Supply Chain Management Lecture 10 –

Integration

Alexa Kirkaldy

Lecture 10 - Learning ObjectivesOn completion you will be able to:

• Explain the need for aligning processes and collaborating between organisations in the supply chain

• Explain what activities can be tackled collaboratively• Discuss the ‘arcs of integration’ model• Explain what is involved in JITII, Efficient Consumer Response

(ECR) and Collaborative planning, forecasting and replenishment (CPFR)

Supply Chain Integration

To establish and seamlessly coordinate the processes for planning, sourcing, manufacturing, distributing and returning products across the supply chain…

… in a manner that competitors cannot easily match.

Purchasing MaterialsControl

Production Sales Distribution

MaterialsManagement

ManufacturingManagement

Distribution

STAGE 1: BASELINE

STAGE 2 FUNCTIONAL INTEGRATION

STAGE 3:INTERNAL INTEGRATION

MaterialsManagement

ManufacturingManagement

Distribution

STAGE 4:EXTERNAL INTEGRATION

SuppliersInternal Supply

ChainCustomers

Stevens (1989)

What is Supply Chain Integration?

1. Access to planning systems (sharing of forecasts)2. Sharing production plans3. Joint EDI (Electronic Data Interchange)

access/networks (or extranet)4. Knowledge of inventory mix/levels5. Packaging customisation6. Delivery frequencies7. Common logistical equipment/containers8. Common use of 3rd party logisticsFrom Frohlick & Westbrook, 2001, cited in Harrison & van Hoek (2005)

9. Sharing of risks?

Activities improved by integration and collaboration

• Forecasting• Designing products and operations • Capacity planning• Inventory management• ERP and scheduling• JIT and Lean

Internal Integration

For some reason alliance professionals find it easier to create alliances with their major competitors than other divisions in their own companies. We don’t deal with our own internal integration. How can we integrate externally if we can’t integrate internally?

Why might this be?

Kirby (2003, p.68) cited in Harrison and van Hoek (2005, p.220)

Arcs of Integration

No Integration

ExtensiveIntegration

Extensive Integration

Suppliers Manufacturer Customer

Narrow Arc of Integration

Broad Arc of Integration

Source: Frohlich and Westbrook (2001) Arcs of Integration: An international study of supply chain strategies, Journal of Operations Management Vol. 19, pp. 185-200

Arcs of Integration

None ExtensiveExtensiveSuppliers CustomerManufacturer

Inward-facing Arc

None ExtensiveExtensiveSuppliers CustomerManufacturer

Periphery-facing Arc

None ExtensiveExtensiveSuppliers CustomerManufacturer

Supplier-facing Arc

None ExtensiveExtensiveSuppliers CustomerManufacturer

Customer-facing Arc

None ExtensiveExtensiveSuppliers CustomerManufacturer

Outward-facing Arc

Source: Frohlich and Westbrook (2001)

Supply ChainSupply Chain

What trading partnersneed……….

• Accurate & timely forecasts

• Visibility of events (e.g. promotions etc…)

• Orders from retailers at a lead-time that allows them to limit their risk

• Efficient order process with orders in line with forecasted quantities

• Shared targets to understand performance

• Ad-hoc forecasts/Intake plans that are inaccurate

• Rushed orders to satisfy demand from promos or planning inaccuracy

• No “true” commitment until -1 to -2 weeks out

• ‘Soft commitments’ that don’t match forecast or order quantities

• Performance measured based on “this week’s issue”

“ Mismatch” leads to inefficiency.

A ‘lose-lose’ situation, with both organizations losing

competitive advantage

What trading partnerstypically receive…..

Poor supply chain integration

The integration challengeOne SKU to One Retailer Chain, weekly order volume

The Forrester Effect

Simulation Days

Ord

er

or

Targ

et

Quanti

ty

0

2000

4000

6000

8000

10000

12000

14000

336 356 376 396 416 436 456 476 496 516 536 556 576 596 616 636 656

Car Build Target Orders toSupplier A

ProductionTarget A

Orders by A on B ProductionTarget B

EFFECT OF A ONCE OFF STEP INCREASE OF 10% IN DEMAND ORDER OSCILLATIONS DOWN THE SUPPLY CHAIN

Order variability is amplified up the supply chain; upstream echelons face higher variability.

Coping with the Forrester Effect• Lead Times

– Quick Response – Push vs. Pull Strategy– Cross Docking– EDI / E-business

• Reduce Variability and Uncertainty– POS– Sharing Information– Every-day low pricing (EDLP) -remove promotions

• Alliance / Partnership Arrangements– Vendor managed inventory– On-site vendor representatives

Inter-Company Integration– Manual JIT II Bose Corporation

• JITII eliminates the buyer and salesman from the customer-supplier relationship

• A supplier employee works on the customer’s site – placing orders on their firm using the customer’s systems– Taking part in production planning

• Benefits of JIT II according to Sherwin Greenblatt of Bose, 1993;– 50% improvement at Bose in the transport measures of ‘on time’, ‘damage’ and

‘shortages’– 26% increase in equipment utilization by a Bose supplier of custom plastic

parts, G&F Industries– 6% saving in material cost at APV Corporation– $1.9 million inventory reduction at AT&T in one location

Electronic Integration

TransactionalAutomation of business

transactions such as purchase orders, invoices, payments

Information sharingRead only sharing of product

spec.s, inventory, shipments for independent planning

Collaborative planningShared information on new product

planning, demand forecasting, replenishment planning

Supply Chain Integration Tactics• Integrating the forward physical flow

– JIT / Mass-customisation & postponement– Distribution strategies (3rd & 4th Party Logistics / Cross-docking)

• Cross docking - collected from suppliers and taken to transhipment centre. Sort & combine for delivery to the customer, without passing into a store.

