Southwest Airlines Challenge to Stay Ahead Abstract This paper will discuss the challenges currently facing Southwest Airlines in their attempt to remain the most profitable airline in the United States. Southwest has posted consecutive quarterly profits dating back to 1991. Southwest’s success is built upon a business model to keep costs low while providing great customer service and maintaining employee satisfaction. Led by Gary Kelly, the CEO of Southwest Airlines, the company strives to find ways to improve bottom line in terms of reliability, low fares, and customer service.
The most notable action the company took to stay ahead of the competition was investing heavily in fuel hedging as a way to combat against rise in jet fuel costs. The strategy paid off for Southwest as it paid much less in fuel costs than its competitors. With the fuel hedging contracts set to expire, Southwest faces the challenge to maintaining its competitive advantage. SYNOPSIS Southwest Airlines is a profitable domestic airline company operating 3,200 flights per day in the United States.
Southwest was founded on the premises of being a low fare carrier with a lean operational business model and high aircraft use (Southwest Airlines, 2010). Southwest started out with three 737 Boeing aircraft operating in Texas. The company today operates a fleet of 537 Boeing 737 jets serving 68 cities in 35 states with nearly 35,000 employees (Southwest Airlines Fact Sheet, 2010). Southwest has been profitable for 37 consecutive years and is the largest U. S. carrier based on domestic passengers carried as of September 30, 2009 (Southwest Airlines Fact Sheet, 2010).
The company philosophy is to offer low fares on airline travel while treating customers like royalty and their employees even better. The company flies only Boeing 737s, to simplify maintenance and training, and employee productivity is high. Planes are turned around for their next flight within 25 minutes, one-third the industry average (A Day in the Life of a 25-minute Turn, 2010). The company operations are dialed down to a science making it highly efficient. Leading the charge at Southwest Airlines is CEO Gary Kelly, who was named one of the best CEOs in America for 2008 and 2009 by Institutional Investor magazine (Gary C.
Kelly, 2010). He leads by example and is very much involved in daily operations. Gary knows the names of many of the nearly 35,000 employees. He travels in the nosiest seats in the back of the plane leaving the good seats for paying customers. He interacts with customers and employees in a manner making titles irrelevant. I believe Gary is an effective leader because people understand and believe in his vision. He is committed to upholding the foundation upon which Southwest Airlines was founded. He does not retort to the lavish perks that other CEOs may enjoy.
Instead, Gary carries himself as one of the common employees. I consider this leading by example because of Southwest Airlines’ commitment to operating a lean operations model. Southwest Airlines has held a competitive advantage over its competitors by securing low fuel costs by investing in a financial tool known as fuel hedging. The concept behind fuel hedging is an agreement to buy fuel that’s tied to specific dates or prices (Can fuel hedges keep Southwest in the money? , 2008). Southwest Airlines is one of the few profitable airline companies in the United States.
The company has a great corporate culture which attracts talented employees. In fact, Southwest received 90,043 resumes and hired 831 new Employees in 2009 (Southwest Airlines Fact Sheet, 2010). KEY ISSUES Key issues that Southwest includes their fuel hedging contracts set to expire soon and pilots demanding increase in salary. Since 1998, Southwest has saved $3. 5 billion over what it would have spent if it had paid the industry average price for jet fuel. These huge savings made Southwest profitable while other airlines took significant losses (Can fuel hedges keep Southwest in the money? 2008). While Southwest pilots are among the highest paid in the industry, they rejected a contract from Southwest for a two percent retroactive pay increase for 2007 thru 2009 with 2010 and 2011 pay increases tied to financial performance (Southwest Pilots Reject Contract, 2009). DEFINE THE PROBLEM AND OPPORTUNITY Fuel hedging saved Southwest Airlines significant amount of money over the last decade. However, Southwest hasn’t done a significant number of new hedging contracts since the first quarter of 2007 The problem is there asn’t been a good opportunity to enter into favorable contracts due to volatility in the crude oil market. (Can fuel hedges keep Southwest in the money? , 2008). It would make sense to enter into new contracts if Southwest anticipated the price of fuel will be much higher in the future. This is hard to predict with cost being as high as it is. With the expiration of existing contracts, the fuel savings advantage Southwest held may soon dissipate. I think this may be time for Southwest Airlines to explore and take advantage of new opportunities to stay ahead of competitors and remain profitable.
One such opportunity is to begin syndicating Southwest Airlines booking and prices on consumer rate comparison websites to capture a larger market share. Currently, Southwest only offers online pricing and booking on southwest. com. ALTERNATIVE SOLUTIONS Southwest may consider expanding operations to cover North America. With the addition of Mexico and Canada, Southwest Airlines may be able to make up for lost revenue due to high fuel costs. The challenge here would be to enter new markets in which the barriers to entry especially regulatory constraints may prove to be too costly.
