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Networked Inventory Management

by

Distributed Object Technology

PROEFSCHRIFT

M.A.A.P. Verwijmeren

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Verwijmeren, Martinus Antonius Adrianus Petrus

Networked Inventory Management by Distributed Object Technology /

Martinus Antonius Adrianus Petrus Verwijmeren. - Leidschendam: KPN Research. -Ill.

PhD thesis Eindhoven University of Technology. -With ref. -With summary in Dutch.

Keywords: logistics management, information technology, supply chain management, inventory

management, networked organisations, computer networks, object-oriented systems, distributed

systems

NUGI 687 / 855

ISBN 90-72125-62-2

Cover picture by Marieke Kavelaars

1998 Koninklijke KPN NV, KPN Research, Leidschendam, The Netherlands

Copyright reserved. Subject to the exceptions provided for by law, no part of this publication may be

reproduced and/or published in print, by photocopying, on microfilm or in any other way without the

written consent of the copyright owner; the same applies to whole or partial adaptations. The

copyright owner retains the sole right to collect from third parties fees payable in respect of copying

and/or take legal or other action from this purpose.

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Networked Inventory Management

by

Distributed Object Technology

PROEFSCHRIFT

ter verkrijging van de graad van doctor

aan de Technische Universiteit Eindhoven,

op gezag van de Rector Magnificus, prof.dr. M. Rem,

voor een commissie aangewezen door het College voor Promoties

in het openbaar te verdedigen

op woensdag 14 oktober 1998 om 16.00 uur

door

Martinus Antonius Adrianus Petrus Verwijmeren

geboren te Breda

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Dit proefschrift is goedgekeurd door de promotoren:

prof.ir. P. van der Vlist

en

prof.dr.ir. A.J.M. Vermunt

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To my grandparents, wondering from above.

To my parents, supporting from behind.

To Marieke, standing by my side.

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Preface

I

Preface

Human civilisation is developing faster then ever before. Change seems to be the only

constant for people living now. We are experiencing globalisation of our economy and, atthe same time, we are facing individualisation of our society. Driving forces for these

developments are, amongst others, logistics management and information technology. In

this context, the research described in this book studies information systems for supply

chain management, that are based on computer network technology.

I owe a great deal of thanks to all the people who in some way supported me in

conducting this PhD study. Thanks to Prof. Tilanus, who helped me in starting up

research after my graduation. I express my gratitude to the former graduate students, who

contributed vital elements to the research: Lucas van Rijen, Rajkov van Grinsven, Lucian

Toia and Erik van het Hof. Thanks to the supervisors from university, in particular to Prof.

Van der Vlist and Prof. Vermunt who guided me through the research process, and to

Prof. Wortmann and Prof. Nieuwenhuis for their valuable comments in the final stage.

I am grateful to KPN, TPG and KPN Research for giving me the opportunity to

conduct research in the middle of the fascinating business dynamics of logistics and

telecommunications. The investment in research enables continuous innovation, which is

the only way to continue business in continuously changing markets. Many thanks to themanagement of KPN Research for funding the research. Despite, or because of the risks, it

was a real pleasure to do my PhD study in the mixture of academia and business. Thanks

to the many colleagues I have met through the years, who gave me inspiration with lively

in-depth discussions as well as relaxed social chats.

A healthy private life, in which dear persons give me comfort and joy, is essential

to succeed in the job. I deeply respect my parents, who laid the foundation of this work by

bringing me up, facilitating my education and showing interest in my occupations. In

addition, I appreciate my friends and family for accepting me to be less involved in social

life in the last few years. Finally, I owe countless hugs to my dear girlfriend Marieke, who

had to do without me so often, who helped me to make progress, and who tolerated my

absence, even when I was present.

As a young boy, I wondered together with my grandparents about the way the world

runs. Later on, I developed the ambition to do some research myself. With the completion

of this dissertation my ambition comes true. Unlike the majority of the world population, I

am living in lucky circumstances, that enabled me to make this intellectual discovery tour.Although it was a lot of work, I feel it as a rewarding privilege to contribute a little bit to

the knowledge of mankind. At the end, I am glad that I have learned very much during

this valuable stage of my life. However, I am much more happy that I am still wondering.

