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Chapter 4 – E-Commerce and Supply Chain Management

Operations Managementby

R. Dan Reid & Nada R. Sanders2nd Edition © Wiley 2005

PowerPoint Presentation by R.B. Clough - UNH

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Learning Objectives Describe the different kinds of electronic commerce Describe supply chains and supply chain

management Describe the bullwip effect Describe factors affecting SCM Describe factors affecting global supply chains Describe the role of vertical integration Solve insourcing or outsourcing problems Describe the role of purchasing in SCM Describe the ethics of supply chain management Describe the role of information sharing in SCM

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Learning Objectives (continued)

Describe role of warehouses in supply chains Describe the role of warehouses in supply

chains Describe the concept of crossdocking Describe supply chain performance measures Describe trends in SCM

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Types of E-Commerce E-commerce is defined as the use of the Internet

and the Web to transact business Business-to-Business (B2B) Evolution:

Automated order entry systems started in 1970’s Electronic Data Interchange (EDI) started in the 1970’s Electronic Storefronts emerged in the 1990’s Net Marketplaces emerged in the late 1990’s

Benefits of B2B E-Commerce Lower procurement Administrative costs, access to global

suppliers Lower inventory investment due to price transparency/ reduced

response time Quality enhanced due to earlier involvement between buyers

and sellers, especially during product design and development

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Types of E-Commerce (cont.)

Business-to-Consumer (B2C) Revenue Models Advertising revenue model Subscription revenue model Transaction fee model Sales revenue model Affiliate revenue model

Consumer-to-Consumer (C2C) E-Commerce Peer-to-Peer (P2P) E-Commerce M-Commerce

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Supply Chains & SCM A supply chain is the network of activities

that deliver a product/service to the customer Sourcing of: raw materials, assembly,

warehousing, order entry, distribution, delivery Supply Chain Management is the business

function that coordinates all of the network links Coordinates movement of goods through supply

chain from suppliers to manufacturers to distributors

Promotes information sharing along chain like forecasts, sales data, & promotions

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A Basic Supply Chain

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Components of a Supply Chain External Suppliers

Tier one supplier supplies directly to the processor Tier two supplier supplies directly to tier one Tier three supplier supplies directly to tier two

Internal Functions include: Processing, purchasing, planning, quality, shipping

External Distributors transport finished goods Logics function manages all material movement

including selection and monitoring carriers

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SCM in a Dairy Products Supply Chain

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The Bullwhip Effect & Information Sharing The Bullwip Effect describes

replenishment orders at different chain levels with no apparent link to final demand. Worst at Tier 3

Causes: poor demand forecasting at each level, waiting to batch orders, price fluctuations & promotions, rationing

Counteracting the Effect: Collaborate forecast at all levels, share real

demand information (POS terminals) Order based on demand rates, not batching Stabilize pricing e.g. Wal-Mart “every day low

prices”

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SCM Factors SCM must consider the following trends,

improved capabilities, & realities: Consumer Expectations and Competition –

power has shifted to the consumer Globalization – capitalize on emerging markets Information Technology – e-commerce,

Internet, EDI, scanning data, intranets Government Regulations - like trade barriers Environment Issues – e.g. waste minimization

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Global SCM Factors Managing extensive global supply

chains introduces many complications Substantial geographical distances increase

lead times and inventory investment Forecasting accuracy complicated by longer

lead times and different operating practices Exchange rates fluctuate, inflation can be high Infrastructure problems like transportation,

communication, lack of skilled labor, & scarce local material supplies

Product proliferation created by the need to customize products for each market

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Insourcing vs. Outsourcing What questions need to be asked

before sourcing decisions are made? Is product/service technology critical to firm’s

success? Is operation a core competency? Do you have the capital to provide capacity &

keep the process current? Will outsourcing extend lead times and limit

flexibility? Can others do it for less cost and better

quality?

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Make or Buy Analysis Analysis will look at the expected sales

levels and cost of internal operations vs. cost of purchasing the product or service

QVCFCQVCFC

QVCFCTC

QVCFCTC

MakeMakeBuyBuy

MakeMakeMake

BuyBuyBuy

:PointceIndifferen

:InsourcingofCostTotal

:gOutsourcinofCostTotal

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Example: Make-or-Buy analysis- A small snowboard manufacturing company is presently sourcing the major portion of its manufacturing process. The cost for the purchased board is $50 each and they estimate their current fixed manufacturing costs at $25,000. A consultant has presented a plan which would reduce the variable cost to $20 each, but requires a major in-house investment which would increase their fixed cost to $400,000.

