UCLA Anderson Global Supply Chain Blog

Saving Rhinos from Extinction in an Intelligent Way

Christopher Tang

There are five species of Rhinos (while, black, greater one-horned, Sumatran and Javan). While the last two Asian species are critically endangered, the other three are endangered because they are hunted by poachers for their horns some Asians believe that Rhino horns can be used to treat certain ailments.     

Over a decade from 2007 to 2017, over 7,245 African Rhinos have been lost to poaching.   By 2017, there are only 100 Sumatran Rhinos and 60 Javan Rhinos left in Asia, and approximately 28,000 Rhinos of the other three species left in Africa.   Rhinos will be extinct without human intervention.  First, one can reduce the demand of Rhino horns by changing the beliefs of certain Asians and improving law enforcement about the trade of Rhino horns. However, this will take time, and time is running out.  Second, one can reduce the poaching of Rhinos in South Africa.  Over the last decade, many organizations such as WWF and Save the Rhino collect donations and contributed funds to recruit more rangers to safe guard these Rhinos.  There is a decline in the number of Rhinos poached in South Africa, but it is very costly and inefficient to rely on these ranchers without additional help.  Despite intensive efforts to protect Rhinos using armed rangers, drones, and trained tracker dogs, more than 1000 Rhinos are being poached in each year. 

Help is on its way.   First, through direct observations, scientists from IBM learned that Zebras normally move along-side Rhinos.  When facing a predator (e.g., a lion), a herd of zebra will scatter.  However, when encountering a poacher with a gun, these animals will move in opposite direction.   Anticipating this behavior, these scientists put radio collars on zebras so that they can monitor the location and movement of these zebras.  This way, they can alert the rangers when the zebras move in opposite direction. 

Second, using historical data on poaching incidents, computer scientists are using machine learning to predict when and where Rhinos were likely to be poached. This way, rangers and drones can patrol these target areas to reduce the number of incidents.

These two approaches are encouraging first step, but much more need to be done to save these Rhinos from extinction. 

Modernizing an old industry using Agriculture Technology

Christopher Tang

Venture capital community is getting excited in investing in agriculture technology to modernize the agriculture sector – a US$ 7.8 trillion industry representing 10% of global GDP.   By 2015, the venture capital invested over US$4.6 billion on different agriculture technologies including agriculture drones, online markets, online knowledge sharing platforms, etc.  

In Kenya’s highlands, farmers grow tea, beans, mangos and bananas, but they find it hard to know when the harvest and send them to market.  Without any form of coordination, farmers can end up waste their time and effort when too many farmers sell the same type of fruits in the same market. When this happens, they have to haul their fruits back to the farm to feed them to the animals.

Through a grant from the Gates Foundation, MasterCard Lab for Financial Inclusion launched 2KUZE in 2017.  2KUZE is a mobile platform that connects smallholder farmers, traders, buyers, and banks in East Africa.  Through this mobile app, farmers can use their mobile phones to check on the prevailing market price for certain fruits in the market.  If they decide to sell their fruits at the prevailing price, they can conduct the entire transactions of selling produce and receiving mobile payments without facing price risks. 

Besides this mobile market platform 2KUZE, WeFarm, an agri-tech company based in the UK, has developed a peer-to-peer knowledge-sharing platform for farmers to exchange text messages about different farming techniques. Other agri-tech mobile platforms enable farmers to upload pictures of pests from their mobile phones so that other farmers can offer suggestions to control these pests.  With the support of these new agriculture technologies, farmers are improving their yield.  This way, farmers can grow more and sell more, when consumers have more affordable food to eat. 

Blockchain can make global supply chains more efficient and secure

Christopher Tang

There are two sides of a bitcoin: a cryptocurrency that enables anonymous individuals to facilitate transactions using a decentralized digital currency without a middleman (such as a bank or credit card company).[1]  One side is labelled risks because bitcoin has involved in money laundering activities, ransom collections (e.g., victims of the WannaCry ransomware attack in 2017 paid their ransoms in bitcoins), illegal transactions on the dark web, etc.  

