You are on page 1of 21

Supply Chain Management & E-Commerce Technology


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

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 What is the latest Technological trend today will eventually be an outdated one tomorrow.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.

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.

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

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 & ( , an eCommerce based Supply Chain Management system from i2 Technologies (ITWO) ( [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 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


their factory position which is automatically updated every minute as 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.


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



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 is as follows,


Transaction by means of

Transaction processing, Databases Electronic Payment Systems, Computer Security, System Reliability

Order fulfillment through


Manufacture (manufacturing systems) Delivery (tracking systems)

Through the usage of the following, - Networks - Internet - Programming - Multimedia - Databases - Transaction processing in the areas of Process of commerce as follows, - Security - Electronic payment - Search engines - Intelligent agents - Data mining

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 Transaction processing Interoperability between online and legacy systems

Data analysis by means of


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


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 [2] Various Search Engines results on the topic of "Supply Chain Management and ecommerce" from

[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 and Software is available with his book [4]. EXHIBITS:


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:


Distribution Process:

Factory Orders

Distribution Orders

Customer Orders


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.