Jonathan Gabbai

Emergent Systems, Management and Aerospace topics

Technological Evolution, Logistics and Supply Chain
Management
by JONATHAN GABBAI on MAY 24, 2001
Technological Evolution and Supply Chain Management
Around 1990, a combination of factors began to change the role of logistics in major
corporations. Quality initiatives and re-engineering were forcing companies to
evaluate entire processes, rather than individual components. Supply-chain
management, the integrated control over goods, information, and money, became the
key facilitator in this new approach.
In essence, supply-chain management represented an attempt to develop a unified
process by which goods and services would be produced for customer sale and
consumption. Furthermore, logistics was now being considered as more than simply
an opportunity to minimise cost it was developing into a core component of
corporate profitability.
More recently, the Internet has become part of peoples daily lives, and during that
time a steady progression of Internet innovations has occurred. Internet browsers and
the development of the World Wide Web made the Internet accessible. Search engines
were developed in response to the proliferation of Web sites. Commercialisation of the
Internet, initially Business-to-Consumer, spawned online shopping. Search engines
morphed into portals, adding content, shopping, and other items. Finally, e-commerce
came into full fruition with the online auction leading the way, illustrating what
potential the technology posed for organisations with regards to purchasing. It follows
that suppliers quickly warmed up to the Internet, with the aim of fulfilling supplier
expectations.
The Current Situation of E-Commerce
E-commerce basically exists along two dimensions. The first dimension defines the
parties: Business-to-Business (B2B) or Business-to-Consumer (B2C). The second
dimension defines the transactional nature. Here exist several categories of service
types. Sell-side servers are electronic storefronts and catalogues that manage the
purchase process from the selection of items through payment. Buy-side servers
provide the capabilities for purchase orders to be entered and fulfilled. Marketplace
applications establish electronic communities that both buyers and sellers can access
(Prince, 2000). Whilst this model is simplistic in nature it is still applicable, to a large
extent, when the system is scaled up a major issue in B2B commerce that is
discussed later.
The Business-to-Commerce Market
The B2C market has taken a recent pounding in the dot.com bubble burst that was
arguably prophesied by the collapse of boo.com, an exclusive on-line sports retail
store, in May 2000 the first and financially largest B2C brand to attempt a
simultaneous launch around the world. A friend and ex-employee working in Business
Development suggested that an over-enthusiastic management dogged the company,
spending money lavishly and relying on the idea that new economy equals new
business rules.
However, one of the key contributors to boo.coms failure was the implementation of
the logistics system. Having overspent in the development phase, the boo.com
management realised that whilst the key to short-term profitability was in setting-up
an in-house logistics and supply system, the required set-up costs were highly
prohibitive.
The company opted to outsource the storage and distribution to two companies in two
locations; DHL in Cologne, Germany (serving Europe) and UPS in Kentucky, USA
(serving USA and rest of world). This was done despite optimistic projection that the
outsourcing model would place boo.com in profit five years after launch, and incur
massive overheads.
Due to this and other contributing factors, after two years of pre-launch work and six
months live on-line, the company was forced into liquidation; venture capitalists (VCs)
got cold feet, and refused further funding to bail the company out a trend that has
accelerated in the B2C market. This has had a knock on effect with the B2B market, but
the fact that B2B start-ups are still getting VC funding (Covisint and Commerce One
are such examples), suggests that the ideas behind B2B have passed a reality-check
sorely lacking in the Internet consumer market.
A further change in attitude towards the B2C market can be found in retail companies,
such as bookstores, who are realising that the Internet is simply another avenue to
reach customers. Whilst many pre-existing companies were worried about start-up
ventures eroding their market share, (Amazon.co.uk for example) it has now
transpired that start-ups were learning logistic lessons the hard way. Recently, many
high-street retail-stores such as Blackwells and Argos have entered the Internet
market, with a well-known brand name and a pre-existing logistics system that has
been extended to accommodate the Internet.
However, this is not a simple exercise, and one should note the troubles of Toys R Us,
whose logistics system broke down during the Christmas 1999 shopping season
because the company couldnt handle the onslaught of customers looking to buy via its
Web site. The toy retailers online order-management tools werent coordinated with
the both the systems and the people overseeing the movement of products through the
supply chain. (Shah, 2000)
Personal experience, on the other hand, suggests that these bricks-and-mortars
companies are faster and more reliable in delivering orders (especially obscure
textbooks) when compared to Internet-only brands. It would be an interesting exercise
to formulate this idea; so far, such information has eluded the author.