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Preface

II

Martin Verwijmeren, July 1998

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Contents

III

Contents

1. Introduction 1

1.1 Research problem 1

1.1.1 Context 1

1.1.2 Objective 3

1.1.3 Limitation 7

1.2 Research method 8

1.2.1 Methodology 8

1.2.2 Framework 11

1.2.3 Report 13

2. Supply chain management analysis 15

2.1 Introduction 15

2.2 Issues in supply chain management 15

2.2.1 Supply chain management 16

2.2.2 Integral inventory management 20

2.2.3 Networked organisation management 24

2.3 Networked inventory management requirements 28

2.3.1 Integral inventory management requirements 31

2.3.1.1 Base Stock Control 33

2.3.1.2 Material/Distribution Requirements Planning 34

2.3.1.3 Line Requirements Planning 35

2.3.2 Networked organisation management requirements 36

2.3.2.1 Configuration flexibility 36

2.3.2.2 Timing flexibility 37

2.3.2.3 Algorithm flexibility 39

2.4 Conclusion 40

3. Networked inventory management design 43

3.1 Introduction 43

3.2 Integral inventory management design 43

3.2.1 Integral inventory management model 44

3.2.1.1 System model 44

3.2.1.2 System variables 47

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Contents

IV

3.2.1.3 System equations 54

3.2.2 Integral inventory management properties 62

3.2.2.1 Base Stock Control 62

3.2.2.2 Material/Distribution Requirements Planning 67

3.2.2.3 Line Requirements Planning 72

3.3 Networked organisation management design 78

3.3.1 Networked organisation management model 78

3.3.1.1 System model 78

3.3.1.2 System variables 82

3.3.1.3 System equations 84

3.3.2 Networked organisation management properties 87

3.3.2.1 Configuration flexibility 87

3.3.2.2 Timing flexibility 93

3.3.2.3 Algorithm flexibility 99

3.4 Conclusion 105

4. Case study implementation 107

4.1 Introduction 107

4.2 Logistics management 107

4.2.1 Current situation 108

4.2.2 Future scenario 114

4.3 System application 117

4.3.1 Application ofNIMISs 118

4.3.2NIMISs and Business Information Systems 122

4.4 Conclusion 126

5. Computer network technology analysis 127


5.2 Issues in computer network technology 127

5.2.1 Computer network technology 128

5.2.2 Distributed system technology 133

5.2.3 Object-oriented system technology 136

5.3 Distributed object technology requirements 139

5.3.1 Distributed system technology requirements 143

5.3.1.1 Local computing 143

5.3.1.2 Heterogeneous computing 144

5.3.1.3 Transparent computing 144

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Contents

V

5.3.2 Object-oriented system technology requirements 145

5.3.2.1 Object classification 146

5.3.2.2 Attribute encapsulation 146

5.3.2.3 Operation invocation 147

5.4 Conclusion 148

6. Distributed object technology design 151


6.2 Object-oriented system technology design 151

6.2.1 Object Modelling Technique 152

6.2.1.1 Object model 155

6.2.1.2 Dynamic model 174

6.2.1.3 Functional model 188

6.2.2 Object-oriented system properties 190

6.2.2.1 Object classification 190

6.2.2.2 Attribute encapsulation 192

6.2.2.3 Operation invocation 194

6.3 Distributed system technology design 195

6.3.1 Common Object Request Broker Architecture 196

6.3.1.1 Object Request Brokers 197

6.3.1.2 Interface Definition Language interfaces 199

6.3.1.3 Services and Facilities 200

6.3.2 Distributed system technology properties 201

6.3.2.1 Local computing 202

6.3.2.2 Heterogeneous computing 204

6.3.2.3 Transparent computing 205

6.4 Conclusion 207

7. Prototype system implementation 209


7.2 Information technology 209

7.2.1 Prototype tools 210

7.2.2 Prototype objects 215

7.3 System operation 219

7.3.1 Prototype installation 219

7.3.2 Prototype use 223

7.4 Conclusion 229

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Contents

VI

8. Conclusion 231

8.1 Outcomes of the research 231

8.1.1 Supply chain management analysis 232

8.1.2 Networked inventory management design 2348.1.3 Case study implementation 235

8.1.4 Computer network technology analysis 236

8.1.5 Distributed object technology design 238

8.1.6 Prototype system implementation 239

8.2 Issues for further research 240

8.2.1 Supply chain management analysis 240

8.2.2 Networked inventory management design 241

8.2.3 Case study implementation 241

8.2.4 Computer network technology analysis 242

8.2.5 Distributed object technology design 242

8.2.6 Prototype system implementation 242

References 245

Abbreviations 257

Summary 261

Samenvatting 269

Curriculum vitae 277

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Chapter 1 Introduction

1

1.Introduction

1.1 Research problem

1.1.1 Context

This research focuses on the mutual impact of trends in logistics management andinformation technology. On the one hand the need for supply chain management is

growing, while on the other hand the possibilities of computer network technology are

booming. The suggestion behind the study described here, is that supply chain

management can be enhanced with the help of computer network technology. A major

challenge is to discover potential synergy between the business trend and the technology

trend.

Logistics concerns the efficient, as well as the effective flow and storage of goods, services

and related information from points of origin to points of consumption, for the purpose of

conforming to customer requirements [CLM, 1991]. In logistics there are active objects

which provide capacity, comprising resources for production, transportation and storage,

and there are passive objects which demand capacity, comprising goods, information and

money [Verwijmeren, 1994b]. Logistics management aims at the optimal planning,

control and monitoring of goods, information and money flows across production,

transportation and storage resources. This is done using expertise in supply and demand,in addition to inventory and capacity. Optimisation in logistics management focuses on

satisfying market requirements, expressed in mutually agreed quality aspects, such as

time, place, quantity and condition, for minimal costs [Vermunt, 1993].

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Introduction Chapter 1

2

Logistics management has been performed since the beginning of civilisation.

Eminent examples of early logistics management are: the supply of materials to Egyptian

pyramids, the Silk Route from the Far East to European markets, the acquisition of exotic

spices by the United East India Company (Verenigde Oostindische Compagnie) from the

Indonesian archipelago, as well as the military organisation for bringing munitions, food

and facilities to the battlefield, as applied by the French emperor Napoleon Bonaparte.

Nowadays, logistics management is of prime importance for businesses, due to its possible

impact on business results.

The current trend in logistics management is supply chain management, focusing

on the inter-organisational management of goods flows between independent organisations

in supply chains, such as raw material winners, component manufacturers, finished

product manufacturers, wholesalers and retailers. In supply chain management, the logic

of integration is extended outside the boundaries of a firm, to include suppliers and

customers. This integrative approach to planning, control and monitoring of product

flows, from suppliers to end users, aims at improved customer service at reduced overall

costs [Ellram, 1991] [Jones, 1985]. Recent initiatives in this field are Quick Response

(QR), Continuous Replenishment (CR), Vendor Managed Inventory (VMI) and Efficient

Consumer Response (ECR) [Kurt, 1993] [Whiteoak, 1993] [Rogers, 1994] [Palmer, 1995].

Information technology is the discipline dealing with resources for, and applications of,

automated information processing. Resources in information technology include computer

systems as well as communication networks. Computers are becoming more and more

interconnected through networks, while networks gain computers as network elements.

Thus, the borders between computer technology and communication technology are fading

away. Applications of information technology range from business to private, from stand-

alone to networked, from a single information medium to multimedia, and from internal

machine processing to user interactive applications. Information technology provides

humanity with the ability to keep in touch without travelling, while it enables businesses to

improve efficiency and effectiveness, as well as to develop new business [Jong, 1997]

[Ericsson, 1995].

The present day information technology has many predecessors. Examples of early

information technology are: the introduction of the electromagnetic telegraph by Samuel

Morse, the creation of the telephone by Alexander Graham Bell, the invention of the first

computers like the MarkI

andENIAC

and the development of theARPANET

, which laid thebasis for the Internet. In this era of rapid developments, there is a great challenge for

organisations in coping with modern information technology.

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The current trend in information technology is computer network technology,

focusing on the integration of computers and communication networks, thus creating a

world-wide network of communicating computers [Harasim, 1993] [Ericsson, 1995]. Due

to advances in technology, the capacity for computing, storage and transmission of

information is increasing at a fast pace. The emphasis in the optimisation of information

processing can therefore shift from technical efficiency to functional effectiveness. This

has been demonstrated by the emergence of electronic mail, Electronic Data Interchange

(EDI), wide area networks, object-oriented programming, distributed computing, the

Internet, its World Wide Web (WWW) and Intranets.

1.1.2 Objective

To discover potential synergy between the business trend and the technology trend, this

research aims at the development of new logistics information systems which support

supply chain management and are based on computer network technology. Supply chain

management requires new information systems that are able to provide both integration

and flexibility. Computer network technology allows information systems to be made up of

self-contained components that operate at different locations. Thus, supply chain

management induces new functional requirements for information systems, whereas new

technical requirements might be satisfied by computer network technology.

The study targets at some particular areas in supply chain management and

computer network technology. Two major issues in the field of supply chain management

are integral inventory management and networked organisation management. In the area

of computer network technology, major issues are distributed system technology and

object-oriented system technology.

In Figure 1-1 a typical supply chain is shown, in which the goods flow starts as raw

materials at natural resources and ends with products at final customers. Raw materialwinners keep raw materials on stock and supply them to component manufacturers.

Component manufacturers have an inventory of materials at the start of the production

process and an inventory of components at the end. Product manufacturers hold

inventories of products and components, the latter being supplied by component

manufacturers. Wholesalers buy products from product manufacturers and hold central

and regional stock in central and regional distribution centres respectively. Retailers get

their supply from wholesalers and have products in local stock for sales to final customers.

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Integration Integration Integration IntegrationIntegration

Central and proceduralinformation system

Stock-pointOpposition Goods Information

Componentmanufacturer

Materialwinner

Productmanufacturer Wholesaler Retailer

Finalcustomers

Naturalresources

Componentstock

Materialstock

Materialstock

Productstock

Componentstock

Regionalstock

Centralstock

Localstock

Figure 1-1 Non-integral inventory management by opposition between organisations,using central and procedural information systems

In todays world, most supply chains still do not profit from supply chain management

from natural resources to final customers. Instead, the supply chains struggle with non-

integral inventory management due to opposition between organisations. As shown in

Figure 1-1, in a vast majority of supply chains the scope of integral inventory management

is limited to one organisation. Buyers and sellers of different organisations try to create

win-loose situations with their own organisation being the winner, thus limiting the scope

of integration. The organisations in the supply chain each apply hierarchical control toachieve internal integration. The limited integral inventory management within one

organisation is usually realised by a central and procedural information system that

measures and controls the inventory from one central site in the organisation. For the

inventory management of all stock-points in the organisation, such a central and

procedural information system imposes mandatory instructions which are generated by

fixed routines.