The other big challenge would be to gain access to airports where competition already has established strong roots. Southwest may also consider offering amenities such as meals and upgraded seats to attract a new segment of customers. The problem is that this approach changes the entire company dynamic. The company was founded on offering no-frills service. To make changes to attract luxury seeking customers may prove to be a costly venture that bears no fruit. SELECTED SOLUTION I think the best solution to remain atop the industry leaders is to begin syndicating booking and pricing services to pricing comparison websites such as expedia. om. I think this will open up other marketing verticals to capture a larger market share of customers. IMPLEMENTATION/RECOMMENDATIONS I think Gary Kelly should negotiate with major price comparison websites to promote Southwest fares and booking services on their websites. The solution is fairly simple to implement and may only require a small investment in IT costs. References: Wikipedia. org (2010). Southwest Airlines. Retrieved May 15, 2010, from: http://en. wikipedia. org/wiki/Southwest_Airlines Southwest. com (2010). Southwest Airlines Fact Sheet, 2010.
Retrieved May 15, 2010, from: http://www. southwest. com/about_swa/press/factsheet. htm Southwest. com (2010). A Day in the Life of a 25-minute Turn, 2010. Retrieved May 16, 2010, from: http://www. southwest. com/about_swa/southwest_difference. html? int=GNAVSWADIFFERENCE Wikipedia. org (2010). Gary C. Kelly. Retrieved May 16, 2010, from: http://en. wikipedia. org/wiki/Gary_C. _Kelly Reed, D. (2008, July 24). Can fuel hedges keep Southwest in the money? Retrieved May 15, 2010, from: http://www. usatoday. com/money/industries/travel/2008-07-23-southwest-jet-fuel_N. htm
Research On Scada Control Systems
This paper aims to define SCADA systems and explore their importance in modern industry and infrastructure. It seeks to clarify the reasons behind growing concerns about the security of these systems, analyze their inherent vulnerabilities, and propose recommendations for improving security measures within SCADA systems.
Supervisory Control and Data Acquisition systems, also referred to as Process Control Systems (PCS), have been specifically developed for automating diverse systems such as traffic control, power grid management, and waste processing.
Control systems are crucial in manufacturing and industrial processing, serving various purposes such as guiding robotic arm and conveyor belt movements, packaging the final product, managing inventory, and monitoring the distribution network. In chemical companies, control systems are essential for monitoring tank levels and ensuring precise ingredient mixing. Likewise, Las Vegas casinos depend on control systems to synchronize water fountain spray with lights and music.
Control systems are utilized in various industries, including oil and gas drilling and refining, water and electricity distribution by utility companies, as well as the collection of wastewater and sewage. They are extensively present in all sectors of the economy. In particular, “supervisory control and data acquisition” (SCADA) refers to the systems that monitor the distribution of vital public utilities such as water, sewer, electricity, oil, and gas. However, India has not yet fully incorporated SCADA systems into its infrastructure.
SCADA systems are widely employed in industrial production and specialized process control for automation purposes. Indian companies, Ranbaxy Labs1 and Voltas2, utilize SCADA systems for process control. However, there is a growing trend of using these systems in countries like the US, UK, and Australia where they play a crucial role in controlling infrastructural systems such as power, water and waste management, and traffic control. Therefore, the economy and infrastructure of these countries heavily depend on SCADA systems.
SCADA systems employ a three-tiered strategy for designing control systems, consisting mainly of control systems. This strategy entails the use of one or more remote terminal units (RTU) connected to various sensors and actuators. These units subsequently transmit data to a master station. Figure 1 provides a visual depiction of this process.
The concept underlying control systems is that any measurable quantity can be managed. Measurement occurs through sensors, while control happens through actuators. Sensors collect data for monitoring and data acquisition, while actuators execute actions based on this data. The primary control system, referred to as SCADA, processes the data and determines suitable actions.
More advanced monitoring and control systems have been made possible by advancements in CPUs and RTU programming capabilities. In the past, applications were programmed at the central master station. However, with ladder-logic programming now being used in modern RTUs, they can be programmed directly at the RTU itself. This type of RTU is called a Programmable Logic Controller (PLC) and is quickly becoming standard in control systems.
The configuration of sensors and actuators on a PLC or RTU determines the quantity and type of inputs and outputs. Different models and manufacturers offer modules designed for input, output, digital, analog, or various combinations. An analog input module typically includes multiple interfaces, with common choices being 8, 16, or 32 inputs. Analog output modules receive digital values from the CPU and convert them into analog representations before transmitting them to the actuators. Output modules usually offer options for 8, 16, or 32 outputs with resolutions commonly set at either 8 or 12 bits.
Digital input modules are commonly utilized for indicating status and alarm signals. Instead of merely indicating “open” or “closed,” a dedicated digital input module is employed for counting voltage or current pulses. However, this capability can also be achieved using standard input modules and ladder-logic programming language functions of the PLC.
