[The Role of Network Supply Chains and
e-Market Places in Supply Chain Management ]
Lecture 2
[Judith Molka-Danielsen]
j.molka-danielsen@himolde.no
http://home.himolde.no/~molka/
Harstad/harstad.htm
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VWR International for the Merck Group
*Merck Group *Merck Eurolab *VWR International
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Overview Part I: Discuss these topics
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in supply chain
management
• Motivation for Network Supply Chains and
e-Market Places
• Implications and value of NSCs
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Overview Part II: Discuss these topics
• What are e-Market Places and Network Supply
Chains?
• NSC Actors
• Phases of Development of NSC
• E-Market Place categories
• Agency Theory
• Transaction Cost Theory
• Two kinds of industrial networks
• Summary
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Order Fulfillment
• Taking orders may be the easiest part
(ie.ToysRUs – ref.Bloomberg00, ref.techdirt00)
• Difficulties in groceries and fresh food
– One reason: Customized products (touch
and feel the produce)
– Second: Pull type manufacturing
•
•
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in
supply chain management
Motivation for Network Supply
Chains and e-Market Places
Implications and value of NSCs
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The Pull vs. Push Model
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Major Concepts
• Order fulfillment: Deliver right order, right place,
on time
• Front office operations: Order taking,
advertisement, CRM
• Back office operations: Accounting, finance,
inventor, packaging, logistics
• Logistics: Managing the flow of goods,
information and money along the supply chain
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The Process of Order Fulfillment
1. Payment Clearance
2. In-stock availability
3. Packaging, shipment
4. Insuring
5. Production (planning,
execution)
6. Plant services
•
•
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in
supply chain management
Motivation for Network Supply
Chains and e-Market Places
Implications and value of NSCs
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7. Purchasing,
warehousing
8. Demand forecast
9. Accounting, billing
10. Customer contacts
11. Returns (Reverse
logistics)
Supply Chain Components
• Upstream: Suppliers, their suppliers (several
tiers). From Raw material to the company
• Internal: All internal process that add value,
conversion to find products
• Downstream: All activities in distribution and
delivery to end customers
•
•
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in
supply chain management
Motivation for Network Supply
Chains and e-Market Places
Implications and value of NSCs
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Components of the Supply Chain
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Supply Chain Management
• SCM is the Flow of material, information,
money, etc. from raw material suppliers
through factories to customers
– Parts are organizations, procedures, and
people
– Integration of the business processes
along the chain, Planning, Organizing,
control of many activities
– Activities include Purchasing, Delivery,
Packaging, Quality Checking,
Warehousing.
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Some Supply Chains are Complex and Nonlinear
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Benefits of SCM
• Reduce transaction costs.
• Reduce uncertainty along the chain
• Proper inventory levels in the chain (minimize
inventory costs)
• Minimize delays in order fulfillment
• Eliminate rush (unplanned) activities
• Provide higher quality customer service
• Major contributor to firm success (even
necessity for survival).
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Problems in Supply Chains
•
• Delays in production, distribution etc.
• Expensive Inventories
• Need for intermediaries in order
fulfillment but lack of coordination
with partners
• Uncertainties in deliveries due to poor
communication with partners
• Poor demand forecasting due to long
Role of order fulfillment
and complex supply chains
Process of order fulfillment
Describe the Supply Chain
Interference with production (channel
Problems and solutions in •
supply chain management
conflict)
Motivation for Network Supply
•
Chains and e-Market Places
Implications and value of NSCs
•
•
•
•
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Problems: in Global Supply Chains
• Can be very long
• Possible cross-broader problems
• Need more complex information technology
support of:
– communication and collaboration
• Possible delays due to: customs, tax,
translations, politics
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SC Problems: specific to e-businesses
• Pure e-businesses (with no physical
infrastructure) may not have
–
–
–
–
the logistics infrastructures to aid in order fulfillment
Experience with distribution
Direct access to end customers
A working strategy with business partners
• One business can be a member of several
supply chains and a member of several
networks
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Problems with Supply Chain Management
• Most Supply Chain Management is not on-line
(today SC information is shared via (fax, email)
78%, (EDI) 65%, (on-line = Internet,extranet)
28%.
• Current techniques are broken
– Information bottlenecks occur
– Long-term plans and short-term schedules do not
connect (manufacturers keep just-in-case stock)
– Customers lose patience (bottlenecks, no info)
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Motivations to tie SC to e-Market Places using
Network Supply Chains
• SCM must go on-line with more partners (also on-line),
to allow real-time adjustment in schedules.
