There is no way that home delivery grocers can

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There is no way that home delivery grocers can perfectly deal with substitutes, other than making sure there are none – something that is unlikely to ever happen. DC-based picking on the other hand has a fairly miserable record. Webvan, a US based online grocery that has gone bankrupt, claimed that workers would be able to pick 450 items per hour or 20 times the productivity of a store shopper. This productivity was based on the ability for workers to pick groceries in large batches without having to waste time and effort traveling between locations. Each worker was going to pick groceries using an automated carousel and then place groceries in a tote that would be automatically routed through the DC by a system of conveyors. While exact data on the productivity Webvan achieved is sparse, several things are clear from the failure of this approach. First, Webvan did not get anywhere near this level of productivity. Second, dedicated facilities of this type are very expensive and typically only feasible when highly utilized. Unfortunately for Webvan, none of their DCs ever approached this level of utilization. Third, picking groceries is a very complex task, partly because of the need to keep things at the proper temperature (there are three basic groups: frozen, chilled and ambient). More recently, Asda announced in December, 2001 that it was abandoning its use of dedicated picking centres at Croydon and Watford and transferring picking to 13 of its retail stores in South East Britain. So why does Ocado think that it can do better than Webvan and Asda? First, a purpose built facility with no stores to support effectively (at least in theory) removes a link in the supply chain. If Ocado can make the DC-based picking approach work, then it can remove the costs of running stores, which typically run 20-25% of sales. These cost savings can be used to offset the costs of picking and delivering the orders. Second, Ocado believes that it has learned valuable lessons from the efforts of its predecessors. In particular, Nigel Robertson states “Our Hatfield facility is built on a larger scale [to approximate the size of a typical DC that supplies about 20 stores]. So it’s much easier for us to deal with ‘peakiness’ and maintain availability. Also we’re completely focused on home deliveries – they’re not an add-on to a retail operation [as with Asda]”. In particular, there are three major differences between Ocado’s approach and that used by predecessors. First, Ocado is taking time to allow learning to take place. The first picking operation was a largely manual process setup in a warehouse in Hemel Hempstead. This allowed Ocado to learn and refine its processes before committing to a more automated approach at its Hatfield purpose-built facility. In addition, Ocado is rolling out this new and yet to be proven approach at a single facility, while Webvan ignored time-tested principles by trying to do something new not in one or two places, but in 8 or more at a time. As everyone at Ocado readily admits – “this is a new

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