Webvan

Table of Contents

Executive Summary 2

Case Analysis Overview 2

Environmental Background 3

SWOT Analysis: Strengths 3

SWOT Analysis: Weaknesses 3

SWOT Analysis: Opportunities 4

SWOT Analysis: Threats 4

Problems: Flawed Capacity Strategy 5

Problems: Lack of QFD 5

Problems: Management Focused on the "Home Run" 5

Potential Alternative Scenario I: Increase Product Variety 5

Lessons Learned/Conclusion 7

Appendix: Figure 1 - Growth of Web Purchases & Online Grocery Purchases 8

Appendix: Figure 2 -- Webvan vs. Brick & Mortar Grocery, Order Size & Frequency 9

Appendix: Figure 3 - Avg Daily Unit Break-Even Analysis 10

Appendix: Figure 4 - Adding Capacity 10

Appendix: Figure 5 - Quality Functional Deployment: House of Quality 11

Appendix: Figure 6 - Potential Changes to Delivery Routes 12

Appendix: Figure 7 -- Marketing-Operations Coordination Model 13

Executive Summary

Webvan was a short-lived Internet grocer that unsuccessfully entered the grocery industry in the late 1990s. The company focused its core capability/strength on highly-automated, capital-intensive and operating systems. However, Webvan showed weakness in its lack of focus on actual customer requirements and needs from a Quality Function Deployment (QFD) point-of-view. Despite typically low profit margins in the industry, the overall size of the industry, the rise in Internet usage and growth online grocery sales were predicted to be ripe opportunities. Uncertain demand was the company's main threat. Inflexible demand requirements, lack of QFD, and poorly structured management incentives proved to be problems for Webvan. It is recommended that Webvan would have benefited by implementing a QFD strategy and through more flexible, and a less capital-intensive approach. QFD would have allowed the company to base its services on actual customer requirements rather than assumptions. Flexible operations would afford the company the ability to grow with actual demand rather than utilizing a "if we build it, they will come" mentality.

Case Analysis Overview

The following analysis will offer an overview of Webvan's environment and SWOT analysis during the company's brief life in the late 1990s and early 2000s. Operations problems, alternatives and recommendations will be presented from a "past tense" point of view, versus the "forward-looking" analysis which is normally found in case analysis. From these past tense alternatives, an operations recommendation will be made that would have turned Webvan into a viable company instead of another dotcom bust.

Environmental Background

Webvan was an Internet grocer/delivery service founded by Louis Borders (Borders Book) in the mid - late 1990s. The company used a highly automated operational strategy which included conveyor systems, inventory tracking, and logistical analysis/scheduling software. Webvan was very well financed through private investing. An IPO raised $800 million, making it the second-best financed Internet-based company ever.

SWOT Analysis: Strengths

First, Webvan's executive staff was compensated based on the company's performance. Stock options were offered to executives to drive the company to perform. Second, Webvan's greatest strength was its highly automated approach toward warehousing, and order management. These operations functions could provide significant time and cost advantages over its traditional brick and mortar competition. Finally, Webvan offered over double the number of items that its traditional grocery competitors. To foreshadow, each of these strengths eventually created problems, unbeknownst to management at the time.

SWOT Analysis: Weaknesses

First, management put very little emphasis into the design of the grocery delivery service from a Quality Functional Deployment (QFD) standpoint. The case makes only minor mention of the San Francisco test market. Therefore it is assumed that Webvan did not infuse customer-focused quality practices into the design of its operational business model. A second weakness can be found in the company's inherent underdog status in a mature grocery industry. Webvan had minimal power against large distributors like P&G and had no private label presence to offset this disadvantage. Webvan's non-traditional operating model was also an issue. The use of non-standard pallet configurations was an example of how large suppliers made accommodations for a smaller reseller. It is assumed that Webvan's supplier relations were complicated by its non-standard shipping requirements, and the sheer number of vendors the company worked with. Finally, Webvan's systems, though highly automated, were extremely expensive, overly-customized (and thus hard to upgrade) and insufficiently funded to support expansion into new markets.

SWOT Analysis: Opportunities

First, the $650B size of the US grocery market was a major opportunity; only a small percentage of this market would be required for a company to have significant profits. Second, both web-purchases and, in particular, online grocery consumer purchases were predicted to increase. The $16.8B in online grocery sales was predicted to represent 1 out of every 5 dollars spent online by 2004 (see figure 1). Third, customer data opportunities were emerging through all online retailers. Webvan's ability to leverage customer purchasing information and its ability to share this data with its suppliers constituted an advantage over traditional grocery competitors. Finally, capital markets in the late 1990s were eagerly funding start up companies.

SWOT Analysis: Threats

First, Webvan's capital-intensive business model collided with a very uncertain growth curve of Internet shopping and grocery shopping. Independent forecasts of online grocery growth