Impact of supply chain collaboration on customer service level and working capital

Collaborations in supply chains as a business strategy is now getting increasing attention at business leadership level. In most cases, collaboration appears to imply vertical integration on both ends of the supply chain, that is, collaboration with suppliers and dealers/retailers. Although horizontal collaboration (that is, between supply chains) is sometimes mentioned, old business model of competition with peers still holds. While benefits of collaboration in general and vertical collaboration in particular have been studied from different angles, research continues to focus on soft issues of collaboration like trust, building partnership and so on because benefits of collaboration are taken for granted. Considering the disorganized retail industry in India which is close to Rs 5,00,000 crores today, we feel there is substantial scope for horizontal collaboration during the consolidation phase. Industry practitioners and researchers are interested to identify quantitative benefits of horizontal collaboration. The area offers a lot of decision flexibility that may be employed to ensure good benefits. However, as our experience indicates sometimes horizontal collaboration may be counter-productive also. Therefore, it would be prudent to investigate its benefits in quantitative terms. Accordingly, we construct a simulator having two parallel supply chains and run it in independent and horizontal collaboration mode. We find that there is substantial reduction in system inventory leading to reduced working capital requirement. More importantly, horizontal collaboration also improves fill rates, a result counter-intuitive to the well understood concept of higher inventory needed to improve service levels. We also find that with increasing demand uncertainty, benefits of horizontal collaboration rise significantly. In our opinion, disorganized Indian retail industry has a golden opportunity to analyze and adopt horizontal collaborations. This paper attempts to offer suitable motivation in this direction.