ptak prizeindia2014 scnext_inquisitive_siom
TRANSCRIPT
The Ptak Prize Challenge
Supply Chain Next (SCNext)-----The Youth of Supply Chain
Round 2 : Ecommerce Supply Chain Challenges
Team Inquisitive, SIOMSnehal Rathi Nikhil NagdeoteSri Harsha
With no entry barrier
any business model
can be easily
replicated. Continuous
Innovation and
operational efficiency
is the key to success..
Else many existing
players will perish
soon…!!
The major challenge is
customer stickiness,
which in the current
scenario is lost due to
too many players having
similar business models
and raging price wars,
leading to a downward
spiral…
Vicious Cycle: Pressure
from investors may lead
to rising prices and
once again customers
turning to offline store
leading to drop in
orders..
The offline players
shifting online have a
competitive advantage
over the online players
trying to go offline…
A business model that
strikes a right balances
the tradeoff between
customer satisfaction
and investor profits can
only sustain in this
highly competitive
industry….
Logistics
infrastructure, last mile
delivery, COD, frauds,
return orders, multiple
logistics partners, and
huge cost of acquiring
and serving a customer
have been major
challenges for the
industry…
Executive Summary There are no hidden figures about the growth of E-commerce industry in India. The online retail market is only 7.9% of the organized retail (Rs 1767 Billion) and a mere 0.5% of the overall retail ( Rs 25286 Billion) as of 2013. The industry is at its nascent stage as compared to developed countries and is surrounded by major technology and logistics challenges. With huge influx of venture capital there is no entry barrier, supplier and customers have higher bargaining power and the industry is highly competitive. With talks of liberalizing the e-commerce in India and tax restructuring, the current market players may face even more competition from the foreign players. To start an ecommerce business in 2015, in the industry which is yet to see profits, which lacks customer loyalty, companies need a robust business model which allows efficient technology integration with product/category focus. With more that 50% online sales being from tier 2 and tier 3 cities, the focus should shift to connecting cities and smaller places. Strategic partnerships with offline players, bulk deliveries, value added services and seller sustainability should be the focus for these companies. In this highly competitive environment, the one who provides Value to customers at the required Velocity with sufficient product Variability and Visibility and takes care of all Vulnerabilities will be the last man standing and will win the game.
Industry Overview
Market Size and Segmentation (2013)
3.855.26
7.039.48
12.615
20
2009 2010 2011 2012 2013 2016 2020
US $ Bn
Online Travel
Industry 73%
E-Tailing14%
Financial Services
6%
Classifieds5%
Other Services
2%
In the last 5 years the industry has seen exponential growth marking a CAGR of 59%from the year 2009 to 2013. Online travel, as of last year they have a lion’s share of 73% out of the total E-Commerce market. Electronics and fashion are close second with a share of about 14%, followed by financial and other services. With rise in internet penetration the e-commerce market is expected to grow to about $ 20 Billion by 2020. Currently works with two main models: Inventory based (buy and sel) and market place models. More than 70% transactions are based on cash on delivery model to gain the trust of consumers.
Industry Overview
*Source: McKinsey, Online and upcoming : The internet impact on India, Dec 2012 Google Report, Economic Times. Internet and mobile association of India, April 2013
Analysis of SC and Logistics
Porter’s FiveForces
Strategy2015-2019
Who Will Win
Estimated Y-o-Y growth ~ 33%
Busy lifestyles, urban traffic congestion and lack of time for offline shopping Low cost products available online with heavy discounts Rise in the standard of living and burgeoning upwardly mobile middle class with high disposable income Increasing broadband internet services and growing 3G penetration in India. The emergence of M-commerce and Smartphone penetration. Last mile delivery of not only products but also services. Rising capital influx from venture capitalists and Private Equity Rise in the literacy levels enabling consumers to buy online. Online payment systems. By 2019 the internet users in India are expected to grow to 420 million with 32% penetration.