The flip side is labelled opportunities not because of bitcoin but its underlying “blockchain” process.  After the development of bitcoin invented by Satoshi Nakamoto in 2009, computer scientists, software industry, and the banking industry were intrigued by the potential applications of bitcoin’s underlying “blockchain” process.   Essentially, blockchain is a shared database that enables different users can append new data, authenticate user’s new data with strong cryptography, and provides incentives for other strangers to manage and secure updates.  In 2014, Vitalik Buterin and his team developed a public, open-source blockchain-based computing platform that is known as Ethereum.  This public blockchain enables users to store and execute smart contracts.[2]

Unfortunately, someone siphoned US$60 million in ethers (Ethereum’s version of bitcoin) from an autonomous version of a venture capital fund project (the Distributed Autonomous Organization) in 2016.  This incident really calls the security of public blockchains into question.  In 2017, more firms are working together to experiment the viability and the benefit of “private” blockchains known as “permissioned blockchains”.  Unlike public blockchains that lack visibility of user identity and lack of governance, all users are known to each other in a private blockchain.  Also, all rules of engagements are established in advance including which users have what rights to append new data to the end of the chain as a block (i.e., blockchain), and all updates are monitored and verified by other users. 

The notion of private blockchains has sparked interest in the financial service industry.  Currently, Depository Trust and Clearing Corporation (DTCC)[3] is leading different projects with banks (e.g., Wells Fargo, Bank of America), investment banks (e.g., J.P. Morgan), credit card companies (e.g., Visa, MasterCard) to launch different blockchain networks in late 2018, handling over US$ 11 trillion worth of credit-default swaps.

Besides the financial service industry, startups such as Axoni and Chains are developing industry-friendly codes that can enable customers to execute smart contracts in a private blockchain.  At the same time, Microsoft is developing a middleware that provides digital keys to authenticate and authorize certain users to append new data. 

IBM is developing new services using private blockchains that are based on Hyperledger Fabric, a distributed ledger with smart contracts.  Knowing the ocean freight industry is very inefficient because a simple shipment from one country to another country can involve over 30 companies (exporters, freight forwarders, shippers, ocean carriers, banks, insurance companies, security inspection companies, customs authorities, importers, port operators, ground transportation logistics companies) and few hundreds of interactions and communications to facilitate notification, verification, approvals, and financial transactions.  In the ocean freight industry, many steps are conducted manually with lots of paper work.  

By noting that the ocean freight process usually involves many users that are known to each other and these users interact with each other in a fairly routine manner, IBM and Maersk formed a partnership in March 2017 to develop a private blockchain solution to digitize, manage, and track shipping transactions. This blockchain solution is intended to help manage and track the paper trail of tens of millions of shipping containers globally by digitizing the supply chain process from end to end with enhanced transparency and security (in terms of information sharing among trading partners). Also, the private blockchain solution is designed to help reduce fraud and errors, reduce the time products spend in the transit and shipping process, improve inventory management and ultimately reduce waste and cost.

Besides the potential of saving billions of dollars, the private blockchain solution can improve workflow and better visibility and security. Specifically, the private blockchain enables each user in the supply chain to track the progress of goods through the supply chain, locate a container is in transit, observe the status of customs documents,  view bills of lading and other data in real time.  Also, the private blockchain is secure because it does not allow any user to modify, delete or even append any record without the consensus of all other users in the supply chain.  This level of transparency helps reduce fraud and errors, reduce the time products spend in the transit and shipping process, improve inventory management and ultimately reduce waste and cost.  Ultimately, the visibility and verifiability of private blockchain among trading partners can make global trade more accessible to a much larger number of players from both emerging and developed countries.

The actual value of bitcoin as a decentralized digital currency without a central repository or single administrator remains unknown, but the value of private blockchains appears to be promising! 

