Operations and E-Commerce

Figure 2 provides a conceptual framework relating key functional areas of a business organization with e-commerce. Information Systems (IS), which in conventional business settings simply plays the role of a supporting function, now serves as the conduit through which e-commerce can be actualized: it now serves as the driver of e-commerce. In view of the technology intensiveness in e-commerce environments, IS becomes a critical component in facilitating the firm's strategic initiatives. This includes aspects such as the determination of appropriate information system solutions for facilitating the firm's internal processes as well as transactions for providing goods and services to its customers. As in conventional business systems, there are strong interrelationships among information systems, marketing systems, financial systems, and operations systems. Although our emphasis in this paper relates to the operations system, there is a spillover of the discussions into other areas due to their interactions with operations.

Figure 2: A Framework for Operations in an E-Commerce Environment.

We note that the basic issues of strategy, quality, capacity, processes, etc., that characterize any business system apply in an e-commerce setting. However, the nature of the operations in the e-commerce environment necessitates understanding certain features that are peculiar and how to effectively manage them. The firm's operations strategy drives its philosophy in the four key areas of Quality Management, Capacity Management, Inventory Management, and Process Management. These are in turn reflected in the way the firm addresses issues relating to logistics/order fulfillment, forecasting, virtual location, and virtual layout.

Operations Strategy

It has somewhat become standard practice for any firm that intends to be successful, to clearly spell out its mission, goals and its corporate strategy: a firm lacking in them can be rightly compared to a sailor without a compass. Traditionally, the corporate strategy is then broken down into various aspects in the areas of marketing, finance, and operations, as well as a number of other supporting functions of the organization. No part of the firm should be left out, as this will rob it of the ability to adequately harness the strengths of the various organs in fulfilling its mission.

The corporate strategy, and by extension, the operations strategy which derives from it, forms the basis for the actions the firm needs to take in creating value through the provision of goods and services. In view of the integral link among the various functions of the organization, the various strategies are interrelated. The operations strategy primarily addresses issues such as product-mix, quality, capacity, inventory, and layout, etc. A key question then is: what is the role of operations strategy in e-commerce? Stated differently, how is e-commerce affected by operations strategy?

Porter (2001) provides some very useful perspectives regarding the place of strategy in the Internet environment. Does the Internet replace sound business practices? Certainly not: he observes that firms that cannot do well offline would find it difficult to do well online. Arguments for this derive from a number of reasons: the point of occurrence or activation of inefficiencies and ineffectiveness would simply be transferred from a brick-and-mortar location to a virtual location. Furthermore, the ubiquity of Internet access provides low-barrier to entry for competing firms. Thus, while it is true that the Internet potentially provides some operational advantages, the key for any firm is not just use of the Internet, but how to use it in innovative ways, thus creating distinctive competency. In order words, the Internet makes strategy to be much more important than would otherwise be the case. Porter emphasizes six key principles that firms need to follow to create distinctive positioning: starting out with the right goal, having clearly defined value propositions, doing things in novel ways, delivering value with tradeoffs (this being informed by the fact that it is usually difficult to do well in all areas), cohesiveness in processes and activities, determination to continue in the well articulated path that it has chosen.

In what ways does strategy impact operations in this environment? In line with the principles outlined above, intelligent enterprises would need to design their Internet-based processes in such a way that the business transaction is simplified, thus saving on time and increasing convenience. Also, innovative ways need to be devised to legally present information that highlights the distinctive features of the firm's products and services, thus making its value proposition become clearly evident to the customers. It is essential to emphasize that cost need not be the issue. As in conventional settings, it could be flexibility, delivery lead-time, and quality, etc. Another important aspect that can facilitate this is to publish on the firm's website, benchmark results of available metrics to show how the firm performs, especially in the areas it proposes as having distinctive competency.

Quality Management

Manufacturing organizations as well as service organizations need to be able to effectively manage their processes so that the quality of the output meets customer requirements. In B2B environments, the Internet provides an avenue to share information relating to quality in real time manner, and thus reduce quality related losses. There are a number of important quality issues relating to purchases over the Internet that makes this somewhat challenging. Most of them essentially relate to service quality and customer relationship management. We examine these issues in some more detail as follows.

