Chapter 5 : E-Commerce and

Supply Chain Management

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Learning Objectives

⚫ Describe the structure of supply chains

⚫ Describe the bullwhip effect
⚫ Describe the issues affecting supply chain
management
⚫ Describe B2B and B2C electronic commerce
⚫ Describe global issues in supply chain
management
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Learning Objectives (continued)
⚫ Describe the role of purchasing in supply chain
management
⚫ Describe the ethics of supplier management
⚫ Describe sourcing issues
⚫ Describe strategic purchasing partnerships
⚫ Describe supply chain distribution
⚫ Describe integrated supply chain management
⚫ Describe supply chain performance measures
⚫ Describe trends in supply chain management
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Supply Chains & SCM
⚫ A supply chain is the network of all the activities involved
in delivering a finished product/service to the customer
⚫ Sourcing of: raw materials, assembly, warehousing,
order entry, distribution, delivery
⚫ Supply Chain Management is the vital 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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Components of a Supply Chain
⚫ External Suppliers– source of raw material
⚫ 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 functions
⚫ Processing, purchasing, planning, quality, shipping
⚫ External Distributors transport finished products to appropriate
locations
⚫ Logistics managers are responsible for traffic management and
distribution management
External Internal External
Suppliers Functions Distributors

INFORMATION
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Components of a Supply Chain
⚫ External Distributors transport finished products to
appropriate locations
⚫ Logistics managers are responsible for managing the
movement of products between locations. Includes;
⚫ traffic management – arranging the method of
shipment for both incoming and outgoing products or
material
⚫ distribution management – movement of material
from manufacturer to the customer
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A Basic Supply Chain

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 Supply
Chain
for Milk
Products

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The Bullwhip Effect
⚫ Bullwhip effect - the inaccurate or distorted
demand information created in the supply chain
⚫ Causes are generated by:
⚫ demand forecasting updating,

⚫ order batching,

⚫ price fluctuations,

⚫ rationing and

⚫ gaming

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The Bullwhip Effect
⚫ Counteracting the Effect:
⚫ Change the way suppliers forecast product
demand by making this information available at
all levels of the supply chain
⚫ Share real demand information (POS terminals)
⚫ Eliminate order batching
⚫ Stabilize pricing
⚫ Eliminate gaming
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Issues Affecting Supply Chain Management

⚫ Information technology – enablers

include the Internet, Web, EDI, intranets
and extranets, bar code scanners, and
point-of-sales demand information
⚫ E-commerce and e-business – uses
internet and web to transact business

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Types of E-Commerce

⚫ E-commerce is defined as the use of

the Internet and the Web to transact
business
⚫ Two types of e-commerce are
⚫ Business-to-business (B2B) and
⚫ Business-to-consumer (B2C)
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Types of E-Commerce
⚫ Business-to-Business (B2B) Evolution:
⚫ Automated order entry systems started in 1970’s
⚫ Electronic Data Interchange (EDI) started in the 1970’s
⚫ Electronic Storefronts emerged in the 1990’s
⚫ Net Marketplaces emerged in the late 1990’s
⚫ Benefits of B2B E-Commerce
⚫ Lower procurement administrative costs,
⚫ Low-cost access to global suppliers
⚫ Lower inventory investment due to price transparency/reduced
response time
⚫ Better product quality because of increased cooperation between
buyers and sellers, especially during the product design and
development
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Types of E-Commerce
⚫ Business-to-Consumer (B2C):
⚫ On-line businesses try to reach individual consumers

⚫ B2C revenue model sources

⚫ Advertising – Web site offers providers and opportunity to
advertise
⚫ Subscription –Web site charges a subscription fee for access to
the site
⚫ Transaction – company receives a fee for executing a transaction

⚫ Sales – a means of selling goods, information, or service directly

to customers
⚫ Affiliate – companies receive a referral fee for directing business
to an affiliate
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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

