First-generation e-commerce is a money pit. Early efforts have focused on building nice Web sites and attracting traffic. Little coordination has taken place between online order taking and physical fulfillment. Customers browse static online catalogs and place orders that are matched against available inventory. In some cases, online orders are actually reentered manually into the company’s production system to initiate the fulfillment process. This lack of integration between front-end and back-end processes contributes to problems such as wrong configurations, delayed shipments, generally poor service and most importantly, unprofitable business.

Superior order fulfillment capability will very quickly become a key competitive advantage. More consumers visiting more online businesses will means little tolerance for shoddy service. Irrespective of how attractive or user-friendly a Web site is, customers are unlikely to come back if the order is not filled quickly and accurately.

Climbing out of the Money Pit

e-commerce will drive lots of new sales but also contribute to exponentially increasing demand variability and order complexity. On the Internet, the next three orders to any given site could be from three different continents with each order requiring a different configuration. Customers will look for real-time information on capacity, production schedules, delivery dates, and transportation options before they order. Back-end systems will need to modernize to meet these requirements. In our view, the traditional make-to-stock mode, favoring inventory as a buffer against fluctuations in demand, will soon be history.

Another significant upcoming change is the move toward dynamic pricing. With the exception of airlines, who have experience with yield management and floating price points, most industries that produce products or services with a short shelf life predominantly use fixed pricing schemes. With the Internet as the common platform, pricing can now be adjusted to reflect real time supply and demand. Instead of lowering or raising prices in increments for the whole target base, pricing can become customer specific. Markets typically support various prices for a single asset since it is a function of the unique value it represents to every buyer and seller at a particular point in time. Just like the airlines, companies dealing with perishable assets (electricity, short life cycle products, and other goods with fluctuating prices) can set prices in real time that helps maximize profitability.