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No doubt greater success could be achieved by collaboration for achieving mutual financial and market benefits and these benefits could be achieved by supply chain integration. Supply chain integration is achieved through best use of technological resources for sharing information with supply chain partners and designing integration within different tiers in supply chains. [Trkman & Groznik 2006].
The supply chain integration strategies are dependent upon the product and market nature. To deliver agile performance in the market place and the product with high demand variations companies must integrate with its supply chain partners to deliver best performance in market place. Integration is also helpful in the market place where customer demand keep on changing and being more responsive to customer demands companies integrate their supply chain with suppliers and distribution partners by sharing vital information to support each other's supply chain. In such case the coordination of marketing strategies and supply chain integration (SCI) strategies will deliver better performance in market. SCI can be used as risk reduction effort; companies in SCI are sharing risk factor for the product rather than individually facing all the risk of product. Integrating with external suppliers having considerable experience in the product, support firms with a systematic learning of managerial and organization skills. [Narasimhan 2002]
The idea of supply chain integration (SCI) can be used to build competitive advantage via information exchange and usage of better technology to transfer the information on time. Supply chain integration makes clear operational objectives for partner about the scale of production, lead times and producing standards. Integration strategies are especially important in manufacturing companies which start integrating with first tier suppliers for mutual product development and marketing approaches for customer response. Supply chain integration also give a chance to supply chain partners to have a flexible quantity contracting, the contract would include rules for sharing costs of inventory, pricing between the supply chain and reallocation of decision rights. This contract added the commitment for the seller to the buyer's forecasts and flexible deliveries in accordance to final consumer. These clauses also help supply chains to produce a flexible master production schedule which is followed across multiple stages of supply chain. These mutual benefits are widely accepted and appreciated in theory but rarely achieved in practice for mutual benefit.
The dimensions of supply chain integration can be combined into; customer, supplier and internal integration. The customer and supplier are part of external integration based on which internal integration strategies, processes and practices are formed. The degree with which internal integration strategies match with external strategies more the chances of firm being successful on customer and supplier side in fulfilling demands and supplies. The way of working of internal and external integration is different. Internal integration focuses on manufacturing systems and functions of departments and functions while external supply chain integration establish collaborative relationships with suppliers and customers. [Flynn et al. 2010]
Importance of internal integration
Internal integration will signify internal structural strength of the firm. Internal integration play vital role in information integration between departments of company and mitigates any ambiguities related to materials flow and removes barriers of information flow between departments to create internal efficiency. Due to this cooperation integration helps supply chain to perform better in requirements of customers. It facilitates the internal supply chain departments to work together on planning and information sharing to deliver as a whole. There is a direct relationship between supply chain integration and internal operational efficiency delivering better financial and business performance. [Flynn et al. 2010]
Importance of external integration
The external supply chain integration helps company to get accurate information from customers about the product about their needs and expectations. In the same way external integration with suppliers help company to build new products and fulfilling the changing customer demands and expectations. Collaborative working with suppliers is also generates production and inventory planning to limit inventory level and reducing financial cost related to working capital. It helps manufactures to develop products, processes schedules on time to deliver on time. The benefit for suppliers is that it will facilitate them to better understand their customer needs, communication and product development process.
[Flynn et al. 2010]
Source: Frohlich & Westbrook. 2001
Figure: 1.0Internal and external Supply chain integration
Framework and approaches in supply chain integration
Supply chain integration is built on coordination of different connected organization and it could be only successful if policies are implemented to have flexible schedule changes and material flows. Usually information regarding purchasing and scheduling policies is shared and implemented which specifies the type of material commitment and scheduling forecast. The buyer provides a forecast to the suppliers for its material requirements which could change over time. These forecasts and production schedules usually changes over time as the delivery time approached but the forecasts provide a general idea amount the quantities required over time.
In supply chain integration, the price must be considered for high variability in material supply. If there is a demand increase than the supplier will bear the additional cost in short term but the persistent variability in demand will have an impact on future purchasing price for both supplier and buyer. The buyer company usually use buffer inventory to minimize the increase in prices and Supplier Company used to have more stock levels of finished goods to gain more profit for the buyer company. This is the point where both parties push each other on price and their integration fails. To avoid this situation connected companies in supply chain also share information regarding the expected variability in order quantities per time period.
