ONLINE TUTORIAL 3: SUPPLY CHAIN MANAGEMENT

Transcription

1 TurbanTut_03.qxd 7/8/04 3:30 PM Page 1 CHAPTER 1 ONLINE TUTORIAL 3: SUPPLY CHAIN MANAGEMENT Content T3.1 Essentials of the Supply and Value Chains T3.2 Computerized Systems: MRP, MRP II, SCM, and Integration T3.3 Enterprise Resource Planning (ERP) T3.4 E-Commerce and Supply Chains T3.5 Global Supply Chains T3.6 Issues in Supply Chain Management Learning Objectives After studying this tutorial, you will be able to: 1. Understand the concept of the supply chain, its importance, and management. 2. Describe the problems of managing the supply chain and identify some innovative solutions. 3. Trace the evolution of software that supports activities along the supply chain and describe MRP, MRP II, SCM software, and ERP. 4. Describe ERP and understand the relationships between ERP and SCM software. 5. Understand the relationships between e-commerce and SCM software. 6. Understand the process and issues of global supply chain management. 7. Describe current issues in SCM. 1

2 TurbanTut_03.qxd 7/8/04 3:30 PM Page 2 2 Online Tutorial 3: Supply Chain Management T3.1 ESSENTIALS OF THE SUPPLY AND VALUE CHAINS DEFINITIONS AND BENEFITS Initially, the concept of a supply chain referred to the flow of materials from their sources (suppliers) to the company, and then inside the company to places where they were needed. A demand chain, which described the process of taking orders and delivering finished goods to customers, also was recognized. These two concepts are interrelated, so it wasn t long before they were combined under the single concept named the supply chain. Definitions The following definitions are helpful for the study of this tutorial. Supply Chain. Supply chain refers to the flow of materials, information, payments, and services from raw materials suppliers, through factories and warehouses, to the end customers. A supply chain also includes the organizations and processes that create and deliver products, information, and services to the end customers. It is a network of activities that delivers a finished product or service to the customer. It includes many tasks such as purchasing, payment flow, materials handling, production planning and control, logistics and warehousing, inventory control, and distribution and delivery. Supply Chain Management. The function of supply chain management (SCM) is to plan, organize, and coordinate all of the supply chain s activities. Today, the concept of SCM refers to a total systems approach to managing the entire supply chain. For an overview, see Larson and Halldorsson (2003). SCM is usually supported by IT. (See Kumar, 2001; Hugos, 2002; and Vakharia, 2002.) SCM Software. SCM software refers to software that supports specific segments of the supply chain, especially in manufacturing, inventory control, scheduling, and transportation. This software is designed to improve decision making, optimization, and analysis. E-Supply Chain. When a supply chain is managed electronically, usually with Webbased software, it is referred to as an e-supply chain. As this tutorial will show, improvements in supply chains frequently involve an attempt to convert them to e-supply chains, namely to automate the information flow in the chain. (See Poirier and Bauer, 2000.) Flows The supply chain includes three flows: materials, information, and financial. Materials flows. This encompasses physical products, new materials, supplies, and so forth that flow along the chain, including returned products, recycled products, and disposal of material or product. Information flows. All data related to demand, shipments, orders, returns, schedules, and changes in the aforementioned are information flows. Financial flows. Financial flows include all transfers of money, payments, credit card information and authorization, payment schedules, and e-payments. A supply chain of milk products is shown in Exhibit T3.1. The process starts with several external suppliers that move milk, cardboard, and plastic to the processing plant. After the milk is processed and packaged, it is delivered to retailers, who sell it to customers. Not shown in the picture are alternative delivery systems, such as delivery from a warehouse directly to customers homes. Note that in service industries, no physical flow of materials occurs, but frequently there is flow of documents (hard and soft copies). These, according to the definition given previously, are to be considered supply chains, because the information flow and financial flow still exist. In fact, the digitization of software, music, and so on results in a supply chain without physical flow. Notice, however, that in such a case, there are two types of information flow: one that replaces material flow (e.g., digitized software) and one that is the supporting information (orders, billing, etc.). In managing supply chains, it is necessary to coordinate all of the aforementioned types of flows among all of the parties involved in the supply chain. (See Viswanadham, 2002.)

3 TurbanTut_03.qxd 7/8/04 3:30 PM Page 3 Online Tutorial 3: Supply Chain Management 3 EXHIBIT T3.1 Milk Products Supply Chain DOWNSTREAM External Distributors Packaged Milk Products Customers Retail Grocers Internal Functions Packaged Milk Products INTERNAL Milk Product Processing Packaging Operation Raw Milk Cardboard Containers Labels Plastic Containers Tier One Dairy Farm FAT FREE MILK Label Company Cardboard Container Manufacturer Plastic Container Manufacturer UPSTREAM Cardboard Chemicals External Suppliers Tier Two Chemical Plant Paper Mill Raw Materials Wood Tier Three Material Flow Information Flow Lumber Company Chemical Extraction Plant Source: Reid, R., and N. R. Sanders, Operations Management. Hoboken, NJ: Wiley, 2002.

4 TurbanTut_03.qxd 7/8/04 3:30 PM Page 4 4 Online Tutorial 3: Supply Chain Management Benefits The main goal of modern SCM is to reduce uncertainty and risks in the supply chain, thereby positively affecting inventory levels, cycle time, business processes, and customer service. These benefits contribute to increased profitability and competitiveness. The benefits of supply chain management have long been recognized in business and in the military. In today s competitive business environment, efficient, effective supply chains are critical to the survival of most organizations, and they are greatly dependent upon the supporting information systems. THE COMPONENTS OF SUPPLY CHAINS The term supply chain comes from a picture of how the partnering organizations in a specific supply chain are linked together. A typical supply chain links a company with its suppliers, its distributors, and its customers. Note that a supply chain frequently involves three segments: upstream, where sourcing or procurement from external suppliers occurs; internal supply chain, where transformation (production), assembly, and packaging take place; and downstream, where distribution to customers takes place, frequently by external distributors, or a disposal takes place. A supply chain also involves a product life cycle approach that goes from dirt to dust. However, a supply chain is more than just the movement of tangible inputs, because it also includes the movement of information and money, and the procedures that support the movement of a product or a service. Finally, the organizations and individuals involved are part of the chain, as well. Tiers of Suppliers An examination of Exhibit T3.1 shows that several potential tiers of suppliers exist. Some processes, such as those required to provide raw milk, may have only one tier of suppliers. However, in many cases several tiers of suppliers exist, meaning that a supplier has one or more subsuppliers, and the subsupplier might have its own subsuppliers, and so on. For example, making cardboard containers involves three tiers: the cardboard container manufacturer (tier one), which gets its material from the paper mill (tier two), which gets its material from the lumber company (tier three). Some supply chains have up to a dozen tiers. Coordinating subsuppliers can be a complex task. Using business-to-business (B2B) exchanges can help with such coordination. TYPES OF SUPPLY CHAINS Supply chains come in all shapes and sizes and can be fairly complex, as shown in Exhibit T3.2. As can be seen in this exhibit, the supply chain for a car manufacturer includes hundreds of suppliers, dozens of manufacturing plants (for parts) and assembly plants (for cars), dealers, direct business customers (fleets), wholesalers (some of which are virtual), customers, and support functions such as product engineering and purchasing. Notice that in this case, the chain is not strictly linear as it is in Exhibit T3.1. Some loops can be found in the process. In addition, sometimes the flow of information and even goods can be bidirectional. For example, not shown in this figure is the return of products (known as reverse logistics, or returns). For the automaker, for example, that would be cars returned to the dealers in the event of defects or recalls by the manufacturer. The supply chain shown in Exhibit T3.1 might have warehouses in different locations, making the chain more complex, such as the one shown in Exhibit T3.2. In fact, several major types of supply chains can be classified into four major categories: integrated make to stock, build to order, continuous replenishment, and channel assembly. If a company uses a build-to-order business model, for example, it will not be necessary to store finished products, but raw materials and components will need to be stored. Therefore, it is clear that supply chains depend on the nature of the company and its business processes. A brief description of the previously mentioned four types follows.

5 TurbanTut_03.qxd 7/8/04 3:30 PM Page 5 EXHIBIT T3.2 An Automotive Supply Chain CARS Car Dealers Online Tutorial 3: Supply Chain Management 5 Engines Glass Sales Operations Product Engineering Manufacturing (57 plants) Electrical/Fuel Handling Devices Transmissions Allocated buildable orders New products and engineering changes Components Group Plastics/ Trim Products Ship release Assembly Material Planning (19 plants) Vehicle scheduling Preproduction planning Components scheduling Planning/sequencing Stampings Castings Electronics Climate Controls Request to buy PARTS Request to buy PURCHASING Sourcing Shipping Assembly Line Warehousing Ship and engineering Receiving releases changes PARTS Advance ship MATERIALS Suppliers (hundreds) notice Engineering changes and ship releases Source: Modified from Handfield, R. B., and E. L. Nichols, Jr. Introduction to Supply Chain Management. Upper Saddle River, NJ: Prentice Hall, 1999, p. 3. Integrated Make to Stock The integrated make-to-stock supply chain model focuses on tracking customer demand in real time, so that the production process can restock the finished-goods inventory efficiently. This integration often is achieved through use of an information system that is fully integrated. Through application of such a system, an organization can receive real-time demand information that can be used to develop and modify production plans and schedules. This information also is integrated further down the supply chain to the procurement function, so that the modified production plans and schedules can be supported by input materials. An example is Starbucks Coffee (starbucks.com), which uses several distribution channels. Starbucks not only sells coffee drinks to consumers, it also sells beans and ground coffee to businesses such as airlines, supermarkets, department stores, and ice-cream makers. In addition, sales can be made through direct mail, including the Internet. Starbucks is successfully integrating all sources of demand and matching it with the supply by using Oracle s automated information system for manufacturing (called GEMMS). The system handles distribution planning, manufacturing scheduling, and inventory control. The coordination of supply with multiple distribution channels requires timely and accurate information flow about demand, inventories, storage capacity, transportation scheduling, and more. The information systems are critical for doing all of these functions with maximum effectiveness and reasonable cost. Finally, Starbucks must work closely with hundreds of business partners. Build to Order Dell Computer is best known for its application of the build-to-order model. In this model, one begins the assembly of the customer s order (from components) almost immediately upon receipt of the order. This requires careful management of the component inventories

