Strategic Implications of E-logistics

Sindre Bolseth, Department of Production and Quality Technology Olav Solem, Department of Industrial Economics and Technology Management Norwegian University of Science and Technology Trondheim, NORWAY ABSTRACT By introducing new ways of combining and integrating actors in the value chain, e-business and Internet are supposed to change business patterns dramatically. A new paradigm of business strategic behavior seems to be appearing. In a broad scope the purpose of our paper intends to develop an understanding of the impact of the e-business and Internet on the logistics and supply chain - the benefits as well as the risks - including impact on supply chain strategy, design, organization design and infrastructure. A relatively wide theoretical and conceptual frame of reference is presented to be able to describe, analyze and understand the formation of new supply chains and new corporate structures in the era of e-business and web-based communities. From an empirical point of view we further present a case study of an extensive e-logistics implementation project in a larger Norwegian manufacturing company transferring the company from being a brick and mortar to a click and mortar one. INTRODUCTION As an introduction we will briefly describe the development of two of the main concepts in our paper: e-business and e-logistics.
Value creation e-business
Integration; Automation

e-commerce
Transactions

e-presence
Information;Communication

Time

Figure 1. The development of Internet applications (Ericsson, 2000) The development of Internet applications can be divided into three major stages see figure 1. E-presence: E-presence starts with one-way information about the company, its products and services. The Internet is primarily used to publish information. Suppliers can deliver product and service information to customers in a cost efficient way. The next step in the stage of e-presence is to create a two-way communication for customers support and for answering question from the customers requiring fast answers. E-commerce:

In the second phase, e-commerce stage, opportunities are opened for transactions. Transactions are the core elements in commercial activities. A transaction consists of two major parts: transaction creation and transaction fulfillment. In the digital economy transaction creation is done over the Internet which usually leads to reduced transaction costs. E-commerce can be divided into two separate areas: B2C and B2B with different e-logistics requirements. E-business: The third phase, e-business, involves transformation of processes and systems to increase integration and automation in order to take advantage of all the possibilities created by the Internet. The key words of the digital economy can be summarized to contain the following key-words: speed, flexibility, connectivity, interactivity, and intangibles. The advent of this new digital economy has triggered a new type of logistics, which we will denote e-logistics. We will define e-logistics as holistic solutions integrating information- and communication technology (ICT) and logistics in the new strategic landscape opening up. E-logistics can also be seen as the physical fulfillment of the new transaction possibilities created through e-business. The agile and flexible logistics designed for the digital economy, the e-logistics, can be regarded as the third phase in the evolution of logistics, following military and business logistics (Ericsson, 2000). PURPOSE E-business and Internet are supposed to change business patterns dramatically by introducing new ways of combining and integrating actors in the value chains and also by automating business processes crossing earlier organizational and technological barriers. A new paradigm of business strategic behavior seems to be appearing for the new digital economy. In a broad scope the purpose of our work is to develop an understanding of the impact of the ebusiness and Internet on the logistics and supply chain - the benefits as well as the risks including impact on supply chain strategy, design, organization design and infrastructure. We therefore study the formation of new supply chains and new corporate structures in the era of electronic business and web-based communities. Our work includes theoretical as well as empirical studies. The present paper contains some of the results so far. THEORETICAL PART: FRAME OF REFERENCE The e-logistics concept is developed in accordance with new rules of playing the business. In the following we intend to outline some of the theoretical background we think we need to understand these new rules. We have a broad scope in our theoretical approach. However, due to limited space available, our treatment will be a survey-type description. A double perspective approach: transaction and relationship orientations In a broad scope we intend to develop an understanding of the impact of e-business and Internet on the logistics and supply chain. As our primary theoretical frame of reference we will therefore present two central perspectives: a transaction oriented one (Coase, 1937, Williamson, 1985) as well as a relationship/network theory oriented one (Fathy, 1999, Hkansson and Snehota, 1995). Our arguments for choosing a double perspective approach are among others that we have observed that e-business can contribute to tighten the relationships among the actors in the value chain as well as between the firms and their customers. In turn this will result in more efficient

