SCM Coordination and SCM Integration

Vidhu I vadakkan

School of Management Studies

CUSAT, Kochi-22
E-mail:vidhu.vadakkann@gmail.com

Abstract: Supply chain management (SCM) is defined as the integration of

key business processes from end user through original suppliers providing
products, services and information that add value for customers and other
stakeholders. The customer is an integral part of the supply chain and the
primary purpose of any supply chain is to satisfy customer needs in the
process of generating the profit for itself. Supply chain activities begin with a
customer order and end with a satisfied customer. There must be an easy
access for coordination and integration among the suppliers for effective
Supply Chain Management. These elements are equally important for
fluctuation of orders, inventory maintenance, replenishment lead times,

transportation costs etc. Certain incentives are also permitted by the supply
chain partners in order to avoid the distortions (unavoidable delays, over
ordering etc.)[1]. Coordination is realized when a decision maker in the
supply chain, acting rationally, makes decisions that are efficient for the
supply chain as a whole [2]. Supply Chain Integration is defined as an
approach that seeks to coordinate and harmonize all elements of a supply
chain from raw material to finished product in order to achieve higher levels
of overall performance and reduced cost [3]. Increasing competition due to
market globalization, product diversity and technological breakthroughs
stimulates independent firms to collaborate in a supply chain that allows
them to gain mutual benefits. This requires the collective know-how of the
coordination mode, including the ability to synchronies interdependent
processes, to integrate information systems and to cope with distributed
learning. The researcher utilized secondary data, including digital libraries,
online databases, journals, etc. to review SCM research papers in different
aspects. This exploratory study reveals the evolution of SCM in various
industries, including manufacturing and service industries, and its future
trends. SCM assists the business organization to compete in the dynamic

international market [4].

Key Words: Supply Chain Management, Supply Chain Management
Coordination, Supply Chain Management Integration.

1.1 INTRODUCTION
1.1. General Information
SCM had its origin in factory assembly lines and Japanese management practice, took
practical shape in the Electronic Data Interchange (EDI) systems of the 1960s, and was
developed in 1990s into Enterprise Resource Planning (ERP) systems. These were firstly
unlinked systems independently controlling Production, Storage, Distribution, Material Control,
etc. In a second stage of development, these systems were integrated under one plan, and this
last plan was then vertically integrated with upstream suppliers and downstream customers [5].
Forrester is the first to identify the phenomenon of oscillating and amplifying order behavior
upstream of supply chains and its effects on inventories, capacity utilization and other
operational parameters. This Forrester effect has become known as the bullwhip effect and can
be considered to be the best-known phenomenon of supply chain inefficiencies. The first time
the bullwhip effect was evident in an industrial company in the supply chain of Procter &
Gambles diaper products. Though diaper sales were relatively stable, fluctuations of distributor
orders were much higher and so were material orders of Procter & Gambles suppliers (Lee
1997). After this discovery, the same effect has been observed in other supply chains as well
and is still evident. The bullwhip effect is evidence of the consequences of uncoordinated
decision making for which there must be easy access for coordination, collaboration and
integration for an effective Supply Chain Management.

The resulting order fluctuations have a variety of consequences for the supply chain. These
fluctuations increase manufacturing costs, inventory costs, replenishment lead times,
transportation costs, and labor costs for shipping and receiving. Additionally, the level of
product availability decreases and relationships across supply chains are affected negatively
(Andraski et. al. 1998)[6].

