Coordination modes for integration in the Supply Chain

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Coordination modes for integration in the Supply Chain

Student:

Hans van der Stok

Student number:

S1274260

E-mail:

hansvdstok@gmail.com

Tel:

(+31)6 212 55 214

Supervisors:

Dr. G.A. Welker

Dr. J. Riezebos

In assignment of:

Deloitte Enterprise Risk Services B.V.

Service line Manufacturing

Supervisors Deloitte:

W. van der Valk (Deloitte ERS)

I. Thiescheffer (Deloitte consulting)

Place, Date:

Amstelveen, 24 August 2008

Programme:

Master Technology Management

Specialization Discrete Technology

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Management summary

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Preface

To finalize my study period, I started working on my master’s thesis in March 2008 at Deloitte Enterprise Risk Services (ERS) in Amstelveen. Six month went on by, continuously working on this research. The result is lying in front of you at this very moment. There are a number of things I would like to say on behalf of this thesis.

First of all, writing this thesis was a difficult, but interesting process. ‘Difficult’ when looking at the numerous times of redefining the goal, ‘getting back to the drawing board’, taking a step back and changing the direction of the research, trying to create a clear overview of the research, etcetera. I think I can go on for another paragraph with mentioning difficulties, but in the end the interesting parts had the upper hand. Especially the development of raw bits of pieces into logical, homogenous pieces of text and ultimately the master thesis as a whole, gave me the drive to keep on continuing the research. During this research, numerous feedback sessions with several people helped me focusing on these aspects and made it possible to drive towards a contented result.

There are a number of people I would like to thank. First of all, I would like to thank my parents (thanks mom and dad!), not so much for solely this research, but more for making it possible and the support of my whole university period. Furthermore, I also would like to thank my brother and sister, friends and especially my girlfriend Jorien, for giving me numerous tips and support, especially in the difficult periods. As of the research, I first would like to thank my supervisor at the university Gera Welker, for the given feedback and support. The feedback was not always ‘what I wanted to hear’, but it was always justified and therefore highly appreciated. Furthermore, I also would like to thank my supervisors at Deloitte Willem van der Valk, Laura de Francisco Campillo and especially Inge Thiescheffer, for the critical examinations of my writings, the long but useful discussions and guiding through my thesis. Finally, I would also like to thank the company Marqt, in particular Ivo de Vries, Martijn de Groot, Bram Merkx and the company Maartens Marktkraam, with in particular Maarten Asselbergs, for making it possible to interview them and to test my research.

To conclude, for me this period has offered me a valuable contribution to my skills, now it is time to apply this knowledge in practice.

Amsterdam, August 2008

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1 Introduction

In this chapter the main goal of this thesis and research plan will be set out. The thesis is about explicating ways how to best integrate in the supply chain in practice. This explication is done on the basis of a model for coordination of Supply Chain Integration, made by (Simatupang, Wright, & Sridharan, 2002)1_{. This}

model is based on four coordination modes for integration in the supply chain. For each mode an explication of which steps can be made in practice in order to better integrate in the supply chain, shall be given. This ‘roadmap’ will also be tested in practice at the company Marqt. This company implemented one of the supply chain integration approaches, namely Vendor Managed Inventory (VMI). An investigation, based on the coordination modes, is made if and how Marqt has established a successful integration with its suppliers, to verify the explication on how to best integrate in the supply chain.

The division of this chapter will be as follows. Paragraph 1.1 will contain the reasoning of this research, both from a theoretical and a practical perspective. In paragraph 1.2 the problem definition will be stated, divided into a research objective and a research question. Paragraph 1.3 will discuss the relevancy and the characterization of the research. Paragraph 1.4 will set out the scope of the research. Paragraph 1.5 will set out the deliverables and in paragraph 1.6 the further division of the paper will be set out.

Graphically2_{, the research will be described as follows:}

Figure 1-1 Divisions of the research plan

1_{Due to the used program for quotation of sources, the correct use of brackets is sometimes lacking.}

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1.1 Reasoning

The reasoning of this research will be given both from a theoretical and a practical perspective.

1.1.1 Theoretical perspective

“The development of the integrated supply chain is the most significant contribution to the delivery of goods and services in the past decade. Supply chain management has been a major source of competitive advantage, and increasingly, in the global economy” (Stonebraker & Liao, 2006). This citation is a very powerful, perhaps an arguable one concerning the development of supply chain management (SCM), but it covers the trend that SCM has brought us nowadays. Briefly reinforcing this point of view and briefly previewing the direction of this paper, (Ragatz, Handfield, & Scannell, 1997) noted that “the effective integration of suppliers into product value/supply chains will be a key factor for some manufacturers in achieving the improvements necessary to remain competitive”.

SCM is defined by the (Mentzer, De Witt, Keebler, & Min, 2001) as follows:

The systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

The terminology SCM is generally associated with advanced information technologies, rapid and responsive logistics service, efficient supplier management, and increasingly with consumer relationship management (Fawcett & Magnan, 2002). SCM is used frequently in management environments, appearing in the trade press, commercials, and brochures for leading professional programs, such as Deloitte, KPMG etcetera.

The logical link between SCM and Supply chain Integration (SCI) can be explained as follows: through managing the supply chain one can better integrate with its supply chain. Both terms are used somewhat interchangeable; however, the emphasis of SCI is collaboration and integration with buyers and suppliers. (Simatupang, Wright, & Sridharan, 2002) confirm this emphasis by relating SCI to the ability to synchronize interdependent processes, to integrate information systems and to cope with distributed learning. Furthermore, collaboration can be seen as a key component of integration; firms have to collaborate with each other in order to better integrate in the supply chain. (Tan, 2001) and (Frohlich & Westbrook, 2001) also stated the importance of collaboration in supply chain relationships and the importance of integration as a mechanism for improving supply chain performance. The integration of the supply chain will thus be the main focus of this thesis.

There are several levels to be recognized when focusing on integration, (Fawcett & Magnan, 2002) describe five primary types, which are graphically shown in fFigure 1-2:

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2. Backward integration with valued first-tier suppliers. 3. Forward integration with valued first-tier customers.

