The Role of IT in the Improvement of Supply Chain Performance

Studies in System Science (SSS) Volume 2, 2014 www.as‐se.org/sss

The Role of IT in the Improvement of Supply Chain Performance Farzad Firouzi Jahantigh*1, Azam Sarafrazi2 1

Department of Industrial Engineering, Faculty of Engineering, University of Sistan and Baluchestan, zahedan, Iran

2

Payam Nour University, Gheshm, Iran

*1

firouzi@eng.usb.ac.ir; 2raheleh.sarfaraz09@gmail.com

Abstract The supply chain plays a major role in modern enterprises to gain a competitive advantage in today's business environment. Since the elements of supply chain have been typically separate and independent entities, the main objective of supply chain management is to develop a mechanism to prioritize goals and to coordinate activities for optimal implementation of system.

Information is the most significant element of coordination. Information technology can be used to help implement the participation of supply chain elements in the supply chain system. Collaborations in supply chain can adjust deficiencies with decentralized control and decrease the bullwhip effect. Taking advantage of information brings about considerable improvements in supply chain performance. Although this approach reduces the anticipated needs in the chain, the lack of process awareness is one of the weaknesses of this method. This study aims to investigate the participation in supply chain and the role of information sharing.

Keywords: Supply Chain; Information; Participation; Process Awareness

Introduction Supply chain management is an important managerial model. The reason for this adoption is that the systems approach to manage the complete flow of information, materials, and services to meet customers’ demands [1].

Frequent studies have identified issues that bring about the lack of coordination and what increases the competitive advantage can be achieved from an integrated supply chain [2][3][4]. Coordination in supply chain leads to an increased flow of information, a reduced uncertainty, and a useful supply chain. These are the key success factors for supply chain management and effective development of organizational operations in different industries. From an operational perspective, supply chain management is the coordination of suppliers, producers, and warehouses are to reduce the system's costs along with satisfying the service requirements, and goods are produced and distributed in right quantities and right time [5]. In this case, the coordination mechanism is individual operation of chain components, increasing the system's profitability. Since supply chain components are separate and independent entities, IT makes coordination between them. Information sharing between the seller and buyer in the chain is as an effective strategy for a modifying bullwhip effect (fluctuating demand from downstream to upstream of the supply chain) and improving the supply chain performance. Data exchange is the most important result of the coordination of units' activities. The production’s plans of traditional distribution have been altered. Many companies have been forced to redesign or relocate their production networks in different countries. Supply chain management emphasizes the long‐term interests of all parts of the supply chain coordination and information sharing.

The Position of IT in Supply Chain Information is one of the most important elements for the supply chain because it provides a basis upon which managers make strategic decisions of their organizations. Information technologies includes tools that are used both for the acquisition of knowledge of this information and for the analysis of information make the best decisions in a chain.

The Role and Effect of IT on the Supply Chain Information as a key driver allows the other supply chain drivers to work together in an integrated and coordinated manner. Information is crucial to the supply chain performance because it provides a basis for decision‐making; and without information, managers can only make decisions blindly. Therefore, information provides a visual model for the chain's managers to make decisions to improve the supply chain's performance.

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Managers' knowledge of how to collect and analyze the information makes more successful supply chain. This is where IT comes into playing. It consists of hardware and software throughout a supply chain that is used for gathering and analyzing information. Using the cooperation of supply chain segments in the coordination and information sharing and collaboration of various parts in the logical networks, the supply chain management has provided a win‐win situation for all components. Supply chain's information sharing provides many benefits in business communications such as vendor managed inventory (VMI), warehousing and quick response (QR).

Participation in supply chain is to form relationships between two independent elements in supply channel, with increasing levels of information sharing to achieve specific goals and the benefits of lower costs and inventories.

Huangetal [7] has presented a production information model containing six categories, which are typically associated with the analysis of information sharing These six categories include product, process, resource, inventory, order, and planning.

Uncertainty in Supply Chain and Bullwhip Effect Uncertainty in the distribution chain of production is usually decreased by inventories. Uncertainties in the system must be identified for formulating effective inventory control policy. In traditional logic studies, a supply chain is often viewed as a multi‐location inventory system. Three separate sources of uncertainty affect the supply chain include suppliers, producers, and customers. Uncertainty is caused by delay in delivery, machine failure, demand fluctuations, etc. which results in an increase in inventory. Uncertainty in supply chain is released in the form of orders' variability leading to increased storage reliability, increased reasonable costs, and ineffective use of resources.

In a supply chain, each member of the chain needs to forecast lower level of product demand for production planning, inventory control, and its material requirements planning. The demand forecasting typically encompasses some uncertainties, which can be regarded as the variability of demands. The most important thing is that the demand variability of upstream members is higher than downstream members. This effect is identified by Procter & Gamble (P&G) and it is called "bullwhip effect" [6]. In recent years, it has become the biggest concern for manufacturers, distributors, and retailers. The reasons for bullwhip effect are identified as follows: demand forecasting, order classification and demand fluctuations.

