The modern business environment is characterized by fast changes, and high competition forces organizations to seek ways to reduce direct, operating, and other costs in order to survive and thrive. For this reason, companies can adopt various methods such as Six Sigma, Kaizen, simultaneous engineering, and Just-in-Time production, to name a few. Among them, the integrated supply chain can be named one of the most important methods of expense reduction because it touches every part of an organization (National Academy of Sciences [NAS] et al., 2000).
Therefore, this essay intends to discuss which type of costs the aforementioned method can effectively reduce and what other important benefits a fully integrated supply chain brings to the organizations compared with the traditional approach. The latter includes a faster and more flexible response to market demands and data centralization and data visibility.
Evidence suggests that a fully integrated supply chain is positively associated with the reduction of inventory-related expenses. For instance, NAS et al. (2000) state that adopting this method can help companies cut inventory levels by approximately 30 percent, which would result in serious savings. Also, an integrated supply chain leads to a reduction in businesses’ transaction costs. In this regard, Singh and Teng (2016) found that the most important variables that best predict transactional expenses include the usage of informational technologies and the existence of trustful relations between counteragents.
Furthermore, an integrated supply chain reduces the costs associated with the management of logistic networks and is mainly achieved through a decrease in supplier redundancy. Finally, the integrated logistic network allows sharing of the costs between different parties and, thus, alleviates the burden solely from one side. Illustrating that process in the context of green-cost share, Raj et al. (2018) maintain that: “…supplier invests in product greening and the buyer offers to share a fraction of the supplier’s upfront cost…” (p. 281). Therefore, it is clear that an optimized supply chain reduces the company’s expenses in many ways.
Additionally, an integrated supply network can ensure the increased speed of response to constantly changing market demands. That is possible due to good communication and trustful relationships between various parties (Thomas et al., 2018). Moreover, an integrated supply chain assumes that all the counteragents seek to share risks and benefits under a win-win paradigm which further positively impacts the success of collaboration and, thus, decreases reaction time to volatility. On the contrary, due to its principal focus on short-term benefits and underdeveloped communication channels, the traditional and unmanaged system would fail to address market changes effectively (NAS et al., 2000). Therefore, the companies which seek to be flexible and respond to volatile market demands swiftly should aim to fully integrate their supply networks.
Moreover, an integrated supply chain promotes data centralization and data visibility. That can help analysts to conduct a deep and broad inquiry of existing business operations, define potential problems and optimization needs and make better predictions (Eljazzar et al., 2018). In contrast, under an unmanaged supply chain, the managers are only restricted to departments’ or companies’ private data. Although it still allows for conducting analysis and forecasts, the results would not be as precise as they would be if the supply network is integrated. As a result, the organization may leave many opportunities for increased competitiveness and profitability unrealized.
In summary, the current paper, firstly, identified which types of costs a fully integrated supply chain is able to reduce. It was found that an optimized supply network is associated with a decrease in inventory-related, transactional, and supplier redundancy-related costs. Moreover, the parties reduce their expenses due to the practice of shared-cost contracts that distribute the money invested in production, innovation, and/or other projects among involved stakeholders. Secondly, the current paper presented some other benefits that are related to supply chain integration. They included the notion that this approach leads to a faster and more flexible response to market demands and allows data centralization and data visibility for better business analysis.
References
Eljazzar, M. M., Amr, M. A., Kassem, S. S., & Ezzat, M. (2019). Merging supply chain and blockchain technologies. In K. Jain, S. Sangle, R. Gupta, J. Persis & R. Mukundan (Eds.), The 28th international conference for the international association of management of technology (pp. 224-228). International Association for Management of Technology.
National Academy of Sciences, National Academy of Engineering Institute of Medicine, National Research Council. (2000). Surviving supply chain integration: Strategies for small manufacturers. National Academy Press.
Raj, A., Biswas, I., & Srivastava, S. K. (2018). Designing supply contracts for the sustainable supply chain using game theory. Journal of Cleaner Production, 185, 275-284.
Singh, A., & Teng, J. T. (2016). Enhancing supply chain outcomes through Information Technology and Trust. Computers in Human Behavior, 54, 290-300.
Thomas, S., Eastman, J., Shepherd, C. D., & Denton, L. T. (2018). A comparative assessment of win-win and win-lose negotiation strategy use on supply chain relational outcomes. The International Journal of Logistics Management, 29(1), 191-215.