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					Welcome

Strategies of Network Companies


       Jonathan D. Wareham
        wareham@acm.org
    Agenda


   When firms cooperate, compete and
    exchange
   problems with traditional supply chain
    management (SCM)
      problems this creates for manufacturers
       problems this creates for their suppliers
                                                   Markets
    

      problems this creates for consumers         Networks

   improvements to traditional SCM                 Firms

      the direct-to-customer model                 Agents
      virtual integration with suppliers
Quiz

? days a box of cereal spends in the supply
 chain?
Distorted information causes total
 inventory in the pharmaceutical supply
 chain to exceed ? days. $? in savings to be
 realized.
$ ? wasted because of poor coordination in
 the food industry supply chain
$ ? Boeing write-off in 1997 due to supply
 chain inefficiencies
Quiz

A box of cereal spends 104 days in the
 supply chain
Distorted information causes total
 inventory in the pharmaceutical supply
 chain to exceed 100 days. $11 billion in
 savings to be realized
Poor coordination wasting $ 30 billion
 annually in the food industry
$ 2.6 billion Boeing write-off in 1997 due
 to supply chain inefficiencies
Defining SCM

SCM is the coordination of material,
 information and financial flows
 between and among enterprises
 participating in the demand fulfillment
 process for a product or service.
Spans multiple organizations and
 industries
Coordination and integration of flows
 essential for the modern enterprise
Gates: Business @ The Speed of Thoug

 A digital nervous system is the corporate,
 digital equivalent of the human nervous
 system, providing a well-integrated flow of
 information to the right part of the
 organization at the right time. A digital
 nervous system consists of the digital
 processes that enable a company to
 perceive and react to its environment, to
 sense competitor challenges and
 customer needs, and to organize timely
 responses.
Gates: Business @ The Speed of Thoug

 A digital nervous system requires a
 combination of hardware and software; it's
 distinguished from a mere network of
 computers by the accuracy, immediacy, and
 richness of the information it brings to
 knowledge workers and the insight and
 collaboration made possible by the
 information.
Scott McNealy on Gates’ View



He is right - I would be very nervous if my
systems were based on their platforms and
products!
RFID Tags
  What is RFID? -- The Tags

Tags can be attached to
almost anything:
   pallets or cases of product
   vehicles
   company assets or personnel
   items such as apparel,
    luggage, laundry
   people, livestock, or pets
   high value electronics such
    as computers, TVs, camcorders
     Are All Tags The Same?

Basic Types:
  Active
     Tag transmits radio signal
     Battery powered
     memory, radio & circuitry
    High Read Range (100
     meters)
  Passive
    Tag reflects radio signal
     from reader
    Reader powered
    Shorter Read Range
     (10cm – 5 meters)
RFID the Supply Chain



     Tag          Antenna        Reader           Middleware      Supply chain
                                                                  execution
- Transmits      - Coiled       - Transmit        - Process      - Backend SCE
  identification antenna of       data to           information    or ERP
  data to a        reader         middleware         from reader systems
  reader           creates                                         receives
                                - Associates      - Filters data
                   magnetic                                        Information
                                  tag info with   - Sends data
                   field with
                                  product info      to backend
                   coiled
                   antenna                          servers
                   of tag
How far, how fast, how much, how many, attached to what?



     Low Frequency
        No regulation
        Penetrate materials (water, wood, tissue well)
        Slow read speed
        Small range
        No penetration of iron and steel
     Medium Frequency
        Little data, small distance
        Thin tags
        Low cost
        High data rates
        Govt regulated
        Non mental penetrating
     High Frequency
        Penetrate materials
        Small tag size
        High data transfer
        Long range
        Non-water or tissue penetrating
        Non-regulated in some regions
        expensive
Where can RFID add value?