There are several questions that need to be answered:
- Is the data returned by the process of a sensitive nature such that loss, modification or compromise of the data, either intentional or unintentional, will cause serious harm to the organization’s mission?
- Are the instructions transmitted to the process of a sensitive nature such that loss, modification or compromise of the instructions, either intentional or unintentional, will cause serious harm to the organization’s mission?
- What type and amount of system data loss, modification or compromise is acceptable?
- Is the data retained or transmitted by the individual components subject to loss, modification or compromise, either intentionally or unintentionally, to a degree that the system will be affected?
- What level of component data loss, modification or compromise is acceptable?
SCADA system hardware components are designed for industrial environments and offer durability. However, these features do not address professionals’ security concerns regarding data protection and restricted component access.
To fully grasp the design of a SCADA system, it is crucial to comprehend both its operational and management aspects within its operating environment. Addressing specific inquiries becomes imperative in this process.
- What environmental factors will affect the process, either negatively or positively?
- What environmental factors will affect the system components, either negatively or positively?
- What is an acceptable level of interference by environmental factors?
- How should these factors be mitigated?
It is possible to exploit a sophisticated system with multiple interfaces for attacks.
When assessing interfaces, it is crucial to determine the required level of security for both system-wide and individual components. This involves considering specific inquiries:
- What interfaces exist for data to flow out of the system?
- What interfaces exist for instructions to flow into the system?
- What level of access is required to the feedback data returned by the process? Who requires access to the data?
- What level of access is required to send instructions to carry out commands against the process?
- Who requires the capability to transmit instructions to the process?
- What protections exist or can be applied to minimize the exposure of vulnerable interfaces by the system?
- What interfaces exist on the components for data or instructions to flow into or out of the component?
- What interfaces exist within the components for data or instructions to flow between components?
- What protections exist or can be applied to minimize the exposure of vulnerable interfaces by the components?
SCADA systems require extra attention to confidentiality and authentication due to their focus on reliability, availability, and data integrity.
In addition to protocols employed, types of interfaces required, hardware configuration, and budget are other issues to consider. Some questions to answer include:
- What degree of reliability is required?
- What degree of availability is required?
- What degree of data integrity is required?
- What degree of confidentiality is required?
- What overhead and latency in transmission is acceptable?
- What is the environment the communications links must traverse?
The analysis of security of these systems places particular importance on the communication requirements.
Although slow, Modbus is widely accepted and has become a de-facto standard. According to a recent survey, 40% of industrial communication applications use Modbus.
Profibus is a German standard that defines three types: Field Message Specification (FMS) for general data acquisition systems, Decentralized Peripherals (DP) for fast communication, and Process Automation (PA) for highly reliable and safe communication.
Foundation Fieldbus is an extension to the 4-20mA standard that utilizes digital technologies.
UCA, also known as the Utility Communications Architecture, is an initiative developed by the Electric Power Research Institute (EPRI) for the electrical industry. It is not merely a protocol definition but a complete collection of standards aiming to enable easy integration into systems, enabling manufacturers to design readily compatible devices. In 1999, IEEE took over the UCA standards process and has since expanded it for the water industry. Additionally, other industries are assessing UCA for its appropriateness.
When evaluating the operational functions of a SCADA system, it is important to consider both the hardware and software being used. In traditional SCADA systems, reliability, stability, and safety are key concerns. However, when considering security, it is also important to ensure that the hardware and software have minimal exploitable flaws. This can be achieved through evaluating their assurance. To assess this, there are several questions that need to be addressed:
- What degree of reliability should the system have with respect to software and hardware?
- What degree of assurance should the system have with respect to software and hardware? What degree of reliability do the components require in order to effectively satisfy the system’s mission?
- What degree of assurance do the components require?
- Has the hardware been tested for reliability, safety, assurance, stability?
- Has the software undergone a formal documented software development process?
- Have the software and hardware formally analyzed or evaluated by a trusted third party?
- What is the configuration management and lifecycle maintenance process for the software, and the firmware update process for the hardware?
- What maintenance is required for the hardware?
When evaluating management functions, it is important to assess both the system users and its components. Additionally, the automated decision-making embedded in the system must be evaluated using the same criteria.
Concerns have arisen due to two current trends in the increase of accessible systems for public use. These trends aim to promote communication and interaction among different systems.
- Definition of standard interfaces and communication protocols in support of cross-vendor compatibility and modularity
- Connection of nodes in a SCADA system to open networks such as the Internet.
Despite the benefits they bring, such phenomena have also led to the systems inheriting the issues commonly found in networked information systems.
The security of information is a growing concern for systems, particularly those deployed in key positions where they are crucial for operations. Leaving these positions unsecured invites attacks from various sources, including pranksters and terrorists. In fact, seized laptops belonging to al Qaeda have uncovered this specific danger.
