MD850: E-Service Operations

1. MD850: E-Service Operations Order Fulfillment and Forward Supply Chain Processes

2. Agenda • Background • Order Fulfillment in e-Services • Supply Chains • Supply Chain Components • Supply Chain Problems • Supply Chain Design • Extending SCM Concepts to E-Services • Supply Chain Modeling & Evaluation • Supply Chain Technology • SCM Perspective on Li & Fung Case

3. Background • Competition is changing • Old: “Firm vs. Firm” • New: “Supply Chain vs. Supply Chain”

4. Background • Supply Chain • Concept of a “supply chain” is relatively new • Prior to 1996, very few management or engineering schools had courses on supply chain management (SCM) • Previous “stumbling blocks” that impeded SC integration • high transaction costs between partners • poor information availability • challenges of managing complex interfaces between functional organizations

5. Background • Scope of Supply Chain Topics • Customer Facing & Internal • Customer Value and SCM • Web-centric product design • Forecasting and inventory management in B2C • Order fulfillment and returns management in B2C

6. Background • Scope of Supply Chain Topics • Supplier Facing • Coordinated product design and supply chain design • Integration of supply chain planning and procurement • Logistics network configuration • Order fulfillment and returns management in B2B • Distribution strategies • Strategic alliances • Models for B2B exchanges • Auctions & analysis of auction properties

7. Background • Scope of Supply Chain Topics • IT Related • Information technology for SCM • Decision Support Systems (DSS) for SCM • Web services: frameworks and technologies • Microsoft’s .NET technology • Sun’s J2EE technology • Open Source technologies

8. Order Fulfillment in e-Services

9. Order Fulfillment in e-Services • Goals of customer care applications are simple • What do online shoppers want? (BCG) • Free delivery – 95% • Free returns if I am unhappy with product – 91% • Guaranteed delivery time – 75% • Quicker delivery – 69% • Site has a store located near me – 46% • “Proper fulfillment is whatever serves the customer best while preserving adequate profit margins to continue in business at a high level of customer satisfaction”

10. Order Fulfillment in e-Services • Designing and implementing customer care applications can be another matter • Central problems • Enterprise information and customer information must be integrated into a unified whole • New kinds of customer behavioral information must be captured and processed • Customers and employees must share a common knowledge base • All organizational functions must have access to a consistent picture of the customer relationship

11. Order Fulfillment in e-Services • E-Fulfillment Processes (Bayles, 2001) • Notification Process • Acknowledgement and confirmation • Instantaneous after purchase • Information fulfillment of digital service-product attributes • Low cost delivery of information • Instant gratification for customer • Picking and Packing • Delivery • Reconciliation/settlement of credit card payment request • Post-delivery activities that ensure customer satisfaction • Returns • Exchanges

12. Order Fulfillment in e-Services • Fulfillment Recommendations (e-Service, Chap. 8) • Build an order confirmation system into your service process to ease customer worries • Grant customers online access to production order process and shipping data • Build (or outsource) warehouse, fulfillment, and product delivery chains that create as much customer contentment on the back end of your service process as on the front end • Focus on fast, efficient fulfillment • Shipping charges … • Probably don’t want to make them free • Perhaps free for … • Large purchase size above some dollar amount • Loyal, high-value customers • In-store pickup

13. Order Fulfillment in e-Services • Fulfillment Recommendations (e-Service, Chap. 8) • Integrate online bill payment into the fulfillment process • Return policies … make the return process as easy as the process for buying • Synchronize returns between digital and physical storefronts • Supply on-the-spot return authorization numbers • Be careful with using purchase information for permission marketing • Where possible, employ online post-sale self-help • Use post-transaction web surveys to gather customer feedback and continually improve service performance