[1] Many people think bitcoin is anonymous, but it is actually pseudo-anonymous.  See Wirdum (2015) for an explanation about this particular issue at https://bitcoinmagazine.com/articles/is-bitcoin-anonymous-a-complete-beginner-s-guide-1447875283/

[2] Smart contracts are software-based agreements that can be executed and enforced automatically according to the terms of the contracts.  For a detailed discussion about how smart contracts work, please see Peck (2017) “Blockchains: How They Work and Why They’ll Change the World,” IEEE Spectrum, October 2017, pp. 24-35.

[3] DTCC (dtcc.com) is a financial utility that holds the books on which firms record their trades including securities trading.

Socially Responsible Drones

Christopher Tang

Besides military and delivery drones, one wonders if drones can be used for socially responsible applications.  Apparently, they can.  Here are some applications:

1. Increase hurricane forecast accuracy. It is difficult to improve the forecast accuracy about the path and the strength of hurricanes to save lives.  A team of scientists at the University of Florida is investing the use of a swarm of six-inch-long drones to ride through hurricanes to collect data on temperature, pressure, humidity, and location.
2. Improve search and rescue missions. Search and rescue missions are time-consuming, expensive, and often dangerous for the people involved. However, with the use of drones equipped with visual, audio, heat-sensing, cellular-sensing surveillance technologies, these missions can be more effective and efficient especially when there is a need to cover large areas of inaccessible terrain or at night.
3. Improve farming productivity. Due to the mountainous terrain in many rice-growing countries, it is difficult to monitor the health of the crops in a large area. Drone companies such as DJI have developed drones that can save time and cost and improve yields for farmers.   Specifically, these drones can use cameras to spot where nitrogen levels are low, and use infrared light cameras to monitor plant health by analyzing photosynthesis is in various plants.
4. Reduce mosquito-borne diseases.  To save lives, government agencies find it challenging to reduce the population of the most deadly animal – the mosquito.  Spraying pesticides is expensive and time consuming in large areas.  In 2016, USAID funded an organization called WeRobotics to develop special drones that can deploy sterile male mosquitoes to reduce local populations of mosquitoes by 90%. To pack as many mosquitoes as possible without damaging them, they put these mosquitoes to sleep by packing them in pre-cooled containers in low temperature.  Once these mosquitoes are released in the area, the warmer external temperature will wake them up so that they can fly off to do the right thing.

To surge or not to surge?

Christopher Tang

On June 24, three largest supermarkets in the United Kingdom (Tesco, Sainsbury’s and Morrisons) announced that they are working on secret plans to install “surge pricing” systems in order to “smooth” customer demands over the course of a day.  For instance, these supermarkets can replace the traditional paper tags on shelves with electronic labels so that the stores can change their prices several times per day at the click of a button.  This way, the store can charge a higher price during rush hours and a lower price during non-peak hours. 

Many customers are used to the idea of surge pricing adopted by Uber.  Therefore, it is natural to think that surge price should enable stores to segment their customers: time-sensitive customers pay a higher price during peak hours and less time-sensitive customers and pay a lower price during non-peak hours.  This seems fair and reasonable.   Hence, many would think that all supermarkets should adopt surge pricing, right? 

I am not so sure.  Here are two reasons why not all supermarkets should adopt surge pricing:

1. If all stores adopt surge pricing, then it will definitely create the incentives for time insensitive and price sensitive to shop during non-peak hours and let those time sensitive consumers to shop during the peak hours.  However, what will happen if one of the stores decided not to surge?   In this case, this store may absorb some of those time insensitive and price sensitive to shop. 
2. Habitual shopping behavior. Even though some customers are time insensitive and price sensitive, they have developed their habits to shop during certain time windows.   Unlike take a ride from Uber that is more spontaneous, shopping at a supermarket is more habitual.  As such, the store who decided not to surge can get these shoppers to shop without changing their habits.  Once these customers develop a new habit to shop at this store, they are unlikely to switch back.  In that case, stores who adopt surge pricing may end up losing some of their customers to stores that do not surge.

Therefore, it is not obvious that all supermarkets should adopt surge pricing to obtain a higher profit.  And we shall see.

