CHAPTER 4

Using Information Technology

After reading this chapter you will be able to

• Assess the technology that is available to support and enable effective supply chain operations
• Appreciate new technology trends and the business capabilities that they will enable
• Better understand how to apply this technology to your own supply chain operations

Information Systems that Support the Supply Chain

Information technology supports internal operations and also collaboration between companies in a supply chain. Using high-speed data networks and databases, companies can share data to better manage the supply chain as a whole and their own individual positions within the supply chain. The effective use of this technology is a key aspect of a company's success.

Although many readers of this book do not need to understand all the aspects and nuances of information technology (IT), every reader does need to understand the basic concepts that apply to using this technology effectively. Let's start with a simple reference model to describe IT. Then we'll use this model to classify and gain perspective on available technology and how it can be used.

All information systems are composed of technology that performs three main functions: data capture and communication; data storage and retrieval; and data manipulation and reporting. Different information systems have different combinations of capabilities in these three functional areas. The specific combination of capabilities is dependent on the demands of the job that a system is designed to perform. Information systems that are employed to support various aspects of supply chain management are created from technologies that perform some combination of these three functions.

Data Capture and Data Communications

The first functional area is composed of systems and technology that create high speed data capture and communications networks. We look at:

• The Internet
• Broadband
• Electronic Data Interchange (EDI)
• eXtensible Markup Language (XML)

The Internet

The Internet is the global data communications network that uses what is known as Internet Protocol (IP) standards to move data from one point to another. The Internet is the universal communication network that can connect with all computers and communication devices. Once a device is hooked into the Internet it can communicate with any other device that is also connected to the Internet, regardless of the different internal data formats that they may use.

Before the Internet, companies had to put in expensive dedicated networks to connect themselves to other companies and move data between their different computer systems. Now, with the Internet already in place, different companies have a way to quickly and inexpensively connect their computer systems. If needed, extra data protection and privacy can be provided by using technology to create virtual private networks (VPN), which utilize the Internet to create very secure communication networks.

Broadband

Basically, this means any communication technology that offers high speed (faster than a 56Kb dial-up modem) access to the Internet with a connection that is always on. This includes technologies such as coaxial cable, digital subscriber line (DSL), metro Ethernet, fixed wireless, and satellite. Broadband technology is spreading and, as it does, it becomes possible for companies in a supply chain to easily and inexpensively hook up with each other and exchange large volumes of data in real time.

Most companies have connected themselves internally using local area network (LAN) technology such as Ethernet that gives them plenty of internal communication capability. Many companies have connected some or all of their different geographical locations using wide area network (WAN) technology such as T1, T3, or frame relay. What now needs to happen is high speed, relatively low-cost connections between separate companies, and that is the role that wireless broadband and cloud computing is playing (see pg. 133).

Electronic Data Interchange (EDI)

Electronic data interchange (EDI) is a technology that was developed to transmit common types of data between companies that do business with each other. Large companies in the manufacturing, automobile, and transportation industries deployed it in the 1980s. It was built to automate back office transactions such as the sending and receiving of purchase orders (known as an “850” transaction), invoices (an “810”), advance shipment notices (an “856”), and back order status (an “855”) to name just a few. It originally was built to run on big, mainframe computers using value-added networks (VANs) to connect with other trading partners. That technology was expensive.

Many companies have large existing investments in EDI systems and find that it is very cost effective to continue to use these systems to communicate with other businesses. Standard EDI data sets have been defined for a large number of business transactions. Companies can decide which data sets they will use and which parts of each data set they will use. EDI systems can now run on any type of computer from mainframe to PC and can use the Internet for data communication as well as VANs. Costs for EDI technology have come down considerably.

Extensible Markup Language (XML)

XML (eXtensible Markup Language) is a technology that is being developed to transmit data in flexible formats between computers and between computers and humans. Where EDI uses rigid, predefined data sets to send data back and forth, XML is extensible and, once certain standards have been agreed upon, XML can also be used to communicate a wide range of different kinds of data and related processing instructions between different computer systems. XML can also be used to communicate between computers and humans because it can drive user interfaces such as web browsers and respond to human input. Unlike EDI, the exact data transactions and processing sequences do not have to be previously defined when using XML.

There are many evolving XML standards in different industries but as yet none of these standards has been widely adopted. The industry that has made the most progress in adopting XML standards is the electronics industry. It is beginning to implement the RosettaNet XML standards.

