Opinion: Supply Chain & e-Commerce - India's new policy

Dear Readers,

This article is about the latest Foreign Direct Investment (FDI) Policy Review in the eCommerce Sector announced by the Government of India on December 26, 2018. I have tried to provide an overview of the policy from a supply chain perspective in the Indian context. This is an attempt to predict how these policy changes could impact the genetic makeup of the Indian supply chain and why I think so. Let me start with some definitions. This will help us start from a common ground and move in the same mindset as our argument unfolds.

Supply Chain as a backbone of e-Commerce

Definition e-Commerce: e-Commerce has been defined as buying and selling of goods or services using the internet. They can be commercial transactions or sale of physical products online. These transactions have been categorized into four segments i.e. B2C, B2B, C2C, C2B, covering almost every kind of transaction that can take place between a buyer or a seller. [2]

There are many players e-commerce’s in pie. Big, Medium or Small who are into e-commerce and many other business entities who actively harness e-commerce’s potential. Some of world’s well known players are mentioned below. On the other hand, Medium or small scale players have a propensity to distinguish themselves on many criteria like geographic territories they serve, product categories they offer etc.

1. E-Commerce: Alibaba, Allegro, Asos, Amazon, Americanas, Bonanza, eBay, Extra, Flipkart, GeM, JD.com, Jumia, Linio, ONDC, Otto, Rakuten, Shopee, Shopify, Vente Prive, Zalando

2. Retailers: Aldi, ASDA, Costco, Carrefour, Tesco, Walmart

3. Businesses: Apple, IKEA, L’Oreal, LVMH, Home Depot, H&M

Definition Supply Chain: Supply Chain is a flow of resources — physical flow, information flow and finance flow — and their processing between multiple entities starting from raw materials to final products delivered to customers. Supply Chain is a domain that includes both engineering (by virtue of use of Operations Research in supply chain’s strategy evaluation and generation) and management. There are many core activities associated with supply chains and as per CSCMP 'logistics management' is one of them.

Supply Chain has been playing a vital role in the success of e-commerce’s transactions. There are many active strategies deployed & the appetite to harness its potential is huge.

Estimates (previous): The supply chains will be the biggest beneficiary of new face of technological innovations. The potential value created by impact of Artificial Intelligence & Analytics on supply chain function will have an estimated impact of $3.6-$5.5 trillion and on Transport & Logistics the potential value impact will be of $0.8-$1 trillion. [7] In 2021 e-commerce’s growth is expected to reach 2.14 billion digital buyers representing 17.5% of world’s e-commerce’s share of total global retail sales. [3]

India’s mutating Logistics sector

India was a +$2.61 trillion economy (Nominal, 2017) or +$9.46 trillion economy (PPP, 2017) & was forecasted to be a +$4.66 trillion economy (Nominal, 2023) or +$16.79 trillion economy (PPP, 2023). [4] At least since past one decade India’s logistics sector is in transformation phase. Her developing Logistics sector was assumed to grow at 12% annually. In 2017 the average Logistics Cost for India was 13% as percentage of economy. On the other hand, for mature Supply Chains like EU’s this cost was +9% and USA’s +8%.

Besides, riding on her existing momentum of building logistics capabilities across India — like transportation networks & ports development, streamlining taxation & regulations, technology adoption etc — and since November 2017 India planned to build 34 Mega Logistics parks, eased fund-raising for Logistics projects, kicked-off National Logistics plan, and is planning to launch a Logistics Portal to prune massive costs. [6]

Dual Value Projection (previous): “… If India moves toward creating mature and efficient supply chains, her economy grows at an average +7% up to 2025, and it’s Logistics sector grows at 12% annually: then this growth coupled with efficiencies in supply chains may lead to savings of +$42 billion (approx.) with every 1% drop in India’s Logistics Cost. So by reducing logistics cost from 13% to 10% India may realise benefits of up to $125 billion by 2025….”

Please note: Total cash strapped in inventory and other processes were NOT part of the proposed probable estimates. Second, if assumptions or forecast figures change then proposed probable estimates too may change.

Indian Government, in November 2017, granted “Infrastructure Status” to her Logistics sector and in January 2018, planned to reduce it’s Logistics cost from 13% (or 14%) to 10% by 2022.

