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Recalibrating Demand-Supply Chains
for the Digital Economy
Arun RaieCommerce InstituteRobinson College of BusinessGeorgia State UniversityAtlanta, GA 30303arunrai@gsu.edu
e-Business Research SeminarUniversity of British ColumbiaMay 11, 2001
Competition is now between supply webs … not companies.
Quiz
• A box of cereal spends ? days in the supply chain.
• Total inventory in the pharmaceutical supply chain exceeds ? days and ? $ in savings to be realized.
• Poor coordination in the food industry supply chain wasted ? dollars.
• Boeing wrote-off ? dollars in 1997 due to supply chain inefficiencies.
• It costs, on average, ? dollars to process each purchase order.
• Bonus question: What’s been happening @ X’mas?
Answers
• A box of cereal spends 104 days in the supply chain.
• Distorted information causes total inventory in the pharmaceutical supply chain to exceed 100 days with $11 billion in savings to be realized.
• Poor coordination wasted $ 30 billion annually in the food industry.
• $ 2.6 billion is how much Boeing wrote-off in 1997 due to supply chain inefficiencies
• $80 was paid, on average, to process each purchase order.
• And, Santa did not show up last year with e-toys!
Fulfillment score = D--
Agenda
• What is driving supply chain reconfiguration?
• How do supply chains configurations differ in their strategic assumptions?
• What e-coordination capabilities are required to support each configuration?
• How should supply chain transformations be managed?
Traditional supply chain obsolescence
Direction of flow of demand Direction of flow of product
Raw Material vendor
Tier-II Suppliers
Tier-I Suppliers
Manufacturers Distrib
ution Centers
Retailers Custo
mer Zones
Point of differentiatio
nDistribution
costsMarket
mediation costs
Design &Design &TransformationTransformation
KnowledgeKnowledge
FulfillmentExpectation
s
Value Chain Roles
Supply ChainSupply ChainConfiguration Configuration
& & Coordination?Coordination?
e-coordination e-coordination InnovationsInnovations
Industry standardsHorizontal & vertical solutionsE-intermediary models
Effective market Effective market mediationmediationComplex order Complex order fulfillmentfulfillmentOngoing service Ongoing service expectationexpectationMulti-channel Multi-channel synchronizationsynchronization
Product & process Product & process modularitymodularityTransformation asset Transformation asset obsolescenceobsolescence
Value Value migration migration Consolidation Consolidation patternspatterns
DiscontinuityDiscontinuity
Supply chain configurations
Verticallyintegrated
Fragmented
Solution Web
Modular
End-to-endintegrated
CustomerPush
DemandPull
SynchronizedPush-Pull
CollaborativePush
DownstreamPush
Firm
Hierarchy
Networks
Markets
Demand Fulfillment Perspective
Org
an
izin
g L
og
ic
The vertically integrated firm
Microprocessors
Operating systems
Peripherals
Applications software
Network services
Assembled hardware
IBM DEC BUNCH
Vertically IntegratedSupplier-driverMass Production
The Computer Industry, 1975-85
Tightly coupled knowledgeMassive capital assetsHigh fixed costsLarge product volumes for capital productivity
Fragmented chainInadequate information processing abilityFirm as unit of competitionInternecine warfareZero-sum games
Consumer Retailer Manufacturer SupplierStore
1-800
e-Store
Stockouts and stockpilesCapital inefficiencyPoor customer service
Integrated Chain
End-to-end supply chain perspectiveOrder management, fulfillment & revenue managementMaterials, information and financial flows
High fill rates & on time deliveryReduced inventory costsWorking capital efficiencyNegative cash conversion cycles
Consumer Retailer Manufacturer Supplier
e-Store Store
Collaborative Planning& Forecasting
The UPS Opportunity?
Management services
Distribution, Storage & Transportation
Internet-enabled applications infrastructure
Modular product design
MicroprocessorsOperating systems
PeripheralsApplications softwareNetwork services
Assembled hardware
IBM DEC BUNCH
Vertically IntegratedSupplier-driverMass Production
The Computer Industry, 1975-85
Source: Fine, 1998
Intel Moto AMD etc.
Microsoft Apple Unix
HP Epson Seagate etc.etc.
Microsoft Lotus Novell etc.
DEC HP IBM EDS etc.
HP Compaq IBM Dell etc.
