Transcript A Logistics Perspective on the Virtual Marketplace

Collaborative Supply Chains
(Review of lessons learned from Taylor Randall’s
lecture in 2002, and added case studies.)
Lo205: 2003
Value chains have always consisted of product flows
and information flows.
Consumer
Retailers
Distributor
Product flows
Information flows
Potential for information technology to transform information flows
to create new business or streamline old business.
Common Business Propositions
#1 - Business built on information content
Information flows alone have significant value.
Examples: iVillage, web communities.
#2 - Direct sales and distribution
Eliminate intermediaries
Examples: Web Van, eToys, Amazon
#3 - Streamlined transactions
Automated purchasing functions exchanges
Examples: E-bay, Exostar, Ventro Group
4 lessons emerging
from the dot.com crash...
Lesson 1:
History shows that innovative business success
depends on a solid technological infrastructure
.… this takes time.
They who fail to learn from history are doomed to repeat it.
History Quiz: Who said it and when?
“You may go to an average store, spend valuable time
and select from a limited stock at retail prices…
or have our Big Store of World Wide Stocks come to you.”
a)
b)
c)
d)
Jeff Bezos - business plan of Amazon.com 1995.
Bill Gates - on retail plans for Microsoft 2000.
Vice President of Wal-mart e-tailing 1998.
none of the above.
History Quiz: Who said it and when?
Answer: d) none of the above
From Sears-Roebuck Catalog 1915
Catalog regarded by economists as a
“radical transformation in the marketing and
distribution of consumer goods.”
Sales Growth History of Sears Roebuck
Richard Sears
begins to sell
watches to
railroad station
agents.
1890
High Growth
1895
First large
general Sears
catalog.
1900
1905
1910
What happened here?
1915
1920
1925
Tough to deliver goods prior to 1900
The King Road Drag
Invention leveled and packed
muddy roads. Made auto
transportation possible.
Sales Growth History of Sears Roebuck
D. Ward King
invents the “King
Road Drag”
Richard Sears
begins to sell
watches to
railroad station
agents.
1890
High Growth
1895
First large
general Sears
catalog.
1900
1905
Sears installs
pick and ship
plant
(10x productivity
increase)
1910
1915
1920
1925
Congress mandates
“Parcel Post” as long
as you have good roads
So what was the greatest innovation the catalog?
or the King Road Drag?
Technological change happens in 3 phases:
1. Creation of infrastructure
2. Arrival of enabling technologies
3. Business built on the previous 2
“A lot of people jumped the gun.
They tried to skip the first two phases.”
Roger McNamee, Integral Capital Partners 2000
Can you identify the key technological infrastructure for your business?
Direct
Grocery Delivery
Stage of Development
Sears
Creation of Infrastructure
Roads
???
Arrival of enabling technologies
Pick System
Postal Service
???
Construction of business
Catalog Sales
home delivery
Lesson 2:
Because infrastructure changes slowly
old companies still hold power.
Even when American voters are most angry, they re-elect
88% of their politicians.
Vital Statistics of Congress.
Incumbent power comes from existing infrastructure.
Examples of incumbent power:
Politicians have political action committee dollars.
3 times as expensive to acquire a customer “on-line”
as it is to acquire a customer with physical stores.
Over 60% of all traditional retailers had data processing and
customer service capabilities before going on-line.
In 1925 Sears opened retail stores by 1930 retail store sales
had outpaced catalog sales.
Sales Growth History of Sears Roebuck
D. Ward King
invents the “King
Road Drag”
Richard Sears
begins to sell
watches to
railroad station
agents.
Sears opens
first retail
stores
1890
1895
First large
general Sears
catalog.
1900
1905
Sears installs
pick and ship
plant
(10x productivity
increase)
1910
1915
1920
Congress mandates
“Parcel Post” as long
as you have good roads
1925
1930
Lesson 3:
The parameter estimates in e-business plans
are so far off, even worst case sensitivity
analysis isn’t bad enough….
Incorrect estimates lead to adoption of
the unprofitable business models.
