Technological Evolution and Supply Chain Management
Around 1990, a combination of factors began to change the role of logistics in major corporations. Quality initiatives and re-engineering were forcing companies to evaluate entire processes, rather than individual components. Supply-chain management, the integrated control over goods, information, and money, became the key facilitator in this new approach.
In essence, supply-chain management represented an attempt to develop a unified process by which goods and services would be produced for customer sale and consumption. Furthermore, logistics was now being considered as more than simply an opportunity to minimise cost – it was developing into a core component of corporate profitability.
More recently, the Internet has become part of people’s daily lives, and during that time a steady progression of Internet innovations has occurred. Internet browsers and the development of the World Wide Web made the Internet accessible. Search engines were developed in response to the proliferation of Web sites. Commercialisation of the Internet, initially Business-to-Consumer, spawned online shopping. Search engines morphed into portals, adding content, shopping, and other items. Finally, e-commerce came into full fruition with the online auction leading the way, illustrating what potential the technology posed for organisations with regards to purchasing. It follows that suppliers quickly warmed up to the Internet, with the aim of fulfilling supplier expectations.
The Current Situation of E-Commerce
E-commerce basically exists along two dimensions. The first dimension defines the parties: Business-to-Business (B2B) or Business-to-Consumer (B2C). The second dimension defines the transactional nature. Here exist several categories of service types. Sell-side servers are electronic storefronts and catalogues that manage the purchase process from the selection of items through payment. Buy-side servers provide the capabilities for purchase orders to be entered and fulfilled. Marketplace applications establish electronic communities that both buyers and sellers can access (Prince, 2000). Whilst this model is simplistic in nature it is still applicable, to a large extent, when the system is scaled up – a major issue in B2B commerce that is discussed later.
The Business-to-Commerce Market
The B2C market has taken a recent pounding in the dot.com bubble burst that was arguably prophesied by the collapse of boo.com, an exclusive on-line sports retail ‘store’, in May 2000 – the first and financially largest B2C brand to attempt a simultaneous launch around the world. A friend and ex-employee working in Business Development suggested that an over-enthusiastic management dogged the company, spending money lavishly and relying on the idea that “new economy equals new business rules.
However, one of the key contributors to boo.com’s failure was the implementation of the logistics system. Having overspent in the development phase, the boo.com management realised that whilst the key to short-term profitability was in setting-up an in-house logistics and supply system, the required set-up costs were highly prohibitive.
The company opted to outsource the storage and distribution to two companies in two locations; DHL in Cologne, Germany (serving Europe) and UPS in Kentucky, USA (serving USA and rest of world). This was done despite optimistic projection that the outsourcing model would place boo.com in profit five years after launch, and incur massive overheads.
Due to this and other contributing factors, after two years of pre-launch work and six months live on-line, the company was forced into liquidation; venture capitalists (VCs) got cold feet, and refused further funding to bail the company out – a trend that has accelerated in the B2C market. This has had a knock on effect with the B2B market, but the fact that B2B start-ups are still getting VC funding (Covisint and Commerce One are such examples), suggests that the ideas behind B2B have passed a reality-check sorely lacking in the Internet consumer market.
A further change in attitude towards the B2C market can be found in retail companies, such as bookstores, who are realising that the Internet is simply another avenue to reach customers. Whilst many pre-existing companies were worried about start-up ventures eroding their market share, (Amazon.co.uk for example) it has now transpired that start-ups were learning logistic lessons the hard way. Recently, many high-street retail-stores such as Blackwells and Argos have entered the Internet market, with a well-known brand name and a pre-existing logistics system that has been extended to accommodate the Internet.
However, this is not a simple exercise, and one should note the troubles of Toys ‘R’ Us, whose logistics system broke down during the Christmas 1999 shopping season because the company couldn’t handle the onslaught of customers looking to buy via its Web site. The toy retailer’s online order-management tools weren’t coordinated with the both the systems and the people overseeing the movement of products through the supply chain. (Shah, 2000)
Personal experience, on the other hand, suggests that these bricks-and-mortars companies are faster and more reliable in delivering orders (especially obscure textbooks) when compared to Internet-only brands. It would be an interesting exercise to formulate this idea; so far, such information has eluded the author.
