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UNIVERSITY OF CRAIOVA FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION MASTER INTERNATIONAL BUSINESS ADMINISTRATION

SUPPLY CHAIN MANAGEMENT IN ELECTRONIC BUSINESSES

Scientific Coordinator: Professor Amelia Badica

Graduate : Gu Sergiu-Adrian

Craiova, 2009

ACKNOWLEDGEMENTS

I greatly appreciate my advisor, professor Amelia Badica, for her guidance and support in shaping and accomplishing of this disseration. This project would not have been possible without her generous assistance. I also am deeply grateful to all my professors for their education, encouragement and support.

CONTENTS Acknowledgements1 Introduction4 CHAPTER I 1. SUPPLY CHAIN MANAGEMENT (SCM)......................................................................6 1.1. Supply Chain Management the concept...6 1.2. Evolution of Supply Chain Management........................................................................8 1.2.1. The Evolving Structure of Supply Chains..10 1.3. Stages of Supply Chain Management Development.13 1.3.1. First Stage Logistics Decentralization...........................................................14 1.3.2. Second Stage Total Cost Management...........................................................14 1.3.3. Third Stage Integrated Functions ..................................................................15 1.3.4. Fourth Stage Supply Chain Management......................................................15 1.3.5. Fifth Stage e-Supply Chain Management ......................................................16 1.4. Electronic Supply Chain Management (e-SCM)...17 1.4.1. Characteristics of e-SCM....17 1.4.2. e-Supply Chain Synchronization.18 CHAPTER II 2. E-BUSINESS AND SUPPLY CHAIN MANAGEMENT...20 2.1. Electronic business.........................................................................................................20 2.1.1. Subset..21 2.1.2. Models.............................................................................................................22 2.1.3. Classification by Provider and Consumer.......................................................22 2.2. Effects of e-Business on the Supply Chain Management..23 2.2.1. e-Business and Change...24 2.2.2. e-Transformation.25 2.3. Information systems that support the supply chain integration and management 27 2.3.1. Data Capture and Data Communications28 2.3.2. Data Storage and Retrieval..29 2.3.3. Data Manipulation and Reporting...30 2.3.4. Internal Data Integration.31 2.3.4.1. ERP and the Internet32 2.4. E-Business and Supply Chain Integration.34 2.4.1 Barriers to Using the Internet in Supply Chain Integration.35 2.5. Electronic Commerce and Supply Chain...36 2.5.1 Procurement and E-Commerce37 2.5.1.1. Process and E-Procurement..41 2.5.1.2. A Model for E-Procurement.42 2.6. e-Collaboaration.45 2.7. The influence of IT architecture of an organization on its potential to reshape its Supply Chain Management...47 3

2.8. The State of Supply Chain Intergration in Romanian Companies.49 2.8.1. Avicola Calarasi..49 2.8.2. S&D Pharma...50 Conclusions...51 Bibliography..51

INTRODUCTION
All around us, due to advancing technology, evolve faster than ever before. Nothing has rocked the way in which companies do business as the emergence of the Internet. Market forces, conducted by the speed of communications that is facilitated by electronic networks, are making product life cycles shorter and shorter. Customer needs and tastes change rapidly. Product inventories are always in danger of becoming obsolete. To counter this tendency, organizations are increasing their expertise and efficiencies in the process of designing and producing new products and in the process of delivering and servicing existing products. Companies that develop higher skill levels in these areas are clearly better able to ride the waves of change and profit from developments in the markets they serve. The processes involved in the designing, building, and delivering of products to the customers that need them have come to be collectively referred to as supply chain management. Electronic management of business supply chains coordinates all business partners in the supply chain over electronic networks and gives all parties an up-to-the-minute overview of all available inventories. Due to the numerous challenges and difficulties that firms face in present's rapidly changing business environment, establishing an effective supply chain is becoming a core competency for many organisations. Effective supply chain management is no longer an option; it is a requirement for survival. Companies within the supply chain must reach new levels of communication and cooperation. Rather than treating each other as adversaries and attempting to gain competitive advantages at the expense of each other, companies with effective supply chain strategies are able to break the traditional paradigms. To survive in todays competitive business climate, organizations must take a broad view of their product and/or service flow. They must consider that the opportunities for system optimization offer much greater potential to bottom-line business results than can be obtained from minor efficiency improvements that stem from the more traditional approach to local business management. Supply chain management allows a much more proactive approach to the typical issues facing businesses in the 2000s. It allows managers the chance to see the impact of local decisions within any element of the entire supply chain on the global results of that chain. Conversely, not practicing these supply chain philosophies and not assuming this global view will render those companies noncompetitive. Those who practice effective supply chain management techniques will surpass and ultimately defeat those who do not. Companies must increasingly recognize the need to explore supply chain management in order to maximize the value being added along the supply chain. The need for implementing SCM is more apparent and pressing than it has ever been. And while some business ventures do recognize and approach this need, they should certainly be aware of some of the problems associated with the implementation of SCM. In order to deal with the accompanying challenges, organisations must embrace IT, e-business, and the 5

Internet that allow increasingly better opportunities for assisting with SCM and improving business performance. Business can do more now with electronic technology than could even be imagined only a few years ago. And, the rate of development promises to increase. Certainly, those tools will make managing a complex supply chain ever more possible. However, the danger exists that business leaders will assume that the tools in and of themselves will provide all the results that they seek. This is simply not true. The technology, no matter how advanced it will become, will forever be only a tool and will not accomplish the synchronization of the supply chain without significant behavioral change throughout every element of the system. How elements of the chain work with each other through real-time communication and coordination will make the difference. Technology is only a tool. How we use that technology to help coordinate the efforts of the entire supply chain will determine its value. This project has the aim to approach the topic of supply chain management as one of central importance for the successful implementation of business today and to explore how electronic businesses are changing supply chain management with reference to its past trends, present operations and future techniques. Since many organizations employing SCM have continously confronted problems with its realization, numerous keys to these problems have been offered. These include the sharing of information with parties along the supply chain as well as the utilization of advances in information technology. In fact, the importance of in-depth knowledge of different ebusiness models and the Internet as tools of transforming SCM has been suggested. This project will not only focus on the recognition of the technological breakthroughs, but also the changes that have taken place with the industry after the introduction of e-Business concepts into supply chain management.

CHAPTER I 1. SUPPLY CHAIN MANAGEMENT 1.1. Supply Chain Management the concept
Supply Chain Management (SCM) was once a dream, a concept more than a reality, since there were many necessary components of supply chain management that could not be fully achieved. A key barrier to full supply chain management was the cost of communicating with and coordinating among the many independent suppliers in each supply chain. An entire supply chain stretches from the creation of raw materials to the delivery of the finished consumer goods. Because firms are involved in many,many supply chains, active supply chain management is practical only for items essential to the firms market success. Managers are increasingly interested in actively managing their supply chains because of three environmental changes. First, technology has been developed to simplify communication between members of the supply chain.Second, new management paradigms have developed that are being widely shared among supply chain members so that it is simpler for these managers to coordinate their efforts. Third, the development of a highly trained workforce allows employees at each stage of the supply chain to assume responsibility and the authority necessary to quickly make decisions and take actions required to coordinate the supply chain. While the three changes above make supply chain management possible, it is competition in the marketplace that is pushing firms to make SCM a reality. Those who master SCM gain a competitive advantage. So, SCM means money. And, SCM means jobs. For the past 30 years the business world has been inundated by concepts and jargon. These include: Materials Logistics Management (MLM), Just-in-Time (JIT),Materials Requirements Planning (MRP), Theory of Constraints (TOC), Total Quality Management (TQM), Agile Manufacturing, Time Based Competition (TBC), Quick Response Manufacturing (QRM), Customer Relationship Management (CRM), and many more. These ideas are not replaced or superseded by SCM. Rather, SCM incorporates all of these ideas to improve and manage the entire supply chain instead of just one firm in the supply chain. Over the past 25 years, managers have learned to view their firms as a system of closely linked processes which deliver products and/or services to customers. Now managers are recognizing that their entire firm is just one link in a chain of firms whose purpose is to serve the customer. By increasing the integration of the entire supply chain, all the firms in the chain can increase their profits. The APICS dictionary defines the term supply chain as either the processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier-user companies, or as the functions within and outside a company that enable the 7

value chain to make products and provide services to the customer. The APICS dictionary defines value chain as those functions within a company that add value to the products or services that the organization sells to customers and for which it receives payment. The differences between the definitions of the supply chain and the value chain are illustrated in Figure 1.1. In Figure 1.1. the supply chain is shown as a series of arrows moving from the raw materials stage to the final customer. Each of these arrows represents an individual firm, which has its own value chain. In Figure 1.1. this value chain is enlarged for one firm in the supply chain so that some of the internal functions of the firm that add value can be shown. In this example note that purchasing, marketing, and operations management are shown as part of the firms internal value chain. These are internal functions of the firm and they occur in every firm that is a member of a supply chain. Figure 1.1. Supply Chain

(Source: Basics of Supply Chain Management)

Another term used in some firms is pipeline. A pipeline is the supply chain for just one part used in a product. In these firms a supply chain for a complex product consists of many pipelines. An example of a pipeline would be a product that begins with rolled steel.. A second step in the pipeline is the cutting process. This is followed by the stamping of the steel into a fender or other component. The component is then assembled into the final product. For example, it may be a fender which is assembled onto a car body. Figure 1.1. also illustrates that the supply chain consists of more than the movement of physical goods between firms. It is also involves the flow of information between firms. This communication is necessary to manage and maintain the supply chain. Another supply chain flow is the flow of money. This is also shown in Figure 1.1. to illustrate that the primary purpose of every firm in the supply chain is to make money. This helps to remind all supply chain members that increasing their own income requires them to do everything in their power to improve the operations of the supply chain. 8

Supply chains comprise the companies and the business activities needed to design, produce, deliver, and use a product or service. Anything or anyone that influences a products time-to-market, price, quality, information exchange, and delivery, among other activities is part of the supply chain. The supply chain management aims at integrating efforts in terms of target 7Rs, i.e., creating the right product, at the right time and right place, in the right quantity and in right condition for the right customer at the right cost (Kapoor and Kansal, 2003). A wellplanned SCM system helps an organization achieve:
1. 2. 3. 4. 5. 6. 7. 8.

Lower costs Competitive edge Reliability of delivery Order fulfillment accuracy Flexibility in replenishment Accuracy of documentation Continuity of supply Quality of company sales, technical and service representation.

Firms depend on their supply chains to provide them with what they need to survive and thrive. Every business fits into one or more supply chains and has a role to play in each of them. The pace of change and the uncertainty about how markets will evolve has made it increasingly important for companies to be aware of the supply chains they participate in and to understand the roles that they play. Those companies that learn how to build and participate in strong supply chains will have a substantial competitive advantage in their markets.

1.2. Evolution of Supply Chain Management


The practice of supply chain management is guided by some fundamental concepts that have not changed much over centuries. Napoleon Bonaparte made a remark, An army marches on its stomach." Napoleon was a skillful general and a master strategist and his remark illustrates that he clearly understood the importance of what we call today an efficient supply chain. Unless the soldiers are fed, the army cannot be efficient. The term "supply chain management" arose in the late 1980s and started to be use widely in the 1990s. Some definitions of supply chain are presented below:

"A supply chain is the alignment of firms that bring products or services to market.from Lambert, Stock, and Ellram in their book Fundamentals of Logistics Management (Lambert,Douglas M., James R. Stock, and Lisa M. Ellram,

1998, Fundamentals of Logistics Management, Boston, MA:Irwin/McGraw-Hill, Chapter 14)

A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. from Chopra and Meindl in their book Supply Chain Management: Strategy, Planning, and Operations (Chopra,Sunil, and Peter Meindl, 2001, Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ: Prentice-Hall, Inc. Chapter 1). A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.from Ganeshan and Harrison at Penn State University in their article An Introduction to Supply Chain Management published at http://silmaril.smeal.psu.edu/supply_chain_intro.html (Ganeshan, Ram, and Terry P. Harrison, 1995,An Introduction to Supply Chain Management, Department of Management Sciences and Information Systems, 303 Beam Business Building, Penn State University, University Park, PA).

