How an algorithm is changing the logistics business

Each time you buy something from the who’s who of e-commerce in India, you set into motion another parallel marketplace in the virtual world. It’s a marketplace where logistics companies—big and small, new and old, countrywide and regional—bid for the business to ship your purchase to your doorstep. A software, whose nerve centre is an algorithm, powers it, and it is reshaping the logistics business and is providing new legs to a flagging sector.

Ecom Express, a company set up this March, embodies many elements of the reboot this logistics marketplace on e-commerce websites is enabling. The brainchild of five former executives of Blue Dart, a leader in logistics, Ecom primarily does business for e-commerce sites and ships to 1,485 pin codes in India.

This is a fraction of the 25,000 pin codes that government-owned India Post goes to or the 10,000 pin codes that DTDC, a large private sector player, services. Yet, if an Ecom can dare to venture into this business, a good reason is the time and place: e-commerce logistics is a Rs 600 crore segment, growing at 50% a year, and the logistics marketplace is an egalitarian platform that rewards competitiveness and performance. Say, a buyer in Guwahati buys an iPhone 5C from a seller in Nagpur on SnapDeal, an e-commerce site that uses such an algorithm to hand out logistics business. The moment the order is placed, the algorithm on SnapDeal’s logistics marketplace—SafeShip— starts whirring and selects the one company that is best placed to deliver from the 14 registered with it. That choice is made on the basis of data fed into SafeShip by each of those 14 players: which pin codes will they service, how much will they charge for each pin code and how much time will they take to deliver? For every order, SafeShip automatically selects—without any manual intervention—the company that services both pin codes (buyer and seller), at the least cost and shortest delivery time. “The order gets reduced to data,” says Rohit Bansal, co-founder and COO of SnapDeal.

Amazon and eBay are also using similar algorithms on their platforms. On some e-commerce sites, the algorithm also factors in past delivery experience. “The algorithm incentivises good shipping behaviour,” adds the spokesperson for eBay India, whose delivery platform PowerShip has four courier companies— Aramax, Blue Dart, FedEx and DotZot.

New Legs, Old Hands

TA Krishnan, managing director of Ecom Express, believes in the power of that customer card. He feels a knowledgeable, nimble upstart has an advantage over the old hands. “My colleagues and I were at Blue Dart for about 25 years,” he explains. “Traditional courier companies have grown in a B2B (businessto-business) era and don’t have experience in B2C (business-to-consumer), as is the case in e-tailing.” Much of the business for traditional logistics companies comes from institutional players. This can be, broadly speaking, broken into two: moving documents (for example, a bank sending papers to another branch) and moving goods (for example, an auto component company moving fenders to an car manufacturer). Thus, they are dealing with companies and fewer locations.

E-commerce, by comparison, requires servicing more sellers (eBay India has 45,000 retailers), more locations and more consumers. “Old models, based on relationships, don’t work online as you get business based on performance, consistency, service and price,” says Krishnan.

Ecom Express is not the only new company to go up against global players like DHL and FedEx, and established domestic names like DTDC and ATS Global. Since 2008, at least five new companies have sprung up, all of them with a focus on etailing (See graphic).

Even some of the traditional players are reorienting themselves to the emerging opportunity in the e-commerce space. For example, DTDC is one of the larger players, with revenues of Rs550 crore in 2012-13. This April, DTDC launched a new company, DotZot, to focus on online sales. This year, DotZot expects to do business worth Rs20 crore and is aiming for Rs100 crore in the next two years.

According to Sanjiv Kathuria, co-founder and CEO of DotZot, the needs of e-tailing are different: a courier company has to pick up goods from a seller; if a package is returned, it has to go to the seller and not the warehouse; there’s cash on delivery. “Traditional courier was not parcel delivery but document delivery. In e-tailing, it’s parcel delivery,” he says. “Productivity norms are different—a boy earning Rs8,000 a month could be delivering an iPhone worth Rs50,000. Cash on delivery has added risks.”

Democratic And Competitive

Despite the many unique demands of e-tailing logistics, players cannot ignore this segment. According to the Express Industry Council of India, a logistics industry body, e-tailing accounts for less than 10% of the revenues of the logistics sector, but it is growing at 50% a year, against 12-14% for the overall sector.

For a sector industry whose main business line—shipping documents—is under assault from the electronic revolution and a tight economy, e-tailing is a saviour. “Online marketplaces have given a fresh lease of life to courier companies and have, in fact, led to start-ups eyeing the business growing at about 75-100% a year,” says Krishnan of Ecom.

A logistics marketplace is emerging as the template of choice for e-commerce players for logistics. Besides being democratic, it incentivises courier companies to offer lower prices and do faster deliveries. “We have seen improvements on both counts,” says Bansal of SnapDeal. “Now, 90% of the orders shipped in our top 20 cities are within 24 hours. Beyond them, in two days.” Prices, too, have dropped. Bansal cites the example of a package where both the seller and buyer are in Delhi: a six-fold traffic increase on this route in one year have reduced the cost (to an e-tailer) to Rs35, from Rs80. “A delivery boy is carrying more packets, reducing cost of delivery,” he says.

Krishnan says, in the logistics marketplace, courier companies are evaluated at every step. “It’s a democratic process where you get business based on your efficiency,” he adds. Size and reach still matter as, harnessed well, they feed into that efficiency, which can work to the advantage of larger, established players. “The more pin codes you can reach, the better,” says Kathuria of DotZot.