Proactive overbooking management to ensure the sky is friendly to fly

Christopher S. Tang

April 27, 2017

Consumers around the world were disturbed by the video that showed a passenger was dragged off United’s flight 3411 by at least 3 security guards on April 10, 2017.  Influenced by Confucius’ teachings on respect for elders, Asians were particularly upset because this passenger was a 69 year old Asian man.  Due to an on-going lawsuit, I shall not comment on the incident that happened.  Instead, I would like to propose a plan that can help United to develop a cost effective and yet customer friendly mechanism to manage overbooking. 

On April 27, 2017, United printed a full page announcement with a title “Actions Speak Louder Than Words” in all major newspapers and sent email to all United Mileage Plus members.  United claimed that it will identify volunteers to give up their seats earlier in case of overbooking, and will increase incentives for voluntary rebooking up to $10,000.   However, these pledges are still “words”: the airline did not explain the action regarding ways to implement these changes.   How can United identify volunteers earlier?  How should United compensate volunteers in a fair and cost effective manner? 

As an Operations Management Professor, I fully agree that overbooking is necessary in order for airlines to manage their seat capacity because of “no shows”.  However, when more passengers show up for a particular flight, airlines need to develop a proactive mechanism to treat customers fairly without breaking the bank.   Here is how airlines can utilize Information Technology and Business Analytics to ensure the sky is friendly to fly:

1. Collect check-in information early. Encourage more customers to check in early over the internet or mobile phones.
   
2. Identify potential volunteers early using a sealed bid process.  During online check-in, United can gently ask the passenger if he/she is willing to be added to the volunteer list.  At the same time,  United can ask this passenger to state the dollar value (up to $10,000) that he/she will accept as compensation for volunteering his/her seat (i.e., ask the passenger to submit a “sealed bid”).  Tell the passenger that the lowest bid will be selected to give up his/her seat when needed, and the airline will make alternative travel arrangement accordingly.  This way, United can identify potential volunteers and their requested compensations in advance. 
   
   * In the auction literature, it is well known that this process will entice passengers to reveal the “true value” of their seats.  Clearly, some passengers will refuse to be added to the volunteer list, but some are willing to volunteer if the airline will compensate him/her according to his/her bid.  This process is consistent with volunteerism.  By doing so, it is unlikely for the airline to overpay the volunteers. [Delta airlines set the dollar amounts for volunteers.  By doing so, it can attract too few (too many) volunteers if the suggested dollar amount is too low (high).  Figure below.]  
3.  Inform volunteers early via internet / mobile phone and at the gate early. Using the early check in records along with millions (if not billions) of past flight records, United can conduct “predictive analysis” to estimate the number of volunteers that is needed for a particular flight.  As time progresses, United can compensate those pre-registered volunteers and make alternative travel arrangements way before boarding time.  This way, volunteers feel respected.

By leveraging Information Technology and Business Analytics and by developing a proactive process, United can fly the friendly sky again!

Unlocking Supply Chain Value from Unsaleable Products

Lauro Diazzesati, Olivia Kussoy, Mike Lee, Datra Oliver, Felipe Caro.

As shelf space is a valuable, yet limited resource, products that retailers cannot sell (unsaleables) are an issue that need to be dealt with constantly. It is estimated that over $260 billion worth of products cannot be sold by retailers every year due to various reasons [1]. The leading causes of unsaleables are damages, discontinued or seasonal products, expired products, failed product launches, recalls, and excess inventory. Retailers that effectively manage their product returns to manufacturers can drive significant savings.

Neither retailers nor manufacturers have the specialization or bandwidth to deal with product returns (manufacturers deal with many retailers, and vice versa). Therefore, both outsource these tasks to specialized reverse logistics providers to assist with examining, categorizing, sorting, and finally disposing the product returns. For instance, Inmar (headquartered in Winston-Salem, NC, and the US’s most prominent player in reverse logistics) has 30 facilities across the country, each having approximately 300,000 square feet of floor space to handle returned consumer packaged goods, pharmaceuticals, automotive parts, and electronics. This type of arrangement is a win-win as it supports both sides (retailer and outsourced provider) to focus on what they each do best, while also keeping environmental safety and sustainability in mind.

