WHITE PAPER

SUPPLY CHAIN MANAGEMENT

AND

E-BUSINESS

June 2008
Momtchil Krastev Profit Center Sofia
m.krastev@clusterstar.com London School of Economics

White Paper
SUPPLY CHAIN MANAGEMENT
AND

E-BUSINESS

Table of Contents

EXECUTIVE SUMMARY ............................................................................................................... 1

INTRODUCTION .......................................................................................................................... 2
I. How knowledge of e-business models might help an organisation seeking to transform its
Supply Chain Management ........................................................................................................ 2
II. The most important key success factors in any SCM transformation exercise ..................... 6
III. How the “six shifts in business focus driven by SCM” can affect the nature of competition
and competitive advantage........................................................................................................ 9
Shift 1. From Cross-Functional Integration to Cross-Enterprise .......................................... 10
Shift 2. From Physical Efficiency to Market Mediation ........................................................ 10
Shift 3. From Supply Focus to Demand Focus ...................................................................... 11
Shift 4. From Single-Company Product Design to Collaborative, Concurrent Product,
Process and Supply-Chain Design ........................................................................................ 11
Shift 5. From Cost Reduction to Breakthrough Business Models ........................................ 12
Shift 6. From Mass-Market Supply to Tailored Offerings .................................................... 13
IV. How the IT architecture of an organisation affects its ability to transform its Supply Chain
Management ............................................................................................................................ 14
CONCLUSIONS .......................................................................................................................... 16
BIBLIOGRAPHY .......................................................................................................................... 17
Executive Summary

This paper serves several main purposes. First, it aims at approaching the topic of supply
chain management as one of central importance for the successful implementation of busi-
ness today. Since many companies employing SCM have continuously faced problems with
its realization, numerous solutions to these problems have been offered. These include the
sharing of information with parties along the supply chain as well as the utilization of ad-
vances in information technology. In fact, the importance of in-depth knowledge of different
e-business models and the Internet as tools of transforming SCM has been suggested.
Second, the importance of recognizing the major key success factors in any SCM transforma-
tion exercise has been thoroughly analyzed. These KSFs are numerous and have been identi-
fied by many authors as the determining forces behind the success of many businesses.
Their integration and alignment within companies’ overall strategies have been emphasized
as well. In addition, the six shifts in business focus driven by SCM have been evaluated in
order to provide yet another crucial insight into the significance of the topic of SCM. Each of
these shifts has been examined in order to allow for a clearer understanding of the implica-
tions for businesses. It has been suggested that the influence of SCM has been so great that,
with the enabling role of IT, it has fundamentally changed the ways of perceiving competi-
tion, marketing, and competitive advantage. Furthermore, the importance of organisations’
IT architecture has been explained to reveal the stemming opportunities for transforming
SCM. Special emphasis has been placed upon the need for partnering among organisations.
The paper finishes with some important conclusions that can be inferred from the examina-
tion of these key topics. These include the fact that companies must gain extensive know-
ledge of the processes of SCM as well as of the different types of e-business models and
their implications. In addition, businesses must learn to identify the critical factors that con-
tribute to a sound e-business model and make use of them accordingly. Companies should
be aware of the major shifts in business focus influenced by SCM and pay particular atten-
tion to the emphasis upon collaboration, customer focus, and customization of prod-
ucts/services. Moreover, successful organisations must know their IT architectures well and
the opportunities that these provide for carrying out business activity. In addition, business-
es should explore the opportunities provided by BPR for gradual improvement of individual
or groups of processes. Finally, some companies can even go a step further by understanding
digital business design or DBD, which some authors consider as the next dimension in the
development of business. By any means, however, companies must always rely upon strong
business models and strategies for doing business, while maximizing upon the capabilities of
IT-enabled solutions of SCM and e-business.

1
Introduction

Due to the many challenges and complexities that organisations face in today’s rapidly
changing business environment, establishing an effective supply chain is becoming a core
competency for many organisations. The importance of smoothly operating supply chains
addresses how the work within and between organisations should be performed based on
high performance, business processes and knowledge, focusing on innovative ways and new
opportunities that would allow for enhanced competitiveness, effectiveness, efficiency,
quality, customer satisfaction, lower costs, and increased revenues (Hugos, 2002). Compa-
nies must increasingly recognize the need to explore supply chain management in order to
maximize the value being added along the supply chain. The need for implementing SCM is
more apparent and pressing than it has ever been. And while some business ventures do
recognize and approach this need, they should certainly be aware of some of the problems
associated with the implementation of SCM. In order to deal with the accompanying chal-
lenges, organisations must embrace IT, e-business, and the Internet that allow increasingly
better opportunities for assisting with SCM and improving business performance (Turban et
al., 2004). The following four sections focus on the issues of greatest importance for the un-
derstanding of SCM and provide some of the solutions that enterprises may utilize to trans-
form their organisations and achieve long-term success in the form of increased competi-
tiveness, customer satisfaction, and financial gains.

I. How knowledge of e-business models might help an organisation seeking to transform

its Supply Chain Management.

It must be recognized that companies seeking improvement should set as an important goal
the acquisition of knowledge of e-business models. In order to adequately support the ar-
gument that understanding of e-business models, e-commerce, the Internet, and IT in gen-
eral can help organisations transform their SCM and recognize new opportunities for doing
business, it is imperative to briefly discuss some key concepts that lie in the core of this top-
ic. First of all, the supply chain of a business refers to the flow of materials, information,
payments, and services from raw material suppliers, via factories and warehouses, to the
end customers. According to Turban et al. (2004), a supply chain also includes the organisa-
tions and processes that create and deliver products, information, and services to the end
customers. To manage the supply chain activities, organisations utilize SCM in order to plan,
organize, and coordinate. Today the concept of SCM refers to a total systems approach to
managing the entire supply chain. (Turban et al., 2004) As argued by Kumar (2001) and Vak-
haria (2002), SCM is usually supported by IT. According to studies conducted by Morgan

2
Stanley, the topic of supply chain management was recently found to be the number one
priority of chief information officers (Morgan Stanley, 2001).