The data gathered from these computers indicates that al Qaeda has gained substantial understanding of the control systems governing the infrastructure of the United States, raising fears of a potential attack. Richard Clarke, an advisor on Information Security to the President of the United States, recently expressed in a Washington Post article that industry leaders should anticipate and acknowledge their vulnerability to hacking. He also criticized them for prioritizing coffee expenses over information security.
Concerns about the control systems for critical operations in the United States have risen. This is due to a series of eight attack scenarios on the country’s power grid formulated by mock intruders from the Energy Department, all of which were successful. The potential for e-terrorism is particularly worrisome because a combined physical and electronic attack could have a more devastating impact than either type of attack alone. Ron Dick, former head of the FBI’s National Infrastructure Protection Center, shares his anxieties: “The thought of a physical attack on U.S. infrastructure… combined with a cyber-attack that disrupts first responders’ access to 911 systems keeps me awake at night.”
Typically, control systems may have some vulnerabilities, including unique issues. However, they often lack established data sensitivity levels. Secure information systems require the identification and classification of data based on similar sensitivity. Without such distinctions, it becomes impractical and futile to determine suitable security measures, such as securing communication links or protecting databases.
Security administration in control systems is often weak due to the influence of outdated infrastructure. The importance of properly managing and administering security is often neglected, leading to ineffective practices and inefficient management. It has been proven through experience that systems lacking solid management and administrative policies will eventually exhibit vulnerabilities. Control systems are not exempt from this phenomenon.
Architecturally, many control systems have centralized data storage and control, which can create a single-point-of-failure. There is also a risk of physical damage to infrastructure assets due to the permissible operation of control equipment. To prevent these issues, an effective control hierarchy should be implemented. Furthermore, some control systems integrate in-house emergency services such as fire alarms into the system itself. However, considering the poor security of these systems, adding these services thoughtlessly only adds complexity and increases vulnerability.
Control system networks have vulnerabilities that vary depending on the type of system. Legacy implementations use proprietary protocols and low-bandwidth data channels. Although there are fewer chances for disruptive behavior compared to newer networks, which resemble modern TCP/IP systems, problems exist because of the older technology. The security of these systems is poor because they were designed at a time when error checking and integrity validation were not considered important.
Furthermore, there is typically a lack of accounting and logging, making it difficult to identify the source and cause of vulnerabilities. The configuration passwords are often weak and may be ineffective due to limitations in the device. The wireless links are not adequately secured. Additionally, networking equipment in these systems, especially when physical access is assumed, is highly susceptible to attacks. It is worth noting that vulnerabilities in older networks are less publicized compared to the vulnerabilities in modern technologies such as Ethernet, routers, and firewalls.
There is little to no network restriction within the network perimeter, which enables “telnet hopping” from harmless network devices to critical utility equipment. There are two additional factors that greatly contribute to the vulnerability of control systems.
The trust in the ability of PCS links to transmit data faithfully is blind. The geographically sparse PCS network often requires long-distance connections. These connections can be made through either cables or wireless technology, and they can be exclusive to the PCS or shared with other users. Shared links are more cost-effective, but often the PCS systems at both ends of the link are not properly shielded from other entities using it.
Moreover, wireless and shared links without security measures are at risk of being eavesdropped or manipulated. Similarly, even unshared cable links that are long or unprotected may be highly vulnerable. For instance, if there is no security mechanism between the master station and RTU, an attacker can transmit a malicious signal through the master station to the RTU, and vice versa.
Recently, a California-based security firm demonstrated the vulnerability of critical infrastructure systems by accessing a remote substation of a large utility company in the southwestern United States. They accomplished this by using a directional antenna and a wireless laptop from a vehicle parked near the substation6.
The PCS is connected to external networks, which are networks that are not part of the PCS. Examples of these networks include connections to an administrative network that is not automated, or connections to other PCS systems for exchanging information or controlling each other. Often, interfaces to external systems assume that the outside network is trustworthy, which means that the security of the PCS relies on one or more organizations. This includes giving certain partners or IT consultants network access without implementing sufficient measures such as firewalls, command logging, or privilege control. As the world moves towards outsourcing and strategic partnerships, security implementation suffers because there is no common standard. Designers frequently forget to secure the backdoors they create for easy system adjustments, which can lead to disaster in the future.
Dial-up modem access lacks encryption and authentication practices. Data transfer over telephone lines or wireless networks is typically either unencrypted or encrypted with a weak algorithm that is easy to crack. This lack of security is due to a need to save time and resources on encryption. Unfortunately, it allows signals to be easily analyzed and potentially modified by attackers.
Online Grocery Business
To set the stage, the initial implementation and learning from phone/catalogue home-shopping in ASDA is outlined to demonstrate why e-commerce was seen as most economically suitable to conduct a grocery home-shopping business. Then the paper illustrates the development stages and critical aspects of ASDA. com’s Web shop. Particularly, it delineates the operational aspects of B2C e-commerce in the grocery business: fulfillment center and fulfillment process. The case will also describe ASDA’s efforts in overcoming problems with their home-shopping fulfillment model and present important elements of ASDA. om’s virtual store and its operation. The paper concludes with the challenges that ASDA. com has been facing, their current status, and future prospects.
