Chapter 10: The role of information technology

Chapter learning objectives

Upon completion of this chapter you will be able to:

• describe, with examples, the meaning and use of e-business
• analyse how e-business can be delivered for organisations in general and describe what an organisation needs to deliver e-business and how this might help it to deliver a selected strategy
• analyse, for a given business, the main elements of both the push and pull models of the supply chain
• describe the relationships between the supply chain, value chain and value network for both product-based and service-based organisations and discuss the use of IT and e-procurement in managing the supply chain.

1 Information technology – the strategic context

Business strategy and information strategy

This section looks at IT/IS strategy in the context of the strategic planning tools met in earlier chapters.

Unlike many other resources, IS/IT evolves very quickly and willoften play a large part in determining corporate strategy. On a SWOTanalysis IS/IT can appear in any of the four quadrants and theappropriate responses have to be made. For example:

• Strength. A business has a very advanced IS/IT system that allows it to respond flexibly to orders while maintaining a low cost base.
• Weakness. An organisation's system is in disarray and customers are becoming irritated by its inability to deliver the proper goods on time.
• Opportunity. Set up new internet site that allows customers to buy over the web.
• Threat. A competitor has spent heavily on IS/IT and can offer very high levels of service as a result.

Illustration 1 – Information technology – the strategic context

MP3 sound compression, the internet and fast broadband connectionshave forced companies like Sony and EMI to reassess their musicretailing strategies. Technology is a threat to these companies.

IS/IT and Porter's five forces

To analyse the SWOT factors relating to IS/IT, it can be useful toconsider how IS/IT can be used to counter Porter's five forces so as tohelp an organisation have a more comfortable existence than some of itscompetitors.

• Rivalry: Use IT to reduce the effects of tough competition for example, by building strong relationships with customers and lowering costs.
• Threat of new entrants: Sophisticated IT applications are expensive, slow to develop and technically challenging. All of these are barriers to entry.
• Supplier pressure: Use IT to find new suppliers. Use IT to automatically rotate orders between suppliers. Compare prices on the internet.
• Customer pressure: Use IT to improve customer service, for example, by allowing on-line ordering.
• Threat of substitutes: Use computer-aided design and manufacturing to develop new products first.

IT/IS and Porter's five forces

Porter's five forces model may be used to help clarify the overallbusiness strategy. The model provides a framework to discuss areas whereinformation technology and systems can yield competitive advantage. Theadvantages may be in defending the organisation against the forces orby attacking and influencing them in its favour.

Management should use the model to determine which of the forcesposes a threat to the future success of the organisation. By rankingthese threats in terms of intensity and immediacy, the most critical canthen be considered in terms of how information technology or systemscan be used to gain advantage or avoid disadvantage.

Threat of entry – new entrants into a market will bringextra capacity and intensify competition. The strength of the threatfrom new entrants will depend upon the strength of the barriers to entryand the likely response of existing competition to a new entrant. ITcan have two possible roles to counteract the threat.

• Defensively, by creating barriers that new entrants to the market find difficult to overcome. IT can increase economies of scale by using computer-controlled production methods, requiring a similar investment in the technology of new entrants. Another defensive move is to colonise the distribution channels by tying customers and suppliers into the supply chain or the distribution chain. The harder the service is to emulate, the higher the barrier is for new entrants.
• Offensively, by breaking down the barriers to entry. An example is the use of telephone banking, which reduces the need to establish a branch network. Automated teller machines (ATMs) created new distribution channels enabling 'bank branches' to be set up in airports, out-of-town supermarkets and other areas where there are many potential customers. These machines provided not only expansion of the total market, but also a low-cost method of overcoming the barriers to entry in the areas where the cost of entry was high and space was at a premium.

Intensity of competitive rivalry – this is rivalry betweenfirms making similar products, or offering the same services, andselling them in the same market. The most intense rivalry is where thebusiness is more mature and the growth has slowed down.

IT can be used to compete. Cost leadership can be exploited by IT,for example, where IT is used to support just-in-time (JIT) systems.Alternatively, IT can be used as a collaborative venture, changing thebasis of competition by setting up new communications networks andforming alliances with complementary organisations for the purpose ofinformation sharing. When Thomson Holidays introduced its on-linereservation system into travel agents' offices, it changed the basis ofcompetition, allowing customers to ask about holiday availability andspecial deals and book a holiday in one visit to the travel agent.

