Management and Innovation of E-Business

Aims of Chapter

• Introduce business-to-business (B2B) e-business and supply chain management (SCM).

• Identify problems supply chains face and explore how IT improves efficiency, coordination, and management.

• Link theoretical concepts with contemporary SCM practice.

• Understand tensions and changes as new technology helps logistics managers deal with new pressures and issues.

Learning Outcomes

• Discuss B2B system strategies.

• Apply B2B models to real-world marketplaces.

• Recognize types and components of supply chains and their purposes and functions.

• Discuss inherent problems and trade-offs in SCM.

• Discuss why particular supply chain strategies are used in specific industries.

• Analyze the role of information and e-business technologies within the supply chain.

• Discuss the importance of SCM in the context of value chains and value networks.

• Recognize actors within the supply chain and appreciate their roles.

• Discuss levels of integration required to facilitate SCM.

• Analyze strengths and weaknesses of particular SCM strategies.

Key Concepts

• B2B structures

• Key attributes of e-marketplaces

• Information and uncertainty

• Lean vs. agile supply chains

• Supply chain integration: value chains and value networks

• Integration at the technological level

• Strategies for organizational integration

• E-procurement

• Recent pressures and current opportunities.

B2B Markets and Supply Chain Management

• Business-to-business (B2B) e-business involves the sale of goods and services between businesses.

• B2B covers applications enabling a business to form electronic relationships with distributors, suppliers, and other partners.

• Examples of B2B e-commerce include websites like alibaba.com.

B2B Strategies

• Two main types:

  • Application of IT to pre-existing relationships: Reduces costs of performing existing business transactions.

    • ICTs support existing economic relationships.

    • Enables cost reduction and increased business volume and profitability.

  • Creation of new marketplaces using IT support systems:

    • ICTs can create business transactions.

    • Creates a new economic environment (marketplace).

    • Changes distribution, management, and information sharing.

    • Marketplace creates sustainable economic relationships with ICT.

B2B Reliance on the Internet

• B2B relies on the internet to sustain or enable economic relationships between business organizations.

• Technologies increase information, reduce search costs, and reduce asymmetry of information and bounded rationality.

• They slash transaction costs and lead to more intensive use of electronic markets rather than electronic hierarchies.

B2B Implementation

• B2B implementation can change the organization of exchange processes and defines contractual agreements.

• Traditional transactions required suppliers and buyers to meet in the same place and time.

• B2B marketplaces operate as virtual marketplaces, connecting suppliers and buyers through communication networks for faster and more efficient information flows.

• Products move from seller to buyer after online transactions are completed.

• Online transactions are more efficient and less time-consuming because ICTs support many activities needed to make the exchange possible.

• ICTs allow more information to be communicated in the same amount of time at much lower costs, reducing time and costs for businesses.

• All the details about products, information about buyers and sellers, and specifications of price, time of delivery, etc., can easily be accessed and exchanged, reducing the costs and time involved in setting up contracts

• ICTs allow matching of potential buyers and sellers, facilitating more efficient brokerage.

• There is more information available about possible buyers and sellers.

• ICTs make it easier to extend the boundaries of a traditional market of buyers and sellers.

• B2Bs are by definition global; few formal boundaries restrict those markets that sellers or buyers have access to.

Supply Chain Management and E-Procurement

• Supply chain management and e-procurement can be regarded as the implementation of B2B e-business.

• Virtually every business relies on suppliers to provide certain goods and services before it can deliver its products to customers.

• These supply chains can be quite extensive and are made up of diverse companies, transport fleets, warehouses, and production and distribution facilities.

Supply Chain Management

• Involves the coordination of all supply activities of an organization.

• Supply chain is the flow of information, materials, goods, and services from raw material suppliers through manufacturers and warehouses to the final consumer.

• Involves the efficient management of materials and information along the whole supply chain from raw materials through first- and second-tier suppliers to final customers.

• Related to logistics and operations management.

• SCM has become one of the key factors for enhancing organizational effectiveness and competitiveness.

