advanced scm

Prof N. Balasubramanian MMM II SEM III - 2014

1-1

Supply Chain Management(3rd Edition)

Chapter 1

Understanding the Supply Chain


Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs

Inventory &warehousing costs

Transportation costs


Inventory

Where do we hold inventory? Suppliers and manufacturers warehouses and distribution centers retailers

Types of Inventory WIP raw materials finished goods

Why do we hold inventory? Economies of scale Uncertainty in supply and demand Lead Time, Capacity limitations


Goals: Reduce Cost, Improve Service

By effectively managing inventory: Xerox eliminated $700 million inventory from its supply chain

Wal-Mart became the largest retail company utilizing efficient inventory management

GM has reduced parts inventory and transportation costs by 26% annually


Goals: Reduce Cost, Improve Service

By not managing inventory successfully In 1994, IBM continues to struggle with shortages in

their ThinkPad line (WSJ, Oct 7, 1994) In 1993, Liz Claiborne said its unexpected earning decline

is the consequence of higher than anticipated excess inventory (WSJ, July 15, 1993)

In 1993, Dell Computers predicts a loss; Stock plunges. Dell acknowledged that the company was sharply off in its forecast of demand, resulting in inventory write downs (WSJ, August 1993)


Understanding Inventory

The inventory policy is affected by: Demand Characteristics

Lead Time

Number of Products

Objectives Service level

Minimize costs

Cost Structure


Cost Structure

Order costs Fixed

Variable

Holding Costs Insurance

Maintenance and Handling

Taxes

Opportunity Costs

Obsolescence


Types of Inventory


Two Forms of Demand

Dependent

Demand for items used to produce final products

Tires for autos are a dependent demand item

Independent

Demand for items used by external customers

Cars, appliances, computers, and houses are examples of independent demand inventory


Objectives of Inventory Management

Provide desired customer service level

Customer service is the ability to satisfy customer requirements Percentage of orders

shipped on schedule

Percentage of line items shipped on schedule

Percentage of dollar volume shipped on schedule

Idle time due to material and component shortages

Provide for cost-efficient operations: Buffer stock for smooth

production flow

Maintain a level work force

Allowing longer production runs & quantity discounts

Minimum inventory investments: Inventory turnover

Weeks, days, or hours of supply


Inventory Investment Measures Example: The Coach Motor Home

Company has annual cost of goods sold of $10,000,000. The average

inventory value at any point in time is $384,615. Calculate inventory turnover

and weeks/days of supply. Inventory Turnover:

Weeks/Days of Supply:

turnsinventory 26$384,615

0$10,000,00

valueinventory average

sold goods ofcost annualTurnover

2weeks0/52$10,000,00

$384,615

dollarsin usage weekly average

dollarsin handon inventory averageSupply of Weeks

days 100/260$10,000,00

$384,615Supply of Days


Inventory Costs

Carrying cost

cost of holding an item in inventory

Ordering cost

cost of replenishing inventory

Shortage cost

temporary or permanent loss of sales when demand cannot be met


Inventory Control Systems

Continuous system (fixed-order-quantity)

constant amount ordered when inventory declines to predetermined level

Periodic system (fixed-time-period)