For proper disposal, goods are aggregated at local retailers, often with a bin or collecting item on each site. These bins have nominal sorting requirements and they function as a repository for the retailer. After being locally filled, bins are consolidated at larger facilities. This process remains the same across seasons, but seasonal sales cycles greatly affect the items collected. Once at the vendor site, goods are sorted, inspected, and designated for repurposing (e.g., food products converted to animal feed products) or destruction (e.g., pharmaceuticals). During sorting, retailers may receive store credits for inventory returns. The entire process can be labor intensive.

A key opportunity in reverse logistics stems from the data that can be collected. Some vendors trace stock keeping units (SKUs) to see if certain stores are having higher than average damaged items, identify trends in packaging design that need to be addressed, and share trends in local demand. This data is captured and reported to manufacturers that, depending on the vendor, may even be able to access results in real time. Manufactures then use the data to improve decisions on product design, labelling, promotion, packaging, placement, and distribution. It is a way to extract information at a level of detail retailers cannot do independently, while also providing convenience and safe destruction. All of these efforts directly affect retailer and manufacturing profitability, and with increased competition for traditional retail margins, gleaning data from the reverse supply chain will be critical to staying in-step with the marketplace.

A number of challenges exist with this outsourcing model for reverse logistics. From the outsourced provider’s perspective, the vast quantities of products (SKUs), multiple disposition options, ever-changing inventory mix, and peak seasonality periods can lead to operational inefficiencies. For facilities that lack automation capabilities, some process steps must be done manually. Staffing the operations can also be challenging, especially during peak periods when overtime and borrowed resources from other facilities are necessary to keep up with the high volumes. Storage of inventory can pose additional logistical issues when capacity is close to full utilization. From the retailer’s perspective, getting real-time data may not be easy or possible at all, particularly for companies that do not have compatible platforms to access the outsourced provider’s systems. Investments in integration and standardization is paramount so retailers and manufacturers can learn from their failed products.

[1] Consumer Returns in the Retail Industry, NRF 2015 (accessed July 20, 2017)

ChefsOrder: Bringing Aggregation and Infomediation to the Restaurant Industry

Aditi Dutt Chaudhuri, James Gische, Felipe Caro

The restaurant industry is one of the few industries in which technology adoption has been slow. Many restaurants still rely on conventional ways of ordering supplies and ingredients over the phone and using simple manual entry methods with pen and paper. Although this method has worked over the years, it is error-prone and time-consuming to track order histories. A typical restaurant manager spends around four hours per week ordering from different suppliers of fresh produce, meats, frozen goods, and other items. Coordinating orders from so many different suppliers and maintaining separate order histories for each can be quite cumbersome. In addition, if there are any changes or miscommunication between the restaurant manager and the supplier, it can lead to shortage or waste, resulting in financial losses that low-margin suppliers and restaurants cannot afford.

To address these problems, ChefsOrder, an LA-based startup, provides a simple solution in the form of an online platform. With a single digital platform, restaurant managers and chefs can manage all of their suppliers in one place, simplifying coordination. This platform also acts as a marketplace for restaurants, enabling them to select suppliers offering the lowest price. According to the company’s founders, customers using ChefsOrder have been able to streamline their ordering process, resulting in significant time saving.

ChefsOrder creates value in the restaurant supply chain via aggregation and infomediation. By aggregating suppliers and restaurants into a single platform, ChefsOrder saves time for restaurants because they do not have to communicate with each of their suppliers separately. ChefsOrder also provides restaurants and suppliers with information, such as order histories, which creates further value. In addition, ChefsOrder helps restaurants reduce risks in supply continuity. A restaurant can use ChefsOrder to find a replacement for a supplier that has been disrupted or that faces a shortage of supply, minimizing the impact of the disruption and reducing the time to recovery.