4. Forward and backward integration with first-tier suppliers and customers.

5. Complete forward and backward integration, also expressed as integration from the “suppliers’ supplier to the customers’ customer”.

Figure 1-2 Different views of supply chain integration3

But how can a company actually integrate with its supply chain members in practice? One way of realizing SCI is by coordinating this integration. (Simatupang, Wright, & Sridharan, 2002) investigated effective coordination for SCI. According to them, “coordination among interdependent firms, such as raw-material suppliers, manufacturers, distributors, third-party logistics providers and retailers, is the key to attaining the flexibility necessary to enable them to progressively improve logistics processes in response to rapidly changing market conditions (…) Poor coordination among the chain members can cause dysfunctional operational performance.” An example of this dysfunctional operational performance is the well-known bullwhip effect, which will be explained in paragraph 5.2. (Simatupang, Wright, & Sridharan, 2002) argued that the main concern of supply chain management is how to coordinate the independent players to work together as a whole to pursue the common goal of chain profitability in changing market conditions. As (Fawcett & Magnan, 2002) stated in Figure 1-2, very few companies are actually engaged in an extensive supply chain, the majority still seeks improvement within four walls. (Simatupang, Wright, & Sridharan, 2002) formulated a framework which contains four coordination modes for integrating a supply chain, shown in Figure 1-3. This coordination framework is divided in two dimensions and will be explained in chapter 4.

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9 | P a g e Figure 1-3 Four coordination modes for integrating the supply chain

Distinguishing and unifying these different coordination modes is established by this framework. The need for coordination is also stated by (Lambert, Knemeyer, & Gardner, 2004), “the advent of supply chain coordination creates the need, at the intercompany level, to pay special attention to the understanding of coordination in order to prepare the chain members to create collaborative efforts successfully”.

The four modes however are only shortly explained in the article of (Simatupang, Wright, & Sridharan, 2002), especially when focusing on how to actually integrate in the supply chain in practice. The practical relevance of this article is in my opinion lacking, which is thus the main focus of this thesis.

Furthermore, in their research a linkage between an integrated supply chain and the four coordination modes is proposed. Four different relationships with respect to the modes and SCI can be graphically shown as follows:

Figure 1-4 The linkage between an integrated supply chain and the four coordination modes

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handled, which will be more explicated in paragraph 4.2. All four elements will be more explicated to discover practical ways on how exactly a solid SCI can be created for a company. By doing this, this research has established a better insight in the practical implementation of SCI.

1.1.2 Practical perspective

The practical part of this thesis will be applied on one level of SCI, backward integration with valued first-tier suppliers, which is previously shown in Figure 1-2. An important argument for this delineation is manageable scope of the investigation with respect to time limitations; it is extensive to comprehend a whole supply chain into investigation. Furthermore, the choice for this level of integration is based on the research done by (Fawcett & Magnan, 2002). In their research a conclusion was drawn that with respect to the integration focused on first-tier suppliers, 34%4_{of the integration efforts is focused on this level (which}

is also shown in Figure 1-2): it is the most common form of supply chain integration. By focusing thus on this level on SCI, the outcome of this research will be of use for the majority of those companies that are integrating with its supply chain (other than internal integration, which evidently should not be seen as SCI).

The company that will be investigated is Marqt, a new food & beverage company that collaborates with its suppliers through Vendor Managed Inventory (VMI) has applied this concept successfully. According to (Danese, 2005), VMI is an integrated approach for customer-supplier co-ordination, according to which the supplier decides on the appropriate inventory levels of each product (within previously agreed upon bounds) and on the inventory policies to maintain these levels. More succinctly, VMI is to be seen as a supply chain collaboration model aiming to make replenishment faster, more accurate and less costly (Vigtil, 2008). The main feature of VMI is thus the transfer of inventory decision making from the downstream side to the upstream side, or to cite (Hopp & Spearman, 2000): the supplier ‘controls the re-supply’. By successfully transferring this decision making, trading partners need to collaborate and share information with each other (Sari, 2007).

The four coordination modes, which are explicated in the theoretical part, are being investigated at Marqt. It is investigated if and how Marqt has established SCI successfully with its partners, which elements they approached in their integration, which line of approach they have taken and what the outcomes (so far) are. By investigating this, possible linkages between theory and practice shall be examined, which will be reflected on the theoretical part. By doing this the research will thus be tested in practice, from which conclusions and recommendations of the research can be made.

1.2 Problem definition

The problem definition will be divided into the research objective and the main research question (Verschuren, 1999). The main research question will be divided into several sub-questions, which will help

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to give a funded answer to the main research question. The purpose of these sub-questions is to structure the research into several logical pieces (Verschuren, 1999).

1.2.1 Research objective

The research objective is defined as follows:

In this research the scope of the practical testing is delineated to VMI, one of the concepts of SCI.

1.2.2 Research question

To establish the research goal, the following research question is defined:

As is stated in the research objective, several sub-questions will be made to structure the research into several logical pieces. The sub-questions that are formulated are to be found in the appendix 10.1.

1.3 Relevancy and characterization of the research

This research can be characterized as a literature/scientific investigation (De Leeuw, 1996), because this research aims at delivering general or generalizable knowledge. It does not intent to generate knowledge that is of importance for a certain company in a certain management situation, but it tends to generate knowledge that can be generally applied. However the practical perspective of the thesis can generate knowledge that is of interest specific for the company Marqt, the overall knowledge that this thesis generates is general.

The research can also be characterized by dividing the relevancy into two types (De Leeuw, 1996), namely:

1) Theoretical relevancy

In the literature there are three kinds of investigations distinguished (Baarda & De Goede, 1997): descriptive investigation, explorative investigation and testing investigation. This investigation can be seen as an explorative investigation, since it tries to capture more practical explications of coordination of SCI. The coordination modes of (Simatupang, Wright, & Sridharan, 2002) will be further explicated and focused on the practical approach. Furthermore, a sequence in the coordination modes and lines

Explicating how to best integrate the SC in practice by using the four coordination modes of Simatupang, Wright & Sridharan (2002).

