ONLINE RETAILING: IMPLICATIONS ON

SUPPLY CHAIN PRACTICESPRESENTED BY:

ASHUTOSH SINGHIIM CALCUTTA

Online Retail Categories

High Growth Categories

Online Retail market in India( in Rs. Billions)

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15P

2015P-2016P

0

100

200

300

400

500

600

15 24 38 5891

139

224

334

504

Global India26% 36%26%

39%20%16%14%6%13% 3%

15-24 years 25-34 years 35-44 years 45-54 years 55+

Online Consumers Age ProfileConsumer Value Proposition

Demographic trends• Internet user base - about 250.2 million as of June 2014• Online shoppers - 10 million ; growing at an estimated 30%

Socio-cultural Influence• 75% of online users between the age group of 15-34 years, India is one of the youngest online demographic globally

• This user group is more susceptible to changes in purchase/ consumption behaviorTechnological Development

• Penetration of internet connection – approx. 21% and Availability of high speed connection

• Better security protocol for online transactions• Advancement in packaging technology and logisticsMacroeconomic Impact• Factors like spiraling inflation and slower economic growth failed to dampen the online shopping frenzy as more and more companies opted for selling wares through the internet route, offering innumerable options and discounts to buyers

• Demand-supply gap in physical retail categoryPolitical-Legal Pressures

• 100% FDI in single and 51% FDI in multi-brand retail resulting in arrival of companies like Walmart

• 100% FDI allowed in B2B online retail business but restrictions on online B2C business

E-commerce Industry in India

ONLINE SHOPPING: CONVENIENCE IS A KEY FACTOR

Source: pwc

Traditional retailing on a decline• Voluntary Conversion• Losing Cost structure• Free Delivery, Free

returns• Subscription

Commerce

ONLINE TRADITIONAL RETAILING• Unlimited assortment or Long

tail is a key value proposition• Bulk negotiation of items and

sold through proper channel• Assortment selection to fill

limited shelf, cut long tail• Inventory only at one level:

Distribution centre• Inventory value is mostly driven by

scale of assortment

• Inventory exists upto 3 levels: Distribution center, region and store; mostly driven by SKUs

• High number of orders, high throughput growth

• Significant need for small order size/packing

• Lower number of orders, stable throughput

• Limited need for small order size/packing

• Freight carrier picks up large number of shipments from distribution centers

• Logistic costs per item are high

• Often company-owned fleet that delivers between distribution centers and to stores

• Logistics costs per item are low • Return by mail returns item faster

to sellable inventory • Often extensive service levels and

generous policies

• Return to store can create reverse logistics complexity

• Return to store creates additional touch point to retain and up-sell

THE COMPARATIVE PICTURE

• India’s online retail industry is very small compared with both organised and overall (organised + unorganised) retail in the country.

• Expectation in industry’s revenues to grow to around 18 per cent of organised retail by 2016 from around 8 per cent in 2013. Still that be just 1% comparing with 9-10% in the US and UK, and around 4-5% in China.

• E-commerce has grown to become the second largest website category in the list of top Indian domains

• See the top 15 e-commerce sites in India in order: quikr.com, amazon.com / amazon.co.uk, flipkart.com, alibaba.com, snapdeal.com, homeshop18.com, naaptol.com, indiamart.com, infibeam.com, ebay.com / ebay.in, jabong.com, myntra.com, seventymm.com, inkfruit.com, tradus.com

(Source - http://techloy.com/2012/10/31/e-commerce-sites-become-indias-second-most-popular-destination-on-mobile-report/)

INDIAN ONLINE RETAIL SCENARIO• Low Internet Penetration. • Mobile phone usage may bolster this rate, as more than 900 million Indians have mobile phone subscriptions, but only 10 percent of mobile subscriptions are for smartphones.• India's poor logistics and trans portation infrastructure outside of tier 1 cities.• Low credit card penetration and complex tax laws • 58 percent of online users make purchases, a figure that will increase as retailers are able to improve consumer conditions.