Due to the increase of competition and dynamics in todays markets, organisations

are forced to further improve their business performance. In particular, customers require

a better price-quality ratio of products as well as a more dynamic product assortment.

Supply chain management can contribute to the required performance improvements, both

in terms of productivity and flexibility. There are two ways to extend the integration

beyond organisational boundaries. Either hierarchical control must be raised to cover all

organisations in a supply chain, or lateral control between the organisations has to be

introduced.

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Central and proceduralinformation system

Stock-point

Integration

Domination Goods Information


Materialwinner


Finalcustomers

Naturalresources

ComponentstockMaterialstockMaterialstock ProductstockComponentstock RegionalstockCentralstock Localstock

Figure 1-2 Integral inventory management by domination of one organisation over others,using a central and procedural information system

So far, very few supply chains have realised supply chain management from natural

resources to final customers, by one organisation dominating the other organisations in the

supply chain. As presented in Figure 1-2, a dominant organisation can make use of

hierarchical control to achieve integral inventory management across organisational

boundaries. The subordinate organisations in the supply chain are forced to obey to the

instructions of the dominant organisation. The integral inventory management enforced by

one dominant organisation is usually accomplished with one central information system

with fixed procedures, ruling the underlying stock-points of the subordinate organisations

in the supply chain.

This type of supply chain management, where one organisation dominates the

others, could improve productivity of the supply chain, including lower costs of inventory

and better inventory related quality (customer service). These results comply to customer

requirements with respect to a better price-quality ratio of products offered. However,

integral inventory management, as imposed by one dominant organisation, does not

contribute to the flexibility of the supply chain, which is needed to offer customers a more

dynamic product assortment. Because subordinate organisations are bound to one

dominant organisation, they can not easily change their portfolio in the supply chain or

switch to other supply chains.

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Distributed and object-orientedinformation system

Stock-pointCo-operation

Integration

Goods Information


Materialwinner


Finalcustomers

Naturalresources

Componentstock

Materialstock

Materialstock

Productstock

Componentstock

Regionalstock

Centralstock

Localstock

Figure 1-3 Integral inventory management by co-operation across networkedorganisations, using distributed and object-oriented information systems

To obtain the required flexibility, supply chains could introduce supply chain management

from natural resources to final customers, by co-operation across a network of

organisations. As is shown in Figure 1-3, networked organisations apply lateral control to

achieve integral inventory management beyond their organisational boundaries. When

compared to non-integral inventory management in supply chains due to opposition

between organisations, the extension of integral inventory management beyondorganisational boundaries can increase the productivity of supply chains, by reducing

inventory related costs and improving inventory related quality (customer service). When

compared to integral inventory management by domination of one organisation, co-

operation across networked organisations can also increase the flexibility of the supply

chains. Networked organisations can frequently change their positions in supply chains to

respond to changing market circumstances. In the context of networked organisations,

new supply chains emerge to create promising products, while supply chains for outdated

products disappear.

The central and procedural information systems currently applied in supply chains, are not

suitable for integral inventory management across networked organisations. These systems

can not simultaneously support the integration required for integral inventory

management as well as the flexibility required for networked organisations. In central

systems, information processing can be integrated across locations, but then the different

organisations in supply chains do not have autonomy over their own functionality anddata, whereas autonomy is an inherent feature of networked organisations, which enables

their flexibility. Procedural systems can provide integrated functions, but they lack the

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flexibility to easily adapt functionality and data to changing conditions in supply chains,

whereas flexibility is an intrinsic property of networked organisations.

Supply chain management is becoming a vital issue for improving the productivity

and flexibility in supply chains. However, existing information systems are not suitable for

integral inventory management across networked organisations. Developments in the field

of computer network technology are removing the need to use central and procedural

information systems. Distributed system technology is becoming mature, that might better

meet the requirements of supply chain management, when compared to central systems.

Moreover, object-oriented system technology is maturing, that might better satisfy the

requirements related to supply chain management, when compared to procedural systems.

Given the opportunities of supply chain management, the shortcomings of existing

information systems and the developments in computer network technology, the main

objective of the research is to:

show the functional and technical feasibility of information systems

for integral inventory management across networked organisations

using distributed and object-oriented system technology

The information systems to be studied in this research are called Networked InventoryManagement Information Systems (NIMISs) [Verwijmeren, 1996a]. The extent to which

the objective is reached, provides answers to the questions whether and how new

information systems conforming to the specified functionality and technology could be

developed. More generally, the research results provide insight into the potential synergy

between supply chain management and computer network technology.

1.1.3 Limitation

The research is limited to the feasibility of information systems for integral inventory

management across networked organisations, making use of distributed and object-

oriented system technology. Many related issues are not considered in the study.

Limitations of the research apply to supply chain management as well as to computer

network technology.

From the functional perspective of supply chain management, only integral inventory

management and networked organisation management are considered. While integral

inventory management is included in the research objective, related functionality such as

capacity management, operations management, human resource management and

financial management are beyond the scope of the research. Within integral inventory

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management, the focus is on alternative information processing in already known

inventory management algorithms, and not on the comparative performance of different

algorithms, nor on the creation of new algorithms.

Other functionality included in the research, concerns facilities for management of

networked organisations. The focus is on processing of state-dependent information such

as demand forecasts within and across organisations, and not on determination,

standardisation and exchange of state-independent data, like product master data,

inventory norm levels, and message formats in Electronic Data Interchange (EDI). Issues

related to networked organisations, such as business process redesign, organisational

culture, transfer pricing and strategic decision making, are excluded from the research.

From the technical perspective of computer network technology, only distributed system

technology and object-oriented system technology are addressed. While distributed system

technology is incorporated in the study, related technical engineering issues, such as

internal processor architectures, low-level communication protocols, database

management mechanisms and operating system details, are beyond the research scope.

The focus is on functionality of application software which is distributed over locations,

and not on comparative platform performance, nor on technical improvements in

hardware components, communication protocols, database systems and operating systems.Other technology incorporated in the research, is object-oriented system

technology. The focus is on the engineering principles of object-oriented system

technology in application software, and not on the comparison of object-oriented design

methods and object-oriented programming languages, nor on the improvement of object-

oriented system concepts and object-oriented computer platforms. Issues related to object-

oriented system technology, such as other system paradigms, maintenance of systems,

reusability of components and management of system development projects, are excluded

from the research.

1.2 Research method

1.2.1 Methodology

Science stands both for knowledge, a set of statements, and for research, the process whichhas knowledge as its product [Wesley, 1982]. Although there is no strict border between

scientific and non-scientific knowledge, typical characteristics of scientific knowledge are

the correctness of the statements as well as their richness of information [Leeuw, 1990]. If

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a statement can not be tested, its correctness can be neither falsified nor proven. If a

statement is correct by definition, it does not contain any sensible information. Hence, it

should in principal be possible to test a scientific statement and it must in theory be

possible to reject it [Leeuw, 1990] [Vries, 1985]. Research methodology is the doctrine of

methods, that is, the application of logic in the fields of science. It is concerned with the

organisation of research to ensure that the outcomes represents scientific knowledge.

Methodology links the type of knowledge coming from research to the type of process

which led to that outcomes.

The product of research is knowledge, which can be captured in several forms,

ranging from single statements to theories [Leeuw, 1990]. Single statements can be

definitions and empirical, analytical or normative claims. The knowledge captured in

single statements is rather limited. A theory is knowledge represented in a collection of

coherent and generic statements. The knowledge embedded in a theory is more

comprehensive than that in a single statement. The knowledge to be generated in this

study is incorporated into a design, which is a model of a system to capture knowledge of

that system. A design represents a set of coherent statements that state what happens when

reality conforms to certain conditions. In the spectrum of knowledge forms, a design

claims less knowledge than a theory, but contains more knowledge than a single

statement.

