The Role of E-Commerce in Supply Chain Management Essay
The emergence of E-commerce technologies has created innumerable opportunities for businesses to develop and streamline their supply chains. Electronic data interchange (EDI) has been used to facilitate business-to-business communication and coordination among supply chain partners. The key to managing a supply chain, however, is to view it as a single entity-and not simply as a series of one to one links between firms along the chain. Accordingly, there are problems with the use of EDI in supply chain management (SCM).
The benefits that E-commerce technologies have to offer towards developing and maintaining a truly holistic approach to SCM are now being realized. This paper first defines the terms e-commerce, e-business, supply chain, and Supply Chain Management, then it delves into problems with the use of EDI in SCM. The main thrust is to show how E-commerce technologies can help overcome these problems and effectively be used in SCM. It ends by identifying some managerial and technical issues corporations will face in order to e-enable their SCM, and by showing some case studies.
Electronic commerce (e-commerce) has revolutionized all facets of business and industry. E-commerce is generally understood to mean buying and selling of information, products, and services via computer networks (Kalakota and Whinston, 1996). i.e. Transaction. It is about redesigning business processes with the help of Internet based technologies.
E-Business is More Than Just e-Commerce it is the continuous optimization of an organization’s value proposition and value chain position using the digitally connected marketplace and the use of the Internet as the primary communications medium, including all business processes and e-Commerce.
Supply Chain the core business processes in an organization that create and deliver a product or service, from concept through development and manufacturing or conversion, and into a market for consumption.
Supply Chain Management is the methods, systems and leadership that continuously improve an organization’s integrated processes for product and service design, purchasing, inventory management, logistics, distribution and customer satisfaction
One of the reasons for the failure of Electronic Data Interchange (EDI) services to fulfill its earlier promise is the absence of common standards for EDI (Leebaert, 1998).
Supply chain plus e-Commerce is about taking a virtual, optimized network of response to the customers and consumers of choice.
Over the past decade, many managers have adapted their ways of operating to incorporate new technology. Dramatic as these changes have often bee, a much more profound transformation of the business landscape lies ahead. The main driver is electronic commerce. All executive are being forced to rethink the strategic fundamentals of their business. Increasingly the complete supply chain is being impacted by the technologies associated electronic connectivity, and need to be redesigned accordingly. In particular, radical change is required in response to:
– reduce, remove and re-deploy many of the traditional approaches to sales and marketing.
– Compress the length of the supply chain through the elimination of middle men in the sales process.
– Create extended enterprises, link manufacturers and inter-industry groups operating within new electronic markets.
– Real time access, capture and transfer of data between trading partners.
– Develop new products which support, sustain and extend electronic commerce.
By truly embracing electronic commerce, a business can transform the way it creates markets and delivers products to its customers. It has strategic business development potential and, as such, needs urgent attention. In turn, it will have a considerable role in facilitating the redesign of many supply chain processes.
The concept is to Extend your supply chain and use a new e-Commerce tool to generate new revenue.
This paper is organized as follows:
First, defines Electronic Data Transition (EDI) and its problems, then presents Supply Chain Management as an organizational application of E-commerce.
Second, discusses the role of e-commerce technologies in supply chain management and how e-commerce facilitates supply chain management.
Finally, identifies some managerial and technical issues corporations will face in order to e-enable their SCM, and by showing some case studies.
2. EDI and its Problems
A good number of firms have used Electronic Data Interchange (EDI) beginning in the 1980s. EDI is, by definition, the direct computer-to-computer exchange between two business partners (e.g., a manufacturer of finished goods and a supplier of raw materials) of standard business documents such as purchase orders and invoices.
EDI can help businesses save time and money by reducing transaction processing and data entry costs while gaining faster access to information. Studies suggest that EDI reduces the human element in communication while improving both speed and accuracy of data flow (e.g., Carter and Ragatz, 1991). Reductions in both leadtimes and inventory levels, using EDI, have been reported (e.g., Dobler and Burt, 1996; Monczka and Carter, 1988).