In fact, when IT is employed and a supply chain is managed electronically, often with Wed-
based software, it is referred to as an e-supply chain (Turban et al, 2004). Indeed, automat-
ing the information flow in a supply chain may lead to considerable improvements (Poirier
and Bauer, 2000). It should be noted that there are three flows that occur in supply chains:
materials flows; information flows; and financial flows. However, in service organisations
there is usually no flow of materials, but rather a flow of documents. Regardless of the type
of organisation, it is necessary to coordinate all the above flows among all parties involved in
the supply chain (Hugos, 2002). The goals of modern SCM are to reduce uncertainty and risks
in the supply chain, thereby positively affecting all processes within the organisation. The
aim of this is to contribute to increased profitability and competitiveness (Vakharia, 2002).
Actually, the efficiency and effectiveness of supply chains in most organisations today are
heavily dependent on supporting information systems.

Even though supply chains and SCM have been around for a while, some problems exist that
call for effective solutions. Many well-known companies have been seriously affected by
such troubles. For instance, Toys ‘R’ Us and Amazon.com have both experienced supply
chain problems manifested by difficulty in fulfilling electronic orders (Turban et al., 2004).
These companies learned the hard way that uncertain demand combined with the need to
coordinate many activities, business units, and partnering organisations may lead to disaster.
Subsequently, these and other corporations realized that a need for innovative IT solutions
was essential. Others, such as Procter & Gamble, discovered what has been recognized as
the ‘bullwhip effect’ (erratic shifts in orders up and down the supply chain) (Donovan, 2002).
In essence, P&G realized that while sales of Pampers and other baby products in retail stores
were fairly stable and predictable, orders from distributors to P&G had major swings, creat-
ing production and inventory problems. After an investigation, the company discovered that
poor demand forecasting and order batching, among others, were causing the problems
along the supply chain. Many other firms, such as Hewlett-Packard and Bristol-Myers Squibb,
have experienced similar ordeals (Turban et al., 2004).

Several alternative ways are generally available to solve the major supply chain problems
that businesses face today. One solution is the sharing of information along the supply chain
(Turban et al., 2004). Such sharing can be facilitated by EDI (electronic data interchange),
extranets, and groupware technologies. In fact, information sharing among supply chain
partners is part of inter-organisational c-commerce, and is sometimes referred to as collabo-
ration supply chain. Many companies do indeed share information along their supply chains,
the prime example being the partnership between Wal-Mart and Procter & Gamble (Rayport

3
and Jaworski, 2001). And while information sharing can certainly help some organisations in
certain situations, many SCM problems can be most effectively and efficiently solved via the
use of IT. For instance, through the use of wireless technology, certain tasks in the supply
chain can be expedited. Furthermore, it is possible to configure optimal shipping plans with-
in any organisation by using quantitative analysis, DSS, and intelligent systems for configura-
tion. DSS can also help in creating strategic partnerships with suppliers by determining which
the most appropriate ones to use are. In order to improve supplier-buyer relationships, CRM
and PRM software can be utilized (Turban et al., 2004). In addition, following the example of
Dell Computer, companies can manufacture only after orders are in by employing sophisti-
cated computers and servers. Indeed the list of possible IT-assisted and IT-enabled solutions
to SCM problems is quite long.

It should be noted that IT can support SCM by providing support for all parts of the supply
chain, including the internal, upstream, and downstream supply chain. Information technol-
ogy provides two major types of software solutions for managing supply chain activities. The
first one is enterprise resource planning (ERP) software, which helps in managing both the
internal and external relationships with the business partners. The second one is supply
chain management (SCM) software, which helps in decision making related both to internal
segments and to their relationships with external ones (Turban et al., 2004). It is important
to note that both types of systems can work within an organisation in order to produce bet-
ter results. Indeed, ERP systems have been found to be one of the most successful tools in
managing supply chains. ERP’s major advantage is that it aims at integrating all departments
and functions across a company onto a single computer system that can serve all of the en-
terprise’s needs (Vakharia, 2002). The leading ERP software is SAP R/3, but companies such
as Oracle, J.D. Edwards, Computer Associates and others develop highly successful systems
as well. In contrast, SCM software is specifically designed to improve decision-making along
the supply chain. The data collected with the use of ERP software can be used as input data
for analysis done with SCM software, hence their complementary nature.

In addition to IT systems, knowledge of e-business models, e-commerce, and the opportuni-

ties made available by the Internet can help organisations to transform and improve their
SCM. In fact, e-commerce is emerging as an excellent tool for providing solutions to prob-
lems along the supply chain (Rayport and Jaworski, 2001). Today, many activities along the
chain can be conducted as part of an EC initiative. E-commerce describes the process of buy-
ing, selling, transferring, or exchanging products, services and/or information via computer
networks, including the Internet. Electronic commerce can indeed make numerous contribu-
tions to SCM and thus help organisations improve (Gillmor et al., 1999). EC can digitize some
products, such as software, which expedites the flow of materials in the chain. EC can also
replace all paper documents that move physically with electronic documents. This change

4
improves speed and accuracy, and the cost of document transmission is much cheaper. In
addition, EC can replace faxes, telephone calls, and telegrams with an electronic messaging
system that will provide better service at a lower cost. EC can also change the nature and
structure of the supply chain from linear to a hub (Libresco, 2000). Such restructuring
enables faster, cheaper and better communication, collaboration, and discovery of informa-
tion. EC typically shortens the supply chain and minimizes inventories. Production changes
from mass production to build-to-order as a result of the ‘pull’ nature of e-commerce. Lastly,
EC facilitates customer service and results in reduced staffing needs due to innovations such
as some self-services.

