ABSTRACT

This paper focuses the role of Information technology (IT) in supply chain management. It
also highlights the contribution of IT in helping to restructure the entire distribution set up
to achieve higher service levels and lower inventory and lower supply chain costs. The broad
strategic directions which need to be supported by the IT strategy are increasing of
frequency of receipts/dispatch, holding materials further up the supply chain and crashing
the various lead times. Critical IT contributions and implementations are discussed.
Fundamental changes have occurred in today's economy. These changes alter the
relationship we have with our customers, our suppliers, our business partners and our
colleagues. It also describes how IT developments have presented companies with
unprecedented opportunities to gain competitive advantage. So IT investment is the pre-
requisite thing for each firm in order to sustain in the market.

INTRODUCTION:

Supply chain management (SCM) is concerned with the flow of products and information
between supply chain members' organizations. Recent development in technologies enables
the organization to avail information easily in their premises. These technologies are helpful
to coordinates the activities to manage the supply chain. The cost of information is
decreased due to the increasing rate of technologies. In the integrated supply chain model
(Fig.1) bi-directional arrow reflect the accommodation of reverse materials and information
feedback flows. Manager needs to understand that information technology is more than just
computers. Except computer data recognition equipment, communication technologies,
factory automation and other hardware and services are included.

Integrated supply chain model

Bi-directional arrow reflects the accommodation of reverse materials and information

feedback flows.
Managers need to understand that information technology is more than just computers.
Except computer, data recognition equipment, communication technologies, factory
automation and other hardware and services are included.

The importance of information in an integrated supply chain management

environment:

Prior to 1980s the information flow between functional areas with in an organization and
between supply chain member organizations were paper based. The paper based
transaction and communication is slow. During this period, information was often over
looked as a critical competitive resource because its value to supply chain members was not
clearly understood. IT infrastructure capabilities provides a competitive positioning of
business initiatives like cycle time reduction, implementation, implementing redesigned
cross-functional processes. Several well know firms involved in supply chain relationship
through information technology. Three factors have strongly impacted this change in the
importance of information. First, satisfying in fact pleasing customer has become something
of a corporate obsession. Serving the customer in the best, most efficient and effective
manner has become critical. Second information is a crucial factor in the managers' abilities
to reduce inventory and human resource requirement to a competitive level. Information
flows plays a crucial role in strategic planning.

Supply chain organizational dynamics:

All enterprises participating in supply chain management initiatives accept a specific role to
perform. They also share the joint belief that they and all other supply chain participants will
be better off because of this collaborative effort. Power with in the supply chain is a central
issue. There has been a general shift of power from manufacturers to retailers over the last
two decade. Retailers sit in a very important position in term of information access for the
supply chain. Retailers have risen to the position of prominence through technologies.

The Wal-Mart & P&G experiences demonstrate how information sharing can be utilized for
mutual advantage. Through sound information technologies Wal-Mart shares point of sale
information from its many retail outlet directly with P&G and other major suppliers.

The development of Inter organizational information system for the supply chain has three
distinct advantages like cost reduction, productivity, improvement and product/market
strategies.

Barrett and Konsynsik have identified five basic levels of participation of individual firms
with in the interorganizational system.

1. Remote Input/Output mode: In this case the member participates from a remote
location with in the application system supported by one or more higher-level participants.

2. Application processing node: In this case a member develops and shares a single
application such as an inventory query or order processing system.

3. Multi participant exchange node : In this case the member develops and shares a
network interlinking itself and any number of lower level participants with whom it has an
established business relationship.

4. Network control node: In this case the member develops and shares a network with
diverse application that may be used by many different types of lower level participants.

5. Integrating network node: In this case the member literally becomes a data
communications/data processing utility that integrates any number of lower level
participants and applications in real times.

Four fundamental mistakes made when determining information requirements are as

follows:

1. Viewing system as functional instead of cross-functional.

2. Interviewing managers individually instead of jointly.
3. Not allowing for trial and error in detail design process.
4. Asking the wrong question during the interview

Information and Technology: Application of SCM:

In the development and maintenance of Supply chain's information systems both software
and hardware must be addressed. Hardware includes computer's input/output devices and
storage media. Software includes the entire system and application programme used for
processing transactions management control, decision-making and strategic planning.
Recent development in Supply chain management software is:

1. Base Rate, Carrier select & match pay (version 2.0) developed by Distribution Sciences
Inc. which is useful for computing freight costs, compares transportation mode rates,
analyze cost and service effectiveness of carrier.

2. A new software programme developed by Ross systems Inc. called Supply Chain planning
which is used for demand forecasting, replenishment & manufacturing tools for accurate
planning and scheduling of activities.

3. P&G distributing company and Saber decision Technologies resulted in a software system
called Transportation Network optimization for streamlining the bidding and award process.

4. Logitility planning solution was recently introduced to provide a programme capable

managing the entire supply chain.

Electronic Commerce:

It is the term used to describe the wide range of tools and techniques utilized to conduct
business in a paperless environment. Electronic commerce therefore includes electronic data
interchange, e-mail, electronic fund transfers, electronic publishing, image processing,
electronic bulletin boards, shared databases and magnetic/optical data capture. Companies
are able to automate the process of moving documents electronically between suppliers and
customers.

Electronic Data Interchange:

Electronic Data Interchange (EDI) refers to computer-to-computer exchange of business

documents in a standard format. EDI describe both the capability and practice of
communicating information between two organizations electronically instead of traditional
form of mail, courier, & fax. The benefits of EDI are:
1. Quick process to information.
2. Better customer service.
3. Reduced paper work.
4. Increased productivity.
5. Improved tracing and expediting.
6. Cost efficiency.
7. Competitive advantage.
8. Improved billing.

