“We live in a world of speed and cheapness,” says Roger W. Smith, who makes every component of a watch from scratch and by his own hand. It is the ultimate opposite of that other Smith (Adam)’s division and specialization of labor. I believe there is room for both in our world. It takes one watchmaker about 6 months to produce one watch. The result is a masterpiece…
A Slate article asks a very simple question: “Ikea is so good at so many things. Why is it so bad at delivery?”
The author tells the story of an item that was purchased from Ikea and was supposed to be delivered by a third party. While Ikea claimed to ship the item, the third party claimed to never receive it. Since Ikea claimed the item was shipped, the order could not be cancelled without incurring a hefty cost. Apparently, this is not a unique experience:
The nightmare of Ikea delivery is a truth so universally acknowledged that even the company cops to it. Chief marketing officer Leontyne Green talked about her own “very frustrating” Ikea delivery experience in a December 2011 Ad Age profile, which stressed the firm’s ongoing efforts to improve delivery and overall customer service.
In trying to explain the above conundrum, the author recruits several of our colleagues from Dartmouth and Harvard:
“With sporadic orders over a wide geographic area, Ikea would need a fleet of trucks that might be idle one day and not able to handle the load the next,” says Robert Shumsky, a professor of operations management at the Tuck School of Business at Dartmouth.
We have discussed several times, albeit in the context of grocery delivery, the fact that one of the main cost drivers of delivery services is density. Since Ikea tends to be quite far from urban and dense areas, it is usually difficult to build density and thus difficult to offer a cost efficient services. One may charge a high price for such a service, but given their target market, this may not be ideal. (more…)
How should Wal-Mart fill web orders? That seems like a straightforward question. And, given that Wal-Mart sold over $7 billion of stuff on the web last year, you would think they would have figured that out by now. Still as the Wall Street Journal tells it, the retail giant is still working through how best to fill orders (Wal-Mart’s E-Stumble With Amazon, Jun 19).
E-commerce at Wal-Mart is run as a distinct business, with its own headquarters, CEO and merchants who buy items specifically for the website. Every year, executives would start a “five-year planning exercise, but the plans were never executed and management would say the sales weren’t there to justify the investment capital,” says a former online-division executive. “Even now e-commerce is a rounding error in the U.S. market.” Wal-Mart said it expects $10 billion in online sales this year, which would amount to about 2% of its $469 billion in annual revenue.
As Wal-Mart’s online orders grew, it turned to makeshift spaces carved out of store-serving distribution centers and third-party warehouse operators to help handle the load. The extra layer added to its costs. Wal-Mart’s online shipping can cost $5 to $7 per parcel, while Amazon averages $3 to $4 per parcel, analysts say—a big difference considering some of Wal-Mart’s popular purchases are low-cost items like $10 packs of underwear.
As the quotes make clear, this is all about how to match Amazon so Wal-Mart remains relevant as more transactions move on-line. To put the challenge in perspective, check out this graphic of Amazon’s distribution network.
In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod. Two interesting e-grocer articles appeared this week:
The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area. Why? In class we show the difficulty of this business and I praise the operational focus of Amazon. If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household. It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.
In his article, Tom proposes a second raison d’etre of AmazonFresh:
AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.
A great article titled “The Ghosts of Sony” and authored by Jake Adelstein and Nathalie-Kyoko Stucky, came to me via a tweet by my good colleague Robert Swinney. (That’s one of the reasons I love Twitter!) It surely is worth a read as it prodded a few thoughts:
History repeats itself: In our Operations Strategy class, we teach two cases that prominently feature Japanese companies both in the same scenario: they attack the incumbent (a Swiss and an American company, respectively) “from below” and gradually move up the food chain. This follows the typical innovation dynamics that Clay Christensen has promulgated. After Sony did the same, it became the incumbent and is now under attack by South Korean Samsung Electronic Co.
Are management professionals good CEOs of tech companies? We need to see more than a few data-points but Sculley didn’t perform well at Apple either, nor did this work at Sony:
Former Sony executives and current employees blame the fall of the firm on the loss of brainpower and good employees during the reign of Nobuyuki Idei, from 1999 to 2005. Idei was the first Sony CEO to rise up entirely from a management background and in the “Who-killed Sony?” genre of books and articles; he is regularly the prime suspect. (more…)
Online retail is exploding with Amazon leading the charge in the long tail, items consumers buy irregularly. Online shopping and delivery of fast movers like groceries, however, is available to few areas in the US: FreshDirect in NYC and Peapod in Chicago and some east coast cities are the big exception.
