Global Logistics and Supply Chain Management- -easyInternetcafe case study
easyInternetcafe
Read the Case Study and answer the following questions. Your answer does NOT need to be in the form of a report.
Questions:
1. How long does it take to open an easyInternetcafe?Illustrate your answer with a GANTT chart.
1. How long does it take to open an easyInternetcafe?Illustrate your answer with a GANTT chart.
Tutor want see your analysis direction according to GANTT CHART. The chart is needed analysed detailed rather than only listed the items.
The PPT in the file can help you do this analysis. Please make sure to read the files carefully.)
2. Should elc build a single European warehouse? If so, where would you recommend they build it?
Use proper data/figures/calculation to discuss then conclude your answer based on enough factors,such as the cost, markets etc factors to choose the location if need built. Show your sufficient and powerful evidence, do not give conclusion directly. answer should be analysed in details and critically.
3. If you were Tanmay, would you recommend UPS, Exel, Globalserve or Ingram Micro? What are the advantages and disadvantages of each company?s approach?
2. Should elc build a single European warehouse? If so, where would you recommend they build it?
Use proper data/figures/calculation to discuss then conclude your answer based on enough factors,such as the cost, markets etc factors to choose the location if need built. Show your sufficient and powerful evidence, do not give conclusion directly. answer should be analysed in details and critically.
3. If you were Tanmay, would you recommend UPS, Exel, Globalserve or Ingram Micro? What are the advantages and disadvantages of each company?s approach?
Discuss specifically in details and talk about adv and disadv correctly and critically.
After Internet investment bubble burst, the original concept of easyInternetcafé (eIc)
was just not working out. The management decided to retrench, closing and
downsizing some of the original cafes. Their new philosophy was to franchise the
operations. So far the company has created about 20 franchised cafes, mostly in
Europe, with 5 in the New York City area. Right now, they are basically operating off
the cuff, with no real operating plan for how to supply and open each new franchise. In
order to address this problem, they have hired Tanmay, an MBA student from a highly
regarded business school to analyse their current operations and give
recommendations as to the way forward.
A brief history and background of easyGroup
easyInternetcafé Ltd. (www.easyinternetcafe.com) is part of the easyGroup
(www.easygroup.co.uk), founded and promoted by the well-renowned Greek
entrepreneur Stelios Haji-Ioannou (www.stelios.com). Other companies in the group
include easyJet, easyCar, easyCinema, easy.com, easyMoney and easyValue. He is
also in the process of launching new companies such as easyBus, easyPizza,
easyCruise, and easyDorm.
Stelios calls himself a serial entrepreneur. He acts as a venture capitalist, founding and
funding his ideas into businesses with a long-term intent to take them public.
Stelios, the son of a Greek shipping tycoon, joined his father’s shipping business after
graduation. A few years later, he borrowed some money from his father and founded his
first venture, Stelmar Tankers in 1992. He soon achieved success with this company
and it is now listed on New York Stock Exchange. Later in 1995, he founded easyJet,
the first company of easygroup. easyJet is a no-frills, low cost airline company. He
took advantage of the high consumer prices charged by other airlines during that time
and the recent deregulation of the airline industry in Europe. Soon easyJet grew to be
Page 3 of 15
the largest no-frills airline in Europe and was listed on London stock exchange in 2000.
With an intention of extending the brand further, he formed a holding company
easyGroup in 1998. Soon other ventures followed. Building on his success with
easyjet, he extended the ‘easy’ brand and founded his next venture easyInternetcafé in
1999, with an aim to provide consumers access to the Internet at the lowest cost. He
launched easyCar in 2000, a car rental company that provides car hire services at a
very low cost. The same year also saw the launch of easyValue.com, offering impartial
comparisons for online shopping and easy.com, a free email service. In 2001,
easyMoney, offering credit card services was launched. And most recently in 2003,
easyCinema, offering a no-frills, low cost 1st run movie theatre. All these companies are
currently held under the umbrella company easyGroup and are all private companies,
with the exception of easyJet which is the only publicly listed company in the group at
this time.
History and objectives of easyInternetcafé Ltd. (eIc)
With the exuberance of Internet boom of late 1990s and with forecasts of high growth in
expected demand, Internet cafés seemed to be a promising and profitable business.
Applying the yield management model1 to this business seemed to strengthen the
optimism, based on the assumption that offering very low prices will increase demand
significantly. Thus to capitalise on the potential, Stelios planned to set up a chain of
Internet cafés in 1999 and launched a new company easyEverything, the name was
later changed to easyInternetcafé in October 2001. With his success with easyJet he
wanted to take the yield management business model further. He invested several
million pounds sterling in occupying high street locations in the heart of big cities in UK,
Europe and US. With an expectation that such busy locations will attract higher footfall.
He also installed a large number of PC terminals at every store, increasing the fixed
cost base. Many other services were also offered, which required a staff commitment at
every store. All these decisions involved heavy investments in the first few years, in light
of optimistic expectations.
