E-business impact on scm


E-Business provides the opportunity for virtual shortening of the supply chain as it extends around the world. The advent of the internet has undoubtedly facilitated movement of data faster and more cheaply than ever before. Consequently the commercial sector is taking a keen interest in developing the concept of e-Business.

Other than the publicity surrounding this phenomenon, many researches have been established in academic literature. Such as Auramo et al (2002), Golicic et al (2002), Gubi et al (2003) and Croom (2005) aims to empirically investigate the impact of e-Business on supply chain management in their research projects.

The arguments made by academics and practitioners suggest that e-Business can restructure supply chain operations through better communications. The growing importance of e-Business is evident by the number of books titled e-supply chain management, universities offering courses in e-Business and the international conferences focusing on a range of e-Business areas from e-Logistics, e-Commerce and e-Procurement to e-Sourcing.

It is an interesting prospect to investigate the physical distribution system of those virtual enterprises in e-business industry and determine the true effectiveness of e-business argued by researchers in this field.

This study focuses on the interrelationship between physical distribution center and e-business. It aims to analyze the particular operations applied to physical distribution centers in e-business companies, as well as the impact of e-business on SC processes. Essentially this study intends to compare the operational performance under different business strategies and in different market places.

There are six chapters in this study: supply chain concept, e-business, the interrelationship between e-business and physical DC, two company research chapters and conclusion.

Chapter 1 aims to undertake a critical review of the literature in the areas of supply chain, in order to formulate suitable definitions for this study, and sets the scope for the study by identifying the role of physical distribution center in supply chain.

Chapter 2 introduces the e-business concept and the current situation of development in China, from both marketing and supply chain perspectives.

Chapter3 analyzes the interrelationship between e-business and physical distribution centers based upon the exploratory literature study at the beginning of the investigation.

Chapter 4 contains the research on three B2C companies in China, and the comparison on their business strategies, geographical distribution systems, operational SC processes and the impact from the utilization of information technologies, etc.

Chapter 5 discusses the different distribution systems and e-business technology utilizations for the company located in different countries (China and US).

Chapter 6 restates the aim of this study and assesses how it was accomplished, using the conclusions derived from the empirical findings.

Supply Chain

Supply Chain Concept

One of the most significant paradigm shifts of modern business management is that individual businesses no longer compete as solely autonomous entities, but rather within supply chains.[1] The term "supply chain management" arose in the late 1980s and came into widespread use in the 1990s. There are many definitions of supply chain, depending on the viewpoint of the definer. Some definitions are offered below:

  • "A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system." from Lee and Billington, 1993
  • "A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers." from Ganeshan, Ram, and Terry P. Harrison, 1995, "An Introduction to Supply Chain Management"
  • "A supply chain is the alignment of firms that bring products or services to market." from Lambert, Douglas M., James R. Stock, and Lisa M. Ellram, 1998, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, Chapter 14
  • "A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves." from Chopra, Sunil, and Peter Meindl, 2001, Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ: Prentice-Hall, Inc. Chapter 1
  • "A supply chain consists of supplier/vendors, manufacturers, distributors, and retailers interconnected by transportation, information and financial infrastructure. The objective is to provide value to the end consumer in terms of products and services, and for each channel participant to garner a profit in doing so." from Shain & Robinson, 2002

The paper follows the last one in the list above, the definition of supply chain from Shain & Robinson. By understanding the definition, it is identified that there are some key components required in a supply chain.

  1. Network
  2. Synonym of "chain" and "system"; emphasizes the fact that participants in the supply chain are specialized and interdependent.

  3. Entities
  4. It's the term for various stakeholders in the supply chain, such as supplier/vendors, manufacturers, distributors, and retailers. They may also be called players, participants.

  5. Complementary assets
  6. The labor among participants contribute specialized, mutually supporting resources (skills, tools) to the supply chain; the facilities such as distribution centers, warehouses, etc. All of which are needed for the supply chain to fulfill its mission.

  7. Linked or shared processes
  8. Encompasses all processes required and decisions made to procure raw materials, transform them into intermediate and finished goods, distribute the finished goods to customers, and provide after-sales service; involving flows of information, materials and funds, these processes are linked or shared since they form the continuum of economic activities necessary to meet consumers' needs

  9. Customers

The ultimate buyers who consume the goods or services

Each supply chain has its own unique set of market demands and operating challenges and yet the issues remain essentially the same in every case. Companies must make decisions individually and collectively regarding the key components to develop their supply chain.

Supply Chain Management Concept

The SCM concept could be said to consist of five distinct management stages. The first can be described as the era of internal logistics departmentalism. In the second stage, logistics began the migration from organizational decentralization to centralization of core functions driven by new attitudes associated with cost optimization and customer service. Stage three witnessed the dramatic expansion of logistics beyond a narrow concern with internal warehousing and transportation to embrace new concepts calling for the linkage of internal operations with analogous functions performed by channel trading partners. As the concept of channel relationships grew, the old logistics concept gave way, in stage-four, to full supply chain management. Today, with the application of internet technology to the SCM concept, we can describe SCM as entering into stage five, e-SCM. These stages are portrayed in Table 1.1.

