Chapter 15

Order Fulfillment,

Logistics, and

Supply Chain Management

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Order Fulfillment Problems

How much do I need? Delivery: time and cost

Fierce competition Where are my goods? Track and Trace

One shipment or many, for an order When will it arrive?

Variability, uncertainty Late delivery

Delays costs low satisfaction In-land and overseas delivery

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Order Fulfillment: Overview

Introduction Taking orders may be the easiest part Factors responsible for delays in deliveries:

Inability to accurately forecast demandIneffective supply chainsPull type manufacturingCustomized products

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Figure 15-1

Push vs. Pull Supply Chains

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Major Concepts

Order fulfillment: Deliver right order on time Front office operations:

Order taking Advertisement CRM

Back office operations Accounting Packaging Finance Logistics Inventory

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Major Concepts (cont.)

Definitions of logistics: Managing the flow of goods, information and

money along the supply chain Aspect of military science dealing with

procurement, maintenance, and transportation Management of details of an operation All activities involved in management of product

movement Right product Right place Right time

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Figure 15-2Order Fulfillment and Logistics Systems

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The Steps of Order Fulfillment

1. Payment Clearance

2. In-stock availability

3. Packaging, shipment

4. Insuring

5. Production (planning, execution)

6. Plant services

7. Purchasing, warehousing

8. Customer contacts

9. Returns

(Reverse logistics)

10. Demand forecast

11. Accounting, billing

12. Reverse logistics

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Shipping a Tropical Fish

1. Placing order, payment

2. Transfer order to Petstore.com, check stock

3. Use a wholesaler to get the fish

4. Supplier finds fish, ships to wholesalers

5. Wholesalers rush to Petstore

6. Petstore uses FedEx to ship to customer with copy of credit card payment

Discussion: What is the contribution of EC?

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Supply Chain Management

Definition: Flow of material,

information, money, etc. from raw material suppliers through factories to customers

It includes: organizations,

procedures, people

SCM: Integration of the

business processes along the chain, Planning, Organizing, control of many activities

Activities: Purchasing, delivery,

packaging, checking, warehousing, etc.

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Figure 15-3An Automotive Supply Chain

Source: Modified from Handfield and Nichols (1999), p. 3.

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Benefits of SCM

Reduce uncertainty along the chain Proper inventory levels in the chain Minimize delays Eliminate rush (unplanned) activities Provide superb customer service Major contributor of success (ever

survival)

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Global Supply Chain

Can be very long Possible cross-border problems

Customs clearance, tax, different regulations Need information technology support of:

Communication Collaboration

Possible delays due to: customs, tax, translations, politics

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Typical Problems Along the Supply Chain

Delays in production, distribution, etc. Expensive Inventories Lack of partners’ coordination Uncertainties in deliveries Poor demand forecast Interference with production Poor quality

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More Difficulties

Virtual companies do not have logistics infrastructures

One company is a member of several supply chain

Conventional warehouses are too expensive

Need automatic warehouses with robots as pickers

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The Bullwhip Effect

propagation

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Bullwhip Effect andInformation Sharing

Flow of information to and from all participating entities

Information sharing between retailers and their suppliers Bullwhip effect refers to erratic shifts in orders up

and down supply chain Distorted information leads to:

Inefficiencies Ineffective shipments Excessive inventories Poor customer service Missed production schedules

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The Bullwhip Effect

Slight changes in actual demand create problems

Partners build “just in case” inventories Lack of trust among partners Stockpiling results in huge cost The manufacturers cannot plan production Cannot order material from suppliers

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Avoiding the Stingof the Bullwhip

How to do it? Information sharing is a must and is facilitated by

EDI, extranets, and groupware technologies

Trust and agreements in regard to: Ordering and inventory decisions Placing supply chain ahead of individual entities

within the corporation

Sharing information could save $30 Billion/year just in the grocery industry

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Preliminary Activities

Understand the supply chain (flow charts) Study internal and external parts Performance measurement are a must

(Benchmarking) Multidimension performance analysis A BPR may be needed People’s relationships are a must

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Areas of Opportunities

Manufacturing processes

Warehousing operation Packaging and delivery Material

inspection/receiving Inbound and outbound

transportation

Reverse logistics (return)

In-plant material handling

Vendor management program

Customer order processing

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Areas of Opportunities (cont.)

