From Distribution Channel
to Distribution System &
Supply Chain Management
The e-Business opportunity
The distribution channel = a system of interdependent
organizations working together to build value as products
proceed through the channel .
3 ways to define the scope of the channel as a systems:
1. Consider distribution functions that are downstream from
the manufacturer to the consumer = definition of
2. Consider the supply chain upstream from the manufacturer
working backward to the raw materials = definition of the
3. Consider the supply chain, the manufacturer, and the
distribution channel as an integrated system = the value
chain = integrated logistics.
The supply chain includes upstream and downstream activities as
well as processes internal to the firm.
Supply chain management (SCM): coordination of flows in
three categories: material (e.g., physical product), information
(e.g., demand forecast), and financial (e.g., credit terms).
⇒ Flow = continuous stream of products, information, finances
flowing among the channel members.
⇒ Most important flow = information (creation of physical product
& financing depend on information.
E-Business: a way to manage this information flow
Raw materials enter into a
via a supply system and are
transformed into finished
Finished goods are then
supplied to the consumers
through a distribution
Several companies linked
together in the process, each
adding value to the product
as it moves through the
Products or services usually flow from
supplier to to customer.
Design and demand information usually
flow from customer to supplier.
Problem in SCM = decide which participant should manage a
channel composed of many firms:
⇒ Sun Microsystems: designs computers but doesn’t build any of
⇒ Sun manages entire supply chain + suppliers of its contract
⇒ Supply chain management software allows for cooperative
⇒ Customer demand information is visible to the suppliers
who then indicate what portion of the demand they can
Interoperability = important in SCM:
⇒ Participants have enterprise resource planning (ERP)
systems to manage their in-house inventory and processes.
⇒ When individual ERP systems share information with the SCM
system, coordination is facilitated in real time.
Channel Management and Power
Electronic data interchange (EDI) :
Is the computerized exchange of information between
organizations (eliminates paperwork).
⇒ Buyer logs onto the supplier’s computer system and types in
an order. The order is electronically conveyed to the supplier
and the buyer receives an electronic bill.
Is effective for establishing structural relationships between
The Internet has put a new face on EDI with the open
standards + interoperable systems:
The Internet replaced expensive proprietary networks =
Business can use the same computer to interface with
Networks of suppliers and buyers can more easily exchange
data using a Web-based interface.
The Bullwhip Effect
Stakeholders along the supply
chain have different and
frequently conflicting objectives.
Accordingly, they often operated
independently, resulting in a
phenomenon called the bullwhip
effect on demand and supply.
Mitigating the Bullwhip Effect
EDI and the Internet
The information available to supply chain
partners, and the speed with which it is
available, has the potential to radically reduce
inventories and increase customer service.
Relationships •Economic impact
•Partner strategic importance
Email-EDI-XML Industry Portal CPFR
Relationships Alliances Colaborative, planning
Aggregation Reverse Auction Exchange
Simple Leverage & Commodity
Buy Negotiate Trading
•Relative spending level
(Source: KPMG) www.congenio.it
The CPFR Opportunity
CPFR: A set of guidelines supported and published by the Voluntary
Inter-industry Commerce Standards (VICS) Association
Trading partners share their plans for future events, and then use an
exception-based process to deal with changes or deviations from
By working on issues before they occur, both partners have time to
A supplier can build inventory well in advance of receiving a
promotional order and carry less safety stock at other times.
