mrp erp mrp ii .pdf

ONLINE TUTORIAL 3: SUPPLY CHAIN MANAGEMENT

11CHAPTER

ContentT3.1 Essentials of the Supply and Value

Chains

T3.2 Computerized Systems: MRP, MRP II,SCM, and Integration

T3.3 Enterprise Resource Planning (ERP)

T3.4 E-Commerce and Supply Chains

T3.5 Global Supply Chains

T3.6 Issues in Supply Chain Management

After studying this tutorial, you will be able to:1. Understand the concept of the supply chain, its

importance, and management.

2. Describe the problems of managing the supplychain and identify some innovative solutions.

3. Trace the evolution of software that supportsactivities along the supply chain and describeMRP, MRP II, SCM software, and ERP.

4. Describe ERP and understand the relationshipsbetween ERP and SCM software.

5. Understand the relationships between e-commerce and SCM software.

6. Understand the process and issues of globalsupply chain management.

7. Describe current issues in SCM.

Learning Objectives

1

TurbanTut_03.qxd 7/8/04 3:30 PM

2 Online Tutorial 3: Supply Chain Management

T3.1 ESSENTIALS OF THE SUPPLY AND VALUE CHAINSDEFINITIONS AND BENEFITSInitially, the concept of a supply chain referred to the flow of materials from their sources(suppliers) to the company, and then inside the company to places where they were needed.A demand chain, which described the process of taking orders and delivering finished goodsto customers, also was recognized. These two concepts are interrelated, so it wasn’t longbefore they were combined under the single concept named the supply chain.

DefinitionsThe following definitions are helpful for the study of this tutorial.

Supply Chain. Supply chain refers to the flow of materials, information, payments, andservices from raw materials suppliers, through factories and warehouses, to the end cus-tomers. A supply chain also includes the organizations and processes that create and deliverproducts, information, and services to the end customers. It is a network of activities thatdelivers a finished product or service to the customer. It includes many tasks such as purchas-ing, payment flow, materials handling, production planning and control, logistics and ware-housing, inventory control, and distribution and delivery.

Supply Chain Management. The function of supply chain management (SCM) is toplan, organize, and coordinate all of the supply chain’s activities. Today, the concept of SCMrefers to a total systems approach to managing the entire supply chain. For an overview, seeLarson and Halldorsson (2003). SCM is usually supported by IT. (See Kumar, 2001; Hugos,2002; and Vakharia, 2002.)

SCM Software. SCM software refers to software that supports specific segments of thesupply chain, especially in manufacturing, inventory control, scheduling, and transportation.This software is designed to improve decision making, optimization, and analysis.

E-Supply Chain. When a supply chain is managed electronically, usually with Web-based software, it is referred to as an e-supply chain. As this tutorial will show, improve-ments in supply chains frequently involve an attempt to convert them to e-supply chains,namely to automate the information flow in the chain. (See Poirier and Bauer, 2000.)

FlowsThe supply chain includes three flows: materials, information, and financial.

◗ Materials flows. This encompasses physical products, new materials, supplies, and soforth that flow along the chain, including returned products, recycled products, and dis-posal of material or product.

◗ Information flows. All data related to demand, shipments, orders, returns, schedules,and changes in the aforementioned are information flows.

◗ Financial flows. Financial flows include all transfers of money, payments, credit cardinformation and authorization, payment schedules, and e-payments.

A supply chain of milk products is shown in Exhibit T3.1. The process starts with sev-eral external suppliers that move milk, cardboard, and plastic to the processing plant. Afterthe milk is processed and packaged, it is delivered to retailers, who sell it to customers. Notshown in the picture are alternative delivery systems, such as delivery from a warehousedirectly to customers’ homes.

Note that in service industries, no physical flow of materials occurs, but frequently thereis flow of documents (hard and soft copies). These, according to the definition given previ-ously, are to be considered supply chains, because the information flow and financial flow stillexist. In fact, the digitization of software, music, and so on results in a supply chain withoutphysical flow. Notice, however, that in such a case, there are two types of information flow:one that replaces material flow (e.g., digitized software) and one that is the supporting infor-mation (orders, billing, etc.). In managing supply chains, it is necessary to coordinate all ofthe aforementioned types of flows among all of the parties involved in the supply chain. (SeeViswanadham, 2002.)


Online Tutorial 3: Supply Chain Management 3

Chemical Plant

ChemicalExtraction Plant

RetailGrocers

Customers

Packaged MilkProducts

Packaged MilkProducts

DO

WN

ST

RE

AM

INT

ER

NA

LU

PS

TR

EA

M

ExternalDistributors

InternalFunctions

TierOne

TierTwo

TierThree

ExternalSuppliers

PackagingOperation

FAT FREEMILK

Label Company

Milk ProductProcessing

Dairy Farm

Cardboard ContainerManufacturer

Plastic ContainerManufacturer

Cardboard

Raw Milk

Car

dboa

rdC

onta

iner

s Plastic

ContainersLa

bels

Chemicals

Wood

Raw Materials

Material Flow

Information Flow

Paper Mill

LumberCompany

EXHIBIT T3.1 Milk Products Supply Chain

Source: Reid, R., and N. R. Sanders, Operations Management. Hoboken, NJ: Wiley, 2002.



BenefitsThe main goal of modern SCM is to reduce uncertainty and risks in the supply chain,thereby positively affecting inventory levels, cycle time, business processes, and customer ser-vice. These benefits contribute to increased profitability and competitiveness. The benefits ofsupply chain management have long been recognized in business and in the military. Intoday’s competitive business environment, efficient, effective supply chains are critical to thesurvival of most organizations, and they are greatly dependent upon the supporting informa-tion systems.

THE COMPONENTS OF SUPPLY CHAINSThe term supply chain comes from a picture of how the partnering organizations in a specificsupply chain are linked together. A typical supply chain links a company with its suppliers, itsdistributors, and its customers. Note that a supply chain frequently involves three segments:upstream, where sourcing or procurement from external suppliers occurs; internal supplychain, where transformation (production), assembly, and packaging take place; and down-stream, where distribution to customers takes place, frequently by external distributors, or adisposal takes place.

A supply chain also involves a product life cycle approach that goes from “dirt to dust.”However, a supply chain is more than just the movement of tangible inputs, because it alsoincludes the movement of information and money, and the procedures that support themovement of a product or a service. Finally, the organizations and individuals involved arepart of the chain, as well.

Tiers of SuppliersAn examination of Exhibit T3.1 shows that several potential tiers of suppliers exist. Someprocesses, such as those required to provide raw milk, may have only one tier of suppliers.However, in many cases several tiers of suppliers exist, meaning that a supplier has one ormore subsuppliers, and the subsupplier might have its own subsuppliers, and so on. Forexample, making cardboard containers involves three tiers: the cardboard container manufac-turer (tier one), which gets its material from the paper mill (tier two), which gets its materialfrom the lumber company (tier three). Some supply chains have up to a dozen tiers.

Coordinating subsuppliers can be a complex task. Using business-to-business (B2B)exchanges can help with such coordination.

TYPES OF SUPPLY CHAINSSupply chains come in all shapes and sizes and can be fairly complex, as shown in Exhibit T3.2.As can be seen in this exhibit, the supply chain for a car manufacturer includes hundreds ofsuppliers, dozens of manufacturing plants (for parts) and assembly plants (for cars), dealers,direct business customers (fleets), wholesalers (some of which are virtual), customers, and sup-port functions such as product engineering and purchasing.

Notice that in this case, the chain is not strictly linear as it is in Exhibit T3.1. Some loopscan be found in the process. In addition, sometimes the flow of information and even goodscan be bidirectional. For example, not shown in this figure is the return of products (knownas reverse logistics, or returns). For the automaker, for example, that would be cars returnedto the dealers in the event of defects or recalls by the manufacturer.

The supply chain shown in Exhibit T3.1 might have warehouses in different locations,making the chain more complex, such as the one shown in Exhibit T3.2. In fact, severalmajor types of supply chains can be classified into four major categories: integrated make tostock, build to order, continuous replenishment, and channel assembly. If a company uses abuild-to-order business model, for example, it will not be necessary to store finished prod-ucts, but raw materials and components will need to be stored. Therefore, it is clear that sup-ply chains depend on the nature of the company and its business processes. A brief descrip-tion of the previously mentioned four types follows.


Assembly MaterialPlanning (19 plants)

• Vehicle scheduling• Preproduction planning• Components scheduling• Planning/sequencing

Shipping

Assembly Line

Warehousing

Receiving

Electronics

Castings

Stampings

TransmissionsEngines

Glass

ComponentsGroup

Suppliers(hundreds)

Manufacturing(57 plants)

ProductEngineering

SalesOperations

Car DealersCARS

PARTS

PURCHASING

Sourcing

Request to

Request tobuy

Shiprelease

Allocatedbuildable

ordersNewproducts andengineering changes

buy

MATERIALS

PAR

TS

Plastics/Trim Products

ClimateControls

Electrical/FuelHandling Devices

Engineering changes and ship releases

Advance ship notice

Ship releases

and engineeringchanges

EXHIBIT T3.2 An Automotive Supply Chain


Integrated Make to StockThe integrated make-to-stock supply chain model focuses on tracking customer demand inreal time, so that the production process can restock the finished-goods inventory efficiently.This integration often is achieved through use of an information system that is fully inte-grated. Through application of such a system, an organization can receive real-time demandinformation that can be used to develop and modify production plans and schedules. Thisinformation also is integrated further down the supply chain to the procurement function, sothat the modified production plans and schedules can be supported by input materials. Anexample is Starbucks Coffee (starbucks.com), which uses several distribution channels.Starbucks not only sells coffee drinks to consumers, it also sells beans and ground coffee tobusinesses such as airlines, supermarkets, department stores, and ice-cream makers. In addi-tion, sales can be made through direct mail, including the Internet. Starbucks is successfullyintegrating all sources of demand and matching it with the supply by using Oracle’s auto-mated information system for manufacturing (called GEMMS). The system handles distri-bution planning, manufacturing scheduling, and inventory control. The coordination of sup-ply with multiple distribution channels requires timely and accurate information flow aboutdemand, inventories, storage capacity, transportation scheduling, and more. The informationsystems are critical for doing all of these functions with maximum effectiveness and reason-able cost. Finally, Starbucks must work closely with hundreds of business partners.

Build to OrderDell Computer is best known for its application of the build-to-order model. In this model,one begins the assembly of the customer’s order (from components) almost immediatelyupon receipt of the order. This requires careful management of the component inventories

Source: Modified from Handfield, R. B., and E. L. Nichols, Jr. Introduction to Supply Chain Management. UpperSaddle River, NJ: Prentice Hall, 1999, p. 3.



and delivery of needed supplies along the supply chain. One way to accomplish this is to uti-lize many common components across several production lines and in several locations. Oneof the primary benefits of this type of supply chain model is the perception that each cus-tomer is receiving a personalized product. In addition, the customer receives it rapidly. Thistype of supply chain model supports the concept of mass customization.

Continuous ReplenishmentThe idea of the continuous-replenishment supply chain model is to replenish the inventoryconstantly by working closely with suppliers and intermediaries. However, if the replenish-ment process involves many shipments, the cost could be too high, causing the supply chainto collapse. Therefore, tight integration is needed between the order-fulfillment process andthe production and acquisition processes. Real-time information about demand changes isrequired in order for the production process to maintain the desired replenishment schedulesand levels. This model is most applicable to environments with stable demand patterns, as isusually the case with distribution of prescription medicines. The model requires intermedi-aries when large systems are involved. Such a distribution channel for McKessen Co. isshown in the upper part of Exhibit T3.3.