    From Manufacturing
          Through Distribution
             Transportation
                  Into a Store’s Back Room
                   Inventory
                       On the Shelf
                                At the Cash
                                  Register
                                  Out the Door
                                   as an anti-theft
                                   device
Top 100 Suppliers:
 Suppliers will mark inbound cases and
  pallets with RFID - 1 January 2005 - May,
  2003 specification calls for ≈256 bit
  read/write tag
• 1 EPC tag per carton – 100% read on conveyor
• 1 EPC tag per pallet – 100% read at Inbound dock
• Conveyor speed of up to 600 feet per minute
• 3 Texas Distribution Centers
• January 2005
               Why???
 Stock management /perishables (field
  to fork)
 In-stock levels
 Invoice reconciliation: damaged,
  deductions, performance penalties,
  etc.
 Scan Based Trading or VMI
 Improved analytics & POS data
 All reads available to suppliers within
  30 minutes
Guidelines for using RFID
 Bar codes cannot be used
 Counting versus identification (reverse
  logistics)
 Use of 3Party logistics and suppliers
 Data collection is chaotic (battlefields,
  hospitals, retails shops)
 Exact configuration of the good must be
  maintained
 Counterfeit protection
 High Risk scenarios, drugs, hospitals
 Collecting data outside of retailer (smart
  refrigerators, medicine cabinets, etc)
 Beer Game video
Traditional supply chain obsolescence

        Direction of flow of demand                       Direction of flow of product

                                         Point of differentiation
                                            Distribution costs
                                         Market mediation costs




                                             Manufacturers
                             Tier-I                                 Distribution
                             Suppliers                              Centers
                 Tier-II
                 Suppliers                                                         Retailers
  Raw Material                                                                                 Customer
  vendor                                                                                       Zones
           The Bullwhip Effect


Upstream amplification of demand variation
Progression of a brushfire to an inferno!




Customer   Retailer   Distributor   Factory   Tier 1 supplier   Equipment
                         Machine Tools at Bullwhip Tip

                         100%
% Change, year to year




                          50%

                           0%
                                 1961

                                        1963

                                                  1965

                                                         1967

                                                                1969

                                                                       1971

                                                                              1973

                                                                                     1975

                                                                                            1977

                                                                                                   1979

                                                                                                          1981

                                                                                                                 1983

                                                                                                                        1985

                                                                                                                               1987

                                                                                                                                      1989

                                                                                                                                             1991
                         -50%

                         -100%
                                               Data from United States, 1961-1991 (GDP, vehicle production, and machine tool orders

                                                   % change GDP
                                                   % change vehicle production index
                                                   % change net new orders machine tool industry
             The Diaper Supply Chain!

        80
        70
        60                                                        Factory
        50                                                        Distributor
Order




        40                                                        Wholesaler
        30                                                        Retailer
        20                                                        Customer
        10
         0
                              11
                                   13
                                        15
                                             17
                                                  19
                                                       21
        1
              3
                  5
                      7
                          9




                                   Week      Ripples to tidal waves
                                             Stockpiles and stockouts
                                             Insufficient or excessive capacities
                                             Higher costs
What is the Problem?


   The “bullwhip effect” - four key causes
       Demand signal processing
         Currently only order information is shared (not actual sales)
         Need to instead share POS retail data (sell-through data)
       Order batching (retailers only order periodically)
         Infrequent access to demand information
       Order rationing
         retailers order popular items excessively
         Hoarding of scare products (inflate demand order of scarce
          product to ensure that you have it on-hand)
       Special Promotions
         Alter the normal pattern of product demand from customer;
          so that it’s impossible to understand the “true” demand
Interorganizational Systems: CRP

                          BIG RETAILER

      < 3% stock outs       Warehouse 1
     < 14days inventory




       P&G

                             Warehouse 2
Before CRP
                     Budget
                              BIG RETAILER
                    Actual
                                Warehouse 1




         P&G

                                 Warehouse 2
   •Volume discounts
  •New product promos
•Here and now discounts
    •Trade marketing
      •Bonuses….
Interorganizational Systems