Though the use of EDI supply chain partners can overcome the distortions and exaggeration
in supply and demand information by improving technologies to facilitate real time sharing
of actual demand and supply information.

Bar coding and Scanner:

Bar code scanners are most visible in the check out counter of super market. This code
specifies name of product and its manufacturer. Other applications are tracking the moving
items such as components in PC assembly operations, automobiles in assembly plants.

Data warehouse:

Data warehouse is a consolidated database maintained separately from an organization's

production system database. Many organizations have multiple databases. A data
warehouse is organized around informational subjects rather than specific business
processes. Data held in data warehouses are time dependent, historical data may also be
aggregated.

Enterprise Resource planning (ERP) tools:

Many companies now view ERP system (eg. Baan, SAP, People soft, etc.) as the core of
their IT infrastructure. ERP system have become enterprise wide transaction processing
tools which capture the data and reduce the manual activities and task associated with
processing financial, inventory and customer order information. ERP system achieve a high
level of integration by utilizing a single data model, developing a common understanding of
what the shared data represents and establishing a set of rules for accessing data.

Conclusion:

World is shrinking day by day with advancement of technology. Customers' expectations are
also increasing and companies are prone to more and more uncertain environment.
Companies will find that their conventional supply chain integration will have to be
expanded beyond their peripheries. The strategic and technological innovations in supply
chain will impact on how organizations buy and sell in the future. However clear vision,
strong planning and technical insight into the Internet's capabilities would be necessary to
ensure that companies maximize the Internet's potential for better supply chain
management and ultimately improved competitiveness. Internet technology, World Wide
Web, electronic commerce etc. will change the way a company is required to do business.
These companies must realize that they must harness the power of technology to
collaborate with their business partners. That means using a new breed of SCM application,
the Internet and other networking links to observe past performance and historical trends to
determine how much product should be made as well as the best and cost effective method
for warehousing it or shipping it to retailer.

Overview of Supply Chain Management

Supply chain management (SCM) refers to the management of activities that procure raw materials,
transform those materials into intermediate goods and final products, and deliver the products
through a distribution system to the end-user.

There are numerous key factors that play an important role in the successful management of supply
chains in today's dynamic environment. Among those are: paying utmost attention to the needs and
desires of the end customer, designing flexibility into the supply chain for rapid response to changing
conditions, utilizing the latest communication and logistics technologies, employing a sound
measurement system for making the right decisions, and always communicating through the total
supply chain.

Several key issues should be addressed in the design and management of supply chains. The most
critical among those are distribution network configurations, inventory control system, product
design, information technology, supply chain integration and strategic partnering.

Recent advances in SCM

As we move on in the 21st century, like all other functions supply chain management is in a state of
metamorphic flux. Several new technologies are creeping into SCM which are reshaping this crucial
business function. Some of these forces and technologies have been described in brief.

1. Information Technology
The Internet as well as the intranet (connecting the workstations within an organization) and
extranet (electronic network among business partners, e.g., EDI) have revolutionized the
management of supply chains. The power and flexibility of these networks offer businesses more
control over the flow of products, services and funds than ever before. Dramatic results have been
obtained from using information to improve supply chain performance.

The Web has created a rare opportunity for organizations to access global markets. It allows for mass
customization, stronger business relationships, a greater degree of channel coordination, and
enhanced communications with customers and business partners.

E-commerce
Electronic commerce has revolutionized how business is conducted in today's world. It is now a
reality in both business-to-customer and business-to-business transactions and is rapidly
accelerating in both areas.
Internet based procurement
Business-to-business sales on the Web are starting to gain popularity. Companies around the world
are getting serious about Internet-based procurement (IBP) because the return on a relatively
modest investment is high and the risk is very low, at least for many items, companies buy routinely.
There are two distinct parts of the IBP market:

Direct-Material Procurement, which involves the acquisition of products directly required for
production. These include the components and materials from key upstream supply chain partners.
Indirect-Material Procurement, which is the purchase of products that are indirectly used in the
production process. They include office supplies; maintenance, repair and operating supplies (MRO).

2. Outsourcing Logistics to third party logistics providers

'Outsourcing' refers to the purchase of goods or services that were previously provided internally.
'Logistics' is defined by the Council of Logistics Management as "that part of the supply chain process
that plans, implements, and controls the efficient, effective flow and storage of goods, services, and
related information from the point of origin to the point of consumption in order to meet customers'
requirements.
Traditionally, logistics activities were handled internally, particularly in medium to large size
corporations. In the United States, third party logistics services have gained momentum over the
past decade.

3. Business Process Reengineering

Business process reengineering (BPR) efforts call for 'radical' restructuring of processes to eliminate
waste, improve quality, increase service level and enhance customer satisfaction. Most BPR efforts
are confined to one company; however, BPR across multiple members of the supply chain should
become increasingly common. By thinking in terms of supply chains instead of individual operations
or functions, companies can improve their competitive strategies. Advances in information and
communication technologies have made it possible to have real-time connectivity among supply
chain partners.
4. Automatic Identification Techniques
Automatic identification, or auto ID for short, is the broad term given to a host of technologies that
are used to help machines identify objects. Auto identification is often coupled with automatic data
capture. That is, companies want to identify items, capture information about them and somehow
get the data into a computer without having employees type it in. The aim of most auto-ID systems is
to increase efficiency, reduce data entry errors, and free up staff to perform more value-added
functions, such as providing customer service. There are a host of technologies that fall under the
auto-ID umbrella. These include bar codes, smart cards, voice recognition, some biometric
technologies (retinal scans, for instance), optical character recognition, and radio frequency
identification (RFID).