Research is a process for producing knowledge, which can be organised according to the

empirical cycle [Leeuw, 1990]. In the empirical cycle, induction and deduction are applied

successively to arrive at tested and informative statements. Induction is a way of reasoning

from particular statements to generic statements, whereas deduction reasons from generic

statements to particular statements. Induction in the empirical cycle concerns taking some

preliminary observations in reality and construction of hypotheses for generic description

or explanation of the observed reality. Based on deduction in the empirical cycle,

particular statements about reality are deduced from the generic hypotheses to test their

correctness. Depending on the similarity between specific observations in reality and the

particular statements about reality, the hypotheses are either rejected or accepted.

To generate the design of the system aimed at in this study, the research process is

organised according to the model cycle, which is similar to the empirical cycle but

specialised in system oriented research [Leeuw, 1990]. The model cycle starts with an

analysis of observations in the environment of a desired system. Using induction,observations in the system environment are used to arrive at requirements for the system to

be designed. Based on the requirements, a generic design of the system is created, that

specifies a model of the system to be realised. From the design, an implementation of the

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system in a particular system environment is deduced. The system implementation tests

the fit of the system design in the particular system environment.

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1.2.2 Framework

While the research methodology specifies the fundamental approach, the particular stages

of this study and their dependencies are specified in a research framework. In Figure 1-4

the research framework for this study is presented. The framework is a specialisation of

the model cycle, which is applied to show the feasibility of the systems. The framework

comprises three phases: analysis, design and implementation. In the framework a

distinction is also made between the functional and technical view of the systems,

representing logistics management and information technology respectively. Combination

of the three phases and the two viewpoints leads to six research stages in between the

introduction and the conclusion. To clarify the relationship between the research stages,

their main inputs and outputs are explained.

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12

Information technologyLogistics management

Networked inventory managementdesign (3)

Distributed object technologydesign (6)

Supply chain managementanalysis (2)

Computer network technologyanalysis (5)

Case studyimplementation (4)

Prototype systemimplementation (7)

Introduction (1)

Conclusion (8)

Figure 1-4 Research framework

The inputs for the introduction are the trends observed in logistics management and

information technology, while the outputs are the objective to be achieved and the method

to be applied. Those outputs are inputs for all other research stages, and therefore they are

not mentioned explicitly in the explanation of the remaining stages.

The inputs for the conclusion are the research objective and method stated in the

introduction, in addition to the results of the six research stages. The outputs of the

research conclusion are the outcomes of the research with respect to logistics management

and information technology, as well as issues for further research in those areas.

The inputs for the supply chain management analysis are the research objective and

method, while the computer network technology analysis provides implicit input. The

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outputs of the supply chain management analysis are observations in the functional system

environment and functional requirements for the information systems.

The inputs for the networked inventory management design are the functional

requirements from the supply chain management analysis, and implicitly the distributed

object technology design. The outputs of the networked inventory management design are

a model that specifies the information systems and an explanation of the functional

properties of the systems.

The inputs for the case study implementation are the networked inventory

management design of the systems, and implicitly the prototype system implementation.

The outputs of the case study implementation are a description of a functional system

environment and a demonstration of the application of the information systems in the

particular environment of logistics management.

The inputs for the computer network technology analysis are the research objective and

method, while implicit input comes from the supply chain management analysis. The

outputs of the computer network technology analysis are observations in the technical

system environment and technical requirements for the information systems.

The inputs for the distributed object technology design are the technical

requirements from the computer network technology analysis, and implicitly thenetworked inventory management design. The outputs of the distributed object technology

design are a model that specifies the information systems and an explanation of the

technical properties of the systems.

The inputs for the prototype system implementation is the distributed object

technology design of the systems, and implicitly the case study implementation. The

outputs of the prototype system implementation are a description of a technical system

environment and a demonstration of the operation of the information systems in the

particular environment of information technology.

1.2.3 Report

In this report the research is documented in a structure that is in line with the previously

presented research framework. Each of its stages is discussed in a separate chapter. The

chapter numbers for the respective stages are shown between brackets in Figure 1-4.

In Chapter 1, the research introduction is given, including the objective and method

of the study. In Chapters 2 to 4, the functional stages of the research framework are

described. In Chapter 2, supply chain management is analysed as one of the trends in

logistics management. Chapter 3 deals with the design of systems for networked inventory

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management. Chapter 4 is dedicated to the case study implementation of the information

systems.

In Chapters 5 to 7, the technical research stages are reported. The analysis of

computer network technology is described in Chapter 5. In Chapter 6, the design of the

information systems using distributed object technology is explained. Then, in Chapter 7

the prototype system implementation is addressed. Finally, in Chapter 8 the conclusion of

the research is stated.

To gain a complete understanding of the ins and outs of the research, the complete

document should be studied. Chapter 1 Introduction and Chapter 8 Conclusion are

relevant to all types of readers as they provide overviews of the starting and finishing

conditions of the research respectively. There are some suggestions for readers with

specific interests. Those who favour logistics management and functional aspects of

related information systems should focus on Chapters 2 to 4. Those who are interested in

information technology can best concentrate on Chapters 5 to 7.

A guideline for readers whose primary interest is in the theoretical background of

the information systems, is to focus on Chapter 2 Supply chain management analysis and

Chapter 5 Computer network technology analysis. Those interested in the internal

structure and behaviour of the information systems should go into Chapter 3 Networkedinventory management design and Chapter 6 Distributed object technology design. For

those who want to know how the systems fit into functional and technical practice,

Chapter 4 Case study implementation and Chapter 7 Prototype system implementation

are the most relevant parts of the document.

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Chapter 2 Supply chain management analysis

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2. Supply chain management analysis

2.1 Introduction

In this chapter, supply chain management and related issues are analysed. The inputs for

the supply chain management analysis are the research objective and method (Chapter 1),

while the computer network technology analysis provides implicit input (Chapter 5). The

outputs of the supply chain management analysis are observations in the functional system

environment and functional requirements for the information systems studied.

In section 2.2, issues in supply chain management are analysed. After a discussion

on supply chain management, integral inventory management and networked organisation

management are explained. In section 2.3, functional requirements for the information

systems are specified. The requirements related to integral inventory management are

followed by the requirements related to networked organisation management.

2.2 Issues in supply chain management

Logistics management is a very broad business and research area, in which supply chain

management covers the part that focuses on integral logistics management across

organisations. Currently, much attention is paid to supply chain management, because

management of logistics activities across organisations offers opportunities to further

increase business performance after internal integration has been reached.

One of the vital competencies for improvement of business performance is integral

inventory management, since in many cases significant costs are related to having either

too many or too few products in stock. To cope with the growing dynamics in competitive

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Supply chain management analysis Chapter 2

16

markets, the flexibility of organisations could be improved by co-operation with other

organisations in a network, so networked organisation management is also becoming a

vital competence for organisations.

The issues in supply chain management that are studied further, are illustrated in

Figure 2-1, with references to the sections where they are discussed. Supply chain

management (SCM) encompasses aspects of integral inventory management (IIM) and

networked organisation management (NOM). Networked inventory management (NIM) is a

concept at the intersection of integral inventory management and networked organisation

management.