Channel AssemblyA slight modification to the build-to-order model is the channel-assembly supply chainmodel. In this model, the parts of the product are gathered and assembled as the productmoves through the distribution channel. This is accomplished through strategic allianceswith third-party logistics (3PL) firms. These services sometimes involve either the physicalassembly of components and making finished products at a 3PL facility, or the collection offinished components for delivery to the customer. For example, a computer company couldhave items such as the monitor and the CPU shipped directly from its vendors to a 3PL fa-cility, such as at Federal Express or UPS. Therefore, the customer’s computer order would notcome together until all items were placed on a vehicle for delivery by the 3PL. A channelassembly might have low or zero inventories and can achieve a faster market response time; itis popular in the computer technology industry. An example is shown in Exhibit T3.3 (lowerpart) with a large distributor, Ingram Micro, at the center of the supply chain.

The flow of goods, services, information, and financial resources usually is designed notonly to transform raw items to finished products and services effectively, but also to do so inan efficient manner. Several types of software are available to achieve this goal.

EXAMPLES OF SUPPLY CHAINS:

Gateway: A Direct Sales ManufacturerGateway is a manufacturer of PCs that sells directly to customers who place orders at Gatewayretail stores, over the telephone, or via the Internet. After a customer places an order, the PC ismanufactured to order and then shipped from one of the assembly plants. Over the years,Gateway expanded its operations worldwide, creating a sales and manufacturing presence inEurope and Asia Pacific. In 1999, the company had three plants in the United States, one plantin Ireland, and one in Malaysia. As of January 2002, Gateway had about 280 retail stores in theUnited States. The retail stores are used mainly for product displays and for customers to seekprofessional advice. Facing lagging demand and fierce price slashing, its share of the domesticPC market had dropped by 20 percent by November 2002. Gateway then closed all of its over-seas operations and shut down one of its production facilities in the United States. It alsoclosed several of its retail stores and reduced the number of configurations of its products.

The answers to the following supply chain–related questions have a bearing on the per-formance of Gateway.

1. Why did Gateway have multiple production facilities in the United States? What advan-tages or disadvantages does this strategy offer relative to a company that has one facility?

2. Why does Gateway not carry any finished-product inventory at its retail stores? Shoulda firm with an investment in retail stores carry any finished-goods inventory? Whatcharacterizes products that are best manufactured to order?



(a) Integrated continuous replenishment pharmaceutical supply chain(Flow of payments not shown.)

(b) Channel assembly: Build-to-order supply chain with no inventory

NewMaterialSources Pharmaceutical

ManufacturersBusiness

CustomersDistribution

Centers

RetailPharmacies

Customers

McKesson

McKessonDistribution

Centers

Physical flow of material

Flow of information

Transportationcompany

(FedEx, UPS)Solectron

Reseller/Customer

Ingram Micro

Ingram’s Web site

Suppliers

EXHIBIT T3.3 Types of Supply Chains

3. Is the Dell model of selling directly without retail stores always less expensive than asupply chain with retail stores?

4. What are the supply chain implications for Gateway’s decision to offer fewer configurations?Answers to these questions determine the appropriateness of Gateway’s supply chain

decisions and will determine the need for IT support. Manufacturers like HP that sell directand through resellers will need a different supply chain design to support their strategy. Howshould they design and manage their supply chains?

7-Eleven: A Convenience StoreWith more than 23,000 stores in about 20 countries, 7-Eleven is one of the largest con-venience store chains in the world. It has about 9,000 stores in Japan and almost 6,000 in the United States. 7-Eleven Japan is one of the most profitable companies listed on theTokyo stock exchange. Its success is attributed primarily to its supply chain design and

Source: Kalakota, R., and M. Robinson, M-Business: The Race to Mobility. McGraw-Hill, 2002, fig. 9.10, p. 301.



management ability. One of the key objectives of 7-Eleven Japan is to micro-match supplyand demand by location, season, and time of day. To fulfill this objective, 7-Eleven Japanopens new stores in target areas. This helps 7-Eleven establish a strong presence, and it con-solidates its warehousing and transportation functions. In addition, all stores are connectedelectronically to the head office, distribution centers (DCs), and suppliers. Orders are passedto the suppliers, which package store-specific orders and deliver them to the DC. At the DC,all orders of like products from different suppliers are combined and delivered to the stores.7-Eleven Japan has made an effort to have no direct store delivery from vendors to the stores.In the United States, 7-Eleven is taking a similar approach to the one used in Japan, exceptthat a large fraction of products is delivered to stores by a distributor and not from the 7-Eleven DC.

In Japan and the United States, 7-Eleven has invested a significant amount of moneyand effort in a retail information system. Data are collected by scanners and analyzed. Theresulting information is then made available to headquarters and the stores for use in ordering,product assortment, and merchandising. Information systems play a key role in 7-Eleven’sability to micro-match supply and demand.

7-Eleven has made clear choices in the design of its supply chain. Other conveniencestore chains have not always made the same choices. The following questions focus mainly on7-Eleven’s supply chain choices and its key success factors.

1. What factors influence the decision regarding the opening and closing of stores? Whydoes 7-Eleven choose to have a preponderance of its stores in a particular location?

2. Why does 7-Eleven Japan discourage direct store delivery from vendors and make aneffort to move all products through combined DCs? How does the presence of the dis-tributor delivering to the stores affect the performance of the delivery system in theUnited States?

3. Where are DCs located, and how many stores does each center serve? How are storesassigned to DCs?

4. What point-of-sales data does 7-Eleven gather, and what information is made availableto store managers to assist them in their ordering and merchandising decisions? Howshould the information system be structured?

W.W. Grainger and McMaster Carr: MRO Suppliers with a Different SupplyChain StrategyW.W. Grainger and McMaster Carr sell maintenance, repair, and operation (MRO) prod-ucts. Both companies have online catalogs, as well as Web pages through which orders can beplaced. Customers can place their orders in the retail stores, over the telephone, or by meansof the Internet. W.W. Grainger orders are either shipped to the customers or picked up bythe customers at one of the stores. McMaster Carr, on the other hand, ships all orders. W.W.Grainger has several DCs that replenish stores and fill customer orders; McMaster Carr hasDCs from which all orders are filled. Both firms offer several hundred thousand products totheir customers. Each firm stocks about 100,000 products; the rest are obtained from thesupplier as needed. Both firms face the following strategic and operational issues.

1. How many DCs should a company have, and where should they be located?2. How should product stocking be managed at the DCs? Should all DCs carry all

products?3. Which products should be carried in inventory, and which products should be left with

the suppliers?4. How should markets be allocated to DCs in terms of order fulfillment? What should be

done if an order cannot be completely filled from a DC? Should specified backup loca-tions be available? How should they be selected?

5. How should replenishment of inventory be managed at the various stocking locations?6. How should Web orders be handled relative to the existing business? Is it better to inte-

grate the Web business with the existing business or to set up separate distribution?



Toyota: A Global Auto ManufacturerToyota Motor Corp. is Japan’s top auto manufacturer. The company has experienced signifi-cant growth in global sales over the last two decades. A key issue facing Toyota is the designof its global production and distribution network. Toyota must decide what the productioncapability of each of the factories will be, because this has a significant impact on the desireddistribution system. Prior to 1996, Toyota used specialized local factories for each market.After the Asian financial crisis from 1996 to 1997, Toyota redesigned its plants so that theycould be shifted quickly to be able to export to markets that remain strong. Toyota calls thisstrategy “global complementation.” For any global manufacturer like Toyota, several ques-tions arise regarding the configuration and capability of the supply chain.

1. Where should the plants be located, and what degree of flexibility should be built intoeach one? What capacity should each plant have?

2. Should plants be able to produce for all markets or only specific contingency markets?3. How should markets be allocated to plants, and how frequently should this allocation

be revised?4. What kind of flexibility should be built into the distribution system?5. How should this flexible investment be valued?6. What actions can be taken during product design to facilitate this flexibility?

Section T3.1 ◗REVIEW1. Define supply chain.2. Define supply chain management (SCM).3. Define e-supply chain.4. List the flows in the supply chain.5. List the benefits of SCM.6. List the types of supply chains.7. Distinguish between built-to-order and continuous-replenishment supply chains.8. Name the different types of supply chains and some of the issues involved in their

operations.

T3.2 COMPUTERIZED SYSTEMS: MRP, MRP II, SCM, AND INTEGRATION

The concept of the supply chain is interrelated with the computerization of its activities,which has evolved over the last 50 years.

THE EVOLUTION OF SUPPLY CHAIN COMPUTERIZED AIDSHistorically, many of the supply chain activities were managed with paper transactions,which can be slow, error prone, and inefficient. Therefore, since the time when computerswere first used for business, people have wanted to automate the supply chain processes. Thefirst software programs, which appeared in the 1950s and early 1960s, supported short seg-ments along the supply chain. Typical examples of these segments are inventory managementsystems, scheduling, and billing. The supporting software was called supply chain management(SCM) software. The major objectives were to reduce cost, expedite processing, and reduceerrors. Such applications were developed in the functional areas, independent of each other,and they became more and more sophisticated with the passage of time. Of special interestwere decision support procedures such as management science optimization and financialdecision-making formulas (e.g., for finding appropriate order quantities).

It quickly became clear that interdependencies exist among some of the supply chainactivities. One early realization was that production scheduling is related to inventory man-agement and purchasing plans. As early as the 1960s, the material requirements planning



(MRP) model was devised. This model essentially integrates production, purchasing, andinventory management of interrelated products. It became clear that computer support couldgreatly enhance the use of this model, which might require daily updating. This resulted incommercial MRP software packages coming on the market.

Although MRP packages were and still are useful in many cases, helping drive in-ventory levels down and streamlining portions of the supply chain, they failed in as manycases. One of the major reasons for the failure was the realization that schedule-inventory-purchasing operations are closely related to financial and labor resources. This realizationresulted in an enhanced MRP methodology (and software) called manufacturing resourceplanning (MRP II). which adds labor requirements and financial planning to MRP. (SeeSheikh, 2002.)

During this evolution, it became more and more common to integrate functional infor-mation systems. This evolution continued, leading to the enterprise resource planning(ERP) concept, which integrates the transaction processing and other routine activities of allfunctional areas in the entire enterprise. ERP initially covered all routine transactions withina company, including internal suppliers and customers, but later it was expanded to incorpo-rate external suppliers and customers in what is known as extended ERP software. The nextstep in this evolution, which started in the late 1990s, is the inclusion of business intelligenceand other software. At the beginning of the twenty-first century, the integration expanded toinclude markets and communities. (See mySAP.com for details.) ERP, which is also knownas enterprise software, will be examined in more detail in Section T3.3.

Notice that throughout this evolution, more and more integrations have occurred alongseveral dimensions (e.g., more functional areas, combining transaction processing and deci-sion support, inclusion of business partners). Therefore, before describing the essentials ofERP and SCM software, it will be beneficial to analyze the reasons for software and activi-ties integration.

WHY SHOULD SYSTEMS BE INTEGRATED?Creating the twenty-first-century enterprise cannot be done effectively using twentieth-century computer technology, which is functionally oriented. Functional systems might notlet different departments communicate with each other in the same language. Worse yet,crucial sales, inventory, and production data often have to be painstakingly entered manuallyinto separate computer systems every time a person who is not a member of a specific depart-ment needs ad hoc information related to the specific department. In many cases, employeessimply do not get the information they need, or they get it too late.

Sandoe et al. (2001) list the following major benefits of systems integration (in decliningorder of importance).

