Collaborative Supply Chain Design - I

As we learnt in Customer’s EVA, customer is the sole focus and the only cause why any organization would love to optimize its supply chain. It serves two purposes:

1. First is, obviously, going beyond the customer’s expectations in terms of availability of “Right Product at the Right Price, at the Right Time and at the Right Location”.
2. Second, maximizing value in terms of customer service and organization's profitability by minimizing the cost involved in supply chain processes.

Supply chain process is triggered by customer’s demand. This demand is met by the retailer by making the right product available at the right price, at the right time and at the right place. Product availability at the retailer’s site at the right price, at the right place and at the right time depends upon how efficient the company’s procurement, inventory, production, warehousing and Logistics & distribution systems are which further depends on if company’s suppliers are able to supply the raw materials of right quality, at the right price, at the right time and at right place or not. Now if you see the various business functions of all the partners participating in the supply chain have to be perfectly aligned. These functions encompass but are not limited to Sales, Procurement, Inventory, Production, Warehousing, Logistics & Distribution, Finance and Accounting and Human Resources and that explains the level of complexity involved in a supply chain process. 

 

In order to align these partner functions in a perfect coordination, it is of utterly significance that the participating partner organizations must have a high level of collaboration not only between their own optimized internal organizational functions (Internal Collaboration) but also the participating partners must indulge themselves in a high level of inter-enterprise collaboration (External Collaboration) and strive to integrate these functions as much seamlessly as possible, share the information such as sales data, sales history, sales trends, Inventory status, competitors' strategies etc. on a real time basis so that all the partners should follow the same supply chain wide strategy and strive to build a more optimized, more agile and more responsive supply chain. Collaborative supply chain initiatives continue to be developed and to gain prominence based on the assumption that closer inter-enterprise relationships and enhanced information exchange will improve the quality of decision-making, reduce demand uncertainty, and, ultimately, improve supply chain performance. Recent research studies have shown that collaboration offers promise for improved supply chain performance in several core areas, including increased sales, improved forecasts, more accurate and timely information, reduced costs, reduced inventory, and improved customer service.

Intensive competition in the market place has forced companies to respond more quickly to customer needs through faster product development and shorter delivery time. Increasing customer awareness and preferences have led to an unprecedented explosion in product variety. End customers give credit only to companies that are able to deliver products with excellent quality, and on time. However, the demand of customers for product variety, especially in the case of short life-cycle products such as food, apparel, toys, and computers, makes it difficult for manufacturers and retailers to predict which particular variety of the products the markets will accept. To be effective in matching demand with supply, manufacturers and retailers need to collaborate in the supply chain.

Supply Chain Collaboration is defined as occurring when “two or more independent companies work jointly to plan and execute supply chain operations with greater success than when acting in isolation”. Collaboration allows for synergy to develop among partners and encourages joint planning and real-time information exchange.

(Reference: “The Collaborative Supply Chain” by Simatupang and Sridharan)

While there are various collaborative arrangements for integrating supply chain activities such as Efficient Customer Response (ECR), Just-in-time (JIT), Kanban, Material Requirement Planning (MRP), Manufacturing Resource Planning (MRP-II), Distribution Resource Planning (DRP), Continuous Replenishment (CR), Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR), each form of collaboration varies in its focus and objectives. Regardless of the collaborative approach taken, however, Simatupang and Sridharan suggest in their book that:

"The requirements for effective collaboration are mutual objectives, integrated policies, appropriate performance measures, a decision domain, information sharing, and incentive alignment. These requirements demonstrate a need for significant planning and communication to occur between partners, and can require significant resource commitment."

Strong relationships increase the likelihood that firms will exchange critical information as required to collaboratively plan and implement new supply chain strategies. In order for this sharing of critical information to occur, a high degree of trust must exist among the collaborating partners. Trust refers to the extent to which supply chain partners perceive each other as credible and benevolent (Ganesan, 1994; Doney and Cannon, 1997). Credibility reflects the extent to which a firm believes their relationship partner has the expertise to perform effectively while benevolence occurs when a firm believes their relationship partner has intentions and motives that will benefit the relationship (Ganesan, 1994).