CAP. 6

Question 1

Introduction

Answer 1

Supply chain management is the optimisation of material flows and associated information flows involved with an organisation’s operations. Supply chain management is a unifying concept that incorporates e-procurement and sell-side e-commerce. By applying IS, companies can enhance or radically improve many aspects of the supply chain. Supply chain management can be enhanced through buy-side e-commerce, internal communications, relationships with partners and sell-side e-commerce. Digital business technologies enable information flows to be redefined to facilitate the sharing of info between partners, often at lower costs than were previously possible.
Supply chain management capabilities are best known for their importance in delivering profitability. Managing distribution and returns from e-commerce sites is a further challenge.
E-procurement has become a strategic issue for digital businesses because it can help achieve significant savings, and other benefits, that directly impact on the customer.
‘Purchasing’ and ‘procurement’ are sometimes used interchangeably, but Kalalota and Robinson (2000): procurement generally has a broader meaning; it also refers to all activities involved with obtaining items from a supplier; this includes purchasing, but also inbound logistics. The use of e-procurement is sometimes considered as part of strategic sourcing, where it’s used to deliver commercially significant benefits to the company.
Key procurement activities and associated information flows within an organisation: searching for and specification of product by the end-user, purchasing by the buyer, payment by an account and receipt and distribution of goods within a warehouse.
E-procurement should be directed at improving performance for each of the ‘five rights of purchasing’ (Baily et al., 1994), which means sourcing items:
1. At the right price
2. Delivered at the right time
3. Of the right quality
4. Of the right quantity
5. From the right source
E-procurement isn’t new; many attempts to automate the process of procurement for the buyer using electronic procurement systems (EPS), workflow systems and links with suppliers through EDI. ‘First-generation e-procurement’: online entry, authorisation and placing of orders using a combination of data entry forms, scanned documents and email-based workflows.
Case Study 6.1: Fast-fashion retailer Zara uses its supply chain to achieve competitive advantage
Box 6.1: What is e-purchasing?

Question 2

E-procurement should be directed at improving performance for each of the ‘five rights of purchasing’ (Baily et al., 1994), which means sourcing items:

Answer 2

1. At the right price
2. Delivered at the right time
3. Of the right quality
4. Of the right quantity
5. From the right source

Question 3

Problems of supply chain management

Answer 3

The challenge of managing inventory across the supply chain is shown by US Department of Commerce (2017) data, which regularly catalogue the ratio between inventory held in different parts of the supply chain.
Increasing supply chain efficiency involves reducing the holding within inventory while maximising sales. Across business there’s limited potential to reduce inventory in systems already optimised and that companies must avoid lost potential sales through out-of-stock items in-store.
Inventory turnover is a measure of the number of times inventory is sold or used in a time period. It’s calculated as the cost of goods sold divided by the average inventory:
* low turnover rate: overstocking or difficult in selling products;
* high turnover rate: inadequate inventory levels, which may lead to a loss in business as the inventory is too low and sales are missed.

Question 4

What is supply chain management and e-procurement?

Answer 4

Supply chain management (SCM) involves the coordination of all supply activities of an organisation from suppliers and delivery of products to customers.
We can distinguish between:
* upstream supply chain activities: buy-side e-commerce;
* downstream supply chain activities: sell-side e-commerce.
SCM includes supplier, buyer, intermediaries. Some companies may have first-tier, second-tier and even third-tier suppliers of first-, second- and higher-tier customers. Each company has many individual supply chains for different products; so the use of the term chain is limiting and supply chain network is a more accurate reflection of the links between an organisation and its partners.
IGD (2017): the pace of change in SCM, mainly due to the utilisation of technology, has increased over the last few years. This has meant that digital businesses constantly need to ask ‘How will we continue to respond to the changing market and increasing competition?’.
IGD: ‘Four Pillars of Supply Chain Success’; the key elements are:
1. Customer centric.
2. Powered by people.
3. Transformed by technology.
4. Resilient and responsive.
Technology is vital to SCM since managing relationships with customers, suppliers and intermediaries is based on the flow of info and the transactions between these parties. Main strategic thrust of enhancing the supply chain: provide a superior value proposition to the customer, of which efficient consumer response (ECR), is important within the retail and packaged consumer goods market. Improving customer value involves improving product quality, customer service quality and/or reducing price and fulfilment times. Increasing efficiency in obtaining resources from a supplier organisation or distributing products to customers reduces operational costs and increases profitability.

Question 5

IGD: ‘Four Pillars of Supply Chain Success’; the key elements are:

Answer 5

1. Customer centric.
2. Powered by people.
3. Transformed by technology.
4. Resilient and responsive.

Question 6

A simple model of a supply chain

Answer 6

An organisation’s supply chain can be viewed from a systems perspective as the acquisition of resources (inputs) and their transformation (process) into products and services (outputs). Organisations can review the transformation process and optimise it to deliver products with greater efficiency and lower cost. The position of the systems boundary for SCM extends beyond the organisation; however, this process perspective misses the strategic importance of SCM – it also provides great opportunities to improve product performance and deliver superior value to the customer. As a result, SCM can gave an impact on the profitability of a company.
SCM is important not only in b2b, but is also vital to the management of b2c and service companies.
Shell Chemicals has developed a vendor-managed inventory (VMI) SCM system to enable delivery of supplies to be more responsive to demands. VMI is a key concept in electronic supply chain and procurement management, which shifts the day-to-day tasks of stock management, purchasing and order tracking from the customer to the supplier.
Mini Case Study 6.1: Boots uses technology to increase supply chain efficiency by 65%
Box 6.2: Efficient consumer response (ECR)
Case Study 6.2: Shell Chemicals redefines its customers’ supply chain

Question 7

What is logistics?