Introduction to RFID
In general terms, Radio Frequency IDentification (RFID) is a means of identifying a person or object
using a radio frequency transmission, typically 125 kHz, 13.56 MHz or 800-900MHz. There are
several methods of identification, but the most common is to store a serial number that identifies a
person or object, and perhaps other information, on a microchip that is attached to an antenna (the
chip and the antenna together are called an RFID transponder or an RFID tag). The antenna enables
the chip to transmit the identification information to a reader. The reader converts the radio waves
reflected back from the RFID tag into digital information that can then be passed on to computers
that can make use of it.

Key components of RFID

An RFID tag consists of a microchip attached to an antenna. RFID tags are developed using a
frequency according to the needs of the system including read range and the environment in which
the tag will be read. Tags are either active (integrating a battery) or passive (having no battery).
Passive tags derive the power to operate from the field generated by the reader.

An RFID reader, usually connected to a Personal Computer, serves the same purpose as a barcode
scanner. It can also be battery-powered to allow mobile transactions with RFID tags. The RFID
reader handles the communication between the Information System and the RFID tag.

An RFID antenna connected to the RFID reader can be of various sizes and structures, depending on
the communication distance required for a given system's performance. The antenna activates the
RFID tag and transfers data by emitting wireless pulses.

An RFID station, made up of an RFID reader and an antenna. It can read information stored into the
RFID tag and also update this RFID tag with new information. It generally holds application
 software specifically designed for the required task. RFID stations may be mounted in arrays around
transfer points in industrial processes to automatically track assets as they are moving through the
process.

Existing Views on the Impact of Internet-Based

Communication Systems on Supply Chain
Management
�Move-to-the-Market� Hypothesis

The basic argument of the �move-to-the-market� hypothesis stated that reduction in

transaction costs enabled by new communication technology would shift overall
governance mechanisms from either cooperative or hierarchical relationships to a
decentralized market system. Research by Malone, Yates, and Benjamin (1987) is often
regarded as the cornerstone of the debate on communication technology and
governance mechanisms under the paradigm of TCA. Because the �move-to-the-
market� claim itself seems so self-evident, there has not been any noticeable
explication of it. From technological and policy perspectives, Wigand and Benjamin
(1995) outlined several prerequisites for the electronic market, such as high rate of
connection, high bandwidth of the connection, cheap and high-speed computer
capability, and no market access favoritism. Similarly, Picot, Bortenlaenger, and Roehrl
(1997) added that full-fledged electronic market transactions require changes in market
organizers, such as transparency institutions, access institutions, price discovery
institutions, and settlement institutions.

The most salient weakness of the �move-to-the-market� hypothesis lies in the

assumption that a sweeping reduction of transaction costs would follow the introduction
of the Internet. Malone and his colleagues (1987) identified major sources of transaction
costs to be coordination costs, asset specificity, and complexity of product description.
They predicted that the new communication technology would reduce them all. Their
position on this issue was reaffirmed later (Malone, Yates, & Benjamin, 1989). The
same problem is observable in an argument made by Picot et al. (1997). Picot and his
colleagues believed that reduction in asset specificity was one of the fundamental
changes leading toward the market. Their argument was that the adoption of the
Internet tends to speed up knowledge diffusion, and, thus, reduce the specificity of
goods, which favors the market as a coordination mechanism. In both cases, these
researchers could have received more credit for their arguments if they had looked into
asset specificity more closely.

�Transaction specific assets� refer to assets that cannot be redeployed to alternative

uses without substantial sacrifice of productive value (Williamson, 1991). And, as the
advocates of �move-to-the-market� hypothesis asserted, some of them are expected
to lose their transaction specificity to a substantial degree with a wide adoption of the
Internet in supply chain management. One type of such transaction-specific asset is
communication technology itself. Before the introduction of the Internet,
interorganizational communication networks were considered transaction-specific
assets. Although there will be some delays, however, the Internet is highly likely to
make other closed communication networks obsolete eventually. Another category
includes products and services for which the production depends heavily on specialized
knowledge and skills. These assets will lose their transaction specificity because of
drastically increased information duplicability and transferability. Temporal specificity, a
type of site specificity in which timely responsiveness by on-site human assets is vital
(Williamson, 1991), will also be greatly reduced by speedy and precise information
exchange. Since all these assets are common in their heavy dependence on
information, we may call them �information-based specific assets� collectively.

Other than these, however, most transaction-specific assets are grounded on more
physical capitals. Out of six transaction-specific assets identified by Williamson (1991),
five of them are considered not to be information-based specific assets. Site specificity
refers to a condition in which successive stations are located in close proximity to each
other to economize on inventory and transportation expenses. An example of physical
asset specificity is specialized dies to produce a component for a particular buyer.
Human asset specificity involves both skilled labor and experienced sales staffs in a
particular product or service area with established personal connections. Dedicated
assets are discrete investments made for a particular customer in general purpose
plants and brand name capital refers to investments exclusively made to brand products
or services together with a transaction partner. By their nature, these types of assets,
while accounting for the majority of transaction-specific assets in the current U.S.
economy, are not likely to be affected by the Internet in any significant way.

In summary, the �move-to-the-market� hypothesis was only partially acceptable.

Indeed, the researchers seemed to have been aware of the problems in their
arguments. Somewhat paradoxical to their main theses, Malone et al. (1987) left room
for electronic hierarchies and tightly coordinated interorganizational relationships.
Wigand and Benjamin (1995) also briefly mentioned that low asset specificity and ease
of description are required for a product to be tradable in electronic markets.

The �Move-to-the-Middle� Hypothesis

The central theme of the �move-to-the-middle� hypothesis was that new

communication technology would call firms into a middle ground from either end
(hierarchy or decentralized market). According to this line of thought, closely
coordinated interdependent firms would be a dominating governance mechanism in
supply chain management. Unlike the �move-to-the-market� hypothesis, however,
there were several different reasons for supporting the same diagnosis. In some cases,
different economic and organizational theories were employed.

