In a supply chain, coordination occurs when the constituents act in unison for the betterment of the supply chain as a whole rather than their own link. Thus, it is likely that on an individual basis, a chain member may stand to suffer a “loss” associated with a coordinated decision. In economics, this is the classical principal-agent dilemma.
Lee and Whang (1999) discuss incentive problems that prevent coordination in a supply chain with a decentralized decision structure. In this type of system, each site manager makes decisions to optimize his or her personal benefit. This type of incentive misalignment can exist within and between functional areas of a site (firm) and also between sites (firms) in the supply chain. For instance, a marketing manager’s objective may be revenue maximization, and he or she may attempt to generate sales with trade promotions to induce forward buying. Meanwhile, a manufacturing manager may have a conflicting objective, such as minimizing production variability or level utilization. As illustrated through the bull-whip effect, trade promotions generally increase variability in production.
Fostering Trust between Partners
Contractual agreements can also be used to develop a foundation of trust between trading partners. A simple contractual relationship is far from a collaborative relationship, however. Firms’ inability to collaborate has often been blamed on the technological limitations of information management. Interestingly, Gallagher (2001) commented that during a spring 2001 Supply Chain Council executive retreat, attendees cited a “lack of trusted relationships between key supply chain participants” as the main obstacle to effective collaboration. Information sharing is no longer constrained by information technologies; it is held back by the impersonal nature of automation.
Incentives from Terms of Sale
Supply chain coordination can be accomplished through a quantity discount schedule for commodity-type products. Because prices for these products are set by the market, a lot size quantity discount scheme can coordinate the supply chain. This holds as long as the increased cycle inventory costs are less than the benefits of the quantity discount scheme. This mechanism is well suited for supply chains with an efficiency driven strategy associated with commodities. A related approach for incentivizing suppliers is to enter into long-term blanket orders with multiple order releases within the planning horizon.
Information technology and SCM
At the overall level, the broadest impact of information technology on SCM is by enabling tighter connectivity between supply chain members. The time and distance gaps that previously hampered information flows and supply chain responsiveness are all but eradicated by the Internet’s relative immediacy of access to existing information. Keskinocak and Tayur (2001, p. 71) noted that the Internet’s rapid communication, innovative trading spaces, accessibility of new distribution channels, and facility for collaboration encourage supply chain managers the rationale for envisioning virtual integration as a reality. Obviously, sharing of accurate information is essential for collaboration. To this end, trading partners must have the means to exchange information.
ERP systems, offered by firms such as SAP and Oracle, provide the basic functionality of visibility and tracking on which tighter connectivity is executed. For example, through Web interfaces, customers and suppliers can place orders to the firm or provide replenishment information for the firm. The ERP system pulls this information from a database and compiles an enterprisewide view that provides order status information for customers, generates shipping orders to suppliers, and inventory positions to APS applications offered by SAP, Oracle, i2 Technologies, Manugistics, and others.
Auctions and Exchanges
Major ERP vendors also provide products that enable firms to create online auctions. The time and financial resources spent developing and organizing an auction are significant overhead expenses. Therefore, industry partnerships or third parties host many auctions and e-markets. B2B and B2C exchanges are dramatically changing the manner in which supply chain activities are being structured. The underlying structure of these exchanges is built around an auction mechanism. In general, an auction can be viewed as a way for sellers to obtain information on the reservation prices of potential customers in the market for a particular product. The implementation of auctions on the Web provides a guarantee for consumers in terms of price efficiencies and simultaneously helps to match buyers and sellers.
At the core of SCM is the optimal coordination of activities at and between individual supply chain members. We have outlined how supply chain members individually and collectively must support and enhance the characteristics of the products serviced by the chain. Friction between product type and the type of supply network servicing the product may be the underlying cause of many supply chain problems. Given that product and supply chain strategies are aligned, effective execution of the SC’s strategy is built on operational foundations including overall network design, sourcing, logistics, transformation processes, and distribution channels. These basic activities work in concert to balance requirements of quality or service levels with economic realities of cost containment. Supply chain managers invariably rely on information technology to facilitate a more efficient physical flow of their products and foster better market mediation throughout the chain.