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Page 1: Online companies just wantjindel.com/wp-content/uploads/2017/09/2000_March... · ers and e-tailers to concentrate on core competencies such as produc-tion, marketing and sales while
Page 2: Online companies just wantjindel.com/wp-content/uploads/2017/09/2000_March... · ers and e-tailers to concentrate on core competencies such as produc-tion, marketing and sales while

Online companies just want

Theto feel fulfilled, but that

opportunity carries risk

for logistics providers

Promise•-commerce, e-business, e-taiiing, whatever "e" you want to call it.

Internet merchandising is booming. However, as Internet-based business-es are learning at great pain, once the sale has been made, the work hasjust begun. "Putting up a Web site is fine, but let's not forget the real

M work starts, when you've taken the order," says Srikant Srinivasan, chiefexecutive of online toy store KBkids. "You have to make sure the ordergets there, gets there in good shape and gets there quickly."

The lesson for the "e" merchants is that e-commerce begins, ends, lives or dieswith e-fulfillment. The recent peak buying and shipping season showed that fulfill-

•ment — the business of getting goods from manufacturers and merchants to con-sumers — was something that many e-tailers failed to consider. Hence, the countless horrorstories of online businesses unable to deliver on orders.

E-fulfillment has spawned an entire industry itself and, in fact,must be an integral part of any e-commerce plan. For logistics companies, this awakeningmarks new opportunity. Logistics firms such as the new UPS e-Ventures, GATX Logistics andASD Systems are seeking to take the headache of e-fulfillment away from e-tailers — for a fee.

By Satish Jindel

March 200O Air Car go W«» Id

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Shipper FocusE-Commerce

The goal is to allow manufactur-ers and e-tailers to concentrate oncore competencies such as produc-tion, marketing and sales while lo-gistics companies provide the criti-cal customer service component andwhat may turn out to be the onlyface-to-face encounter a consumerhas in a purchase.

Thus, e-tailers face a tough deci-sion. They can outsource their ful-fillment operation and sacrificesome cost competitiveness or theycan develop and manage a distribu-tion network of their own that isdependent on many variables.

Logistics companies, too, facetough decisions: they must be keen-ly aware of the goals of the e-com-merce companies, their businessplans, product characteristics andtheir needs across a large part of thesupply chain.

As e-commerce evolves, the fol-lowing three models are emergingfor distribution of products andmerchandize to e-consumers:

1. Manufacturers selling direct toe-consumer (The "Dell model,"for Dell Computers)

2. Group of manufacturers sup-porting an enabler to marketand manage the distributionof products to consumers(The "Amazon.com model")

3. Manufacturers working throughnational and local enablers us-ing brick and mortar facilitiesfor marketing and distributionto e-consumers (The "Webvanmodel," for the California-basedgrocery delivery operation).

The optimum e-fulfillment strate-gy is to develop a distribution net-work that is best suited to the entire

E-CommerceImplications of e-commerce distribution channels to manufacturers

Model Maintainbrandloyalty

Provide Reducesuperior supply chaincustomer linksservice

Dell High Low High

Amazon Medium Medium Medium

Local Low High Low

production and distribution process,including manufacturers' capabili-ties, location of production facilities,product attributes, purchasing pat-terns of online buyer and socio-eco-nomic profile of target e-consumer.To do that, retailers must look atnumerous questions:

Product characteristics• The physical attributes, such as

the weight, density, cube, shelflife, perishability, etc.

• The value of goods.

Purchasing patterns of e-consumers• Is selection driven by brand loy-

alty or price?• What is the frequency and pre-

dictability of purchases, such asare they impulse decisions forgifts or planned purchase for

Reduceinventory

levels

High

Medium

Low

Promote Transit timeother company between production

products and deliveryto consumer

High

Medium

Fast

Medium

Low Slow

periodic consumption? What arethe implications on deliverydensity and returns.

Manufacturers' abilities to handlee-commerce dynamics

• Geographic location of facilitiesby world region.

• Proximity of the facilities to thetarget e-consumer.

• Production process compatibilityto handle merge-in-transit.

• Relationship of production costto transportation cost.

• Scope of goods produced forbundling of items for a highertotal value per transaction.

