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E-commerce is driving change in logistics, making warehouses smarter

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Southeast Asian e-commerce giant Lazada’s warehouse in Laguna. -- BW FILE PHOTO

By Denise A. Valdez
Reporter

ONE OF THE MOST celebrated advantages of the growing e-commerce industry is how it allows shoppers to feed their itch for browsing and purchasing products at any time of the day. The rising penetration of smart phones and the growing number of Filipinos with access to the Internet make it easier to morph a mall into the tiny screens of digital devices.

Based on Hootsuite and We Are Social’s “Digital 2019” report, which measured global Internet use from January 2018 to January this year, 71% of the Philippines’ total population is on the Internet, and every Filipino user of e-commerce sites spent an average of $18 or almost P1,000 on online shopping last year.

A Google-Temasek report in November, “e-Conomy SEA 2018: Southeast Asia’s internet economy hits an inflection point,” also projected e-commerce to continue growing in Southeast Asia through 2025. It noted that the Philippines is expected to record a compound annual growth rate (CAGR) of 25% to $21 billion in the 10-year period from 2015.

“[T]he Internet economy in the Philippines is still a relatively untapped opportunity… With increased focus and investments from regional unicorns and local start-ups, we estimate that the Philippines could ignite growth beyond 30% CAGR and fully achieve its long-term potential,” it said.

But what comes with the growth of e-commerce is an adjustment on the part of online retailers to cope with the changing behavior of consumers.




“UPS Pulse of the Online Shopper,” which was released March 2018 by logistics firm United Parcel Service (UPS), said shoppers in Asia have high expectations from e-commerce platforms for next-day delivery of orders. In its survey of more than 18,000 online shoppers around the world, it found 73% of shoppers in Asia expect an order placed between 6 p.m. to midnight to be delivered the next day.

“Customers are definitely getting more demanding from the experience… They want it to be fast, they want it to be easy. They don’t want to wait a long time,” UPS Philippines Managing Director Chris J. Buono told BusinessWorld in an interview last year.

However, the most recent data from the Philippines’ trade department showed the cost of logistics is a big challenge for retailers. A policy brief conducted in partnership with the World Bank showed logistics costs in the Philippines took up 27.16% of the total sales of companies, making the country the most expensive compared to regional peers Indonesia (21.4%), Vietnam (16.3%) and Thailand (11.11%).

To balance customers’ stricter demands for fast and efficient delivery of goods and the high cost of logistics in the country, Southeast Asian e-commerce giant Lazada said it is pushed to invest heavily in improving its processes.

In an email interview with BusinessWorld, Lazada Philippines Chief Executive Officer for Logistics and Operations Juan Pavez Spencer said the biggest challenge for the e-commerce firm is indeed the logistics side of the operation.

“The Philippines is very complex in terms of geography with more than 7,000 islands and there are a lot of hard-to-reach islands making delivery expensive in the Philippines. Lazada resolved the logistics challenge by launching our in-house fleet making logistics one of our core strengths,” he said.

Since the company started operations in the Philippines seven years ago, Lazada has established three warehouses — in Laguna, Cebu and Davao — set up 50 logistics hubs and opened one sorting center in Tanyag (Taguig) — a strategy to help it cover as much base as it can across the country.

“We are trying to look for more areas to strategically place the fulfillment centers as close as we can to where the customers are,” Mr. Pavez said.

Jose Mari Victorio R. Danga, a logistics and warehousing professional who used to head the automation division of SSI Schaefer Systems Philippines, Inc., said it is the trend now for companies to decentralize operations to improve the speed of delivery.

“Before, the trend was to have big distribution centers. But now, because of the traffic, most companies would like to have a satellite warehouse near their customers for easier delivery of goods,” he said in an interview.

Lazada integrates smart technology into its logistics operations to achieve maximum efficiency. Mr. Pavez said the company’s 54,000-square meter warehouse in Laguna was built from the ground up with automation in mind, and it is investing in a bigger warehouse north of Manila which will be “technology-driven with smarter algorithms employing more automation.”

He said the integration of Alibaba Group’s logistics arm Cainiao Network with Lazada is an integral part of growing the company’s warehousing and logistics capabilities.

“We are benefiting from Alibaba’s successful experience in China, also an emerging market, and the power of Alibaba’s ecosystem, from logistics, payments, and technology,” Mr. Pavez said.