• Interconnect long-term plans and short-term
schedules. Synchronize production schedules with
suppliers (have accurate configure-to-order
information).
• All steps in the supply chain will be on-line (Plus:
design, sales, marketing, production, quality check,
customer satisfaction).
• Liability – becomes recognizable and traceable.
•
•
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in
supply chain management
Motivation for Network Supply
Chains and e-Market Places
Implications and value of NSCs
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Business drivers for eMarket Place Systems
• Globalized Markets: reduce profit margins for firms
• Information Intensity: in products raise participation costs
• Mergers, acquisitions, consolidations: in traditional industries
create scale economies, and intensify competition between
remaining players.
• Business Process Redesign: changes the process structure
in the firms, new enterprise wide systems are needed to
support the new structure.
• Informaition needed for products: shortens product cycle
times, ie. less time to get a product to market and less time
to realize positive returns
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Business drivers for eMarket Place Systems
• Integrated processes within the firm: not distinct
processes
• Integrated processes within an industry: requires
cooperation within an industry to strengthen
potential industry profits
• Information architecture investments: lead to new
knowledge - lead to something that can be sold.
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Technology Drivers for eMarket Place Systems
Availability of:
• Relational databases
• Reduced storage costs
• Expanded use of public networks (ie. Internet) and
standards that support its use (ie. XML, HTTP, TCP/IP).
• Client-Server architectures and technologies available.
• Desk-top and portable user environments variety
available (ie. phones, palmtops, portables).
• Enterprise network software - management and
integration tools, middleware, ubiqutious computing
technology.
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Motivation: Network Supply Chain (NSC) solutions
go further…
Large manufacturing enterprises will connect their Supply
Chains to a Net.
NSC is a network of inter-enterprise supply chain events
connected through a private or public e-Market Place.
• A business has access to many suppliers through ecatalogs and pricing through auctions
• A business has access to many buyers and can post
(RFQ)
• Exchanges are controlled by few large companies or 3rd
party managed
• Use of Vertical vs. Horizontal infrastructures for different
kinds of cost savings.
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Value: NSC information benefits
• Extend options for new partnerships - in design,
marketing, logistics. More resources available.
• Central hub of information - Companies can provide
network wide management and analysis of
operations data across multiple constitutents.
• Costs in the supply chain will be more visible - so
that faults, like faulty design, are more transparent,
and taken out. Improves product quality.
• NSCs will focus on private - business partner
eMarketplaces. SAP software works around this.
•
•
•
•
•
•
Role of order fulfillment
Process of order fulfillment
Describe the Supply Chain
Problems and solutions in
supply chain management
Motivation for Network Supply
Chains and e-Market Places
Implications and value of NSCs
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What are e-Market Places and Network Supply Chains?
Enterprise Systems and Industrial Networks
• Enterprise Systems links IT resources across
the whole firm in an Electronic Market Place
(MP). It integrates business processes across
all functional areas.
• Industrial Networks link enterprise systems
between companies in Network Supply Chains
(NSC), such as in SCM (supply chain
management).
•What are e-Market Places and Network
Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial networks
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NSC Actors
Product
Supplier
Service
Supplier
Digital Intermediaries
Product
Integrator
Portal
End Users
Digital connector
Customer agent
Terminal, mobile
Tlf, tv, pda
Market place
BtB
Product
Supplier
Enterprise
Marketplace builder (infrastructure supplier)
•What are e-Market Places and Network
Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial networks
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-Systemintegrator
Consumer
Network access provision
(e-handel services access
Paymentprovider
-Payment system
Distributor
- physical and digital delivery
Phases to NSCs
•What are e-Market Places and Network Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•…
1. Integrate procurement - Put production plans on-line and
connect to purchase order systems using XML.
2. Create Collaborative Hubs - Synchronize the planning
and production schedules. Put business logic in
advanced planning and scheduling (APS) software to
share with partners but allow participants to shield some
data (private).
3. Create Networks of Collaborative Hubs – These hubs will
share
1. Infromation Streams - Integrate information from start to
finish. So Cisco shares sales information with its
manufacturers. The NSC must offer enterprise applications
such as CRM, ERP, etc.
2. Material Streams – tight information & distribution process
Mercedes-Benz might demand all suppliers tie to the NSC to
ensure quality in planning and production details.
3. Financial Streams – more partnership options in design and
small applications sharing.
