DISTRIBUTION AND RE-DISTRIBUTION IN E-COMMERCE

Leif ENARSSON, Växjö University, Sweden

1. Introduction Since its introduction, e-commerce via the Internet has gone through an up-and-down cycle, mainly depending on the problems with the concepts of distribution, but also with the return of products which do not satisfy the customers. After some years of ecommerce we can now establish that the success of e-commerce is very much dependent upon an effective distribution system, and also of a system that can take back not wanted products (for reuse) in some way. This is particular distinct in the B2C commerce. This paper is based on two investigations (pre research studies); one treats the e-commerce distribution systems, and the other re-distribution (return) systems. The results indicate that it is the “old” companies, as IKEA, who are the most successful in creating e-commerce distribution systems, even if they have much more to develop. Hardly any company has developed a re-distribution system that is fully satisfactory. Redistribution or return system is a field where the logistics researchers can develop models for new concepts.

2. Definition Even if this paper focus the physical distribution and re-distribution (return) system, it can be of some value to first define the conceptions “e-commerce” and “e-business”. According to Chaffey (2002) e-commerce is “all electronically mediated information exchanges between an organisation and its external stakeholders”. According to the same source, e-business is “all electronically-mediated information exchange, both within an organisation and with external stakeholders supporting the range of business processes”. The overall question is if it is necessary to define the conception when the e-prefix is encountered in so many different ways in business contexts. Mougayer (1998) means that it is an understanding that service can be offered to customers, and it is the business benefits that are obtainable through e-business that are important. I have seen many other different definitions, and my statement is that e-commerce is focused more on the market, while e-business is more a general business model. Nevertheless, all deal with electronic business communications. This paper treats physical delivery B2C systems, not marketing or other systems, and therefor e-commerce is the conception used in this paper.

3. E-commerce in B2C E-commerce in general is a developing process from information and communication to transaction, integration and automation. This development is especially for B2B, where the partners are in some way at the same stage in the developing process. In B2C the partners (i.e. the selling company and the customers) are not at the same level, and

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therefor it is much harder to use e-commerce in a way effective for both partners. Another fundamental reason is that the customers are so many (a grey mass) and the purchases so few. The conditions, too, put special demands upon the shaping of delivery channels. The delivery system is a convex system, whereas the return system is concave.

4. Different positions for companies in a B2C system When we examine delivery systems in B2C, we first have to classify the companies and their situation at the commencement of their B2C sales and also the development of their delivery and return systems. The first category has developed its delivery systems previously, and in some way also its return systems. The second category has developed neither delivery nor return systems, but refers customers to shops where customers can return products they do not wish to keep. The third category has no delivery or return systems at the B2C starting point. Thus we have tree different situations which very much affect the possible successes of the system. They also show an awareness in the company of the significance of adequate and effective distribution and return systems. In the main, the first category was, and still is, mainly mail order companies. Although they had to develop web sites and home pages, their previous delivery systems haven´t needed changing. They still use the same transport companies and the same structure from the time when they used mail, fax or telephone. In this category you have small specialised companies, but also very big ones as Redcats Nordic. The second category comprises ordinary shops which have opened up new selling channel. They have had to develop new distribution channels, with the difference compared to the other categories of having a return system for the customers which is easier to both understand and use. One can return not wanted products to nearest shop. In this category one will find companies as IKEA and H&M (Hennes & Mauritz). In the third category, without any distribution system, almost every actor has left the market. They where IT-companies, and lacked almost any knowledge of logistics. They where the first into the e-commerce market, and then first out, since those firms with a knowledge of logistics wisely waited so as long as there was considerable uncertainty about the market.

