Welcome

Strategies of Network Companies

Jonathan D. Warehamwareham@acm.org

Agenda

When firms cooperate, compete and exchange

problems with traditional supply chain management (SCM) problems this creates for manufacturers problems this creates for their suppliers problems this creates for consumers

improvements to traditional SCM the direct-to-customer model virtual integration with suppliers

Agents

Firms

Networks

Markets

Quiz

? days a box of cereal spends in the supply chain?

Distorted information causes total inventory in the pharmaceutical supply chain to exceed ? days. $? in savings to be realized.

$ ? wasted because of poor coordination in the food industry supply chain

$ ? Boeing write-off in 1997 due to supply chain inefficiencies

Quiz

A box of cereal spends 104 days in the supply chain

Distorted information causes total inventory in the pharmaceutical supply chain to exceed 100 days. $11 billion in savings to be realized

Poor coordination wasting $ 30 billion annually in the food industry

$ 2.6 billion Boeing write-off in 1997 due to supply chain inefficiencies

Defining SCM

SCM is the coordination of material, information and financial flows between and among enterprises participating in the demand fulfillment process for a product or service.

Spans multiple organizations and industries

Coordination and integration of flows essential for the modern enterprise

A digital nervous system is the corporate, digital equivalent of the human nervous system, providing a well-integrated flow of information to the right part of the organization at the right time. A digital nervous system consists of the digital processes that enable a company to perceive and react to its environment, to sense competitor challenges and customer needs, and to organize timely responses.

Gates: Business @ The Speed of Thought

A digital nervous system requires a combination of hardware and software; it's distinguished from a mere network of computers by the accuracy, immediacy, and richness of the information it brings to knowledge workers and the insight and collaboration made possible by the information.

Gates: Business @ The Speed of Thought

Scott McNealy on Gates’ View

He is right - I would be very nervous if my systems were based on their platforms and products!

RFID Tags

Tags can be attached to almost anything:

pallets or cases of product vehicles company assets or personnel items such as apparel,

luggage, laundry people, livestock, or pets high value electronics such

as computers, TVs, camcorders

What is RFID? -- The TagsWhat is RFID? -- The Tags

Are All Tags The Same?Are All Tags The Same?

Basic Types:Active

Tag transmits radio signal Battery powered memory,

radio & circuitry High Read Range (100

meters)Passive

Tag reflects radio signal from reader

Reader powered Shorter Read Range

(10cm – 5 meters)

RFID the Supply Chain

Tag ReaderAntenna Middleware Supply chain execution- Coiled

antenna ofreader creates magnetic field with coiled antenna of tag

- Transmits identification data to a reader

-Transmit data tomiddleware

-Associates tag info with product info

-Process information from reader

-Filters data

-Sends data to backend servers

- Backend SCE or ERPsystems receives Information

How far, how fast, How far, how fast, how much, how many, attached to whathow much, how many, attached to what??

Low Frequency No regulation Penetrate materials (water, wood, tissue well) Slow read speed Small range No penetration of iron and steel

Medium Frequency Little data, small distance Thin tags Low cost High data rates Govt regulated Non mental penetrating

High Frequency Penetrate materials Small tag size High data transfer Long range Non-water or tissue penetrating Non-regulated in some regions expensive

Where can RFID add value?

From Manufacturing

Into a Store’s Back Room Inventory

On the Shelf At the Cash

Register

Through Distribution Transportation

Out the Door as an anti-theft device

Top 100 Suppliers: Suppliers will mark inbound cases and

pallets with RFID - 1 January 2005 - May, 2003 specification calls for ≈256 bit read/write tag

• 1 EPC tag per carton – 100% read on conveyor

• 1 EPC tag per pallet – 100% read at Inbound dock

• Conveyor speed of up to 600 feet per minute

• 3 Texas Distribution Centers

• January 2005

Why???

