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Version: April 26, 2000

Sunil Chopra is the IBM Distinguished Professor of Operations Management and Jan Van Mieghem is an AssociateProfessor of Operations Management; both are at the Kellogg Graduate School of Management at Northwestern University.

Both are co-authors of "Managing Business Process Flows" (Prentice Hall 1999). Professor Chopra also is the co-authorof the new textbook "Designing and Managing Supply Chain Flows," (to be published by Prentice Hall), which inspired thisarticle.Copyright ! 2000. All rights reserved, contact [email protected].

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W HICH E -BUSINESS IS RIGHT FOR YOUR SUPPLY CHAIN ?by Sunil Chopra and Jan A. Van Mieghem

(Forthcoming in Supply Chain Management Review )

The Internet is revolutionizing the way companiesconduct business. Or is it? We argue that the value of the Internet for a firm is strongly dependent on the firmsindustry and on the strategy it pursues. A survey of firmswith an online presence displays wide disparities inperformance. While Dell has successfully used theInternet to boost revenues and earnings, Amazon lost$585 million on revenues of $1.6 billion in 1999. Firmsthat fully exploit the revenue enhancements and costreduction opportunities offered by the Internet andoptimally integrate e-business with existing channels arelikely to be the big winners in the Internet age.

The Role of E-business in a Supply Chain

E-business involves the execution of businesstransactions over the Internet. Companies conducting e-business perform some or all of the following activitiesover the Internet across the supply chain:

Providing product and other information Negotiating prices and contracts Placing and receiving orders Tracking orders Filling and delivering orders Paying and receiving payment.

All these activities have been conducted in the past usingexisting "channels" such as retail stores, sales people, andcatalogs. For example, companies like Lands End andW.W. Grainger have used catalogs to provide productinformation to customers.

Companies have used the Internet in a variety of ways to enhance supply chain performance. Dell uses theInternet to display all its product options to customers.Companies like Solectron and Ford have used theInternet to increase collaboration in product design. UPSand Federal Express have used the Internet to allowcustomers to track their packages.

Our goal is to characterize how different firms canbest use the strengths of the Internet to enhance theperformance of their supply chains. We argue that theanswer is industry and strategy specific and propose asimple framework that managers can use make thisdecision.

A Strategic Framework to Evaluate Supply ChainOpportunities from E-business

The framework starts from the premise that supply chaindecisions must be evaluated in a strategic context basedon the answers to the following three questions:

1. What is your firm's desired strategic position?2. Given your 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 fit between the desired strategicposition of the firm and the capabilities of supply chainprocesses used to satisfy customer needs (Porter 1996).The desired strategic position may be articulated in termsof a clear priority ranking on the needs of the customersegments that are targeted by the firm. Typicaldimensions of customer needs that may be targeted by asupply chain include timeliness, accessibility,availability, customizability, quality of service, and price.There is a tradeoff between the level at which a set of customer needs is targeted and the cost incurred by the

supply chain in meeting these needs.The efficient frontier represents the lowest costof delivering a given level of a customer need using thebest available supply chain processes. Each point on thefrontier corresponds to a particular supply chainstructure, employing the best available technologies,managerial policies, and inputs to deliver the desiredlevel of a customer need at lowest cost. As such, theefficient frontier constitutes the state of best practices at agiven point in time (Porter 1996). It also shows theinherent trade-offs that a firm must consider whenselecting its strategic position given limitations in

process technology and policies.With the Internet come new associated

technologies and managerial policies that shift thefrontier outward. An outward shift represents either adecrease in cost for a given level of performance along acustomer need or a higher level of performance at a givencost. The shift in the efficient frontier on adding theInternet to available channels will vary by industry. In


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e-business and the supply chain

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some instances, the Internet may shift the frontier bysignificantly decreasing the cost for existing levels of performance. For example, at industrial supplier W.W.Grainger, e-business does not change any of theunderlying processes but makes them cheaper to execute.This would mean that the main advantage from e-business would be to increase efficiency by automating

previous activities (i.e., substituting labor for capital). Inother instances, such as the online grocer Peapod.com,the Internet primarily enhances convenience withoutsignificantly reducing costs. (Later on we will argue thatcosts may actually increase.) In that case, the mainadvantage of the e-business would be to offer highervalue along a given customer need. Sometimes, e-business may shift the frontier out along both dimensionssimultaneously, as is the case for Dell Computers that isable to deliver both higher customer value in terms of customization and responsiveness, and lower processcost.