• Value-added services performedby current distribution channel.

• Profit margin available for brick-and-mortar enablers.

Socio-economic profile of thetarget e-consumers

• The disposable income of thehousehold.

• Do both spouses generally workaway from home?

• Physical characteristics of theneighborhood in terms of densityand security.

Each model presents a set of op-portunities and challenges to themanufacturers of products, onlineretailers or current brick-and-mortarstores and to the logistics companiesthat facilitate the movement ofgoods between each link.

30 AirCargoVHorld March 2000

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Shipper FocusE-Commerce

Implications forManufacturers

E-commerce is forcing changes inthe distribution channels that

are requiring all parties — manufac-turers, distributors, retailers, con-sumers and logistics companies —to evaluate their value propositionand develop capabilities that willmeet the evolving demands of theInternet age.

Under longstanding distributionpractice, manufacturers havelargely let an enabler such asa wholesaler or distributormanage the logistics of get-ting the product from theproduction facilities to theconsumer.

This has created long-term relationships and tieswithin the distributionchannel that may not bemost suitable for the futurepresented by e commerce.

Yet many manufacturersare caught between protect-ing the current sales chan-nels and their need tochange for the future.

The change is even hard-er for companies that cannot see successful examplesof e commerce-driven distri-bution channels in theirown industry.

Although the Dell modelof direct sales to consumersappears to be most attrac-tive to manufacturers, itsapplication and successdepends on a proper matchwith product characteristics,purchasing patterns of con-sumers and socio-economicattributes of the consumer.

Other challenges and opportunitiesof each model include:

1. Manufacturer sells direct toconsumer (The "Dell model")

• Protects brand name of the man-ufacturer from being lost.

• Provides higher operating marginor lower product price by elimi-nating intermediaries.

• Enables bundling of productsfor greater penetration of cus-tomer budget.

ir cargo companies pinning their future onbusiness-to-business e-comme.ce deliveriesface a potential gold mine if a forecast by theGartnerGroup proves true.

According to the business technology con-sultancy, "B2B" e-commerce will grow from$145 billion in 1999 to $7.29 trillion by 2004,when that segment will account for 7 percent

of all global sales transactions. That would be a boonto transport providers because delivery companies

find such traffic, with its high density of deliveries,more profitable than business-to-consumer deliveries.

"The B2B explosion is imminent, fueled by a com-bustible mixture of investment financing, IT spendingand opportunistic euphoria that is being tunneledinto start-ups and brick and mortars' e-commerce ini-tiatives," says Leah Knight, principal analyst for Gart-nerGroup's e-Business Intelligence Services.

The GartnerGroup also predicts that companiesthat develop Internet-based B2B e-marketplaceswithin specific industries will drive the growth andaccount for 37 percent, or $2.71 trillion, of the B2Bmarket by 2004.

This year, the consultancy projects B2B e-commercesales will grow 278 percent to $403 billion. The groupsays sales will reach $953 billion in 2001, followed by$2.18 trillion in 2002 and $3.95 trillion in 2003.

— Brendan Sobie

• Provides ability to customize theorder to consumer specifications.

• Reduces role of traditional retail-ers, as the airlines have reducedthe role of travel agents.

• Could promote mergers and ac-quisitions in the consumer prod-ucts industry driven by needs ofthis new distribution channel.

2. Manufacturers supporting anational enabler to marketand manage the distribution

of products to consumers(The "Amazon model")• Gives greater leverage

to the enabler in settingproduct specificationsand price.

• Consumer loyalty mayshift from product brandto enabler service andquality image.

• As the enabler acquiresgreater influence over con-sumers, it may promotegeneric products underits own brand for highermargin over time.

• Operating margins forenabler will improve atthe expense of the manu-facturer.

• Requires an extensive net-work of distribution cen-ters with ability to ware-house inventory for multi-ple manufacturers.

3. Manufacturers workingthrough national andlocal enablers withbrick and mortar storesfor joint marketingand distribution toconsumers (The "Web-van model")

32 Air Cargo World March 2000

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Shipper FocusE-Commerce

• Requires investmentin marketing directlyto the consumers tomaintain customerloyalty for theirbrands.

• Rely on consumers'pull for sale of theirproducts.

