Supply Chain Management

&
E-Commerce Technology
By

Nachiappan Annamalai
P.No: 2843-5431
Dept. of Industrial Engineering
State University of New York at Buffalo

Submitted in partial fulfillment of the requirement of CSE 712,

"Seminar on E-Commerce," Spring Semester 2000
Instructor: Dr. Aidong Zhang, State University of New York at Buffalo

Abstract:
Technology improves day by day. What is the latest Technological trend today will
eventually be an outdated one tomorrow. Man, ever since evolution has found new things
and transformed himself from the Stone Age to an Age called the "Information Age".
Now we live in a world where Information in the right sense at the right time and right
place is what determines the economic success of nations.
This Report presents a Comprehensive review of the fundamentals of Supply Chain
Management and the various issues related to it. The Report also explains a few complex
problems each entity in the Supply Chain faces and about the hardships that arise out of
it. Finally the ways and means to tackle these issues are dealt with. It is at this stage that
we find that We could solve all these complex issues through the latest cutting edge
information technology tool called e-commerce. So the concluding part of the report
presents how E-Commerce Technology can be used to tackle the complex problems in the
Modern day Supply Chain. It provides examples of how these concepts that have been
applied in various organizations.

Introduction:
When we hear of a Supply Chain for any product , a few basic questions arise in our
mind. The following Questions and Answers present the basics of a Supply Chain and
give an outlook towards Supply Chain Management.
What is a Supply Chain?
A Supply Chain is a Channel through which a demand for a product is satisfied by means
of supply of products through various entities present. The Entities in a Supply Chain are
Suppliers, Manufacturer, Middlemen(Wholesaler and Retailer) and finally the Customer.
So the demand of the Customer is satisfied by supply of value added goods that travel
through the Supply Chain entities.
What is Supply Chain Management?
Supply Chain Management deals with the total flow of Materials through the various
entities in the supply chain (i.e. from Suppliers to Customers) so as to maximize profits ,
minimize costs for the entities in the supply chain while providing maximum delight to
the customer.
What is the Supply Chain Process?
A Supply Chain Process consists of various Orders like Procurement Order ,
Manufacturing Order , Factory order , Distribution Order, and Customer Orders. The
main concern of Supply Chain Management is how and when and in what quantity are

these orders to be placed by each entity of the supply chain to his adjacent entity so as to
achieve the objectives mentioned in the definition of Supply Chain Management.
What is the Scope of Supply Chain Management?
The following diagram explains the Scope of Supply Chain Management. The arrow
marks in the diagrams indicate orders placed by adjacent Supply Chain entity to his
predecessor. The triangles indicate the Inventory of goods each entity has.

Why are these Orders for products and its Supply important?
This can be explained by a Diagram called the "Feast or Famine" Diagram.

Let us consider the demand and supply curves for a product, We see that at one point of
time we have excessive inventories and at another point of time we have a stock out and

thereby we are unable to meet the demand. So both these result in either huge amount of
losses and capital blockage for the supply chain entities or results with Dissatisfied
customers.
What is the time involved in the Process?
The time involved in a traditional supply chain process is enormous. As there are many
orders which are placed by each entity to his adjacent entity, each order(demand) and
supply process takes its own time. For ex. The procurement order time in a company was
as follows:

