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    E-commerce needs a stronger supply chain backbone

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    E-commerce and other B2C businesses are strongly gaining ground and establishing themselves as a serious format of organized retailing in India. While many companies set up in the past few years have seen success, there is no doubt that they have had to face some of the most tricky and difficult business environments as they innovated and broke their way through. From what started as an offering to an educated buyer looking for convenience, e-commerce has now quickly spread into tier II, III and IV cities of India. A new piece of technology or the latest fashion trends generally made their way into these towns slowly, even as the metropolitan India kept abreast with the world’s top picks. Their reach and their ability to stock and sell more items than would fit in an entire mall are their two biggest business differentiators. Unlike physical retailing, through brick-and-mortar shops and trading stores, online and TV retailers are not bound by the physical constraints that constrict the distributor-dealer-retailer model of physical shops. They, through their web portals, can offer unlimited shelf-space and are not restricted by operational timings and geographical boundaries, providing an opportunity to cater to wider markets at a comparatively lower cost.

    However, the key phrase not to be missed is ‘no geographical boundaries’. It requires a robust supply chain and last mile distribution network, as well as an established reverse logistics network in India, to cater to the logistics requirements of the e-commerce companies. E-commerce and other B2C enterprises pose a very unique set of logistics needs, that’s not so readily established or available in India. This is also the reason why we have seen many e-commerce players such as establish their own delivery network. Even though document courier companies can boast of a nationwide reach and time definite delivery, they do not possess the expertise to deliver commercial value goods. Their services are used to deliver documents, which do not always require the recipient’s full attention upon delivery – no VAT and check-post issues, no COD, no inspection of goods and no real complication if the documents get lost in transit. Express cargo logistics service providers are well equipped at handling commercial cargo, the complexities associated with it and the sense of custodianship that gives comfort to the customers. However, they are used to delivering bulk loads at the premises of distributors, retailers and shop establishments. They have a working relationship established over time with these dealers and distributors and hence every link in the supply chain is comfortable working with each other.

    E-commerce though requires a mix of the two – so unique a mix that it is very difficult to try and successfully complete the operations in one type or the other. Additionally, this is a new experience even for the customers, who have emotions and desires tagged with the shipment. There is a challenge converting the act of delivery to that of a delivery experience. Apart from behaviour, etiquettes and responsiveness, services like installation of equipment or instruction on use will also have to be offered at some stage. B2C companies require deliveries of commercial value cargo, but for one-time and hence unknown customers, with the added complexity of cash-on-delivery.

    India never had the need before to establish a supply chain specifically to deal with such kind of requirements. Retail required an express-cargo or traditional transportation backbone, while documents required a standard courier service, both of which exist in various forms and levels of network and reach. However, as the e-commerce industry in India takes to newer heights, the challenge to build a logistics backbone and infrastructure for distribution pan-India is a daunting task, rife with challenges for both the e-commerce companies as well as for the logistics service providers.

    Challenge 1: VAT Regulations

    The current VAT regulations actually do not permit, in most states, for material to be sold to an individual in one state, when it is being directly shipped to him or her from another state, without the completion of tedious VAT formalities and paperwork. Currently, while most e-commerce loads are being treated as an exception by VAT authorities as the product is being bought for individual consumption, it is a big question mark on the legality of an inter-state transaction. Further, there are Octroi and Entry Taxes applicable in many states and municipal limits, which are local duties applicable on goods bought from outside. These require duty to be paid at the time of entry into that jurisdiction, which is then to be collected later from the customer at the time of delivery. The end consumer is not always aware of such additional expenses, and can at times be dissatisfied with the enhanced ‘true cost’ of the product, hence resulting in returns or rejects (or worse, a brand-damaging tirade on a social network site). A seamless GST may be a long-awaited answer, but till then, the state governments need to find ways to bring clarity on how to handle the inter-state sales.

    Challenge 2: Road Distribution Network

    The second challenge is a direct result of the first. Due to complications of transactions at various VAT check posts and the inability of document courier companies or last-mile delivery companies to provide logistics solutions that fit the legal framework, there is a heavy bent towards Air services being utilized for interstate movement of B2C shipments, rather than availing a much more economical and viable distribution option via Road. The majority of e-commerce companies are currently shipping their goods from their warehouses to the end consumer through the Air network, of courier companies or directly the airlines themselves. It cuts down the hassles of clearing multiple VAT check posts over a long haul (let’s say, for example, that if central warehouse is in Delhi, and the material has to be sent to customer in Bengaluru, then by air, negotiations are only required at the Bengaluru check post, whereas by road, we could be looking at over 20 such check posts at most state borders). While many companies feel that Air is also a necessity to satisfy the customer who is unwilling to wait very long for the shipment, many have started to already reach the levels of engagement with their customers that shipping by road is just as satisfying to the customer, and a whole lot cheaper. But very few logistics service providers are able to offer that as an option, specifically to inaccessible and remote places, and hence air services remain, not the preferred but the necessary mode of transport. With more electronics, appliances and other bulk orders, the cost of shipping is increasing exponentially for the companies, who are unable to pass on this cost to their customers. A robust and pan-India road network is critical to the evolution of the e-commerce companies as they expand their product base and their customer base to the deepest parts of the country.

