Learning Objectives

By the end of this chapter, you will be able to:

  • Explain why IT is fundamental to modern SCM.
  • Describe the role of inter-organizational information systems like EDI and extranets.
  • Differentiate between supply chain planning and supply chain execution systems.
  • Define the bullwhip effect and explain how IT helps to mitigate it.

IT: The Backbone of Modern Supply Chain Management

Modern Supply Chain Management (SCM) is fundamentally an information-intensive discipline. The efficient management of the material and financial flows in a supply chain is entirely dependent on the accurate and timely management of the information flow. Information technology provides the critical infrastructure and tools that enable this.

IT enables modern supply chain management Figure 1: IT Support for Supply Chain Management

Key Technologies Supporting SCM

Several types of inter-organizational information systems are crucial for SCM:

flowchart TB
    subgraph TECH["SCM Technologies"]
        EDI["📤 EDI\nElectronic Data\nInterchange"]
        EXT["🌐 Extranets\nPartner\nNetworks"]
        PORT["🖥️ Portals\nWeb-based\nAccess"]
    end

    subgraph SYSTEMS["SCM Systems"]
        PLAN["📋 Planning\nSystems\n(Forecasting)"]
        EXEC["⚙️ Execution\nSystems\n(WMS, TMS)"]
    end

    TECH --> VISIBILITY["👁️ Supply Chain\nVisibility"]
    SYSTEMS --> VISIBILITY
    VISIBILITY --> MITIGATE["📉 Mitigate\nBullwhip Effect"]

    style VISIBILITY fill:#1565c0,color:#fff
    style MITIGATE fill:#2e7d32,color:#fff

Figure 2: IT Technologies for SCM

  1. Electronic Data Interchange (EDI) EDI is a communication standard that allows business partners to exchange routine documents, such as purchase orders, invoices, and shipping notices, directly between their computer systems. By automating this exchange, EDI eliminates the need for manual data entry, which reduces errors, saves time, and lowers costs.

  2. Extranets An extranet is a private network that uses internet technologies to securely share parts of a business’s information or operations with its suppliers, vendors, partners, or customers. An extranet is a key tool for enabling collaboration between a company and its supply chain partners. For example, a manufacturer might use an extranet to provide its suppliers with access to its production schedule, allowing them to plan their own operations more effectively.

  3. Portals and Exchanges Web-based portals provide a single point of access for partners to find information and conduct business.

    • Procurement Portals (Supplier Portals): These are portals used for managing the relationship with suppliers. A company can post its purchasing requirements, and suppliers can use the portal to submit bids, manage orders, and send invoices.
    • Distribution Portals (Customer Portals): These portals are used to manage the relationship with distribution partners and customers. Customers can use the portal to place orders, track the status of their shipments, and manage their accounts.

Supply Chain Management Systems (SCMS)

These are the dedicated software applications for managing the supply chain. They can generally be divided into two categories:

  • Supply Chain Planning Systems: These systems use advanced mathematical models to help the organization make better decisions about planning its supply chain. This includes tools for demand forecasting (predicting customer demand) and for optimizing the production and distribution network.

  • Supply Chain Execution Systems: These systems are focused on managing the flow of products through the distribution centers and warehouses to ensure that they are delivered to the right location in the most efficient way. This includes Warehouse Management Systems (WMS) and Transportation Management Systems (TMS).

Mitigating the Bullwhip Effect

The bullwhip effect is a phenomenon in which small fluctuations in demand at the retail level become progressively larger and more amplified as they move up the supply chain to the wholesaler, manufacturer, and raw material supplier. This leads to excess inventory, inefficient production, and poor customer service.

The primary cause of the bullwhip effect is a lack of information sharing between the different stages of the supply chain. IT plays a crucial role in mitigating this effect. By using the technologies described above (EDI, extranets, SCMS), companies can share real-time demand and inventory data with their supply chain partners. This increased visibility allows all members of the supply chain to better anticipate demand and coordinate their activities, leading to a more efficient and stable supply chain.

Summary

Information Technology is the critical enabler of modern SCM. Inter-organizational systems like EDI and extranets facilitate seamless communication between supply chain partners. Specialized Supply Chain Management Systems help with both planning and execution, from demand forecasting to warehouse management. By providing real-time visibility into demand and inventory data, these technologies are essential for mitigating the bullwhip effect and creating a more efficient, responsive, and collaborative supply chain.

Key Takeaways

  • The information flow is the most critical flow in a modern supply chain.
  • EDI and extranets are key technologies for sharing information between supply chain partners.
  • IT helps to mitigate the bullwhip effect by increasing visibility and information sharing.
  • SCMS are divided into planning systems (for decision making) and execution systems (for managing logistics).

Discussion Questions

  1. What is the difference between an intranet and an extranet?
  2. How does sharing real-time sales data with your suppliers help reduce the bullwhip effect?
  3. Can a small business with only a few suppliers benefit from SCM technologies? Which ones would be most useful?