One of the branches of the �move-to-the-middle� hypothesis was based on

�Business Networks.� Although each sub-unit of a business network is a highly
integrated dyadic relationship, a network could be distinguished from a dyadic
relationship as sets of connected relationships going beyond the dyad (Anderson,
H�kansson, & Johanson, 1994). Johnston and Lawrence (1988) argued that value-
adding partnerships�groups of small companies sharing information freely�were
emerging rapidly and, consequently, would become a more prevalent form of
organizational coordination.

A few years later, the network idea was developed further by several other researchers.
Based on an observation of large U.S. manufacturers and theTeletel network system in
France, Steinfield and his colleagues (1995) predicted that firms would be more likely to
use interorganizational networks to build tight relationships with their trading partners
than to use spot markets. Nouwens and Bouwman (1995) also argued that the new
communication technology would abolish the traditional dichotomy between market and
hierarchy and, eventually, lead to the development of the �network-organization,� a
set of independent organizations that cooperate to manage the flow of products and
services in the value chain.

Another line of thought has evolved from an observation that, with the wide adoption of
new communication technology, the supplier basis for the firms in many industries
decreased rather increased, contrary to what had been predicted by Malone et al.
(1987). Intrigued by this phenomenon, Bakos and Brynjolfsson considered several
alternative explanations and, finally, formulated a conclusion based on the �incomplete
contract theory" (Bakos, 1991a, 1991b; Bakos & Brynjolfsson, 1993a, 1993b).
According to their reasoning, new information technology gave more significance to
noncontractible investments by suppliers, such as quality, responsiveness, and
innovation. In turn, when such investments were especially required, firms would
employ fewer suppliers. Based on a continuum of the �incomplete contract theory�
explanation, Brynjolfsson (1994) created a model describing the influence of new
communication technology on organizational structure. According to the model, new
communication technology would result in less integration and smaller firms by reducing
asset specificity.

Unlike other advocates of the �move-to-the-middle� hypothesis, Clemons, together

with his colleagues, closely examined every component of transaction costs one by one
(Clemons, Reddi, & Row, 1993 Clemons & Row, 1992). According to their analyses,
choice of governance mechanism was dependent on the costs of coordination and the
transaction risk associated with the coordination. Normally, decreases in coordination
costs would cause increases in transaction risk. However, in their view, new
communication technology would create a unique environment where both coordination
costs and related transaction risk could be reduced simultaneously and therefore two
highly coordinated, interdependent firms would be a dominating governance mechanism
in supply chain management.

Since the �move-to-the-middle� hypothesis originated from several different

perspectives, each line of thought had distinct problems in its argument. Supporters of
electronic �business networks� had a similar dilemma with the supporters of the
�move-to-the-hierarchy� hypothesis. Although they strongly argued that network-
organizations would be the future of organizational governance choice, they were aware
of the possibility that technological innovation might make room for a decentralized pure
market (Nouwens & Bouwman, 1995; Steinfield et al., 1995). Also, they left the door
open for hierarchy by briefly mentioning product attributes. However, their consideration
of product attributes was not fully integrated in their argument.

Although Bakos and Brynjolfsson (1993a, 1993b) captured parts of the reality, and their
reasoning appeared seamless, they did not explain why they thought that new
communication technology would increase the significance of noncontractible
investments. Contrary to their assumption, in reality, many kinds of noncontractible
investments became more obtainable with new communication technology. Also,
Brynjolfsson (1994)�s modeling was particularly concerned with information assets, as
opposed to other kinds of specific assets such as site-specific assets and physically-
specific assets. Therefore, application of his model should be limited to situations where
only information-based specific assets are involved.

Two studies by Clemons and colleagues were based on a notion that the impact of new
communication technology on organizational coordination should be predicted by
decomposing transaction costs. Since this position is shared by our analytical
framework, these studies were subjected to a more thorough examination (Clemons et
al., 1993; Clemons & Row, 1992). Clemons and Row (1992) broke down transaction
costs as follows:

Transaction costs = Costs of coordination + Costs of transaction risk

Transaction risk = Transaction-specific capital + Information asymmetries + Loss of

resource control

Primarily, Clemons and Row (1992) argued that new communication technology would
reduce coordination costs. They also stated that coordination costs are largely
independent of whether an interaction occurs within a single firm or across firm
boundaries. For the part of transaction risks, they reasoned, new communication
technology would reduce transaction risk by reducing the level of transaction-specific
capital and by reducing the cost of monitoring and control among separate firms.

Later, Clemons, Reddi and Row (1993) made some changes in their previous argument
and analyzed transaction costs as follows:

Transactions cost = Coordination cost + Operations risk + Opportunism risk

They defined coordination cost as the cost of exchanging information and incorporating
the information into decision processes in a broad sense. Operations risk was defined
as the risk that the other parties in the transaction willfully misrepresent themselves or
withhold information, or underperform their agreed-upon responsibilities. They added
that the operations risk stems from differences in objectives among transacting parties
and is supported by information asymmetries between the parties or by difficulties in
enforcing agreements. The last component of transaction costs, opportunism risk, was
referred to as the risk associated with a lack of bargaining power or a loss of bargaining
power directly resulting from the execution of a relationship. They broke down the
opportunism risk into three parts, relationship-specific investments, small-numbers
bargaining, and loss of resource control.