Components of SCM

• Final customers (or consumers) are less prominent in discussions of SCM than major manufacturers, large retailers, and raw materials suppliers.

• Main activities concern truck-loads (or trainloads) of components, semi-finished goods, and finished goods between these main actors.

• Information flows among these actors plus also upstream and downstream, from and to the consumer. Traditional supply chain structure.

Upstream and Downstream Supply Chain

• Upstream supply chain: Transactions between an organization and its suppliers and intermediaries (buy-side e-commerce).

• Downstream supply chain: Transactions between an organization and its customers and intermediaries (sell-side e-commerce).

Current Importance of SCM

• Until the mid-1990s, supply chains were largely ‘invisible’ and SCM was an area that few senior managers took much interest in: a veritable backwater.

• This changed dramatically with the onset of globalization.

• The reduction in global trade barriers, together with increased containerization of freight traffic and cheap air travel, resulted in a major shift of manufacturing from the West to new low-cost production centers in, for example, China and Eastern Europe.

• Global supply chains were needed to shift the goods halfway across the world, and their success can be seen in the huge growth of world trade and the widespread availability in our local shops of cheap, high-quality goods that have traveled thousands of miles. (BPO- Business Process Outsourcing).

SCM as the 'Physical Internet'

• The Economist (2006) referred to supply chains as ‘the physical Internet’, which means that it should be as easy to move goods around the world as it is to access websites around the world.

• The ideas behind SCM are now being applied to services as particular service processes (e.g. call centers, the checking of insurance claims, etc.) are being moved offshore in what is termed ‘business process outsourcing’.

Business Process Outsourcing (BPO)

• A subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions (or processes) to a third-party service provider.

• BPO current also includes:

  • back office outsourcing for internal business functions such as human resources or finance and accounting.

  • front office outsourcing for customer-related services such as contact center services.

• BPO that is contracted outside a company's country is called offshore outsourcing.

Key Processes of Supply Chain Management

• Demand forecasting

• Production planning

• Inventory management

• Distribution management

• Processing customer orders

• Purchasing

• Communication between trading partners.

B2B Structures

• Three main B2B marketplace orientations:

  • Supplier oriented market

  • Buyer oriented market

  • Intermediary oriented market.

B2B Marketplace Orientations

• Supplier-oriented market: Suppliers invest in ICT to create new business opportunities (e.g., Dell).

• Buyer-oriented market: Buyers invest in ICT to create a procurement platform (e.g., e-procurement).

• Intermediary-oriented market: Third party invests in ICT to create a neutral marketplace (e.g., Alibaba).

Supplier Oriented Market

• Most common structure:

  • The B2B e-commerce is very similar to the B2C.

  • The main technological implementation is done at the supplier site.

  • Manufacturer-drive electronic stores.

  • Same store as used by individual consumers and business corporations. (B2C, B2B)

  • May involve auction run by supplier.

  • Example: Amazon (AWS); Cisco; Dell;

• Suppliers invest in the ICT platform to reduce search cost by making available online access to information pertaining to their goods and services to the buyers.

• The suppliers can reduce the contracting costs by automating the buying process and providing reviews from other customers that can help reduce uncertainty of the buyers.

• Suppliers can make use of the platform to reduce control and regulation costs by providing better sales support. The greater transparency from reviews and feedback by buyers can improve the quality of products and services provided by suppliers and reduce any opportunistic behaviours by the suppliers.

Buyer Oriented Market

• Typical of big acquisition department.

• Search costs are higher when the search process takes place in the market.

• In this case the big-buyer is opening their own marketplace to suppliers.

• Buyer opens a market on its server.

• Invites potential suppliers to bid on the RFQ (Request for quotes) Example: E-procurement.

• A Buyer Oriented Marketplace allows the buyers to establish an efficient purchasing environment.

• Buyer can use the marketplace to reduce search cost for buyer by maintaining a pool of approved suppliers.

• Buyer can reduce the contracting costs by automating the purchasing process.

• They can reduce control and regulation costs by having greater control over the enforcement of the terms and conditions of the purchase.

