E-Commerce Supply Chain Challenges

Submitted By:

Optimist

IIM Shillong

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Executive Summary

The case was studied and secondary research done on e-commerce industry to

understand the workings of the industry, the bottlenecks involved and the profitability

of the industry as a whole. Further we moved on to the logistics involved in particular

and made it our main point of focus. Primary and secondary research was carried out to

understand the bits and bytes of the system (respondents being the users as well as the

employees of these companies). After analyzing the data gathered, we could come up

with solutions to the questions asked from us and think about the future of the industry

as a whole, performing Porter’s 5 force analysis, strategizing and finding the drawbacks

involved in the logistics.

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Background

• A growing number of Indians are fast turning into full-timeonline shoppers, buying everything from books to apparel,home decor and electronic devices at the click of a button

• Top e-retailers are threatening to dwarf the revenues of brick-and-mortar rivals - at least in some categories for sure thoughnone of the big e-retailers is anywhere close to making profits

• Financials of companies like Flipkart, Snapdeal, Myntra arenot made public. They shrug off any talk of profit becausethey are in growth mode right now.

• As for valuation, Flipkart was pegged at between $1.7 billionand $2 billion recently, and Snapdeal at $1 billion

• Few e-retailers follows a model where they do not own theinventory but allows individual businesses to sell theirproducts on its website which is more beneficial.

• Few e-retailers like Amazon uses the conventional inventory-based format that is supposed to be a revenue guzzlerbecause of the heavy investment it requires in setting upwarehouses and storage space.

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Drawbacks of E-commerce Logistics

• Late deliveries: Single item to be shippedto customer from warehouse each time anorder is placed. Whereas in FMCG theyship in huge quantities saving thetransportation cost in high numbers.

• Inventory stocks: Stocks cannot be kept inhigh quantities, unlike FMCG companies,to avoid incurring huge holding cost.

VAT: In FMCG, the supplier sells to retailer and retailerfurther sells to consumer and no VAT problems are to beincurred by the company, as the VAT being paid byretailer is taken care of by charging the product in higherprice to consumer. Example: Creative speakers inShillong cost INR 3500, which can easily be availedonline at INR 2699. Whereas in online delivery, the e-commerce sites are unaware of the total amount of VATor state taxes to be incurred on the way, and hence theyhave to charge the products at minimal prices, and atthe end, they have to pay the taxes incurred.

Applying COD: The retailer collects the money and then transfers the money back to e-commerce site, afterwhich he is paid. So he has to deliver his transportation services even before getting paid. The lead timebetween his services delivered and money received is high, usually from 2-3 weeks which causes discontentamong them. Also the delivery company does not immediately transfer the money back to e-commercepeople and they take 1 week to deliver so, hence the e-commerce have to re-order their stock even beforereceiving the payment from prior sale. Considering that almost 70% of sales in India are COD, this is a bignumber in price being paid by e-commerce. Whereas in retail industry, the retailer pays the money tocompany on the stock purchased then and there, and further offers COD to customers from his side, thusboth the parties are happy for receiving fast money

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Drawbacks of E-commerce Logistics

Return policy: Return policy in FMCG, thecustomer returns to retailer which is then sent byretailer to the company in a whole lot together ona weekly basis. But in e-commerce, the customerhas to incur the price for return delivery to e-commerce leading to discontent (in absence ofproper reverse logistics). Even if the reverselogistics is there for certain sites such as Flipkart, itis not effective and high costs are incurredbecause the packaging is to be sent by them tocustomer for easy transport

Last mile network: Customized logistics foreach last mile network planning, unlikestandard logistics in bulk of FMCG. 53% of thecost incurred in this whereas the FMCG endsbefore it.Also, non-standard addresses in India, logisticscompany often give call to e-commerceenquiring about location.

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Bargaining Power of Customers:

High due to wide availability of choice. With FDI coming in, this will increase further.

Threat of New Entrants :

Major barriers such as regulatory issues, supply chain complexities, inefficient

infrastructure, and automatic approval not being allowed for foreign investment in retail

Bargaining Power of Suppliers:

The unorganized sector has a dominant position Established players have a slight edge over others and enjoy brand distinction Access to capital plays an importantpart for expansion in the space

Threat of Substitutes :

Healthy economic growth, changing demographic profile, increasing disposable

incomes, changing consumer tastes and preferences are driving and will continue to

drive growth in the organized retail market in India

Threat of Competitor:

New entrants like International players are expected to further

intensify the competition

Porter’s Five Forces

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E-commerce Business Prospects – 2015

Yes, we would definitely start an ecommerce business in 2015 because:

• E-commerce is the sunrise sector in India and has huge potential in India. The Indian e-commercemarket is projected to reach $6 billion in value of goods sold in 2015, a 70% spike in revenue over2014, making the country the fastest growing e-commerce market in Asia-Pacific region.