The themes lying beneath these analyses of transaction costs were the same: New
communication technology would lead to more tightly coupled interfirm relationships
across various industries by reducing coordination costs while not increasing
transaction risks previously incurred by high coordination. Indeed, this notion contains a
great deal of truth. At the same time, however, we cannot help disagreeing on four
crucial points. First, we assert that coordination costs are not independent of whether
the interaction occurs within a single firm or across firm boundaries. On the contrary,
coordination costs are heavily affected by whether a firm buys in-house or buys in a
market. If coordination costs were not appreciably different in the two cases,
outsourcing would be more desirable for any firm as long as its transactions with
suppliers do not involve a substantial amount of transaction-specific assets. Second,
opportunism is not limited to a small portion of transaction costs. Rather, opportunism is
one of the two basic behavioral assumptions of TCA and widespread across the whole
process of transaction activities (Williamson, 1985). Third, they did not show how new
communication technology could lower asset specificity other than information-based
asset specificity. Therefore, their prediction could be true only within a limited range.
Finally, it seemed that they were violating a basic assumption of TCA. According to their
reasoning, the most desirable governance mechanism was a middle ground between
market and hierarchy, a so-called cooperative relationship, which was unobtainable only
because of high coordination costs and transaction risks. In this scenario, the biggest
contribution of new communication technology would be reduction in coordination costs
and transaction costs, which enables cooperative relationships between suppliers and
buyers. Quite differently, TCA regards a market as the ideal governance choice. Only
when procurement through market mechanisms become too expensive because of high
uncertainties and asset specificity will the firm search for better alternatives such as a
closely coordinated cooperative relationship or hierarchy.

While most of the arguments supporting the �move-to-the-middle� hypothesis were

based on theoretical speculation or conceptual modeling, Stump and Sriram (1997)
actually tested the �move-to-the-middle� hypothesis with empirical data. Not
surprisingly, they failed to establish a direct relationship between a buyer�s investment
in new communication technology and the overall closeness of the buyer-supplier
relationship. The two variables were only indirectly associated by a mediating variable,
the percentage of purchasing transactions using new communication technology. These
findings illuminate the possibility that organizations use new communication technology
in diverse ways for their unique needs, not just for transactions with other firms.

The problems in the �move-to-the-market� and �move-to-the-middle� hypotheses

might be attributable in part to the various directions that communication technology
developments have taken since the formation of the hypotheses. It must have been a
difficult job to predict exactly how information technology would unfold within five to ten
years for the researchers in the 1990s, let alone for those writing in the 1980s. Although
there was a general consensus on the future direction of technological development,
they were still living in the age of Electronic Data Exchange (EDI), a 20-year-old
technology. Albeit it was the harbinger of electronic commerce, expensive installation
and implementation costs have kept more than 99% of U.S. businesses from using it
(Wilde, 1997). Consequently, there were not enough suppliers and buyers to form an
electronic spot market. Also, once having adopted EDI, the companies would rather
closely coordinate with their suppliers and buyers to recover the sunk cost. Still, there
are a lot of companies in the field running on EDI. Some of them may want to stay with
the old technology while some may be trying to integrate new and more standardized
technology into their existing system. Even if companies want to adopt the new
technology, there are many financial, technological, regulatory, and other environmental
obstacles. From observation of the capital market automation process, Picot (1995)
named this phenomenon �vision-reality discrepancy.� Unlike the prediction of
unanimous transformation to one or the other, capital market automation resulted in a
 heterogeneous spectrum of electronic trading systems. The main cause of the
phenomenon was a substantial amount of variation in the completeness of information
obtainable through electronic systems. However, this chronological disadvantage
cannot excuse the hypotheses from their technology-deterministic perspective. The
principal drawback of the hypotheses was not their shortsightedness about the direction
of technological progress, but their misunderstanding of the fundamental governance
problems addressed in TCA and their consequent prescription of global remedies for
organizations with different governance problems.

The Internet-Based Supply Chain Management and

Governance Mechanism
The fact that new communication technology cannot favor one governance mechanism
over others does not suggest that it has no influence on supply chain management.
Quite contrarily, the technology is expected to bring tremendous changes in the way
firms interact with each other. The technology itself cannot be a direct cause of
governance choice, but the way the technology is used by organizations will lead to
either an earthshaking transformation or the status quo. Therefore, understanding
fundamental governance-related problems and the effects of new communication
technology on these problems is essential for sound decision making.

Fundamental governance problems addressed in transaction cost analysis

Transaction costs analysis (TCA) is a theory about the governance mechanism of

economic organizations. According to this theory, the tradeoff between production costs
and transaction costs of a firm indicates the most appropriate governance mechanism
for the firm among three broadly generalized types of interorganizational coordination:
market, hierarchy, and hybrid. The major advantage of market over hierarchy stems
from production costs because of the economy of scale and scope. On the other hand,
hierarchy mostly benefits from transaction costs because of high adaptability and tight
control. Between the two, TCA maintains market as a default mechanism in modern
capitalist economies.

TCA maintains that there are three dimensions in which one transaction is different from
another: transaction asset specificity, environmental uncertainty, and behavioral
uncertainty. TCA assumes that the most basic unit of the economic agent, the human, is
intentionally rational, but only to a certain extent (Simon, 1961). Also, TCA assumes that
economic man seeks self-interest with guile (Williamson, 1985). Under these
assumptions of bounded rationality and opportunism, the presence of transaction-
specific assets gives rise to various governance-related problems.

Since transaction-specific assets cannot be salvaged without a substantial loss in their

values, transactions that require a significant investment in transaction-specific assets
creates lock-in situations. Lock-in situations carry the risk of holdup problems to
procurers. On the other hand, it can also damage providers by forcing an unbearable
amount of discount upon them. To avoid these lock-in problems, transaction parties
often spend extra money as a part of transaction costs to safeguard their assets in
various ways including crafting lengthy contracts and broadening supply bases.

Environmental uncertainty can be interpreted as unanticipated changes in

circumstances surrounding an exchange (Noordewier, John & Nevin, 1990). Hence,
adaptability to the unanticipated changes is crucial. Adaptation is not only required
within organizations, but also between organizations. However, it is not always easy to
induce cooperation from transaction partners in market governance. To adapt to
changing environments in a timely and efficient manner, therefore, firms have to expend
heavily on communication, negotiation, and coordination costs.