A retailer can alter the product mix to reduce the impact of supply
Supply Chain Visibility
Collaboration Develop front-end agreement
Accurate forecast Create joint business plan
Lower inventory Create sales forecast
Identify and resolve exceptions
Create order forecast
Identify and resolve exceptions
Collaborative activities of demand, production, purchase planning,
forecasting, and inventory replenishment among supply chain partners
Retailers: higher sales, higher service levels, lower inventories
Manufacturers: higher sales, higher order fill rates, lower inventories, faster cycle
Lower product obsolescence/deterioration lower system costs
Culture, Control, Structure/architecture, Collusion
Data aggregation: Sectoral discrepancy, Temporal discrepancy
(Fliedner & Kim 2001) www.congenio.it
Outsource the process
From B2C to B2B
Product and Service Value as
Perceived by Your Customers
B2C: Convenience Versus Specialty
Example: common food items
Purchased less frequently
Example: Stereos, computers
B2C: Commodity-like and Digital
Same no matter where you purchase it
Price and ease of ordering are important
Examples: books, music, movies
Purchased and delivered over the Internet
Best product type for B2C e-commerce
Examples: Music, software
B2C: Mass Customization
Mass customization – the ability of an
organization to give its customers the opportunity
to tailor its products or services
Dell – customized computer purchases
Apple iTunes – only the music you want (not necessarily
the whole album)
B2B: MRO Versus Direct
Maintenance, repair, and operations (MRO)
materials (indirect materials) – materials necessary for
running a company but do not relate to the company’s
primary business activities
Similar to convenience items in B2C
Office supplies, repair parts, lubricating oils
Buyers in B2B make large purchases
Can then demand a discount (not true in B2C)
Can team up with other buyers to create demand aggregation
Demand aggregation – combining purchase requests from
multiple buyers which justifies a larger discount
Direct materials – materials that are used in production
in a manufacturing company or are placed on the shelf
for sale in retail environments
Relate directly to a company’s primary business activities
Quality, quantity, and delivery timing are important
Buyers can participate in reverse auctions for direct
Reverse auction – process in which a buyer posts its
interests in buying items and sellers compete by
submitting successively lower bids
The lowest bidder wins
B2B: Horizontal Versus Vertical
B2B e-commerce takes advantage of e-marketplaces
Electronic marketplace (e-marketplace) – interactive
business providing a central market where multiple
buyers and sellers can engage in e-commerce
Horizontal e-marketplace – connects buyers
and sellers across many industries
Primarily for Maintenance, repair, and
operations (MRO) materials (indirect
All industries need office supplies, travel, and
Vertical e-marketplace – connects buyers and
sellers in a given industry
Primarily for direct materials
Each industry has unique direct material
Textile and Clothing Industry
Supply chains in the textile and clothing industry tend to be complex
and very fragmented.
They consist of a number of discrete activities that are increasingly
organised in an integrated production network. Integration is both
horizontal and vertical, and companies tend to be specialised in
activities (e.g. sewing, finishing) or products.
Specialisation and location of these activities are key variables in
determining value added and margins of end products.
Each production activity involves a network of relations among
suppliers, third parties and customers. These relations are long standing
and performance (response time, quality and price) is not, as a general
rule, measured in order to enhance the overall efficiency.
This attitude, combined with the still widespread usage of traditional
means of communications (telephone, fax), limits the efficiency of
exchanges along the value chain.
In this picture, the deployment of ICT can lead to relevant efficiency
The prerequisite for online collaboration with external partners is the
digitalization of information to be exchanged. To allow for
automatic processing, information has to be digitalised in structured,
consistent and standardised formats.
This prerequisite is particularly critical in this sector where
production is carried out through numerous exchanges among
suppliers, sub-contractors and customers.
Electronic business can be really useful only where there is the right
degree of consensus between companies and industries on issues
such as product description or the order/payment process to be
described. Without this, there is the risk of a company’s IS not
understanding data sent by those of the trading partners
E-business Watch in Textile and clothing sector
(European Commission - 2005)
The EU textile and clothing sector is predominantly an SME-
based industry. Enterprises of less than 50 employees account for
60% of the workforce in the EU clothing sub-sector and produce
almost 50% of value added.
There has been a sharp decline in employment over the past
decades, together with a substantial rise in productivity brought
about by deep restructuring and the introduction of new
The level of e-business in the textile and clothing industry is
below average compared to other manufacturing sectors
The sector's e-Business Index – a compound indicator of ICT
adoption and e-business intensity – is close to that of service
sectors such as tourism and construction, but below
manufacturing sectors analysed by the e-Business W@tch (2005).
The textile and clothing industry is dominated by small and
medium enterprises. Small company size is reported as a main
reason by many firms which say that e-business does not play a
significant role in their operations.
Data also show a clear dichotomy within the industry itself. While
medium and large companies appear to be fairly well equipped
with ICT infrastructure, small and micro enterprises still show
The use of advanced ICT systems in large textile companies is
quite in line with adoption rates among large companies from the
most advanced manufacturing sectors.
Examples are Enterprise Resource Planning (ERP) and Supply
Chain Management (SCM) systems.