The Role of Physical DCs in Supply Chain

There are a number of reasons why DCs are required. These vary in importance depending on the nature of a company's business. In general, the main reasons are:

  • To hold inventory and decouple demand requirements from production capabilities. This helps to smooth the flow of products in the supply chain and assists in operational efficiency, enabling an 'agile' response to customer demands.
  • To hold inventory to enable large seasonal demands to be catered for more economically.
  • To hold inventory to help provide good customer service.
  • To enable cost trade-offs with the transport system by allowing full vehicle loads to be used.
  • To facilitate order assembly.

These reasons emphasize the importance of the DCs. It is possible to summarize the main reason for developing a logistics network as 'the need to provide an effective service to the customer, whilst minimizing the cost of that service'. Service and cost factors are thus of paramount importance when determining the number, size and location of DCs.

For the best possible customer service, a DC would have to be provided right next to the customer, and it would have to hold adequate stocks of all the goods the customer might require. This would obviously be a very expensive solution.

At the other extreme, the cheapest solution would be to have just one DC and to send out a large truck to each customer whenever his or her orders were sufficient to fill the vehicle so that an economic full load could be delivered. This would be a cheap alternative for the supplier, but as deliveries might then only be made to a customer once or maybe twice a year, the supplier might soon lose the customer's business.

There is obviously a suitable compromise somewhere between these extremes. This will usually consist of the provision of a number of DCs on a regional or area basis, and the use of large primary (line-haul) vehicles to service these, with smaller vehicles delivering the orders to customers. For certain operations, of course, even these simple relationships will vary because of the need for very high levels of customer service or the very high value of products.

In addition, it should be noted that there are a number of different types of DC, each of which might be considered in a suitable physical distribution structure. These might include:

  • Finished Goods DCs these hold the stock from factories;
  • Distribution Centers, which might be central, regional (RDC), national (NDC) or local DCs all of these will hold stock to a greater or lesser extent;
  • Trans-shipment sites or Cross-docking DCs by and large, these do not hold stock, but act as intermediate points in the distribution operation for the transfer of goods and picked orders to customers;
  • Seasonal stock-holding sites;
  • Overflow sites.

Logistics network and DC location strategies are aimed at establishing the most appropriate blend of storage and transport at a given customer service level. The interrelationship of the different distribution elements and their associated costs thus provide the basis for decision making.

The Cost Factor

The overall logistics cost is the cost should be taken into account, which varies with respect to the different site alternatives (number, size, type and location), and consists of the individual distribution cost elements.

  1. Production Costs
  2. These will vary according to the type of production process or system used and the type of product manufactured. Make-to-stock or make-to-order will also be relevant. Factories may be 'focused' on one or two specific types of product or may make a large range of different products. Different distribution structures may be required to support different types of product. The effect on primary transport costs will be very relevant.

  3. Packaging Costs
  4. These are mainly concerned with the trade-off between the type of packaging and the handling and transport costs. The type of load unitization will also be important.

  5. Information Systems Costs
  6. These cover a wide area from order receipt to management information systems. The type of DC network will affect many of these costs. These costs may represent a variety of information or communication requirements ranging from order processing to load assembly lists.

  7. Lost Sales Costs
  8. These might occur because of inadequate customer service, and are very relevant in the context of the proximity of the DC to the customer, together with the reliability and speed of service.

  9. Inventory Costs
  10. These include the cost of capital tied up in inventory as well as the cost of obsolescence, etc. They have a fundamental relationship with the DC network in terms of the number of stock-holding points and the hierarchy of stock-holding according to DC type.

    The key costs can be broken down into four main areas:

    • Capital cost the cost of the physical stock. This is the financing charge, which is the current cost of capital to a company or the opportunity cost of tying up capital that might otherwise be producing a return if invested elsewhere.
    • Service cost that is, stock management and insurance.
    • Risk costs which occur through pilferage, deterioration of stock, damage and stock obsolescence.
    • Storage costs here considered separately as warehousing costs.
  11. Transport Costs
  12. The number and location of sites within the distribution structure, and the associated throughputs significantly affect transport costs. Both primary transport and final delivery costs are affected by DC numbers and location.

    The two most important categories of transport costs are primary (trunking/linehaul) and secondary (final) delivery. These are affected differently according to the number of DCs in a distribution network.

    Delivery transport is concerned with the delivering of orders from the DC to the customer. This can be carried out by a company using its own fleet of vehicles or by a third-party carrier. Whichever alternative is used, the cost of delivery is essentially dependent on the distance that has to be travelled. Delivery distance can be divided into two types: 1) 'drop' distance, which is the distance travelled once a drop or delivery zone has been reached; and 2) 'stem' distance, which is the distance to and from a delivery zone. Whilst the 'drop' distance remains the same whatever the distance from the supplying DC, the 'stem' distance varies according to the number of DCs in the system. The greater the number of sites, the less the stem distance.

    The primary transport element is the supply of products in bulk (i.e. in full pallet loads) to the DCs from the central finished goods warehouse or production point. Once again, the number of sites affects the overall cost of this type of transport. In this instance, the effect is not a particularly large one, but it does result in an increase in primary transport costs as the number of DCs increases.

