Which EBusiness is Right for Your Supply Chain

1
Which E-Business is Right for Your Supply Chain?

• Learning Objectives
• Identify the role of e-business in a supply chain
• Apply transaction cost economic theory to
  e-business
• Evaluate the impact of establishing an e-business
  on revenues for a supply chain
• Evaluate the impact of establishing an e-business
  on costs for a supply chain

2
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?

3
E-Business Defined

• all about cycle time, speed, globalization,
  enhanced productivity, reaching new customers and
  sharing knowledge across institutions for
  competitive advantage.

Louis Gerstner, Chairman, IBM
4
Transaction Cost Economics (Coase and Williamson)

• Transaction costs are the costs of organising
  economic activity and not the cost of production
• Bounded rationality - human beings have a limited
  capacity to receive, store and process
  information
• Opportunism - incomplete or distorted disclosure
  of information
• Market uncertainty - unpredictable change of
  price, quality, supply or demand of product
• Asset specificity Parties are engaged in trade
  that is supported by significant investments

5
Bounded Rationality

• Information overload
• Provision of search engines
• Internet opens up the entire organisation to vast
  information resources
• The collective information processing capacity of
  the organisation increases

6
Opportunism

• Internet culture is the antithesis of opportunism
• Reduce profits in the value chain and reduce the
  cost to the customer
• Innovations that cut costs and raise
  productivity, tend to raise economic well-being
  and create new businesses and opportunities

7
Market Uncertainty

• Reduced through the data collected on-line
  compared to traditional market research
• Analysis of Web pages shows which are being
  accessed
• On-line surveys
• Product preferences

8
Asset Specificity

• Business moves from competitive to collaborative
• Facilitates the formation of virtual
  organisations
• Free access to software on-line
• Open testing area for customers to test drive
  hardware and software systems

9
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?

10
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

11
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

12
The Computer Industry Dell on-line
Customer Order and
Manufacturing Cycle
Procurement cycle
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives
13
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

14
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

15
Retailing Amazon.com
Pull
Pull
Amazon Supply Chain
Bookstore Supply Chain
16
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

17
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

18
Grocery on-line
Customer
Pull
Pull
Order Fulfillment Centre
Supplier
On-Line Supply Chain
Supermarket Supply Chain
19
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)

20
Added costs for online grocer

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

21
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