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Upstream Information Flow in the Supply Chain: The Case of Finnish

Manufacturers

Ogan Yigitbasioglu

M.Sc. Thesis in Accounting

The Swedish School of Economics and Business Administration

2004


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HANKEN - Swedish School of Economics and Business Administration

Department: Accounting Type of Work:Master of Science Thesis

Author:Ogan Yigitbasioglu Date:10.05.2004

Title of Thesis: UPSTREAM INFORMATION FLOW IN THE SUPPLY CHAIN:

THE CASE OF FINNISH MANUFACTURERS

Abstract:

Collaboration between trading partners to reduce uncertainties and costs in the supply chain

has become a must for many companies in this highly competitive and globalized world.

Communication technologies have matured and with the recent emergence of Collaborative

Information Systems, supply chain partners are increasingly sharing more information with

each other on parameters such as product demand, inventory and production schedules. On

the other hand, the sharing of sensitive information may lead to undesired outcomes such as

information leakage and hold-up costs. Despite this common trend and risks, little is known

about how buyers and suppliers in the supply chain approach this issue, particularly on how

they decide what information to share with partners. Therefore, the objective of this thesis is

to identify the factors that influence Finnish manufacturers decisions as buyers on how much

information to share with suppliers. The thesis also aims to determine the extent and intensity

of information provided to suppliers along with whether companies have a formal policy

regarding this issue.

A questionnaire was sent to manufacturers in Finland to find out among others how relevant

the factors identified in the theoretical part of the thesis are in affecting buyers decisions.

According to the results, buyers in the Finnish manufacturing industry are fairly transparent

with respect to the extent of information they provide to their suppliers, especially on

forecasted demand for their products. Furthermore, transaction specific and relation specific

factors are considered to be most relevant whereas supplier specific and suppliers market

specific factors are found not to be that relevant. Results also show that only a few companies

have a formal methodology for this purpose despite the fact that one third of the companies

are admitting that they are at risk because of information known to their suppliers.

Keywords: communication technologies, Supply Change Management, collaboration,

integration, Collaborative Information Systems, ERP, JIT, VMI, ECR, CPFR, APO, trust

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Table of Contents

Table of Contents.. iii

List of Figures vii

List of Tables. viii

1. Introduction. 1

1.1 Background on Collaboration.. 1

1.2 Research Objective.. 2

1.3 Structure of the Thesis. 3

2. Enterprise Applications.. 5

2.1 Objective and Structure 5

2.2 Production and Resource Planning... 5

2.3 Materials Requirement Planning...6

2.4 Manufacturing Resource Planning 8

2.5 Enterprise Resource Planning Systems. 9

2.6 Summary and Conclusion of this Chapter 13

3. Communication Technologies Enabling Integration and Collaboration15


3.2 Electronic Data Interchange. 15

3.3 Extensible Markup Language (XML).. 17

3.4 Web services. 20

3.5 Electronic Business XML. 24


4. Supply Chain Management Practices and Inter-enterprise Applications. 28


4.2 Supply Chain Management (SCM).. 28

4.3 Just-In-Time. 32

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4.4 Efficient Consumer Response.. 33

4.5 Advanced Planning and Scheduling 35

4.6 Business Process Optimisation 37

4.7 Vendor Managed Inventory. 38

4.8 Collaborative Planning Forecasting and Replenishment. 39

4.9 Summary and Conclusion of this Chapter... 43

5. Supplier Relationship Management.. 44


5.2 Supplier Relationship Management (SRM). 44

5.2.1 Supplier Selection and Performance Measurement. 45

5.3 SRM Solutions.. 48

5.3.1 Manugistics SRM.48

5.3.2 ORACLE SCM 49

5.3.3 PeopleSoft SRM.. 50

5.3.4 SAP SCM 52

5.4 Main Features of SRM.. 54

5.5 Implications of SRM and SCM on the degree of Information Sharing 55

5.5.1 Collaborative Supply Planning 55

5.5.2 Product and Product Design.58

5.6 Summary and Conclusion of this Chapter.61

6. The Economics of Collaboration 62

6.1 Objective and Structure.....................................................................................62

6.2 The Firm............................................................................................................62

6.3 Asset Specificity................................................................................................64

6.4 Product Innovation and the Role of Information.............................................. 66

6.5 Contracts........................................................................................................... 67

6.6 Strategic Core................................................................................................... 69

6.7 Efficient Boundaries of the Firm...................................................................... 70


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7. Previous Research 74

7.1 Objective and Structure.74

7.2 Previous Research. 74

7.2.1 Benefits of Collaboration 74

7.2.2 Barriers to Collaboration: Trust and Risk 75

7.2.3 The Case Study of Sainsburry .76

7.2.4 Upstream Information Flow 76

7.2.5 Supplier Selection 77


8.Factors Affecting Collaboration. 80


8.2 Factors Affecting Collaboration .. 80

8.2.1 Factors Related to Supplier's Characteristics... 80

8.2.2 Factors Related to Supplier's Market .. 85

8.2.3 Transaction Specific Factors 86

8.2.4 Factors Related to Product's Characteristics 88

8.2.5 Factors related to Buyer's Products. 88

8.2.6 Relational Factors 89

8.3 Collaboration as a Function of Factors. 91


9. Research Methodology 94

9.1 Objective and Structure.94

9.2 Research Methodology..94

9.2.1 Sample..94

9.2.2 Survey.. 96

9.3 Research Results... 99

9.3.1 Company Information and Suppliers... 99

9.3.2 Information provided to suppliers 102

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9.3.3 Relevance of factors for upstream information flow.. 104

9.3.4 Decision Process/Method 113

9.4 A Critical Evaluation of the Research.. 117

9.4.1 Statistical Methods.. 117

9.4.2 Research Bias.. 118


10. Conclusion.. 120

10.1 Objective and Structure...120

10.2 Conclusion.. 120

10.3 Validity and Reliability... 123

10.4 Recommendations for Further Research. 124

References.... 125

Appendix: The Questionnaire.... 133

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List of Figures

Figure 1.1: The Structure of the Thesis. 3

Figure 2.1: An MRP System. 7

Figure 3.1: UDDI core data structures.. 22

Figure 3.2: businessEntity Structure diagram 23

Figure 4.1: Integrated Supply Chain. 29

Figure 5.1: Ballard Supplier Management Program. 46

Figure 5.2: Ballards Preferred Supplier Characteristics.. 47

Figure 5.3: Coupling and Information Flow. 57

Figure 5.4: Information flow on product characteristics.. 60

Figure 6.1: Economies based in the strategic core.................................................... 71

Figure 8.1: The Interaction of Factors.. 92

Figure 9.1: Sector Distribution.. 99

Figure 9.2: Firm Size Distribution..... 100

Figure 9.3: Core Suppliers. 101

Figure 9.4: Purchases from Core-suppliers 102

Figure 9.5: Upstream Information Transfer.. 103

Figure 9.6: Relevance of Supplier Specific Factors.. 105

Figure 9.7: Relevance of Factors on Supplier's Market. 106

Figure 9.8: Relevance of Transaction Specific Factors. 107

Figure 9.9: Relevance of Factors on Supplier's Products.. 109

Figure 9.10: Certainty/Uncertainty of Demand. 110

Figure 9.11: Relevance of Relational Factors 111

Figure 9.12: Method of Supplier Evaluation. 114

Figure 9.13: Methodology Design. 115

Figure 9.14: Classification Capability of the Buyer's Methodology. 116

Figure 9.15: Are buyers at risk? 117

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List of Tables

Table 2.1: Major ERP Vendors. 10

Table 2.2: ERPs main capabilities... 10Table 4.1: Main tasks of SCM.. 30

Table 5.1: Decision Criteria across Studies.. 45

Table 5.2: Features of SRM solutions... 54

Table 5.3: Collaborative Supply Chain Planning components

of Business Solutions 55

Table 5.4: Coupling... 58

Table 5.5: Collaborative Design components of business solutions. 59

Table 5.6: Coupling II 60

Table 8.1: Factors determining the trustworthiness of a company 81

Table 9.1 Sector Distribution. 100

Table 9.2: Firm Size Distribution.. 101

Table 9.3: Mean Values for Information Transfer. 103

Table 9.4: Mean Values for Supplier Specific Factors.. 106

Table 9.5: Mean Values for Factors related to Supplier's Market. 107

Table 9.6: Mean Values for Transaction Specific Factors 108

Table 9.7: Mean Values for Relational Factors. 111

Table 9.8: Mean Values of all factors 112

Table 9.9: Averages for Categories... 113

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1. Introduction

1.1 Background on Collaboration

The management of a company's relationship with its suppliers and customers is as

critical to its success as the management of its internal operations. Thus, during the recent

years, Supply Chain Management has drawn a lot of attention mostly owing to rapid

developments in Information and Communication Technologies (ICT). New technologies

like Enterprise Resource Planning systems and management practices like Collaborative

