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Logistics and the E-commerce Revolution

Logistics, as a Discipline is very much in the news these days. It is the Science of moving products from the point of origin to the point of consumption in most efficient and effective manner. By efficient we normally refer to the cost factor and by effectiveness we refer to how well we have been able to meet customer needs.  Hence, if we deliver a parcel to the customer at the most economic cost we may still not succeed because we may deliver it outside the customer’s definition of delivery time.  Similarly, we may deliver a parcel within the delivery time but we may fail to deliver on the efficiency front if there are cheaper options available.

Logistics has a big role to play in e-commerce. However, till a long time, the emphasis used to be on working of the effectiveness part. Hence, e-commerce players used the services of Blue Dart and Fed Ex for their deliveries. These logistics partners were also integrated to the e-commerce players like Flipkart through APIs. The API integration allowed the complete visibility of the package once it left the seller and till the time it got received by the customer. However, this approach got into problems when e-commerce players tried to scale up (Example – Flipkart Big Billion Day debacle) where capacity constraints prevented Flipkart from being effective. Along with this, the mindset of the e-commerce sector also changed. A sector which used to talk of GMV (Gross Merchandise Value) earlier, suddenly had to talk of profits or more appropriately, look at their costs.

Hence, the next trend in the e-commerce sector was towards building own Logistics capability. Flipkart for example, delivers 55% of parcels through its own Logistics arm : e-kart. This is a big achievement if one considers the scale of India (20,000 plus pin codes) and the fact that most of the orders come from Tier 2 and Tier 3 cities. Along with this came the emergence of private logistics players like Delhivery and E-Com Express. These private players were focused on the needs of the e-commerce players (niche operators). They offered specialized services like Warehousing and managing of Reverse Logistics, which is basically the management of Logistics of products that are returned by customers. These new players in the Logistics sector were also favorably inclined towards technology. Besides API integration, they also had investments in Warehousing technology and Last Mile Logistics (from the Destination Warehouse to the Customer).

The result of all these developments was that the e-commerce sector was able to move up on the efficiency frontier. The efficiency frontier is basically a trade-off between Customer Service Level and the Cost of delivering the service (another word for Logistics Cost). This basically means that if an e-commerce player wants to increase its service level to customers, it can do so only by increasing the logistics cost. However, the growth of the logistics sector especially in-house logistics and 3PL partiipation has allowed the Industry to do both – increase customer service and also bring down the cost of logistics. As a result, we also have many innovations like Same Day Delivery and Instant Payments to customers who return. This is made possible by the great level of integration that has been achieved in the e-commerce supply chain.