MD850: E-Service Operations

Order Fulfillment and Forward Supply Chain Processes

Agenda
Background Order Fulfillment in e-Services Supply Chains
Supply Chain Components Supply Chain Problems Supply Chain Design Extending SCM Concepts to E-Services Supply Chain Modeling & Evaluation Supply Chain Technology

SCM Perspective on Li & Fung Case

Background
Competition is changing
Old: Firm vs. Firm New: Supply Chain vs. Supply Chain

Background
Supply Chain
Concept of a supply chain is relatively new Prior to 1996, very few management or engineering schools had courses on supply chain management (SCM) Previous stumbling blocks that impeded SC integration high transaction costs between partners poor information availability challenges of managing complex interfaces between functional organizations

Background
Scope of Supply Chain Topics
Customer Facing & Internal Customer Value and SCM Web-centric product design Forecasting and inventory management in B2C Order fulfillment and returns management in B2C

Background
Scope of Supply Chain Topics
Supplier Facing Coordinated product design and supply chain design Integration of supply chain planning and procurement Logistics network configuration Order fulfillment and returns management in B2B Distribution strategies Strategic alliances Models for B2B exchanges

Background
Scope of Supply Chain Topics
IT Related Information technology for SCM Decision Support Systems (DSS) for SCM Web services: frameworks and technologies

Microsofts .NET technology Suns J2EE technology Open Source technologies

Order Fulfillment in eServices

Order Fulfillment in e-Services

Goals of customer care applications are simple
What do online shoppers want? (BCG)
Free delivery 95% Free returns if I am unhappy with product 91% Guaranteed delivery time 75% Quicker delivery 69% Site has a store located near me 46%

Proper fulfillment is whatever serves the customer best while preserving adequate profit margins to continue in business at a high level of customer satisfaction

Order Fulfillment in e-Services

Designing and implementing customer care applications can be another matter
Central problems

Enterprise information and customer information must be integrated into a unified whole New kinds of customer behavioral information must be captured and processed Customers and employees must share a common knowledge base

All organizational functions must have access to a consistent picture of the customer relationship

Order Fulfillment in e-Services

E-Fulfillment Processes (Bayles, 2001)
Notification Process
Acknowledgment and confirmation
Instantaneous after purchase

Information fulfillment of digital service-product attributes

Low cost delivery of information Instant gratification for customer

Picking and Packing Delivery Reconciliation/settlement of credit card payment request Post-delivery activities that ensure customer satisfaction
Returns Exchanges

Order Fulfillment in e-Services

Fulfillment Recommendations (e-Service, Chap. 8)
Build an order confirmation system into your service process to ease customer worries Grant customers online access to production order process and shipping data Build (or outsource) warehouse, fulfillment, and product delivery chains that create as much customer contentment on the back end of your service process as on the front end Focus on fast, efficient fulfillment Shipping charges
Probably dont want to make them free Perhaps free for
Large purchase size above some dollar amount Loyal, high-value customers In-store pickup

Order Fulfillment in e-Services

Fulfillment Recommendations (e-Service, Chap. 8)
Integrate online bill payment into the fulfillment process Return policies make the return process as easy as the process for buying
Synchronize returns between digital and physical storefronts Supply on-the-spot return authorization numbers

Be careful with using purchase information for permission marketing Where possible, employ online post-sale self-help Use post-transaction web surveys to gather customer feedback and continually improve service performance

Order Fulfillment in e-Services

Fulfillment Tasks for e-Businesses
GOAL: Achieve total end-to-end visibility throughout the supply chain Must deal with international pricing/taxation and shipping issues
Pricing customized to location of customer Shipping agents to deal with tax issues Local fulfillment center

Provide online shipping tools Link web site to package carriers host systems
FedEx, UPS online tracking tools with APIs USPS eventually will have tracking tools

Integrate shipping, tracking and distribution systems with ERP systems

FedEx, UPS systems with APIs for doing so

Order Fulfillment in e-Services

Fulfillment Outsourcing
Potential benefits
Speed to market
Deploy e-Service quickly No capital investment in fulfillment Level of service provided by outsourcer may be better than a start-ups fulfillment service

Scalability
Higher when using an large fulfillment service

Focus
On business competencies, not on shipping

Lower costs
No need to hire shipping staff

Focus on the customer Capitalize on efficiencies

Supply Chains

Supply Chains
What is a Supply Chain?
Porters Value Chain
Firm Infrastructure Human Resources Management Technology Development Procurement Profit Margin Outbound Logistics Marketing & Sales Service

Inbound Logistics

Operations

Supply Chains
What is a Supply Chain?

