New study shows that coordination among supply chain partners reduces costs.

Sushil K. Gupta

“We need to cut costs!”

This mandate drives most companies today—and many of them look to supply chain management as one area in which they could achieve that goal.

“The importance of effective supply chain management is increasing amid intense global competition and growing business complexities,” said Sushil K. Gupta, professor in the College of Business Administration’s Department of Decision Sciences and Information Systems (DSIS).

Gupta, along with three colleagues from other universities, recently completed a study that examines the benefits of coordinated decision making in a supply chain consisting of a manufacturer, a distributor, and several retailers. The paper, titled “Supply Chain Scheduling: Just-in-Time Environment,” will appear soon in the Annals of Operations Research, a leading journal in the field.

The study puts forth the premise that a harmonious relationship among various members of a supply chain is key to a firm’s survival and growth.

“However, supply chains are susceptible to power plays wherein a dominant player may dictate terms to other members, thereby improving its own performance but decreasing the overall performance of the supply chain,” Gupta said. “Ideally, the supply chain’s members should coordinate their operations to lower costs, to keep their competitive edges sharp, and to achieve global optimization.”

Complex calculations offer a simple formula for success.

As part of their study, Gupta and his colleagues developed mathematical models for the individual optimization goals of the manufacturer and the distributor, and then compared the results of these models with the results obtained from a joint optimization model at the supply chain system level.

“In our study, we examined conflict and cooperation issues in the supply chain,” Gupta said. “The cost of conflict to a supply chain partner is a measure of the amount by which the unconstrained optimal cost increases when a decision is made under the scheduling constraints imposed by one of the partners.”

While the formulas may seem complex, the concepts they present make good, solid business sense. In essence, according to Gupta, three possible scenarios are at work in the supply chain system:

  1. The manufacturer is the dominant partner, telling the distributor, “Hey, this is my production schedule. You do whatever you have to do on your end to manage distribution and inventory, but I’m not changing. This is how I’m going to control my costs.”
  2. The distributor is the dominant partner, telling the manufacturer, “You have to produce the goods according to my schedule. That’s how I can best minimize my costs.”
  3. The manufacturer and distributor work together to develop a production and delivery schedule that minimizes costs at the system level.

Partners who choose cooperation over conflict reap the cost-savings benefits.

“Our formulas and analyses demonstrate that when the manufacturer and distributor in the supply chain system agree to collaborate, they both benefit in today’s just-in-time environment,” Gupta said. “The creation of positive surplus in the supply chain system due to cost reduction can be shared by both partners—an end result that makes the coordinated mechanism much more attractive. What’s more, by working together, the partners build trust and strengthen their relationship.”

Another key player in the supply chain—the retailer—benefits as well, as the resulting cost-savings and improvements in operational efficiencies help the supply chain system as a whole compete more effectively in today’s global marketplace.

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