MGT605 - Topic 3

Internet Strategies
LEARNING OUTCOMES
 Understand what is Internet Strategies.
 Understand the operational advantages and
disadvantages of doing business over the internet
 Choose an appropriate distribution and inventory
strategy for a brick & mortar
[Brick and Mortar refers to a physical presence of
an organization or business in a building or other
structure]retailer who will compete on internet
 Select an appropriate customer service strategy for
the internet
Internet Strategies
 It is the process by which a business adopts a web-
based approach to marketing and engaging its
customers through a proprietary web site.
 Includes tactical web-based applications for increasing
its competitive advantage, improving customer and
employee communications, and increasing marketing
efficiencies.
 Internet Marketing & Operations Advantages
The strength of the Internet hype was based on several factors. Some basic expected
effects of the Internet were supposed to produce the following:
Better products and services
 Interactive games and software; interactive maps to find the
location of nearest gas station.
More intelligent products and services
 Link past purchases with new products and alert potentially
interested customers
 E.g. Amazon.com
Lower Prices for standard products
 Presumed lower cost structure
 Ease of comparison shopping on internet ( convenient)
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 Unlimited retail space
Differential Cost Drivers of Internet
and Traditional Firms
 Bricks: The cost of maintaining physical
stores is lower for internet firms
 Taxes: Federal Legislation allows Internet
sales are exempt from sales taxes
 Inventory and Personnel: Internet sales
have a significant advantage in inventory &
personnel required to run the operations of
the firms.
 Logistics: Internet firms are at a
disadvantage

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Inventory
 Required stocking levels are related to the
service level desired and the variance in
demand for a given product
 For individual stores to have sufficient safety

kN
stock:

 For a central location to have sufficient safety

stock: k N

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Inventory Stocking Example

 Assume the following about sales of “Make

Millions at Home” at SuperBooks:
 500 stores
 Mean sales of 20 copies per day
 Standard deviation of 5.
 Service levels of 95%
 Number of books sold: 500*20 = 10,000
 Safety stock required: 1.645*5*500=4113
 With a single warehouse linked to a website
 Safety stock required:
1.645 * 5 * 500  184
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 Personnel
 Theeffect on personnel is similar to that of
inventory stocking
 Fewer people are required in a centralized system like a website or
telephone bank than in decentralized systems
 Utilization efficiencies lower the number of people required in a
centralized environment

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 Logistics
 Distribution offers traditional retailers a cost
advantage
 Shipping costs on a per unit basis are much higher
for an internet firm that ships individual orders
directly to consumers

Traditional Systems Internet Systems

Central Warehouses

Distribution Centers

Retail Outlets

Customers

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Logistics
 Reverse logistics is a far larger problem in an
internet environment
 Return rates can approach 30% for internet retailers
 Retailers have a “product perception” advantage as
consumers are able to view and touch merchandise
prior to the sale.
 Items returned in an internet environment cannot
easily be put back on the shelves, rather they are
shipped back to the merchant and restocked in a
vast warehouse

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 Strategies for Mixed Traditional &
Internet Retailers
 Integrating the back-office of traditional and
retail businesses is challenging
 Warehouse format: pallets/forklifts/wide aisles
vs. pick-and-pack, narrow aisles
 Shipping: bulk vs. individual orders
Inventory and Shipping Strategies for Combined
Internet/Traditional Retailers

Bulk Single Item

Professional
Integrated Cost Minimizer
Shopper
Transportation Dedicated
Segregated
sharing Systems

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Assessment of Strategies
 Dedicated Systems
 Warehouse systems are separate for
catalog/internet vs. retail side (examples include
JCPenny)
 May include outsourcing Internet orders to a third
party firm (examples include Wal-Mart, Macy’s
and Bloomingdales)
 Disadvantages of both strategies include excess
inventory and excess distribution costs

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Assessment of Strategies
 Professional Shopper
 A store employee walks the retail outlet to pick the order
 Disadvantages

