PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
Supply Chain Information
Systems and Electronic
Commerce
Chapter 18
CENGAGE LEARNING
Monczka – Handfield – Giunipero – Patterson
Chapter Overview
 Evolution of e-SCM systems
 An overview of the e-supply chain
 Drivers of new supply chain systems
and applications
 Enterprise resource planning systems
 Purchasing databases and data
warehouses
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Chapter Overview
 Technology for electronic
communication between buyers and
sellers
 E-sourcing suites
 E-sourcing basics
 Supplier relationship management
 E-sourcing and supply: fully integrated
systems
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The Electronic Revolution in SCM
 Continued growth in web-based supply
chain tools and solutions
 Greater sophistication in e-SCM system
expenditures
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Fewer software providers
Increasing capabilities
Shorter project implementation life cycles
Improved pricing and terms
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Evolving e-SCM Tools
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Point-of-sale systems
RFID
Product life cycle software
Bid optimization
Computerized negotiation models
E-mobile environment (laptops, PDAs,
and smart cell phones)
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Supply Chain Information Flows
 Record and retrieve critical data
 Execute and control physical and
monetary flows
 Automate routine decisions
 Support planning activities
 Support higher-level tactical and
strategic decision making
 Move and share information cross
firms and between users
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Decision Making
CRM
Internal
SCM
SRM
Strategic Decision Making
Supply Chain Planning
Tactical Decision Making
Routine Decision Making
Transaction Processing
7
Transaction Processing
 Information flows record and retrieve
critical data
 Execute and control physical and
monetary flows
 Little or no human intervention
 Bar code system to track location
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Routine Decision Making
 Oftentimes automated
 Exceptions dealt with manually
 Automated inventory management
systems
 Order quantities
 Reorder points
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Supply Chain Planning
 Decide on technologies for next
generation of products or services
 Identify supply base requirements
 Forecasted demand
 Production decisions
 Projected cash flows
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Strategic Decision Making
 Search for data patterns or
relationships
 Customer segment analysis
 Product life cycle forecasting
 “What if” analyses
 Need for flexibility for data
manipulation and presentation
 Decision support systems (DSS)
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SCM Systems Map
Strategic
Decision
Making
Supply
Chain
Planning
Supplier
Relationship
Management
(SRM)
Applications
Tactical
Decision
Making
Decision
Support
Systems (DSS)
Network
Design
Customer
Relationship
Management
(CRM)
Applications
Enterprise
Resource
Planning
(ERP)
Applications
Routine
Decision
Making
Warehouse
Management
and
Transportation
Execution
Transaction
Processing
Suppliers
Internal
Supply Chain
Warehouse
and
Transportation
Planning
Customers
Logistics
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Enterprise Resource Planning
 Large, dedicated business transaction
processing and reporting systems
 Integrates all classic business
functions together
 Uses common database
 Best for routine decision making and
transaction processing
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ERP System Overview
Finance
Accounting
Finance
Sales
Operations
Purchasing
Central
Database
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SRM/CRM Applications
SRM Applications
 Design
collaboration
 Sourcing decisions
 Negotiations
 Buy process
 Supply
collaboration
CRM Applications
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Market analysis
Sell process
Order management
Call and service
center management
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Network Design Applications
 Where should we locate warehouses?
 How large should our transportation
fleet be?
 Based on simulation and optimization
modeling
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Transportation - Warehouse Planning
 Used to allocate fixed logistics capacity
 How many units should we ship from
each warehouse to each demand
point?