Example: Revenue Model for a Campus Intranet Provider
Advertising Model vs. Software Model
1 school
Advertising
# Schools
# Users Per School
1
Install
8000
Active Usage
65%
Sessions/Day
2
Page views/Session
Images/Page
12
4
Days year
180
CPM/1000 views
$25
Total Revenue
1 school
Software
$2.25 M
Maintenance
$250,000
$50,000
Example: Revenue Model for a Campus Intranet Provider
1 school
# Schools
Phase II
Actual
750
1200
1200
8000
8000
8000
7000
Active Usage
65%
65%
80%
50%
Sessions/Day
2
2
2
.5
12
12
12
5
4
4
4
1.5
Days year
180
180
180
180
CPM/1000 views
$25
$25
$45
$3
# Users Per School
Page views/Session
Images/Page
Total Revenue
Business Valuation
1
Phase I
$2.25 M
$2.2 B
$6.3 B
$250 M
$500 M
$8.5 M
?
Under actual numbers software model makes more sense.
Lesson 4:
In many cases it is hard to sell the value
of improved information flow without the
accompanying product flow.
Example:
Business to Business Purchasing
Fragmented
Manufacturers
Distributors
Hospitals
Problem:
Fragmentation makes purchasing function too complex (multiple
shipments and invoices to track, pricing problems.
Opportunity:
Use New IT to consolidate invoicing and purchasing function
Example:
Business to Business Purchasing
B2B
Exchange
Question:
How much is the improved information flow worth?
Benchmark: Traditional Distributor gets 17% to 30% margin
New Propositions
Use technology to make old infrastructure more efficient.
#1 Enhance existing products and services with internet technology.
#2 Use technology to reduce costs of coordination within companies.
#3 Use technology to reduce transaction costs between business
partners.
Summary
Lessons from the dot.com crash
1 - Successful businesses built on new technology take time.
2 - Incumbents may be more successful using technology.
3 - Carefully consider the estimates in your business models.
4 - Carefully evaluate the value attached to information flows.
Choosing a business model for
internet retailing
Lecture by Taylor Randall (2002)
Two basic choices
Inventory Ownership
Drop-shipping
Wholesaler
Wholesaler
Retailer
Customer
Retailer
Customer
What factors influence the choice of supply chain?
Supply Chain options on the Internet*
Primary way company fulfills online orders
% of Internet-only
retailers
From company facility that existed
13.9%
From company facility that was developed
30.6%
Drop-shipped
Drop-shipped
30.6%
30.6%
Outsourced
8.3%
From facility operated by a partner
8.3%
Electronic fulfillment (software)
5.6%
Other
2.7%
*The state of eRetailing 2000. Supplement to “eRetailing World” March 2000.
Motivating Example:
Meet Spun.com
“Cheap tricks”
•Start-up capital: $825,000
•200,000 CD titles
available for immediate
shipment
•No inventory
One supply chain type not dominant
within or across industries
Hold Inventory
Drop-ship
CDs
CDNow.com
Spun.com
General
Retailing
Amazon
Value America
Retail
Category
Business results not consistent
Hold Inventory
Drop-ship
CDs
CDNow.com
Spun.com
General
Retailing
Amazon
Value America
Retail
Category
Making Supply Chain Choice: Theory
Considerations in favor of drop-shipping:
•Reduced investment into fulfillment capabilities
•Wider product selection
•Lower fulfillment cost
•No inventory obsolescence
Considerations in favor of inventory ownership:
Hybrid
strategy?
•Benefits due to inventory pooling
•Higher product margin
•More control over stocking decisions
•More control over product offering
•Avoid encroachment of customers
•Ease of order consolidation
•Lower technology investment
Factors Influencing Inventory Choice
Own
Immature
Large
Low variants
Low uncertainty
Drop-Ship
Development of Industry
Mature
Firm Size
Small
Product Variety
Demand Uncertainty
High variants
High uncertainty
Lower
Product Transportation Costs
Higher
Lower
Product Obsolescence Risk
Higher
Sample Description
• Survey of 64 publicly held e-tailers
• 56 responses, 54 usable responses (84.4%)
• Between 60% and 70% of e-tailing revenue.