order placed for variable amount after fixed passage of time


ABC Classification

Class A

5 15 % of units

70 80 % of value

Class B

30 % of units

15 % of value

Class C

50 60 % of units

5 10 % of value


ABC Classification

1 $ 60 90

2 350 40

3 30 130

4 80 60

5 30 100

6 20 180

7 10 170

8 320 50

9 510 60

10 20 120

PART UNIT COST ANNUAL USAGE


9 $30,600 35.9 6.0 6.0

8 16,000 18.7 5.0 11.0

2 14,000 16.4 4.0 15.0

1 5,400 6.3 9.0 24.0

4 4,800 5.6 6.0 30.0

3 3,900 4.6 10.0 40.0

6 3,600 4.2 18.0 58.0

5 3,000 3.5 13.0 71.0

10 2,400 2.8 12.0 83.0

7 1,700 2.0 17.0 100.0

TOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE

A

B

C

$85,400

ABC Classification

% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY

A 9, 8, 2 71.0 15.0

B 1, 4, 3 16.5 25.0

C 6, 5, 10, 7 12.5 60.0


Examples of Ordering Approaches

Lot for Lot Example

1 2 3 4 5 6 7 8

Requirements 70 70 65 60 55 85 75 85

Projected-on-Hand (30) 0 0 0 0 0 0 0

Order Placement 40 70 65 60 55 85 75 85

Fixed Order Quantity Example with Order Quantity of 200

1 2 3 4 5 6 7 8

Requirements 70 70 65 60 55 85 75 85

Projected-on-Hand (30) 160 90 25 165 110 25 150 65

Order Placement 200 200 200

Min-Max Example with min.= 50 and max.= 250 units

1 2 3 4 5 6 7 8

Requirements 70 70 65 60 55 85 75 85


Order Placement 220 140 180 160

Order n Periods with n = 3 periods

1 2 3 4 5 6 7 8

Requirements 70 70 65 60 55 85 75 85


Order Placement 175 200 160


Economic Order Quantity (EOQ) Models & Assumptions

EOQ -optimal order quantity that will minimize total inventory costs

EOQ Assumptions: Demand is known & constant - no

safety stock is required

Lead time is known & constant

No quantity discounts are available

Ordering (or setup) costs are constant

All demand is satisfied (no shortages)

The order quantity arrives in a single shipment


Inventory Order Cycle

Demand rate

TimeLead time

Lead time

Order placed

Order placed

Order receipt

Order receipt

Invento

ry L

evel

Reorder point, R

Order quantity, Q

0

Average

inventory

Q

2


EOQ Cost Model

Co - cost of placing order D - annual demand

Cc - annual per-unit carrying cost Q - order quantity

Annual ordering cost =CoD

Q

Annual carrying cost =CcQ

2

Total cost = +CoD

Q

CcQ

2


EOQ Cost Model

TC = +CoD

Q

CcQ

2

= +CoD

Q2Cc

2

TC

Q

0 = +C0D

Q2Cc

2

Qopt =2CoD

Cc

Deriving Qopt Proving equality of costs at optimal point

=CoD

Q

CcQ

2

Q2 =2CoD

Cc

Qopt =2CoD

Cc


EOQ Cost Model

Order Quantity, Q

Annual cost ($) Total Cost

Carrying Cost =CcQ

2

Slope = 0

Minimum total cost

Optimal orderQopt

Ordering Cost =CoD

Q


Cc = $0.75 per gallon Co = $150 D = 10,000 gallons

Qopt =2CoD

Cc

Qopt =2(150)(10,000)

(0.75)

Qopt = 2,000 gallons

TCmin = +CoD

Q

CcQ

2

TCmin = +(150)(10,000)

2,000

(0.75)(2,000)

2

TCmin = $750 + $750 = $1,500

Orders per year = D/Qopt

= 10,000/2,000

= 5 orders/year

Order cycle time = 311 days/(D/Qopt)

= 311/5

= 62.2 store days

EOQ Example


Reorder Point

Inventory level at which a new order is placed

R = dL

where

d = demand rate per period

L = lead time

Demand = 10,000 gallons/year

Store open 311 days/year

Daily demand = 10,000 / 311 = 32.154 gallons/day

Lead time = L = 10 days

R = dL = (32.154)(10) = 321.54 gallons


Safety Stock

Safety stock

buffer added to on hand inventory during lead time

Stock out

an inventory shortage

Service level

probability that the inventory available during lead time will meet demand

P(Demand during lead time


Variable Demand With Reorder Point

Reorder

point, R

Q

LT

Time

LT

Inve

nto

ry le

ve

l

0


Reorder Point With Safety Stock

Reorder

point, R

Q

LTTime

LT

Invento

ry level

0

Safety Stock


Reorder Point With Variable Demand

R = dL + zd L

where

d = average daily demand

L = lead time

d = the standard deviation of daily demand z = number of standard deviations

corresponding to the service level

probability

zd L = safety stock


For a special ingredient YZ150 used in the manufacture of a detergent at Kolkata-based Bengal Chemicals, the following figures are existing:-Yearly demand - 260,000 Kg; Production quantity 50,000 KgSafety Stock 20,000 KgThe set-up cost independent of quantity is Rs 2000 for each production batch. The price of the ingredients Rs 150/Kg. Annual holding cost is 15% of the value of the ingredient (inventory interest rate 15%). Assuming 230 working days/year, calculate:a. The number of production batches during a yearb. Average inventory level (including the safety stock)c. Inventory turnoverd. Average days of supply in inventory (known as cover-time)e. Reorder point if the lead time is 10 working daysf. Total inventory costs per year and total inventory costs per working day with

production quantity 50000 kgg. EOQ (pure)h. The company can produce YZ150 at a production rate 7500 kg per working day.