Planning promise to cut costs and increase customer satisfaction which eventually leads

to increased market share and shareholder value. In fact back in year 2000, according to

Computer Sciences Corporations' Survey with 822 executives in 26 countries, connecting

to customers, suppliers, and/or partners ranked first among all the issues relating to

information systems (CSC 2001).

Supply Chain Management has evolved over the years in the light of the ever increasing

capabilities in the ICT to include new concepts like Customer Relationship Management

and Supplier Relationship Management. While a lot of emphasis has been placed into

customer relations in the past, research and applications have been relatively poor on thesupplier side. It is only now that Supplier Relationship Management is becoming an

equally important issue. A successful Supplier Relationship Management in place can

save a great amount of money. One of the advantages is increased visibility in the supply

chain which results in lower inventory levels. Also the automation of tedious tasks like

requests for proposal leads to faster procurement execution and thus to compressed cycle

times. Costs per unit are also likely to decrease as demand consolidation across multiple

business units can be performed with an integrated system.

As technology has become ubiquitous and with the availability of off-the-shelf supply

chain software solutions, many companies are increasingly opting for integration with

external parties. As these developments are taking place, we are led to believe that the

ultimate goal of firms should be to act as one firm with full information exchnage.

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"However in the excitement about these software solutions, it is often overlooked that

creation and implementation of integrated supply chains requires tremendous resources, a

great deal of management time and energy, large organization-wide changes, huge

commitment from suppliers/partners, and sophisticated technical infrastructure" (Pant et

al. 2003). Furthermore integration also brings along new risks resulting from the

disclosure of sensitive information and not to mention that collaborative relationships are

suitable only under certain conditions depending on the market and/or the nature of the

product. Unlike in the past when collaboration was more of a strategic decision, today

collaboration and integration is at the tip of a finger. Collaboration is encouraged to firms

in order to stay competitive. In the light of these events, it is the firms that must decide

ultimately what kind of strategy to adopt; to what extent to collaborate or to share

information on each others business affairs. This study intends to find out if companies

do have competent decision mechanisms to deal with this issue, and also aims to identify

what factors are involved in these decisions. A buyers perspective is adopted to reduce

the scope and complexity of the research.

1.2 Research Objective

The objective of this thesis is to examine interorganizational collaboration mechanisms in

terms of the theoretical frameworks and applications that exist, and to find out how

Finnish manufacturing firms as buyers in the supply chain approach this issue.

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1.3 Structure of the Thesis

The thesis, as can be seen from Figure 1.1, is structured as follows:

BuyerSupplier

EnterpriseInformation

Systems: Chapter 2

SRM/SCMCollaboration and information flow between firms: Chapter 5,6

SCM (CPFR,VMI, etc.)Inter-enterprise systems:

Chapter 4

Communication Tecnologies:Chapter 3

Factors influencing collaboration:Chapter: 7, 8

EnterpriseInformation

Systems: Chapter 2

Figure 1.1: The Structure of the Thesis

Chapter 2 introduces the information systems that most companies use today to run their

businesses. Their main functions, capabilities and limitations are presented here.

Chapter 3 presents the communication technologies that enterprise information systems

use to connect to each other.

In chapter 4, Supply Chain Management (SCM) as a concept is introduced along with its

motivation and evolution. The chapter also presents the new-generation of collaborativeinter-enterprise applications that emerged out of SCM. These applications use the

communication technologies explained in chapter 3 and are mainly extensions to the

existing information systems explained in chapter 2.

Supplier Relationship Management (SRM) as a complementary approach, emphasizing

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the need for further collaboration, is presented in chapter 5 along with some examples of

applications based on SRM. This chapter also elaborates on the coupling requirements

between trading partners in terms of the types of information that needs to be exchanged

as a result of the new practices.

In chapter 6, the literature on transaction cost economics is reviewed, to understand the

motivation for integration and collaboration between firms from the theoretical

perspective.

Chapter 7 presents previous studies on collaboration and information exchange in the

supply chain.

Chapter 8 builds upon the previous chapter in so far as it identifies and discusses further

factors that may affect the degree of collaboration and information exchange between

supply chain partners.

In chapter 9, the research design is explained which includes the sampling method and

the questionnaire. The chapter also presents the data analysis and findings.

Chapter 10 evaluates the research findings and concludes the thesis.

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2. Enterprise Applications

2.1 Objective and Structure

In this chapter, I shall present the basic systems that the advanced applications of today

are based on. In section 2.2, the reader is introduced to production and resource planning

in order to understand the core activities of manufacturing firms. Section 2.3 provides

information on MRP, the very first systems that attempted to automate some of the tasks

identified in section 2.2. Sections 2.4, 2.5 introduce Manufacturing Resource Planning

(MRPII) and Enterprise Resource Planning (ERP) Systems respectively. The motivation,

key features and some of the advantages and disadvantages of these systems are

discussed.

2.2 Production and Resource Planning

Manufacturing companies buy materials to produce goods that can be sold for profit. Two

core processes involved in this activity are procurement and manufacturing. It is an

important task to coordinate the inflow of materials so that production runs smoothly. A

shortage in supplies will halt production, if the necessary buffer stocks are not available.

This will have serious implications for a company, as demand cannot be met. Loss of

sales will translate into lost profits as well as reduced liquidity, not to mention the loss of

customers. Finding the solution in higher stocks is inefficient as it drives costs up. The

other process, manufacturing, also has to be carried out appropriately. Capacity plans

must be such that resources like machinery are not overused but at the same time are kept

profitable. Furthermore, action plans for the unexpected, such as machine breakdowns,

have to be available at all times. All the above-mentioned activities require detailed

planning and calculation as well as timely and accurate data on current processes.

The second half of the 20th century witnessed rapid developments in information

technology. Enterprises benefited from the new technologies, which enhanced data

processing capabilities and brought along new data acquisition techniques such as bar

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coding. Networks connecting multiple terminals allowed the exchange of information on

various activities including logistics and production. In early 1970's, the first systems,

Materials Requirements Planning (MRP), arrived to shop floors to help the planning and

carrying out of certain tasks. These systems have then evolved into becoming the

complex information systems of today, used for the efficient management of enterprises

as well as enabling collaboration among them.

2.3 Materials Requirement Planning (MRP)

MRP emerged in the early 1970's as a software application to address inventory and

scheduling issues in manufacturing. It was the first of its kind as a system that applied

already known concepts such as order-point methods. MRP addresses questions likewhich materials and components are needed, in what quantities and when. The system

consists of a set of logically related procedures and decision rules which uses as inputs

the demand information from the master production schedule (MPS), the inventory

status, and the product composition information (the bill of materials - BOM). The MPS

is a time phased production plan containing actual customer orders and forecasted

demand and is the driver of the entire system. Figure 2.1 illustrates an MRP system.

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Outputs andReports

MRPprogram

Bill ofmaterials

file

InventoryStatus File

Master

ProductionSchedule

Customerorders

Demandforecasts

Figure 2.1: An MRP System (Coyle et al 2003, 252)

From the inputs, the system determines (1) quantities the company should order and

when, (2) the need to expedite or reschedule arrival dates or needed products and (3) the

canceled need for products. Thus, changes in customer requirements are easily dealt withsuch a system as production and purchase plans are automatically revised when the MPS

changes.