It appears that a significant share of large textile firms have taken
the lead towards supply chain integration and online trading with
Adoption is demand-driven
The adoption of e-business in this industry is mainly demand-
driven. Pressure from distribution and business partners along
the value chain are the main motivations.
Companies are aware of competitive advantages related to e-
business, the most important of which is the possibility to gain
efficiency in a very complex and fragmented organisation
The main barriers to the adoption of e-business in this industry
are related to the negative market trends and the increasing
competition, which affect overall investment capacity at a
general sector level.
The growing international competition and quick changes in
market trends will eventually force companies to adopt more
effective solutions in response to these new strategic challenges
average investments reflect to a large extent the industry structure (SMEs)- it
is clear that investments per company are lower.
among large companies, for example, average ICT investments correspond
to those from firms in the food and automotive industries, whose large firms
are known to be intensive users of ICT.
Internal and External collaboration
Quite low percentages, considering the number of players normally involved in
the value chain. Solutions supporting structured exchanges are not still widely
spread in this industry. This kind of solution is mainly used by large companies,
often operating in different phases of the supply chain.
SMEs which are often focused on a single apportioned phase still rely on
traditional instruments such as telephone and fax, only e-mail has been recently
included as a more sophisticated mean of information.
E-Procurement and Supply Chain integration
Efficient management of procurement is a fundamental
activity along a sector value chain which is very complex and
fragmented. Due to the large number of transactions, even
slight improvements in this domain can produce significant
Online procurement can be carried out regardless of a real
integration of systems with suppliers, for instance by making
orders from a supplier's website. It is often the first step
towards a more comprehensive and integrated use of ICT in
ICT solutions used for e-procurement
Most of the companies use standard software packages or rely
on ad-hoc developed solutions.
IT solutions like e-marketplace or online trading platforms,
software services provided by Application Service Providers or
functionalities offered through provider sales solutions are less
The rather low use of e-marketplaces reflects the limited
number of marketplaces in the textile and clothing industry.
According to ICE e-Market Services Italia, there are 45
emarketplaces (www.emarketservices.com) worldwide. This
figure is quite low, both in absolute terms and in comparison to
other industries, given the sector’s size and importance in the
for the large majority (79%) of firms (weighted by number of firms),
the usage of e-procurement has had no impact on the number of
suppliers which have remained the same.
1. The slowdown in the market is compelling companies to
examine which areas can deliver cost takeouts and improve
2. A 5% reduction in spending can have the same impact on
bottom-line profits as does a 30% increase in sales
3. procurement cost reduction is something which is within
ones control while sales increase in dependent on external
4. Procurement costs form 50-60% of the cost of goods sold
5. Sourcing-&-Procurement is one of the last completely un-
automated parts of the modern organization.
6. The next killer application is e-sourcing and e-procurement
because of the tremendous cost savings it can generate
Benefits of eProcurement
For a hypothetical organisation a 5 % reduction in procurement costs
increases profitability by 27%, a 10% by 55% and a 15% by 82%.
Reduction Baseline 5% 10% 15%
Revenue 1000m 1000m 1000m 1000m
Material Cost 550m 523m 495m 468M
Labor 225m 225m 225m 225M
Gross Margin 225m 252m 208m 307M
Operating Expenses 125m 125m 125m 125M
Net Income 100m 127m 155m 182M
(Before Taxes) 27% 55% 82%
E-Business in the distribution channel
Sector-specific factors that currently influence the efficiency of development
and production processes are:
short life cycle,
changing customer patterns,
the need for systems that can efficiently handle small orders and production
batches, reduced lead times and rapidly changing production parameters.
A major challenge is matching supply with demand; therefore there is an
increasing need for streamlining interfaces between manufacturing and
Especially in the fashion market segments, it is essential to quickly adapt
production planning (which is often launched in the dark) to market trends
in order to decrease the risk of overstocks and to monitor customers’ trends.
There are diverse strategies which may support companies in dealing with
the issue of demand-driven production and lead time shortening. All of
them, however, imply the access to sales data which is as detailed and up-to-
date as possible.
