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Chapter 4 – E-Commerce and Supply Chain Management

Operations Managementby

R. Dan Reid & Nada R. Sanders3rd Edition © Wiley 2010

PowerPoint Presentation by R.B. Clough – UNH M. E. Henrie - UAA

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

activities involved in delivering a finished product/service to the customer Sourcing of raw materials, assembly,

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

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 Supply Chain can provide strategic advantage

Why Nokia Is Leaving Moto in the Dusthttp://www.businessweek.com/globalbiz/content/jul2007/gb20070719_088898.htm?chan=search

Nokia's supply-chain management may be the best of any company in the world. It has a big head start in fast-growing markets such as China and India. And it has $9.5 billion in cash and practically no debt, so it can invest far more than rivals on developing new products or conquering new markets—and thus build even more intimidating economies of scale. "We are about to report our billionth customer, so we must be doing something right," says Anssi Vanjoki, a Nokia executive committee member responsible for multimedia devices.

Thanks to those advantages, Nokia's global market share has climbed to 37%, and some in the industry think it could hit 40% this year. Business Week July 19, 2007

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Supply Chain Management is Challenging!

http://www.businessweek.com/bwdaily/dnflash/content/apr2008/db2008043_948354.htm?chan=search

Even More Boeing 787 Delays?

Given assembly and design issues, deliveries of the 787 Dreamliner aren't likely until late 2009. Some dissatisfied customers are discussing compensation

Deliveries of the Dreamliner are already 10 months behind schedule and glitches along Boeing's complex global supply chain slowed production and forced the company to redesign its wing box. Asked on Apr. 3 about the possibility of yet another delay, Boeing (BA) spokeswoman Yvonne Leach simply acknowledged that an announcement of a revised schedule is coming soon. Business Week April 4, 2007

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A Supply Chain can be a matter of life & death

http://www.breitbart.com/article.php?id=D8UAB1DO2&show_article=1

Iran has the second largest natural gas reservoir of the world but its supply network has been overwhelmed by high demand. Both reformists and conservatives are increasingly asking the president why Iranians are dying from the cold while sitting on the massive gas fields.

As much as 22 inches of snow fell in areas of northern and central Iran in early January, the heaviest snowfall in more than a decade. Local media have reported 64 cold-related deaths this winter and say gas cuts are to blame. Breitbart.com, January 21, 2008

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Suppliers Key Material Decisions

Location Capacity Lot sizes; that is, how much to make in a

production run Inventory (mainly raw material)

Key Information & Related Decisions Customer orders Costs, market prices EDI; web-based;…

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Manufacturers/Assemblers Key Material Decisions

Location Capacity Sourcing of components necessary

resources: labor, fuel, equipment Lot sizes; that is, how much to make in a

production run Inventory (in all forms)

Key Information & Related Decisions Supplier shipments Customer orders Costs, market prices

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Warehouse/Distribution Centers

Key Material Decisions Location Capacity Inventory (finished & semi-finished)

Key Information & Related Decisions Customer orders Manufacturer/Assembler shipments

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Retailers Key Material Decisions

Location Inventory (finished goods)

Key Information & Related Decisions Customer orders Shipments from Warehouses/DCs Market prices

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Links Logistical or Physical

Routes Modes Capacities

Cyber Rates Tracking of shipments Orders Contracts Regulations

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Components of a Supply Chain External Suppliers– source of raw

material 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

functions Processing, purchasing, planning, quality,

shipping External Distributors transport finished

products to appropriate locations Logistics managers are responsible for

traffic management and distribution management

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Components of a Supply Chain External Distributors transport

finished products to appropriate locations Logistics managers are responsible

for managing the movement of products between locations. Includes;

traffic management – arranging the method of shipment for both incoming and outgoing products or material

distribution management – movement of material from manufacturer to the customer

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Sourcing Issues Which products to produce in-house and which

are provided by other supply chain members Vertical integration – a measure of how much

of the supply chain is owned by the manufacturer

Backward integration – owning or controlling of sources of raw material and component parts

Forward integration – owning or control the channels of distribution

Vertical integration related to levels of insourcing or outsourcing products or services

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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 product/service a core

competency? Is it something your company must

do to survive?

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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 1: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first decision is whether they should make the bagels on-site or by the bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. The believe they will sell 60,000 bagels.

Mary and Sue wants to know if they should make or buy the bagels.

FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x

Q) Q = 56,000 bagels

Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000 bagels, they should make the bagels in-house

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Critical Factors in Successful Partnership Relations

Critical factors in successful partnering include; Impact – attaining levels of productivity and

competitiveness that are not possible through normal supplier relationships

Intimacy – working relationship between two partners

Vision – the mission or objectives of the partnership

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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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Suppliers & Partnershipshttp://www.businessweek.com/magazine/content/01_23/b3735036.htm?chan=search

The key to Stallkamp's first revolution was the emphasis on cooperation among carmakers and their suppliers. Rather than dictate lower parts prices to suppliers, he offered incentives. If suppliers found a way to save a dollar, Stallkamp let them keep 50 cents. And instead of playing competitors off against one another, he pledged loyalty to Chrysler's incumbent suppliers, as long as they could meet contract terms.

