THE LOGISTICS CHALLENGE OF E-COMMERCE

The vertiginous pace of growth of virtual transactions has transformed logistics into one of the main barriers to the development of e-commerce, especially in the case of business to consumer – B2C commerce, involving physical products for the final consumer.

The first general alert occurred during the last Christmas period (1999) in the United States, where the explosion of Internet sales produced a real collapse in the existing attendance and delivery systems. An indicator of the extent of the problem, captured by research carried out by the Jupiter Corporation, are the 25% of customers dissatisfied with the delivery service for their purchases, made during the Christmas period. There is nothing more frustrating than a Christmas gift that is mistaken or delivered after December 25th.

The most surprising thing is that this happened exactly in the USA, a country with a strong logistics tradition, where excellent companies such as Wal-Mart, LL Beans and Frito-Lay are emerging, as well as fast delivery service providers of recognized competence such as UPS , FedEx, and the United States Postal Service – USPS. The most plausible explanation for this logistical “disaster” is the recognition that B2C electronic commerce has unique characteristics, which create special demands that are difficult for traditional logistical systems to meet, no matter how competent they are. An indication of this phenomenon is the fact that Wal-Mart itself, recognized worldwide for the excellence of its logistics, decided to hire a third party, Fingerhut Cos. Inc., a specialist in low-volume order fulfillment, to handle the operations of its virtual store, at the same time that Amazon.com, the largest and most well-known online retailer, decided to invest around US$ 300 million dollars to create a logistics infrastructure, made up of 7 large warehouses, specially organized for e-commerce, with the aim of generating internal training that guarantees differentiation based on the excellence of logistics services.

Unlike the logistic systems of the old economy, developed to attend trade between companies, and which are characterized by large volume orders, where most deliveries are made on pallets in stores or distribution centers, virtual trade logistics are characterized by a large number of small orders, geographically dispersed, and delivered door-to-door fractionally, resulting in low geographic density and high delivery costs. Existing estimates are that door-to-door deliveries carried out by virtual commerce companies cost two to three times more than traditional commerce deliveries carried out between companies.

Despite the numerous possibilities of the Internet, the physical product cannot be shipped over the network. Therefore, the distribution system is decisive for the success or failure of companies that work with B2C e-commerce. This changing scenario creates enormous challenges and opportunities for the development of logistics in all places where e-commerce is evolving. Understanding the characteristics of these challenges and opportunities is the main objective of this article.

THE EVOLUTION OF E-COMMERCE AND ITS IMPACT ON LOGISTICS

The e-commerce diffusion process is closely linked to the emergence of Amazon.com in 1995, in the USA, and the rapid success of its sales, which have been growing at astonishing rates since that year. Already in the first month of operation, Amazon.com managed to sell books in all 50 American states, and in 40 different countries around the world. In four years of operation, that is, between 1995 and 1999, the company started from zero, to US$ 1,7 billion in revenue, an unprecedented feat in the history of world retail. The success of Amazon.com sales has awakened the attention of countless companies and entrepreneurs around the world to the enormous potential of the new retail concept, giving rise to a number of new B2C e-commerce initiatives. The direct consequence of these initiatives has been the rapid growth of this form of commerce in all industrialized countries of the world. The US, which is now responsible for around 70% of the total volume of online transactions worldwide, is a good example of the current and expected pace of e-commerce growth. Figure 1 presents the evolution of e-commerce sales in the US between 1998 and 1999, and projections from the year 2000 to 2003.

In figure 1, it is possible to verify that B2B e-commerce is growing at a much higher pace than B2C, and should jump from a value of US$ 109 billion in 1999 to US$ 1,33 trillion in 2003. Although much lower, the B2C electronic commerce, reached a volume of US$ 18 billion in 1999, and should reach the sum of US$ 108 billion in 2003. As a consequence, it is estimated that, for the year 2003, the construction of 10 million meters squares of new warehouses specially designed to handle the 2,1 billion domestic deliveries expected to take place that year. The United State Postal Service and UPS, which together handle about 75% of all e-commerce deliveries, are stretched thin and working to reduce their respective operating costs. Along with the need to build warehouses, there is a growing demand for providing information on delivered goods, which is forcing companies to make large investments in information technology.

Companies involved in e-commerce are beginning to realize that in order to fulfill orders directly from the final consumer, it is necessary to have distribution centers that allow picking at the level of individual items, with a high degree of efficiency, in addition to systems that make it possible to manage a huge number of orders, made up of a small number of items, and often placed by new customers, about which there is no registration information, either from a commercial point of view or from a location point of view. More than that, these companies are discovering that Internet sales tend to substantially increase the rate of return of purchased goods, because when making the purchase decision, the customer does not have the opportunity of physical contact with the selected products, and often is disappointed when physical delivery takes place. In the US, the rate of growth of returns has been greater than the rate of growth of virtual sales. In some stores, the rate of returns reaches the alarming rate of 30%. What is worse is that the overwhelming majority of logistic systems in operation are not prepared to carry out the reverse logistics, necessary to bring back the products returned by the end customer.

