MD850: E-Service Operations
Order Fulfillment and Forward
Supply Chain Processes
Agenda
 Background
 Order Fulfillment in e-Services
 Supply Chains






Supply Chain Components
Supply Chain Problems
Supply Chain Design
Extending SCM Concepts to E-Services
Supply Chain Modeling & Evaluation
Supply Chain Technology
 SCM Perspective on Li & Fung Case
Background
 Competition is changing
 Old: “Firm vs. Firm”
 New: “Supply Chain vs. Supply Chain”
Background
 Supply Chain
 Concept of a “supply chain” is relatively new
 Prior to 1996, very few management or engineering
schools had courses on supply chain management
(SCM)
 Previous “stumbling blocks” that impeded SC
integration
 high transaction costs between partners
 poor information availability
 challenges of managing complex interfaces
between functional organizations
Background
 Scope of Supply Chain Topics
 Customer Facing & Internal
 Customer Value and SCM
 Web-centric product design
 Forecasting and inventory management in B2C
 Order fulfillment and returns management in B2C
Background
 Scope of Supply Chain Topics
 Supplier Facing
 Coordinated product design and supply chain design
 Integration of supply chain planning and
procurement
 Logistics network configuration
 Order fulfillment and returns management in B2B
 Distribution strategies
 Strategic alliances
 Models for B2B exchanges
 Auctions & analysis of auction properties
Background
 Scope of Supply Chain Topics
 IT Related
 Information technology for SCM
 Decision Support Systems (DSS) for SCM
 Web services: frameworks and technologies



Microsoft’s .NET technology
Sun’s J2EE technology
Open Source technologies
Order Fulfillment in e-Services
Order Fulfillment in e-Services
 Goals of customer care applications are simple
 What do online shoppers want? (BCG)





Free delivery – 95%
Free returns if I am unhappy with product – 91%
Guaranteed delivery time – 75%
Quicker delivery – 69%
Site has a store located near me – 46%
 “Proper fulfillment is whatever serves the customer best while
preserving adequate profit margins to continue in business at a
high level of customer satisfaction”
Order Fulfillment in e-Services
 Designing and implementing customer care applications
can be another matter
 Central problems



Enterprise information and customer information must be
integrated into a unified whole
New kinds of customer behavioral information must be captured
and processed
Customers and employees must share a common knowledge base
 All organizational functions must have access to a consistent
picture of the customer relationship
Order Fulfillment in e-Services
 E-Fulfillment Processes (Bayles, 2001)
 Notification Process
 Acknowledgement and confirmation
 Instantaneous after purchase
 Information fulfillment of digital service-product attributes
 Low cost delivery of information
 Instant gratification for customer




