Effectiveness Of Information Technology On Supply Chain Management

Supply Chain Management is the concept known as the management of the materials and the information across all the partners within an industry including customers customer’s and suppliers supplier’s. Supply Chain Management introduces the initiatives for competitive advantages to companies and it reinforces the use of technology for more accurate and faster communication among supply chain partners.

The field of supply chain management has become tremendously important to companies in an increasingly competitive global marketplace.

The term supply chain refers to the entire network of companies that work together to design, produce, deliver, and service products ( Hausman, 2001)

Generally speaking, the supply chain is the sequence of enterprises from suppliers to end customers. The National Research Council refers to it is an

” …..association of customers and suppliers who, working together yet in their own best interest, buy, convert, distribute and sell goods and services among themselves resulting in the creation of a specific end product ( National Resource Council, 2000)

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According to the Mentzer Supply chain management is defined as the systemic, strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. (Mentzer et al.,2001 in www.emeraldinsight.com)

Companies cannot work for themselves and are hence automatically part of at least one supply chain. The key participants are the manufacturers and their respective suppliers that collaborate to create and support the end-product as well as the customers that purchase the latter. A typical supply chain comprises the following layers.( Werner, 2002)

Primary producer

Multiple tiers suppliers

One’s own company

Intermediary trade in the form of wholesale and retail

End-users

A supply chain is the process of moving goods from the customer order through the raw materials stage, supply, production, and distribution of products to the customer.

All organisation have supply chains of varying degrees, depending upon the size of the organisation and the type of product manufactured. These networks obtain supplies and components, change these materials into finished products and then distribute them to the customer. Managing the chain of events in this process is what is known as supply chain management. ( Ligus, 1999)

The bullwhip effect is a major cause of supply chains problems. It describes how small fluctuations in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturer, and suppliers. As an example consider disposable diapers. Babies generally consume diapers at a more or less consistent rate when aggregated over a large group of customers. Nevertheless, order fluctuations invariably become considerably larger as one moves upstream in this supply chain. Consequences of the bullwhip effect can be severe, including excess and fluctuating inventories, shortages and stock outs, longer lead times, higher transportation and manufacturing costs, and mistrust between supply chain partners.(Fisher, 1997)

The Supply Chain Operation Model (SCOR) was designed to enable companies to communicate, compare and learn from competitors both within and outside of their industry. It only measures supply chain performance but also effectiveness of supply chain reengineering. Further it has the ability to test and plan future process improvements.

The SCOR is a process reference model. Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross functional framework( SCC,2001)

The evaluation of supply chain management information technology enables companies to integrate activities and organisations that were previously separate. Inside a larger organisation the key element for forging new efficient processes is sharing data between functions in real time. The objective is to eliminate administrative tasks that were develop when information could only be shared by sending documents between these areas. ( Eloranta, E & Holmstrom, J et al., 2001)

Information technologies are no longer considered as “nice to have” instead it is believed that is a “must”. Whoever uses the information technologies effectively in managing his business will have more chance to succeed in today’s world. Capturing the necessary data is one part of the race but filtering and changing the data into information effectively is the most important concept. Companies produce vast amounts of data everyday but they require advance tools to manipulate the data to reach the informative data which helps to manage their business.

The purpose of this research is to introduce the supply chain management concept and initiatives; and point the information technologies used in this area to achieve the expected benefits from the management of a supply chain. It emphasis how information technologies effect supply chain management and how can it be used to manage the supply chain more effectively.

In this piece of work, the basics of Supply chain management and the initiatives of the supply chain management are being described. The effects of information technologies, as the inevitable backbone of the supply chain management, will be explained in detail.

3. Rationale for Chosen Topic:

Companies strive to improve market share, grow corporate profit, and gain strategic advantage. In order to achieve these goals, supply chain competency must be placed at the heart of a company’s business model. Firms realize that the competition is driven by customer demand. Effective supply chain management can offer customers high quality products and services with low prices.

Effective SCM can help lower production and distribution costs through seamless cooperation between business partners in their supply chain.

The big retail chains have fought to a standstill in price wars over the last decade. Now they are realising that the lending edge IT is an invaluable weapon in the battle for market share ( Masters)

4. Research Questions:

Formulating a series of questions adds clarity to the research process. Therefore, the fundamental questions for the proposed research topic are:

What are the benefits of IT on management of supply chain?

What are the effects of IT system on supply chain management?

What are the benefits of vendor managed inventory in supply chain management?

5. Research Objectives:

The research objectives explain the purpose of the research and define standards for what the researcher is going to do. The objectives specify the information needed to accomplish the research process.