Since we have seen that the B2C market is in difficulties and that, in the short to
medium term, the Internet will only really be used as an extension to the shop-front,
this report will concentrate on the financially vaster B2B commerce market that
encompasses a broad range of inter-company transactions. This includes wholesale
trade as well as company purchases of services, resources, technology, manufactured
parts and components, as well as insurance and financial services.
The Size of the Business-to-Business Market
The potential size of B2B e-commerce in the economy is vast, though somewhat
difficult to pin down. Jupiter Communications (2000) estimates that overall
transactions of goods (excluding services) between businesses in the United States
should amount to $11.5 trillion in 2000, of which $336 billion are conducted
electronically.
By 2005, they expect the online component to represent $6.3 trillion out of a total of
$15.1 trillion. The Gartner Group estimates it to be $7.29 trillion by 2004
(Montgomery Research, 2000). A bit more modestly, Goldman Sachs (2000) projects
B2B e-commerce trans actions to reach $4.5 trillion worldwide by 2005. The Gartner
Group estimates that there were $90 billion in Internet B2B transactions in 1999, by
comparison with only $16.7 billion in Internet B2C transactions, including brokerage
fees for online financial trading as well as retail sales of goods (Uchitelle, 2000).
The Impact of Business-to-Business E-Commerce
E-commerce innovations aim to reduce the cost of procurement before, during and
after the transaction. At every stage, e-commerce avoids the need to translate
computer files into paper documents, a process that generally involves errors, delay
and costly clerical personnel. E-commerce automates this process by mediating
transactions through Web sites and Electronic Data Interchange (EDI). Note that EDI
is an e-commerce technology older than the World Wide Web that involves point-to-
point communications done over proprietary networks, rather than over the Internet.
Relative to EDI, Internet commerce offers considerable advantages in terms of cost
and convenience. Internet commerce typically makes use of open standards and off-
the-shelf technology on a global network, while EDI relies on customised hardware
and software. (Eriksen, 2000).
Before the transaction, Internet technology may lower the cost of searching for
suppliers or buyers and making price and product comparisons. Search costs can be
significant relative to the value of the product, particularly for small purchases. Alf
Sherk, the founder of e-Chemicals, claims: When youre dealing with one or two drum
quantities, the cost of comparison shopping can be more than the value of the
product??? (Jones, 1999).
Sales personnel acting as sales representatives have traditionally carried out such
mundane tasks as tracking product availability and pricing and supplying such
information to customers. By automating these information services, e-commerce
relieves sales personnel of these tasks, allowing them to concentrate on account
management and marketing strategy (Slade, 2000).
During the transaction, e-commerce can reduce the cost of communicating with
counterparts in other companies regarding transaction details. Transactions over
computer networks avoid many of the associated costs of interpersonal economic
exchange, including the costs of travel, time spent on communication, physical space
for meetings, and processing paper documents.
After the transaction, electronic commerce allows companies to lower costs of
communication, to monitor contractual performance, or to confirm delivery. In
addition, companies can apply information generated by the transaction to update
their inventory, production and accounting records by automatically linking their
transactions to software used for managing all aspects of the firm including sales,
purchasing and operations.
The potential cost savings in this area are substantial. Processing a purchase order
manually, including paperwork, data entry, phone calls, faxes, and approval requests,
can be quite expensive, so online transactions might easily reduce costs by a factor of
five or ten or more. There is evidence that such cost reductions are possible. British
Telecom estimates that by moving external procurement functions to electronic
commerce, it has reduced its costs from $113 to $8 per transaction (Phillips and
Meeker, 2000).
MasterCard estimates that the cost of processing purchase orders has fallen from $125
to $40, with the time involved cut from 4 days to 1.25 days (Alaniz and Roberts, 1999).
