3 focus areas for air cargo to empower e-commerce - Part 1

3 focus areas for air cargo to empower e-commerce - Part 1

The phrase "brick and mortar" is a retronym to imply a physical entity in a landscape that is slowly being taken over by its digital variant – the most prominent example being a retail store in a world that is embracing e-commerce. At the risk of oversimplification, the electronic model is favourable for sellers who can cut off intermediaries as well as save investment in showroom space and other sales display related costs, while the end customers appreciate the fact that these savings are typically passed on to them through slashed prices!

The key lies in the logistics of getting the purchased goods in an efficient, cost effective manner from the warehouse to the hands of a purchaser who may well be across the globe in another city, country or continent. At present, air cargo companies tend to consider e-commerce players as large volume players who deserve "volume discounts" but little else. But in the modern world, it is plainly visible that air cargo and e-commerce retailing have a potentially symbiotic relationship that can be strengthened and rendered even more valuable to both parties by implementing a greater degree of customization in the products. 

The unique capabilities of air cargo has been tapped into by e-commerce retailers to strengthen their business models on three clear lines: 

1. Variety and scope of goods

2. Speed and reliability of delivery

3. Coverage area and reach

For a stripped down example, take one single order of 20,000 books from a publisher, which is typically to be dispatched to a wholesale/retail vendor such as a brick and mortar bookstore. At the same time, 20,000 individual customers can order one book each from the same publisher who is halfway across the globe from them. The total order is 20,000 books in both cases, but the former is likely to be packed on to a container and loaded onto a freight ship (because speed isn't important since the final retail sale is expected only in some point of time in future), as opposed to the latter, which would more likely be packed into an aircraft for speedy delivery because the end retail sale has already happened and it is important for delivering a positive customer experience.

Although speed is an overwhelmingly positive characteristic of air cargo, which no other channel can possibly offer to that level, it shouldn't distract us from the other advantages. The underlying principle is that goods shipped through the aerial route tend to be have a high ratio of "value:volume", which IATA estimates to be 35% of the world total by value but less than 1% by volume. This means the supply chains have to be designed with some inherent level of security and trackability, which is useful to e-commerce companies to provide a differentiated customer experience.

In a sense, e-commerce companies return the favour through providing a higher degree of predictability in the business, thereby enabling air cargo companies to make targeted investments to improve their supply chain economics. Specialized products for e-commerce companies would enable these two parties to take over the ownership of a larger portion of the supply chain, eliminating the less mature organizations that act as intermediaries and thereby bring greater level of accountability into the chain. 

The promise of volume in e-commerce

Customers have been strongly embracing the new paradigm of experience, made possible through seamlessly blending online and offline channels. This has led to steady growth in e-commerce transactions across the world (averaging 20% annual growth for the past decade) and in return, this translates into an assurance of present and future demand for air cargo, like never before. This view is endorsed by IATA, which has declared capitalizing on e-commerce as one of the key goals of its StB Cargo transformation program.
IATA reports that cross-border e-commerce trades primarily in low cost, lightweight products. Specifically, around 81% of all the packages are below 2 kg in weight, with a good 45% of the total being less than a quarter of that. With the exception of travel, entertainment and financial services, around 50% of online retailing is footwear, apparel and consumer electronics!

Peculiarities of the model

Granted, not every prospect who walks into a brick and mortar store will end up making a purchase and becoming a customer. But the pipeline leakage is far worse in e-commerce, due to the sheer ease of engagement and the total lack of commitment until the very end of the transaction. As a result, e-commerce platforms need to offer very strong incentives to ensure completion of a purchase while making the experience as seamless as possible in every way. Discounts, promises of free and fast delivery and the assurance of returns and refunds are some of these incentives which are prevalent in e-commerce today. 

Sellers by themselves typically don't have as much control or visibility of the supply chain as they would desire, once the goods sold leave their warehouse. So they look to their logistics partners to provide this. These partners on the chain, including freight forwarders and cargo transporters, can hold up their end of the bargain through designing products which are well mapped to specific needs of these e-commerce providers. That is where things get a little complicated, because in the pursuit of an experience as close to (or better than) a brick and mortar operation, the buyer will have heavy demands on speed, cost-effectiveness, transparency and above all bidirectionality to enable goods to be returned in case they don't live up to expectations.  

Typical service level offerings provided to customers

The e-commerce companies therefore need comprehensive digitization across the supply chain, which is enabled by intelligent platforms. However, recognizing that a 100% consolidated chain lies too far into the future, air cargo providers can in the interim offer a greater level of customization in their products. This would be aligned with what the e-commerce company promises in terms of value addition to their end customers. The focus areas in this regard can be: 

1. Better control of bidirectional logistics

An e-commerce platform acts as a consolidator for the seller, who is able to aggregate small orders from a larger customer base to make up the scale required for cost-efficient shipping. For the cargo logistics provider, this gives a great deal of predictability on the supply chain from the shipper to the respective logistics hub servicing each cluster of buyers. But an e-commerce retail transaction typically comes with the option for returns, which is essentially retracing the entire chain in reverse, back from the buyer to the seller.  

Flow of goods in bidirectional logistics

The air cargo provider can start with a volume based discount on reverse logistics – for every 100 tonnes that is transported to the customer, a small percentage of returns can be processed and transported for free, or at a reduced price point. Typical returns ratios are easily revealed in the e-commerce company's analysis and therefore a feasible value addition may be arrived at. Instead of paying for 110 tonnes of goods in a specific time period, the company has to pay for only 100 tonnes – that is a 9% discount in return transportation costs, thereby allowing for more attractive return propositions for the goods they sell on their platform.

Now, this model is very much sustainable if we stick to the books example quoted above. But what about sensitive goods and types of cargo which require special attention? A seller (or the seller's cargo handling agent) can be educated on the protocols and safety measures associated with such cargo, as can be a distributor/retailer who considers those goods his/her business to sell effectively. But in the reverse logistics, how can a one-off customer be expected to possess sufficient knowledge of the protocols required for safe return of a package (or portion of opened package) especially in an international shipment? It makes sense therefore to integrate such handling capabilities (based on specialized information) into the cargo product designed for the e-commerce vendor. 


Ashok Rajan is Senior Vice President & Head of Airline Cargo Services line of business at IBS. An accomplished specialist in the Travel & Transportation domain, he has a track record of 18+ years in conceptualizing and building products for the industry. Having played multiple roles in the organization from development to product management to running transition programs for customers, Ashok is involved with building and executing the strategy for the flag-ship iCargo product line of the company.  

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Sunday, 19 August 2018

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