THE ROLE OF INFORMATION AND COMMUNICATION TECHNOLOGY IN SUPPLY CHAIN

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1 THE ROLE OF INFORMATION AND COMMUNICATION TECHNOLOGY IN SUPPLY CHAIN Zlatko NEDELKO Faculty of Economics and Business, University of Maribor, Slovenia Abstract In nowadays complex business environment it is very difficult for an organization to act independently (anymore) on the market. Organizations which are participating in on one or more supply chains could outperform their competitors, which are not taking part in any supply chain. Therefore membership in one or more supply chains has become one among most important prerequisites, in order to retain/gain competitive advantage in modern business environment. One among most important considerations in the problematic of supply chain is its organization and especially its management, known as supply chain management. Advancement in modern information and communication technology and internet coupled with heightened interest for virtuality and virtual design of organizations has a great impact on many business segments/areas. Therefore organization of supply chain could vary on a continuum from traditional to virtual organization. Paper discuses two thesis: (1) Information and communication technology is a base for virtual organization of supply chain and for linking dispersed supply chain participants; and (2) The role and importance of modern information and communication technology for/in supply chain is importantly dependent upon geographic dispersion of supply chain participants. Keywords: geographic dispersion, information and communication technology, supply chain, supply chain management, virtual organization. 1. Introduction The competitive environment has changed dramatically in past two decades and has become very complex (Stock et al., 1999; Christaanse and Kumar, 2000). Globalization also has an important impact on business environment and on all business organizations, especially in last two decades. In the 1980s when various pressures, especially from customers and organizational environment, were weak, the collaboration with entities outside organizational borders was weak (Rushton et al, 2001; Murphy and Wood, 2004). Especially in the 1990s, occurred the shift form adversarial price-driven relationships between organizations towards collaborative partnerships-driven partnerships between organizations (Howard, 2005). Organizations started to realize that they are not able to act independently (anymore) on the global market. The globalization has forced organizations, to look for more effective ways to coordinate the flow of materials into and out of the organization. Key to such coordination is collaboration and closer relationships with suppliers (Mentzer et al., 2001). Collaboration with entities/organizations outside organizational borders could bring substantial benefits for all organizations involved (Drew and Smith, 1998; Ballou, 2007; Rushton et al., 2001; Murphy and Wood, 2004; Balou, 1999). In the early beginnings organizations focused primarily on the integrations with its suppliers (Slack et al., 1995; Deffe and Stank, 2005; Ballou, 1999).

2 Integration of organization, especially with its suppliers and other entities outside organizational borders is known as a supply chain (SC) concept, which emphasized that several different organizations are involved in getting the product to the end user (Rushton et al, 2001; Cooper et al, 1997). Due to the changed business environment, participation in one or even more SCs has become an important (pre)condition for organization s present/future success (Lummus and Vokurka, 1999). SC exists as a concept, but it needs to be properly managed, which is known as SC management (SCM) (Mentzer et al., 2001). SCM has become a topic of considerable interest among educators and practitioners recently (Larson and Halldorsson, 2002, Phillips-Connolly et al., 2005; Gibson et al., 2005; Burgess et al., 2006). Due to the many participants of SC, which are becoming more and more scattered around the globe, an important issue in the problematic of SC is also its organization (Browne and Zhang, 1999). SC could be organized in various ways. Due to the increased influence of virtuality and virtual design on the organizations, SC could also be organized virtual. Therefore SC could be organized traditional at one end of continuum and virtual on other end of continuum (Daft, 2000; Daft, 2003; Hatch, 1997; Tsoukas and Knudsen, 2003). Information and communication technology (ICT) has a crucial role in the organization of SC. Therefore ICT is a central construct which makes virtual organizing of SC possible. In this paper therefore we shall focus on introduction to the concept of SC, introduction to ICT as a base for virtual organization of SC and the role of ICT for/in SC. 2. Introduction to SC There are many different terms and/or concepts which are used to describe various parts and/or entire SC. Different terms/concepts are used to describe the management of different parts of the SC. Some are: purchasing and supply management, physical distribution management, logistics, materials management and SCM (Slack et al., 1995). Focus will be on the emergence of SC concept. Since the early history of humankind, the goods that people wanted were not always produced at the place of consumption. But on the other hand, goods and other commodities were often in abundance, but widely dispersed. Because no well developed transportation and other related systems existed, the movement of goods from place of production (abundance of goods) to the place of (possible) consumption, was limited (Ballou, 1999; Stank et al., 2005). This fact forced people to live close to the place of production in order to ensure access to wanted goods. Mentioned situation was only at the beginning of the humankind. Soon afterwards trade was established and has to be on the increase during centuries. Goods and other commodities have become available also outside the areas where they were produced. From the above presented cognitions is seen, that early beginnings of nowadays logistics could be traced late back in humankind history. Logistics activities have been carried out by individuals for many years (Slack et al., 1995; Ballou, 1999), but on the other hand there were lack of interest and/or study in the filed of logistics. Before 1950s, logistics was thought (only) of military terms (Ballou, 2007). During the 1960s and 1970s logistics has become a well established and also well accepted discipline, based on a system theory approach and emphasizing the idea of materials flow (Persson, 1997). In that time organizations started to look also at their material flows, especially flows between organization and their suppliers. Since 1980s, rapid and tremendous