6 TurbanTut_03.qxd 7/8/04 3:30 PM Page 6 6 Online Tutorial 3: Supply Chain Management and delivery of needed supplies along the supply chain. One way to accomplish this is to utilize many common components across several production lines and in several locations. One of the primary benefits of this type of supply chain model is the perception that each customer is receiving a personalized product. In addition, the customer receives it rapidly. This type of supply chain model supports the concept of mass customization. Continuous Replenishment The idea of the continuous-replenishment supply chain model is to replenish the inventory constantly by working closely with suppliers and intermediaries. However, if the replenishment process involves many shipments, the cost could be too high, causing the supply chain to collapse. Therefore, tight integration is needed between the order-fulfillment process and the production and acquisition processes. Real-time information about demand changes is required in order for the production process to maintain the desired replenishment schedules and levels. This model is most applicable to environments with stable demand patterns, as is usually the case with distribution of prescription medicines. The model requires intermediaries when large systems are involved. Such a distribution channel for McKessen Co. is shown in the upper part of Exhibit T3.3. Channel Assembly A slight modification to the build-to-order model is the channel-assembly supply chain model. In this model, the parts of the product are gathered and assembled as the product moves through the distribution channel. This is accomplished through strategic alliances with third-party logistics (3PL) firms. These services sometimes involve either the physical assembly of components and making finished products at a 3PL facility, or the collection of finished components for delivery to the customer. For example, a computer company could have items such as the monitor and the CPU shipped directly from its vendors to a 3PL facility, such as at Federal Express or UPS. Therefore, the customer s computer order would not come together until all items were placed on a vehicle for delivery by the 3PL. A channel assembly might have low or zero inventories and can achieve a faster market response time; it is popular in the computer technology industry. An example is shown in Exhibit T3.3 (lower part) with a large distributor, Ingram Micro, at the center of the supply chain. The flow of goods, services, information, and financial resources usually is designed not only to transform raw items to finished products and services effectively, but also to do so in an efficient manner. Several types of software are available to achieve this goal. EXAMPLES OF SUPPLY CHAINS: Gateway: A Direct Sales Manufacturer Gateway is a manufacturer of PCs that sells directly to customers who place orders at Gateway retail stores, over the telephone, or via the Internet. After a customer places an order, the PC is manufactured to order and then shipped from one of the assembly plants. Over the years, Gateway expanded its operations worldwide, creating a sales and manufacturing presence in Europe and Asia Pacific. In 1999, the company had three plants in the United States, one plant in Ireland, and one in Malaysia. As of January 2002, Gateway had about 280 retail stores in the United States. The retail stores are used mainly for product displays and for customers to seek professional advice. Facing lagging demand and fierce price slashing, its share of the domestic PC market had dropped by 20 percent by November Gateway then closed all of its overseas operations and shut down one of its production facilities in the United States. It also closed several of its retail stores and reduced the number of configurations of its products. The answers to the following supply chain related questions have a bearing on the performance of Gateway. 1. Why did Gateway have multiple production facilities in the United States? What advantages or disadvantages does this strategy offer relative to a company that has one facility? 2. Why does Gateway not carry any finished-product inventory at its retail stores? Should a firm with an investment in retail stores carry any finished-goods inventory? What characterizes products that are best manufactured to order?

7 TurbanTut_03.qxd 7/8/04 3:30 PM Page 7 Online Tutorial 3: Supply Chain Management 7 EXHIBIT T3.3 Types of Supply Chains McKesson New Material Sources Pharmaceutical Manufacturers Business Customers Distribution Centers Retail Pharmacies McKesson Distribution Centers Customers Physical flow of material Flow of information (a) Integrated continuous replenishment pharmaceutical supply chain (Flow of payments not shown.) Suppliers Solectron Transportation company (FedEx, UPS) Ingram Micro Ingram s Web site Reseller/Customer (b) Channel assembly: Build-to-order supply chain with no inventory Source: Kalakota, R., and M. Robinson, M-Business: The Race to Mobility. McGraw-Hill, 2002, fig. 9.10, p Is the Dell model of selling directly without retail stores always less expensive than a supply chain with retail stores? 4. What are the supply chain implications for Gateway s decision to offer fewer configurations? Answers to these questions determine the appropriateness of Gateway s supply chain decisions and will determine the need for IT support. Manufacturers like HP that sell direct and through resellers will need a different supply chain design to support their strategy. How should they design and manage their supply chains? 7-Eleven: A Convenience Store With more than 23,000 stores in about 20 countries, 7-Eleven is one of the largest convenience store chains in the world. It has about 9,000 stores in Japan and almost 6,000 in the United States. 7-Eleven Japan is one of the most profitable companies listed on the Tokyo stock exchange. Its success is attributed primarily to its supply chain design and

8 TurbanTut_03.qxd 7/8/04 3:30 PM Page 8 8 Online Tutorial 3: Supply Chain Management management ability. One of the key objectives of 7-Eleven Japan is to micro-match supply and demand by location, season, and time of day. To fulfill this objective, 7-Eleven Japan opens new stores in target areas. This helps 7-Eleven establish a strong presence, and it consolidates its warehousing and transportation functions. In addition, all stores are connected electronically to the head office, distribution centers (DCs), and suppliers. Orders are passed to the suppliers, which package store-specific orders and deliver them to the DC. At the DC, all orders of like products from different suppliers are combined and delivered to the stores. 7-Eleven Japan has made an effort to have no direct store delivery from vendors to the stores. In the United States, 7-Eleven is taking a similar approach to the one used in Japan, except that a large fraction of products is delivered to stores by a distributor and not from the 7-Eleven DC. In Japan and the United States, 7-Eleven has invested a significant amount of money and effort in a retail information system. Data are collected by scanners and analyzed. The resulting information is then made available to headquarters and the stores for use in ordering, product assortment, and merchandising. Information systems play a key role in 7-Eleven s ability to micro-match supply and demand. 7-Eleven has made clear choices in the design of its supply chain. Other convenience store chains have not always made the same choices. The following questions focus mainly on 7-Eleven s supply chain choices and its key success factors. 1. What factors influence the decision regarding the opening and closing of stores? Why does 7-Eleven choose to have a preponderance of its stores in a particular location? 2. Why does 7-Eleven Japan discourage direct store delivery from vendors and make an effort to move all products through combined DCs? How does the presence of the distributor delivering to the stores affect the performance of the delivery system in the United States? 3. Where are DCs located, and how many stores does each center serve? How are stores assigned to DCs? 4. What point-of-sales data does 7-Eleven gather, and what information is made available to store managers to assist them in their ordering and merchandising decisions? How should the information system be structured? W.W. Grainger and McMaster Carr: MRO Suppliers with a Different Supply Chain Strategy W.W. Grainger and McMaster Carr sell maintenance, repair, and operation (MRO) products. Both companies have online catalogs, as well as Web pages through which orders can be placed. Customers can place their orders in the retail stores, over the telephone, or by means of the Internet. W.W. Grainger orders are either shipped to the customers or picked up by the customers at one of the stores. McMaster Carr, on the other hand, ships all orders. W.W. Grainger has several DCs that replenish stores and fill customer orders; McMaster Carr has DCs from which all orders are filled. Both firms offer several hundred thousand products to their customers. Each firm stocks about 100,000 products; the rest are obtained from the supplier as needed. Both firms face the following strategic and operational issues. 1. How many DCs should a company have, and where should they be located? 2. How should product stocking be managed at the DCs? Should all DCs carry all products? 3. Which products should be carried in inventory, and which products should be left with the suppliers? 4. How should markets be allocated to DCs in terms of order fulfillment? What should be done if an order cannot be completely filled from a DC? Should specified backup locations be available? How should they be selected? 5. How should replenishment of inventory be managed at the various stocking locations? 6. How should Web orders be handled relative to the existing business? Is it better to integrate the Web business with the existing business or to set up separate distribution?

9 TurbanTut_03.qxd 7/8/04 3:30 PM Page 9 Toyota: A Global Auto Manufacturer Toyota Motor Corp. is Japan s top auto manufacturer. The company has experienced significant growth in global sales over the last two decades. A key issue facing Toyota is the design of its global production and distribution network. Toyota must decide what the production capability of each of the factories will be, because this has a significant impact on the desired distribution system. Prior to 1996, Toyota used specialized local factories for each market. After the Asian financial crisis from 1996 to 1997, Toyota redesigned its plants so that they could be shifted quickly to be able to export to markets that remain strong. Toyota calls this strategy global complementation. For any global manufacturer like Toyota, several questions arise regarding the configuration and capability of the supply chain. 1. Where should the plants be located, and what degree of flexibility should be built into each one? What capacity should each plant have? 2. Should plants be able to produce for all markets or only specific contingency markets? 3. How should markets be allocated to plants, and how frequently should this allocation be revised? 4. What kind of flexibility should be built into the distribution system? 5. How should this flexible investment be valued? 6. What actions can be taken during product design to facilitate this flexibility? Online Tutorial 3: Supply Chain Management 9 Section T3.1 REVIEW 1. Define supply chain. 2. Define supply chain management (SCM). 3. Define e-supply chain. 4. List the flows in the supply chain. 5. List the benefits of SCM. 6. List the types of supply chains. 7. Distinguish between built-to-order and continuous-replenishment supply chains. 8. Name the different types of supply chains and some of the issues involved in their operations. T3.2 COMPUTERIZED SYSTEMS: MRP, MRP II, SCM, AND INTEGRATION The concept of the supply chain is interrelated with the computerization of its activities, which has evolved over the last 50 years. THE EVOLUTION OF SUPPLY CHAIN COMPUTERIZED AIDS Historically, many of the supply chain activities were managed with paper transactions, which can be slow, error prone, and inefficient. Therefore, since the time when computers were first used for business, people have wanted to automate the supply chain processes. The first software programs, which appeared in the 1950s and early 1960s, supported short segments along the supply chain. Typical examples of these segments are inventory management systems, scheduling, and billing. The supporting software was called supply chain management (SCM) software. The major objectives were to reduce cost, expedite processing, and reduce errors. Such applications were developed in the functional areas, independent of each other, and they became more and more sophisticated with the passage of time. Of special interest were decision support procedures such as management science optimization and financial decision-making formulas (e.g., for finding appropriate order quantities). It quickly became clear that interdependencies exist among some of the supply chain activities. One early realization was that production scheduling is related to inventory management and purchasing plans. As early as the 1960s, the material requirements planning

10 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management (MRP) model was devised. This model essentially integrates production, purchasing, and inventory management of interrelated products. It became clear that computer support could greatly enhance the use of this model, which might require daily updating. This resulted in commercial MRP software packages coming on the market. Although MRP packages were and still are useful in many cases, helping drive inventory levels down and streamlining portions of the supply chain, they failed in as many cases. One of the major reasons for the failure was the realization that schedule-inventorypurchasing operations are closely related to financial and labor resources. This realization resulted in an enhanced MRP methodology (and software) called manufacturing resource planning (MRP II). which adds labor requirements and financial planning to MRP. (See Sheikh, 2002.) During this evolution, it became more and more common to integrate functional information systems. This evolution continued, leading to the enterprise resource planning (ERP) concept, which integrates the transaction processing and other routine activities of all functional areas in the entire enterprise. ERP initially covered all routine transactions within a company, including internal suppliers and customers, but later it was expanded to incorporate external suppliers and customers in what is known as extended ERP software. The next step in this evolution, which started in the late 1990s, is the inclusion of business intelligence and other software. At the beginning of the twenty-first century, the integration expanded to include markets and communities. (See mysap.com for details.) ERP, which is also known as enterprise software, will be examined in more detail in Section T3.3. Notice that throughout this evolution, more and more integrations have occurred along several dimensions (e.g., more functional areas, combining transaction processing and decision support, inclusion of business partners). Therefore, before describing the essentials of ERP and SCM software, it will be beneficial to analyze the reasons for software and activities integration. WHY SHOULD SYSTEMS BE INTEGRATED? Creating the twenty-first-century enterprise cannot be done effectively using twentiethcentury computer technology, which is functionally oriented. Functional systems might not let different departments communicate with each other in the same language. Worse yet, crucial sales, inventory, and production data often have to be painstakingly entered manually into separate computer systems every time a person who is not a member of a specific department needs ad hoc information related to the specific department. In many cases, employees simply do not get the information they need, or they get it too late. Sandoe et al. (2001) list the following major benefits of systems integration (in declining order of importance). Tangible benefits: Inventory reduction, personnel reduction, productivity improvement, order management improvement, financial-close cycle improvements, IT cost reduction, procurement cost reduction, cash management improvements, revenue/profit increases, transportation logistics cost reduction, maintenance reduction, and on-time delivery improvement Intangible benefits: Information visibility, new/improved processes, customer responsiveness, standardization, flexibility, globalization, and business performance Internal Versus External Integration Internal integration refers to integration between applications or between applications and databases inside a company. For example, one may integrate the inventory control with an ordering system, or a Customer Relationship Management (CRM) suite with the database of customers. Large companies that have hundreds of applications might find it extremely difficult to integrate the newer Web-based applications with the old legacy systems. External integration refers to integration of applications or databases among business partners; for example, the suppliers catalogs with the buyers e-procurement system. External integration is especially needed for B2B and for partners relationship management (PRM) systems.

