Supply Chain Management

(2nd Edition)

Chapter 18
E-Business and the Supply Chain

© 2004 Prentice-Hall, Inc. 18-1

 Outline
 The Role of E-Business in a Supply Chain
 The E-Business Framework
 The B2B Addition to the E-Business Framework
 E-Business in Practice

© 2004 Prentice-Hall, Inc. 18-2

 Role of E-Business in a Supply Chain
 E-business: Execution of business transactions
over the Internet
 B2C: Business to consumer
 B2B: Business to business

© 2004 Prentice-Hall, Inc. 18-3

 E-Business Transactions
 Providing information across the supply chain
 Negotiating prices and contracts
 Allowing customers to place orders
 Allowing customers to track orders
 Filling and delivering orders to customers
 Receiving payment from customers
 Placing orders with suppliers
 Paying suppliers
 These transactions were previously done through
other channels
© 2004 Prentice-Hall, Inc. 18-4
 The Impact of E-Business on
Supply Chain Performance
 Impact of E-Business on Responsiveness (which
primarily affects a company’s ability to grow and
protect revenue)
 Impact of E-Business on Efficiency (which
primarily affects a company’s costs)

© 2004 Prentice-Hall, Inc. 18-5

 Impact of E-Business
on Responsiveness
 Offering direct sales to consumers
 24-hour access from any location
 Wider product portfolio and information aggregation
 Personalization/customization
 Faster time to market
 Flexible pricing, product portfolio, and promotions
 Price and service discrimination
 Efficient funds transfer
 Lower stockout levels
 Convenience/automated processes
 Potential revenue disadvantage of e-business (for customers
who require a short response time)
© 2004 Prentice-Hall, Inc. 18-6
 Impact of E-Business on Cost
 Inventory
 Facilities
 Transportation
 Information

© 2004 Prentice-Hall, Inc. 18-7

 The B2C E-Business Scorecard
(Table 18.1)
Area Impact Area Impact
Direct sales Efficient funds
transfer
24-hour access Lower stockouts

Product portfolio Convenience

Personalization Inventory

Time to market Facilities

Flexible pricing Transportation

Price discrimination Information

++ Very positive; + Positive; = Neutral; - Negative; -- Very negative

© 2004 Prentice-Hall, Inc. 18-8

 Applying the E-Business Framework
 PC Industry
 Book Industry
 Grocery Industry
 MRO Supplies Industry

© 2004 Prentice-Hall, Inc. 18-9

 Revenue Impact of E-Business
on the PC Industry (Dell)
 Sells PCs directly to customers and starts assembly after
receiving a customer order
 Revenue disadvantage for customers who do not want to
wait or who need a lot of help setting up a computer
 Revenue advantages:
– Offer virtually unlimited different PC configurations
– Bring new products to market faster
– Fast at providing customized PCs
– Price flexibility
– Direct selling eliminates distributor and retailer margins
– Negative working capital
© 2004 Prentice-Hall, Inc. 18-10
 Cost Impact of E-Business
on the PC Industry
 Inventory costs – geographic aggregation,
postponement, dampening of bullwhip effect
 Facility costs – no physical distribution or retail
outlets; customer participation
 Transportation costs – higher outbound
transportation costs (PCs are shipped individually)
 E-Business impact for Dell (Table 18.2)
– Significantly improved performance
– Exploited every advantage provided by the Internet

© 2004 Prentice-Hall, Inc. 18-11

 The Impact of E-Business on Dell
Performance (Table 18.2)
Area Impact Area Impact
Direct sales ++ Efficient funds ++
transfer
24-hour access + Lower stockouts +

Product portfolio ++ Convenience =

Personalization ++ Inventory ++

Time to market ++ Facilities ++

Flexible pricing ++ Transportation -

Price discrimination = Information =

++ Very positive; + Positive; = Neutral; - Negative; -- Very negative

© 2004 Prentice-Hall, Inc. 18-12

 Value of E-Business for a
Traditional PC Manufacturer
 Potential value for traditional PC firm
 Use e-business to sell customized PCs that are
hard to forecast
 Sell standard configurations through traditional
channels
 Introduce new models on the Internet
 Allows lower inventory

