Download Chapter2: Understanding E

Chapter 4:
E-Business Distribution
Systems and Supply
Chain Management
For use with Strategic Electronic Marketing:
Managing E-Business, 2e
Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 1
LEARNING OBJECTIVES (1)
• Explain why distribution systems change.
• Describe the nature of distribution systems.
• Compare and contrast traditional
distribution systems and e-business based
distribution systems.
• Describe how channel relationships are
changing.
For use with Strategic Electronic Marketing:
Managing E-Business, 2e
Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 2
LEARNING OBJECTIVES (2)
• Outline how channel relationships are
changing.
• Discuss how power is shifting in
distribution channels.
• Explain how middlemen’s roles are
changing in the distribution channel.
For use with Strategic Electronic Marketing:
Managing E-Business, 2e
Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 3
Vignette: The Car Buying Game (1)
• Thinking Strategically
– Decide how important a test drive is before choosing a car
model to purchase.
– Investigate the way people make decisions to purchase a
car.
– When do customers start thinking about the model to
purchase?
– What type of information do customers gather before they
buy?
– Speculate on how the Web could help in the customer
decision-making process.
For use with Strategic Electronic Marketing:
Managing E-Business, 2e
Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 4
Vignette: The Car Buying Game (2)
• Thinking Strategically
– Contrast the traditional automobile business model
and the new e-business-age business model.
– Speculate on the future of Covisint.
– What are the advantages and disadvantages of
having a global automotive exchange for both the
manufacturers and the suppliers?
– Autobytel site (www.autobytel.com) GM BuyPower site
(www.gmbuypower.com) Covisint (www.covisint.com)
Carpoint (www.carpoint.msn.com) Ford (www.ford.com)
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 5
Table 4.1: Restructuring the
Automotive Distribution System
Area
Strategy
Goal
Retailing
Allow customers to customize their car
purchases online, track their orders.
Reduce working capital by lowing
inventory.
Suppliers
Develop auto manufacturing
marketplace for all parts and supply
purchasing.
Reduce transaction costs, speed data
exchange, and lower prices
through quantity discounts.
Financing
Allow for online financing and
payments.
Cut costs, speed payment flows.
Marketing
Use online communication systems to
inform, persuade and develop leads.
Improves efficiency by gaining insight
to customer’s needs and design
preferences.
Customer
service
Allow customers to use online systems
to check financing, warranties, and
service updates.
Improve service with instant access
and collect data on customer
problems.
Source: Kathleen Kerwin, Marcia Stepanek, and David Welch, “At Ford, E-Commerce is Job 1,” Business Week, February
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 6
Distribution System
• Channels of distribution provide a standard
of living for customers by moving products
from producers to users in the most cost
efficient manner possible.
– In traditional markets this has included producers
and intermediaries such as wholesalers and/or
retailers.
• Supply Chains are the flow of raw materials,
information, finances, and final products
through the distribution channel.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 7
New E-business
Based Distribution Systems
•
Characterized by:
– Electronic linkages between all distribution channel
members
– A greater reliance on cybermediaries and facilitators.
– A reduction in the number of traditional middlemen.
– Reduced inventory and shorter inventory cycles
– Tighter relationships between trade sellers and buyers.
– Power shifts from producers and retailers to the
customer.
– Lower prices and greater variety for the consumer.
– Greater responsiveness to the customer.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 8
Table 4.2: Supply Chain Performance
Delivery
Performance
to Request
(% of orders)
Upside Production
Flexibility/Material Availability
(# days)
Total Supply
Chain Costs
Cash-to-Cash
Cycle Time
(% of revenue)
(# days)
Bestin-class
Median
Bestin-class
Median
Bestin-class
Median
Best-inclass
Median
Computers &
Electronics
88.4
61
8.6
30
3.2
7.3
26
58.2
Consumer Packaged
Goods
98.6
82.9
8.3
25.5
3.1
8.7
48
97.1
Defense & Industrial
97.4
75
19.5
43.5
3.6
11.9
28.5
60.7
Pharmaceuticals &
Chemicals
99
94.5
12.2
90
5.7
11.5
27
91.2
Telecommunications
86.7
53.1
28
70
2.5
8.2
60.2
103.5
Source: Courtesy of the Performance Measurement Group (PMG), a subsidiary of Pitiglio Rabin Todd and McGrath
(PRTM). Based on a two-year benchmarking study of more than 110 participants. For more information contact PMG at
781-434-1470 or http://www.pmgbenchmarking.com.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 9
Distribution Channels Evolution (1)
• Channels of distribution evolve as new infrastructures
and consumer shopping patterns develop.
