CHAPTER 4

Order Processing and Information Systems

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-2Customer Order Cycle

• Six components of order cycle time (see next two slides)

• Order processing system initiates logistics activities– Determining transportation mode, carrier, loading sequence– Assigning inventory and preparing pick/pack lists– Updating inventory file– Establishing replenishment lists– Preparing shipping documents– Shipping product to customer

• Order entry and processing provides important information to the MIS

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-3Total Order Cycle: A Customer's Perspective

Key: 1. Order preparation and transmittal 1 days2. Order received and entered into system 1 day3. Order processed 1 day4. Order picking/production and packing 1 days5. Transit time 3 days6. Warehouse receiving and placing into storage 1 day

Total order cycle time 8 days

1. Customerplaces order

6. Orderdelivered to

customer

5. Ordershipped tocustomer

2. Orderreceived

3. Orderprocessed

4. Order picked

and packed

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-4The Path of a Customer’s Order

Warehousewithdrawal

Inventoryfile

Productionschedule

Checkcredit

Inventoryavailable

Shipcustomer

order

Customerdelivery

Ordertransmittal

Customerorder

Entercustomer

order

InvoiceBackorder

Production Transportationscheduling

Shippingdocumentation

Processorder

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-5

• Customers’ perspective (total) vs. suppliers’ perspective (internal to firm)

• The importance of cycle time variability (next slide) – value of reduction in order cycle time vs. reduction in order cycle time variability

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-6Total Order Cycle with Variability

2. Order entry and processing

Frequency:

1 2 3

1. Order preparation and transmittal

Frequency:

0.5 1 1.53

3. Order picking or production

Frequency:

1 9

Frequency:

TOTAL

3.5 days 8 20 days

5. Transportation

Frequency:

1 3 5

6. Customer receiving

Frequency:

.5 1 1.5

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-7Methods of Order Entry

• Telephone customer service representative who has access to inventory data

• Electronic Data Interchange (see next two slides)– Reduced paperwork– Improved order accuracy– Increased speed of transmission of order and

other data– Reduced clerical/admin. effort in data entry,

filing, mailing, etc.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-8Definition of EDI

Interorganizational exchange of business documentation in structured, machine-processable form.

Unstructured Structured

Fax EDIE-Mail Order entryPerson-to-person Computer-to-computer

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-9EDI Versus Traditional Methods

Source: Margaret A. Emmelhainz, Electronic Data Interchange: A Total Management Guide (New York: Van Nostrand Reinhold, 1990), p. 5.

BUYER'S PURCHASINGAPPLICATION

SELLER'S ORDERENTRY APPLICATION

PURCHASING

PURCHASING

POST OFFICEBUYER'S

COMPUTER

EDI FLOW

PO POSELLER'S

COMPUTER

ORDERENTRY

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-10EDI

• Protocols (standards): company; industry association; universal (e.g., ANSI X 12)

• Proprietary Systems vs. Value-Added Networks (see next slide)

• Volume/cost considerations

• EDI via the Internet• Logistics transactions: ASN, bill of lading, freight

tender, shipment information, etc.

• Failure to integrate with internal systems

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-11Typical EDI Configurations

SOURCE: GE Information Service, as reported in Lisa H. Harrington, "The ABC's of EDI," Traffic Management 29, no. 8 (August 1990), p. 51.

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Third-party

vendor

Proprietary system

Value-added network (VAN)

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-12Integrating Order Processing and Firm’s Logistics Information Systems

• Technologies– Bar Coding– RFID– Point-of-Sale Data Gathering– Artificial Intelligence and Expert Systems– Enterprise Resource Planning– Trading Exchanges

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-13

The Role of Trading Exchanges• Trading exchanges enable electronic

collaboration among partners and customers who can share information about products from sales trends to design information.

• Trading exchanges will use the concept of community to go beyond the simple buying and selling of direct materials and services to offering a full range of services that complement the commercial transactions.

Example: MetalSite, a trading exchange for steel products, also offers logistics, banking, and credit services.

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4-14

Trading Exchanges as Applications Suites

• Trading exchanges will replace ERP systems as the applications suites of the future.– ERP systems can achieve a high level of

information integration and fast information retrieval by utilizing a single data model and set of rules for accessing data within a single company.

– ERP systems often failed to deliver because they proved to be inflexible in the face of changing business models and technologies.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-15

– ERP systems are characterized by a degree of rigidity that is nearly impossible to coordinate across today’s complex supply chains.

– Trading exchanges offer collaboration within an entire trading community.

• Trading exchanges will act as the hub for business community integration – adding supply chain execution functionality is one of the first steps in broadening community offerings.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-16

Trading Exchange Models• Independent Vertical Exchanges (IVX): an

independent intermediary that connects many buyers to many suppliers within a vertical market segment (e-Chemicals, e-Steele, e-Food)

• Independent Horizontal Exchanges (IHX): similar to IVX except that focus is not aimed at a single industry

(GroupTrade.com – marketplace for procurement of office supplies, equipment, and services telecoms; exchange.com – marketplace for the procurement of high tech products; mondus – offers procurement services for small and midsize businesses)

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4-17

• Consortium Trading Exchange (CTX): a consortium of major industry players, often representing a significant percentage of the commercial transactions in a single industry – operates primarily to reduce transaction and product costs to make the market more efficient for its users.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-18• Private Trading Exchanges (PTX): owned

and maintained by a single company to more effectively manage interactions with its trading partners; a one-to-many environment with the owner a participant in each deal.

• PTX will be the software applications platform on which an individual company will build its trading interface to the outside world via the Internet.

• PTX will serve as the interface between internal systems and the plethora of exchanges with which a company will interact.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

4-19

Logistics Exchanges (LX)• Identifies carriers and service providers• Initiates a RFQ process that will qualify partners

based on cost and service requirements• Establishes a contract that will be monitored for

compliance throughout its entire life• Transmits replenishment orders to suppliers• Schedules transportation arrangements for each

shipment• Provides documentation required for international

trade• Gives buyer and seller full visibility to key events

as product makes its way from supplier’s dock to the buyer