Market and Supply Chain
COSC 643
Sungchul Hong
Goal
• Understand market functions and types.
• Study some electronically linked business
types.
• Business process.
• Value chain.
• Supply chain.
• Types of e-commerce.
Supply and Demand
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Supply
Demand
Price
Quantity
Demand
supply
Price
Quantity
Search Cost
• The business cost which is related to finding
a trading partner, doing negotiation, and
making contract.
Initial Investment & Marginal
Cost
• The marginal cost is the addition to total
cost.
Types of Market
• direct search markets
– Search, negotiation costs
• brokered markets
– Information about potential sellers and buyers
– Information service
• dealer markets
– Dealer quote, bid-ask spread.
• auction markets
– Market quote and no bid-ask spread
Direct Search Markets
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No price information.
Limitation on search.
High search cost.
The trading price could be biased.
Brokered Markets
• Intermediaries (Brokers)
• Economies of scale (trading volume)
– Economical use of equipment
– Information (connection)
• Potential trader, fair price
• Charge commission (less than direct search)
Dealer Markets
• They have their won bid, offer, quotations,
and inventory.
• Guaranteed immediate transaction. (no price
risk)
• Bid-ask spread (buy low and sell high)
Auction Markets
• They have centralized procedures for both
buyers and sellers.
• Need efficient trading volume
• Continuous auction market.
• Periodic auction market.
• Immediate transaction
• No bid-ask spread
System, Business, and IT
• Businesses operate through systems in
which people perform business processes
using technology and information.
• Business professionals participate in all the
major phases of building and maintaining
these systems, and therefore need
knowledge and skills necessary for effective
participation.
System, Business, and IT
• Advances in IT have been and continue to
be a driving force in business innovation in
general and e-business in particular.
• The success of IT-enabled systems is in no
way guaranteed even when the latest
technology is used.
Coordination Cost
• Coordination costs are composed of costs of
gathering information, negotiation contracts,
and protecting against the risk of
opportunistic bargaining.
Coordination Cost Application
• Complex product description
– Flower, Auto parts
• Simple product description
– TV, Car
• Physical characteristics
– Bricks
Markets and Hierarchies
• Markets coordinate the flow through supply
and demand and external transactions
between different individuals and firms.
• Hierarchies coordinate the flow of material
through adjacent steps by controlling and
directing it at a higher level in the
managerial hierarchy.
Coordination of Market
• In markets, a buyer can compare goods from
different possible suppliers.
• He can choose the best combination of
characteristics of goods.
• The market coordination costs associated with
these markets are relatively high because the buyer
must gather and analyze information form a
variety of sellers.
Coordination of Hierarchy
• The hierarchies, however, reduces
coordination costs over the markets by
eliminating the buyer’s need to gather and
analyze the information about different
suppliers.
markets
Low
hierarchies
Coordination
Cost
High
Business Systems
• Businesses operate through systems and the
systems are composed of subsystems.
• A system has its purpose, boundary,
environment, inputs and outputs.
Business Process
• A business process is a related group of
steps or activities in which people use
information and other resources to create
value for internal or external customers.
• This process has time, space, input, output,
begging and end.
Sub Process
• Sub processes are parts of a process that are
processes in their own right of process.
Process
Value Adding
• A process’s value added is the amount of value it
creates for its internal or external customer.
• At Dell Computer, the process “ assemble a
computer” starts with the computer’s component
parts and ends with a completely assembled
computer.
– The value added is the difference between the value of
the components and the value of the assembled
computer.
Coordinating Business Processes
• Creating a new product
• Creating a coordinated plan for an entire
business
• Fulfilling customer orders
Typical Functional Areas
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Engineering
Sales and Marketing
Production
Accounting and Finance
Human Resources
Value Chain
• The set of processes a firm uses to create value for
its customers is often called its value chain.
• The value chain includes primary processes that
directly create the value the firm’s customer
perceives and support processes that add value
indirectly by making it easier for others to perform
the primary processes.
Value Activities and Value Chain
• A company must engage in multiple activities in
order to perform its business.
• Each activity is a process called “value activity”
• A company’s “value chain” is a network of value
activities, which are connected by links that
describe relationships among value activities in
the value chain, such as cost or effectiveness
Example (a hypothetical restaurant)
Purchase
Food
Store Food
Cook Food
Create Bill
Seat
Customers
Take
Orders
Serve food
Receive
Payment
IT and Value-Chain
• New information technology contribute to
close integration of adjacent steps on the
value-added chain through the electronic
markets and electronic hierarchies.
Case 1 (Dell)
• Traditionally pc manufactures produce computers based
on demand estimation.
• Those manufactures made contract with distributors
that sold the computers to individuals or businesses.
• Dell eliminates middleman’s charges and risk of large
inventories by taking orders directly from the customers
and building computers according to the customer’s
specification.
• Dell uses electronic links to its suppliers that tell them
exactly when the parts are needed. And Dell also uses
outsourcing efficiently.
Types of Information Systems
• Supply Chain Systems
• Material requirement planning (MRP)
systems
• Electronic data interchange (EDI) system
• Supply Chain Management (SCM)
Supply Chain Systems
• Regardless of whether the firm is a
manufacturer or a retailer, its supply chain
for raw materials and components should
assure reliable, low-cost acquisition of
whatever it needs.
Supply Chain Systems
• Determine material requirements for future weeks
or months
– Information flow
– Material flow
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Generate new orders
Send the orders to suppliers
Obtain commitment dates for likely receipt.
Verify that the ordered material actually arrived.
MRP (Material requirement
planning )
• This system is attempted to integrate
purchasing and production activities
EDI
• EDI system connects large companies and
their suppliers electronically.
• Electronic data transmission is virtually
instantaneous, the supplier’s information
system can check for availability and
respond quickly with a confirmation.
SCM (Supply Chain
Management)
• SCM goes beyond automating data transfers.
• It is the overall system of coordinating
closely withy suppliers so that both the firm
and its suppliers reap the benefits of smaller
inventories, smoother production, and less
waste.
HW#1
• Select an e-business company (e.g. Dell)
• Draw a supply chain diagram of this company.
– You need to justify the structure of the chain.
• Analyze whether this company’s supply chain is
suitable for a market or a hierarchy.
• Analyze the advantages of e-business in this
company.
• Discuss the problem of a market type e-business
supply-chain.