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of approaches for these coordination modes shall be proposed. By doing this more knowledge on practical aspects for integration in the supply chain will be created.

2) Practical relevancy

This research has also a practical relevancy, since its findings are tested on the company Marqt. Furthermore, the findings can also be of importance regarding other practical implications of SCI, since generalizable knowledge is presented. As a result, the practical relevancy will thus also be taken into account.

When integrating aspects and characterization, the following figure can be drawn to clarify the intend and routing of this research:

Figure 1-5 Schematic view of the scientific research5

When looking back at the several (sub) questions that have been made, one can also see this routing in this sequence of questions. By taking this order of questioning, a comprehensible and complete research will be established.

1.4 Research scope

Because of the limited capacity of this research, a number of delineations will be made to comprehend a well-proportioned scope. These delineations will now be discussed.

SCM itself must be seen as the main focus. The theoretical scope within this area is supply chain integration, in particular coordination modes for SCI. To test the findings of this research, the company Marqt will be investigated. Since the whole supply chain of Marqt is too extensive to investigate, one level of SCI is lifted out, backward integration with valued first-tier suppliers. Marqt has established the collaboration model Vendor Managed inventory (VMI), which fits the selected level of SCI. For a comprehensive scope of this thesis, the collaboration model VMI will be examined in practice. A last delineation will be made; the literature references will solely be founded by articles, papers and books that are published and are at hand through (the portal of) the Rijksuniversity of Groningen.

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1.5 Research deliverables

This research will have the following deliverables:

1) A comprehensive view and background of SCM will be established. 2) A comprehensive view of SCI will be established.

3) A comprehensive view of the model of coordination for SCI by (Simatupang, Wright, & Sridharan, 2002) will be established.

4) Four coordination modes of the model by (Simatupang, Wright, & Sridharan, 2002) will extensively be explicated.

5) These different coordination modes are being tested in practice at Marqt’s VMI approach. 6) The completeness of the modes is also checked in practice.

7) Together with the previous mentioned deliverables, a conclusion and recommendations are given, about how to best integrate the SC in practice by using the four coordination modes.

When all these deliverables have been made, this will ultimately lead to the main research objective.

1.6 Research division

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2 Supply Chain Management

The phrase ‘supply chain’ and ‘supply chain management’ have appeared a couple of times, but the exact meaning of these is lacking. First, in paragraph 2.1 the term supply chain is explained, subsequently in paragraph 2.2 SCM is further discussed. Once the phrase SCM is defined, a broader perspective of SCM will be given in paragraph 2.3. Also a closer look leading to SCM will be given in the appendix, paragraph 10.2.

2.1 Supply Chain

There is little confusion about the term supply chain in the literature. Some authors emphasize the logistic impact, others focus more on the interrelationship between firms, but one could say that an overall consensus has been established concerning the term. (Mentzer, De Witt, Keebler, & Min, 2001) have identified several definitions and combined them into: “A supply chain is a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a consumer.” This definition will be applied in this research. A graphical display of an example of a supply chain is represented in Figure 2-1.

Figure 2-1 Overview of a random supply chain

As can be seen in the figure, the product flow is moving in downstream direction towards the consumer, the information and funds will move in the opposite direction.

2.2 Supply Chain Management

Now that the phrase supply chain has been defined, the phrase SCM can be further examined. As little indistinctness there is about the term supply chain, SCM is far more difficult. It is a ‘rather eclectic6_term

with little consensus in its conceptualization and research methodological bases’ (Burgess, Singh, &

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Koroglu, 2006). According to (Skjoett-Larsen, 1999), the SCM concept can be studied from many perspectives, such as systems engineering, economics, sociology and management. Also (Burgess, Singh, & Koroglu, 2006) stated that much of the knowledge about SCM resides in narrow functional silos such as purchasing, logistics, IT and marketing.

To clarify the relation and distinction between the term SCM and SC, the following example will be given: although none of the companies perhaps actually manages their supply chain, the supply chain itself still exists. It is thus fair to say that supply chains are everywhere and companies are almost always ‘chained’ in several supply chains. Whether those companies actively take place in that supply chain as a member and actually manage their supply chains, this can certainly not be said for every company. Also the following division of the expression SCM should be mentioned; it is seen by diverse authors both as a management philosophy as well as a set of management processes. The former can also be called SC ‘orientation’, which is defined as the recognition by an organization of the systemic, strategic implications of the tactical activities involved in managing the various flows in a supply chain (Mentzer, De Witt, Keebler, & Min, 2001). The former is also more theoretical approach, the latter is more practical. The latter should be seen as SC ‘management’; the sum total of all the explicit management actions undertaken to realize that philosophy. This is graphically explained in Figure 2-2.

Figure 2-2 Graphical overview of the term SCM

To conclude, SCM encompasses both an implicit and an explicit approach, for which the implicit one is needed as an input for the explicit approach. Companies implementing SCM should thus first have a supply chain orientation; or to cite (Spekman, Spear, & Kamauff, 2002) ‘it appears that it is one thing to talk about SCM and quite another to actually implement such a program’. For this thesis the following definition on the term SCM, given by (Mentzer, De Witt, Keebler, & Min, 2001) is used, as is stated in paragraph 1.1.1:

The systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

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• Lowering costs required to provide the necessary level of customer service to a specific segment. • Improved customer service through increased stock availability and reduced order cycle time. • Developing innovative solutions and synchronizing the flow of products, services and

information to create unique, individualized sources of customer service value.

• These low costs and differentiated service help build a competitive advantage for the supply chain.

This list of objectives is not exhaustless; various other articles point out other objectives, however, the overall meaning of these can be formulated as follows. SCM is concerned with increasing efficiency (referring to the cost-reducing objective) as well as effectiveness (referring to the customer value-adding objective). Its aim is to create more customer value to achieve competitive advantage, which in return expects the creation of more profitability and/or improvement of the operational margins.

To gain more insight in the origins of SCM, an historical overview leading to SCM is given in the appendix. The reader is referred to paragraph 10.2.

