, vendor agreements, the role of lawyers and
auditors and security are some of the issues that add complexity to its adoption, not to
mention the adjustment time and skilled human resources required. The translation of
company data structures into EDI standards may also require manual intervention in the
process. Thus, its success is a matter of management support and commitment.
EDI is and was widely used in the past, as it was the only solution for fast data
transmission and processing. It compressed cycle times and reduced costs associated with
communication and paper. However the emergence of a much cheaper, flexible and
ubiquitous technology, the Internet, has reduced its popularity throughout the years. The
Extensible Markup Language (XML) was developed in the late 1990's to facilitate data
transmission over the Internet. XML will be covered in the next section.
3.3 Extensible Markup Language (XML)
XML is a protocol for containing and managing information on the Internet. It is a
family of technologies that can do everything from formatting documents to filtering
data (Ray 2001, 2). Despite its name, XML is not a markup language like the Hyper
Text Markup Language (HTML). It provides a framework -the rules and the tools for
creating your own markup (Fitzgerald 2001, 20). A markup language is a set of
symbols that can be placed in the text of a document that enhances to demarcate and label
the parts of a document (Ray 2003, 2).
To create an XML document, another file called, an XML Schema, is required. The
Schema defines all the rules that the document must adhere to and validates the
document. Once, the document is validated, a stylesheet is applied on the document so as
to output a desired format. Thus the content of the file is kept separately from its
presentation. With this feature, it is easier to reuse and refit the content for various
needs (Fitzgerald 2001, 37).
XML evolved mainly out of two markup languages, the Standard Generalized Markup
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Language (SGML) and HTML. SGML was developed in the 1970's and became a
standard in 1980. Although, powerful and comprehensive, it never enjoyed broad
popularity due to its complexity (Fitzgerald 2001, 17). Consequently, HTML was
developed in the early 1990's as a very easy to understand, but at the same time,
inflexible, markup language in CERN. Despite HTML's success, Web's flourishment in
the 1990's demanded a more complex language to structure, store and transfer
information over the Web. Thus work on XML began in 1996 and continued until its
standardization in 1998 by the World Wide Web Consortium (W3C), a body formed to
standardize web-related technologies. Below are XML's features and advantages:
XML is free
No proprietary rights exist over XML, so anyone can use XML for free.
XML is structured
As text is expressed in a clear and logical way, softwares and humans can
organize, find and interpret documents and data quickly and accurately.
XML is the basis for a file format
As XML is so well structured, XML documents can be shared between entirelydifferent computer and software systems. This will make XML, the backbone of
electronic commerce worldwide.
XML is open
XML recommendations are managed by W3C. Unlike private firms, W3C shares
all drafts of XML-related working papers so that the community stays up-to-date
with future enhancements and prepare accordingly.
XML is nonproprietary
It is not owned by a proprietary company or tied to a specific software or
hardware.
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XML is platform independent
Although some of the applications to create XML may not be platform
independent, XML itself is.
(Fitzgerald 2001, 20)
Also, XML compared to previous inter-enterprise communication technologies like EDI
has many advantages. XML is web based and therefore much cheaper to use compared to
VAN's. It is also in a human readable format, and new applications and businesses can be
easily added to the network (Remarkable eBusiness 2002). It is anticipated that XML will
not replace EDI entirely in the short run due to heavy investments in EDI infrastructure
but the superiority of XML is undeniable.
There are also translation softwares available on the market such as Vitria's
BusinessWare EDI module that convert EDI documents into XML and vice versa (Vitria
2003). The conversion is required when, for example, customer's online orders are
translated into purchasing orders by the vendor and sent to its supply chain partners using
the existing EDI infrastructure.
Due to the above-mentioned characteristics of XML, many businesses, today, use XML
and XML based technologies such as web services for inter-enterprise communication.
However XML has its own problems, mainly because of its high degree of flexibility.
Today, there is an abundance of XML based frameworks (vocabularies) that compete
with each other to become the standard for B2B communication. For XML messages to
be interpreted by other businesses, the companies have to agree on an XML-based B2B
standard (mainly for schemas), which defines the document formats, allowable
information and process descriptions (Rautajoki, T 2003, 26). So far, common standards
mostly exist in vertical industries. One example is RosettaNet, which is popular among
major information technology, electronic components, and semiconductor manufacturing
companies. Also the Open Travel Alliance's Standards (travel industry) enjoyed
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somewhat broader adoption (Virevesi, J 2003). These standards however, only serve
specific industries and a cross-industry standard must be in place to facilitate global
communication. Web services and ebXML are two standards that are attempting to
achieve this objective during the last few years.