    If the costs for both primary and delivery transport are taken as a combined transport cost then the total transport costs can be related to the different number of DCs in a distribution network. The overall effect of combining the two transport costs is that total transport costs will reduce, the greater the number of sites that there are in the system.

  13. Warehousing Costs

These costs vary according to the type of storage and handling systems used, together with the volume and throughput at the site. The size and type of site will thus be important, as will the location.

The major cost breakdown is between building, building services, labour, equipment and management/supervision. The relationship of these costs will, of course, vary under different circumstances industry, product type, volume throughput, regional location, age of building, handling system, etc. In general, the direct labour cost is likely to be the greatest element, with the building cost likely to fluctuate from very high (new building, prime location) to very low (old building, peppercorn rent, low rates or local taxes).

The Customer Service Factor

Customer service, as a critical success factor for most companies, has become very significant. But the ability to improve service levels and to maintain this improvement is a challenge that faces many companies. The major reasons are:

  • the growth in customer expectations thus service fulfillment has become a priority for any successful strategy;
  • the growing professionalism of buyers many buyers now recognize the importance of service as well as price in the product offering;
  • markets have become increasingly service-sensitive there is little else to differentiate between products;
  • the diminution of brand loyalty, particularly with respect to FMCG, where immediate product availability is the vital factor;
  • the development of new ideas such as relationship marketing where fulfilling service expectations is the key and customer retention is a priority.

The components of customer service may be seen as transaction-related elements, where the emphasis is on the specific service provided. They are usually divided into three categories. These reflect the nature and timing of the particular service requirements (before, during and after delivery of the product):

  1. Pre-transaction elements: these are customer service factors that arise prior to the actual transaction taking place. They include:
    • written customer service policy;
    • accessibility of order personnel;
    • single order contact point;
    • method of ordering;
    • order size constraints;
    • system flexibility;
  2. Transaction elements: these are the elements directly related to the physical transaction and are those that are most commonly concerned with distribution and logistics. Under this heading would be included:
    • order cycle time;
    • order preparation;
    • inventory availability;
    • delivery alternatives;
    • delivery time;
    • delivery reliability;
    • delivery of complete order;
    • condition of goods;
    • order status information.
  3. Post-transaction elements: these involve those elements that occur after the delivery has taken place, such as:
  • availability of spares;
  • invoicing procedures;
  • invoicing accuracy;
  • product tracing/warranty;
  • returns policy;
  • customer complaints and procedures;
  • claims procedures.


What is E-business?

It is common to use the terms e-business and e-commerce as synonyms. However, there are differences between the two: e-business is broader than e-commerce. E-commerce is the exchange, procurement, and distribution of products, services, and/or payments between two or more economic entities via computers or other electronic means (Pitre, 2000). This definition is consistent with the first definition of e-commerce given by Kalakota and Whinston (1997). However, it excludes intra-organizational applications that do not interface with external entities. In contrast, e-business includes the strategies, tactics, practices, activities, and methodologies that companies apply to use information technologies to improve their business practices (Abu-Musa, 2004; Pinero, 2001).

E-business can be loosely defined as a business process that uses the Internet or other electronic medium as a channel to complete business transactions. As classified by Geoffrion and Krishnan (2001), e-business consists of three areas: (1) customer-oriented activity and (2) business-oriented activity supported by (3) the e-business technology infrastructure.

The (1) customer-oriented activity consists of the activities with customers involved such as business-to-customer (B2C), customer-to-customer (C2C), government-to-customer (G2C), etc.; the (2) business-oriented activity comprises business-to-business (B2B), business-to-government (B2G), etc. It is concluded that the scope of e-business spread across three categories: business, customers and government. See Table 2.1 to view categories and segments.

The above table illustrates the broad segments of e-business. This paper focuses on the B2C segment and excludes other segments, which is defined as the use of a variety of Internet applications that enable companies to sell goods and services directly to the end-customer on the Internet.

For (3) the e-business technology infrastructure, it is defined as the total investment in information and communications technologies (ICT) in the company, which includes hardware, software, telecommunications, electronically stored data, devices to collect and represent that data, and the people who provide IT services. Both information technology capability provided by internal groups ('insourced') and those outsourced to suppliers such as IBM Global Services and HP Enterprise Services (former EDS) are included as well. It is often claimed that information and communication technologies (ICT) will be for the economy what steam and machine power were to the industrial revolution (Van Hoek, 2001a:21).

Current Status of E-business in China

According to CNNIC (China Internet Network Information Center), by December 31, 2009, the number of Chinese Internet users and the Penetration rate of the Internet had reached 384 million and 29% respectively. The number of Internet users increased by 40 million compared with late 2008, up 28.9%, and the increase in the number of Chinese Internet users remains robust.

The number of online shoppers rose against the economic crisis by nearly 14 million from 74 million to 87.88 million, more and more Internet users were used to transparent and convenient online shopping.

