E-Business : from Demand Networks to TechnoLogistics Angel Díaz Professor of Logistics and Supply Chain Management ISLI, Bordeaux School of Business

"If you sell you have to deliver". This phrase should be remembered by all that try to engage in the e-business revolution disregarding the back-office, the necessary logistics system. In this article we examine the forces that drive companies to work into tightly integrated networks, propose a taxonomy of the e-business solutions that this tight integration requires, and discuss their implicit supply chain strategies. This article constitutes a set of hypothesis currently being empirically tested at ISLI. The world has become a very confusing place. Less than a decade ago, firms were being forced by the Enterprise Resources Planning (ERP) revolution into a radical alteration of their internal operations. Now e-business and the Internet are driving further changes – this time in firms’ external environment. Consider the following scenario: A product’s end user, located in Bordeaux for example, receives on his/her WAP phone a new on-line retail catalogue from a retail outlet, in Toulouse, from which it regularly buys goods. The end user places an on-line order. The retail outlet discovers that the article is not available at its Bordeaux warehouse, and decides to place an order with the manufacturer (i.e., in Barcelona), whose factory planning system checks on the raw materials’ availability with its own supplier (located in Lisbon); organises the purchase of these materials; schedules a production sequencing; and gives the retail outlet in Toulouse a firm delivery date. This firm then reverts to the ultimate customer in Bordeaux and agrees a final delivery date and price. Its internal system handles the booking of a consolidated third party transport to Bordeaux, as well as the electronic payment of the order. This process, which involves five different companies, takes place in just a few seconds, and the end user finds it completely transparent.

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To discuss all of the issues that would be involved in a transaction of this nature, we briefly review some current literature in the field of inter-firm collaboration; propose a taxonomy of e-business sites; and examine some of their logistical implications.

Moving towards Demand Networks The concept of a supply chain implies a push approach to the basic single-pipe process - yet firms increasingly operate as complex, customer-oriented networks. Although most managers are familiar with the market-related, pull-side causes of this new mode of organization (including globalisation), the technology-related, push-side causes are usually less obvious. On one hand, this second, external group of organizational drivers translate the arrival of a new and inexpensive universal communications medium (the Internet). On the other hand, they reflect advances in logistical practices, namely: Quick Response, Efficient Consumer Response (ECR), Collaborative Planning, Forecasting and Replenishment (CPFR). Over the years, a great deal has been written on the subject of inter-firm collaboration. One concept that appears in much of this literature involves the idea of Industrial Networks, a variation on the old notion of industrial districts (Ebers & Jarillo, 1998).

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Supplier

Factory

Retailer

Supplier

Retailer

Factory

Without stocks slow response, high

Without stocks rapid response, lower

production and transportation costs

production and transportation costs

Industrial Networks are groups of organizations whose ties to one another result from the associations that they have repeatedly renewed whilst in the process of serving a given market. The drivers underlying this particular type of collaboration have been extensively analysed, and include the joint-specialisation strategies that firms pursue; the search for mutual learning, in an effort to accelerate product development and improve information and product flows (thereby reducing costs and lag times); the generation of virtual scale and scope economies; and the creation of entry barriers (Cervilla and Lorenzo, 2000; Hinterhuber and Hirsh, 1998; Gomes-Casseres, 1994). Another important factor involves the particular form of network collaboration that is chosen: buyer-supplier relationships, joint activities, informational ties, strategic alliances, joint ventures, consortia, and long-term supply partnerships. This rich conceptual backdrop is a platform for better understanding the various ways in which IT-related phenomena can be applied to the supply chain. Two practical exercises help us to exemplify the conceptual platform underlying the need for greater collaboration. The first involves imagining a simple chain that is made up of a supplier, a factory and a retailer. Suppose that a mischievous but benign superior force has made all inventory disappear from the face of the earth. As there are no stocks, when the end user demands the product, the retailer must place an order with the manufacturer, which in turn has to place an order with its own supplier(s). Eventually materials flow down the chain, but response times can be long, and production and transportation

