e-Business IS RIGHT

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Which

e-BusinessI S R I G H Tfor Your Supply Chain?

By Sunil Chopra and Jan A. Van Mieghem

The short answer is that it depends ...

on your industry, your corporate strate-

gy, and your supply chain capabilities.

The trick is to get all three in align-

ment. And then pursue the e-business

opportunities that can be integrated

into—and leveraged by—the aligned

elements. The companies that do this

successfully stand to capture the rev-

enue enhancements promised by the

Internet. Here’s a simple framework to

follow that can lead to success.

Sunil Chopra is the IBM DistinguishedProfessor of Operations Management, andJan Van Mieghem is an associate professorof operations management, both atNorthwestern University’s KelloggGraduate School of Management. They areco-authors of Managing BusinessProcess Flows (Prentice Hall, 1999).Professor Chopra also is co-author ofSupply Chain Management: Strategy,Planning, and Operation (Prentice Hall,2000).

The Internet is revolutionizing the way companies conductbusiness. Or is it?

A survey of companies with an online presence showswide disparities in performance. Although Dell has usedthe Internet to boost revenues and earnings successfully,Amazon lost $585 million on revenues of $1.6 billion in1999. We argue that the value of the Internet for a compa-ny strongly depends on the company’s industry and on thestrategy it pursues. The big winners will likely be those thatfully exploit the revenue enhancements and cost-reductionopportunities offered by the Internet and optimally inte-grate e-business with existing channels. Toward this end,we propose a simple framework that managers can use toselect the best e-business model to enhance their supplychain’s performance.

Needed: A Strategic Framework An Internet strategy must be considered within the con-

text of the company’s overall business plan. The frameworkstarts from the premise that supply chain decisions must beevaluated in a strategic context based on the answers to thefollowing three questions:

1. What is the firm’s desired strategic position?2. Given the firm’s strategic position, what supply chain

capabilities are needed to support the strategy?3. Given the desired supply chain capabilities, how

should the supply chain be structured?The goal is to create a fit between the desired strategic

position and the supply chain capabilities and processes used

ALIGNMENT PERFORMANCE RELATIONSHIP STRATEGY RESEARCH TECHNOLOGY INSIGHT

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to satisfy customer needs and priorities.1 A company definesits desired strategic position by first ranking its customers’ toppriorities and then articulating how it plans to respond tothese needs. Typical customer needs include timeliness,accessibility, availability, customizability, quality of service,and price. At the same time, the company must consider thetrade-off between how it would like to respond to customerneeds and the supply chain costs incurred to meet thoseneeds. The efficient frontier represents the lowest cost of meeting agiven level of customer needusing the best available supplychain processes. Each point onthe frontier corresponds to aparticular supply chain struc-ture, employing the best avail-able technologies, managerialpolicies, and inputs to meet thedesired level of a customerneed at the lowest cost. Assuch, the efficient frontier con-stitutes the state of best prac-tices at a given point in time.2

It also shows the inherent

trade-offs that a company must consider when selecting itsstrategic position given limitations in process technology andpolicies. With the Internet come new associated technologies andmanagerial policies that shift the frontier outward. (This shiftis represented in Exhibit 1.) An outward shift representseither a decrease in cost for a given level of performancealong a customer need or a higher level of performance at agiven cost. The shift caused by adding the Internet will varyby industry. In some instances, the Internet may shift the

frontier by significantlydecreasing the cost for existinglevels of performance. In thiscase, the main advantage of e-business would be to increaseefficiency by automating previ-ous activities (i.e., substitutingcapital for labor). In other instances, such as thecase of the online grocerPeapod, the Internet primarilyenhances convenience withoutreducing costs significantly.(Later on we will argue that

EXHIBIT 1

Impact of Internet on the "Efficient Frontier"

Process Cost

Use Internet toEnhance Value

Use Internetto IncreaseEfficiency

LowHigh Low

High

Pro

duct

Val

ueto

Cus

tom

er

Illustration by Eric Mueller



e-Business

costs actually may increase.) In that case, the main advan-tage of the e-business channel would be to offer highervalue to a given customer need. Sometimes, e-business mayshift the frontier out along both dimensions simultaneously.Dell Computers, for example, delivers both lower processcost and higher customer value through customization andresponsiveness.

