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
Customer Order and
Manufacturing Cycle Manufacturing Cycle
Procurement 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 Customer
Pull Pull
Amazon Retail Store

Distributor Warehouse (?)

Publisher Publisher

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
Warehouse (?)

Manufacturer 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
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-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

Strategy Direct Cross Inventory at

Attribute Shipment Docking Warehouses
Risk Take
Pooling Advantage
Transportation Reduced Reduced
Costs Inbound Costs Inbound Costs
Holding No Warehouse No Holding
Costs Costs Costs
Demand Delayed Delayed
Variability Allocation Allocation
Direct-to-Consumer:Cost Trade-
Off
Cost Trade-Off for BuyPC.com

$20
$18
$16
Cost ($ million)

$14 Total Cost

$12 Inventory
$10 Transportation
$8
Fixed Cost
$6
$4
$2
$0
0 5 10 15
Number of DC's
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
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 Land’s End which
has both channels