In the near term, XML and EDI are merging into hybrid systems that are evolving to meet the needs of companies in different supply chains. It is not cost effective for companies with existing EDI systems that are working well enough to replace them with newer XML systems all at once. So XML extensions are being grafted onto EDI systems. Software is available to quickly translate EDI data to XML and then back to EDI. Service providers are now offering Internet-based EDI to smaller suppliers who do business with large EDI-using customers.

In the longer term, EDI will be wholly consumed by XML as XML standards are agreed upon and start to spread. As these standards spread they will enable very flexible communication between companies in a supply chain. XML will allow communication that is more spontaneous and freeform, like any human language. This kind of communication will drive a network of computers and people interacting with other computers and other people. The purpose of this network will be to coordinate supply operations on a daily basis.

Data Storage and Retrieval

The second functional area of an information system is composed of technology that stores and retrieves data. This activity is performed by database technology. A database is an organized grouping of data that is stored in an electronic format. The most common type of database uses what is called “relational database” technology. Relational databases store related groups of data in individual tables and provide for retrieval of data with the use of a standard language called structured query language (SQL).

A database is a model of the business processes for which it collects and stores data. The model is defined by the level of detail in the data it collects. The design of every database has to strike a balance between highly aggregate data at one extreme and highly detailed data at the other extreme. This balance is arrived at by weighing the needs and budget of a business against the increasing cost associated with more and more detailed data. The balance is reflected in what is called the data model of the database.

As events occur in a business process, there are database transactions. The data model of the database determines which transactions can be recorded since the database cannot record transactions that are either more detailed or more aggregated than provided for in the data model. These transactions can be recorded as soon as they happen—called “realtime” updating—or they may be captured and recorded in batches that happen on a periodic basis—called “batch” updating.

A database also provides for the different data-retrieval needs of the people who use it. People doing different jobs will want different combinations of data from the same database. These different combinations are called “views.” Views can be created and made available to people who need them to do their jobs. For instance, consider a database that contains sales history for a range of different products to a range of different customers. A customer view of this data might show a customer the different products and quantities they purchased over a period of time and show detail of the purchases at each customer location. A manufacturer view might show all the customers who bought their group of products over a period of time and show detail for the products that each customer bought.

Data Manipulation and Reporting

Different supply chain systems are created by combining processing logic to manipulate and display data with the technology required to capture, communicate, store, and retrieve data. The way that a system manipulates and displays the data that flows through it is determined by the specific business operations that the system is designed to support. Information systems contain the processing logic needed by the business operations they support. Chopra and Meindl define several kinds of systems that support supply chain operations:

• Enterprise Resource Planning (ERP)
• Procurement Systems
• Advanced Planning and Scheduling (APS)
• Transportation Planning Systems
• Demand Planning
• Customer Relationship Management (CRM) and Sales Force Automation (SFA)
• Supply Chain Management (SCM)
• Inventory Management Systems
• Manufacturing Execution Systems (MES)
• Transportation Scheduling Systems
• Warehouse Management Systems (WMS)

Enterprise Resource Planning

Enterprise Resource Planning (ERP) systems gather data from across multiple functions in a company. ERP systems monitor orders, production schedules, raw material purchases, and finished-goods inventory. They support a process-oriented view of business that cuts across different functional departments. For instance, an ERP system can view the entire order-fulfillment process and track an order from the procurement of material to fill the order to delivery of the finished product to the customer.

ERP systems come in modules that can be installed on their own or in combination with other modules. There are usually modules for finance, procurement, manufacturing, order fulfillment, human resources, and logistics. The focus of these modules is primarily on carrying out and monitoring daily transactions. ERP systems often lack the analytical capabilities needed to optimize the efficiency of these transactions.

Procurement Systems

Procurement systems focus on the procurement activities that take place between a company and its suppliers. The purpose of these systems is to streamline the procurement process and make it more efficient. Such systems typically replace supplier catalogs with a product database that contains all of the needed information about products the company buys. They also keep track of part numbers, prices, purchasing histories, and supplier performance.

Procurement systems allow people to compare the price and performance capabilities of different suppliers. This way the best suppliers are identified so that relationships can be established with these suppliers and prices negotiated. The routine transactions that occur in the purchasing process can then be largely automated.

