Recalibrating Demand-Supply Chains for the Digital Economy

1. Recalibrating Demand-Supply Chains for the Digital Economy Competition is now between supply webs … not companies. Arun Rai eCommerce Institute Robinson College of Business Georgia State University Atlanta, GA 30303 arunrai@gsu.edu e-Business Research Seminar University of British Columbia May 11, 2001

2. Quiz • A box of cereal spends ? days in the supply chain. • Total inventory in the pharmaceutical supply chain exceeds ? daysand? $in savings to be realized. • Poor coordination in the food industry supply chain wasted ? dollars. • Boeing wrote-off ? dollars in 1997 due to supply chain inefficiencies. • It costs, on average, ? dollars to process each purchase order. • Bonus question: What’s been happening @ X’mas?

3. Answers • A box of cereal spends 104 days in the supply chain. • Distorted information causes total inventory in the pharmaceutical supply chain to exceed 100 days with$11 billion in savings to be realized. • Poor coordination wasted $ 30 billion annually in the food industry. • $ 2.6 billion is how much Boeing wrote-off in 1997 due to supply chain inefficiencies • $80was paid, on average, to process each purchase order. • And, Santa did not show up last year with e-toys! Fulfillment score = D--

4. Agenda • What is driving supply chain reconfiguration? • How do supply chains configurations differ in their strategic assumptions? • What e-coordination capabilities are required to support each configuration? • How should supply chain transformations be managed?

5. Traditional supply chain obsolescence Direction of flow of demand Direction of flow ofproduct Point of differentiation Distribution costs Market mediation costs Manufacturers Tier-I Suppliers Distribution Centers Tier-II Suppliers Retailers Customer Zones Raw Material vendor

6. Industry standards Horizontal & vertical solutions E-intermediary models Effective market mediation Complex order fulfillment Ongoing service expectation Multi-channel synchronization e-coordination Innovations Fulfillment Expectations Supply Chain Configuration & Coordination? Discontinuity Discontinuity Design & Transformation Knowledge Value Chain Roles Value migration Consolidation patterns Product & process modularity Transformation asset obsolescence

7. Supply chain configurations Solution Web Networks Modular Hierarchy Organizing Logic End-to-end integrated Fragmented Markets Vertically integrated Firm Customer Push Downstream Push Collaborative Push Synchronized Push-Pull Demand Pull Demand Fulfillment Perspective

8. The vertically integrated firm IBM DEC BUNCH The Computer Industry, 1975-85 Microprocessors Vertically Integrated Supplier-driver Mass Production Operating systems Peripherals Applications software Network services Assembled hardware Tightly coupled knowledge Massive capital assets High fixed costs Large product volumes for capital productivity

9. Fragmented chain Inadequate information processing ability Firm as unit of competition Internecine warfare Zero-sum games Consumer Store Retailer Manufacturer Supplier 1-800 e-Store  Stockouts and stockpiles Capital inefficiency Poor customer service

10.  High fill rates & on time delivery Reduced inventory costs Working capital efficiency Negative cash conversion cycles Integrated Chain End-to-end supply chain perspective Order management, fulfillment & revenue management Materials, information and financial flows The UPS Opportunity? Distribution, Storage & Transportation Management services Internet-enabled applications infrastructure Manufacturer Consumer Retailer Supplier e-Store Store Collaborative Planning & Forecasting

11. The Computer Industry, 1975-85 IBM DEC BUNCH Microprocessors Vertically Integrated Supplier-driver Mass Production Intel Moto AMD etc. Operating systems Peripherals Applications software Microsoft Apple Unix Network services Assembled hardware HP Epson Seagate etc. etc. The Computer Industry, 1985-95 Microprocessors Microsoft Lotus Novell etc. Horizontal structure Innovation focused Mass customization Operating systems Peripherals DEC HP IBM EDS etc. Applications software Network services HP Compaq IBM Dell etc. Assembled hardware Source: Fine, 1998 Modular product design