2.0 SUPPLY CHAIN MANAGEMENT COORDINATION AND INTEGRATION

SCM COORDINATION
2.1. Supply Chain Management Coordination
Coordination aims at achieving global optimization within a defined supply chain network.
Interactive, joint collaborative efforts aim to exploit hidden potential and consequently expand
the optimization potential, i.e. it shifts the efficient performance frontier upwards. The three
types of coordination in terms of level of involvement, in ascending order: (1) simple
information exchange, (2) formulated information sharing, and (3) modeled collaboration.
Simple information exchange is straightforward in its meaning. It refers to information
exchange without additional interpretation or rules. In formulated information sharing, such
policies as restocking policies are shared together with operational information. In modeled
collaboration, operational models are also shared, together with capabilities, factory load,
inventories, and orders. This understanding can be directly linked to the three levels of
collaboration which are data exchange, cooperative collaboration and cognitive collaboration.
These views, however, indicate a more extensive information sharing scheme on the highest
level instead of a close team-work-like working relationship. As in the bullwhip effect, supply
chain profitability as a whole can only be maximized when all stages are coordinated. This
does not mean coordination is less important or relevant; it is just not as intensive.
Consequently, this must lead to concerted decisions. The significance of coordination has been
confirmed by a study conducted by Thonemann among manufacturing companies. There, supply
chain coordination has been identified as the top success factor by manufacturing companies.
It is inferred that a supply chain is fully coordinated when all decisions are aligned to
accomplish global system objectives. Information sharing is of central importance for
coordination which allows for coordinated forecasts and forecasts based on richer information.
Thus, a lack of coordination occurs when decision makers have incomplete information or
incentives that are not compatible with system-wide objectives. As in bullwhip effect, even full
information availability does not guarantee optimal supply chain performance. Nevertheless,
full information availability can have a significant, positive impact on supply chain performance.
But the problem of conflicting objective functions may remain and cause forecasts to be
distorted (Swaminathan and Tayur). Complementary to the counter-measures identified by Lee,
Padmanabhan, and Whang in the context of the bullwhip-effect, Chopra and Meindl have
considered five categories of obstacles to coordination. These comprise factors that lead to
local optimization, an increase in information delay, distortion, and variability within the supply
chain. These categories are:
a) Incentive obstacles: These are obstacles that are caused by wrong incentives provided to
supply chain members in order to influence their decisions to support global optimization
instead of pareto-efficient solutions.
b) Information processing obstacles: They consist of orders based on forecasts instead of
customer demand, and a lack of information sharing.
c) Operational obstacles: Lot requirements, rationing and shortage gaming, and large
replenishment lead times can be summarized as operational obstacles. The effect of lead
times was pointed out which can result in the halving of forecast errors.

d)

Pricing obstacles: Lot sizes based on quantity discounts and price fluctuations contribute
largely to the variability within supply chains.
e) Behavioral obstacles: Policies and management practices, such as frequency of MRP
runs, limited company perspective and local optimization characterize this category.
Centralization, known as risk pooling, referred to as a horizontal coordination mechanism. Risk
pooling reduces demand variability if demand is aggregated across locations. It is a means by
which safety stock and average inventory can be reduced in a system. Of course, some costs
might increase, such as transportation costs or customer lead time and therefore this has to be
weighed against the benefits. Square root rule is a system for inventory can be reduced
proportionally to the square root of the number of stock locations before and after
centralization, under certain assumptions, researchers have summarized the major strategies
and coordination mechanism:
a) Price coordination using quantity discounts: System optimization is sought through the
alignment of a manufacturers pricing structure with a customers purchasing incentives
under a variety of conditions, such as capacity restrictions and different information
availability.
b) Non-price coordination: This includes mechanisms such as service territories, quantity
forcing, and service differentiation.
c) Buy-back and returns policy: Such strategies aim to increase stocking incentives for
customers, especially for perishable products.
d) Quantity flexibility: Contracts including flexible quantities such as a guaranteed amount of
minimum purchases by a buyer and maximum amount of products made available through
a supplier aim at sharing the risks of forecast deviations.
e) Allocation rules: Due to scarce capacity resources, customers might distort their orders,
which in turn lead to supply chain inefficiencies [1].
Under certain conditions, a supply chain is better off not providing truthful information about
actual order requirements but also note that this might change if conditions change, such as
marginal cost for capacity or marginal customer costs. Increasing competition due to market
globalization, product diversity and technological breakthroughs stimulates independent firms
to collaborate in a supply chain that allows them to gain mutual benefits. This requires the
collective know-how of the coordination mode, including the ability to synchronies
interdependent processes, to integrate information systems and to cope with distributed
learning.
The efficient coordinated scheduling of production and air transportation becomes a
challenging problem as global companies move towards higher collaborative and competitive
environments [7].
Taxonomy of coordination modes:
A symbiotic relationship becomes important to facilitate networking among divisions within a
firm, or between firms in a supply chain. The main concern of supply chain management is how
to coordinate the independent players to work together as a whole to pursue the common goal
of chain profitability in changing market conditions. Generally, Malone and Crowston (1994)
define coordination as the act of managing interdependencies between activities performed to
achieve a goal. In the supply chain context, coordination can be viewed as an act of properly
combining (relating, harmonizing, adjusting, aligning) a number of objects (actions, objectives,
decisions, information, knowledge, funds) for the achievement of the chain goal. Since the
nature of an object of coordination varies, a separate coordination mode is required to manage
a specific object. Although the chain members implicitly apply different coordination modes to
assist one another to manage processes, capabilities and information in response to market
uncertainty, little attention has been paid to distinguishing and unifying them.
Taxonomy of coordination refers to the act of classifying different coordination modes under
one roof. The mutuality of coordination can be divided into two main dimensions, namely
complementarity of processes and coherency of understanding. Complementartly refers to how

