Chapter 15

Order Fulfillment, Logistics, and Supply Chain Management

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Learning Objectives
Understand the role of order fulfillment and back-office operations in EC Describe the order fulfillment process Understand the concept of the supply chain, its importance and management Describe the problems of managing the supply chain and the use of innovative solutions
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Learning Objectives (cont.)

Describe the need for integrating information systems of front office and back office Trace the evolution of software that supports activities along the supply chain and their management Understand the relationship among ERP, SCM and EC
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The Toy Order Fulfillment Problem

Overall satisfaction with online purchasing declined significantly in December 1999 and January 2000
Order fulfillment infrastructure shown to be very weak Toysrus.com and other toy e-tailers had the most critical problems

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The Toy Order Fulfillment Problem (cont.)

Fierce competition in the toy industry caused inventory deficiencies
Offered free delivery Offered $20 discount

Orders could not be met in time for the holidays so they gave out $100 coupons

Amazon.com had to ship orders for several products in several shipments instead of one raising the delivery cost
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Order Fulfillment: Overview

Introduction
Taking orders may be the easiest part Factors responsible for delays in deliveries:
Inability to accurately forecast demand Ineffective supply chains Pull type manufacturing Customized products

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Figure 15-1 Push vs. Pull Supply Chains

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Major Concepts
Order fulfillment: Deliver right order on time Front office operations:
Order taking Advertisement CRM

Back office operations

Accounting Finance Inventory Packaging Logistics

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Major Concepts (cont.)

Definitions of logistics:
Managing the flow of goods, information and money along the supply chain Aspect of military science dealing with procurement, maintenance, and transportation Management of details of an operation All activities involved in management of product movement
Right product Right place Right time
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Figure 15-2
Order Fulfillment and Logistics Systems

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The Steps of Order Fulfillment

1. 2. 3. 4. 5. Payment Clearance In-stock availability Packaging, shipment Insuring Production (planning, execution) 6. Plant services 7. Purchasing, warehousing 8. Customer contacts 9. Returns (Reverse logistics) 10. Demand forecast 11. Accounting, billing 12. Reverse logistics

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Shipping a Tropical Fish

1. 2. 3. 4. 5. 6. Placing order, payment Transfer order to Petstore.com, check stock Use a wholesaler to get the fish Supplier finds fish, ships to wholesalers Wholesalers rush to Petstore Petstore uses FedEx to ship to customer with copy of credit card payment Discussion: What is the contribution of EC?
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Supply Chain Management

Definition: Flow of material, information, money, etc. from raw material suppliers through factories to customers It includes: organizations, procedures, people SCM: Integration of the business processes along the chain, Planning, Organizing, control of many activities Activities: Purchasing, delivery, packaging, checking, warehousing, etc.

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Figure 15-3 An Automotive Supply Chain

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

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

Can be very long Possible cross-border problems Need information technology support of:
Communication Collaboration

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

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Typical Problems Along the Supply Chain

Delays in production, distribution, etc. Expensive Inventories Lack of partners coordination Uncertainties in deliveries Poor demand forecast Interference with production Poor quality
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More Difficulties
Virtual companies do not have logistics infrastructures One company is a member of several supply chain Conventional warehouses are too expensive Need automatic warehouses with robots as pickers
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Bullwhip Effect and Information Sharing

Flow of information to and from all participating entities Information sharing between retailers and their suppliers
Bullwhip effect refers to erratic shifts in orders up and down supply chain Distorted information leads to:
Inefficiencies Ineffective shipments Excessive inventories Poor customer service Missed production schedules
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The Bullwhip Effect

Slight changes in actual demand create problems Partners build just in case inventories Lack of trust among partners Stockpiling results in huge cost The manufacturers cannot plan production Cannot order material from suppliers
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Avoiding the Sting of the Bullwhip

How to do it?
Information sharing is a must and is facilitated by EDI, extranets, and groupware technologies

Trust and agreements in regard to:

Ordering and inventory decisions Placing supply chain ahead of individual entities within the corporation

Sharing information could save $30 Billion/year just in the grocery industry
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Preliminary Activities
Understand the supply chain (flow charts) Study internal and external parts Performance measurement are a must (Benchmarking) Multidimension performance analysis A BPR may be needed People s relationships are a must
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Areas of Opportunities
Manufacturing processes Warehousing operation Packaging and delivery Material inspection/receiving Inbound and outbound transportation Reverse logistics (return) In-plant material handling Vendor management program Customer order processing

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Areas of Opportunities (cont.)

