E-Commerce, Logistics and Supply Chain Management

Supply Chain: a network of activities that deliver a finished

product or service to the customer.
– The connected links of external suppliers, internal
processes, and external distributors.

External Internal External

Suppliers Functions Distributors

INFORMATION
Logistics
• The process of planning, implementing, and controlling
the efficient, cost-effective flow and storage of goods,
services, and related information, from point of origin to
point of consumption, for the purpose of conforming to
customer requirements.
• Components of an Integrated Logistics System
– External Supply: links suppliers to operations process
– Internal Operations: manages in-process material flow
– Physical Distribution: links operations process to customers
External Suppliers
• External suppliers provide the necessary raw materials, services, and
component parts.
• Purchased materials & services frequently represent 50% (or more) of the
costs of goods sold.
• Suppliers are frequently members of several supply chains – often in different
roles.
– Tier one suppliers: Directly supplies materials or services to the firm that
does business with the final customer
– Tier two suppliers: Provides materials or services to tier one suppliers
– Tier three suppliers: Providers materials or services to tier two suppliers
Developing a Supply Base
Criteria for Choosing Suppliers
• Cost: Cost per unit & transaction costs
• Quality: Conformance to specifications
• On-time delivery: Speed & predictability

Size of Supplier Pool: 1 or many per item

Partnering with Suppliers

One Supplier per Item
• May only be one practical source for the item
– Patent issues, geography, or quality considerations
• The supply chain is integrated to support JIT or EDI
– Making multiple suppliers impractical
• Availability of quantity discounts
• Supplier may be more responsive if it’s guaranteed all your
business for the item
• Contract might bind you to using only one supplier
• Deliveries may be scheduled more easily
Multiple Suppliers per Item
• No single supplier may have sufficient capacity
• Competition may result in better pricing or service
• Multiple suppliers spreads the risk of supply chain interruption
• Eliminates purchaser’s dependence on a single source of supply
• Provides greater volume flexibility
• Government regulation may require multiple suppliers
– Antitrust issues
• Allows testing new suppliers without risking a complete
disruption of material flow
Partnering with Suppliers

• Involves developing a long-term, mutually-

beneficial relationship:
– Requires trust to share information, risk,
opportunities, & investing in compatible
technology
– Work together to reduce waste and inefficiency
& develop new products
– Agree to share the gains
Internal Functions

• Vary by industry & firm, but might include:

– Processing
– Purchasing
– Production Planning & Control
– Quality Assurance
– Shipping
Distribution
Getting the right material to the right place at
the right time in the right quantity:
– Traffic Management:
• The selection, scheduling & control of carriers (e.g.:
trucks & rail) for both incoming & outgoing
materials & products
– Distribution Management:
• The packaging, storing & handling of products in
transit to the end-user.
Formulas for Measuring Supply-Chain Performance

• Inventory Turnover = Cost of goods sold .

Average aggregate inventory value

• Weeks of Supply = Average aggregate inventory value (52 Weeks)

Cost of goods sold
Trends in Logistics Management
• Increased awareness of strategic benefits
of integrated logistics management
• Third-party logistics services
• Just-in-time logistics
• Environmental sensitivity
• NOW: Supply chains create tremendous amounts of waste
material to protect goods in shipment and storage.
• FUTURE: Distribution will use reverse logistics, the
recycling or proper disposal of cardboard, packing
material, strapping, shrink wrap, pallets, etc...
 Supply
Chain for
Milk
Products
Supply Chain Management
• A philosophy that describes how organizations should
manage their supply chains to achieve strategic advantage
• The objective is to synchronize requirements of the final
customer with the flow of materials and information along
the supply chain to reach a balance between high customer
service and low cost
• Supply Chain Management entails:
– Coordinating the movement of goods and delivery of services.
– Sharing information between members of the supply chain.
• For example: sales, forecasts, promotional campaigns, and
inventory levels.
SCM: the need to reduce variability or the impact
of variability on the supply chain
• Supply network variability
– late deliveries: weather,equipment breakdown
– quality problems
• Manufacturing process variability
– machine reliability and equipment failure
– changeovers / setups / part expediting
– design and quality problems
• Customer network variability
– cancellations and irregular orders
– equipment failure
Carrying safety
– scheduling
inventories are the
most common
approach to dealing
with variability
Information Sharing
• Supply chain partners can benefit by sharing
information on sales, demand forecasts,
inventory levels & marketing campaigns
• Inaccurate or distorted information leads to the
Bullwhip Effect

Typical Information Flow

The bullwhip effect

• Demand variability increases as you move up the supply chain from customers
towards supply

