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Supply chain collaboration alternatives: understanding the expected costs and benefits Tim McLaren, Milena Head, and Yufei Yuan DeGroote School of Business McMaster University Abstract: [Collaboration is a recent trend in supply chain management (SCM) that focuses on joint planning, coordination, and process integration between suppliers, customers, and other partners in a supply chain. Its competitive benefits include cost reductions and increased return on assets, and increased reliability and responsiveness to market needs. Recent advances in inter-enterprise software and communication technologies, along with a growing use of strategic partnering and outsourcing relationships, has resulted in a confusing assortment of alternative information systems approaches for supporting collaborative SCM. This paper analyzes the alternatives and presents a framework for understanding the expected costs and benefits of each type of system. These costs include not only the total cost of ownership of the system, but also the partnership opportunity cost - the cost of being tied to a partner due to system inflexibility. The benefits of collaborative SCM include process, inventory, and product cost reductions as well as increased cycle times, service levels, and market intelligence.] Originally published in Internet Research: Electronic Networking Applications and Policy, Volume 12, Number 4 , 2002. pp. 348-364.

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Supply chaincollaborationalternatives:understanding theexpected costs andbenefits

Tim McLaren, Milena Head andYufei Yuan

Introduction

Supply chain management (SCM) is awell-established discipline that involves thecoordination of an organization’s internalplanning, manufacturing, and procurementefforts with those of its external partners (i.e.suppliers, retailers, etc.). To reduceinefficiencies in a supply chain, organizationsare increasingly using information systems tointegrate the systems and processes throughouttheir supply chain. Effective supply chainintegration and synchronization amongpartners can eliminate excess inventory, reducelead times, increase sales, and improvecustomer service (Anderson and Lee, 1999).

However, mere coordination among tradingpartners today is no longer enough to maintaina competitive advantage. Instead, companiesare moving towards collaborative SCM in aneffort to reduce the information imbalances thatresult in the dreaded ‘‘bullwhip effect’’ (Leeet al., 1997), while increasing theirresponsiveness to market demands andcustomer service (Mentzer et al., 2000).

This paper begins with a description andanalysis of the various methods forsynchronizing supply chain information andprocesses between organizations such as usingelectronic data interchange (EDI), joining anelectronic marketplace, or utilizing sharedcollaborative SCM systems. Proponents ofthese varying methodologies are oftenself-interested commercial vendors or areorganizations that have invested in an initiativethemselves and need to convince others tofollow suit. Given this bias, and a lack of asuitable framework for analyzing the expectedcosts and benefits, it is very difficult todetermine which approach is most suitable foran organization. This paper presents acost-benefit framework to address this issue.

Similarly, several previous studies attest to thetransaction cost savings of interorganizationalsystems (Mukhopadhyay et al., 1995; Seidmannand Sundararajan, 1998), but ignore other costsof ownership or opportunity costs of having aninflexible system. We will examine these‘‘hidden costs’’ in addition to the potentialbenefits the systems can generate.

Ultimately, this paper will provide aframework for organizations or researchers

The authors

Tim McLaren is a PhD candidate, Milena Head is an

Assistant Professor of Information Systems, and Yufei Yuanis a Professor of Information Systems, all at the

Michael G. DeGroote School of Business, McMaster

University, West Hamilton, Ontario, Canada.

Keywords

Supply chain management, Internet,

Electronic data interchange

Abstract

Collaboration is a recent trend in supply chain management

(SCM) that focuses on joint planning, coordination, and process

integration between suppliers, customers, and other partners in

a supply chain. Its competitive benefits include cost reductions

and increased return on assets, and increased reliability and

responsivenes s to market needs. Recent advances in inter-

enterprise software and communication technologies, along

with a growing use of strategic partnering and outsourcing

relationships, has resulted in a confusing assortment of

alternative information systems approaches for supporting

collaborative SCM. This paper analyzes the alternatives and

presents a framework for understanding the expected costs and

benefits of each type of system. These costs include not only the

total cost of ownership of the system, but also the partnership

opportunity cost ± the cost of being tied to a partner due to

system inflexibility. The benefits of collaborative SCM include

process, inventory, and product cost reductions as well as

increased cycle times, service levels, and market intelligence.

Electronic access

The research register for this journal is available at

http://www.emeraldinsight.com/researchregisters

The current issue and full text archive of this journal is

available at

http://www.emeraldinsight.com/1066-2243.htm

348

Internet Research: Electronic Networking Applications and Policy

Volume 12 . Number 4 . 2002 . pp. 348±364

# MCB UP Limited . ISSN 1066-2243

DOI 10.1108/10662240210438416

investigating collaborative SCM to examine theanticipated costs and benefits of the alternativesystems. Given the uniqueness of most systemimplementations, our analysis generalizes theexpected costs and benefits of the variousalternatives based on previous studies andanecdotal evidence. Based on this evidence, wethen make some general conclusions andobservations.

We will first begin with an overview of thejustification for collaboration followed by anoverview of the alternatives.

From business logistics to supply chaincollaboration

This section shows details of how businesslogistics has evolved into supply chaincollaboration.