Determine the economic production lot size. Assuming the safety stock is decreased to 10000 kg, calculate the new number of production batches per year, average days of supply in inventory, and the new total costs per working day and year.

Problem using EOQ Cost Model This exercise to be done by students


Market Two

Risk Pooling

Consider these two systems:

Supplier

Warehouse One

Warehouse Two

Market One

Market Two

Supplier Warehouse

Market One


For the same service level, which system will require more inventory? Why?

For the same total inventory level, which system will have better service? Why?

What are the factors that affect these answers?

Risk Pooling


Compare the two systems: two products maintain 97% service level $60 order cost $0.27 weekly holding cost $1.05 transportation cost per unit in decentralized

system, $1.10 in centralized system 1 week lead time

Risk Pooling An Example


Week 1 2 3 4 5 6 7 8

Prod A,

Market 1

33 45 37 38 55 30 18 58

Prod A,

Market 2

46 35 41 40 26 48 18 55

Prod B,

Market 1

0 2 3 0 0 1 3 0

Product B,

Market 2

2 4 0 0 3 1 0 0



Warehouse Product AVG STD CV

Market 1 A 39.3 13.2 .34

Market 2 A 38.6 12.0 .31

Market 1 B 1.125 1.36 1.21

Market 2 B 1.25 1.58 1.26



Warehouse Product AVG STD CV s S Avg.

Inven.

%

Dec.

Market 1 A 39.3 13.2 .34 65 197 91

Market 2 A 38.6 12.0 .31 62 193 88

Market 1 B 1.125 1.36 1.21 4 29 14

Market 2 B 1.25 1.58 1.26 5 29 15

Cent. A 77.9 20.7 .27 118 304 132 36%

Cent B 2.375 1.9 .81 6 39 20 43%



Centralizing inventory control reduces both safety stock and average inventory level for the same service level.

This works best for High coefficient of variation, which increases required

safety stock. Negatively correlated demand. Why?

What other kinds of risk pooling will we see?

Risk Pooling Observations


Risk Pooling: Types of Risk Pooling*

Risk Pooling Across Markets

Risk Pooling Across Products

Risk Pooling Across Time Daily order up to quantity is:

LTAVG + z AVG LT

10 1211 13 14 15

Demands

Orders


To Centralize or not to Centralize

What is the effect on: Safety stock?

Service level?

Overhead?

Lead time?

Transportation Costs?


Centralized Decision

Supplier

Warehouse

Retailers

Centralized Systems*


Centralized Distribution Systems*

Question: How much inventory should management keep at each location?

A good strategy: The retailer raises inventory to level Sr each period The supplier raises the sum of inventory in the retailer

and supplier warehouses and in transit to Ss If there is not enough inventory in the warehouse to

meet all demands from retailers, it is allocated so that the service level at each of the retailers will be equal.


Inventory Management: Best Practice

Periodic inventory reviews

Tight management of usage rates, lead times and safety stock

ABC approach

Reduced safety stock levels

Shift more inventory, or inventory ownership, to suppliers

Quantitative approaches


Changes In Inventory Turnover

Inventory turnover ratio = annual sales/avg. inventory level

Inventory turns increased by 30% from 1995 to 1998

Inventory turns increased by 27% from 1998 to 2000

Overall the increase is from 8.0 turns per year to over 13 per year over a five year period ending in year 2000.


Industry Upper

Quartile

Median Lower

Quartile Dairy Products 34.4 19.3 9.2

Electronic Component 9.8 5.7 3.7

Electronic Computers 9.4 5.3 3.5

Books: publishing 9.8 2.4 1.3

Household audio &

video equipment 6.2 3.4 2.3

Household electrical

appliances 8.0 5.0 3.8

Industrial chemical 10.3 6.6 4.4

Inventory Turnover Ratio


Factors that Drive Reduction in Inventory

Top management emphasis on inventory reduction (19%)

Reduce the Number of SKUs in the warehouse (10%) (Stock keeping unit)

Improved forecasting (7%)

Use of sophisticated inventory management software (6%)

Coordination among supply chain members (6%)

Others


Factors that Drive Inventory Turns Increase

Better software for inventory management (16.2%)

Reduced lead time (15%)

Improved forecasting (10.7%)

Application of SCM principals (9.6%)

More attention to inventory management (6.6%)

Reduction in SKU (5.1%)

Others


VALUE OF INFORMATION IN SUPPLY CHAIN COORDINATION


Learning Objectives

1. Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance.

