Role of Supply Chain Coordination in OM: Select Experiences from India

Transcription

1 POMS Abstrct Nuber: Role of Supply Chin Coorintion in OM: Select Experiences fro Ini Arshiner Reserch Scholr,Deprtent of Mechnicl Engineering Inin Institute of Technology Delhi, Huz Khs, New Delhi , INDIA Eil: Mo Arun Kn Professor,Deprtent of Mechnicl Engineering Inin Institute of Technology Delhi, Huz Khs, New Delhi , INDIA Eil: Ph S G Deshukh Professor,Deprtent of Mechnicl Engineering Inin Institute of Technology Delhi, Huz Khs, New Delhi , INDIA Eil: eshukh@ech.iit.ernet.in Ph POMS 18th Annul Conference Dlls, Texs, U.S.A. My 4 to My 7, 2007 Corresponing uthor

2 Role of Supply Chin Coorintion in OM: Select Experiences fro Ini Abstrct Supply Chin (SC) is concerne with the integrtion (cobining into hrony) of processes between vrious ifferent but epenent SC entities to nge seless flow of resources n infortion. Supply Chin Coorintion (SCC) helps in nging epenencies, which sees to be often conflicting ong vrious entities, especilly in eveloping countries. It cn be chllenging tsk for teching counity to tckle the proble t the ctivity n interfce level with the existing nlyticl oels, which re highly frgente, yopic n isjointe.. The utility of these oels see to be liite fro prctitioners point of view, for exple, uch celebrte OM oel newsboy proble! In this pper, pegogicl frework using heuristics n siultion is propose with ngeril iplictions n insights, which cn ct s lerning evice-cu- ecision support to the prctitioners, thereby, briging gp between oel n relity. The frework y lso link coorintion echniss n perfornce. Key wors: Newsboy oel, supply chin coorintion, heuristics, Prctice of OM Introuction Supply chin ngeent (SCM) s focus subject hs receive ore n ore ttention n interest fro both cei n inustry. Vrious thees in SC, such s purchsing, sourcing, inventory, istribution, n trnsporttion hve been res of concerns within tritionl OM. But with treenous use of IT, infortion systes n ening expecttions fro vriety of qurters, SCM hs becoe ore n ore relevnt n thetic. Accoring to Lee n Ng (1997), istinction between so-clle SCM n OM lies in two iensions of integrtion n coorintion: orgniztionl integrtion (both verticlly n horizontlly, enble by IT) n flow (teril/oney/infortion) coorintion. The flows of proucts, services n infortion between firs nee to be orgnize n nge s if they belong to one entity. This entity is not the fir but the supply chin or supply network. The opertions ngeent (OM) tsk is pririly efine by the prgtic chllenges of ipleenttion. The y-to-y prouction of goos or elivery of services requires

3 prctitioners to continully ke ecisions n ipleent chnges. OM is suppose to concentrte on vrious ngeril functions so s to cter to the rel nees n spirtions of prctitioners. However, it ppers tht the theoreticl ies/concepts of the OM fiel re frgente, though it hs borrowe ny concepts fro Opertions Reserch/Mngeent Science. SCM provies n opportunity to integrte n coorinte these frgente islns to ke the flows of proucts n infortion between firs strtegic tter. SCM cn lso be viewe s holistic reltionship ngeent concept. The supply chin hs its own justifiction outsie the interests of the iniviul fir. This is ricl suborintion of iniviul firs role in creting custoer vlue n copeting in the rketplce. Inste, supply chins copete ginst supply chins. Integrtion is key result re in SCM tht trnsfers ecision power to the ngeent of the supply chin rther thn to the iniviul firs constituting the supply chin (Storey et l., 2006). Supply Chin Mngeent in Ini Supply chin ngeent is currently perceive s n effective ens to chieving successful interntionl copetitiveness. Interest in supply chin ngeent hs been otivte by perceive benefits of collbortive reltionships. The ngeent concept hs lso cught ttention in Ini. Shy et l.(2006) hve iusse vrious fctors for Ini s copetitiveness in the oin of SCM. It sees tht Inin orgniztions hve relize the inppropriteness of copeting effectively in isoltion fro their suppliers n other ssocites of the supply chin. Toy, the Inin inustry spens n exceptionlly high ount of 12 to 15 per cent of its revenue on logistics. Close to 22 per cent of the ggregte sles in the inustril sector, ounting to over US$25 billion, is tie up in inventories in the supply chin network countrywie (Shy et l., 2004). Inin

4 orgniztions hve ove fro physicl istribution to logistics ngeent. They re now on course to gruting to supply chin ngeent, the preferre ne for ctuliztion of integrte logistics (Pre Vrt, 1998b). More thn 15 yers hve psse since Ini econoy hs tken the pth to globliztion n liberliztion n now Ini is one of the worl s fstestgrowing econoies with iverse rkets.. Mnging supply chin in such vst country is ost chllenging for ny orgniztion becuse of business prctices, governent regultions, technology cpbility, trnsporttion infrstructure, etc. The opening up of the Inin econoy hs thrown ny chllenges to Inin inustry. To tke the chllenges of liberliztion n globliztion, the thrust of the inustry is oving towrs iproving qulity, cost n response tie. To ttin this, inustry is concentrting on iproving their nufcturing copetence by better ngeent of technology, supply chins n other resources (Pre Vrt, 1998). Becuse of globl copetitive pressures, nufcturing orgniztions re fining it worthwhile to evelop nufcturing bse, in Ini, especilly for nufcturing of utoobile n electronic coponents. This hs resulte in growing wreness bout OM in the sll n eiu sectors. This is suppleente by the fst growth of IT, which hs e ulti-loction plnts fesible. Recent evelopents in countries like Jpn, Kore, Singpore, etc., see to hve influence Inin inustry to intin copetitive ege on globl le. The techniques n prctices in SCM like qulity, infortion technology, joint ecision-king opte by the inustries in these countries in eveloping their supply chins re being ctively pursue by the prctitioners in Ini. Eerging enblers for enhncing Mteril, Finncil n Infortion Flows As stte erlier, the teril, oney n infortion flows re being consierbly ipcte by vriety of enbling evelopents in Ini. These re surize in Tble 1.