material and information flows and a tighter integration in the value chain. Due to this fact the transaction costs for the different actors can be reduced. In addition e-business and Internet open up possibilities for relationship building which might have a great strategic impact related to production of personalized customer adapted products and services. Transaction cost theory (TCT) gives an explanation of the nature of transactions and the possible savings companies can achieve through strategic use of e-business. TCT has its origin with Coases classical paper The nature of the firm published in 1937, and is basically a way to explain the costs of doing activities internally versus the cost related to buying the same goods or services in the market. Like network theory, see next page, transaction costs oppose the neoclassical view, regarding the firm independent of its surroundings. Coase (op. cit.) stated that there would be no collaboration in a market with very low transaction costs. The best price and product will always be found in the marked. Likewise there would be no collaboration in markets with extremely high transaction costs. In such markets, the only reasonable actions would be inhouse production (Coase, 1952 in Williamson, 1985). The firm will always be able to produce the product at lower cost than what is found in the marked. Viewing transaction costs in this way might help understanding the difference in network structure across different lines of businesses. Making exchanges generate costs. This is the core of TCT and is what distinguishes it from neoclassical economic theory. TCT seeks to explain the organizing of production and trade by exploring the effects of these costs. While there exist a cost of making exchanges there is also generated costs regarded to organizing the internal production. This administration cost seems to increase with the size of the firm. This phenomenon is called diseconomies of scale. Transaction costs economics employs two basic assumptions about behavior: bounded rationality and opportunism. Further, the basic dimension of transitions relies on three factors: the frequency they occur with, the degree and type of the uncertainty they are associated with, and finally the conditions of asset specificity (Williamson, 1985). Reducing the cost by internal organizing and diminish the bureaucracy of traditional function structures is the aim of Businesses Process Reengineering (BPR), (Hammer and Champy, 1993). BPR might provide some interesting aspects to transaction cost theory by suggesting that there is different ways of organize internally, going from a functional organizational logic to a more process oriented organizational logic. This introduces yet another aspect complicating the question of organizing internally or in the market. However, we can observe a shift in emphasis in marketing literature, and also in strategy literature, from focusing on transactions to paying more attention to relationships. The new marketing technique is referred to as one-to-one marketing, relationship marketing, customer management and customer relationship management (CRM). In these programs, firms examine an individuals profile, and tailor programs to suit that individual. The basic idea for customer relationship marketing is establishing a learning relationship with each customer, starting with the most valuable ones (Peppers et al., 1999), to create repeat purchase. This learning relationship can get smarter with each interaction. The supplier learns more about the customer for each time they interact, and thereby increases the ability to customize products and services for the individual customers. With customization the dealer-customer relation grows stronger for each time, and gives the selling firm a lead in front of competitors. These relationships can develop into strategic alliances, which are long-term relationships between customers and suppliers, in which the mutual interests of the parties become increasingly obvious. Two trends have brought relationship management concepts to the forefront in management research and practice. First, as global competition has increased, it has become harder to

differentiate between products; companies have started to move from a product-centric view of the world to a customer-centric one. Secondly, the use of the Internet and other information technologies facilitate the use of analyzing and deploying customer data to increase customer satisfaction. The network business model was launched in academic circles back in the 1960s as a reaction to the classical strategic approach that regarded firms resources as independent and enclosed assets (Hkansson and Snehota, 1995). Attention was now brought to the role played by consumers, suppliers and competitors as vital contributions for achieving success. Network theory has over the years expanded the emphasis on pure vertical integration enclosing horizontal relations as well. To some extent network theory seeks to raise the same questions as transaction costs theory on which activities to perform internally, i.e. in the hierarchy, and which activities to integrate with partners, i.e. outsource in the marked. While the transaction cost theory focus upon the single transactions, network theory introduces time and seeks to optimize the series of transactions between companies. In this way network theory is emphasizing trust, transactions by social norms and the development of personal relationships, see for instance, Hkansson (1982) These two theoretical perspectives: the transaction and the relationship orientations, will play a central role in our further theoretical development focusing on how the traditional business models and value chains undergo dramatic changes due to the new technology. For some actors in the value chain the on-going digital technological development represents threats. However for other actors the same development means and gives possibilities. For instance, this is true for digital intermediaries creating customer value by new information sources and search possibilities, or by helping buyers and sellers to meet on the virtual market arena. Further, the strategic implications of e-business for the competition structure and dynamics will be focused on. The characteristic features of e-business and Internet will as a digital intermedium technology create new distribution channels, new marketing methods and models as well as new sales forms in the business world. In turn this will dramatically change the strategic assumptions for value creation in the firms. The traditional company functions like purchasing, production, sales, marketing and distribution will still exist, but the underlying logic for business doing will change. Value creation: new and changed business models There are different models and methods developed to study and analyze value creation in a company. The most well known model in this context is the famous value chain model of M.E. Porter (Porter, 1985). However, this is a model not that adequate to study value creation in every firm. The Porter value chain model is best suited for studying value creation in traditional manufacturing companies with a linear, sequential physical material flow. In the new digital economy, now emerging, and supposed to be governing more and more, an increasing part of the companies will be service-creating companies for which the Porter value creation model (Porter, op. cit.) may not be the best and most purposeful one. However, Stabell and Fjeldstad (1998) have developed and presented two new and alternative value configuration models as an addition to Porters value chain model: value workshop and value network, describing respectively problem solving activities and contact establishing, intermediary and disseminating activities. The value workshop is mainly focusing on how values are created in technology-intensive companies solving unique problems for the customer. The problem is defined as the gap between the present situation and a wished future situation, and the value creation is defined as the change going from the first one to the second one. The value

