Collaborative Supply Chains
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Collaborative Supply Chains in Retail Industries (Reference: notes by Taylor Randall, 2002 and added case studies by jmd.). Lo205: 2006. Value chains have always consisted of product flows and information flows. Product flows. Distributor. Retailers. Consumer. Manufacturer.

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Lo205 2006

Collaborative Supply Chainsin Retail Industries(Reference: notes by Taylor Randall, 2002 and added case studies by jmd.)

Lo205: 2006


Lo205 2006

Value chains have always consisted of product flows

and information flows.

Product flows

Distributor

Retailers

Consumer

Manufacturer

Information flows

Potential for information technology to transform information flows

to create new business or streamline old business.


Lo205 2006

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


Lo205 2006

4 lessons emerging

from the dot.com crash...


Lo205 2006

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.


Lo205 2006

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) Jeff Bezos - business plan of Amazon.com 1995.

b) Bill Gates - on retail plans for Microsoft 2000.

c) Vice President of Wal-mart e-tailing 1998.

d) none of the above.


Lo205 2006

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.”


Lo205 2006

Sales Growth History of Sears Roebuck

Richard Sears

begins to sell

watches to

railroad station

agents.

High Growth

First large

general Sears

catalog.

What happened here?


Lo205 2006

Tough to deliver goods prior to 1900


Lo205 2006

The King Road Drag

Invention leveled and packed

muddy roads. Made auto

transportation possible.


Lo205 2006

Sales Growth History of Sears Roebuck

D. Ward King

invents the “King

Road Drag”

Richard Sears

begins to sell

watches to

railroad station

agents.

High Growth

Sears installs

pick and ship

plant

(10x productivity

increase)

First large

general Sears

catalog.

Congress mandates

“Parcel Post” as long

as you have good roads

So what was the greatest innovation the catalog?

or the King Road Drag?


Lo205 2006

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


Lo205 2006

Can you identify the key technological infrastructure for your business?

Direct

Grocery Delivery

Stage of Development

Sears

Creation of InfrastructureRoads???

Arrival of enabling technologiesPick System???

Postal Service

Construction of businessCatalog Sales home delivery


Lo205 2006

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.


Lo205 2006

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.


Lo205 2006

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

First large

general Sears

catalog.

Congress mandates

“Parcel Post” as long

as you have good roads

Sears installs

pick and ship

plant

(10x productivity

increase)


Lo205 2006

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.


Lo205 2006

Example: Revenue Model for a Campus Intranet Provider

Advertising Model vs. Software Model

1 school 1 school

Advertising Software

# Schools 1 Install $250,000

# Users Per School 8000 Maintenance $50,000

Active Usage 65%

Sessions/Day 2

Page views/Session 12

Images/Page 4

Days year 180

CPM/1000 views $25

Total Revenue $2.25 M


Lo205 2006

Example: Revenue Model for a Campus Intranet Provider

1 school Phase I Phase II Actual

# Schools 1 750 1200 1200

# Users Per School 8000 8000 8000 7000

Active Usage 65% 65% 80% 50%

Sessions/Day 2 2 2 .5

Page views/Session 12 12 12 5

Images/Page 4 4 4 1.5

Days year 180 180 180 180

CPM/1000 views $25 $25 $45 $3

Total Revenue $2.25 M $2.2 B $6.3 B $8.5 M

Business Valuation $250 M $500 M ?

Under actual numbers software model makes more sense.


Lo205 2006

Lesson 4:

In many cases it is hard to sell the value

of improved information flow without the

accompanying product flow.


Lo205 2006

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


Lo205 2006

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

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

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

Choosing a business model for internet retailing

Lecture by Taylor Randall (2002)


Lo205 2006

Two basic choices

Inventory Ownership

Drop-shipping

Wholesaler

Wholesaler

Retailer

Retailer

Customer

Customer

What factors influence the choice of supply chain?


Lo205 2006

Supply Chain options on the Internet*

Drop-shipped 30.6%

*The state of eRetailing 2000. Supplement to “eRetailing World” March 2000.


Lo205 2006

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

One supply chain type not dominant within or across industries

Hold Inventory

Drop-ship

CDNow.com

Spun.com

CDs

Retail

Category

General

Retailing

Amazon

Value America


Business results not consistent

BANKRUPT

BANKRUPT

Business results not consistent

Hold Inventory

Drop-ship

CDNow.com

Spun.com

CDs

Retail

Category

General

Retailing

Amazon

Value America


Lo205 2006

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

  • Benefits due to inventory pooling

Hybrid strategy?

  • Considerations in favor of inventory ownership:

  • 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

Factors Influencing Inventory Choice

Own

Drop-Ship

Immature

Large

Low variants

Low uncertainty

Lower

Lower

Development of Industry

Firm Size

Product Variety

Demand Uncertainty

Product Transportation Costs

Product Obsolescence Risk

Mature

Small

High variants

High uncertainty

Higher

Higher


Lo205 2006

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.comPets.com

  • Barnes&Noble.comEgghead.com

  • CDNow.comDelias.com

  • Fogdog.comAutobytel.com

  • Webvan.comBuy.com

  • 36 companies choose to hold inventory (67%)

  • 11 bankrupt companies (20%)


Lo205 2006

Likely to drop-ship

Likely to own inventory

0

1

Elected to drop-ship

Elected to own

Model Recommendation

Own

Not own

Rational

21 firms

Irrational

4 firms

Own

Actual Choice

Irrational

4 firms

Rational

17 firms

Not own

Measure of rational supply chain choice


Lo205 2006

Irrational supply chain choice

is associated with bankruptcy!

Irrational Supply Chain Choice and Probability of Bankruptcy

RationalIrrationalDifference

Choice Choice

0.10 0.37 0.27*

Probability of Bankruptcy

*statistically significant difference

Poor supply chain choice one of factors associated with failure.


Summary1

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

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 StoreDepot

Fixed Costs per Year $20,000 $10 million

Picking Labor Per Order $20 $5

When do you use a existing store and when do you use a depot?


Case study online grocery retailing by jmd 2003

Case Study: Online Grocery Retailing (by JMD, 2003)

  • In 2000 Jupiter Media Matrix predicted online-grocery 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 20031

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 20032

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 20033

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 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.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 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.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 20031

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.


Lo205 2006

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.


Lo205 2006

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

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

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 20034

Case Study: Online Grocery Retailing (by JMD, 2003)

  • www.tesco.com

  • www.netgrocer.com

  • www.le-shop.ch

  • www.peapod.com


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