The Computer Industry, 1985-95
Microprocessors
Operating systems
PeripheralsApplications software
Network services
Assembled hardware
Horizontal structureInnovation focusedMass customization
Modular chain
Distributor/ManufacturerWeb site
3 PL Partners
Supply chain perspectiveSeparates architectural & modular knowledgeLow interdependency; high recombinability
Contract manufacturers
Contribution margin focusInnovation, order management, fulfillment, & revenue management
Suppliers Resellers
Distributor- DCs, Warehouses
PhysicalInformation/Financial
Cold plug-ins (spot equity focus)
Short-term service partners
e-Platform infrastructure (network, data, applications)
Long-term business partners
MR
O
Capacity
Offi
ce
Auto
matio
n
Routin
e
IT S
erv
ices
Know
ledge
Com
ple
ments
Utilitie
s
Require
ments
Dete
rmin
atio
n
Solu
tion
Develo
pm
ent
Revenue
Managem
ent
Reverse
Logistics
Fulfi
llment
Pla
tform
D
evelo
pm
ent
Hot plug-ins (serial equity focus)
Customer
Knowledge integration
& platform services
Transaction
integration
Solution webs
Challenging “artificial”:Product categoriesConsolidated demand timeIntegral product designs
SUPPLY CHAIN CONFIGURATION Properties Vertically
Integrated Fragmented End-to-End
Integrated Modular Chains Solution Webs
Unit of Competition
Firm Firm Supply chain
Supply network Solution networks
Strategic Focus Value chain control
Coercive supply chain gaming
Cooperative buffer reduction
Mass customization; Postponement of differentiation
Points of presence in fulfillment webs
Knowledge Integration
Tightly coupled within the firm
Tightly coupled within the firm
Tightly coupled SC planning & execution knowledge
Separation of modular & architectural knowledge
Separation of modular, architectural & platform knowledge
Strategic profiles of supply chain configurations
SUPPLY CHAIN CONFIGURATION Properties Vertically
Integrated Fragmented End-to-End
Integrated Modular Chains Solution Webs
External Coordination
Non-existent Non-core activities.
SC planning & execution
Innovation; SC planning & execution
Platform development; knowledge integration
Asset specificity Low transaction specific assets
Low transaction specific assets
Transaction specific assets for SC planning & execution
Transaction specific assets for product development & SC planning/execution
High transaction specific assets for knowledge integration & SC planning/execution
Contracting Rationale
Transaction cost & risk
Transaction cost & risk
Predictable service levels
Innovation capability & predictable service levels
Complementary platforms & problem-solving knowledge
Strategic profiles of supply chain configurations
Fragmented fulfillment: The bullwhip effect
Customer Retailer Distributor Factory Tier 1 supplierTier II supplier
Upstream amplification of demand variationProgression of a brushfire to an inferno!
Poor coordination of Poor coordination of material,material, information information and and financialfinancial flows flows between and among between and among enterprises participating in the enterprises participating in the demand fulfillment process.demand fulfillment process.
Sequential interdependenceLow transaction specific capitalLimited information sharingSafety stock exaggerationHost-centric legacy appsIT reinforces decision structures
Machine tools at bullwhip tip
-80%-60%-40%-20%
0%20%40%60%80%
100%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
Data from United States, 1961-1991 (GDP, vehicle production, and machine tool orders
% C
ha
ng
e, y
ea
r to
ye
ar
% change GDP% change vehicle production index% change net new orders machine tool industry
Reported in Fine, 1998
Multi-channel End-to-End Integration
PharmaceuticalManufacturers
McKessonDistribution Center
CVSDistribution Center
Store
Supply chain-wide visibilityStellar order management & fulfillmente-ramps to complementary resourcesSCM+ERP+CRMMulti-echelon resource planningOptimally staging and moving goods
Online channels & flows
Offline channels & flows
“Calibrated” online & offline coupling
e-Store
PhysicalInformation/Financial
Modular chains
SuppliersIngram Web Site
Reseller/Customer
3 PL Providers
Buffer staging & movementComponent level inventory rationalizationInventory velocity & channel assembly
Solectron
Service role of distributors3PL outsourcing SC Knowledge co-creation
Suppliers Warehouses, DCs