5 Tble 1: Iproveent in Vrious Flows in Inin Context Flow Enble by Evience Mteril Flow Money Flow Infortion Flow Iproveent in infrstructure (ro, rilwys, ir) Growth in courier/crgo Wrehousing Autotion in bnking Iproveent in Couniction Use of ERP systes n stte-of-the-rt softwres in supply chin Source: Shy et l. (2004) n Mitr (2007) Golen qurilterl project initite liking etro cities Iproveent in perfornce of Inin Rilwys Continer services reily vilble Mny privte irlines introuce Increse in privte opertors (FeEx, TNT etc.) n volue hnle by the Concept of 3-r prty wrehousing introuce n growth in nuber of Wrehousing copnies Iprove services Esy ccessibility to cpitl Mny privte lening gencies Iprove connectivity n Mobile penetrtion ensity Iprove infortion flow between suppliers n orgniztions Growing wreness bout internet n web bse services All the bove evelopent hs corroborte the fct tht Inin copnies re now sensitize towrs SC orienttion. Generlly, in SCM, there re vrious stges of turity. SCM inititives cn be visulize cross vrious iensions: Coopertion, coorintion, collbortion n integrtion. In our view currently, there is n eergent nee to view coorintion s priority re. This is ue to the following fcts: ) Inin copnies re still in n environent, which is guie by tx regie (vrious types of tx structure exist: centrl verses stte, excise, sles etc.) b) The IT is eerging s powerful enbler for coorintion of vrious ctivities cross the SC. c) Inin inset is still in the pperwork or bureucrtic set up where the buyer n supplier re ore cofortble with contrctul rrngeents. A strong focus on ocuenttion (perhps guie by ISO9000) still previls. On this bckgroun, it is necessry to hve serious look t the coorintion proble. Reserch Opportunities for Coorintion in Supply Chin A typicl supply chin (SC) consists of ifferent functions: logistics, inventory, purchsing n procureent, prouction plnning, intr-n inter-orgniztionl reltionships n perfornce

6 esures. SCs re generlly coplex with ctivities spre over ultiple functions or orgniztions over lengthy tie horizons. The ynic structure of the supply chin poses ny interesting chllenges for effective syste coorintion. Supply chin ebers cnnot copete s inepenent ebers. The prouct use by the en custoer psses through nuber of entities contribute in the vlue ition of the prouct before consuption. To iprove the overll perfornce of supply chin, the ebers of supply chin y behve s prt of unifie syste n coorinte with ech other. Thus coorintion coes into focus. The priry resons for coorintion is tht eprtents n work groups re interepenent-they epen on one nother for infortion n resources to perfor their respective ctivities efficiently n effectively. These coul be sequentilly interepenent or reciproclly interepenent. There re reporte ttepts in the literture regring coorintion of ifferent functions of the supply chin; however, the stuy of coorinting functions in isoltion y not help to coorinte the whole supply chin. Though, the nee for coorintion is relize, little effort hs been reporte in the literture to evelop holistic view of coorintion. There sees to be no unique efinition of SCC. Different coorintion oels hve been propose consiering isolte ctivities or ifferent functions of supply chin. There is no unique perspective on coorintion, but the lck of coorintion cn be esily rticulte through vriety of surrogte esures. The ost coonly ccepte efinition in the literture of coorintion is the ct of nging epenencies between entities n the joint effort of entities working together towrs utully efine gols (Mlone n Crowston, 1994). Accoring to Siputng et l. (2002) coorintion is necessry prerequisite to chieve the utul of gol of supply chin s whole s well s those of the prticipting units, given the nture of interepenence between

7 these units. Supply chins with reuce profit rgins, intensive copetition, pressure for keeping low inventory n huge cost ssocite with cpcities, coorintion becoes ipertive. Typiclly orgniztions copleent ech other in supply chin. Interepenencies y enhnce such copleentrities. Coorintion coul lso be source of copetitive vntge. SCM coorintion in SC cn lso be perceive s echnis to cope with the uncertinty. Bllou et l. (2000) view coorintion s centrl lever of supply chin ngeent. Stnk et l. (1999) stuie inter-fir coorintion processes chrcterize by effective couniction, infortion exchnge, prtnering, n perfornce onitoring. Lee (2000) proposes supply chin coorintion s vehicle to reesign ecision rights, workflow, n resources between chin ebers to leverge better perfornce such s higher profit rgins, iprove custoer service perfornce, n fster response tie. The lck of coorintion y result in poor perfornce of supply chin. The istch between supply n en results in rise in the costs of stock out, rkown, expeiting, trnsshipent, vertising n sle preprtion, excess inventory, obsoleence, n isposl (Fisher et l., 1994). Accoring to Lee et l. (1997), the current policies y quickly becoe outte becuse they re crete inly to suit locl copny to ern locl benefits n not the coorinte supply chin, which results in en plifiction. The syetric infortion trnsfer between supply chin ebers y result in interrupte prouction heules; longer le ties, higher level of loss n ge n lower custoer service levels. Supply chin (SC) coorintion is prouctive inititive to nge the coplex SC ctivities with the help of coorintion echniss like contrcts, infortion shring, infortion technology, joint ecision-king, etc. In supply chin context coorintion cn be chieve with joint ecision king of ll processes of supply chin procureent, prouction, istribution