• Financial data from COMPUSTAT data base
• Example Companies
Amazon.com
Barnes&Noble.com
CDNow.com
Fogdog.com
Webvan.com
Pets.com
Egghead.com
Delias.com
Autobytel.com
Buy.com
• 36 companies choose to hold inventory (67%)
• 11 bankrupt companies (20%)
Measure of rational supply chain choice
Likely to drop-ship
Likely to own inventory
0
1
Elected to drop-ship
Elected to own
Model Recommendation
Own
Not own
Own
Rational
21 firms
Irrational
4 firms
Not own
Irrational
4 firms
Rational
17 firms
Actual Choice
Irrational supply chain choice
is associated with bankruptcy!
Irrational Supply Chain Choice and Probability of Bankruptcy
Rational
Choice
Probability of Bankruptcy
0.10
Irrational
Choice
0.37
Difference
0.27*
*statistically significant difference
Poor supply chain choice one of factors associated with failure.
Summary
Research results:
– theoretically obtained criteria for inventory choice,
– confirmed hypothesis empirically,
– linked inventory choice and firm performance.
Supply Chain Choice Parameters in
Grocery Industry
Market Trends:
2% of all sales will be over internet
$100 per order 20 or 30 times per year.
5% margin on food.
60 items per order
$25 delivery charge
Existing Store
Fixed Costs per Year
Picking Labor Per Order
Depot
$20,000
$10 million
$20
$5
When do you use a existing store and when do you use a depot?
Case Study: Online Grocery
Retailing (by JMD, 2003)
• In 2000 Jupiter Media Matrix predicted onlinegrocery sales in 2001 to be 2 billion, and in 2005
to 7 billion in the US market.
• But there have been many failures:
–
–
–
–
–
Streamline.com (2000)
ShopLink.com (2000)
Priceline.com quit grocery service (2000)
Kozmo.com and PDQuick.com (2001)
Webvan and HomeRuns.com (2001)
Case Study: Online Grocery
Retailing (by JMD, 2003)
• Peapod Inc. is now the largest in US.
• They were rescued from bankrupcy by
Dutch supermarket chain Royal Ahold in
April 2000. They invested 73 mil.
• Peapod uses a hybrid order fulfillment
model: stand alone distribution centers and
Ahold’s supermarkets.
Case Study: Online Grocery
Retailing (by JMD, 2003)
• Peapod’s characteristics:
– Average customer order is 130 dollars.
– They charge 9.95 delivery fee
– They had a profit in their Chicago center in
2001.
Case Study: Online Grocery
Retailing (by JMD, 2003)
• E-grocers in Europe have done better
• Datamonitor analyst think the global market
is worth 55 billion by 2005, and the UK
market is 9.2 billion of that.
• Tesco.com is one of the most successful in
the UK.
Webvan case (by JMD, 2003)
• Webvan shut down in 2001
• They had purchased HomeGrocer.com for 1.2
billion in 2000.
• They had 750,000 customers, 2000 employees,
almost 50% of US market share.
• They could not turn a profit because of their
distribution system. They built 26 high tech
automated distribution centers (cost 1 bil.)
• They hoped to cut 40 labor costs on handling
groceries. But they did not have enough orders to
cover fixed costs. They lost 5 to 30 dollars per
order in operating costs.
Netgrocer.com case (by JMD, 2003)
• Netgrocer delivers only non-perishable goods and maintain only
one warehouse in US.
• They send packages by Federal Express instead of maintaining a
fleet of vans.
• They are the only e-grocer that can efficiently server both
suburban and rural populations. (seniors, students, military).
• Thier site is visited by 12-15 million per year. Company sales 25
mil. in 2000. Grown 65% since 1996. Employs 65. Profitable
2002.
• Aggressive customer acquisition, repeat purchasers, online
promotions. Offer hard to find grocery items. Delivered in 24
hours.
• Peapod is giving it’s package delivery customers to Netgrocer.
Netgrocer is also partners with manufacturers like Nabisco,
Nestle, Gerber, Parmalat, Mead Johnson.
Tesco.com case
(by JMD, 2003)
• Tesco.com is largest online grocer in world. Has order
fulfillment operation to 250 Tesco stores (have 690
stores in UK) can reach 94% of population. Start 1996.
• 1 mil. customers, 70,000 orders per week, 422 mil. in
annual sales. (3rd largest portal in UK).
• Going into other markets: electronics, clothes, wine,
baby products.
• In Ireland, starting in So.Korea.
