Digitec AG: E-Commerce with Custom Software
Digitec, one of the major Swiss providers of information technology (IT) and consumer electronics, pursues a multi-channel sales strategy. Customers can buy products and numerous supplementary services in an online shop or retail shop, via the call center, or by e-mail. At the same time, Digitec offers low prices matched only by specialist online retailers. Extremely efficient processes are essential to combining first-rate service quality and low prices. To this end, Digitec has developed a custom business software solution that brings together order processing, inventory management, customer management, and its online shop. As a result, software programming has become one of the retail company's core competencies.
table des matiĂ¨res1. The Company
2. What Triggered the Project
3. Transaction Support in Multi-Channel Commerce
Business Perspective, Suggestion Phase , Information Phase , Item Classification , Agreement Phase , Fulfillment Phase , Retention Phase , Process Perspective , Order Process Online Shop, Intercompany-Order, Application Perspective , Technical Perspective , Housing
4. Project Flow and Operation
6. Success Factors
1. The Company
Digitec AG is one of the major Swiss providers of information technology and consumer electronics. Today it is mainly active in the B2C market, with over 300,000 customers. Its annual rate of growth is between 50 and 100%.
Background, Industry, Products, and Target Group
Digitec was founded in 2001 and started out as an online retailer. Right from the start, however, customers have had the option of picking up the products they order in person. The first retail outlet was opened in Zurich in 2003.
The company was started when the online shop was activated. It was founded by three students during the university holidays. Without much effort on the part of the founders, the shop was discovered on the Internet by prospective customers and, to the owners' great surprise, customers started to order products. The company started out with its three founders and one employee to assemble PCs.
Eight years later, in 2009, Digitec employs a total of 168 staff. This corresponds to a full-time equivalent (FTE) of 150 employees. Digitec has developed into a retailer with a central logistics facility, several retail outlets, and an extensive online shop. The company's rate of growth is above average. Additional retail outlets, for example, in Kriens, are planned for September 2009.
The information technology and consumer electronics industry has distinctive characteristics. On the one hand, sales turnover has increased steadily in recent years. This is due to the innovative capabilities of manufacturers, some of whom also work with extremely short product life cycles. On the other hand, low margins have prevailed in the industry for many years at all levels of retail. This forces retailers to design their processes very efficiently and purchase goods as cheaply as possible.
The structure of the industry is characterized by a multi-level retail chain. Goods pass from manufacturers and international wholesalers to distributors who in turn supply retailers at mostly national level. In recent years, direct sales channels have become more and more established, not least due to the rise of e-commerce. Manufacturers are increasingly supplying retailers or selling directly to end customers (direct distribution).
As in many industries, sales from e-commerce in the IT and consumer electronics industry are growing faster than sales from other sources. Customers are placing ever greater value on the transparency of the Internet, where they can research products and prices thoroughly before purchasing them.
Digitec started out selling computer hardware, which is still an important area of its business. Telecommunications, consumer electronics, and photo/video equipment were added to its portfolio several years ago along with additional IT products such as notebooks, printers, monitors, and software. Digitec offers a total of 25,000 items, 5,000 of which it stocks in its own warehouses.
So far, Digitec has concentrated on the B2C area, selling its products in Switzerland only. Since May 2008 it has been developing its B2B offerings, which are growing quickly.
Digitec will continue to base its competitive strategy on its online shop, retail outlets, back office, and call center (multi-channel sales). High-quality service, expert consulting, and service offerings round off its comprehensive core portfolio. Digitec aims to continually improve its range of services in the coming years. Digitec's retail outlets must have all of the features of a classic retailer, but offer products at prices that are typical of specialist online retailers. This hybrid strategy (top quality at low prices) gives customers good value for money.
Importance of IT and E-Business
IT and e-business are essential to Digitec if it is to achieve a high level of efficiency. Digitec's only option for aligning its information systems optimally with its workflows was to develop its own solution for order processing, inventory management, customer management (referred to as an "ERP system") and its online shop, with the associated amount of effort. If workflows change, the system can be adjusted in a matter of hours. This creates a considerable degree of flexibility. As a result, the custom development of the ERP system and online shop has become one of Digitec's core competencies.