Having the definition of supply chain we can define supply chain management as the actions we can do to influence the behaviour of supply chain to get the expected results. Some definitions of supply chain management are:

The systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.from Mentzer, DeWitt, Deebler, Min, Nix,Smith, and Zacharia in their article Defining Supply Chain Management in the Journal of Business Logistics (Mentzer, John T.,William DeWitt, James S. Keebler, Soonhong Min, Nancy W. Nix, Carlo D. Smith, and Zach G. Zacharia, 2001, Defining Supply Chain Management, Journal of BusinessLogistics,Vol. 22, No. 2, p. 18). Supply chain management is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.

There is a basic pattern to the practice of supply chain management. Each supply chain has its own unique set of market demands and operating challenges and yet the issues remain essentially the same in every case. Companies in any supply chain must make decisions individually and collectively regarding their actions in five areas: 1. ProductionWhat products does the market want? How much of which products should be produced and by when? This activity includes the creation of master production schedules that take into account plant capacities,workload balancing, quality control, and equipment maintenance. 10

2. InventoryWhat inventory should be stocked at each stage in a supply chain? How much inventory should be held as raw materials, semifinished, or finished goods? The primary purpose of inventory is to act as a buffer against uncertainty in the supply chain. However, holding inventory can be expensive, so what are the optimal inventory levels and reorder points? 3. LocationWhere should facilities for production and inventory storage be located? Where are the most cost efficient locations for production and for storage of inventory? Should existing facilities be used or new ones built? Once these decisions are made they determine the possible paths available for product to flow through for delivery to the final consumer. 4. TransportationHow should inventory be moved from one supply chain location to another? Air freight and truck delivery are generally fast and reliable but they are expensive. Shipping by sea or rail is much less expensive but usually involves longer transit times and more uncertainty. This uncertainty must be compensated for by stocking higher levels of inventory. When is it better to use which mode of transportation? 5. InformationHow much data should be collected and how much information should be shared? Timely and accurate information holds the promise of better coordination and better decision making. With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it. The sum of these decisions will define the capabilities and effectiveness of a companys supply chain. The things a company can do and the ways that it can compete in its markets are all very much dependent on the effectiveness of its supply chain. If a companys strategy is to serve a mass market and compete on the basis of price, it had better have a supply chain that is optimized for low cost. If a companys strategy is to serve a market segment and compete on the basis of customer service and convenience, it had better have a supply chain optimized for responsiveness. Who a company is and what it can do is shaped by its supply chain and by the markets it serves. Each market or group of customers has a specific set of needs. The supply chains that serve different markets need to respond effectively to these needs. Some markets demand and will pay for high levels of responsiveness. Other markets require their supply chains to focus more on efficiency. The overall effect of the decisions made concerning each driver will determine how well the supply chain serves its market and how profitable it is for the participants in that supply chain- (Figure 1.2.).

1.2.1. The Evolving Structure of Supply Chains


The participants in a supply chain are continuously making decisions that affect how they manage the five supply chain drivers. Each organization tries to maximize its performance in dealing with these drivers through a combination of outsourcing, partnering, and in-house expertise. In the fast-moving markets of our present economy a 11

company usually will focus on what it considers to be its core competencies in supply chain management and outsource the rest.

Figure 1.2. The Five Major Supply Chain Drivers

The Five Major Supply Chain Drivers


1. PRODUCTION What, how, and when to produce

5. INFORMATIO N The basis for making these decisions

2. INVENTORY How much to make and how much to store.

4. TRANSPORTATION How and when to move the product

3. LOCATION Where best to do what activity

RESPONSIVENESS versus EFFICIENCY The right combination of efficiency and responsiveness in each of these drivers enables a supply chain to "increase throughput while simultaneously diminishing inventory and operating cost "
Source: adapted from Essentials of Supply Chain Management

This was not always the case though. In the slower moving massmarkets of the industrial age it was common for successful companies to attempt to own much of their supply chain. That was known as vertical integration. The aim of vertical integration was to gain maximum efficiency through economies of scale (see Figure 1.3.).

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Figure 1.3. Old Supply Chains versus New

Source: Essentials of Supply Chain Management

Globalization, highly competitive markets, and the rapid pace of technological change are now driving the development of supply chains where multiple companies work together, each company focusing on the activities that it does best. Mining companies focus on mining, timber companies focus on logging and making lumber, and manufacturing companies focus on different types of manufacturing from making component parts to doing final assembly. This way people in each company can keep up with rapid rates of change and keep learning the new skills needed to compete in their particular business. 13

Where companies once routinely ran their own warehouses or operated their own fleet of trucks, they now have to consider whether those operations are really a core competency or whether it is more cost effective to outsource those operations to other companies that make logistics the center of their business. To achieve high levels of operating efficiency and to keep up with continuing changes in technology, companies need to focus on their core competencies. It requires this kind of focus to stay competitive. Instead of vertical integration, companies now practice virtual integration. Companies find other companies who they can work with to perform the activities called for in their supply chains. How a company defines its core competencies and how it positions itself in the supply chains it serves is one of the most important decisions it can make.

1.3. Stages of Supply Chain Management Development


The SCM concept could be said to consist of five distinct management stages. The first can be described as the era of internal logistics departmentalism. In the second stage, logistics began the migration from organizational decentralization to centralization of core functions driven by new attitudes associated with cost optimization and customer service. Stage three witnessed the dramatic expansion of logistics beyond a narrow concern with internal warehousing and transportation to embrace new concepts calling for the linkage of internal operations with analogous functions performed by channel trading partners. As the concept of channel relationships grew, the old logistics concept gave way, in stage-four, to full supply chain management. Today, with the application of Internet technology to the SCM concept, we can describe SCM as entering into stage five, e-SCM. These stages are portrayed in table 1.4.

TABLE 1.4. SCM Management Stages SCM Stage Management Warehousing and Transportation Management Focus Stage 1 to 1960s Operations performance Support for sales/marketing Warehousing Inventory control Transportation efficiencies Stage 2 to 1980 Logistics centralization Total cost management Optimizing operations Customer service Logistics as a competitive advantage 14 Organizational Design Decentralized logistics functions Weak internal linkages between logistics functions Little logistics management authority Centralized logistics functions Growing power of logistics management authority Application of computer

Total Cost Management

Integrated Logistics Management

Supply Chain Management

e-Supply Chain Management

Stage 3 to 1990 Logistics planning Supply chain strategies Integration with enterprise functions Integration with channel operations functions Stage 4 to 2000 Strategic view of supply chain Use of extranet technologies Growth of coevolutionary channel alliances Collaboration to leverage channel competencies Stage 5 2000+ Application of the Internet to the SCM concept Low-cost instantaneous sharing of all databases e-Information SCM synchronization

Expansion of logistics functions Supply chain planning Support for TQM Expansion of logistics management functions Trading partner networking Virtual organization Market coevolution Benchmarking and reengineering Supply chain TQM metrics

Networked, multienterprise supply chain .coms, e-tailers, and market exchanges Organizational agility and scaleability

Source: Adapted from e-Supply Chain Management

1.3.1. First Stage Logistics Decentralization


Historically, the first stage of SCM occurred in the period extending from the late 19th century to the early 1960s. During this era logistics was not perceived as a source of significant competitive advantage. Viewed essentially as an intermediary function concerned with inventory management and delivery, it was felt that logistics could not make much of a contribution to profitability and, therefore, was not worthy of much capital investment. In an era when process and delivery cycle times were long, global competition practically non-existent, and the marketplace driven by mass production and mass distribution, logistics decentralization was a minor problem for most companies.

1.3.2. Second Stage Total Cost Management

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The second stage in the evolution of SCM can be said to revolve around two critical focal points. The first can be described as the concerted effort made by companies to centralize logistics functions into a single management system. By merging what previously had been a series of fragmented functions into a single department, it would be possible to decrease individual costs associated with transportation, inventory, and physical distribution, while simultaneously increasing the productivity of the logistics system as a whole. Second, it was hoped that centralization would facilitate the application of the total cost concept to logistics. The objective of this strategy is to strive to minimize the total cost of logistics, rather than focus on reducing the costs of one or two specific logistics functions, such as transportation or warehousing. A much larger assumption was that, because logistics costs and customer service were reciprocal, it would be easy to calculate the cost trade-offs necessary to balance total logistics costs with marketing and sales objectives.

1.3.3. Third Stage Integrated Functions


During the 1980s, enterprise executives became increasingly aware that focusing solely on the total cost of logistics represented a passive approach to channel management. This awareness was driven by the radical changes occurring in what was rapidly becoming a global marketplace. If the decade could be compressed into two quintessential catchwords, they would be competition and quality management. One of the most significant results of the challenges of the 1980s was the recognition that logistics itself constituted a significant competitive weapon. Up to this period, most executives had viewed logistics as playing a tactical role, with little impact on corporate strategic planning. By the mid-1980s, however, companies began to understand that, by enabling organizations to pursue both cost/operational and service/value advantages through continuous process improvement and closer integration with channel partners, logistics could provide enormous strategic value.

1.3.4. Fourth Stage Supply Chain Management


During the mid-1990s, companies began to expand the concepts of integrated logistics and supply channel management to embrace the new realities of the marketplace. The acceleration of globalization, the increasing power of the customer demanding ever higher levels of service and supplier agility, organizational reengineering, third-party outsourcing, and the growing pervasiveness of information technologies had forced businesses to look beyond the integrated logistics paradigm in the search for new strategic models. The pressure of responding to these new challenges compelled organizations to implement what only can be called a dramatic paradigm shift from stage-three logistics to SCM. The fundamental feature of the integrated logistics model was the 16

merger of channel management functions with those of trading partners targeted at improving customer service and total cost reduction across whole channels. In contrast, at the core of phase four organizations is a distinct recognition that competitive advantage can only be built by optimizing and synchronizing the productive competencies of each channel trading partner to realize entirely new levels of customer value. Using the supply chain operations reference (SCOR) model as a benchmark, the differences between stage-three logistics and stage-four SCM can be clearly illustrated. Plan . In stage-three logistics, most business functions were still inward looking. Firms focused their energies on internal company scenario planning, business modeling, and corporate resource allocation management. ERP systems and sequential process management tools assisted managers to execute channel-level inventory flows, transportation, and customer fulfillment. In contrast, stage-four SCM companies began to perceive themselves and the supply networks to which they belonged as .value chains.. Knowing the total cost to all network partners and optimizing the customer-winning velocity of collective supply channel competencies became the central focus. Companies began to deploy channel optimization software and communications enabling tools like EDI to network their ERP systems, in order to provide visibility to requirements needs across the entire network. Source. Companies with stage-three sourcing functions utilize the integrated logistics concept to merge their procurement needs with the capabilities of their channel suppliers. The goal is to reduce costs and lead times, share critical planning data, assure quality and delivery reliability, and develop win-win partnerships. In contrast, stage-four SCM sourcing functions perceive their suppliers as extensions of a single supply chain system. Besides achieving the benefits of integrated logistics, a critical goal of SCM-driven companies is to utilize channel data to execute volume purchasing to benefit all network trading partners. When possible, computerized extranet technologies are used to assemble channel collaborative relationships pointing toward consortia buying. Transportation and warehousing costs are reduced by the joint utilization of outsourcing opportunities, thereby reducing the overall assets invested in channel inventories. Make . Stage-three organizations resist sharing product design and process technologies. Normally, collaboration in this area is undertaken in response to quality management certification or when it is found to be more economical to outsource manufacturing. There is minimal networking between trading partners when it comes to computer aided design (CAD) and ERP manufacturing databases. Stage-four companies, on the other hand, seek to make collaborative design planning and scheduling with their supply chains a fundamental issue. When possible, they seek to closely integrate their ERP systems to eliminate time and cost up and down the supply channel. SCM firms also understand that speedy product design-to-market occurs when they seek to leverage the competencies and resources of channel partners to generate .virtual. manufacturing environments that are capable of being as agile and scaleable as necessary to take advantage of every marketplace opportunity. Deliver . Customer management in stage-three companies is squarely focused on making internal sales functions more efficient. A heavy priority is placed on basic 17

available-to-promise functionality, finished goods management, and determining the proper timing of distribution channel differentiation. While there is some limited sharing of specific information on market segments and customers, databases are considered proprietary,and pricing data is rarely shared. In contrast, stage-four SCM firms are focused on reducing logistics costs and channel redundancies by converging channel partner warehouse space, transportation equipment, and delivery capabilities. Customer management looks toward automation tools to facilitate field sales, capability to promise tools, customer relationship management (CRM) software, mass customization, and availability of general supply chain repositories of joint trading partner market and customer data.