Picking and Packing
Delivery
Reconciliation/settlement of credit card payment request
Post-delivery activities that ensure customer satisfaction
 Returns
 Exchanges
Order Fulfillment in e-Services
 Fulfillment Recommendations (e-Service, Chap. 8)
 Build an order confirmation system into your service process to
ease customer worries
 Grant customers online access to production order process and
shipping data
 Build (or outsource) warehouse, fulfillment, and product
delivery chains that create as much customer contentment on the
back end of your service process as on the front end
 Focus on fast, efficient fulfillment
 Shipping charges …
 Probably don’t want to make them free
 Perhaps free for …
 Large purchase size above some dollar amount
 Loyal, high-value customers
 In-store pickup
Order Fulfillment in e-Services
 Fulfillment Recommendations (e-Service, Chap. 8)
 Integrate online bill payment into the fulfillment process
 Return policies … make the return process as easy as the process
for buying
 Synchronize returns between digital and physical storefronts
 Supply on-the-spot return authorization numbers
 Be careful with using purchase information for permission
marketing
 Where possible, employ online post-sale self-help
 Use post-transaction web surveys to gather customer feedback
and continually improve service performance
Order Fulfillment in e-Services
 Fulfillment Tasks for e-Businesses
 GOAL: Achieve total end-to-end visibility throughout the supply
chain
 Must deal with international pricing/taxation and shipping issues
 Pricing customized to location of customer
 Shipping agents to deal with tax issues
 Local fulfillment center
 Provide online shipping tools
 Link web site to package carriers’ host systems
 FedEx, UPS – online tracking tools with APIs
 USPS – eventually will have tracking tools
 Integrate shipping, tracking and distribution systems with ERP
systems
 FedEx, UPS – systems with APIs for doing so
Order Fulfillment in e-Services
 Fulfillment Outsourcing
 Potential benefits
 Speed to market
 Deploy e-Service quickly
 No capital investment in fulfillment
 Level of service provided by outsourcer may be better than a
start-up’s fulfillment service
 Scalability
 Higher when using an large fulfillment service
 Focus
 On business competencies, not on shipping
 Lower costs
 No need to hire shipping staff
 Focus on the customer
 Capitalize on efficiencies
Supply Chains
Supply Chains
What is a Supply Chain?
Porter’s “Value Chain”
Firm Infrastructure
Human Resources Management
Technology Development
Procurement
Inbound
Logistics
Operations
Profit
Margin
Outbound
Logistics
Marketing
& Sales
Service
Supply Chains
What is a Supply Chain?
Value Chain of Supplier
Value Chain of Buyer
Supply Chains
What is a Supply Chain?
Supplier’s Virtual Value Chain
Buyer’s Virtual Value Chain
Profit
Margin
Profit
Margin
Information
Flow
Value Chain
Information
Flow
Value Chain
of Supplier
Profit
Margin
of Buyer
Profit
Margin
Supply Chain Components
Supply Chain Components
Components of a Supply Chain?
Supplier’s Virtual Value Chain
Digital Content Networks
Value Chain
of Supplier
Networks of Physical Objects
Networks of Service Providers
Buyer’s Virtual Value Chain
Digital Content Networks
Value Chain
of Buyer
Networks of Physical Objects
Networks of Service Providers
Supply Chain Components
Components of a Supply Chain?
 Supply chain is a “network of organizations that are
involved, through upstream and downstream linkages, in
the different processes and activities that produce value in
the form of products and services in the hands of the
ultimate customer.” (Christopher, 1998)
 Supply chain components





Two or more legally separated organizations
Material, information, and financial flows
Firms producing objects
Logistics service providers
Ultimate customer
Supply Chain Problems
Supply Chain Problems
 Supply Chain Problems
 Inventory




Work of the devil
Holding costs
Risk of obsolescense
Quality problems hidden
 The Bullwhip Effect
Supply Chain Problems
The Bullwhip Effect
A Small
Demand
Shift
Leads To
Retailer
Distributor
Huge Variation
in On-Hand Inventory
and Manufacturing
Manufacturer
Huge Variation in
Orders and Inventories
Wholesaler
“The Bullwhip
Effect”
Supply Chain Problems
Historical Inventory Management
 Inventories
 Independent demand

Multiple Period Demands




Assume demand pattern. Forecast when you will stock out. At the
appropriate time, order some order quantity (or up to some quantity),
so that with the amount you receive at a future date -- plus the buffer
inventory (“safety stock”) -- you will have a small probability of
stocking out
Single Period Demand -- “paperboy problem”; “fashion goods”
Order to balance costs of “overage” against costs of “underage” -giving maximum profit
A/B/C -- some inventories more important or costly than others

Monitor costly inventories closely

Don’t monitor cheap inventories, just hold lots of buffer stock
 Dependent demands


MRP/MRP II
ERP/Extended ERP
Supply Chain Problems
Drawbacks of Inventory Methods
 Inventories
 Independent demand

Multiple Period Demands, Single Period Demand, A/B/C







Paper orders
Misplaced products
Inaccurate inventories
Human errors
Cycle Counting -- strategies to count everything in warehouse (e.g.,
1/N of warehouse at a time, over N periods); facilitates balancing the
objectives of different inventory methods
Dependent demands
MRP/MRP II/ERP/Extended ERP




