Supply
Chain Management
in
E-Commerce
by
Cenk Tolunay
07.27.2002
MIS 6319 - Enterprise Resource Computing
Instructor: Lou Thompson
In
today’s world, there is a constant pressure to reduce the cost of doing the
business in order to maintain the competitive edge. The major four key aspects
of the business: lower costs, faster delivery, higher quality and mass
customization. According to some industry estimates, logistics and inventory
cost constitute around 68 percent of the turnover of a manufacturing company.
Globally, logistics constitute around 20 percent of the express cargo and
freight industry.
Despite
the recession and its inevitable effect on manufacturing, there is a growing
market for supply chain management (SCM) applications. With a market climbing
into the $15 billion range at mid-decade, manufacturers are clearly seeing the
necessity of SCM solutions to streamline the management of the total supply
chain.
SAP
is clearly the leader of this SCM industry. It stated that its supply chain
vision and field execution, as well as its strong vertical industry expertise,
continue to have strong appeal with customers, supporting its claim of continued
global leadership of the SCM solutions market. SAP first declared leadership in
SCM in 2001, when reported software license revenues demonstrated that SAP had
outpaced all other competitors.
Manufacturers
today are reporting payback from their SCM investments in several areas:
inventory performance, customer fill rates and reduced logistics costs.
Collaborative applications, although catching on more slowing than analysts
initially believed, are growing and adding value, as companies streamline their
communication network and implement private exchanges or use existing networks
to drive supplier coordination for raw materials, piece parts and more.
As everything in the business environment, the supply chain
management is changing rapidly. The future supply chain organizations will be
one that feels that it has a direct impact on market share, among many other
non-traditional metrics. A company’s market share is directly and indirectly
impacted by a supply chain organization in the following ways:
1-
Minimizing warehouse mis-picks, transportation or cross-dock errors, can
result in a one-time market share increase within a period. This keeps the
customer from moving to a competition to complete the order, which would cost
market share.
2-
Sustained performance
improvement can help an organization satisfy customers and minimize any tendency
to go elsewhere.
3-
Routinely meeting customers basic expectations means repeat business and
more customer loyalty.
With
the Internet boom in the late 90’s the speed of change increased to the
highest level. For a long time supply chain management has largely restricted
itself to the old economy companies that are working with their partners to
improve efficiency. Technology has revolutionized supply chain design,
management and control. It has enabled a shift from inventory to information,
from competition to collaboration, and from cost to value.
Things
are running faster and there is almost no room for a mistake or a failure in the
processes for today’s businesses. When on link on a supply chain is out of
line, it damages the entire chain, often resulting in additional airfreight
charges to meet delivery deadlines. Actually, the manufacturers are working on
such a slim margins that one or two airfreight can wipe out their profits. The
target is being able to track the product through the life cycle of a supply
chain because then the savings are astronomical.
The
status quo for SCM involves phone calls, faxes and travel or else establishment
of new offices to keep an eye on second and third party partners. In the
increasingly global economy, these expenses add up quickly. As an alternative to
the status quo, the newest breed of supply chain solutions are web-based,
allowing for manufacturers to manage a global process that involves dozens of
second and third parties from the relative peace and quite of their own Internet
connection. While tech manufacturers like Cisco Systems were among the first to
benefit from such technology, players in just about every industry are following
the suit, including many from the apparel world.
Current
trend is a move towards a concept that is known as eDesign, suppliers and
manufacturers sharing design and engineering information over the Internet in
the early stages of products development. The premise of such web-based
collaborative processes is faster time to market, quicker upgrades, efficient
life cycle management, and the elimination of unnecessary inventory. Companies
in a wide variety of industries; Lucent, Cisco in the hi-tech industry, GAP and
Land’s End in the fashion industry are embracing principles of eDesign to
accelerate product development cycles.
There
is a new concept called digital supply chain. This is a modular supply chain for
the future that trading partners will posses the processes and the technologies
that will enable rapid and seamless business integration. It will be the B2B
version of Plug and Play where supply chain entities plug-in to their chosen
trading partners via digital-hubs to deign products, manage money, information
and people flows, and fulfill orders. A digital hub is simply a platform for
trading partners such as manufactures, distributors, retailers, third-party
logistics and other service providers to share information via common databases
and to make dynamically-optimized joint decisions using real time data.
Over
the last year the B2B electronic commerce world is being revolutionized by a new
supply chain initiative called Collaborative Planning, Forecasting and
Replenishment (CPFR). This new promising new business model is going to align
processes and standardize technologies to share forecast and other planning
information securely, simultaneously, globally and in real-time. The key idea is
for partner firms to share information-forecasts, pricing and promotions, store
openings, production and shipping schedules, inventory and replenishment
information and so on over the internet and plan logistical activities together.
With CPFR, Sara Lee and Wal-Mart decreased inventories by 12 percent
while increasing service levels by 2.7 percent fro 23 branded items.