1.3.5. Fifth Stage e-Supply Chain Management


Today, the application of Internet technology has propelled the SCM concept to a new dimension. Originating as a management method to optimize internal costs and productivities, SCM has evolved, through the application of e-business technologies, into a powerful strategic function capable of engendering radically new customer value propositions through the architecting of external, Internet-enabled collaborative channel partnerships. Actualizing e-SCM is a three-step process. Companies begin first with the integration of supply channel functions within the enterprise. An example would be integrating sales and logistics so that the customer, rather than departmental measurements, would receive top attention. The next step would be to integrate across trading partners channel operations functions, such as transportation, channel inventories, and forecasting. Finally, the highest level would be achieved by utilizing the power of the Internet to synchronize the channel functions of the entire supply network into a single, scaleable virtual enterprise, capable of optimizing core competencies and resources from anywhere at any time in the supply chain to meet market opportunities.

1.4. Electronic Supply Chain Management e-SCM


The immense changes brought about by the dynamics of todays global marketplace and the breakthroughs occurring in Internet-based technologies have elevated the effective management of the supply chain to new levels of importance. As companies find themselves under constant pressure to develop fast, flexible, scalable product and service capabilities that empower customers to choose and transact the product/ service solutions they value the most, digitally and in real time, they have been increasingly turning to their business trading partners for sources to enrich their competitive competencies. Increasingly, it has become apparent that traditional business paradigms centered solely on closed, internal performance metrics are rapidly being replaced by new models coalescing around the recognition that, to continuously recreate competitive advantage, companies must work together across enterprise boundaries and optimize interchannel processes and innovative capabilities. Electronic Supply Chain Management(e-SCM) is a tactical and strategic management philosophy that seeks to network the collective productive capacities and resources of intersecting supply channel systems through the application of Internet technologies in the search for innovative solutions and the synchronization of channel capabilities 18

dedicated to the creation of unique, individualized sources of customer value.

1.4.1. Characteristics of e-SCM


The merger of SCM and the Internet calls for a transvaluation of former perspectives of the tactical and strategic importance of the supply chain. Past definitions of SCM were more or less preoccupied with attempts to extend the concepts of supply channel integration to the performance of operations activities associated with optimizing manufacturing and logistics processes and accelerating the flow of inventory and information through the network system. Laboring under the limitations of intranet and extranet technology tools, such as EDI, the best companies could hope to accomplish was to structure private value-added networks (VANs) that permitted the transmission of a narrow band of information from a narrow group of supply partners. With the emergence of Internet technologies, the concept of supply channel management has moved to a whole new dimension. In the past, the primary problem inhibiting full activation of the SCM model was the mechanism that would provide the interlocking connectivity between business systems. The Internet solves this gap in SCM collaboration. Todays Web applications provide whole supply chains with the capability to instantaneously share databases, forecasts, inventory and capacity plans, product information, financial data, and just about anything else companies may need for effective decision-making. And the integration can be global, 24 7 365, with 100% accuracy.

1.4.2. e-Supply Chain Synchronization


To meet the challenges of doing business in todays marketplace, companies like Aspect have been engineering new methods for linking together real-time e-information. The result of this effort is the concept of e-supply chain synchronization (e-SCS), and it is about transmitting e-information as fast as possible through the supply channel and interlinking all network nodes to achieve a seamless supply chain response to the customer. The obvious goal of e-SCS is to utilize technology to achieve a direct linkage between demand and supply at all points in the channel network. The value of such synchronization is obvious: minimization of work-inprocess inventories, elimination of the .bullwhip. effect through the distribution channel, overall reduced costs, and the perfect matching of customer requirements with available product. e-SCS enables whole supply chains to concurrently manage the everincreasing complexity of todays e-business and collaborative relationships and can provide the following advantages: Ability to network companies in a supply chain community, in order to manage channel complexities by engineering enhanced planning and decision- making capabilities, starting with internal ERP systems, and extending connectivity to Internet-linked channel trading partners.

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Ensuring that supply channel costs are minimized and that they are, as much as possible, the most competitive across geographies and companies. Capturing the most profitable customers, on a global basis, by creating more compelling, value-based relationships than other supply chain networks. Securing access to the most value-added suppliers, on a global basis, by establishing superior Internet-enabled supply chains that offer businessto- business technology and trading partner relationships. Engineering flexible, agile organizations and supply networks that can leverage an array of Internet technologies, ranging from collaborative product commerce to multi-channel e-information visibility to capitalize on changes to customer demand and shifts in supply-side dynamics.

Establishing effective e-SCS in a supply channel ecosystem will require network trading partners to create channel structures, integrated planning and control, and information architectures capable of promoting continuous channel synchronization through collaborative design. A successful e-SCS channel will contain the following key components: a market-winning strategy, synchronized relations with partners, technologies that enable channel synchronized e-information, and performance metrics that assist cross-channel teams to continuously review channel capabilities and reformulate channel decisions (see Figure 1.5). Figure 1.5. e-Supply chain channels.

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Source: Introduction to e-Supply Chain Management

CHAPTER II

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2. E-BUSINESS AND SUPPLY CHAIN MANAGEMENT

2.1. Electronic Business


Electronic business is an innovation that modern day organisations cannot do without. It is based on technology, evolves with technological developments, digitises and automates business processes, is global and leads to improved competitiveness, efficiencies, increased market share, and business expansion. Technological developments applied to e-business results in new issues in the organisation, in dealing with business partners and customers, requires new laws and regulations and automated business processes. Conducting business electronically is a change from traditional ways of doing things, leading to large scale transformation of existing business. To attain business efficiencies from e-business, it is imperative that organisations effectively manage the e-business environment, and all associated changes to digitize and maintain the environment. In this chapter we concentrate on various forms of electronic business applications divided: e-commerce, e-procurement and e-collaboration . e-Commerce helps a network of supply chain partners identify and respond quickly to changing customer demand captured over the Internet. e-Procurement allows companies to use the Internet for procuring direct or indirect materials, as well as handling value-added services like transportation, warehousing, customs clearing, payment, quality validation, and documentation. eCollaboration facilitates coordination of various decisions and activities beyond transactions among the supply chain partners, both suppliers and customers, over the Internet (e.g., coordination of engineering changes in the bill-of-materials for a product that is manufactured by an outsourced partner). Electronic Business, commonly referred to as "eBusiness" or "e-Business", may be defined as the utilization of information and communication technologies (ICT) in support of all the activities of business. Commerce constitutes the exchange of products and services between businesses, groups and individuals and hence can be seen as one of the essential activities of any business. Hence, electronic commerce or eCommerce focuses on the use of ICT to enable the external activities and relationships of the business with individuals, groups and other businesses Electronic business methods enable companies to link their internal and external data processing systems more efficiently and flexibly, to work more closely with suppliers and partners, and to better satisfy the needs and expectations of their customers. In practice, e-business is more than just e-commerce. While e-business refers to more strategic focus with an emphasis on the functions that occur using electronic capabilities, e-commerce is a subset of an overall e-business strategy. E-commerce seeks to add revenue streams using the World Wide Web or the Internet to build and enhance relationships with clients and partners and to improve efficiency using the Empty Vessel strategy. Often, e-commerce involves the application of knowledge management systems.

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E-business involves business processes spanning the entire value chain: electronic purchasing and supply chain management, processing orders electronically, handling customer service, and cooperating with business partners. Special technical standards for ebusiness facilitate the exchange of data between companies. E-business software solutions allow the integration of intra and inter firm business processes. E-business can be conducted using the Web, the Internet, intranets, extranets, or some combination of these

2.1.1. Subsets
Electronic business applications can be divided into three categories: 1.Internal business systems: Customer Relationship Management (CRM) Enterprise Resource Planning (ERP) Document Management Systems (DMS) Human Resources Management (HRM)

2. Enterprise communication and collaboration: VoIP Content Management System (CMS) e-Mail Voice Mail Web conferencing Digital work flows (or business process management) 3. Electronic commerce - business-to-business electronic commerce (B2B) or business-to-consumer electronic commerce (B2C): internet shop supply chain management (SCM) online marketing offline marketing

2.1.2. Models
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When organizations go online, they have to decide which e-business models best suit their goals. A business model is defined as the organization of product, service and information flows, and the source of revenues and benefits for suppliers and customers. The concept of e-business model is the same but used in the online presence. The following is a list of the currently most adopted e-business models:

E-shops E-commerce E-procurement E-malls E-auctions Virtual communities Collaboration platforms Third-party marketplaces Value-chain integrators Value-chain service providers Information brokerage Telecommunication

2.1.3. Classification by provider and consumer


Roughly dividing the world into providers/producers and consumers/clients one can classify e-businesses into various categories (see Figure 2.1.). Companies (business), public institutions (administration), as well as private persons (consumer) can be both service providers and service consumers. What is important is that the electronic business relationship generates added value, which may take the form of either a monetary or an intangible contribution. Figure 2.1 shows the three most important groups of market participants, along with their possible business connections. Each of these participants can appear as a provider or consumer of services. Thus, nine basic business relationships develop in total. A further subset of exchange relationships are termed electronic government (eGovernment), namely the options A2A, A2B, and A2C. Administration-toadministration means the use of information and communication technologies by local government to electronically organize internal administrative channels. This can take place within a single level of administration (see the virtual community in Fig. 2.1), or between different levels of administration. In addition, officials can make offers to citizens (option A2C, where C means Citizen) or to companies (A2B). Electronic votes and elections, are examples of A2C. Figure 2.1. Various electronic business relationships 24

Source: eBusiness and eCommerce

The letter A stands for administration and concerns not only government but also nongovernmental organizations (NGOs), such as nonprofit organizations (NPOs). The letter C stands for consumer or citizen. It is important to note that people can also appear as providers in the service provider and service consumer matrix. For example, option C2C refers to an electronic business relationship between individuals. Moreover, consumers or citizens can provide services for companies (C2B) or for administrative units (C2A).

2.2. Effects of e-Business on the Supply Chain Management


A huge Gross Domestic Product (GDP) deficit between America and Third World countries has been evident since the early 1970s. As the result, many American companies have decided to either close their production lines in America or move their factories to lower cost countries or they have bought products from Asian manufactures based in Japan, Korea, and Taiwan. This enabled them to gain bigger marketing power by gaining access to a cheaper production price. The supply chain has lengthened from a few hundred miles to at least ten thousand miles but the product prices, in addition to shipping costs, are still cheaper than before they made this change. In the 1970s, finding a manufacturer, or starting a new company, in another country was not easy, especially when facing cultural differences and legal issues. Also, bringing the products across the Pacific Ocean back to the United States can be very difficult because more third parties are involved in the supply chain. Information from Asia is not 25

easy to find and much of the secondary information could be deemed useless or incorrect. These difficulties had brought some new jobs into the business (supply chain environment), such as brokers and agencies. In the first stage of business globalization, during 1970 to 1980, brokers and agencies had done a good job with helping companies on both sides of the Pacific Ocean. They provided the manufactures information to American companies and brought American business to Asian manufactories. Though this new pattern of the supply chain dealing with brokers and agencies had satisfied the demand from consumers in the United States and also brought huge revenue to Asian manufacturers. Marketing is about competition such as price, promotion, product, and placement. In the 1980s, the growing GDP in Asia had raised price of products cast a subsegment decline in companies profits. Once again, in mid-1980s, some companies decided to move their orders to other undeveloped countries such as China, the Philippines, and Vietnam. The second move seemed enough to keep the products prices as low as consumers demanded at the time. However in the 1990s, the usage of the Internet gave the consumers huge leverage to compare prices from different sources. The Internet did not only give consumers more power to compare products prices, but also allowed companies to find more distributors easily. Also, American companies and Asian manufactures could easily reach each other without the necessity to pay commissions to agencies and brokers. This change has shaken up the whole supply chain environment because the Internet has collected huge amounts of information together for every one of us. Some industries have started to build up their internal information systems to connect the external web base delivery levels of need and to reach the goal of customization and personalization. The web-based applications have impacted brokers and agencies heavily and, as a result, forced some of them to go out of business. If web based applications can provide information to everyone in the market, the next stage of the supply chain in eBusiness will concentrate on reducing the length of transaction process, and more distributors.