Threat of substitute products – this threat applies bothbetween industries (e.g. rail travel with bus travel and private car)and within an industry (e.g. long-life milk as substitute for deliveredfresh milk). In many cases IS themselves are the substitute product.Word-processing packages are a substitute for typewriters.

IT-based products can be used to imitate existing goods as inelectronic keyboards and organs. In the case of computer games, IT hasformed the basis of a new leisure industry.

Computer-aided design and computer-assisted manufacture (CAD/CAM)have helped competitors to bring innovative products to the market morequickly than in the past.

Interactive information systems add value by providing an extraservice to an existing product. An example of this is provided by ICI's'Counsellor', an expert system that advises farmers on disease control.It analyses data input by the farmer on areas such as crop varietiesgrown, soil type and previous history of disease and recommendsfungicides or other suitable ICI products to solve the farmer'sproblems.

The threat from substitutes can be minimised by ensuring that anorganisation develops a product before its rivals and then protects thatproduct for a number of years by means of patents. This approach iswidely used in the pharmaceutical and biotech industries wherespecialist software is now widely used in the drug discovery process,enabling drugs to be developed that target specific human and animaldiseases.

Bargaining power of customers – the bargaining power ofcustomers can be affected by using IT to create switching costs and'lock' the buyer into products and services. The switching costs may bein both cash terms and operational inconvenience terms. For example, PCsrun under Microsoft operating systems are not very efficient when usingnon-Microsoft application software.

Another form of locking customers in is to develop customerinformation systems that inform the organisation about the customer'sbehaviour, purchases and characteristics. This information enables theorganisation to target customers in terms of direct marketing and otherforms of incentive such as loyalty schemes, where methods of rewardingcustomer loyalty by giving them 'preferred customer' status are used. Ifa clothing retailer is launching a new collection it can offer itsloyal customers a private viewing. Some airlines have deals such asfrequent flyers and air miles as incentives.

The IT techniques at play here include 'data warehousing' – thecollection and storage of large volumes of customer information onspending and purchasing patterns, social group, family make-up, etc.This then allows for 'data mining' – the extraction of relevant datafrom the warehouse as the source for target marketing drives. It wasreported recently that Tesco, the UK's largest supermarket group, wasmining its customer data to identify customers over the age of 60 whoregularly purchased children's clothes, food and toys – possiblyleading to a marketing push aimed at grandparents.

Bargaining power of suppliers – the bargaining power of suppliers, and hence their ability to charge higher prices, will be influenced by:

• the degree to which switching costs apply and substitutes are available
• the presence of one or two dominant suppliers controlling prices
• the products offered having a uniqueness of brand, technical performance or design not available elsewhere.

Reducing the suppliers' power to control the supply can erode thispower. Where an organisation is dependent on components of a certainstandard in a certain time, IT can provide a purchases database thatenables easy scanning of prices from a number of suppliers. Suppliers'power can be shared so that the supplier and the organisation bothbenefit from performance improvements. The Ford Motor Company set up CADlinks with its suppliers with the intention of reducing the costs ofdesign specification and change. Both the time taken and the error ratewere reduced because specifications did not have to be re-keyed into thesuppliers' manufacturing tools.

How IT can play a role in generic strategies

IS/IT and Porter's generic strategies

Porter identified three generic strategies for dealing with thecompetitive forces. The two basic strategies are overall cost leadershipand differentiation. The third strategy – a focus strategy –concentrates on a particular segment of a product line or geographicalmarket – a niche. If it is known which strategy an organisation iscurrently using to promote their products and/or services, it should bepossible to define a role for IS to enhance that strategy.

