Strategic Electronic Marketing: Managing E-Business, 2e ch04

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

Copyright 2003 South-Western College Publishing

Chapter 4 Slide: 1

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: 2

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

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Chapter 4 Slide: 3

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.

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Chapter 4 Slide: 4

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.

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Chapter 4 Slide: 5

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)

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Chapter 4 Slide: 6

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

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Chapter 4 Slide: 7

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.

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Chapter 4 Slide: 8

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.

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Chapter 4 Slide: 9

Table 4.2: Supply Chain Performance  Delivery

Performance to Request(% of orders)

Upside Production Flexibility/Mater-ial Availability(# days)

Total Supply Chain Costs (% of revenue)

Cash-to-Cash Cycle Time (# days)

Best-in-class

Median Best-in-class

Median Best-in-class

Median Best-in-class

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.

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Chapter 4 Slide: 10

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.

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Chapter 4 Slide: 11

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.

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Chapter 4 Slide: 12

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.

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Chapter 4 Slide: 13

Figure 4.1: Distribution System

Producer ConsumerFacilitatorsShipping, Information Flows,

Fund Flows, etc.

Intermediaries Retailers or Warehouse Wholesalers Other

Agents Producers

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Producer A B C (facilitator aids the transaction)

Wholesaler A

(facilitator aids the transaction)

Retailer A (Large) B (Small)

(customer and retailer transaction)

Customers

Figure 4.2: Bulk Breaking and Assortment Creating

Location 1A B C

Location 2F G H

Unserved MarketD E

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Chapter 4 Slide: 15

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.

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Chapter 4 Slide: 16

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.

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Chapter 4 Slide: 17

Figure 4.3: Traditional Channel Intermediary Flows

PRODUCT SOURCE Financing

Risking

OrderingPayment

CUSTOMERPromotion

Physical PossessionTitle/Ownership

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Chapter 4 Slide: 18

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.

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Chapter 4 Slide: 19

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

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Chapter 4 Slide: 20

Electronic intermediary Direct From Manufacturer

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

E-Commerce ARetailer

Customers

Figure 4.4: Alternate Electronic Channels of Distribution

Internet and cybermediaries aid the transactionA B C D E F G H

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

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Chapter 4 Slide: 21

Figure 4.5: E-Business Distribution System

PRODUCT SOURCE

CUSTOMER

Promotion

Physical Possession

Ordering E-Business

Shipper

Credit Card

FinancingRisking

PaymentBased on: Brad Kleindl, “Virtual Marketing,” Southern Business and Economic Review, Spring 1996, pp. 10-15.

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Chapter 4 Slide: 22

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.

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Chapter 4 Slide: 23

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)

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Chapter 4 Slide: 24

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.

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Chapter 4 Slide: 25

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).

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Chapter 4 Slide: 26

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

Customer's Browser

Payment processor(credit card or bank)

Customer's Bank (credit card issuer or

account holder)

Vendor's Server

Sends encrypted payment request(Credit card #, B-B voucher)

Information flowCheck for authenticity and funds for credit card or bank funds.

Payment Approval

Verification of Credit

Authorization Query

Statement(credit card or purchase statement)

Authorized online payment system

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Chapter 4 Slide: 27

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

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Chapter 4 Slide: 28

• 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.

Electronic Credit (2)

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Chapter 4 Slide: 29

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)

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Chapter 4 Slide: 30

Table 4.3: Electronic Payment Options

Option Description Advantages DisadvantagesCredit cards Magnetic strip based

cards that allow for charging purchases.

Widely used and accepted around the world. Infrastructure to read cards in place.

Subject to fraud through number theft, card scanning, or card theft.

Debit Cards Magnetic strip based cards that allow for debiting purchases or cash withdrawals from checking accounts.

Widely used and accepted around the world. Infrastructure to read cards in place. Uses PIN number for enhanced security.

Subject to fraud through number theft, card scanning, or card theft. (PIN numbers offer additional protection.)

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Chapter 4 Slide: 31

Table 4.3: Electronic Payment OptionsOption Description Advantages DisadvantagesSmart 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 devices allow for purchases to be made and charged to a phone bill.

Allows for micropayments and security.

Technology not widely available.

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Chapter 4 Slide: 32

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.

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Chapter 4 Slide: 33

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?

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Chapter 4 Slide: 34

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: 35

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.

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Chapter 4 Slide: 36

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: 37

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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Chapter 4 Slide: 38

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: 39

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: 40

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: 41

ALE #4.2: Outlining a Distribution System (1)

Product Source:

Customer:

Who Promotes:

Who Ships:

How are orders taken

E-Business

Shipper:

Payment procedure

Who financesPayment

flow:

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Chapter 4 Slide: 42

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.