1 For a more detailed discussion of yield management, see the case study by N. Kumar, “easyJet – The Web’s
Favorite Airline”, August 8, 2000
Page 4 of 15
Store launches in initial years
The first store was opened on 21st June 1999 at Victoria, London with 330 PCs at a
single cafe2. More stores soon followed. (See Exhibit 1: Current eIc stores). The Friday
after Thanksgiving saw the first store in the US open in Times Square, New York with
8002 PCs, which was the largest Internet café in the world to date1. In 2000, the
operations spread to Continental Europe. The first store in Amsterdam opened with
6002 PCs, followed by other large stores in many cities across Europe with between 250
and 600 PCs each. The company received excellent support from the public, who
visited these in hordes, even waiting in queues to enter the cafes. New store launches
continued in 2000 all across Europe and the UK,
In 2000, as a result of the dotcom boom and the huge store launches, eIc and Stelios
earned many accolades for their innovation, marketing, use of technology and
investments in large and attractive retail properties. For example:
‘The new media marketer of the year’ in March 2000 from Revolution magazine
‘Retail Launch of the Year’ at the ‘Retail Week Awards 2000’,
Networking Industry Award for 2000 – Most Innovative Use of Networking
Products and Services,
e-company of the year at the Future UK Internet Awards ceremony, the winner was
chosen by the public,
International Property Strategy and Development, Design, Innovation and Concept
at the MAPIC awards in Cannes, France – one of the most prestigious awards
ceremonies in the International Retail Real Estate sector.
In light of all these factors of the dotcom boom, high expectations of growth
opportunities, growing the ‘easy’ brand image and public appeal, in May 2000 eIc
received funding from Apax Partners and Hewlett Packard, together investing £25
million into the venture.
Losses
2easyInternetcafé Ltd. (2003) http://www.easyinternetcafe.com
Page 5 of 15
During these years, from 1999 to 2002, easyInternetcafé owned and operated all their
own stores. Despite these accolades and fanfare, the high expectations of growth in
demand and revenues did not materialise, the dotcom/internet bubble had deflated as
did the crowds of customers. As a result, eIc incurred cumulative losses of £80- £100
million over the period.
Flaw identification and felt need for strategic change
In 2003, with losses continuing to mount, eIc decided to radically revamp their
operations. They realised that the high investments made by them were not justified in
the Internet café business. The revenues required to break even were huge for each
single location with 250-600 PC terminals to fill, and the possibility of achieving such
high revenue levels were bleak.
Consequently in 2003, in order to eliminate the need for future investments in new
stores, the strategy was changed. It was decided to appoint franchisees for the new
stores and also, if possible, for the existing legacy stores (i.e. Company-owned stores).
According to the new strategy, the franchisee would be required to bear the costs of the
property and the hardware. This would eliminate eIc’s drain on capital.
It was also decided to that smaller stores with 20 to 30 PCs was the way forward.
The goal was to create an Internet cafes that could be completely unmanned, with no
staff required at any store aside from regular maintenance. Some members of the
management team thought that it was important that every cafe looked the same, with
common signage, furnishings and PCs, currently HP branded due to their venture
capital investment.
Back to Core competence
As a result of the above process of strategic analysis & decision-making and the
resultant strategic change, eIc decided to stick to their core competence and outsource
all the non-core activities. Their core competence is the yield management business
model applied to the Internet café business and the proprietary hardware and software
to implement it. This core competence is supplemented by the ‘easy’ brand, which
enjoys excellent brand recognition in Europe and the UK.
Logistics – a bottleneck for scalability
Page 6 of 15
In order to achieve the goal of five-fold growth and a level of 10 stores openings per
week, the company had to be capable of handling the increased level of activity.
Logistics has become one of the integral activities of eIc following the change in
strategy and it also remains to be one of the few non-core operational activities
remaining in direct control of the company. eIc only needs to research and award the
franchise and deliver the equipment to the franchisee. All other activities, which were
earlier undertaken by eIc, are now, outsourced to the franchisee.
Since the focus is also on opening numerous stores simultaneously, the logistics
system needs to be robust, efficient, effective and flexible enough to cope with the
increase in the level of activity and enable smooth, easy and more importantly costeffective
logistics process for the provision of equipment to the franchisee.
The company perceives the current logistics system to be a drag on scalability,
efficiency and a bottleneck for growth and the main reason for spiralling high costs and
thus losses. The company required an evaluation of the present system and intends to
explore other alternative options that would make the system scalable at the lowest cost
and meet their needs.
Organizing for Scalability
Tanmay’s first recognition was that each store opening was really a “project” in project
management terms. There was a starting event that set the project in motion (with the
signing of a franchise agreement, in most cases) and an ending point with the actual
opening of the store. Some of these “activities” were logistics-related while others were
not.
Starting with the non-logistical activities, Tanmay found that the negotiations,
investigation and discussions with a potential franchisee could take days for a simple
individual franchise to several months for some of the more complex deals that included
multiple locations. However, the real process began once the franchise agreement was
signed. If the franchisee did not already have space for the café, eIc would assist in
recommendations with locations.
The broadband internet connection had to be installed by the local telecoms supplier.
This unfortunately could take several months, as one Italian franchisee found out to his
dismay.
Page 7 of 15
A summary of the major steps and their predecessors is listed in the table below:
Activity Description Average
Duration
Immediate
Predecessors
A Contract is signed with franchisee 1 wk -
B Space for café is contracted or existing
space acquired
4 wks A
C Broadband internet connection 4 wks B
D Desks installed 1 day B
E Server delivered and installed 2 days B,C
F PCs delivered and installed 2 days D, E
G CVM delivered and installed* 1 day E
H Signage delivered and installed 1 day B
I Chairs delivered and installed 1 day F
J Testing complete system 2 days F, G
K Open for business 1 day H,I,J
• *eIc will endeavor to keep the CVMs in stock due to the long lead time. Stores could not open with
out the CVM as there would be no way to sell the internet time with out them.
