2What is E-Business?E-business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performanceE-commerce is the ability to perform major commerce transactions electronicallye-commerce is part of e-BusinessInternet technology is the driver of the business changeThe focus is on the extended enterprise:Intra-organizationalBusiness to Consumer (B2C)Business to Business (B2B)The Internet can have a huge impact on supply chain performance.
3What 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?
4The Retail IndustryBrick-and-mortar companies establish virtual retail storesWal-Mart, K-Mart, Barnes & Noble, Circuit CityAn effective approach - hybrid stocking strategyHigh volume/fast moving products for local storageLow volume/slow moving products for browsing and purchase on line (risk pooling)Danger of channel conflict
5Existing Channels for Business Product informationPhysical stores, EDI, catalogs, face to face, NegotiationFace to face, phone, fax, sealed bids, …Order placementPhysical store, EDI, phone, fax, face to face, …Order trackingEDI, phone, fax, …Order fulfillmentCustomer pick up, physical delivery
6Potential Revenue Opportunities from E-Business Direct sales to customers24 hour access for order placementInformation aggregationInformation sharing in supply chainFlexibility on pricing and promotionPrice and service discriminationFaster time to marketEfficient funds transfer - reduce working capital
7Potential Cost Opportunities from E-Business Direct customer contact for manufacturersCoordination in the supply chainCustomer participationPostpone product differentiation to after order is placedDownloadable productReduce facility costsGeographical centralization and resulting reduction in inventories
8Basic evaluation framework How does going on line impact revenues?How does going on line impact costs?Facility (site + personnel)InventoryTransportationInformationShould 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?
10Potential opportunities exploited by Dell Revenue opportunities24 hour access for order placementDirect salesProviding customization and large selection informationFlexibility on pricing and promotionFaster time to marketEfficient funds transfer - reduce working capitalRevenue negativesLonger response time than store and no help with selection
11Potential opportunities exploited by Dell Cost opportunitiesDirect sales eliminating intermediaryCustomer participation: Call center & catalog costsInformation sharing in supply chainReduce facility costsGeographical Centralization and reduced inventoriesPostpone product differentiation to after order is placed using product platforms and common componentsOutbound transportation costs increase
12OpportunitiesSignificant, 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 phaseOpportunity most significant for new, hard to forecast productsComplements strength of existing retail channels
14Potential opportunities exploited by Amazon Revenue opportunities24 hour access for order placementProviding large selection and other informationAttract customers who do not want to go to storeFlexibility on pricingEfficient funds transferRevenue negativesIntermediary (distributor) reduces marginLonger response time than bookstore
15Potential opportunities exploited by Amazon Cost opportunitiesReduce facility costsGeographical centralization and reduced inventories: Most effective for low volume, hard to forecast books, least effective for high volume best sellersCost increasesOutbound transportation costs increaseHandling cost increase
16OpportunitiesGoing on-line, by itself, offers lower cost advantages (may be some disadvantages) than in Dell model given current form of booksCost and availability advantages are more significant for low volume booksOn-line channel has significant cost benefit if books are downloadable
17How should bookstore chains react? An on line channel allows it to match Amazon’s revenue advantagesUse a hybrid approach in stocking and pricingHigh volume books for local storageLow volume books for browsing and purchase on linePricing varies by delivery and pick up option
19Potential opportunities for on line grocer Revenue opportunitiesAttract customers who do not want to go to supermarketOut of town customers for specialty itemsMenus and other value addedCost opportunitiesReduced facility costs (sites as well as checkout clerks)Inventory savings from centralization (primarily for slow moving, specialty items)
20Added costs for online grocer Additional outbound transportation cost: Have to cover the last mile to the customerAdditional picking and packing costs
21OpportunitiesNegligible opportunity to compete on cost, except maybe for specialized low volume itemsCompetition has to be on convenience or some other form of value addedTo lower delivery cost disadvantage, must be more than on-line groceryGreatest opportunity may be for supermarket chains to expand value offering
22Key MessagesSome supply chains are better suited to exploit the cost benefits of going on-lineAbility to increase processes in pull phaseAbility to delay product differentiationBig inventory benefit from geographical centralizationSignificant facility cost reduction on centralizationTransport to customer is a small fraction of product costAll are achieved if product is downloadable
23B2B: W.W. Grainger Revenue opportunities 24 hour access for order placementLarge selection information with simple searchDisplay of substitutable productsFlexibility on pricing and promotionAbility to alert customer of order statusFaster time to market
24B2B: W.W. Grainger Cost opportunities Reduced order taking costs Reduced order placement costs for customersReduced error because of multiple data entryReduced catalog costs
25B2B: FreeMarketsThe worldwide market for direct materials procurement is approximately $5 trillion, with the U.S. segment at approximately $1 trillionMorgan Stanley Dean Witter Internet Industry ResearchFreeMarkets is a B2B Internet company that creates online auctions for procurers of direct materialsMSDW Claim: FreeMarkets’ clients typically achieve savings of 2% to 25%
26B2B: Matching Base Demand and Capacity Potential opportunitiesAbility to reach more bidders and get lower unit priceKey questionsWhat 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?