2.3 Broader perspective on SCM

As is previously said in paragraph 2.2, the SCM concept can be studied from many perspectives. When looking at SCM from a business perspective, a shift its shape from vertical tall and functional alignment towards horizontal, process and customer oriented is to be recognized (which is also to be seen in the previous paragraphs). However, there are also other concepts at hand that focus on these issues. Total Quality Management (TQM) comes insight, but the most common, well-known is Business Process Re-engineering (BPR). BPR is for instance defined by (Davenport, 1993) as: the analysis and design of work flows and processes within and between organizations. When looking at the scope of this definition, it exceeds the boundaries of a single firm (referring to and between organizations), which is the same for SCM. Also the focus is on flows and processes, which can also be said for SCM. (Evans, 1995) created an overview of the overlap between BPR and SCM, for more information the reader is referred to this article. However, of course there are differences: the BPR approach requires a fundamental rethink of core business processes, while SCM works to optimize the whole supply chain (Evans, 1995). Both objectives are the same (creating competitive advantage), but the implementation phases are slightly different. To cite (Evans, 1995) “those who have already implemented SCM will have already travelled the same path as BPR and, we would argue re-engineered their own processes.”

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3 Supply Chain Integration

Explications of how to best integrate the SC in practice be investigated through the framework presented by (Simatupang, Wright, & Sridharan, 2002). But before this is done, SCI itself and its context are being analyzed in this chapter.

3.1 Defining Supply Chain Integration

The basis of SCI is characterized by (Akkermans, Bogerd, & Vos, 1999) as cooperation, collaboration, information sharing, trust, partnerships and shared technology. (Handfield & Nichols, 1999) describe three principal elements of an integration of a supply chain as information systems, inventory management and supply chain relations. Furthermore, the explicit meaning of the term ‘integration’ can be defined as the process of combining. From these findings the conclusion can be drawn that SCI is seen as a mechanism for creating the relational aspect of SCM. This is being confirmed by (Power, 2005) , who stated that “integration cannot be complete without a tight linkage of the organizational relationships between companies”. To conclude, (Handfield & Nichols, 1999) also emphasize the importance of relationships for the effective management of supply chains. They stated that the technological and physical transfer elements are understood, and that the issue of relationships is more difficult, less well understood and therefore more fundamentally important. This last statement will be examined further in chapter 4.

Putting SCI in practice, it can roughly be seen as the integration of two or more organizations, so that for example, a retailer can signal a reorder to its wholesaler and to its wholesaler's supplier at the same time.

The main reasons for SCI are stated by (Handfield & Nichols, 1999) as the information revolution, increased levels of global competition creating a more demanding customer and demand driven markets and the emergence of new types of inter-organizational relationships. (Lambert, Emmelhainz, & Gardner, 1996) defined four drivers for a desired SCI, namely:

1. Asset/cost efficiencies 2. Customer service 3. Marketing advantage 4. Profit stability/growth

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3.2 SCM, SCI and coordination

Figure 3-1 will display the relationship between SCM, SCI and coordination, which will be explained below.

Figure 3-1 The relationship between SCM, SCI and coordination

As was previously mentioned in paragraph 1.1.1 (Theoretical perspective), the terms SCM and SCI are somewhat used interchangeable, however, SCM encompasses more than SCI. When looking at paragraph 2.2 (Supply Chain Management), SCM focuses on improving the performance of the SC, as well as their individual members. SCI focuses more on the relational aspects of SCM, on how SC members can successfully integrate with each other. This can indeed its turn contribute to improving the performance. To conclude, one could say that SCM tries to control the supply chain, while SCI ‘only’ tries to establish the supply chain.

When further zooming in on SCI, coordination can be seen as a way of establishing SCI. “A firm needs to develop effective coordination within and beyond its boundaries in order to maximize the potential for converting competitive advantage into profitability” (Handfield & Nichols, 1999). This is a very powerful citation concerning coordination, which shows directly the benefits that can be created through coordination. Coordination can be analyzed as making different actors or aspects work together on behalf of a goal or target, which in this case is integrating in the supply chain. As (Simatupang, Wright, & Sridharan, 2002) stated, “coordination among independent firms (….) is the key to attaining the flexibility necessary to enable them to progressively improve logistics processes in response to rapidly changing market conditions. (Lee, Padmanabhan, & Whang, 1997) mentioned negative consequences of poor coordination, for instance higher inventory costs, longer delivery times, higher transportation costs and lowered customer service. When thus coordination is discussed, the focus will be on making different actors in the supply chain working together, on behalf of maximizing the potential for competitive advantage into profitability.

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SCM is one thing, actually implementing it and truly collaborating in supply chains is another. Often companies do not even know exactly who their supply chain members are, especially the more upstream and downstream ones. More important, (Lambert & Cooper, 2000) correctly stated that there has been little effort to identify specific supply chain members, key processes that require integration or what management must do to successfully manage the supply chain.

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4 Coordination for Supply Chain Integration model

In this chapter coordination for SCI models will be examined. Different models will be viewed in paragraph 4.1. Once this is viewed, the chosen model of (Simatupang, Wright, & Sridharan, 2002) will be explained in paragraph 4.2.

4.1 Different models

There are various models presented that discuss and try to comprehend SCI. (Handfield & Nichols, 1999) listed the main drivers of integration: the information revolution, the increased levels of global competition creating a more demanding customer and demand driven markets and the emergence of new types of inter-organizational relationships. They describe in their book the three principal elements of a SCI model as being:

1. Information systems (management of information and financial flows) 2. Inventory management (management of product and material flows)

3. Supply chain relations (management of relationships between trading partners)

(Lee, Padmanabhan, & Whang, 1997) suggested for improvement of overall supply chain performance the following divisions:

1. Channel coordination 2. Operational efficiency 3. Information sharing

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22 | P a g e Figure 4-1 Four coordination modes for integrating the supply chain

Current investigations focus solely on a single element. (Simatupang, Wright, & Sridharan, 2002) refer to these elements as the coordination modes. Little attention has been given to their interactions. The model that will be used for this investigation represents all elements and their interactions. Also it shows the interactions between the partners within the supply chain. For this reason, the model provided by (Simatupang, Wright, & Sridharan, 2002) will be used.