3 change has occurred in the field of logistics (in broader sense) (Murphy and Wood, 2004; Rushton et al., 2001). Many definitions of logistics exist in literature (Rushton et al., 2001; Ballou, 2007). Common to most proposed definitions of logistics is that logistics encompasses various activities which are required to physically move raw materials into the organizations production facilities and to move finished goods to the end users (Daft, 2000). In 1980s the primary aim of logistics was integration with other functions (in broader sense) within an organization in order to improve overall performance of organization. In the 1990s, due to the increased competition among organizations coupled with rapid globalization, organizations realized that collaboration with entities outside organizational borders could bring substantial benefits, for all organizations involved. This is known under the term SC (Murphy and Wood, 2004; Rushton et al., 2001; Slack et al., 1995). The interest of organizations for participating in one or more SC has increased lately (Lummus and Vokurka, 1999), because organizations are not capable to compete as an autonomous entity (anymore), but rather as a part of SC (Weber, 2002). Various definitions of SC and SCM exist in literature and in business practice (Rushton et al., 2001; Ballou, 1999; Lummus and Vokurka, 1999). Common to most SC definitions is the emphasis on the flow of goods from raw materials through production processes to the end user (Murphy and Wood, 2004; Mentzer et al, 2001). Figure 1 depicts a simple SC model. Figure 1. A simple SC model (Rushton et al., 2001). Suppliers Procurement Manufacture Distribution Customer End users There are many reasons for increasing popularity and usage of SC concept in business practice. Main drivers may be confined to trends in global sourcing of materials, an emphasis on time and quality-based competition and customers which demand higher quality products and/or services at lower cost and in a shorter time (Mentzer et al., 2001; Goh and Pinaikul, 1998; Ballou, 2007). Organizations which are members of SC could gain following benefits (Dobler and Burt, 1998; Cooper et al., 1997; Stank et al., 2005; Ballou, 2007): (1) increased efficiency of organizations (e.g. greater productivity, lower costs); (2) reduced inventory levels throughout the entire SC (reduced bullwhip effect ); (3) fast and agile response to the customers needs and wants; (4) improved delivery performance (shorter order fulfillment time); (5) enhanced inter-organizational communication and collaboration among organizations in SC and (6) improved forecasting precision. On the other hand some possible disadvantages for organizations which are part of SC could be (Murphy and Wood, 2004; Slack et al., 1995; Ballou, 1999): (1) lack of top management commitment; (2) reluctance to share/exchange relevant data among SC participants; (3) incompatible information systems; (4) different (incompatible) organizational cultures prevent close collaboration; (5) complexity of integration process into the SC.