Answer 7

It’s a concept closely related to SCM. Chartered Institute of Logistics and Transport: ‘logistics is defined as the time-related positioning of resource. It’s also described as the ‘five rights’. It’s the process of ensuring that goods or a service is: -in the right place, -at the right time, -in the right quantity, -at the right quality, -at the right price.’
Logistics is used to refer not to all supply chain activities, but to the management of logistics or inbound and outbound logistics, and it’s essential to the efficient management of the supply chain.
More online and multi-channel retailers have been piloting and operating new models of same-day and next-day delivery, offering more immediate product access and helping to provide competitive advantage. These operating models have needed innovative and affordable logistics solutions and the ‘last mile’ has become more important because of the rising share of online retail. Other growth areas include alternative pic-up and delivery options.
Same-day delivery options are mainly offered in e-commerce-savvy cities, and development on the supply side is driven by 3 key players: parcel logistics providers, courier brokers and the retailers.
Hausmann et al. (2014): only technologically advanced retailers and logistic providers are able to offer same-day delivery. There are 4 supply chain and logistics prerequisites to get to this stage:
1. Products need to be locally available.
2. Retailers ned to have a real-time overview of their inventories.
3. Picking and packing processes need to be fast.
4. Flexible enough to pick up and deliver orders ad hoc or during multiple times throughout the day.

Question 8

Hausmann et al. (2014): only technologically advanced retailers and logistic providers are able to offer same-day delivery. There are 4 supply chain and logistics prerequisites to get to this stage:

Answer 8

1. Products need to be locally available.
2. Retailers ned to have a real-time overview of their inventories.
3. Picking and packing processes need to be fast.
4. Flexible enough to pick up and deliver orders ad hoc or during multiple times throughout the day.

Question 9

Push and pull supply chain models.

Answer 9

• Push model: a manufacturer who perhaps develops an innovative product, identifies a suitable target market and creates a distribution channel to push the product to the market. The typical motivation for a push approach is to optimise the production process for cost and efficiency.
• Pull model: focused on the customer’s needs and starts with analysis of their requirements through market research and close cooperation with customers and suppliers in new product development. The typical motivation for a pull approach is to optimise the production process for customer response, cost and efficiency.

Question 10

The value chain

Answer 10

Porter’s value chain (VC) is a well-established concept for considering key activities that an organisation can perform or manage with the intention of adding value for the customer as products and services move from conception to delivery to the customer. The value chain is a model that describes different value-adding activities that connect a company’s supply side with its demand side. We can identify:
* an internal value chain;
* an external value chain.
Managers can redesign internal and external processes to improve efficiency and effectiveness. Benefits for the customer are created by reducing cost and adding value:
* within each element of the value chain;
* at the interface between elements of the value chain.
In equation form this is:
Value = (Benefit of each VC activity – Its cost) + (Benefit of each interface between VC activities – Its cost)
Digital communications can be used to enhance the value chain by making activities such as procurement more efficient and also enabling data integration between activities.
Traditional value chain analysis distinguishes between:
* primary activities.
* support activities.
With the advent of digital business, the support activities offer far more than just support; indeed, having effective IS and management of human resources contributes critically to the primary activities.
Digital technologies can reduce production times and costs by increasing the flow of information as a way to integrate different value chain activities. Rayport and Sviokla (1996): Internet enables value to be created by gathering, organising, selecting, synthesising and distributing info. They refer to a separate parallel virtual value chain mirroring the physical value chain.

Question 11

Restructuring the internal value chain

Answer 11

Traditional models of the value chain have been re-evaluated with the advent of global electronic communications. Some key weaknesses in the traditional value chain model:
* It’s most applicable to manufacturing of physical products as opposed to providing services.
* It’s a one-way chain involved with pushing products to the customer; it doesn’t high-light the importance of understanding customer needs.
* The internal value chain doesn’t emphasise the importance of value network.
Deise et al. (2000): revised form of the value chain; it starts with the market research process, emphasising the importance of real-time environmental scanning made possible through digital communications links with distributors and customers. As new product development occurs, the marketing strategy will be refined and at the same time steps can be taken to obtain the resources and production processes necessary to create, store and distribute new product. Through analysis of the value chain and looking at how digital communications can be used to speed up the process, manufacturers have been able to reduce time to market from conception of a new product idea through to launch on the market. At the same time, the use of technology increases value chain efficiency.

Question 12

The value stream

Answer 12

The value stream is a concept closely related to the value chain. The difference is that it considers different types of tasks involved with adding value and looks at how the efficiency of these tasks can be improved. Womack and Jones (1998): value stream as ‘the set of all the specific actions required to bring a specific product through the 3 critical management tasks of any business:
1. The problem-solving task (not traditional value chain activity);
2. The information management task;
3. The physical transformation task.’
By reducing new product development and production times and costs, organisations can increase customer value by decreasing fulfilment time or price, and/or increasing product and service quality. Clearly, e-commerce plays a key role in decreasing time to market and production times and costs.
Customer value (brand perception) = (Product quality Service x quality)/(Price x Fulfilment time)

Question 13

Womack and Jones (1998): value stream as ‘the set of all the specific actions required to bring a specific product through the 3 critical management tasks of any business:

Answer 13

1. The problem-solving task (not traditional value chain activity);
2. The information management task;
3. The physical transformation task.’