There are several opportunities for a platform like ChefsOrder to expand by providing additional value in the restaurant supply chain. First, ChefsOrder can offer the same kind of aggregation value for suppliers as it currently does for restaurants. Features for suppliers to track their restaurant customers would allow suppliers to track orders, optimize delivery schedules, and communicate with their customers efficiently. ChefsOrder can also provide more information to both parties to enhance the value of the platform. Such information could include restaurants’ ratings and reviews of suppliers and demand forecasts by product for suppliers. Finally, ChefsOrder can help restaurants and suppliers optimize their supply contracts by suggesting and facilitating buyback or revenue/profit-sharing contracts in the right circumstances. All of these enhancements would allow ChefsOrder to increase the overall supply chain surplus, benefiting both parties on the platform.

ChefsOrder will face important risks and challenges moving forward. The most critical threat will most likely be from increased competition. This could come from existing players in the restaurant supply chain; e.g. larger suppliers developing their technology for interacting with restaurants. The company also faces competitors focused specifically on the restaurant industry, such as SimpleOrder, and larger procurement software vendors who operate across industries, such as SAP Ariba. As with all double-sided platforms, ChefsOrder's success will depend on scaling up network effects to fend off competitors.

Warby Parker vs Luxottica: Supply Chain Disintermediation in the Eyewear Industry

Josef Bogosian, Diego Flores, Sonali Galhotra, Mark Lee, Alex Lieu, Felipe Caro

The King of Eyewear: Luxottica

Based in Italy, Luxottica has a monopoly-like position in the global eyewear industry. Luxottica target markets are in fashion, luxury, and sports eyewear, and with a market share of 58% [1], Luxottica has a stake in every part of the market. It owns eyewear brands such as Ray-Bans, and has licensing agreements with fashion retailers such as Chanel. Eyewear is distributed through retail channels such as LensCrafters and Sunglass Hut, and Luxottica also operates its own vision insurance company. Luxottica recently strengthened its position in the industry by vertically integrating with the world’s largest lenses manufacturer, Essilor, in January 2017 [2]. Eyewear has long been a very high margin business, and Luxottica is estimated to markup frames between 10x - 25x from point of manufacture to point of sale, while Essilor sold lenses that were sold to retailers at 3x - 5x retail margin [3].

Luxottica maintains a warehouse in Atlanta and ships roughly 470k units of inventory each week - 300k to retail locations and 170k as wholesale to independent opticians and department stores. In most retail LensCrafters locations, prescriptions are written and the lenses are polished using machines located on-site, oftentimes within the same day. Though the majority of revenue comes through this traditional brick-and-mortar retail model, Luxottica also owns Frames-direct.com.

Luxottica has manufacturing facilities in five countries: Italy, China, India, United States and Brazil. It is a captive onshoring and offshoring model, with six facilities based in its home country of Italy, two in China, and one facility each for the US, India and Brazil. The US facility is mainly used for its Oakley brand while the small facilities in Brazil and India serve local markets. Luxottica presumably uses a dual sourcing and a base-surge strategy for some eyewear models with China being their low cost far away source for base supply and Italy being the close source to meet surges in demand. The manufacturing facilities produced a combined 93 million prescription frames and sunglasses in 2016.  The group output by country is 41% in Italy, 46% in China and India, 10% in the US, and 3% in Brazil [4].

An Industry Newcomer: Warby Parker

Realizing the large margins in the eyewear industry, Warby Parker entered the eyewear industry in 2010 by disintermediating the traditional retail supply chain and providing prescription frames via the internet. Warby Parker targets consumers who are fashion oriented, but also value quality and accessibility of eyewear. With expected sales of $250 million in 2017, Warby Parker sales are projected to be split 50/50 between online and brick-and-mortar [5]. If purchasing glasses online, consumers are able to choose any five frames online to be delivered as part of their Home-Try-On (HTO) program. Consumers can then purchase at any time online by entering a prescription, and Warby Parker will send a new pair of glasses within 10-12 business days. Customers are expected to return the HTO frames within five days using a prepaid return label.

