Can E-Commerce Be Profitable?

Despite dramatic sales increases, most e-commerce businesses continue to lose money. Red ink, however, needn’t be the dot-com norm.

Losses could be avoided if e-managers knew as much about operating a business as building a Web site. Time and again, e-tailer financial statements reveal a recurring and avoidable pitfall – big write-downs of bloated inventories.

It’s ironic, but most e-commerce managers haven’t kept pace with new time-based, digital operating models. It’s as though laptops were being delivered by horse and buggy.

Even Microsoft’s Bill Gates concedes that very few companies have the speed of response they will need to compete in the new high-speed business world.

To turn a profit, e-managers must first change their focus. Too many concentrate on the point of sale, equating success with rising Web site hits. You can almost hear the old retailers’ refrain, “Location, location, location.”

In reality, the Internet has made location moot by creating, in effect, one huge global store where shelf space can be purchased at minimal cost.

Instead of focusing on the point of sale, e-managers ought to be looking at their back-office operations and delivery systems.

Consider Its celebrated founder, Jeff Bezos, got off on the right foot when he began filling online orders in 1995. Once he received a request, he’d call a publisher to have the book delivered. Believe it or not, that was a better e-business model than the one Amazon employs today.

Amazon has built expensive warehouses and stocked them with tons of merchandise – all done, it says, to satisfy orders promptly. For shareholders, though, this has meant hefty capital outlays and write-downs of unsold inventories, which continue to dog Amazon to this day.

It needn’t be this way. Dell Computer Corp. is a good example of how a direct seller can operate profitably and avoid costly inventory write-downs.

What is Dell doing right that Amazon is doing wrong? The answer lies in its different operating methods.

Dell makes a profit because it rejected the traditional supply-chain model, with its large inventory requirements, and opted in favor of an information-based value-chain approach.

Value chains digitally connect all the parties that add value to an item – from suppliers to manufacturers, from distributors to retailers. This allows for just-in-time delivery and speedy manufacture, without burdensome inventories.

The key is timely information. Real-time data permit decision-making based on actual demand rather than months-away forecasts. This, combined with rapid response in manufacturing operations, reduces lead time to hours or days vs. weeks or months. It also makes for an especially lean, agile and profitable business. Though Dell still has room for improvement, especially in regard to its suppliers, its internal value chain requires only a week’s inventory – primarily parts such as chips and hard drives.

As founder Michael Dell says, “The closer you get to perfect information about demand, the closer you get to zero inventory. It’s a simple formula. More inventory means you have less information, and more information means you have less inventory.”

In the United Kingdom, retailer Marks & Spencer and Polaroid Scotland also now operate as value chains. Both enjoy low inventories, fill orders almost immediately and manufacture to suit changing consumer tastes.

In time, the real competition in the global economy will boil down to which companies have the more cost-effective, flattened and responsive value chains. Lead times of less than a day will become the norm. And low overheads will result in both lower prices and sustainable profits.

Consumer satisfaction, too, will improve. Not only will value chains be able to satisfy demand more readily, but short lead times will mean manufacturing to order. What are now mass-produced items will be customized to meet individual customer requests.

Ultimately, adroit response to changing demand will determine profitability in the new turn-on-a-dime economy.

So ignore the misguided “clicks vs. mortar” debate. The actual point of sale, whether it’s a walk-in store or an online site, won’t really matter when it comes to determining a company’s profitability, for the victors will be decided in the back office.

Commerce of all types is about to become a competition among lean, cost-effective value chains, and businesses will be measured by their deftness in giving consumers what they want, when they want it.

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