Behavioral uncertainty is often understood as the degree of difficulty associated with

assessing the performance of transaction partners (Rindfleisch & Heide, 1997). In
evaluating the performance of transacting partners, information asymmetry is the core
problem. Some information asymmetry can be of a non-strategic kind, caused by a
simple lack of communication. However, some information asymmetry can be created
strategically to take an unfair advantage of transaction partners. Firms may not release
information important to transaction partners intentionally. Furthermore, they may
provide their partners with false information. To prevent these problems, firms have to
find appropriate partners and constantly monitor their performances. And these
activities incur prior screening and selection costs and subsequent measurement costs.

The impact of Internet-based communication systems on transaction costs

Although environmental uncertainty has been conceptualized in many different ways,

unpredictability seems to be its most common aspect. Instability in existing markets can
make it difficult to predict sales volume. Constant advances in production technology
are another contributing factor. Predicting new products or new markets almost always
bears some degree of uncertainty. In addition, unpredictability may stem from
unfamiliarity with the business environment such as policy and culture in foreign
markets. Facing these uncertainty issues, participants of a supply chain may
significantly benefit from the seamless communication made possible by the adoption of
new communication technology. Increased bandwidth and decreased response time in
information exchange, among many benefits, are expected to eliminate various sources
of uncertainty and subsequently reduce adaptation costs.

Volume instability in extant markets is the most common problem of environmental

uncertainty that economic organizations face on a daily basis (Rindfleisch & Heide,
1997). Even within this narrowed area of environmental uncertainty, there are many
ways that new communication technology can reduce the problem. In the first place,
rich information can be exchanged between transacting partners with a greater speed
and efficiency at less expense. In procurement, time and resources needed for the
search for suppliers can be drastically reduced. Firms can improve their prospects of
acquiring a sufficient quantity of goods or services in case of demand surge. In the
sales of products and services, firms can at all times have one extra outlet with a huge
number of potential buyers. Faster and accurate communication within a supply chain
has positive effects on inventory management as well. Although �just-in-time�
procurement has already been in place with the introduction of EDI, expansion of the
network without significant further investment enables firms to cut every corner of
inventory handling costs. The rapid flow of information without interruption enables firms
to renegotiate terms or adjust to design changes before incurring irrecoverable costs for
transacting partners. Therefore, the damage caused by failure to adapt to environmental
changes can be ameliorated in a relatively expedient manner.

The notion that Internet-based communication systems reduce coordination costs has
largely been supported by researchers. Earlier, Bakos (1991b) simulated the reduction
in stockout costs with the deployment of new information technology. Gebauer and
Segev (2001) also indicated drastic reduction in coordination costs as an underlying
mechanism of integrated procurement functions led by the Internet. Case analyses of a
used car market and a nutraceutical industry revealed reduction in coordination costs
through processing improvements, marketplace benefits, and indirect improvements
(Garicano & Kaplan, 2000).

The impact of new communication technology on behavioral uncertainty can be more

complicated because of the partially strategic nature of behavioral uncertainty. The
problems of behavioral uncertainty originate from information asymmetry of both
strategic and non-strategic kinds. On the positive side, new communication technology
can extend choices for firms to pick their transaction partners ex ante. It can be
especially useful for firms that had been experiencing difficulties in finding suppliers or
buyers within their geographic boundaries. Without the technology, identifying potential
transaction partners and then selecting one of them based on the information obtained
from various sources can be a drain on both time and resources. Internet-based
communication systems enable firms to receive bids from both regional and national
organizations. By comparing bids from many candidates, firms can understand the
market situation more fully and thus increase their ability to select the best fit for their
demands. Also, managers can utilize electronic information sources and communication
tools to check the backgrounds of potential transaction partners. In addition, a
company�s Website can provide prospective bidders with detailed information about
the company. Subsequently, the information on the Website may help the bidders�
self-selection. During and after transactions, Internet-based communication systems
can make sales records more transparent. For less standardized performances,
increased capacity of the network may allow more frequent samplings of the
downstream processes and result in decreased monitoring costs (Bakos, 1991b).
Furthermore, new communication technology may make access to customers easier.
With the increased accessibility to customers, managers can gain insights about
agents� hard-to-measure performances.
Still, a substantial amount of information asymmetry may remain, especially if the
asymmetry were intentionally created by transacting partners. Even worse, too much
dependence on new communication technology for performance evaluation can cause
another set of problems. The emergence of spot markets supported by the Internet calls
for an authentication process. Although some market makers have set up
prequalification systems, there are still a lot of holes to be filled (Kambil, 1997; Kambil,
Nunes, & Wilson, 1999). Besides, information about a transacting partner other than
price and product specification is hard to convey via the Internet. Cultural incompatibility
between two trading firms, undetected at the moment of contract, can interrupt the flow
of information and products later. Also, socialization, one of the most effective ways of
reducing monitoring costs, may become inapplicable. Socialization occurring between
transacting partners over the course of the business process often takes care of a great
many monitoring problems. However, automation of transaction processes deprives
transaction partners of socialization opportunities. As a result, the relationship may
become more vulnerable to opportunism and, consequently, incur more monitoring
expenses.

The risks associated with the heavy dependence on Internet-based communication

technology are also present after a transaction is completed. Traditionally, most
transactions have been executed within certain industrial and geographical boundaries.
Therefore, local reputation kept opportunistic behaviors in check. It was also relatively
easier to recover from the damages done by an adverse selection. If firms choose their
transaction partners outside of conventional industrial and geographical boundaries,
purely based on the information provided on the Internet, the social embeddedness of
economic behaviors has no power to either reduce the amount of damage beforehand
or enforce compensation for the damage afterwards. Although any social relationship
between transaction parties had been regarded as a threat to efficiency by some
economists, the notion that concrete personal relations and networks of such relations
generate trust and discourage malfeasance has gained popularity during the past two
decades (Granovetter, 1985).

