BUS606: Operations and Supply Chain Management

Typology of supply chain strategies

Fisher introduced the idea that supply chain design should match the degree of demand uncertainty. Fisher discriminates between functional and innovative products. For functional products, having low demand uncertainty, efficient or lean supply chains perform best. For innovative products, that have a high degree of demand uncertainty, flexible or agile chains are a better match. Lee extends Fisher's analysis by adding the dimension of supply uncertainty. Lee distinguishes between stable and evolving supply processes. Stable processes are characterized by controllable production, mature technology and settled industry. In evolving supply processes production and technology are under development and more or less unpredictable.Lee matches four supply chain types with characteristics of supply and demand (see figure 1):

Figure 1. Supply chain strategies and demand and supply characteristics

• Efficient supply chains focus on cost reduction and match with low supply uncertainty - i.e. a controllable production process - and low demand uncertainty.
• Risk-hedging supply chains focus on pooling resources to reduce supply uncertainty; this type of chain matches with high supply uncertainty and low demand uncertainty.
• Responsive supply chains focus on flexibility through make-to-order process and mass customization; they match with low supply uncertainty and high demand uncertainty.
• Agile supply chains combine risk-hedging and responsive strategies, aiming to cope with both high supply uncertainty and high demand uncertainty.
  

The present chapter focuses on agile supply chains. A firm operating in such a supply chain lacks information about future demand and cannot reliably plan the order fulfillment process. After having defined the current position, two types of strategic options for dealing with the accompanying uncertainty can be distinguished: i) uncertainty reduction strategies that focus on decreasing the need for information, and ii) strategies for better management of uncertainties that focus on improving the information processing capacity.

Firstly, a firm should determine whether reduction of uncertainty is possible and desirable. Uncertainty reduction would imply a shift toward efficient, responsive, or risk-hedging supply chains in the framework of Figure 1. Reduction strategies aim to reduce differentiation by standardization and to eliminate the sources of disruptions. Demand-related examples are product standardization, sharing demand information exchange for improved forecasting and establishment of long-term contracts. Supply-related examples of reduction strategies are improved production control, sharing supply information for synchronized planning, cooperation with technology suppliers, hubs for supplier-managed inventory, and production standardization e.g. by fixed batch volumes, standard carriers, or fixed delivery schedules. Reduction of, especially, demand uncertainty - for instance by product standardization and reducing available product options – is not always desirable. In particular this is not desirable for firms that find their market niche in flexibly fulfilling specific customer needs.

Firms that cannot sufficiently reduce supply and demand uncertainties must find ways to manage the uncertainties. Such firms can consider possibilities for uncertainty management, which leave differentiation and unpredictability as is, but aim to manage it by better organization, maintaining close relationships with suppliers and service providers, usage of advanced decision support tools and better utilization of information.

The mentioned strategies show that information systems are important means for uncertainty reduction and uncertainty management. However, in particular agile supply chains entails specific information system needs, as discussed below.

Agile supply chains

In the 1990s Supply Chain Management (SCM) evolved towards an integrated process approach in which the concepts of logistics management were extended to incorporate the integration of firms in its supply chain. In the beginning, the focus in Supply Chain Management (SCM) was very much on so-called lean supply chains. The origins of lean manufacturing can be traced to the Toyota Production System (TPS), which focuses on the reduction and elimination of waste. Thus, lean supply chains focus on efficient streamlined pipelines that push raw material to the market in order to supply predictable demand in high volumes at the lowest costs.

During the 1990s the focus on supply chains as static physical pipelines was criticized more and more. In definitions from the Supply Chain Management (SCM) literature, the network character of supply chains was emphasized: "A Supply Chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer".

The enrichment of the supply chain concept with the network dimension was no conclusive answer to the criticisms on supply chains as static physical pipelines. Also supply chain networks can be focused on the pushing products efficiently to the ultimate customers. As a consequence, in the beginning of this century there was an intensive debate in the SCM-field on agility as an alternative for the then dominant approach of leanness. It was argued that a fundamental shift was required in the dominant underlying approach. According to Christopher, the lengthy and slow-moving "pipelines" have become unsustainable due to the turbulence and volatility of current marketplaces. He suggests that the key to survival in these changed conditions is through "agility", in particular by the creation of responsive supply chains that are market sensitive.

Agility can be defined as "using market knowledge and virtual corporation to exploit profitable opportunities in a volatile market place". Agile supply chains are required to be market sensitive and hence nimble. The primary purpose of responsive chains is to respond quickly to unpredictable demand in order to minimize stock outs, forced markdowns and obsolete inventory. This thinking is based on dynamics of business systems, which has been a major issue in management research for a long time, while the concept of agility can be traced back to Goldman et al.

