The Role of IT in a Supply Chain

Information is the supply chain driver that serves as the glue allowing the other three drivers to work together to create an integrated, coordinated supply chain. Information is crucial to supply chain performance because it provides the foundation on which supply chain processes execute transactions and managers make decisions. Without information, a manager will not know what customers want, how much inventory is in stock and when more products should be produced and shipped. In short, without information a manager can only make decisions blindly. Therefore, information makes the supply chain visible to a manager. With this visibility, a manager can make decisions to improve the supply chain’s performance. In many ways, information is the most important of the four supply chain drivers because without it, none of the other drivers can be used to deliver a high level of performance.

Given the role of information in a supply chain’s success, managers must understand how information is gathered and analyzed. IT consists of the hardware and software throughout a supply chain that gathers, analyzes, and acts on information. IT serves as the eyes and ears (and sometimes a portion of the brain) of management in a supply chain, capturing and analyzing the information necessary to make a good decision.

Using IT systems to capture and analyze information can have a significant impact on a firm’s performance. For example, a major manufacturer of computer workstations and servers found that much of the information on customer demand was not being used to set production schedules and inventory levels. The manufacturing group lacked this demand information, which forced them to make inventory and production decisions blindly. By installing a supply chain software system, the company was able to gather and analyze data to produce recommended stocking levels. Using the IT system enabled the company to cut its inventory in half because managers could now make decisions based on information rather than educated guesses. Large impacts like this underscore the importance of IT as a driver of supply chain performance.

Information must have the following characteristics to be useful when making supply chain decisions:

Information must be accurate
Information must be accessible in a timely manner
Information must be of the right kind

Information is used when making a wide variety of decisions about inventories, transportation and facilities within a supply chain as discussed below:

Inventory: Setting optimal inventory policies require information that includes demand patterns, cost of carrying inventory, cost of stocking out, and cost of ordering. E.g. Wal-Mart collects detailed demand, cost, margins and supplier information to make these inventory policy decisions.

Transportation: Deciding on transportation networks, routing, modes, shipments, and vendors requires information including costs, customer locations and shipment sizes to make good decisions. Wal-Mart uses information to tightly integrate its operations with those of its suppliers. This integration allows Wal- Mart to implement cross-docking in its transportation network, saving on both inventory and transportation costs.

Facility: Determining the location, capacity and schedules of a facility requires information on the trade-offs between efficiency and flexibility, demand, exchange rates, taxes and so on. Wal-Mart’s supplier uses the demand information from Wal-Mart’s stores to set their production schedules. Wal-Mart uses information on demand to determine where to place its new stores and cross-docking facilities.

In summary, information is crucial to making good supply chain decisions at all three levels of decision making (strategy, planning and operations) and in each of the other supply chain drivers (inventory, transportation and facilities). IT enables not only the gathering of this data to create supply chain visibility, but also the analysis of this data so that the supply chain decisions made will maximize profitability.

Supply Chain IT Framework

Given the wide realm of information, it is important to develop a framework that helps a manager understand how this information is utilized by the various segments of IT within the supply chain. It is valuable to note that the driver of IT in the supply chain has increasingly been the enterprise software developed to enable processes both within and across companies. Enterprise software collects transaction data, analyzes this data to make decisions and executes on these decisions both within an enterprise and across its supply chain. Certainly other parts of IT beyond enterprise software such as hardware, implementation services and support are all crucial to making IT effective. Within a supply chain, however, the different capabilities provided by IT have as their most basic building block the capabilities of the supply chain’s enterprise software. In many ways, software shapes the entire industry of IT as the other components follow the software lead. It is for this reason that we use enterprise software and its evolution as the primary guide in analyzing IT and its impact on the supply chain. The evolution of enterprise software provides insights not only into the future of IT, but also into what the key supply chain processes are.

Figure: Framework for impact of IT on Supply Chain Management

Supply Chain Macro Process and IT

The emergence of supply chain management has broadened the scope across which companies make decisions. The scope has expanded from trying to optimize performance across the division, to the enterprise, and now to the entire supply chain. This broadening of scope emphasizes the importance of including processes all along the supply chain when making decisions. From an enterprise’s perspective, all processes within its supply chain can be categorized into three main areas: processes focussed downstream, processes focussed internally and processes focussed upstream.

The classification is as follows:

Customer Relationship Management (CRM): Processes that focus on downstream interactions between the enterprise and its customers.
- - Marketing
  - Sales
  - Order Management
  - Call/service center
Internal Supply Chain Management (ISCM): Processes that focus on internal operations within the enterprise. Notice that the software industry commonly calls this ‘Supply Chain Management.
- - Strategic Planning
  - Demand Planning
  - Supply Planning
  - Fulfillment(transportation and warehousing application)
  - Field Service
Supplier Relationship Management (SRM): Processes that focus on upstream interactions between the enterprise and its suppliers.

Future of IT in Supply Chain

At the highest level, the three SCM macro processes will continue to drive the evolution of enterprise software. The CRM software has been the fastest growing and is now the largest, category of the three macro processes. Software providers in the CRM space have focussed on improving CRM processes themselves but have more work to do to improve integration between CRM and internal operational processes. Future success will be partially driven by the ability to integrate CRM applications into internal operations.

Given that the ISCM macro process aims to fulfil demand that is generated by CRM processes, there needs to be strong integration between the ISCM and CRM macro processes. Successful ISCM software providers have helped improve decision making within ISCM processes. Good integration with CRM and SRM, however, is still largely inadequate at both the organizational and software levels. Future opportunities are likely to arise partly in improving each ISCM process, but primarily in improving with CRM and SRM.

There is one final note worth mentioning with regards to the future of new software players in this area. One might conclude from our analysis that it will be very difficult for a new company to break into the ranks of successful enterprise software companies given the lead in functionality, integration and ecosystem that existing firms already have. We believe, however, that there are two potential paths for a company to enter the market:

The first is through superior functionality, whether it is specific functionality needed by a particular industry or an application that improves the ease of use of existing functionality, allowing users to take full advantage of the functionality.
The other path consists of providing an integrated product that increases the linkage between the macro processes. Certainly it will be difficult for a start-up to garner the resources to build an integrated product across CRM, ISCM and SRM.

Risk Management in IT

Supply chain risk management (SCRM) is “the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity”.

Information in SCRM attempts to reduce supply chain vulnerability via a coordinated holistic approach, involving all supply chain stakeholders, which identifies and analyses the risk of failure points within the supply chain. Mitigation plans to manage these risks can involve logistics, finance and risk management disciplines; the ultimate goal being to ensure supply chain continuity in the event of a scenario which otherwise have interrupted normal business and thereby profitability. Informational supply chain logistics techniques such as supply chain optimization to prejudice contingency planning which would otherwise reduce the overall risk level for that particular supply chain.

The major area of risk in IT can be divided into two broad categories:

Risk involved with installing new IT system
Risk on operating IT system

Supply Chain IT in Practice

Select an IT system that addresses the company’s key success factors.
Take incremental steps and measure value.
Align the level of sophistication with the need for sophistication.
Use of IT systems to support decision-making, not to make decisions.
Think about the future.

Unit 8: IT in a Supply Chain