Invoicing, auditing and other accounting activities

Collaboration procedures with partners

Employee training and deployments

Labor scheduling

Use of teams and empowerment of employees

Automation of processes

Use of software for facilitating all the above

Inventory management and control

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Using Inventories

The classical MAGIC Insurance against stock out Can be in several places Can be excessive Can be insufficient

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Using Inventories

Using inventories to solve supply chain shortages: Building inventories as insurance against

uncertainty—products and parts flow smoothly Very difficult to correctly determine inventory

levels for each product and partCustomized finished products can only stock

componentsExcessive levels are costly to storeInsufficient levels cannot protect against high

demand or slow delivery times

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Using Inventories (cont.)

Example: Littlewoods Stores; UK Retail clothing industry is very competitive Littlewoods instituted an IT-supported

initiative to support supply chain efficiency; specifically, to deal with the overstocking problem

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Littlewoods Stores (cont.)

Use a Web-Based performance reporting system that analyzes daily: Marketing and financial data Merchandising Space planning Purchasing data

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Littlewoods Stores (cont.)

Using data warehouse, DSS and other end-user oriented software system has helped: Reduce backup inventory expenses Increased the ability to strategically price

merchandise differently in different stores Reduced the need for stock liquidations Cut marketing distribution costs significantly Increased the number of Web-based users

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Proper SCM

Proper SCM and inventory management requires coordination of all activities and links in the supply chain to: Ensure that goods move smoothly and on

time from suppliers to customers Keep inventories low Keep costs down

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Proper SCM (cont.)

Coordination is needed because: Supply chain partners depend on each other Partners don’t always work together toward the same

goal

To properly control uncertainties it is necessary to: Understand the causes/problems Determine how uncertainties will affect other activities

up and down the supply chain Formulate ways to eliminate or reduce uncertainties

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Proper SCM (cont.)

Information flow is a key: communications between business partners should be: Effective Efficient

Support is needed to ensure this communication and is enabled by: IT support EC support

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EC Solutions Along the Supply Chain

Automate order taking (e-procurement) Use EDI/Internet Web-based ordering; intelligent agents

Electronic payments Inventory reduction (made-to-order pull

process) Improved inventory management Decreased administrative costs

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EC Solutions Along the Supply Chain (cont.)

Digitization of products—instant order fulfillment

Back-office interface Shortens cycle time Eliminates errors

Collaborative commerce among members of the supply chain Shortens cycle time Minimizes delays

and work interruptions

Lower inventories Lower

administrative costs

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Innovative Solutions toOrder Fulfillment Problem

Examples of solutions to order fulfillment: Real-time video (Webcam)

Move inventory 70 times/yearFAO Schwartz demonstrates famous store in

New York

MailBoxes Etc. and Innotrac Corp.Comprehensive systemSoftware connects e-tailers and order

management systems

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Innovative Solutions toOrder Fulfillment Problem (cont.)

Role of 7-Eleven & convenience stores Can be used as a collection point for returns Can be used as a pick-up place Can be used as a place for order placing Can pay in cash/card to the store

Returns are a problem: up to 30%

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Innovative Solutions toOrder Fulfillment Problem (cont.)

Relysoftware.com helps find: “Forwarders”—intermediaries that prepare

goods for shipping for companies

Relysoftware.com also helps: Forwarders find the best prices on air

carriers Carriers fill up empty cargo space by

bidding it up

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Same Day, Even Same Hour Delivery

Role of FedEx and similar shippers From a delivery to all-logistics Many services (see Box 13.4) Complete inventory control Packaging, warehousing, reordering, etc. Tracking services to customers

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Same Day, Even Same Hour Delivery (cont.)

Supermarket deliveries Transport of fresh food to people who are in

homes only at specific hours Distribution systems are critical Fresh food may be spoiled

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Figure 15-4Proposed Order Fulfillment for Groceryworks

Source: Steinert-Threlkeld (January 31, 2000). Originally published in Interactive Week, www.xplane.com

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Automated Warehouses

B2C order fulfillment—send small quantities to a large number of individuals Step 1: retailers contract Fingerhut to stock

products and deliver Web orders Step 2: merchandise stored SKU warehouse Step 3: orders arrive Step 4: computer program consolidates

orders from all vendors into “pick waves”

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Automated Warehouses (cont.)