3.4 Web services
Web services are software programs that use XML to exchange information with other
software via common Internet protocols (Deitel, DuWaldt & Trees 2003, 23). These
softwares can send requests and possibly respond to other computers' requests. Although
the basic standards and ideas had existed for several years, Hewlett-Packard was the first
software vendor to introduce the concept of web services with its e-Speak product in1999 (Deitel et al. 2003).
Web services can perform a great variety of tasks, often referred to as methods or
functions. A financial application for example might invoke a function on a remote
computer to return the current value of a certain stock.
The big advantage of web services is that they allow applications written in different
programming languages and on different platforms to communicate. This is possible
through the use of common XML standards. There had also been earlier attempts to
facilitate the communication of applications between disparate systems. OMG's Common
Object Request Broker Architecture (CORBA) and Microsoft's Distributed Component
Object Model (DCOM) were for example two technologies that allowed two applications
running in different locations to communicate (Deitel et al. 2003). The drawbacks of
these technologies were that they were proprietary and not interoperable.
Three technologies that are all XML-based constitute the core infrastructure of Web
services (Virevesi, J 2003). The Simple Object Access Protocol (SOAP), Web Services
Description Language and Universal Description, Discover and Integration (UDDI) are
the technologies that deliver Web services.
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The purpose of SOAP is to enable data transfer between systems distributed over the
network (Deitel et al. 2003, 33). A SOAP message is sent by the requesting application
to invoke a method provided by a web service. The Web service uses the information
contained in the message to perform the function and may respond via another SOAP
message. SOAP consists of a set of standardized XML schemas and the messages have
three components: an envelope, header and body. The envelope wraps the header and
body elements; the header is an optional element that provides information regarding
topics such as security and routing; the body contains application specific data that is
being communicated (Deitel et al. 2003). SOAP is layered over an Internet protocol such
as HTTP or SMTP.
WSDL is an XML based language through which a Web service can convey to other
applications the methods that the service provides and how those methods can be
accessed (Deitel et al. 2003, 34). WSDL documents make Web services self-describing
which saves a lot of effort for the developers of applications aimed at using the services.
A WSDL document includes information regarding a particular Web service's
capabilities, location, the kind of messages it can send and receive, what Internet
protocols to use to connect and the information required to invoke a function. Although,
WSDL documents are complex, their generation is simple as many Web services
development tools generate them automatically when a Web service is developed.
UDDI is used to publish and locate web services on a network. Companies can use a
standard XML based format to describe their electronic capabilities and business
processes. The specification also provides a standardized method of registering and
locating the descriptions on a network such as the Internet (Deitel et al. 2003). Registries
maybe public or private, allowing only approved partners to access them. The largest and
most comprehensive public registry is the UDDI Business Registry (UDDI), which was
developed to facilitate the formation of new business relationships (Deitel et al. 2003).
UDDI's contain information in three levels of detail: white -, yellow - and green pages.
White pages convey the least information, that is, their contact information and a textual
description of themselves. Yellow pages provide classification information and details on
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companies' electronic capabilities. Green pages list technical data relating to services and
business processes (Deitel et al. 2003).
UDDI V3, the latest specification consists of four core data structures as shown in Figure
3.1
Figure 3.1: UDDI core data structures (UDDI 2004)
The data structures contain information to describe the business, its capabilities and the
method of accessing its services. The businessEntity component includes information
about the type of business it is. The structure of a businessEntity is shown in Figure 3.2
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Figure 3.2: businessEntity Structure diagram (UDDI 2004)
As the Figure illustrates, the businessEntity contains data on a business, its name,
description, contacts and so on. The description however does not contain any
information about the trustworthiness of an entity. Trust could be conveyed through
standardized, common notations such as ISO 9000, or through a common rankingscheme.
For the deployment, management and execution of Web services, two distinct
architectures and technologies are competing for dominance. These are the Microsoft
.NET and Java Enterprise Edition (J2EE) application frameworks. They both support the
Web services standards and provide the platforms, tools, and programming environments
for their development and integration. The most striking difference between these
application frameworks is in their support for operating systems and programming
languages. The .NET Framework supports multiple languages such as C#, C++, Cobol
and Perl but runs only on Microsoft Windows Operating Systems. In contrast, J2EE can
run on any platform but supports only Java. Furthermore, whereas J2EE is an open
standard, .Net is a proprietary technology that is more tightly coupled and optimized to
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run with Microsoft tools. It is anticipated that the two platforms will co-exist and that
neither of them will be the dominant technology because of their differences (Virevesi. J.
