E-Business Strategy Topic Six: E-Chain Management


The following definitions describe the specific e-chain concepts used in this topic.

e-Chain management: the computer-mediated integration, organisation and supervision of all activities in an enterprise's purchasing and supply of goods and services through exchange transactions. Management of exchange activities may include those further up or down the chain and not only those with the 'nearest trading neighbour'. The goal is to effectively and efficiently satisfy supplier's and buyer's needs.

e-Supply chain management (e-SCM): the computer-mediated integration, organisation and supervision of all activities in upstream purchasing of goods and services from suppliers through exchange transactions.

e-Demand chain management (e-DCM): the computer-mediated integration, organisation and supervision of all activities in downstream sales of goods and services to customers through exchange transactions.

e-Marketplace: a computer-mediated marketplace where there are many buyers and many sellers (as opposed to few buyers and many sellers, or vice versa). Also called an e-hub, net marketplace, or B2B exchange.

Collaborative planning, forecasting and replenishment (CPFR): A computer-mediated management practice in which suppliers and retailers collaborate in their planning and demand forecasting to optimise flow of materials along the supply chain.

A Brief History

The management of the sourcing, production, delivery of and payment for goods and services has changed radically over time. We are now in the fifth phase of management techniques.

1. Physical distribution: Isolation. In the days before services were a wide part of the economy, physical goods were the focus of chain management. Tasks involved managing the physical flow of goods from one chain partner to another.

2. Logistics: Trading partners. The original approach of simply distributing physical goods as and when required on ad hoc basis was inefficient and expensive. Logistics, the management of supply as a formalised process, developed. The focus of logistics was to ensure cost-effective flows and storage of goods according to customer requirements.

3. Integrated logistics management: Trading exchanges. Integrated logistics management added management of chain linkages, with teams developing and managing operations. Basic computerisation of the process was also introduced to improve accuracy and timeliness.

4. Supply chain management: Trading communities. The next step was to emphasis interorganisational coordination between adjacent chain partners, rather than individual organisational processes. The two-way flow of information between partners helped streamline forecasting, manufacturing and delivery.

5. e-Chain management: e-Marketplaces. Current e-chain management extensively uses computer-mediation (especially Internet technologies) to coordinate entire industry value chains.

e-Supply chain management and e-demand chain management are at the forefront of current management practice, and are best integrated in a way that provides timely and effective information and supply, to create competitive advantage—or at least competitive parity for laggards.

e-Chain Drivers

Use of enterprise resource planning (ERP) and e-procurement correlates positively with labour productivity growth. Online procurement changes the process of ordering goods and services. e-Procurement turns the slow, error-prone and costly paper-based process into an efficient, interactive real-time electronic process; the main benefits of e-procurement is the reduction in transaction costs. The cost reduction will be between 50 and 56% per order. However, the benefits of cost reduction may only arise for large firms that process hundreds of orders each week. For small companies, the costs of the e-procurement system may outweigh the benefits.

Overall, there have been a number of key trends that have driven the move to e-chain management.

Chain member trends
* A proliferation of channel members, requiring a much higher level of cooperation and coordination.
* Channel members' willingness to participate in an holistic solution.
* Desire for speed of service to shorten lead times and reduce costs.
* Movement to building core chain management competencies or to outsource to experts.
* Increase process transparency to increase accountability.

Technology trends: Standardisation on common, cost-effective computerisation, including the Internet, rather than relying on old proprietary systems and trying to build connections between them (middleware).

Increased value that can be provided to customers, suppliers and other partners include:
* sharing of operating savings via offering lower product prices
* more accurate and faster order fulfilment
* more flexible (JIT—Just In Time) deliveries
* better response to urgent orders, while at the same time, reducing the need for them
* wider range of product and delivery choices streamlined payment of completed orders.

An important task of e-chain management is to predict what customers will want in the future. Product consumption in many categories is seasonal—in fact, few categories are completely without season. Without accurate forecasting systems, an enterprise is exposed to risk in regard to overproduction and supply, or may experience embarrassing stock-outs.

More sophisticated e-chain management systems incorporate forecasting functions. Time series analysis of sales figures is used to uncover patterns and predict demand. In cases where there is no historical sales data, advanced e-business research techniques such as choice modelling can allow extrapolation and prediction.

Central to really accurate forecasting is collaboration between chain members. While forecasts can be determined mathematically from sales and other data, interpretation of the results with partners will strengthen the quality of decisions made on the basis of the forecasting results.