Since we have seen that the B2C market is in difficulties and that, in the short to medium term, the Internet will only really be used as an extension to the shop-front, this report will concentrate on the financially vaster B2B commerce market that encompasses a broad range of inter-company transactions. This includes wholesale trade as well as company purchases of services, resources, technology, manufactured parts and components, as well as insurance and financial services.
The Size of the Business-to-Business Market
The potential size of B2B e-commerce in the economy is vast, though somewhat difficult to pin down. Jupiter Communications (2000) estimates that overall transactions of goods (excluding services) between businesses in the United States should amount to $11.5 trillion in 2000, of which $336 billion are conducted electronically.
By 2005, they expect the online component to represent $6.3 trillion out of a total of $15.1 trillion. The Gartner Group estimates it to be $7.29 trillion by 2004 (Montgomery Research, 2000). A bit more modestly, Goldman Sachs (2000) projects B2B e-commerce trans actions to reach $4.5 trillion worldwide by 2005. The Gartner Group estimates that there were $90 billion in Internet B2B transactions in 1999, by comparison with only $16.7 billion in Internet B2C transactions, including brokerage fees for online financial trading as well as retail sales of goods (Uchitelle, 2000).
The Impact of Business-to-Business E-Commerce
E-commerce innovations aim to reduce the cost of procurement before, during and after the transaction. At every stage, e-commerce avoids the need to translate computer files into paper documents, a process that generally involves errors, delay and costly clerical personnel. E-commerce automates this process by mediating transactions through Web sites and Electronic Data Interchange (EDI). Note that EDI is an e-commerce technology older than the World Wide Web that involves point-to-point communications done over proprietary networks, rather than over the Internet. Relative to EDI, Internet commerce offers considerable advantages in terms of cost and convenience. Internet commerce typically makes use of open standards and off-the-shelf technology on a global network, while EDI relies on customised hardware and software. (Eriksen, 2000).
Before the transaction, Internet technology may lower the cost of searching for suppliers or buyers and making price and product comparisons. Search costs can be significant relative to the value of the product, particularly for small purchases. Alf Sherk, the founder of e-Chemicals, claims: “When you’re dealing with one or two drum quantities, the cost of comparison shopping can be more than the value of the product??? (Jones, 1999).
Sales personnel acting as sales representatives have traditionally carried out such mundane tasks as tracking product availability and pricing and supplying such information to customers. By automating these information services, e-commerce relieves sales personnel of these tasks, allowing them to concentrate on account management and marketing strategy (Slade, 2000).
During the transaction, e-commerce can reduce the cost of communicating with counterparts in other companies regarding transaction details. Transactions over computer networks avoid many of the associated costs of interpersonal economic exchange, including the costs of travel, time spent on communication, physical space for meetings, and processing paper documents.
After the transaction, electronic commerce allows companies to lower costs of communication, to monitor contractual performance, or to confirm delivery. In addition, companies can apply information generated by the transaction to update their inventory, production and accounting records by automatically linking their transactions to software used for managing all aspects of the firm including sales, purchasing and operations.
The potential cost savings in this area are substantial. Processing a purchase order manually, including paperwork, data entry, phone calls, faxes, and approval requests, can be quite expensive, so online transactions might easily reduce costs by a factor of five or ten or more. There is evidence that such cost reductions are possible. British Telecom estimates that by moving external procurement functions to electronic commerce, it has reduced its costs from $113 to $8 per transaction (Phillips and Meeker, 2000).
MasterCard estimates that the cost of processing purchase orders has fallen from $125 to $40, with the time involved cut from 4 days to 1.25 days (Alaniz and Roberts, 1999).
