Which E-Business is Right for Your Supply Chain?

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.

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?

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

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

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

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

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?

The Computer Industry: Dell on-line

Customer Order andManufacturing Cycle

Procurement Cycle

Dell Supply Chain Cycles

Procurement cycleCustomer Order andManufacturing Cycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

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

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

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

Retailing: Amazon.com

Publisher

Distributor

Amazon

Customer

Amazon Supply Chain

Publisher

Warehouse (?)

Retail Store

Customer

Bookstore Supply Chain

Pull Pull

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

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

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

How should bookstore chains react?

• An on line channel allows it to match Amazon’s 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

Grocery on-line

Manufacturer

Online Grocer

Customer

On-Line Supply Chain

Manufacturer

Warehouse (?)

Supermarket

Customer

Supermarket Supply Chain

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)

Added costs for online grocer

• Additional outbound transportation cost: Have to cover the last mile to the customer

• Additional picking and packing costs

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

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

All are achieved if product is downloadable

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

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

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%

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?

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

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

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

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

Distribution Strategies

• Warehousing

• Direct Shipping– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

• Cross-Docking

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 ????

What accounts for Wal-Mart’s 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-Mart’s cost of sales

significantly and made it possible to offer everyday low prices to their customers.

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.

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies

Direct-to-Consumer:Cost Trade-Off

Cost Trade-Off for BuyPC.com

$0$2$4$6$8

$10$12$14$16$18$20

0 5 10 15

Number of DC's

Co

st (

$ m

illio

n)

Total Cost

Inventory

Transportation

Fixed Cost

Industry Benchmarks:Number of Distribution Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.# ofWH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound

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 Land’s End which has both channels