Redesigning the supply chain for Internet shopping – Bringing ...
Redesigning the supply chain for Internet shopping –
Bringing ECR to the households
Department of Industrial Management
Helsinki University of Technology
Internet shopping is generally considered to grow in the future, however, the forecasts about the
growth rate vary a lot (US Department of Commerce, 1998; OECD, 1998). So far the main focus in
electronic shopping has been on the marketing, ordering, and paying processes. Logistical processes
have most often been based on the existing distribution structures causing additional costs to the
consumers. In this paper we argue that the major restricting factor for the growth of electronic
shopping is physical distribution and supply chain management. Internet shopping facilitates
significant redesigning of the entire supply chain from the factories to the households. It also enables
expanding ECR (Efficient Consumer Response) systems to the households by changing the logistics
control principles. Leading edge companies in the electronic grocery shopping sector such as
Streamline and Homeruns are already experimenting with new kinds of supply chain configurations.
Keywords: E-commerce, Logistics, Supply Chain Management, Efficient Consumer Response (ECR)
1. Emerging e-grocery business models
Until recently electronic grocery shops have offered extra value for customers only by doing home
deliveries. However, this is not enough if electronic grocery shops want to reach the critical mass of
consumers. This critical mass of consumers is looking for cheaper prices as well as better service.
This has led to the situation where almost every electronic grocery shop has had to reevaluate their
Customer service is still important, but low expenses have taken a more important role. Furthermore,
the word “service” does not mean only home deliveries any more. There are a lot more aspects of
service than home delivery in the electronic grocery. Customers appreciate things such as delivery
window, easy way of receiving and wide product range. This has led to a situation where we have two
different ways of operation in the electronic grocery markets. First, we have electronic grocery shops
that offer home deliveries as intermediators in the supply chain. Second, we have electronic grocery
shops that offer good service, but also cheaper prices for consumers. This second group of electronic
grocery shops have created a totally new channel between manufacturers and consumers.
Based on the pioneering e-Grocery businesses two basic strategies for e-Groceries can be identified:
• the intermediary model, where the e-Grocer offer consumers home delivery from local
• the channel model, where the e-Grocer creates a new channel that replaces the local
supermarket with home-delivery from a distribution center
There are many differences between the two business models. Table 1 lists the most important.
Difference Intermediary model Channel model
Home deliveries as an extra Integrate role of wholesaler
Role / mission service, from retailer or and retailer
To create new channel
Mode of operation Intermediary between manufacturers and
Customers’ “purchase” Customer inventory
Value offering point (quick delivery) management (“enough
Delivery frequency Order fulfillment, Replenishment, fixed
“order anytime” delivery frequency
Final dispatch point Retailer / wholesaler Local distribution center
Customer relationship Occasional / regular Regular customer
Products Brands A lot of “private labels”
Expenses High variable costs, low fixed Low variable costs, high fixed
Prices for customers High Low
Goal High customer service High customer service and
low prices for the customers
Table 1: The main differences between the intermediary and channel model
We have two good examples of these different business models. The first one is Peapod, Inc.
(www.peapod.com) which is the leading Internet supermarket in the US. The company provides
home deliveries in eight metropolitan markets and serves about 100 000 customers (Peapod, 1999).
Its strategy has been to take over the markets rapidly. Peapod has taken advantage of the existing
supermarket infrastructure and therefore this way to work requires a relatively small capital investment
to start (Macht 1996).
Peapod has worked many years in cooperation with local retail partners such as Jewel-Osco and
Safeway. This is why we can say that it has operated as an intermediator in the electronic grocery
markets. Peapod did not own warehouses, instead it picked products from the Jewel-Osco or
Safeway supermarkets. This is not very cost effective, but it is a strategy that allows you to quickly
move into new areas and cities. Thus, it is a fast way to increase sales volume.
The weakness in Peapod’s service is receiving of the products. Customers have to be at home to
accept the delivery, which is a major restriction for many customers.