It should be noted that numerous e-commerce transactions can be done between various
parties and include all of the following: business-to-business (B2B); collaborative commerce
(c-commerce); business-to consumer (B2C); consumer-to-business (C2B); consumer-to-
consumer (C2C); intrabusiness commerce; etc. (Turban et al., 2004) Furthermore, in addition
to e-commerce, another popular term used today, often interchangeably, is ‘e-business.’ E-
business usually refers to a broader definition of EC, not just the buying and selling of goods
and services, but also servicing customers, collaborating with business partners, conducting
electronic transactions within an organisation, etc. In fact, different types of e-commerce or
e-business are executed in one or more business models (Doig, 2000). These e-business
models are numerous and vary in nature. However, what all of them have in common is the
fact that they empower organisations to make a difference and completely revolutionize the
way of conducting business. Some of these e-business models include online direct market-
ing, online auctions, product customization, value chain integrators, supply chain improvers,
and others.

Finally, the Internet can also offer new strategic opportunities to organisations seeking to
transform their SCM. The global networked environment actually allows for the realization
of the potential of IT, since it enables companies to realize the major capabilities of informa-
tion systems. The Internet makes it possible for IT solutions, such as ERP and SCM software
packages, to give the most to the businesses that choose to employ them. In addition, the
Net also allows for e-commerce between millions of businesses and individual customers
from all over the globe. Lastly, the Internet enables companies to select among alternative e-
business models, because these ventures do have the medium through which to realize their
innovative and daring ideas and concepts. Certainly, some limitations of IT, e-commerce, e-
business, and the Internet still exist, and companies need to recognize those in order to
avoid disillusionment (Huff, 2001). However, the benefits of these ‘enablers’ and ‘drivers’ for
organisations, customers, and the general public far outweigh their disadvantages. There-
fore, the accumulation of knowledge and the development of know-how regarding IT, e-
commerce/e-business, and the Internet can make all the difference in the world for compa-

5
nies that need or want to successfully transform their supply chain management in order to
be competitive in today’s cutthroat business environment.

II. The most important key success factors in any SCM transformation exercise.

After having discussed the importance of acquiring knowledge of IT and e-business models
for companies, it is useful to identify the most important key success factors (KSFs) in any
SCM transformation exercise. Once the goals have been identified, organisations must set to
find ways of realizing them. By focusing on certain crucial areas, businesses can use the KSFs
to their advantage. In fact, authors such as Afuah and Tucci (2003) have developed complete
models that aim to show the correct approach to finding a sound e-business model by re-
cognizing the most essential factors of success. These numerous KSFs are widely recognized
by many authors and they are worth examining in detail. Porter (2001) defines KSFs as the
areas or functions where things must go right to ensure successful competitive performance
for an organisation. In addition, Liang et al. (2004) suggest that KSFs are the differentiating
factors between the organisations that succeed and the ones that fail. Therefore, business
leaders must identify the existing performance gaps in their organisations and discover ways
of improving.
Collaboration, successful relationships, and networking present the first group of KSFs for
organisations seeking to transform their SCM. Collaboration emphasizes clear partnership,
which, as Kalakota and Robinson (2001) argue, should include appropriate use of resources
needed for Internet business implementation. Furthermore, inter-organisational relation-
ships are critical for the success of any e-business. On the other hand, alliances present yet
another type of today’s successful relationship between companies that employ the Web to
manage their e-business effectively. In fact, according to Kalakota and Robinson (2001), be-
ing an e-business means collaboration and networking with like-minded, Internet-enabled
trading partners. An example is the relationship between Amazon.com and Toys ‘R’ Us,
which created a co-branded site whereby Amazon.com developed the web pages, housed
the entire inventory in its warehouses, filled orders, and handled customer service and re-
turns. In doing so, Amazon acquired options to expand its business scale in the toy segment
(Turban et al, 2004). In addition, networking is also very important, especially for the sustai-
nability of an e-business model (Afuah and Tucci, 2003). Since, in order to survive, e-
businesses must create networks with other firms in ways allowing both sides to benefit as
much as possible. As the digital era is constantly witnessing massive changes, e-business,
especially over the Internet, should be considered increasingly difficult to sustain.

Top management support and commitment, as Dickson and DeSanctis (2001) argue, is
another key success factor for successful implementation of SCM transformation processes

6
for any organisation. The effectiveness of an e-business model depends upon the amount of
support by upper management. In fact, most experts agree that a lack of commitment on
the part of management is a sure sign of failure. Indeed, many argue that the top manage-
ment involvement and commitment is one of the most critical factors for the success of e-
business (Turban et al., 2004). Considering the Afuah & Tucci model, this particular KSF re-
lates to the implementation component of the e-business model, defining what people need
and what the Internet strategy is giving them. Setting strategic goals is another KSF that, as
Lee (2002) points out, makes the e-business model consistent with business objectives in
order to achieve success. A good example is that of the Millipore flooring company, which
decided on two strategic goals for its Web-site in order to increase international business
opportunities. First, to enable the existing and potential customers to interact directly with
the company’s information on various technical, application, product, news and ordering
aspects. Second, to enable its marketers to deal with strategic partners, regulatory agencies
and external databases. Another example is the lesson learned by 3M’s eBiz team to always
keep the focus on achieving the business goals, without separating the business from its e-
business strategy (Porter, 2001). On the other hand, keeping in mind the Afuah & Tucci
model, those firms who rush to enter the Internet’s highly competitive environment without
a carefully planned strategy and business model face a high probability of failure.

