supply chain integration and e-business strategies - rg

7/29/2019 Supply Chain Integration and E-Business Strategies - RG

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Supply Chain Integration

and e-Business Strategies

Ranjan Ghosh

Indian Institute of ManagementCalcutta


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Outline

Review

Supply Chain Dynamics

A new Supply Chain Paradigm Matching Products with Strategies

e-Business Opportunities


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The Dynamics of the Supply

Chain

OrderS

ize

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

Retailer Orders

Distributor Orders

Production Plan


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The Dynamics of the Supply

Chain

OrderS

ize

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

Production Plan


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What are the Causes

Promotional sales

Volume and Transportation discounts

Batching Inflated orders

Demand Forecast

Long cycle times Lack of Visibility to demand information


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Consequences

Increased safety stock

Reduced service level

Inefficient allocation of resources

Increased transportation costs


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The Bullwhip Effect:Causes thereof

Variability in customer orders

Delivery lags, particularly long cycle times

Information lags

Promotional Campaigns/Variation in Prices

Over and Under Ordering

Lumpiness in ordering Misperceptions of feedback

Chain accumulations


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The Bullwhip Effect:Managerial Insights

Exists, in part, due to the retailers need toestimate the mean and variance of demand.

The increase in variability is an increasing

function of the lead time. The more complicated the demand models

and the forecasting techniques, the greaterthe increase.

Centralized demand information can reducethe bullwhip effect, but will not eliminate it.


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Coping with the Bullwhip Effectin Leading Companies

Reduce Variability and Uncertainty

- POS

- Sharing Information

- Year-round low pricing

Reduce Lead Times

- EDI

- Cross Docking

Collaborative Channel Management & Alliances

Vendor managed inventory

On-site vendor representatives

Th F i N


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The Future is Not

What

it Used to be

Reduce cost

Increase Profit

Increase service level

Increase flexibility

A new Business Modele-


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Reality is Different..

Peapod Example Founded 1989

140,000 members, largest on-line grocer

Revenue tripled to $73 million in 1999

1st Quarter of 2000: $25M Sales, Loss: $8M

Amazon.com Example Founded in 1995; 1st Internet purchase for most people

1996: $16M Sales, $6M Loss

1999: $1.6B Sales, $720M Loss 2000: $2.7B Sales, $1.4B Loss

Last quarter of 2001: $50M Profit

Total debt: $2.2B


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Reality is Different.

Dell Example: Dell Computer has outperformed the competition in

terms of shareholder value growth over the eight

years period, 1988-1996, by over 3,000% (seeAnderson and Lee, 1999)


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Reality is Different.

Cisco Example:

Ciscos Internet based business model has beeninstrumental in our ability to quadruple in size from

fiscal 1994 to fiscal 1998 ($1.3B to over $8B), hireapproximately 1000 new employees per quarter andsaving $560M annually in business expenses (PeterSolvik, CIO Cisco)


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e-Business is a collection of business modelsand processes motivated by Internet

technology, and focusing on improving theextended enterprise performance e-commerce is part of e-Business

Internet technology is the driver of the businesschange

The focus is on the extended enterprise: Intra-organizational

Business to Consumer (B2C)

Business to Business (B2B)

The e-BusinessModel


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A new Supply Chain Paradigm

A shift from a Push System...

Production decisions are based onforecast

to a Push-Pull System


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From Make-to-Stock Model.

ConfigurationAssemblySuppliers


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Demand Forecast

The three principles of all forecastingtechniques:

Forecasts are usually wrong

The longer the forecast horizon the worst

is the forecast

Aggregate forecasts are more accurate The Risk Pooling Concept


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Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers


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Parts inventory is replenished based onforecasts

Assembly is based on accurate customerdemand


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.to Assemble-to-Order Model

ConfigurationAssemblySuppliers


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Business models in the BookIndustry

From Push Systems...

Barnes and Noble

...To Pull Systems

Amazon.com, 1996-1999

And, finally to Push-Pull Systems

Amazon.com, 1999-present 7 warehouses, 3M sq. ft.,


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Direct-to-Consumer:Cost Trade-Off

Cost Trade-Off for BuyPC.com

$0$2$4

$6$8

$10$12$14$16

$18$20

0 5 10 15

Number of DC's

Cost($million)

Total Cost

Inventory

Transportation

Fixed Cost


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Industry Benchmarks:Number of Distribution Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.# ofWH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product- Service not important (oreasy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound


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e-Business in the Retail Industry

Brick-&-Mortar companies establish Virtual retailstores

Wal-Mart, K-Mart, Barnes and Noble

Use a hybrid approach in stocking High volume/fast moving products for local storage

Low volume/slow moving products for browsing andpurchase on line

Channel Conflict Issues


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E-Fulfillment Requires aNew Logistics Infrastructure

Traditional Supply Chain e-Supply Chain

Supply Chain Strategy Push Push-Pull

Shipment Type Bulk Parcel

Inventory Flow Unidirectional Bi-directional

Reverse Logistics Simple Highly Complex

Destination Small Number of Stores Highly Dispersed Customers

Lead Times Depends Short


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Wal-Marts e-fulfillmentStrategy

Wal-Mart has always prided itself in its in-housedistribution operations.

Thus, it was a huge surprise when the companyannounced that it plans to hire an outside firm to handle

order fulfillment and warehousing for its on-line storeWal-Mart.com, which the retailer launched in the fall of1999.

Filling orders behind the scenes of Wal-Marts cyberstoreis Fingerhut Business Services. Fingerhut will provide

Internet order fulfillment, warehousing, shipment,payment processing, customer service and merchandisereturns.


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Matching Supply ChainStrategies with Products

Pull Push

Pull

Push

I

Computer

II

IV III

Demanduncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies of

Scale


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Locating the Push-PullBoundary


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Organizational Skills Needed

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness


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e-Business Opportunities:

Reduce Facility Costs

Eliminate retail/distributor sites

Reduce Inventory Costs

Apply the risk-pooling concept

Centralized stocking

Postponement of product differentiation

Use Dynamic Pricing Strategies toImprove Supply Chain Performance


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e-Business Opportunities:

Supply Chain Visibility

Reduction in the Bullwhip Effect Reduction in Inventory

Improved service level

Better utilization of Resources

Improve supply chain performance Provide key performance measures

Identify and alert when violations occur

Allow planning based on global supply chain data

supply chain integration and e-business strategies - rg

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