2. What Triggered the Project
When Digitec started out, the market for standard software did not offer a wide range of fully-developed, cost-effective software for online shops. It was clear from the outset, therefore, that the shop would have to be a custom development. The first shop was based on a Microsoft Access database.
Due to the growing volume of transactions, the central IT systems had to be migrated to a more powerful database in 2005. To this end, the commonly-used ERP and online shop systems on the market were evaluated thoroughly in 2004. This evaluation took account of the costs of the systems as well as their suitability for Digitec's processes.
The evaluation concluded that the standard software available was too inflexible and that it would be far too expensive and time consuming to adjust it to Digitec's specific processes. It was also felt that many of the software products were very user unfriendly (low level of usability). As a result of this evaluation, a decision was made to develop a custom ERP system and online shop.
Most of the custom development is carried out by Digitec itself with only minimal involvement of external business partners. It was important to collaborate with suppliers such as Also, TechData, Ingram, and Littlebit so that purchase orders could be processed electronically on the supplier side.
3. Transaction Support in Multi-Channel Commerce
Business Perspective and Goals
It addition to its range of products, Digitec also offers its customers useful services such as consulting, delivery, installation, and extended warranties. The fully-developed, highly usable online shop demonstrates Digitec's customer focus.
This also applies to multi-channel sales. Customers can choose from several channels depending on their own needs and preferences. Fig. 1 shows how Digitec bundles the offerings of manufacturers and wholesalers on one side and forwards them to customers through various channels on the other.
Fig. 1 Business Scenario: Transaction Processing in Multi-Channel Sales
In an industry with low margins, the combination of low prices and high-quality offering through several sales channels can only succeed if the cost structure is extremely efficient. As a result, process costs in the areas of procurement, stockholding, and order processing are central to Digitec's business concept in addition to purchase prices. Low process costs are achieved by a series of optimization measures to which the support provided by the business software is essential. Custom development for the ERP system and online shop pursued the following objectives, therefore:
â€˘ Design the operative processes to be flexible and easy to adjust
â€˘ Keep the costs of the operative processes low
â€˘ Keep the costs of the IT system low
â€˘ Offer the customer an optimal level of service
The support provided by IT benefits customers not only by facilitating low prices, but also by supporting them throughout the entire transaction process. This is best illustrated by a transaction process in which a customer places a purchase order. In e-commerce in particular, the transaction process is normally divided into five phases [WĂ¶lfle 2008]: the suggestion phase, information phase, agreement phase, processing phase (or fulfillment phase), and retention phase (or after-sales phase). Digitec supports its customers in the individual phases of the transaction process as follows:
For providers, the main focus of the suggestion phase is to match their offerings with a latent requirement of potential customers. To do this, providers need a forum in which to address customers, which is primarily provided by means of advertising. Providers must also communicate a message that speaks to the latent requirements of customers and encourages them to place an order or at least to investigate the offering. This applies not only to winning new customers, but also to retaining existing ones.
Digitec employs various marketing instruments during this phase. These include offline instruments such as printed adverts, billboards, and recently also television adverts. Online instruments such as banners and inclusion in price comparison portals are also used.
Customers require some basic information before they can decide whether to place an order. Digitec's prospective customers need the URL of the online shop and the addresses of the retail outlets as well as information essential to the buying process such as how they can obtain information, whether they can reach Digitec by telephone, who they can contact if they have problems, and how they can pay. Customers must have this basic information before they can start to examine the details of the offer, which is the outcome of a successful suggestion phase.
The information phase is a key step in the buying process. In this phase, the customer gathers information about the offer from a company. The main aim of this phase is to identify a suitable product and find out about its quality, price, availability, and so on. The information phase ends with a full shopping basket.
