ROLE OF INFORMATION TECHNOLOGY IN SUPPLY CHAIN MANAGEMENT

Transcription

1 186 ROLE OF INFORMATION TECHNOLOGY IN SUPPLY CHAIN MANAGEMENT Amit Aggarwal 1, Leena Garg 2 1. Assistant Professor, JP School Of Business, Meerut, Uttar Pradesh 2. Assistant Professor, JP School Of Business, Meerut, Uttar Pradesh Abstract Supply chain management is nothing but integration of elements of logistics system of the firm and its further integration with logistics systems of business partners like vendors, customers, and 3PL service providers. In supply chain integration, the firm integrates its own value chain with the value chains of its business partners for systematic exploitation of the shared resources. By working together as partners, the firm and its supply chain members can provide greatest value to end users at lowest costs and remain active in the marketplace for longer period. Information technology allows firms to coordinate production with demand, slash inventory and cycle times, better manage logistics, improve customer satisfaction, and reduce overall costs. In the present day s competitive environment, the success of supply chain integration is largely conditioned by the extent of use of information technology. By using information technology, vendors are able to drastically cut response times. It allows firms real-time access to point of sale information. It is essential for the retailers and manufacturers to know, where exactly a firm s products are and how long it takes to get them from point A to point B, because they strive to find profit by cutting inefficiencies out of the supply chain. Improvement in information technology reduces transaction costs and promotes better communications between firms. One of the components of the implementation of supply chain management is information sharing through two-way communication between partners within a supply chain. As a result, most of the corporate enterprises are, considerably, investing in the development of an appropriate IT infrastructure foe supply chain integration in terms of computer hardware, software, and connectivity means of Electronic Data Interchange (EDI), Bar Code System (BCS), Enterprise Resource Planning (ERP), and Intranet, Extranet and Internet. Keywords: Order Processing, Lead Time, Logistics, Storage, Value Chain. Corresponding Author

2 187 Introduction A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. An example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arbores cent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large. The concept of Supply Chain Management is based on two core ideas. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain. The second idea is that while supply chains have existed for a long time, most organizations have only paid attention to what was happening within their four walls. Few businesses understood, much less managed, the entire chain of activities that ultimately delivered products to the final customer. Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -- strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: Location Production Inventory Transportation (distribution)

3 188 Location Decision: The geographic placement of production facilities, stocking points, and sourcing points is the Natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. Production Decision: The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. Inventory Decisions: These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose is to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. Transportation Decisions: The mode choice aspect of these decisions is the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for- Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy Supply Chain Technologies and Strategies 1. E-Auctions: Use of technology tools to drive on-line contract bidding for a growing array of both indirect and indirect materials. Pain: one band-aid. Gain: five dollar signs (both out of five - see the full report). As we write in the report, why wouldn't this work? It sure does for companies like Rubbermaid and Hallmark. 2. Labor Management Systems in Distribution: A combination of software, engineering and mindset change to improve logistics productivity. Labor management systems are typically built on discrete, engineered standards for specific tasks in a distribution center, plus detailed reporting at the individual operator level against the resulting dynamic goal

4 189 time calculations for the day s work. Pain: two band-aids. Gain: four dollar signs. One of the first things we'd do in any decent size DC operation. 3. Spend Management Visibility: Software that provides greatly improved visibility to what a company actually spends, where, and with what vendors. Pain: three band-aids. Gain: five dollar signs. It works at home, why not in companies? 4. Demand Management/S&OP: A process, generally supported by some level of technology tools, of aligning the sell side and the supply side of the company around a unified financial and operations plan. While many companies have nominal sales and operations planning processes in place, the consistent feedback is that most are far from optimally effective. In parallel with the growth of S&OP is the concept of demand management, in which sales, marketing, finance and the supply chain work together to drive demand and sales that maximize profitability, rather than simply reacting to forecast demand. Pain: four band-aids. Gain: five dollar signs. Faster reaction to opportunities and organizational alignment are essential today. 5. Supplier Portals: The technology has existed for some time now to relatively easily integrate suppliers through increasingly functional web portals. The scope of activities is very broad, from purchase order management, to providing demand visibility, to advance ship notice and bar code label generation, to generating dynamic inbound shipment requirements. Pain: two band-aids. Gain: three dollar signs. We see know reason for companies not to be doing this. 6. Network Optimization: Use of network optimization software to find the optimal balance between costs and service in the configuration of a company s supply chain network. Increasingly, these tools are being used more tactically than in the past, supporting global sourcing strategies, more short term inventory planning decisions, new product introductions, and even sales and operations planning. Pain: four band-aids. Gain: five dollar signs. A variety of factors is making this a hot category right now, and the use cases are changing. 7. Transportation Management Systems (TMS): Software systems that enable shippers to automate planning and execution, connect electronically with carriers, and reduce freight costs though optimal mode selection, optimal carrier assignment, shipment consolidation, and use of continuous moves. Pain: two band-aids. Gain: three dollar signs, but can be larger for companies with big freight spend.