2003).
Web services are a promising new technology. However, because it is new, a set of issues
plague its widely adoption at this stage. First of all, the standards that Web services are
based on, SOAP, WSDL and UDDI, are still in development. So far, only SOAP has
managed to become the World Wide Web Consortium's (W3C) recommendation. Also
intellectual property claims by Microsoft and IBM, who significantly contributed to the
development of SOAP and UDDI threaten the free use of the technology. Other barriers
to adoption is the lack of security standards for Web services as well as their slowness for
high-performance (Deitel et al. 2003). Finally, the framework is considered to be "light-
weight", as it leaves some of the technological elements open and to be solved by the
implementer (Virevesi. J. 2003). Alternatively, ebXML provides a more sophisticated
and robust mechanism for complex business collaboration services which is presented in
the next section.
3.5 Electronic Business XML (ebXML)
ebXML is an open infrastructure that has similar objectives to those of web services.
ebXML provides companies with a standard method to exchange business messages,
conduct trading relationships, communicate data in common terms and define and
register business processes (ebXML 2003, 1).
Work on ebXML began in 1999, a joint effort by Organization for the Advancement of
Structured Information Standards (OASIS) and the United Nations Center for Trade
Facilitation and Electronic Business (UN/CEFACT).
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The project delivered five layers of substantive data specifications, including XML
standards for:
Business processes
Core data components
Collaboration protocol agreements
Messaging
Registries and repositories (ebXML 2003)
The Business processes specification provides a generic metamodel for businesses to
describe their processes. The specification, in its core, determines the trading partners'
role in the transaction, the exchanged documents, their sequence and the information
contained in them (Virevesi, J 2003).
The data items that are exchanged between businesses are referred to as core data
components. Data items are, typically, frequently used terms such as invoice. The term
invoice may however have a different meaning across industries. In one industry, invoice
may relate to a statement of charges, and in another, may be used to describe
international shipping (Virevesi, J 2003). Thus, this ebXML specification aims to
identify a set of common semantics to be used between businesses so as to enhance
information interoperability. Therefore businesses can re-use them across multiple
business situations without the risk of causing ambiguity.
Collaboration protocol agreements (CPA) seek to automate much of the process of
discovering and establishing partnerships, especially in situations where the businesses
have not collaborated before (Virevesi, J 2003). A CPA is created through a
Collaboration Protocol Profile (CPP). This is an XML document that describes
businesses, both, technological and business capabilities and is stored in an ebXML
repository. From repositories, potential trading partners can search for these documents
and establish trading relationships. Once parties agree on the terms to do e-business, the
CPA becomes legally binding.
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Messaging refers to a secure and reliable method of sending information over a network.
Technical issues relating to the packaging, transferring and routing of messages over the
web are addressed in this specification. The technology is based on SOAP but it provides
higher security through the use of strong cryptographic techniques and digital signatures.
Registries and repositories provide a way for potential business partners to submit and
search a variety of documents with the intention of enabling collaboration. Documents
relating to business capabilities of businesses including CPA's, can be queried in order to
find a business partner.
The Registry Information Model of ebXML dictates all classes and attributes a registry
may have. Within the model, "slots" are used to add arbitrary attributes to RegistryObject
instances (ebXML 2004). This feature allows companies to add arbitrary attributes to
their descriptions. Thus, certain attributes could be used here to convey trust such as
certificates and standards (e.g. ISO 9000). A common notation for such attributes must be
in place however in order to make queries involving such attributes more efficient.
The registry can be also be used for the submissions of schemas that define industry-wide
messages and vocabularies as well as industry-specific business models (Virevesi, J
2003).
Overall, ebXML offers a more comprehensive and reliable framework compared to Web
services. It takes collaboration to a higher level through valuing business process
semantics and document content standardization as fundamental enablers of successful
business collaborations (Virevesi, J 2003). Finally, ebXML is a vendor independent
technology (unlike Microsofts BizTalk framework for XML) which functions across all
platforms and therefore seeks to achieve maximum interoperability also at the technical
level. Also, the recent approval of the four ebXML OASIS Standards (which now
includes the ISO 1500 annotation) by the International Standards Organization (ISO) is
likely to have a reinforcing effect on the effort to promote an open and reliable
framework for communication and collaboration in the future.
