《电子商务 E-business》阅读文献：Models for supply chains in e-business

Models for Supply chains in e-Business Jayashankar M. Swaminathan Sridhar R Tay Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599 Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213 Sups ya ceai management is likely to play an important role in the digital economy. In we first describe major issues in traditional supply chain management. Next, we focus our attention on the supply chain issues of visibility, supplier relationships, dis- tribution and pricing, customization, and real-time decision technologies that have risen to mportance with the prevalence of e-business. We present an overview of relevant analytical research models that have been developed in these areas discuss their contributions and conclude with a discussion on future modeling opportunities in this area (Supply Chain Management; Electronic Business; Collaboration; Information Sharing; Decision Support; Supplier Relations; Procurement; Distribution; Customization; Literature Survey) 1. Introduction by coordinating with customers over the Internet It is estimated that e-commerce in the United States (Bylinski 2001); and Autoliv reduced the plant inven will grow from $72 billion in 2002 to approximately tory by 37% by coordinating orders online with sup- $217 billion by 2007, according to a recent Forrester pliers(lundegaard 2001). The large potential impact research report (ohnson et al. 2002). While the Pre- of the Internet on supply chain management makes dicted numbers may not be exact, there is no doubt the study of supply chain models in e-business timely that the rapid growth and adoption of the Internet and important has already had a great impact on all aspects of Supply chain management is a vast topr business, including customer acquisition, marketing, first provide a comprehensive definition of supply human resource management, finance, information hain management and then discuss opportunities systems(IS), and operations. Supply chain manage- and changes created as a result of Internet usage ment that has played an important role in traditional 1.1. Supply Chain Management businesses is likely to be crucial in the digital econ- omy as well(Geoffrion and Krishnan 2001). Keenan the design of new products and services, procuring and Ante(2002)note that during the next five years, raw materials, transforming them into semifinished collaboration by supply chain partners over the Inter- and finished products, and delivering them to the net can potentially save $223 billion with the reduc- end customer. This definition or a modified ver tion in transaction, production, and inventory costs. sion of it, has been used by several researchers(see This could be one of the largest benefits of Internet Lee and Billington 1993, Swaminathan et al. 1998, technology and many firms have already begun Swaminathan 2001a, Keskinocak and Tayur 2001) realize these benefits. For example, Microsoft used Supply chain management is the efficient manage- a Web collaboration tool to bring the Xbox video ment of the end-to-end process, which starts with game console to market two months ahead of sched- the design of the product or service and ends with ule( Keenan and ante 2002); Cutler-Hammer has dou- the time when it has been sold, consumed, and bled profits and increased productivity by 35% for its finally, discarded by the consumer. This complete pro- onfigured motor control centers and control panels cess includes product design, procurement, Planning 025-1909/03/4910/1387 MANAGEMENT SCIENCE C 2003 INFORMS 1526-5501 electronic ISSN ol.49,No.10, October2003,pp.1387-1406

Models for Supply Chains in E-Business Jayashankar M. Swaminathan • Sridhar R. Tayur Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599 Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213 Supply chain management is likely to play an important role in the digital economy. In this paper, we first describe major issues in traditional supply chain management. Next, we focus our attention on the supply chain issues of visibility, supplier relationships, dis￾tribution and pricing, customization, and real-time decision technologies that have risen to importance with the prevalence of e-business. We present an overview of relevant analytical research models that have been developed in these areas, discuss their contributions, and conclude with a discussion on future modeling opportunities in this area. (Supply Chain Management; Electronic Business; Collaboration; Information Sharing; Decision Support; Supplier Relations; Procurement; Distribution; Customization; Literature Survey) 1. Introduction It is estimated that e-commerce in the United States will grow from $72 billion in 2002 to approximately $217 billion by 2007, according to a recent Forrester research report (Johnson et al. 2002). While the pre￾dicted numbers may not be exact, there is no doubt that the rapid growth and adoption of the Internet has already had a great impact on all aspects of business, including customer acquisition, marketing, human resource management, finance, information systems (IS), and operations. Supply chain manage￾ment that has played an important role in traditional businesses is likely to be crucial in the digital econ￾omy as well (Geoffrion and Krishnan 2001). Keenan and Ante (2002) note that during the next five years, collaboration by supply chain partners over the Inter￾net can potentially save $223 billion with the reduc￾tion in transaction, production, and inventory costs. This could be one of the largest benefits of Internet technology and many firms have already begun to realize these benefits. For example, Microsoft used a Web collaboration tool to bring the Xbox video game console to market two months ahead of sched￾ule (Keenan and Ante 2002); Cutler-Hammer has dou￾bled profits and increased productivity by 35% for its configured motor control centers and control panels by coordinating with customers over the Internet (Bylinski 2001); and Autoliv reduced the plant inven￾tory by 37% by coordinating orders online with sup￾pliers (Lundegaard 2001). The large potential impact of the Internet on supply chain management makes the study of supply chain models in e-business timely and important. Supply chain management is a vast topic. We first provide a comprehensive definition of supply chain management and then discuss opportunities and changes created as a result of Internet usage. 1.1. Supply Chain Management A supply chain is the set of entities involved in the design of new products and services, procuring raw materials, transforming them into semifinished and finished products, and delivering them to the end customer. This definition, or a modified ver￾sion of it, has been used by several researchers (see Lee and Billington 1993, Swaminathan et al. 1998, Swaminathan 2001a, Keskinocak and Tayur 2001). Supply chain management is the efficient manage￾ment of the end-to-end process, which starts with the design of the product or service and ends with the time when it has been sold, consumed, and finally, discarded by the consumer. This complete pro￾cess includes product design, procurement, planning 0025-1909/03/4910/1387 1526-5501 electronic ISSN Management Science © 2003 INFORMS Vol. 49, No. 10, October 2003, pp. 1387–1406

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business and forecasting, production, distribution, fulfillment, Information flow Decisions. In what form is after-sales support, and end-of-life disposal. Supply information shared between different entities in the chain management issues can be classified into supply chain: paper, voice via telephone, electronic two broad categories: configuration(design-oriented) data interchange (EDI)? How much collaboration issues that relate to the basic infrastructure occurs among the supply chain partners during new execution of the supply chai es, and coordination product development? which the supply chain execute (execution-oriented)issues that relate to the actual Cash Flow Decisions. When do suppliers get paid os Configuration-level issues include the following for their deliveries? What prices should be charged for products? What kinds of cost reduction efforts are taken across the supply chain (or expected of Procurement and Supplier Decisions. How many suppliers)? In a global firm, in which currency will a and what kinds of suppliers are necessary? Which supplier be paid? parts should be outsourced and which should be kept It is clear that supply chain management spans sev in house? How can procurement practices be stream- eral functional and geographical areas, introducing lined and standardized? How should long-term and complexities both in terms of design and execution short-term contracts be used with suppliers? Some of the pertinent factors that complicate supply Production Decisions. In a global production net- chain management decisions include the pre of work, where and how many manufacturing sites multiple agents and their sometimes conflicting incen- should be operational? How much capacity should be tives; uncertainty in demand, supply and produc- installed at each of these sites? What kinds of prod tion distribution process; asymmetry of information ucts and services are going to be supported through related to product design, inventory, costs, demand the supply chain? How much variety should be pro- and capacity across the supply chain between the vided to customers? What degree of commonality is various parties in the supply chain; and lead time es in the supply chair Distribution Decisions. What kind of distribu- all these complexities lead to several types of inef tion channels should a firm have? How many and ficiencies in the supply chain: poor utilization of where should the distribution and retail outlets be inventory assets (Lee and Billington 1992);distor- located? What kinds of transportation modes and tion of information such as the bullwhip effect(Lee routes should be used? How should a firm exploit et al. 1997); high stock-outs and nonresponsive sup- ply chains(Fisher et al. 1994); poor customer ser- vice due to customization-responsiveness challenges Information Support Decisions. Should enterprise (Swaminathan and Tayur 1998); and double marginal resource planning software be standardized across ization that leads to lower profits for the supply chain the functional units of a firm? Should the supply (Cachon 2003) chain work on standard protocols or on proprietary The science related to supply chain management standards? traces its history back to the early 1950s when sev Coordination level issues include the following eral researchers were interested in understanding the optimal policies related to inventory manage- Material Flow Decisions. How much inventory of ment. In one of the first works, Clark and Scarf different product types should be stored to realize the (1960) developed models for managing inventories at expected service levels? Should inventory be carried multiple echelons. Numerous researchers have stud in finished form or semifinished form? How often ied related inventory problems under stochastic and should inventory be replenished? Should a firm make deterministic environments over the last 50 years inventory decisions or is it better to have the vendor This stream of research(mostly from a centralized manage the inventory? Should suppliers be required perspective)is concisely captured in the research to deliver goods just in time? handbook edited by Graves et al.