The company’s trading activities involved the operation of food, clothing, home, and leisure superstores throughout Great Britain, mainly targeted at the British working class family. With its superstore format, the company had been very strong in non-food offerings. In January 2004, ASDA had 255 stores and 24 depots around UK with 122,000 employees and was a subsidiary of US-based Wal-Mart Stores Incorporated, the biggest retailer in the world. This paper appears in Idea journal International Journal of Cases in print or electronic forms without written Copyright © 2005, the Group Inc. Copying or distributing on Electronic Commerce edited by Mehdi KhosrowPour. ASDA’s parent, was founded by Sam Walton in Bentonville, Arkansas, United States (US) in 1962.
In the fiscal year ending January 31, 2004, the company was one of the biggest in the world, with a turnover of around $256. 329 billion under the lead of H. Lee Scott, Jr. the president and CEO. In total, Wal-Mart had nearly 5,000 stores and wholesale clubs across 10 countries and more than 1. 3 million employees worldwide (which were referred to as the “associates” in Wal-Mart or “colleagues” in ASDA). The ASDA headquarters were based in Leeds. Leeds is the premier city in Yorkshire, one of the northern counties in the United Kingdom.
The company was founded by a group of Yorkshire farmers in 1965 as Associated Dairies. Its first store opened in the same year, and since then, it has specialized in bulk selling at low prices. ASDA then expanded into the South of England in the 1970s and 1980s. The company was acquired in June 1999 by Wal-Mart Stores Inc. In 2004, ASDA’s management team was led by Tony Denuzio, CEO for ASDA, which reported to John Menzer, president and CEO of Wal-Mart’s international division. ASDA acquired and retained customers by providing a broad assortment of quality merchandise and services at low prices.
Wal-Mart’s “Everyday Low Price” policy (EDLP) had gained ASDA the title of “British best value supermarket” for 7 successive years. In 2004, it offered around 25,000 lines of food and non-food. ASDA, as all other subsidiaries of Wal-Mart Stores Inc. , was ruled by three basic beliefs: respect for individuals, service to customers, and striving for excellence. These rules were established by Sam Walton (1992). Walton also claimed that the success of building the company could be pinned down into 10 rules that were still true for the company in 2004.
These rules were:
- Commit to your business. Believe in it more than anybody else;
- Share your profits with all your associates, and treat them as partners;
- Motivate your partners;
- Communicate everything you possibly can to your partners;
- Appreciate everything your associates do for the business;
- Celebrate your successes;
- Listen to everyone in your company;
- Exceed your customers’ expectations;
- Control your expenses better than your competition;
- Swim upstream. Go the other way.
Really, we got big by replacing inventory with information” (Walton as cited by Wal-mart, 1999, p. 9). IT played a major role in the success of Wal-Mart. It believed that IT was a key facilitator in staying focused on customers: getting customers what they want, at the right place and the right time, and exceeding their expectations. The management of IT in ASDA was housed under the ISD (Information Services Division), led by Andy Haywood, who reported to Linda M. Dillman, Wal-Mart’s CIO (chief information officer). Figure 1 describes ASDA’s ISD strategy.
The Acquisition of ASDA by Wal-Mart
ASDA had access to the world’s best IT infrastructure for a retailer. IT integration between ASDA and Wal-Mart was completed at the end of 2002. In the long term, such integration would enable ASDA to grow without limitations, as was explained by Wal-Mart Europe ISD director in 2003: “…what we have done is to replicate to some extent the infrastructure we have in the rest of Wal-Mart to allow ASDA to expand in any way/shape/form they need to. In more immediate terms, such integration had enabled ASDA to leverage its supreme IT infrastructure to continuously maximize efficiency, lower prices, improve availability, increase the quality of goods provided, as well as widen variety. At the heart of the IT infrastructure, a very powerful tool that allowed such improvement was Retail Link. Since the acquisition was completed in 1999, a lot of effort was put into adopting and developing the system to conform to ASDA’s business practices.
In 2003, Retail Link facilitated the daily trading practices between ASDA and more than 1,000 suppliers. Retail Link was a proprietary Web-based exchange linking Wal-Mart (including ASDA) and their suppliers, or a private e-marketplace (Hoffman, Keedy & Roberts, 2002). In 2004, Retail Link was the biggest commercial data warehouse in the world (with 101 terabytes of capacity), which captured (among others) the point-of-sale figures – by item, by store, by day – enabling company and suppliers to track merchandise, study how the products sold, inventory information, and shipping deals.
The system integrated Wal-Mart’s EDI (Electronic Data Interchange) networks with an extranet used by the trading teams and some 10,000 suppliers. The sophistication of real-time. data gathered from its network then helped the company to develop sophisticated data warehouse tools and computerized data exchanges with suppliers.
