In the post-pandemic retail era defined by ease of access and personalization, direct-to-consumer (D2C) is emerging as a business model that offers end-to-end customer service without the need for traditional intermediaries. If reports are to be believed, in India, the total addressable direct-to-consumer (D2C) market is expected to grow by over 15 times from 2015 to 2025. In 2020, the total addressable D2C market was valued at US$33.1 billion. By 2025, the total addressable D2C market is forecast to grow almost threefold and reach US$100 billion. There are various factors at play behind this impressive growth trajectory, which includes the e-commerce boom and the increasing demand for digital shopping experiences. What would set these fast-emerging D2C brands to stand out from the crowd is an impeccable supply chain, that is not only agile, flexible, real-time, and responsive, but is also able to augment consumer shopping & delivery experience. Our recently hosted webinar, ‘Demand driven Direct-to-Consumer (D2C) Supply Chain’, unravelled multi-faceted answers to the pertinent question, Is Supply Chain Ready for the D2C Behemoth? Excerpts from the captivating webinar…
SANJAY DESAI - Co-founder & Regional Director, Humana International (S) Pte Ltd.
D2C is opening a new direct relationship between a manufacturer with direct consumer of product or services creating a more “personalised” experience. This “personalised” experience is the newfound mixture in the success for both consumers and industries.
What is Direct to Consumer and why is it termed as new may be different?
The traditional B2B sales channels remained intact for a while but not long. Influenced by increasingly strong international competition with digital customer experience strategies, the demands on B2B companies increased, and so did the cost structure as well as expectations from the customers. As markets moved from Urban to Rural areas, the velocity of the customers started to reduce in-congregated areas to rural areas. That increased the velocity of shipments from a certain high-mid value to low-mid value. At the same time, the Channel (layered) structures were getting costly and B2B organisations wanted a reason to stop relying on individual dealers alone. Hence, ‘Direct-to-Consumer’ as a new form of physical logistics and then a monetization model was born. Then Covid-19 took over. It changed the way mankind started to deal with each other, our consumption styles changed, our buying habits changed. Covid brought in a ‘forced’ adoption of e-commerce in all sectors. That was the last straw in the B2B coffin!!! The rest is all in front of us.
D2C is the new engine of customer experience in the digital age and specifically of this century. By year 2000, the value chain (models) or distribution footprints in B2B were clearly defined: Manufacturers produced their goods, sold them into a network made up of intermediaries or wholesale dealers, who in turn, supplied to smaller dealers locally or to the end users. At the turn of the millennium, more and more companies focused on establishing online shops and therefore created an online sales strategy. From a customer’s point of view, as the generational cohort moved and new generation started to takeover, the markets started to become more and more efficient, intelligent, and technologically matured at a young age. This further hastened the progress in the right direction.
What is the speciality of D2C? What does D2C allow a business to do?
D2C is a classic example of a new business Model whereby an organisation can profit more from the customer’s available data (Demand, Preference, Location, Consumption patterns) if an organisation is willing to invest in modern technology including harnessing the capabilities of their employees. It can create a new model, which is virtually non-replaceable for a long time since this is the future of all current value chain models. Applied correctly, D2C is a profitable sales strategy. When introducing D2C, great outcomes depend on using the right methodology, right process and optimum technology. For starters, a new D2C enterprise should continue to generate a new high-performance monetization channel without neglecting the B2B and B2C model. However, we must note that over next five years, we will see every available commodity and market will move to D2C model, regardless of any business dynamics or push backs.
From a customer’s point of view, would a customer be common to both D2C and B2C?
Regardless of whether it is a D2C or B2C model, a customer can be the same. The difference in the two models being, in a D2C business model, almost all middlemen are fully eliminated, and the manufacturing or mainstream organisation ships the products direct to customer without the presence of the traditional Channel partners. The illustration on the next page explains this phenomenon very well.
If we focus on India, we are riding a huge new wave & opportunity. Which are the big / new shaping trends that will drive this massive growth forward?
The D2C transition was always on the cards even before Covid-19 came into picture. We just needed some movement or a sentinel to make it more pronounced. It is considered that in next 3-4 years, India will become US$100 billion consumer’s market. The momentum is evident with VC funding, multiple consolidations, IPOs, dynamic market reactions in recent times. These events do indicate that the Indian D2C ecosystem is boiling at an inflexion point of rapid growth driven by the seismic move to online & growing social media consumption. Some of the major trends that will re-shape the D2C markets in India are…
Access to affordable internet data and smartphones on a larger scale of society
Growing middle class with appetite to spend money on technology is enormous
A slow and definitive shift from Joint Family system to Nuclear / small family
Rise of individualism / buying smaller units for self only, no more family shopping
Young consumers experimenting across categories, retailers, promotions leaving brand loyalty out of the window
Accentuated focus on wellness, hygiene, nutrition, and sustainability in a new way.
