December 2014 | Commentary | The Lean Supply Chain

Supply Chain Integration + Collaboration = Time Travel?

Tags: Reverse Logistics, Inventory Management, Logistics I.T., Retail, Warehouse Management Systems (WMS)

Paul A. Myerson is Professor of Practice in Supply Chain Management at Lehigh University and author of books on Lean for McGraw-Hill, and supply chain for Pearson, 610-758-1576

By integrating and collaborating with partners and customers downstream as part of a Lean strategy for your supply chain, you actually open a window into your future—and even your past. It's like having the ability to time travel.

But before we travel through time, let's define the subtle differences between integration and collaboration.

Integration of supply chain components started in the 1970s when Electronic Data Interchange created a business-to-business communications standard, followed in the 1990s by Enterprise Resource Planning systems with common databases. Then came the introduction and growth of the Internet.

But true supply chain collaboration is more than just integrating information among business functions and partners. Yes, it is companies working together to improve data sharing, but it is also an interactive process that results in joint decisions and activities—often in multi-company teams from various disciplines in each organization.

Furthermore, supply chain collaboration is not easy to accomplish for many reasons, including a tendency to rely too much on one technology, failure to understand when and with whom to collaborate, and a propensity for distrust among partners.

Now that we're clearer about supply chain integration versus collaboration, let's talk time travel.

Collaborative programs, such as Quick Response, Efficient Consumer Response, Vendor Managed Inventory, and the most recent iterations of Collaborative Planning, Forecasting, and Replenishment, have been around since the late 1980s. They all involve getting a more accurate downstream picture of the supply chain, using information such as point-of-sale data, retail store and distribution center inventory balances and withdrawals, and current and future events such as promotions, discounts, or advertising.

These types of solutions reduce the bullwhip effect—progressively larger inventory swings in response to changes in customer demand—the result of which is supply chain volatility, inefficiency, and waste.

Through a structured integration and collaboration process, it is possible for manufacturers and distributors, in essence, to time travel and see potential causes of future disruptions before they occur. While an initial investment in resources may be required, opportunities for fewer stockouts on store shelves, up-selling, and cross-selling may be worth it.

The 80/20 Rule

The initial investment often causes companies to shy away from integration and collaboration programs without looking at the big picture. One way to justify the investment is via the Pareto Principle (also known as the 80/20 rule). The rule states that in business, there is a natural tendency for a small number of items to generate a disproportionately large portion of sales and/or profits.

The 80/20 rule also applies to an organization's customer base, focusing on integration and collaboration efforts with larger customers who make up a greater portion of sales. Companies can use the advance information gained through this process to significantly improve forecasts, thus boosting service levels, reducing inventory costs, and removing other types of additional waste in the supply chain.

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