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Production Planning & Control,

Vol. 15, No. 6, September 2004, 584–595

Virtual supply-chain management


Keywords Logistics, virtual supply chain, critical success allows companies to see how their suppliers are performing,
factors from their sourcing of raw materials to their delivery to the
retail outlet. Achieving greater transparency in the supply
chain requires the development of comprehensive e-Logistics
Abstract. In global business competition, companies believe tools, which provide all players with open communication
greater transparency in supply-chain operations and collabora- and shared information in every stage of the order-to-delivery
tion is very important for success. Transparency brings account- process. Supply-chain transparency in ordering, inventory and
ability and responsibility. This openness in the supply-chain transportation is a prerequisite for optimization and is critical

Authors: A. Gunasekaran (corresponding author), Department of Management, University of

Massachusetts, North Dartmouth, MA 02747-2300, USA. E-mail: agunasekaran@umassd.edu.
E. W. T. Ngai, Department of Management and Marketing, The Hong Kong Polytechnic
University, Hung Hom, Kowloon, Hong Kong, PR China.

ANGAPPA GUNASEKARAN is a Professor of Operations Management in the Department of

Management at the Charlton College of Business, University of Massachusetts, Dartmouth.
Dr Gunasekaran has held academic positions at Brunel University (UK), Monash University
(Australia), the University of Vaasa (Finland), the University of Madras (India), and the
University of Toronto, Laval University and Concordia University (Canada). He is teaching
undergraduate and graduate courses in operations management and management science.
Dr Gunasekaran has received the Thomas J. Higginson Award for Excellence in Teaching (2001–
2002) within the Charlton College of Business. He has over 150 articles published in 40 different
peer-reviewed journals that include International Journal of Operations and Production Management,
International Journal of Production Research, Production and Inventory Management Journal, European
Journal of Operational Research and Computers and Industrial Engineering. He has presented about 50
papers and published 50 articles in conferences and given a number of invited talks in about 20
countries. He has received an Outstanding Paper Award from Managerial Auditing Journal for the year
Dr Gunasekaran is on the Editorial Board of over 20 journals that include Production Planning and
Control, Journal of Operations Management, International Journal of Production Economics, International
Journal of Computer-integrated Manufacturing, International Journal of Operations and Production
Management, Technovation and Computers in Industry: An International Journal. Dr Gunasekaran is
involved with several national and international collaborative projects that are funded by both
private and government agencies. He has organized several international workshops and confer-
ences in the emerging areas of operations management and information systems. Dr Gunasekaran
has edited a couple of books that include Agile Manufacturing: The 21st Century Competitive Strategy
(Elsevier) and Knowledge and Information Technology Management: Human and Social Perspectives (Idea
Group Publishing). Dr Gunasekaran is the Editor of Benchmarking: An International Journal and the
North American Editor of Supply Chain Management: An International Journal. He has edited special
issues for a number of highly reputed journals and some of them include: European Journal of
Operational Research, Business Process Management Journal, Information Systems Journal, Logistics
Information Management, International Journal of Operations and Production Management, International
Journal of Production Economics and Journal of Operational Research Society. Dr Gunasekaran is currently
interested in researching benchmarking, agile manufacturing, management information systems, e-
Commerce (B2B), information technology/systems evaluation, performance measures and metrics
in new economy, technology management, logistics, supply-chain management and total quality
management. He actively serves on several university committees.

Production Planning & Control ISSN 0953–7287 print/ISSN 1366–5871 online # 2004 Taylor & Francis Ltd
DOI: 10.1080/09537280412331283955
Virtual supply-chain management 585

ERIC W. T. NGAI is currently an Associate Professor in the Department of Management and

Marketing at The Hong Kong Polytechnic University. His current research interests are in the
areas of electronic commerce, decision support systems and e-Supply-chain management. He has
published in a number of journals including IEEE Transactions on Systems, Man and Cybernetics,
Information and Management, Expert Systems, Expert Systems and Applications, International Journal of
Operations and Production Management, Omega, Transportation Research and others. He serves as an
associate editor for the International Journal of Enterprise Information Systems and is on the Editorial
Board of International Journal of Production Research. Dr Eric Ngai has received the Faculty Award for
Outstanding Performance/Achievement in Teaching (2003–2004).