The second example is Streamline, Inc. (www.streamline.com) which provides regular home
deliveries of groceries and other goods and services in the Boston suburban area. Streamline
purchases groceries straight from manufacturers and importers. Product are not filled out of existing
stores, but rather out of the company’s own Consumer Resource Center (CRC) (Dagher 1998).
Streamline’s operations are built only to serve internet shopping. Because the CRC is not designed
for shopping, picking and packing are faster and easier to do than in the supermarket. Orders are
delivered to consumer receiving boxes, which include three-temperature units. These “Streamline
boxes” are located for example in the customers’ garage. Streamline has a high service level and
furthermore it has created a new channel between manufacturers and customers that have lower
variable costs for home deliveries than when delivered from traditional shops. This will reduce the
costs of goods sold when sales volume increases. The weakness of Streamline’s service is the
delivery frequency. Streamline delivers products only once a week, which is not enough for all
Peapod has noticed that it can not compete against other electronic grocery shops by its current
operation mode. It has started to redesign the distribution channel by setting up its own centralized
distribution centers. Because the new structure has lower variable costs and the break-even point is
at higher level, they are lowering their service fees to the consumer to further stimulate demand
We can conclude that Peapods direction is away from the intermediary model towards the channel
model. The emerging model still has serious weaknesses, especially regarding tight time windows for
the receiving of the products in the household. If Peapod can solve the customer’s receiving issue, it
can plan better the distribution to the consumer as Streamline does. This can be leveraged for
leveling the workloads on the distribution centers and delivery vans. Another important aspect is that if
the receiving problem is solved and the value offering point is moved from customer purchase to
customer inventory management (replenishment) it also becomes easier to forecast customer
demand. This can then be translated in reducing inventory buffers in the whole supply chain.
2. The challenges facing the e-grocery supply chain
The Peapod and Streamline cases illustrate different strategies and operational modes for the
development of e-Grocery in its very early stages. They also show that there are a lot of potential to
improve both efficiency and effectiveness, and logistics is one of the key issues for reaching them.
This analysis combined with the analysis of the e-Groceries in Finland that are all still applying the
intermediary model, has lead us to conclude that the following are the key issues for building an
effective and responsive supply chain for the e-Grocery business:
• What is the most effective development path from the current retail business to dedicated e-
Grocery that minimizes risks and maximizes revenues?
• How can we leverage business-to-business collaboration to improve the efficiency and
responsiveness of the e-Grocery supply chain?
• How does the development of household resource planning applications affect the e-Grocery
• How can a supplier company effectively configure its own business for supporting different
These challenges need to be addressed in the right order and together. To do this the ECOMLOG
research program has been set up at the TAI Institute at the Helsinki University of Technology. The
research program coordinates four research projects addressing the above mentioned challenges
facing the e-grocery supply chain. The ECOMLOG research program was launched in April 1999, and
is to continue until April 2002. In this paper we will discuss the challenges of the e-grocery supply
chain in connection with the research agenda and the preliminary results from the research program.
2.1 Identifying a competitive development path for the Finnish grocery
The first objective for the research program is to identify a competitive e-grocery business model for
the Finnish market. The aim is to demonstrate how a Finnish retailer, based on the investments made
to the current structure of the grocery supply chain, can build up a channel model. The envisioned
model is, thus, a hybrid model combining the existing supermarket channel with a parallel home
delivery channel. The basic idea of the hybrid model is that the retailer changes a part of the shop to a
local distribution center for home deliveries while still keeping also the conventional store. The
assortment of the traditional shop is changed so that share of bulk products decreases and the share
of special products increases. The home delivery distribution center uses the conventional store also
as an inventory for slow moving items.
The first results from the research program indicate that the cost for the consumer to shop and take
home his own groceries corresponds to 20 percent of total grocery sales in Finland (Yrjölä et al.,
1999). This calculation is based on the value of free time used for road investments in Finland. The
result clearly illustrates the high cost of the current supermarket business model for people who value
“We shop for you” is the key selling argument for current e-Grocers in Finland. However, the next step
is to define the cost and revenue structure for home delivery, and to identify the conditions for
providing the service at no or only a small additional cost. The goal is to determine how a channel
model can be realized based on the existing supply chain investments of the retail trade in Finland.
