Recalibrating Demand-Supply Chains

for the Digital Economy

Arun RaieCommerce InstituteRobinson College of BusinessGeorgia State UniversityAtlanta, GA 30303arunrai@gsu.edu

e-Business Research SeminarUniversity of British ColumbiaMay 11, 2001

Competition is now between supply webs … not companies.

Quiz

• A box of cereal spends ? days in the supply chain.

• Total inventory in the pharmaceutical supply chain exceeds ? days and ? $ in savings to be realized.

• Poor coordination in the food industry supply chain wasted ? dollars.

• Boeing wrote-off ? dollars in 1997 due to supply chain inefficiencies.

• It costs, on average, ? dollars to process each purchase order.

• Bonus question: What’s been happening @ X’mas?

Answers

• A box of cereal spends 104 days in the supply chain.

• Distorted information causes total inventory in the pharmaceutical supply chain to exceed 100 days with $11 billion in savings to be realized.

• Poor coordination wasted $ 30 billion annually in the food industry.

• $ 2.6 billion is how much Boeing wrote-off in 1997 due to supply chain inefficiencies

• $80 was paid, on average, to process each purchase order.

• And, Santa did not show up last year with e-toys!

Fulfillment score = D--

Agenda

• What is driving supply chain reconfiguration?

• How do supply chains configurations differ in their strategic assumptions?

• What e-coordination capabilities are required to support each configuration?

• How should supply chain transformations be managed?

Traditional supply chain obsolescence

Direction of flow of demand Direction of flow of product

Raw Material vendor

Tier-II Suppliers

Tier-I Suppliers

Manufacturers Distrib

ution Centers

Retailers Custo

mer Zones

Point of differentiatio

nDistribution

costsMarket

mediation costs

Design &Design &TransformationTransformation

KnowledgeKnowledge

FulfillmentExpectation

s

Value Chain Roles

Supply ChainSupply ChainConfiguration Configuration

& & Coordination?Coordination?

e-coordination e-coordination InnovationsInnovations

Industry standardsHorizontal & vertical solutionsE-intermediary models

Effective market Effective market mediationmediationComplex order Complex order fulfillmentfulfillmentOngoing service Ongoing service expectationexpectationMulti-channel Multi-channel synchronizationsynchronization

Product & process Product & process modularitymodularityTransformation asset Transformation asset obsolescenceobsolescence

Value Value migration migration Consolidation Consolidation patternspatterns

DiscontinuityDiscontinuity

Supply chain configurations

Verticallyintegrated

Fragmented

Solution Web

Modular

End-to-endintegrated

CustomerPush

DemandPull

SynchronizedPush-Pull

CollaborativePush

DownstreamPush

Firm

Hierarchy

Networks

Markets

Demand Fulfillment Perspective

Org

an

izin

g L

og

ic

The vertically integrated firm

Microprocessors

Operating systems

Peripherals

Applications software

Network services

Assembled hardware

IBM DEC BUNCH

Vertically IntegratedSupplier-driverMass Production

The Computer Industry, 1975-85

Tightly coupled knowledgeMassive capital assetsHigh fixed costsLarge product volumes for capital productivity

Fragmented chainInadequate information processing abilityFirm as unit of competitionInternecine warfareZero-sum games

Consumer Retailer Manufacturer SupplierStore

1-800

e-Store

Stockouts and stockpilesCapital inefficiencyPoor customer service

Integrated Chain

End-to-end supply chain perspectiveOrder management, fulfillment & revenue managementMaterials, information and financial flows

High fill rates & on time deliveryReduced inventory costsWorking capital efficiencyNegative cash conversion cycles

Consumer Retailer Manufacturer Supplier

e-Store Store

Collaborative Planning& Forecasting

The UPS Opportunity?

Management services

Distribution, Storage & Transportation

Internet-enabled applications infrastructure

Modular product design

MicroprocessorsOperating systems

PeripheralsApplications softwareNetwork services

Assembled hardware

IBM DEC BUNCH

Vertically IntegratedSupplier-driverMass Production

The Computer Industry, 1975-85

Source: Fine, 1998

Intel Moto AMD etc.

Microsoft Apple Unix

HP Epson Seagate etc.etc.

Microsoft Lotus Novell etc.

DEC HP IBM EDS etc.

HP Compaq IBM Dell etc.