Question 14

Value chain analysis

Answer 14

This is an analytical framework for decomposing an organisation into its individual activities and determining value added at each stage. In this way the organisation can assess how effectively resources are being used. It may be possible to use IS to increase the efficiency of resource usage for each element in the value chain and even between activities.
How can an organisation positively impact on its value chain by investing in new or upgraded IS? Porter and Millar (1985): five-step process:
1. Step 1: assess the info intensity of the value chain. The higher the level of intensity and/or the higher the degree of reliance on good-quality info, the greater the potential impact of new IS.
2. Step 2: determine the role of IS in the industry structure. It’s also important to understand the info linkages between buyers and suppliers within the industry and how they and competitors might be affected by and react to new info technology.
3. Step 3: identify and rank the ways in which IS might create competitive advantage. High-cost or critical activity areas present good targets.
4. Step 4: investigate how IS might spawn new businesses.
5. Step 5: develop a plan for taking advantage of IS, which is business-driven rather than technology-driven. The plan should assign priorities to the IS investments.
This process can also be applied to an organisation’s external value chain. Womack and Jones (1998): value stream analysis. Companies should map every activity that occurs in creating new products and delivering products or services to customers and categorise them as:
1. Those that create value as perceived by the customer;
2. Those that create no value, but are required by product development or production systems and can’t immediately be eliminated;
3. Those that don’t add value, so can be immediately eliminated.
In value stream analysis, efficiency for each stage will be calculated. If information management can be used to reduce these storage times, it can create large savings in terms of reduced storage capacities.
At a practical level, improvements in the value chain are implemented through iterative improvements planning implemented through Sales and Operations Planning (S&OP) systems. Kjellsdotter and Jonsson (2010): benefits of digital business throughout the stages of an iterative planning cycle:
1. Creating a consensus forecast.
2. Creating a preliminary delivery plan.
3. Creating a preliminary production plan.
4. Adjusting delivery and production plan.
5. Settle delivery and production plan.

Question 15

How can an organisation positively impact on its value chain by investing in new or upgraded IS? Porter and Millar (1985): five-step process:

Answer 15

1. Step 1: assess the info intensity of the value chain. The higher the level of intensity and/or the higher the degree of reliance on good-quality info, the greater the potential impact of new IS.
2. Step 2: determine the role of IS in the industry structure. It’s also important to understand the info linkages between buyers and suppliers within the industry and how they and competitors might be affected by and react to new info technology.
3. Step 3: identify and rank the ways in which IS might create competitive advantage. High-cost or critical activity areas present good targets.
4. Step 4: investigate how IS might spawn new businesses.
5. Step 5: develop a plan for taking advantage of IS, which is business-driven rather than technology-driven. The plan should assign priorities to the IS investments.

Question 16

Kjellsdotter and Jonsson (2010): benefits of digital business throughout the stages of an iterative planning cycle:

Answer 16

1. Creating a consensus forecast.
2. Creating a preliminary delivery plan.
3. Creating a preliminary production plan.
4. Adjusting delivery and production plan.
5. Settle delivery and production plan.

Question 17

Value networks

Answer 17

Reduced time to market and increased customer responsiveness are not simply the result of reviewing the efficiency of internal processes and how IS are deployed, but also result through consideration of how partners can be involved to outsource some processes. Porter’s original work considered not only the internal value chain, but also the external value chain or value network. Deise et al. (2000): value network management as the process of effectively deciding what to outsource in a constraint-based, real-time environment based on fluctuation.
Digital communications have enabled the transfer of info necessary to create, manage and monitor outsourcing partnerships. These links are also mediated through intermediaries known as ‘value chain integrators’ or directly between partners. As a result, the concept of managing a value network of partners has become commonplace.
Some of the partners of a value network that characterises partners as:
1. Supply-side partners.
2. Partners that fulfil primary or core value chain activities. In the virtual organisation all core activities may be outsourced.
3. Sell-side partners.
4. Value chain integrators or partners who supply services that mediate the internal and external value chain.
The value network offers a different perspective that is intended to emphasise:
* The digital interconnections between partners and the organisation and directly between partners that potentially enables real-time info exchange between partners.
* The dynamic nature of the network. The network can be readily modified according to market conditions or in response to customer demands.
* Different type of links can be formed between different types of partners.
Wholesale outsourcing to third parties isn’t the only option. Outsourcing does imply cost reduction

Question 18

Some of the partners of a value network that characterises partners as:

Answer 18

1. Supply-side partners.
2. Partners that fulfil primary or core value chain activities. In the virtual organisation all core activities may be outsourced.
3. Sell-side partners.
4. Value chain integrators or partners who supply services that mediate the internal and external value chain.

Question 19

The value network offers a different perspective that is intended to emphasise

Answer 19

• The digital interconnections between partners and the organisation and directly between partners that potentially enables real-time info exchange between partners.
• The dynamic nature of the network. The network can be readily modified according to market conditions or in response to customer demands.
• Different type of links can be formed between different types of partners.
  Wholesale outsourcing to third parties isn’t the only option. Outsourcing does imply cost reduction.

Question 20

Options for restructuring the supply chain

Answer 20

Managers will consider how the structure of the supply chain can be modified. These are mainly choices that have existed for many years, but Internet technology provides a more efficient enabler and lower-cost communications.
SCM options can be viewed as a continuum between internal control (‘vertical integration’) and external control through outsourcing (‘virtual integration’). The intermediate situation is sometimes referred to as ‘vertical disintegration’ or ‘supply chain disaggregation’.
During the second half of the 20th century: general trend from vertical integration through vertical disintegration to virtual integration. Marketing activities are now largely outsourced to marketing agencies.
Hayes and Wheelwright (1994): useful framework that summarises choices for an organisation’s vertical integration strategy. 3 main decisions:
1. The direction of any expansion.
2. The extent of vertical integration.
3. The balance among the vertically integrated stages.
Combining these concepts, we can refer to a typical b2b company.
How can electronic communications support these strategies? Through increasing the flow of info between members of the supply chain, a strategy of narrower process span can be supported by e-commerce. However, this relies on all members of the supply chain being e-enabled. Companies undertaking offensive or defensive strategies will be in a better position to stipulate adoption of e-commerce, and so increase the overall efficiency of the supply chain.