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Figure 1. De-coupling a horizontally integrated process

costs high (due to the absence of scale economies). Now, in a scenario where the existence of stocks is permitted, the customer can walk away with the product at almost any time; consolidated “batched” operations become feasible; and this reduces production and transportation costs. Unfortunately the greater ease of a “batching” process is offset by the need to carry a large and expensive inventory, by the process’s hidden inefficiencies, and, perhaps most importantly, by the de-coupling of what had been an integrated horizontal process into three vertical "silos", each of which is trying to optimise its own sphere of activity, regardless of the consequences for the other elements that comprise the chain. The second exercise is the famous Beer Game, created by MIT’s System Dynamics Group (Sterman, 1989). It simulates the manufacturing and distribution of beer. The chain contains four members (plant, distributor, wholesaler, and retailer). Only the retailer is familiar with the actual levels of market demand. Because of the delays that exist in the ordering cycle, and due to the chain’s lack of overall coordination, the other three members in the chain are constantly in a position where they have to make demand projections. This causes

variations in inventory levels, amplified into what is generally known as the "Bullwhip effect" (Mason-Jones, R. and Towill, D., 2000). (Figure 2). The clear conclusion is the chain can only be optimised through a real-time sharing of information; a rapid delivery; and joint planning. These exercises demonstrate the need for greater integration, a trend that has accelerated as a result of the globalisation-related advances that are creating bettereducated customers and increased competition. This has forced firms to simultaneously improve their response times, lower their costs, and augment the precision of their working processes. Firms that try to perpetuate any process that has been de-coupled from the supply chain will not be able to compete with rivals who have achieved what the superior force mentioned in the first exercise above had been striving to achieve: the implementation, via increased integration and greater responsiveness, of a process that is as efficient as a system which is nourished by an abundance of stocks – yet which does not feature any stocks at all.

Figure 2: Quick response, information and collaboration reduce the bullwhip effect

Information flow

Factory

Distributor

4 weeks

Wholesaler

Retailer

D e m a n d

Materials flow

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Using Information Technology as an Enabler of Network Integration

Suppliers

Sales cycle

Purchasing cycle

Manufacturing Finance

Customer

HRM

New Technologies: e-business, Internet, APS Figure 4. The evolution of ERP into APS

supplier (I2 Technologies, for example, prefers to divide their "Rhythm" solution into Demand Planning, Supply Planning, and Demand Fulfillment systems; whereas SAP "APO" proposes operational, monitoring and tactical modules that resemble the levels that had been proposed by Delfmann).

It was less than a decade ago that organizations first started to implement ERP systems. This was a first step towards process integration. ERP systems involve a conversion of vertical "silos", or departments, into horizontally integrated cross-functional processes. They have been invaluable as the driver behind a crossfunctional, or process-oriented, view of the organization. However, because of the aforementioned forces currently at work, the time has now come for this integration to be extended beyond the borders of any one organization. Information technology can be applied to firms’ logistical functions at three separate levels (Delfmann, 2000). At the lower, operational level, data integrity is ensured through the application of transaction-oriented systems (ERP, bar coding). At the upper, strategic level, simulation and monitoring systems facilitate decision-making. More significantly for the present article, at the intermediate level, IT can enable the integration of networks through the use of collaborative practices (e.g. joint forecasting and scheduling). The actual means for achieving this integration varies from supplier to

As stimulating as these developments are, valid questions remain as to their universality. During the first few years of ERP implementation, a best practices school maintained that, given the similarity between most of the business processes in this area (purchasing, payroll), firms should benefit from current trends by adopting standardised best practices, instead of trying to adapt their information systems to (allegedly inefficient) non-core practices. This view evolved into best-practices-by-market view, which currently divides markets into vertical and horizontal ones. A

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Distribution

CRM

ERP

In Figure 4, ERP implementation has helped convert a traditional functional organization into a cross-functional one. A natural extension, driven by the aforementioned forces, would be the network’s integration, on the customer side via CRM (Customer Relationship Management), and on the supplier side via B2B (Business to Business purchasing). Coordinated systems of this sort allow for a scenario such as the aforementioned one, involving an Advanced Planning and Scheduling System (APS) that operates by using standardised, inexpensive communication platforms; e-business solutions, and the Internet.