The idea is to create alliances of suppliers who have agreed to centralize the control of their supply-chain operations. Suppose that a dozen companies are involved in the manufacturing and assembly of a car seat. Today, the small fry make and deliver parts to a larger integrator, who assembles the seat and delivers it to a General Motors Corp. (GM ) or a Ford Motor Co. (F ) The staff at each of these companies watches over the flow of goods, manages delivery dates, and tends to their clients.

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Suppliers & Partnershipshttp://www.businessweek.com/magazine/content/01_23/b3735036.htm?chan=search

Q: Why do we need to change the way we deal with the supply chain?

A: [Stallkamp] In a nutshell, I still believe that supply chains need to be actively managed by someone. When I was at [Chrysler], we had a concerted policy to help our suppliers and cooperatively manage the supply chain. Now, the OEMs [original equipment manufacturers--i.e., the auto makers] seem to be moving away from active management to more passive management. When that happens, I believe it's up to the supply base itself to try to find another alternative

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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

Government Regulations and E-Commerce – issues of Internet government regulations

Environment Implications of E-Commerce – recycling, sustainable eco-efficiency, and waste minimization

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Global SCM Factors Managing extensive global supply

chains introduces many complications Geographically dispersed members -

increase replenishment transit times and inventory investment

Forecasting accuracy complicated by longer lead times and different operating practices

Exchange rates fluctuate, inflation can be high Infrastructure issues 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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The Role of Purchasing

Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations is a constant concern Developing supplier relationships is

essential Determining how many suppliers to use Developing partnerships

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The Traditional Purchasing Process

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The E-purchasing Process

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The Bullwhip Effect Bullwhip effect - the inaccurate or distorted

demand information created in the supply chain

Causes are generated by: demand forecasting updating, order batching, price fluctuations, rationing and gaming

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Bullwhip Effect (from Chase, Jacobs, &

Aquilano) O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

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Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chain

The magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

McGraw-Hill

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The Bullwhip Effect Counteracting the Effect:

Change the way suppliers forecast product demand by making this information available at all levels of the supply chain

Share real demand information (POS terminals)

Eliminate order batching Stabilize pricing Eliminate gaming

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Issues Affecting Supply Chain Management

Information technology – enablers include the Internet, Web, EDI, intranets and extranets, bar code scanners, and point-of-sales demand information

E-commerce and e-business – uses internet and web to transact business

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Supply Chain Logistics & Distribution

Warehouses involved in supply chain distributions and include Plant warehouses Regional warehouses Local warehouses

Warehouses can either be General – used for long-term storage Distribution – used for short-term storage,

consolidation, and product mixing

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Supply Chain Logistics & Distribution

Transportation consolidation – warehouses consolidate less-than-truckload (LTL) quantities into truckload (TL) quantities

Product mixing – warehouse value added customer service of grouping a variety of products into a direct shipment to the customer

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Supply Chain Logistics & Distribution

Services are offered can improve customer service by moving goods closer to the customer and thus reducing replenishment time

Crossdocking or movement of material without storage and order-picking material while still performing the receiving and shipping functions.

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Supply Chain Logistics & Distribution

Radio Frequency Identification Technology (RFID) – automated data collection technology which relies on radio waves to transfer data between reader and RFID tag

Third-party Service Providers – ease of developing an electronic storefront has allowed the discovery of suppliers from around the world

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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 Manufacturer’s Goals

Reduce costs Reduce duplication of

effort Improve quality Reduce lead time Implement cost reduction

program Involve suppliers early Reduce time to market

Supplier’s Goals Increase sales volume Increase customer

loyalty Reduce cost Improve demand data Improve profitability

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Supply Chain Measurements

Measuring supply chain performance Traditional measures include;

Return on investment Profitability Market share Revenue growth

Additional measures Customer service levels Inventory turns Weeks of supply Inventory obsolescence

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Supply Chain Performance Measurement

Customer demands for better-quality requires company’s to develop ways to measure improvements

Some measurements include Warranty costs Products returned Cost reductions allowed because of product

defects Company response times Transaction costs

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Eliminating Sources of Waste in Supply Chain

Overproduction: don’t build product before needed

Delay between activities in chain: eliminate them

Unnecessary transport or conveyance of product: includes both internal and external movement

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Eliminating Sources of Waste in Supply Chain con’t Unnecessary movement of people:

includes travel or reaching due to poorly designed work space

Excess inventory ready and in position: includes early deliveries, excess inventory, etc.