• Overall cost leadership is about competing by offering products or services at low cost and value for money. The emphasis is on cost reduction. For example, driving down inventory levels, with the assistance of IT for supply chain planning and scheduling, can reduce costs. Sales forecasting software that can be fed into manufacturing resources planning applications can be used in shop floor planning and scheduling applications to increase efficiency.
• Differentiation is about showing that your product or service is different from those of your competitors through, e.g. brand image, customer service or design. A way of differentiating may be to make the ordering process as easy and flexible as possible. This can be done by providing on-line information services to identify the most appropriate product or service, followed up by a simple on-line ordering process. Where the differentiation is by customisation, CAD (computer-aided design) can reduce costs effectively.
• Focus. This strategy concentrates on a niche market, e.g. a particular buyer group, market, geographic area, segment or product line. The opportunities for IS/IT include providing access to customer information, trends and competitors so as to maximise competitive thrust and exclude competitors.

Test your understanding 1

Consider how an estate agent could use IS/IT to improve its competitive position.

2 E-Business

The meaning and use of e-business

E-commerce is described as 'all electronically mediated informationexchanges between an organisation and its external stakeholders'. Ane-commerce transaction can be considered from two perspectives.

E-business has been defined as the transformation of key businessprocesses through the use of internet technologies.

So, e-commerce is a subset of e-business. The most genericdescription of e-commerce is trading on the internet, buying and sellingproducts and services online.

Porter suggested three ways in which IS/IT in general can affectthe competitive environment and an organisation's ability to compete.Though these points apply to IS/IT in general, they are particularlyimportant when considering e-business.

• New businesses might become possible. For example, auction sites and photo-album sites.
• The industry structure can be changed. For example, in the music business it can be argued that the large CD publishers have less power because music can be self-published on the internet.
• IS/IT can provide an organisation with competitive advantage by providing new ways of operating. For example, airlines save money by encouraging internet bookings.

Categories of e-business

The categories of e-business functions are shown below:

• B2B (business to business). For example, a supermarket IS system automatically placing orders into suppliers' IS systems.
• B2C (business to consumer). Selling over the internet – books, flights, music, etc.
• C2B (consumer to business). Some internet sites display a selection of suppliers' offerings from which the user can choose. A model that largely depends on the internet.
• C2C (consumer to consumer). Auction sites, such as ebay, putting consumers in touch with each other. Amazon does the same by offering second-hand books. This model largely depends on the internet.
• 'Buy side' e-commerce focuses on transactions between a purchasing organisation and its suppliers.
• 'Sell side' e-commerce focuses on transactions between a purchasing organisation and its customers.

The stages of e-business

The stages of e-business can be described as:

This model helps businesses to understand where they are in theprocess of e-business, and this will help them to decide where to gonext with further development.

Benefits of e-business

Most companies employ e-business to achieve the following:

• Cost reduction – e.g. lower overheads, cheaper procurement
• Increased revenue – e.g. online sales, better CRM
• Better information for control – e.g. monitoring website sales
• Increased visibility
• Enhanced customer service – e.g. via extranets
• Improved marketing – e.g. e-mailing customers with special offers
• Market penetration – e.g. even small suppliers can gain a global presence via the internet
• The combination of the above should be to enhance the company's competitive advantage

Illustration 2 – E-business

Many supermarkets now offer a home-delivery service. Over theinternet, inventory lists are displayed on customers who fill anelectronic 'shopping trolley' and proceed to payment and checkout. Adelivery period is chosen (say 4pm–6pm) for the following day.Supermarket staff pick the goods chosen and pack them for delivery.

Standard shopping lists can be set up by users to speed up theprocess. The standard lists can be amended each time (for example, extramilk, but no carrots).

Expanded example

In the above example, what should the supermarket do if it is outof stock of an ordered item, when it comes to be picked for packing?

Solution

Suggestions are:

• have standard options for the customer at ordering time: substitute with a similar product or omit item
• email customer (likely to be inefficient)
• phone customer (perhaps not welcomed by the customer).

Barriers to e-business

Barriers to e-business can be seen in both the organisation itself and in its suppliers and customers. They include:

• technophobia
• security concerns      
• set-up costs
• running costs
• limited opportunities to exploit e-business
• limited IT resources in house
• customers not likely to be interested in e-business.

