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Digital Business and E-Commerce
Management
Seventh Edition
Part 2
Strategy and applications
Chapter 6
Supply chain and demand
Copyright © 2019, 2015, 2011 Pearson Education, Inc. All Rights Reserved
Learning outcomes
• Identify the main elements of supply chain
management and e-procurement
• Assess the potential of information systems to
support supply chain management and e-
procurement
• Analyse procurement methods to evaluate cost
savings
Management issues
• Which technologies should we deploy for supply
chain management e-procurement and how
should they be prioritised?
• Which elements of the supply chain should be
managed within and beyond the organisation
and how can technology be used to facilitate
this?
• Which method(s) of e-procurement should we
adopt?
• What are the practical issues with online supply
chain management and e-procurement?
Procurement & Purchasing
• It is worth noting that the terms ‘purchasing’ and
‘procurement’ are sometimes used interchangeably,
but as Kalakota and Robinson (2000) point out,
‘procurement’ generally has a broader meaning.
• ‘Procurement’ refers to all activities involved with
obtaining items from a supplier; this includes
purchasing, but also inbound logistics such as
transportation, goods-in and warehousing before the
item is used.
• The use of e-procurement is sometimes considered as
part of ‘strategic sourcing’, where it is used to deliver
commercially significant benefits to the company.
Figure 6.2 Key procurement
activities within an organisation
e-procurement
• E-Procurement: The electronic integration and
management of all procurement activities,
including purchase request, authorisation,
ordering, delivery and payment, between a
purchaser and a supplier.
• Electronic procurement system (EPS): An
electronic system used to automate all or part of
the procurement function.
The five rights of e-procurement
• At the right price
• Delivered at the right time
• Are of the right quality
• Of the right quantity
• From the right source
Baily et al. (1994)
Problems of supply chain
Problems of supply chain
Figure 6.3 Members of the supply chain: (a)
simplified view; (b) including intermediaries
SCM – some definitions
• Supply chain management (SCM) The coordination
of all supply activities of an organisation from its
suppliers and partners to its customers
• Upstream supply chain Transactions between an
organisation and its suppliers and intermediaries,
equivalent to buy-side e-commerce
• Downstream supply chain Transactions between
an organisation and its customers and intermediaries,
equivalent to sell-side e-commerce
The key elements of supply chain success (IGD, 2017)
are:
• 1 Customer centric. The supply chain exists to serve its customers and the
best ones build their upstream processes to support providing an outstanding
service for their end customer.
• 2 Powered by people. The best supply chains utilise people to add value;
however, there are skills shortages in some areas. This means that attracting,
retaining and retraining are important elements of supply chain management.
• 3 Transformed by technology. Technological innovation and adoption have
helped transform the supply chain. Key areas include automation,
synchronisation and transition to a data-driven environment. This also brings
new challenges to digital businesses and online retailers.
• 4 Resilient and responsive. The macro-environment, such as the adoption of
technology, the impact of a political or economic landscape, etc., means that
disruption and interruption are on the increase. Therefore, recognising where
risks and their impacts are requires a plan and is one of the first steps to
building a resilient and responsive supply chain.
Table 6.2 Objectives and strategies for
effective consumer response (ECR)
Figure 6.5 A typical supply chain
for a B2B company
VMI
• Vendor-managed inventory (VMI)
• Supply chain partners manage the replenishment of parts
or items for sale through sharing of information on
variations in demand and stocking level for goods used for
manufacture or sale.
Logistics
• Logistics is defined as the time-related positioning of
resource. It is also described as the ‘five rights’. Essentially, it
is the process of ensuring that goods or a service is:
• • In the right place
• • At the right time
• • In the right quantity
• • At the right quality
• • At the right price.
• Inbound logistics: The management of material resources
entering an organisation from its suppliers and other partners.
• Outbound logistics The management of resources supplied
from an organisation to its customers and intermediaries.
Push & Pull SC Models
• The push model is illustrated by a manufacturer who
perhaps develops an innovative product, identifies a
suitable target market and creates a distribution channel to
push the product to the market - Figure 6.6(a).
• The typical motivation for a push approach is to optimise
the production process for cost and efficiency.
• The alternative approach consistent with ECR is the pull
model, which is focused on the customer’s needs and
starts with analysis of their requirements through market
research and close cooperation with customers and
suppliers in new product development (Figure 6.6(b)).
Figure 6.6 Push and pull approaches
to supply chain management
Figure 6.6 Push and pull approaches
to supply chain management
(Continued)
The Value Chain
• Value chain (VC)
• A model that considers how supply chain activities can add
value to products and services delivered to the customer.
• • within each element of the value chain, such as
procurement, manufacture, sales and distribution;
• • at the interface between elements of the value chain
such as between sales and distribution.
• In equation form this is:
• Value = (Benefit of each VC activity - Its cost) + (Benefit of
each interface between VC activities - Its cost)
The Value Chain
• Traditional value chain analysis (Figure 6.7(a))
distinguishes between primary activities that contribute
directly to getting goods and services to the customer and
support activities, which provide the inputs and
infrastructure that allow the primary activities to take place.
• It can be argued that, with the advent of digital business,
the support activities offer far more than just support;
indeed, having effective information systems and
management of human resources contributes critically to
the primary activities.
The Value Chain
• The virtual value chain involves electronic commerce
used to mediate traditional value chain activities such as
market research, procurement, logistics, manufacture,
marketing and distribution.
• The processing is machine-based or ‘virtual’ rather than
paper-based.
• Human intervention is still required in many activities, but
the ‘virtuality’ of the value chain will increase as software
agents increasingly perform these activities.
Figure 6.7 Two alternative models of the
value chain: (a) traditional value chain
model; (b) revised value chain model
Source: Adapted from Deise et al. (2000) Figure 6.4(b).
Figure 6.8 Members of the value
network of an organisation
Source: Adapted from Deise et al. (2000).
Value Stream
• The value stream is a concept closely related to the value chain.
• The difference is that it considers different types of tasks that are
involved with adding value and looks at how the efficiency of these
tasks can be improved.
• Womack and Jones (1998) define the value stream as: the set of
all the specific actions required to bring a specific product through
the three critical management tasks of any business:
• 1 the problem-solving task [the processes of new product
development and production launch];
• 2 the information management task [the processes of order taking,
scheduling to delivery];
• 3 the physical transformation task [the processes of transforming
raw materials to finished product delivered to customers].
Customer Value
• Returning to the definition of customer value from Deise et al. (2000)
shown in the equation below, we can see that the lean thinking
approach proposed by Womack and Jones is aimed at adding value
by cutting out waste in each of these three management tasks.
• By reducing new product development and production times and
costs, organisations can then either increase customer value by
decreasing fulfilment time or price, and/or increasing product and
service quality.
• Clearly, e-commerce plays a key role in decreasing time to market and
production times and costs.
Value Chain Analysis
• This is an analytical framework for decomposing