There are even more variables to consider regarding the effects of Internet-based
communication systems on asset specificity and the subsequent costs required to
safeguard transaction specific assets. More than anything else, the Internet can reduce
transaction asset specificity by simply broadening the choice for procurers. The
broadened choice overcoming geographical boundaries reduces a firm�s reliance on
its existing partner and opens up the whole world of potential suppliers with the
capability and willingness to engage in a transaction. Scholars also added that the
Internet will reduce asset specificity by facilitating techniques like flexible manufacturing
(Brynjolfsson, Malone, Gurbaxani, & Kambil, 1994), making more specific information
contractible (Brynjolfsson, 1994), removing barriers between different communication
systems (Clemons et al., 1993), and speeding up knowledge diffusion (Picot et al.,
1997).

Although these changes are important enough to be noticed, however, the Internet�s
ability to reduce asset specificity appears to be somewhat overstated. Production of
 non-information goods still requires certain material equipment, skilled labor, physical
space, and a certain amount of specialized capital. Also, the produced goods or
services should be handled by sufficiently knowledgeable sales agents who also
maintain a strong bond with their customers. Even if Internet-based communication
systems can help managers to draft, negotiate, enforce, and resolve contract terms to
safeguard specific assets, it may take some time before managers are willing to perform
such crucial activities online. Steinfield, Chan, and Kraut (2000) found no evidence that
the use of the Internet reduces transaction specificity of assets in four different
industries. They also revealed a tendency for only the firms with previous electronic
transaction experience to use the Internet more to procure major supplies.

For the national or global economy as a whole, opportunity costs of asset specificity
may increase with wide adoption of Internet-based communication systems. The
prospect of investing in production facilities to produce transaction specific assets
seems to be significantly diminished. So far, too much emphasis has been placed on
the mere execution of electronic transactions, while strategies for electronic transactions
have been virtually ignored. Firms have been busy with conducting businesses online
without a vision of what their competitive edge would be in Internet-assisted markets.
Similarly, start-up market makers hurriedly opened their businesses without a long-term
plan of how to differentiate themselves from others. As a result, firms in electronic
markets cannot exchange credible commitments with their transaction partners. Indeed,
most transactions currently occurring through the Internet are solely based on price
competition (Bakos, 1991a, 1997; Kambil, 1997; Porter, 2001). An empirical study
(Kraut, Steinfield, Chan, Butler, & Hoag, 1998) provides direct support for this
perspective. In an examination of the relationships between the use of electronic
networks, asset specificity, and the degree of outsourcing, outsourcing of transaction
specific assets decreased with an increase in the use of electronic networks.

Gebauer and Zagler (2000) speculated on the notion that the nature of the transaction
determines the governance mechanism. They stated that products low in value and high
in process cost should be obtained by short-term oriented buying processes, whereas
products characterized by high complexity, innovation and strategic relevance should be
procured by long-term oriented sourcing processes. When the focus of the transaction
is the cost of products, according to Gebauer and Zagler, the transaction occurs midway
between sourcing and buying. For each of the three product types, the role of Internet-
based communication systems was different. When sourcing, information technology
was expected to provide context information, decision support, and/or collaboration.
When buying, information technology was expected to serve as traditional EDI and/or
desktop purchasing in horizontal exchanges. When the focus was on product cost, they
predicted that information technology would create bidding systems, supplier
directories, and/or industry exchanges.

The Internet-based Communication Systems and

Governance Mechanism Choice
Making a decision between hierarchy and market is a two-step process. First, a
manager of a firm should figure out how much cost reduction will be gained under a
hierarchy system and a market system respectively. Second, the amount of cost saving
in procuring the same product/service using market versus hierarchy systems should be
compared. This comparison process is crucial, but often neglected because researchers
tend to assume that Internet-based communication systems reduce procurement costs
between firms more than they do within a firm. The whole discussion of the �move-to-
the-market� hypothesis was built on this unproven assumption. Earlier, Kraut and his
colleagues (1998) raised a question concerning its validity. They insisted that the
dominant view of the effects of electronic networks underestimated benefits to firms
adopting the technology for internal uses and proved their point by demonstrating a
positive effect of electronic network use on the level of in-house production.

Market systems will mostly benefit from the reduction in transaction costs, whereas
hierarchy systems will benefit from the reduction in production costs. A firm might have
been taking hierarchical governance mechanisms because of high asset specificity,
high environmental uncertainty, high behavioral uncertainty, or any combination of the
three. If a firm adopted hierarchical governance mechanisms mainly because of asset
specificity of a non-information kind, then cost reduction resulting from the adoption of
the Internet-based procurement system would be minimal. Conversely, if either non-
strategic behavioral uncertainty or environmental uncertainty were the primary reason
for deploying hierarchical governance mechanisms, a firm would be able to reduce
transaction costs significantly. In such a case, switching to a market system would be a
strategically sound choice. Of course, the reduction in transaction costs under the
market system should be bigger than the reduction in production costs under the
hierarchy system (Figure 1). This thesis can be summarized into a set of normative
statements as follows:

Principle 1. To assess the impact of the Internet on governance mechanism choice

between market and hierarchy, transaction cost reduction in market and production cost
reduction in hierarchy should be compared.

Hypothesis 1-1. With high asset specificity, use of the Internet in supply chain
management is less likely to affect the choice of market or hierarchy as the governance
mechanism.