Explanation of the barriers to e-business

• Technophobia. Senior managers are distrustful and sceptical about the alleged benefits of e-business
• Security concerns about hackers and electronic fraud
• Set-up costs. Simple, static pages are cheap to set up, but dynamic pages, linking to e-commerce systems and databases, with impressive design values are expensive to set up
• Running costs. Renting space on a web-server. Also, maintenance of websites is very important as most users are very unforgiving about out-of-date sites. Updating, say with special offers, is also needed to encourage return visits, perhaps linked to email campaigns
• Limited opportunities to exploit e-business. Some businesses (such as selling books) are more suitable for e-business than others (such as selling carpets)
• Limited IT resources in house (e.g. a lack of staff skills creating staff resistance) so recruitment is needed or all development and maintenance has to be sub-contracted
• Customers not likely to be interested in e-business (e.g. firms targeting retired pensioners).

Intranets and extranets

Intranets are internal internets. They exist inside theorganisation only, using website and browser technology to displayinformation.

Commonly they contain:

• information about customers
• information about products
• information about competitors
• news/updates
• procedure manuals.

However, there's no reason why accounting information cannot be delivered over intranets.

Extranets are intranets that are connected to external intranets.

For example, a supplier could give customers access to their orderprocessing system so that orders can be placed and tracked. It is whenthese types of external connection are made that e-business can begin toproduce spectacular results.

Other requirements needed to deliver an e-business strategy

Connection to the internet will not, of itself, deliver e-business.Suitable hardware, software and business processes have to be in place.Here are some examples of how e-business could affect various businessareas.

Making websites interactive

One of the most effective things you can do with your website is togive users power over it. Give them choices, tools and features thatencourage them to interact with the site and provide them with a senseof control over it.

• Search – Provide users with the ability to search your website for words, phrases and/or provide them with key topics from which to choose. Consider in what format the results are to be presented.
• Online forms – How many, number of fields in each, what needs to be verified before the user submits the form – e.g. have they completed the field for email address?
• 'Members only' section to the site – Is there a section that can only be accessed via a user name and password? Where are the user names and passwords to be stored? How will you handle people who forget their password?
• Interactive questionnaires/surveys/polls – How many, how long, how presented? What will you do with the information provided by the users?
• Animations – How can you (should you) use Flash or other programming devices to bring life into your site and illustrate products and services?
• Subscription email lists – What can users subscribe to by way of email lists, such as e-newsletters?
• Links to other sites – How many and what tools are to be employed during maintenance to check automatically on the veracity of the link?
• Downloadable files – PDFs, images, audio files – how many, in what format, with what restrictions?
• Contact Us – What contact details should be on the site – e.g. email, telephone, street address?
• Site map – What is the site map of the website to look like? Just text as links or is a diagram preferred?
• Text-only version of the site – Will you need a text-only version of the website for customers who are visually impaired or with a slow/expensive connection?
• Multilingual requirements – How many languages? How much of the site is to be multilingual? At what point are users to nominate which language they want to view the site in – e.g. home page, a splash page?
• Provision for printing and bookmarking (i.e. allowing users to store the website address in their browser's memory or 'favourites' section) – Are users to be able to bookmark specific pages or is the home page sufficient? Do you want any special print function other than the default function supplied by the browser?

3 Supply chain management (SCM)

Many businesses prosper or fail depending on the success of theirrelationship with their suppliers and with those who they supply.Businesses that rely on other businesses to this extent are in what iscalled a supply chain – each supplying each other right up to thefinal link in the chain, the consumer. The internet can help make thisrelationship work moreeffectively and efficiently.

About supply chains

A supply chain encompasses all activities and information flowsnecessary for the transformation of goods from the origin of the rawmaterial to when the product is finally consumed or discarded.

This typically involves distribution of the product from thesupplier to the manufacturer to the wholesaler to the retailer and tothe final consumer, otherwise known as nodes in the supply chain.

It is helpful to make a distinction between upstream and downstreamsupply chain management. For an Internet retailer, for example,upstream SCM would involve transactions between the firm and itssuppliers (equivalent to buy-side e-commerce) and downstream, customers(equivalent to sell-side e-commerce).

The transformation of product from node to node includes activities such as:

• production planning
• purchasing
• materials management
• distribution
• customer service
• forecasting.

While each firm can be competitive through improvements to itsinternal practices, ultimately the ability to do business effectivelydepends on the efficient functioning of the entire supply chain.

Managing the chain

Managing the chain primarily concentrates on managing the movement of the following three areas:

• materials/inventory
• information
• funds.