Ascertaining Item's Conformance to Specifications

This is not much of an issue for certain products as the Internet provides effective mechanisms for the customer to determine the quality of the material. Take for example, a plan to purchase a book through an online bookstore such as amazon.com. Providing a reasonably good description of the book as well as sample pages on the Internet makes it rather unlikely for the customer to receive something different from what was expected, except of course, if there was a wrong shipment. Objective reviews of the content by an unbiased reader, also helps provide a balanced view of quality in the above respect. Although one cannot rule out other quality problems relating to the printing, binding, etc., for a particular copy, they would unlikely be issues the customer would worry about as opposed to other types of products that have close tolerance or precision requirements such as electronic gadgets. Customizable products such as apparel that are very difficult to fully specify online pose significant challenge in this respect.

Higher Risk of Product Damage in Transit

Consider two manufacturers, A and B, where the former supplies its products directly to the customer and the latter sells through a brick-and-mortar outlet. Shipping product items in bulk reduces the risk of product damages as compared to shipping single items to individual customers throughout the country or even throughout the world. The firm engaging in B2C e-commerce will then need to pay more particular attention to the activities of logistic service providers (e.g., UPS, FedEx, or the U.S. postal service) that handle and deliver the product to the customer. The company may resolve this by implementing insurance policies for items that they ship out, especially if they are of premium prices.

Customer Help-Line

Companies that sell tangible products over the Internet are particularly faced with the challenge of providing sufficient information about the product. Visual static displays and three-dimensional dynamic displays of the items used by some companies have proved useful. For example, real estate agencies have started using the latter form to display video streams of the interior and exterior of homes that they put on sale. However, this does not replace the fact that the customer cannot actually see or feel the item, as would be experienced in a brick-and-mortar scenario. In view of this situation, an intelligent enterprise needs to be responsive to customers needs by providing avenues through which their questions can be answered and their concerns addressed.

On-Time Delivery

This is an aspect that needs to be emphasized by intelligent enterprises selling products over the Internet in order to compete successfully with their brick-and-mortar counterparts. The customer is fully aware that there is some trade-off on delivery lead-time for convenience/price when choosing to purchase items online. Nonetheless, Internet firms ought to make the necessary effort to ensure that the difference is not so much as to reduce or eliminate the impact on the advantages. This can be handled in a number of ways, including partnering with efficient logistic firms and designing effective inventory management systems.

Capacity and Inventory Management

Capacity and inventory management in an e-commerce environment is in general not much different from that in a conventional setting. However, issues that have peculiar characteristics in an e-commerce environment do impact capacity and inventory decisions. In particular, the challenges of accurately forecasting demand places a burden on the firm's ability to maintain sufficient inventory or provide adequate capacity, especially against the background of the need for prompt order fulfillment.

Firms that operate under the B2C e-commerce framework would need to decide how much inventory of the item to hold in stock at a given time, based on expected demand. While this will be relatively easy to do for standard products, it will pose challenges for customized products. The firm would need to work closely with companies that are capable of responding quickly to changes in product mixes. Paradigms such as mass customization and postponement of the point of differentiating the products will facilitate efficient order fulfillment and reduced costs.

Realizing the benefits that can be derived from working together with suppliers of parts and distributors of the final output, in many industries, there has been an increased thrust toward supply chain management. One of the key characteristics of supply chains is the flow of goods/services and information across the entities. Typically, goods and services flow downstream towards the customer, while information flows occur in both directions. In an automotive supply chain, for example, information about demand quantity and preferences flow from the customers, through the dealers to the automobile manufacturer. Figure 3 provides a schematic diagram of a supply chain. The challenges of supply chain management are further exacerbated by its global nature in many industries. For example, the door lock mechanism that goes into certain car models assembled in the United States are manufactured in plants in Mexico. These plants, in turn, receive raw materials such as circuit boards from Taiwan.

Figure 3: Schematic Representation of a Typical Supply Chain.

In a B2B environment that is part of a supply chain, it is important to establish the characteristics of the product as far as priorities in fulfilling the physical function or market mediation function is concerned: The physical function concerns the production, transportation, and inventorying of items; while the market mediation function seeks to match the product supply with the demand in the market, especially with respect to product mix. Fisher (1997) has observed that a responsive supply chain that focuses on speed in reacting to variability in requirements is more appropriate for such innovative products as it will reduce the market mediation costs, which comprise of stockout and premium shipping costs. On the other hand, an efficient supply chain that focuses on reducing the physical costs will be more appropriate for products that are standard and have little or no unpredictability in demand.

