1. Welcome Strategies of Network Companies Jonathan D. Wareham wareham@acm.org

2. Agenda  When firms cooperate, compete and exchange  problems with traditional supply chain management (SCM) problems this creates for manufacturers problems this creates for their suppliers problems this creates for consumers  improvements to traditional SCM the direct-to-customer model virtual integration with suppliers Agents Firms Networks Markets

3. Quiz  ? days a box of cereal spends in the supply chain?  Distorted information causes total inventory in the pharmaceutical supply chain to exceed ? days. $? in savings to be realized.  $ ? wasted because of poor coordination in the food industry supply chain  $ ? Boeing write-off in 1997 due to supply chain inefficiencies

4. Quiz  A box of cereal spends 104 days in the supply chain  Distorted information causes total inventory in the pharmaceutical supply chain to exceed 100 days. $11 billion in savings to be realized  Poor coordination wasting $ 30 billion annually in the food industry  $ 2.6 billion Boeing write-off in 1997 due to supply chain inefficiencies

5. Defining SCM  SCM is the coordination of material, information and financial flows between and among enterprises participating in the demand fulfillment process for a product or service.  Spans multiple organizations and industries  Coordination and integration of flows essential for the modern enterprise

6. A digital nervous system is the corporate, digital equivalent of the human nervous system, providing a well-integrated flow of information to the right part of the organization at the right time. A digital nervous system consists of the digital processes that enable a company to perceive and react to its environment, to sense competitor challenges and customer needs, and to organize timely responses. Gates: Business @ The Speed of Thought

7. A digital nervous system requires a combination of hardware and software; it's distinguished from a mere network of computers by the accuracy, immediacy, and richness of the information it brings to knowledge workers and the insight and collaboration made possible by the information. Gates: Business @ The Speed of Thought

8. Scott McNealy on Gates’ View He is right - I would be very nervous if my systems were based on their platforms and products!

9. RFID Tags

10. Tags can be attached to almost anything: pallets or cases of product vehicles company assets or personnel items such as apparel, luggage, laundry people, livestock, or pets high value electronics such as computers, TVs, camcorders What is RFID? -- The Tags

11. Are All Tags The Same? Basic Types: Active  Tag transmits radio signal  Battery powered memory, radio & circuitry  High Read Range (100 meters) Passive  Tag reflects radio signal from reader  Reader powered  Shorter Read Range (10cm – 5 meters)

12. RFID the Supply Chain TagReaderAntennaMiddlewareSupply chain execution - Coiled antenna of reader creates magnetic field with coiled antenna of tag - Transmits identification data to a reader -Transmit data to middleware -Associates tag info with product info -Process information from reader -Filters data -Sends data to backend servers - Backend SCE or ERP systems receives Information

13. How far, how fast, how much, how many, attached to what? Low Frequency No regulation Penetrate materials (water, wood, tissue well) Slow read speed Small range No penetration of iron and steel Medium Frequency Little data, small distance Thin tags Low cost High data rates Govt regulated Non mental penetrating High Frequency Penetrate materials Small tag size High data transfer Long range Non-water or tissue penetrating Non-regulated in some regions expensive

14. Where can RFID add value?  From Manufacturing  Into a Store’s Back Room Inventory  On the Shelf  At the Cash Register  Through Distribution  Transportation  Out the Door as an anti-theft device

15. Top 100 Suppliers: FSuppliers will mark inbound cases and pallets with RFID - 1 January 2005 - May, 2003 specification calls for ≈256 bit read/write tag 1 EPC tag per carton – 100% read on conveyor 1 EPC tag per pallet – 100% read at Inbound dock Conveyor speed of up to 600 feet per minute 3 Texas Distribution Centers January 2005

16. Why???  Stock management /perishables (field to fork)  In-stock levels  Invoice reconciliation: damaged, deductions, performance penalties, etc.  Scan Based Trading or VMI  Improved analytics & POS data  All reads available to suppliers within 30 minutes

17. Guidelines for using RFID  Bar codes cannot be used  Counting versus identification (reverse logistics)  Use of 3Party logistics and suppliers  Data collection is chaotic (battlefields, hospitals, retails shops)  Exact configuration of the good must be maintained  Counterfeit protection  High Risk scenarios, drugs, hospitals  Collecting data outside of retailer (smart refrigerators, medicine cabinets, etc)

18.  Beer Game video

19. Traditional supply chain obsolescence Direction of flow of demandDirection of flow of product Raw Material vendor Tier-II Suppliers Tier-I Suppliers Manufacturers Distribution Centers Retailers Customer Zones Point of differentiation Distribution costs Market mediation costs

20. The Bullwhip Effect CustomerRetailerDistributorFactoryTier 1 supplierEquipment Upstream amplification of demand variation Progression of a brushfire to an inferno!

21. Machine Tools at Bullwhip Tip

22. The Diaper Supply Chain! Ripples to tidal waves Stockpiles and stockouts Insufficient or excessive capacities Higher costs

23. What is the Problem?  The “bullwhip effect” - four key causes  Demand signal processing Currently only order information is shared (not actual sales) Need to instead share POS retail data (sell-through data)  Order batching (retailers only order periodically) Infrequent access to demand information  Order rationing retailers order popular items excessively Hoarding of scare products (inflate demand order of scarce product to ensure that you have it on-hand)  Special Promotions Alter the normal pattern of product demand from customer; so that it’s impossible to understand the “true” demand

24. Interorganizational Systems: CRP P&G Warehouse 1 Warehouse 2 BIG RETAILER < 3% stock outs < 14days inventory

25. Before CRP P&G Warehouse 1 Warehouse 2 BIG RETAILER Budget Actual Volume discounts New product promos Here and now discounts Trade marketing Bonuses….

