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Chapter 4 – E-Commerce and Supply Chain Management

Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007
PowerPoint Presentation by R.B. Clough – UNH M. E. Henrie - UAA

© 2007 Wiley


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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A Supply Chain can provide strategic advantage
Why Nokia Is Leaving Moto in the Dust

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 © 2007 Wiley 3

Supply Chain Management is Challenging!

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

© 2007 Wiley


A Supply Chain can be a matter of life & death
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 © 2007 Wiley this winter and say gas cuts are to blame.


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market prices EDI. web-based. how much to make in a production run Inventory (mainly raw material) Customer orders Costs. that is.…  Key Information & Related Decisions    © 2007 Wiley 7 .Suppliers  Key Material Decisions     Location Capacity Lot sizes.

that is. equipment Lot sizes. market prices  Key Information & Related Decisions    © 2007 Wiley 8 . fuel. how much to make in a production run Inventory (in all forms) Supplier shipments Customer orders Costs.Manufacturers/Assemblers  Key Material Decisions      Location Capacity Sourcing of components necessary resources: labor.

Warehouse/Distribution Centers   Key Material Decisions  Location  Capacity  Inventory (finished & semi-finished) Key Information & Related Decisions   Customer orders Manufacturer/Assembler shipments © 2007 Wiley 9 .

Retailers   Key Material Decisions  Location  Inventory (finished goods) Key Information & Related Decisions    Customer orders Shipments from Warehouses/DCs Market prices © 2007 Wiley 10 .

Links  Logistical or Physical    Routes Modes Capacities Rates Tracking of shipments Orders Contracts Regulations  Cyber      © 2007 Wiley 11 .

quality. planning. purchasing. shipping  Internal Functions include – processing functions   External Distributors transport finished products to appropriate locations  Logistics managers are responsible for traffic management and distribution management © 2007 Wiley 12 .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 Processing.

Includes.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.   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 © 2007 Wiley 13 .

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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 © 2007 Wiley 15 .

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? © 2007 Wiley 16 .Insourcing vs.

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 TC Buy = FCBuy + (VCBuy × Q ) Total Cost of Outsourcing : Total Cost of Insourcing: TCMake = FCMake + (VCMake × Q ) Indifference Point : FCBuy + (VCBuy × Q ) = FCMake + (VCMake × Q ) © 2007 Wiley 17 .

15 per bagel to make. FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $1. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. It will cost them $0. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15.000 bagels and Mary and Sue expect to use 60.15 x Q) Q = 56.40 each. have decided to open a bagel shop.40 x Q) = $15.     Mary and Sue wants to know if they should make or buy the bagels. They can buy the bagels for $0.000 annually.000 bagels.000 + ($0.000 bagels.Example 1: Make-or-Buy analysis.000 bagels Since the costs are equal at 56. Their first decision is whether they should make the bagels on-site or by the bagels from a local bakery. The believe they will sell 60.Mary and Sue.000 + ($0. they should make the bagels in-house  © 2007 Wiley 18 .

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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 © 2007 Wiley 20 .

Critical Factors in Successful Partnership Relations Have a long-term orientation Are strategic in nature Share information Share a common vision Share short/long term plans Driven by end-customer needs  Benefits and Share risks of Partnering Early supplier opportunities involvement (ESI) in the design process Using supplier expertise to develop and share cost improvements and eliminate    costly processes Shorten time to market © 2007 Wiley 21 .

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and tends to Wiley clients. Rather than dictate lower parts prices to suppliers. the small fry make and deliver parts to a larger integrator. (GM ) or a Ford Motor Co. manages delivery dates.businessweek. © 2007 their as long as they could meet contract terms. (F ) The staff at each of these companies watches over the flow of goods. who assembles the seat and delivers it to a General Motors Corp. he offered incentives. Suppose that a dozen companies are involved in the manufacturing and assembly of a car seat. Today. And instead of playing competitors off against one another. he pledged loyalty to Chrysler's incumbent suppliers.Suppliers & Partnerships The key to Stallkamp's first revolution was the emphasis on cooperation among carmakers and their suppliers. Stallkamp let them keep 50 cents.htm? 23 . If suppliers found a way to save a dollar. The idea is to create alliances of suppliers who have agreed to centralize the control of their supply-chain operations.

the auto makers] seem to be moving away from active management to more passive Now. we had a concerted policy to help our suppliers and cooperatively manage the supply chain.. When I was at [Chrysler]. I still believe that supply chains need to be actively managed by someone. When that happens. the OEMs [original equipment manufacturers--i.htm? © 2007 Wiley 24 .businessweek.Suppliers & Partnerships Q: Why do we need to change the way we deal with the supply chain? A: [Stallkamp] In a nutshell. I believe it's up to the supply base itself to try to find another alternative http://www.e.