⚫ Government Regulations and E-Commerce –

issues of Internet government regulations
⚫ Environment Implications of E-Commerce –
recycling, sustainable eco-efficiency, and waste
minimization
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Global SCM Factors
⚫ Managing extensive global supply chains introduces
many complications
⚫ Geographically dispersed members - increase replenishment
transit times and inventory investment
⚫ Forecasting accuracy complicated by longer lead times and
different operating practices
⚫ Exchange rates fluctuate, inflation can be high
⚫ Infrastructure issues 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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Sourcing Issues
⚫ Which products to produce in-house and which are
provided by other supply chain members
⚫ Vertical integration – a measure of how much of the
supply chain is owned by the manufacturer
⚫ Backward integration – owning or controlling of sources of
raw material and component parts
⚫ Forward integration – owning or control the channels of
distribution
⚫ Vertical integration related to levels of insourcing or
outsourcing products or services
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Insourcing vs. Outsourcing

⚫ What questions need to be asked before

sourcing decisions are made?
⚫ Is product/service technology critical to
firm’s success?
⚫ Is product/service a core competency?
⚫ Is it something your company must do to
survive?
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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 Outsourcin g :
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- Mary and Sue, have decided to open a bagel shop.
Their first decision is whether they should make the bagels on-site or by the
bagels from a local bakery. If they buy from the local bakery they will
need airtight containers at a fixed cost of $1000 annually. They can buy
the bagels for $0.40 each. If they make the bagels in-house they will
need a small kitchen at a fixed cost of $15,000 annually. It will cost
them $0.15 per bagel to make. The believe they will sell 60,000 bagels.
⚫ Mary and Sue wants to know if they should make or
buy the bagels.
⚫ FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
⚫ $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
⚫ Q = 56,000 bagels
⚫ Since the costs are equal at 56,000 bagels and Mary
and Sue expect to use 60,000 bagels, they should
make the bagels in-house
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The Role of Purchasing

⚫ Purchasing role has attained increased

importance since material costs represent
50-60% of cost of goods sold
⚫ Ethicsconsiderations is a constant concern
⚫ Developing supplier relationships is essential

⚫ Determining how many suppliers to use

⚫ Developing partnerships

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Critical Factors in Successful Partnership Relations

⚫ Critical factors in successful partnering include;

⚫ Impact – attaining levels of productivity and
competitiveness that are not possible through
normal supplier relationships
⚫ Intimacy – working relationship between two
partners
⚫ Vision – the mission or objectives of the
partnership
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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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Supply Chain Distribution
⚫ Warehouses involved in supply chain distributions
and include
⚫ Plant warehouses
⚫ Regional warehouses

⚫ Local warehouses

⚫ Warehouses can either be

⚫ General – used for long-term storage
⚫ Distribution – used for short-term storage,
consolidation, and product mixing
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Supply Chain Distribution - continued
⚫ Transportation consolidation – warehouses
consolidate less-than-truckload (LTL)
quantities into truckload (TL) quantities
⚫ Product mixing – warehouse value added
customer service of grouping a variety of
products into a direct shipment to the
customer
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Supply Chain Distribution - continued
⚫ Services are offered can improve customer
service by moving goods closer to the
customer and thus reducing replenishment
time
⚫ Crossdocking or movement of material
without storage and order-picking
material while still performing the
receiving and shipping functions.
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Supply Chain Distribution - continued
⚫ Radio Frequency Identification Technology
(RFID) – automated data collection technology
which relies on radio waves to transfer data
between reader and RFID tag
⚫ Third-party Service Providers – ease of
developing an electronic storefront has
allowed the discovery of suppliers from around
the world
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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
⚫ Manufacturer’s Goals
⚫ Supplier’s Goals
⚫ Reduce costs
⚫ Increase sales volume
⚫ Reduce duplication of effort
⚫ Increase customer loyalty
⚫ Improve quality
⚫ Reduce cost
⚫ Reduce lead time
⚫ Improve demand data
⚫ Implement cost reduction program
⚫ Improve profitability
⚫ Involve suppliers early
⚫ Reduce time to market
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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

