Supply Chain Integration and

Collaboration
Dr Carlos Mena

Agenda
What is Supply Chain Integration?
Why to Integrate?
How to integrate?

What is Supply Chain Collaboration?

Why do we collaborate?
Success factors
Failure factors

What is Supply Chain

Integration?

Supply Chain Integration

To establish and seamlessly coordinate the
processes for planning, sourcing, manufacturing,
distributing and returning products across the
supply chain
in a manner that competitors cannot easily
match.

STAGE 1: BASELINE
Purchasing

Materials
Control

Production

Sales

Distribution

STAGE 2 FUNCTIONAL INTEGRATION

Materials
Management

Manufacturing
Management

Distribution

STAGE 3:INTERNAL INTEGRATION

Materials
Management

Manufacturing
Management

Distribution

STAGE 4:EXTERNAL INTEGRATION

Suppliers

Internal Supply
Chain

Customers
Stevens (1989)

STAGE 5: THE INTERNET ENABLED SUPPLY CHAIN

C
S

C
S

C
S

S
S

S
S

STAGE 6: THE COMPLEX ADAPTIVE SUPPLY CHAIN

C

S
S

C
S

C
S

S
S
S

C
C

S
C

Advantages and Disadvantages of

Integration
Advantages
Efficiency
Lowering inventory and waste
Lower transaction costs
(negotiations and monitoring)
Reduced cycle times and time to
market

Shared risk and investment

Encourage long-term investments
Improved learning and information
exchange
Allows synergy to take place
Can increase flexibility (short-term)

Disadvantages
Inability to price accurately
qualitative matters
Efforts and costs to establish and
monitor the relationship
Risk of loosing IPR
Risk of divulging sensitive
information
Potential opportunism
Potential abuse of power
Can become dependent
Can reduce flexibility (long-term)

Why to Integrate?

The Forrester Effect

Order variability is amplified up

the supply chain; upstream
echelons face higher variability.

Order or Target Quantity

EFFECT OF A ONCE OFF STEP INCREASE OF 10% IN DEMAND

ORDER OSCILLATIONS DOWN THE SUPPLY CHAIN
14000
12000
10000
8000
6000
4000
2000
0
336 356 376 396 416 436 456 476 496 516 536 556 576 596 616 636 656
Simulation Days
Car Build Target

Orders to
Supplier A

Orders by A on B

Production
Target B

Production
Target A

The Forrester Effect

CAPACITY
REQUIRED

APPARENT

Shortages
REAL
TIME

Over
Ordering

Demand
Distortion

Safety
Stock
Increase

Unreliable
Delivery

Adapted from Houlihan, 1987.

Coping with the Forrester Effect

Lead Times
Quick Response
Push vs. Pull Strategy
Cross Docking

Reduce Variability and Uncertainty

Point of Sale (POS) information
Sharing information
Year-round low pricing

Alliance / Partnership Arrangements

Vendor managed inventory
On-site vendor representatives

Arcs of Integration
Narrow Arc of Integration
Broad Arc
of Integration

Extensive
Integration

Suppliers

No
Integration

Manufacturer

Extensive
Integration

Customer

Source: Frohlich and Westbrook (2001) Arcs of Integration: An international study of supply
chain strategies, Journal of Operations Management Vol. 19, pp. 185-200

Arcs of Integration
Inward-facing Arc

Periphery-facing Arc

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Outward-facing Arc

Supplier-facing Arc

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Customer-facing Arc

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Source: Frohlich and Westbrook (2001)

Arcs of Integration: Sample

Inward-facing Arc

Periphery-facing Arc

44

137

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Outward-facing Arc

29
Supplier-facing Arc

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Customer-facing Arc

39

42

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Extensiv
None
Extensiv
e
e
SuppliersManufacturer Customer

Source: Frohlich and Westbrook (2001)

Arcs of Integration: Conclusions

Outward-facing Supply Chain strategy is associated with
the largest rates of significant performance improvements
Manufacturers may be jeopardising performance by
continuing to follow the inward-facing strategy
Supplier- and customer-facing strategies gained little more
than periphery and inward-facing strategies
Over 40% of the sample was in the periphery-facing
group. This might be the natural equilibrium point of
integration

Approaches to Supply Chain

Integration

Responsive
Supply Chain

Efcient
Supply Chain

Matching Supply Chains with

Products
Functional
Products

Innovative
Products

Match

Mismatch

Predictable demand
Low product variety
Long life-cycles
Eg. Groceries,
Pet Food

Mismatch

Uncertain demand.
High product variety
Short life-cycles
Eg. Computers
Fashion products

