Nov 23, 2016

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

R Jayaraman

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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