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Logistics & warehousing in e-commerce

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The origins of retailing via the Internet in India can be traced back to the 1990s but this phenomenon really took root when started operations in 2007 and it has come a long way since then. The current smartphone revolution has ensured that virtually every Indian can have access to popular e-commerce applications such as , and Flipkart, and bridge the massive gap that other modern retail formats have struggled with, i.e ‘Customer Reach’. India has the second largest Internet usage base with broadband penetration of approximately 40 percent. The total number of internet users in India stands at over 500 million or close to 40 percent of the Indian population, yet the share of e-commerce in total retail revenue is just 11 percent in the 7 major cities.

Still a fledgling phenomenon, the share of e-tail in total retail revenue is quite low but growing at great pace. E-commerce retail has caused a significant change in the lifestyle of Indian shoppers, from how they shop to what they shop. Strong underlying drivers such as improved access to Internet and smartphones,attention to marketing, ease of shopping for customers, modern payment options, deals and discounts and the rapidly changing lifestyle needs are fuelling the growth of the e-tail market. Projected to grow at 65 percent annually, the e-tail market size that stood at approximately $3 billion in 2014 is expected to be a $70 billion market by the end of 2019.

The market is dominated by the top three players (Flipkart, Amazon and Snapdeal). They control almost 90 percent of the market share in the industry. These large players have diversified their product offerings and are continuously expanding it to have a greater footprint on the industry.

Role of Logistics in E-Tailing

The movement of a product from a seller to the buyer in the e-tailing scenario involves several stages. These stages or processes have ensured organised growth in the e-tail logistics segment and thus increased the flexibility and scalability of the whole system. These processes are listed and briefly discussed below:

First-mile Logistics: Goods are picked up from the sellers and transported to the e-commerce retailers’ mother hub or fulfillment center as per the logistics model adapted. Post the arrival at the fulfillment center, the product is checked against the transport receipt, following which, the product goes through a strict quality check, before it goes on to the shelf. Thereafter, inventory is updated through the Warehouse Management System (WMS), which reflects in the stock report generated.

At the Fulfillment Center (Mother Hub): Post first-mile logistics, the product lies on the shelf until fulfillment, which involves sorting, picking and packaging of products. Once the order is placed on the e-tailer’s website, a pick list is generated, and the order is picked and consequently updated in the WMS. Then, the products are packaged, categorised and moved to the mother warehouse, from where they are sorted for last-mile delivery.

Line Haul: The process involves linking the fulfillment center with the distribution/ dispatch center, via road, rail or air, subject to the most efficient transit time and costmatrix.

Last-mile Logistics: This phase involves the dispatch and shipping of products from the delivery/ dispatch center to the end customer, from where they are shipped out to the customers. This leg of the entire logistics chain is dependent on manpower and infrastructure in terms of the number of delivery hubs, delivery vans and bikes.

Reverse Logistics: Another important aspect of E-commerce retail is product returns, which can be customer initiated or due to a logistics failure. The returned products are cycled back into the inventory, restocked and re-listed or sent back to the seller due to quality issues. These involve complications such as refund, exchange and replacement that increase the overall cost of the supply chain. E-commerce retailers are endeavouring to minimise returns constantly by including as much information about the products as possible, such as detailed technical specifications in case of electronics and size and colour information in case of apparel. The e-tail consumer today also has the option to cancel his purchase even after the product has been dispatched from the dispatch center.

Cost of E-Tail Logistics

The cost of logistics for e-commerce retailers can be split into components of consolidation, line-haul, sorting (this comprises a major chunk of the fulfillment costs) and last-mile delivery. Return logistics is a relatively new factor that e-tailing companies have to contend with, and its costs are estimated to be approximately twice those of regular delivery charges. There are a myriad of factors that affect the logistics costs of an e-tailer.

These costs vary by type and volume of delivery and the extent of technology used. Deliveries can be characterised into standard and special/slotted deliveries. Standard delivery costs are usually borne by the retailer but for special and slotted deliveries (such as one-day delivery, prime delivery) the cost is passed on to the buyer. In addition to this, there are expenses on tax and labour. Other related expenses such as misrouting, lost shipments and handling damages add up to the costs. While the expenses mentioned thus far depend on sales volumes, the e-tail logistics player also has to incur huge investments in terms of fixed costs such as warehouse development and fl eet procurement.

Major Trends in E-Tail Logistics

The e-tail industry players have been the first movers in adapting to new trends in the logistics market. They have quickly adopted new technologies, optimised their supply chain network and encouraged state of-the-art logistics infrastructure. Following are a few examples of trending supply chain practices in the e-tail industry.