for making business decisions. In this paper, the experiences and market share, and to take advantage of efficiencies in
of a virtual supply-chain (VSC) company are discussed with production and sourcing. A key determinant of business
reference to the strategies, methods and technologies of its
supply-chain. The supply-chain aims for improved customer performance is the role of logistics in ensuring a smooth
satisfaction and hence for overall competitiveness in a global flow of materials, products and information throughout
market. This discussion will be useful for other companies a company’s supply-chains (Sum et al. 2001). Logistics
intending to emulate some of the critical success factors in have thus become recognized as a critical factor in
VSC management.
achieving competitive advantage (Christopher 1992,
1997, Bowersox and Daugherty 1995, Bowersox and
Closs 1996). In this context, ‘enterprise logistics’ have
1. Introduction three key properties: (i) the ability to provide a seamless
delivery process; (ii) the ability to track materials as they
The emergence of e-Commerce and information com- are in transit; and (iii) the ability to adjust transporta-
munication technologies has enabled companies to be tion agreements based on specific customer demands
flexible and responsive to changing market requirements. (Greis and Kasarda 1997). Logistics have been defined
The new millennium has brought new information tech-
by Daskin (1985) as ‘the design and operations of the
nologies and organizational environments, resulting in
physical, managerial, and informational systems needed
an electronic supply-chain (ESC). The ESC links trading
to allow goods to overcome time and space’. Another
partners through various information technologies–
definition promulgated by the Council of Logistics
including the internet and/or electronic data interchange
Management (Ballou 1999: 4) is as follows:
(EDI)–to allow them to buy, sell and move products,
services and cash. The traditional methods of logistics the process of planning, implementing and control-
control are increasingly incapable of managing the ling the efficient, cost-effective flow and storage of
dynamics of contemporary logistics service requirements raw materials, in-process inventory, finished goods
(Deborah 1997, Calza and Passaro 1997, Razaaque and related information from point of origin to
and Chang 1998, Ballou 1999, Angeles 2000, Arlbjorn point of consumption for the purpose of confirming
and Halldorsson 2002). The rapid proliferation of to customer requirements.
e-Commerce requires a new approach; in particular, flex-
ibility in the supply-chain is needed. To provide speed The supply-chain is an integrated business model for
to market and fast, flexible responses to customer needs, logistics management. It covers the flow of goods from
a new supply-chain environment is needed. Supply-chain suppliers through manufacturing and distribution chains
management (SCM) is a method for integrating a manu- to the end consumer. Christopher (1992) has suggested
facturer’s operations with those of all of its suppliers and that the real competition is not company against com-
customers and their intermediaries. SCM seeks to inte- pany, but supply-chain against supply-chain. In recent
grate the relationships and operations of several-tier years, information systems (ISs) have been seen as more
suppliers in meeting requirements–such as quantity, than simply resources that support various business pro-
delivery and the timely exchange of information. Firms cesses (Alshawi 2001). Feraud (1998) has pointed out
that embrace SCM also solicit ideas from key suppliers similarities in the objectives of strategic management of
and involve them directly in new product development information technology and of logistics information man-
processes. By managing supply-chain costs and linking agement. Some researchers (for example, Cooper 1994,
supplier capabilities to new product development, the Christopher 1997) have explained the close links between
corporate performance objectives in many organizations information systems and the management of logistics. In
are advanced (Gurin 2000). the present paper, the importance of virtual supply-chain
In today’s highly competitive environment, many (VSC) management in global competitiveness is high-
companies are becoming global to increase sales, profit lighted, along with the implications of information sys-
586 A. Gunasekaran and E. W. T. Ngai

