E-Business Enables Costs to Be Minimised in Supply Chains. Identify Relevant Theory Underpinning This Assertion, and Illustrate Your Answer with Examples of Practice in the Airline Industry

E-BUSINESS ENABLES COSTS TO BE MINIMISED IN SUPPLY CHAINS. IDENTIFY RELEVANT THEORY UNDERPINNING THIS ASSERTION, AND ILLUSTRATE YOUR ANSWER WITH EXAMPLES OF PRACTICE IN THE AIRLINE INDUSTRY.

Companies are embracing e-business in their supply chain in order to: overcome the global dispersion in their supply chains operations, in particular, manufacturing and distribution facilities, manage localised markets requiring more customised products, counter increased competition arising from the digitisation of markets, become more responsive to customer needs (Kalakota and Robinson, 1999) and because: "the bulk of most companies costs can be directly attributed to activities within the supply chain" (Hadley, 2004, p. 29). Before e-business' contribution to cost reduction in the supply chain is discussed, it is first important to distinguish between terms. According to Chaffey (2002), e-commerce, which refers to: "all electronically mediated information exchanges between an organisation and its external stakeholders," is a subset of e-business, which uses Information and Communication Technology (ICT) to transform key business processes, some of which, such as processing a purchasing order, that are not strictly included in e-commerce. Both e-business and e-commerce have the ability to streamline and re-structure the supply chain, the process through which: "raw materials, intermediate products, and finish goods are acquired, transformed, stored, and sold" (Kalakota and Robinson, 1999). Supply chain management (SCM) helps organisations to integrate their supplier, distributor and customer logistics requirements within this chain (Laudon and Laundon, 2002), in terms of both the upstream supply chain, equivalent to buy-side e-commerce (transactions between suppliers and intermediaries) and downstream supply chain, equivalent to sell-side e-commerce (transactions between customers and intermediaries). The supply chain can follow either a 'push' or 'pull' model, being production-driven or demand-driven respectively (Chaffey, 2002), which is a strategic decision that rests with the organisation. So how have SCM developed?

Since the 1960s, SCM has focused on operational-level activities (material handling, issuance of purchase orders, material requirements planning and the taking of customer orders). However, following the integration of e-business into the supply chain, known as the 'e-supply' chain, SCM has become tactical and in some cases strategic, with the advance of supply chain planning, or SCP (demand, sales and operations, capacity and distribution planning). Here, SCP aims to minimise costs across the entire supply chain whilst ensuring customer expectations are met (Hadley, 2004). This has enabled organisations to improve the value-adding activities throughout their value chain, enabling internal and external efficiencies, and across their value and supply network, creating widespread external reductions in transaction costs, performance improvement and the surpassing of customer expectations. In the airline industry since the 1980s, as has been the case in many other industries, organisations have focused

on re-engineering their processes to increase efficiencies. In doing so, the industry has been re-assessing its internal supply chain and in some cases its wider supply network, addressing its relationships with suppliers, manufacturers, distributors, retailers, and customers. Today, following the technological strides associated with the so-called e-business 'boom' of the late 1990s and early part of 2000, SCM has become a much more potent competitive weapon.

An evolutionary framework of SCM applied to the airline industry

In their study of the evolution of SCM, Folinas et al (2004) showed that organisations have adopted SCM to varying extents. In their analysis, the authors categorised SCM evolution using five parameters: business strategy, co-operative relationships among clients and partners, the degree of application of innovator technologies, the management/evaluation of information for decision processing, and basic logistics functions. Four types of SCM emerged: core logistics activities efficiency, co-ordination of internal organisational processes, inter-enterprises business exchanges, and establishment of dynamic networks between virtual organisations. The first two lead to internal cost efficiency within a single organisation, whereas the latter two refer to external cost efficiencies derived from the agglomeration of multiple organisations' supply chains. These four types of SCM are outlined individually below with reference to the airline industry where appropriate.

Type 1: core logistics activities efficiency

In 'fundamental' or 'inception' SCM (Dobbs, 1998; Poirer and Reiter, 1998) organisations adopt basic SCM techniques and ICT within individual departments, aimed at achieving lower costs, price and inventory reductions, and improved quality resulting from logistical efficiencies, typically when an organisation meets its total volume through a smaller supplier base. Little strategic advantage is achieved at this level of e-business integration (Folinas et al., 2004). The e-procurement system adopted a British Airways in 2000 is one such example although airlines will be involved in this stage of SCM.

Type 2: co-ordination of internal organisational processes

In 'cross-functional', 'developmental' or 'integrated' SCM, organisations start to introduce e-commerce and re-engineer their systems, integrating their internal supply chain, which becomes co-ordinated at a more corporate level and synchronised through the development of intranets connecting networks of internal users and enterprise and information support systems. Here, "information is replacing inventory" (Kalakota and Robinson, 1999, p. 202) generating organisation wide cost savings, performance enhancements, and customer service and transaction processing improvements (Folinas et al., 2004). For example, in the airline industry a number of airlines (AeroMexico, Air New Zealand, Delta Air Lines, South African Airways and Swiss International Airlines) use e-gatematrix to help co-ordinate their internal organisational process 'above the wing'. E-gatematrix is an e-business system that manages an airline's in-flight supply chain services (catering and cabin-cleaning services and in-flight entertainment), automating the process, making it more cost effective and flexible (Higgins, 2002). Most airlines today at least implement type 2 SCM, enabling customers to purchase tickets