High Low

High

Low

Use Internet toincrease efficiency

Use Internet toenhance value

Process cost

P r o

d u c t v a

l u e

t o c u s t o m e r

Figure 1: The Impact of the Internet on the EfficientFrontier

We are interested in characterizing the conditions underwhich e-business is most likely to increase cost efficiencyor to enhance value in terms of some non-price factorslike responsiveness, variety or quality. Firms can usesuch a characterization to decide how e-business can bestbe positioned to support the strategic position.

The Impact of E-business on Supply ChainPerformance

Setting up an e-business affects both revenues and costsfor a firm. Next we will elaborate on both aspects.

Revenue Impact of E-business

E-business allows firms to enhance revenues by direct sales to customers. Manufacturers and other members of the supply chain that do not have direct contact withcustomers in traditional retail channels can use theInternet to shrink the supply chain by bypassing retailersand selling direct to customers. For example, DellComputers sells PCs online direct to customers. As aresult, Dell can enjoy higher margins than traditional PCmanufacturers that must share some margin with retailers.Clearly, retailers are in a weaker position to exploit thisopportunity from e-business than other members of the

supply chain. For example, going online would benefitan airline more than a travel agent.

Providing on-line product and otherinformation across the supply chain allows flexibility on

price, product portfolio and promotions . The Internetmakes information located at a central source (the sellersweb server) available to anyone with Internet access, so

that a change in price, product portfolio or promotionsonly requires one database entry. A traditional mail ordercompany would need to mail new catalogs to allcustomers to change prices or products. Using its e-business, however, L.L. Bean only needs to update theprice on its website. This allows dynamic "revenuemanagement" where prices reflect actual demand andinventory positions, very much like airline yieldmanagement. For example, Dell uses the Internet tochange prices and delivery times for different PCconfigurations regularly, based on demand andcomponent availability.

On-line product information allows a much faster time to market as a product can be "introduced" assoon as a first unit is available. This is particularlyvaluable in industries with short product life cycles,where e-business provides an advantage over a "physical"product information model. A new product introductionin a traditional model requires a substantial volume of new product to be manufactured and transported to fillthe physical channels. This is evident again in thecomputer industry where Dell often introduces newproducts earlier than its competitors.The Internet allows information aggregation and offeringa wider product portfolio from many sources to enhancerevenues. For example, Yahoo! Shopping providesproduct information from a large number of retailers andenhances revenues for all by attracting customers becausethey are likely to find the product they are seeking.

Physical retail store chains could aggregate productavailability information across all stores on the Internet tosatisfy customers by directing them to the appropriatelocation. In contrast to direct sales and eliminating themiddle man, it has become popular to create hubs orportals to link customers to other companies and theirproducts. This improves shopping and fulfillmentthrough one-stop and the hosting firm can receiverevenues through commission fees and advertising.Recently, Amazon announced that it was renting some of its web-site to other e-tailers for $606.5 million in cash.

Negotiating prices and contracts withcustomers and suppliers on-line allows price and servicecustomization . By accommodating individual requests,the product/service may be customized and pricedaccordingly. Keeping customer profiles and having them"log-in" facilitates such price and service discriminationby allowing subsequent class or customer specificrouting. Individualizing the purchasing experience foreach customer is difficult in a physical store where thestore layout cannot be changed for each individualcustomer. After logging in at Schwab, clients with asubstantial investment portfolio have access to additionalSignature Services. Aside from such servicediscrimination , an e-business could price discriminateand alter prices based on the buying power of individual


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customers to enhance revenues. Auctions sites like eBayand exchanges like Commerce One allow people to bidfor goods and services with different people potentiallypaying different prices. Other e-businesses offercustomers a menu of services at different prices, allowingthem to select the desired level of service. For example,Amazon.com provides a customer ordering multiple

books with shipping times for each book. Some titlesmay be available for next day shipping while othersinvolve a weeklong lead-time. Customers can choose toreceive one order after a week at a lower price, orseparate shipments in order of availability at a higherprice.

