JOINT OECD/ECMT SEMINAR

PARIS 5-6 June 2001

THE IMPACT OF E-COMMERCE ON TRANSPORT

Session 1: E-COMMERCE - A STOCK-TAKE

Paper prepared by the OECD Secretariat

TABLE OF CONTENTS

Page

1.

Understanding of the concept of e-commerce .............................................................................. 3 Definition of e-commerce .................................................................................................................. 3 Features of e-commerce ..................................................................................................................... 3

2.

Implications for transport ............................................................................................................... 5 Implications for business a new business strategy ........................................................................ 5 Concern of transport being a bottleneck for e-commerce development.......................................... 5 Impacts on transport demand ............................................................................................................. 6 Impacts on parties in the supply chain............................................................................................... 6 Impacts on distribution ....................................................................................................................... 7

3.

Policy implications ............................................................................................................................ 8 Present government actions................................................................................................................ 8 Transport policies in the future .......................................................................................................... 9

1.

Understanding of the concept of e-commerce

Definition of e-commerce E-commerce simply defined is any method of using electronic communications and computer technology to conduct business, but the most eye-catching developments of e-commerce are related to the internet. Ten years ago the internet world-wide had under 3 million users and it had no applications involving e-commerce. By 1999, its usage had increased over 80-fold and around a quarter of these users were purchasing on-line to a value of around US$110 billion. If this expected rapid growth continues by 2005, e-commerce transactions between businesses (B2B) and from businesses to consumers (B2C) will represent 5% of the transactions in each of the two sectors. These sectors constitute the key areas of development and progress. Overall the global internet economy could soon be worth about 5% of the worlds GDP. This phenomenal growth of the world wide web has enabled it to be used both as a trading platform and as a supply chain management (SCM) concept. The nature of the trading platform may simply represent an advertisement facility or, at the other extreme, be an interactive site through which consumers can shop or bid at auctions at a global level, resulting in close interaction of supply and demand. It is this trading platform usage that is usually referred to as e-commerce but the impact on SCM is also important, especially when considering its implications for transport. Features of e-commerce The development of e-commerce has several features. (1) Involvement of small companies E-commerce enables small companies to be involved in electronic transactions and thereby operate in a world-wide market. The concept of electronic business transaction itself is at least 20 years old. Electronic data interchange (EDI) technology allowed large companies that could afford the investment in hardware and specific software to send messages to each other for placing orders and managing deliveries. Stock inventories could be cut significantly and Just-in-Time (JIT) ordering systems saved large sums on the cost of holding product components. For example, in the automotive industry EDI was extended across the entire supply chain to allow dealers to place orders directly with distributors who in turn ordered from manufacturers who in turn ordered from component suppliers. However, smaller businesses had little involvement in this as they did not have the volumes of transactions to justify the investment. In addition, the lack of standards in procedures, each one being specific to a particular system, meant that the cost of customisation for EDI business was prohibitive for a small company. The internet has changed this completely. With web browsers, there are now common standards for communication and widespread availability of client access software. This enables small businesses to operate in a world market. There are numerous examples of growing successes in the small business sector.

(2) Closer inter-relationship within the supply chain The open structure and low usage costs for the internet constantly stimulate both new and existing information and communication technologies (ICT), thereby making it more and more possible for buyers and sellers to come together efficiently. The result is the creation of new marketplaces and opportunities which themselves cause changes in product and service customisation, search and location, distribution, and consumption. E-commerce is often seen in terms of online purchasing or business to consumer (B2C) commerce, though this activity is fairly small compared to business to business commerce (B2B). In 1998 for example, the former was worth perhaps 8 billion US$ and the latter 43 billion US$; predictions for 2003 are of the order of 108billion US$ and 1.3trillion US$, respectively. Although some B2B growth is due to the transfer of supply chain management (SCM) systems from the old EDI networks to the internet, it is also driven by the recognition by businesses that they can share information and work collaboratively with other businesses, and deal directly with suppliers, thereby not only reducing inventory costs in the process but promoting a more effective customer service as well. Sophisticated B2B systems encompass the entire supply chain by working with customers, manufacturers and suppliers. Related developments can also be seen in new businesses with new products and services that have emerged as a result of an e-commerce approach. Whether in B2B or B2C scenarios, this form of supply depends on improved information and understanding of consumer or business user requirements, and provision is moving from simply supplying a product more efficiently to tailoring an entire service that matches particular user requirements. The ever-closer provision of service and product requirements or their combination to meet particular needs of the user or consumer will be an increasing feature of ecommerce supply. The e-commerce process can eliminate the usual industry practice of over-estimating materials that then get wasted. With e-commerce, what is ordered is used, and when there is a gap, it can be filled readily by electronic ordering combined with JIT delivery. This could lead to environmental benefits. (3) Developing a global market The third feature is the global aspect of e-commerce. E-commerce operates beyond national borders, and thereby brings together supply and demand at a global level. This feature may lead to changes in the structure of supply chains as global sourcing increases. In terms of business procurement, trading can be done with the best possible supplier, whatever their location, and the time needed to negotiate is reduced as a result of online transmission of documents and other communications. Therefore, it could be said that the development of ICT has enormous effect on conventional systems and, furthermore, to national competitiveness. Developing countries such as China and India and emerging markets in Asia are starting to use e-commerce techniques to improve footholds in world markets. Long-term business relations between companies have therefore become threatened and the procurement market has been thrown open to all suppliers. This has had employment implications for production workers, office staff and middle management further accentuated by greater opportunities for outsourcing by firms even of administrative functions such as personnel and finance, which are becoming increasingly practicable through the use of ICT. Companies can offer and operate business services in a way comparable to them being an internal unit within the purchasing company itself. Such impacts are at present unevenly distributed, being seen as relatively commonplace in the USA and less well-developed for example in Japan where a more fraternalistic business model is the cultural norm.

