INTERNET-BASED ELECTRONIC MARKETPLACES AND SUPPLY CHAIN MANAGEMENT. Martin Grieger, PhD

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1 This Chapter is taken from my dissertation: INTERNET-BASED ELECTRONIC MARKETPLACES AND SUPPLY CHAIN MANAGEMENT A SYSTEMS APPROACH TOWARDS A HOLISTIC CONCEPT OF UTILIZING INTERNET-BASED ELECTRONIC MARKETPLACES TO SUPPORT SUPPLY CHAIN MANAGEMENT Martin Grieger, PhD

2 1.1 SUPPLY CHAIN MANAGEMENT - ORIGIN AND DEFINITION Firms are not closed systems isolated from their environment, but open to and dependent on flows of resources, personnel and information from the outside. Academia in the field of supply chain management has recognized that it is easier to understand and explain firms behavior by viewing them as entities in a large system of relations and interdependent activities called a supply chain 1. Although the supply chain is a misleading term for what is better characterized as a network (e.g. Christopher 1998, Mentzer et al referring to Webster 1992, Schary & Skjøtt-Larsen 2001), the idea remains the same to describe the linkages between a focal firm and its environment in terms of relationships, activities and/or flows. This open system perspective of the firm is derived from Mentzer and his colleagues (2001) who state that in 1958 Forrester introduced the underlining theory behind supply chain management by recognizing the integrated nature 2 of organizational relationships: Management is on the verge of a major breakthrough in understanding how industrial company success depends on the interactions between the flows of information, materials, money, manpower, and capital equipment. The way these five flow systems interlock to amplify one another and to cause change and fluctuation will form the basis for anticipating the effects of decisions, policies, organizational forms, and investment choices. (Forrester 1958, p. 37) Though his article is more than forty years old, it appears that Forrester identified key management issues and illustrated the dynamics of factors associated with the phenomenon referred to in contemporary business literature as supply chain management. (Mentzer et al. 2001, p. 2) Forrester s perspective of the interwined nature of organizations and management of flows penetrating the organizations has been widely accepted, and the information order flow 1 There have been a lot of discussions on the origin of the term supply chain. Some people state that the term was first used by consultants in the mid 1980s. Lummus and Vokurka (1999) have investigated the history of supply chain initiatives, which can be traced to the early beginnings of the textile industry with the quick response program and later to efficient consumer response in the grocery industry. In academia the term supply chain was adopted in the late 1980s when the first journal articles were published (e.g. Jones & Riley 1987, Houlihan 1987, Ellram 1989 or Stevens 1989). In the 1990s, supply chain management began to dominate logistics conferences and was recognized as a new challenge for researchers and managers in logistics (Skjøtt-Larsen 1999). Mentzer et al. (2001) revealed that at the 1995 Annual Conference of the Council of Logistics Management, 13.5% of the concurrent session titles contained the words supply chain. In 1997, it was already 22.4%. But also in other disciplines such as marketing or operations management, supply chain management became a recognized research field. Approximately one third of the conference papers in the 2002 European Operations Management Association (Euroma) Conference, Copenhagen, Denmark dealt with supply chain management issues.

3 problem has become a popular research field under the name, the bullwhip effect (see Lee, Padmanabhan & Whang 1997). However, there is no common understanding of the term supply chain management and different schools of thought can be identified (Bechtel & Jayaram 1997). A more recent angle brings the management of key business processes across supply chains to the centre of attention (e.g. Lambert, Cooper & Pagh 1998, Lambert & Cooper 2000, Croxton et al. 2001, Ackere, Larsen & Morecroft 1993, McCormack & McAdam 2001, Thaler 1999). Lambert, Cooper and Pagh (1998), three supporters of this viewpoint, recommend the following (process-oriented) definition of supply chain management, which is the fundament of this dissertation: Supply chain management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders. (Lambert, Cooper & Pagh 1998, p. 1) Supply chain management offers the opportunity to identify and use the synergy of intra and inter-company integration and management. In this view, supply chain management captures a total business process oriented role and represents a new way of managing the business and relationships with other members of the supply chain (Lambert, Cooper & Pagh 1998). This understanding of the supply chain management concept is illustrated in 2 Forrester (1958) argued that system dynamics might have an impact on the performance of functions such as research, engineering, sales, and promotion because of the intertwined nature of organizations. He used a computer simulation of order information flow to show this phenomenon. Forrester (1958) illustrated the influence on production and distribution performance for each firm and the entire system (see also Mentzer et al. 2001).