Step 5: picked items moved by conveyors to packing area; computer configures size and type of packing; types special packing instructions

Step 6: conveyer takes packages to scanning station (weighed)

Step 7: scan destination; moved by conveyer to waiting trucks

Step 8: full trucks depart for Post Offices

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Handling Returns

Necessary for maintaining customer trust and loyalty Return item to place it was purchased Separate logistics of returns from logistics of

delivery Allow customer to physically drop returned

items at collection stations Completely outsource returns

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Outsourcing Logistics (3PL):The UPS Strategy

UPS provides broad EC services: Electronic tracking of packages Electronic supply chain services for

corporate customers by industry including:Portal page with industry-related informationStatistics

Calculators for computing shipping fees Help customers manage electronic supply

chains

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The UPS Strategy (cont.)

UPS provides broad EC services Improved inventory management,

warehousing, and delivery Integration with shipping management

system Notify customers by e-mail of:

Delivery statusExpected time of arrival of incoming packages

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The UPS Strategy (cont.)

Representative tools 7 transportation and delivery applications

Track packages Analyze shipping history Calculate exact time-in-transit

Downloadable tools Proof of delivery Optimal routing features

Delivery of digital documents Wireless access to UPS system

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Supply Chain Components

Upstream: like placing orders: Suppliers, their suppliers (several tiers) From raw material to the company

Internal: all internal processes that add value, conversion to find products Production scheduling Costing Inventory control

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Supply Chain Components (cont.)

Downstream: all activities in distribution and delivery to end customers Sales Customer billing Delivery scheduling

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Software Support

SCM Activities Type of Software

Upstream activities Supplier managementOrdering systemsOrder tracking systems

Internal supply chain activities

Inventory managementPurchasing order managementBudgeting, cost controlHuman resource information

Downstream activities

Salesperson productivity toolsOnline telemarketingAd management etc.

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Integration-Benefits

Tangible benefits Inventory reduction Personnel reduction Productivity

improvement Order management

improvement Financial cycle

improvements

Intangible benefits Information visibility New/improved

processes Customer

responsiveness Standardization Flexibility Globalization Business performance

Automation of segments useful, but integration brings:

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Integration Along the Supply Chain

Need to streamline operations New business models New organizational relationships (virtual

companies) Examples Warner Lambert and Wal-Mart

(Box 15.6)

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Areas of Integration

Order taking - production inventory levels Payment info in B2B - Visa, MasterCard, etc. Low inventory levels - automatic ordering Order to manufacturing - generate a list of needed

resources & their availability Changes in an order - transmit to suppliers and

their suppliers Tracking systems - available to customers

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Evolution of Software Integration

Completely Independent of each other MRP= Material Requirements Planning:

InventoryProduction

MRPII=Manufacturing Requirements Planningmore integratedMRP+Finance+Labor

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Evolution of Software Integration (cont.)

Completely Independent of each other ERP=Enterprise Resources Planning

All functional areas

Extended ERP includesSuppliersCustomers

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From SAP to mySAP.com

SAP = Traditional ERP = Automate and Integrate transactions

MySAP.com = Web-based comprehensive system Workplace - a personalized, role-based interface Marketplace - one stop destination for business

professionals to collaborate Business Scenarios - products for the Internet and

intranet Application-hosing - hosting Web applications for

SMEs

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ERP Benefits

ERP = Integrating business processes and activities in real time

Solves many supply chain problems Necessary for medium to large

corporations Helpful also for some SMEs

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ERP Implementation

Need to interface with EC order taking system

Manages all routine transactions in the enterprise

Recently extended to suppliers and customers

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Developing ERP Systems

Do-it-yourself, from scratch (only few will)

Use Integrated packages such as R/3 from SAP

“Best of Bread” approach, using integrating software

Rent in from ASP service

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Post-ERP (2nd Generation)

1st generation - transaction processing orientation 2nd generation

Including decision-making capabilities EC requires decision support EC requires business intelligence

SCM software: Production Planning, Manpower utilization, Profitability models, market analysis

Integration of SCM capabilities APS function: advanced planning and scheduling Other added functionalities: CRM, KM

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ASP and ERP Outsourcing

Why ASP or lease? Leasing information systems application Back to the days of “time-sharing” A risk prevention strategy Very popular with ERP (expensive,

cumbersome)

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Managerial Issues

Planning for order fulfillment is a critical task, especially for virtual EC vendors

Dealing with returns can be a complex issue Partnerships and alliances can improve logistics

and alleviate supply chain problems Many software products are available to improve

SCM and logistics EC must be tightly connected with back-office

operations

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Managerial Issues (cont.)

It is necessary to integrate it with EC front-office operations

Importance of creation of logistics system for EC and how to use EC applications to improve the supply chain

Software integration may require considerable time and money