We are interested in characterizing the conditions underwhich e-business is most likely to increase cost efficiency ormost likely to enhance value in terms of some nonprice fac-tors like responsiveness, variety, or quality. Companies canuse such a characterization to decide how they can best usee-business initiatives to support their strategic position.

Revenue and Cost Impacts of e-Business

The next step in the framework, then, is to characterizeand understand how e-business would affect a company’srevenues and costs using a simple scorecard. These impactsare discussed in detail below.

RReevveennuuee IImmppaacctt ooff ee--BBuussiinneesssse-Business affects revenues in seven key ways, which are

explained below.First, e-business allows companies to enhance

revenues by direct sales to customers.Manufacturers and other supply chain membersthat do not have direct contact with customers intraditional retail channels can use the Internet toshrink the supply chain by bypassing retailers andselling direct to customers. For example, DellComputers sells PCs online direct to customers.

As a result, Dell enjoys higher margins than do tra-ditional PC manufacturers that must share somemargin with retailers. Clearly, retailers are in aweaker position to exploit this e-business opportu-nity than are other members of the supply chain.For example, going online would benefit an airlinemore than a travel agent.

Making online product and other information accessibleto all members of the supply chain allows flexibility on price,product portfolio, and promotions. The Internet makes infor-mation located at a central source (the seller’s Web server)available to anyone with Internet access, so that a change inprice, product portfolio, or promotions only requires onedatabase entry. A traditional mail-order company would needto mail new catalogs to all customers to change prices orproducts. Using its e-business channel, however, L.L. Beanonly needs to update the price on its Web site. This allows

dynamic “revenue management” where prices reflect actualdemand and inventory positions, very much like airline yieldmanagement. For example, Dell uses the Internet to changeprices and delivery times for different PC configurations reg-ularly, based on demand and component availability.

Online product information allows a much faster time tomarket because a product can be “introduced” as soon as thefirst unit is available. Speed is particularly valuable to indus-tries with short product life cycles, where e-business providesan advantage over a “physical” product information model. Anew-product introduction in a traditional model requires asubstantial volume of new product to be manufactured andtransported to fill the physical channels.

Negotiating prices and contracts with customers and sup-pliers online allows price and service customization. By accom-modating individual requests, the e-business may customizeand price its product/service accordingly. Keeping customerprofiles and having clients “log in” facilitates such price andservice discrimination by allowing subsequent customer-spe-cific routing. (By contrast, individualizing the purchasingexperience is difficult in a physical store because the storelayout cannot be changed for each customer.) After logging inat the Schwab Web site, for example, clients with a substan-tial investment portfolio have access to additional “signatureservices.” Aside from such service discrimination, an e-busi-ness could price discriminate and alter prices based on thebuying power of individual customers to enhance revenues.Auction sites like eBay and exchanges like Commerce Oneallow people to bid for goods and services, with different peo-ple potentially paying different prices. Other e-businessesoffer customers a menu of services at various prices, allowing

them to select the desired level ofservice. For example, Amazon.comprovides a customer ordering multi-ple books with shipping times foreach book. Some titles may be avail-able for next-day shipping, while oth-ers involve a week’s leadtime.

Customers can choose to receive one order after a week at alower price or separate shipments in order of availability at ahigher price.

Global access at any time from any place in terms of orderplacement allows an e-business to enhance revenues byattracting customers who may not be able to place ordersduring regular business hours. For example, customers canplace orders at industrial supplier Grainger.com even at timeswhen the Grainger stores where they will pick up their ordersare closed. Grainger has observed a surge in online ordersafter store closing times. (Similar access convenience may beimportant in Europe, where many supermarkets are closed inthe evenings, exactly the time when many customers whowork could place their orders.) e-Business also allows a smallspecialty store with one location near Chicago, for instance,to reach customers worldwide.

The Internet also enhances revenues by offering informa-

An Internet strategy must be consideredwithin the context of the organization’s overallbusiness plan.