Stock management /perishables (field to fork)

In-stock levels Invoice reconciliation: damaged,

deductions, performance penalties, etc. Scan Based Trading or VMI Improved analytics & POS data All reads available to suppliers within

30 minutes

Guidelines for using RFID Bar codes cannot be used Counting versus identification (reverse

logistics) Use of 3Party logistics and suppliers Data collection is chaotic (battlefields,

hospitals, retails shops) Exact configuration of the good must be

maintained Counterfeit protection High Risk scenarios, drugs, hospitals Collecting data outside of retailer (smart

refrigerators, medicine cabinets, etc)

Beer Game video

Traditional supply chain obsolescence

Direction of flow of demand Direction of flow of product

Raw Material vendor

Tier-II Suppliers

Tier-I Suppliers

Manufacturers Distrib

ution Centers

Retailers Custo

mer Zones

Point of Point of differentiatiodifferentiatio

nnDistribution Distribution

costscostsMarket Market

mediation mediation costscosts

The Bullwhip Effect

Customer Retailer Distributor Factory Tier 1 supplier Equipment

Upstream amplification of demand variationProgression of a brushfire to an inferno!

Machine Tools at Bullwhip Tip

-100%

-50%

0%

50%

100%

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

Data from United States, 1961-1991 (GDP, vehicle production, and machine tool orders

% C

ha

ng

e, y

ea

r to

ye

ar

% change GDP

% change vehicle production index

% change net new orders machine tool industry

The Diaper Supply Chain!

010

203040

5060

7080

Week

Ord

er

Factory

Distributor

Wholesaler

Retailer

Customer

Ripples to tidal wavesStockpiles and stockoutsInsufficient or excessive capacitiesHigher costs

What is the Problem?

The “bullwhip effect” - four key causes Demand signal processing

Currently only order information is shared (not actual sales) Need to instead share POS retail data (sell-through data)

Order batching (retailers only order periodically) Infrequent access to demand information

Order rationing retailers order popular items excessively Hoarding of scare products (inflate demand order of scarce

product to ensure that you have it on-hand)

Special Promotions Alter the normal pattern of product demand from customer;

so that it’s impossible to understand the “true” demand

Interorganizational Systems: CRP

P&G

Warehouse 1

Warehouse 2

BIG RETAILER

< 3% stock outs

< 14days inventory

Before CRP

P&G

Warehouse 1

Warehouse 2

BIG RETAILERBudget

Actual

•Volume discounts•New product promos

•Here and now discounts•Trade marketing

•Bonuses….

Interorganizational Systems

Integration of supply chain across companies

Degrees of integration: information, process, property rights

Increased efficiencies through 1. optimal production/logistics planning 2. lower inventories 3. increased flexibility 4. customer satisfaction

Oh brave new world, this is wonderful…But…

The Economist says….

Look out for proprietary systems with high specificity Lock-in

Sharing processes is optimal from logistics viewpoint, but remember ‘knowledge of time and place’

Additional information acquired by one party can reduce bargaining power of other. Competitive industries like retailing, grocery and electronics has demonstrated many examples of this….

Types of Shared Information

Inventory information Transition to echelon-based inventory systems Upstream companies can determine when and

what to produce Downstream companies can improve service

levels with less inventory

Types of Shared Information

Sales Data Variance of orders greater than that of sales The “bullwhip effect” - four key causes

Demand signal processing Move to sharing sell-through data and POS retail

data Order batching

Infrequent access to demand information Order rationing

Hoarding of scare products Promotions

Types of Information Sharing

Production/Delivery Schedule Improves due-date estimation Expand planning horizons

Other Information Sharing Performance metrics Capacity information

Challenges

Aligning incentives of different partners Channel Management Example

Trust and cooperation Confidentiality of shared information Anti-trust implications, such as possible

price fixing behavior Timeliness and accuracy of information Technological constraints

SCM Software –Who?

What does SCM software do?

2 Main Functions: Tracking & Optimization

Factory Scheduling Bar Code Warehouse Management Transportation Routing and Scheduling Inter Organizational Systems Collaborative Planning & Optimization Multi – echelon optimization E-Procurement & Marketplaces Supplier Contract Management RFID Management Systems

Commercial Uses of New Technologies

Many commercial forms are products of modern technologies

Manugistics, I2, Commerce 1, Ariba

3.1

2.3.3

.7

eCommerce Status? Doing fine….

0

100

200

300

400

500

600

700

800

1999 2,000 2001Billion USD

eCommerce - Where?

Manufacturing (19.6% of all sales) Transportation equipment Beverage and tobacco Electrical equipment & components

Wholesalers (11.7% of all sales) Drugs and druggists Motor vehicles, parts and supplies Professional and commercial equipment

eCommerce - Where? (cont.)

