Supply Chains and
Electronic Commerce:
Partners in the Digital Age
© Arthur Geoffrion
The Anderson School, UCLA
October 16, 1999
With special thanks to Clark Chang, Alex Duffy,
Chae Hong, Cornelia Marsh, Max Moroz, and Noëlle Triaureau
1
To those who were not there:
These slides are on-line mainly for reference by those who
were at my talk. Since some non-attending invitees may access
them also, however, I’m adding a small amount of commentary
in extra slides such as this one to explain some of the biggest
logical gaps to those who are trying to follow the slide
show without the benefit of having heard it live.
Please remember to use the Slide Show (full screen) view, and
to have the two sound clips in the same folder. Then you’ll get
full sound, animation, and no distraction by hidden slides.
Next come a few slides that explain why I had to give the
talk sitting down on 10/16/99. While I was at it, I took a swipe
at my HMO.
To those who were not there:
Before giving the traditional outline of the talk, I establish
some basic vocabulary and concepts for my two topics:
supply chains and e-commerce.
The next slide reproduces a painting by Pieter Brueghel
to suggest how complex supply chains have become.
Then comes a simple diagrammatic view of supply chains
and some discussion about some of the undiagrammed
complexity that it hides.
1a
Typical Supply Chain
(Consumer Packaged Goods) Manufacturer
Suppliers
2
Manufacturer
Warehouses
Retailers
Consumers
Supplier Detail
Chrysler
General
Motors
Ford
Johnson Controls
Hardware Suppliers
Soft Trim Suppliers
Excel/Atwood
2a
Lear Favesa
Douglas &
Lomason
R. R. Spring
Collins &
Aikman
Milliken &
Company
Specialty Screw
Textileather
Technotrim
Canadian Fab
Source: John Kay, Chrysler
Rockford Spring
Dudek &
Bock Spring
Typical Supply Chain
Material
Funds
Information
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
2.1
Retailers
Consumers
Definitions of Supply Chain Management
• D. Simchi-Levi, P. Kaminsky, and E. Simchi-Levi, Designing
and Managing the Supply Chain, McGraw Hill 1999:
… a set of approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses and stores, so that merchandise is
produced and distributed in the right quantities, to the right
locations, and at the right time, in order to minimize system-wide
costs while satisfying service level requirements.
• Council of Logistics Management:
…the process of planning, implementing and controlling the
efficient, cost-effective flow and storage of raw materials, inprocess inventories, finished goods, and related information from
point-of-origin to point-of-consumption for the purpose of
conforming to customer requirements.
2aa
Slide 2bhttp://www.geog.ucl.ac.uk/casa/martin/atlas/hackers.jpg
Source:
Electronic Commerce
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
3
Retailers
Consumers
Business to Consumer E-Commerce
B2C
Suppliers
Manufacturer
Warehouses
Retailers
Channel & Trading Partners
Internet plays
significant role
3.1
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
Consumers
Business to Business E-Commerce
B2B
Suppliers
Manufacturer
B2C
Warehouses
Retailers
Channel & Trading Partners
Internet plays
significant role
3.2
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
Consumers
Extranet
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
Internet Technology
3.3
Retailers
Consumers
Extranet
Intranet
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
Internet Technology
3.4
Retailers
Consumers
Extranet
Internet
Intranet
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
3.5
Retailers
Consumers
TCP/IP over packetswitched networks
Supply Chain Costs
Fed. + State + Local Gov.
Retail Trade
Health
Radio & TV
0
1 Trillion
1997 GDP Share (U.S.)
• Top Management Visibility
• Crucial for E-Commerce
4
• Business Week, NY Times, Red Herring, WSJ,...
• The Markets
BILLIONS
1400
1200
1000
Business to
Consumer
Business to
Business Goods
800
600
400
200
0
1998 1999 2000 2001 2002 2003
Source: Forrester Research
5
Internet/E-Commerce Reshaping Supply Chains
• Growing Internet markets
• Dematerialization
• Unprecedented customer expectations
Supply Chains Crucial for E-Commerce
• Fulfillment
• Customers demand sophisticated SC’s
• Slim margins demand SC efficiency
6
Outline
7
II. Strategic SC Design
• 30-year perspective
III. Internet & EC
• 30-year perspective
IV. Fusion
• 5 major EC trends
challenging supply chains
• Meeting EC challenges
to strategic SC design
V. Coda
• The future
• Management challenges
• These slides & more
Collegial Briefing
• Broadly accessible
• Demonstrative
• Rich in context (historical, institutional)
• Major trends & emerging developments
• Personal
• Entertaining
• Take-aways
8
II. Strategic Supply Chain Design:
30 Year Odyssey
Personal Journey
Math programming theory
Similar projects
Hunt-Wesson project
DOD Study
Insight, Inc. + Research fallout
Evolution of Strategic SC Design: 1970
1.
2.
3.
4.
5.
6.
