CHAPTER FOUR

Discussion Questions

1. What differences in the retail environment may justify the fact that the fast-
moving consumer goods supply chain in India has far more distributors than it has
in the United States?

India is a land of shopkeepers selling to over a billion consumers. The number of

retailers has been put at between 10 and 50 million. India is becomingly
increasingly Westernized, but it will be quite a while (if not forever) before
shopkeepers are supplanted by large retailers. The sheer volume of small store
owners requires a large number of distributors to service them. Distributors play
an important role by aggregating last-mile delivery to the small shops and also
aggregating collection of payables. The presence of distributors makes both
activities much more efficient than they would be if each manufacturer had to
perform both activities for all small shops. Poor infrastructure, although not
entirely a retail concern, is another reason why India may need far more
distributors than in the United States.

The younger generation in India, particularly the IT-rich areas of Bangalore and
Chennai, have far higher disposable income than the older generation and the rest
of the country. These young workers have very different retail habits and are
causing changes in India’s shopping and supply chain needs.

2. A specialty chemical company is considering expanding its operations into Brazil,

where five companies dominate the consumption of specialty chemicals. What
sort of distribution network should this company use?

If the expansion into Brazil is merely a sales operation, then distributor storage
with last-mile delivery is the best network design. If the expanded operations
include manufacturing capabilities, then manufacturer storage with direct
shipping is a strong possibility. Given the nature of the product, package carrier
delivery is not an option and retail storage with customer pickup is out of the
question since this is a B2B scenario. In-transit merge would be an option only if
the manufacturer established a network of plants in Brazil, perhaps focused
factories relatively close to each customer.

The chemical company has only five customers to serve; it would not require too
large an investment in logistical infrastructure to effectively serve all five without
intervention by a distributor. Their short supply chain would be easier to
coordinate due to the stable demands and information sharing that is possible in a
B2B scenario.

3. A distributor has heard that one of the major manufacturers from which it buys is
considering going direct to the consumer. What can the distributor do about this?
 What advantages can it offer the manufacturer that the manufacturer is unlikely to
be able to reproduce?

The two supply network designs that the distributor can propose to counter the
manufacturer’s proposal are the distributor storage with package carrier delivery
and the distributor storage with last-mile delivery. Both of these counter-
proposals offer higher-order visibility for the customer while having simpler
information infrastructure than with manufacturer storage. The response time for
both is excellent, and the customer experience is also superior to the direct model.
If the manufacturer is trying to provide excellent customer service, the increased
costs in transportation and potentially higher levels of inventory may be
acceptable tradeoffs.

4. What types of distribution networks are typically best suited for commodity
items?

For B2C settings, commodity items are available from many sources, and
customers expect them to be delivered quickly; if a supply chain can’t be
responsive, the customers will move on to the next source. A distribution network
designed for retail storage with customer pickup achieves quick response for
high-demand, low-variety products. Other commodity products can be effectively
distributed using distributor storage with last-mile delivery, which is also suited
for high-demand, quick-response products.

For B2B customers, commodity products are typically purchased in large

quantities and can often be delivered directly from the manufacturer to the
customer.

5. What type of distribution network is best suited to highly differentiated products?

The networks that are best suited to highly differentiated products are the
manufacturer storage with direct shipping and the manufacturer storage with in-
transit merge. Both approaches have the ability to aggregate inventories and
postpone product customization, which would help support a wider variety of
products.

6. In the future, do you see the value added by distributors decreasing, increasing, or
staying about the same?

It is doubtful that value added by distributors will decrease over time (at least as
long as product variety keeps growing); the nature of competition in all areas
would suggest that distributors that add less value would be winnowed out. It is
more likely that distributors will be asked to do more or may volunteer to do so as
a means of differentiating themselves from the competition.
7. Why has the online channel been more successful in the computer hardware
industry compared with the grocery industry? In the future, how valuable is the
online channel likely to be in the computer hardware industry?

The computer hardware industry is selling a constantly changing product that is

purchased on a per-household basis, less routinely than the commodity products
that make up groceries. Computer hardware is also more expensive than grocery.
A company like Dell can leverage the Internet as a marketing and distribution tool
to advertise new capabilities and options before bricks-and-mortar retailers can.
Dell also removes whatever intimidation (or frustration) factor might be
experienced by conversing with in-store sales representatives. Computers have a
very high value to shipping cost ratio, so the increased shipping costs when
compared to a traditional store are negligible. Groceries have a much lower ratio;
although in-store shoppers are incurring costs to pick up their groceries, those
costs are hidden in comparison to the delivery charge on an itemized bill from
Peapod.

The online channel will continue to be a valuable tool in the computer hardware
industry but its value is likely to diminish as hardware platforms become more
standardized with most of the customization occurring with software. Whereas
Dell only sold to customers online in 2000, by 2017 it sold most of its computer
hardware to consumers through third-party retailers.

8. Is the online channel likely to be more beneficial in the early part or the mature
part of a product’s life cycle? Why?

The online channel is more likely to be more beneficial in the early part of a
product’s life cycle. Online channel strengths include flexible pricing,
promotions, and product portfolios and greater speed in disseminating product
information. The online channel also allows the aggregation of inventories, which
is especially beneficial in the early phase of the life cycle when demand is
uncertain. Later in the life cycle, a product is likely to be a commodity, which
doesn’t play to the strengths of this channel.

9. Consider the sale of home improvement products at Home Depot or a chain of

hardware stores such as True Value. Which can extract the greatest benefit from
adding the online channel? Why?