2.2.1. E-Business and Change


E-business not only helps organizations to conduct business on-line but also helps to connect the organization with all its internal and external value chain components; value chain-suppliers, logistics providers, wholesalers, distributors, service providers, and end customers for many different purposes (Fahey, Srivastava, Sharon, & Smith, 2001). Ebusiness, in spite of its pervasiveness, visibility, and impact, often remains a poorly understood phenomenon. It has been stated that e-business embodies the most pervasive, disruptive, and disconcerting form of change (Fahey et al., 2001). E-business creates integrated networks of relationships with channels, end customers, suppliers, providers, and even rivals that were not possible before. E-business is transforming the solutions available to customers in almost every industry. Customers can shop on a 24/7 time schedule and companies can offer many self-service applications and deliver products and services on the request of customers when they want it and where they want it. These new solutions open up possibilities for customer value creation and delivery that were simply unimaginable a mere three years ago. E-business, due to its ability to target customers 1-to-1, offers the platform for new forms of marketplace that have been changing the competitive rules of the game. E-business is dramatically reshaping every traditional business process: from developing new products and managing customer relationships to acquiring human resources and procuring raw materials and components (Sharma, 2001; 2003). It places an 26

especially heavy premium on new forms of integrated and intensive relationships with external entities, new sets of perceptions held by customers, channels, suppliers, and, of course, significant new knowledge (Ginige, Murugesan, & Kazanis, 2001). 'Change management' is the process of managing the effective implementation of organizational strategies, ensuring that permanent changes in goals, behaviors, relationships, processes and systems are achieved for business advantage (Bridges, 1991). Successful organizational change requires sophisticated planning, design, communications and implementation management, with continuous stakeholder involvement (Bryson & Anderson, 2000), and it needs proactive planning and implementation. A failed change can create poor morale, lack of credibility, customer irritation, competitors' advantage, and resistance to further change. Change management requires an understanding of all the points of impact, a system view; meticulous planning and scheduling, and excellent communications and HR management (Buchanan & Badham, 1999; Carnell, 1995). The new e-business technologies necessitate not just the reengineering of existing processes but also mandate design, development, and deployment of fundamentally new ways of conceiving and executing business processes (Fahey et al., 2001). Senior executives in every organization thus confront a central challenge: how to transition from traditional business methodologies into e-business transformation and how to manage the change successfully. According to Gartner Group, 80% of all e-business downtime incidents are caused by problems not due to failure of IT processes but to poorly executed changes (Liebmann, 2001). It is important to understand just how challenging change has become for technology teams. E-business applications now rely on an incredibly complex chain of elements, each of which must be in good working order and well-behaved in relation to every other element in the end-to-end chain for the whole thing to work. These elements include network hardware, servers running various operating systems, highly "componentized" software across multiple tiers, diverse types of web content, security systems, storage devices, processes, people, applications and more (Wargin & Dobiey, 2001).

2.2.2. E-Transformation
Several trends in the marketplace are already pointing to the signs of e-transformation, all of which are focused on allowing businesses to get to the customer faster, with more velocity and more value. E-transformation involves changes in how a company does business, how it enters new markets, how it communicates across the enterprise, and how it deals with suppliers (Budhwani, 2001 ). Above all, transformation is about customers changing the means by which companies find, sell to, service, and communicate with them (Wilder, 1999 ). In a Information Week Research survey of 300 IT executives, the most common "transformational" initiative under way at their companies was interaction with customers (Wilder, 1999 ). An e-transformed company is a company that has implemented a combination of aggressive deployment of e-business enablers to change business and supply-chain components. Examples of e-transformation are everywhere. Auto manufacturers are bringing on-line processes to a sales culture that has never been before. Many companies are offering on-line access to their products and services and offering self-service applications. Airline industry is bringing IT to bear on virtually every aspect of its customer experience.

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E-transformation not only helps companies to hack away at the intermediaries between them and their customers, but also to reward and reinforce the links that are delivering new and different types of values to customers. Companies undertaking etransformation are concurrently applying value management principles, reengineering their core business processes, and implementing enabling e-technologies - all with the intent of developing and implementing innovative business models. E-technologies provide the opportunities to build new business models but do not assure their success. To stay ahead, the e-transformed company will need to continue to implement innovation. The etransformation strategic direction will provide the high-level description of new business concepts and the required modifications to the existing business model, organizational capabilities and infrastructure, and method of interaction with customers and external partners (Schuh, Mueller, & Tockenbuerger, 2002). At its core, e-transformation is about breaking down walls - internal walls between business and IT and between other company functions - but even more radically, walls between what is inside and outside the company. The Internet, of course, offers an unprecedented vehicle to do that for customers, suppliers, and business partners. But it is not just about opening doors with extranets and customer self-service web sites. It is about a new mind-set - opening the company to new partnerships and new ideas from unexpected sources. The Process-Technology-People (PT-P) approach describes the operational behavior of organizations, in how an organization's business processes interact with each other, with the processes of its customers and suppliers, and with other external business processes. This simple, yet powerful framework is based on the fact that the processes are performed by people using relevant information systems applications and technologies. The interaction between business processes occurs, in fact, via the interconnection of applications and technologies, and via the cooperation of people. Thus the change management framework is divided into five different dimensions. The e-transformation model based on Process-Technology-People (P-T-P) Model (Sharpe, 1989) is presented in Figure 2.2.

Figure 2.2: E-Transformation model 28

Source: E-Business Innovation and Change Management

2.3. Information systems that support the supply chain integration and management.
Information technology can support internal operations and also collaboration between companies in a supply chain. Using high speed data networks and databases, companies can share data to better manage the supply chain as a whole and their own individual positions within the supply chain. The effective use of this technology is a key aspect of a companys success. All information systems are composed of technology that performs three main functions: data capture and communication; data storage and retrieval; and data manipulation and reporting. Different information systems have different combinations of capabilities in these functional areas. The specific combination of capabilities is dependent on the demands of the job that a system is designed to perform. Information systems that are employed to support various aspects of supply chain management are created from technologies that perform some combination of these functions.

2.3.1. Data Capture and Data Communications


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The first functional area is composed of systems and technology that create high speed data capture and communications networks. It is this technology that can overcome the lag times and lack of big picture information that gives rise to the bullwhip effect.We will look at: The Internet Broadband EDI XML

The Internet The Internet is the global data communications network that uses what is known as Internet Protocol (IP) standards to move data from one point to another. The Internet is the universal communications network that can connect with all computers and communication devices. Once a device is hooked into the Internet it can communicate with any other device that is also connected to the Internet regardless of the different internal data formats that they may use. Before the Internet, companies had to put in expensive dedicated networks to connect themselves to other companies and move data between their different computer systems. Now, with the Internet already in place, different companies have a way to quickly and inexpensively connect their computer systems. If needed, extra data protection and privacy can be provided by using technology to create virtual private networks (VPNs) that utilize the Internet to create very secure communication networks. Broadband Basically, this means any communications technology that offers high speed (faster than a 56Kb dial-up modem) access to the Internet with a connection that is always on. This includes technologies such as coaxial cable, digital subscriber line (DSL), metro Ethernet, fixed wireless, and satellite. Broadband technology is spreading and as it does, it becomes possible for companies in a supply chain to easily and inexpensively hook up with each other and exchange large volumes of data in real-time. Most companies have connected themselves internally using local area network (LAN) technology such as Ethernet that gives them plenty of internal communications capability. Many companies have connected some or all of their different geographical locations using wide area network (WAN) technology such as T1, T3, or frame relay.What nowneeds to happen is high speed, relatively low cost connections between separate companies and that is the role that broadband will play. EDI Electronic Data Interchange (EDI) is a technology that was developed to transmit common types of data between companies that do business with each other. It was first deployed in the 1980s by large companies in the manufacturing, automobile, and transportation industries. It was built to automate back office transactions such as the sending and receiving of purchase orders (known as an 850 transaction), invoices (an 810), advance shipment notices (an 856), and backorder status (an 855) to name just a few. It originally was built to run on big, mainframe computers using value added networks (VANs) to connect with other trading partners. That technology was expensive. Many companies have large existing investments in EDI systems and find that it is very cost effective to continue to use these systems to communicate with other businesses. 30

Standard EDI data sets have been defined for a large number of business transactions. Companies can decide which data sets they will use and which parts of each data set they will use. EDI systems can now run on any type of computer from mainframe to PC and it can use the Internet for data communications as well as VANs. Costs for EDI technology have come down considerably. XML XML (eXtensible Markup Language) is a technology that is being developed to transmit data in flexible formats between computers and between computers and humans. Where EDI uses rigid, pre-defined data sets to send data back and forth, XML is extensible and once certain standards have been agreed upon, XML can also be used to communicate a wide range of different kinds of data and related processing instructions between different computer systems. XML can also be used to communicate between computers and humans because it can drive user interfaces such as web browsers and respond to human input. Unlike EDI, the exact data transactions and processing sequences do not have to be previously defined when using XML. There are many evolving XML standards in different industries but as yet none of these standards has been widely adopted. The industry that has made the most progress in adopting XML standards is the electronics industry. They are beginning to implement the RosettaNet XML standards (www.rosettanet.org). In the near term, XML and EDI are merging into hybrid systems that are evolving to meet the needs of companies in different supply chains. It is not cost effective for companies with existing EDI systems that are working well enough to replace them with newer XML systems all at once. So XML extensions are being grafted onto EDI systems. Software is available to quickly translate EDI data to XML and then back to EDI. Service providers are now offering Internet-based EDI to smaller suppliers who do business with large EDI-using customers. In the longer term, EDI will be wholly consumed by XML as XML standards are agreed upon and start to spread. As these standards spread they will enable very flexible communications between companies in a supply chain. XML will allow communications that are more spontaneous and free form, like any human language. This kind of communication will drive a network of computers and people interacting with other computers and other people. The purpose of this network will be to coordinate supply operations on a daily basis.

2.3.2. Data Storage and Retrieval


The second functional area of an information system is composed of technology that stores and retrieves data. This activity is performed by database technology. A database is an organized grouping of data that is stored in an electronic format. The most common type of database uses what is called relational database technology. Relational databases store related groups of data in individual tables and provide for retrieval of data with the use of a standard language called structured query language (SQL). A database is a model of the business processes for which it collects and stores data. The model is defined by the level of detail in the data it collects. The design of every database has to strike a balance between highly aggregate data at one extreme and highly detailed data at the other extreme. This balance is arrived at by weighing the needs and budget of a business against the increasing cost associated with more and more detailed data. The balance is reflected in what is called the data model of the database. 31

As events occur in a business process, there are database transactions. The data model of the database determines which transactions can be recorded since the database cannot record transactions that are either more detailed or more aggregated than provided for in the data model. These transactions can be recorded as soon as they happen and that is called realtime updating or they may be captured and recorded in batches that happen on a periodic basis and that is called batch updating. A database also provides for the different data retrieval needs of the people who use it. People doing different jobs will want different combinations of data from the same database. These different combinations are called views. Views can be created and made available to people who need them to do their jobs. For instance, consider a database that contains sales history for a range of different products to a range of different customers. A customer view of this data might show a customer the different products and quantities they purchased over a period of time and show detail of the purchases at each customer location. A manufacturer view might show all the customers who bought their group of products over a period of time and show detail for the products that each customer bought.