8 n wrehousing n econoic lloction of the requireent of resources ong supply chin ebers. There re ultiple benefits ccruing fro effective SCC. Soe of these inclue: eliintion of excess inventory, reuction of le ties, increse sles, iprove custoer service, efficient prouct evelopents efforts, low nufcturing costs, increse flexibility to cope with high en uncertinty, increse custoer retention, n revenue enhnceents (Fisher et l. 1994, Lee et l., 1997). Coorintion is perceive s prerequisite to integrte opertions of supply chin entities to chieve coon gols. Siputng et l. (2002, n 2004) hve given elborte on utility of coorintion in supply chin. It y be note tht there coul be vrious coorintion echniss vilble. Tble 2 gives soe of the wiely reporte n relevnt coorintion echniss n their respective benefits. Tble 2: Vrious coorintion echniss Supply chin Deription coorintion Supply chin contrcts Coorintion is chieve bse on coonly use supply chin contrcts such s buybck contrcts, quntity flexibility, quntity iounts n revenue shring, Buybck contrcts: Buyer is llowe to return ny leftover units to the supplier t the en of the perio t frction of purchse price untity Flexibility contrcts: Buyer is llowe to oify the orer within liits gree to the supplier s en visibility increses closer to the point of sle Infortion shring Coorintion is chieve by shring infortion on inventory t, en custoer en, sles t, prouction heule, cpcity, qulity n le-tie, n infortion bse coorintion echnis. Infortion shring y be on line or offline Infortion technology Coorintion is chieve bse on use of technologies such s Internet, eil, fx, EDI, n ERP. Joint ecision king The supply chin ebers jointly pln for forecsting, esign of prouct, joint replenishent, profit shring, orering n heuling ctivities bse on joint ecision king Benefits Increse supply chin profits Risk shring ong supply chin prtners Reuces the proble of ouble rginliztion Infortion cn be substitute of inventory n le tie Reuces the supply chin costs Reuces the en vribility Iproves the service level Enhnces responsiveness Enbles rpi exchnge of proucts, infortion n funs Allows visibility n ccessibility to ll supply chin ebers Reuces the en vribility Increses flexibility of response to custoer en Reuces infortion syetry Reuces inventory cost Iproves the custoer service Iproves the efficiency of replenishent process

9 Methoology Keeping the objectives of stuying coorintion issue, ethoology coprising both qulittive n quntittive oels blening both theory n prctice ws opte (Fig 1). A theoreticl bckgroun bse on coorintion perspective fro vrious ngles ws evelope. Here the bsic eleents of coorintion such s interepenency, coherency n utulity were ppe into the context of supply chin (Arshiner et l., 2006b). After unerstning the theoreticl unerpinnings, n epiricl ethoology bse on cse stuies ws opte to investigte n explore vrious opportunities vilble for coorintion in Inin context. Cse stuy is powerful tool for exploring n unerstning vrious issues relte to SCC. The objective of these cse stuies ws to: ) unerstn the extent of coorintion in Inin copnies b) pprecite vrious echniss vilble for coorintion c) ocuent the turity levels of these orgniztion sin SCM. Nee for coorintion Theory Dignostics n Lerning Moels, prctices n ipleenttion Fig 1: Methoology Aopte In ll, five ifferent copnies (lbele s Alph, Bet etc.) were selecte for the bove purpose. Fiel visits, iussions with executives n support fro ocuente literture fore the bsis for highlighting these cse stuies fro SCC point of view. Tble 3 presents synoptic view of

10 the lernings fro these cse copnies. After getting prgtic view bse on these cses, nee for siultion-bse frework ws felt. Accoringly, suitble theoreticl oel bse (bse on newsboy oel) ws ientifie. Tble 3: Sury of cse copnies S. Copny Brief Chrcteristics of Supply Chin Rerks No. 1 Alph Auto coponents (Fuel injection pups n sprk plugs) Nuber of eployees is ore thn 3000, four nufcturing plnts with prent copny in Europe Spns cross 1000 towns ll over Ini with over 4000 uthorize elers One Globl evelopent center with 250 qulifie n experience engineers n technicins Different functionl eprtents pln forecsting n prouction heules jointly ERP Infortion syste is instlle in one of the plnts, rest operte on locl softwre Orgnize regulr eetings with suppliers Suppliers lwys sen coitte orer quntity Cross-functionl te fro Alph select the suppliers Suppliers re given trining n eonstrtions for ctul requireents of esign of proucts Only cpcity n orer infortion is shre with suppliers untity flexibility contrcts re offere to buyers Ipleente supply chin inititives like R, EDI, ECR n JIT 2 Bet Electricl uto coponents Hs % rket shre, eployees, 250 suppliers (30-35 interntionl suppliers) Three plnts (very-well coorinte, interplnt trnsfer of inventory, joint ecision king regring orering) Conucts exhibitions for ll suppliers n give prize for the best suppliers Orgnizes frequent eetings with suppliers Approxitely 65% of the vlue ition is one t supplier The locl suppliers supply JIT, 2-3 ties y The in objective is cost reuction (3-5% yer on yer) Mjor custoer, gives nnul estition of en JIT, TPM n TM inititives very well ipleente MNC consultnts for procureent Well coorinte functionl eprtents with the help of joint ecision king Infortion systes is n issue, istch in ctul inventory n inventory shown by softwre Meetings help in foring longter prtnerships Trust n coitent is visible with suppliers Incresing en shows goo custoer service provie by Alph Knowlege shring with suppliers helps in iproving prouct esign Infortion shring echnis cn be iprove untity flexibility contrcts with buyer y help to reuce inventory holing costs n shortge costs Vrious inititives help Alph to coorinte with suppliers n buyers by proviing qulity service to custoers Aggressive on supplier front Joint ecision king is very uch evient Technicl ssistnce is provie to supplier Multi-plnt coorintion by joint orering Fst infortion syste help in JIT replenishent Focus on iproving custoer service n efficiency Develope suppliers by giving trining for best prctices, visiting suppliers Knowlege shring by exchnging of tes between north n south suppliers Cost trens re shre with suppliers Joint inititives with suppliers for