Prices must be retail + shipping and

handling
Phantom stock-outs
High cost of order fulfillment

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Assessment of Strategies
 Cost Minimizers
 Orders are picked individually, but goods are
combined and sent on dedicated trucks
 Transportation may be shared with other
retailers
 Advantages
 Cost effective
 Disadvantages
 Time consuming for customer who may have to wait for
order

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Assessment of Strategies
 Transportation Sharing
 Internet orders are shipped to retail outlets with
the retailers regular suppliers; customers pick
them up in the retail outlet
 Example: JCPenney and 7-Eleven of Japan
 Advantages
 Eliminates problems of the “last mile”
 Disadvantages
 Inconvenient for the customer

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 Level of integration in order picking and
delivery
Inventory Segregation: Where Internet Order Picking Occurs

High Low

Bulk Break-bulk Flagship Retail Contiguous Dedicated

distribution distribution retail stores distribution distribution
center center store center center

Options for Delivering Internet Orders

Bulk Shipments Individual Shipments

Customer pickup Customer pickup Bulk from Shipping direct

at retail at retail distribution center to customer
store/Retail store store/Delivery to general home
order pick from distribution area/individual
center delivery to home
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Customer Service and the Internet

 Inthe last 5 years customer satisfaction has

declined
 Companies have implemented cost-saving
automated technologies without considering
customer satisfaction
 Internet customer service is terrible
 37% never receive a response to e-mails
 90% of consumers would prefer live support, 1%
of retailers have live support
 67% of all shoppers abandon shopping carts

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Cost of Service Transactions

Process Unit Cost % of Telephone Cost

Traditional Means
Letter $12.45 451%
Telephone $ 2.76 100%
Web
Billing query-fully automated
(occasional operator intervention) $0.27 10%
Billing query through customer
on line account $0.14 5%
Query that requires agent
response back to customer $1.38 50%
Operational update available
through on line access $0.14 5%
Operational query that can have
automated response (occasional
operator intervention) $0.27 10%

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Internet Service Design
 Product characteristics
 Customization level, complexity, customer
knowledge, capacity
 Process characteristics
 Technology and task
 Touch points
 Interaction between customers, employees and
systems

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Service Design Model

Product Process Touch point Outcome

Technology Customer
Performance
Product

Task Employees

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 Product

 The product dictates what type of activity

will happen on the internet
 E-commerce vs. e-service
 Customization
 Is contact with a real person required?
 Can the internet facilitate service inquiries?
 Is loyalty the goal?
 Product complexity and product knowledge
 Example: technical support for novices vs.
experienced users

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Processes
Back-Office Processes
Transaction Systems Distribution & Fulfillment
Billing Systems
Shipping Inventory
Receiving Distribution
Tracking

Information Systems Knowledge Systems

Data Capture
Supporting Hardware Organization
Supporting Software Access
Use (Selling & Monitoring)

Front Office Processes

• Interaction Systems
 Status Checking
 FAQ, FUP, Scripting,
Keyword Search
 Wizards
 Bulletin Boards
 Monitored Discussion Forums
 Call-back Buttons
 Real-time chat
 VOIP
 Language Translation
 Voice Recognition

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Touch Points
 Match customer tasks with appropriate
touch points.
 Complaints: phone
 Sales: internet, live chats
 Balance inquiries: internet, automated phone
system
 Give customers options based on their
preferences for contacting the company
 Customer Contact Centers (CCC’s)

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Outcomes
 Measures of performance include the
following:
 Employee satisfaction
 Customer satisfaction
 Response times
 Form (greeting, language, offering additional
help)
 Employee knowledge
 Customer regard
 Intention for repeat encounter

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References
 Agrawal, N., and S. Smith. 1996. Estimating Negative Binomial Demand for Retail
Inventory
 Management with Unobservable Lost Sales. Naval Research Logistics, 43,
839861.
 Andersen Consulting. 2000. Who Does the Best job of EFulfillment? Logistics
Magazine
 (November), 5966.
 Downs, B., Metters, R., and J. Semple. 2001. Managing Inventory with Multiple
Products,
 Lags in Delivery, Resource Constraints, and Lost Sales: A Mathematical
Programming