Supply Chain Integration

and e-Business Strategies

Ranjan Ghosh
Indian Institute of Management
Calcutta

Outline
Review
Supply Chain Dynamics

A new Supply Chain Paradigm

Matching Products with Strategies
e-Business Opportunities

Order Size

The Dynamics of the Supply

Chain

Customer
Customer
Demand
Demand
Distributor
Distributor Orders
Orders

Retailer
RetailerOrders
Orders

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Order Size

The Dynamics of the Supply

Chain

Customer
Customer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

What are the Causes

Promotional sales
Volume and Transportation discounts
Batching

Inflated orders
Demand Forecast
Long cycle times
Lack of Visibility to demand information

Consequences
Increased safety stock
Reduced service level
Inefficient allocation of resources
Increased transportation costs

The Bullwhip Effect:

Causes thereof

Variability in customer orders

Delivery lags, particularly long cycle times
Information lags
Promotional Campaigns/Variation in Prices
Over and Under Ordering
Lumpiness in ordering
Misperceptions of feedback
Chain accumulations

The Bullwhip Effect:

Managerial Insights
Exists, in part, due to the retailers need to
estimate the mean and variance of demand.
The increase in variability is an increasing
function of the lead time.
The more complicated the demand models
and the forecasting techniques, the greater
the increase.
Centralized demand information can reduce
the bullwhip effect, but will not eliminate it.

Coping with the Bullwhip Effect

in Leading Companies
Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Collaborative Channel Management & Alliances
Vendor managed inventory
On-site vendor representatives

The Future is Not

What
it Used to be
A new e- Business Model
Reduce cost
Increase Profit
Increase service level
Increase flexibility

Reality is Different..
Amazon.com Example

Founded in 1995; 1st Internet purchase for most people

1996: $16M Sales, $6M Loss
1999: $1.6B Sales, $720M Loss
2000: $2.7B Sales, $1.4B Loss
Last quarter of 2001: $50M Profit
Total debt: $2.2B

Peapod Example

Founded 1989
140,000 members, largest on-line grocer
Revenue tripled to $73 million in 1999
1st Quarter of 2000: $25M Sales, Loss: $8M

Reality is Different.
Dell Example:
Dell Computer has outperformed the competition in
terms of shareholder value growth over the eight
years period, 1988-1996, by over 3,000% (see
Anderson and Lee, 1999)

Reality is Different.
Cisco Example:
Ciscos Internet based business model has been
instrumental in our ability to quadruple in size from
fiscal 1994 to fiscal 1998 ($1.3B to over $8B), hire
approximately 1000 new employees per quarter and
saving $560M annually in business expenses (Peter
Solvik, CIO Cisco)

The e-Business Model

e-Business is a collection of business models
and processes motivated by Internet
technology, and focusing on improving the
extended enterprise performance
e-commerce is part of e-Business
Internet technology is the driver of the business
change
The focus is on the extended enterprise:
Intra-organizational
Business to Consumer (B2C)
Business to Business (B2B)

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System

From Make-to-Stock Model.

Suppliers

Assembly

Configuration

Demand Forecast
The three principles of all forecasting
techniques:
Forecasts are usually wrong
The longer the forecast horizon the worst
is the forecast
Aggregate forecasts are more accurate
The Risk Pooling Concept

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System

Push-Pull Supply Chains

The Supply Chain Time Line

Customers

Suppliers

PUSH STRATEGY
Low Uncertainty

PULL STRATEGY
High Uncertainty
Push-Pull Boundary

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System
Parts inventory is replenished based on
forecasts
Assembly is based on accurate customer
demand

.to Assemble-to-Order Model

Suppliers

Assembly

Configuration

Business models in the Book

Industry
From Push Systems...
Barnes and Noble

...To Pull Systems

Amazon.com, 1996-1999

And, finally to Push-Pull Systems

Amazon.com, 1999-present
7 warehouses, 3M sq. ft.,

Direct-to-Consumer:
Cost Trade-Off

Cost ($ million)

Cost Trade-Off for BuyPC.com

$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0

Total Cost
Inventory
Transportation
Fixed Cost

10

Number of DC's

15

Industry Benchmarks:
Number of Distribution Centers
Pharmaceuticals

Avg.
# of
WH

Food Companies

14

- High margin product

- Service not important (or
easy to ship express)
- Inventory expensive
relative to transportation

Chemicals

25
- Low margin product
- Service very important
- Outbound transportation
expensive relative to inbound

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

e-Business in the Retail Industry

Brick-&-Mortar companies establish Virtual retail
stores
Wal-Mart, K-Mart, Barnes and Noble

Use a hybrid approach in stocking

High volume/fast moving products for local storage
Low volume/slow moving products for browsing and
purchase on line

Channel Conflict Issues

E-Fulfillment Requires a
New Logistics Infrastructure
Traditional Supply Chain

e-Supply Chain

Supply Chain Strategy

Push

Push-Pull

Shipment Type

Bulk

Parcel

Inventory Flow

Unidirectional

Bi-directional

Simple

Highly Complex

Destination

Small Number of Stores

Highly Dispersed Customers

Lead Times

Depends

Short

Reverse Logistics

Wal-Marts e-fulfillment
Strategy
Wal-Mart has always prided itself in its in-house
distribution operations.
Thus, it was a huge surprise when the company
announced that it plans to hire an outside firm to handle
order fulfillment and warehousing for its on-line store
Wal-Mart.com, which the retailer launched in the fall of
1999.
Filling orders behind the scenes of Wal-Marts cyberstore
is Fingerhut Business Services. Fingerhut will provide
Internet order fulfillment, warehousing, shipment,
payment processing, customer service and merchandise
returns.

Matching Supply Chain

Strategies with Products
Demand
uncertainty
(C.V.)

Pull

II

Computer

IV

Push

III
Delivery cost
Unit price

L
L

Pull

Push

Economies of
Scale

Locating the Push-Pull

Boundary

Organizational Skills Needed

Raw
Material

Customers
Push

Pull

Low Uncertainty

High Uncertainty

Long Lead Times

Short Cycle Times

Cost Minimization

Service Level

Resource Allocation

Responsiveness

e-Business Opportunities:
Reduce Facility Costs
Eliminate retail/distributor sites

Reduce Inventory Costs

Apply the risk-pooling concept
Centralized stocking
Postponement of product differentiation

Use Dynamic Pricing Strategies to

Improve Supply Chain Performance

e-Business Opportunities:
Supply Chain Visibility
Reduction in the Bullwhip Effect
Reduction in Inventory
Improved service level
Better utilization of Resources

Improve supply chain performance

Provide key performance measures
Identify and alert when violations occur
Allow planning based on global supply chain data