SUPPLY CHAIN MANAGEMENT, I THUMBS UP! 1. What differences in the retail environm
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Question
SUPPLY CHAIN MANAGEMENT, I THUMBS UP!
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?
4. What types of distribution networks are typically best suited for commodity items?
5. What type of network is best suited to highly differentiated products?
6. In the future, do you see the value added by distributors decreasing, increasing, or staying about the same?
. Why has the online channel been more successful in the com- puter hardware industry compared with the grocery industry? In the future, how valuable is the online channel likely to be in the computer hardware industry?
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?
10. Amazon sells books, music, electronics, software, toys, and home improvement products online. In which product cate- gory does going online offer the greatest advantage com- pared 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?
11. Why should an online seller such as Amazon build more warehouses as its sales volume grows?
12. Amazon has opened bookstores and announced the opening of convenience stores. How can these traditional retail chan- nels allow Amazon to complement its online channel effectively?
Explanation / Answer
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.
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.
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.
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 the online channel been more successful in the com- puter 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 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.
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?
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.
10. Amazon sells books, music, electronics, software, toys, and home improvement products online. In which product cate- gory does going online offer the greatest advantage com- pared 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 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 online seller 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.
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