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3.6 Summary and Conclusion of this Chapter
This chapter focused on the communication technologies used today to connect disparate
information systems together. EDI is the oldest among them and is still being widely
used. However XML and XML based frameworks such as Web services and ebXML that
use the Internet are becoming more popular. New features that EDI lacks include the
automation of searching and finding of new business partners. For this purpose, registries
and repositories (specific databases) with descriptions of businesses can be queried
according to desired criteria. Between the two frameworks, ebXML is more advanced
and could allow attributes that can convey a degree of trust to a potential business
partner. EDI compared to XML as a technology is more mature but also more expensive
to use. XML on the other hand is much cheaper to use as it utilizes the existing Internetinfrastructure but there is still not a worldwide common standard for XML. This is due to
XML's overflexibility from which it draws its power at the same time. Without a
dominant standard however, some firms are reluctant to invest in XML.
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4. Supply Chain Management Practices and Inter-enterprise
Applications
4.1 Objective and Structure
Theories looking beyond companies boundaries to optimize the entire value chain have
started to emerge in the 60's(Coyle, Bardi, Langley 2003). The theories have stressed the
importance of collaboration and information sharing within a supply chain. These ideas
and theories have evolved throughout the years to become a concept known as Supply
Chain Management (SCM).
The objective of this chapter is to present the milestones in the evolution of collaboration
in the supply chain. Thus, this chapter is going to present SCM as a management
philosophy and the theoretical frameworks and applications that emerged out of it.
The chapter is structured in the following manner: section 4.2 introduces SCM. In
Section 4.3, JIT is explained. ECR, as a movement that advocated collaboration is
presented in section 4.4. Advanced Planning and Scheduling (APS), as the first truly
enterprise software solution for SCM is explained in section 4.5. Sections 4.6, 4.7, and
4.8 focus on BPO, VMI and CPFR respectively, as further SCM approaches and present
some of the applications based on them.
4.2 Supply Chain Management
Supply Chain Management (SCM) as a concept came into the domain of management in
the early 1990's in the face of increasing competition. Coyle et al. (2003) defines a supply
chain as "an extended enterprise that crosses over the boundaries of individual firms to
span the logistical related activities of all the companies involved in the supply chain.
This extended enterprise attempts to execute or implement a coordinated, two-way flow
of goods/services, information, and financials (especially cash)". The main idea here is to
take into account all the activities in the supply chain, beginning with the supply of raw
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materials all the way to the ultimate consumer, rather than at the organizational level.
Figure 4.1 depicts the structure of a simple supply chain.
Vendors Wholesalers Manufacturers Wholesalers Retailers/Customers
Product/Services
Information
Finances
Figure 4.1: Integrated Supply Chain (Coyle et al., 2003, 18)
Suppliers provide raw materials to wholesalers, which keep them in stock and sell them
later to manufacturers. Manufacturers use these materials to produce end products, which
are then transported to wholesalers. Finally, the goods are distributed to retailers, who
then sell them to end customers. In reality, supply chains are more complex as multipleconnections between nodes exist and the number of intermediaries may be
overwhelming.
The flow of goods and services has always been the main focus of management.
Customers expect their orders to be delivered on time and without damage. Its flow is
two-way as the more products become sophisticated and customized, the more goods are
returned and thus the importance of reverse logistics is hereby indicated. The information
flow plays a vital role in the success of supply chain management. Prior to this concept,
information flow was viewed as flowing to the opposite direction of products. Usually
this information consisted of only sales data and/or demand. As information was not
shared, demand data became only available to adjacent nodes in the supply chain. With
the new approach, information on typically sales become available in real time to all the
involved parties so that uncertainties in the supply chain can be reduced and production
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along with logistics can be arranged more properly. The third flow -financials indicates
the impact of supply chain management on cash flows, which are now much faster as it
leads to supply chain compression and faster order cycle times. A good example of this
phenomenon is Dell, the computer manufacturer. It keeps 4 days of supplies in its
inventory (Dell 2003). This development has a tremendous impact on profits and the cost
of doing business.
The goal of supply chain management is to meet customer demand for customized
products with minimum lead-time and cost. To achieve this objective, visibility in the
supply chain has to be high. Information on demand forecasts and production plans need
to be shared so as to reduce bullwhip effects: Relatively small fluctuations in the actual
demand among consumers are magnified through the logistics chain and cause larger
amplifications, with consequent negative effects on the planning of the production and
logistics systems in the earlier stages (Knolmayer, Mertens & Zeier 2002, 7). The Beer
Game developed in the 1960's by MIT does also demonstrate the importance of an
integrated approach to managing the supply chain; it particularly demonstrates the value
of sharing information across various supply chain components (Li 2002). The game,
later also computerized, simulates the supply chain for beer manufacture and
demonstrates the systems' dynamics; how the patterns we create in our relations with the
world around us sometimes give unexpected and undesired results (MASystems 2003).