A supply chain is the collection of functionalactivities through which raw materials areconverted into finished products for sale to acustomer (Ballou, 1999). The term supplychain management is therefore synonymouswith business logistics management, except thatthe latter is commonly misconstrued to have anarrower connotation focused mainly ontransportation of goods. Ballou (1999) uses theterm integrated business logistics managementto reflect the need to coordinate themanagement of both the product supply(materials management) and subsequentproduct delivery (distribution) activities;however, the term supply chain managementhas proven more popular. Similarly, someauthors have felt that the term supply chain hasa connotation that is limited to supplierprocesses and does not emphasize the customeror distribution processes involved. Thus, wehave terms such as value chains (Porter, 1985),supply networks, and business webs usedinterchangeably with supply chain, though theirusage is not always consistent. In many cases, aweb is a more accurate metaphor than a chain,though the distinction is not important to thisarticle, as transactions still mainly occurbetween only two partners at one time.Nonetheless, the more traditional term supplychain is used as it is readily understood andemphasizes the interconnected nature of the

various functional activities involved insupplying a good or service to a customer.

Businesses in the early part of the twentiethcentury were often vertically integratedoperations, i.e. they performed manufacturing,sourcing, warehousing, sales, and logisticsfunctions ‘‘in house’’. However, by the late1900s, vertical integration had almostdisappeared and most organizations includedexternal partners in their supply chain. Sincethese external partners (suppliers,transportation providers, retailers, etc.) areoutside of the management control of anorganization, supply chain management hastraditionally involved each organizationmanaging their portion of the supply chain andmonitoring their partners to ensure they fulfilltheir contractual obligations (Ballou, 1999).

There can be numerous problems with thisapproach, the best known perhaps being the‘‘bullwhip effect’’, where the effects ofuncertainty in demand and lead times causeorder sizes and lead times to be inflated thefurther up the supply chain and away from theend customer you get (Lee et al., 1997). Thisleads to a much greater amount of excess andobsolete inventory in the supply chain in aneffort to protect against stock outs between eachlink in the chain. However, with increasedmanagement coordination of the supply chainand by making end-customer demandinformation readily available to the entiresupply chain, the bullwhip effect can bereduced and there is limited amplification ofuncertainty along the chain (Lee et al., 1997).

Thus, while supply chain managementfocuses on controlling the activities amongst thesupply chain partners, supply chain integrationfocuses on improving the information flowbetween links in the chain, and supply chainoptimization or supply chain coordinationfocuses on making decisions that reduce theinformation asymmetry and resulting excessinventory in the supply chain. However, if onlythe dominant partner drives supply chainoptimization decisions, this can create anasymmetrical distribution of information,inventory, and ultimately bargaining powerbetween the partners (Iacovou et al., 1995).Thus, in order to optimize the entire supplynetwork and not just create local optima in oneor two partners, the organizations must jointly

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Supply chain collaboration alternatives

Tim McLaren, Milena Head, and Yufei Yuan


Volume 12 . Number 4 . 2002 . 348±364

make supply and demand decisions that createsustainable value for all involved. Hence, manyorganizations are increasingly developingstrategic partnerships with their suppliers andcustomers in an effort to reduce waste in theirprocurement and order fulfillment processes(Porter, 1985).

Collaborative SCM goes beyond mereexchanging and integrating informationbetween suppliers and their customers, andinvolves tactical joint decision making amongthe partners in the areas of collaborativeplanning, forecasting, distribution, and productdesign (Kumar, 2001). Collaboration alsoinvolves strategic joint decision making aboutpartnerships and network design. The result ofcollaborative SCM is not only the reduction ofwaste in the supply chain, but increasedresponsiveness, customer satisfaction, andcompetitiveness among all members of thepartnership. Thus, collaborative SCM systemsallow organizations to progress beyond mereoperational-level information exchange andoptimization and can transform a business andits partners into more competitiveorganizations.

It is important to note that true collaborationrequires more than simply a focus onoptimizing transactional or operationalfunctions. As Walter et al. (2001) observe,high-performing collaborative relationshipsrequire not only a focus on direct value-creatingor buyer-supplier functions, but also an equalfocus on the indirect relationship building andsustaining functions.

Many organizations have undertakeninformation technology supported initiatives totransform their focus from operational buyingand selling relationships into higher performingcollaborative relationships. Venkatraman(1991) describes five levels of businesstransformation made possible throughinformation technology (IT) implementation.These are:(1) localized exploitation;(2) internal integration;(3) business process redesign;(4) business network redesign; and(5) business scope redefinition.

While organizations do not always performthese stages sequentially, in general, the higher

the level, the greater the potential benefits,strategic impact, and degree of organizationalchange required. The focus of this paper will beon business network redesign which utilized ITresources to redesign the linkages betweenbusiness partners to create new capabilities,generate favourable asymmetries in themarketplace (Venkatraman, 1991), andintegrate business processes betweenorganizations sharing a common value chain(Porter, 1985).

Collaborative SCM systems are designed tosupport enhanced information sharing andcollaborative planning among partners in aneffort to reduce information asymmetries in thesupply chain, which contribute to the bullwhipeffect and result in excess inventories (Lee,2000). They support collaboration primarilythrough three mechanisms:(1) information integration;(2) process and resource coordination; and(3) reporting of performance measures to

ensure accountability (Lee, 2000).

Traditional purpose-built information systems,which we often term legacy systems, have oftenfocused primarily on meeting only one of theseobjectives at a time, while more integratedsystems such as enterprise resource planning(ERP) applications are better suited to meet allthree requirements.