II.20
2000
Logistics as a corporate function
Information technology
Solution techniques
Data development & management
Model features & software capabilities
How companies actually use SC design software
II. Strategic Supply Chain Design:
30 Year Odyssey
Personal Journey
Math programming theory
Similar projects
Hunt-Wesson project
DOD Study
Insight, Inc. + Research fallout
Evolution of Strategic SC Design: 1970
20A
2000
Hunt-Wesson Problem
Inbound
SOURCES
Transportation
Links
CANDIDATE
DISTRIBUTION CENTERS
(DCs)
Outbound
Transportation
Links
CUSTOMER
GROUPS
Direct Transportation Links
SUPPLY DATA
(1) List of Products (really product groups)
(2) List of Sources
*(3) Annual Supply Limits, CWT/yr
(source × prod)
*(4) Unit Supply Costs, $/ CWT (source × prod)
CUSTOMER DATA
(9) List of Customer Groups
(10) Cust Demands, CWT/yr (group × prod)
(11) Single-source Product Bundles (a customer
group must receive all prod in a given bundle
from one DC)
*(12) Net Selling Prices, $/CWT (cust group ×
prod)
DC DATA
(5) List of Candidate DCs and their missions
*(6) Min and Max Allowable Annual Throughput
Volume for Each DC, CWT/yr
-- throughput volume can be weighted by prod
(7) Fixed Cost for each DC, $/yr
(8) Variable Costs, $/CWT (DC × prod)
TRANSPORTATION DATA
(13) List of Permissible Inbound Links and
Freight Rates, $/CWT (prod × source × DC)
(14) List of Permissible Outbound Links and
Freight Rates, $/CWT (prod × DC × cust group)
(15) List of Permissible Direct Links and
Freight Rates, $/CWT (prod × link)
*Asterisk data optional
21
Benders Decomposition
Upper Bound
MASTER PROBLEM
(configuration generator)
Lower Bound
Configuration
TOTAL
SYSTEM
COST
Evaluation &
Byproduct Info
TRANSPORTATION SUBPROBLEMS
(configuration evaluator)
Find best flows for
first product
22
Find best flows for
second product
Find best flows for
last product
II. Strategic Supply Chain Design:
30 Year Odyssey
Personal Journey
Math programming theory
Similar projects
Hunt-Wesson project
DOD Study
Insight, Inc. + Research fallout
Lagrangean relaxation, approximation theory,
aggregation theory, Structured Modeling, ...
Evolution of Strategic SC Design: 1970
20A1
2000
To those who were not there:
The previous few slides illustrated parts of my personal
experiences with strategic supply chain design. Most
of the account was verbal.
The rest of Part II explains how this area has evolved
during the past 30 years, but I only had time to discuss
the third evolutionary dimension.
20a1a
II. Strategic Supply Chain Design:
30 Year Odyssey
Personal Journey
Evolution of Strategic SC Design: 1970
2000
1. Logistics as a corporate function
2. Information technology
3. Solution techniques
4. Data development & management
5. Model features & software capabilities
6. How companies actually use SC design software
20B
1. Evolution of Logistics as a Corporate Function
• Dramatic elevation within corp. hierarchy
CEO
VP Finance
VP Mfg.
VP Logistics
• Expanding responsibilities: Logistics
Supply Chain Management
1
3
Suppliers
4
2
2
Manufacturer
1
1
Warehouses
4
3
Retailers
1
1
23
1
3
Consumers
4
2. Evolution of IT
ftp rtfm.mit.edu
cd pub/usenet/news.answers/fax-faq
get part1
quit
You can’t fight a sea change in user expectations.
23.5
3. Evolution of Solution Techniques
Cost calculators, heuristics, LP, Mixed Integer LP (pre-1970)
Benders decomposition specialized (1971)
Primal network simplex (early 1970s)
LP factorization (1970s)
Incremental improvements amazing (1970s
1999)
Strategic supply chain design
problems are well-solved by the
best of today’s specialized software.
8-15% cost reduction + service improvement
24
AC : 30+ x $50M
“Optimization” all the rage,
but…obsolete non-optimizing
methods still widely used!
• Managers can’t or don’t discriminate
-- Misleading claims by vendors
-- Computer graphics seduce
25
25a
Source: Insight, Inc.
25b
Source: CAPS Logistics
25c
Source: Insight, Inc.
“We bought a system because it had
the best graphics--now we don’t even
use the graphics except for
demonstrations to visiting firemen.
We sacrificed solution quality to have
nice graphics”
Systems Manager
Oil Company
25d
“We have been down the graphics path.
We are now much more concerned with
good solutions. There has been far too
much emphasis on pretty displays of bad
answers. Get us the substance -- we’ll
worry about how to make it look nice.”
Senior VP
Consumer products company
25e
“Optimization” all the rage,
but…obsolete non-optimizing
methods still widely used!
