e-integration in the supply chain: Barriers and performance

Decision Sciences, Fall 2002 by Frohlich, Markham T

e-Integration in the Supply Chain: Barriers and Performance*

ABSTRACT

Current opinion holds that Internet-based supply chain integration with upstream suppliers and downstream customers (called "e-integration" in this paper) is superior to traditional ways of doing business. This proposition remains untested, however, and similarly we know little about what are the upstream, internal, and downstream barriers to implementing e-integration. This paper empirically addressed these questions using data from a large single nation study, and found (1) a positive link between e-integration and performance, and (2) that internal barriers impeded e-integration more than either upstream supplier barriers or downstream customer barriers. Findings from this study contribute to our theoretical understanding of implementing change in contemporary supply chains, and have important implications for manufacturers interested in improving their supply chain's performance using the Internet.

Subject Areas: e-Business Implementation, Supply Chain Management, and Survey Research.

INTRODUCTION

The most admired and feared manufacturers today have tightly integrated supply chains. Real-time information travels immediately backwards though these supply chains and inventory flows swiftly forwards. Most importantly, products are delivered quickly and reliably when and where they are needed. This precise coordination with short lead-times helps defeats the bullwhip effect and contributes to the company's overall success (Lee, Padmanabhan, & Whang, 1997).

Although we've know about the theoretical benefits of supply chain integration for years, making it work in practice has been difficult. Pre-Internet, there was no solution to the tradeoffs in supply chain integration between low cost, rich content, and long-distance. Electronic data interchange (EDI) allowed expensive but limited content with a few remote partners, while Kanban provided low cost yet rich connections with many nearby customers or suppliers. Only recently has the Internet resolved these tradeoffs, and now all supply chain partners can be effectively integrated.

While Internet-enabled supply chains may be powerful strategic weapons, there are still many questions unanswered about them in practice (Bowersox, Closs, & Stank, 2000). Do Internet-enabled supply chains actually improve performance? If so, what are the barriers that prevent every manufacturer from implementing web-based supply chains? This investigation was especially motivated by the hype surrounding web-based supply chains and lack of confirmatory evidence. In order to implement change, managers need to know (1) what to do and (2) where to start. We can only begin to offer them this type of sound advice once practice is linked to performance and the barriers to change are understood. This research contributes to the literature by being the first to consider these issues. Towards that goal, the paper extends our knowledge about Internet-enabled supply chains and identifies the greatest obstacles to their integration.

E-INTEGRATION

Problems in nonintegrated supply chains are legendary and well documented since Forrester's (1961) pioneering work. Poor integration causes the classic boom-bust bullwhip of materials trickling down the supply chain and alternating excess inventory and stock-outs (Metters, 1997). Conversely, having an integrated supply chain provides significant competitive advantage including the ability to outperform rivals on both price and delivery (Lee & Billington, 1992).

Because planning instability is magnified backwards up the supply chain (Lee, Padmanabhan, & Whang, 1997), controlling error amplification from downstream customers to upstream suppliers is especially crucial (Bhaskaran, 1998). The more integrated the flow of data between customers and suppliers, the easier it is to balance supply and demand across the entire network (Trent & Monczka, 1998). An important new trend, therefore, is coordinating supply chain partners using the Internet (Feeny, 2001). Pre-Internet, real-time demand information and inventory visibility were typically impossible to achieve and most supply and demand "integration" involved a patchwork of telephoning, faxing, and EDI. This has changed in the Internet era, and widely available web-based technologies now permit strong customer and supplier integration for inventory planning, demand forecasting, order scheduling, and customer relationship management. For simplicity, in this paper we call this broad upstream and downstream supply chain integration using the Internet "e-integration."

e-Integration and Performance

There are two relevant types of performance metrics for Internet-enabled supply chains. The first is traditional operational measures like delivery lead-times, transaction costs, and inventory turns. The Internet in theory allows companies to greatly improve these conventional performance metrics and hence managers now talk about "five-day cars," zero-cost or "frictionless" transactions, and days (not months) of inventory in the pipeline. The second metric is e-business performance as measured by the percentage of incoming procurement and outgoing finished goods transacted over the Internet. In 1995, Michael Dell set a famous goal that 50 percent of all business at his company must be done over the web, and in hindsight he thought that they could have easily achieved 70 percent (Margretta, 1998). Other Internet users like Cisco have similarly argued that 50 percent incoming and outgoing transactions over the Internet is a milestone in supply chain evolution at which point e-business truly becomes a decisive competitive weapon.