2.3.3. Data Manipulation and Reporting


Different supply chain systems are created by combining processing logic to manipulate and display data with the technology required to capture, communicate, store, and retrieve data. The way that a system manipulates and displays the data that flows through it is determined by the specific business operations that the system is designed to support. Information systems contain the processing logic needed by the business operations they support. Chopra and Meindl define several kinds of systems that support supply chain operations: Enterprise Resource Planning (ERP) Procurement Systems Advanced Planning and Scheduling Transportation Planning Systems Demand Planning Customer Relation Management (CRM) and Sales Force Automation (SFA) Supply Chain Management (SCM) Inventory Management Systems Manufacturing Execution Systems (MES) Transportation Scheduling Systems Warehouse Management Systems (WMS) Supply chain management is driven by the customer. It requires communication to all participants in the supply chain of the customers needs and wants as well as how well these needs and wants are being met. To facilitate managing the linkages in the supply chain, many types of software tools have been developed. These software programs are not the strategy, rather they are tools to implement a firms strategy. The strategy is to focus the entire supply chain on satisfying the needs of the customer. Installing and using these tools is not the goal of the firm; the goal is to improve management of the supply chain. The information technology is an enabling technology that allows managers to do their job

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better because they have information that is more complete and more accurate than they would otherwise have. There is a variety of software packages for each link in the supply chain. As computers and telecommunications equipment become cheaper, there will be even more advanced types of software available. To simplify the presentation of the types and role of the software used, software will be discussed here in 3 major sections. The internal linkages (software integrating our own firms functions) will be discussed first, because this usually serves as the platform for integrating the firm with other software. Second, software that links our firm to our customers will be examined. Third, software that links our firm to our suppliers will be the final type that is reviewed.

2.3.4.Internal Data Integration


A common type of software used by firms to manage their internal portion of the supply chain is enterprise resources planning (ERP) system. An ERP system attempts to integrate all of the information processes in the organization and to use this integration to improve performance for the customer. An enterprise resources planning system is a set of software modules that provides a company with the capability of automating the transactions involved with its business processes. The ERP system provides a common database and establishes uniform policies and practices across the entire enterprise. This allows real-time access to the data. An ERP system is an outgrowth of the traditional manufacturing software systems such as Material Requirements Planning Systems (MRPII). The traditional systems focused on planning and optimization of these plans. The ERP system expanded beyond these to serve additional functions in the firm. ERP systems provide more data integrity, use of accessible databases, and consolidation of many different incompatible systems. The ERP system focuses on capturing all of the transactions in a firm. But, the ERP system does not suggest which decisions to make about the supply chain. Enterprise resources planning (ERP) 1) An accounting oriented information system for identifying and planning the enterprise-wide resources needed to take, make, ship, and account for customer orders. An ERP system differs from the typical MRPII system in technical requirements such as graphical user interface, relational database, use of fourth-generation language and computer assisted software engineering tools in development, client/server architecture, and open-system portability. 2) More generally, a method for the effective planning and control of all resources needed to take, make, ship, and account for customer orders in a manufacturing, distribution, or service company. APICS Dictionary, 9th edition, 1998 Some software suppliers are developing interfaces for the ERP systems to interact with other ERPs across the web to allow Enterprise Supply Chain Management systems. These would address supply chain management and planning across an entire supply chain (i.e., the customer, suppliers, different divisions, etc.). 33

2.3.4.1. ERP and the Internet


Enterprise resources planning (ERP) will not be killed by the Internet. To be useful on the Net though, ERP systems will require a front end that will allow interaction with customers and increased use internally. The fixes to this system will require an enormous effort. It is here in the area of customer linkages that technologies seem to be advancing the most rapidly. Technologies that are simplifying the process of integrating the supply chain from the customer order to the suppliers product delivery include relational database system with real-time data, local area networks (LAN),wide area networks (WAN), and improved communications capabilities including the Internet and the World Wide Web. Local area network (LAN)A high-speed data communication system for linking computer terminals, programs, storage, and graphic devices at multiple workstations distributed over a relatively small geographic area such as a building or campus. APICS Dictionary, 9th edition, 1998 Wide area network (WAN)A public or private data communication system for linking computers distributed over a large geographic area. APICS Dictionary, 9th edition, 1998 The goal many firms have when installing this technology is to shorten the time it takes to receive an order, process it, prepare the product, and ship it to the customer. The purpose of shortening this order cycle is to increase customer service. To have the technology effectively reduce the order cycle requires that all appropriate personnel receive the necessary training so that they can turn the information obtained into knowledge and then act on this knowledge. Indeed, in one of its advertisements, SAP, the manufacturer of R/3, states that the rapid evolution of supply chain management is being driven by the integrated technology. It is this technology that enables companies to reengineer operations and link their entire business to align the flow of the goods with the markets demands. The emerging technology is increasingly capable of supporting interactive collaboration between all members in the supply chain. The revolution in U.S. manufacturing philosophy that occurred after 1980 was to move from the push systems toward shop floor systems that pull materials into the process. The revolution occurring now is to extend this pull of materials from the customer throughout the entire supply chain. For production to be able to respond to the customers needs, it must know the customers needs.Many firms are striving hard to produce and deliver their product very quickly to the customer so that they do not have to carry finished goods.Many attribute Dell Computers phenomenal success to their ability to customize a customers personal computer and deliver it quickly. Dell can do this because of the way it has organized its factory floor and the speed with which it can move information around the organization. 34

Whenever possible, firms want to use actual customer orders to schedule their factories. They prefer not to guess about potential demand. These firms do not schedule based on a forecast or a production plan because the shops production lead time is shorter or equal to the length of time that a customer is willing to wait for a product. Their production process may be facilitated by flexible manufacturing environments which can process a wide range of volumes. And their administrative systems are supported by software which helps to quickly schedule the shop as the orders come in. In this environment, the customers may communicate on-line with the factory. This capability helps the firm replan quickly as the conditions change. EDI has not progressed as rapidly as expected over the past decade. It was difficult to implement and it required intercompany standardization of how the transaction documents should be organized. Further there were often problems between points of connection. A typical EDI system is illustrated in Figure 2.3 Most EDI systems do not operate in real time. They batch process the data. The Internet makes it feasible to conduct exchanges between companies on a transaction-bytransaction basis. While there are enormous potential savings from placing the entire supply chain online, it is difficult to achieve this. There are technological, logistical, and conceptual barriers to accomplishing this. In the auto industry, the Big 3 began electronically linking suppliers before 1985 with the goal of improving the flow of materials. That was to be just the first step, while later steps would incorporate engineering design systems and financial transaction systems. As part of this, the Automotive Industry Action Group (AIAG founded in 1981 to develop specific product-oriented standards) established industry-wide electronic communication standards in the mid-80s. Great progress has been made. All or most of the tier 1 suppliers electronically communicate purchase orders and releases for production, but the more sophisticated data is not shared electronically and few of the tier 1 suppliers are linked electronically with their own suppliers. One barrier has been the incompatibility of the different software systems used by the OEM and its suppliers. Further, many engineers prefer working with 2-dimensional figures on paper to looking at 3-dimensional files on the computer. Another barrier is that even some of the suppliers who have EDI capability do not incorporate it into their overall manufacturing and inventory-management information systems. The information comes in on one system, and then it is keyed into second system.

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Figure 2.3. Electronic Data Interchange (EDI) in Business-to-Business Communication

Source: Basic of Supply Chain Management

2.4. E-Business and Supply Chain Integration


The widespread availability and use of the Internet offers companies opportunities that did not exist before. These opportunities are made possible because it is now so easy and relatively inexpensive for companies to connect to the Internet. Once connected, companies can send data to and receive data from other companies that they do business with regardless of the particular computers or software that individual companies may be using to run their internal operations. Based on this data sharing, opportunities exist to achieve tremendous supply chain efficiencies and significant increases in customer service and responsiveness. These are the results of better supply chain integration. E-business encompasses the evolving set of principles and practices that companies are employing to gain the benefits inherent in better supply chain integration. In the words of Professors Hau Lee and Seungjin Whang of Stanford University, e-business specifically refers to, the planning and execution of the front-end and back-end operations in a supply chain using the Internet. In a white paper titled E-Business and Supply Chain Integration published by the Stanford Global Supply Chain Management Forum (www.stanford.edu/group/scforum/) professors Lee and Whang lay out four key dimensions of the impact of e-business on supply chain integration.These four dimensions create a sequence of greater and greater integration and coordination among supply chain participants. This sequence culminates in the creation of whole new ways to conduct business. The four dimensions are:

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1. Information integrationIs the ability to share relevant information among companies in a supply chain. This includes data such as: sales history and demand forecasts; inventory status; production schedules; production capacities; sales promotions; and transportation schedules. This data should be available to the people who need it in a real-time, on-line format via the Internet or private network. 2. Planning synchronizationRefers to the joint participation of companies in a supply chain in the demand forecasting and inventory replenishment scheduling. It also includes the collaborative design, development, and bringing to market of new products. 3. Workflow coordinationIs the next step after planning synchronization. It is the streamlining and automation of ongoing business activities across companies in a given supply chain. This includes activities such as purchasing and product design. 4. New business modelsCan emerge as a result of supply chain integration made possible by the Internet. Roles and responsibilities of companies in a supply chain can be redesigned so that each company can truly concentrate on the activities that are its core competencies. Non-core activities can be outsourced to other companies. New capabilities and efficiencies will become possible.

2.4.1.Barriers to Using the Internet in Supply Chain Integration


The major barrier to increased supply chain integration is the mind set of the managers of the different firms involved. With or without an Internet, most managers view their firm as being an independent system. They do not have a systematic view of the supply chain. Given this attitude, it is difficult for a firm to develop the openness necessary to share information freely over an extranet. Cisco Systems outsources all of its manufacturing. It has its suppliers post their quotes and forecasts on Ciscos Website each quarter. Then Cisco selects its suppliers and contract manufacturers (Economist, June 26, 1999). A second barrier to integrating the Internet into a company is the need for services in addition to products. This is an opportunity as well as a challenge. Firms will have the opportunity to sell services as well as a product to customers on the Net. The challenge is that many of the services will not be provided by the firm selling the product. Instead, the service may be outsourced to a partner. For example, one service provided by the Home Depot chain of building supply stores is that contractors can be given account numbers. The contractor can use that account number to log onto Home Depots Website. The Website will provide services such as material estimates and work schedules for jobs. It will also allow the contractor to schedule deliveries. Dell Computers Factory

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Dell sends orders to its factory in Ireland (responsible for manufacturing PCs for Europe) from its Website and call centers. This information is relayed to its suppliers, so that they know the components needed and when they are needed. As the components enter, they are assembled and the final assembled computer is shipped a few hours later. Dell sells over $15 million of computers from its Website each day. Dells suppliers have real-time access to information about orders that Dell receives over the Internet. Dell also allows customers to track the progress of their order from the factory to their doorstep on the Internet.

2.5. Electronic Commerce and Supply Chain


The Internet can help companies lower costs throughout their supply chain.It is also possible to use the Internet to improve customer service. Industry is just starting to use the Internet, but as industrial leaders begin to use it they will force others in their industry to do the same thing. Both large firms and small firms will embrace the Internet over the next few years. The computer industry has already done so. As the use of the Internet allows decreased costs and increased customer contact, these firms will become more competitive and put increasing pressure on their competition to take the same steps. What firms who are leaders in the Internet applications are striving to achieve is the transfer of many of their core processes to the Web. This means that firms will need Websites that can support online transactions and can share data with their customers databases and their suppliers database. Past investments in information technology have primarily been focused on improving the internal operations of the firm. The Internet allows increased communication and connection with the outside world. Electronic business allows the benefits of speed and automation of internal processes to be shared with customers and suppliers. The ability to collaborate with others is an additional competitive advantage. The advantage of the Internet over EDI is that it is much more flexible. The Internet can adapt quickly to changes in market conditions. The Internet also has open standards. Companies can use the Internet to facilitate communication internally on what is referred to as an intranet. The information that would sit in logistics, or manufacturing or finance, etc., can be shared quickly between functions. This increases the amount of internal collaboration that is possible. Collaboration can also be increased with suppliers and customers by creating an extranet. In an extranet, corporate information is shared with selected outsiders. This allows collaboration and cooperation with the firms outside. It is hoped that suppliers will match their production patterns to the demand patterns they can observe as the demand information is shared. Some authors even dare to state that ecommerce eliminates the business cycle doom, giving rise to a New Economy. Whereas the influence of e-commerce on, for instance, grocery retail and other markets for goods is the subject of many publications, its 38

impact on markets of transport services receives relatively little attention. However, there is ample reason. E-commerce induces a completely new context for transport business, revealing two main influences on the management of logistics: 1. it blurs traditional company boundaries 2. it makes completely new functions and companies appear (and others disappear). The effect is even greater on intermodal transport management whose need for significant information means that the influence goes to the very core of business. We may say, therefore, that e-commerce redefines intermodal freight business.