Integrating the e-business strategy with the marketing strategy, another KSF, provides e-
businesses with the opportunity to differentiate from competitors. Porter (2001) argues that
integrating Internet with a business marketing strategy is an important component for suc-
cessful e-business. Turban et al. (2004) show that successful Internet marketers are those
that build systems that can be integrated with existing applications and serve the needs of
trading partners at either end of the value chain (e.g. Toyota, Dell, 3M, Nabisco and Sun Mi-
crosystems). Taking into consideration the Afuah & Tucci model, this KSF pertains to the
connected activities component of the model. It has to do with the question of how the In-
ternet changes the direction of strategy and how the marketing strategy helps for the very
success of the e-business model. In addition, the e-business environment, culture, and regu-
lations represent another KSF for e-business. Brynolfsson and Kahin (2001) suggest that cul-
tures of different countries as well as the internal cultures of organisations must be taken
into account when doing e-business. In fact, providing information that will be desired by a
variety of people with different needs and tastes would result in a mix of nationalities and
cultures. Companies like Dell, through its built-to-order system, consider very seriously the
cultural dimension. Bearing in mind the Afuah & Tucci model, this KSF is connected to the
scope component of the business model, since it determines the ‘permitted’ environment,
where the business can satisfy its employees and customers. Also, it connects with the im-
plementation component, defining all conditions and people who are involved in the busi-
ness.

7
From financial point of view, the main KSF is the maximization of the return on investment.
Whether instigated primarily by cost reduction motives or to sustain competitive advantage,
becoming an e-business represents an investment of sizable magnitude (Goutsos and Kara-
capilidis, 2004). Identifying the return on investment or ROI, for such a business, is as impor-
tant as the business itself. In fact, the ROI component may be crucial to the future direction
of e-business (Libresco, 2000). With regard to the Afuah & Tucci model, this KSF relates to
the revenue source component of the e-business model. The approach to revenue is differ-
ent in comparison to traditional businesses, which are often based on large volumes of sales.
E-business is based on attracting more customers and satisfying their needs and wants, thus
maximizing the customer value and making revenues from customer investments in the par-
ticular e-business.
Trust and security are also considered to be vital factors that determine the success of any e-
business model. As consumers gain more knowledge of the Internet, trust in e-businesses
will become a key differentiator that will determine the success or failure of many compa-
nies. The trust of consumers in e-business could be divided into three areas: trust in the In-
ternet and the specific Web-site, trust in the information displayed, and trust in delivery ful-
fillment and service (Brynolfsson and Kahin, 2001). In fact, trust has an influence on develop-
ing positive customer attitude, intention, and purchasing. Moreover, according to Huff
(2001) one of the most common problems occurring over the Net is connected to the securi-
ty of financial transactions and payment systems.

Another important KSF for any organisation’s SCM transformation exercise and e-business
model is attracting customers and sustaining their acceptance. Companies should make spe-
cial efforts to motivate customers to make the move to an online environment; otherwise
they will be lost in a crowd of competing firms and will never become connected to the elec-
tronic marketplace. Businesses have to prepare efficient internal systems to respond quickly
to customers’ requests, questions, and comments (Johnson and Seungjin, 2002). According
to Kalakota and Robinson (2001), the operational excellence model that delivers the highest
customer satisfaction is built on an e-business infrastructure that has four characteristics: it
is user-friendly, functional, reliable, and delivers integrated performance. According to
Neumann (1994), the opinion of end-users or the customers is the only thing that matters
when determining whether any business is a success or not. These two factors relate to the
customer value component of the Afuah & Tucci model. The reason is that both factors are
aiming to attract new customers in every possible way and to retain existing ones for the
long-term.

Other two KSFs of considerable importance to an SCM transformation exercise and e-

business are IT infrastructure and web-site design. Broadbent and Weill (1997) consider an
adequate IT infrastructure to be a vital factor in successful e-business. Some important ele-

8
ments that must be considered include computer literacy (all parties in the relationship or
transaction must be familiar with PCs and appreciate the benefits and potential of IT applica-
tions) and availability of equipment for access and services. (For more detailed discussion of
IT infrastructure and architecture, please refer to Section IV) The Afuah & Tucci model de-
monstrates that IT infrastructure is a KSF that relates to the capability component on one
hand, giving explanation through the practice and theory that need to be learned, and to the
pricing, depending on how expensive technology would be used and how much it would
lower the costs of doing business, on the other. Lastly, web-site design represents another
crucial KSF. In fact, the creation of a web-site is not a one-time effort. Web-sites must pro-
vide valuable, accurate content and information that is continually maintained and updated
if they are to attract new customers and encourage them to return (Kumar, 2001). The ma-
jority of on-line users come to the Internet for relevant information, and organisations that
provide more such information on their products and services are more likely to succeed.
According to the Afuah & Tucci model, web-site design is part of the capability components,
which relate to the question of what the business can offer to customers that differentiates
them from competitors. In addition, this KSF also has to do with the implementation compo-
nent, because web-site design is one of the most powerful tools a business can use to im-
plement its activities. In summary, all these KSFs and others, that may be more important to
specific companies and organisations, must be taken into serious consideration by managers
seeking to successfully implement a SCM transformation (Afuah, 2003). By utilizing IT and
newly-developed e-business models, companies must realise that these principles that the
KSFs represent are the ones that may lead to long-term success. Of course, these must not
only be realized but rather fully integrated into the e-business and overall strategy of a firm.
While learning some important lessons from the Afuah & Tucci model, many managers may
be on their way of establishing the structures of successful e-business/e-commerce models
for the future.

