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

© 2010 Wiley 1
 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

© 2010 Wiley 2
A Supply Chain can provide strategic advantage
Why Nokia Is Leaving Moto in the Dust
http://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
© 2010 Wiley 3
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

© 2010 Wiley 4
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
© 2010 Wiley 5
 © 2010 Wiley 6
fig_04_01
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;…

© 2010 Wiley 7
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

© 2010 Wiley 8
Warehouse/Distribution Centers
 Key Material Decisions
 Location

 Capacity

 Inventory (finished & semi-finished)

 Key Information & Related Decisions

 Customer orders
 Manufacturer/Assembler shipments

© 2010 Wiley 9
Retailers
 Key Material Decisions
 Location

 Inventory (finished goods)

 Key Information & Related Decisions

 Customer orders
 Shipments from Warehouses/DCs
 Market prices

© 2010 Wiley 10
Links
 Logistical or Physical
 Routes
 Modes
 Capacities
 Cyber
 Rates
 Tracking of shipments
 Orders
 Contracts
 Regulations

© 2010 Wiley 11
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
© 2010 Wiley 12
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

© 2010 Wiley 13
 fig_04_02
© 2010 Wiley 14
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

© 2010 Wiley 15
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?

© 2010 Wiley 16
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  VCBuy  Q 
Total Cost of Insourcing :
TC Make  FCMake  VCMake  Q 
Indifferen ce Point :
FCBuy  VCBuy  Q   FCMake  VCMake  Q 
© 2010 Wiley 17
 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

© 2010 Wiley 18
 © 2010 Wiley 19
table_04_02
 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

© 2010 Wiley 20
 Critical Factors in Successful
Partnership Relations
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

 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
© 2010 Wiley 21
table_04_03

© 2010 Wiley 22
 Suppliers & Partnerships
http://www.businessweek.com/magazine/content/01_23/b3735036.htm?c
han=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.
© 2010 Wiley 23
 Suppliers & Partnerships
http://www.businessweek.com/magazine/content/01_23/b3735036.htm?c
han=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

© 2010 Wiley 24
 © 2010 Wiley 25
table_04_01
 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

© 2010 Wiley 26
 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
© 2010 Wiley 27
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

© 2010 Wiley 28
The Traditional Purchasing
Process

© 2010 Wiley 29
The E-purchasing Process

© 2010 Wiley 30
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

© 2010 Wiley 31
 Bullwhip Effect (from Chase, Jacobs, & Aquilano)

The
Themagnification
magnificationof
of variability
variabilityin
inorders
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thesupply-
supply-
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Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

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© 2007 Wiley
McGraw-Hill 32
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
© 2010 Wiley 33
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

© 2010 Wiley 34
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

© 2010 Wiley 35
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
© 2010 Wiley 36
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.
© 2010 Wiley 37
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

© 2010 Wiley 38
 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  Supplier’s Goals
 Reduce costs  Increase sales volume

 Reduce duplication of effort  Increase customer loyalty

 Improve quality  Reduce cost

 Reduce lead time  Improve demand data

 Implement cost reduction  Improve profitability

program
 Involve suppliers early
 Reduce time to market © 2010 Wiley 39
 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
© 2010 Wiley 40
 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 © 2010 Wiley 41
 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

© 2010 Wiley 42
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.

© 2010 Wiley 43
 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)

© 2010 Wiley 44
 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
© 2010 Wiley 45
 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
© 2010 Wiley 46
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
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/
© 2010 Wiley 47
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.

© 2010 Wiley 48
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

© 2010 Wiley 49
 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
© 2010 Wiley 50
 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.
© 2010 Wiley 51
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

© 2010 Wiley 52
Case in Supply Chain Network Design: Procter & Gamble
In 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.
© 2010 Wiley 53
 3M Supply Chain Design
http://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."

© 2010 Wiley 54
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.

© 2010 Wiley 55
 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
© 2010 Wiley 56
 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.
© 2010 Wiley 57
 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.
© 2010 Wiley 58
 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.
© 2010 Wiley 59
 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.
© 2010 Wiley 60
 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.

© 2010 Wiley 61
 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.

© 2010 Wiley 62