Warby Parker maintains a warehouse in New York, through which it fulfills orders and operates its HTO program. Manufacturing is outsourced to offshore factories in China.  These factories are located in the same province within China.  A potential issue with this single sourcing strategy is that it may leave Warby Parker vulnerable to supply chain disruptions from natural disasters, labor disputes, and shipping issues.  This also leaves Warby Parker less able to meet demand fluctuations, compared to Luxottica’s base-surge strategy.

Warby Parker has found success through disintermediation by designing frames in-house (avoiding licensing fees), working directly with suppliers, and transferring value to consumers. In a margin comparison between a $200 frame of Ray-Bans and a $95 Warby Parker frame with lenses, Warby Parker transferred ~$97 in value to consumers by working directly with frame suppliers and building their own lenses thus having lower frames and lens costs than Luxottica (see Exhibit 1). 

Exhibit 1: Margin analysis. Source: [2] and Alibaba.com.

Supply Chain Differences

Luxottica sources raw material and manufacture frames in Italy and China, from where they are shipped to Luxottica's assembly centre in Atlanta. Luxottica, unlike Warby Parker, has clear differentiation between sun-glass and eye-glass frames. Once assembled, these frames and lenses are shipped to retail locations worldwide using commercial air carriers making the supply chain model closer to the efficiency side in the efficient-versus-responsive spectrum (Exhibit 2).

Warby Parker also sources most of their raw material from a family-based firm in Italy. The raw acetate is shipped from Italy to China, where it is cut and assembled into frames. For the final step these frames are sent to labs in New York where frames are edged and inserted into frames. The type of lense being put in the frame - eyeglass lense or sunglass lense - depends on consumer demand. Therefore, Warby Parker has some level of flexibility at the last stage of their process, making their supply chain model more responsive. Once frames are inserted, the product is ready to ship (Exhibit 2).

Exhibit 2: supply chain comparison and location of the push-pull boundary.

The benefit of Warby Parker’s disintermediated supply chain model is illustrated by a comparison of inventory and sales (see Exhibit 3). By maintaining a limited number of retail stores, and pooling inventory at its New York-based warehouse, Warby Parker can deliver higher inventory turns. Luxottica kept 4.25 weeks of inventory at its warehouses in 2016. If we assume the same number for Warby Parker, then Warby Parker turned over frame inventory roughly 10x in 2016, compared to Luxottica at 7x. It is likely that Warby Parker will need more than 4.25 weeks of inventory at the warehouse to run the HTO program, but even if Warby Parker needs 6 weeks or so of inventory it would still have better inventory turns than Luxottica.

Exhibit 3: inventory turns (computed with unit sales). Source: [2], [6], and primary research including store visits.

Benefits from Inventory Pooling and Delayed Differentiation

 

By pooling inventory, Warby Parker can lower holding costs and maintain a high service level for all their SKUs. One notable feature of Warby Parker is that they also pool demand by having significant overlap between gendered frame offerings. For example, of the 203 men’s eyeglass SKUs (Frame-Color combinations) offered on WarbyParker.com, 199 of them are also available as women’s eyeglass frames. There are 61 unique women’s eyeglass SKUs. Within the HTO program, 70% of the available eyeglass SKUs are listed for both men and women.

In addition to many unisex frame offerings, Warby Parker also has frames that are available for both eyeglasses and sunglasses. As of June 2016, there were 26 SKUs available across men’s and women’s eye and sunglasses, as well as 12 SKUs available across both women’s eye and sunglasses. This flexibility gives Warby Parker an opportunity to do delayed differentiation – i.e., determine whether a given frame is used for sunglasses or eyeglasses after an order is placed. This can help reduce inventory levels and manage demand variability during season transitions.

Further Growth Opportunities

An obvious growth opportunity for Warby Parker is the expansion of its in-store optometry. This is an attractive low hanging fruit as Warby Parker already has the infrastructure and required regulatory clearance. This opportunity will be beneficial as it will allow for vertical integration and strategic price discrimination. The market size for this opportunity is estimated at $6.2bn, with an estimated annual growth of 2.7%.