© 2004 Prentice-Hall, Inc. 18-13

 Revenue Impact of E-Business
on the Book Industry (Amazon)
 Negative:
– An additional stage in the supply chain – the distributor (this
is more of a cost impact)
– Downward price pressure
– Does not attract customer who has a short response time
requirement or prefers to examine a book before purchase
 Positive:
– Offers millions of books
– Uses Internet to recommend books
– Provides reviews and comments from other customers
– Quickly introduces new titles
– Allows shopping 24 hours, 7 days/week
© 2004 Prentice-Hall, Inc. 18-14
 Cost Impact of E-Business
on the Book Industry
 Inventory costs – geographic aggregation of high-
volume books; purchases low-volume books from
distributor after customer order
 Facility costs – no retail outlets, but higher order-
processing costs
 Transportation costs – very high
 E-business impact at Amazon (Table 18.3)
– Mixed, few profits as yet
– There are not as many advantages to selling books on the
Internet compared to selling PCs

© 2004 Prentice-Hall, Inc. 18-15

 Impact of E-Business on
Amazon.com (Table 18.3)
Area Impact Area Impact
Direct sales = Efficient funds =
transfer
24-hour access + Lower stockouts +

Product portfolio ++ Convenience =

Personalization + Inventory +

Time to market + Facilities +

Flexible pricing + Transportation --

Price discrimination = Information -

++ Very positive; + Positive; = Neutral; - Negative; -- Very negative

© 2004 Prentice-Hall, Inc. 18-16

 Value of E-Business for a
Traditional Bookstore Chain
 Can benefit from setting up complementary
e-business
 Carry high-volume books in stores, sell low-volume
books online to take advantage of aggregation
 Provide access to online business in stores
 Can possibly use technology to print a book on
demand
 Can deliver books sold online to stores and allow
customers to pick them up there

© 2004 Prentice-Hall, Inc. 18-17

 Revenue Impact of E-Business
on the Grocery Industry (Peapod)
 Online grocer
 Selling convenience, especially in urban areas
 Specialty food stores also sell convenience
 Peapod provides a customized shopping
experience based on customer preferences, which
a supermarket cannot do
 Provides opportunities for targeted advertising;
selling information about customers

© 2004 Prentice-Hall, Inc. 18-18

 Cost Impact of E-Business
on the Grocery Industry
 Inventory costs: lower inventories, but aggregation is
limited because of the need for local fulfillment centers and
the fact that most groceries are staples with steady demand
 Facility costs: no retail outlets, but higher order processing
costs
 Transportation costs: higher transportation costs
– inbound and outbound transportation costs
– groceries have a relatively low value-to-weight ratio
 E-business impact at Peapod (Table 18.4)
– some revenue advantages but higher costs
– less cost advantage for groceries than for books or PCs

© 2004 Prentice-Hall, Inc. 18-19

 Impact of E-Business
on Peapod (Table 18.4)
Area Impact Area Impact
Direct sales = Efficient funds =
transfer
24-hour access + Lower stockouts =

Product portfolio = Convenience ++

Personalization + Inventory =

Time to market = Facilities -

Flexible pricing + Transportation --

Price discrimination = Information -

++ Very positive; + Positive; = Neutral; - Negative; -- Very negative

© 2004 Prentice-Hall, Inc. 18-20

 Value of E-Business for a
Traditional Grocery Chain
 E-business could be a beneficial complement to a
traditional grocer
 E-business used to offer convenience to customers
who are willing to pay for it
 Can offer a wide range of services at differing
prices based on the amount of work done by the
customer
 Albertson’s is an example of this approach

© 2004 Prentice-Hall, Inc. 18-21

 Using E-Business to Sell
MRO Supplies: Grainger.com
 Grainger is a distributor of maintenance, repair,
and operating supplies
 Traditional part of the business is through catalog
or in-person orders
 Also sells online:
– Grainger.com
– FindMRO.com
– OrderZone.com

