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com/blog/2013/04/22/inventory-vs-marketplace-model-debate
essentially technology platforms that provide tools for buyers and sellers to participate and a trusted environment that facilitates price discovery and transactions (vs. actually being responsible for fulfilling transactions), they can scale very rapidly. Weve seen all of these dynamics play out at close range as a result of our investment in the Indian Energy Exchange (IEX; www.iexindia.com). IEX operates an electronic market for power in India and has emerged as the dominant power exchange in the country with deep liquidity. The take-away is that when you get marketplace business models right, they are profitable, scalable, defensible and highly valued. Which is why contrasting the inventory model with a marketplace model makes for an exciting debate. The inventory model In India, there is no question that being in control of the product (i.e. having physical inventory) enables a superior post-purchase consumer experience. If you have the product in your control, then (assuming your systems and processes are robust) you: (i) have visibility into your stock level, (ii) know where the product is physically located, and (iii) control the pick, pack and ship process. This means that you minimize the likelihood of accepting an order only to later discover that you dont have the product. It also means that you can optimize dispatch time. The bottom line is that being in control of the product enables you to deliver faster and with higher accuracy, and respond effectively to customer inquiries about shipping status. Given the correlation between delivery times and return rates that weve observed (i.e. long delivery times are clearly correlated with high return rates), this is really important. The problem is that being in control of the product has meant that companies compromise capital efficiency because they buy product from vendors up-front, thus tying up capital in inventory, while at the same time exposing themselves to inventory mark-down risk. This can get ugly which is why it makes sense to explore other approaches, one of which is a marketplace model. Marketplaces in ecommerce how different are they really? The reality is that most of the marketplace models we see in ecommerce are not platforms, as described earlier. For example, in ecommerce marketplaces the prices are fixed, not discovered, and the ecommerce company is responsible (from the customers perspective) for several aspects of the post-purchase experience, such as fulfillment and customer service. The reality is that to the customer, many of these marketplace companies look identical to inventory-led ecommerce businesses. In other words, these models are simply one possible response to the constraints and challenges of traditional inventory models. And the marketplace model is not without its downsides for example shipping costs are higher because multi-product orders are fragmented across vendors and shipped separately. And this in turn may lead to customer dissonance because a customer wont receive their entire order at one time. There are other solutions [Note that for purposes of this discussion I am not considering FDI related implications on company structure.] Other possible ways of mitigating capital intensity while remaining in control of the product include (but may not be limited to) vendor credit, consignment sales (where products are in the possession of the ecommerce company but are not paid for upfront) or back-to-back purchasing (where the ecommerce company places the
order on a vendor/supplier after receiving an order from a consumer). For example, ASOS, a UK-based online lifestyle retailer, has net working capital of less than 2% of sales while operating an inventory model. Similarly, Shoppers Stop in India has a negative working capital model again despite being an inventory-led business. Focus on the substance, not the glossy headlines This is a meaty and critical subject for any company involved in online commerce. Were encouraging our companies to experiment with strategies that resolve the trade-offs outlined in this post because we think companies that successfully do so will have more attractive scale and economic characteristics over the longterm. The purpose of the post is not to take sides on the inventory vs. marketplace model debate or address the pros and cons of each approach in detail rather it is simply an attempt to surface the underlying issues that are driving the evolution of how ecommerce companies operate in India. (Bejul Somaia is managing director at Lightspeed Advisory Services India.) To become a guest contributor with VCCircle, write to shrija@vccircle.com.