 Integration of supply chain across
  companies
 Degrees of integration: information,
  process, property rights
 Increased efficiencies through
  1. optimal production/logistics planning
  2. lower inventories
  3. increased flexibility
  4. customer satisfaction
 Oh brave new world, this is
  wonderful…But…
The Economist says….
 Look out for proprietary systems with
  high specificity Lock-in
 Sharing processes is optimal from
  logistics viewpoint, but remember
  ‘knowledge of time and place’
 Additional information acquired by
  one party can reduce bargaining
  power of other. Competitive
  industries like retailing, grocery and
  electronics has demonstrated many
  examples of this….
 Types of Shared Information

Inventory information
 Transition to echelon-based inventory systems
 Upstream companies can determine when and
  what to produce
 Downstream companies can improve service
  levels with less inventory
 Types of Shared Information


Sales Data
 Variance of orders greater than that of
  sales
 The “bullwhip effect” - four key causes
    Demand signal processing
       Move to sharing sell-through data and POS
        retail data
    Order batching
       Infrequent access to demand information
    Order rationing
       Hoarding of scare products
    Promotions
Types of Information Sharing

Production/Delivery Schedule
 Improves due-date estimation
 Expand planning horizons
Other Information Sharing
 Performance metrics
 Capacity information
Challenges

Aligning incentives of different partners
 Channel Management Example
Trust and cooperation
Confidentiality of shared information
Anti-trust implications, such as possible
 price fixing behavior
Timeliness and accuracy of information
Technological constraints
SCM Software –Who?
What does SCM software do?
 2 Main Functions: Tracking & Optimization

     Factory Scheduling
     Bar Code Warehouse Management
     Transportation Routing and Scheduling
     Inter Organizational Systems
     Collaborative Planning & Optimization
     Multi – echelon optimization
     E-Procurement & Marketplaces
     Supplier Contract Management
     RFID Management Systems
Commercial Uses of New
Technologies

                    Many
                     commercial
                     forms are
                     products of
                     modern
                     technologies
Manugistics, I2, Commerce 1, Ariba


              3.1                .7




               .3               2.3
eCommerce Status? Doing fine….


   800

   700
   600
   500

   400
   300

   200

   100

     0
              1999   2,000   2001
Billion USD
eCommerce - Where?
 Manufacturing (19.6% of all sales)
   Transportation equipment
   Beverage and tobacco
   Electrical equipment & components
 Wholesalers (11.7% of all sales)
   Drugs and druggists
   Motor vehicles, parts and supplies
   Professional and commercial equipment
eCommerce - Where? (cont.)
 Services (1% of total sales)
   Travel arrangement and reservations
   Securities & commodities
    intermediation
   Publishing and software
 Retail Sales (1.4% of total retail
  sales)
   Books and magazines
    Outlook

                                     Common
                    Present           Sense
   Manufacturing    18%               70%
   Wholesalers        8%              50%
   Services           1%              20%
   Retail Sales       1%              30%




                              • 60-80% of all eCommerce conducted through EDI
                                      • x12 & EDIFACT (primarily VANS)

                                          www.census.gov/estats
B2B What Happened ?
 Estimates that over 1,000 B2B
  portal will soon consolidate to <
  200.
 Less than 15% of all exchanges
  operating
 2 Stories:
   Vertical
   Horizontal
Your task….

 You would like to buy a 3 year old
  Honda Prelude. You have 2 options:

  1. Buy the car in a private transaction,
     mediated through the newspaper
     classifieds, or
  2. Buy the car through a used car dealership


Asses the relative advantages and
  disadvantages of each option.
Intermediaries
 Up to 25% of the
  economy
 Financial
  Intermediaries
 Dealers &
  Wholesalers
OK, so what do Intermediaries do?