(1993). Over the MANAGEMENT SCIENCE/VoL 49, No 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business and forecasting, production, distribution, fulfillment, after-sales support, and end-of-life disposal. Supply chain management issues can be classified into two broad categories: configuration (design-oriented) issues that relate to the basic infrastructure on which the supply chain executes, and coordination (execution-oriented) issues that relate to the actual execution of the supply chain. Configuration-level issues include the following topics. Procurement and Supplier Decisions. How many and what kinds of suppliers are necessary? Which parts should be outsourced and which should be kept in house? How can procurement practices be stream￾lined and standardized? How should long-term and short-term contracts be used with suppliers? Production Decisions. In a global production net￾work, where and how many manufacturing sites should be operational? How much capacity should be installed at each of these sites? What kinds of prod￾ucts and services are going to be supported through the supply chain? How much variety should be pro￾vided to customers? What degree of commonality is required across the product portfolio? Distribution Decisions. What kind of distribu￾tion channels should a firm have? How many and where should the distribution and retail outlets be located? What kinds of transportation modes and routes should be used? How should a firm exploit risk-pooling opportunities? Information Support Decisions. Should enterprise resource planning software be standardized across the functional units of a firm? Should the supply chain work on standard protocols or on proprietary standards? Coordination level issues include the following topics. Material Flow Decisions. How much inventory of different product types should be stored to realize the expected service levels? Should inventory be carried in finished form or semifinished form? How often should inventory be replenished? Should a firm make inventory decisions or is it better to have the vendor manage the inventory? Should suppliers be required to deliver goods just in time? Information Flow Decisions. In what form is information shared between different entities in the supply chain: paper, voice via telephone, electronic data interchange (EDI)? How much collaboration occurs among the supply chain partners during new product development? Cash Flow Decisions. When do suppliers get paid for their deliveries? What prices should be charged for products? What kinds of cost reduction efforts are taken across the supply chain (or expected of suppliers)? In a global firm, in which currency will a supplier be paid? It is clear that supply chain management spans sev￾eral functional and geographical areas, introducing complexities both in terms of design and execution. Some of the pertinent factors that complicate supply chain management decisions include the presence of multiple agents and their sometimes conflicting incen￾tives; uncertainty in demand, supply and produc￾tion distribution process; asymmetry of information related to product design, inventory, costs, demand and capacity across the supply chain between the various parties in the supply chain; and lead time between the different entities in the supply chain. All these complexities lead to several types of inef- ficiencies in the supply chain: poor utilization of inventory assets (Lee and Billington 1992); distor￾tion of information such as the bullwhip effect (Lee et al. 1997); high stock-outs and nonresponsive sup￾ply chains (Fisher et al. 1994); poor customer ser￾vice due to customization-responsiveness challenges (Swaminathan and Tayur 1998); and double marginal￾ization that leads to lower profits for the supply chain (Cachon 2003). The science related to supply chain management traces its history back to the early 1950s when sev￾eral researchers were interested in understanding the optimal policies related to inventory manage￾ment. In one of the first works, Clark and Scarf (1960) developed models for managing inventories at multiple echelons. Numerous researchers have stud￾ied related inventory problems under stochastic and deterministic environments over the last 50 years. This stream of research (mostly from a centralized perspective) is concisely captured in the research handbook edited by Graves et al. (1993). Over the 1388 Management Science/Vol. 49, No. 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business last decade, researchers have studied several other enterprise. This has elevated the role of supply chain issues related to supply chain management that models from being decision-making enablers for a include decentralized multiagent models to analyze single business unit to being enablers for driving cor supply chain coordination problems, models that inte- porate strategy. Thus, the Internet has greatly elevated grate information availability across the supply chain the role of supply chain modeling and analysis within with logistics decisions, models for supply contracts a firm. and demand forecasting, and models that integrate The advent of e-business has also created sev- product design with supply chain management. A eral challenges and opportunities in the supply chain collection of prominent research in this area is con- environment. First and foremost, the Internet has tained in Tayur et al. (1999)and Graves and de Kok increased the opportunity for consumers to buy prod (2003) ucts and services without going to a store. Though the practice of direct selling through catalogs and 1. 2. E-Business and Supply Chain phone was in use earlier by a few firms, the Inter- E-business can be loosely defined as a business pro- net has made this form of sales more significant cess that uses the Internet or other electronic medium In a direct sales environment, the fulfillment process as a channel to complete business transactions. determines how long customers will wait between As classified by Geoffrion and Krishnan (2001), sale and delivery. This has made the back-end ful- e-business consists of three areas: (1)consumer- fillment process-which mostly depends on supply oriented activity and(2) business-oriented activity chain management--extremely important Further, in supported by(3)the e-business technology infras- the electronic environment, customer expectations tructure. The consumer-oriented activities consist in terms of quick and timely delivery have also of business-to-consumer, consumer-to-consumer, and increased. At the same time, the Internet has opened government-to-consumer activities. The business- up opportunities for firms to share information and oriented activities comprise business-to-business, efficiently coordinate their activities with other enti- business-to-government, and government-to-business ties in the supply chain. This has created several activities. The technology infrastructure relates to net- new avenues in traditional supply chain areas. For work infrastructure, network applications, decision example, in supplier selection and procurement, firms technologies, and software tools and applications. have to decide if they should join private or pub- Within this broad definition of e-business activities, lic exchanges or develop highly-integrated supply we will restrict our attention mainly to consumer- partnerships. They need to determine if they should oriented and business-oriented activities, as well as use auction and bidding for contracts and, if so, decision technologies that are employed for supply which type would be most beneficial. In distribu- chain management tion, they need to decide if the firm will offer prod- The Internet has influenced the usage of supply ucts through the Internet channel and, if so, how this chain models in three ways. First, the Internet has method would differ from the traditional channel facilitated increased use of enterprise resource plan- This raises the question of how the synergies would solutions(APS). Secondtlanning and optimization ning(ERP) and advanced be realized in terms of inventory, transportation, and the ability to obtain real- distribution. Similarly, the availability of real-time time information and the access to large computer information has raised important questions such as systems is enabling firms to develop detailed(high- the degree to which information sharing protocol granularity) supply chain models that can be uti- should be standard or proprietary; the amount and lized to make real-time decisions. Last, the Internet type of information that should be shared with the has created opportunities to integrate information rest of the supply chain partners; and the types of and decision making across different functional units, collaborative processes that may be beneficial. The hereby creating a need for supply chain models that degree of change in issues related to the supply chain go beyond a business unit to study the extended spans a huge spectrum from concepts and issues that MANAGEMENT SCIENCE/VoL 49, No. 10, October 2003 1389

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business last decade, researchers have studied several other issues related to supply chain management that include decentralized multiagent models to analyze supply chain coordination problems, models that inte￾grate information availability across the supply chain with logistics decisions, models for supply contracts and demand forecasting, and models that integrate product design with supply chain management. A collection of prominent research in this area is con￾tained in Tayur et al. (1999) and Graves and de Kok (2003). 