Supply chain integration is the cooperation of buyers and sellers, with the goal that all parties benefit from the relationship. The resulting supply chain partnerships result in improved quality, improved delivery, and an improved bottom line for everyone involved in the supply chain—and in addition, the final customers get better quality, reliable on-time delivery, and more responsive service.
What is Supply Chain Integration?
At the simplest level, supply chain integration involves communication between a buyer and a seller. The objective is to establish an ongoing working relationship such that the buyer's needs are better known and understood by the supplier.
Supply chain integration often takes the form of integrated computer systems. For example, the supplier's computer system may be set up to deliver real-time data to the buyer’s computer. This allows the buyer to know:
- The current status of all orders.
- Which products are in the supplier's inventory.
- The status of products being manufacturer for the buyer.
- When an order or product is ready to ship.
- Tracking of the shipment.
This simple form of supply chain integration can often be seen when buying from an online retailer. You can see immediately whether the item is in stock. After placing an order, you receive notices that inform you when the order has been received, when it is ready for shipment, and when the item has been shipped, along with the tracking number.
Two-Way Supply Chain Integration
The next step in supply chain integration is for the buyer's computer system to send information directly to the seller's, providing two-way communication. For example, the buyer's computer system may automatically monitor their incoming orders and production status, and use that information to issue purchase orders directly to the supplier's computer systems. With an automated, synergistic two-way flow of information, the buyer's incoming orders might even directly trigger increased production by the supplier, without any human interaction. A buyer's computer system might even automatically check with several suppliers to find needed in-stock items, and place the appropriate orders to ensure that the purchased materials arrive when they are needed.
Complex Supply Chain Integration
The integration of the supply chain can be extended as far as is needed. Partners in a supply chain can include manufacturers, distributors, importers, consumers, banks, storage facilities, insurance companies, and transportation companies. Any organization that is a part of the supply chain can be a part of an integrated and automated system for that supply chain. The objective is improve efficiency and quality, eliminate waste, and reduce costs in every part of the manufacture and delivery of a product simply by working together.
Supply chain integration can help to eliminate problems such as:
- High inventory costs.
- Overproduction and underproduction.
- Production slowdowns resulting from a lack of purchased materials or components.
- Unreliable delivery or quality of purchased materials or components.
- Poor service from suppliers.
- High transportation costs from frequent use of expedited shipping.
- Confused purchasing processes.
- Inadequately managed supplier relationships.
- Supplier errors and order processing problems.
Supply Chain Integration – A Multi-Organization Structure
The purchasing department usually takes the lead in establishing supply chain integration. It begins with a leader identifying supply chain problems and ways those issues can be resolved. Goals are established for improving the supply chain, and a plan is created that lays out what needs to be done. At this point, the purchasing department begins to work with suppliers and vendors to implement changes in the supply chain that will achieve the stated objectives.
For supply chain integration to work, there must be benefits for both parties. This may take spending time explaining the benefits of supply chain integration to vendors and suppliers, and working out details so that both parties benefit. Keep in mind that this is a partnership, in which you are asking your suppliers to make certain commitments to you. They'll expect that you also make some commitments that benefit them. There must be a shared interest in making supply chain integration work.
Establishing supply chain integration is an incremental process. The typical approach is to make small changes, collect feedback, and then make further adjustments. This is a continual process, resulting in improvements that build on other improvements. Significant steps forward can be taken quickly, while the continuous feedback helps keep everything going in the right direction.
Elements of Supply Chain Integration
There are four key components to a successful implementation of supply chain integration. These are known as the Four C's of Supply Chain Integration.
As mentioned, communication is key. Everyone involved in the supply chain needs to be well informed, allowing them to quickly adjust their operations to meet changes in demand and new business opportunities. This is often done using integrated computer systems, but direct channels of communication between key people should also be in place.
The focus should always be on the final customer's needs, and what the customer values and is willing to pay for. This requires the lead organization to have a close relationship with their customers.
The lead organization must make others in the supply chain aware of the final customer's needs, and how their part of the supply chain impacts the ability to meet those needs. Everything must be focused on the final customer's needs; ultimately, they are the ones paying the bills for everyone else in the supply chain.
To be effective, supply chain integration requires good relationships among all the members of the supply chain. This is called collaboration. Each participant in the supply chain should be interested in developing their suppliers, including providing training to improve their product knowledge and understanding of the markets being served. They may even become involved in joint product development projects. Supply chain integration is a collaborative partnership.
The sharing of supply and demand information is critical for the success. This may include information that is usually considered proprietary. However, without close cooperation, the members of the supply chain will not have the information they need to be responsive to customer needs.
Benefits of Supply Chain Integration
There are a number of benefits that result from effective supply chain integration.
An integrated supply chain results in improved ability to respond to rapid changes in the market. This is backed by a shared interest, throughout the supply chain, in getting things right the first time.
Improved Inventory Management
There will be fewer overstocked and understocked items. Overall you'll have smaller inventories, reducing storage costs and allowing quicker replacement of obsolete items. This is the result of n improved ability to match inventory levels with customer demand.
In addition to reduced costs associated with inventory, costs for quality control and inspections, administrative activities, and purchasing will all go down. Transportation costs will even be reduced, due to optimization of loads and better forecasting.
You'll have fewer and better suppliers. You'll have more confidence in the quality provided by those suppliers, and in their ability to deliver orders on time.
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