– In the 1800's Sears took advantage of newly developed
rail systems to build a retail empire by using catalogues
to offer customers products that were not available
locally.
– Sears' purchasing power allowed for a greater variety of
products, increasing their negotiation power and forcing
down the prices of the products offered to customers.
– In the second half of the 1900's customers took
advantage of improved highway systems to move to
suburbs, K-Mart followed and built a discount empire.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 10
Distribution Channels Evolution (2)
• Channels of distribution evolve as new infrastructures
and consumer shopping patterns develop.
– The growth of suburbs led to retail concentrations in
malls, which, in turn, fostered a shift in consumer
purchasing patterns.
– The growth of national franchises and malls helped lead
to the decline in retail sales in central business districts.
– Consumer acceptance of credit card use and 800
number phone numbers have allowed a multitude of
catalogue companies to offer niche products to
customers and sell directly to the home.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 11
What Is Distribution
• Intermediaries, such as wholesalers and
retailers, split large production runs into
small amounts (breaking bulk) and create an
assortment of products to offer a customer.
• Facilitators facilitate or help the flow of the
transaction by physically moving the
product, information, or funds through the
distribution channel.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 12
Figure 4.1: Distribution System
Intermediaries
Warehouse
Producer
Wholesalers
Agents
Retailers or
Other
Producers
Facilitators
Shipping, Information Flows,
Fund Flows, etc.
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Consumer
Chapter 4 Slide: 13
Figure 4.2: Bulk Breaking and
Assortment Creating
Producer
A
B
(facilitator aids the transaction)
Wholesaler
C
A
(facilitator aids the transaction)
Retailer
A (Large)
B (Small)
(customer and retailer
transaction)
Customers
Location 1
A
B
C
Unserved Market
D
E
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Location 2
F
G
H
Chapter 4 Slide: 14
Channel Functions (1)
• Physical possession: transferring the good or
service to the customer.
– This includes the warehousing process and the physical
movement of the product from the producer to the
customer.
• Title or ownership flow: when the customer
purchases the product or when they receive the
product.
• Promotion: allows for communication between
the channel members.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 15
Channel Functions (2)
• Ordering system: ordering system could be
through paper and pencil systems, or through
electronically controlled data interchanges.
• Payment flows: A customer may pay cash, or they
may use credit from other channel members by
postponing payments (i.e. due in thirty to sixty
days).
– The customer may also finance their purchase.
For use with Strategic Electronic Marketing:
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Chapter 4 Slide: 16
Figure 4.3: Traditional Channel
Intermediary Flows
Physical Possession
Title/Ownership
PRODUCT
SOURCE
Promotion
Financing
Risking
CUSTOMER
Ordering
Payment
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 17
E-Business Channel Systems (1)
• Mass Customization is the process of producing
individualized products at mass-production
speeds.
• Cybermediaries operate in electronic markets to
facilitate the exchange process.
– Facilitators help move the physical product:
• Trucking companies and overnight shippers.
– Facilitators help payment flows:
• Credit card companies and banking institutions.
– Facilitators help communication:
• Advertising companies or host ISPs.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 18
E-Business Channel Systems (2)
• Fulfillment includes the activities necessary to
deliver a product to a customer, including
everything from ordering to delivery.
• E-marketplace use e-business technology to
allow trading partners to buy and sell goods
and services electronically.
• Private Exchange same as an e-marketplace,
but only open to a specific firm or industry.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 19
Figure 4.4: Alternate Electronic
Channels of Distribution
Producer
A
E-Commerce
Retailer
Customers
B
(Extranets and cybermediaries
aid the transaction)
C
A
A
Electronic intermediary
Internet and cybermediaries aid the transaction
B
C
D
E
F
G
H
Direct From Manufacturer
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 20
Figure 4.5: E-Business
Distribution System
Physical
Possession
Shipper
Promotion
PRODUCT
SOURCE
Ordering
Financing
Risking
Payment
E-Business
CUSTOMER
Credit
Card
Based on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review,
Spring 1996, pp. 10-15.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 21
E-business Distribution
Development
• Electronic Channel Captain
– A channel captain is an intermediary that
organizes and controls the channel.