Among the advantages of the system are its capability to maintain a reasonable amount of

safety stock and to minimize or eliminate inventories whenever possible. MRP -based

systems can also identify process problems and potential supply chain disruptions long

before they occur and take necessary corrective actions (Coyle et al. 2003, 255).

The drawbacks of MRP lie mainly in its assumptions of infinite capacity and fixed lead

times.

By late 1970's companies realized that information in an MRP could be also utilized in

other units of a business, which led to the development of MRP II.

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2.4 Manufacturing Resource Planning (MRP II)

MRP II includes all the functionalities of an MRP and have the following added

capabilities (University of Cambridge 2003):

Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates

the feedback from previous run, which is the work already progressed on the shop floor.

This helps the system to regularly update all the levels of the schedule.

Resource Scheduling: During scheduling, the system also takes into account the plant

and equipment required to convert raw materials into finished goods. This is also the

reason why the initials now mean Manufacturing Resource Planning. Thus capacity is anintegral part of the system unlike in MRP, however it is only considered after scheduling

has been done. Due to this procedure, it may for example turn out that insufficient time

was allowed within the MRP schedule for the individual operations to be completed.

Batching: Alsobatching needs to be incorporated into the system if resources need to be

scheduled. 'Lot for Lot', ' Economic Batch Quantity', 'Part Period Cover' are the three

types of batching rules that are widely used by many software packages.

Lot for Lot: In this scheme orders for materials exactly match production plans.

EBQ: The Economic Batch Quantity is a method to balance the holding cost with

the set up cost for production.

Part Period Cover: Here, batches are made to cover a fixed period of demand such

as a week.

Software Extension Programs: A number of software extensions are designed and are

available for MRP II to help the scheduling procedure. The most important is Rough Cut

Capacity Planning (RCCP). This was an attempt to match the order load to the capacity

available by pushing orders from overload periods to periods of underload.

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MRP II helps management to use company resources more efficiently by providing

information based on the production plan to all the following functional areas or units:

Purchasing - purchase orders

Production - production scheduling and control, inventory control, capacity planning

Finance - financial resources needed for material, labor, overhead etc.

Accounting - actual cash flow projections, production costs, etc.

MRP II is also capable of making "what if" analysis. A production manager can for

example see the impact of changing the MPS on the purchasing requirements or capacity

usage. Thus, planning for unexpected events, like machine breakdowns, can be done

more realistically.

Although, a more superior system than MRP, it also has limited capability and flexibility.

Like MRP, it also assumes fixed lead times and similarly batch sizing rules are fixed.

Also the system was far too rigid to implement it across multiple locations and

production plants. Hence, the need for a more integrated and scalable system gave way to

the development of enterprise resource planning (ERP) system in the early 1990's.

2.5 Enterprise Resource Planning (ERP) Systems

ERP systems are large, complex and configurable softwares that integrate disparate

information systems into a single system. It enhances decision-making as the system

retrieves data in real time for analysis from its various modules. ERP systems are widely

used today and form the basis of many company-wide information systems. The leading

ERP vendor is SAP with a market share of 25% in 2002 (Midrangeserver 2003). Table

2.1 illustrates the major ERP vendors for large organizations and their market shares.

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ERP

Vendors

Market

Share

SAP 25,1

Oracle 7

PeopleSoft 6,5

Sage 5,4

Microsoft 4,9

Others 51,1

Table 2.1: Major ERP Vendors (Midrangeserver 2003)

To explain the features and capabilities of an ERP system, it is useful to take an example:

SAP's ERP system. The SAP R/3 was released in 1992. Since then, SAP added new

functionalities to its product to become now the SAP R/3 Enterprise. SAP R/3 is an

important building block of the mySAP business suite family of applications. SAP R/3's

main modules are presented below to illustrate the capabilities of an ERP system

Module Function(s)

Sales and Distribution (SD) Supports sales and distribution activities, with

functions for pricing, order processing, and on-time

delivery. It has a direct interface with the MM and

PP modules that enables the system to check

customer credit, materials and capacity to meet

demand. When approved, orders are executed and

billed automatically.

Materials Management (MM) Supports the purchasing process through automated

supplier evaluation and integrated invoiceverification. Procurement and warehousing costs are

lowered with accurate inventory and warehouse

management.

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Module Function(s)

Production Planning (PP) This module supports production planning,

execution of manufacturing processes, analysis and

control. Different manufacturing processes

including repetitive, make to order, assemble to

order and make to stock production are supported.

Financial Accounting (FI) Collects data relevant to financial accounting into

an integrated General Ledger. It provides

comprehensive and consolidated financial reports

that give an up to the minute "snapshot" of the

enterprise.

Controlling (CO) This module provides a set of planning and control

tools for enterprise control systems.

Treasury (TR) A module for financial management to ensure

liquidity and minimize risk.

Enterprise Controlling (EC) It continuously monitors metrics and performance

indicators on the basis of specially prepared

management information

Investment Management (IM) Offers integrated management of investment

projects from planning through execution to

settlement. Also pre-investment analysis and

depreciation simulations are provided.

Plant Maintenance and Service

(PM)

The planning, control and processing of scheduled

maintenance, inspection, special maintenance and

service management availability of operational

systems including plants and equipment delivered to

customers is thereby ensured.

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Module Function(s)

Quality Management (QM) Monitors, manages and tracks all processes relevant

to quality assurance. Inspection and corrective

measured are initiated along the supply chain

through this module.

Project System (PS) All phases of a project is coordinated and controlled

in direct coordination with Purchasing and Control,

from quotation to design and approval, to resource

management and cost settlement.

Human Resources (HR) Supports the management of human resources and

streamlines HR transactions.

Table 2.2: ERPs main capabilities (Stanford 2003)

Technological novelties and characteristics of ERP systems include the move to

relational database management systems (RDMS), the use of graphical user interfaces

(GUI), open systems and client-server architecture.

ERP systems are implemented based on a business process reference model. The model is

developed by the ERP vendor and incorporates best practices for that particular industry.

Often, organizations need to re-engineer their business processes in order to align them

with those of the software. Organizational structures may also mismatch with the

organizational structure implicitly promoted in the reference model. Thus ERP projects

become more complex when business processes must be re-engineered and when

softwares have to be reconfigured and modified to fit the organization.

During the 90's, many large enterprises implemented ERP systems. However, the

implementation of ERP systems seldom ran smoothly and indeed, a considerable number

of projects have failed in the past leading to firms bankruptcies in the worst case. ERP

projects may last up to several years and usually cost millions of dollars. Thus, a

successful project requires the long-term commitment of higher management, sufficient

resources and time.

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ERP systems have disadvantages. They are designed to record events that have already

occurred. The lack of forward visibility limits their capability of making intelligent

decision-making. Thus, ERP systems are relatively inflexible in the face of

environmental changes.

ERP systems are continuously evolving to become more open, interoperable and to

include more advanced features. SAP, for example, incorporates new technologies such

as Java, Extensible Markup Language (XML), Light Weight Directory Access Control

Protocol (LDAP) and Wireless Markup Language (WML) for interoperability with

heterogeneous systems. Also many components and extensions to SAP R/3 Enterprise are

available such as the

Advanced Planner and Optimizer (APO), Supplier Relationship Management (SRM) and

Business Information Warehouse (BW). APO and SRM will be discussed in chapter 4

and 5 respectively as they enable collaboration among supply chain partners.