Value Chain of Supplier

Value Chain of Buyer

Supply Chains
What is a Supply Chain?
Suppliers Virtual Value Chain Buyers Virtual Value Chain

Information Flow

Profit Margin

Information Flow

Profit Margin

Value Chain

of Supplier

Value Chain

of Buyer

Profit Margin

Profit Margin

Supply Chain Components

Supply Chain Components

Components of a Supply Chain?
Suppliers Virtual Value Chain Buyers Virtual Value Chain

Digital Content Networks

Digital Content Networks

Value Chain

of Supplier

Value Chain

of Buyer

Networks of Physical Objects Networks of Service Providers

Networks of Physical Objects Networks of Service Providers

Supply Chain Components

Components of a Supply Chain?
Supply chain is a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. (Christopher, 1998) Supply chain components
Two or more legally separated organizations Material, information, and financial flows Firms producing objects Logistics service providers Ultimate customer

Supply Chain Problems

Supply Chain Problems

Supply Chain Problems
Inventory

Work of the devil Holding costs Risk of obsolescense Quality problems hidden

The Bullwhip Effect

Supply Chain Problems

The Bullwhip Effect
A Small Demand Shift Leads To Huge Variation in Orders and Inventories

Retailer

Distributor

Wholesaler

Huge Variation in On-Hand Inventory and Manufacturing

The Bullwhip Effect

Manufacturer

Supply Chain Problems

Inventories

Historical Inventory Management

Multiple Period Demands
Assume demand pattern. Forecast when you will stock out. At the appropriate time, order some order quantity (or up to some quantity), so that with the amount you receive at a future date -- plus the buffer inventory (safety stock) -- you will have a small probability of stocking out

Independent demand

Single Period Demand -- paperboy problem; fashion goods Order to balance costs of overage against costs of underage -- giving maximum profit A/B/C -- some inventories more important or costly than others Monitor costly inventories closely Dont monitor cheap inventories, just hold lots of buffer stock

Dependent demands

MRP/MRP II ERP/Extended ERP

Supply Chain Problems

Drawbacks of Inventory Methods
Inventories
Independent demand

Multiple Period Demands, Single Period Demand, A/B/C

Paper orders Misplaced products Inaccurate inventories Human errors Cycle Counting -- strategies to count everything in warehouse (e.g., 1/N of warehouse at a time, over N periods); facilitates balancing the objectives of different inventory methods

Dependent demand

MRP/MRP II/ERP/Extended ERP

Stacks of paper production schedules Paper order releases Change reports -- to previous schedules System nervousness -- when allowing updating of schedules

Supply Chain Problems

What The Experts Now Suggest
Rocket Science Retailing
(Fisher et al., HBR, July/Aug 2000)

Retailer objective: right product, right place, right time, right price Historically, the opposite has happened

most inventory planning is for long life-cycle products online and offline stockouts increasing markdowns supply chain lead times often are so long, that forecasts of demand only confirm that the product will tank, and nothing can be done about it create a high-tech forecasting system supported by a flexible supply chain

Rocket Science Retailing

Supply Chain Problems

What The Experts Now Suggest
Rocket Science Retailing
Forecasting

(Fisher et al., HBR, July/Aug 2000)

Update forecasts based on early sales data Track and predict forecasting accuracy Get product testing right -- make it scientific Use a variety of forecasting approaches Work with supply chain partners Reserve production capacity; hold generic raw-material inventories that can later be developed into finished product Troubleshoot production problems, design for easy manufacturability Make decision making flexible; empower employees

Supply Chain Speed

Supply Chain Problems

What The Experts Now Suggest
Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000)
Inventories Need to track stockouts UNFORTUNATELY, no commercial software available to track stockouts Accurate, Available Data Most retailing data inaccurate and inaccessible to employees Store-level sales data usually incorrect

Why: (1) clerk scanning one item multiple times to ring up multiple slightly different items, (2) like-for-like returns, without scanning in return and exchange Inventory counts usually off
warehouse ships wrong item, supplier shorts, case-pack dimensions change without changing in inventory system