GLOBAL ONLINE RETAIL

CLASSIFYING WORLD ONLINE RETAIL

• U.S. Online share of overall retail sales 2010–2015 forecast key takeaways • Online sales will grow at a

CAGR of 10% • Multichannel customers have

significantly higher lifetime values than bricks-and-mortar or online-only customers

GLOBAL ONLINE RETAIL ENVIRONMENT

GLOBAL SCENARIOUS Market:

The online retail market remains fragmented—more than 450 retailers account for 70 percent of sales, led by online-only giants Amazon (17 percent market share) and eBay (6 percent).

Online shoppers in the United States expect competitive prices, easy payment options, quick delivery and free returns, and top-notch customer service. They also value the option to purchase items and pick them up in their channels of their choice.

Americans are warming up to the idea of collaborative and personalized online business models that offer shoppers a more engaging retail experience.

Retailers are making significant investments to integrate channels, given the value Americans place on making purchases in the channel of their choice.

Retailers are making significant investments to integrate channels, given the value Americans place on making purchases in the channel of their choice.

China Market:

China's $64 billion online retail, over the next five years reach to $271 billion, due to infrastruc ture improvements, increased Internet access for rural regions, rising wealth, and consumers' growing predisposition to spend.

A "race to the bottom" pricing mentality dominates in a competitive market, as retailers lowering prices to increase sales and gain market share.

China is in the early stages of multichannel retail as retailers slowly begin entering the online space. Multichannel crossover is rare as most Chinese retailers operate their physical store and online businesses separately.

Logistical challenges, particularly outside of urban centers, have kept China from its full online retail potential.

More than 80 percent of Chinese consumers say they use social media to learn about products before purchase, and 66 percent write product reviews after making a purchase.

Brazil Market:

The Brazilian market is $11 billion in size with it projected to grow at a CAGR of 20 percent over the next five years.

The country has 90 million Internet users, 57 percent of whom buy online, and features the largest social networking base in Latin America.

Brazil's strong and growing middle class shops online to get more "bang for the buck.“

Brazilian consumers read online product reviews and solicit friends' opinions, often through social media, before making purchase decisions.

Logistics and on-time delivery remain challenges for online retailers in Brazil. -

Japan Market:

Japan is an online retail powerhouse, with 100 million Internet users, 75 million online buyers, and $52 billion in online sales.

Japan's advanced financial infrastructure allows consumers to make online purchases efficiently, and its superior logistical infrastructure enables same-day delivery for many online orders.

Over the next five years, Japan's online retail market is expected to reach $80 billion.

Japan's "connected consumers" choose to buy online for convenience. Many have more than one mobile device, connecting with their computers, cell phones, and tablets.

Retailers are investing in online capabilities to meet the needs of Japanese consumers.

To combat this aversion to debt, most retailers offer the konbini payment option where consumers make purchases online, print out receipts, and pay cash at local convenience stores.

TRADITIONAL RETAIL CHAIN V/S ONLINE RETAIL CHAIN

VendorRetail

Distribution

Centre

Retail Outlets

Customer

Physical Flow

Information Flow

• Inventory Turnover ratio (On-shelf availability)• Reverse logistics complexity

Vendor/

supplier

Publisher/Mfg

Independent

Supplier – 3rd party

Wholesaler DC

Partner DC

Website and

IT Systems

Customer

Internet

Retailer DC

Physical Flow

Information Flow

The concept of Drop-Shipping

V/S

AGILE SUPPLY CHAIN

Urban Logistics Multi-Modality Hub and spoke model High Speed freight services

A DE-CENTRALIZED SUPPLY CHAIN

URBAN DISTRIBUTION SYSTEM

Distribution Centre

Hub

Spoke

• Improves product control• Adds flexibility• Effective Risk Management• Fill rate maximization

THE EVOLUTION OF URBAN LOGISTICS

LOGISTICS FACILITIES FEATURESMega e-fulfillment centers

• Vey Large area ( 1 million sq. feet)

• Cross dock configuration and large parking area

• Close to parcel hub and large labor supply

• High bay(15m) for mezzanine floors

Parcel hub/ sortation center• High length to width

ratio and low density • Cross docking

configuration and extensive loading for lorries. 360 degree circulation and automated internal system for sortation

• Center of gravity location to feed local parcel delivery

Parcel delivery centers and urban logistics depot• 360 degree

revolution and cross docking for vans. Generally located at edge of major cities

Return Processing Centers• Return items to e-

fulfillment center

E-COMMERCE NEEDS A STRONGER SUPPLY CHAIN BACKBONE

VAT Regulations• Octroi and

Entry Taxes applicable in many states and municipal limits

• Completion of tedious VAT formalities and paperwork before actual delivery of the product to an individual.