5 Strategic/Global Sourcing: Use of a more integrated, consolidated approach to supplier selection and procurement, including evaluating total supply chain costs, and consolidating purchasing power. Rapidly, strategic sourcing is also tightly tied to off shoring and global sourcing strategies. We probably could have moved this up on the list, but the opportunities vary dramatically company to company. Pain: three band-aids. Gain: four dollar signs. Obviously a hot strategy now, though many having early trouble getting the results they expect. 9. Wireless in the Warehouse: While use of radio frequency/wireless terminals in distribution centers is at one level a highly penetrated and mature market, we continue to be amazed at the number of even fairly large companies that are still using paper-based systems in their DCs. Pain: one band-aid. Gain: two dollar signs. This is becoming very easy to implement. 10. Yard Management Systems (YMS) and Dock Door Scheduling: Software tools, implemented either stand-alone or in conjunction with a WMS or TMS, that provide visibility into yard inventory and optimize appointment scheduling and execution on inbound and outbound dock doors. The category has enjoyed substantial growth in the past two years. Pain: one band-aid. Gain: two dollar signs. Environmental changes making these systems increasingly easy to justify. Literature Review It is well acknowledged that the use of IT is an integral part of modern SCM. For example; Simchi-Levi etal. (2003, p. 267) list the objectives of IT in SCM: Providing information availability and visibility Enabling single point of contact of data Allowing decisions based on total supply chain information Enabling collaboration with supply chain partners Examining extant literature, we can grossly classify the functional roles of IT in SCM in three categories IT supports frictionless transaction execution. IT is a means for enhancing collaboration and coordination in supply chains. IT based decision support systems (such as APS advanced planning and scheduling and SCEM supply chain event management) can be used to aid better decisions. In our discussion we will limit ourselves to the first two functional roles, as the decision

6 191 support role is somewhat separate area entailing less interaction with different supply chain parties. Functional roles of IT in SCM Transaction execution Collaboration and coordination Decision support There is an abundance of studies from recent past examining how companies have adopted technologies in transaction execution in supply chains. Lancioni et al. (2003) compare the use of IT in 1999 and 2001among CLM companies. Their study shows a clear increase in the use of web-technologies especially in purchasing and transportation. Same kinds of results are reported by Rahman (2003) having the 1000 largest Indian companies as the study population. On the other hand, another recent study by Supply Chain Council (2002) on the use IT in supply chain management in large US companies, mainly manufacturers, revealed that although the use of IT has progressed, companies have still much to go. For example, % of transactions were still done by manual methods (phone, fax, and mail). This might demonstrate how companies having to interact with multiple partners cannot use IT with all. As for the information sharing in supply chains, besides well known success stories such as Cisco and Dell, there are less clear empirical evidence how companies actually use IT in their supply chains for coordination. The main view seems to be that the use of IT in this sense is limited. For example, van Hoek (2001) holds that e-supply chains coupling integrated supply chain scope and strategic approach for the use of IT are very rare cases. Skjoett-Larsen and Bagchi (2002) observe in their recent case study among 14 European companies in 5 networks that in many cases supply chain integration is based on more traditional methods. Also evidence suggest that the scope of collaboration is limited: based in their extensive research with over 50 indepth interviews and a survey with nearly 600 responses within APICS, NAPMand CLM members, Fawcett and Magnan (2002) report that true collaboration beyond first-tier is rare. In summary, companies have adopted new technologies especially for conducting transactions. However, there is less discussion on how companies actually use new IT in managing their supply chains and on the links of using IT in transactions and information sharing

7 192 Research Methodology Research in common parlance refers to a search for knowledge. It can also define research as a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation. According to Clifford Woody research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organising and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. Research is a process of collecting, analyzing and interpreting information to answer questions. But to qualify as research, the process must have certain characteristics: it must, as far as possible, be controlled, rigorous, systematic, valid and verifiable, empirical and critical. The main objectives of research are: 1. To gain familiarity with a phenomenon or to achieve new insights into it (studies with this 2. object in view are termed as exploratory or formulative research studies); 3. To portray accurately the characteristics of a particular individual, situation or a group 4. (studies with this object in view are known as descriptive research studies); 5. To determine the frequency with which something occurs or with which it is associated 6. with something else (studies with this object in view are known as diagnostic research 7. studies); 8. To test a hypothesis of a causal relationship between variables (such studies are known as hypothesis-testing research studies). The Framework for Impact of IT on SCM IT on Purchasing IT on Logistic IT on Firm IT on Vendor Relationship Management IT on Customer Relationship Management