Intermediary Oriented Market

• Both buyers and sellers are meeting in a virtual environment created by an intermediary.

• E-hubs.

• 3rd party sets up marketplace: matches buyers and sellers.

• Similar to B2C mall: Bring buyers and suppliers (bidders) to one place.

• An intermediary Oriented Marketplace is where a third party invests in ICT to create a neutral marketplace where buyers and sellers can trade.

• It is operate by a third party.

• The intermediary Oriented Market will reduce the transaction cost for both the suppliers and buyers.

• The success of an intermediary depends on the number of suppliers and buyers using the marketplace.

• The main justification for the existence of these marketplaces is the neutrality created for both the buyers and suppliers.

• Buyers and sellers do not have to bear the overall operational cost of running the marketplace and maintaining the technology.

• Buyers and sellers will need to pay the variable costsfor making use of the marketplace.

• The neutrality of these marketplaces makes them unbiased towards both buyers and sellers so that neither is exposed to other’s strategic interest.

• Intermediary oriented marketplaces help to match buyers and sellers in a virtual environment which provides lower transaction costs for both parties without creating any bias in favor of one or the other.

• Typical intermediary oriented marketplaces are electronic hubs such as Alibaba.

Key Attributes of E-Marketplaces

• Biased versus neutral: Electronic marketplaces can favor either the buyer or the seller (biased) or not favor either (neutral).

• Aggregation is best when:

  • the cost of processing an order is high relative to cost of item

  • specialised products are involved

  • buyers and/or suppliers are highly fragmented

  • there is unpredictable demand

  • buyers are not sophisticated enough to understand dynamic pricing mechanisms

  • most purchasing is done on the basis of pre-negotiated contracts

  • a meta-catalogue can be created.

• Matching is best when:

  • products are commodities or near-commodities

  • there are massive trading volumes

  • products can be traded sight unseen

  • purchasing is done on a spot/transaction basis

  • logistics and fulfilment can be conducted by third parties

  • demand and prices are volatile.

Upstream and Downstream Supply Chain - The B2B Company

• Upstream supply chain includes suppliers, agents, warehouses, and wholesalers.

• Downstream supply chain includes customers, retailers, distributors, and agents.

Objectives of Fast Supply Chains

• Get the right product to the right place at the right time:

  • Speed

  • Reliability

  • Control

  • Flexibility to change

  • Low cost

  • Quality

  • Minimization of inventory

Problems of Supply Chain

• Slow response time

• Excessive inventories being held ‘just in case’

• Poor coordination and customer service

• Cannot support a wide range of products

• Unnecessarily costly

• Uncertainty in forecasting product demand

• Encounter ‘shrinkage’ (loss of products along the supply chain) and waste

Information and Uncertainty in SCM

• Uncertainty increases transaction costs.

• Improved information reduces uncertainty of supply and demand.

• Better predictions of consumer demand and potential supply problems, provided by ICTs, can improve supply chain performance.

Bullwhip Effect

• Bullwhip effect arises when businesses, particularly retailers, overestimate customer demand for products that are highly dependent, for instance, on fashion or weather.

• Higher variability in orders from retailer to manufacturer than actual sales.

Demand and Supply Uncertainty

• Demand and supply uncertainty depends on the type of product and stability of both its supply and demand.

• Certain products have a stable and predictable demand (e.g. groceries).

• Others may face high demand uncertainty due to the nature of the product (e.g. innovative computer technology with a small consumer base).

• Certain products have a uncertainty for supply due to wheather. (e.g. production of crops for food).

• Low Demand Uncertainty, Low Supply Uncertainty: Processed food, Basic clothing, oil

• Low Demand Uncertainty, High Supply Uncertainty: Fresh food, hydro-electric, wind power

• High Demand Uncertainty, Low Supply Uncertainty: Fashion clothing, smart mobile phones

• High Demand Uncertainty, High Supply Uncertainty: New semiconductors, leading age computer technology

Lee’s Uncertainty Framework

• Efficient supply chains: (Lean) Low supply and demand uncertainty; focus on reducing costs and increasing efficiency.