1.2. E-Business and Supply Chain E-business can be loosely defined as a business pro￾cess that uses the Internet or other electronic medium as a channel to complete business transactions. As classified by Geoffrion and Krishnan (2001), e-business consists of three areas: (1) consumer￾oriented activity and (2) business-oriented activity supported by (3) the e-business technology infras￾tructure. The consumer-oriented activities consist of business-to-consumer, consumer-to-consumer, and government-to-consumer activities. The business￾oriented activities comprise business-to-business, business-to-government, and government-to-business activities. The technology infrastructure relates to net￾work infrastructure, network applications, decision technologies, and software tools and applications. Within this broad definition of e-business activities, we will restrict our attention mainly to consumer￾oriented and business-oriented activities, as well as decision technologies that are employed for supply chain management. The Internet has influenced the usage of supply chain models in three ways. First, the Internet has facilitated increased use of enterprise resource plan￾ning (ERP) and advanced planning and optimization solutions (APS). Second, the ability to obtain real￾time information and the access to large computer systems is enabling firms to develop detailed (high￾granularity) supply chain models that can be uti￾lized to make real-time decisions. Last, the Internet has created opportunities to integrate information and decision making across different functional units, thereby creating a need for supply chain models that go beyond a business unit to study the extended enterprise. This has elevated the role of supply chain models from being decision-making enablers for a single business unit to being enablers for driving cor￾porate strategy. Thus, the Internet has greatly elevated the role of supply chain modeling and analysis within a firm. The advent of e-business has also created sev￾eral challenges and opportunities in the supply chain environment. First and foremost, the Internet has increased the opportunity for consumers to buy prod￾ucts and services without going to a store. Though the practice of direct selling through catalogs and phone was in use earlier by a few firms, the Inter￾net has made this form of sales more significant. In a direct sales environment, the fulfillment process determines how long customers will wait between sale and delivery. This has made the back-end ful- fillment process—which mostly depends on supply chain management—extremely important. Further, in the electronic environment, customer expectations in terms of quick and timely delivery have also increased. At the same time, the Internet has opened up opportunities for firms to share information and efficiently coordinate their activities with other enti￾ties in the supply chain. This has created several new avenues in traditional supply chain areas. For example, in supplier selection and procurement, firms have to decide if they should join private or pub￾lic exchanges or develop highly-integrated supply partnerships. They need to determine if they should use auction and bidding for contracts and, if so, which type would be most beneficial. In distribu￾tion, they need to decide if the firm will offer prod￾ucts through the Internet channel and, if so, how this method would differ from the traditional channel. This raises the question of how the synergies would be realized in terms of inventory, transportation, and distribution. Similarly, the availability of real-time information has raised important questions such as the degree to which information sharing protocol should be standard or proprietary; the amount and type of information that should be shared with the rest of the supply chain partners; and the types of collaborative processes that may be beneficial. The degree of change in issues related to the supply chain spans a huge spectrum from concepts and issues that Management Science/Vol. 49, No. 10, October 2003 1389

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business have been marginally affected to a whole set of new have increased in importance with the Internet, and issues that have emerged as a result of e-business (2) those that are new issues in the e-business envi First, several issues related to supply chain man- ronment. This paper is not intended to be exhaustive agement have not necessarily changed in principle, in coverage, rather our aim is to concentrate on spe although e-business may have had an impact on some cific areas related to supply chain and e-business and of their parameters. For example, to maintain given highlight papers that, in our opinion, have tackled levels of service, a firm still needs buffer inventory important issues. For a more exhaustive coverage, the or buffer capacity. This has not changed as a result reader is referred to the research handbook by Simchi of the Internet, although the uncertainty involved in Levi et al.(2003). In particular, our focus will be on the decision making may have decreased with the papers that utilize analytical modeling and operations availability of more information. Similarly, a firm still research methodology in supply chain planning and needs to take into account the interplay between fixed execution. This is a relatively new area, thus, many and variable costs, while making decisions related to of the research papers discussed in this article are procurement or setting up additional capacity. With unpublished the prevalence of the Internet, the firm might more 1.3.1. Procurement and Supplier easily be able to obtain a lower procurement price or The e-business paradigm has created an immense alvage excess capacity through market mechanisms. opportunity for firms to consolidate their buyin Next are existing supply chain issues that have processes(also called e-procurement). The first suc- become important as a result of e-business. For exam- cess stories in the area of e-procurement came from ple,leveragingrisk-poolingconceptscangreatlyben-softwarefirmsarIba(http://www.ariba.com)and P at fewer locations as compared to a traditional dis- which primarily dealt with indirect goods and tribution channel. Amazon. com can store all inver services. The initial idea in these systems was that tory for the entire U.S. market in five warehouses when procurement is consolidated under a single as opposed to several hundred retail outlets(hence, roof, the firm benefits from price reductions(a direct stocking points)that would be needed for similar cov- result of quantity discount). E-procurement systems erage in the traditional channel. Similarly, mass cus- enable individual employees to become aware of tomization has gained a lot of momentum with the all qualified suppliers and to complete the procure Internet because firms can allow customers to interac- ment process quickly and easily. Subsequently, more ively specify customizations of their offerings. It has advanced models for procurement have evolved that ecome more important for firms to understand how use auctions to determine which firm wins a pro- to cope with customization in an effective manner curement contract. Each contract is open to bids in Finally, in the last few years, a third category of an electronic auction house and qualified suppliers issues new to supply chain management has emerged. are allowed to participate. Although auctions have One example is linking the dynamic pricing of prod- been used for industrial contracts before, execution ucts to the inventory and capacity decisions. Another was rather cumbersome and, thus, were used only is coordinating Internet and traditional distribution for large and important contracts. E-business firms channelsintermsofpricesaswellasinformationsuchasFreemarkeTs(http://www.freemarkets.com,a Grom, product flows. Additionally, the advent of elec- business-to-business, third-party auctions firm)have tronic marketplaces and auctions has opened a whole made it much easier to conduct these auctions and new set of es related to procurement and supplier as a result, firms are beginning to use these auctions relationships more frequently for procurement. This poses new research issues such as whether a firm should use 1.3. Focus of this Paper such auctions for all its components and suppliers this paper, we focus on the last two types of sup- what the long-term effect of such auctions on supplier ply chain issues previously discussed: (1)those that relationship is; how firms can use both traditional MANAGEMENT SCIENCE/VoL 49, No 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business have been marginally affected to a whole set of new issues that have emerged as a result of e-business. First, several issues related to supply chain man￾agement have not necessarily changed in principle, although e-business may have had an impact on some of their parameters. For example, to maintain given levels of service, a firm still needs buffer inventory or buffer capacity. This has not changed as a result of the Internet, although the uncertainty involved in the decision making may have decreased with the availability of more information. Similarly, a firm still needs to take into account the interplay between fixed and variable costs, while making decisions related to procurement or setting up additional capacity. With the prevalence of the Internet, the firm might more easily be able to obtain a lower procurement price or salvage excess capacity through market mechanisms. Next are existing supply chain issues that have become important as a result of e-business. For exam￾ple, leveraging risk-pooling concepts can greatly ben￾efit Internet channels because products may be stored at fewer locations as compared to a traditional dis￾tribution channel. Amazon.com can store all inven￾tory for the entire U.S. market in five warehouses as opposed to several hundred retail outlets (hence, stocking points) that would be needed for similar cov￾erage in the traditional channel. Similarly, mass cus￾tomization has gained a lot of momentum with the Internet because firms can allow customers to interac￾tively specify customizations of their offerings. It has become more important for firms to understand how to cope with customization in an effective manner. Finally, in the last few years, a third category of issues new to supply chain management has emerged. One example is linking the dynamic pricing of prod￾ucts to the inventory and capacity decisions. Another is coordinating Internet and traditional distribution channels in terms of prices as well as information and product flows. Additionally, the advent of elec￾tronic marketplaces and auctions has opened a whole new set of issues related to procurement and supplier relationships. 1.3. Focus of this Paper In this paper, we focus on the last two types of sup￾ply chain issues previously discussed: (1) those that have increased in importance with the Internet, and (2) those that are new issues in the e-business envi￾ronment. This paper is not intended to be exhaustive in coverage, rather our aim is to concentrate on spe￾cific areas related to supply chain and e-business and highlight papers that, in our opinion, have tackled important issues. For a more exhaustive coverage, the reader is referred to the research handbook by Simchi￾Levi et al. (2003). In particular, our focus will be on papers that utilize analytical modeling and operations research methodology in supply chain planning and execution. This is a relatively new area, thus, many of the research papers discussed in this article are unpublished. 1.3.1. Procurement and Supplier Management. The e-business paradigm has created an immense opportunity for firms to consolidate their buying processes (also called e-procurement). The first suc￾cess stories in the area of e-procurement came from software firms Ariba (http://www.ariba.com) and Commerce One (http://www.commerceone.com), which primarily dealt with indirect goods and services. The initial idea in these systems was that when procurement is consolidated under a single roof, the firm benefits from price reductions (a direct result of quantity discount). E-procurement systems enable individual employees to become aware of all qualified suppliers and to complete the procure￾ment process quickly and easily. Subsequently, more advanced models for procurement have evolved that use auctions to determine which firm wins a pro￾curement contract. Each contract is open to bids in an electronic auction house and qualified suppliers are allowed to participate. Although auctions have been used for industrial contracts before, execution was rather cumbersome and, thus, were used only for large and important contracts. E-business firms such as FreeMarkets (http://www.freemarkets.com, a business-to-business, third-party auctions firm) have made it much easier to conduct these auctions and, as a result, firms are beginning to use these auctions more frequently for procurement. This poses new research issues such as whether a firm should use such auctions for all its components and suppliers; what the long-term effect of such auctions on supplier relationship is; how firms can use both traditional 1390 Management Science/Vol. 49, No. 