In the Internet age, the term information tends to convey an image of the kind of data that can be stored, processed and communicated electronically. Information comes in different shapes and forms, however, with important implications for supply chain strategy. An important distinction must be made between information that can be codified and interpreted in a standard way, and information that is tacit and requires specific experience or capabilities to interpret.
Many types of coordination problems in operational settings require information that can, in fact, be fairly well codified and interpreted in a relatively unambiguous way. Examples would be information on costs, prices, quantities, and dates of specific models shipped and delivered, inventory levels, defect rates, and production schedules. Many elements of the design of certain products (such as layout, part specifications, materials, interfaces between components etc.), can be codified in blue prints and CAD models. Similarly, standardized module interfaces can codify much of what designers of different parts of system need to know about each other’s designs in order to coordinate their tasks. One of the advantages of codified information is that it can be shared relatively quickly and efficiently. New information technologies are making it even quicker and more efficient to share codified information across large numbers of people and organizations spread over wide distances. When different companies can quickly and easily share requisite information (via documents or electronically formatted data), vertical integration is not necessary to achieve coordination.
In retail supply chains, for example, better coordination between different parts of the supply chain from producer through retailer can significantly reduce the costs of stock-outs and excess inventories, as will be discussed. Adjusting production to reflect what is actually selling at the store level requires that information about retail sales and inventory levels be rapidly shared throughout the supply chain. Because the relevant information can be codified and captured, processed, and transmitted electronically, better coordination in retail supply chains does not require vertical integration. It can be achieved across separate companies using appropriate information technologies (e.g. point of sale terminals) and contractual agreements delineating operating policies that must be followed. It is no coincidence that the trend towards outsourcing has accelerated in recent years as the Internet and other technologies that facilitate information exchange became available. The new technologies have improved the coordination efficiency of outsourcing.
Similarly, if part designs and specifications can be codified precisely and conveyed in standard ways, coordination between R&D and manufacturing may not require vertical integration. It is not that coordination between R&D and manufacturing isn’t necessary rather, that such coordination can be achieved through the exchange of well documented and standardized information between the organizations. This may help to explain why the contract manufacturing of printed circuit boards in the electronics industry has become such a big business. Printed circuit boards’ designs, while very complex, can be fully specified in writing and transmitted electronically to suppliers. Modular product designs, in which the interfaces between different components or subsystems are well specified and standardized, are also likely to enable sufficient coordination without vertical integration. In analysing the disk drive industry, non-integrated firms appear to have gained competitive advantage during the period when disk drive designs became modular. Standard interfaces embodied all of the information required by designers of different systems (heads, disks, controllers, etc.) to coordinate their work. Since there was no need for extensive communication between designers of different parts of the system there was no advantage to being vertically integrated.
There are many types of situations; however, where the information required for close coordination is not easy to capture in codified format, or to interpret properly, because it is idiosyncratic and tacit. A good example would be the interface between R&D and manufacturing in biotechnology. Genetically engineered processes are enormously complex. Moreover, they are relatively new and many scientists in the field describe them as “more art than science”. Many of the nuances of these processes are not well understood, even by the most highly skilled R&D and manufacturing personnel in the industry. As results, it is extremely difficult to describe the process in its entirety via documentation. Processes developed at laboratory scale often do not work as expected, when transferred to a full scale production facility.
Uncovering the reasons for these problems typically requires extensive experimentation and iteration of the process. In addition, there are subtle but important interactions between the product and the process technology. Minor alterations in the process can have a significant impact on the quality and character of the product being made. As a result, process development requires extensive coordination and communication between process R&D and manufacturing. Successfully, transferring the process from the lab to the plant requires R&D personnel to go to the plant, often for an extended period of time, to set up the process and supervise initial test batches. Process problems encountered at large scale may require changes to the process (e.g. reaction temperatures) the production environment (e.g. a new piece of equipment), or both.