14. Order Fulfillment in e-Services • Fulfillment Tasks for e-Businesses • GOAL: Achieve total end-to-end visibility throughout the supply chain • Must deal with international pricing/taxation and shipping issues • Pricing customized to location of customer • Shipping agents to deal with tax issues • Local fulfillment center • Provide online shipping tools • Link web site to package carriers’ host systems • FedEx, UPS – online tracking tools with APIs • USPS – eventually will have tracking tools • Integrate shipping, tracking and distribution systems with ERP systems • FedEx, UPS – systems with APIs for doing so

15. Order Fulfillment in e-Services • Fulfillment Outsourcing • Potential benefits • Speed to market • Deploy e-Service quickly • No capital investment in fulfillment • Level of service provided by outsourcer may be better than a start-up’s fulfillment service • Scalability • Higher when using an large fulfillment service • Focus • On business competencies, not on shipping • Lower costs • No need to hire shipping staff • Focus on the customer • Capitalize on efficiencies

16. Supply Chains

17. Supply ChainsWhat is a Supply Chain? Porter’s “Value Chain” Firm Infrastructure Human Resources Management Technology Development Procurement Profit Margin Inbound Logistics Outbound Logistics Marketing & Sales Operations Service

18. Supply ChainsWhat is a Supply Chain? Value Chain of Supplier Value Chain of Buyer

19. Supply ChainsWhat is a Supply Chain? Supplier’s Virtual Value Chain Buyer’s Virtual Value Chain Profit Margin Profit Margin Information Flow Information Flow Value Chain of Buyer Value Chain of Supplier Profit Margin Profit Margin

20. Supply Chain Components

21. Supply Chain ComponentsComponents of a Supply Chain? Supplier’s Virtual Value Chain Buyer’s Virtual Value Chain Digital Content Networks Digital Content Networks Value Chain of Buyer Value Chain of Supplier Networks of Physical Objects Networks of Service Providers Networks of Physical Objects Networks of Service Providers

22. Supply Chain ComponentsComponents of a Supply Chain? • Supply chain is a “network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.” (Christopher, 1998) • Supply chain components • Two or more legally separated organizations • Material, information, and financial flows • Firms producing objects • Logistics service providers • Ultimate customer

23. Supply Chain Problems

24. Supply Chain Problems • Supply Chain Problems • Inventory • Work of the devil • Holding costs • Risk of obsolescense • Quality problems hidden • The Bullwhip Effect

25. Supply Chain ProblemsThe Bullwhip Effect Huge Variation in Orders and Inventories A Small Demand Shift Leads To Retailer Distributor Wholesaler Huge Variation in On-Hand Inventory and Manufacturing “The Bullwhip Effect” Manufacturer

26. Supply Chain ProblemsHistorical Inventory Management • Inventories • Independent demand • Multiple Period Demands • Assume demand pattern. Forecast when you will stock out. At the appropriate time, order some order quantity (or up to some quantity), so that with the amount you receive at a future date -- plus the buffer inventory (“safety stock”) -- you will have a small probability of stocking out • Single Period Demand -- “paperboy problem”; “fashion goods” • Order to balance costs of “overage” against costs of “underage” -- giving maximum profit • A/B/C -- some inventories more important or costly than others • Monitor costly inventories closely • Don’t monitor cheap inventories, just hold lots of buffer stock • Dependent demands • MRP/MRP II • ERP/Extended ERP

27. Supply Chain ProblemsDrawbacks of Inventory Methods • Inventories • Independent demand • Multiple Period Demands, Single Period Demand, A/B/C • Paper orders • Misplaced products • Inaccurate inventories • Human errors • Cycle Counting -- strategies to count everything in warehouse (e.g., 1/N of warehouse at a time, over N periods); facilitates balancing the objectives of different inventory methods • Dependent demands • MRP/MRP II/ERP/Extended ERP • Stacks of paper production schedules • Paper order releases • Change reports -- to previous schedules • System nervousness -- when allowing updating of schedules

28. Supply Chain ProblemsWhat “The Experts” Now Suggest • Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000) • Retailer objective: “right product, right place, right time, right price” • Historically, the opposite has happened • most inventory planning is for long life-cycle products • online and offline stockouts • increasing markdowns • supply chain lead times often are so long, that forecasts of demand only confirm that the product will tank, and nothing can be done about it • Rocket Science Retailing • “create a high-tech forecasting system supported by a flexible supply chain”