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business and auction mechanisms to hedge against risks in a The ability to access information across the supply more efficient manner; and how a third party such as chain and use it in real time provides various oppor- FreeMarkets can ensure that capacities of suppliers tunities. Inventory requirements for buffer stocks are are taken into account in these auctions so that the likely to be lower, because the uncertainty in forecasts contract is executable and demand can be reduced across the supply chain. A related phenomenon in the supplier management Allocation of inventory to different retail outlets or area is the formation of industry-wide supply chain customers as part of order fulfillment can be done consortia such as e2open(high tech) and Covisint more effectively when there is visibility about the (automobile). The motivation behind the formation number and type of inventory located at the different of these consortia (also sometimes called market- sites in the supply chain. As more supply chain exe- places)is their ability to provide liquidity to inventory cution information becomes available, firms can plan and capacity present in the extended supply chain for future operations using advanced planning and and make it possible for the supply chain partners optimization tools. The ability to share information to get involved in long-term collaborative planning creates an opportunity for firms to have collaborative nd design efforts. For example, a manufacturer with planning and design, which removes the inefficien- excess inventory could salvage it in the marketplace. cies in these processes. This has opened up several Similarly, buyers may have the ability to conduct es for rese tions for industrial parts and procure capacity options are shared more often than before, how should they from the supply base. There are a number of new be used more effectively; how can collaborative fore- research issues that have evolved as a result of the casts be generated and used across the channel; how above changes. For example, how could one quan can a firm use the demand, inventory, or supply infor- tify the benefits of joining such a consortium for mation from other partners more effectively. We will firm; how many firms of the same type are likely to discuss research on these issues in $3 in a consortium how could the different firm 1.3.3. Pricing and Distribution. Physical retail use the liquidity and options in the marketplace to stores have traditionally been the most common mode improve their operational performance. We will dis- of distribution. Catalog firms have traditionally been cuss research on the issues of procurement and sup- considered a rather niche market for only certain type plier management in§2. of products. E-business has opened up a completely new dimension to distribution by enabling firms to 1.3.2. Visibility and Information Sharing. The use alternative distribution channels in addition to prevalence of ERP allows firms to have access to brick-and-mortar stores. Also, the ability to share data across their supply chains, which could be used information across the supply chain has made it eas- or gaining better efficiency and effectiveness (Sodhi ier for firms to try to coordinate the flow of materi 2001). The ability to access information from various als across multiple channels. In a rush to exploit this parts of the organization has helped firms to stream- opportunity, several firms during the last few years line their business processes and reduce inefficient- have set up Internet stores and created new busi- cies. Although ERP systems were implemented before nesses(such as online grocery).However, many of the boom in e-business, their potential could not be them paid little or no attention to logistics associated explored and expanded due to lack of common stan vith those operations and, as a result, did not go far. dards and cost of access. The growth of e-business For example, online grocers grossly underestimated allows and requires that the information made avail- the transportation costs associated with the"last able from the ERP systems be shared with other firms mile"delivery and the effect of capacity utilization on in the extended supply chain through the Internet. economies of scale(reinhardt 2001 ). Traditional firms This enables firms to coordinate and collaborate with such as ibm, barnes Noble, and Wal-Mart also their suppliers and customers as well as synchronize faced challenging issues during this period when they their in-house operations created their own Internet operations. These questions MANAGEMENT SCIENCE/VoL 49, No. 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business and auction mechanisms to hedge against risks in a more efficient manner; and how a third party such as FreeMarkets can ensure that capacities of suppliers are taken into account in these auctions so that the contract is executable. A related phenomenon in the supplier management area is the formation of industry-wide supply chain consortia such as e2open (high tech) and Covisint (automobile). The motivation behind the formation of these consortia (also sometimes called market￾places) is their ability to provide liquidity to inventory and capacity present in the extended supply chain and make it possible for the supply chain partners to get involved in long-term collaborative planning and design efforts. For example, a manufacturer with excess inventory could salvage it in the marketplace. Similarly, buyers may have the ability to conduct auc￾tions for industrial parts and procure capacity options from the supply base. There are a number of new research issues that have evolved as a result of the above changes. For example, how could one quan￾tify the benefits of joining such a consortium for a firm; how many firms of the same type are likely to stay in a consortium; how could the different firms use the liquidity and options in the marketplace to improve their operational performance. We will dis￾cuss research on the issues of procurement and sup￾plier management in §2. 1.3.2. Visibility and Information Sharing. The prevalence of ERP allows firms to have access to data across their supply chains, which could be used for gaining better efficiency and effectiveness (Sodhi 2001). The ability to access information from various parts of the organization has helped firms to stream￾line their business processes and reduce inefficien￾cies. Although ERP systems were implemented before the boom in e-business, their potential could not be explored and expanded due to lack of common stan￾dards and cost of access. The growth of e-business allows and requires that the information made avail￾able from the ERP systems be shared with other firms in the extended supply chain through the Internet. This enables firms to coordinate and collaborate with their suppliers and customers as well as synchronize their in-house operations. The ability to access information across the supply chain and use it in real time provides various oppor￾tunities. Inventory requirements for buffer stocks are likely to be lower, because the uncertainty in forecasts and demand can be reduced across the supply chain. Allocation of inventory to different retail outlets or customers as part of order fulfillment can be done more effectively when there is visibility about the number and type of inventory located at the different sites in the supply chain. As more supply chain exe￾cution information becomes available, firms can plan for future operations using advanced planning and optimization tools. The ability to share information creates an opportunity for firms to have collaborative planning and design, which removes the inefficien￾cies in these processes. This has opened up several new issues for researchers. For example, if forecasts are shared more often than before, how should they be used more effectively; how can collaborative fore￾casts be generated and used across the channel; how can a firm use the demand, inventory, or supply infor￾mation from other partners more effectively. We will discuss research on these issues in §3. 1.3.3. Pricing and Distribution. Physical retail stores have traditionally been the most common mode of distribution. Catalog firms have traditionally been considered a rather niche market for only certain types of products. E-business has opened up a completely new dimension to distribution by enabling firms to use alternative distribution channels in addition to brick-and-mortar stores. Also, the ability to share information across the supply chain has made it eas￾ier for firms to try to coordinate the flow of materi￾als across multiple channels. In a rush to exploit this opportunity, several firms during the last few years have set up Internet stores and created new busi￾nesses (such as online grocery). However, many of them paid little or no attention to logistics associated with those operations and, as a result, did not go far. For example, online grocers grossly underestimated the transportation costs associated with the “last mile” delivery and the effect of capacity utilization on economies of scale (Reinhardt 2001). Traditional firms such as IBM, Barnes & Noble, and Wal-Mart also faced challenging issues during this period when they created their own Internet operations. These questions Management Science/Vol. 49, No. 10, October 2003 1391