Global access at any time from any place interms of order placement allows an e-business to enhancerevenues by attracting customers who may not be able toplace orders during regular business hours. For example,customers can place orders at industrial supplierGrainger.com, even when the Grainger stores where theywill pick up their orders are closed. Grainer has observeda surge in online orders after their stores close. (Similaraccess convenience may be important in Europe, wheremany supermarkets are closed in the evenings, exactly thetime when many customers that work could place theirorders.) An e-business also allows a small specialty storewith one location near Chicago to reach customersworldwide.

E-business can enhance revenues by speedingup collection of funds. An example of speeding upcollection comes from the 2000 presidential campaign of John McCain. Within 48 hours of his primary victory inNew Hampshire, Mr. McCains campaign collected $1million over his website. Receiving $1 million in checkswould require much more time and effort to process andcollect them!

Cost Impact of E-business

In Designing and Managing Supply Chain Flows, it isargued that the impact of e-business on supply chaincosts is better understood by considering the four driversof supply chain performance.

Facility costs include both site and processing costs.E-businesses are able to centralize facilities becauseonline sales allow the separation of order placement and order fulfillment . Site costs may decrease as directcustomer-manufacturer contact and geographicalcentralization eliminates or reduces retail sites. Forexample, Amazon supplies its customers from a fewwarehouses, while Borders and Barnes and Noble mustincur facility costs for all their retail stores. In addition,bookstores have a higher space cost per square foot andlower asset utilization compared to warehouses.

An e-business can decrease processing cost if theycan increase the amount of customer participation. Forexample, customers purchasing online from L.L. Beando all the work of selecting the product, placing andorder, and paying. This is in contrast to a call centerwhere an employee is involved in the order process. Insome instances, e-businesses may face higher processingcosts because they have to perform tasks currentlyperformed by the customer at a retail store. By

separating fulfillment from order placement, an e-business can smooth the order fulfillment rate. Thisreduces the peak load for order fulfillment and thusresource requirements and costs. Finally, a direct-salesmanufacturer can reduce handling costs because fewersupply chain stages are involved in the product flow tothe customer.

Inventory costs : Many e-businesses can centralizeinventories because they do not have to carry inventoryclose to the customer. This geographical centralizationreduces required inventory levels because of increasedeconomies of scale in the supply and reduced aggregatedvariability in the demand. In some instances, given thetime lag between when an online order is placed andfilled, e-businesses can reduce inventories by postponingproduct differentiation until after the customer order hasbeen placed. Postponing assembly or productdifferentiation allows a firm to "assemble to order"customized products from common components.Conceptually, postponement decreases the supplyprocesses that are operated in "push" mode (i.e., inanticipation of a customer order, as shown in Figure 2)while it increases the processes that operate in "pull"mode (i.e., after a particular customer order arrives). Amajor advantage of e-business is that, by separatingordering from fulfillment, increased flexibility inoperations is gained to implement postponement. (It issomehow ironic that by "going on Internet time," supplychains may actually buy themselves time compared totraditional brick-and-mortar retailing where ordering andfulfillment tend to coincide.)

Procurement cycleCustomer Order andManufacturing Cycle

Customer order arrives

PUSH Processes

time

PULL Processes

Customer order filled

Figure 2: Push and Pull Processes

Transportation costs . One should differentiateinbound from outbound transportation: a firm incursinbound transportation costs to bring a replenishmentorder in from a supplier while it incurs outboundtransportation costs to deliver the product to thecustomer. Typically, replenishment orders enjoy lowerunit transportation costs than customer orders because of scale economies. Physical centralization increases thedistance traveled by a customer order, while decreasingthe distance traveled by a replenishment order. Thus,compared to a business with several physical outlets, ane-business will tend to have higher transportation costsper unit. Clearly, transportation costs are eliminated fordownloadable information goods.

