1. © 2007 Wiley1 Chapter 4 E-Commerce and Supply Chain Management Operations Management by R. Dan Reid & Nada R. Sanders 3 rd Edition © Wiley 2007

2. © 2007 Wiley2 Learning Objectives Describe the different kinds of electronic commerce Describe supply chains and supply chain management Describe the bullwhip effect Describe factors affecting SCM Describe factors affecting global supply chains Describe the role of vertical integration Solve in-sourcing or out-sourcing problems Describe the role of purchasing in SCM Describe the ethics of supply chain management Describe the role of information sharing in SCM Describe the role of warehouses in supply chains Describe the concept of cross-docking Describe supply chain performance measures Describe trends in SCM

3. © 2007 Wiley3 Types of E-Commerce E-commerce is defined as the use of the Internet and the Web to transact business Five types of e-commerce Business-to-business (B2B) Business-to-consumer (B2C) Customer-to-customer (C2C) Peer-to-peer (P2P) Mobile commerce (m-commerce)

4. © 2007 Wiley4 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, Access to global suppliers Lower inventory investment due to price transparency/reduced response time Quality enhanced due to earlier involvement between buyers and sellers, especially during product design and development

5. © 2007 Wiley5 Types of E-Commerce (cont.) Business-to-Consumer (B2C) Revenue Models Advertising revenue model Subscription revenue model Transaction fee model Sales revenue model Affiliate revenue model Consumer-to-Consumer (C2C) E-Commerce Peer-to-Peer (P2P) E-Commerce M-Commerce

6. © 2007 Wiley6 Supply Chains & SCM A supply chain is the network of activities that deliver a product/service to the customer Sourcing of: raw materials, assembly, warehousing, order entry, distribution, delivery Supply Chain Management is the 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

7. © 2007 Wiley7 Components of a Typical Supply Chain External Suppliers Internal Functions External Distributors INFORMATION FUNDS

8. © 2007 Wiley8 Components of a Supply Chain External Suppliers Tier one supplier supplies directly to the processor Tier two supplier supplies directly to tier one Tier three supplier supplies directly to tier two Internal Functions include: Processing, purchasing, planning, quality, shipping External Distributors transport finished goods Logics function manages all material movement including selection and monitoring carriers

9. © 2007 Wiley9 The Supply Chain

10. © 2007 Wiley10 A Basic Supply Chain

11. © 2007 Wiley11 SCM in a Dairy Products Supply Chain

12. © 2007 Wiley12 The Bullwhip Effect & Information Sharing The Bullwip Effect describes replenishment orders at different chain levels with no apparent link to final demand. Worst at Tier 3 Causes: poor demand forecasting at each level, waiting to batch orders, price fluctuations & promotions, rationing Counteracting the Effect: Collaborate forecast at all levels, share real demand information (POS terminals) Order based on demand rates, not batching Stabilize pricing e.g. Wal-Mart “every day low prices”

13. © 2007 Wiley13 SCM Factors SCM must consider the following trends, improved capabilities, & realities: Consumer Expectations and Competition – power has shifted to the consumer Globalization – capitalize on emerging markets Information Technology – e-commerce, Internet, EDI, scanning data, intranets Government Regulations - like trade barriers Environment Issues – e.g. waste minimization

14. © 2007 Wiley14 Global SCM Factors Managing extensive global supply chains introduces many complications Substantial geographical distances increase lead times and inventory investment Forecasting accuracy complicated by longer lead times and different operating practices Exchange rates fluctuate, inflation can be high Infrastructure problems like transportation, communication, lack of skilled labor, & scarce local material supplies Product proliferation created by the need to customize products for each market

15. © 2007 Wiley15 Vertical Integration Vertical integration – a measure of how much of the supply chain is owned by the manufacturer Backward integration – acquisition or control of sources of raw material and component parts Forward integration – acquisition or control of its distribution channels Vertical integration related to levels of insourcing and outsourcing

16. © 2007 Wiley16 In-sourcing vs. Outsourcing What questions need to be asked before sourcing decisions are made? Is product/service technology critical to firm’s success? Is operation a core competency? Do you have the capital to provide capacity & keep the process current? Will outsourcing extend lead times and limit flexibility? Can others do it for less cost and better quality?

17. © 2007 Wiley17 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

18. © 2007 Wiley18 Example: Make-or-Buy analysis- A small snowboard manufacturing company is presently sourcing the major portion of its manufacturing process. The cost for the purchased board is $50 each and they estimate their current fixed manufacturing costs at $25,000. A consultant has presented a plan which would reduce the variable cost to $20 each, but requires a major in-house investment which would increase their fixed cost to $400,000. The owner wants to know what unit sales must be to justify the new proposal. FC Buy + (VC Buy x Q) = FC Make + (VC Make x Q) $25,000 + ($50 x Q) = $400,000 + ($20 x Q) Q = 12,500 units Purchasing has identified a new supplier that can produce a board for $30 each. Now what is the Indifference Point? $25,000 + ($30 x Q) = $400,000 + ($20 x Q) Q = 37,500 units

19. © 2007 Wiley19 Purchasing’s Role in SCM Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations Developing supplier relationships Determining how many suppliers Developing partnerships Industry trend is to a much smaller supplier base. Why?

