SCMPro - Jan. 2016

Progressive GrocerE-commerce
How it is changing Supply Chains & Logistics

The core principles of logistics companies is reliable service and cost effectiveness. This is what their customers look for. This is also, the basis on of operational design of logistics companies. In this context, the approach of e-commerce companies is something of a puzzle.

In December, I placed an order with one of the large e-commerce websites for a new toolbox. Being on the website, I also ordered a spray can of a cleaning agent and, at the last minute, tossed in a pen as well. Given the order value, the shipment was free of cost. 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. 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 an efficiency focus. 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 emphasising the superior buying experience of modern formats and lower prices due to bulk buying. It has been a long journey and 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 RAIEY study of 2014), that would be a market of approximately $42 billion. Today, e-commerce companies are doing the same to them, by saving customers the difficulty of travelling to the store and
lower prices.

In current day urban India, the need to travel to a shopping centre or mall, is not a simple task. With average metro travel speeds reduced to 10 km per hour or less, consumers lose too much time in transit. This is 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 and 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 and 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 transacting and home delivery, they are not going to take lightly to having to travel to stores for every need. E-commerce is here to stay.

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 and insufficient public transport systems are at the core of the problem. It is to fight such traffic that people prefer to order from home and 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 and more people and 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 and 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 and 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 organised retail. Recent estimates have put the e-commerce industry at around $3.5 billion. This is less than 10% of organised retail and 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 and 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 personalised delivery at scale is obviously still evolving, even in a relatively more evolved market like the USA.

In India, we have a long way to go before stabilising 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 and third-party delivery services for restaurants, the model has proven difficult to scale and, therefore, to sustain. Yet, there is still a significant need. The existing model is a pressure cooker situation, with costs not truly realised. This is indicated by the attrition rate among the delivery boys, which is operating in the 30- 50% levels. Either costs will have to go up or workloads will have to reduce, effectively driving unit cost up again.

Direction of the solution

When looking for a solution to a new cost effective delivery model, we should look at both organisation and innovation.

Most logistics systems across the world and throughout history have been organised 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 specialise in different areas. Some specialised in making chips, others in hard disks and yet others in software. Similarly, this industry should move to models of specialisation with different players catering to different needs. An e-retailer should focus on retailing and process design to ensure customer experience, not in execution of logistics operations. This will become even more critical as e-retailers spread their wings and 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 play 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 and pin point delivery can also make a difference. In a world where people are trackable based on their phones and 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 utilisation rate of those lockers can be increased dramatically.

There is likely to be a lot of change in the area of logistics and the world is already moving towards it. It will be interesting to see how industry evolves as it goes forward.

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd