The Net Imperative By Elizabeth Daniel, Senior Research Fellow in Information Systems and Mark Barratt Teaching Fellow in Supply Chain Management
Electronic commerce is one of the most talked about subjects in business today. But unless organisations enable information to flow from their customers to all members of their supply chain, they are unlikely to reap the full benefits.
Electronic commerce promises businesses new ways of working, such as gaining more knowledge about their customers, transforming their internal business processes and increasing the visibility of demand in their supply chains. It is forecast to attract new entrants to many markets and even result in the restructuring of whole industries. Intercompany trade of goods over the internet is predicted to double every year over the next five years, surging from $34 billion to $1.3 trillion by 2003 (Forrester Research 1999). It is therefore imperative that managers take every opportunity to understand the implications of electronic-commerce for their own companies, and how they can develop an effective e-commerce strategy and an agile supply chain that will support this approach.
What is electronic commerce? The term is usually used to mean businesses trading either with their customers or their suppliers via the internet. The hype surrounding “e-commerce” has resulted in something akin to mass hysteria with organisations stampeding to have a web site, and then asking themselves what they do next. If they are managing to sell to consumers, then there is the sudden realisation that the organisation‟s back-office processes and supply chains have to be aligned to meet a new set of consumer expectations. Electronic commerce can, however, also be used to cover trading with an organisation‟s suppliers and business customers. In this sense, the term 2e-business” is more appropriate (see figure 1). The general concept of electronic commerce also covers related activities, such as the existing EDI (electronic data interchange) systems some companies have been
using for more than a decade, or the use of telephone call centres.
Figure 1. A model of electronic commerce.
Rather than define electronic commerce by the technology platform it sits upon, it is most powerful to define it by its intent. This is to allow the flow of accurate, timely and rich information, such as demand information stockholding levels, promotional information, or new product information, thereby creating visibility across organisations and their supply chains. In the ideal scenario, this flow starts with the consumer or customer, passes through the organisation itself and is shared with all organisations in the supply chain.
Why all the excitement? The excitement surrounding electronic commerce is not just hype created by the media; on the contrary, it stems from a recognition of the significant benefits that it can offer businesses, both existing organisations and new start-ups. Electronic commerce allows businesses to do the things they currently do, but to do them better. The simplest example - and where many businesses start their exploration of “e-commerce” - is that of companies using web sites to provide information about products and services. This information has traditionally been transmitted via printed brochures or via mass media advertising. A web site is not only likely to be cheaper to set up and update, it also allows customers to find the information on the particular product they require rather than
being bombarded with information about products they are not interested in. A web site even allows the organisation to customise the information provided to each individual customer.
However, the excitement also stems from the fact that electronic commerce (in the sense of e-commerce i.e. business to consumer) allows businesses to do things that were not previously possible. This has led to the formation of certain types of businesses, or business models, unique to the internet. One example is a company called LastMinute.com which sells goods and services at the last minute, such as theatre tickets just before the curtain goes up or tables in popular restaurants just before the reservation time. This business relies entirely on the unique features of the internet, that is the ability to publish information quickly and cheaply to a large, even worldwide audience. It would not be possible to run such a business by traditional means - the products and services offered would be obsolete before a paper listing could be printed and distributed.
A real win-win The ability to do new things via the internet is not confined to internet start-ups. It allows traditional, “bricks and mortar” businesses to do new things and in a way that benefits both the company and its customers - a real win-win scenario.
One obvious way that electronic commerce does this is by providing a number of new routes or channels through which goods or services can be sold. These additional channels are likely to give the company access to new consumers and business customers; and since the internet is a global medium, a company can easily access new geographic markets. To the customers of such services, the new channel provides additional choice and hence greater convenience.
If the product or service being sold can be digitised, such as music, software, news or most financial services, the internet also provides a route by which it can be distributed directly to customers. This adds to the customer convenience, since they can receive the product immediately and the company saves on distribution costs. An example of the
potential scale of savings can be taken from the financial services sector. A banking transaction made at an on-line bank is estimated to cost one-tenth of a transaction carried out in a traditional branch. With banks undertaking many millions of transactions each day, such savings are highly significant.
True dialogue with your customers! The internet offers businesses – whether they are on-line start-ups or more traditional businesses forms - an opportunity that may prove to be more valuable than the promotion, trading and distribution already described. It offers businesses the opportunity to communicate with their customers in a way not previously possible. For the first time, businesses will be able to have a two-way dialogue with their customers on an individual basis, wherever those customers are in the world. This was previously only possible for businesses operating a local service since it relied on face-to-face interaction.
Companies must therefore learn how to communicate with their customers in this way and also to act on what they learn, tailoring their communication, products and services offered to each customer. In every market sector, customers are becoming more demanding and less loyal to any single supplier. Electronic commerce is expected to exacerbate this trend, as customers can more easily shop around for alternative goods and services, which means that even greater power will shift from suppliers to buyers. Entering into a dialogue with customers in order to provide products and services that are tailored to their individual needs will be a key element in earning true customer loyalty.
New intermediaries Electronic commerce will not only shift power to better informed customers, it is forecast to have a significant impact on the companies supplying a particular market. If manufacturers can quickly and relatively cheaply promote and sell their products and services over the internet directly to the end users, then the role of intermediaries such as brokers, distributors and even retailers is unclear and such companies may not survive.
