Internet-Enabled Supply Chains

Quan Z. Sheng, John Mo, and Jiang Li

The Handbook of Technology Management
John Wiley & Sons, Inc, New York
(Chapter Outline)
1. Introduction

Internet-Enabled Supply Chain Management

Necessity (importance, and significance)

Summary of existing major aspects/practices

Structure of this chapter

2. Current Status of the Internet-Enabled Supply Chain Management

The proliferation of the application of internet technology into SCM has been seen in
many literature and real industrial setting [Rahman, 2003]. According to Boone [Boone,
2007], internet technologies have permeated every process of supply chain. It is beyond
the scope of this chapter to go into every aspects of the SCM where internet technology
has been using in industry demonstrated in various literatures. We will focus on
discussing basic architecture of internet-enabled SCM and the essential processes of
SCM where internet technology has been used and applied successfully.
2.1 Architecture of Internet-Enabled Supply Chain Management
The most popular use of the Internet for SCM is in the following key business processes:
Transportation, Order Processing, Managing Vendor Relations, Purchasing/Procurement,
Customer Service, Inventory Management, and Production Scheduling [Lancioni, 2000].
The Internet-enable SCM can be a very complicated system which is far beyond the
traditional EDI type of system. To streamline the entire business process of SCM with
Internet technology demands good understanding the essential business process of SCM
and efficient technological solution to deal with complicated information flow, material
flow, and human resource management. High level of the abstraction of this type of the

architecture of Internet-enabled SCM can be illustrated in Fig. 1. As shown in Fig. 1,

Internet-enabled SCM includes widely resources than the traditional Intranet and Extranet
which has limited opening to the customers and suppliers. Moreover, Internet provides
more abilities and services in SCM to all the employees, employers of a company,
customers, and suppliers. For examples, online auction provides abilities for companies
to sell their products to customers around the world directly [Bichler, 2000; Branco,
1997]; online bid for product procurement enable a company to get the lowest offers of
the product price worldwide. Thus, building an Internet-enabled SCM system will give a
company edge over traditional intranet, and extranet-based SCM system.
It is consensus that, world-class organization will require world-class SCM [Carter, 2000;
Sharma, 2002]. Built on the technological potential of Internet technology and human
knowledge, it is more likely to build an efficient and profitable SCM system. In the rest
of the sections, the Internet technologies applied to the key processes of SCM (see Fig. 1)
are introduced briefly.

Supply Chain Management System

Consumers /
End-Customers

Other processes

......

......

Customers
Transportation

Manufacturer

Logistics

......

Marketing
Production
Purchasing

......

Order Processing

Financial

......

Managing Vendor Relations

Information flow

......

Purchasing/Procurement

Tier 1
Suppliers

Customer Service

Inventory Management

Tier 2
Suppliers

Production Scheduling

Intranet
Extranet

Internet
Notes:
1 The symbol "

" represents the information flow of the key business processes after processing SCM sysem

2 The symbol "

" represents the raw information from in the supply chains before processing by the SCM system

3 The symbol "

" represents product flow in the SCM system

4 The symbol "

" represents the information flow between the business processes of SCM sysem and Internet

5 The diagram is adapted from [Sebastian, 2003]

Figure 1 Architecture of Internet-Enabled Supply Chain Management

2.2 Key Supply Chain Processes and the Internet

2.2.1

Purchasing/Procurement and internet

As one of the key processes of SCM, successful purchasing of the desired product with
lowest price and highest quality is one of the critical factors that contribute the success of
a firm. Research has shown that the use of the Internet technologies in managing
purchasing in the SCM has increased quickly over the decade [Boone, 2007; Sebastin,
2003; Lancioni, 2000]. Internet technologies have been utilized in various aspects of
purchasing application. In summary, e-purchasing are widely used in following aspects:
Checking vendor price quotation. Through Internet, the firm can have widely choice
and spectrum worldwide to look for the best quote of products that are required for the
firm.