5. Basis for e-commerce distribution system A distribution system is a wide concept involving different logistics activities such as customer support, order handling, warehousing, packaging and transportation (Lambert, Stock, 1993). Nowadays it is common to use a third party company for these logistics activities. The e-commerce companies can buy these activities, which means they not have to invest in new distribution systems themselves (Stern, El-Ansary, Coughlan, 1996). These needs fulfil the detailed formulated processes with simple routines, good information systems, and also reduce any uncertainties over delivery. It also called a common kaizen system. The order itself is a basis for the whole logistics system, and therefor it is important that

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it be handled in right way. Order reception is a process that can be simplified by use of e-commerce (May, 2000). The customers themselves fill in the order and the orders are sent directly for picking and packing, without any hold-ups in the system. In other words; with e-commerce it is possible to put in an order by a direct link to the internal systems. For the mail-order company it means that orders are directly linked to the existing logistics systems. The order systems can to various extents be automated, but the more the order is effected electronically, the less likely the risk for error. The transport system is one of the most important factors in a delivery system. In ecommerce it normally comprises parcels weighing between 1 and 100 kilo, under 1 kg, the order can be sent as a letter. A traditional distribution system implies that a product passes three stages; the factory, the central warehouse and the local warehouse. This is not a postponement system. For companies which start e-commerce is it possible to change and render effective distribution systems. These can be achieved by skipping some of the moments in the distribution chain, which means that the customer order point (COP) can be moved back in the whole distribution system. In the e-commerce there is expectations that distribution can be slimmed down by the possibility of reducing wholesaler or retailer links. On the other hand there is a risk that e-commerce also can become an additional link in the distribution system. Reasons for this are the high picking and packing costs for small orders, and thus an increasing number of addressees. The potential in e-commerce is very much dependent upon the development of distribution systems, and whether or not the costs can be reduced. The most common reasons why people shop via Internet is convenience (i.e. time saving), and lower prices. These can be hard to combine, because quick delivery often costs more.

6. E-commerce distribution systems in reality In a limited research project carried out in 2001, a number of Swedish-based ecommerce distribution systems were studied (case studies). These were both mail-order companies and companies with shops. Among them were the bigger mail-order companies such as Hobbex (with markets in Sweden, Finland, Denmark and Germany), Ellos, Josefsson, La Redute (all in international markets) as well as smaller units such as Börjes (specialist in horse products). A further company examined was IKEA. The result from the project is used in this paper. A larger research continue and will be finished in end of year 2003. There are some notable differences between big and small companies; for one thing, it is important, as in most business, to have a strong brand. Big companies are also in a better position to make necessary investments more easily. Long-running traditions within mail-order companies are also important. The reason for starting e-commerce was the possibility of increasing profits, but many also felt a general pressure to introduce it. E-commerce can be everything from a rather simple home page to an advanced Internet-shop where customers can both see the stock balance, and compare prices and delivery times. The companies themselves see e-commerce as a means of

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competition, and a chance which they cannot afford to through away. However, they realise too that e-commerce has not had the penetration they expected. For some of the companies it was a naturally development to expand mail-order in to e-commerce, especially since they already possessed well-developed computer systems. Every company investigated intends to go on both with mail-order and e-commerce. This means that rationalisations as e-commerce could contribute to will be impossible to reach. Increased profits must be reached by rationalisations within the distribution system, and through in increasing selling.

7. Order handling in e-commerce When a company starts with e-commerce, most changes in its distribution systems are related to the order-handling system. There can be differences between big companies with good resources for investments, and small companies, but all those companies in the investigation work with developing their order-handling systems. The degree of automatisation is also dependent upon the capacity of the systems. This means that order and store systems are integrated to various extents in different companies. It therefor follows that effectiveness can be higher in bigger companies. Receiving an order can be done in different ways; by telephone, letter, fax, e-mail or Internet. The differences are found in the degree of manual interference. This implies that the speed of handling the order is different, since e-commerce is faster in the ordering process (which should not to be confused with distribution). From a customer perspective this provides the possibility of choosing a higher degree of customer service. For the e-commerce companies it means working with the regular maintenance and up-dating of the home page, and control of the orders. Accessibility is a main leading reason for starting e-commerce, and some companies note that more than 50% of their orders are received after normal working hours. Even if it possible to attain advantages with e-commerce, we have seen some shortcomings, which are mainly related to badly integrated systems. It is important for the customer to receive an order confirmation, but not all companies have a system for this. Many customers receive no information about delivery times, and if they do, it often is based upon stock balance from the previous day. Hardly any companies give delivery times in real time if the stock balance is not online. Another problem is false orders through mistakes, or even jokes. Personal service, such as obtained through telephone ordering, is also impossible with e-commerce, and can decrease sales even more.