Unfortunately, EDI is not living up to its promise for a number of reasons. First, the participating companies must agree on the format of a standard, and it is not as easy for them to do so since many of them use different standards. Second, software is too expensive and too proprietary. Specialized software must be developed by participating businesses to convert incoming and outgoing messages in a common format that is understandable to other businesses. Traditional EDI works better between two large organizations with a high volume of transactions (Barret and Hogenson, 1998). Third, the transaction fees are too high. Again, only large organizations can afford EDI.
Fourth, EDI addresses one-to-one, business-to-business links between entities without holistically tackling the problem of end-to-end efficiency along the entire supply chain.
The bottom line is this: EDI will remain in SCM, at least for the time being, since it has the advantage of higher data security than the Internet and it can carry large transaction volumes. However, a growing number of experts agree that the economics of the Internet versus EDI appear overwhelming (Bartholomew, 1997).
3. Organizational Applications Of Ecommerce
E-Commerce has influenced two important areas of organizational applications: just-in-time (JIT) purchasing, and supply chain management (SCM). The main focus of JIT purchasing is to reduce inventories in the manufacturing cycle. Supply chain management refers to a broader area that integrates several processes such as purchase of raw materials as well as delivery of finished goods. SCM enables organizations to source raw materials from and/or distribute finished goods to anywhere in the world. SCM provides a centralized global management strategy and enables businesses to manage information not only within itself but also across other industries and enterprises.
In the context of JIT purchasing, an important issue to be considered is the industry structure. Purchasing strategies will differ for digitizable products as opposed to traditional materials. Purchasing function entails information gathering regarding price, quality, features and price of required raw materials or parts/subassemblies. E-commerce provides an inexpensive and efficient way to gather such information.
Another noteworthy feature is the elimination of intermediaries. Does the electronic marketplace always ensure lower prices? Lee (1998) refers to the Japanese experience of AUCNET where the product cost was higher when bought through the electronic market (e-market). One probable reason for this phenomenon could be the increased number of potential customers available to sellers via emarket.
Typically, electronic marketplaces do not list the market price of goods. Generally, producers offer asking prices and customers decide the quantities to be purchased at relatively fixed prices (Lee, 1998). The essence of JIT purchasing is prompt deliveries. Even though this may mean negotiations with suppliers at times, e-commerce provides a variety of choices for the purchaser.
Supply chain management pertains to the efficient utilization of inventories. In order to achieve this, purchase and process functions have to interact closely with suppliers. SCM envisages a small number of suppliers who are virtual partners with manufacturers. E-commerce affords a way through which databases can be shared by suppliers and manufacturers. Inventory management becomes easier as time cycles of order-ship-bill process get reduced. This should lead to reduced inventories and make out-of-stock occurrences very rare.
SCM can be considered as an extension of JIT as it includes prompt delivery of products to customers. For corporate success, besides good product quality, product delivery without deviating from the committed time schedules is equally critical. E-commerce can play an important role in the latter area by providing the customer to directly access the manufacturer’s database.
One of the difficulties in successfully implementing SCM is the changing operational conditions. Conveying of information, regarding design changes and price revisions through electronically linked organizations, is no longer a problem. Electronic payment systems can ensure that payments can be sent and received without any delay. E-commerce can also improve the productivity of sales personnel. Improved communication among customers and personnel in sales and production will result in increased productivity.
4. The Role Of E-Commerce Technologies In SCM
The benefits offered by EDI pale in comparison with those available via E-commerce-based technologies (Cross, 2000). Some may even view the Internet’s impact on SCM as rivaling that of the interstate highway system on the transportation industry (Carter el al., 2000). E-commerce-based technologies are capable of delivering a holistic system that incorporates what EDI is already capable of accomplishing -combining it with broad-based access and cost effective, real-time document transmission and distribution (e.g., Larson and Kulchitsky, 2000). This section discusses how E-Commerce technologies can help achieve these and other objectives, and how some businesses are actually using these technologies to realize these goals.
The evidence of e-enabled SCM is especially visible in the high technology environment where product life cycles are often measured in months or even days. Corporations like Cisco, Dell, and IBM lead the revolution by developing comprehensive and global supply chains characterized by low inventory levels, lean production, demand collaboration, and deferred assembly-resulting in lower costs and greater responsiveness to changing market conditions (Cross, 2000).