III. How the “six shifts in business focus driven by SCM” can affect the nature of competi-
tion and competitive advantage.

In their article “The Supply Chain Management Effect”, Kopczak and Johnson (2003) explain
their research and findings concerning the “six shifts in business focus driven by SCM”. The
authors reveal that SCM has increasingly been finding its place as one of the most dominant
business philosophies of the past decade. More and more businesses have understood the
opportunities that properly utilized SCM can provide to organisations. In fact, the influence
of SCM has been so great that it has shifted business focus in a number of important ways.
According to Kopczak and Johnson (2003), supply chain management has resulted in six ma-
jor shifts in business focus, and each shift has redefined management’s view of what busi-

9
ness questions are being asked as well as what information needs to be gathered and
shared. It is interesting to note that several factors have contributed to the facilitation of
those shifts. IT has been recognized as the major enabler of this transformation. Advances in
information technology, including ECR (efficient consumer response) and collaborative plan-
ning, have greatly contributed to the occurrence of the six shifts. It is useful to consider each
of these shifts in detail.

Shift 1. From Cross-Functional Integration to Cross-Enterprise

The first of the shifts has been from cross-functional integration within companies to inte-
gration across companies. In fact, IT advances have enabled this shift to a considerable de-
gree. Companies have sought to better coordinate and improve supply and thus satisfy more
customers by building deep and better supplier relationships (Kopczak and Johnson, 2003). It
just takes some reading to spot the quiet change that is sweeping the business world. Sup-
pliers and customers alike are being renamed to ‘business partners.’ This simple change of
words, however, may convey a lot of meaning. Although companies still face certain difficul-
ties with improving the supply-side, the situation is much better. Global companies continue
to network their IT systems, and extranets have become ubiquitous. While in the past busi-
ness relations were characterized mainly by rivalries, now terms like ‘collaboration’ seem
more appropriate. For example, Dell has regular meetings with its suppliers to find more
ways to streamline the supply-chain. The company also sends its special squad that analyzes
each supplier’s business processes and tries to improve them, for the supply-chain’s benefit
as a whole. Toyota also supervises its suppliers, by sending monthly report cards to core-
suppliers, thus facilitating immediate and constant feedback. It develops suppliers’ technical
capabilities. It also shares information intensively, though selectively, and conducts joint
improvement activities (Kopczak and Johnson, 2003). These and other examples clearly show
that companies who cooperate sensibly are likely to reap major benefits.

Shift 2. From Physical Efficiency to Market Mediation

Companies that excel at SCM usually manage two aspects of supply: physical supply and
market mediation. In the past, the focus has been on the physical supply since it has been
clearer for companies to identify and understand. However, since businesses have increa-
singly realized the importance of market mediation costs, more emphasize has shifted to-
wards the latter. In fact, a supply-chain cannot work unless it is based on three core prin-
ciples (the three A’s): Agility, Adaptability and Alignment (Fisher, 1997). If it is not agile, it
cannot respond to unexpected changes. If it does not adapt while markets or strategies

10
evolve, it will become obsolete. If it is not aligned, then its members will not work in the di-
rection, which will maximize the chain’s profits. Incentives, which have proved to be a very
important tool, are used to address market-mediation costs. This can significantly affect the
chain’s performance. The danger of non-alignment can be understood by looking at Cisco’s
case. Everyone thought Cisco’s supply chain was infallible. However, in 2001 Cisco had to
write-off $2.5 billion worth of inventory. Since Cisco uses contractor manufactures, some of
them had stockpiled semi-finished products because demand for Cisco’s products usually
exceeded supply. They had an incentive to build buffer stocks, and Cisco rewarded them
when they delivered supplies quickly. Contractors had nothing to lose by building excess
inventory; however, in this case the problem was apparent (Donovan, 2002). The lesson
learned was that correct alignment can minimize the costs of matching supply and demand,
while allowing for continuing reduction in the costs of production and distribution.

Shift 3. From Supply Focus to Demand Focus

A third important shift has shown that while companies do maintain efforts to improve
supply, many have put even more emphasis on gathering better demand information and
employing demand management. In essence, the entire philosophy of the old ‘push’ strategy
has been replaced by the new ‘pull’ strategy (Kotler, 1994). Some practical examples come
from Japan. In Toyota there is a term for surplus inventory: muda (or ‘waste’). Companies
now have the experience, the will, and the technological infrastructure to tackle this major
problem. Two decades ago inventory and stock levels had to be high. Now companies use JIT
and ECR (effective customer response) techniques in order to eliminate waste. CRM and ERP
programs include modules that make accurate forecasts and thereby reduce the risk of over-
stocking or stock-outs. Seven-Eleven Japan (SEJ) is an example of how a company that builds
its supply chain on agility, adaptability, and alignment stays ahead of its rivals. The company
has designed its supply chain in such a way that allows it to respond to quick changes in de-
mand. It has invested in real-time systems to detect changes in customer preferences and
tracks data on sales and consumers at every store. The data allows the supply chain to
detect fluctuations in demand between stores, to alert suppliers of potential shifts in re-
quirements, to help reallocate inventory among stores, and to ensure that the company res-
tocks at the right time (Kopczak and Johnson, 2003).