2.5.1. Procurement and E-Commerce


In the wake of current SCM thinking, procurement is becoming an increasingly important function for overall operations (Spekman, Kamauff & Myhr, 1994). Purchasing managers have moved from being transaction accountants to information brokers, and from being the primary point of contact with suppliers to managers of external manufacturing (Spekman, Kamauff, & Myhr, 1994). More often than not, procurement involves other organizational units, such as production and engineering, making the function complex. Therefore, to improve buyer/seller interaction in complex procurement situations, issues regarding technical, commercial, logistical, and social/communication elements and activities need to be handled in a relational approach (cf. Hkansson, 1982; 1993; Rehme, 2001). At the same time, for less complex types of procurement (e.g., commodity type products), there may not be a need for establishing long-lasting relationships. Instead it may be desirable to keep suppliers at arms length. Inevitably, there are large discrepancies between different strategic and processual considerations depending on the various types of purchased goods. Thus there is a need to direct appropriate purchasing measures and tools for different types of goods purchased and for different steps in the procurement process. Van Weele (1997), for instance, emphasizes the need for different purchasing strategies. He forwards a multitude of variables that affect the purchasing process, such as product characteristics, strategic importance of the purchase, financial impact of the purchase, market characteristics, relative risk, effects on existing routines and processes, and the role of the purchasing department. These variables can in many ways affect the different tools and solutions that are needed in procurement. An e-commerce survey conducted in 1998 reported that purchasing managers expected that Web-based solutions would enable tighter and cheaper supplier relationships and thus reduce the length of the supply chain (Segev, Gebauer et al., 1998). Moreover (in the same report) purchasing managers stated that e-procurement would provide them with cost-reduction means through, e.g., bidding models via the Internet. These perceived benefits of e-commerce appear to be contradictory, since employing market forces (i.e., bidding models) in buyer/supplier relationships often means retorting to arms length relationships not compatible with tighter supplier relationships. They also indicate the purchasing managers goal: to attain the best of two worlds, i.e., to improve supplier relationships while still exercising market forces. In summary, the purchasing managers saw e-commerce as beneficial when it comes to reducing buying and transaction costs (Segev, Gebauer et al., 1998). In addition, according to a purchasing director at Volvo Cars 39

(the car manufacturer), suppliers that do not utilize the opportunities for rationalizations that e-commerce can provide will face the risk of losing business (NyTeknik, 2001). Most of these benefits and value-adds can be attributed to the automation of various processes, enhancing speed and improving correctness of information. Many of the e-procurement initiatives have been geared towards process automation. For instance, when Ericsson (the telecom company) and ABB (the power and automation company) introduced their more comprehensive e-commerce solutions, they focused on automating parts of the purchasing process for indirect material, with their solutions Click-to-Buy and Easy-to-Buy, in order to cut costs. Other companies, such as Dell or Cisco, attempted, through their use of e-commerce, to increase efficiency in logistics and marketing processes in order to achieve cost reductions and improve the competitive situation, e.g., in the form of decreased TTC (Time-To-Customer), TTM (Time-To-Market), and lower inventory levels. Another example of e-commerce for reducing costs is Pipe-Chain, an Internet-based solution for VMI (Vendor Managed Inventory), which is used by Ericsson and a number of their suppliers. It is clear that strategic considerations in purchasing have great impact on the requirements of e-procurement solutions. The predominant purchasing efforts in ecommerce have been directed towards indirect material, where the items are often nonstrategic and low in value. As mentioned above, the first and largest e-procurement investments in ABB and Ericsson, for instance, were for indirect material. These eprocurement solutions are often solely aimed at reducing costs of the procurement process rather than focusing on price negotiations and supplier relationship improvements. In Figure 1.5. the importance of procurement denotes the overall impact of the cost of purchased goods on business performance (cost of material/total costs, etc.), and the complexity of the market marks the degree of logistics costs and complexity, monopoly or oligopoly conditions, technological development, etc. (Kraljic, 1983). This means that purchased items are classified based on their overall business impact, on the one hand, and how difficult they are to come by, on the other. Kraljics matrix illustrates the difference between purchasing strategies when handling different sets of items (goods), i.e., noncritical, leverage, bottleneck, and strategic items. This classification of items purchased ranges from a market situation where suppliers are kept at arms length, to a situation where it is necessary to adopt policies to support tight integration with suppliers. Furthermore, the matrix denotes the way that purchasing decisions are authorized, i.e., the degree of centralized decision making in the purchasing process. The Kraljic classification scheme is quite often used in industry (for instance, in ABB and Ericsson). From a supply strategy perspective, it is important to understand the different strategies for which different ecommerce solutions are appropriate. In order to evaluate different solutions and make suggestions for appropriateness, as well as to investigate the usefulness of different eprocurement solutions, we use the matrix in Figure 2.4. Non-Critical Items For non-critical items, i.e., standard products and commodities with a large number of suppliers being able to supply the goods, e-procurement solutions ought to be aimed primarily at cost reductions. Products purchased do not significantly burden overall cost. Instead, the process cost is, in comparison to the purchased goods, high. Therefore, the 40

automation of processes in order to cut costs is a desirable function for an e-procurement solution. Figure 2.4. E-procurement solutions for different purchased items

Source: Strategies for Generating e-Business Renturns on Investment

Many e-commerce solutions for purchasing have had their focus on this group of materials. ABB and Ericsson, among others, have come up with their most comprehensive solutions for this type of purchase, where contracts have been established at the corporate centers along with electronic catalogs. Ericssons solution handles goods such as stationery, hand tools, and other items that are indirect by nature. The e-procurement solution is organized as an electronic catalog where the corporate purchasing department arranges the contractual agreements and the suppliers need to meet certain criteria in order to be included in the catalog. The solution is operated by a third party, who updates and maintains the catalog. There are several reasons why non-critical items have been among the first to be handled by e-commerce solutions. First, as these materials are non-critical, purchasing managers take less risk in introducing this new purchasing measure, since a failure does not affect overall operations to any great extent. Therefore, managers can be proactive without 41

risking any major operations. Second, for this type of material, the cost of the purchasing process itself is a substantial part of the overall cost, and since one of the more obvious upsides of e-procurement is process cost reduction, an investment in this group can provide a fairly easy return-on-investment. E-procurement leads to a centralization of contracting and the upholding of product databases whereas purchasing decisions remain decentralized. This way of doing business is also a way for the purchasing center to reduce maverick buying. In the long run, the e-catalog can be expanded with more suppliers to improve online competition, thus reducing prices. However, this aim has so far been secondary (at best). Finally, it is interesting to note that catalog services are one of the few applications of e-marketplaces that suppliers have a positive attitude towards as compared to, e.g., Internet auctions where they are forced to underbid each other (NyTeknik, 2001). Bottleneck Items For bottleneck items, it is important to control the supplier in order to secure deliveries (cf. Kraljic, 1983). These products are not so important from an overall cost perspective, whereas to ensure deliveries is. Price should therefore be of secondary importance. Since the material in question is mainly specified, it is not easy to swap suppliers. Instead it will be important for the buyer to be able to efficiently provide technical data to the supplier, and in turn be provided with current production and inventory information from the supplier. Information exchange on product and production is therefore important, whereas the actual ordering is less so. Furthermore, in a long-term perspective, the possibility to search for future suppliers may be one of the largest benefits. For instance, a company in the Swedish food industry incorporated new Internetbased search routines in order to find new or alternate suppliers for maintenance and repair type of products. Each buying situation is similar to a new-buy situation. Company or business search engines and directories, such as Business.com and Manufacturing.com, are designed to aid users in finding companies, products, services, and information with regards to wanted products. Still, the most common way to search for suppliers is through general search engines such as Google, Yahoo, or Alta Vista. To be able to search for new suppliers in order to ensure deliveries in a fairly cost-efficient way means that the buyer is able to reduce his dependency on suppliers with limited production capacity, thus reducing the complexity of the supply market and creating higher flexibility. Correctly designed eprocurement initiatives enable the buyer to better manage (or control) this supplier base. Strategic Items From an e-procurement perspective, strategic materials are highly interesting. They have a great impact on overall cost and functionality of the final products. Long-term relationships that are controlled from a corporate purchasing center are seen as the (viable) way to ensure the supply of goods, whereas bargaining is not an option (cf. Kraljic, 1983). Furthermore, these items often involve highly technical exchange of information, particularly in the product development stages, such as CAD-drawings and specification. The e-procurement system is thus able to cater for the exchange of technical information. In fact, it is important that the system aid the participants in all relationship-enhancing activities concerning issues such as commercial agreements, logistical arrangements, as well as any interpersonal relationships between the two parties. This is particularly crucial since it is not easy to find alternative suppliers, and more importantly, the products are often developed in cooperation between buyer and seller (Hkansson, 1982, 1993). Due to the importance of the products in this group, investments in solutions to improve the buyer/seller process ought to be fairly defendable. Although there are clearly benefits that could be drawn from employing e42

procurement initiatives in this area, it is hard to come by successful cases (cf. hrwallRnnbck, 2002). SAAB Aerospace, a manufacturer of military airplanes, put a lot of effort in adopting Internet solutions with a number of key suppliers. This was done to make joint development projects more efficient and effective. However, caused, for instance, by the technical complexities of the products and high demands on security in the transfer of information, the Internet solutions were never used or developed to their full potential (hrwall-Rnnbck, 2002). Leverage Items These items are very important for the overall business cost (see Kraljic, 1983). They consist of a mix of commodities and specified materials, and have probably the greatest potential for e-commerce solutions. For these products, two strategies related to eprocurement can be seen. The first strategy is to enhance the relationship in order to create a more efficient way for the operations. Comprehensive supply-chain management (SCM) solutions are viable, while the volume-value is large enough and the business is characterized by a high level of re-buy. The potential savings are often quite large and affect a range of operations in both the buying and selling firm (e.g., Ericsson & PipeChain). Ericssons Pipe-Chain solution involved first-tier suppliers that, with the help of Internet-based software, delivered products to the Ericsson assembly line. The software highlights product requirements and results in a transparent buyer/ supplier interface, in so much as the suppliers can see Ericssons stock status and deliver accordingly. The second strategy is to exercise the purchasing clout that is available. This leads to a more market-oriented approach and is, consequently, quite different in its functionality from a relationship-enhancing one. The savings that may be generated from increased competition are also potentially large, but then predominantly based on the purchasing price (e.g., e-auctions). Both solutions, however, are quite comprehensive and affect activities in the purchasing department. E-procurement solutions of the SCM type are even more comprehensive and have major effects on other operational units as well.

2.5.1.1. Process and E-Procurement


Industrial procurement is a complex process, especially in a new-buy situation (see Figure 2.5.) that involves several steps all the way from the search of suppliers to the resulting delivery and invoicing of goods (Van Weele, 1997). It can be very time consuming (up to several months). For instance, for scarce or strategic items, there are normally a limited number of suppliers available, and the procurement process involves building up personal relationships between representatives not only in the procurement departments, but also with representatives from quality, product support, production, design, and corporate management. On the other hand for non-critical items, which are more transaction oriented, it might not be necessary to establish relationships at all, but rely on market forces. It is obvious that depending on the step of the process, different skills and support are necessary. The process perspective states that there are discrepancies between the e-commerce solutions that are pertinent, useful, and value adding to an organization, where these discrepancies depend on what the procurement process looks like and on what steps process emphasis is placed. 43

Figure 2.5. The procurement process and some examples of associated functionality needed by an e-commerce solution.

Source: Strategies for Generating E-Business Returns on Investment

A procurement process differs with what kind of product is purchased, but is generally long and structured from tender to delivery, and involves many parties and requirements within the buying organization (Van Weele, 1997; cf. Figure 2.5.). Eprocurement must cater for the length, the involvement of many parties on both the buying and selling sides, and the negotiation complexities that come with technical and commercial agendas. This means that the whole process may not be well suited to ecommerce initiatives. Rather, steps in the purchasing process will be performed with ecommerce depending on the situation. The extent to which the process can be computerized differs depending on the complexity of the product and the value, volume, and frequency with which it is purchased. New-buy and one-off complex purchases are less likely to be performed through e-commerce if compared to standard products purchased in large volumes.