Information sharing improves supply chaincoordination . An e-business can easily share demandand other information (such as inventory positions)across the supply chain to dampen the bullwhip effect


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and improve coordination. Sharing planning and

forecasting information further improves coordinationand reduces overall supply chain costs while bettermatching demand with supply. Information processingcosts also tend to be lower for an e-business if it hassuccessfully integrated systems across the supply chain.

A scorecard for e-business evaluation in the supplychain

The different factors influenced by e-business aresummarized in a scorecard, as shown in Figure 3. Byevaluating the impact on the various factors, one gainsinsight in how e-business impacts a particular supplychain and whether this value can most easily be capturedby existing players or by new entrants. For example, if opportunities mostly accrue on the revenue side of thescorecard, the e-channel may be best positioned as avalue enhancement of the product offering. If, on theother hand, the e-channel mostly improves cost, a focuson efficiency may be more appropriate.

At the danger of over simplification, the scorecard doessuggest some key conditions for the supply chain toexploit the maximum benefit of going on-line: The supply chain is able to exploit all potential

revenue enhancing opportunities of e-business Centralization significantly reduces facility costs. Going on-line reduces processing costs. Centralization yields significant inventory benefits.

This is most likely if there are considerableeconomies of scale, or for new products or low-volume high-variety products, which have highdemand uncertainty and benefit most from statisticalaggregation.

The supply chain can move processes to after acustomer has placed an online order.

The supply chain can postpone productdifferentiation.

Outbound transportation to the customer is a small

fraction of total product cost.

Notice that all these conditions are satisfied bydownloadable information goods: Facility costs areminimal as physical storage and personnel (handling &management) requirements are minimal. Inventoryrequirements vanish as one copy of the file on the serveris sufficient. With a sufficient, non-depletable inventoryposition of one, pull and postponement have noincremental value and become irrelevant. Finally,outbound transportation costs are minimal over theInternet. For example, it is much faster and less costly tolet customers download the prospectus of a mutual fundthan to mail or fax it. In addition, downloadableproducts also can exploit all the revenue opportunities.Thus, downloadable information goods are the perfect fitto the e-business channel. For them, the Internet movesthe frontier out along both dimensions, increasingsimultaneously efficiency and value. This, however, isthe exception to the "rule:" for non-downloadableproducts, most supply chains should make a clear choiceon the positioning of the e-channel. We illustrate thiswith four examples: two of which are supply chainscatering the consumer (business-to-consumer, or B2C),while the other two are business-to-business (B2B)supply chains.

B2C in the Computer Industry: Dell Computer on-line

The success story of how Michael Dell started sellingcomputers directly to the consumer in 1984 has become aclassic introduction to the direct business model , as it iscalled. Recently, the Internet has become a logicalextension of Dell's direct model. This becomes apparentby analyzing the scorecard of e-business in Dell's supplychain, as summarized in Figure 4.

On the revenue side, the e-business channelcontinues Dells direct sales model with increasedmargins compared to a traditional computer manufacturerwith resellers. The ability to change prices and delivery

Revenue Opportunities Cost Opportunities Direct sales

! Increased margin from eliminating intermediaries Product information:

! Flexibility on price and promotions! Wider product portfolio offering! Faster time to market

Negotiating prices and contract terms:! Price and service customization! Downward price pressure due to increase competition

Order placement and tracking:! Access at anytime from any place

Fulfillment:! Increased availability by aggregating information! Shorter response time! Increased choice of delivery options

Payment:! Efficient funds transfer may improve cash flow

Facility costs:! Site costs: eliminate intermediaries or retail and

distribution sites! Processing costs: customer participation, smoothed

capacity requirements Inventory costs:

! Reduce cycle stock (geographic centralization)! Reduce safety stock (statistical aggregation)! Postponing product differentiation to after order

placement Transportation costs:

! Inbound! Outbound

Information sharing improves supply chain coordination:! Reduce bullwhip effect! Shared planning and forecasting

Figure 3: A (example) scorecard for e-business in the supply chain


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times on the fly has been used effectively by Dell tomanage demand based on component availability.