2. Identify obstacles to coordination in a supply chain.

3. Discuss managerial levers that help achieve coordination in a supply chain.

4. Understand the different forms of collaborative planning, forecasting, and replenishment possible in a supply chain.


Lack of Supply Chain Coordination and the Bullwhip Effect

Supply chain coordination all stages of the chain take actions that are aligned and increase total supply chain surplus

Requires that each stage share information and take into account the effects of its actions on the other stages

Lack of coordination results when: Objectives of different stages conflict Information moving between stages is delayed or distorted


Bullwhip Effect

Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers

Distorts demand information within the supply chain

Results from a loss of supply chain coordination


Demand at Different Stages


The Effect on Performance

Supply chain lacks coordination if each stage optimizes only its local objective

Reduces total profits Performance measures include

Manufacturing cost Inventory cost Replenishment lead time Transportation cost Labor cost for shipping and receiving Level of product availability Relationships across the supply chain


The Effect on Performance

Performance Measure Impact of the Lack of Coordination

Manufacturing cost Increases

Inventory cost Increases

Replenishment lead time Increases

Transportation cost Increases

Shipping and receiving cost Increases

Level of product availability Decreases

Profitability Decreases

Table 10-1


Obstacles to Coordination in a Supply Chain

Incentive Obstacles

Information Processing Obstacles

Operational Obstacles

Pricing Obstacles

Behavioral Obstacles


Incentive Obstacles

Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits

Local optimization within functions or stages of a supply chain

Sales force incentives


Information Processing Obstacles

When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain

Forecasting based on orders, not customer demand

Lack of information sharing



Occur when placing and filling orders lead to an increase in variability

Ordering in large lots

Large replenishment lead times

Rationing and shortage gaming


Figure 10-2



Pricing Obstacles

When pricing policies for a product lead to an increase in variability of orders placed

Lot-size based quantity decisions

Price fluctuations


Pricing Obstacles

Figure 10-3


Behavioral Obstacles

Problems in learning within organizations that contribute to information distortion

1. Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages

2. Different stages of the supply chain react to the current local situation rather than trying to identify the root causes

3. Different stages of the supply chain blame one another for the fluctuations

4. No stage of the supply chain learns from its actions over time

5. A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance


Managerial Levers to Achieve Coordination

Aligning goals and incentives

Improving information accuracy

Improving operational performance

Designing pricing strategies to stabilize orders

Building strategic partnerships and trust


Aligning Goals and Incentives

Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits

Align goals across the supply chain Align incentives across functions Pricing for coordination Alter sales force incentives from sell-in (to the retailer) to sell-

through (by the retailer)


Improving Information Visibility and Accuracy

Sharing point of sale data

Implementing collaborative forecasting and planning

Designing single-stage control of replenishment Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)


Improving Operational Performance

Reducing replenishment lead time

Reducing lot sizes

Rationing based on past sales and sharing information to limit gaming


Designing Pricing Strategiesto Stabilize Orders

Encouraging retailers to order in smaller lots and reduce forward buying

Moving from lot size-based to volume-based quantity discounts

Stabilizing pricing

Building strategic partnerships and trust


Continuous Replenishment and Vendor-Managed Inventories

A single point of replenishment

CRP wholesaler or manufacturer replenishes based on POS data

VMI manufacturer or supplier is responsible for all decisions regarding inventory

Substitutes


Collaborative Planning, Forecasting, and Replenishment (CPFR)

Sellers and buyers in a supply chain may collaborate along any or all of the following

1. Strategy and planning2. Demand and supply management3. Execution4. Analysis

Retail event collaboration DC replenishment collaboration


Common CPFR Scenarios

CPFR ScenarioWhere Applied in Supply Chain Industries Where Applied

Retail event collaboration Highly promoted channels or categories

All industries other than those that practice EveryDay Low Price (EDLP)