The impact of Retail Link on ASDA’s business can be explained as follows: Getting customers what they want: Advanced data-mining for accurate merchandising. The availability of historical data in Retail Link allowed sales from the past 10 years to be combined with variables such as weather, holidays, and school schedules to predict optimal product supply for specific stores under a range of situations. In the price they want (even lower), when they want them: Real-time data for minimized inventory cost.
Availability of real time data related to ASDA’s business enabled the company to implement a just in time supply system, minimizing inventory costs. The level of buffer inventory could be minimized, whilst still ensuring goods were always available when customers want them by automatically alerting vendors whenever supply was needed using point of sales figures from Retail Link. (b) Perpetual inventory and collaborative planning, forecasting, and replenishment (CPFR) for optimized replenishment. Instead of its previous systems of replenishment (store-driven ordering), with Retail Link ASDA imposed “perpetual inventory” using the timely information of sales, inventory, and so forth that were shared between the company and its suppliers. As such, the replenishment of goods could be continuously optimized. Retail Link also enabled ASDA and its suppliers to collaboratively conduct and analyze the planning and forecasting for related products.
As a result, both parties could continuously advance their lanning and forecasting techniques for optimum replenishment, further improve communication, and deepen the supplier-buyer relationship. Global purchasing for improved bargaining power and quality of goods. Retail Link allowed the aggregation of orders from different Wal-Mart divisions around the world into a single request to suppliers all over the world. By acquiring certain products from a single supplier, Wal-Mart was able to improve the quality of its goods as well as supply logistics and retail prices. Improved logistics capability. The timely information enabled by Retail Link allowed the logistics team to efficiently deliver goods from its hub-andspoke systems to stores, to respond timely to customers’ needs. As can be gathered, Retail Link was an important source of ASDA’s competitive advantage: low-cost leadership. This discussion is aimed to provide an understanding of the company’s capability in continuously lowering prices, getting customers what they want when they want it, and exceeding their expectations.
However, while it serves as an excellent background to the case, Retail Link is not the main focus of this case study. This paper focuses on ASDA @t Home, the B2C e-commerce side of ASDA.
Among the Big Four, ASDA, Morrisons, and Tesco had been positioned as lowcost or value providers, with ASDA targeting a slightly lower level market than Tesco, while Morrisons was more or less similar to ASDA. J. Sainsbury’s, on the other hand, had been trying to reach a slightly higher end of the market, yet was “caught in the middle” when competing with the likes of Marks & Spencer or Waitrose. Its loss of market share against ASDA illustrates that price was still a key factor for customers (Michaels, 2004). The distribution of power between supplier-retailer-consumer in the grocery industry had evolved in the last few decades. While in 1970s most power was held by producers that supplied grocery retailers, between the 1980s to mid-1990s, the power had shifted to the retailers.
Nonetheless, since the late 1990s, consumers were claimed to possess the most power (as revealed by ASDA’s head of ISD infrastructure during an interview) along with their changing lifestyles and demographics. As such, there had been a transformation in the UK supermarket industry marked by intense competition and tighter profit margin to players. This development had then forced retailers to pursue better partnerships with their suppliers (Zairi, 1998). At the same time, physical expansion got harder along with increased population and market saturation. Such a situation had made customer acquisition and retention difficult. More than ever, retailers were forced to experiment with creative innovations (e. g. product, store format, service) and adoption of advanced new technology to achieve the optimal rate of operational efficiency as well as customers’ shopping experience. In the face of difficulties in the grocery market since late 1990s, as outlined above, home-shopping was seen as an attractive option for supermarket players. The UK grocery market was oligopolistic with high utilization of average store space.
Therefore, it was arguably very suitable for the grocery home-shopping business (Boyer & Frohlich, 2002). In fact, the need for a grocery home-shopping service had been identified for decades. Nevertheless, in the UK there had not been a mechanism of rolling it out profitably. This was due to the efficiency of the self-service model in grocery retailing, coupled with a tiny profit margin related to the business. The economical offering of homeshopping services was not possible without charging customers excessively due to the expensive labor and logistics costs. The year of 1990 marked the beginning of the UK grocery home-shopping era with the launch of The Food Ferry, the world’s oldest operating grocery home-shopping company. This company used a catalogue home-shopping model and outsourced its goods to local suppliers targeting a small area of customer households around central London. Later on in the mid-1990s, some of ASDA’s strong competitors, Tesco and J. Sainsbury, had entered the online shopping market (1995 for Tesco and 1996 for J. Sainsbury). Inspired by the development of online grocery supermarket in the US as well as the aspiration to capture competitors’ market shares, both players started investing in building the online grocery market. They were also followed by several other supermarket players. During this time, both Tesco and J.