 Optimization modeling based on
warehouse capacities, customer demand
levels, and shipping costs
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Execution Systems
 Kick off and control movement of
materials between supply chain
partners
 Where to store
 Where to go pick items up
 How many to pick
 Bar code systems
 Global positioning systems
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Drivers of New SCM Systems
 Internal and external strategic
integration
 Globalization and communication
 Data information management
 New business processes
 Replacement of legacy systems
 Strategic cost management
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Strategic Integration
 Internal
 Use of common information between
various sites and functional areas
 Enterprise resource planning systems
 External
 Need to link suppliers, distributors, and
customers
 Forecast demand
 Balance supply and demand
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Globalization and Communication
 Differing cultures and geographies
 Need to:
 Manage global customers and suppliers
 Calculate total global logistics costs
 Increase leverage and component
standardization
 Improve communication of global
strategies
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Data Information Management
 New IS technologies (servers, wireless
applications, and telecommunication)
 Need to effectively filter, analyze, and
mine huge amounts of data to support
managerial decision making
 Data warehouse systems
 Decision support systems
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New Business Processes
 Constantly evolving and changing
technologies
 Reduce redundancies, delays, and
waste
 Need to create a rapid response
capability to adapt to changing
customer needs and controlling costs
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Replacement of Legacy Systems
 Need to replace existing piecemeal
chains of unlinked data systems
 Eliminate hardware and software
incompatibilities and allow real time,
fluid communication
 Computer networking
 Telecommunications
 Web-based applications
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Strategic Cost Management
 High volume of transactions to deal
with
 Need to automate data capture in a
single enterprise-wide data warehouse
accessible to all users
 Timely and accurate information
replaces inventory investments
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ERP Systems
 Integrated transaction processing and
reporting system
 Tracks organizational resources,
including people, processes, and
technology
 Creates a process logic for functional
interaction
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An ERP System Example
Financial and Resource Controlling
Customer
contact
Sales
order
Inventory
sourcing
Delivery
Customer
billing
Customer
payment
Sales order
planning
MPS
MRP
Planned
order
Production
order
Shop floor
control
Requisition
Supplier
selection
PO
Goods
receipt
Invoice
verification
Supplier
payment
Logistics Controlling – Warehouse, Transportation
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Basic Business Processes
Selling a product
or service
Customer order management process
Making a product
Production planning and execution
process
Buying a product
Procurement process
Costing, paying
the bills, collecting
Financial / management accounting
and reporting process
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ERP and Basic Business Processes
 Adopting a single customer, product,
and supplier database
 One master record with multiple views
 Common database
 Information is captured only once in
real time
 Highly visible transactions
 Linked with the work flow
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Implementing ERP Systems
 Create a process map for every major
process
 May need to reengineer processes prior
to ERP to remove non-value-adding
steps
 Could result in major organizational
and culture change
 Need for well-defined processes before
implementing
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Implementation Steps
1. Define the current process as is
2. Define what the best-in-class business
process should be
3. Develop the system
4. Work through all final bugs and then
flip the switch
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ERP Implementation Cycle
Discovery
Design
System
build-out
Testing
Training
Cutover
Postcutover
support
Source: Premier International, Chicago
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Purchasing Databases
 An integrated collection of computer
files capable of storing operational data
essential for managing a department
 Minimal overlapping of information
between files
 Allows different systems to use data
contained in the database
 Efficient cross-referencing of data
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Purchasing Data Warehouses
 Type of decision support tool for
collecting data from different resources
and making it available to end users in
a consolidated, consistent manner
 Combines data all in one place
 Maintained separately from the
production system database
 Organized around informational
subjects rather than by process
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Purchasing Data Warehouses
 Data is fed from multiple production
databases
 Time-dependent, historical data
 Oftentimes aggregated
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Purchasing Database Examples
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Part files
Supplier name and address files
Historical usage files
Open-order and past-due files
Bill-of-material files
Engineering requirements files
Forecasted demand files