Road Distribution Network• Complications

of transactions at various VAT check posts.

• A robust and pan-India road network is critical to the evolution of the e-commerce companies.

Cash On Delivery• Huge hassles

of reconciliation across various delivery locations and a risk of banking errors, fraud and a huge wastage of human effort.

• The issue of change of title also rises.

Reverse Logistics• Product

defect, customer dissatisfaction or simply a change of heart within the ‘free return’ period. The customer faces a major issue of how to send this back.

• Proper guidelines and transparency throughout the process a must.

Skilled Manpower• Shortage of

skilled experience in the supply chain world.

E-COMMERCE NEEDS A STRONGER SUPPLY CHAIN BACKBONE

ONLINE RETAILING GROWTH IMPLICATIONSWarehousing Requirements• High growth in e-retailing will require several investments in logistics

infrastructure

• Investments in fulfillment centers and warehouses, downstream parcel and sortation centers.

• Need to equip these nodes with state-of-the-art technology and modern warehousing practices promoting visibility across the logistics chain

• Competition will force e-retailers to deliver products as quickly as possible

2013 2017-20(Expected)0

2

4

6

8

10

12

14

16

1.7

15

335%

770%

Warehousing Requirements( in million sq. ft.)

Source: pwc

Increasing warehouse locations

Source: mckinsey

INCREASING PRODUCT CHOICE• Online buying still limited to

exclusive categories such as consumer electronics, apparels and lifestyle, books, music and video

• Other categories such as food and beverages, departmental store, home furnishings, auto parts, healthcare and office equipment will also see increased online activity

• Each product category will demand its own customized logistics requirements

Source: Mckinsey

Within Apparel and Lifestyle category localized suppliers or warehouses is best suited. Predict buying patterns and ensure seasonal inventory replenishment.For books, music and video use of large centralized inventory for a large region is neededFor consumer electronics and durables having lesser SKU proliferation, higher product value and higher security and handling needs, JIT and direct fulfillment model is suitedFor hot and cold merchandising, localized sourcing and continuous availability of temperature controlled infrastructure throughout supply chain is critical

CASH ON DELIVERY

• India has been a vibrant cash economy

• Consumer’s purchasing behavior involves an initial overall inspection of the product from different perspectives and paying subsequently.

• Low penetration of credit and debit cards• Resulted in ‘cash-on -delivery’ (COD) as a

preferred payment option of majority of the Indian consumers

Supply Chain Issues• Extra layer of complexity on supply chain in terms of reverse

logistics

• Higher Lead Time in supply chain. Result in obsolescence.

• Theft and fraud by collection agent in the delivery part

• With more and more Online Retailers have to efficiently design supply chain for preventing theft and reducing overall cost of reverse logistics. In-house vs. 3PL has to be taken into consideration

Source: IAMAI

SUPPLY CHAIN MANAGEMENT @

Books & General

MerchandiseCCC Lifestyle

FLIPKART : SUPPLY CHAINCustomer

Places order on Website

Inventory Management

Team is notified

Order transmitted to

nearest warehouse

Order Management

System is reconciled

every morning

Order allocated from inventory

New PO raised for

replenishment

Item sent for packing & shipping

preparation

Item Shipped

Item Received at distribution

Centre

Last mile delivery by Courier cos / Flipkart Internal Delivery arm / Indian Postal Service / DC personnel

