[The Role of Network Supply Chains and e-Market Places in Supply Chain Management ] Lecture 2

04/21/23

[The Role of Network Supply Chains ande-Market Places in Supply Chain Management ]Lecture 2

[Judith Molka-Danielsen]

[email protected]

http://home.himolde.no/~molka/Harstad/harstad.htm

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VWR International for the Merck Group

Merck Group Merck Eurolab VWR International

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Overview Part I: Discuss these topics

• Role of order fulfillment• Process of order fulfillment • Describe the Supply Chain• Problems and solutions in supply chain

management• Motivation for Network Supply Chains and

e-Market Places• Implications and value of NSCs

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Overview Part II: Discuss these topics

• What are e-Market Places and Network Supply Chains?

• NSC Actors• Phases of Development of NSC• E-Market Place categories• Agency Theory• Transaction Cost Theory• Two kinds of industrial networks• Summary

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Order Fulfillment

• Taking orders may be the easiest part (ie.ToysRUs – ref.Bloomberg00, ref.techdirt00)

• Difficulties in groceries and fresh food– One reason: Customized products (touch

and feel the produce)– Second: Pull type manufacturing

• Role of order fulfillment• Process of order fulfillment • Describe the Supply Chain• Problems and solutions in

supply chain management• Motivation for Network Supply

Chains and e-Market Places• Implications and value of NSCs

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The Pull vs. Push Model

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Major Concepts

• Order fulfillment: Deliver right order, right place, on time

• Front office operations: Order taking, advertisement, CRM

• Back office operations: Accounting, finance, inventor, packaging, logistics

• Logistics: Managing the flow of goods, information and money along the supply chain

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The Process of Order Fulfillment

1. Payment Clearance

2. In-stock availability

3. Packaging, shipment

4. Insuring

5. Production (planning, execution)

6. Plant services

7. Purchasing, warehousing

8. Demand forecast

9. Accounting, billing

10. Customer contacts

11. Returns (Reverse logistics)




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Supply Chain Components

• UpstreamUpstream: Suppliers, their suppliers (several tiers). From Raw material to the company

• InternalInternal: All internal process that add value, conversion to find products

• DownstreamDownstream: All activities in distribution and delivery to end customers




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Components of the Supply Chain

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Supply Chain Management• SCM is the Flow of material, information,

money, etc. from raw material suppliers through factories to customers– Parts are organizations, procedures, and

people– Integration of the business processes

along the chain, Planning, Organizing, control of many activities

– Activities include Purchasing, Delivery, Packaging, Quality Checking, Warehousing.

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Some Supply Chains are Complex and Nonlinear

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Benefits of SCM

• Reduce transaction costs.• Reduce uncertainty along the chain• Proper inventory levels in the chain (minimize

inventory costs)• Minimize delays in order fulfillment• Eliminate rush (unplanned) activities• Provide higher quality customer service• Major contributor to firm success (even

necessity for survival).

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Problems in Supply Chains

• Delays in production, distribution etc.• Expensive Inventories• Need for intermediaries in order

fulfillment but lack of coordination with partners

• Uncertainties in deliveries due to poor communication with partners

• Poor demand forecasting due to long and complex supply chains

• Interference with production (channel conflict)




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Problems: in Global Supply Chains

• Can be very long• Possible cross-broader problems• Need more complex information technology

support of:– communication and collaboration

• Possible delays due to: customs, tax, translations, politics

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SC Problems: specific to e-businesses

• Pure e-businesses (with no physical infrastructure) may not have – the logistics infrastructures to aid in order fulfillment– Experience with distribution– Direct access to end customers– A working strategy with business partners

• One business can be a member of several supply chains and a member of several networks

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Problems with Supply Chain Management

• Most Supply Chain Management is not on-line (today SC information is shared via (fax, email) 78%, (EDI) 65%, (on-line = Internet,extranet) 28%.

• Current techniques are broken– Information bottlenecks occur– Long-term plans and short-term schedules do not

connect (manufacturers keep just-in-case stock)– Customers lose patience (bottlenecks, no info)

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Motivations to tie SC to e-Market Places using Network Supply Chains

• SCM must go on-line with more partners (also on-line), to allow real-time adjustment in schedules.

• Interconnect long-term plans and short-term schedules. Synchronize production schedules with suppliers (have accurate configure-to-order information).

