Retail is struggling with the logistics of online shopping: can it be profitable?

By Professor Robert Boute (Vlerick Business School) and researcher Joeri Poppe (KULeuven)

A lot has already been written about the optimisation of the supply chain. Theories have been developed, concepts have been tested and consequently the field is well established, both theoretically and practically. But online sales have turned the traditional supply chain on its head. Today, many companies try to increase their revenue by means of e-commerce, but they are still finding it hard to make their e-commerce activities profitable. One of the causes is the complex logistics. In order to support its members, the Production & Logistics Department at KU Leuven organised an evening seminar on the challenges of e-commerce and omni-channel logistics. Three speakers outlined the problem: Professor Walther Ploos van Amstel (University of Amsterdam), Jeroen D-Espallier (bPost) and Edwin Stroot (Kuehne + Nagel).

Professor Ploos van Amstel started by stating clearly that the blind "copy and paste" behaviour of applying traditional supply chain practices to online shop logistics is perhaps the biggest margin killer in the whole e-fulfilment phenomenon. The first important difference with traditional retail is the complexity of the "last mile delivery". Given that 70% of the European population live in cities with more than 50,000 inhabitants, where a third of the population are not at home during the first delivery attempt, this is no surprise.  As a result, ways of making the last mile more efficient are currently being investigated. Possibilities include city distribution, collection points and unmanned package points. The complexity of returns (in fashion, up to 40-50% of orders are returned) and the great unpredictability of demand (which leads to unbalanced, increased stock) makes it very difficult to obtain profit from e-commerce.

With the prediction that 44% of retail sales will be made cross-channel by 2018, this is a trend that cannot be ignored. But how can the profitability of this chain, pull-driven by discerning customers, be maintained? It is important to distinguish between market segments. A one-size-fits-all strategy will not work. After all, there is a big difference between the price-conscious customer looking for the best deal online, the passionate shopper who makes purchases as a form of relaxation, the customer looking for the best quality and service and the customer who views shopping as a necessary evil. Each segment wants to be served differently. It is therefore important to start by considering which customer segment you want to serve.

A hybrid combination of supply chains has been proposed, allowing for a kind of symbiosis. For the e-commerce distribution of Lego, for example, Kuehne + Nagel offers almost the exact same toy boxes through a separate channel, disconnected from traditional distribution. In the same way, at bPost the important conceptual distinction has been made between traditional, standard post (where minimal costs are the aim) and specialised post (which provides complex solutions). Both will form an important source of future income, but they each require a different network. In the first instance, the standard network is consolidated as much as possible: as part of their work, the postal workers cover 715,000 km every day, passing each post box an average of four times a day. Bearing this in mind, the postal worker has been recast as a service provider: someone in touch with people who helps them to fulfil their needs. But for complex issues, the special network is required (bPost on request, shop & deliver, Saturday delivery etc.).

One of the problems with e-commerce is the online customer's motto: “I want it all, and I want it now”. But in fact even this can bring innovations and opportunities of its own. Customers do everything themselves online, and more options and extra, paid services can be offered. Take Nespresso for example: their problem was the fact that customers often ordered coffee capsules at the weekend, resulting in a huge peak in deliveries on Monday. As a reaction to this, Nespresso now offers a paid service through which the customer can choose when the order is delivered. This has resulted in deliveries spread out better across the week. In other words, the customer pays to make Nespresso's supply chain more efficient - a double win.

Throughout e-fulfilment, it is important to bring an end to thinking in terms of columns: stock, transport and warehouse management must be developed as a single strategy; the supply chain of the future should not only be managed better but should also be organised better to facilitate flow to the customer. Stocks should be monitored almost constantly, with pricing strategies and orders linked in real time and adjusted to the buying behaviour of online consumers.

As e-fulfilment is so different to the traditional supply chain, established names can miss the innovation boat whilst successful start-ups not only survive but even flourish in this new ecosystem they were designed for. Uber recently hinted that it sees logistics as the next challenge; recently experiments with bicycle courier services, named UberRUSH, have started in Manhattan. After all, two thirds of online sales today take place between consumers (as opposed to one third business to consumer). Easyvan and Gogovan have recently been launched in Hong Kong: student companies in contact with 35,000 delivery vans through apps. Both companies were launched in Singapore at the same time and now have their sights set on Europe. EBay also wants to start organising its own logistics, and a successful initiative could make it the largest package delivery service. DHL beware!

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