• Note: This activity table does not take the lead times listed in Table 3 into effect. This is only related
to the installation activities. Therefore, orders for the various components to be delivered on time
need to be made in advance of the planned date by the amount of the lead time.
Now armed with a more specific planning process, Tanmay suggested that orders for
equipment for stores opening within the same window of opportunity (meaning that they
could wait for several new store’s requests came in as long as the delay in ordering
would not delay the project plan for any particular store. This could now be combined
with the logistics operations options discussed below.
Current Logistics Situation
Tanmay’s research has calculated that if they continued using their current in-house
method eIc will have to spend approximately £1300 for all the logistics activities
involved in opening a new store except the outbound transport to the franchisee. This
includes eIc labor costs of £602 per store. All calculations were based on forecast of
opening 4 new franchises per week for the next 3 years.
In other words, the total annual logistics costs (excluding outbound transport costs
which were eventually billed to the franchisee) are approximately £270,000, which
Page 8 of 15
includes annual labor costs of £125,250 (based on 208 stores opening per year). It was
noted that if store openings were less, the labor costs were still considered fixed.
Outbound transportation costs of eIc’s equipment to each franchisee was divided into 3
zones based on distance from the UK:
• Zone 1 – closest to UK (France, Spain, Netherlands) – £300 per store
• Zone 2 – mid-range from UK (Poland, Czech, Finland) – £450 per store
• Zone 3 – farthest from UK (Greece, Turkey, Bulgaria) – £750 per store.
After his initial presentation, management wanted to look at ways to decrease this cost.
Tanmay’s next task was looking into viable alternatives. After a bit of reasearch, he
found 4 alternatives. 2 were considered pure logistics service providers and 2 were
categorized as integrated supply chain solution providers.
UPS Global Logistics
UPS required eIc to procure the equipment themselves and arrange with their suppliers
to deliver it to UPS warehouse where UPS would consolidate the orders, configure the
equipment, kit it together into a pallet and arrange for transportation to the franchisee.
UPS would not provide billing services direct to the franchisee. eIc would still need to
buy the equipment from the suppliers; take ownership of the goods i.e. incur cost of
capital. eIc would also need to pay a consolidated invoice for the outbound delivery
charges to the franchisee locations and later collect these expenses from the
franchisee. Because of the warehousing that UPS would provide, eIc’s labor costs were
estimated to decrease to £477 per store. The total cost of implementing UPS proposal
was £1110 of which £477 is eIc labor costs. Outbound transportation costs were
estimated to be approximately 10% lower using the UPS contract.
Exel
Exel offered a similar services to UPS’s, with the addition of supplier management
services. They would need to appoint two dedicated personnel, a contracts manager
and an administrator. Exel would manage the present stock of eIc, forecast store
openings, manage purchase requirements, co-ordinate & manage delivery & returns,
audit invoices, be a point of contact for franchisees and manage the whole account at a
cost of £57,000 p.a. Exel would also arrange for the inbound logistics transport to a
Page 9 of 15
merge-in-transit location where all pallets would be kitted together and sent to the
franchisee as a complete package. They would also provide configuration services for
the computer equipment. Like UPS, they will not bill the franchisee for the equipment
and logistics costs. This would still require eIc to provide those activities.
it was thought that even though Exel provided additional services, labor costs would
remain similar to the proposal from UPS due to the need to still provide the billing
services to the franchisee and first contact with the key suppliers. Total cost was
estimated to be £1,434 per store, of which £957 was the logistics costs and £477 eIc
labor costs totaling. Again, outbound transportation costs were approximately 10%
current rates.
Globalserve
Globalserve provides complete IT supply chain globally including IT procurement,
delivery and support solutions with various global IT suppliers and Value Added
Resellers (VARs) in 260 countries. This would enable eIc to obtain economies of scale
by consolidating their purchases with Globalserve and yet receive local delivery,
payment facility (in local currencies) and support. Tanmay thought that this model
seemed suitable for eIc as long as they are willing to change some of their suppliers
which will enable them to agree on a global price for nearly all the equipment required.
Globalserve would pass that order to the local VAR in the franchisee’s country. The
VAR would deliver the products locally and collect the cost of equipment and delivery
charges from franchisee directly. The VAR could also provide additional services at the
franchisee’s discretion such as configuration, store set-up support, etc. As the VAR
would be in the country of franchisee, they would speak the same language and would
understand the working practices of that country. This would enable eIc to devolve the
management of the delivery and allied support services to the VAR, thus freeing the
personnel of eIc to focus on the core activity of the company. Globalserve will charge a
transaction fee of 3.25% and local reseller mark-up of 5%, of the equipment purchase
value for each transaction. There will also be a one-off cost for service set up
amounting to £10,000 and a £2,000 set up cost per country wherever eIc wants this
system. Since the CVM, spares, desks and signage would still be provided by eIc’s
current suppliers, Globalserve can incorporate the suppliers of these items into the
Page 10 of 15
system with only the 3.25% transaction fee. These items would be shipped directly
from the supplier to the franchisee using Globalserve’s transportation services,
bypassing the VAR in each country. As can be seen in Exhibit 2, the total basic cost
(excl VAT) of equipment per store amounts to £22,573. Fees would be charged at
3.25% Subtracting out the items supplied to Globalserve by eIc’s current suppliers, the
total value results to £19,933, which will be charged at the 5% reseller mark up fee. EIc
currently has franchises in 10 countries, and without expanding to other countries, the
total country set up costs will be £20,000. It is also assumed that the country set up and
the initial service set up fee of £10,000 are amortised over a period of one year. Thus
the cost per store will be:
Transaction fee £22,573 X 3.25% = £734 per store
Reseller mark up £19,933 X 5% = £997 per store
Country set up fee £20,000/208 stores = £96 per store
Initial service set up fee £10,000/208 stores = £48 per store
Total Globalserve charges £1,875 per store
The only other costs are eIc staff costs, which are estimated to be reduced to £381 per
store. Thus the total cost per store will be £1,875 + £381 = £2,256.