• Risk-hedging supply chains: High supply uncertainty; maintain shared pools of stock.

• Responsive supply chains: High demand uncertainty; very flexible in responding to sudden changes in demand. Sales data needs to be passed back up the supply chain very quickly and all member firms need to be prepared to quickly adjust their production and other activities. The Zara case is a good example of this.

• Agile supply chains: Both supply and demand are uncertain; needs to be both responsive and risk-hedging.

Uncertainty and Supply Chain Management Strategy (Lee, 2002)

Lean (Efficient) vs. Agile (Responsive) Supply Chains

• Lean supply chains are optimized for cost-efficiency.

• Agile (or responsive) supply chains have flexibility to accommodate uncertainty and change.

• Trade-off between service and efficiency (Frei, 2006).

Complexity of Supply Chain

• Suppliers like to give their customers (the retailers) a high level of service (e.g. delivery arrangements) but this can be expensive. Retailers may want high levels of variability, in terms of time, place and quantity of deliveries, which are hard to justify on cost-efficiency grounds.

• Suppliers (for example, of groceries) may wish to give their best customers (the large supermarkets) a better service (e.g. delivery on a Sunday) than the service available to their average customers.

• Providing different service levels adds to the complexity of supply chain management and, in the worst case, can lead to the sub-optimisation of the whole supply chain by a powerful player.

Supply Chain Integration: Value Chains and Value Networks

• Traditional integration strategy was acquisition (vertical integration).

• Today, this is regarded as clumsy, capital-consuming, and time-consuming.

Restructuring Supply Chain with E-Business Technology

• Vertical integration: Supply chain activities undertaken and controlled within the organization.

• Virtual integration: Majority of supply chain activities undertaken and controlled outside the organization by third parties.

Framework for Vertical Integration

• The direction of any expansion - the company aim to direct ownership at the upstream or downstream supply chain.

  • Downstream vertical integration => offensive strategic move to control the distribution channels to customers.

  • Upstream vertical integration=> defensive strategic move to ensure the continuous supply of raw materials.

Characteristics and Applications of Integration Strategies

Value Chains and Value Networks

• Michael Porter introduced the notion of value chain to describe what organizations can do to add value to goods or services as they move from creation to delivery to the customer.

• Value-adding activities can take place internally, within an organization’s boundaries, or externally, where activities are performed by supply chain partners.

• Value stream focuses on increasing the efficiency of tasks involved in adding value, particularly during the development and launch of a new products.

Value Networks

• Refers to the relationship between a company and its external partners for the execution of the company’s core activities and support processes.

• These value networks are enabled by information technology that facilitates electronic-based communication.

Key Aspects of Value Networks

• Electronic interconnectedness between partners.

• Dynamic relationships between partners.

• Partners can be readily added and removed.

• Different types of electronic links can exist between partners.

Virtual Organization

• An organisation which uses information and communications technology to allow it to operate without clearly defined physical boundaries between different functions.

• It provides customised services by outsourcing production and other functions to third parties.

Collaboration and Coordination in Virtual Organizations

• Virtual organisation is made up of individual companies collaborating closely with each other to meet a particular objective – profit-seeking in a commercial market.

• The key issues then become collaboration and coordination, rather than the competition that is emphasised in traditional business writing.

Implementation of Virtual Organisation

• Implementation at three levels (Schubert & Legner, 2011):

  • Technological level – technologies that link organizations together

  • Organisational level – the strategies followed to leverage the coordination

  • Institutional level – the governance structures for inter-organisational relationships within an industry. (Not covered in this course)

Case: Dell

• Key areas where Dell has successfully used ICT to virtually integrate and improve the Supply Chain Management:

  • Through virtual integration, Dell is stitching together a business with the partners using ICT to allow sharing of information in a real-time fashion.

  • Sharing of daily production requirements.

  • Sharing of design databases, methodologies, quantity required for production.

  • Changing the focus on how much inventory to how fast the inventory is moving.

