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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 in the United
States?

India is a land of shopkeepers selling to over a billion consumers. 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. 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. Poor
infrastructure, although not entirely a retail concern, is another reason why India may
need far more distributors than in the U.S.

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 utilize?

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

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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?

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.

5. What type of networks are 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; 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 e-business been more successful in the PC industry compared to the
grocery industry? In the future, how valuable is e-business likely to be in the PC
industry?

The PC industry is selling a highly customized product that is purchased on a per-

household basis, less routinely than the commodity products that make up groceries. 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.
E-business will continue to be a valuable tool in the PC industry; none of the advantages
currently being enjoyed by Dell and Gateway are likely to change significantly.

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

E-business is more likely to be more beneficial in the early part of a product’s life cycle.
E-business strengths include flexible pricing, promotions, and product portfolios and
greater speed in disseminating product information. 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. Who can extract the greatest benefit from
going online? Why?

Both entities and other hardware companies like Ace are already on-line. 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 on-line, 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 TrueValue.com.
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 OurHouse.com, 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

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benefiting from first-mover advantage. Already two Net pure-plays -- Hardware.com and
HomeWarehouse.com -- have gone under.”

10. Amazon.com sells books, music, electronics, software, toys, and home improvement
products online. In which product category does e-business offer the greatest
advantage compared to a retail store chain? In which product category does e-
business offer the smallest advantage (or a potential cost disadvantage) compared to
a retail store chain? Why?

Amazon’s greatest e-business advantage comes from book sales; 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. 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. Electronics, hardware, and even toys are products that most consumers
would like to experience before making a selection. Any cost advantage Amazon might
have in these sectors may be overshadowed by an inability to hold the item on-line.

11. Why should an e-business such as Amazon.com 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.

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