In the China market, C2C (customer to customer) and B2C (business to customer) online shopping web portals generated total sales value of 248.35 billion Yuan (EU) in 2009, increasing by 93.7% from 2008, according to China-based iResearch Consulting Group.

China's potential of online shopping is yet to be released. Additionally, the government has attached great importance to e-business's stimulus to the economy, and has released a series of policies to regularize and guide e-business development; industry e-business also grew vigorously, with more e-business platforms emerging and more and more farsighted traditional enterprises setting out for e-business. Against the general background, e-business is expected to maintain fast growth in the coming years.

Current Development Situation of Supply Chain for E-business in China

With annual growth estimated at around 30 percent on average, China is by far the strongest developing market in the global supply chain management and logistics sector. Tremendous growth in foreign trade and direct investments, strong domestic economic development and state support for massive infrastructure investments mean that China will continue to offer great opportunities for SCM and logistics services. And as the country becomes ever more integrated into worldwide manufacturing processes, time-sensitive logistics for global supply chains will grow in importance.

Global integrators such as UPS, TNT, DHL and FedEx have been in China for two decades, and have over that time captured a large share of China's international time-sensitive SCM and logistics market.

Local operators are very active in the domestic market and have been snapping up opportunities in an effort to stay ahead of the intense competition. While some have expanded profitably, no one has managed to capture more than 10 percent of the market.

Most providers offer comprehensive service levels, competitive prices and some competencies in serving markets regionally. Yet no one seems to have a major competitive advantage, and no one could cover the whole country.

The geographical and regulatory landscape of local Chinese logistics operations is highly fragmented. And the strong protectionism of local authorities, especially with regard to road transport, has put up significant barriers to large expansion strategies.

The Interrelationship between E-business and Physical Distribution Centers

E-business is rapidly evolving as requirements grow in areas such as product deliveries, transportation and physical flow control. E-business also enables new business models and improvements in physical flow management.

The increasing prevalence of e-business and the networked way of doing business are both changing the environment for supply chain operations. Physical distribution has grown in importance as entire value chains from earth to earth must be managed. With growing outsourcing of business operations grows the importance of managing the whole process that brings added value to the end customer. This has created new needs in the logistics field. For example, the demand for different value-added services in logistics is increasing. Traditions in the field and its status make it difficult to find services to fulfill these new needs.

E-business provides the means for data transfers in ordering, delivery, production, supply etc. almost in real-time. However, the product's manufacture and transport cannot be done at the same speed. Speedy and accurate deliveries without added costs represent a great challenge in the future. Complexity grows in networked businesses in relation to how well optimized the chains are.

The Requirements for Physical DCs from B2C companies

Operation Strategy in Distribution Center

1, Commonly, there are two alternative storage strategies applied on inventory management:

* Directed storage

In the directed storage methodology, an item is assigned to a fixed location. Every time this item is ordered it will be stowed and picked from the same "address" or location in the DC. Benefits of this strategy are as follows:

  1. Ability to store high volume products in convenient locations, increasing picker productivity
  2. Ability for associates to learn where products are located
  3. High degree of accuracy

However, directed storage is not beneficial from a space utilization perspective. As inventory is depleted from the fixed location, the storage unit is under-utilized until inventory is replenished once again. Figure 1.1 provides an idealized view of this dynamic as presented by Bartholdi and Hackman.

Theoretically, at any given point in time the storage locations will be half empty on average.

  • Random storage
  • In random storage, items are physically stored anywhere that there is available space in the pick area. Therefore, multiple different products may be placed in the same storage area. Once a product is removed, a different product may take the place of the original one.

    From a space utilization perspective, the random stow methodology performs much better. Bartholdi and Hackman estimate that average capacity utilization for random storage will be approximately 66%. However, there are several drawbacks as well:

    1. Workers are not able to learn where products are located, potentially reducing efficiency
    2. In some cases, products may take longer to stow as workers search for available space
    3. Accuracy issues may arise due to employee error

    2, Additionally, there are three alternative product placement strategies applied on inventory management:

  • Product Group Affinity
  • A product placement strategy that directs inventory to virtual warehouse zones based on product group. For example, Books would be stored in one area of the warehouse, videos in another area of the warehouse, etc.

    The product affinity approach hypothesizes that since customers tend to order items within a single product group, this placement strategy will enable orders to be in closer proximity to one another, thereby reducing the distance between picks and increasing pick productivity. Additionally, storage equipment can be tailored to the individual product requirements, resulting in additional gains. While products would be directed to their associated warehouse zones, items would be stowed randomly within these zones thereby leveraging the benefits of both the directed and random stow philosophies.

  • ABC Classification
  • An inventory control strategy, based on a form of Pareto analysis, provides a mechanism for identifying different categories of stock that will require different management and controls. The items are divided into three categories (A, B, and C), according to a criterion such as revenue generation, turnover, or usage value. Typically, "A" items represent 20 percent in terms of quantity and 75 to 80 percent in terms of the value.

  • The Cloud

A cloud strategy that distributes inventory randomly to several different warehouse zones (called clouds). The goal is to create multiple such clouds that would at any given point in time contain all inventory needed for fulfilling all customer orders. The cloud concept hypothesizes that by dispersing the inventory to multiple locations customer orders will be able to be picked from one or a few clouds, resulting in increased pick productivity as distance traveled between consecutive picks is minimized.