Advanced Planning and Scheduling

Advanced Planning and Scheduling (APS) systems are highly analytical applications whose purpose is to assess plant capacity, material availability, and customer demand. These systems then produce schedules for what to make in which plant and at what time. APS systems base their calculations on the input of transaction-level data that is extracted from ERP or legacy transaction-processing systems. They then use linear programming techniques and other sophisticated algorithms to create their recommended schedules.

Transportation Planning Systems

Transportation Planning Systems are systems that calculate what quantity of materials should be brought to what locations at what times. The systems enable people to compare different modes of transportation, different routes, and different carriers. Transportation plans are then created using these systems. The software for these systems is sold by system vendors. Other providers—known as content vendors—provide the data that is needed by these systems, such as mileage, fuel costs, and shipping tariffs.

Demand Planning

Demand-planning systems use special techniques and algorithms to help a company forecast its demand. These systems take historical sales data and information about planned promotions and other events that can affect customer demand, such as seasonality and market trends. They use this data to create models that help predict future sales.

Another feature that is often associated with demand planning systems is revenue management. This feature lets a company experiment with different price mixes for its different products in light of the predicted demand. The idea is to find a mix of products and prices that maximizes total revenue to the company. Companies in the travel industry such as airlines, rental car agencies, and hotels are already using revenue management techniques. These techniques will spread to other industries.

Customer Relationship Management and Sales Force Automation

Systems of this type automate many of the tasks related to servicing existing customers and finding new customers. Customer Relationship Management (CRM) systems track buying patterns and histories of customers. They consolidate a company's customer-related data in a place where it is quickly accessible to customer-service representatives and salespeople who use the data to better respond to customer requests.

Sales Force Automation (SFA) systems allow a company to better coordinate and monitor the activities of its sales force. These systems automate many of the tasks related to scheduling sales calls and follow-up visits and preparing quotes and proposals for customers and prospects.

Supply Chain Management

Supply Chain Management (SCM) systems are suites of different supply chain applications, such as those described here, that are tightly integrated with each other. An SCM system could be an integrated suite that contains advanced planning and scheduling, transportation planning, demand planning, and inventory planning applications. SCM systems rely on ERP or relevant legacy systems to provide them with the data to support the analysis and planning that they do. These systems have the analytical capabilities to support strategic-level decision making.

Inventory Management Systems

These systems support the activities described in Chapter 2 that are part of inventory management such as tracking historical demand patterns for products, monitoring inventory levels for different products, and calculating economic order quantities and the levels of safety inventory that should be held for each product. These systems are used to find the right balance for a company between the cost of carrying inventory and the cost of running out of inventory and losing sales revenue because of that.

Manufacturing Execution Systems

The focus is on carrying out the production activities in a factory. This kind of system is less analytical than an APS. It produces short-term production schedules and allocates raw materials and production resources within a single manufacturing plant. A Manufacturing Execution System (MES) is similar in its operational focus to an ERP system and frequently MES software is produced by ERP software vendors.

Transportation Scheduling Systems

Systems in this category are similar to ERP and MES applications in that they are less analytical and more focused on daily operational issues. A transportation scheduling system produces short-term transportation and delivery schedules that are used by a company.

Warehouse Management Systems

Warehouse Management Systems (WMS) support daily warehouse operations. They provide capabilities to efficiently run the ongoing operations of a warehouse. These systems keep track of inventory levels and stocking locations within a warehouse and they support the actions needed to pick, pack, and ship product to fill customer orders.

New Trends in Supply Chain Technology

The demands of our global economy are forcing companies and entire supply chains to adopt more flexible and responsive modes of operation. Both the interdependence of companies and economies, and the rapid and often unexpected pace of events call for responses from companies that are faster and also more well thought out than what was required in the past.

In order to rise to this challenge, companies must find ways to leverage the supply chain systems previously described, which they already have in place or that they are currently installing. They need to find ways to provide these systems with more timely and more accurate data and better coordinate the use of these systems. Companies need to achieve overall supply chain improvements and not just improvements in individual supply chain activities.

There are four promising technologies that can be used to complement existing supply chain systems. These technologies do not replace existing systems. In fact they require that there be an existing infrastructure of systems to provide the foundation upon which they can be installed.

