This past week brought out a series of counter salvos in an apparent price war that broke out between Amazon.com and Wal-Mart.com.  A posting appearing in SiliconValley.com summarizes the week’s events, noting how both outlets are now offering a select group of ten upcoming book titles for under $10.  These events are being characterized as the first salvo in positioning the predominant holiday book sales online shopping destination.

With the opening salvo’s positioning of these books at below publisher cost, this could be a very harmful “game of chicken”. All of this is also on the heels of stepped efforts by Amazon, Google, Sony and others to position e-book readers and content as attractive gifts for the upcoming holiday season.

I’m going to offer my own supply chain management and sales channel disruption perspectives, specifically, how I would handicap the potential winners and losers after the first initial salvos. 

If this was a horse race, and I was the handicapper, I would tend to favor Amazon with the highest odds for winning endurance.  The reasons come down to proven capabilities in online commerce, order fulfillment and supply chain infrastructure capabilities.  More evidence of that fact came later in the week with Amazon’s announcement that it would offer select same-day shipment delivery services for select cities.

Amazon continues to navigate itself through good economic times and bad, with an ability to adapt its online commerce business model to the current needs of the market. In the latest June quarter, Amazon reported a 14% increase in net sales and a free cash flow increase of 89%, to $1.54 billion.  While operating income declined 27%, the company is still profitable, which is a condition that many large-scale retailers cannot match. 

One could also certainly argue that Wal-Mart has been just as successful in overall financial terms.  There is, however, one very important difference, which reflects more on the core competency of each company’s supply chain network.  Amazon’s network has been designed and tuned to support nothing but online commerce.  Wal-Mart, on the other hand, may be in a situation where marketing strategy has not been grounded in current supply chain capability.  We all know and admire Wal-Mart’s supply chain prowness in supporting a brick-and mortar retail network. Not many companies have proven success in their ability to pull-off a high volume sales fulfillment business model for both brick and mortar and online commerce.

What about the potential casualties of this type of war?  Industry observers point to book authors as the targets of collateral damage.  I agree.  Add existing book retailers to the collateral damage list as well.  Retailers such as troubled Barnes and Noble, or Borders can ill afford to face an upcoming holiday season with customers expecting aggressive discounting or endless bargains. 

The real victims of this book price war are going to be the bystanders, namely the classic book retailers and longer-term, the individual authors. That is the real tragedy of this affair.  Wal-Mart gets to boast, Amazon reaps the benefit, and yet another set of victims succumb to the perils of win-lose marketing destruction.

Bob Ferrari

Yesterday, the U.S. Federal Trade Commission (FTC) issued new rules regarding the relationships or endorsements and testimonials in advertising, which has a particular impact on independent bloggers.  According to an article appearing in the New York Times, beginning December 1^st, bloggers who review or endorse products must disclose any connection with advertisers, including the receipt of free products, or whether bloggers were paid in any way for posting certain endorsements.  According a Digital Media posting on CNET, authored by Caroline McCarthy, the FTC release indicates in part: … “Thus bloggers, who make an endorsement must disclose the material connections they share with the seller of the product or service.”

Include me as one blogger who endorses this new guideline. 

When writing my commentaries on this blog, I do disclose as warranted, any financial or other considerations that I might have with sponsors or clients that may benefit from a posting.  I’ve always thought that this is what readers should expect.  I have further observed that the majority of my fellow independent bloggers commenting on supply chain topics tend toward full disclosure of relationships, which is a credit to this particular blogging community.

On the Spend Matters blog, Jason Busch povided his commentary regarding this new ruling, and noted that to insure consistency of practice the FTC should look at traditional media and industry analyst firms that may well be in violation of the spirit of this ruling.  I echo these comments.  Media outlets that provide both editorial commentary and sell webcasts and other promotional marketing activities owe readers full disclosure.  All Industry Analyst firms should, in turn, disclose when a mention and/or ranking of a technology provider or company involve a paying client.

Regulation of independent bloggers is welcomed, and I trust that traditional media and industry analyst firms will also step-up to the spirit of this ruling.

What’s your view?

Should traditional media and industry analyst firms fully disclose their material connections when writing about certain providers? Provide your comments at the bottom of this posting.

 Bob Ferrari

An article in todays Wall Street Journal, For Toys ‘R’ Us, Holidays Are Open and Shut, (subscription may be required) indicates that this large toy retailer plans to open 350 temporary stores and toy boutiques to leverage sales during the upcoming holiday season.  In the article, Chief Executive Gerald R. Storch indicates that the retailer wants to “seize the day” and increase holiday market share.  KB Toys, which is now defunct, located many of its stores in shopping malls, and that turns out to be the current target for Toys ‘ R’ Us. The retailer indicates that 80 of the stores will be free-standing mall outlets while the remainder will be toy shops co-existing within its own Babies ‘R’ Us stores.  These temporary stores will be small enough for shoppers to easily find the hottest selling toy, and will be open from October through mid-January.