Making Effective Links

Collaboration and cooperation can be as important for e-business strategies than simple competition.

Until recently, e-supply change management (e-SCM) and e-demand change management (e-DCM) have been treated as two separate activities. But one company's supplier (upstream) is another company's customer (downstream) in an entire industry supply chain, so it is best if strategy, management and operations are integrated between channel members.

Both supply and demand chains may be direct or indirect—or even use a mix of the two. Where supply transactions occur between two businesses, the chain is referred to as business-to-business (B2B). Where supply transactions occur between a business and a consumer, the chain is referred to as business-to-consumer (B2C). Consumers are unique in that they (a) don't generally buy the product to resell it as businesses often do, and (b) being at the end of the supply chain, they provide the entire gross cash flow that travels back up the supply chain.

For large corporations—and some medium-size ones, too—business operations are underpinned by enterprise resource planning (ERP) systems. These systems include modules that support e-SCM and other activities (Falk 2005: 1232):

"An important role of ERP is to serve as a platform for other applications, such as Customer Relationship Management (CRM) and Supply Chain Management (SCM). In recent years, all major ERP suppliers have integrated SCM strategy into their ERP systems. Web-based product availability and delivery information are just a few of the common business applications that involve blending technologies from both disciplines."

Building The E-Chain

Marketplaces and B2B exchanges provide two broad categories of service: aggregation and facilitation.

Aggregation refers to making available large numbers of potential partners—both buyers and suppliers—along with, in many cases, listings of the goods they want to buy or sell. Aggregation provides the obvious benefit of liquidity, an important consideration for all traders.

Facilitation refers to helping e-marketplace participants interact with each other before, during, and after their decisions to do business together. Prior to this decision, e-marketplaces facilitate by providing information about potential partners, including certification as to their demonstrated qualities (credit, fulfillment reliability, etc.). Many e-marketplaces also offer post-partnership facilitation services such as arranging credit and logistics services, and in some cases taking responsibility for order fulfilment (McAfee 2000).

There are three key characteristics to consider when designing and building an e-chain management system. They are:

* Speed: the system provides fast access to the necessary procedures and information.

* Reach: the system can be reached and used by all the appropriate personnel, suppliers and customers, regardless of where they are in the world.

* Value: the system supports precisely the kinds of e-chain management that the enterprise and its industry chain require for efficient and effective operation.

Before starting the planning process to build an e-chain for the organisation and its partners, the first step is to consider the industry's structure along with the types of goods and services to be exchanged, and determine what broad strategic e-chain approach the firm should adopt. Rehme et al. (2005) describe four major strategic approaches:

1. Materials management
2. Strategic supply management
3. Procurement management
4. Sourcing management

Managing The E-Chain

Once you have established the desired e-chain, it needs to be managed so that it really delivers the benefits expected of it. Direction and involvement requires both technical management (the electronic infrastructure) and relationship management. In addition to considering what you expect of others, you also need to consider what their own enterprise does or could offer to the e-chain as incentives to participate. Obviously, the efficiencies provided by a move to a new or improved e-chain model are incentives themselves, but in a well-connected world, such advantages move rapidly from being differentiating key drivers, to being merely necessary support for competitive parity.

Risk Management

The benefits of e-chain management don't come without risks, which managers need to assess and handle. Risks can be classified into the following categories:

1. Selection of business model
2. Technology integration
3. System availability
4. Security
5. Changes to business process
6. Sharing benefits
7. Corporate governance

Implications for Managers

Moving to new or improved e-chain models and systems can create competitive advantage for an enterprise - or a network of enterprises. At the very least, adoption of e-chain practices may be necessary just to achieve parity with competitors. To maximise the success rate of, and value derived from e-chain initiatives, managers should keep the following in mind:

* be aware of the stage of e-chain use in your industry (e.g. narrow trading partners versus global e-markets).

* construct value propositions that underpin the e-chain business model, and link those to relevant online models.

* consider not only internal forecasting, but also collaborative forecasting to be able to plan your own ordering and production.

* assess who all the actors in your e-chain may include, and build cost-effective incentive programs to engage and retain them.

* remember that effective e-chain strategies may include non-computer-related (as well as computer-related) solutions such as restructuring, new process flows, retraining and so on.

* plan to manage the risks of business model selection, technology integration, system availability, security, change management and corporate governance.

* use both technical management and relationship management to ensure e-chain harmony and effectiveness.