4 SC has many participants. Therefore there is a substantial need to manage the whole SC (Murphy and Wood, 2004). There exist many different terms and/or concepts in literature and in business practice, which are used to describe the management of different parts of the SC (Slack et al. 1995; Ballou, 2007; Rushton et al., 2001; Murphy and Wood, 2004; Cooper et al., 1997; Kauffman, 2002). Different terms and/or concepts are not interchangeable and are not universally applied, even though that they could overlap with other terms and/or concepts in terms of referring to common parts of the entire SC (Slack et al., 1995; Kauffman, 2002). See Figure 2. Figure 2. Terms used to describe the management of different parts of the SC (Adopted from: Slack et al., 1995; Kauffman, 2002). Second-tier suppliers First-tier suppliers First-tier customers Second-tier customers Supplier 1 Supplier 4 Retailer 1 End user 1 Supplier 2 Supplier.. Organization Retailer.. End user 2 Supplier 3 Supplier.. End user.. SUPPLY SIDE Purchasing and supply management Physical distribution management DEMAND SIDE Logistics Materials management Supply chain management Figure above present different terms/concepts which describe the management of different parts of SC. Some terms/concepts are more focused on the management of different parts of SC. Therefore purchasing and supply management is more focused on supply side of SC, otherwise physical distribution management is focused on demand side of SC. Logistics is an extension of physical distribution management and refers to management of materials and information flow from an organization down to the end customers. Materials management refers to management of the material and information flow thorough the immediate SC. SCM refers to managing all participants of SC (e.g. suppliers, manufacturers, distributors), which are involved in the process of delivering goods from supplier to end users (Daft, 2000; Larson and Halldorsson, 2002). It is important to emphasize, that SC is not just a new names for logistics (Kauffman, 2002; Cooper et al., 1997; Slack et al., 1995; Lummus et al., 2001). SCM has emerged from all previous concepts for managing SC (Larson et al., 2007). SCM is a discipline in the early stage of evolution, therefore there is a lack of common definition what is a SCM (Gibson et al., 2005; Burgess et al, 2006). But SCM has become a topic of considerable interest among practitioners and educators recently (Burgess et al., 2006; Larson and Halldorsson, 2002; Mentzer et al, 2001). SCM connects all SC participants in an efficient

5 network of relationships and transactions that can reduce costs, improve customer service, develop organization s knowledge base, increase efficiency within single organization and create barriers to entry for competing organizations (Phillips-Connolly et al., 2005). From the presented cognitions in this chapter is evident, that SC relationships have advanced from competitive to collaborative (Hoek, 2001). One among most important aspect in the broad problematic of SC is also its organization. Advancement in modern ICT, coupled with important impact of virtuality and virtual design, has also enabled virtual organization of SC. In following chapter we are presenting ICT as a foundation and as a central construct, which could connect globally dispersed SC participants, and enables virtual organization of SC. 3. ICT and virtual organization of SC ICT has become one among key drivers of recent developments and has pervaded every business segment and also every home (Kuppusamy and Santhapparaj, 2005). So called dot.com organizations have been emerging lately very fast and electronic business, which is coming to the forefront of the international markets. It is often claimed that ICT has become to economy what steam and machine power were to the industrial revolution (Hoek, 2001). On the other hand also expectations about the impact of ICT on business are positive and high. Evident is that use of ICT is positively correlated with improved overall organizational performance (Pokharel, 2005). ICT is an umbrella term, which is a collective term for computer-based information systems that support collaboration among groups, markets, hierarchies (i.e. organizations) (Howard, 2005). Another definition suggests that ICT encompasses hardware, software, telecommunications, databases and other technologies, which organizations, could use in order to improve their performance (Daft, 2000). Term ICT is often used interchangeably with information technology (IT) (Collins, 2002). When the terms ICT and IT are used interchangeably, the term IT reflects more recent growth in computer applications that support information exchange at all levels within and between organizations (Howard, 2005). For the purpose of our discussion we use term ICT. In the early beginnings of SC concept usage in business practice, SC was organized mostly traditional. In initial phase of SC development, the most relationships were established between organizations and its suppliers. There were limited information processing ability, reduced ability to exchange data and reduced communication information (Christiaanse and Kumar, 2000; Howard, 2005). Therefore exchange of transaction data was very poor among organizations, which collaborate. ICT provides the capability to collaborate and exchange of transactional and also other data among organizations involved in SC. Therefore ICT could be viewed as an enabler of cooperation that provides a stable platform for inter-organizational collaboration (Hoek, 2001). In nowadays SC it is very important and also challenging to effectively coordinate entire SC from suppliers to end users (Christiaanse and Kumar, 2000). From the above presented cognitions, it is seen that usage of ICT in SC enables interorganization collaboration among all organizations in SC (i.e. exchange of transaction data between organization and its suppliers). Therefore ICT is a base and/or central construct which have ability to connect all dispersed participants of SC. Usage of modern ICT in SC has also a important impact on organization of SC.