4.2 Simatupang, Wright & Sridharan SCI coordination model

In this paragraph the used model of (Simatupang, Wright, & Sridharan, 2002) will be explained.

Four coordination modes for integrating the supply chain is being framed in a matrix by (Simatupang, Wright, & Sridharan, 2002), as is shown in Figure 4-1. The elements that are recorded in this matrix will be further explained below.

The two dimensions of coordination are the focus and the mutuality. First the focus of coordination will be explicated, after which the mutuality will be examined. As is to be seen, the focus of coordination is divided into operational and organizational.

• Organizational focus of coordination refers to the issue of different actors with different interests needing to work together towards a collective goal. ‘How can we organize the complex situation of integration with supply chain partners’, is one of the main questions that is tried to resolve with this coordination mode. Actors along the supply chain have different core competencies, with a different focus. When each actor understands the different focus and interests of each other, benefits of partnership can be established.

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The second dimension is the mutuality of coordination. Mutuality refers to the issue of relationships. To establish a strong relationship between partners, mutual goals and benefits have to be set. Only by mutuality a sustainable, profitable relationship can be created and established. In 1980 Porter created his competitive five forces model, in which bargaining power of both suppliers and buyers is considered to be a potential threat to an industry. In contrast to this element of Porter’s framework, the trend nowadays seems to have a cooperation focus: collaborating with suppliers and buyers, instead of arming to their potential threats. It can be said that mutuality is important to strengthen the ‘closeness’ of the relationships, which results in better coordination of activities among the partners. This second dimension, mutuality of coordination, is also divided into two parts, namely complementary and coherency.

• Complementary of processes. According to (Simatupang, Wright, & Sridharan, 2002), complementary refers to how the chain members collectively manage interdependencies between logistics activities to create value. The main concerns of complementary are managing the logistic process along the supply chain and removing economic barriers. By reducing or eliminating these concerns, complementary leads to increasing mutual values, such as increased sales and less logistic costs. This can be shared by the participating members. Empirical investigation also pointed out that focusing on combining benefits exceeds the total of benefits of gained independently (Frohlich & Westbrook, 2001).

• Coherency of understanding refers to the degree of consistency of reasoning across organizational borders through diffusing common understanding. This coherency can be accomplished by sharing information and knowledge towards partners to better comprehend the interdependencies. As (Simatupang, Wright, & Sridharan, 2002) stated, ‘coherency can be seen as the alignment of context, viewpoint, purpose and actions to attain the shared goal through information sharing and collective learning’. This includes full market, information and technology knowledge.

4.3 Contributions towards the model

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24 | P a g e Figure 4-2 The interplay between an integrated supply chain and the four, sequenced coordination modes.

As can be recognized from this figure, in comparison with figure 1-4, the locations of the coordination modes have been changed. This is done in order to indicate a sequence in the proposed approach to explicate how to best integrate the supply chain in practice, starting with incentive alignment. The sequence of the elaboration of coordination modes will be different than (Simatupang, Wright, & Sridharan, 2002) in their article did. The reason for this different sequence is based on chronological steps that, in my opinion, have to be made for successful coordination. First, (future) partners of a supply chain need to align their incentives on an organizational level. When alignment does not take place, chances are very small that integration in the supply chain will actually be successful, since it, among other things, consists of the customer identification. Second, partners need to share information with each other, in order to establish this alignment on an operational level. With this information partners can gain more insight in each other’s data and better communication can enhance the efficiency and effectiveness of the supply chain. Subsequently, synchronization of the logistics can be dealt with. The business processes can be linked to each other to gain better operational integration. At last, establishing a successful collaboration is one thing, maintaining it is the following step. Through collective learning future steps can be made to maintain competitive advantage via increasing the capabilities in the whole supply chain. This will be further explicated in chapter 5.

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5 Concretizing the four coordination modes

The four coordination modes will now be further explicated to create a more practical insight of how to best integrate the SC in practice. On behalf of this, four lines of approaches will be created and explicated.

5.1 Incentive Alignment

For the first coordination mode the following steps will be made to better comprehend incentive alignment. First the term ‘incentive’ and ‘alignment’ shall be explicated, after which the combination of both will looked into. Once this has been done, the next step is finding out the reasons for initiating incentive alignment. The final part of this paragraph will look into explicating how to best integrate the SC in practice from an incentive alignment perspective.

What is incentive alignment?

An incentive can be seen as any kind of factor that provides a particular course of action. The most obvious factor of this first element is a financial asset; however, there are also moral factors that contribute to the course of action, for instance reputation. A division of intrinsic and extrinsic incentives can be made. These incentives can be analyzed on benefits versus risks. For instance when a company is to be aligned with a partner, chances are that synergy can be created, which is a benefit. On the other hand an alignment leads to better understanding of each other businesses, which may lead to abusing this knowledge for one partner’s own business. This is thus a risk. These different actions can be plotted into a matrix with four quadrants, as is to be seen in Figure 5-1. The list of examples is definitely not exhausting, but it gives a good impression of the variety and different kinds of incentives.

Figure 5-1 Matrix of incentive divisions

The second element of this coordination mode is alignment, which can be seen as a situation where the partners in the supply chain have the focus on the same goal and roadmap7_{towards that goal. To explain}

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what is meant with the term ‘partners’, (Lambert, Knemeyer, & Gardner, 2004) give the following definition of a successful partnership: ‘A partnership is a tailored business relationship based on mutual trust, openness, shared risks and shared rewards that results in business performance greater than would be achieved by the two firms working together in the absence of partnership.’ In other words a successful partnership is an outcome of well implemented SCI. A partnership is not the same as a relationship, because there is amongst others more commitment to each other.

Now both terms of incentive alignment are explained, an overall definition of the combination of the terms shall be given. Incentive alignment attempts to provide various mechanisms to distribute benefits and risks associated with logistics functions to motivate independent actors in order to achieve supply chain profitability (Lee, 2000).