Ingram Micro
Ingram Micro is the world’s largest B2B trade-only wholesale provider of technology
products and services, including supply chain management. As opposed to
Globalserve, which does not sell products itself but rather through its network of VARs,
Ingram Micro will sell directly to eIc. In addition, Ingram Micro provides complete
integrated solutions from procurement, warehousing, transportation, configuration,
billing & payment collection facilities and returns management. Ingram Micro has
relations with various large IT vendors for all IT products. They can also provide a billing
& payment collection facility where they can bill the franchisee directly for the equipment
and services, and even arrange leasing terms if required. For the moment, they can
provide franchisee billing and payment collection facilities only in the UK, France,
Sweden, Belgium and Spain. For supply to other countries eIc can first collect the
money from franchisee and then pay Ingram Micro for supply in those countries. They
Page 11 of 15
can also store the proprietory products for eIc in the UK and ship to European countries,
as needed. Ingram earns a certain mark up percentage, for e.g. 3 to 4% for products
they supply. If eIc procures from them and they make their margin in the supply deal
then they effectively will not charge extra for warehousing, order management, stocking
& kitting the standard IT products. It would eliminate most of the logistics costs of eIc.
A monthly fee of £1,500 will be charged and eIc will have to pay for the inbound
transport and warehousing at a rate of approximately £5 per pallet per week for the
proprietory products like the CVM etc. Total costs if products bought from Ingram Micro
summarized in the following table:
Delivery costs proprietory prdts £37 per store
Cost of capital proprietory prdts £25 per store
Storage costs proprietory prdts £30 per store (£6225/208 stores)
Monthly Fee £87 per store (£1500/208 stores)
Total costs £179 per store
The price of the computer equipment purchased from Ingram (including their markup)
came out to be lower than existing supplier contracts.
Astonished at the low price, Tanmay checked again to make sure the offer was correct.
Ingram’s low delivery charges were correct, as long as eIc committed to buying their
equipment from them.
For comparison, Ingram also quoted for the same service, but using eIc current
suppliers. In case of procuring equipments from elsewhere and not from Ingram Micro,
they would charge 4% for standard IT products. In that case costs would be:
Delivery costs proprietory prdts £37 per store
Cost of capital proprietory prdts £25 per store
Storage costs proprietory prdts £30 per store As above
IT prdts charges £797 per store £19,933 X 4%
Monthly charges £87 per store As above
Total costs £976 per store
To summarize the Ingram bid, if Ingram supplies, stocks, configures, kits together,
transports and collects payments on eIc’s behalf, then the staff costs would be similar to
that of globalserve i.e. £381 for a total of £560 (£179 logistics cost + 381 eIc labor cost).
Questions to consider:
Page 12 of 15
In the latter case, where Ingram provides the logistics services, but not procurement,
the staff costs would be similar to other logistics companies (UPS and Exel) at £477.
Total costs for the second option would be £1453 (£976 logistics cost + £477 eIc labor
cost).
At this point, Tanmay was left to analyse the proposals and make a recommendation to
the eIc management.
Page 13 of 15
Exhibit 1 Total number of stores worldwide as of 29 Sep 2003
includes both company and franchise operations
Location Stores PCs
1 London 14 2172
2 New York 4 745
3 Amsterdam 3 490
4 Athens 2 76
5 Barcelona 2 573
6 Berlin 1 319
7 Bologna, Italy 1 110
8 Brussels 1 256
9 Cyprus 1 11
10 Dublin 1 68
11 Edinburgh 1 448
12 Frankfurt 1 28
13 Glasgow 1 357
14 Huddersfield 1 29
15 Maastricht, Netherlands 1 40
16 Madrid 3 242
17 Manchester 2 374
18 Milan 1 60
19 Munich 1 434
20 New Jersey 1 9
21 Rome 2 275
22 Rotterdam, Netherlands 1 120
23 Den Bosch, Netherlands 1 31
Total 47 7267
Source: http://www.easyinternetcafe.com
Page 14 of 15
Exhibit 2 Existing supplier base
Supplier Price/ Units/ Cost/
Items Location Unit £ Store Store
Must be supplied by eIc
1 CVM Key Technologies, Hull, UK 1128 1 1,128
2 CVM spares Key Technologies, Hull, UK 376.5 1 377
3 Desks Poland 29 30 870
4 Light box & name sign panel Quickpaint, Netherlands 265 1 265
Can be bought directly by franchisee
5 CVM PC NEC, Berkshire, UK 290 1 290
6 Server Using legacy store stock 1650 1 1,650
7 Server Rack Multidata, Kent, UK 795 1 795
8 Server Shelf Multidata, Kent, UK 48 2 96
9 LAN Modem Dabs.com, Lancashire, UK 181 1 181
10 10 way power bar Multidata, Kent, UK 70 1 70
11 PC & power cables Using legacy store stock 290 33 9,570
12 MONITORS (cables & adapters) Using legacy store stock 150 33 4,950
13 Monitor Stands Waratah Bus. Solution, Berkshire, UK 22 30 660
14 MICE Actebis, Swindon, UK 6.97 33 230
15 KEYBOARDS Dabs.com, Lancashire, UK 2.56 33 84
16 CVM UPS Dabs.com, Lancashire, UK 98 1 98
17 Server UPS Dabs.com, Lancashire, UK 309 1 309
18 Switches Dell, Berkshire, UK 118 5 590
19 Chairs CLICK HERE FOR MORE ON THIS TOPIC
was just not working out. The management decided to retrench, closing and
downsizing some of the original cafes. Their new philosophy was to franchise the
operations. So far the company has created about 20 franchised cafes, mostly in
Europe, with 5 in the New York City area. Right now, they are basically operating off
the cuff, with no real operating plan for how to supply and open each new franchise. In
order to address this problem, they have hired Tanmay, an MBA student from a highly
regarded business school to analyse their current operations and give
recommendations as to the way forward.