8 193 IT on Purchasing: The use of the IT in managing purchasing in the supply chains has developed rapidly over the last 10 years. The research demonstrates that the IT is utilized in a variety of procurement applications including the communication with vendors, checking vendor price quotes and making purchases from vendor catalogs. Vendor negotiation has also been streamlined through the use of the IT. Face-to-face negotiations are through the use of the IT. Face-to-face negotiations are conducted through the IT. This includes the bargaining, renegotiation, price and term agreements [16]. The receipt of queries from vendors, providing vendors with information and the processing of returns and damaged goods were all handled by the IT. The other more popular use of the IT in supply chains is in order processing applications. The most frequent use of the IT here is in order placement and order status. Over half of the firms use the IT for this purpose This has dramatically reduced the costs of order processing. The use of the IT in order processing has reduced the error rate involved in order processing. Errors now can be detected more easily and corrected more quickly IT on Operation: One of the most costly aspects of supply chains is the management of inventory. The research has shown that the most popular use of the IT in this area is the communication of stock outs by customers to vendors, or the notification of stock outs by companies to their customers. The IT has enabled companies to more quickly institute EDI information programs with their customers. The IT has affected inventory management most dramatically in the ability of firms to be proactive in the management of inventory systems. This is demonstrated in the ability of firms to notify customers of order shipping delays and inventory emergencies, in order to decrease the delivery lead time and inventory Production scheduling has traditionally been the most difficult aspect of SCM. The IT has enabled firms to minimize the difficulty in their production scheduling by improving the communication between vendors, firms and customers. The research showed that some of the firms in the study use the IT to coordinate their JIT programs with vendors. In addition, some of the firms are beginning to use the IT to coordinate their production schedules with their vendors. IT on Logistic: The most popular use of the IT in supply chains is in the management of transport. Transportation typically is the highest cost component in a supply chain, according to literature review.

9 194 The research showed that the monitoring of pickups at regional distribution centers by carriers is the most popular application of the IT in this area. This is particularly important for a company, since tracking shipments to regional depots provides the firm with data on the reliability performance of the carriers it is using. This enables transportation managers to make sure that the motor carriers they use are meeting their promised arrival times. It also provides managers with the information they need to inform carriers of shipment delays as they occur and to not have to wait for days before the information becomes available for corrective measures to be taken. Claims reporting, processing and settlement are more easily handled through the use of IT tracking system applications. In production and logistics, many parties are involved in coordinating all the processes that are involved in fulfilling a customer's order: manufacturer, suppliers of parts and subassemblies, material managers, logistics managers, transportation carriers, customer service representatives, quality assurance staffs and others. The goals are to reduce the cycle time to fill a customer's order, reduce the inventory of parts, work in process and finished goods in the pipeline, increase the accuracy and completeness of filling a customer's order and of billing him for it and accelerate the payment for the delivered items to put cash in the bank as soon as possible. To achieve this degree of Order Cycle Integration, manufacturers, merchandisers and their trading partners are using IT. IT on Customer Relationships: Many management experts argue that, by focusing on total customer satisfaction, a company can improve its processes to deliver better service at a lower cost. Customer- satisfaction driven is often described as the next step beyond TQM, total quality management: the objective is not simply to deliver some abstract definition of quality but to deliver total satisfaction to the customer, of which the delivery of quality is only a part. Meanwhile, in the past, customer information could not be fully utilized in setting processes of firms conditions. With recent increase in the speed of the IT, it has provided firms with the ability to offer their customers another way to contact the firm regarding service issues and integrate customer information and firm information to bring great benefits to both customer and firm. The research shows that some of the companies use the IT to receive customer complaints, while the others utilize it for emergency notifications. IT on Vendor Relationships: IT deployment in supply chains leads to closer buyer-supplier relationships. Stump and Sriram provide empirical evidence that the use of IT is associated with the overall closeness of buyer-supplier relationships. Subramani reports a positive

