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SCM: Integration and collaboration

Pankaj Kumar Medhi

Assistant Professor

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Introduction

In today’s world of international trade and global competition, where increasingly supply chains compete more so than individual firms and products, integration and collaboration have become key differentiators of high performing supply chains.

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Core sections

• Supply chain integration

• Supply chain collaboration principles

• Supply chain collaboration methods

• Collaborative planning, forecasting and replenishment (CPFR)

• Vendor managed inventory (VMI)

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Learning objectives

• Define the terms integration and collaboration in the global SCM context

• Explain how internal and external integration can be achieved to benefit supply chain performance

• Discuss collaborative working and partnerships• Elaborate on specific methods used to enable

collaboration • Offer a holistic perspective of SCM to provide an

understanding of how supply chains can gain greater integration and collaboration in the future

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Supply chain integration

• Integration is the alignment and interlinking of business processes, and embodies various communication channels and linkages within a supply network

• Collaboration is a relationship between supply chain partners developed over a period of time

Integration should not be confused with collaboration, and integration is possible without collaboration, but it

can be an enabler of collaboration

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Distinctions between the primary modes of integration

Cross-functional integration within a selected organization

Integration with selected first tier, and increasingly second tier suppliers

Integration with selected first tier customers or service providers

Integration with suppliers and customers

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Internal integration

• To integrate communications and information systems so as to optimise their effectiveness and efficiency

• Can be achieved by structuring the organisation and the design and implementation of information systems– Non-value adding activity is minimised– Costs, lead-times, and functional silos are reduced– Service quality is improved

• BPR is a method commonly used to analyse existing organizational structures, eliminate non-value adding activities, and implement new work structures →let organization be optimally aligned

• ERP is key enabler of internal integration, often expose any remaining non-value adding activities in the organization

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External integration

• EDI is a key enabler of supply chain integration– It streamlines information sharing and processing

between supply chain partners – Effective and efficient organisational design is a

prerequisite ‘Keiretsu’ supply chain structure:

– OEM work closely with their first tier suppliers to integrate manufacturing, logistics and information processes; which is passed upstream

• This enables just-in-time line-side delivery at their assembly plants• A seamless lean supply chain is created• The supply chain is viewed as one extended operation• It was pioneered in Japanese banking

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Supply chain collaboration principles

• While IT are enablers of supply chain integration, optimal and uniform organizational structures are fundamental to integrating factors in a supply chain

• The key constraint of integration across multiple echelons– The scale and complexity of global supply chains – Information sharing may not be benefit to all supply chain partners,

possibly exposing suppliers to their competitors Supermarket retail is intensely competitive

Drives down consumer prices at the supermarket shelves Squeeze their suppliers to operate with lower profit margins and

tighter delivery schedules Competitively rather than collaboratively

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Supply chain collaboration principles

• Collaboration is dependant on the provision of mutual benefit, but in between suppliers it is difficult to achieve in supply chains

• Hence trust becomes an issue

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The prisoner’s dilemma

You and a partner are suspected of committing a crime andarrested. The police interview each of you separately. The policedetective offers you a deal: your sentence will be reduced if youconfess!

Here are your options:• If you confess but your partner doesn’t: your partner gets the full 10-

year sentence for committing the crime, whilst you get a 2-year sentence for collaborating.

• If you don’t confess but you partner does: the tables are turned! You get the full 10-year sentence, whilst your partner gets the 2-year sentence.

• If both of you confess: you each get a reduced sentence of 5 years.• If neither of you confess: you are both free people.

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The prisoner’s dilemma

The dilemma you face is ‘do you trust your partner to make the same decision as you?’

The best strategy is based on trust,

and results in a ‘win-win’ situation.