Once installed, these technologies provide ways to better collect data needed by existing systems. They also provide better ways to share data among systems and to make that data visible and meaningful to people who need it. They also provide people with a way to devise well thought out and more effective responses to challenges and opportunities. These four technologies are:

1. Radio Frequency Identification (RFID)
2. Business Process Management (BPM)
3. Business Intelligence (BI)
4. Simulation Modeling

IN THE REAL WORLD

Radio Frequency Identification

This is a much-talked-about technology for supply chain management. What is new is the opportunity to start using this technology widely to track pallets, cases, and even individual items as they move through supply chains from manufacturers to end-use customers. Radio frequency identification (RFID) technology itself is not new and has been in use in specialized applications for more than 20 years. Now the technology is maturing and the related costs of using it are coming way down. Where the technology was once used to track movement of items within a facility or within a single company, it is now becoming cost effective to start using RFID to track products moving through supply chains that stretch all the way around the globe.

When we talk about RFID we need to understand that there are two parts to this discussion. The first part is about the technology itself, the electronic devices that make RFID systems a reality. The second part is about the information or the content this technology enables us to capture and share. It is important to understand both parts of RFID in order to appreciate how it can be such a powerful driver of supply chain efficiency.

RFID Technology RFID technology is composed of hardware such as RFID tags and the radio-frequency scanners and antennas that enable these hardware devices to communicate with each other. Let's start with the RFID tags. They come in two varieties—active and passive. Active tags have their own power source and continuously broadcast their information. Passive tags are tags where the tag has no energy of its own. When a passive RFID tag passes by a radio-frequency scanner the energy from the radio scanner activates passive tags and induces them to broadcast their data, which is then picked up by the antenna of a data reader.

The scanners operate at certain radio frequency levels and at certain power levels. The RFID tags, whether active or passive, broadcast their information on certain frequencies. There are standards published for these frequencies and power levels but the technology is still improving and standards are evolving.

Passive RFID tags are by far the most widely used. This is because their cost and complexity is much lower than that of active tags. Large companies, especially in the consumer-goods retail industry such as Wal-Mart, are mandating that their suppliers start using passive RFID tags on the products that they ship. Initially these tags are required only at the pallet and case level. As the technology matures, as people gain more experience in the use of the technology, and prices continue to come down, RFID tags will start being required on the individual items themselves.

RFID Information RFID information is composed of descriptive data about the product itself and of tracking data that traces the movement of the product through the supply chain. It makes sense for there to be a single worldwide standard for this information so that people all over the world in different companies and countries can read the data easily and not have to translate it from one standard to another. At present there is one organization that is setting standards for product information. This organization is called GS1 (www.gs1.org) and it is a combination of two previous organizations, the Uniform Code Council and EAN International. The Uniform Code Council was the originator of the Universal Product Code or UPC number. EAN International created the European Article Number or EAN.

The two item numbering schemes—UPC and EAN—were combined in 1997, and starting in 2005 all participants in a supply chain were required to handle product identification data that is in the combined format. This is referred to as the “14-digit UPC” in North America or the “13-digit EAN plus check digit” in Europe. The GS1 organization also introduced a new term for these item-numbering schemes. The term is Global Trade Item Number or GTIN and it refers to the fact that there is now just one unified 14-digit numbering scheme.

The GTIN is a part of a global item-numbering scheme that GS1 has introduced called the Electronic Product Code or EPC. The EPC consists of four components or data fields. Those components are: (1) the version code that tells what version of EPC is being used; (2) the manager code that tells what organization created the EPC number; (3) the object class that defines the type of item or service; and (4) the serial number that identifies a specific individual instance of the item or service. The GTIN already contains data for the manager code and the object class, so you can think of EPC as a GTIN (or a UPC or EAN) with a serial number attached. Organizations can register with GS1. They will be assigned a manager code and can begin using the EPC standards.

At present most companies use systems based on the EPC information standards combined with passive RFID tags. In these systems a radio scanner activates a passive RFID tag that sends its EPC number to a data reader. The data reader sends the EPC number to an application system that uses the Internet to communicate with a system called the EPC Global Network. The EPC Global Network is a system designed by GS1 that enables companies to find out what kind of item an EPC number refers to and get more information about that specific item such as its manufacture date and its movement history through the supply chain. Exhibit 4.2 shows how this process works.

RFID Benefits and Problems The benefits of RFID are significant. To begin with, it offers a much lower-cost way to capture data about products and their movements through a supply chain. The data that is captured is also more accurate and it can go to great levels of detail. Data can go from the level of shipping containers to pallets to cases and down to individual items. This enables much more visibility of inventory and product flows in supply chains. The increased visibility makes it possible to operate supply chains more efficiently, leading to lower costs. And finally, because data is captured and stored so much more efficiently, it is also easier to share this data with other parties in a supply chain. This makes supply chain collaboration more effective and increases overall supply chain productivity.

