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MANAGEMENTISSUES INSUPPLYCHAINCOLLABORATION 377By contrast, when each part of the supply chain ob-
tains real-time information about actual end demand, and
when inventory management decisions are coordinated,
inventory levels are reduced across the supply chain. The
key is to provide each unit of the supply chain with more
complete information shared by all units. Exactly what
kind of information is this? Demand forecasts, point of
sale, capacity, production plans, promotion plans, and
customer forecasts are some of the many forms this in-
formation can take (Lee & Whang, 1998). This more com-
plete information helps reduce distortions and errors and
permits better decisions. An important example is shared
information about point of sale demand and demand fore-
casts, which permits development of a single demand
forecast, or at least a coordinated series of forecasts based
on common data, everywhere in the supply chain.
Different forms of cooperation are created through
linking together the information systems of firms using
the Internet. For example, we can distinguish between au-
tomatic replenishment programs (ARP), where inventory
restocking of individual items is triggered by actual needs,
and collaborative planning/forecasting/replenishment
(CPFR), where firms engage in joint planning to make
long-term forecasts that are updated in real time based
on actual demand and market changes. CPFR involves a
higher level of cooperation and collaboration than ARP
does. Efficiency gains in CPFR come from reductions in
overall inventory while increasing stock availability (espe-
cially during promotions) and achieving better asset uti-
lization (Stank, Daugherty, & Autry, 1999). One reported
success story is a CPFR trial at Nabisco and the grocery
chain Wegmans Food Markets that resulted in increasing
sales while significantly reducing inventory and improv-
ing service levels (Oliver, Chung, & Samanich, 2001).
The efficiency gains from the Internet arise from its ca-
pacity to quickly transmit large amounts of complex infor-
mation throughout the supply chain. However, there are
important choices about the nature of the Internet links
to suppliers. Generally, two broad e-procurement options
exist: first, use of broadly based transactional exchanges
to aggregate sellers (and sometimes buyers) so as to create
a larger market with lower search costs and lower product
costs; and second, the use of Internet-based links to create
a relationship exchange among established suppliers so as
to increase information flow and manage inventory. There
are important distinctions between these options relevant
to management decisions (Kaplan & Sawhney, 2000). The
great benefit of the broad transactional exchange is the
ability to consolidate markets, expand access to suppli-
ers, lower search costs, and lower acquisition costs. The
online auction is perhaps the best example of such a sys-
tem, with many buyers and sellers operating much like the
stock market. The reverse auction is a variant, in which a
buyer places a request for bids for a product and receives
competing bids from a collection of suppliers. By contrast,
the private trading exchange (PTX) or private hub is a
term used to describe a relationship exchange used for ex-
changing information and automating transactions with
a long-term supplier (Dooley, 2002; Gurbaxani, 2002).
The use of a broad transactional exchange for e-
procurement has many potential benefits, especially if
the product has commodity-like characteristics withmany suppliers, many of which have additional capacity
(Emiliani, 2000). Where price is the primary consider-
ation, transactional exchanges can generate significant
savings. Goods such as those for maintenance, repair,
and operations (MRO) meet these criteria (Croom, 2000).
However, there are important qualifications to the hoped-
for benefits. Many of the public exchanges established
to provide such markets failed to generate adequate
aggregation of buyers or sellers (The Economist, 2001).
Additionally, the realized gains from reverse auctions may
be much less than expected. Firms using an online reverse
auction may achieve significant gross savings, only to find
those savings reduced by hidden costs associated with
switching suppliers (Emiliani & Stec, 2002). The relation-
ship with suppliers in an arm’s length public exchange is
generally adversarial, and this is compounded by the fact
that use of an exchange for e-procurement sets suppliers
against each other in a bidding war. Consequently, many
suppliers have avoided these exchanges, thereby holding
down liquidity. Attempting to fix these weaknesses, many
arm’s length transactional exchanges have developed new
capabilities for adding value. This includes Free Markets’
ability to provide specialized information needed for
complex transactions, specialized solution providers
like Biztro.com, and sell-side asset exchanges such as
transportal network (Wise & Morrison, 2000).
Perhaps more significant, arm’s length trading in an
exchange is inconsistent with achieving greater collabo-
ration with suppliers. In a mutually beneficial relation-
ship with a supplier, negotiations over price, quantity,
replenishment, product development, and variations in
product can be used to establish parameters for automat-
ing actions over the Internet. The relationship exchange
provides benefits beyond price. Savings can be realized
through reductions in ordering costs, time saving, lower
search costs, and procedures for facilitating the ordering
process. These savings can be considerable, such as the re-
duction in transaction costs by British Telecom from $113
to $8 (Lucking-Reiley & Spulber, 2001). A relationship ex-
change can also be used to combine a transaction envi-
ronment for suppliers with a complex interfirm commu-
nication system. Exostar is a defense aviation exchange
supported by Rolls-Royce, BAe Systems, Boeing, Lock-
heed Martin, and Raytheon. This exchange is used to co-
ordinate the relationship of suppliers and product design
for complex systems, such as fighter aircraft (Economist
Intelligence Unit, 2002).
The decision to use a B2B exchange (whether a trans-
actional or relational) must link Internet strategy with the
nature of the relationships that exist in the supply chain
(Jap & Mohr, 2002). The obvious difficulties come when
firms previously engaged in an arm’s length transaction
attempt to shift to a more collaborative environment or
when firms in a collaborative environment are moved to
a public exchange with more intense conflict.MANAGEMENT ISSUES IN SUPPLY
CHAIN COLLABORATION
The Internet does not create the need for coopera-
tion and collaboration in supply chains; this has always
been important. However, the Internet does provide new