Levels of Supply chain Integration
The integration requires significant coordination among internal organization functions for external transaction with suppliers and customers. It is dependent upon the strategy and capability of trust of buyer and supplier that how much they could integrate and share information with each other for mutual benefit. In literature there are three levels of integration:
Myopic is the lowest level of integration. Under this approach only first tier partner of supply chain are considered flexible in terms of information sharing, purchasing and scheduling policies. In such case supply chain is not integrated with second tier suppliers and only first tier suppliers and buyers are considered capable for flexibility and integration.
The integration with the critical path with first tier are considered capable for integration, in addition to this the second tier member on the critical path are also considered flexible and integrated. The critical path is the path with longest lead time from top tier member till lowest but usually in supply chain integration there are more first tier suppliers than second tier suppliers.
This is the highest level of integration. In such situation information sharing is made with every member of supply chain for purchasing and scheduling flexibility and integration. [Wei & Krajewski 2000]
For integration there is business level buyer-supplier relationship management and operation process integration is involved. To build this integration relationship processes, people, technology and processes are involved. For operational efficiency closer relationship between involved parties are required, people who share the information about the process using technology.
Source: Grubic et al. 2010
Figure: 1.1 Supply chain process relationships
Supply chain could be integrated via sharing information regarding production process, inventory control systems and distribution control process, as suggested by [Cooper et al. 1997] shown in figure 1.0. This is the inbound logistics, materials management and outbound logistics of supply chain. Sharing information regarding these three supply chain process in multiple supply chains makes integration complex. Materials usually flow in one direction but the flow of information regarding materials requires much coordination between each organization internal and external process. At different point in supply chain integration information regarding inventory levels, sales forecast, and order history for each activity is made available to supply chain partners. [Grubic et al. 2010]
Integration Tactics and Arcs of Integration:
Figure 1.0 shows two interrelated forms of integration. In addition to internal and external integration this figure also shows the direction of coordination. The forward physical flow of products to the customer integrates delivery process due to integration between supplier and manufacturer. Other direction of coordination is backward coordination of information technologies and data flow starting from consumers to the supplier. Multiple supply chains could integrate using information technology and traditional planning and control software.
The figure 1.2 shows different integration levels and focus of direction of integration. The direction of integration could be different and could be more biased towards supplier's side or customer's side or equal to both sides. The arc directs the importance of the level of integration and shows the segment where firms focus more than other. The arc shows level of integration explained in chapter 1.2.1. Myopic integration shows narrow arc of integration in figure 1.2 and total integration shows the broad arc of integration. The broad arc shows the manufacturing organization is perusing highly integrative suppliers and customers focused supply chain and maintains high level of information flow.
Source: Frohlich & Westbrook. 2001
Figure: 1.2 Arcs of integration
When the companies integrate and give response to customers as one entity, their performance is enhanced throughout supply chain. It helps companies to balance the demand and supply throughout the supply chain and management of the variability in demand, supply, cost, inventory controls and being more responsive to market changes. This collaborative working and building relationships on both suppliers and customer's side help manufacturing companies to build long lasting competitive advantage.
Real world example:
In automobile industry like Ford and Toyota, like all other automobile industry manufactures these manufacturing companies provide planning schedules and forecasts to their first tire suppliers through which supplier calculate future delivery requirement. This information sharing is not common with second tier supplier or lower tier suppliers. Due to demand variability the cost penalties associated with it increase which could be reduced with accurate forecast. Due to inconsistent variation in scheduling second point for information exchange are second tier suppliers.
Supply chain uncertainties and risks
Due to globalizations, dynamically changing markets and increasing competition companies are more venerable to business risks. More than 70% of the product cost of the company comes from supply chain due to which the risks and uncertainties associated with supply chain need to mitigate immediately to make a predictable profit stream and growth. [Christopher 2004].
Supply chain functions are stretched to several interconnected network of organizations and supply chain functions are related with each department of the organizations connected to that network. This makes supply chain more complex and venerable to internal and external risks. Now managers are being forced to address an increasing variety of risk at strategic level as well as operational level. These are endogenous (internal) and exogenous (external) risks associated with supply chain. This classification of risks is based upon the sources of risks rather than nature, scale and manageability of risk. But somehow the endogenous risks are considered more manageable than exogenous as they are in control of firm's internal process but the critical thing is the realisation of risk with an ample time to be prepared to make any risk manageable. [Christopher 2004].