tems in logistics management. A case study conducted inefficient logistics management, increase returns on
with a supply-chain company in Hong Kong is presented assets, streamline purchasing procedures, and improve
with the objective of elucidating the critical success fac- forecast and central planning abilities. Open communi-
tors in the VSC. These factors would be helpful to other cation and cooperative supported work can achieve these
companies seeking to emulate the success of LINE. benefits.
The organization of the paper is as follows. Section 2 According to Serve et al. (2002), electronic connectivity
presents the background for the research. Section 3 will enable supply-chain integration to execute cross-
presents a conceptual model for VSC management. enterprise activities and to coordinate the operations of
Section 4 examines a case study and section 5 summarizes collaborating firms. As a result, electronic connectivity
the findings. will move firms from using enterprise-centric supply-
chains (in which an enterprise drives multiple processes)
to synchronized electronically connected supply-chains
2. Background of research (in which one process drives more than a single enter-
prise). The benefits of developing supply-chain efficien-
In the new economy, the focus has been on: (i) build- cies using B2B are many. Collaboration among
ing on core strengths; (ii) provision of real-time infor- supply-chain vendors improves demand forecasts, pro-
mation; (iii) globalizing service demand; (iv) visibility motes efficient inventory management and reduces
of key performance indicators; (v) collaboration in cycle times. The internet provides the benefits of centra-
supply-chain operation; and (vi) e-Commerce develop- lized data and real-time feedback with a more econom-
ment. The main objective of SCM is to integrate ical architecture. These benefits require an industry-
processes with a view to reducing waste (defective pro- standard web browser (for example, Internet Explorer),
ducts, inventory, idle capacity due to failures, and so and businesses are progressing in the development of such
forth), reducing order-to-delivery cycle times, and devel- a tool. They can use the internet to market and sell
oping a flexible response throughout the supply-chain. products, communicate with customers and electroni-
Waste can be reduced within the supply-chain by three cally link with business partners (Del Vecchio 2000).
primary means: (i) minimizing duplication, (ii) achieving An effective SCM, in terms of strategies and opera-
a level of uniformity among operations and systems; and tions, is essential for a successful company. SCM can
(iii) increasing quality. reach beyond the boundaries of a single company to
Williams et al. (2002) explored traditional SCM and share information among suppliers, manufacturers, dis-
electronic supply-chain management, and noted the tributors and retailers. The internet plays a major role
resulting effect on strategic alliances and partnerships. in this sharing. The ability to focus on one layer of
The core characteristic of the electronic supply-chain the supply-chain has enabled organizations (such as
was identified as flexibility. American-On-Line (AOL) and lastminute.com) to be
Virtual organizations (also referred to as agile, out- innovative. The attempt to develop VSC architecture
sourced or seamless organizations) have been defined in focuses on the importance of knowledge and intellect
various ways in the literature. Greis and Kasarda (1997) in creating value (Graham and Hardaker 2000). The
defined them as ‘legally separate but operationally inter- growth of web-based electronic commerce has created a
dependent companies focused on responding to a market number of approaches for modelling how e-Commerce
opportunity’. Virtual organizations create a network affects business. Multiple interactions can be seen from
of suppliers, manufacturers and administrative services three company perspectives: (i) B2B; (ii) business-to-con-
to accomplish specific objectives, such as flexibility and sumer (B2C); and (iii) marketplace (M). B2B space
responsiveness (Fitzpatrick and Burke 2000). includes the myriad upstream and downstream transac-
Successful SCM requires a change from managing tions that enhance channel coordination and customer
individual functions to integrating activities into the relationships. B2C encompasses all interactions between
key supply-chain processes. Serve et al. (2002) discussed the customer and firm. M involves the company, its
the merits of supply-chain and business-to-business partners and its customers. M provides opportunities
(B2B), and the impacts that they have on each other. for developing communication interactions–including
They employed the concept of B2B marketplaces as the customer surveys and information exchange on such
participating units in a supply-chain process in order to things as product warranty and service capabilities.
enhance the business process. Virtual enterprises can use The web enables all suppliers in a supply-chain to iden-
this extended form of supply-chain as building blocks. tify and coordinate data transfers with each other.
An effective supply-chain will have a number of benefits. Chiu (1995) discussed the integration of IT
It will increase inventory turnover, increase customer with logistics management concepts and identified the
service and responsiveness, reduce costs associated with critical success factors in effective logistics management
Virtual supply-chain management 587

as including: (i) effective logistics planning; (ii) well- (Strader et al. 1998). This involves an alliance of separate
designed distribution organization; (iii) prudent selection firms that can quickly bring together a set of core com-
of allied companies; (iv) a close relationship with trading petencies to take advantage of a market opportunity.
partners; (v) good logistics investment analysis; (vi) logis- Depending upon future business objectives, the alliance
tics management barriers elimination; (vii) top manage- might change. VSCs are enabled by an information
ment commitment; and (viii) continuous improvement in infrastructure of continually improving technology. The
logistics. marriage of supply-chain and e-Commerce achieves com-
The web platform has several advantages and over- petitive advantages and market dominance. The internet
comes some traditional problems. These include: (i) plays a very important role in the networked economy.
real-time inventory information; (ii) single data entry For example, online ordering on the web is directly con-
to minimize human error (because the data input is nected to production planning. The production plan is
handled by customers and thus there is no need for shared with suppliers who receive orders in real-time
re-entry); (iii) real-time online ordering functions; and from the original equipment manufacturer, using the
(iv) multi-level password controls (so that different supply-chain-wide information infrastructure. Informa-
functions have different access levels controlled by their tion is used not only for operational ordering purposes,
respective authorized people). Feraud (1998) has but also as a strategic, long-term resource for competi-
presented a framework for improving strategic decision- tiveness and further innovation in the supply-chain.
making in logistics information management. Ligon et al. Stored customer information can also be used for data-
(1992) discussed the role of EDI in logistics services. mining and customer profiling (van Hoek 2001). Virtual
Peng and Vellenga (1993) highlighted the importance integration allows interaction with customers, networked
of government support in promoting logistics services trading partners and suppliers. This works effectively
with reference to China. Several researchers have dealt with the support of internet-based portal technologies,
with logistics issues in a global perspective (Gary and such as eXtensible Markup Language (XML) and
Davies 1991, Welch and Nayak 1992, Wyatt 1992, Electronic Business using eXtensible Markup Language
Fawcett et al. 1993, Handfield 1994, Quinn and Hilmer (ebXML), which allow structured and unstructured
1994). The areas of e-Logistics and logistics business data from networked trading partners to be accessed
process outsourcing are subsets of this larger external from a common interface. The VSC is based on business
logistics market. alliances using such internet technologies.
Virtual logistics resources can be traded in much the
same way as banks and individuals trade foreign curren-
3. A conceptual model for VSC cies and shares. Using computer applications and the
internet, it becomes feasible to do this at a very low
The supply-chain consists of the logistical and infor- level in logistics operations. Such resources include
mational elements extending from the demands of the production processes, production sub-processes, tools,
marketplace at one end to the specific product/service vehicles, spare vehicle capacity, material-handling equip-
delivery to the customer at the other. The integrated ment, stock items parts, or even slots in a warehouse.
supply-chain structure seeks to minimize non-value- These resources can be purchased, utilized remotely,
added activities and their associated structures. This and lent or sold when surplus to requirements. Infor-
drives investment cost, operating cost and time out of mation technologies are designed to coordinate a smooth
the supply-chain process (Stewart 1995). flow of information, goods, cash and other services
Van Hoek (2001) has argued that simply building a across the supply-chain. Logistic systems can then be
customer-facing web environment is not very difficult, constructed by purchasing the appropriate portfolio of
but managing it with an underlying business model resources and such a portfolio can be adjusted easily
that includes an e-Supply-chain is challenging. Experts and rapidly to reflect changes in demand, changes in
claim that supply-chain failures can be attributed to markets or changes in products (Clarke 1998).
a lack of information with respect to order and inventory A conceptual model that explains the VSC is presented
management. Companies such as Amazon.com, ebay.com, in figure 1. The VSC is based on developing a suitable
FedEx.com, bestbuy.com, hotels.com, buy.com, and network of collaborating firms depending on various
so forth, have websites in which orders can be received resource requirements. The chain starts from market/
24 hours per day from anywhere in the world. customer demands and continues until these demands
Unfortunately, their systems are inadequate when it are fulfilled. The VSC has four phases along the value-
comes to fulfilling the orders. adding processes: (i) plan; (ii) source; (iii) make; and (iv)
A VSC represents a temporary network of firms deliver. Each phase has its own information system
coming together to exploit fast-changing opportunities modules that are integrated with other phases of the
588 A. Gunasekaran and E. W. T. Ngai