There are problems with RFID as well. The technology itself is still improving and it can be difficult at times to get it to work as expected. As companies begin using the technology, they find that it takes time to set up systems of RFID tags and radio scanners so that there is a high enough read rate on the data readers. If passive RFID tags are blocked by metal or liquids or other tags then it can be difficult for data readers to accurately read all the RFID tags that flow past them. Data-read rates can be very low at first and it takes time and trial and error to get read-rate percentages up into the high 90s.

EXHIBIT 4.2

The EPC Global Network and its various subsystems are also still works in progress. The goal is for any company anywhere that reads an EPC number to be able to instantly access information describing the specific item and its supply chain movement. This is not always a reality. It will take a lot of work for product manufacturers to register their EPC numbers with the EPC Global Network and keep them constantly up to date. It will take work for other supply chain companies such as logistics and distribution companies to register with GS1 and record data that tracks product movements. In addition the EPC Global Network and the EPC standards must keep pace with global developments and evolve to meet changing needs in different regions of the world and in different industries.

Business Process Management

A process is a sequence of steps that lead to the delivery of a specified product or service. When you think about it you realize that business processes themselves are assets of an organization just as much as the organization's people, products, and information. The way that an organization uses its people, products, and information show up in the way its business processes operate.

Business process management (BPM) is a way for companies to carry out a continuous, incremental process of improving their operational performance. A company starts by mapping out its key processes. The company defines the steps in a process and uses BPM software to collect and display a continuous stream of data that shows the movement of transactions through each step. The BPM software can be used to automate many of the routine tasks such as moving different kinds of data from one task to another. It can also be set to detect certain error conditions and send automatic alerts to people who need to respond to these conditions quickly.

When used effectively, BPM software makes a business process visible to the people who are responsible for the efficient operation of that process. When people involved in the operation of a business process see what is happening as it is happening, they can take effective action to respond to problems and to improve productivity. The process-performance data that BPM software collects also provides a base of information that people can use to design new processes when existing ones are no longer able to meet business needs.

Business Intelligence

Because of the fast pace of change in markets and their supply chains, it is very important for people and organizations to stay current with events as they happen and understand what these events mean. Business intelligence (BI) systems help companies to understand what is happening within their own organizations and within the markets they serve.

BI systems collect, store, and analyze data. They collect data using many different sources. Data can be collected from sensors and RFID scanners. Data can be collected by BPM systems, or data can be obtained from the many transaction-processing systems in a company such as ERP systems, order entry systems, or CRM systems. Once the data is collected, it is stored in a database where people access it as needed. Often the database is updated with new data on a continuous or realtime basis.

When people access the data they use BI software tools that help them analyze the data and display the results. BI software tools run the range from simple spreadsheets and charts to complex multivariable regression analysis and linear programming. The proper mix of BI tools is determined by the needs of the people in a situation and their skill and training levels. Scientists doing molecular research have very demanding needs and they are also a highly skilled and educated group of people. Running an efficient supply chain is a very demanding job but people do not need the type of sophisticated BI tools called for in molecular research.

Successful BI systems are tailored to best support the people using them. In Chapter 5 we discuss the techniques and metrics for measuring supply chain performance. In light of these requirements, we then examine the structure of a BI system that is designed to meet the needs of people responsible for running a supply chain. This provides a good example of how BI is used to support supply chain operations (see pages 178–181).

Simulation Modeling

Simulation modeling software is a category of software that is growing rapidly. Because of the fast pace of change in business, companies are faced with the need to make important decisions more often and these decisions have significant consequences on company operations and profitability. Companies are faced with decisions such as where to build a new factory or distribution center and what is the best way to lay out and equip a new facility.

Simulation modeling software allows people to create a model of a factory or a supply chain or a delivery route and then subject that model to different inputs and different situations and observe what happens. A design that may seem good on paper could very well turn out to have problems that are not apparent until the design is modeled and its performance is simulated under a range of different conditions. It is much faster and cheaper to find this out through simulations than to find out the hard way through real experience (see Chapter 7 for more on this idea).