Lehman Brothers finds that a financial transaction is $1.27 for a teller, $0.27 for an
ATM and $0.01 for an online transaction (The Economist, 2000). Online brokerage
fees have fallen to below $5 in comparison with traditional discount brokerage fees
exceeding $50, suggesting a decrease in costs in back-office operations and brokerage
transactions with financial exchanges. Even if such estimated savings are greater than
average or vary across industries, their aggregate impact is likely to be enormous. By
lowering the costs of transactions, e-commerce will change not only operating costs
but also the characteristics and scope of feasible transactions.
Business-to-Business E-Commerce Supply Chains
In an effective B2B e-commerce environment, the supply-chain can easily be viewed as
a single virtual enterprise, a true value chain in which all resources use Internet
technologies to communicate and collaborate effectively, providing and gaining instant
access to information.
An efficient supply-chain can be realised by integrating all its business applications
electronically. A complete B2B e-commerce solution can be realised by integrating IT
systems at two levels. For any organisation, the first level of integration is required
with the rest of the internal business, while the second level of integration is required
between supply-chain partners and customers. Many business customers are shifting
purchasing, logistics, and overall supply management to the Internet to shorten supply
chains. To this end, it is predicted that within five years it is likely that 20 percent of all
business transactions will be carried out electronically. (Australian Internet & E-
Commerce Special Report, 2000)
One of the biggest challenges in any supply-chain is getting the right information to the
right place at the right time. Traditional supply-chains have been dominated by fax and
batch information transfers, mechanisms that are faltering under the new
requirements for speed, flexibility and ever increasing volumes of data. The key to
better supply-chain performance is to ensure that all the members of the chain can
create, share, and use the information that drives their collective business.
For most organisations, years of accumulating independently developed applications
running on a cross-section of hardware systems have resulted in complex and
sometimes unwieldy IT environments. The diversity of applications ranges from
common packaged desktop software and front-end applications, such as sales force
automation, to the Enterprise Resource Planning (ERP) software (e.g. e-
manufacturing, distribution, HR, financial management applications) to custom-
developed applications. External systems and technologies encountered through the
supply-chain further complicate the problem of integrating all of these dissimilar
systems. The key to a really efficient supply-chain is application integration.
Application integration involves:
The transportation and transformation of data between one or more business
applications;
The business rules that govern when this transportation and transformation takes
place;
The integrity constraints that determine the success or failure of the integration.
(Prince, 1999)
However, the really exciting aspect of e-commerce supply chains is on the level beyond
application integration, as illustrated in figure 1. As the supply-chain evolves in the
information age, the Webs capability to support tight coordination between business
partners means that all the information, transactions, and decisions that are the
essence of synchronised supply chains will flow through the Web.

Figure 1 The evolution of supply-chain integration, leading to increased benefits
Anderson (2000)
Using the Internet to connect the systems of supply-chain partners will become the
medium through which the essential processes of managing and synchronising supply
chains are carried out. As it does so, it will change the nature of supply-chain
businesses completely. Anderson (2000) states, A company that misses this
distinction [integration versus synchronisation] is in grave danger. It may find itself
celebrating the squeezing of supplier margins at auction or the reduction in inbound
inventory by sharing forecasts while its competitor builds a tightly linked alliance that
shuts it out of the channel to the market completely.???
Using On-line Markets to Revolutionise Buying and Selling
As mentioned earlier, the real benefits of e-commerce with regard to purchasing and
supply come at the level beyond simple auctions. Once an organisation is synchronised
with itself (especially if it is large) and other companies and even an entire industry,
the benefits of dynamic supply networks can be harnessed. These networks tackle the
inefficiencies that build up when no one company has ability to view the supply system
as a whole.
For an example, consider two companies with operations in the same region that are
ordering items from overseas. Each will be placing orders with similar logistics
requirements (similar pick-up point, similar destination, similar time-frame) but no
one has the network visibility to see the logic of bundling the products together to
reduce transport costs and provide an improved service. (Moore, 2000)
Dynamic supply networks operate on the basis that there are multiple points of supply
and multiple points of delivery that must be actively managed as a network. The
network managers or even autonomous software agents (Gabbai, 2000) create value
by gaining complete visibility across the network, and are therefore in a position to
maximise the efficiency of the total network.
The customers of the network see the reduced costs and better service of the system
and tend to be comfortable participating with their competitors as inbound logistics is
rarely seen as a point of differentiation.