the chain members collectively manage interdependencies between logistics activities to

create value. Interdependence is the degree to which one process depends on the other to
achieve the overall value creation processes. Managing logistics processes along the supply
chain and removing economic barriers such as incentive misalignment are the concerns of
complementarity. Milgrom and Roberts (1990) initiate the concept of complementarily between
interdependent activities and modern manufacturing. They argue that modern manufacturing
does not involve small adjustments made independently but rather substantial and coordinated
changes in the overall business processes from material procurement to product delivery.
Complementarities among those activities lead to increases in mutual values such as
increased sales and lowered logistics costs that can be shared by the participating members.
Similarly, complementarity of the logistics processes across the supply chain leads to
substantial benefit for all members. When chain members synchronies decision making about
value creation to ensure a seamless flow of goods and services and coordinate the benefit
sharing associated with logistics improvement, they are likely to shape complementarily.
Coherency refers to the degree of consistency of reasoning across organizational borders
through diffusing common understanding. To meet the requirements for coherency, the chain
members need to share information and knowledge that can be used to make sense of the
process interdependencies and to manage uncertainties along the supply chain. Lissack and
Roos (2001) verify the fact that organizations must find ways to make sense about their identity
in a turbulent environment in order to build a coherent viewpoint and actions.
The second dimension is the focus of coordination on either operational or organizational
linkages. Linkages exist when activities taken by one chain member affect activities or outputs
of another chain member. Therefore, linkages are the interfaces between firms where chain
members need to coordinate their joint decisions. Operational linkages focus on the integration
of interdependent processes and information flows that provide ways for partners to carry out
logistics planning and day-to-day transactions. Recognizing operational linkages allows the
chain members to contribute to, and become involved in, the operational decision making.
Organizational linkages consist of interconnected actors who perceive and argue about their
own interests in carrying out collective action. Appreciating organizational linkages allows them
to understand partnership activities and bargaining realities. Both of these linkages provide the
groundwork for successful coordination. Four coordination modes can be identified based on
the two dimensions of coordination:
(1) Logistics synchronization;
(2) Information sharing;
(3) Incentive alignment; and
(4) Collective learning. [8]
Logistics synchronization:
Logistics synchronization means recognizing and concerting improvement initiatives that
significantly contribute to value creation in the acquisition, consumption and disposition of
products and services in todays rapidly changing markets.
Govindarajan and Gupta (2001) suggest three interrelated areas to ensure logistics
synchronization:
(1) Customer definition;
(2) Customer value identification; and
(3) Value creation process design.
Information sharing:
Incentive alignment:
Incentives define how decision-makers are to be rewarded or penalized for the decisions they
make.
Collective learning:
The coordination of collective learning deals with how to tackle the coherency problem of
initiation and diffusion of knowledge across organizational borders (Sawhney and Prandelli, 2000).

Coordination theory:
There are two approaches to achieve coordination. The first is to centralize decision making to
a single entity, which attempts to optimize the network. The second type is decentralized
decision making that utilizes coordination mechanisms (Sahin and Robinson, 2002) [7].

2.2. Supply Chain Integration

Supply Chain Integration is the use of technology to underpin the coordination of these
business functions. Businesses implementing Supply Chain Integration use a common platform
like Celtrinos Smart Admin, to provide a way to connect the disparate systems at each business
and the transactional workflow required to move from raw materials to saleable product and the
data interchange between each supplier in the process.
In the past, every step of the supply chain required manual intervention to process and
progress orders and generate the paperwork required to keep track of each interaction. The
supplier of raw materials would receive a manual purchase order from the manufacturer and in
return create a manual invoice. Several documents would then change hands at every point of
the initial purchase process to keep everything on track and ensure an accurate audit trail of
the sale. This flurry of documents is then repeated at every step along the supply chain right up
to the final sale [10].
ISCM Implementation Steps:
There is no proven path to implementing ISCM. There are so many operational and strategic
facets to ISCM that any given implementation can take an infinite variety of forms, progress
through radically different stages, and result in several different outcomes. However, broadly
speaking, ISCM implementations should focus on these steps:

assessing supply chain opportunities;

developing an ISCM vision;

developing an ISCM strategy;

creating the optimum ISCM organizational structure;

establishing the ISCM information and communication network; and

Translating the ISCM strategy into actions.