11 TurbanTut_03.qxd 7/8/04 3:30 PM Page 11 Types of Integration: From a Supply to a Value Chain The most obvious integration is that of the segments of the supply chain and the information that flows among the segments. However, there is another type of integration the integration of the value chain. Traditionally, the supply chain has been thought of in terms of purchasing, transportation, warehousing, and logistics. The integrated value chain is a more encompassing concept. It is the process by which multiple enterprises within a shared market channel collaboratively plan, implement, and manage (electronically as well as physically) the flow of goods, services, and information along the entire chain in a manner that increases customerperceived value. This process optimizes the efficiency of the chain, creating a competitive advantage for all stakeholders in the value chain. The supply chain is basically a description of flows and activities, but the value chain expresses the contributions made by various segments and activities to the profit and to customers satisfaction. (For a survey, see Drickhamer, 2002.) Another way of defining the value chain integration is as a process of collaboration that optimizes all internal and external activities involved in delivering greater perceived value to the ultimate customer. A supply chain transforms into an integrated value chain when it: Extends the chain all the way from subsuppliers (tier two, three, etc.) to customers. Integrates back-office operations with those of the front office. Becomes highly customer-centric, focusing on demand generation and customer service, as well as demand fulfillment and logistics. Seeks to optimize the value added by information and utility-enhancing services. Is proactively designed by chain members to compete as an extended enterprise, creating and enhancing customer-perceived value by means of cross-enterprise collaboration. COLLABORATION ALONG THE SUPPLY CHAIN Presently, only a few large companies are successfully involved in a comprehensive collaboration to restructure the supply and value chains. One such effort is described in Application Case T3.1. It involves the Collaborative Planning, Forecasting and Replenishment (CPFR) project. For a special report on this type of collaboration, see ASCET (2000), where such collaboration is referred to as collaborative commerce networks, or collaborative commerce. Vendor-managed inventory (VMI) is a collaboration strategy often used by these large retailers. The suppliers (vendors) monitor inventory levels at retail stores and place replenishment orders when needed. Another example of supply chain integration is product-development systems that allow suppliers to dial into a client s intranet, pull product specifications, and view illustrations and videos of a manufacturing process. (For further discussion, see Selland, January 1999 and October 1999; and Hagel, 2002.) Section T3.2 REVIEW 1. Define MRP, MRP II, and ERP. 2. Define internal and external integration of supply chain segments. 3. List the benefits of integration (tangible and intangible). 4. Describe collaboration along the supply chain. 5. What is CPFR? (Hint: See Case T3.1.) T3.3 ENTERPRISE RESOURCE PLANNING (ERP) One of the most successful tools for managing supply chains is enterprise resource planning (ERP). WHAT IS ERP? With the advance of enterprise-wide client/server computing comes a new challenge: how to control all major business processes with a single software architecture in real time. Such an integrated software solution, known as enterprise resource planning (ERP), or just enterprise Online Tutorial 3: Supply Chain Management 11

12 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management CASE T3.1 EC Application HOW WARNER-LAMBERT APPLIES AN INTEGRATED SUPPLY CHAIN One of Warner-Lambert s (warner-lambert.com) major products is Listerine antiseptic mouthwash. The materials for making Listerine come mainly from eucalyptus trees in Australia and are shipped to the Warner-Lambert (WL) manufacturing plant in New Jersey. The major problem in New Jersey is to determine how much Listerine to produce. Then one can figure how much of each raw material is needed and when. Listerine is first purchased by wholesalers and then by thousands of retail stores, some of which are giants such as Wal-Mart. The problem the manufacturing plant faces is to forecast the overall demand. A wrong forecast will result either in high inventories of products or raw materials or in shortages. Inventories are expensive to keep, and shortages may result in a loss of business. Warner-Lambert forecasts demand with the help of Manugistics Inc. s Demand Planning Information System. (Manugistics is a vendor of IT software for SCM.) Used with other software in Manugistics Supply Chain Planning suite, the system analyzes manufacturing, distribution, and sales data against expected demand and business climate information. Its goal is to help WL decide how much Listerine (and other products) to make, and how much of each raw ingredient is needed and when. For example, the model can anticipate the impact of a seasonal promotion or of a production line being down. The sales and marketing group of WL also meets monthly with WL employees in finance, procurement, (continued) Wal-Mart Warner-Lambert (WL) Operational System ERP Internet EDI Internet Data Warehouse Wal-Mart CPFR Server WL CPFR Server SCM Manufacturing Planning RetailLink Sales Data about WL Products?? Inventory Plan Forecast Internet Review and Comments

13 TurbanTut_03.qxd 7/8/04 3:30 PM Page 13 Online Tutorial 3: Supply Chain Management 13 CASE T3.1 EC Application HOW WARNER-LAMBERT APPLIES AN INTEGRATED SUPPLY CHAIN (continued) and other departments. The group enters the expected demand for Listerine into a Corp. Prism Capacity Planning system (now Invensys Plc.), which schedules the production of Listerine in the amounts needed and generates electronic purchase orders for WL s suppliers. WL s supply chain excellence stems from the Collaborative Planning, Forecasting, and Replenishment (CPFR) program. This is a retailing industry project for which piloting was done at WL. In the pilot project, WL shared strategic plans, performance data, and market insight with Wal-Mart over private networks. The company realized that it could benefit from Wal-Mart s market knowledge, just as Wal-Mart could benefit from WL s product knowledge. In CPFR, trading partners collaborate on demand forecasting using collaborative e-commerce. The project includes major SCM and ERP vendors, such as SAP and Manugistics. (See previous page.) During the CPFR pilot, WL increased its products shelf-fill rate the extent to which a store s shelves are fully stocked from 87 percent to 98 percent, earning the company about $8 million a year in additional sales (the equivalent of a new product launch) for much less investment. WL is now using the Internet to expand the CPFR program to all its major suppliers and retail partners. Warner-Lambert also is involved in another collaborative retail industry project: the Supply-Chain Operations Reference (SCOR), an initiative of the Supply-Chain Council in the United States. SCOR divides supply chain operations into parts, giving manufacturers, suppliers, distributors, and retailers a framework within which to evaluate the effectiveness of their processes along the same supply chains. Sources: Compiled from CIO, August 15, 1998; Stores, June 1998; and Logistics Management and Distribution Report, October 1998 and November Questions 1. For what industries, besides retailing, will such collaboration be beneficial? 2. Why was Listerine a target for the pilot CPFR collaboration? systems, is a process of planning and managing all resources and their use in the entire enterprise. ERP is a software program comprising a set of applications that automate routine backend operations such as financial, inventory management, and scheduling to help enterprises handle jobs such as order fulfillment. (See O Leary, 2000.) For example, there are modules for cost control, accounts payable and receivable, fixed assets, and treasury management. ERP promises benefits ranging from increased efficiency to improved quality, productivity, and profitability. (See Ragowsky and Somers, 2002, for details.) The name enterprise resource planning is misleading because the software does not address planning or resources. ERP s major objective is to integrate all departments and functions across a company onto a single computer system that can serve all of the enterprise s needs. (See Stratman and Roth, 2002.) For example, improved order entry allows immediate access to inventory, product data, customer credit history, and prior order information. This availability of information raises productivity and increases customer satisfaction. ERP, for example, helped Master Product Company increase customer satisfaction and, consequently, sales by 20 percent, while decreasing inventory by 30 percent; this resulted in an increase in productivity (Caldwell, 1997). ERP systems are in use in thousands of large and medium-sized companies worldwide. Some are producing dramatic results. (See erpassist.com.) For businesses that want to use ERP, one option is to self-develop an integrated system by using existing functional packages or by programming one s own systems. The other option is to use commercially available, integrated ERP software. The leading software for ERP is SAP R/3. Oracle, Computer Associates, and PeopleSoft also make similar products. These products include dozens of different modules, as shown in Exhibit T3.4. Another alternative is to lease systems from application service providers (ASPs). A major advantage of this approach is that even a small company can enjoy ERP because users can lease only relevant modules rather than buying the entire package. As of 2003, some ERP vendors are willing to sell only relevant modules; SAP and IBM currently sell ERP for small to medium enterprises (SMEs).

14 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management EXHIBIT T3.4 Representative Modules in ERP ERPs may contain more than 70 different modules. Here are major representative modules: Finance/Accounting Area: General ledger Keeps centralized charges of accounts and corporate financial balances. Accounts receivable Tracks payment due to a company from its customers. Accounts payable Schedules bill payments to suppliers and distributors. Fixed assets Manages depreciation and other costs associated with tangible assets such as buildings, property, and equipment. Treasury management Monitors and analyzes cash holdings, financial deals, and investment risks. Cost control Analyzes corporate costs related to overhead, products, and manufacturing orders. Financial accounting A comprehensive, robust financial accounting package for monitoring real-time values from financially relevant transactions out of value-creation processes. Managerial accounting Helps companies optimally monitor and control all performance-relevant information in an environment that is completely integrated with all operative transactions throughout the company. Managerial accounting helps a company take control of its profitability. Financial supply chain management Enables financial collaboration within the enterprise and its business networks using defined corporate policies and shared services to handle all customers and supply chain related financial processes; helps automate the financial supply chain using the Web and other new electronic service models. Manager self-service Provides business managers with access to all relevant business information as well as related services through financial portal solutions. HR content and processes empower anyone who manages and makes decisions about finance, management, and human capital. The portals provide convenient Web-based access to internal and external applications, business content, and services that may be the key to tasks, processes, or business decisions. Others Activity-based management, balanced score card, collections, financial analysis, billing, budgeting, expense management, and risk management. Manufacturing and Logistics: Production planning management and control Performs capacity planning and creates a daily production schedule for a company s manufacturing plants. Plans and control the enterprise production process. Materials management Controls purchasing of raw materials needed to build products. Manages inventory stocks. Warehouse management Maintains records of warehoused goods and processes movement of products through warehouses. Transportation management Arranges, schedules, and monitors delivery of products to customers via trucks, trains, and other vehicles. Project management Monitors costs and work schedules on a project-by-project basis. Customer service management Administers installed-base service agreements and checks contracts and warranties when customers call for help. Operations Enables a company to efficiently streamline the logistic operations for the optimal execution of all orders resulting from purchasing, sales, production, and change management environments. Purchase order management enables the efficient handling and execution of purchase orders integrated within the entire logistics process. Inventory management Allows a company an integrated management system of stock and inventories in an integrated operative environment. Maintenance & quality Allows a company to efficiently handle the plant maintenance and quality control process within the company. Delivery management Executes the delivery and transportation processes to efficiently support a sales environment. Others Allows discrete and/or process manufacturing, product life cycle (PLM) management, supply chain planning and management, and procurement. Marketing and Sales: Sales order management Enable the sales order fulfillment process allowing for fast and efficient execution of customer sales orders. Order entry and processing Automate the data entry process of customer orders and keeps track of the status of orders. Managing sales leads Generate, evaluate, and track leads. Managing advertisements and promotions Identify best campaigns and targets, measure results, plan trade promotions. Manage sales Plan fields sales, automate call center, manage sales incentives. (continued)