Clearly, there is a great potential, but is success a given for enterprises? What are the minimum “Must haves” that an enterprise must address?
While the potential is huge and consistent, it is not given or simple. If an enterprise wants to go down the path of moving to D2C model, they need to study the underlying risk and opportunities, the ecosystem, the commodities that they deal in and how the Regional or Local trade sentiment is moving along. Beside the normal “must haves” like Vision / Mission / Purpose / Brand building / Talent, enterprise needs to think a bit beyond and peel the layers to understand what it would take to find success in D2C model. There are few important elements that enterprises need to chart as they embark the D2C journey. Let us see a few…
Objective /outcome of D2C Channel: Consumer insights great experience, brand building, sales management, scale strategy from Urban to Rural
Product to be marketed: Optimised product offering, understanding unit economics, regulation to enter a market, addressable market, margins, and potential in future
Product mix & pricing strategy: Right mix of portfolio, Consumer benefits, differentiated pricing market segmentation, rational for mid and premium range
Technology and payment: Payment gateways, 3P payment systems, CRM support for order entry / product in/ out accounting
Sustainable approach: Use subscription model, SEO campaigns, celebrity influences
How critical is the role of information technology in D2C business model?
Within D2C, modern information technology and digitalization play pivotal roles. The main focus is to support the company’s internal digital and e-commerce strategy with an optimized piece of technology. In doing so, special attention must be paid to the scalability, reliability, and time-to-market efficiency of the shop solution. Technology allows manufacturers/ wholesalers gain greater visibility into their data. The entrepreneurs must remember to strike a balance between technological investments alone v/s a combined focused investment on all three fronts – People, Process and Tools. Transformation is NOT about Technology. It is more about People than anything. Furthermore, it is essential that the technology is flexibly adjustable and expandable. After all, customers’ behaviours and expectations will constantly change, as are the demands on technology. Here are some of the major benefits of a Tech based approach to your business…
Helps the platform to reach its full potential
Seamless integration of order taking to customer POD
Enables end-to-end value chain operations including providing E2E network visibility
Helps to create ‘Returns’ as an alternate line of revenue
How do you foresee the future of D2C?
D2C is here to stay and stay for a long time than what we all can anticipate. It is opening a new direct relationship between a marketer (or a manufacturer) with direct consumer of product or services creating a more “personalised” experience. This “personalised” experience is the newfound mixture in the success for both consumers and industries. D2C is not some “magic bullet” that will automatically spur any business to greatness. In fact, implementing the D2C model without really knowing what the minimum requirements are, is a short-cut to burn cost, efforts, time and people’s passion. May be in the next two decades, the patterns of success in D2C will change, there will be new maturity angles, Performance KPI will drastically change and define success. And the Bell Curve will start shifting. It is also possible that we may go back to a reverse journey of entering offline retail of a different nature. Today, we have new entrants (Mamaearth, Sugar Cosmetics) who are tapping into physical retailing formats, further strengthening brand visibility, experience, and reach.
RAHUL VISHWAKARMA Co-founder & CEO, Crest
The entire beauty of doing inventory management lies between finding a right demand forecasting model to identify inefficiencies and inaccuracies in the demand forecast and then try to compensate that with having the right safety stock, having the right reorder point in place.
What’s a D2C model, according to you?
The D2C model is all about having an end-to-end control over the entire customer experience. A D2C company doesn’t have any middlemen between the company and its end customers, and they can reach them directly, be it offline or online. This has traditionally been the case with the fashion Industry with companies like Levi’s or Lee who have been selling directly through their stores and also through multi-brand outlets. But in today’s changing paradigms, sales happen through the companies’ own websites as well.
Does it necessarily need to be a consumer product or can a B2B product be considered as D2C?
In B2B too, direct sales do happen. For instance, in previous experience with the oil & gas companies, a lot of sales used to happen directly between companies themselves. So, companies would directly work with the drillers. Even in the machinery segment, companies directly sell to their consumers along with having a distributor network. It is possible in all aspects.
What’s your take on the importance of demand forecasting in D2C?
More than demand forecasting, it’s the balance between forecast accuracy, safety stock and the inventory turn in itself. Demand forecasting, after a certain point, has diminishing returns. Even if you can go beyond 80% accuracy, you cannot really reduce or cut down on your safety stock. So, after a certain point, I don’t think demand forecast accuracy adds a lot of value.
