E-business: from Demand Networks to TechnoLogistics
"If you sell you have to deliver". This phrase should be remembered by all
that try to engage in the e-business revolution disregarding the
back-office, the necessary logistics system. In this article we examine the
forces that drive companies to work into tightly integrated networks,
propose a taxonomy of the e-business solutions that this tight integration
requires, and discuss their implicit supply chain strategies. This article
constitutes a set of hypothesis currently being empirically tested at ISLI.
The world has become a very confusing place. Less than a decade ago, firms were being
forced by the Enterprise Resources Planning (ERP) revolution into a radical alteration of their
internal operations. Now e-business and the Internet are driving further changes – this time in
firms’ external environment. Consider the following scenario:
A product’s end user, located in Bordeaux for example, receives on his/her WAP phone a new
on-line retail catalogue from a retail outlet, in Toulouse, from which it regularly buys goods.
The end user places an on-line order. The retail outlet discovers that the article is not available
at its Bordeaux warehouse, and decides to place an order with the manufacturer (i.e., in
Barcelona), whose factory planning system checks on the raw materials’ availability with its
own supplier (located in Lisbon); organises the purchase of these materials; schedules a
production sequencing; and gives the retail outlet in Toulouse a firm delivery date. This firm
then reverts to the ultimate customer in Bordeaux and agrees a final delivery date and price.
Its internal system handles the booking of a consolidated third party transport to Bordeaux, as
well as the electronic payment of the order. This process, which involves five different
companies, takes place in just a few seconds, and the end user finds it completely transparent.
To discuss all of the issues that would be involved in a transaction of this nature, we briefly
review some current literature in the field of inter-firm collaboration; propose a taxonomy of
e-business sites; and examine some of their logistical implications.
Moving towards Demand Networks
The concept of a supply chain implies a push approach to the basic single-pipe process - yet
firms increasingly operate as complex, customer-oriented networks. Although most managers
are familiar with the market-related, pull-side causes of this new mode of organisation
(including globalisation), the technology-related, push-side causes are usually less obvious.
On one hand, this second, external group of organisational drivers translate the arrival of a
new and inexpensive universal communications medium (the Internet). On the other hand,
they reflect advances in logistical practices, including Quick Response; Efficient Consumer
Response (ECR); and Collaborative Planning, Forecasting and Replenishment (CPFR).
Over the years, a great deal has been written on the subject of inter-firm collaboration. One
concept that appears in much of this literature involves the idea of Industrial Networks, a
variation of the old notion of industrial districts (Ebers & Jarillo, 1998). Industrial Networks
are groups of organisations whose ties to one another result from the associations that they
have repeatedly renewed whilst in the process of serving a given market. The drivers
underlying this particular type of collaboration have been extensively analysed, and include
the co-especialisation strategies that firms pursue; the search for mutual learning, in an effort
to accelerate product development and improve information and product flows (thereby
reducing costs and lag times); the generation of virtual scale and scope economies; and the
creation of entry barriers (Cervilla and Lorenzo, 2000; Hinterhuber and Hirsh, 1998; GomesCasseres, 1994). Another important factor involves the particular form of network
collaboration that is chosen: buyer-supplier relationships, joint activities, informational ties,
strategic alliances, joint ventures, consortia, and long-term supply partnerships. This rich
conceptual backdrop is a platform for better understanding the various ways in which ITrelated phenomena can be applied to the supply chain.
Two practical exercises help us to exemplify the conceptual platform underlying the need for
greater collaboration. The first involves imagining a simple chain that is made up of a
supplier, a factory and a retailer. Suppose that a mischievous but benign superior force has
made all inventory disappear from the face of the earth. As there are no stocks, when the end
user demands the product, the retailer must place an order with the manufacturer, which in
turn has to place an order with its own supplier(s). Eventually materials flow down the chain,
but response times can be long, and production and transportation costs high (due to the
absence of scale economies). Now, in a scenario where the existence of stocks is permitted,
the customer can walk away with the product at almost any time; consolidated “batched”
operations become feasible; and this reduces production and transportation costs.
Unfortunately the greater ease of a “batching” process is offset by the need to carry a large
and expensive inventory; by the process’s hidden inefficiencies; and, perhaps most
importantly, by the de-coupling of what had been an integrated horizontal process into three
vertical "silos", each of which is trying to optimise its own sphere of activity, regardless of the
consequences for the other elements that comprise the chain.