6 SC has many participants. In nowadays business environment, characterized with rapid globalization processes, it is very likely, that participants of SC are scattered around the globe (Browne and Zhang, 1999; Phillips-Connolly et al., 2005). SCs are becoming more and more international, which makes organization of SC even more complex (Phillips-Connolly et al., 2005). A different set of organizing rules is needed in changed circumstances (geographic dispersion of SC participants, usage of modern ICT, need for tightly cooperation between SC participants, need to exchange transactional data). Therefore a new logic form for organizing had emerged virtual organizing (Black and Edwards, 2000). Virtual organization could be any organization with non-collocated organizational entities and resources, necessitating the use of virtual organization in order to connect geographic dispersed elements to achieve organizational objectives. There are many facets of virtual organization in business practice. Some important are: outsourcing, electronic, business, distance learning and relationships with SC partners (Shekhar, 2006). Important characteristics and benefits of virtual organization and/or organizing are (Davidow and Malone, 1995; Warner and Witzel, 2004): (1) lower importance of physical structure and less assets (i.e. offices; buildings); (2) ICT is a foundation for virtual organization; (3) boundary less organization; (4) ability to connect globally dispersed members of virtual organization and; (5) collaboration and exchange of transactional data is enabled between members of virtual organization. The organization form of SC could range from totally traditional organizing to totally virtual organizing (Shekhar, 2006; Hatch, 1997; Cole, 2004). Dispersion of organization members we measured with criterion of geographic dispersion (Shekhar, 2006). According to presented starting points, for the purpose of our discussion we assume that entire SC could be viewed as an entity virtual organization. Therefore SC could be organized either more close to traditional or more close to virtual organization. SC participants could be collocated in a single location or are in close proximity (i.e. cluster) on one end of continuum and on the other end of continuum SC members are dispersed around the globe. Relations between geographic dispersion of SC members and organization form of SC are shown in figure 3. Figure 3. Relations between geographic dispersion of SC members and organization form of SC. Virtual Organization Organization form of SC Traditional Organization 1.2. Virtual organization of collocated SC participants 1.1 Traditional organization of collocated SC participants 2.2 Virtual organization of dispersed SC participants 1.2 Traditional organization of dispersed SC participants Collocated Geographic dispersion of SC participants Dispersed

7 Figure 3 presents different possibilities how to organize SC. Traditional organization of SC was in prevalence before the advent of modern ICT and the emergence of virtual organization. Main obstacle of traditional organization of SC is its inability to connect dispersed members of SC, due to the limited usage of ICT. Another important obstacle is limited ability to share/exchange transactional data between organizations in SC, especially between organizations and its suppliers. This is extremely important in nowadays business practice, when the electronic business is in huge increase. In nowadays business practice traditional organization of SC is not a real option (anymore) to organize SC, not even in those SCs in participants are in close proximity (i.e. cluster). Nowadays trends in business environment, coupled with rapid globalization processes, are making SC more and more international. Therefore this also means that SC participants are becoming more dispersed (i.e. global souring). In such a case virtual organization of SC could bring substantial benefits for all participants in comparison to traditional organization of SC. Due to the fierce global competition, prevalence of ICT usage among business (SC) partners and time pressure, virtual organization of SC, has become an important pre-condition for gaining/retaining competitive advantage over competitors. One among several most important benefits of virtual organized SC is ability to share/exchange transactional data among SC partners. This is enabled by ICT. Virtual organization of SC could be used either to organize SC participants which are in close proximity or are scattered around the region/globe. There are many possible benefits of virtual organization of SC, for all SC partners. Main benefits of virtual organization of SC are (Warner and Witzel, 2004; Harmon, 2003; Davidow and Malone, 1995): (1) distance work is enabled and there is reduced need for temporarily relocation, due to the ability to held a meeting in virtual space using modern ICT (i.e. videoconferencing); (2) enabled and/or improved exchange of transactional and other data among SC partners. Especially important is exchange of transactional date among organization and its supplies on one hand and customers on other hand (i.e. electronic business, business-to-business, business-to-customers); (3) flexibility and quick response to partners need in SC; (4) increased visible size of organization (i.e. organization which is part of SC could be viewed as a part of bigger organization - SC); (5) rationalization in different business areas in organizations which participate in SC (i.e. reduced bullwhip effect due to the improved cooperation among SC participants, reduced travel expenses). From the above presented cognitions is evident, that ICT has played an important role in the development of SC concept, when we consider it as one of possible manifestations of virtual organization in business practice. 4. The role of ICT in SC Participation in virtual organized SC could bring substantial benefits for its participants. We have already mentioned that for the purpose of our discussion we assume that geographic dispersion of SC members is a partial criterion for degree of virtuality. In this chapter we will emphasize the role and importance of ICT for/in SC, which is importantly dependent upon geographic dispersion of SC participants. For the purpose of our discussion, emphasizing the role of ICT for/in SC, we will first present three different (in our opinion basic) types of roles of ICT according to the organization form of

