Tuesday, March 5, 2013

Supply chain opportunities from E-business

The Internet is revolutionizing the way of doing businesses. Companies are using Internet in different ways to improve their supply chains. Dell is using Internet to display all its products to its customers, Ford is using it to increase participation in product design, UPS is using it to enable its customers to track their orders and J.C. Penny as we read in the articles is using it to increase its online sales. Dell's model of selling products over the Internet, with no retail outlets and no resellers, is the most admired and imitated e-commerce model. In this blog, I'll try to answer if this model can be replicated and can provide the same revenue and cost opportunities to different kind of industries by comparing these opportunities for Dell with companies from different industries.

Computer Industry: Example - Dell

Revenue Opportunities
1. Increased margin due to direct sales to the customers.
2. Flexibility on pricing and promotion through web.
3. Faster time to market new products on web.
4. Providing customization and customer dependent services through direct consumer contact.
5. Providing dynamic inventory information to suppliers to match demand with supply.
6. Efficient cash flow management: Dell receives direct payment from its customers before it pays to its suppliers.

Cost Opportunities
1. Eliminates warehousing cost through shipping directly from suppliers to customers.
2. Ordering personnel cost transferred to customers.
3. Increased information sharing - Reduced bullwhip effect through shared planning and forecasting on  web
4. Geographical Centralization and reduced inventory
5. Reduced inbound(supplier to manufacturer) transportation cost
6. Reduced Inventory - Product manufacturing and fulfillment is done after the order is placed. Common platforms and components adopted for various products help in meeting the above objective.

1. Increased outbound transportation cost to customers. However, they are relatively small for higher-end computers and high-volume corporate accounts.
2. Increased response time compared to other retailers.

Looking at all the above opportunities, we can say that the advantages of e-business are significant in the computer industry especially for those products, which are new or are difficult to forecast. The product customization should be moved to the pull phase and inventories should be held as common components during the push phase to gain maximum benefits from this approach. 

Online Grocery Stores: Example - Peapod.com

Revenue opportunities
1. Attract customers who do not want to go to supermarket
2. Provide specialty items for out of town customers.
3. Bundled menus and other value added services based on tracked online shopping behavior
4. Real-time suggestions to customers based on their previous purchases.
5. Targeted advertising and discounts.

Cost opportunities
1. Reduced facility cost
2. Reduced inventory due to centralization (although savings primarily from slow moving, specialty items) 

1. Increased response times
2. Additional outbound transportation costs.
3. Additional picking, packing and handling activities done by customers in traditional super markets
4. Managing peak demand early morning and after 5 pm when customers are at home to ensure delivery of fresh goods.
5. Decreased delivery stops per hour for spread-out suburban areas, making the whole delivery process very inefficient.

Therefore, e-grocers lack opportunities to compete on cost. The savings from reduced inventory are also very less as supermarkets already achieve mostly accurate forecasts. Grocery stores can use Internet just to provide more value to their customers but not to gain cost advantages.

Industrial supply company: W.W. Grainger

Revenue opportunities
1. 24- hour access to order placements
2. Displaying and updating product information
3. Price and promotion flexibility
4. Faster time to market
5. Enable customers to keep track of their orders

Cost opportunities
1. Reduced order taking cost due to increased customer's participation
2. Reduced error because of multiple data entry
3. Automatically trigger supply orders

Increased ease of comparison shopping, which can reduce prices and margins.

This is a good example of how both buyers and sellers can decrease the transaction cost of making and fulfilling orders by using Internet. The use of Internet for order placement will significantly increase in the B2B (Business to business enterprises) over the years. 

Therefore, the value of the Internet for a firm is highly dependent on the type of industry and the strategy of the firm. In some cases, it may decrease the transaction cost like that of industrial supplier W.W.Grainger and in other cases, such as the online grocer Peapod.com, it may offer higher value without significantly reducing costs.  Sometimes, e-business can provide both reduction in cost and high customer value like in case of Dell. Therefore, it becomes important for companies from different industries to analyze the impact of e-channel on their supply chains before deciding their e-business model.


[1] http://www.kellogg.northwestern.edu/faculty/vanmieghem/htm/e-business-scmr-april26.pdf
[3] http://www.ecommerce-guide.com/news/news/article.php/2013731/Case-Study-Dellcom.htm

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