15 TurbanTut_03.qxd 7/8/04 3:30 PM Page 15 EXHIBIT T3.4 (continued) Human Resources Management: Online Tutorial 3: Supply Chain Management 15 Human resources administration Automates personnel management processes including recruitment, business travel, and vacation allotments. Payroll Handles accounting and preparation of checks related to employee salaries, wages, and bonuses. Self-service HR Lets workers change their personal information and benefit allocations online without having to send forms to human resources. HRM analytics Provides data analysis and reporting tools as well as strategic enterprise management capabilities to support informed HR policy and decision making. The solutions enable the company to analyze and optimize the current workforce, to implement and monitor the corporate strategy, and to continuously evaluate how different scenarios will affect business goals. Others Benefits management, learning and training, labor relations. Corporate Services: Real estate management Provides a complete solution with capabilities to support every stage of the real estate portfolio life cycle and streamlines business processes, allowing companies to optimally utilize and manage their real-estate assets. Incentive and commission management Processes all types of variable remuneration for employees, sales forces and partners, such as incentives, commissions, and brokerage fees. Travel management Provides applications for business travel management that support and optimize travel processes; includes travel manager s marketplace, which supports procurement of travel services. With seamless integration to expense reporting, travel management allows for the optimal management of the entire business travel cycle. Sources: Complied from mysap.com, oracle.com, and peoplesoft.com. THE FIRST-GENERATION ERP An ERP suite provides a single interface for managing all the routine activities performed in manufacturing from entering sales orders, to coordinating shipping, to providing after-sales customer service. As of the late 1990s, ERP systems were being extended along the supply chain to suppliers and customers. They can incorporate functionality for customer interaction and for managing relationships with suppliers and vendors, making the system look less like one company s internal system. Large companies have been successful in integrating several hundred applications using ERP software, saving millions of dollars and significantly increasing customer satisfaction. For example, ExxonMobil consolidated 300 different information systems by implementing SAP R/3 in its U.S. petrochemical operations alone. ERP forces discipline and organization around business processes, making the alignment of IT and business goals more likely. Also, by implementing ERP, a company can discover all the dusty corners of its business. However, ERP software can be extremely complex to implement; companies often need to change existing business processes to fit ERP s format, and some companies require only some of the ERP s software modules yet must purchase the entire package. For these reasons, ERP software might not be attractive to everyone. For example, Caldwell and Stein (1998) report that Inland Steel Industries, Inc., opted to write its own ERP system (containing 7 million lines of code), which supports 27 integrated applications, rather than use commercial ERP. Also, some companies, such as Starbucks, decided to use a best of breed approach, building their ERP with ready-made components from several vendors. As indicated earlier, the option of leasing individual modules from ASPs may lessen this problem. In whatever form it is implemented, ERP has played a critical role in getting manufacturers to focus on business processes, thus facilitating business process changes across the enterprise. (See El Sawy, 2001.) By tying together multiple plants and distribution facilities, ERP solutions also have facilitated a change in thinking that has its ultimate expression in an enterprise that is better able to expand operations and in better supply chain management. (For a comprehensive treatment of ERP, its cost, implementation problems, and payback, see Koch et al., 1999; James and Wolfe, 2000; Jacobs and Whybark, 2000; and Lucas and Bishop, 2002.) Palaniswamy and Frank (2002) describe positive results obtained by using Oracle ERP and discuss its implementation process. However, ERP as it was originally designed was never meant to fully support supply chains. ERP solutions are centered on routine business transactions. As such, they do not

16 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management provide the computerized models needed to respond rapidly to real-time changes in supply, demand, labor, or capacity, nor to effectively integrate with e-commerce. This deficiency has been overcome by the second generation of ERP. THE SECOND-GENERATION ERP The goal of first-generation ERP was to automate routine business transactions; indeed, ERP projects do save companies millions of dollars. A report by Merrill Lynch noted that nearly 40 percent of all U.S. companies with more than $1 billion in annual revenues have implemented ERP systems. However, by the late 1990s, the major benefits of ERP had been fully exploited. It became clear that with the completion of the Y2K projects that were an integral part of many ERP implementations, the first generation of ERP was nearing the end of its useful life. However, the ERP movement was far from over. A second, more powerful generation of ERP development started. (See James and Wolf, 2000.) Its objectives are to leverage existing systems in order to increase efficiency in handling transactions, to improve decision making, and to further transform ways of doing business into e-commerce. The first generation of ERP excelled in its ability to manage administrative activities such as payroll, inventory, and order processing. For example, an ERP system has the functionality of electronic ordering or the best way to bill the customer, but all it does is automate the transactions. Palaniswamy and Frank (2002) cite examples of five case studies indicating that ERP significantly enhances the performance of manufacturing organizations as a result of automating transactions. The reports generated by ERP systems gave planners statistics about what happened in the company, costs, and financial performance. However, the planning systems developed using ERP were rudimentary. Reports from first-generation ERP systems provided a snapshot of the business at a single point in time. However, they did not support the continuous planning that is central to supply chain planning, which continues to refine and enhance the plan as changes and events occur up to the last minute before executing the plan. Attempting to come up with an optimal plan using first-generation, ERP-based systems has been compared to steering a car by looking in the rearview mirror. This created the need for planning systems oriented toward decision making, which is what SCM software vendors provide. (See Insights and Additions T3.1.) Combining ERP with SCM Software To illustrate how ERP and SCM might work together, one can look at the task of order processing. A fundamental difference exists between SCM and ERP: The question for SCM software is Should I take your order? instead of the ERP approach of How can I best take or fulfill your order? The SCM and ERP software are information systems and will be referred to as such. Thus, the analytical SCM systems have emerged as a complement to ERP systems to provide intelligent decision support or business intelligence capabilities. (See Keskinocak, 2001.) An SCM system is designed to overlay existing systems and to pull data from every step of the supply chain. Thus, it is able to provide a clear, global picture of where the enterprise is heading. An example of a successful SCM effort is that of IBM. IBM restructured its global supply chain in order to achieve quick responsiveness to customers and to do it with minimal inventory. To support this effort, IBM developed an extended-enterprise, supply-chain analysis tool called the Asset Management Tool (AMT). AMT integrates graphical process modeling, analytical performance optimization, simulation, activity-based costing, and enterprise database connectivity into a system that allows quantitative analysis of inter-enterprise supply chains. IBM has used AMT to analyze and make improvements in such areas as inventory budgets, turnover objectives, customer-service targets, and new product introductions. The system was implemented at a number of IBM business units and their channel partners. AMT benefits include a savings of more than $750 million in materials costs and price-protection expenses each year. (For details, see Yao et al., 2000.) The system was also a prerequisite to a major e-procurement initiative at IBM. Creating a plan from an SCM system allows companies to assess quickly the impact of their actions on the entire supply chain, including customer demand. Therefore, it makes sense to integrate ERP and SCM.

17 TurbanTut_03.qxd 7/8/04 3:30 PM Page 17 Online Tutorial 3: Supply Chain Management 17 Insights and Additions T3.1 SCM Software Versus ERP Software SCM software refers to software that is specifically designed to improve decision making along the supply chain, such as determining the best way to ship to your customer or the optional production plan inside your own manufacturing system. This is in contrast with ERP software, which streamlines the flow of routine information along the supply chain (such as order taking, inventory levels computing, or sales data). In fact, data collected by the ERP system are frequently used as input data for analysis done with ERP software (Latamore, 2000). To better understand the differences between the two, one can look at the products offered by two SCM vendors: i2 and Manugistics. i2 CORPORATION OPTIMIZATION SOLUTIONS This company offers a set of file-integrated optimization solutions, which are shown in the upper part of exhibit below (shown between suppliers and customers ). Notice that all are optimization tools: For example, logistics optimization enables companies to procure, plan, execute, and monitor freight movements across multiple modes, borders, and enterprises. Optimization usually is built on Decision Support Systems (DSS) models, such as linear programming and simulation, as well on other analytical tools. The optimization tools (each of which includes several applications; see i2.com/solutionareas/index.cfm) are supported by content subscription and supply chain services modules. The entire set of solutions can be connected to ERP and legacy systems, which provide the data for the analysis and optimization done by the optimization modules. (continued) Fulfillment Optimization Suppliers Spend Optimization Production Optimization Revenue & Profit Optimization Customers Logistics Optimization Content Subscription Supply Chain Operating Services ERP ERP/Legacy Systems ERP Source: From The Foundation for Supply Chain Optimization, 2003.

18 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management Insights and Additions T3.1 (continued) MANUGISTICS SUPPLY CHAIN MANAGEMENT SOLUTIONS Manugistics offers the following integrated solution suites. Network Design and Optimization Manufacturing Planning and Scheduling Sales and Operations Planning Fulfillment Management Collaborative Vendor Managed Inventory (VMI) and CPFR A private Trading Intelligent Hub (for external integration) Service and Parts Management Logistics Management Profitable Order Management Profitable Demand Management Enterprise Profit Optimization Each suite has several applications. (See manugistics.com.) Alternative Ways to Integrate ERP and SCM How is such integration done? One approach is to work with different software products from different vendors. For example, a business might use SAP as an ERP and add to it Manugistics manufacturing-oriented SCM software, as shown earlier in the Warner- Lambert case. Such an approach requires fitting different software, which can be a complex task, unless special interfaces known as adopters provided by middleware vendors exist. (See Linthicum, 1999.) The second approach is for the ERP vendors to add decision support and analysis capabilities, which are known as business intelligence. Business intelligence refers to analysis performed by different IT tools such as data mining and intelligent systems. Using one vendor and a combined product solves the integration problem. However, as is the case with integration of database management systems and spreadsheets in Excel, the result can be a product with some weak functionalities. Most ERP vendors offer such functionalities for another reason though: It is cheaper for the customers. The added functionalities, which create the second-generation ERP, include not only decision support but also CRM, electronic commerce, and data warehousing and mining. Some systems include a knowledge management component, as well. In 2003, vendors started to add product life cycle management (PLM) in an attempt to optimize the supply chain (Hill, 2003). An example of ERP application that includes an SCM module is provided in Application Case T3.2. SUPPLY CHAIN INTELLIGENCE The inclusion of business intelligence in supply chain software solutions is called by some supply chain intelligence (SCI). SCI applications enable strategic decision making by analyzing data along the entire supply chain. To better understand SCI, it is worthwhile to compare it with SCM. Such a comparison is provided in Exhibit T3.5.

19 TurbanTut_03.qxd 7/8/04 3:30 PM Page 19 CASE T3.2 EC Application COLGATE-PALMOLIVE USES ERP TO SMOOTH ITS SUPPLY CHAIN Online Tutorial 3: Supply Chain Management 19 Colgate-Palmolive is the world leader in oral care products (mouthwashes, toothpaste, and toothbrushes) and a major supplier of personal care products (baby care, deodorants, shampoos, and soaps). In addition, the company s Hill s Health Science Diet is a leading pet food brand worldwide. Foreign sales account for about 70 percent of Colgate s total revenues. To stay competitive, Colgate continuously seeks to streamline its supply chain, where thousands of suppliers and customers interact with the company. At the same time, Colgate faces the challenges of new product acceleration, which has been a factor in driving faster sales growth and improved market share. Also, Colgate is devising ways to offer consumers a greater choice of better products at a lower cost to the company, which creates complexities in the manufacturing and the supply chains. To better manage and coordinate its business, Colgate embarked on an ERP implementation to allow the company to access more timely and accurate data and to reduce costs. The structure of the ERP is shown in exhibit above. An important factor for Colgate was whether it could use the ERP software across the entire spectrum of the business. Colgate needed the ability to coordinate globally and to act locally. Colgate s U.S. division installed SAP R/3 for this purpose. Source: Compiled from Kalakota and Robinson (2002). Questions 1. What is the role of the ERP? 2. Who are the major beneficiaries? Supply Chain Planning and Optimization Manufacturing Planning Transportation Planning Distribution Planning Demand Planning Mktg. Mgmt. & Research Product Development Pricing & Promotion Sales Order Entry Enterprise Resource Planning Suppliers E-Commerce Purchasing & Accounts Payable MRP Inbound Inventory Plant Mgmt. Manufacturing & Production Scheduling (MPS) Inventory Control & Warehousing Distribution & Accounts Receivable Customers Finance and Accounting Human Resources Source: Kalakota, R., and M. Robinson, M-Business: The Race to Mobility. New York: M c Graw-Hill, 2002, p How Are SCI Capabilities Provided? The following are common ways to provide SCI capabilities. Use an enhanced ERP package that includes business intelligence capabilities. For example, see Oracle and SAP products of 2001 or later. Integrate the ERP with business intelligence software from a specialized vendor, such as Brio, Cognus, Information Builders, or Business Objects. Use Web Services. (See Hagel, 2002.) Create a best-of-breed system by using components from several vendors that will provide the required capabilities.

