1

Information Technology & Information Sharing in Supply Chains

Zhi-Long ChenMichael O. Ball

Robert H. Smith School of BusinessUniversity of MarylandCollege Park, MD 20742

2

Supply Chain Management as a Competitive Weapon

It is becoming more difficult for companies to compete on cost or even product quality to seek new competitive advantages, companies are looking to innovative supply chains that can provide:– New levels of customer service especially in terms of order

promising response and reliability

– Greater product variety – extreme case customizable products

– Fast introduction of new technologies

– Fast introduction of new products may need to quickly reconfigure supply chain including supply chain partners

Great burden on IT infrastructure.

3

Importance of Fast Access to Supply Chain Information

order

dist centeravailability

factoryavailabilitylocal

availability

remote retailavailability

IT Infrastructure: provides “visibility”across global supply chain to allowsearch for product availability

4

Push and Pull Production Systems

Order raw materials

transport & storage

Produce product

Deliver product to customer/retailer

transport & storage

customer orderForecast demand

Order raw materials

transport & storage

Produce product

Deliver product to customer/retailer

transport & storage

customer order

PUSH VS PULL

5

Push-Pull Systems

product models

Manufacturingincl final assembly

suppliers

generic products and components

Manufacturing

Assemblyto

order

Push-pull boundaryinventory

forecast driven order driven

6

Assemble-to-Order

In an assemble-to-order (ATO) production environment, final product assembly is not carried out until a customer order is received.

ATO Advantages:– Greater product variety

– Fast integration of new technologies

– Lower inventory costs

Making it work requires sophisticated order promising and fulfillment systems

7

Order Promising Decision Support in an ATO Setting

Capacity Availability

Capacity Planning

Aggregate Planning

Master ProductionScheduling (MPS)

Material RequirementsPlanning (MRP)

Production

Assembly

Packaging

Shipping

Picking

x

Order promising in assemble-to-order environment:match available resources to customer orders

Resources:• raw material and component availability• production capacity

customerorders

• Order Promising Decisions: accept/reject/split order; order quantities and delivery dates• Considerations: order profitability; customer priority; customer satisfaction (reducing response/delivery time); production efficiency

8

Decision Models + Flexible IT Flexibility in Production Planning and Order Handling

4/5 4/6 4/7 4/8 4/9promise

dateFactory 1

Factory 2

4/2 new

orders

promisedateFactory 1

Factory 2

4/3 new

orders

promisedateFactory 1

Factory 2

4/4 new

orders

Flexibility can substantially improve overall business performance but it is far from commonplace!!!

9

Information Technology Challenges

• Integration of business information systems: ERP, supply chain mgmt, etc.

• Inter-company communication (vital in today’s multi-company supply chains)

• Making sophisticated business systems available to small and medium-sized firms

• Non-technical challenges: – international regulatory and standards issues– balancing need to share with privacy needs

10

Phenomenon Observed in Supply Chain

Ord

er

Siz

e

Time

CustomerDemand

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan

11

Bullwhip Effect

The bullwhip effect is a phenomenon observed in supply chains wherein the demand variability increases as one moves upstream from retailers to distributors to manufacturers

RetailersWarehouses/Distributors

Manufacturers

12

Bullwhip EffectBullwhip EffectExample: Example: P&G Diapers

13

Bullwhip is Bad

It distorts the order information & amplifies order variability.

• Impact of Bullwhip Effect:

-- Inventory: More safety stock needed

-- Customer Service: Lower service level, more likely to cause stockouts and lost sales

-- Manufacturing: Lower capacity utilization

-- Transportation: Lower utilization of transportation

-- Warehousing: More warehouse capacity neededHigher costs

14

• Root Causes: Lack of Information

1. Demand forecast updating

2. Rationing and shortage gaming

Causes of Bullwhip Effect

15

Cause 1: Demand Forecast Updating (Demand Signal Processing)

• Retailers forecast customers demand and then place orders with manufacturer• Manufacturer receives orders from retailers

Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1

Order Qt goes to upstream

CustomersMfctr.Lead time L

Demand variability gets amplified from downstream to upstream!

- Commonly, the variability of Q is 2 to 15 times the variability of D

Retailers

16

Cause 2: Rationing and Shortage Gaming

• As a result, customers’ orders give the supplier little information on a product’s real demand, a particularly vexing problem for new products

• When product demand exceeds supply, a manufacturer often rations its product to customers. Example:

Car ManufacturerAvailable = 200

Dealer 1

Dealer 2

Order = 100

Order = 200

Received = 67

Received = 133

Only 2/3 of the order can be fulfilled

Need = 120

Need = 180

Order = 180

Order = 270

• Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:

Car Manufacturer

Dealer 1

Dealer 2

Available = 500

Received = 180

Received = 270

17

Information Sharing to Counteract the Bullwhip

•Sharing sales and inventory data•Allocation based on past sales

2. Shortage Gaming

•Use of point-of-sale (POS) data•Electronic data interchange (EDI)•Vendor-managed inventory•Lead-time reduction

1. Demand Signal Processing

InitiativesCause of Bullwhip

18

Famous Success Story: Benetton

• Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975, Benetton had 200 stores across Italy.

• Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion.

• Many attribute Benetton’s success to successful use of communication and information technologies in their supply chain.

19

Famous Success Story: Benetton

1. Integrated Information Systems

• Global EDI network that links agents with production

and inventory information

• EDI order transmission to HQ

• EDI linkage with air carriers

• Data linked to manufacturing

2. Coordinated Planning

• Frequent review allows fast reaction

• Integrated distribution strategy

20

Information Sharing Challenges

• Build strategic partnerships between manufacturers, distributors, and retailers

• Develop effective collaborative demand forecasting methods

• Create effective mechanisms for information sharing across supply chain partners:– Technical issues

• Integrating incompatible systems• standards

– Business issues: • incentives to share• Overcoming privacy/proprietary information concerns