an organisation into its individual activities and
determining value added at each stage.
• In this way the organisation can then assess how
effectively resources are being used.
• It may be possible to use information systems to
increase the efficiency of resource usage for each
element in the value chain and even between
activities.
• 1 Step 1: Assess the information intensity of the value chain (i.e.
the level and usage of information within each value chain activity
and between each level of activity).
• The higher the level of intensity and/or the higher the degree of
reliance on good-quality information, the greater the potential
impact of new information systems.
• 2 Step 2: Determine the role of IS in the industry structure. It is also
important here to understand the information linkages between
buyers and suppliers within the industry and how they and
competitors might be affected by and react to new information
technology.
• 3 Step 3 Identify and rank the ways in which IS might create
competitive advantage. High-cost or critical activity areas present
good targets.
• 4 Step 4 Investigate how IS might spawn new businesses.

• 5 Step 5 Develop a plan for taking advantage of IS, which
is businessdriven rather than technology-driven.
• The plan should assign priorities to the IS investments
(which of course should be subjected to an appropriate
cost-benefit analysis).
Restructuring Internal Value Chain
• Traditional models of the value chain (such as Figure 6.7(a))
have been reevaluated with the advent of global electronic
communications.
• It can be suggested that there are some key weaknesses in the
traditional value chain model:
• • It is most applicable to manufacturing of physical products as
opposed to providing services.
• • It is a one-way chain involved with pushing products to the
customer; it does not highlight the importance of understanding
customer needs.
• • The internal value chain does not emphasise the importance
of value networks (although Porter (1980) did produce a
diagram that indicated network relationships)
Technology options and standards
for supply chain management
• • EDI, which is an established and relatively simple
method of exchanging orders, delivery notes and invoices;
• • XML- or XML-EDI-based data transfer, which enables
more sophisticated one-to-many data transfers such as a
request for orders being transmitted to potential suppliers;
• • middleware or software, used to integrate or translate
requests from external systems in real time so they are
understood by internal systems and follow-up events will
be triggered;
• • manual email orders or online purchase through a
traditional web-based ecommerce store for B2B.
Typical benefits of e-supply chain
management
• 1 Increased efficiency of individual processes. If the B2B
company adopts e-procurement this will result in a faster
cycle time and lower cost per order.
• Benefit: reduced cycle time and cost per order.
• 2 Reduced complexity of the supply chain. This is the
process of disintermediation referred to in Chapter 2. Here
the B2B company will offer the facility to sell direct from its
e-commerce site rather than through distributors or
retailers.
• Benefit: reduced cost of channel distribution and sale.
Typical benefits of e-supply chain
management
• 3 Improved data integration between elements of the supply chain.
The B2B company can share information with its suppliers on the
demand for its products to optimise the supply process.
• Benefit: reduced cost of paper processing.
• 4 Reduced cost through outsourcing. The company can outsource
or use virtual integration to transfer assets and costs such as
inventory holding costs to third-party companies.
• Benefits: lower costs through price competition and reduced
spend on manufacturing capacity and holding capacity.
• 5 Innovation. eSCM should make it possible to be more flexible in
delivering a more diverse range of products and to reduce time to
market.
• Benefit: better customer responsiveness.
IS-supported upstream supply chain
management
• RFID tags have become a revolutionary element in supply chain
management and are widely used for logistics purposes.
• They can be attached to individual product items in a warehouse or in a
retail location.
• With appropriate RFID reader technology they can then be used to
assess stock levels.
• With the possibility of the RFID reader being connected to a system to
upload item location and status to the Internet, this approach is referred to
as the Internet of Things.
• Recently, more companies are integrating RFID technology into their
strategic planning, since it provides significant advantages to supply chain
performance.
• There are far more benefits gained by RFID implementation into supply
chain and logistics operations than just improving identification of
products, shipments and assets.
Figure 6.9 The characteristics of vertical
integration, vertical disintegration and