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business included how the Internet operation should differ es th he product. We will discuss several mod priced across these two channels; whether all prod- their effect on supply chain performance In ss hs and from traditional practice; how the products should be capture the trade-offs in these operatio ucts should be offered on both channels: and what kind of autonomy should be provided to Internet 1.3.5. Enterprise Software and Decision Support operations. Technologies. Last, the Internet has had a great The ability to dynamically change prices in the impact on development of decision technologies that marketplace is yet another aspect of distribution that use the available data across the supply chain. In the e-business has greatly impacted. In traditional sup- past, although the models were available, their imple- ply chain operations, price changes were allowed mentation in real time was almost infeasible. As a but would occur only at regular or planned inter- result, they were mainly used for planning purposes vals. However, the Internet enables firms to more However the Internet has facilitated real-time acce dynamically adjust prices with little additional effort. to information across the supply chain, making it now This poses interesting issues related to how often possible to use decision models durin execution. A prices should be changed and how one can effectively related phenomenon is the development of intelligent couple dynamic pricing with production or capacity supply chain software agents that could take appro- decisions priate actions in real time, thus, streamlining supply of distribution that relates to risk pooling. Because sion technologies in greater detl some of these deci- The Internet has compounded one of the benefits chain operations. In s6, we discuss products may be stored at fewer physical loca tions, the benefits of risk pooling will lead to lower inventory requirements. Having a separate inven- 2. Procurement and Supplier tory depot for Internet operations provides the abil- Selection ity to adjust inventory allocations between the retailer One of the major effects of the Internet on supply and the inventory depot. This raises several impor- chain practices is in the area of procurement. Firms tant research issues. How much inventory should be now use the Internet, not only to diversify the supply stored at the various locations? How can firms cre- base and hedge risk, but also to obtain lower costs ate incentives so that the brick-and-mortar retailers through auctions. This has raised important issues an collaborate with each other? We discuss pertinent related to supply chain management. At the strategi research related to distribution and pricing in $4 level, firms need to decide whether they should have 1.3.4. Customization and Postponement. The In- long-term contracts with a few fixed ternet has increased the expectation of customers for auctions and a dynamic supplier base to reduce their complete customization at a nominal charge. Even costs. In particular, firms need to understand under before the advent of e-business, firms faced the chal- what circumstances is it beneficial to have(1)long es relate ed to mass customization and high prod- term relationships; (2)auction-based, short-term rela uct variety, but this has increased immensely over the tionships; or(3)a combination of(1)and(2).Another last few years. Part of the reason is the Internet pro- important decision is whether a firm should have one vides an easy and convenient wa ay for customers to supplier or multiple suppliers and how that choice express their preferences, and sometimes even v: may depend on repetition in purchase Elmaghraby the product as it is customized. Firms are finding(2000) presents an extensive survey of economics that it is important not to completely rely on tradi- oriented models that deals with supplier selection and ional manufacturing paradigms of inventory build- sourcing strategies in traditional settings. Our focus ing(make to stock). They are fine tuning their produc- will be on supplier selection and procurement models tion process so that they can store inventory of raw under uncertainty in demand or supply that incorpo- materials or semifinished inventory and more rapidly rate the ability of the firm to use the Internet to make respond to customer demand after the customer has the process more efficient MANAGEMENT SCIENCE/Vol. 49, No 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business included how the Internet operation should differ from traditional practice; how the products should be priced across these two channels; whether all prod￾ucts should be offered on both channels; and what kind of autonomy should be provided to Internet operations. The ability to dynamically change prices in the marketplace is yet another aspect of distribution that e-business has greatly impacted. In traditional sup￾ply chain operations, price changes were allowed but would occur only at regular or planned inter￾vals. However, the Internet enables firms to more dynamically adjust prices with little additional effort. This poses interesting issues related to how often prices should be changed and how one can effectively couple dynamic pricing with production or capacity decisions. The Internet has compounded one of the benefits of distribution that relates to risk pooling. Because products may be stored at fewer physical loca￾tions, the benefits of risk pooling will lead to lower inventory requirements. Having a separate inven￾tory depot for Internet operations provides the abil￾ity to adjust inventory allocations between the retailer and the inventory depot. This raises several impor￾tant research issues. How much inventory should be stored at the various locations? How can firms cre￾ate incentives so that the brick-and-mortar retailers can collaborate with each other? We discuss pertinent research related to distribution and pricing in §4. 1.3.4. Customization and Postponement. The In￾ternet has increased the expectation of customers for complete customization at a nominal charge. Even before the advent of e-business, firms faced the chal￾lenges related to mass customization and high prod￾uct variety, but this has increased immensely over the last few years. Part of the reason is the Internet pro￾vides an easy and convenient way for customers to express their preferences, and sometimes even view the product as it is customized. Firms are finding that it is important not to completely rely on tradi￾tional manufacturing paradigms of inventory build￾ing (make to stock). They are fine tuning their produc￾tion process so that they can store inventory of raw materials or semifinished inventory and more rapidly respond to customer demand after the customer has ordered the product. We will discuss several mod￾els that capture the trade-offs in these operations and their effect on supply chain performance in §5. 1.3.5. Enterprise Software and Decision Support Technologies. Last, the Internet has had a great impact on development of decision technologies that use the available data across the supply chain. In the past, although the models were available, their imple￾mentation in real time was almost infeasible. As a result, they were mainly used for planning purposes. However, the Internet has facilitated real-time access to information across the supply chain, making it now possible to use decision models during execution. A related phenomenon is the development of intelligent supply chain software agents that could take appro￾priate actions in real time, thus, streamlining supply chain operations. In §6, we discuss some of these deci￾sion technologies in greater detail. 2. Procurement and Supplier Selection One of the major effects of the Internet on supply chain practices is in the area of procurement. Firms now use the Internet, not only to diversify the supply base and hedge risk, but also to obtain lower costs through auctions. This has raised important issues related to supply chain management. At the strategic level, firms need to decide whether they should have long-term contracts with a few fixed suppliers or use auctions and a dynamic supplier base to reduce their costs. In particular, firms need to understand under what circumstances is it beneficial to have (1) long￾term relationships; (2) auction-based, short-term rela￾tionships; or (3) a combination of (1) and (2). Another important decision is whether a firm should have one supplier or multiple suppliers and how that choice may depend on repetition in purchase. Elmaghraby (2000) presents an extensive survey of economics￾oriented models that deals with supplier selection and sourcing strategies in traditional settings. Our focus will be on supplier selection and procurement models under uncertainty in demand or supply that incorpo￾rate the ability of the firm to use the Internet to make the process more efficient. 1392 Management Science/Vol. 49, No. 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business Peleg et al.(2002)develop a model that considers two states. This uncertainty is resolved in the second the potential discounts that an exclusive long-term period where demand becomes deterministic In con- supplier may be able to offer based on learning and trast to standard two-period models, they assume that compare that to the savings that might be gener- demand only occurs in the second period. The first ated through an auction, in a two-period setting with period is only for capacity reservation and demand uncertain demand. The strategic partner guarantees resolution. Under this setting, they demonstrate the a price of p per unit in the first period and p(1-A) existence of a unique subgame perfect Nash equi in the second period, where 0 <A<1. This model librium under the various models. They show that attributes it to the long-term learning effects of an the supplier, manufacturer, and the supply chain as a exclusive supplier. In an auction-based setting, the whole are aided by this additional negotiation period firm still pays a per unit price p in the first period, but where demand is actually not realized, but demand conducts an auction in the second period. The firm resolution occurs and capacity is reserved.Under only knows the distribution of the minimum price uncertain demand and limited capacity at the sup- (which is assumed to be independent of the quan tity bought)that could be obtained as a result of the plier, they show that the additional period is bene- ficial, but the impact on profits(and its sharing) is auction. In the combined strategy, the firm decides more involved and depends on the level of capacity to use the exclusive supplier for the most part(by availabl having a contract to order a minimum amount in As more and more firms begin to use auctions for the second period)and orders any remaining amount conducting business transactions, it is important that from the auction. Under random demand assump- models be developed that capture the buyer bidder tions, Peleg et al.(2002)derive the optimal ordering interactions and tie them to supply chain decisions quantities for the firm. They show that there exists a A beyond which it is optimal for the buyer to prefer a and constraints. Motivated by FreeMarkets,Gallien and Wein(2000) study the design of smart markets strategic long-term partnership, as opposed to using for industrial procurement. They study a multi-item an auction in the second period. Further, depending on the distribution of price obtained from the auction, Procurement auction mechanism for supply environ- the combined strategy may be superior or inferior to ments with capacity constraints. This enables them to a pure auction strategy. Finally, the authors explore model rational behavior of suppliers in terms of their the effect of increasing the supplier base(in the auc- responses when they have limited capacity. In partic- tion)by modeling the benefits obtained (due to poten- ular, they consider an auction with n suppliers and tial lower prices)in the distribution of price from the m components, each having a fixed order size. The Jective of the manufacturing firm is to minimize the In the automotive supply chain, a tier-1 manu- total cost of procurement across all the components, facturer such as Ingersoll-Rand often has to reserve taking into account the capacities of the various sup- capacityfromitssupplierworldwidepm.com,whichpliersIneachroundsuppliersgiveapricebidfor is a coalition of small powder metal technology man- each of the components. The assumption is that the ufacturers.Because the coalition is a powerful entity, price bids decrease as the rounds progress. Further, at the manufacturer may need to develop contracting the end of each round, the auctioneer provides each mechanisms such as capacity reservation(which is of the suppliers information about allocations and the similar in spirit to the minimum order assumptions best bids for the next round that would maximize the of Peleg et al. 2002). Motivated by the above setting, supplier's profits, assuming all other suppliers hold Erhun et al. (2001)study the strategic interaction and on to their old bid. The auction stops when the new questions of participation(from the suppliers), profit set of bids from all the suppliers is identical to the sharing, and impact on end customers. They ana- previous round. Under these conditions, the authors lyze a two-period model where the downward slop- show that such an auction does converge, and they ing demand in the second period could be in one of provide a bound for the profits of the manufacturer MANAGEMENT SCIENCE/VoL 49, No. 10, October 2003 1393