  • Dell uses ICT to free people up to solve more complicated problems. Dell allows customers to access internal support tools on-line in the same way Dell’s technical support teams do.

  • With ICT, Dell can increase the inventory velocity.

  • Dell virtually integrate with company upstream like Sony for just-in-time delivery of monitors and down stream 3PL company like Airborne Express or UPS for transportation of products.

  • Dell uses real-time information on the demand to the manufacturing centers in Austin, Ireland and Malaysia. Dell build to customer’s order and provide only five or six days of lead time. The practices allow Dell to avoid stuffing the channels with old inventory.

  • Fast-cycle segmentation approach taken by Dell allows the company to forecast what its customers are going to need and when.

  • Dell uses ICT to coordinates the flow of that strategic information all the way back to its suppliers, effectively substituting information for inventory.

  • Dell make use of ICT to reduce the number of intermediaries between demand and source of supply.

  • The direct model of Dell also allow Dell to spread out the demand of their goods from various business customers.

  • ICT is being used to monitor the products customers are buying. The close monitoring of what the customer is actually buying allows Dell to compete effectively in the market. By keeping accurate forecast of the demand Dell is able to keep the inventory low.

Dell: Virtual Integration over Vertical Integration

• Virtual integration offers the advantages of tightly coordinated supply chain offered by vertical integration and at the same time benefits from the focus and specialisation.

• Through virtual integration, Dell can grow without physical assets and less staff. Whereas, vertical integration will require Dell to grow by acquiring up stream or down stream entities in the supply chain.

• Virtual integration allows Dell to focus on delivering solutions and systems to customers.

• Dell can invest into activities where the company can add value to the customers. Vertical integration will require the company to develop all components within the organisation.

• With suppliers becoming as partners with long- term commitment, Dell can reach the market faster and avoid getting stuck with obsolete inventory that goes down 50% a year which can be a massive risk.

• Virtual integration allows Dell to meet customers’ needs faster and more efficiently than vertical integration.

• Dell can be efficient and responsive to change at the same time.

Integration at the Technological Level

• Electronic data interchange (EDI)

• ERP

• Radio frequency identification (RFID)

E-SCM

• Electronic supply chain management uses technologies such as e-ERP, EDI and RFID to

  • reduce order-to-delivery time

  • reduce costs of manufacturing,

  • manage inventory more effectively

  • Improve demand forecasting

  • Reduce time to introduce new products

  • Improve aftermarket/post-sales operations

  • Lead to faster turnaround in innovation

Electronic Data Interchange (EDI)

• EDI is the electronic interchange of formatted data between computer applications, using agreed message standards; a system which preceded web-based electronic business.

• It’s basically a technology of the 1980s and 1990s which nevertheless had a significant effect on SCM and it is still widely used in many industries.

• EDI comprises:

  • Software (bridging; message passing; security)

  • Message standards (industry/international) in terms of formats and product codes

  • Reliable 3rd-party value added networks - public networks were unreliable at the time

  • Organisations - trading partners, system suppliers and standards bodies – standardisation is hugely important as clearly the senders and receivers of messages had to be using the same formats and product codes

Benefit of EDI

• Benefit of EDI:

  • The immediate benefits of EDI, compared to conventional mail, fax or telephone calls, were:

    • Improved communication speed, uniformity, accuracy

    • Cost savings: no re-keying; less paper.

  • EDI facilitated global supply chain management, reduced uncertainty and improved customer service.

  • Improved trading relationships, acting as a vehicle for collaboration between trading partners.

Problems with EDI

• It took a long time to agree international industry message standards.

• Organizations had to restructure many of their basic business processes and link the EDI system to their internal systems.

• Using EDI, orders could be generated (and sent off) automatically as soon as stock levels reached certain minima and, similarly, payments could be made automatically as soon as the system received an invoice.

• Large companies with huge transaction volumes tended to gain more than smaller companies and some large firms forced small suppliers to adopt their favoured (and expensive) EDI system, as well as charging significant sums for consultancy and implementing the system.