 Negotiating with vendors, and making purchases from vendor catalogs. The firm can
purchase through Internet from vendors website at any time and transcend the
geographical limitation as it is used to be by traditional method.
Using more sophisticated communication and negotiation techniques including
bargaining and renegotiation of price, and negotiation of the term agreements with the
support of the Internet Visual technologies
Improving inter-organizational coordination within the supply chain, improving
relationships with business partners, and offering competitive sourcing opportunities
for the buyer organizations [Subramaniam, 2002].
Managing the product-damage issues through the use of the Internet is also possible.
Internet-enabled purchasing can reduce the costs of handling returned or damaged
goods by using the fast tracking and notification mechanism beforehand when
damaged goods can be shipped [Lancioni, 2000]. Moreover, the financial aspects of
returned goods are also handled more efficiently, including notification as to when
credits are posted by vendors. Likewise, warranty issues can also be handled on the
Internet.
Procurement over Internet has apparent advantages and greatest potential for savings for
a firm such as lower transaction cost, improving the possibilities of efficient purchasing
through acting and reacting fast to meet the rapid changing market. According to USA
National Association of Purchasing Management, it costs an average of $150 to generate
a purchase order in ordinarily purchasing process [IBM, 2001]. By using e-procurement
systems, the cost for the purchasing will be reduced to about $30 due to cutting down
paperwork, manual errors and processing delays. Thus, the return on investment payback
is a promising for a firm to adopt the Internet-enabled purchasing paradigm.
Many e-purchasing systems over Internet have been developed and used throughout the
world. Many companies adopted e-procurement system or techniques such as Electronic
catalogs, price search engines, recommendation agents and comparison matrices as
electronic purchasing aids to cut costs and to avoid paper-based order errors. For
example, General Electric permits on-line purchasing from vendor catalogs by each
department which results in reducing purchasing staff by more than 50 percent[Lancioni,
2000]. IBM developed and used an e-procurement system saving $500 million in the first
year alone [IBM, 2001]. The system enabled IBM to manage multiple tiers of suppliers
(12,000 suppliers are involved in the system) and improved the quality of the purchased
product and components.
E-procurement has also been used by various governments, for example, one of the
departments in Greek Government used e-procurement system to purchase required
materials through Internet [Panayiotou, 2004].
However, adoption of e-procurement is not an easy task. It requires a systematical
process and management commitment to the process. Rajkumar (2001) advise the
managerial challenges by listing critical success factors of e-procurement implementation
such as having proper e-procurement strategy, engineering procurement processes and
setting and managing expectations. Moreover, research has shown that there are still
some procurement problems that can not be effectively solved by Internet technology
[Essig, 2001]. More specifically, it is hard to ensure the credential of a company through
internet alone. Moreover, following questions are identified as likely direction for the
further research:

1) how to use the vendors information effectively and efficiently,

2) how to get better decision based on those information listed in 1);
3) how to analyze carefully the extended flow of information through the Internet and
generate useful recommendations on how to implement e-procurement successfully.
2.2.2