A brief history and background of easyGroup
easyInternetcafé Ltd. (www.easyinternetcafe.com) is part of the easyGroup
(www.easygroup.co.uk), founded and promoted by the well-renowned Greek
entrepreneur Stelios Haji-Ioannou (www.stelios.com). Other companies in the group
include easyJet, easyCar, easyCinema, easy.com, easyMoney and easyValue. He is
also in the process of launching new companies such as easyBus, easyPizza,
easyCruise, and easyDorm.
Stelios calls himself a serial entrepreneur. He acts as a venture capitalist, founding and
funding his ideas into businesses with a long-term intent to take them public.
Stelios, the son of a Greek shipping tycoon, joined his father’s shipping business after
graduation. A few years later, he borrowed some money from his father and founded his
first venture, Stelmar Tankers in 1992. He soon achieved success with this company
and it is now listed on New York Stock Exchange. Later in 1995, he founded easyJet,
the first company of easygroup. easyJet is a no-frills, low cost airline company. He
took advantage of the high consumer prices charged by other airlines during that time
and the recent deregulation of the airline industry in Europe. Soon easyJet grew to be
Page 3 of 15
the largest no-frills airline in Europe and was listed on London stock exchange in 2000.
With an intention of extending the brand further, he formed a holding company
easyGroup in 1998. Soon other ventures followed. Building on his success with
easyjet, he extended the ‘easy’ brand and founded his next venture easyInternetcafé in
1999, with an aim to provide consumers access to the Internet at the lowest cost. He
launched easyCar in 2000, a car rental company that provides car hire services at a
very low cost. The same year also saw the launch of easyValue.com, offering impartial
comparisons for online shopping and easy.com, a free email service. In 2001,
easyMoney, offering credit card services was launched. And most recently in 2003,
easyCinema, offering a no-frills, low cost 1st run movie theatre. All these companies are
currently held under the umbrella company easyGroup and are all private companies,
with the exception of easyJet which is the only publicly listed company in the group at
this time.
History and objectives of easyInternetcafé Ltd. (eIc)
With the exuberance of Internet boom of late 1990s and with forecasts of high growth in
expected demand, Internet cafés seemed to be a promising and profitable business.
Applying the yield management model1 to this business seemed to strengthen the
optimism, based on the assumption that offering very low prices will increase demand
significantly. Thus to capitalise on the potential, Stelios planned to set up a chain of
Internet cafés in 1999 and launched a new company easyEverything, the name was
later changed to easyInternetcafé in October 2001. With his success with easyJet he
wanted to take the yield management business model further. He invested several
million pounds sterling in occupying high street locations in the heart of big cities in UK,
Europe and US. With an expectation that such busy locations will attract higher footfall.
He also installed a large number of PC terminals at every store, increasing the fixed
cost base. Many other services were also offered, which required a staff commitment at
every store. All these decisions involved heavy investments in the first few years, in light
of optimistic expectations.
1 For a more detailed discussion of yield management, see the case study by N. Kumar, “easyJet – The Web’s
Favorite Airline”, August 8, 2000
Page 4 of 15
Store launches in initial years
The first store was opened on 21st June 1999 at Victoria, London with 330 PCs at a
single cafe2. More stores soon followed. (See Exhibit 1: Current eIc stores). The Friday
after Thanksgiving saw the first store in the US open in Times Square, New York with
8002 PCs, which was the largest Internet café in the world to date1. In 2000, the
operations spread to Continental Europe. The first store in Amsterdam opened with
6002 PCs, followed by other large stores in many cities across Europe with between 250
and 600 PCs each. The company received excellent support from the public, who
visited these in hordes, even waiting in queues to enter the cafes. New store launches
continued in 2000 all across Europe and the UK,
In 2000, as a result of the dotcom boom and the huge store launches, eIc and Stelios
earned many accolades for their innovation, marketing, use of technology and
investments in large and attractive retail properties. For example:
‘The new media marketer of the year’ in March 2000 from Revolution magazine
‘Retail Launch of the Year’ at the ‘Retail Week Awards 2000’,
Networking Industry Award for 2000 – Most Innovative Use of Networking
Products and Services,
e-company of the year at the Future UK Internet Awards ceremony, the winner was
chosen by the public,
International Property Strategy and Development, Design, Innovation and Concept
at the MAPIC awards in Cannes, France – one of the most prestigious awards
ceremonies in the International Retail Real Estate sector.