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tion aggregation and a wider product portfolio from manysources. For example, Yahoo! Shopping provides productinformation from a large number of retailers. This informa-tion aggregation enhances revenues because it attracts cus-tomers who know they are likely to find the product they areseeking. Physical retail store chains could similarly aggregateproduct availability information from all their stores on theInternet and direct interested customers to the appropriatelocation. In contrast to direct sales and “eliminating the mid-dle man,” it has become popular to create hubs or portals tolink customers to other companies and their products. Thesehubs and portals improve shopping and fulfillment through aone-stop method with the hosting firm receiving revenuesthrough commission fees and advertising. For example,Amazon announced that it earned $606.5 million from rent-ing some of its Web site toother e-tailers.

Finally, e-business canenhance revenues by speedingup collection of funds. An exam-ple comes from John McCain’s2000 presidential campaign.Within 48 hours of his primaryvictory in New Hampshire,McCain’s campaign collected$1 million over his Web site.Receiving and processing $1million in checks would havetaken considerably more timeand effort than the online col-lection did.

CCoosstt IImmppaacctt ooff ee--BBuussiinneessssCompanies also must understand the effects of imple-

menting an e-business plan on cost. In our book, SupplyChain Management: Strategy, Planning, and Operation, weargue that companies can better understand the impact of e-business on supply chain costs by considering four key dri-vers of supply chain performance—facilities, inventory, trans-portation, and information.

Facility costs (including both site and processing costs). e-Businesses can centralize facilities because online sales allowthe separation of order placement and order fulfillment. Sitecosts may decrease as direct customer-manufacturer contactand geographical centralization eliminate or reduce retailsites. For example, Amazon supplies its customers from a fewwarehouses, while Borders and Barnes & Noble must incurfacility costs for all their retail stores. In addition, bookstoreshave a higher space cost per square foot and lower asset uti-lization than warehouses do.

An e-business can decrease processing costs if it canincrease the level of customer participation. For example,customers purchasing online from L.L. Bean do all the workof selecting the product, placing an order, and paying. This isin contrast to a call center where an employee is involved inthe order process. In some instances, however, e-businesses

may face higher processing costs because they have to per-form tasks now done by the customer at a retail store. By sep-arating fulfillment from order placement, an e-business cansmooth the order-fulfillment rate. This reduces the peak loadfor order fulfillment and, thus, resource requirements andcosts. Finally, a direct-sales manufacturer can reduce han-dling costs because fewer supply chain stages are involved inthe product flow to the customer.

Inventory costs. Many e-businesses can centralize inven-tories because they do not have to carry inventory close tothe customer. This geographical centralization reducesrequired inventory levels because of increased economies ofscale in the supply end and reduced aggregated variability indemand. In some instances, given the time lag betweenwhen an online order is placed and filled, e-businesses can

reduce inventories by postpon-ing product differentiationuntil after the customer orderhas been placed. Postponingassembly or product differenti-ation allows a company to“assemble to order” customizedproducts from common com-ponents. Conceptually, post-ponement decreases the sup-ply processes that are operatedin “push” mode (i.e., in antici-pation of a customer order, asshown in Exhibit 2), whileincreasing the processes that

operate in “pull” mode (i.e., after a particular customerorder arrives). By separating ordering from fulfillment, e-business increases flexibility in operations and allows thecompany to implement postponement.

Transportation costs. Inbound and outbound transportationcosts need to be differentiated: A company incurs inboundcosts to bring a replenishment order in from a supplier; itincurs outbound costs to deliver the product to the customer.Typically, replenishment orders enjoy lower unit transporta-tion costs than customer orders because of economies ofscale. Physical centralization increases the distance traveledby a customer order while decreasing the distance traveled bya replenishment order. Thus, compared with a business withseveral physical outlets, an e-business will tend to have high-er transportation costs per unit. Obviously, transportationcosts are eliminated for downloadable information goods.

Information-processing costs. An e-business can easily sharedemand and other information (such as inventory positions)across the supply chain to dampen the bullwhip effect andimprove coordination. Sharing planning and forecasting infor-mation further improves supply chain coordination andreduces overall supply chain costs while better matchingdemand with supply. Information-processing costs also tendto be lower for an e-business if it has successfully integratedsystems across the supply chain.