virtual integration
IS infrastructure for supply chain
management
• Information systems need to deliver supply chain
visibility to different parties who need to access the
supply chain information of an organisation, whether they
be employees, suppliers, logistics service providers or
customers.
• Users need to be able to personalise their view of the
information according to their needs - customers want to
see the status of their order, suppliers want to access the
organisation’s database to know when their customer is
next likely to place a major order.
• Security is also important - if a company has differential
pricing, it will not want customers to see price differences.
Figure 6.10 A typical IS infrastructure for
supply chain management
Strategies for supply chain
improvement
• Strategies for supply chain improvement have been categorised by
Hughes et al. (1998) according to the scope of change and the
speed of change.
• Figure 6.11 illustrates four strategic options for the supply chain. The
two strategies that are relatively limited in scope apply to individual
processes such as procurement or outbound logistics and can be
thought of as delivering improvement at an operational level.
• These may give short-term benefits while minimising the risk of more
radical change.
• Conversely, where the scope of change is more extensive there is a
greater risk, but also greater potential reward.
• These changes include complete re-engineering of processes or
major changes to the supply chain.
Figure 6.11 Alternative strategies for modification
of the digital business supply chain
How important is procurement?
• ‘We estimate that for every dollar a company
earns in revenue, 50 cents to 55 cents is spent
on indirect goods and services – things like office
supplies and computer equipment.
• That half dollar represents an opportunity: By

driving costs out of the purchasing process,
companies can increase profits without having
to sell more goods.’ Hildebrand (2002)
Table 6.5 Process flow analysis for traditional
procurement (typical cycle time, 5.5 days)
Note: See Table 6.6 on p. 285 for key to symbols
Table 6.6 Process flow analysis for new
e-procurement (typical cycle time, 1.5 days)
Types of procurement
• Businesses tend to buy by one of two methods:
• • Systematic sourcing - negotiated contracts with
regular suppliers.
• • Spot sourcing - fulfilment of an immediate need,
typically of a commoditised item for which it is less
important to know the credibility of the supplier.
• Often items such as stationery are purchased
repeatedly, either for identical items (straight
rebuy) or with some changes (modified rebuy).
• E-procurement systems can make rebuys more
straightforward.
Types of e-procurement
• 1 E-sourcing. Finding potential new suppliers using the Internet during the
information-gathering step of the procurement process.
• 2 E-tendering. The process of screening suppliers and sending suppliers

requests for information (RFI) or requests for price (RFP).
• 3 E-informing. Qualification of suppliers for suitability. It doesn’t involve

transactions but instead handles information about the supplier’s quality,
financial status or delivery capabilities.
• 4 E-reverse auctions. Enable the purchasing company to buy goods and

services that have the lowest price or combination of lowest price and other
conditions via Internet technology.
• 5 eMRO and web-based ERP. These involve the purchase and supply of
products that are the core of most e-procurement applications. The software
used manages the process of creating and approving purchasing
requisitions, placing orders and receiving the goods or services ordered.
Figure 6.14 Use of different information systems
for different aspects of the Fulfilment cycle
Figure 6.15 The three main e-procurement
model alternatives for buyers
Figure 6.16 Integration between
e-procurement systems and catalogue data
Summary
• You should be able to identify the main
elements of supply chain management and
e-procurement
• You should be able to assess the potential of
information systems to support supply chain
management and e-procurement
• You should be able to analyse procurement
methods to evaluate cost savings

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Digital Business and E-Commerce

Baily et al. (1994)

Source: Adapted from Deise et al. (2000) Figure 6.4(b).

Source: Adapted from Deise et al. (2000).

• This is an analytical framework for decomposing

• 4 Step 4 Investigate how IS might spawn new businesses.

• That half dollar represents an opportunity: By

Note: See Table 6.6 on p. 285 for key to symbols

• 2 E-tendering. The process of screening suppliers and sending suppliers

• 3 E-informing. Qualification of suppliers for suitability. It doesn’t involve

• 4 E-reverse auctions. Enable the purchasing company to buy goods and

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