How critical inventory visibility is from a D2C perspective; whether it is really undervalued in day-today operations?
Inventory visibility, along with creating your pipeline, ensures that at every stage, companies have a running assembly line of supply chain, be it same day versus a 10–20-minute delivery or even 2 days delivery. Visibility enables companies to define their hierarchy of supply chain in a way that every step has its own buffer, including the pipeline, so that they are able to replenish time and again.
Supply chain professionals have been enamoured with 'Just In Time' model, but there are some good aspects in the agile supply chain model as well, where, if we are able to correctly identify the safety stock, inventory turn, and the right reorder point, be it variable schedule, achieving serviceability of 90%+ is possible. Even for a model with 10-15 minutes/day over hundreds of different pin codes, it is something that can be accomplished effortlessly and is also extremely sustainable in nature. I've seen a couple of firms in the past where teams were significantly reliant on demand prediction accuracy, where teams wanted to push above 95-98%, taking a huge risk, especially in the opportunity scenario. For example, if you have a larger event and some unforeseen circumstances may disrupt your forecast accuracy, at that point in time, inventory visibility makes more sense than identifying the right KPIs at every level of the supply chain and maintaining those KPIs and serviceability as well, everywhere, rather than just at individual nodes in the supply chain.
What are the challenges, do you foresee for start-ups in a D2C delivery model because you need to be agile and you should have a supply chain model, which will cater to unit rather than a box, also be able to be quick and turn around things faster?
One of the bigger challenges is not having the right person accountable for a lot of the processes. Of course, tech is needed, but tech along with people, is also very much needed especially until three years or so ago, there weren't a lot of consumer-focused start-ups coming up who wanted to grow very fast but given how, for instance, Mamaearth and Sugar, paved the way and became inspiration for many forward-looking brands and even for businesses, which are importing and selling, one needs to have a system in place, which is tracking each and every step in supply chain.
Secondly, one needs to also have a proper S&OP in place as we cannot really adopt the enterprise supply chain, which might make sense for big companies like Unilever or Marico where an S&OP cycle would really take 40—45 days. A D2C company, which needs to be agile, cannot really follow the same process. While having a mix of B2B and D2C business, you also need to have accountability in place. S&OP is very much needed. We can implement all sorts of tech here, but that tech will not really be of much use if their backbone isn't there to really take that forward or run it on an ongoing basis itself. Of course, startups don't need the muscle and strength like big players, but they still need backbone to handle that entire strength as well.
How can companies optimize inventory management to reduce D2C supply chain variabilities?
The entire beauty of doing inventory management lies between finding a right demand forecasting model to identify inefficiencies and inaccuracies in the demand forecast and then try to compensate that with having the right safety stock, having the right reorder point in place. All of these factors comprise the inventory turn, whether it is growth prediction or SLA requirement, because attempting to increase or decrease any of these parameters will result in massive inefficiencies in the system in managing the complicated supply chain. D2C is all about creating a common rule based engine for either safety stock or determining the best reorder point; it should be SKU and location specific, and it should be reviewed on every cycle. A better inventory management model should include elements of trial & error as well as forecasting.
How do you manage the Liquidity of the slow moving and obsolete inventory?
One thing we must always keep track of is the age of the inventory using the appropriate technology and keeping the pipeline intact. There are definitely new age-solutions that can help predict the slowness or obsolescence of inventory. Keeping track of that can help businesses prepare 3-4 months in advance. Once you have that, you can also go into deep discounting via the D2C channel. That way, you can definitely liquidate the majority of stock that will become obsolete.
Winners in this game will be the D2C brands who can stand out of the crowd and are able to convince investors to give them the money to push the product in the offline channel, where the biggest part of ‘Bharat’ still shops.
How have you seen the D2C space evolve in the last 5 to 6 years and how do you see this playing out in the future?
To get a perspective on this space, let us divide it into two parts – Product and Distribution. The single most important thing that the D2C channel has done is that it has reduced the friction at several points – from the time a product is conceived till it finally reaches the customer. If a traditional, non-D2C company wants to bring a product to the market, it needs to conduct surveys with focused groups, manufacture a big batch of tens of thousands of pieces, carefully select a few areas in which it needs to be piloted, extend credit to the distribution channel, educate the sales team & the retailers, allocate advertising & marketing budgets for local activation, etc, and then track its progress carefully of the next several weeks. It is a pretty time consuming and expensive exercise.