E-commerce
in retailing industry has become a very promising tool in the late 90’s. The
movement of products sold through the Internet was a revolution in those days.
Internet retailers, such as Amazon. com, improvised their inventory management
operations in makeshift warehouses. There was no plan to efficiently coordinate
the sourcing of goods upstream in the supply chain with arrival of end-consumer
orders. Over the past couple of years of highly visible problems in the
fulfillment of end-consumer orders, especially during the holiday season in
1999, firms have come to realize that internet retailing involves more than
transmitting and managing end-consumer transactions and information. Today,
there is a widespread acknowledgment that supply-chain management is very much a
part of the core business of what Internet retailing is about.
There
is a new technique for the retailers called Vendor-Managed-Inventory (VMI).
Especially in the consumer products industry, in addition to using electronic
data interchange (EDI) for order transmission, several firms have initiated VMI.
With this, a supplier is empowered to manage inventories of agreed items at
distributor or retailer locations. The grocery industry has similar initiative
called efficient customer response (ECR) where large manufacturers like Procter
and Gamble have reengineered their processes with mass merchandisers like
Wal-Mart.
In
a web-based VMI system, the suppliers monitor inventory information via the
Internet and replenish the items according to a predetermined contract.
According the estimations, by using VMI distributors companies on an average cut
the time for order fulfillment from a range of 22 to 29 days to one of 14 to 17
days. Over all VMI has the flowing potential benefits: 1) Improved customer
service, 2) reduced inventory, 3) reduced uncertainty for the supplier and, 4)
reduced administrative costs.
The
figure below shows three different supply-chain configurations for an Internet
retailer. All three supply chains have a common information interface between
the consumer and the retailer. It is likely that products available in 24 hours
are located in the retailer’s inventory, products that take two to three days
are likely to be ready fro drop shipping, while products that take a few weeks
are niche products.
In
a physical retailing environment, customer orders and product inventories must
coincide at the same location and at the same time. However, in the Internet based retailing environment these
elements do not have to coincide at the same location and the same time. In
other words, in an Internet environment the decision by the retailer to
appropriate inventories need not come before the arrival of end-consumer orders.
Bottom line, the geographical distances separating entities upstream in the
supply chain and retailing outlets become insignificant in the operations of the
supply chain.
The
inventory decisions are different in the e-commerce arena. For example, Amazon
retailing model and traditional, brick and mortar retailing firms’ models
difference in the inventory management. Instead of managing its inbound material
flows in a just-in-time environment, Amazon operates under an almost-in-time
basis. That is, instead of making inventory appropriation decision right before
the arrival of end-consumer orders, Amazon makes inventory appropriation
decision right after the arrival of end-consumer orders, thereby completely
eliminating the time lag between the occurrence of these two events.
The
Internet brings the promise of opening supply chain to global markets and
meeting and exceeding customer expectations with a very efficient use of working
capital. The Internet has also changed the role of distributor in the supply
chain. From being the primary channel for product distribution for major
manufacturers, they are emerging as service providers.
The
use of Internet technology to exchange information between end-consumers and
sellers is enabling the creation of joint processes between the sellers and
other firms residing upstream in the supply chain. In other words, customer
demand is captured by retailers operating on the Internet and shared with
suppliers located upstream in the supply chain in order to coordinate the
sourcing and movement of supply-chain wide inventory. A good example for this
application is Dell Computers. Once Dell aggregates end-consumer orders placed
through its Internet site, it transmits them electronically to either one of its
manufacturing facilities worldwide. There, a computer compiles the information
on the parts needed to fulfill each end-consumer orders and generates an order
bar code for tracking purposes. The inbound flow of computer parts into Dell’s
manufacturing plant is done on JIT basis. This is possible because dell
maintains close electronic links, communicating replenishment needs to its
vendors on an hourly basis. In some cases, the links even allow Dell to direct
suppliers’ shipments right to the end-consumers. The end result from Dell’s
use of Internet technology is a faster supply chain in which the time lags
between end-consumer orders and inventory ordering decisions are minimal.
From
the supplier to end-consumer, the value chain has been affected by the Internet
revolution. Better relations with the suppliers, collaborating with them and
enjoying the reduced costs, maintaining lower inventories, satisfying the
customers with faster and more reliable services are the some of the major
fruits of this revolution.
References
Boone,
T and Ganeshan, R “New Directions in Supply Chain Management”. 2002
Lowson,
B, King, R and Hunter, A “Quick Response: Managing the Supply Chain to Meet
Consumer Demand”. 2000
Slota,
J “Effective Supply Chain Management.” Financial Executive. March 2002,
Vol.18, p.57-59
Peterson,
E “Web-Based Supply Chain Tools Soon to Be in Demand.” Wearables Business.
April 2002
Wohl,
B “SAP Continues Market Leadership For Supply Chain Management; mySAP
Supply Chain Management Moves Positively In Gartner Magic
Quadrant.” Canadian Corporate News. July 15, 2002,