Suboptimal use of space: trailer loads, warehouses, etc.

Errors that cause rework: billing errors, inventory discrepancies, etc.

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Types of E-Commerce

E-commerce is defined as the use of the Internet and the Web to transact business

Two types of e-commerce are Business-to-business (B2B) and Business-to-consumer (B2C)

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Types of E-Commerce 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, Low-cost access to global suppliers Lower inventory investment due to price

transparency/reduced response time Better product quality because of increased cooperation

between buyers and sellers, especially during the product design and development

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Types of E-Commerce Business-to-Consumer (B2C):

On-line businesses try to reach individual consumers

B2C revenue model sources Advertising – Web site offers providers and

opportunity to advertise Subscription –Web site charges a subscription fee

for access to the site Transaction – company receives a fee for

executing a transaction Sales – a means of selling goods, information, or

service directly to customers Affiliate – companies receive a referral fee for

directing business to an affiliate

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E-Commerce Case: Amazon.comIn 2003, Amazon achieved a net profit margin of 0.7%. Though not spectacular, this was a milestone for a company that had run large losses in each and every year since its founding as an online bookstore in 1995. Healthier net profit margins of 8.5% and 4.2% followed in 2004 and 2005, respectively.

One of the keys to attaining profitability was the reconfiguration of Amazon’s supply chain. At first Amazon had attempted to implement a pure pull system without the use of warehouses. The internet had seemed to pave the way to this mode of operation. Most of Amazon’s books came from the wholesaler Ingram Book Group. Ingram maintained inventory but received an appreciable amount of sales revenue in return. In addition, Amazon shared Ingram’s inventory with other booksellers, leading to costly stockouts during peak demand periods, such as the holidays.

Amazon adapted by redesigning its supply chain to include warehouses that are managed as “push” operations. The retail part of operations, however, remains a “pull” system, satisfying demand in the form of individual orders.Sources: Designing and Managing the Supply Chain, Third Edition, by D. Simchi-Levi, P. Kaminsky, and E. Simchi-Levi, McGraw-Hill Irwin, Boston. Hoovers online, http://www.hoovers.com/

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E-Commerce Case: Furniture.com

Furniture.com was a shooting star during the dot.com boom in the late 90s. It featured thousands of products and at its peak drew 1,000,000 visitors per month to its website.

But while Furniture.com was racking up $22 million in sales through the first 9 months of the year 2000, it was also incurring huge logistics costs because of inefficient delivery processes. While furniture production lot sizes are typically small and activated by orders, economic delivery lot sizes are usually much larger and regularly scheduled, causing a mismatch in the supply chain. The firm also encountered unexpected problems maintaining an alliance with 6 regional distributors along with thorny repair and return issues. Business was permanently tabled at Furniture.com in November, 2000.

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E-Commerce Case, continued: Furniture.com

Or so it seemed! In mid-2002, several former employees rallied investors to re-start the company. The new Furniture.com eschews distribution centers and a fulfilment infrastructure. “The previous Furniture.com followed the model en vogue at the time, the model getting funded at the time, which was to be the next Amazon of the relevant category” said President Carl Prindle. In markets where it operates, the new company partners with brick-and-mortar retailers, who provide the distribution. The firm’s focus is now exclusively on upgrading its online marketing, providing, for instance, a room planner to online shoppers. A percentage of each online sale is remitted to Furniture.com in return.

Sources: Designing and Managing the Supply Chain, Third Edition, by D. Simchi-Levi, P. Kaminsky, and E. Simchi-Levi, McGraw-Hill Irwin, Boston.“Reincarnated Furniture.com partners with retailers,” by Mike Duff, DSN Retailing Today; 2/7/2005, Vol. 44 Issue 3, p6, 2p

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Current Trends in SCM Increased use of electronic marketplace

such as E-distributors – independently owned net

marketplaces having catalogs representing thousands of suppliers and designed for spot purchases

E-purchasing – companies that connect on-line MRO suppliers to business who pay fees to join the market, usually for long-term contractual purchasing

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Current Trends in SCM - continued

Increased use of electronic marketplace such as Value chain management – automation of a firm’s

purchasing or selling processes Exchanges – marketplace that focuses on spot

requirements of large firms in a single industry Industry consortia – industry-owned markets that

enable buyers to purchase direct inputs from a limited set of invited suppliers

Decreased supply chain velocity due to greater distances with greater uncertainty and generally less efficient.

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SCM Across the Organization SCM changes the way companies do business. Accounting shares SCM benefits due to

inventory level decreases Marketing benefits by improved customer

service levels Information systems are critical for information

sharing through PSO data, EDI, RFID, the Internet, intranet, and extranets

Purchasing is responsible for sourcing materials

Operations use timely demand information to more effectively plan production schedules

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Case in Supply Chain Network Design: Procter & GambleIn the 1990s, P&G was facing competitive pressure primarily with regard to overall cost. Excess capacity at plants, largely due to successful quality initiatives in the 80s, and reduced distribution requirements, largely due to redesigned “compactified” products, presented P&G with an opportunity to re-design their supply chain.