Stacks of paper production schedules
Paper order releases
Change reports -- to previous schedules
System nervousness -- when allowing updating of schedules
Supply Chain Problems
What “The Experts” Now Suggest
 Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000)
 Retailer objective: “right product, right place, right time, right price”
 Historically, the opposite has happened





most inventory planning is for long life-cycle products
online and offline stockouts
increasing markdowns
supply chain lead times often are so long, that forecasts of demand only
confirm that the product will tank, and nothing can be done about it
Rocket Science Retailing

“create a high-tech forecasting system supported by a flexible supply
chain”
Supply Chain Problems
What “The Experts” Now Suggest
 Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000)
 Forecasting




Update forecasts based on early sales data
Track and predict forecasting accuracy
Get product testing right -- make it scientific
Use a variety of forecasting approaches
 Supply Chain Speed




Work with supply chain partners
Reserve production capacity; hold generic raw-material
inventories that can later be developed into finished product
Troubleshoot production problems, design for easy
manufacturability
Make decision making flexible; empower employees
Supply Chain Problems
What “The Experts” Now Suggest
 Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000)
 Inventories
 Need to track stockouts
 UNFORTUNATELY, no commercial software available to track stockouts
 Accurate, Available Data
 Most retailing data inaccurate and inaccessible to employees
 Store-level sales data usually incorrect




Why: (1) clerk scanning one item multiple times to ring up multiple slightly
different items, (2) like-for-like returns, without scanning in return and exchange
Inventory counts usually off
warehouse ships wrong item, supplier shorts, case-pack dimensions change without
changing in inventory system
Most companies don’t keep enough data
 kills their ability to forecast time-series of demand accurately
 aggregation of data kills knowledge at SKU level
 lack of SKU kills ability to customize supply chain and shipments
Supply Chain Problems
What “The Experts” Now Suggest
 Manufacturing for Lean Retailing (Abernathy et al., HBR, Nov/Dec 2000)
 Historical


large order at beginning of period
manufacturers treated SKUs within a product line all the same
 Lean Retailing


Manufacturers must replenish retailers stocks on an ongoing basis; tend to
accomplish by holding extra inventory; get stuck with inventory if styles
change; risk of getting stuck increases with product proliferation
Solution
 Need to differentiate between SKUs -- think of product lines as
portfolios of distinct goods
 Need to rethink sourcing strategies, reallocating manufacturing across
 off-shore sources (high volume, low-variance demands)
 close-to-market sources (low volume, high-variance demand)
Supply Chain Problems
IT to the Rescue
 “The Wearable Warehouse”, Business 2.0
 VISION
 “Turn the supply chain into the warehouse”




reliable inventory numbers
better order fulfillment
security: reducing in-transit theft … (in turn, improving on-hand
data)
accurate tracking of goods
 Humans (networked objects) provide services to the system


Essentially automated Cycle Counting
Wireless IS implements strategy for what item should be counted
when
 Distributed, heterogeneous objects [inventory containers] report
what they contain and where they are, to update system information
Supply Chain Design
Supply Chain Design
 Research in Supply Chain Design and
Management
 Stretches back to 1940s/1950s
 Prior to 1990s, most SCM research was for “simple”
material flows and transportation

Most complex: optimal policy for a single-product, singlestage, capacitated SC with a stationary demand process
 Simple multi-stage and/or multi-product supply chain
models were computationally intractable
 First mathematical modeling papers with
computational results were published in 1991

Start of modern supply chain management research
Supply Chain Design
Conceptual Approaches
 Research in Supply Chain Design and
Management
 Conceptual SCM Research
 Porter’s Value Chain Model (1985)
 Fine’s Clockspeed (1998) Approach
Supply Chains
Conceptual Frameworks
 Clockspeed (Charles Fine, MIT)
 “Biologists study fruit flies because their fast rates of
evolution permit rapid learning that can then be
applied to understanding the genetics of slowerclockspeed species -- like humans.”
 Managers should study industrial equivalents of fruit
flies
 Fast clockspeed industries