2.6 Summary and Conclusion of this Chapter

Companies need to make complex plans and calculations related to purchasing and

manufacturing. These plans and calculations do also require regular updates when for

example changes in customer orders or manufacturing capacity occur. Hence, this chapter

introduced the reader to MRP and MRP II, the very first information systems that

attempted to automate some of the tasks associated with manufacturing. MRP and the

more superiour system, MRP II, were widely used until the 90s when they were replaced

by ERP systems for their limitations and weaknesses. ERP systems, which integrate

disparate information systems into a single system, were widely adopted in the 90s andnow constitute the main building block of a companies information system. Thus their

features and capabilities were presented in this chapter. ERP systems can be reconfigured

so that new and more 'intelligent' systems or modules, such as APS, which will be

discussed in section 4.5, can be added to them. Indeed, with the emergence of the Internet

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and the communication technologies discussed in the next chapter, these systems have

become more capable. With increased connectivity, it has become much easier to

exchange information and therefore to collaborate with partners.

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3. Communication Technologies Enabling Integration and

Collaboration


Once enterprise systems were in place, it became necessary to make systems talk to each

other. Communication between disparate systems was required for both, intra-

organizational and inter-organizational purposes. For example the systems of a bank's

branches needed to talk to each other or talk to the bank's main server. Interorganizational

communication on the other hand was required for eliminating paper-work and speeding

up certain tasks such as ordering.

This chapter looks at the evolution of the different technologies facilitating

communication between distant computers. A popular and pre-Internet-era technology,

the Electronic Data Interchange (EDI) is discussed in section 3.2. In section 3.3, the

Extensible Markup Language (XML) is explained on which the Web services and

electronic business XML (ebXML) frameworks are based on. These two frameworks are

emerging as the two dominant technologies for Business-to-Business (B2B)

communication, integration and collaboration and are therefore presented in sections 3.4

and 3.5 respectively.

3.2 Electronic Data Interchange (EDI)

EDI is the organization-to-organization, computer-to-computer exchange of business data

in a structured, machine-processable format (Coyle et al. 2003, 464). It eliminates

paperwork related to various business processes such as, purchase orders, pricing, order

status, scheduling, shipping, receiving, invoice payments, contracts, production data,

marketing, sales and others. It also eliminates multiple data entry and improves the speed

and accuracy of information. The need for EDI was realized in the 1960's as a way to

reduce expensive communication means, time consuming paperwork and thus to remain

competitive in the industry. To achieve this objective, a standard focusing on the content

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of the message, rather than the method of its transmission was then developed. The

Transport Data Coordinating Community (TDCC) in charge of this effort created the so-

called transaction sets for this purpose. They consist of several data segments that specify

the data elements like price, model number and carrier code. This followed American

National Standards Institute's authorization of another committee, the Accredited

Standards Committee (ASC) X-12, to develop a standard between trading partners based

on the TDCC structure in 1979. The internationalization of the EDI stationary was

completed in 1986 with UN's involvement to develop the standard called United Nations

Electronic Data Interchange for Administration, Commerce, and Transport

(UN/EDIFACT).

To use EDI, trading partners needed a special software and means for electronic

communication. Regarding electronic communication, companies had two options: to use

either direct transmission, that is, a dial-up or a dedicated line to directly connect to a

partners computer, or alternatively, a Value Added Network (VAN). VAN involved a

third party to provide the means of communication like Sonera and therefore was more

reliable but more expensive. VAN's however allowed to use different computer systems

between trading partners through a method called protocol conversion. Also, VAN's had

the advantage of reducing phone bills as the amount of data transmitted was charged

instead of the transmission distance.

EDI works by first translating (EDI Translation software) the document to be sent into a

standard format. Next, the connection is established, usually by dialing the phone number

of the VAN. The message is then sent to an electronic mailbox on the VAN. From the

electronic mailbox, the receiver's software will retrieve the file, interpret the message,

check for compliance with EDI standards and store it. Also a 'Functional Acknowledge' is

sent to the sender to inform if the message was received and if it complies with EDI

standards. Now, the message can be translated to produce a hard copy of the message or

transformed into a different format for further processing using the translation software.

A great disadvantage of using EDI was that it was very expensive to implement and

operate. Today, it can cost between 50.000 and 2 million US dollars to implement, which

represents a significant cost for especially small to medium sized businesses (IT Portal,

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2003). Also trading partner agreements, vendor agreements, the role of lawyers and

auditors and security are some of the issues that add complexity to its adoption, not to

mention the adjustment time and skilled human resources required. The translation of

company data structures into EDI standards may also require manual intervention in the

process. Thus, its success is a matter of management support and commitment.

EDI is and was widely used in the past, as it was the only solution for fast data

transmission and processing. It compressed cycle times and reduced costs associated with

communication and paper. However the emergence of a much cheaper, flexible and

ubiquitous technology, the Internet, has reduced its popularity throughout the years. The

Extensible Markup Language (XML) was developed in the late 1990's to facilitate data

transmission over the Internet. XML will be covered in the next section.

3.3 Extensible Markup Language (XML)

XML is a protocol for containing and managing information on the Internet. It is a

family of technologies that can do everything from formatting documents to filtering

data (Ray 2001, 2). Despite its name, XML is not a markup language like the Hyper

Text Markup Language (HTML). It provides a framework -the rules and the tools for

creating your own markup (Fitzgerald 2001, 20). A markup language is a set of

symbols that can be placed in the text of a document that enhances to demarcate and label

the parts of a document (Ray 2003, 2).

To create an XML document, another file called, an XML Schema, is required. The

Schema defines all the rules that the document must adhere to and validates the

document. Once, the document is validated, a stylesheet is applied on the document so as

to output a desired format. Thus the content of the file is kept separately from its

presentation. With this feature, it is easier to reuse and refit the content for various

needs (Fitzgerald 2001, 37).

XML evolved mainly out of two markup languages, the Standard Generalized Markup

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Language (SGML) and HTML. SGML was developed in the 1970's and became a

standard in 1980. Although, powerful and comprehensive, it never enjoyed broad

popularity due to its complexity (Fitzgerald 2001, 17). Consequently, HTML was

developed in the early 1990's as a very easy to understand, but at the same time,

inflexible, markup language in CERN. Despite HTML's success, Web's flourishment in

the 1990's demanded a more complex language to structure, store and transfer

information over the Web. Thus work on XML began in 1996 and continued until its

standardization in 1998 by the World Wide Web Consortium (W3C), a body formed to

standardize web-related technologies. Below are XML's features and advantages:

XML is free

No proprietary rights exist over XML, so anyone can use XML for free.

XML is structured

As text is expressed in a clear and logical way, softwares and humans can

organize, find and interpret documents and data quickly and accurately.

XML is the basis for a file format

As XML is so well structured, XML documents can be shared between entirelydifferent computer and software systems. This will make XML, the backbone of

electronic commerce worldwide.

XML is open

XML recommendations are managed by W3C. Unlike private firms, W3C shares

all drafts of XML-related working papers so that the community stays up-to-date

with future enhancements and prepare accordingly.

XML is nonproprietary

It is not owned by a proprietary company or tied to a specific software or

hardware.

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XML is platform independent

Although some of the applications to create XML may not be platform

independent, XML itself is.

(Fitzgerald 2001, 20)

Also, XML compared to previous inter-enterprise communication technologies like EDI

has many advantages. XML is web based and therefore much cheaper to use compared to

VAN's. It is also in a human readable format, and new applications and businesses can be

easily added to the network (Remarkable eBusiness 2002). It is anticipated that XML will

not replace EDI entirely in the short run due to heavy investments in EDI infrastructure

but the superiority of XML is undeniable.

There are also translation softwares available on the market such as Vitria's

BusinessWare EDI module that convert EDI documents into XML and vice versa (Vitria

2003). The conversion is required when, for example, customer's online orders are

translated into purchasing orders by the vendor and sent to its supply chain partners using

the existing EDI infrastructure.

Due to the above-mentioned characteristics of XML, many businesses, today, use XML

and XML based technologies such as web services for inter-enterprise communication.

However XML has its own problems, mainly because of its high degree of flexibility.