Shift 4. From Single-Company Product Design to Collaborative, Concurrent Product, Process

and Supply-Chain Design

Today, most business has shifted toward collaboration in one way or another. Companies
now no longer design products separately, but rather do it in collaborative, concurrent ways.

11
They also do it along the entire supply chain, involving their suppliers and customers. Since it
is usually customers that know their needs and preferences best, many companies have in-
volved the consumers in the product/service design process. Examples include GE with their
“LightSpeed VCT” heart scanner; Staples, the American office-supplies retailer, with their
“wordlock” gadget (a padlock that uses words instead of numbers); and BMW with their
prototype telematics (combining computing, telecommunications, and online services for a
new generation of luxury cars) (Turban et al., 2004). In other cases companies have send the
basic requirements (size, shape, function) to their supplies and have asked them to design
the products/services themselves. Other even more inventive companies buy the design,
customize it and sell it under their own brand (e.g. Motorola phones). Toyota, when it needs
new parts for its models, sends the description of the part (i.e. tires) to the vendors. Toyota
provides the vendors with feedback and suggestions during the design stage. It then tries the
prototypes. The vendor who will offer the best quality/price will earn a contract for the life-
time of the model. It is probably no surprise that Toyota’s models rank first in terms of quali-
ty (Huff, 2001). The important point is that all of these companies and others have realized
that collaborating with customers and suppliers often proves extremely beneficial.

Shift 5. From Cost Reduction to Breakthrough Business Models

Tesco, Toyota, Dell, Zara, Southwest, IKEA, Seven-Eleven Japan, Samsung, Amazon and P&G
are all companies who are true leaders in their industries. The reasons behind this are their
business models (Afuah, 2004). All these companies have, by combining IT and SCM, created
new unique business models. Dell, for example, has dominated the PC retailing business by
cutting off the intermediates. Today, in 2005, Dell Computer has an unrivaled market share
due to the incredible combination of innovative SCM with a breakthrough business model.
P&G, the consumer goods giant, invests heavily in technology (especially CRM systems) in
order to create promotions for its products, to gauge their success, to help redirect market-
ing dollars to more profitable activities and propose new products that could boost sales.
P&G also employs IT techniques that help the whole supply chain to run smoothly and avoid
stock-outs at retailers. P&G continues to grow while its rivals, Unilever and Colgate-
Palmolive, lag behind it. Finally, the venerable Toyota is not only the world’s most profitable
automotive company but also the company behind Just-in-time, one of the most used prin-
ciples of SCM. All these companies have the best growth rates in their industries and they
boast the highest margins. The advent of the Internet, the increase of international trade,
the ability to produce everywhere, the proliferation of business software and computer
hardware, and the accumulated business expertise have led to the creation of a very strong
competitive advantage, SCM (Barnes-Vieyra and Claycomb, 2001). Companies that recognize
this opportunity and take advantage of it are the ones most likely to succeed.

12
Shift 6. From Mass-Market Supply to Tailored Offerings

The era of the Mass-Market is almost over, because businesses differentiate more and more.
Segments are more difficult to define, and tastes and preferences change on a daily basis.
Since customer loyalty is difficult to maintain, companies are now trying to snatch competi-
tors’ customers, while retaining their own (Kopczak and Johnson, 2003). This shift can be
clearly observed in the fashion industry. What is trendy today can easily be considered old-
fashioned in a month. To deal with this, Zara uses a postponement strategy. It orders 40% of
its fabrics dyed and the other 60% white. Zara never keeps a SKU (stock keeping unit) more
than three weeks. If a color does not sell well, Zara stops producing it and starts producing a
different one. This saves time, money, and creates a product that customers want. Kimberly-
Clark, on the other hand, uses CRM to design promotional packages for specific retailers.
Now Kimberly-Clark is implementing an ambitious system designed to reach into a wide ar-
ray of consumer-advertising and promotional activities (Turban et al., 2004). Other business-
es have also been quick in recognizing the shift from mass marketing to tailored offerings. In
many industries, the battle for customers has begun, and the companies that stay behind
may never catch up.

It has been argued that SCM and IT, both as an enabler and a driver, have changed indus-
tries, introduced new business models, and altered the nature of competition. In fact, com-
panies that do understand the six shifts influenced by SCM are more likely to become and
remain competitive than their rivals who fail in this endeavor. All of these shifts have com-
pletely changed the nature of marketing and competition. The focus on collaboration across
company lines, demand rather than supply-side issues, more specialization, and develop-
ment of unique business models to respond has been very clearly displayed in the business
of the past decade. The six shifts have also meant that companies can now develop break-
through competitive advantages using a large array of tools, including SCM and IT-assisted
solutions and applications. However, these shifts have also meant that sustaining those
competitive advantages will become more and more difficult as these tools are discovered
by more and more businesses (Porter, 1985). At the moment, the companies that pioneered
SCM are reaping the rewards and enjoying windfall profits. Sooner or later, however, their
competitors will finally catch up. Yet, by then new business models will have appeared to
take the lead over the incumbents. This is the story of evolution. Countries rise and fall,
businesses flourish and go bust. Processes and strategies gain and lose in popularity and ac-
ceptance. But the chips are on the fact that the following decade will most likely belong to
SCM (Kopczak and Johnson, 2003).

