Supply Chain SWOT Analysis

Clearly, with inventory and allied costs constituting 15-20 per cent of a portal’s operational costs, e-retailers are once again evaluating the most viable strategy. This debate has once again reignited on the inventory-based versus marketplace business model with Flipkart recently announcing the launch of its marketplace platform.  In a pure marketplace model, an e-retailer does not hold any product inventory, and once an order is placed online, a supplier of the good or service, sends it directly to the online shopper.

Flipkart is not alone. Pepperfry utilises the managed marketplace model to ensure high quality for its products via suitable quality checks and uniform packaging standards through fulfillment centres, but does not hold any inventory. This model has been popularised globally by eBay and it also ensures a standard packaging format across geographies, for products purchased on its site.

And, with online players still debating on which is the most viable model, several of them are also using a hybrid model, like Yebhi which operates in both managed marketplace and inventory- based model, on a 30:70 ratio, respectively.  Manmohan Agarwal, CEO and Co-Founder, Yebhi, said, “We have tried to ensure a perfect blend, in terms of customer service levels and profitability.”

Striking a similar note, Sanjiv Kathuria, co-founder and CEO, Dotzot, a special e-retail logistics arm of DTDC, said, “The inventory-based model ensures much better delivery standards. Similarly, the managed marketplace model also helps considerably to improve delivery related standards.” 

According to a recent report by Franchise India, the online retail market is expected to double over the next two years to Rs 7, 200 crore, given 40 million browsers and growing each day.

Selecting the right model 

The selection of an appropriate business model depends upon the product and service offered by an e-retailer, coupled the customer service standards that are to be implemented.

For instance, in the case of e-retailers offering home and lifestyle products or electronic accessories with a wide range of products, the marketplace model is viewed as more appropriate. This business model also helps an online player to scale up his operation rather quickly, and earns commission in the range of 6-10 per cent from suppliers. “Products which are not standardised in terms of design or available in large variety, should be sold through a marketplace model to avoid high working capital costs,” said Ashish Shah, COO and Co-Founder, Pepperfry.

Apart from that, the government’s FDI policy also favours the marketplace model. Deepa Thomas, eCommerce Evangelist, eBay India, said, “An online marketplace is an entrepreneurial platform and permits faster growth at lower distribution costs, across geographies. Also, it is a beneficial model for sellers, as we take care of marketing and payments, and suppliers can instead focus on sourcing and customer service.”

Nevertheless, in a marketplace model if suitable steps are not taken, it can result in lower customer satisfaction levels due to delays in product deliveries and non-uniform packaging, coupled with product quality levels not uniform. In addition, the discounts offered for various products are not under the control of an e-retailer.

“In a marketplace model, there are often issues related to the shipping cost and it can create friction with the consumer,” said Agarwal of Yebhi.

On the other hand, the inventory-based model is viable for e-retailers with a limited range and which can be stored with ease. In addition, it broadly helps to ensure more uniform customer service standards via quality checks, uniform packaging and optimising delivery schedules.

Thomas of eBay India added, “In an inventory-based model, an e-retailer needs to manage its inventory cost, coupled with expertise in demand forecasting and supply chain, which often may not be possible.”

Operational strategy

E-retailers operating in either of the two business models have often taken best practises from the opposite model and suitably incorporated into their operational strategy, in a bid to improve customer satisfaction levels and profitability. For instance, the marketplace model has been tweaked to overcome the challenges of packaging and quality control.

Globally, Amazon follows the managed marketplace model for half of its business worldwide, while in India, Pepperfry was the first one to adopt it. And, Pepperfry has opened fulfilment centres where it receives the product ordered online, does suitable quality checks, ensures uniform packaging and sends it for delivery. This strategy enables it to ensure customer service standards across product categories.

“This model requires a high level of efficiency and consistency, coupled with continuous interaction with sellers. And, it permits to quickly scale up the business,” adds Shah of Pepperfry.

Similarly, Yebhi which operates on a hybrid model has its own logistics team to ensure timely delivery for its products, and also helps them to reduce costs related to product returns.

Clearly, as e-retail market matures, and supply and logistic chains improve, it would become increasingly viable to adopt a hybrid business model.