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Iqra UniversityIqra UniversityIqra UniversityIqra University
Supply Chain ManagementSupply Chain Management
And EAnd E--BusinessBusiness
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SCM Improvement PrinciplesSCM Improvement Principles
What Can BeWhat Is
The Seven Principles of Supply Chain Management
Segment customers based upon service needs
Customize the logistics network
Listen to the signals of the marketplace and plan
accordingly
Differentiate products closer to the consumer
Source strategically
Develop a supply-chain-wide technology strategy
Adopt channel spanning performance measures
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The Bullwhip EffectThe Bullwhip EffectThe Bullwhip EffectThe Bullwhip Effect
The bullwhip Effect is a major cause of higher costs and
inefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.
As an example, consider disposable diapers. Babiesgenerally consume diapers at a more or lessconsistent rate when aggregated over a largegroup of customers. Nevertheless, order fluctuationsinvariably become considerably larger as onemoves upstream in this chain.
The bullwhip Effect is a major cause of higher costs and
inefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.
As an example, consider disposable diapers. Babiesgenerally consume diapers at a more or lessconsistent rate when aggregated over a largegroup of customers. Nevertheless, order fluctuationsinvariably become considerably larger as onemoves upstream in this chain.
Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between
supply chain partners
Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between
supply chain partners
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Supply Chain upstream ActivitiesSupply Chain upstream ActivitiesSupply Chain upstream ActivitiesSupply Chain upstream Activities
We do it all for you! McDonalds
Have it your way Burger King
We do it all for you! McDonalds
Have it your way Burger King
In most supply chains, the upstream activities respond to forecast, whilesomewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans
In most supply chains, the upstream activities respond to forecast, whilesomewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans
Build to stock VS Build to Order
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INTEGRATING OPERATIONS MANAGEMENTWITH OTHER FUNCTIONSINTEGRATING OPERATIONS MANAGEMENTWITH OTHER FUNCTIONSINTEGRATING OPERATIONS MANAGEMENTWITH OTHER FUNCTIONSINTEGRATING OPERATIONS MANAGEMENTWITH OTHER FUNCTIONS
Customer choices introduce complexityCustomer choices introduce complexity
product variety, demand uncertainty, variableproduct variety, demand uncertainty, variable
capacity requirementscapacity requirements
Mass customization is replacing mass production inMass customization is replacing mass production inmany industriesmany industries
There is more opportunity to coordinate activitiesThere is more opportunity to coordinate activities
because of information systemsbecause of information systems
Supply chain management has become a criticalSupply chain management has become a criticalaspect of business successaspect of business success
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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO ESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E--COMMERCECOMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO ESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E--COMMERCECOMMERCE
Ford motor company did everything from mining toFord motor company did everything from mining to
final assembly of its Model T vehicles in the earlyfinal assembly of its Model T vehicles in the early
1900s1900s
allowed coordination of all sequentially relatedallowed coordination of all sequentially relatedactivities for large efficiency gainsactivities for large efficiency gains
very difficult to accommodate product variety orvery difficult to accommodate product variety or
make model changesmake model changes
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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO ESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E--COMMERCECOMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO ESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E--COMMERCECOMMERCE
Other factors leading to division of supply chainsOther factors leading to division of supply chains
technology, economies of scale, need for focus intechnology, economies of scale, need for focus in
operationsoperations
Supply chain improvementsSupply chain improvements Just in Time (JIT) manufacturingJust in Time (JIT) manufacturing
Lean productionLean production
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SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
CONFIGURATION OF THE SUPPLY CHAINCONFIGURATION OF THE SUPPLY CHAIN
SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
CONFIGURATION OF THE SUPPLY CHAINCONFIGURATION OF THE SUPPLY CHAIN
what the product service bundle will includewhat the product service bundle will include
((manufacturing to stock & manufacturing to ordermanufacturing to stock & manufacturing to order
what portion of bundle will be outsourcedwhat portion of bundle will be outsourced
where facilities will be located and capacitieswhere facilities will be located and capacities what technologies will be usedwhat technologies will be used
how supplierhow supplier--customer communications will becustomer communications will be
handledhandled
the expectations to which suppliers and customersthe expectations to which suppliers and customers
will be heldwill be held
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SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
COORDINATION OF THE SUPPLY CHAINCOORDINATION OF THE SUPPLY CHAIN
SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
COORDINATION OF THE SUPPLY CHAINCOORDINATION OF THE SUPPLY CHAIN
determining when to provide products and servicesdetermining when to provide products and services
and in what quantitiesand in what quantities
ensuring suppliers are able to provide the valueensuring suppliers are able to provide the value
required of themrequired of them setting appropriate levels for capacity, inventorysetting appropriate levels for capacity, inventory
and lead timeand lead time
communicating demand, performance expectationscommunicating demand, performance expectations
and performance results with suppliers andand performance results with suppliers andcustomerscustomers
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SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
IMPROVEMENTOF THE SUPPLY CHAINIMPROVEMENTOF THE SUPPLY CHAIN
SUPPLY CHAIN MANAGEMENTDECISIONS:SUPPLY CHAIN MANAGEMENTDECISIONS:
IMPROVEMENTOF THE SUPPLY CHAINIMPROVEMENTOF THE SUPPLY CHAIN
installing Enterprise Resource Planning (ERP)installing Enterprise Resource Planning (ERP)
systems or other information technologiessystems or other information technologies
streamlining the channels of supplystreamlining the channels of supply
changing technologies or planning systems tochanging technologies or planning systems toimprove quality, lead time, cost or serviceimprove quality, lead time, cost or service
redesigning the product service bundle to make itredesigning the product service bundle to make it
easier to provide or of greater value to theeasier to provide or of greater value to the
customercustomer
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SupplySupply--Chain Costs as a Percent of SalesChain Costs as a Percent of SalesSupplySupply--Chain Costs as a Percent of SalesChain Costs as a Percent of Sales
All industryAll industry
AutomobileAutomobile
FoodFood
LumberLumber
PaperPaper
PetroleumPetroleum
TransportationTransportation
52%52%
67%67%
60%60%
61%61%
55%55%
79%79%
62%62%
Industry Percent of Sales
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11%
31%
58%
Material
Dir Wages
Other
71%
16%13% COGS
Payroll
Other
83%
9%8% COGS
Payroll
Other
ManufacturingManufacturing
WholesaleWholesale
RetailRetail
Material Costs inMaterial Costs inSupplySupply--ChainChain
Material Costs inMaterial Costs inSupplySupply--ChainChain
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Global SupplyGlobal Supply--Chain IssuesChain IssuesGlobal SupplyGlobal Supply--Chain IssuesChain Issues
Supply chains in a global environment must be:Supply chains in a global environment must be:
Flexible enough to react to sudden changes inFlexible enough to react to sudden changes inparts availability, distribution, or shippingparts availability, distribution, or shippingchannels, import duties, and currency rateschannels, import duties, and currency rates
Able to use the latest computer and transmissionAble to use the latest computer and transmissiontechnologies to schedule and manage thetechnologies to schedule and manage the
shipment of parts in and finished products outshipment of parts in and finished products out Staffed with local specialists to handle duties,Staffed with local specialists to handle duties,
trade, freight, customs and political issuestrade, freight, customs and political issues
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Plans to help achieve company missionPlans to help achieve company mission
Affect longAffect long--term competitive positionterm competitive position
Strategic optionsStrategic options
Many suppliersMany suppliers
Few suppliersFew suppliers
Keiretsu networkKeiretsu network
Vertical integrationVertical integration Virtual companyVirtual company Plan
1995 Corel Corp.
SupplySupply--Chain StrategiesChain StrategiesSupplySupply--Chain StrategiesChain Strategies
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SupplySupply--Chain StrategiesChain StrategiesSupplySupply--Chain StrategiesChain Strategies
Negotiate with many suppliers; play one supplier against anotherNegotiate with many suppliers; play one supplier against another Develop longDevelop long--term partnering arrangements with a few suppliersterm partnering arrangements with a few suppliers
who will work with you to satisfy the end customerwho will work with you to satisfy the end customer
Vertically integrate; buy the actual supplierVertically integrate; buy the actual supplier
KeiretsuKeiretsu -- have your suppliers become part of a company coalitionhave your suppliers become part of a company coalition Create a virtual company that uses suppliers on an asCreate a virtual company that uses suppliers on an as--needed basis.needed basis.