A case in point is IBM. It has realized significant benefits from e-enablement. Since 1994, IBM has reduced inventory write-offs by $800 million, increased on-time delivery from 90% to 98%, and reduced order time from two weeks to realtime.
On the supply side, the big blue has reduced the cost of purchasing goods and services by $4.2 billion (Cross, 2000).
Extranets link various partners in the supply chain using a public or private communications infrastructure. The availability of the Internet to electronically transfer massive amounts of information over the extranets with minimal time and effort has resulted in effi- Issues and Trends of IT Management in Contemporary Organizations 349 cient and effective sharing of information among business partners.
Companies have used the Internet and extranets to, among others, reduce delivery costs and increase the number of deliveries.
A case in point is General Electric. GE has used the Internet to schedule shipments out of its warehouses in metropolitan areas. The numbers of deliveries per hour has increased significantly while transportation costs per order have dropped dramatically (Lancioni et al., 2000).
Firms would benefit from increased use of the Internet in purchasing activities, and the potential for significant cost savings and productivity improvement suggests so (Deeter-Schmelz et al., 2001).
The E-commerce technologies can also increase the value of the information that can be transmitted back and forth in the context of SCM.
A case in point is, again, General Electric. In 1996, GE decided to streamline, using the Web, its procurement process for certain products that require a formal request for proposal (RFP). GE believed that it can use the Web to reduce both the time and cost involved in the process. In fact, cycle time for the RFP process dropped from 29 days using the manual process down to 4 to 12 days over the Web (Cross, 2000).
E-commerce technologies increase the value of the information that can be exchanged. Previously, via EDI, only transactions could have been transmitted back and forth. E-commerce technologies are helping SCM become more of a global business-to-business phenomenon by greatly increasing the size of the audience that can be reached.
The one-to-one nature of EDI in SCM has definitely been superceded by the many-to-many capabilities of E-commerce technologies.
A case in point is the Automotive Network Exchange (ANX) recently established by the big three automakers: General Motors Corporation, Ford Motor Company, and Daimler- Chrysler AG. Even though the project is presently in its infancy, it still makes the point. The goal here is to create a very large virtual marketplace using a reliable, secure, highly efficient extranet where all automakers can conduct business with suppliers and other business partners (Peters, 2000).
5. E-Commerce Facilitated Supply Chain Management
The impact of e-commerce on supply chain management (SCM) has to be analyzed in two stages. In the first stage we study the business environment to decide whether the marketplace is dominated by suppliers, buyers, or intermediaries. Then we look at the technological interface among those entities.
In supplier-oriented marketplace, the ‘electronic store’ is defined by the supplier. An example of this business model is Dell (Turban et al, 2000). 90 percent of the computers sold by Dell was for business customers. In a buyeroriented marketplace, potential suppliers are required to bid on the buyer’s server. General Electric is an example of this type of business model. In an intermediary-oriented marketplace, customer’s order information, supplier’s product information are handled by the intermediaries’ server. Boeings’ PART is an example of an intermediary mall.
The technological interface among the B2B e-commerce entities is currently being provided by the following three initiatives: universal description, discovery and integration (UDDI), e-business Extensible Markup Language (ebXML), and XML/edi (Bloomberg, 2001). UDDI is an XML-based registry service established by IBM, Ariba, and Microsoft. UDDI provides Green Pages where companies can specify their purchase order formats in addition to automated White Pages and Yellow Pages. United Nations has sponsored the ebXML initiative to create a single global marketplace. The objective is to create a framework where business and technology vendors can create consistent, robust, and interoperable e-business components. An attempt to add the advantages of XML to legacy Electronic Data Interchange (EDI) systems has resulted in XML/edi.
The incorporation of software agents to EDI is expected to resolve the ambiguities in the legacy EDI systems.
UDDI has the advantage of being a straightforward interface but lacks elements that automate the quality and timeliness requirements of direct procurement. While it has the potential to address these requirements, ebXML is more complex and more difficult to implement. XML/edi will always be an upgrade to an antiquated system, unlikely to appeal to companies that are not already using EDI.
