The Changing World of Manufacturing – Part II – The Advent of E-Commerce

R Jayaraman

Author: R Jayaraman

Date: Wed, 2016-11-23 14:55

There is much in the air these days. E-Commerce is riding the waves. So much noise, just like when a new child is born. People want to name it, they want to give special significance to the features, and they want to imagine how the child will grow up, how it will change the world and so on. All this has happened in the case of E-Commerce, and will continue too. So how to sift the stuff from all the chaff?

Much like the “film promotions” being done by Bollywood glitterati, E-Commerce has been glamourised, demonised, “God”-ditised and revised again in the next cycle. Over the years E-Commerce has come to occupy a lot of media attention and space. I am always suspicious of anything which the media is hung-ho about. You will have to remove the layers to get at the nuggets. You will have to get through the hyperbole to know kya actually bole?

There are at least four effects that E-Commerce has had on manufacturing which have profoundly affected manufacturing and changed it forever. To begin with, the scale of sale or the volume effect. E-Commerce companies are now placing orders which beat the erstwhile “big” wholesalers hollow. In the “good old days” a wholesaler had a sphere of influence over an area of say 100 square miles, with a population of about 50,000. If the product which he is involved in is selling at the rate of 100 per person per month then he would need 50,000*100 = 5 million pieces per month. Adding some safety stocks to this he could be expected to stock about 6 million pieces at any time. Which means that he would order, say, four times a month, asking for 1.25 million pieces per week. In the new E-Commerce world the wholesaler is out of business. The E-Commerce company places direct orders on the manufacturer. Since the company’s client base is several millions, merely due to the reach of the website through the internet, the ordering is also in the millions per week. So, now the manufacturer has lesser customers placing orders but the order quantities are much larger. The overall effect is that those manufacturers who have excess capacity are able to produce surges of large quantities and meet with the order requirements and those who cannot are falling by the wayside.

The second is the “speed effect.” This is a result of the changing nature of buying. Buyers are slowly moving to a space where brand knowledge and experience makes them place orders, the details of which they do not have the time to study thoroughly. For example, I placed an order for a book which has ceased publication some years back from a very famous brand. However after the promised delivery date came and went without the product, I wrote to the company and they are arranging for the refund. Will I go to the company again? Good question. But more and more such E-Commerce sales will happen and customers are expecting goods and services at speed, that is to say, like yesterday. So if a manufacturer is not able to develop responsive, alert and agile supply chains there is grief at the end.

The third effect is what may be called “the storage syndrome.” Goods ordered are received speedily, but then the volumes ordered in panic and “for safety stock” reasons will not get sold so easily. They have to be nurtured and guarded, much like spoilt children, till they find themselves in the hands of a courier or a truck. In this time period they may be tagged, RFID’s , GPS’d, vertically-handled, horizontally moved, packed, unpacked and repacked and so on. These gymnastics take place in large warehouses where one has to continuously track where the materials you want are. They could also be called Wherehouses. This is a new, major activity, much unlike what any wholesaler in the past has either seen or heard (those who have seen the FedEx or the Wal-Mart DC’s will know what I am talking about) and could, over time, become a manufacturing activity by itself. There is good value adding potential here.

The fourth is the “mind change” effect. Manufacturers are not new to customer returns, but the quantum was well contained, perhaps 1 to 2 %. Practices like lean and six sigma kept defects to the minimum, as a result of which customer returns were less and even, in odd cases, high, and could be replaced without asking any questions, as the six sigma process guaranteed less than 3 defects per million. However the E-Commerce customer is a “mind changer” as many E-Commerce retail companies in India have learnt. When the courier reaches the customer after the many twists and turns on the metro roads , using two wheelers which are driven ambidextrously, the customer is unwilling to accept the package as he has had a “change of mind“. This then becomes the start of the customer return chain which can be longer and tougher than running the marathon as it has to run the gauntlet of the metro roads once again as also the gauntlet of the tax laws which make it near impossible for accounting. So manufacturers who find innovative ways to deal with customer returns become favourites with the E-Commerce companies. But they need to be prepared for returns of up to 10%.