So each order and supply cycle alone might take a vast amount of time thus delaying the
Supply Chain Process (traditional).
How can we effectively manage the Supply Chain Process?
Next comes the question of how well a Supply Chain and its Process can be managed in
order to achieve our aims and ambitions. Effective Supply Chain Management involves
in
Managing the whole supply chain as a single entity.
Our aim is to Optimize the Supply chain as a single entity (as a whole). i.e. We try to
optimize the profits of each and every entity in the supply chain and not just one of
them alone and at the same time provide the utmost value to the customers.
Recognizing end user (Customer) service requirements as a function of time, Quantity
and place .
i.e. Customer Utility = f (time, quantity, place).
Effective use of Inventory.
Continous Improvement & reduced Supply Chain Process time.
Recognizing time as a basis of competitive advantage.
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What is the effect of this time consuming & improper Supply Chain Management
Process?
Excessive Inventories as a result of forward buy:
If the demand and supply process is exactly same, then it will not result in Inventory
stocks at all. But in reality for these entities they cant be same, so each entity in the
Supply Chain has his own inventory stocks. The Grocery Supply Chain alone as an
excessive inventory of $30 Billion.
Poor Product Forecast & Capacity Planning
As the time involved in the supply chain process is large, Product forecasts by each
entity becomes poor and gives rise to more Stock out or Excessive Inventory
problems.
Poor Customer Service
High Corrective costs - Overtime, Subcontracting Cost, Transportation Problems
Optimized Supply Chain as a whole entity is not possible
Internationalization of the Supply Chain is not possible as the problems become even
more worse.
COMPLEX PROBLEMS IN SUPPLY CHAIN MANAGEMENT:
Thus from all these Questions and Answers we find that Demand information in a Supply
Chain is often distorted from one part of the chain to the other. Such distortions are
known as Bullwhip Effect. They lead to tremendous inefficiencies of the supply chain
as explained earlier. Billions of precious dollars are at stake due to this problem.
Bullwhip Effect:
Definition: This Phenomenon was first found at Proctor & Gamble (P&G), where
Logistics executives were examining the order patterns of one of their best selling
products, Pampers disposable diapers. They found the sales of the product at retail stores
were fluctuating. When they examined the orders placed by the retailer to the distributors
they were more variant in nature. Again on inspection of the orders placed by distributors
to the manufacturers, the orders varied even more and the variance in the orders placed
by the manufacturers to their suppliers was the highest. So they found that on going up
the Supply Chain, the demand variability swings were increasing (Figure: 1&2). This
effect was named as the BULLWHIP EFFECT by the P&G executives as it resembled a
Bull-Whip. The Bull Whip effect is also know as Whip-Lash or the Whip-Saw
Effect.[4]
Companies like HP had to rely heavily on the sales order from the resellers to make
product forecasts, capacity planning, inventory planning, and production scheduling. So
this problem of demand information distortions caused a lot of problems for the
management. Likewise companies like Eli Lilly and Bristol Meyer Squibb and
distributors like McKesson and retailers like Longs Drug Stores face a lot similar
problems like Inventory duplication. Almost the entire Computer Manufacturing Industry
was rocked by this problem of Bull-Whip effect. This trend set the foundations for
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extensive Research in this area. Various Research executives found out the various causes
for this effect.
CAUSES OF BULL-WHIP EFFECT:
A few causes of Bull-Whip effect are:

Demand Forecast Updating

Order Batching
Price Fluctuation
Shortage Gaming

DEMAND FORECAST UPDATING:

We have already got a feel of how there is a variation and amplification of
variation as one moves up the supply chain. By moving up the supply chain, we mean the
movement of orders from the CustomersRetailers-Distributors-Manufacturer-Suppliers
(entities of the supply chain). It is very common that every entity in the supply chain
performs product forecasting based on the order history from the entitys immediate
customers. It turns out that such a simple process of Demand forecasting, when
performed by each entity independently leads to the BullWhip effect. The Beer-Game
demonstrates this effect [6].
Let us assume ourselves as a manager of a company and we order a particular amount of
products from a supplier based on our forecasting results. The order sent to supplier
would reflect the amount needed to replenish our stocks needed to satisfy future demand
based on demand forecast and also on our safety stocks needed. The result is that
fluctuations in the order quantities over time can be much greater than those of the
demand data, which is stochastic in nature. The lead-time to order and supply process is
very important as it can be seen that this lead-time is inversely proportional to the
BullWhip effect.
ORDER BATCHING:
Orders are batched and sent, Why does this happen. Ii is mainly due to two reasons that
firms always batch their orders. They are,
1. Time and cost constraints: Cost of procurement (billing process costs P&G between
$35 and $75 for each order) will be less when you order more from suppliers or the
lead time to order and supply may be less, so in order to take advantage of this, firms
order in large quantities at a particular point of time thus giving rise to Order
Batching.
2. Transportation problems: Transportation problems occur when Transportation
agencies demand a Full Truck Load (FTL). So in order to satisfy this criteria and also
get cheaper transportation costs, firms go in batched orders.