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NSC Trends
Collaborative Hubs
S = Supplier/Seller
B = Buyer
M = Marketplace Hub
 Networks of linked Hubs
B2B eCommerce
Brochure-ware
 publicize on-line, sell
off-line
 enabling commerce through
 aggregation many-to-many
 commerce
Basic eCommerce
EDI Networks
 Expensive, closed
 Non-scalable
 one-to-one selling
from website
S
S
S
S
S
S
S
M
S
B B
B
S
B
B
B
B
S
B
S
B
B
B
S
B
B
B
S B
M
M
M
M
B
B
S
B
S
S
B
S
B
Sann tids integrasjon mellom
kjøpere og selgeres systemer
Forsyningskjedeintegrasjon
S
Time
1996
1997
Source: Morgan Stanley Internet Research
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B
S
S
1998
1999
2000
2001
NSC: Market place categories
• Main Categories
– Horizontal
– Vertical
– Buyer based, Seller based, neutral
• Producer
– Indirect
– Direct
• Owner
– Market actors are the dominate
– Dot.com businesses are owners
• Categories of market places
•What are e-Market Places and Network
Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial networks
– Buy and sell and develop shared services
– E-collaboration
• One vertical market place will be able to
manage an entire business branch.
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Agency Theory
• Agency Theory states that the organization is a nexus of
contracts among self interested individuals.
• Agency Costs are the sum of
• monitoring costs (gathering information for reports)
• bonding costs (developing reports) and
• residual costs (the costs the principal incurs by deviation
of the agent, despite the monitoring activities).
• Agency Costs rise as the decision moves away from the local
source of information (the customer) and as decision making
moves up to the top management level.
• E-Market Place and NSC let decisions be more decentralized.
•What are e-Market Places and Network
Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial networks
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Transaction Cost Theory –
Ronald H. Coase, in ``The
Nature of the Firm´´(1937)
It says that firms exist to reduce the transaction costs of
individuals acting in the market.
Transaction costs will decide if a firm should produce something
themselves or let someone else do it, not only market price.
Transaction costs today are lower because of alliances and
networks.
Coase was not specific in his description of what transaction costs
were, but they include for example,
• Search Costs
•What are e-Market Places and Network
Supply Chains?
•NSC Actors
•Phases of Development of NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial networks
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• Information Costs
• Distribution Costs
• Order Processing Costs
• Contract enforcement Costs
• Advertising Costs
Gurbaxani and Whang (1993) on Transaction Costs
• Says that market Transaction Costs are External
Coordination Costs.
• External Coordination Costs = Operational Costs +
Contractual Costs
• Operational Costs (search costs, transportation costs,
inventory holding costs, communication costs) and
• Contractual Costs (the costs of writing contracts, cost of
enforcing contracts).
• Example: tradeoffs in development of a software product.
– contract requirements involved in the development
– If the market can produce this product at less expense, then
the business will outsource the project.
– If the business can do it at less cost, they will internalize the
project to produce the software product.
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Shared transactions
Transaction costs
Market communications
Before and after sales processing
Payment transactions
Move towards a
frictionless and transparent
market?
Savings in money: 10 - 50 %
Savings in time: 50 - 96 %
Cisco: 57 % of their orders are
processed without involving people.
Savings up to 95 %
Distribution
Production costs - 20 %
Distribution costs of digital products up to 99 %
Customer Resource
Management (CRM)
Automatic system to store customer preferences
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Stages and Limitations in Mergers and Aquisitions
1. Strategic Exploration - what firms may offer unusual
systems, knowledge, or economies of scale? Are the
target company systems problematic (should avoid these
partners)?
2. Valuation - Target company is already identified. Identify
the costs of integration, estimate the benefits. What are
costs to upgrade IT systems?
3. Purchase - Develope a core integration team to validate
the costs and benefits of the system. Develope a business
process team to examine the business processes.
Develope a IT infrastructure team to the target firms
infrastructure.
4. Transition rationalization - Why keep some of the target
companies old systems. Eliminate what is not needed.
Integrate systems with the combined system.
Alternative: Industrial Networks (NSC) can be an alternative
to Mergers and Aquisitions.
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Limitations of merging the Enterprise Systems of
two organizations
1. Implementation of merged systems is difficult.
2. Costs are up front, benefits are hard to account for and
intangible.
3. Avoid replacing one legacy system with another.
4. Interoperability with older legacy systems, and
transitions.
5. Realising Strategic Value - "The only strategic assets in
the end are knowledge and information unavailable to
your competitors." So, must use ES to gain
understanding of your own firm and customers in a way
that cannot be duplicated by competitors. It is therefore
the combination of the firm's people-assests and
information technology assests together that is not
easily duplicated. This strategic value is not necessarily
lost by integrating ES.