The shop application was developed with usability in mind (see "Application Perspective". The focus was on a clear catalog design, intuitive operation, and first rate search functions. Each product is categorized based on its properties to enable users to perform structured product searches by category. This also makes it easy to compare products within a category [Item Classification]. Digitec developed the necessary classification criteria (such as the capacity of a storage device) itself and also enters the corresponding metadata (such as 16 GB).
Customers receive additional information in the form of special offers, bestsellers, and news that are shown at product category level (special offers) or can be called (bestsellers, news). Customers can call recommendations at item level in the form of accessories or ratings.
Due to Digitec's multi-channel strategy, support for the information phase is not restricted to the online shop. In addition to searching the electronic product catalog, customers can receive information in person at the Digitec retail outlets, by telephone from the call center, or by e-mail.
The aim of the agreement phase is to conclude a valid contract regulating the delivery and payment of the goods based on the filled shopping basket. The provider and customer must agree upon several contractual details such as the price, quantity, shipping type, payment method, delivery and payment dates, and additional costs such as transport costs. Key framework conditions for this are set out in the general terms and conditions and in the warranty conditions. In Internet business, the contract takes effect as soon as the customer receives an order confirmation from the provider.
Digitec supports customers during the agreement phase by means of a streamlined, clearly structured checkout process. This includes, for example, the option of specifying whether the goods are to be delivered or the customer wants to pick them up at the retail outlet, as well as the services required such as on-site installation or extended warranty. The customer can choose between several payment methods: Inpayment slip (ISR - inpayment slip with reference number), credit card, cash on delivery, or the Swiss postal service's Yellownet service. Private customers must pay in advance regardless of the payment method selected. Corporate customers can pay retroactively on account. To prevent payment shortfalls, credit rating checks are carried out and credit insurance taken out.
To help customers decide on a dispatch method, Digitec does not charge separate shipping costs. These are already included in the price. The aim of this is to treat all handover methods as similarly as possible, since costs are also incurred if the goods are picked up in person. It is normally cheaper for the customer to have the goods delivered.
After a valid contract has come into effect between the contractual partners, it must be fulfilled by both parties (fulfillment). The provider fulfills the contract by transferring ownership of the goods and the customer by making payment.
For purchase orders from private customers, fulfillment at Digitec starts with payment. The shipping process is not triggered until the payment has been received.
Digitec operates a logistics center in Wohlen to process the flows of goods. This logistics center is the hub of the entire inventory management process. Around 5,000 of the 25,000 items offered in the online shop are stored in the warehouse.
Goods are sent to customers by post or freight forwarder. The postal service picks up the shipments at Digitec several times a day so that the customer can receive the goods on the following day. As already mentioned, the customers can also pick up the goods themselves from a Digitec retail outlet.
If the customer has to return an item, he can address it either to Digitec or to a service center of the manufacturer. It is normally cheaper for the customer to return the goods directly to the service center of the manufacturer, since the goods arrive there faster and are also returned directly to the customer.
The customer can follow the status of order processing and delivery in his customer account. If goods are sent by the postal service, it is also possible to track and trace them. If the delivery details previously agreed upon change, the customer is informed automatically by e-mail.
The next phase after contract fulfillment is the retention phase, which is also often referred to as the after-sales phase. The key aim of this phase is to retain the customer and transition to the suggestion phase for a new buying process.
Within the scope of the retention phase, Digitec provides the warranties or services set out by law or in the contract. It is particularly important here that the customer can receive advice at a retail outlet if he has a problem.
The customer can rate products on the Web site and view all purchase orders from all channels. The data that Digitec has stored about its customers has not so far been used to address specific customers within the scope of marketing campaigns. Only in the corporate customer area is offline communication personalized based on customer data. The employees at the retail outlets and call center have access to the customer data and can use it accordingly to advise customers.
To illustrate how the combination of optimized processes and optimized IT support can lead to a high level of productivity in order processing, this section describes two sample customer processes. The first example is a purchase order process in the online shop, and the second is a transaction at a retail outlet. These are typical purchasing scenarios for private customers. The subsequent sections also concentrate on private customer business.