Hypothesis 1-2. With low asset specificity, use of the Internet in supply chain
management is more likely to favor market over hierarchy as the governance
mechanism.
 Figure 1. Internet-based supply chain management and market or hierarchy

Just as asset specificity can be the main reason for firms to stay with the hierarchy
system, asset specificity can make firms choose more closely coordinated inter-firm
relationships among various hybrid forms of market-oriented governance mechanisms.
Both arm�s-length relationships and more closely coordinated markets would benefit
from the reduction in transaction costs. Assuming that the cost reductions in both
market systems cancel each other out, it would be asset specificity that decides the
choice between these two governance mechanisms (Figure 2). Firms with high asset
specificity will prefer closely coordinated market governance mechanisms over arm�s-
length relationships. This thesis can be summarized as follows:

Principle 2. To assess the impact of the Internet on governance mechanism choice

between arm�s-length relationship and close coordination, transaction cost reduction
between the two should be compared.

Hypothesis 2-1. With high asset specificity, use of the Internet in supply chain
management is less likely to affect the choice of arm�s-length relationship or close
coordination as the governance mechanism.

Hypothesis 2-2. With low asset specificity, use of the Internet in supply chain
management is more likely to favor arm�s-length relationship over closely coordinated
markets as the governance mechanism.
 Figure 2. Internet-Based Supply Chain Management and Hybrid Markets

At the same time, there are several factors that can delay the application of this trade-
off model in governance choice. Traditional arm�s-length relationships were perceived
to be relatively safe from opportunism because they had been established for the spot
transaction of non-specific assets, under low environmental and behavioral uncertainty.
Aside from the real level of risk, however, electronic transactions seem to have
increased the perceived vulnerability to opportunism. Consequently, arm�s-length
relationships will become more vulnerable to the reputation effect, which used to be
salient mainly in hybrid contracting (Williamson, 1991). Although systematic research on
this matter is virtually non-existent, anecdotal evidence is not hard to find. Proliferation
of hybrid online/offline business compared to pure online players is one piece of
evidence (Useem, October 30, 2000). A survey by Visa U.S.A. showed that 45% of
purchase managers were not engaging in electronic procurement because of a lack of
senior management support (E-procurement, November 20, 2000). And the untrusting
voice of the senior management can be heard from many places (Bennett, October 23,
2000).

Business managers� increased risk perception of electronic transactions is expected to

result in strengthened relationships with their previous offline transaction partners. Many
manufacturers are not going to dump their previous suppliers for the sake of cheaper
bidders online. Business media report on many companies maintaining their existing
relationships with offline partners although they have a capability to find substitutes
online (Bennett, October 23, 2000; Bulkeley, July 17, 2000; McGinnis, October 30,
2000). A case study examining 18 firms employing the online-offline hybrid approach
drew a similar picture. Although the hybrid channel system presented such advantages
as cost savings, improved differentiation, and enhanced trust, it promoted market
extension mostly in the context of B-to-C retailing, not in B-to-B procurement (Steinfield,
Bouwman, & Adelaar, 2002).

http://www.epiqtech.com/supply_chain-Management-Software.htm

Supply Chain

At SFO technologies, we have a dynamic supply chain management group that focus on timely procurement
and manufacturing of products. Through our continuous interaction and open communications, we define
custom solutions to cater to the specific needs of our customers.

Our global customers get benefited by improved visibility into demand fluctuations and materials. Our SCM
helps to reduces inventory costs providing significant cost savings to our customers while faster cycle times
ensures timely delivery. We provide significant value to customers by savings in time and money in
procurement and manufacturing.

At SFO technologies, we have strong processes in Planning, Sourcing and Logistics that enable us to deliver
optimum performance.

Click here to download a presentation on Supply Chain Management at SFO Technologies

Read a whitepaper on Electronics Manufacturing (EMS at a Crossroads)

How a typical SCM Hub operates?

Here are some of our major suppliers:

Agilent AMD AMP

ARROW Avnet Eurofarad

 FE Global Electronics Fisher Electronics Future Electronics

Hitachi ITT Cannon Kester Components

Kyocera Lambda Electronics Le Champ (Sea)

Maxim Nu Horizons Panasonic

Siemens Sumitron Texas Instruments

Tyco Vectra International

Planning

Planning is one of the very critical and closely monitored processes at SFO Technologies. The real time
information provided by systems help SFO technologies to react to supply demand conditions.
A closely monitored supply chain using effective metrics enable us to be highly efficient, less costly and
deliver high value and quality to our customers.

Sourcing

Source the right quantity of materials when it is required from the right suppliers enable SFO Technologies
to reduce inventory without compromising supply. The pricing, payment and delivery arrangements with
local, regional and global suppliers help us sourcing at the right time thereby reducing risks of high
inventory and price escalations.

We continuously improve our relationships with our suppliers and have metrics in place to monitor and
improve the relationships. Continuous benchmarking of our services on the basis of the metrics helps us to
provide best prices, lead times, inventory and availability to our customers

Logistics

Long term relationship with carriers and forwarding agencies provide us with the capability of timely
movements both in and out. The strategic advantage of the Special Economic Zone provides us the added
advantage of timely movements. Relationships with international agencies help us get better prices as well
as provide better visibility to our customers about shipments.
Business to Business (B2B)

In order to achieve effective supply chain partnership with our customers, we focus integration with our
customers through B2B solutions. We have complete information about our customers through customer
information system that provides information online about customer needs. The in-house IT team has
developed customised solutions and tools like Financial Supply Chain, Forward module etc. to provide real
time access to information and to identify bottlenecks immediately.

The seamless integration with supplier systems enables us online procurement, visibility to sourcing etc.

An extensive supply chain management process exists to continuously benchmark the performance of
suppliers. Through the supplier rating on the basis of performance and supplier selection processes, and
with complete visibility into supplier’s processes, we ensure quality and timelines of supplies

At SFO technologies, focussed SCM activities and review provide an accurate assessment of the situation.
Customer focussed SCM status meetings, Business performance and assets review meetings ensure that
appropriate proactive actions are initiated.