Information in the Supply Chain

In this section, we discuss the role that information plays in the supply chain, as well as key information-related decisions that supply chain managers must make.

1. Role in the Supply Chain

Good information can help improve the utilization of supply chain assets and the coordination of supply chain flows to increase responsiveness and reduce costs. Seven-Eleven Japan uses infor­mation to improve product availability while decreasing inventories. Walmart uses information on shipments from suppliers to facilitate cross-docking and lower inventory and transportation expense. Li & Fung, a global trading group supplying time-sensitive consumer goods such as apparel, uses information on its third-party manufacturers to source each order from the most appropriate supplier. Airlines routinely use information to offer the right number of seats at a discount price, leaving sufficient seats for business customers who make reservations at the last minute and are willing to pay a higher price. Each of these examples illustrates the importance of information as a key driver that can be used to provide higher responsiveness while simultane­ously improving efficiency.

Even though the sharing of information can help a supply chain better meet customer needs at lower cost, there is a danger in the assumption that more information is always better. As more information is shared across a supply chain, the complexity and cost of both the required

infrastructure and the follow-up analysis grow exponentially. The marginal value provided by the information shared, however, diminishes as more and more information becomes available. It is thus important to evaluate the minimum information required to accomplish the desired objec­tives. For example, it may often be enough if aggregate sales, rather than detailed point-of-sale data, are shared between a retailer and a manufacturer. Aggregate information is cheaper to share and provides most of the value with regard to better production planning. The trade-off between complexity and value is important to consider when setting up the information infrastructure. The following examples illustrate how information can be used to provide customized products and improve supply chain performance.

EXAMPLE 3-4 DHL

DHL is a logistics and parcel delivery company that operates in more than 140,000 destinations with a presence in more than 200 countries, which involves working in diverse local environ­ments with different languages, cultures, and local knowledge. For DHL, working locally means that its employees and customers have access to accurate tracking information on their packages in their local language. DHL moved from a decentralized information system involving 50 sys­tems to a centralized integrated system to reduce risk and decrease costs while improving cus­tomer service. This resulted in a 40 percent reduction in infrastructure costs, coupled with more reliable communications throughout DHL’s worldwide operation.[1]

EXAMPLE 3-5 Sunsweet Growers

Sunsweet Growers, a California-based dried fruit producer, implemented a supply chain sales and operations planning (S&OP) suite to replace its Excel-based planning system. The company has a highly seasonal supply, with harvest taking place primarily during September and October. Demand is also seasonal, with peak times occurring during the Christmas period. Good planning thus can be very valuable. Sunsweet’s goal when implementing the suite was twofold: Each function should operate with the same data, and an early warning capability should alert planners and managers about any potential mismatches between supply and demand. After the implemen­tation, production overruns at Sunsweet dropped from 30 percent to under 15 percent. Forecast accuracy improved by 15 to 20 percent. The early warning system alerts allowed planners to react as much as two to three weeks earlier than before the implementation.

2. Components of Information Decisions

We now consider key components of information that a company must analyze to increase effi­ciency and improve responsiveness within its supply chain.

PusH VERsus pull When designing processes of the supply chain, managers must determine whether these processes are part of the push or pull phase in the chain. We discussed this distinction in Chapter 1, but we mention it again because different types of systems require different types of information. Push systems start with forecasts that are used to build the master production schedule and roll it back, creating schedules for suppliers with part types, quantities, and delivery dates. Pull systems require information on actual demand to be transmitted extremely quickly throughout the entire chain so production and distribution of products can reflect the real demand accurately.

COORDINATION AND INFORMATION SHARING Supply chain coordination occurs when all stages of a supply chain work toward the objective of maximizing total supply chain profitability based on shared information. Lack of coordination can result in a significant loss of supply chain surplus. Coordination among different stages in a supply chain requires each stage to share appropri­ate information with other stages. For example, if a supplier is to produce the right parts in a timely manner for a manufacturer in a pull system, the manufacturer must share demand and production information with the supplier. Information sharing is thus crucial to the success of a supply chain.

SALES AND OPERATIONS PLANNING Sales and operations planning (S&OP) is the process of creating an overall supply plan (production and inventories) to meet the anticipated level of demand (sales). The S&OP process starts with sales and marketing communicating their needs to the supply chain, which, in turn, communicates to sales and marketing whether the needs can be met, and at what cost. The goal of S&OP is to come up with an agreed-upon sales, production, and inventory plan that can be used to plan supply chain needs and project revenues and profits. The sales and operations plan becomes a critical piece of information to be shared across the sup­ply chain because it affects both the demand on a firm’s suppliers and the supply to its customers.

ENABLING TECHNOLOGIES Many technologies exist to share and analyze information in the supply chain. Managers must decide which technologies to use and how to integrate them into their supply chain. Some of these technologies include the following:

1. Electronic data interchange (EDI) was developed in the 1970s to facilitate the placement of instantaneous, paperless purchase orders with suppliers. Its proprietary nature, however, required significant upfront investment and often some translation between the communicating parties. It did, however, make transactions faster and more accurate than when they were paper based.
2. Relative to EDI, the Internet conveys much more information using a standard infra­structure allowing supply chains to improve both efficiency and responsiveness. The beginning of the twenty-first century has seen the Internet become the dominant medium of communication across all the macro processes (CRM, ISCM, and SRM, discussed in Chapter 1) that link the sup­ply chain from suppliers to customers.
3. Enterprise resource planning (ERP) systems provide the transactional tracking and global visibility of information from within a company and across its supply chain. This real­time information helps a supply chain improve the quality of its operational decisions. ERP sys­tems keep track of the information, whereas the Internet provides one method with which to view this information.
4. Supply chain management (SCM) software uses the information in ERP systems to pro­vide analytical decision support in addition to the visibility of information. ERP systems show a company what is going on, whereas SCM systems help a company decide what it should do.
5. Radio frequency identification (RFID) consists of an active or passive radio frequency (RF) tag, applied to the item being tracked, and an RF reader/emitter. A passive tag draws energy from the reader, whereas an active tag has its own battery and draws power from it. RFID has many potential uses. It can be used in manufacturing to check availability of the entire bill of materials. The technology can make the receiving of a truck much faster and cheaper. Full imple­mentation of RFID could eliminate the need for manual counting and bar-code scanning at the receiving dock. It can also be used to get an exact count of incoming items and items in storage.

INFORMATION-RELATED METRICS A manager should track the following information-related metrics that influence supply chain performance:

• Forecast horizon identifies how far in advance of the actual event a forecast is made. The forecast horizon must be greater than or equal to the lead time of the decision that is driven by the forecast.

• Frequency of update identifies how frequently each forecast is updated. The forecast should be updated somewhat more frequently than a decision will be revisited, so large changes can be flagged and corrective action taken.
• Forecast error measures the difference between the forecast and actual demand. The forecast error is a measure of uncertainty and drives all responses to uncertainty, such as safety inventory or excess capacity.
• Seasonal factors measure the extent to which the average demand in a season is above or below the average in the year.
• Variance from plan identifies the difference between the planned production/inventories and the actual values. These variances can be used to raise flags that identify shortages and surpluses.
• Ratio of demand variability to order variability measures the standard deviation of incoming demand and supply orders placed. A ratio less than 1 potentially indicates the existence of the bullwhip effect, which is discussed in Chapter 10.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.