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Roman Kapuscinksi in his office
  Roman Kapuscinski

Improving the Efficiency of Supply Chains

1/27/2004 --

ANN ARBOR, Mich.---Few companies are able to integrate backward with their suppliers and forward with their retailers to achieve the efficiency associated with centralized control of their supply chain. Instead, firms generally must make the best of a decentralized setting where they have little or no control over individual suppliers and retailers---whose objectives are to minimize their own costs regardless of the impact on the overall system.

Despite these inherent conflicts, scholars at the University of Michigan Business School propose a new collaborative strategy designed to improve the efficiency of decentralized supply chains. In a recent research paper, Michigan faculty member Roman Kapuscinski, graduate student Wanshan (Adam) Zhu and Indiana University faculty member Srinagesh Gavirneni say signing supply contracts that restrict a retailer's orders at certain times can decrease the efficiency loss caused by decentralized ownership.

"Through this strategy, our computational study shows that total supply-chain costs can be reduced by as much as 22 percent, averaging around 7 percent," says Kapuscinski, assistant professor of operations and management science at the Business School. "In addition, up to 60 percent of potential savings, with an average of 30 percent, can be captured."

For research purposes, Kapuscinski, Zhu and Gavirneni used a simplified model involving one supplier, one retailer and one product in a marketplace where customer demand fluctuated randomly.

They found that greater overall cost efficiency was realized when a retailer's order was restricted to a fixed quantity during some periods (but not limited during other periods) in the supply-chain cycle and a supplier continued to have free access to information about inventory levels at the retailer, thereby facilitating production decisions. This strategy proved most effective when supplier capacity was high, retailer backlogging cost was not too high, retailer holding cost was not too high compared to supplier holding cost, and variance in demand was moderate compared to supplier capacity.

Insights gained from the study also apply to market situations involving multiple customers and/or multiple products.

"In the presence of many retailers, a supplier can stagger the fixed-order and unrestricted-order periods so that in every period it is supplying a fixed quantity to some retailers while satisfying random demands from others," Kapuscinski says. Staggering not only reduces uncertainties but also enables a supplier to use retail-inventory information to predict demands more accurately. Likewise, in the case of multiple products, in every period a supplier can provide a fixed quantity of some products to retailers while meeting random demands for other products.

The researchers add one note of caution in their findings. When supplier capacity is very large, they say, synchronizing all constrained retailer orders to the same period will result in slightly higher cost savings. However, when supplier capacity is limited, staggering the fixed orders so they fall in different periods proves more efficient.

For more information, contact:
Bernie DeGroat
Phone: 734.936.1015