In the first example, a customer selects a television in the online shop and orders it. The online shop shows that the television is not available in any of Digitec's warehouses but is available at a supplier. For this function, Digitec imports the item lists of suppliers, sometimes as often as once an hour. The display of the warehouse stock in the supplier's warehouse is then updated in the online product catalog. The customer requests delivery by post or freight forwarder and installation at his home. Fig. 2 shows the fulfillment processes necessary for this.
The television must first be ordered from the supplier. The customer pays in advance by online transfer (online banking) and uses the ISR reference number. On the next working day at 7 a. m., Digitec finds this transfer on an electronic list (ISR file) that is created by the bank and provided to Digitec within the scope of online banking. Once the ISR file has been downloaded, the payment data can be imported to the ERP system. The reference number is checked, the payment posted automatically, and the order released. If the payment amount differs, the customer receives a reminder or credit memo to the value of the difference.
Fig. 2: Process Perspective: Order Processing
The television ordered from the supplier arrives at the logistics center after one or two days. When the goods are received, the system checks which order they belong to and reserves them for this order. Goods to be stored that are assigned to individual sales orders or that offset backlogs are flagged as "reserved". They are assigned a storage bin and a putaway document is created. To group the television from the example with other items, the shipment must be picked. The logistics employee calls the released orders at the warehouse and the setup documents for these orders are created.
The picked orders are transferred to the outgoing mail department together with the invoice. To prepare the shipment, an employee in the outgoing mail department creates a shipping file for the freight forwarder in XML format. This is sent to the freight forwarder by e-mail or FTP. Freight forwarders handle the pallet shipments that are required for bulky goods such as televisions. Based on the shipping file, the freight forwarder generates pallet numbers for shipping and creates a PDF of these, which Digitec can call via the Internet and print out. The PDF contains the delivery documents for the shipment that are attached to the pallets. The freight forwarder scans the pallet number for the outgoing delivery. This process is then complete for Digitec.
When the freight forwarder receives notification that the pallet has left the warehouse, he contacts the customer by telephone or text message to arrange a delivery date. He then plans a route, delivers the television, and provides the service ordered by the customer (in this example, home installation).
If goods are sent as packages, shipping is also prepared by uploading a file with shipping details to the postal service. Since the address no longer needs to be scanned, the outbound delivery process is optimized and the next-day delivery rate increases from 97.5% to 99%. The shipping list must also be uploaded for payment processing by means of paperless cash on delivery, for which a physical inpayment slip no longer needs to be included in the package. In this case, the mailman is automatically reminded that he must collect payment when he delivers the goods.
In the second example, a customer goes to a retail outlet in Zurich to obtain information. He selects a camera that is not available at the outlet, but is stored in the central warehouse. The sales assistant at the outlet has access to the warehouse data. Since it is 11 a. m., the sales assistant can tell the customer that he can pick up the camera at the retail outlet at 5 p. m. In addition to the camera, the customer also orders a memory card that is available at the outlet.
The sales assistant creates a purchase order for the customer [Intercompany - Order]and the camera is reserved for him at the central warehouse. The setup document for the camera is among those that are called at the central warehouse. After setup, the item is placed in a container (plastic box with barcode) and posted in the system as a transfer from the logistics center in Wohlen to the retail outlet in Zurich. The container is then picked up at the central warehouse by a Digitec shuttle and transported to the retail outlet, where it is identified by means of its barcode and posted in the warehouse as a goods receipt. The container is assigned a storage bin. The customer is informed by e-mail or text message that the camera is ready for pickup at the outlet. When the customer arrives at the retail outlet, the sales assistant prints a setup document and retrieves the two articles â€“ the memory card and the camera â€“ from the warehouse. The customer pays at the checkout upon receiving the goods.
