Chapter 4 – E-Commerce and

Supply Chain Management

Operations Management
by
R. Dan Reid & Nada R. Sanders
3nd Edition © Wiley 2007

PowerPoint Presentation by R.B. Clough - UNH

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 Learning Objectives
 Describe the different kinds of electronic commerce
 Describe supply chains and supply chain management
 Describe the bullwip effect
 Describe factors affecting SCM
 Describe factors affecting global supply chains
 Describe the role of vertical integration
 Solve insourcing or outsourcing problems
 Describe the role of purchasing in SCM
 Describe the ethics of supply chain management
 Describe the role of information sharing in SCM

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Learning Objectives (continued)

 Describe role of warehouses in supply chains

 Describe the role of warehouses in supply chains
 Describe the concept of crossdocking
 Describe supply chain performance measures
 Describe trends in SCM

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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 forecasts,

sales data, & promotions

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A Basic Supply Chain

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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.
 Traffic management: deciding on the methods of shipping (i.e. trains)
 Distribution management: deals with packaging, storing, and handling
of products in warehouses.


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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
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Issues affecting supply chain
management
 E-commerce is defined as the use of the Internet and the Web to transact business.
 E-Commerce differ from e-business. E-business does not generate money directly to the business
(I.e inventory control, wage system..)
 Business-to-Business (B2B) Evolution:
Although direct sales to customers through the Internet is popular, B2B is most popular type of e-
commerce.
 Automated order entry systems started in 1970’s
Used to send digital orders to suppliers through telephone models. This technology changes in the 1980’s to
personal computers and in the 1990’s to internet workstations that access catalogs . This system was owned
by suppliers.
 Electronic Data Interchange (EDI) started in the 1970’s. EDI is computer= to computer system for
sharing documents. It is buyer side solution made to reduce the procurement cost on buyers
 Electronic Storefronts emerged in the 1990’s : Allowing suppliers to put their product on line to
general public. Cheaper than previous systems.
 Net Marketplaces emerged in the late 1990’s: Brings hundreds of thousands of suppliers (each with
electronic cataloged) and hundreds of purchasing firms into a single internet base environment
 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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Issues affecting supply chain
 Business-to-Consumer (B2C) Revenue Models
 Advertising revenue model: a web site offers its user info. About products and provide
opportunity to advertise (Yahoo)
 Subscription revenue model: offers content and services (I.e report ) content should be
valuable;e not easily found elsewhere.
 Transaction fee model: developers of this model receives fee on transaction (airlines, stocks…)
 Sales revenue model: I.e Amazon, sells products or information to customers
 Affiliate revenue model: Developers of this system receive fee for directing customers to
businesses.
 Consumer-to-Consumer (C2C) E-Commerce Customers sell to each other with the help of on
line maker(I.e Bay auction site)
 Peer-to-Peer (P2P) E-Commerce: Link users without common server allows them to share
information make money through subscription.
 M-Commerce. Mobile commerce is access to Inter net through wireless devices

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Issues affecting SCM
 Consumer Expectations and Competition – power has shifted to the
consumer. Access to products through internet made it possible for
customer to investigate, compare and buy, this gives customer substantial
amount of power.

 Since customers have access to hundreds of suppliers, suppliers must

differentiate themselves to provide customers with excellent value.

 On line sales however put pressure on suppliers to com up with an effective

method for returned merchandise.

 Globalization – capitalize on emerging markets. Rethink how to provide

value for customers worldwide. The challenge is how to deliver small
quantities to huge number of customers around the world. Many companies
outsources to DHL or Fed. Express.

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Issues affecting SCM

Government Regulations - like trade barriers,

taxation, copyrights
Environmental Issues – e.g. waste


minimization

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 Issues affecting SCM
 Substantial geographical distances increase lead times and
inventory investment. Higher inventory investment..higer degree of
uncertainty.
 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 actually owned and operated
by the manufacturing company.
 Insource: process or activities that are completed
in-house.
 Outsource: process or activates that are
completed by suppliers.
 Backward integration: owning or controlling
sources of raw materials and components.
 Forward integration: owning or controlling the
channels of distributions.

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Vertical Integration:
Insourcing 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?

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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  VCBuy  Q 
Total Cost of Insourcing :
TC Make  FCMake  VCMake  Q 
Indifferen ce Point :
FCBuy  VCBuy  Q   FCMake  VCMake  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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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?
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 Critical Factors in Successful
Partnership Relations
Have a long-term orientation Share a common vision
Are strategic in nature Share short/long term plans
Share information Driven by end-customer needs
Share risks and opportunities

 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
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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 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
 Crossdocking to eliminate storage and order picking
costs, e.g. Home Depot, Wal-Mart, Costco
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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
- 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

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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. Walmart
 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
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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 5 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
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 Chapter 5 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 5 Highlights (continued)

 Warehouses do transportation consolidation, product

mixing or blending, and reducing response time
 Crossdocking 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

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 The End
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