The benefits from dynamic supply networks come from the combination of greater
automation of processes and the ability to consolidate purchase orders across supplier
and transport providers. An early benefit is the reduction of administrative costs for
each transaction. The major cost reduction target is transportation by consolidating
loads and reducing unplanned shipments. However, improved visibility of demand
across several companies creates the opportunity to drive down procurement costs
through not only volume price breaks with customers, but also a more powerful
negotiation position.
Further, tighter control of the supply side allows managers to gain other efficiencies
elsewhere in the supply chain. Lower inventories, fewer stock outs that lead to lower
production losses, and better customer service are some of the secondary benefits that
may be achieved (Moore, 2000).
Purchasing and Supply in the Aerospace and Automotive Sectors
Boeing Co., Lockheed Martin Corp, BAE Systems and Raytheon Co., four giants in an
aerospace market with over $400 million in annual sales have recently agreed to join
forces to create the largest B2B industry portal. (BAE Systems, 2001)
Initially, the four aerospace companies will equally share 75 percent of a new company
being formed to operate the exchange. Adjustments will be made proportional to each
founders flow of e-commerce through the exchange in its first three years. Twenty
percent will be reserved for additional exchange participants. Commerce One Inc.
providers of the exchange software, a system designed to support layers of common
and proprietary components, will control another 5 percent. Such layering, the
participants say, lowers risk by enabling gradual integration of new and old
technologies. (Lawrence, 2000)
The range of aerospace and defence commodities available on the exchange will be
very substantial. Examples include raw materials; expendable parts such as fasteners,
fittings and brackets; technical data, aircraft components, defence electronic
components and aftermarket parts.
Thomas Gonzales, Commerce Ones chief technical officer said, A typical commercial
airplane, for instance, contains as many as six million parts and is supported by
millions of pages of technical documentation In addition, there will be an e-
marketplace for the indirect products and services that aerospace companies, airlines
and their suppliers need to operate their businesses.??? (Commerce One, 2000)
Commerce One maintains that the ability of software to evolve will influence major
aspects of commerce software systems. Issues addressed in the aerospace/defence
exchange include:
Cost of ownership, i.e., the cost of updating and changing systems to meet new
business requirements;
Capitalisation on new business opportunities by extending existing commerce
systems and building new ones;
Increased efficiency through improvement of business processes supported by
partnering commerce systems;
Heightened interconnectivity in the business process, business protocol and
technology levels;
Market growth and cost reduction through interoperability with new customers
and partners. (Lawrence, 2000)
This third party logistics model is increasingly popular, and has recently been adopted
by the automotive industry, headed by Covisint (partnered with Commerce One). They
intend to provide a hub into which automotive buyers and suppliers can trade
information as well as products, in an efficient and visible manner. (Covisint, 2001)
Covisint predict that the average savings made between suppliers and the Original
Equipment Manufacturer (OEM) to be in the region of $1,064 per car. This figure is
split fairly down the middle between the OEM and its suppliers. This figure spans
across savings from warranty expenditure, and inventory carrying through to
specification alignment. These savings total a projected value of $13.8 billion in
savings to the American auto industry. (Commerce One/Covisint, 2001)
Conclusions
From the information presented in this report, one can initially say that the move from
traditional logistics to e-commerce based systems is a certainty in many large industry
sectors the current and future amounts of money in B2B trading are a testimony to
that. However, placing a financial benefit to supply-chain management through e-
commerce is a difficult task. Triplett and Bosworth (2000) observe that economic
changes attributable to e-commerce cross the traditional production boundary used in
national accounts.
As an example, they compare the purchase of a book from a traditional retailer with
the purchase of a book from an online retailer. Comparing the prices in the two
settings ignores the costs of travel and time involved in visiting the traditional retailer,
while explicitly counting the costs of shipping and handling for the online purchase. In
the case of B2B e-commerce, one would like measurement of productivity to reflect
total net benefits, including lower search and procurement costs for buyers and sellers.
A related question is how much of the current activities of companies in
manufacturing, contraction, energy, transportation are devoted to production
operations and how much are attributable to transactions.
Why is this radical change so certain? It is not that the technology is fashionable,???
nor even that there are efficiencies to be gained. At the heart of the matter are
customers ever increasing demands. Customers whether they are business
customers or individual consumers are looking beyond cost as the sole differential of
value. They are demanding innovation and personalisation of not only the products but
of the associated service and delivery. The increased variety and velocity of business
increases the complexity of the supply-chain issues exponentially and yet at the same
time requires even greater flexibility.