• Requires brick-and-mortar enablers tofunction as a distribu-tion center for localdelivery and returns,and for regular retailactivity.

• The distributionchannel and logisticsinfrastructure re-mains largely un-changed for productsthat are either perish-able or require con-tact with the productprior to selection.

Logistified

The changes generatedby e-commerce repre-

sent equally significant opportunitiesand challenges for logistics and trans-portation companies such as GATX,ASD Systems, Logistix,Clickship.com, and a host of othersthat have sprung up to leverage thecapabilities of the Internet.

These companies are aggressivelyinvesting in warehouses and logis-tics software to handle the demandsof the e-commerce marketplace.However, to generate the demand,these companies will need todemonstrate to the manufacturersand enablers their understandingof what logistics requirements andcapabilities will be important to the

he air express carriers that once brandished ratediscounting in fierce battles for market share arenow using Internet strategy in a bid to get theupper hand.

United Parcel Service and Federal Express havebeen aggressively embracing the e-commerce banneras they announce supply chain and technologyinitiatives aimed at the new Web-based economy.

UPS touted its Internet capabilities in announcing asupply chain management deal with Ford Motor Co.aimed at cutting delivery times for Ford cars and even cre-ated something called UPS e-Ventures, a subsidiary aimedt incubating e-commerce companies.

In that announcement, UPS transformed its near-cen-tury of largely-generic parcel delivery into a "92-year her-itage of expertise in operational execution and logistics."

FedEx has focused mostly on its technological exper-tise, announcing initiatives such as a multi-carrier ship-ping system for its customers that includes FedEx andits competitors.

But UPS may have delivered the sharpest blow lastmonth at a government-sponsored forum on e-commerceand logistics. UPS Chairman Jim Kelly hosted the eventalongside John Morgridge, chairman of Cisco Systems.Aside from making the overwhelming majority of routersthat manage traffic on the Internet, Cisco is Federal Ex-press' highest-profile logistics customer.

—Paul Page

successful implementation of thenew distribution channel.

To handle the full scope of suchservices, some logistics companiesare developing relationships withother companies. For example,GATX Logistics has a relationshipwith InterWorld for Web site devel-opment and management whichcan help manufacturers sell directlyto the consumer. Similarly, ASD Sys-tem has capabilities appropriate forsmaller online retailers and catalogcompanies looking for marketingtheir products on the Internet.

The implications of each model onlogistics companies will vary depend-

ing on which models arebeing targeted for logisticssupport:

1. The "Dell Model"Dell Computer has

been successful imple-menting its direct salesmodel with help fromlogistics companies. Yetthese logistics companieshave not demonstratedsuccess in adapting themodel for other industriesand manufacturers.

Few manufacturers ofconsumer goods, electron-ics, personal hygiene andbeauty supplies have test-ed or adopted this model,largely because of a lack oflogistics expertise. Somethat have attempted touse the Internet to selldirect, such as Nike, havestruggled. However, com-panies such as Procter &Gamble, Gillette andJohnson & Johnson repre-sent huge opportunities

for application of this model.This model presents the greatest

growth opportunity for logistics sup-pliers, but it is also the most difficultto design and implement. The leadtime to create this opportunity isvery long due to institutional barri-ers such as reluctance to change, fearof upsetting current distributionchannel parties, and a fear of failure.

It also may require the greatestinvestment because of the need todevelop a network of fulfillmentcenters that are optimized for pro-duction facilities of manufacturersand the operation network for deliv-ery to consumers.

34 AirCargolAforld March 2OOO

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Shipper FocusE-Commerce

2. The "Amazon model"This is the most common model

currently in use for online retail sales.It also appears to be the common tar-get for logistics companies looking toparticipate in e-commerce. It is simi-lar to the traditional retail infrastruc-ture, providing for faster implemen-tation by both online retailers and bylogistics companies.

Logistics operators targeting thismodel will:

• Provide Web-based order man-agement service.

• Manage inbound freight of fin-ished goods.

• Allow for pricing comparison ofcomparable products.

• Handle merge-in-transit activityfor different products from sever-al manufacturers and distribu-tion centers.

• Manage inventory in motion formany different manufacturers.

• Provide warehousing and inven-tory management services.