The aim of this research is to gain a better understanding of supply chain management and how affect IT on management of Supply Chain by analyzing the “vendor managed inventory (VMI)”. This VMI concept will be introduced and its benefits to supply chain management

6. Literature Review:

Information is crucial to supply chain performance because it provides the foundation on which supply chain processes execute transactions and managers make decisions. Without information, a manager will not know what customer want, how much inventory in stock, and when more products should be produced and shipped. In short, without information a manager can only make a decision blindly. Therefore, information makes the supply chain visible to a manager. Given the role of information in a supply chain’s success, managers must understand how information is gathered and analysed. This is where IT comes into play. IT consists of the hardware and software throughout a supply chain that gathers, analyses, and acts on information. It serves as the eyes and ears of management in a supply chain, capturing and analysing the information necessary to make a good decision.

Using IT systems to capture and analyse information can have a significant impact on a firm’s performance. For example, a major manufacturer of computer work-stations and serves found that much of the information on customer demand was not being used to set production schedules and inventory levels. The manufacturing group lacked this demand information, which forced them to make inventory and production decisions blindly. By installing a supply chain software system, the company was able to gather and analyse data to produce recommended stocking levels. Using the IT system enabled the company to cut its inventory in half because managers could now make decisions based on information rather than educated guesses. Large impacts like this underscore the importance of IT as a driver of supply chain performance. (Chopra, S. and Meindl, P., 2001)

An efficient way to improve the effectiveness of SCM is to use Information Technology (IT). IT-solutions improve the integration with other actors in the supply chain and make the business processes more effective. This is done by reorganizing the processes and automating the information-flow between the businesses involved (Wu et al., 2004). Information technology has developed in a very fast pace in the area of supply chain management. This has generated new tools and solutions to handle the information sharing between different actors in supply networks. These types of supply chain technologies are of great current interest which is indicated by a research made by AMR Research Inc. The research indicates that nearly $15 billion been spent on SCM software since 1999 in the US alone (Ruppel, 2004).

The most typical role of IT in SCM is reducing the friction in transaction between supply chains partners through cost-effective information flow. Conversely, IT is more importantly viewed to have a role in supporting the collaboration and coordination of supply chains through information sharing. Present IT as one of the key cures for bullwhip effect in supply chains. IT can be used for decision support. In this instance the analytical power of computers is used to provide assistance to managerial decisions. (www.emeraldinsight.com)

Supply chain management is a vital part of the search for competitive advantage, today there is a wide range of software technologies that help to provide lean and efficient supply chains. All of which enable data, which might previously have been seen half way around the world by mail, to be delivered almost instantly with little cost or effort. (Johannson, M., 2003)

A fast development of information technology has given the information flow within the supply chain a more central role than before. IT is a very important component within supply chain management and the development of IT has created many new opportunities for managing the supply chain. (Paulsson, U., & Nilsson, C-H., & Tryggestad, K., 2000)

The internet is seen as the next big supply chain opportunity as it has gained increased reliability and security over recent years. As businesses have gained experience of this technology they are now able to take full advantage of sales automation through the internet. (Johannson, M., 2003)

The supply chain absorbs as much as 60 to 80 percent of a sales dollar. Therefore it is of great importance to evaluate and analyze how the supply chain activities can be done more efficiently. This thesis focuses towards these types of activities, when a real-time IT-Logistics solution is implemented within the supply chain. This is done by many companies and the supply chain is becoming more and more essential to the firm’s competitive strategy. (Ballou, R. H., 2004)

Information Technology (IT) is playing an increasingly critical role in the success or failure of the supply chain. IT ranks highly as the essential ingredient and backbone for the success of supply chain integration.(Barut, M., Faisst, W., and Kanet, J.J., 2002). IT has become one of the keys to operating success. It is impossible to achieve an effective supply chain without IT. Since suppliers are located all over the world, it is essential to integrate the activities both inside and outside of an organization. This requires an integrated information system (IS) for sharing information on various value-adding activities along the supply chain. (Gunasekaran, A. and Ngai, E.W.T., 2004)

As customer demand steadily increases the importance of the application of information technology became clear, However success is not guaranteed by the technology itself, but by its application. (Eloranta, E & Holmstrom, J., 2001)

Over time, there have been numerous initiatives that have attempted to create efficiency and effectiveness through integration of supply chain activities and process. They have been identified by names such as quick response, electronic data interchange ( EDI), short cycle manufacturing, vendor-manage inventory (VMI), continuous-replenishment planning ( CRP), and efficient consumer response (ECR). (Coyle, J.J, Bardi, E.J., Langley, C.J., 2003)

Electronic Data interchange ( EDI) allows companies to place instantaneous, paperless purchase orders with suppliers. EDI is not only efficient, but it also decreases the time needed to get products to customers as transaction can occur more quickly and accurately than when they are paper based. (Chopra, S. and Meindl, P., 2001) Prior to installing EDI many retail outlets would place orders for goods during stock out situations. For manufacturers this meant unpredictable peaks and falls in the order process, therefore making it difficult to establish a manufacturing cycle for their products. Retailers would stock up at the beginning of the season and face increasing stockholding costs plus the risk of having to mark down products at the end of the season to make way for new products. (Stafford, J., 1997)