Information Flow

B2C, B2B,
B2G & M

Data Collection, Information Processing

and Information Sharing, Internet, Intranet
and Extranet

Market/Customer Demands Fulfilled

Plan Source Make Deliver
Market/Customer Demands

planning, Data e-Procurement,
mining, e-Auction,
Collaborative e-Marketplace, Web-based e-Logistics,
planning, Data mining, Design, e-Payment,
Market Customer MRPII, ERP, EDI, XML
Intelligence, relationship JIT, TQM
Demand management and CRM

Company infrastructure, Human resource

management, Management of technology,
Procurement, Computer skills, Bar coding and
scanning, Warehousing exhibition, Fleet
utilization system, Inventory management system
Network of

Materials Flow
Figure 1. A conceptual model for a virtual supply-chain.

value chain. Various information technologies and sys- internet, intranet and extranet. These information
tems have been used for this purpose, including B2C, systems act as platforms for the integration of several of
B2B and M. Two major management tasks are the dev- the phases (plan, source, make and deliver) of the supply-
eloping of partnerships based on core competencies and chain with the objective of promoting open communi-
of resource requirements to satisfy market requirements. cation among partners. In VSCs, a network of firms
The integration of supply-chains can be achieved by: (i) provides different products or services so that a complete
communication, information systems; (ii) training and service can be performed by the virtual organization.
education; (iii) performance measures and rewards; and The network of firms is based on various strategic con-
(iv) strategic plan. siderations and resource requirements, which include:
B2C, B2B, business-to-government (B2G) and Market- (i) company infrastructure; (ii) human resource manage-
space (http://www.marketspace.org.uk/) facilitate data ment; (iii) management of technology; (iv) procurement;
collection, information processing and information (v) computer skills; (vi) bar coding and scanning
sharing using communication technologies such as EDI, technologies; (vii) warehousing exhibition; (viii) fleet
Virtual supply-chain management 589

utilization systems; and (ix) inventory management B2B can reduce purchasing costs. This is because locating
systems. Information flows in both ways along the goods and completing the necessary paper work are
VSC, but the materials flow in only one direction, except labour-intensive processes (Serve et al. 2002).
for product returns.