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& 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. and waste minimization © 2007 Wiley 26 .SCM Factors  SCM must consider the following trends. improved capabilities. sustainable eco-efficiency.

inflation can be high Infrastructure issues like transportation.Global SCM Factors  Managing extensive global supply chains introduces many complications      Geographically dispersed members . & scarce local material supplies Product proliferation created by the need to customize products for each market © 2007 Wiley 27 . communication. lack of skilled labor.increase replenishment transit times and inventory investment Forecasting accuracy complicated by longer lead times and different operating practices Exchange rates fluctuate.

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 © 2007 Wiley 28 .

 price fluctuations.the inaccurate or distorted demand information created in the supply chain Causes are generated by:  demand forecasting updating.The Bullwhip Effect   Bullwhip effect .  rationing and  gaming © 2007 Wiley 29 .  order batching.

& The magnification of variability in orders in the supplyThe magnification of variability in orders in the supplychain chain Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders Order Quantity Order Quantity Time Time Order Quantity Time A lot of A lot of retailers each retailers each with little with little variability in variability in their orders…. of wholesalers. …can lead to …can lead to greater variability greater variability for a fewer number for a fewer number of wholesalers.Bullwhip Effect Aquilano) (from Chase. their orders…. and… and… © 2007 Wiley McGraw-Hill …can lead to …can lead to even greater even greater variability for a variability for a single single manufacturer. manufacturer. Jacobs. 30 .

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 © 2007 Wiley 31 .

Issues Affecting Supply Chain Management   Information technology – enablers include the Internet. Web. bar code scanners. intranets and extranets. EDI. and point-of-sales demand information E-commerce and e-business – uses internet and web to transact business © 2007 Wiley 32 .

and product mixing © 2007 Wiley 33  Warehouses can either be   .Supply Chain Logistics & Distribution  Warehouses involved in supply chain distributions and include    Plant warehouses Regional warehouses Local warehouses General – used for long-term storage Distribution – used for short-term storage. consolidation.

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 © 2007 Wiley 34 .

© 2007 Wiley 35 .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.

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 © 2007 Wiley 36 .

and over 1000 customers. Comprised of over 50 product categories. 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. Analysis of this supply chain led to the formulation of a large-scale mixed integer linear program. over 60 plants. presented P&G with an opportunity to re-design their supply chain. 15 distribution centers. Excess capacity at plants. largely due to redesigned “compactified” products. Sources: "Blending OR/MS. The documented pre-tax savings of roughly $200 million annually is proof of the pudding indeed in the case of this DSS. © 2007 Wiley 37 . Judgment. and GIS: Restructuring P&G's Supply Chain" by Jeffrey Camm et al.Case in Supply Chain Network Design: Procter & Gamble In the 1990s. largely due to successful quality initiatives in the 80s. P&G was facing competitive pressure primarily with regard to overall cost. and reduced distribution requirements. the redesign was a major project involving over 500 people organized in more than 30 teams. The GIS gave managers a good grip on solutions generated by the DSS under various scenarios. such as that of closing specific plants.

where 3M pulls in more than 60% of its revenues.. In Buckley's view. including 11 outside the 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. just 35% of 3M's manufacturing capacity is overseas. Despite a vast.htm?chan=search EXPANSION AND CONTRACTION  Buckley plans to spend $1. How did things get that way at 3M? For a long time. and where it expects to get up to 75% over the next several years. complicated network of 64 international subsidiary companies. with four new factories in China alone.3M Supply Chain Design http://www.S. The thinking is that the new factories will add much needed capacity—especially abroad. one of the © "make a tenets of the 3M catechism was2007 Wiley little." 38 . sell a little.5 billion on 18 new plants or major expansions around the world.

That's costly.S. In the fourth quarter of 2006. and it served the company quite well—when its infrastructure and sales were centered mainly in the U. for instance. The net result is that 3M has a lot of money tied up in inventory around the world that's just sitting on boats. machined in France. sales rose about $500 million. KEEPING INVENTORY MOVING  Now. and sold in Japan. even before it has to jump any local bureaucratic hurdles. in trucks. sell a little" means that a typical product might be extruded in Canada.Once a project was green-lighted. "make a little. and in warehouses. If that trend continues. and it means that half of 3M products spend 100 days traveling through the supply line." he says. 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. © 2007 Wiley 39 . It was a way to minimize the financial risk of a new product. it might receive funding. "You'd be borrowing money to grow. packaged in Mexico. Buckley says. according to Buckley. But working capital went up $450 million and receivables increased $250 million.

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 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 40 © 2007 Wiley .

Supply Chain Measurements  Measuring supply chain performance  Traditional measures include.     Return on investment Profitability Market share Revenue growth Customer service levels Inventory turns Weeks of supply © 2007 Wiley Inventory obsolescence  Additional measures     41 .

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 © 2007 Wiley 42 .

