Method of supply chain optimization in E-commerce

MPRA Munich Personal RePEc Archive Method of supply chain optiization in E-coerce Petr Suchánek and Robert Bucki Silesian University - School of Business Adinistration, The College of Inforatics and Manageent May 2011 Online at http://pra.ub.uni-uenchen.de/32366/ MPRA Paper No. 32366, posted 22. July 2011 12:03 UTC

METHOD OF SUPPLY CHAIN OPTIMIZATION IN E- COMMERCE Petr Suchánek Silesian University in Opava, School of Business Adinistration in Karvina, Departent of Inforatics Univerzitní náěstí 1934/3, 73340 Karviná, Czech Republic suchanek@opf.slu.cz Robert Bucki The College of Inforatics and Manageent in Bielsko-Biała, Departent of Inforatics ul. Legionów 81, 43-300 Bielsko-Biała, Poland rbucki@wsi.edu.pl ABSTRACT Rapid developent of technologies and their penetration into all sectors generates a wide range of strealining of production and trade processes. Electronic coerce is the area in which inforation and counication technology (ICT) is an essential and indispensable eleent. It is based on the use of e-coerce systes. An e-coerce syste cobines several parts consisting of custoers, suppliers (sellers, dealers, producers, businessen, etc.), the web server (web interface), the inforation syste (ERP, CRM, the database syste), the payent syste, the dispatch syste and the legislature itself. All these subsystes ust be anaged both at the operational level and in ters of the whole e-coerce syste. E-coerce systes are tools eant to support the supply chain (SC), the quality of which as well as other parts of the e-coerce syste largely depend on anageent processes representing supply chain anageent (SCM). The optial way to ensure the success of SCM is to use the ethods of odelling and siulation based on appropriate odels and atheatical representation of a real SC. Such odels are constructed with the use of process and value-chain oriented approaches or based on the concept of ulti-agent systes. Different types of odels in conjunction with a suitable atheatical representation allow us to perfor the siulation process which outputs can help anagers ake suitable decisions. The paper ais at presenting conteporary approaches to the supply chain odelling within e-coerce systes. Moreover, the case study ephasized hereby is oriented to present the saple siulation approach in order to find the optial allocation of resources which are eant to iniize shipping costs. JEL Classification: C02, C51, C61, C69, M29 Key Words: e-coerce syste, supply chain, supply chain anageent, warehouse, allocation of resources Introduction Electronic coerce (e-coerce) has becoe an essential support for business activities carried out between all types of chain store operators. In a siplified for e-coerce is just buying and selling products online. In fact, it encopasses the entire online process of developing, arketing, selling, delivering, servicing as well as paying for products and services purchased by internetworked, global arketplaces of custoers with the support of the worldwide network of business partners. [9] Essential support for electronic coerce is understood as the so-called e-coerce syste. E- coerce systes are, by their very nature, systes that allow quick and inexpensive entry of copany doing business in the doestic and foreign arkets. One of the key areas that could have a significant ipact on cost is a supply chain (SC) and in particular its part focused on warehouses location. General objective is always to deterine which warehouses to open and which of these warehouses should supply the various stores such that the su of the aintenance and supply costs is iniized. Manageent of any flexible syste including delivery routes is possible by eans of a heuristic approach. Econoic profits are generated by iniizing losses. [2] In case of transportation goods, it is necessary to iniize the length of the defined delivery routes. The process of stocking with setting the locations for ore distribution centres becoes even ore coplex by adding new liitations. [1] 1 E-coerce Syste The e-coerce syste is an inforation syste with its own architecture. The architecture of an