• India represents a $3.5 billion market, growing at approximately 60-70 % every year. It representsless than 4% of the total retail market. B2C (business to consumer) e-Commerce leads the marketin India, while B2B (business to business) is limited to organizations that drive online channels tointegrate with their partners and distributors.

• The e-commerce market in the country is expected to grow 37% to reach $20 billion by next yearon the back of growing internet population and increased online shoppers.

• 80% of the e-Commerce shoppers of 2016 still are available to be nabbed by e-Commerce sites.And they’re going to come from predominantly two categories.

• First, from Tier-2 and Tier-3 cities as the logistics and connectivity there improve and second,young people that get jobs/pocket-money and start shopping online.

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Strategy for Future Growth

Acquisitions in the e-retail market:

• By acquisition, e-retail companies should be able to reduce costs, especially in logistics and distribution which is a significant cost head

• With all eyes on growth more than profitability, e-retail is making an all-out pitch to capture more and more of the total retail pie in India estimated at $600 billion

• From around $3.1 billion now, e-retail is poised to touch $22 billion in five years

Shift from Internet to non-internet based mobile platforms:

• The top eight metros account for 70-75 per cent of the current total internet penetration in India.

• Mobile tele-density is also expected to grow further from non-metros, with major cities already having more than 100% mobile tele-density

• With huge traction for e-commerce coming from these cities and growing demand for regional content, these markets are already hot spots for a number of brands

• An exciting statistics is that 68 million internet users are from rural India and the e-commerce industry is waking up to the potential of the rural Indian who has money but less access to goods

Efficient Logistics and Supply Chain:

• Up to 90% of goods ordered online in India are moved by air, which pushes up delivery costs by around half, according to several online retailers and logistics companies

• With India’s perennial infrastructure failings far from being resolved, most e-tailers are focusing their investment on setting up their own capital-intensive logistics businesses

• To reduce air shipments setting up regional warehouses and signing up more suppliers across the country is required to ensure customers get orders delivered by the nearest supplier 9

Combo In FutureRETAIL TO ONLINE

Pros

• Successful examples, Bloomingdale, Best Buy, Barnes & Noble, Linens ‘N Things and Walmart

• Internet viewed as logical extension of the store-front’s physical presence, a complement to existing customer relationships (directly with product and not with shopping experience as opposed to that with online to retail), business processes and distribution systems (Zerega, 1999)

• Branding is a tremendous advantage of the products, people will be ready to take their chances with online purchase for renowned brands

• Adoption of internet increases productivity by reducing transaction costs. Consumer surplus increases: lower prices and customer value increases

• Lower cost of implementation

• High cash flow in beginning stages (important for a new venture

• Overheads: Staffing(designer), domain space, SSL certificates, warehousing in bulk, shipping costs, marketing costs, almost nil set-up cost but revenues increase manifold

• Changes can be made on the fly as per the requirement

• Number of potential customer reach increases manifold

Cons

• High marketing costs, don’t need our website to just sit there with no views

• Need to have digital marketing knowledge, completely different from standard marketing

• Hard to overcome the first mover advantage that giants like Flipkart and amazon have

• Confidence and trust building up in customers to buy from a new website is not that easy, we need to market based on the already developed product brand (Indian mentality still not that comfortable with online purchases)

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Combo In FutureONLINE TO RETAIL

Pros

• Successful examples, Pepperfry opened a 2500 sq. ft. store at Powai, an “experience centre”, FabFurnish, Urban ladder

• Trial room which was missing in online shopping can now be achieved

• Marketing is easier, online reach nationwide is already there, just one flash message on their website to tell people about their new open physical retail store

• Better able to meet last mile network in remote areas – avoiding high transportation cost (53% of logistics cost avoided)

Cons

• High cost of implementation

• Low cash flow in early stages (set-up cost is high)

• Overheads: Rent of land, Fitout (customization of shop floor), staffing (sales agents), electricity, insurance, phones and other incidentals

• Changes hard to be made once implemented as per the changing world today compared to years ago

• Increased reach is deepened down in one area where retail store is opened, high costs are incurred if we want to increase this reach

• Online ecommerce facing huge losses (only marginal profits), it becomes difficult for them to make such a huge investment

• Have a brand name in online store, but sell products from suppliers only who already have their physical retail stores, so it does not make much of a difference when they open up a physical store, apart from the name of e-commerce

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Who is the WINNER ?

• After primary and secondary market research, we have the

values and points:

• India retail - $35 billion

• Online retail - $3 billion

• Clearly the pros of retail to online outweigh its cons and as

well the pros of online to retail (which have high cons).

• Hence the retail to online will be more beneficial than vice-

versa.

• We have our winner – ONLINE TO RETAIL

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Thank You

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