Sainsbury had been fulfilling customers’ orders from their stores. (In 1999, J. Sainsbury started investing in a warehouse for home-shopping purposes. ) ASDA took a “wait and see” stance for their e-commerce launch and opted for a phone/fax catalogue-based shopping to start with (Faragher, 2002). In order to bring ASDA’s offering to a whole new audience, ASDA’s first ever home-shopping initiative was piloted in December 1998. The business, called “ASDA @t Home,” initially sold groceries. After a two-month pilot, ASDA @t Home went live in the form of catalogue home-shopping, adding paper-based catalogues to the existing online catalogue, offering next day delivery.
Traditionally, the company had a stronger presence in the northern part of England and focused on middle to lower economic classes. At the end of its 2-month pilot, the service was extended to reach as many as 450,000 upmarket households within the radius of 15 miles from its first home-shopping warehouse in Croydon, South London. After less than a year of running the business, supporting existing home-shopping systems with a third-party call center had proved very expensive for ASDA.
Furthermore, low profit margins of the grocery business would have to cover fix and variable costs inherent in the home-shopping service (such as driver costs, petrol, depreciation costs for vans, warehouse operation costs, labor costs for picking and packing customer orders, and others). Figure 2. Phone-based catalogue shopping ordering process for ASDA @t Home Start Ordering Process Customer register details on the phone Phone Operator take details and ask customer to read 6 digit codes next to catalogue Customer read 6 digit codes Phone Operator read out product Product Correct? Yes Any special instruction? Yes Special instruction recorded by operator No No Is there any other orders? No Customer pay with credit/debit card on the phone Yes Operator key in order to PC system, automatically downloaded to Home shopping server Finish Ordering Process Copyright © 2005, Idea Group Inc.
Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. marked the gradual changeover from phone/fax to include PC-based home-shopping. It was Octavia Morley, ASDA’s director of home and online home shopping who was directly responsible for the venture. Trials of PC-based shopping were conducted in August that year. Customers used a CD-Rom, which allowed them to order the whole range of products available from the catalogue. PC-based orders would be created off-line, and then customers would connect to the home-shopping servers using the Internet to transfer their orders.
At about the same time, the company started its second warehouse in Watford, expanding their reach to another 250,000 households; they also had planned another 13 to 15 depots nationwide in 2003. The trial was successful; Morley reported that it was a significantly cheaper channel to conduct a home-shopping business (compared to phone/fax) (Mugan, 1999). PC-based home shopping acted as a trial for a seamless multi-channel homeshopping offering that was seen as the preferred choice by ASDA’s management since the year of 2000. s.
During this time, the company had learned from its competitors’ mistakes and perfected its warehouse operation. After it was launched in November 2000, the company started expanding its services until yet another major changeover in 2001 for ASDA @t Home’s operation. This fact showed how complicated the implementation of an e-commerce application was, even for a company with such vast resources. The next section provides a discussion on the development of ASDA @t Home online, the problems it faced, how it overcame them, and its vision forward.
This was the starting point of ASDA @t Home’s migration to a higher level of home-shopping operation. For over 6 months, the team conducted the design, coding, testing, and deployment of the ASDA. com Web site. They identified several critical aspects for the Web site, among all: techniques for finding products, checkout mechanism, shopping basket facility, delivery booking, security, customer help/guidance, account information, and registration. In November 2000, ASDA @t Home launched their Web site for a closed community. For this, a team of developers was put together to support the launch of the Web site in Bentonville (Wal-Mart’s head office).
The project team rapidly ironed out initial glitches using feedback from the initial users of the site, ready for the full launch in December 2000. When the Web site was finally launched, ASDA @t Home allowed customers to be able to hop between the Web and telephone, at the time offering 6,000 lines of products. Customers could even “mix and match” between different ways of accessing ASDA @t Home to place an order. The business had also launched its Interactive Digital TV shopping in 2002. This, however, was closed down after approximately a year in operation. Customers’ Orders Fulfillment A key element of online grocery was how fulfillment was handled (Boyer, Hult, Splinder & Santoni, 2003; Ellis, 2003). There were two basic models available (Tanskanen, Yrjola & Holmstrom, 2002). The first was to piggy-back on an existing supermarket or cash and carry (this will be referred to as in-store picking). Online grocer could either pick goods from its existing supermarkets/cash and carries or, in the case of pure plays, from others’ stores. The second alternative was to serve the online grocery customers by building a dedicated picking center, either automated or not.
In comparing both models, according to Delaney-Klinger, Boyer, and Frohlich (2003), the in-store picking model would minimize cost when sales were limited by sacrificing some degree of picking efficiencies. Furthermore, this model would enhance existing customers’ shopping experience as goods were delivered from their local stores (Seybold, 2001). Nonetheless, in-store fulfillment bore the risk of cannibalization to the existing stores, as shoppers needed to compete with in-store pickers; it would also be inefficient for huge volumes (Boyer & Frohlich, 2002). With a dedicated fulfillment model, a company could serve much more orders than with an in-store model. The order fulfillment process could be optimized, and the cost of picking could be minimized with this model.
