The Internet Encyclopedia (Volume 3)

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Supply Chain Management and the InternetSupply Chain Management and the Internet

Thomas D. Lairson,Rollins College

Introduction 374

The Global Business Revolution and Supply

Chains 374

How Does the Internet Affect Supply Chain

Management? 375

Opportunities for Gains 375

Management Issues in Supply Chain

Collaboration 377

New Business Models 379

Case Studies 381

Nortel 381

Cisco Systems 381

Dell Computer 382

NMS Communications 383

Future Trends 383

Glossary 384

Cross References 385

References 385

INTRODUCTION

The Internet creates a new environment for exchanging

information and conducting business transactions. More

than ever possible before, the Internet increases the quan-

tity and expands the richness of information in real time

to a much wider set of participants and thereby raises dra-

matically the value of information in supply chain man-

agement. The Internet also increases transparency, which

is the ability to “see across the supply chain,” through the

enhanced capacity to obtain, distribute, and create infor-

mation across distances, and does so at a cost that has

been decreasing by 35% per year.^1 This ability changes

the management of supply chains by expanding capabil-

ities and extending the scope of management across the

supply chain, and contributes to reductions in cost and

improved service. As a consequence, the strategic calcu-

lations of firms must now incorporate supply chain op-

erations and new business models that concentrate on

reaping the benefits of an Internet-based supply chain.

This places a tremendous premium on creating, shar-

ing, and using information throughout the supply chain.

Where once firms in a supply chain had little choice but

to operate mostly alone in an information vacuum, now

they must operate in a collaborative environment with an

abundance of information. Trade-offs that once seemed

immutable are now significantly modified by new Inter-

net capabilities.

THE GLOBAL BUSINESS REVOLUTION

AND SUPPLY CHAINS

The Internet has emerged as a new medium of business

at a time of revolutionary changes in global business,

and it will reinforce and accelerate these changes. Many

(^1) This calculation is derived from Moore’s Law, which describes the rate
of increase in the number of transistors on a fixed size of semiconduc-
tor material. Gordon Moore predicted, correctly, that this number would
double every 18 months. The consequence is that the processing power
of a computer doubles every 18 months, at a constant to falling cost. The
result is that the cost of information creation and distribution falls by
roughly 35% per year and has done so for more than 30 years (Woodall,
2000).
traditional business problems and issues will continue
into the Internet era, but with new technological options
and management challenges. The business environment
began to change in the 1970s, as a result of the globaliza-
tion of production, trade, and capital flows (Nolan, 2001).
Making this possible were the familiar forces of falling
trade barriers, liberalization of capital movements, and
declining transportation, communication, and informa-
tion processing costs. The result was a transformation
of the production of goods, with a focus on cost reduc-
tion through lean manufacturing, shortened product cy-
cles and more flexible manufacturing capabilities, and
increasing pressure for greater product variety and cus-
tomization. The new competition made many firms re-
think their capabilities and shed secondary operations
so as to focus on “core capabilities.” The most compet-
itive firms were able to develop a global brand and amass
the product technology, R&D, financial strength, informa-
tion technology, and human resources necessary to de-
velop and manufacture products through globally con-
structed supply chains. These “core system integrators”
were successful in assembling the most globally compet-
itive suppliers—usually those with the ability to invest in
the needed R&D and information technology—and this
forced second-tier suppliers to make similar investments
needed to participate in the system. The consequence was
a geographical dispersion of production and a much finer
division of labor within supply chains, with ever more dif-
ferentiated product components located in ever wider ge-
ographical areas. This global value chain typically is tied
together by the “system integrator,” a firm that is espe-
cially effective in gathering and distributing information
on a global scale.
These global supply networks have restructured the
competitive position of firms and the development oppor-
tunities of nations. Supply chains have become a central
source of competitive strength, operating as the main in-
gredient for the development of a system of lean, flexible
production, customization, and rapid, accurate distribu-
tion. Firms have been forced to upgrade the efficiency
of their supply chains, and this process raises the value
of information dramatically. Many of these changes had
occurred by the mid-1990s, when the Internet emerged
374