8. Transport system in e-commerce One of the advantages of e-commerce should be that delivery is fast, but only one of the companies in the investigation had a 24-hours delivery system. This means that every order has to be written on a daily basis. The customer preferences are mainly two, namely cost (i.e. cheapness) and speed. If the product is cheap enough, the customer is prepared to wait longer for delivery. Every company uses external transport companies for its deliveries, but no company has such co-operation that it can be called an

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integrated system. Companies that have used mail-order continue with the same delivery network system and the same transport companies. Another problem is packing and packing, as not every product is suitable for existing packaging. A product in B2C is sold by the piece and cannot be transported in a suitable way. This means that not everything can be sold via e-commerce. A result from the study is that shorter delivery times in the future will increase the business via ecommerce. All the e-commerce companies have their own warehouses, and deliver from these. The main reason why the customer order point cannot be moved further back in the chain is that most of the products are imported from other countries.

9. General aspects of return system in e-commerce Re-distribution, or a return system, is included in reverse logistics, but one have to separate reverse logistics partly into waste handling, and partly into return handling. The main idea for return systems in reverse logistics is to promote and support alternative uses for the product. With new or old functionality the products, or part of them, enter the market again where it may also go through several trading cycles. From the reverse logistics perspective, the flow for production waste and commercial returns is very important, because these two, combined with the end-of-use return flow, are all input flows in the recovery chain. A commercial return would be any unsold product that a supplier has agreed to take back from the retailer/e-commerce company (Kokkinaki et al, 1999). Over the past decade product returns have mutated from a necessary cost of doing business to an epidemic problem. A recent study by the Reverse Logistics Executive Council indicates that the cost of reverse logistics, i.e. the handling and disposal of returned goods, may exceed euro 40 Billion a year for the U.S. companies. There are variety reasons why a product may be returned. The most common being that the product did not meet customer´s need, that the customer did not understand how to use the product properly, that the product was defective, or that the customer abused a liberal return policy (Rogers & Tibben-Lembke, 1998). For many industries, learning to manage the reverse flow is of prime importance. The flow will continue to increase because the Internet is the fastest growing technological industry; in the U.S. alone, more than 55 million people shop regularly online. The return process is usually the longest lasting impression that a customer has of a company´s customer service. A good return process can help to ensure that a customer will repeat purchases. A slow and painful return process can keep a customer from coming back. The challenge merchants face is to develop and apply strategies that will enable them to control returns; this is something many companies have perceived, and for which they have consequently liberalised their return policies due to competitive pressures. The return process can be described as follows. First the person who is responsible for the re-possession process has to evaluate the conditions of the returned products. If the product is in good shape, it could be re-sold to a primary or secondary market. The

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product could also be sent back to the manufacturer for further actions. The retailers (i.e. e-commerce companies) also have a number of other options for dealing with returned products. They might repair or re-pack the products themselves, and sell them on, but it is also happens that some product are in such a bad shape that the only options is recycling or landfill. The critical element to successful reverse logistics (i.e. return logistics) is having a short period for the returned goods cycle. If a company can deal with quickly, it can for example, resell the product faster, send the product back to the manufacturer sooner, or send it to the recycling centre. Often, when a product comes back to a retailer/ecommerce company, it is not clear whether the items are; defective, can be reused or refurbished, or simply have to be sent to landfill. Part of the difficulty that companies have to deal with in compacting time for the re-possession cycle is that there does not seem to be much reward for taking responsibility, or making timely decisions on how a product should be classified.