11 3 Delt Autoobile (Sports n utility vehicles n light coercil vehicles) 4 Oeg Auto coponents (Multi point fuel injection (MPF) systes, Air suction vlve (ASV)) Le tie, sles Vs npower, stock turn rtio, custoer line rejection n spce/unit re the perfornce esures Supplier perfornce evelopent te (SPDT) is fore to visit suppliers Three fiel representtives re there per custoer, who provie ily ctul consuption of proucts Custoers o not wnt to keep inventory, so JIT supply to custoers Monthly review inventory Hs ore thn 50% rket shre, people, 8 nufcturing plnts, 275elers, n pproxitely 700 suppliers Network is connecte to Delt s sles eprtent by n extensive IT infrstructure Delt hs goo R & D prctices, negligible iport content There is prcticing website for 100 suppliers to counicte suppliers for prt requireents, sttus of orer, qulity n bills by proviing psswors to ech supplier SAP (Delt s consultncy: Bristlecon) ipleenttion helps to connect the functionl eprtents of Delt In the Delt s orgniztion structure, two of the 5 VPs re responsible for venor ngeent n orer ngeent collectively tking cre of SCM opertions with the help of te. The SCM coprise of logistics, heuling, inventory ngeent, stocking n terils ngeent The SCM te esign n evelop supply chin systes, provies trining to internl eployees n to the suppliers n onitoring uiting Mke to stock ites re e s per the one onth requireent in pipeline Mke to orer re the vrint oels Grully following Toyot prouction syste (pull syste) The oes of trnsctions re phones, eils n fxes Delt encourges strtegic sourcing by foring groups of tes for close lisioning with suppliers of ifferent coponents 1200 people, 100 venors Vlue bse iounts re given to the buyer Single source to Hero Hon for 90% of ASV Annul en is counicte by buyer There is no softwre use for opertions qulity iproveents Accessibility to the infortion regring ily requireent t custoers cn help in plnning prouction t Bet Forecst heules re shre with the suppliers Coorinte istribution syste helps to supply the custoers operting Toyot syste Strong network connecte through IT streline physicl flow SAP ipleenttion helps coorinte vrious functionl eprtent by upte inventory infortion Suppliers re coorinte with the help of IT which reuces the trnsction tie n errors relte to the orers Suppliers re encourge by proviing the trining n technicl ssistnce Delt s copetitive vntge in strtegic sourcing, where specilize eployees liison with the R&D eprtents of rw terils suppliers by visiting theselves Strtegic prtnerships between suppliers re fore by selecting suppliers with goo infortion systes, innovtive technologies n expertise in the specilize coponents Custoers cnnot purchse online After-sles-service is provie by nufcturing spre prts inhouse t copetitive prices Less effort for shring infortion regring inventory, cpcity with ownstre ebers Strtegic sourcing y le to stnr contrcts between Delt n suppliers Diounts y help in coorinting buyers Single sourcing to Hero Hon, shows its coitent to Oeg ERP n new IT systes y reuce le ties.

12 5 Phi Hevy engineering Genertors/ Trnsforers plnning Supply le tie is 8-16 weeks 50% of the ites follow pull systes Mke to stock ites (generlly of 1200 tonnes of weight) More thn 460 jor suppliers n 25 regulr suppliers 70-80% of teril is iporte Every orer hs its own specifictions For the stnr ites, VMI inititive is use The le tie of supply is 3-6 onths ERP is use to coorinte ll functionl eprtents: Mterils, purchsing, Accounts, IT n strtegic plnning The ites re sol through teners The ite chrcteristics le to slow own ctivities of supply chin Coorinte functionl eprtents Generl observtions ) These copnies re wre of vrious fcets of SCM. On conservtive footing, these copnies see to hve proper SC orienttion in plce. b) Though the use of IT n infortion systes is pprecite, infortion systes re still evolving. c) The ecision king process sees to be frgente n not uch support for ecisionking is tken fro IT. ) Interctions with suppliers re very uch evient in ost of the cses. Through vriety of inititives, these copnies re involving their suppliers. e) The inboun logistic prt of the SC sees to be eveloping. f) Though these copnies re wre of vrious echniss for coorintion, soe echniss see to be ore in use. Tble 4 shows ifferent ecision tht y be ffecte by vrious coorintion echniss. Bse on our unerstning of the previling sitution n the necotl evience vilble, n vrious ecisions in SC (s shown in Decision-coorintion echnis trix), we visulize the following hierrchy (Fig 2) which y nifest in ters of sn-cone oel for ipleenting coorintion: Coorintion through vrious Contrcts Coorintion through use of infortion technology Coorintion through infortion shring, n t the highest level of turity, Coorintion through Joint ecision-king wherein vrious entities of SC re involve in ecision king

13 Tble 4: Decision- coorintion echnis trix Sple Decisions Vrious echniss Supply Infortion chin Technology contrcts Coorintion issues in X logistic service provier n custoer for tiing, quntity, pricing, oe of trnsport etc. Integrting the logistics ctivity geogrphiclly isperse network/ Supply chin Infortion shring X X X Joint ecision king Coorinte orer X X X quntity Coorinte tiing n X X X heuling of the orer Coorinte tiing of replenishent X Inventory ngeent in network X X Forecsting X X Integrte Prouctionistribution Joint consiertion of cost t vrious levels of SC Integrte Procureent- X X Prouction Pricing ecisions X X X X Supplier selection n X X X X evlution Profit /revenue shring X Flexible orering X X Joint focus on custoer service X X The Sn Cone oel suggests tht lthough in the short ter it is possible to ipleent coorintion through contrcts, there is ctully hierrchy ongst the four echniss. To buil cuultive n lsting coorintion cpbility, ngeent ttention n resources shoul go first towrs enhncing ters of contrcts, then - while the efforts to enhnce qulity of contrcts re further expne - ttention shoul be pi to invest in infortion technology X X

14 then- n gin while efforts on the previous two re further enhnce orgniztions shoul ture so s to hve en environent of infortion shring which ultitely results in eveloping cpbilities so s to ensure Joint ecision king thereby king the origintions ture in coorintion efforts. Tkl et l. (2006) hve illustrte the use of sn cone oel in nlyzing, evluting n structuring ulti-focuse strtegies. Joint Decision Mking Infortion Shring Infortion Technology Contrcts Fig 2: Sn-cone Moel for Supply Chin Coorintion Mturity As note erlier, t the lowest level of turity coorintion y be chieve through contrcts. It sees tht coorintion through contrcts hs lot of potentil for ppliction in Inin copnies ue to the following resons: ) Inin ngeent is very uch t hoe with proceurl n contrctul rrngeents. b) ISO9000 hs provie goo pltfor for vrious levels of ocuenttion in these copnies. c) The tx n regultory environent is conucive for ipleenttion of contrcts. The bove fcts otivte to stuy the coorintion through contrcts. Coorintion through Contrcts n Newsboy Moel Supply chin contrcts re useful tools to otivte vrious supply chin ctors behve coherently n in coorinte nner. A contrct cn be efine s n greeent between the two prties.