Operations in Distribution Center

At a tactical level, all the physical distribution centers of B2C companies perform the same basic function. The DCs obtain large shipments from vendors and retail partners, store these items, and then deliver smaller quantities to the end customer, who typically purchases only a few items. The translation of these goods from large incoming shipments to small outgoing deliveries consists of several major DC physical processes, as following: receive, stow, replenish, pick, sort, pack and ship.

  1. Receive
  2. The first major step in DC is the receive operation. Here, items are delivered from thousands of vendors based on the company's ordering systems. The critical steps in this process are as follows: inspecting shipments to ensure the quantity and content of the cases matches PO, "virtually" receiving the items in IT system for tracking purposes, and lastly staging the items for the next process.

    Shipments may be received at the dock or directly at the storage bin (Direct to Bin). In the former process items must be handled twice, once to receive and again when the item is stowed. In the latter process, where items are received directly at the bin, the receive process and stow operation essentially become one process. Direct to Bin id typically utilized for some major high quality vendors where accuracy issues are not problematic, thereby minimizing the need for quality inspections.

  3. Stow
  4. The stow process, also called "put-away", is the method on which products are physically stored in preparation for retrieval in the downstream picking process. Usually, each unique inventory item has a unique bar-code for tracking.

  5. Replenishment
  6. Once safety stock levels are reached the inventory is pulled from a "receive area" and replenished to the major stow areas. The replenishment process itself is essentially the same as the stow operation.

  7. Pick
  8. The pick operation is that the picker follows a computer generated pick list on an RF scanner, and follows a "pick path" which represents the route a picker must follow. The RF scanner shows the picker the location of the next item on the list. Once the item is found the picker scans the item to ensure that it is the correct one with the correct bar-code.

    Normally the pickers are not picking all of the items for a given customer order (called "pick-to-order"); rather they are picking items that may belong to tens or hundreds of different orders. And additionally, multiple pickers may pick items for the same order. This is necessary because for a given customer order, each item in the order may be located in faraway locations in the warehouse. In order to minimize travel time between picks, a sophisticated computer algorithm assigns pickers items to items in close proximity. This means that items must later be sorted into their correct orders in the downstream process.

    Picking is the most critical process for B2C companies.

  9. Sortation
  10. The major goal of the sortation process is to assemble the items from many picker totes into their associated customer orders. This process can be done automatically or manually.

  11. Pack
  12. Once the items have been assembled into their customer orders, they are ready to be packed. Packers place the orders into right-sized boxes and the orders are directed to the appropriate location for their shipping destination.

  13. Ship

The last process is to load the boxes onto trucks for their final delivery to customer.

The Impact on Physical DCs from the development of E-business

Internet and e-business not only revolutionized the way goods are sold, but how they are managed within a physical distribution center. Customer demand customized products delivered at very high speed with complete order flexibility and convenience. Today's customer wants to be able to track their orders instantly from the moment they purchase the goods until the moment the goods arrives on their doorstep, and be able to determine delivery costs and time-in-transit, and break up their orders for multiple ship-to addresses.

Using electronic data transfer solutions has improved all the Supply Chain processes. The new concept, so called e-SCM, increases the speed and security, improving the entire process management. The networked supply chain integrates the e-business company processes with those of customers and suppliers.

E-SCM is a tactical and strategic management philosophy that seeks to network the collective productive capacities and resources of intersecting supply channel systems through the application of Internet technologies in the search for innovative solutions and the synchronization of channel capabilities dedicated to the creation of unique, individualized sources of customer value.

The application of Internet technologies focused on the continuous regeneration of networks of businesses empowered to execute superlative, customer-winning value at the lowest cost through the digital, real-time synchronization of product/service transfer, service needs and demand priorities, vital marketplace information, and logistics delivery capabilities.

Research on Physical Distribution Centers for B2C companies in China

Current Status of B2C in China

Researchers generally have agreed that there is tremendous potential in the online consumer market in China (Wong et al., 2004). However, as research in B2C e-business in developing markets in general, research in the area of B2C e-business in China is very limited. There are several studies about the online population in China. The rapid growth of the Chinese online population and the telecommunication industry is documented in Zhao (2002) and Wong et al. (2004). Regarding online consumer behavior, a somewhat outdated paper (Wee and Raman Chandra, 2000) reveals that Internet shoppers in Mainland China, Hong Kong, and Korea have similar characteristics. Most of them are young and male, hold degrees, and are working professionals. They shop online because of the convenience. However, they are concerned about online security, fraud, refund issues, and merchandise quality. Most of these characteristics of the Chinese Internet population do not appear to have changed much, according to a more recent study by Wong et al. (2004), although it is evident that the Internet has become more accessible to people in almost all age, education, and socioeconomic groups.

Products should be delivered from the DC which covers the area where the given customer orders come from. For example, if a customer orders from Shanghai and the products should be delivered from Shanghai LC, and if an order has been taken place with an address near Beijing area, then the products could only be delivered from Beijing LC, etc.

