ELC 498 DAY 5 Creating & Capturing Value in the Supply Chain

Agenda Questions?? 4 th Perspective Creating & Capturing Value in the Supply Chain ERP Overview Pick case studies Two for Oct 1 (SAP and Siebel) Two for Oct 4 (QRS and AOL) Case study presentation information posted in Blackboard

4 Perspectives 1. Technological Drivers Of Change 2. Creating Value: Economics Of Internet- based Commerce 3. Capturing Value: Market Structure And Competition 4. Creating And Capturing Value In The Supply Chain

The Supply Chain The flow of good and services i a supply chain is generally unilateral from the raw materials to the consumer Information flows in both directions in a supply chain Supply conditions (up) Demand condition (down) Information flow helps to minimize transaction costs in the chain Reduce buffer inventories Reduce “bull whip effect”

Vertical market structures Vale creation and capture If you hold a powerful position in the vertical chain you can extract value both upstream and downstream (at the expense of the consumer) Disintermediation can cause intermediaries to completely disappear from the chain (and sometimes create new ones!) eCommerce has the ability to improve supply chains and to completely restructure vertical markets by the creation of new electronic markets

Manufacturing versus Distribution The Vision Tie real-time demand information to JIT manufacturing “pull” manufacturing Reality is “push” manufacturing Guess the demand and start making and distributing products that you hope the consumer will buy. What will market researchers do then??

Attempts to realize the Vision Tie all the economic actors in the vertical chain electronically The Internet!!! The problem American manufacturing is not set up this way (use batch manufacturing) Requires “sea State” change Best example is DELL But what about the Wal-Mart deal?

Dell Direct sales to end consumer Get the order Make the PC Ship the order Why only dell? New industry <> no legacy issues

What about the auto industry? 8 weeks to make a car at GM 3 weeks at Toyota Kaizen and Kanban! Distribution is still the problem Centralized manufacturing of a large hard to ship item Consumers will compromise and buy “off the lot” instead of “made to order” because they just won’t wait.

Channel Conflicts Consumer shops off-line; buys on-line No geographic protection; exclusive sales regions Manufactures selling direct to consumers Competes with other downstream channels Higher pricing or collaborative sales

Changes Two ways Reduce transaction costs Configure productions process to produce components when and where it is most efficient Improve information flows (up and down) Ensure that information about what is needed, what has been produced, and what is in process is available wherever it is needed in the chain

Wal-Mart Uses integrated data systems to optimize its supply chains Suppliers systems tied into Wal-Mart systems POS info relayed to suppliers Triggers replenishment orders Stock levels automatically readjusted based on statistical modeling of demand

Some issues Who has the best information of consumers demand? The retailers (local view of customers) The manufactures (global view of retailers) Pool the information!! Cultural problems Inertia Boundary issues Integration brings structural reliance which leads to high switching cost (ex post exploitation) Technology integration issues XML & SOAP

Electronic markets Restructuring of the supply chain Many forms Solve different problems Must suppliers sell to more than end user Most end user buy from more than one supplier

Normal supply chain

With new Intermediaries for Transactions

The new intermediaries Two types Vertical With a given industry Auto suppliers Horizontal Across all industries MRO’s

Intermediary interactions

DSIR returns eCommerce Hubs exhibit DSIR More buyers > greater value for a sellers to join More sellers > greater value for the buyers to join Lower transaction costs for ALL Lower search costs for ALL Winner take all B2B markets First mover advantage

Marketplace Outcomes Sellers Buyers FewMany Few Less value created Les need for Marketplace Difficult for Third Party to enter Intermediate levels of value created Intermediate need for marketplace Buyers best positions to establish Markets Many Intermediate levels of value created Intermediate need for marketplace Sellers best position to establish Markets HUGE value created Hard to get traction (chicken and egg) Role for third party

Summary New technology Revolutionary Restructuring > new marketplaces Evolutionary Gradual improvement and efficiencies will exhibit mania, revulsion and then consolidation There will be only one (or two) marketplaces in each market sector Winner take all effects