News Release

Study: supply chain savings jump 22% for companies that use I.T. to cut lead time

Peer-Reviewed Publication

Institute for Operations Research and the Management Sciences

Manufacturers and retailers that use improvements in information technology to shorten the time it takes to produce and deliver a product can realize an average 22% savings in supply chain costs, according to a study published in a journal of the Institute for Operations Research and the Management Sciences (INFORMS®). Similarly, companies that use IT to manufacture products in smaller batches that are better tailored to individual retailers' needs can realize an average 21% supply chain savings.

In contrast, using checkout counter scanners and new techniques of electronic data interchange (EDI) to provide manufacturers with early alerts about retailers' demand and inventory yields only a 2.2% average supply chain improvement over traditional information policy. These results apply to long life-cycle products like groceries and other daily consumables, where the average demand rate is well known from history. Information sharing between retailers and manufacturers can still be expected to have high value for short-life cycle products like fashion apparel, toys and trendy music that have highly unpredictable demand.

The study, "Supply Chain Inventory Management and the Value of Shared Information," is by Gérard P. Cachon, Associate Professor of Operations Management, the Wharton School, and Marshall L. Fisher, Stephen J. Heyman Professor, Professor of Operations and Information Management, and Co-Director, Fishman-David Center for Service and Operations Management at the Wharton School. It appears in the current issue of Management Science, an INFORMS publication.

The researchers set out to test the commonly held belief that analyzing sales data collected at point of sale brings major savings to retailers and manufacturers, who can use electronic data interchange to improve ordering and reordering.

The researchers noted that the same information technology that facilitates information sharing also allows manufacturers to reduce lead times, increase shipment frequency, and tailor the size of the batches they manufacture.

In fact, they determined in the study, these other improvements appear to be the chief contributors to IT savings in supply chains. "We conclude that while information sharing does reduce costs, simply flowing goods through the supply chain more quickly and more evenly produces an order of magnitude greater improvement," write the authors. "Our results are surprising; indeed, we undertook this research with the strong expectation that we would be able to demonstrate significant benefits to information sharing in these models."

The authors conjecture that new forms of information exchange have limited benefits because a retailer's traditional order conveys to the supplier a substantial portion of the information that the supplier needs to perform its ordering and allocation. Economists teach that a retailer's demand information is most valuable when the retailer's inventory approaches a level that should trigger the supplier to order additional inventory. Since this is also the time when the retailer is likely to submit an order anyway, sharing information early contributes little. This is especially true when the supplier delivers frequently with a short lead-time, since it will be receiving frequent orders from the retailer that provide a steady flow of information about demand.

The study uses mathematical modeling, simulation, and other forms of operations research to analyze the impact of information technology on the supply chain. The researchers use theoretical techniques to reach their conclusion. But they note that examples of companies shortening the time it takes to manufacture and process orders are showing up more often.

The assumptions in their study best fit the operations of food manufacturers and supermarkets, and these are among the businesses that have seen such savings, the study reports. Three examples based on published reports and company data are Barilla, the world's largest pasta producer, which reduced its lead time from over 1 week to 2 days; Campbell Soup Company, whose savings mirror those in the Cachon-Fisher model; and H.E.B., a Texas-based grocery chain, which eliminated 6 to 10 days from its lead time.

Although industries like fashion apparel traditionally incorporate long lead times of several seasons, this lag may also be shortening with the advent of new technology.

"One Japanese clothing manufacturer, World Company, can design, manufacture, and deliver an item to stores in as little as three weeks," says Professor Fisher. "Needless to say, their supply chain savings and their boost in sales have been substantial."

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The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications. The INFORMS website is at http://www.informs.org .


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