Tangible benefits: Inventory reduction, personnel reduction, productivity improvement,order management improvement, financial-close cycle improvements, IT cost reduction,procurement cost reduction, cash management improvements, revenue/profit increases,transportation logistics cost reduction, maintenance reduction, and on-time deliveryimprovement

Intangible benefits: Information visibility, new/improved processes, customer responsive-ness, standardization, flexibility, globalization, and business performance

Internal Versus External IntegrationInternal integration refers to integration between applications or between applications anddatabases inside a company. For example, one may integrate the inventory control with anordering system, or a Customer Relationship Management (CRM) suite with the databaseof customers. Large companies that have hundreds of applications might find it extremelydifficult to integrate the newer Web-based applications with the old legacy systems.

External integration refers to integration of applications or databases among businesspartners; for example, the suppliers’ catalogs with the buyers’ e-procurement system.External integration is especially needed for B2B and for partners’ relationship management(PRM) systems.



Types of Integration: From a Supply to a Value ChainThe most obvious integration is that of the segments of the supply chain and the informationthat flows among the segments. However, there is another type of integration—the integrationof the value chain. Traditionally, the supply chain has been thought of in terms of purchasing,transportation, warehousing, and logistics.The integrated value chain is a more encompassingconcept. It is the process by which multiple enterprises within a shared market channel col-laboratively plan, implement, and manage (electronically as well as physically) the flow ofgoods, services, and information along the entire chain in a manner that increases customer-perceived value. This process optimizes the efficiency of the chain, creating a competitiveadvantage for all stakeholders in the value chain. The supply chain is basically a description offlows and activities, but the value chain expresses the contributions made by various segmentsand activities to the profit and to customers’ satisfaction. (For a survey, see Drickhamer, 2002.)

Another way of defining the value chain integration is as a process of collaboration thatoptimizes all internal and external activities involved in delivering greater perceived value tothe ultimate customer. A supply chain transforms into an integrated value chain when it:

◗ Extends the chain all the way from subsuppliers (tier two, three, etc.) to customers.◗ Integrates back-office operations with those of the front office.◗ Becomes highly customer-centric, focusing on demand generation and customer service,

as well as demand fulfillment and logistics.◗ Seeks to optimize the value added by information and utility-enhancing services.◗ Is proactively designed by chain members to compete as an “extended enterprise,” creat-

ing and enhancing customer-perceived value by means of cross-enterprise collaboration.

COLLABORATION ALONG THE SUPPLY CHAINPresently, only a few large companies are successfully involved in a comprehensive collabora-tion to restructure the supply and value chains. One such effort is described in ApplicationCase T3.1. It involves the Collaborative Planning, Forecasting and Replenishment (CPFR)project.

For a special report on this type of collaboration, see ASCET (2000), where such collab-oration is referred to as collaborative commerce networks, or collaborative commerce.

Vendor-managed inventory (VMI) is a collaboration strategy often used by these largeretailers. The suppliers (vendors) monitor inventory levels at retail stores and place replenish-ment orders when needed.

Another example of supply chain integration is product-development systems that allowsuppliers to dial into a client’s intranet, pull product specifications, and view illustrations andvideos of a manufacturing process. (For further discussion, see Selland, January 1999 andOctober 1999; and Hagel, 2002.)

Section T3.2 ◗ REVIEW1. Define MRP, MRP II, and ERP.2. Define internal and external integration of supply chain segments.3. List the benefits of integration (tangible and intangible).4. Describe collaboration along the supply chain.5. What is CPFR? (Hint: See Case T3.1.)

T3.3 ENTERPRISE RESOURCE PLANNING (ERP)One of the most successful tools for managing supply chains is enterprise resource plan-ning (ERP).

WHAT IS ERP?With the advance of enterprise-wide client/server computing comes a new challenge: how tocontrol all major business processes with a single software architecture in real time. Such anintegrated software solution, known as enterprise resource planning (ERP), or just enterprise



CASE T3.1EC Application

HOW WARNER-LAMBERT APPLIES AN INTEGRATEDSUPPLY CHAINOne of Warner-Lambert’s (warner-lambert.com) major productsis Listerine antiseptic mouthwash. The materials for makingListerine come mainly from eucalyptus trees in Australia andare shipped to the Warner-Lambert (WL) manufacturing plantin New Jersey. The major problem in New Jersey is to deter-mine how much Listerine to produce. Then one can figurehow much of each raw material is needed and when. Listerineis first purchased by wholesalers and then by thousands ofretail stores, some of which are giants such as Wal-Mart. Theproblem the manufacturing plant faces is to forecast theoverall demand. A wrong forecast will result either in highinventories of products or raw materials or in shortages.Inventories are expensive to keep, and shortages may resultin a loss of business.

Warner-Lambert forecasts demand with the help ofManugistics Inc.’s Demand Planning Information System.(Manugistics is a vendor of IT software for SCM.) Used withother software in Manugistics’ Supply Chain Planning suite,the system analyzes manufacturing, distribution, and salesdata against expected demand and business climate informa-tion. Its goal is to help WL decide how much Listerine (andother products) to make, and how much of each raw ingredi-ent is needed and when. For example, the model can antici-pate the impact of a seasonal promotion or of a productionline being down. The sales and marketing group of WL alsomeets monthly with WL employees in finance, procurement,

(continued)

Wal-MartCPFRServer

RetailLink

Sales Data aboutWL Products

InventoryPlan

Forecast

Wal-Mart

Operational System

SCMManufacturing

Planning

Warner-Lambert (WL)

ERP

Data Warehouse

Review andComments

Internet

Internet Internet

WLCPFRServer

EDI

? ?




HOW WARNER-LAMBERT APPLIES AN INTEGRATEDSUPPLY CHAIN (continued)and other departments. The group enters the expecteddemand for Listerine into a Corp. Prism Capacity Planningsystem (now Invensys Plc.), which schedules the productionof Listerine in the amounts needed and generates electronicpurchase orders for WL’s suppliers.

WL’s supply chain excellence stems from the CollaborativePlanning, Forecasting, and Replenishment (CPFR) program.This is a retailing industry project for which piloting was doneat WL. In the pilot project, WL shared strategic plans, perfor-mance data, and market insight with Wal-Mart over privatenetworks. The company realized that it could benefit from Wal-Mart’s market knowledge, just as Wal-Mart could benefitfrom WL’s product knowledge. In CPFR, trading partnerscollaborate on demand forecasting using collaborative e-commerce. The project includes major SCM and ERP vendors,such as SAP and Manugistics. (See previous page.) During theCPFR pilot, WL increased its products’ shelf-fill rate—theextent to which a store’s shelves are fully stocked—from 87 percent to 98 percent, earning the company about $8 mil-lion a year in additional sales (the equivalent of a new productlaunch) for much less investment. WL is now using the

Internet to expand the CPFR program to all its major suppliersand retail partners.

Warner-Lambert also is involved in another collaborativeretail industry project: the Supply-Chain Operations Reference(SCOR), an initiative of the Supply-Chain Council in theUnited States. SCOR divides supply chain operations intoparts, giving manufacturers, suppliers, distributors, and retail-ers a framework within which to evaluate the effectiveness oftheir processes along the same supply chains.

Sources: Compiled from CIO, August 15, 1998; Stores, June 1998;and Logistics Management and Distribution Report, October 1998 andNovember 1999.

Questions1. For what industries, besides retailing, will such

collaboration be beneficial?

2. Why was Listerine a target for the pilot CPFRcollaboration?

systems, is a process of planning and managing all resources and their use in the entire enter-prise. ERP is a software program comprising a set of applications that automate routine back-end operations such as financial, inventory management, and scheduling to help enterpriseshandle jobs such as order fulfillment. (See O’Leary, 2000.) For example, there are modules forcost control, accounts payable and receivable, fixed assets, and treasury management. ERPpromises benefits ranging from increased efficiency to improved quality, productivity, andprofitability. (See Ragowsky and Somers, 2002, for details.)

The name enterprise resource planning is misleading because the software does not addressplanning or resources. ERP’s major objective is to integrate all departments and functionsacross a company onto a single computer system that can serve all of the enterprise’s needs.(See Stratman and Roth, 2002.) For example, improved order entry allows immediate accessto inventory, product data, customer credit history, and prior order information. This avail-ability of information raises productivity and increases customer satisfaction. ERP, for exam-ple, helped Master Product Company increase customer satisfaction and, consequently, salesby 20 percent, while decreasing inventory by 30 percent; this resulted in an increase in pro-ductivity (Caldwell, 1997). ERP systems are in use in thousands of large and medium-sizedcompanies worldwide. Some are producing dramatic results. (See erpassist.com.)

For businesses that want to use ERP, one option is to self-develop an integrated systemby using existing functional packages or by programming one’s own systems. The otheroption is to use commercially available, integrated ERP software. The leading software forERP is SAP R/3. Oracle, Computer Associates, and PeopleSoft also make similar products.These products include dozens of different modules, as shown in Exhibit T3.4. Anotheralternative is to lease systems from application service providers (ASPs). A major advantageof this approach is that even a small company can enjoy ERP because users can lease only rele-vant modules rather than buying the entire package. As of 2003, some ERP vendors are will-ing to sell only relevant modules; SAP and IBM currently sell ERP for small to mediumenterprises (SMEs).



EXHIBIT T3.4 Representative Modules in ERPERPs may contain more than 70 different modules. Here are major representative modules:

Finance/Accounting Area:General ledger—Keeps centralized charges of accounts and corporate financial balances.Accounts receivable—Tracks payment due to a company from its customers.Accounts payable—Schedules bill payments to suppliers and distributors.Fixed assets—Manages depreciation and other costs associated with tangible assets such as buildings, property, and equipment.Treasury management—Monitors and analyzes cash holdings, financial deals, and investment risks.Cost control—Analyzes corporate costs related to overhead, products, and manufacturing orders.Financial accounting—A comprehensive, robust financial accounting package for monitoring real-time values from financially

relevant transactions out of value-creation processes.Managerial accounting—Helps companies optimally monitor and control all performance-relevant information in an environ-

ment that is completely integrated with all operative transactions throughout the company. Managerial accounting helps acompany take control of its profitability.

Financial supply chain management—Enables financial collaboration within the enterprise and its business networks usingdefined corporate policies and shared services to handle all customers—and supply chain–related financial processes; helpsautomate the financial supply chain using the Web and other new electronic service models.

Manager self-service—Provides business managers with access to all relevant business information as well as related servicesthrough financial portal solutions. HR content and processes empower anyone who manages and makes decisions aboutfinance, management, and human capital. The portals provide convenient Web-based access to internal and external applica-tions, business content, and services that may be the key to tasks, processes, or business decisions.

Others—Activity-based management, balanced score card, collections, financial analysis, billing, budgeting, expense manage-ment, and risk management.

Manufacturing and Logistics:Production planning management and control—Performs capacity planning and creates a daily production schedule for a

company’s manufacturing plants. Plans and control the enterprise production process.Materials management—Controls purchasing of raw materials needed to build products. Manages inventory stocks.Warehouse management—Maintains records of warehoused goods and processes movement of products through warehouses.Transportation management—Arranges, schedules, and monitors delivery of products to customers via trucks, trains, and other

vehicles.Project management—Monitors costs and work schedules on a project-by-project basis.Customer service management—Administers installed-base service agreements and checks contracts and warranties when cus-

tomers call for help.Operations—Enables a company to efficiently streamline the logistic operations for the optimal execution of all orders result-

ing from purchasing, sales, production, and change management environments.Purchase order management—enables the efficient handling and execution of purchase orders integrated within the entire

logistics process.Inventory management—Allows a company an integrated management system of stock and inventories in an integrated opera-

tive environment.Maintenance & quality—Allows a company to efficiently handle the plant maintenance and quality control process within the

company.Delivery management—Executes the delivery and transportation processes to efficiently support a sales environment.Others—Allows discrete and/or process manufacturing, product life cycle (PLM) management, supply chain planning and man-

agement, and procurement.