Lehman Brothers finds that a financial transaction is $1.27 for a teller, $0.27 for an ATM and $0.01 for an online transaction (The Economist, 2000). Online brokerage fees have fallen to below $5 in comparison with traditional discount brokerage fees exceeding $50, suggesting a decrease in costs in back-office operations and brokerage transactions with financial exchanges. Even if such estimated savings are greater than average or vary across industries, their aggregate impact is likely to be enormous. By lowering the costs of transactions, e-commerce will change not only operating costs but also the characteristics and scope of feasible transactions.
Business-to-Business E-Commerce Supply Chains
In an effective B2B e-commerce environment, the supply-chain can easily be viewed as a single virtual enterprise, a true value chain in which all resources use Internet technologies to communicate and collaborate effectively, providing and gaining instant access to information.
An efficient supply-chain can be realised by integrating all its business applications electronically. A complete B2B e-commerce solution can be realised by integrating IT systems at two levels. For any organisation, the first level of integration is required with the rest of the internal business, while the second level of integration is required between supply-chain partners and customers. Many business customers are shifting purchasing, logistics, and overall supply management to the Internet to shorten supply chains. To this end, it is predicted that within five years it is likely that 20 percent of all business transactions will be carried out electronically. (Australian Internet & E-Commerce Special Report, 2000)
One of the biggest challenges in any supply-chain is getting the right information to the right place at the right time. Traditional supply-chains have been dominated by fax and batch information transfers, mechanisms that are faltering under the new requirements for speed, flexibility and ever increasing volumes of data. The key to better supply-chain performance is to ensure that all the members of the chain can create, share, and use the information that drives their collective business.
For most organisations, years of accumulating independently developed applications running on a cross-section of hardware systems have resulted in complex and sometimes unwieldy IT environments. The diversity of applications ranges from common packaged desktop software and front-end applications, such as sales force automation, to the Enterprise Resource Planning (ERP) software (e.g. e-manufacturing, distribution, HR, financial management applications) to custom-developed applications. External systems and technologies encountered through the supply-chain further complicate the problem of integrating all of these dissimilar systems. The key to a really efficient supply-chain is application integration.
Application integration involves:
- The transportation and transformation of data between one or more business applications;
- The business rules that govern when this transportation and transformation takes place;
- The integrity constraints that determine the success or failure of the integration. (Prince, 1999)
However, the really exciting aspect of e-commerce supply chains is on the level beyond application integration, as illustrated in figure 1. As the supply-chain evolves in the information age, the Web’s capability to support tight coordination between business partners means that all the information, transactions, and decisions that are the essence of synchronised supply chains will flow through the Web.
Using the Internet to connect the systems of supply-chain partners will become the medium through which the essential processes of managing and synchronising supply chains are carried out. As it does so, it will change the nature of supply-chain businesses completely. Anderson (2000) states, “A company that misses this distinction [integration versus synchronisation] is in grave danger. It may find itself celebrating the squeezing of supplier margins at auction or the reduction in inbound inventory by sharing forecasts while its competitor builds a tightly linked alliance that shuts it out of the channel to the market completely.???
Using On-line Markets to Revolutionise Buying and Selling
As mentioned earlier, the real benefits of e-commerce with regard to purchasing and supply come at the level beyond simple auctions. Once an organisation is synchronised with itself (especially if it is large) and other companies and even an entire industry, the benefits of dynamic supply networks can be harnessed. These networks tackle the inefficiencies that build up when no one company has ability to view the supply system as a whole.
For an example, consider two companies with operations in the same region that are ordering items from overseas. Each will be placing orders with similar logistics requirements (similar pick-up point, similar destination, similar time-frame) but no one has the network visibility to see the logic of bundling the products together to reduce transport costs and provide an improved service. (Moore, 2000)
Dynamic supply networks operate on the basis that there are multiple points of supply and multiple points of delivery that must be actively managed as a network. The network managers or even autonomous software agents (Gabbai, 2000) create value by gaining complete visibility across the network, and are therefore in a position to maximise the efficiency of the total network.