Contrast that with D2C brand that has precious data about their loyal end customers who are most likely to use the new product. It can directly talk to them to get feedback. Today there are homegrown brands, which are just making a few hundred pieces, put it out in front of the customer for feedback on the pricing, packaging, positioning & keep tweaking it till they find the right product-market fit, or even take a decision to kill it – much faster and at a much lower cost. Which is great! This has allowed entrepreneurs to start small and paved the way for so many innovative products & brands to reach the consumers and create value for everyone. Having said that, a low barrier to entry has also made the markets crowded and highly competitive. I don’t see this trend slowing down in the near future. Brands and products are getting added every day, which is good for the consumer but, raises the bar for the brand. It shifts the goalpost from a great product to great distribution.
For example, even Sugar started as a D2C brand, but is now an omni-channel player with a massive field force to sell offline – through our 100+ exclusive brand outlets across the country, counters at departmental stores and malls, and through 1000s of small beauty outlets on the high streets, through hundreds of stockists & distributors appointed across the country. So, we are, in a way, playing the same old traditional game. Yes, it takes deep pockets to venture offline. So, the winners in this game will be the D2C brands who can stand out of the crowd, and hence are able to convince investors to give them the money to push the product in the offline channel, where the biggest part of ‘Bharat’ still shops – at least for the next 7-8 years as I see it, if not more.
Looking ahead, they will have to understand the salient features of each channel and learn to leverage the strengths of each. For example, from our experience, even within cosmetics, we have products and shades that sell only offline and some which sell only online, but not so well at the retail outlets. Then there are other business needs such as liquidation of aging & slow moving inventory. Traditionally, when D2C did not exist, it was very difficult to manage liquidation of stock because of revenue leakage. Now, we have the option to offer deep discounts online, and sell off slow moving stock in a very controlled manner. In summary, I think that as a D2C brand succeeds online & with its EBOs, it must and it will venture into multi-brand outlets offline, become omni-channel. Winners will emerge from the companies who can actually play the omni-channel game really well.
Is supply chain for D2C different from traditional methods and what are the challenges that you are facing?
Yes. The two channels, while not entirely different, have significant differences and are unique in their own way. Let me try to explain it with what I have seen at Sugar. In the beauty business, whether you are selling colour cosmetics or perfumes, you need to have testers to avail customers of try & buy option. But you are not expected to send testers to online shoppers. You use photos, infographics, explainer videos to do the job of testers. From the supply chain point of view, what that means is if you sell only online, you stock 500 SKUs. But if you also sell offline, you need to manage 1000 SKUs (500 saleables + 500 testers).
Secondly, a pure play D2C company may be processing tens of thousands of orders, but each order is very small, for example, 4 pieces per order on average. So, the product development team of this company needs to think of only single pieces. They do not need to develop bulk packs. Further, an order for a customer almost never exceeds one box, and even that must be designed to impress the customer and build the brand. But an offline / omni-channel player needs to think of bulk shipments too! Take Hindustan Unilever for example. Their distribution network is just not designed to sell single pieces. Their system processes orders for only packed boxes with 6 / 8 / 12 / 20 /50 pieces per box.
As I mentioned earlier, an omni-channel player will have to manage both. Another key difference is the need to handle multiple MRPs for a given SKU. In case of pureplay D2C, if you decide to hike or drop prices, you can change your packaging, update the prices online and you’re done. But it doesn't work that way in B2B, where companies have inventory lying in multiple channels, with several distributors and thousands of touch points. An omni-channel entity needs to have a robust system in place to handle multiple MRPs of the same SKU, so that they can be ordered, tracked, stocked, and sold separately. Price mismatches in inventory and between the invoice and the physically delivered goods to a customer creates a lot of issues. If you process 500 B2B orders a day, imagine the invoice carrying new MRP, alongside the products with old MRP getting packed & shipped. Your customers and the sales teams will start getting exasperated, and the accounts team members will get busy issuing credit notes and debit notes, while the other team would be managing the massive mismatches in the system vs physical inventory at the warehouse, all of which ultimately would result in customer dissatisfaction, loss of sales plus revenue leakage.
To give you yet another difference, for all D2C players, sales returns are a part of life. But that is not the case with B2B where you don't get returns unless there is a genuine mistake in taking the order. Even the tech ecosystem of SaaS tools being used by D2C companies right now is not fully ready and mature enough to handle the B2B business. Players transitioning from pure play D2C to B2B and trying to go omni-channel are struggling currently as the SaaS tools also learn and evolve. I can share a lot of critical & interesting differences! But I hope I have been able to drive home the point that the supply chain requirements of a D2C company though not completely different, are significantly different vis-à-vis the traditional B2B.
What are the things one must do to plan inventory better?