• Managers can’t or don’t discriminate
-- Misleading claims by vendors
-- Maps seduce
Challenge to B-Schools
26
Slide 26a
4. Evolution of Data Development
& Management Tools
Data
TOTAL PROJECT EFFORT
and software code
28
Data development just one phase in life
cycle of a strategic SC design study
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
28.2
Recognize opportunity for improvement
Analyze study requirements, negotiate charter
Finalize model structure, organize study team, make detailed study plan
Develop and verify data
Prepare solver, customize as necessary
Verify and validate the instantiated model & solver
Do optimization runs
Analyze results
Report and explain findings & conclusions
Document data development, model, solver, analysis
Maintain, update, improve
Re-evaluate everything periodically, terminate or transition when appropriate
MASSES OF SUPPLY CHAIN DATA
Demand
forecast
Past sales
Materials
BOM
Packaging
Inventories
Production
capacities
Transportation
Warehousing
Duty Rates
COMPUTER
MODEL
28.3
Labor
TYPES OF DATA NEEDED
A. Product/Part Data
1. Product Name/Description
2. List of Parts
3. Bill of Material (BOM) Relationship
4. Candidate Supply Points by Part
5. Customer Demand by Product by Zone
6. Part Weight
7. Optional - Duty Class (Harmonized Codes)
8. Optional - Markup by Part by Location
9. Optional - Process Types and Usage by Part
28.4
B. Part/Facility Data
1. Part Fixed Cost
2. Part Variable Cost
3. Lead Time or Cycle Time
4. Inventory
C. Facility Data
1. Facility Fixed Cost
2. Candidate Geographic
Locations
TYPES OF DATA NEEDED, cont’d
D. Capacity Constraint Data (All Optional)
1. Part/Location Unit Capacity Constraint
2. Part Locations Constraint
3. Distribution Facility Capacity Constraint
4. Manufacturing Resource Capacity Constraint
5. Resource Locations Constraint
6. Min & Max Number of Sites by Type
E. Transportation Data (air, surface, ocean)
1. Freight Rates & Transit Times
2. Transport Capacities
3. Geo Data
F. International Trade Data (All Optional)
1. Duty Rates
2. Local Content and Offset Trade Targets
3. International Tax Rates
28.6
Commercial
or Reusable
Databases
(50-150 MB)
MANAGEMENT SUPPORT SYSTEM
Related
System
Related
System
Related
System
Related
System
DATA MANAGER
Data Extracts
Problem
PREVIEWER
Strategy
RUN
CONTROL
28.8
Approved Solution
SOLVER
REVIEWER
Solution
Repeat as required
SIMULATOR
Source: Insight, Inc.
4. Evolution of Data Development
& Management Tools
Data
TOTAL PROJECT EFFORT
• Need to invest in demographic, trade,
and transportation databases
Make data a core competence
28.9
5. Evolution of Model Structure
and Software Capabilities
Steadily broadening model scope
and increasing software capabilities
SC execs will never be satisfied!
Drivers:
• Quest for competitive advantage
• IT revolution
• Quest for ease of use
• Support for more parts of the SC
29
Broadened Scope of Information
and Coordination
Plan
Deliver
Suppliers’
Supplier
Source Make Deliver
Supplier
Source
Make
Deliver
Your Company
(internal or
external)
Customer
Source
Customer’s
Customer
(internal or
external)
John Birchak, Intel Corp., National
Science Foundation, University of
29.2
Source Make Deliver
55
6. How Companies Actually Use
Supply Chain Design Software
Over time: increasingly broad and ambitious uses
•
•
•
•
29.5
Mergers, acquisitions, divestitures
Strategic alliances
Product proliferation
Global issues
III. The Internet and E-Commerce
Personal Journey
Personal Experiences (early 80’s)
Internet Course (1993-96)
E-Commerce Course (1998-)
30-Year History
Internet Timeline (UCLA Origins)
Rapid Growth
E-Commerce Landscape
Who are the Leaders?
30
Internet Timeline
Early 60’s Kleinrock (UCLA), Paul Baran (RAND)
1969
ARPANET: 1st node at UCLA
1970
1971
1972
1974
1975
1979
1981
1983
1984
1985
1986
31
1st cross-country link UCLA  BBN
Telnet (remote terminal access)
FTP (file transfer protocol)
E-mail
Telenet (BBN): lst public packet data service
Mailing list
Usenet (bulletin board)
1st inter-industry EDI standard
ANSI X12 standard for EDI
DOD declares TCP/IP to be its standard
ARPANET hosts pass 1,000
Neuromancer, by William Gibson
1st registered domain
EDIFACT international EDI standards
NSFNET created
NNTP (adapts USENET to Internet)
Internet Timeline, cont’d
1987
1988
1989
1990
1991
1993
1994
1995
32
No. hosts passes 10,000
Internet Relay Chat
Internet Worm
No. hosts passes 100,000
ARPANET decommissioned (20th anniv. UCLA symposium)
MCI Mail, CompuServe, ATTMail, Sprintmail connect to Internet
NSF lifts restrictions on commercial use
Gopher
Web (Tim Berners-Lee, CERN)
PGP (Pretty Good Privacy)
Mosaic mania
J. Patrick has Internet epiphany at IBM
Commercial users outnumber research/acad users 2:1
Netscape launches
Yahoo! launches
RealAudio
Java
AOL, CompuServe, Prodigy provide Internet access
Internet IPOs begin
Amazon.com launches
Internet Timeline, cont’d
1995
cont’d
1996
1997
1998
1999
33
WWW surpasses FTP on NSFNET
More .com than .edu Web servers
Gates has Internet epiphany at Microsoft
NSFNET backbone retired
Internet Explorer ships: browser war begins
Political interference around the world
Telecommunications Act of 1996
CompuServe surrenders to Web
E-Commerce passes $1 billion
More M & A, investments, partnerships
More venture capital
More suits
Supreme Court strikes CDA
Internet & E-Commerce go into hyperdrive
Hyperdrive continues
Internet turns 30 (30th anniv. UCLA symposium)
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/historical.html
33.5.a
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/historical.html
33.5.b
September 1971
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/historical.html
33.5.c
ARPANET, October 1980
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/historical.html
33.5cc
Circa 1989
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/ansmap.jpg
33.5d
http://www.cs.bell-labs.com/~ches/map/wired.gif
33.5.f
.
Internet Growth: Linear Scale
60,000,000
56,218,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
1969
34a
1974
Source: Network Wizards
1979
1984
1989
1994
1999
.
Internet Growth: Linear Scale
60,000,000
56,218,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
1969
34a
1974
Source: Network Wizards
1979
1984
1989
1994
1999
.
