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Channel Separation for Electronic Commerce
Ari P.J. Vepsäläinen
Professor of Logistics
and
Timo O. Saarinen
Professor of Information Systems
Helsinki School of Economics
P.O. Box 1210
FIN-00101 Helsinki, Finland
Tel. +358 9 4313 8326
Fax. +358 9 4313 8669
E-mail: vepsalai@hkkk.fi
ABSTRACT
The current surge of Electronic Commerce into consumer business has raised the
questions on how the new customer relationships will propagate changes upstream to
the distribution channels. There are expectations of completely new configurations of
firms and markets in the emerging electronic business or enterprise. The topic of this
paper is the analysis of the changes on the industry level into the form of customerdriven channels. We review the evolution of distribution channels from the early days
of industrialization into the electronic age, with an emphasis on the service revolution.
The main thrust of the evolution has been in the separation the activities and
capabilities of the conventional channel organizations from co-located units first into
specialized structures for sales and marketing and physical transfer, and later further
for value-added services. Within services, we further separate ordering and
administration from financial intermediation.
While observing the progressive separation of channels on the industry level, driven
mainly by the adoption of advanced information systems and communication networks
in addition to the globalization of industries, we also provide new understanding of the
structural transformation of the distribution channels. The control of the process is
sifting forward in the channel opening new business opportunities both backwards and
across the channels. Hence the previous frameworks emphasizing the downstream
push, such as Supply Chain Management and Business Process Redesign, have to be
challenged with more flexible construct allowing for business relationships in the pull
mode and across markets. We call the new framework for business design, enabled by
the breakthrough of Electronic Commerce, the Customer Channel model of
distribution strategies.
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INTRODUCTION
The introduction of Electronic Commerce into consumer business is taking place in
many areas (Kallio et al. 1997, Heikkilä et al. 1998a, 1998b and 1998c). This has
raised the research question on how the new customer relationships will propagate
changes upstream to the distribution channels. There are expectations of completely
new configurations of firms and markets in the emerging electronic business or
enterprise (Apte and Vepsalainen 1993, Mäkelin and Vepsäläinen 1989, Soronen
1997). The goal of this paper is to analyze the changes on the level of individual firms
and industries that seem to be leading to new structures of distribution. On the level of
markets the direction is towards the form of customer-driven channels (Bask and
Vepsäläinen 1997, Haapanen et al. 1998). In order to get some perspective, we review
the evolution of distribution channels from the early days of industrialization into the
electronic age, with an emphasis on the service revolution.
The impact of Electronic Commerce on customer services and logistics can be
evaluated with a framework that extends from the sources of raw materials innovation
of new products down to the consumer processes. Along with the globalization of
competition in international market the Internet enables electronic, commercial
interactions between tens of thousands of organizations and tens of millions of
individuals. This creates a vast, dynamic and heterogeneous market economy of
information and computation services and resources. There are expectations that the
economy will be expanding depending substantially on an increasing range of
information products and services (Hammer and Champy 1993, Jahnukainen and
Vepsäläinen 1992). The distribution channels of physical goods will need to be
extended to incorporate these information goods.
This paper is organized as follows.
First in Section 2, the concept of channel
separation is discussed with an illustration of the service evolution. Next we introduce
a specific framework, called the Customer Channel framework, as a model suggested
as the next stage in Section 3, and alternative forms of Electronic Commerce replacing
grocery stores are outlined in Section 4. Conclusions are presented in Section 5.
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SEPARATION OF CHANNELS IN DISTRIBUTION
Conventionally distribution has meant the delivery of products from the producers to
the customers either directly or through the intermediaries of trade. Stern and ElAnsary (1982) have defined the marketing channel as a combination of independent
organizations that contribute to the delivery of product or service to consumption.
This paper extends this view by considering the linking of different product
development processes with the customer processes as the mission of distribution so
that these processes actively by-pass several echelons of the producers, wholesalers
and retailers processes. The world trade emerged as standardized products were made
available close to the end user markets. Besides going international and establishing
several stages, distribution made an important step when the members of the chain
started using separate channels for transferring the physical product and
communicating the information pertaining to the transaction.