Continuous Replenishment Program (CRP) is an efficient replenishment concept within the Efficient Consumer Response (ECR) arena. It focuses on improving the flow of products in the supply chain, both forward to the customer and eventually the end customer, and backward to the supplier.(Ahlerup, T., 2001)

Vendor manage inventory process can be defined as “A mechanism where the supplier creates the purchase orders based on the demand information exchanged by the retailer/ customer” To say this is a simple terms, VMI is a backward replenishment model where the supplier does the demand creation and demand fulfilment. In this model, instead of the customer managing his inventory and deciding how much to fulfil and when, the supplier does.

The Vendor Managed Inventory (VMI) concept is one type of joint chain scheduling which takes care of the customers’ demand. This leads to increased flexibility for the supplier and efficient replenishment for the customer. (Vollmann, T. E., et al 2005) In order to make this work, it is necessary to have compatible systems that can support several standards of information flows from different actors. According to Vollmann this can be done through an open IT-architecture with a common platform for all actors within the network.

VMI also helps by conveying customer demand data to the manufacturer, who can then plan production accordingly. This helps improve manufacturer forecasts and better match manufacturer production with customer demand. (Chopra, S. and Meindl, P., 2001)

Vendor managed inventory (VMI) is a technique that allows suppliers to be empowered by managing inventories of agreed-upon items. VMI is now a widely practiced initiative in the retail industry. For example, Procter and Gamble (P&G) and Wal-Mart have developed well-functioned VMI systems. A Web-based VMI system, in which the suppliers monitor inventory information via the Internet and replenish the items according to a predetermined contract, will improve customer service, reduce inventory buffers, reduce administrative costs, and reduce uncertainty for the supplier.

The literature review identifies that IT is expected to have a pivotal role in managing supply chains, now and in the future. In fact it seems that the use of IT is crucial, especially in fast-moving industries, and particularly for managing contemporary supply networks. Moreover, the close relationship of the concept of SCM and IT sometimes makes it hard to assess which one contributes benefits. For example implementing a VMI model with EDI information transmission can lead to substantial reduction of inventories and at the same time increase material availability.

7. Research Methodology:

The research design phase starts with the election of research methodology for the proposed study. The objectives of the study, the availability of information, cost of obtaining data, and appropriateness of the topic determines the research methodology used for the study.

As the research is exploratory in nature, Qualitative research will be deemed more appropriate by choosing a case study, exploration of question of what the benefits of IT in SCM are. For the purpose of this investigation many different forms of primary research will be gathered by doing email and telephone interview. The goal is to understand the current state of IT implementations in SCM and what practical benefit they have recognised in SCM.

Through the gathering of this primary research the information is mainly qualitative, this type of research does not involve numbers and figures or analysis of part performance but rather finding out peoples opinions and feelings, this type research also becomes increasingly important as a way of trying to predict further into the future. ( Dooley, D. & Dransfield, et.al.1999)

I will also use secondary data from the previous researcher, surveys and some contemporary issues. Secondary information will be used as a starting point for the further primary research, therefore it will be used in a majority of the research, this is due to the limitation of primary research and there is also a great deal of valuable information available through secondary research that the researcher fell need to be included, as it provides a good foundation for which to compare primary information and will therefore ensure validity.

8. Data Collection Methods:

The data collection or gathering process is the stage in which the researcher collects data about the proposed topic.

In this study, primary and secondary data collection method will be used to identify the nature of the problem. The articles from the business journals, the business books and other publicized material will be investigated to present the ideas of different academics on the issue of managing strategic change. Their findings on the issue will be included and research process and the comparison of opposite ideas will be based on the ideas of these academics.

Athens Online Journals, University Libraries, Barnet Libraries, City Business Library , and British Library will be used to collect the required articles and books for the investigation.

9. Data Analysis:

This is the stage where the researcher accomplishes several procedures to transform the data into useful information which helps answering the management problem and phenomenon.

The proposed data analysis approach is “qualitative” data analysis method for this research. Data obtained through email surveys and telephone interview, various text books, journals and articles will be critically analysed by using a structured and systematic approach. The first aim here is to approach to the concept systematically and rigorously by doing so. The second aim is to establish a relationship between different ideas and structure them to reach to a conclusion.

10. Resource Requirements:

The library facilities will be helpful to find sources such as published copies, course books, journals and samples. Internet is the most powerful source to gather information about companies, published copies, journals, samples, literature and secondary data. The other researches about the same subjects will be obtained through Internet websites and library.