Furthermore, while operational-levelinter-enterprise systems such as EDI systemsoften benefit customers much more thansuppliers (Lee et al., 1999), systems thatsupport tactical and strategic collaborativeplanning help ensure that the benefits ofcoordination are sustainable and experiencedby all members of the chain, not just thecustomers. This shared value enhances thesustainability of the relationship, whileequalizing the bargaining power of the partners(Seidmann and Sundararajan, 1998) andstrengthening their level of trust (Karahannasand Jones, 1999).

In summary, organizations can experience agreater level of benefits as their supply chainsevolve from an internal focus on businesslogistics to more collaborative relationships. Wehave integrated these benefits and theirassociated costs into the conceptual modelpresented later in this paper. Using this model,

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the following sections first describe and thenanalyze each of the alternative systems forsupporting the evolution towards morecollaborative SCM.

Systems for collaborative SCM

The desire to share information and promotecollaborative management of the supply chaincauses organizations to increasingly turn tointerorganizational information systems (IOS)for supply chain collaboration, referred to hereas collaborative SCM systems. Indeed, a supplychain-wide information infrastructure candisseminate supply and demand informationthroughout the chain in near real time, whichgreatly reduces the bullwhip effect (van Hoek,2001) and enables collaboration.

We classify the systems that support thesevarying degrees of supply chain coordinationand collaboration into three major types:(1) message-based systems that transmit

information to partner applications usingtechnologies such as fax, e-mail, EDI, oreXtensible Markup Language (XML)messages;

(2) electronic procurement hubs, portals, ormarketplaces that facilitate purchasing ofgoods or services from electroniccatalogues, tenders, or auctions; and

(3) shared collaborative SCM systems thatinclude collaborative planning, forecasting,and replenishment capabilities in additionto electronic procurement functionality.

There are many different types of supply chainIOS, such as EDI or enterprise applicationintegration (EAI) based systems, electronicmarketplaces, or even non-computerized phoneor fax-based systems. Since there is oftenconfusion over the terms used to classify aparticular type of IOS (for example someauthors use hub or marketplaceinterchangeably), we have attempted to use themost widely accepted definitions and explainthe key differences between the classifications.Following a brief description of ourclassification, we will analyze the expected netbenefits of usage of each type of system forsupporting collaborative SCM.

The key differences between the alternativesystems are the type of trading relationships andprocesses they are designed for and the degreeof interorganizational integration they support,as shown in Figure 1.

In analyzing the type relationship, we look atthe cardinality of the relationships the system isdesigned to support. In other words, is thesystem optimized for supporting one-to-onerelationships, such as EDI, or many-to-manyrelationships, such as multiple suppliers andcustomers interacting in an electronicmarketplace? Somewhere in between theseextremes lie systems designed for one-to-manyrelationships such as Web-based order entrysystems or auctions. We are not implying thatEDI systems cannot be used to interact withdozens of suppliers and customers. Rather, eachadditional customer-supplier link requires asignificant effort to integrate the systems,processes, and data definitions between the twopartners, resulting in multiple one-to-onerelationships with all of the EDI tradingpartners. By contrast, once an organizationintegrates its systems with an electronicmarketplace, it can engage in multiple tradingrelationships with minimal incremental effort.

Similarly, the capability of the systems tosupport unique or customized supply chainprocesses between the trading partnerscoincides with the type of relationship thesystem is designed for. For example, sinceelectronic marketplaces are designed formany-to-many supplier-to-customerrelationships, they require a high degree ofstandardization of business processes. Incontrast, since systems using EDI or EAIinvolve linkages between one customer and onesupplier at a time, they can support much morecustomized and unique business processes.

The other key variable that distinguishescollaborative SCM systems is the degree ofintegration achieved or required between thepartners. Tight integration implies a closealignment of the trading processes, systems,and data definitions between the partners andcommunication that allows information to flowefficiently between the organizations. Incontrast, loosely integrated trading partnershave significant differences in businessprocesses and data definitions that requiresubstantial human intervention to pass

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information between the two organizations.Note that even though EDI achieves tight dataintegration, it often fails to facilitate theharmonization of business processes andsystems amongst the trading partners. Bycomparison, enterprise application integrationusually results in closer alignment of businessprocesses and systems as partners are forced toagree upon a process or use the process modelsembedded in the enterprise systems. Similarly,when joining an electronic marketplace,companies must align their processes and datadefinitions with the standards enforced by themarketplace.

While this classification of systems andapproaches provides a first-cut approximationof which situations each is most appropriate for,it is insufficient for determining the mosteffective strategy for a given organization. Inorder to shed more light on the differentapproaches in Figure 1, we briefly describe eachin the following section.

Phone/fax/e-mail systemsTraditionally, many supply chain activities haveinvolved the usage of manual andsemi-automated phone, fax, and e-mail systemsin addition to face-to-face and paper-basedtransactions. For many functions such asestablishing relationships and initial contractnegotiations, these methods are indispensableand unlikely to be replaced completely by more

automated systems. However, many supplychain processes can be made much moreefficient by employing information technologyto improve information sharing, reduce errorsand rework, and free resources to work on morevalue-added tasks (O’Leary, 2000).