15 Supply chin contrct is the set of ny cluses tht offers suitble infortion n incentive echnis to gurntee ll the firs in supply chin to chieve coorintion n optiize the chnnel perfornce (Cchon, 2004). Typicl preters of the contrct y inclue: price (wholesle, buybck n prouct price), quntity (the ount of flexibility given in quntity) n cost (slvge, rginl n goowill) for which the supply chin ebers re epenent on ech other. Supply chin contrcts forlly rule the trnsctions between supply chin ebers n lter utilize incentives (risks n rewrs) to ke supply chin eber s ecisions coherent ong ech other. The supply chin risks y rise fro the vrious sources of uncertinty like rket en, selling price, n prouct qulity n elivery tie. Hving single optil orer quntity for whole supply chin cn reuce these risks n the contrcts re expecte to oify the profits of ll supply chin ctors. Tble 5 presents justifiction for using two types of contrcts (Buybck n untity flexibility) Tble 5: Justifiction for Usge of supply chin contrcts Type of contrct Avntges to supplier Avntges to buyer Buybck contrct It encourges buyer to orer lrge quntity It Increses the profits of supplier untity flexibility contrct It reuces the over stock buren It increses the profits of supplier It iproves the plnning cpbility The iniu purchse greeent by buyer shifts soe of the en risk ownsie It reuces the cost/risk of overstock It increses slvge vlue per unit in the for of buybck price It increses the level of prouct vilbility The buyer s orer quntity ore in line with ctul en It increses the profits of buyer The supplier forlly gurntees the buyer specific sfety cushion in excess of estite requireents It helps in shring prt of inventory n stock out cost buren with supplier The buyer gets full protection on unsol but coitte orer quntity Hving felt the nee for SC coorintion through contrcts, it ws perceive tht suitble oel be evelope so s to enhnce the chnces of its ipleenttion. The supply chin

16 contrcts y be price-bse contrcts (buybck contrcts) or quntity bse contrcts (quntity flexibility contrcts). In buybck contrcts, the buyer is llowe to return ny leftover units to the supplier t the en of the perio t frction of purchse price. The buy bck contrct increses the orer quntity of buyer s the contrct increses the slvge vlue per unit for the buyer. In quntity flexibility contrcts, the buyer is llowe to oify the orer within liits gree to the supplier s en visibility increses closer to the point of sle. The buyer oifies the orer s he gins better ie of ctul rket en over tie. These two coorinte contrcts were consiere s potentil cnite for ipleenttion. The bsis of contrct oel is originte fro the clssicl newsboy proble. The newsboy proble is single perio oel pplie to the sesonl proucts. The objective of newsboy oel is to eterine the optil orer quntity by setting rginl (expecte) revenues equl to rginl costs. Extening the concept of perfornce iproveent, ifferent stre hs been explore, which is coorintion by contrcts. The bsic oel of evluting optil orer quntity will rein se s in newsboy oel with soe oifictions. The oifictions re require for coherent n utul ecision by consiering ech eber s expecttions fro supply chin. (see Appenix for n brige version of the oel). A frework bse on siultion cn be better tool to cpture the ore relistic picture of ifferent enrios of contrcts n the vlue of coorintion cn be evlute quntittively. The contrcts cn be copre uner siilr conitions of en, cost n price to choose the ters of reference for the best contrct. In view of the observtions, oel is evelope with view to: evlute the vlue of coorintion bse on vrious perfornce esures of supply chin contrcts n lso copre ifferent kins of contrcts uner siilr pretric conitions such s en, price, n cost,

17 explore ifferent enrios of coorintion n copre these enrios with the inepenent or no coorintion cse n explore further the nee for other coorintion echniss in conjunction with supply chin contrcts The priry otivtion stes fro the fct tht the ngers fin siultion bse pproch s n esy tool for enhncing their ecision-king bilities. Accoring to Vn Hoek et l. (2002), ngers re the criticl iensions in ecision-king. The strength of the propose oel lies in the fct tht the contrcts re esigne prior to the reliztion of the ctul en. This y help in projecting the expecte behvior of supply chin perfornce for ifferent enrios of coorintion. The propose frework helps (Arshiner et l., 2006) in siulting the ifferent enrios of coorintion by contrcts, in which the perfornce esures re evlute for the rnges of contrct preters. These perfornce esures help in evluting the vlue of coorintion in supply chin n lso inicte tht which contrct is beneficil t ifferent levels of supply chin uner siilr pretric conitions. The propose frework lso cts s ecision king tool for choosing contrcts for prticulr type of en bse on nuber of enrios generte..the siultion of ifferent enrios y result in lower bouns n upper bouns for vrious contrct preters. By ipleenting the wht-if nlysis, n pproprite set of perfornce esures cn be eterine. The contrct preters fro the given rnge y be chosen so tht the profits of ll ebers in cse of coorintion by contrcts re ore thn the respective profits in inepenent cse The oel incorportes two cses: inepenent cse ( no coorintion ) n the cse of coorintion. A three-level SC is consiere (Mnufcturer-Assebler-Distributor) with the ssuption of probbilistic en vli for single seson. In the inepenent cse, the

18 eber t the extree ownstre en (here Distributor ) eterines his optil orer quntity bse on his locl cost n price preters. The orer quntity optil to the ownstre eber y not be optil to other ebers or the whole supply chin. The secon cse of coorintion is explore in which first n optil orer quntity of whole SC is eterine n then contrcts re forulte between SC ebers to otivte ll SC ebers to coorinte with ech other. A coherent n utul ecision is require to coorinte SC ebers. The contrct preters re eterine like buybck prices ( between ssebler n istributor n between nufcturer n ssebler) n flexibility provie by ssebler/ nufcturer to istributor/ssebler in orer quntity. The oel is bse on the clssicl newsboy proble. This oel is refine to 3-level SC n oifie to cpture profit equtions s shown in Appenix. The oel is well pplicble for the sesonl en in which the inventory t the en of seson is ispose off. The en is ssue to follow norl istribution. By using equtions given in Appenix, the oel is converte into Excel worksheet. The contrct preters re eterine with the help of set of inequlities given in (Appenix). Tble 6 surizes the oel. Tble 6: Spresheet Bse Siultion Moel Scope of the oel 3-level SC (Mnufcturer (M), Assebler(A) n Distributor(D) Pltfor Use Excel worksheet Inputs Vrious cost preters, en istribution Decision vribles Orer untities for M, D n A Expecte Outputs Vrious perfornce esures such s : Expecte profits, Revenues relize, Slvge vlue relize, Goowill incurre, Mrginl cost incurre, Wholesle vlue relize, Expecte sles, Left over inventory, n Units short. Logic of the oel Bse on extension of newsboy proble (see Appenix for forultion) with n objective of xiizing the profits Wht if enrios generte Wht will hppen if buybck price of M is increse by 10 %? Wht will hppen if rginl cost of M is ecrese by 15%? Wht will hppen if en is increse by 20 %? Wht will hppen if there is lower/upper boun on price?