The customers of the network see the reduced costs and better service of the system and tend to be comfortable participating with their competitors as inbound logistics is rarely seen as a point of differentiation.
The benefits from dynamic supply networks come from the combination of greater automation of processes and the ability to consolidate purchase orders across supplier and transport providers. An early benefit is the reduction of administrative costs for each transaction. The major cost reduction target is transportation by consolidating loads and reducing unplanned shipments. However, improved visibility of demand across several companies creates the opportunity to drive down procurement costs through not only volume price breaks with customers, but also a more powerful negotiation position.
Further, tighter control of the supply side allows managers to gain other efficiencies elsewhere in the supply chain. Lower inventories, fewer stock outs that lead to lower production losses, and better customer service are some of the secondary benefits that may be achieved (Moore, 2000).
Purchasing and Supply in the Aerospace and Automotive Sectors
Boeing Co., Lockheed Martin Corp, BAE Systems and Raytheon Co., four giants in an aerospace market with over $400 million in annual sales have recently agreed to join forces to create the largest B2B industry portal. (BAE Systems, 2001)
Initially, the four aerospace companies will equally share 75 percent of a new company being formed to operate the exchange. Adjustments will be made proportional to each founder’s flow of e-commerce through the exchange in its first three years. Twenty percent will be reserved for additional exchange participants. Commerce One Inc. providers of the exchange software, a system designed to support layers of common and proprietary components, will control another 5 percent. Such layering, the participants say, lowers risk by enabling gradual integration of new and old technologies. (Lawrence, 2000)
The range of aerospace and defence commodities available on the exchange will be very substantial. Examples include raw materials; expendable parts such as fasteners, fittings and brackets; technical data, aircraft components, defence electronic components and aftermarket parts.
Thomas Gonzales, Commerce One’s chief technical officer said, “A typical commercial airplane, for instance, contains as many as six million parts and is supported by millions of pages of technical documentation… In addition, there will be an e-marketplace for the indirect products and services that aerospace companies, airlines and their suppliers need to operate their businesses.??? (Commerce One, 2000)
Commerce One maintains that the ability of software to evolve will influence major aspects of commerce software systems. Issues addressed in the aerospace/defence exchange include:
- Cost of ownership, i.e., the cost of updating and changing systems to meet new business requirements;
- Capitalisation on new business opportunities by extending existing commerce systems and building new ones;
- Increased efficiency through improvement of business processes supported by partnering commerce systems;
- Heightened interconnectivity in the business process, business protocol and technology levels;
- Market growth and cost reduction through interoperability with new customers and partners. (Lawrence, 2000)
This third party logistics model is increasingly popular, and has recently been adopted by the automotive industry, headed by Covisint (partnered with Commerce One). They intend to provide a hub into which automotive buyers and suppliers can trade information as well as products, in an efficient and visible manner. (Covisint, 2001)
Covisint predict that the average savings made between suppliers and the Original Equipment Manufacturer (OEM) to be in the region of $1,064 per car. This figure is split fairly down the middle between the OEM and its suppliers. This figure spans across savings from warranty expenditure, and inventory carrying through to specification alignment. These savings total a projected value of $13.8 billion in savings to the American auto industry. (Commerce One/Covisint, 2001)
From the information presented in this report, one can initially say that the move from traditional logistics to e-commerce based systems is a certainty in many large industry sectors – the current and future amounts of money in B2B trading are a testimony to that. However, placing a financial benefit to supply-chain management through e-commerce is a difficult task. Triplett and Bosworth (2000) observe that economic changes attributable to e-commerce cross the traditional production boundary used in national accounts.
