Economic and Environmental Implications of Online Retailing and Centralized Stock Keeping in the United States

1. Economic and Environmental Implications of Online Retailing and Centralized Stock Keeping in the United States H. Scott Matthews and Chris Hendrickson Green Design Carnegie Mellon University

2. Growth of Retail E-commerce ($) • US DOC began measuring and reporting retail e-commerce in March 2000 • 4Q 02 = $14.3 Billion • 1.6% of all retail purchases [$46B for 2002] • Uses same sampling as traditional surveys • 12,000 out of 2 million firms (dangerous now?) • Note the following are not considered retail (and thus also not counted in e-commerce $) • Travel, financial, ticket brokering

3. E-Commerce Retail Quarterly Volume ($B)

4. Traditional Retail Logistics System • Factory to warehouse to warehouse to retailer. • Last leg of trip by private vehicle

5. Single Facility Sales • LL Bean, Lands End - catalogue sales • Amazon (original), MusicOutpost - web based sales from a single facility

6. www.eiolca.net • Free life cycle assessment software on the web from Carnegie Mellon - public data • >20,000 uses this year • economic, environment and resource requirements for purchases from any sector • just added injury and fatality data • based on linear model of economy and 500 sectors!

7. EIO-LCA Implementation • Use the 480*480 commodity input-output matrix of the U.S. economy (1997) • Augment with sector-level environmental impact coefficient matrices (R) (average impact per dollar of output) • Linear environmental impact calculation: E = R[I - D]-1F

9. Book Publishing Case Study • Traditional System: • logistics: printer > warehouse > warehouse > retailer > home, all by truck/car • unsold returns - roughly 35% for bestsellers • E-commerce System: • logistics: printer > warehouse > distribution center >home, by air and truck. • No unsold returns

10. Traditional: truck transport (1000 mi) warehousing production of returns reverse travel of returns private automobile transport E-Commerce air transport (500 mi) truck transport (500 mi) warehousing Comparative Analysis

11. Comparative Costs ($ 1000s for $ 1 M or 290,000 books)

12. Why are E-Commerce Costs Lower? • Higher transportation costs for e-commerce, but: • Returns of unsold copies • Lower retail transactions costs • Lower (private) automobile cost • Result is cost advantage for e-Commerce

14. Summary Environmental Impacts(per-book basis)

15. Sensitivity Analysis • ‘Traditional’ becomes better if: • Local distance to bookstore < 3 miles • Air transport of books > 700 miles • Orders not shipped together

16. Harry Potter Case • 250,000 books shipped on release date by Amazon.com • 9,000 trucks and 100 airplanes • 2.5 lb. book, 0.7 lb. packaging (3.2 lbs.) • Bookstores got 10 per box • Shopping trips for books avg. 11 miles • Marginal effects

18. Example 2: Centralized or Virtual Warehouse • Traditional: Stock at Local Warehouse with Rapid Delivery but High Stock Costs • Centralized or Virtual: Stock at Remote Warehouse with Rapid Delivery by Higher Cost Mode. (Note E-commerce Model: Delivery Mode Choices).

19. Warehousing vs. Trucking ($ 100M)

20. Example: Defense Logistics Agency • Military spare parts management: 632,000 part types, inventory of 108 million parts, value of $ 83 B, 286 storage locations. • GAO – Consolidate spare parts inventory in major sites. • GAO – also, reduce excess inventory (not analyzed here)

21. Centralized Warehousing

22. Local to Central Warehouses

23. Some Analysis Issues • What are E-commerce future scenarios? • What will happen with local manufacturing technology? • What will be impact of new business models for controlling inventory (warehousing), manufacturing and shipping. • What is appropriate time scale of analysis?

24. Analysis Boundary Issues (cont.) • Buildings - decrease in retail or warehouse space? • Shopping - will individuals substitute other travel for reduced shopping travel? • Computers - what fraction of personal computer burdens should be allocated to E-commerce?

25. Will E-commerce Improve or Degrade the Environment? • Net Effect - hypothesis: depends upon product and processes and upon the analysis boundary. • Appropriate Public Policy - • Don’t ignore service industries in environmental policy. • Consider life cycle costs including social costs. • Take advantage of cost savings to create environmental benefits

26. Acknowledgments • AT&T Foundation’s Industrial Ecology Faculty Fellowship Program • Organization of Economic Cooperation and Development (OECD) • Japan Foundation Center for Global Partnership

27. References • "Environmental and Economic Effects of E-Commerce: A Case Study of Book  Publishing and Retail Logistics," Hendrickson, Chris T., H. Scott Matthews, and Denise L. Soh,  Transportation Research Record 1763, pp. 6-12, 2001. • "Harry Potter and the Health of the Environment," Matthews, H. Scott, Chris Hendrickson and Lester Lave, Spectrum, 20-22, November 2000. • The Economic and Environmental Implications of Warehousing Strategies in the New Economy, Matthews, H. Scott and Chris Hendrickson,  J. of Industrial Ecology, 2002.