20 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management EXHIBIT T3.5 Comparing SCM and SCI Supply Chain Management Largely about managing the procurement and production links of the supply chain. Transactional. Tactical decision making. Helps reduce costs through improved operational efficiency. Usually just the SCM application s data (as a vertical stovepipe). Records one state of data, representing now. Assists in material and production planning. Quantifies cost of some materials. Shows today s yield but cannot explain influences on it; thus provides no help for improvements. Simple reporting. Supply Chain Intelligence Provides a broad view of an entire supply chain to reveal full product and component life cycle. Analytic. Strategic decision making. Reveals opportunities for cost reduction, but also stimulates revenue growth. Integrates supplier, manufacturing, and product data (horizontal). Keeps a historic record. Does what-if forecasting based on historical data. Enables an understanding of total cost. Drills into yield figures to reveal what caused the performance level, so it can be improved. Collaborative environment with personalizable monitoring of metrics. Source: Russom, P., Increasing Manufacturing Performance Through Supply Chain Intelligence. DM Review, September Reprinted by permission from Sage Tree, Inc. ERP FAILURES AND JUSTIFICATION Despite all the improvements, ERP projects, especially large ones, may fail as shown in Insights and Additions T3.2. In order to avoid failures and ensure success, it is necessary, according to thespot4sap.com, for the partners involved in ERP implementation to hold open and honest dialogue at the start of each project, and to nail down the critical success factors of the implementation. Included in this initial dialogue should be consideration of the following factors: the customer s expectations; the ERP product capabilities and limitations; the level of change the customer has to go through to make the system fit; the level of commitment within the customer organization to see the project through to completion; the risks presented by politics within the customer organization; and the implementing consultant s capabilities, responsibilities, and role (if applicable). Failures also can be minimized if appropriate cost-benefit and justification are done in advance. (See Oliver and Romm, 2002; Murphy and Simon, 2002.) Another way to avoid failures, or at least to minimize their cost, is to use ASPs. ERP implementation may be offered by cultural and global factors. For an analysis of the Asian experiences, see Soh et al. (2000). Finally, Willcocks and Sykes (2002) relate the successful implementation of ERP to the need to identify and build key in-house IT capabilities before embarking on ERP. Section T3.3 REVIEW 1. Describe an ERP system. 2. Compare building an ERP with buying or leasing one. 3. Compare the first and second generations of ERP. 4. Define SCM software, and list some of its capabilities. T3.4 E-COMMERCE AND SUPPLY CHAINS E-commerce (EC) is emerging as a superb tool for providing solutions to problems along the supply chain. Many supply chain activities, from taking customers orders to procurement, can be conducted as part of an EC initiative. In general, EC can make the following contributions to supply chain management. 1. Digitize products such as software. This expedites the flow of materials in the chain. It is also much cheaper to create and move electronic digits than physical products.

21 TurbanTut_03.qxd 7/8/04 3:30 PM Page 21 Online Tutorial 3: Supply Chain Management 21 Insights and Additions T3.2 Even the Best-Planned ERPs Sometimes Fail The complexity of ERP projects causes some of them to fail, as shown by the following examples. Example 1: Hershey s chocolate bars and its other products were not selling well in late Hershey Foods Corp. reported a 19-percent drop in third-quarter net earnings due to computer problems. The problems continued for several months, causing Hershey to lose market share and several hundred million dollars. The major problem, according to the company, was its new order-and-distribution system, which uses software from SAP (the ERP) and Siebel Systems (the CRM). Since the integrated system went live in July 1999, Hershey had been unable to fill all orders and get products onto shelves on time. It took many months to fix the problem. Example 2: In November 1999, Whirlpool Corp. reported major delays in its shipments of appliances due to bugs in its new ERP. Orders for quantities smaller than one truckload met with snags in the areas of order processing, tracking, and invoicing. According to cnet.com (site accessed February 16, 2001), SAP gave Whirlpool the red light twice prior to the date on which the project would go live, saying the supply chain was not ready, but Whirlpool ignored the signals. Example 3: FoxMeyer, a major distributor of prescription drugs to hospitals and pharmacies that filed for bankruptcy in 1996, sued SAP and Accenture Consulting (in August 2001) for $500 million each, claiming that the ERP system they constructed led to its demise. See the complete case on the book s Web site at wiley.com/college/turban. Many customers sued FoxMeyer, as well. All cases are still pending as of May Example 4: W. L. Gore and Associates filed a lawsuit against PeopleSoft and Deloitte & Touche, because the ERP project that the two companies developed for the company cost twice the original estimate. Note: In the W. L. Gore and FoxMeyer cases, the ERP vendors and consultants blamed their client s poor management teams for the ERP problems. Both cases were in court at the time this was written (fall 2003). Example 5: Nike, Inc., installed a $400 million global e-supply chain in 2000 to manage the supply chain of its shoes and other products. In an attempt to save time, the company modified a generic software product from i2 Inc., only to find out that the ERP-based e-supply chain does not work. The system was repaired in 2001 after causing millions of dollars in damages to Nike. Sources: Compiled from Davenport, T. H., Mission Critical: Realizing the Promise of Enterprise Systems. Cambridge, MA: Harvard Business School Press, 2000; cnet.com; cio.com; and Business Courier (miscellaneous dates). 2. Replace all paper documents that move physically with electronic documents. This change improves speed and accuracy, and the cost of document transmission is much cheaper. 3. Provide an integrated messaging system. A single business transaction could involve many messages, totaling thousands of messages per week or even per day for a company. E-commerce can replace related faxes, telephone calls, and telegrams with an electronic messaging system at a minimal cost. 4. Change the nature and structure of the supply chain from linear to a hub. Such restructuring enables faster, cheaper, and better communication, collaboration, and discovery of information. 5. Enhance collaboration and information sharing among the partners in the supply chain. This can improve cooperation, coordination, and demand forecasts. 6. Shorten the supply chain and minimize inventories. Production changes from mass production to build to order as a result of the pull nature of EC. The auto industry, for example, is expected to save billions of dollars annually in inventory reduction alone by moving to an e-commerce-supported, build-to-order strategy. 7. Facilitate customer service. Of special interest is the reduction of contact between employees and customers due to innovations such as the introduction of a Web site for frequently asked questions (FAQs) and self-services such as the self-tracking of shipments. 8. Introduce efficiencies. These efficiencies relate to buying and selling through the creation of e-marketplaces and e-procurement. The next section examines some specific activities and cases.

22 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management BUYING AND SELLING ALONG THE SUPPLY CHAIN A major role of EC is to facilitate buying and selling along all segments of the supply chain. The major activity categories are upstream activities, internal supply chain activities, downstream activities, and combined upstream/downstream activities. Upstream Activities Many innovative models of EC improve the upstream activities. These models generally are described as e-procurement. Examples are reverse auctions, aggregation of vendors catalogs at the buyer s site, procurement via consortia, and group purchasing. (For others, see Mitchell, 2000; Adamson, 2000; and Varley, 2000.) Internal Supply Chain Activities Internal SCM activities include several intrabusiness EC activities. These activities from entering orders of materials, to recording sales, to tracking shipments usually are conducted over a corporate intranet. The Chevron Texaco case that follows illustrates several internal EC applications. Downstream Activities The following are typical EC models of downstream activities. Selling on your own Web site. Large companies such as Intel, Dell, Cisco, and IBM use this model. At the company s Web site, buyers review electronic catalogs from which they can make purchases. Large buyers get their own pages and customized catalogs. Companies sell their standard products, and many allow customers to configure customized products (e.g., Cisco, National Semiconductor Corp.). Auctions. Large companies such as Dell conduct auctions of products or obsolete equipment on their Web sites. Electronic auctions can shorten cycle time and save on logistics expenses. For example, in the United States, more than 2.5 million used cars are sold in auctions annually. Many of these auctions are offered online and are supplied by car rental companies, government agencies, banks, and some other large organizations. One pure online B2B auctioneer, for example, is manheimauctions.com. The buyers are car dealers who then resell the cars to individuals. Traditional car auctions are done on large lots, where the cars are displayed and physically auctioned. In the electronic auction, the autos do not need to be transported to a physical auction site, nor do buyers have to travel to an auction site. Savings of up to $500 per car can be realized. Exchanges Considerable support to B2B supply chains can be provided by electronic exchanges. Such exchanges are shown in Exhibit T3.6. Notice that this example shows three separate exchanges. In other cases, the entire industry might have only one exchange. Upstream and Downstream Combined It is sometimes advisable to combine upstream and downstream EC activities. This can be done in B2B exchanges, where many buyers and sellers meet. Most of these exchanges are centered one in each industry, so they are referred to as vertical exchanges. A typical vertical exchange is the one organized by ChemConnect. Similar markets exist for metals, electricity (which is sold among electricity-generating companies), and many commodities. Some vertical exchanges use auctions and reverse auctions. Many other e-commerce innovations exist. For example, Radio Frequency ID (RFID) tags provide real-time information that can smooth the supply chain. (See Exhibit T3.7.) INTEGRATION OF EC WITH ERP Because many middle-sized and large companies already have an ERP system or are installing one, and because EC needs to interface with ERP, it makes sense to integrate the two tightly. Such interface is needed mainly for order fulfillment and for collaboration with business partners, as in the case of inventory managed by suppliers. Integrating EC and ERP efforts is still