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Many sources per itemMany sources per item
Adversarial relationshipAdversarial relationship
ShortShort--termterm
Little opennessLittle openness Negotiated, sporadic POsNegotiated, sporadic POs
High pricesHigh prices
Infrequent, large lotsInfrequent, large lots
Delivery to receiving dockDelivery to receiving dock 1995 Corel Corp.
Many Suppliers StrategyMany Suppliers StrategyMany Suppliers StrategyMany Suppliers Strategy
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1 or few sources per item1 or few sources per item
Partnership (JIT)Partnership (JIT)
LongLong--term, stableterm, stable
OnOn--site audits & visitssite audits & visits Exclusive contractsExclusive contracts
Low prices (large orders)Low prices (large orders)
Frequent, small lotsFrequent, small lots
Delivery to point of useDelivery to point of use
1995CorelCorp.
Few Suppliers StrategyFew Suppliers StrategyFew Suppliers StrategyFew Suppliers Strategy
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Tactics for Close Supplier RelationshipsTactics for Close Supplier RelationshipsTactics for Close Supplier RelationshipsTactics for Close Supplier Relationships
TacticTactic Reduce total number of suppliersReduce total number of suppliers
Certify suppliersCertify suppliers
Ask for JIT delivery from keyAsk for JIT delivery from key
supplierssuppliers
Involve key suppliers in newInvolve key suppliers in new
product designproduct design
Develop software linkages toDevelop software linkages tosupplierssuppliers
ResultsResults Average 20% reduction in 5 yearsAverage 20% reduction in 5 years
Almost 40% of all companiesAlmost 40% of all companiessurveyed were themselves currentlysurveyed were themselves currently
certifiedcertified About 60% ask for thisAbout 60% ask for this
About 54% do thisAbout 54% do this
Almost 80% claim to do thisAlmost 80% claim to do thisAbout 50% claim thisAbout 50% claim this
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Raw Material
(Suppliers)
BackwardBackward
IntegrationIntegration
CurrentCurrent
TransformationTransformation
ForwardForward
IntegrationIntegration
Finished GoodsFinished Goods
(Customers)(Customers)
Ability to produce goodsAbility to produce goods
previously purchasedpreviously purchased
Setup operationsSetup operations
Buy supplierBuy supplier
MakeMake--buy issuebuy issue
Major financial commitmentMajor financial commitment
Hard to do all things wellHard to do all things well
Vertical Integration StrategyVertical Integration StrategyVertical Integration StrategyVertical Integration Strategy
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Forms of Vertical IntegrationForms of Vertical Integration
Iron Ore
Steel
Automobiles
Distribution
System
Dealers
Silicon
Integrated
Circuits
Circuit Boards
Computers
Watches
Calculators
Farming
Flour Milling
Raw Material
(Suppliers)
Backward
Integration
Current
Transformation
Forward
Integration
Finished Goods
(Customers)Baked Goods
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Vertical Integration Can be Forward or BackwardVertical Integration Can be Forward or BackwardVertical Integration Can be Forward or BackwardVertical Integration Can be Forward or Backward
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
Raw material (suppliers)Raw material (suppliers) Iron oreIron ore SiliconSilicon FarmingFarming
Backward IntegrationBackward Integration SteelSteelCurrent TransformationCurrent Transformation AutomobilesAutomobiles Integrated CircuitsIntegrated Circuits FlourFlour
MillingMilling
Forward IntegrationForward Integration DistributionDistribution
SystemSystem
Circuit boardsCircuit boards
Finished goods (customers)Finished goods (customers) DealersDealers Computers, watches,Computers, watches,calculatorscalculators
BakedBakedGoodsGoods
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Japanese word for affiliated chainJapanese word for affiliated chain
System of mutual alliances andSystem of mutual alliances and
crosscross--ownershipownership
Company stock is held by allied firmsCompany stock is held by allied firms
Lowers need for shortLowers need for short--term profitsterm profits
Links manufacturers, suppliers, distributors, &Links manufacturers, suppliers, distributors, &
lenderslenders Partnerships extend across entire supply chainPartnerships extend across entire supply chain
Keiretsu Network StrategyKeiretsu Network StrategyKeiretsu Network StrategyKeiretsu Network Strategy
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Virtual CompaniesVirtual CompaniesVirtual CompaniesVirtual Companies
Companies that rely on a variety of supplierCompanies that rely on a variety of supplierrelationships to provide services on demand.relationships to provide services on demand.
Also known as hollow corporations, or networkAlso known as hollow corporations, or network
corporationscorporations
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1995 Corel Corp.
Virtual Company StrategyVirtual Company StrategyVirtual Company StrategyVirtual Company Strategy
Network of independent companiesNetwork of independent companies
Linked by technologyLinked by technology
PCs, faxes, Internet etc.PCs, faxes, Internet etc.
Each contributes core competenciesEach contributes core competencies Typically provide servicesTypically provide services
Payroll, editing, designingPayroll, editing, designing
May be long or shortMay be long or short--termterm
Usually, only until opportunity is metUsually, only until opportunity is met
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Managing the SupplyManaging the Supply--ChainChainManaging the SupplyManaging the Supply--ChainChain
Options:Options:
PostponementPostponement
Channel assemblyChannel assembly
Drop shippingDrop shipping
Blanket ordersBlanket orders
Invoiceless purchasingInvoiceless purchasing
Electronic ordering and funds transferElectronic ordering and funds transfer
Stockless purchasingStockless purchasing StandardizationStandardization
Internet purchasing (eInternet purchasing (e--procurement)procurement)
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Managing the SupplyManaging the Supply--ChainChain -- Other OptionsOther OptionsManaging the SupplyManaging the Supply--ChainChain -- Other OptionsOther Options
Establishing lines of credit for suppliersEstablishing lines of credit for suppliers
Reducing bank floatReducing bank float
Coordinating production and shipping schedules withCoordinating production and shipping schedules with
suppliers and distributorssuppliers and distributors Sharing market researchSharing market research
Making optimal use of warehouse spaceMaking optimal use of warehouse space
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Successful SupplySuccessful Supply--Chain Management Requires:Chain Management Requires:Successful SupplySuccessful Supply--Chain Management Requires:Chain Management Requires:
A mutual agreement on goalsA mutual agreement on goals
TrustTrust
Compatible organizational culturesCompatible organizational cultures
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ORGANIZATION STRUCTUREORGANIZATION STRUCTUREORGANIZATION STRUCTUREORGANIZATION STRUCTURE
SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT
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1-38 2001 The Gillette Company
GSCM Mission
The Gillette Company will be as highly
recognised and admired by our customers,
shareholders, and employees for SupplyChain performance as we are for our
product development and support of globalbrands. We will become World Class in
Planning & Executing Product Deliveryfrom Source to Customers Shelf.