• All steps in the supply chain will be on-line (Plus: design, sales, marketing, production, quality check, customer satisfaction).

• Liability – becomes recognizable and traceable.




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Business drivers for eMarket Place Systems

• Globalized Markets: reduce profit margins for firms

• Information Intensity: in products raise participation costs

• Mergers, acquisitions, consolidations: in traditional industries create scale economies, and intensify competition between remaining players.

• Business Process Redesign: changes the process structure in the firms, new enterprise wide systems are needed to support the new structure.

• Informaition needed for products: shortens product cycle times, ie. less time to get a product to market and less time to realize positive returns

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Business drivers for eMarket Place Systems

• Integrated processes within the firm: not distinct processes

• Integrated processes within an industry: requires cooperation within an industry to strengthen potential industry profits

• Information architecture investments: lead to new knowledge - lead to something that can be sold.

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Technology Drivers for eMarket Place Systems

Availability of: • Relational databases

• Reduced storage costs

• Expanded use of public networks (ie. Internet) and standards that support its use (ie. XML, HTTP, TCP/IP).

• Client-Server architectures and technologies available.

• Desk-top and portable user environments variety available (ie. phones, palmtops, portables).

• Enterprise network software - management and integration tools, middleware, ubiqutious computing technology.

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Motivation: Network Supply Chain (NSC) solutions go further…

Large manufacturing enterprises will connect their Supply Chains to a Net.

NSC is a network of inter-enterprise supply chain events connected through a private or public e-Market Place.

• A business has access to many suppliers through e-catalogs and pricing through auctions

• A business has access to many buyers and can post (RFQ)

• Exchanges are controlled by few large companies or 3rd party managed

• Use of Vertical vs. Horizontal infrastructures for different kinds of cost savings.

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Value: NSC information benefits• Extend options for new partnerships - in design,

marketing, logistics. More resources available.• Central hub of information - Companies can provide

network wide management and analysis of operations data across multiple constitutents.

• Costs in the supply chain will be more visible - so that faults, like faulty design, are more transparent, and taken out. Improves product quality.

• NSCs will focus on private - business partner eMarketplaces. SAP software works around this.




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What are e-Market Places and Network Supply Chains?Enterprise Systems and Industrial Networks

• Enterprise Systems links IT resources across the whole firm in an Electronic Market Place (MP). It integrates business processes across all functional areas.

• Industrial Networks link enterprise systems between companies in Network Supply Chains (NSC), such as in SCM (supply chain management).

•What are e-Market Places and Network Supply Chains?•NSC Actors•Phases of Development of NSC•E-Market Place categories•Agency Theory•Transaction Cost Theory•Two kinds of industrial networks

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ProductSupplier Digital Intermediaries End Users

ServiceSupplier

ProductIntegrator

PortalDigital connectorCustomer agent Consumer

Enterprise

Marketplace builder (infrastructure supplier)

Distributor

-System-integrator

Payment-provider

ProductSupplier

NSC Actors

Network access provision

(e-handel services access

-Payment system

- physical and digital delivery

Market placeBtB

Terminal, mobileTlf, tv, pda


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Phases to NSCs

1. Integrate procurement - Put production plans on-line and connect to purchase order systems using XML.

2. Create Collaborative Hubs - Synchronize the planning and production schedules. Put business logic in advanced planning and scheduling (APS) software to share with partners but allow participants to shield some data (private).

3. Create Networks of Collaborative Hubs – These hubs will share 1. Infromation Streams - Integrate information from start to

finish. So Cisco shares sales information with its manufacturers. The NSC must offer enterprise applications such as CRM, ERP, etc.

2. Material Streams – tight information & distribution process Mercedes-Benz might demand all suppliers tie to the NSC to ensure quality in planning and production details.

