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How is the growth of e-commerce affecting supply chains?

The rise of e-commerce and the digital revolution have shifted the balance of power in the relationship between retailers and consumers. E-commerce facilities now allow businesses to sell directly to their target market. Today’s consumers can influence the way retailers and other online businesses operate to meet their needs and wants, via online channels. One impact of this has been and still is, a major driver of disruption in supply chains.

Supply chain is the backbone of e-commerce

Operational capability and a track record in B2B do not always translate easily to the consumer environment. B2C companies face the risk stumbling over their lack of supply chain infrastructure. They may have a poor understanding of the dynamics involved in distributing goods direct to the customer. Activities are more complex; product lifecycles are shorter, order sizes are smaller requiring different packaging and there are many more deliveries.

Retailers need to maintain or even exceed the quality of their service that customers experience in their traditional sales channels. This often requires organizational changes. Selling direct to customers, either using own facilities or via an outsource partner, require new skills and investment in technology and communication tools. The role of information systems is much more important when serving the consumer online.

The impact on areas of the supply chain

1. Sourcing

Because there are more configurations and variants in products and their life cycles are shorter, sourcing strategies have to change. Large retailers with strong buying power will still be able to buy directly from manufacturers but need to explore more efficient and slicker buying processes. Shorter delivery times from the manufacturer and specific consumer-related packaging and labelling are required.

2. Inventory and warehousing

As a result of the increase in the range and variety of products to be stored, the number of stock keeping units (SKUs) grows. One question is: do you allocate dedicated stock for online sales or not? Optimising multiple inventories requires different rules, e.g. buffer stock and returned items demand more space. Any new inventory management activities may require some investment in upgrading technology.

3. Distribution and warehousing

Order picking and packing for B2C requires a greater frequency of picking because order sizes are decreasing and speed is required. If there is no capacity for growth, how and where do we do this? It may be necessary to outsource distribution and/or find extra warehouse space after considering the cost and viability of the options. Besides separating e-commerce stock and regular retail stock, there is a need to accommodate value-added services required by customers.

4. Shipping and transport

There are more frequent deliveries to a greater variety of locations. What types of transport logistics will be needed? Drop shipping may be an option. This involves transferring customer orders to a service provider or middleman who fulfils the orders by shipping the items directly to the customer on your behalf.

5. Reverse logistics and returns

Dealing with returns and reverse logistics is a new area of concern in the world of e-commerce. What systems and processes are required? Because of the increase in returns due to online purchasing, return logistics for e-commerce are often outsourced to a third party. It may be necessary to handle the return stream for e-commerce separately from other returns. Added complications occur when managing returns from other countries.

6. Customer service

For retailers, the attraction of e-commerce is great exposure for their brands and the opportunity to get closer to their customers’ needs and aspirations. However, failure to provide customer satisfaction comes with reputational risk. The challenge is to remain profitable while meeting consumers’ expectations and this is where supply chain plays an integral part.

More about the supply chain challenges in e-commerce in our next article.

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