Value of Information for Reducing Cost in Supply Chain Management

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Abstract: Enterprises are facing a rapid growth in their sizes around the world. This trend forces complex departments work individually and coordinately at the same time. Therefore, diverse information must be shared and synchronized to ensure a company to obtain interests. As a result of information management becomes an important part to an organization, more and more leading enterprises in a variety of industries have started to invest a mammoth of money in enterprise-wide approach to integrate data to improve the performance. This paper will focus on logistics industry and discuss how information management can reduce operational cost in a traditional supply chain, reverse supply chain and closed-loop supply chain.

1.0 Introduction

Nowadays, the competition among organizations becomes fierce, cutthroat and heated. Firms spend a mammoth amount of money on innovation, manufacturing, delivery, marketing and customer service in order to defeat their competitors to win the competition. Among these efforts, supply chain management is a pivotal factor which can decide the performance of a firm. Because an effective supply chain management ensures that the customers can receive the right products at the right time in the right place with the lowest cost. However, more and more firms realize that it is very hard for them to manage the activities in supply chain management effectively by themselves. Therefore, they turn to search partners and begin to collaborate with them to earn the profits. For example, a manufacturer may cooperate with its downstream partner - retailer - to obtain the information about the real demand of its customer. Or, the manufacturer may collaborate with its upstream partner - supplier - to reduce the cost of raw materials. How to achieve the collaboration among the members in a supply chain? Information management, especially information sharing, is an appropriate way to achieve this goal.

In this paper, the importance and benefit of information sharing in a supply chain and the way to implement information sharing will be discussed in three different types of supply chain. That is, traditional supply chain, reverse supply and the closed-loop supply chain. The purpose of this paper is to make the audience pay attention to role of information sharing in improving the performance of a supply chain.

The structure of this paper is as follows. In section 2, the benefit and the cost of information sharing will be illustrated in a traditional supply chain. Besides that, a popular and effective way of information sharing - Vendor Managed Inventory (VMI) - will be introduced in a traditional supply chain too. Section 3 and 4 will discuss the role of information management in reverse and closed-loop supply chain respectively.

2.0 Information Sharing in a Traditional Supply Chain

A traditional supply chain, consisting of suppliers, manufacturers, retailers and customers, is a system of people, technology, information, activities and resources involved in delivering a product or service from supplier to customer (Stadtler, 2008, p.11).

In a supply chain, the purpose of each member is to earn profit as much as possible. Therefore, all of them will make their own optimal decisions, ignoring the overall performance of the whole supply chain. As a consequence, they are reluctant to share information with the others. Since they believe sharing information may weaken their power and advantage in a supply chain. However, in fact, lacking of information sharing among members in a supply chain leads to excessive operational costs. For example, retailer sells products to the customers. So, retailer knows the demand information very well. If he does not want to share this information with his upstream partner - manufacturer, there will be unnecessary cost in manufacturer due to inaccurate forecast conducted by manufacturer (Lee, Padmanabhan and Whang, 1997, p.546). Specifically speaking, if the forecast exceeds the real demand, there will be excessive raw materials, holding cost and warehousing cost. On the other hand, if manufacturer underestimates the real demand, the opportunity cost - cost for shortage - occurs. Besides that, in order to satisfy the demand, manufacturer may adjust its schedule and pay extra cost for workers to finish the task in time. The similar situation - extra cost - because of lacking of information sharing also happens in supplier and retailer. According to a survey, lacking of information sharing can lead to an extra cost in the range between 12.5% and 25% (Lee, etc., 1997, p.547).

In order to reduce the operational cost, members in a supply chain begin to cooperate with each other to share information. Many scholars illustrate the benefits of information sharing in a supply chain (Agrawal, Sengupta and Shanker, 2009, p.577; Ha and Tong, 2008, p.702; Fiala P., 2005, p.411; Chen and Lee, 2009, p.783; Chan and Chan, 2009, p.216). Agrawal et al. (2009, p.578) illustrate that information sharing can effectively weaken bullwhip effect, the demand order variabilities in a supply chain were amplified from the downstream to the upstream (Lee, Padmanabhan and Whang, 1997, p.95), to reduce the operational cost in a supply chain. In their paper, they consider demand process, forecasting model and replenishment policy to propose a model. After analyzing the model, they come to a conclusion that the variability of order quantity is reduced due to information about end customers' demand shared with warehouse. Moreover, they also find that the benefit of information sharing is more if the warehouse lead-time becomes lower.

Even though information sharing can enhance the effectiveness and efficiency of a supply chain, and make the supply chain to earn the overall optimal profit, there is some cost triggered by information sharing. If the cost is only born by the informed organization or, if there is no appropriate mechanism to share the extra profit due to the information sharing by informed organization, it is not sure that whether the informed member has any incentive to share information with the uninformed partners.