This, I think, is a very big piece with several moving parts. So instead of trying to cover it all, I would like to just re-emphasize some very basic principles which, I have seen very often, we tend to lose focus on. Why do we stock inventory? Inventory is nothing but a hedge against loss of business due to a stock-out. If we lived in a world where everything would be delivered to us next day, why would we build big warehouses & keep months of inventory? Keeping that in mind, one has to always optimize between the cost of a stock-out versus cost of overstock. An out-of-stock situation is not always a crime. It depends upon what product you are dealing with. If you are dealing with something like F&V where margins & shelf life – both are very low, overstocking will potentially hurt your bottom line far more than being out of stock.
The first and the most sensible thing to do is to not take very big blind bets. If you wish to introduce a new product in the market, you can’t straight-away place an order a few months of inventory. Companies should order the smallest batch possible, put it out in the market, check the acceptance level in terms of pricing, quality, packaging, etc. The first job is to mitigate product risk. Once you get the customer acceptance for the product, order bigger quantities and then keep a close watch on the sales velocity. We need to remember that there are no easy shortcuts. Further, if for any reason, sales drop, do not just wait and hope for sales to pick up, till the product is only 1-2 months away from its expiry date. Keep a hawk-eye on the stock cover. If you sense trouble, offer a discount early, increase trade margin, or bundle it with a fast-selling product. If companies are vigilant at each step and act timely, they will not have to panic or face big inventory write-offs later. And equally importantly, it will help the customer get a product much earlier, when it is much fresher.
It is actually not very complicated. Just make sure you do not get distracted with a lot of jargon, complicated forecasting tools & methodologies. These are very important and helpful but can prove to be useful only if there is clarity on the fundamental business objectives & principles.
Does it mean that whether a self-managed supply chain model or outsource model do you have a better balance and where you have more control – self-managed or and completely outsourced supply chain model?
Let's just think about the options available to us on the table and start with the simplest of all.
Option 1: Outsource nothing – I build my own infrastructure and run the day to day operation myself.
Option 2: I own the infrastructure but let somebody else run the day to day operation, or vice versa.
Option 3: Outsource everything – the infrastructure, and the day-to-day operation.
First of all, there is no right or wrong answer. It all depends upon the stage where you are in your business. At an early stage of the company where uncertainty is high, the last thing you want to do is incur big CapEx. At this stage, it makes sense to completely outsource. But having said that, once you've found product market and you are scaling, you want to think about building sustainable differentiators – be it the product, the last mile delivery, the customer support experience, etc. I think it goes back to the fundamental business strategy. It makes sense to fully outsource if you wish to scale up rapidly. But, over the longer term, if you remain fully outsourced, the service provider will learn from your experience and offer the same service at a premium to your competitor. So, it is very important to start bringing key competencies inhouse and start building on those as you scale up.
I personally lean towards a hybrid arrangement – outsource the undifferentiated portions of infrastructure and day-to-day running. But invest in innovating & building proprietary tech & processes that can truly help differentiate you in the eyes of the customers and delight them. You must keep building that competence inhouse, and never outsource it.
In an omni-channel world, where companies are directly connecting with the consumers, every address becomes that experience centre for us.
How do you define D2C from an omni-channel perspective?
In the traditional world, the D2C model had always existed. There are multiple outlets where the experience is dictated by the organisation itself. The experience of shopping would range from having the right assortment, the availability, the great discounts, etc., which comes from the outlet owned by the organization. In that case, companies have a higher degree of consistency in quality with regards to products, communication, or the people that they interact with. In an omnichannel world, where companies are directly connecting with the consumers, every address becomes that experience centre for us. So, whether the customer is shopping from Zepto or from our own website, dictating and having the right degree of control, right from availability, discounts, and the quality of the communication, are the key parameters that help companies define D2C in the omni-channel world. Additionally, it is equally important to have the same consistency for the marketplaces, such as Amazon or Flipkart or Q-commerce platform such as Zepto. In a nutshell, it’s about reaching & acquiring existing customers and new customers as directly as possible while delivering a significantly superior experience across many touch points that the customer has access to.
Is the customer impressed more by the last mile or is it really an end-to-end experience? Is it the entirety of the functional work that helps get a greater experience or does the D2C experience only reside in the last mile?
The sum of all these aspects dictates the customer experience but last mile plays a very big part for sure. Since we are a product-focused organization, the last mile is the critical link that can make or break the ultimate consumer experience. Today, as well, across India, no matter how many delivery partners you partner with, having a close monitoring on it, having a degree of control that ensures that last mile is proper; is the key to growth and customer retention. For example, at Sleepy Owl, we choose that degree of experience. As we are based out of Delhi-NCR, we ensure that our Delhi-NCR deliveries are done through our own set of riders and whenever the orders get placed, the riders go out and ensure that all the aspects of the delivery, the way it is handed over in a package, the way they speak to those customers, are in our control. But, as you move the product across the different value chains, the last mile can actually break that experience. So, having that control is absolutely necessary.