Marketing and Sales:Sales order management—Enable the sales order fulfillment process allowing for fast and efficient execution of customer sales

orders.Order entry and processing—Automate the data entry process of customer orders and keeps track of the status of orders.Managing sales leads—Generate, evaluate, and track leads.Managing advertisements and promotions—Identify best campaigns and targets, measure results, plan trade promotions.Manage sales—Plan fields sales, automate call center, manage sales incentives.

(continued)



EXHIBIT T3.4 (continued)Human Resources Management:Human resources administration—Automates personnel management processes including recruitment, business travel, and

vacation allotments.Payroll—Handles accounting and preparation of checks related to employee salaries, wages, and bonuses.Self-service HR—Lets workers change their personal information and benefit allocations online without having to send forms

to human resources.HRM analytics—Provides data analysis and reporting tools as well as strategic enterprise management capabilities to support

informed HR policy and decision making. The solutions enable the company to analyze and optimize the current workforce, toimplement and monitor the corporate strategy, and to continuously evaluate how different scenarios will affect business goals.

Others—Benefits’ management, learning and training, labor relations.

Corporate Services:Real estate management—Provides a complete solution with capabilities to support every stage of the real estate portfolio

life cycle and streamlines business processes, allowing companies to optimally utilize and manage their real-estate assets.Incentive and commission management—Processes all types of variable remuneration for employees, sales forces and part-

ners, such as incentives, commissions, and brokerage fees.Travel management—Provides applications for business travel management that support and optimize travel processes;

includes travel manager’s marketplace, which supports procurement of travel services. With seamless integration to expensereporting, travel management allows for the optimal management of the entire business travel cycle.

Sources: Complied from mysap.com, oracle.com, and peoplesoft.com.

THE FIRST-GENERATION ERPAn ERP suite provides a single interface for managing all the routine activities performed inmanufacturing from entering sales orders, to coordinating shipping, to providing after-salescustomer service. As of the late 1990s, ERP systems were being extended along the supplychain to suppliers and customers. They can incorporate functionality for customer interactionand for managing relationships with suppliers and vendors, making the system look less likeone company’s internal system.

Large companies have been successful in integrating several hundred applications usingERP software, saving millions of dollars and significantly increasing customer satisfaction.For example, ExxonMobil consolidated 300 different information systems by implementingSAP R/3 in its U.S. petrochemical operations alone. ERP forces discipline and organizationaround business processes, making the alignment of IT and business goals more likely. Also,by implementing ERP, a company can discover all the “dusty corners” of its business.

However, ERP software can be extremely complex to implement; companies often needto change existing business processes to fit ERP’s format, and some companies require onlysome of the ERP’s software modules yet must purchase the entire package. For these reasons,ERP software might not be attractive to everyone. For example, Caldwell and Stein (1998)report that Inland Steel Industries, Inc., opted to write its own ERP system (containing 7million lines of code), which supports 27 integrated applications, rather than use commercialERP. Also, some companies, such as Starbucks, decided to use a best of breed approach,building their ERP with ready-made components from several vendors. As indicated earlier,the option of leasing individual modules from ASPs may lessen this problem.

In whatever form it is implemented, ERP has played a critical role in getting manufac-turers to focus on business processes, thus facilitating business process changes across theenterprise. (See El Sawy, 2001.) By tying together multiple plants and distribution facilities,ERP solutions also have facilitated a change in thinking that has its ultimate expression in anenterprise that is better able to expand operations and in better supply chain management.(For a comprehensive treatment of ERP, its cost, implementation problems, and payback, seeKoch et al., 1999; James and Wolfe, 2000; Jacobs and Whybark, 2000; and Lucas and Bishop,2002.) Palaniswamy and Frank (2002) describe positive results obtained by using OracleERP and discuss its implementation process.

However, ERP as it was originally designed was never meant to fully support supplychains. ERP solutions are centered on routine business transactions. As such, they do not



provide the computerized models needed to respond rapidly to real-time changes in supply,demand, labor, or capacity, nor to effectively integrate with e-commerce. This deficiency hasbeen overcome by the second generation of ERP.

THE SECOND-GENERATION ERPThe goal of first-generation ERP was to automate routine business transactions; indeed,ERP projects do save companies millions of dollars. A report by Merrill Lynch noted that nearly 40 percent of all U.S. companies with more than $1 billion in annual revenueshave implemented ERP systems. However, by the late 1990s, the major benefits of ERP had been fully exploited. It became clear that with the completion of the Y2K projects thatwere an integral part of many ERP implementations, the first generation of ERP was near-ing the end of its useful life. However, the ERP movement was far from over. A second, morepowerful generation of ERP development started. (See James and Wolf, 2000.) Its objectivesare to leverage existing systems in order to increase efficiency in handling transactions, toimprove decision making, and to further transform ways of doing business into e-commerce.

The first generation of ERP excelled in its ability to manage administrative activitiessuch as payroll, inventory, and order processing. For example, an ERP system has the func-tionality of electronic ordering or the best way to bill the customer, but all it does is automatethe transactions. Palaniswamy and Frank (2002) cite examples of five case studies indicatingthat ERP significantly enhances the performance of manufacturing organizations as a resultof automating transactions.

The reports generated by ERP systems gave planners statistics about what happened inthe company, costs, and financial performance. However, the planning systems developedusing ERP were rudimentary. Reports from first-generation ERP systems provided a snap-shot of the business at a single point in time. However, they did not support the continuousplanning that is central to supply chain planning, which continues to refine and enhance theplan as changes and events occur up to the last minute before executing the plan. Attemptingto come up with an optimal plan using first-generation, ERP-based systems has been com-pared to steering a car by looking in the rearview mirror.

This created the need for planning systems oriented toward decision making, which iswhat SCM software vendors provide. (See Insights and Additions T3.1.)

Combining ERP with SCM SoftwareTo illustrate how ERP and SCM might work together, one can look at the task of order process-ing. A fundamental difference exists between SCM and ERP: The question for SCM software is“Should I take your order?” instead of the ERP approach of “How can I best take or fulfill yourorder?” The SCM and ERP software are information systems and will be referred to as such.

Thus, the analytical SCM systems have emerged as a complement to ERP systems toprovide intelligent decision support or business intelligence capabilities. (See Keskinocak,2001.) An SCM system is designed to overlay existing systems and to pull data from everystep of the supply chain. Thus, it is able to provide a clear, global picture of where the enter-prise is heading. An example of a successful SCM effort is that of IBM. IBM restructuredits global supply chain in order to achieve quick responsiveness to customers and to do itwith minimal inventory. To support this effort, IBM developed an extended-enterprise,supply-chain analysis tool called the Asset Management Tool (AMT). AMT integratesgraphical process modeling, analytical performance optimization, simulation, activity-basedcosting, and enterprise database connectivity into a system that allows quantitative analysisof inter-enterprise supply chains. IBM has used AMT to analyze and make improvementsin such areas as inventory budgets, turnover objectives, customer-service targets, and newproduct introductions. The system was implemented at a number of IBM business unitsand their channel partners. AMT benefits include a savings of more than $750 million inmaterials costs and price-protection expenses each year. (For details, see Yao et al., 2000.)The system was also a prerequisite to a major e-procurement initiative at IBM. Creating aplan from an SCM system allows companies to assess quickly the impact of their actions onthe entire supply chain, including customer demand. Therefore, it makes sense to integrateERP and SCM.



SCM software refers to software that is specifically designed to improve decision making along the supply chain, such as deter-mining the best way to ship to your customer or the optional production plan inside your own manufacturing system. This is incontrast with ERP software, which streamlines the flow of routine information along the supply chain (such as order taking,inventory levels computing, or sales data). In fact, data collected by the ERP system are frequently used as input data foranalysis done with ERP software (Latamore, 2000). To better understand the differences between the two, one can look at theproducts offered by two SCM vendors: i2 and Manugistics.

i2 CORPORATION OPTIMIZATION SOLUTIONSThis company offers a set of file-integrated optimization solutions, which are shown in the upper part of exhibit below (shownbetween “suppliers” and “customers”). Notice that all are optimization tools: For example, logistics optimization enables companiesto procure, plan, execute, and monitor freight movements across multiple modes, borders, and enterprises. Optimization usually isbuilt on Decision Support Systems (DSS) models, such as linear programming and simulation, as well on other analytical tools.

The optimization tools (each of which includes several applications; see i2.com/solutionareas/index.cfm) are supported bycontent subscription and supply chain services modules. The entire set of solutions can be connected to ERP and legacy sys-tems, which provide the data for the analysis and optimization done by the optimization modules.

(continued)

Insights and Additions T3.1 SCM Software Versus ERP Software

Fulfillment Optimization

SpendOptimization

ProductionOptimization

Revenue& Profit

Optimization

Logistics Optimization

Content Subscription

Supply Chain Operating Services

ERP/Legacy Systems

Suppliers Customers

ERP ERP

Source: From “The Foundation for Supply Chain Optimization,” 2003.



MANUGISTICS SUPPLY CHAIN MANAGEMENT SOLUTIONSManugistics offers the following integrated solution suites.

◗ Network Design and Optimization◗ Manufacturing Planning and Scheduling◗ Sales and Operations Planning◗ Fulfillment Management◗ Collaborative Vendor Managed Inventory (VMI) and CPFR◗ A private Trading Intelligent Hub (for external integration)◗ Service and Parts Management◗ Logistics Management◗ Profitable Order Management◗ Profitable Demand Management◗ Enterprise Profit Optimization

Each suite has several applications. (See manugistics.com.)

Insights and Additions T3.1 (continued)

Alternative Ways to Integrate ERP and SCMHow is such integration done? One approach is to work with different software productsfrom different vendors. For example, a business might use SAP as an ERP and add to itManugistics’ manufacturing-oriented SCM software, as shown earlier in the Warner-Lambert case. Such an approach requires fitting different software, which can be a complextask, unless special interfaces known as adopters provided by middleware vendors exist. (SeeLinthicum, 1999.)

The second approach is for the ERP vendors to add decision support and analysiscapabilities, which are known as business intelligence. Business intelligence refers to analy-sis performed by different IT tools such as data mining and intelligent systems. Using one vendor and a combined product solves the integration problem. However, as is the case with integration of database management systems and spreadsheets in Excel, the result can be a product with some weak functionalities. Most ERP vendors offer such func-tionalities for another reason though: It is cheaper for the customers. The added func-tionalities, which create the second-generation ERP, include not only decision support but also CRM, electronic commerce, and data warehousing and mining. Some systemsinclude a knowledge management component, as well. In 2003, vendors started to addproduct life cycle management (PLM) in an attempt to optimize the supply chain (Hill,2003). An example of ERP application that includes an SCM module is provided inApplication Case T3.2.

SUPPLY CHAIN INTELLIGENCEThe inclusion of business intelligence in supply chain software solutions is called by somesupply chain intelligence (SCI). SCI applications enable strategic decision making by ana-lyzing data along the entire supply chain. To better understand SCI, it is worthwhile to com-pare it with SCM. Such a comparison is provided in Exhibit T3.5.




COLGATE-PALMOLIVE USES ERP TO SMOOTH ITS SUPPLY CHAINColgate-Palmolive is the world leader in oral care products(mouthwashes, toothpaste, and toothbrushes) and a majorsupplier of personal care products (baby care, deodorants,shampoos, and soaps). In addition, the company’s Hill’s HealthScience Diet is a leading pet food brand worldwide. Foreignsales account for about 70 percent of Colgate’s total revenues.