workshop differs from the value chain model primarily focusing on the value of the product or the service for the customer. The value network seems, like the value workshop, to be used more and more to describe and understand value creation. The model is especially suitable for analyzing value configuration in service companies creating values for their customers by establishing contacts between different actors and by arranging for co-operation between them. The company itself is not to be looked as a network, but rather as a supplier of a network building service. The value network arranges co-operation between actors where the value is in the number of customers and also the composition of these customers. In the new digital economy, we need, in getting a better understanding of customer value creation, all these three models to be more fully equipped from a theoretical point of view. In addition to the above-mentioned works, we have got still other theoretical models, for instance, the new value creation model by Evans and Wurster (2000). According to Evans and Wurster (op. cit.) e-business has changed the economy and the means of attaining competitive advantage which implies that e-business demands certain issues to be taken into account when formulating a strategy. Further, Evans and Wurster proclaim that there are three dimensions: reach, rich and affiliation, to analyze value creation and competition on the new virtual market arena. Affiliation changes with e-business and the new economy, shifting the balance of power from the sellers to the buyers. This indicates that the purpose of the company strategy is to achieve closer relationships to the consumers, where closer relationships may be attained through customer loyalty. Richness means information, and especially the extended access to information, when doing e-business, indicates and represents the possibilities of a new competitive advantage. The company strategy should therefore try to use richness, such as customer information and product information, to deepen customer relationships and build brand loyalty. Reach indicates that e-commerce implies more ways of reaching the market and customers. For product suppliers, reach denotes that retailers may become unnecessary in the sales and the distribution structures. Reach nonetheless also implies a risky exposure to comprehensive comparison, and the company strategy should therefore try to avoid such comparison by keeping the pricing structure opaque or less transparent. However, there are different opinions about how e-business and Internet will change the strategy landscape. Does the new technology render established rules about strategy obsolete? According to a brand new work by M.E. Porter, it is to the contrary, it makes them more vital than ever (Porter, 2001). The reason why is that the Internet weakens industries profitability, as rivals compete on price alone. And the Internet no longer provides proprietary advantages, as virtually all companies now use the Web. Porter (op. cit.) explains that the Internet is no more than a tool albeit a powerful one- that can support or damage a companys strategic positioning. The key to using it most effectively is by integrating Internet initiatives into your companys overall strategy and operations so that they 1) complement, not cannibalize, your established competitive approaches and 2) create systematic advantages that your competitors can not copy. The virtual market arena: a new dynamics of competition Not only business processes will change due to the new ICT-technology. When the value chain is being reconfigured and, for instance, new intermediaries replace existing businesses, this will also have a decisive impact on the competition arena with dramatic effects and changes. Under the new paradigm we will therefore have a need for a new understanding and for remodeling competition dynamics. A starting point to understand the new market and competition situation can be the industry structure model, or the so called five-forces model developed by M.E. Porter