SCM: Supply chain management(2.2.1)

Logistics management

NIM:

Networked

inventorymanagement

(2.3)

NOM:

Networked

organisationmanagement

(2.2.3)

IIM:

Integral

inventorymanagement

(2.2.2)

Figure 2-1 Issues in supply chain management

2.2.1 Supply chain management

In Figure 2-2 world-wide supply chains are illustrated, including various natural

resources, final customers, organisations, resources and products. The supply chain

entities are related by the product flows between them. Any path in the network, linking

the entities from natural resources to final customers, represents one particular supplychain. In addition to the feed forward flows of materials, the links of a supply chain are

related via the feedback flows of information [Stevens, 1989]. Flows of money also go

across the supply chain entities, to compensate for transactions.

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A supply chain typically crosses several organisational boundaries as the materials

flow from raw materials suppliers through to the end customers [Scott, 1991].

Organisations in supply chains can be raw material winners, component manufacturers,

finished product manufacturers, wholesalers and retailers. As most organisations deal with

multiple buyers and suppliers, they form a complex business network comprising many

interdependent supply chains.

The processes in supply chains include passive objects which demand capacity and

active objects which provide capacity [Verwijmeren, 1994b]. Passive objects in supply

chains are goods, information and money, whose status can be changed by active objects.

Goods represent, amongst others, raw materials, components or finished products, while

information includes orders, plans, bills, notifications and the like, while money refers to

amounts of cash or money deposited in bank accounts. Active objects in supply chains can

be categorised into resources for production, transportation and storage. Production

resources focus on change of material, transport resources deal with change of place and

storage resources are devoted to change of time. Active objects not only work on goods,

but also process information and money [Verwijmeren, 1995].

Figure 2-2 World-wide supply chains

Due to increasing competition, companies are required to improve their business

performance. More and more markets have been liberalised in recent years, resulting in

global market places with severe competition. The increased competition between the

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numerous players in the open markets, has resulted in a relative shift of power from

suppliers to customers. Whereas previously customers in a local market place were bound

to local companies and companies could rely on those captive customers, in the global

market place customers can choose between a greater variety of offerings from an

increased number of suppliers.

In the open markets just one superior performer can raise the competitive threshold

for companies around the world. Good performers drive out the inferior, because the

lowest price, the highest quality, the best service available from any one of them soon

becomes the standard for all competitors [Hammer, 1993]. In this way, customers get more

power in telling suppliers the specifications of the products they need, the delivery dates

they accept and the prices they allow. As a consequence, customers become accustomed to

being offered with a wide assortment of products, easily available at attractive prices and

certain to perform to specification [Scott, 1991]. Ultimately, customers ask for mass

customisation, for which suppliers have to deliver products at affordable prices, with

enough variety so that nearly every customer feels that he buys a customised product [Pine,

1992].

Customer requirements due to the increase of competition include a better price-

quality ratio of products as well as a more dynamic product assortment. To cope with those

customer requirements, companies are forced to improve their business performance.Demand for a better price-quality ratio requires improvement of the business productivity,

which can be achieved by realising cost reduction (efficiency increase) or quality

improvement (effectiveness increase) in the business processes. Demand for a more

dynamic product assortment implies that businesses have to enhance their flexibility, so

that their business processes can cope with a broader product range and can adapt to a

varying product portfolio.

One of the ways to improve business performance is supply chain management, which

concerns the inter-organisational management of goods flows between independent

organisations. Supply chain management is an integral approach to planning, control and

monitoring of total materials flows from suppliers to end users, aiming at improved

customer service at reduced overall costs [Ellram, 1991] [Jones, 1985]. It focuses on the

final customer, who creates demand, which in turn supports the existence of the supply

chain to provide the customer with products. When there is no dominant organisation in a

supply chain, with hierarchical control over other organisations, every organisation in thesupply chain has its own strategic and operational management units to control its own

processes. From this perspective, supply chain management concerns the co-ordination of

operational management units from different organisations in a supply chain, within the

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constraints imposed by their respective strategic management units, aiming at an optimal

exchange of goods, information and money between the organisations to meet customer

requirements [Verwijmeren, 1994b].

The realisation of supply chain management is a complex process in which the

scope of integration is extended beyond organisational boundaries. Logistics management

typically starts from a stage of fragmented local process optimisation. Subsequent

integration stages inside an organisation are single function integration, integration of

adjacent functions and organisation-wide integration. Supply chain management starts

when the scope of integration is extended from internal to external co-ordination, a stage

that takes into account customers and suppliers in the supply chains [Stevens, 1989]

[Christopher, 1994]. The scope of supply chain management can ultimately grow to

integral management of whole supply chains, from natural resources to final customers.

Supply chain management encompasses diverse functional areas, such as inventory

management, operations management and capacity management. Some particular

concepts for supply chain management are Quick Response (QR), Continuous

Replenishment (CR), Vendor Managed Inventory (VMI) and Efficient Consumer Response

(ECR) [Kurt, 1993] [Whiteoak, 1993] [Rogers, 1994] [Palmer, 1995]. ECR is a set of

strategies developed by the grocery industry that allows an entire channel to act like a

single firm by taking away barriers to information and product flows in order to improvecompetitiveness. The ECR strategies are efficient store assortments, efficient replenishment,

efficient promotion and efficient product information.

Supply chain management is a concept for organisations to achieve higher productivity

and greater flexibility, thus responding to customers who require a better price-quality

ratio and a more dynamic product assortment. Supply chain management represents an

opportunity for organisations to utilise assets, particularly inventory, more effectively,

while decreasing the ownership and management risks of vertical integration [Ellram,

1991]. Instead of local optimisation, supply chains are co-ordinated to optimise overall

performance. By examining the trade-offs in supply chains across organisations, less

inventory or capacity is required to achieve the same service level [Ellram, 1989]. Because

inventory costs per product, due to space, capital and obsolescence can fall, more products

can be offered simultaneously, while new products can be introduced more rapidly. In

addition, the co-operative attitude of the organisations participating in supply chain

management, makes it easier to establish supply chains for new products.The core principle behind supply chain management is the reduction of uncertainty

in decision making processes of organisations in supply chains. Supply chain management

can reduce uncertainties related to supplier performance, manufacturing processes and

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customer demand [Davis, 1993]. To reduce those uncertainties, a collective framework for

supply chain management is needed. Elements in that framework are the recognition of

the required customer service level for end users, the positioning of stock-points along the

supply chain and the development of policies for managing the supply chain as a single

entity [Jones, 1985]. The policies must ensure that the control system is well damped at

each stage, that time delays are reduced and that market demand flows throughout the

chain with minimum distortion [Towill, 1996].

The co-ordination of the management processes in a supply chain requires

information exchange between the organisations in the supply chain. The extra availability

of information in decision making units reduces uncertainty, resulting in better control

and finally in improved performance [Sheombar, 1995]. For the exchange of proprietary

information, such as sales and forecasts, a collaborative attitude of the supply chain

partners is needed [Walker, 1994]. The required co-operation is encountered in

organisations that apply networked organisation management.

2.2.2 Integral inventory management

By focusing on the inventory aspect, a network of supply chains can be considered as a

network of stock-points connected through transit processes. Raw materials, components,

assemblies and finished products all represent inventory at the various stages of production

and distribution. Inventory occurs at all places in a supply chain, both in storage processes

and in production and in transportation processes. Inventory in a storage process is called

stock-point inventory, while inventory in production and transportation processes is called

transit inventory.

Instead of classification by the type of process in which inventory resides, inventory

can also be categorised by the reason for its existence in supply chains [Wijngaard, 1985]

[Donselaar, 1987] [Hoekstra, 1987] [Graves, 1988] [Monhemius, 1989] [Fogarty, 1991][Graves, 1993]. Inventory can either be classified as purposely desired inventory or

necessarily required inventory. There are at least four categories of so-called desired

inventory. Speculative inventory is held for profiting from expected price changes.

