eCommerce supply chains have many future challenges

Roger OakdenLogistics Management, Logistics Planning, Supply Chains & Supply NetworksLeave a Comment

Urban delivery

eCommerce is not different

It is generally accepted that after reaching eight percent of the target market, a new product, idea or process gains general acceptance. In 2020, eCommerce broke through that barrier across many countries, due to COVID19 generated demand, although the take-up diverged widely.

Unfortunately, there are assumptions that eCommerce, using advanced IT applications and automation, is different from other businesses. The fallacy of this approach is currently evident, with a major eCommerce businesses in Australia experiencing some traditional problems.

Comments in the media indicate that the business considered growth in eCommerce sales over the COVID lockdown disruption to be the ‘new normal’. They implemented an aggressive expansion strategy, with the following outcomes:

  • Increased the size of orders placed on suppliers. This was in expectation of high demand and to cover against possible disruptions in supply
  • Higher than expected shipping costs, due to disruptions at ports and by shipping lines
  • Price increases in the key electronics product category. This was due to increased global demand and the shortage of microprocessors that initially affected the supply of vehicles but later affected consumer electronics
  • eCommerce demand weakened after the periods of shutdown
  • Overstocked inventory of imported goods
  • Substantial increase in locations to store the increased inventory. This increased complexity and costs when transporting goods and distributing orders
  • Increased warehousing costs, due to overstocking
  • Discounted prices to clear stock, which reduced margins

eCommerce is a development of ‘mail-order’, which existed for more than 100 years. It is not different or easier than other businesses. When providing goods for consumers, the lowest cost method is when consumers physically buy, pay and transport goods from a retail shop. Other scenarios incur added costs for retailers. A Capgemini consultancy study identified that for a hypothetical grocery retailer in the US, net profit could potentially fall by 26 percent over three years unless it improved the last-mile delivery capabilities.

Challenges for Logisticians

For Logisticians, new challenges will arise and cost-down pressures will continue. The three continuing challenges are:

Delivery costs: Many of the costs incurred for last-mile delivery are variable, meaning that as eCommerce delivery volumes increase, so will delivery costs. If consumers do not pay for picking and delivery of an eCommerce order, a retailer has few choices to defray the costs:

  • reduce labour costs through employing contract, part time, casual and ‘gig’ workers as discussed in a previous blogpost
  • negotiate lower prices with the third party delivery providers
  • increase selling prices to include the delivery and return costs
  • rationalise product range to reduce the inventory ‘long tail’
  • provide ‘click and collect’ service from a retailer’s store, a parcel locker or convenience store

Only ‘click and collect’ appears to be attractive from a business development perspective. Consolidating locations means delivering multiple parcels to the retailer’s shops, convenience stores or locations with many lockers, enabling collection of parcels at the buyers’ convenience. An analysis in Australia found that nearly 50 percent of shoppers collected their parcel between two to four days after it arrived at a collection location and just under 20 percent waited five or more days to collect their parcel. Only 30 percent of online shoppers collected parcels on the day of delivery to the collection point. In Europe, more than 50 percent of online consumers use the ‘click and collect’ option for convenience.

Orders returned: Cost can double for a returned product than it costs to deliver. In the UK, about 30 percent of eCommerce consumers over-purchase, then return unwanted items – called ‘intentional returns’. This is similar in other developed countries and compares with about 9 percent return of goods purchased in physical stores.

The returns process is an element of Reverse Logistics that requires a dedicated and easy to use IT application as discussed in an earlier blogpost.

Vehicle emissions: Without changes to the eCommerce business model, by 2030 the world’s 100 largest cities could increase the number of delivery vehicles by over 30 percent. If these vehicles are powered by internal combustion engines (ICE), it will increase emissions by more than 30 percent.

To encourage parcel delivery businesses to invest in zero emission vehicles, countries will use a carrot and stick approach. For example, the Netherlands will ban ICE delivery vehicles from 2025, but the government will financially help companies to buy or lease electric vehicles. Also, Low Emission Zones (e.g. comply with Euro 6 emissions standards) are being implemented in central and densely populated areas of cities in Germany, Italy, Spain and the UK. Those not meeting the emissions standards required by zones will face penalties.

Examples of more recent challenges are:

  • The pandemic has changed perceptions of inventory by some corporate managers from ‘just in time’ to’ just in case’. This is to (hopefully) avoid potential disruptions in supply chains. The scenario outlined above indicates that inventory management by Logisticians will be required, as the disruptions caused by the pandemic recede and management memories fade. In addition, more inventory is influencing the size of warehouses and bigger warehouses invite more inventory.
  • An objective for some eCommerce businesses is to further reduce the delivery time from receipt of order, but is that what consumers want, or rather their order arrives within the promised (less than 2 hour) delivery slot?
  • Use ‘last mile’ fulfilment centres (re-purposed retail facilities with attached fulfilment centre, ‘last mile hubs’, ‘dark stores’ or ‘micro-fulfilment centres’) to positioned products in more locations that are closer to the consumer. More locations are the dream of commercial real estate agents. However, as more locations require additional finished goods inventory (as noted in the example above), is this a cost effective way of managing distribution costs?.

Some challenges within eCommerce that could increase in the future are:

  • increased demand by consumers for same-day delivery, because it is provided ‘free’ or below cost;
  • increase in the volume of returns, because consumers can order and return at no or low cost
  • increase of ‘parcel dimension pricing’. Truck capacity requirements are reduced (some commentators consider by up to 20 percent). There is a need to automatically identify an order’s actual dimensions and weight and have on-site construction of protective packaging around items
  • lack of ‘visibility’ through supply chains, due to reluctance of software application providers to develop interoperability between applications
  • increase in truck capacity at peak times to meet delivery windows and cover for increased traffic congestion

These challenges (and opportunities) will require some serious thinking within eCommerce businesses as they will not go away. The overall threat is that if the sector is slow to change, then governments will do so by regulation.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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