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Managing Director
Chief Executive
CFO/Finance
Director
Sales
Director
Supply Chain
Director
Operation
Director
Marketing
Director
Secretary
Procurement
Manager
Warehouse
Manager
Production
Control
H. R.
Director
Imports
Local
Contract
R. M.
P. M.
F. S.
MRP
MRPM
Outsource
Expediting
Manager
Transportation
CRM
Documentation
ORGANIZATION STRUCTURE SUPPLY CHAIN MANAGEMENT
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Market Distribution Operating ConcernsMarket Distribution Operating ConcernsMarket Distribution Operating ConcernsMarket Distribution Operating Concerns
Market Distribution:
Activities related to providing customer service. Requires performing
order receipt and processing, deploying inventories, storage and
handling, and outbound transportation within a supply chain. Includesthe responsibility to coordinate with marketing planning in such areas
as pricing, promotional support, customer service levels, delivery
standards, handling return merchandise, and life-cycle support. The
primary market distribution objective is to assist in revenue generation
by providing strategically desired customer service levels at the lowest
total cost.
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2
Manufacturing Support Operating ConcernsManufacturing Support Operating ConcernsManufacturing Support Operating ConcernsManufacturing Support Operating Concerns
Manufacturing Support:
Activities related to planning, scheduling, and supporting
manufacturing operations. Requires master schedule planning and
performing work-in-process storage, handling, transportation, and timephasing of components. Includes the responsibility for storage of
inventory at manufacturing sites and maximum flexibility in the
coordination of geographic and final assemblies postponement
between manufacturing and market distribution operations.
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Procurement Operating ConcernsProcurement Operating ConcernsProcurement Operating ConcernsProcurement Operating Concerns
Procurement:
Activities related to obtaining products and materials from outside
suppliers. Requires performing resource planning, supply sourcing,
negotiation, order placement, inbound transportation, receiving andinspection, storage and handling, and quality assurance. Includes the
responsibility to coordinate with suppliers in such areas as scheduling,
supply continuity, hedging, and speculation, as well as research
leading to new sources or programs. The primary procurement
objective is to support manufacturing or resale organizations by
providing timely purchasing at the lowest total cost.
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Mission of Purchasing
The mission of purchasing is to sensethe competitive priorities necessary foreach major product/service (low
production costs, fast and on-timedeliveries, high quality /services, andflexibility) and to develop purchasing
plans for each major product/servicethat are consistent with operationsstrategies
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Mission of PurchasingMission of PurchasingMission of PurchasingMission of Purchasing
Develop purchasing plans for each major product orDevelop purchasing plans for each major product orservice that are consistent with operations strategies:service that are consistent with operations strategies:
Low production costsLow production costs
Fast and on
Fast and on--time deliveriestime deliveries
High quality products and servicesHigh quality products and services
FlexibilityFlexibility
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Purchasing ManagementPurchasing ManagementPurchasing ManagementPurchasing Management
Maintain data base of available, qualified suppliersMaintain data base of available, qualified suppliers
Select suppliers to supply each materialSelect suppliers to supply each material
Negotiate contracts with suppliersNegotiate contracts with suppliers
Act as interface between company and suppliersAct as interface between company and suppliers
Provide training to suppliers on latest technologiesProvide training to suppliers on latest technologies
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Purchasing vs. ProcurementPurchasing vs. Procurement
Purchasing is normally associated with a functionalPurchasing is normally associated with a functionalactivityactivity
Procurement/Sourcing should be viewed as a strategicProcurement/Sourcing should be viewed as a strategic
activity for the business.activity for the business.
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9
Purchasing vs. Sourcing (contd)Purchasing vs. Sourcing (contd)
Purchasing Mentality Sourcing Mentality
One contract at a time Continual Improvement
Win-lose Win-win
Immediate returns Long-term perspective
Secretive Trusting
Current needs can be met Strategic fit exists
Lowest purchase price Total cost of ownership
Multiple suppliers Supply-base reduction
Infrequent interaction Frequent interaction
Criticism Constructive evaluations
Buyer-sales relationship Cross-functional relationship
Safety in numbers Safety in knowledge
Quality inspected Quality at source
Inventory as safeguard Information as safeguard
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Supplier Development Through ProcurementSupplier Development Through Procurement
The Procurement Viewpoint
Supplier Purchaser Procurement Initiative
Marketing Response
Supplier PurchaserMarketing Initiative
Purchasing Response
The Marketing Viewpoint
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Importance of SourcingImportance of Sourcing
In the average manufacturing firm purchased goodsIn the average manufacturing firm purchased goodsand services account for55% of every sales Dollarand services account for55% of every sales Dollar
Direct labor costs account for only about 10% of theDirect labor costs account for only about 10% of the
sales dollarsales dollar
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Procurements Potential PayoffProcurements Potential Payoff
Beginning PositionBeginning Position
SalesSales $100,000,000$100,000,000
Purchases(55%)Purchases(55%) 55,000,00055,000,000
Labor (15%)Labor (15%) 15,000,00015,000,000
Other (22%)Other (22%) 22,000,00022,000,000
PrePre--tax profit (8%)tax profit (8%) 8,000,0008,000,000
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Procurements Potential PayoffProcurements Potential Payoff
Reduce
urchasecost
b 10%
I crease
sales b 68%
Reduce labor
cost b 36%
ales $100,000,000 $168,000,000 $100,000,000
Purchases 4 , 00,000 2,400,000 ,000,000
Labor 15,000,000 25,200,000 ,600,000
Other 22,000,000 36, 60,000 22,000,000
Pre-tax
Profit
13,500,000 13,440,000 13,400,000
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Major Categories for the Components ofTotal Cost of OwnershipMajor Categories for the Components ofTotal Cost of OwnershipMajor Categories for the Components ofTotal Cost of OwnershipMajor Categories for the Components ofTotal Cost of Ownership
Pre-transaction Components1. Identifying need
. Investigating sources
. Qualifying sources
. Adding supplier tointernal systems
5. Educating :supplier in firms operationsfirm in suppliers operations
Post-transaction Components1. Line fallout
. Defective finished goodsrejected before sale
. Field failures
. Repair/ replacement in field5. Customer goodwill/ reputation
of firm6. Cost of repair parts7. Cost of maintenance and repairs
Transaction Components1. Price
.Order placement/ preparation
. Delivery/ transportation
. Tariffs/ duties5. Billing/ payment
6. Inspection7. Return of parts8. Follow-up and correction
Total Cost of Ownership
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Major Trends in ProcurementMajor Trends in Procurement
Fewer sources of supply will be usedFewer sources of supply will be used
Buyers will be more concerned with final customer satisfactionBuyers will be more concerned with final customer satisfaction
Buyers will focus on lead supplier relationshipsBuyers will focus on lead supplier relationships
Buyers will drive shorter cycle timesBuyers will drive shorter cycle times Design engineers and buyers will be part of sourcing teamsDesign engineers and buyers will be part of sourcing teams
Global sourcing will increaseGlobal sourcing will increase
ee--procurement will have a major impactprocurement will have a major impact--not all of it will benot all of it will bepositive for supply chain integrationpositive for supply chain integration
buying exchangesbuying exchanges auction sitesauction sites
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EE--ChemicalsChemicalsEE--ChemicalsChemicals
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Advantages of Centralized PurchasingAdvantages of Centralized PurchasingAdvantages of Centralized PurchasingAdvantages of Centralized Purchasing
Buying in large quantitiesBuying in large quantities -- better pricesbetter prices
More clout with suppliersMore clout with suppliers -- greater supply continuitygreater supply continuity
Larger purchasing departmentLarger purchasing department -- buyer specializationbuyer specialization
Combining small ordersCombining small orders -- less order cost duplicationless order cost duplication Combining shipmentsCombining shipments -- lower transportation costslower transportation costs
Better overall controlBetter overall control
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Purchasing ProcessPurchasing ProcessPurchasing ProcessPurchasing Process
Material RequisitionMaterial Requisition
Request for QuotationsRequest for Quotations
Select Best SupplierSelect Best Supplier
Purchase OrderPurchase Order
Receive and Inspect GoodsReceive and Inspect Goods
From purchasing,From purchasing,
to potential suppliersto potential suppliers
From any department,From any department,to purchasingto purchasing
Based on quality, price,Based on quality, price,
lead time, dependabilitylead time, dependability
From purchasing,From purchasing,
to selected supplierto selected supplier
From supplier, to receiving,From supplier, to receiving,
quality control, warehousequality control, warehouse
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Content of Material RequisitionContent of Material RequisitionContent of Material RequisitionContent of Material Requisition
Requisition no.Requisition no.
