Logistics : The Heart of E-Commerce

What can make your e-commerce business succeed? A simplistically amazing website? Or the best catalog put to display? Or a strong marketing and advertising engine? Or a good vendor base that ensures the timely supply of goods?

You would definitely argue that a perfect mix of all these is necessary. But the only tangible experience of yours', a customer will have; is when he/she would unpack the packet. For the customer, that's the only moment of truth. And that's what puts Logistics at the heart of e-commerce.

How E-Commerce Logistics Is Different From Traditional Logistics?

• Couriers and speed post had been existing in India and delivering goods for decades. But sadly, they weren't meant to serve the fast-paced delivery requirements of e-commerce. In a typical, postal system, a letter from Delhi to Bangalore would take 7-10 days for delivery. E-commerce couldn't afford that; as it was competing with the retail industry where consumers have a way too many choices. In fact, when Flipkart, initially approached traditional logistic companies, it was shown the door because no one could afford that service level and such fast commitments.
• E-commerce promises the fastest delivery no matter what cost the online retailer has to bear but traditional logistics meant delivering goods at low operational cost. Suppose, 100 parcels (each with an average weight of 2 kg) have to be delivered from Delhi to Noida in a day. In traditional logistics; a mini truck (van) would collect all those 100 parcels in bulk and then go on to deliver. If 20 minutes is the average time to deliver one parcel; it would take 33 hours to deliver all the parcels. Some being postponed to the next day while some being delivered at a time as ugly as 11.55 PM. And that's not exactly what E-commerce promises to its buyers. Instead, 10 bikers employed with 10 packets each; can deliver to all the customers much faster. That's put the expenses on end mile delivery to 50% for e-commerce compared to 20% for traditional logistics.
• For e-commerce, logistics is core to its operations. It's not a compliment. What if a few consignments got delayed to an offline clothing outlet? The offline retail outlet often houses sufficient inventory in t's warehouse. It can even sale the mannequin copies to it's the customer but less inventory and low warehouse operation is the core of e-commerce. It just has to deliver what has been promised.

The Economics of E-Commerce Logistics

End to end logistics accounts for 50% of the total logistics cost. The average salary of a biker performing end mile delivery in Delhi NCR is around 12000-15000 INR. Adding overheads like incentives, fuel costs take the cost to Rs.25,000. Considering, 10 hours working time, (within an overall standing and transfer time of 24 minutes for each delivery) a biker who can deliver around 20-30 kgs of goods per day. That sums to around 625 kgs (25x25 days) delivered per month. (The delivery agent wouldn't work for more than 25 days a month.)

25,000/625 gives an approximation of delivery rate at 40 rupees per kg. Adding the overhead costs, like multiple attempts at delivering and other operational costs, puts the figure to around 75 rupees per kg. As the end to end, logistics accounts for 50% of the total logistics cost, the average delivery cost per kg would be somewhere around Rs. 150 but again it varies for different demographics (traffic, population density, etc.).

The low-cost delivery model isn't profitable at this moment. The e-commerce companies are heavily cross-subsidizing logistics operations.

Is a Low-Cost Delivery Model Sustainable?

The fact remains that, India is one of the cheapest delivery destinations in the entire world, owing to one of the cheapest labour force. The e-commerce companies compensate this, by either charging customers a premium charge for faster delivery or reduce its margin. At present, most of the major e-commerce players in India already have a negative margin.

It's a glaring paradox. E-commerce logistics cost is bound to rise every year but the pressure on e-commerce is to reduce costs. It opens up a vast avenue for digitalization, technological upgradation and innovation.

The Case of "Reverse Logistics"

What if the cloth doesn't fit my size? What if the product isn't exactly what I am looking for? What if the product isn't the same as I saw and expected? E-commerce in India suffered from this trust breach and e-commerce players like Myntra aggressively pitched for refunds.

On average, 30% of consumers making a purchase online, return the good. Customers have become more choosy than ever and policies like 30 days refund policy make Reverse Logistic an inevitable reality.

Though reverse logistics is costly; it is a competitive advantage that e-commerce companies offer. It is their cost of doing business.

Types of Reverse Logistics

• Multiple attempts - (Where a delivery agent makes multiple attempts to deliver the same consignment.)
• Customer Initiated Delay - (When a customer asks for a delay in delivering owing to personal reasons. - out of station or being on leave)
• Instant Return - It usually happens when customers refuse to take the consignment and have opted for Cash on Delivery. They may no longer need the product.
• Partial Return - Partial return is built in the business model. Jabong would deliver a 5 and a 7 sized shoe too when you have ordered a 6 sized shoe. What if the size 6 doesn't fit in; what you have anticipated? You can take 7 sized shoes and return the rest.

Implications of Reverse Logistics

• Reverse Logistics is a very costly affair.
• The entire process is very cumbersome. Logistic companies have no idea about the online retailer's Stock Keeping Unit (SKU) and the task of collecting, verifying and accepting returned packages lies with delivery agents who are just not skilled and professional for the said job. The path back to the warehouse and vendor is a long journey.
• Most of the goods get destroyed in the reverse logistics process. There are players in the market who have emerged in the recent past; who take this returned goods from warehouses at a lower cost and sell it or offer logistics back to vendors.

Future of Reverse Logistics

According to a report in the Wall Street Journal, Amazon has been reportedly revoking Prime memberships and banning shoppers on its website for those who return too many orders or return items for reasons deemed unacceptable.

In Canada too, H&M no longer accepts returns in-store from online purchases, forcing consumers to use and pay for postage.

Best Buy, Home Depot, and several retailers in the US are using a service that scores customers’ shopping behavior (not unlike credit-rating agencies) and imposes limits on the amount of merchandise they can return. The system can override the store’s return policy and refuse to refund a purchase.

Cash Management and Logistics

3/4th of the e-commerce transaction in India happens through cash. "I won't pay until I get the good in my hand" is an inline Indian phenomenon.

Future of cash in Indian e-commerce

Cash in Indian e-commerce setup would keep on increasing despite digital push as the e-commerce would reach to people in non-metros. Gaining trust and reaching to people who still don't prefer to pay unless they get tangible goods, will be the main reason.

How cash cycle impacts e-commerce players?

Suppose, a logistic partner in a city delivers 10,000 consignments in a day; with an average value of each consignment Rs. 1500. Since the overall cash payment is around 70%, that's near to 1 crore cash collected every day.

The freight charge per package charged by the logistics company is Rs. 200; thus the total freight charge would be Rs. 6 lakhs.

The logistics company has 1 crore receivable against a freight fare of 6 lakhs. This money is used by these logistics companies for working capital; until they pay it back. Initially, the window for paying the money back was 30 days and this was one of the main reasons why Flipkart created E-kart so that it can get the money instantly.

Market Share For E-Commerce Logistics

• Traditional logistic player (existing for 20-25 years) like Bluedart, FedEx, Gati controls 70% of the e-commerce logistics market. These players have modified themselves with changing requirements and have penetrated deep into the market owing to their huge network and workforce.
• Leading e-commerce companies like Flipkart and Jabong came up with their own 'last-mile delivery' companies; eKart and GoJavas. These companies are often called as 'captive companies'.
• Sensing the shooting growth of India's e-commerce to $850 billion by 2020, there are players like Ecom-Express, Ship Rocket who exclusively handles logistic only for e-commerce.