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From Distribution Channel From Distribution Channel to ...

  1. 1. From Distribution Channel to Distribution System & Supply Chain Management The e-Business opportunity Distribution System 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 distribution channel, 2. Consider the supply chain upstream from the manufacturer working backward to the raw materials = definition of the supply chain 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. 1
  2. 2. Distribution System 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 more efficiently Material Flow Raw materials enter into a manuafacturing organization via a supply system and are transformed into finished goods. Finished goods are then supplied to the consumers through a distribution system. Several companies linked together in the process, each adding value to the product as it moves through the supply chain. 2
  3. 3. Information Flow Products or services usually flow from supplier to to customer. Design and demand information usually flow from customer to supplier. Distribution System Problem in SCM = decide which participant should manage a channel composed of many firms: ⇒ Sun Microsystems: designs computers but doesn’t build any of them ⇒ Sun manages entire supply chain + suppliers of its contract manufacturers. ⇒ Supply chain management software allows for cooperative coordination. ⇒ Customer demand information is visible to the suppliers who then indicate what portion of the demand they can handle. 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. 3
  4. 4. 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 businesses. The Internet has put a new face on EDI with the open standards + interoperable systems: The Internet replaced expensive proprietary networks = cost savings, Business can use the same computer to interface with multiple suppliers, 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. 4
  5. 5. 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. 5
  6. 6. E-Business Relationships •Economic impact •Partner strategic importance •Partner readiness/compatibility Low High Relationship Focus High Email-EDI-XML Industry Portal CPFR Simple Strategic Partnerships Relationships Alliances Colaborative, planning forecasting, replenishment •Product strategic •Technical complexity •Buying difficulty Aggregation Reverse Auction Exchange Simple Leverage & Commodity Buy Negotiate Trading Low Cost Focus Low High •Relative spending level •Price volatility (Source: KPMG) 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 plans. By working on issues before they occur, both partners have time to react. 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 problems. 6
  7. 7. CPFR 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 Order generation CPFR Collaborative activities of demand, production, purchase planning, forecasting, and inventory replenishment among supply chain partners Benefits Retailers: higher sales, higher service levels, lower inventories Manufacturers: higher sales, higher order fill rates, lower inventories, faster cycle times Lower product obsolescence/deterioration lower system costs Obstacles Culture, Control, Structure/architecture, Collusion Data aggregation: Sectoral discrepancy, Temporal discrepancy (Fliedner & Kim 2001) 7
  8. 8. E-Marketplace Outsource the process From B2C to B2B Product and Service Value as Perceived by Your Customers 8
  9. 9. B2C: Convenience Versus Specialty Convenience Lower priced Purchased frequently Example: common food items Specialty Higher priced Purchased less frequently Example: Stereos, computers B2C: Commodity-like and Digital Commodity-like Same no matter where you purchase it Price and ease of ordering are important Examples: books, music, movies Digital Purchased and delivered over the Internet Best product type for B2C e-commerce Examples: Music, software 9
  10. 10. 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 10
  11. 11. MRO Materials 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 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 11
  12. 12. Direct Materials Buyers can participate in reverse auctions for direct materials 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-marketplaces Vertical e-marketplaces 12
  13. 13. E-Marketplaces Horizontal E-Marketplace Horizontal e-marketplace – connects buyers and sellers across many industries Primarily for Maintenance, repair, and operations (MRO) materials (indirect materials) All industries need office supplies, travel, and the like 13
  14. 14. Vertical E-Marketplace Vertical e-marketplace – connects buyers and sellers in a given industry Primarily for direct materials Each industry has unique direct material needs 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. 14
  15. 15. In this picture, the deployment of ICT can lead to relevant efficiency gains 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 technologies. 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). 15
  16. 16. Size matters… 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 significant gaps. 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 business partners. 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 structure. 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 16
  17. 17. 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. 17
  18. 18. 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 overall savings. 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 business processes. 18
  19. 19. 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 common 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 ( 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 overall economy. 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. 19
  20. 20. Procurement Trends 1. The slowdown in the market is compelling companies to examine which areas can deliver cost takeouts and improve profitability 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 factors 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% 20
  21. 21. E-Business in the distribution channel Sector-specific factors that currently influence the efficiency of development and production processes are: product proliferation, 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 distribution. 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- Way Sales (2003): 200 mln € 5000 models are created every year Core business: not manufacturing but information flow management Licensing network: presence in 40 countries, which means different consumer to which you are addressing 21
  22. 22. Collection Development Stylist research Design Prototyping Pre-orders (licensing network) Samples manufacturing 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 rejected) 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 22
  23. 23. 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 wholesale From each licensing wholesale the products are delivered to the retailers, or to the final customer (consumer) in case of online selling (e-commerce) The B2C: Kappastore Sales (2005): 3,7 millions € (+30% on 2004) 40.000 orders processed 23
  24. 24. Web Site Network B-CONSUMER B-WHOLESALE B-RETAIL Rifle Since 1999 in Rifle Jeans the relationship between manufacturers and the company are managed through an Extranet platform named C&T (contractor and third parties) 60 manufacturers abroad 15% production in Romania 85% production in Cina, Indonesia, India, Greece and Turkey 24
  25. 25. Web based Order management The supplier can log in a dedicated web site and examine the order’s: Quantities Technical specifications Net shipped (difference between order quantity and shipped quantity) If the supplier is late, Rifle can decide to stop the remaining production 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 25
  26. 26. “Send lot” function The supplier can input: Number of products per pack Average weight Pack weight Pack dimension …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 The results No more fax! Subcontractor relationship management during sample creation worked that way: Before: 5 fax machine working 16 hours for 20 days (…transmission errors) 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 €) 26
  27. 27. Rifil ( 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 customer base. 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 system. 27
  28. 28. Rifil Order In November 2004, Rifil implemented a new order management system: Rifil Order (first tested by the main customer – which is a distributor) 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 fulfilment: new orders, pending orders, confirmed orders and “ready to go” orders. Rifil Order is integrated with the Rifil production management application: confirmed orders are automatically visualised in the production management system. There, a control procedure is implemented which gives the green light to the production program. 28
  29. 29. Results achieved Before the introduction of Rifil Order, orders were received by Rifil’s commercial department via fax and, more recently, via e-mail. 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 planning. 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 inaccuracy. 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 system. 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. 29
  30. 30. Color Visualization 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 used. 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 Rifil Order; 2. select from the Pantone folder and insert the related code in Rifil Order; 3. send to Rifil a test of knitwear which Rifil will reproduce. …needless to say, the latter is still largely applied. Liolà ( 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 30
  31. 31. 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 decentralisation. 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 these times In 2004 the firm started order acquisition process automation, through investments in IT in the following areas: 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. 31
  32. 32. Results achieved 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. Alexiè 32
  33. 33. Eurochildren 33