Requisition dateRequisition date Item master codeItem master code
Description of material or contentDescription of material or content
Used in productUsed in product
Unit of measureUnit of measure SpecificationSpecification
Lead timeLead time
Sourcing data :supplier or producerSourcing data :supplier or producer
Mode of transportMode of transport Economic order lot size (packing unit)Economic order lot size (packing unit)
Shelf life restrictionShelf life restriction
Material handling requirement (control temperature)Material handling requirement (control temperature)
Documents to accompany with the materialDocuments to accompany with the material
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Content of Material RequisitionContent of Material RequisitionContent of Material RequisitionContent of Material Requisition
Item master codeItem master code Quality control analysis days (quarantine)Quality control analysis days (quarantine)
Reorder quantityReorder quantity
Maximum inventoryMaximum inventory
Standard priceStandard price Duty and sales tax and other border crossing charges dataDuty and sales tax and other border crossing charges data
Clearing agent or mode of transportation while handlingClearing agent or mode of transportation while handlinglocallylocally
Certificate of originCertificate of origin
Labeling specificationLabeling specification
Any special handling restriction etc.Any special handling restriction etc.
Required dateRequired date
Authorized signature etc.Authorized signature etc.
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Content of Material RequisitionContent of Material RequisitionContent of Material RequisitionContent of Material Requisition
Item master codeItem master code Capital goodsCapital goods
Equipment, machinery, installation, parts,Equipment, machinery, installation, parts,subassemblysubassembly
Method of deliveryMethod of delivery
Maintenance, preMaintenance, pre--post, after sales service,post, after sales service,annual preventive, accidental,annual preventive, accidental,
Financial package, (supplier credit, leasing,Financial package, (supplier credit, leasing,consignment sales, wet leasing etc.)consignment sales, wet leasing etc.)
InsuranceInsurance
Commissioning, trial,Commissioning, trial,
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Content of quotationContent of quotation-- invitationinvitationContent of quotationContent of quotation-- invitationinvitation
Will be address to the enlisted supplierWill be address to the enlisted supplier
Date of quotationDate of quotation
Deadline for the quotation to be receivedDeadline for the quotation to be received
All the details as mentioned on the companies master dataAll the details as mentioned on the companies master data
Financial and payments procedureFinancial and payments procedure
Method of paymentMethod of payment
Term of paymentTerm of payment
Negotiable documentsNegotiable documents
Companies bankers (L/C, Contract, Usance,)Companies bankers (L/C, Contract, Usance,)
Bullet delivery, or partial shipment allowedBullet delivery, or partial shipment allowed Penalty clausePenalty clause
Margin or deposit with the tender or bank guaranteeMargin or deposit with the tender or bank guarantee
InsuranceInsurance
Title of good transferTitle of good transfer
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Content of quotationContent of quotation-- invitationinvitationContent of quotationContent of quotation-- invitationinvitation
Tentative date of intimation or opening of quotation.Tentative date of intimation or opening of quotation.
Is it a revolving contract or one time deliveryIs it a revolving contract or one time delivery Condition for the visit of siteCondition for the visit of site
Specimen samplesSpecimen samples
Condition for the approval of sample etc.Condition for the approval of sample etc.
Capital goodsCapital goods
Turn keyTurn key
InstallationInstallation
TrainingTraining
After sale serviceAfter sale service
Maintenance contractMaintenance contract
Free maintenance periodFree maintenance period
Pregnancy period before the deliveryPregnancy period before the delivery
Supplier creditSupplier credit
Leasing facility etc.Leasing facility etc.
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Selection of supplierSelection of supplier sourcingsourcingSelection of supplierSelection of supplier sourcingsourcing
Bench mark for spread sheet analysisBench mark for spread sheet analysis
Lead timeLead time
Location of sourcing siteLocation of sourcing site
LocalLocal
ImportsImports
InIn--house configuration,house configuration,
OutsourcingOutsourcing
Importing in bulk or mixImporting in bulk or mix
Term offeredTerm offered
Price (rupees, usd, euro, sterling)Price (rupees, usd, euro, sterling)
Credit (local L/C, contract, letter of aware nessCredit (local L/C, contract, letter of aware ness Loading and unloadingLoading and unloading
TransportationTransportation
InsuranceInsurance
Freight collect, freight prepaidFreight collect, freight prepaid
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Selection of supplierSelection of supplier sourcingsourcingSelection of supplierSelection of supplier sourcingsourcing
Bench mark for spread sheet analysisBench mark for spread sheet analysis
Term offered (more)Term offered (more) Lot sizeLot size
Negotiation documentation chargesNegotiation documentation charges
L/c opening commission on beneficiary accountsL/c opening commission on beneficiary accounts
Accessibility (quick response, emergency, replenishmentAccessibility (quick response, emergency, replenishment Past experiencePast experience
CredibilityCredibility financial, data from the contemporariesfinancial, data from the contemporaries
Maintenance service post deliveryMaintenance service post delivery
After sale service
After sale service
Turn keyTurn key ------projectsprojects
Implementation, installation, trial commissioning , etc.Implementation, installation, trial commissioning , etc.
Configuration, source key, parachute clause, divorce, noticeConfiguration, source key, parachute clause, divorce, noticeperiod etc.period etc.
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Purchase orderPurchase orderPurchase orderPurchase order
Date of orderDate of order
Purchase order numberPurchase order number
Reference (indent number or confirmation)Reference (indent number or confirmation)
Maximum detail from item master code.Maximum detail from item master code.
Financial termsFinancial terms
Delivery dateDelivery date
Method of shipmentMethod of shipment
Lot sizeLot size
Partial shipmentPartial shipment
Maintenance contractMaintenance contract Freight and other chargesFreight and other charges
Margin, advance, guarantee, l/c contract, letter of awarenessMargin, advance, guarantee, l/c contract, letter of awarenesscommitment, other terms and conditions,commitment, other terms and conditions,
Documentation requiredDocumentation required
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Purchase orderPurchase orderPurchase orderPurchase order
A
uthorizedA
uthorized Any special term (preAny special term (pre--shipment samples, qualityshipment samples, quality
control specification, standards,)control specification, standards,)
Validation dataValidation data
Shelf lifeShelf life
GuaranteeGuarantee
Insurance conditionInsurance condition
Any special mode of handlingAny special mode of handling
Loading unloadingLoading unloading
Freight etc.Freight etc.
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Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by BuyerAllegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer
In exchange for cash and gifts, allowing supplier toIn exchange for cash and gifts, allowing supplier tostore tools and park vehicles on company propertystore tools and park vehicles on company property
and awarding contracts to suppliers without bidding.and awarding contracts to suppliers without bidding.
Accepting gifts such as expensive perfumery, cloths,Accepting gifts such as expensive perfumery, cloths,
dinners, function cards, foreign trips, liquor, giftdinners, function cards, foreign trips, liquor, gift
coupon during festivals and holidays season.coupon during festivals and holidays season.
Accepting on sharing basis indenting commissionAccepting on sharing basis indenting commission
within or outside the countrywithin or outside the country Bid rigging, accepting bribes, theft and tax evasion,Bid rigging, accepting bribes, theft and tax evasion,
and accepting large sums of cash.and accepting large sums of cash.
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Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by BuyerAllegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer
Payment processing on receipt of kickbackPayment processing on receipt of kickback Approval of product quality on receipt of kickbackApproval of product quality on receipt of kickback
Accepting less quantity of goods in exchange ofAccepting less quantity of goods in exchange of
bribesbribes
Accepting lot of bribes in acceptance enlistment ofAccepting lot of bribes in acceptance enlistment of
approved suppliers or contractorsapproved suppliers or contractors
Benami Transaction through their own respectiveBenami Transaction through their own respective
companiescompanies Opening their own respective buying houses orOpening their own respective buying houses or
agency and making the purchases from them.agency and making the purchases from them.