Companies that use BPM systems to manage their work processes can use the BPM process definitions to create models of their processes. Then they can use the data they collect in their BI systems to provide the input for simulating these processes under different business conditions. They can experiment with new ways to organize their work as business conditions evolve. By using simulation models and data from their BI systems, companies are able to test out new business models before they actually commit to them. And when new models are implemented there is much less risk because they have been tested. The models that are selected are shown to be the ones that offer the best performance and are much less likely to have serious problems.

The Impact on Supply Chain Operations

Although each of these new technologies is interesting and useful all by themselves, their true potential is realized when they are used in conjunction with each other. Just as Wal-Mart designed its supply chain based on the combination of four complementary practices (see Chapter 1 Executive Insight on page 18), companies once again have the opportunity to design extraordinary supply chains based on the use of combinations of these four new technologies (also see Chapter 7).

RFID technology can provide a steady stream of data that tracks individual items through a supply chain. This data can be monitored through the use of BPM systems and combined to provide a comprehensive end-to-end picture of the products flowing through a supply chain. BPM systems can update this picture on a real-time or near realtime basis and show people where the bottlenecks and disruptions are that need their attention.

Once people have identified the bottlenecks and disruptions in a supply chain, they can make use of BI databases and analytical software to investigate the situations and identify root causes of these problems. When root causes are identified, people can design ways to address these problems. Then by using simulation systems they can model potential supply chain process changes and see the probable impact of each different process change. In this way people quickly select the most effective changes and implement them with a high level of confidence that they will actually deliver the desired results.

Just as Wal-Mart rose to dominate its markets through the development of a highly efficient supply chain, there are opportunities once again for companies and alliances of companies to collaborate and create a new breed of supply chains that will be a key factor in achieving new levels of efficiency and responsiveness. This new level of supply chain performance will enable the rise of new companies and whole new industries. The potential of these new supply chains is further explored in the last chapter of this book.

A Combination of Technologies Creates Cloud Computing

Since the turn of this century, several different but related kinds of information technology have been evolving rapidly, and they are now combining to make it possible to deliver computing resources on demand to companies almost anywhere in the world. The combination of technologies, such as the Internet, Web browsers, server virtualization, parallel computing, and open source software, produces a whole new set of possibilities for delivering computing resources.

The term “cloud computing” is now used to describe the result of combining these technologies. IT vendors are offering combinations of these technologies to companies that want to outsource some or all of their traditional IT operations such as running data centers and operating traditional application packages, like ERP, CRM, and other business support applications.

The exact definition of cloud computing is still evolving. Cloud computing is both a model for delivery of business-computing services and a method for managing and operating computing hardware and software infrastructure. Different IT vendors put their own spin on their definitions, but they share more commonality in their definitions than differences. Here are two working definitions:

• “Consumer and business products, services, and solutions delivered and consumed in real time over the Internet” (Frank Gens, “Defining “Cloud Services”—an IDC update,” IDC Exchange, (September 30th 2009), http://blogs.idc.com/e/?p=422)
• “…a broad array of Web-based services aimed at allowing users to obtain a wide range of functional capabilities on a ‘pay-as-you-go’ basis that previously required tremendous hardware/software investments and professional skills to acquire.” (Jeff Kaplan, “Simplifying the Term ‘Cloud Computing’” Datamation.com Blog, (June 25, 2009), http://itmanagement.earth-web.com/netsys/article.php/3826921/Simplifying-the-Term-Cloud-Computing.htm)

There are three characteristics that everyone seems to accept when it comes to describing cloud computing. Everyone agrees that cloud computing has the characteristics of:

1. Practically Unlimited Computing Resources—Resources such as computing power, data storage space, and additional user sign-on IDs for applications are available on demand as needed, and this enables a high degree of agility and scalability in meeting evolving business needs.
2. No Long-Term Commitments—Computing resources are immediately available and they may be used as long as needed and then retired because they are acquired on a month-to-month or even a minute-to-minute basis.
3. Pay-as-You-Go Cost Structure—Because there are no longterm commitments, the cost of cloud computing resources is a variable cost, not a fixed cost; cost fluctuates depending on the amount of usage.

For a more detailed and far-reaching discussion of cloud computing and its impact on business operations please see my book Business in the Cloud: What Every Business Needs to Know about Cloud Computing (Hugos and Hulitzky, Business in the Cloud, John Wiley & Sons, Hoboken NJ, 2010).

Assessing Technology and System Needs

When evaluating different systems that can be used to support your supply chain it is important to keep in mind your goal—the reason for using any of these systems. What customers desire is good service and good prices. That is what guides them when they select companies to do business with. Technology is not an end in itself. It is only a means to enable a company to be of service to its customers. People and organizations that keep this in mind will do well.