Application of EDI

• EDI quickly grew in popularity, especially in certain industries – in the UK the automotive and fast moving consumer goods (supermarkets) industries were early adopters of EDI.

• This was because of the large number of standard transactions between a limited number of firms, the requirement for careful reporting and the availability of standard product codes.

• There was a critical mass of collaborating firms with the necessary trust, motivation and technical expertise.

EDI vs Web-based Internet

• EDI has a tradition (or culture) of ‘serious’ business-to- business operations while the commercial use of the web began as fundamentally more business-to- consumer oriented.

• Web-based internet offers open XML standards such that it is cheaper and simpler than EDI.

• The use of EDI persists, particularly in the early adopter industries. This is because of the high switching costs for entire industries, a residual distrust of internet (in terms of resilience and security) and the time taken to agree international XML standards. There is also a certain institutional inertia (‘if it ain’t broke, don’t fix it’) and large firms (the main EDI users) tend to be fairly ‘clubby’.

• In most firms, the underlying EDI system is hidden by web- based user-friendly front-ends and EDI translation software.

ERP

• A software technology that is particularly important to large organizations, both internally and for communicating along the supply chain, is that of enterprise resource planning (ERP) systems.

• These are large, complex suites of software that serve to integrate the various common functions (e.g. accounting, production, human resources) and data of an organization.

• Considered as internal systems, these are of limited interest to e- business, which is fundamentally inter-organisational.

• Using EDI protocols and extranets, the ERP systems of the companies along the supply chain can be connected together and hence can ‘talk to each other’ in order to provide seamless communication between the various departments of different companies.

• Cisco’s supply chain, for example, depends upon interconnected ERPs.

Radio Frequency Identification (RFID)

• RFID is a so-called ‘automatic identification’ technology, which permits the identification of items without direct human intervention.

• Its predecessor, bar coding technology, relied on line-of-sight transmission of data along the supply chain and often required human beings to intervene in the process.

• RFID can automate the product identification process and thus promises many benefits to supply chain management.

Benefits of RFID

• RFID offers many potential advantages over previous supply chain technologies.

• For one, by automating the process, it can reduce labor costs. The RFID tags themselves allow significantly larger amounts of data to be stored on the products (e.g. serial number, color, size, price), leading to better intelligence along the supply chain.

• Additionally, the tags increase inventory visibility for partners and improve response times to customer demands and market trends.

• RFID also permits asset tracking, which can help reduce shrinkage and, in the case of a product being recalled, allows partners to locate and remove faulty goods quickly.

• Depending on how it is implemented, RFID can help facilitate item-level tracking, whereby tags are stored in each individual product (as opposed to pallet or case- level tracking).

• Item-level tracking opens up many opportunities for increased intelligence along the supply chain, for example in terms of theft detection, stock monitoring and product customisation.

• The automatic identification provides speed, accuracy, cost saving, efficiency and improved control.

• At the information level it improves data capture and tracking and it can indirectly lead to transformation through the reengineering of business processes.

• If it is implemented at the item- level, it can benefit inventory management and marketing through improving the shopping experience and supporting sales promotions through the ease of electronic price changes.

• In terms of merchandise management, it can feed into display management, as well as reducing shrinkage.

Problems Associated with RFID

• RFID tags can be expensive.

• The reliability of RFID is also a concern as certain metals interfere with the radio frequencies used by RFID.

• There may be performance issues in terms of accuracy and speed.

• RFID is by nature an inter-organisational technology that requires the adoption of (the same) standards by all trading partners.

• Decisions need to be taken whether to implement RFID at the item level or at the pallet level.

• If the RFID readers are fixed (not mobile), then this may restrict the freedom with which processes can be carried out.

• If the RFID tags are left on goods when consumers leave the shop, there is a potential to identify the consumer in the future, which raises privacy issues.

Strategies for Organizational Integration

• Management strategies are needed to leverage those technological links.

• The aim of these strategies is the formation of business networks with improved trading partner relationships through the relatively unfettered sharing of sales, inventory and production information.

• This collaboration sometimes stretches to the sharing of staff and facilities.