Related, the faster time to market for new productintroductions is a considerable benefit when product lifecycles are measured in months. Having direct customercontact allows Dell to provide customization and largeselection on their customer-specific Premier web pages.It may allow customer-dependent service, such as pre-installed software images and priority routing, withaccompanied customer-negotiated pricing. Moreover,through continuously updated "recommendedconfigurations," Dell can steer customers towardsproducts that are in ample supply. Similarly, by sharingdynamic inventory information with suppliers, Dell canwork both on the input and output ends of the supplychain to match demand with supply. Customers have theconvenience of ordering anytime and anywhere, whileDell may track all corporate-wide purchases. As such, itbecomes a virtual IT department in addition to just beinga corporation's PC vendor. Finally, by tracking andmanaging cash flow very tightly, a negative cash-conversion cycle of a few weeks is gained: Dell gets paidbefore it pays its supplier, exploiting direct payment withpostponed delivery. Increased response time is perhapsthe only negative revenue potential that Dell hascompared to traditional brick-and-mortar retailers.

On the cost side, the direct model eliminatesintermediaries. In addition, long-term relationship withhigh-reliability suppliers such as Sony allow Dell to shipmonitors directly from the supplier to the customer,eliminating costly warehousing costs and the delays in

additional inventories. Not only are warehousingdecreased, ordering personnel costs are transferred ontothe customer!

The greatest inventory benefits accrue from afast, well-coordinated supply chain that enables theseparation of procurement cycle from customer order andmanufacturing cycle. While procurement is initiated inanticipation of demand, manufacturing and fulfillment isonly started when an order arrives. This is possible byadopting common platforms and components for variousproducts. While finished goods inventory is eliminated

(or already paid for), the input inventory is greatlyreduced by exploiting economies of scale and statistical

aggregation over the common components.Similarly, high volumes of a relatively limited

set of common inputs may reduce inbound transportationcosts, or even eliminate them if the supplier is co-located.Perhaps the only negative cost impact of the e-channel isthe increased outbound transportation costs to customers.Those, however, are relatively small when focusing onhigher-end computers and on high-volume corporateaccounts.

Thus, the opportunities of the e-business aresignificant in the computer industry. To exploit themwell, the supply chain must move product customizationto the pull phase and hold inventories as commoncomponents during the push phase. The opportunit iesare most significant for new, hard to forecast products,where aggregation offers the greatest benefit in terms of inventory reduction. Nevertheless, self-reliant orderingassumes a somewhat experienced customer who requiresless handholding. As such, the e-channel maycomplement the strength of existing retail channels withfocus on service and educating consumers to choose lowcost computers.

Suppliers

Peapod Fulfillment Center

Customer

Peapod Supply Chain

Suppliers

Warehouse (?)

Supermarket

Customer

Supermarket Supply Chain

PullPull

Figure 5: Peapod and a typical supermarket supply chain

B2C in the Grocery Industry: Peapod.com

Peapod.com is one of the oldest online grocers. Thecompany started in Chicago in a collaborativearrangement with the supermarket chain Jewel where


$$ Increased margin from eliminating intermediaries Product information:

$$ Flexibility on price and promotions$$ Wider product portfolio offering$$ Faster time to market

Negotiating prices and contract terms:$ Price and service customization-$ Downward price pressure due to increase competition

Order placement and tracking:$$ Access at anytime from any place

Fulfillment:0 Increased availability by aggregating information-$ Shorter response time0 Increased choice of delivery options

Payment:$ Efficient funds transfer may improve cash flow

Facility costs:$$ Site costs: eliminate intermediaries or retail anddistribution warehouses$$ Processing costs: customer participation, smoothedcapacity requirements

Inventory costs:$ Reduce cycle stock (geographic centralization)

$$ Reduce safety stock (statistical aggregation)$$ Postponing product differentiation to after orderplacement

Transportation costs:0 Inbound-$ Outbound

Information sharing improves supply chain coordination:$ Reduce bullwhip effect$ Shared planning and forecasting

Scale: -$$, -$, 0, $, $$ is from very negative impact, marginal to very positive.Figure 4: The scorecard for e-business in Dell's supply chain.