Question 21

Hayes and Wheelwright (1994): useful framework that summarises choices for an organisation’s vertical integration strategy. 3 main decisions:

Answer 21

1. The direction of any expansion.
2. The extent of vertical integration.
3. The balance among the vertically integrated stages.

Question 22

Using digital business to restructure the supply chain

Answer 22

Using digital communication to improve supply chain efficiency is dependent on effective exchange and sharing of info. The challenges of achieving standardised data formats and data exchange have given rise to the study of optimisation of the information supply chain (ISC) as suggested by Marinos (2005) and Sun and Yen (2005). March et al. (2007): ISC as: ‘an information-centric view of physical and virtual supply chains where each entity adds value to the chain by providing the right info to the right entity at the right time in a secure manner. ISCs create value for the collaborating entities by gathering, organizing, selecting, synthetizing, and distributing information. The challenges to cultivating an ISC arise from both organizational and technological perspectives. Agility and flexibility in internal and inter-organizational business processes are required to benefit from technology investments in ISCs’.
Legner and Schemm (2008): two different types of info sharing and coordination problems in the retail and consumer goods industries:
1. Transactional info flow that allows for coordinating the physical demand and supply chain;
2. Contextual info flow that ensures that retailers and manufacturers interpret data in the same way.
A well-established problem is the bullwhip effect or information asymmetry, which results in amplification of the demand signal and fluctuation of inventory level along a supply chain. The ECR concept is an attempt to reduce info asymmetry. Although info asymmetry can be reduced through the use of technology, technical barriers will prevent it.

Question 23

Legner and Schemm (2008): two different types of info sharing and coordination problems in the retail and consumer goods industries:

Answer 23

1. Transactional info flow that allows for coordinating the physical demand and supply chain;
2. Contextual info flow that ensures that retailers and manufacturers interpret data in the same way.

Question 24

Technology options and standards for supply chain management

Answer 24

Some of the data transfer options and standards that enable eSCM include:
* EDI.
* XML or XML-EDI.
* Middleware or software.
* Manual email orders or online purchase.
These mechanisms enable data to be transferred to suppliers from clients using enterprise resource planning (ERP) systems.
Typical benefits of e-supply chain management (b2b company) include:
1. Increased efficiency of individual processes. Benefit: reduced cycle time and cost per order.
2. Reduced complexity of the supply chain. Benefit: reduced cost of channel distribution and sale.
3. Improved data integration between elements of the supply chain. Benefit: reduced cost of paper processing.
4. Reduced cost through outsourcing. Benefits: lower costs through price competition and reduced spend on manufacturing capacity and holding capacity.
5. Innovation. Benefit: better customer responsiveness.
Case Study 6.3: Argos uses e-supply chain management to improve customer convenience

Question 25

Typical benefits of e-supply chain management (b2b company) include:

Answer 25

1. Increased efficiency of individual processes. Benefit: reduced cycle time and cost per order.
2. Reduced complexity of the supply chain. Benefit: reduced cost of channel distribution and sale.
3. Improved data integration between elements of the supply chain. Benefit: reduced cost of paper processing.
4. Reduced cost through outsourcing. Benefits: lower costs through price competition and reduced spend on manufacturing capacity and holding capacity.
5. Innovation. Benefit: better customer responsiveness.

Question 26

IS-supported upstream supply chain management

Answer 26

The key activities of upstream SCM are procurement and upstream logistics. The way in which IS can be used to support procurement in the digital business is of great importance.
Many grocery retailers have been at the forefront of using technology to manage their upstream supply chain.

Question 27

• RFID and the Internet of Things

Answer 27

RFID tags are widely used for logistics purposes. They can be attached to individual product items in a warehouse or in a retail location. With appropriate RFID reader technology, they can be used to assess stock levels. With the possibility of the RFID reader being connected to a system to upload item location and status to the Internet, this approach is referred to as the Internet of Things. More companies are integrating RFID technologies into their strategic planning, since it provides significant advantages to supply chain performance. There are far more benefits gained by RFID implementation into supply chain and logistics operations than just improving identification of products, shipments and assets.

Question 28

IS-supported downstream supply chain management

Answer 28

The key activities of downstream SCM are outbound logistics and fulfilment. In a b2b context the benefits for downstream customers are similar to the benefits that the organisation receives through automating its upstream supply chain.
We also use the grocery retail market to illustrate the implications of e-commerce for management of the downstream supply chain.

Question 29

Outbound logistics management.

Answer 29

The importance of outbound logistics relates to the expectations of offering direct sales through a website. Logistics is crucial to delivering the service promise established on the website.

Question 30

IS infrastructure for supply chain management

Answer 30

IS need to deliver supply chain visibility to different parties who need to access the supply chain information of an organisation. Users need to be able to personalise their view of the info according to their needs – customers want to see the status of their order, suppliers want to access the organisation’s database to know when their customer is next likely to place a major order. Security is also important.
These requirements for delivering supply chain information imply the need for an integrated supply chain database with different personalised views for different parties. Applications can be divided into those for planning the supply chain and those to execute the supply chain processes. A key feature of a modern supply chain infrastructure is the use of a central operational database that enables info to be shared between supply chain processes and applications. This operational database is usually part of an enterprise resource planning system (es: SAP, Baan or Prism) and is usually purchased with the applications for supply chain planning and execution. Some of the planning applications are more likely to be supplied by separate software suppliers. Info needed by managers to intervene in the supply chain process when problems occur is delivered as alerts or through continuous monitoring across secure private intranets or extranets used to link to partners.