• Backward coordination of information– Sharing data from planning and control systems– Electronic Data Interchange (EDI) / E-business

• Holistic Strategies– Partnerships– Efficient Consumer Response (ECR)– Collaborative Planning, Forecasting and Replenishment

(CPFR)

Efficient Consumer Response• Established now as a grocery industry initiative but origins in work by Kurt

Salmon Associates in US for apparel in 1993

• Designed to integrate and rationalise via collaboration:– Product assortment– Promotion– New product development– Replenishment

• Targets non value adding costs in the supply chain• Refer to case study – ECR in the UK ( Procter and Gamble

ECR Improvement Categories

Harrison A. & van Hoek R., Logistics Management and Strategy, 2005, p.226

Collaborative planning, forecasting and replenishment (CPFR)

• Originated in 1995 by Wal-Mart, Warner-Lambert, Benchmarking Partners, SAP and Manugistics

• Goal to develop a model to collaboratively forecast and replenish inventory

• In 1998 Voluntary Inter-industry Commerce Standards Committee (VICS) (who developed bar codes and EDI standards for retail) got involved – see www.vics.org

• Requires – joint forecasting by customer & supplier – Extensive support from Internet-based products

• Refer to case study on trials in the UK grocery sector

9 Step CPFR Model1.Develop the front end agreement2.Create joint business plans3.Create individual sales forecasts4.Identify exceptions to sales forecasts5.Resolve / collaborate on exception items6.Create order forecast7.Identify exceptions to order forecasts8.Resolve / collaborate on exception items9.Generate orders

Harrison and Van Hoek, 2011

Scope of CPFR …

Supplier Managed Inventory

Integrated Suppliers

Enabling Technologies

Reliable Operations

Efficient Replenishment Efficient Replenishment

VMI, CRP

Order Forecast

Sales Forecast

Supplier Manufacturer Customer POS

CPFR

DownstreamUpstream

Category Management

CPFR requires….

Suppliers

Excess Inventory

Rush orders

to Suppliers

Excess Inventoryand Stock

Outs

Obsoles-cence

Stock Outs/Lost Sales

Unexpected Production

changes

Excess inventory

Manufacturers CustomersCollaborativeProcesses

CollaborativeProcesses

…organizations to align and integrate their internal supply chains as well as synchronize with their trading partners

Supply Chain challenges

• Establish the ground rules for the collaborative relationship (Front End Agreement and Joint Business Plan)

• Determine product mix and placement

• Develop event plans for the planning period

• Project consumer (point-of-sale) demand (Sales Forecast)

• Calculate order and shipment requirements over the planning horizon

• Place orders, prepare and deliver shipments

• Receive and stock products on retail shelves

• Record sales transactions and make payments

• Monitor exception conditions• Calculate key metrics• Share product and market

insights• Adjust plans and processes

for continuously improved results

The VICS CPFR model (2004)

CPFR Benefits – Nestle UK

• Improved availability of product to consumer – increase sales• Total service improved, total costs reduced, capacity can be reduced as

fewer uncertainties• Processes integrated across organisations• Information communicated quickly, more structured format, transparent,

real time• Audit trail to show when amendments were made• Data in process can be used for analysis, monitoring and evaluation• Process can be completed in a quicker time scale, lower total cost• Trading partners are more committed to shared plans and objectives.

Source: Christopher, 4th Edition, 2011

Lecture 10, Key Points & Tips

• Integration in the supply chain can be classified in 5 ways Inward-facing; Periphery-facing, Supplier-facing, Customer-facing and Outward-facing.

• Benefits can be obtained from simply improving collaboration and integration within the organisation and this should be the starting point before integrating externally. However, internal integration is often more difficult because of company politics and problems measuring and achieving cost reductions without redundancies.

• Outward-facing integration achieves the greatest benefits.

• JIT2 aims to achieve inter-company collaboration manually by using a supplier-in-plant at the customer’s premise removing the buyer and salesman.

Lecture 10, Key Points • Electronic integration can be undertaken in three ways by transactional

transmission of fixed-format documents, information sharing or collaborative planning.

• ECR is an industry-wide initiative popular in retailing and fast moving consumer goods that integrates and rationalises product ranges, new product introductions, promotions and replenishment across the supply chain.

• CPFR is aimed at ‘making inventory management more efficient and cost-effective, while improving customer service and leveraging technology to significantly improve profitability’. By planning collaboratively replenishment of products is more timely and accurate. Based on Harrison A. & van Hoek R., Logistics Management and Strategy, 2005, pp. 241-242.

For next Friday

Read the case studies• ECR in the UK – 2 questions• CPFR in the grocery sector – 3 questions

Possible oral presentation questions• What functions are integrated in this supply

chain, which could be?• What evidence is there that collaborative

planning, forecasting and replenishment is taking place in this supply chain?