Key Drivers of E-commerce
*Source: McKinsey, Online and upcoming : The internet impact on India, Dec 2012; Dinodia Capital Advisory Report; Research by Alvis Lazarus;
Internet and mobile association of India, April 2013
2300
480
245120 102
34.00%38.00%
77.00%
10.00%
80.00%
0.00%
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Global China US India Japan
Internet Users % Penetration
Internet Users and Penetration
2662
583
279 350
105
43.00%
43.00%
86.00%
28.00%
84.00%
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Industry OverviewIndustry Overview Analysis of SC and Logistics
Porter’s FiveForces
Strategy2015-2019
Who Will Win
2011
2015
1
2
3
4
5
Procurement
Inventory
Warehouse Operations
Transportation & Logistics
Payment andPost sale support
Traditional Brick and Mortar E-commerce Supply Chain Challenges in e-commerce
SKU limited by limited shelf space; Items procured in bulk
Virtually unlimited shelf space; Items may or may not be procured by company ( marketplace model)
Direct shipment from supplier does not allow bulk shipments; lack of coordination ; lack of technology integration; Longer Procure to Pay cycle
Inventory exists at distribution centers ( National; regional; stores)
Inventory exists either at distribution centers or at highly distributed supplier location (sellers)
Huge inventory in case of buy and sell model; High probability of stock out; No specific product location as unsold products are returned to sellers by e-commerce companies
Lower number of orders ;Limited need for small order size picking and packing; Machinery needed due to larger sizes
Large number of orders ;Significant need for small order size picking and packing; Manual labor needed due to smaller sizes
No stacks of similar products exist; Locating a product requires quality tracing system; Every product requires different packing and dunning making pick and pack more complicated
Often company owned fleet drivers between DCs and to store; Low need for door to door delivery; Low logistics cost per itemEnd item picked by consumer from stores
Delivery picked from DC or directly from sellerDirect shipment or indirect (from seller to DC and DC to customer)Needs door to door delivery of end items;
High logistics cost per item; Risk of theft and fraud; Tracing and tracking of individual items become difficult; Less connectivity to end consumers; Less connectivity between cities and rural India; Return order consolidation required; Full truck load is a major concern; Multiple consolidation points
Payment at point of service;Return to store
Payment online or at point of delivery;Need for secure online payment systemReturn to DC or seller;Value added services crucial for differentiation;
Last mile delivery person responsible for customer experience; Risk of theft and fraud; Customer expectation for service guarantee; Longer order to cash cycle reducing the working capital
The bottlenecks and complexities in E-commerce logistics are caused not only because of difference in transportation needs but because of a different business model altogether. Every stage in the e-commerce supply chain causes different challenges for
logistics arm of the company.
Analysis of SC and Logistics
Industry Overview
Porter’s FiveForces
Strategy2015-2019
Who Will Win
No one size fits all. The supply chain and especially the logistics need to be fit for a product category. Glossary, fruits and vegetables, furniture other consumer goods and electronics all demand different network capability. There has to be balance of trade off between efficiency on one end and responsiveness on the other. Companies are adopting the same strategy for all categories due to broad range of offerings. More than 50% of the demand for online products has been from tier 2 and tier 3 cities. Reach to tier 3 places along with rural India is still a major barrier to growth of ecommerce. But there is lack of warehousing infrastructure here at the same time lack of connectivity between cities and these places. Of the six drivers of supply chain, neither of the drivers are completely utilized nor completely integrated. State owned transport is not customer centric and private owned transportation lack funds for expansion.
Reason for Bottlenecks
Competitive Strategy
Supply Chain Strategy
Facilities Transportation
PricingSourcingIT systems
Efficiency Responsiveness
Inventory
Logistical Drivers
Cross Functional Drivers
Drivers of Supply Chain for Ecommerce Industry
Lack of connectivity between cities, and rural India Underdeveloped InfrastructureVAT Regulations Reverse Logistics ( Consolidation centers) Lack of Skilled Labor Inefficient Technology integration Inefficient trace and track Pin code reach and COD ( Non standardization of Postal Address )
Its not only the bidirectional flow of material but also that of information and cash which affects the efficient operations
Critical Bottleneck Factors in a nutshell
Industry Overview
Porter’s FiveForces
Strategy2015-2019
Who Will Win Analysis of
SC and Logistics
Industry Overview
Less than Truck load and Empty backhaul Package cost due to separate delivery for same order Outsourced vs Owned logistics (Multiple Logistics Partners) Trust on 3rd party vendors Product Availability Ship to delivery time ( slots) Cost per Kg and collection cost for COD orders Size of product (Weight and Volume) Flexible return policies Unitization and Palletization not possible
Last Mile53%
Line Haul37%
Collection4%
Sorting6%
There is a clear gap in the market with no logistics player offering the breadth of services needed at a competitive price across a broad network demanded by ecommerce companies. Large networks offering basic services or Small networks offering more complex services. No one service provider to handle everything. E-commerce in certain segments like baby products, consumer electronics, telecommunications, computer products and furniture are struggling with logistics supplier’s inability to handle large or irregularly shaped shipments at lower costs.Companies have to rely on multiple logistic partners (DTDC, Blue Dart, owned logistics, etc) making the technology integration more complicated. Empty back hauling by delivery personal and double trips to collect return goods. Consolidating the forward and backward movement of items from a particular area in single trip is complex. This leads to network planning and scheduling a nightmare.