Today, there is an abundance of XML based frameworks (vocabularies) that compete

with each other to become the standard for B2B communication. For XML messages to

be interpreted by other businesses, the companies have to agree on an XML-based B2B

standard (mainly for schemas), which defines the document formats, allowable

information and process descriptions (Rautajoki, T 2003, 26). So far, common standards

mostly exist in vertical industries. One example is RosettaNet, which is popular among

major information technology, electronic components, and semiconductor manufacturing

companies. Also the Open Travel Alliance's Standards (travel industry) enjoyed

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somewhat broader adoption (Virevesi, J 2003). These standards however, only serve

specific industries and a cross-industry standard must be in place to facilitate global

communication. Web services and ebXML are two standards that are attempting to

achieve this objective during the last few years.

3.4 Web services

Web services are software programs that use XML to exchange information with other

software via common Internet protocols (Deitel, DuWaldt & Trees 2003, 23). These

softwares can send requests and possibly respond to other computers' requests. Although

the basic standards and ideas had existed for several years, Hewlett-Packard was the first

software vendor to introduce the concept of web services with its e-Speak product in1999 (Deitel et al. 2003).

Web services can perform a great variety of tasks, often referred to as methods or

functions. A financial application for example might invoke a function on a remote

computer to return the current value of a certain stock.

The big advantage of web services is that they allow applications written in different

programming languages and on different platforms to communicate. This is possible

through the use of common XML standards. There had also been earlier attempts to

facilitate the communication of applications between disparate systems. OMG's Common

Object Request Broker Architecture (CORBA) and Microsoft's Distributed Component

Object Model (DCOM) were for example two technologies that allowed two applications

running in different locations to communicate (Deitel et al. 2003). The drawbacks of

these technologies were that they were proprietary and not interoperable.

Three technologies that are all XML-based constitute the core infrastructure of Web

services (Virevesi, J 2003). The Simple Object Access Protocol (SOAP), Web Services

Description Language and Universal Description, Discover and Integration (UDDI) are

the technologies that deliver Web services.

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The purpose of SOAP is to enable data transfer between systems distributed over the

network (Deitel et al. 2003, 33). A SOAP message is sent by the requesting application

to invoke a method provided by a web service. The Web service uses the information

contained in the message to perform the function and may respond via another SOAP

message. SOAP consists of a set of standardized XML schemas and the messages have

three components: an envelope, header and body. The envelope wraps the header and

body elements; the header is an optional element that provides information regarding

topics such as security and routing; the body contains application specific data that is

being communicated (Deitel et al. 2003). SOAP is layered over an Internet protocol such

as HTTP or SMTP.

WSDL is an XML based language through which a Web service can convey to other

applications the methods that the service provides and how those methods can be

accessed (Deitel et al. 2003, 34). WSDL documents make Web services self-describing

which saves a lot of effort for the developers of applications aimed at using the services.

A WSDL document includes information regarding a particular Web service's

capabilities, location, the kind of messages it can send and receive, what Internet

protocols to use to connect and the information required to invoke a function. Although,

WSDL documents are complex, their generation is simple as many Web services

development tools generate them automatically when a Web service is developed.

UDDI is used to publish and locate web services on a network. Companies can use a

standard XML based format to describe their electronic capabilities and business

processes. The specification also provides a standardized method of registering and

locating the descriptions on a network such as the Internet (Deitel et al. 2003). Registries

maybe public or private, allowing only approved partners to access them. The largest and

most comprehensive public registry is the UDDI Business Registry (UDDI), which was

developed to facilitate the formation of new business relationships (Deitel et al. 2003).

UDDI's contain information in three levels of detail: white -, yellow - and green pages.

White pages convey the least information, that is, their contact information and a textual

description of themselves. Yellow pages provide classification information and details on

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companies' electronic capabilities. Green pages list technical data relating to services and

business processes (Deitel et al. 2003).

UDDI V3, the latest specification consists of four core data structures as shown in Figure

3.1

Figure 3.1: UDDI core data structures (UDDI 2004)

The data structures contain information to describe the business, its capabilities and the

method of accessing its services. The businessEntity component includes information

about the type of business it is. The structure of a businessEntity is shown in Figure 3.2

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Figure 3.2: businessEntity Structure diagram (UDDI 2004)

As the Figure illustrates, the businessEntity contains data on a business, its name,

description, contacts and so on. The description however does not contain any

information about the trustworthiness of an entity. Trust could be conveyed through

standardized, common notations such as ISO 9000, or through a common rankingscheme.

For the deployment, management and execution of Web services, two distinct

architectures and technologies are competing for dominance. These are the Microsoft

.NET and Java Enterprise Edition (J2EE) application frameworks. They both support the

Web services standards and provide the platforms, tools, and programming environments

for their development and integration. The most striking difference between these

application frameworks is in their support for operating systems and programming

languages. The .NET Framework supports multiple languages such as C#, C++, Cobol

and Perl but runs only on Microsoft Windows Operating Systems. In contrast, J2EE can

run on any platform but supports only Java. Furthermore, whereas J2EE is an open

standard, .Net is a proprietary technology that is more tightly coupled and optimized to

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run with Microsoft tools. It is anticipated that the two platforms will co-exist and that

neither of them will be the dominant technology because of their differences (Virevesi. J.

2003).

Web services are a promising new technology. However, because it is new, a set of issues

plague its widely adoption at this stage. First of all, the standards that Web services are

based on, SOAP, WSDL and UDDI, are still in development. So far, only SOAP has

managed to become the World Wide Web Consortium's (W3C) recommendation. Also

intellectual property claims by Microsoft and IBM, who significantly contributed to the

development of SOAP and UDDI threaten the free use of the technology. Other barriers

to adoption is the lack of security standards for Web services as well as their slowness for

high-performance (Deitel et al. 2003). Finally, the framework is considered to be "light-

weight", as it leaves some of the technological elements open and to be solved by the

implementer (Virevesi. J. 2003). Alternatively, ebXML provides a more sophisticated

and robust mechanism for complex business collaboration services which is presented in

the next section.

3.5 Electronic Business XML (ebXML)

ebXML is an open infrastructure that has similar objectives to those of web services.

ebXML provides companies with a standard method to exchange business messages,

conduct trading relationships, communicate data in common terms and define and

register business processes (ebXML 2003, 1).

Work on ebXML began in 1999, a joint effort by Organization for the Advancement of

Structured Information Standards (OASIS) and the United Nations Center for Trade

Facilitation and Electronic Business (UN/CEFACT).

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The project delivered five layers of substantive data specifications, including XML

standards for:

Business processes

Core data components

Collaboration protocol agreements

Messaging

Registries and repositories (ebXML 2003)

The Business processes specification provides a generic metamodel for businesses to

describe their processes. The specification, in its core, determines the trading partners'

role in the transaction, the exchanged documents, their sequence and the information

contained in them (Virevesi, J 2003).

The data items that are exchanged between businesses are referred to as core data

components. Data items are, typically, frequently used terms such as invoice. The term

invoice may however have a different meaning across industries. In one industry, invoice

may relate to a statement of charges, and in another, may be used to describe

international shipping (Virevesi, J 2003). Thus, this ebXML specification aims to

identify a set of common semantics to be used between businesses so as to enhance

information interoperability. Therefore businesses can re-use them across multiple

business situations without the risk of causing ambiguity.

Collaboration protocol agreements (CPA) seek to automate much of the process of

discovering and establishing partnerships, especially in situations where the businesses

have not collaborated before (Virevesi, J 2003). A CPA is created through a

Collaboration Protocol Profile (CPP). This is an XML document that describes

businesses, both, technological and business capabilities and is stored in an ebXML

repository. From repositories, potential trading partners can search for these documents

and establish trading relationships. Once parties agree on the terms to do e-business, the

CPA becomes legally binding.

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Messaging refers to a secure and reliable method of sending information over a network.

Technical issues relating to the packaging, transferring and routing of messages over the

web are addressed in this specification. The technology is based on SOAP but it provides

higher security through the use of strong cryptographic techniques and digital signatures.

Registries and repositories provide a way for potential business partners to submit and

search a variety of documents with the intention of enabling collaboration. Documents

relating to business capabilities of businesses including CPA's, can be queried in order to

find a business partner.