The 4LCs and 21 city hubs are supporting their 42 self-pick points spreaded in 25cities, which allows customers to go and pick their orders by themselves; and supporting the cash on delivery service (COD service) to customers in more than 50 cities, which is the service that the deliverers take products to customer with POS terminal machines and collect payments from customers either by credit card or by cash.

There are only 50 cities where provided the COD service and the deliveries are taken by the self-owned 3PL: Shanghai Yuanmai Express. For other places all over China, the deliveries are taken by contract 3PLs.

3, DC Operation Diagnosis

  1. Stow
  2. In 360buy, inventory is neither stowed by product type (Product Group Affinity) nor randomly (the cloud). Inventory is ranked according to demand velocity. Items with the highest velocity are stowed to the fast pick area, such as: close to the pick-up/drop-off (P/D) point, close to receive, etc. In contrast, items with the lowest demand velocity are stowed to the areas far away from the fast pick areas.

  3. Picking
  4. Each picker would have to pick all the items for 20 orders each time. IT system would gather the information about the items like bar-code, locations and picking route, and print it automatically in a paper picking list for each picker.

  5. Sortation
  6. In sortation process, there are following operations: resort, reconfirm, and invoice. Once a picker tote, which contains 20 orders, arrives in the staging area they are physically resorted into 20 separate orders. And, each item has to be scanned and reconfirmed with the customer order manually. Lastly, an errorless order is sent to invoice.

  7. Packing

As items are assembled with invoice into a customer order, they are ready to be packed. Packers use double-layer plastic bags, foamed plastic materials and cartons for packing. For the orders delivered by the company self-owned deliverers, the double-layer plastic bags would be used for the purpose of cost-saving; for the orders would be delivered by contract 3PLs, they are covered with double-layer foamed plastic materials and packed with a right sized carton. The last step is to load the boxes for their final delivery.

It takes approximately 30 minutes to finish all the processes from Order Print and Pick, to Pack and Ship.

In Chinese Book Industry, Amazon.cn is the first company who has the real-time IT system interface with its suppliers. Once a customer places an order in Amazon.cn, the suppliers will receive the order details by EDI and delivers the very items to Amazon Fulfillment Centers.

Amazon.cn utilizes the Intelligent Cargo Transfer System to forecast the demand for different products in each region and distributes the inventory in each FC during purchasing process accordingly. Such that the extra lead time and cost of cargo transfer between FCs could be minimized.

The orders in Beijing, Suzhou, Guangzhou area (where Amazon 3 FCs located) are delivered by company self-owned delivery team, which approximately 300 people by far. For the orders from other locations throughout China is done by contract 3PLs. The main partners of Amazon.cn are ZJS Express, China Railway Express and TNT.

3, DC Operation Diagnosis

  1. Stow
  2. Amazon differentiates each unique inventory item as an ASIN (Amazon Stock Identification Number), similar to a SKU. Every ASIN is assigned a unique numerical bar-code. And in its Fulfillment Centers, a single unit of storage is called a "bin". For tracking purposes, each bin also has a unique bar-code. Therefore, when an ASIN is placed in a bin, the item is both physically and virtually stowed. This tracking capability is essential to Amazon's quality and customer service. Amazon.cn has implemented many advanced technologies under Amazon global standard.

    In Amazon China, the Product Group Affinity strategy is implemented. The storage area has been divided into several storage zones for specific product stowing. For example, there is the publication product zone, consumer goods zone, etc.

    Random storage method is used inside each zone, which means, a distinct ASIN will not necessarily be placed in the same bin the next time the item is stowed in the fulfillment center. Once the stower finds an available bin location, they will use an RF scanner to scan the item and the bin location, such that the item is both physically and virtually stored in Amazon's software systems. This will enable the item to be retrieved once an order is placed by a customer.

    In order to manage the random storage method more effectively, Amazon uses a special kind of racks, which are designed with adjustable vertical clapboard. The stower can adjust the space of the rack by moving the vertical clapboard according to the product size, to maximize the utilization of the space.

  3. Picking
  4. Each picker would have to pick all the items for 50 orders each time. The picker follows a computer generated pick list on a RF scanner, and follows a "pick path" which represents the route a picker must follow.

    Each picker tote has its unique bar-code. When the picker tote is working, it is considered as a moving rack to Amazon's IT system. The RF scanner shows the picker the location of the next item on the list. Once an item is found the picker scans the item and the bin location, such that the item is both physically and virtually picked in the system. Then the picker inspects the item for damage and places the item in a tote, in the meantime, the picker has to match the picker tote with the very item. The picker will then move to the next location identified on the RF scanner in the nearest location.

  5. Sortation
  6. In sortation process, each item is removed from the tote, scanned, and directed to a bin in a "rebin station". A rebin station is looks like a cupboard consist of many transparent compartments except it is bigger and portable. Once all of the items in the picker tote have been placed in the appropriate bin in the rebin station, the rebin station will be moved to the next step in the process, packing.

    In Amazon China, Crisplant (an automated conveyor system) has been set up but hasn't been put into use so far.

