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Stanford Report, June 28, 2000

Dot-com, brick-and-mortar firm managers discuss using Internet in supply chains

BY MARGARET L. YOUNG AND JENNIFER READ  

Using the Internet and other forms of rapid data exchange to create more efficient and economical supply chains was the key topic at a conference held earlier this month by the Stanford Global Supply Chain Management Forum, a research institute in partnership with industry and the schools of engineering and business.

The forum, "Information-Smart Supply Chain Management," took place June 8-9 and featured speakers from Internet companies such as Winebuyer.com and traditional brick-and-mortar firms such as drugstore chain CVS Corp. that are using the Internet to cut costs while increasing responsiveness to customer needs.

"A lot of these companies are figuring out how they are going to use the Internet to create value," said forum director Hau Lee, a professor of operations, information and technology at the Business School and the Kleiner, Perkins, Mayfield, Sequoia Capital Professor in the School of Engineering.


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Joseph Pyne, senior vice president of marketing and corporate development for UPS, said the key to efficiency is a robust backroom. "E-commerce is just commerce using technology. It's not just about having a beautiful website. You have to look closely at your backend. You have to ask yourself if your fulfillment system is capable of delivering to Dublin, Ireland."

Koichi Nishimura, chief executive officer of Solectron, an electronics manufacturing services provider, said, "Companies must align their processes so there can be seamless integration. It is like a relay race. The problems occur in the handoffs between runners."

The supply chain is undergoing another complete transformation, Pyne continued: "It's about the three T's -- time, transparency and trust. Lightning velocity, invisible to the customers, and careful branding of services to gain the trust of the customer -- that's what it is all about."

Several of the conference speakers emphasized the importance of using online business-to-business exchange sites to gather information from multiple customers and suppliers and process that information rapidly into orders and deliveries. This, in turn, will create horizontal companies that efficiently handle one segment of an item's production, sale or distribution before handing matters off to a manufacturing supplier in the production chain, said Greg Owens, president and chief executive officer of Manugistics Group Inc., an e-commerce management company in Rockville, Md.

This wave of the future already has hit Japan, said Seungjin Whang, associate professor of operations, information and technology at the Business School. Whang discussed 7dream.com, a joint venture between the Seven-Eleven Japan (SEL) convenience store chain and six other Japanese corporations, including music vendor Sony and Fuji Photo Film, that makes ordering from the Internet as easy as dropping by the local 7-Eleven. Customers are able, as a result of the alliance, to order and pay, in cash, for tickets, books and other commodities. They also can download music disks on site and process digital film.

Data streamlining occurs at the backend as well. Cashiers at the convenience stores estimate the age and record the gender of each customer. This information, in turn, is compiled overnight and distributed, giving both SEL and its suppliers a precise picture of who buys what when. In response to the fluctuations in demand, SEL stores change their layouts several times daily in response to expected customer demand.

The success of 7dream.com in Japan has been such that the SEL's market valuation has quadrupled. However, Whang cautioned that it

was unclear whether this success would automatically translate into other markets. He pointed out that there were several factors that contributed to SEL's success that were not applicable in the United States, such as a preference for cash payments, relatively few PCs and the tendency of the Japanese to commute by rail and walk by convenience stores on a daily basis. "Will this work in the U.S.?" Whang asked. "Of course, as a professor, I don't have the answer."

Whang did, however, introduce Linda Heasley, vice president of merchandise planning at CVS in Woonsocket, R.I., which has attempted to implement some of 7dream.com's strategies in the United States in the past year. So far, the information gathered from customers has made it possible to reduce inventory and more effectively tailor store content.

"As we expand, we will be able to edit assortment," Heasley said. In addition, the CVS Internet site makes it possible to offer more depth and variety in areas such as vitamins. Whereas CVS stores offer an average of 550 units, the online pharmacy offers 5,000.

Not all online options seem to appeal to customers, however. About 68 percent of CVS customers prefer going to the store rather than getting home delivery, and automated teller machines in the stores have been largely ignored by customers, Heasley said. Nonetheless, she was optimistic about integrating e-commerce with bricks and mortar. "It can work here," she said.

Margaret L. Young and Jennifer Read are freelance writers. SR