The Commerce of E-Commerce: Who bears the Supply Chain Costs?

E-Commerce is steeped more in the "Commerce" question than in the Electronic enablement.

First of all when commerce moves from buying from a retail outlet to ordering and getting delivery at home, the most expensive block is moved from the process, the block of the retail outlet itself which blocks an expensive space in the middle of the city; coming at a stratospheric cost whether you buy that space or rent it, which is the biggest fixed cost in the entire chain.  

IKEA understood this well before the others and put their stores not within the city but off limits of the city to benefit from the lower costs. But when you do not need  to be off limits of the city and you can operate from any distant place which will only be a warehousing space from where you could ship to the end customer, the expensive part of the retail cost is taken care in your commerce.

But it makes a disruptive change in the whole end to end chain from production, warehousing and distribution. The logistics cost of the end to end chain will depend on a number of different factors, which often vie against each other and we get to an optimization puzzle.

E-Commerce throws up this challenge that when you have to maximize return on investment for the end to end chain, which part of the chain do you need to reconfigure given that you have thousands of shipping points in the final journey instead of a single one to a retail outlet?

Would the final cost of end to end chain remain the same in the new E-Commerce journey or are there different puzzles to be solved?

Actually we are dealing with multiple puzzles here. One puzzle is fulfillment itself and here India is still struggling to make a normal fulfillment process work, which means if an item is ordered and it is available in the warehouse, whether it can be delivered within a given time frame.

This puzzle is a logistics puzzle, where you have multiple routing and the optimizer will determine the best option, which may not be the least cost option if you have a number of constraints and you are trying to drive your business on the principles of fulfillment excellence.

But surely the fulfillment model will move to the ultimate bottom line question, whether or not the investment in E-Commerce delivered the ultimate value, which is return on equity.

When this question is to be taken up, we have a range of puzzles to deal with. The first is the outlay of fixed costs and variable costs. Most E-Commerce firms have not taken the ownership of the fixed costs in the entire chain and left it to other partners, barring the long term players like Amazon, who are the real end to end players.

Does the evidence suggest that owning the entire supply chain fixed cost is the best and most optimum way to deliver value?

I am not sure as this question has many imponderables to be looked at. The most important is financing itself as most of the supply chain companies do not have the wherewithal to own the entire fixed costs of the chain.

On the other hand when multiple actors own different parts of the chain fixed costs, we have a loss in value; the value falls through the cracks in the chain.

This allows for a multi-level analysis, at one level we have the binding urge to look at the delivery model and how efficient is the delivery model, here we focus on the variable costs of the chain. But eventually fixed costs of the chain have to be owned and return on that must be calculated.

Sharing the fixed costs and variable costs among the different partners come at a cost; finding value in the entire chain has its associated power equations to be dealt with.

In India when logistics parks and warehousing space is exploding to the roof and more investments must be made here, we must understand the nuances of where the value will come from.

Mere growth is not good enough in E-Commerce, it must be profitable, eventually.