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Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
The National Association for Purchasing ManagersThe National Association for Purchasing Managers(NAPM) has developed a set of three principles and(NAPM) has developed a set of three principles and
12 standards to help guide ethical behaviour in12 standards to help guide ethical behaviour in
purchasing. These are the principles:purchasing. These are the principles:
Loyalty to your organizationLoyalty to your organization
Justice to those with whom you dealJustice to those with whom you deal
Faith in your professionFaith in your profession
From these principles are derived the NAPMFrom these principles are derived the NAPMstandards of purchasing practice (domestic andstandards of purchasing practice (domestic and
international)international)
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Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
Avoid the intent and appearance of unethical orAvoid the intent and appearance of unethical orcompromising practice in relationships, actions, andcompromising practice in relationships, actions, andcommunicationscommunications
Demonstrate loyalty to the employer by diligently followingDemonstrate loyalty to the employer by diligently followingthe lawful instructions of the employer, using reasonable carethe lawful instructions of the employer, using reasonable care
and only authority granted.and only authority granted. Refrain from any private business or professional activityRefrain from any private business or professional activity
that would create a conflict between personal interests andthat would create a conflict between personal interests andthe interests of the employerthe interests of the employer
Refrain from soliciting or accepting money, loans, credits, orRefrain from soliciting or accepting money, loans, credits, orprejudicial discounts, and the acceptance of gifts,prejudicial discounts, and the acceptance of gifts,entertainment favours, or services from present or potentialentertainment favours, or services from present or potentialsuppliers that might influence or appear to influencesuppliers that might influence or appear to influence
purchasing decisions.purchasing decisions.
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Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
Handle confidential or proprietary informationHandle confidential or proprietary informationbelonging to employers or suppliers with due carebelonging to employers or suppliers with due careand proper consideration of ethical and legaland proper consideration of ethical and legalramifications and governmental regulationramifications and governmental regulation
Promote positive supplier relationships throughPromote positive supplier relationships throughcourtesy and impartiality in all phases of thecourtesy and impartiality in all phases of thepurchasing cycle.purchasing cycle.
Refrain from reciprocal agreements that restrainRefrain from reciprocal agreements that restrain
competitioncompetition Know and obey the letter and spirit of lawsKnow and obey the letter and spirit of laws
governing the purchasing function and remain alertgoverning the purchasing function and remain alertto the legal ramifications of purchasing decisions.to the legal ramifications of purchasing decisions.
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Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
Encourage all segments of society to participate byEncourage all segments of society to participate bydemonstrating support for small, disadvantaged, anddemonstrating support for small, disadvantaged, andminorityminority--owned businesses.owned businesses.
Discourage purchasing involvement in employersDiscourage purchasing involvement in employers
sponsored programs of personal purchases that aresponsored programs of personal purchases that arenot business related.not business related.
Enhance the proficiency and stature of theEnhance the proficiency and stature of thepurchasing profession by acquiring and maintainingpurchasing profession by acquiring and maintaining
current technical knowledge and the highestcurrent technical knowledge and the higheststandards of ethical behaviorstandards of ethical behavior
Conduct international purchasing in accordance withConduct international purchasing in accordance withthe laws, customs, and practices of foreign countriesthe laws, customs, and practices of foreign countries
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Buyers DutiesBuyers DutiesBuyers DutiesBuyers Duties
Know the market for their commoditiesKnow the market for their commodities Understand the laws.... tax, contract, patent..Understand the laws.... tax, contract, patent..
Process purchase requisitions and quotation requestsProcess purchase requisitions and quotation requests
Make supplier selectionsMake supplier selections Negotiate prices and conditions of saleNegotiate prices and conditions of sale
Place and followPlace and follow--up on purchase ordersup on purchase orders
Maintain ethical behaviorMaintain ethical behavior
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MakeMake--oror--Buy AnalysisBuy AnalysisMakeMake--oror--Buy AnalysisBuy Analysis
Considerations in makeConsiderations in make--oror--buy decisions:buy decisions: Lower costLower cost -- purchasing or production?purchasing or production?
Better qualityBetter quality -- supplier or insupplier or in--house?house?
MoreMore--reliable deliveriesreliable deliveries -- supplier or insupplier or in--house?house? What degree of vertical integration is desirable?What degree of vertical integration is desirable?
Should distinctive competencies be outsourced?Should distinctive competencies be outsourced?
M k /B C id tiM k /B C id ti
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Make/Buy ConsiderationsMake/Buy Considerations
1.1. Maintain core competenciesMaintain core competencies
and protect personnel fromand protect personnel from
layofflayoff2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supplyAssure adequate supply
5.5. Utilize surplus labor andUtilize surplus labor andmake a marginalmake a marginal
contributioncontribution
1.1. Frees management to dealFrees management to deal
with its primary businesswith its primary business
2.2. Lower acquisition costLower acquisition cost3.3. Preserve supplierPreserve supplier
commitmentcommitment
4.4. Obtain technical orObtain technical or
management abilitymanagement ability5.5. Inadequate capacityInadequate capacity
Reasons for Making Reasons for Buying
M k /B C id tiM k /B C id ti C ti dC ti d
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Make/Buy ConsiderationsMake/Buy Considerations -- ContinuedContinued
6.6. Obtain desired quantityObtain desired quantity
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain a unique item thatObtain a unique item thatwould entail a prohibitivewould entail a prohibitive
commitment from thecommitment from the
suppliersupplier
9.9. Protect proprietary design orProtect proprietary design orqualityquality
10.10. Increase or maintain size ofIncrease or maintain size of
companycompany
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure flexibility andEnsure flexibility and
alternate source of supplyalternate source of supply8.8. Inadequate managerial orInadequate managerial or
technical resourcestechnical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by patent orItem is protected by patent ortrade secrettrade secret
Reasons for Making Reasons for Buying
E l M kE l M k BBE l M kE l M k BB
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Example: MakeExample: Make--oror--BuyBuyExample: MakeExample: Make--oror--BuyBuy
A firm manufactures a product that contains aA firm manufactures a product that contains apart requiring heat treatment. An analyst is trying topart requiring heat treatment. An analyst is trying to
decide whether it is more economical to buy the heatdecide whether it is more economical to buy the heat
treating service or perform the treatment in house.treating service or perform the treatment in house.
Pertinent data is shown on the next slide.Pertinent data is shown on the next slide.If part quality and delivery performance are aboutIf part quality and delivery performance are about
the same for the two alternatives, which alternativethe same for the two alternatives, which alternative
should be selected?should be selected?
E l M kE l M k BBE l M kE l M k BB
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Example: MakeExample: Make--oror--BuyBuyExample: MakeExample: Make--oror--BuyBuy
PurchasePurchase
HeatHeat--TreatTreat HeatHeat--TreatTreat
InIn--HouseHouse ServiceService
Number of parts annuallyNumber of parts annually 5,0005,000 5,0005,000Fixed cost per yearFixed cost per year $25,000$25,000 $0$0
Variable cost per partVariable cost per part $13.20$13.20 $17.50$17.50
E l M kE l M k BBE l M kE l M k BB
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Example: MakeExample: Make--oror--BuyBuyExample: MakeExample: Make--oror--BuyBuy
Compute the total cost for each alternativeCompute the total cost for each alternative
TC = FC + vQTC = FC + vQ
TCTC11 = FC= FC11 + v+ v11Q = 25,000 + 13.20(5,000) = $91,000Q = 25,000 + 13.20(5,000) = $91,000
TCTC22 = FC= FC22 + v+ v22Q = 0 + 17.50(5,000) = $87,500Q = 0 + 17.50(5,000) = $87,500
The firm should buy the heatThe firm should buy the heat--treating service (thetreating service (the
second alternative).second alternative).
continuedcontinued
E l M kE l M k BBE l M kE l M k BB
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Example: MakeExample: Make--oror--BuyBuyExample: MakeExample: Make--oror--BuyBuy
The analyst has assumed that 5,000 parts per yearThe analyst has assumed that 5,000 parts per yearwill require heat treatment. By how many parts canwill require heat treatment. By how many parts can
the firms requirements increase or decrease beforethe firms requirements increase or decrease before
inin--house heat treating is more economical? Shouldhouse heat treating is more economical? Should
the analyst rethink his/her decision?the analyst rethink his/her decision?