So, if after all these effects, you still receive the goods that you have ordered from a E-Commerce company, be sure God is great.  

 

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Comments

Dear Sir, You have rightly pointed out these big 4 effects of E-commerce, which are very relevant & throws light on how the Ecomm industry is changing traditional Market place & Manufacturing. Another big & positive effect of Ecomm is boost to local Handicraft, Textile, toys & small time plastic accessories manufacturers in India. The E-Comm platform has straight away exposed/opened them to National & International buyers against the earlier local Wholesale or Nearest Big town market. They can not only sell their produce to larger audience but also compete with other sellers /manufacturer of similar items, which results in better product quality, healthy competition & better price equilibrium nationally for similar products. The Macro effect of this will be short in arm for acceptance for “Made in India” products in the market place.

Dear Sir, I thoroughly appreciate your viewpoint. The advent on E-commerce has revolutionized the way people do day to day shopping. This has had a huge impact on manufacturing sector and in the years to come, we can expect more revolutionary changes. The four effects which you have mentioned aptly capture the essence of the complex story. 1. The scale of sale or the volume effect: The number of internet user’s in India reached to about 354 million in year 2015. Disposable income of urban population has increased multi-fold and so has the consumption. Indian E-commerce industry is witnessing 6 million new entrants every month. Those Manufactures who have excess capacity can capture this market opportunity for their benefit. 2. The speed effect: Due to innovative branding efforts by firms, brand knowledge and experience can generate explosive demand. The manufacturing processes needs to be responsive and agile enough to cater to the surge in demand. The digital consumers also demand faster delivery. Many E-Commerce players guarantee one day delivery or next day delivery. This needs a strong and responsive logistics system. 3. The storage syndrome: Technology is helping the manufacturers to manage their warehouses. New technologies like automated warehouse management using artificial intelligence and IOT based solutions are the key for future. Technological innovations can prevent warehouses from becoming “where-houses”. 4. The mind change effect: All the major E-commerce players extend services such as cash on delivery and hassle free returns. It is critical for the companies to provide such services in order to sustain business in the cut throat competitive environment. Manufacturers should be prepared for returns up to 10% which used to be at 1-2% in the earlier days. Manufacturers can differentiate themselves from other players by offering highest level of services only to reap in benefits of customer loyalty and repeat business.

Dear Sir, I very much agree to the point you have creatively expressed in this article. There have been supply chains as long as there have been suppliers and customers. However, off late, with the advancement in communication & technology and the ways in which the information is captured at each moment, the world has indeed become flat, as rightly said by author Thomas Freidman. This transformation has not only revolutionized supply chains but also enabled sectors such as e-commerce to maintain a competitive advantage with very thin or sometimes no margin. As our very own Dr Sesha Iyer Sir defines it “ Supply chains start from earth and goes back to earth”, however, the scope, scale and speed of these processes have all gathered revolutionary momentum due to which businesses around the world hasten to catch up or, in the case of leaders such as Amazon, Walmart & Zara, to stay ahead. This level of connectedness is impacting supply chains and more so lately businesses, which is why it’s evolving into a more strategic role. E-commerce thrives on the fact that unless and until it capitalizes on all the four areas, mentioned by you, which are: i) Scale/Volume ii) Speed iii) Storage iv) Perception change, the actions taken by them won’t be able to influence the success of rest of the network. Also, the convenience of Returns/exchanges, offered by most of the e-commerce companies, has seen the light of day only because of the never ending transformations in Reverse Logistics. Such services make E- commerce steal the show from wholesalers and it no way suggests that the ultimate level of service has reached the threshold. May be this is the beginning. With the advent of IoT, AI, Block chain and many more, the day is not far when e- commerce, as a business, will be leveraged to another level altogether.

