ch 13 - process integration

hidden action (moral hazard)

Salesperson effort Substitute products (Private Label) Moral Hazard on Safety Stock

Moral Hazard Exists when:

a) costly for agent b) impact principal c) not contractable

When is it contractable?

a) observable b) verifiable c) enforceable

The Silo Mentality

"I win, you lose" Using low cost suppliers. Ignoring customers. Assigning few resources to new product & service design.

Implementing change in supply chains is often difficult due to

"behavioral" or "organizational" issues

10 parts of the SCM Integration Model

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know soundscan adverse selection example

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7) Assess and Improve External Process Integration and Performance

Build, maintain & strengthen relationships Share knowledge management solutions, such as forecast information, new products, & expansion plans

3) Align SC Strategies with Key SC Process Objectives

Customer relationship management Customer service management Demand management Order fulfillment Manufacturing flow management Supplier relationship management Product development & commercialization Returns management

Managing Supply Chain Risk

Increase safety stocks also known as stockpiling and forward buying Identify backup suppliers & logistics services which may provide emergency sourcing & multiple sourcing Diversify the supply base Utilize a supply chain IT system Develop a formal risk management program

8) Extend Process Integration to 2nd-Tier SC Partners

Integrate process to 2nd-tier partners & beyond Radio-frequency identification (RFID) tag- relays product's location as it moves through the supply chain. Passive RFID tags don't contain internal power. Active RFID tags use battery power & are very expensive

Bullwhip Effect--Demand Forecast Updating

Make actual demand data available to suppliers. Vendor-managed inventory (VMI) Reduce the length of the supply chain. Reduce the lead times from order to delivery

6) Develop SC Performance Measures for Key Processes

Monitor links w/trading partners in key SCM processes. Trading partners should monitor measures across member firms for each of the SC processes

Bullwhip Effect--Order Batching

Order batching occurs when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets. Solution: use frequent & smaller order sizes. Firms can order smaller quantities of a variety of items from a supplier or use a freight forwarder to consolidate small shipments

2) Review and Establish SC Strategies

Parts purchased & suppliers Shop layout & manufacturing processes Design of the products manufactured Mode of transportation Warranty & return services Employee training methods Types of information technologies used

4) Develop Internal Performance Measures for Key Processes

Performance should be continuously measured ERP systems support measures Firm is able to track progress in each key processes

hidden information (adverse selection)

Pre-Contract Heart-attack insurance. SoundScan: trend-setting retailers might not join. Owens and Minor

Intermediary

Presence of an intermediary can serve to align incentives ex: Li and Fung

Bullwhip Effect- Rationing & Shortage Gaming

Rationing- When demand exceeds the availability, supplier provides partial supply to customers, who also tend to inflate orders Shortage gaming- When production capacity equals demand, demand then drops, as the buyers try to unload excess inventories Solution: sellers should allocate short supplies based on the demand histories of their customers. Sharing future order plans with suppliers allows suppliers to increase capacity if needed

Aligning Incentives

Recognizing potential incongruence Pinpointing goal incongruence Implementing Solutions

Bullwhip Effect- Price Fluctuations

Reduce price fluctuations that create forward buying activities to take advantage of the low price offers between: retailers & consumers. distributors & retailers. manufacturers & distribution -Eliminate price discounting. Many retailers have adopted everyday low prices (EDLP)

Managing Supply Chain Security

Reducing the risk of intentionally created disruptions in supply chain operations A supply chain is only as secure as its weakest link Security management collaboration should include, for example, contractual requirements for secure systems

1) Identify Critical SC Trading Partners

Sell & deliver products to final customers Identifying primary trading partners allows the firm to concentrate on these links

Obstacles to Process Integration

Silo Mentality, lack of supply chain visibility, lack of trust, lack of knowledge, activities causing the bullwhip effect, demand forecast updating, order batching, price fluctuations, rationing and shortage gaming

5) Assess and Improve Internal Integration of Key SC Processes

Team cooperation across all functions Management support & resources ERP system an understanding of the internal supply chain

9) Reevaluate the Integration Model Annually

Trading partners should revisit the integration model annually for changes within supply chains & to assess the impact of these on integration efforts

Overcoming Goal Incongruence

contract based, information based, trust and relationship based, structure based, identifying which one is important

The ultimate goal of supply chain management is

create value for end customers and firms

Principal-Agent Theory

incentives help agents to choose actions

Key idea in "trust-based" solutions

is to convert episodic relationships to repeat interactions

Misaligned incentives are at the core of

the trust problem. Sustainable trust requires incentive alignment

Performance reviews of managers must include:

their ability to integrate processes internally and externally

Process integration requires:

training, willing/competence, trust