Reasons for initiating incentive alignment

Now that the general meaning of incentive alignment has been clarified, one needs to understand the reasons for alignment with SC members. Questions like ‘why do we need to align our incentives?’ and ‘what kind of benefits can we achieve by this?’ can be asked by SC members. When aligning with other supply chain partners, sharing risks and benefits topics need to be considered. Although it is scientifically proved that supply chain integration can indeed be more profitable than the total profit gaining of supply chain companies working independent, in reality SCI is still not common. In the end the SC members find it of more importance to maximize their own profit than the total SC profit. What thus misses is the incentive to integrate, at least on an aggregated level. When incentives are to be aligned with other supply chain members, benefits and risks should be distributed in such a way that all SC members are motivated to participate in the SCI. Therefore, incentive alignment can be considered as a key element of successful integrating in the supply chain.

How to create incentive alignment in practice

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27 | P a g e Figure 5-2 Line of approach for realizing incentive alignment

Step 1. In order to align with the participating members, one needs to clarify who those members actually are. This includes the whole supply chain, from the raw material provider all the way towards the retailer. However, since the whole supply chain is too complex to achieve a full integration of all business entities, a practical approach to SCM is to consider only strategically important suppliers in the value chain (Tan, 2001). One simply cannot comprehend the whole supply chain; every member has on its supply- and buy-side a network that is shaped like a tree-form, which cannot be encompassed. A small, but very important detail to this practical approach has to be mentioned: in the definition of SC the consumer is indeed taken into account, however, for managing this SC, this consumer is deliberately left out. The reason for this is that the actual consumer cannot be ‘managed’; however, this does not mean that the consumer is not of importance. The focus on the consumer is made in the defining of the goal, which is to be seen in Figure 5-2. Reading back the comment of (Tan, 2001), this detail is indeed taken into account, focusing on the mention of suppliers, which is clarified in Figure 5-3:

Figure 5-3 Random SC with supplier identification

According to (Skjoett-Larsen, 1999), resources and capabilities can create a sustainable, competitive advantage for a SC if they have the following characteristics:

• Value-adding (valuable) • Rareness (scarce) • Costly to imitate

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By discussing the potential SC partners, these characteristics have to be analyzed for each potential partner. By further looking into these characteristics, an internal as well as an external analysis has to be made. This includes the internal view of recourses and capabilities, combined with the external view of environmental opportunities and threats. So by focusing on these characteristics and viewpoints, the core value processes of the potential partners can be defined. By doing this the preconditions for a solid choice of (future) partners are known.

Step 2. Once the participating SC members are clarified, the reasons for incentive alignment must be comprehended. Through communicating with the participating members the actual benefits for the SC can be clarified, which subsequently has to be further explained how this can also have benefits for the individual member. The ultimate goal of this step is thus to create the awareness for synergy. A main component of this is the benefit/risk sharing. In a successful alignment the balance between benefit and risks should be in the right proportion between partners. Mechanisms need to be in place to ensure that the benefits and risks are shared, but on an intrinsic and an extrinsic level. Trust and commitment is needed at this, to build and sustain the partnership; to refer to (Spekman, Spear, & Kamauff, 2002), ‘Trust is truly the cornerstone of any collaborative supply chain as it is the foundation for social order. When looking at the line of approach for creating incentive alignment, one can identify by these drivers and components the second step: ‘understanding the reasons for incentive alignment’

Step 3. Now the reasons for incentive alignment are clarified, one needs to focus on the needs and wishes of the core consumer, which can only be done when one knows which consumer they wants to serve. Ideally, every action should be done on behalf of the customer. When this focus is not made, chances are that, although actions may enhance the efficiency of the supply chain, it may not be effective in enhancing customer satisfaction. Returning to Figure 5-2 Line of approach for realizing incentive alignment); the core consumer that the supply chain wants to serve thus has to be identified. When supply chain members are to be aligned, overall understanding and agreement on which core consumer it will serve has to be established. This should be seen as the first goal that has to be established, all participating SC members have to agree on the core consumer that is to be served.

Step 4. Once the consumer definition is made, their value identification is needed. Through communicating especially with the upstream partners, the SC can recognize the needs and wishes of the consumer. This last step is an important one, since essentially it is the consumer that needs to be satisfied in order to create competitive advantage. The whole supply chain should be aware and focused on these wishes and demands, so by doing this ultimate value can be created for the core consumer. This on its turn creates competitive advantage for the SC. Returning to the goal mentioned in step 3, there are of course several ways to reach this goal, since the core consumer has numerous wishes and demands. Overall agreement should consequently be made on which wishes and demands are to be fulfilled in order to reach that goal.

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since the consumer is fickle, the technology is rapidly evolving and the life-cycles of products and services are more and more shortened. Knowledge about the true consumer and its value identification is thus essential and needs updating. An up-to-date example is the environmental awareness of the consumer nowadays. A rapid development concerning global warming and environmental sustainability did not solely come from diverse industries itself (referring to for instance the awareness of the CO2_{emission reduction),}

their customers had a leading part in this, demanding more environmental friendly and sustainable products from these industries.

Step 5. Once the previous steps have been made, a clear roadmap has to be created about what should be done to realize the benefits. The core consumer that is to be served, along with the aiming on a number needs and wishes that are trying to be fulfilled, needs to be mapped and a guidebook on how to establish this needs to be created. When this is done, there has to be overall alignment on this way of approaching the goal form all participating SC members, otherwise there may be several different paths towards the same goal, which negatively affects the efficiency.

Step 6. The created roadmap gives a good oversight of the various benefits and risks that have to be considered. The last step is assigned with correctly balancing and distributing these benefits and risks among the participating SC members. A consensus has to be realized about the distribution of benefits and risks. Furthermore, it is important that the benefits and risks and monitored over time, to check if their proportions are still in balance.