Essentially whip effect is caused by changing the order. Increased information sharing between supply chain members can reduce uncertainty for decreasing or eliminating this effect. The increasing participation of vertical information, which uses the electronic data interchange (EDI) technology, can facilitate the performance of suppliers and this can greatly improve the performance of supply chain system. The importance of integrating information has promoted the increasing attention to strategic supply chain partnerships.

The Role of IT in Organizations and Businesses to Be Competitive As business management previously relied on executive's sixth sense, which would be based on executive's experience, and computer invention provided the possibility to collect and analyze past data, and established a product based on previous experience and gathering technical knowledge, which not only prevented from repeating previous mistakes but also was served as a future strategic plan. The influence of computer as an essential supporting tool that management can obtain its information from large data, analyzes and processes it and at the same time issued instructions for changing reactions including sales, purchasing, warehousing, and or production planning are necessary.

The rapid growth of IT makes information and management an inseparable process. IT is not only an effective tool, but it is a catalyst, which changes the fundamentals of business. In international production, distribution, and customer networks, IT has become a powerful strategic tool for managing innovation and added‐value. Organizations also reshape because of using IT and their structure will be different form the past.

Using information technology, more information can be shared with the public and organizational hierarchy is not much important for management and other employees. Managers in such organizations have more chances to communicate with subordinates by which they increase their working relationships and employees feel closer to decision‐makers. However, more importantly, information is easily available in a methodology and framework for strategic and timely decision making for top management without being screened, interpreted and summarized by management levels. IT application begins with efficiency improvement and then improves the effectiveness. There is an increasing use of IT as a strategic management tool for the sustainable competition and effective development.

Information Sharing Policy

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Information sharing policy involves information centralization, VMI, and Collaborative Planning Forecasting and Replenishment (CPFR). Information content and the way of sharing information are different in different policies.

Information centralization is the most significant policy in information sharing in which retailers plan the market consumption for the rest of supply chain to reduce the bullwhip effect. VMI means that suppliers manage and control downstream inventories based on their inventory and production information. CPFR shares more information than just demand information.

Identifying the Impact of Operational Information Identifying the impact of operational information is the most important result to ensure the accuracy of information that must be exchanged when coordination occurs. Implementation of information sharing among companies involves costs. The balance must occur between the cost and profit. To do so, the effect of operational information should be identified. The objective of information exchange between companies is to achieve stabilization and balance in the supply chain. From the system control's viewpoint, a stable system can be defined as a system in a balance (when it is encountered an external force) can be returned to the status after its evaluation, otherwise it is not stable. Information has assumed a leading and optimized role throughout the supply chain operations. IT development has changed the ways which organizations can achieve competitive advantage through supply chain management. Successful companies and organizations always apply IT to develop their business strategies and it has a significant impact on the entire supply chain [8].

Balance in supply chain is a situation in which the upstream and downstream of companies is closely related, the production process is prolonged, and needs are met in a timely manner, and supply chain performance indicators are fixed at a certain time. This situation can be assessed through indicators such as inventory cost, order procurement rate, and procurement time. The combination of qualitative analysis and quantitative research is helpful to identify the impact of operational information.

Coordination Classification of Operational Information Coordination of operational information can be divided into two methods. First, Coordination of operational information in the supply chain experiences internal and external coordination. Companies (especially producer) can first implement internal coordination. The objective of internal coordination is to submit accurate information in a right manner to individuals who require production and management in a proper time. Then the supply chain reaches new level and new instability point occurs. At this point, various types of information may be exchanged between companies and other supply chains may have different conditions, high or low inventory cost, and respond to customers quickly or slowly. To select one of them chain requires additional information that is provided by other partners.

Second, coordination of operational information can be categorized based on the information flow depth.

Information flow is a layer between retailer and distributor, distributor and producer, and/or producer and supplier.

Multi‐layer information flow is enabling each company to achieve the depth of the vertical flow of information in which the information is exchanged.

Process Awareness Ayers (2000) has pointed out the importance of information systems in the supply chain, however, he has emphasized the importance of "process awareness". It means that companies need to mobilize necessary resources, time, tools, and personnel to facilitate the sharing of information in the supply chain.

Conclusion Today, information in a supply chain is a critical factor for decision‐making and improving throughout the supply chain. Information coordination is a key approach to achieve coordination in the supply chain. Various information, its effect on supply chain performance, and information sharing policy are the most important research factors in the supply chain. IT enhances cooperation internally and externally and avoids the bullwhip effect. Identifying the impact of operational information is the most important result to ensure the accuracy of information that must be exchanged when coordination occurs. Supply chain collaborations can adjust the deficiencies by decentralizing control and reducing the bullwhip effect. It should be noted that although this approach reduces the forecasting needs in the chain, the lack of process awareness is one of its weaknesses. Given the key role of information and communication in all processes and phenomena of human society, it could be expected that the more development

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and capability of relevant technologies might lead to far‐reaching profound and durable effects.

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