Integration Level Of Supply Chain Practices

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Complex relationship within a supply chain need to be understood and managed in order to improve the overall effectiveness and performance of chain members. Existing researches claim that improvement in supply chain operations is considered to be a possible competitive advantage for its practitioners where such improvement is impossibly achieved with deficiency of integration in supply chain operations (Sohal et al. 2002). Hence, integrated supply chain practices can greatly improve both potential profit and competitive position of the practitioners. This is in line with findings of Wood (1997) IN Sohal et al. (2002) whom discovered that about 10% reductions in the costs of supply chain operations can yield about 50% improvement in pre-tax profits. Supply chain integration is often referred as a seamless supply chain where territorial boundaries among chain members are removed and they effectively operate as a part of one single organization (Sahay and Ramneesh, 2003). The basic elements of supply chain integration are coordination, cooperation, collaboration, information sharing, trust, partnership and shared technology where these terms are alternatively used in existing supply chain integration studies (Chen and Paulraj, 2004; Cousins and Menguic, 2006; Arshinder et al. 2008).

Typically, there are three levels in implementation of supply chain practices namely direct supply chain, extended supply chain and an ultimate supply chain (Mentzer et al. 2001) (refer Figure 2.6). A direct supply chain consists of a company, a supplier and a customer involved in both upstream and/or downstream of products, services, finances and/ or information. For an example, a new hotel operator gets supplies of room furniture from Furniture Company which then, assigns the nicely arranged rooms to a tour operator for further assembling to sales to final customers. This example illustrates a very simple relationship among the supply chain members i.e. furniture company (supplier), hotel operator (company) and tour operator (customers). However, an actual supply chain process is broader consisting of company's suppliers (first tier) and their suppliers (second tier) as well as company's customers and their customers. This is known as an extended supply chain which has more chain members compared to the direct supply chain. Based on preceding example, in an extended supply chain, there are companies that supply finished furniture or raw materials for the production of furniture to the said furniture company. The furniture company then sells the furniture to the said hotel operators. The hotel operator then assigns the rooms, which have been arranged with furniture, to tour operators for assembling these rooms with other tourism products into a tourism package. The tour operators then sell the package directly to final customers or indirectly through the travel agents. This example clearly implies that complexity of supply chain is higher with involvement of more members where it is not an easy task to coordinate all the chain members in intended manner. Beside these, an ultimate supply chain includes all the organizations involved in all the upstream and downstream flows of products, services, finances and information from the ultimate supplier to the ultimate customer. In this level, there are also third parties whom further facilitate the supply chain operations through their services or assistances in logistic, marketing, financial and so on. At this level, all chain members including third parties should be well integrated in order to improve the overall effectiveness of supply chain.

Figure 2.6: Implementation Levels of Supply Chain

Source: Mentzer et al. 2001

In addition to the three implementation levels of SCM proposed by Mentzer et al. (2001), Sohal et al. (2002) discovered that there are also three integration levels of supply chain namely reactive, tactical and strategic. Reactive is the lowest level of implementation which merely acts to satisfy a trading partner's request. Typical application at this level includes some simple electronic data interchange (EDI) transactions. Such implementation merely incurs additional operational costs. Next is tactical level where the supply chain activities are integrated to a specific business process, such as purchasing and production, in improving its efficiency. At this level, adequate planning is done and hence, substantial cost savings are possible to achieve. The ultimate is strategic level where it seeks to integrate various business processes across the supply chain in a planned and staged manner. Such integration is expected to yield incredible costs savings in addition to other business advantages.

In realty, only few firms have fully integrated entire supply chain activities despite the enormous potential benefits that could be resulted from higher integration level (Mentzer et al. 2001; Sohal et al. 2003; Sahay and Ramneesh, 2003). Accordingly, Fawcett and Magnan (2002) discovered that about 47% of the surveyed companies are working towards integration of business processes within the company meanwhile about 34% of them are integrating with first-tier suppliers and 11% of them are integrating with key customers. Surprisingly, only 8% of them are systematically integrating supply chain activities among key customers and suppliers where there are practically no companies which fully integrate supply chain activities either with their supplier's suppliers or with customer's customers.

To conclude, the companies that integrate supply chain activities at lower level would achieve less or no benefits and in certain cases, the lower supply chain integration negatively affects the financial performance of the company by incurring additional costs. On the other hand, companies can enjoy significant benefits through the integration of supply chain activities within and across the organizations.