⚫ Inventory obsolescence

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Supply Chain Performance Measurement
⚫ Customer demands for better-quality requires
company’s to develop ways to measure
improvements
⚫ Some measurements include
⚫ Warranty costs
⚫ Products returned

⚫ Cost reductions allowed because of product defects

⚫ Company response times

⚫ Transaction costs

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Current Trends in SCM
⚫ Increased use of electronic marketplace such as
⚫ E-distributors – independently owned net
marketplaces having catalogs representing
thousands of suppliers and designed for spot
purchases
⚫ E-purchasing – companies that connect on-line
MRO suppliers to business who pay fees to join
the market, usually for long-term contractual
purchasing
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Current Trends in SCM - continued
⚫ Increased use of electronic marketplace such as
⚫ Value chain management – automation of a firm’s
purchasing or selling processes
⚫ Exchanges – marketplace that focuses on spot
requirements of large firms in a single industry
⚫ Industry consortia – industry-owned markets that
enable buyers to purchase direct inputs from a
limited set of invited suppliers
⚫ Decreased supply chain velocity due to greater
distances with greater uncertainty and generally
less efficient.
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SCM Across the Organization
⚫ SCM changes the way companies do business.
⚫ Accounting shares SCM benefits due to inventory level
decreases
⚫ Marketing benefits by improved customer service levels
⚫ Information systems are critical for information sharing
through Pos data, EDI, RFID, the Internet, intranet, and
extranets
⚫ Purchasing is responsible for sourcing materials
⚫ Operations use timely demand information to more effectively
plan production schedules
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Chapter 5 Highlights
⚫ Every organization is part of a supply chain, either as a
customer or as a supplier. Supply chains include all
the processes needed to make a finished product, from
the extraction of raw materials through the sale to the
end user. SCM is the integration and coordination of
these efforts.
⚫ The bullwhip effect distorts product demand
information passed between levels of the supply chain.
The more levels that exist, the more distortion that is
possible. Variability results from updating demand
estimates at each level, order batching, price
fluctuations, and rationing
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Chapter 5 Highlights (continued)
⚫ Many issues affect supply chain management. The
Internet, the WEB, EDI, intranets, extranets, bar-
code scanners, and POS data are SCM enablers.
⚫ B2B and B2C electronic commerce enable supply
chain management. Net marketplaces bring
together thousands or suppliers and customers.
Allowing for efficient sourcing and lower
transaction costs.

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Chapter 5 Highlights (continued)

⚫ Global supply chains increase geographic

distances between members, causing greater
uncertainty in delivery times.
⚫ Purchasing has a major role in SCM.
Purchasing is involved in sourcing decisions
and developing strategic long-term
partnerships.
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Chapter 5 Highlights (continued)
⚫ Ethics in supply Chain management is an ongoing
concern. Since buyers are in a position to
influence or award business, it is imperative that
buyers avoid any appearance of unethical
behavior or conflict of interest.
⚫ Companies make insourcing and outsourcing
decisions. These make-or-buy decisions are based
on financial and strategic criteria.
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Chapter 5 Highlights (continued)
⚫ Partnerships require sharing information,
risks, technologies, and opportunities.
Impact, intimacy, and vision are critical to
successful partnering.
⚫ Supply chain distribution requires effective
warehousing operations. The warehouses
provide transportation, consolidation,
product mixing, and service.
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Chapter 5 Highlights (continued)

⚫ Integrated SCM usually begins with

the manufacturer integrating internal
processes first. The, the company
tries to integrate the external
suppliers. The last step is integrating
the external distributors.
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Chapter 5 Highlights (continued)
⚫ A company needs to evaluate the performance of
its supply chain. Regular performance metrics
(ROI, profitability, market share, customer service
levels, etc.) and other measures that reflect the
objectives of the SC are used.
⚫ The emergence of net marketplaces has
significantly affected SCM. As supply chains
become longer, it is likely that supply chain
velocity will decrease. It is possible that a more
strategic and integrated approach is needed to
advance SCM to the next level.
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