To stay competitive, Colgate continuously seeks tostreamline its supply chain, where thousands of suppliers andcustomers interact with the company. At the same time,Colgate faces the challenges of new product acceleration,which has been a factor in driving faster sales growth andimproved market share. Also, Colgate is devising ways tooffer consumers a greater choice of better products at alower cost to the company, which creates complexities in themanufacturing and the supply chains. To better manage andcoordinate its business, Colgate embarked on an ERP imple-

mentation to allow the company to access more timely andaccurate data and to reduce costs. The structure of the ERP isshown in exhibit above.

An important factor for Colgate was whether it coulduse the ERP software across the entire spectrum of the busi-ness. Colgate needed the ability to coordinate globally andto act locally. Colgate’s U.S. division installed SAP R/3 forthis purpose.

Source: Compiled from Kalakota and Robinson (2002).

Questions1. What is the role of the ERP?

2. Who are the major beneficiaries?

How Are SCI Capabilities Provided?The following are common ways to provide SCI capabilities.

◗ Use an enhanced ERP package that includes business intelligence capabilities. Forexample, see Oracle and SAP products of 2001 or later.

◗ Integrate the ERP with business intelligence software from a specialized vendor, such asBrio, Cognus, Information Builders, or Business Objects.

◗ Use Web Services. (See Hagel, 2002.)◗ Create a best-of-breed system by using components from several vendors that will pro-

vide the required capabilities.

Sup

plie

rs

Supply Chain Planning and Optimization

ManufacturingPlanning

TransportationPlanning

DistributionPlanning

DemandPlanning

E-C

omm

erce

Mktg.Mgmt. &

Research

ProductDevelopment

Pricing &Promotion

Finance and Accounting

Human Resources

Sales OrderEntry

Purchasing& Accounts

Payable

MRPInboundInventory

Plant Mgmt.

Manufacturing& ProductionScheduling

(MPS)

InventoryControl &

Warehousing

Distribution& AccountsReceivable

Cus

tom

ers

Enterprise Resource Planning

Source: Kalakota, R., and M. Robinson, M-Business: The Race to Mobility. New York: McGraw-Hill, 2002, p. 259.



EXHIBIT T3.5 Comparing SCM and SCISupply Chain Management Supply Chain IntelligenceLargely about managing the procurement and production Provides a broad view of an entire supply chain to reveal full

links of the supply chain. product and component life cycle.Transactional. Analytic.Tactical decision making. Strategic decision making.Helps reduce costs through improved operational efficiency. Reveals opportunities for cost reduction, but also stimulates Usually just the SCM application’s data (as a vertical stovepipe). revenue growth.Records one state of data, representing “now.” Integrates supplier, manufacturing, and product data (horizontal).Assists in material and production planning. Keeps a historic record.Quantifies cost of some materials. Does what-if forecasting based on historical data.Shows today’s yield but cannot explain influences on it; thus Enables an understanding of total cost.

provides no help for improvements. Drills into yield figures to reveal what caused the performance Simple reporting. level, so it can be improved.

Collaborative environment with personalizable monitoring of metrics.

Source: Russom, P., “Increasing Manufacturing Performance Through Supply Chain Intelligence.” DM Review, September 2000. Reprinted bypermission from Sage Tree, Inc.

ERP FAILURES AND JUSTIFICATIONDespite all the improvements, ERP projects, especially large ones, may fail as shown inInsights and Additions T3.2.

In order to avoid failures and ensure success, it is necessary, according to thespot4sap.com,for the partners involved in ERP implementation to hold open and honest dialogue at the startof each project, and to nail down the critical success factors of the implementation. Included inthis initial dialogue should be consideration of the following factors: the customer’s expecta-tions; the ERP product capabilities and limitations; the level of change the customer has to gothrough to make the system fit; the level of commitment within the customer organization tosee the project through to completion; the risks presented by politics within the customer orga-nization; and the implementing consultant’s capabilities, responsibilities, and role (if applica-ble). Failures also can be minimized if appropriate cost-benefit and justification are done inadvance. (See Oliver and Romm, 2002; Murphy and Simon, 2002.) Another way to avoid fail-ures, or at least to minimize their cost, is to use ASPs. ERP implementation may be offered bycultural and global factors. For an analysis of the Asian experiences, see Soh et al. (2000).

Finally, Willcocks and Sykes (2002) relate the successful implementation of ERP to theneed to identify and build key in-house IT capabilities before embarking on ERP.

Section T3.3 ◗REVIEW1. Describe an ERP system.2. Compare building an ERP with buying or leasing one.3. Compare the first and second generations of ERP.4. Define SCM software, and list some of its capabilities.

T3.4 E-COMMERCE AND SUPPLY CHAINSE-commerce (EC) is emerging as a superb tool for providing solutions to problems along thesupply chain. Many supply chain activities, from taking customers’ orders to procurement,can be conducted as part of an EC initiative. In general, EC can make the following contri-butions to supply chain management.

1. Digitize products such as software. This expedites the flow of materials in the chain. Itis also much cheaper to create and move electronic digits than physical products.



The complexity of ERP projects causes some of them to fail, as shown by the following examples.Example 1: Hershey’s chocolate bars and its other products were not selling well in late 1999. Hershey Foods Corp.

reported a 19-percent drop in third-quarter net earnings due to computer problems. The problems continued for several months,causing Hershey to lose market share and several hundred million dollars. The major problem, according to the company, was itsnew order-and-distribution system, which uses software from SAP (the ERP) and Siebel Systems (the CRM). Since the integratedsystem went live in July 1999, Hershey had been unable to fill all orders and get products onto shelves on time. It took manymonths to fix the problem.

Example 2: In November 1999, Whirlpool Corp. reported major delays in its shipments of appliances due to “bugs” in itsnew ERP. Orders for quantities smaller than one truckload met with snags in the areas of order processing, tracking, and invoic-ing. According to cnet.com (site accessed February 16, 2001), SAP gave Whirlpool the red light twice prior to the date on whichthe project would go live, saying the supply chain was not ready, but Whirlpool ignored the signals.

Example 3: FoxMeyer, a major distributor of prescription drugs to hospitals and pharmacies that filed for bankruptcy in1996, sued SAP and Accenture Consulting (in August 2001) for $500 million each, claiming that the ERP system they con-structed led to its demise. See the complete case on the book’s Web site at wiley.com/college/turban. Many customers suedFoxMeyer, as well. All cases are still pending as of May 2003.

Example 4: W. L. Gore and Associates filed a lawsuit against PeopleSoft and Deloitte & Touche, because the ERP projectthat the two companies developed for the company cost twice the original estimate.

Note: In the W. L. Gore and FoxMeyer cases, the ERP vendors and consultants blamed their client’s poor management teamsfor the ERP problems. Both cases were in court at the time this was written (fall 2003).

Example 5: Nike, Inc., installed a $400 million global e-supply chain in 2000 to manage the supply chain of its shoes andother products. In an attempt to save time, the company modified a generic software product from i2 Inc., only to find out thatthe ERP-based e-supply chain does not work. The system was repaired in 2001 after causing millions of dollars in damages to Nike.

Sources: Compiled from Davenport, T. H., Mission Critical: Realizing the Promise of Enterprise Systems. Cambridge, MA: Harvard Business SchoolPress, 2000; cnet.com; cio.com; and Business Courier (miscellaneous dates).

Insights and Additions T3.2 Even the Best-Planned ERPs Sometimes Fail

2. Replace all paper documents that move physically with electronic documents. Thischange improves speed and accuracy, and the cost of document transmission is muchcheaper.

3. Provide an integrated messaging system. A single business transaction could involvemany messages, totaling thousands of messages per week or even per day for a company.E-commerce can replace related faxes, telephone calls, and telegrams with an electronicmessaging system at a minimal cost.

4. Change the nature and structure of the supply chain from linear to a hub. Suchrestructuring enables faster, cheaper, and better communication, collaboration, and dis-covery of information.

5. Enhance collaboration and information sharing among the partners in the supplychain. This can improve cooperation, coordination, and demand forecasts.

6. Shorten the supply chain and minimize inventories. Production changes from massproduction to build to order as a result of the “pull” nature of EC. The auto industry, forexample, is expected to save billions of dollars annually in inventory reduction alone bymoving to an e-commerce-supported, build-to-order strategy.

7. Facilitate customer service. Of special interest is the reduction of contact betweenemployees and customers due to innovations such as the introduction of a Web site for fre-quently asked questions (FAQs) and self-services such as the self-tracking of shipments.

8. Introduce efficiencies. These efficiencies relate to buying and selling through the cre-ation of e-marketplaces and e-procurement.

The next section examines some specific activities and cases.



BUYING AND SELLING ALONG THE SUPPLY CHAINA major role of EC is to facilitate buying and selling along all segments of the supply chain.The major activity categories are upstream activities, internal supply chain activities, down-stream activities, and combined upstream/downstream activities.

Upstream ActivitiesMany innovative models of EC improve the upstream activities. These models generally aredescribed as e-procurement. Examples are reverse auctions, aggregation of vendors’ catalogsat the buyer’s site, procurement via consortia, and group purchasing. (For others, seeMitchell, 2000; Adamson, 2000; and Varley, 2000.)

Internal Supply Chain ActivitiesInternal SCM activities include several intrabusiness EC activities. These activities—fromentering orders of materials, to recording sales, to tracking shipments—usually are conductedover a corporate intranet. The Chevron Texaco case that follows illustrates several internalEC applications.

Downstream ActivitiesThe following are typical EC models of downstream activities.

Selling on your own Web site. Large companies such as Intel, Dell, Cisco, and IBM usethis model. At the company’s Web site, buyers review electronic catalogs from which they canmake purchases. Large buyers get their own pages and customized catalogs. Companies selltheir standard products, and many allow customers to configure customized products (e.g.,Cisco, National Semiconductor Corp.).

Auctions. Large companies such as Dell conduct auctions of products or obsolete equip-ment on their Web sites. Electronic auctions can shorten cycle time and save on logisticsexpenses. For example, in the United States, more than 2.5 million used cars are sold in auc-tions annually. Many of these auctions are offered online and are supplied by car rental com-panies, government agencies, banks, and some other large organizations. One pure onlineB2B auctioneer, for example, is manheimauctions.com. The buyers are car dealers who thenresell the cars to individuals. Traditional car auctions are done on large lots, where the cars aredisplayed and physically auctioned. In the electronic auction, the autos do not need to betransported to a physical auction site, nor do buyers have to travel to an auction site. Savingsof up to $500 per car can be realized.

ExchangesConsiderable support to B2B supply chains can be provided by electronic exchanges. Suchexchanges are shown in Exhibit T3.6. Notice that this example shows three separateexchanges. In other cases, the entire industry might have only one exchange.

Upstream and Downstream CombinedIt is sometimes advisable to combine upstream and downstream EC activities.This can be donein B2B exchanges, where many buyers and sellers meet. Most of these exchanges are centeredone in each industry, so they are referred to as vertical exchanges. A typical vertical exchange isthe one organized by ChemConnect. Similar markets exist for metals, electricity (which is soldamong electricity-generating companies), and many commodities. Some vertical exchanges useauctions and reverse auctions.

Many other e-commerce innovations exist. For example, Radio Frequency ID (RFID)tags provide real-time information that can smooth the supply chain. (See Exhibit T3.7.)

INTEGRATION OF EC WITH ERPBecause many middle-sized and large companies already have an ERP system or are installingone, and because EC needs to interface with ERP, it makes sense to integrate the two tightly.Such interface is needed mainly for order fulfillment and for collaboration with business part-ners, as in the case of inventory managed by suppliers. Integrating EC and ERP efforts is still




CHEVRONTEXACO MODERNIZED ITS SUPPLY CHAIN WITH EC TOOLSTHE PROBLEMChevronTexaco is the largest U.S. oil company, and it ismultinational in nature. Its main business is drilling, refin-ing, transporting, and selling gasoline (oil). In this competi-tive business, a savings of even a quarter of a penny for eachgallon totals up to millions, and so does the cost. Two prob-lems have plagued the industry: running out of oil whenneeded at each pump, and a delivery that is aborted becausea tank at the gas station is too full (called retain). Run-outsand retains, known as the industry’s “twin evils,” have beentargets for improvements for years with little success.