29. Supply Chain ProblemsWhat “The Experts” Now Suggest • Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000) • Forecasting • Update forecasts based on early sales data • Track and predict forecasting accuracy • Get product testing right -- make it scientific • Use a variety of forecasting approaches • Supply Chain Speed • Work with supply chain partners • Reserve production capacity; hold generic raw-material inventories that can later be developed into finished product • Troubleshoot production problems, design for easy manufacturability • Make decision making flexible; empower employees

30. Supply Chain ProblemsWhat “The Experts” Now Suggest • Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000) • Inventories • Need to track stockouts • UNFORTUNATELY, no commercial software available to track stockouts • Accurate, Available Data • Most retailing data inaccurate and inaccessible to employees • Store-level sales data usually incorrect • Why: (1) clerk scanning one item multiple times to ring up multiple slightly different items, (2) like-for-like returns, without scanning in return and exchange • Inventory counts usually off • warehouse ships wrong item, supplier shorts, case-pack dimensions change without changing in inventory system • Most companies don’t keep enough data • kills their ability to forecast time-series of demand accurately • aggregation of data kills knowledge at SKU level • lack of SKU kills ability to customize supply chain and shipments

31. Supply Chain ProblemsWhat “The Experts” Now Suggest • Manufacturing for Lean Retailing (Abernathy et al., HBR, Nov/Dec 2000) • Historical • large order at beginning of period • manufacturers treated SKUs within a product line all the same • Lean Retailing • Manufacturers must replenish retailers stocks on an ongoing basis; tend to accomplish by holding extra inventory; get stuck with inventory if styles change; risk of getting stuck increases with product proliferation • Solution • Need to differentiate between SKUs -- think of product lines as portfolios of distinct goods • Need to rethink sourcing strategies, reallocating manufacturing across • off-shore sources (high volume, low-variance demands) • close-to-market sources (low volume, high-variance demand)

32. Supply Chain ProblemsIT to the Rescue • “The Wearable Warehouse”, Business 2.0 • VISION • “Turn the supply chain into the warehouse” • reliable inventory numbers • better order fulfillment • security: reducing in-transit theft … (in turn, improving on-hand data) • accurate tracking of goods • Humans (networked objects) provide services to the system • Essentially automated Cycle Counting • Wireless IS implements strategy for what item should be counted when • Distributed, heterogeneous objects [inventory containers] report what they contain and where they are, to update system information

33. Supply Chain Design

34. Supply Chain Design • Research in Supply Chain Design and Management • Stretches back to 1940s/1950s • Prior to 1990s, most SCM research was for “simple” material flows and transportation • Most complex: optimal policy for a single-product, single-stage, capacitated SC with a stationary demand process • Simple multi-stage and/or multi-product supply chain models were computationally intractable • First mathematical modeling papers with computational results were published in 1991 • Start of modern supply chain management research

35. Supply Chain DesignConceptual Approaches • Research in Supply Chain Design and Management • Conceptual SCM Research • Porter’s Value Chain Model (1985) • Fine’s Clockspeed (1998) Approach

36. Supply ChainsConceptual Frameworks • Clockspeed (Charles Fine, MIT) • “Biologists study fruit flies because their fast rates of evolution permit rapid learning that can then be applied to understanding the genetics of slower-clockspeed species -- like humans.” • Managers should study industrial equivalents of fruit flies • Fast clockspeed industries • Internet services • personal computers • multimedia entertainment

37. Supply ChainsConceptual Frameworks • Clockspeed (Charles Fine, MIT) • “The ultimate core competency of an organization is “supply chain design,” which I define as choosing what capabilities along the value chain to invest in and develop internally, and which to allocate for development by suppliers.” • “Fast-clockspeed” supply chain characteristics • rapidly evolving world • designing and redesigning firm’s chain of capabilities • objective is a series of competitive advantages -- often quite temporary

