As a human being, we all consume products and/or services all the time. This morning you got up and ate your breakfast, e.g., eggs, milk, bread, fresh fruits, and the like. After the breakfast, you drove your car to work or school. At your office, you used your computer, perhaps equipped with 27” LCD monitor. During your break, you drank a cup of coffee and played with your iPhone. So on and so forth. You probably take it for granted that you can enjoy all of these products. But if you take a closer look at how each of these products can be made and eventually delivered to you, you will realize that each one of these is no short of miracle. For example, which fruit do you like? Consider fresh strawberries. In order for the strawberries to be on your breakfast table, there must be numerous functions, activities, transactions, and people involved in planting, cultivating, delivering, and consuming strawberries. Moreover, all of these functions, activities, transactions, and people are connected as an integral chain, through which physical products like strawberries themselves and virtual elements such as information and communication flow back and forth constantly. By grouping related functions or activities, we have a supply chain, comprised of four primary functions such as supplier, manufacturer, distributor, and finally consumer. A supply chain is essentially a value chain. For the society or economy as a whole, the goal is to maximize value, i.e., to create satisfactory value without spending too much. In order to create the maximum value for the strawberry supply chain, every participant in the chain must carry out its function efficiently. In addition, all of the members must coordinate with each other effectively in order to ensure value maximization. We have to face the same issues for almost all the products and services we take for granted in our everyday life, e.g., cars, hamburgers, haircuts, surgeries, movies, banks, restaurants, and you name it! In this course, we want to understand fundamental principles of value creation for the consumers or the market. We try to answer questions like how the product or service is made, how the value-creating activities or functions are coordinated, who should play what leadership roles in realizing all these, and so on. As our course title hints, we approach all of these issues from a learning perspective, which is dynamic in nature and emphasizes long-term capability building rather than short-term symptomatic problem solving.
Designing Factors - Infrastructural Dimension
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Supply Chain Strategy I: Structural and Infrastructural Dimensions
In order to optimize the supply chain performance, the firm must design its supply chain effectively. In this chapter, we will talk about how to design the effective supply chain and look into the designing factors of supply chain management in detail.
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Bowon KimProfessor
KAIST Business School
Now let's talk about infrastructural dimension of supply chain design issues.
But actually there is only one
infrastructural dimension element, which is coordination.
Coordination is based on supply chain perspective.
In other words coordination must
occur among supply chain participants.
And it's pretty important thing for system [INAUDIBLE].
System-wise optimization.
System optimal performance.
Coordination meaning that you communicate with your suppliers and partners.
Your partners are those that share the same value chain.
So you make joint decisions and you communicate with
them, you discuss issues with them, and you work with your
partners to adjust some of your policies, or to come
up with the better strategies, and so on and so forth.
That's the definition of coordination.
And now what other types of coordinations were, what is the important thing
you want to work with your supply chain partners for
instance the first thing that comes to our mind is information sharing.
Information about the market, right?
Information sharing.
If you're the manufacturer and you work
with your, you know, customer which is usually
the retail stores, for example, then you are interested in knowing the
end market's demand, and then you need to work with your customer.
You need to work with the retailers to get
more accurate information about the end customer's demand, you know?
That kind of thing.
Information sharing is a big part of coordination.
And then, sometimes, you want to work with
just supplies when you develop your new product.
Because
usually, you don't have all the knowledge, you don't have all the expert, expertise,
you don't have all the technology needed to develop a new product.
Sometimes much of that knowledge is with the supplier.
So somehow you need to work with
the suppliers to develop better, better products,
to develop a new product in a
more effective and more, you know, efficient way.
And sometimes you do, many, joint decision making.
You
probably need to do, the advertising or promotion with your suppliers together.
Or sometimes you need to adjust your
capacity and while doing that, you constantly communicate
and talk with your suppliers and maybe
your distribution partners so on and so forth.
So there are many issues related
to very comprehensive to decision making [INAUDIBLE].
And obviously R&D which is you know, also should related to your
product development but sum up R&D for the [UNKNOWN] product as well.
So, you want to do your R&D activities by working
with your suppliers and sometimes working with your own customers.
So these are the sum of the, these are the sum of the elements of coordination.
There are some other examples, but I will
say that these are the four most important coordination
areas.
Now let's think about coordination levels.
I want to make some typology.
Coordination is necessary, not only between different companies, right?
You have different companies and you need them to coordinate with each other.
But even if you look at this inside, inside of this manufacturing company, if
you look at the inside of the
company, then there are also activities and functions
that must be coordinated with each other.
So, let's say, the coordination is not only for inter-firm
relationship, but also intra-firm, within the firm.
And also, there is coordination between
different functions or within the same functions.
For example, let's say production department, production
department in company A, and also people in the
production department company A, they must to work together.
Maybe the imports or some, you
know, different things in the production department.
And they have to work together.
That's, that coordination is intra-firm, intra-functional coordination.
Or sometimes, even within, even within the same company, let's say production.