Through such coordination, the supply chain can be entirely optimized and unnecessary
stocks eliminated. Table 4.1 sums up the main tasks of Supply Chain Management:
Orientation Strategic Operative
Internal Focus Strategies for Product and
process development
Strategies for providing
products and services
Make or buy decisions
Internal Quality assurance
Intra-plant transport
Intra-plant storage
Determination of ordering
quantities and lot sizes
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Orientation Strategic Operative
Quality management Optimization of schedules
and sequences
Intra-plant IS for planning
and controlling of order
management
External Focus Development of an SCM
mission
Procurement and marketing
strategies
Supplier and customer
management
Recycling strategy
Definition of an SCM
controlling and
benchmarking system
Internet appearance
Research about procurement
and sales markets
Evaluation and selection of
suppliers
Sales forecasts
Control of the sales force
Dual Focus pooling of
interests
Supplier and customer
structure policies
Coordination of SCM
strategies with business
partners
Legal basis for SCM
partnership
Joint pursuit of improved
business processes
Managing the organizational
and system interfaces
Definition of communication
relationships with business
partners, paying special
attention to IS
Table 4.1: Main tasks of SCM (Knolmayer et al. 2002, 6)
The ultimate goal of Supply Chain Management is to operate the whole supply chain as if
it were a single organization. To achieve this goal however, information sharing does not
solely suffice. Collaboration among supply chain partners must be present in all decision
making. In general, the decisions companies and their units take are categorized as
strategical, tactical, or operational. Partners need to provide visibility in all these levels in
order to achieve a full unity. It is from this idea that the Collaboration and Forecasting
Requirement approach was initiated. This concept is explored in section 4.8.
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The developments of new management practices and needs fostered new generation of
information systems that attempt to optimize the supply chain like advanced planning and
scheduling (APS) softwares described in section 4.4.
4.3 Just-In-Time (JIT)
JIT as a management philosophy has attracted much attention since the creation of the
idea, which is credited to Kiichiro Toyota, the founder of Toyota Motor Corporation,
during the 1930's (Factorylogic 2004). JIT does not promote collaboration like SCM
explicitly but SCM is somewhat of a pre-requisite for a successful JIT implementation. I
therefore find it useful and interesting to include it in this chapter.
JIT aims to eliminate waste. Waste results when an activity adds cost without adding
value. The unnecessary moving and storing of goods are examples for such activities.
JIT, which is also known as lean production, aims to improve profits and return on
investment by reducing inventory levels. improving product quality, reducing production
and delivery lead times. In a JIT system, underutilized (excess) capacity is used instead of
buffer inventories to hedge against problems that arise (Ashland 2003). An important
concept in JIT is kanbans which is a technique based on replacing material that has been
used but has no forward visibility (Phil Robinson 2003). Thus JIT is a pull system in
contrast to for example Materials Requirements Planning (MRP), which is a pull system.
In a pull system, parts are pulled to the next production stage when they are needed
whereas in a push system, they are pushed according to the schedule. The main goal of
the JIT system is to achieve a balanced flow of parts throughout the work centers with the
minimum queues and lot sizes. In general, the JIT approach is favorable when production
processes are uniform in terms of frequency and parts and components produced. A
successful JIT system requires low set up times, flexible work force, supplier quality
assurance and better maintenance for equipment (Ashland 2003).
The implementation of JIT has become rather simple as many systems and softwares
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today allow real-time information sharing. JIT as a standalone practice does not promote
collaboration in terms of sharing information on e.g. demand forecasts for a buyer's
products. Orders of materials from suppliers are only placed when demand for the buyer's
products actually arise. Thus JIT as such differs from the other practices in this chapter in
so far as not to promoting the sharing of information between trading partners explicitly.
Lastly, it was mentioned above that supplier quality insurance is required for a successful
JIT system. Without a substantial degree of collaboration however, buyers cannot be sure
if the supplier has materials readily available whenever demanded. Thus JIT does
implicitly require SCM in order to ensure a lean flow of materials from suppliers.
4.4 Efficient Consumer Response (ECR)
ECR was initiated in 1992 as an industry-wide voluntary effort in US to improve the
supply chain in the grocery industry (FMI 2003). The movement was based on an earlier
general merchandise effort in US, the Quick Response (QR).
QR had focused on shortening the retail order cycle, which also meant lower inventory
levels. The adoption of technologies like EDI and bar codes that made data entry and
ordering easier significantly took days out of the order cycle time. Order cycles werefurther reduced through what were called "strategic partnerships," where retailers and
manufacturers would work together as a team to set up ways of achieving performance
goals that exceeded existing industry practices" (FMI 2003).