Question 31

Supply chain management implementation

Answer 31

The supply chain is becoming increasingly complicated because of the connected consumer.

Question 32

Data standardisation and exchange

Answer 32

The difficulties of exchanging info between incompatible systems has been a barrier limiting the adoption of SCM.
Schemm et al. (2007): benefits of this approach for retailers:
* Order and item administration improved by 50%;
* Coupon rejection at the checkout reduced by 40%;
* Data management efforts reduced by 30%;
* Improvement of on-shelf availability, with out-of-stock items reduced from 8% to 3%.
However, new technologies are starting to transform the supply chain. A network of AI systems can design the supply chain and automatically select the most effective chain.

Question 33

The supply chain management strategy process

Answer 33

A strategic approach for SCM can also be defined using the SOSTACtm approach.
Strategies for SCM improvement have been categorised by Hughes et al. (1998) according to the scope of change and the speed of change.

Question 34

Goal-setting and performance management for eSCM

Answer 34

To manage eSCM effectively, the type of benefits and an improved service to customers should be developed into a performance management framework. Sambasivan et al. (2009): consolidated performance measures described by other SCM researchers. They identified these categories of measures and gave examples of metrics within each:
1. Cost in supply chain: Total, distribution, manufacturing, and inventory cost.
2. Profitability: ROI.
3. Customer responsiveness: Time required to produce, number of orders delivered on time, number of units produced, fill rate, stockout probability, number of back orders, number of stockouts, customer response time, average lead time, shipping errors, customer complaints.
4. Flexibility: Volume, delivery, mix, and new product flexibility, planned order procedures, order lead time, customer order path.
5. Supply chain partnership: Level and degree of info sharing, buyer-vendor cost-saving initiatives, extent of mutual cooperation leading to improved quality, extent of mutual assistance in problem-solving efforts, the entity and stage at which supplier is involved.
6. Production level metric: Range of products and services, effectiveness of scheduling techniques, capacity utilisation.
7. Delivery performance: Delivery-to-request data, delivery-to-commit date, order fill lead time, number of faultless notes invoiced, flexibility of delivery systems to meet customer needs, total distribution cost, delivery lead time.
8. Customer service and satisfaction: Flexibility, customer query time, post-transaction measures of customer service, customer perception of service.
9. Supply chain finance and logistics cost: Cost associated with assets and ROI, total inventory cost, total cash flow time.
10. Cost performance: Material cost, labour cost, machinery energy cost, machinery material consumption, inventory and WIP level, total productivity, direct labour productivity, fixed capital productivity, indirect labour productivity, working capital productivity, value-added productivity.
11. Internal and external time performance: Time to market, distribution lead time, delivery reliability, supplier lead time, supplier reliability, manufacturing lead time, standard run time, set-up time, wit time, move time, inventory turnover, order carrying-out time.
12. Quality performance: SPC measures, machine reliability, rework, quality system cost, inbound quality, vendor quality rating, customer satisfaction, technical assistance, returned goods.
13. Customer relationship management: Supplier relationship management and order fulfilment process, measures not discussed in paper.

Question 35

Managing partnerships.

Answer 35

A key element of restructuring of the supply chain is examining the form of relationships with partners such as suppliers and distributors. This need to review the form of partnership has been accentuated with the globalisation enabled by e-commerce.
Stuart and McCutcheon (2000): typically, low cost is the main driver for partnership management in supply management (mainly upstream). According to these authors, the modification of supply chain partnerships usually follows the received wisdom which many practitioners are rigidly following. This approach requires companies to:
1. Focus on core competencies;
2. Reduce their number of suppliers;
3. Develop strong partnership relationships built on shared info and trust with the remaining suppliers.
Stuart and McCutcheon (2000): this approach may not suit all needs and the type of relationship required will be dependent on the ultimate objective. When reviewing partnerships, companies need to decide the options for the extent of their control of the supply chain process. Although an organisation may lose control of the process through outsourcing, a contractual arrangement will still enable them to exert a strong control over the outputs of the process.
As the depth of relationship between partners increases, the volume and complexity of info exchange requirements will increase. For a long-term arrangement, info exchange can include:
* Short-term orders;
* Medium-to-long-term capacity commitments;
* Long-term financial or contractual agreement;
* Product design, including specifications;
* Performance monitoring, standard of product and service quality;
* Logistics.
For a short-term relationship, simple info on transactions only is all that’s required.
Stuart and McCutcheon (2000): a more simplified set of partnership choices. They suggest that the partnering option chosen should be dependent on the core objective. If this is cost reduction, a relationship with competitive tension is required. If the core objective is value-added benefits, additional design features or the need for customisation, then the arm’s-length approach may not be appropriate; in this case a strategic alliance or cooperative partnership is the best option. They point out that the competitive advantages achieved through cost reduction are likely to be short-lived so companies will increasingly need to turn value-added benefits. Each supplier has to be considered for whichever type of partnership is most appropriate.