The main point to be noted here is that when firms batch their orders in particular
quantities at particular time (For. 5000 units at a beginning of every month), such
ordering leads to amplification of variability of demand for the supplier as there is an
overlap in the order cycles to him.
More Problems are what are called MRP & DRP jitters. Most firms have MRP systems
that are run at certain periods of time in order to reduce MRP running costs. So as a result
of this Order batching occurs. (Figure:3).
PRICE FLUCTUATION:
As we have already seen, firms try to buy large quantities (Order process) when the price
of a particular product is less. As a result of this firms order more when the price is less
and less when it is more. So erratic price fluctuations cause variations in the demand.
Thus giving rise to Bull Whip effect. i.e. Variation in buying quantity is much bigger
than variation in consumption rate. It is estimated that forward buys constitute 75 to 100
billion dollars of inventory on the grocery industry alone. (Figure: 4)
Moreover firms use trade promotions (Stock Market value of the share) as a benchmark
for the order process. If the stock prices rise, then it is assumed that firms product
demand will also increase. As a result of it firms order more and then end up having large
inventories as a result of poor sales. Bristol-Myers Squibb was sued by a group of
Shareholders when its stocks plummeted from $74 to $67, as a result of disappointing
sales performance in the 1992 quarter, when the actual sales increase was only 5%
instead of the anticipated 13%. The anticipated sales of 13% was due to the companys
trade deals in the previous quarter that flooded the distribution channel with forward buy
inventories of the companys product. [3]
SHORTAGE GAMING:
This is due to what is called as Phantom Orders. Distributors and retailers expect a huge
demand and order more from the Manufacturer who supplies it to them. If the expected
demand is not there, then all products will end up as inventories at the distributor and
retailer sites. As a result there will not be any orders from them to the manufacturer as
they already have inventories. But the manufacturer would have produced more as a
result of previous orders in large quantities.
Motorola was not able to meet the consumer demands for handsets and cellular phones
forcing many distributors to turn away business during the 1992 and 1993 Christmas
shopping season. Distributors like Airtouch Communications and Baby Bells,
anticipating the possibility of such shortages, acted defensively by over-ordering towards
the end of 1994. But the demand had dropped heavily in 1994, thus resulting in huge
inventories. Thus when the company announced its fourth quarter earnings for 1994, the
firms stocks tumbled by almost 10% [3].

COUNTERACTIONS TO BULLWHIP EFFECT:

The Bull-Whip effect can be mitigated to a large extent by means of better,

Information Sharing
Channel Alignment
Operational Efficiency

among the various entities in the supply chain and to avoid the causes of Bullwhip effect
by,

Avoiding Multiple Demand Forecast Updates

This can be obtained through analysis from the point of sale (POS). All entities will
have to use information at the retailer as he is the one in direct touch with the
customer. Thus if all entities base their ordering process based on the information
obtained then the ordering process will depend on the exact demand from consumers
and will therefore reduce demand variability. This information will have to available
at real time, so Electronic Data Interchange (EDI) could serve this purpose. This is
evident in the example of Supply Chains like WALMART. All entities in the supply
chain will base their ordering process based on the POS (Wal-Mart Stores). The real
time data could easily be obtained (using EDI) as it is already available. The
inventory on hand at the site can be easily obtained from the sales done until that time
(this info is available as all items are priced using Bar Codes which are also used to
identify the number of items sold).
Moreover Consumer- Direct principles may be used as a way of avoiding
information distortion. Companies like Dell and Apple follow this principle of
eliminating intermediaries and directly selling their products to consumers.

Avoid Order Batching

This can be done by means of solving the Full- Truck Load problem. For this either
Third Party Logistics or Product Mix transportation could be used (Figure 5). MRP
jitters too will have to be avoided.

Stabilizing Prices
Stabilized prices will eliminate demand variation. Strategies like Every Day Low
Pricing (EDLP) and Activity based costing could be used in order to frame prices.
Example: TOPS Supermarket chains use these principles.

Eliminate Gaming in Shortage Situations

Shortage gaming occurs as a result of Phantom Orders. These Phantom orders could
be avoided by means of supplying products to the Distributors and retailers based on
the past sales records. Companies like General Motors (GM), Texas Instruments (TI),
Hewlett Packard (HP) uses this type of product supply.

Other Methods could be through the use of Composite Team Inventory Management
or Vendor Managed Inventory (VMI) Methods.