Phone, fax, and e-mail systems all supporthighly flexible and customized tradingrelationships, though they lack standards intheir usage. They are very suited forcommunicating unstructured information, butdo not support communicating structuredinformation into the recipients’ systemselectronically. As a result, they do not support avery tight degree of interorganizationalintegration. While e-mail systems can transmitstructured information such as electronicpurchase orders directly into a recipient’ssystem, we classify that type of system as EDI.In our classification, we assume that phone, fax,and e-mail messages contain unstructured textor images.

Offline auctions/trade exchangesOffline auctions involve one supplier and manycustomers (in a forward auction) or onecustomer and many suppliers (in a reverseauction). As the auction process usuallyfocuses on price as the prime decision variable,they have had the widest acceptance incommodity markets.

Figure 1 Interorganizational systems for supply chain collaboration

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Similarly, offline trade exchanges helpcoordinate similar markets, yet are designed tosupport many-to-many relationships. Bothoffline auctions and trade exchanges supportonly a limited degree of interorganizationalintegration, as the systems and data are notelectronically integrated, and the businessprocesses amongst the trading partners areoften disparate and uncoordinated. As a result,many former offline auctions and exchangeshave migrated to online electronic marketplacesto increase the benefits of integration andcoordination amongst their members (forexample, the General Electric TradingExchange).

Web-based order entry systemsWeb-based order entry systems, sometimesreferred to as business-to-consumer (B2C) orbusiness-to-business (B2B) Web sites orcustomer portals, enable customers to directlyinteract with a supplier’s sales order system. Asopposed to eProcurement applications,Web-based order entry systems reside on thesupplier’s computers. Since the customermanually enters the information, the degree ofsystems and data integration between thecustomer and supplier is loose, even though thesupplier’s systems may be internally integrated.Furthermore, since the customer must conformto the supplier’s business processes, the degreeof process integration or coordination betweenthe two parties is also loose.

If transactions are predominatelycommunicated electronically rather thanentered manually, we classify those systems asEDI or EAI systems as appropriate.

Electronic procurement hub/portalWeb-based procurement systems reside on acustomer’s systems and allow the customer toelectronically integrate its systems andprocesses to some degree with those of itssuppliers. In general, an eProcurement systemor portal refers to a Web site operated by acustomer which contains informationintegrated from its suppliers’ systems. Often,the site includes electronic catalogues from thesuppliers, and includes functionality to submitpurchase orders electronically to the supplierfrom within the portal application. Typically,the customer performs most of the effort of

integrating the supplier catalogues into theeProcurement system.

In contrast, the term e-hub or supplier portalusually refers to a Web site belonging to acustomer that allows its suppliers to integratetheir systems and processes with those of theorganization (Stevens, 2001). In this paper,electronic procurement portals or hubs areassumed private infrastructures, rather than thepublic third-party electronic marketplaces thatare described in a later section.

Electronic data interchange/enterpriseapplication integrationThe traditional method for businesses toexchange structured operational informationelectronically has been to use electronic datainterchange (EDI). Strictly speaking, EDI is nota type of system, but rather a standards-basedmessaging methodology for formatting andcommunicating business transactions betweenorganizations. While electronic marketplacesand procurement systems may utilize EDImessages, they provide a higher degree ofprocess coordination and enable transactionsbetween multiple parties rather than theone-to-one communications of what we refer toas EDI systems.

Similarly, enterprise application integration(EAI) is also a standards-based messagingapproach to integrating systems, though itusually implies the use of XML-formattedmessages and integrated enterprise-widesystems. EAI in a supply chain usually involvesone-to-one integration between enterpriseapplications including legacy systems, ERP,SCM, or advanced planning and scheduling(APS) systems.

While XML is more flexible than EDI forformatting messages, like traditional EDI, itrequires trading partners to adhere to commonstandards for defining the business processesand for formatting and using the data. AlthoughXML usage is rapidly evolving, currently thereis little to distinguish XML-based EAI frommore traditional EDI.

Third-party electronic marketplacesElectronic marketplaces are onlinebusiness-to-business (B2B) communities thatlink participants to a global network of buyersand sellers (Stevens, 2001). They usually

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include capabilities for product sourcing andordering such as electronic catalogues, onlineauctions, and sometimes include approvalsrouting and contract management capabilities(Archer and Gebauer, 2000). A third party suchas CommerceOne, eSteel, or W.W. Graingertypically hosts the marketplaces (Kaplan andSawhney, 2000). While some organizations aredeveloping their own private marketplaces, wecould classify these as eProcurement solutions.Therefore, we will only consider the uniquecharacteristics of third-party electronicmarketplaces.

Shared collaborative SCM systemsSo far, we have looked at various methods andtechnologies that can help integrate thesystems, data, and business processes amongtwo or more partners in a supply chain. Whileeach of these alternatives differs in the degree ofstrategic collaboration supported, they are allsimilar in their approach of facilitatingcollaboration through system integration.

In contrast, the use of shared collaborativeSCM systems takes a different approach byeliminating much of the integration andtranslation efforts agreeing upon sharedprocesses and systems. Examples of thesesystems include jointly owned SCM systems orSCM modules from ERP or APS packages thathave been made accessible for partner accessand collaboration.

Shared collaborative supply chain systems aredesigned for trading partners to perform jointsupply chain planning, design, and optimizationrather than to simply facilitate the exchange ofinformation between the partners. Theyaccomplish this by sharing a single system forboth partners, rather than by attempting tointegrate separate systems. Nonetheless, thereare costs for each party for integrating theirother SCM systems with the shared system.