An Operations Audit gives the explanation: the costs of covering the last mile are strongly influenced by delivery density which makes large sprawl areas prohibitively costly to serve (as dotcom busts like Webvan quickly learned). In our operations strategy class, we study Peapod by linking its financial performance to its operational structure and execution. Such analysis highlights the importance of operational metrics such as stops per hour and pick&pack per hour and revenue metrics such as basket size ($ per order). Students always suggest to replace the expensive delivery process by a pick-up model. For companies with a large investment in delivery assets and processes such as FreshDirect and Peapod, however, embracing pickup (which Peapod is experimenting with) then necessitates a hybrid model. In contrast, pure-play pick-up models such as the French ChronoDrive never invested in delivery assets.
This brings us to Relay Foods which seems to differentiate itself on 3 dimensions:
Emphasize local suppliers, and hence satisfy the “local food movement”.
Local supply allows daily deliveries which minimizes inventory risk.
Focus on pickup approach. (They also offer home delivery at a premium of $10/order.)
Relay foods is based in Charlottesville, Virginia, and also serves Richmond. It can show nice growth trajectories (see video below) in those two markets and earlier this month announced it raised $1.2 million to expand in to the greater Washington, Baltimore, and Philadelphia areas. (more…)
When it reports earnings on Tuesday, the retailer is widely expected to post its second straight year of declining domestic same-store sales. Wal-Mart’s U.S. comparable-store sales already had fallen for six consecutive quarters, an unprecedented losing streak.
The article puts some on the blame on recent changes at Wal-Mart. In an attempt to attract wealthier customers, they have changed the mix of products they sell with stronger emphasis on organic food and trendy fashion goods. They have also reduced the clutter in the stores and improved what people refer to as servicescape. Wal-Mart also got away from its promise for every-day-low-prices. As growth slowed and Wal-Mart began running out of room to build new supercenters, the chain began running promotions and discounts on select products—Wal-Mart calls them “rollbacks”—while raising prices on other items.
Can hospitals do better by doing less? This is not to suggest that hospitals should provide less care for any individual patient. Rather the question is whether hospitals can provide better, less expensive care by limiting the scope of the services they provide. That is, instead of aiming to be a one-stop shop treating all ailments, could hospitals benefit from focusing on a narrow range of procedures?
The Globe and Mail tells a pretty compelling story that the concept of a “focused factory” to a hospital can greatly improve operations — in both the management and medical sense of the word (How the factory floor inspired a new model for health care, Nov 9). The article concentrates on Kensington Eye Institute, a Toronto non-profit provider of eye care.
Ms. Swarney was one of 27 patients that Wednesday, a slow day for one of the country’s busiest cataract clinics. It has single-handedly made a huge dent in the waiting list for cataract surgery in the Toronto area, where the wait is now 127 days for the surgery, down 60 per cent from 2005. Kensington is a leader in adapting manufacturing practices to medical care. From its unassuming perch on the sixth floor of a medical building in downtown Toronto’s eclectic Kensington Market neighbourhood, the private, not-for-profit clinic is quietly bucking the trend of health-care costs that seem to go nowhere but up.
When Kensington opened its doors in January, 2006, it received $5-million in funding to perform 6,700 cataract surgeries a year. Two years later, the clinic had increased its caseload to 7,200 patients a year with the same budget. “We did that through operating efficiencies,” says Brian McFarlane, chief executive officer of the clinic.
Amazon is the 800 pound gorilla of on-line retailing. They are estimated to have an 8% share of the e-commerce market. Given their span from books to apparel to frying pans, no other site really comes close. Now we have two stories about how firms are trying to compete with Jeff Bezos and company. The first concerns ShopRunner (Retailers Team Up Against Amazon, Oct 6, Wall Street Journal). As the graphic above spells out, ShopRunner is attempt to match with Amazon’s Amazon Prime service. For $79 a year, Amazon will ship every order in two days for free. Not only does this remove part of the cost comparison between buying from Amazon or at the mall, it also locks in shoppers. Why buy a book from Barnes and Noble on line when Amazon won’t charge for shipping?
That logic is pretty compelling. A Goldman Sachs analyst estimates that Amazon has two to three prime members in the US and about five million globally. Further, they spend a lot more than non-Prime members. Needless to say other retailers want a slice of that action. Hence, ShopRunner.
Several dozen U.S. retailers are banding together to take on Amazon.com Inc. by striking at one of online shoppers’ biggest concerns: shipping costs. Under a cooperative program called ShopRunner, launched on Tuesday, the retailers are mimicking Amazon by dangling a $79 loyalty program that offers unlimited two-day shipping. But in this case it’s across all of the participants’ online stores, whether it’s Babies ‘R’ Us, Pet Smart, Dick’s Sporting Goods, GNC or a host of others. One-upping Amazon, ShopRunner will offer free returns.