Whichever of the two frameworks a supply chain adopts (efficient or responsive supply chain), the importance of effective transmission of information cannot be overemphasized. Current use of Electronic Data Interchange (EDI) systems to transmit information between successive points along the supply chain often creates information asymmetry that might require holding more than necessary inventory in the supply pipeline. In other cases, stockouts may necessitate premium transportation, which are very expensive. Information asymmetry at the successive stages in the supply chain leads to the bullwhip effect, a phenomenon that has continued to garner attention in the business community. The Internet's provision of a hub-and-spoke system creates visibility across all stages in the chain, which is crucial especially in environments where there is rapid change in product mix as in the case of fashion goods and automotive interior systems. Other advantages include reduced cost of modification of product and pricing information, since a central system such as an exchange can make the same information available to all parties at the same time without the need for duplication. Furthermore, the hub-and-spoke connection, which a central system provides, reduces linkage costs, as only one link needs to be added each time a new member needs to be included in the supply or distribution network. This will lead to savings in setup and maintenance costs.

Process Management

In providing goods and services to consumers, companies operating within an e-commerce framework are saddled with certain processes that are unique in addition to those that exist under the brick-and-mortar framework. The virtual environment introduces challenges for the firm as it deals with customers who are required to change the way they have been used to operating over a long period of time. For certain types of products like fashion clothing for which color and quality are key attributes that influence purchase, processes have to be put in place to enable the customer to overcome the barrier he/she faces in making the purchase decision. Many people are still uncomfortable with providing credit card information online because of the fear that someone else might have access to the information and make use of it illegally. Processes have to be put in place to protect customer information and efforts to make the customer assured of this fact are necessary. Studies have in fact shown that due to some of these reasons, a significant proportion of prospective customers go online only to gather product information and then use such information to purchase offline. Processes that help manage information to improve understanding of customer shopping behavior and facilitate forecasting also need to be put in place. This will in turn help the firm to deal with its order fulfillment requirements as well as help in managing inventory.

On the B2B front, the Internet provides a means to facilitate exchange of information with customers in a timely fashion. However, decisions as to the most appropriate— effective and cost-efficient—framework need to be made. While many companies have found use of private exchanges or public exchanges most beneficial, others are partnering to establish consortiums. Still there are those firms, especially the large and well-established firms, such as Daimler Chrysler, which combines all these frameworks and uses each for managing pertinent processes.

With the increasing occurrence of cyber-crimes, firms can be very vulnerable to attacks that can lead to the loss of valuable information, causing irreparable damages to the firm's operations. It is therefore critical for e-commerce firms to invest in processes that will protect their systems. In addition to having these processes in place, there is the need to continually monitor, revise, and update them in the light of changing business environment as well as illegal innovations that can be inimical to the firm's safety.

Logistics and Order Fulfillment

The Internet does offer customers the convenience and ease of ordering items from the comfort of their own homes. Often, though, customers expect to receive the item soon after order placement: this places a significant burden on the e-tailer as far as order fulfillment is concerned. This is exemplified by the gross inability to satisfy customer orders experienced by a number of e-tailers (e.g., Sears and Toys 'R Us) during the Christmas season of 1999. In order to meet this essential customer requirement, companies need to develop effective warehousing, distribution and logistic strategies. Firms will be able to meet shipping schedules and thus preventing customer dissatisfaction, while avoiding excessive cost bills from premium transportation. Addressing this issue appropriately includes location decisions for the firm's warehouses or partnering with other firms so as to use their facilities as service outlets. Customers can receive or return products through these outlets. In the financial services industry, for example, Western Union Transfer, a company that provides money transfer services to customers, functions through grocery stores and department stores around the country to provide the needed services. Even though commission will need to be paid to these firms that act as service outlets, it would in general be a lot cheaper for a company to operate through these outlets as compared to opening its own service centers throughout the country. Another approach that has been used by traditional brick-and-mortar operations— combining distribution networks—can also be adopted. For example, General Mills and Land O'Lakes, two noncompetitive firms, supplying yogurts and butter, respectively, to supermarkets, now collaborate by combining their distribution networks.