A MORE BETTER SOLUTION:

The most and the only better solution in order to mitigate the Bull-Whip effect would be
to use the latest cutting edge tool E-COMMERCE.
e-commerce would provide
Better Information sharing
Proper Channel (Chain) Alignment
Increase Operational efficiency
Transaction Processing, thus decreasing Ordering and Supply Process lead times and
costs.
Monetary transactions

The Power of these benefits of using e-commerce is clearly detailed in the following
section which comprises of the details obtained from Tradematrix.com(
www.tradematix.com) & Hightechmatix.com (www.hightechmatrix.com) , an eCommerce based Supply Chain Management system from i2 Technologies (ITWO)
(www.i2.com) [1].
As we know that efficient SCM requires efficient Sourcing and Procurement as shown
Let us take an Example and analyze the uses of e-commerce in SCM.
Consider a Buyer named Bud Buyer who is a Procurement Manager at Velocity
Computers, which has its facilities at San Jose, Dallas and New York. He has four
suppliers Cyber, Raven, Valykrie and Proton who supply different products he need for
manufacturing his computers.

As soon as he logs onto his computer with the tradematrix.com web based software,

He sees that the Procurement department Specialist Mr. Leon Tucker has requested him
to buy certain products. The GUI of the process is as above. Then he moves onto find
how his suppliers respond to it. He is able to immediately access as to how many
products of requirement can Cyber, Raven, Valkyrie, Proton supply at present based upon

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their factory position which is automatically updated every minute as tradematrix.com is

a website which connects all entities of the supply chain.

Then He is able to find as to which how much of Supply Demand Mismatch is there
between his suppliers and himself as shown.

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Then he finds his procurement requirements given by the procurement department and
also the no. of products Suppliers have committed to supply. Mainly he notes how much
is the demand from End Consumer. So The delta or the mismatch of his orders with the
demand from the consumer is got. So from all these data, he will be able to order the
correct amount of products from the supplier, so that he will be able to optimize his
process of supply, i.e. he will meet the demand of the consumer and also will have
optimal inventories.

Then he places the order to the supplier now based upon cost and time required for the
supplier to satisfy his order. So he chooses the appropriate supplier from his approved
vendor list. Finally he places an order which is processed immediately and will reflect
onto the suppliers system to whom he has ordered.
Then on the Suppliers side a screen pops up to indicate the order and give his an option of
accepting the order. Then after accepting his order, he will have to make arrangements for
delivery of the products. So with this he goes to a screen where he could give orders to
his transporter for transportation of the products in order to meet the demand from Bud
Buyer. So from this he provides the necessary information for the logistics company to
transport his products to Velocity computers. On acceptance by the transporter, all entities
of the supply chain get an information of completion of the bid which was optimized by

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means of intelligent agents in the software which mitigates Bull-Whip effect through
effective and real time communication between supply chain entities through ecommerce.

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Thus this process effectively explains as to what can be done with the help of ecommerce. Now let us see the means by which e-commerce is useful in SCM by having
the clear understanding of the previous example.
PROCESS OF COMMERCE:
The general process of commerce is explained by the following sequential points,

Buyer and Sellers find each other through

- Communication - Advertising and Marketing
- Intermediaries (Dealers, Distributors, Representatives)
Negotiation between Buyer and Seller to sign Supply contracts
- Through Agents (buyers , lawyers)
Transaction of
- Contracts
- Payment (or through many payments)
Order Fulfillment
- Manufacture
- Delivery
Post- Sale Events
- Customer Service
- Reorder, Restock
Accounting
- Analyze are we really making profit?
Data Analysis
- To analyze who is really buying the stuff in order to improve our business
process in future.

THE e-COMMERCE PROCESS:

The e-commerce process is as follows,

Transaction by means of

Transaction processing, Databases

Electronic Payment Systems,
Computer Security,
System Reliability

Order fulfillment through

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Manufacture (manufacturing systems)

Delivery (tracking systems)

Through the usage of the following,

- Networks
- Internet
- Programming
- Multimedia
- Databases
- Transaction
processing

- Security
- Electronic payment
- Search engines
- Intelligent agents
- Data mining

in the areas of Process of commerce as follows,

Buyers and sellers find each other through

Communication (via Networks, the Internet, Programming and

Information Retrieval)
Human-Computer Interaction, Multimedia
Intermediaries

Negotiation though the use of Electronic Negotiation, Intelligent agents

Post-sale events like

Customer Service and Help Facilities

Reorder, restock

Accounting through

Disintermediation

Transaction processing
Interoperability between online and legacy systems

Data analysis by means of

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Data Mining

So through this we see that the Internet and Web based systems and Intelligent agents in
the e-commerce process can be used to improve the speed and efficiency of the
traditional process of commerce.
My Own Suggestions for an ideal e-commerce system for Supply Chain Management
would be a system with its backbone as the Internet and WWW (World Wide Web). It
would have two ends a front end and a back end
The Front end and back end components consist of the following,

