Chapter – 10

The Development of E-tail Logistics

John Fernie and Alan McKinnon

Presented by –Group No. 1Jappreet S. BhatiaDeepak JainLokesh Yadav

IntroductionWhilst members of the supply chain have sought ways

to foster collaboration, the rise of e-commerce has posed a set of challenges for retailers .

The rise and subsequent fall of many dot com companies in 1998–2002 led to a high degree of speculation as to the reconfiguration of the business to consumer (B2C) channel.

Ultimately, e fulfilment, especially the ‘last mile’ problem of delivering goods to the final customer, holds the key to success in this channel.

The business to business (B2B) channel, however, has more to offer members of the supply chain because of the number and complexity of transactions

Main Issues Why have ‘pure players/retailers’ failed in this channel ? Identified four key challenges:1. limited online potential;2. high cost of delivery;3. selection–variety trade-offs;4. existing entrenched competition.The advantages of the store model are the low initial

investment required and the speed of rolling out the service to a wide geographical market.

The problem here, however, is that out-of-stocks and substitutions of products are more prevalent as online shoppers compete with in-store counterparts for products.

The Rise of Ecommerce While it is generally accepted that e-commerce has

grown considerably in the 1990s One of the reasons for over-optimistic forecasts for e-

commerce growth in the 1990s was consumer acceptance of the Internet and widespread adoption of PC usage.

By 2002 it was estimated that the number of Internet users numbered 450 million

The increased sophistication of mobile phones with WAP applications also offers potential opportunities

Traditional retail channels were to be disrupted as new players entered the market with online offers

Country Estimate Country Estimate Country Estimate

1. USA 149.0 14. Brazil 6.127. Czech Republic 2.2

2. China 33.7 15. Australia 5.6 28. Norway 2.2

3. UK 33.0 16. India 5.0 29. Finland 2.1

4. Germany 26.0 17. Poland 4.9 30. Argentina 2.0

5. Japan 22.0 18. Thailand 4.6 31. Philippines 2.06. South Korea 16.7 19. Sweden 4.5 32. Malaysia 2.0

7. Canada 14.220. Hong Kong 3.9 33. Chile 1.8

8. France 11.0 21. Turkey 3.7 34. Denmark 1.6

9. Italy 11.022. Switzerland 3.4 35. South Africa 1.5

10. Russia 7.5 23. Portugal 3.1 36. Greece 1.3

11. Spain 7.0 24. Belgium 2.737. New Zealand 1.3

12. Netherlands 6.8 25. Austria 2.7 38. Singapore 1.3

13. Taiwan 6.4 26. Mexico 2.3 39. Israel 1.2

Source: Michalak and Jones, 2003Table 9.1: The Largest Users of the Internet Worldwide: A Comparison of Estimates for 2002 (millions)

The E commerce Consumer

Internet connectivity, as revealed in Research , depicted an English- speaking, developed country phenomenon

In the early stages the profile of the e- commerce shopper was a young male professional in a middle-class neighbour hood.

As the technology becomes more accepted the gender and socio-economic mix has changed

This shows an online lifecycle from infrequent online purchases – virtual virgins, chatters and gamers and dot.com chatters – to frequent online purchases – surfing suits and wired living.

Group 1 Virtual Virgins

Of those online, this group is least likely to have bought online. Less than 2 per 1,000 will have made any form of online purchase last month. Their time online is half the national average and they are likely to have started using the Internet more recently than other people. With the exception of chatting, this group do Internet activities less frequently than average. Because of their relative inexperience they are more likely to worry about security and delivery problems with buying online and to consider the process to be difficult. People in this group are twice as likely as those in any other group to be female. The elderly and children are more commonly found in this type than any other.

Group 2 Chatters & Gamers

This group, predominantly young males, might spend as much time online as the most avid type of Internet user; however they tend not to be buyers. Only one in five has ever made an online purchase. They may consider shopping online to be difficult and their fear of delivery and security problems is above average. These people are avid chatters and gamers who use news groups and download as frequently as the most active and experienced surfers. Nearly half are under 25. The schoolchildren in this type are more likely to connect from school/university than any other e-type, although connection from home is still the most frequent.