20. © 2007 Wiley20 Critical Factors in Successful Partnership Relations Benefits of Partnering Early supplier involvement (ESI) in the design process Using supplier expertise to develop and share cost improvements and eliminate costly processes Shorten time to market Have a long-term orientationShare a common vision Are strategic in natureShare short/long term plans Share informationDriven by end-customer needs Share risks and opportunities

21. © 2007 Wiley21 Integrated SCM Implementing integrated SCM requires: Analyzing the whole supply chain Starting by integrating internal functions first Integrating external suppliers through partnerships Possible Supply Chain Objectives Reduce costs, improve quality Reduce lead time and inventory Reduce time to market Increase sales Improve demand data/forecasting

22. © 2007 Wiley22 The Role of Warehouses There are two types–general and distribution What do warehouses do? Transportation consolidation from LTL quantities to TL quantities Product mixing is a value added service which groups a variety of items together for better service and reduced cost Services like providing a closer location point to the customer. Also customizing services like adding instruction books or proper voltage power cord Cross-docking to eliminate storage and order picking costs, e.g. Home Depot, Wal-Mart, Costco

23. © 2007 Wiley23 Supply Chain Measurements Measuring supply chain performance Traditional measures include; Return on investment Profitability Market share Revenue growth Additional measures Customer service levels Inventory turns Weeks of supply Inventory obsolescence

24. © 2007 Wiley24 Supply Chain Measurements Dell Computer has achieved excellent results from their SCM implementation. They have made dramatic improvements in competitive priorities: Cost – prices 10-15% lower than competition Speed – Dell can take either a phone or Internet order and ship within 36 hours - Dell’s nearby component warehouse has reduced inventories to 13 days of supply compared to Compaq’s 25 Flexibility – suppliers restock warehouse so Dell can build and ship customized make to order PC’s

25. © 2007 Wiley25 Current Trends in SCM Supply chains will be more agile, flexible, and integrated to reflect consumer expectations Technology will facilitate real time demand sharing throughout entire supply chains Winning firms will have the best supply chains, e.g. Wal- Mart Greater use of net-marketplaces to bring more suppliers into contact with more suppliers to reduce price and lower transaction costs Greater use of E-distributors providing products via e- catalog from thousands of suppliers at one market place E-purchasing companies connecting online suppliers offering VCM for MRO supplies will charge fees to join the market

26. © 2007 Wiley26 Trends in SCM (continued) More online exchanges for spot requirements of large firms in a single industry, e.g. E-steelcom, E- greenbiz.com More use of industry owned consortia enabling buyers to purchase direct inputs from a limited set of invited participants, e.g. Covisint.com (automotive), Avendra.com (hospitality), and ForestExpress.com (paper and forest) More use of value adding third party logistics providers like UPS More virtual corporations overseeing networks of suppliers SCM performance measurements will focus on quality, speed, flexibility, and value

27. © 2007 Wiley27 Chapter 4 Highlights E-commerce is the use of the Internet to transact business; B2B, B2C, C2C, P2P, M-commerce SCM involves integration of all process to make a product, from raw materials to end user sales The bullwhip effect is the distortion of real demand cause by multi-level batching, bad estimates, price fluctuations, and rationing Many factors affect SCM; demands for better service, quality, quicker response, and global marketplaces, fierce competition, & information technology With global SCM, complicating factors include lengthened lead times, exchange rates, & many infrastructure issues in developing countries

28. © 2007 Wiley28 Chapter 4 Highlights (continued) Vertical integration is more appropriate for high volume, standard products Outsourcing is more appropriate for non-core processes and activities Purchasing manages supplier selection and supplier relationships, including forming partnerships The ISM has developed ethics principles & standards Information sharing is critical to effective SCM to minimize the risk inherent in long supply chains Technology like bar code scanners, POS terminals, EDI, & the Internet have moved information sharing of actual consumer demand closer to real time

29. © 2007 Wiley29 Chapter 4 Highlights (continued) Warehouses do transportation consolidation, product mixing or blending, and reducing response time Cross-docking eliminates costs of storage and order picking. Requires close coordination of carriers Measuring supply chain performance needs to reflect potential improvements in quality costs, service, inventory and capital investment, and productivity The most significant advance will be the increased use of electronic marketplaces; e-distributors, e-purchasing, online exchanges, and industry consortia

30. © 2007 Wiley30 Chapter 4 Homework Hints 1.a. determine Q that makes the two total costs equal. b. given the demand (Q), compare the costs for the two options. 4.a. Data for Downhill Boards (DB) is in problem #3, use that to determine in-house cost. b. Determine the indifference point for the costs of DB versus FFI. Additional factors could be operations, marketing, and finance issues.