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An Enterprise e-Market Place System would
integrate the business processes of the entire
enterprise SC into one system of business
processes and operations.
VENDORS
INBOUND MANUFACTURING
LOGISTICS
MARKETING
FINANCE
AND
SUPPORT
SALES
SINGLE SOFTWARE &
HARDWARE SYSTEM
PERMEABLE BOUNDARIES
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CUSTOMERS
Two kinds of industrial networks for Network
Supply Chains (NSC).
1. Vertically organized industrial networks try to replace
acquiring suppliers and manufacturers with networks.
•
Before: firms would try to reduce transaction costs by
combining firms and not building their own transportation
and logistics systems.
2. Horizontally organized industrial networks try to replace
mergers with strategic alliances.
•
•What are e-Market Places
and Network Supply
Chains?
•NSC Actors
•Phases of Development of
NSC
•E-Market Place categories
•Agency Theory
•Transaction Cost Theory
•Two kinds of industrial
networks
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•
•
They are organized across industries between competitors.
Merging with competitors could reduce agency costs by
creating economies of scale and scope on products and
services.
But these networks allow certain stages of the supply
chain to be shared and not competed for (ie. Dell and IBM
coordinate development of computer components).
Goal is to create "web-value" meaning more industry value
that the industry competitors can all benefit from.
INDUSTRIAL NETWORKS –integrate systems from many
firms, vertically and horizontally
Enterprise System – for one large business can
integrate an enterprise value chain, ie. Coca-Cola.
COMPETING
firms
firm 1
firm 2
firm 3
INDUSTRY
VALUE
CHAIN
INDUSTRIAL NETWORKS
COMPETING
Suppliers
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supplier
1
supplier
2
supplier
3
MP reduce inefficiencies and transaction costs
Inefficiencties and
transaction costs are in
Market place functions
Market communications
Catalog, search agent, standards
development, catalog development.
Distributiopn and ordering
E-business procedures. XML as a
common language for EDI and
business applications, for document
exchange.
Price setting
Auctions, reverse auctions, strike
price contracts (options).
Reliability and security
Third party authorization and digital
signatures.
Supply Chain
From MP to NSC and information hub
for all business processes and
transactions.
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Challenges for NSC
• Permeability of the boundaries of the firm. Customers
and Suppliers and Competitors have access to your
business processes. They learn more about you.
• Difficult to measure benefits and costs. Even more
intangible across boundaries.
• Vulnerable to customers and suppliers. Everyone is
shopping for the best price.
• Security - Management can lose control over its IT
systems, (who develops, where is the data located,
which
• Changes in the corporate culture, re-education of
employees or changing people is needed.
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Summary : Implications, changes from the
traditional market place
• One to three (vertical) market places will dominate
in each business branch (pharmaceutical, energy,
travel).
• They will integrate the market place horizontally.
• The market place will be dominated by a big
industry actor in the given branch.
• There will be development of end-to-end service
through strategic alliances between market place
builders.
• The market place will afterwards change the
cooperations or alliances that form the branches
value chains.
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Trends for business evolution towards total
business solutions or ``ebusiness suites´´
• Application Integration where the firm integrates the most
important business applications.
– Administrative system steering with (ERP)
– Value chain management through (SCM)
– Customer Resource Management and handling (CRM)
• These internal business applications will go on-ling (ie.
on the Web, with private membership).
• These internal production management systems will go
on-line (ie. on the Web, with private membership).
– CAD (Computor Aided Desigh
– CAM (computor Aided Management)
– CAE (Computor Aided Engineering)
PricewaterhouseCoopers
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Trends for business evolution towards total
business solutions or ``ebusiness suites´´
• When all of these processes are digitized
and ``on-line´´ then the business can
cooperate with other businesses in eMarket Places using NSC. Further,
e-collaboration can take place.
• E-Market Places will become information
hubs for all business processes and value
chain management through (SCM) will be
central.
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Summary of trends for e-Market Places and NSC
• The e-Market Place will evolve from an e-commerce market
place focused on buying and selling, to Network Supply
Chains (NSC).
• E-Market Places will become the cooperative process
arranger and outsourcer (to save on transaction costs).
• E-Market Places will become infromation hubs for all
business processes.
• E-Market Places will integrate information from start to
finish, through all stages of the supply chain.
• The value chain becomes an integration of information
processes from the industry supply chain (NSC).
• Everything will center on the business process.
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