Strategic inventory exists to secure critical supply during crises. Capacity inventory is held

to level and smooth occupation of resources when demand or supply shows structural

fluctuation. Promotional inventory, held to provide product visibility to customers, can

also be classified as desired inventory.

Ideally, no extra inventory would exist in a supply chain other than the categories

of desired inventory mentioned above. Nevertheless, there are at least four categories of so-

called required inventory, needed to cope with uncertainties and inflexibility in the

demand and supply processes. Lead time inventory is required because of throughput times

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of processes and buffer inventory is required to uncouple operations. These two categories

can be put under the heading transit inventory. Furthermore, lot size inventory is required

for processing materials in batches and safety inventory is required to compensate for the

stochastic behaviour of processes. These two categories can be grouped under the heading

stock-point inventory.


Materialwinner


Finalcustomers

Naturalresources

Inventory

Excess

Desired

Required

Shortage

Componentstock

Materialstock

Materialstock

Productstock

Componentstock

Regionalstock

Centralstock

Localstock

Figure 2-3 Inventory categories in supply chains

In Figure 2-3 inventory categories in supply chains are plotted for a particular supply

chain, from natural resources to final customers. For every stage in the supply chain the

inventory levels are indicated per category. Given the levels of the desired as well as the

required inventory, there would ideally be no extra inventory categories in a supply chain.

However, excess inventory and inventory shortage (negative inventory) occur due to

imperfect inventory management. It is an old truth that inventory management is one of

the decisive factors in determining whether a firm makes a profit or a loss [Whitin, 1957].

Excess inventory has a negative impact on business performance, in particular on

productivity, as it increases inventory related costs like costs for capital, space and

obsolescence. Inventory shortage also harms business performance, as it reduces inventory

related revenues coming from product availability for customer service.

Excess inventory and inventory shortage are both caused by uncertainties in

quantifying and timing of supply and demand, which are not adequately dealt with by the

present inventory management systems. Through amplification, minor uncertainties indownstream supply chain stages may develop major unforeseen variability in upstream

stages. Amplification is a non-technical term implying a response from some part of a

system which is greater than would at first seem to be justified by the causes [Forrester,

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1961]. Due to this system dynamics phenomenon, a small change in demand at some

points of sale to final customers could result in large demand fluctuations in the supply

chain some stages upstream. The amplification is the negative result of the lack of proper

inventory management systems in supply chains, and the forthcoming delays and

distortions in information flows through the supply chains. In many forecasting

procedures, growth rates are extrapolated, even though this is not justified. There is also a

tendency to order ahead when deliveries slow down or during price rises. Moreover,

production orders may differ from sales orders for inventory accumulation, to fill supply

pipelines and for speculation.

A traditional way of coping with uncertainties in demand and supply has been to

hold more inventory [Scott, 1991]. However, in competitive markets, fighting

uncertainties by inventory increase might not be a valid remedy, because inventory

holding costs might become prohibitive. To raise the price-quality ratio of products in

response to increased customer requirements, alternative measures have to be considered.

Integral inventory management is one of the directions for tackling uncertainties in supply

chains without increasing inventory.

Integral inventory management concerns the co-ordinated planning, control and

monitoring of inventory levels in stock-points throughout supply chains, in order tomaximise overall supply chain performance. Supply chains can be represented as multi-

echelon or multi-stage inventory systems. As integral inventory management can be

perceived as co-ordination of the echelons from one virtual point of view, it is also known

as centralised control of multi-echelon inventory systems [Zijm, 1992] [Graves, 1993]

[Lee, 1993] [Diks, 1996] [Houtum, 1996] [Stenger, 1996].

Several algorithms exist for integral inventory management, such as Base Stock

Control [Magee, 1958] [Clark, 1960], Material (and Distribution) Requirements Planning

(MRP/DRP) [Orlicky, 1975] [Martin, 1983] [Martin, 1993] and Line Requirements

Planning [Donselaar, 1989]. Material Requirements Planning (MRP) and Distribution

Requirements Planning (DRP) manage inventory in supply chains with the help of time-

phased demand and inventory levels, using values for the current moment and for future

periods. Base Stock Control (BSC) works against final customer demand and integral

inventory (or echelon stock), rather than against demand generated by replenishment

orders from the next downstream stock-point in the supply chain [Clark, 1960] [Silver,

1985]. LRP

also makes use of final customer demand and integral inventory, but worksalso with time-phased demand and inventory levels, like MRP/DRP [Donselaar, 1990].

Non-integral inventory management is also called decentralised inventory control

or single echelon management. A category of algorithms for non-integral inventory

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management is Statistical Inventory Control (SIC), also called re-order point techniques

[Silver, 1985] [Donselaar, 1989] [Fogarty, 1991]. SIC ignores the implications of decisions

at one stock-point for the inventory levels of other stock-points. Replenishment orders tend

to become progressively larger and less frequent further upstream in the supply chain. As

a consequence, it takes a long time before changes in customer demand influence the

behaviour of upstream stock-points.

Whereas orders in non-integral inventory management are based on current and

local inventory status only, integral inventory management typically uses more

information than just current and local inventory status in a stock-point to determine

orders. The extra information is used to obtain coherence in the management of the

inventory levels at the stock-points of a supply chain. Because integral inventory

management uses more information in its decision making algorithms, it requires more

information exchange across supply chain processes than non-integral inventory

management [Lee, 1992].

Integral inventory management is a means for businesses by which they can raise their

productivity, including cost reduction and quality improvement. In general, integral

inventory management produces superior results when compared to non-integral inventory

management [Lee, 1993] [Axster, 1994] [Hausman, 1994] [Stenger, 1996]. Integralinventory management can decrease costs incurred by holding excess inventory or due to

encountering inventory shortage, and can also increase revenues related to product

availability for customer service.

In non-integral inventory management, the implications of decisions at one stock-

point for the inventory levels of other stock-points are ignored. A consequence of the lack

of coherent management is amplification of variations in the supply chains [Donselaar,

1989]. Thus, non-integral inventory management leads to high uncertainties, which have

to be compensated by high inventory norm levels to reach a certain target level for product

availability. The explanation for the inferior performance of SIC when compared to BSC,

MRP/DRP and LRP, is that it does not use information on future demand or inventory levels

in downstream stages.

The use of information on inventory in other stages or on expected demand in

future periods, reduces the uncertainties in the decision making processes. Hence, better

ordering decisions can be made, ultimately leading to reduced inventory levels at the

stock-points, without harming service levels. BecauseBSC

,MRP

/DRP

andLRP

exploitdependencies of stock-points in supply chains, they outperform SIC, assuming that the

parameters are optimal in all algorithms. BSC is triggered by customer demand, which

often varies less than upstream ordering, so inventory levels can be decreased. MRP/DRP

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exploits the time-varying and dependent nature of demand and inventory levels, resulting

in uncertainty reductions and hence lower inventories. LRP makes supply chains even

more transparent, resulting in more robust management when compared to MRP/DRP and

further reduction of inventory levels.

From an inventory management perspective, there is a distinct advantage in using

integral inventory management, both within as well as across organisations. However,

despite the theoretical benefits of integral inventory management, there may be

organisational reasons for applying non-integral inventory management [Hausman, 1994].

In particular, information flows can be restricted or can be costly so that integral inventory

management may not be feasible [Lee, 1993]. Companies that apply networked

organisation management have less restrictions with respect to information flows, while

information systems can reduce costs of processing information in supply chains.