The owner wants to know what unit sales must be to justify the new proposal.

FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $25,000 + ($50 x Q) = $400,000 + ($20 x Q) Q = 12,500 units

Purchasing has identified a new supplier that can produce a board for $30 each. Now what is the Indifference Point?

$25,000 + ($30 x Q) = $400,000 + ($20 x Q) Q = 37,500 units

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Purchasing’s Role in SCM

Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations Developing supplier relationships Determining how many suppliers Developing partnerships

Industry trend is to a much smaller supplier base. Why?

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Critical Factors in Successful Partnership Relations

Benefits of Partnering Early supplier involvement (ESI) in the design

process Using supplier expertise to develop and share cost

improvements and eliminate costly processes Shorten time to market

Have a long-term orientation

Share a common vision

Are strategic in nature Share short/long term plans

Share information Driven by end-customer needs

Share risks and opportunities

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Integrated SCM Implementing integrated SCM requires:

Analyzing the whole supply chain Starting by integrating internal functions first Integrating external suppliers through

partnerships Possible Supply Chain Objectives

Reduce costs, improve quality Reduce lead time and inventory Reduce time to market Increase sales Improve demand data/forecasting

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The Role of Warehouses There are two types–general and

distribution What do warehouses do?

Transportation consolidation from LTL quantities to TL quantities

Product mixing is a value added service which groups a variety of items together for better service and reduced cost

Services like providing a closer location point to the customer. Also customizing services like adding instruction books or proper voltage power cord

Crossdocking to eliminate storage and order picking costs, e.g. Home Depot, Wal-Mart, Costco

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Supply Chain Measurements

Dell Computer has achieved excellent results from their SCM implementation. They have made dramatic improvements in competitive priorities:

Cost – prices 10-15% lower than competition

Speed – Dell can take either a phone or Internet order and ship within 36 hours - Dell’s nearby component warehouse has reduced inventories to 13 days of supply compared to Compaq’s 25 Flexibility – suppliers restock warehouse so Dell can build and ship customized make to order PC’s

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Current Trends in SCM Supply chains will be more agile, flexible, and integrated

to reflect consumer expectations Technology will facilitate real time demand sharing

throughout entire supply chains Winning firms will have the best supply chains, e.g.

Walmart Greater use of net-marketplaces to bring more suppliers

into contact with more suppliers to reduce price and lower transaction costs

Greater use of E-distributors providing products via e-catalog from thousands of suppliers at one market place

E-purchasing companies connecting online suppliers offering VCM for MRO supplies will charge fees to join the market

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Trends in SCM (continued)

More online exchanges for spot requirements of large firms in a single industry, e.g. E-steelcom, E-greenbiz.com

More use of industry owned consortia enabling buyers to purchase direct inputs from a limited set of invited participants, e.g. Covisint.com (automotive), Avendra.com (hospitality), and ForestExpress.com (paper and forest)

More use of value adding third party logistics providers like UPS

More virtual corporations overseeing networks of suppliers SCM performance measurements will focus on quality,

speed, flexibility, and value

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Chapter 5 Highlights E-commerce is the use of the Internet to transact

business; B2B, B2C, C2C, P2P, M-commerce SCM involves integration of all process to make a

product, from raw materials to end user sales The bullwhip effect is the distortion of real

demand cause by multi-level batching, bad estimates, price fluctuations, and rationing

Many factors affect SCM; demands for better service, quality, quicker response, and global marketplaces, fierce competition, & information technology

With global SCM, complicating factors include lengthened lead times, exchange rates, & many infrastructure issues in developing countries

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Chapter 5 Highlights (continued)

Vertical integration is more appropriate for high volume, standard products

Outsourcing is more appropriate for non-core processes and activities

Purchasing manages supplier selection and supplier relationships, including forming partnerships

The ISM has developed ethics principles & standards Information sharing is critical to effective SCM to

minimize the risk inherent in long supply chains Technology like bar code scanners, POS terminals,

EDI, & the Internet have moved information sharing of actual consumer demand closer to real time

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Chapter 5 Highlights (continued)

Warehouses do transportation consolidation, product mixing or blending, and reducing response time

Crossdocking eliminates costs of storage and order picking. Requires close coordination of carriers

Measuring supply chain performance needs to reflect potential improvements in quality costs, service, inventory and capital investment, and productivity

The most significant advance will be the increased use of electronic marketplaces; e-distributors, e-purchasing, online exchanges, and industry consortia

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