Gasoline flows in the supply chain, starting with theupstream, which includes oil hunting, drilling, and so on. Thenit is processed, and finally it goes to the downstream part,which is the customer-facing part of the chain. The difficultyis to match the three parts of the chain. ChevronTexaco ownsoil fields and refineries, but it also buys crude and refined oilto meet peak demand. Purchases are of two kinds: those thathave long-term contracts and those that are purchased asneeded on the spot market at prevailing prices, which are usu-ally higher than contract purchase prices.

ChevronTexaco acted in the past like a mass-productionmanufacturing company, just trying to make products andthen sell them (supply-driven strategy). The problem withthis strategy is that each time a company makes too much ortoo little, extra cost is introduced into the supply chain.

THE SOLUTIONThe company decided to change its supply chain businessmodel from one that is supply driven to one that is demanddriven. Namely, instead of worrying about how much oil itwould process and then pushing it, the company started wor-rying about how much oil its customers wanted. This changerequired a major transformation in the business and anextensive support network of information technologies.

To implement the IT support, the company is investing$15 million each year in the United States alone in propri-etary supply chain IT software that can capture data in realtime. Each tank in each gas station is equipped with an elec-tronic label monitor that conveys real-time informationabout the oil level through a cable to the station’s IT-basedmanagement system. The data then travel via a satellite tothe primary inventory system at the company’s main office.There, an advanced, DSS-based planning system processesthe data to help with refining, marketing, and logistics deci-sions. This DSS includes information collected at truckingand airline companies. Using an ERP and a business planningsystem, ChevronTexaco determines how much to refine, howmuch to buy on spot markets, and when and how much toship to each of its retail stations.

The system uses demand forecasting to determine howmuch oil it will refine on a monthly basis, with weekly and dailychecks. This way, production is matched to customers’ demand.To perform all of these steps, it is necessary to integrate thesupply and demand information systems; this is where the ERPsoftware is useful. Planners at various points across the supplychain (e.g., refinery, terminal management, station management,transportation, and production) must share data constantly.These data are provided by the various information systems.

Recent IT projects that support the supply chain and extend it globally are NetReady, which enables 150 e-business initiatives; Global Information Link (GIL2), which enables connectivity throughout the company; e-Guest, which enables sharing of information with businesspartners; and Human Resources Information System.

THE RESULTSThe integrated system that allows data to be shared acrossthe company has improved decision making at every point in the customer-facing and processing parts of the supplychain, increasing the company’s profits by more than $300 million in 1999 and by more than an additional $100 million in 2000. (The increase resulted from otherinitiatives also, but it was mostly due to the change in the supply chain.)

According to Worthen (2002), studies indicate thatcompanies that belong to the top 20 percent in their indus-tries operate their supply chains twice as efficiently asmedian companies. The successful companies carry half asmuch inventory and can respond to a significant rise indemand (20 percent or higher) twice as fast; they also knowhow to minimize the number of deliveries. ChevronTexacobelongs in this category.

Sources: Compiled from Worthen (2002) and ChevronTexaco.com (see“Information Technology,” site accessed May 19, 2003).

Questions1. “The company business is not to make the product, but

selling the product.” Explain this statement. Relate itto the new strategy.

2. Why was it necessary to use IT to support the change?

3. Identify all the segments of the supply chain.

4. Identify all supporting information systems in this case.

5. Why is this an example of an EC-enabled application?



EXHIBIT T3.7 Radio Frequency Tags: Smooth Supply Chains

Suppliers Manufacturers

ContractManufacturers

VirtualManufacturers

Information Flows

Goods Flow

Supplier-Oriented

Exchanges

LogisticsExchanges

Customer-Oriented

Exchanges

FinancialMarketPlan

Retailers

Returned Items

WholesaleDistributors

LogisticsProviders

Customers

Banks

EXHIBIT T3.6 How Several Exchanges Work in One Supply Chain

Source: Heizer, J., and B. Render, Operations Management, 7th ed. Upper Saddle River, NJ: Pearson Education, Inc., 2004, p. 423.

in its infancy in many organizations. ERP vendors started to integrate EC with ERP onlysince 1997 on a small scale and only in 2000 as a major initiative. (See Siau and Messersmith,2002.) For example, SAP introduced mySAP.com as a major initiative in 1999. The mySAPinitiative is a multifaceted Internet product that includes EC, online trading sites, an infor-mation portal, application hosting, and more user-friendly graphical interfaces.

Section T3.4 ◗REVIEW1. List EC contributions for improving supply chain operations.2. How does EC facilitate buying and selling along the supply chain?3. Why is demand driven a better strategy?



T3.5 GLOBAL SUPPLY CHAINSSupply chains that involve suppliers and customers or other business partners that are locatedin two or more countries are referred to as global supply chains. (See Harrison, 2001; andHandfield and Nichols, 2003.)

CHARACTERISTICS AND PROBLEMS ALONG GLOBAL SUPPLY CHAINSThe major reasons companies go global are lower prices of materials, products, services, andlabor; availability of buying customers; availability of products that are unavailable domesti-cally; the firm’s global expansion strategy; advanced or special technology available in othercountries; high quality of products available; intensification of global competition, whichdrives companies to cut costs; the need to develop a foreign presence; and fulfillment ofcounter trade. E-commerce has made it much easier to find suppliers in other countries (e.g.,by using electronic bidding), as well as to find customers in other countries. (See Handfieldet al., 2002.)

Global supply chains are usually longer than domestic ones, and they can be more com-plex. Therefore, additional uncertainties are likely. Some of the issues that can create difficul-ties in global supply chains are legal issues, customs fees and taxes, language and cultural dif-ferences, fast changes in currency exchange rates, and political instabilities. An example ofthe difficulties of using a global supply chain can be seen in Application Case T3.4.

The supply chain in a global environment must be:

1. Flexible enough to adapt to changes in the environment.2. Able to meet all regulatory and other country-specific constraints.3. Effective and efficient.

Information technologies are a major contributor for meeting these objectives.Companies use innovative, IT-based solutions to solve global supply chain problems. For

example, Volkswagen brings in suppliers’ teams, who work in VW factories in Brazil,Argentina, and the Czech Republic. (See Application Case T3.5.)

Information technologies are extremely useful in supporting global supply chains, butthey need to be designed carefully (Harrison, 2001). For example, TradeNet in Singaporeconnects sellers, buyers, and government agencies via electronic data interchange (EDI). Asimilar network, TradeLink, operates in Hong Kong, using EDI and EDI/Internet in anattempt to connect about 70,000 trading partners.

IT provides not only EDI and other communication options, but also online exper-tise regarding the sometimes difficult and fast-changing regulations. IT also can be instru-mental in helping businesses find trade partners (via electronic directories and searchengines as in the case of alibaba.com and chemconnect.com). IT also allows for automaticWeb page translation to many languages. Finally, IT facilitates outsourcing of products and services, especially computer programming, to countries with a plentiful supply of low-cost labor.

Section T3.5 ◗REVIEW1. Describe the characteristics of a global supply chain.2. Describe the potential problems along a global supply chain.3. How does IT facilitate solutions for global supply chain problems?

T3.6 ISSUES IN SUPPLY CHAIN MANAGEMENTThe following are a few representative issues that are closely related to IT.

HOW MANY SUPPLIERS?Companies can choose to have many or few suppliers. Each strategy has pros and cons. Themore suppliers a company has, the less dependent on each one the company is and the lowerthe price is due to competition. A company also minimizes the risk of a supplier going out of




LEGO STRUGGLES WITH GLOBAL ISSUESLego Company of Denmark (lego.com) is a major producer oftoys, including electronic ones. It is the world’s most well-known toy manufacturer. (It was voted “the toy company ofthe century,” and it has thousands of Web sites created byfans all over the world.) In 1999, the company decided tomarket its Lego Mindstorms robot on the Internet. Thisproduct is a unique innovation. Its users can build a Legorobot using more than 700 traditional Lego elements, pro-gram it on a PC, and transfer the program to the robot. Legosells its products in many countries using several regionaldistribution centers. When the decision to go global usingelectronic commerce was made, the company had the follow-ing concerns.

◗ How should the company choose which countries to sell in?It does not make sense to go to all countries, because salesare low in some countries, and some offer no logistical sup-port services. What if a customer wants to buy online, butthere is no physical representation of Lego in that country?

◗ A supportive distribution and service system would beneeded, including returns and software support. Again,these were not available in many countries.

◗ There is an issue of merging the off-line and online opera-tions versus creating a new, centralized unit, which seemedto be a complex undertaking.

◗ Existing warehouses were optimized to handle distributionto commercial buyers but not to individual customers (amajor B2C problem).

◗ It would be necessary to handle returns around the globe.How should that be done?

◗ Lego products were selling in different countries in differentcurrencies and at different prices. Should the product besold on the Internet at a single price? In which currency?How would this price be related to the off-line prices?Alternatively, should the pages be customized for eachcountry?

◗ How should the company handle the direct mail and trackindividual shipments? Should the company use one 3PL orseveral?

◗ Invoicing must comply with the regulations of many coun-tries. As a result, how many different invoices should beused?

◗ Should Lego create a separate Web site for Mindstorms?What language(s) should be used on the site?

◗ Some countries have strict regulations regarding advertisingand sales to children. In addition, laws on consumer pro-tection vary among countries. How could the companymake sure not to violate any of these?

◗ How should the company handle restrictions on the elec-tronic transfer of individuals’ personal data? These restric-tions differ among countries.

◗ How should the company handle the tax and import dutypayments in different countries?

In the rush to get its innovative product to market,Lego did not solve all of these issues before the direct mar-keting was introduced. The resulting problems forced Legoto close the Web site for business in 1998. It took about ayear to solve all of the global trade–related issues andeventually reopen the site. By 2001, Lego was selling many of its products online, priced in U.S. dollars, but theonline service was available in only 15 countries. By 2003,Lego.com was operating as an independent unit that allowsthe online design of many products. (For example, see “TrainConfigurator” at the Web site.) The site offers many Web-only deals, and it is visited by more than 4 million uniquevisitors each day.

Sources: Compiled from Lego.com; Damsguard and Horluck (2000);and Stoll (2003).

Questions1. Enter Lego’s Web site and see the latest EC activities.

Also, investigate what the competitors are doing.

2. Is the Web the way to go global?

business or being unable to meet sudden increases in demand. Government regulations fordoing government jobs may require multiple suppliers, as well.

On the other hand, the fewer suppliers a company has, the more attention and servicethe company gets. The company also might receive volume discounts because the companybuys more from each supplier. In addition, the company can anticipate better delivery sched-ules and build better relationships with its suppliers.

IT plays a major role in this important issue. For example, when using a company-centric e-marketplace, the number of suppliers tends to be smaller. However, in B2Bexchanges, a company is exposed to many suppliers. There is no one best solution to thisissue. For further discussion, see Reid and Sanders (2002) and Heizer and Render (2003). Arelated issue is which suppliers to select.




HOW VOLKSWAGEN RUNS ITS SUPPLY CHAIN IN BRAZIL

In its Brazilian truck manufacturing plant located 100 milesnorthwest of Rio de Janeiro, Volkswagen (VW) radicallyaltered its supply chain in 2002. The objectives were toreduce the number of defective parts, cut labor costs, andimprove efficiency. This is a relatively small manufacturingplant with scheduled production of only 100 trucks per dayand only 1,000 workers. However, only 200 of the 1,000 workfor Volkswagen; they are responsible for overall quality, mar-keting, research, and design. The other 800 work for suppli-ers such as Rockwell International and Cummins Engines, andthey do the specific assembly work. Volkswagen’s innovativesupply chain already improves quality and has driven downcosts, as each supplier accepts responsibility for its units andits workers’ compensation.