While organizations can modify the sequence and emphasis placed on these steps to meet the
needs of a particular situation, these activities are recommended as a guide for implementing
ISCM.
Assessing Supply Chain Opportunities:
Changing consumer demographics, the emergence of new distribution channels, the
consolidation of trading partners, and the increasing use of computer and telecommunications
technology are creating a changing environment for organizations. Each of these factors is
producing new challenges and new supply chain opportunities. An effective way to begin
assessing supply chain opportunities is by forming an organization-wide steering committee
that oversees all related project activities, challenges the basis of recommendations, and
approves final recommendations and implementation plans. To spearhead the opportunity

assessment effort, the creation of a supply chain assessment team that works under the aegis
of the steering committee is recommended.
The focus of the assessment team must be on facts rather than guesswork or emotions.
Several categories of information need to be gathered and analyzed including:

competitiveness of the organization;

consumer and trading partner preferences;

the strength of the brand or the product line;

the impact on production and logistics operations; and

Risks and rewards.

Developing an ISCM Vision:
Step two in the implementation process is to create a vision of the desired supply chain.
Visioning provides organizations with specific goals and strategies on how they plan to identify
and realize the opportunities they expect to find in the marketplace. Four critical dimensions to
be included in formulating an ISCM vision are:

sourcing;

demand flow;

customer service; and

Supply chain integration.

These objectives are achieved through careful analysis, collaboration, and communication
among supply chain partners. Each dimension of the visioning process brings new perspective
and progress toward these objectives.
Developing an ISCM Strategy:
An ISCM strategy must create maximum economic value for the customer. World-class ISCM
strategies are based on or incorporate many of the following principles of supply chain
excellence:

Formulate a differentiated supply chain strategy.

Segment customers based on service needs.

Customize the logistics network.

Organize business units around major processes, not functions.

Outsource elements of the chain for higher performance.

Differentiate product closer to the customer.

Develop a supply-chain-wide technology strategy.

Capture signals of market demand and plan accordingly.

Set clear guidelines for creating or terminating alliances with supply chain partners.

Adopt channel-spanning performance measures.

Creating the Optimum ISCM Organizational Structure:
Once the ISCM strategy has been articulated and accepted, the next task is to define how the
customers needs will be met at each stage of the supply pipeline, as well as who among the
participants can best fulfill that need. The role of each partner within an ISCM organizational
structure cannot be static. As new customer segments are identified or new channels are
developed to serve current customers, the network structure and the role of participating
organizations will need to change. In some cases, new participants with new skills, such as
electronic capability or global reach, may be recruited. If this is done, the entire network should
be reconfigured to ensure effective integration of new with existing players and skills. Some of
the more beneficial approaches used to create ISCM organizational structures have been used
by firms such as Corning, Allied Signal, and AT&T, including:

Engineering and design talent is shared among trading partners, focusing on those
projects and products that hold the greatest promise for mutual benefit. Joint design and
development and assignment of joint resources to work through challenges and

opportunities to isolate innovative and marketable solutions are part of this collaborative
effort.

Joint training sessions are led by the best available, most highly skilled trainer from among
the participating units.

Executive overviews are conducted jointly as the search for identifying leading practices
that will benefit all the trading partners continues. Benchmarking and high-level briefings
serve to ensure that the network remains responsive to changing conditions.

Cross-organizational pilot tests of new ideas or products provide benefits both in lessons
learned and problems avoided.