Internet Growth: Logarithmic Scale
1 billion
1,000,000,000
100,000,000
56,218,000
10,000,000
1,000,000
100,000
10,000
1,000
100
10
1
1969
34b
1974
Source: Network Wizards
1979
1984
1989
1994
1999
34.5b
34.5c
8 Most Wired Countries (9/98)
Rank
1
2
3
4
5
6
7
8
U.S.
Germany
Japan
United Kingdom
France
Canada
Italy
Australia
Internet Users in Millions
1998
2000
76.5
132.3
7.1
22.9
9.8
21.9
8.1
17.0
2.8
12.6
6.4
11.6
2.1
10.6
4.4
8.0
Europe
Worldwide
36.0
147.8
Country
Source: Computer Industry Almanac
34.5.d
102.0
327.0
Total Number of Web Servers as of 9/99
8,000,000
4,000,000
0
Aug
1996
1998
Apache
Netscape
Microsoft
NCSA
Source: Netcraft
35
1997
1999
Other
Growth of E-Commerce in U.S.
($ in billions)
Business to Consumer
Tangible Goods
Info Goods/Services
Total
1995
0.04
0.19
0.23
1996
0.24
0.73
0.97
1997
1.21
2.92
4.13
1998
4.10
6.22
10.32
1996
0.95
0.31
1.26
1997
6.97
1.88
8.85
1998
23.86
5.71
29.57
Business to Business
Tangible Goods
Info Goods/Services
Total
1995
0.07
0.03
0.10
EDI
Source: Keenan Vision Inc., Margherio
36
130 to 600
E-Business Landscape
Consumer-Oriented (all web)
37
Business-Oriented
Generate revenue from consumer
Information goods and services
Tangible goods
Internet commerce
Services and information goods
Tangible goods
Generate revenue from others
Advertisers
Sponsors
Extranet commerce
Distribution-centric
Procurement-centric
Non-revenue-generating Web sites
Community-oriented
Discussion
Free services
Image-building
Non-Internet commerce (EDI)
Intranets
Infrastructure
EC-enabling hw/sw/services
Internet, VANs
B2C Century Club: Retail Revenues > $100M in ’98
M on t h ly
Grow t h
(% )
Company
1Travel.com Inc.
Amazon.com, Inc.
Ameritrade Corp.
Auctions Sales, Inc.
AutoWeb.com
Campmor Inc.
Cendant Corp.
Creative Computers Inc.
Cyberian Outpost
Dell Computer
E Trade Securities Inc.
Source: ActivMedia
38
25
10
20
50
10
40
• Profits?
• Computer hw/sw
Company
Egghead, Inc.
Gateway, Inc.
Micro Warehouse Inc.
Pegasus Systems Inc.
Preview Travel, Inc.
Onsale (Software Partners)
Tech Store
The Learning Company
The Sabre Group
Ticketmaster Multimedia
Walt Disney Co.
• Info goods
• Net-only companies
M on t h ly
Grow t h
(% )
1
30
35
42
30
25
The 25 Largest Internet Companies by Revenue (millions)
• Public
• Growing
• Majority of revenue from Internet
Company
America Online
Amazon.com, Inc.
E*Trade
Yahoo
PSINet
USWeb/CKS
Ameritrade
Onsale
EarthLink Network
CheckFree
MindSpring
Priceline.com
38.3
Revenue
7/98-6/99
$4,800
$1,000
$435
$390
$390
$292
$274
$266
$254
$250
$215
$189
Source: InternetWorldNews.com
Company
Security Dynamics
Verio
CheckPoint
Excite@Home
CMGI
Network Solutions
Prodigy
eBay
uBID
BarnesandNoble.com
Concentric Network
Lycos
Exodus
Revenue
7/98-6/99
$188
$188
$170
$159
$151
$142
$142
$125
$119
$113
$110
$109
$108
Top 25 Web Properties by Reach
(8/99, millions of unique visitors)
1
2
3
4
5
6
7
8
9
10
11
12
13
AOL Network
Yahoo Sites
Microsoft Sites
Lycos
Go Network
Excite@Home
Amazon
Time Warner Online
Go2Net Network
AltaVista Sites
LookSmart
RealSite Portfolio
Bluemountainarts.com
Source: Media Metrix, Inc.
39
53.4
40.2
35.0
29.4
20.3
16.1
12.6
11.7
11.1
10.2
9.9
9.5
9.2
14
15
16
17
18
19
20
21
22
23
24
25
Xoom.com Sites
About.com Sites
EBay
ZDNet Sites
CNET
Snap Sites
Goto.com
Juno / Juno.com
AT&T Web Sites
Infospace Impressions
Viacom Online
The Weather Channel
9.1
8.9
8.8
8.6
8.5
8.3
7.1
7.0
6.6
6.4
6.4
5.6
IV. Fusion
Major E-Commerce Trends Challenging SCM
1. Growing Internet Markets
2. Dematerialization
3. Mass Customization
4. Great Expectations
5. More Efficient Business Processes
& Organizational Coordination
Meeting the Challenges: Strategic SC Design
Large-Scale Optimization
Back-of-the-Envelope Methods
40
1. Growing Internet Markets
(dollars in billions)
Business to Consumer
1999
2004
Convenience Items
$
7.0
$
69.1
Low cost, discretionary
Researched Purchases
$ 11.4
$
78.8
Planned, information-driven
Replenished Goods
$
1.8
$
36.6
Frequently repurchased
$ 20.2
$
184.5
Total
Business to Business Goods
Business to Business Services
1999
2003
Computing, Electronics $ 50.4 $ 395.3
Financial
Motor Vehicles
$ 9.3 $ 212.9
Professional
Admin and support
Petrochemicals
$ 10.3 $ 178.3
Business travel
Utilities
$ 15.4 $ 169.5
Telecom
Other
$ 23.9 $ 374.8
Total
Total
$ 109.3 $ 1,330.8
Source: Forrester Research, Inc.
