Impact of inventory policy consistency on the three-stage supply chain performance.

Author:Cheng, Liang-Chieh 'Victor'

    The widely cited argument, "The real competition is not company against company, but rather supply chain against supply chain," (Christopher, 1998) has been accepted by industry practitioners and academia. (Fine, 2000) further indicates that a supply chain partner needs to be able to configure and reconfigure a supply-chain network quickly to meet changing demand. Moreover, recent research has provided empirical evidence in configuring or reconfiguring production/logistics practices for high supply chain performance (Gereffi, Humphrey, and Sturgeon, 2005; Sturgeon, 2002), further suggesting that the ability to integrate the underlying information infrastructure and business processes quickly is key to sccessesses.

    Supply chain management needs not only intra-organizational but also inter-organizational endeavors. Effective supply chain management requires coordination among the various channel members. Currently, practitioner's and academic research has contributed substantial knowledge to effectively managing supply chains. Programs such as vendor managed inventory (VMI) and continuous replenishment planning (CRP) can enable the seller to monitor inventory levels at the buyer's stock-keeping locations and assume responsibility for requisite inventory replenishments (Cheng and Grimm, 2006; Lee, Padmanabhan, and Whang, 1997a, b). Supply chain members may develop long-term relationships with suppliers that more closely resemble "partnerships" than occasional transactions. These partnerships succeed when they develop idiosyncratic interfirm relations through investments in specific capital assets, shared know-how, complementary assets, and effective governance mechanisms (Cheng and Grimm, 2006).

    In addition, extant academic work has also developed insightful theories and contributed a variety of knowledge and insights to understanding supply chain competition from strategic management, marketing, logistics, and information management perspectives (Lee et al., 1997b; van der Zee and van der Vorst, 2005; Wu and Olson, 2008). In brief, practitioners' experience and academic studies indicate the concepts of supply chain management and supply chain competition have motivated people to think about doing business from a new perspective--supply chain perspective.

    This paper attempts to contribute knowledge to effective supply chain management from a new angle--the consistency of supply chain inventory policy combinations. Specifically, policies of integrative internal and external logistics activities can contribute to overall supply chain performance. Intuitively, consistent upstream and downstream inventory policies imply similar routines and norms of operation and decision making processes. Inconsistent inventory policy combinations imply differences between operation and decision processes. Interestingly, whether consistent vertical inventory policy combinations enhance supply chain performance is an issue not yet fully understood by extent researchers.

    Selection of inventory policy has a profound impact on both a firm's supply chain and financial performance. In the short run, the effects of particular inventory policies would be reflected on the balance sheets. In the long run, inventory policies would affect the overall level of customer service, which in turn affects customer satisfaction (Tersine, 1998). Furthermore, inventory policies within the supply chain are not independent policies. The policy outcomes of downstream inventory decisions could serve as crucial signals for upstream inventory policy decisions. Thus, assessing the impact of inventory policy combinations is appropriate and crucial to understand supply chain performance.

    This study attempts to address the following research questions: Do different inventory policy combinations have different impacts on supply chain performance? Does consistency of inventory policies enhance the ability of supply chain partners to obtain higher supply chain performance? To what extent can we quantify the value concerning the information sharing of inventory policies between supply chain partners?

    Based on the economic order quantity (EOQ) and economic order interval (EOI) models, this paper develops simulation models and evaluates the impact of inventory policy consistency on the performance of a three-stage supply chain (i.e., a reseller-vendor-manufacturer triad. See Figure 1.) In addition, this paper also attempts to simulate and quantify the effects of the synchronization and integration of supply chain information.


    The structure of this study is as follows: the next section reviews relevant literature; the third section then discusses proposition needed to answer the research questions; the fourth section presents the research methodology; the following sections report analysis results and managerial implications based on the data analysis results; finally, conclusions, limitations, and future research is discussed in the final section.


    2.1 Supply Chain Management

    Supply Chain is defined as the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer (Christopher, 1998). This definition explicitly identifies the plausible unit of analysis, i.e. supply chain organizations, linkages, and networks.

    Scholars in the supply chain management field (Cheng and Grimm, 2006; La Londe and Masters, 1994; Mentzer et al., 2001) have suggested that effective management for a supply chain shall manifest the following features:

  3. Supply chain partners, upstream and downstream, are are coordinated by long-term agreements;

  4. Supply chain partners develop trust and commitment to business relationships.

  5. Supply chain partners integrate logistics activities through sharing key information, e.g. demand and sales data and forecasts.

  6. A supply chain displays a potential shift in the locus of controlling supply chain processes from intra-firm operations to inter-firm synchronization.

    Recent empirical studies also provide evidence that long-term agreement, integration of logistics activities, information sharing activities, and center of control for supply chain processes play crucial roles for supply chain management (Reiner, 2005; Reiner and Trcka, 2004; Tannock et al., 2007).

    2.2 Demand Amplification (the Bullwhip Effect) on the Supply Chain

    An interesting phenomenon, bullwhip effect, has been widely discussed in analyzing supply chain performance. The "bullwhip effect" refers to the phenomenon where orders to the supplier tend to have a larger variance than sales to the buyer (i.e., demand distortion), and that the distortion propagates upstream in an amplified form (i.e., variance amplification) (Lee et al., 1997a, b). Lee et al. (1997a, b) identified five main causes of the bullwhip effect: 1) the use of demand forecasting; 2) supply shortages; 3) lead times; 4) batch ordering; and 5) price variations. Through an analytical model, Lee et al. suggest that supply chain coordination activities, such as the combination of sell through data, exchange of inventory status information, and order coordination, are effective methods to mitigate the bullwhip effect.

    2.3 Effects of Information Sharing Mechanisms

    There has been much interest in quantifying the value of information sharing between manufacturers and retailers. Chen et al. (2000) examine supply chain management by quantifying the bullwhip effect by developing a simple supply chain model with a single retailer and a single manufacturer who face autocorrelated demand. Their model includes two factors: demand forecasting and order lead times. They conclude that centralized demand information can reduce, but cannot completely eliminate, the bullwhip effect.

    Another research by Choudhury et al. (2008) considers the case of a 2-stage supply chain in which the manufacturer has limited capacity. They consider two cases of information sharing between the manufacturer and the retailer. In the first case, the manufacturer obtains information from the retailer about the parameters of the underlying demand distribution and the (s, S) ordering policy adopted by the retailer. In the second case, the manufacturer obtains additional information from the retailer about the period-to-period inventory level. Costs of the first and the second cases are compared to evaluate the benefit of obtaining additional information about the retailer's inventory level. It was found that, when the difference between s and S and the demand variance are reduced to moderate values and the supplier has moderate to high capacity, the information link is expected to be most beneficial.

    Furthermore, Lee et al.(2000), by applying (s...

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