Enhanced Use of Technology: The boom in the Indian E-commerce sector can be attributed largely to the enhanced use of technology, which has helped improve E-commerce in areas across the supply chain, inventory management, improve customer experience and minimising wastages. Whether it is integration of the E-commerce players’ system with that of the 3PLs via an Application Programme Interface (API) or it is the use of card on delivery system, the E-commerce industry in India is using it to take their business forward. Technology is today an inextricable part of the supply chain and it will prove to be the critical differentiator that will dictate the pace of evolution of the e-tail logistics industry.

Shift Towards Outsourced Fulfillment Models: The Indian e-tail segment is growing and evolving at an ever increasing pace. Initially, e-tailers were dealing with moderate product volumes, limited geographic reach, and hence managing operations in-house was relatively less complex. Higher costs and limited external capabilities of 3PLs earlier also drove several e-tailers to manage their fulfillment in-house. However, with an increase in the scale of business and the emergence of high-end logistics players in the e-commerce industry, the sector seems to be undergoing a modular shift toward contracting out a range of fulfillment processes including delivery. An emergence of tech-based logistics start-ups has also enabled the e-tailers to outsource to these ‘high values–low cost’ logistics models.

Seller Driven Logistics: There is also a growing number of cases where vendors handle packing as well as dispatch.

This programme is however available to sellers who have been associated with the marketplaces for a considerable time and have been consistent in terms of sales as well as customer feedback. This is also dependent on the geographical footprint of the seller. Such a model is useful when it does not make sense for the E-commerce player to pick up a product and transport it to the mother hub and then to the buyer.

For example: a particular seller is not really far away from the point of delivery, but the e-tail fulfillment process at the mother hub lies totally out of the way and constitutes an unnecessary delay. At such times, the e-tailer asks the seller to drop off the product at the point of delivery.

Reverse Logistics: Returns management is an increasingly important part of the e-tail business, specifically for E-commerce retailers perpetually endeavouring to bridge the ‘Look & Feel’ gap that a brickand- mortar store provides. The companies have a return policy of 7to 10 days and also 30 days in certain categories. 3PLs currently do not off er real-time updates on the status of reverse shipments. However, 3PLs are addressing this issue by having dedicated returns management centers that take care of quality checks, relabeling and handover of cargo for return to warehouses of sellers. Investment is expected to ramp up, e-tail players will employ technology for their reverse logistics chain, along with a dynamic and measured policy to tackle fraud and tampering during reverse logistics. Most E-commerce firms strive to provide a hassle-free returns’ system. For example: The whole process on Amazon takes about 10–15 days including the refunds and the process is largely transparent and hassle free.

Faster Delivery Models: There is an increasing trend of same day and 1-day deliveries in the Indian E-commerce retail market for most product categories. Additionally, international as well as domestic retailers are offering deliveries not only within a day or two but also within specific time-slots, which are 90 minutes to two hours long, for an additional charge. This model has been particularly gaining popularity for grocery products. Amazon Prime and Flipkart Assured are the most common examples of the faster delivery practice in the industry.

Challenges To E-Tail Logistics

India is arguably the most promising consumption market in the world today but reaching all of these potential consumers is its gravest challenge. Last mile connectivity to the Tier II and III cities has been a virtual roadblock in an infrastructure starved nation such as India. Despite that, we have seen unprecedented growth in E-commerce retail over the last 5 years. This is primarily due to the resourcefulness and adaptability of the Indian logistics industry. Following are the major challenges that E-commerce logistics players need to contend with:

Uncertainty of Demand – Demand estimation is a perennial issue for the e-tailer and by extension, to his logistics provider. Demand is a function of several variables and this makes predicting demand a very challenging task. A massive and diverse customer base, seasonal changing patterns, paucity of historical data for new products and markets, disruption in social and behavioural norms, shifting buying criteria of customers and disruptions in demand patterns from competitors make estimating demand a very diffi cult task. E-tail is all about getting the right product at the right time at the right place and this uncertainty results in an invariable increase in logistics costs and delivery timelines.

GST Compliance – While GST will eventually streamline the supply chain by simplifying the erstwhile draconian tax regime, it does demand compliance from all businesses, which will cause teething issues in the short term. Most E-commerce companies are worried that there will be a shortage of inventory available, as suppliers are yet to get GST compliant and till such time, E-commerce firms will have to rely on inventory in their own warehouses and incur extra logistics cost for movement of goods to different demand clusters in the country.

Returns Management – Providing customers with seamless returns is a costly affair. It requires a logistics chain, which includes collection of products from the customer and returning it to the seller. However, processes handling reverse logistics are yet to be streamlined and the incessantly increasing volumes are perpetually increasingly logistics cost pressures to the already bleeding E-commerce player.

Infrastructure Bottlenecks – While the e-tail model can reach the Indian customer in the vast peripheries of the country and get him acquainted with the available products, actually delivering the product to him is quite another question. Inadequate transport infrastructure is one of the major reasons for high logistics costs in India. Connectivity beyond the metro cities in India is very limited, which puts significant limitations on the delivery capabilities of logistics services providers (LSPs).

(Knight Frank India)