The Role of Network Supply Chains and eMarket

[The Role of Network Supply Chains and e-Market Places in Supply Chain Management ] Lecture 2 [Judith Molka-Danielsen] j. molka-danielsen@himolde. no http: //home. himolde. no/~molka/ Harstad/harstad. htm 9/19/2021

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VWR International for the Merck Group *Merck Eurolab *VWR International 9/19/2021

Overview Part I: Discuss these topics • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management • Motivation for Network Supply Chains and -Market Places • Implications and value of NSCs 9/19/2021 e

Overview Part II: Discuss these topics • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks • Summary 9/19/2021

Order Fulfillment • Taking orders may be the easiest part (ie. Toys. RUs – ref. Bloomberg 00, ref. techdirt 00) • Difficulties in groceries and fresh food – One reason: Customized products (touch and feel the produce) – Second: Pull type manufacturing • • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management Motivation for Network Supply Chains and e-Market Places Implications and value of NSCs 9/19/2021

The Pull vs. Push Model 9/19/2021

Major Concepts • Order fulfillment: Deliver right order, right place, on time • Front office operations: Order taking, advertisement, CRM • Back office operations: Accounting, finance, inventor, packaging, logistics • Logistics: Managing the flow of goods, information and money along the supply chain 9/19/2021

The Process of Order Fulfillment 1. Payment Clearance 2. In-stock availability 3. Packaging, shipment 4. Insuring 5. Production (planning, execution) 6. Plant services • • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management Motivation for Network Supply Chains and e-Market Places Implications and value of NSCs 9/19/2021 7. Purchasing, warehousing 8. Demand forecast 9. Accounting, billing 10. Customer contacts 11. Returns (Reverse logistics)

Supply Chain Components • Upstream: Upstream Suppliers, their suppliers (several tiers). From Raw material to the company • Internal: Internal All internal process that add value, conversion to find products • Downstream: Downstream All activities in distribution and delivery to end customers • • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management Motivation for Network Supply Chains and e-Market Places Implications and value of NSCs 9/19/2021

Components of the Supply Chain 9/19/2021

Supply Chain Management • SCM is the Flow of material, information, money, etc. from raw material suppliers through factories to customers – Parts are organizations, procedures, and people – Integration of the business processes along the chain, Planning, Organizing, control of many activities – Activities include Purchasing, Delivery, Packaging, Quality Checking, Warehousing. 9/19/2021

Some Supply Chains are Complex and Nonlinear 9/19/2021

Benefits of SCM • Reduce transaction costs. • Reduce uncertainty along the chain • Proper inventory levels in the chain (minimize inventory costs) • Minimize delays in order fulfillment • Eliminate rush (unplanned) activities • Provide higher quality customer service • Major contributor to firm success (even necessity for survival). 9/19/2021

Problems in Supply Chains • • Delays in production, distribution etc. • Expensive Inventories • Need for intermediaries in order fulfillment but lack of coordination with partners • Uncertainties in deliveries due to poor communication with partners • Poor demand forecasting due to long Role of order fulfillment and complex supply chains Process of order fulfillment Describe the Supply Chain Interference with production (channel Problems and solutions in • supply chain management conflict) Motivation for Network Supply • Chains and e-Market Places Implications and value of NSCs • • 9/19/2021

Problems: in Global Supply Chains • Can be very long • Possible cross-broader problems • Need more complex information technology support of: – communication and collaboration • Possible delays due to: customs, tax, translations, politics 9/19/2021

SC Problems: specific to e-businesses • Pure e-businesses (with no physical infrastructure) may not have – – the logistics infrastructures to aid in order fulfillment Experience with distribution Direct access to end customers A working strategy with business partners • One business can be a member of several supply chains and a member of several networks 9/19/2021

Problems with Supply Chain Management • Most Supply Chain Management is not on-line (today SC information is shared via (fax, email) 78%, (EDI) 65%, (on-line = Internet, extranet) 28%. • Current techniques are broken – Information bottlenecks occur – Long-term plans and short-term schedules do not connect (manufacturers keep just-in-case stock) – Customers lose patience (bottlenecks, no info) 9/19/2021

