How e-retailing is affecting traditional supply chains & logistics

Traditional retailers are pressed between a brick and a click.

Don't want to miss the best from Business Standard?

As e-retail entrenched itself in the first decade of the millennium, it jostled for space and began to push the traditional or brick-and-mortar retail towards the sidelines. While the debate whether e-commerce is overhyped and a bubble continues, the presence of online retail is already transforming Indian supply chains akin to their counterparts in other countries.

At first, the older, traditional retail ignored the new kid-on-the-block, e-retail. Now in a fit of panic, organised retailers have opened e-commerce channels to interact with the customer, the idea being to engage with the customer in multiple formats: more channels might be better—a multi-channel approach or an omni-channel approach; if not footfalls in the physical store, then, at least clicks on the website may convert into sales. But this has not eased the situation; in fact, it has worsened due to supply chain complexities.

The backbone of all retail is supply chain. But the supply chain models of brick-and-mortar retail and online retail are different. Traditional retail chains follow a sequential multi-tier structure: manufacturer, centralised warehouse, regional distribution centres and physical stores. As a result, the movement of goods is slow, more inventory is distributed in the entire chain and the operating cost of maintaining various facilities, especially the stores, is substantial. Customers interact with the retail staff in the store and their shopping experience is store-centric.

Whereas e-retail does away with multi-echelon distribution centre model and ships the item direct from the warehouse to the customer without maintaining any of the facilities and having to bear overheads. The online shopping experience is almost impersonal.

The pressure on the e-retail chains comes from the type of shoppers who order goods online. Consider typical young or middle-aged, impatient shoppers expecting delivery of items within a day or two, if not in a few hours, or else they will click and order on a rival website. Logistics, therefore, plays an even greater role in these supply chains: the burden of last-mile delivery is on the e-retailer, unlike a brick-and-mortar retailer where you would drive to the store to pick up the item. Keeping both logistics costs lower and delivery-time lesser is always a trade-off, a slippery one at best.

In conventional retail, the logistics cost are only up to the bulk movement of goods to main store. But an e-retailer has to pack the items to prevent damage during transit that are in small lots of parcels, which delivery boys often carry in bags slung over their shoulders. Moreover, free shipping tags along with most of internet sales. For the online shopper, the delivery boys are the first and only flesh- and-blood contact with the company, and their interaction with the customer—the last leg in the supply chain—may sweeten or sour the overall experience of the customer. Oddly, though, the delivery boy may be from an independent logistics company, the online retailer bears the brunt of the shopper.

Realising the importance of logistics, many online retailers, especially the big ones, have set up their own companies or are moving in this direction instead of hiring third-party logistics (3PL) services providers and courier companies. Flipkart has eKart as its logistics arm, while Amazon set up Amazon Transportation Services Private Limited in India.

Supply chain managers of the traditional retailers who have added an e-retail arm are a harried lot as items may have to be picked up from anywhere in the entire chain, often from the store itself, to fulfil a sudden online order. On top of that, a pure e-retail supply chain has hassles of its own. Such a chain has to take care also of broken, defective and unserviceable items. Almost 30 % of goods sold online are returned for various reasons, some as flimsy as customer not being available or simply refusing to collect the items—that is why many online sellers no longer offer ‘Cash on Delivery’ facility in a few states in India.

Reverse logistics is a demanding task in these chains as no customer is as impatient and may be irate, as an online shopper  sitting at home with an unusable item, more so if she has paid in advance.

Indian e-retailers are yet to turn profitable. While deep discounts and free-shipping will remain for some time as the e-retailers slug it out among themselves, the only other option to reduce the bleeding is to cut operating costs—which are mainly  supply chain  costs. But, again there are trade-offs at each step. To maintain high service levels, many e-retailers are building smaller warehouses in urban areas to be in vicinity of consumers, despite the high property costs, rather than having bigger warehouses in the outskirts of cities.

After adding an e-retail arm, organised retailers find themselves competing with pure e-retail companies for the online share. But they may end up cutting off their nose to spite their own face, by harming their traditional retail business. Across the globe, late entrants in the field like Wal-Mart— an apotheosis of supply chain efficiency—are finding it difficult to integrate e-retail with existing business model.

Traditional Indian retailers have never excelled at supply chain management; their stores are saddled with blocked inventory. Unifying different supply chains and evolving into an omni-channel business is no mean feat. Until then, the Indian brick-and-mortar retailers will remain pressed between a brick and a click.

Prashant K Singh is a logistics and supply chain management professional with the Indian Air Force. The views are personal.

He tells how supply chains & logistics affect every thing around us on his blog, Unshackled, a part of Business Standard's platform, Punditry.

He tweets as @ZenPK