Supply chain managers crave innovative ways to cut costs and streamline systems. Often, they
turn to technology, hoping for big savings and process improvements. But not every tool that
promises huge cost reductions and streamlined operations is right for every business.
That’s why Ann Marucheck cautions supply-chain managers to be skeptical about anecdotal reports
of how technology or information sharing have resulted in huge cost savings.
Marucheck is chair and professor of the operations, technology and innovation management (OTIM)
area at UNC Kenan-Flagler.
Since substantial investments of money and time are required with a new technology, supply chain
managers need to take a nuanced approach and ask if the technology or information sharing will
provide additional information that realizes gains.
Reducing perishability in the supply chain
Questions remain about the sustainability of the online grocery business after Webvan’s 2001
failure. Learning from the firm’s mistakes, today’s online grocers follow one of two business
- Many large grocers, like Safeway and Albertson’s, piggyback online services on their brick-andmortar infrastructures. Their incremental investment is low, but since food items stay in the
supply chain much longer, many only offer non-perishables, such as laundry detergent and
canned goods. With these items’ paper-thin margins, the grocers’ key to profitability is volume,
which their warehouses can handle.
- Purely online grocers, like FreshDirect and Peapod, operate regionally. They have a shorter
supply chain, which means perishables move faster and arrive fresher. This model can make
money, but it doesn’t have the scale needed to expand nationally without having a direct
impact on supply chain length and product quality.
Marucheck investigated the profitability of different operations models for online grocers and finds
that both models can be profitable if businesses correctly match product mix to supply chain
Managing inventory transactions
A shorter supply chain is more responsive to demand, keeping inventory levels low and customer
satisfaction high. To achieve this, many industries—including the auto sector—have invested in
electronic data interchange (EDI) systems to seamlessly transmit information from the demand
side through the supply chain and back again.
Marucheck undertook an integrated analysis of EDI research and the technology’s impact. Cost
savings from EDI often depend on the degree of coordination within the supply chain.
Unfortunately, many businesses use different types of applications software from different vendors.
This makes it difficult—if not impossible—to integrate EDI data with an existing application
For instance, a supplier in the auto industry began receiving purchase orders through EDI. Because
of different communication standards, it never was able to fully integrate the purchasing
information from the EDI system into the order-processing software or inventory management
software. Costs actually increased—with no benefits realized.
Marucheck reviewed research on how supply chain information is used and developed guidelines for
making successful adoption and implementation decisions.Information about customer demand gets distorted over time by the various ordering policies used
by different firms, Marucheck found. As a result, its w accuracy and reliability are highly suspect.
Not surprisingly, data is of greatest value when it reduces uncertainty around actual demand or
supply. When EDI is deeply integrated across the enterprise and through the supply chain, a firm
can achieve meaningful efficiencies and savings—and its supply chain nears “perfection” through
Dell, for example, uses EDI to match demand to inventory and delivery. At point-of-sale, orders for
components in the batch size are transmitted via EDI to the supplier for nearly immediate delivery.
As a result, Dell holds virtually no inventory.
So while reduced uncertainty equals reduced costs, more information doesn’t necessarily mean
more savings and efficiencies, Marucheck advises.
Seeing the value
In fact, only information that creates cost-savings or generates revenue is of true value to the
business. This is borne out in a study of RFID applications by Marucheck and UNC Kenan-Flagler
colleagues Noel Greis and Monica Nogueira and Linning Cai of Tsinghua University.
One company deployed RFID tags to capture more information of value to the customer. But
customers had never asked for the information and were unlikely to pay for it. And because the
business wasn’t using RFID in other capacities, it invested in a technology that added no real value
to the enterprise.
Even the world’s largest retailer, Wal-Mart, didn’t get it right. After requiring suppliers to use the
tags (and at their own expense), Wal-Mart saw only incremental cost savings. Said one food
supplier interviewed for the study: “We tagged our product to meet the mandate of Wal-Mart, but
probably haven’t realized enough gains through tracking to expand it to all our products.”
On the other hand, the same supplier sees how the RFID tags could potentially provide very
meaningful input related to food safety. “We are interested in the ability of more sophisticated tags
which have sensing capabilities which can keep records of the temperature and humidity the
product is exposed to throughout the supply chain. That would really help us better manage
our perishable products.”
In this case, RFID tags could provide managers information about conditions (such as temperature
and moisture) during shipping, storage and handling that affect a product’s shelf life. The same
data also could be used to track an item in the case of contamination and determine which items
need to be recalled in case of a safety or security problem. At the very least, better RFID tags
could provide information on how long the product has been in the supply chain and where it has
been to determine how long it could safely be offered on the retail shelf.
The bottom line
Marucheck’s research clearly shows that managers should not assume that investing in a
technology—even when coerced to do so by a more powerful channel partner—will produce huge
cost savings. And savings generated by automated processes can be erased by the costs of
hardware, software, training and maintenance—particularly if the underlying processes aren’t
changed to leverage the new technologies and the information they can provide.
The take-away for supply chain managers, then, is to take an analytical approach to new
technologies and practices.
Questions to ask when evaluating technology for supply chain operations and process
- Have the problems that the technology is designed to address been created by “broken”
processes or “work arounds” due to process bottlenecks? (If so, you probably won’t realize
the purported cost savings).
- What benefits do we expect from this technology and are there other “closed system”
technologies that can provide the same benefits?
- What standards does the technology use and are these the same as our global supply chain
- As the technology industry consolidates, will the vendor likely be around in the next 3-5
years to support the technology and to provide the upgrades and integration to other
systems needed for supply chain integration?
- What areas of the business and the supply chain, besides those immediately impacted, need
to learn about the technology?