Motivations to tie SC to e-Market Places using Network Supply Chains • SCM must go on-line with more partners (also on-line), to allow real-time adjustment in schedules. • Interconnect long-term plans and short-term schedules. Synchronize production schedules with suppliers (have accurate configure-to-order information). • All steps in the supply chain will be on-line (Plus: design, sales, marketing, production, quality check, customer satisfaction). • Liability – becomes recognizable and traceable. • • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management Motivation for Network Supply Chains and e-Market Places Implications and value of NSCs 9/19/2021

Business drivers for e. Market Place Systems • Globalized Markets: reduce profit margins for firms • Information Intensity: in products raise participation costs • Mergers, acquisitions, consolidations: in traditional industries create scale economies, and intensify competition between remaining players. • Business Process Redesign: changes the process structure in the firms, new enterprise wide systems are needed to support the new structure. • Informaition needed for products: shortens product cycle times, ie. less time to get a product to market and less time to realize positive returns 9/19/2021

Business drivers for e. Market Place Systems • Integrated processes within the firm: not distinct processes • Integrated processes within an industry: requires cooperation within an industry to strengthen potential industry profits • Information architecture investments: lead to new knowledge - lead to something that can be sold. 9/19/2021

Technology Drivers for e. Market Place Systems Availability of: • Relational databases • Reduced storage costs • Expanded use of public networks (ie. Internet) and standards that support its use (ie. XML, HTTP, TCP/IP). • Client-Server architectures and technologies available. • Desk-top and portable user environments variety available (ie. phones, palmtops, portables). • Enterprise network software - management and integration tools, middleware, ubiqutious computing technology. 9/19/2021

Motivation: Network Supply Chain (NSC) solutions go further… Large manufacturing enterprises will connect their Supply Chains to a Net. NSC is a network of inter-enterprise supply chain events connected through a private or public e-Market Place. • A business has access to many suppliers through ecatalogs and pricing through auctions • A business has access to many buyers and can post (RFQ) • Exchanges are controlled by few large companies or 3 rd party managed • Use of Vertical vs. Horizontal infrastructures for different kinds of cost savings. 9/19/2021

Value: NSC information benefits • Extend options for new partnerships - in design, marketing, logistics. More resources available. • Central hub of information - Companies can provide network wide management and analysis of operations data across multiple constitutents. • Costs in the supply chain will be more visible - so that faults, like faulty design, are more transparent, and taken out. Improves product quality. • NSCs will focus on private - business partner e. Marketplaces. SAP software works around this. • • • Role of order fulfillment Process of order fulfillment Describe the Supply Chain Problems and solutions in supply chain management Motivation for Network Supply Chains and e-Market Places Implications and value of NSCs 9/19/2021

What are e-Market Places and Network Supply Chains? Enterprise Systems and Industrial Networks • Enterprise Systems links IT resources across the whole firm in an Electronic Market Place (MP). It integrates business processes across all functional areas. • Industrial Networks link enterprise systems between companies in Network Supply Chains (NSC), such as in SCM (supply chain management). • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021

NSC Actors Product Supplier Service Supplier Digital Intermediaries Product Integrator Portal End Users Digital connector Terminal, mobile Customer agent Tlf, tv, pda Market place Bt. B Product Supplier Enterprise Marketplace builder (infrastructure supplier) • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021 -Systemintegrator Consumer Network access provision (e-handel services access Paymentprovider -Payment system Distributor - physical and digital delivery

Phases to NSCs • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • … 1. Integrate procurement - Put production plans on-line and connect to purchase order systems using XML. 2. Create Collaborative Hubs - Synchronize the planning and production schedules. Put business logic in advanced planning and scheduling (APS) software to share with partners but allow participants to shield some data (private). 3. Create Networks of Collaborative Hubs – These hubs will share 1. Infromation Streams - Integrate information from start to finish. So Cisco shares sales information with its manufacturers. The NSC must offer enterprise applications such as CRM, ERP, etc. 2. Material Streams – tight information & distribution process Mercedes-Benz might demand all suppliers tie to the NSC to ensure quality in planning and production details. 3. Financial Streams – more partnership options in design and small applications sharing. 9/19/2021