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Back office

B2B

All these factors reflect the pull that the market has been exerting on supply chain processes. At the same time as this pull, and undoubtedly influenced by it, there has been a rapid development in supply chain practices and Internet-based information technology resources. Nowadays, actors are in a position to exchange the type of information that is required for a full integration of the supply chain. Suppliers of IT solutions whose traditional ERP markets have become saturated have been quick to identify this trend, and to provide systems support for it. It is precisely this combination of market pull and technology push that has lead to an acceleration of supply chain integration through the use of Information Technology.

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vertical market in the automobile sector, for example, will be composed of second and first tier suppliers; assembly plants; and support organizations (spares, repairs) - all of whom have little activity outside of this specific market. SAP has identified a score of similar sectors (inc. oil and gas, health, retailing), and provided different ERP solutions for each. Horizontal markets provide goods or services that are common to many vertical markets (office supplies), or different networks within a vertical market (spare parts). From these issues, we can infer our next hypothesis, namely that different business networks require different Information Technology and Logistics Support Systems.

One Size Doesn't Fit All: The Need For Application Models A simple collaboration model, useful for understanding supply chain issues, is Díaz and Esqueda’s vertical-horizontal one (1998). In Figure 5, two basic types of collaboration are proposed, depending on the power symmetries each involves. In a situation with large suppliers and small customers (i.e., small electronic sub-assemblers purchasing chips from Intel), power asymmetries preclude any truly close integration, even as horizontal collaboration amongst the smaller firms generate virtual scale economies in activities such as purchasing, exporting and marketing. In this case, vertical relations(e.g., between Intel and the sub-assemblers) remain limited and transactionoriented. In a situation where small

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high purchasing-cost to value-ofmaterial ratios.

Horizontal collaboration

Intel

Purchasing groups Export consortiums ● Market studies ● Training centers ● Technology developmer

● ●

Vertical integration Synchronizing core processes (forecast, planning) for JIT relations: advantages of vertical integration with flexibility

HP

Figure 5. Vertical and horizontal relations

sub-assemblers supply a large customer (e.g., Hewlett Packard), power asymmetries are a driver behind true vertical integration, as both supplier and customer are motivated to synchronise their production plans in order to achieve an effective just-intime relationship. In this case, relations are not just transactionoriented – rather, they imply mutual trust (which is needed for the exchange of core information, i.e., forecasts and production plans). Taylor et al. (1999) have proposed an e-business model based on the number of parties involved in a transaction, called the model of the many and the few. In line with these principles, we now propose a taxonomy of four basic e-business models, (Figure 6, based on Díaz, 2000). Sell-side (many buyers - few sellers): This is the now classic sell-side e-business site, popularised by the pioneering efforts of firms such as Amazon.com and Houra.fr, the Internet sales vehicle for the French retailer Cora. Sites can exist in Business to Consumer (B2C) open access formats, and in more controlled B2B formats (e.g., the Boeing PART site, that handles over 85% of this firm’s spare parts). The technology that supports these sites is a mature one, and can be divided into on-line catalogues (ShiftKey) or else into transaction support systems (OpenMarket, InterWorld), with both types usually being combined in a single web site. There is little customersupplier integration, but transaction

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costs and inconveniences are reduced for the customer. This type of e-business, particularly in the travel industry, might capture up to 9% of the total market by the year 2002. Market side (many buyers-many sellers): This type of e-business is an attempt to democratize the purchasing process, organised as per the old (non-virtual) markets, through a facilitation of information flows, and thus a leveling of prices. Buyers can access a variety of suppliers, search for the best prices and conditions, and team-up with one another in order to better their purchasing power. Sellers can reduce transaction costs significantly. This is particularly interesting in the case of MRO (Maintenance, Repair and Operations materials), i.e., those slow logistical flows that can represent 80% of all purchasing transactions (Shapiro and Hesse, 1999). These transactions are for a low value on average, resulting in Many

Buyers

Buy Side (few buyers - many sellers): In this situation, a large buyer installs a buy-side portal. Firms such as Chevron are quickly developing these sorts of sites, motivated by the prospect of significant cuts in costs and lag times. Oracle cites transaction cost reductions of between $15 and $175 for Xerox (although the latter sum does seem atypically high). The business solutions market is a highly competitive one. The market for larger clients (defined in Fortune 500 size terms) is dominated by Ariba and CommerceOne; and for smaller clients, by Clarus. An example of this type of site is Chevron’s Ariba-based procurement site (petrocosm.com).