Like each of the alternatives, there aretrade-offs between the benefits and the costs ofusing collaborative systems. We discuss thesetrade-offs in the following section.

Conceptual model of alternatives

The benefits of collaboration include reducedprocess costs, inventory levels, and product

costs that result from the coordination of actualcustomer demand with supplier productionplans (Mentzer et al., 2000). Furthermore,Mentzer et al. (2000) found that collaborationalso resulted in faster product-to-market cycletimes, improved service levels (based on stockouts, lead times, and quality), and a betterunderstanding of end-customer needsthroughout the entire chain (marketintelligence). Figure 2 shows that these benefitsfall into two broad categories: enhancedresponsiveness to market and reduced supplychain costs.

The costs involved in collaborative SCM fallinto two broad categories: the total cost ofownership (TCO) of the system as well thepartnership opportunity cost (the costassociated with being tied into a specificpartner). TCO consists of the total lifecyclecosts of the chosen processes and systemsincluding cost of systems acquisition, usage,maintenance, dealing with errors andinefficiencies, and integration with partnersover the lifetime of the solution (Degraeve andRoodhooft, 1999). As shown in Figure 2, thecomponents of TCO include costs of systemsimplementation and integration, coordinatingand integrating business processes amongpartners, and translating and integrating dataamong systems.

The analysis of costs must account for theopportunity costs of sustaining and changingpartnerships and processes. The partnershipopportunity cost represents the value of thebenefits forgone by not adopting a morebeneficial partnership (after Gibbins, 1995). Itincludes the costs of switching partners and thepartnership instability cost (costs due to thefrequency of partnership changes). Forexample, inflexible systems such as EDI havehigh costs for switching to other partners, whichcontributes to a higher partnership opportunitycost (Poirier and Bauer, 2001). However, ifpartnerships are stable and long-term, thepartnership instability cost is low resulting in amore moderate partnership opportunity cost.

Systems that do not promote long-termrelationships (such as many auction-basedsystems) will result in instable relationships anda high partnership instability cost. Thisinstability results in the partners forgoing thebenefits of long-term collaboration, resulting in

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a high partnership opportunity cost, eventhough the switching costs in auctions are low(Anderson and Lee, 1999). Therefore, a highpartnership opportunity cost can result fromeither high switching costs or high partnershipinstability, or both.

It is important to note that in collaborativeSCM, low switching costs are desirable for mostsituations. At first, this may seem contrary toPorter’s (1985) suggestion that high switchingcosts are desirable for preventing customersfrom trading with other partners. However, aswe have discussed, low costs of switchingpartners enables organizations to more easilysupport the relationships that are the mostbeneficial to the organization and thus lower theopportunity cost associated with a partnership.Furthermore, several studies have suggestedthat partnerships that are maintained throughcoercion, threats, or high switching costs fail toprovide the equity of benefits to both partiesthat are required for sustainable collaboration(Kumar and van Dissel, 1996; Iacovou et al.,1995).

The overall cost of the system is the sum ofthe total cost of ownership and the opportunitycost of inflexibility. The net benefit of thecollaborative SCM system is therefore thebenefit resulting from enhanced market

responsiveness and reduction of supply chaincosts less the cost of ownership and opportunitycosts, as shown in Figure 2.

In the following section, we examine each ofthe alternative systems for collaborative SCM,and analyze their potential costs and benefitsusing the above conceptual model.

Expected costs and benefits ofcollaborative SCM systems

The following analysis generalizes the expectedbenefits and expected costs of each of thealternative collaborative SCM systems, asshown in Tables I and II, respectively. Since theimplementations of the various systems are asunique as the organizations that use them, thereis little value in trying to do direct empiricalcomparisons between the systems. Instead, wecan make some conclusions and observationsbased on previous studies and anecdotalevidence.

Phone/fax/e-mail systemsCompared to paper-based or in-persontransactions, the use of telephones for supplychain transactions can increase the efficiency ofthe transactions involved. However, as the

Figure 2 Cost-benefit model for collaborative SCM systems

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Volume 12 . Number 4 . 2002 . 348±364

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Volume 12 . Number 4 . 2002 . 348±364

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information communicated is not integratedwith any other systems, these efficiency gainsare minimal, and may be offset by an increasedlikelihood of errors.

Fax and e-mail systems yield greater processgains over phone systems, especially when theyare integrated with the sender’s informationsystems. However, as can be seen in Table I,the increased benefits are not as substantial asmore sophisticated and integrated supply chainsystems.

The net benefits accrued from informationsharing using phone, fax, and e-mail systemsare limited mainly by the fact that theinformation communicated is difficult tointegrate into the receiver’s systems withoutmanual processing and data translation. Asshown in Table II, the total cost of ownership ofthese systems is generally low, except for thecost of data translation and integration, which ismedium, since it is a labour-intensive activity.

The usage of phone, fax, and e-mail systemsresults in relatively low partnership opportunitycosts as the unintegrated nature of the systemskeeps the switching costs low. Also, the highersearch costs for finding new partners with thesesystems (Bakos, 1997) acts as a disincentive forfrequent partnership switching resulting in alow partnership instability cost (see Table II).As they can be more automated andcommunicate richer information, e-mailsystems do offer more process gains than phoneor fax systems, but at a proportionately greatertotal cost of ownership, due to their support andinfrastructure costs. The use of e-mail totransmit structured data directly to othersystems is better classified as a type of EDI andis discussed later.