2.5.1.2. A Model for E-Procurement


Merging the procurement process model with the procurement strategies matrix (see Figure 2.6.) makes it possible to identifydepending on the strategy employedwhat phases of the process are most important, and subsequently what e-procurement solutions and models are pertinent. Table 2.1. summarizes the Kraljic matrix, process focus, and the eprocurement models. It also exemplifies some solutions in use. In the category Purchasing Management, e-procurement has been used to a fairly great extent. Since there are few risks involved, it is relatively easy to set up these kinds of solutions. At the same time however, the impact on total business is limited, although there are cost savings to be generated by adopting lean processes. From a process perspective, e-procurement initiatives are predominantly appropriate for the ordering process, where the actual order, payment authorization, and invoicing are sub-processes that can be automated fairly easily (e.g., self-billing, etc.), and thus lower the transaction costs for this material. One example is Ericssons Click-to Buy solution, which holds indirect material in a purchasing catalog, such as hand tools, etc. Their solution has resulted in fewer suppliers that subsequently become more important. 44

Figure 2.6.: A synthesis of strategy and process in e-procurement

Source: Strategies for Generating E-Business Returns on Investment

Table 2.1: Summary of the discussion and identifying e-procurement models Purchasi Goods Purchas Supply EE-Model Process Focus Solution ng Type Supplied ing Market Purchasi Solution Examples Importa Comple ng nce xity Strategy Purchasin NonLow Low Corporate EOrder Focus Ericssons g Critical, Assortme Catalog Click-to-Buy Managem Standard, nt of ent Commodi Goods ties Sourcing Mainly Low High Relations Informati Information Manufacturing. Managem Specified hip but on Exchange com, Google, ent Materials Searching Exchang Search and Yahoo New e and/or Select Supplier Suppliers E-Agent 45

Table 2.1: Summary of the discussion and identifying e-procurement models Purchasi Goods Purchas Supply EE-Model Process Focus Solution ng Type Supplied ing Market Purchasi Solution Examples Importa Comple ng nce xity Strategy Supply Strategic High High Tight Resource Strategic SAAB Managem Items Relations Network. Information Aerospace ent hip Stable Exchange Members (Incl. Sensitive Information) Materials Leverage High Low Tight E-SCM, Comprehensiv Ericsson PipeManagem Items, Relations Eeness Chain, GE ent Commodi hip, or Marketpl TPN ties and Marketpla ace Specified ce
Source: Adapted from Strategies for Generating E-Business Returns on Investment

E-procurement initiatives in the category Sourcing Management are somewhat difficult to extract large-cost savings from. The investments should be directed towards information exchange in the areas of product and production, for the short term, and searching alternate suppliers for the long term. As with purchasing management, however, the impact on the overall operations remains low, and does not contribute significantly to total business. For this type of product, the e-procurement solution should aid in the procurement process rather than automate it, e.g., in terms of search engines and/or solutions that help transfer product and production information. On the one hand resource coordination for order fulfillment is vital, and on the other hand supporting the search for suppliers is important. One example of structured search engines to help find suppliers is Manufacturing.com, which lists suppliers in different industrial segments, and includes product descriptions and contact information. The category Supply Management involves strategic considerations on a high level in the organization. E-procurement investments should be designed primarily to cater for the exchange of technical and commercial information. As with sourcing management, the e-procurement solution should support the ongoing process, rather than automate parts of it. Since the exchange involves sensitive information, the solution needs to be as secure as possible, and requires long-term relationships based on trust. Effects on the buyers business may be substantial, particularly with regards to product development and innovation. As for the impact of e-procurement on the purchasing process, e-procurement does not need to be connected to the ordering per se. Instead it is important that the solutions contribute to tight integration and resource coordination between the parties, since close cooperation in, e.g., product development efforts are of interest. With SAAB Aerospace the solution exemplifies the difficulty in adopting Internet solutions for this group of materials. The category Materials Management is the most interesting group of purchases in relation to e-procurement. This is due to the large effects on the overall business that can be a result of efficiencies and price pressures for this type of material. However, to be meaningful for e-procurement, this strategic group needs to be divided into two subgroups. One is for materials that ought to be handled in tight relationships, such as specified materials, or materials with high technical content or high volume-value that 46

benefit from an SCM type of efficiency effort. This is exemplified by the Ericsson/PipeChain solution that was particularly aimed at improving the logistics processes. The other is made up of the products that can be supplied adequately on a more open market, where purchasing clout can be exercised in order to benefit from price negotiations. One example is the early GE TPN that was aimed at cutting costs, but also at providing a better market for the supply of goods, for instance in auctions. Also, the early intentions of Covisint can be attributed to improving the market. Clearly, the division between the two groups is a strategic decision in itself and results in two new distinct groups of materials. It is important to maintain that the division means that the segmentation needs to be done in order to define the different e-procurement functionalities required. However, the products in the two groups can vary over time, and it requires deliberate action in order to change a product from a relationship focus to a market focus. Despite their different forms, e-models for these product groups are quite comprehensive, regardless of focus, though they are fairly different from each other. One model needs to cater for SCM functionality or VMI approaches, which means that the focus is aimed at logistics issues. The other approach is directed towards commercial content with RFQ and bidding functionalities, which also includes contracting and ordering. Since the functionality for these two strategic decisions is comprehensive, the resulting investments are therefore large. In particular, for relationship/SCM focus, other departments and operations than purchasing are highly affected. Process-wise comprehensiveness is of importance. In both cases it is a matter of being able to work through the entire process and utilize e-procurement models in many steps.

2.6. e-Collaboaration
While e-commerce and e-procurement have captured most of the business press headlines over the last decade, the promise of e-collaboration may be far greater. We define ecollaboration as business-to-business interactions facilitated by the Internet. These interactions go beyond simple buy/sell transactions and may be better described as relationships. These include such activities as information sharing and integration, decision sharing, process sharing, and resource sharing. Lee and Whang (2002) provide this taxonomy of e-collaboration and link the idea to earlier research in supply chain management. Of the three areas, information sharing has seen the most research. With widespread interest in the bullwhip effect (Lee, Padmanabhan, Whang (1997)), many researchers have worked to quantify the impact of the bullwhip (Chen, Drezner, Ryan, and Simchi-Levi 2000) and examine the benefits of sharing information (Cachon and Fisher 2000; Iyer and Ye 2000).There has also been significant work to understand the benefits of IT investments within an enterprise (for example, the impact of ERP; McAfee2002). While the concept and content of collaboration is still in its infancy, companies have become keenly aware that pursuing closely integrated supply chain partnerships is critical to survival. The following points have surfaced as the main drivers. The relentless acceleration in the forces changing todays business environment the power of the customer, global trade, Internet enablers, deregulation, emerging markets, rapidly diminishing product life cycles, and others require all categories of business to be able to leverage these changes to increase competitive advantage. The faster the growth, the more dependent firms have become on utilizing the

47

resources and core competencies of channel network partners to stay ahead, if not drive the power curve. Companies have always known that the more integrated and efficient the passage of information and the performance of transactions, the less the cost. As the level of collaboration technologies, even as simple as the facsimile, increases between trading partners, the more the cost of business declines and the capacity to respond to marketplace needs increases. The changes impacting todays marketplace have increasingly obsoleted the old strategies for creating value. Companies simply cannot remain inward-focused and dependent on historically successful product and service offerings. Business strategists must look to merge existing marketplace leadership with continuous innovation to enlarge the scope and scale of competitive reach or generate new competitive opportunities. Succeeding in this agenda means quickly gaining new effciencies and capabilities possible only by collaborating with channel network partners. The increasing customer-centricity of the marketplace is obsoleting previous response strategies. Connectivity tools providing for the real-time visibility of market channel functions, such as forecasting, inventory availability, transportation capacities, and supply channel-driven capability-topromise, will enable manufacturers to configure products and supply nodes quicker to respond more accurately to reduce supply chain waste and shorten lead-times. It once took 120 days to deliver a custom automobile.Today, thanks in large measure to its collaborative capabilities, Toyota can deliver the same car in three days. Finally, the assets and material, financial, and intellectual capital required of each business today to meet the needs of an increasingly global and volatile marketplace are gradually outstripping the capabilities of even the largest of companies. Worldclass human capital, as well as productive assets, may be far cheaper to locate out in the supply chain through collaboration than to develop internally.

Process sharing like collaborative innovation and product design is also another exciting opportunity. Many researchers are wondering how the web will change innovation within and between companies (Sawhney and Prandelli 2000). In a pair of papers, Johnson (2000, 2002) examines webcentric collaboration for product design in both the high-tech and apparel industries. He develops a framework for understanding the supply chain benefits of design collaboration. There are many cases that examine different elements of collaboration, from information sharing and integration to process and resource sharing. Several of these cases examine new web-native software companies who have developed new applications for different types of collaboration. For example, Agile looks at the role of collaboratively managing product design and engineering changes over the web; Extricity looks at software designed to aid in information integration between enterprise systems; SeeCommerce illustrates an application of information integration at DaimlerChrysler to facilitate supply chain metrics; Quad explores the value of supply chain visibility to each supply chain partner provided by 48

RFID tracking of materials traveling through a supply chain; and Syncra focuses on collaborative forecasting and replenishment between a buyer and seller. Several other cases have highlighted the impact of information integration on some particular aspect of the supply chain. Some of the cases are focused on managing supply while others are more focused on the customers. For example, the Solectron case focuses on how the use of information has transformed Solectron from a simple contract manufacturer into a full service supply chain integrator. Likewise, the "Third-Party Logistics Services", case examines how companies like transportation provider Flying Cargo are using information to enhance their service offerings in a near commodity business. On the other hand, cases like General Motors and Lufthansa illustrate how information can be used to increase customer loyalty and manage the prices. HewlettPackard examines the reverse supply chain and the information integration issues of managing returns. Finally, Marks & Spencer and Zara examine competition between two apparel companies, including the role of integrated design and manufacturing.

2.7. The influence of IT architecture of an organization on its potential to reshape its Supply Chain Management.
In order to understand how the IT architecture of an organisation can affect its ability to transform its SCM, it is important to jointly consider the concepts of information infrastructure and information technology architecture. The information infrastructure of an organisation is extremely important and is even considered a key success factor in any SCM transformation exercise. In fact, the information infrastructure refers to the physical facilities, services, and management that support all shared computing resources in an organisation (Turban et al., 2004). According to Broadbent and Weill (1997), there are five major components of the infrastructure: computer hardware, software, networks and communications facilities (including the Internet and intranets), databases, and information management personnel. IT infrastructure is in turn derived from IT architecture. The IT architecture then is a map of the information assets in an organisation. On the Web, IT architecture includes the content and organisation of the site as well as the interface to support browsing and search capabilities. The IT architecture of an e-business is a guide for current operations and an outline for future directions (Turban et al., 2004). It assures managers that the organisations IT structure will meet its strategic business needs. Creating the IT architecture is a recurring process, which is driven by the business architecture. Finally, the business architecture describes organisational plans, visions, objectives and problems, and the information required to support them (Koontz, 2000). It is also important to recognize the different types of IT architectures that may exist in organizations based on the predominant computing environment. In fact, the type of IT architecture that a particular organisation uses would also determine its ability to transform its SCM. The different environments that can exist in organisations concerning IT architecture fall under three categories (Turban et al., 2004). First, in a mainframe environment, processing of information is done by one or more mainframe computers. Users work with passive terminals to access information, while being controlled by the mainframe. In a PC environment, on the other hand, only PCs provide the computing power in the information system. In this scenario, numerous computers can be connected to form a network. And finally, in distributed computing (where processing work is divided between 49