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Peapods pickers would fill an order before delivering it.Peapod has now moved to supplying orders fromcentralized fulfillment centers in areas that the companyserves. Each fulfillment center is much larger than asupermarket and is comparable to a warehouse. ThePeapod and supermarket supply chains are comparableexcept that some supermarket products are supplieddirectly from suppliers (Fig. 5).

On-line grocers allow order placement anytimeand from anywhere. They can attract customers who donot like to go to a supermarket (who does?). They haveflexibility on pricing and promotions. They couldprovide a large variety of goods, including specialtyitems, such as ethnic foods, although Peapod does notoffer significantly more variety than a typicalsupermarket. In addition, they can bundle menus andrecommended ingredients with specialty items, based on

tracked online shopping behavior and histories. Unlike asupermarket store, which has no knowledge of what hasbeen purchased until a customer checks out or of thesubstitution patterns for goods that were stocked out,Peapod can guide online shopping behavior with real-time suggestions. Peapod can use its data for targetedinteractive advertising and discounts. This revenue boostis significant to the extent that most e-grocers at thisstage have lost money in the actual sale of groceries butmade money on the sale of consumer choice data tosuppliers. On the cost side, the virtual store reducesfacility costs by eliminating retail sites and checkoutclerks. Inventories are reduced due to centralization;although savings would accrue primarily to slow moving,

specialty items.E-grocers also have several disadvantagescompared to their brick-and-mortar counterparts:increased response times and additional outboundtransportation costs to cover the last mile to the customer.W argue that e-grocers have a negligible opportunity tocompete on cost, except perhaps for specialized low-volume, dry items. The e-grocer incurs additionalactivities in picking, packing and handling that are notincurred by a traditional supermarket where customers dopick and pack; and handling is done in high volume(pallet based). The inventory savings due to

centralization are marginal because supermarkets alreadyachieve sufficient forecast accuracy thanks to their largesize. (If, however, online grocers focused primarily onspecialty items, as EthnicGrocer.com, inventory benefitsfrom aggregation would be larger.) Online grocers incursignificantly higher transportation costs than asupermarket because of home delivery. Indeed, grocerieshave a low value to weight or volume ratio. They requirea specialized delivery fleet whose cost will necessarily berather high as a fraction of the value. This precludescentralization on a large national or even regional scale;indeed, most e-grocers have warehouses in eachmetropolitan area that they serve. In addition, depositingthe groceries at the customer is much less flexible thanputting a book in the mailbox: with fresh goods,consumers need to be home to take delivery, whichcreates significant peak demands early morning and after

5pm. Finally, while delivery density in cities may besufficiently high, achieving an acceptable number of delivery stops per hour in a spread-out suburban area willbe difficult. (Many e-grocers strive for gaining marketshare to improve delivery density and may extend intogeneral home delivery of other goods. Yet it isquestionable that even such strategy can ever competewith parcel companies like UPS or FedEx, who not onlydeliver, but also pick up; resulting in double efficiencies.)

This scorecard analysis, summarized in Figure6, suggests that e-grocers have negligible opportunity tocompete on cost in general grocery items, especially freshfood. Indeed, all key conditions listed earlier to exploitcost benefits are violated. Competition, therefore, must

be on convenience or some other form of value added.For example, opportunities do exist for specialty orethnic segments. Also, convenience can be added byautomating the repeat purchasing activities that mosthouseholds go through each week. Once a weekly basketis set up on the web, repetitive ordering is greatly spedup. In addition, the supply chain may exploit recurrentpatterns by smoothing and leveling the load provided asolution is found for the delivery so that customerpresence is not needed. (Competitor Streamline.comallows unattended delivery by installing fridge and


0 Increased margin from eliminating intermediaries Product information:

$ Flexibility on price and promotions$ Wider product portfolio offering0 Faster time to market

Negotiating prices and contract terms:

$ Price and service discrimination-$ Downward price pressure due to increase competition Order placement and tracking:

$$ Anytime and anywhere Fulfillment:

0 Increased availability by aggregating information-$ Shorter response time0 Increased choice of delivery options

Payment:0 Efficient funds transfer may improve cash flow

Facility costs:$ Site costs: eliminate intermediaries or retail anddistribution warehouses-$$ Processing costs: customer participation, smoothedcapacity requirements

Inventory costs:0 Reduce cycle stock (geographic centralization)0 Reduce safety stock (statistical aggregation)0 Postponing product differentiation to after orderplacement

Transportation costs:0 Inbound-$$ Outbound

Information sharing improves supply chain coordination:0 Reduce bullwhip effect0 Shared planning and forecasting

Scale: -$$, -$, 0, $, $$: from very negative impact (-$$), over marginal (0), to very positive (+$$).Figure 6: The scorecard for on-line grocer Peapod.com.


