Chapter 4 E-Commerce

and Supply Chain

Management
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd 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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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

Internal Functions include processing

functions

Tier one supplier supplies directly to the processor

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

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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fig_04_02

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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 firms 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
Total Cost of Outsourcing :

TC Buy FC Buy VC Buy Q

Total Cost of Insourcing :

TC Make FCMake VCMake Q

Indifferen ce Point :

FC Buy VC Buy Q FCMake VCMake Q

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 2010 Wiley
table_04_02

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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
Have a long-term
Share a common vision
orientation
Are strategic in nature

Share short/long term

plans

Share information

Driven by end-customer
needs

Benefits
Share
risks andof Partnering
Early supplier involvement (ESI) in the design process
opportunities

Using supplier expertise to develop and share cost

improvements and eliminate costly processes
Shorten time to market
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table_04_03

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Suppliers & Partnerships

http://www.businessweek.com/magazine/content/01_23/b373503
6.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,
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manages delivery dates, and tends to their clients.

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Suppliers & Partnerships

http://www.businessweek.com/magazine/content/01_23/b373503
6.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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 2010 Wiley
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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 foreach
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 E-purchasing Process

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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-thantruckload (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 orderpicking 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

Manufacturers Goals

Suppliers Goals

Reduce costs
Reduce duplication of effort
Improve quality

Reduce lead time

Implement cost reduction

program
Involve suppliers early
Reduce time to market

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
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Inventory obsolescence

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Supply Chain Performance

Measurement

Customer demands for better-quality

requires companys 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: dont 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
cont
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 1970s

Electronic Data Interchange (EDI) started in the 1970s
Electronic Storefronts emerged in the 1990s
Net Marketplaces emerged in the late 1990s

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.com

In 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
Amazons 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 Amazons 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 Ingrams 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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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 online MRO suppliers to business who pay
fees to join the market, usually for longterm contractual purchasing
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Current Trends in SCM continued

Increased use of electronic marketplace such as

Value chain management automation of a firms

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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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
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costs.

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.
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