3. Financial Streams – more partnership options in design and small applications sharing.

•What are e-Market Places and Network Supply Chains?•NSC Actors•Phases of Development of NSC•E-Market Place categories•…

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NSC Trends

Time 1996 1997 1998 1999 2000 2001

Markedseffektiv

itet

EDI Networks Expensive, closed Non-scalable

Brochure-ware publicize on-line, sell

off-line

Basic eCommerce one-to-one selling

from website

B2B eCommerce enabling commerce through aggregation many-to-many commerce

Source: Morgan Stanley Internet Research

Collaborative Hubs Networks of linked Hubs

BS B

S

S BS

BS

BS

BS

BBS

BS

B

M M

M M

S

B

S

S

SS

B

BB

S

B

B

B

B

B

B

B

S

M

S

S

SS

S = Supplier/SellerB = BuyerM = Marketplace Hub

Sann tids integrasjon mellom kjøpere og selgeres systemer

Forsyningskjedeintegrasjon

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NSC: Market place categories• Main Categories

– Horizontal– Vertical– Buyer based, Seller based, neutral

• Producer– Indirect– Direct

• Owner– Market actors are the dominate – Dot.com businesses are owners

• Categories of market places– Buy and sell and develop shared services

– E-collaboration

• One vertical market place will be able to manage an entire business branch.


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Agency Theory • Agency Theory states that the organization is a nexus of

contracts among self interested individuals. • Agency Costs are the sum of

• monitoring costs (gathering information for reports)

• bonding costs (developing reports) and

• residual costs (the costs the principal incurs by deviation of the agent, despite the monitoring activities).

• Agency Costs rise as the decision moves away from the local source of information (the customer) and as decision making moves up to the top management level.

• E-Market Place and NSC let decisions be more decentralized.•What are e-Market Places and Network Supply Chains?•NSC Actors•Phases of Development of NSC•E-Market Place categories•Agency Theory•Transaction Cost Theory•Two kinds of industrial networks

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Transaction Cost Theory – Ronald H. Coase, in ``The Nature of the Firm´´(1937)

It says that firms exist to reduce the transaction costs of individuals acting in the market.

Transaction costs will decide if a firm should produce something themselves or let someone else do it, not only market price.

Transaction costs today are lower because of alliances and networks.

Coase was not specific in his description of what transaction costs were, but they include for example,

• Search Costs

• Information Costs

• Distribution Costs

• Order Processing Costs

• Contract enforcement Costs

• Advertising Costs


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Gurbaxani and Whang (1993) on Transaction Costs

• Says that market Transaction Costs are External Coordination Costs.

• External Coordination Costs = Operational Costs + Contractual Costs

• Operational Costs (search costs, transportation costs, inventory holding costs, communication costs) and

• Contractual Costs (the costs of writing contracts, cost of enforcing contracts).

• Example: tradeoffs in development of a software product. – contract requirements involved in the development – If the market can produce this product at less expense, then

the business will outsource the project. – If the business can do it at less cost, they will internalize the

project to produce the software product.

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Shared transactions

Market communications

Payment transactions

Distribution

Before and after sales processing

Customer Resource Management (CRM)

Transaction costs

Move towards a frictionless and transparent

market?

Savings in money: 10 - 50 %Savings in time: 50 - 96 %

Cisco: 57 % of their orders are processed without involving people.

Savings up to 95 %

Production costs - 20 %Distribution costs of digital products up to 99 %

Automatic system to store customer preferences

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Stages and Limitations in Mergers and Aquisitions 1. Strategic Exploration - what firms may offer unusual

systems, knowledge, or economies of scale? Are the target company systems problematic (should avoid these partners)?

2. Valuation - Target company is already identified. Identify the costs of integration, estimate the benefits. What are costs to upgrade IT systems?

3. Purchase - Develope a core integration team to validate the costs and benefits of the system. Develope a business process team to examine the business processes. Develope a IT infrastructure team to the target firms infrastructure.

4. Transition rationalization - Why keep some of the target companies old systems. Eliminate what is not needed. Integrate systems with the combined system.

Alternative: Industrial Networks (NSC) can be an alternative to Mergers and Aquisitions.

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Limitations of merging the Enterprise Systems of two organizations

1. Implementation of merged systems is difficult. 2. Costs are up front, benefits are hard to account for and

intangible. 3. Avoid replacing one legacy system with another. 4. Interoperability with older legacy systems, and

transitions. 5. Realising Strategic Value - "The only strategic assets in

the end are knowledge and information unavailable to your competitors." So, must use ES to gain understanding of your own firm and customers in a way that cannot be duplicated by competitors. It is therefore the combination of the firm's people-assests and information technology assests together that is not easily duplicated. This strategic value is not necessarily lost by integrating ES.

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An Enterprise e-Market Place System would integrate the business processes of the entire enterprise SC into one system of business processes and operations.