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storage boxes with keypad access system at theircustomers.)

The greatest opportunity of an e-channel,however, may be for incumbent supermarket chains,which already own the regional distribution centers.They can set up the additional e-channel as a focused"plant-within-a-plant" to expand the value offering. In

addition to picking themselves, customers could chooseto have supermarket personnel pick the order from theshelf but the customer provides outbound transport, or,the supermarket could provide home delivery at thehighest price. Among supermarket chains, Albertsonshas taken the lead at combining e-business withtraditional supermarkets. Part of the store is a fulfillmentcenter for online orders, while the other part is asupermarket. This allows the firm economies of scale oninbound transport while keeping delivery distances tocustomers short on outbound. Our analysis wouldsuggest that such dual-pronged approach is the mosteffective positioning of e-business in mass-marketgroceries where pure online grocers are likely to be lesseffective.

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

W.W. Grainger is a business-to-business distributor of maintenance, repairs and operating (MRO) supplies,ranging from consumables like machine lubricants tohardware items like nuts and bolts for repairs. Graingeris famous for their 4-inch thick catalogs with thousandsof parts that customers could order over the phone or buyat one of the 380 branches in the U.S., which are similarto a large retail store. In 1995, it set up Grainger.com,allowing customers to place orders on its website thatoffers over 200,000 products.Going on-line provides considerable revenue

opportunities: 24-hour access for order placement with avery large selection available through easy electronicsearch. Product information is updated easily, allowingprice and promotion flexibility. New products can beadded to the "virtual catalog" immediately, drasticallyimproving time to market. Allowing industrial customersto place order anytime is a considerable convenience fornight shifts, who no longer have to notify day purchasingto place orders, but now can do it immediately,drastically reducing their response time. Not only candelivery times be estimated for each order using up-to-date inventory status, the customer also can be alertedautomatically (through email) regarding order status. Adownside of on-line ordering is increased ease of comparison shopping, which is expected to drive downprices and margins. Yet Grainger realized that it is betterto cannibalize its own brick and mortar channel than tolet others do it.

Considerable cost opportunities exist comparedto the phone or mail order channel: order taking costsreduce as the customer participates. More importantly,errors are greatly reduced as duplication of data entry iseliminated. Catalog-printing costs reduce significantly.Inventory and transportation costs are marginallyimpacted, as the fulfillment system remains largelyunchanged. By integrating the suppliers, synchronization

over the entire supply chain can be improved as customerorders automatically trigger supply orders wheninventories need replenishment. Inventory and facilitycosts at Grainger will not change significantly by goingonline unless it decides to close some of its branches.

Online sales by Grainger also offer a significantcost reduction opportunity for buyers. Ordering costs

drop significantly and buyers can allow end users toorder directly, improving response time and decreasingerrors.

The sale of MRO supplies is an example wherethe Internet is ideally suited to eliminating theweaknesses of the current system. The basic supplychain remains unchanged but going online allows bothbuyers and sellers to decrease the transaction cost of placing and fulfilling orders and increase the productportfolio. The use of the Internet to replace existingchannels of order placement is likely to grow at asignificant pace in the B2B arena.

B2B Auctions in Procurement: Internet Exchanges

Internet exchanges create electronic markets andcommunities where firms can obtain information and buyand sell products. Not only do they act as on-lineauctioneer, they may also inspect and 'approve' (certify)bidders or suppliers along various non-price factors.