The Computer Industry, 1985-95

Microprocessors

Operating systems

PeripheralsApplications software

Network services

Assembled hardware

Horizontal structureInnovation focusedMass customization

Modular chain

Distributor/ManufacturerWeb site

3 PL Partners

Supply chain perspectiveSeparates architectural & modular knowledgeLow interdependency; high recombinability

Contract manufacturers

Contribution margin focusInnovation, order management, fulfillment, & revenue management

Suppliers Resellers

Distributor- DCs, Warehouses

PhysicalInformation/Financial

Cold plug-ins (spot equity focus)

Short-term service partners

e-Platform infrastructure (network, data, applications)

Long-term business partners

MR

O

Capacity

Offi

ce

Auto

matio

n

Routin

e

IT S

erv

ices

Know

ledge

Com

ple

ments

Utilitie

s

Require

ments

Dete

rmin

atio

n

Solu

tion

Develo

pm

ent

Revenue

Managem

ent

Reverse

Logistics

Fulfi

llment

Pla

tform

D

evelo

pm

ent

Hot plug-ins (serial equity focus)

Customer

Knowledge integration

& platform services

Transaction

integration

Solution webs

Challenging “artificial”:Product categoriesConsolidated demand timeIntegral product designs

SUPPLY CHAIN CONFIGURATION Properties Vertically

Integrated Fragmented End-to-End

Integrated Modular Chains Solution Webs

Unit of Competition

Firm Firm Supply chain

Supply network Solution networks

Strategic Focus Value chain control

Coercive supply chain gaming

Cooperative buffer reduction

Mass customization; Postponement of differentiation

Points of presence in fulfillment webs

Knowledge Integration

Tightly coupled within the firm

Tightly coupled within the firm

Tightly coupled SC planning & execution knowledge

Separation of modular & architectural knowledge

Separation of modular, architectural & platform knowledge

Strategic profiles of supply chain configurations

SUPPLY CHAIN CONFIGURATION Properties Vertically

Integrated Fragmented End-to-End

Integrated Modular Chains Solution Webs

External Coordination

Non-existent Non-core activities.

SC planning & execution

Innovation; SC planning & execution

Platform development; knowledge integration

Asset specificity Low transaction specific assets

Low transaction specific assets

Transaction specific assets for SC planning & execution

Transaction specific assets for product development & SC planning/execution

High transaction specific assets for knowledge integration & SC planning/execution

Contracting Rationale

Transaction cost & risk

Transaction cost & risk

Predictable service levels

Innovation capability & predictable service levels

Complementary platforms & problem-solving knowledge

Strategic profiles of supply chain configurations

Fragmented fulfillment: The bullwhip effect

Customer Retailer Distributor Factory Tier 1 supplierTier II supplier

Upstream amplification of demand variationProgression of a brushfire to an inferno!

Poor coordination of Poor coordination of material,material, information information and and financialfinancial flows flows between and among between and among enterprises participating in the enterprises participating in the demand fulfillment process.demand fulfillment process.

Sequential interdependenceLow transaction specific capitalLimited information sharingSafety stock exaggerationHost-centric legacy appsIT reinforces decision structures

Machine tools at bullwhip tip

-80%-60%-40%-20%

0%20%40%60%80%

100%

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

Data from United States, 1961-1991 (GDP, vehicle production, and machine tool orders

% C

ha

ng

e, y

ea

r to

ye

ar

% change GDP% change vehicle production index% change net new orders machine tool industry

Reported in Fine, 1998

Multi-channel End-to-End Integration

PharmaceuticalManufacturers

McKessonDistribution Center

CVSDistribution Center

Store

Supply chain-wide visibilityStellar order management & fulfillmente-ramps to complementary resourcesSCM+ERP+CRMMulti-echelon resource planningOptimally staging and moving goods

Online channels & flows

Offline channels & flows

“Calibrated” online & offline coupling

e-Store

PhysicalInformation/Financial

Modular chains

SuppliersIngram Web Site

Reseller/Customer

3 PL Providers

Buffer staging & movementComponent level inventory rationalizationInventory velocity & channel assembly