Lee and Whang (2001) present a framework and classification of methods that are being adopted by firms to address the e-fulfillment challenge: logistics postponement, dematerialization, resource exchange, leveraged shipments, and the click-and-mortar model. Most of these methods relate to use of information to replace inventory and to improve efficiency and effectiveness. Logistics postponement involves withholding certain components in the area where fulfillment is to be made and merging and assembling with other components that are shipped to the same site. This reduces costs incurred in first transporting those components to a central warehouse or assembly facility only to reroute the final product to an area where the components were obtained from. It is important to note that this framework can only be successfully implemented for a case involving low precision production processes and inexpensive equipment. Dematerialization is the phenomenon whereby products that are conventionally available in physical form are transformed into electronic forms to facilitate transmission. Consequently, the customer then downloads it for his or her own use. In addition to the fact that these are instantly deliverable, saving on cost and time, they generally have fewer issues relating to product quality. Not all products or services are amenable to dematerialization: examples of products that can be transmitted this way include books and music compact discs, software, etc. A particularly classic example of the practice of dematerialization is the current trend with academic journal subscriptions: Most academic journals now operate online and customers pay to have access and download articles from the publisher's website. A win-win situation is created as it reduces transaction costs for the publishers (no postage fee, no printing cost), which can be transferred to the customers in the form of reduced subscription rates. It also eliminates customer wait times. Although most customers who use e-tailers do so for convenience, some may be willing to trade-off some amount of convenience for reduced prices. The click-and-mortar model offers e-tailers the opportunity to reduce logistics costs by consolidating shipments to some local sites close to the customer and requiring the customer to conclude the last stage of the order fulfillment process by going there to pick up the ordered items.

Forecasting

E-commerce firms face the conventional challenges in the forecasting of product demand, especially for customizable items such as apparel and electronics. The vastness of the market space for a firm's offering over the Internet introduces another dimension to this challenge, since literally, the entire world becomes the market. As changes in tastes and needs vary from one region of the world to another, predicting actual needs becomes a daunting task. One of the key questions that the firm will be seeking an answer to is, how many people would be purchasing my goods or services? There is the danger of underestimation, which leads to problems in order fulfillment. On the other hand, there is equally the danger of overestimation, which leads to high inventory levels with its attendant costs. As pointed out above, Toys 'R Us and Sears were among the many e-tailers that created customer dissatisfaction due to inability to fulfill orders during the holiday season of 1999. On the other side of the spectrum was William-Sonoma, a San Francisco based marketer of upscale kitchenware and home furnishings. The company, which basically operates by using mail catalogues, had launched an e-commerce site in November 1999 (Business Week, 2000). In early 2000, it announced a 13 percent drop in fourth quarter profits of the previous year: this saw its stock price falling by 37 percent. In anticipation of large holiday sales as well as its desire not to disappoint the customers, the company increased inventory. At the end of the peak selling season during the holiday, leftovers were 40 percent more than the previous year's. This resulted from the company's inability to adequately estimate the volume of purchase through the Web.

The dynamic and uncertain nature of e-commerce contributes to the challenges faced by companies doing business on the Internet. A field study carried out by Golicic et al. (2001) indicates that this was the view of executives from seven companies in diverse industries, including automotive, chemical, and logistics. The executives noted that forecasting demand, which is critical to their success, is a major aspect of these challenges. They use traditional forecasting approaches that combine strategic and tactical forecasting techniques. However, due to the dynamic nature of the environment, including constant change in business models, little confidence is placed on strategic forecasts.

Although, as observed above, forecasting is especially challenging in an e-commerce environment, the Internet can enhance visibility and serve as a vehicle to facilitate information gathering that can be useful in that respect. In some cases this obviates the need for a forecast, while in others, it provides a means for real-time analysis that helps predict demand. One of the issues that is beginning to gain popularity in B2C e-commerce is the tracking of customers or potential customers' visits to the firm's website. Some of the information gathered about the customer includes the frequency of visit, the types of products observed and time spent observing them, actual products purchased, and inherent patterns in purchasing behavior (e.g., groups of products purchased). Models analyze this mass of data and provide information about likely purchase quantities over some time span. The success of this procedure will depend heavily on the sophistication of the models as far as predictive ability is concerned. Visibility among partners is particularly applicable in the B2B environment. Using technologies such as point-of-sale and Internet exchanges, information can be transmitted from dealers right through to all the tiers in a multi-tier supply chain environment.

Virtual Layout

Layout in the framework of e-commerce essentially relates to web-design. It includes appropriate placement of product and service information in such a way that they are easily found by would-be customers. One of the main reasons they have chosen to shop online in the first place is because of the convenience it affords them from the comfort of their homes as well as the fact that they want to save on transaction time. A significant amount of time spent searching for items on the Internet will certainly not augur well for the firm. A well designed website with efficient search mechanisms and proper classification of items will go a long way to enhance the purchase experience of the customer.

