SUPPLY CHAIN INTEGRATION AND COORDINATION Adriano O. Solis, Ph.D.

Academic Advisor, NAPM El Paso

Difficulty of Supply Chain Integration The early papers (e.g., Jones and Riley, 1985; Houlihan, 1985) on supply chain management (SCM) stressed that the key to managing a supply chain efficiently is to view it as a single entityinstead of relegating fragmented responsibility to the various functional areas (e.g., purchasing, manufacturing, distribution, and sales) and entities (e.g., national, regional, and sub-regional warehouses and distribution centers) in the chain. Three elements were cited as being necessary in integrating/coordinating the supply chain: (a) recognizing customer service level requirements, (b) determining where inventories should be positioned along the supply chain, and how much stock to carry at each point, and (c) developing appropriate policies and procedures for managing the entire chain as a single entity. Traditional inventory theory suggests that a supply chain will use increasing amounts of resources (e.g., inventory, manufacturing/transport/storage facilities, funds, people) to satisfy greater service levels and customer needs. Integration of the supply chain is aimed at lowering the total amount of resources needed to provide the required customer service levels. However, supply chain integration is difficult for two main reasons (SimchiLevi et al., 2000). In the first place, the various entities along the supply chain will have different, often conflicting objectives. For instance, car dealers will prefer to have as wide a variety of automobile models and option configurations actually present on their premises. On the other hand, a car manufacturer would find it very costly to maintain huge dealer-based inventories. Likewise, suppliers deliveries of sub-assemblies, components, and accessories will have to address the car manufacturers need to address the wide variety of models and options that car buyers expect. However, suppliers may prefer to deliver materials in larger lot sizes in order to achieve production, handling, and transportation economies. It is certainly important to recognize that supply chain management involves minimizing system-wide costs and maximizing the overall value generated by the supply chain. It will be doomed to failure if costs were simply shifted from one entity to another along the chainwhich may happen when entities have conflicting objectives and only the entity that wields more power is favored by a certain decision. Secondly, the supply chain is a dynamic system. Customers expectations and customer demand change over time, as with suppliers and distributors capabilities. Undoubtedly, the entities and relationships between entities along the supply chain will also evolve over time. After World War II, there was a dearth of products in domestic markets, while customers exhibited fairly homogeneous, predictable product preferences. Mass production was an appropriate competitive strategy. Eventually, however, customers have become more sophisticated and demandingexpecting not only increasingly lower prices and higher levels of quality and reliability in the products that they purchase, but also greater customization. Mass customization imposes operating concerns and pressures upon the various entities along the supply chain that are totally different from those under a regime of mass production. Computer vendors like Dell and Gateway now allow customers to select, using the Internet, from among many possible configurations and options for personal computers listed in on-line catalogs, and ship the customized orders direct to buyers offices or homes within a matter of days. This constitutes a significant departure from the traditional supply chain for the personal computer industry, which has included distributors and retailers. Similarly, global markets are characterized by increasingly shorter product life cycles. Personal computers, for instance, have life cycles currently estimated to be six months or even less. The pressure to drastically reduce time to market underscores the importance of such relatively new approaches as early purchasing involvement and early supplier involvement in the product development process.
Article in The Criterion, June 2001 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management]

Dimensions of Supply Chain Management The key supply chain processes identified by both the Supply-Chain Council and the Global Supply Chain Forum clearly indicate the need to coordinate across various entities along the supply chain, both within and between organizations. There are three dimensions along which integration/coordination of supply chain processes and activities need to take place [see Figure 2]: intra-functional, inter-functional, and interorganizational (Ballou et al., 2000).

Figure 2.

Dimensions of Supply Chain Coordination

The Firm Inter-organizational Coordination Inter-functional Coordination Other Functions

Intra-functional Coordination Materials Management Function

Other Entities Along the Firms Supply Chain

Intra-functional coordination pertains to managing activities within the firms logistics or materials management function. The coordination is strictly between activities under the direct responsibility of a logistics or materials manager, and could be relatively easy. Intra-functional coordination would generally involve trading off costs against each other (e.g., inventory carrying costs versus production setup or purchasing costs, inventory carrying costs versus transportation costs, warehousing costs versus transportation costs). Analysis and
Article in The Criterion, June 2001 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management]
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optimization of activities and costs that are in conflict, being within the responsibility and authority of the logistics manager, is possible, and has been a major contributor to cost reductions in product flow activities. Managing supply chain activities within the same firm also involves functions other than logistics or materials management: marketing, production, finance, etc. Changes in practices and/or levels of activity in purchasing, transportation, warehousing, and inventories would have implications on the other organizational functions, and vice versaand would require inter-functional coordination, which makes managerial control relatively more difficult. For instance, reducing inventory levels or using lower-cost, but slower transport services may reduce materials management costs, but also adversely affect the marketing objective of maximizing sales revenues or the firms customer service level objectives. Opting for more frequent, but lower-volume deliveries of raw materials or supplies may reduce inventory carrying costs, but also adversely affect a production departments objective of minimizing unit processing costs or a service departments customer service level objectives. Adding new warehouses and trucks may reduce per unit logistics costs, but also adversely affect the finance departments objective of minimizing capital requirements. There is a need to balance the effects of such changes on the other functions in a manner that would most benefit the organization as a whole. This interfunctional coordination takes place within the firm, but outside of the logistics function. Finally, the supply chain includes separate legal entities (suppliers, manufacturers, distributors, retailers, and customers), and calls for inter-organizationalor inter-enterprisecoordination. It is this dimension of SCM, being relatively uncharted territory for most supply management professionals, that presents perhaps more significant opportunities for improvements in service levels and costsimprovements that cannot be achieved if entities along the supply chain were to act independently and focus on optimizing their own cost structures. Interorganizational coordinating mechanisms that transcend the traditional, legal boundaries and benefit the entities in the supply chain that are involved, such as early supplier involvement in new product development, just-in-time systems, or vendor-managed inventories, need to be developed and implemented.
References Ballou, R.L., Gilbert, S.M., and Mukherjee, A. (2000). New Managerial Challenges from Supply Chain Opportunities. Industrial Marketing Management, Vol. 29, No. 1, 7-18. Houlihan, J.B. (1985). International Supply Chain Management. International Journal of Physical Distribution and Materials Management, Vol. 15, No. 1, 22-38. Jones, T.C. and Riley, D.W. (1985). Using Inventory for Competitive Advantage through Supply Chain Management. International Journal of Physical Distribution and Materials Management, Vol. 15, No. 5, 16-26. Simchi-Levi, D., Kaminsky, P. and E. Simchi-Levi, E. (2000). Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies, McGraw-Hill, New York. Note: This is the third in a series of short, expository articles on supply chain management. These have been incorporated as sections in an articleforthcoming in the Encyclopedia of Information Systems on supply chain management and information technology prepared by Professors Mo Adam Mahmood, Leopoldo A. Gemoets, and Adriano O. Solis, all of the Department of Information and Decision Sciences, The University of Texas at El Paso.

Article in The Criterion, June 2001 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management]