Internet services
personal computers
multimedia entertainment
Supply Chains
Conceptual Frameworks
 Clockspeed (Charles Fine, MIT)
 “The ultimate core competency of an organization is
“supply chain design,” which I define as choosing
what capabilities along the value chain to invest in
and develop internally, and which to allocate for
development by suppliers.”
 “Fast-clockspeed” supply chain characteristics



rapidly evolving world
designing and redesigning firm’s chain of capabilities
objective is a series of competitive advantages -- often
quite temporary
Supply Chains
Conceptual Frameworks
 Clockspeed (Charles Fine, MIT)
 Computer-industry motivated principles about the
design and evolution of supply chains

“Beware of Intel Inside”





IBM employed modular supply chain design (Intel, MS DOS)
power in the chain, and financial rewards, had shifted upstream
since most modern products are largely computer components and
electronics, they potentially fall prey to same forces
Supply Chain Double Helix
 oscillation of supply chain structure
Three-Dimensional Concurrent Engineering
 concurrent design of capabilities (product, process, supply
chain)
Supply Chains
Conceptual Frameworks
Niche
Competitors
Integral
Product,
Vertical
Industry
High-Dimensional
Complexity
Pressure to
Dis-Integrate
Modular
Product,
Horizontal
Industry
Pressure to
Integrate
Organizational
Rigities
(Charles Fine, Clockspeed, 1998)
Supply Chain
Double Helix
Technical
Advances
Supplier Market
Power
Proprietary
System
Profitability
Supply Chains
Conceptual Frameworks
PRODUCT
Performance
Specifications
PROCESS
Technology,
& Process
Planning
Recipe,
Unit Process
Details,
Strategy
Product Architecture,
& Make/Buy
3-D C. E.:
Supply Chain
Overlapping
Responsibilities
Time, Space,
& Availability
SUPPLY
CHAIN
Manufacturing
System,
Make/Buy
(Charles Fine, Clockspeed, 1998)
3-D C. E.:
Supply Chain
Concurrency
Model
Supply Chains
Conceptual Frameworks
PRODUCT
Design
Architecture
Detailed
Performance
Specific’s
and
Functions
Modular
vs.
Integral
PROCESS
Unit
Processes
Technology
&
Equipment
SUPPLY CHAIN
Manufact.
System
Functional
Cellular
Supply
Chain
Architect.
Logistics
& Coord.
System
Set of
Organizations
and
Allocation
of Tasks
Autonomous
vs.
Integrated
Focus
Technology
Architecture
(Charles Fine,
Clockspeed, 1998)
Supply Chains
Conceptual Frameworks
 Clockspeed (Charles Fine, MIT)
 Prediction:

“supply chain design as a strategic precursor to supply chain
management will only increase in the decade to come as
industry clockspeeds continue to accelerate, and the halflives of many capabilities in our existing supply chains need
replacement and/or upgrading”
Extending Supply Chain Concepts
to e-Service Operations
Supply Chains
Conceptual Frameworks
Process Control
Service-Product
Static
Static;
Mechanization
Dynamic
Niche
Need
Unique
Items
Broad
Need
Common
Items
(Heim and Sinha, 2001)
Dynamic;
Intelligence
(Jaikumar, 1994)
?
Supply Chains
Conceptual Frameworks
Past:
Many suppliers/customer flows
Flow volumes small and sporadic
Coming:
Stable, selective supply chain relationships
Few suppliers/customer flows
(Reliable suppliers, Loyal customers)
Large, steady flow volumes
Geographic proximity
(Schonberger, World Class Manufacturing: The Next Decade, 1996)
Supply Chains
Conceptual Frameworks Relationship +
Speedy e-Service Communication +
Network Design, Control &
Management
Supply Chain Control
Static
Dynamic
Unique
Items
Li & Fung
Common
Items
Covisint
Relationship
(MD850, 2001) Relationship +
Speedy e-Service Communication
Supply Chains
Conceptual Frameworks
 Business 2.0, Kalakota & Robinson, 2001
 First Generation: Communities, Storefronts, and
RFP/RFQ Facilitators
 Second Generation: Virtual Distributors and Auction
Hubs
 Third Generation: Collaborative Trading Hubs

end-to-end management of their supply chains
 Industry Consortiums: Joint-Venture Procurement
Hubs