41
1999
$ 7.3
$ 4.4
$ 3.9
$ 5.0
$ 1.5
$ 22.1
2003
$ 80.0
$ 48.0
$ 39.0
$ 38.0
$ 15.0
$ 220.0
North American On-Line Retail Spending
(Forrester Research, 11/98)
41a
US Online Retail Projections By Category
(Forrester Research, 9/99)
Total US revenue
1999
20,252
2000
38,755
% of total
2004
2001
2002
2003
2004 retail
64,179 101,128 143,758 184,481
7%
Total convenience
7,037
13,492
22,431
38,624
53,693
69,107
10%
Media
3,617
5,461
7,444
10,091
11,867
12,598
22%
Software
1,240
1,898
2,472
2,964
3,168
3,290
50%
Books
1,202
1,715
2,200
2,724
3,152
3,279
16%
Music
848
1,386
2,067
3,213
3,946
4,286
25%
Videos
326
463
705
1,190
1,601
1,743
15%
300
669
1,208
1,926
2,917
3,929
14%
1,620
3,607
6,581
14,710
20,181
27,128
9%
General apparel
1,061
2,566
5,106
12,333
16,694
22,516
11%
Footwear
121
290
392
605
902
1,085
2%
Accessories
438
751
1,083
1,772
2,585
3,527
9%
* Not all figures add up due to rounding.
(Millions)
Event tickets
Apparel
41b
US Online Retail Projections By Category
(Forrester Research, 9/99)
* Not all figures add up due to rounding.
(Millions)
1999
20,252
2000
38,755
656
998
1,788
2,853
3,923
4,659
12%
Flowers
354
550
1,000
1,565
2,151
2,472
13%
Greetings
134
177
333
587
729
798
8%
Specialty gifts
167
271
454
701
1,043
1,389
13%
Household goods
250
618
1,221
2,084
3,562
5,755
8%
Recreation
595
2,139
4,189
6,961
11,243
15,039
6%
253
610
1,098
1,739
2,991
3,663
10%
Sporting goods
165
586
1,162
1,949
3,068
4,220
8%
Tools and garden
177
1,930
3,273
5,184
Total US revenue
Gifts and flowers
Toys and video games
41b1
% of total
2004
2001
2002
2003
2004 retail
64,179 101,128 143,758 184,481
7%
944
7,156
5%
US Online Retail Projections By Category
(Forrester Research, 9/99)
1999
20,252
2000
38,755
% of total
2004
2001
2002
2003
2004 retail
64,179 101,128 143,758 184,481
7%
11,414
21,135
33,816
48,443
65,912
78,782
8%
7,798
13,950
20,732
26,042
29,447
32,097
12%
-
400
1,800
4,500
12,200
16,567
4%
3,170
5,785
9,710
15,317
20,152
24,211
16%
Computer hardware
1,964
3,471
5,737
9,154
11,424
12,541
40%
Consumer electronics
1,205
2,315
3,974
6,163
8,728
11,670
10%
446
1,000
1,574
2,584
4,113
5,908
6%
Appliances
179
405
459
756
1,268
2,023
9%
Furniture
268
595
1,114
1,828
2,845
3,884
5%
* Not all figures add up due to rounding.
(Millions)
Total US revenue
Total researched
Leisure travel
Automobiles
Electronics
Housewares
41b2
US Online Retail Projections By Category
(Forrester Research, 9/99)
* Not all figures add up due to rounding.
(Millions)
41b3
% of total
2004
2001
2002
2003
2004 retail
64,179 101,128 143,758 184,481
7%
Total US revenue
1999
20,252
2000
38,755
Total replenishment
Food and beverage
1,800
513
4,128
7,932
1,132
Health and beauty
509
Miscellaneous
778
24,153
2,459
14,061
5,009
1,189
2,108
1,807
3,365
4%
10,836
36,592
16,863
3,833
6,294
10,335
5%
5,219
7,023
9,394
14%
3%
U.S. Business-to-Business E-Commerce: Goods
1998 1999 2000 2001 2002 2003
41c
U.S. Business-to-Business E-Commerce: Services
41d
Projected Consumer Online Shopping
Revenues for Year 2000 (worldwide)
Yankee Group
Forrester Research
$12,090
Legg Mason Wood Walker
eStats
BancAmerica Robert Stephens
$13,880
$14,800
$15,983
Cyber Dialogue (U.S. only)
$16,800
Jupiter Communications
$17,000
Gartner Group
Cowles/Simba
International Data Corp.
Morgan Stanley
Source: eStats, 1998
41e
Dollars in Millions
$10,000
$20,000
$22,200
$26,800
$32,000
SC Impact of Growing Internet Markets
+
Higher
Lower
Suppliers
Manufacturer
- Warehouses -
Retailers
+
Consumers
Service!