inforation syste encopasses the hardware and software used to deliver the solution to the final consuer of services. The architecture is a description of the design and contents of a coputerized syste. [3] Syste architecture ust be designed so that the whole syste ensures support for all key areas which are adinistration, sales, production, finance, logistic, supply chain, personnel, planning, IS/IT, security and finally anageent. Each key area is usually supported by one defined subsyste. To achieve the efficiency of the whole e-coerce syste, all subsystes fro which the syste is coposed, ust be efficient. Main basic coponents of e-coerce systes are custoers, Internet, web server, CRM (Custoer Relationship Manageent), ERP (Enterprise Resource Planning), LAN (Local Area Network), cooperating suppliers and custoers, payent syste, warehouse syste, delivery of goods, after-delivery (after-sales) services (Fig. 1). [12] Target group of custoer, purchaser, and business partners External business environent Custoers Purchasers Business partners Copany doing business CRM Counication interface Orders Contracts Payents Marketing Prootion After-sales service Analysis Statistics Trends ERP Accounting Managerial accounting Property adinistration Inventory anageent Production anageent Production planning Order anageent Receivables anageent Huan resource anageent Project anageent Business intelligence Payents Delivery of goods (or services) Fig. 1: E-coerce syste Source: own Warehouse Basic coponents of e-coerce syste are supported and controlled by the anageent (SCM - Supply Chain Manageent, FRM - Financial Resource Manageent, HRM - Huan Resource Manageent, MRP - Manufacturing Resource Planning, CPM - Coposite Product Mapping, etc.), hardware, software, people, co-operative suppliers, legislation, Internet services and so on. The whole e-coerce syste ust be seen as a part of business environent. All anageents and decision-aking processes have to be targeted to the custoers and their needs and requireents. Today, custoers are ore sophisticated and have higher expectations than those in past decades. They deand better products and services. This intense, copetitive environent forces copanies to operate ore efficiently. 2 Supply chain in e-coerce The ter supply chain anageent is relatively new in literature, appearing first in 1982 by Oliver and Webber in book [8]. Supply chain anageent is viewed by any as a highly novel anageent concept, but coparison with earlier work reveals siilarities. The fundaental assuptions, on which supply chain anageent rests, are significantly older [4].

Supply chain is one of the key areas in e-coerce. The supply chain is generally defined as ulti-syste of operators, anufacturers, distributors, resellers and custoers, aong which is a flow of goods, inforation and finance. [5] The quality of the supply chain, as well as other parts of e- coerce syste, largely depends on the set anageent processes. In this context, we speak of the SCM (Supply Chain Manageent). SCM concept includes not only the logistics process as well as strategic anageent of the entire supply chain, including supplier selection, distribution of production functions, outsourcing of capacity or processing of custoer requireents. Successful ipleentation of SCM concept is fully dependent on the integration of enterprise resources, and together with ERP and CRM is the basic building block of inforation and corporate strategy of copany. [11] The ai of the supply chain is to deliver goods in the shortest tie at the lowest possible price while ensuring the highest quality. Quality can depend, for exaple, on the safe transport appropriate to the nature of the goods and/or services and what is iportant, delivery of goods in the shortest tie also leads to a reduction in storage costs. A characteristic feature of the supply chain is the network concept which contains a nuber of subjects, each with its objectives which are sought for in order to be achieved by eans of the appropriate anageent syste (Fig. 2). Transport and/or delivery Subcontractor 1 Manufacturer 1 Warehouse 1 Distributor 1 Custoer 1 Subcontractor Manufacturer k Warehouse y Distributor l Custoer n Subcontractor M Manufacturer K Warehouse Y Distributor L Custoer N Fig. 2: Supply chain network diagra Source: own A network of anufacturers, distributors, and subcontractors ust be appropriately apped to a network of warehouses. Warehouses ay be owned by individual entities identified in the diagra as shown in Fig. 2 or entities (copanies) specifically focused on warehouse activities. Supply chain systes can be odelled by nuber of ways. In this context, the basic ethods are process oriented and value-chain oriented approaches and for the purpose of siulation, ulti-agents syste approach is often ipleented. The ain difference between process odelling and value chain odelling is that process odelling specifies "how" a process is realized and ipleented while value chain odelling specifies "why" the process occurs in ters of added value to the process participants. Specifying "why" and "what" is the ain contribution of the value odelling approach copared to the process-oriented approach which focuses ainly on "how" and oits the "why". Optiization of all these approaches can be perfored using linear and ixed integer prograing. [10] E-coerce is a direct sale which requires inial nuber or zero interediaries in the distribution of goods. The general objective should be that all ebers in the distribution channel work together toward an end goal of giving the best value to the final custoer. One of the ethods used in the SCM is the so-called ECR (Efficient Custoer Response). The ECR principle consists in cooperation between retailers and their suppliers based on four pillars that are deand anageent, supply anageent, enabling and integrating factors. Ultiately, ECR allows us to achieve axiu cost reduction, iproved service, optiization of stock anageent and production optiization. ECR benefit for suppliers is an opportunity for better planning of production and logistics cost savings. On the other hand, ECR help custoers increase product availability and relative price decrease. Other ethods for prooting SCM are CRP (Continuous Replenishent), QR (Quick Response), VMI (Vendor Managed Inventory) or CPFR (Collaborative Planning, Forecasting and Replenishent). Thousands of copanies around the globe now use supply chain siulation and optiization ethods. A necessary condition for optiizing the supply chain is knowledge of business environent

