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376 SUPPLYCHAINMANAGEMENT AND THEINTERNETCustomersRetailersDistributionAssembly/
Manufacturing/
ProcessingSuppliersTier ITier IIMaterials/Products/Components Flows
Information FlowsFigure 1: Integrated supply chain for an extended real-time
enterprise.One main approach to integration identifies four
stages: information integration, planning synchroniza-
tion, workflow coordination, and the recognition of new
business models (Lee & Whang, 2001a). The first stage, in-
formation integration, requires the collection and sharing
of a broad range of data regarding the status of operations
in the supply chain. This includes data on sales, inventory,
production, promotion plans, demand forecasts, and in-
formation about the location and delivery schedules of
goods in transit. The second stage, planning synchroniza-
tion, involves identifying how the newly developed and
shared information is to be used. This requires not only
the joint creation of decision-making standards, including
common rules for defining outcomes and making choices,
but also the application of this system to production plan-
ning, forecasting, replenishment, design, capacity utiliza-
tion, and service. The third stage, workflow coordination,
extends the activities in planning synchronization to the
actual coordination of the operation of the supply chain,
including production decisions, procurement and order-
ing, and product development and design. The final stage,
recognition of new business models, takes advantage of
the opportunities of the creation of an extended, real-time
enterprise. This requires bringing customers into the in-
formation system and using customer information and in-
volvement for real-time product customization, demand
management, dynamic pricing, real-time quality control
of manufacturing based on user experiences, reallocatingTable 1Efficiency Benefits from an Internet-Enabled
Supply ChainMake better forecasts
Reduce inventory risks and costs
Reduce procurement costs
Coordinate production, distribution, and fulfillment
more effectively
More easily locate specific items in the supply chain
Monitor and respond more quickly to bottlenecks and
other problems in the supply chain
Reduce lead time
Reduce delays and time lags in movement of
components through the supply chain
Improve service while lowering costs
More rapid development of products
Faster time-to-market
Moderate bullwhip effectcapacity, developing new categories of information avail-
able from integrating the extended enterprise, developing
new forms of service, and redefining the relationship be-
tween products and services.
Table 1 lists some of the most important gains we can
expect from the new system of information integration
across the supply chain. Perhaps the most significant is
the ability to manage and control inventory levels, primar-
ily by moderating the bullwhip effect. This is the term used
to describe the tendency for small variations in demand
by downstream end customers to result in increasing in-
ventory variation across the various upstream stages of
the supply chain (Simchi-Levy, Kaminsky, & Simchi-Levy,
2000).
The bullwhip effect is a consequence of decision-
making using incomplete information, which comes from
the absence of supply chain integration (Lee, et al., 1997).
Typically, production decisions are made using informa-
tion only from the next level in the supply chain, and this
results in the use of hedging decision models to adjust for
the uncertainty in this incomplete information. In other
words, when individual actors in a supply chain use in-
formation known only to them (usually orders from the
actors at the next level of the chain) to make forecasts and
orders, and then pass only their orders on to the next actor
in the chain, the result is that increasing levels of inven-
tory are held at succeeding lower levels of the chain. When
this incomplete information is combined with production
lead times, use of large batch orders, and use of higher
order size to protect against shortages, the end result is
considerable overshooting or undershooting of optimum
inventory levels. Thus, much of the bullwhip effect and
its negative effects on inventory levels is the result of each
level of the supply chain making demand forecasts and op-
timization decisions based on information affecting only a
limited part of the entire chain (Simchi-Levy, 2000). When
each unit makes independent production decisions based
on independently generated forecasts, using incomplete
data, the resulting inventory levels for each organization
in the supply chain and cumulatively across the supply
chain are excessive and inefficient.