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business Peleg et al. (2002) develop a model that considers the potential discounts that an exclusive long-term supplier may be able to offer based on learning and compare that to the savings that might be gener￾ated through an auction, in a two-period setting with uncertain demand. The strategic partner guarantees a price of p per unit in the first period and p1 −  in the second period, where 0 << 1. This model attributes it to the long-term learning effects of an exclusive supplier. In an auction-based setting, the firm still pays a per unit price p in the first period, but conducts an auction in the second period. The firm only knows the distribution of the minimum price (which is assumed to be independent of the quan￾tity bought) that could be obtained as a result of the auction. In the combined strategy, the firm decides to use the exclusive supplier for the most part (by having a contract to order a minimum amount in the second period) and orders any remaining amount from the auction. Under random demand assump￾tions, Peleg et al. (2002) derive the optimal ordering quantities for the firm. They show that there exists a beyond which it is optimal for the buyer to prefer a strategic long-term partnership, as opposed to using an auction in the second period. Further, depending on the distribution of price obtained from the auction, the combined strategy may be superior or inferior to a pure auction strategy. Finally, the authors explore the effect of increasing the supplier base (in the auc￾tion) by modeling the benefits obtained (due to poten￾tial lower prices) in the distribution of price from the auction. In the automotive supply chain, a tier-1 manu￾facturer such as Ingersoll-Rand often has to reserve capacity from its supplier, worldwidepm.com, which is a coalition of small powder metal technology man￾ufacturers. Because the coalition is a powerful entity, the manufacturer may need to develop contracting mechanisms such as capacity reservation (which is similar in spirit to the minimum order assumptions of Peleg et al. 2002). Motivated by the above setting, Erhun et al. (2001) study the strategic interaction and questions of participation (from the suppliers), profit sharing, and impact on end customers. They ana￾lyze a two-period model where the downward slop￾ing demand in the second period could be in one of two states. This uncertainty is resolved in the second period where demand becomes deterministic. In con￾trast to standard two-period models, they assume that demand only occurs in the second period. The first period is only for capacity reservation and demand resolution. Under this setting, they demonstrate the existence of a unique subgame perfect Nash equi￾librium under the various models. They show that the supplier, manufacturer, and the supply chain as a whole are aided by this additional negotiation period where demand is actually not realized, but demand resolution occurs and capacity is reserved. Under uncertain demand and limited capacity at the sup￾plier, they show that the additional period is bene- ficial, but the impact on profits (and its sharing) is more involved and depends on the level of capacity available. As more and more firms begin to use auctions for conducting business transactions, it is important that models be developed that capture the buyer bidder interactions and tie them to supply chain decisions and constraints. Motivated by FreeMarkets, Gallien and Wein (2000) study the design of smart markets for industrial procurement. They study a multi-item procurement auction mechanism for supply environ￾ments with capacity constraints. This enables them to model rational behavior of suppliers in terms of their responses when they have limited capacity. In partic￾ular, they consider an auction with n suppliers and m components, each having a fixed order size. The objective of the manufacturing firm is to minimize the total cost of procurement across all the components, taking into account the capacities of the various sup￾pliers. In each round, suppliers give a price bid for each of the components. The assumption is that the price bids decrease as the rounds progress. Further, at the end of each round, the auctioneer provides each of the suppliers information about allocations and the best bids for the next round that would maximize the supplier’s profits, assuming all other suppliers hold on to their old bid. The auction stops when the new set of bids from all the suppliers is identical to the previous round. Under these conditions, the authors show that such an auction does converge, and they provide a bound for the profits of the manufacturer. Management Science/Vol. 49, No. 10, October 2003 1393

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business Further, for special cases with two suppliers, they pro- chain performance). They show that the former is vide insights on the impact of initial bids indeterminate, ie. the total sales volume for the man. Davenport and Kalagnanam (2001) study auction ufacturer may increase or decrease, depending on the strategies for sourcing large quantities of direct mate- critical fractile. However, the latter is always posi rials over the Internet. They study two auction mech- tive, i.e., the secondary market always improves allo- anisms, the first of which solicits supply curves as cation efficiency. The sum of the effects is also unclear bids to capture quantity discounts. The second auc- in that the welfare of the supply chain may or may tion aggregates short-term demand across multiple not increase as a result of the secondary market. manufacturing facilities and allows suppliers to pro- Finally, the authors present potential strategies for de bundled all-or-nothing bids. They incorporate the manufacturer to increase sales in the presence of business rules as side constraints in their integer pro- the secondary market. Dong and Durbin(2001)study gramming formulation and use computational results other implications of such surplus markets on supply to study these mechanisms chain efficiency. Keskinocak and Tayur(2001)describe While an auction typically serves as a price- examples where matching algorithms developed by determination mechanism, Jin and Wu(2001a)show operations researchers have been used in market that the auction could also serve as a coordina- places as decision support for matching demand and tion mechanism for the supply chain. They demon- supply Kleindorfer and Wu(2003)present a trate that different forms of auction and market analysis of research related to integrating long-term mechanisms change the nature of supplier competi- and short-term contracting using B2B exchanges on, thus, the buyer-supplier interaction In partic- A related phenomenon in the area of procurement ular, they consider a two-supplier-one-buyer system and supplier relationships has been industry-wide under four different types of market schemes. They consortia where multiple buyers and suppliers within propose a two-part contract auction where the buyer an industry join and conduct business Better transac- announces a price-sensitive order function, while the tional efficiency has been highlighted as the key ben suppliers compete in an ascending bid side-payment efit of consortia such as Covisint(automotive)and auction. Channel coordination can be achieved if the Converge(high tech). The dynamics of these entities market intermediary strives to reduce the extent of are not well understood and pose several important information asymmetry, while restricting the buyers questions. For example, one could expect that having profit on the side payments. Using the insights from multiple suppliers on the same platform is likely to the two-supplier-one-buyer analysis, they rank mar- reduce prices for the buyer, but it is likely to bene ket schemes by their impact on expected channel effi- fit other buyers in the consortium as well. Thus, it is ciency, expected profitability for the buyer, expected not clear if one should join the consortium in the first profitability for the winning supplier, and expected place. One of the reasons for Dell deciding not to join commission revenue for the market maker either of the high-tech consortia, Converge or e2open, Lee and Whang(2002)investigate the impact of a could be that they do not want to open up their econdary market where resellers can buy and sell supply chain processes to competitors. Granot and excess inventories. They develop a two-period model Sosic (2001) study this issue using a stylized model with a single manufacturer and many resellers. The where there are three firms whose products have a resellers order products from the manufacturer in certain degree of substitutability. They explore con- the first period and are allowed to trade invento- ditions under which formation of three-member and ries among themselves in the second period. They two-member alliances is optimal. In particular, they derive the optimal decisions for the resellers, along consider a deterministic linear model for the demand with the equilibrium market price of the secondary that depends on the prices charged by the firm and its market. Two types of effects are created due to the competitors, and the degree of substitutability across secondary market:(1)a quantity effect (sales by the the products. They assume that when alliances ar manufacturer), and(2) an allocation effect(supply formed, the procurement cost (or the price paid by MANAGEMENT SCIENCE/VoL 49, No 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business Further, for special cases with two suppliers, they pro￾vide insights on the impact of initial bids. Davenport and Kalagnanam (2001) study auction strategies for sourcing large quantities of direct mate￾rials over the Internet. They study two auction mech￾anisms, the first of which solicits supply curves as bids to capture quantity discounts. The second auc￾tion aggregates short-term demand across multiple manufacturing facilities and allows suppliers to pro￾vide bundled all-or-nothing bids. They incorporate business rules as side constraints in their integer pro￾gramming formulation and use computational results to study these mechanisms. While an auction typically serves as a price￾determination mechanism, Jin and Wu (2001a) show that the auction could also serve as a coordina￾tion mechanism for the supply chain. They demon￾strate that different forms of auction and market mechanisms change the nature of supplier