and properly defined corporate strategy. In order to adapt to current arket needs, copanies should focus on ost significant iproveents. Iproveents should be based on easurable quantitative indicators, which are: nuber of order entry points; nuber of inventory locations; aount of inventory; nuber of anufacturing sites or locations; storage costs; shipping costs; speed of inforation and aterial flow through the supply chain. Generally, standard etrics for supply chain anageent perforance include tie, cost, and variability [6]. High values for any of these etrics ean costly and inefficient supply chains. 3 Selection of warehouse best location The warehouse location selection is processing of selecting the allocation centre in the econoic region where there are soe supply stations and the certain deand point. Generally, the warehouse location selection odel has to atch the principles of adaptation, coordination, efficiency and strategy. [15] Selecting the best warehouse location to iniize shipping costs in the e-coerce systes reains the issue which requires finding optial allocation of resources and ust be addressed carefully. The type of location which is chosen depends largely on the type of the e-business. However, there are various areas worth considering before aking a final decision. The warehouse ust be located correctly to efficiently eet clients and custoers delivery requireents taking into account road access in the possible areas. Moreover, supply chain anageent is a high ipact ission that ust win arket share and custoer loyalty as well as result in reducing total supply chain costs and increasing in forecast accuracy. Another iportant issue is the need to iprove in order-fulfillent cycle tie and extend the strategic capability. Proper strategic logistics planning should unavoidably lead to reducing the costs of logistics operations in order to iprove custoer service levels. Distribution network design is a key business priority. Optiized distribution operations will significantly reduce distribution costs and product flows. These also let us odel risk profiles and facilitate effective decision-aking. Potential alternative distribution strategies ust take into account custoer locations while aintaining the present network design and consolidation of existing distribution depots. [13] In the e-coerce systes there is the need to present an integrated odel for the location of a warehouse, the allocation of retailers to warehouses and find the nuber of eans of transport to deliver the deand and the required eans of transport routing in order to iniize total transportation costs, fixed and operating costs and routing costs. Such odels assue that the nuber of plants has already been deterined and gives us the inforation what the nuber of warehouses to open is as well as how warehouses are allocated to plants. Moreover, we should know how retailers are allocated to warehouses and who the retailers really are. There is also the need to know in what order they will be visited and how any eans of transport are required for each route. Miniu costs ust be searched for. It is necessary to integrate location, allocation, and routing decisions in the design of a supply chain network. [7] Relocation of the anufacturer has adverse side effects such as causing the readjustent of any existing systes and creating any iinent strategic probles. One of such probles is the warehouse location of freight forwarders: they have to decide whether they should locate their warehouses in the new place, in current locations, or in new locations. The freight forwarders have to ake responsible decisions and evaluate soe potential warehouse locations. [14] 4 Proble forulation There are N shops given, n 1,..., N. There are M places for the location of warehouses 1,..., M.

