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Webvan case study from Supply Chain Management

Webvan case study from Supply Chain Management

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  • 1. Webvan Case Study Submitted By: Ashwin Ramesh Hardik Doshi Himani Garg Punit Biyani
  • 2. What happened here? Why did the business fail so spectacularly?  Louis Borders in 1997 wanted to take advantage of people making purchases online  Raised approximately $800 million from private investors and the public via an IPO  Expected to breakeven in five quarters  Challenges compared to regular grocery stores :  Razor thin margins  Wide product range  Temperature requirements
  • 3. What happened?  Invested heavily in inventory forecasting  Wanted to avoid costs involved in stocking  Aggressive expansion  Extra costs incurred by Webvan DCs  Packing carts with customer orders  Delivering the ordered items  Projected annual revenue of $300 million per DC but all DCs operated at around 25 – 35% capacity  Bottlenecks include:  Misaligned totes  Misread displays  Incomplete orders
  • 4. Why Business failed?  Webvan tried to expand too quickly without maximizing operating efficiency  Too much money plugged into technology without working on increasing demand  Company should have worked on making existing operations more efficient
  • 5. What was supposed to happen?  A faster, cheaper & more efficient model of delivering items to customers.  Deliver goods within a specified 30 min window.  DCs will operate at breakeven capacity within five quarters of being launched.  Attract audience first and then monetize eyeballs to bring in additional revenues & do it on a global scale.  Economies of scale.  Inventory turnover 24 times annually as compared to 9 to 11 times in traditional supermarkets.
  • 6. On what basis Webvan’s founders and initial investors hoped for success of their venture??  No other online grocery store successful at that time and the inability of existing grocers to offer same day delivery.  Webvan founders planned to deliver the same day within 30-min delivery window. This was their Unique Selling Proposition.  Predicting Growth  International Data corporation estimated 177 mn web users by end of 2003.  Consumer purchases of online grocery to increase from 12.4 bn in 1998 to 75 bn in 2003.  Most people view grocery shopping as an inconvenient & nearly 55% of Americans considered time to be their most precious commodity.  35% of the market would buy groceries on the internet by 2003-04
  • 7. Were Webvan goals too ambitious?  Webvan entered into agreement with Bechtel to construct 26 expensive Distribution Centers across the country at a cost of $1B. The money spent on infrastructure far exceeded sales growth.  Acquired HomeGrocer.com, though for some analysts it was hard to believe the success of two weak companies merging up.  Despite realized losses, Webvan expanded in Atlanta, Sacramento, Chicago, New Jersey. No focus on minimizing losses and curb spending  Recruited a Dream team consisted of senior executives from Andersen Consulting, Yahoo!, Benchmark Capital, Sequioa Capital, etc. of which none had management experience in e-commerce.  Emphasized on 30-minute window delivery model; did not consider that many working customers would prefer their groceries delivered at home at night.
  • 8. “You don’t build a rocket to go halfway to Mars”  Webvan had invested over $1B in expensive DC’s  Bought software from Optum Inc. and Descartes System. Also hired 80 software programmers  Planned to spend up to 200MUSD on advertising  Over-confident about their plans  Webvan wished to increase their market share and hence invested heavily to attain their mission.
  • 9. What could the company have done differently to increase their chances of success?  Target fewer related products in a segment at a time instead of all products in the first go.  A Step by step approach to grow both organically and inorganically after evaluating the revenue structure.  Webvan spent 3 yrs and hired 80 software programmers. It was not a tried and tested model. Ideally a smaller pilot project should be developed and taken further if successful.  Webvan planned to invest $200m which was way higher than required. Changing advertising structure and channel might help.  Hire senior executives who have experience in similar domain  Probably think of relocating the store in a higher population area  Organize online food festival which will attract customers to their website
  • 10. Do you think large number of people will ever buy on internet?  Yes  Total US market--$650 billion.  63 million web users in united states at the end of 1998 were projected to grow to 177 million users by end of 2003.  Forrester Research projected that 5% of US household would be buying groceries online in a few years and Jupiter communications forecast says $3.5 billion.  55% of Americans considered grocery shopping as an inconvenience and time as their most precious commodity.  faster cheaper and more efficient way of delivering items to consumers.
  • 11. Do you think large number of people will ever buy on internet?  Lower price of purchasing—as no building cost and less operating stores which can be passed on to customers.  Order frequency.  30-minute delivery window.  Convenience of ordering anytime, pay by credit card and schedule deliveries.  Busy and high salaried employees would find it extremely useful.  Door to door delivery.
  • 12. What lessons do you take away from the Webvan story about the “dot-com era”?  Over ambitious goals  Simultaneous over expansion.  Due to dot-com era and online groceries has to do with last mile ecommerce they were able to raise lot of money initially from the market but failed badly when bubble blast.  Customers have weekly shopping ingrained in their behavior.  Mismatch between demand forecast and actual demand.  Losses kept on increasing due to capital-intensive business plan.  Failed to meet operating targets at many places quarter on quarter and it kept on accumulating.  Decreasing repurchase frequency