Executive Thought Leadership

The Role of Technology and the Internet in Supply

Professor Hau L. Lee is the founding and current Director of the Stanford Global Supply Chain Management Forum .

Lee: I would have to say the lack of visibility. This deficiency can be in the form of missing information, poor communication, reluctance to share information, and simply wrong data. Inadequate visibility typically occurs in the organizational, geographical, and time spaces. In the organizational space, we do not have visibility across different organizations (which can be internal as well as external). In the geographical space, we do not have visibility into what happens at different locations of the supply chain. In the time space, we do not have visibility into what has happened in the past.

iQ: What is the “bullwhip effect?” Based on your research, how does it exacerbate the problems of an inefficient supply chain?

Lee: The bullwhip effect describes the phenomenon of information distortion as it passes from one member to the next across the supply chain. As a result, it is equivalent to not having visibility in a supply chain. Worse still, companies can be misled by the information they receive and rely on that misinformation to make capacity, production, inventory, and logistics decisions. Inaccurate and distorted information naturally leads to poor decisions with heavy cost consequences to the supply chain. In addition, the trust among members of the supply chain erodes as poor decisions lead to poor performance.

iQ: In your expert opinion, what can manufacturers do to address the challenges caused by the bullwhip effect?

Lee: Manufacturers need to work on two fronts. First, don’t be fooled by the bullwhip effect; that is, when the bullwhip effect occurs, you need the ability to figure out what exactly is happening in the market place so that you avoid destructive or costly decisions as a result of a distorted picture of the supply chain. This requires an investment to gain transparency and visibility across the supply chain. Second, determine how to fundamentally change the way distorted information gets transmitted, so that the distortion can be reduced; that is, "dampen" the bullwhip. Potentially, this requires changing incentive systems, collaborating with partners in the supply chain, investing in information systems that will give rise to coordinated and synchronized planning, and creating partnership relationships.

iQ: What do you foresee as the future in linking demand-based management technologies with supply-chain management systems to address the challenges of the supply chain?

Lee: Some of the bullwhip effects observed in supply chains today occur when companies fail to manage their demand instruments, that is, promotion plans, prices, category management, and other sales efforts, with the full understanding of supply-chain impacts. Thus, if demand instruments are not well understood and if companies are not aware of their existence, big bullwhips can result. So supply-chain management and demand-based management must be linked and integrated. Visibility into both is a minimum requirement, and coordinated plans would be the ideal.

iQ: Does the Internet play a role in linking demand-based management technologies with the supply-chain management system? And if so, how?

Lee: Visibility will form the foundation of integrating demand-based management with supply-chain management. The Internet is the best vehicle for information integration, and I expect that the Internet will form the basis for visibility as well. In addition, integrating demand-based management with supply-chain management requires intelligent decision support systems that can analyze massive data to determine the best integration plans. Such systems require using data from various sources, performing the necessary analyses, and ultimately delivering the results and plans to the various parties concerned. Again, I see the Internet as the basic platform for all such information transfer and execution.

With the Internet, we can have point-of-sales data, inventory levels, and other status information transmitted to all upstream players in a supply chain in real time. This avoids the bullwhip effect, effectively enabling all players to see if any demand instruments and resupply plans are necessary to match supply and demand. When the upstream players have production plans or procurement plans in place, as well as any promotion or price change plans, they can also be transmitted instantly to all downstream players. The result is that no one is surprised and everyone can act in accordance with the current plan in place.

For companies that use the Internet as their sales channel, it is also easy to obtain point-of-sales data directly, and price changes as well as other promotion plans can also be executed instantaneously.

The Internet also allows for customized demand-based management and supply-chain solutions. For example, it is possible that some demand instruments can be used for some segments of the market. With customers ordering through the Internet, such segmented strategies are easy to implement.

Finally, some of the demand-based management instruments have not been effective in the past because tracking of results is often inaccurate and inadequate. For example, instruments like rebates, price protection, group discounts, and other incentive schemes require accurate tracking of orders, sales, and inventory across multiple channels in the supply chain. Such information is often not tracked properly, so companies fail to leverage these instruments and their benefits are lost. The Internet is a natural setting in which such data can be tracked and retrieved with ease.

iQ: What are your recommendations to business leaders who want to align their e-business strategies with their supply-chain management strategies?

Lee: It is important to note that e-business must support the firm’s overall supply-chain strategy. Supply-chain strategies must be identified first, as e-business can be one avenue in which to deliver the supply-chain strategy. In addition, e-business strategies must also be coordinated with other strategies such as outsourcing, direct channel or multichannel strategies, vendor-managed inventory programs, collaborative planning, forecasting, replenishment (CPFR), collaborative design, and strategic sourcing that together support the overall supply-chain strategies of a firm. In all cases, the strategies must be communicated to not only the internal organization, but to all the supply-chain partners as well.

iQ: What is your advice to business leaders who want to link their demand forecasts to the supply-chain system? What is the benefit to manufacturers if they can achieve this objective?

Lee: Ideally, we should have demand forecasts of not only one company, but that of its customers, as well as those customers’ customers, all interlinked. This can be a powerful tool to create transparencies and visibilities, and thereby avoid the bullwhip effect. Companies that achieve this link-up can create tremendous efficiencies, such as lower inventory, faster response time, better customer service, improved asset utilization, and ultimately, potentially better sales and returns. The ultimate goal is a supply chain that moves in unison, instead of having different parts of the supply chain operating in different directions and at paces (if members of the chain were left relying on independent and different forecasts, for example). The concept is simple but powerful.