Information Technology & Information Sharing in Supply Chains

1. Information Technology & Information Sharing in Supply Chains Zhi-Long Chen Michael O. Ball Robert H. Smith School of Business University of Maryland College Park, MD 20742

2. Supply Chain Management as a Competitive Weapon It is becoming more difficult for companies to compete on cost or even product quality  to seek new competitive advantages, companies are looking to innovative supply chains that can provide: • New levels of customer service especially in terms of order promising response and reliability • Greater product variety – extreme case customizable products • Fast introduction of new technologies • Fast introduction of new products  may need to quickly reconfigure supply chain including supply chain partners  Great burden on IT infrastructure.

3. Importance of Fast Access to Supply Chain Information order factory availability local availability dist center availability remote retail availability IT Infrastructure: provides “visibility” across global supply chain to allow search for product availability

4. Push and Pull Production Systems PUSH VS PULL Forecast demand customer order Order raw materials Order raw materials transport & storage transport & storage Produce product Produce product transport & storage transport & storage Deliver product to customer/retailer Deliver product to customer/retailer customer order

5. product models suppliers Manufacturing incl final assembly generic products and components inventory Push-pull boundary Assembly to order Manufacturing forecast driven order driven Push-Pull Systems

6. Assemble-to-Order In an assemble-to-order (ATO) production environment, final product assembly is not carried out until a customer order is received. ATO Advantages: • Greater product variety • Fast integration of new technologies • Lower inventory costs • Making it work requires sophisticated order promising and fulfillment systems

7. Picking Production Assembly Packaging Shipping Order Promising Decision Support in an ATO Setting customer orders • Resources: • raw material • and component • availability • production • capacity Capacity Planning Aggregate Planning x Master Production Scheduling (MPS) Material Requirements Planning (MRP) Capacity Availability Order promising in assemble-to-order environment: match available resources to customer orders • Order Promising Decisions: accept/reject/split order; • order quantities and delivery dates • Considerations: order profitability; customer priority; customer • satisfaction (reducing response/delivery time); production • efficiency

8. Decision Models + Flexible IT  Flexibility in Production Planning and Order Handling 4/5 4/6 4/7 4/8 4/9 4/2 new orders promise date Factory 1 Factory 2 4/3 new orders promise date Factory 1 Factory 2 4/4 new orders promise date Factory 1 Factory 2 Flexibility can substantially improve overall business performance but it is far from commonplace!!!

9. Information Technology Challenges • Integration of business information systems: ERP, supply chain mgmt, etc. • Inter-company communication (vital in today’s multi-company supply chains) • Making sophisticated business systems available to small and medium-sized firms • Non-technical challenges: • international regulatory and standards issues • balancing need to share with privacy needs

10. Retailer Orders Distributor Orders Production Plan Phenomenon Observed in Supply Chain Customer Demand Order Size Time

11. Bullwhip Effect The bullwhip effect is a phenomenon observed in supply chains wherein the demand variability increases as one moves upstream from retailers to distributors to manufacturers Retailers Warehouses/ Distributors Manufacturers

12. Bullwhip EffectExample: P&G Diapers

13. Bullwhip is Bad • Impact of Bullwhip Effect: • -- Inventory: More safety stock needed • -- Transportation: Lower utilization of transportation Higher costs • -- Warehousing: More warehouse capacity needed • -- Manufacturing: Lower capacity utilization • -- Customer Service: Lower service level, more likely to cause • stockouts and lost sales It distorts the order information & amplifies order variability.

14. Causes of Bullwhip Effect • Root Causes: Lack of Information • 1. Demand forecast updating • 2. Rationing and shortage gaming

15. Cause 1: Demand Forecast Updating (Demand Signal Processing) Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1 Order Qt goes to upstream Lead time L Mfctr. Retailers Customers • Retailers forecast customers demand • and then place orders with manufacturer • Manufacturer receives orders from retailers Demand variability gets amplified from downstream to upstream! - Commonly, the variability of Q is 2 to 15 times the variability of D

16. When product demand exceeds supply, a manufacturer often rations its product to customers. Example: Dealer 1 Order = 100 Received = 67 Dealer 2 Order = 200 Car Manufacturer Available = 200 Received = 133 Only 2/3 of the order can be fulfilled • Knowing the manufacturer policy, customers exaggerate their real • needs when they order (game the system). Example: Dealer 1 Order = 180 Received = 180 Need = 120 Dealer 2 Need = 180 Order = 270 Received = 270 Car Manufacturer Available = 500 Cause 2: Rationing and Shortage Gaming • As a result, customers’ orders give the supplier little information on a • product’s real demand, a particularly vexing problem for new products

17. Information Sharing to Counteract the Bullwhip Cause of Bullwhip Initiatives • Use of point-of-sale (POS) data • Electronic data interchange (EDI) • Vendor-managed inventory • Lead-time reduction 1. Demand Signal Processing 2. Shortage Gaming • Sharing sales and inventory data • Allocation based on past sales

18. Famous Success Story: Benetton • Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975, Benetton had 200 stores across Italy. • Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion. • Many attribute Benetton’s success to successful use of communication and information technologies in their supply chain.

19. Famous Success Story: Benetton 1. Integrated Information Systems • Global EDI network that links agents with production and inventory information • EDI order transmission to HQ • EDI linkage with air carriers • Data linked to manufacturing 2. Coordinated Planning • Frequent review allows fast reaction • Integrated distribution strategy

20. Information Sharing Challenges • Build strategic partnerships between manufacturers, distributors, and retailers • Develop effective collaborative demand forecasting methods • Create effective mechanisms for information sharing across supply chain partners: • Technical issues • Integrating incompatible systems • standards • Business issues: • incentives to share • Overcoming privacy/proprietary information concerns