However, a new generation of intermediaries has already been born that companies wishing to undertake e-commerce must consider. An example is the internet service provider or ISP. If a customer wishes to access your on-line services via the internet, then they will have to pass through such an intermediary. The service that customers perceive your site to be delivering may therefore be more dependent on the ISP‟s service levels than your own. What is more, the future may well give rise to a whole new type of intermediary, one that acts on a customer‟s behalf to search for information about products of interest and to filter incoming offers from companies. An important feature of such new intermediaries will be trust, since a customer would wish to be certain that the products found and recommended were indeed the most suitable and not those most heavily promoted by the suppliers.
Home shopping is reborn! Home shopping is not new: some large, successful organisations have for many years been selling a vast range of products via mail order catalogues. However, the exponential growth in the number of users of the internet, combined with changes in society, is expected to fuel a rapid growth in home shopping, particularly in sectors that have not traditionally used this shopping format. In the US, for instance, sales of cars over the internet were worth $200 million last year.
The value of home shopping is estimated to be worth £68 billion by year 2003, but will only represent 8% of total projected internet revenue. At present in the fast-moving consumer goods sector, the home shopping market is dominated by retailers. Very few of these would claim to be profitable, because of a lack of dedicated distribution systems and the high level of flexibility required to handle orders.
There are a variety of issues that need to be resolved in this type of electronic commerce:
Where should the product be delivered: the drive for added value may bring about the need for alternative delivery locations such as the office, railway stations, or even petrol stations!
Security of delivery when customers are not at home: retailers will be forced to consider providing consumers with security boxes to enable deliveries. Product returns management: existing home shopping organisations face up to 40% product returns as consumers order more goods than they actually require. Conflicts with existing supply chain relationships: going direct to consumers could jeopardise existing channels to market via retailers. Supply chain relationships will need to become much more open and co-operative to support efficient and effective home shopping and delivery channels.
The role of people in the digital era: as sophisticated technology encompasses many organisations rather than individual ones, staff will need to have much broader skills and develop a „supply chain mindset‟
Branding: Organisations will need to determine strategies for both global and local market decisions. Whilst they may be selling globally, local customisation may still prevail.
Implications of price transparency: consumers around the globe will be able to compare prices more easily. Country specific pricing may disappear requiring organisations to dramatically rethink their pricing strategies
Order fulfilment: store-based order picking is not economical yet a distribution centre is not sufficiently flexible. Organisations will need to modify existing distribution systems, develop new ones or consider outsourcing to third/fourth party logistics providers.
RS Components Procurement and transaction processing costs are significant for many organisations. Internet-enabled technology offers the chance to reduce these costs by facilitating automatic processing of customer orders. It can also provide greater convenience and additional functionality to customers. An innovative example of such technology is RS Components. RS has moved from an expensive paper-based catalogue to a web catalogue that offers electronic procurement capability whilst significantly reducing order processing costs. (see http://rswww.com)
The transparent organisation Many businesses wish to reap the win-win aspect of electronic commerce described above, to better serve their customers, be they a consumer or another business, and make operational cost savings at the same time. The more information that can be provided to customers, the more they can use this information to serve themselves, and the more cost savings are likely to be made. For this reason, many organisations are now allowing customers to see into their internal operations by integrating their electronic commerce services with their existing internal IT systems. Such integration renders the organisation virtually transparent to the outside world! A good example of such systems is the parcel carriers such as FedEx and UPS that allow customers to track their parcels on-line.
The internet can also be used as a cross-company and supply chain interface to foster operationally efficient, connected, and co-operative relationships among manufacturers, suppliers, and distributors. Some major European grocery retailers are now beginning to share demand data, in-store inventory levels and promotional data with a growing number of suppliers over the internet, particularly in respect of order replenishment and promotions management. Enabling joint planning, product tracking, and more efficient promotions management, such systems are making supply chains much more responsive and agile.
Tesco: sharing information in the supply chain Lack of visibility in the supply chain is a significant barrier to reducing costs and improving service levels, and a major inhibitor of supply chain agility. UK supermarket Tesco has sought to overcome these barriers by sharing demand, promotional and stockholding information with its suppliers via an internet enabled extranet. Such information allows suppliers to monitor the level of their products in Tesco‟s distribution centres so as to enable more efficient replenishment, whilst improving in-store availability – a key factor for improving product sales. (see http://www.tesco.co.uk)
The challenge ahead Research currently being undertaken at Cranfield School of Management has highlighted the main challenges that managers face when considering electronic commerce developments. The key issues they raised included: understanding and providing a true value proposition for customers developing a coherent e-commerce strategy across the organisation understanding the impact on the supply chain developing an agile supply chain to support the electronic commerce strategy building a business case for electronic services raising the internal understanding of electronic commerce, particularly at senior management levels. Cranfield is currently undertaking a number of collaborative projects with major companies to address these issues.
Electronic commerce clearly offers both companies and their customers many benefits, but for organisations those opportunities also pose many challenges. For example, allowing customers or suppliers to see into your organisation via linked IT systems is not yet possible in many organisations because the necessary internal IT systems do not currently exist.
Brave new world The world of electronic commerce is an uncertain one. There are no fixed rules and boundaries to which organisations can adhere; they are faced with journeys into the unknown. What is clear is that organisations face enormous upheaval if they are to reap the potential benefits of electronic commerce. Putting in place the right strategy for electronic commerce, supported by agile supply chains capable of meeting the new forms of demand from business customers and consumers, will see the demise of many existing business. Organisations will need to initiate exploratory projects, separate from their existing businesses, and possibly as joint ventures with other organisations, to assist with the development of the necessary understanding. After the mists of uncertainty clear, only those brave organisations committed to learning the many painful lessons that trading in the digital era will bring, will take their place alongside the mass of new organisations that have appeared, unshackled by the vestiges of traditional business.