• Handle delivery of productsthrough regional or national dis-tribution network depending onthe various characteristics forthe model.

3. The "Webvan model"For the growth and ability to real-

ize the potential for Internet-gener-ated demand for delivery from localbrick and mortar enablers, the same-day pickup and delivery infrastruc-ture will need to evolve rapidly. Thefragmented nature of same-day pick-up and delivery service has limitedachievement of delivery density,productivity and proper marketingto reduce cost of the service.

Logistics and transportationenablers that can bring the samelevel of technology, marketing, op-erational planning, managementtalent to same-day service that hasfueled growth of the express marketwill find that the pent-up demandfor this service with e-commercemodels can be greater than whatFrederick Smith envisioned forovernight service when he launchedFederal Express.

The capabilities needed for thismodel are:

• Greater investment in thebrick-and-mortar infrastructure.

• Handling of inbound freight forfinished goods.

• Management of a more tradi-tional distribution network withtruckload and less-than-truck-load deliveries to local distribu-tion centers.

• Optimization of stores to support

customer visits to view new prod-ucts and to handle exchangesand returns.

• Integration of the existing retail-ers into the online channel forsales to e-consumers.

• Handling same-day delivery ofgoods and pickup returns.

Strategicconsequences

Since most manufacturers havebeen slow to develop distribu-

tion channels for the new e-com-merce age, enablers like Amazon.comhave become the Wai-Marts of cyber-space, putting manufacturers' prod-ucts before an enormous and grow-ing audience of online buyers.

However, over time, these en-ablers will gain such influence withconsumers that the loyalty will shiftfrom manufacturer of product to theprovider. That will shift the balanceof power for pricing and productspecification from the manufacturerto the enabler. This should be ofalarming concern for manufacturersthat have the potential to adopt thedirect to consumer model but whofear disturbing their relationshipwith the enablers within their cur-rent distribution channels.

Common Aviation Areas:Pathway to Multilateral Open Skies or

Just a False Start?

Join top industry leaders in exploring these key issues.• Can the United States and the European Union ever get negotiating

mandates to make common aviation areas happen?

• Are governments ready to discuss common aviation areas?

• What becomes of alliances in the common aviation area

environment?

• Should cargo be the "test case" for common aviation areas?

9th Annual International Aviation Symposium May 10-12, 2000The Phoenician Resort, Phoenix, Arizona

P H O E N I X S K X H A R B O R INTERNATIONAL A I R P O R T

For more information call 602-273-8863, fax 602-273-8870, or register online at www.phxskyharbor.com

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Shipper FocusE-Commerce

Brand name loyalty cannot be un-derestimated. Consider that severalInternet companies spent $2 millionper minute on recent advertisingduring the Super Bowl simply todevelop name recognition. Procter &Gamble, Gillette and others can cap-italize on their already strong brandnames for products consumed dailyby American households.

By ignoring this opportunity,these companies also risk becomingproducers of generic products to besold under the brand name of Ama-zon.com, Webvan.com or other suchenablers. This is already occurringin the information industry whereAmerica Online, an information en-abler, is acquiring Time Warner, the

producer of information.Because the world's largest con-

sumer market remains in the UnitedStates, the implications are evengreater for overseas-based manufac-turers with strong brand name aware-ness in world markets. Companiessuch as Phillips, Unilever, Nestle,Cadbury and others will need signifi-cant assistance in the logistics area tostreamline their distribution chan-nels, eliminate non-value-added sup-ply-chain links, and speed delivery toconsumers to maintain their marketshare in an Internet-driven economy.

The internet recognizes no geo-graphic boundaries, but the fulfill-ment capabilities of the e-commerceparticipants will determine whether

they can capitalize on consumerappetites for their products.

With modern communicationsgrowing faster and reaching moredeeply around the world, the abilityto generate sales from consumersin far-flung markets may actuallyprove to be a relatively simple task.The more difficult task will be meet-ing such demand with the logisticsthat delivers the promise of techno-logical progress in a timely and cost-efficient manner.

Satish Jindel is a principal of SIConsulting, a Pittsburgh consultancyspecializing in package delivery, andhead ofShiprefund.com, an Internet-based software application for shippers.

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