    Challenge 3: Cash On Delivery

    The big issue of credit card penetration (or actually, non-penetration) was resolved very quickly by the e-commerce pioneers who gambled with and introduced ‘Cash on Delivery’ system, a unique collection process that allowed the customer to make cash payments upon receiving the goods. This has been the single biggest game changer in the e-commerce world, with up to 70 per cent of all sales happening through this mode of payment. However, as with the first discussion point, the legality of the entire transaction here remains again under a cloud. As per RBI rules, a service provider (such as a collection agent or in this case, the logistics service provider) can collect cash from, in this case, a customer. However the exact monetary instruments collected (same ‘note’) must be handed over directly to the e-commerce company. This means this money cannot be deposited in the service provider’s own account before being transferred to the company. Further, the issue of change of title also rises – where this material can be deemed sold to the logistics company who has further ‘sold’ this ahead to the end-customer, leading to a VAT liability. The solution to both these cases is to collect on behalf of the e-commerce company and deposit directly in their bank. However, to do so, it means huge hassles of reconciliation across various delivery locations (as many as 500 cities, even), and a risk of banking errors, fraud and a huge wastage of human effort. Again, this area too requires some clarity, as it is the very foundation of success for e-commerce, and it is very clear that going ahead this will continue to play a major part in the development of the B2C economy across every square inch of India.

    Challenge 4: Reverse Logistics

    For every 100 packages delivered successfully, 6-10 are returned back due to various reasons – product defect, customer dissatisfaction or simply a change of heart within the ‘free return’ period. In all cases, the customer faces a major issue of how to send this back. E-commerce companies have started to take this challenge very seriously as this too is a major source of customer satisfaction or dissatisfaction. Providing forward logistics is far easier than coordinating pickups from residences of people, across all locations. Proper packaging is a prime concern, as the original box may or may not be available (and even if it is available, it may or may not be transit worthy). Add to that, the issue of authenticity of the product and its actual physical condition. A robust reverse logistics network is just as key to the success of e-commerce as a forward distribution network is, but the definition of robust is even more stringent here, with proper guidelines and transparency throughout the process a must.

    Challenge 5: Skilled Manpower

    With a sudden and exponential growth in B2C businesses across the country, there is a serious shortage of skilled experience in the supply chain world. As shared earlier, B2C e-commerce/ commerce requires a very unique supply chain setup, which means old experience can count for some, but not for everything. This skill gap is not just in the logistics sector, but in the entire e-retail world, partly driven by the fact that with business models constantly evolving, no one is able to quite comprehend what skills are actually required. Further, with new companies and new models being launched every other day, and a shortage of skilled manpower in general, there is a continuous stream of employees joining and leaving, leading to issues in ramp up, stability of operations and in the overall long-term business plan of any organization.

    These challenges are only some of the very many faced by B2C e-commerce players in the domain of supply chain. But their resilience and ability to innovate, and the confidence to tackle any business impacting issue has been phenomenal. Let us be clear – the e-commerce and similar B2C platforms are here to stay. They have demonstrated the customer need, a path ahead and have worked fearlessly to overcome any challenge (such as establishing their own logistics support system to tackle the unique problems). Now they need the experts to step in and put in place an efficient and optimized logistics network, and the statutory authorities to shed clear light on the various grey areas and lay down the guidelines for all. With many retail laws still archaic, they do not fit into the new age requirements, and just as the e-commerce companies have evolved to change the way the game is played, it is time for all support services and statutory bodies to step up and create the ecosystem for a more electric future!

    About the author:  , Director – has firmly entrenched itself as the ‘Knowledge Leader’ and ‘Market Leader’ of the supply chain and logistics industry in India. With its fleet of over 3600 GPS enabled vehicles traversing 6,00,000 kms a day and a strong network of over 580 offices, caters to diverse business verticals ranging from Apparel & Lifestyle, Healthcare, Engineering & Electrical, Hi-Tech, to Publishing, Automotive, Institutional, FMCG andConsumer Durables.