19 Relevnce of results n ngeril iplictions The ifferent enrios of coorintion hve been generte n siultion is crrie out to relize the vlue of SC coorintion. The vlue of coorintion by supply chin contrcts cn be relize in the for of iproveent in the perfornce esures. Tble 7 presents the teplte generte to cpture these esures. The siultion oel ws run for vrious enrios. The following re ngeril iplictions bse on the results of the siultion (Arshiner et l., 2006): ) Ipct on the profits of SC s whole n on the iniviul SC ebers As expecte, the totl supply chin profits re ore in the cse of coorintion by contrcts copre to the cse of no coorintion. The other perfornce esures re lso iprove by contrcts. It is interesting to note tht iniviul profits re lso increse in cse of coorintion by contrcts. The optil orer quntity of whole SC reuces the profits of istributor. The contrcts ct s cushion ginst the reuction of profits. Also, the nufcturer n ssebler generte ore profits by encourging istributor to orer ore quntity. This increse in totl profits y be shre in proportion to the respective vlue ition of the prouct by ech eber. b) Role of vlues of contrct preters in SC coorintion The vlues of ifferent contrct preters cn be chosen through siultion. These preters cn be eterine by setting inequlities of profits in no coorintion cse n coorintion cse. Any eber will continue to rein s prt of supply chin till the profits in cse of contrcts re ore thn the profits in the no coorintion cse. The iproveent in perfornce by using the contrct preters is ue to the price flexibility given in cse of buybck contrct n the quntity flexibility given in cse of quntity flexibility contrct. c) Other perfornce inictors of SC coorintion by contrct The cobine effect of perfornce esures (leftover inventory, units short n verge sles) cn lso be observe through siultion. These contrcts help in reucing the units short n iproving the verge sles with no ipct on leftover inventory. There is ope to esign contrcts in which the leftover inventory coul be n ite for negtions while rfting the contrcts. )Flexibility s new esure of SC coorintion The coorintion by contrcts provies flexibility (in both price n quntity) in supply chin. This cn be observe in Fig 3. The flexibility cn be relize in the bove contrcts s follows: i) Buybck contrct: The price of unsol goos cn be returne t price ore thn the istributor/ssebler slvge. The ifference between buybck price n the slvge vlue per unit (price flexibility) is the profit iproveent of istributor n the increse in orer quntity iproves the perfornce of ssebler/nufcturer (s the cse y be). Hence, this type of contrct y provie cushion ginst uner stock.

20 ii) untity flexibility: Soe flexibility in orer quntity is provie to the istributor/ssebler, which help in reucing the rginl costs n wholesle prices. The rnge of quntity flexibility is the ifference between iniu coitent of orer quntity by the istributor/ssebler n the xiu quntity coitte to eliver by ssebler/nufcturer. untity flexibility LOW HIGH LOW Optil No Coorintion Price flexibility untity Flexibility Buybck HIGH Fig 3: untity n Price Flexibility Mtrix Tble 7: Teplte for vrious perfornce esures for coorintion No coorintion Corontion Through Supply chin eber Perfornce Mesures Buybck Distributor (D) Assebler (A) Mnufcturer (M) Actul Sle Revenue relize Leftover inventory Slvge relize Units short Goowill incurre Mrginl cost incurre Wholesle incurre Buybck vlue relize Profits Leftover inventory Slvge relize Units short Goowill incurre Mrginl cost incurre Wholesle vlue relize Wholesle incurre Buybck vlue relize Buybck vlue incurre Profits Leftover inventory (Slvge relize buybck quntity) Units short Goowill incurre Mrginl incurre Wholesle vlue relize Profits Totl Profits of SC (D) + ((A)+(M) untity flexibility

21 Fro the siultion results, it cn be observe tht flexibility (price n quntity) cn lso be n iportnt perfornce esure of coorintion. The rnge of contrct preters help in relizing the ount of flexibility provie to supply chin ebers, hence goo inictor of supply chin coorintion. The contrcts re esigne t the strt of ny reltionship, n hence y ct s precursor for goo reltionship. As the reltionship between supply chin ebers becoe stronger over perio of tie, one cn think of ipleenting other coorintion echniss in plce in conjunction with the supply chin contrcts in line with the propose sn cone oel. It ust be ephsize tht contrcts re not the only coorintion echniss in supply chin, but there re ny other coorintion echniss, which helps, in chieving coorintion. The contrcts re generlly esigne t the strt of ny reltionship between ifferent ebers of the SC. Once the contrcts re ipleente, it y be require to introuce other coorintion echniss. Tble 8 presents n overview of vrious echniss vilble for coorintion in the cse stuy of Delt (entione in Tble 2). Tble 8 : Existing syste n propose syste of procureent in Alph Process Existing Syste Propose Syste Coorintion echnis uottions Mnul hnling Web bse syste Infortion Technology Supplier Selection Supplier Evlution Tritionl ttributes Coorintion cpbilities Infortion shring, infortion technology, collbortion Subjective pproch Anlyticl pproch Infortion technology Contrcts Very less infortion Contrcts which helps in chieving coorintion Orer Mngeent Opertions Plnning Coorintion contrcts Ol couniction syste EDI n XML Infortion technology Iniviul plnning Joint plnning with infortion shring Infortion shring, collbortion