23 TurbanTut_03.qxd 7/8/04 3:30 PM Page 23 Online Tutorial 3: Supply Chain Management 23 CASE T3.3 EC Application CHEVRONTEXACO MODERNIZED ITS SUPPLY CHAIN WITH EC TOOLS THE PROBLEM ChevronTexaco is the largest U.S. oil company, and it is multinational in nature. Its main business is drilling, refining, transporting, and selling gasoline (oil). In this competitive business, a savings of even a quarter of a penny for each gallon totals up to millions, and so does the cost. Two problems have plagued the industry: running out of oil when needed at each pump, and a delivery that is aborted because a tank at the gas station is too full (called retain). Run-outs and retains, known as the industry s twin evils, have been targets for improvements for years with little success. Gasoline flows in the supply chain, starting with the upstream, which includes oil hunting, drilling, and so on. Then it is processed, and finally it goes to the downstream part, which is the customer-facing part of the chain. The difficulty is to match the three parts of the chain. ChevronTexaco owns oil fields and refineries, but it also buys crude and refined oil to meet peak demand. Purchases are of two kinds: those that have long-term contracts and those that are purchased as needed on the spot market at prevailing prices, which are usually higher than contract purchase prices. ChevronTexaco acted in the past like a mass-production manufacturing company, just trying to make products and then sell them (supply-driven strategy). The problem with this strategy is that each time a company makes too much or too little, extra cost is introduced into the supply chain. THE SOLUTION The company decided to change its supply chain business model from one that is supply driven to one that is demand driven. Namely, instead of worrying about how much oil it would process and then pushing it, the company started worrying about how much oil its customers wanted. This change required a major transformation in the business and an extensive support network of information technologies. To implement the IT support, the company is investing $15 million each year in the United States alone in proprietary supply chain IT software that can capture data in real time. Each tank in each gas station is equipped with an electronic label monitor that conveys real-time information about the oil level through a cable to the station s IT-based management system. The data then travel via a satellite to the primary inventory system at the company s main office. There, an advanced, DSS-based planning system processes the data to help with refining, marketing, and logistics decisions. This DSS includes information collected at trucking and airline companies. Using an ERP and a business planning system, ChevronTexaco determines how much to refine, how much to buy on spot markets, and when and how much to ship to each of its retail stations. The system uses demand forecasting to determine how much oil it will refine on a monthly basis, with weekly and daily checks. This way, production is matched to customers demand. To perform all of these steps, it is necessary to integrate the supply and demand information systems; this is where the ERP software is useful. Planners at various points across the supply chain (e.g., refinery, terminal management, station management, transportation, and production) must share data constantly. These data are provided by the various information systems. Recent IT projects that support the supply chain and extend it globally are NetReady, which enables 150 e-business initiatives; Global Information Link (GIL2), which enables connectivity throughout the company; e-guest, which enables sharing of information with business partners; and Human Resources Information System. THE RESULTS The integrated system that allows data to be shared across the company has improved decision making at every point in the customer-facing and processing parts of the supply chain, increasing the company s profits by more than $300 million in 1999 and by more than an additional $100 million in (The increase resulted from other initiatives also, but it was mostly due to the change in the supply chain.) According to Worthen (2002), studies indicate that companies that belong to the top 20 percent in their industries operate their supply chains twice as efficiently as median companies. The successful companies carry half as much inventory and can respond to a significant rise in demand (20 percent or higher) twice as fast; they also know how to minimize the number of deliveries. ChevronTexaco belongs in this category. Sources: Compiled from Worthen (2002) and ChevronTexaco.com (see Information Technology, site accessed May 19, 2003). Questions 1. The company business is not to make the product, but selling the product. Explain this statement. Relate it to the new strategy. 2. Why was it necessary to use IT to support the change? 3. Identify all the segments of the supply chain. 4. Identify all supporting information systems in this case. 5. Why is this an example of an EC-enabled application?

24 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management EXHIBIT T3.6 How Several Exchanges Work in One Supply Chain Financial Market Plan Banks Wholesale Distributors Retailers Suppliers Manufacturers Supplier- Oriented Exchanges Logistics Exchanges Customer- Oriented Exchanges Contract Manufacturers Virtual Manufacturers Logistics Providers Returned Items Customers Information Flows Goods Flow in its infancy in many organizations. ERP vendors started to integrate EC with ERP only since 1997 on a small scale and only in 2000 as a major initiative. (See Siau and Messersmith, 2002.) For example, SAP introduced mysap.com as a major initiative in The mysap initiative is a multifaceted Internet product that includes EC, online trading sites, an information portal, application hosting, and more user-friendly graphical interfaces. Section T3.4 REVIEW 1. List EC contributions for improving supply chain operations. 2. How does EC facilitate buying and selling along the supply chain? 3. Why is demand driven a better strategy? EXHIBIT T3.7 Radio Frequency Tags: Smooth Supply Chains Source: Heizer, J., and B. Render, Operations Management, 7 th ed. Upper Saddle River, NJ: Pearson Education, Inc., 2004, p. 423.

25 TurbanTut_03.qxd 7/8/04 3:30 PM Page 25 T3.5 GLOBAL SUPPLY CHAINS Supply chains that involve suppliers and customers or other business partners that are located in two or more countries are referred to as global supply chains. (See Harrison, 2001; and Handfield and Nichols, 2003.) CHARACTERISTICS AND PROBLEMS ALONG GLOBAL SUPPLY CHAINS The major reasons companies go global are lower prices of materials, products, services, and labor; availability of buying customers; availability of products that are unavailable domestically; the firm s global expansion strategy; advanced or special technology available in other countries; high quality of products available; intensification of global competition, which drives companies to cut costs; the need to develop a foreign presence; and fulfillment of counter trade. E-commerce has made it much easier to find suppliers in other countries (e.g., by using electronic bidding), as well as to find customers in other countries. (See Handfield et al., 2002.) Global supply chains are usually longer than domestic ones, and they can be more complex. Therefore, additional uncertainties are likely. Some of the issues that can create difficulties in global supply chains are legal issues, customs fees and taxes, language and cultural differences, fast changes in currency exchange rates, and political instabilities. An example of the difficulties of using a global supply chain can be seen in Application Case T3.4. The supply chain in a global environment must be: 1. Flexible enough to adapt to changes in the environment. 2. Able to meet all regulatory and other country-specific constraints. 3. Effective and efficient. Information technologies are a major contributor for meeting these objectives. Companies use innovative, IT-based solutions to solve global supply chain problems. For example, Volkswagen brings in suppliers teams, who work in VW factories in Brazil, Argentina, and the Czech Republic. (See Application Case T3.5.) Information technologies are extremely useful in supporting global supply chains, but they need to be designed carefully (Harrison, 2001). For example, TradeNet in Singapore connects sellers, buyers, and government agencies via electronic data interchange (EDI). A similar network, TradeLink, operates in Hong Kong, using EDI and EDI/Internet in an attempt to connect about 70,000 trading partners. IT provides not only EDI and other communication options, but also online expertise regarding the sometimes difficult and fast-changing regulations. IT also can be instrumental in helping businesses find trade partners (via electronic directories and search engines as in the case of alibaba.com and chemconnect.com). IT also allows for automatic Web page translation to many languages. Finally, IT facilitates outsourcing of products and services, especially computer programming, to countries with a plentiful supply of lowcost labor. Section T3.5 REVIEW 1. Describe the characteristics of a global supply chain. 2. Describe the potential problems along a global supply chain. 3. How does IT facilitate solutions for global supply chain problems? T3.6 ISSUES IN SUPPLY CHAIN MANAGEMENT The following are a few representative issues that are closely related to IT. HOW MANY SUPPLIERS? Companies can choose to have many or few suppliers. Each strategy has pros and cons. The more suppliers a company has, the less dependent on each one the company is and the lower the price is due to competition. A company also minimizes the risk of a supplier going out of Online Tutorial 3: Supply Chain Management 25

26 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management CASE T3.4 EC Application LEGO STRUGGLES WITH GLOBAL ISSUES Lego Company of Denmark (lego.com) is a major producer of toys, including electronic ones. It is the world s most wellknown toy manufacturer. (It was voted the toy company of the century, and it has thousands of Web sites created by fans all over the world.) In 1999, the company decided to market its Lego Mindstorms robot on the Internet. This product is a unique innovation. Its users can build a Lego robot using more than 700 traditional Lego elements, program it on a PC, and transfer the program to the robot. Lego sells its products in many countries using several regional distribution centers. When the decision to go global using electronic commerce was made, the company had the following concerns. How should the company choose which countries to sell in? It does not make sense to go to all countries, because sales are low in some countries, and some offer no logistical support services. What if a customer wants to buy online, but there is no physical representation of Lego in that country? A supportive distribution and service system would be needed, including returns and software support. Again, these were not available in many countries. There is an issue of merging the off-line and online operations versus creating a new, centralized unit, which seemed to be a complex undertaking. Existing warehouses were optimized to handle distribution to commercial buyers but not to individual customers (a major B2C problem). It would be necessary to handle returns around the globe. How should that be done? Lego products were selling in different countries in different currencies and at different prices. Should the product be sold on the Internet at a single price? In which currency? How would this price be related to the off-line prices? Alternatively, should the pages be customized for each country? How should the company handle the direct mail and track individual shipments? Should the company use one 3PL or several? Invoicing must comply with the regulations of many countries. As a result, how many different invoices should be used? Should Lego create a separate Web site for Mindstorms? What language(s) should be used on the site? Some countries have strict regulations regarding advertising and sales to children. In addition, laws on consumer protection vary among countries. How could the company make sure not to violate any of these? How should the company handle restrictions on the electronic transfer of individuals personal data? These restrictions differ among countries. How should the company handle the tax and import duty payments in different countries? In the rush to get its innovative product to market, Lego did not solve all of these issues before the direct marketing was introduced. The resulting problems forced Lego to close the Web site for business in It took about a year to solve all of the global trade related issues and eventually reopen the site. By 2001, Lego was selling many of its products online, priced in U.S. dollars, but the online service was available in only 15 countries. By 2003, Lego.com was operating as an independent unit that allows the online design of many products. (For example, see Train Configurator at the Web site.) The site offers many Webonly deals, and it is visited by more than 4 million unique visitors each day. Sources: Compiled from Lego.com; Damsguard and Horluck (2000); and Stoll (2003). Questions 1. Enter Lego s Web site and see the latest EC activities. Also, investigate what the competitors are doing. 2. Is the Web the way to go global? business or being unable to meet sudden increases in demand. Government regulations for doing government jobs may require multiple suppliers, as well. On the other hand, the fewer suppliers a company has, the more attention and service the company gets. The company also might receive volume discounts because the company buys more from each supplier. In addition, the company can anticipate better delivery schedules and build better relationships with its suppliers. IT plays a major role in this important issue. For example, when using a companycentric e-marketplace, the number of suppliers tends to be smaller. However, in B2B exchanges, a company is exposed to many suppliers. There is no one best solution to this issue. For further discussion, see Reid and Sanders (2002) and Heizer and Render (2003). A related issue is which suppliers to select.

27 TurbanTut_03.qxd 7/8/04 3:30 PM Page 27 Online Tutorial 3: Supply Chain Management 27 CASE T3.5 EC Application HOW VOLKSWAGEN RUNS ITS SUPPLY CHAIN IN BRAZIL Source: Heizer, J., and B. Render, Operations Management, 7 th ed. Upper Saddle River, NJ: Pearson Education, Inc., 2004, p In its Brazilian truck manufacturing plant located 100 miles northwest of Rio de Janeiro, Volkswagen (VW) radically altered its supply chain in The objectives were to reduce the number of defective parts, cut labor costs, and improve efficiency. This is a relatively small manufacturing plant with scheduled production of only 100 trucks per day and only 1,000 workers. However, only 200 of the 1,000 work for Volkswagen; they are responsible for overall quality, marketing, research, and design. The other 800 work for suppliers such as Rockwell International and Cummins Engines, and they do the specific assembly work. Volkswagen s innovative supply chain already improves quality and has driven down costs, as each supplier accepts responsibility for its units and its workers compensation. Volkswagen s major suppliers are assigned space in the VW plant, but they provide their own components, supplies, and workers. Workers from various suppliers build the truck as it moves down the assembly line. The system is illustrated in exhibit above. At the first stop in the assembly process, workers from Iochepe-Maxion mount the gas tank, transmission lines, and steering blocks. As the chassis moves down the line, employees from Rockwell mount axles and brakes. Then workers from Remon put on wheels and adjust tire pressure. The MWM/Cummins team installs the engine and transmission. Truck cabs, produced by the Brazilian firm Delga Automotivea, are painted by Eisenmann, then finished and upholstered by VDO, both of Germany. Volkswagen employees do an evaluation of the final trucks. VW already is trying a similar approach in plants in Buenos Aires, Argentina, and with Skoda in the Czech Republic. Volkswagen s new level of integration in supply chain management could be the wave of the future. Source: Compiled from Heizer and Render (2003): Questions 1. Draw the supply chain of this VW manufacturing plant. 2. Explain how IT improves the supply chain management. Distinguish among upstream, internal, and downstream activities.