India’s e-commerce policy (review) from Supply Chain’s perspective

In first two sections you have read WHYs and now lets delve into HOWs? Under the parameters  &  assumptions so far defined and vectors given, lets first read the policy review published on 26 December 2018 by Government of India.

Readings from Policy Review 2018: [5]

1. India has (re)defined e-commerce into 2 segments. “Inventory based Model” & “Marketplace based Model”

1.1 Inventory based Model: Where an entity owns the inventory of good and services and is sold to consumers directly, mostly B2C transactions.

1.2 Marketplace based Model: A technology based platform provider by an e-commerce entity and they act as a facilitator between buyer & seller, mostly B2B transactions.

2. Some of the Conditions

2.1 Inventory based Model:

2.1.1 100% Foreign Direct Investment is allowed

2.1.2 If >25% of its inventory is sold by a single platform or its group companies

2.1.3 Entity is permitted to sell its products on the platform run by itself.

2.2 Marketplace based Model:

2.2.1 00% Foreign Direct Investment is NOT allowed

2.2.2 Entity will not exercise ownership or control over Inventory

2.2.3 Entity is not permitted to sell its products on the platform run by itself.

2.2.4 May mostly act as PaaS, either for B2B or B2C sales

2.2.5 May act as 3PLs

2.2.6 May facilitate payment of sales

2.2.7 Seller will be responsible for any goods delivery, customer satisfaction, product’s warrantee/guarantee.

3. Graduation (automatic): If an e-commerce’s Marketplace based Model entity has equity participation or its group companies or having control over inventory or will sell >25% of a vendor’s inventory then it will graduate from Market based Model to Inventory based Model.

Supply Chain’s perspective on Policy:

If you have observed, this policy review has nudged India’s e-commerce’s activities into realm of Supply Chain. There is a renewed emphasis on Inventory & Logistics management. E-commerce entities or their users may be obliged to rethink their supply chain strategies. Those strategies may start influencing their revenues, costs and assets to start with. I believe, in following 2-3 quarters, or more for some, from the effective date of policy, this review may pose heightened risks but in long term e-commerce’s performance and execution will be a stealth. I propose, the objective should not be to reestablish the equilibrium but to make supply chain their core competency by changing its genetic make up — India’s supply chain as a sector is uncertain, mutating, & expanding. This is what India may attain by end of 2025: —

1. Points 2 (Conditions of policy), may lead to surge in Supply Chain based service providers e.g. in PaaS, in 3PLs, freight carriers etc

2. Business entities who graduate from “Marketplace based” to “Inventory based” either may be obliged to innovate their supply chain networks or may use services mentioned in point above.

3. These changes may lead to many supply chain based innovations, may be by established players or by start-ups.

4. I think, if played well, Omni Channel networks may be “New Supply Chain Norm” in India by 2025.

The compounding benefits of newly created core competence of India’s Supply Chains — won’t be limited to e-commerce players. It’ll be a boon to all the business entities. Especially for medium & small scale enterprises or the start-ups: if they intended to scale up or diversify they may emerge as the biggest beneficiaries of shared supply chain innovations in networks, processes, and technologies. This may be a genesis for India’s multitude of “Mini Supply Chains” as new norm by end of 2025 — one of the many irresistible arrows in India’s quiver.

References

1. Dollar values are in US dollars.

2. Encyclopedia. shopify.com

3. E-commerce’s survey time period 2015 — 2017. statista.com

4. Forecast Reports. April 2018. International Monetary Fund (IMF).

5. Review of the policy on Foreign Direct Investment in e-commerce. 26 December 2018. Press Note No. 2 (2018 Series). Department of Industrial Policy & Promotion, Government of India (URL: https://dipp.gov.in/whats-new/press-note-2-2018)

6. Royal R, Singh S, Indian Logistics Sector: On the Path of Transformation, June 2018 National Institute of Transforming India (Niti Ayog), Government of India

7. Visualising the uses and potential impact of AI and other Analytics, April 2018. McKinsey Global Institute

8. Government e-Marketplace (GeM), Department of Commerce, Government of India

9. India Brand Equity Foundation (IBEF), Department of Commerce, Government of India