Internet Cafe

Executive Summary

Due to poor financial performance, EasyInternetCafe has decided divert from large cafes to a franchise model with smaller café sizes. Its main goal is also to focus on its core competencies such as the yield management model. In order to do so, it will be outsourcing its non-core competence activities which include logistics. Ingram Micro has been chosen as the logistics provider as they offer more full service activities while remaining at a lower cost than its competitors. By including Ingram Micro in corporate decisions and meetings, EIC can keep Ingram Micro accountable and stay updated with issues as they arise (just as they would if they owned the logistics arm of the Company). By having the capital freed from investing in hardware and stores, EIC is able to invest more in creating value through their management of franchisees and their yield management model.

Issues Identification

EasyInternetCafe (EIC) was launched in 1999 under the umbrella of the EasyGroup. Their mission is to provide customers with internet access at low costs and to capitalize on the tech boom. Despite the excellent support and recognition from the public, EIC is experiencing adversity of keeping their business profitable after the “dot-com” bubble burst.

Their business plan of owning many large cafes that could house 250-500 PC terminals at each café is not working. They have decided to restructure their business by downsizing the cafes. They propose to do this by using the franchise business model. These franchised stores will be smaller and house 20-30 PC terminals and only need staff for basic maintenance. EIC believes that by being less involved with the operations of the stores, they can focus on their core competence and outsource all non-core activities. Their core competence is their yield management model associated with the “Easy” brand. EIC’s goal was to open 10 stores per week over the next 2-3 years. In order to achieve this, a cost-efficient and flexible logistics system is what EIC needs to have in place so that their franchisee stores are provided with equipment and setup. Because logistics is one of the non-core activities, the present logistics system will be critically reviewed and the outsourcing options will be evaluated in this case.

Environmental and Root Cause Analysis

According to the new business strategy of using franchisees instead of vertically owning everything, the franchisee will be responsible for the costs of property (café) and hardware. Also, these stores will be smaller, housing 20-30 PC terminals. Corporate EasyInternetCafe believes that every café should be uniform and look the same, with signage, PC terminals, and furnishings, etc.

To create a new franchisee, the following will occur (timeline):

• If the franchisee does not have space for a café, EIC will help find one within 4 weeks (28 days)

• Broadband internet connection will take on average 4 weeks to set up (28 days)

• Desks will have to be installed within 1 day

• The server must be delivered and installed within 2 days and the PCs must be delivered and installed in 2 days

• CVM delivered and installed in 1 day

• Signage delivered and installed in 1 day

• Chairs delivered and installed in 1 day

• Testing the complete system will take 2 days

• The business will open within 1 day

However, depending on which location the franchisee is in, the costs will change. They are classified into 3 zones:

Zone 1 – closest to UK (France, Spain, Netherlands) @ 300 GBP per store

Zone 2 – mid-range from UK (Poland, Czech, Finland) @ 450 GDP per store

Zone 3 – farthest from UK (Greece, Turkey, Bulgaria) @ 750 GBP per store

One of the issues that are evident is the time that will take for negotiations to occur. As stated, discussions with a franchisee can take days to several months. Each store opening is like a “project” with the ending point being the opening of the store. Some of these issues being logistical ones.

From the predecessors plan, we can see the timetable for each activity. Since some activities overlap, we can calculate the total length of time as follows:

Activity A +B + C + E + F + J + K = 7 + 28 + 28 + 2 + 2 + 2 + 2 +1 = 70

This means that the average duration it should take to open the café is 70 days.

Alternatives or Options

Given 4 options, we can breakdown and summarize each one as follows:

UPS

UPS offers several levels of service.

-They don’t help with the billing services of the franchise

-The warehouse is provided by the franchise

-Per store, the total costs of using UPS is 1,110 GBP, of which 477 GBP is labour costs to EIC

Exel

Exel is similar to UPS’s with the addition of supplier management services.

-UPS is able to maintain the billing service

-Two dedicated personnel are employed (contracts manager and administrator)

-Per store, the total cost is 1,434 GBP, of which 957 GBP is the logistics costs and 477 GBP is labour to EIC

Globalserve

Globalserve provides complete IT supply chain globally, including IT procurement.

-They will make Value Added Resellers (VAR) for the franchise in several countries

-Product will be directly delivered to the franchisee

-Transaction fee of 3.25% will be charged and the local reseller has a mark-up of 5% for the equipment purchased

-Per store, the total cost is 1,875 GBP (Globalserve charge) + 381 GBP (labour cost) = 2,256 GBP

Ingram Micro

Ingram Micro is a provider of technology products and services, including supply chain management.

-They offer the following:

• A Warehouse facility

• A Transportation facility

• Provide Computer configuration

• Provide Direct billing to the franchise and payment collection

• Return management

-Per store, the total cost is 560 GBP (179 GBP logistics cost and 371 GBP EIC labour cost)

Recommendation and Implementation

From the four proposals, Ingram appears to be the most suitable for EasyInternetCafe. Of the other options, UPS does not want any risk by maintaining the billing system. Because of this, EIC will still need to provide these services even though it is not part of their core-competencies. Exel practically offers the same service as UPS (including billing services) but includes the hiring of a contracts manager and administrator, of which, contribute to a higher logistical cost than UPS. Globalserve will add Value Added Resllers for the franchise in several countries. The will deliver the products locally and collect the costs of equipment and delivery charges from the franchisee directly. Although their labour cost is lower than UPS and Exel, their logistics cost is higher than the two. The last option, Ingram, provides a warehouse facility, directs billing to the franchise, has a transportation facility, and provides IT equipment. For all this, they only charge 560 GBP. If EIC buys their IT equipment separately, they will need to spend 1,357 GBP in comparison. That being said, choosing Ingram allows EIC to focus on their core competencies while using a financially beneficial logistics provider.