When returning to the supply chain integration model (Figure 4-2), it can be stated that incentive alignment is of main importance for successfully integrating in the supply chain. When the line of approach for realizing incentive alignment are executed, it is aimed to create motivation among SC members to concert efforts, which on its turn is expected to create higher gains for the supply chain as well as its individual members. To conclude, (Simatupang, Wright, & Sridharan, 2002) correctly stated that “the theory underlying to incentive alignment assumes that an individual chain member tends to act in a certain way based on the expectation that the act will result in a mutual benefit and on the attractiveness of that benefit to individual chain members”. When looking at the chronological sequence, it is stated that incentive alignment can be seen as the first step for integration in the supply chain. It consists of several elements, which have to be obtained first when successfully integrating in the supply chain, for instance alignment on the core consumer. Once this incentive alignment between members of a supply chain has been established, future steps should be made, which will be discussed in the upcoming paragraphs.

5.2 Information Sharing

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What is information sharing?

Information sharing in supply chains can be roughly seen as exchanging information, data and/or sources that helps understand and enhance the processes between supply chain members. (Simatupang, Wright, & Sridharan, 2002) state that “it is concerned with facilitation that enables participating members to have visibility of customer demand, product movement and performance metrics”. Information sharing can thus be seen as an enabler for more efficient and effective planning and coordination of a supply chain (Welker, van der Vaart, & van Donk, 2008). Or more particular, according to (Lee, Padmanabhan, & Whang, 1997): it has a direct impact on the production scheduling, inventory control and delivery plans of individual members in the supply chain. Companies nowadays are well aware of this, and are investing heavily in all sorts of information technology to enhance their ability to manage information across their supply chain. Over the last decade information technology has expanded enormous, which makes it far more easy and affordable to use and exchange information. Internet technologies, such as XML (Extensible Markup Language) and EDI (Electronic Data Interchange), but also internet applications such as the WWW (World Wide Web) and e-mail, make interactions between companies more feasible. This expansion has lead to electronic commerce (also known as e-commerce or e-business), which can be seen as a generic term for making business through computer networks, such as the examples previously mentioned.

Which information should be shared?

But what kind of information should actually be shared? What kind of information is being exchanged through e-commerce? Information can be divided in two time dimensions, since not all data is requisite to be at hand frequently. For instance, when the information about trends that are happening in a specific market is needed, it is not always necessary that this information is up to date. A division of information can be made:

Figure 5-4 Short term update information versus long term update information

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sector an update every day or two days may be appropriate. This requires a clear specification of the time dimensions when information sharing is to be implemented.

Reasons for sharing information

One important mode for coordination in a supply chain is sharing information among members of the supply chain. This viewpoint will be explained by looking at inventory. A common, much practiced way of reducing uncertainty concerning inventory demand is purchasing larger amounts than needed. A well-known effect is the consequence of this behavior, the bullwhip effect. The bullwhip effect refers to the problem that can arise through a fluctuating demand within a supply chain. Figure 5-5 and figure 7-8 graphically expresses this problem:

Figure 5-5 The bullwhip effect Figure 7-8 Orders vs. Sales8

This fluctuating demand of products makes prediction of the amount of products to be manufactured more difficult. The production stock can by this shift from a shortage of products to a surplus of products within a short period of time. A forecast will be made by a supply chain member, together with a small extra to cover this fluctuation. The upstream partner does on his turn the same, again with a small extra. What thus happens is that every SC member withdraws extra amounts of inventory, resulting in more and more upstream inventory than needed.

Information sharing is the answer to this problem. When the partners within the supply chain have access to information downstream that comprehends this problem, they are able to develop a forecast based on the expected consumer demand that is determined downstream. Also, by having information that can gain more insight in the sources of this uncertainty, the supply chain can minimize or even prevent this. Improving the information sharing among the members of a supply chain can realize the efficiency and effectiveness of supply chains. Such cooperative behaviors of SC members provide rapid access to the required information, more sensitivity towards the needs of the customers, and faster response times than the competitors.

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Realize information sharing in practice

Now the question remains how information among supply chain partners can be effectively and efficiently initiated and coordinated. In Figure 5-6 a line of approach for how to best integrate in the SC in practice with respect to information sharing is graphically given.

Figure 5-6 Line of approach for realizing information sharing

Step 1. This can be seen as a current state analysis. Companies are nowadays already using all sorts of information systems. However, companies in the SC often have different private information, which is often not shared with others. When information sharing with other supply chain members is being established, first an analysis of the current information systems and corresponding information has to be made. This is needed because not only the system itself has to be analyzed, but also the information that the system processes needs to be known. This analysis needs also to be done for every SC member, since the processed information is different for each. For instance the retailer has better projected customer demand compared with the manufacturer. The manufacturer on his turn has better information about products, capacity and delivery times than the retailer. Mapping should be done with respect to which information and information systems the SC members use.

Step 2. (Kaipia & Hartiala, 2006) did a research on identifying ways to improve the supply chain performance through information sharing. In the research project, propositions were identified as the most promising in improving the performance of the supply chain. A couple of their propositions are mentioned below and adapted to this research. (Kaipia & Hartiala, 2006) notified that only information that improves the supply chain has to be shared. Supply chain partners need to be aware of the fact that when the entire information is shared, focus on core, essential information is lost in the burden of information at hand. Thus, a comparative assessment of which information will be shared and which not, must be made. Furthermore, (Kaipia & Hartiala, 2006) also stated that this information needs to be simplified, synchronized and stabilized in practice. This is needed because simplifies the use and interpretation of the information. Different sorts of data is previously mentioned in Figure 5-4 Short term update information versus long term update information). The willingness of sharing information by the participating SC members can also be of importance. However, when the incentive alignments steps have been successfully, risks and benefits are already known, which will have a positive impact on the willingness of information sharing.

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Step 3. Now the current state and the needed information are known, the following step is how to convert this current situation into the desired information. The goal in this step is to identify the gap between ‘current and future’, so ways how to establish this in practice can be sought out.

Step 4. An appropriate information system that can handle this information needs to be chosen and has to be accepted by all affected SC members. A generic information system may be chosen for all participating SC members, but more common is an information system for parts of the supply chain. There are a number of information systems that can be used for an improved flow of information throughout the SC. Each of these systems focuses on different information handlings; some of them are comprehensive ones, others focus on more specific kind of information. According to the information that is to be shared, an appropriate one must be chosen. This can vary according to the kind of industry and position in the SC. (Power, 2005) enumerates the following:

• ERP (Enterprise Resource Planning) systems (developed from MRP II systems) • Order management systems; to automate the order fulfillment process.

