Market and Supply Chain

COSC 643

Sungchul Hong

Goal

• Understand market functions and types.

• Study some electronically linked business types.

• Business process.

• Value chain.

• Supply chain.

• Types of e-commerce.

Supply and Demand

• Supply

• Demand

• Price

• Quantity

Quantity

Price

supplyDemand

Search Cost

• The business cost which is related to finding a trading partner, doing negotiation, and making contract.

Initial Investment & Marginal Cost

• The marginal cost is the addition to total cost.

Types of Market

• direct search markets– Search, negotiation costs

• brokered markets– Information about potential sellers and buyers– Information service

• dealer markets– Dealer quote, bid-ask spread.

• auction markets – Market quote and no bid-ask spread

Direct Search Markets

• No price information.

• Limitation on search.

• High search cost.

• The trading price could be biased.

Brokered Markets

• Intermediaries (Brokers)

• Economies of scale (trading volume)– Economical use of equipment– Information (connection)

• Potential trader, fair price

• Charge commission (less than direct search)

Dealer Markets

• They have their won bid, offer, quotations, and inventory.

• Guaranteed immediate transaction. (no price risk)

• Bid-ask spread (buy low and sell high)

Auction Markets

• They have centralized procedures for both buyers and sellers.

• Need efficient trading volume

• Continuous auction market.

• Periodic auction market.

• Immediate transaction

• No bid-ask spread

System, Business, and IT

• Businesses operate through systems in which people perform business processes using technology and information.

• Business professionals participate in all the major phases of building and maintaining these systems, and therefore need knowledge and skills necessary for effective participation.

System, Business, and IT

• Advances in IT have been and continue to be a driving force in business innovation in general and e-business in particular.

• The success of IT-enabled systems is in no way guaranteed even when the latest technology is used.

Coordination Cost

• Coordination costs are composed of costs of gathering information, negotiation contracts, and protecting against the risk of opportunistic bargaining.

Coordination Cost Application

• Complex product description– Flower, Auto parts

• Simple product description– TV, Car

• Physical characteristics– Bricks

Markets and Hierarchies

• Markets coordinate the flow through supply and demand and external transactions between different individuals and firms.

• Hierarchies coordinate the flow of material through adjacent steps by controlling and directing it at a higher level in the managerial hierarchy.

Coordination of Market

• In markets, a buyer can compare goods from different possible suppliers.

• He can choose the best combination of characteristics of goods.

• The market coordination costs associated with these markets are relatively high because the buyer must gather and analyze information form a variety of sellers.

Coordination of Hierarchy

• The hierarchies, however, reduces coordination costs over the markets by eliminating the buyer’s need to gather and analyze the information about different suppliers.

Coordination Cost

HighLow

hierarchiesmarkets

Business Systems

• Businesses operate through systems and the systems are composed of subsystems.

• A system has its purpose, boundary, environment, inputs and outputs.

Business Process

• A business process is a related group of steps or activities in which people use information and other resources to create value for internal or external customers.

• This process has time, space, input, output, begging and end.

Sub Process

• Sub processes are parts of a process that are processes in their own right of process.

Process

Value Adding

• A process’s value added is the amount of value it creates for its internal or external customer.

• At Dell Computer, the process “ assemble a computer” starts with the computer’s component parts and ends with a completely assembled computer. – The value added is the difference between

the value of the components and the value of the assembled computer.

Coordinating Business Processes

• Creating a new product

• Creating a coordinated plan for an entire business

• Fulfilling customer orders

Typical Functional Areas

• Engineering

• Sales and Marketing

• Production

• Accounting and Finance

• Human Resources

Value Chain

• The set of processes a firm uses to create value for its customers is often called its value chain.

• The value chain includes primary processes that directly create the value the firm’s customer perceives and support processes that add value indirectly by making it easier for others to perform the primary processes.

Value Activities and Value Chain

• A company must engage in multiple activities in order to perform its business.

• Each activity is a process called “value activity”

• A company’s “value chain” is a network of value activities, which are connected by links that describe relationships among value activities in the value chain, such as cost or effectiveness

Purchase Food

Seat Customers

Store Food

Take Orders

Cook Food

Serve food

Create Bill

Receive Payment

Example (a hypothetical restaurant)      

 

IT and Value-Chain

• New information technology contribute to close integration of adjacent steps on the value-added chain through the electronic markets and electronic hierarchies.

Case 1 (Dell) • Traditionally pc manufactures produce computers

based on demand estimation. • Those manufactures made contract with distributors

that sold the computers to individuals or businesses. • Dell eliminates middleman’s charges and risk of

large inventories by taking orders directly from the customers and building computers according to the customer’s specification.

• Dell uses electronic links to its suppliers that tell them exactly when the parts are needed. And Dell also uses outsourcing efficiently.

Types of Information Systems

• Supply Chain Systems

• Material requirement planning (MRP) systems

• Electronic data interchange (EDI) system

• Supply Chain Management (SCM)

Supply Chain Systems

• Regardless of whether the firm is a manufacturer or a retailer, its supply chain for raw materials and components should assure reliable, low-cost acquisition of whatever it needs.

Supply Chain Systems

• Determine material requirements for future weeks or months– Information flow– Material flow

• Generate new orders• Send the orders to suppliers• Obtain commitment dates for likely

receipt.• Verify that the ordered material actually

arrived.

MRP (Material requirement planning )

• This system is attempted to integrate purchasing and production activities

EDI

• EDI system connects large companies and their suppliers electronically.

• Electronic data transmission is virtually instantaneous, the supplier’s information system can check for availability and respond quickly with a confirmation.

SCM (Supply Chain Management)

• SCM goes beyond automating data transfers.

• It is the overall system of coordinating closely withy suppliers so that both the firm and its suppliers reap the benefits of smaller inventories, smoother production, and less waste.

HW#1

• Select an e-business company (e.g. Dell)• Draw a supply chain diagram of this company.

– You need to justify the structure of the chain.

• Analyze whether this company’s supply chain is suitable for a market or a hierarchy.

• Analyze the advantages of e-business in this company.

• Discuss the problem of a market type e-business supply-chain.