3.3. Make
3.1. Plan
This stage involves converting raw materials and sub-
At this phase of the supply-chain, data on customer assemblies into final products that can be accepted by
orders or sales forecasts from the marketing department customers. In VSCs, the conversion takes place in a net-
are processed for product development and management. work of firms. A material requirements planning (MRP)
Customer relationship management (CRM) and B2C are system integrates the various production and assembly
used for information processing and making decisions. activities in a virtual enterprise. B2B companies can
B2B helps to increase the market intelligence and quickly and easily receive price quotes from numerous
decrease the inventory level. Major tasks at this stage suppliers by using the internet. B2B makes connections
include network planning, data mining and collaborative between buyers and sellers that might not otherwise have
planning with suppliers and customers about the market happened (Serve et al. 2002). Web-based design, engi-
and the resources required. The issue of strategic alliance neering and process planning have been achieved with
plays an important role in planning for the VSC envi- the help of computer-aided design/computer-aided man-
ronment. Obviously, demand drives all supply-chain ufacturing (CAD/CAM), Pro-Engineer, computer-aided
activities; accurate forecasting of market requirements process planning (CAPP) and computer-integrated man-
using B2C, CRM and B2B is thus essential for effective ufacturing (CIM). ERP systems, such as SAP, BAAN,
VSC management. Firms must plan to focus on customer Peoplesoft and Oracle, have been used for advanced pro-
demand, satisfaction and retention. By using web-based duction planning, networking with suppliers, material
information systems and data-mining techniques, custo- requirements planning, and production control. In the
mer and supplier profiling can be done accurately. With make phase, customer-relationship management will be
the help of enterprise resource planning (ERP) systems, useful in developing a collaborative supported work along
the manufacturing cycle time and the cost of production supplier–customer links. Operations strategies such as
can also be estimated. Moreover, various experiments JIT are used to manage on-time supplies and deliveries
could be conducted to select the optimal decisions in along the supply-chain. This will lead to a reduction in
different areas of the VSC. In addition, company infra- non-value-adding activities and hence in the overall pro-
structure should be taken into account while planning for duction cost. Business process re-engineering will help
the activities in a VSC. process mapping in the supply chain and provide oppor-
tunities for various IT applications (including B2B and
ERP), with the aim of eliminating non-value-adding
3.2. Source activities. Total quality management (TQM) is a work-
place culture that promotes quality management in the
In this phase of the supply chain, the volume fore- supply-chain based on cooperation, open communication
casts for products are used to determine the different and investment in people.
resources required–including raw materials, components
and parts, and sub-assemblies. Then suppliers for these
resources are selected, based on pre-determined criteria. 3.4. Deliver
B2B e-Commerce has been widely used for this purpose,
including strategic supplier–partner development based Deliver deals with logistics that include warehousing,
on core competencies. ERP systems, such as SAP, Oracle, transportation, order management, installation, invoic-
BAAN and Peoplesoft, are used for integration with ing and cash collection. Web-based information systems,
collaborating firms. B2B helps to decrease the inventory such as e-Logistics, are useful in integrating the activities
levels. E-Auction and e-Marketplace technologies are concerning the logistics value chain with the objective of
new options that should be considered in developing delivering the goods in the most cost-effective manner.
a commodity sourcing strategy. Data-mining technology This includes using the EDI, XML and ebXML technol-
can be used for researching the root causes of material ogies that link enterprises across the supply-chain and the
and information flow problems and for using this logistics activities within those enterprises.
research for process improvements. The internet allows System architecture should focus on information flow
the use of just-in-time ( JIT) manufacturing techniques. from point-of-need to point-of-use. Key data on products,
590 A. Gunasekaran and E. W. T. Ngai

customers, suppliers, orders, forecasting, inventory, per- include Orange, HKNet and Pacific Supernet, Caltex,
formance reporting, order replenishment and shipment/ bigboxx, DHL and AXA.
invoicing must be accessible at multiple points in the LINE’s strategic focus has been on leveraging tech-
supply-chain and be converted to information. Within nology for improving communication and visibility
a virtual environment, information about the stock along the value chain. The mission of LINE is to develop
held can be accessed locally and the stock catalogue a global logistics network with the objective of developing
can allow for organized access to remote stock informa- partnerships between stakeholders–including clients,
tion. Internet applications can be developed that allow manufacturers and customers.
for efficient remote control of stock and for organized
access to stock items that are geographically dispersed. 4.2. The case analysis
To support e-Logistics, we need EDI, XML and
ebXML technologies, and a way to communicate the The model developed for VSC (figure 1) can be oper-
requirements to logistics operators and customers. ationalized along the four main phases of the supply-
Furthermore, technologies–such as bar code, bar code chain: (i) plan; (ii) source; (iii) make; and (iv) deliver.
scanners, radio frequency identification (RFID), smart It should be noted that LINE views the supply-chain as
cards, vision systems, and so forth–are required to consisting of the following phases: (i) source; (ii) make;
support e-Logistics. (iii) store; (iv) move; and (v) payment. LINE did not
include a separate phase of ‘plan’ because this had
already taken place when developing the virtual supply
4. Case study: Logistics Information Network network. As a major third-party logistics (3PL) com-
Enterprise (Hong Kong) pany, LINE gives due consideration to downstream
logistics (distribution) operations. This explains why
In this section, a case study is presented to assess the delivery phase is split into two phases: (a) store and
the model reported in the previous section. The present (b) move (the third and fourth stages in the LINE
authors visited the company that is the subject of the case supply-chain noted above). Because the issue of payment
study and interviewed the business development manager is important from the perspective of achieving a VSC,
and other key employees. A set of questions based on the the phase of ‘payment’ (the fifth stage in the LINE
theoretical model developed for VSC was used in these supply-chain noted above) has been integrated into
interviews. In addition, the authors collected data using the formal supply-chain management arrangements by
reports made available by the company, including the LINE logistics.
company’s website resource (http://www.arena.com/ LINE aims to provide collaborative logistics technol-
aboutus.html). ogies and services through a global logistics and supply-
chain network. The LINE logistics services network
configuration is presented in figure 2. This has three
4.1. Company background major domains: (i) service providers (truckers, 3PLs
and port operators); (ii) logistics services (systems and
Logistics Information Network Enterprise (LINE) is partnerships); and (iii) trading partners (brands,
a provider of supply-chain and logistics solutions and retailers, suppliers and factories). The LINE network
collaborative networks. LINE was established in early integrates these three major activities into the single
2000 as the supply-chain solutions and logistics services platform of a VSC.
division of Hutchinson Port Holdings (HPH) Group, LINE addresses the requirements of clients by assessing
the world’s leading port investor, developer and opera- the technology and culture of their operating environ-
tor, with operations in 15 countries throughout Asia, ment. LINE has a three-layer information architecture
the Middle East, Africa, Europe and the Americas. that is presented in figure 3. This includes logistics
At present, HPH operates 30 ports and a number of services, systems and relationships. The systems layer is
transportation-related service companies. linked into five phases of the VSC: (i) source; (ii) make;
LINE and HPH are backed by Hutchison Whampoa (iii) store; (iv) move; and (v) pay. Implementation of the
Limited (HWL), a Hong Kong-based diversified, multi- VSC has led to transparency along the logistics chain
national conglomerate that is part of the Li Ka-shing activities and an effective transportation-management
group of companies. LINE has its headquarters in system.
Hong Kong and offices in the USA and Europe. It serves LINE’s strategy is based on the type of industry sectors
customers that include freight forwarders, transportation in which their solutions offer potential to add value–such
buyers and suppliers, banks, insurance companies and as soft goods, footwear, apparel, electronics and con-
government agencies. Some of their major partners sumer products. LINE performs value-adding activities
Virtual supply-chain management 591