EXHIBIT 2

The Push and Pull Processes

Time

PUSHProcesses

ProcurementCycle

CustomerOrder Arrives

PULLProcesses

Customer Order andManufacturing Cycle

CustomerOrder Filled



e-Business

A Scorecard fore-BusinessEvaluation

The different revenueand cost factors influencedby e-business are summa-rized in a scorecard, asshown in Exhibit 3.Evaluating the various fac-tors gives insight into howe-business affects a partic-ular supply chain andwhether this value canmost easily be captured byexisting players or by newentrants. For example, ifopportunities mostlyaccrue on the revenue sideof the scorecard, the e-channel may be best posi-tioned as a value enhance-ment of the productoffering. If, on the other hand, the e-channel mostly improvescost, a focus on efficiency may be more appropriate.

At the risk of oversimplifying, the scorecard does suggestsome key conditions that will allow the supply chain toexploit the maximum benefit of going online. These condi-tions include:

� The supply chain is able to exploit all potential revenue-enhancing opportunities of e-business.� Centralization reduces facility costs significantly.� Going online reduces processing costs.� Centralization yields significant inventory benefits. Thisis most likely if there are considerable economies of scaleor if the goods are new products or low-volume, high-vari-ety products, which have high demand uncertainty andbenefit most from statistical aggregation.� Supply chain processes can be realigned to increase thepull processes and respond more closely to actual demand,rather than rely on forecasts.� The supply chain can postpone product differentiation.� Outbound transportation to the customer is a smallfraction of total product cost.Notice that downloadable information goods satisfy all

these conditions: Facility costs are minimal as physical stor-age and personnel (handling and management) requirementsare minimal. Inventory requirements vanish as one copy ofthe file on the server is sufficient. With a sufficient, nonde-pleteable inventory position of one, pull and postponementhave no incremental value and thus become irrelevant.Finally, outbound transportation costs are minimal over theInternet. For example, it is much faster and less costly to letcustomers download a mutual fund prospectus than to mailor fax it. In addition, downloadable products also can exploitall the revenue opportunities.

Thus, downloadable information goods are the perfect fitfor the e-business channel. For them, the Internet moves thefrontier out along both dimensions, simultaneously increasingefficiency and value. This, however, is the exception to the“rule.” For nondownloadable products, most supply chainsshould make a clear choice on the positioning of the e-chan-nel—either as increasing value or as increasing efficiency.We illustrate this with four examples: two of which are sup-ply chains catering to the consumer (business-to-consumer,or B2C), while the other two are business-to-business (B2B)supply chains. In only two of these examples, Dell and W.W.Grainger, was the supply chain able to increase both valueand efficiency. We will provide the actual scorecard for thefirst two examples.

B2C in the Computer Industry: Dell Computer Online

Dell Computer is one company that has succeeded inusing the Internet to increase both value and efficiency. Thesuccess story of how Michael Dell started selling computersdirectly to the consumer in 1984 has become a classic intro-duction to the “direct business model,” as it is called.Recently, the Internet has become a logical extension ofDell’s direct model. This becomes apparent by analyzing thescorecard for e-business in Dell’s supply chain, as summa-rized in Exhibit 4.

On the revenue side, the e-business channel continuesDell’s direct sales model with increased margins comparedwith a traditional computer manufacturer with resellers. Thecompany’s ability to change prices and delivery times on thefly has been leveraged effectively to manage demand basedon component availability. The faster time to market for new-product introductions is a considerable benefit when product

EXHIBIT 3

e-Business - Supply Chain Scorecard

Revenue Opportunities

Direct sales: � Increased margin from eliminating intermediariesProduct information: � Flexibility on price and promotions � Wider product portfolio offeringTime to market: � Faster time to marketNegotiating prices and contract terms: � Price and service customization � Downward price pressure due to increased competitionOrder placement and tracking: � Access at any time from any placeFulfillment: � Increased availability by aggregating information � Shorter response time � Increased choice of delivery optionsPayment: � Efficient funds transfer may improve cash flow

Cost Opportunities

Facility costs: � Site costs: eliminate intermediaries or retail and distribution sites � Processing costs: customer participation, smoothed capacity requirementsInventory costs: � Reduced cycle stock (geographic centralization) � Reduced safety stock (statistical aggregation) � Postponing product differentiation to after order placementTransportation costs: � Inbound � OutboundInformation sharing improves supply chain coordination: � Reduced bullwhip effect � Shared planning and forecasting



life cycles are measured in months. Having direct customercontact allows Dell to provide customization and a wideselection on its customer-specific “Premier” Web pages. Itenables customer-dependent service, such as pre-installedsoftware images and priority routing, with customer-negotiat-ed pricing. Furthermore, through continuously updated “rec-ommended configurations,” Dell can steer customers towardproducts that are in ample supply. Similarly, by sharingdynamic inventory information with suppliers, Dell can workboth on the input and output ends of the supply chain tomatch demand with supply.