How the traditional capabilities can deliver the right D2C experience, from the left side of the value chain to the extreme right side?
Our experience, collectively, has been all about balancing these elements together. For our D2C brand that is operating on an omni-channel space, there are two ends of the spectrum – Product experience and Customer experience. Brands like Sleepy Owl are stretched on both sides where customers demand a top-notch product & service experience. Typically, both of these are very different capabilities. At one end of the spectrum, we have the big giants such as Unilever and P&G, while on the other side, we have marketplaces such as Amazon and Flipkart that are really customer experience focused. This conundrum plays out every single day in my life and for every supply chain professional managing D2C supply chain.
We are optimizing this as we move along but, as an organisation in the D2C space, there are always two North Stars that stem from. If you are a product brand, it starts with the product itself, the consistencies, and the capabilities that we want to build in-house for the product to deliver that kind of experience. The distribution leg of the supply chain would need a degree of orchestration because then you have a lot of stakeholders that come in either as partners through your ecosystem or you slowly build in those capabilities.
For example, if it’s a sales ecosystem, either you have your distributors you are partnering with to take in stocks and distribute it across or you have the logistics partners who do the first mile till the last mile of the deliveries; when it comes to D2C ecosystem, there is the returns and the customer experience team. These elements require a very close orchestration in the entire value chain; and it’ll continue to be so in an omnichannel world.
If you decide to be on the other end of the spectrum – customer experience – then you develop all those capabilities in-house but, for us, our North Star is being product first brand because, as a brand and as a product, we do service one need gap and we continue to address that gap for that particular individual. That’s how the orchestration gets defined. Now, as a brand, do I leave the entire ecosystem to be completely orchestrated? No. In that type of ecosystem also, which needs orchestration, whether it’s 3PL logistics, distribution, having in-store experiences, you define the areas that need and deliver that experience. At Sleepy Owl, we chose that in Delhi-NCR, we ensure all our deliveries are top-notch. We take that burden, extra effort and build that capability in-house to do that day in and day out. That’s how we are trying to orchestrate portions of it as we scale along the journey. So, it all comes down to what you want the brand to control the experience for. That’s precisely why we see Nike going direct and other brand retail stores, besides being present on Myntra and other websites.
Is this new knowledge that we have in the last 5 years because of communities and leaders like you who are start-ups, disruptors, different thinkers or is it because the supply chain fraternity, even in B2B, has realised this?
I would rather resonate with the B2B aspect. When I started out my journey, Flipkart was a nascent player and, over a period of 10 years, we saw the fragmentation of supply chain from 3-4 day delivery, to now 10–15-minute deliveries, so, the supply chain itself has shifted and I have been a very close observer to this; even B2B organisations and my past organisations like Marico do take cognizance of this transformative shift in the supply chain and how it plays out as a competitive advantage over others. There are learnings that have been gained from the B2B experience and have been re-engineered & innovated over time and implemented in the D2C supply chain models.
Who, in your entire supply chain, is responsible for each activity and how do you distribute that responsibility?
Supply chain does evolve over a period. Companies need to bring in more people to drive bigger hygiene factor and as you scale up, find technology that can optimize some portion of it, but obviously with the ecosystem growing wider and wider, the answer is always going to be People and Technology. The second thing, which I would like to focus on is that S&OP is an absolute MUST at whichever stage the company is. Yes, the bigger organisations do have a longer cycle, while for us, the cycle is actually smaller. Certain D2C channel dynamics come into play very early on and therefore you try and predict the factors driving those recurring predictability and the factors that might have variability in the D2C forecasting and the other channel follows the model that fits into the channel dynamics. During the initial stages, as you build in rigor in S&OP, forecasting becomes stronger, but the initial stages are through inventory management and in my experience, having a supplier or a reliable supplier who understands that variability and manages those variabilities at his end and the partnership that you develop over that period, eases that variability that comes in month on month. There are some months where requirements might shoot up, having an ecosystem or supplier that understands this variability and be able to react to it at a much faster pace rather than having suppliers who are working on fixed schedules to drive more efficiencies in the supply chain, will always prove to be beneficial.