Inventory Management

Inventory management is one of the most important aspects of SCM [Fisher, 1997], this
is because each one-point drop in inventory cost can result in more than one hundred
million dollars in savings for a firm [Lancioni, 2003]. Moreover, research has shown that
lacking efficient information flow in the inventory management will result in inventory
buffers and inefficiencies of supply chain management [Sebastin, 2003]. Thus, to keep
inventory levels low, reduce overall holding costs, and still provide high levels of
customer service become a challenge issues in inventory management which shall be the
essential benefits of the Internet to firms in managing inventory in their supply chains.
Internet-enabled inventory management provides exactly such abilities which can
effectively mitigate those problems mentioned above.
The most popular use of the Internet in the inventory management area is the notification
of stock-outs by companies to their customers or communication of stock-outs by
customers to vendors [Lancioni, 2000]. More specifically, Internet can contribute
efficient inventory management from following aspects:
Enable companies to more quickly institute EDI information programs with their world
wide customers. Through Internet, EDI systems take only half of the needed time to
develop and to be put into operation than the case without using Internet. Thus, the
items that are stored in multiple warehouses and multiple locations can be effectively
managed and tracked by using Internet.
Enable the firms to be proactive in the management of inventory systems. By using the
Internet, the firm can track out-of-stock inventory items in field depots and notify
customers of order-shipping delays and inventory emergencies. The firm can also
pursue quick action to replenish the inventory quickly.
Enable the senior management getting inventory information more quickly and making
quick decision because of the reporting systems that can be used through the Internet.
The inventory information include finished-goods inventory levels at manufacturing
and field level depots along with raw material levels at central and regional assembly
locations.
Enable tracking important items in a timely and efficiency manner through integrating
RFID (Radio Frequency Identification) technologies, communication technologies, and
Internet. By using these technologies, the firm can implement on-line, real-time
tracking systems that provide paperless, timely and quality information necessary to
maintain inventory control for any specific items. Thus improve customer satisfaction
and profitable operations.
Research has shown that many companies begin to use Internet to manage their inventory
[Lancioni, 2000]. Due to Internet-enabled inventory management system can provide real
time stock information at all levels in the supply chain from customer stocks, field
inventories and plant inventory, Internet deployment of inventory management rose from
30.1% in 1999 to 48.5% in 2001 []. For example, the Big Three auto companies lowered

stock levels in all parts of their assembly process by an average of 4% in 1999. Each onepoint drop in inventory results in more than one hundred million dollars in savings for the
individual firm. Thus,.Philips Semiconductors, a leading international semiconductor
supplier, managed their inventory by using Internet to simplify inventory tracking, reduce
cost associated with manual labor and increase supply chain accuracy[Philips, 2006].
2.2.3

Transportation

Transportation typically is one of the highest cost components in a supply chain

[Lancioni, 2000]. Reducing the cost of the transportation is a important issues in the
SCM. In the last decade, many technologies that is support transportation management
over internet have been developed such as Internet fleet management which allows
system wide customer capable tracking their items at any time around the world. By
using these technologies, items transportation productivity including outbound truckload
and carload shipments is improved, and the back-haul rates is reduced, and items claims
management is improved which results in overall economic gains. Research has shown
that using Internet-enabled transportation technologies has increased, rising from 56.2%
of firms in 1999 to 84.3% in 2001 [Lancioni, 2003].
In brief, Internet-enabled transportation management includes mainly following aspects:
Monitoring of pickups at regional distribution centers by carriers. This is particularly
important for a company, since data of tracking shipments to regional depots can
enable the firm to estimate the reliability performance of the carriers it is using. This
enables transportation managers to make sure that the motor carriers they use are
meeting their promised arrival times. It also provides managers with the information
they need to inform customers the delays as they occur, and take corrective measures to
reduce negative impact due to the delay.
Managing the claims occurred in the transportation management. The claims tracked
through the Internet is also efficient. Claims reporting, processing, and settlement are
more easily handled through the use of Internet tracking-system applications.
Parcel tracking has become common service in most of the developed countries which is
a typical example of the transportation management through Internet. For example,
United Parcel Service was able to lower its individual per trace costs from US$1.54 to
less than US$0.40 when the Internet tracking was developed in 1999.
2.2.4

Order Processing

Order processing over Internet has already become a normal practice by many young
people of the new generation. Order processing in SCM built on Internet technologies is
also very widely used in industry. One of the benefits of the ordering through Internet is
the it provides a mechanism to streamline the quotation process and lower the overall
cost. The most frequent use of the Internet technologies in order processing can be
summarized from the following aspects:
Order placement and checking order status. Many firms use the Internet for this
purpose. Research has shown that order processing and checking order status can