In light of all these factors of the dotcom boom, high expectations of growth
opportunities, growing the ‘easy’ brand image and public appeal, in May 2000 eIc
received funding from Apax Partners and Hewlett Packard, together investing £25
million into the venture.
Losses
2easyInternetcafé Ltd. (2003) http://www.easyinternetcafe.com
Page 5 of 15
During these years, from 1999 to 2002, easyInternetcafé owned and operated all their
own stores. Despite these accolades and fanfare, the high expectations of growth in
demand and revenues did not materialise, the dotcom/internet bubble had deflated as
did the crowds of customers. As a result, eIc incurred cumulative losses of £80- £100
million over the period.
Flaw identification and felt need for strategic change
In 2003, with losses continuing to mount, eIc decided to radically revamp their
operations. They realised that the high investments made by them were not justified in
the Internet café business. The revenues required to break even were huge for each
single location with 250-600 PC terminals to fill, and the possibility of achieving such
high revenue levels were bleak.
Consequently in 2003, in order to eliminate the need for future investments in new
stores, the strategy was changed. It was decided to appoint franchisees for the new
stores and also, if possible, for the existing legacy stores (i.e. Company-owned stores).
According to the new strategy, the franchisee would be required to bear the costs of the
property and the hardware. This would eliminate eIc’s drain on capital.
It was also decided to that smaller stores with 20 to 30 PCs was the way forward.
The goal was to create an Internet cafes that could be completely unmanned, with no
staff required at any store aside from regular maintenance. Some members of the
management team thought that it was important that every cafe looked the same, with
common signage, furnishings and PCs, currently HP branded due to their venture
capital investment.
Back to Core competence
As a result of the above process of strategic analysis & decision-making and the
resultant strategic change, eIc decided to stick to their core competence and outsource
all the non-core activities. Their core competence is the yield management business
model applied to the Internet café business and the proprietary hardware and software
to implement it. This core competence is supplemented by the ‘easy’ brand, which
enjoys excellent brand recognition in Europe and the UK.
Logistics – a bottleneck for scalability
Page 6 of 15
In order to achieve the goal of five-fold growth and a level of 10 stores openings per
week, the company had to be capable of handling the increased level of activity.
Logistics has become one of the integral activities of eIc following the change in
strategy and it also remains to be one of the few non-core operational activities
remaining in direct control of the company. eIc only needs to research and award the
franchise and deliver the equipment to the franchisee. All other activities, which were
earlier undertaken by eIc, are now, outsourced to the franchisee.
Since the focus is also on opening numerous stores simultaneously, the logistics
system needs to be robust, efficient, effective and flexible enough to cope with the
increase in the level of activity and enable smooth, easy and more importantly costeffective
logistics process for the provision of equipment to the franchisee.
The company perceives the current logistics system to be a drag on scalability,
efficiency and a bottleneck for growth and the main reason for spiralling high costs and
thus losses. The company required an evaluation of the present system and intends to
explore other alternative options that would make the system scalable at the lowest cost
and meet their needs.
Organizing for Scalability
Tanmay’s first recognition was that each store opening was really a “project” in project
management terms. There was a starting event that set the project in motion (with the
signing of a franchise agreement, in most cases) and an ending point with the actual
opening of the store. Some of these “activities” were logistics-related while others were
not.
Starting with the non-logistical activities, Tanmay found that the negotiations,
investigation and discussions with a potential franchisee could take days for a simple
individual franchise to several months for some of the more complex deals that included
multiple locations. However, the real process began once the franchise agreement was
signed. If the franchisee did not already have space for the café, eIc would assist in
recommendations with locations.
The broadband internet connection had to be installed by the local telecoms supplier.
This unfortunately could take several months, as one Italian franchisee found out to his
dismay.
Page 7 of 15
A summary of the major steps and their predecessors is listed in the table below:
Activity Description Average
Duration
Immediate
Predecessors
A Contract is signed with franchisee 1 wk -
B Space for café is contracted or existing
space acquired
4 wks A
C Broadband internet connection 4 wks B
D Desks installed 1 day B
E Server delivered and installed 2 days B,C
F PCs delivered and installed 2 days D, E
G CVM delivered and installed* 1 day E
H Signage delivered and installed 1 day B
I Chairs delivered and installed 1 day F
J Testing complete system 2 days F, G
K Open for business 1 day H,I,J
• *eIc will endeavor to keep the CVMs in stock due to the long lead time. Stores could not open with
out the CVM as there would be no way to sell the internet time with out them.
• Note: This activity table does not take the lead times listed in Table 3 into effect. This is only related
to the installation activities. Therefore, orders for the various components to be delivered on time
need to be made in advance of the planned date by the amount of the lead time.
Now armed with a more specific planning process, Tanmay suggested that orders for
equipment for stores opening within the same window of opportunity (meaning that they
could wait for several new store’s requests came in as long as the delay in ordering
would not delay the project plan for any particular store. This could now be combined
with the logistics operations options discussed below.
Current Logistics Situation
Tanmay’s research has calculated that if they continued using their current in-house
method eIc will have to spend approximately £1300 for all the logistics activities
involved in opening a new store except the outbound transport to the franchisee. This
includes eIc labor costs of £602 per store. All calculations were based on forecast of
opening 4 new franchises per week for the next 3 years.
