How Much Can We Spare with E-Business: Examining the Effects in Supply Chain Management

By Ferbar, Liljana | Issues in Informing Science & Information Technology, Annual 2004 | Go to article overview

How Much Can We Spare with E-Business: Examining the Effects in Supply Chain Management


Ferbar, Liljana, Issues in Informing Science & Information Technology


Introduction

Various aspects of e-business have attracted increased attention in recent years. Different theoretical advantages of the use of e-business were established and their practical application was described with various case studies. The question today is no longer whether to use e-business, particularly not on the business-to-business level (B2B), but how to utilize it to achieve optimal results.

In this paper we concentrate on one aspect of e-business applications, namely on its effect in supply chain management, more specifically on the possible decrease in inventory levels and total average costs. One of the main reasons for higher levels of inventory is uncertainty about the future--usually only limited information is available about the needs of suppliers, our own production and future customer wishes. E-business and specifically Internet offer an ideal way to reduce the costs of acquiring timely and exact information about those needs and possibilities. As shown by some practical examples it can indeed lead to considerably lower inventory related costs.

While the use of e-business for inventory management has attracted increased attention of researchers and practicians in recent years, we approach this topic from a slightly different angle.

We do not concentrate on methods of achieving certain changes and improvements, but rather we provide a new mathematical model to show how different changes in order costs can affect optimal ordering intervals and quantity, average stock levels and consequently total inventory-related costs.

The results, also demonstrated using a practical, numerical example in the last part of this paper, certainly support the claim that efforts in integrating e-business in supply-chain dynamics are well justified and bring substantial benefits and cost savings.

In the first part of this paper important considerations about e-business and inventory levels are briefly summarized. In the second part we briefly present the average cost approach used to determine the optimal ordering policy. In the third part of the paper we assume that order costs become perturbed and we study the effect of this finite magnitude perturbation on the optimal ordering policy. In the fourth part we demonstrate the main sensitivity results using a simple numerical example. In the last part some conclusions are given.

Impact of E-business on Inventory

In recent years more and more companies have become aware of the costs connected with inventory levels, either raw materials or finished products. In addition to the fact that a considerable amount of capital, which otherwise could be used more productively elsewhere, has to be invested in stocks, high inventory levels also cause other costs such as warehousing costs, different taxes, insurance, costs of bad quality (due to mistakes found out later), disintegration etc.

The decrease in inventory levels is possible only if the reasons for inventories are eliminated or reduced. Without this such a decrease could cause production problems, fines due to nonfulfillment of contracts and last but not least loss of customers. E-business offers multiple possibilities for the decrease in inventory levels (Van der Vorst, Van Dongen, Nouguier, & Hilhorst, 2002). Specifically it can help to reduce order costs, which leads to the decrease in total inventory costs, as shown in this paper.

The main advantage of Internet and e-business is that it can make information widely available at low costs. This means that inventory levels can be reduced at all levels of supply chain without increasing the risk of stockouts (and costs related with stock-outs) for any company or customer involved in the process.

IT enables new ways of manufacturing, such as just-in-time production or virtual enterprise system (more about virtual enterprises can be found for example in Krauter (1999)) that can result in a considerable decrease in inventory and inventory related costs. …

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