Front End
- Portal
- Communication Systems - Interface with Mobile Devices & GPS - for access
to real time info.
- Money Transaction Systems
- Customer Management Systems
Back End
- Optimization Agents
- Decision Support Systems & Intelligent Agents
- Transaction Processing System
- Prioritizing Systems - Shows Contradictions
- Forecasting System with Responder- Capability to match Supply chain
System Dynamics

This kind of system would be able to deal with the Supply Chain problems in a better
way than existing e-commerce systems. Companies which already have e-commerce
systems could re-engineer their system in order to facilitate its usage in Supply Chain
Management. The Re-Engineering process would be to just add the back-end
components. A similar kind of system could be added to e-commerce systems to aid in
providing Manufacturing services too as follows,

Front End System Functions

- Product Design & Quality Specification
- Customer Management & Communication System
- Money Transactions
Back End System Functions
- Standard time & Least Cost
- Supply Time
- Optimization Agents
- CNC Machine Code Conversion agents
- Routers to route data to CNC Machine

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While the front-end performs the above said functions, the back-end system could
provide the customer who comes to order on the web with details as to what would be the
least cost and time in which the products can be supplied by the manufacturer by the
usage of Optimization systems. With this feedback the Customer orders on the web and
also provides the design data of the product he wants. The part may be an assembly of
different components, so an intelligent agent could generate the design details of
individual components needed to manufacture the products. Then this data could be
converted into CNC (Computer Numerically Controlled) Machine codes which are
directly routed to individual machines by means of routers networks. Thus each machine
with the help of automated material handling system can automatically produce the
product in real-time thus reducing manufacturing lead - time. But this system is useful for
a Direct business model. For a Chain where there are intermediaries, components from
the previously explained e-commerce system will have to be integrated.
CONCLUSION:
Thus through the usage of e-Commerce, a company can mitigate the effect of the BullWhip effect in its Supply Chain and also achieve all the benefits of efficient Supply
Chain Management as explained in this report earlier. The firm could end up on a positive
note with more satisfied customers and optimal inventory costs and better dollar profits.
Though the world has become a global village with the advent of the Internet, Supply
Chain Management through e-Commerce is yet to catch its speed. More and more
companies are starting to use these efficient techniques and a majority of others are to
follow suit. The age we order products and immediately get it the next minute is not far
off due to Supply Chain Management and E-Commerce.
REFERENCES:
[1] Intelligent e-businesses - A White Paper (1999) by i2 Technologies available at URL
www.i2.com.
[2] Various Search Engines results on the topic of "Supply Chain Management and ecommerce" from
www.google.com
www.yahoo.com
www.metacrawler.com
www.askjeeves.com
www.altavista.com

[3] "The Paralyzing curse of Bullwhip Effect in a Supply Chain" by Hau L.Lee, Paddy
Padmananbhan and Seungjin Whang, Stanford University, March 17th, 1995.
[4] "Designing and managing the Supply Chain" - by Authors: David Simchi-Levi
(Northwestern University), Philip Kaminsky (University of California, Berkeley) and
Edith Simchi-Levi (LogicTools), Publisher: McGraw-Hill, 1999
[5] "Information Distortion in a Supply Chain: The Bull Whip Effect" Working paper by
H.L.Lee, P. Padmanabhan and S.Whang, Stanford University, 1994.
[6] The Beer Game: Demonstrating the value of Integrated Supply Chain Management Lecture notes by Philip Kaminsky and David Simchi-Levi
http://users.iems.nwu.edu/~levi and Software is available with his book [4].
EXHIBITS:

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Exhibit: These Exhibits explain the constituents of a Procurement, Manufacturing and

Distribution Process.
Procurement Process:
Searching for / Identifying appropriate Suppliers
Managing / Communicating Preferred Supplier lists
Request for Quote (RFQ) development
RFQ response/receipt
Screening and sorting Proposals
Contract Negotiation
Placing of Procurement Orders

Manufacturing Process:

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Distribution Process:

Factory
Orders

Distribution Orders

Customer
Orders

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The arrow marks denote the Supply Process and the Order process flows in the opposite
direction. So this is also an example of a pull chain.

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