Invoicing, auditing and other accounting activities Collaboration procedures with partners Employee training and deployments Labor scheduling Use of teams and empowerment of employees Automation of processes Use of software for facilitating all the above Inventory management and control
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Using Inventories

Insurance against stock out Can be in several places Can be excessive Can be insufficient Example: Littlewoods stores; UK

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Using Inventories
Using inventories to solve supply chain shortages:
Building inventories as insurance against uncertainty products and parts flow smoothly Very difficult to correctly determine inventory levels for each product and part
Customized finished products can only stock components Excessive levels are costly to store Insufficient levels cannot protect against high demand or slow delivery times
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Using Inventories (cont.)

Example: Littlewoods Stores; UK

Retail clothing industry is very competitive Littlewoods instituted an IT-supported initiative to support supply chain efficiency; specifically, to deal with the overstocking problem

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Littlewoods Stores (cont.)

Use a Web-Based performance reporting system that analyzes daily:

Marketing and financial data Merchandising Space planning Purchasing data

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Littlewoods Stores (cont.)

Using data warehouse, DSS and other end-user oriented software system has helped:
Reduce backup inventory expenses Increased the ability to strategically price merchandise differently in different stores Reduced the need for stock liquidations Cut marketing distribution costs significantly Increased the number of Web-based users
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Proper SCM

Proper SCM and inventory management requires coordination of all activities and links in the supply chain to:
Ensure that goods move smoothly and on time from suppliers to customers Keep inventories low Keep costs down

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Proper SCM (cont.)

Coordination is needed because:
Supply chain partners depend on each other Partners don t always work together toward the same goal

To properly control uncertainties it is necessary to:

Understand the causes/problems Determine how uncertainties will affect other activities up and down the supply chain Formulate ways to eliminate or reduce uncertainties
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Proper SCM (cont.)

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

Effective Efficient

Support is needed to ensure this communication and is enabled by:

IT support EC support

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EC Solutions Along the Supply Chain

Automate order taking
Use EDI/Internet Web-based ordering; intelligent agents

Electronic payments Inventory reduction (made-to-order pull process)

Improved inventory management Decreased administrative costs
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EC Solutions Along the Supply Chain (cont.)

Digitization of products instant order fulfillment Back-office interface
Shortens cycle time Eliminates errors

Collaborative commerce among members of the supply chain

Shortens cycle time Minimizes delays and work interruptions Lower inventories Lower administrative costs

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Innovative Solutions to Order Fulfillment Problem

Examples of solutions to order fulfillment:
Real-time video (Webcam)
Move inventory 70 times/year FAO Schwartz demonstrates famous store in New York

MailBoxes Etc. and Innotrac Corp.

Comprehensive system Software connects e-tailers and order management systems
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Innovative Solutions to Order Fulfillment Problem (cont.)

Role of 7-Eleven & convenience stores
Can be used as a collection point for returns Can be used as a pick-up place Can be used as a place for order placing Can pay in cash/card to the store Returns are a problem: up to 30%

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Innovative Solutions to Order Fulfillment Problem (cont.)

Relysoftware.com helps find:
Forwarders intermediaries that prepare goods for shipping for companies

Relysoftware.com also helps:

Forwarders find the best prices on air carriers Carriers fill up empty cargo space by bidding it up

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Same Day, Even Same Hour Delivery

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

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Same Day, Even Same Hour Delivery (cont.)

Supermarket deliveries
Transport of fresh food to people who are in homes only at specific hours Distribution systems are critical Fresh food may be spoiled

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E-Markets and Exchanges

Types:
One company with many suppliers (RFQ) Catalogs, auctions One company with many buyers (RFQ) Exchanges controlled by few large companies (e.g., ANX) 3rd-party managed exchanges Vertical vs. Horizontal portals

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Figure 15-4
Proposed Order Fulfillment for Groceryworks

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

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Automated Warehouses
B2C order fulfillment send small quantities to a large number of individuals
Step 1: retailers contract Fingerhut to stock products and deliver Web orders Step 2: merchandise stored SKU warehouse Step 3: orders arrive Step 4: computer program consolidates orders from all vendors into pick waves

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Automated Warehouses (cont.)