Covisint -- automotives
Orbitz.com -- airlines
Supply Chains
Conceptual Frameworks
Process Control
Service-Product
Static
Dynamic
Static;
Dynamic;
Mechanization Intelligence
Niche
Need
Unique
Items
Broad
Need
Common
Items
Supply Chain Control
Static
Unique
Items
Common
Items
Dynamic
Services
Goods
e-Service
49 = 262,144
possible
design
positions
Digital
Content
Guiding Principles
Supply Chain
Some Guiding Principles
 Align (a la 3-D Concurrent Engineering)
 Product
 Process
 Supply Chain
Reasonable Question: Yes, but how?
Conceptual Supply Chain
Modeling and Evaluation
Supply Chains
Supply Chain Structures
 e-Fulfillment
 Step #1: Model Supply Chain Process
 Example: Furniture Industry
Traditional Furniture Supply Chain
Manufacturing
Ship to Retail
Repair Damage
Inventory at Retail
Local Shipping
Assembly at Home
Supply Chains
Supply Chain Structures
Pure e-Tailer Furniture Supply Chain
Manufacturing
Long Distance Shipping
Local Shipping
Assembly at Home
Repair Damage
Pure e-Tailers with Warehouses Furniture Supply Chain
Manufacturing
Ship to Warehouse
Repair Damage
Inventory at Warehouse
Local Shipping
Assembly in Home
Supply Chains
Supply Chain Structures
Manufacturer Direct Furniture Supply Chain
Manufacturing
Long Distance Shipping
Local Shipping
Assembly at Home
Repair Damage
Retailers On The Web Furniture Supply Chain
Manufacturing
Ship to Retail
Repair Damage
Inventory at Retail
Local Shipping
Assembly at Home
Supply Chains
Supply Chain Evaluation
 e-Fulfillment
 Step #2: Back to the Basics (Cost, Quality,
Flexibility, Delivery)

Analyze supply chain characteristics -- basic operations
strategies -- based on knowledge of product and process
characteristics in that industry
 3-D

Concurrent Engineering
Determine if there exists a dominant strategic position
compared to existing position(s) of incumbents …
 (Cdom, Qdom, Fdom, Ddom) “better than” (Cx, Qx, Fx, Dx) for all
design positions X
Supply Chains
Possibly
Better
Supply Chain Evaluation
Possibly
Worse
 e-Fulfillment
 Furniture Industry
Relative
Cost of
Returns
Cost of
Shipping
Cost of
Order
Capture
Cost of
Inventory
Cost of
Repair
Cost of
Quality
Traditional
Retailer
L
M
L
L
H
L
Pure
e-Tailer
H
L
H
H
M
H
e-Tailer
w/ Warehouse
H
M
M
M
M
M
Retailer
on the Web
L
M
L
L
H
M
Supply Chain Management
Technology
Background
Supply Chain Management Technology
Procurement
long-term
Production
Distribution
Sales
Strategic Network Planning
mid-term
Master Planning
Demand
Planning
Material
Requirements
Planning
short-term
Production
Planning
Scheduling
Distribution
Planning
Transport
Planning
Demand
Fulfillment &
Available-toPromise
Advanced
Planning
System
(APS)
Software
Modules
Background
Supply Chain Management Technology
Procurement
Production
Distribution
Sales
Strategic Network Planning
Configuration
Purchasing
Quantities
Material
Requirements
Planning
Simulation Results
Master Planning
Capacity Booking Capacity Booking
Dist’n Quant./Alloc.
Stock Levels
Lot Sizes
Production
Planning
Lot-Sizes
Scheduling
Demand
Planning
Forecast
Distribution
Planning
Tranportation
Demand
Quantity/Modes Fulfillment & ATP
Transport Current Orders
Planning
Due Dates
Forecast
Due Dates
Supply
Coordination
and Data
Flows of APS
Modules
Supply Chain e-Services
Technology
 SCM Technologies
 J2EE Technologies
 SAP re-tooled all of its applications to support the J2EE
protocol, in addition to its own ABAP technology standards
 Many examples of using Java for enhanced SCM
 .NET Technology
 Doesn’t support multiple platforms, which will be difficult
for integration of supply chain
 Supply chain vendors have been trying to convince
Microsoft to support J2EE, so they could easily integrate
enterprise SCM to the desktop, but Microsoft has refused
Supply Chain e-Services
Technology
 SCM Technologies
 OpenAdaptor.org