• The result is normally improved coordination and increased efficiency but often at the price of a reduction of autonomy for individual (especially smaller) firms.

• Instead of individual firms competing, they now compete as supply chains.

Vendor Managed Inventory

• A good example of the changes taking place in relationships between trading partners is vendor- managed inventory (VMI).

• This close collaboration, facilitated by SCM technology (usually EDI), involves the buyer (typically a retailer) handing over the responsibilities of managing its inventory (including when to order and how much to order) to the supplier.

• The supplier is able to manage this through information sharing between the two.

Key Ideas of Vendor-Managed Inventory

• The supplier manages inventory/orders, not the retailer, and this produces an integrated and optimized supplier/retailer value network.

• Benefits include reduced inventory and faster replenishment, and improved collaboration in areas like joint promotions

• Potential drawbacks (for retailers) include loss of autonomy and increase dependence on the supplier

Example of Vendor-Managed Inventory (VMI)

• VMI is driven by large organizations such as Wal- Mart and Procter & Gamble.

• VMI is known as continuous replenishment and efficient consumer response.

• It is facilitated by the electronic exchange of inventory information, and the suppliers calculates a proposed order based on past trend and current marketing promotions and sends it to the retailer for approval before supplying the goods.

A Summary of the Problems of Supply Chain Management and How Digital Business Can Assist (Chaffey Table 6.1)

Implementation of Integration

• It is essential that supply chains operate seamlessly on an everyday, ‘24-7’ level and the various components within the supply chain , people, processes and technology, must be tightly integrated.

• They have to fit together, all the way along the supply chain, regardless of whether the strategy is one of vertical or virtual integration.

Integration - People Level

• It is essential that organizations and their staff trust each other and can collaborate together across organizational boundaries to ensure the success of the overall supply chain.

• With VMI, the order process can be automated.

• Supplier-customer relationships become more important . Large suppliers will now form ‘account teams’ to improve service levels, logistics, distribution, returns and promotions for the benefit of both parties

• There should be clear channels between the trading partners to solve any problem.

Integration – Business Process and Technology

• Integration between the business processes and the technology is also very important.

• An effective supply chain requires organizations to pick and choose particular technologies to provide advantages for specific processes, keeping in mind the context if the company (in terms of culture, governance structure, specifics of products/service).

Integration - Technologies

• The various technologies themselves have to fit together, both within individual organisations and among the supply chain partners.

• One approach is that of integrated ERP software packages, in addition to the integration achieved through common RFID standards.

• The network links between the trading partners are provided by EDI systems (or their equivalent), which offer standard message formats and protocols.

Push and Pull Supply Chain Model

• Push Model:

  • Push models involve manufacturers developing products, which they then try to market. Push approach is typically motivated by a desire to lower costs and increase efficiencies during production.

• Pull model:

  • Pull models focus instead on what customers need, incorporating their requirements into product development and distribution.

Push vs. Pull

• Push production is based on forecast.

• In push production, stock is pushed to downstream to ensure customer demand is satisfied.

• Pull production is based on actual or consumed demand.

• In pull production, stock is minimized. The actual production will be based on customers’ actual order.

Third Party Logistics

• Third party logistics (3PL) is the outsourcing of part of all of the logistics activities by a company that used to perform such activities in-house.

• 4PL shifts the focus from operational services to supply chain coordination, which is more information intensive.

Advantages of 3PL

• The client company can focus on core competency and outsource all non-core activities to external experts

• There are cost related advantages through economies of scale

• Labour costs are shared between client & provider

• Offshore suppliers can be managed and trained by 3PL providers

• Capacity utilisation can be optimised

• Outsourcing to external experts can increase the satisfaction of customers through the ability to pay greater attention to their needs

• It can provide access to international distribution networks

• Enables risk sharing with an external agent

• It provides access to state of art technology

• It allows for inventory reduction

• There is more flexibility to cope with the changing demand

Disadvantages of 3PL

• Loss of in-house expertise

• Logistics itself can be a core competency that is better not outsourced

• Overdependence on external expertise can lead to