Supply chain integration can be explained as the close alignment and coordination within a supply chain which uses shared management information systems. Integration is the process in which various processes and supply chain activities work together to eliminate any inefficiency which is related to supply chain fragmentation. For businesses to succeed in the digital community they must be able to manage the integration of business, people, technology, and processes within the enterprise and across extended enterprises. An integrated supply chain is supposed to necessitate excellent communication between a buyer and seller. The Supply Chain Management system is an inter-enterprise cooperation and collaboration with business partners, suppliers, and customers. The integration process involves implementing ERP and SCM systems with the Customer Relationship Management, Product Lifecycle Management, e-procurement, and e-marketplaces making them available on the Web so as to have cooperation and collaboration in the entire value chain. The use of more integrated supply chain structures can raise questions on the nature of internal and external customer and supplier relationships. The main aim of this paper is to explain the importance of Supply Chain Integration and identify challenges that the process faces and possible solutions.
The primary drivers of supply integration are:
- Increased cost competitiveness- if the efficiency of internal operations is improved there is a need to have cost reductions through the improvement of effectiveness and synergy in the supply chains.
- Shorter product life cycles- there has been a growth of the production of products with shorter life cycles which has been fueled by the competition in the global industries. Supply chain integration will make the distribution of products with shorter life cycles easier and faster which will, in turn, reduce wastage.
- Faster product development cycles- for companies to remain competitive they must reduce the development cycle times of their products. When a product is brought to the market early enough, it will have a significant market share and sufficient unit volumes that will drop the costs rapidly.
- Globalization and customization of product offerings- all over the world there has been an increased demand for products that address specific needs of which the customers can afford. This has led to the growth of mass customization of goods.
- Higher overall quality- demand of higher overall quality has increased over time because there has been a growth of customer affluence and the fierce competition to be able to supply clients with their needs.
The integration process commands discipline in the management skills, technologies, and processes so as to use the functions and capabilities of the chain effectively. Integration of the supply change has the potential to improve profits and competitive positions (Kolmykova, A. 2016). In business, the supply chain is crucial for organizations, process efficiency on the global level as it ensures proper functioning of business operations. Some of the advantages of supply chain integration are;
1. Inventory management- whereby when there is close alignment with providers a company will be able to order materials in small quantities and have them delivered instead of ordering in bulk that will need to be properly managed and stored.
2. Known costs – when a company uses a particular supplier for specific materials long-term contracts can be drawn with the set price for the items. With the company knowing the fixed price it will be able to quickly adjust the selling price for the item with a guaranteed profit to be gained. The company will be able to maintain and increase revenue which will result in higher profit margins.
3. Guaranteed Customer- in an integrated supply chain companies manufacture products to feel the needs and wants in a chain and usually deliver the products to the next company, these means a company will always have guaranteed customers and less finished goods sitting in the warehouse. Companies will be able to predict demand and be able to provide accordingly. When innovation and logistics are put together with an efficient supply chain management, businesses will adequately respond to changes in demand.
4. Flexibility- with an integrated supply change companies will have increased flexibility to have a fast response to external events like a change in customer demand and actions of competitors. Companies will have the advantage of gathering information from their opponent’s plans through their supply chains.
Competition among businesses is increasing, and the operations of the firm are becoming more sophisticated. Three key issues are changing the SCM and logistics strategic landscape. These three points are:
1. The globalization of supply chains.
2. Vertical disintegration.
3. The different role of the supply chain as a source of strategic leverage.
Globalization of Supply Chains
In recent years there has been a significant change in the structure of the international economic and business environment. The global economic integration has increased due to the growth in trade blocs all over the world. This change is largely facilitated by the reduction of barriers to the transportation of capital, goods, services, people, and information on the international level which has increased international trade and foreign direct investment. The rapid growth of the world trade has resulted in the growth of supply chains. This increase is related to the buy, make, move, and sell design of product supply chains. With the structure of the international economic and business environment evolving global sourcing of materials and other input has become much easier for many organizations. In a report provided by the World Trade Organization during the production of American cars, 30% of their value is from Korea, 17.5% is from Japan, 7.5% from Germany, 4% from Singapore and Taiwan, 2.5% from the U.K and 1.5% from Barbados and Ireland. Only 37% of production value is from the United States (Faden, C. 2014) . This report shows that the imported intermediates have increased.
Company focus has expanded on the core activities or competencies which are the central things that organizations do well. The non-core activities are usually outsourced as they usually are time-consuming, they take up time energy and workspace which lead to the management losing sight of what is important. The economic and business globalization has resulted in the outsourcing of critical supply chains from third parties.