Supplier
Factory
Retailer
Supplier
Factory
Retailer
Without stocks: slow response, high
With stocks: rapid response, lower
production and transportation costs
production and transportation costs
Figure 1. De-coupling a horizontally integrated process
The second exercise is the famous Beer Game, created by MIT’s System Dynamics Group
(Sterman, 1989). It simulates the manufacturing and distribution of beer. The chain contains
four members (plant, distributor, wholesaler, and retailer). Only the retailer is familiar with
the actual levels of market demand. Because of the delays that exist in the ordering cycle, and
due to the chain’s lack of overall coordination, the other three members in the chain are
constantly in a position where they have to make demand projections. This causes variations
in inventory levels, amplified into what is generally known as the "bull-whip effect" (MasonJones, R. and Towill, D., 2000). (Figure 2). The clear conclusion is the chain can only be
optimised through a real-time sharing of information; a rapid delivery; and joint planning.
4 weeks
Information flow
Factory
Distributor
Wholesaler
Materials flow
Retailer
D
e
m
a
n
d
Figure 2: Quick response, information and collaboration reduce the bull-whip effect
These exercises demonstrate the need for greater integration, a trend that has accelerated as a
result of the globalisation-related advances that are creating better-educated customers and
increased competition. This has forced firms to simultaneously improve their response times;
lower their costs; and augment the precision of their working processes. Firms that try to
perpetuate any process that has been de-coupled from the supply chain will not be able to
compete with rivals who have achieved what the superior force mentioned in the first exercise
above had been striving to realise: the implementation, via increased integration and greater
responsiveness, of a process that is as efficient as a system which is nourished by an
abundance of stocks – yet which does not feature any stocks at all.
All these factors reflect the pull that the market has been exerting on supply chain processes.
At the same time as this pull, and undoubtedly influenced by it, there has been a rapid
development in supply chain practices and Internet-based information technology resources.
Nowadays, actors are in a position to exchange the type of information that is required for a
full integration of the supply chain. Suppliers of IT solutions whose traditional ERP markets
have become saturated have been quick to identify this trend, and to provide systems support
for it. It is precisely this combination of market pull and technology push that has lead to an
acceleration of supply chain integration through the use of Information Technology.
Using Information Technology as an Enabler of Network Integration
It was less than a decade ago that organisations first started to implement ERP systems. This
was a first step towards process integration. ERP systems involve a conversion of vertical
"silos", or departments, into horizontally integrated cross-functional processes. They have
been invaluable as the driver behind a cross-functional, or process-oriented, view of the
organisation. However, because of the aforementioned forces currently at work, the time has
now come for this integration to be extended beyond the borders of any one organisation.
Information technology can be applied to firms’ logistical functions at three separate levels
(Delfmann, 2000). At the lower, operational level, data integrity is ensured through the
application of transaction-oriented systems (ERP, bar coding). At the upper, strategic level,
simulation and monitoring systems facilitate decision-making. More significantly for the
present article, at the intermediate level, IT can enable the integration of networks through the
use of collaborative practices (e.g., joint forecasting and scheduling). The actual means for
achieving this integration varies from supplier to supplier (I2 Technologies, for example,
prefers to divide their "Rhythm" solution into Demand Planning, Supply Planning, and
Demand Fulfillment systems; whereas SAP "APO" proposes operational, monitoring and
tactical modules that resemble the levels that had been proposed by Delfmann).
In Figure 4, ERP implementation has helped convert a traditional functional organisation into
a cross-functional one. A natural extension, driven by the aforementioned forces, would be
the network’s integration, on the customer side via CRM (Customer Relationship
Management), and on the supplier side via B2B (Business to Business purchasing).
Coordinated systems of this sort permit a scenario such as the aforementioned one, involving
an Advanced Planning and Scheduling System (APS) that operates by using standardised,
inexpensive communication platforms; e-business solutions; and the Internet
Front office
Back office
Purchasing
cycle
Sales
cycle
Manufacturing
Finance
HRM
Distribution
CRM
Suppliers
B2B
ERP
Customer
Figure 4. The evolution of ERP into APS
As stimulating as these developments are, valid questions remain as to their universality.
During the first few years of ERP implementation, a best practices school maintained that,
given the similarity between most of the business processes in this area (purchasing, payroll),
firms should benefit from current trends by adopting standardised best practices, instead of
trying to adapt their information systems to (allegedly inefficient) non-core practices. This
view evolved into best-practices-by-market view, which currently divides markets into
vertical and horizontal ones. A vertical market in the automobile sector, for example, will be
composed of second and first tier suppliers; assembly plants; and support organizations
(spares, repairs) - all of whom have little activity outside of this specific market. SAP has
identified a score of similar sectors (inc. oil and gas, health, retailing), and provided different
ERP solutions for each. Horizontal markets provide goods or services that are common to
many vertical markets (office supplies), or different networks within a vertical market (spare
parts). From these issues, we can infer our next hypothesis, namely that different business
networks require different Information Technology and Logistics Support Systems.
