EasyInternetcafe was started by the easyGroup in the midst of the Internet boom in the United Kingdom. The mission of this company is to provide customers with access to the internet at the lowest possible cost. After the Internet Investment bubble burst, easyInternetcafe is experiencing a loss in profits and is struggling to survive. The original business concept was to have large, stand-alone cafes with 250-800 PCs per store. After the initial internet boom phased out, a decrease in profits and loss of business was happening. A re-structure of the company is required in order to keep the company operating. The company decided to downsize and are operating smaller franchised stores, consisting of only 20-30 PCs, and no staff on-site except for regular maintenance. With less involvement in store operations, easyInternetcafe is able to concentrate on activities of outsourcing all non-core management activities.
EasyInternetecafe is finding that their current locations operate with too many PCs for the amount of business they receive, and they have no real strategic operating plan in place for new franchises that are opening, especially when it comes to their logistics system. The company has to determine whether they should outsource their logistics activities for store openings. Four alternatives are taken into consideration to help reduce overall logistics costs and to help the business become successful, 2 of which are considered pure logistics service providers, and the other 2 are categorized as integrated supply chain solution providers. Upon analyzing these options, it is recommended that easyInternetcafe should hire Ingram Micro to help them manage their supply chain activities and help them reduce their logistics costs.
The group’s early emphasis was on the rationale that high sales volume would quickly cover set-up costs, therefore they decided to open as many stores as quickly as possible. Many of the locations including London and New York City, had between 250-800 PCs at a single café, which resulted in a major profit loss as the demand for internet cafes declined. As losses mounted, management decided to re-evaluate their strategy and close some of their large money-losing stores and focus on franchising the operation, which calls for reducing the number of PC’s to 20 to 30 terminals.
The company is facing an issue with supplying their new franchisees with equipment and furnishings to open their cafes. This has led to a critical logistics issue about how and from where to supply the stores, while still following standard opening operating procedures. By not having a strategic operating plan in place, there has been an increase in costs associated with setting up the new stores, logistics, and transportation. There have also been bottlenecks with logistics as they are only able to open stores based on the lead times outlined in their project plan.
Environmental and Root Cause Analysis
In their attempt to downsize their internet cafes, easyInternetcafe is adopting the franchise business model by opening smaller stores with fewer PCs, and only hiring staff for basic maintenance. The franchise owner will be responsible for the property costs and the hardware, and all franchise locations should look the same with identical signage, PC terminals, furniture, etc. 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, and the concept of giving value for money.
EIC’s goal is to open 10 stores per week over the next 2-3 years. In order to achieve this, a cost-efficient and flexible logistics system needs to be in place so that their franchised stores are provided with equipment and setup. Since logistics is one of the non-core activities, the present logistics system needs to be analyzed to determine the most efficient and effective strategy that will be aligned with the companies objectives. The table below shows the events and timelines that occur when opening a new franchise.
As some of the activities overlap, the average time it should take to open a new location is approximate 70 days. However, depending on the franchise location, the outbound transportation costs will change. They are classified into 3 zones based on their distance from the UK: Zone 1 – closest to UK (France, Spain, Netherlands) @ £300 per store Zone 2 – mid-range from UK (Poland, Czech, Finland) @ £450 per store Zone 3 – farthest from UK (Greece, Turkey, Bulgaria) @ £750 per store The majority of the stores (23 locations) are located in Zone 1, which is £6900 in outbound transport costs. Zone 2 has 13 stores, which is £5850, and Zone 3 has the remaining 11 which is £8250.
That results in a total £21,000 in outbound transportation costs for the stores in all three zones. Management needs to create a logistics plan to help reduce these costs. Their current method of shipping everything in one “convenient” shipment means that most of the computer equipment needs to be stored until the desks, tables, and other furnishings are set up. This is not the most cost effective option, considering that the desks are being shipped from Poland to the UK and then again to the final store location. EIC has to make the decision of whether or not to continue to send all equipment and furnishings to the franchisee as a single shipment from their warehouse in the UK, or to outsource the logistics to a 3PL provider who would coordinate the movement of all equipment and furnishings from the company’s suppliers throughout Europe to the franchisee.