Technology can be impressive, but in business, technology is only important insofar as it enables a company or an entire supply chain to profitably deliver valuable products and services to its customers. Do not let the complexity or the details of any technology or system be a distraction from this basic truth. Indeed, any technology that is highly complex or that is touted as being “state of the art” or “leading edge” is probably more suited for a research laboratory than it is for a business operation.

Success in supply chain management comes from delivering the highest levels of service at the lowest cost. Technology is expensive and it can quickly add a lot of cost to business operations. Keep in mind that it is a far better thing to use simple technology well than to use sophisticated technology in a clumsy manner.

E-Business and Supply Chain Integration

The widespread availability and use of the Internet offers companies opportunities that did not exist before. These opportunities are made possible because it is now so easy and relatively inexpensive for companies to connect to the Internet. Once connected, companies can send data to and receive data from other companies that they do business with, regardless of the particular computers or software that individual companies may be using to run their internal operations. Based on this data sharing, opportunities exist to achieve tremendous supply chain efficiencies and significant increases in customer service and responsiveness. These are the results of better supply chain integration.

EXECUTIVE INSIGHT

E-business encompasses the evolving set of principles and practices that companies are employing to gain the benefits inherent in better supply chain integration. In the words of professors Hau Lee and Se-ungjin Whang of Stanford University, e-business specifically refers to “the planning and execution of the front-end and back-end operations in a supply chain using the Internet.”

In a white paper titled “E-Business and Supply Chain Integration” published by the Stanford Global Supply Chain Management Forum, professors Lee and Whang lay out four key dimensions of the impact of e-business on supply chain integration. These four dimensions create a sequence of greater and greater integration and coordination among supply chain participants. This sequence culminates in the creation of whole new ways to conduct business. The four dimensions are:

1. Information Integration—Is the ability to share relevant information among companies in a supply chain. This includes data such as: sales history and demand forecasts; inventory status; production schedules; production capacities; sales promotions; and transportation schedules. This data should be available to the people who need it in a real-time, on-line format via the Internet or private network.
2. Planning Synchronization—Refers to the joint participation of companies in a supply chain in the demand forecasting and inventory replenishment scheduling. It also includes the collaborative design, development, and bringing to market of new products.
3. Work-Flow Coordination—Is the next step after planning synchronization. It is the streamlining and automation of ongoing business activities across companies in a given supply chain. This includes activities such as purchasing and product design.
4. New Business Models—Can emerge as a result of supply chain integration made possible by the Internet. Roles and responsibilities of companies in a supply chain can be redesigned so that each company can truly concentrate on the activities that are its core competencies. Noncore activities can be outsourced to other companies. New capabilities and efficiencies will become possible.

Companies are looking at how to achieve efficiencies in a broad range of supply chain operations such as product design, demand forecasting, inventory management, and customer service. The key to realizing these efficiencies is information sharing between companies in a supply chain. Many current e-business developments are working on methods and standards to share information across multiple companies. Information sharing is the foundation, and then cross-company coordination is what will deliver the desired efficiencies. Once information integration is in place, the next three dimensions: planning synchronization; workflow coordination; and new business models can evolve much more rapidly. E-business and supply chain development has only just begun.

Chapter Summary

The use of supporting technology is necessary for effective supply chain operations. All information systems are composed of technology that performs three main functions. These three functions are: (1) data capture and communication; (2) data storage and retrieval; and (3) data manipulation and reporting. Different supply chain information systems have different combinations of capabilities in these functional areas. Systems such as ERP, CRM, and MES are all examples of systems that consist of combinations of these three functions.

New technologies are having a strong impact on supply chain management. Some technologies that are changing the way businesses manage their supply chains are RFID, BPM, BI, and simulation modeling. These technologies do not replace older systems, but instead build upon the foundation of system functionality provided by existing systems such as ERP, CRM, and MES. The combined effect of these new technologies gives a company the ability to closely monitor supply chain operations and make adjustments quickly and cost effectively.

The Internet makes it possible for companies in a supply chain to make electronic connections with each other for purposes of exchanging information about the products they sell. These connections also enable close coordination between companies as they carry out the various activities that drive the supply chains they participate in. As these electronic connections become more widespread and commonplace, they are enabling a whole new level of cooperation that leads to greater business efficiency and responsiveness.