Given this scenario, it is easy to understand the fundamental role of logistics activities in the new world of e-commerce. According to Peter Drucker, the most recognized guru in the administration area, distribution, traditionally considered a support function in traditional retail, starts to constitute a fundamental competence for companies involved with e-commerce. Only through it can companies aim for differentiation and achieve competitive advantage.

Until recently, e-commerce order fulfillment issues have not surfaced due to the fact that most companies have been controlling complexity by limiting the number of SKUs sold and the locations served, by using regional partners, and by charging an average value for delivery freight. Furthermore, the number of orders was still very small, averaging between 500 and 1000 per day. With regard to international sales, a survey with a sample made up of the largest American virtual retailers indicated that around 85% of the companies do not carry them out, and the remaining 15% do so with many restrictions. Customs problems get in the way a lot; Customers often return goods because, only upon receipt, do they discover a series of tariffs that must be paid and which were not explicit at the time of purchase.

But these restrictions will have to be relaxed, so that e-commerce can take advantage of one of its biggest potential competitive advantages, that is, the capacity, almost unlimited, to add new SKUs and to act with global geographic coverage.

Indeed, the revolutionary power of Internet technology lies in its ability to break the paradigm of the trade-off between richness and breadth. Wealth concerns the capacity for personalization, interactivity between buyer and seller, and the diversity and depth of the information available. Scope refers to the number of customers that can be reached, as well as the variety of items that can be marketed. In the world of the old economy, when a company wants to act comprehensively, that is to offer a wide range of products to a huge number of customers, it is forced, for economic reasons, to limit the wealth of information / communication with its potential customers. .. That is, it is forced to use a generic communication strategy, a mass approach. On the other hand, if you want to use a personalized marketing strategy, that is, rich in information, interaction and customization, it will have to restrict the number of customers approached and products offered. With Internet technology and its power of network communication, this trade-off tends to disappear, allowing companies to combine comprehensiveness with great richness in the process of communicating with their customers. Therefore, by limiting the number of locations reached, or the number of items offered, virtual retail is giving up one of the most revolutionary characteristics of e-commerce. To get rid of these restrictions, a consequence of the difficulty of meeting and delivering physical products sold over the Internet, companies will need to invest in new and creative logistical structures, as a way of overcoming the challenges of this fantastic new world, efficiently and at competitive costs.

FACING THE CHALLENGES OF E-COMMERCE

To adequately face the challenges of e-commerce, the first step is to understand the specificities that generate the need for new logistics solutions. The lack of awareness about the size of these challenges is the main factor generating the problems faced by virtual commerce companies. Surveys carried out in the US indicate a strong tendency for e-commerce companies to focus their attention on website development, with a strong emphasis on reliability and marketing issues, relegating efforts to create logistical structures adequate to the challenges presented to the background. By adopting this behavior, virtual companies run three types of risk. First, they run the real risk of losing customers who are dissatisfied with the lack of logistical services. Second, they can lose money by misjudging existing logistical costs and inappropriate pricing policies with customers. Finally, these companies' distribution systems can get out of hand as they continue to operate based on traditional structures, such as the use of pallets, and inappropriate warehousing and picking systems. Table 1 below presents the main differences between traditional logistics and business-to-consumer e-commerce.

The analysis of Table 1 makes clear the need to develop specific logistics systems to meet the demands of B2C e-commerce. The currently existing systems certainly do not suit the characteristics of this new concept. For this reason, there is a strong tendency to seek new arrangements to face this challenge. Many of these arrangements involve three types of actors: the e-commerce company, responsible for the selection, purchase and sale of goods, a specialized logistics operator, responsible for order fulfillment (fulfillment), and a courier or express delivery company, responsible for by the physical delivery activity. Experience has shown that, contrary to what one might imagine, the biggest bottleneck in e-commerce is not found in physical door-to-door delivery, but in fulfillment, or order fulfillment, which includes order processing, inventory management, coordination with suppliers, and sorting and packaging of goods. In the USA, for example, the existence of companies with a great tradition in door-to-door express delivery, such as UPS, FedEx, and USPS, makes the physical delivery activity very effective from the point of view of delivery times and consistency. , though still expensive due to geographic dispersion of delivery locations. Even in Brazil, where there are no companies with the tradition and sophistication of UPS and FedEx, Empresa Brasileira de Correios has been playing this role. Despite its technological shortcomings – mainly with regard to information technology – which do not allow the tracking of goods in transit, Correios has a formidable physical distribution network spread throughout the country, which has been used by e-mail companies. commerce, and by logistics operators specializing in fulfillment, to deliver more than 75% of purchases made through virtual retail.