NSC Trends Collaborative Hubs S = Supplier/Seller B = Buyer M = Marketplace Hub n Networks of linked Hubs B 2 B e. Commerce Brochure-ware n publicize on-line, sell off-line n enabling commerce through n aggregation many-to-many n commerce B S Basic e. Commerce EDI Networks n Expensive, closed n Non-scalable S S B B B S n one-to-one selling from website B B S S S M S B B B S et it tiv ek f f e s S Ma Time 1996 1997 Source: Morgan Stanley Internet Research 9/19/2021 1998 d rke 1999 S S B M M B B S S B S B Sann tids integrasjon mellom kjøpere og selgeres systemer Forsyningskjedeintegrasjon 2000 2001

NSC: Market place categories • Main Categories – Horizontal – Vertical – Buyer based, Seller based, neutral • Producer – Indirect – Direct • Owner – Market actors are the dominate – Dot. com businesses are owners • Categories of market places • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021 – Buy and sell and develop shared services – E-collaboration • One vertical market place will be able to manage an entire business branch.

Agency Theory • Agency Theory states that the organization is a nexus of contracts among self interested individuals. • Agency Costs are the sum of • monitoring costs (gathering information for reports) • bonding costs (developing reports) and • residual costs (the costs the principal incurs by deviation of the agent, despite the monitoring activities). • Agency Costs rise as the decision moves away from the local source of information (the customer) and as decision making moves up to the top management level. • E-Market Place and NSC let decisions be more decentralized. • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021

Transaction Cost Theory – Ronald H. Coase, in ``The Nature of the Firm´´(1937) It says that firms exist to reduce the transaction costs of individuals acting in the market. Transaction costs will decide if a firm should produce something themselves or let someone else do it, not only market price. Transaction costs today are lower because of alliances and networks. Coase was not specific in his description of what transaction costs were, but they include for example, • Search Costs • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of NSC • E-Market Place categories • Agency Theory • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021 • Information Costs • Distribution Costs • Order Processing Costs • Contract enforcement Costs • Advertising Costs

Gurbaxani and Whang (1993) on Transaction Costs • Says that market Transaction Costs are External Coordination Costs. • External Coordination Costs = Operational Costs + Contractual Costs • Operational Costs (search costs, transportation costs, inventory holding costs, communication costs) and • Contractual Costs (the costs of writing contracts, cost of enforcing contracts). • Example: tradeoffs in development of a software product. – contract requirements involved in the development – If the market can produce this product at less expense, then the business will outsource the project. – If the business can do it at less cost, they will internalize the project to produce the software product. 9/19/2021

Shared transactions Transaction costs Market communications Before and after sales processing Payment transactions Move towards a frictionless and transparent market? Savings in money: 10 - 50 % Savings in time: 50 - 96 % Cisco: 57 % of their orders are processed without involving people. Savings up to 95 % Distribution Production costs - 20 % Distribution costs of digital products up to 99 % Customer Resource Management (CRM) Automatic system to store customer preferences 9/19/2021

Stages and Limitations in Mergers and Aquisitions 1. Strategic Exploration - what firms may offer unusual systems, knowledge, or economies of scale? Are the target company systems problematic (should avoid these partners)? 2. Valuation - Target company is already identified. Identify the costs of integration, estimate the benefits. What are costs to upgrade IT systems? 3. Purchase - Develope a core integration team to validate the costs and benefits of the system. Develope a business process team to examine the business processes. Develope a IT infrastructure team to the target firms infrastructure. 4. Transition rationalization - Why keep some of the target companies old systems. Eliminate what is not needed. Integrate systems with the combined system. Alternative: Industrial Networks (NSC) can be an alternative to Mergers and Aquisitions. 9/19/2021

Limitations of merging the Enterprise Systems of two organizations 1. Implementation of merged systems is difficult. 2. Costs are up front, benefits are hard to account for and intangible. 3. Avoid replacing one legacy system with another. 4. Interoperability with older legacy systems, and transitions. 5. Realising Strategic Value - "The only strategic assets in the end are knowledge and information unavailable to your competitors. " So, must use ES to gain understanding of your own firm and customers in a way that cannot be duplicated by competitors. It is therefore the combination of the firm's people-assests and information technology assests together that is not easily duplicated. This strategic value is not necessarily lost by integrating ES. 9/19/2021