Reason for Last Mile Network Planning and Scheduling Nightmare
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era
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ost
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arce
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X Axis: Total parcels delivered (per city per day)
Estimated cost structure per parcel for logistics companies
Last Mile Delivery cost for owned and outsourced service
Factors that cause Last mile network planning and scheduling a nightmare
Industry Overview
Porter’s FiveForces
Strategy2015-2019
Who Will Win Analysis of
SC and Logistics
Easy access to distribution channels Low initial capital investment No entry barriers and lot of funding options available Low consumer switching costs Huge growth opportunities in India
Threat of New Entrants
Contract Qualifiers
Negligible Product Differentiation Lot of substitutes are available The product performance of substitute products is same or better Low switching costs make the industry price sensitive
Threat from Substitutes
Multiple options and variety to choose from Low switching costs Can easily compare product prices and features across platformsWith increasing competition the bargaining power is shifting towards consumers
Bargaining Power - Buyer
Huge scope for forward integration by supplier to sell their own products and increase their marginsMultiple selling platforms provide high bargaining power Low to medium switching costs for e-commerce companies
Bargaining Power - Supplier
Companies have to compete with brick and mortar as well as other ecommerce companiesHigh exit cost for inventory based models
Tough competition makes it difficult to increase the market share Companies competing only on prices with very low differentiation
Internal Rivalry
Low entry barriers make the industry very competitive and decreases the scope for potential profits
Consumers always look for better deals and thus there is no brand loyalt amongst the consumers
Minimum product differentiation and low switching cost give a lot of power to buyers
Suppliers have high bargaining power as they sell via multiple platforms and channels
Porter’s 5 ForcesIndustry
OverviewAnalysis of SC and Logistics
Strategy2015-2019
Who Will Win Porter’s Five Forces
Ne
gativesP
osi
tive
sPorter’s 5 Forces
Probable implementation of GST by 2016 Make in India to help build infrastructure Funding available from angel investors and VCs E-commerce logistics growing at a very fast pace A lot of technology start up are changing the way
businesses work Shifting trend from cost leadership to
product/service differentiation
Sustainable Business Model Distribution strategy to reduce cost Track customer experience but at the same time
reduce cost. Differentiate with Value Added Services.
Focus on niche segment with huge Analyze all risk and exit strategy. Strategic Partnerships with offline players
…..Supporting Environment ....Right Operations Model
+
Bridging the Internal and External Environmental
Gap with… 1. Attractiveness of Industry in terms
of scope and growth2. Huge untapped market3. Internet and Mobile Penetration
1. Profitability2. Customer Loyalty3. Government Policies
We would not start our Ecommerce Business with a broad segment category competing on cost with no entry barriers. Right product for right market with huge growth potential supported and equipped with right business model is what we would look to start with. A niche market segment ( Eg: Influenced by Women buying decisions with CAGR of about 40% in the near future) with first mover advantage would be our preference to start with.
Will you start your own E-commerce business in 2015??
Industry Overview
Analysis of SC and Logistics
Strategy2015-2019
Who Will Win Porter’s Five Forces
CustomersOperations
Investments
Customers do expect the lowest prices for products but it is not the only criteria. The trend has been shifting towards quality and differentiation. Value added services : Product trials, fast and efficient and scheduled, delivery, Cash on Delivery, Easy pick up for return orders, online assistance, combo offers Customer wants to experience the feel of offline market at every touch point like marketing, presales, purchase experience, and post sale service. Customer wants efficient delivery, minimum hassle of product return and cash in hand for returned products. Everything come at an extra cost to the companies.
Industry Overview
Companies are investing around Rupees 1200 to 1500 to get a customer with an average order of Rs.500 ( one time) Huge discounts from investors hard earned money. Reinvesting the money earned to provide more discount and services to customers. Huge investments in expansion, acquisitions, category expansion, logistics and technology. Despite very low (negative) Cash Conversion Cycle ( Amazon CCC = -30 days), cash remittance take very long due to COD facility. Very recently the cash remittances have been reduced from 15 days to a week.
Where Are Companies losing/spending/overspending? Customer Expectations
Capital is essential to run the operations, provide service and fulfill customer expectations.
If there is no investment then there would be no customers and if you don’t win customers then you don’t need capital. ….
