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E-commerce in a connected world
Electronic commerce has now been on the scene for around two decades. In that brief period, it has transformed the processes of buying and selling goods and has made a profound impact on the way that companies manage their supply chains.
We previously wrote about the rise of e-commerce and its effects on supply chains in the Q2/2011 issue of Supply Chain Quarterly. In this column we offer an update to that article, "The economic impact of e-commerce," with new evidence of an accelerating transition to electronic transactions across the spectrum of U.S. goods-producing businesses. E-commerce continues to alter the nature of business-to-business (B2B) and business-to-consumer (B2C) commerce, influencing pricing, product availability, inventory management, transportation patterns, and consumer behavior in developed economies worldwide.
[Figure 1] E-commerce share of retail sales less auto dealers, gas, food stores, and restaurants Enlarge this image
[Figure 2] Employment, couriers, and messengers Enlarge this image
B2B commands lion's share
Business-to-business electronic commerce accounts for the vast majority of total e-commerce sales and plays an important role in global supply chain networks. Although online shopping gets more popular attention, e-commerce retail sales are dwarfed by electronic sales in both the manufacturing and wholesale sectors. Manufacturing e-commerce makes up 56 percent of total e-commerce in the United States, while wholesale make up 38 percent. The vast majority of both constitute B2B trade. Meanwhile, retail accounts for a mere 6 percent.
Moreover, e-commerce composes a greater share of the total sales for manufacturing and wholesale than it does for retail. In 2016, e-commerce sales made up 64.8 percent of overall manufacturing sales and 32.4 percent of wholesale sales, while e-commerce made up only 8 percent of total retail sales. This disparity is partially a consequence of the earlier development of B2B infrastructure from the electronic data interchange (EDI) networks of the 1970s and 1980s.
The growth of the e-commerce share of manufacturing and wholesale sales has been rapid; consider that in 2003, only 21 percent of manufacturing sales and 14.6 percent of wholesale sales in the United States were conducted via e-commerce. This rapid growth has changed the cost and profit picture for companies worldwide. At the microeconomic level, B2B e-commerce has caused a substantial reduction in transaction costs, improved supply chain management, and reduced costs for domestic and global sourcing. At the macroeconomic level, B2B e-commerce has placed downward pressure on inflation and increased productivity, profit margins, and competitiveness. In particular, price inflation for consumer goods has come under extraordinary downward pressure in recent years due to both B2B and B2C e-commerce. Indeed, the annual growth of the U.S. Consumer Price Index for commodities excluding food and energy was positive in only two of the 61 months since April 2013.
B2C rising rapidly
Although the B2C market started relatively behind the B2B market in terms of e-commerce adoption, e-commerce retail sales growth is catching up. Retail's e-commerce sales growth has outpaced that of the wholesale and manufacturing sectors for 12 of the 14 years leading up to 2016. Between 2003 and 2016, retail e-commerce has grown by an average of 17.0 percent annually, compared with 7.3 percent and 12.2 percent respectively for wholesale and manufacturing. The share of retail sales conducted by e-commerce in 2016 was 14.5 percent even when excluding sales at auto and auto parts dealers, gas stations, food and beverage stores, and restaurants—a far cry from manufacturing's 64.8 percent. But this share is rising rapidly; most recently, in the first quarter of 2018, it jumped to 17.1 percent. In IHS Markit's latest retail sales forecast, we expect e-commerce sales to reach 19 percent by mid-2019. (See Figure 2.)
One particularly important segment of e-commerce retail sales is mail-order houses, many of which have both an online and a traditional brick-and-mortar presence. While mail-order houses accounted for 10 percent of total retail sales, they dominated e-commerce retail sales at 85.5 percent. The adoption rate for e-commerce has been different for different types of products in the mail-order house segment. However, even products that have historically been slower to join online markets are now making headway. While in the early days, high-tech products were the stars of the show, other types of merchandise are now responsible for the rapidity of growth. Between 2003 and 2016, e-commerce sales growth of furniture in the mail-order channel tipped the scales at 1,100 percent, while computers and peripheral equipment managed only 184-percent growth.
The relative ease, rapidity, and convenience of online shopping has produced shifts in consumer shopping patterns. Between 2003 and 2016, the average amount of time Americans spent shopping on weekends and holidays fell from 0.56 of an hour to 0.48—a 14-percent decline, due to the ease of online shopping. The growth of e-commerce retail sales has also reduced consumers' search cost, placed downward pressure on the price of many consumer goods, and reduced price dispersion for many consumer goods.
These economic impacts have led to a substantial decrease in the number of small businesses operating in certain areas of the retail space, as retailers are increasingly competing with the global market. As a result, only the biggest businesses and those most able to cut costs have been able to survive.
In addition, there appear to be considerable synergies between B2C parcel volumes and heavier freight. Parcel industry insiders have observed that businesses involved with B2B e-commerce often have stronger B2B shipment volumes if they also maintain robust B2C shipment volumes than those businesses that do not engage in consumer e-commerce.
The shift to electronic commerce is also visible in labor markets. Through 2010, e-commerce had a somewhat ambiguous effect on the jobs picture, with employment at "nonstore" retailers seeming to trend downward despite strong sales growth. The share of nonstore retail employees remained roughly stable between 2003 and 2009 at around 2.8 percent—even as nonstore retailers' share of total retail sales increased by more than a third. But after 2010, nonstore retail employment took off, rising from an average of 420,000 people employed in 2010 to 570,000 people employed in 2017, while its jobs share rose from 2.9 to 3.6 percent. Although punishing to many retailers, the rapid growth of e-commerce retail sales has also provided a major boost to residential parcel delivery services, which are needed to get the goods into consumers' hands. Between 2012 and 2017, employment of couriers and messengers rocketed from an average of 535,000 jobs to 685,000. (See Figure 3.)
As technology, e-commerce, and globalization become more intertwined, buyers and sellers are increasing their connectivity and the speed with which they conduct sales transactions. This has the side effect of transmitting market disturbances much more quickly—and even exacerbating them. Quicker responses to sales transactions can have cascading impacts on supply chains, resulting in large contractions or expansions in orders, production, shipments, and inventory. The rapid growth of e-commerce therefore requires supply chain managers to take precautions and develop strategies for dealing with the rapid demand swings that are a new feature of our connected world.
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