Inventory control

Amongst other things, this will include a consideration of:

• number, location and size of warehouses and distribution centres
• production scheduling (including life cycle management to ensure that new products can be successfully integrated into the chain)
• a transportation strategy (in terms of routes, timing etc.)

Information management

The key elements of information required for successful supply chain management include:

• potential levels of end-user and customer demand
• daily production and distribution plans
• resource availability and utilisation

Fund management

For the system to work it needs to be sufficiently liquid at allnodes to ensure that bottlenecks are avoided and supply can besustained. There also needs to be a strong relationship of trust betweeneach party in the chain.

Importance of Information Technology

IT plays an obvious role in providing, storing, managing andinterrogating the information management part of supply chainmanagement. But IT can provide aid for all of the areas that requireconsideration through systems such as e-procurement and customerrelationship management (covered in the next chapter), and there willalso be links to other areas of the syllabus such as BPR, projectmanagement, organisational structure etc.

Illustration 3 – Supply chain management (SCM)

For example, a wholesaler's inability to adequately maintaininventory control or respond to sudden changes in demand for stock maymean that a retailer cannot meet final consumer demand. Conversely, poorsales data from retailers may result in inadequate forecasting ofmanufacturing requirements.

Push and pull supply chain models

In the traditional supply chain model, the raw material suppliers are at one end of the supply chain.

• They are connected to manufacturers and distributors, who are in turn connected to a retailer and the end-customer.
• Although customers are the source of the profits, they are at the end of the chain in the 'push' model.

Driven by e-commerce's capabilities to empower clients, manycompanies are moving from the traditional 'push' business model, wheremanufacturers, suppliers, distributors and marketers have most of thepower, to a customer-driven 'pull' model.

This new business model is less product-centric and more directlyfocused on the individual consumer – a more marketing-orientedapproach.

• In the pull model, customers use electronic connections to pull whatever they need out of the system.
• Electronic supply chain connectivity gives end customers the opportunity to give direction to suppliers, for example, about the precise specifications of the products they want.
• Ultimately, customers have a direct voice in the functioning of the supply chain.

E-commerce creates a much more efficient supply chain that benefitsboth customers and manufacturers. Companies can better serve customerneeds, carry fewer inventories, and send products to market morequickly.

Illustration 4 – Supply chain management (SCM)

Several personal computer manufacturers allow users to order overthe internet and to customise their machines (for example Lenovo andDell). PCs are then made to customers' orders.

Test your understanding 2

Describe what is meant by the terms 'push' and 'pull' supply chains models.

Revisiting the value chain

Porter's value chain revisited

The theory behind the value chain is that somewhere theorganisation carries out activities that customers value, are willing topay for, and that result in profits being made. The activities could beskill and knowhow related, organisational or manufacturing.

The traditional value chain has been criticised because it:

• is designed primarily to describe manufacturing businesses
• does not emphasise the importance of the customer enough. It is product led rather than market led.

Deise proposed an alternative value chain that places more emphasis on the customer:

In terms of this model, e-business enables companies to:

• carry out continuous market research as products are ordered and sold
• use the results of continuous monitoring to order goods, design new products and design special offers
• allow great flexibility and speed of response, provided members of the up-stream supply chain (suppliers) also embrace e-business.

Note the last point carefully: the whole supply chain must beflexible and efficient if any one member of it is to benefit from bettermarket information. There's no point one company knowing what itscustomers want if its suppliers and distributors cannot respondadequately.

Illustration 5 – Supply chain management (SCM)

In the supply chain shown, ABC Manufacturing Ltd must be responsiveto its customers. Direct supplier 1 and Direct supplier 2 must beresponsive to ABC Manufacturing Ltd, and Indirect supplier 1 must beresponsive to Direct supplier 2.

Obviously, if e-business capability is present in all members ofthe supply chain, management of the chain is becoming more feasible:selling, delivering, ordering, designing and manufacturing can all belinked electronically permitting:

• cost savings
• time savings
• faster innovation
• better marketing
• better quality.

4 Upstream SCM

The key activities of upstream SCM are procurement and upstreamlogistics. A good example of how the upstream supply chain can beimproved using IT is Tescos:

Illustration 6 – Upstream SCM

Tesco

• Largest grocery retailer in the UK
• A typical store stocks 50,000 products
• Over 2,000 suppliers, each of which will supply at most 200 products

What is e-procurement?

