Supply Chain in Internet Age

By Prof Hau Lee

Assignment # 2

Submitted to: Mr. Hanif Anjari Submitted by: Murtaza Hussain [CM-3]

About Prof. Hau Lee Professor of Operations, Information and Technology Director of the Stanford Global Supply Chain Management Forum Director of the Strategies and Leadership in Supply Chains Executive Program

Summary This report is a summary of Prof. Hau Lees lecture on Supply Chain in Internet age at Stanford School of Business. Deliver right product for the right market, at the right time Highlights of Prof. Lees Lecture The need of businesses today is to be more profitable, more efficient Supply chain is the differentiation of business The three stages of Innovation Substitution Scaling Structural effect Substitution There are two types of Substitution, Supplier Driven; the decision of product substitution is made by the supplier. Supplier will substitute the product based on its own inventory position, the market forecast and other related information. It often occurs in multi-product manufacturing system and some service industry. Consumer driven; the product substitution decision is made by the consumers. When a product is stock-out, the customer will choose other product or leave without buying. Scaling Lower cost & economies of scale can be achieved by producing or purchasing large lots. These economies of scale result due to fixed costs associated with ordering and transportation, quantity discounts on buying larger lots, and shortterm discounts or trade promotions Structural effect Companies wanting to control Bullwhip effect should focus at adjusting supply chain infrastructure & its processes. Structural changes are much better than substitution.

The impact of the Internet on supply chain management has lead to business opportunities far beyond supply chain integration. Professor Lee argues that companies should not be satisfied with the substitution effect or the scale effect when enjoying the benefits of the Internet on supply chain management. They need to identify opportunities for structural changes to their supply chain, and enable those changes to take place. The result will be new collaborative ventures, and can lead to entirely new product lines. He discussed how some companies have leaped ahead by encouraging the structural changes precipitated by integrating supply chain management and the Internet. Examples Cisco e-hub Netfish The Bullwhip Effect The bullwhip effect occurs when the demand order variabilities in the supply chain are amplified as they moved up the supply chain. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, inactive transportation, and missed production schedules. Causes of Bullwhip Effect Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called "safety stock". Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants increase orders. In periods of falling demand, orders fall or stop; thereby not reducing inventory. The effect is that variations are amplified as one move upstream in the supply chain (further from the customer).

How to Counteract the Bullwhip Effect 1. 2. 3. 4. 5. Avoid multiple demand forecast updates Break order batches Stabilize prices Free return policies Eliminate short gaming

Companies can effectively counteract the bullwhip effect by thoroughly understanding its underlying causes. Industry leaders are implementing innovative strategies like i) Integrating new information systems ii) Defining new organizational relationships, and iii) Implementing new incentive and measurement systems. By implementation of SAP and other integrated ERP systems Supply Chain Management has really evolved and has further strengthened its role to be a sole competitive advantage any organization can have. Organizations thus need to give due importance to Supply Chain Management as its in their best interest to do so. E-Markets examples Converge, HP, Compaq, Agilent etc

E2 Open examples LG, Hitachi, etc We also discussed how Intuit reformed its product based business into customized solutions for its customers. egreetings.com & bluemountain.com