– Any company that can gain this position can
obtain the power over other members allowing
them to take a higher percentage of the overall
transaction costs.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 22
Physical Possession
• Physical possession requires physically moving
products from one location to another.
Federal Express Corporation (www.FedEx.com)
United Parcel Service (www.ups.com)
• Information intermediaries provide efficiency to
the channel by allowing shipping price
comparison.
TanData Corporation (www.tandata.com)
FreighQuote.com (www.FreightQuote.com)
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 23
Communication Linkages
• Communication between the firm and the
customer can be facilitated over the Internet
through the design of Web pages.
• Extranets are used to link businesses
together enabling communication between
companies and allowing for transactions.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 24
Payment Flows, Financing,
and Risk Taking
• Four parties at risk in electronic transfers.
–
–
–
–
The customer (end user)
The seller (business-to-business or retailer)
The producer
The transfer agent (credit card companies or
banking institutions).
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 25
Figure 4.6: Transfer of Electronic
Payments (E-Payments)
Customer's
Browser
Sends encrypted payment request
(Credit card #, B-B voucher)
Vendor's Server
Information flow
Statement
(credit card
or purchase
statement)
Authorized
online
payment
system
Payment
Approval
Check for
authenticity and
funds for credit
card or bank
funds.
Authorization
Query
Customer's Bank
(credit card issuer or
account holder)
Verification of
Credit
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Payment processor
(credit card or bank)
Chapter 4 Slide: 26
Electronic Credit (1)
• Secure Electronic Transaction (SET)
– Allows for the encryption of all transaction data. Merchants
never see the credit card number so it can not be stolen from
them and they can not fraudulently use the number.
• A digital signature
– An encrypted unique alphanumeric number related to a
document and the individual who send the document which
can be verified on purchase orders before transactions are
completed.
• Electronic signatures
– Include digital signatures and other metrics such as
passwords, biometrics, and other identification systems.
Electronic signatures have the same legal weight as hand
signed signatures
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 27
Electronic Credit (2)
• Micropayments
– Allows for paying small Web transactions.
– A software wallet requires that a buyer sets up an online account.
This allows an amount of money to be added to a Web browser’s
wallet.
• Smart cards or E-cash (electronic cash)
– Allow individuals to purchase without paper money.
– Smart cards use a micro-controller chip embedded in a card. A
number of devices such as parking meters, newsstands, vending
machines, pay phones, etc can read the cards and be used for
payment.
– Information on individual purchases can be captured from the
cards for the marketer's databases.
– Smart cards have been in use in much of the world except for the
United States where magnetic strip cards have dominated.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 28
Electronic Billing
• Electronic billing, or the sending of bills
and the allowing of making payments over
the Internet.
– Reduces costs for companies from up to $1.75
per bill to around 25 to 30 cents per bill.
– Online billing consolidation companies
consolidate an individual’s bills allowing them
to make one payment online.
CheckFree (www.checkfree.com)
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 29
Table 4.3: Electronic Payment Options
Option
Description
Advantages
Credit cards
Magnetic strip based
cards that allow
for charging
purchases.
Widely used and
Subject to fraud
accepted around
through number
the world.
theft, card
Infrastructure to
scanning, or card
read cards in place.
theft.
Debit Cards
Magnetic strip based Widely used and
Subject to fraud
cards that allow
accepted around
through number
for debiting
the world.
theft, card
purchases or cash
Infrastructure to
scanning, or card
withdrawals from
read cards in place.
theft. (PIN
checking
Uses PIN number
numbers offer
accounts.
for enhanced
additional
security.
protection.)
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Disadvantages
Chapter 4 Slide: 30
Table 4.3: Electronic Payment Options
Option
Description
Advantages
Disadvantages
Smart Cards
“Enhanced” credit
cards that use a
microchip to record
information.
Allows for enhanced
security,
micropayments, and
the storage of
additional information.
Can be tied to PCs for
payments.
Cards can be stolen,
but if linked to PIN
numbers or
biometrics security
can be enhanced.
Online
Wallets
Software based
payment system tied
to a PC.
Allows for
micopayments online.
Technology not
widely available or
accepted by all
retailers.
Wireless
purchases
Some wireless
Allows for
devices allow for
micropayments and
purchases to be made security.
and charged to a
phone bill.
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Technology not
widely available.
Chapter 4 Slide: 31
Relationship Development
• The search for channel members is a time
consuming and expensive.
– Once these relationships are established, firms
have an incentive to attempt to maintain the
best relationship possible.