BasicNet owns RobediKappa, Kappa, Jesus, Superga, K-
Sales (2003): 200 mln €
5000 models are created every year
Core business: not manufacturing but information flow
Licensing network: presence in 40 countries, which
means different consumer to which you are addressing
Pre-orders (licensing network)
Orders (licensing network)
Information flow management
After an informal briefing, preliminar sketches (Freehand)
are published in a dedicated web site
A group of manufacturers (coordinated by the Sourcing
Center) realizes some prototypes to verify the feasibility
Some of the prototypes are approved by BasicNet (others
BasicNet creates a virtual book (taking some digital shots of
the prototypes and modifying them with a package such as
Photoshop) in a dedicated web site
Licensing network can examine the virtual book, gives some
feedback, and communicate their pre-orders
This feedback allows BasicNet to focus only on the virtual
prototypes that meet the requirement of the licensing network
Samples manufacturing and presentation (14 weeks after the virtual
presentation) to the licensing network (“touch & see”, not virtual) in
order to collect the real orders
In such way a virtual warehouse is created, with the availability of
each products; the “virtuality” comes from the fact that the
manufacturers directly deliver the products to each licensing
From each licensing wholesale the products are delivered to the
retailers, or to the final customer (consumer) in case of online selling
The B2C: Kappastore
Sales (2005): 3,7 millions € (+30% on 2004)
40.000 orders processed
Web Site Network
Since 1999 in Rifle Jeans the relationship between
manufacturers and the company are managed through an
Extranet platform named C&T (contractor and third
60 manufacturers abroad
15% production in Romania
85% production in Cina, Indonesia, India, Greece and
Web based Order management
The supplier can log in a dedicated web site and examine
Net shipped (difference between order quantity and shipped
If the supplier is late, Rifle can decide to stop the
The web activity of the supplier is tracked; the supplier
must confirm the reading of the messages or file sent
Web based bar code generation
The supplier can download the bar codes and print them
Rifle can scan the bar code to track the goods delivered
to the warehouse
Products bar code and pack bar code
“Send lot” function
The supplier can input:
Number of products per pack
…and the web site:
optimizes packing expedition to minimize shipping costs
generate a pack bar code
send an e-mail to the Italian warehouse with the packing
list and all the details
No more fax! Subcontractor relationship management
during sample creation worked that way:
Before: 5 fax machine working 16 hours for 20 days
After: 15 minutes to send the same amount of
information to the subcontractors
The average cost per product of Staff dedicated to
manage the relationship with the subcontractors has
been lowered to 0,04 € (from 0,18 €)
Rifil SA is a Romanian supplier of yarn. In Romania, the production of yarns
for knitwear factories is covered by few companies
Company size (no. of employees): 400
Turnover in last financial year 42,000,000 euro
More than 150 customers: 90% are SMEs and 10% are large companies.
To face increasing competition from domestic and Asian competitors, Rifil’s
strategy focuses on vertical integration at group level, with the aim to assure
quality control while keeping price competitiveness.
More recently, the company has tried to differentiate its competitive
positioning through the provision of value-added services to its SME
Rifil has implemented a system for management orders, which is simple, easy
to use, requires minimum equipment on the customer side but, at the same
time, can improve and shorten the order-to-production cycle.
This order system is integrated with Rifil’s internal production system.
Significant time savings and reduction of errors have been achieved.
Rifil focused on the provision of value added services to the
small manufacturing companies which represent the core of
its customer base.
These customers rely on limited ICT equipment and poorly
structured organisation & production planning.
On the other hand, to remain competitive on the market they
need to be flexible and quickly react to market changes while
keeping quality standards.
To match these needs, Rifil implemented a new system for
ordermanagement, which is simple, easy to use, requires
minimum equipment on the customer side but, at the same
time, can improve and shorten the order-to-production cycle.
This order system is integrated with Rifil’s internal production
In November 2004, Rifil implemented a new order management
system: Rifil Order (first tested by the main customer – which is a
Rifil Order is a software application that allows customers to
monitor all the order phases from their PCs through a
broadband connection. The development of this software,
which was realised by a company belonging to Rifil Group,
lasted one month and the costs sustained for the development
were quite low.
As of April 2005, Rifil Order is managing about 30% of Rifil’s
total orders but the company is trying to push it among the
whole customer base.
The application is organised in four different sections
corresponding to the various phases in the order
and “ready to go” orders.
Rifil Order is integrated with the Rifil production
management application: confirmed orders are
automatically visualised in the production management
There, a control procedure is implemented which gives
the green light to the production program.