  7. Pack/Ship

DangDang has adopted a phase-in strategy. Which means that they calculate the warehouse capacity would be needed for the next year according to their yearly sales forecast every year, and they make the decision either to expand their existing DCs or to locate a new one, or both, based on the calculation. They only build a DC when the sales in a market reach RMB40 MILLION. By doing so, DangDang can gain the flexibility of warehouse expansion, quick response to the new market, and avoid the periodic idle of DC capacity as well.

Products would be delivered from the closest DC to customers. If customer orders a product which doesn't stock in the closest DC, then the customer can chose either to wait one or two days more for Cargo transfer between DCs; or to split order (if not a single product order) and receive it directly from Beijing DC with probably longer lead time (depending on the distance between the deliver destination and Beijing DC). And over 450 cities where are provided the COD services.

All the transportations are outsourced. The delivery partners of DangDang include 20 transportation companies and 40 express delivery service firms (freelance couriers). All of these delivery service providers only serve regional markets with major cities as their centers. They have established delivery workforces in the areas they serve, employing to local contract logistics providers in different regions, including cargo transportation and deliveries.

3, DC Operation Diagnosis

  1. Stow
  2. DangDang uses ABC Classification to manage their inventory. A class represents the items with high demand velocity; B class consists of the items with medium velocity and C class stands for the items with low demand velocity. A class items are stowed in the area close to the distinct of sort/pack; A class items are stowed in farther places and C class items are stowed the most far away.

  3. Picking
  4. Each picker would have to pick all the items for 40 orders each time. The ERP system would generate and print out a picking list with the shortest picking route. Usually, pickers start from C class area, then go through B class area and finish picking in A class area so that the picker totes can be moved to sortation area immediately.

  5. Sort and Pack

The distinct of sort/pack is right next to A class storage area. Once pickers finish the picking operations, their picker totes are immediately moved and the items contained are physically resorted into customer orders. Once the items are assembled into an order, they are moved and packed with right sized boxes. The last step in process is moving packed orders into different racks standing at one side of sort/pack area, which differentiate themselves by signing city names on. For example, a customer order with the delivery destination of Shanghai would be placed into the rack signed "Shanghai" and waits for their final delivery.

All the processes in this area are handled by working people in groups. There are 70 groups working in DangDang's Beijing DC, 60 of which are working on publication products, and 10 groups are working on the rest products.

In order to fulfill the major customers' demand, who majorly distributed in coastal regions in both southeast China and the south of China, all the three companies located their DCs in Shanghai area and Guangzhou to provide a better service level to their main customers.

Because of the long distances between different regions and the fact that China is so big, there is a very limited area could be served by a single DC.

From the table 4.8, it indicates that Amazon.cn has applied a series of advanced technologies from the support of Amazon.com, with a strategy of building up a powerful foundation to support its future development, in the meanwhile, Amazon.cn also suffers from the high cost of investment on its systems and with no profit until last year.

On the contrast, DangDang.com follows a phase-in strategy which allows them to build up new tools and facilities according to its development and obtains flexibility and quick response to the market. Therefore, DangDang.com has less redundancy.

For 360buy.com, most of their IT systems are self-developed, which is much easier to adapt and adjust along with the business development. Additionally, 360buy.com does not have the systems dependency and redundancy problems as well.

Compare with Amazon.com US

The Management of Physical DCs in Amazon.com

Amazon.com Company Background

Amazon's vision is to have the "earth's greatest selection" and to be the "earth's most customer-centric company", with its strategy which is based on convenience, selection, and low prices.

In 2004, Amazon posted their first profit; in 2009, sales grew % to billion USD in revenues, capturing % of all online sales (excluding auctions and travels). Net income for the year was billion USD.

There are two core competencies of Amazon, namely their software expertise and operational excellence.

Amazon.com Distribution System

Amazon's distribution centers are called Fulfillment Centers (FC's). Amazon has operations in several locations throughout the US. Each of the FC's has specific capabilities and product lines, enabling the firm to offer a large selection, while leveraging a common platform and meeting the unique requirements of their local markets.

Amazon shares the information about customer orders, current storages and forecasting/expansion plans with its suppliers synchronously. So that its suppliers could deliver customer orders directly without to store the products in Amazon's FCs, depending on whether the customer agrees on split deliveries. If so, the customer might receive the order in more than one deliveries which might come from different FCs and suppliers, and only one delivery fee would be charged; if not, the suppliers would have to transport the products to Amazon's one specific FC following the instruction from their IT systems in order to combine orders.

All the deliveries are taken by 3PLs. And in several major cities like New York, could provide the customers one-day delivery or 12-hour delivery. For other places across the US, Amazon provides second-day delivery services.

DC Operations Diagnosis

  1. Stow
  2. Both directed and random storage methods are applied within Amazon Fulfillment Centers.

    * Directed storage

    In the directed storage, an ASIN is assigned to a specific bin location. Every time this ASIN is ordered it will be stowed and picked from the same "address" or location in the FC. Items are directed to various storage types based on their demand velocity. Items with higher demand will be directed to pallet areas, while lower demand items will be placed in smaller storage types. The velocity thresholds are set by the software engineering team.

