The Value of Sharing Information Up and Down the Supply Chain

Sharing information among retailers, wholesalers, distributors and manufacturers is supposed to be a good thing.

For years, academics have sung its praises, saying that better information up and down the supply chain reduces the “bullwhip effect,” whereby stockpiles of inventory get bigger and bigger as you move from retailer to manufacturer because no one can rely on the order forecasts at each point in the chain and the inaccuracies multiply.

For example, let’s say a retailer offers a promotion on a certain item for a month but doesn’t tell anybody else about it. The extra orders will drive up the forecasts of everybody else for weeks or even months afterwards, until the retailer’s orders settle back down to normal.

Retailers have the best numbers, because they can measure direct sales, not somebody else’s forecasts. But for various reasons–mostly that precious human resource, trust–someone along the line is reluctant to pass the information along. If the Japanese success with just-in-time manufacturing doesn’t prove the merit of information sharing, there may be little more that can be done to get Americans to give up their contentious vendor-supplier relationships and just get along.

But academics are trying to prove that the theory isn’t just Japanese magic or the power of Wal-Mart to command manufacturers to manage their own inventories in the stores. They started with mathematical models that couldn’t possibly duplicate the complexities of a real supply chain. Today, they’re using simulation software that is capable of duplicating all the weird things that people and companies do when they buy and sell things.

Zhensen Huang, a recent PhD graduate from the University of Maryland, Baltimore County, with guidance from his professor, Aryya Gangopadhyay, created a virtual supply chain model with one manufacturer, two wholesalers, four distributors, eight retailers and 100 consumers. They shared information three ways: total (everybody got retailer sales information), partial (some got it and some didn’t) and no sharing.

And they found that the value of total information sharing is a lock. “We found that for the distributors, wholesalers and manufacturers there was significant reduction in inventory and backorder costs,” says Gangopadhyay. Even partial sharing saves more money than none at all, they found.

Interestingly, retailers benefitted the least from sharing, while manufacturers gained the most. That makes sense, because the retailers have the most accurate information to begin with. By the time the information gets to manufacturers in a typically reticent American supply chain, the bull whip is snapping with violent inaccuracy.

Yet if the benefits of information sharing don’t accrue equally, the issue becomes who pays for it? Retailers will have little incentive to pay for information sharing systems unless they can expect lower prices from the rest of the chain. This is the way it has always been. The first link in the chain makes the rest of the chain pay for the sharing systems. Suppliers, often already operating on razor-thin margins, don’t want to foot the bill. Witness the reluctance of suppliers to accede to Wal-Mart’s demands for RFID tags.

The answer is human intervention along with the systems, says Bob Parker, vice president of Manufacturing Insights (CIO.com’s parent company, IDG, also owns Manufacturing Insights). “The way Toyota gets suppliers to buy in is they say, ’Here, we’ll send consultants in on our dime to show you how to get the 7 percent cost reduction we’re asking for.’ American companies generally don’t do that with their suppliers.”

Give us your war stories of information sharing in your supply chain. Aryya has generously agreed to respond to questions and comments here in the blog.