26. Interorganizational Systems  Integration of supply chain across companies  Degrees of integration: information, process, property rights  Increased efficiencies through 1.optimal production/logistics planning 2.lower inventories 3.increased flexibility 4.customer satisfaction  Oh brave new world, this is wonderful… But…

27. The Economist says….  Look out for proprietary systems with high specificity Lock-in  Sharing processes is optimal from logistics viewpoint, but remember ‘knowledge of time and place’  Additional information acquired by one party can reduce bargaining power of other. Competitive industries like retailing, grocery and electronics has demonstrated many examples of this….

28. Types of Shared Information  Inventory information Transition to echelon-based inventory systems Upstream companies can determine when and what to produce Downstream companies can improve service levels with less inventory

29. Types of Shared Information  Sales Data Variance of orders greater than that of sales The “bullwhip effect” - four key causes  Demand signal processing Move to sharing sell-through data and POS retail data  Order batching Infrequent access to demand information  Order rationing Hoarding of scare products  Promotions

30. Types of Information Sharing  Production/Delivery Schedule Improves due-date estimation Expand planning horizons  Other Information Sharing Performance metrics Capacity information

31. Challenges  Aligning incentives of different partners Channel Management Example  Trust and cooperation  Confidentiality of shared information  Anti-trust implications, such as possible price fixing behavior  Timeliness and accuracy of information  Technological constraints

32. SCM Software –Who?

33. What does SCM software do?  2 Main Functions: Tracking & Optimization Factory Scheduling Bar Code Warehouse Management Transportation Routing and Scheduling Inter Organizational Systems Collaborative Planning & Optimization Multi – echelon optimization E-Procurement & Marketplaces Supplier Contract Management RFID Management Systems

34. Commercial Uses of New Technologies  Many commercial forms are products of modern technologies

35. Manugistics, I2, Commerce 1, Ariba 3.1 2.3.3.7

36. eCommerce Status? Doing fine…. Billion USD

37. eCommerce - Where?  Manufacturing (19.6% of all sales) Transportation equipment Beverage and tobacco Electrical equipment & components  Wholesalers (11.7% of all sales) Drugs and druggists Motor vehicles, parts and supplies Professional and commercial equipment

38. eCommerce - Where? (cont.)  Services (1% of total sales) Travel arrangement and reservations Securities & commodities intermediation Publishing and software  Retail Sales (1.4% of total retail sales) Books and magazines

39. Outlook Common Present Sense  Manufacturing 18% 70%  Wholesalers 8% 50%  Services 1% 20%  Retail Sales 1% 30% 60-80% of all eCommerce conducted through EDI x12 & EDIFACT (primarily VANS) www.census.gov/estats

40. B2B What Happened ?  Estimates that over 1,000 B2B portal will soon consolidate to < 200.  Less than 15% of all exchanges operating  2 Stories: Vertical Horizontal

41. Your task….  You would like to buy a 3 year old Honda Prelude. You have 2 options: 1.Buy the car in a private transaction, mediated through the newspaper classifieds, or 2.Buy the car through a used car dealership Asses the relative advantages and disadvantages of each option.

42. Intermediaries  Up to 25% of the economy  Financial Intermediaries  Dealers & Wholesalers

43. Information management: compiling and filtering information, informing consumer's knowledge of supply and demand capacity. Logistics management: economies of scale, scope and specialization in conveying goods from production sites to consumption sites Transaction securitization: controlling and guaranteeing the quality of goods and payments delivered to buyer and seller Insurance: insurance for the existence of a market for the products, that is, a market making function Liquidity: extending credit to both sides of the transaction, alleviating liquidity constraints OK, so what do Intermediaries do?

44. Morgan Stanley “Collaborative Commerce”  Before the Order Purchase approval and routing Promotions and campaigns Financing Inventory availability Price negotiation  During Fulfillment Order status Partial Shipments Backorder information Substitute products Order explosion to multiple suppliers Scheduling of inventory  After Delivery Warranty and maintenance Replacement parts Asset Management Regulatory Compliance Returns and incorrect ships Settlement Inspection

45. B2B Portals – 2 main types Horizontal  1 product sector – many industries  Large exchanges  Provide liquidity, transparency, aggregate supply & demand  Require high volume of transactions, small commission base  Additional revenue through value adds like financing, asset management, warrantees Vertical  One industry –many products  Limited membership  Eliminate inefficiencies in specific industry supply chains  Fewer transactions – revenue based on realized savings

46. Purpose  Increase understanding of rent generation models in electronic intermediaries Implications of network and product characteristics Evolution of rent accrual mechanisms & information and relational capabilities  Comparative case studies: 2 companies, both founded in Atlanta in 2000, & backed by large industry incumbents Omnexus eGatematrix

47. Omnexus

48.  Plastics Industry one of world’s largest  589 billion dollars in revenue  Employs 1.5 million people  BASF  Bayer  Dow  Dupont  Ticona/Celanese

49. Omnexus Large marketplace, MCBase Search on thousands of materials with specific properties Integration with suppliers ERP systems Real time inventory and price data Submission of RFQs Electronic billing and transaction clearing Customer Support

50. Segmentation of Resins Buyers

51. Competition

52. Evolution

53. eGate Matrix

57. What Happened? Conclusions Horizontal  Many portals built on information aggregation assumption  Barriers to entry low  Too many portals, can’t generate volume  Suppliers weary of transparency (stick with EDI and Fax)  Most sectors can support 1-3 exchanges (max).  Forget commodities and content - Focus on payment, logistics, & value adds…. Vertical  Often very sound business model  Implementation hard work  Barriers to adoption: legal, organizational, procedural  Slow in the making, but scale well  Most profitable in fragmented markets with customizable products