Question 36

Managing global distribution

Answer 36

Arnold (2000): 7 action that manufacturers should follow as they enter new overseas markets enabled by the Internet:
1. Select distributors, don’t let them select you.
2. Look for distributors capable of developing markets rather than those with new customer contacts.
3. Treat the local distributors as long-term partners, not temporary market-entry vehicles.
4. Support market entry by committing money, managers and proven marketing ideas.
5. From the start, maintain control over marketing strategy.
6. Make sure distributors provide you with detailed market and financial performance data.
7. Build links among national distributors at the earliest opportunity.
PwC (2013): Global Supply Chain Survey; the next-generation supply chain is described as Efficient, Fast and Tailored, with speed and adaptability necessary to drive success.
Case Study 6.4: RFID – keeping track starts its move to a faster track

Question 37

What is e-procurement? Understanding the procurement process

Answer 37

Before the advent of e-procurement, organisational purchasing processes had remained similar for decades. The paper-based process involves the end-user selecting an item by conducting a search and then filling in a paper requisition form that is sent to a buyer in the purchasing department. The buyer then fills in an order form dispatched to the supplier. After the item is delivered, the item and a delivery note are usually reconciled with the order form and an invoice and then payment occurs. Procurement also includes the transport, storage and distribution of goods received within the business – this is referred to as inbound logistics.
IFO-Basware (2012): study of the global adoption of e-invoicing in business of all sizes in key markets. The report showed a continuing increased adoption and use of e-invoicing and automated payment processing. Faster invoicing cycles and reduced invoice costs were the top two e-invoice benefits experienced by respondents.
However, the challenges of implementing e-invoicing solutions were highlighted by a continued reliance on rudimentary electronic documents and manual processes. Overall. Levels of fully automated e-invoicing were increasing but needed improvement.

Question 38

Types of procurement

Answer 38

Consider the different types of items that are obtained by procurement and types of ordering.
A b2b company might buy everything from steel for manufacturing products, through equipment to help machine products, to paper clips and pens for office use. Two broad categories of procurement:
- Items that relate to manufacturing of products (production-related procurement);
- Operating or non-production-related procurement, which supports the operations of the whole business and includes office supplies, furniture, IS, MRO goods and a range of services from catering to travel, and professional services such as consulting and training.
Raw materials for the production of goods and MRO goods are particularly important since they’re critical to the operation of a business. Businesses tend to buy by one of two methods:
* Systematic sourcing.
* Spot sourcing.
Often items such as stationery are purchased repeatedly, either for identical items (straight rebuy) or with some changes (modified rebuy). E-procurement systems can make rebuys more straightforward.

Question 39

Participants in different types of e-procurement

Answer 39

Riggings and Mitra (2007): 8 types of intermediary that need to be reviewed to understand options for changes to procurement as part of developing an e-procurement strategy:
* Traditional manufacturers, which produce physical goods generally sold to other corporate customers.
* Direct sales manufacturers, similar to traditional manufacturers but bypass intermediaries and sell direct to end consumers via web or phone channels. They can be a cost-effective option for companies procuring business services.
* Value-added procurement partners, intermediaries to sell products/services to other businesses.
* Online hubs, which are industry-specific vertical portals that generate revenues via b2b exchange.
* Knowledge experts, who produce information goods.
* Online information services, provide unique info to end users that is either original in its development or provides a unique editorial perspective.
* Online retailers, include start-up digital businesses and more traditional multichannel retailers.
* Portal communities, aggregate different online information services into an integrated customer experience. These overlap with the online information services and knowledge experts.
Knudsen (2003) and Smart (2010): main types of different types or applications of e-procurement:
1. E-sourcing. Finding potential new suppliers using the Internet during the information-gathering step of the procurement process.
2. E-tendering. The process of screening suppliers and sending suppliers requests for information (RFI) or requests for price (RFP).
3. E-informing. Qualification of suppliers for suitability. It doesn’t involve transactions but handles info about the supplier’s quality, financial status or delivery capabilities.
4. E-reverse auctions. Enable the purchasing company to buy goods and services that have the lowest price or combination of lowest price and other conditions via Internet technology.
5. eMRO and web-based ERP. These involve the purchase and supply of products that are the core of most e-procurement applications. The software used manages the process of creating and approving purchasing requisitions, placing orders and receiving the goods or services ordered.

Question 40

Riggings and Mitra (2007): 8 types of intermediary that need to be reviewed to understand options for changes to procurement as part of developing an e-procurement strategy:

Answer 40

• Traditional manufacturers, which produce physical goods generally sold to other corporate customers.
• Direct sales manufacturers, similar to traditional manufacturers but bypass intermediaries and sell direct to end consumers via web or phone channels. They can be a cost-effective option for companies procuring business services.
• Value-added procurement partners, intermediaries to sell products/services to other businesses.
• Online hubs, which are industry-specific vertical portals that generate revenues via b2b exchange.
• Knowledge experts, who produce information goods.
• Online information services, provide unique info to end users that is either original in its development or provides a unique editorial perspective.
• Online retailers, include start-up digital businesses and more traditional multichannel retailers.
• Portal communities, aggregate different online information services into an integrated customer experience. These overlap with the online information services and knowledge experts.

Question 41

Knudsen (2003) and Smart (2010): main types of different types or applications of e-procurement

Answer 41

1. E-sourcing. Finding potential new suppliers using the Internet during the information-gathering step of the procurement process.
2. E-tendering. The process of screening suppliers and sending suppliers requests for information (RFI) or requests for price (RFP).
3. E-informing. Qualification of suppliers for suitability. It doesn’t involve transactions but handles info about the supplier’s quality, financial status or delivery capabilities.
4. E-reverse auctions. Enable the purchasing company to buy goods and services that have the lowest price or combination of lowest price and other conditions via Internet technology.
5. eMRO and web-based ERP. These involve the purchase and supply of products that are the core of most e-procurement applications. The software used manages the process of creating and approving purchasing requisitions, placing orders and receiving the goods or services ordered.