In a report (Clark and Hammond, 1997, p.252), retailers realize that the manufacturers can earn more profit from the end customers demand information provided by the retailers. However, retailers are not sure that whether they can benefit from information sharing with manufacturers.

Chu and Lee (2006, p.1568) discuss how to encourage retailer to share information and how to divide the cost involved in information sharing among members in a supply chain. They model a Bayesian game and find that there are two factors impacting on the retailer to share information. That is, the cost of revealing information and the natural of market demand signal. If the revealing cost is huge, retailer will not share information regardless of the natural of market demand signal. On the other hand, if the revealing cost is small, retailer is willing to share information if a high demand is signaled, but holds the information if a low demand is signaled (Chu and Lee, 2006, p.1576). What's more, different types of information have different costs. They demonstrate that, if all the types of information can achieve the same goal, the information which is the least costly will be used. For example, the cost of point-of-sale (POS) data is higher than that of aggregated data. If both types of data can serve the same purpose, aggregated data will be used (Chu and Lee, 2006, p.1577).

Since there are a amount of advantages of information sharing in reducing the operational cost in a supply chain, which methods can be used to share information? Vendor Managed Inventory (VMI) is an effective and popular way, which is applied in supermarket, grocery, automotive and food industry (Kiesmüller and Broekmeulen, 2010, p.406; Cachon and Fisher, 1997, p.266; Tyan and Wee, 2003, p.11).

VMI refers to a collaborative strategy. In this strategy, supplier, instead of buyer, monitors the inventory level of buyer and deliver the goods to the buyer periodically based on the sales forecast (Waller, Johnson and Davis, 1999, p.183). There are six main activities in VMI (Kienle, 2004, p.44). That is, buyer provides information about current sales and inventory level to the supplier; supplier examines the received data and integrates into his own enterprise process and plan to deliver goods to the buyer; supplier informs buyer before delivery; supplier begins to supply goods; buyer received and stores goods in the warehouse and buyer sends invoice to the supplier.

As mentioned before, buyer can acknowledge that supplier can earn extra profit by receiving the information from buyer. But, the buyer is not sure whether he can benefit when he provide information to the supplier. In fact, VMI can bring many advantages to buyer (Kiesmüller and Broekmeulen, 2010, p.408).

The first advantage of implementing VMI for buyer is to reduce operational cost. As to the buyer, such as retailer, he always faces a dilemma: customer service and inventory level. If the retailer intends to make sure a good customer service, he has to keep a high level of inventory in the warehouse to satisfy the needs at any time. However, the high level of inventory will cost excessive cost of retailer, thereby reducing the profit. On the other hand, if the retailer tries to save the inventory cost, he can reduce the level of inventory, which may lead to a shortage and then lower the level of customer service. VMI can solve this dilemma due to the frequent replenishment by the supplier. Therefore, retailer can satisfy the demand of customers very well at a lower inventory cost. Besides that, VMI can reduce the transportation cost substantially. Since the supplier decides the time and volume of goods to deliver, he can make a schedule in advance. It means that he can use full truckload shipments to deliver goods, which costs less (Waller et al., 1999, p.184).

What's more, VMI can reduce the bullwhip effect to a large extent (Cachon and Fisher, 1997, p.268). Bullwhip effect is caused by uncertainty demand and interrupted information flows among members in a supply chain (Lee, etc., 1997, p.546). With VMI, the upper stream members have access to the information about real demand of customers, which can help them to improve the accuracy of forecasting. Therefore, there will be less unnecessary cost in the supply chain.

The third advantage of VMI is to avoid the sub-optimization. Without VMI, the buyer may order the quantity of goods to achieve his own optimal goal, regardless of the capacity of the supplier. This phenomenon can lead to sub-optimization of the whole supply chain. With VMI, buyer and supplier share information, so they can make decision to obtain the overall optimization (Kiesmüller and Broekmeulen, 2010, p.406).

Besides VMI, continuous replenishment programs (CRP) is examined for cost reduction too. CRP refers to efficient replenishment, which focuses on the improvement of the flows in a supply chain, both forward to the end customers and backward to the raw material suppliers (Yao and Dresner, 2008, p.362). In CRP, buyer and supplier share the level of inventory to reduce the inventory level on both firms. In VMI, supplier has right to manage the inventory of buyer. Yao and Dresner (2008, p.374) compare CRP and VMI in reducing the operational cost in a supply chain. They find that when the replenishment frequency increases, manufacturer can earn more profit under VMI and retailer can benefit more under CRP.