dramatically reduce the costs of order processing in a supply chain system. A major
component of this cost saving is the reduction of paperwork involved in traditional
order processing systems because of the Internet.
Improvement of the speed and the quality of the order processing. The Internet-enabled
order processing stem can reduce the time between the order is placed and the time it is
received by a customer by almost one-half [Lancioni, 2001]. Moreover, the use of the
Internet in order processing has reduced the error rate likely involved in order
processing in the traditionally paper-based ordering system. Errors now can be avoided
through checking vendor prices on-line; they can also be detected more easily and
corrected more quickly through an intelligent ordering processing system.
Handling of return goods and out-of-stock notification of the customer. One of the
typical functionality provided by the Internet-enabled order processing system is that it
can provide timely responses of the ordering processing when the items is out of stock
and/or when the wrong items are sent to the customers or the quality requirements of
customers are not satisfied. This function is also shown very important and
economically beneficial since a return order can cost a firm as much as 12 times more
to process than an out bound order [Lancioni, 2003]. Thus, better management of this
process will help firms reduce related cost
As an example of effective application of Internet technologies, Herman Miller was able
to reduce its order-to-delivery cycle from 8 to less than 2 weeks, while Weyerhaeuser was
able to reduce order-processing time from 3 to 4 weeks to 15 min [Walker, 2000].
It is worth mentioning that shifting to Internet-enabled ordering processing and
purchasing will also have significant positive impacts to the inventory management. For
example. Do It Best, a US building distributor, has reports a saving of some US$4.5
million due to the elimination of mail time after using Internet-enabled ordering
processing and purchasing system [Lancioni, 2003].
NAPA Auto Parts, a leading US auto parts supplier, adopted Internet ordering processing
system that positions the company to gain an even greater share of the market.
NAPAonline currently receives a million unique visitors every month and offers more
than 200,000 parts to customers, most with overnight delivery [NAPA, 2001]
2.2.5

Customer Service

The Internet has provided firms with the ability to offer

their customers another way to contact the firm regarding
service issues. The research shows that 43.8% of
the companies use the Internet to receive customer complaints,
while 33.9% utilize it for emergency notifications
(see Table 6). The Internet also gives customers 24hour access to a companys service department, enabling
customers to immediately notify companies of any service

issues or problems that may arise. The overall effect

has led to reduced response times and resolutions of customer
service problems.
The Internet has improved the two-way flow of communication
between firms and their customers. This is
demonstrated by the results of the research that show that
U.S. companies are using the Internet not only for service
issues, but for selling their products and services as well
(47.9%). This two-way communication capability can
have a profound effect on cementing customer-firm relationships.
Experience with Internet service systems
shows that customers whose service issues are dealt with
quickly and to their satisfaction, are more likely to want
to purchase the firms products again. The Internet can
build strong product and service loyalty if used appropriately
in the customer service area.
Customer service experienced the fourth largest increase
in Internet usage over the last 2 years rising from 52.5% of the
sample respondents in 1999 to 67.1% in 2001. This approximately
15% increase results from the ability of firms to raise
their customer service levels through improved service
response times and faster problem resolutions. Concomitant
with these benefits has been the ability of firms to develop
higher levels of customer retention and loyalty. This has
enabled many companies that, heretofore, had more difficulty
with customer churn when confronted with competitive price
challenges, to respond with better service strategies to offset
the competition.
2.2.6

Production Scheduling

2.2.7

Relations with Vendors

Vendor relation applications of the Internet increased by

11.9% from 1999 to 2001. The rise was, in part, due to the
development of on-line catalogues, Internet exchanges and
the ability of firms to integrate their production plans with the
procurement support needed from vendors. The Internet
enabled both parties to keep in close touch with one another
in the development of JITand vendor-management-inventory
programs and to make near seamless stock level adjustments.
With the trend toward the development of strategic vendor
partnerships, the Internet has made it much easier for companies
to develop such relationships.

2.3 Impacts of Internet-Enabled Supply Chains

eBusiness technologies have permeated every supply
chain process.
Undoubtedly, the data demonstrate that the Internet is playing a significant role in
lowering overall purchasing costs for firms. This has enabled buyers to develop
knowledge of competitor prices and make more economical purchases for their respective
companies.

While eBusiness technologies bring with them the

promise of lean and efficient supply chains, companies
that use them need to address several issues before its
potential is fully realized.