two or more computers, using a network for connection) the participating computers can be all mainframes, all PCs, or as in most cases, a combination of the two types. Distributed computing is the predominant model in organisations today since it provides some important advantages. First of all, many software applications can be shared among users with the use of networked computers and the necessary software. In addition, this type of IT architecture provides more flexibility to organisations that can make use of it by transforming their SCM to better integrate the needs of their suppliers and customers throughout the supply chain (Harmon, 2001). A successful example of an organisation transforming its IT architecture to improve its SCM is the case of Chase Manhattan Bank (now J. P. Morgan Chase). The company reorganized many of its processes and designed improved IT architecture to expand its service range and create additional value for both its partners and customers (Turban et al., 2004). To better understand how IT architecture affects an organisations ability to transform supply chain management, some additional concepts should be explored as well, namely the range and reach capabilities. In essence, both terms have to do with the scope of a business model, as described by Afuah and Tucci (2003). The reach refers to the market segments or geographic areas that a company can target, while the range has to do with the different types of products/services that the company can offer to the targeted segments of customers. In fact, in the past several decades, most organisations faced serious problems with both the reach and range due to the limited nature of IT systems (e.g. EDIs that were only used by large companies). Today the situation has improved considerably, and the problem of reach has been solved almost entirely. This is, of course, due to the advent of the Internet, which now allows companies to connect their IT systems to the Web and use the Net for doing business. Now, it is no longer a question of how many customers can a company reach, but rather of how many is a business prepared to service. On the other hand, the problem of range still causes trouble to many businesses. Even though IT and the Internet have brought considerable progress, some products and, especially, services cannot be provided electronically without compromising their quality. This problem is made even worse by the fact that many customers are unwilling to switch to e-business when it comes to some traditional offerings. However, it is likely that evolving technology will alleviate the situation in the future. In summary, in order to successfully transform their SCM, organisations must realize that by changing their supply chains to e-supply chains, by improving their IT architectures, and by collaborating with suppliers, customers, and even rival companies along the supply chain, they multiply their chances of success. In fact, organisations can also focus on CRM (customer relationship management) and especially on PRM (partner relationship management) to achieve better results. PRM uses automated processes to support partnerships, and it usually utilizes Web-based technologies. By securely acquiring, distributing, and managing information, PRM applications facilitate partner relationships and improve strategic alliances. (Turban et al., 2004) In fact, the more flexible an organisation becomes, the more likely it is to effectively and efficiently respond to customers needs and wants. One way through which companies can become more flexible involves the development of better IT architectures that foster this flexibility. Knowledge of information technology and the enormous opportunities provided by the Internet is essential so that businesses can concentrate their resources appropriately in any SCM transformation exercise. Lastly, the e-business opportunities of todays highly competitive business environment seem to be more sensibly explored with cooperative efforts and initiatives. This is not to suggest that companies should not strive for individuality and uniqueness, but 50

rather to propose that constructive collaboration is what often makes the difference between failure and success.

2.8. The State of Supply Chain Intergration in Romanian Companies


It must be said that while the Western world has already stepped into the Internet era for some time now, the vast majority of the Romanian companies are still caught in information chaos. Yet, the first step towards return on investment is information coherence. A lot of information so-called sensitive or critical for a business is lost in the classic information cycle not necessarily out of lack of goodwill or of technological support but out of some deficiencies in the information cycle and the lack of departments integration in an organizational environment. Although Romanian companies acknowledge SCM efficiency as a tool for business optimization, they still have a traditionalistic, classical approach to it. However there are in romanian companies which paved the way in electronic businesses implementing successfully ERP, CRM, HRM solution. Of all Romanian SCM software producers, the group of best qualified consists of: Totalsoft, Wizrom, CriSoft, Transart, BIT Software, EBS. These companies, owned together a quota of approximately 12% in 2005 (soft and serviceincluded). In comparison, SAP Romania owned 28,3%, and Oracle Romania 17,4%. Apart from the six Romanian producers mentioned, among the local producers the best qualified on the segment of customers with more than 250 employees is SIVECO (19,3% of market), the only local producing company of integrated ERP solutions that has managed to implement of its Siveco Applications solution, of many million euros in very large companies such as: PETROM, Orange, Raiffeisen Bank, Citibank, Aerostar Bacau, Termoelectrica. Romanias adhesion to the EU has imposed an entire series of changes of the way the business function, as well as of fiscal and accounting legislation. These changes must be assimilated as soon as possible by Romanian companies that want to last on the market. Adapt or die is the right saying for contemporary business environment. I will present bellow two Romanian companies which managed to tackle the problem of competitiveness through SCM solutions.

2.8.1. Avicola Calarasi


Avicola Calarasi, one of the main players in Romanian food industry, is reputed among the national economic environment as a respectable company, specialized in the production and sale of chicken meat and other meat products. The production activity involves the management of an important volume of data and processes, for which reason the decision makers in the company have identified resources to improve the profitability of the business by implementing IT applications. The organization of the 19 farms Avicola Calarasi, as well as the management of

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the sales force, are b both based on complex set of rules, managed by means of the SIVECO Applications integrated system, provided by SIVECO Romania. The implementation of an ERP (Enterprise Resource Planning) at Avicola Calarasi has lead to the following benefits: The automation of the supply chain; The automation of the price lists, allowing for the management control on the sales prices; Integration with the electronic scales, leading to the automation of the weighing process; Control of the sales per Client, per Agent and per Distributor; Establishment of the discount policies; Elimination of the redundancies resulting from the operation within various support systems.

2.8.2. S&D Pharma


S&D Pharma (Romania) SRL is member of S&D Pharma Ltd. U.K. S&D Pharma is one of the important distributors of pharmaceutical products in Romania. The company has 3 branches: Bucharest, Brasov, Cluj. In april 2005 the company decided to replace the old informatic system with a integrated ERP solution, the objective of this action was: an improved efficiency- import and distribution of pharmaceutical products- through improving internal flows and processes. The implementation of the ERP took 6 months. In the first stage, the professionals from S&D Pharma, meet the representatives of software company for shaping a proper understanding of business processes in pharmaceutical field. The results of implementation are following: A better control of the activity, facilitated by instantly access to information; The sales volume increased 3 times due to the fact that the management used the time for business developement instead of solving problems gererated by ERP; The quality of business increase; A better integration with customers, suppliers, and support partners.

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CONCLUSIONS

The essence of supply chain management is communication, allowing the ultimate consumer to become a partner in the process. Although the electronic technology facilitate communication and business can do more now than could even be imagined few years ago, supply chain management remains a largely misunderstood and often misapplied business philosophy To survive and thrive in the Digital Era companies must have extensive knowledge of the processes of SCM as well as of the different types of e-business models and their implications. They don't have to ask themselves if it is proper to do a bussiness online but how to do it. Furthermore, businesses must learn to identify the key success factors that contribute to a sound e-business model and make use of them accordingly. Companies should be aware of the major shifts in business focus influenced by SCM and pay particular attention to the emphasis upon collaboration, customer focus, and customization of products/services. Moreover, successful organisations must know their IT architectures well and the opportunities that these provide for doing business. If a specific need is identified, the IT architecture of a company must be transformed in order to better support the SCM function. In fact, businesses can also approach the opportunities for gradual improvement offered by BPR or business process redesign, rather than business process reengineering described. Once a company has maximized its SCM function via the use of IT and the Internet, it can also seek to improve particular processes that seem to lag behind in speed or performance. Since BPR offers considerable options, organisations can aim at redesigning individual processes or groups of processes simultaneously. Also some businesses can even go a step further and explore the opportunities of DBD (digital business design). Digital business design is described as the art and science of using digital technologies to expand a companys strategic options. DBD is not about technology for its own sake; it is about serving customers, creating unique value propositions, leveraging talent, improving productivity, and increasing profits. DBD is about using digital options to craft a business model that is not only superior, but also unique. What is certain is that businesses should definitely understand technology, but, even more importantly, they must rely upon solid business models and strategies if they are to benefit from the often complementary nature of IT and the Internet. Because, as Michael Dell perhaps put it best, If you take a business that is a bad business and put it on-line, its still a bad business. Its just become an on-line bad business (Slywotzky and Morrison 2001).

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The digital economy is transforming the lives of people beyond recognition. There is a revolution in the way that things are produced and traded before they reach the final consumer. Also there is a revolution of rising expectations as the world is getting transformed to a global village and the access to the good things in life will no more be in the domain of the rich and influential, whether in developed or developing countries. The buzzword is e-commerce which reshaped the way in which SCM is approached. The term e-commerce goes beyond doing business electronically.Doing business electronically means that the conventional processes are computerized and are done on the Internet, however now it seems that the Internet is not merely an alternative to make a channel for marketing or selling product online. Instead the electronic marketplace enables the seller to innovate the whole business process from the producer to consumer to service by integrating them in the seamless whole, where product choices and prices are updated according to the customer information in real-time on web stores. E-commerce does have unique advantages for businesses. It allows a shop, a show room or an office to open 24 hours a day, seven days a week. It also means that time zones are not a problem.A Web site can bring a prospect from the point of advertising and information directly to the point of sale, seamlessly, without involving any other medium. Adoption of new information technologies, particularly e-commerce, is expected to result in improvements in firm performance, such as reducing transaction costs and closer coordination of economic activity among business partners. E-commerce also is expected to facilitate entry into new markets or extension of existing markets and greater integration of systems with suppliers and customers. E-commerce is changing business economics and as a result many firms are re-engineering their core business processes. Suppliers and retailers are able to collaborate on product forecasts, product flow and inventory management decisions using the collaborative Internet-based networks between suppliers and retailers. Since procurement costs can represent up to 75% of the total cost of goods sold, cost initiatives in business relationships are more often than not initiated and managed by the buyer (Emiliani, 2000). Electronic marketplaces (Brehmer & Johansson, 2001; Kaplan & Sawhney, 2000) increasingly focus on lowering prices and reducing costs in procurement. Also, within established supplier relationships, e-commerce development is very much focused on the cost aspects and on establishing transaction cost-effective extranet solutions (Brehmer, 2002). Consequently, many e-procurement solutions are thus aimed at rationalizing and strengthening established relationships rather than focusing on purchasing price alone (Clemons & Reddi, 1993). I argue that different purchasing situations call for different strategies when employing e-commerce solutions. Recent supply chain research states that a move to closer relationships is a necessity if competitiveness is to be preserved. However, much of the activity in the purchasing area gives evidence that this is not always the case; instead, many of the solutions and ideas are heavily geared towards arms length relationships. I do not claim that this is the solution for all situations, but I do not agree with many SCM researchers that everything must go towards close integration between parties involved. Instead, e-commerce solutions for procurement enable different strategic choices depending on the market situation, the e-commerce solutions at hand, and the strategic focus of the firm. In light of this, it is argued that the degree of integration and the particularities of the 54

used solutions depend on a variety of contingencies such as the purchasing strategy employed, items purchased, and the layout of the purchasing process. Differences in a desired buyer/supplier relationship influence what e-commerce solutions are pertinent. In a situation with close relationships and tight integration, ERP integration and information exchange will be of the essence. When market characteristics are present, e-marketplaces and bidding models are interesting. Facing a situation with low supply complexity and high purchasing importance, it is more difficult to evaluate what ecommerce solution is pertinent, and a more careful analysis of the contingencies might be called for, i.e., whether tight relationships with suppliers are important or not. Due to this and the fact that here the impact of procurement on total operations is high, we argue that this is where companies have the most to gain if they analyze their purchasing situation carefully and adopting the correct e-commerce solutions. Our proposed model can help companies in this endeavor. The use of information technology in supply chains is becoming more important than in the past. One of the reasons is because business environments are moving from mass-production to customization. Supply chain combined with IT or Electronic Supply Chain (eSC) is a supply chain that integrates and coordinates suppliers, manufacturers, logistic channels, and customers using information technology (IT). The e-supply chain makes it easier and less costly to manage suppliers. IT can link all activities in a supply chain into an integrated and coordinated system that is fast, responsive, flexible, and able to produce a high volume of customized products at low cost. The Internet makes it possible for IT solutions, such as ERP and SCM software packages, to give the most to the businesses that choose to employ them. In addition, the Internet also allows for e-commerce between millions of businesses and individual customers from all over the globe. Lastly, the Internet enables companies to select among alternative ebusiness models, because these ventures do have the medium through which to realize their innovative and daring ideas and concepts. Certainly, some limitations of IT, e-commerce, ebusiness, and the Internet still exist, and companies need to recognize those in order to avoid disillusionment (Huff, 2001). However, the benefits of these enablers and drivers for organisations, customers, and the general public far outweigh their disadvantages. Therefore, the accumulation of knowledge and the development of know-how regarding IT, ecommerce/ e-business, and the Internet can make all the difference in the world for companies that need or want to successfully transform their supply chain management in order to be competitive in todays cutthroat business environment. From practical point of view, this study showed that electronic businesses have significant effects on supply chain coordination and performance, that companies should be flexible to adapt to new and that communication between all supply chain members is vital for all parties and the more you use communication channels the more successful you are.

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