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

2. 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.

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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?

9. The Computer Industry: Dell on-line
Customer Order and
Procurement cycle
Manufacturing Cycle
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives

10. 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

11. 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

12. 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

13. Retailing: Amazon.com Amazon Customer Retail Store Customer Pull Pull
Publisher
Distributor
Publisher
Warehouse (?)
Amazon Supply Chain
Bookstore Supply Chain

14. 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

15. 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

16. 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

17. 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

18. Grocery on-line Customer Customer Supermarket Online Grocer
Manufacturer
Warehouse (?)
Manufacturer
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. 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

22. 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

23. 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

24. 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

25. 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%

26. 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?

27. 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

28. 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

29. 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
Two Summary Slides: opportunities provided by e-business

30. 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

31. Distribution Strategies
Warehousing
Direct Shipping
No DC needed
Lead times reduced
“smaller trucks”
no risk pooling effects
Cross-Docking

32. Cross Docking In 1979 10 Years later
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 ????

33. 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.

34. 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.

35. Distribution Strategies

36. Direct-to-Consumer:Cost Trade-Off

37. Industry Benchmarks: Number of Distribution Centers
Pharmaceuticals
Food Companies
Chemicals
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

38. 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
The 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.