Offline auctions/trade exchangesTraditional offline auctions and offline tradeexchanges are widely believed to yield benefitsto a supply chain in increased market efficiencyand reduced searching costs, which results in amoderate product and process cost reduction.However, as the information exchanged istypically not integrated with any systems, thereis minimal benefit in terms of increasedresponsiveness of the supply chain or reductionof inventory (see Table I).

Furthermore, the unintegrated nature of thesystems results in ownership costs similar to

phone, fax, or e-mail systems, since manualdata entry and translation is usually required. Inaddition, auctions that focus mainly on pricereduce the bargaining power of suppliers,preventing them from maintaining long-termcollaborative relationships, which results in ahigher partnership instability cost (Stevens,2001). However, this cost could be lowered ifthe auctions support multi-attributenegotiations (in addition to price) and suppliersperceive more benefits and bargaining power(see Table II).

In summary, offline auctions require aconsiderable human effort to perform data andprocess translations between the partners, yetfail to adequately support tactical or strategicinformation sharing or collaboration.

Web-based order entry systemsWith Web-based order entry systems, theinformation exchanged between the customerand supplier is consistent with the supplier’ssystem, resulting in a lower error rate andminimal rework of the information, ascompared to voice- or paper-basedtransactions. However, while the supplier doesnot need to translate the information (as it isalready entered into their system) the customeris required to do a mental translation of theirprocesses and information into the process andformat required by the supplier’s order entrysystem. Thus, the supplier experiencesefficiency gains from the integration, while thecustomer experiences fewer such benefits,especially after having to learn how to interactwith several different supplier Web sites.

In a system that benefits the supplier muchmore than the customer, the efficiency gains ofintegration are self-limiting because thecustomers will tend to seek out relationshipsthat are more desirable. As a result,organizations participating in supply chainsprimarily dependent on Web-based order entrysystems will experience a moderate level ofcycle time reduction, service level gains, andmarket intelligence gains due to the partialintegration of information (Table I). However,these gains are not as much as the remainingalternatives, which offer fuller integration ofinformation between both trading partners.

As shown in Table II, Web-based order entrysystems have a total cost of ownership and

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partnership opportunity cost that is comparableto phone, fax, or e-mail systems, though thesystem integration costs are usually somewhathigher.

Another important aspect of these systems isthat they are primarily designed for supportingtransactional information processing, ratherthan tactical or strategic supply chaincollaboration. For example, most Web-basedorder entry systems do not make tacticalinformation such as actual product availabilityor lead times available, which would providemore of a benefit to their customers.Furthermore, as the customer’s systems are notintegrated with those of the supplier, there islittle to tie them into the relationship and thusthe switching costs are low. Fortunately, thelow switching costs mean the flexibility of thesupply chain partnerships is high and theopportunity costs of being tied to specificpartners is low.

Thus, Tables I and II show that while theopportunity and switching costs are low forWeb-based order entry systems, the benefit ofstrategic information sharing and collaborationare also low. Note, that if strategic planninginformation were made available to thecustomers on the Web site, such as‘‘available-to-promise’’ data, then thecollaboration gains would increase. However,again, the lack of integration with thecustomers’ systems and processes would limitthe gains realized. Note that if the informationwere integrated with the customer systems, thenthe system would be better termed a hub orportal as described in the following section.

Electronic procurement hub/portalElectronic procurement portals and hubsincrease the efficiency of trading partners byintegrating the data, processes, and systemsutilized in a supply chain. They can lead tolower product prices through spendingconsolidation and process efficiencies (Archerand Yuan, 2000); however, the biggest savingscome from purchasing compliance by reducingoff-contract buying and forcing purchases to bemade against established contracts (Hope-Rosset al., 2000). Thus, Table II shows thesesystems have a high potential for cycle timereduction, service level gains, and process andproduct cost reductions. However, since they

do not focus on the exchange of supply anddemand information, the inventory costreduction and market intelligence benefits arenot as high as for EDI, EAI, or collaborativesupply chain systems.

The benefits of electronic procurementsolutions are often offset by the large integrationand translation efforts required to facilitate theelectronic transactions amongst the partners(Archer and Gebauer, 2000). Though they canresult in lower transaction costs, the cost ofmaintaining different electronic catalogues fordifferent customers and from integrating theseinto another organizations systems is high(Ginsburg et al., 1999), resulting in a significanttotal cost of ownership over the lifetime of thepartnership, as shown in Table II.

Similarly, this integration inflexibility carriessignificant switching and opportunity costs ascosts are sunk into maintaining the existingrelationships and information-sharingcapabilities (Archer and Yuan, 2000). Theability to share strategic planning informationamongst the supply chain partners is oftenbetter than with organizations without any typeof inter-enterprise integration, however, it isstill limited. Thus, Tables I and II show thatthese systems yield only moderate benefits fromcollaboration, though they have loweropportunity costs and costs of ownership thanthe following systems, which are better suitedfor a higher level of supply chain collaboration.

Electronic data interchange/enterpriseapplication integrationPartners in a supply chain have long used EDIfor exchanging sales orders electronically (Leeet al., 1999). More recently, supply chains haveadopted technologies such as enterpriseapplication integration to achieve the samebenefits of electronic information exchange in amore flexible manner using the Internet andXML message formats. However, both EDIand EAI approaches share the samecharacteristics of standards-based messagingand their expected costs and benefits in Figure 2are very similar.