The central applications at Digitec are the ERP system and the online shop (Fig. 3). These two systems are used to control procurement, inventory management, sales, order processing, and credit checks and to develop the product catalog. Digitec developed both of these systems itself. The ERP system is based on a Microsoft Access application that was mainly programmed in Visual Basic (VB). The online shop was developed using Active Server Pages .NET (ASP.NET) in the Microsoft .NET environment and mainly programmed in C#. Both applications access a common SQL database and work with the same data basis â€“ product master data, customer master data, transaction data, warehouse data, and so on is stored centrally. Both systems also use a document repository on a file server. The ERP system uses the file server, for example, to store and import ISR files and item data from suppliers. Purchase orders that have been sent to the suppliers are also stored on the file server. Product images and PDF files containing product descriptions are stored on a file server for displaying the products in the online shop.
The employees at Digitec's headquarters and at all Digitec locations (logistics center, retail outlets) use the ERP system by means of proprietary clients that are operated in local networks. A browser is needed to use the online shop and electronic product catalog.
The systems of the banks and transport companies are also involved in the fulfillment phase (see "Business Perspective and Goals"). Depending on the payment method, one or more online banking applications are required for payment processing. The postal service/freight forwarders prepare logistics fulfillment by sending the shipping lists to the transport companies by e-mail or FTP.
Fig. 3: Overview of Applications
Fig. 4 shows the technical structure of the solution. While Digitec owns the server-side hardware systems, it outsources nearly all operation and maintenance to a service center within the scope of a service contract. This operation model is known as "housing". The server-side hardware comprises the Web servers, SQL servers, file servers, an exchange server for e-mail communication, and a Microsoft Office Communications Server (OCS) for internal communication. Data exchange over the Internet is processed by a Microsoft Internet Security and Acceleration Server (ISA server), which brings together router, firewall, and VPN functions.
The Digitec locations are connected to the housing service center directly by means of dedicated lines. The servers are virtual servers that are installed on Digitec's own hardware. The server hardware is configured redundantly for security reasons.
Fig. 4: Technical Structure
4. Project Flow and Operation
The previous sections mainly dealt with the current situation at the company and with its objectives, processes, and applications. This section goes on to explain some of the central influencing factors and developments that contributed to the current situation.
Since the three managing directors of Digitec are familiar with all the processes within the company, they are able to make investment decisions themselves. Employees' ideas are accepted, evaluated, and implemented according to priority on an ongoing basis. Important measures that require only a minimal amount of effort are implemented immediately. Measures that require a greater amount of effort are implemented later on. The cost-benefit ratio of the measure is decisive for its implementation.
Development and Rollout of the Software Solution
The managing directors used to develop the custom software themselves. Today, other programmers are involved in this process. The managing directors develop the designs within the scope of discussions and implement these immediately. The directors themselves define the objectives and specifications for the developers. If deviations occur, further meetings are held to develop solution proposals. The managing directors are also responsible for planning the software development projects.
The fact that the directors have development and system know-how means that the decision-making and implementation processes for programming are also very short. The ability to implement decisions quickly gives Digitec a decisive advantage over its competitors. It is also important that the managing directors have an overview of the system and the strategic goals of the company.
Besides continually improving the software, the solutions are replaced by completely new systems every few years. Migrations to new platforms and architectures are also carried out at this time. In 2009, the existing ERP system and online shop will be converted successively to new systems programmed using ASP.NET.
Digitec employs several programmers to develop and maintain the software and also make ongoing changes and improvements to the system. Technicians maintain employees' PCs. Digitec employs between six and eight programmers and technicians on average. The employees in the various specialist departments are responsible for maintaining product and customer data and generating content for the product catalog and online shop.
Since software development is closely based on the processes and requirements of employees, the software has a high level of performance and usability. As a result, employees are very happy with the system.
The e-business applications in the B2B area, such as electronic purchase order processing with the suppliers or transfer of shipping lists to transport companies, were developed in collaboration with the business partners, meaning that they meet expectations.
Achievement of Goals and Changes Brought About
All of the objectives set out in the business perspective in "Business Perspective and Goals" regarding in-house development of an ERP system and online shop have been met. The software can be improved on an ongoing basis due to the high level of flexibility when implementing changes. This makes it possible to increase efficiency still further. It has also proved effective to outsource operation of the server-side hardware to an external service provider.