open source supply chain integration system, made opensource on 1/30/2001
originally developed for financial services
developed by investment bank Dresdner Kleinwort
Wasserstein (DrKW)
already used in global integration 40 projects by DrKW
“allows the rapid, simple and often code-free integration of
any system to any other system, enabling the complete
supply chain, plus internal systems, to be integrated while
allowing access to the web”
SCM Perspective on Li & Fung
Case Study
SCM Perspective
Li & Fung
 Sourcing Characteristics
 Seasons


Past: 2-4
Now: 6-7 … “fast clockspeed”?
 Customers


Past: potentially many, but very slow deals, as translation
was the service
Now: 350 big customers, potentially 22,800 SMEs might be
added
 Suppliers


Past: relatively few
Now: 7500 suppliers, 26 countries … more than 1 million
workers engaged on their behalf (assuming 200/plant)
SCM Perspective
Li & Fung
Supply Chain Control
Static
1910 Interpreter
Margin=15% Unique
Items
Common
Items
Broker
Margin=10, 5, then 3%
1970s: Regional
Sourcing Agent
Dynamic
Present Li & Fung
Margin = 6-8% softgoods
10-30% hardgoods,
function of sourcing
complexity
Breaking up Value Chain
Dispersed Manufacturing
Rational Kitting of Parts
1980s: Delivering
Manufacturing Programs
SCM Perspective
Li & Fung
The Process
Front End
Design
Engineering
Production
Planning
The Goods and Related Services
Back End
Softgoods
Hardgoods
Textiles USA
Toys
Accessories
Festive Items
Furnishings
Handicrafts
Home
Travel Goods
Sporting Goods
Textiles ROW
Raw Material and Component Sourcing
Quality Control
Testing
Logistics
Managing Production
SCM Perspective
Li & Fung
Communications
“Sense”
Li & Fung
Client
Design
Materials Sourcing
Factories
“Respond”
Quality Control
Logistics
SCM Perspective
Li & Fung
“Operational
Support
System”
Li & Fung
Client
Design
Materials Sourcing
Factories
Quality Control
Logistics
SCM Perspective
Li & Fung
Retail Price $4
Client
Design
Materials Sourcing
Margin to Share = $3
Li & Fung
Factories
Quality Control
Cost: $1
Logistics
SCM Perspective
Transaction Fee %
Covisint
Margin (Ford, GM) = $3,000
Retail Price $19,000
Ford, GM, et al.
Design
Materials Sourcing
Tier 1 Only
Covisint
Factories Quality Control
Tier 1 Only
Cost: $16,000?
Logistics
Tier 1 Only
Summary
 Conceptual supply chain frameworks
 Fine: Two supply chain “periods” within an industry
 Fine: 3-D engineering of product, process, supplychain
 Guiding principle: link up service-product,
service-process, service supply chain
 Very complex task
 3 product components, 3 process components, 3
supply chain types … all must work together
 Many different supply chain models
Summary
 Evaluation can initially (subjectively) be done
based on standard operations strategies/metrics




Cost
Quality
Flexibility
Delivery
 Thorough analysis and management of supply
chains will involve hefty mathematics/OR models