The term 'procurement' covers all the activities needed to obtain items from a supplier: the whole purchases cycle.

The purchases cycle

• Identifying when items are needed, how many are needed and gaining authority to acquire them.
• Finding suitable suppliers.
• Choosing which supplier to order from.
• Agreeing the price or perhaps a range of prices depending on volumes.
• Ordering the goods with the chosen supplier(s).
• Receiving goods into the organisation.
• Checking the goods are as ordered and handling queries.
• Recording the goods in inventory or the fixed asset register as appropriate.
• Storing of goods.
• Receiving, checking and processing the supplier's invoice.
• Paying the supplier according to cash flow/cash discount priorities.

E-procurement is the term used to describe the electronic methodsused in every stage of the procurement process, from identification ofrequirement through to payment. It can be broken down into the stages ofe-sourcing, e-purchasing and e-payment.

E-sourcing covers electronic methods for finding new suppliers and establishing contracts.

Not only can e-sourcing save administrative time and money, it canenable companies to discover new suppliers and to source more easilyfrom other countries.

Issuing electronic invitations to tender and requests for quotations reduces:

• administration overheads
• potentially costly errors, as the re-keying of information is minimised
• the time to respond.

E-purchasing covers product selection and ordering.

Buying and selling online streamlines procurement and reducesoverheads through spending less on administration time and cutting downon bureaucracy. E-purchasing transfers effort from a central orderingdepartment to those who need the products. Features of an e-purchasingsystem include:

• electronic catalogues for core/standard items
• recurring requisitions/shopping lists for regularly purchased items. The standard shopping lists form the basis of regular orders and the lists can have items added or deleted for each specific order
• electronic purchase orders despatched automatically through an extranet to suppliers
• detailed management information reporting capabilities.

Improvements in customer service can result from being able toplace and track orders at any time of day. An e-catalogue is anelectronic version of a supplier's paper catalogue including productname, description, an illustration, balance in hand and so on. Userexpectations have increased dramatically in recent years as a result oftheir personal experiences of shopping on the internet. Well-designedwebsites and web interfaces are essential to offer good functionality soas to maintain user satisfaction.

E-payment includes tools such as electronic invoicing andelectronic funds transfers. Again, e-payment can make the paymentprocesses more efficient for both the purchaser and supplier, reducingcosts and errors that can occur as a result of information beingtransferred manually from and into their respective accounting systems.These efficiency savings can result in cost reductions to be shared byboth parties.

Benefits and risks of e-procurement

The benefits of e-procurement

The more of the procurement process that can be automated, the better as there will be considerable financial benefits.

• Labour costs will be greatly reduced.
• Inventory holding costs will be reduced. Not only should overstocking be less likely, but if orders are cheap to place and process, they can be placed much more frequently, so average inventories can be lower.
• Production and sales should be higher as there will be fewer stock-outs because of more accurate monitoring of demand and greater ordering accuracy.

Other benefits include the following:

• The firm may benefit from a much wider choice of suppliers rather than relying on local ones.
• Greater financial transparency and accountability
• Greater control over inventories
• Quicker ordering, making it easier to operate lean or JiT manufacturing systems
• There are also considerable benefits to the suppliers concerned, such as reduced ordering costs, reduced paperwork and improved cash flow, that should strengthen the relationship between the firm and its suppliers.

Potential risks of e-procurement

There are some risks associated with e-procurement. These are:

• technology risks. There is a risk that the system (whether software or hardware) will not function correctly. There are risks that it might not interface properly with the organisation's system. There are very high risks that it will not communicate properly with a wide range of supplier systems
• organisational risks. Staff might be reluctant to accept the new procurement methods
• no cost savings realised. As with all IS/IT projects, it is very difficult to predict all the benefits that can arise. Tangible benefits (such as might arise if fewer staff have to be employed) are relatively easy to forecast. However, intangible benefits (such as better customer service giving rise to an improved reputation) are very difficult to estimate with any accuracy.

Test your understanding 3

XL Travel are a tour operator based in the country's capital. Theyrun weekly trips to the seaside resort of Black Rock (around 140 kmaway) for four day visits (typically Friday to Monday).

