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 middlemens 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 5

Table 4.1: Restructuring the Automotive Distribution System

Area Retailing Strategy Allow customers to customize their car purchases online, track their orders. Develop auto manufacturing marketplace for all parts and supply purchasing. Allow for online financing and payments. Use online communication systems to inform, persuade and develop leads. Allow customers to use online systems to check financing, warranties, and service updates. Goal Reduce working capital by lowing inventory. Reduce transaction costs, speed data exchange, and lower prices through quantity discounts. Cut costs, speed payment flows. Improves efficiency by gaining insight to customers needs and design preferences. Improve service with instant access and collect data on customer problems. Suppliers

Financing Marketing

Customer service

Source: Kathleen Kerwin, Marcia Stepanek, and David Welch, At Ford, E -Commerce is Job 1, Business Week, February For use with Strategic Electronic Marketing: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 8

Table 4.2: Supply Chain Performance

Delivery Performance to Request
(% of orders)
Bestin-class Median

Upside Production Flexibility/Material Availability (# days)

Best-inclass Median

Total Supply Chain Costs

(% of revenue)
Bestin-class Median

Cash-to-Cash Cycle Time

(# days)
Bestin-class Median

Computers & Electronics Consumer Packaged Goods Defense & Industrial Pharmaceuticals & Chemicals Telecommunications

88.4 98.6 97.4 99 86.7

61 82.9 75 94.5 53.1

8.6 8.3 19.5 12.2 28

30 25.5 43.5 90 70

3.2 3.1 3.6 5.7 2.5

7.3 8.7 11.9 11.5 8.2

26 48 28.5 27 60.2

58.2 97.1 60.7 91.2 103.5

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: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 12

Figure 4.1: Distribution System

Intermediaries Warehouse Wholesalers Agents Retailers or Other Producers

Producer

Facilitators Shipping, Information Flows, Fund Flows, etc.

Consumer

For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 13

Figure 4.2: Bulk Breaking and Assortment Creating

Producer A B (facilitator aids the transaction) C

Wholesaler

(facilitator aids the transaction) Retailer A (Large) (customer and retailer transaction) Customers Location 1 A B C Unserved Market D E Location 2 F G H
Chapter 4 Slide: 14

B (Small)

For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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: Managing E-Business, 2e 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 16

Figure 4.3: Traditional Channel Intermediary Flows

Physical Possession Title/Ownership
PRODUCT SOURCE Promotion Financing Risking Ordering Payment CUSTOMER

For use with Strategic Electronic Marketing: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 19

Figure 4.4: Alternate Electronic Channels of Distribution

Producer A B (Extranets and cybermediaries aid the transaction) A C

E-Commerce Retailer

Customers

Internet and cybermediaries aid the transaction B C D E F G

Direct From Manufacturer
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Electronic intermediary

Chapter 4 Slide: 20

Figure 4.5: E-Business Distribution System

Physical Possession
Promotion PRODUCT SOURCE Ordering Financing Risking

Shipper

E-Business

CUSTOMER

Payment

Credit Card

Based on: Brad Kleindl, Virtual Marketing, Southern Business and Economic Review, Spring 1996, pp. 10-15.
For use with Strategic Electronic Marketing: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 25

Figure 4.6: Transfer of Electronic Payments (E-Payments)

Customer's Browser
Statement (credit card or purchase statement) Sends encrypted payment request (Credit card #, B-B voucher)

Vendor's Server
Information flow

Authorized online payment system Authorization Query

Payment Approval

Check for authenticity and funds for credit card or bank funds.

Customer's Bank
(credit card issuer or account holder) Verification of Credit
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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: Managing E-Business, 2e 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 browsers 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: Managing E-Business, 2e 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 individuals bills allowing them to make one payment online.
CheckFree (www.checkfree.com)
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 29

Table 4.3: Electronic Payment Options

Option Description Advantages Disadvantages

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.)

For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 30

Table 4.3: Electronic Payment Options

Option Smart Cards Description Enhanced credit cards that use a microchip to record information. Advantages Allows for enhanced security, micropayments, and the storage of additional information. Can be tied to PCs for payments. Allows for micopayments online. Disadvantages 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.

Technology not widely available or accepted by all retailers. Technology not widely available.

Wireless purchases

Some wireless Allows for devices allow for micropayments and purchases to be made security. and charged to a phone bill.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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 boys 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: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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 Ingrams customers. Recommend to Ingram if they should or should not start selling directly to the end user.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 35

Power Shifts to the Consumer

The Internet increases customers 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.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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.
For use with Strategic Electronic Marketing: Managing E-Business, 2e 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.

For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

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?
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 40

ALE #4.2: Outlining a Distribution System (1)

Who Ships: Who Promotes: How are orders taken Who finances Payment flow:
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Shipper:

Product Source:

E-Business

Customer:

Payment procedure

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.
For use with Strategic Electronic Marketing: Managing E-Business, 2e Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 42