4 Figure 1, which shows a simplified supply chain network structure, the information and product flows, and eight key supply chain business processes (see also Table 1) penetrating functional silos within the company and the various corporate silos across the supply chain. Thus, business processes become supply chain business processes linked across intra and intercompany boundaries (Lambert, Cooper & Pagh 1998).

5 Figure 1: Supply chain management: Integrating and managing business processes across the supply chain Supply Chain Business Processes Supply Chain Business Processes Tier 2 Supplier Tier 2 Supplier Information Flow Information Flow Manufacturer Tier 1 Manufacturer Supplier Tier 1 Logistics Customer Consumer Supplier Purchasing Logistics Marketing & Sales Customer Consumer Purchasing Marketing & Sales PRODUCT Production FLOW Flow Production PRODUCT Production FLOW Flow Finance Production R&D Finance R&D CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT MANUFACTURING FLOW MANAGEMENT SUPPLIER PROCUREMENT RELATIONSHIP MANAGEMENT SUPPLIER PROCUREMENT RELATIONSHIP MANAGEMENT PRODUCT DEVELOPMENT AND AND COMMERCIALIZATION COMMERCIAL. PRODUCT DEVELOPMENT AND AND COMMERCIALIZATION COMMERCIAL. RETURN RETURNS MANAGEMENT RETURN RETURNS MANAGEMENT Source: Cooper, Lambert and Pagh. (1997) and modified bycroxton et al. (2001) The essence of this supply chain management framework deals with eight key business processes. Davenport and Short define a business process as a set of logically-related tasks performed to achieve a defined business outcome (1990, p. 12). Likewise, Hinterhuber defines it as a set of integrated and coordinated activities required for producing products or offering services (1995, p. 65) and Alter as a related group of steps or activities that use people information and other resources to create value for internal or external customers (1999, p. 39). Lambert et al. (1997, 1998), however, adopted Davenport s (1993) definition of a process as a structured and measured set of activities designed to produce a specific output for a

6 particular customer or market modifying the definition according to the end-customer and flow-oriented characteristics of supply chain management. 3 A process can be viewed as a structure of activities designed for action with a focus on end-customers and on the dynamic management of flows involving products, cash, knowledge and/or ideas. (Lambert, Cooper & Pagh 1998, p. 9) Table 1: Overview of the supply chain business processes and flows SCM Processes Customer relationship management Customer service management Demand management Order fulfillment Manufacturing flow management Supplier relationship management Product development and commercialization Return management Supply chain management flows Product flow Information flow Money flow Tasks (only example) Structure for how the relationship with the customer is developed and maintained. Customer service is the interface of logistics and marketing [ ] Source for customer information, e.g. product availability, shipping dates, order status Balance the customers requirements with the firm s supply capabilities e.g. forecasting demand Generate, enter, process, document, pick, deliver, and handle customer orders. The objective is to develop a seamless process from the supplier to the organization and then on to its various customer segments. Making the products and establishing the manufacturing flexibility needed to serve target markets. With supply chain management, the product is pulled through the plant based on customer needs. Strategic plans are developed with suppliers to support the manufacturing flow management process and the development of new products. [ ] Long-term partnerships are developed with a small core group of suppliers. Define and manage product and service agreements and prices. Developing new products. Integrating customers and suppliers into the product development process in order to reduce time to market Identify productivity improvement opportunities and breakthrough projects. Review environmental and legal compliance guidelines; Managing day-to-day return activities Refers to the original emphasis of logistics, to deliver the right product at the right time in the right quality and quantity and at the right place. Establishes and manages the communication and information flow facility structure linking all supply chain members. The goal is to reduce cycle times for receipts and payments. Quotations adapted from Croxton et al and Stock and Lambert (Stock & Lambert 2001, chapter 2) 3 Al-Mashari and Zairi state that as business processes are the manner in which work gets done within an organization, they are a distinguishing characteristic among organizations, and thus a significant factor leading to competitive edge (2000, p. 11 referring to Venkatraman 1994 and Hinterhuber 1995). As business processes are the manner in which work gets done across organizations in Lambert s et al. (1998) supply chain management concept, they are a distinguishing characteristic among the members of a supply chain and a significant factor leading to the overall competitive advantage of the supply chain. Lambert s et al. view of key processes is similar to that of Alter, who differentiates between processes that typically occur in functional areas and processes that occur across functional areas. According to Alter (1999), cross-functional processes are fulfilling customer orders and designated as essential processes. Willcocks and Smith (1995) classify business processes into four groups: core (central to business operations), support, management (concerned with organizing and controlling business resources), and business network processes (with scope beyond organizational boundaries). This classification is not congruent with Lambert s et al. (1998) view of a key supply chain process, which only includes three process groups core, management and business network processes.