+
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
41f
2. Dematerialization:
Information Goods Shed Their Material Disguises
Greeting Cards (Blue Mountain Arts, American Greetings,
Hallmark)
Music (MP3 sites, Diamond Multimedia Rio)
Postal Mail (email, USPS)
Printed Matter (e-books, WSJ, i-Print)
Software (Cyberian Outpost, Egghead, Micro Warehouse)
Videos (digital camcorders)
Pirated MP3 file obtained by searching on
http://mp3.lycos.com. The full MP3 file, sun.mp3, is
supplied in the goodie bag you will receive later.
42
SC Impact of Dematerialization
Higher
Lower
Suppliers
Manufacturer
Warehouses
-
Retailers
Consumers
-
Channel & Trading Partners New Infomediaries
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
42.7
3. Mass Customization
Buyer-side drivers: reduced search costs, globalization
Seller-side drivers: battle commoditization, market segmentation
Build-to-Order
Apparel (Just Ducky Creations)
* Computers (Dell, Gateway, Ingram Micro/Solectron)
Internet Gear (Cisco)
Personalized Products & Services
Books (NetMark Group)
Gifts (text/photo applications, e.g. Photoloft.com, Pix.com,
Walt Disney)
News Services (WSJ Interactive)
43
To those who were not there:
At this point I told the story of my daughter’s attempt
to buy a built-to-order Compaq computer over the Web.
Due to malfunctioning Website software, her experience
was a nightmare. Compaq couldn’t
* Cancel the redundant orders
* Stop shipment of the redundant computers
* Lift the redundant credit card charges
* Pay for the return of the extra computers.
43a
3. Mass Customization
Buyer-side drivers: reduced search costs, globalization
Seller-side drivers: battle commoditization, market segmentation
Build-to-Order
Apparel (Just Ducky Creations)
Computers (Dell, Gateway, Ingram Micro/Solectron)
Internet Gear (Cisco)
Personalized Products & Services
* Books (NetMark Group)
* Gifts (text/photo applications, e.g. Photoloft.com, Pix.com,
Walt Disney)
News Services (WSJ Interactive)
43 dup
Source: NetMark Group
43b
To those who were not there:
To illustrate the idea of a personalized gift item, I related
how I had picture cookies made as a way of thanking the
colleague who introduced me when I delivered the earlier
Anderson Faculty Lecture version of this talk: take a snap
with a digital camera (or scan a photo), add text with a
graphics editor, and email the file to Pix.com as part of an
on-line order.
The point of this example and the last one: with a little
imagination, you can personalize almost anything you can
think of with text or a picture or both.
SC Impact of Mass Customization
Higher
Lower
Size, freq
$, Assets
Suppliers
Manufacturer
-
$
Warehouses
Retailers
Size, freq
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
43c
Consumers
4. Great Expectations
• Point, click, and be gratified!
• Power to the buyer!
Quick Delivery (e.g., FedEx, UPS)
Customer Services and More
Order Confirmation/Status/Tracking
Personalized Account
E-mailable customer service desk
Free samples (info products)
Impartial product/service reviews
E-mail notification service
Recommendation system
44
Customers Expect Quick Delivery
Merchant Attributes Avg. Importance
Product In-Stock
3.20
Product Selection
3.15
On-Time Delivery
3.10
Price
3.08
Product Information
2.98
Merchant Attributes Avg. Importance
Customer Support
2.83
Ease of Returns
2.74
Website Navigation
2.64
Customer Loyalty
2.44
Website Aesthetics
1.86
Importance of Product In-Stock
IMPORTANCE:
0 = Not
1 = Somewhat
2 = Important
3 = Very
4 = Extremely
Importance of On-Time Delivery
43.8%
48.8%
37.1%
38.8%
14.3%
8.9%
2.7%
t
No
S
44a
2.9%
.8%
t
ha
w
e
om
nt
rta
o
p
Im
Ve
ry
ely
em
r
t
Ex
t
No
S
2.0%
at
wh
e
om
Source: Binary Compass Enterprises
nt
rta
o
Imp
Ve
ry
E
ely
m
e
xtr
SC Impact of Great Expectations
Higher
Lower
+
Cycle Times
Suppliers
Manufacturer
Inven
Warehouses
Retailers
+
Channel & Trading Partners: Service!
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
44b
Consumers
Service!
5. More Efficient Business Processes
& Organizational Coordination
• Badly needed
• Technology-driven
Coordination-intensive SC-related strategies
and tactics include:
–
–
–
–
Intranets, Extranets
Internet-based EDI
Collaborative Forecasting & Replenishment
Open Trading Partner Network
• http://www.ecommerce.gov/emerging.htm
• http://www.ise.ufl.edu/Supplychain/
45
SC Impact of Business Process Redesign
and More Organizational Coordination
Higher
Lower
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
45.2
Retailers
Consumers
• Reduced costs and assets
• Reduced cycle times
• Value additions to BPs
• More alliances & partnerships
• New strategies & tactics
Other EC Trends with SC Implications
6. Greater Reliance on Parcel Delivery and More
Bypass of Intermediaries
7. Accelerated Globalization
8. More Substitution of Information and
Coordination for Inventories
9. More Vendor-Managed Inventory (VMI) and
Remote Inventory Sensing
10. Structural Instability of Supply Chains
45.5
Electronic Commerce
Detuning … even destruction!