The endogenous and exogenous supply chain risk includes:
Source: Christopher 2004
Figure 2.0 Sources of supply chain risks
Supply chain process risk
The reason supply chain risk is different from other business risk is that it is networked together. Each networked or node play an important role in completion of the process and each node has its own specific risk that's why supply chain risk is prolonged to several organizations and every member has an influence on process and shares each other's risk. [Ritchie & Brindley 2007]
Supply chain control risk
As the risk of supply chain is variable to multi organizations so the control of order quantities, batch sizes, safety stock and logistics management becomes too complex and risky to manage with respect to demand and supply ratios. [Christopher 2004].
Supply - Demand Risk
This supply chain risk is related with both internal and external to the firm. With respect to demand the firm has to manage its internal stock and with respect to anticipated demand and making smooth delivery. But there is always a risk of supply and demand fluctuations and inventory variations.
Any kind of accident, natural disaster or any other incident in the market place could have a direct impact on supply chain. This impact could be extreme variation in demand side or it could be any economic, political or legal factors of which a company supply chain could be affected.
Supply chain uncertainty lead to supply chain risk. It can simply be defined in terms of having inadequate information for decision making. The factor of supply chain uncertainties comes under process and supply & demand risk because uncertainties lead to risk. These uncertainties could include situation like where decision could vary the business object due to uncertainty in information, lacking of effective control measures on controlling the risk factors and lacking timing to process the available information regarding uncertainty. These uncertainties have a major impact on manufacturing functions. As value is added on every node of supply chain but the complex supply chain network makes it uncertain that at which stage or which network there is a risk of delay or a breakdown activities, in other words distinguishing non value adding activates or waste. The supply chain is also venerable to the supply and demand side of suppliers and customers. Producing a product with customer specification through supply chain of many companies at the right cost and time adds to this process uncertainty across whole supply chain. In short uncertainty would be all the factors which make supply chain decision making more ambiguous. Any supply chain decision which is there is more uncertainty than more supply chain risk will be involved in it. [Vorst & Beulens 2002]
Theories for Supply chain uncertainty
Identifying sources of uncertainty to generate supply chain redesign strategies
For an already established supply chain the management focus must be on identification of sources of uncertainties and redesigning the supply chain strategies for optimal performance. This model categorises the potential sources of supply chain uncertainties and based on which suggested resign strategies could be adopted to minimize the effect of risk due to uncertainties. According to this model uncertainties were categorized as below:
The inherited features of already established supply chain will produce somehow predicable fluctuations of supply and demand. If there is high variation in these patterns of fluctuations than the planning, scheduling and controlling for delivery will be affected.
Special characteristics of supply chain that could cause disturbance in performance could be configuration of the nodes or network allowing flexibility, process control structures in the chain, the information flow and flexibility in terms of decision risk.
External factors that cause uncertainness in supply chains like; changes in market structure, regulation and competitive situation that could cause risk to supply chain.
Possible redesign strategies:
This model made number of different supply chain redesigning strategies as possible solutions for uncertainties Some of these strategies for eliminating supply chain uncertainty supply chain could be eliminated by; eliminating non value adding activities, reducing number of parties involved in supply chain, changing location of business, changing parties involved in chain, reallocating roles and processes to perform action and collaborative planning and control of supply chain. [Vorst & Beulens 2002].
The supply chain complexity triangle
This theory explains the uncertainness in supply chain with a triangle which gave insight about generation of uncertainties in supply chain. Three factors discussed in triangle are independent effects but still these are interacting factors that cause uncertainness in supply chain.
Source: Wilding 1998
Figure 2.1 supply chain complexity triangle
Deterministic chaos in supply chain
According to this theory chaos (complete disorder or confusion) could arise in supply chain due to decision making process among different networked supply chain of different companies and from supply chain control systems in these different nods. The decision making chaos could arise by the ordering patterns for the product between each organization which creates variation in demand and supply and inventory levels. Stock policy adjustment decisions for the desire of low level of inventory also create deterministic chaos in industrial environment of supply chain. Supply chain control systems in warehousing also create some uncertainties in supply chain making it more complex and uncertain. In terms of channel used for distribution increasing number of echelons and channels used has an impact on creating chaos in supply chain.
Parallel interaction related to the interaction of processes between each echelon of supply chain. This interaction in different channels of supply chain in the same tier supply creates uncertainty and results in rescheduling and reorganizing the systems with respect to changing demand and supply to achieve optimal outcome.