Numerous studies have shown that EDI canreduce transaction-processing costs tonear-negligible levels (Mukhopadhyay et al.,1995; O’Leary, 2000). However, the total costof ownership of EDI systems is substantial due

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to the systems and data integration effortsrequired (see Table I). Furthermore, thisintegration effort usually requires a largeamount of ‘‘hard-coded’’ data translations,which results in a system that is less flexible inadapting to changing partners, processes, anddata structures. The result is a high cost ofswitching partners, as shown in Table II.

While EDI provides definitions for commonmessage formats to be exchanged, its rigiddata model and inflexible formattingrequirements force trading partners to expendconsiderable effort in formatting the data to beexchanged and agreeing upon a common datamodel to be used (Mukhopadhyay et al.,1995). Furthermore, the systems areproprietary, complex, and costly, andsometimes require smaller partners to becoerced into implementing them (Archer andGebauer, 2000; Lee et al., 1999). As Moore(2001) observed, the result is that EDIrelationships cannot be implemented easily,quickly, or inexpensively. This is because theEDI standards focus more on defining therigid message structures and less on definingwhich data fields are required for a transactionand how the information should beinterpreted.

As a result, two trading partners wishing toexchange EDI messages need to first agreeupon how to structure and interpret themessages and then configure their systems totranslate their legacy data into this commonformat. If one of the partners then wanted toexchange EDI messages with a thirdorganization, it would need to start thenegotiations all over again with that party inorder to adopt a common data model (Moore,2001). As each party would like to use theirown data model and minimize the datatranslation required, the likely outcome is thatorganizations would need to translate their dataseparately for each of their trading partnersrather than being able to use one commonmodel. The result is high system and dataintegration costs. On the positive side, sinceEDI and EAI participants must adhere tocommon standards, the costs of coordinatingtheir processes are lower than most of thealternatives (see Table II).

Third-party electronic marketplacesElectronic marketplaces are useful forcoordinating supply chains for someorganizations, but like EDI, are not as widelyaccepted as has been predicted. Stevens (2001)suggests that there are several obstacles toparticipating fruitfully in an electronicmarketplace including supplier resistance,buyer resistance, connectivity, and return oninvestment (ROI) issues.

Suppliers have been reluctant to joinelectronic marketplaces as they usually involvehighly competitive auction processes focusedprimarily on price, resulting in unsustainablylow prices and a high partnership instability costsimilar to offline auctions. However, unlikeoffline auctions, the system implementationcosts are somewhat higher due to thetechnology integration requirements (seeTable II).

In order to gain more acceptance withsuppliers, such marketplaces will need toprovide negotiation support on other termssuch as quality, service level, and paymentterms and support longer-term contracts.Otherwise, many suppliers will continue tofocus more on building less flexible one-to-onerelationships with their strategic partners(Stevens, 2001).

Likewise, buyers are hesitant to joinmarketplaces that do not support the robusttypes of negotiations that are required forlong-term successful relationships. They alsohave legitimate concerns about having theirsupply chain transactions and planningforecasts so easily visible to their competitors inthe marketplace. Furthermore, buyers inindustry-specific marketplaces have found itdifficult to come to agreement with theirbusiness rivals upon the required infrastructure,processes, and standards required to supportthe transactions.

Ultimately, despite the low infrastructurecosts of the Internet and the emergence ofpromising technologies such as XML, thepresent state of B2B connectivity has notprogressed far beyond the rigid standards ofEDI. While the Internet has reduced the cost ofbandwidth, most trading situations still requiresignificant investment to translate legacy datainto some format agreed upon by themarketplace participants (Ginsburg et al.,

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1999), as shown in Table II. Since there ispresently no agreed-upon standard that issufficiently flexible to accommodate all tradingpartners, organizations must expend asignificant amount of resources to set up thoselinkages to the marketplace and their otherpartners. Similarly, the lack of clear standardsresults in a high process coordination costbetween the trading partners, as shown inTable II. In many cases, it has been impossibleto meet the ROI requirements of less than ayear, which has become standard in manyinformation technology (IT) investments(Stevens, 2001).

The result has been that few electronicmarketplaces have achieved the tradingvolumes originally budgeted for and many havebeen dissolved within years of their launch.Nonetheless, as technology and standardsevolve, like electronic procurement hubs andportals, electronic marketplaces holdconsiderable promise for reducing transactioncosts and enabling tighter collaborationthroughout the supply chain (see Table I).

Shared collaborative systemsCollaborative supply chain systems go beyondmere sharing of operational data such asproduction schedules and available-to-promisecapabilities. They also facilitate exchange andcoordination of tactical information such assupply and demand forecasts, and may evenassist strategic planning through trade networkdesign and optimization (Kumar, 2001).