Step 5: picked items moved by conveyors to packing area; computer configures size and type of packing; types special packing instructions Step 6: conveyer takes packages to scanning station (weighed) Step 7: scan destination; moved by conveyer to waiting trucks Step 8: full trucks depart for Post Offices

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Handling Returns
Necessary for maintaining customer trust and loyalty
Return item to place it was purchased Separate logistics of returns from logistics of delivery Allow customer to physically drop returned items at collection stations Completely outsource returns

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Outsourcing Logistics: The UPS Strategy

UPS provides broad EC services:
Electronic tracking of packages Electronic supply chain services for corporate customers by industry including:
Portal page with industry-related information Statistics

Calculators for computing shipping fees Help customers manage electronic supply chains
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The UPS Strategy (cont.)

UPS provides broad EC services

Improved inventory management, warehousing, and delivery Integration with shipping management system Notify customers by e-mail of:
Delivery status Expected time of arrival of incoming packages
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The UPS Strategy (cont.)

Representative tools
7 transportation and delivery applications
Track packages Analyze shipping history Calculate exact time-in-transit

Downloadable tools
Proof of delivery Optimal routing features

Delivery of digital documents Wireless access to UPS system

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Supply Chain Components

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

Internal: all internal processes that add value, conversion to find products
Production scheduling Costing Inventory control
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Supply Chain Components (cont.)

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

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Software Support
SCM Activities
Upstream activities

Type of Software
Supplier management Ordering systems Order tracking systems Inventory management Purchasing order management Budgeting, cost control Human resource information Salesperson productivity tools Online telemarketing Ad management etc.
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Internal supply chain activities

Downstream activities

Integration-Benefits
Automation of segments useful, but integration brings:
Tangible benefits
Inventory reduction Personnel reduction Productivity improvement Order management improvement Financial cycle improvements
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Intangible benefits
Information visibility New/improved processes Customer responsiveness Standardization Flexibility Globalization Business performance
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Integration Along the Supply Chain

Need to streamline operations New business models New organizational relationships (virtual companies) Examples Warner Lambert and Wal-Mart (Box 15.6)

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Areas of Integration
Order taking - production inventory levels Payment info in B2B - Visa, MasterCard, etc. Low inventory levels - automatic ordering Order to manufacturing - generate a list of needed resources & their availability Changes in an order - transmit to suppliers and their suppliers Tracking systems - available to customers
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Evolution of Software Integration

Completely Independent of each other
MRP= Material Requirements Planning:
Inventory Production

MRPII=Manufacturing Requirements Planning

more integrated MRP+Finance+Labor

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Evolution of Software Integration (cont.)

Completely Independent of each other
ERP=Enterprise Resources Planning
All functional areas

Extended ERP includes

Suppliers Customers

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From SAP to mySAP.com

SAP=Traditional ERP=Automate and Integrate transactions MySAP.com = Web-based comprehensive system
Workplace - a personalized, role-based interface Marketplace - one stop destination for business professionals to collaborate Business Scenarios - products for the Internet and intranet Application-hosing - hosting Web applications for SMEs
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ERP Benefits

ERP = Integrating business processes and activities in real time Solves many supply chain problems Necessary for medium to large corporations Helpful also for some SMEs

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ERP Implementation
Need to interface with EC order taking system Manages all routine transactions in the enterprise Recently extended to suppliers and customers

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Developing ERP Systems

Do-it-yourself, from scratch (only few will) Use Integrated packages such as R/3 from SAP Best of Bread approach, using integrating software Rent in from ASP service

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Post-ERP (2nd Generation)

1st generation - transaction processing orientation 2nd generation
Including decision-making capabilities EC requires decision support EC requires business intelligence

SCM software: Production Planning, Manpower utilization, Profitability models, market analysis Integration of SCM capabilities Other added functionalities: CRM, KM
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ASP and ERP Outsourcing

Why ASP or lease?

Leasing information systems application Back to the days of time-sharing A risk prevention strategy Very popular with ERP (expensive, cumbersome)

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Managerial Issues
Planning for order fulfillment is a critical task, especially for virtual EC vendors Dealing with returns can be a complex issue Partnerships and alliances can improve logistics and alleviate supply chain problems Many software products are available to improve SCM and logistics EC must be tightly connected with backoffice operations
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Managerial Issues (cont.)

It is necessary to integrate it with EC front-office operations Importance of creation of logistics system for EC and how to use EC applications to improve the supply chain Software integration may require considerable time and money
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