(Porter, 1980), and this is what Porter has done in his brand new work which we have earlier referred to (Porter, 2001). However, some of the strategic implications due to e-business and Internet, may not be completely and fully explained using Porters industry structure model. This model is based on a classical market and economic view and from a strategic point of view it is anchored in the positioning tradition. It is therefore, and also as the name of the model says (the five-forces competitive model), built on a market view dominated by competition thinking. To understand, however, the dynamic global markets of to day, we may also have to include co-operation as important and real phenomena. Nowadays, with the fast changing market structures and with chains competing against each other as a dominant factor, we can experience that co-operation internally in a chain might be of decisive importance for survival for the member companies. On this background, to make co-operative advantages through co-operation in the chain, will become more and more important, confer network theory part and the underlying double perspective of this paper. METHODOLOGICAL PART As part of our work we have done several case studies related to e-logistics and its strategic implications for business companies. The research design has involved field survey research as well as case studies of several companies coming from different industries and branches. Measures for the theoretical constructs have been based on past research. A series of qualitative interviews have been conducted, interviewing mainly managers in the case-companies. In the empirical part we will describe and analyze one specific company: the Glamox case. EMPIRICAL PART: GLAMOX the e-lighting company Glamox is a Norwegian industry group developing, manufacturing and distributing professional lighting solutions worldwide. Glamox is an international company with production capacities in 5 countries across Europe, Asia and North America, a turnover of approximately 1.3 billion NOK and 1,250 employees. The group is divided in two separate sales divisions: European Professional Lighting (EPL) and Global Marine Offshore (GMO). European Professional lighting is the sales division for the countries where Glamox has established franchise companies themselves. In these markets the company has two brands: Glamox and Hvik. The GMO division focuses on e.g. marine/offshore installations, an area where Glamox is one of the most significant deliverers in the world. The GMO division also works with lighting projects based ashore all around the world. Revitalizing Glamox Reclaiming the industrial leadership In 1998 the strategy process Revitalizing Glamox Reclaiming the industrial leadership was launched, see figure 2. This process was based on a pre-study done in 1997. The pre-study aimed to analyze the market situation, both present and in the future, and map the strengths, weaknesses, possibilities and threats for Glamox. Based on this pre-study it was formulated business and economical goals, as well as detailed strategies for the company.

The background for starting up this project was Glamoxs bad function towards customers, with failing communication and an ineffective value chain. The objective for this strategy process was to achieve a profit margin of 8% (or at least 100-mill NOK operating profit) within two years. Lost market share should be regained and the customers should experience Glamox as the leading company in the chosen core business areas.

G lam ox gam ep lan 1998 -2001

1 9 98 V isio n 1 99 9 2 0 00 2 00 1

R evita lisin g G lam ox

R eclaim ing th e in d u strial lead ersh ip W in m arket sh are and b e p erceived leader in 9 invest segm en ts P rofit an d exp an d A cquire & alliance in 9 segm ents E x pan d strategy sco pe - N ew produ cts - N ew m arkets / segm ents P rofit / H arvest co re stra tegy F o rm alise organisation and career develop m ent planning

B u siness o bjec tives S tra te g ic step s

8% op erating p ro fit m argin M ob ilisatio n N ew stru cture N ew leadersh ip team M ob ilise organisatio n A nalyse - M arket p ortfolio - V .C .R - M anu f. R estru cturin g Im p lem en ta tion Im plem ent m arket strategy - 9 segm ents - Pricin g - Investm ents Im p lem ent V C R - BAAN Im plem ent produ ctio n efficiency E stab lish R & D

Figure 2: Revitalizing Glamox Reclaiming the industrial leadership The project (Revitalizing Glamox Reclaiming the industrial leadership) had two cornerstones: Market Strategy Portfolio Analysis Value Chain Reengineering The first element, Market Strategy Portfolio Analysis, was based on the McKinsey Industry attractiveness-Business strength portfolio matrix and the M.E. Porters five-forces and value chain models (Porter, 1980, 1985), where all of Glamoxs business areas were systematically and thoroughly analyzed. This concluded in an action-oriented market strategy, with 9 segments as future core business areas. The second element, Value Chain Reengineering (VCR), aimed to totally rearrange the value chain in order to achieve a simple, efficient and comprehensive value chain. The reason for this project was the inefficient value chain, the lack of ability to satisfy the customers and a frustrating environment for the employees. The VCR project aimed to implement digital work processes throughout the company. The purpose of the digital work processes was that all communication between customers, sales personnel, logistic centers, production plants and suppliers were meant to be digital as illustrated in figure 3. The VCR project was mainly an ICTproject with 7 sub-projects, whereby implementing Baan (ERP-system) and making Glamox ebusiness ready were two of them.

 a complete E-business ready value chain .