8 SC (See also: Slack et al, 1995). Therefore the level of ICT usage in SC varies from low to high. The organization form of SC varies from totally traditional organization to totally virtual organization. Mentioned types of roles of ICT in SC, according to the organization form of SC and the level of ICT usage in SC are shown in figure 4. Figure 4. Types of role of ICT in SC. high Requirement Level of ICT usage in SC Tool low Advantage Traditional organization Organization form of SC Virtual organization From the above presented picture we could identify following thee types of roles of ICT in SC, according to the organization form of SC and the level of ICT usage in SC: (1) Type 1 advantage organization of SC is traditional and the level of ICT usage in SC is low. Therefore the role of ICT in SC is not crucial. In mentioned case, organization is not dependent upon ICT, due to the traditional organization of SC. The role of ICT is limited (only) to exchange/share transactional and other data among SC participants. Therefore we consider ICT as an advantage, which could results in realization of some benefits of ICT usage in SC. It is important to emphasize that organization of SC doesn t require ICT. ICT is considered as a possible advantage ; (2) Type 2 Tool organization of SC in now more close to the virtual organization in comparison to type 1. Level of ICT usage in SC is medium in comparison to type 1. But on the other hand ICT is becoming important, because the organization of SC in now more close to virtual then to traditional. Therefore, at this point ICT has become a base/foundation for virtual organization of SC. Virtual organization of SC is dependent upon ICT and could not exist without it (ICT is a base for virtual organization of SC). Even though that ICT usage is now medium among SC partners in SC, some potentials of ICT usage in SC are still wasted; (3) Type 3 Requirement organization of SC is virtual and level of ICT usage in SC is now (very) close to high level. Therefore the role of ICT in SC has advanced from advantage, though tool to requirement. ICT is now absolutely needed in order to establish virtual organization of SC on one hand, and on the other hand main and many benefits of high usage of ICT in SC could be realized. We identified the different types of role of ICT for SC, which is importantly dependent upon organization form of SC and the level of ICT usage in SC. Therefore the role of ICT for SC is importantly dependent upon on the ways that SC is organized, either traditional either virtual.