Furthermore, food quality as well as availability could be ensured by having a dedicated center (Roberts, Xu & Mettos, 2003). Customers could benefit from almost real-time visibility to the availability of goods when ordering from companies using this model (Yousept & Li, 2004). Nevertheless, this model required a significant upfront investment; Webvan, for example, spent $25 million (? 13. 8 million) for each of its automated warehouses. Furthermore, it also entailed more logistics cost compared to the in-store picking model, as warehouses were usually built relatively far from customer residence (Roberts et al. , 2003). Table 2 compares the limitations and benefits of both approaches.
Rather than implementing any of the fulfillment models in their purest form, companies could also implement a hybrid model, an operational option between in-store picking and a dedicated fulfillment center (Yrjola, 2001). This way, players were trying to combine the benefits of both worlds. In practice, there was no best way of implementing a hybrid model. In the UK, due to the emerging development of the online grocery business, in 2004, a lot of experiments were still conducted to find the best way for each player to optimize fulfillment. For example, Tesco in the UK had different combinations of its online shopping fulfillment model: 1. 2. In-store picking for grocery goods.
Combination of dedicated/in-store for wines: Cases of goods were picked in a central depot, they were then sent through to stores. In the designated store, wines were then being cross-stocked (i. e. , they did not go the store’s stock). Finally, they were shipped to customers. Outsourcing for items, such as CDs, DVDs, white goods, and general merchandise, to a third party (where the company used the supplier’s warehouse).
In-store Picking Benefits Negligible start-up cost Instant coverage of service to wide audience using supermarkets network nationwide Dedicated Picking Centre Limitations Significant start-up cost Only covering areas surrounding the warehouse (even though each warehouse can cover a much wider area than a store), therefore slow coverage to wider audience Significant additional operational cost, wastage, overhead and other cost related to running a warehouse Smaller range of products offered Little extra to current operational cost Wide range of products offered (following the store’s range) Limitations Limited home-shopping fulfilment capacity Inefficient picking process – high cost No visibility of goods availability Risk of error in goods replacement Big risk of product error in general Disturbance to offline customers Lower assurance over food quality in online order fulfilment
Benefits High home-shopping fulfilment capacity Optimised picking process – low cost Near real-time visibility of goods availability Limited chance of the need to replace goods Less risk of product error in general No disturbance to offline customers Better assurance of food quality in online order fulfilment Nevertheless, embracing hybrid models usually involved different customer ordering systems, back-end systems as well as fulfillment processes. In some instances, players might decide to adopt hybrid methods for different geographical areas with varying levels of demand and population density. This might sometimes result in twice the effort of designing work practices and investment in different systems. The problem of home delivery service also represented a big challenge in online grocery shopping (Punakivi, Yrjola, & Holmstrom, 2001).
One of the most important factors that affects the cost for home delivery was sales per area (sales per mile2 or km2) (Yrjola, 2001). The more sales there were until a certain point, the lower the cost of home delivery. This represented a challenge for a dedicated fulfillment center. Other important aspects were related to the delivery time window offered to customer as well as when the delivery was in comparison to the order. Different combinations included one-hour delivery window, two-hour delivery window, either next delivery or longer (Punakivi & Saranen, 2001; Punakivi, Yrjola & Holmstrom, 2001). ASDA @t Home fulfilled its customers’ home-shopping orders using a dedicated warehouse.
This model was chosen for ASDA @t Home’s operation instead of the instore picking model to avoid the cannibalization of their existing stores. It was believed. That a bespoke dedicated fulfillment model would be more efficient than an equivalent store operation, which was designed to ensure maximum shopping enjoyment, impulse buying, and ease of finding based on consumption habits. Arguably, the traditional supermarket store design could not produce the optimal process to fulfill customers’ homeshopping orders.
The dedicated warehouse model would also be able to handle a greater volume of orders (Spence, 2002a) and enabled ASDA @t Home to reach areas where it did not have a strong presence at the time. The Changeover ASDA @t Home had been operating for 18 months when it became apparent that the dedicated fulfillment center was not suitable to support the growth of the business. Round about the time of introduction to a new multi-channel platform, Iain Spence was conducting a feasibility analysis to compare in-store fulfillment and ASDA’s warehouse model; he concluded that in-store picking was more commercially viable. This was confirmed by ASDA’s general manager for e-commerce in 2003. There were several reasons why a dedicated fulfillment center would not be suitable for ASDA @t Home: 1.
Low customer uptake for online grocery home-shopping while it was very expensive to run the warehouse. ASDA @t Home was experiencing problems in achieving breakeven on the warehouse operations costs on a daily basis. Both existing warehouses had problems reaching the breakeven point of 500 orders a day. The short shelf life of much food led to a massive amount of wastage, while no steady income was definite. In addition to wastage, other aspects (e. g. , rent, depreciation, labor) also added to the expensive cost of warehouse operation.