The company also started a joint project with the Alibaba Supply Chain Team in the third quarter of 2018, which Mr. Pavez said “improves the cost and operational efficiency of the LEL (Lazada eLogistics) supply chain service level, and at the same time, provides better service to consumers and suppliers.”

The integration has so far resulted in better forecasting of demand for inventory, reduced shipping costs, and a more transparent sharing of real time information and analytics with partner brands and sellers.

Lazada’s heavy investment in automating its logistics facilities is “already advanced” in the context of the Philippines, Mr. Danga said, who worked at a material handling equipment supplier.

“Most of the companies here in the Philippines, especially for the manufacturing companies, tend to do third- party logistics. But for Lazada, as much as possible they want to control their costs so they can lower the prices of their goods and to have better margins,” he said.

He noted investing in logistics automation ultimately helps a company’s bottom line as it improves efficiency, thereby allowing stocks in a warehouse to continuously be replenished at exactly the right time.

“It’s not cheap to invest, definitely. This is millions, almost billions in terms of total investment. But what’s the reason for the investment? …They’re more concerned about efficiency. If they can do more efficient operations, they can lower the cost, and at the same time they can have faster product turnaround,” Mr. Danga said.

He said the cost of logistics automation is still prohibitive for most companies.

Installing a warehouse management system costs around P2 million to P4 million, and this technology is considered entry-level. Full automation of a warehouse costs about 350 euros (around P20,000) per pallet position, equivalent to a ground area of 1 x 1.2 meters.

Mr. Dangan said aside from the barrier to entry posed by the high cost of smart technology, companies are also more motivated to invest in acquiring land to build more warehouses instead.

“Land tends to appreciate. If you invest in equipment, that tends to depreciate. So they’re going to weigh the investment,” he said.

Another major obstacle to logistics automation is the moral dilemma of risking jobs that may be taken over if a company invests in smart technology.

Stephanie Duque-Nepomuceno, Sherilyn M. Zantua and Jovale C. Vitao, researchers from the Technological Institute of the Philippines who have studied optimization of warehouse operations in the Philippines, said the push for automation is boosted by the fact that human labor is indeed prone to error.

“Automation improves your output. With human intervention, you have a higher chance of error… You have to factor in fatigue and the learning curve,” Ms. Nepomuceno said in an interview.

As industrial engineers, they noted how there is always an internal conflict within companies whenever there is a push for systems optimization as this usually translates to job loss.

“‘Yun ‘yung fear nila sa mga IE na kapag mag-i-improve ng process, ibig sabihin noon magtatanggal ng tao [Employees usually fear industrial engineers when there’s an effort to improve process, because it usually means people will be removed from their jobs],” Ms. Zantua said.

“Hindrance din ‘yun pero syempre, hindi mo rin sila masisisi… Isa ‘yun sa kino-consider ng company, ng management [That’s a hindrance but of course you can’t blame them. So that’s something a company considers],” she added.

They also noted that companies must start seeing the process of optimizing logistics work beyond the acquisition of technology to include the need to train staff for it.

“In a perfect world, automation or optimization would lead to growth, and growth would lead to more jobs. But that’s the perfect world. With what we have now, it doesn’t necessarily translate to that. Kasi sa atin [What happens] when you optimize processes is usually to create more jobs pero [but] jobs for professionals. What we’d reduce would be the jobs of the rank and file,” Ms. Nepomuceno said.

“If you have an operator operating this machine for 10 years, not necessarily a college graduate — minsan [sometime they are] subject matter expert just because they’ve been working for a really long time — they can use that guy, train him professionally…,” she added.

Ms. Vitao noted that usually the employees inside the warehouse have the most impact on a company because they are the ones directly participating in the system.

Mr. Danga concurred on the job retention concerns, noting the opportunity available for companies in the integration of a new technology in a system.

“Most people, especially here, think automation is a job killer. In reality, it’s supposed to…upskill the manpower,” he said.

While companies in the Philippines may still have a long way to go to keep up with the most recent logistics technology in the market, Mr. Danga said he believes the country is moving in the right direction.

“It’s only a matter of time. The Philippines is in a good position. More investors are willing to invest now because of our growing GDP… Sooner or later, these technologies will come. It’s quite competitive now in terms of this kind of market,” he said.

“From what I know, there are a lot of companies, at least the business owners, thinking of this already. But they’re not willing to shell out money on full automation or some sort of automation immediately.”

Mr. Danga noted if the Philippine market continues to mature, companies must soon invest in smart technology to stay alive, as no amount of manpower would be able to keep pace with the expected growth of logistics demand from e-commerce.

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