Suppliers
Manufacturer
Warehouses
Channel & Trading Partners
• 3rd Party Service Providers
• Sales Agents/Brokers
• Distributors/Wholesalers
• Importers/Exporters
45.7
Retailers
Consumers
•Sales Agents/Brokers
•Importers/Exporters
45.7a
45.7b
45.7c
45.7d
45.7e
45.7f
45.7g
To those who were not there:
We’ve seen how various powerful trends in e-commerce are
greatly unbalancing existing supply chains. The way to rebalance them or to design them for new Internet companies
dealing in tangible goods, I claim, is to use the large-scale
optimization methods whose genesis goes back to the 1970s
as explained in item 3 of Part II of this talk.
Small analytic models can make fine companions to the
large-scale models, as explained afterwards.
Mini-sermon: venture capitalists are in a position to
“encourage” the use of such methods by new companies
whose supply chains will have to grow rapidly.
Large-Scale Optimization for
SC Design in the Age of E-Commerce
1. Rebalance SC Unbalanced by EC
2. Adaptive What-If Studies for EC Initiatives
a. Drop-ship to Customers
b. Vendor-Managed Inventory
c. New Channel Partner
d. Postponement Proposal
3. Parametric Studies for EC-Induced Changes
a. Quantify Cost/Time Trade-off
b. Scale Demand Patterns
c. Inventory Reductions, ...
4. Design SC from Scratch for EC Startup (VC role?)
#2, 3 require true optimization
46
Rubber Band Rulers No Good for
A-B Comparisons & Parametric Studies
2. Adaptive What-If Studies for EC Initiatives
a. Drop-ship to Customers
c. New Channel Partner
b. Vendor-Managed Inventory d. Postponement Proposal
3. Parametric Studies for EC-Induced Changes
a. Quantify Cost/Time Trade-off
b. Scale Demand Patterns
c. Inventory Reductions, ...
Fact: Heuristics, expert systems, interactive methods, genetic
algorithms, neural nets, etc., usually yield unpredictably
suboptimal solutions
rubber band rulers
46a
What-if option A
$100.0 M
What-if option B
$101.2 M
Back-of-the-Envelope Models
Analytical (highly simplified, few parameters)
Companion models, not substitutes
Uses
• Suggest explanations for full-model results
• Estimate parametric sensitivities
• Suggest when full-scale study needed
Precedents
•
•
•
•
47
Hogan, Manne, …(energy modeling)
Kleijnen, Zeigler (computer simulation)
RAND (emergency service deployment)
Rogers, Zahavi (power systems)
An Embryonic Example
DC
DC Service Area

demand density
f ($) DC fixed cost
t ($/cwt-mi) freight rate
R (mi) service area radius
(cwt/mi2)
Unit Costs ($/sq mi)
0.9
Can parlay into a national model:
• How many DCs
• DC size
• Relative cost magnitudes
48
delivery
DC fixed
total
3.05
0.8
R* =
0.7
0.6
0.5
p
t
3
f
0.4
0.3
.377 p  t R
f /p R2
0.2
0.1
0
50
100
R* 150
200
250
Radius (mi)
• Growing Internet demand   
• Dematerialization   
• Rising delivery expectations  t , f 
• More Cost-Effective DC’s  f 
As a companion to a full-scale model,
analytical models can give good results
Data Change
Increase p by 5%
Increase t by 7%
Increase t by 13%
Increase f by 5%
Full-Scale Model
Optimal n
Optimal n
before change
after change
24
24
24
25
26
28
24
25
Analytic
Predicted n*
after change
24.8
25.1
28.2
24.9
Data for a consumer products manufacturer
Run #
Mean fixed cost f
1
$36,600
2
$25,000
3
$20,000
4 (base)
$15,800
5
$13,500
6
$10,000
Data for a mining company
Actual n*
19
23
27
30
33
38
Gross behaviors quite similar
49
Predicted n*
17.1
22.1
25.6
30.0
33.2
40.7
V.
V. Coda
•
•
•
•
50
The Future
Academic Challenges and Initiatives
Summary
Your Goodie Bag
50.4
Source: http://www.spe.sony.com/movies/johnnymnemonic/assets/09hero1f.jpg
A. Penzias, “The Next Fifty Years”
1. For Silicon Technology, the Best is Ahead
On average, there will be a million-fold increase in the power of microelectronics.
2. Very Affordable Bandwidth
The per-bit cost of global data communications will drop by some three orders of
magnitude.
3. Interconnected Products
Interconnected products and services will become far more common--and will generally
cost appreciably less--than their stand-alone equivalents.
4. Real Home Networks
Future households will define themselves as much by their home networks as they now
do by walls and fences.
5. "The Net"
The Internet, telecommunications, and broadcast entertainment will blend into a single
environment.
6. On-Line Shopping
The number and variety of targeted commercial and consumer offers will spur the
pervasive use of software surrogates.
Source: http://www.lucent.com/ideas/perspectives/bltj/autumn_97/paper08/000000.html
51
7. Living in a Glass Village
Except for those willing to go to much trouble and expense, large portions of what we
now regard as privacy will diminish greatly, or even disappear altogether.
8. My Very Own PC
Truly personal computers will become as much a part of twenty-first century clothing
as today's wristwatches.
9. The End of Lines -- GPS Becomes Indispensable
Networked alternatives to congestion rationing will extend the just-in-time concept to
consumer services.
10. Corporations Focusing on What They Do Best
Specialization, rather than vertical integration, will dominate the next century's
communications and information services businesses.
11. Winning the Struggle Against Disease
Humankind's ability to map, simulate, and modify biological molecules will shift the
frontier of medical research from dealing with disease to coping with issues of
longevity.
12. The Past Record of Futurists
Predictions about the future--this paper included--will be shown to have
underestimated the pace of technology and overestimated its impact on human society.
