Supply Chain Management and Information Systems - Principles of Management

The supply chain of an organization is the vertically integrated chain of suppliers that provides raw materials, partly finished products, or finished products to an organization. Wal-Mart’s supply chain, for example, includes all organizations that supply the products it sells in its stores. Similarly, Dell’s supply chain includes all enterprises that make the component parts for its assembly operations.

The central task in supply chain management is to synchronize the flow of products from suppliers, through transportation networks, to the firm, and then out to the firm’s customers, so that inventory is minimized and capacity utilization is optimized. One way in which managers try to improve supply chain coordination is to have suppliers locate close to their own operations. Many of Toyota’s suppliers, for example, locate their plants next to Toyota’s assembly operations, making it easier to implement just-in-time inventory systems.

However, in today’s global economy, this is not always desirable. Many suppliers have moved production facilities to low-cost locations such as China, Malaysia, or Mexico to take advantage of low labor costs. Indeed, the demands of a firm for lower-priced inputs may force them to do this. Thus many of Wal-Mart’s suppliers have established production facilities in China to better serve the giant retailer’s demands for lower prices.

As a result of such trends, in recent decades the supply chains of many enterprises have stretched out geographically. Coordinating such globally dispersed supply chains is a major challenge for operations managers.

Fortunately Web-based information systems give operating managers tight control oversuch dispersed supply chains. By tracking component parts through a supply chain, information systems let a firm optimize its production scheduling according to when components are expected to arrive. By locating component parts in the supply chain precisely, good information systems allow a firm to accelerate production when needed by pulling key components out of the regular supply chain and having them flown to the manufacturing plant.

Firms increasingly use electronic data interchange (EDI) to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers. EDI systems require computer links between a firm, its suppliers, and its shippers. Sometimes customers also are integrated into the system (as in Dell’s build-to-order system). These electronic links are used to place orders with suppliers, register parts leaving a supplier, track them as they travel toward a manufacturing plant, and register their arrival.

Suppliers typically also use an EDI link to send invoices to the purchasing firm. One consequence of an EDI system is that suppliers, shippers, and the purchasing firm can communicate with each other with no time delay, which increases the flexibility and responsiveness of the whole supply system. A second consequence is that much of the paperwork between suppliers, shippers, and the purchasing firm is eliminated.

Before the emergence of the Internet as a major communication medium, firms and their suppliers normally had to purchase expensive proprietary software solutions to implementEDI systems. The ubiquity of the Internet and the availability of Web-based applications have made most of these proprietary solutions obsolete. Less expensive Web-based systems that are much easier to install and manage now dominate the market for supply chain management software.

These Web-based systems are rapidly transforming the management of supply chains, allowing even small firms to achieve a much better balance between supply and demand, thereby reducing the inventory in their systems and reaping the associated productivity benefits. With increasing numbers of firms adopting these systems, those that don’t may find themselves at a significant competitive disadvantage.


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