From the debate emerged that both leanness and agility are no mutually exclusive strategies. On a strategic level it is a matter of strategic choice. There is no one best chain network design ('one size fits all'), but companies continuously have to decide in which supply chain they want to participate, which role they are able to play the best and how they deliver added value in these networks. Furthermore, on an operational level it is always a balancing process between push and pull elements. Nevertheless, there is a trend towards more agile supply chains because of increasing demand and supply uncertainty.

Role of information systems in Supply Chain Management

Supply chain management aims to manage the complex of business processes performed by numerous interdependent supply chain actors as an integrated whole.Information systems are vital to make the resulting complex, frequent and inter-enterprise information flows manageable by offering tools to automatically capture, process, transfer and communicate information in the supply chain. They can support the planning, control and coordinationof supply chains in the following aspects:

• Communication of goals, plans and orders based on actual demand and supply information;
• Assurance of the required process execution by triggering the right activities and guiding the appropriate usage of resources and material (instructions);
• Continuous and chain-wide registration of monitoring information and effective alert mechanisms;
• Rapid and integrated decision-making based on aggregated and enriched monitoring information and information about external variables;
• Fast communication and implementation of the decided corrective and preventive actions.
  

As a consequence, one can distinguish between the following roles of information systems in Supply Chain Management:

• Inter-organizational technical communication infrastructures, including the Internet and Virtual Private Networks;
• EDI/XML based techniques for data exchange;
• Enterprise Application Integration (EAI): software to integrate the applications of individual chain actors, nowadays based on service-oriented architecture (SOA);
• Central, mostly web based information systems that are used by all involved supply chain actors to manage the basic information flow;

• Product configuration tools that help to specify customer specific orders in interaction with the customer within the process constraints (guided selling) and convert generated customer orders automatically into detailed production, sourcing or distribution orders;
• Point of Sales (POS) applications that help to replenish retail stocks on basis of actual consumer transactions;
• Integrated Planning Systems (CPFR: Collaborative Forecasting Planning and Replenishment), in which the planning of the involved companies is aligned;

• Enterprise software for production management, distribution, warehouse management, sales, purchase and finance (ERP systems);
• Early Warning Systems that continuously measure the process conditions and alert if there is serious risk based on an intelligent reaction on condition changes;
• Inter-organisational Management Information Systems that translate the basis process information into high-level management information about the realization of Performance Indicators, often in the form of management cockpits or dashboards;

• Demand Forecasting Models that help to analyse consumer behaviour e.g. on basis of Point of Sales data and predict future consumer demand in order to improve planning;
• Chain Process Simulation Models, that analyse the process behaviour in various levels of demand orientation and help to improve the fulfilment of consumer demand;
• Process configuration and implementation: the adjustment of control variables and the supporting information systems in order to support customer-specific process execution. Vital enabling element is the ability to configure and reconfigure ICT rapidly. Furthermore, ICT can support the required changes in human behaviour, e.g. by stimulating problem awareness (diagnosis tools), vision development (gaming and simulation) and intervention design.
  

A firm's information systems should match the type of supply chain it operates in. For further analysis we distinguish between front-office systems (coping with the demand side) and back-office systems (coping with the supply side). Front-office systems include order management, contract management, sales configurator, demand forecasting, and customer relations management systems. Back-office systems include resource planning and scheduling, stock management, purchasing, and supplier relations management systems. The type of supply chain determines the required flexibility of front- and back-office systems:

Efficient supply chains require stable, straight-forward planning systems for both front-office and back-office. The systems must be well-integrated to reduce waste of resources. Back-office systems support large volume production of standardized products based on long-run forecasts. Front-office systems support efficient order processing, long-run contracts and demand forecasts. Traditional ERP systems cover the demands of efficient supply chains.

• Risk-hedgingsupply chains require the same type of stable front-office systems as efficient supply chains do. However, they require flexible back-office systems, integrated with production control systems and supplier's systems. Disturbance of production or supply of materials should rapidly be observed and lead to re-planning and rescheduling. The rigid planning and scheduling systems of traditional ERP systems may cause problems in this type of supply chain.
• Responsivesupply chains place high demands on the ability to combine fluctuations in demand and available supplies with respect to product specifications and lead times. The most common approach to organize responsiveness is mass customization in an assemble-to-order (ATO) production environment. This type of supply chain quickly responses to demand variability by efficient assembling of order-specific products from standard components. It requires stable back-office systems for efficient production of standardized components and rapid assembly. Traditional ERP systems can meet this demand. However, front-office systems require a flexibility usually not offered by traditional ERP systems. A responsive supply chain may require a more sophisticated sales configurator.
• Agilesupply chains require flexibility in both front-office and back-office systems. They demand flexible ERP in the back-office and sophisticated configurator and customer communications systems in the front-office. Tight integration is required between front-office and back-office and with systems of both suppliers and customers.