28 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management VERTICAL INTEGRATION As illustrated earlier, companies use suppliers and subsuppliers (several tiers) in their supply chain. However, instead of using such suppliers, a company might produce the products itself. Such a strategy is called backward vertical integration. In a forward vertical integration, a manufacturer of components also makes the finished products. Another example is a manufacturer that does its own distribution and sales to customers (e.g., via e-commerce) along the downstream of the supply chain, such as Dell computers does. Either type of vertical integration has its pros and cons. By using IT, one can increase the control and improve communication in vertically integrated systems. For further discussion, see Heizer and Render (2003) and Reid and Sanders (2002). DEVELOPING SUPPLIERS AND OTHER PARTNERS RELATIONSHIPS One of the most highly recommended strategies for improved SCM is creating strong relationships with one of the partners along the supply chain, including customers. Companies such as peoplesoft.com provide the necessary software to develop appropriate relationships. The issue is how much to invest in improving suppliers and partners relationships. OTHER ISSUES 1. Ethical issues. Conducting a supply chain management project might result in the need to lay off, retrain, or transfer employees. Should management notify the employees in advance regarding such possibilities? What should be done about older employees who might be difficult to retrain? Other ethical issues might involve sharing of personal information, which could be required for a collaborative organizational culture. The question is how to force it on employees who are resisting it. Finally, individuals might have to share computer programs that they designed for their personal use. Such programs might be considered the intellectual property of the individuals. Should the employees be compensated? 2. How much to integrate? Although companies should consider extreme integration projects including ERP, SCM, and electronic commerce they should recognize that integrating long, complex supply chain segments might result in a failure. Therefore, companies often tightly integrate the upstream, inside-company, and downstream activities, each part by itself, and loosely connect these three. 3. The role of IT. Almost all major SCM projects use IT. However, it is important to remember that in most cases, the technology plays a supportive role, and the primary roles are organizational and managerial in nature. On the other hand, without IT, most SCM efforts do not succeed. 4. Organizational adaptability. To adopt ERP and other enabling software, organization processes must, unfortunately, conform to the software, not the other way around. When the software is changed, when a later version is released, for example, the organization processes must change also. Some organizations are able and willing to make such changes; others are not. 5. Should the company sell online overseas? EC provides an opportunity to expand markets globally. However, this can create long, complex supply chains. Therefore, it is necessary to check first the logistics along the supply chain, as well regulations and payment issues. 6. Just-in-time delivery. The goal of this strategy is to deliver parts and materials exactly when they are needed, keeping Section T3.6 REVIEW 1. What are the pros and cons of a smaller number of suppliers? How can IT help in reducing the number of suppliers? 2. How can PRM improve SCM? 3. How can EC facilitate vertical integration?

29 TurbanTut_03.qxd 7/8/04 3:30 PM Page 29 Online Tutorial 3: Supply Chain Management 29 KEY TERMS Backward vertical integration 28 Business intelligence 18 Collaborative commerce 11 E-supply chain 2 Enterprise resource planning (ERP) 10 Enterprise systems 11 Forward vertical integration 28 Global supply chains 25 Manufacturing resource planning (MRP II) 10 Material requirements planning (MRP) 9 Product life cycle management (PLM) 18 Reverse logistics (returns) 4 Supply chain 2 Supply chain intelligence (SCI) 18 Supply chain management (SCM) 2 Vendor-managed inventory (VMI) 11 Vertical exchanges 22 Vertical integration 28 SUMMARY (NUMBERS REFER TO LEARNING OBJECTIVES) 1 It is necessary to manage the supply chain properly to assure superb customer service, low cost, and short cycle time. 1 The supply chain must be completely managed from the raw materials to the end customers. 2 It is difficult to manage the supply chain due to the uncertainties in demand and supply and the need to coordinate several business partners activities. 2 Innovative approaches to SCM require cooperation and coordination of the business partners, facilitated by IT innovations such as inventory optimization and VMI over extranets. These approaches allow suppliers to view companies inventories in real time and manage them for their customers. 3, 4 Software support for supply chain management has increased in coverage and scope, from MRP to MRP II, to ERP, to enhanced ERP (with business partners), and to an ERP/SCM software integration. 4 Today, ERP software, which is designed to improve standard business transactions, is enhanced with business intelligence and decision-support capabilities, as well as Web interfaces. 4 ERP is an integrated software (also known as an enterprise software), processing enterprise software that manages all information processing of routine transactions in an enterprise. 5 E-commerce tools, such as e-procurement and collaborative commerce, are used to solve supply chain problems. 5 Special large, automated warehouses help improve the EC order fulfillment, but they can be expensive to build and operate. 5 Electronic commerce is able to provide new solutions to problems along the supply chain by integrating the company s major business activities with upstream and downstream entities via an electronic infrastructure. 6 Global supply chains are usually long and can be complex. Therefore, they must be analyzed carefully before a decision to go global is finalized. 6 Of the many issues related to SCM and EC, one should explore vertical integration, decide on the number of suppliers, deal with ethical issues, and provide computer-based PRM. 7 Supply chain management software deals with optimization of segments of the supply chain (e.g., inventory control). It was recently integrated into some ERP packages. DISCUSSION QUESTIONS 1. Identify the supply chain(s) and the flow of information described in the ChevronTexaco case. 2. Discuss ERP failures. What lessons can be learned? 3. Discuss the Warner-Lambert Listerine case, and prepare a chart of Warner Lambert s supply chain. 4. Discuss the advantage of demand-driven versus supplydriven supply chains. 5. Distinguish between ERP and SCM software. In what ways do they complement each other? 6. Discuss the relationships between e-commerce and ERP. 7. Discuss what it would be like if the registration process and class scheduling process at your college or university were restructured to an online, real-time, seamless system with good connectivity and good

30 TurbanTut_03.qxd 7/8/04 3:30 PM Page Online Tutorial 3: Supply Chain Management empowerment in the organization. (If your registration is already online, find another manual process that can be automated.) Explain the supply chain in this situation. 8. Relate ERP to software integration. 9. Discuss how cooperation between a company that you are familiar with and its suppliers can reduce inventory costs. 10. Find examples of how organizations improve their supply chains in two of the following: manufacturing, hospitals, retailing, banking, education, construction, agribusiness, and shipping. 11. Discuss the meaning of intelligence in the term supply chain intelligence. 12. It is said that supply chains are essentially a series of linked suppliers and customers; every customer is in turn a supplier to the next downstream organization, until the ultimate end user. Explain. Use of a diagram is recommended. EXERCISES 1. Draw the supply chains of Dell Computer (see Online Minicase 2) and Warner-Lambert. What are the similarities? The differences? 2. Draw the supply chain of Lego. (See additional description at lego.com.) Include at least two countries. 3. Enter aberdeen.com and observe their online supply chain community (supplychainaccess.com). Some of the information there is free. Prepare an outline of the major resources available at the site. 4. Automated warehouses play a major role in B2C and mail-order fulfillments. Find material on how they operate. (Use google.com and findarticles.com for more information.) 5. Examine the functionalities of ERP software from SAP or other vendors. INTERNET EXERCISES 1. Enter ups.com. Examine some of the IT-supported customer services and tools provided by the company. How does UPS contribute to supply chain improvements? 2. Enter supply-chain.org, cio.com, findarticles.com, and google.com and search for recent information on supply chain management integration. 3. Enter coca-colastore.com. Examine the delivery and the return options that are available there. 4. The U.S. Postal Service provides EC logistics. Examine its services and tracking systems at uspsprioritymail.com. What are the potential advantages for EC shippers? 5. Enter brio.com and identify Brio s solution to SCM integration as it relates to decision making for EC. View the demo. 6. Enter rawmart.com and find what information they provide that supports logistics. Also find what shipment services they provide online. 7. Visit ups.com and find its recent EC initiatives. Compare them with those of fedex.com. Then go to onlinestore.ups.com and simulate a purchase. 8. Enter efulfillmentservice.com. Review the products you find there. How does the company organize the network? How is it related to companies such as FedEx? How does this company make money? GROUP EXERCISE BACKGROUND Custom Furniture Ltd. (CF) is a large office furniture manufacturing company that specializes in custom-made luxury office furniture (such as executive desks and boardroom tables and chairs). Located in a big metropolitan area (population about 12 million), the company is known for its quality products, has been growing slowly, and controls a fairly large but fixed market share. CF salespeople, equipped with a catalog of their basic products and pictures of some specially designed furniture, visit their regular customers periodically and call on potential customers to set up appointments to show the catalogs.

31 TurbanTut_03.qxd 7/8/04 3:30 PM Page 31 Online Tutorial 3: Supply Chain Management 31 If a customer is interested, a sketch of the furniture is made jointly with the customer, measurements are taken, and an estimated price is given on the spot (using a formula in the salesperson s portable PC). The order information is faxed or manually delivered to the main office daily. The design department prepares the blueprints of the furniture, finance/accounting prepares an accurate price, and a contract is sent to the customer by mail or a delivery service. (Legal requirements do not allow faxing.) The customer can negotiate the deal and can request modifications. After the contract is finalized, production begins and the final product is sent to the customer. PROBLEMS The company experiences the following problems. a. Completed furniture is frequently returned for changes. ( This is not what we had in mind; you misinterpreted our sketch. ) Although some modifications can be made at the customer s site, other items must physically be sent back to the company. b. Deliveries are made by a small contractor who charges low fees with the understanding that a delivery might take 1 to 3 days from the time the delivery is called for. Using a larger delivery company would cost 47 percent more with a guaranteed same-day delivery cycle. c. The salespeople claim they are too busy to actively seek many new customers. Because they are paid mostly fixed salaries (which is the norm in the industry), adding more salespeople might be too expensive. d. Customers frequently complain about the long time span from when they place the order to when the furniture is received. e. Although the company sells only a few dozen products that are made from a selection of 250 basic components, literally millions of configurations of the final products are possible. In general, customers are getting more innovative and demanding, so it is getting more difficult to translate customers wishes into blueprints and final products. f. A new company, CF2.com (factitious name), appeared from nowhere a few weeks ago, offering competing products at a 30 percent discount and a 50 percent reduction in cycle time. CF2.com has not received an order yet, but CF remembers what happened to Toys R Us and Barnes and Noble companies that ignored online competition. Your mission. Your group was hired as a consultant by CF. What would you advise CF Management to do? 1. Prepare a diagram of the supply chain of CF in this case. 2. Using your knowledge of strategic IT systems, SCM, e-commerce, and so on, prepare a plan for CF that will deal with each of the aforementioned six points. That is, what IT-based solutions can be used? Because cost could be a major factor, suggest two alternatives for each point (standard and deluxe). WEB RESOURCES FOR SCM Large numbers of resources for supply chain improvement and management are available on the Web. The following are representative examples. American Supplier Institute (ASI): amsup.com Council of Logistics Management: clm1.org CXO Media Inc.: cio.com/research Erasmus Global Supply Chain Center: global-supply-chain.org ERP Association: erpassist.com Institute for Logistics Management: logistics-edu.com IT Guide: smeit.com Logistics Information on the Web: dsii.com Nummi: nummi.com Purchasing Magazines Web Site: manufacturing.net/ magazine/purchasing SME Supply Chain Management: bettermanage ment.com Supply Chain Academy: supplychainacademy.com Supply Chain Exchange: gxs.com Supply Chain Planet: supplychainplanet.com Supply Chain Excellence: pfsweb.com Harvard Business School Cases: textbookcasematch.hbsp. Harvard.edu: 1. H. F. Butt Grocery Co.: The New Digital Strategy (A)(# ): Examines how this company s supply chain has moved to e-commerce. 2. Webvan (# ): Discusses the processes by which Webvan delivers groceries to customers homes. 3. Cisco Systems: Building Leading Internet Capabilities (# ): Cisco s efforts to broaden its Internet use are explored.