Equipment Tier 1 Supplier Factory Distributor Retailer Custom

er
Bullwhip effect in autos to machine tools
Autos
Machine tools

80%

60%

40%
% change in demand

20%

0%

-20%

-40%
GDP = solid line
-60%

-80% Source:Anderson, Fine and Parker (1996)

Bullwhip effect in the US PC supply chain
Changes in
demand
80%

60%

Semiconductor
40% Equipment

20% PC

0%

-20% Semiconductor

-40%

1995 1996 1997 1998 1999 2000 2001

Annual percentage changes in demand (in $s) at three levels of the semiconductor
supply chain: personal computers, semiconductors and semiconductor manufacturing
equipment.
Consequences of the bullwhip effect
• Inefficient production or excessive inventory.

• Low utilization of the distribution channel.

• Necessity to have capacity far exceeding average demand.

• High transportation costs.

• Poor customer service due to stockouts.

Causes of the bullwhip effect
• Order synchronization
– Multiple retailers who tend to order around the same time period
– Manufacturers responding to an MRP system that place raw material orders at the beginning of
the month
• Order batching
– In order to save on shipping or ordering costs, firms order a full pallet or full truck load
• Trade promotions and forward buying
– Supplier offers a discount on product ordered in a specific time period
– Supplier offers a quantity discount
– A retailer orders a large quantity intending to take advantage of a discount and sells excess
product to a second retailer (this strategy is called diversion)
• Reactive and over-reactive ordering
– A retailer who is not sure that demand is stable over time may act aggressively when faced with
periods of lower or higher than expected demand
• Shortage gaming
– A retailer who wants to insure product from an under-capacitated supplier may over order
expecting to only receive a portion of the ordered quantity
Strategies to combat the bullwhip effect
• Information sharing:
– Collaborative Planning, Forecasting and Replenishment (CPFR)

• Smooth the flow of products

– Coordinate with retailers to spread deliveries evenly.
– Reduce minimum batch sizes.
– Smaller and more frequent replenishments (EDI).

• Eliminate pathological incentives

– Every day low price
– Restrict returns and order cancellations
– Order allocation based on past sales in case of shortages

• Vendor Managed Inventory (VMI): delegation of stocking decisions

Future Challenges
Household Replenishment:
Classic downstream Fulfilling consumer demand at the point of use (the home).
Supply Chain Often called ‘the last mile’ problem.

Extraction Business Extraction Business

Material Refiner Material Refiner

Component Manufacturer Component Manufacturer

Producer Producer
Freeze Point Delay
Wholesaler Disintermediation
(Postponement):
Of Supply Chain
Last minute customization to with E-Commerce
Retailer provide exactly what the
consumer wants while
maintaining very small
Consumer inventories Consumer
Supply Chain and Logistical Costs

Functional Activity % of sales

Administration 2.4
Transportation :
Inbound 2.1
Outbound 4.3 6.4
Receiving and shipping 1.7
Packaging 2.6
Warehousing 3.7
Inventory carrying cost:
Interest 2.2
Taxes, insurance, obsolescence 1.6 3.8
Order processing 1.2
Total 21.8%
Transportation and the Traveling Salesman Problem

The traveling salesman problem is a special network formulations

that requires a heuristic solution for all but the smallest problems.
The object of the TSP is to find a network cycle that minimizes the
total distance required to visit all nodes once.

The nearest neighbor procedure (heuristic)

1. Start with a node (location to be visited) at the beginning
of the tour (the depot node).
2. Find the closest to the last node added to the tour.
3. Go back to step 2 until all nodes have been added.
4. Connect the first and last nodes to complete the tour.
Example: Use the following symmetric distance matrix to design a tour that minimizes
total distance traveled.

From To Node (in miles)

Node 1 2 3 4 5 6
1 - 5.4 2.8 10.5 8.2 4.1
2 5.4 - 5.0 9.5 5.0 8.5
3 2.8 5.0 - 7.8 6.0 3.6
4 10.5 9.5 7.8 - 5.0 9.5
5 8.2 5.0 6.0 5.0 - 9.2
6 4.1 8.5 3.6 9.5 9.2 -
 The Clark and Wright Savings Heuristic

1. Select any node as the depot node (node 1)

2. Compute the savings, Sij , for linking nodes i and j:
Sij = c1i + c1j - cij for i and j nodes 2,3,...,n
where cij = the cost of traveling from node i to node j
3. Rank the savings from largest to smallest
4. Start at the top of the list, form larger subtours by linking
appropriate nodes i and j. Stop when complete tour is
formed.
Example
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