E ample: MakeE ample: Make oror BBE ample: MakeE ample: Make oror BB
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Example: MakeExample: Make--oror--BuyBuyExample: MakeExample: Make--oror--BuyBuy
Compute the breakCompute the break--even parts quantityeven parts quantity
FCFC11 + v+ v11Q = FCQ = FC22 + v+ v22QQ
Q = (FCQ = (FC11 -- FCFC22)/(v)/(v22-- vv11))
Q = (25,000Q = (25,000 0)/(17.500)/(17.50 13.20)13.20)Q = 5,814Q = 5,814
If the firms annual parts requirement increasesIf the firms annual parts requirement increases
by 814 (about 16%) or more, inby 814 (about 16%) or more, in--house heat treatmenthouse heat treatmentwould be more economical. The analyst should givewould be more economical. The analyst should give
the decision more thought.the decision more thought.
LogisticsLogisticsLogisticsLogistics
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LogisticsLogisticsLogisticsLogistics
LogisticsLogistics usually refers to management of:usually refers to management of: the movement of materials within the factorythe movement of materials within the factory
the shipment of incoming materials from suppliersthe shipment of incoming materials from suppliers
the shipment of outgoing products to customersthe shipment of outgoing products to customers
Movement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within Factories
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Movement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within Factories
IncomingIncoming
VehiclesVehicles
ReceivingReceiving
DockDock
QualityQuality
ControlControlWarehouseWarehouse
WorkWork
CenterCenter
OtherWorkOtherWork
CentersCentersPackagingPackaging
FinishedFinished
GoodsGoods
ShippingShippingShippingShipping
DockDock
OutgoingOutgoing
VehiclesVehicles
The typical locations from/to which material is moved:The typical locations from/to which material is moved:
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
TrafficTraffic Traffic departmentsTraffic departments routinely examine shippingroutinely examine shipping
schedules and select:schedules and select:
shipping methodsshipping methods
time tablestime tables ways of expediting deliveriesways of expediting deliveries
Traffic managementTraffic management is a specialized field requiringis a specialized field requiring
technical training in Department of Transportationtechnical training in Department of Transportation
(DOT) and Interstate Commerce Commission(DOT) and Interstate Commerce Commission
(ICC) regulations and rates.(ICC) regulations and rates.
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
DistributionDistribution DistributionDistribution, or physical distribution, is the, or physical distribution, is the
shipment of finished goods through the distributionshipment of finished goods through the distribution
system to customers.system to customers.
AA distribution systemdistribution system is the network of shippingis the network of shipping
and receiving points starting with the factory andand receiving points starting with the factory and
ending with the customers.ending with the customers.
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
Distribution Requirements PlanningDistribution Requirements Planning DRP is the planning for the replenishment ofDRP is the planning for the replenishment of
regional warehouse inventories.regional warehouse inventories.
DRP uses MRPDRP uses MRP--type logic to translate regionaltype logic to translate regional
warehouse requirements into central distributionwarehouse requirements into central distribution--
center requirements, which are then translated intocenter requirements, which are then translated into
gross requirements in the MPS at the factory.gross requirements in the MPS at the factory.
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
Distribution Requirements PlanningDistribution Requirements Planning Scheduled receiptsScheduled receipts are previouslyare previously--placed orders thatplaced orders that
are expected to arrive in a given weekare expected to arrive in a given week
Planned receipt of shipmentsPlanned receipt of shipments are orders planned, butare orders planned, but
not yet placed, for the futurenot yet placed, for the future
Projected ending inventoryProjected ending inventory is computed as:is computed as:
Previous weeks projected ending inventoryPrevious weeks projected ending inventory
+ Planned receipt of shipments in current week+ Planned receipt of shipments in current week + Scheduled receipt of shipments in current week+ Scheduled receipt of shipments in current week
---- Forecasted demand in current weekForecasted demand in current week
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
DRP TimeDRP Time--Phased Order Point RecordPhased Order Point Record
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1
Std. Quantity = 50 SS = 10Std. Quantity = 50 SS = 10
6060
--11
8080
5050
3030
4040
4040
11 22 33
3030
50505050
50505050
303020201010
4040
5544
4040
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
Products are shipped from a companys mainProducts are shipped from a companys maindistribution center (adjacent to the factory) to twodistribution center (adjacent to the factory) to two
regional warehouses. The DRP records on the nextregional warehouses. The DRP records on the next
two slides showtwo slides show for the two regional warehousefor the two regional warehouse
the forecasted demand, scheduled receipts, and lastthe forecasted demand, scheduled receipts, and lastweeks projected ending inventories for a singleweeks projected ending inventories for a single
product.product.
The third upcoming slide showsThe third upcoming slide shows for the mainfor the main
distribution centerdistribution center scheduled receipts and lastscheduled receipts and lastweeks projected ending inventory for the sameweeks projected ending inventory for the same
product. Complete the DRP records.product. Complete the DRP records.
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
DRP Record forDRP Record for RegionalWarehouse #1RegionalWarehouse #1
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1
Std. Quantity = 100 SS = 50Std. Quantity = 100 SS = 50
200200
--11
100100
8080 100100
11 22 33
8080 6060
5544
100100
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
DRP Record forDRP Record for RegionalWarehouse #2RegionalWarehouse #2
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #2Region. Warehouse #2 LT = 2LT = 2
Std. Quantity = 200 SS = 80Std. Quantity = 200 SS = 80
220220
--11
200200
100100 200200
11 22 33
200200 240240
5544
200200
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
DRP Record forDRP Record for Main Distribution CenterMain Distribution Center
Gross Requirements (units)Gross Requirements (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Main Distrib. CenterMain Distrib. Center LT = 1LT = 1
Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200
250250
--11
500500
11 22 33 5544
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
Completed DRP Record forCompleted DRP Record for RegionalWarehouse #1RegionalWarehouse #1
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1
Std. Quantity = 100 SS = 50Std. Quantity = 100 SS = 50
200200
--11
220220
100100
8080
100100
120120
100100
11 22 33
8080
100100
100100
100100
80808080140140
6060
5544
100100
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
Completed DRP Record forCompleted DRP Record for RegionalWarehouse #2RegionalWarehouse #2
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #2Region. Warehouse #2 LT = 2LT = 2
Std. Quantity = 200 SS = 80Std. Quantity = 200 SS = 80
220220
--11
200200
320320
200200
100100
200200
120120
200200
11 22 33
200200
200200200200200200
200200
80808080120120
240240
5544
200200
WeekWeek
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
DRP Record for Main Distribution CenterDRP Record for Main Distribution Center The gross requirement ( in row 1) for any weekThe gross requirement ( in row 1) for any week
is determined by summing the planned orders foris determined by summing the planned orders forshipment for the same week at the two regionalshipment for the same week at the two regional
warehouseswarehouses These gross requirements at the MDC are input toThese gross requirements at the MDC are input to
the master production schedule in the factorythe master production schedule in the factory
In other words, the timing and quantities ofIn other words, the timing and quantities of
production in the factory are linked to the timingproduction in the factory are linked to the timingand quantities of demand at the regionaland quantities of demand at the regionalwarehouseswarehouses
Example: DRPExample: DRPExample: DRPExample: DRP
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Example: DRPExample: DRPExample: DRPExample: DRP
Completed DRP Record forCompleted DRP Record for Main Distribution CenterMain Distribution Center
Forecasted demand (units)Forecasted demand (units)
Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Main Distrib. CenterMain Distrib. Center LT = 1LT = 1
Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200
250250
--11
550550
500500
200200
500500
250250
300300
11 22 33
200200
500500
450450450450550550
100100
5544
WeekWeek
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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pppp
Distribution Resource PlanningDistribution Resource Planning Distribution resource planningDistribution resource planning extends DRP soextends DRP so
that the key resources of warehouse space,that the key resources of warehouse space,
workers, cash, and vehicles are provided in theworkers, cash, and vehicles are provided in the
correct quantities at the correct times.correct quantities at the correct times.