It would also prove beneficial for Warby Parker to bring back its “Virtual Try-On” feature, especially in a mobile platform. This will provide valuable real time data insight regarding fashion trends, and styles customers are interested - which will provide better forecasting ability, allowing Warby Parker more time to react and adjust production and inventory levels ahead of time. Warby Parker will be able to anticipate future fashion trends as well by creating “dummy” frames for customers to try on. By creating “dummy” frames that are still in line with its modern American styling, Warby Parker will be able to minimize its design costs and collect demand information. Additionally, collecting facial data can be used to focus marketing or product offerings to customers depending on their facial features. 

Warby Parker is currently working on a “Mobile Eye Exam” application. As of this writing, the application is still under development, but releasing this application will logically result in further vertical integration, and a long term disintermediation of optometrists, at least for simple eye exams, might be bound to happen.

[1] Based on online and retail eyeglass revenue figures from IBIS World and Luxottica 2016 United States sales

[2] Luxottica 2016 annual report, accessed July 20, 2017

[3] “Warby Parker: Vision of a ‘Good’ Fashion Brand” by Christopher Marquis & Laura Velez Villa, HBS Case Study

[4] http://www.luxottica.com/en/about-us/company-profile/luxottica-world, accessed July 20, 2017

[5] The Warby You Don’t Know by Tom Foster, accessed July 20, 2017

[6] Warby Parker Grew to $250 Million in Sales by Tom Foster, accessed July 20, 2017

Blind bookings: Do you know where you are going to?

Qing Li (HKUST) and Christopher Tang (UCLA)

As we played the classic pops on Pandora during our nostalgic moments over the holiday season, Diana Ross’ 1976 Oscar winning song “Do you know where you are going to?” reminds us of an intriguing selling strategy that airlines have been using over the last few years.  This strategy is called “blind booking” and is intended to sell unsold tickets at low prices (e.g., 33 euros one-way on Eurowings airlines) without telling the passengers about the actual destination in advance.   Eurowings will inform the passengers of the “mystery destinations” immediately after they complete the blind booking process, but other airlines such as Virgin Australia informs the passengers a few days before departure.  Recently, a U.S. startup company Pack Up + Go (packupgo.com) offers mystery 3-day getaway package (flight + hotel) in the US for a low price: customers can select a theme but they do not know the destination until a few days before departure.

 

What is the point of keeping customers in the dark?

Airlines can lower prices to get rid of those unsold tickets, but this selling strategy is a bad idea because it can induce “strategic waiting” – price-sensitive or non-urgent travelers will delay their purchase with the hope to get a good deal.  Consequently, airlines will end up selling too many tickets at low prices.   Case in point.  In the late 70s, British airways offered 90 pound same day standby tickets for unsold seats for flights between London and Hong Kong.  After observing many international students and other price-sensitive passengers camp out at the Heathrow airport hoping to get the standby deal, British airways cancelled the standby discount tickets after a couple of months.

Without encouraging strategic waiting,   blind booking can enable airlines to obtain a decent price from those customers who are less destination-specific, and force destination-specific customers (e.g., business travelers) to pay the regular price.  Without letting customers know of the destination in advance, blind booking is marketed as an exciting and surprising experience at low prices!

 

Can you have the cake and eat it too? 

All customers like low prices, but very few  like unpleasant surprises and  wish to visit the same old cities again and again.  To take advantage of this weak spot of certain customers, some airlines allow customers to exclude cities at a fee.   For example, Eurowings charges five euros per city excluded. This “extra fee” strategy enables airlines to charge those fussy passengers a higher price. 

As in Dianna Ross’s classic song, “Do you get what you are hoping for?” Sure, with extra fees, you can.  Are there other ways to achieve a win-win for both airlines and their customers? Perhaps extra information. For Pack Up + Go, customers complete a survey before they confirm a booking. They will not be sent to places they have recently visited or they will visit in their planned upcoming trips. What about unsold seat information? Suppose Eurowings has 90 unsold seats to Barcelona but only 10 to Vienna, would it reveal this information to customers? Maybe it should. Customers can make more informed choices. They will value the services more and airlines may also benefit from more loyal customers. Will these ideas lead to a win-win?  “Do you know?”