The channel for physical distribution consisted of component sourcing, assembly, and
several levels of warehousing before entering the next stage of trade. The flow of
information through the transaction channel (Bowersox 1978) was completely
different both organizationally and geographically. There were marketing managers
and media, and the sales office as well as corporate sales involved. Figure 1 illustrates
the separation of the transaction and physical distribution channels.
However, the assignment of information flow to a separate channel, fashionable as it
was in the seventies, is somewhat misleading since there are information flows
associated also with the product transfer channel.
Next observation was the realization that selling and ordering actually are separate
processes for which separate channels should be provided. Hence there are three
separate channels with their own organizations and centralization schemes as
discussed by Abrahamsson and Brege (1997). The channels are for sales, product
flows, and administration, especially order processing.
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Transaction Channel - Information Flow
R
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Design
Service
Research
Service
Sales
Rep.
Advertising
Office
Purch.
& Salesi
Purch.
& Salesi
Purch.
& Salesi
Subcontrctor
Production
Wholeseller
Factory,
Stocks
Factory,
Stocks
Stocks &
Terminals
Exchange
Supplier
Break
Bulk
Common
Carrier
Common
Carrier
Order
& Salesi
Truck
Media
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Customer s
Retailer
t
Pick Up
o
Stores &
m
Shelves
e
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Mail,
s
Courier
Order
Physical Distribuiton Channel - Product Flow
Figure 1 The separation of transaction channel and physical distribution
channel with the multi-echelon structure
Similar concepts have been suggested by Rosenbloom (1995). According to him there
are several views by which producers, wholesalers, retailers and customers analyze the
marketing channel. Taking into account these view, he defines marketing channel as
external organization available to the management for reaching the goals of
distribution.
Furthermore, he distinguishes the following flows of distribution:
product flow, negotiation flow, ownership flow, information flow, and promotion
flow. Instead of the conventional multi-echelon channel structure he prefers a simple
concept of a group of channel members who carry out the specific tasks of
distribution. While this definition appropriately identifies the different flows (and
channels) of distribution, the separation of information to an independent channel is
not agreeable to us.
The open inter-organizational networks can substitute for some of the physical
distribution. The developments towards modular products and postponed production
(Inkiläinen 1996), mass customization (Mäkelin and Vepsäläinen 1995) and integrated
relationship-oriented marketing communication (Raulas and Vepsäläinen 1994) all
build up potential for electronic commerce to gain from. Also the concept of Efficient
Consumer Response (ECR) integrates the different channels within the distribution
chain, even though the emphasis is still in improving the turn on the store shelves.
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THE MODEL OF CUSTOMER CHANNELS
We introduce yet another model for the separation of distribution channels that we call
the Customer Channels framework (see Bask 1998a and 1998b, Bask and Vepsäläinen
1997, Haapanen et al. 1998). The assumption is that in the future, these channels are
the central way of organizing the firms and information systems. The existence of a
channel means that there are capabilities offered in the marketplace independent of
any individual producer, merchant or customer.
The Customer Channel model suggests that there are four different types of channels
(Figure 2):
1)
Promotion Channel that communicates the market offerings to the
customers, carries out persuasion and provides for feedback from
customers and virtual communities.
2)
Financing Channel supports the payments, funding and insuring of
transactions and, in general, manages the return on investment, risks and
incentives for cooperation.
3)
Ordering Channel that facilitates the administration of supply contracts,
quarantees, customer complaints and other commitments.
4)
Transfer Channel that accomplishes manufacturing and deliveries through
the warehouses to the final customer, managing as well any after sales
services, maintenace and reverse logistics operations.
Since the channels provide standardized access across different industries, the
consumer will become an active party joining manufacturing and trade in the valueadded processes. Some examples of services emerging along the Customer Channels
are shown in Figure 3. In Promotion Channel, the marketing and media mergers have
accomplished much of the channel support (Raulas and Vepsäläinen 1994). The
customers are joining Virtual Communities (Hagel and Armstrong 1997) to share
information on market offerings and to gain weight in the creation of them.
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Promotion Channel
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Ordering Channel
Transfer Channel
Figure 2
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The Separated Customer Channels.