Respected sir, thanks for your thoughtful insight on to the subject. You have straight away targeted the cause & effects of e-commerce on the manufacturing sector. Order & demand management, Inventory management, how much to be produced & Customer quality are the major 4 foundation pillars of any manufacturing industry. My point of view of looking at this revolution is reverse or totally opposite. The success factor for e-commerce lies in the successfully segmenting its customer & positioning them self in the perfectly in consumer market by targeting the right audience’s at right time; This “e-commerce” sector has also later tuned out to be the need of the hour due to the governments most focused initiative of digitalizing India. General Working model of E-commerce Industry: - Customers now has the alternative solution for visiting shops & centers for direct buying. Instead, for buyers the most preferred way is to go online review the multiple options based on quality, cost, delivery, variety & then choosing the products. This is saving huge amount of cost & time for the customer. It will not be fair to say that good old wholesalers are out of business now as they are E-commerce has also brought many small town retailers & producers; into the sellers list of companies like flipkart & Amazon to increase the penetration in larger market place, which according to me is a win-win situation for both the parties. More over the customers will be always dependent on small stores nearby for the items which they consume on day to day basis & items which are essentials to life E.g. Grocery item, vegetables, medicines etc. The latest Data released by Economics time through ASSOCHAM-Resurgent mentions that by 2017 the online buying community count will cross 100 million & which was 69 million for 2016.By end of 2018 the total e-retail sales is expected to touch $17.52 billion. It also mentions the total e-retail sale is growing at a rate of 15% Y-O-Y.I also acknowledge that e-commerce not only has shiny side only but it also carries some challenges like robust e-commerce laws, low entry barriers, rapidly changing customer needs, shortage of skilled manpower, India’s slow moving internet revolution which is restricting the fast penetration into rural market. This can be overcome by strong reforms & regulatory authority implementation. The figures shows that it is not affecting the manufacturing sector of India as there is increase in consumer demand for the goods which requires continues capacity enhancement at manufacturing sector. The contribution of Indian manufacturing sector into the GDP is increasing & sustaining. To sum it up I believe that there is no negative impact of e-commerce industry on the manufacturing sector & main pillars but it has only improved supply chain & distribution methods by shading extra time & cost involved. The quality of life of people is improved by saving some time & money which was earlier going into visiting the shops & stores.

I largely agree with your thoughts on how E-Commerce has been a game changer in the Indian retail industry across segments, including manufacturing. Consider large appliances as an example. This is one of the fastest growing categories in E-Commerce and a focus category, and for good reasons. More and more consumers are shopping online today across categories, and as per independent reports, large appliances and furniture are two of the fastest growing categories in the online space. The difference in price is sometimes massive compared to an offline retailer. Major appliance manufacturers like LG, SAMSUNG, Whirlpool and Haier are using online as their preferred platform to showcase their latest models. In fact, Haier has completely moved online in their second innings trying to establish a foothold in the Indian market. Today a consumer just needs to open Amazon or Flipkart and browse to a category, read a few reviews in case of doubts, and just purchase his chosen product in a few seconds. Deliveries are usually very fast if you factor in the size of these units. A Maximum of 3 working days is what it took for an LG Split Aircon to reach me. And it was installed by an LG technician the same day. Offline retailers take an almost similar amount of time to get this done. So why would anyone prefer an offline retailer? You can just walk into a regular store and check out the product, then walk out and order the same online. And save a lot of money in the process. On the aspect of returns which you mention, all the major players have now tweaked their returns policy to ‘replacement’ instead of ‘return’. This has greatly helped in bringing down their losses to a manageable extent. Are there any caveats? Customers ending up with not so fresh stock or old stock is a real problem online. Amazon and Flipkart are an excellent platform to dispose off ageing inventory. In the apparel category, except for a few promoted brands, a lot of the products sold have had a shelf life of above six months. Offline retailers actively use this as a way of moving old stock to make way for new SKU’s. This way they can shift the stock faster due to the wide reach of online, as compared to offline. There are also no clear answers on what happens to customer returns. You will find reviews where customers have complained on having received a used or unsealed box with scuff or smudge marks, some parts missing etc. Vendors might be reselling the returned items to new sellers after some minor cleaning up. This is a worrying trend, and the E-Commerce companies will end up with legal issues, not to mention lost customers.

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