The Registry Information Model of ebXML dictates all classes and attributes a registry

may have. Within the model, "slots" are used to add arbitrary attributes to RegistryObject

instances (ebXML 2004). This feature allows companies to add arbitrary attributes to

their descriptions. Thus, certain attributes could be used here to convey trust such as

certificates and standards (e.g. ISO 9000). A common notation for such attributes must be

in place however in order to make queries involving such attributes more efficient.

The registry can be also be used for the submissions of schemas that define industry-wide

messages and vocabularies as well as industry-specific business models (Virevesi, J

2003).

Overall, ebXML offers a more comprehensive and reliable framework compared to Web

services. It takes collaboration to a higher level through valuing business process

semantics and document content standardization as fundamental enablers of successful

business collaborations (Virevesi, J 2003). Finally, ebXML is a vendor independent

technology (unlike Microsofts BizTalk framework for XML) which functions across all

platforms and therefore seeks to achieve maximum interoperability also at the technical

level. Also, the recent approval of the four ebXML OASIS Standards (which now

includes the ISO 1500 annotation) by the International Standards Organization (ISO) is

likely to have a reinforcing effect on the effort to promote an open and reliable

framework for communication and collaboration in the future.

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This chapter focused on the communication technologies used today to connect disparate

information systems together. EDI is the oldest among them and is still being widely

used. However XML and XML based frameworks such as Web services and ebXML that

use the Internet are becoming more popular. New features that EDI lacks include the

automation of searching and finding of new business partners. For this purpose, registries

and repositories (specific databases) with descriptions of businesses can be queried

according to desired criteria. Between the two frameworks, ebXML is more advanced

and could allow attributes that can convey a degree of trust to a potential business

partner. EDI compared to XML as a technology is more mature but also more expensive

to use. XML on the other hand is much cheaper to use as it utilizes the existing Internetinfrastructure but there is still not a worldwide common standard for XML. This is due to

XML's overflexibility from which it draws its power at the same time. Without a

dominant standard however, some firms are reluctant to invest in XML.

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4. Supply Chain Management Practices and Inter-enterprise

Applications


Theories looking beyond companies boundaries to optimize the entire value chain have

started to emerge in the 60's(Coyle, Bardi, Langley 2003). The theories have stressed the

importance of collaboration and information sharing within a supply chain. These ideas

and theories have evolved throughout the years to become a concept known as Supply

Chain Management (SCM).

The objective of this chapter is to present the milestones in the evolution of collaboration

in the supply chain. Thus, this chapter is going to present SCM as a management

philosophy and the theoretical frameworks and applications that emerged out of it.

The chapter is structured in the following manner: section 4.2 introduces SCM. In

Section 4.3, JIT is explained. ECR, as a movement that advocated collaboration is

presented in section 4.4. Advanced Planning and Scheduling (APS), as the first truly

enterprise software solution for SCM is explained in section 4.5. Sections 4.6, 4.7, and

4.8 focus on BPO, VMI and CPFR respectively, as further SCM approaches and present

some of the applications based on them.

4.2 Supply Chain Management

Supply Chain Management (SCM) as a concept came into the domain of management in

the early 1990's in the face of increasing competition. Coyle et al. (2003) defines a supply

chain as "an extended enterprise that crosses over the boundaries of individual firms to

span the logistical related activities of all the companies involved in the supply chain.

This extended enterprise attempts to execute or implement a coordinated, two-way flow

of goods/services, information, and financials (especially cash)". The main idea here is to

take into account all the activities in the supply chain, beginning with the supply of raw

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materials all the way to the ultimate consumer, rather than at the organizational level.

Figure 4.1 depicts the structure of a simple supply chain.

Vendors Wholesalers Manufacturers Wholesalers Retailers/Customers

Product/Services

Information

Finances

Figure 4.1: Integrated Supply Chain (Coyle et al., 2003, 18)

Suppliers provide raw materials to wholesalers, which keep them in stock and sell them

later to manufacturers. Manufacturers use these materials to produce end products, which

are then transported to wholesalers. Finally, the goods are distributed to retailers, who

then sell them to end customers. In reality, supply chains are more complex as multipleconnections between nodes exist and the number of intermediaries may be

overwhelming.

The flow of goods and services has always been the main focus of management.

Customers expect their orders to be delivered on time and without damage. Its flow is

two-way as the more products become sophisticated and customized, the more goods are

returned and thus the importance of reverse logistics is hereby indicated. The information

flow plays a vital role in the success of supply chain management. Prior to this concept,

information flow was viewed as flowing to the opposite direction of products. Usually

this information consisted of only sales data and/or demand. As information was not

shared, demand data became only available to adjacent nodes in the supply chain. With

the new approach, information on typically sales become available in real time to all the

involved parties so that uncertainties in the supply chain can be reduced and production

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along with logistics can be arranged more properly. The third flow -financials indicates

the impact of supply chain management on cash flows, which are now much faster as it

leads to supply chain compression and faster order cycle times. A good example of this

phenomenon is Dell, the computer manufacturer. It keeps 4 days of supplies in its

inventory (Dell 2003). This development has a tremendous impact on profits and the cost

of doing business.

The goal of supply chain management is to meet customer demand for customized

products with minimum lead-time and cost. To achieve this objective, visibility in the

supply chain has to be high. Information on demand forecasts and production plans need

to be shared so as to reduce bullwhip effects: Relatively small fluctuations in the actual

demand among consumers are magnified through the logistics chain and cause larger

amplifications, with consequent negative effects on the planning of the production and

logistics systems in the earlier stages (Knolmayer, Mertens & Zeier 2002, 7). The Beer

Game developed in the 1960's by MIT does also demonstrate the importance of an

integrated approach to managing the supply chain; it particularly demonstrates the value

of sharing information across various supply chain components (Li 2002). The game,

later also computerized, simulates the supply chain for beer manufacture and

demonstrates the systems' dynamics; how the patterns we create in our relations with the

world around us sometimes give unexpected and undesired results (MASystems 2003).

Through such coordination, the supply chain can be entirely optimized and unnecessary

stocks eliminated. Table 4.1 sums up the main tasks of Supply Chain Management:

Orientation Strategic Operative

Internal Focus Strategies for Product and

process development

Strategies for providing

products and services

Make or buy decisions

Internal Quality assurance

Intra-plant transport

Intra-plant storage

Determination of ordering

quantities and lot sizes

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Orientation Strategic Operative

Quality management Optimization of schedules

and sequences

Intra-plant IS for planning

and controlling of order

management

External Focus Development of an SCM

mission

Procurement and marketing

strategies

Supplier and customer

management

Recycling strategy

Definition of an SCM

controlling and

benchmarking system

Internet appearance

Research about procurement

and sales markets

Evaluation and selection of

suppliers

Sales forecasts

Control of the sales force

Dual Focus pooling of

interests

Supplier and customer

structure policies

Coordination of SCM

strategies with business

partners

Legal basis for SCM

partnership

Joint pursuit of improved

business processes

Managing the organizational

and system interfaces

Definition of communication

relationships with business

partners, paying special

attention to IS

Table 4.1: Main tasks of SCM (Knolmayer et al. 2002, 6)

The ultimate goal of Supply Chain Management is to operate the whole supply chain as if

it were a single organization. To achieve this goal however, information sharing does not

solely suffice. Collaboration among supply chain partners must be present in all decision

making. In general, the decisions companies and their units take are categorized as

strategical, tactical, or operational. Partners need to provide visibility in all these levels in

order to achieve a full unity. It is from this idea that the Collaboration and Forecasting

Requirement approach was initiated. This concept is explored in section 4.8.

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The developments of new management practices and needs fostered new generation of

information systems that attempt to optimize the supply chain like advanced planning and

scheduling (APS) softwares described in section 4.4.