38. Supply ChainsConceptual Frameworks • Clockspeed (Charles Fine, MIT) • Computer-industry motivated principles about the design and evolution of supply chains • “Beware of Intel Inside” • IBM employed modular supply chain design (Intel, MS DOS) • power in the chain, and financial rewards, had shifted upstream • since most modern products are largely computer components and electronics, they potentially fall prey to same forces • Supply Chain Double Helix • oscillation of supply chain structure • Three-Dimensional Concurrent Engineering • concurrent design of capabilities (product, process, supply chain)

39. Supply ChainsConceptual Frameworks Modular Product, Horizontal Industry Integral Product, Vertical Industry Niche Competitors Technical Advances High-Dimensional Complexity Supplier Market Power Pressure to Dis-Integrate Pressure to Integrate Proprietary System Profitability Organizational Rigities Supply Chain Double Helix (Charles Fine, Clockspeed, 1998)

40. Supply ChainsConceptual Frameworks Recipe, Unit Process PRODUCT PROCESS Technology, & Process Planning Performance Specifications Details, Strategy Product Architecture, & Make/Buy Time, Space, & Availability Manufacturing System, Make/Buy 3-D C. E.: Supply Chain Overlapping Responsibilities SUPPLY CHAIN (Charles Fine, Clockspeed, 1998)

41. 3-D C. E.: Supply Chain Concurrency Model Supply ChainsConceptual Frameworks PRODUCT PROCESS SUPPLY CHAIN Design Detailed Performance Specific’s and Functions Manufact. System Functional Cellular Architecture Modular vs. Integral Unit Processes Technology & Equipment Supply Chain Architect. Set of Organizations and Allocation of Tasks Logistics & Coord. System Autonomous vs. Integrated Focus Technology (Charles Fine, Clockspeed, 1998) Architecture

42. Supply ChainsConceptual Frameworks • Clockspeed (Charles Fine, MIT) • Prediction: • “supply chain design as a strategic precursor to supply chain management will only increase in the decade to come as industry clockspeeds continue to accelerate, and the half-lives of many capabilities in our existing supply chains need replacement and/or upgrading”

43. Extending Supply Chain Concepts to e-Service Operations

44. Supply ChainsConceptual Frameworks Process Control Service-Product Static; Mechanization Dynamic; Intelligence Static Dynamic Unique Items Niche Need Common Items Broad Need (Heim and Sinha, 2001) (Jaikumar, 1994) ?

45. Supply ChainsConceptual Frameworks Evolution Coming: Stable, selective supply chain relationships Few suppliers/customer flows (Reliable suppliers, Loyal customers) Large, steady flow volumes Geographic proximity Past: Many suppliers/customer flows Flow volumes small and sporadic (Schonberger, World Class Manufacturing: The Next Decade, 1996)

46. Supply ChainsConceptual Frameworks Relationship + Speedy e-Service Communication + Network Design, Control & Management Supply Chain Control Static Dynamic Unique Items Li & Fung Common Items Covisint Relationship Relationship + Speedy e-Service Communication (MD850, 2001)

47. Supply ChainsConceptual Frameworks • Business 2.0, Kalakota & Robinson, 2001 • First Generation: Communities, Storefronts, and RFP/RFQ Facilitators • Second Generation: Virtual Distributors and Auction Hubs • Third Generation: Collaborative Trading Hubs • end-to-end management of their supply chains • Industry Consortiums: Joint-Venture Procurement Hubs • Covisint -- automotives • Orbitz.com -- airlines

48. Supply ChainsConceptual Frameworks Process Control Service-Product Static; Mechanization Dynamic; Intelligence Static Dynamic Niche Need Unique Items Common Items Broad Need Supply Chain Control Static Dynamic Unique Items Common Items

49. Services Goods e-Service 49 = 262,144 possible design positions Digital Content

50. Guiding Principles