DC replenishment collaboration

Retail DC or distributor DC Drugstores, hardware, grocery

Store replenishment collaboration

Direct store delivery or retail DC-to-store delivery

Mass merchants, club stores

Collaborative assortment planning

Apparel and seasonal goods Department stores, specialty retail

Table 10-2



Store replenishment collaboration

Collaborative assortment planning

Organizational and technology requirements for successful CPFR

Risks and hurdles for a CPFR implementation



Figure 10-4


Achieving Coordination in Practice

Quantify the bullwhip effect

Get top management commitment for coordination

Devote resources to coordination

Focus on communication with other stages

Try to achieve coordination in the entire supply chain network

Use technology to improve connectivity in the supply chain

Share the benefits of coordination equitably


Strategic Alliances

Advanced Supply Chain Management


Introduction

Complexity in business environments increasing

Resources required to manage are becoming increasingly scarce

Many functions need to be outsourced

Firms need to ensure that functions are performed by the other firms


Framework for Strategic Alliances: When to Go for a Strategic Alliance?

Adding value to products

Improving market access

Strengthening operations

Adding technological strength

Enhancing strategic growth

Enhancing organizational skills

Building financial strength


Downsides

Core competencies should not be compromised

Competitive advantages should not be compromised


Firm A

Internal Activities

If we have core competencies

in this business function, doing

it as an internal activity may be the

best way to do it.


Firm A Firm B

Internal Activities Acquisitions

.

Firm A can control how Firm B does

the business function.

However, it might be expensive, there

may be problems blending the cultures

of the two firms and Firm B may have

had past dealings with Firm As competitors


Arms Length transactions

Firm A Firm B

$


Firm A Firm B



Firm A Firm B

$



Firm A Firm B

Strategic Alliances

Order

Multifaceted, goal-oriented, long-term partnerships between

two companies.

Both risks and rewards are shared.

Typically lead to long-term strategic benefits for both partners.


Extreme Alliances the strange story of virtual airlines

Owned no aircraft

Contracted maintenance

Leased airport gates

Leased reservation systems

Mainly provided cash flow for owners companies involved in things like real estate


Three Types of Strategic Alliances

Third Party Logistics (3PL)

RetailerSupplier Partnerships (RSP)

Distributor Integration (DI)


Third Party Logistics (3PL)

Use of 3PL providers to take over a companys logistics functions

Almost a $85 billion industry by 2004

8% of all logistics costs attributed to 3PL


Key Logistics Activities

Customer service.

Demand forecasting.

Inventory management.

Logistics communication.

Materials handling.

Order processing.

Packaging.

Parts and service support.

Plant and warehouse site selection.

Procurement.

Reverse logistics.

Traffic, transportation

Warehousing, storage.


Organization

internal and external

components of the supply

system

CustomersSuppliers

Supply ChainManagement:

Demand forecasting. Plant and

warehouse site selection. Inventory

management. Materials handling.

Warehousing, storage. Packaging. Order

processing.


Organization

internal and external

components of the supply

system

CustomersSuppliers

Supply ChainManagement:

Customer service

Parts and service support

Reverse logistics

Traffic, transportation

..

Procurement.

Parts and service

Support. Traffic.

Transportation.


Two Basic Types of Third Party Logistics Providers

Asset-based Trucks Warehouses Information systems


Two Basic Types of Third Party Logistics Providers

Asset-based Trucks Warehouses Information systems

Non-asset based Primarily are

coordinators.


Reasons for Third Party Logistics

Allows company to focus on its core competencies.

Business including logistics is becoming so complicated it is difficult to keep up with all developments.


What Is 3PL?

Strategic partnership

Long term commitment

Multi-function arrangement

Process integration

Large range of 3PL companies Non-asset owning 3PL companies called 4PL

Provide services but not trucks, warehouses

Prevalent usage with larger companies


3PL Advantages

Focus on Core Strengths Allows a company to focus on its core competencies

Logistics expertise left to the logistics experts


3PL Advantages

Provides Technological Flexibility Technology advances adopted by better 3PL providers

Adoption possible by 3PLs in a quicker, more cost-effective way

3PLs may have the capability to meet the needs of a firms potential customers


3PL Advantages

Provides Other Flexibilities Flexibility in geographic locations.

Flexibility in service offerings

Flexibility in resource and workforce size


3PL Disadvantages

Loss of control inherent in outsourcing a particular function.

Outbound logistics 3PLs interact with a firms customers. Many third-party logistics firms work very hard to address

these concerns. Painting company logos on the sides of trucks, dressing 3PL

employees in the uniforms of the hiring company, and providing extensive reporting on each customer interaction.