Group 3 dot.com Dabblers

As average Internet users, these people have mixed feelings regarding the pros and cons of online shopping. Around 40 per cent will have made some form of purchase online, and with the exception of chatting, their interests spread across all forms of Internet activity. These people may see benefits of the Internet in convenience and speed of delivery.

Classification

Future All of this research shows that e-tailing has been most

successful to date where a multi-channel ‘click and bricks’ approach is adopted.

In this context, we are referring to non-food products, where traditional department stores and clothing specialists have considerable experience of dealing with the non-store shopper through their catalogues and ‘low tech’ selling techniques.

Similarly the early e-tailing specialist pioneers with CDs, books, videos and computing equipment already had an infrastructure to deal with home-based orders.

The grocery sector is much more complex, and home delivery is more associated with food service and added-value products.

The Grocery Market Grocery shopping impacts on all consumers. We all have

to eat! However, our populations are getting older so shopping is more of a chore; conversely, the younger, time-poor, affluent consumers may hate to waste time buying groceries

Online grocery shoppers bought for the family. They were younger, female and better educated with higher incomes. The final survey showed that customer retention rates were good

The two main e-grocers in the UK, Tesco and Sainsbury, claim that their online customers spend more than their conventional customers

The Major E Grocers   Tesco UK Webvan USA

Streamline USA Peapod USA

Background

The biggest supermarket chain in the UK

Started as a pure e-grocer in1999

Started as a pure e-grocer in 1992

Started home delivery service before the Internet in 1989

Investments in e-grocer development US $58 million

Approx US $ 1200 million

Approx US $80 million

Approx US $ 150 million

Main operational mode

Industrialized picking from the supermarket

Highly automated picking in distribution centre (DC)

Picking from the distribution centre, reception boxes, value adding services

Picking from both DC and stores

Current status

The biggest e-grocer in the world. Expanding its operations outside the UK. Partnering with Safeway and Groceryworks.

Operations ceased July 2001

Part of operations were sold to Peapod in September 2000. The rest of operations ceased in November 2000.

Bought by global grocery retailer Royal Ahold. Second biggest e-grocer in the world.

Source: Tanskanen, Yrjola and Holmstrom, 2002Table 9.3: The major existing and former e-grocers

Challenges for E Grocers limited online potential;high cost of delivery; selection–variety trade-offs;existing entrenched competition.

Internet users tend to be trading off the time it takes to shop.

However, as Research has shown, the 58 per cent net gain in convenience benefit is often eroded by ‘leakages’ in the process of ordering to ultimate delivery.

Furthermore, the next two key store choice variables tend to be price and assortment.

Price may have been competitive with stores but delivery charges push prices up to the customer.

Suggestions for E Grocers e- grocery should be a complementary channel rather than a substitute, and that companies should be investing in service innovations to give value to the customer. The customer needs a credible alternative to self-

service, and the researchers suggest that this has to be achieved at a local level, where routine purchases can be shifted effectively to e-grocery.

To facilitate product selection, Web-based information technology can tailor the retail offer to the customer’s needs.

The virtual store can be more creative than the restrictions placed on the physical stocking of goods on shelves; however, manufacturers will need to provide ‘pre-packaged’ electronic product information for ordering on the Web.

The Logistical Challenges Over the past decade many e-tail businesses have failed

primarily because of an inability to provide cost-effective order fulfilment

The greatest logistical challenges are faced by companies providing a grocery delivery service to the home.

They must typically pick an order comprising 60–80 items across three temperature regimes from a total range of 10–25,000 products within 12–24 hours for delivery to customers within 1–2 hour time-slots

Online shopping for non-food items has demanded less logistical innovation

Logistical Requirements First, it is substantially increasing the volume of goods

that must be handled, creating the need for new distribution centers and larger vehicle fleets.

Second, many online retailers are serving customers from different socio-economic backgrounds from the traditional mail order shopper.

As they live in different neighbour hoods, the geographical pattern of home delivery is changing.