MARKETINGMARKETING INBOUNDINBOUND MANUFACTURING MANUFACTURING FINANCEFINANCE AND AND SUPPORTSUPPORT LOGISTICSLOGISTICS SALES SALES

VENDORSVENDORS

CUSTOMERSCUSTOMERSSINGLE SOFTWARE & SINGLE SOFTWARE & HARDWARE SYSTEMHARDWARE SYSTEM

PERMEABLE BOUNDARIESPERMEABLE BOUNDARIES

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Two kinds of industrial networks for Network Supply Chains (NSC).

1. Vertically organized industrial networks try to replace acquiring suppliers and manufacturers with networks. • Before: firms would try to reduce transaction costs by

combining firms and not building their own transportation and logistics systems.

2. Horizontally organized industrial networks try to replace mergers with strategic alliances. • They are organized across industries between competitors.

Merging with competitors could reduce agency costs by creating economies of scale and scope on products and services.

• But these networks allow certain stages of the supply chain to be shared and not competed for (ie. Dell and IBM coordinate development of computer components).

• Goal is to create "web-value" meaning more industry value that the industry competitors can all benefit from.


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INDUSTRIAL NETWORKSINDUSTRIAL NETWORKS

INDUSTRIAL NETWORKS –integrate systems from many firms, vertically and horizontally

INDUSTRY INDUSTRY VALUE VALUE CHAINCHAIN

firm 1 firm 2 firm 3COMPETING

firms

supplier 1

supplier2

supplier3

COMPETING Suppliers

Enterprise System – for one large business can integrate an enterprise value chain, ie. Coca-Cola.

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MP reduce inefficiencies and transaction costs

Inefficiencties and transaction costs are in

Market place functions

Market communications Catalog, search agent, standards development, catalog development.

Distributiopn and ordering E-business procedures. XML as a common language for EDI and business applications, for document exchange.

Price setting Auctions, reverse auctions, strike price contracts (options).

Reliability and security Third party authorization and digital signatures.

Supply Chain From MP to NSC and information hub for all business processes and transactions.

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Challenges for NSC

• Permeability of the boundaries of the firm. Customers and Suppliers and Competitors have access to your business processes. They learn more about you.

• Difficult to measure benefits and costs. Even more intangible across boundaries.

• Vulnerable to customers and suppliers. Everyone is shopping for the best price.

• Security - Management can lose control over its IT systems, (who develops, where is the data located, which

• Changes in the corporate culture, re-education of employees or changing people is needed.

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Summary : Implications, changes from the traditional market place

• One to three (vertical) market places will dominate in each business branch (pharmaceutical, energy, travel).

• They will integrate the market place horizontally. • The market place will be dominated by a big

industry actor in the given branch.• There will be development of end-to-end service

through strategic alliances between market place builders.

• The market place will afterwards change the cooperations or alliances that form the branches value chains.

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Trends for business evolution towards total business solutions or `èbusiness suites´´

• Application Integration where the firm integrates the most important business applications. – Administrative system steering with (ERP)

– Value chain management through (SCM)

– Customer Resource Management and handling (CRM)

• These internal business applications will go on-ling (ie. on the Web, with private membership).

• These internal production management systems will go on-line (ie. on the Web, with private membership).– CAD (Computor Aided Desigh

– CAM (computor Aided Management)

– CAE (Computor Aided Engineering)

PricewaterhouseCoopers

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Trends for business evolution towards total business solutions or `èbusiness suites´´

• When all of these processes are digitized and `òn-line´´ then the business can cooperate with other businesses in e-Market Places using NSC. Further, e-collaboration can take place.

• E-Market Places will become information hubs for all business processes and value chain management through (SCM) will be central.

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Summary of trends for e-Market Places and NSC

• The e-Market Place will evolve from an e-commerce market place focused on buying and selling, to Network Supply Chains (NSC).

• E-Market Places will become the cooperative process arranger and outsourcer (to save on transaction costs).

• E-Market Places will become infromation hubs for all business processes.

• E-Market Places will integrate information from start to finish, through all stages of the supply chain.

• The value chain becomes an integration of information processes from the industry supply chain (NSC).

• Everything will center on the business process.

Documents

[The Role of Network Supply Chains and e-Market Places in Supply Chain Management ] Lecture 2