Information system utilization strategy for supply chain integration

Journal of Business Logistics, 2001 by Narasimhan, Ram, Kim, Soo Wook

The introduction of information technology by a firm for integrated supply chain management could lead to better efficiency and effectiveness, compared to existing logistics systems (Goldhar and Lei 1991; Sullivan 1985). For example, under current warehouse management, it might be necessary to secure sufficient space to keep a large enough inventory for timely delivery. Integrated supply chain management utilizing information systems and a shared supply chain database can enable the company to identify optimal inventory levels, reduce warehouse space, and increase inventory turnover (Kaeli 1990; Kaplan 1986; Shull 1987). The new integrated supply chain management systems, if utilized properly, can lead to higher quality products, enhanced productivity, efficient machine utilization, reduced space, and ultimately increase logistics efficiency and flexibility (Gross 1984; Kaltwasser 1990). Furthermore, past research has shown that companies can achieve economies of scale by establishing a long-term strategic alliance or network relationship with suppliers for stable and continuous procurement (Coleman, Bhattacharya, and Brace 1995; Goldhar and Lei 1991; Tilanus 1997). Consequently, the introduction and utilization of integrated information systems for managing the supply chain would not only enhance quality as well as reduce delivery times and costs, but also eventually enhance the company's competitiveness and position it for further growth (Goldhar and Lei 1991; Huggins and Schmitt 1995; Kaeli 1990; Kaltwasser 1990; La Londe and Masters 1990).

However, the information technologies and systems currently utilized by most companies are separate and meant to be used by such functions as procurement, production, and sales. This makes it difficult, if not impossible, to connect each functional system. It also lowers the effectiveness and efficiency of these systems. Therefore, from the perspective of integrated supply chain management, it is necessary to establish a total supply chain network with an integrated database capable of supporting each function (Bardi, Raghunathan, and Bagchi 1994).

This research analyzes the characteristics of information systems utilized in supply chain management, prioritizes the utilization of functional information systems by identifying the structural relationship between these information systems' characteristics and supply chain management performance, and develops a set of guidelines for strategic utilization of information systems.

This paper is organized as follows. First, previous research on the role of information systems for supply chain management is discussed. Next, the characteristics of information systems utilized for supply chain management are identified, based on factor analysis of sample data from 244 of Korea's large manufacturing firms. Third, a conceptual model and hypotheses relating to utilization of information system and supply chain management (SCM) performance are developed and tested using LISREL analysis. A set of strategies for information system (IS) utilization in supply chain management is explicated based on SEM results. The implications of the results are discussed in the concluding section.

LITERATURE REVIEW

Supply chain management deals with the control of material and information flows, the structural and infrastructural processes relating to the transformation of the materials into value added products, and the delivery of the finished products through appropriate channels to customers and markets so as to maximize customer value and satisfaction. It seeks to enhance competitive performance by closely integrating the internal functions within a company (e.g., marketing, product design and development, manufacturing) and effectively linking them with the external operations of suppliers, customers, and other channel members. As John Gossman (1997), vice-president of materials management at AlliedSignal, recently noted: "competition is no longer company to company, but supply chain to supply chain." His statement emphasizes the strategic importance of supply chain management (Vickery, Calantone, and Droge 1999). The benefit of such supply chain management can be attained through electronic linkage among various supply chain activities utilizing information technology and the construction of integrated supply chain information systems (Bowersox and Daugherty 1995; Currie 1993).

The introduction of information systems in supply chain management originally was limited to the automation of clerical functions (Williams et al. 1997). Information systems were viewed as providing infrastructural support to the value chain and having an indirect impact on the competitiveness of a product. Companies were able to reduce costs through information systems, but the benefits were not typically apparent to customers. With intensification of competition, firms started to utilize information systems to directly influence the processes comprising the value chain (Rushton and Oxley 1994; Williams et al. 1997). Through the utilization of information systems, companies have been able to integrate similar functions spread over different areas as well as curtail unnecessary activities, thus enhancing their capability to cope with sophisticated needs of customers and meet product quality standards (Bardi, Raghunathan, and Bagchi 1994). Earl (1989) classified the scope of information technology into the following categories according to whether information technology is widely used in the value chain or selectively used for only information processing and whether it is applied for value creation or applied for the connection of value-adding activities: (1) Information technology that automates or improves the physical aspect of every activity; (2) Information technology used for physically connecting each value activity or controlling those activities at the connecting point; (3) Information systems that facilitate the implementation, support, and management of value activities; and (4) Information systems that optimize or adjust the connection of each value activity. Earl's classification is not only applicable to the internal value chain of a firm, but can also be extended to the company's supply chain, linking suppliers and customers.