2.2.3 Networked organisation management

Supply chains are managed by their participating organisations. Within organisations, the

co-ordination of activities is based on a hierarchy. Higher organisational levels control

lower organisational units through instructions and feedback. Across organisations, the

market is the co-ordination mechanism. In the market place, an organisation agrees upon

activities with external actors. Organisations can either perform business activities in-

house, thus co-ordinating through their hierarchy, or they can out-source activities to

suppliers, implying co-ordination by the market. Organisational boundaries occur where

co-ordination through a hierarchy is interrupted by the market mechanism.

Whether it is best to manage business activities through hierarchies or markets can

be determined with the help of the transaction cost approach [Williamson, 1975]

[Williamson, 1981]. A transaction occurs when goods or services are transferred from one

stage of activity to another. Organisations try to minimise costs associated withtransactions by selecting the most appropriate co-ordination mechanism. Transactions are

internalised when the costs of co-ordination by a hierarchy (internal co-ordination) and

internal production are less than the costs of co-ordination by the market (external co-

ordination) and external production, whereas externalisation occurs when the internal

costs are higher than the external costs. The higher the uncertainty, complexity, frequency

and asset specificity of transactions, the higher the costs for external co-ordination, the

more likely these transactions are to be internalised. The trade-off between internal versus

external co-ordination plus production costs, results in efficient boundaries across

organisations.

Co-ordination by the market can be differentiated to the duration of the

relationships between a buyer and a seller [Sheombar, 1995]. The market mechanism

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might co-ordinate one time transactions between buyers and sellers with short-term

relationships. Each time a transaction is needed, a new agreement has to be established by

the buyer and the seller. Alternatively, the market mechanism can co-ordinate multiple

transactions as part of a contract between a buyer and a seller that have a long-term

relationship. In that case, the contract agreed upon can be considered as a super

transaction established in the market. Co-ordination by hierarchy includes several types of

organisation management [Miles, 1992] [Mintzberg, 1983]. In functional organisation

management, an organisation is divided into functionally specialised departments that

together make complete products. It allows firms to achieve the necessary size and

efficiency for mass production. In divisional organisation management, organisations are

split up in divisions that specialise in particular products. These product oriented divisions

operate as nearly autonomous companies to their respective customers, while corporate

management serves as an investment banker in strategic decisions. Finally, matrix

organisation management combines elements of both functional and divisional

organisation management.

HierarchyNetworked organisationsMarket

Organisation

Fixed relationshipsSemi-stable relationshipsLoose relationships

Relationship

Figure 2-4 Networked organisations between markets and hierarchies

An alternative to co-ordination by either market or hierarchy is networked organisation

management. A networked organisation is an organisation (actor, company or business

unit) with its own strategic control unit, that co-operates with other organisations at a

tactical and operational level, within its strategic constraints, in order to gain mutual

benefits [Verwijmeren, 1996a]. Typical characteristics of networked organisation

management include autonomous control, common goals, mutual trust, information

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exchange, close co-operation and variable coupling [Thorelli, 1986] [Powell, 1990] [Scott

Morton, 1991] [Miles, 1992] [Webster, 1992] [Ching, 1996]. Organisation types that

include aspects of networked organisation management are the Value-Adding Partnership

[Johnston, 1988], the Virtual Corporation [Davidow, 1992], the Lean Enterprise

[Womack, 1994] and the Extended Enterprise [Browne, 1995].

In networked organisation management, several organisations are linked by

relationships in between markets and hierarchies. Together, they make up a network

which can be tight or loose depending on the number, intensity and type op interactions

between the members [Thorelli, 1986]. A network in this context is a set of organisations

which are connected by semi-stable relations [Aken, 1998]. The relationships have a

certain durability, but are not fixed. In principle, the network can be broken without

destroying the organisations in the network. Figure 2-4 illustrates how networked

organisations are positioned between markets and hierarchies when considering the

strength of the relationships between the organisational units. In pure markets, the

relationships between organisations are extremely loose. A short-term relationship occurs

for a one time transaction and then disappears. In pure hierarchies, the relationships

between organisational units are completely fixed. The relationships exist indefinitely,

possibly for the lifetime of the entire organisation.

A network of networked organisations is the intermediate between on the one handthe vertically integrated firm and on the other hand the open market. In contrast to an

open market, there is some joint commitment among networked organisations to establish

and cultivate relationships [Ching, 1996]. Whereas in a closed hierarchy there is unity of

ownership, power and loyalty, in a network of networked organisations there is no single

trinity, but distributed ownership, power and loyalty instead [Aken, 1998]. Instead of

contracts in markets and employment in hierarchies, the normative basis in networked

organisations consists of complementary strengths. In networked organisations the climate

is oriented to mutual benefits, as compared to the suspicion in the market and the

formalities in a hierarchy. Furthermore, the means for communication across networked

organisations are relationships, instead of prices in the market and routines in a hierarchy

[Powell, 1996].

Stable, internal and dynamic networks represent three common types of networked

organisations [Miles, 1992]. In a stable network, one core organisation maintains tight

relationships with a limited set of outside suppliers and distributors that also serveorganisations outside the network. These business partners are carefully selected by the

core firm and closely tied by contractual arrangements. An internal network consists of

organisational units within one organisation, buying and selling among themselves at

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prices established in the open market. To verify the price and quality of the products

which are part of internal transactions, the organisational units have a regular opportunity

to buy and sell outside the network.

In a dynamic network, independent organisations are linked together for temporary

production and then disassembled to become part of another network [Miles, 1992]. These

dynamic networked organisations can participate in various supply chains for different

products simultaneously. In a dynamic network, business functions such as development,

manufacturing and distribution could be performed by independent organisations in the

network [Miles, 1986]. Brokers may be used to locate and group these different

organisations. As a substitute for lengthy trust building processes based on experience,

information systems with broad access are used to mutually verify contributions.

A stable network applies the logic of a functional organisation to serve stable

demand and uses the logic of market contracts to their business partners, who also work

for other customers to maintain their competitive fitness [Miles, 1992]. The logic of an

internal network is on the one hand the shared utilisation of resources, as in matrix

organisations, and on the other hand the creation of a market inside a firm. A dynamic

network is partly based on the logic of a divisional organisation, by focusing on different

products and markets. For the rest, a dynamic network is driven by the availability of

numerous organisations in the market that are willing to participate in temporarynetworks.

Networked organisation management provides businesses with the opportunity to increase

flexibility, including the ability to process more different products simultaneously as well

as the ability to more frequently introduce new products and remove outdated ones.

Hierarchies and markets support productivity and flexibility respectively, but they are not

geared to support them simultaneously, as required in competitive markets. By combining

the benefits of both hierarchy and market, networked organisations can increase the

flexibility of organisations, while remaining as efficient as hierarchies [Thorelli, 1986].

Networked organisations can obtain more flexibility than hierarchies, because they

represent autonomous units with great willingness to co-operate with others [Miles, 1986].

Instead of advocating resource accumulation, a networked organisation focuses on its own

strengths and uses voluntary relationships to respond to dynamic market demand [Miles,

1992] [Snow, 1992]. In networked organisation management, the scale and management

associated with large companies is combined with the flexibility, creativity and lowoverheads usually found in small companies [Johnston, 1988].