Analyzing Shipping DecisionsAnalyzing Shipping DecisionsAnalyzing Shipping DecisionsAnalyzing Shipping Decisions
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y g pp gy g pp gy g pp gy g pp g
The Transportation ProblemThe Transportation Problem Problem involves shipping a product from severalProblem involves shipping a product from several
sources (ex. factories) with limited supply tosources (ex. factories) with limited supply to
several destinations (ex. warehouses) with demandseveral destinations (ex. warehouses) with demand
to be satisfiedto be satisfied
PerPer--unit cost of shipping from each source to eachunit cost of shipping from each source to each
destination is specifieddestination is specified
Optimal solution minimizes total shipping cost and
Optimal solution minimizes total shipping cost andspecifies the quantity of product to be shippedspecifies the quantity of product to be shipped
from each source to each destinationfrom each source to each destination
Example: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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p g pp gp g pp gp g pp gp g pp g
Pacer produces computer monitors in its threePacer produces computer monitors in its threefactories and ships them to five regional warehouses.factories and ships them to five regional warehouses.
The factoryThe factory--toto--warehouse shipping costs per monitorwarehouse shipping costs per monitor
are:are:
WarehouseWarehouse
FactoryFactory AA BB CC DD EE
11 $2.10$2.10 $4.30$4.30 $3.60$3.60 $1.80$1.80 $2.70$2.70
22 4.904.90 2.602.60 3.503.50 4.504.50 3.703.7033 3.903.90 3.603.60 1.501.50 5.805.80 3.303.30
continuedcontinued
Example: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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p g pp gp g pp gp g pp gp g pp g
The factories have the following capacitiesThe factories have the following capacities(monitors produced per month): 1 = 10,000;(monitors produced per month): 1 = 10,000;
2 = 20,000; and 3 = 10,000.2 = 20,000; and 3 = 10,000.
The warehouses need at least these numbers ofThe warehouses need at least these numbers of
monitors per month: A = 5,000; B = 10,000; C =monitors per month: A = 5,000; B = 10,000; C =10,000; D = 5,000; and E = 10,000.10,000; D = 5,000; and E = 10,000.
Use the POM Software Library to solve thisUse the POM Software Library to solve this
transportation problem.transportation problem.
Example: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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SolutionSolution
WarehouseWarehouse
FactoryFactory AA BB CC DD EE
11 5,0005,000 00 00 5,0005,000 0022 00 10,00010,000 00 00 10,00010,000
33 00 00 10,00010,000 00 00
Total monthly shipping cost = $97
,500Total monthly shipping cost = $9
7,500(Note: all warehouse demand is satisfied(Note: all warehouse demand is satisfied
and no factorys capacity is exceeded.)and no factorys capacity is exceeded.)
p g pp gp g pp gp g pp gp g pp g
Innovations in LogisticsInnovations in LogisticsInnovations in LogisticsInnovations in Logistics
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gggg
New developments affecting logistics include:New developments affecting logistics include: AllAll--freight airportsfreight airports
InterInter--modal shippingmodal shipping
InIn--transit ratestransit rates Consolidated shipmentsConsolidated shipments
AirAir--freight and trucking deregulationfreight and trucking deregulation
Advanced logistics softwareAdvanced logistics software
WarehousingWarehousingWarehousingWarehousing
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gggg
WarehousingWarehousing is the management of materials whileis the management of materials whilethey are in storage.they are in storage.
Warehousing activities include:Warehousing activities include:
StoringStoring
DispersingDispersing
OrderingOrdering
AccountingAccounting
WarehousingWarehousingWarehousingWarehousing
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Record keeping within warehousing requires aRecord keeping within warehousing requires a stockstockrecordrecord for each item that is carried in inventories.for each item that is carried in inventories.
The individual item is called aThe individual item is called a stockstock--keeping unitkeeping unit
(SKU).(SKU).
Stock records are running accounts that show:Stock records are running accounts that show:
OnOn--hand balancehand balance
Receipts and expected receiptsReceipts and expected receipts
Disbursements, promises, and allocationsDisbursements, promises, and allocations
Inventory AccountingInventory AccountingInventory AccountingInventory Accounting
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In the past, inventory accounting was based on:In the past, inventory accounting was based on: periodic inventory accounting systemsperiodic inventory accounting systems ---- periodicperiodic
(end(end--ofof--day) updating of inventory recordsday) updating of inventory records
physical inventory countsphysical inventory counts ---- periodic (endperiodic (end--ofof--year)year)
physical counting of all SKUs at one timephysical counting of all SKUs at one time
Today, more and more firms are using:Today, more and more firms are using:
perpetual inventory accounting systemsperpetual inventory accounting systems ---- realreal--timetime
updating of records as transactions occurupdating of records as transactions occur cycle countingcycle counting ---- ongoing (daily or weekly) physicalongoing (daily or weekly) physical
counting of different SKUscounting of different SKUs
Example: Cycle CountingExample: Cycle CountingExample: Cycle CountingExample: Cycle Counting
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A company is implementing a cycleA company is implementing a cycle--countingcounting program. ClassA items will be counted monthly, program. ClassA items will be counted monthly,
Class B items will be counted quarterly, and Class CClass B items will be counted quarterly, and Class C
items will be counted semiitems will be counted semi--annually.annually.
5% of the firms inventory items are classified as5% of the firms inventory items are classified asClass A, 20% are Class B, and 75% are Class C. IfClass A, 20% are Class B, and 75% are Class C. If
the firm has 16,000 different SKUs (unique inventorythe firm has 16,000 different SKUs (unique inventory
items), how many will need to be counted daily?items), how many will need to be counted daily?
Assume 200 days per year are available for cycleAssume 200 days per year are available for cyclecounting.counting.
Example: Cycle CountingExample: Cycle CountingExample: Cycle CountingExample: Cycle Counting
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NumberNumberNumberNumber of Countsof Counts
ClassClass of Itemsof Items per Itemper Item Total CountsTotal Counts
of Itemof Item per Classper Class per Year per Year per Year per Year
AA 800800 1212 9,6009,600
BB 3,2003,200 44 12,80012,800
CC 12,00012,000 22 24,00024,000
TotalTotal 16,00016,000 46,40046,400
Example: Cycle CountingExample: Cycle CountingExample: Cycle CountingExample: Cycle Counting
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Number of Inventory Items Counted DailyNumber of Inventory Items Counted Daily
= 46,400/200 = 232 items per day= 46,400/200 = 232 items per day
otal ounts per year=
Number of available days per year
Example: Cycle CountingExample: Cycle CountingExample: Cycle CountingExample: Cycle Counting
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The cycleThe cycle--counting personnel must count 232counting personnel must count 232inventory items per day. If the average cycleinventory items per day. If the average cycle--countercounter
can count 24 items per day, how many counters arecan count 24 items per day, how many counters are
needed?needed?