Vision world class delivery precision
Customer

Whole saler
EDI

Sales GSS/ Optiwin Glabase GSS/Optiwin Glabase

Wholesaler
EDI WEB

Customer

Complete delivery

3. party logistics Oslo Trading product

SPOC, Logistic centre North Europe Molde BaaN/Glabase

SPOC, Logistic centre Central Europe, Bremen BaaN/Glabase

3. party logistics Bremen

Trading Product

Glamox Wide Area Network

Molde/Vg.

Vr, Fin.

Keila, Est.

Svelvik

Bremen/Tet.

6 Crossdocking

Figure 3: A complete e-business ready value chain Glamox believes that e-business can increase the turnover for the company, contribute to gain market shares and rationalize the internal value chain. E-business is regarded as important for the business, and the first company to launch it in the market will get a lead. Even though Glamox claims that the VCR-project was mainly an ICT project (in regards of investments), it would not have been carried out without the necessary restructuring of the value chain. It was the restructuring of the value chain that triggered the other parts of the project. A crucial element in the restructuring was the change of manufacturing strategy. Firstly, the company had done a focusing of the factories, based on products families and competence, see figure 3. Secondly the principles of manufacturing have also been changed, from make-to-stock to make-to-order. E-logistics at Glamox: Going from a brick and mortar to a click and mortar company The logistic division is built around two logistic centers, see figure 3. The purpose of these two centers is that they should function as a single point of contact (SPOC) for the customers. They are responsible for the order processing, logistic coordination and to coordinate the deliveries. In addition they are also responsible for support and divergence on orders. The distribution are executed by use of two 3. Parts warehouses and cross docking (from the different production plants and the 3. Parts warehouses). In the following we will highlight some of the results and consequences from executing the VCR project. We will primarily focus on the internal and external integration that have taken place in order to make Glamox so called e-business ready.

The new internal electronic value chain Earlier the company had 25 different ICT systems installed within the company. During the project these were replaced by one ERP system (with three special programs in addition) with one common database for all the plants. Thereby all employees are using the same system and the knowledge, integration and co-ordination between the different plants are increased. The Value Chain Reengineering project was a typical business process reengineering project, a BPR project, confer theoretical part, were the goal is to dramatically change and improve the business structure of a company. There were four important conceptual elements in the reengineering of the value chain at Glamox. The vision of the mobile salesman has been the cornerstone of the restructuring and simplification of the value chain. This means that the process from order to delivery has been redesigned and standardized in order to find the optimal way of serving the customers the best possible way. Now each salesman is equipped with portable computers installed with a customer relationship management (CRM) system, called Glamox Sales System (self developed). The salesman connects to the network and the main system either via mobile or fixed communication, and is able to transfer information electronically to the BaaN ERP system and to get out on-line information. The second element is the idea of Single Point Of Contact (SPOC). From all points of the network Glamox employees have access to all kind of information and are able to carry out all types of transactions. This has made it possible to centralize logistics information to two main logistics centers. The sales representatives work now directly towards their Single Point Of Contact at one of the logistic centers. The SPOC is the sales representatives permanent contact person and takes the responsibility from order entry through the delivery chain until the order is delivered and invoice sent. The third element is the concept of Modular Products. All new high end products developed in Glamox lately, demanding a considerable extent of flexibility, are now constructed on modular basis production. This means that with a few basic common components various complete products can be assembled in a short time, and only the basic modules are stored (mass customization). The last element is the idea of Complete deliveries to customers direct from factories and 3. party stock via cross docking. The modular product design philosophy makes it possible to deliver directly from factories, or should an order consists of products manufactured by several factories and stocks, it is possible to make all products to meet somewhere on the road to the customer, through the cross docking system. In this way the customer receives a complete delivery and one invoice. The new external value chain Glamox is now in the project phase to undertake the electronic integration of external cooperation partners, that is customers and suppliers. The aim is gradually to obtain the same degree of seamless integration with the companys surroundings as they have achieved internally between the different companies in the Glamox group. The biggest customers in Norway have already been connected to make transactions through EDI solutions. Internet and Extranet solutions will also play along in this integration process. The company has the intention of launching an e-service menu with priority. Glamox has approximately 150 suppliers of critical components for the production. Of these 150 suppliers about 10 are chosen to contribute in the research and development tasks. These are