As an example, they compare the purchase of a book from a traditional retailer with the purchase of a book from an online retailer. Comparing the prices in the two settings ignores the costs of travel and time involved in visiting the traditional retailer, while explicitly counting the costs of shipping and handling for the online purchase. In the case of B2B e-commerce, one would like measurement of productivity to reflect total net benefits, including lower search and procurement costs for buyers and sellers. A related question is how much of the current activities of companies in manufacturing, contraction, energy, transportation are devoted to production operations and how much are attributable to transactions.
Why is this radical change so certain? It is not that the technology is “fashionable,??? nor even that there are efficiencies to be gained. At the heart of the matter are customers’ ever increasing demands. Customers – whether they are business customers or individual consumers – are looking beyond cost as the sole differential of value. They are demanding innovation and personalisation of not only the products but of the associated service and delivery. The increased variety and velocity of business increases the complexity of the supply-chain issues exponentially and yet at the same time requires even greater flexibility.
Whilst simple ideas of supply-chain e-commerce have been presented, such as the on-line auction, and B2C purchasing as an extension to a business, it is the ability to integrate multiple systems and various organisations and even industries that will ultimately justify the use of e-commerce supply-chains.
The competitive power in this environment will lie with a network of business partners who each bring the specific capabilities to bear. But the supply-chain activities of these partners must be tightly synchronised with the demands of the market place. That level of coordination requires not only the ability to communicate but also the capability to manage the complexity and immediacy of synchronisation.
Prince (1999) states “The impact on the way the supply-chain operates is far-reaching: the supply-chain as it is known today will effectively disintegrate; the management of supply-chain activities will become far more dynamic and decision-making will occur faster and will be based on real-time information.???
However, as with all things complex, there are many potential pitfalls. The huge complexity in systems integration, which is fundamental for an efficient and workable supply-chain system that is integrated to other systems is surly a major issue. For example, companies will need to set up a platform that enables suppliers and customers to retrieve information about the demand picture, forecasts, delivery dates, shipment tracking, and other data necessary for planning their business suggestions. A logistics hub would allow buyers, sellers, distributors, and transportation providers to tap into one central source, pull data from ERP systems, and receive order-tracking alerts and notification of potential problems. (Shah, 2000)
However, according to Roger W. Lowther, vice president of transportation services at USCO Logistics, a logistics provider in Palo Alto, USA, companies shouldn’t plunge into technology complexities. Many companies don’t consider logistics a core competency, and the only alternative is farming out logistics functions to third-party logistics providers (3PLs).
In some ways, though, the 3PLs could be at the innovative forefront on the e-commerce supply-chain. These specialist logistics groups will not own any traditional logistics assets, but rather will manage the systems and make the decisions related to the supply-chain network. Furthermore, as with the Commerce One business model, they will provide the means to connect proprietary and non-proprietary trading systems to a massive network hub, where a whole industry can reap the benefits of global trading and high visibility.
As Covisint (Commerce One/Covisint, 2001) have identified, the 3PL model will tend to increase the need for a centralised control (see figure 2), as well as being highly flexible and scalable. Whilst this model is simple to comprehend, it has major drawbacks. Scalability is not simple to attain (just look at scalability problems in SAP software implementation), and by having one central hub, suppliers and purchasers are relying on the reliability of one partner. Furthermore, should a technical difficulty, virus, or even a malicious hacking attack occur, the entire system can break down (Australian Internet & E-Commerce Special Report, 2000). The peer-to-peer system that relies on many individual connections lacks the visibility of the central hub system, but is much more reliable; should one supplier system go down, the overall network will still operate. A compromise between the two systems may offer more reliability and functionality in the future (Gabbai, 2000).
Ultimately, it is suggested that, as with new business models and technologies, it is uncertain what types of market mechanisms will be favored by e-commerce and the relative importance of different types of intermediaries. Will industry consortia own B2B exchanges or will they tend toward independence? Reiley (2000)
The plethora of entrants and business models, and the significant returns to market consolidation, suggest that substantial entry and exit of firms and models will take place before the true and substantial benefits of B2B purchasing and supply e-commerce are obtained.
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