    * Random storage

    In random storage, items are physically stored anywhere that there is available space in the pick area. Therefore, a distinct ASIN will not necessarily be placed in the same bin the next time the item is stowed in the fulfillment center. Once the stower finds an available bin location, they will use an RF scanner to scan the item and the bin location, such that the item is both physically and virtually stored in Amazon's software systems. This will enable the item to be retrieved once an order is placed by a customer.

    Amazon utilizes several different storage types to fit their wide range of product types and customer demands. The main storage types are library, library deep, case flow, and pallet rack.

  3. Picking
  4. The picker follows a computer generated pick list on a RF scanner, and follows a "pick path" which represents the route a picker must follow.

    The RF scanner shows the picker the location of the next item on the list. Once an item is found the picker scans the item to ensure that it is the correct ASIN. Then the picker inspects the item for damage and places the item in a tote. The tote is stored on a cart. The picker will then move to the next location identified on the RF scanner. Once a tote is deemed full, the picker will place the tote on a conveyor in preparation for next process. The tote itself has a bar code such that the items in the tote can be physically tracked throughout the remaining steps of the fulfillment process.

    At Amazon, pickers are not picking all of items for a given customer order; rather they are picking items that may belong to tens or hundreds of different orders. Additionally, multiple different pickers may pick items for the same order. This is necessary because for a given customer order, each item in the order may be located in faraway locations in the warehouse. In order to minimize travel time between picks, a sophisticated computer algorithm assigns pickers items to items in close proximity. This means that items must later be sorted into their correct orders in next process.

  5. Sortation
  6. There are two different methods of sortation are used: automated and manual sortation.

    * Automated Sortation

    In the automated sortation, an operator removes each item from the picker tote, then the item goes through an induct station where it is directed along a series of conveyors to one of several thousand chutes or lanes where it will eventually meet up with the remainder of the customer order. Once the order is completed, it will go to the pack process.

    * Manual Sortation

    In the manual sortation, there are two major operations: tote sortation and rebin. In tote sortation there are distinct staging areas for batches of totes to arrive. A "batch" contains multiple orders which are contained in several different totes. Once the batch of totes arrives in the staging area they are physically moved to the "rebin" step. In the rebin process, each item is removed from the tote, scanned, and directed to a bin in a "rebin station". A rebin station is similar to a library shelving mechanism except it is smaller and portable. Items that belong to the same customer order will "meet" or be assembled in the same bin. Once all of the items in the totes have been placed in the appropriate bin in the rebin station, the rebin station will be moved to the next step in process, packing.

  7. Pack/Ship

The assembled customer order would be packed with right-sized boxes and directed to the appropriate location for their shipping destination. The last step in the process is to load the boxes onto trucks for their final delivery to the customer.

Explain the differences compare with Amazon.cn

Due to the challenges of operating an e-business in China, it is critical that e-business firms develop strategies suitable to local market conditions. Although e-business models are much more advanced in developed countries such as the U.S., these models cannot be copied directly in China.

Comparing between Amazon.com in US and Amazon.cn, there is several reasons could explain the differences.

  1. Customer characteristics
  2. There is a difference of customer characteristics between US and China.

    In US, the customers have been going through the period of mail shopping and TV shopping, which has built up a market basic maturely on online shopping, with the tolerance of waiting for the long distance delivery and trustful after sale services and return systems.

    In China, people still prefer to buy goods in stores and make the payment face to face instead of make decisions only based on the pictures and wait for the delivery.

  3. Development of supply chain
  4. The supply chain industry has been well developed in US. For Amazon.com, all the transportation included inbound and distributions are outsourced to its 3PL partners. Additionally, the logistics infrastructures are convenient and covers throughout the US, especially, the freight transportation is well developed.

    On the contrast, although China has invested a lot in transportation constructions for years, China is so big and the geographical and regulatory landscape of local Chinese logistics operations is highly fragmented. The strong protectionism of local authorities, especially with regard to road transport, has put up significant barriers to the national supply chain development.

  5. Utilization of advanced technologies

Amazon.com is one of the leading companies on information technology development. And a lot of automated facilities are used for years. Comparing with that, most of the activities are operated manually in China because of the low labor cost, resulting to the complexity of management and less efficiency.

The utilization of advanced network IT systems (e-business methodologies) are limited in China because that most of the SMEs in China could not afford the IT systems both for cost reason and workforce reasons. And generally, more than half of the suppliers for B2C companies are SMEs. Therefore, it is difficult to build the electronic interfaces between the company and its suppliers.


This study built upon the previous literatures on e-business development and IT technologies development for supply chain management, and the 4 companies' research. It confirmed the importance of physical distribution center for supply chain. It summarized the general requirements for physical distribution centers from e-business companies, and the impact on physical distribution centers from using e-business technologies. This study used 3 Chinese local companies and one American company to research and to generate the conclusion that, firstly, physical distribution centers are essential facilities to fulfill customer demand for B2C companies, and secondly the utilization of e-business technology has both positive and negative impact on the physical distribution center management depending on the value proposition and business strategy of the company.


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