supposed to be tightly integrated into the value chain with high degree of exchange of information. The most important suppliers are now ready to interact digitally with Glamox (either by EDI or other IT-solutions). Conclusions: In this paper we have tried to develop an understanding of the impact of the e-business and the Internet on the logistics and supply chain. We have chosen a double perspective, a transaction and a relationship oriented, approach in order to understand how e-business and Internet impact supply chain strategy, design, organization design and infrastructure. Through our case, Glamox, we have tried to illustrate the importance of restructuring the value chain by implementing ebusiness in order to get a well function e-logistics. We will summarize the results of our studies in the following way: Consequences of e-business for the logistics: Reduced number of suppliers and with more concentrated relationships. The costs of the suppliers, and not the prices, will be of decisive importance-(partnerships in profitability). Simplified and reduced inventories and transaction costs between sellers and buyers. Reduced number of levels in the distribution chains. More reflected attitudes towards outsourcing, or reengineering of existing logistical processes. Reduced number of competitors. A noticeable increase in the number of bonds in the supply chains based on ICT. Logistics as a competitive edge: The logistics processes will be performed in a new or more automated way and with a high potential for profitability increase. Global competition plus IT will give higher degree of distribution directly to the customer which means new solutions for actors, and new design of supply chains and the physical logistics. Smaller transaction costs will change the rules of the game for optimal inventory. The relative costs of transportation and distribution is increasing. Automation of business processes along the value chain. Large challenges in coordination of information and the physical flow along the supply chain. Dislocation of activities between the actors along the supply chain. Some further trends: Internet will make logistics to be one of the key factors for product differentiation. Marketing on the Internet will probably in a short time fall off as a competitive edge due to the fact that all enterprises will be able to do it. The enterprises just looking at the Internet strategies as an IT-question, and forgetting to include the logistics solutions, will fail. In a few years wholesalers and distributors will probably have a substantial part of its result from post sales and post sales service.

10

REFERENCES: Coase, R.H. (1937): The Nature of the Firm, Economica, Vol. 4, pp. 386-405. Ericsson, D. (2000): E-logistics-Key to Success in the Digital Economy, Paper given at a Conference in Athens May, 15 2000. Evans, P. and Wurster, T.S. (2000): Blown to Bits. How the New Economics of Information Transforms Strategy, Harvard Business School Press, Boston. Fathy, N. (1999): E-commerce: All about Customer Relationship Management, URL:http://www.suite101.com/article.cfm/elecronic_commerce/16952. Hammer, M. and Champy, J. (1993): Reengineering the corporation, Harper, New York. Hkansson, H. (1982): International Marketing and Purchasing of Industrial Goods: An Interaction Approach, Wiley, Chichester, U.K. Hkansson, H. and Snehota I. (1995): Developing Relationships in Business Networks, Routledge, London. Peppers, D., Rogers, M. and Dorf, B. (1999): The one to one fieldbook: The complete toolkit for implementing a 1 to 1 marketing program, Oxford, Captone. Porter, M.E. (2001): Strategy and the Internet, Harvard Business Review, March, pp. 63-79. Porter, M.E. (1985): Competitive Advantage-Creating and sustaining superior performance, Free Press, New York. Porter, M.E. (1980): Competitive Strategy, The Free Press Collier MacMillan Publishers, New York. Stabell, C.B. and Fjeldstad, E.D. (1998): Configuring Value for Competitive Advantage: On Chains, Shops, and Networks, Strategic Management Journal, Vol.19, pp. 413-437. Williamson, O.E. (1985): The Economic Institution of Capitalism, Free Press, New York.

11