The tours are very popular – especially with people aged over 65(who make up over 90% of XL's customers). The company has tradedprofitably for many years on the back of premium pricing. But recentlyprofits have started to fall, coinciding with a minority of complaintsfrom regular users. Some users feel that the quality of the trips havefallen and are not up to previous high standards. Other users feel that,whilst XL itself has invested (with plush new offices, bettermarketing, more staff, easier booking systems etc.), this investment hasgone on the wrong areas.

XL has built up a large cash surplus for further investment. One ofthe ways that it is considering using this cash is to invest andimprove its supply chain.

Required:

(a)What are likely to be the elements of XL's upstream supply chain?

(b)What areas could XL aim to change?

(c)How might IT play a role in facilitating this change?

Restructuring the supply chain

In an earlier chapter we looked at strategic choices ofoutsourcing, vertical integration and strategic alliances, where the keyissues of cost, quality and control were highlighted.

These are still relevant for online businesses as much as forconventional 'bricks and mortar' organisations. All organisations mustdecide between:

• vertical integration – manufacturing in-house
• virtual integration – the majority of supply chain activities are undertaken by third parties
• virtual disintegration (disaggregation) – in between these two extremes.

However, Internet technology allows more efficient and cheapercommunications within the chosen structure and may make virtualintegration preferred to vertical integration.

5 Downstream SCM

Downstream supply change management is about managing relationshipswith both customers and consumers, as well as any other intermediariesalong the way.

Examples of downstream supply chain management actions are:

• providing displays for retailers
• creating a website for end users
• creating user forums on websites
• determining which retailers and distributors to use
• use of different logistical methods/providers
• changes to finished goods inventory policies
• setting recommended retail prices
• giving retail exclusivity rights
• forward integration.

Dealing with intermediaries

A typical downstream for a manufacturer might involve selling todistributors, who then sell on to retailers, who in turn sell on to endusers. Distributors and retailers are therefore intermediaries betweenthe manufacturer and the consumer of the product. One element of supplychain management is to manage intermediaries.

• E-commerce can lead to disintermediation. In this process intermediate organisations (middlemen) can be taken out of the supply chain.
• The process of reintermediation is also found, i.e. new intermediaries are introduced to the value chain, or at least to some aspects of it.
• Countermediation is where established firms create their own new intermediaries to compete with established intermediaries.

Examples

An example of disintermediation is seen in the travel industrywhere travel agents have been cut out of many transactions as the publiccan book directly with hotels, airlines and rail companies.

The travel industry also gives an example of reintermediation.Companies like lastminute.com and expedia.com are like new travelagents, presenting a wide choice of products and services.

An example of countermediation is Opodo.com, set up by acollaboration of European airlines to encourage customers to bookflights directly with them rather than using cost-comparisonintermediaries such as lastminute.com.

Test your understanding 4

Following on from TYU 3, would you recommend downstream supply chain management for XL Travel?

6 Chapter summary

Test your understanding answers

Test your understanding 1

All of the following technologies could help either to save costs or provide enhanced (and differentiated) service.

• Use of digital cameras to photograph property. The images would then be made available over the web.
• Video of properties that can be downloaded and viewed over the web.
• Graphics programs designed to make floor diagrams easy to produce.
• Standard descriptive phrases ('deceptively large' or do they mean 'deceptively small'?) that can be used for property write-ups.
• A database of properties, searchable by price, bedrooms, type, area, age, etc.
• Properties linked to an interactive map.
• A database of recent property prices in the area.
• Buyer requirements database.
• Automatic mailing lists to circulate information to buyers.
• Electronic appointments system.
• Computerised accounting system used for property management.

Test your understanding 2

In a push supply chain, customers are at the end of the supplychain and products are pushed at them by suppliers. The customers mightnot be very keen on the products available, but they have to take (orleave) what is offered. If demand for goods goes up, the manufacturerswill probably not respond with increased production.

In a pull model, the suppliers are at the end of the supply chainbut they pull products into the system. If customer demand goes up, moregoodswill be made and supplied.