One Size Doesn't Fit All: The Need For Application Models
A simple collaboration model, useful for understanding supply chain issues, is Diaz and
Esqueda’s vertical-horizontal one (1998). In Figure 5, two basic types of collaboration are
proposed, depending on the power symmetries each involves. In a situation with large
suppliers and small customers (i.e., small electronic sub-assemblers purchasing chips from
Intel), power asymmetries preclude any truly close integration, even as horizontal
collaboration amongst the smaller firms engender virtual scale economies in activities such as
purchasing, exporting and marketing. In this case, vertical relations (e.g., between Intel and
the sub-assemblers) remain limited and transaction-oriented. In a situation where small subassemblers supply a large customer (e.g., Hewlett Packard), power asymmetries are a driver
behind true vertical integration, as both supplier and customer are motivated to synchronise
their production plans in order to achieve an effective just-in-time relationship. In this case,
relations are not just transaction-oriented – rather, they imply mutual trust (which is needed
for the exchange of core information, i.e., forecasts and production plans).
Intel
•Purchasing groups
•Export consortiums
•Market studies
•Training centers
•Technology development
Vertical
integration
Synchronizing core
processes (forecast,
planning) for JIT
relations: advantages of
vertical integration with
flexibility
Horizontal
collaboration
HP
Figure 5. Vertical and horizontal relations
Taylor et al. (1999) have proposed an e-business model based on the number of parties
involved in a transaction, called the model of the many and the few. In line with these
principles, we now propose a taxonomy of four basic e-business models, (Figure 6, based on
Díaz, 2000).
Sell-side (many buyers - few sellers). This is the now classic sell-side e-business site,
popularised by the pioneering efforts of firms such as Amazon.com and Houra.fr, the Internet
sales vehicle for the French retailer Cora. Sites can exist in Business to Consumer (B2C) open
access formats, and in more controlled B2B formats (e.g., the Boeing PART site, that handles
over 85% of this firm’s spare parts). The technology that supports these sites is a mature one,
and can be divided into on-line catalogues (ShiftKey) or else into transaction support systems
(OpenMarket, InterWorld), with both types usually being combined in a single web site.
There is little customer-supplier integration, but transaction costs and inconveniences are
reduced for the customer. This type of e-business, particularly in the travel industry, might
capture up to 9% of the total market by the year 2002.
Market side (many buyers-many sellers). This type of e-business is an attempt to democratise
the purchasing process, organised as per the old (non-virtual) markets, through a facilitation
of information flows, and thus a leveling of prices. Buyers can access a variety of suppliers,
search for the best prices and conditions, and team-up with one another in order to better their
purchasing power. Sellers can reduce transaction costs significantly. This is particularly
interesting in the case of MRO (Maintenance, Repair and Operations materials), i.e., those
slow logistical flows that can represent 80% of all purchasing transactions (Shapiro and
Hesse, 1999). These transactions are for a low value on average, resulting in high purchasingcost to value-of-material ratios. Because of this, and due to the e-business technology that has
become available, it is no surprise that MRO e-market web sites have proliferated. (By March
2000, The Economist had cited over 700 e-market sites.) MRO sites (which differ from saleside sites in that a leading company facilitates the exchange process, but doesn’t lead it
directly), are to be distinguished from specific market (i.e., spares), intra-vertical sites; and
from shared market (i.e., office supplies), inter-vertical ones. Examples of intra-vertical
e-market sites are industrial spares (tpn.geis.com), health sector spares and consumables
(neoforma.com), automobile spares (auto-xchange.com) and electronic parts (e2open.com).
Many
Sell-side
Market-side
B-C
Intra-vertical
B-B
Buyers
(Amazon.com,
Houra.fr)
(Boeing Parts)
(MRO: Ford)
Inter-vertical
(office supplies)
(Computers)
Few
(Cisco)
Integration-side
(Chevron)
Buy-side
Few
Sellers
Many
Figure 6. A taxonomy of e-business sites
Buy Side (few buyers - many sellers): In this situation, a large buyer installs a buy-side portal.
Firms such as Chevron are quickly developing these sorts of sites, motivated by the prospect
of significant cuts in costs and lag times. Oracle cites transaction cost reductions of between
$15 and $175 for Xerox (although the latter sum does seem atypically high). The business
solutions market is a highly competitive one. The market for larger clients (defined in Fortune
500 size terms) is dominated by Ariba and CommerceOne; and for smaller clients, by Clarus.
An example of this type of site is Chevron’s Ariba-based procurement site (petrocosm.com).