27B2B: Matching Demand Shortage and Surplus Capacity Potential opportunitiesAbility to aggregate and display all available surplus capacityBetter match of surplus capacity and unmet demandBest provided by an intermediaryKey issueTotal cost (product + transportation + …) must be accounted for in the auction
28Key MessagesSignificant B2B opportunity to use Internet to reduce cost and improve efficiency of existing processesSignificant B2B opportunity to improve collaboration within existing supply chainsAuction opportunity for B2B is primarily for matching demand shortage with surplus capacity, not for base load
29E-business Opportunities: Reduce Facility CostsEliminate retail/distributor sitesReduce Inventory CostsApply the risk-pooling conceptCentralized stockingPostponement of product differentiationUse Dynamic Pricing Strategies to Improve Supply Chain PerformanceTwo Summary Slides: opportunities provided by e-business
30E-business Opportunities: Supply Chain VisibilityReduction in the Bullwhip EffectReduction in InventoryImproved service levelBetter utilization of ResourcesImprove supply chain performanceProvide key performance measuresIdentify and alert when violations occurAllow planning based on global supply chain data
31Distribution Strategies WarehousingDirect ShippingNo DC neededLead times reduced“smaller trucks”no risk pooling effectsCross-Docking
32Cross Docking In 1979 10 Years later Kmart had 1891 stores and average revenues per store of $7.25 millionWal-Mart was a small niche retailer in the South with only 229 stores and average revenues under $3.5 million10 Years laterWal-Mart hadhighest sales per square foot of any discount retailerhighest inventory turnover of any discount retailerHighest operating profit of any discount retailer.Today Wal-Mart is the largest and highest profit retailer in the worldKmart ????
33What accounts for Wal-Mart’s remarkable success A focus on satisfying customer needsproviding customers access to goods when and where they want themcost structures that enable competitive pricingThis was achieved by way the company replenished inventory the centerpiece of its strategy.Wal-Mart employed a logistics technique known as cross-dockinggoods 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.
34Characteristics of Cross-Docking: Goods spend at most 48 hours in the warehouseCross Docking avoids inventory and handling costs,Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for KmartStores trigger orders for products.
37Industry Benchmarks: Number of Distribution Centers PharmaceuticalsFood CompaniesChemicalsAvg.# ofWH31425- High margin product- Service not important (oreasy to ship express)- Inventory expensiverelative to transportation- Low margin product- Service very important- Outbound transportationexpensive relative to inboundSources: CLM 1999, Herbert W. Davis & Co; LogicTools
38E-Fulfillment How have strategies changed? From shipping cases to single itemsFrom shipping to a relatively small number of stores to individual end usersWhat is the difference between on-line and catalogue selling?Consider for instance Land’s End which has both channelsThe point here is that e-fulfillment is not so different than catalogue selling. Indeed, Land’s End uses the same fulfillment systems for both channels.