Also important is the sequence of activities that needs to be performed by the customer during the purchase transaction. This is synonymous with flow process design in the conventional brink-and-mortar framework. In other words, information relating to pricing, taxes, payment, warranty, return policies, etc., need to be arranged as the customer goes through the virtual store. For example, consider a customer who just wants to buy a single item that costs $20. Oblivious of the fact there is a $10 shipping charge, s/he goes through the entire shopping procedures, only to be informed of this added cost just before checking out. While this might not be much of an issue for a customer purchasing $200 worth of items, it certainly is for one purchasing $20 worth of item because the shipping charge is 50 percent of the purchase price. A customer so treated will probably not want to visit that site in future to purchase other products. Word-of-mouth communication of this experience to others will certainly affect the image, goodwill, and profitability of the company.

The importance of effectively managing these aspects is underscored in the result of a survey by the Boston consulting group of 12,000 North American consumers, 10,000 of whom had made purchases online (Sliwa, 2000). Part of the survey finding showed that 45 percent of the respondents indicated that sometimes or frequently "the site was so confusing that I could not find the product." Some other typical problems experienced included, "Site would not accept credit card" and "Site made unauthorized charges to credit card."

Virtual Location

In the conventional brick-and-mortar scenario, location decisions are important because of the fact that they are capital intensive, long-term in nature, and changes could have a significantly negative impact on the firm's profitability. Factors influencing these decisions include proximity to raw materials, proximity to customers, operating costs, availability of manpower, etc. Although the framework of virtual location and physical location are basically different, there are similarities between them. Issues such as operating costs and proximity to customers are equally important decisions that impact where to locate. Location decisions within the framework of electronic commerce is no less a strategic issue than it is in the conventional brick-and-mortar scenario. There are two dimensions to this issue.

First, is the decision as to what percentage of the business should be carried out online. In the book retail industry, for example, amazon.com operates almost completely online whereas Barnes & Nobles combines online operations with its brick-and-mortar stores. In the furniture industry, while FurnituresOnline.com operates fully online, Ethan Allen, which basically operates brick-and-mortar stores, started an initiative in 1999 to increase the level of transactions over the Internet. One of the greatest challenges fully established brick-and-mortar operations face is how to involve dealers in this new wave without making them feel that they are being left out. Ethan Allen involves the dealers by using them as points of shipment for merchandise purchased over the Internet by someone in the immediate vicinity of the dealer. These dealers also provide return or repair related services where necessary. In return they earn 25 percent of the price of the item. Even in cases where the items are shipped directly from the factory, a dealer in the immediate vicinity of the person purchasing over the Internet earns 10 percent of the sales price. This seems to have worked reasonably well for this company. It remains to be seen how well this framework will work in other industries. In fact, dealerships remain one of the major obstacles in the path of Ford Motor Company's initiative of applying Dell's direct sales model for automobile sales (Austin, 1999).

Even though the level of Internet operations differs among companies, one thread that runs through all of them is their presence on the Internet through some established website. The second important issue, therefore, is how the firm should position itself in virtual space in order to reach potential customers. This is especially necessary for B2C transactions that require a large customer base and also when conventional means of advertising the firm's products are not as cost effective. As more and more people spend a considerable amount of time online, using the web space for advertising the firm's products and services would become increasingly important. How then should the intelligent enterprise best carry out this type of advertisement? Many Internet sites that primarily serve this function have arisen over recent years; e.g., search engines such as aol.com, yahoo.com, etc., provide such services. Companies pay large sums of money for use of these heavy traffic sites, either to have their advertisements with website addresses displayed or to include them as search results when would-be customers put in the key words. For example, the online florist shop, 1-800-flowers and American Greeting Cards have paid sums of $25 million for four years and $100 million for five years, respectively, to aol.com (Heizer & Render, 2000). In certain cases, the amount paid depends on the number of keywords supplied or the number of clicks recorded through the search engine. Amazon.com is another classic example of a firm that uses this method to drive customers to its site: quite often, whenever a keyword relating to some item in Amazon's database is input, its icon appears on the same screen, thus navigating the customer to the desired product.

Virtual location in a B2B environment would be when a company registers within some Internet exchange, thus creating visibility to other companies who may need the products or services. A classic example is the consortium automotive exchange, Covisint, formed by the Big Three Auto companies; and Nissan, Renault, Commerce One, and Oracle.