• Will enter US market with Safeway food retailer. Also
will pay 22 mil. for 35% share in GroceryWork.com and
relaunch under Safeway brand. Safeway local stores
will handle order fulfillment. Safeway has 1500 stores
in the US.
LeShop.ch case (by JMD, 2003)
• LeShop sales were 6 mil. Swiss francs in 2000. 50%
increase over 1999. Since they have grown 30% each
month. Revenues for the 1st half of 2001 were 5.5 mil.
Swiss francs.
• Average spending is 152 Swiss francs. 16,000 have
been customers, 76% make repeat purchases. Bon
appetit Group is a 54% major partner. 70 employees.
Offer 4500 supermarket products.
• 400 orders per day. Have a fulfillment center in the
Bremgarten region. Store fresh foods and employees
select. But they distribute incoming orders to packing
zones. The shipping box goes to the packing zone, so
employees to not take trolleys through the aisles. They
pack orders simultaneously. Use Express Post to send.
Charge a delivery fee of 12 Swiss francs.
LeShop.ch case (by JMD, 2003)
• LeShop sales were 6 mil. Swiss francs in 2000. 50%
increase over 1999. Since they have grown 30% each
month. Revenues for the 1st half of 2001 were 5.5 mil.
Swiss francs.
• Average spending is 152 Swiss francs. 16,000 have
been customers, 76% make repeat purchases. Bon
appetit Group is a 54% major partner. 70 employees.
Offer 4500 supermarket products.
• 400 orders per day. Have a fulfillment center in the
Bremgarten region. Store fresh foods and employees
select. But they distribute incoming orders to packing
zones. The shipping box goes to the packing zone, so
employees to not take trolleys through the aisles. They
pack orders simultaneously. Use Express Post to send.
Charge a delivery fee of 12 Swiss francs.
•
•
•
•
Given online grocers in US are struggling, will
the web-based home-delivery company ever
turn a profit? (by JMD, 2003)
Yes – but grocers must focus on high-end markets,
limit delivery schedules and make partnerships with
bricks-and-mortar grocers.
Instead of maintaining expensive inventory and
warehouses, Peapod uses Royal Ahold stores (Stop &
Shop and Giant Food) for its inventory. Low entry
costs, builds cust. base.
Tesco also uses local supermarkets to fill orders and
not central warehouses.
The model that has been working is an existing
popular grocery chain builds it’s own online ordering
system and uses it’s own stores as the warehouse.
Given online grocers in US are struggling, will
the web-based home-delivery company ever
turn a profit? (by JMD, 2003)
• No – Studies have shown that Americans do not like
going to the grocery store, but they do not want
someone else picking their tomatoes.
• Roger Blackwell says <the mass-market home
delivery model will not work because few people are
home in the day when the people who deliver want to
work>…also he says, ”You should not try to use the
Internet..to compete in an industry where the existing
competitors are giants with highly efficient
distribution systems.”
Why did Tesco.com become a success while Webvan
failed? (by JMD, 2003)
• Webvan tried to reinvent the whole infrastructure. Wanted to
build 26 warehouses costing 35 mil each. The warehouses
would have to serve large areas with high order volume to
cover costs. Also had to spend on brand building.
– Fast expansion
– Revolutionary customer
– Free delivery
• Tesco extended its supermarkets with online grocery orders.
They had brand, suppliers, advertising, a database of 10 mil.
Card club members. They use the store-picking model. They
can serve an area of 100,000 people and break even on small
volumes.
– Slow expansion of infrastructure
– Obtain traditional customers
– Charge a delivery fee (covers cost of vans and drivers).
What future challenges will Tesco.com face? (by JMD,
2003)
• They must depreciate costs to their offline business.
• Growing competition from Sainsbury (UK). They use
a hybrid model with 36 stores for building customer
base, but also has warehouses (picking centers for
delivering goods to customer door). Ocado is the UK
version of Webvan. Orcado just uses the warehouse
model.
• Tesco’s success in UK may not translate to the US
because the US does not have any grocery chains with
national status. Also the population in the US is more
heterogeneous, with ethnically diverse demands for
goods. This means listing more items to serve smaller
groups.
Case Study: Online Grocery
Retailing (by JMD, 2003)
•
•
•
•
www.tesco.com
www.netgrocer.com
www.le-shop.ch
www.peapod.com