13
IV. How the IT architecture of an organisation affects its ability to transform its Supply
Chain Management.

In order to understand how the IT architecture of an organisation can affect its ability to
transform its SCM, it is important to jointly consider the concepts of information infrastruc-
ture and information technology architecture. As seen in Section II, the information infra-
structure of an organisation is extremely important and is even considered a key success
factor in any SCM transformation exercise. In fact, the information infrastructure refers to
the physical facilities, services, and management that support all shared computing re-
sources in an organisation (Turban et al., 2004). According to Broadbent and Weill (1997),
there are five major components of the infrastructure: computer hardware, software, net-
works and communications facilities (including the Internet and intranets), databases, and
information management personnel. IT infrastructure is in turn derived from IT architecture.
The IT architecture then is a map of the information assets in an organisation. On the Web,
IT architecture includes the content and organisation of the site as well as the interface to
support browsing and search capabilities. The IT architecture of an e-business is a guide for
current operations and an outline for future directions (Turban et al., 2004). It assures man-
agers that the organisation’s IT structure will meet its strategic business needs. Creating the
IT architecture is a recurring process, which is driven by the business architecture. Finally,
the business architecture describes organisational plans, visions, objectives and problems,
and the information required to support them (Koontz, 2000).

It is also important to recognize the different ‘types’ of IT architectures that may exist in or-
ganisations based on the predominant computing environment. In fact, the type of IT archi-
tecture that a particular organisation uses would also determine its ability to transform its
SCM. The different environments that can exist in organisations concerning IT architecture
fall under three categories (Turban et al., 2004). First, in a mainframe environment,
processing of information is done by one or more mainframe computers. Users work with
passive terminals to access information, while being controlled by the mainframe. In a PC
environment, on the other hand, only PCs provide the computing power in the information
system. In this scenario, numerous computers can be connected to form a network. And
finally, in distributed computing (where processing work is divided between two or more
computers, using a network for connection) the participating computers can be all main-
frames, all PCs, or as in most cases, a combination of the two types. Distributed computing is
the predominant model in organisations today since it provides some important advantages.
First of all, many software applications can be shared among users with the use of net-
worked computers and the necessary software. In addition, this type of IT architecture pro-
vides more flexibility to organisations that can make use of it by transforming their SCM to
better integrate the needs of their suppliers and customers throughout the supply chain

14
(Harmon, 2001). A successful example of an organisation transforming its IT architecture to
improve its SCM is the case of Chase Manhattan Bank (now J. P. Morgan Chase). The compa-
ny reorganized many of its processes and designed improved IT architecture to expand its
service range and create additional value for both its partners and customers (Turban et al.,
2004).

To better understand how IT architecture affects an organisation’s ability to transform

supply chain management, some additional concepts should be explored as well, namely the
‘range’ and ‘reach’ capabilities. In essence, both terms have to do with the scope of a busi-
ness model, as described by Afuah and Tucci (2003). The ‘reach’ refers to the market seg-
ments or geographic areas that a company can target, while the ‘range’ has to do with the
different types of products/services that the company can offer to the targeted segments of
customers. In fact, in the past several decades, most organisations faced serious problems
with both the ‘reach’ and ‘range’ due to the limited nature of IT systems (e.g. EDIs that were
only used by large companies). Today the situation has improved considerably, and the
problem of ‘reach’ has been solved almost entirely. This is, of course, due to the advent of
the Internet, which now allows companies to connect their IT systems to the Web and use
the Net for doing business. Now, it is no longer a question of how many customers can a
company reach, but rather of how many is a business prepared to service. On the other
hand, the problem of ‘range’ still causes trouble to many businesses. Even though IT and the
Internet have brought considerable progress, some products and, especially, services cannot
be provided electronically without compromising their quality. This problem is made even
worse by the fact that many customers are unwilling to switch to e-business when it comes
to some traditional offerings. However, it is likely that evolving technology will alleviate the
situation in the future.

In summary, in order to successfully transform their SCM, organisations must realize that by
changing their supply chains to e-supply chains (please refer to Section I), by improving their
IT architectures, and by collaborating with suppliers, customers, and even rival companies
along the supply chain, they multiply their chances of success. In fact, organisations can also
focus on CRM (customer relationship management) and especially on PRM (partner relation-
ship management) to achieve better results. PRM uses automated processes to support
partnerships, and it usually utilizes Web-based technologies. By securely acquiring, distribut-
ing, and managing information, PRM applications facilitate partner relationships and im-
prove strategic alliances. (Turban et al., 2004) In fact, the more flexible an organisation be-
comes, the more likely it is to effectively and efficiently respond to customers’ needs and
wants. One way through which companies can become more flexible involves the develop-
ment of better IT architectures that foster this flexibility. Knowledge of information technol-
ogy and the enormous opportunities provided by the Internet is essential so that businesses

15
can concentrate their resources appropriately in any SCM transformation exercise. Lastly,
the e-business opportunities of today’s highly competitive business environment seem to be
more sensibly explored with cooperative efforts and initiatives. This is not to suggest that
companies should not strive for individuality and uniqueness, but rather to propose that
constructive collaboration is what often makes the difference between failure and success.

