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 online

Customer Order and Manufacturing Cycle
Procurement cycle Customer Order and Manufacturing Cycle

Procurement Cycle
PUSH PROCESSES PULL PROCESSES

Customer Order Arrives

Dell Supply Chain Cycles

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

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 Amazons 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 Warehouse (?) Manufacturer On-Line Supply Chain Manufacturer 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 All are achieved if product is downloadable Transport to customer is a small fraction of product cost

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-Marts 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
Strategy Attribute Risk Pooling Transportation Costs Holding Costs Demand Variability No Warehouse Costs Reduced Inbound Costs No Holding Costs Delayed Allocation Delayed Allocation Direct Shipment Cross Docking Inventory at Warehouses Take Advantage Reduced Inbound Costs

Direct-to-Consumer:Cost TradeOff
Cost Trade-Off for BuyPC.com
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 0 5 10 15 Number of DC's

Cost ($ million)

Total Cost Inventory Transportation Fixed Cost

Industry Benchmarks: Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg. # of WH

14

25
- Low margin product - Service very important - Outbound transportation expensive relative to inbound

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

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 Lands End which has both channels