Match

Source: Fisher, M (1997) What is the right supply Chain for your Product?, HBR, March-April

Physically Efficient vs. MarketResponsive Supply Chains

Physically Efficient

Market Responsive

Primary purpose

Supply predictable demand

efficiently at the lowest price

Respond quickly to
unpredictable demand

Manufacturing focus

High average utilisation

Deploy excess buffer capacity

Inventory strategy

Generate high turns and

minimise inventory

Deploy buffer stocks of parts

or finished goods

Lead-time focus

Shorten lead time as long as it

doesnt increase cost

Invest aggressively in ways to

reduce lead times

Approach to
choosing suppliers

Cost and quality

Speed, flexibility and quality

Product-design
strategy

Maximise performance and

minimise cost

Use modular design to

postpone differentiation

Lean !

Agile !

Source: Fisher, M (1997) What is the right supply Chain for your Product?, HBR, March-April

Supply Positioning
In order to realise the financial and other benefits
that are available, companies need to plan their
supply chain at a strategic level. A small
number of customers and suppliers must be
prioritised
A.T. Kearny survey (1996, p. 2)

Two Key Variables for Supply

Positioning
Purchasing impact on financial results
The strategic importance of purchasing in terms of the
value added to product line, the percentage of raw
material in total cost and their impact on profitability.

Supply risk
This refers to the evaluation of the suppliers market in
terms of scarcity, pace of technology and/or materials
substitution, entry barriers, logistics cost or complexity
and monopoly or oligopoly conditions.

Supply Positioning Karljics Matrix

Purchasing impact on fnancial results

High

LEVERAGE ITEMS

STRATEGIC ITEMS

Obtained from various suppliers

Represent a large share of the product cost
Smalls changes in price have a strong effect
on the product

Obtained from one supplier

Product for which supply is not guaranteed
Represent a considerable value

Partnership

Competitive Bidding

NORMAL ITEMS
Usually have a small value per unit
There are many alternative suppliers

Systems Contracting

BOTTLENECK ITEMS
Represent a relatively limited value in terms
of money
Vulnerable in regard to their supply

Secure continuity of supply

Low
Low

Supply risk

High

Source: Kraljic, P (1983) Purchasing Must Become Supply Management, HBR, Sep-Oct, pp

Applying Kraljics Matrix

You are responsible for Purchasing in a company that manufactures
aeroplanes (like Boeing or Airbus). Decide for each of the following
items whether you think it is a leverage item, normal item, strategic item
or bottleneck item.
1. Jet engines
2. The nuts, bolts and washers used in assemble (often referred to as
fasteners)
3. Titanium
4. TV screen to be fitted to each seat
5. Seats for the passengers
6. Stationary to be used by the employees (paper, pens, files, etc.)

Purchasing impact on fnancial results

Applying Kraljics Matrix

High

Low

Low

LEVERAGE ITEMS

STRATEGIC ITEMS

NORMAL ITEMS

BOTTLENECK ITEMS

Supply risk

High

Purchasing impact on fnancial results

Applying Kraljics Matrix

High

Low

LEVERAGE ITEMS

STRATEGIC ITEMS

Seats (higher cost but relatively

low technology product with
multiple suppliers)

NORMAL ITEMS

Jet engines (very high cost and

only 3 suppliers)

BOTTLENECK ITEMS

TVs, Fasteners & Stationary (low Titanium (has been a world

cost, multiple suppliers)
shortage but low cost
compared to Jet engine)

Low

Supply risk

High

The Sustainable Purchasing

Portfolio Matrix
Threat to triple bottom line

High

Low

Strategic
Strategic
Commodity
Transitional
Commodity
True
Commodity

Bottleneck

Non-critical
item

Low

Supply risk

High

PAGELL, M., WU, Z. & WASSERMAN, M.E., 2010. THINKING DIFFERENTLY ABOUT PURCHASING PORTFOLIOS: AN
ASSESSMENT OF SUSTAINABLE SOURCING. Journal of Supply Chain Management, 46(1), 57-73.

Why do we
collaborate?

Why do we collaborate?

It is the long history of humankind (and

animal kind, too) those who learned to
collaborate and improvise most effectively
have prevailed.
Charles Darwin

27

Why we dont collaborate?