Most companies dont keep enough data kills their ability to forecast time-series of demand accurately aggregation of data kills knowledge at SKU level lack of SKU kills ability to customize supply chain and shipments

Supply Chain Problems

What The Experts Now Suggest
Manufacturing for Lean Retailing (Abernathy et al., HBR,
Nov/Dec 2000)

Historical

large order at beginning of period manufacturers treated SKUs within a product line all the same Manufacturers must replenish retailers stocks on an ongoing basis; tend to accomplish by holding extra inventory; get stuck with inventory if styles change; risk of getting stuck increases with product proliferation Solution Need to differentiate between SKUs -- think of product lines as portfolios of distinct goods Need to rethink sourcing strategies, reallocating manufacturing across off-shore sources (high volume, low-variance demands) close-to-market sources (low volume, high-variance demand)

Lean Retailing

Supply Chain Problems

IT to the Rescue
The Wearable Warehouse, Business 2.0
VISION Turn the supply chain into the warehouse

reliable inventory numbers better order fulfillment security: reducing in-transit theft (in turn, improving on-hand data) accurate tracking of goods

Humans (networked objects) provide services to the system

Essentially automated Cycle Counting Wireless IS implements strategy for what item should be counted when

Distributed, heterogeneous objects [inventory containers] report what they contain and where they are, to update system information

Supply Chain Design

Supply Chain Design

Research in Supply Chain Design and Management
Stretches back to 1940s/1950s Prior to 1990s, most SCM research was for simple material flows and transportation

Most complex: optimal policy for a single-product, single-stage, capacitated SC with a stationary demand process

Simple multi-stage and/or multi-product supply chain models were computationally intractable First mathematical modeling papers with computational results were published in 1991

Start of modern supply chain management research

Supply Chain Design

Conceptual Approaches
Research in Supply Chain Design and Management
Conceptual SCM Research Porters Value Chain Model (1985) Fines Clockspeed (1998) Approach

Supply Chains
Conceptual Frameworks
Clockspeed (Charles Fine, MIT)
Biologists study fruit flies because their fast rates of evolution permit rapid learning that can then be applied to understanding the genetics of slower-clockspeed species -- like humans. Managers should study industrial equivalents of fruit flies Fast clockspeed industries

Internet services personal computers multimedia entertainment

Supply Chains
Conceptual Frameworks
Clockspeed (Charles Fine, MIT)
The ultimate core competency of an organization is supply chain design, which I define as choosing what capabilities along the value chain to invest in and develop internally, and which to allocate for development by suppliers.

Fast-clockspeed supply chain characteristics

rapidly evolving world designing and redesigning firms chain of capabilities objective is a series of competitive advantages --

Supply Chains
Conceptual Frameworks
Clockspeed (Charles Fine, MIT)
Computer-industry motivated principles about the design and evolution of supply chains

Beware of Intel Inside

IBM employed modular supply chain design (Intel, MS DOS) power in the chain, and financial rewards, had shifted upstream since most modern products are largely computer components and electronics, they potentially fall prey to same forces

Supply Chain Double Helix oscillation of supply chain structure Three-Dimensional Concurrent Engineering concurrent design of capabilities (product, process, supply chain)

Supply Chains
Conceptual Frameworks

Niche Competitors High-Dimensional Complexity Organizational Rigities

Integral Product, Vertical Industry

Modular Product, Horizontal Industry

Technical Advances Supplier Market Power Proprietary System Profitability

Pressure to Dis-Integrate

Pressure to Integrate

(Charles Fine, Clockspeed, 1998)

Supply Chain Double Helix

Supply Chains
Conceptual Frameworks
PRODUCT Performance Specifications PROCESS Technology, & Process Planning Recipe, Unit Process

Details, Strategy

Product Architecture, & Make/Buy Time, Space, & Availability SUPPLY CHAIN Manufacturing System, Make/Buy
(Charles Fine, Clockspeed, 1998)

3-D C. E.: Supply Chain Overlapping Responsibilities

Supply Chains
Conceptual Frameworks
PRODUCT
Design
Detailed Performance Specifics and Functions

3-D C. E.: Supply Chain Concurrency Model

PROCESS
Unit Processes
Technology & Equipment

SUPPLY CHAIN
Supply Chain Architect.
Set of Organizations and Allocation of Tasks