A B2B and a D2C supply chain are completely different from each other. A D2C supply chain needs a degree of flexibility in their in its entire value chain, right from the suppliers’ ability to schedule and reschedule requirements as and when it comes. In these cases, companies need to perform due diligence in their supplier evaluations and supply consistency. They need to invest in S&OP, which is appropriate with a lot of rigor and shorter life cycles. Once you bring these three things together in harmony with having a technology to overlay it, it will obviously result in a D2C performance that you want to achieve.
How do you account for the degree of returns, especially in a grocery environment? In a consumer product, there are always damages, wrong shipments, wrong packaging, how do you really account for such eventualities?
I think returns percentage is a function of the categories that the brand typically operates. For example, in a clothing brand, you will see a return that is far higher because the flirtatious nature of the product with the customer itself defines the degree of returns. Fortunately, we operate in a category that is much more planned. There is a degree of consistency in consumption, which defines the kind of planned purchases that we have and again it defines the kind of returns that we get on our D2C orders. Fortunately, for us, the returns have been historically low. Now when it comes to accounting them as a percentage, there are different technologies that help us assess data pin code wise through that micro granularity in terms of the potential of high returns and the potential of no return. There are technology solutions that we have deployed in our ecosystem that identify customers and their past purchase behaviour to understand returns better and we continue to use that through day in & out to assess and ensure that our returns can consistently stay lower. For us, deploying those technologies to get incremental improvements in return helps us a lot in ensuring the right quality product stays in the entire supply chain.
How do you achieve the liquidity lever while managing the inventory, asset management, and the customer satisfaction for the organization?
Wastage and expiry don't have an easy solution. This has been an age old challenge for all supply chain professionals. Wastage and expiry need a very hawk eye to the inventory and ensuring that this is cash at the end of the day. The degree of importance is carried all the way to the top and also across the breadth of the organization. At Sleepy Owl, our products have a shelf life of six months. We have a strong supplier ecosystem in place that understands this challenge. If you are packing with a co-packer, we understand we work with their vendor partners or we introduce our own vendor partners who can supply materials at a much shorter lead time, so they don't have to carry their own inventory or they don't have to take longer runs patch sizes.
We brainstorm with them, understand their challenges and constraints around batch scheduling, then we go back to the drawing board to incorporate those concerns into our product design stage. We follow this approach day in & out as part of the new launches to control the wastage and expiry. Having shorter batches and shorter runs and having the suppliers who are able to turn it around faster helps in controlling, but nothing defeats a hawk-eye in each of these stages. Companies need an individual or a team of individuals or a team of planners who are looking into this with a rigor and ensure that products are liquidated at the right time.
How effective is D2C over traditional supply chain model if you have to build your brand quickly and without much friction?
I think the fundamentals for building a product or the brand in itself, remains the same irrespective of any channel. However, the D2C channel allows you to test your hypothesis very early on and with D2C, you have the early adopters in place. You can continue to experiment with your product proposition, i.e., rate during the entire life cycle and then launch it in your offline channels to see and validate those tractions. It's always a series of small jumps that leads to a bigger jump and that helps us. Secondly, when it comes to brand building, D2C allows two-way conversations between the company and the consumers and often times, we get feedback from our consumers that are addressed in the most relevant fashion. These aspects ensure consistency in product quality, ascertain that the narratives are in place and that the customer understands the price value spectrum that the company is offering them. Once companies do this process day in & out, it reinforces a strong belief. For instance, Sleepy Owl stands for ‘Simply Great Coffee’. We go that extra mile to deliver that experience and reinforce the belief that our customers do have a simply great coffee at whatever time and need that they might have. Internally also, we look all our discussions and debates through this lens – Consistency in whichever channel that we operate, which ultimately builds and strengthens the ethos of our brand, which does take a longer horizon and a longer time.
PRADEEP BILLAVA - Senior Director – Control Tower and Customer Experience, Zepto
Having a supply chain that cuts short a lot of lead time, middle time and delivers a great last-minute experience are the must-haves for a D2C model.
What are those must-haves in order to excel, in a D2C model, or the virtues that an organization must bring on to the table?
One of the key aspects is to really be cognizant of the customer behaviour as there has been a constant shift in the market trends contemporarily. Companies must be open to be an omnichannel player. I would like to share Pepperfry, that started out as an online store, selling furniture, and continued for about a couple of years. Eventually, they realized that there has been a large set of customers who would prefer a more traditional approach of physically visiting a store and selecting their furniture along with interacting with an expert to help them place an order, which led to expanding into physical stores. Something similar happened with Ikea where they changed their flagship model in India and launched micro-stores.