Number of CycleNumber of Cycle--Counting Personnel RequiredCounting Personnel Required
= 232/24 = 9.67 or 10 counters= 232/24 = 9.67 or 10 counters
Number of items counted er d y=
Number of items er d y er counter
Top Selling Supply Chain Management SoftwareTop Selling Supply Chain Management SoftwareTop Selling Supply Chain Management SoftwareTop Selling Supply Chain Management Software
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In 198
0 a young engineer in Dallas named Sanjiv Sidhu saw aIn 198
0 a young engineer in Dallas named Sanjiv Sidhu saw abusiness opportunity in the scientific observation that even thebusiness opportunity in the scientific observation that even thesmartest people can only juggle as many as nine variablessmartest people can only juggle as many as nine variableswhen making decisions. With that in mind he developedwhen making decisions. With that in mind he developedcomputer software for shopcomputer software for shop--floor managers based on artificialfloor managers based on artificial
intelligence and advanced simulation models.F
ound in 1988
intelligence and advanced simulation models.F
ound in 1988
i2 Technologies Inc., develops software for factories toi2 Technologies Inc., develops software for factories tomanage the delivery of components and the shipment ofmanage the delivery of components and the shipment of
products.products. (www.i2.com)(www.i2.com)
1999 Information Week magazine, Product of the year awards.1999 Information Week magazine, Product of the year awards.
I2 Technologies Rhythm software owns 13
percent of theI2 Technologies Rhythm software owns 13
percent of themarket for supply chain management software with more thanmarket for supply chain management software with more than800 customer companies worldwide, including Compaq, Dell,800 customer companies worldwide, including Compaq, Dell,Ford, General Motors, CocaFord, General Motors, Coca--Cola, Black and Decker, IBM,Cola, Black and Decker, IBM,and Texas Instruments. The software helps companies to betterand Texas Instruments. The software helps companies to better
manage inventories and manufacturing capacities by usingmanage inventories and manufacturing capacities by using
SoftwareSoftware ------continuedcontinuedSoftwareSoftware ------continuedcontinued
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Simulation models instead of the rules of thumb that haveSimulation models instead of the rules of thumb that havetraditionally been applied to managing plants. The Rhythmtraditionally been applied to managing plants. The Rhythmsoftware also includes applications for productsoftware also includes applications for product
Product life cycle managementProduct life cycle management
Supply planning,Supply planning,
Demand planning, demand fulfillment,Demand planning, demand fulfillment,
Financial and operations planning,Financial and operations planning, And customer relationship managementAnd customer relationship management
A typical $ 1 billionA typical $ 1 billion--aa--year manufacturer carrying $250year manufacturer carrying $250million inventory can comfortably cut inventory to less thanmillion inventory can comfortably cut inventory to less than$100 million with better supply chain management. According$100 million with better supply chain management. Accordingto Mr. Sidhu the savings come from reduced borrowing, lowerto Mr. Sidhu the savings come from reduced borrowing, lowerstorage costs, and reduced risk of damage or obsolescence,.storage costs, and reduced risk of damage or obsolescence,.Companies can then reinvest much of the money in productCompanies can then reinvest much of the money in productdevelopment or building efficiencies.development or building efficiencies.
ExpeditingExpeditingExpeditingExpediting
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Expediting is the focusing of one or more personsExpediting is the focusing of one or more personsattention on a particular order or batch of materialsattention on a particular order or batch of materialsfor the purpose of speeding up the order through allfor the purpose of speeding up the order through allor part of the entire supply chain. Deor part of the entire supply chain. De--expeditingexpeditingmeans slowing down an order. Expediting or demeans slowing down an order. Expediting or de--expediting is necessary usually because unforeseenexpediting is necessary usually because unforeseenevents have caused an order for materials or productsevents have caused an order for materials or productsto be late or early. Some of these sort of events are:to be late or early. Some of these sort of events are:
A customer increased the quantity of productsA customer increased the quantity of products
ordered. The expanded order quantity now exceedsordered. The expanded order quantity now exceedsfinished goods inventory, and additional productsfinished goods inventory, and additional productsmust be quickly produced.must be quickly produced.
ExpeditingExpeditingExpeditingExpediting
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A Supplier fails to ship an order for materials whenA Supplier fails to ship an order for materials when
promised. Emergency shipping procedures must bepromised. Emergency shipping procedures must beemployed in order to get the parts in house in time to avoidemployed in order to get the parts in house in time to avoid
a stockout or disruption of the production processes.a stockout or disruption of the production processes.
Parts being processed in heatParts being processed in heat--treat have encounteredtreat have encountered
technical difficulties. The batch must be quickly transferredtechnical difficulties. The batch must be quickly transferred
ahead of other materials if the annealing process is not toahead of other materials if the annealing process is not to
be delayed.be delayed.
After a special order for an electric generator has beenAfter a special order for an electric generator has been
started in production, the customer calls and wants to delaystarted in production, the customer calls and wants to delay
the shipment for three weeks. The work in process shouldthe shipment for three weeks. The work in process shouldbe slowed and rescheduled so that the product is completedbe slowed and rescheduled so that the product is completed
when the customer wants it shipped.when the customer wants it shipped.
ExpeditingExpeditingExpeditingExpediting
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Expediting most often is necessary because of the uncertaintiesExpediting most often is necessary because of the uncertainties
presents in production systems; customer demand, materialpresents in production systems; customer demand, materialdelivery times; and indelivery times; and in--house processing times are but a few ofhouse processing times are but a few ofthese uncertainties. Material management must be flexiblethese uncertainties. Material management must be flexibleenough to accommodate these uncertainties by reactingenough to accommodate these uncertainties by reactingquickly when the unexpected happens. Expediting isquickly when the unexpected happens. Expediting is
periodically performed by all materials managementperiodically performed by all materials managementemployees, and this activity helps make supply chains flexible.employees, and this activity helps make supply chains flexible.
Expediting completes the materials cycle that proceeds fromExpediting completes the materials cycle that proceeds fromacquisition of materials to the delivery of finished goods intoacquisition of materials to the delivery of finished goods intocustomers hands. The means to change procedures, overridecustomers hands. The means to change procedures, override
policy, make telephone calls and collect past favours, devisepolicy, make telephone calls and collect past favours, devisequick solutions as they occur, and other tactics of expeditingquick solutions as they occur, and other tactics of expeditingare some of the important ways that managers made materialsare some of the important ways that managers made materialssystems work effectively and get the right quantity of the rightsystems work effectively and get the right quantity of the rightmaterial to the right place at the right time.material to the right place at the right time.
Measuring the Performance Materials ManagersMeasuring the Performance Materials ManagersMeasuring the Performance Materials ManagersMeasuring the Performance Materials Managers
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Level and value of inLevel and value of in--house inventorieshouse inventories Percentage of orders delivered on timePercentage of orders delivered on time
Number of stockoutsNumber of stockouts
Annual cost of materialsAnnual cost of materials
Annual cost of transportationAnnual cost of transportation
Annual cost of warehouseAnnual cost of warehouse
Number of customer complaintsNumber of customer complaints
Other factorsOther factors
Material Management Performance In Multinational CompaniesMaterial Management Performance In Multinational CompaniesMaterial Management Performance In Multinational CompaniesMaterial Management Performance In Multinational Companies
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Performance Criteria All Companies Multinational
Number of supplier for each items 5
Number of purchasing agent RS 100 mln. 5. .
Cost of purchasing as % of purchases . % 0.8%
Time required to perform an evaluation weeks 0. week
Time required to place an order 6 weeks . minut
Percentage of late deliveries % %
Percentage of defects 1.5% 0.0001%
Number of material stockout per year 00
EE--Business & Supply Chain ManagementBusiness & Supply Chain ManagementEE--Business & Supply Chain ManagementBusiness & Supply Chain Management
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Internet has grown and evolved, more and moreInternet has grown and evolved, more and morecompanies have become involved in ecompanies have become involved in e--busine
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