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Module SCM104: Internet Technologies and Supply Chain Management
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...Before widespread expansion of the Internet, most supply chains were operated according to the so-called Traditional Model, where companies doing business together did so "directly" (i.e. with separately managed links at every stage between suppliers and customers); this model is illustrated in the figure below, in which the blue lines represent information, financial, and material flows:
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With the Internet emerging as an important way to conduct business, an alternative model has emerged, often called the Net Model, in which intermediate nodes link many buyers and sellers. This model is illustrated in the figure below. As we'll see later on, these intermediate nodes can be exchanges (either public or private) or e-hubs; again the blue lines represent information, financial, and material flows (although material flows may bypass the hub to minimize transportation costs)...
...Before we look at some examples, let's start with a quick overview of each area of management impact:
Cost Reduction
Using the Internet for information sharing and coordination will generally result in lower inventory levels; a variety of factors lead to this result. To the extent that the Internet speeds up the administrative portion of ordering, reduced lead times will tend to reduce safety stocks required in the system. (Recall that safety stock is required to protect against demand and supply uncertainties, and the main drivers of safety stock are the length of the replenishment lead time and the magnitude of forecast errors.) In addition, if partners in the chain do collaborative forecasting, we would expect forecast error to drop, again reducing safety stocks. As we discussed in SCM102, the Bullwhip Effect contributes to excess inventories, and we would expect less of a Bullwhip Effect with better information sharing. Lower administrative costs of ordering can also reduce excessive order batching, further reducing the Bullwhip Effect.
The auction and reverse-auction aspects of e-marketplaces provide the opportunity for lower prices of purchased materials and components. Various companies have had experience in this area, and for standard parts and components the Internet has provided the buyer with an opportunity to reach a much larger set of potential suppliers. Generally, in such a situation the final prices tend to be lower than before. Why does this happen? With larger numbers of potential suppliers, there is likely to be some supplier who is willing to take a somewhat lower price for a variety of reasons: current excess labor or equipment capacity, current excess supply of his/her own raw materials, or requirement for positive cash flow are common examples.
Another way to achieve cost reductions is to improve logistics management. The Internet makes it possible to share real-time or dynamic information with all parties, so that, for example, a truck making multiple deliveries can have its drop-off load quantities dynamically updated as time passes and customer demands may have altered target delivery quantities at each store...
...Texas Instruments has recently implemented an extensive planning and supply/demand matching optimization tool using the Internet. Every two days they do a global supply/demand match for over 45,000 products produced in 56 factories worldwide. 70% of their customer orders are now online; they provide real-time order status information. Their system has factory-level planning optimization with global inventory visibility.
The results of this improvement are a two-week reduction in customer delivery times and an increase in factory utilization of 2%. A two-week reduction in customer delivery times is clearly beneficial from a competitive standpoint. Also, while the increase in factory utilization may sound small, the impact of such a change on profitability is much larger than 2% since one is earning additional revenue without any increase in corresponding production capacity costs. (This is a fair assumption because Texas Instruments' factories typically build to order, which means they are likely to sell what they produce.)
Placing their benefits in our framework:
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Texas Instruments' Management Impact
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Cost Reduction |
Revenue Enhancement |
Speed / Efficiency |
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| Across the Chain |
Globally optimal supply/demand balancing
Increased factory utilization
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Lead time reduction
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| Across Multiple Chains |
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Multiple Chains
We have not yet provided any examples of multiple-chain benefits. To offer one example, a Contract Manufacturer or EMS (Electronic Manufacturing Services provider) may need to purchase a standard component for multiple OEMs (Original Equipment Manufacturers - customers of the EMS)...
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