Before the introduction of Rifil Order, orders were received by
Rifil’s commercial department via fax and, more recently, via
Thanks to Rifil Order, the company has achieved significant
benefits in time savings and reduction of errors. Continuous
monitoring and real time updating of inputs to the production
system allow for quicker and more precise production
Moreover, the system allows reduction of manual errors
coming from both key accounts and from customers. The
latter are now forced to use for the definition of the
items/products to be purchased a standard language defined
by the company that is intended reduce the degree of
Rifil estimates that the overall management of the customer
base has been simplified: phone calls have been reduced by
70%. Moreover, key accounts benefit from significant time
savings because they are no longer compelled both to work
manually and to answer consumers’ telephone requests.
Rifil Order has been accepted by both internal and external
users. This aspect is a fundamental precondition in order to
integrate a new application in the company’s management
Thanks to Rifil Order customers can directly manage their
orders with the possibility of modifying them until they enter
the production process. Before the introduction of this
application, if consumers wanted to modify their orders, they
were compelled to phone Rifil’s key accounts or send a
fax/e-mail, with important time wastes for both the parties.
The full and large scale application of a completely
automated ordering system encounters a major barrier in the
difficulties of visualising colours on the PC screens currently
While the standardisation process, in terms of definition of
parameters, has improved remarkably, this is not yet as the
case for colour visualisation on PCs.
Customers who need to select colours of products have
three main possibilities:
1. select from Rifil’s colours folder and then insert the related code in
2. select from the Pantone folder and insert the related code in Rifil
3. send to Rifil a test of knitwear which Rifil will reproduce.
…needless to say, the latter is still largely applied.
An Italian medium-sized (207 employees, 20 millions euro)
clothing maker (Liolà) with a well-known brand
Vertically integrated: from the production of fabric, to dying
and printing, garment manufacture and distribution, mainly
through a own-brand sales outlet network.
Has adopted a strategy of control of the market through a
network of single-brand shops integrated into the company
information system with full visibility in both directions:
upstream and downstream.
In 2004, the company decided to automate both the sales
force and the mono-brand sales outlets.
The automation of the distribution process was carried out
with an aim to contain warehouse stock levels as tightly as
possible, supplying a continual delivery and thus ultimately
increasing both trade and consumer brand loyalty, through a
flexible and efficient service
The final aim is to create a continual flow of merchandise
at the sales outlets, through mechanisms to allow
maximum integration and planning through the various
phases of the supply chain that forms the Group.
These mechanisms allow a significant reduction in
production and distribution times by comparison to the
main competitors, which generally aim for production
The company/group is able to produce a high quality
garment in 8 days from raw yarn; only the most efficient
low-cost ready-to-wear manufacturers are able to equal
In 2004 the firm started order acquisition process
automation, through investments in IT in the following
Sales force: the agents (14 in Italy and 10 abroad), were equipped
with laptops, connected to the Liolà central warehouse via internet,
through a reserved site.
The own-brand sales outlets (100 in Italy and 60 abroad), are also
connected to the company warehouse using the same software
package used by the sales agents.
This package allows the visualisation of merchandise in the
warehouse and order placement, by inserting the garment
code in real time, and then receipt of merchandise the
following day, if already in stock at the warehouse, or if not,
within 8 days.
In this way the agents can manage the basic seasonal
catalogue orders (for all shops, both own and multi brand),
whilst the own-brand shops can manage the orders.
Sales process and sales outlet computerisation has allowed:
A significant reduction in trade stock and improvement in profits.
Liolà shops have the opportunity to substitute a proportion of unsold
garments with alternative garments. Essentially, the firm has calculated
that a Liolà own-brand shop is able to obtain the same profit as a
multi-brand shop, with a 25-30% lower turnover. This is due to the fact
that a traditional shop has to work with the merchandise it has in stock
and therefore face sales, unsold goods and devaluation of merchandise.
A reduction of the time that elapses between product design and
making the product available in the sales outlets, extending the just-
in-time concept to the entire production/distribution chain.
The satisfaction of increasingly personalised or segment-specific
needs, passing from traditional order-delivery cycles, with medium-
large consignments to few destinations, to cycles that allow various
consignments to several different destinations.
Essentially, this allows switch from a manufacturer-centred
model to one focusing on the customer.