competi￾tion, thus, the buyer-supplier interaction. In partic￾ular, they consider a two-supplier–one-buyer system under four different types of market schemes. They propose a two-part contract auction where the buyer announces a price-sensitive order function, while the suppliers compete in an ascending bid side-payment auction. Channel coordination can be achieved if the market intermediary strives to reduce the extent of information asymmetry, while restricting the buyer’s profit on the side payments. Using the insights from the two-supplier–one-buyer analysis, they rank mar￾ket schemes by their impact on expected channel effi- ciency, expected profitability for the buyer, expected profitability for the winning supplier, and expected commission revenue for the market maker. Lee and Whang (2002) investigate the impact of a secondary market where resellers can buy and sell excess inventories. They develop a two-period model with a single manufacturer and many resellers. The resellers order products from the manufacturer in the first period and are allowed to trade invento￾ries among themselves in the second period. They derive the optimal decisions for the resellers, along with the equilibrium market price of the secondary market. Two types of effects are created due to the secondary market: (1) a quantity effect (sales by the manufacturer), and (2) an allocation effect (supply chain performance). They show that the former is indeterminate, i.e., the total sales volume for the man￾ufacturer may increase or decrease, depending on the critical fractile. However, the latter is always posi￾tive, i.e., the secondary market always improves allo￾cation efficiency. The sum of the effects is also unclear in that the welfare of the supply chain may or may not increase as a result of the secondary market. Finally, the authors present potential strategies for the manufacturer to increase sales in the presence of the secondary market. Dong and Durbin (2001) study other implications of such surplus markets on supply chain efficiency. Keskinocak and Tayur (2001) describe examples where matching algorithms developed by operations researchers have been used in market￾places as decision support for matching demand and supply. Kleindorfer and Wu (2003) present a detailed analysis of research related to integrating long-term and short-term contracting using B2B exchanges. A related phenomenon in the area of procurement and supplier relationships has been industry-wide consortia where multiple buyers and suppliers within an industry join and conduct business. Better transac￾tional efficiency has been highlighted as the key ben￾efit of consortia such as Covisint (automotive) and Converge (high tech). The dynamics of these entities are not well understood and pose several important questions. For example, one could expect that having multiple suppliers on the same platform is likely to reduce prices for the buyer, but it is likely to bene- fit other buyers in the consortium as well. Thus, it is not clear if one should join the consortium in the first place. One of the reasons for Dell deciding not to join either of the high-tech consortia, Converge or e2open, could be that they do not want to open up their supply chain processes to competitors. Granot and Sosic (2001) study this issue using a stylized model where there are three firms whose products have a certain degree of substitutability. They explore con￾ditions under which formation of three-member and two-member alliances is optimal. In particular, they consider a deterministic linear model for the demand that depends on the prices charged by the firm and its competitors, and the degree of substitutability across the products. They assume that when alliances are formed, the procurement cost (or the price paid by 1394 Management Science/Vol. 49, No. 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business the firm)strictly decreases, and that the sum of the members. They consider coordination mechanisms for reductions due to a firm joining a two-firm coalition a horizontal alliance characterized by the following with each of the other firms is greater than the reduc- features:(1)firms in the alliance can exert effort only tion obtained when all three firms are in the alliance. in their local markets to increase customer demand With these decreases in costs, the authors derive con for the alliance,(2)customers are mobile and a cus- ditions under which joining a three- or two-party tomer living in a given alliance members local area coalition is beneficial for a firm. They also identify may have a need to buy from some other alliance conditions under which a firm may prefer to be in a member, and(3)the coordination rules followed by two-firm alliance to prevent others from forming an the alliance determine which firms from a large pool independent two-firm alliance even though this may of potential member firms join the alliance, and ho lead to lower profits. The authors also provide several much effort each firm joining the alliance exerts in other insights into the stability of these alliances. ts local market. In this horizontal alliance setul Jin and Wu(2001b) study the formation of supplier they consider the use of two coordination mecha coalitions in the context of a buyer-centric procure- nisms: (1)a linear transfer of fees between mem- ment market. They consider a second-price descend- bers if demand from one member's local customer is ing sealed-bid auction and propose a two-stage served by another member, and(2)ownership of an auction mechanism that allows suppliers to form equal share of the alliance profits generated from a coalitions with one another. Building on the founda- royalty on each member's sales. The authors derive tions of core games and bidding rings, they explore conditions on the distribution of demand external the idea of managed collusion, which provides a ity among alliance members to determine when each means to enhancing bidder profitability. They also coordination mechanism should be used separately, entify basic requirements for a valid coalition mech- and when the mechanisms should be used together anism, including characteristics such as individual rationality, welfare compatibility, maintaining compe- tition, and financial balance They show that such a 3. Visibility and Information mechanism could be constructed so that the buyer Sharing does not lose the advantage from supplier competi- The Internet has made it easier to share informa- tion, and a stable coalition structure could be formed. tion among supply chain partners. The current trend They propose a profit distribution scheme among in the industry is to try to leverage the benefits members in the supplier coalition and show that obtained through information sharing (also called vis- the proposed scheme provides proper incentives such ibility)across the supply chain to improve opera- that(1)the best strategy for a coalition member is to tional performance, customer service, and solution comply with the coalition agreement, and (2) bidding development. The notion of lack of information in the the true cost is the best strategy so long as the bids are supply chain and the resulting bullwhip effect was uniformly distributed and the bidders cost is above first studied by Lee et al.(1997). Chen et al.(2000) a certain threshold. They also investigate the stable quantify the effect of forecasting and lead times on oalition structure under the proposed mechanism, the bullwhip effect under stylized supply chain set and show that under symmetric information there tings. A number of other papers have dealt with the exists one unique strongly stable coalition structure. flow of information in the supply chain and the effect Butler et al.(1997) suggest that the prevalence of that on its performance. We will only focus on a of the Internet will lead to a reduction in costs of few papers in the interest of space interaction among firms that may make horizontal Gavirneni et al.(1999) consider the role of infor alliances (i.e, alliances between similar businesses) mation in a two-stage capacitated supply chain under more attractive. Nault and Tyagi(2001)examine three types of information flow: (1)no information is coordination mechanisms that achieve an alignment shared with the supplier (2)the supplier knows the between the success of the alliance and its individual end-item demand distribution and the retailer uses MANAGEMENT SCIENCE/VoL 49, No. 10, October 2003 1395

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business the firm) strictly decreases, and that the sum of the reductions due to a firm joining a two-firm coalition with each of the other firms is greater than the reduc￾tion obtained when all three firms are in the alliance. With these decreases in costs, the authors derive con￾ditions under which joining a three- or two-party coalition is beneficial for a firm. They also identify conditions under which a firm may prefer to be in a two-firm alliance to prevent others from forming an independent two-firm alliance even though this may lead to lower profits. The authors also provide several other insights into the stability of these alliances. Jin and Wu (2001b) study the formation of supplier coalitions in the context of a buyer-centric procure￾ment market. They consider a second-price descend￾ing sealed-bid auction and propose a two-stage auction mechanism that allows suppliers to form coalitions with one another. Building on the founda￾tions of core games and bidding rings, they explore the idea of managed collusion, which provides a means to enhancing bidder profitability. They also identify basic requirements for a valid coalition mech￾anism, including characteristics such as individual rationality, welfare compatibility, maintaining compe￾tition, and financial balance. They show that such a mechanism could be constructed so that the buyer does not lose the advantage from supplier competi￾tion, and a stable coalition structure could be formed. They propose a profit distribution scheme among members in the supplier coalition and show that the proposed scheme provides proper incentives such that (1) the best strategy for a coalition member is to comply with the coalition agreement, and (2) bidding the true cost is the best strategy so long as the bids are uniformly distributed and the bidder’s cost is above a certain threshold. They also investigate the stable coalition structure under the proposed mechanism, and show that under symmetric information there exists one unique strongly stable coalition structure. Butler et al. (1997) suggest that the prevalence of the Internet will lead to a reduction in costs of interaction among firms that may make horizontal alliances (i.e., alliances between similar businesses) more attractive. Nault and Tyagi (2001) examine coordination mechanisms that achieve an alignment between the success of the alliance and its individual members. They consider coordination mechanisms for a horizontal alliance characterized by the following features: (1) firms in the alliance can exert effort only in their local markets to increase customer demand for the alliance, (2) customers are mobile, and a cus￾tomer living in a given alliance member’s local area may have a need to buy from some other alliance member, and (3) the coordination rules followed by the alliance determine which firms from a large pool of potential member firms join the alliance, and how much effort each firm joining the alliance exerts in its local market. In this horizontal alliance setup, they consider the use of two coordination mecha￾nisms: (1) a linear transfer of fees between mem￾bers if demand from one member’s local customer is served by another member, and (2) ownership of an equal share of the alliance profits generated from a royalty on each member’s sales. The authors derive conditions on the distribution of demand external￾ity among alliance members to determine when each coordination mechanism should be used separately, and when the mechanisms should be used together. 