Source: http://www.lucent.com/ideas/perspectives/bltj/autumn_97/paper08/000000.html
Commentary: http://www.anderson.ucla.edu/faculty/art.geoffrion/home/ec1/penziasNotes.doc
52
Slide 52.2
The Digital Age Needs Everyone
Accounting: Hawkins, “Keeping Score: Accounting Issues and EC”, 4/99
Asset Impairment
Taxation
E-Commerce Accounting
Third Party Reliance
Electronic Payments
Valuation
Econ: Choi-Stahl-Whinston, EEC, 1997
Auctions, Bidding, Electronic Markets
Network Externalities
Product Differentiation & Pricing
Decision Sciences: Geoffrion, INFORMS Journal on Computing, Fall 1998
Consumer Applications
Infrastructure Design and Management
Professional Applications
Finance: Merrill Lynch, “Commercial Banks & Securities Broker Dealers:
E-trading
Front-row Seats for the Electronic Revolution”
Financial Intermediaries
Valuation of Internet Stocks
HR&OB
Job Markets (incl. reconciling on-line markets with corp salary guidelines)
Office Abuse of Web Access
Two Cultures
53
The Digital Age Needs Everyone (cont’d)
Information Systems: Commun. of the ACM, July 1998
E-Commerce Software/Hardware
Internet Business Applications
Internet Infrastructure & Services
Software Agents
Marketing: Hoffman, “Key Published Sources for Internet Marketing Scholars, 3/99
Internet Advertising Strategy
Internet Channel Strategy
Internet Marketing Strategy
Online Consumer Behavior
Operations & Technology Management: NSF Workshop on SCM in EC, 10/98
E-Commerce Technology Management
Supply Chains for E-Commerce
Technology Strategy
Virtual Community Management
Strategy & Organization: Shapiro & Varian, Information Rules, 1998
Competition in the Digital Age
Internet/Extranet/Intranet/EC Strategy
Virtualization
54
Academic Initiatives in E-Commerce
CMU MS in Electronic Commerce (1999)
MIT Program on E-Commerce and Marketing (1999)
E-Commerce Research Forum
Stanford
Center for Study of E-Commerce (1999)
UT Austin
Center for Research in E-Commerce
Experimental Digital Economy
Vanderbilt
Concentration in E-Commerce
Project 2000
AGSM Board of Visitors’ Strat Plan
55
To those who were not there:
In addition to the items on the last slide, initiatives
include Georgia Tech ( new Center for E-Commerce
with $5M industry funds), Harvard (taking a horizontal
approach with case studies on Internet companies in almost
every course), and Wharton (Dean Gerrity resigned this
summer and is now heading the Forum on E-Commerce,
said to involve more than 50 faculty and about 50 courses).
Although there has been no official discussion of an EC
initiative by AGSM’s administration until very recently,
things are happening anyway as sketched (incompletely)
on the next slide.
E-Commerce at Anderson
Courses Taught or Scheduled
Lee Cooper
George Geis
Arthur Geoffrion
Martin Greenberger
Uday Karmarkar
Marvin Lieberman
???
Academic Unit Initiatives
Decision Sciences: reorient M.S.?
Marketing: going horizontal
???
MBA Track?
Center?
55.5
Summary
SC and EC: Partners in the Digital Age
• Lessons from 30 years in Strategic SC Design
• Internet and E-Commerce Era
• Strategic Supply Chain Design Approaches for EC
• The Future
56
Summary, cont’d
SC and EC: Partners in the Digital Age
• Lessons from 30 years in Strategic SC Design
* Strategic SC design: a well-solved class of problems
* Optimization essential for adaptive what-if and parametric studies
* Industry becoming less sophisticated about quantitative methods
* Map-based user interfaces seduce
* Never try to fight a sea change in user expectations
* Data is king
* Scope of SC mgmt and modeling: an ever-expanding universe
• Internet and E-Commerce Era
• Strategic Supply Chain Design Approaches for EC
• The Future
57
SC and EC: Partners in the Digital Age
• Lessons from 30 years in Strategic SC Design
• Internet and E-Commerce Era
* UCLA Origins, phenomenal growth
* Some basic distinctions
B2B vs. B2C E-commerce
Tangible vs. information goods
Internet vs. Intranet vs. Extranet
* Some important E-commerce trends (detuning SCs!)
Accelerating Internet market growth
Dematerialization
Mass Customization
Customer expectations rule
More efficient business processes & organizational coordination
• Strategic Supply Chain Design Approaches for EC
• The Future
58
Summary, cont’d
SC and EC: Partners in the Digital Age
• Lessons from 30 years in Strategic SC Design
• Internet and E-Commerce Era
• Strategic Supply Chain Design Approaches for EC
* The Brawn: large-scale mixed integer linear programming
models tell you what
* The Brains: back-of-the-envelope models tell you why
• The Future
59
Summary, cont’d
SC and EC: Partners in the Digital Age
• Lessons from 30 years in Strategic SC Design
• Internet and E-Commerce Era
• Strategic Supply Chain Design Approaches for EC
• The Future
* New IT driving both SC management and EC
* Seismic challenges & opportunities for every field of management
60
Your Goodie Bag
www.anderson.ucla.edu/faculty/art.geoffrion/home/goodiebag.htm
• PowerPoint slides
• Additional references and links
• Public mirror of my fall ‘98
e-commerce course
61
Source: http://www.geog.ucl.ac.uk/casa/martin/atlas/hackers.jpg