Supply chain collaboration alternatives: understanding the expected costs and benefits

[Collaboration is a recent trend in supply chain management (SCM) that focuses on joint planning, coordination, and process integration between suppliers, customers, and other partners in a supply chain. Its competitive benefits include cost reductions and increased return on assets, and increased reliability and responsiveness to market needs. Recent advances in inter-enterprise software and communication technologies, along with a growing use of strategic partnering and outsourcing relationships, has resulted in a confusing assortment of alternative information systems approaches for supporting collaborative SCM. This paper analyzes the alternatives and presents a framework for understanding the expected costs and benefits of each type of system. These costs include not only the total cost of ownership of the system, but also the partnership opportunity cost the cost of being tied to a partner due to system inflexibility. The benefits of collaborative SCM include process, inventory, and product cost reductions as well as increased cycle times, service levels, and market intelligence.] Originally published in Internet Research: Electronic Networking Applications and Policy, Volume 12, Number 4 , 2002. pp. 348-364. About Internet Research (INTR): Editor: David Schwartz Editorial Board: Phillip Ein-Dor, Joey George, Dov Te’eni, Thompson Teo Established: 1991 ISI Impact Factor: 0.6 (average number of times an article is cited per year) © MCB UP Limited. ISSN 1066-2243 The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1066-2243.htm. This paper is furnished by the authors with permission of MCB UP Ltd., the holder of the copyright. Unauthorized reproduction prohibited. Supply chain collaboration alternatives: understanding the expected costs and benefits Tim McLaren, Milena Head and Yufei Yuan Introduction Supply chain management (SCM) is a well-established discipline that involves the coordination of an organization’s internal planning, manufacturing, and procurement efforts with those of its external partners (i.e. suppliers, retailers, etc.). To reduce inefficiencies in a supply chain, organizations are increasingly using information systems to integrate the systems and processes throughout their supply chain. Effective supply chain integration and synchronization among partners can eliminate excess inventory, reduce lead times, increase sales, and improve customer service (Anderson and Lee, 1999). However, mere coordination among trading partners today is no longer enough to maintain a competitive advantage. Instead, companies are moving towards collaborative SCM in an effort to reduce the information imbalances that result in the dreaded ‘‘bullwhip effect’’ (Lee et al., 1997), while increasing their responsiveness to market demands and customer service (Mentzer et al., 2000). This paper begins with a description and analysis of the various methods for synchronizing supply chain information and processes between organizations such as using electronic data interchange (EDI), joining an electronic marketplace, or utilizing shared collaborative SCM systems. Proponents of these varying methodologies are often self-interested commercial vendors or are organizations that have invested in an initiative themselves and need to convince others to follow suit. Given this bias, and a lack of a suitable framework for analyzing the expected costs and benefits, it is very difficult to determine which approach is most suitable for an organization. This paper presents a cost-benefit framework to address this issue. Similarly, several previous studies attest to the transaction cost savings of interorganizational systems (Mukhopadhyay et al., 1995; Seidmann and Sundararajan, 1998), but ignore other costs of ownership or opportunity costs of having an inflexible system. We will examine these ‘‘hidden costs’’ in addition to the potential benefits the systems can generate. Ultimately, this paper will provide a framework for organizations or researchers The authors Tim McLaren is a PhD candidate, Milena Head is an Assistant Professor of Information Systems, and Yufei Yuan is a Professor of Information Systems, all at the Michael G. DeGroote School of Business, McMaster University, West Hamilton, Ontario, Canada.