Customers, for their part, have the convenience of orderinganytime and anywhere, while Dell may track all corporatewidepurchases. As such, Dell becomes a virtual IT department inaddition to just being a corporation’s PC vendor.

Finally, by tracking and managing cash flow very tightlyand maintaining low inventories, Dell gains a negative cash-conversion cycle of a few weeks; the company gets paidbefore it pays its supplier, exploiting direct payment withpostponed delivery. Increased response time is perhaps theonly negative-revenue risk compared with traditional bricks-and-mortar retailers.

On the cost side, the direct model eliminates intermedi-aries. In addition, long-term relationships with high-reliabilitysuppliers, such as Sony, allow Dell to ship monitors directly

from the supplier to the cus-tomer. This eliminates ware-housing costs and the delaysassociated with additionalinventories. Not only arewarehousing costs decreased,

ordering personnel costs are transferred to the customer!The greatest inventory cost benefits accrue from a fast,

well-coordinated supply chain that enables the separation ofthe procurement cycle from the customer order and manu-facturing cycle. Although procurement is initiated in antici-pation of demand, manufacturing and fulfillment begin onlywhen an order arrives. Dell makes this postponement possi-ble by adopting common platforms and components for vari-ous products. While finished-goods inventory is eliminated(or already paid for), Dell greatly reduces the input inventoryby exploiting economies of scale and statistical aggregationover the common components.

Similarly, high volumes of a relatively limited set of com-mon inputs may reduce inbound transportation costs or eveneliminate them if the supplier is co-located. Perhaps the onlynegative cost impact of the e-channel is the increased out-bound transportation costs to customers. Those costs, howev-er, are relatively small when dealing with higher-end comput-ers and on high-volume corporate accounts.

In short, the e-business opportunities are significant in thecomputer industry. To exploit them well, the supply chainmust move product customization to the pull phase and holdinventories as common components during the push phase.The opportunities are most significant for new, hard-to-forecast products, where aggregation offers the greatest

benefit in terms of inventoryreduction. Nevertheless, self-reliant ordering assumes asomewhat experienced cus-tomer who requires lesshandholding. As such, the e-channel may complementthe strength of existing retailchannels with a focus on ser-vice and educating con-sumers to choose low-costcomputers.

B2C in theGrocery Industry: Peapod.com

The scorecard approachcan also be used to evaluatethe opportunities for onlinegrocers.

Peapod.com is one of theoldest online grocers. Thecompany started in Chicagoin a collaborative arrangement

With the Internet come new associated technologies and managerial policies that shift the“efficient frontier” outward.

EXHIBIT 4

Scorecard for e-Business in Dell Supply Chain


Direct sales: $$ Increased margin from eliminating intermediariesProduct information: $$ Flexibility on price and promotions $$ Wider product portfolio offeringTime to market: $$ Faster time to marketNegotiating prices and contract terms: $ Price and service customization -$ Downward price pressure due to increased competition Order placement and tracking: $$ Access at any time from any placeFulfillment: 0 Increased availability by aggregating information -$ Shorter response time 0 Increased choice of delivery optionsPayment: $ Efficient funds transfer may improve cash flow

Cost Opportunities

Facility costs: $$ Site costs: eliminate intermediaries or retail and distribution warehouses $$ Processing costs: customer participation, smoothed capacity requirementsInventory costs: $ Reduced cycle stock (geographic centralization) $$ Reduced safety stock (statistical aggregation) $$ Postponing product differentiation to after order placementTransportation costs: 0 Inbound -$ OutboundInformation sharing improves supply chain coordination: $ Reduced bullwhip effect $ Shared planning and forecasting

-$$ -$ 0 $ $$Impact: Very Negative Marginal Very Positive



e-Business

with the supermarketchain Jewel wherePeapod’s pickers would fillan order before deliveringit. Peapod now has movedto supplying orders fromcentralized fulfillment cen-ters in areas that the com-pany serves. Each fulfill-ment center is much largerthan a supermarket and iscomparable to a ware-house.

