Chapter 4

E-Commerce and Supply

Chain Management
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition Wiley 2007
2007 Wiley

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
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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)
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Types of E-Commerce

Business-to-Business (B2B) Evolution:

Automated order entry systems started in 1970s

Electronic Data Interchange (EDI) started in the 1970s
Electronic Storefronts emerged in the 1990s
Net Marketplaces emerged in the late 1990s

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
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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
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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
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forecasts, sales data,
& promotions

Components of a
Typical Supply Chain
External
Suppliers

Internal
Functions

External
Distributors

INFORMATION
FUNDS

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Components of a Supply
Chain

External Suppliers

Internal Functions include:

Tier one supplier supplies directly to the processor

Tier two supplier supplies directly to tier one
Tier three supplier supplies directly to tier two
Processing, purchasing, planning, quality, shipping

External Distributors transport finished goods

Logics function manages all material movement

including selection and monitoring carriers

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The Supply
Chain

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A Basic Supply Chain

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SCM in a Dairy Products

Supply Chain

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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
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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

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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
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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
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In-sourcing vs.
Outsourcing

What questions need to be asked

before sourcing decisions are made?

Is product/service technology critical to firms

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?
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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
Total Cost of Outsourcing :
TC Buy FC Buy VC Buy Q
Total Cost of Insourcing :
TC Make FC Make VC Make Q
Indifferen ce Point :
FC Buy VC Buy Q FC Make VC Make Q
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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.
FCBuy + (VCBuy x Q) = FCMake + (VCMake 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

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Purchasings 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?
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Critical Factors in
Successful Partnership
Relations
Have a long-term
Share a common vision
orientation
Are strategic in nature

Share short/long term

plans

Share information

Driven by end-customer
needs

Benefits of Partnering

Sharerisks and
Early supplier involvement (ESI) in the design
opportunities
process

Using supplier expertise to develop and share cost

improvements and eliminate costly processes
Shorten time to market
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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
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The Role of Warehouses

There are two typesgeneral 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
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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
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Inventory obsolescence

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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
- Dells nearby component warehouse
has reduced inventories to 13 days of
supply compared to Compaqs 25
Flexibility suppliers restock warehouse so Dell can
build and ship customized make to order PCs
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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 2007 Wiley
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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
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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 indeveloping
countries
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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
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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, epurchasing, online exchanges, and industry consortia

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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.
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