Tuesday, March 5, 2013

The Taobao Effect on Fashion Supply Chain in China

From this week's reading, we learnt about how good use of information technology can help improve supply chain management. In the J.C. Penney article, the impact of e-commerce on its traditional business was addressed. This reminds me of my experience with Taobao.com in China.

Taobao is the biggest C2C platform in China. Taobao, in Chinese, means hunting for treasure. As the name suggests, you can seriously find everything you want on it with a really good price. One time I was looking for a seasonal chocolate that is only sold in Switzerland and I found it in Taobao.  Even better, it was the same price as when I bought it in Geneva with only an extra national shipping fee (much cheaper than my airplane ticket). That's what I liked about Taobao, and there are billions of people feel the same way: Taobao has a tremendous customer base of 1.7 billion, and facilitates 48,000 transactions per minutes.[1] This e-business giant has strongly impacted all kinds of traditional business, especially the fashion industry.

The Taobao Effect
In China, my normal shopping procedure used to be like this: go to the retail store --> pick up and try on cloths I liked --> Note down the item number (which is usually shown on the price tag) --> go back and order it online from independent purchasing agents who runs their business on Taobao. The reason why I was doing this was because with the exact same cloth, the price offered from Taobao is much cheaper than if I buy it directly form the store. Usually I can receive a discount of 20%-50% off. And I'm not the only person who benefit from this transaction. In fact, these agencies earns tons of money every year. Believe it or not, their business all simply start with a membership card.

Normally a clothing retailer will always give its customer a membership card, which will offer, for example, a 10% off for every $100 purchase, in order to attract more returning customers. Since these purchasing agents are buying goods for hundreds of customers, they can receive a really high discount. And the more the buy, the more privileges they get. These privileges allow them to offer their customers with a certain level of discount (lower than the retail price in order to attract more customers) and still making profit from the price difference. We can have a single formula of revenue = discount received from the membership - discount to customers.

Problem Raised
Suppose the fashion retailer who normally has 20 goods sold per day offers 20% discount to their VIP card holders, and a purchasing agent who hold the VIP card is going to help 10 customers buying cloths. In this situation, the fashion retailer will lose 10% of its revenue per day. However, when think about it, it seems that except for the revenue decreasing, all the other aspects - inventory, logistics, etc - are remaining the same.

So does it mean the fashion retailers should take no action?

The answer is definitely no. One thing that most retailers didn't notice is that they are missing the most critical data they can get in improving their supply chain design: first hand data of customer preferences and purchasing behaviours.

Fashion Fights Back
One possible solution, which in my opinion is also the future trend, is to build real stores basically just for display and fitting, and design an online store where most of the transactions will happen. In addition to the traditional way of shopping, customers can now try on the cloths, take their time and make up their mind, order it online, and receive the cloths within 24 hours.

Using this model, fashion retailers can largely reduce their cost. First, inventory cost is decreasing. Since the stores will serve more like a show room, lower in store inventory level is required. Instead, goods can be centralised and stored in a single warehouse, which reduce the average holding cost of each goods. Second, operating expenses are reducing. This is because they will require less store space and the related costs, such as electricity, lease, maintenance, staff, etc, will all reduce at the same time.

Since the cost is reducing, fashion retailers will be able to offer a lower price. This will attract even more customer to buy their cloths. It will definitely bring the company a boost in profit.

Besides all the monetary effects, fashion retailers will also have the chance to gather first hand customer data. It helps the company to have a better understanding about its customer behaviour, and estimate the demand more accurately. And it will result in a even further decrease in inventory and other costs.

As customers, we can also benefit from this new business model. The most obvious thing is that we can  receive a better price. Besides, shopping on the brand's official site is always easier - no need to spend time comparing price nor worrying about if the goods are fake. Therefore, the lead time and searching cost on the customers' side is also reducing.

Questions: what are the challenges to build up this online transaction based supply chain? Since we are sending goods individually to customers instead of sending it in a batch to the store, will the cost of transportation increase or decrease?


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