Order Management

System

Flipkart Generated Barcode

Shipping & Tracking ID

Via courier companies / Flikart Self

Delivery/ IPS

Air Cargo / Train /

Overnight Truck

2 Wheeler / Small van /

Postal Service

INVENTORY POLICY• Re-order point model, Target inventory service levels-95%• Sales projections, volumetric size are parameters on which

inventory space is allocated• Generally inventory planning is done on daily basis ( exception life

style products )• Inventory management team studies parameters like fill rate, lead

time etc. to decide ROP• Monthly check to ensure min amount of working capital is locked in

inventory• Tracking order by barcode, order number, ID

LOGISTICS NETWORK

ANALYSIS• Data collected for 9 weeks for below mentioned

categories• These categories are chosen because of variation in

demand pattern & margins• Category 1: Leather & Travel accessories• Category 2: camera & camera accessories• Category 3: computer & computer accessories

LEATHER & TRAVEL ACCESSORIES-ANALYSISStock keeping units: 394Bag & Belts form biggest sub categoryFill rate is increasing & inventory level decreasingInventory management improving

1234567890

5001000150020002500

0.0%20.0%40.0%60.0%80.0%100.0%

InventoryFill rate

Inventory & Fill Rates for Leather & Travel Accessories

1 2 3 4 5 6 7 8 90.000.200.400.600.801.00

Leather & Travel Inventory Weeks

Weeks of Inventory

Inventory for Leather & Travel Accessories

CONTINUED…

1 2 3 4 5 6 7 8 9750

800

850

900

950

1000

1050

1100

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

InventoryFill Rate

Inventory and Fill Rates for Bags1 2 3 4 5 6 7 8 9

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1.90

Weeks of Inventory

Inventory Data for Bags Inventory

1 2 3 4 5 6 7 8 9580600620640660680700720740760780

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%100.0%

InventoryFill Rate

1 2 3 4 5 6 7 8 91.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

Weeks of Inventory

Inventory and Fill Rates for Belts Inventory Data for Belts

CAMERA & CAMERA ACCESSORIES-ANALYSIS

1 2 3 4 5 6 7 8 90

200400600800

10001200

0.0%20.0%40.0%60.0%80.0%100.0%

Inven-toryFill Rate

Inventory and Fill Rates for Camera & Camera Accessories

1 2 3 4 5 6 7 8 90.00

0.50

1.00

1.50

2.00

2.50

3.00

Weeks of Invent...

Inventory Levels for Camera & Camera Accessories

Stock keeping units: 48 ( 06 camera & 42 accessories )Inventory levels low but fill rate is also on the lower side

CONTINUED….

Inventory & Fill Rates for Cameras 1 2 3 4 5 6 7 8 90.000.200.400.600.801.001.201.401.601.802.00

Weeks of Inventory

Inventory Level for Cameras

Inventory and Fill Rates for Camera Accessories

1 2 3 4 5 6 7 8 90.00

0.05

0.10

0.15

0.20

0.25

0.30

Weeks of Invent...

Inventory Levels for Camera Accessories

COMPUTER & IT’S ACCESSORIES-ANALYSIS

1 2 3 4 5 6 7 8 90

1000

2000

3000

4000

5000

6000

7000

8000

50.0%55.0%60.0%65.0%70.0%75.0%80.0%85.0%90.0%95.0%100.0%

InventoryFill Rate

Inventory & Fill Rates for Computer and Computer Accessories

1 2 3 4 5 6 7 8 90.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Weeks of Inventory

Inventory Levels for Computer & Computer Accessories

Stock keeping units: 2001 week of inventory is kept still fluctuating fill rates

CONTINUED…..

1 2 3 4 5 6 7 8 90

20

40

60

80

100

120

140

160

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

InventoryFill Rate

Inventory & Fill Rates for Laptops

1 2 3 4 5 6 7 8 90

1000

2000

3000

4000

5000

6000

7000

50.0%55.0%60.0%65.0%70.0%75.0%80.0%85.0%90.0%95.0%100.0%

InventoryFill Rate

Inventory & Fill Rates for Laptop Accessories

RECOMMENDATIONS• Inventory replenishment should be company

determined, not driven by market demand• Increase weeks of inventory for items which are

costly to transport to reduce frequency of orders• Large safety stock should be kept for

subcategory “camera” a high margin product