The means to do this is simulating home-delivery under different demand and product offering
To identify the management and technological enablers for the hybrid model the operations of an e-
grocery distribution center, and distribution fleet are studied in detail. A cost and revenue model for
home delivery has already been defined in the project. A simulation model is also being constructed
using CAPS software to perform detailed analyses. In the first phase the emphasis is solely on the
distribution from the logistics centers to homes in the Helsinki area. Later research project phases will
include also the mid- and up-stream part of the physical distribution channel.
The simulation analysis compares alternative scenarios. The first simulation model of home delivery,
comparing the intermediary and channel model, show that how the goods are received in the
household has a major impact on the economics of the business model. A tight delivery window is a
major constraint on the efficient utilization of personnel in the distribution center and of delivery vans.
Finally, the project aims to launch pilots where the key enabling management processes and
technologies are prototyped and tested, together with the participating industry partners. The
participating industry partners include a major Finnish retail chain, several consumer packaged goods
suppliers, as well as telecom companies, and providers of material handling equipment and services.
2.2 Business-to-business collaboration to improve efficiency and
responsiveness in the e-grocery supply chain
It has been estimated that collaboration in planning, forecasting, and replenishment between supply
chain partners has the potential to reduce pipeline inventory by up to 25 % in the retail supply chain.
(www.cpfr.org) Thus, the potential for reducing total supply chain costs through information
management is critical for realizing a competitive home delivery business model.
The establishment of efficient replenishment practices, such as Vendor Managed Inventory (VMI),
between the members of the supply chain is a first step that key players in the Finnish retail supply
chain have already made (Holmström, 1998a). However, with the introduction of a retail channel that
reaches the consumer household new opportunities emerge in the domain of planning and
The objective of the e-collaboration task in the ECOMLOG project is to:
• leverage the new opportunities offered by a channel reaching the consumer in the household for
better supply chain planning and control
• develop new planning and forecasting tools that supplement the efficient replenishment models
currently being implemented in the Finnish retail supply chain
A comprehensive study covering the basic scenarios for collaborative supply chain planning and
forecasting has started. Based on the specific characteristics of the e-Grocery business a control
model for running the whole supply chain based on household demand will be constructed.
Developing and piloting a new forecasting approach is proposed as part of the e-collaboration task in
the first year. Currently industry partners are being approached to participate in the development and
This assortment forecasting approach has been developed to specifically address the logistical impact
of changes in the product range offered to the consumer (Holmström, 1998b). The approach enables
suppliers and trade customers to collaborate on logistics at a much earlier stage in the demand chain,
namely when deciding on what products to introduce or phase out from a category. The prototype will
be designed specifically for supporting a collaborative process. The Internet and distributed
computing (Corba) will be deployed in the prototype.
2.3 The impact of household resource planning on e-Grocery business
Streamline’s channel model attempts to provide a replenishment service to the consumer. However,
since the household lacks a system for inventory management the supplier cannot take full
responsibility for delivering when a product runs out. In the Streamline model the consumer is till
required to review and release a weekly order.
But, today we are already seeing examples of ‘intelligent’ household appliances, e.g. refrigerators and
garbage bins with barcode scanners. Linking up these appliances to a simple inventory management
program would offer the e-grocer an opportunity to do the same for the household as some of its
suppliers do for the e-grocer: take responsibility that a selection of products is replenished according
Different value added services by the e-grocer can be defined depending on what demand processes
are covered by a resource planning application in the household. The basic value offering point is ‘to
purchase’. In this case the household application only covers purchasing over the Internet. If the
household resource planning application includes inventory management, then the value offering can
be moved to inventory management, and the supplier takes responsibility for replenishing products to
consumption. Finally, if a calendar and scheduling functionality is included in the household resource
planning application, then the value offering point of the supplier can be moved to planning. Now, the
e-grocer could propose to deliver the ingredients for a weekend meal according to a specified recipe
in the consumer’s recipe book and the number of people invited.