32 TurbanTut_03.qxd 32 7/8/04 3:30 PM Page 32 Online Tutorial 3: Supply Chain Management REAL-WORLD CASES CASE 1: SMOOTHING THE SUPPLY CHAIN OF DAVIS AND WARSHOW USING THE WEB Davis & Warshow (daviswarshow.com) is a plumbing and heating wholesaler in New York City. This is a competitive business, where a medium-sized company ($60 million in annual sales) like Davis & Warshow (D&W) can survive only by being innovative. Indeed, the 75-year-old company survived mainly by positioning itself as a technology-first mover in its industry. For example, in 1945 it used a billing machine, in the 1950s it computerized its payroll, and in the mid-1980s the company introduced EDI and voice mail. In 2000, the company embarked on automated warehousing and e-commerce to smooth its supply chain. With New York s old buildings, it is difficult for plumbers to know in advance what parts they will need. They are usually on the job sites when they find out what parts they have to get. Calling in for parts and materials and then waiting for delivery costs a lot of money in terms of lost time. D&W s mission is to provide parts as quickly as possible to its customers, who are retailers and plumbing contractors. The company has a large warehouse, 6 distribution centers (branches), and 20 delivery trucks, each equipped with a wireless communication system. However, delivery still was slow at times. In addition, inventories at the distribution centers were high, because the delivery from the central warehouse was not fast enough. This has all changed now, thanks to the automated warehouse. Using Mincron s Warehouse Management System, Davis & Warshow built an automated, 120,000-squarefoot warehouse. To begin with, all products that are not bar-coded by the manufacturers are labeled as they enter the warehouse. Then, all employees at the warehouse had to learn to use radio-frequency bar-code scanners and unlearn many years of the traditional ways of putting away, picking, and shipping orders. Employees worried that scan guns would eliminate their jobs along with the paper documents that were being replaced. Employees cooperation was achieved when job and salary levels were guaranteed. (New employees, however, are paid less, because they do not need the same level of training and experience.) Using the scan guns, employees can find items in a few minutes. Before, it took much longer in some cases a few hours. Another problem was order entry. Customers used to order by fax, by phone, or by dropping in to a distribution branch. Now, the customer can order on the Web, and the orders go directly to the warehouse. From there, they are routed to the nearest distribution center, which gets parts for special orders when needed. Linking its Web site to ebay s Web site allows D&W to auction surplus faucets and other parts. The company was amazed to find that plumbing-hungry Web surfers were bidding up prices sometimes to as much as 100 percent over the normal price. The electronic catalogs of D&W are used by the customers (plumbing contractors and builders) not only to place orders, but also to prepare their proposals for their clients. This coordination makes it easier for the customers to sell a job. D&W views it as a customer service. Using passwords, the contractors and builders can access information in the electronic catalogs that they can t get anywhere else. The company also helped its customers solve another problem. Many of the customers do not keep their pricing information up-to-date. D&W has created a customized Excel spreadsheet for each customer with a Web site password and loaded updated pricing information onto a CD-ROM. Contractors can use the CD-ROM to make sure prices are current. The Web site and the CD-ROM are synchronized. Adoption was slow at the beginning, but it started to accelerate in D&W expects a major portion of its business to be online by Some of the system s benefits are that employees can quickly find any item with the scan guns, employees stress levels have gone down dramatically because they no longer need to hunt around the warehouse for products or pieces of paper, and customer service and customer satisfaction levels have improved dramatically; finally, the system paid for itself in 2 years just from inventory reduction at the distribution branches. Sources: Compiled from B. Miodonski, Davis & Warshow Hit 75 Running, Supply House Times, July 2000; and daviswarshow.com (site accessed May 13, 2003). Questions 1. Will D&W be disintermediated if manufacturers start to sell directly to contractors? 2. What will happen if its competitors duplicate the system?

33 TurbanTut_03.qxd 7/8/04 3:30 PM Page 33 Online Tutorial 3: Supply Chain Management REAL-WORLD CASES CASE 2: HOW DELL IS MANAGING ITS SUPPLY CHAIN The Problem Michael Dell started his business as a student from his university dorm by using a mail-order approach to selling PCs. This changed the manner in which PCs were sold. The customer did not have to come to a store to buy a computer, and Dell was able to customize the computer to the specifications of the customer. The direct-mail approach enabled Dell to underprice his rivals, who were using distributors and retailers, by about 10 percent. For several years the business grew slowly, but Dell constantly captured market share. In 1993, Compaq, the PC market leader at that time, decided to cut prices drastically to drive Dell computers out of the market. As a result of the price war, Dell Computer, Inc., had a $65 million loss from reduced sales and inventory writedowns in the first 6 months of 1993 alone. The company was on the verge of bankruptcy. The Solution Dell realized that the only way to win the marketing war was to introduce fundamental changes, termed business process reengineering (Chapter 9), in its own business, and along the supply chain from its suppliers all the way to its customers. In addition to competing on price and quality, Dell started competing on speed. Since 2000, if you order a customized PC on any working day, the computer can be on the delivery truck in 2 to 3 days; a complex, custom-made PC will be delivered in 5 days or less. Among the IT-supported innovations were the following. Dell uses a mass customization approach to production. Though the approach wasn t a new one, Dell was the first to use it in making and selling computers. Dell builds many computers only after they are ordered. This is done by using just-in-time manufacturing (Chapter 7), which also enables quick deliveries, low inventory levels, little or no obsolescence, and lower marketing and administrative costs. Component warehouses, which are maintained by Dell s vendors, are located within 15 minutes of Dell factories. As described in Chapter 2, Dell gets components quickly, and it can get components that are up to 60 days newer than those of its major competitors by using Web services. Most orders from customers and to suppliers are placed on the Web. Shipments, which are handled by UPS and other carriers, are all arranged electronically. Dell collaborates electronically with its major buyers to pick customers brains for new product ideas. Dell s new PC models are tested at the same time as the networks that they reside on are tested. This coop- eration with other vendors reduced the testing period from 60 or 90 days to 15. Using the Internet, Dell s employees constantly monitor productivity and rate of return on investment (ROI) on all products. Most significant for Dell has been the emergence of electronic commerce. In 2003, Dell was selling more than $8.0 million worth of computers each day on its Web site, and this amount was growing by an unheard of 6 percent per month. In 1999, Dell added electronic auctions (dellauction.com) as a marketing channel. Dell s goal is to sell most of its computers from its Web site (dell.com). In addition to computers, Dell sells servers, printers, and other hardware. Dell frequently is cited as an example of a top customer relationship management (CRM) provider. The e-crm activities are integrated electronically with customers ordering and order fulfillment. For example, customers can track their orders online to see if the computers are in production or already on the shipping track. They also can access detailed diagrams of the computers and get information about troubleshooting. By using viewer-approved configurations and pricing for its customers and by eliminating paperwork, Dell has been able to cut administrative process expenses by 15 percent. In addition, Dell created customized home pages for its biggest corporate customers, such as Eastman Chemical, Monsanto, and Wells Fargo. These sites, known as Premier Pages, enable customers employees to use Dell s provided configuration and workflow software to design computers, get an order approved inside the client organization, and place orders quickly and easily. These employees also can order PCs for their own homes and receive the corporate price. The electronic ordering makes customers happy, but it also enables Dell to collect payments quickly. After orders are received, they are transferred electronically to the production floor. Intelligent systems prepare the required parts and components list for each computer and check availability. If they are not in stock, components are ordered electronically directly from suppliers, which can sometimes deliver in less than 60 minutes. Dell uses several other information technologies, including , EDI, video teleconferencing, electronic procurement, computerized faxes, an intranet, DSS, and a Web-based call center. Computerized manufacturing systems tightly link the entire demand and supply chains from suppliers to buyers. This system is the foundation on which the build-to-order strategy rests. Dell also passes along data about its defect rates, engineering changes, and product enhancements to its suppliers. Because Dell and its suppliers are in constant communication, the margin for error is reduced. Also, employees 33

34 TurbanTut_03.qxd 34 7/8/04 3:30 PM Page 34 Online Tutorial 3: Supply Chain Management are now able to collaborate in real time on product designs and enhancements. In turn, suppliers are required to share with Dell sensitive information, such as their own quality problems. It was easy to get suppliers to follow Dell s lead because they also reap the benefits of faster cycle times, reduced inventory, and improved forecasts. In addition, Dell uses the Internet to create a community around its supply chain. Dell s corporate portal has links to bulletin boards where partners from around the world can exchange information about their experiences with Dell and its value chain. In 2000, Dell was a first mover to the use of Web services to expedite communication between its manufacturing plants and its vendor-managed hubs and parts suppliers. (See Hagel, 2002.) in-plant inventories by about 85 percent and vendors inventories by 10 percent to 40 percent (Hagel, 2002). The Results 3. List the collaborative actions with business partners in this case. By 2000, Dell had become the number-one PC seller. It is considered one of the world s best-managed and most profitable companies. The Web services system alone reduced Sources: Compiled from several articles in Business Week (1997 through 2001); cio.com (2001); dell.com, accessed March 27, 2003; Hagel (2002). Questions 1. List all the actions taken by Dell to improve its supply chain. Which are (or can be) facilitated by IT? 2. Divide the actions in question 1 into the upstream, downstream, and internal parts of the supply chain. 4. Why is it critical for Dell to maintain such an efficient supply chain? REFERENCES Adamson, J. E-Procurement Comes of Age. Proceedings, E-Commerce for Transition Economy, Geneva, June ASCET. From Supply Chain to Collaborative Network: Case Studies in the Food Industry. White paper, Andersen_ASCET.com. Bayles, D. L. E-Commerce Logistics and Fulfillment. Upper Saddle River, NJ: Prentice-Hall, Caldwell, B. Taming the Beast. Information Week, March 10, Caldwell, B., and T. Stein. Beyond ERP: New IT Agenda. Information Week, November 30, Chopra, S., and P. Meindl. Supply Chain Management, 2d ed. Upper Saddle River, NJ: Prentice-Hall, Cio.com. Supply Chain Integration: The Name of the Game Is Collaboration. CIO Magazine, November 1, 1999, special advertising supplement. Damsguard, L., and J. Horluck. Designing com/shop: Business Issues and Concerns, case European Case Clearing House, Davenport, T. H., Mission Critical: Realizing the Promise of Enterprise Systems, Cambridge, MA: Harvard Business School Press, Donovan, R. M. Supply Chain Management: Cracking the Bullwhip Effect. Material Handling Management, Director Issue ( ). Drickhamer, D. Value-Chain Management Moves from Dream to Reality. Industry Week, April El Sawy, D. A. Redesigning Enterprise Processes for E-Business. New York: McGraw-Hill, Gupta, V. Gibbons-Paul. Suspicious Minds. CIO Magazine, January 15, Hagel, J., III. Out of the Box. Boston: Harvard Business School Press, Handfield, R. B., and E. L. Nichols, Jr. Introduction to Supply Chain Management. Upper Saddle River, NJ: Prentice Hall, Handfield, R. B., and E. L. Nichols, Jr. Introduction to Supply Chain Management. Upper Saddle River, NJ: Prentice-Hall, 1999; 2d ed., Handfield, R. B., et al. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems. Upper Saddle River, NJ: Financial Times/Prentice Hall, Harrison, T. P. Global Supply Chain Design. Information Systems Frontiers (October December 2001). Heizer, J., and B. Render. Operations Management, 7th ed. Upper Saddle River, NJ: Prentice-Hall, Hill, K. Next Big Thing for ERP Vendors? CRM Daily, February 19, Hugos, M. H. Essentials of Supply Chain Management. New York: Wiley, Jacobs, F. R., and D. C. Whybark. Why ERP? Boston: McGraw-Hill, James D., and M. L. Wolf. A Second Wind for ERP. McKinsey Quarterly, no. 2 (2000). Kalakota, R., and M. Robinson. ebusiness 2.2. Boston: Addison Wesley, Kalakota, R., and M. Robinson. M-Business: The Race to Mobility. New York: McGraw-Hill, 2002.

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