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Authors: Seidmann, Abraham
Sundararajan, Arun
Issue Date: Sep-1997
Publisher: Stern School of Business, New York University
Series/Report no.: IS-97-18
Abstract: Information technology has radically altered the management of supply chain operations; many business partners who are adjacent on the supply chain can gain from entering inter-organizational information sharing (IOIS) relationships and sharing information that was previously accessible to only one of them. This situation is typical in retailer-supplier logistics management relationships. The first part of our study analyzes different forms of virtual integration - relationships between independent companies that result in some of their operations resembling those of a single vertically integrated firm - and classifies them based on their models of information sharing across the supply chain. We find that there are four primary policies that firms adopt when they exchange information across the supply chain; these are EDI, vendor managed inventory (VMI), continuous replenishment (CR) and category management (CM). Typically, corporations view the development of inter-organizational information systems, and the sharing of information as being targeted at increasing operational efficiency by reducing ordering costs, inventory costs and supply lead times. Many studies have focused on studying IOIS technology issues, and estimating the value generated from these arrangements using traditional models of inventory and ordering costs. However, we find that in a number of cases, the information shared can have cross-functional value - it can also be used to improve a supplier's production planning, and to alter their marketing and sales strategies. Paradoxically, however, suppliers who receive such information feel that not only are their benefits minimal, but they often end up worse off than before the IOIS was implemented. The second part of our study explains this paradox. We show how retailers and other buyers can successfully contract to end up with more value than is generated by the sharing of information. Using game-theoretic models of strategic interaction, we show that this effect intensifies as the competitive value of the information to the supplier's marketing and sales departments increases. Besides, as the value that could be generated by the sales and production divisions of the supplier increases, we demonstrate how the supplier loses more and more value. Furthermore, the buyer need not actually share the information to derive these rents; we indicate why the possibility of sharing is sufficient, even when the buyer cannot independently create value from that information. The practical contributions of this inter-disciplinary study are manifold. We provide a clear and lucid description of the different levels at which organizations share information. We also describe a fairly general modeling framework which lays the foundation for a deeper analysis of this increasingly important area. Our strategic results demonstrate that a single focus on the technological or operational aspects of IOIS can mislead managers significantly. The true costs and benefits of these relationships can only be judged by recognizing the cross-functional impact of the information flows on the operational architecture, the marketing strategies of the suppliers and buyers, and the nature of competition within the respective organizations' industries.
Appears in Collections:IOMS: Information Systems Working Papers

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