Test your understanding 3

(a)The key elements of XL's upstream supply chain is likely to include:

• travel providers (such as bus, train or airline companies)
• accommodation providers
• local food producers and suppliers (some of these will actually be the suppliers to the accommodation providers)
• attractions, activity and excursion providers.

But it could be widened further to include:

• laundry providers
• waste disposal companies
• energy and water suppliers
• sports events
• bars and clubs
• local infrastructure providers.

However, any initial step in supply chain management is likely to focus on the management of the first group of key elements.

(b)There is an opinion amongst aminority of customers that the quality of the service as deteriorateddue to a lack of investment. One element of supply chain management isto ensure that the chain contains the correct value system to supportthe firm's competitive advantage. XL should therefore consider whetherthey are using the correct travel companies, accommodation providers,attractions etc.

If existing suppliers are deemed to be appropriate then XLshould look to introduce a move towards elements of a 'pull' system. XLshould communicate with a selection of customers (not just those who arecomplaining) to determine what they would like from their tour, whattheir expectations are, how things could be improved etc.

This will allow them to have a better idea of what is neededfrom suppliers. It will allow XL to complete thorough inspections ofsuppliers and also to provide suppliers with information on potentialchanges that might be required. So focusing on the key elements of XL'ssupply chain, the following gives some ideas of the areas that XL couldlook to improve, change, redesign or remove:

• accommodation
  • location
  • ease of access
  • furniture used
  • bedding used
  • staffing
  • facilities
• travel providers
  • capacity
  • safety measures
  • check-in facilities
  • age of transport
  • in-journey refreshments, facilities and entertainment (where appropriate)
  • luggage capacity, security and safety
• food suppliers
  • ingredients used
  • range of menus
  • facilities
  • capacity
  • waiting times
  • service
• attractions etc.
  • availability
  • ease of access
  • waiting times
  • safety record
  • facilities
  • range of products

Supply chain management will require a consideration and possible investment in all of these areas and many more.

(c)Information Technology can play avery important role in supply chain management. Firstly it can gatherinformation. Initially, in a pull system, this should be customerfocused. So, for example, Customer Relationship Management (CRM - seenext chapter) software can be used to determine customer needs, buyingpatterns, likes/dislikes etc.

The next set of information can be on elements of the upstreamsupply chain. For example, in part (b) some suggestions were given onwhat needs to be considered for each of the four key elements of XL'supstream supply chain, XL can obtain information on current performanceusing software to record and interrogate the data.

IT can also be used to provide and share data. Customerfeedback and suggestions can be provided to suppliers. Also, supplierscan more easily access information on the potential number, age,requirements etc. of potential visitors. For example, the software mightflag in advance that one of the visitors has a physical disability sothat suppliers can prepare for this in advance.

The IT system might also be able to cope with and alleviatepotential 'bottlenecks' in the system. If, for example, a particularaccommodation supplier hasn't got the capacity to cope with the numberof visitors who are arriving on a particular date, the system shouldallow for alternative accommodation for the excess to be found quicklyand easily.

The system could even be expanded for advance planning ofelements of the system such as meals and entertainment. Customers couldperhaps pre-book tickets for events or particular items on the menus offood providers.

Overall, the system is likely to provide benefits for allparties in the chain. XL can retain its competitive advantage, customerscan receive a better and more personalised service, and suppliers willget better information for planning.

Test your understanding 4

There would be some definite benefits from introducing downstream management to XL Travel such as:

• e-marketing might be more easily used to give more up-to-date and personalised information to customers.
• updates to schedules, events etc. might be more easily communicated to customers,
• customers might feel more obliged to rebook with XL Travel if IT systems improve the convenience of making a booking.

However, for XL, downstream supply chain management may not beattractive for a number of reasons. Firstly, they already deal directlywith their customers so there would be no 'dis-intermediation' benefits.

Also, given the age of their typical customer base, there may belittle take-up of e-marketing and on-line booking systems. This is anage group that are typically low users of technology and the cost ofinvestment in these downstream systems is unlikely to be recovered bythe benefits highlighted above.

In fact, moving away from its existing personal levels of servicemight actually further alienate its client base and be seen as a furtherexample of investment happening in the wrong areas.

Overall, XL Travel should focus on upstream supply chain managementand avoid downstream management until a time when customers are readyfor it and demanding it.

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