Volkswagen’s major suppliers are assigned space in theVW plant, but they provide their own components, supplies,and workers. Workers from various suppliers build the truckas it moves down the assembly line. The system is illustratedin exhibit above. At the first stop in the assembly process,workers from Iochepe-Maxion mount the gas tank, transmis-sion lines, and steering blocks. As the chassis moves down

the line, employees from Rockwell mount axles and brakes.Then workers from Remon put on wheels and adjust tire pres-sure. The MWM/Cummins team installs the engine and trans-mission. Truck cabs, produced by the Brazilian firm DelgaAutomotivea, are painted by Eisenmann, then finished andupholstered by VDO, both of Germany. Volkswagen employeesdo an evaluation of the final trucks.

VW already is trying a similar approach in plants inBuenos Aires, Argentina, and with Skoda in the CzechRepublic. Volkswagen’s new level of integration in supplychain management could be the wave of the future.

Source: Compiled from Heizer and Render (2003): 412–414.

Questions1. Draw the supply chain of this VW manufacturing plant.

2. Explain how IT improves the supply chain manage-ment. Distinguish among upstream, internal, anddownstream activities.

Source: Heizer, J., and B. Render, Operations Management, 7th ed. Upper Saddle River, NJ: PearsonEducation, Inc., 2004, p. 412.



VERTICAL INTEGRATIONAs illustrated earlier, companies use suppliers and subsuppliers (several tiers) in their supplychain. However, instead of using such suppliers, a company might produce the productsitself. Such a strategy is called backward vertical integration. In a forward vertical integra-tion, a manufacturer of components also makes the finished products. Another example is amanufacturer that does its own distribution and sales to customers (e.g., via e-commerce)along the downstream of the supply chain, such as Dell computers does.

Either type of vertical integration has its pros and cons. By using IT, one can increasethe control and improve communication in vertically integrated systems. For further discus-sion, see Heizer and Render (2003) and Reid and Sanders (2002).

DEVELOPING SUPPLIERS’ AND OTHER PARTNERS’ RELATIONSHIPSOne of the most highly recommended strategies for improved SCM is creating strong rela-tionships with one of the partners along the supply chain, including customers. Companiessuch as peoplesoft.com provide the necessary software to develop appropriate relationships.The issue is how much to invest in improving suppliers’ and partners’ relationships.

OTHER ISSUES1. Ethical issues. Conducting a supply chain management project might result in the need

to lay off, retrain, or transfer employees. Should management notify the employees inadvance regarding such possibilities? What should be done about older employees whomight be difficult to retrain? Other ethical issues might involve sharing of personalinformation, which could be required for a collaborative organizational culture. Thequestion is how to force it on employees who are resisting it. Finally, individuals mighthave to share computer programs that they designed for their personal use. Such pro-grams might be considered the intellectual property of the individuals. Should theemployees be compensated?

2. How much to integrate? Although companies should consider extreme integrationprojects—including ERP, SCM, and electronic commerce—they should recognize thatintegrating long, complex supply chain segments might result in a failure. Therefore,companies often tightly integrate the upstream, inside-company, and downstream activ-ities, each part by itself, and loosely connect these three.

3. The role of IT. Almost all major SCM projects use IT. However, it is important toremember that in most cases, the technology plays a supportive role, and the primaryroles are organizational and managerial in nature. On the other hand, without IT, mostSCM efforts do not succeed.

4. Organizational adaptability. To adopt ERP and other enabling software, organizationprocesses must, unfortunately, conform to the software, not the other way around. Whenthe software is changed, when a later version is released, for example, the organizationprocesses must change also. Some organizations are able and willing to make suchchanges; others are not.

5. Should the company sell online overseas? EC provides an opportunity to expand marketsglobally. However, this can create long, complex supply chains. Therefore, it is neces-sary to check first the logistics along the supply chain, as well regulations and pay-ment issues.

6. Just-in-time delivery. The goal of this strategy is to deliver parts and materials exactlywhen they are needed, keeping

Section T3.6 ◗REVIEW1. What are the pros and cons of a smaller number of suppliers? How can IT help in reduc-

ing the number of suppliers?2. How can PRM improve SCM?3. How can EC facilitate vertical integration?



KEY TERMSBackward vertical integration 28Business intelligence 18Collaborative commerce 11E-supply chain 2Enterprise resource planning

(ERP) 10Enterprise systems 11Forward vertical integration 28Global supply chains 25

Manufacturing resource planning (MRP II) 10

Material requirements planning (MRP) 9

Product life cycle management (PLM) 18

Reverse logistics (returns) 4Supply chain 2

Supply chain intelligence (SCI) 18

Supply chain management (SCM) 2

Vendor-managed inventory (VMI) 11

Vertical exchanges 22Vertical integration 28

SUMMARY (NUMBERS REFER TO LEARNING OBJECTIVES)1 It is necessary to manage the supply chain properly to

assure superb customer service, low cost, and shortcycle time.

1 The supply chain must be completely managed fromthe raw materials to the end customers.

2 It is difficult to manage the supply chain due to theuncertainties in demand and supply and the need tocoordinate several business partners’ activities.

2 Innovative approaches to SCM require cooperationand coordination of the business partners, facilitatedby IT innovations such as inventory optimization andVMI over extranets. These approaches allow suppliersto view companies’ inventories in real time and man-age them for their customers.

3, 4 Software support for supply chain management hasincreased in coverage and scope, from MRP to MRPII, to ERP, to enhanced ERP (with business partners),and to an ERP/SCM software integration.

4 Today, ERP software, which is designed to improvestandard business transactions, is enhanced with busi-ness intelligence and decision-support capabilities, aswell as Web interfaces.

4 ERP is an integrated software (also known as anenterprise software), processing enterprise software

that manages all information processing of routinetransactions in an enterprise.

5 E-commerce tools, such as e-procurement and col-laborative commerce, are used to solve supply chainproblems.

5 Special large, automated warehouses help improve theEC order fulfillment, but they can be expensive tobuild and operate.

5 Electronic commerce is able to provide new solutionsto problems along the supply chain by integrating thecompany’s major business activities with upstream anddownstream entities via an electronic infrastructure.

6 Global supply chains are usually long and can be com-plex. Therefore, they must be analyzed carefully beforea decision to go global is finalized.

6 Of the many issues related to SCM and EC, oneshould explore vertical integration, decide on thenumber of suppliers, deal with ethical issues, and pro-vide computer-based PRM.

7 Supply chain management software deals with opti-mization of segments of the supply chain (e.g., inven-tory control). It was recently integrated into someERP packages.

DISCUSSION QUESTIONS1. Identify the supply chain(s) and the flow of informa-

tion described in the ChevronTexaco case.2. Discuss ERP failures. What lessons can be learned?3. Discuss the Warner-Lambert Listerine case, and pre-

pare a chart of Warner Lambert’s supply chain.4. Discuss the advantage of demand-driven versus supply-

driven supply chains.

5. Distinguish between ERP and SCM software. Inwhat ways do they complement each other?

6. Discuss the relationships between e-commerce and ERP.7. Discuss what it would be like if the registration

process and class scheduling process at your college oruniversity were restructured to an online, real-time,seamless system with good connectivity and good



EXERCISES1. Draw the supply chains of Dell Computer (see Online

Minicase 2) and Warner-Lambert. What are the simi-larities? The differences?

2. Draw the supply chain of Lego. (See additionaldescription at lego.com.) Include at least twocountries.

3. Enter aberdeen.com and observe their “online supplychain community” (supplychainaccess.com). Some of

the information there is free. Prepare an outline of themajor resources available at the site.

4. Automated warehouses play a major role in B2C andmail-order fulfillments. Find material on how theyoperate. (Use google.com and findarticles.com formore information.)

5. Examine the functionalities of ERP software fromSAP or other vendors.

INTERNET EXERCISES1. Enter ups.com. Examine some of the IT-supported cus-

tomer services and tools provided by the company. Howdoes UPS contribute to supply chain improvements?

2. Enter supply-chain.org, cio.com, findarticles.com,and google.com and search for recent information onsupply chain management integration.

3. Enter coca-colastore.com. Examine the delivery andthe return options that are available there.

4. The U.S. Postal Service provides EC logistics. Examine itsservices and tracking systems at uspsprioritymail.com.What are the potential advantages for EC shippers?

5. Enter brio.com and identify Brio’s solution to SCMintegration as it relates to decision making for EC.View the demo.

6. Enter rawmart.com and findwhat information they providethat supports logistics. Also findwhat shipment services they pro-vide online.

7. Visit ups.com and find its recent EC initiatives.Compare them with those of fedex.com. Then go toonlinestore.ups.com and simulate a purchase.

8. Enter efulfillmentservice.com. Review the productsyou find there. How does the company organize thenetwork? How is it related to companies such asFedEx? How does this company make money?

empowerment in the organization. (If your registra-tion is already online, find another manual process thatcan be automated.) Explain the supply chain in thissituation.

8. Relate ERP to software integration.9. Discuss how cooperation between a company that you are

familiar with and its suppliers can reduce inventory costs.10. Find examples of how organizations improve their

supply chains in two of the following: manufacturing,

hospitals, retailing, banking, education, construction,agribusiness, and shipping.

11. Discuss the meaning of intelligence in the term supplychain intelligence.

12. It is said that supply chains are essentially “a series oflinked suppliers and customers; every customer is inturn a supplier to the next downstream organization,until the ultimate end user.” Explain. Use of a diagramis recommended.

GROUP EXERCISEBACKGROUNDCustom Furniture Ltd. (CF) is a large office furnituremanufacturing company that specializes in custom-madeluxury office furniture (such as executive desks and board-room tables and chairs). Located in a big metropolitanarea (population about 12 million), the company is known

for its quality products, has been growing slowly, and con-trols a fairly large but fixed market share. CF salespeople,equipped with a catalog of their basic products and pic-tures of some specially designed furniture, visit their reg-ular customers periodically and call on potential cus-tomers to set up appointments to show the catalogs.



WEB RESOURCES FOR SCMLarge numbers of resources for supply chain im-

provement and management are available on the Web.The following are representative examples.

American Supplier Institute (ASI): amsup.comCouncil of Logistics Management: clm1.orgCXO Media Inc.: cio.com/researchErasmus Global Supply Chain Center:

global-supply-chain.orgERP Association: erpassist.comInstitute for Logistics Management: logistics-edu.comIT Guide: smeit.comLogistics Information on the Web: dsii.comNummi: nummi.comPurchasing Magazines Web Site: manufacturing.net/

magazine/purchasingSME Supply Chain Management: bettermanage ment.com

Supply Chain Academy: supplychainacademy.comSupply Chain Exchange: gxs.comSupply Chain Planet: supplychainplanet.comSupply Chain Excellence: pfsweb.com

Harvard Business School Cases: textbookcasematch.hbsp.Harvard.edu:

1. H. F. Butt Grocery Co.: The New Digital Strategy(A)(#300-106): Examines how this company’s supplychain has moved to e-commerce.

2. Webvan (#602-037): Discusses the processes by whichWebvan delivers groceries to customers’ homes.

3. Cisco Systems: Building Leading Internet Capabilities(#301-133): Cisco’s efforts to broaden its Internet useare explored.