10 195 relationship between an IT-based supply chain and organizational benefits. Grover et al. [18] suggest that the decision to use IT within the dyad could encourage the commitment to establishing relational behavior. Their results show that IT decreases transaction costs between buyers and suppliers and creates a more relational/cooperative governance structure. Trust plays a key role in any organizational relationship that IT facilitates it. Trust exists when a party believes that its partner is reliable and benevolent [18] there has been a noticeable increase in the importance of trust in different forms of inter-organizational relationships in management literature. The need for trust between partners has been identified as an essential element of buyer-supplier relationships. IT on Firm: To keep costs down, an organization must have a high level of discipline: each person knows what needs to be done, knows how to do it and does it quickly and efficiently. This argues for the organization to have a high degree of standardized procedures and for everyone to be trained in these procedures and to execute them without question. Yet, in anever-changing market place, it is important to also be able to innovate, to offer new service packages and new organizational linkages with the customer. To do this requires a discipline of change which encourages innovation and yet retains the stability of existing procedures until innovations are ready for wide- spread adoption. IT could overcome this problem. IT usage was also explored in the context of the size of the firm with two measures-the number of employees and sales volume. As measured by the number of employees, larger firms were more likely to use the IT to communicate with customers on order status and to manage the outsourcing of customer service functions. Why SCM Strategy is Important for an Organization Supply Chain Strategies are the critical backbone to Business Organizations today. Effective Market coverage, Availability of Products at locations which hold the key to revenue recognition depends upon the effectiveness of Supply Chain Strategy rolled out. Very simply stated, when a product is introduced in the market and advertised, the entire market in the country and all the sales counters need to have the product where the customer is able to buy and take delivery. Any glitch in product not being available at the right time can result in drop in customer interest and demand which can be disastrous. Transportation network design and management assume importance to support sales and marketing strategy. Inventory control and inventory visibility are two very critical elements in any operations for these are the cost drivers and directly impact the bottom lines in the balance

11 196 sheet. Inventory means value and is an asset of the company. Every business has a standard for inventory turnaround that is optimum for the business. Inventory turnaround refers to the number of times the inventory is sold and replaced in a period of twelve months. The health of the inventory turn relates to the health of business. In a global scenario, the finished goods inventory is held at many locations and distribution centers, managed by third parties. A lot of inventory would also be in the pipeline in transportation, besides the inventory with distributors and retail stocking points. Since any loss of inventory anywhere in the supply chain would result in loss of value, effective control of inventory and visibility of inventory gains importance as a key factor of Supply Chain Management function. IT and SCM Recently with development of IT, the concepts of supply chain design and management have become a popular operations paradigm. The complexity of SCM has also forced companies to go for online communication systems. For example, the Internet increases the richness of communications through greater interactivity between the firm and the customer. This illustrates an evolution in supply chain towards online business communities. Supply chain management emphasizes the long-term benefit of all parties on the chain through cooperation and information sharing. This confirms the importance of IT in SCM which is largely caused by variability of ordering. Table 1: The use of IT in purchase and sales transactions % of companies (n=36) Implemented Particulars Using IT & Using IT IT under the last 5 years Purchase Orders 64% 92% 36% Purchase Invoices 47% 50% 28% Sales Orders 67% 89% 39% Sales Invoices 64% 64% 28% In purchase or sales transactions 89% 100% 72%

12 197 The use of IT is commonplace within our progressive companies. Two thirds of the companies use some IT in purchase ordering or sales order intake. Typical solutions used are traditional EDIFACT and sales transactions. On the other hand, there is still a wide use of manual methods (phone, fax, and ). In fact, only in a few special instances the transactions were conducted completely with IT. In these cases the amount of supply chain parties was limited or the focal company had power over the other parties to implement a solution it has desired to use. In total, the majority (72 %) of companies have implemented some IT in purchase or sales transaction in recent years. It seems that the main technologies allowing the increase of IT use have been the extranet and 3rd party provided services, since these technologies have highest rates of new implementations under last five years. Conclusion The results of this study indicate that the operational use of IT has developed in the last five years. In particular Internet technology and third party transaction integration services have provided companies with increased possibilities to network with supply chain partners. Furthermore, only implementing IT, as such, for example in invoicing automation, is not likely to lead to higher-level business impacts. Stating this, it is interesting to observe that in the SCM context the main body of companies views IT primarily from operational perspective. A reason for this may be the relative novelty of IT, meaning that larger scale and strategic solutions are still yet to come, and after companies have installed a basic IT infrastructure. There is no single way of using IT and, moreover, the broader the business area where IT impacts, the more solutions have to be customized. As applications are more tailormade, it is also more difficult to copy a solution from one company to another. It was further observed that to achieve real competitive advantage it is important to focus on improving those processes that are most critical for customer service. Benefits of IT in SCM are multitude and vary in the context of their implementation. Moreover, as the use of IT is closely related to process changes, most of the benefits are overlapping and interlinked.

13 198 References - Ahmad, S. & Schroeder, R.G. (2001,) The impact of electronic data interchange on delivery performance, Production and Operations Management, 10(1), pp Benjamin, R.I., Rockart, J.F., Scott Morton, M.S. & Wyman, J. (1984), Information Technology: A Strategic Opportunity, Sloan Management Review, 25(3), pp McFarlan, F.W. (1984), Information technology changes the way you compete, Harvard Business Review, 62(3), pp Melkas, H. (2004), Towards holistic management of information within service networks safety. - Meredith (1998), Building operations management theory through case and field research Journal of Operations Management, 16(Issue no), pp Min, H. & Galle, W.P. (2001), Electronic Commerce-based Purchasing: A Survey on the Perceptual Differences Between Large and Small Organizations International Journal of Logistics: Research and Applications, 4(1), pp