3. Visibility and Information Sharing The Internet has made it easier to share informa￾tion among supply chain partners. The current trend in the industry is to try to leverage the benefits obtained through information sharing (also called vis￾ibility) across the supply chain to improve opera￾tional performance, customer service, and solution development. The notion of lack of information in the supply chain and the resulting bullwhip effect was first studied by Lee et al. (1997). Chen et al. (2000) quantify the effect of forecasting and lead times on the bullwhip effect under stylized supply chain set￾tings. A number of other papers have dealt with the flow of information in the supply chain and the effect of that on its performance. We will only focus on a few papers in the interest of space. Gavirneni et al. (1999) consider the role of infor￾mation in a two-stage capacitated supply chain under three types of information flow: (1) no information is shared with the supplier (2) the supplier knows the end-item demand distribution and the retailer uses Management Science/Vol. 49, No. 10, October 2003 1395

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business an(s, S)policy, and (3) the supplier has complete (2000) demonstrate situations when forecast update information about the inventory state of the retailer. may not get better over time. Miyoaka and Hausman The authors show the optimality of order-up-to poli-(2001) study a two-stage supply chain where using cies for finite and infinite horizon models. Through a old forecasts may be better. computational analysis, they study the role of infor- Although sharing forecasts can be beneficial in most mation availability and the savings obtained under cases, and the Internet does facilitate the sharing of ifferent operational conditions. Lee et al.(2000) such information, conflicting objectives may cause study the value of information in a two-level supply the forecasts to be distorted. Celikbas et al.(1999) chain with nonstationary end demand and show that address this issue in a intrafirm setting where mar- value of information could be high, particularly in keting and manufacturing units may have conflict- cases where demand may be correlated over time. The ing objectives regarding forecasts. Marketing, being effect of vendor managed inventory(VMI) systems, a revenue center, may have an incentive to over where the buyer shares demand information with the forecast whereas manufacturing, being a cost center, supplier who, in turn, manages the buyers inventory, may have an incentive to underproduce as compared have also been extensively studied by researchers to the forecast. The authors study a decentralized ( see Cetinkaya and Lee 2000 and Cheung and Lee setting where demand is uncertain and marketing provides a forecast to manufacturing, which in turn A related issue in supply chain information shar- produces a quantity based on the forecasted amount ing is sharing forecast information. It is highlighted and the knowledge about the demand distribution that one of the reasons for Dell's They show that by suitably setting penalties for over- success is its ability to transmit timely and accurate forecast and underproduction, one can coordinate the forecasts to its suppliers. Because forecasts are not system. Chen(1999)considers a supply chain whose always accurate, firms may pass demand information members are divisions of the same firm and are man- in the form of bands (lower and upper estimates)that aged by different individuals who have local inven- may get more refined as one gets closer to the actual tory information. He shows that the owner of the period of ordering. It is important to understand firm can manage the divisions as cost centers without how frequent forecasts can be used to improve sup- compromising the systemwide performance by using ly chain performance. Kaminsky and Swaminathan an incentive-compatible measurement scheme based (2001)present a model for forecast evolution that cap- on accounting inventory levels. Similar to Celikbas ares two notions related to forecasts: (1)forecasts are et al. (1999), Chen(1999)shows that it is important not exact and (2)forecasts over longer horizons are for the upstream members of the supply chain to less certain than those over shorter horizons with this have access to accurate customer demand informa- forecast evolution model, they develop a capacitated tion. More recently, Cachon and Lariviere(2001)study production planning model for a single product with forecast sharing in a two-stage supply chain between terminal demand. After showing that the optimal pro- a manufacturer and a supplier, where the manufac- duction policy is order up to, they develop heuristics turer provides an initial forecast and a contract to for the problem and characterize their performance. the supplier, who in turn invests to set up capacity Through a detailed computational study, the authors in anticipation of demand. The focus of the study show that these heuristics get close to the optimal is on two types of compliances:(1)forced compli- solution with holding costs (less than 0.5% away from ance, where the supplier is forced to develop a given timal on average under the conditions studied) capacity once he accepts a contract from the and provide insights on the effect of early, interme- ufacturer and(2) voluntary compliance, where diate, and late information updates in forecasts on supplier can set the capacity optimally. Cachon and optimal costs. Although it is reasonable to assume Lariviere(2001)show that compliance regime plays that forecasts do get better as one gets closer to the an important role in the supply chain performance decision epoch in most cases, Cattani and Hausman The authors find that it is always in the interest of 1396 MANAGEMENT SCIENCE/VoL 49, No 10, October 2003

SWAMINATHAN AND TAYUR Models for Supply Chains in E-Business an (s S) policy, and (3) the supplier has complete information about the inventory state of the retailer. The authors show the optimality of order-up-to poli￾cies for finite and infinite horizon models. Through a computational analysis, they study the role of infor￾mation availability and the savings obtained under different operational conditions. Lee et al. (2000) study the value of information in a two-level supply chain with nonstationary end demand and show that value of information could be high, particularly in cases where demand may be correlated over time. The effect of vendor managed inventory (VMI) systems, where the buyer shares demand information with the supplier who, in turn, manages the buyer’s inventory, have also been extensively studied by researchers (see Cetinkaya and Lee 2000 and Cheung and Lee 2002). A related issue in supply chain information shar￾ing is sharing forecast information. It is highlighted in the popular press that one of the reasons for Dell’s success is its ability to transmit timely and accurate forecasts to its suppliers. Because forecasts are not always accurate, firms may pass demand information in the form of bands (lower and upper estimates) that may get more refined as one gets closer to the actual period of ordering. It is important to understand how frequent forecasts can be used to improve sup￾ply chain performance. Kaminsky and Swaminathan (2001) present a model for forecast evolution that cap￾tures two notions related to forecasts: (1) forecasts are not exact and (2) forecasts over longer horizons are less certain than those over shorter horizons. With this forecast evolution model, they develop a capacitated production planning model for a single product with terminal demand. After showing that the optimal pro￾duction policy is order up to, they develop heuristics for the problem and characterize their performance. Through a detailed computational study, the authors show that these heuristics get close to the optimal solution with holding costs (less than 0.5% away from optimal on average under the conditions studied) and provide insights on the effect of early, interme￾diate, and late information updates in forecasts on optimal costs. Although it is reasonable to assume that forecasts do get better as one gets closer to the decision epoch in most cases, Cattani and Hausman (2000) demonstrate situations when forecast updates may not get better over time. Miyoaka and Hausman (2001) study a two-stage supply chain where using old forecasts may be better. Although sharing forecasts can be beneficial in most cases, and the Internet does facilitate the sharing of such information, conflicting objectives may cause the forecasts to be distorted. Celikbas et al. (1999) address this issue in a intrafirm setting where mar￾keting and manufacturing units may have conflict￾ing objectives regarding forecasts. Marketing, being a revenue center, may have an incentive to over￾forecast whereas manufacturing, being a cost center, may have an incentive to underproduce as compared to the forecast. The authors study a decentralized setting where demand is uncertain and marketing provides a forecast to manufacturing, which in turn produces a quantity based on the forecasted amount and the knowledge about the demand distribution. They show that by suitably setting penalties for over￾forecast and underproduction, one can coordinate the system. Chen (1999) considers a supply chain whose members are divisions of the same firm and are man￾aged by different individuals who have local inven￾tory information. He shows that the owner of the firm can manage the divisions as cost centers without compromising the systemwide performance by using an incentive-compatible measurement scheme based on accounting inventory levels. Similar to Celikbas et al. (1999), Chen (1999) shows that it is important for the upstream members of the supply chain to have access to accurate customer demand informa￾tion. More recently, Cachon and Lariviere (2001) study forecast sharing in a two-stage supply chain between a manufacturer and a supplier, where the manufac￾turer provides an initial forecast and a contract to the supplier, who in turn invests to set up capacity in anticipation of demand. The focus of the study is on two types of compliances: (1) forced compli￾ance, where the supplier is forced to develop a given capacity once he accepts a contract from the man￾ufacturer and (2) voluntary compliance, where the supplier can set the capacity optimally. Cachon and Lariviere (2001) show that compliance regime plays an important role in the supply chain performance. The authors find that it is always in the interest of 1396 Management Science/Vol. 49, No. 10, October 2003