E-B2B distribution strategies for fragmented retail environments: Saving India’s mom-and-pop stores

Editor’s Note: The SCM thesis E-Commerce Business-to-Business (e-B2B) Distribution Strategy and Network Design for Nanostores was authored by Austin Iglesias Saragih and Syed Tanveer Ahmed and supervised by Dr. Christopher Mejía Argueta ([email protected]). For more information on the research, please contact the thesis supervisor.

Today, almost 90% of India’s consumer packaged goods (CPG) brands operate in fragmented channels. These channels depend on exclusive distributors: the brand’s sole authorized supplier to wholesalers and then retailers. The supply chain connecting the CPG brands and kiranas is a very long one. Kiranas, also called nanostores or mom-and-pop stores, are small, family-owned retail stores that serve the families in their neighborhood—sometimes as many as 500 families. Customers might run out to their local kirana to buy rice, cooking oil, or even soap. Distribution to kiranas poses a logistics challenge because kiranas place small orders, deal with and receive orders from many exclusive distributors, and offer many brands. All these factors contribute to kiranas’ high cost to serve. We wondered—Could e-commerce platforms help kiranas reduce costs?

Our research study at MIT, which was sponsored by an e-commerce platform company, seeks to evaluate whether a non-exclusive e-commerce business-to-business (e-B2B) distributor could fill this gap and help kiranas become more efficient in this fiercely competitive retail market. Non-exclusivity allows the distributor to engage with multiple brands. To do this, we answer two questions for e-B2B distributors:

(1) What strategic drivers should they look for in their supply chain?

(2) What should they do to reduce costs while maintaining a good service level?

Cost vs. service: the classic supply chain trade-off

E-B2B distributors face a key trade-off: cost versus level of service. As a business, they have to operate at the lowest costs. However, they also need to provide a reliable delivery service to the kiranas. If they deliver too frequently, it makes kirana owners happy, but the small order sizes increase delivery costs. On the other hand, if distributors do not meet kiranas’ delivery expectations, they lose them as customers. An optimal balance is essential to retain loyalty while operating efficiently.

To balance cost and level of service, we identified four main variables:

(1) Market penetration

(2) Wallet share

(3) Frequency of deliveries, and

(4) Urban circuity factors.

These variables were computed into a cost optimization model called the two-echelon location-routing problem (2E-CLRP). This model combines two supply chain optimization problems: facility location problem and vehicle routing problem. These problems are NP-hard, so we used a routing cost approximation heuristic to reduce complexity while maintaining a high-quality solution.

Focus on capturing the market, increasing share

Logistics cost to serve is the most critical cost element for B2B distribution. Non-exclusive e-B2B distributors can significantly reduce this cost to serve by growing their number of onboarded stores (market penetration) and their share of sales for each store (wallet share). This reduction is driven by an increase in economies of scale—namely, the order drop size at each kirana.

Based on our sponsoring company’s data, we determined that a 10% threshold of wallet share and market penetration would result in an order size that maximizes the vehicle utilization in this distribution network. This threshold also achieves optimal cost savings, given our sponsor company’s cost structures and operational capacities.

The company can use the cost savings to invest in other promising regions, increase the level of service, or share these margins with the kiranas to strengthen their loyalty and improve their well-being. Beyond this threshold, there will only be minimal cost savings, as the company requires additional vehicles to fulfill more demand.

Companies planning to enter e-B2B distribution should focus on reaching the threshold of these two variables to quickly achieve most of the cost savings and operate profitably. Increasing the frequency of deliveries or opening in regions with difficult road networks can increase cost to serve, but not to a significant extent. Therefore, companies should not be afraid to expand to promising regions or improve their level of service to gain a larger market share.

We foresee a disruption in Indian CPG distribution models. E-B2B players will drastically change how companies reach their retailers. With widespread mobile penetration and digital connectivity at very affordable prices, the emergence of e-B2B distribution is happening now. E-B2B distribution can also make the lives of kirana owners simpler. Even though this may seem disruptive, it is likely to emerge as the most efficient model in the coming years. Finally, we believe that our findings will also hold true for other emerging markets. Overall, e-B2B distribution serves as a promising solution to the current fragmented retail channels.

Every year, approximately 80 students in the MIT Center for Transportation & Logistics’s (MIT CTL) Master of Supply Chain Management (SCM) program complete approximately 45 one-year research projects.
These students are early-career business professionals from multiple countries, with two to 10 years of experience in the industry. Most of the research projects are chosen, sponsored by, and carried out in collaboration with multinational corporations. Joint teams that include MIT SCM students and MIT CTL faculty work on real-world problems. In this series, they summarize a selection of the latest SCM research.

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