Marketing bravado aside, this move is really a counter response to retail giant Wal-Mart, who just this month announced a massive store and strategy revamp termed Project Impact. This initiative outlines cleaner, less cluttered stores, friendlier customer service, and an emphasis on categories where the competition can be killed. A recent Time magazine article quotes Burt Flickinger, a veteran Wal-Mart watcher as indicating that they have knocked out four of the top five toy retailers thus far, and are now setting the target,you guessed it, Toys ‘R’ Us.

I believe we should all send a collective “bravo” to the Toys ‘R’ Us management team for practicing agility in their selling strategy.  Perhaps this is indeed the practicing of just-in-time retail deployment.

No doubt there may be challenges for inventory planners in selecting and stocking the most appropriate inventory for these temporary stores, but the fact that this retailer has taken on a counter initiative is worthy of praise. 

Time will certainly be the judge as to the overall success of this program in countering erosion of consumer market share, but practicing agility and market responsiveness is worthy of praise.

What’s your view regarding this strategy?

 Bob Ferrari

Over the weekend, stories appeared in multiple global media sites indicating that Dell experienced a second online pricing snafu involving customers within Taiwan, and Dell is now facing a series of challenges on multiple fronts.  The company apparently set local pricing errors on June 25, and again over this weekend.  The pricing errors involved laptop PC’s and a 19-inch monitor.  According to an article on CIO.com, a 19-inch LCD was listed for local Taiwan based customers for NT$500, or the U.S. equivalent of $15.26.  A similar price error occurred this weekend listing the Dell E4300 laptop for NT$18,500, or the U.S. equivalent of $563.40.  Normal pricing for this specific laptop is NT $69,000 according to news reports.

What struck me the most about this evolving incident was the overall speed and amplification of these errors. The first pricing errors appeared between 9:17pm on June 25, and 6:56am on June 26, roughly ten hours of online exposure.  According to an article in the Taipei Times, more than 26,000 people placed orders for the 19 inch monitors. The second error occurring this weekend, which involved the E4300 laptop, garnered roughly 14,000 orders involving close to 50,000 laptops.  Obviously, with an average of 3.6 laptops per order, some buyer intelligence was involved as Internet-driven chat groups and buying forums quickly spread the news of a bargain.

While Dell has admitted to and apologized relative to these pricing errors, it also chose to cancel the inputted orders.  Instead, the company has offered impacted customers options for discount certificates good for a future purchase on dell.com.tw.

Reaction has been swift.  Taiwan’s Fair Trade Commission has indicated that it will determine whether Dell has violated the Fair Trade Law by failing to deliver orders as advertised, and could possibly face stiff fines.  Dell’s reluctance to deliver the wrongly priced orders has also drawn criticism from Taiwanese Internet users and the media. The Taiwan Consumer Foundation has indicated that Dell had previously made similar pricing errors in China, and subsequently agreed to sell the items as priced.  The agency also cited other global corporations such as IBM, Whirlpool, and Murubeni as all acknowledging similar mistakes and honoring orders.

In my view Dell faces two significant challenges, each fueled by the current impact of the Internet.  The first is the building customer relations problem, as local governmental agencies, consumers, and impacted customers increase the “negative tone” relative to Dell.  To avoid more embarrassment and financial harm, Dell will need to find more creative means to appease consumers.

The second, and what I believe should be of the most concern to Dell’s Internet fulfillment and support professionals is how these pricing errors occurred on multiple occasions. Beyond an obvious internal control problem, the fact that Dell discovered its problem in 10 hours is no longer an acceptable response time.  Today’s buying reality is information rich and well informed consumers equipped with all forms of social media and instant information messaging devices that can alert buyers to bargains too good to refuse. With Internet sites open 24 hours a day and seven days a week, the clock never stops on a pricing error, until and unless it is quickly discovered and corrected.  Whether it is a lack of controls, inadequate staffing, or a system error, it doesn’t matter.  The error did occur, and the implications are a reality.

The fact that this also occurred at Dell, which AMR Research this year rated as number two in its Supply Chain Top Twenty Five for 2009 should not go unnoticed.  Late last year, Supply Chain Matters commented on Dell’s new decentralized supply chain operations model which was initiated to enable product groups to have more worldwide autonomy and flexibility in overcoming geographic boundaries.  This latest crisis will surely provide additional learning around the need for stronger internal controls in a decentralized model.

What do you think?  Should Dell bite the bullet and honor the pricing error, or find a compromise?  Do you suspect that this was a problem caused by decentralized controls? Would technology have helped discover this problem in a more timely fashion?