Alternatives and Options
Management wants to look at ways to decrease the costs of logistics activities. There are 4 alternatives to consider, 2 of which are considered pure logistics service providers and the other 2 are categorized as integrated supply chain solution providers. UPS Global Logistics
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. The total cost of implementation is £1110, of which £477 is easyInternetcafe labor costs. Pros: UPS will provide warehousing
Complete IT supply chain services are provided globally by Globalserve, including IT procurement and Value Added Resellers (VARs) for franchises in several countries, and products are directly delivered to the different franchises. They charge a transaction fee of 3.25% and a local reseller mark-up of 5% of the equipment purchase value for each transaction. There is also 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 plus labor costs of £381, which amounts to £2,256 per store Pros: Products are shipped directly to the franchise, reducing lead times and carrying costs Cons: Transaction, set-up, and markup fees
Ingram Micro is the largest B2B trade-only wholesale provider of technology products and services. They are a warehouse and transportation facility, and 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. Pros: EIC is able to maintain control over supplier selection and specific equipment purchases; lower logistics costs Cons: Stores will have different brands of PC’s – not identical to other franchise locations
Recommendations and Implementation
When evaluating these 4 alternatives, the following factors (aside from price) need to be considered: 3PL Evaluation Factors: Information technology (IT), Quality (ISO 9000, Six-sigma), total logistics costs, services, performance metrics, and ‘intangible’ factors such as experience, scope, and growth. 3PL Selection Criteria: Financial stability, experience, management and workforce, reputation, strategic direction/growth potential, facilities and equipment, operations, IT (order-processing system, barcoding, Internet, ERP), compatibility, and service. After analyzing our current process and the four logistics options, I recommend using Ingram Micro to manage our logistic services. The services that they offer allow them to take the responsibility for all activities, whereas the other candidates only offer a portion of them. Ingram has the ability to bill and do business in almost every country, which will help with some of the barriers that may inhibit us from expanding our business in other countries, such as the language, religious, and social barriers.
I recommend proceeding with Option 1 as procurement, warehousing, and transportation are all very complex activities that go hand in hand. If we were to proceed with Option 2 and have EIC procure its own IT products, we would then be responsible for dealing with lead time variables, which could in turn have an effect on other activities if there are delays. Although this option will be a very large adjustment for easyInternetcafe, it will allow them to get equipment to the stores in an efficient manner, while still being able to focus on their core competencies. Since EIC will be allocating their logistical actions to Ingram, implementation will be relatively easy. Prior to Ingram taking these responsibilities, there will have to be numerous meetings between both parties to determine what the goals and objectives are. Meetings will be held at a convenient location for both parties, most likely at the easyGroup head office due to Ingram being scattered geographically.
The meetings should include the key players in both organizations, consisting of Senior buyers, head of Procurement, head of Transportation, head of Logistics and Warehousing, Senior IT members, Head of Accounting, and current Managers. These meetings will take place between respective teams at first, and they will be completed within 1 week. Once Ingram has received all the information they require, the meetings will become cross-functional in order to gather all strategic information, which should take no longer than 1 week. At this point, Ingram will have all the information required to start building a process for easyInternetcafe.
Since Ingram Micro has experience in this area, they should be able to form a plan relatively quickly, no longer than 5 to 6 days. Once the plan is complete, roughly 3 weeks after start, Ingram will take over. Now that EIC no longer has to worry about the logistic functions, there will be a large number of employees with either a reduced workload, or no workload. In this case, the employees can be utilized by the other companies within easyGroup. EIC will now be able to focus on its core competence activities such as the yield management model, and can work closely with new and upcoming franchisees to create a better method of forecasting, along with mitigating demand fluctuations.
Monitor and Control
Since Ingram will be managing all of the integrated supply chain activities, Ingram will be able to provide EIC with reports upon request. This will be done on a weekly basis based on the large volume of franchises that are predicted to open. There will be various reports to monitor their process, including the following: Savings Report – show savings in each process compared to the old method. On Time Delivery Report – this will show if there are any problems with delivery, and if so, where the problem exists. Completion Time Report – this will show if stores are being opened within the standard time, a problem with opening time will suggest a problem with procurement of installation services.
Reports will continue to be provided upon request, however if the service levels are meeting or exceeding expectations, the frequency of requests will be reduced. If reports show growth as expected, a meeting of all parties will not be required. If reports are showing losses, meetings will be held in order to determine the cause. In addition, there will be scheduled meetings every quarter between executives from both companies to ensure that the established goals and objectives are being met, and to help rectify any issues that need further examination.