Service Providers Logistics Services Trading Partners

Truckers Systems Brands

3PLs Partnership Retailers
Port Operators Suppliers

Figure 2. LINE logistics services network.

Logistics Information Network Enterprises (LINE)

Logistics Services,
Management Systems.

Source Make Store Move Pay

Figure 3. Logistics Information Network Enterprise.

to all participants along the supply-chain. The company companies aim for shorter cycle times and increased shar-
develops an integrated logistics chain solution that takes ing of information. This can be seen from the collabora-
into consideration their clients’ major brands and manu- tion among LINE, clients and customers. Earlier supply-
facturers. LINE utilizes a shared information system for chain systems were not designed to operate in these com-
logistics operations and collaboration. This complements petitive global and e-Commerce environments. In view of
the customer’s existing enterprise resource planning this, LINE has automated its supply-chain to provide a
(ERP) and supply-chain planning and optimization sys- wide range of commercial and electronic documentation.
tems. LINE has an integrated system for information This allows LINE to capture data at any point along the
technology and logistics processes, viz. Lead Logistics value chain and to manage real-time information proces-
Provider (LLP). LLP acts as a single entry point that sing. Eventually, this allows LINE to deliver the goods on
manages the entire process–utilizing the power and time in a cost-effective manner.
speed of the internet and leveraging the capabilities of LINE’s logistics information system, LLP, supports
multiple 3PL providers. the transparency and integration that is needed to
With the LLP, a single point of customer contact for achieve cross-functional and cross-enterprise integration
logistics services, and increased transparency and value- in real time. This eliminates the communication barriers
added distribution centres, a reduction of 30% in lead- among diverse participants in the logistics and supply-
time and logistics cost has been achieved. chain. In the past, products were designed for assembly;
now, at LINE, they are designed for achieving maximum
supply-chain efficiency. Utilizing the speed of the inter-
4.2.1. Source net, a client can have access to a wide range of data
about suppliers and can better manage all its suppliers
In the twenty-first century, supply-chain manage- with more accurate and timely information on capacity
ment is based on speed, efficiency, reducing waste, and service requirements. In addition, a client can col-
reducing cost, communication and trust. Manufacturing laborate with suppliers using the information to fulfil
592 A. Gunasekaran and E. W. T. Ngai