Conclusions

As described in Sections I through IV, there is a number of important issues that must be
considered by companies seeking to transform their SCM and proceed into e-business. Or-
ganisations must have extensive knowledge of the processes of SCM as well as of the differ-
ent types of e-business models and their implications. In addition, businesses must learn to
identify the key success factors that contribute to a sound e-business model and make use of
them accordingly. Companies should be aware of the major shifts in business focus influ-
enced by SCM and pay particular attention to the emphasis upon collaboration, customer
focus, and customization of products/services. Furthermore, successful organisations must
know their IT architectures well and the opportunities that these provide for doing business.
If a specific need is identified, the IT architecture of a company must be transformed in order
to better support the SCM function. In fact, businesses can also approach the opportunities
for gradual improvement offered by BPR or business process redesign, rather than business
process reengineering described by Hammer and Champy (1993). Once a company has max-
imized its SCM function via the use of IT and the Internet, it can also seek to improve particu-
lar processes that seem to lag behind in speed or performance. Since BPR offers considera-
ble options, organisations can aim at redesigning individual processes or groups of processes
simultaneously (El Sawy, 2001). Finally, some businesses can even go a step further and ex-
plore the opportunities of DBD (digital business design). Some authors, including Slywotzky
and Morrison (2001), have argued that DBD is yet another dimension in the development of
business. Digital business design is described as the art and science of using digital technolo-
gies to expand a company’s strategic options. DBD is not about technology for its own sake;
it is about serving customers, creating unique value propositions, leveraging talent, improv-
ing productivity, and increasing profits. According to Slywotzky and Morrison (2001), DBD is
about using digital options to craft a business model that is not only superior, but also
unique. What is certain is that businesses should definitely understand technology, but, even
more importantly, they must rely upon solid business models and strategies if they are to
benefit from the often complementary nature of IT and the Internet. Because, as Michael
Dell perhaps put it best, “If you take a business that is a bad business and put it on-line, it’s
still a bad business. It’s just become an on-line bad business” (Slywotzky and Morrison,
2001).

16
 Bibliography

Afuah, A. (2003) Business models: a strategic management approach. New York: McGraw-
Hill.

Afuah, A. and Tucci, C. (2003) Internet business models and strategies: text and cases. New
York: McGraw-Hill. p. 51-75.

Barnes-Vieyra, P. and Claycomb, C. (2001) Business-to-business e-commerce: models and

managerial decisions. Business Horizons, 44(3), p. 13-20.

Broadbent, M. and Weill, P. (1997) Management by maxim: how business IT managers can
create IT infrastructures. Sloan Management Review, Spring 1997.

Brynolfsson, E. and Kahin, B. (eds.) (2001) Understanding digital economy. Cambridge, MIT
Press.

Dickson, G. and DeSanctis, G. (2001) Information technology and the future enterprise: new
models for managers. Upper Saddle River, Prentice Hall.

Doig, L. (2000) E-commerce models: choosing what suits. Australian CPA, 70(3), 55-57.

Donovan, R. (2002) Supply chain management: cracking the bull-whip effect. Material Han-
dling Management, Director Issue, 2002/2003.

El-Sawy, O. (2001) Redesigning enterprise processes for e-business. New York, McGraw Hill.

Fisher, M. (1997) What is the right supply chain for your products? Harvard Business Review,
75, p. 105-116.

Gillmor, S. et al. (1999) New model for e-commerce. Information Week, June 28 1999.

Goutsos, S. and Karacapilidis, N. (2004) Enhanced supply chain management for e-business
transactions. International Journal of Production Economics, 89(2), p. 141-152.

Hammer, M and Champy, J. (1993) Reengineering the corporation. New York, Harper Busi-
ness.

Harmon, P. et al. (2001) Developing e-business systems and architectures: a manager’s

guide. San Francisco, Morgan Kaufmann.

Huff, S. et al. (2001) Cases in electronic commerce. New York, McGraw Hill.

Hugos, M. (2002) Essentials of supply chain management. Now York, John Wiley.

17
Johnson, M. and Seungjin, W. (2002) Introduction to the special issue on e-business and
supply chain management. Production & Operations Management, 11(4), p. 411-412.

Kalakota, R. and Robinson, M. (2001) E-businesses: roadmap for success. Reading, Addison
Wesley.

Koontz, C. (2000) Develop a solid architecture. e-Business Advisor, January 2000.

Kopczak, L. and Johnson, M. (2003) The supply chain management effect. Sloan Manage-
ment Review, Spring 2003, p. 27-34.

Kotler, P. (1994) Marketing Management. Englewood Cliffs, Prentice Hall.

Kumar, K. (ed.) (2001) Technology for supply chain management. Communications of the
ACM, June 2001.

Lee, H. (2002) Aligning supply chain strategies with product uncertainties. California Man-
agement Review, 44, p. 105-119.

Liang, T. et al. (2004) Effects of electronic commerce models and industrial characteristics on
firm performance. Industrial Management & Data Systems, 104(7), p. 538-545.

Libresco, J. (2000) Developing a better e-commerce model. Marketing News, February 28

2000.

Morgan Stanley (2001) CIO Survey Series: Release 2.7, October 2, 2001.

Neumann, S. (1994) Strategic information systems – competition through information tech-

nologies. New York, Macmillan.

Poirier, C. and Bauer, M. (2000) E-supply chain: using the Internet to revolutionize your busi-
ness. San Francisco, Berrett-Koehler.

Porter, M. (1985) Competitive advantage: creating and sustaining superior performance.

New York, Free Press.

Porter, M. (2001) Strategy and the Internet. Harvard Business Review, March 2001.

Rayport, J. and Jaworski, B. (2001) E-commerce. New York, McGraw Hill.

Slywotzky, A. and Morrison, D. (2001) How digital is your business? London, Nicholas Brea-
ley. p. 8-22.

Turban, E. et al. (2004) Electronic commerce. Upper Saddle River, Prentice Hall.

Vakharia, J. (ed.) (2002) E-business and supply chain management. Decision Sciences, Fall
2002.

18
For further information, please do not hesitate to contact us:

ClusterStar KG
Werderstr. 1
86159 Augsburg
Germany

Office +49 (0) 821 26 12 084

Cell +49 (0) 176 213 003 52

E-mail: service@clusterstar.com
Skype: clusterstar

www.clusterstar.com

19