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Communication Technology
 Electronic data interchange (EDI)
 Standard form (EDI standards)
 Translation capability (EDI software)
 Mail service (EDI network)
 EDI and the Internet
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An Ideal EDI Transaction
1. Buyer’s computer monitors real-time
inventory status
2. If replenishment needed, application
program notifies translation software
3. EDI P.O. is created and released
against pre-negotiated blanket order
4. Supplier’s computer receives order
and translates into local format
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An Ideal EDI Transaction
5. Functional acknowledgement is
automatically generated and sent to
buyer
6. EDI P.O. creates additional electronic
transactions
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Buyer’s accounts payable application
Buyer’s receiving file
Supplier’s warehouse or factory file
Supplier’s invoice file
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An Ideal EDI Transaction
7. When order is filled at supplier,
advance shipping notice is created
and transmitted to buyer
8. Upon receipt of goods, actual shipping
notice is entered into receipt file
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An Ideal EDI Transaction
9. Receipt notice is transmitted to
buyer’s accounts payable application
and to supplier’s invoicing system
10. Invoice received by buyer is
translated into buyer’s format and
invoice, receiving notice, and P.O. are
reconciled in a three-way match
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An Ideal EDI Transaction
11. Payment authorization is generated
and transmitted to accounts payable,
and payment is sent to supplier
electronically
12. Electronic remittance notice is sent to
supplier, and buyer is credited for
payment
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EDI and the Internet
 Traditional EDI:
 Often requires a major investment due to
application-specific technology
 Also requires payment of fees to VAN
providers
 Different EDI standards
 Different customers have different EDI
systems
 Not considered interactive
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Virtual Private Network
 Similar to a VAN but at much lower cost
 Hosted on a third party’s website and
server
 Involves tunneling protocols for security
 May require a T1 line for large volumes
of data
 Typically requires a common ERP
platform at each end
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Internet-Based EDI
Internet
Virtual Private Network
Local ISP
Router at HQ
Remote Client
Corporate HQ – Local LAN
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E-Sourcing Basics
 Sell-side systems
 Contain products or services from one or
more suppliers
 Buy-side systems
 Controlled by buyers and tied into their
intranets and extranets
 Third-party marketplaces
 Facilitate electronic purchasing process
without buying or selling
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Sell-Side Systems
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Typically free registration to users
Supplier guarantees site security
No investment by buyer
Ease of access to many suppliers
Inability to track expenditures or to
control expenditures
 Offer varying degrees of security
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Buy-Side Systems
 May be either self-designed or provided
by e-sourcing suite suppliers
 Allow supply manager to manage the
sourcing cycle, track spend, and exert
control of contract management
 Requires initial investment and periodic
updates
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Third-Party Marketplaces
 Independent firms who neither buy nor
sell goods and services
 Vertical portals
 Narrow range of commodities
 Horizontal portals
 Broader range goods or services
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SRM Systems
 Focused on decision support around a
broad group of transactions
 Using both data and structured
mathematical modeling
 Interactive system to assist in:
 Supplier selection
 Contract management
 Contract compliance
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Characteristics of SRM Systems
 Spend analysis
 Sourcing
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RFQ processing
Reverse auctions
Bid optimization
Negotiation and total
cost support
 P.O. issuance
 Receiving and
inspection
 Contract
management and
compliance
 Supplier
performance
measurement and
control
 Total cost reporting
 Price forecasting
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Spend Analysis
 Determination of the dollar amount and
volume of expenditures
 What goods and services purchased
 Which suppliers purchased from
 Where internal demand originates
 Spending reduction
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Spending Reduction
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Consolidation of similar purchases
Reduction in the number of suppliers
Reduction of maverick spend
Reduction of spend by other departments
Increased use of more efficient
contracting methods
 Development of methods to reduce risk
and increase supply assurance
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Spend Analysis Data
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Minimum of one year of spend data
Develop similar categories of spend
Assign spend to the categories
Develop appropriate spend strategies
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Request for Quotation
 A request to submit a proposal based
on a set of specifications provided by a
buyer
 Also known as the eRFx module
 Request for information (RFI)
 Request for proposal (RFP)
 Request for quotation (RFQ)
