19-01-2012

E-Commerce Distribution and

Logistics

Amazon, Myntra, Flipkart, Infibeam..

Handling Target's fulfillment at the same time we use Ingram to drop-ship

appear to be contradictory strategies
Rohit D
Operations Interest Group, IIM Lucknow

Differences between E-Commerce and

Traditional Distribution systems
Reach of Distribution

Traditional Large quantities of goods (high value) to relatively few destinations

E-commerce Small quantities (low value) to huge number of destinations implication on distribution cost/unit

Capacity View
Traditional Relatively stable demand except predictable peaks in festive seasons
E-commerce Highly fragmented with peaks during weekends and holidays
festive seasons demands are highly unpredictable
Packaging
Traditional End consumer packaging almost negligible
E-commerce Varied packaging requirements depending on the fragility of the
product and requirements of costumer (gift packing)
Warehousing

Traditional City/Region wise warehouses

E-commerce Central warehousing (except amazon which has many distribution
centers)

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Common Practices in EC Distribution

Drop Shipping
Retailer does not stock the goods Transfers customer orders to manufacturer
who ships it directly
Eg. 1996-1999, Amazon stored no inventory Ingram satisfied majority of the orders.
Same is done by Indiaplaza.com in India UBS publishers for books, Sulekha
distributors for electronic goods.

Reverse Logistics

Product returns are significantly higher in e-retailing

Physical inspection is lower leading to increased likelihood of returns

Wrong address during customer checkout or labeling

Order Fulfillment system should be configured for the same
Eg. Flipkart allows cancellation of orders even after the product is shipped

Collect/Cash on Delivery

Amazon Sourcing Strategy

Vendors can list their products on Amazon Seller Central IT system

Amazon reviews the products before putting them on sale on its site

Vendors products are allocated space in warehouse

Vendor can monitor inventory using Seller Central and is responsible for

maintaining the requisite inventory by sending packages to Amazon fulfillment

centers

Charges are applicable for storing, shipping and transportation of products to

customers depending on the size of the product

Advantages for vendors

Reduced employee overhead required for packing and shipping

Amazon takes care of customer service queries

Returns are processed by Amazon itself

Increased visibility of products and higher sales due to new channel

Economies in transportation (as vendor sends a lot to amazon)

Contd..

19-01-2012

Amazon Sourcing Strategy

Vendors are given the sales forecasts and are expected to meet them (subject to
penalties if they dont)
Review period is given to vendor where in his ability to meet Amazons requirements
is examined
Fast moving items - Amazon procures them on priority and manages the inventory
itself
Eg: Harry potter titles just after release, ipads/iphones

Small items which take up very little space Managed by Amazon

Orders for bulky/awkward items like washing machines, refrigerators etc are drop
shipped directly by manufacturer customers tend to order them individually
Question!
Why did Amazon reduce drop-shipping through vendors though it appeared profitable?
Customers order products belonging to different categories - Amazon ends up paying higher
transportation charges
Lack of inventory control you might end up selling what the vendor does not have in stock

Amazon
Order Fulfillment system
Costumer places
an order

Items are placed in

crates along the
conveyor belt.
Automatic bar code
readers track
movement

Computer
checks the
location of item

Pickers pick an item

from the bin whose
light glows and reset
it (multiple if
necessary)

Distribution
center is notified

Flow meister
assigns orders to
employees

All the crates arrive at a central location where bar codes are matched with order
numbers. Items even if picked at different locations slide into common
cardboard boxes. These boxes are packed, labeled and routed to truck bays.

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Amazon Distribution strategy

Critical Decisions to be made when opening a distribution center
A. Location of fulfillment center/RDC
B. Capacity of RDC

C. Automation level of machinery

Factors influencing the decision

1. Projected demand volume which can/needs to be met

2. Reduction in transportation costs

3. Projected increase in customer service level

4. Number of vendors willing to sell on Amazon from that region

5. Fixed costs paid upfront (warehouse construction, land acquisition,

Material handling machinery, IT Infrastructure)

6. Recurring fixed costs (Employee salaries, maintenance, utilities, taxes)

7. Recurring variable costs (Material handling charges, Packaging material)

Amazon Inventory Management

Supply Side
Programs identify the critical inventory level for each item at each location
depending on parameters such as
a. Historical demand data
b. Supply lead time specified by vendor
c. Transportation time to customer from various fulfillment centers
As soon as stocks reach the critical level, computer flags the vendors and also
informs the CSR to follow up
Demand Side

Programs identify the suitable fulfillment center based on

a. Lead time specified by customer (shipping time)
b. Work load on fulfillment centers
c. Existing backlog

Based on demand data, decisions are made on where to stock up the item;
A slow moving item is maintained at a centralized location and shipping times
are accordingly offered to the customer.

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Logistics @ Amazon
Handled by third parties like USPS, UPS, Fedex etc depending on region
Long term contracts but pay per use leveraging volume of business

Shipping method based on customer choice Overnight/Air/Land Flexibility

Managing Returns Critical aspect of Supply Chain
Managed by third party Altrec Corp.
Transportation:

Contract with UPS Pickup/Customer Drop off at location

Customer can also request return label shipping will be paid by Amazon
Re-packing:

Inspection of item on receipt Refund based on condition of item

Defective send back to supplier/Open package wrong item was supplied

Assigning SKU to item since item condition has changed refurbished
Inventory management of refurbished item

Emerging distribution practices by

e-retailers

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Cash on Delivery

30% of orders face problems during transaction process connectivity issues

Lack of consumer trust Cards used only for withdrawing money

COD Started first in China, replicated in India

Evolution of Value Payable Post (VPP) offered by India Post

Advantages? Really?

Serious supply chain issues due to added complexity

Collection charges 35 to 65 Rs per transaction

Cash cycle increases by 15 days on an average

Increased volume of returns Reverse Logistics Additional Cost again!

Third party COD providers like Gharpay capitalizing on increasing online biz

In House Delivery Service

80% of orders are COD Increased delivery costs

Last mile delivery is handled by companys agents in Tier 1 and 2 cities

Example

Delhi warehouse Lucknow demand center (Flipkart/Infibeam)

Consolidated orders are sent in bulk through blue-dart to Lucknow flipkart

office (lower transportation costs)

Individual orders are sorted here and assigned to delivery agents

(accountability and visibility no trust issues/no third party)

Collect money and deposit in a bank the next day (reduced cash cycle)

Any returns are consolidated every week and sent back to warehouse (reduced
cost of reverse logistics)

But extra overhead and transportation costs Tradeoff? Cost-benefit analysis?

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Web links
An example of the customer issue due to lack of co-ordination between
UPS and Amazon
http://allfreelancewriting.com/2010/01/07/freelancing/general/whatamazon-and-ups-taught-me-about-customer-service/
Amazon distribution center
http://www.youtube.com/watch?v=yw5NcaMxfxU
Third party COD service provider
http://gharpay.in/pricing/