Networked organisations are able to couple and uncouple other organisations with

less cost and time than hierarchies [Miles, 1992]. Hierarchies in vertically integrated firms

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are slow to react upon rapidly changing customer requirements with creative product

offerings, because they are bound to an installed base of dedicated resources that can not

be adapted immediately. It is easier for a networked organisation to make a link with a

business partner than for a hierarchy to buy and integrate an organisation. In cases when a

business partner no longer fits in the strategy, it is easier to end the co-operation than it is

to remove an organisational unit from an organisation [Aken, 1998]. Networked

organisations operate in an organisation network that meets customer demands for that

particular moment, and adapt their position in the network to cope with complex and

changing customer demands. So, networked organisation management is a means to

increase flexibility in supply chains, which is needed to provide customers with a more

dynamic product assortment.

In networked organisation management, the flexibility of the market mechanism is

as far as possible, combined with the technical specialisation and efficiency of functional

organisation management, the market responsiveness and effectiveness of divisional

management, and the balanced orientation and asset transfer capabilities of matrix

organisation management [Miles, 1986] [Miles, 1992]. Pure markets provide ultimate

flexibility, because there are no direct dependencies between actors, and prices alone

determine production and exchange [Powell, 1990]. Markets fulfil some co-ordination but

can not achieve integration, as there is no control to reach a common objective. Prices area simplifying communication mechanism, which can hardly capture the difficulties of

complex and dynamic exchange of products. Hence, markets become less efficient when

dealing with supply chains that need extensive information exchange to offer a more

dynamic product assortment.

2.3 Networked inventory management requirements

Both higher productivity and greater flexibility are needed in supply chains to offer

customers products with a better price-quality ratio and a more dynamic product

assortment. The analysis of the issues in supply chain management shows that integral

inventory management could increase productivity in supply chains. Co-ordination with

the help of information exchange can reduce inventory excess or shortage, and can

improve product availability for customer service, so contributing to a better price-quality

ratio. The analysis further indicates that networked organisation management could

increase flexibility in supply chains. Co-ordination through the best of market and

hierarchy enables coupling of organisations in networks with minimum cost and time to

respond to changing demand, so contributing to a more dynamic product assortment.

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Thus, integral inventory management and networked organisation management are

supplementary directions for improvement of business performance in supply chains.

Ideally, both issues in supply chain management should be combined to satisfy customer

requirements. The combination of integral inventory management (IIM) and networked

organisation management (NOM) is called networked inventory management (NIM)

[Verwijmeren, 1996a] [Verwijmeren, 1997]. In Figure 2-5 the simultaneous achievement

of integral inventory management and networked organisation management is depicted.

Integral inventory managementSuppliers

Networkedorganisation

Customers



Operational processincluding a stock-point

Goods flow Information flow

Figure 2-5 Networked inventory management

In supply chains with opposition between the organisations, the scope of integral inventory

management is limited to the organisational boundaries. Opposition does not allow

inventory management within an organisation to become integrated with the inventory

management of other organisations in the supply chains. Integral inventory management

could be achieved in supply chains where one organisation dominates the others. The

dominant organisation then places a hierarchy on top of the subordinate organisations to

control the supply chain.

In contrast to organisations with opposition relationships, in networked inventorymanagement the scope of integration is expanded to a network of organisations. The

inventory levels in stock-points of different organisations are managed in a coherent way.

Compared to integration through hierarchical control by one dominant organisation,

networked inventory management achieves integral inventory management by lateral

control across the networked organisations. Co-operation between networked

organisations makes it possible to co-ordinate the inventory management inside an

organisation with the inventory management of other organisations in the supply chains.

Currently, no information systems appear to be available which are geared to networked

inventory management. Existing information systems for supply chain management either

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miss adequate support for integral inventory management or lack facilities for networked

organisation management.

Information systems that come closest to the required functionality for integral

inventory management are the commercially available Enterprise Resource Planning (ERP)

systems, as offered by, amongst others, Baan, MFG/PRO, Oracle, JD Edwards, PeopleSoft

and SAP [Andersen, 1995] [Lierop, 1996] [Berenschot, 1997] [Ovum, 1997] [Ten Hagen,

1997] [Coopers, 1998] [Verwijmeren, 1998]. ERP systems provide extensive functionality

for, amongst others, logistics management, financial management and human resource

management within organisations. In the client-server architectures ofERP systems, local

client systems interact with a central server to provide internal business processes with

integral functionality. Many of these systems provide multi-site functionality for

management of an internal network, consisting of organisational units within one

organisation. However, due to the use of a central server, the ERP systems lack the

autonomy for management across networked organisations in external networks and miss

the flexibility needed by networked organisations in dynamic networks.

Information systems that come closest to the required functionality of networked

organisation management are inter-organisational information systems emerging from

coupling local systems through Electronic Data Interchange (EDI) [Wierda, 1991] [Vlist,

1991] [Suomi, 1992] [Vlist, 1992] [Vlist, 1994]. InEDI

based inter-organisational systems,local computers exchange information in a standard data format that can be interpreted by

the communicating computers. These systems provide facilities for networked organisation

management, as they respect the autonomy and flexibility of networked organisations.

However, with their focus on standardised data exchange between computers, the EDI

based inter-organisational systems do not provide the logic for integral inventory

management.

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SCM: Supply chain management

Integral inventory management:

Base Stock Control

Material/Distribution Requirements Planning

Line Requirements Planning

Networked organisation management:

Configuration flexibility

Timing flexibility

Algorithm flexibility

Networked inventory management requirements

NIMIS

NIM:

Networked

inventory

management

NOM:

Networkedorganisationmanagement

IIM:

Integralinventory

management

Figure 2-6 Networked inventory management requirements

To increase productivity and flexibility of supply chains, information systems for

networked inventory management are needed, but these systems are not yet commonly

available. Therefore, the feasibility of information systems that support networked

inventory management is studied. These information systems are called Networked

Inventory Management Information Systems (NIMISs). As presented in Figure 2-6,

networked inventory management (NIM) imposes functional requirements on the

information systems being studied. The functional requirements for NIMISs come partly

from integral inventory management (IIM) and partly relate to networked organisation

management (NOM). The requirements for the information systems are explained below.

2.3.1 Integral inventory management requirementsConforming to the research objective, NIMISs need to support networked inventory

management (NIM), so the information systems have to provide functionality for integral

inventory management (IIM). To show the functional feasibility of information systems for

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networked inventory management, three relevant functional requirements related to

integral inventory management are imposed on the systems to be designed. The NIMISs

should provide functionality for:

1. Base Stock Control (BSC)2. Material/Distribution Requirements Planning (MRP/DRP)

3. Line Requirements Planning (LRP)

Due to practical research limitations, these functional requirements do not represent an

exhaustive list of possible algorithms for integral inventory management. However, when

compared to non-integral inventory management, the requirements comprise both aspects

of integration in the time dimension of inventory management and aspects of integration

in the place dimension of inventory management. MRP and LRP integrate over time, while

BSC and LRP integrate over place. Therefore, these requirements could also give insight

into the feasibility of related types of algorithms for integral inventory management to be

supported by the information systems.

The requirements concerning integral inventory management are extensions to Statistical

Inventory Control (SIC), an algorithm for non-integral inventory management. In SIC a

local inventory level is managed in an instantaneous way by making replenishment

decisions based on the costs, lead times, service and statistics of that stock-point, ignoring

the implications of decisions at one stock-point for the inventory levels of other stock-

points [Silver, 1985]. Figure 2-7 illustrates how the integral inventory management

algorithms BSC, MRP/DRP and LRP extend on the non-integral SIC algorithm [Donselaar,

1987].

On the horizontal axis, the place focus of the inventory management algorithms is

plotted, divided into local or integral inventory. SIC and MRP both manage local inventory

levels, that is, the inventory on hand (and on

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