Third, online shoppers typically have high logistical expectations, demanding rapid and reliable delivery at convenient times

Home Delivery Channel The home delivery channel terminates at the home or a

nearby customer collection point. It is less clear where it begins. the start of the home

delivery channel is defined as the ‘order penetration point’

This is the point at which the customer order, in this case transmitted from the home, activates the order fulfilment process.

This physical process usually begins with the picking of goods within a stockholding point.

Only when picked are the goods designated for a particular home shopper.

Distribution downstream from this point is sometimes labelled J4U, ‘just for you’.

Contd …. Within multi-channel retail systems, this order penetration

point is the point at which home deliveries diverge from the conventional retail supply chain which routes products to shops.

For example, in the case of those supermarket chains that have diversified into home shopping, the order penetration point is either the shop or a local fulfilment (or ‘pick’) centre, where online orders are assembled.

Both of these outlets draw supplies from a common source, the regional distribution centre.

It makes sense, therefore, to regard the home delivery channel for grocery products as starting at the shop or the pick centre

While the upper levels of the home delivery channels for grocery and non-food products are different the last link in the chain (the so called ‘last mile’) is depicted herein

Distribution of Non Food Items

They are generally supplied directly to the home from the point of production or a central distribution centre

Within these J4U ( just for you ) delivery networks, each order must be individually packaged at the central distribution point.

Within home shopping systems, whether catalogue- or Internet based, there is a large flow of returned product

Distribution of Grocery Items

In contrast to the average general merchandise order, which comprises from one to three separate items, the average online grocery order contains 60–100 items, many of which are perishable and need rapid picking and delivery.

This requires localized order picking in either an existing shop or a dedicated fulfilment (or ‘pick’) centre.

Over the past few years there has been much discussion of the relative merits of store-based or fulfilment centre picking

Store Based Fulfilment The main advantage of store-based fulfilment is that

it minimizes the amount of speculative investment in new logistical facilities for which future demand is uncertain.

Basing home delivery operations at existing shops allows retailers to improve the utilization of their existing assets and resources

Another major benefit of shop-based fulfilment is that it enables the retailer to achieve a rapid rate of geographical expansion, securing market share and winning customer loyalty much more quickly than competitors committed to the fulfilment centre model

The Last Mile Problem In making the final delivery to the home, companies

must strike an acceptable and profitable balance between customer convenience, distribution cost and security. Most customers would like deliveries to be made urgently at a precise time with 100 per cent reliability.

A fundamental distinction exists between unsecured and secured delivery.

Unsecured delivery, sometimes called ‘door stepping’ in the UK, involves simply leaving the consignment outside the house, preferably in a concealed location.

This eliminates the need for a return journey and can be convenient for customers, but obviously exposes the order to the risk of theft or damage.

Contd….When no one is at home, the delivery can be secured in

four ways:

Giving the delivery driver internal access to the home or an outbuilding.

Placing the order at a home-based reception (or ‘drop’) box.

Leaving it at a local collection point.Delivering the order to a local agency which stores it

and delivers it when the customer is at home.

Diagram

Environmental Impact Concerns have been expressed that online retailing is

likely to generate more transport and impose a heavier burden on the environment than store-based retailing

According to the research , which included ‘trucking, air freight, production, packaging and passenger trips’, energy consumption, air pollution, greenhouse gas emissions and

the quantity of hazardous waste were, respectively, 16, 36, 9 and 23 per cent lower in the case of online retailing

If delivery vehicles directly substitute for car trips, the kilo metres saved per shopping load are likely to be substantial – with reductions in the order of 70 per cent or more.

ConclusionsDespite the collapse of the dot-com bubble, online

retailing has been enjoying healthy growth in recent years, and this is predicted to continue.

The future rate of growth will partly depend on the quality and efficiency of the supporting system of order fulfilment.

E-grocery logistics has presented more formidable challenges

The more successful ‘bricks and clicks’ retailers may eventually have to invest in new facilities to accommodate future growth

E commerce in India ET 17/2/16

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