10. A return system investigation In 2001 my research group investigated in a limited project some return systems employed by a selection of big and small companies (mainly mail-order ones). Some of them were the same as those in the distribution project. The research was leaded by the author and the research method was case studies. The research in return logistics continue during this and next year in an enlarged group leaded by the author. In this project it is also the intention to develop both models and theory for return system in business logistics aspects. The field is rather new and theory is meagre, it is mainly from United States and the Reverse Logistics Executive Council one can find useful theory. An overall distribution and return system can be described as below, actually it is two different systems performed during different time. Distribution Manufacturing Collection system

Customer Gatekeeper

Re-use

Refurbishing

Re-packaging Recycling Re-manufacturing Landfill Salvage, Charity Secondary market, Internal shop

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Two of the main activities are gatekeeper and return-centre; other activities as transportation are less problematic. Efficient gatekeeping early in the channel prevents goods from entering the reverse logistics system. Gatekeeping can also be important because it is the moment when decisions on whether to accept the product into the system or not have to be taken. Gatekeeping also plays an important role as an information collector. Some companies have a call-centre as gatekeeper, even if it means an additional cost, the strategy being to decrease the number of returns. The customers have to contact the gatekeeper before sending back the parcel, whereby it is possible for the customers to explain directly why whey wish to send the product back. Others customers do not have the same possibility for contacting the company, one instance when the customer has to use a mailing voucher to return the product. The other important part in the return system is return-centre itself, It makes a big difference how the return-centre is organised; it can be a part of the ordinary warehouse, or completely separated from it, depending on how big the return flow is. The company has to have a return policy which includes good customer service while simultaneously serving as a goal to decrease the return costs. There are different strategies for charging the customers for the products and transport costs, although normally a return is accepted without charges within 14 days of delivery. The IT-system is important in the return-centre, and while some companies have an information system, it does not always support the information about returned goods to be returned. In these case it provides only limited information about costs of returns, which makes it nearly impossible to evaluate the return system as such, or to decide about more cost efficient alternatives. These companies are not aware of the costs of the return flow. In other IT-systems the staff can input customer number, returned product code, return reason code and conditions into the system. In these cases the system can make decisions of whether or not accept the return product into the return flow pipeline. If the product is intact, it will be assigned a new identification code. The system also allows for the collecting of statistics from different return reasons, data that help the company to calculate its costs for returns. It is also possible for the purchasing department to see from the data collection if one supplier has constant quality problems, and thus change the supplier in order to avoid those problems. The personnel in return centre are a specialised labour force which take care of the customers return. In the largest companies is customer return handling system of its own. Specialised labour means a possibility for shorter cycle time and the chance of increasing the number of returns going back to the primary market. It can also provide the possibility of having a repair shop within the customer return-centre. Return-centre handling, including gate keeping, is decisive for effectiveness in other activities such as transportation and refurbishment. An activity schedule can be illustrated in following way.

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11. Conclusions Even if the e-commerce market has gone through a turbulent period, the market, without hesitation, will increase in the future. The winners will be those companies who are established already before the “e-commerce period” started, and have well developed logistics systems both for distribution and re-distribution. Order handling is one of the most important activities if the commerce shall succeed. The cost in an e-commerce order system will normally increase, therefor the issue will be to create a competitive system which include lowest possible costs, and at the same time rapid deliveries. In the re-distribution system is creating of the return centre, as well as handling of returned goods in the centre, of decisive meaning. A cost effective handling system is very much depending of the personnel; their knowledge, responsibility and experience, and therefor these activities must be seen as most important even from a managers strategic perspective. The costs for returned goods are for some articles very high (up to 50% of the price for the article), therefor the effectiveness of the return handling is decisive for a company´s total economical result.

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Bibliography Chaffey, D (2002) E-business and E-commerce Management. Prentice Hall. Kokkinaki, A. I. Dekker, R. Nunen van J. Pappis, C. (1999) An Exploraty Study on Electronic Commerce for Reverce Logistics. Econometric Institute Report EI-9950/A Lambert, D. Stock, J (1993) Fundamentals of Logistics Management, Ill. Irwin Cop. May, P. (2000) The business of e-commerce. Studentlitteratur, Lund Mougayer, M (1998) E-commerce? E-business? Who E-cars? Computer World web site. Rogers, D. S. & Tibben-Lembke, R. S. (1999) Going Backwards: Reverse Logistics Trends and Practices, Pittsburgh, PA: RLEC Press. Rogers, D. S. & Tibben-Lembke, R. S. (2001) An Examination of Reverse Logistics Practices. Journal of Business Logistics. Vol. 22, No. 2. Stern, L. El-Ansary, A. Coughlan, A. (1996) Marketing Channels, Prentice Hall; Upper Saddle River

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