Supply Chain Integration has four stages of its integration framework as explained below;
- Baseline Integration entails the management of supply chain issues separately by each department in the same company.
- Functional Integration is whereby all the departments in the company work together so as to reduce costs.
- Internal Integration involves the connecting of all units via the same IT infrastructure so that there is an increase in efficiency
- External Integration is the joint effort of all companies in the supply change through working together
External Supplier and Customer Integration
External integration is the partnering of a company with its different consumers like clients and vendors. Integration with suppliers into the product supply chains will aid manufacturers in maintaining a competitive advantage. Research has found that the greater the degree of combination of both customers and suppliers the better the performance improvement of an organization. When providers and customers build a long-term relationship in a supply chain that is based on mutual understanding, it will ensure the constant flow of information and materials. For supply chain integration to be successful long-term relationships that involve responsibilities, general planning, joint efforts, and investments need to be adopted. The long-term relationships enable a business to overcome noisy business environments and ensure that delivery of products is constant (Heap, J. 2013). Supply chain integration will involve the coordination and collaboration of trade partners. Organizations should also consider information integration which is the sharing of operational, tactical, and strategic information with the supply chain. When information is shared between the management and the supply chain, it will lead to more efficient operations. Providing information across the supply chain creates visibility of inventory and production.
There are four levels in which integration is practiced;
1. Internal cross-functional integration
2. Backward integration with valued first-tier suppliers.
3. Forward integration with valued first-tier customers.
4. Complete backward and forward integration
First-tier suppliers can play a fundamental role in the promoting of integration through assisting and guiding the low-tiers suppliers. There are four stages between integration and supply chains, which are an internal level which involves activities that affect the company internally, Dyadic level includes two-party relationships like supplier & manufacturer or manufacturer & retailer. Chain level which requires set of Dyadic relationships supplier and a supplier’s supplier or a customer and a client’s customer. The final level is networking level which is concerned with wider network operations.
There is a need to shift from traditional supply chain systems which are filled with fragmentation to effective methods that involve integration. Incorporating more integrated approaches will require changes in the management of internal and external customer and supplier relationships. One critical issue is that the management should look at is the determining of appropriate relationships that will best suit a set of circumstances. The outsourcing of key supply chain activities such as warehousing, manufacturing, and transportation has resulted in a drift from the ‘control through ownership’ to models of control and management by establishing a supply chain relationship management.
Internal Supply Chain Integration
Internal supply chain integration is the chain of activities and functions that are performed by a company that will end with the customer receiving the final product. The integration of these activities usually demands the holistic performance of the functions of all the departments in the company. Successful internal supply chain integration should result in excellent company performance and customer service delivery. The internal integration process involves purchasing, operations, and logistics which are responsible for the provision of the product to the client. Purchasing is the start of input so that a product can begin the production process. Operations are the process of transforming raw materials into a final product. Logistics is the process where transfer and delivery of the product to the customer starts.
Costs of Integration
Most of the supply chain integration efforts have been limited in scope because of the costs, complexities, and risks of integrating and managing a highly integrated supply chain. Some of the major costs are time devoted to managing, training, and support, opportunity costs, and investment in the software and compatible information systems of the supply chain integration (Christopher, & Hoek, 2016) . Other expenses include risks of production stoppages and effort devoted to becoming a better customer. Potential threats like power outages, storms, disruption in communications, equipment breakdowns, and terrorism are not easily predicted thus are costly to prepare most of the time. Good communications and resource sharing are helpful in responding to disruptions, but those involved in the supply chain must be extra careful to high levels of risk in their quest for integration.
The integrating of a supply chain is usually an incremental process that gives priority to the investments with the highest potential returns. The supply chains of different units of a business are different priorities and approaches based on strategies, needs, and potential returns. Many companies use an approach that begins and is developed internally, and it gradually works outwards through the supply chain. The first step is usually to make in-house improvements like reductions in inventory which will reduce working capital, transportation costs, and warehousing (Faden, C. 2014). With this move in place, the integration effort will start to progress outward. The process of integration begins with supplier selection and development, approaches to integration, and then management tools that are available to support these efforts. Finally, the factors that are critical to success are identified, and the metrics for evaluating performance and progress are suggested.
Supplier Selection and Development Process
This process is a strategic initiative that is undertaken as part of the overall competitive strategy of a company. When a corporation uses outside suppliers, they will have to do a search for competitive providers based on the capability needs. The providers should be carefully selected because they will have a long-term and intimate business relationship.
Integration by Function
Many companies prefer the use of a function by function method to integrate the supply chain focusing on features that offer the highest returns. The most frequently combined features are inventories, procurement, manufacturing operations, inbound logistics, and the distribution of product & services. A successfully integrated supply chain must be open to function shift ability.
