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 and Procurement cycle Manufacturing Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives

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 Amazon Customer Retail Store Customer Pull Pull Publisher Distributor Publisher Warehouse (?) Amazon Supply Chain Bookstore Supply Chain

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 Customer Customer Supermarket Online Grocer Manufacturer Warehouse (?) Manufacturer On-Line Supply Chain 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 Two Summary Slides: opportunities provided by e-business

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 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 ????

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.

Distribution Strategies

Direct-to-Consumer:Cost Trade-Off

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

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.