E commerce – how it is changing supply chains

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E-Commerce – How it is changing Supply Chains
By
Zubin Poonawalla
In January, I placed an order with one of the large e-commerce websites for a
new toolkit. Being on the website, I also ordered a spray can of a cleaning agent
&, at the last minute, tossed in a pen as well. Given the order value, the shipment
was on FOC basis delivery. When the items were actually delivered to my home,
there were three separate deliveries. The first to arrive was the pen – in a large
box, delivered at home on a Tata Ace vehicle. The other two items arrived two
days later, on the same day, in separate deliveries.
This seems to fly in the face of one of the core operating principles of logistics
companies – that of having a focus on efficiency. Without that, there is a question
of sustainability. Can e-commerce companies continue to supply goods with such
service levels, at such cost? As a client once commented – “My people believe in
servicing the customer at any cost. That doesn’t work for me. I need them to
service the customer at the right cost!”
Urban congestion & rural reach
Two decades ago, what is termed modern trade was trying to woo customers
away from traditional kirana stores. They did this by emphasizing the superior
buying experience of modern formats & lower prices due to bulk buying. It has
been a long journey & in this time they have pulled about 8% of sales away from
traditional corner stores. On a retail base of $ 520 billion (estimated by the RAI-
EY study of FY15), that would be a market of approx. $ 42 billion. Today, e-
commerce companies are doing the same to them, by saving customers the
difficulty of travelling to the store & lower prices.
In current day urban India, the need to travel to a shopping centre / mall, is not a
simple task. With average metro travel speeds reduced to 10 km/hour or less,
consumers loose too much time in transit. This coupled with parking difficulties,
if they have used their own vehicle. Given this level of urban congestion,
shopping from home does have its advantages.
For smaller towns, it is an issue of access. Since brick & mortar retail is an
investment intensive operation, it is more economical to extend online sales than
create new stores. Shopping online gives people in these towns a quicker service
& wider choice. Also, they will have the benefit of having their orders delivered
to them.
Just as modern trade met an important need of the Indian consumer over the
past two decades, so too does e-commerce meet an important consumer need
today. Moreover, as consumers get accustomed to online browsing, online
transaction & home delivery, they are not going to take lightly to having to travel
to stores for every need. E-commerce is here to stay.

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The other side of sustainability
Most urban centres in India are a commuter’s nightmare. Where earlier people
joked about the local trains of what was then Bombay, today every city has its
own traffic woes. There is widespread acceptance that our extremely poor &
insufficient public transport systems are at the core of the problem. It si to fight
such traffic that people prefer to order from the comforts of home & have goods
delivered to them at home.
This home delivery model is rapidly growing. From e-commerce retailers to
hyperlocal delivery companies, everyone delivers at home. The “uberisation” of
the economy is leading to more & more people & vehicles plying the streets to
meet the needs of people in their homes. This would be a good thing to reduce
traffic congestion. If a single vehicle can meet the needs of 5 to 10 households in
a single trip, it means that one vehicle replaced 5 to 10 others. This is both an
economic cost saving as well as a reduction in traffic congestion & pollution
levels.
Similarly, if those same 5 to 10 households don’t have one or more people
walking into a retail outlet, there is a saving expensive retail space & the
environmental load of air conditioning. Today, these are important factors as we
move to being an increasingly consumption driven country.
This is true in theory. Today, the numbers still do not bear this out. E-commerce
in India is still a tiny fraction of organized retail. Recent estimates have put the e-
commerce industry at around $ 3.5 billion. This is less than 10% of organized
retail & much less than 1% of all retail. So, if you were thinking that e-commerce
will change traffic patterns or pollution levels, there is a long wait ahead.
The bottled up delivery problem
Many e-commerce companies are establishing their own delivery networks. Or,
they are partnering with logistics players who are offering them access to
existing networks. In the US, the last mile continues to be the most difficult &
expensive leg in the delivery chain. So, while the bulk of deliveries are happening
over Fedex, UPS or the postal service, companies are continuing to search for
new options. Amazon has started using its distribution centers, coupled with a
private fleet to make deliveries. Others are looking to crowdsourced delivery
systems. The concept of personalized delivery at scale is obviously still evolving,
even in a relatively more evolved market like USA.
In India, we have a long way to go before stabilizing on how to deal with this new
phenomenon of individual home deliveries in bulk. A recent experiment has been
that of hyperlocals. Initially positioning themselves as online retailers & third-
party delivery services for restaurants, the model has proven difficult to scale &,
therefore, to sustain. Yet, there is still a significant need. The existing model is a
pressure cooker situation, with costs not truly realized. This is indicated by the
attrition rate among delivery boys, which is operating in the 30 – 50% levels.
Either cots will have to go up or workloads will have to reduce, effectively
driving unit cost up again.

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Direction of the solution
When looking for a solution to a new cost effective delivery model, we should
look at both organization & innovation.
Most logistics systems across the world & throughout history have been
organized to operate on shared infrastructure. The most expensive investment in
road transport is the road itself. Likewise, for rail it is the laying of the tracks.
When countries first moved to a communication system, the postal system was a
public infrastructure. Today, the internet is the same.
The PC industry really started to grow when open standards allowed different
players to specialize in different areas. Some specialized in making chips, others
in hard disks & yet others in software. Similarly, this industry should move to
models of specialization with different players catering to different needs. An e-
retailer should focus on retailing & process design to ensure customer
experience, not in execution of logistics operations. This will become even more
critical as e-retailers spread their wings & cross national boundaries. It is likely
we will see increasingly strong networks of logistics players catering to the
world of e-retail.
Secondly, technology will paly a significant role. The early experiments by
Amazon to use drone are just that – experiments. It is possible that airborne
drones will set new standards for small parcel delivery. Today, last mile delivery
is extremely labour intensive. At one time, no one thought bank cashiers could be
replaced by ATMs. Similarly, it is not unlikely that people will get their parcels
from a machine at their doorstep.
Ubiquitous tracking & pin point delivery can also make a difference. In a world
where people are trackable based on their phones & GPS, it is not impossible to
imagine a company offering to drop off a parcel on their way home, at a bus stop
or a commonly visited grocery store. Pick up lockers already exist in parts of the
world. By clubbing it with modern technology the utilization rate of those lockers
can be increased dramatically.
There is likely to be a lot of change in the area of logistics & the world is already
moving towards it. It will be interesting to see how industry evolves as it goes
forward!