Architecture
Modular vs. Integral

Manufact. System
Functional Cellular

Logistics & Coord. System

Autonomous vs. Integrated

Technology Architecture

Focus
(Charles Fine, Clockspeed, 1998)

Supply Chains
Conceptual Frameworks
Clockspeed (Charles Fine, MIT)
Prediction:

supply chain design as a strategic precursor to supply chain management will only increase in the decade to come as industry clockspeeds continue to accelerate, and the half-lives of many capabilities in our existing supply chains need replacement and/or upgrading

Extending Supply Chain Concepts to e-Service Operations

Supply Chains
Conceptual Frameworks
Service-Product
Static Niche Need Dynamic
Unique Items

Process Control
Static; Mechanization Dynamic; Intelligence

Broad Need

Common Items

(Heim and Sinha, 2001)

(Jaikumar, 1994)

Supply Chains
Conceptual Frameworks

n Evolutio

Past: Many suppliers/customer flows Flow volumes small and sporadic

Coming: Stable, selective supply chain relationships Few suppliers/customer flows (Reliable suppliers, Loyal customers) Large, steady flow volumes Geographic proximity
(Schonberger, World Class Manufacturing: The Next Decade, 1996)

Supply Chains
Conceptual Frameworks Relationship +
Supply Chain Control
Static Dynamic
Speedy e-Service Communication + Network Design, Control & Management

Unique Items

Li & Fung

Common Items

Covisint

Relationship

(MD850, 2001) Relationship +

Speedy e-Service Communication

Supply Chains
Conceptual Frameworks
Business 2.0, Kalakota & Robinson, 2001
First Generation: Communities, Storefronts, and RFP/RFQ Facilitators Second Generation: Virtual Distributors and Auction Hubs Third Generation: Collaborative Trading Hubs

end-to-end management of their supply chains

Industry Consortiums: Joint-Venture Procurement Hubs

Covisint -- automotives Orbitz.com -- airlines

Supply Chains
Conceptual Frameworks
Service-Product Static Dynamic Process Control
Static; Dynamic; Mechanization Intelligence

Niche Need

Unique Items

Broad Need

Common Items

Supply Chain Control

Static Dynamic

Unique Items

Common Items

Goods

Services

e-Service

49 = 262,144 possible design positions

Digital Content

Guiding Principles

Supply Chain
Some Guiding Principles Align (a la 3-D Concurrent Engineering)
Product Process Supply Chain

Reasonable Question: Yes, but how?

Conceptual Supply Chain Modeling and Evaluation

Supply Chains
Supply Chain Structures
e-Fulfillment
Step #1: Model Supply Chain Process Example: Furniture Industry
Traditional Furniture Supply Chain
Manufacturing Ship to Retail Repair Damage Inventory at Retail Local Shipping Assembly at Home

Supply Chains
Supply Chain Structures
Pure e-Tailer Furniture Supply Chain
Manufacturing Long Distance Shipping Local Shipping Assembly at Home Repair Damage

Pure e-Tailers with Warehouses Furniture Supply Chain

Manufacturing Ship to Warehouse Repair Damage Inventory at Warehouse Local Shipping Assembly in Home

Supply Chains
Supply Chain Structures
Manufacturer Direct Furniture Supply Chain
Manufacturing Long Distance Shipping Local Shipping Assembly at Home Repair Damage

Retailers On The Web Furniture Supply Chain

Manufacturing Ship to Retail Repair Damage Inventory at Retail Local Shipping Assembly at Home

Supply Chains
Supply Chain Evaluation
e-Fulfillment
Step #2: Back to the Basics (Cost, Quality, Flexibility, Delivery)

Analyze supply chain characteristics -- basic operations strategies -- based on knowledge of product and process characteristics in that industry

3-D Concurrent Engineering

Determine if there exists a dominant strategic position compared to existing position(s) of incumbents (C dom, Qdom, Fdom, Ddom) better than (Cx, Qx, Fx, Dx) for all design positions X

Supply Chains
Supply Chain Evaluation
e-Fulfillment
Furniture Industry
Relative Cost of Returns Traditional Retailer Pure e-Tailer e-Tailer w/ Warehouse Retailer on the Web Cost of Inventory Cost of Repair Cost of Shipping Cost of Order Capture