McGraw-Hill Irwin. Amazon adapted by redesigning its supply chain to include warehouses that are managed as “push” operations.E-Commerce Case: Amazon.5% and 4. Amazon shared Ingram’s inventory with other booksellers. however. Sources: Designing and Managing the Supply Chain.hoovers. Healthier net profit margins of 8. Simchi-Levi. Kaminsky. Hoovers online. Amazon achieved a net profit margin of 0.2% followed in 2004 and © 2007 Wiley 43 . leading to costly stockouts during peak demand periods. remains a “pull” system. http://www. and E. Simchi-Levi. by D. Third Edition. The retail part of operations. Most of Amazon’s books came from the wholesaler Ingram Book Group. 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. satisfying demand in the form of individual orders. One of the keys to attaining profitability was the reconfiguration of Amazon’s supply chain. such as the holidays. Ingram maintained inventory but received an appreciable amount of sales revenue in return. At first Amazon had attempted to implement a pure pull system without the use of warehouses. P. Though not spectacular. The internet had seemed to pave the way to this mode of operation. Boston.7%. respectively. In In 2003. was a shooting star during the dot. The firm also encountered unexpected problems maintaining an alliance with 6 regional distributors along with thorny repair and return was racking up $22 million in sales through the first 9 months of the year 2000.E-Commerce Case: Furniture. But while Furniture. While furniture production lot sizes are typically small and activated by Furniture.000 visitors per month to its website. causing a mismatch in the supply chain. It featured thousands of products and at its peak drew 1. it was also incurring huge logistics costs because of inefficient delivery processes. economic delivery lot sizes are usually much larger and regularly in boom in the late 90s. Business was permanently tabled at Furniture. © 2007 Wiley 44 . 2000.

com Or so it seemed! In mid-2002. McGraw-Hill Irwin. a room planner to online shoppers. continued: Furniture. the new company partners with brickand-mortar retailers. 2/7/2005. DSN Retailing Today.“Reincarnated Furniture. Kaminsky. Boston. The new Furniture. Simchi-Levi. Third Edition. “The previous Furniture. and in return. Vol. followed the model en vogue at the time. by D. 44 Issue 3. eschews distribution centers and a fulfilment infrastructure.E-Commerce Case. several former employees rallied investors to re-start the company. the model getting funded at the time. for instance. A percentage of each online sale is remitted to Furniture. who provide the partners with retailers.” by Mike Duff. Sources: Designing and Managing the Supply Chain. which was to be the next Amazon of the relevant category” said President Carl Prindle. P. 2p © 2007 Wiley 45 . p6. In markets where it operates. The firm’s focus is now exclusively on upgrading its online marketing.

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) © 2007 Wiley 46 .

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. especially during the product design and development © 2007 Wiley 47 . 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.

or service directly to customers Affiliate – companies receive a referral fee for directing business to an affiliate © 2007 Wiley 48  B2C revenue model sources      .Types of E-Commerce  Business-to-Consumer (B2C):  On-line businesses try to reach individual consumers 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.

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 © 2007 Wiley 49 .

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. © 2007 Wiley 50 .

intranet. RFID. EDI.SCM Across the Organization       SCM changes the way companies do business. and extranets Purchasing is responsible for sourcing materials Operations use timely demand information to more effectively plan production schedules © 2007 Wiley 51 . the Internet. 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.

the more distortion that is possible. price fluctuations. either as a customer or as a supplier. The more levels that exist. The bullwhip effect distorts product demand information passed between levels of the supply chain. and rationing © 2007 Wiley 52 . SCM is the integration and coordination of these efforts. from the extraction of raw materials through the sale to the end user. Supply chains include all the processes needed to make a finished product.Chapter 4 Highlights   Every organization is part of a supply chain. order batching. Variability results from updating demand estimates at each level.

Net marketplaces bring together thousands or suppliers and customers. EDI. B2B and B2C electronic commerce enable supply chain management. Allowing for efficient sourcing and lower transaction © 2007 Wiley 53 costs. bar-code scanners. intranets. and POS data are SCM enablers. the WEB.Chapter 4 Highlights (continued)   Many issues affect supply chain management. extranets. The Internet. .

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. © 2007 Wiley 54 . Purchasing is involved in sourcing decisions and developing strategic long-term partnerships.

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. © 2007 Wiley 55 . Since buyers are in a position to influence or award business.Chapter 4 Highlights (continued)   Ethics in supply management is an ongoing concern.

Supply chain distribution requires effective warehousing operations. consolidation. intimacy. The warehouses provide transportation. Impact. and service. and opportunities. product mixing. technologies.Chapter 4 Highlights (continued)   Partnerships require sharing information. © 2007 Wiley 56 . and vision are critical to successful partnering. risks.

Chapter 4 Highlights (continued)  Integrated SCM usually begins with the manufacturer integrating internal processes first. The last step is integrating the external distributors. © 2007 Wiley 57 . the company tries to integrate the external suppliers. The.

etc. Regular performance metrics (ROI. The emergence of net marketplaces has significantly affected SCM.Chapter 4 Highlights (continued)   A company needs to evaluate the performance of its supply chain. market share. © 2007 Wiley 58 . customer service levels.) and other measures that reflect the objectives of the SC are used. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level. profitability. As supply chains become longer. it is likely that supply chain velocity will decrease.