An Enterprise e-Market Place System would integrate the business processes of the entire enterprise SC into one system of business processes and operations. VENDORS INBOUND MANUFACTURING LOGISTICS MARKETING FINANCE AND SUPPORT SALES SINGLE SOFTWARE & HARDWARE SYSTEM PERMEABLE BOUNDARIES 9/19/2021 CUSTOMERS

Two kinds of industrial networks for Network Supply Chains (NSC). 1. Vertically organized industrial networks try to replace acquiring suppliers and manufacturers with networks. • Before: firms would try to reduce transaction costs by combining firms and not building their own transportation and logistics systems. 2. Horizontally organized industrial networks try to replace mergers with strategic alliances. • • What are e-Market Places and Network Supply Chains? • NSC Actors • Phases of Development of • NSC • E-Market Place categories • Agency Theory • • Transaction Cost Theory • Two kinds of industrial networks 9/19/2021 They are organized across industries between competitors. Merging with competitors could reduce agency costs by creating economies of scale and scope on products and services. But these networks allow certain stages of the supply chain to be shared and not competed for (ie. Dell and IBM coordinate development of computer components). Goal is to create "web-value" meaning more industry value that the industry competitors can all benefit from.

INDUSTRIAL NETWORKS –integrate systems from many firms, vertically and horizontally Enterprise System – for one large business can integrate an enterprise value chain, ie. Coca-Cola. COMPETING firms firm 1 firm 2 firm 3 INDUSTRY VALUE CHAIN INDUSTRIAL NETWORKS COMPETING Suppliers 9/19/2021 supplier 2 supplier 3

MP reduce inefficiencies and transaction costs Inefficiencties and transaction costs are in Market place functions Market communications Catalog, search agent, standards development, catalog development. Distributiopn and ordering E-business procedures. XML as a common language for EDI and business applications, for document exchange. Price setting Auctions, reverse auctions, strike price contracts (options). Reliability and security Third party authorization and digital signatures. Supply Chain From MP to NSC and information hub for all business processes and transactions. 9/19/2021

Challenges for NSC • Permeability of the boundaries of the firm. Customers and Suppliers and Competitors have access to your business processes. They learn more about you. • Difficult to measure benefits and costs. Even more intangible across boundaries. • Vulnerable to customers and suppliers. Everyone is shopping for the best price. • Security - Management can lose control over its IT systems, (who develops, where is the data located, which • Changes in the corporate culture, re-education of employees or changing people is needed. 9/19/2021

Summary : Implications, changes from the traditional market place • One to three (vertical) market places will dominate in each business branch (pharmaceutical, energy, travel). • They will integrate the market place horizontally. • The market place will be dominated by a big industry actor in the given branch. • There will be development of end-to-end service through strategic alliances between market place builders. • The market place will afterwards change the cooperations or alliances that form the branches value chains. 9/19/2021

Trends for business evolution towards total business solutions or ``ebusiness suites´´ • Application Integration where the firm integrates the most important business applications. – Administrative system steering with (ERP) – Value chain management through (SCM) – Customer Resource Management and handling (CRM) • These internal business applications will go on-ling (ie. on the Web, with private membership). • These internal production management systems will go on-line (ie. on the Web, with private membership). – CAD (Computor Aided Desigh – CAM (computor Aided Management) – CAE (Computor Aided Engineering) 9/19/2021 Pricewaterhouse. Coopers

Trends for business evolution towards total business solutions or ``ebusiness suites´´ • When all of these processes are digitized and ``on-line´´ then the business can cooperate with other businesses in e. Market Places using NSC. Further, e -collaboration can take place. • E-Market Places will become information hubs for all business processes and value chain management through (SCM) will be central. 9/19/2021

Summary of trends for e-Market Places and NSC • The e-Market Place will evolve from an e-commerce market place focused on buying and selling, to Network Supply Chains (NSC). • E-Market Places will become the cooperative process arranger and outsourcer (to save on transaction costs). • E-Market Places will become infromation hubs for all business processes. • E-Market Places will integrate information from start to finish, through all stages of the supply chain. • The value chain becomes an integration of information processes from the industry supply chain (NSC). • Everything will center on the business process. 9/19/2021