Recent advances in information technology have enabled low- cost and efficient inter-organizational information sharing (IOIS) relationships between firms adjacent on the supply chain. These arrangements have been prevalent in the automotive industry for many years. For instance, Chrysler mandates that all its suppliers be able to interface electronically with their logistics management information systems. However, of late, IOIS arrangements have become more varied, and have also become common in a number of other industries; in particular, between large commercial retailers and their suppliers of OTC (over-the-counter) goods.
To illustrate some of the issues that are believed are crucial to understanding their costs and benefits, consider the following real-life case:
ABC Corporation started selling pharmaceutical over-the- counter (OTC) products in 1978. They have a variety of such products that they sell today. They rely heavily on electronic interfacing at various levels with their buyers in order to drive efficient supply chain management. ABC was introduced to EDI in 1985. Their basic EDI process is fairly simple. Customers enter orders via EDI by sending UPC codes and order quantities to an electronic mailbox with a specific customer ID. Orders are retrieved four times a day, and after being screened for consistency, are translated and sent into ABC’s order processing system. Currently, there are over 160 customers who use EDI for ordering. 70% of their dollar volume of orders comes in electronically, and 50% of the total number of orders uses this system. The benefits of the simple EDI system have been immense. Delivery times have been cut from an average of 21 days to an average of 5 days. Customer order problems, which used to take 24 hours to handle, are resolved in less than an hour. The EDI system is handled by customer service representatives, who, instead of entering line items manually, now have more time to focus on advertising, selling and forecasting. However, there are some concerns with this system. Customers like to use the same UPC each time they order, and do not keep up with changing product types and packaging sizes; hence, a fraction of the orders tend to be for products that are no longer in existence. It is difficult to handle specialized product features, and promotional products, due to the information gap between the customer and ABC. ABC has solved these problems and achieved further operating improvements using VMI (vendor managed inventory). For instance, one of their retailers allows them to hook the EDI system into the retailer’s inventory system. This allows them to view POS data – ABC controls the stock in the retailers’ stores. This eliminates the information gap discussed earlier. This information also has cross-functional value, as it allows ABC to generate superior demand forecasts. It has increased the number of inventory turns by over 300%. Another of ABC’s retailers does not allow this form of VMI, but gives ABC access to their POS information; this information is targeted at helping ABC’s marketing and sales divisions make better forecasts, and to give ABC the option of replenishing stocks continuously. ABC also manages a whole category of OTC pharmaceutical products for one of their retailers; this provides ABC with valuable information about competing pharmaceutical companies’ sales and promotion patterns. The benefits to ABC should be immense; however, their managers do not feel that there is any tangible net value from these advanced systems. The efficiency of their logistics management and their marketing strategies have improved; however, these benefits seem to be outweighed by the fact that they operate on stringent and expensive supply schedules, and are saddled with a number of the ordering costs that the retailer used to bear. In short, as one despondent manager put it: ‘The retailer seems to have extracted all the benefits of our partnership’.
The case raises a number of interesting points. We focus primarily on the following issues:
How much information should a firm share? If sharing information generates value, one might argue, and then why not share all relevant information available? At least two observations are of consequence when examining the question of up to what level must one builds these relationships:
- The sharing of information also affects a different dimension of the buyer-supplier relationship: the relative bargaining power of the two parties.
- The nature of the information shared may influence the strategies of departments outside operations and supply chain management; also, it may affect the competitive position of the buyer or supplier with respect to their own industry rivals.
Based on above example, we describe the impact of different levels of information sharing on the operations, sales and marketing strategies of an organization.
- If these arrangements are indeed value creating, then a question which arises is how IOIS relationships can be sustained. For instance, a supplier may get tremendous operations and sales strategy improvements if permitted to access point-of-sales information; however, the buyer may not gain significantly from this arrangement. In a case like this, one would expect a contract of some kind to ensure that the information is shared on a continuous basis, and that the value created is shared in a satisfactory manner.