© 2004 Prentice-Hall, Inc. 18-22

 Revenue Impact of
E-Business for Grainger
 Prices for MRO supplies will drop because of the
Internet
 But revenue enhancement for Grainger
– Customer can access all 220,000 items (limited to 80,000
in catalog)
– Searching for items is simpler on the Internet
– FindMRO and OrderZone allow the offering of a larger
variety of products
– A new product can be offered for sale as soon as it is
introduced
– Customers can place and check on orders anytime
© 2004 Prentice-Hall, Inc. 18-23
 Cost Impact of E-Business
on Grainger (MRO supplies)
 Inventory costs – slightly lower through
aggregation and lower lead times
 Facility costs – lower order processing costs,
some branches may be closed
 Transportation costs – no change likely
 E-business impact at Grainger (Table 18.5)
– Marginal improvement in revenue
– Decrease in order processing cost
– Benefits to customers

© 2004 Prentice-Hall, Inc. 18-24

 Impact of E-Business
on Grainger (Table 18.5)
Area Impact Area Impact
Direct sales = Efficient funds =
transfer
24-hour access + Lower stockouts =

Product portfolio ++ Convenience +

Personalization + Inventory =

Time to market + Facilities +

Flexible pricing + Transportation =

Price discrimination = Information -

++ Very positive; + Positive; = Neutral; - Negative; -- Very negative

© 2004 Prentice-Hall, Inc. 18-25

 The B2B Addition to the
E-Business Framework
 The wide variety of factors potentially important in
B2C transactions can be reduced to three principal
categories:
– Reduced transaction costs
– Improved market efficiencies
– Supply chain benefits

© 2004 Prentice-Hall, Inc. 18-26

 Transaction Costs: When E-Business
Will Have a Positive Impact
 Transactions are frequent and small in size
 Phone and fax are the current method of transmitting
orders
 A lot of effort is spent reconciling product and financial
flows

© 2004 Prentice-Hall, Inc. 18-27

 Improved Market Efficiencies: When
E-Business Will Have a Positive Impact
 Limited buyer/seller qualification is required
 A fragmented market exists with many competing
players either on the buy or sell side
 A large number of buyers/sellers can be attracted to
the online site

© 2004 Prentice-Hall, Inc. 18-28

 Supply Chain Benefits: When
E-Business Will Have a Positive Impact
 The bullwhip effect is quite significant due to
information distortion in the supply chain
 The supply chain as a whole achieves low inventory
turns and poor product availability
 Each stage has little visibility into either the customer
or supplier stage
 There is little collaboration in the supply chain in
terms of promotions and new product introduction
 Product life cycles are short

© 2004 Prentice-Hall, Inc. 18-29

 Application of the B2B
E-Business Framework
 Figure 18.4: The E-Business Value Proposition
 Figure 18.5: A Decision Tree Representation of the
B2B Addition to the E-Business Framework

© 2004 Prentice-Hall, Inc. 18-30

 B2B E-Business Value Proposition
(Figure 18.4)
Hard

Supply Chain Benefits

Ease of Implementation

Market Efficiencies
Easy

Reduced Transaction Charges

Low High
Value Created
© 2004 Prentice-Hall, Inc. 18-31
 E-Business in Practice
 Integrate the Internet with the existing physical
network
 Devise shipment pricing strategies that reflect costs
 Optimize e-business logistics to handle packages, not
pallets
 Design the e-business supply chain to handle returns
efficiently
 Keep customers informed throughout the order
fulfillment cycle

© 2004 Prentice-Hall, Inc. 18-32

 Summary of Learning Objectives
 What is the role of e-business in the supply chain?
 What are the effects of e-business on supply chain
performance?
 How can the e-business framework be used to
evaluate whether a company is a good candidate for
e-business and where the company should target its
e-business efforts?

© 2004 Prentice-Hall, Inc. 18-33