4.3 Just-In-Time (JIT)

JIT as a management philosophy has attracted much attention since the creation of the

idea, which is credited to Kiichiro Toyota, the founder of Toyota Motor Corporation,

during the 1930's (Factorylogic 2004). JIT does not promote collaboration like SCM

explicitly but SCM is somewhat of a pre-requisite for a successful JIT implementation. I

therefore find it useful and interesting to include it in this chapter.

JIT aims to eliminate waste. Waste results when an activity adds cost without adding

value. The unnecessary moving and storing of goods are examples for such activities.

JIT, which is also known as lean production, aims to improve profits and return on

investment by reducing inventory levels. improving product quality, reducing production

and delivery lead times. In a JIT system, underutilized (excess) capacity is used instead of

buffer inventories to hedge against problems that arise (Ashland 2003). An important

concept in JIT is kanbans which is a technique based on replacing material that has been

used but has no forward visibility (Phil Robinson 2003). Thus JIT is a pull system in

contrast to for example Materials Requirements Planning (MRP), which is a pull system.

In a pull system, parts are pulled to the next production stage when they are needed

whereas in a push system, they are pushed according to the schedule. The main goal of

the JIT system is to achieve a balanced flow of parts throughout the work centers with the

minimum queues and lot sizes. In general, the JIT approach is favorable when production

processes are uniform in terms of frequency and parts and components produced. A

successful JIT system requires low set up times, flexible work force, supplier quality

assurance and better maintenance for equipment (Ashland 2003).

The implementation of JIT has become rather simple as many systems and softwares

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today allow real-time information sharing. JIT as a standalone practice does not promote

collaboration in terms of sharing information on e.g. demand forecasts for a buyer's

products. Orders of materials from suppliers are only placed when demand for the buyer's

products actually arise. Thus JIT as such differs from the other practices in this chapter in

so far as not to promoting the sharing of information between trading partners explicitly.

Lastly, it was mentioned above that supplier quality insurance is required for a successful

JIT system. Without a substantial degree of collaboration however, buyers cannot be sure

if the supplier has materials readily available whenever demanded. Thus JIT does

implicitly require SCM in order to ensure a lean flow of materials from suppliers.

4.4 Efficient Consumer Response (ECR)

ECR was initiated in 1992 as an industry-wide voluntary effort in US to improve the

supply chain in the grocery industry (FMI 2003). The movement was based on an earlier

general merchandise effort in US, the Quick Response (QR).

QR had focused on shortening the retail order cycle, which also meant lower inventory

levels. The adoption of technologies like EDI and bar codes that made data entry and

ordering easier significantly took days out of the order cycle time. Order cycles werefurther reduced through what were called "strategic partnerships," where retailers and

manufacturers would work together as a team to set up ways of achieving performance

goals that exceeded existing industry practices" (FMI 2003).

ECR uses similar methods, which is technology and collaboration, but addresses a much

wider scope of issues. These include new product introductions, item assortments and

promotions. Accurate point of sale data (POS) and other relevant information is passed

on to trading partners by EDI so that products are manufactured according to actualconsumer demand. The movement produced many reports on best practices on topics like

computer assisted ordering, direct store delivery, integrated EDI, continuous

replenishment, transportation, category management, and large-scale organizational

change.

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The ECR includes the following components:

Efficient Store Assortment - addresses how many items to carry in a category,

what type of items and in what sizes/flavors/packages, and how much space to

give to each item. This is closely linked to category management.

Efficient Replenishment - focuses on shortening and eliminating costs in the order

cycle, starting with accurate point-of-sale data. Includes efficiencies to be gained

by using continuous replenishment programs, EDI, cross docking, computer

assisted ordering and new receiving techniques.

Efficient Promotion - addresses inefficient promotional practices that tend to

inflate inventories and practices, whose effects may not be fully passed through to

consumers to influence their purchase decisions.

Efficient New Product Introduction - addresses improving the entire process of

introducing new products, which is subject to high failure rates, thereby bringing

extra costs into the system.

(FMI 2003)

ECR, as evident from its methods and objectives, takes a rather complete approach to

supply chain management. Here, collaboration between trading partners in terms of

sharing information related to e.g. sales (POS), promotions and plans is encouraged.

Therefore ECR from the outset, that is 1992, was an initiative that comes close to today's

supply chain management practices.

In so far as to how much to collaborate between trading partners, the ECR literature does

not provide any information. ECRs purpose is to improve the supply chain and therefore

promotes information exchange without bringing up issues like its risks and trust.

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4.5 Advanced Planning and Scheduling (APS)

Advanced Planning and Scheduling is a new-generation software, developed in the end of

90's. They are first of their kind because some of their components incorporate

collaboration. APS systems aim at optimizing the supply chain and have far more

capabilities than ERP systems. These capabilities are presented below (Knolmayer et al.

2002, 130):

Network Planning

Sales and Operations

Demand Planning and communication

Supply Planning

Available/Capable to promise

Distribution Planning

Manufacturing planning and scheduling

Deployment Planning

Warehouse Management

Transportation Planning and Scheduling

APS compared to an ERP system is more "intelligent" owing to its complex optimization

procedures and heuristics. The Capable to Match feature for example is a popular

heuristics, which operates with either bucket-oriented demands or individual customer

orders. It does this by taking into account order priorities and categorized sources of

supply such as stock on hand and production capacity. However, handling capacities and

warehouse and transport resources are not considered. A much more advanced function is

the Available to Promise (ATP), which investigates whether a promised delivery can be

made, and if so when. An ATP can handle very complex tasks such as (Knolmayer et al.

2002, 147):

1. An article that cannot be delivered on time may be replaced by a superior for the

same price ("upgrading").

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2. When a reservation is canceled in favor of another customer, the additional profit

from the customer order has to be weighed against any disadvantages (e.g.,

contract penalties) likely to result from the deferred delivery date for the other

order.

3. Inventory may be obtained from another warehouse; however, this results in

additional costs and may break into decentrally planned safety stocks at the

delivering location.

4. Partial deliveries from different locations are bundled to form a complete order,

with a consequent increase in cost.

5. Although a part-delivery can avoid too much disappointment for the customer,

higher overall cost results.

Other features of an APS include task specific interfaces, different levels of aggregation

and planning accuracy and mechanisms to deal with exception situations (Knolmayer et

al. 2002, 132). Another dominant feature of these systems, as in the case of SAP's

Advanced Planner and Optimizer (APO) software, is that different planning methods

operating with different time horizons (operational, tactical and strategic) are provided.

The supply chain is optimized with the help of sophisticated modeling and statistical

techniques. The system combines forecasted demand with different cost parameters in

order to generate a production and transportation plan. This involves the use of complex

algorithms and heuristics that also take into account the interdependences between the

different types of costs and between the relevant constraints.

SAP's APO possesses several features for collaboration among supply chain partners.

The Collaboration Engine serves this purpose. It contains joint forecasts and also offers a

platform where bids or bid invitations can be searched, by both, suppliers and buyers

through an interface. Overall, APS tools generate a high rate of return by enhancing

visibility of production plans and schedules, improving and speeding forecasts, and

taking real time decisions in the face of demand and supply fluctuations rather than batch

processing.

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Similarly to ECR, also the literature on APS does not give any information on the risks of

collaboration and the issue of trust. Users of APS systems however must configure their

systems to provide the most appropriate level of detail on their businesses to their

partners. To do this, they must evaluate their partners efficiently and be able to

distinguish between them.

APS systems have been very popular but enterprises soon realized that the success of

APS does also depend on the efficient functioning of all the processes involved in

delivering a product. Hence software producers eventually moved from APS tools which

mostly focus on manufacturing, distribution and transportation, to a complete set of

software or business process optimization.

4.6 Business Process Optimization (BPO)

Many software companies like SAP, Manugistics and i2 have developed and continue

developing business process optimization softwares (BPO). They use, like APS, a set of

intelligent methods and techniques to cover a variety of areas in the supply chain.

