Alagu Balaraman is Partner & MD, CGN Global – India
In this year’s e-Tail India Expo in Mumbai, one of the largest e-commerce conferences in the country, speaker after speaker emphasised the need for a strong supply chain to help the e-commerce businesses. For a lot of people, supply chains are something that happens in the background and what they see is the person who delivers the item they ordered landing up at their door. There is a lot more to it. Supply chains can make or break businesses.
In most companies, about 50 – 80% of all the cost of the company is tied into the supply chain. So, managing the supply chain is essential for profitability. On the flip side, a good supply chain ensures that customers get quality products on time and in good condition.
What is the supply chain? It is the whole chain of people and companies involved in making, distributing and delivering products. Each step has to work correctly and efficiently. In India, supply chains are often quite complex, especially for consumer products. People in India also have a very wide range of incomes, which decides which products they would be able to afford to buy. So, consumer companies in India have evolved long complex distribution supply chains.
E-commerce companies entering this field have to establish distribution networks. What the e-commerce companies, like Flipkart, Amazon and SnapDeal, have achieved so far is very impressive. However, just as traditional companies have different distribution systems for metros, small towns and rural areas, so too does the size and complexity of our metros give rise to a variety of e-commerce supply chains. One of the most recent developments in this field is the hyper-local retailer.
The regular e-commerce player follows what is called an inventory led model of business. They buy goods from manufacturers and keep it in inventory. Then, as customers order for products on their website, they pack and ship these products. So, the inventory is owned by the e-commerce company. To hold it they have warehouses. As they grow in scale, these companies can improve the performance of these warehouses. They can train people in working on systematically repeatable processes and help improve reliability in their supply chain. This translates to more accurate and timely deliveries to customers.
Hyper-local e-commerce companies typically act as a bridge between retailers and the customers. Once a customer orders something on their website, say the week’s groceries, they send a person to pick it up from a nearby enrolled shop. Then the person delivers it to the customer’s home. This is a less capital intensive business, as the hyper-local e-commerce company is not buying in advance nor setting up warehouses. This lowers their cost structure and who wants cost build up in a middleman like a retailer? Yet, this advantage starts working against them when they start to grow. It is difficult to ensure the quality of process and accuracy of order fulfilment when you don’t directly control the inventory. So, many of these hyper-local companies will be quick to start, but will find it difficult to grow very large.
Another big advantage that inventory led e-commerce companies will have is their growing buying power. On the other hand, hyper-local companies will be getting products from existing retailers at a smaller discount.
Does this mean that there is no role for hyper-local e-commerce companies? Not at all. Where it comes to very specific services, they will survive. If there are specialities within a town or a locality, be it food, handicrafts or other speciality items, they will not attract the large players. So, hyper-locals will survive and thrive, but they have to find their niche.
Large inventory led e-commerce and hyper-local players, each will have their own space to operate in and they will service different needs. However, like any new and emerging field the only definite thing is that no one knows what directions will actually play out.