From the buyer’s perspective, the goal is to achieve automatic procurement from several suppliers with an emphasis on quality and timeliness. In addition, the buyer is also interested in supplier’s catalog data in order to ensure consistent product specifications. On the other hand, the supplier is interested in maximizing the number of customer companies. Suppliers want to be involved in buyer’s inventory management so that a demand signal automatically triggers an appropriate order.
In order to automate supply chain, one of the essential requirements is interoperability. In this regard, UDDI is particularly useful. As both Ariba and Commerce One support UDDI, companies that use e-marketplaces supplied by those vendors will be able to connect with each other.
Another important issue that contributes to the success of supply chain automation is the need for constant site monitoring. Ensuring smooth working of a site while the user environment changes will ensure customer retention (Mitchell, 2001). We now have developers offering performance management tools that predict the performance of e-business applications.
6. Successful Deployment Of E-enabled SCM: Some Managerial And Technical Issues
This section identifies some of the managerial and technical issues corporations will face in order to e-enable their SCM.
6.1 Managerial Issues
The emerging environment in today’s global marketplace is one where businesses no longer compete with each other as autonomous, individual firms. Rather than simply brand versus brand or store versus store, competition is now on a supply chain versus supply chain basis (Lambert and Cooper, 2000). The supply chain cannot be viewed merely as a series of one-to-one, business-to-business links between the entities along the chain. Even the early papers had emphasized that the entire supply chain needs to be viewed as a single entity- albeit a network of multiple legal entities and relationships. Management of the individual business firm should learn to identify, develop, and exploit synergies offered by coordination and integration throughout this network of entities and relationships along the firm’s supply chain.
The people using the new E-commerce technologies and their willingness and ability to embrace changes may pose the biggest barrier to e-SCM collaboration (Taninecz, 2000). A detailed survey of Fortune 500 executives found that three main barriers to SCM are lack of functional expertise, lack of management expertise, and ineffective change management (Cottril, 2000). Top management can play a big role in alleviating these barriers by hiring people with appropriate technical, functional, and management expertise and by providing guidance and training to those employees who may have difficulty with organizational changes induced by e-SCM.
To encourage inter-organizational coordination and collaboration, it is necessary for the other firms along the supply chain to recognize that the application of E-commerce technologies would benefit not only the firm advocating the use of such technologies across supply chain entities. In particular, supply chain managers should ensure that the other entities involved do perceive the implementation of new technology as being not merely an added burden in terms of effort and cost, but actually translating into benefits that outweigh the additional cost.
6.2 Technical Issues
Many strategic managers have not embraced e-enabled management practices as a management concept. As a result, working towards an e-enabled SCM is being hindered by the lack of proper vision. Strategic managers should accept and encourage development and deployment of e-enabled management practices.
The majority of businesses do not yet have an e-strategy. To succeed in e-business, corporations must have an integrated e-business strategy considering both customer needs and corporate business objectives (Caldwell, 2000). The e-strategy must be integrated with the overall business strategy.
Many businesses do not also have an e-SCM strategy. Since Ecommerce technologies are being used more and more in enhancing what supply chains have to offer, it is important for businesses to develop an e-SCM strategy especially if they want to play a proactive role in using e-enabled supply chains that take advantage of some of the benefits these technologies have to offer. In order to operate effectively, organizations moving to e-SCM will require access to a wide range of E-commerce technologies including intranets, extranets, and access to the Web. Top management must be willing to spend money to put the E-commerce technological infrastructure in place.
Security protection is still an issue in using E-commerce technologies.
Before e-SCM reaches its full potential, security must be in place to give suppliers and other trading partners the confidence that information and communication are securely handled. Businesses must develop a strong information technology infrastructure that will establish appropriate security measures such as a “firewall,” network integrity, authentication, and authorization. Top management must help develop such a strong IT infrastructure.
One of the biggest problems in making SCM more efficient and effective is the fact that many links along the supply chain are reluctant to swap information back and forth (Frederick, 2000). One of the basic premises of successful e-SCM is that organizations are willing to share information with their business partners on their internal operations including inventory, orders, and shipments. E-commerce technologies can help swap enormous amount of information back and forth quickly but cannot do so without help and approval of top management. Top management must help create a climate of trust and true partnership among the partners.