Bob Ferrari

My former employer, AMR Research, is wrapping up its supply chain executive conference in Phoenix this week.  One of the highlights of this conference is the annual announcement of AMR’s Top 25 Supply Chains.  Consultants and industry bloggers are precluded from the voting, so penning this entry is my way of weighing in.

Well-known and respected IT blogger Vinnie Mirchandani offered his observations of this year’s listing on his Deal Architect blog, and I must admit that I, too was scratching my head when I read of some of the 2009 selections.

First, I echo Vinnie’s observation that AMR has made a name for itself with consistently good supply chain research.  Much of this began with some of the original and gifted analysts such as my former mentor, Dr. Larry Lapide, along with the late John Fontanella, and others.  But having been in the industry analyst world for five years, I sometimes understand how research methodologies can go astray.

Vinnie’s observations note that not a single Chinese company, e-tailor, or utility have appeared on the list.  Perhaps the reason lies in the overall selection methodology, which tends to eliminate these companies from ever entering the selection process. 

AMR appropriately places higher weighting criteria on consistent financial performance metrics, one of which is a three year moving average of Return-On-Assets. In my view, high ROA can be a bias toward companies that have outsourced major supply chain inventory and operations, or reside in less asset intensive industries. Case in point, IBM is rated number 4, but has outsourced a vast majority of its manufacturing, including laptop production to Lenovo, and is quickly transforming itself to a services company. 

We further don’t see the presence of major contract manufacturers like Foxcon, probably because these companies have to monetize global manufacturing assets for their OEM customers.  Companies like Dow Chemical, BASF, or even TSMC are also hindered because of their asset intensity. Yet these same companies are constantly required to be more agile and responsive to their upstream customers, many appearing on the Top 25 list. Does this preclude organizations that reside downstream in the value-chain from ever being considered?

How can Dell move from the number three position last year, to number two this year, ahead of rival HP in the number 17 position?  What’s up with that! I’ve posted a number of commentaries, the latest being Reflection on Dell’s Latest Reorganization, that pointed to Dell’s decision to move from a previous centralized supply chain structure, to one of de-centralized supply chain functions residing within global business units, which is how HP currently manages supply chain.  Dell’s recent announcement of 63% drop in profits, continued flat demand, and restructuring charges doesn’t seem to fit with a number two rating.  AMR’s Supply Chain Reaction blog praises HP for building a more distinctive brand operational excellence and comprehensive risk management.

On a slightly more positive note, I was however really pleased to see Intel finally appear on the Top 25 after so many years of non-appearance.  AMR points to Intel’s efforts of being more demand-driven, moving beyond its former notions of technology push.  Unmentioned, but probably contributing to this recognition is a movement toward a more centralized supply chain management structure, corporate-wide efforts toward standardization on SAP ERP and supply chain applications, as well as leveraged use of some best-of-breed supply chain analytics, visibility and intelligence tools.

It seems that win at all costs is becoming our new form of competitive culture.  Television programs like American Idol, Dancing with the Stars and others play upon the influence of viewers who have the ultimate power to influence the final vote.  I sincerely hope that recognition of the Top 25 Supply Chains does not adopt this model.

What’s your reaction to this year’s Top 25?

 Bob Ferrari

This week I had the opportunity to view the webcast Best Practices in Risk Management which was hosted by Purchasing magazine and sponsored by Spend Management technology provider Zycus.  I really enjoyed the format of the event and wanted to share a few of my observations as an audience member, since I believe it can be an important feedback for technology marketing professionals who sponsor these types of events.

Marketing professionals sometimes confuse the purpose of webcasts, particularly in this new era of Web 2.0 marketing.  It seems that the singular goal is to gather prospective leads and push content vs. a broader perspective of engaging in a series of educational forums or events that help prospects understand the various aspects of a business challenge and how best practices supported by technology can provide meaningful business benefit.  Many supply chain related webcasts that I’ve viewed of late tend to be too one-dimensional, pushing large amounts of information without context. They leave little room for audience interaction or two-way dialogue, which for me defeats the purpose of the event. When I conduct or sponsor a webcast, I want to insure that there are some forms of interaction that can provide learning for all participants.

The Purchasing webcast featured two senior procurement executives as panelists, and Paul Teague, Purchasing Chief Editor served as the moderator.  While there was important content related to challenges and best practices in supplier-related risk management, the content served more as discussion points among the panelists.  Mr. Teaque also inserted a number of live audience polling questions, which provided two-way feedback for the entire audience.  There were frequent breaks where live questions were responded to by the panelists, and the panelists did not necessarily have the same perspectives, which is fine. 

I for one vote for more interactive webcasts where audience members can have their questions answered and where all can share in knowledge.  It provides a far better outcome.

What’s your view- do you prefer a more interactive format in webcasts?

 Bob Ferrari