An online grocer suchas Peapod can offer sever-al services of value to theconsumer. Online grocersallow order placementanytime and from any-where. They can attractcustomers who do not liketo go to a supermarket(who does?). They haveflexibility on pricing andpromotions. They could provide a large variety of goods,including specialty items such as ethnic foods—althoughPeapod does not offer significantly more variety than a typi-cal supermarket does. In addition, they can bundle menusand recommended ingredients with specialty items, basedon tracked online shopping behavior and histories. A super-market store has no knowledge of what has been purchaseduntil a customer checks out or of the substitution patternsfor goods that were stocked out. Peapod, however, canguide online shopping behavior with real-time suggestions.Peapod can use its data for targeted interactive advertisingand discounts. This revenue boost is significant becausemost e-grocers, at this stage, have lost money in the actualsale of groceries but have made money on the sale of con-sumer choice data to suppliers.

On the cost side, however, e-grocers have several disad-vantages compared with their bricks-and-mortar counter-parts. Although the virtual store reduces facility costs byeliminating retail sites and checkout clerks, it incurs process-ing costs for activities such as picking, packing, and handling.In a traditional supermarket, customers do their own pickand pack, while handling is done in high-volume palletsinstead of “eaches.” The inventory savings resulting from cen-tralization also prove marginal because supermarkets alreadyachieve sufficient forecast accuracy from their large size.Inventory benefits from aggregation are higher, however, fore-grocers such as EthnicGrocer.com that focus primarily onslower-moving specialty items.

Online grocers also have significantly higher transporta-tion costs than traditional supermarkets do because of homedelivery. They require a specialized delivery fleet whose cost

will be a high fraction of product value. The nature of homedelivery precludes centralization on a large national or evenregional scale. Indeed, most e-grocers have warehouses ineach metropolitan area that they serve. In addition, deposit-ing the groceries at the customer’s home is much less flexiblethan putting a book in the mailbox. With fresh goods, con-sumers need to be home to receive the delivery, which cre-ates significant peaks in requested delivery times in the earlymorning and after 5 p.m. Finally, while delivery density incities may be sufficiently high, achieving an acceptable num-ber of delivery stops per hour in a spread-out suburban areawill be difficult. (Many e-grocers strive for gaining marketshare to improve delivery density and may extend into generalhome delivery of other goods. Yet it is questionable whethersuch a strategy can ever compete with parcel companies, likeUPS or FedEx, that not only deliver but also pick up, whichresults in double efficiencies.)

This scorecard analysis, summarized in Exhibit 5, suggeststhat e-grocers have negligible opportunity to compete on costin general grocery items, especially fresh food. Indeed, the e-grocery model possesses none of the earlier-listed key condi-tions for capitalizing on the cost benefits of the Internet. e-Grocers, therefore, must compete on convenience or someother form of value added. For example, opportunities doexist for specialty or ethnic segments. Also, convenience canbe added by automating the purchasing activities that mosthouseholds perform each week. Once a weekly basket is setup on the Web, repetitive ordering is greatly accelerated. Inaddition, the supply chain may exploit recurrent patterns bysmoothing and leveling the load and delivery process—pro-vided a solution is found so that the customer’s presence is

EXHIBIT 5

Scorecard for e-Business in Peapod.com Supply Chain


Direct sales: 0 Increased margin from eliminating intermediariesProduct information: $ Flexibility on price and promotions $ Wider product portfolio offeringTime to market: 0 Faster time to marketNegotiating prices and contract terms: $ Price and service discrimination -$ Downward price pressure due to increased competition Order placement and tracking: $$ Anytime and anywhereFulfillment: 0 Increased availability by aggregating information -$ Shorter response time 0 Increased choice of delivery optionsPayment: 0 Efficient funds transfer may improve cash flow

Cost Opportunities

Facility costs: $ Site costs: eliminate intermediaries or retail and distribution warehouses -$$ Processing costs: customer participation, smoothed capacity requirementsInventory costs: 0 Reduced cycle stock (geographic centralization) 0 Reduced safety stock (statistical aggregation) 0 Postponing product differentiation to after order placementTransportation costs: 0 Inbound -$$ OutboundInformation sharing improves supply chain coordination: 0 Reduced bullwhip effect 0 Shared planning and forecasting

-$$ -$ 0 $ $$Impact: Very Negative Marginal Very Positive



not needed for delivery. (Peapod competitor Streamline.com,for example, allows unattended delivery by installing refriger-ated storage boxes with keypad access systems at its cus-tomers’ homes.)