Today virtually all suppliers work with a value offering ‘to purchase’. But the introduction of Internet
and ERP systems has already made offers ‘to inventory management’ common in business-to-
business relationships. There is no reason to doubt that the development of household planning
applications will not have a similar impact on the business-to-consumer relationship in the e-grocery
The objective of the ECOMLOG research program is to outline what a household resource planning
system would have to cover, to enable e-grocers to design advanced demand-supply chains. By
taking ‘Enterprise Resource Planning’ as a starting point, the requirements and currently available
technology for an effective household resource system is examined. For example, how can ‘inventory
counting’ best be solved in the household to enable a replenishment service?
2.4 Configuration of the supplier business model for supporting different
The right supply chain for the different new channels emerging depends on the demand chain of your
business partner. To address the challenge of configuring a supplier’s business model for supporting
different retailing models the ECOMLOG research program aims to develop a systematic approach to
identify, based on the customer demand chain, the best value offering point.
Demand-supply chain configurations are implemented by formalizing the customer-vendor
relationships through e.g. service agreements, and collaboration processes. This activity already now
takes place in many companies – however in the research program an approach to manage these
configurations more systematically is to be developed. The focus is on the outbound side, i.e.
configuration between a supplier’s customers and the supplier.
The first task is the identification of the major potential value offering points based on the demand
chain descriptions from each main customer segment and the classification of the major demand-
supply chain configurations used.
A demand-supply chain diagnostics tool is to be developed that:
• For operational purposes: helps to determine customer value vs. cost to serve. How to set terms
of delivery, availability and planning for a specific customer?
• For tactical/ strategic purposes: helps to assess how the adoption of new configurations by
customers affect overall performance
In the research program the demand-supply chain configuration approach is enhanced to determine
the impact of customer demand chain, product characteristics and lifecycle on value offering and
order penetration solutions. This is to support formalizing service offering definitions for key value
offering segments. What does the customer buy – including all complementors – and what is the
supplier value added? How to maximize the value of a specific product in a specific demand-supply
Additionally, best practices examples and an overview of systematic demand-supply chain
configuration approaches will also be assembled.
3. Research agenda and projects
Electronic commerce brings many opportunities and challenges in the supply chain management
area. The first obstacle concerns physical distribution to the household. Especially for grocery retailing
the challenge is to find solutions for home delivery that are convenient for the consumer and cost
efficient. The initial results of the research project indicate that the key to success is a solution for
receiving goods in the household, and building a dedicated local distribution center using existing
The second hurdle is improving business-to-business collaboration in the supply chain. The working
hypothesis in the ECOMLOG research program is that using Vendor Managed Inventory for order
generation and collaborative assortment forecasting techniques for managing the reorder point and
safety stock levels enable improvements in inventory buffering and efficiency upstream in the supply
chain. The major supplier companies invited to participate in the program already have experience
from VMI, and now expect to take the next step by developing and piloting collaborative planning
together with the retailing chain partner participating in the e-Collaboration project.
As we have seen, the scope of the household resource planning that is available for the consumer
determines the value offering an e-Grocer can make. Research into this critical development area for
advanced value offerings has been initiated together with leading technology and telecom service
providers in the C-VOP project.
Finally, for supplier it is important to learn how to work with parallel business models. This last
obstacle to an efficient and responsive e-commerce supply chain is addressed in the B-VOP project of
the ECOMLOG research program.
Table 1 summarizes the sub-projects, research issues and working hypothesis.
Research issues and working hypothesis
Project Issue Working hypothesis
Intertrade + How can we build up an efficient Hybrid model: build up a channel business
Simulation e-grocery model in Finland? model by transforming hypermarkets to local
project distribution centers
e-Collaboration How can we leverage business- Replenish + pace: combine VMI on
to-business collaboration to distributor level with assortment forecasting
improve the e-grocery supply on channel format level
C-VOP What is the impact of household Household resource planning: intelligent
resource planning on e-grocery appliances and functional information
business models? services need to be integrated before e-
grocers can move beyond simple order
B-VOP How can a supplier effectively Service offering: the supplier must formalize
work with differentiated business terms of availability and planning, not just
Table 2: Sub-projects of EOMLOG research program.
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