SUPPLY CHAIN

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E-COMMERCE IT430

Lesson 38

SUPPLY CHAIN

Supply chain includes all the activities associated with the flow and transformation of goods from the raw

materials stage all the way to the end user. Supply chain can be broken into three parts, that is, upstream

activities, internal activities and downstream activities.

Upstream activities relate to materials/services or the input from suppliers

Internal activities relate to manufacturing and packaging of goods

Downstream activities relate to distribution and sale of goods to distributors/customers

Fig. 1 below shows a simple example of supply chain of a milk processing unit. Note that milkmen supply

milk to the processing facility. The processing business has ordered a corrugate paper company to supply

boxes/paperboard for packaging. The paper company receives its raw material from a lumber company for

manufacturing boxes. The lumber company also supplies paper to label printing business for

making/printing paper labels. These are upstream activities. The boxes and labels should be available to the

processing business at the packaging stage. The milk processing unit processes the milk, packages it in

boxes and attaches labels to them. These are internal activities. The packaged milk is sent to distributors

who distribute the same at different stores from where customers purchase. These are downstream

activities.

Supply

The Milk

Processing Unit

Chain

Unprocessed

Packaged

Processed

milk

Supplier of

Processing

Distributors

unprocessed

Packaging

Stores

Customers

Facility

milk

Boxes

Lumber

Corrugate

Company

Paper Co.

paperboard

Label

manufacturing

Labels

Fig. 1

Supply chain management

Engaging and negotiating with suppliers can be extremely beneficial. The process of taking active role in

working with suppliers to improve products and processes is called supply chain management. Today, firms

are reaching beyond limits of their own organizational structure. They are creating new network form of

organization among the members of supply chain. Supply chain management is now used to add value in

the form of benefits to the ultimate customer at the end of supply chain. It has become important for a

business to work to establish long term relationship with at least small number of capable suppliers.

Internet technologies and supply chain

Internet is a very quick and effective tool of communication. On the other hand, communication is also a

very critical element in supply chain management. Using internet technology:

suppliers can share any information about changes in the customer demand;

suppliers can have immediate notice of any changes in product design;

drawings/specifications of a product can be quickly provided to the suppliers and vice versa;

processing speed of a transaction can be increased;

cost of handling a transaction can be reduced;

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chances of errors in entering transaction data are reduced;

Probably, the only disadvantage of using internet technology in a supply chain is that sometimes it may

prove to be costly. However, in ultimate analysis, the advantages override the cost factor.

With the help of supply chain management software, one can not only manage the internal processes but

also processes of other members of the supply chain. Therefore, it can be predicted that when and how

much of certain product would need to be produced.

Examples of technology use in supply chain

A typical example of the use of technology in supply chain management is a company which is well-known

worldwide as the largest producer of commercial aircrafts. It makes a big effort to keep its production on

schedule. Most commercial airplanes require more than 1 million individual parts and assemblies and each

airplane is configured according to specific needs of the purchasing airline. Timely availability of these parts

must be ensured otherwise entire production schedule would be disturbed.

In 1997 the company had to stop its two assembly operations for several weeks due to errors in production

and scheduling system causing it a huge financial loss. Thereafter, it decided to invest in information

systems in every element of its supply chain. Involving its suppliers in the process, it began the use of EDI

and internet technology, so that the suppliers could supply the right part or assembly at right time to

prevent production delay. Now, the suppliers could get engineering specifications and drawings before the

start of manufacturing using a secure internet connection, and plan their own business activities,

accordingly. Also, members of the supply chain could have the knowledge of the completion of milestones

and any changes in production schedule. In two years time, this approach resulted in reducing half the time

needed to complete individual assembly processes. Thus, instead of waiting for 3 years the customer airlines

could now have the ordered airplane ready for delivery in 10-12 months. Furthermore, the company

launched a spare parts web site for ordering replacement parts. The site allowed customer airlines to register

and order for replacement parts through browsers. Soon, the site was processing 5000 transactions per day

at much lower cost as compared to orders cost through phone, mail, or fax. It also improved customer

service in the sense that most parts could now be delivered the same day or the next day.

Another example is of a famous computer selling brand. It realized that by increasing the amount of

information about its customers it was able to reduce amount of inventory it should hold. It decided to

share this information with other members of the supply chain by allowing its top suppliers to have access

to a secure web site which informed them about its latest sales forecasts, planned product changes or any

warranty claims etc. It also provided information about its customers and their buying pattern. Thus, it

helped suppliers to plan their own production in a much better way.

The above examples show how members of supply chain can work together to reduce inventory, increase

quality of product, reduce production cost and increase process speed.

Supply chain and ultimate consumer orientation

Primary objective of supply chain is to help each company to meet needs of the consumer at the end of

supply chain. This approach is called ultimate consumer orientation. In 1995, a company dealing in the

business of production of tiers in America adopted a different approach by shifting its focus on tire dealers

from ultimate customers. It created an extranet that allowed tire dealers to access tire specifications,

inventory status and promotional information on the web. Thus, it gave opportunity to dealers to access

product information directly and immediately. It also saved money since a web page is less expensive than

answering thousands of phone calls daily by the company. This initiative provided a better service to

dealers, so dealers using this extranet were not likely to recommend to customers a tire from the competing

business.

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Competitive Strategy

Ability of an organization to prosper arises from its competitive advantage over other organizations

operating within its market sector. The strategy of a business to achieve this goal of competitive advantage

is known as competitive strategy. Three basic strategies for competitive advantage are as under:

Cost leadership

Differentiation

Focus

Cost leadership

It is the ability to sell the goods or provide the service at a price that is lower than that of competitors, and

thus attract more customers.

Differentiation

Differentiation means that your product/service has certain quality that makes it more attractive than the

one offered by your competitor, despite the price of your competitor's product/service is somewhat lower.

For instance, you can beat your competitors for the reason that the air conditioner produced by your

company is unique as it does not produce noise while in operation, whereas this feature is missing in the air

conditioners produced by your competitors.

Focus

Focus strategy is defined as concentration on a single aspect of the market. That single aspect can be a

particular market segment or market area or product type. For example, if my competitors are focusing on

different market areas, I may, on the other hand, plan that I can be more profitable by concentrating on one

particular area. It may be a particular province or a city etc. where I may have a better distribution channel.

Role of e-commerce in Competitive Strategy

By applying EC following major benefits can be derived:

Reduced administration/transaction cost

Since things can be done electronically, so infrastructure or overhead cost (cost of building, staff, stationary

etc) is reduced. Similarly, you can sell directly to your customers and it eliminates the cut/revenue payable to

intermediaries or dealers. Thus, EC helps in achieving cost leadership.

Improved logistics supply chain

Using EC one can have a quick response to the order placed. In other words, just in time delivery of the

material is possible. It helps in reducing inventory and overall production cost and achieving cost

leadership/differentiation.

Customization

With the help of EC, customer data can be gathered and analyzing it customers can be served in a better

manner according to their needs. One can, thus, implement differentiation and focus strategy.

Differentiate a product in terms of quality of service

For example, online business of sale of music or books etc. In such cases delivery time and transaction cost

is saved as customers can directly download the product from the web site, thus, it helps in achieving cost

leadership and differentiation.

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