Business / View

Race is to the swift in winning online customers

By JIAN LI (China Daily) Updated: 2015-04-14 10:52

Sending orders for next-day delivery costs more than slower service, right? Maybe not, and Chinese e-retailers that cut their shipping time in half can win customers for no additional cost.

The nation's e-commerce market has seen tremendous growth, reaching $448.8 billion in sales in 2014, nearly 11 percent of all retail sales.

China has become the world's largest e-commerce market, surpassing the United States, and it is just getting started.

With underdeveloped infrastructure and support systems, the country's e-retailers are on the lookout for competitive advantages based on systems they already have, especially as many e-retail offerings have become commoditized and leading e-retailers have yet to be profitable.

One factor can provide a competitive edge: the logistics service level-specifically, the speed of order fulfillment.

In China, e-retailers could cut express delivery time in half-from 48 hours to 24 hours-without spending anything more. This could be a vital move in the quest to attain important e-retail goals, such as meeting consumers' expectations.

A significant portion of online shoppers are "convenience seekers". They want to save time, get a fast response from e-retailers and have orders delivered to their doors-all of which requires fast and reliable logistics and delivery support.

Faster delivery is also a new way to differentiate. Online offerings have become commoditized in China. Retailers have similar products, equally matched geographic coverage, comparable prices and even similar promotions. Logistics is where e-retailers can set themselves apart, even as the country's logistics industry remains largely immature.

In Chinese e-retail, payment on delivery is common. Some shoppers place duplicate orders with different suppliers, pay for the order that arrives first and return the others. This is likely transient behavior: customers are experimenting and will eventually develop loyalty for preferred e-retailers. In the meantime, it is a costly practice for e-retailers to absorb-and it makes delivery speed an essential way to capture customers.

Faster service-from the moment an order is placed until it is delivered-costs more than slower service, or so many believe. In most areas of logistics and operations, this speed-cost paradigm is true. But not for e-retailers, thanks to features that are unique to the typical e-retail supply chain.

To deliver orders quickly, stock usually needs to be held and the orders picked and packed in close proximity to where customers live. This process determines the number and locations of fulfillment centers.

Having more FCs close to customers has several ramifications: There will be fewer detours and more direct shipping routes from distribution centers to destination hubs and depots and therefore less distance traveled.

In addition, faster service means less in-transit inventory; although having more FCs will affect the inventory-pooling effect of safety stock at the FCs, this drawback does not outweigh the other benefits. The end result is faster deliveries at a lower cost.

To challenge commonly accepted views about service and logistics requires a deep understanding of customer needs and the e-retailer's own cost structure through data-driven analysis at the category level, and even the level of individual products.

No matter how fast a retailer claims its customer service is, reliable service is ultimately what matters most. In the US, slower but reliable ground service (which can take five to seven days) accounts for about 70 percent of the total express market and close to 100 percent of the e-retail express market.

All of the reasons that people shop online-cost, speed and product assortment-are factors that go into designing responsive, reliable e-retail service levels. Only after those components are in place can e-retailers truly provide customers with winning value propositions. And that is the competitive advantage.

The author is principal of A.T. Kearney (Shanghai) Consulting Co Ltd. The views do not necessarily reflect those of China Daily.

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