ECR uses similar methods, which is technology and collaboration, but addresses a much
wider scope of issues. These include new product introductions, item assortments and
promotions. Accurate point of sale data (POS) and other relevant information is passed
on to trading partners by EDI so that products are manufactured according to actualconsumer demand. The movement produced many reports on best practices on topics like
computer assisted ordering, direct store delivery, integrated EDI, continuous
replenishment, transportation, category management, and large-scale organizational
change.
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The ECR includes the following components:
Efficient Store Assortment - addresses how many items to carry in a category,
what type of items and in what sizes/flavors/packages, and how much space to
give to each item. This is closely linked to category management.
Efficient Replenishment - focuses on shortening and eliminating costs in the order
cycle, starting with accurate point-of-sale data. Includes efficiencies to be gained
by using continuous replenishment programs, EDI, cross docking, computer
assisted ordering and new receiving techniques.
Efficient Promotion - addresses inefficient promotional practices that tend to
inflate inventories and practices, whose effects may not be fully passed through to
consumers to influence their purchase decisions.
Efficient New Product Introduction - addresses improving the entire process of
introducing new products, which is subject to high failure rates, thereby bringing
extra costs into the system.
(FMI 2003)
ECR, as evident from its methods and objectives, takes a rather complete approach to
supply chain management. Here, collaboration between trading partners in terms of
sharing information related to e.g. sales (POS), promotions and plans is encouraged.
Therefore ECR from the outset, that is 1992, was an initiative that comes close to today's
supply chain management practices.
In so far as to how much to collaborate between trading partners, the ECR literature does
not provide any information. ECRs purpose is to improve the supply chain and therefore
promotes information exchange without bringing up issues like its risks and trust.
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4.5 Advanced Planning and Scheduling (APS)
Advanced Planning and Scheduling is a new-generation software, developed in the end of
90's. They are first of their kind because some of their components incorporate
collaboration. APS systems aim at optimizing the supply chain and have far more
capabilities than ERP systems. These capabilities are presented below (Knolmayer et al.
2002, 130):
Network Planning
Sales and Operations
Demand Planning and communication
Supply Planning
Available/Capable to promise
Distribution Planning
Manufacturing planning and scheduling
Deployment Planning
Warehouse Management
Transportation Planning and Scheduling
APS compared to an ERP system is more "intelligent" owing to its complex optimization
procedures and heuristics. The Capable to Match feature for example is a popular
heuristics, which operates with either bucket-oriented demands or individual customer
orders. It does this by taking into account order priorities and categorized sources of
supply such as stock on hand and production capacity. However, handling capacities and
warehouse and transport resources are not considered. A much more advanced function is
the Available to Promise (ATP), which investigates whether a promised delivery can be
made, and if so when. An ATP can handle very complex tasks such as (Knolmayer et al.
2002, 147):
1. An article that cannot be delivered on time may be replaced by a superior for the
same price ("upgrading").
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2. When a reservation is canceled in favor of another customer, the additional profit
from the customer order has to be weighed against any disadvantages (e.g.,
contract penalties) likely to result from the deferred delivery date for the other
order.
3. Inventory may be obtained from another warehouse; however, this results in
additional costs and may break into decentrally planned safety stocks at the
delivering location.
4. Partial deliveries from different locations are bundled to form a complete order,
with a consequent increase in cost.
5. Although a part-delivery can avoid too much disappointment for the customer,
higher overall cost results.
Other features of an APS include task specific interfaces, different levels of aggregation
and planning accuracy and mechanisms to deal with exception situations (Knolmayer et
al. 2002, 132). Another dominant feature of these systems, as in the case of SAP's
Advanced Planner and Optimizer (APO) software, is that different planning methods
operating with different time horizons (operational, tactical and strategic) are provided.
The supply chain is optimized with the help of sophisticated modeling and statistical
techniques. The system combines forecasted demand with different cost parameters in
order to generate a production and transportation plan. This involves the use of complex
algorithms and heuristics that also take into account the interdependences between the
different types of costs and between the relevant constraints.
SAP's APO possesses several features for collaboration among supply chain partners.
The Collaboration Engine serves this purpose. It contains joint forecasts and also offers a
platform where bids or bid invitations can be searched, by both, suppliers and buyers
through an interface. Overall, APS tools generate a high rate of return by enhancing
visibility of production plans and schedules, improving and speeding forecasts, and
taking real time decisions in the face of demand and supply fluctuations rather than batch
processing.