The study off demand amplification was first on a linear supply chain was done by Jay Forrester (1961). One critical result of his study was determining the impact of business policy change in sales, seasonal production cycles and creating swing in inventory. This change in demand amplification is transferred from one organization to other connected organizations. [Wilding 1998]
Forrester / Bullwhip effect in supply chain
The most painful impact on supply chain happens due to upstream order magnification which is Forrester effect or bullwhip effect. The uncertainties of demand generated by the customer is critical to be fulfilled for business survival and building a competitive advantage. Forecasting the demand and making necessary measures in supply chain are also important to building customer confidence and competitive advantage to maximize market share. Companies who optimize their forecast potential to determine demand would be able to perform better in market place. Any uncertainty in demand will lead to uncertainty in supply or inventory levels creating huge variation in inventory level and hence will increase cost. If the firms supply chain is connected with others forms than due to Forrester effect demand variations will increase with every order level. These variations are produced due to delays information and material which transfers the fluctuations in supply chain upstream and downstream. Some other situation like having infinite lead times, no fixed ordering cost and when the past information is not used for demand forecasting and no measures taken to control the internal safety stock of the firm with respect to the forecast. If there would be no fixed ordering cost than it would also vary with different size of orders and will vary with bullwhip effect. Supply chain cannot survive without controlling lead times and full control on distribution. When there is a shortage of the product, depending upon the product nature customer will behave differently, customers might place order from different channels of product distribution to gain access to the product with in shortest lead time. This behaviour sometimes create a false demand and bullwhip effect forcing companies to increase capacity, cycle and safety stock to fulfil orders.
Source: Wilding 1998
Figure 2.2 The Forrester flywheel effect
The behaviour of Forrester effect is shown in figure 2.2. Any price fluctuations for the customer could give rise to Bullwhip effect. For certain product small decrease in price would lead to high increase in demand and vice versa. Both situations create bullwhip effect. If there is a shortage in the demand side of the supply chain will create more orders in the downstream of the supply chain. This distortion will increase the safety and cycle stock levels in the downstream and will gradually shift the increase in upstream of supply chain. If the behaviour of Forrester effect is constant like; the increase and decrease of demand vary at the same rate than in real stock terms of replenishment could be constant. [Wilding 1998]
The countermeasures for bullwhip effect can be used to improve the supply chain design and reducing cost to build a competitive advantage.
Source: Jones & Towill 2000
Figure 2.3 Reducing uncertainty circle
In figure 2.3 A, shows the typical situation of supply chain where demand, supply, process and control are equally important areas where uncertainty could exists. These uncertainties could arise due to information and material variations. Figure 2.3 B, shows the implementation of lean thinking in the supply chain process. It could be implemented by eliminating non value added activities and reducing lead times between operations and controlling process at each stage in terms of lead times. The lead timing in the supply side could be reduced more than 50% if the manufacturing process is reduced and collaborate with the suppliers via partnership sourcing and redesigning process. It will increase supplier quality, reduce lead times and will achieve consistent delivery. It will make organization in better situation to be able to cope with demand variations, reducing time to market, reducing cost and reducing supply chain uncertainness. The information system is critical in counter measures of supply chain uncertainty. Most companies ensure dynamic and up-to-date information to reduce uncertainty but in addition to information supply chain design must be arranged to form a quick response to the demand variability. Creating supply chain visibility is also good method for making the information visible to everyone about the materials information. [Jones & Towill 2000]
Increasing supply chain velocity can also be used as a countermeasure to deal with bullwhip effect. Increasing supply chain velocity would decrease lead times in supply chin from end-to-end pipeline time. The pipeline time would be the time of moving materials from one end of supply chain to the other. Most common ways of improving supply chain velocity are streamlined processes, reducing lead times and non-value adding activities. [Christopher 2004].
Real world examples:
In 2001 the UPF- Thompson becomes insolvent who was the major supplier of Land Rover's best-selling model, the Discovery. There was a possibility for Rover to shut down production due to failure from supply side. Rover must have taken into consideration about its sole suppliers for a component and his financial condition due to unrelated and ill-starred foreign venture. [Christopher 2004].
Wal-Mart stores (USA) started consumer information for its supplier like P&G to reduce the barriers of information and uncertainties. Now P&G is responsible to replenish its stock at Wal-Mart stores through a Vendor Managed Inventory (VMI) system. [Jones & Towill 2000].