The greatest e-channel opportunity, however, may be forincumbent supermarket chains, which already own their ownregional distribution centers. They can set up the additionale-channel as a focused “plant within a plant” to expand theirvalue offering. In addition to picking their orders themselvesin the stores, customers could choose to have supermarketpersonnel pick for them with the customer providing the out-bound transport. Alternatively, the supermarket could pro-vide home delivery at the highest price. Among supermarketchains, Albertson’s has taken the lead in combining e-busi-ness with traditional stores. Part of the store is a fulfillmentcenter for online orders, while the other part is a supermar-ket. This provides the company with economies of scale oninbound transport while keeping delivery distances to cus-tomers short on outbound. Our analysis would suggest thatsuch a dual-pronged approach is the most effective position-ing of e-business in mass-market groceries where pure onlinegrocers are likely to be less effective.

B2B in the Parts-Supply Industry: W.W. Grainger

W.W. Grainger is an example of a company that can seizeboth revenue and cost-saving opportunities by going online.W.W. Grainger is a business-to-business distributor of main-tenance, repair, and operating (MRO) supplies ranging fromconsumables, like machine lubricants, to hardware items,like nuts and bolts for repairs. Grainger is famous for its four-inch thick catalogs with thousands of parts that customerscan order over the phone or buy at one of its 380 U.S.branches, which are similar to large retail stores. In 1995, thecompany set up Grainger.com, allowing cus-tomers to place orders on its Web site, whichoffers more than 200,000 products.

Going online provides considerable revenueopportunities: 24-hour access for order place-ment with a very large selection availablethrough an easy electronic search. Productinformation is updated easily, allowing price and promotionflexibility. New products can be added to the “virtual catalog”immediately, improving time to market drastically. Allowingindustrial customers to place an order anytime is a consider-able convenience for people on night shifts. They no longerhave to notify day purchasing to place orders but instead cando it immediately, reducing response time. Grainger can esti-mate not only delivery times for each order using up-to-dateinventory status but also can alert the customer automatically(through e-mail) regarding order status. A downside of onlineordering is increased ease of comparison shopping, which isexpected to drive down prices and margins. Yet Grainger real-ized that it was better to cannibalize its own bricks-and-mor-tar channel than to let others do it.

Considerable cost opportunities also exist compared withthe phone or mail-order channel. Order-taking costs decreaseas the customer participates. More importantly, errors aregreatly reduced as duplication of data entry is eliminated.Catalog-printing costs also decline significantly. By integrat-ing the suppliers, Grainger can improve synchronization overthe entire supply chain as customer orders automatically trig-ger supply orders when inventories need replenishment.Inventory and transportation costs, however, are affectedmarginally, as the fulfillment system remains largelyunchanged. Likewise, inventory and facility costs at Graingerwill not change significantly by going online unless the com-pany decides to close some of its branches.

The sale of MRO supplies is an example where theInternet is ideally suited to eliminating the weaknesses of thecurrent system. The basic supply chain remains unchangedbut going online allows both buyers and sellers to decrease thetransaction cost of placing and fulfilling orders and to increasethe product portfolio. The use of the Internet to replace exist-ing channels of order placement is likely to grow at a signifi-cant pace in the B2B arena.

B2B Auctions in Procurement:Internet Exchanges

Companies also can use the scorecard tech-nique as they decide whether and how to use anInternet exchange.

Internet exchanges create electronic markets andcommunities where businesses can obtain informa-tion and buy and sell products. Exchanges bringtogether many buyers and many sellers from anindustry. The technology can be used to facilitateonline buying transactions and hold auctions forB2B commerce.

On the one hand, exchanges can enhance therevenue opportunities for sellers by enlarging theset of buyers. On the other hand, buyers can seize upon cost-saving opportunities by being able to search across multiplesuppliers when looking to procure an item. By substantiallylowering barriers to entry in the bidding process, Internetauctions drive down supply prices. This may seem to implythat buyers should use exchanges to conduct auctions wheresuppliers compete against each other.