requirements of customers on time. LINE employs just- 4.2.4. Move

in-time ( JIT) processes to manage inventories along the
logistics value chain. This includes a module for data LINE transport management and allied solutions aim to
mining and e-Auction to enable customer profiling and optimize planning, loading and routeing. LINE’s trans-
the prioritizing of operations. portation module results in estimated savings of 10–12%
in transport costs. Transportation management systems
(TMS) is an online solution module of LINE that is
4.2.2. Make designed to improve capacity usage and to optimize
freight transport costs. Companies maximize capacity
LINE views the supply-chain from the perspective of usage and select the most appropriate combination of
an end-to-end process, making decisions based on real- channels. LINE determines the truckload, optimizes
time information in a way that traditional ERP systems the route, manages the warehouse and equipment, and
do not. LINE supports manufacturing productivity by tracks online cargo. TMS increases the utilization of the
making available the required materials and services at transport fleet by continuous optimal planning and by
the right time, in the right quantity and at competitive scheduling thousands of customer bookings–taking into
prices. This allows companies to compete in a global account real-time events and the constraints of resource
market with multiple competitive performance objec- availability. Wireless technologies, such as cellphones and
tives. It assists manufacturers of different sizes and tech- pagers, have been widely used to communicate with
nological sophistication who can benefit from total transportation vehicles. This improves communication
supply-chain integration. This helps to improve materials with both clients and customers, and thus enhances
planning, and allows clients to optimize their operational customer service and satisfaction.
efficiency and deliver better service to their customers.
The system operates as an ERP system and integrates
the activities of manufacturers and 3PL. LINE has a 4.2.5. Payment
module for B2B e-Commerce functions along the value
chain. Automation is the main strategy of LINE in its VSC requires automation of the payment process
logistics operations, including value-added activities. The along the logistics chain. An electronic payment system
‘make’ phase requires the availability of all the required develops confidence in the VSC and transparent integra-
materials–so that the final product is assembled and tion of various collaborating firms along the supply
delivered to customers on time with minimum wastage chain. LINE’s platform for exchanging information
of resources (including minimization of unnecessary includes the placing of orders, knowledge of the status
inventory, materials handling and other related over- of goods, and ability to make online payments–thus
heads). enhancing customers’ confidence in the system. The
LINE module also includes foreign exchange services
(including credit financing) and integrates financial set-
4.2.3. Store tlement into the supply-chain. This is achieved through
an alliance with a leading provider of global online pay-
Inventory cost reduction leads to a reduction in ment services. With LINE, sellers can receive payment
the overall cost of production. In view of this, LINE’s assurance and gain access to an extensive network of
inventory module focuses on reducing inventory and logistics providers, inspection agents, financial companies
thus delivering a better service to customers. LINE and cargo insurance.
performs a range of value-added services–including last-
minute global inventory diversions, ticketing and
4.3. Critical success factors
labelling, scan-and-pack and document preparation by
strategically aligning with HPH. Clients can receive the
A summary of LINE’s strategies and technologies for
most up-to-date information from LINE for warehouse
VSC management is presented in table 1.
capacity planning. In general, companies can operate
The following is a summary of the critical success
with confidence when they have more accurate infor-
factors in LINE Logistics.
mation about the location, volume, availability and
lead-time of products. LINE has utilized the available . Strategic alliances with various logistics service pro-
information technology for shared communication viders are utilized to achieve an effective virtual
along the logistics value chain. The information technol- chain of partners who provide different services
ogies used by LINE include EDI, bar code systems, smart along the supply-chain on the basis of their core
card, XML and ebXML. competencies.
Virtual supply-chain management 593

Table 1. Summary of LINE’s strategies and technologies for logistics SCM.

Module Strategies/Technologies
Source Collaboration, Connectivity, Strategic partnership with buyers, Open communications and cost reduction and
profit for all, Logistics information system and easy payment systems, Visibility, Connectivity, an internet-based
SCM information system, Collaboration with suppliers, Electronic documentation, Real-time information and
processing and storage of mission-critical information
Make Single platform, Supply-chain, User-friendly real-time information for Supply-chain integration and
Collaborative partners
Store Focus on inventory reduction, Inventory visibility by real-time information system, Strategic port facilities,
Wide range of value-added services, Last-minute global inventory diversions, ticketing, labelling, scan and pack,
Accurate warehouse capacity with online information access, Capable-of-promising
Move Simplest and most efficient way, Optimize planning, loading and routeing, Capacity utilization, Select the most
appropriate mode for transportation, Intelligent application of LINE technologies, Optimum utilization of
freight transport costs
Pay Integrated financial settlement system, Strategic alliance with global online payment services, Electronic
payment, Payment assurance, and foreign exchange services including credit financing