The warehouse operating cost in the -th point equals b, The supply cost of the nth shop fro the -th warehouse equals The capacity of the warehouse is arked by w, The orders of the shops are represented by z n, Let 1,..., M. n 1,..., N. 1,..., M. a,. x, be the decision variable. The decision variable takes the following values: x,n 5 Matheatical odel 1 0 if the -th warehouse supplies the nth shop otherwise There are the following allowable solutions: M x 1 N n1 x, 1 - each shop is supplied by one warehouse only z w, n n - the warehouse accepts orders which can be realized Let us introduce the criterion of iniizing costs: Q M N M x, n a, n b y 1 1 1 products warehouse supply costs operating costs in at the sae tie y 1 0 if N x n1, n otherwise 1 6 Heuristic algoriths 6.1 The choice of the cheapest warehouse (b ) b in b 1 jm j Not assigned shops with inial costs are allocated to warehouses as follows: a in a,, j 1 jn The shops allocated if the following condition is fulfilled: z j j z n w

The allocated shops warehouses a, n b, 1,..., M, 1,..., M, n 1,..., N are disregarded in calculations. The used are also disregarded in calculations. 6.2 The choice of the cheapest transport (a,n ) The inial eleents a, fro the atrix A a, n are chosen subsequently. If for the -th shop the warehouse has already been chosen, we ignore it in the further calculations. If no new shop can be added to the -th warehouse, we ignore it in the further calculations. In this way, we get the N-stage calculation process. Moreover, if x, n 1, we add the cost b to the n criterion su. Conclusion To optiize the final goods prize and axiize the profit of the anufacturers, distributors and sellers ean to take into account any factors that ay influence the process of stocking and distribution by varying degrees. Certain factors of the optiu distribution and stocking processes are easy adapted to changing circustances but the others ight signify high input costs for every odification. The distribution centre location is one of those that should be planned very carefully before the realization as every additional change usually eans new input costs. It is necessary to deterine proper distribution channels. The distance between the locations of participating copanies and expected custoers eans to set the locations of custoers' centers. Deterination of proper locations of custoers' centers ight be quite a sophisticated task as it is based just on the current orders, previous experiences and arketing survey. One approach to the discussed proble is forulated in the paper hereby. Econoic control of the distribution syste can be optiized for instance by the distribution channel specification which requires another approach. It eans trying iniizing the total production tie so that ready products are delivered to the output store in a stochastic way. The ai reains to avoid extra costs generated by prolonged delivery ties and other unnecessary delays. The heuristic approach to the proble is shown in order to ake the correct decision regarding the eans of transportation which plays the ost iportant role. The paper deals with a logistic proble consisting in setting the proper location for stock of aterials and products and their distribution in order to collect the in the store or directly deliver to the custoer. Moreover, the optial distances between participating copanies and expected custoers are sought by taking into account dependences that influence the shipping prize, the prize for stocking both aterials and products and the other significant constraints too in order to iniize the costs of stocking and distribution. Acknowledgent The content of the paper is based on the outputs of the project SGS/24/2010 - Use of BI and BPM to support effective anageent (the project is carried out at The Silesian University in Opava, School of Business Adinistration in Karviná Czech Republic). References [1] ANTONYOVÁ, A., BUCKI, R. The Process of Stocking with Setting the Locations for a Few Distribution Centers. Proceedings of the Workshop: Inforation Logistics. The College of Inforatics and Manageent, Bielsko-Biała, 16-17 Septeber 2010, pp. 30-33. ISBN 978-83-62466-01-6. [2] BUCKI, R. Managing a Flexible Econoic Syste. Acta acadeica karviniensia, vědecký recenzovaný časopis, Slezská univerzita v Opavě, Obchodně podnikatelská fakulta v Karviné, č. 2, roč. 2010, s. 51-58. ISSN 1212-415X. [3] BURD, S.D. Systes Architecture. 5th edition. Course Technology, 2005. 656 p. ISBN 978-0619216924. [4] COOPER, M., LAMBERT, D., PAGH, J. Supply chain anageent: More than just a nae for logistics. In The International Journal of Logistics Manageent, vol. 8, no. 1, 1997 [5] FIALA, P. Modelování dodavatelských řetězců. Praha: Professional Publishing, 2005. 1. vyd. 168 s. ISBN 80-86419-62-2.

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