In other words, the total annual logistics costs (excluding outbound transport costs
which were eventually billed to the franchisee) are approximately £270,000, which
Page 8 of 15
includes annual labor costs of £125,250 (based on 208 stores opening per year). It was
noted that if store openings were less, the labor costs were still considered fixed.
Outbound transportation costs of eIc’s equipment to each franchisee was divided into 3
zones based on distance from the UK:
• Zone 1 – closest to UK (France, Spain, Netherlands) – £300 per store
• Zone 2 – mid-range from UK (Poland, Czech, Finland) – £450 per store
• Zone 3 – farthest from UK (Greece, Turkey, Bulgaria) – £750 per store.
After his initial presentation, management wanted to look at ways to decrease this cost.
Tanmay’s next task was looking into viable alternatives. After a bit of reasearch, he
found 4 alternatives. 2 were considered pure logistics service providers and 2 were
categorized as integrated supply chain solution providers.
UPS Global Logistics
UPS required eIc to procure the equipment themselves and arrange with their suppliers
to deliver it to UPS warehouse where UPS would consolidate the orders, configure the
equipment, kit it together into a pallet and arrange for transportation to the franchisee.
UPS would not provide billing services direct to the franchisee. eIc would still need to
buy the equipment from the suppliers; take ownership of the goods i.e. incur cost of
capital. eIc would also need to pay a consolidated invoice for the outbound delivery
charges to the franchisee locations and later collect these expenses from the
franchisee. Because of the warehousing that UPS would provide, eIc’s labor costs were
estimated to decrease to £477 per store. The total cost of implementing UPS proposal
was £1110 of which £477 is eIc labor costs. Outbound transportation costs were
estimated to be approximately 10% lower using the UPS contract.
Exel
Exel offered a similar services to UPS’s, with the addition of supplier management
services. They would need to appoint two dedicated personnel, a contracts manager
and an administrator. Exel would manage the present stock of eIc, forecast store
openings, manage purchase requirements, co-ordinate & manage delivery & returns,
audit invoices, be a point of contact for franchisees and manage the whole account at a
cost of £57,000 p.a. Exel would also arrange for the inbound logistics transport to a
Page 9 of 15
merge-in-transit location where all pallets would be kitted together and sent to the
franchisee as a complete package. They would also provide configuration services for
the computer equipment. Like UPS, they will not bill the franchisee for the equipment
and logistics costs. This would still require eIc to provide those activities.
it was thought that even though Exel provided additional services, labor costs would
remain similar to the proposal from UPS due to the need to still provide the billing
services to the franchisee and first contact with the key suppliers. Total cost was
estimated to be £1,434 per store, of which £957 was the logistics costs and £477 eIc
labor costs totaling. Again, outbound transportation costs were approximately 10%
current rates.
Globalserve
Globalserve provides complete IT supply chain globally including IT procurement,
delivery and support solutions with various global IT suppliers and Value Added
Resellers (VARs) in 260 countries. This would enable eIc to obtain economies of scale
by consolidating their purchases with Globalserve and yet receive local delivery,
payment facility (in local currencies) and support. Tanmay thought that this model
seemed suitable for eIc as long as they are willing to change some of their suppliers
which will enable them to agree on a global price for nearly all the equipment required.
Globalserve would pass that order to the local VAR in the franchisee’s country. The
VAR would deliver the products locally and collect the cost of equipment and delivery
charges from franchisee directly. The VAR could also provide additional services at the
franchisee’s discretion such as configuration, store set-up support, etc. As the VAR
would be in the country of franchisee, they would speak the same language and would
understand the working practices of that country. This would enable eIc to devolve the
management of the delivery and allied support services to the VAR, thus freeing the
personnel of eIc to focus on the core activity of the company. Globalserve will charge a
transaction fee of 3.25% and local reseller mark-up of 5%, of the equipment purchase
value for each transaction. There will also be a one-off cost for service set up
amounting to £10,000 and a £2,000 set up cost per country wherever eIc wants this
system. Since the CVM, spares, desks and signage would still be provided by eIc’s
current suppliers, Globalserve can incorporate the suppliers of these items into the
Page 10 of 15
system with only the 3.25% transaction fee. These items would be shipped directly
from the supplier to the franchisee using Globalserve’s transportation services,
bypassing the VAR in each country. As can be seen in Exhibit 2, the total basic cost
(excl VAT) of equipment per store amounts to £22,573. Fees would be charged at
3.25% Subtracting out the items supplied to Globalserve by eIc’s current suppliers, the
total value results to £19,933, which will be charged at the 5% reseller mark up fee. EIc
currently has franchises in 10 countries, and without expanding to other countries, the
total country set up costs will be £20,000. It is also assumed that the country set up and
the initial service set up fee of £10,000 are amortised over a period of one year. Thus
the cost per store will be:
Transaction fee £22,573 X 3.25% = £734 per store
Reseller mark up £19,933 X 5% = £997 per store
Country set up fee £20,000/208 stores = £96 per store
Initial service set up fee £10,000/208 stores = £48 per store
Total Globalserve charges £1,875 per store
The only other costs are eIc staff costs, which are estimated to be reduced to £381 per
store. Thus the total cost per store will be £1,875 + £381 = £2,256.