If a customer is interested, a sketch of the furniture ismade jointly with the customer, measurements are taken,and an estimated price is given on the spot (using a for-mula in the salesperson’s portable PC). The order infor-mation is faxed or manually delivered to the main officedaily. The design department prepares the blueprints ofthe furniture, finance/accounting prepares an accurateprice, and a contract is sent to the customer by mail or adelivery service. (Legal requirements do not allow faxing.)The customer can negotiate the deal and can requestmodifications. After the contract is finalized, productionbegins and the final product is sent to the customer.

PROBLEMSThe company experiences the following problems.

a. Completed furniture is frequently returned forchanges. (“This is not what we had in mind; youmisinterpreted our sketch.”) Although some modi-fications can be made at the customer’s site, otheritems must physically be sent back to the company.

b. Deliveries are made by a small contractor whocharges low fees with the understanding that adelivery might take 1 to 3 days from the time thedelivery is called for. Using a larger delivery com-pany would cost 47 percent more with a guaran-teed same-day delivery cycle.

c. The salespeople claim they are too busy to activelyseek many new customers. Because they are paidmostly fixed salaries (which is the norm in the indus-try), adding more salespeople might be too expensive.

d. Customers frequently complain about the longtime span from when they place the order to whenthe furniture is received.

e. Although the company sells only a few dozenproducts that are made from a selection of 250basic components, literally millions of configura-tions of the final products are possible. In general,customers are getting more innovative anddemanding, so it is getting more difficult to trans-late customers’ wishes into blueprints and finalproducts.

f. A new company, CF2.com (factitious name),appeared from nowhere a few weeks ago, offeringcompeting products at a 30 percent discount and a50 percent reduction in cycle time. CF2.com hasnot received an order yet, but CF remembers whathappened to Toys R Us and Barnes and Noble—companies that ignored online competition.

Your mission. Your group was hired as a consultant byCF. What would you advise CF Management to do?

1. Prepare a diagram of the supply chain of CF in thiscase.

2. Using your knowledge of strategic IT systems, SCM,e-commerce, and so on, prepare a plan for CF thatwill deal with each of the aforementioned six points.That is, what IT-based solutions can be used?Because cost could be a major factor, suggest twoalternatives for each point (standard and deluxe).



Davis & Warshow (daviswarshow.com) is a plumbing andheating wholesaler in New York City. This is a competi-tive business, where a medium-sized company ($60 mil-lion in annual sales) like Davis & Warshow (D&W) cansurvive only by being innovative. Indeed, the 75-year-oldcompany survived mainly by positioning itself as atechnology-first mover in its industry. For example, in1945 it used a billing machine, in the 1950s it com-puterized its payroll, and in the mid-1980s the companyintroduced EDI and voice mail. In 2000, the companyembarked on automated warehousing and e-commerce tosmooth its supply chain.

With New York’s old buildings, it is difficult forplumbers to know in advance what parts they will need.They are usually on the job sites when they find outwhat parts they have to get. Calling in for parts andmaterials and then waiting for delivery costs a lot ofmoney in terms of lost time. D&W’s mission is to provideparts as quickly as possible to its customers, who areretailers and plumbing contractors.

The company has a large warehouse, 6 distributioncenters (branches), and 20 delivery trucks, eachequipped with a wireless communication system.However, delivery still was slow at times. In addition,inventories at the distribution centers were high,because the delivery from the central warehouse was notfast enough. This has all changed now, thanks to theautomated warehouse.

Using Mincron’s Warehouse Management System,Davis & Warshow built an automated, 120,000-square-foot warehouse. To begin with, all products that are notbar-coded by the manufacturers are labeled as they enterthe warehouse. Then, all employees at the warehouse hadto learn to use radio-frequency bar-code scanners andunlearn many years of the traditional ways of puttingaway, picking, and shipping orders. Employees worriedthat scan guns would eliminate their jobs along with thepaper documents that were being replaced. Employees’cooperation was achieved when job and salary levels wereguaranteed. (New employees, however, are paid less,because they do not need the same level of training andexperience.) Using the scan guns, employees can finditems in a few minutes. Before, it took much longer—insome cases a few hours.

Another problem was order entry. Customers used toorder by fax, by phone, or by dropping in to a distribu-tion branch. Now, the customer can order on the Web,

REAL-WORLD CASES

CASE 1: SMOOTHING THE SUPPLY CHAIN OF DAVIS AND WARSHOW USING THE WEB

and the orders go directly to the warehouse. From there,they are routed to the nearest distribution center, whichgets parts for special orders when needed.

Linking its Web site to eBay’s Web site allows D&Wto auction surplus faucets and other parts. The companywas amazed to find that plumbing-hungry Web surferswere bidding up prices sometimes to as much as 100 per-cent over the normal price.

The electronic catalogs of D&W are used by the cus-tomers (plumbing contractors and builders) not only toplace orders, but also to prepare their proposals for theirclients. This coordination makes it easier for the cus-tomers to sell a job. D&W views it as a customer service.Using passwords, the contractors and builders can accessinformation in the electronic catalogs that they can’t getanywhere else.

The company also helped its customers solveanother problem. Many of the customers do not keeptheir pricing information up-to-date. D&W has created acustomized Excel spreadsheet for each customer with aWeb site password and loaded updated pricing informa-tion onto a CD-ROM. Contractors can use the CD-ROM to make sure prices are current. The Web site and the CD-ROM are synchronized.

Adoption was slow at the beginning, but it startedto accelerate in 2001. D&W expects a major portion ofits business to be online by 2005. Some of the system’sbenefits are that employees can quickly find any itemwith the scan guns, employees’ stress levels have gonedown dramatically because they no longer need to huntaround the warehouse for products or pieces of paper,and customer service and customer satisfaction levelshave improved dramatically; finally, the system paid foritself in 2 years just from inventory reduction at the dis-tribution branches.

Sources: Compiled from B. Miodonski, “Davis & Warshow Hit 75Running,” Supply House Times, July 2000; and daviswarshow.com(site accessed May 13, 2003).

Questions1. Will D&W be disintermediated if manufacturers

start to sell directly to contractors?

2. What will happen if its competitors duplicate thesystem?



The ProblemMichael Dell started his business as a student from hisuniversity dorm by using a mail-order approach to sellingPCs. This changed the manner in which PCs were sold.The customer did not have to come to a store to buy acomputer, and Dell was able to customize the computerto the specifications of the customer. The direct-mailapproach enabled Dell to underprice his rivals, who wereusing distributors and retailers, by about 10 percent. Forseveral years the business grew slowly, but Dell con-stantly captured market share. In 1993, Compaq, the PCmarket leader at that time, decided to cut prices drasti-cally to drive Dell computers out of the market. As aresult of the price war, Dell Computer, Inc., had a $65 million loss from reduced sales and inventory write-downs in the first 6 months of 1993 alone. The companywas on the verge of bankruptcy.

The SolutionDell realized that the only way to win the marketing warwas to introduce fundamental changes, termed businessprocess reengineering (Chapter 9), in its own business,and along the supply chain from its suppliers all the wayto its customers. In addition to competing on price andquality, Dell started competing on speed. Since 2000, ifyou order a customized PC on any working day, the com-puter can be on the delivery truck in 2 to 3 days; a com-plex, custom-made PC will be delivered in 5 days or less.Among the IT-supported innovations were the following.

◗ Dell uses a mass customization approach to produc-tion. Though the approach wasn’t a new one, Dell wasthe first to use it in making and selling computers.

◗ Dell builds many computers only after they areordered. This is done by using just-in-time manufac-turing (Chapter 7), which also enables quick deliveries,low inventory levels, little or no obsolescence, andlower marketing and administrative costs.

◗ Component warehouses, which are maintained by Dell’svendors, are located within 15 minutes of Dell facto-ries. As described in Chapter 2, Dell gets componentsquickly, and it can get components that are up to 60 days newer than those of its major competitors byusing Web services.

◗ Most orders from customers and to suppliers are placedon the Web.

◗ Shipments, which are handled by UPS and other carri-ers, are all arranged electronically.

◗ Dell collaborates electronically with its major buyersto pick customers’ brains for new product ideas.

◗ Dell’s new PC models are tested at the same time asthe networks that they reside on are tested. This coop-

REAL-WORLD CASES

CASE 2: HOW DELL IS MANAGING ITS SUPPLY CHAIN

eration with other vendors reduced the testing periodfrom 60 or 90 days to 15.

◗ Using the Internet, Dell’s employees constantly moni-tor productivity and rate of return on investment (ROI)on all products.

Most significant for Dell has been the emergence ofelectronic commerce. In 2003, Dell was selling more than$8.0 million worth of computers each day on its Website, and this amount was growing by an unheard of 6 percent per month. In 1999, Dell added electronicauctions (dellauction.com) as a marketing channel. Dell’sgoal is to sell most of its computers from its Web site(dell.com). In addition to computers, Dell sells servers,printers, and other hardware.

Dell frequently is cited as an example of a top cus-tomer relationship management (CRM) provider. The e-CRM activities are integrated electronically with cus-tomers’ ordering and order fulfillment. For example, cus-tomers can track their orders online to see if the comput-ers are in production or already on the shipping track.They also can access detailed diagrams of the computersand get information about troubleshooting. By usingviewer-approved configurations and pricing for its cus-tomers and by eliminating paperwork, Dell has been ableto cut administrative process expenses by 15 percent.

In addition, Dell created customized home pages forits biggest corporate customers, such as EastmanChemical, Monsanto, and Wells Fargo. These sites, knownas Premier Pages, enable customers’ employees to useDell’s provided configuration and workflow software todesign computers, get an order approved inside theclient organization, and place orders quickly and easily.These employees also can order PCs for their own homesand receive the corporate price. The electronic orderingmakes customers happy, but it also enables Dell to col-lect payments quickly.

After orders are received, they are transferred elec-tronically to the production floor. Intelligent systemsprepare the required parts and components list for eachcomputer and check availability. If they are not in stock,components are ordered electronically directly from sup-pliers, which can sometimes deliver in less than 60 min-utes. Dell uses several other information technologies,including e-mail, EDI, video teleconferencing, electronicprocurement, computerized faxes, an intranet, DSS, and aWeb-based call center. Computerized manufacturing sys-tems tightly link the entire demand and supply chainsfrom suppliers to buyers. This system is the foundationon which the build-to-order strategy rests.

Dell also passes along data about its defect rates,engineering changes, and product enhancements to its sup-pliers. Because Dell and its suppliers are in constant com-munication, the margin for error is reduced. Also, employees



are now able to collaborate in real time on product designsand enhancements. In turn, suppliers are required to sharewith Dell sensitive information, such as their own qualityproblems. It was easy to get suppliers to follow Dell’s leadbecause they also reap the benefits of faster cycle times,reduced inventory, and improved forecasts.

In addition, Dell uses the Internet to create a com-munity around its supply chain. Dell’s corporate portalhas links to bulletin boards where partners from aroundthe world can exchange information about their experi-ences with Dell and its value chain.

In 2000, Dell was a first mover to the use of Webservices to expedite communication between its manufac-turing plants and its vendor-managed hubs and parts’suppliers. (See Hagel, 2002.)

The ResultsBy 2000, Dell had become the number-one PC seller. It isconsidered one of the world’s best-managed and most prof-itable companies. The Web services system alone reduced

in-plant inventories by about 85 percent and vendors’inventories by 10 percent to 40 percent (Hagel, 2002).

Sources: Compiled from several articles in Business Week (1997through 2001); cio.com (2001); dell.com, accessed March 27,2003; Hagel (2002).

Questions1. List all the actions taken by Dell to improve its

supply chain. Which are (or can be) facilitated by IT?

2. Divide the actions in question 1 into theupstream, downstream, and internal parts of the supply chain.

3. List the collaborative actions with business part-ners in this case.

4. Why is it critical for Dell to maintain such an effi-cient supply chain?

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