• Demand planning systems; for managing and monitoring forecasts. • Warehouse management systems; for inventory management.

• Transport management systems; for the planning and dispatching of shipments. • CRM (Customer Relationship Management) systems; for providing customer service. • Support and intelligence on customer demographics

All these systems tend to create order in the overload of raw data of a firm, or as (Power, 2005) states: “effective application of information technology to the integration of supply chain activities has the effect of reducing levels of complexity and uncertainty”. Nowadays, these systems are almost a prerequisite for a company; they cannot function properly without it.

Step 5. The last phase is the implementation of and adaption to the system needs to be established. Once the applied information system is known, all participating SC members need to implement it. In practice there are always adaptations to be made when converting from the former to the new information system. Information needs to be converted, linkage between other systems may need updating, etcetera. It is also of importance that every participating division of the companies involved needs to adapt to and understand the working of the new information system.

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5.3 Logistics synchronization

In this paragraph the meaning of synchronization of logistics will be given. After realizing an understanding of the term logistics synchronization, an explication how to best integrate in the SC in practice from a logistics synchronization perspective.

What is logistics synchronization?

In paragraph 10.2 (Historical overview leading to SCM) the term logistics is further explained. For this reason only the definition will be given here: logistics is that part of SCM that plans, implements, and controls the efficient forward and reverse flows and storage of goods, services, and related information between the point of origin and point of consumption in order to meet customer requirements. The second part of this coordination mode is synchronization, which can be roughly seen as the joint matching of two or more differences. Matching the two terms together according to (Fisher, 1997): the coordination of logistics synchronization is responsible for ensuring alignment between logistics process activities to deliver products and services to fulfill customer needs and wants. Furthermore, (Simatupang, Wright, & Sridharan, 2002) state that “logistics synchronization means recognizing and concerting improvement initiatives that significantly contribute to value creation in the acquisition, consumption and disposition of products and services in today’s rapidly changing markets (....) It also assists participating members to resolve role conflict, so each member can perform specific tasks and assume certain responsibility to ensure the attainment of chain profitability”. From these explanations the core function of logistics synchronization can be filtered: it focuses on an effective and efficient logistic synchronization to create value-adding processes. Examples are for instance shortening delivery times by streamlining the transport, enhancing efficiency by synchronizing packaging with multiple products, etcetera.

Reasons for logistics synchronization

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synchronization become clear. It can be concluded that the reasons for coordinating logistics synchronization are numerous; however, the core elements are reducing production costs and increasing the level of customer service.

How to synchronize logistics in practice

Now the meanings and reasons for logistics synchronization are known, the focus will be on how to achieve logistics synchronization in practice. A graphical overview of this is given in Figure 5-7:

Figure 5-7 Line of approach for realizing logistics synchronization

Step 1. The first step is the mapping the processes of the SC. With this mapping is not only the making of a product meant, also the ‘after sales’ functions and the disposal of the product must be taken into account. By doing this, a comprehensive view of what is actually done in the SC is established. It is also of importance that all participating SC members with all their actions involved should be examined. The reason for this mapping is to create a comprehensive view where to eliminate waste or where value can be added, which will be examined in the upcoming steps. Making an Actor Activity Diagram (AAD) across the supply chain can for instance be useful for mapping the processes

Step 2. The second and third step are somewhat reversible, both aspects have a direct linkage with improving efficiency and effectiveness. But since it is more logical to eliminate inefficiencies and/or ineffectiveness first, this is put in second place. The two steps are also inextricably bound up with lean manufacturing, which is also shortly mentioned in paragraph 10.2 (Historical overview leading to SCM). Lean manufacturing is generic process management philosophy focused on creating the optimal way of producing goods through the removal of waste and implementing flow. As waste is eliminated, quality improves while production time and cost are reduced. Examples of such ‘tools’ are Value Stream Mapping, Pokayoke and Kanban systems.

Waste elimination can be achieved when the mapping of the product life cycle is closer examined. For instance similarities in two successive SC proceedings could easily be combined. Or repetition of the same activities could of course be eliminated at once. Also core and side activities should be examined; when a SC member offers a side activity that is the core business of a second SC member, it is likely that the second one can establish this activity more efficient and/or effective. By doing this, all core activities of the SC members become more visible and members can focus more solely on his/hers core business.

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discussed in paragraph 5.1 (Incentive Alignment), however, a second notice is made because it is of main importance that the focus is on the needs and demands of the customer. By creating synergy ways of enhancing value through collaboration is meant. Examples one could think of are combining transportation and co-producing (parts of a) product.

Step 4. The last step indicates that there has to be a loop in order to keep on enhancing chain profitability, it should be an iterative process. One simply cannot go over this sequence of processes just once, especially when looking at the rapidly evolving market conditions. New developments must be evaluated if it is still synchronic with the SC, also discovering and refining wastes and values should be maintained.

To conclude, one needs to understand that there are various different methods that can be applied for synchronizing logistics. This varies according to the type of industry and the type of integration, which was shown in Figure 1-2 Different views of supply chain integration). Examples are collaborative transportation (e.g. direct shipping, cross-docking) and operational flexibility (e.g. make-to-forecast, build-to-order) and logistics postponement. When successfully implement these in the supply chain, they have a significant impact in reducing inventory costs and increasing the level of customer service.

5.4 Collective Learning

In this paragraph the last coordination mode will be examined: collective learning. First the meaning of collective learning will be looked into, after which the reasons to focus on collective learning will be explicated. How to best integrate the SC in practice from a collective learning perspective will be explained at the end.

What is collective learning?

Collective learning is about learning from SC members for knowing each other’s capabilities and by this creating new capabilities. It is thus concerned with transferring knowledge from one SC member to another, in order to enhance capabilities, which on its turn leads to improving the supply chain.

Reasons for collective learning

Coordination modes for integration in the Supply Chain