Logistics is one of the core competencies of a firm Makes no sense to outsource these activities to a supplier

who may not be as capable as the firms in-house expertise Wal-Mart, pharmaceutical companies


3PL IssuesCosts and Customer Orientation

Know your own costs Compare with the cost of using an outsourcing firm. Use activity-based costing techniques

Customer orientation of the 3PL Ability of provider to understand the needs of the hiring firm

and to adapt its services to the special requirements of that firm.

Reliability.

Flexibility of the provider

Prof N. Balasubramanian MMM II SEM III - 2014 7-97

E-Supply Chains

Definitions and Concepts supply chain

The flow of materials, information, money, and services from raw material suppliers through factories and warehouses to the end customers

e-supply chain

A supply chain that is managed electronically, usually with Web technologies


E-Supply Chains


E-Supply Chains

Supply Chain Parts Upstream supply chain

procurement

The process made up of a range of activities by which an organization obtains or gains access to the resources (materials, skills, capabilities, facilities) they require to undertake their core business activities

Internal supply chain

Downstream supply chain


E-Supply Chains

supply chain management (SCM)A complex process that requires the coordination of many activities so that the shipment of goods and services from supplier right through to customer is done efficiently and effectively for all parties concerned. SCM aims to minimize inventory levels, optimize production and increase throughput, decrease manufacturing time, optimize logistics and distribution, streamline order fulfillment, and overall reduce the costs associated with these activities


E-Supply Chains

e-supply chain management (e-SCM)The collaborative use of technology to improve the operations of supply chain activities as well as the management of supply chains

The success of an e-supply chain depends on: The ability of all supply chain partners to view partner

collaboration as a strategic asset A well-defined supply chain strategy Information visibility along the entire supply chain Speed, cost, quality, and customer service Integrating the supply chain more tightly


E-Supply Chains

Activities and infrastructure of E-SCM Supply chain replenishment E-procurement Supply chain monitoring and control using RFID Inventory management using wireless devices Collaborative planning Collaborative design and product development E-logistics Use of B2B exchanges and supply webs


E-Supply Chains

e-procurement

The use of Web-based technology to support the key procurement processes, including requisitioning, sourcing, contracting, ordering, and payment. E-procurement supports the purchase of both direct and indirect materials and employs several Web-based functions such as online catalogs, contracts, purchase orders, and shipping notices

collaborative planning

A business practice that combines the business knowledge and forecasts of multiple players along a supply chain to improve the planning and fulfillment of customer demand


E-Supply Chains

Infrastructure for e-SCM Electronic Data Interchange (EDI)

Extranets

Intranets

Corporate portals

Workflow systems and tools

Groupware and other collaborative tools


E-Supply Chains

Determining the Right Supply Chain Strategy Functional products are staple products that have stable

and predictable demand and call for a simple, efficient, low-cost supply chain

Innovative products tend to have higher profit margins, volatile demand, and short product life cycles. These products require a supply chain that emphasizes speed, responsiveness, and flexibility rather than low costs


Supply Chain Problems and Solutions

Typical Problems along the Supply Chain With increasing globalization and offshoring, supply

chains can be very long and involve many internal and external partners located in different places

A lack of logistics infrastructure might prevent the right goods from reaching their destinations on time

Quality problems with materials and parts also can contribute to deficiencies in the supply chain

bullwhip effectErratic shifts in orders up and down supply chains


Supply Chain Problems and Solutions

The Need for Information Sharing along the Supply Chain

EC Solutions along the Supply Chain Order taking

Order fulfillment

Electronic payments

Managing risk

Inventories can be minimized

Collaborative commerce


Key Enabling Supply Chain Technologies: RFID and Rubee

radio frequency identification (RFID)

Tags that can be attached to or embedded in objects, animals, or humans and use radio waves to communicate with a reader for the purpose of uniquely identifying the object or transmitting data and/or storing information about the object



LIMITATIONS OF RFID For small companies, the cost of the system may be too

high The restriction of the environments in which RFID tags are

easily read Different levels of read accuracy at different points along

the supply chain Concerns over customer privacy Agreeing on universal standards Connecting the RFIDs with existing IT systems



RuBee

Bidirectional, on-demand, peer-to-peer radiating transceiver protocol under development by the Institute of Electrical and Electronics Engineers


