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Collaborative Supply Chains (Review of lessons learned from Taylor Randall

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Title: A Logistics Perspective on the Virtual Marketplace Author: Taylor Randall Last modified by: Judith Molka-Danielsen Created Date: 10/23/2000 2:48:58 PM – PowerPoint PPT presentation

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Title: Collaborative Supply Chains (Review of lessons learned from Taylor Randall


1
Collaborative Supply Chains (Review of lessons
learned from Taylor Randalls lecture in 2002,
and added case studies.)
Lo205 2003
2
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.
3
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
4 lessons emerging from the dot.com crash...
5
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.
6
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.
7
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.
8
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?
9
Tough to deliver goods prior to 1900
10
The King Road Drag Invention leveled and
packed muddy roads. Made auto transportation
possible.
11
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?
12
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
13
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 ??? Po
stal Service Construction of business Catalog
Sales home delivery
14
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.
15
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.
16
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)
17
Lesson 3 The parameter estimates in e-business
plans are so far off, even worst case sensitivity
analysis isnt bad enough. Incorrect
estimates lead to adoption of the unprofitable
business models.
18
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

19
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.
20
Lesson 4 In many cases it is hard to sell the
value of improved information flow without
the accompanying product flow.
21
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
22
Example Business to Business Purchasing
B2B Exchange
Question How much is the improved information
flow worth? Benchmark Traditional Distributor
gets 17 to 30 margin
23
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.
24
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.
25
Choosing a business model for internet retailing
  • Lecture by Taylor Randall (2002)

26
Two basic choices
Inventory Ownership
Drop-shipping
Wholesaler
Wholesaler
Retailer
Retailer
Customer
Customer
What factors influence the choice of supply chain?
27
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 30.6
Outsourced 8.3
From facility operated by a partner 8.3
Electronic fulfillment (software) 5.6
Other 2.7
Drop-shipped
30.6
The state of eRetailing 2000. Supplement to
eRetailing World March 2000.
28
Motivating Example Meet Spun.com
  • Cheap tricks
  • Start-up capital 825,000
  • 200,000 CD titles available for immediate
    shipment
  • No inventory

29
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
30
Business results not consistent
Hold Inventory
Drop-ship
CDNow.com
Spun.com
CDs
Retail Category
General Retailing
Amazon
Value America
31
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

32
Factors Influencing Inventory Choice
Own
Drop-Ship
Development of Industry Firm Size Product
Variety Demand Uncertainty Product
Transportation Costs Product Obsolescence Risk
Immature Large Low variants Low
uncertainty Lower Lower
Mature Small High variants High
uncertainty Higher Higher
33
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 Pets.com
  • BarnesNoble.com Egghead.com
  • CDNow.com Delias.com
  • Fogdog.com Autobytel.com
  • Webvan.com Buy.com
  • 36 companies choose to hold inventory (67)
  • 11 bankrupt companies (20)

34
Measure of rational supply chain choice
35
Irrational supply chain choice
is associated with bankruptcy!
Irrational Supply Chain Choice and Probability of
Bankruptcy
Rational Irrational Difference Choice Choice
0.10 0.37 0.27
Probability of Bankruptcy
statistically significant difference
Poor supply chain choice one of factors
associated with failure.
36
Summary
  • Research results
  • theoretically obtained criteria for inventory
    choice,
  • confirmed hypothesis empirically,
  • linked inventory choice and firm performance.

37
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 Depot 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?
38
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)

39
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 Aholds
    supermarkets.

40
Case Study Online Grocery Retailing (by JMD,
2003)
  • Peapods characteristics
  • Average customer order is 130 dollars.
  • They charge 9.95 delivery fee
  • They had a profit in their Chicago center in 2001.

41
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.

42
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.

43
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 its package delivery customers
    to Netgrocer. Netgrocer is also partners with
    manufacturers like Nabisco, Nestle, Gerber,
    Parmalat, Mead Johnson.

44
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.

45
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.

46
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.

47
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 its own online
    ordering system and uses its own stores as the
    warehouse.

48
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 ltthe mass-market home
    delivery model will not work because few people
    are home in the day when the people who deliver
    want to workgtalso 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.

49
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).

50
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.
  • Tescos 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.

51
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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