22 The following points y further help in iproving the coorintion in supply chin: i. To eterine the optil supply chin orer quntity the cost n price preters nee to be known well in vnce. The supply chin ebers y shre the infortion regring cost n price n y jointly eterine the optil orer quntity. ii. A proper echnis nees to be evolve to shre the profits in proportion to the respective vlue ition by the ebers. In this context, Joint plnning will ply n iportnt role to relize vlue of such coorintion. iii. Since the flexibility of price n quntity is given by relying on the ebers, it is iportnt for the ebers to be loyl with ech other in ters of fir sle of proucts. The flexibility is given t the cost of soe preter, so it is iportnt for the nufcturer/ssebler to know the exct sle t the ssebler/istributor. The infortion cn be sent through Point-of-Sles (POS) t or through other infortion systes. Regulr onitoring of inventory t the buyer en is very iportnt. In cse of quntity flexibility contrct, the infortion on chnge orer quntity y be require to counicte in short spn of tie. The fst infortion systes y help in quick trnsfer of infortion regring orer quntity with less le-tie. iv. The knowlege of rket is very iportnt. By chnging vribility in en, noticeble chnge in the perfornce esures cn be observe. In rel cse, if ll the ebers forecst their own en, this will further ffect the perfornce esures. For exple the optil orer quntity of supply chin will be ifferent for ifferent en istributions. A tiely infortion shring of en is lso very iportnt to relize the benefits of coorintion. An inititive such s Collbortive Plnning, Forecsting n Replenishent (CPFR) coul be of use here. The ownstre eber hs ore ccurte infortion regring en. By ipleenting CPFR, the knowlege bout rket y be shre by the ownstre eber with other SC ebers n joint plnning of forecsting n replenishent y reuce en uncertinty It y be note tht without siultion, the insights gine in this oel woul not be pprecite. It will lso be ifficult to visulize effects of vrious ecision vribles n preters through sttic nlyticl oels! Siultion oel enhnces utility of such oels.

23 Concluing Rerks Toy, supply chin ngeent is eerging s full-flege iipline in its own right. In Ini: eprtents re being reorgnize into Supply Chin, logistics heings n gret el of strtegic vision hs coe into being. Chnges unleshe by Ini s incresing integrtion into the globl supply chins re chnging the copetitive lnpe of business. ) It sees tht Inin orgniztions re now sol to the ie tht SCM is not tritionl iproveent technique but philosophy tht les to iproveent not ssocite with functionl /eprtentl reviews which focus only internlly. Mngeent ust not only control inputs but lso significntly chnge the processes itself. This y require reengineering efforts (Mohnty n Deshukh, 1998). Accoringly, OM counity hs to tke note of this n ccoringly, oify/en the curriculu n sensitize the future ngers bout this. b) Trnsforing business fro n inwr looking ( wht we ke will sell ) to flexible n coorinte outwr looking business ( wht oes the custoer wnt us to ke n sell ) is the otivtion for SCM. The coorintion ttepts re initite to respon to cobintion of fctors such s intense copetition n ening set of custoers. c) The ever-incresing copetition in toy s business worl hs force the supply chin ebers to ct coherently n tke joint ecisions to chieve coorintion. Supply chin contrcts re very useful coorintion echnis to evlute the coorintion vlue in supply chin. The propose frework helpe in siulting vrious enrios of coorintion by contrcts (buybck n quntity flexibility). The ifference between ifferent perfornce esures in coorinte cse n no coorinte cse helps in ssessing the vlue of coorintion. The ifferent enrios generte cn be use to copre the contrcts uner siilr rket conitions. This hs utility for prcticing SC ngers: to esign n select the contrct bse on the overll profits or soe other perfornce esure. This pprecition stes fro genertion of vrious enrios which otherwise y be ifficult to visulize. It ust be note tht typicl supply chin lso els with hun systes, n hence, the following ifficulties in coorinting supply chin ebers y be visulize. There exist ifferences in the interest of supply chin ebers s the ebers hbitully work s n iniviul fir bse on locl perspective n opportunistic behvior results in istch of supply n en (Fisher et l., 1994). The following types of conflicts y exist: conflicting gols n objectives (gol conflict), isgreeents over oin of ecisions n ctions (oin conflict) n ifferences in perceptions of relity use in joint ecision king (perceptul conflict) between supply chin ebers.

24 The bove ifficulties cll for n ctive ttention fro POM counity. The inititives suggeste in this pper such s siple-to-use n esy-to-unerstn worksheet bse n siultion-oriente pproches y enhnce the chnces of ipleenttion of oels. This will lso help in ppreciting the role of coorintion in supply chins. It y be note tht bottos up pproch is vocte in this pper. Relizing the nees n icttes of Inin inustry for SCM n then eveloping tool kit to eet these spirtions n expecttions present unique opportunities n chllenges to POM counity in Ini. References 1. Arshiner, Kn, A., n Deshukh, S. G. (2006), A frework for evlution of supply chin coorintion using contrcts, in fourth AIMS Interntionl Conference on Mngeent, hel t IIM Inore (Ini), Deceber Arshiner, Kn, A. n Deshukh, S. G. (2006b), A Coorintion bse Perspective on the Procureent process in Supply Chin, Interntionl Journl of Vlue Chin Mngeent, 1, Bllou, R.H., Gilbert, S. M. n Mukherjee, A., (2000), New ngeril chllenges fro supply chin opportunities, Inustril Mrketing Mngeent, 29, Cchon, G. P. (2004), Supply chin coorintion with contrcts, In S. Grves n T. e Kok (Es.), Hnbooks in Opertions Reserch n Mngeent Science. North- Holln Press. 5. Fisher, M. L., Rn, A n McClelln, A. S., (1994), Rocket ience retiling is lost here: re you rey?, Hrvr Business Review, 72, Lee H.L. n Ng S M, (1997), Introuction to the specil issue on Globl Supply Chin Mngeent, Prouction n Opertions Mngeent, 6(3), Lee, H. L., (2000), Creting vlue through supply chin integrtion. Supply Chin Mngeent Review, 4, Mlone, T. n Crowston, K., (1994), The interiiplinry stuy of coorintion. ACM Coputing Surveys, 26, Mitr Ait, (2007), Retil boo fuels growth in logistics sector, Business Line, Jn 15, Mohnty R P n Deshukh S G, (1998), Reengineering of Supply Chin: lessons fro cse stuies, in Shy, B.S. (E.), Supply Chin Mngeent for Globl Copetitiveness, Mcilln Ini, New Delhi, pp

