Improving inventory level through information sharing and cooperation
- Marie-Antoinette Mbaye
- 24 oct. 2023
- 5 min de lecture
As professionals, we can all recall the impact of the lack of information regarding stock availability in our daily activity. This obstacle can decrease the agility of the entire supply chain while increasing inventory risks such as oversupply or shortages. For Zahara Lofti et al. (2013)[1], information technology on modern supply led to better coordination among partners. However, we should underline that available technologies, such as software, are not sufficient to obtain the willingness of partners to cooperate. Indeed, the core of this field is the improvement of the inventory level while mastering costs for a better service level.
Before sharing information with their partners, companies should assess their needs, goals, and abilities. To do so, the researchers have established four questions that managers should answer:
What kind of information should be shared?
Which interlocutor/partner should we share the information with?
Which method/channel/technique can be used to share this information?
At which frequency can we share this information?
Defining this spectrum helps to avoid unnecessary actions, costs, and improve the entire collaboration process on both sides. Companies obtain a lot of gain out of this “knowledge sharing”, such as decreasing the uncertainty while improving the quality service toward the customer who will receive products with a lower price and an order to delivery lead time.
In their research, Zahara Lofti et al. (2013), the type of information that can be shared are categorized as follow:
Inventory Information
Sales Data
Sales forecasting
Order information
Product ability information
Exploitation information of new products
Zahra Lotfi et al. (2013) have developed in their work the list of the benefits of the information integration among partners, which includes:
Inventory reduction and efficient inventory management
Cost reduction
Increasing visibility (significant reduction of uncertainties)
Significant reduction or complete elimination of Bullwhip Effect
Improved resource utilization
Increased productivity, organizational efficiency, and improved services
Building and strengthening social bonds
Early problem detection
Quick response
Reducing the cycle time from order to delivery
Better tracing and tracking
Earlier time to market
Expanded network
Optimized capacity utilization
The researchers have pointed out that the most valuable data for companies are the inventory and demand information. They enable companies, but also the partners involve, to have a higher forecast. In this sense, information sharing rebalances the asymmetry caused by the lack of knowledge that one actor might possess. From a monetary point of view, Zhao et al. (2002) proved that an information-sharing used effectively can lead to a decrease of inventory costs between 5% and 35%.
To push further this notion of information sharing, companies should look at systems of cooperation such as a way to work effectively between partners. Indeed, systems such as Vendor Managed Inventory (VMI), Collaborative Planning (CP), Forecasting and Replenishment (CPFR), Efficient Consumer Response (ECR), can improve a collaborative strategy. For example, a distributor having issues seeing the customer’s stock level frequently can be solved easily with this kind of process.
However, besides the advantages that represent sharing information, we must acknowledge this process also has some limits, such as:
The privacy of the information shared can go against the confidentiality policy of the structure.
Data should be accurate and relatable in order to avoid the circulation of altered information.
The technologies used to share information can be very costly.
Partners have to invest in the training of their employees for new processes and technologies.
In a research made by Mohammed M. Ali et al. (2017)[2], it has been demonstrated that information sharing allows conveying demand characteristics between partners. Even if companies understand the importance of collaboration, a lot of them tend to limit the information shared between external and internal partners. The core of this mindset is based on trust issues among partners. Indeed, organizations are assessing supply chain risks with confidentiality risk (Laeequddin et al. 2009).
As a lot of companies are challenged by a lack of information, researchers developed methods to do forecasting in a data-constrained environment. In their work, Mohammed M. Ali et al. (2017), aimed to answer to this issue: “what to do when we don’t have the information shared”, or when the manufacturer/ distributor doesn’t have the visibility on the demand process at the retailer?
In that case, companies have three strategies available:
1. The demand strategy when there is No Information Sharing (NIS):
Companies can plan with the data history and the orders received from the retailer, but they do not receive any information about the demand from the retailer.
The forecasting method is the Minimum Mean Square Error (MMSE).
2. The Downstream Demand Inference (DDI) demand strategy:
The manufacturer is not aware of the demand process at the retailer.
The forecasting method is the Simple Moving Average (SMA). This method is the most used among practitioners because it is based on the arithmetic mean of the most recent observation. However, this method is less accurate than others, such as the Single Exponential Smoothing (SES), on the short time forecasting horizon. As the forecasting horizon lengthens, the difference of accuracy between the SMA and the SES methods decreases (Makridakis et al., 1982). Another element should be taken into account with the SMA method. It is not suitable for demand patterns that have strong seasonality or trend.
3. The demand strategy with Forecasting Information Sharing (FIS)
The forecasting and the demand information are shared easily among the partners.
The forecasting method used is the most optimal, and most of the time it is the SMA.
Mohammed M. Ali et al. (2017) demonstrate in their work the importance of information sharing in the supply chain. Indeed, the FIS strategy (strategy 3), largely outperformed the NIS (strategy 1) and the DDI (strategy 2) strategies with a lower Mean Square Error (MSE) in their forecasts. If we compare the strategies 1 and 2, we can see that the NIS strategy (strategy 1) is outperforming the DDI strategy (strategy 2). However, after a breaking point, researchers noticed that the NIS strategy is impacted by the Bullwhip Effect, causing a decrease in the performance of this strategy. Nevertheless, the forecasting accuracy outweighs the Bullwhip Effect, causing the NIS strategy to be a better strategy than the DDI.
Inventory costs have also been analyzed in this study. The results show that inventory costs are at the lower while in the FIS strategy, but the cost reduction is more effective in the MMSE method (strategy 1) compare to the SMA method (strategies 2 and 3).
To conclude, according to this article sharing information is more effective in terms of cost reduction and inventory level than the forecasting methods used.
Sources
[1] Lotfi Z., et al., (2013), ‘Information Sharing in Supply Chain Management’, Procedia Technology, 11, 2013, p.298-304, [online], available at https://doi.org/10.1016/j.protcy.2013.12.194 (accessed 29 July 2020). [2] Mohammad M. Ali, et al., (2017), ‘Supply chain forecasting when information is not shared’, European Journal of Operational Research, 260(3), p.984-994, [online], available at https://doi.org/10.1016/j.ejor.2016.11.046 (accessed 29 July 2020).
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