Within Financing Channel, the credit card companies and Venture Capitalists provide much
of the funding of consumption and innovation, respectively. Branded products can be put to
market without production (there are sub- and supercontractors) and logistics (there are third
parties and value-added services) capabilities (Vepsäläinen 1991, Bask 1998a and 1998b).
The development of services related to order management and separation of services is
lagging in many industries (see Tinnilä and Vepsäläinen 1995, Tinnilä 1997).
By channels we mean structures and arrangements that are accessible to most customers
(Haapanen et al. 1998). Consider the different types of channels – transportation channels
built for any vehicle to move on, radio and tv channels based on shared technology and
broadcasting protocols, and service organizations as they are in Hollywood, for instance,
available to any aspiring director for making a movie without own employees for casting,
studio, camera, etc These elements – physical structures and routines, shared technological
systems and information, and incentives for service – constitute the capabilities upon which
the Customer Channels are built and coordinated.
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Customer
Community
Promotion Channel
Research & Development
Advertising Media
Venture Capital
Credit Services
Financing Channel
Branded Products
Total Service Concepts
Ordering Channel
Value-Added Services
Logistics Services
Supercontractor
Transfer Channel
Figure 3
Courier Services
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Examples of services emerging along the Customer Channels
as the result of Business Process Re-engineering
Most existing channels – especially those delivering universal service – need a
combination of all three structures, as is obvious by considering banking services and
channels: branch office network, payment systems, and advisory services. On the
other hand, any element of a channel (be it a building, information network, or
organization) can be simultaneously used as a part of several Customer Channels.
Hence it may be misleading to name a channel on the basis of the Internet, or agent, or
store.
Why, then, would there be exactly these four types of Customer Channels emerging.
Why aren’t the three (as suggested by Abrahamsson and Brege (1997)) enough, or,
even more suggestively, why would the four suggested by us suffice. Furthermore,
why separation of the channels is needed in the first place, why cannot the operations
of distribution be permanently integrated into one flexible channel? There are several
explanations:
1)
Each channel serves a specific customer need (physical transfer, both
bits and atoms), persuasion and communication, ordering and financial
transactions). These four capabilities are all needed for a purtchase and
delivery of a product, and they can be also offered separately (Mäkelin and
Vepsäläinen 1995).
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2)
To access the channel, a customer needs an address and perhaps also a
password. There are four broad types of address needs – a receiving device
for mass communication, a street address for the delivery, a customer
number for ordering, and a bill number (and perhaps an account number)
for payments.
3)
The role of the intermediaries and their relationship with the supplier and
the purchaser are different: third party may handle the entire service, as in
logistics transport, it may act as a certification agent as in a financial
transaction, or the customer interacts with the media as in marketing
communication.
4)
The regulation of trade and legislation in general are specialized acording
to the suggested Customer Channels, consider transportation law and
product liability (Transfer Channel), contract law (Ordering), financial laws
(Financing Channel) and patent law, copyrights and laws on marketing and
advertising (Promotion Channel).
5)
The applications of information technology have been largely developed
separately for the four channel suggested. Even with an universal network
such as Internet the usage and conventions are different for the separate
channels.
6)
Research and education has been segmented according to the channels
proposed. New contributions either demonstrate the need to integrate the
business process totally along, not across, the channels (Hammer and
Champy 1993, Tinnilä 1997), or the need to coordinate across the opposite
ends of the channels (Raulas and Vepsäläinen 1994, Vepsäläinen 1991,
Hsuan and Vepsäläinen 1997, Hsuan 1998).
The concept of Customer Channels suggests that the control of the distribution chain
moves forward. Why then has the channeling of services taking place at aslower pace
than the technological progress would seem to allow? One reason is that the concept
assumes an adaptation on the level of industries and even across industries to gain
from market-wide economies of scale and scope. The separation of channels also
presupposes reorganizations challenging the power of existing players. Supply Chain
Management (Abrahamsson and Brege 1997) and Business Process Redesign
(Hammer and Chanpy 1993, Tinnilä 1995), while operating on the level of individual
chains and businesses have already pointed out the opportunities for larger scope of
reintegration and new coordination systems to reach the critical mass.