Developing and operating custom software also has its drawbacks, of course. Handling the complexity of such a system poses a significant challenge. This creates a dependency on the people who understand the system. Testing is also laborious, as is the further development of the know-how required.
Investments, Profitability, and Key Figures
Continual adjustments to the software incur ongoing costs that are difficult to measure. A comparison calculation showed that for Digitec, programming and adjusting its own software would be significantly more cost effective than buying and customizing standard software. What is more, the flexibility of the custom software has created a market advantage that outweighs its costs.
6. Success Factors
The results of the Studienreihe Netzreport study showed that the majority of Swiss SMEs use standard software (Schubert et al. 2006). At the same time, SMEs tend to carry out as many IT tasks as possible internally (Schubert/Leimstoll 2007). The proportion of IT outsourcing at Swiss SMEs is very low.
Digitec pursues the opposite strategy. The company uses custom software developed in-house for central processes. On the other hand, operation and support services for hardware (in particular the server systems) are outsourced.
Digitec has recognized that operating hardware in-house does not bring any competitive advantages, whereas developing business software that ensures optimal support for business processes does. Process efficiency is a key requirement for coupling a high level of service quality with attractive prices in an industry with low margins. This makes software development a core competence of the retail company.
Special Features of the Solution
A key advantage of purchasing goods from Digitec is the combination of online shop and retail outlets. This enables customers to obtain information in the online shop and then go to the retail outlet for more specific information, for example. At the same time, Digitec offers prices that only specialist online retailers can match.
The key to combining a high level of service quality with low prices at Digitec lies in aligning the offering, processes, and supporting IT infrastructure. The processes and structure of the IT resources are designed such that the Digitec locations (headquarters, logistics center, and retail outlets) are highly integrated with one another. This creates highly efficient inter-location processes.
The business software developed in-house has a range of features that facilitate the high level of process efficiency. Examples of these cutting-edge functions:
â€˘ Data storage: The ERP system and online shop use a shared database.
â€˘ IT as an enabler: The software allows processes to be improved continually.
â€˘ Communication and coordination: The ERP system sends automatically-generated internal and external e-mails that are tailored to specific processes. Status e-mails inform employees and trigger manual processes.
â€˘ Data exchange: The frequent exchange of data with suppliers (purchase orders, item lists with availability and prices), transport companies (shipping lists), and banks (ISR files) mostly takes place electronically and primarily by means of XML files.
â€˘ Outsourcing: Hardly any hardware expertise is required since hardware operations are outsourced.
â€˘ User-friendliness: The usability of the systems was a main focus when the software was being developed.
The benefit to the customers who use the online shop lies not only in usability. Digitec supports the transaction process of the customer in all phases by providing useful functions. The shop remains easy to understand and does not include unnecessary content.
The transaction process is also supported at the retail outlets. Sales assistants can access the ERP system at any time to find out which goods are available at which warehouse and how quickly they can be delivered to the retail outlet. This allows Digitec to offer customers a high level of service.
Reflection on Long-Term Success Factors
The key to sustainable success lies in the ability to react to changes, constantly develop and implement new ideas, identify trends, and actively design suitable offers. Digitec's business software supports this process by enabling adjustments to be made quickly and cost-effectively in line with changing processes. This creates a significant degree of flexibility â€“ processes can be improved or adapted to changed general conditions or requirements at any time. The company does not stick to previous decisions if they prove to be unprofitable. This allows it to continually improve efficiency and achieve long-term success.
The Digitec case study shows that software programming can become a core competence even for a retail company and that an SME can also be capable of developing comprehensive, complex software. This does not mean, however, that use of standard software, which is so common today, needs to be questioned. Each company should carefully check, however, whether an in-house development would be better able to meet its needs at a lower price than a customized standard software solution.
In-house development requires a high level of internal IT expertise, however. At Digitec, this is provided by the company's three founders, whose IT know-how and affinity was already a core competence when the company was established.
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