Sharing Information to Boost the Bottom Line

Global business, retail innovations, and advances in information technology have had a huge impact on supply chain management. These changes are driving retailers and suppliers to share more information than ever before in order to deliver goods faster and keep inventories lower. Two Stanford Business School professors have assessed this trend as well as what data should be shared and what should be kept secret.

For years, companies have used their internal information systems to increase productivity. The new emphasis is on data systems that are tightly linked with outsiders, such as subcontractors or delivery agents. “All the internal opportunities have been exhausted,” says Seungjin Whang, Jagdeep and Roshni Singh Professor of Operations, Information, and Technology, who conducted the study with Hau Lee, Thoma Professor of Operations, Information, and Technology. “Now the mentality has changed. Companies have to gain efficiencies within the supply chain. As a result, many share information that used to be proprietary,” Whang says.

One form of supply chain data sharing is implemented through vendor managed inventory. Innovative retailers such as Wal-Mart can share weekly sales information by computer with a supplier like Procter & Gamble, which would then manage the inventory at Wal-Mart. By sharing information with its supplier, a retailer can lessen information distortion (called “the bullwhip effect”) in a supply chain and lower inventory. “If the supplier doesn’t perform, it pays a penalty,” says Whang. Suppliers also benefit because if they know how sales are going, they can better manage production schedules.

Using the supply chain to improve the bottom line is something that Japanese manufacturers have done for decades by building close, face-to-face relationships with parts makers and other key players in their keiretsu industrial groups. In Japan, a buyer typically visits a supplier many times a year and gives advice on where sales and growth are headed. The American adoption of this relationship is more formal. “It’s not based on a handshake, but on technology,” says Whang. American manufacturers and suppliers are learning to use the Internet to connect with 300 buyers at once to share data.

But Lee and Whang warn that current information systems are woefully lacking. Most are based on electronic data interchange (EDI), a 30-year-old, internally focused software technology designed for transaction processing. “EDI has minimum connections with the outside world and is now a primitive form of communication,” says Whang. “We need the next generation of system technology to address the needs and concerns of the Internet environment.”

How do you share this huge set of information over vast networks with high-speed communications? In their study, Lee and Whang discuss the features of new information systems and outline precautions data-sharing partners should keep in mind as they build technology in this field.

First, supply chain partners must take care when sharing sensitive cost data, such as production yields or parts pricing. Allowing suppliers or customers to know your pricing or costs can lead to pressure to lower prices and can eventually erode profits.

Second, confidentiality should be a top priority. For example, if a supplier provides a critical part to two competing manufacturers, the manufacturers should not share sales data unless the supplier guarantees the information will not be leaked to the other company. The situation becomes tricky if the supplier and one of the two manufacturers are the same company.

Third, information sharing can lead to a violation of antitrust regulations. If two retailers regularly tell their supplier their demand projections for the next 10 weeks, the forecast may signal plans for a future promotional campaign. When that information is relayed to the other retailer through the supplier, it may potentially be used as a price-fixing instrument between the two retailers to avoid cut-throat competition. Antitrust authorities are likely to scrutinize such practices, so suppliers must be sure that shared data is not used for purposes other than its original intent. In addition, if a retailer shares revenue data with a manufacturer, the retailer has less flexibility to juggle year-end numbers for tax- or performance-reporting purposes.

Fourth, the technology itself presents another hurdle. Partners have to negotiate specifications as well as how to split the cost of the system. Developing a cross-organizational information system is expensive, time-consuming, and risky.

Finally, information sharing has to be timely and accurate. Personal computer makers, for example, often complain about receiving poor sales data from resellers because some end their reporting on different days of the month. While manufacturers have to be sure that data is consistent, increased information sharing seems to be an inevitable part of supply chain management.