Whilst simple ideas of supply-chain e-commerce have been presented, such as the on-
line auction, and B2C purchasing as an extension to a business, it is the ability to
integrate multiple systems and various organisations and even industries that will
ultimately justify the use of e-commerce supply-chains.
The competitive power in this environment will lie with a network of business partners
who each bring the specific capabilities to bear. But the supply-chain activities of these
partners must be tightly synchronised with the demands of the market place. That level
of coordination requires not only the ability to communicate but also the capability to
manage the complexity and immediacy of synchronisation.
Prince (1999) states The impact on the way the supply-chain operates is far-reaching:
the supply-chain as it is known today will effectively disintegrate; the management of
supply-chain activities will become far more dynamic and decision-making will occur
faster and will be based on real-time information.???
However, as with all things complex, there are many potential pitfalls. The huge
complexity in systems integration, which is fundamental for an efficient and workable
supply-chain system that is integrated to other systems is surly a major issue. For
example, companies will need to set up a platform that enables suppliers and
customers to retrieve information about the demand picture, forecasts, delivery dates,
shipment tracking, and other data necessary for planning their business suggestions. A
logistics hub would allow buyers, sellers, distributors, and transportation providers to
tap into one central source, pull data from ERP systems, and receive order-tracking
alerts and notification of potential problems. (Shah, 2000)
However, according to Roger W. Lowther, vice president of transportation services at
USCO Logistics, a logistics provider in Palo Alto, USA, companies shouldnt plunge
into technology complexities. Many companies dont consider logistics a core
competency, and the only alternative is farming out logistics functions to third-party
logistics providers (3PLs).
In some ways, though, the 3PLs could be at the innovative forefront on the e-
commerce supply-chain. These specialist logistics groups will not own any traditional
logistics assets, but rather will manage the systems and make the decisions related to
the supply-chain network. Furthermore, as with the Commerce One business model,
they will provide the means to connect proprietary and non-proprietary trading
systems to a massive network hub, where a whole industry can reap the benefits of
global trading and high visibility.

Figure 2 Supply-Chain Integration Evolution Commerce One/Covisint (2001)
As Covisint (Commerce One/Covisint, 2001) have identified, the 3PL model will tend
to increase the need for a centralised control (see figure 2), as well as being highly
flexible and scalable. Whilst this model is simple to comprehend, it has major
drawbacks. Scalability is not simple to attain (just look at scalability problems in SAP
software implementation), and by having one central hub, suppliers and purchasers
are relying on the reliability of one partner. Furthermore, should a technical difficulty,
virus, or even a malicious hacking attack occur, the entire system can break down
(Australian Internet & E-Commerce Special Report, 2000). The peer-to-peer system
that relies on many individual connections lacks the visibility of the central hub
system, but is much more reliable; should one supplier system go down, the overall
network will still operate. A compromise between the two systems may offer more
reliability and functionality in the future (Gabbai, 2000).
Ultimately, it is suggested that, as with new business models and technologies, it is
uncertain what types of market mechanisms will be favored by e-commerce and the
relative importance of different types of intermediaries. Will industry consortia own
B2B exchanges or will they tend toward independence? Reiley (2000)
The plethora of entrants and business models, and the significant returns to market
consolidation, suggest that substantial entry and exit of firms and models will take
place before the true and substantial benefits of B2B purchasing and supply e-
commerce are obtained.
References
Alaniz, S., and Roberts, R., E-Procurement: A Guide To Buy- Side Applications,???
Stephens Inc, (27 December 1999)
Australian Internet & E-Commerce Special Report,??? Australian Government Body (11 April
2000)
Eriksen, L., Online Vertical Markets: Not a One-Size-Fits-All World,??? The Report
on Manufacturing, March, Boston: AMR Research (2000)
Gabbai, J., Agent Technology within Industry,??? First Year EngD Transfer Report,
UMIST (September 2000)
Goldman Sachs, Technology: Internet-Commerce,??? United States, Global Equity
Research (9 May 2000)
Jones, K., E-commerce Liposuction Key to Stealth Strategy,??? Forbes AS AP, (4 June
1999)