B-C

Sell-side B-B

Because of this, and due to the e-business technology that has become available, it is no surprise that MRO e-market web sites have sprouted. (By March 2000, The Economist had cited over 700 e-market sites.) MRO sites (which differ from sale-side sites in that a leading company facilitates the exchange process, but doesn’t lead it directly), are to be distinguished from specific market (i.e., spares), intra-vertical sites; and from shared market (i.e., office supplies), inter-vertical ones. Examples of intra-vertical e-market sites are industrial spares (tpn.geis.com), health sector spares and consumables (neoforma.com), automobile spares (auto-xchange.com) and electronic parts (e2open.com).

Market-side

(Amazon.com, Houra.fr)

Intra-vertical (MRO:Ford) Inter-vertical (office supplies)

(Boeing Parts)

(Computers) Few (Cisco)

(Chevron)

Buy-side

Integration-side Few

Sellers

Many

Figure 6. A taxonomy of e-business sites

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Integration side (few buyers - few sellers): This is the most interesting type of e-business from a logistics point of view – as well as being the most difficult to implement. It is possible to visualise two subclasses of this type: a large client with smaller suppliers who have integrated in a co-specialisation arrangement (e.g., Cisco); or similar-sized firms that carry out joint production planning in order to achieve a truly just-in-time integration. In the first instance, suppliers will have the right incentives to integrate – but they will not necessarily have access to the right kind of technology. In the second situation, the opposite prevails. This type of network relation has been a driver behind integration practices such as QR, ECR and CPFR. However, Information Technology solutions such as APS (Advanced Planning Systems) have been slower to arrive due to the many complexities that are involved (including cultural and protocol considerations). This type of closely knit integration is implicit in the scenario which was presented in the introduction to the present study, involving a combination of sell-side and

buy-side technologies. Complex implementations of this sort are still a thing of the future – but their advent could be accelerated by the conclusion of new alliances (e.g., IBM, i2 and Ariba).

The field is evolving rapidly. On one hand, corporate strategy can evolve over time, and firms may end up forming close alliances with their logistical service providers, with this latter group helping to manage selling sites (i.e., TNT for Fiat’s spare parts business, c.f., Parker 1999) or create multi-company sites (i.e., the alliance between Ford, GM and Chrysler-Benz). On the other hand, technology also evolves quickly, as witnessed by the emergence of Intelligent Agents (Greis and Kasarda, 2000) who are capable of facilitating the fulfillment process through an automatic scheduling of deliveries, that is, through the linkage of Web-based transaction activities with the logistical service providers themselves – with these providers being located in logistics kiosks, and offering a one-stop all-inclusive transaction and fulfillment service.

Supporting a Network in a Rapidly Changing World The emergence of business networks featuring interrelated embedded Information Technology and Logistics solutions raises two issues that need to be resolved at the same time. The first is whether fulfillment systems can guarantee deliveries in an environment that is marked by rapid change. The second involves the procurement of the human resources that are needed to successfully support such complex, cross-functional systems. Fulfilling orders: Toys-R-Us’s disastrous e-commerce experienceduring the 1999 Christmas season (Stankevich, 2000) demonstrates that, in spite of the high hopes that have been raised by the promise of e-business, business fundamentals still apply: if you sell, you have to fulfil. Moreover, each e-business model requires a different logistics strategy, as Figure 6 shows.