12. Modular chain Distributor - DCs, Warehouses Contract manufacturers 3 PL Partners Distributor/ Manufacturer Web site Resellers Suppliers Physical Information/Financial Supply chain perspective Separates architectural & modular knowledge Low interdependency; high recombinability Contribution margin focus Innovation, order management, fulfillment, & revenue management

13. Cold plug-ins (spot equity focus) Knowledge Complements MRO Capacity Utilities Routine IT Services Office Automation Transaction integration Customer Short-term service partners e-Platform infrastructure (network, data, applications) Long-term business partners Requirements Determination Solution Development Platform Development Fulfillment Reverse Logistics Revenue Management Knowledge integration & platform services Hot plug-ins (serial equity focus) Solution webs Challenging “artificial”: Product categories Consolidated demand time Integral product designs

14. Strategic profiles of supply chain configurations

15. Strategic profiles of supply chain configurations

16. Customer Retailer Distributor Factory Tier 1 supplier Tier II supplier Fragmented fulfillment: The bullwhip effect Upstream amplification of demand variation Progression of a brushfire to an inferno! Poor coordination of material,information and financial flows between and among enterprises participating in the demand fulfillment process. Sequential interdependence Low transaction specific capital Limited information sharing Safety stock exaggeration Host-centric legacy apps IT reinforces decision structures

17. Machine tools at bullwhip tip Reported in Fine, 1998

18. Online channels & flows “Calibrated” online & offline coupling Offline channels & flows Multi-channel End-to-End Integration e-Store CVS Distribution Center Pharmaceutical Manufacturers Store McKesson Distribution Center Supply chain-wide visibility Stellar order management & fulfillment e-ramps to complementary resources SCM+ERP+CRM Multi-echelon resource planning Optimally staging and moving goods Physical Information/Financial

19. Modular chains Suppliers Warehouses, DCs Solectron 3 PL Providers Reseller/ Customer Ingram Web Site Suppliers Service role of distributors 3PL outsourcing SC Knowledge co-creation Buffer staging & movement Component level inventory rationalization Inventory velocity & channel assembly Physical Info/Financial

20. Solutions development Process Execution 3PL Management Systems solutions Customer service excellence Management of 4PL Investment in resources Process & Metrics Management Systems integration Solution Webs: Weaving Boundary Spanning Partnerships Carriers, 3PLs Asset structure (Cisco/UPS; Kozmo & Strabucks) Multiple value architectures (UPS’ eReturns) Partnerships & complex contracts Transaction aggregation (UPS & Buy.com) Visible platform architectures Coordinating inter-generational innovations

24. Supply chain transformation Integrate end-to-end supply chain Rationalize multi-channel operations Infuse e-coordination technologies Develop info. sharing mindset Manage principal-agent conflicts Develop suppliers Solution Web Networks Modular Hierarchy Organizing Logic End-to-end integrated Fragmented Markets Vertically integrated Firm Customer Push Downstream Push Collaborative Push Synchronized Push-Pull Demand Pull Demand Fulfillment Perspective

25. Supply chain transformation Reconfigure assets, products, processes & e-solutions Integrate using architecture information Deploy multi-echelon buffering Develop “deep” relationships [3PL, other] Exploit arbitrage opportunities Solution Web Networks Modular Hierarchy Organizing Logic End-to-end integrated Fragmented Markets Vertically integrated Firm Customer Push Downstream Push Collaborative Push Synchronized Push-Pull Demand Pull Demand Fulfillment Perspective

26. Supply chain transformation Develop platform capabilities Embrace real options perspective Implement governance methods for dynamic transactions, incomplete contracts, revenue flows & settlement Solution Web Networks Modular Hierarchy Organizing Logic End-to-end integrated Fragmented Markets Vertically integrated Firm Customer Push Downstream Push Collaborative Push Synchronized Push-Pull Demand Pull Demand Fulfillment Perspective

27. Thank You!