SCM-2230-A01-Introduction to Supply Chain Management

CHAPTER FOUR: Distribution Networks and Omni-channel Retailing

This document is adopted and modified from the course textbook [Chopra, S. (2019),
Supply Chain Management: Strategy, planning, and operation, 7th Edition: Pearson,
New York.] to facilitate and develop students' intuition of the concepts covered in the
course. The examples discussed and provided in the course are illustrated further in
this document, which helps students to develop their intuitive understanding of supply
chain concepts.

Discussion Questions and Answers

Q1: 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?

A1: 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 becoming 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 essential 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.

Q2: In the future, do you see the value added by distributors decreasing, increasing, or
staying about the same?

A2: 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.
Q3: 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?

A3: 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 groceries. A
company like Dell can leverage the Internet as a marketing and distribution tool to
advertise new capabilities and options before brick-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 compared to the delivery charge on an
itemized bill from Peapod (an online grocery delivery service ccompany).

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.

Q4: Is the online channel likely to be more beneficial in the early part or the mature part
of a product’s life cycle? Why?

A4: 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.

Q5: 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?

A5: 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 TrueValue.com. 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 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

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—Hardware.com and
HomeWarehouse.com—have gone under.”

Q6: Amazon.com 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?

A6: 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.

Q7: Why should an online channel such as Amazon build more warehouses as its sales
volume grows?

A7: Amazon initially tried to run its 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.

Q8: 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?

A8: 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 (the 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.