Version: April 26, 2000
WHICH E-BUSINESS IS RIGHT FOR YOUR SUPPLY CHAIN?
by Sunil Chopra and Jan A. Van Mieghem (Forthcoming in Supply Chain Management Review) The Internet is revolutionizing the way companies conduct business. Or is it? We argue that the value of the Internet for a firm is strongly dependent on the firm’s industry and on the strategy it pursues. A survey of firms with an online presence displays wide disparities in performance. While Dell has successfully used the Internet to boost revenues and earnings, Amazon lost $585 million on revenues of $1.6 billion in 1999. Firms that fully exploit the revenue enhancements and cost reduction opportunities offered by the Internet and optimally integrate e-business with existing channels are likely to be the big winners in the Internet age.
A Strategic Framework to Evaluate Supply Chain Opportunities from E-business The framework starts from the premise that supply chain decisions must be evaluated in a strategic context based on the answers to the following three questions: 1. 2. 3. What is your firm's desired strategic position? Given your the firm's strategic position, what supply chain capabilities are needed to support the strategy? Given the desired supply chain capabilities, how should the supply chain be structured?
The Role of E-business in a Supply Chain E-business involves the execution of business transactions over the Internet. Companies conducting ebusiness perform some or all of the following activities over the Internet across the supply chain: • • • • • • Providing product and other information Negotiating prices and contracts Placing and receiving orders Tracking orders Filling and delivering orders Paying and receiving payment. The goal is to create fit between the desired strategic position of the firm and the capabilities of supply chain processes used to satisfy customer needs (Porter 1996). The desired strategic position may be articulated in terms of a clear priority ranking on the needs of the customer segments that are targeted by the firm. Typical dimensions of customer needs that may be targeted by a supply chain include timeliness, accessibility, availability, customizability, quality of service, and price. There is a tradeoff between the level at which a set of customer needs is targeted and the cost incurred by the supply chain in meeting these needs. The efficient frontier represents the lowest cost of delivering a given level of a customer need using the best available supply chain processes. Each point on the frontier corresponds to a particular supply chain structure, employing the best available technologies, managerial policies, and inputs to deliver the desired level of a customer need at lowest cost. As such, the efficient frontier constitutes the state of best practices at a given point in time (Porter 1996). It also shows the inherent trade-offs that a firm must consider when selecting its strategic position given limitations in process technology and policies. With the Internet come new associated technologies and managerial policies that shift the frontier outward. An outward shift represents either a decrease in cost for a given level of performance along a customer need or a higher level of performance at a given cost. The shift in the efficient frontier on adding the Internet to available channels will vary by industry. In
All these activities have been conducted in the past using existing "channels" such as retail stores, sales people, and catalogs. For example, companies like Lands End and W.W. Grainger have used catalogs to provide product information to customers. Companies have used the Internet in a variety of ways to enhance supply chain performance. Dell uses the Internet to display all its product options to customers. Companies like Solectron and Ford have used the Internet to increase collaboration in product design. UPS and Federal Express have used the Internet to allow customers to track their...
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