Through their support of joint planninginitiatives such as collaborative planning,forecasting, and replenishment (CPFR), sharedcollaborative SCM systems can greatly reducethe ‘‘bullwhip effect’’ and yield more accuratedemand forecasts. Both the supplier andcustomer jointly agree upon supply anddemand forecasts and plans and can coordinatetheir promotion and distribution strategies. Theresult is more predictable demand, whichlessens the amount of inventory required in thesupply chain and reduces the amount ofexception processing and expediting required,leading to cycle time reduction and service levelgains (Anderson and Lee, 1999; Mentzer et al.,2000). Furthermore, the joint collaborationallows a high level of market intelligence sharingthroughout the supply chain, as customers,

distributors, and suppliers can all shareinformation about customer needs (Andersonand Lee, 1999). Thus, Table I shows that theoverall benefits for shared collaborative SCMsystems are expected to be high.

The process coordination costs are high asthe systems are shared among partners eachhaving their own unique business processes.Similarly, both parties must agree upon amutual data format and must translate andintegrate the shared data with their ownsystems, resulting in a high data translation andintegration cost. However, since the sharedsystem acts like a single hub, the systemintegration costs are not as high as in thepoint-to-point EDI or EAI solutions, and arecomparable to the system integration costs ofcentralized electronic procurement ormarketplace solutions (see Table II). AsGinsburg et al. (1999) explain, the systeminterface costs are a function of the number ofpartners that need a different system interface,and therefore the centralized or shared systemsare expected to have lower system integrationcosts than the point-to-point solutions.

Furthermore, since two or more partnersinvest in the shared system, the cost ofswitching partners is high. However, since thecollaborative systems usually have large benefitsfor both the customers and the suppliers in atrading relationship (Anderson and Lee, 1999),we expect the relationships will be sustainableand the partnership instability cost will be low(see Table II).

Expected net benefits of collaborativeSCM systems

As shown in Figure 2, the net benefits of acollaborative SCM system are derived from thetotal costs of ownership, the opportunity costsdue to inflexibility, the enhanced marketresponsiveness, and the amount of supply chaincost reduction. In Figure 3, we havesummarized the relative costs and benefits ofthe alternative systems for collaborative SCM.In general, the lowest cost alternatives yield theleast amount of benefit from collaboration.Similarly, the alternatives offering the highpotential benefits of collaboration havemoderate costs of ownership and opportunity

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costs. The exception is EDI systems, which weexpect to have high opportunity costs due totheir inflexibility and a high total cost ofownership due to high ongoing system and dataintegration costs.

Figure 3 is a generalization intended to showthe relative costs and benefits that can beexpected from different approaches tocollaborative SCM. The actual costs andbenefits that could be expected would dependupon the functionality that the systems supportand how they are implemented and integratedwith existing systems and processes. Thecost-benefit model shown in Figure 2 should beused as a guideline to anticipate costs andbenefits for any specific supply chaincollaboration initiative.

Conclusions and directions for furtherresearch

Through a comprehensive review of previousresearch, we have shown that collaborativeSCM can result in significant benefits to anorganization. These benefits include not onlysupply chain cost reduction, but also an

increased market responsiveness that shouldresult in top-line revenue growth. We havedescribed the alternative systems for supportingsupply chain collaboration, and highlighted thedifferent potential each has in achieving thesebenefits.

We have also described the anticipated costsof each system, which are due not only toimplementing, using, and maintaining thesystems, but also the cost of integrating thesystems, processes, and data within andbetween organizations. Many previous studiesattest to the transaction cost savings of theseinterorganizational systems, but ignore theswitching costs required to change partners orbusiness processes, and also the opportunitycosts of not having a system flexible enough todo business with whichever partner is mostsuitable.

Finally, we have shown that not all of thealternatives considered will achieve the samelevel of business transformation in the supplychain. Similarly, even though we attempt tomake some general cost-benefit comparisons,we acknowledge that not all of the alternativesare equally appropriate for a given organization.While supply chain collaboration is an assumed

Figure 3 Expected overall cost-benefit of supply chain collaboration systems

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goal, the choice of system will also depend onwhether the organization seeks to maximizeefficiency and integration, flexibility, or systemcomprehensiveness.

Clearly, the generalizations and hypothesesmade in this paper need to be followed up withadditional empirical research. This paper wasnot intended to be used as a guide in choosingbetween the different collaborative SCMalternatives, rather it has attempted to build aconceptual cost-benefit model that would behelpful in analyzing and comparing similarsystems. In collating a wide variety of researchon these disparate systems, we have attemptedto highlight the key benefits and challenges ofeach in order to enable investigations that aremore detailed.

This paper has established the justification fora higher level of collaboration between supplychain partners. By looking at the individualfactors that influence the net benefits of thealternative systems, the cost-benefit frameworkwe have developed enables a deeperunderstanding of the alternatives forcollaborative SCM. The framework will beuseful in designing empirical studies to furtherexamine the relationships between the cost andbenefit drivers and the net benefits orsuccessfulness of the implementations.

Further studies should also consider thefactors that contribute to each of the summarylevel cost and benefit drivers presented in thispaper. For example, preliminary studies suggestthat the benefits of collaboration are influencedby the degree of goal alignment between tradingpartners (Quinn, 1999) or the level of trust(Karahannas and Jones, 1999). Furthermore,this paper considers costs in terms ofownership, integration, and implementationcosts, but does not look specifically at the risksof collaboration at a detailed level. Furtherstudies should address the potential risks insharing proprietary information, to provideinsights into achieving an optimal balance ofcollaboration and risk management.

Finally, given the strategic importance ofsupply chain collaboration for manyorganizations, there is a clear need to furtherinvestigate and validate the models put forwardin this study.

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