Integration side (few buyers - few sellers). This is the most interesting type of e-business from
a logistics point of view – as well as being the most difficult to implement. It is possible to
visualise two subclasses of this type: a large client with smaller suppliers who have integrated
in a co-specialisation arrangement (e.g., Cisco); or similar-sized firms that carry out joint
production planning in order to achieve a truly just-in-time integration. In the first instance,
suppliers will have the right incentives to integrate – but they will not necessarily have access
to the right kind of technology. In the second situation, the opposite prevails. This type of
network relation has been a driver behind integration practices such as QR, ECR and CPFR.
However, Information Technology solutions such as APS (Advanced Planning Systems) have
been slower to arrive due to the many complexities that are involved (including cultural and
protocol considerations).
This type of closely knit integration is implicit in the scenario which was presented in the
introduction to the present study, involving a combination of sell-side and buy-side
technologies. Complex implementations of this sort are still a thing of the future – but their
advent could be accelerated by the conclusion of new alliances (e.g., IBM, i2 and Ariba).
Supporting a Network in a Rapidly Changing World
The emergence of business networks featuring interrelated embedded Information
Technology and Logistics solutions raises two issues that need to be resolved at the same
time. The first is whether fulfillment systems can guarantee deliveries in an environment that
is marked by rapid change. The second involves the procurement of the human resources that
are needed to successfully support such complex, cross-functional systems.
Fulfilling orders. Toys-R-Us’s disastrous e-commerce experience during the 1999 Christmas
season (Stankevich, 2000) demonstrates that, in spite of the high hopes that have been raised
by the promise of e-business, business fundamentals still apply: if you sell, you have to fulfil.
Moreover, each e-business model requires a different logistics strategy, as Figure 6 shows.
Lesser complexity, but lower return on investment and less value added. Fewer barriers due to the maturity of
the technology and lesser intensity of contacts.
Supply chain strategy
 Customer-oriented strategy
 Use of own channels or
development of close
relationship with logistics
provider
 Importance of tracing
information along the chain
(together with customer)
Market
Many small
 Transaction-oriented,
 Casual relations with 3PL
transactions from
emphasis on cost
providers and horizontal
many origins to
reduction without loss in collaboration to achieve
many destinations
level of service
consolidation effects.
 High level of service
 Use of Intelligent Agents
 Stock control
 Loop includes reverse
 Higher degree of contact
logistics
Buy
Fewer, larger
 More strategy-oriented,
 Strategies include upstream
transactions from
emphasis on transaction
consolidation using own
many origins to
cost reduction and rapid
channels, or close relations
single destination
delivery
with logistics provider
 Higher degree of contact
Integration Few large
 Strategy-oriented,
 Joint forecasting and
transactions from
emphasis on rapid
planning between customers
few origins to few
response (Time based
and suppliers
destinations
Management)
 Logistics contracts with
 Long term total cost
suppliers
reduction through
 Distribution through own
synchronisation of chain channels or close relations
with logistics provider
Sell
Type of market
Many small
transactions from
single origin to
many destinations
Logistical objective
 Transaction-oriented,
emphasis on transaction
cost reduction without
loss of level of service
 High level of service,
reduced transport costs
 Low degree of contact
More complex, but higher return on investment and value added. Barriers: Cultural (trust and change),
Immature Technology
Figure 6. Supply chain strategy inherent to each basic e-business model
The field is evolving rapidly. On one hand, firms’ strategy can evolve over time, and they
may end up forming close alliances with their logistical service providers, with this latter
group helping to manage selling sites (i.e., TNT for Fiat’s spare parts business, c.f., Parker
1999) or create multi-company sites (i.e., the alliance between Ford, GM and Chrysler-Benz).
On the other hand, technology also evolves quickly, as witnessed by the emergence of
Intelligent Agents (Greis and Kasarda, 2000) who are capable of facilitating the fulfillment
process through an automatic scheduling of deliveries, that is, through the linkage of Webbased transaction activities with the logistical service providers themselves – with these
providers being located in logistics kiosks, and offering a one-stop all-inclusive transaction
and fulfillment service.
Careful attention will need to be paid to these issues, both by firms that want to benefit from
the new technologies whilst avoiding the costly mistakes of early ERP or e-business
implementations, and also from academics who want to keep abreast of current developments
so as fulfil their role of training the new type of logistics professional (Techno-logistical
expert) that the market requires nowadays.
These are exciting times for the logistics profession. Firms’ strategies are increasingly imbued
with interrelated issues that revolve around networks into which IT has been embedded, and
where the main deterrents to the rapid extension of new technologies (confused business
models and the scarcity of human resources) can be tackled through the adoption of some of
the ideas which the present paper has tried to present.
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