At first glance, the greatest benefit of anInternet exchange is to buyers who have the ability tosearch across multiple suppliers when looking to procurean item. By substantially lowering barriers to entry in thebidding process, Internet auctions drive down supplyprices. Lower prices are the cost of wider demandmarkets to suppliers. This seems to imply that all buyersof commodity products may benefit from purchasing atauction exchanges. There are, however, considerable

downsides to this approach if it is implementedindiscriminately. Purchase of all products using auctionsmay lower the purchase price but will tend to increase thetotal cost of purchase for a firm. The ability to lowersupply chain costs requires long-term relationshipswithin the supply chain. Indeed, the movement towardslean operations, as exemplified by Dell, heavily dependson a few suppliers who become "long term partners." Inthe auto industry, the last two decades of the twentiethcentury focused on improving supply chain relationshipsso that suppliers and auto manufacturers could workclosely to improve the way products were designed,manufactured, and delivered. Chrysler significantlyimproved its performance by getting suppliers involvedin the design phase of a new product. This level of supplier involvement is only possible given a long-termrelationship between suppliers and manufacturers.

Thus, core products that a buyer requires insignificant and steady quantities should not be handledthrough a bid or auction process hosted by anintermediary. Direct e-business between the buyer andseller should be used in this setting to reduce transactioncosts of order placement and fulfillment and improvedinformation exchange during order fulfillment as well asproduct design. A good example of this approach is Delland its use of e-business when dealing with its suppliers.


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Dell does not use the Internet to create a marketplacewhere suppliers compete against each other for ordersfrom Dell. Dell uses the Internet to exchange demandand inventory information with its suppliers. This allowssuppliers to set appropriate production levels and helpthe Dell supply chain to better match supply and demand.

When it comes to utilizing excess or surplus

capacity (i.e., any capacity left after utilizing basecapacity), the story is very different and on-lineauctioning may provide significant opportunities.Exchanges provide the ability to aggregate and display allavailable surplus capacity across an entire industry. Assuch, a market is created to better match surplus capacitywith unmet demand. For example, a manufacturer inneed of unforeseen additional transportation may placean emergency shipment out to bid if their regular truckingcompany has no trucks available. By matching uncertaincomponents in demand to aggregated surplus capacity(supply), online auction markets may improve the overallmatch of demand with supply obtained from long-termcontracting. Our analysis would suggest a two-prongedpurchasing strategy: for stable, recurrent demands theInternet focus should be on reducing transaction costsand improving supply chain performance, while onlineauctions may be used to satisfy uncertain demand wherethe value of aggregation is the greatest.

Incentive problems and credibility suggest thatthe auction market is best provided through anintermediary. The key issue may be to account for thetotal cost in the auction, including product,transportation, and other relevant costs. For example, if aseller is offering a stamping press currently in NorthernItaly, an offer from that region is more attractive that anidentical offer from Belgium if the seller incurs thetransportation cost. While incorporating such non-pricefactors may be automated for more commodity products,

it is much harder for customized products.

Conclusions and Guidelines

The scorecard provides a tool to analyze theimpact of the e-channel on a supply chain and how it isbest positioned. It also indicates detailed areas forpotential concern, which must be considered whensetting up an e-business.

From a supply chain operations perspective, theanalysis suggests some guidelines that may help the e-business in practice:

Think about integrating the Internet with theexisting supply chain network, rather than setting

up a separate e-business. Integration will leverageand improve current processes, while separatechannels may add inefficiencies to the supplychain.

Structure e-business logistics to accommodatepackages instead of pallets. The goal should be tomitigate the loss of economies of scale due toincreased volume in smaller sizes. This suggestsnew logistics opportunities such as orderconsolidation (merge in transit, mega distributors)and order pick-up sites.

Devise shipping pricing strategies that reflect thecosts of activities. Disregarding orunderestimating transportation costs hascontributed to the losses incurred by e-grocers todate.

Design the supply chain to efficiently handlereturns. Because the Internet cannot match the

traditional customer experience of touching,feeling, testing and even smelling the productbefore buying it, returns in an e-business willalways exceed those of traditional store.

Keep customers informed throughout thefulfillment and returns cycle.

M. E. Porter, "What is Strategy?" Harvard Business Review ,Nov-Dec 1996.

Documents

e Business Scmr