Here, one of the key aspects to understand is, how the customer behaviours change based on geographical locations. One of the things I vividly remember during my stint with Flipkart was the kind of traction we received from tier II & III cities. The customers from these geographical areas loved buying their electronics online, which made our distribution and supply chain verticals to ensure that even if the order is placed from the most remote areas in the country and there were time and logistics constraints, we still had to take the extra efforts to deliver those products. As a team, we took that path anyways, which led Flipkart to get massive business specially during the Big Billion days year-on-year, and then they built further on the serviceability of the business.
Secondly, distribution is one of the most important frameworks for the customers; facilitating end-to-end sales depending upon the availability, how quickly it gets sold off and the speed in which the business is able to replenish. If the firm is able to manage the entire cycle in a short time span, it leads to delivering fresh products to the end users conveniently, and that too not just groceries but any kind of inventory, like apparels, furniture, etc. Fresh products fundamentally mean a great experience to customers. Having a supply chain that cuts short a lot of lead time, middle time and delivers a great last-minute experience are the must-haves for a D2C model.
From a customer demand velocity or customer integration aspect, how do you manage or shape that demand velocity for such a model; does the forecasting efficiency become extremely prominent?
When you start off, you go by certain assumptions, however, over a period of time, once the customers start coming in, the realization hits about what’s actually being sold online, the categories that you can experiment with, in turn making the business forecasting stronger by the day. One of the key elements that has really changed at Zepto, is the way we really plan our inventory, fill rate and efficiency around the fill rate, as that gives a clear picture of the momentum on the App that is driving those purchase patterns. This is the era for a ‘Quick Commerce’ industry where you deliver in 10 minutes, if we are falling short on the availability of an inventory even by 30 minutes, we are missing out on actual sales. Also, this leads to losing on customer recall, the reason being, whilst we were inverting a product during those 30 minutes window due to unavailability, the customer may have gone elsewhere to buy it.
Eventually, this is where the business starts losing its customers. Hence, according to me, Precise Forecasting is one of the key ingredients in the recipe of quick commerce. Every organization learns with experiences overtime and then they start building their business around it, as they say, ‘Rome wasn’t built in a day’, hence, consistency and the right approach is a mandate for any business. Also, they need to understand their design of experiments and explore innovative options about what new approaches can be taken, like introducing a new category or a new line of product, something that can be actually delivered to the customers hassle-free. Hence, a goal-oriented planning is pervasive and comes foremost in Supply Chain Management, as we are well aware that if we get that right, it’s definitely going to deliver the business that we aim to achieve.
How do we really balance the cost and the customer experience given that you need to do everything right into the entire value chain?
I think one of one of the key aspects for any D2C brand is the last mile part because that's also the moment of truth for their customers and it also amounts to a significant cost in terms of the overall value chain. When you are in an Industry that has got brutal competition, there are a lot of challenges in terms of having that share of last mile team as you grow. The only thing that comes to solve is basically innovation in every way.
Companies need to optimize deliveries through not just riders but through cyclists, that's something that we would really want to build on to because that eventually saves the cost for the person doing the delivery too and then when he sees that value add, he would actually be able to deliver as well, so changing that mix of delivery, finding alternate delivery model is what we are focusing on. When we were at Flipkart, we started to deliver not just through dedicated people at supply chain but also exploring the kirana model wherein we asked kirana partners to tie up with Flipkart and do deliveries for their local areas. It took about two to three years for us to scale it up to a level where it would be significantly contributing to lower costs in the overall value chain but eventually, it proved to be a great backbone for us to leverage on cost. In short, you really have to be innovative and keep exploring newer models of delivery to reach the optimum. I believe the process of trial and errors is actually going to help companies build what is going to last for a longer period of time and the earlier they find the alternatives, the faster they're able to build on the model and gain momentum.
How are you able to strike a balance between inventory levels and stock availability?
This is one of the key things that happened at Zepto. We sell quite a few products that expire soon. We are into fruits and vegetables as well, which have a shelf life of 2-3 days. I strongly believe in starting at a slow pace. When you are confident about how much you are able to sell, that helps you to stock inventory as per requirement. Apart from that, there are some key levers that that can be leveraged, like how soon can you replenish. We typically started off with having replenishments once a day and now there are times when we are looking forward to replenishing our stores every 10 – 12 hours. Then, there are some stores where we replenish even faster. If you build your relationships with your partners in such a way wherein you are able to leverage on the replenishment timelines, you get more control over your stocks. This entire process de-risks your business, helps in changing MOQs or changing the replenishment cycles. Today we have our own mother warehouses. We also keep certain items, which have slightly longer shelf lives to ensure that our replenishment cycles are much faster. In this digital world, companies need to leverage the latest technologies, which give them early warning signals and help them take those liquidity actions on time.