9 When organization of SC is more close to traditional the role of ICT is advantage, but on the other hand, when the organization of SC is more close to virtual organization, the role of ICT is crucial (i.e. ICT is need in order to organize SC virtual). The identified different types of role of ICT for SC, according to the organization form of SC and the level of ICT usage in SC, are now starting points to emphasize the importance of ICT according to the geographic dispersion of SC participants. Geographic dispersion is defined in previous chapter. In following section we therefore assess the role of ICT for SC with comparison of above defined types (defined earlier in chapter) and geographic dispersion of SC participants. Due to the limited space of the paper we limited presentation only to three most significant roles of ICT in SC. See Figure 5. Figure 5. Increasing role of ICT in SC. Dispersed Geographic dispersion of SC participants Competitive advantage Prerequisite Collocated Useful aid Type 1 Type 2 Types Type 3 Useful aid relation between type 1 (of the role of ICT in SC) and collocated SC participants (i.e. cluster). In such a situation ICT is useful aid. ICT is not crucial, from the view point of organization of SC, because all participants of SC are in near proximity. But in the era, in which electronic business is in important increase, the minimal use of ICT is unavoidable for organizations. Organizations (i.e. participants of SC) which use the ICT could outperform its traditionally organized competitors, which don t use ICT. Therefore ICT could bring important benefits to organizations which use ICT in their operations, especially in collaboration with its suppliers. Nowadays it is significantly trend towards electronic business. Due to the many transactions (i.e. high value, many items) between organizations (business-to-business transactions), usage of ICT could become very useful for participants of SC. Even thought that SC organization is organized traditional, its participants could use ICT for inter-organizational collaboration and gain some benefits. Most important benefits are related to the ability to share/exchange transactional data among SC participants (i.e. car manufacturer and its suppliers have established business-tobusiness). Benefits of ICT usage in above mentioned situation are related mainly to improved order management, improved communication and collaboration. On the other hand, SC participants are in close proximity, therefore traditional organization of SC is still possible, but on the other hand benefits of virtual organizing, which are enabled, by ICT, are neglected (for now).

10 Competitive advantage relation between type 2 and moderate geographic dispersed SC participants. In mentioned situation the role of ICT is competitive advantage. We assume that important breaking point in the usage of modern ICT in SC in order to gain possible benefits of virtual organization is, when SC is more close to virtual organization. At this point the role of ICT in SC advances from useful aid to competitive advantage. This practically means that, when the organization of SC is more close to virtual organization the usage of ICT in SC become almost necessary. On the other hand also SC participants are now more scattered around the globe in comparison to previous mentioned role of ICT useful aid. Therefore also from the view point of organization of dispersed member of SC is much easier and beneficial to organize SC virtual. ICT has now become a base/foundation for virtual organization of SC. Besides that, medium level of ICT usage enable organizations in SC, easier inter-organizational collaboration and much previously mentioned benefits of ICT usage could be gained. Some are: organizations are able to establish electronic business with their suppliers (also with end users), exchange and/share of transactional data, flexibility is higher, due to established connections with SC partners. Prerequisite relation between type 3 and highly geographic dispersed SC members. In this case the role of ICT is assigned to prerequisite. Now the organization is virtual (degree of virtuality is one). Therefore there is no other option to organize SC. ICT role advent to prerequisite because ICT has become a central construct around which entire SC is built. On the other hand SC participants are now globally dispersed around the globe. Therefore virtual organization of SC is in nowadays business practice only option, for retaining and/or gaining competitive advantage over competitors. ICT usage level is now very high. Main reason is the need for virtual organization due to the high geographic dispersion of SC participants. Other reasons are: ability to engage in electronic business, ability to share/exchange transactional data and other previously mentioned benefits of virtual organization of SC and ICT usage for inter-organizational collaboration. 6. Conclusion Organizations have always cooperated with entities outside organizational borders, especially suppliers and end users. Recently the concept of SC has become in prevalence and participating in one or more even SCs has become necessary for organizations, in order to retain and/or gain competitive advantage. Modern ICT has an important influence at the organization form of SC. ICT is a foundation/base for virtual organization of SC, which could brings several benefits for all SC participants. But the importance of ICT is not only to enable virtual organization of SC but also ICT also enables inter-organizational collaboration. Main benefits of ICT usage among SC participants are: engagement in electronic business, flexibility and stability, share and/or exchange of transactional data, reduced bullwhip effect and reduced paperwork in transactions between organizations in SC. We identified that there is a strong positive correlation between the role and/or importance ICT for/in SC and geographic dispersion of SC participants. Cognitions presented above present increasing role and/or importance of ICT when the geographic dispersion of SC participants is heightening. Therefore the role and/or importance of ICT in SC is importantly dependent on geographic dispersion of SC participants. The higher the geographic dispersion of SC members is, the more important the role of ICT for SC is.

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