Ingram Micro
Ingram Micro is the world’s largest B2B trade-only wholesale provider of technology
products and services, including supply chain management. As opposed to
Globalserve, which does not sell products itself but rather through its network of VARs,
Ingram Micro will sell directly to eIc. In addition, Ingram Micro provides complete
integrated solutions from procurement, warehousing, transportation, configuration,
billing & payment collection facilities and returns management. Ingram Micro has
relations with various large IT vendors for all IT products. They can also provide a billing
& payment collection facility where they can bill the franchisee directly for the equipment
and services, and even arrange leasing terms if required. For the moment, they can
provide franchisee billing and payment collection facilities only in the UK, France,
Sweden, Belgium and Spain. For supply to other countries eIc can first collect the
money from franchisee and then pay Ingram Micro for supply in those countries. They
Page 11 of 15
can also store the proprietory products for eIc in the UK and ship to European countries,
as needed. Ingram earns a certain mark up percentage, for e.g. 3 to 4% for products
they supply. If eIc procures from them and they make their margin in the supply deal
then they effectively will not charge extra for warehousing, order management, stocking
& kitting the standard IT products. It would eliminate most of the logistics costs of eIc.
A monthly fee of £1,500 will be charged and eIc will have to pay for the inbound
transport and warehousing at a rate of approximately £5 per pallet per week for the
proprietory products like the CVM etc. Total costs if products bought from Ingram Micro
summarized in the following table:
Delivery costs proprietory prdts £37 per store
Cost of capital proprietory prdts £25 per store
Storage costs proprietory prdts £30 per store (£6225/208 stores)
Monthly Fee £87 per store (£1500/208 stores)
Total costs £179 per store
The price of the computer equipment purchased from Ingram (including their markup)
came out to be lower than existing supplier contracts.
Astonished at the low price, Tanmay checked again to make sure the offer was correct.
Ingram’s low delivery charges were correct, as long as eIc committed to buying their
equipment from them.
For comparison, Ingram also quoted for the same service, but using eIc current
suppliers. In case of procuring equipments from elsewhere and not from Ingram Micro,
they would charge 4% for standard IT products. In that case costs would be:
Delivery costs proprietory prdts £37 per store
Cost of capital proprietory prdts £25 per store
Storage costs proprietory prdts £30 per store As above
IT prdts charges £797 per store £19,933 X 4%
Monthly charges £87 per store As above
Total costs £976 per store
To summarize the Ingram bid, if Ingram supplies, stocks, configures, kits together,
transports and collects payments on eIc’s behalf, then the staff costs would be similar to
that of globalserve i.e. £381 for a total of £560 (£179 logistics cost + 381 eIc labor cost).
Questions to consider:
Page 12 of 15
In the latter case, where Ingram provides the logistics services, but not procurement,
the staff costs would be similar to other logistics companies (UPS and Exel) at £477.
Total costs for the second option would be £1453 (£976 logistics cost + £477 eIc labor
cost).
At this point, Tanmay was left to analyse the proposals and make a recommendation to
the eIc management.
Page 13 of 15
Exhibit 1 Total number of stores worldwide as of 29 Sep 2003
includes both company and franchise operations
Location Stores PCs
1 London 14 2172
2 New York 4 745
3 Amsterdam 3 490
4 Athens 2 76
5 Barcelona 2 573
6 Berlin 1 319
7 Bologna, Italy 1 110
8 Brussels 1 256
9 Cyprus 1 11
10 Dublin 1 68
11 Edinburgh 1 448
12 Frankfurt 1 28
13 Glasgow 1 357
14 Huddersfield 1 29
15 Maastricht, Netherlands 1 40
16 Madrid 3 242
17 Manchester 2 374
18 Milan 1 60
19 Munich 1 434
20 New Jersey 1 9
21 Rome 2 275
22 Rotterdam, Netherlands 1 120
23 Den Bosch, Netherlands 1 31
Total 47 7267
Source: http://www.easyinternetcafe.com
Page 14 of 15
Exhibit 2 Existing supplier base
Supplier Price/ Units/ Cost/
Items Location Unit £ Store Store
Must be supplied by eIc
1 CVM Key Technologies, Hull, UK 1128 1 1,128
2 CVM spares Key Technologies, Hull, UK 376.5 1 377
3 Desks Poland 29 30 870
4 Light box & name sign panel Quickpaint, Netherlands 265 1 265
Can be bought directly by franchisee
5 CVM PC NEC, Berkshire, UK 290 1 290
6 Server Using legacy store stock 1650 1 1,650
7 Server Rack Multidata, Kent, UK 795 1 795
8 Server Shelf Multidata, Kent, UK 48 2 96
9 LAN Modem Dabs.com, Lancashire, UK 181 1 181
10 10 way power bar Multidata, Kent, UK 70 1 70
11 PC & power cables Using legacy store stock 290 33 9,570
12 MONITORS (cables & adapters) Using legacy store stock 150 33 4,950
13 Monitor Stands Waratah Bus. Solution, Berkshire, UK 22 30 660
14 MICE Actebis, Swindon, UK 6.97 33 230
15 KEYBOARDS Dabs.com, Lancashire, UK 2.56 33 84
16 CVM UPS Dabs.com, Lancashire, UK 98 1 98
17 Server UPS Dabs.com, Lancashire, UK 309 1 309
18 Switches Dell, Berkshire, UK 118 5 590
19 Chairs CLICK HERE FOR MORE ON THIS TOPIC
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