Industry Overview
Analysis of SC and Logistics
Porter’s Five forces
Who Will Win Strategy 2015-2019
The Goal of the Business is to make money..!! Increase Throughput...!! Reduce Inventory…!! Reduce Operating expenses…!! (All the same
time)
Industry Overview
Analysis of SC and Logistics
Porter’s FiveForces
Who Will Win Strategy 2015-2019
Strategic Partnership with offline players and Government ( training and educating people and promoting specific industry segments) Service Partnerships/ Service Acquisitions Focus on the tier 3 and 4 cities which contribute to more than 50% of the online sales. (Revenue / Cost per sq feet is bound to be low)
Starting offline operations in the form of Return consolidation centers in metros. Initiate education and training of offline retailers to integrate virtually and adapt to technology. Invest in building partnership with logistics solution providers or develop own logistics network. Tie ups with corporate for bulk deliveries at office
locations.
Shift to a single logistics solution provider in every state / region. Integrate technology between the partners. (Vendors/sellers, warehouse and Logistics partners). Align penetration strategy with that of logistics partner
Expand product category only by acquisition and diversion of all orders by technology integrationWith increasing use of debit card shift to 50% COD
model. Smaller Fulfillment centers near to customers and multiple delivery options ( Home delivery, Parcel Pickup)
Completely personalized services Personalized Billion Day offers rather than mass offers Complete penetration to rural India
2015* 2016*
2017* 2018*
2019*
*End of Year Targets
Industry Overview
While the trend to go online is inevitable, there are delicate issues that brands need to balance between their online and offline operations: (1) Price difference between the two channels leads to traffic loss offline, so SKU differentiation maybe the only option. (2) Organizational level: Reconciling differences between online and offline management(3) Customer synergy needs to be carefully examined.
With both the groups having different set of advantages and challenges….The one who provides Value to customers at the required Velocity with sufficient product Variability and Visibility and takes care of all Vulnerabilities will be the last man standing
and will Win the game.
Have strong distribution networks in the form of distributors and retailers. Strong technology system and training to the traditional retailers to adopt to changing environment will favor this group. Can have products listed on multiple platforms including its own web portal. ( Multi channel sale) Major challenge is to maintain same cost across all platforms and channels Have advantage of customer touch experience and capability to provide all value added services including home delivery and product return. High proportion of in-house logistics capabilities and prior experience Needs little upgradation. A area or regional store accessible to limited consumers.
Have to work all the way on distribution networks. Sound technology and can reach internet and mobile penetration. Customer touch and feel experience will make them take the offline way. Virtually no limit to inventory and variety. Huge number of sellers. Available to provide competitive costs to consumers. Offline stores would be the face for the customers. Offline store will help provide post sale customer service and experience which is currently missing. Strategic partnerships with existing offline players will strengthen the entire system. Offline stores will can act as return consolidation centers thereby reducing return costs.
Online to Offline: Pros and Cons Offline to Online: Pros and Cons
Industry Overview
Analysis of SC and Logistics
Porter’s Five Forces
Strategy2015-2019
Who will Win
Consumer will choose shopping channel of preference Choice, Availability and Price will decide shopping habits as compared to shopping experience Shopping will be treated more as a chore than recreation due to work pressures. As attitudes change, consumers will buy high value items and brands online.
Having discussed this, following factors make offline players moving online more probable to win with right strategy implementation at the right time…
Online players trying to go offline could not provide the same variety as its online portal. If they go offline it has to be for specific categories like fashion and apparels, electronics. Huge investment at this point of time to set up a shopping mall type of a center in cities in order to accommodate maximum number of categories. Lack of variety would take away its one of its existing advantages. The cost of products would increase due to the extra cost of inventory and operations. This could make the consumers more dissatisfied and companies even less profitable. Offline players need to set up enough stores to be accessible which is not foreseen in near future.
Offline players need to work on their operational efficiency with respect to reducing customers shopping time by providing what they want. Services like home delivery, store specific inventory applications will help customers to make good choices. More over they have all the advantages of being online via multiple online platforms. Strategic partnerships with online market places to sell products and act as service partners. They can have their own brands listed online and offline for display and trials. Talking about products from brands ( Sony, Toshiba); they have a strong distribution network in the form of distributors and retailers. Last mile delivery is more easier given the reach.
Why online cannot..!! Why offline can..!!
Industry Overview
Analysis of SC and Logistics
Porter’s Five Forces
Strategy 2015-2019
Who will Win
Team Inquisitive, SIOM
Thank You..!!