"Next to enjoying ourselves, the next greatest
pleasure consists in preventing others from
enjoying themselves, or, more generally, in the
acquisition of power"
Russell, B. (1928) "The Recrudescence of Puritanism" Sceptical Essays

Why do we collaborate?
The Prisoners Dilemma
Two criminals arrested under the suspicion of
having committed a crime together
The police does not have sufficient proof to have
them convicted
The two prisoners are isolated from each other,
and the police visit each of them and offer a deal:
the one who offers evidence against the other
one will be freed

The Prisoners Dilemma:

Options
If none accepts the offer both of them will get only a small
punishment because of lack of proof
If one of them betrays the other one, the defector will gain
more, since he is freed; the silent one will receive the full
punishment
If both betray, both will be punished, but less severely than
if they had refused to talk
The dilemma resides in the fact that each prisoner has a
choice between two options, but cannot make a good
decision without knowing what the other one will do

Why do we collaborate?
The Prisoners Dilemma
Action of A
Cooperate

Defect

Both
gain 5

A gains 10
B gains 0

B gains 10
A gains 0

Both
gain 0

Action of B
Cooperate

Defect

Why do we collaborate?
The Prisoners Dilemma
Prisoners dilemma is a non-sum-zero game, just as supply
chain management
Results are different if we play many times (this is called
the Iterative Prisoners Dilemma or ITP)
Best strategy is called tit-for-tat
Starts by cooperating but when the opponent defects, "tit for tat"
defects too

Tit-for-tat has three main characteristics:

Nice: this means that it will never be the first to defect
Provocable: if the opponent defects, it retaliates by defecting too
Forgiving: as soon as the opponent cooperates again, the strategy
forgets about the previous defection, and cooperates

Why do companies collaborate?

Source: CAPS Research (2007)

Characteristics of Partnership Types

Partnership
Type

Activities

Time horizon

Scope of
activities

Cooperation

Fewer suppliers
Short term
contracts

Short-term

Single functional
area

Coordination

Information
linkages
WIP linkages
EDI exchange

Long-term

Multiple
functional areas

Collaboration

Supply chain
integration
Joint planning
Technology
sharing

Long-term with
no fixed date

Firms see each

other as
extensions of
their own firm

Key Messages
Supply Chain Management is primarily concerned with the
efficient integration
Supply chain integration can have a direct impact in
performance but, it is not always suitable
It is natural to collaborate, we do it because we can
achieve mutual benefits
TRUST is central to collaboration

Were in this together

Douglas Lambert and Michael Knemeyer
HBR December 2004

Case Study

The Partnership Model

DRIVERS
Compelling
reasons to
partner

Decision to
create or
adjust
partnership

COMPONENTS
Joint activities
and processes

OUTCOMES

FACILITATORS
Supportive
environmental
factors

Types of Relationship
Vertical
Integration

Partnerships

Joint
Venture
Organizations share significant level of integration
Each party views each other as an extension of their firm
Long-term horizon with no end date

Type III

Organizations integrate activities

Operates across multiple divisions and functions
Long-term horizon

Type II

Organizations recognize each other as partners on a limited basis

Coordinate activities and planning
Short term focus
Involves only one division or functional area within each organization

Type I

Arms Length

Propensity to Partner Matrix

Ease of coordination
(measured by facilitator points)

Companies desire for partnership

(measured by drivers points)
8-12

12-15

16-25
12-15

Best partnership type:

I, in which coordination
is limited

8-11

Best partnership type:

Arms length

Best partnership type:

II, in whish activities of
multiple divisions are
integrated

16-24
Best partnership type:
III, in which each
company views the
other as an extension
of itself

How to commit in 28 hours

- Day 1
Articulate drivers: meet separately to discuss reasons for this
partnership. Give a score indicating the likelihood of success for
these categories:

asset and cost efficiencies

customer service improvements
marketing advantages
profit growth or stability

Presentation of drivers: Both groups present drivers to each other and

challenge those considered unacceptable. The lowest becomes the
score for the partnership
Evaluate facilitators: the teams examine factors that could help or
hinder cooperation and score four basic and five additional factors
Decide level of partnership: consulting the propensity to partner
matrix (Type I, II, III or Arms Length)

How to commit in 28 hours

- Day 2 (not covered in this exercise)
Examination of components:
Examine the management components required for the
type of relationship they want
Create a plan for developing the components required

Review:
Evaluate drivers identified in day 1
Assign specific action plans

Were in this together

3 Groups of 8 people divided in two sub groups
4 people representing Tyson
4 representing Wendys

Simulate Day 1 of Lambert and Knemeyers approach

Articulate drivers (working in subgroup) 25 min
Presentation of drivers (complete group) 25 min
Evaluate facilitators and decide level of partnership (complete
group) 25 min
Final feedback 5 min