Integration by Process
Performance is improved when the supply chain is a set of integrated process capabilities rather than separate corporations and functions. Integration will be most successful across multiple processes.
Barriers to Integration
Many obstacles can impede the integration process. Optimization of one part of the supply can lead to the entire system being sabotaged. For better results to be attained the system should be optimized as a whole. Barriers to integration include:
- Poor communications
- Lack of mutually acceptable goals
- Inappropriate metrics for evaluating performance
- Clashing of corporate cultures
- Incompatibility of capabilities in electronic design technologies
- Lack of commitment in the nurturing of relationships
- Lack of mutual trust and respect
- Procurement policies and regulations of government
- Legal barriers which include intellectual property liability, and antitrust issues
There are forces beyond the control of supply chain partners which can break down the best efforts of integration. The supply chain managers should have the capability to anticipate these challenges, understand the abilities and limitations of those involved in the supply change so as to be able to come up with effective responses. If the supply chain managers have these skills and understanding of the dynamics and interrelationships of the supply chain, there will be more timely effective responses to disruptions and imbalances can be solved (Awasthi, & Grzybowska, 2014). There is always a chance for improvement of supply chain effectiveness. The problem in improving supply chain is brought by the challenge to prioritize opportunities correctly, devoting the time needed, allocation of scarce resources, and the expertise necessary to harvest theses opportunities. Understanding the supply chain integration and being able to pursue the best opportunities will enable a company to have a competitive advantage.
The integrated supply chain usually requires different management skills from the traditional SMEs. Participants of the supply chain must work towards achieving the goals of the integrated chain and still at the same time work towards realizing the aims of the individual enterprise. Organizations acquire most of their valuable knowledge from the hands-on experience and the informal human networks. To be able to bring change one must gain knowledge on how to harvest the power of these networks which are always in collusion with the management hierarchy (Madjid, T. 2013). Hierarchies usually involve the assertion of authority and power while networks are all about get things done and because of this, they are adaptable and constantly shifting.
Risk and Innovation
For a company to succeed in the changing of supply chain environment the management must be willing and ready to take the probable risks so as to promote innovation and ensure the company maintains a competitive advantage. By pursuing different customers, the SME might be able to rule out some business risks even though more customers means some might create additional and conflicting demands. The SME should be able to eliminate the bad clients, pursue, and ensure they keep the good ones then improve relationships by building and nurturing trust (Lan, & Unhelkar, 2012). The managements’ job includes the creation and management of an innovative environment.
Human Factors and Skills
The cultural and interpersonal issues have been linked to creating barriers to the effective participation of supply chain integration more than technical matters. The success of integrated supply chains requires a high level of interpersonal skills. It has already been noted that a long-term personal relationship with customers and suppliers is very crucial for a business to be stable and experience growth. Bonds of trust that enhance the credibility of each side are usually formed through a person-to-person relationship. One of the most important relationships are those that involve day-to-day decision making in all the levels of the customer and supplier organization. A successful integration demands a very tight and cohesive relationship that has a common goal between them on many levels and functions throughout the supply chain. All the participants that are in the supply change are independent entities thus there is a need for the supply chain integration and implementation to be handled with utmost care. The progress in supply chain integration commands that human interrelationships be improved so as to achieve technological integration. Companies should be in a position to assess and strengthen their management capabilities, create an environment that will adapt to flexibility, evolving skills, change, and learning that is needed by the integrated supply chain. The management should also find out how to deal with risks effectively. It is important that those involved in the supply chain integration continuously work to gain more knowledge and skills so that the customer supply chain is integrated effectively.
The success of the supply chain integration calls for all the organizations and persons involved in the process that together they will be able to benefit from their joint efforts. The supply chain includes a multi-organizational team that is supposed to cooperate in accomplishing one mission. All participants who are participating in the supply change are meant to benefit, and not just one party is benefiting. The supply chain integration demands for strategic alignment, relationship management, process improvement, and IT infrastructure. This has been noted to be difficult, but it is also attainable. With the reduction of trade barriers, easy access to technologies, and modern management methods, and availability of overnight deliveries the competition is becoming more and more severe. Competition is now based on the requirements of integrated supply chain such as quality, delivery, service, and technology. It is rather clear that for businesses to overcome the challenges in the integration of the supply chain they must have a significant strategic plan, increase their strengths in finance, management, & technology. Companies should also ensure that there is added value on their products, interact more closely with their customers and incorporate their individual supply chains so as to improve performance and reduce costs. These processes and responses are critical in the successful participation of companies in the modern supply chains.