Which E-Business is Right for Your Supply Chain?

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Which E-Business is Right for Your Supply Chain?
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What is E-Business?

• E-business is a collection of business models and
  processes motivated by Internet technology, and
  focusing on improving the extended enterprise
  performance
• E-commerce is the ability to perform major
  commerce transactions electronically
• e-commerce is part of e-Business
• Internet technology is the driver of the business
  change
• The focus is on the extended enterprise
• Intra-organizational
• Business to Consumer (B2C)
• Business to Business (B2B)
• The Internet can have a huge impact on supply
  chain performance.

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What is E-Business?

• Business transacted over the Internet
• Is product information displayed on the Internet?
• Is negotiation over the Internet?
• Is the order placed over the Internet?
• Is the order tracked over the Internet?
• Is the order fulfilled over the Internet?
• Is payment transacted over the Internet?

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The Retail Industry

• Brick-and-mortar companies establish virtual
  retail stores
• Wal-Mart, K-Mart, Barnes Noble, Circuit City
• An effective approach - hybrid stocking strategy
• High volume/fast moving products for local
  storage
• Low volume/slow moving products for browsing and
  purchase on line (risk pooling)
• Danger of channel conflict

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Existing Channels for Business

• Product information
• Physical stores, EDI, catalogs, face to face,
  Negotiation
• Face to face, phone, fax, sealed bids,
• Order placement
• Physical store, EDI, phone, fax, face to face,
• Order tracking
• EDI, phone, fax,
• Order fulfillment
• Customer pick up, physical delivery

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Potential Revenue Opportunities from E-Business

• Direct sales to customers
• 24 hour access for order placement
• Information aggregation
• Information sharing in supply chain
• Flexibility on pricing and promotion
• Price and service discrimination
• Faster time to market
• Efficient funds transfer - reduce working capital

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Potential Cost Opportunities from E-Business

• Direct customer contact for manufacturers
• Coordination in the supply chain
• Customer participation
• Postpone product differentiation to after order
  is placed
• Downloadable product
• Reduce facility costs
• Geographical centralization and resulting
  reduction in inventories

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Basic evaluation framework

• How does going on line impact revenues?
• How does going on line impact costs?
• Facility (site personnel)
• Inventory
• Transportation
• Information
• Should the e-commerce channel position itself for
  efficiency or responsiveness?
• Who in the supply chain can extract most value?
• Is the value to existing players or new entrants?

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The Computer Industry Dell on-line
Customer Order and
Manufacturing Cycle
Procurement cycle
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives
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Potential opportunities exploited by Dell

• Revenue opportunities
• 24 hour access for order placement
• Direct sales
• Providing customization and large selection
  information
• Flexibility on pricing and promotion
• Faster time to market
• Efficient funds transfer - reduce working capital
• Revenue negatives
• Longer response time than store and no help with
  selection

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Potential opportunities exploited by Dell

• Cost opportunities
• Direct sales eliminating intermediary
• Customer participation Call center catalog
  costs
• Information sharing in supply chain
• Reduce facility costs
• Geographical Centralization and reduced
  inventories
• Postpone product differentiation to after order
  is placed using product platforms and common
  components
• Outbound transportation costs increase

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Opportunities

• Significant, but must be combined with component
  commonality, and build to order. Must move
  product customization to pull phase of supply
  chain and hold inventories as common components
  during the push phase
• Opportunity most significant for new, hard to
  forecast products
• Complements strength of existing retail channels

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Retailing Amazon.com
Pull
Pull
Amazon Supply Chain
Bookstore Supply Chain
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Potential opportunities exploited by Amazon

• Revenue opportunities
• 24 hour access for order placement
• Providing large selection and other information
• Attract customers who do not want to go to store
• Flexibility on pricing
• Efficient funds transfer
• Revenue negatives
• Intermediary (distributor) reduces margin
• Longer response time than bookstore

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Potential opportunities exploited by Amazon

• Cost opportunities
• Reduce facility costs
• Geographical centralization and reduced
  inventories Most effective for low volume, hard
  to forecast books, least effective for high
  volume best sellers
• Cost increases
• Outbound transportation costs increase
• Handling cost increase

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Opportunities

• Going on-line, by itself, offers lower cost
  advantages (may be some disadvantages) than in
  Dell model given current form of books
• Cost and availability advantages are more
  significant for low volume books
• On-line channel has significant cost benefit if
  books are downloadable

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How should bookstore chains react?