The most critical challenge for the coordination of separated channels has been the
activities of the customer in retail store. We are used to the most primitive routinebased coordination whereby the customer integrates the distribution chain in the store
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by looking for information on products and prices, picking up goods and carrying them
through the cashier’s desk. This procedure is easy to implement – everybody knows
how to do it – but it has severely restricted the development of the logistics and
marketing activities by forcing them to converge at the store. It has also limited the
options of the customer to get a relief from the tedious daily shopping routines.
4
ELECTRONIC STORE OR DISTRIBUTED SHOPPING?
The introduction of electronic shopping is expected here to follow roughly the
following three stages and the corresponding models:
1)
Electronic Store supported by a Physical Store
2)
Dedicated Electronic Store
3)
Shopping services distributed along Customer Channels
The majority of electronic stores so far have been built on top of an existing retailing
infrastructure (Kallio et al. 1997, Heikkilä et al. 1998a, 1998b and 1998c). This mode
of operation is illustrated in Figure 4.
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Producer
Whole
Seller
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Transfer Channel
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Electronic Store built on top of existing structure.
The retailer offers the on-line search and ordering from the existing store. In addition,
there are arrangements for home delivery or pick-up service. The underlying logistics
are the same for both the physical and electronic store. This type add-on electronic
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store cannot compete with price but rather the additional services provided. Besides
the extra pay for the picking up and delivery, the customer may use other services such
as menu planning or purchase suggestions based on shopping history.
More advanced services apply a Dedicated Electronic Store format which is
implemented with its own purchasing and warehousing systems (Figure 5). The
products from different suppliers are collected in a terminal organized especially for
handling small and pre-packaged batches.
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StoreStore
Electronic
Ordering Channel
Transfer Channel
Figure 5
The Dedicated Store specialized for electronic shopping
Order processing can in this case be automated and any pre-ordering information can
be utilized in replenishment. Better coordination and use of outside logistics services
allows for low cost strategy while maintaining responsive service.
The previous solutions are based on the control of sales and delivery by the store
manager and converging the promotions, ordering and payments at the customers
premises. The next step could be, figuratively and electronically, out of the store and
home – each of the tasks of shopping are separated to specialized firms and the
channels are coordinated independent of the place and time of customer needs (see
Figure 6).
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E
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Promotion Channel
Financing Channel
Ordering Channel
Shopping
Services
Coordinated
within
Separated
Channels
Transfer Channel
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Electronic Shopping Services coordinated within separated
Customer Channels
In promotions and marketing the virtual communities (Hagel and Armstrong 1997)
may take a major role. For grocery shopping there are options based on employer,
residence, life style or the like. Similarly, the customers may organize the ordering
and payment services for all their shopping needs with one service provider, or they
can rely on those offered by the store or financial institutions.
The ultimate form of distributed Customer Channels is an intelligent customer-driven
shopping system that learns the needs of the customer and is capable of coordinating
the order and delivery from the low-cost or preferred point of supply. The intelligent
search agents may totally eliminate the need for customer action but also many of the
traditional tasks involved, such as ordering (via automatic inventory tracking in ice
box) and payment (via extended credit line and automatic trading of credit). Hence the
active role of customer doesn’t mean a lot of “clicking activities” or any activities, for
that matter. Some new benefits can be achieved by delegating the customer service to
market makers or channel managers who are in the best position to share and
accumulate the information on demand and supply.
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CONCLUSIONS
Shopping is a pervasive feature of the market economy. For consumers, equipped
with capabilities far inferior to those of firms, the shopping process has been
standardized on the basis of easy coordination of the tasks of persuasion, ordering,
payment and delivery by integrating them with universal routines at the store. The
emerging on-line shopping process serves a double duty in breaking this tedious
process that has also forced the distribution organized by manufacturers, wholesalers
and retailers to converge at the store with incomplete and indirect coordination. First,
electronic shopping endows the private customer with the distributed access to the
different services, and second, Electronic Commerce allows the members of the
distribution channel to reconfigure their own service processes so as to fully utilize the
new opportunities to reach the customer. The gains in terms of fewer and smaller
inventories, improved coordination of the movements of previously unlinked goods
within the supply chains of different industries and markets, and the savings due to
more accurate ordering and payment processes will ensure the wide adoption of
standardized services. The key to the responsiveness is the separation of the customer
channels on the basis of the service characteristics, not solely on the temporary
ownership of the goods.
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