Supply chain management has been literally reinvented by the new networked
technologies and the practices they facilitate, i.e., e-procurement, e-logistics,
collaborative commerce, real-time demand forecasting, inventory management, true
just-in-time (JIT) production, customer interface, and web-based package tracking

The Internet as an enabling force for improved supply chain management offers
efficiency and cost reduction to business processes across industries and nations. By
allowing real-time communication among supply chain participants, networks can
practice integrated forecasting, where it is possible to modify raw material orders to meet
demand in real time, thus reducing the costs of stock outs or conversely costs associated
with holding often perishable inventory
Similarly, interfirm information transfer via the Internet can
reduce the costs of order tracking and logistics as shipments
can be located en route and labor and physical plant requirements
can be more accurately anticipated to achieve resource
synergy [5].
While the Internet provides a low-cost network for
business-to-business commerce transactions, the benefits
of the Internet and electronic commerce go far beyond cost
reduction [3]. Participants in the supply chain can use
collaborative commerce to enhance value at all stages by
allowing increased customization in materials and processes
to meet the overall needs of the supply chain network,
including end users. For example, in the plastics industry, it
has been found that the Internet has given both downstream
and upstream members of the supply chain the ability to
offer technical support and alter raw material inputs and
virtual specifications (websites) in real time to enhance the
performance of network products and services. In essence,
the Internet allows supply chains to decrease friction within
their chains, improve output, and enhance overall satisfaction
at every node of the network [4

---------------------------------------------------Supply chains in practically every industry are at the beginning of a startling reinvention
triggered by the rise of the Internet. The revolution extends beyond performance
improvements and efficiencies gained from automation and communication to include
entirely new opportunities to create value. This new value is derived from synchronized
supply chains that can reach out to a bigger market, perform mass customization to tailor
product and services to meet the individual customers'' needs and develop new products
and services that adapt to the competitive and environmental needs. The Internet changes
the way in which supply chains are managed, planned and controlled. The information,
decisions and processes that form Supply Chain Management are moving to the Web,

breaking old paradigms of inter-company boundaries. This common ground will be

where entire supply chains truly can be synchronized. New upstart specialist providers of
both virtual and physical activities will carve out their own unique roles in the new
infrastructure. In this churning environment, supply chain capabilities will be crucial. But
gaining those vital competitive capabilities will not be through the typical supply chain
initiatives of today.
The Internet has already had a tremendous impact on the field of supply chain
management, and there is more to come.
a number of companies (Cisco, Dell, Adaptec, Zara, and Texas Instruments) have used
the Internet successfully to lower costs and add value to their businesses.
the Internet impacts supply chains
examine the variety of e-business relationships made possible through the Internet and
learn important reasons why some approaches work better than others.
The Internet can create more sourcing opportunities for raw materials; we'll use a spot
market simulation to show how combining long-term contracts with spot market
purchases can reduce safety stocks and their associated holding costs. You'll also discover
how emerging standards like Web Services (XML, SOAP, UDDI, and WSDL) can
simplify information exchange and business processes within the enterprise and between
supply chain partners; a closer look at RosettaNet will show how the development of
standard business practices for Internet relationships can reduce costs and improve
response times.
Finally, you can't just blindly accept everything you hear about the future of supply chain
management; for each new innovation, the risks for each player must be weighed against
the chain-wide benefits. You'll look to the future of Internet-enabled supply chains to gain
an understanding of what challenges lie ahread in a number of different areas.
5. Conclusions

The problem and caution that needed to be took care of

McFarlan (1984) emphasized that executives should understand if communication
technology can be the core of their competitive strength or if it will simply play a
supporting role. Wigand (1997) also emphasized the importance of optimal organizational
fit and alignment in the deployment of information technology. He made it clear that
what brings added value to a firm is not information technology itself, but well-tuned
coordination between business strategies and technology. A recent issue of the McKinsey
Quarterly reported that some companies that made heavy investments in supply chain
management information systems performed worse than companies that did not, although
technological investment in supply chain management increased the efficiency of firms
on average (Kanakamedala, Ramsdell, & Srivatsan, 2003). These findings clearly
demonstrate what managers have been told repeatedly. To adopt this new communication
technology successfully, firms must have a working supply chain and know how the
technology can improve their existing supply chain.