Due to poor financial performance, EasyInternetCafe has decided divert from large cafes to a franchise model with smaller café sizes. Its main goal is also to focus on its core competencies such as the yield management model. In order to do so, it will be outsourcing its non-core competence activities which include logistics. Ingram Micro has been chosen as the logistics provider as they offer more full service activities while remaining at a lower cost than its competitors. By including Ingram Micro in corporate decisions and meetings, EIC can keep Ingram Micro accountable and stay updated with issues as they arise (just as they would if they owned the logistics arm of the Company).
EasyInternetCafe (EIC) was launched in 1999 under the umbrella of the EasyGroup. Their mission is to provide customers with internet access at low costs and to capitalize on the tech boom. Despite the excellent support and recognition from the public, EIC is experiencing adversity of keeping their business profitable after the “dot-com” bubble burst. The first store was opened in Europe with 330 PCs at a single location and this business plan of owning many large cafes that could house 250-500 PC terminals at each café has not worked. They have decided to restructure their business by downsizing the cafes. They propose to do this by using the franchise business model. These franchised stores will be smaller and house 20-30 PC terminals and only need staff for basic maintenance. EIC believes that by being less involved with the operations of the stores, they can focus on their core competence and outsource all non-core activities. Their core competence is their yield management model associated with the “Easy” brand.
EIC’s goal was to open 10 stores per week over the next 2-3 years and in order to achieve this, a cost-efficient and flexible logistics system is what EIC needs to have in place so that their franchisee stores are provided with equipment and setup. Because logistics is one of the non-core activities, the present logistics system will be critically reviewed and the outsourcing options would be evaluated. Another issue easyInternetcafe is facing is there is no real strategic operating plan on how easyInternetcafe plans to supply and open each new franchise’s. This is an integral part of cost cutting to help with the losses that have been experienced by the company. As a result of not having a strategic plan in place, this is resulting in increased costs being incurred for the setup of new stores, increased logistics and transportation costs, and bottlenecks happening with logistics, as they can only open as many stores as they can ship to and set up. This results in a strain on scalability, efficiency and bottlenecks for successful growth.
Root Cause and Environmental Analysis:
EasyInternetcafe currently is trying to re-vamp the internet café’s in hopes to increase profits and investments. In 2003 it was determined in order to eliminate the need for future investments in new stores the strategy would change, and stores would now be appointed as franchisees, and if possible for existing legacy stores (i.e. company-owned) as well. However, kicking of the operations of franchises will require time and even though with this new strategy of opening smaller stores with only 20-30 PCs will still need months and resources to start. Each store opening is like a “project” with the ending point being the opening of the store and some of these issues being logistical ones. From the predecessors plan, we can see the timetable for each activity. Since some activities overlap but we can calculate the total length of time as follows. Activity A +B + C + E + F + J + K = 7 + 28 + 28 + 2 + 2 + 2 + 2 +1 = 70 This means that the average duration it should take to open the café is 70 days.
The current plan in place is to have 10 stores open per week over the next 2-3 years, these new franchised café’s would be unmanned and no staff would be required at any store aside from the regular maintenance. The cost of logistics is not calculated accurately as it is shown as approximately £1300 for opening new stores; however this did not include outbound transport to the franchise. £602 per store was included for easyInternetcafe labor costs. After looking at calculations and the forecasting of opening 4 new stores per week over the next 3 years the annual logistics costs (excluding outbound transport costs) would total approximately £270,000; which included labour of £125,250 based of 208 store openings per year.
Options and Alternatives:
In order to help reduce costs four alternatives have been found. Two of the options are considered to be pure logistics service provides and two are categorized as integrated supply chain solution provides. UPS requires easyInternetcafe to procure equipment and arrange with suppliers to deliver it to the UPS warehouse. Once equipment arrives, UPS will consolidate orders, configure equipment, kit it together on pallets and arrange the transportation to the franchise store locations. Some pros and cons of UPS Global Logistics is, UPS will provide warehousing, however UPS will not maintain billing services, and the total cost of implementing the UPS proposal is £1110 of which £477 is easyInternetcafe labour costs.
Similar services are offered by Excel to that of UPS, with the addition of supplier management services. Some of the pros are Excel would appoint two dedicated personnel, a contracts manager, and an administrator, they would also manage present stock, forecast store openings, manage purchase requirements, and co-ordinate and manage delivery as well as returns. Excel would also be the point of contact for franchisees and manage the whole accounts. The con of this service is implementation would cost £57,000 per year. Estimated costs per store would be £1,434 of which £957 was logistics costs and £477 labor cost.
Complete IT supply chain services are provided globally by Globalserve, including IT procurement. Some pros in regards to Globalserve are they make Value Added Resellers (VAR) for franchises in several countries. Also, product is directly delivered to the different franchises. Some of the cons are cost; Globalserve would charge a transaction fee of 3.25% and a local reseller mark-up of 5%, of the equipment purchase value for each transaction. Also included would be a one-off cost for service set up amounting to £10,000 and a £2,000 set up cost per country. Total cost per store would be £1,875+ labor costs of £381, totalling £2,256 per store; the highest of all three alternatives thus far.
The last option is Ingram Micro which is the largest B2B trade-only wholesale provider of technology products and services. The pros of this provider are they are a warehouse and transportation facility and they also provide computer configuration as well as a billing facility which would direct bill to each franchise. Two options to consider with this company are Option 1 which would total £560 which included supply, stock, configure kit together, and transport and collect payments for easyInternetcafe. Option 2 which would total £1,453 would include providing logistics, but not procurement.
Recommendation and Implementation:
From the four proposals, Ingram appears to be the most suitable for EasyInternetCafe. Of the other options, UPS does not want any risk by maintaining the billing system. Because of this, EIC will still need to provide these services even though it is not part of their core-competencies. Exel practically offers the same service as UPS (including billing services) but includes the hiring of a contracts manager and administrator, of which, contribute to a higher logistical cost than UPS. Globalserve will add Value Added Resllers for the franchise in several countries. They will deliver the products locally and collect the costs of equipment and delivery charges from the franchisee directly.
Although their labour cost is lower than UPS and Exel, their logistics cost is higher than the two. The last option, Ingram, provides a warehouse facility, directs billing to the franchise, has a transportation facility, and provides IT equipment. For all this, they only charge 560 GBP. If EIC buys their IT equipment separately, they will need to spend 1,357 GBP in comparison. That being said, choosing Ingram allows EIC to focus on their core competencies while using a financially beneficial logistics provider.
Monitor and Control:
In order to monitor how well a job Ingram is doing, EasyInternetCafe will need to be provided with weekly updates on inventory levels for all things EIC uses. Having these reports will allow EIC to determine where they stand logistically and can integrate their sales and operations together to improve growth (e.g. number of franchisee openings). Further, even though the logistics portion is being outsourced, it is very important to think of them as an extension of the body (business) and not separate. Including the logistics managers in Company meetings or huddles allows EIC to keep track of any issues that may arise.
Site visits to the warehouses and operational areas will also help to maintain the relationship and show Ingram that EIC cares and values what they do. Once everything is running smoothly, meetings will be able to be moved to quarterly then semi-annually. It will be important to continue meetings so that if problems arise they will be caught in a timely manner, this will help with the success of the business as well as ensure the company remains profitable.