Services (1% of total sales) Travel arrangement and reservations Securities & commodities

intermediation Publishing and software

Retail Sales (1.4% of total retail sales) Books and magazines

Outlook

CommonPresent Sense

Manufacturing 18% 70% Wholesalers 8% 50% Services 1% 20% Retail Sales 1% 30%

• 60-80% of all eCommerce conducted through EDI • x12 & EDIFACT (primarily VANS)

www.census.gov/estats

B2B What Happened ?

Estimates that over 1,000 B2B portal will soon consolidate to < 200.

Less than 15% of all exchanges operating

2 Stories: Vertical Horizontal

Your task….

You would like to buy a 3 year old Honda Prelude. You have 2 options:

1. Buy the car in a private transaction, mediated through the newspaper classifieds, or

2. Buy the car through a used car dealership

Asses the relative advantages and disadvantages of each option.

Intermediaries

Up to 25% of the economy

Financial Intermediaries

Dealers & Wholesalers

Information management: compiling and filtering information, informing consumer's knowledge of supply and demand capacity.Logistics management: economies of scale, scope and specialization in conveying goods from production sites to consumption sites

Transaction securitization: controlling and guaranteeing the quality of goods and payments delivered to buyer and seller

Insurance: insurance for the existence of a market for the products, that is, a market making function

Liquidity: extending credit to both sides of the transaction, alleviating liquidity constraints

OK, so what do Intermediaries do?

Morgan Stanley “Collaborative Commerce”

Before the Order Purchase approval and routing Promotions and campaigns Financing Inventory availability Price negotiation

During Fulfillment Order status Partial Shipments Backorder information Substitute products Order explosion to multiple suppliers Scheduling of inventory

After Delivery Warranty and maintenance Replacement parts Asset Management Regulatory Compliance Returns and incorrect ships Settlement Inspection

B2B Portals – 2 main types

Horizontal 1 product sector –

many industries Large exchanges Provide liquidity,

transparency, aggregate supply & demand

Require high volume of transactions, small commission base

Additional revenue through value adds like financing, asset management, warrantees

Vertical One industry –many

products Limited membership Eliminate inefficiencies

in specific industry supply chains

Fewer transactions – revenue based on realized savings

Purpose Increase understanding of rent generation

models in electronic intermediaries Implications of network and product

characteristics Evolution of rent accrual mechanisms &

information and relational capabilities Comparative case studies: 2 companies, both

founded in Atlanta in 2000, & backed by large industry incumbents

Omnexus

eGatematrix

Omnexus

Omnexus

Plastics Industry one of world’s largest 589 billion dollars in revenue Employs 1.5 million people

BASF Bayer Dow Dupont Ticona/Celanese

Omnexus

•Large marketplace, MCBase •Search on thousands of materials with specific properties•Integration with suppliers ERP systems•Real time inventory and price data•Submission of RFQs•Electronic billing and transaction clearing•Customer Support

Size # of Firms Annual Revenues Market ShareLarge 200 >30 million >50%Medium 2,700 6 million 30%Small 5,000 <$1 million <20%

Segmentation of Resins Buyers

Competition

Evolution

eGate Matrix

Suppliers/ Distributors/ Manufacturers Caterers

Service Providers Airlines

Flight schedule information from airlinesQuality performance feedback from airlines

Flight schedule information from airlinesQuality performance feedback from airlines

Flight schedule information from airlinesQuality performance feedback from airlines

Inventory and service availability updates from all groups

Food products, supplies, materials to caterers or directly to plane

Prepared meals and other supplies to planeEquipment (galley, culinary, etc.) hand-offs between flights

Audio and video supplies/ equipment to plane

Equipment (galley, culinary, etc.) hand-offs between flights

Mark-up payment from airlines for services rendered

Payment from airlines Service charges from airlines

Information Flows

Physical Flows

Financial Flows

What Happened? Conclusions

Horizontal Many portals built on

information aggregation assumption

Barriers to entry low Too many portals, can’t

generate volume Suppliers weary of

transparency (stick with EDI and Fax)

Most sectors can support 1-3 exchanges (max).

Forget commodities and content - Focus on payment, logistics, & value adds….

Vertical Often very sound

business model Implementation hard

work Barriers to adoption:

legal, organizational, procedural

Slow in the making, but scale well

Most profitable in fragmented markets with customizable products