25 11. Pre Vrt,(1998), Supply chin ngeent in Ini: probles n chllenges, in Shy, B.S. (E.), Supply Chin Mngeent for Globl Copetitiveness, Mcilln Ini, New Delhi, pp Pre Vrt, (1998b), A report on opertions ngeent in Ini, Interntionl Journl of Opertions & Prouction Mngeent, 18, Shy B, Gupt J.N.D n Mohn R, (2006), Mnging supply chins for copetitiveness: Inin Scenrio, Supply Chin Mngeent: An interntionl Journl, 11, Shy B., Cvle V, n Mohn R., (2004), The Inin supply chin rchitecture, Supply Chin Mngeent: An interntionl Journl, 8, Situpng T, Snroto I H, n Lubis S B H, (2004), Supply chin coorintion in fshion fir, Supply Chin Mngeent: An interntionl Journl, 9, Situpng T. M., Wright A. C. n Srihrn R., (2002), The knowlege of supply chin coorintion in fshion fir, Business Process Mngeent Journl, 8 (3), Storey J, Eberson C., Gosell J n Hrrison A, (2006), Supply chin ngeent: Theory, Prctice n Chllenges, Interntionl Journl of Opertions n Prouction Mngeent, 26, 7, Tkl J., Leskinen J., Sivusuo H., Hirvelä J. n, Kekäle T., 2006, The sn cone oel: illustrting ulti-focuse strtegies, Mngeent Decision, 44, Vn Hoek R, Chth R., n Wiling R,(2002), Mngers in supply chin: the criticl iension, Supply Chin Mngeent: An interntionl Journl,7,

26 Appenix: A theticl oel bse on Newsboy Moel for supply chin contrcts Mnufcturer The following equtions y help in eterining the contrct preters/perfornce esures using contrcts: Cse I: No coorintion cse A.1 The profit eqution of istributor P (q) A.2 The profit eqution of ssebler = ps(q) + s A.3 The profit eqution of nufcturer (q - S(q)) - g + P (q) = -g (D - q) +w P (q) = -g A.4 The optil orer quntity of istributor Cse II: Coorintion cse F(q ) = 1 - (D - q) A.5 The optil orer quntity of whole supply chin F ( c ) = 1 - p - s + (D - q) + - w q - c q - w +w c + w - s p - s + g + c + g A.6 The profit eqution of istributor when is orere P + q - c + c - s + g + g q q q - c ( ) = ps( ) s ( - S( )) - g ( D - ) - w - c A.7 The profit eqution of ssebler when is orere P ( Distributor c : Prouction cost c : Mrginl cost g : Goowill cost g : Goowill cost s : Slvge s : Slvge W : Wholesle price by nufcturer p : Price of prouct Assebler c : Mrginl cost q : Optil quntity of istributor g : Goowill cost : Optil orer quntity of supply chin s : Slvge S(q) : Expecte sles which cn be efine s: : Wholesle price w ) = -g (D - S ( q ) = q ) + w q F ( y ) y The istributor is subjecte to rno en D with pf( f), CDF(F) n F Decision vrible for buybck contrct β 1 β c = 1 : Buybck price t which istributor returns the unsol units to the ssebler t the en of seson : Buybck price t which ssebler returns the unsol units to the nufcturer t the en of seson Decision vrible for quntity flexibility contrct (1-δ) : Miniu purchse quntity coitte by istributor, Where 0 < δ < 1 : Mxiu orer quntity coitte by ssebler F - w q

27 A.8 The profit eqution of nufcturer when is prouce P ( ) = -g (D - ) + w A.9 The profit eqution of istributor in cse of buybck contrcts P β b ( ) = ps( ) + 1( - S( )) - g ( D - ) - w - c A.10 The profit eqution of ssebler in cse of buybck contrcts P b ( ) = -g (D - ) + w - c - w -β 1 ( - S( A.11 The profit eqution of nufcturer in cse of buybck contrcts P b ( ) = -g (D - ) +w - c -β 2 ( - c - S( )) + s ( )) + s A.12 By setting following inequlities, the preters β 1 n β 2 cn be eterine b b b P ( ) P ( q ), P ( ) P ( q ), P ( ) P (p - s )S(q) + (s + g - w - c β 1 - S( )q + (w β (g + w - c - w )q + (c + w - g 2 -β 1 - S( ) β 2 (g + w - c + s ) - s S( - S( ) ) - w ) + q(c + c - s - g - g ) - w ( - S( ( q ) ) - ps( + s ) - S( S( ) )) +β A.13() The profit eqution of istributor in cse of quntity flexibility contrcts when en D< =(1-δ) P q ( ) = ps((1 -δ) ) + s ((1 -δ) - D) - w (1 -δ) - c (1 ) -δ) (b) The profit eqution of istributor in cse of quntity flexibility contrcts when (1-δ) <D<= P q ( ) = ps( ) + w ( - D) - (c) The profit eqution of istributor in cse of quntity flexibility contrcts when D> P q ( ) = ps( ) - w w - c - c - g (D - ) A.14() The profit eqution of ssebler in cse of quntity flexibility contrcts when en D< =(1-δ) P q ( ) =w (1 -δ) - c (1 -δ) - w (1 -δ) (b) The profit eqution of ssebler in cse of quntity flexibility contrcts when (1-δ) <D<= q P ( ) =w - c - w - w ( - D) + w ( - D) (c) The profit eqution of ssebler in cse of quntity flexibility contrcts when D> P q ( ) =w - c - w - g (D - ) A.15() profit eqution of nufcturer in cse of quntity flexibility contrcts when en D<=(1-δ) P q ( ) =w (1 -δ) - c (1 -δ) - w (1 -δ) (b) profit eqution of nufcturer in cse of quntity flexibility contrcts when (1-δ) <D<= q P ( ) =w - c - w ( - D) + s ( - D) (c) profit eqution of nufcturer in cse of quntity flexibility contrcts when D> Fro inequlities of A.12 P q ( ) =w (1 δ ) - c q - g (D - ) )) 2 ( - S( ))

28 Filene: POMS Arshiner-Kn-SGD-Mr-1 Directory: D:\POMS conf-bstrct-10-jn-07\op v group\to be subitte Teplte: C:\Docuents n Settings\copq\Appliction Dt\Microsoft\Tepltes\Norl.ot Title: Supply Chin (SC) hs been efine s integrtion (process of cobining into copleteness n hrony) of SC processes between Subject: Author: user Keywors: Coents: Cretion Dte: 2/28/2007 9:13 PM Chnge Nuber: 6 Lst Sve On: 2/28/2007 9:39 PM Lst Sve By: hp Totl Eiting Tie: 30 Minutes Lst Printe On: 2/28/2007 9:53 PM As of Lst Coplete Printing Nuber of Pges: 27 Nuber of Wors: 7,995 (pprox.) Nuber of Chrcters: 45,572 (pprox.)