7 Lambert and his colleagues (1998) propose a supply chain management framework that includes the combination of three inter-related elements: (1) the supply chain structure, (2) the supply chain business processes (see Table 1), and (3) the supply chain management components. The implementation of supply chain management involves several design decisions. These decisions include the choice of actors, with whom it is critical to link, the choice of processes that need to be linked to each of the actors, and the level of integration with each process link. The three elements, their design tasks, and parameter are listed in Table 2. Table 2: Supply chain management design decisions Framework Element Task Parameter Supply Chain Network Structure Key Question: Who are the key supply chain members with whom to link processes? Supply Chain Business Processes Key Question: What processes should be linked with each of the key supply chain members? Supply Chain Management Components Key Question: What level of integration and management should be applied to each process link? Identifying Supply Chain Members Identify the Structural Dimension of the Network Identify Types of Business Process Links Identify Key-Processes Apply Physical & Technical Management Components Apply Managerial & Behavioral Management Components Primary supply chain members Supporting Companies Horizontal structure Vertical structure Horizontal position of the focal company Managed Process Links Monitored Process Links Not-managed Process Links Non-member Process Links Customer Relationship Management Customer Service Management Demand Management Order Fulfillment Manufacturing Flow Management Supplier Relationship Management Product Development and Commercialization Returns Management Planning and Control Methods Work Flow/ Activity Structure Organization Structure Communication and Information Flow Facility Structure Product Flow Facility Structure Management Methods Power and Leadership Structures Risk and Reward Structure Culture and Attitude Source: Adapted from Lambert, Cooper & Pagh 1998 and Croxton et al. 2001

8 Christaanse and Kumar (2000) introduced a similar framework, which involves four design decisions. The first decision, the choice of actors in the supply chain, remains the same. The second decision refers to the governance mechanism in the supply chain, which is an aspect of Lambert s et al. level of integration. This decision deals with the ownership of the members in the supply chain. In this sense, a high level of integration implies that all actors in the supply chain are owned by one firm (vertical integration). A low level of integration implies that all members of the supply chain transact using the market mechanism. Such types of relations are called arm s length relationships. The third decision refers to the structuring (i.e. sequencing order) of the activities in the supply chain, the counterpart of Lambert s et al. process integration aspect. The authors refer to Lee, Padmanabhan and Whang (1997) and argue that the supply chain structure is mostly determined by the natural sequence of processes inherent in the manufacturing process [ and] often a consequence of chance, previous history, habit, limitations of the communication media, and limitations of the coordination mechanism (Christiaanse & Kumar 2000, p. 272). The last decision is the choice of coordination structures in the supply chain, which is based upon the flow of coordinating information. 4 4 In addition, Christiaanse and Kumar highlight an important aspect: not all decisions are a matter of design because some are given naturally. While some of these decisions are the result of the natural production and delivery processes (e.g. beer cannot be brewed unless the barley is grown, or it cannot be loaded on a ship unless it has arrived on the dockside), or are strategically fundamental to the chain (e.g. for brand image reasons, unlike Carlsberg which is brewed close to destination, Heineken is brewed only in The Netherlands), other decisions are a matter of design and thus, theoretically at least, under the control of the designer of the supply chain. Moreover, these decisions are interrelated. For example, the choice of a totally vertically integrated governance structure precludes free choice of actors outside the ownership of the firm, while the choice of a market mechanism at every supply-chain link would limit the design to dyadic coordination at the supplier-buyer interface (Christiaanse & Kumar 2000, p. 271).

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