There are, however, considerable downsides to thisapproach if it is implemented indiscriminately because othersupply chain costs are ignored. Purchase of all products usingauctions may lower the purchase price but will tend toincrease the total cost of purchase for a company. The ability

Companies need to fully understand how e-business would

affect their revenues and costs.



e-Business

to reduce supply chain costs requires long-term relationshipswithin the supply chain. Indeed, the movement toward leanoperations, as exemplified by Dell, depends heavily on a fewsuppliers who become “long-term partners.” In the autoindustry, the last two decades of the 20th century focused onimproving supply chain relationships so that suppliers andauto manufacturers could work closely to improve the wayproducts were designed, manufactured, and delivered.Chrysler significantly improved its performance by gettingsuppliers involved in the new-product design phase. Thislevel of supplier involvement is only possible given a long-term relationship between suppliers and manufacturers.

Thus, core products that a buyer requires in significantand steady quantities should not be handled through an auc-tion hosted by an intermediary. In this case, Internetexchanges should be used to reduce the transaction costs oforder placement and fulfillment and improve informationexchange for collaborative planning across the supply chain.A good example of this approach is Dell and its use of e-busi-ness when dealing with suppliers. Dell does not use theInternet to create a marketplace where suppliers competeagainst each other for Dell’s orders. Rather, thecomputer maker uses the Internet to exchangedemand, production, and inventory informationwith its suppliers. This allows suppliers to setappropriate production levels and help the Dellsupply chain better match supply and demand.

When it comes to utilizing excess or surpluscapacity (i.e., any capacity left after utilizing basecapacity), the story is very different and online auctioning mayprovide significant opportunities. Exchanges provide the abilityto aggregate and display all available surplus capacity across anentire industry. As such, a market is created to better matchsurplus capacity with unmet demand. For example, a manufac-turer in need of unforeseen additional transportation mayplace an emergency shipment out to bid if its regular motorcarrier has no trucks available. By matching uncertain compo-nents in demand to aggregated surplus capacity (supply),online auction markets may improve the overall match ofdemand with supply obtained from long-term contracting. Ouranalysis would suggest a two-pronged purchasing strategy: Forstable, recurrent demands, the Internet focus should be onreducing transaction costs and improving supply chain perfor-mance, while online auctions may be used to satisfy uncertaindemand where the value of aggregation is the greatest.

Incentive problems and credibility issues suggest that theauction market is best provided through a neutral intermedi-ary. The key issue may be to account for the total cost in theauction, including product, transportation, and other relevantcosts. For example, if a seller is offering a stamping press cur-rently in Northern Italy, an offer from that region is moreattractive that an identical offer from Belgium if the seller

incurs the transportation cost. Although incorporating suchnonprice factors may be automated for commodity products,it is much harder for customized items.

Guidelines Going ForwardAs the examples show, the scorecard provides a tool to

analyze the impact of the e-channel on a supply chain andhow that e-channel is best positioned. It also points to areasfor potential concern, which must be considered when set-ting up an e-business.

From a supply chain operations perspective, thefollowing guidelines may help the e-business inpractice:

� Think about integrating the Internet with theexisting supply chain network rather than settingup a separate e-business. Integration will lever-age and improve current processes, while sepa-rate channels may add inefficiencies to the sup-ply chain.� Structure e-business logistics to accommo-date packages instead of pallets. The goal should

be to mitigate the loss of economies of scale dueto increased volume in smaller sizes. This sug-gests new logistics opportunities such as orderconsolidation (merge in transit, mega distributors) andorder pickup sites.� Devise shipping pricing strategies that reflect the costsof activities. Disregarding or underestimating transporta-tion costs has contributed to the losses incurred by e-gro-cers to date.� Design the supply chain to handle returns efficiently.Because the Internet cannot match the traditional cus-tomer experience of feeling, testing, and even smelling theproduct before buying it, returns in an e-business willalways exceed those of traditional stores.� Keep customers informed throughout the fulfillmentand returns cycle.

Footnotes

1 M.E. Porter, “What Is Strategy?” Harvard BusinessReview, November-December 1996.

2 Porter, 1996.

The Internet enhances revenues by offering information

aggregation and a wider product portfo-lio from many sources.


e-Business IS RIGHT

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