Production function at company A need you to work with
marketing function or sales function at company A.
So this is inter-functional coordination but intra-firm.
So intra-firm inter-functional coordination.
Or let's say we have our reduction
function and our supplier, our supplier's production function is there.
So let's say that's company B.
And then the, the coordination must be there.
That's interfirm, but interfunctional
coordination.
Finally, we can think about let's say, production function.
Production function at company A must work with the marketing function at company B.
If that is the kind of
coordination required, that is inter-firm, inter-functional coordination.
And we'll just say that this might be the most challenging coordination style.
Another perspective we can think about regarding this you know coordination.
We, we can think about coordination intensity.
Coordination intensity.
This is most primitive form.
There is actually not much coordination at all.
It's one directional communication.
One directional communication.
And there is not much feedback there.
So the communication flows from upstream to downstream.
And now the next level of coordination is this, feedback.
So, information is somehow moved back, backward, from downstream to upstream.
So, we have information, but the thing is that this
is just us, directions from the downstream functions.
There is no guarantee that that feedback information
is actually incorporated into the option neighbors
decision making or optimum functions strategy.
And this one is a little, you know, high level organization,
and as you can see, the coordination and communication occurs
between consecutive or neighboring functions, okay?
So, in the manufacturing function coordinate with the
distribution function, and supply function coordinate manufacturing function.
So it's kind of like a local coordination, right?
This is good coordination, but some are recorded as local
coordination.
So, coordination is good, local coordination is good,
but somehow it has its own limitations as well.
In other words you can see only this neighboring functions at the same time.
And you probably cannot look at the entire value chain, entire supply chain.
So, the most intensity, most intensity coordination form
involves some sort of, integrated coordination entity.
In other words there is a entity that can over, you know, that can look
at this entire, the over all this value chain functions and
project functions at the same time and this entity can
be part of formal organizational you need, or, it can be informal.
As long as you have a champion, or you have activity, you know, department or
partition that has some power or authority to look at all these
values and activities at the same time and to initiate,
coordinate all of these functions and activities at the same time.
Then that is going to be very significant developments in terms of coordination.
So the company has to decide where we
stand, where we stand in terms of, this coordination.
Whether we have very high level of coordination, or low level of
coordination.
Okay.
So far, we emphasized that, you know,
coordination is needed, and coordination is good.
And the [UNKNOWN] must try to coordinate all these value chain activities.
But in reality, coordination is not that straightforward, it's not easy.
Because there are some of these
difficulties or barriers to effective coordination.
Let me talk about three of such barriers.
The first one is, sometimes we don't have fair measurement to system.
Why do we coordinate with each other?
Because we believe that if we coordinate, then somehow
our, you know, profit or our share will increase.
Lets say this is our current share, or pie, the current pie it is.
But if we do coordination, we think that the pie can get
bigger.
But the thing is how much contribution you make.
How much contribution I make to this you know, pie increase.
Unless I know exactly how much contribution I make, you know
either with or without fair measurement, I don't know how
much, you know, cry, crane I have, to the increased part.
So when there is you know, there is no systematic and fair
measurement system, it is pretty difficult to choo, do fair sharing.
Fair sharing of this coordination benefit.
It becomes difficult.
And that is problematic.
Coordination involves very close relationship between parties
involved in that process, and therefore, if you don't trust
that partner, quite you know, quite well, then sometimes
you're afraid of leaking your own proprietary knowledge.
In other words you don't want to lose your own
knowledge, know how information or technology.
But sometimes it's, somewhat difficult to find the
trustworthy partner for whom I don't have any concern with,
or concern about this [UNKNOWN] proprietary knowledge.
But that's not easy.
That in reality, that's a little bit difficult.
And finally, certain organizations as very particular or peculiar culture
that prevents, prevents the members of their organization from working together.
So, their culture is highly competitive, that means
that you know, no matter what happens, I
have to win this guy, and win this
people and win this function and win this department.
The culture is highly competitive then
it's not easy to encourage this coordination.
So
these are the, some of the more important barriers to effective coordination, but at
the same time we need to think about what cost do we have to pay if coordination
fails.
Basically the most important cost, the most serious cost is information
quality reduction.
Uncertainty increases, planning failure, unnecessary risk taking, and mismatch
between supply and demand, and stock of high inventory.
And that means that all those negative repercussions of having too
much inventory, we already mentioned.
So, in coordination phase information quality will go down,
all the file information quality, more formally very shortly.
But anyway, information quality goes down, that's very, you know, serious problem.
It has very significant deprecation along the way.
And therefore we have to measure this cost.
And then we have to think about these barriers.
And which one dominates.
So this is another time of
cost time analysis.
And if coordination fails, inefficiency will go up.
Somehow these two cost types are related with each other, right?
Information quality goes down, that actually encourages
or it enhances inefficients in the system.
Non value added activities, unnecessary mistakes, sub optimal
resource allocation, opportunity cost, so on and so forth.
These are the reasons why we
can see inefficiency increase when coordination fails.
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