Solectron

Service role of distributors3PL outsourcing SC Knowledge co-creation

Suppliers Warehouses, DCs

PhysicalInfo/Financial

Solution Webs: Weaving Boundary Spanning Partnerships

Carriers, 3PLs

Solutions development

Systems solutions

Managementof 4PL

Process & Metrics Management

Systems integration

3PLManagement

Process Execution

Customer service excellence

Investment in resources

Asset structure (Cisco/UPS; Kozmo & Strabucks)Multiple value architectures (UPS’ eReturns)Partnerships & complex contracts

Transaction aggregation (UPS & Buy.com)Visible platform architecturesCoordinating inter-generational innovations

SUPPLY CHAIN CONFIGURATION Properties Vertically

Integrated Fragmented End-to-End

Integrated Modular Chains Solution Webs

Fulfillment focus

Repeatable, predictable & efficient

Sporadic Repeatable, predictable & efficient

Responsive, anticipatory & effective

Responsive, anticipatory & comprehensive

Process optimization focus

Firm’s value chain activities

Firm’s value chain activities & transaction costs

Multi-echelon SC planning & execution

Multi-echelon synchronization of supply- & demand- processes

Multi-echelon knowledge integration for dynamic fulfillment

Flow coordination

Internal coordination of information, physical & financial flows

Batched inter-firm, dyadic coordination of information, physical & financial flows

Real-time supply-chain wide coordination of information, financial & physical flows

Real-time supply- & demand-chain coordination of information, financial & physical flows

Real-time customer requirements interpretation & supplier knowledge integration

SUPPLY CHAIN CONFIGURATION Properties Vertically

Integrated Fragmented End-to-End

Integrated Modular Chains Solution Webs

Logistics & distribution role

Push products into market. Focus on transportation and movement.

Break bulk & pool risk

Continuous flow of information, revenue & products

Expedition of upstream demand flow & downstream supply flow

Integration hubs for supplier- & customer- processes

Supply chain visibility

Internal sharing Dyadic transactional data

Orders, fulfillment & revenue flows

Architectural specifications, orders, fulfillment, & revenue flows

Platform capability, complementary supplier- & customer-knowledge, orders, fulfillment, & revenue flows

SUPPLY CHAIN CONFIGURATION

Properties Vertically Integrated

Fragmented End-to-End Integrated

Modular Chains Solution Webs

IS Portfolio Orientation

ERP

ERP; lean external coordination systems

SC planning & execution; ERP; lean CRM systems

SC planning & execution; ERP; CRM.

Platform capability for current & future supplier- & customer-apps

IS Integration Objectives

Functional Lean inter-firm EDI integration

Web-based, extranet & dedicated EDI integration

Web-based, extranet & dedicated EDI integration

Web-based, extranet & dedicated EDI integration of current & future suppliers/customers

Information Exchange Standards

Firm-specific EDI standards XML standards Specialized XML data type definitions & PIP.

Industry-spanning DTDs, app protocol interfaces, and PIP

Supply chain transformation

Verticallyintegrated

Fragmented

Solution Web

Modular

End-to-endintegrated

CustomerPush

DemandPull

SynchronizedPush-Pull

CollaborativePush

DownstreamPush

Firm

Hierarchy

Networks

Markets

Demand Fulfillment Perspective

Org

an

izin

g L

og

ic

Integrate end-to-end supply chainRationalize multi-channel operationsInfuse e-coordination technologiesDevelop info. sharing mindsetManage principal-agent conflictsDevelop suppliers

Supply chain transformation

Verticallyintegrated

Fragmented

Solution Web

Modular

End-to-endintegrated

CustomerPush

DemandPull

SynchronizedPush-Pull

CollaborativePush

DownstreamPush

Firm

Hierarchy

Networks

Markets

Demand Fulfillment Perspective

Org

an

izin

g L

og

ic

Reconfigure assets, products, processes &e-solutions

Integrate using architecture informationDeploy multi-echelon buffering Develop “deep” relationships [3PL, other]Exploit arbitrage opportunities

Supply chain transformation

Verticallyintegrated

Fragmented

Solution Web

Modular

End-to-endintegrated

CustomerPush

DemandPull

SynchronizedPush-Pull

CollaborativePush

DownstreamPush

Firm

Hierarchy

Networks

Markets

Demand Fulfillment Perspective

Org

an

izin

g L

og

ic

Develop platform capabilitiesEmbrace real options perspectiveImplement governance methods for dynamictransactions, incomplete contracts, revenue flows & settlement

Thank You!