• An on line channel allows it to match Amazons
  revenue advantages
• Use a hybrid approach in stocking and pricing
• High volume books for local storage
• Low volume books for browsing and purchase on
  line
• Pricing varies by delivery and pick up option

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Grocery on-line
Customer
Online Grocer
Manufacturer
On-Line Supply Chain
Supermarket Supply Chain
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Potential opportunities for on line grocer

• Revenue opportunities
• Attract customers who do not want to go to
  supermarket
• Out of town customers for specialty items
• Menus and other value added
• Cost opportunities
• Reduced facility costs (sites as well as checkout
  clerks)
• Inventory savings from centralization (primarily
  for slow moving, specialty items)

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Added costs for online grocer

• Additional outbound transportation cost Have to
  cover the last mile to the customer
• Additional picking and packing costs

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Opportunities

• Negligible opportunity to compete on cost, except
  maybe for specialized low volume items
• Competition has to be on convenience or some
  other form of value added
• To lower delivery cost disadvantage, must be more
  than on-line grocery
• Greatest opportunity may be for supermarket
  chains to expand value offering

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Key Messages

• Some supply chains are better suited to exploit
  the cost benefits of going on-line
• Ability to increase processes in pull phase
• Ability to delay product differentiation
• Big inventory benefit from geographical
  centralization
• Significant facility cost reduction on
  centralization
• Transport to customer is a small fraction of
  product cost

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B2B W.W. Grainger

• Revenue opportunities
• 24 hour access for order placement
• Large selection information with simple search
• Display of substitutable products
• Flexibility on pricing and promotion
• Ability to alert customer of order status
• Faster time to market

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B2B W.W. Grainger

• Cost opportunities
• Reduced order taking costs
• Reduced order placement costs for customers
• Reduced error because of multiple data entry
• Reduced catalog costs

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B2B FreeMarkets

• The worldwide market for direct materials
  procurement is approximately 5 trillion, with
  the U.S. segment at approximately 1 trillion
• Morgan Stanley Dean Witter Internet Industry
  Research
• FreeMarkets is a B2B Internet company that
  creates online auctions for procurers of direct
  materials
• MSDW Claim FreeMarkets clients typically
  achieve savings of 2 to 25

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B2B Matching Base Demand and Capacity

• Potential opportunities
• Ability to reach more bidders and get lower unit
  price
• Key questions
• What does it do to total cost of material?
• How many bidders do you need to achieve this?
• How does this impact cooperative relationships
  within supply chain?
• Does intermediary provide any value?

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B2B Matching Demand Shortage and Surplus Capacity

• Potential opportunities
• Ability to aggregate and display all available
  surplus capacity
• Better match of surplus capacity and unmet demand
• Best provided by an intermediary
• Key issue
• Total cost (product transportation ) must be
  accounted for in the auction

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Key Messages

• Significant B2B opportunity to use Internet to
  reduce cost and improve efficiency of existing
  processes
• Significant B2B opportunity to improve
  collaboration within existing supply chains
• Auction opportunity for B2B is primarily for
  matching demand shortage with surplus capacity,
  not for base load

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E-business Opportunities

• Reduce Facility Costs
• Eliminate retail/distributor sites
• Reduce Inventory Costs
• Apply the risk-pooling concept
• Centralized stocking
• Postponement of product differentiation
• Use Dynamic Pricing Strategies to Improve Supply
  Chain Performance

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E-business Opportunities

• Supply Chain Visibility
• Reduction in the Bullwhip Effect
• Reduction in Inventory
• Improved service level
• Better utilization of Resources
• Improve supply chain performance
• Provide key performance measures
• Identify and alert when violations occur
• Allow planning based on global supply chain data

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Distribution Strategies

• Warehousing
• Direct Shipping
• No DC needed
• Lead times reduced
• smaller trucks
• no risk pooling effects
• Cross-Docking

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Cross Docking

• In 1979
• Kmart had 1891 stores and average revenues per
  store of 7.25 million
• Wal-Mart was a small niche retailer in the South
  with only 229 stores and average revenues under
  3.5 million
• 10 Years later
• Wal-Mart had
• highest sales per square foot of any discount
  retailer
• highest inventory turnover of any discount
  retailer
• Highest operating profit of any discount
  retailer.
• Today Wal-Mart is the largest and highest profit
  retailer in the world
• Kmart ????

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What accounts for Wal-Marts remarkable success

• A focus on satisfying customer needs
• providing customers access to goods when and
  where they want them
• cost structures that enable competitive pricing
• This was achieved by way the company replenished
  inventory the centerpiece of its strategy.
• Wal-Mart employed a logistics technique known as
  cross-docking
• goods are continuously delivered to warehouses
  where they are dispatched to stores without ever
  sitting in inventory.
• This strategy reduced Wal-Marts cost of sales
  significantly and made it possible to offer
  everyday low prices to their customers.

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Characteristics of Cross-Docking

• Goods spend at most 48 hours in the warehouse
• Cross Docking avoids inventory and handling
  costs,
• Wal-Mart delivers about 85 of its goods through
  its warehouse system, compared to about 50 for
  Kmart
• Stores trigger orders for products.

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Distribution Strategies
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Direct-to-ConsumerCost Trade-Off
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Industry BenchmarksNumber of Distribution
Centers
Food Companies
Chemicals
Pharmaceuticals
Avg. of WH
3
14
25
- High margin product - Service not important (or
easy to ship express) - Inventory
expensive relative to transportation
- Low margin product - Service very important -
Outbound transportation expensive relative to
inbound
Sources CLM 1999, Herbert W. Davis Co
LogicTools
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E-Fulfillment

• How have strategies changed?
• From shipping cases to single items
• From shipping to a relatively small number of
  stores to individual end users
• What is the difference between on-line and
  catalogue selling?
• Consider for instance Lands End which has both
  channels