Comprised of over 50 product categories, over 60 plants, 15 distribution centers, and over 1000 customers, the redesign was a major project involving over 500 people organized in more than 30 teams. Analysis of this supply chain led to the formulation of a large-scale mixed integer linear program,

An important feature of the DSS developed around this model was the visualization capability afforded by integrating a Geographic Information System (GIS) into the user interface. The GIS gave managers a good grip on solutions generated by the DSS under various scenarios, such as that of closing specific plants. The documented pre-tax savings of roughly $200 million annually is proof of the pudding indeed in the case of this DSS.

Sources: "Blending OR/MS, Judgment, and GIS: Restructuring P&G's Supply Chain" by Jeffrey Camm et al.

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3M Supply Chain Designhttp://www.businessweek.com/magazine/content/07_24/b4038410.htm?chan=search

EXPANSION AND CONTRACTION  Buckley plans to spend $1.5 billion on 18 new plants or major expansions around the world, including 11 outside the U.S., with four new factories in China alone. The thinking is that the new factories will add much needed capacity—especially abroad, where 3M pulls in more than 60% of its revenues, and where it expects to get up to 75% over the next several years.

Despite a vast, complicated network of 64 international subsidiary companies, just 35% of 3M's manufacturing capacity is overseas. In Buckley's view, the plant expansions won't just add capacity—they are an opportunity to make the whole logistics chain more efficient by shortening supply lines and bringing production closer to local markets.

How did things get that way at 3M? For a long time, one of the tenets of the 3M catechism was "make a little, sell a little."

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Once a project was green-lighted, it might receive funding, but the developer or scientist would have to make small quantities of the product in an ad hoc manner by using idle spots of time at factories throughout the 3M system. It was a way to minimize the financial risk of a new product, and it served the company quite well—when its infrastructure and sales were centered mainly in the U.S.

KEEPING INVENTORY MOVING  Now, "make a little, sell a little" means that a typical product might be extruded in Canada, machined in France, packaged in Mexico, and sold in Japan. That's costly, and it means that half of 3M products spend 100 days traveling through the supply line, according to Buckley, even before it has to jump any local bureaucratic hurdles.

The net result is that 3M has a lot of money tied up in inventory around the world that's just sitting on boats, in trucks, and in warehouses. In the fourth quarter of 2006, for instance, sales rose about $500 million. But working capital went up $450 million and receivables increased $250 million, Buckley says. If that trend continues, "You'd be borrowing money to grow," he says.

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Chapter 4 Highlights Every organization is part of a supply chain, either

as a customer or as a supplier. Supply chains include all the processes needed to make a finished product, from the extraction of raw materials through the sale to the end user. SCM is the integration and coordination of these efforts.

The bullwhip effect distorts product demand information passed between levels of the supply chain. The more levels that exist, the more distortion that is possible. Variability results from updating demand estimates at each level, order batching, price fluctuations, and rationing

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Chapter 4 Highlights (continued)

Many issues affect supply chain management. The Internet, the WEB, EDI, intranets, extranets, bar-code scanners, and POS data are SCM enablers.

B2B and B2C electronic commerce enable supply chain management. Net marketplaces bring together thousands or suppliers and customers. Allowing for efficient sourcing and lower transaction costs.

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Chapter 4 Highlights (continued)

Global supply chains increase geographic distances between members, causing greater uncertainty in delivery times.

Purchasing has a major role in SCM. Purchasing is involved in sourcing decisions and developing strategic long-term partnerships.

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Chapter 4 Highlights (continued)

Ethics in supply management is an ongoing concern. Since buyers are in a position to influence or award business, it is imperative that buyers avoid any appearance of unethical behavior or conflict of interest.

Companies make insourcing and outsourcing decisions. These make-or-buy decisions are based on financial and strategic criteria.

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Chapter 4 Highlights (continued)

Partnerships require sharing information, risks, technologies, and opportunities. Impact, intimacy, and vision are critical to successful partnering.

Supply chain distribution requires effective warehousing operations. The warehouses provide transportation, consolidation, product mixing, and service.

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Chapter 4 Highlights (continued)

Integrated SCM usually begins with the manufacturer integrating internal processes first. The, the company tries to integrate the external suppliers. The last step is integrating the external distributors.

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Chapter 4 Highlights (continued)

A company needs to evaluate the performance of its supply chain. Regular performance metrics (ROI, profitability, market share, customer service levels, etc.) and other measures that reflect the objectives of the SC are used.

The emergence of net marketplaces has significantly affected SCM. As supply chains become longer, it is likely that supply chain velocity will decrease. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level.