Joint investments are made in specialized equipment or focused facilities that support the
supply network.
Establishing the ISCM Information and Communication Network:
The thread that draws channel partners together is a common objective and its communication.
Information, and the tools and technologies that create it, provide the means to bridge
organizational boundaries and support inter-organizational learning. The development of a
robust information and communication network aids ISCM participants in achieving several
critical supply chain requirements. Several primary features define effective ISCM information
and communication systems including:

They are based on distributed open systems, or client/server architectures that will allow
business systems as well as personal computers to talk with one another;

Distributed relational database technology underlies the network structures allowing for
ready access and transparent use by individuals and enterprises in any location;

Systems span inter-enterprise functional boundaries and enable the development and
structuring of global channel-wide information networks, allowing companies to share
information regarding customers, production, inventory, and finance with their supply chain
partners; and

These systems are able to process transactions from multiple organizations and
infrastructures rapidly and accurately.
ISCM information and communication networks can be divided into the following three stages:

Transactionalelectronic execution of transactions;

Information-sharingelectronic sharing or exchange of information; and

Collaborativeelectronic collaboration on strategic, tactical, and operational planning.

Translating ISCM Strategies into Actions:
For most organizations, implementing an ISCM strategy spanning material and product flow
from vendors to final consumption, across an array of different organizations or functional
groups, is a complex task. While the specific implementation path will vary by organization over
the months and years following the definition of an ISCM vision and strategy, a range of actions
are required by channel partner organizations, including:

appointing a process owner;

aligning culture with strategic response;

reengineering critical business processes;

measuring performance;

developing and training the workforce;

communicating and demonstrating senior management commitment;

involving stakeholders and gaining commitment to change;

implementing a system to track benefits;

communicating with all stakeholders; and

Creating an integration map [11].

The integration of supply chain processes can provide an effective means by which costs can
be reduced and customer service levels improved [12]. Effective supply chain management
(SCM) has become a potentially valuable way of securing competitive advantage and
improving organizational performance since competition is no longer between organizations,
but among supply chains [13]. Supply chain management (SCM) is a well-established
discipline that involves the coordination of an organizations internal planning, manufacturing,
and procurement efforts with those of its external partners (i.e. suppliers, retailers, etc.)[14].A
warehouse may also be called a distribution center; Warehouse management is the process of
coordinating the incoming goods, the subsequent storage and tracking of the goods, and
finally, the distribution of the goods to their proper destinations [15]. The fields Supply Chain
Management (SCM) and Total Quality Management (TQM) are immensely deliberated among
the researchers and academia since 1980s. Both topics had their emergence from the
requirements of serving the needs of customers with high aspirations. TQM emanated with the
contributions of quality gurus during 1950s [16]. Supply chains cannot tolerate even 24 hours
of disruption. So if you lose your place in the supply chain because of wild behavior you could
lose a lot. It would be like pouring cement down one of your oil wells[17]. The Integrated
Supply Chain Management (ISCM) project addresses coordination problems at the tactical and
operational levels. It is composed of a set of cooperating, intelligent agents, each per-forming
one or more supply chain functions, and coordinating their decisions with other agents -this is
called a Logistical Execution System (LES)[18]. In the course of time, the most considerable
benefits to businesses with advanced SCM capabilities will be radically improved customer
responsiveness, developed customer service and satisfaction, increased flexibility for changing
market conditions, improved customer retention and more effective marketing [19]. Firms within
a supply chain routinely communicate with each other. This form of inter organizational
communication can occur in many ways, from the postal transfer of paper invoices and
purchase orders to sophisticated information technology (IT) that links two companies
databases[20].

3.1. ILLUSTRATIONS
3.2. Figures And Photographs

Fig. 1 ISCM Implementation Steps.

3.3. Tables

Author
Thompson, 1967
Galbraith, 1970

Table 1. Taxonomy of coordination modes in a supply chain.

Type of coordination
When used
Coordination by
Establishing routines and
Standardization
rules for stable or repetitive
situations, generalized
interdependence. Requires
least communication and low

Thompson, 1967
Galbraith, 1970

Coordination by
Planning

decision making effort.

Setting targets and schedules
to govern the actions in
Interdependent units. Should
be used in more dynamic
situations than
standardization with
sequential Interdependence.

Thompson, 1967

Mutual
adjustment

Requires intermediate effort.

Involves new information
transmission during the
process or action, reciprocal
interdependence, demands

Van de Ven and

Delbecq, 1976

Team increases.
arrangement

more effort.
Needed when
interdependence increases.

Table 2. Types of coordination [9].

4.0. CONCLUSION
Supply chain management (SCM) is defined as the integration of key business processes from
end user through original suppliers providing products, services and information that add value
for customers and other stakeholders. Coordination aims at achieving global optimization
within a defined supply chain network. Supply Chain Integration is the use of technology to
underpin the coordination of these business functions.

5.0. REFERENCES

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