Question 42

Drivers of e-procurement

Answer 42

Smart (2010): review of the business benefits of e-procurement through case studies of 3 companies; 5 key drivers or supplier selection criteria for e-procurement adoption related to improving:
1. Control – improving compliance, achieving centralisation, raising standards, optimising sourcing strategy and improved auditing of data. Enhanced budgetary control is achieved through rules to limit spending and improved reporting facilities.
2. Cost – improved buying leverage through increased supplier competition, monitoring savings targets and transactional cost reduction-
3. Process – rationalisation and standardisation of e-procurement processes giving reduced cycle time, improved visibility of processes for management and efficient invoice settlement.
4. Individual performance – knowledge sharing, value-added productivity and productivity improvements.
5. Supplier management – reduced supplier numbers, improved supplier management and selection and integration.
Direct cost reductions through efficiencies in the process. Process efficiencies result in less staff time spent in searching and ordering products and reconciling deliveries with invoices. Savings also occur due to automated validation of pre-approved spending budgets for individuals or departments, leading to fewer people processing each other, and in less time. It’s also possible to reduce the cost of physical materials.
There are also indirect benefits from e-procurement; the cycle time between order and use of supplies can be reduced. In addition, e-procurement may enable greater flexibility in ordering goods from different suppliers according to best value. E-procurement also tends to change the role of buyers in the purchasing department. By removing administrative tasks, buyers can spend more time on value-adding activities, that may include more time spent with key suppliers to improve product delivery and costs or analysis and control of purchasing behaviour.
Riggins and Mitra (2007): also be used to review strategy since it highlights potential benefits in terms of process efficiency and effectiveness and strategic benefits to the company; main dimensions of value:
* Planning – shows the potential for an e-procurement system to increase the quality and dissemination of management info about e-procurement.
* Development – e-procurement systems can be incorporated early in new product development to identify manufacturing costs; this can help accelerate development.
* Inbound – the main focus of e-procurement, with efficiency gains from paperless transactions and more cost-effective sourcing possible through hubs or marketplaces. A strategic benefit is vendor-managed inventory (VMI), where supply chain partners will manage the replenishment of parts or items for sale.
* Production – the integration of systems managing manufacture with the procurement systems used to ensure that manufacturing isn’t limited by poor availability of parts.
* Outbound – management of fulfilment of products to customers. It’s not usually managed by the e-procurement system, but demand must be evaluated by linking through these systems to achieve efficient consumer response (ECR).

Question 43

Smart (2010): review of the business benefits of e-procurement through case studies of 3 companies; 5 key drivers or supplier selection criteria for e-procurement adoption related to improving:

Answer 43

1. Control – improving compliance, achieving centralisation, raising standards, optimising sourcing strategy and improved auditing of data. Enhanced budgetary control is achieved through rules to limit spending and improved reporting facilities.
2. Cost – improved buying leverage through increased supplier competition, monitoring savings targets and transactional cost reduction-
3. Process – rationalisation and standardisation of e-procurement processes giving reduced cycle time, improved visibility of processes for management and efficient invoice settlement.
4. Individual performance – knowledge sharing, value-added productivity and productivity improvements.
5. Supplier management – reduced supplier numbers, improved supplier management and selection and integration.

Question 44

Riggins and Mitra (2007): also be used to review strategy since it highlights potential benefits in terms of process efficiency and effectiveness and strategic benefits to the company; main dimensions of value:

Answer 44

• Planning – shows the potential for an e-procurement system to increase the quality and dissemination of management info about e-procurement.
• Development – e-procurement systems can be incorporated early in new product development to identify manufacturing costs; this can help accelerate development.
• Inbound – the main focus of e-procurement, with efficiency gains from paperless transactions and more cost-effective sourcing possible through hubs or marketplaces. A strategic benefit is vendor-managed inventory (VMI), where supply chain partners will manage the replenishment of parts or items for sale.
• Production – the integration of systems managing manufacture with the procurement systems used to ensure that manufacturing isn’t limited by poor availability of parts.
• Outbound – management of fulfilment of products to customers. It’s not usually managed by the e-procurement system, but demand must be evaluated by linking through these systems to achieve efficient consumer response (ECR).

Question 45

Examples of the benefits of e-procurement

Answer 45

The primary drivers are efficiency and cost reduction. In many cases, the cost of ordering exceeds the value of the product purchased.
Case Study 6.5: Honeywell improves efficiency through SCM and e-procurement

Question 46

Estimating e-procurement costs

Answer 46

The general approach to estimating procurement costs is straightforward. First, we calculate the average procurement cost per item, then we multiply by the average number of requisitions. To calculate cost savings from e-procurement:
Savings = No. of requisitions x (Original cost – New cost)

Question 47

The impact of cost savings on profitability

Answer 47

Kluge (1997): cost savings achieved through e-procurement may have a significant effect on profitability. The largest savings and impact on profitability will typically be for manufacturing companies in which procurement is a major cost element and there are many requisitions for low-value items. Consequence: a wide variation in potential savings according to industry.

Question 48

Barriers and risks of e-procurement adoption

Answer 48

There’re also barriers to adoption of e-procurement. CIPS (200): issues for suppliers:
* Competition issues;
* Possible negative perception from suppliers;
* Negotiated procurement benefits may be shared with other exchange users who may be competitors;
* Creation of catalogues can be a long process and costly to suppliers;
* Culture profile within organisations.
Since cost savings of e-procurement are achieved through empowerment of originator throughout the business to directly purchase their items, there’s a risk that some originators may take advantage of this.

