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 / Third Quarter 2000 / Issue 20(originally published by Booz & Company)


The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes

Key Operating Strengths

A less obvious benefit of the merger could result from blending the talent pools and alternative perspectives of the two companies. Press reports have highlighted Webvan's automated carousels as a breakthrough in operational efficiency. In reality, these carousels generally hold the slow moving items and accordingly aren't the key to operational efficiency.

Instead, we believe the greatest strength in Webvan's operating model may be its tightly managed cross-dock operations. Described as "stations" at Webvan, these lean neighborhood operations take truckload deliveries from the central distribution center and quickly transfer them to local delivery vans for the true "last mile" to the home.

HomeGrocer employs multiple distribution centers, rather than a cross-dock network of stations, and employs traditional low-automation flow-through racks in its facilities. A combined approach that minimizes the investment in high-tech gadgetry while employing the hub and spoke delivery system could yield a leaner, more effective network, saving the combined company more cash as it continues its nationwide rollout.

A New Category Killer

More speculative is how could benefit from a tighter link with this new, leading "last mile" company. (Amazon owns a 22 percent stake in HomeGrocer). While the public mind still largely associates Amazon with books, the company has continued to expand its product offerings. It's currently the number one e-tailer, and seems on an inevitable collision course with Webvan, which is also adding new product categories.

For Amazon and Webvan, cooperation may be better than competition. Each business currently offers a different and potentially complementary value proposition around the speed-versus-variety tradeoff. Webvan focuses on convenient, tightly scheduled delivery, while Amazon offers massive selection and the ability to recommend specific products based upon user input and buying patterns. Combining forces, the two could increase average order sizes — a critical driver of Internet delivery economics.

Put simply, a category killer offering low-cost scheduled delivery could potentially dominate e-tailing. While both Webvan and Amazon independently aspire to this dominant position, a combined effort could improve the chances of turning aspiration into reality.

Imagine yourself a regular Webvan customer searching Amazon for a gift. You set your "one click ordering" option to ship the product via your next scheduled Webvan delivery — with only a nominal shipping charge versus the normal one. With enough volume, Amazon could ship product into Webvan distribution centers with minimal marginal incremental cost for either party. And for high volume goods (such as best selling books currently sold by both companies), Webvan could pull the product from its own locally deployed stock. Together, Webvan and Amazon could be more efficient and as well as offer a better value to the consumer.

Business Model Evolution

In short, the predicted business model evolution for the last mile has begun — on Internet time. As Webvan CEO George Shaheen has asserted, only a few companies will earn the right to cross into the home. Although the last mile terrain remains treacherous, his proposed stock swap with HomeGrocer improves Webvan's odds of surviving an attack by a competitor fighting for the same right.

More importantly, though mergers will continue in Internet retailing, consolidation marks only the first step. Looking ahead, we see many exciting options as competitors shape and reshape business models to better serve the end consumer — and do so at a profit.

Reprint No. 00304

Tim Laseter, [email protected], serves on the operations faculty at the Darden Graduate School of Business at the University of Virginia. Previously he was a a vice president with Booz Allen Hamilton in McLean, Va. Mr/ Laseter has 15 years of experience in building organizational capabilities in sourcing, supply chain management, and operations strategy in a variety of industries.
Pat Houston, [email protected]
Pat Houston, a Booz Allen Hamilton principal based in New York, focuses on driving organizational performance improvement through strategic and operational transformation.

Anne Chung, [email protected]
Anne Chung, a principal in Booz Allen Hamilton’s Cleveland office, focuses on supply chain management and Internet-enabled operations.

Silas Byrne, [email protected]
Silas Byrne is an associate in Booz-Allen & Hamilton's New York office focusing on operational and organizational issues across a broad range of industries.

Martha Turner, [email protected]
Martha Turner is a senior associate in Booz Allen Hamilton's New York office. She specializes in operations and supply chain management in a broad range of industries, with particular emphasis on e-business.

Anand Devendran, [email protected]
Anand Devendran is a consultant in Booz-Allen & Hamilton's New York office focusing on operational and growth strategies across a wide range of industries.
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