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Similarly to ECR, also the literature on APS does not give any information on the risks of
collaboration and the issue of trust. Users of APS systems however must configure their
systems to provide the most appropriate level of detail on their businesses to their
partners. To do this, they must evaluate their partners efficiently and be able to
distinguish between them.
APS systems have been very popular but enterprises soon realized that the success of
APS does also depend on the efficient functioning of all the processes involved in
delivering a product. Hence software producers eventually moved from APS tools which
mostly focus on manufacturing, distribution and transportation, to a complete set of
software or business process optimization.
4.6 Business Process Optimization (BPO)
Many software companies like SAP, Manugistics and i2 have developed and continue
developing business process optimization softwares (BPO). They use, like APS, a set of
intelligent methods and techniques to cover a variety of areas in the supply chain.
Normally, the system leverages the existing infrastructure to collect data from the
enterprise (e.g., from the ERP system). Typically, its components include the following
(Manugistics 2003):
Supply Chain Management, which includes
network design and optimization, manufacturing planning and scheduling, sales
and operations planning, fulfillment management, collaborative VMI and CPFR,
private trading networks, and logistics management
Customer Relationship Management, which includes
product configuration, pricing optimization administration, promising (Available
to Promise - ATP), fulfillment, monitoring and alerting, and settlement
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Supplier Relationship Management, which includes
collaborative design, spend analysis and optimization, strategic sourcing and
contract management, procurement execution, collaborative supply planning
As evident from above, BPO includes all aspects of a companys operations. Supply
chain management, as a topic on its own right has been covered greatly so far. Also as
Customer Relationship Management is out of the scope of this thesis, I will focus on the
supplier relationship side of the supply chain, which will be covered in chapter 5 in
detail.
4.7 Vendor Managed Inventory (VMI)
VMI is yet another concept that attempts to optimize the supply chain through increasing
collaboration in the ordering process. Normally, when a buyer needs a product, it places
an order to a supplier. With VMI, it is the supplier who decides when and how much to
order and who maintains the inventory plan. In VMI, a partnership is formed between the
supplier and buyer, in which the supplier takes care of the orders and replenishing. To
accomplish this, the supplier gets regularly information on the inventory level and sales
data of the buyer via the web or Electronic Data Interchange (EDI). Thus, when inventory
for example drops below a certain level, orders are generated automatically on behalf of
the buyer. In this case, it is the supplier who creates and manages the inventory plan.
VMI is sometimes referred to as Supplier Managed Inventory (SMI). The difference
between the two is where the software is run (Ahmed 2004). In VMI, the software
physically runs on the supplier's premises, where data relating to demand and inventory is
entered into the system. In VMI, the software is run by the buyer or a third party and to
which the supplier has access through typically a web browser.
There are many software companies that provide VMI/SMI solutions. They increasingly
come bundled or as an integral part of similar solutions like Supplier Relationship
Management and/or Supply Chain Management solutions.
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In VMI/SMI, as evident, the supplier has full information about the buyer's inventory. In
addition to that, we can presume that from the rate of inventory usage, the supplier can
make rather accurate estimates on the buyer's capacity, production schedules, logistics,
and the demand for its end products. Therefore, VMI requires a very high degree of trust
between the supplier and the buyer. How trust is formed and maintained as well as the
risks associated with VMI are not elaborated in the literature.
4.8 Collaborative Planning Forecasting and Replenishment (CPFR)
Collaborative Planning Forecasting and Replenishment (CPFR) is the term for a business
model that encourages the integration and collaboration between supply chain partners.
Its goal is to reduce the bullwhip effect resulting from uncertainties in the demand. Alsothrough more coordination among supply chain partners, it is possible to reduce costs
associated with administration. For example, the elimination of duplicated tasks such as
planning and forecasting can reduce both time and money. To achieve this objective,
suppliers and customers jointly administer information and manage processes that result
in win-win situations. The CPFR framework is also supported by the Voluntary Inter-
industry Commerce Standards, an organization that embodies the CPFR Committee.
Enterprise software providers like SAP use the Committees CPFR Voluntary
Guidelines as a principal reference source in this area (Knolmayer et al. 2002, 123).
The CPFR model is divided into three levels (planning, forecasting, and replenishment)
and comprises nine steps.