  Information management: compiling and filtering
  information, informing consumer's knowledge of supply
  and demand capacity.
  Logistics management: economies of scale, scope and
  specialization in conveying goods from production sites
  to consumption sites
  Transaction securitization: controlling and guaranteeing
  the quality of goods and payments delivered to buyer
  and seller
  Insurance: insurance for the existence of a market for
  the products, that is, a market making function
  Liquidity: extending credit to both sides of the
  transaction, alleviating liquidity constraints
Morgan Stanley                         “Collaborative Commerce”


    Before the Order
        Purchase approval and routing
        Promotions and campaigns
        Financing
        Inventory availability
        Price negotiation
    During Fulfillment
        Order status
        Partial Shipments
        Backorder information
        Substitute products
        Order explosion to multiple suppliers
        Scheduling of inventory
    After Delivery
        Warranty and maintenance
        Replacement parts
        Asset Management
        Regulatory Compliance
        Returns and incorrect ships
        Settlement
        Inspection
B2B Portals – 2 main types

         Horizontal                     Vertical
   1 product sector –           One industry –many
    many industries               products
   Large exchanges              Limited membership
   Provide liquidity,           Eliminate inefficiencies
    transparency,                 in specific industry
    aggregate supply &            supply chains
    demand
                                 Fewer transactions –
   Require high volume of        revenue based on
    transactions, small           realized savings
    commission base
   Additional revenue
    through value adds like
    financing, asset
    management,
    warrantees
Purpose
 Increase understanding of rent generation
  models in electronic intermediaries
    Implications of network and product
     characteristics
    Evolution of rent accrual mechanisms &
     information and relational capabilities
 Comparative case studies: 2 companies, both
  founded in Atlanta in 2000, & backed by large
  industry incumbents

    Omnexus


    eGatematrix
Omnexus
Omnexus
 Plastics Industry one of world’s largest
 589 billion dollars in revenue
 Employs 1.5 million people

   BASF
   Bayer
   Dow
   Dupont
   Ticona/Celanese
Omnexus

 •Large marketplace, MCBase
 •Search on thousands of materials with specific
 properties
 •Integration with suppliers ERP systems
 •Real time inventory and price data
 •Submission of RFQs
 •Electronic billing and transaction clearing
 •Customer Support

 Size  # of Firms Annual Revenues        Market Share
Large         200    >30 million            >50%
Medium      2,700     6 million              30%
Small       5,000    <$1 million            <20%
Segmentation of Resins Buyers
Competition
Evolution
eGate Matrix
  Food products, supplies,     Prepared meals and other          Audio and video supplies/    Equipment (galley, culinary,
  materials to caterers or     supplies to plane                 equipment to plane           etc.) hand-offs between
  directly to plane            Equipment (galley, culinary,                                   flights
                               etc.) hand-offs between flights




 Suppliers/ Distributors/
                                                                  Service Providers                    Airlines
    Manufacturers                    Caterers


Flight schedule information    Flight schedule information        Flight schedule
from airlines                  from airlines                      information from airlines    Inventory and service
Quality performance feedback   Quality performance feedback       Quality performance          availability updates from all
from airlines                  from airlines                      feedback from airlines       groups




   Payment from airlines       Mark-up payment from               Service charges from
                               airlines for services rendered     airlines




   Information Flows

    Physical Flows

    Financial Flows
    What Happened? Conclusions
                                         Vertical
         Horizontal
                                  Often very sound
   Many portals built on
    information aggregation        business model
    assumption                    Implementation hard
   Barriers to entry low          work
   Too many portals, can’t       Barriers to adoption:
    generate volume
                                   legal, organizational,
   Suppliers weary of
    transparency (stick with       procedural
    EDI and Fax)                  Slow in the making,
   Most sectors can support       but scale well
    1-3 exchanges (max).
                                  Most profitable in
   Forget commodities and
    content - Focus on             fragmented markets
    payment, logistics, &          with customizable
    value adds….                   products

				
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