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The journey from open market negotiations to collaboration A trust-based win-win situation in a supply chain partnership takes time

Trust needs to be built up step-by-step, the journey towards a collaborative supply chain can be long and arduous

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The two dimensions of collaboration applied to transport management

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The combination of vertical and horizontal collaboration can achieve..• Reduce

– Inventory-carrying costs

– Unproductive waiting time

– Empty running times

• Adopting collaborative methods such as joint planning and technology sharing can improve lead time performance

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Supply chain collaboration methods

• Suppliers competing for the same orders creates supply chain inefficiencies– This will inevitably drive down their prices, promise unrealistic lead-times and lose their focus on product and service quality

• Supply base rationalisation: periodically a key focus of such organisations– E.g. in 2002 Nissan cut its supply base by half to reduce complexity

and costs– A response to market pressures– It is easier for an OEM to work with a few selected suppliers, than to

work with many suppliers. – Suppliers who are not directly competing against each other for

individual orders are more likely to collaborate

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Supply chain collaboration methods

• Supplier development can enable improved integration and also collaboration (e.g. Keiretsu)– Shift suppliers’ mindsets from thinking competitively to

collaboratively– Enables integrated order processing application for aggregated

procurement

• Aggregated procurement: – Rather than individual suppliers tendering for particular orders,

specific suppliers are selected by a supplier selection software package based on their capabilities

– Each supplier gains a share of the total orders based on their ability to deliver the order on time and to specification

– Consequently, the overall supply base incrementally improves, reducing the likelihood of future rationalization.

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Collaborative planning, forecasting and replenishment (CPFR)

Figure 13.10 The CPFR process (adapted from Cassivi, 2006)

• Scale and complexity are significant constraints

• Fundamentally, it is difficult to forge close partnerships with many partners

• Hence some CPFR solutions will have greater scope and depth than others

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Three modes of CPFR

Basic CPFR: a limited number of business processes integrated between a limited number of supply chain partners

Developed CPFR: will typically involve a greater number of data exchanges between two partners, and may extend to suppliers taking responsibility for replenishment on behalf of their customer

Advanced CPFR goes beyond data exchanges to synchronise forecasting information systems and coordinate planning and replenishment processes

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The transition to an advanced CPFR

• A long-term relationship to have built up• Considerable constraints

– Time, complexity, scale and the substantial financial investment required

For large-scale multinational organization– The benefits of CPFR outweigh the initial investment

For organizations without the same economies of scale– The development is obviously more difficult to achieve

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Vendor Managed Inventory (VMI)

• A holistic view of inventory levels is taken throughout the supply chain with a single point of control for all inventory management

• The vendor manages stock replenishment at their facilities to enable a customer to effectively eliminate an echelon in the supply chain

• Upstream demand visibility is improved to reduce the impact of demand fluctuations

• Hence VMI can enable supply to more accurately and precisely meet demand

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Vendor Managed Inventory (VMI)

Figure 13.11 A simplifi ed VMI scenario (adapted from Matthias et al., 2005)

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Vendor Managed Inventory (VMI)

By providing improved supply and demand informationvisibility via centralized control, VMI can specifically.. • Reduce the impact of the following sources of the bullwhip effect:

– Price variation– customers over-ordering due to stock shortages (i.e. Houlihan effect)– Demand signal processing (i.e. Forrester effect)– Order batching(i.e. Burbidge effect) →in Chapter 7

• As with CPFR, significant investment in developing an appropriate collaborative relationship is a prerequisite to operating VMI

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Types of vendor managed inventory in supply chainsTable 13.1 Types of Vendor Managed Inventory in Supply Chains

Configuration Description of collaborative or vendor managed functions

Type 0 Traditional supply chain

Type I Replenishment only

Type II Replenishment and forecasting

Type III Replenishment, forecasting andcustomer inventory management

Type IV Replenishment, forecasting,customer inventory managementand distribution planning

Type I and II have been implemented in supply chains in various sectors

Type III and IV are more advanced and require further research and

development

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Selected generic organisation structures

Each department designs their own silo for their own purposes, without due consideration of the needs of other departments

• Improved integration between dedicated teams in each department, communication and information processing between departments id streamlined.• it retain functional reporting structures, that will cause conflict of purpose between, and duplication of the roles, of the functional managers and the process or product managers

• Individuals from each relevant function are located together with little or no need to operate outside of that team• Currently best practice in organizational design is complete shift away from functional silos to a pure product or process organization structure

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Thanks!