Step 1: Develop front-end agreement
In this first step, the involving parties develop the rules for the cooperation. Here,
partners exchange their expectations and define the necessary resources. To accomplish
this, the buyer and seller co-develop a general business arrangement that includes the
overall understanding and objective of the collaboration, confidentiality agreement, data
to be shared and the empowerment of resources (both actions and commitment) (CPFR
2003). Also the criteria and metrics to measure the effectiveness and success of the CPFR
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process are identified here. For example parties may set 96% retail in stock, six turns at
retail, less than 15% forecast error and less then 20% order forecast error as their
objective. The outcome of this step is a blueprint for companies to begin the collaborative
relationship or to redefine it in accordance with CPFR standard.
Step 2: Create joint business plan
In Step 2, the seller and buyer exchange information about their corporate strategies with
the goal of developing a joint business plan. Also, for every retailer/manufacturer
scenario, a partnership strategy with all the roles, objectives and tactics is defined. This
results in item management profiles where for each collaborated item certain rules are
established (e.g., on minimum ordering quantities, lead times, and ordering intervals).
Issues such as marketing and sales promotions, e.g. advertising campaigns or temporal
price reductions that may have a large impact on demand, are also disclosed here.
Step 3: Create Sales Forecast
This step involves the creation of a method to derive a sales forecast. Point of Sales
(POS) data and information on other effecting factors mainly from Step 2 are used to
produce a sales forecast. The CPFR guidelines do not define a particular method to be
used for a joint forecast but considers four scenarios where the manufacturer, retailer and
distributor have different weights. According to Knolmayer et al., (2002) participants in
the Supply Chain use their "in house" systems to prepare individual forecasts, which are
integrated to give a joint forecast. Forecasts can be made by using arithmetic averages,
weighted arithmetic averages according to sales volumes or the quality of past forecasts,
or the most pessimistic/optimistic forecasts.
Step 4: Identify exceptions for sales forecast
This Step determines those events where the actual requirements differ from the forecast
by more than a specified tolerance threshold set in Step 1. The causes may not only lie in
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wrong forecasts but external disturbances, such as reduction in manufacturing capacity
resulting from a strike or machine failure.
Step 5: Resolve/collaborate on exception items
This phase requires a high degree of communication in which exceptions are analysed,
new events are reported, and forecasts are adjusted accordingly.
Step 6: Create order forecast
Step 6 involves the combination of sales forecasts, inventory information and other
casual information to predict what orders will be received. Here, the agreements reached
in Step 1 on issues like safety stock, order quantities and lead times must be taken in to
account also. The result of this step is a time phased order forecast in which the short
term-portion of the forecast is used for order generation, while the longer-term portion is
used for planning.
Step 7: Identify exceptions for order forecast
In this step, similarly to Step 4, order arrivals that fall outside the order forecast
constraints are identified. There could be for example demand that cannot be met in the
available time because of inadequate production capacities.
Step 8: Resolve/collaborate on exception items
Order forecast exceptions are investigated in this step through querying shared data and
communication. The resulting changes are submitted as an adjusted forecast and causes
are eliminated in case they arise from miscommunication. At this stage, it has to be also
determined if exceptions can be ignored or, if, not, what action should be taken for
compensation. It might be for example necessary for the buyer to order from a supplier
outside the supply chain.
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Step 9: Order Generation
This step involves the transformation of the order forecast into a committed order. The
task of order generation can be fulfilled by either of the parties depending competencies,
systems, and resources. In this final stage, it is expected that the created order to consume
the forecast.
The importance and benefit of this management philosophy has led more recently to the
development of CPFR softwares. SAP with its Collaborative Replenishment Planning
(CRP) solution attempts to capture and implement the CPFR framework in the form of a
software.
CPFR requires a high level of collaboration. The CPFR framework does neither address
the issue of trust between trading partners nor issues such as how far to collaborate and
even when to collaborate. It presumes that collaboration is beneficial in any case. Despite
that, the following two questions are posed to the reader of the CPFR framework (CPFR
2004):
Are your trading partners ready for CPFR? Can your trading partner relationships characterized as open and trusting?
Thus, companies are faced with adopting CPFR due to its benefits but may be somewhat
confused in so far as to not knowing how much to collaborate and what decisions they
have to make.
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4.9 Summary and Conclusion of this Chapter
This chapter covered SCM and its different management approaches such as VMI and
CPFR. SCM requires the collaboration of trading partners through the sharing of
sensitive information. The exchange of information reduces uncertainty in the supply
chain and eliminates excessive inventory. Enterprise software vendors such as SAP and
Manugistics are increasingly incorporating these management philosophies into their
enterprise applications and solutions. The effective and risk free implementation of SCM
and use of its systems, however, necessitates the existence of sound decision mechanisms
and careful system configurations. The literature on the approaches and applications