Both entities and other hardware companies such as Ace are already online. An
article titled “Home Depot’s Self-Improvement – Company Business and
Marketing” by Eric Young in The Industry Standard, September 11, 2000,
indicates that Home Depot is the last major player to go online, but brings the
deepest pockets. Those of us that have stood in line with the contractors realize
that many of Home Depot’s items are ill-suited to a web enterprise and the
clientele is equally ill-suited. Contractor sales are such a significant portion of
 Home Depot’s sales in comparison with the mix at True Value, that it is likely
that True Value will ultimately benefit more from an e-commerce division.
The article goes on to say,
“Each chain is employing a slightly different e-commerce strategy. Whereas
Home Depot wants its site to replicate its merchandise mix, True Value limits the
number of items it offers online. For example, at True Value, Net shoppers won't
find products most people need in a hurry, such as toilet-tank fix-it kits. “You're
not going to wait three days to have it shipped so you can stop the water from
dripping into your neighbor's apartment,” says Neil Hastie, CIO at
[Link]. Also, these products are typically available at the local hardware
store where customers can pick them up quickly.

Ace Hardware, meanwhile, thinks bigger is better. Its site offers almost
everything in its stores, plus about 15,000 additional products. Ace's
supplementary online offerings are a windfall from its investment in
[Link], a Web-based home improvement site that handles Ace's online
sales. The two companies split online revenues. Ace joined forces with OurHouse
to get a leg up in e-commerce. "We didn't want to be left in the starting gate," says
Ken Nichols, a retail operations vice president for Ace.

Waiting in the wings is Lowe's, the nation's second-largest home improvement

chain. Like Home Depot, Lowe's wants to expand its online presence but is
approaching e-commerce slowly. Beginning in October, the retailer will offer a
wide selection in a limited number of categories, such as hand tools and
appliances. Lowe's will deliver Net orders directly to buyers or to the store closest
to the customer, again like Home Depot.

Meanwhile, Internet-only retailers are scrambling to win over customers, vowing

to compete against offline chains in price and selection. CornerHardware, for
example, says it currently has 125,000 products available—three times the
number available at an average Home Depot store.

The pure Internet players acknowledge that they don’t have the brand recognition
of Home Depot. But they hope to build their brands before Home Depot and the
other brick-and-mortar stores establish a strong online presence. Still, it's not clear
that any are benefiting from first-mover advantage. Already two Net pure-plays—
[Link] and [Link]—have gone under.”

10. [Link] sells books, music, electronics, software, toys, and home
improvement products online. In which product category does going online offer
the greatest advantage compared with a retail store chain? In which product
category does the online channel offer the smallest advantage (or a potential cost
disadvantage) compared with a retail store chain? Why?

Amazon’s greatest online channel advantage comes from the sale of products that
have high variety and are slow moving; they are able to list millions of book titles
 that a physical store cannot possibly carry on their shelves. Cost advantages for
Amazon are few and far between; the item price to shipping cost ratio for books,
music, and software is not as high as most consumers would prefer. While
Amazon has a cost advantage relative to physical stores for slow-moving books,
this advantage is reduced (or disappears) for best-selling books. Amazon certainly
has no cost advantage with music and software. Both are readily sold over the
Internet; it would behoove Amazon to partner with another Seattle-area company
to make this the norm.

Over time Amazon has added many other categories including electronics and
clothing. In both instances, Amazon has a significant cost advantage for niche
products relative to brick-and-mortar stores. For fast-moving products, however,
this advantage diminishes and in many cases disappears. For example, it is
impossible for Amazon to compete with Costco on price for fast-moving, low-
value products such as detergent. In these instances, Amazon can compete for
convenience-sensitive customers who are willing to pay a higher price for the
convenience of having their order delivered at home.

11. Why should an online channel such as Amazon build more warehouses as its sales
volume grows?

Amazon initially tried to run their entire book business with no warehousing
facilities, instead relying on other distributors to carry their entire inventory. Next,
Amazon ran their business out of a single warehouse in Seattle and discovered it
wasn’t feasible; the trade-off of responsiveness and cost was causing excessive
delays in getting products to customers. Now Amazon uses a hybrid of these two
systems, carrying items that it knows will sell in its own warehouses and letting
others carry items that have greater demand uncertainty. As Amazon’s business
grows, it should continue to establish warehouses to spread its facilities closer to
pockets of new customers, thus achieving better levels of responsiveness while
still maintaining its cost advantage. Moving closer to customers reduces the
transportation cost while being responsive.

12. Amazon has opened bookstores and announced the opening of convenience
stores. How can these traditional retail channels allow Amazon to complement its
online channel effectively?

The biggest challenge for the online channel is in being very responsive and being
cost competitive for fast-moving, low-value products. The physical stores offer
Amazon an opportunity to use the stores for such products. A bookstore can
provide a best seller quickly to a customer at low cost, whereas the online channel
can provide the remaining wide variety of titles to customers at low cost (though
with a longer delivery time).

Similarly for groceries, physical locations such as convenience stores (an Whole
Foods recently purchased by Amazon) complement the online channel by
providing fast-moving, low-value products to customers quickly and efficiently
(something the online channel has difficulty with). The online channel can
continue to serve convenience-seeking customers for such products, but more
price-sensitive customers and customers needing the product in a hurry can be
well served by the physical stores.

In the long run, Amazon also has a chance to use these physical locations as
pickup locations for online orders.