. Joint ventures bolster cooperative supported work . LINE has its own audit system for monitoring the
among firms along the supply-chain, with transpar- performance of SCM. Traditional performance
ent communication being an essential part of the measures and metrics might not be applicable for
joint projects. measuring the performance of VSC. For example,
. Advanced warehouse management systems enable information productivity is important in VSC effec-
inventory and consolidation activities to be mana- tiveness, as is the ability to develop partnership
ged more effectively, and help to keep track of phy- based on core competencies. Key performance indi-
sical inventories more accurately. cators (such as order fulfilment time, strategic align-
. Web-based logistics information systems provide an ment and information productivity) help to manage
open platform for exchanging information about VSC more productively.
the status of orders and opportunities for bidding. . LINE looks at everything from the perspective of
The application of real-time information facilitates order fulfilment. Order fulfilment drives all sup-
effective VSC management. ply-chain activities. Reducing the time needed to
. Integration of all activities along the supply-chain fulfil the order motivates companies to focus on
using strategic partnerships and open communi- developing an integrated value chain with the
cation with collaborating firms allows a focus on help of a network of partners and information tech-
reducing cycle time and inventory costs. nologies.
. Technological advances (such as the internet, auto-
mation in material-handling activities and EDI)
play a major role in exchanging more accurate
and timely information and in reducing human 5. Summary and conclusions
physical work in handling materials. In turn, this
helps in avoiding conflicts between partners along The objectives of supply-chain improvement processes
the supply-chain and helps to eliminate various are to achieve waste reduction, order-to-delivery cycle-
non-value-adding activities. time reduction, quality improvement and enhanced
. LINE is trying to achieve fourth-party logistics supply-chain performance. These objectives are attained
(4PL), and believes this to be important. Third- through intrafirm and interfirm functional integration,
party logistics (3PL) is the management of logistic sharing and cooperation. The company that is most
services beyond transportation. For example, this closely aligned with consumers will eventually become
might include storage, transshipment and value- the channel master, and will control its supply chain.
added services (as well as the use of subcontractors). In this paper, an attempt has been made to study the
4PL is the integration of all companies involved implications of VSC through a literature survey, the
along the supply-chain. 4PL is the planning, steering development of a conceptual framework for VSC, and
and controlling of all logistic procedures (for exam- the testing of that framework through a case study of
ple, flow of information, material and capital) by one a company in Hong Kong. The conceptual model pre-
service provider with long-term strategic objectives. sented here will enable managers to understand the value
594 A. Gunasekaran and E. W. T. Ngai

of the components: (i) plan; (ii) source; (iii) make; and solution so that an integrated logistics value chain
(iv) deliver. The application of VSC will definitely ben- can be developed.
efit business processes by eliminating the weaknesses . Streamlining and optimizing the flow of goods using
inherent in the traditional supply-chain. The virtual sup- a business process re-engineering approach along
ply chain allows resources to be treated as commodities the logistics value chain is also needed.
that can be lent, borrowed or traded. They can thus be The above summary from the case study provides
flexibly consolidated, apportioned and allocated. sufficient evidence to demonstrate the application of the
The success of the VSC hinges upon the application of conceptual model for a VSC. However, the company’s
a real-time logistics information system to improve com- confidentiality policy prevents the provision of additional
munication along the supply-chain. The major challenge information with respect to the fine details of the com-
in developing a VSC is networking and relationship pany’s system architecture and financial performance.
management. For managing the VSC, key performance Nevertheless, the authors appreciate the company’s
indicators for the success of networking and relation- cooperation in providing the above information–thus
ship management need to be determined. Because VSC enabling the case study to be completed satisfactorily.
relies on an effective communication system, a suitable
information system using various information communi-
cation technologies needs to be developed.
To summarize, the following are the key success factors
for a successful VSC: (i) strategic alliances; (ii) web-based The authors are most grateful to two anonymous
information systems; (iii) automation for business process referees for their constructive and helpful comments
re-engineering; (iv) supply-chain visibility; and (v) a per- that helped to improve the presentation of the paper
formance-measurement system. considerably.
The following are the critical success factors for VSC The authors thank Mr R. Wong, Business Development
from LINE Logistics (see also table 1). Manager and other employees at LINE, Hong Kong,
. Transparency and sharing information in the sup- for providing necessary information for this case-study
ply-chain is essential. Information is the driving research. This research was supported in part by the
force of activities along the logistics value chain. Hong Kong Polytechnic University under grant number
Accurate information about delivery date, volume A-632.
and location of goods in transit helps to avoid any
misunderstanding with respect to the quality of ser-
vice, and thus enhances overall customer satisfac- Acronyms
. The application of a real-time logistics information 3PLs Third-party Logistics
system improves communication along the logistics 4PLs Fourth-party Logistics
value chain. AOL America On-line
. Networking and relationship management with col- B2B Business-to-Business
laborating firms, clients and customers is required. B2C Business-to-Consumer
. Key performance indicators must be established to B2G Business-to-Government
evaluate the performance of logistics services. CAD/CAM Computer-aided Design/Computer-aided
. An effective logistics-information management sys- Manufacturing
tem is paramount for the timely delivery of goods CAPP Computer-aided Process Planning
and better customer service. CIM Computer-integrated Manufacturing
. Activity-based costing in logistics costing provides CRM Customer Relationship Management
process mapping along the value chain, and thus ebXML Electronic Business using Extensible Markup
facilitates the elimination of non-value-adding Language
activities. EDI Electronic Data Interchange
. Having an effective reliable transportation fleet ERP Enterprise Resource Planning
(outsourced) is essential. Strategic partnership ESC Electronic Supply Chain
with transportation companies will help to leverage HPH Hutchison Port Holdings
other benefits–such as consolidation of goods and HWL Hutchison Whampoa Limited
control of inventory costs. IS Information System
. Aiming for a one-stop solution for buyers/suppliers IT Information Technology
is necessary. This requires a logistics-network JIT Just-in-Time
Virtual supply-chain management 595

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