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Reverse Auctions
 Electronics processes where multiple
sellers vie for the business of a single
buyer
 Results in price reductions
 Regular reverse auctions vs. rank
reverse auctions
 Can often alienate suppliers by focus
on price only
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Steps in a Reverse Auction
 Buyer decides which commodities are
to be considered for a reverse auction
 Suppliers are initially evaluated and
invited to participate
 Buyer writes RFQ and sends to all
qualified suppliers
 Bidding process is conducted
 Buyer analyzes results and rewards
business to chosen supplier
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How to Conduct a Reverse Auction
 Self-service
 Full-service third party provider
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Selection of commodity
Supplier qualification
Provide training
Conducts auction
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Reverse Auctions
 Buyer-initiated bidding event
 Utilizes electronic software that allows
price or rank visibility to sellers
 Secure, online environment within a
specified timeframe
 Goal is rational market price for the
chosen commodity
 Reduces bidding time
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Concerns of Reverse Auctions
 Price reductions without regard to
existing or future relationship
 May breed mistrust or lack of
cooperation
 Realized price reductions may
decrease over time
 Tactical, not strategic in nature
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Phases of A Reverse Auction
 Before the reverse auction
 Determine strategic importance of
relationship
 Importance of price vs. other variables
 Offer phase
 Explaining the rules
 Execution phase
 Select appropriate form of contract
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Considerations in Reverse Auctions
 Price – most controversial
 Strategic importance of relationship
 Tradeoff between price and opportunity
cost of not choosing suppliers who can
contribute in non-price areas
 Market-based (bid-and-buy) approach
vs. need for relationship and
cooperation
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E-Bid Optimization
 Permits suppliers to configure bids in
any number of alternative ways
 Flexible bidding or expressive bidding
 Increases buyer’s ability to analyze and
review bids optimally
 Uses mathematical algorithms in
evaluating different supply and cost
scenarios
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Estimating Total Costs
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Shipping
Freight
Duties
Imports and tariffs
Inventory costs
Quality costs
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Contract Management / Compliance
 Oversight of the back end of the
sourcing process
 Ensure that suppliers and users are in
compliance with contract terms
 Other considerations
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Other Considerations
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Price compliance
Changes in terms
Volume discount thresholds
Payment schedules
Due dates
Contingencies for nonperformance
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Performance Measurement
 Visibility to open-item status
 Measures and analyzes supplier
performance
 Use of electronic scorecards
 Automatic inquiry of item status
 Monitoring of order due dates
 Analysis of supplier performance
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Performance Measurement
 Capability to monitor planned receipts
against due dates
 Provide immediate visibility to past-due
items
 Flag those items likely to become past
due
 Generate summary reports and
compare to predetermined criteria
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Benefits of Measurement
 Input into supplier selection
considering total cost, not just price
 Isolating supplier process
inefficiencies
 Improving total cycle times
 Providing suppliers with reliable
feedback on historical performance
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Total Cost Reporting
 Generate timely management reports
 Provide visibility to entire materials
process
 Use of data warehouses
 Frequency of reporting
 Real-time updating
 Data buckets
 Batch updating
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Price Forecasting
 Length of item’s product life cycle
 Current life cycle phase
 Item’s price history
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Integrated E-Sourcing and Supply
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ERP systems
Sourcing strategy module
Supply chain planning module
Distribution planning module
Demand planning module
Supplier collaboration module
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Information Visibility
 Sharing critical data required to
manage the flow of products, services,
and information in real time between
suppliers and customers
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Share forecasts
Manage inventories
Schedule labor
Optimize deliveries
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Benefits of Information Visibility
 Suppliers are aware of buyer’s needs in
a timely manner
 Buyer is assured that shipments are
received on time, every tome
 Allows problems to become more
visible earlier
 Improved processes
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Benefits of Information Visibility
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Breaks down organization barriers
Builds in supply chain visibility
Manages by metrics
Reduces decision cycle time
Encourages decision making
collaboration
 Reduces opportunity and problem
resolution latency
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