Collaborative Commerce

collaborative commerce (c-commerce)The use of digital technologies that enable companies to collaboratively plan, design, develop, manage, and research products, services, and innovative EC applications

collaboration hubThe central point of control for an e-market. A single c-hub, representing one e-market owner, can host multiple collaboration spaces (c-spaces) in which trading partners use c-enablers to exchange data with the c-hub



grid computing

A form of distributed computing that involves coordinating and sharing computing, application, data, storage, or network resources across dynamic and geographically dispersed organizations

service-oriented architecture (SOA)

An architectural concept that defines the use of services to support a variety of business needs. In SOA, existing IT assets (called services) are reused and reconnected rather than the more time consuming and costly reinvention of new systems



Representative Examples of E-Collaboration

vendor-managed inventory (VMI)The practice of retailers making suppliers responsible for determining when to order and how much to order

Information sharing between retailers and suppliers Retailersupplier collaboration Lower transportation and inventory costs and reduced

stockouts Reduction of design cycle time Reduction of product development time



Barriers to C-Commerce Most organizations have achieved only moderate levels of collaboration

because of: A lack of internal integration, standards, and networks

Security and privacy concerns, and distrust over who has access to and control of information stored in a partners database

Internal resistance to information sharing and to new approaches

A lack of internal skills to conduct c-commerce


Collaborative Planning, CPFR,and Collaborative Design

collaborative planning, forecasting, and replenishment (CPFR)

Project in which suppliers and retailers collaborate in their planning and demand forecasting to optimize flow of materials along the supply chain


advanced planning and scheduling (APS) systems

Programs that use algorithms to identify optimal solutions to complex planning problems that are bound by constraints



product lifecycle management (PLM)

Business strategy that enables manufacturers to control and share product-related data as part of product design and development efforts



Supply Chain Integration

How Information Systems Are Integrated Internal integration includes connecting applications with

databases and with each other and connecting customer-facing applications (front end) with order fulfillment and the functional information systems (back end)

Integration with business partners connects an organizations systems with those of its external business partners


Supply Chain Integration

Web Services

An architecture enabling assembly of distributed applications from software services and tying them together

Integration along the Extended Supply Chain Information integration along the extended supply chainall the way from

raw material to the customers door


Corporate (Enterprise) Portals

corporate (enterprise) portal

A gateway for entering a corporate Web site, enabling communication, collaboration, and access to company information



Types of Corporate Portals Types of generic portals

Portals for suppliers and other partners

Customer portals

Employee portals

Executive and supervisor portal

mobile portals

Portals accessible via mobile devices, especially cell phones and PDAs



The Functionalities of Portals information portals

Portals that store data and enable users to navigate and query these data

collaborative portals

Portals that allow collaboration



Justifying Portals Portals offer benefits that are difficult to quantify

Developing Portals Many vendors offer tools for building corporate portals as well as hosting

services


Collaboration-Enabling Tools: From Workflow to Groupware

Workflow Technologies and Applications workflow

The movement of information as it flows through the sequence of steps that make up an organizations work procedures

workflow systemsBusiness process automation tools that place system controls in the hands of user departments to automate information processing tasks

workflow managementThe automation of workflows, so that documents, information, and tasks are passed from one participant to the next in the steps of an organizations business process



Types of Workflow Applications Collaborative workflow Production workflow Administrative workflow

The benefits of workflow management systems include: Cycle time reduction Productivity gains Improved process control Improved quality of services Lower staff training costs Lower management costs Improved user satisfaction More effective collaboration and knowledge sharing



groupware

Software products that use networks to support collaboration among groups of people who share a common task or goal

Synchronous versus Asynchronous Products



Electronic Meeting Systems virtual meetings

Online meetings whose members are in different locations, even in different countries

group decision support system (GDSS)

An interactive computer-based system that facilitates the solution of semistructured and unstructured problems by a group of decision makers



Electronic Teleconferencing

teleconferencing

The use of electronic communication that allows two or more people at different locations to have a simultaneous conference



video teleconference

Virtual meeting in which participants in one location can see participants at other locations on a large screen or a desktop computer

data conferencing

Virtual meeting in which geographically-dispersed groups work on documents together and exchange computer files during videoconferences



Voice-over-IP (VoIP)

Communication systems that transmit voice calls over Internet Protocolbased networks

Interactive whiteboards

screen-sharing software

Software that enables group members, even in different locations, to work on the same document, which is shown on the PC screen of each participant



Instant video

Integration and groupware suites Lotus Notes/Domino

Microsoft NetMeeting

Novell GroupWise


Managerial Issues

1. How difficult is it to introduce e-collaboration?

2. How much can be shared with business partners? Can they be trusted?

3. Who is in charge of our portal and intranet content?

4. Who will design the corporate portal?

5. Should we conduct virtual meetings?


E-procurement


Learning objectives

Identify the benefits and risks of e-procurement

Analyse procurement methods to evaluate cost savings

Assess different options for integration of organisations information systems with e-procurement suppliers


Issues for managers

What benefits and risks are associated with e-procurement?