Possibly Better Possibly Worse

Cost of Quality

L H H L

M L M M

L H M L

L H M L

H M M H

L H M M

Supply Chain Management Technology

Background
Supply Chain Management Technology
Procurement Production Distribution Sales

long-term

Strategic Network Planning

Advanced Planning System (APS) Software Modules

mid-term

Master Planning

Demand Planning Distribution Planning

Transport Planning
Demand Fulfillment & Available-toPromise

Material Requirements Planning

short-term

Production Planning Scheduling

Background
Supply Chain Management Technology
Procurement Production Distribution Sales

Strategic Network Planning

Configuration Purchasing Quantities Simulation Results Capacity Booking Capacity Booking Distn Quant./Alloc. Stock Levels Lot Sizes Forecast

Master Planning

Demand Planning
Forecast

Material Requirements Planning

Production Planning
Lot-Sizes Scheduling

Distribution Planning

Coordination and Data Flows of APS Modules

Tranportation Demand Quantity/Modes Fulfillment & ATP Transport Current Orders

Planning

Due Dates

Due Dates

Supply

Supply Chain e-Services

Technology
SCM Technologies
J2EE Technologies
SAP re-tooled all of its applications to support the J2EE protocol, in addition to its own ABAP technology standards Many examples of using Java for enhanced SCM

.NET Technology
Doesnt support multiple platforms, which will be difficult for integration of supply chain Supply chain vendors have been trying to convince Microsoft to support J2EE, so they could easily integrate enterprise SCM to the desktop, but Microsoft has refused

Supply Chain e-Services

Technology
SCM Technologies
OpenAdaptor.org

open source supply chain integration system, made open-source on 1/30/2001 originally developed for financial services developed by investment bank Dresdner Kleinwort Wasserstein (DrKW) already used in global integration 40 projects by DrKW allows the rapid, simple and often code-free integration of any system to any other system, enabling the complete supply chain, plus internal systems, to be integrated while allowing access to the web

SCM Perspective on Li & Fung Case Study

SCM Perspective
Sourcing Characteristics
Seasons

Li & Fung

Past: 2-4 Now: 6-7 fast clockspeed? Past: potentially many, but very slow deals, as translation was the service Now: 350 big customers, potentially 22,800 SMEs might be added Past: relatively few Now: 7500 suppliers, 26 countries more than 1 million workers engaged on their behalf (assuming 200/plant)

Customers

Suppliers

SCM Perspective
Li & Fung
Supply Chain Control
Static Dynamic

1910 Interpreter Margin=15% Unique

Items

Present Li & Fung Margin = 6-8% softgoods 10-30% hardgoods, function of sourcing complexity

Broker Margin=10, 5, then 3%

Common Items

Breaking up Value Chain Dispersed Manufacturing Rational Kitting of Parts 1980s: Delivering Manufacturing Programs

1970s: Regional Sourcing Agent

SCM Perspective
Li & Fung
The Process Front End
Design Engineering Production Planning

The Goods and Related Services

Softgoods Textiles USA Textiles ROW Hardgoods Toys Accessories Festive Items Furnishings Handicrafts Home Travel Goods Sporting Goods

Back End
Quality Control Testing Logistics

Raw Material and Component Sourcing

Managing Production

SCM Perspective
Li & Fung
Communications Client Sense Li & Fung

Design

Materials Sourcing

Factories

Quality Control

Logistics

Respond

SCM Perspective
Li & Fung
Client Li & Fung Operational Support System

Design

Materials Sourcing

Factories

Quality Control

Logistics

SCM Perspective
Li & Fung
Retail Price $4 Client Li & Fung Margin to Share = $3

Design

Materials Sourcing

Factories

Quality Control

Logistics

Cost: $1

SCM Perspective Fee % Transaction

Covisint
Retail Price $19,000 Ford, GM, et al. Margin (Ford, GM) = $3,000 Covisint

Design

Materials Sourcing Tier 1 Only

Factories Quality Control Tier 1 Only

Logistics Tier 1 Only

Cost: $16,000?

Summary
Conceptual supply chain frameworks
Fine: Two supply chain periods within an industry Fine: 3-D engineering of product, process, supply-chain

Guiding principle: link up service-product, service-process, service supply chain

Very complex task 3 product components, 3 process components, 3 supply chain types all must work together

Many different supply chain models

Summary
Evaluation can initially (subjectively) be done based on standard operations strategies/metrics
Cost Quality Flexibility Delivery

Thorough analysis and management of supply chains will involve hefty mathematics/OR models