These paper mentioned before mainly discuss end-customer-demand information sharing in a supply chain to improve the accuracy of forecasting or reduce the level of inventory in the warehouse. However, this kind of research ignores the return flows in a supply chain. The return flows are caused by two main reasons: customer service and legislation (Chouinard, D'Amours and Aï-Kadi, 2005, p.105).With respect to the customer service, in order to establish brand image and increase the sales, firms provide guarantee that customers can return the goods to the retailer within a certain period, such as 30,60, or 90 days, after purchase. This kind of return is defined as commercial returns (Guide and Van Wassenhove, 2009, p.11).With regard to the legislation, more and more countries issue strict laws to ask manufacturers to recycle the used products from the customers and safely deal with these products. For example, WEEE (Waste of Electrical and Electronic Equipment) Directive in Europe requires manufacturers who produce electronic products to deal with the end-of-life electrical and electronic waste in Europe (Atasu and Van Wassenhove, 2010, p.27). This kind of returns belong to end-of-use or end-of-life returns (Guide and Van Wassenhove, 2009, p.11). In the U.S., customers can return the mobile phones after purchase without any reasons with 30 days (commercial returns). The replace rate for mobile phones is about 80% annually. The majority of the replaced phones are fully functional. The reason for customers to change their mobile phones is that customers treat mobile phones as fashionable products. The arrival of new type of phones makes the used but fully functional ones out of date (end-of-use returns). As to some customers, they only change their mobile phones at the end of product life cycle, which belongs to end-of-life returns (Guide and Van Wassenhove, 2009, p.11).

Then, a question is proposed. What are the characteristics of return flows and how to management the information in this kind of flow?

3.0 Information Management in a Reverse Supply Chain

Many authors propose the definition of return flows in a supply chain - reverse supply chain. Among these definitions, the definition given by the European Working Group on Reverse Logistics (REVLOG) is seemed to be the most convincing one. That is, the process of dealing with the backward flows of raw materials, in process inventory and finished goods from users to a proper disposal point (de Brito and Dekker, 2004, p.5). Generally speaking, unlike the flows in traditional supply chain, the ones in reverse supply chain begin at the downstream of the chain, such as customers. Therefore, there is new challenge in reverse supply chain. It is extremely difficult to forecast the amount and the time of the supply - that is, the used product returns from the end customers to the disposal point (de Brito and Van der Laan, 2009, p.85). The inaccurate forecast of returns may lead to the problems in the inventory, transportation and remanufacturing, which will induce huge operational cost. Hence, it is imperative to manage information in a reverse supply chain to improve the quality of forecast and encourage the cooperation among member in the reverse supply chain.

Chouinard et al. (2005, p.105) discuss how to integrate reverse logistics activities into an organization and how to coordinate this new system. In their article, they emphasize the importance of information management in a reverse supply chain. They suggest that information management should consider the issues about a product which can be reintroduced at a different level of an organization's activities. Besides that, new approaches for control and the addition of information should be investigated too. What's more, the information defined in a reverse supply chain should be involved at tactic, operational and strategic levels.

Since it is very hard to obtain enough information in a reverse supply chain to make decisions, de Brito and van der Laan (2009, p.97) examine the impact of imperfect information in the return process on the performance of inventory management. They use four methods to forecast lead time. After analysis, they come to a conclusion that in the case of imperfect information, the most informed method may not ensure the best performance on inventory management.

The papers about information management in reverse supply chain mainly focus on how to apply information to reduce the operational cost in a chain. Nevertheless, there is little incentive for members in a chain to improve the ability of information management if the only purpose is for the customer service and legislation with less cost. Therefore, in the next section, another type of supply chain - closed-loop supply chain - will be introduced. In this type of supply chain, the task of information management is not only to reduce the operational cost, but also to maximize the profit in a supply chain.

4.0 Closed-loop Supply Chain

In the latest five years, more and more scholars and entrepreneurs pay their attention on closed-loop supply chain. Closed-loop supply chain can be briefly defined as the combination of forward and backward supply chain (Ferguson and Souza, 2010, p.2). The activities in a closed-loop supply chain involve recycling, grading, disposition, remanufacturing and remarketing. Among these activities, remanufacturing can add value in the chain.

Since research in this area is relatively new, there are few papers discuss information management in a closed-loop supply chain. Ketzenberg (2009, p.502) studies the value of information in a firm which satisfies customer's demand by new product, remanufactured product or a mix of both type. There are four types of uncertainty: demand, returns, recovery yield and capacity utilization. In this setting, he discusses the value of information in three types: demand, yield and capacity. He finds that different types of information can become the most valuable in different situations. For example, when the rate of return is high, the yield loss is high, the variability of returns is high and the availability of capacity is high, yield information is the most valuable one. If the return rates and return variability are high, penalty costs are high, yield loss is low, capacity information is the most important one. What's more, if the demand variability, capacity availability and holding cost are high, demand information is the most valuable one.

5.0 Conclusion

As information is a key factor for an organization to reduce operational cost and obtain competitive advantages in a marketplace, information management is essential and pivotal. This paper discusses the information management in three types of supply chain. That is, traditional supply chain, reverse supply chain and closed-loop supply chain. After reviewing literature, it is obvious that the study about information management in closed-loop supply chain is scare. Therefore, in the future, scholars and entrepreneurs can make effort in this aspect to reduce the cost and maximize the profit.