– A firm must take into consideration the
behavioral aspects of channel relationships.
• Including: dependence, cooperation, conflict, power
and power bases, satisfaction, and relational
development.
For use with Strategic Electronic Marketing:
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Chapter 4 Slide: 32
Case 4.1: Britney Powers Chips
• Speculate on the future success of smart card
technology in the United States.
• Indicate the advantages these systems have over
credit cards.
• Outline the business model for the boy’s smart
cards.
• Were else could this type of application be used?
• How close are these payment systems to replacing
cash?
For use with Strategic Electronic Marketing:
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Chapter 4 Slide: 33
Power
• The Internet reduces the power of some channel
members by lowering dependency upon others.
• Transaction costs govern how much effort is used
to evaluate channel members as partners.
– Transaction Cost Analysis is the process of assessing
the overall cost of maintaining and finding new
relationships.
– A firm will stay with a current partner if the cost of
finding a new partner outweighs the benefits that can be
obtained.
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Chapter 4 Slide: 34
Case 4.1: Fighting for the Middle Position
• Thinking Strategically
– Consider the position of Ingram Micro.
– Explain why they exist in the channel by looking at the
benefits they provide to the seller and the buyer.
– Determine the long-term viability of Ingram.
– Consider if the manufacturers of software and hardware
could bypass Ingram.
– Consider Ingram’s customers. Recommend to Ingram if
they should or should not start selling directly to the
end user.
For use with Strategic Electronic Marketing:
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 35
Power Shifts to the Consumer
• The Internet increases customer’s power:
– The customer can become aware of a wider
variety of providers increasing the number of
alternative sources of supply.
– Customers are able to voice their opinions on
businesses and products at discussion sites and
business sites.
– Customers can use e-businesses to gain power
and lower prices.
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Chapter 4 Slide: 36
Channel conflicts
• A channel conflict exists when a company sells products
to the same market through more than one distribution
system. To avoid these conflicts manufactures have:
– Refused to supply online businesses.
– Set up e-commerce sites that offer different products
online.
– Offer products at the same price as retail outlets and
then adding a shipping fee.
– Offer product lines and services that distributors do not
carry.
– Press ahead with a commerce site.
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Copyright 2003 South-Western College Publishing
Chapter 4 Slide: 37
Death Of The Middleman
• Disintermediation is the process of eliminating
the middleman from the exchange process.
• Those middlemen most likely to be hurt will be:
– Those who do not add value to the exchange but are
only go-betweens, information brokers, or order-takers.
– Middlemen concerned about their careers should be
sure that they are able to offer value to the exchange
process.
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Chapter 4 Slide: 38
ALE #4.1: Lassoing Jeans Online
• Visit each of the sites:
• Lee Jeans (www.leejeans.com)
• Wrangler Jeans (www.wrangler.com)
• Arizona Jeans (www.arizonajeans.com)
• Levi Strauss (www.levi.com)
– Decide why these brands have adopted differing
strategies to using the Web in aiding distribution.
– Consider who owns the brands and how that may make
a difference in the chosen strategy.
– Why do you think Levi changed its strategy.
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Chapter 4 Slide: 39
ALE #4.2: Outlining a Distribution System (2)
• Describe the role of the e-business in the
distribution model.
• Explain how each function is performed.
• Determine if the cost of the product offered
is different from the cost of the product
available locally.
• Do you see any channel conflicts which
may occur with this system?
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Chapter 4 Slide: 40
ALE #4.2: Outlining a Distribution System (1)
Who
Ships:
Product
Source:
Who
Promotes:
How are
orders
taken
Who
finances
Shipper:
E-Business
Customer:
Payment
procedure
Payment
flow:
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Chapter 4 Slide: 41
Competitive Exercise 4.3:
Developing an E-distribution System
• Some businesses may find it is more efficient to allow
others to control some aspect of their distribution
functions. These businesses may turn to commerce service
providers or fulfillment companies for support. Assume
you or your team are going to present a distribution
strategy proposal to management.
– Evaluate fulfillment providers and determine which would be best
at providing support (use a search term such as e-commerce
fulfillment).
– Consider if a cybermediary fulfillment company is best at handling
services for small businesses or large businesses.
– Consider the risks of placing your inventory in a fulfillment
company.
– Contrast the pros of cons of developing these services in-house or
outsourcing. Make a final recommendation.
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Chapter 4 Slide: 42