Question 49

Implementing e-procurement

Answer 49

Implementing e-procurement has the challenges of change management associated with any IS. If the implementation can mirror existing practices, then it will be mostly straightforward, but many of the benefits won’t be gained and the use of new technology often forces new processes to be considered. CIPS (2008): forcefully makes the case that some re-engineering will be required.
IS manager and procurement team must work together to find a solution that links together the different people and tasks of procurement. Different types of systems:
* Stock-control system –production-related procurement; reordering is required when the number in stock falls below reorder thresholds.
* CD or web-based catalogue – paper catalogues replaced by electronic forms that make it quicker to find suppliers.
* Email or database-based workflow systems –integrate the entry of the order by the originator, approval by manager and placement by buyer. Systems may be extended to accounting systems.
* Order entry on website – buyer often can order directly on the supplier’s website, but this will involve rekeying and there’s no integration with systems for requisitioning or accounting.
i. Accounting systems – networked accounting systems enable staff in the buying department to enter an order, which can then be used by accounting staff to make payment when the invoice arrives. IFO-Basware (2012) global e-invoicing reports that automation is still limited, with around half of companies receiving email invoices with PDF attachments. A half receive XML e-invoices using a service provider and 14% with their own system.
ii. Integrated e-procurement or ERP systems – aim to integrate all the facilities above and will include integration with suppliers’ systems.
Companies face a difficult choice in achieving full-cycle e-procurement, since they have the option of trying to link different systems or purchasing a single new system that integrates the facilities of the previous systems. Purchasing a new system may be the simplest technical option, but it may be more expensive than trying to integrate existing systems and it also require retraining in the system.

Question 50

IS manager and procurement team must work together to find a solution that links together the different people and tasks of procurement. Different types of systems:

Answer 50

• Stock-control system –production-related procurement; reordering is required when the number in stock falls below reorder thresholds.
• CD or web-based catalogue – paper catalogues replaced by electronic forms that make it quicker to find suppliers.
• Email or database-based workflow systems –integrate the entry of the order by the originator, approval by manager and placement by buyer. Systems may be extended to accounting systems.
• Order entry on website – buyer often can order directly on the supplier’s website, but this will involve rekeying and there’s no integration with systems for requisitioning or accounting.
  i. Accounting systems – networked accounting systems enable staff in the buying department to enter an order, which can then be used by accounting staff to make payment when the invoice arrives. IFO-Basware (2012) global e-invoicing reports that automation is still limited, with around half of companies receiving email invoices with PDF attachments. A half receive XML e-invoices using a service provider and 14% with their own system.
  ii. Integrated e-procurement or ERP systems – aim to integrate all the facilities above and will include integration with suppliers’ systems.

Question 51

Integrating company systems with supplier systems

Answer 51

High cost and cycle-time benefits can be achieved. But if integrating systems within a company is difficult, then linking with other companies’ systems is more so. This situation arises as suppliers will use different types of systems and different models for integration. 3 fundamental models for location of b2b e-commerce: sell-side, buy-side and marketplace-based.
Specialised e-procurement software may be necessary to interface with the ERP system. This could be a special e-procurement application or it could be middleware to interface with an e-procurement component of an ERP system. The e-procurement system can access price catalogues in 2 ways:
A. House electronic catalogues from different suppliers inside the company and firewall.
Benefit: data is housed inside the company and can be readily accessed. However, electronic links beyond the firewall will be needed to update the catalogues, or this is achieved via delivery of a CD with the updated catalogue.
B. Use a punchout catalogue where access through the firewall is used to access catalogues on a supplier or intermediary site, ideally within a standard format.
Benefits: this has done the work of collecting data from different suppliers and producing it in a consistent format.

Question 52

B2b marketplaces

Answer 52

Before 2000, b2b marketplaces were heralded as transforming b2b purchases; however, many have had difficulty in achieving sustainable business models, although there’re examples of successful marketplaces in vertical industries.
Electronic b2b marketplace are known as marketplaces, exchanges or hubs. They’re intermediaries that are part of the reintermediation phenomenon and are independent of buyers and suppliers.
Private b2b exchanges are usually created by an individual manufacturer or supplier and include a walled garden of suppliers.

Question 53

Types of marketplaces

Answer 53

Kaplan and Sawhney (2000): taxonomy of b2b marketplaces by applying existing classifications of corporate purchasing, namely how businesses buy and what businesses buy. They identify 4 types of marketplaces. Manufacturing-input marketplaces: vertical marketplaces set up for a particular industry, while operating resources tend to be horizontal marketplaces offering a range of products to differing industries.
They introduced another variation in the way marketplaces differ. This is according to whether the marketplace is direct between buyer and seller or whether some degree of aggregation occurs. Volume discounts can be achieved through combining the purchasing power of individual. This type of aggregation is reverse aggregation: aggregation is back through the supply chain from customers to suppliers. Forward aggregation: the supply chain operates through distributors in a traditional way.
Sawhney (1999): companies looking to create exchanges, although some b2b marketplaces do offer both catalogue hubs and exchanges.
Some marketplaces also differ in the range of services they offer. Sawhney (1999): refers to these marketplaces as metamediaries.

Question 54

The future of e-procurement

Answer 54

Some suggest that the task of searching for suppliers and products may be taken over by software agents that have defined rules or some degree of intelligence that replicates intelligence in humans. On the Internet, agents can be used for marketing research by performing searches using many search engines, and in the future, they may also be used to search for products or to purchase products. Agents work using predetermined rules or may learn rules using neural network techniques. Such rules will govern whether purchases should be made or not.
Gartner (2017): basic artificial intelligence or machine learning is being used by some procurement applications to help automate the process of collecting, classifying and analysing an organisation’s expenditure to help identify saving or find new ways to create better efficiency. In the next stage on, some procurement technology vendors are creating cognitive procurement advisors and virtual personal assistants to help increase automation and efficiency.
Tucker and Jones (2000): also review the use of intelligent agents for sourcing; they foresee agents undertaking evaluation of a wide range of possible alternative suppliers based on predefined quantitative selection criteria. It’s not clear is how the software will assess trustworthiness of a supplier or their competence as a business partner or associate.