A recent survey carried out by the Center for Studies in Logistics at Coppead, showed that the biggest problems of e-commerce logistical performance in Brazil reside in the stages that go from preparing and sending the order by the consumer, to transferring the product to the customer. carrier for physical delivery. From the moment the transporter receives the goods, along with the correct information, the delivery process, mostly carried out by the Post Office, tends to occur with relative tranquility, although errors still occur and there is a lack of tracking information for the goods in transit. . The main problems encountered during the order fulfillment stage were, for the most part, of an informational nature: difficulties with closing the financial transaction, – mainly when using the bank slip, but also the credit card – difficulties in obtaining information about the status of the order, and errors in the transcription of the addressing information, involving city, zip code, and name of the recipient. It was also verified the occurrence of problems related to the unavailability of products and picking errors. These results reinforce the argument that the biggest challenges of B2C e-commerce are in the order fulfillment activity.

The growth in the number of commercial transactions via the Internet should further accentuate the situation described above. The greater the number of orders fulfilled and delivered, the cheaper and easier the physical delivery will be – due to the growth in geographic density and the resulting economy of scale – and the more complex and expensive the order fulfillment process, due to the multiplication of the number of suppliers and items to be controlled, separated and packaged.

The solution to this problem necessarily involves the creation of new logistic models for fulfilling orders. A solution that is beginning to be identified as adequate is what is being called an “end-to-end” logistics system. According to Forrester Research, this model is an extension of the system used by some mail order companies and involves visibility of the transported package, as well as the continuity of the service provided, from the moment of purchase to the moment of delivery. There are three basic principles of this model.

The first is strengthening the relationship with the customer. The service provided must exceed customer expectations. New types of services can be offered to consumers, increasing the possibilities of interaction between them and the company throughout the order cycle. The customer must be informed of all the details regarding the complete order cycle, as well as the availability of the products, delivery forecast and the total cost of the transaction. Companies must be proactive in sending information regarding the customer's order, especially when the goals previously established at the time of purchase cannot be met. In addition to these concerns, companies must design and manage an agile and simple after-sales service. That is, the structure of after-sales services must allow customers a simple and quick process of returning the goods, both in the case of cancellation of the purchase, as well as exchange. To provide this service in a planned manner, companies must be concerned with both fulfillment and reverse logistics.

The second principle of the model is to focus on packages, not pallets. Companies must prepare for a large flow of orders composed of a few items and configure their logistics system in order to obtain the desired service level. Those who want long-term success must prepare for shortened order cycles, often lasting hours rather than days. Companies should try to reduce the number of returns as much as possible. As sales forecasting can be a difficult task when it comes to e-commerce, it is necessary to prepare for peak periods, often negotiating special services with suppliers in order to contemplate these phases. In short, companies must carry out good demand management. In addition, they must be concerned with consolidating items into a single delivery without compromising inventory costs. Another recommendation is to customize services for each order, such as assembly, gift wrapping and promotions, seeking to carry out one-to-one marketing.

The third and final principle concerns door-to-door delivery. Companies must prepare for all types of delivery, be it commercial, residential, with requested assembly, that contemplates the absence of the customer, etc. Many companies consider the delivery activity a commodity; but in e-commerce, it should be seen as a differentiating factor with customers. To this end, the customer must be offered several options for receiving the goods, providing maximum convenience. In this way, companies can, for example, allow the customer to pick up their order at a certain agreed location. And finally, companies should automatically handle exceptions, even allowing package redirection throughout the delivery cycle. This automation is necessary given the volume of daily orders, which no longer support manual and unplanned handling of exception cases.

BIBLIOGRAPHY

HUPPERTZ, PAUL. Market Changes Require New Supply Chain Thinking. Transportation & Distribution, p. 70-74, Mar. 1999.

JUPITER News: Online Holiday Sales Hit $7 Billion, Consumer Satisfaction Rising: Long-term Loyalty Poses a Hurdle for Web Merchants. Available on the INTERNET via http://www.jup.com/company/pressreleaselist.jsp. Archive consulted in 2000.

EVANS, PHILIP, WURSTER, THOMAS S. Getting Real About Virtual Commerce. Harvard Business Review, p. 83-94, Nov./Dec. 1999.

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MCCULLOUGH, STACIE S, DOLBERG, STAN, LEYNE, LIZ , REINHARD, ANDREW A. GATOFF, JASON. Mastering Commerce Logistics. The Forrester Report. Aug. 1999.