PhysicalInfo/Financial
Solution Webs: Weaving Boundary Spanning Partnerships
Carriers, 3PLs
Solutions development
Systems solutions
Managementof 4PL
Process & Metrics Management
Systems integration
3PLManagement
Process Execution
Customer service excellence
Investment in resources
Asset structure (Cisco/UPS; Kozmo & Strabucks)Multiple value architectures (UPS’ eReturns)Partnerships & complex contracts
Transaction aggregation (UPS & Buy.com)Visible platform architecturesCoordinating inter-generational innovations
SUPPLY CHAIN CONFIGURATION Properties Vertically
Integrated Fragmented End-to-End
Integrated Modular Chains Solution Webs
Fulfillment focus
Repeatable, predictable & efficient
Sporadic Repeatable, predictable & efficient
Responsive, anticipatory & effective
Responsive, anticipatory & comprehensive
Process optimization focus
Firm’s value chain activities
Firm’s value chain activities & transaction costs
Multi-echelon SC planning & execution
Multi-echelon synchronization of supply- & demand- processes
Multi-echelon knowledge integration for dynamic fulfillment
Flow coordination
Internal coordination of information, physical & financial flows
Batched inter-firm, dyadic coordination of information, physical & financial flows
Real-time supply-chain wide coordination of information, financial & physical flows
Real-time supply- & demand-chain coordination of information, financial & physical flows
Real-time customer requirements interpretation & supplier knowledge integration
SUPPLY CHAIN CONFIGURATION Properties Vertically
Integrated Fragmented End-to-End
Integrated Modular Chains Solution Webs
Logistics & distribution role
Push products into market. Focus on transportation and movement.
Break bulk & pool risk
Continuous flow of information, revenue & products
Expedition of upstream demand flow & downstream supply flow
Integration hubs for supplier- & customer- processes
Supply chain visibility
Internal sharing Dyadic transactional data
Orders, fulfillment & revenue flows
Architectural specifications, orders, fulfillment, & revenue flows
Platform capability, complementary supplier- & customer-knowledge, orders, fulfillment, & revenue flows
SUPPLY CHAIN CONFIGURATION
Properties Vertically Integrated
Fragmented End-to-End Integrated
Modular Chains Solution Webs
IS Portfolio Orientation
ERP
ERP; lean external coordination systems
SC planning & execution; ERP; lean CRM systems
SC planning & execution; ERP; CRM.
Platform capability for current & future supplier- & customer-apps
IS Integration Objectives
Functional Lean inter-firm EDI integration
Web-based, extranet & dedicated EDI integration
Web-based, extranet & dedicated EDI integration
Web-based, extranet & dedicated EDI integration of current & future suppliers/customers
Information Exchange Standards
Firm-specific EDI standards XML standards Specialized XML data type definitions & PIP.
Industry-spanning DTDs, app protocol interfaces, and PIP
Supply chain transformation
Verticallyintegrated
Fragmented
Solution Web
Modular
End-to-endintegrated
CustomerPush
DemandPull
SynchronizedPush-Pull
CollaborativePush
DownstreamPush
Firm
Hierarchy
Networks
Markets
Demand Fulfillment Perspective
Org
an
izin
g L
og
ic
Integrate end-to-end supply chainRationalize multi-channel operationsInfuse e-coordination technologiesDevelop info. sharing mindsetManage principal-agent conflictsDevelop suppliers
Supply chain transformation
Verticallyintegrated
Fragmented
Solution Web
Modular
End-to-endintegrated
CustomerPush
DemandPull
SynchronizedPush-Pull
CollaborativePush
DownstreamPush
Firm
Hierarchy
Networks
Markets
Demand Fulfillment Perspective
Org
an
izin
g L
og
ic
Reconfigure assets, products, processes &e-solutions
Integrate using architecture informationDeploy multi-echelon buffering Develop “deep” relationships [3PL, other]Exploit arbitrage opportunities
Supply chain transformation
Verticallyintegrated
Fragmented
Solution Web
Modular
End-to-endintegrated
CustomerPush
DemandPull
SynchronizedPush-Pull
CollaborativePush
DownstreamPush
Firm
Hierarchy
Networks
Markets
Demand Fulfillment Perspective
Org
an
izin
g L
og
ic
Develop platform capabilitiesEmbrace real options perspectiveImplement governance methods for dynamictransactions, incomplete contracts, revenue flows & settlement
Thank You!
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