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167227-1 Report Abstract

Impact of Electronic Commerce on Logistics Operations: A Focus on Vendor Managed Inventory (VMI) Strategies

Mouhamad Y. Rabah and Hani S. Mahmassani, University of Texas at Austin, February 2002, 78 pp. (167227-1)

This report investigates the impacts of Information and Communication Technologies (ICT) and the Internet on logistics operations. The major contributions are: 1) an overview of the Internet growth during the past five years, as it relates to electronic commerce 2) a conceptual framework that assesses the impact of ICT on supply chain operations, 3) two modeling schemes representing no information sharing (NIS) and information sharing (IS) scenarios among multiple retailers and one supplier, and 4) cost reductions achievable through information sharing in a two-echelon supply chain where the supplier adopts a Vendor Managed Inventory (VMI) policy.

Reported statistics concerning Internet growth show large discrepancies, reflecting different traffic measurement methodologies adopted by various companies and agencies. Advantages and disadvantages of currently used techniques are presented. Trends in the development of electronic business-to-customer (B2C) and business-to-business (B2B) commerce sectors are discussed, and various forecasts are compared to actual observations where applicable.

A major industry affected by ICT is the logistics industry. A framework reflecting the transformation of logistics operations into supply chain management with real-time information and collaboration is presented. The framework reflects the shift in logistics operations towards strategies that allow faster reaction to customer demand changes facilitated by technological advancements and collaboration among various parties. These policies include Merge-In-Transit (MIT), Time Definite Delivery (TDD), postponement strategy, and VMI. Advantages and disadvantages of logistics relational settings and operations are discussed.

Finally, cost reductions achievable through information sharing among multiple retailers and one supplier are quantified. Simulation experiments are developed to model a setting with no information sharing (NIS) based on the Economic Order Quantity (EOQ), which is contrasted to a scenario with information sharing (IS) based on a VMI policy. Heuristic algorithms are applied to solve both problems. Results, based on randomly generated instances, show that the main benefit to retailers is a major decrease in stock-out costs. The major benefit for the supplier is the reduction in the so-called bullwhip effect, which translates into a decrease in inventory holding cost. Finally, although the number of visits from the supplier to retailers increased significantly, the transportation cost decreased in almost all cases reflecting the use of more efficient routes by the supplier when bundling retailers’ demands.

Keywords: Logistic Operations, Vendor Managed Inventory, Electronic Commerce, Communication Technology

ENTIRE REPORT (Adobe Acrobat File – 428KBytes)