Normally, the system leverages the existing infrastructure to collect data from the

enterprise (e.g., from the ERP system). Typically, its components include the following

(Manugistics 2003):

Supply Chain Management, which includes

network design and optimization, manufacturing planning and scheduling, sales

and operations planning, fulfillment management, collaborative VMI and CPFR,

private trading networks, and logistics management

Customer Relationship Management, which includes

product configuration, pricing optimization administration, promising (Available

to Promise - ATP), fulfillment, monitoring and alerting, and settlement

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Supplier Relationship Management, which includes

collaborative design, spend analysis and optimization, strategic sourcing and

contract management, procurement execution, collaborative supply planning

As evident from above, BPO includes all aspects of a companys operations. Supply

chain management, as a topic on its own right has been covered greatly so far. Also as

Customer Relationship Management is out of the scope of this thesis, I will focus on the

supplier relationship side of the supply chain, which will be covered in chapter 5 in

detail.

4.7 Vendor Managed Inventory (VMI)

VMI is yet another concept that attempts to optimize the supply chain through increasing

collaboration in the ordering process. Normally, when a buyer needs a product, it places

an order to a supplier. With VMI, it is the supplier who decides when and how much to

order and who maintains the inventory plan. In VMI, a partnership is formed between the

supplier and buyer, in which the supplier takes care of the orders and replenishing. To

accomplish this, the supplier gets regularly information on the inventory level and sales

data of the buyer via the web or Electronic Data Interchange (EDI). Thus, when inventory

for example drops below a certain level, orders are generated automatically on behalf of

the buyer. In this case, it is the supplier who creates and manages the inventory plan.

VMI is sometimes referred to as Supplier Managed Inventory (SMI). The difference

between the two is where the software is run (Ahmed 2004). In VMI, the software

physically runs on the supplier's premises, where data relating to demand and inventory is

entered into the system. In VMI, the software is run by the buyer or a third party and to

which the supplier has access through typically a web browser.

There are many software companies that provide VMI/SMI solutions. They increasingly

come bundled or as an integral part of similar solutions like Supplier Relationship

Management and/or Supply Chain Management solutions.

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In VMI/SMI, as evident, the supplier has full information about the buyer's inventory. In

addition to that, we can presume that from the rate of inventory usage, the supplier can

make rather accurate estimates on the buyer's capacity, production schedules, logistics,

and the demand for its end products. Therefore, VMI requires a very high degree of trust

between the supplier and the buyer. How trust is formed and maintained as well as the

risks associated with VMI are not elaborated in the literature.

4.8 Collaborative Planning Forecasting and Replenishment (CPFR)

Collaborative Planning Forecasting and Replenishment (CPFR) is the term for a business

model that encourages the integration and collaboration between supply chain partners.

Its goal is to reduce the bullwhip effect resulting from uncertainties in the demand. Alsothrough more coordination among supply chain partners, it is possible to reduce costs

associated with administration. For example, the elimination of duplicated tasks such as

planning and forecasting can reduce both time and money. To achieve this objective,

suppliers and customers jointly administer information and manage processes that result

in win-win situations. The CPFR framework is also supported by the Voluntary Inter-

industry Commerce Standards, an organization that embodies the CPFR Committee.

Enterprise software providers like SAP use the Committees CPFR Voluntary

Guidelines as a principal reference source in this area (Knolmayer et al. 2002, 123).

The CPFR model is divided into three levels (planning, forecasting, and replenishment)

and comprises nine steps.

Step 1: Develop front-end agreement

In this first step, the involving parties develop the rules for the cooperation. Here,

partners exchange their expectations and define the necessary resources. To accomplish

this, the buyer and seller co-develop a general business arrangement that includes the

overall understanding and objective of the collaboration, confidentiality agreement, data

to be shared and the empowerment of resources (both actions and commitment) (CPFR

2003). Also the criteria and metrics to measure the effectiveness and success of the CPFR

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process are identified here. For example parties may set 96% retail in stock, six turns at

retail, less than 15% forecast error and less then 20% order forecast error as their

objective. The outcome of this step is a blueprint for companies to begin the collaborative

relationship or to redefine it in accordance with CPFR standard.

Step 2: Create joint business plan

In Step 2, the seller and buyer exchange information about their corporate strategies with

the goal of developing a joint business plan. Also, for every retailer/manufacturer

scenario, a partnership strategy with all the roles, objectives and tactics is defined. This

results in item management profiles where for each collaborated item certain rules are

established (e.g., on minimum ordering quantities, lead times, and ordering intervals).

Issues such as marketing and sales promotions, e.g. advertising campaigns or temporal

price reductions that may have a large impact on demand, are also disclosed here.

Step 3: Create Sales Forecast

This step involves the creation of a method to derive a sales forecast. Point of Sales

(POS) data and information on other effecting factors mainly from Step 2 are used to

produce a sales forecast. The CPFR guidelines do not define a particular method to be

used for a joint forecast but considers four scenarios where the manufacturer, retailer and

distributor have different weights. According to Knolmayer et al., (2002) participants in

the Supply Chain use their "in house" systems to prepare individual forecasts, which are

integrated to give a joint forecast. Forecasts can be made by using arithmetic averages,

weighted arithmetic averages according to sales volumes or the quality of past forecasts,

or the most pessimistic/optimistic forecasts.

Step 4: Identify exceptions for sales forecast

This Step determines those events where the actual requirements differ from the forecast

by more than a specified tolerance threshold set in Step 1. The causes may not only lie in

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wrong forecasts but external disturbances, such as reduction in manufacturing capacity

resulting from a strike or machine failure.

Step 5: Resolve/collaborate on exception items

This phase requires a high degree of communication in which exceptions are analysed,

new events are reported, and forecasts are adjusted accordingly.

Step 6: Create order forecast

Step 6 involves the combination of sales forecasts, inventory information and other

casual information to predict what orders will be received. Here, the agreements reached

in Step 1 on issues like safety stock, order quantities and lead times must be taken in to

account also. The result of this step is a time phased order forecast in which the short

term-portion of the forecast is used for order generation, while the longer-term portion is

used for planning.

Step 7: Identify exceptions for order forecast

In this step, similarly to Step 4, order arrivals that fall outside the order forecast

constraints are identified. There could be for example demand that cannot be met in the

available time because of inadequate production capacities.

Step 8: Resolve/collaborate on exception items

Order forecast exceptions are investigated in this step through querying shared data and

communication. The resulting changes are submitted as an adjusted forecast and causes

are eliminated in case they arise from miscommunication. At this stage, it has to be also

determined if exceptions can be ignored or, if, not, what action should be taken for

compensation. It might be for example necessary for the buyer to order from a supplier

outside the supply chain.

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Step 9: Order Generation

This step involves the transformation of the order forecast into a committed order. The

task of order generation can be fulfilled by either of the parties depending competencies,

systems, and resources. In this final stage, it is expected that the created order to consume

the forecast.

The importance and benefit of this management philosophy has led more recently to the

development of CPFR softwares. SAP with its Collaborative Replenishment Planning

(CRP) solution attempts to capture and implement the CPFR framework in the form of a

software.

CPFR requires a high level of collaboration. The CPFR framework does neither address

the issue of trust between trading partners nor issues such as how far to collaborate and

even when to collaborate. It presumes that collaboration is beneficial in any case. Despite

that, the following two questions are posed to the reader of the CPFR framework (CPFR

2004):

Are your trading partners ready for CPFR? Can your trading partner relationships characterized as open and trusting?

Thus, companies are faced with adopting CPFR due to its benefits but may be somewhat

confused in so far as to not knowing how much to collaborate and what decisions they

have to make.

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This chapter covered SCM and its different management approaches such as VMI and

CPFR. SCM requires the collaboration of trading partners through the sharing of

sensitive information. The exchange of information reduces uncertainty in the supply

chain and eliminates excessive inventory. Enterprise software vendors such as SAP and

Manugistics are increasingly incorporating these management philosophies into their

enterprise applications and solutions. The effective and risk free implementation of SCM

and use of its systems, however, necessitates the existence of sound decision mechanisms

and careful system configurations. The literature on the approaches and applications