Careful attention will need to be paid to these issues, both by firms that want to benefit from the new technologies whilst avoiding the costly mistakes of early ERP or e-business implementations, and also from academics who want to

Lesser complexity, but lower return on investment and less value added. Fewer barriers due to the maturity of the technology and lesser intensity of contacts.

Type of market Sell

Many small transactions from single origin to many destinations

Market

Many small transactions from single origins to many destinations

Buy

Fewer, larger transactions from many origins to single destination

Integration

Few large transactions from few origins to few destinations

Supply chain strategy

Logistical objective Transaction-oriented, emphasis on transaction cost reduction without loss of level of service ● High level of service, reduced transport costs ● Low degree of contact ●

Transaction-oriented, emphasis on cost reduction without loss in level of service ● High level of service ● Stock control ● Higher degree of contact ●

More strategy-oriented, emphasis on transaction cost reduction and rapid delivery ● Higher degree of contact ●

Strategy-oriented, emphasis on rapid response (Time based Management) ● Long tem total cost reduction through synchronisationof chain

Customer-oriented strategy Use of own channels or development of close relationship with logistics provider ● Importance of tracing information along the chain (togheter with customer) ● ●

Casual relations with 3PL providers and horizontal collaboration to achieve consolidation effects. ● Use of intelligent Agents ● Loop includes reverse logistics ●

●

Strategies include upstream consolidation using own channels, or close relations with logistics provider

Joint forecasting and planning between customers and suppliers ● Logistics contracts with suppliers ● Distribution through own channels or close relations with logistics provider

●

●

More complex, but higher return on investment and value added. Barriers: Cultural (trust and change), Immature Technology Figure 6. Supply chain strategy inherent to each basic e-business model

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keep abreast of current developments so as fulfil their role of training the new type of logistics professional (Techno-logistical expert) that the market requires nowadays. These are exciting times for the logistics profession. Firms’ strategies are increasingly imbued with interrelated issues that revolve around networks into which IT has been embedded, and where the main deterrents to the rapid extension of new technologies (confused business models and the scarcity of human resources) can be tackled through the adoption of some of the ideas which the present paper has tried to present.

Mason-Jones, R. and Towill, D.R. (2000). “Coping with uncertainty: erducing “bullwhip” behaviour in global supply chains”. Supply Chain Forum: An international journal Vol. 1. N° 1 Parker, J. (1999). "TNT, Fiat strengthen ties". Traffic World; Aug 16 Shapiro, P. and A. Hesse (1999). "Tracking Electronic Commerce: Signal of Change". Prism Q1. Sterman, J. (1989). "Modeling Managerial Behavior: Misperceptions of Feedback in a Dynamic Decision Making Experiment". Management Science. Vol. 35, No. 3. Stankevich, D. (2000). "Was the grinch really online?". Discount Merchandiser; Bristol; Mar Taylor et al. (1999). "How Electronic Commerce is Reshaping Industry Structures". Prism Q1.

References Cervilla, M. and Lorenzo, O. (2000): "Redes de empresas y tecnologías de información: opciones para el desarrollo de la PYME". Debates IESA. Vol. 5. No. 1. Delfmann, W. (2000): "The Influence of IT on Logistic Networks". Presentation at the ELA conference. Díaz A. (2000): "Teaching Logistics in an e-business world". Proceedings of the ELA conference. Díaz, A. (2000): "e-business: cómo la tec nología de información crea redes de negocio". Forthcomming in Debates IESA. Díaz, A. and P. Esqueda (1998): “Planificación de producción bajo incertidumbre: un menú estratégico”. Debates IESA. Vol. 4. No. 2. Ebers, M. y C. Jarillo (1998). "The construction, forms, and consequences of industry networks" International Studies of Management & Organization. Vol. 27. No. 4 Gomes-Casseres, B. (1994). "Group Versus Group: How Alliance Networks Compete". Harvard Business Review. July-August. Greiss, N. and Kasarda, J. (2000). "From e-logistics to Intelligent Logistics: The Global Transpark concept". Proceedings of the ELA conference. Hinterhuber, H. and A. Hirsh (1998). "Starting Up a Strategic Network". Thunderbird International Business Review. Vol. 40. No. 3.

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