Which method(s) of e-procurement should we adopt?

What organisational and technical issues are involved in introducing e-procurement?


How important is e-procurement?

In Q1 2001, polling similar organizations showed that two thirds of companies had started to implement e-procurement systems.

However, complete solutions were rare: only about one in six actually has a live system in place. Of the rest, nearly half (47%) have some form of interim solution or are part way through implementation programmes


Key procurement activities within an organization

Figure 7.1 Key procurement activities within an organization


Requirements for procurement systems

Baily et al., 1994 says procurement involves sourcing items: At the right price.

Delivered at the right time.

Of the right quality.

Of the right quantity.

From the right source.


Electronic procurement system

Figure 7.2 Electronic procurement system

Source: Tranmit plc


Turban et al. (2000) summarize the benefits of e-procurement as follows:

Reduced purchasing cycle time and cost

Enhanced budgetary control (achieved through rules to limit spending and improved reporting facilities)

Elimination of administrative errors (correcting errors is traditionally a major part of a buyers workload)

Increasing buyers productivity (enabling them to concentrate on strategic purchasing issues)

Lowering prices through product standardization and consolidation of buys

Improving information management (better access to prices from alternative suppliers and summaries of spending)

Improving the payment process (this does not often occur currently since payment is not always integrated into e-procurement systems).


Use of different information systems for different aspects of the fulfilment cycle

Figure 7.3 Use of different information systems for different aspects of the

fulfilment cycle


E-mail notification of requisition approval

Figure 7.4 E-mail notification of requisition approval

Source: Tranmit plc


Document management software for reconciling supplier invoice

with purchase order data

Figure 7.5 Document management software for reconciling supplier invoice with

purchase order data

Source: Tranmit plc


The three main e-procurement model alternatives for buyers

Figure 7.6 The three main e-procurement model alternatives for buyers


Integration between e-procurement systems and catalogue data

Figure 7.7 Integration between e-procurement systems and catalogue data


An online catalogue of items for purchase

Figure 7.8 An online catalogue of items for purchase

Source: Tranmit plc


Implementation risks

Authentication fraud

Maverick purchasing

Lock-in to suppliers

Cost-savings not realized

Cost and difficulty of implementing systems


B2B Marketplaces

International benchmarking study: UK, 11% of businesses provide the opportunity for

customers to purchase from e-marketplaces, 9% in Sweden and Italy, 8% in Australia and Germany, 7% in France and 6% in Japan.

ComputerWorld (2001a) reported that of an estimated 900 business-to-business Web sites that were functioning worldwide mid-2000, a little more than 400 were left standing by end-2000.


Types of B2B marketplace

What businesses buy?

How businesses

buy?

Operating resources Manufacturing

resources

Systematic sourcing MRO Hubs

www.barclaysb2b.com

Catalogue Hubs

www.sciquest.com

Spot sourcing Yield Managers

www.elance.com

Exchanges

www.e-steel.com

www.plasticsnet.com


Covisint example - DaimlerChrysler AG - 2001

512 online bidding events processed through Covisint in the last twelve months

Purchasing volume of approximately 10 billion. That is a third of the total procurement volume assigned in newly closed deals in 2001.

In May 2001, DaimlerChrysler staged the largest online bidding event ever, with an order volume of 3.5 billion in just four days.

In total, 43 per cent of the total value of the parts for a future Chrysler model series was negotiated online with over 50 online bidding events in the third quarter of 2001 alone.


Criteria in selecting marketplaces

Number of suppliers and customers who are actively trading (not just members)

Costs of being a buying member (on each transaction)

Backing from trade associations

Funding source

Ease of using exchange through all stages of buying process from order to receipt

Technical changes needed to integrate with system are industry standards being established through XML?

Documents

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