2.

Implications for transport

Implications for business a new business strategy From a company or business standpoint, e-commerce is expected to change the way that companies do business. Electronic data interchange (EDI) made it possible for large corporations such as car manufacturers to send electronic messages to place orders or manage inventories. This implementation of a just-in-time (JIT) ordering system resulted in cutting of stock inventories and saving millions on the cost of maintaining parts. An e-commerce approach can now be applied in the same way to the sale or procurement of products or services Further developments have been achieved by implementing an e-commerce approach. They derive from tailoring a product more specifically to the needs of the customer. For example in Europe increasing numbers of cars are now built to order, whereas in the USA they still tend to be built on a stock basis, tying up billions of dollars of cash. In this market sector, e-commerce may allow customers to configure, select, price and finance the new purchase, and then collect it from a pre-arranged dealership. With such a build to order approach, the whole stream will be pushed closer to customers and their needs will have to be responded to more quickly, accurately, and at lower cost. In the future, such customers are likely to be short of time and willing to pay to save it, be well-informed, require exact needs customised and supported by personal service, intolerant of failure and difficulties, and want producers to be responsible for the impact of their products on the environment. Such an approach will change supplier-customer relationships to closely managed alliances and collaboration. The key to action has to be the integration of e-business into business with the former regarded as a tool to help develop the latter. For such an e-business strategy to be successful, there are certain critical issues to address. These include creating awareness and commitment, allocating dedicated staff, developing and implementing a phased strategy, and harnessing e-procurement, purchasing and delivery. Concern of transport being a bottleneck for development of e-commerce A major concern for the development of e-commerce is delivery. Companies are devising ways of selling goods over the internet but getting these to the customer is another matter. As online orders from consumers or businesses continue to grow, electronic sellers may be faced with logistics chaos. A recent survey showed that nearly a fifth of online customers said in a survey that delivery of their orders either took longer than expected or never happened. As a result many stopped shopping online while others simply refused to do more business with the offending e-commerce retailer. There have been some significant delivery crises. For example, in the USA, large companies admitted that they could not guarantee Christmas deliveries which resulted in consumer irritation when it was found that an order could not be cancelled nor amended Some observers feel that the future pace and profitability of e-commerce for physically transported goods particularly in the B2C sector hinges heavily on the ability of online retail sales to be fulfilled. However, existing supply chain systems are not designed for such internet retailing. The equipment, warehousing, 5

and other facilities underpinning transport are designed to handle large consignments, but with ecommerce they need to be used to move small packages. E-commerce retailers and transport and logistics service providers are still searching for solutions that will ensure that e-commerce shipments are handled and transported at a cost that produces profits. If this cannot be done, e-commerce will be under threat, particularly if greater travelling distance per package are required by the globalisation of supply chains. However, although the influence of e-commerce on many markets has received considerable attention in recent years, its impacts on transport services has surprisingly been given scant attention. Present implications of e-commerce for transport can be considered in three categories impacts on transport demand, impacts on parties in the supply chain and impacts on distribution (including implications for intermodal transport). These aspects are dealt with in turn in the following paragraphs. Impacts on transport demand The overall impact on transport demand is not clear. In freight transport, two scenarios may be depicted. In one scenario, e-commerce leads to an increase in freight transport demand. In this scenario, e-commerce results in transport that is completely subordinate to customer service, consisting of frequent JIT shipments of small packages, leading to highly fragmented freight shipments characterised by less than full (LTF) truckloads to and from distribution centres. The demand for freight transport may increase until the transport system is unable to cope in its present form. In the other scenario, opportunities provided by ICT, including out-sourcing and consolidation between shippers, combined with environmental concerns and the need to stay competitive, will result in all opportunities to reduce transport demand being exploited, thereby reducing demand. The scenario to be followed would depend on many unknowns such as relative populations of time-poor and social shoppers, relative costs of various ways of getting goods and the cost-sensitivity of various purchases. There could be variations between countries, localities, regulatory regimes, and socio-economic groupings Whether e-commerce would lead to reduction of travel for shopping and hence to reduction in transport demand as a whole is also not clear. It seems at first sight that e-commerce may lessen the transport demand associated with retail trading but the time saved may be used to travel for other reasons. Other factors may also affect net outcome, such as: the present requirement of people needing to be at home to receive deliveries, the heterogeneity of shopping needs, and combinations of travel for other purposes. Impacts on parties in the supply chain E-commerce is now driving changes in SCM. It has two major influences: vertical integration between trading partners both shippers and logistics service providers, and the appearance of completely new functions and companies. The former relates to information sharing, common planning, and exchange of existing functions by way of supply chain integration which is supported and driven by ICT and e-commerce. The main requirement is that the partners in the chain are sufficiently informed about each others processes and mechanisms so that they can anticipate anothers needs and operate near an optimum level. Technological advances support this process by bringing about improvements in information exchange. Firms making components or products required for shipment can have up to the minute information on stocks and their usage for

production and arrange for immediate replacement so that minimum amounts of stock are held on site. There are good examples of companies undertaking SCM via the internet. A consequence of e-commerce development therefore is that information becomes more easily available to all partners in the supply chain. Threats come to those parties in the chain who have traditionally earned a living on their access to scarce information since the switch over to e-commerce may leave little room for them. Agents, freight forwarders, wholesalers, retailers, those concerned with logistics functions such as consolidation, storage, picking, and marketing will all face more and more competition from e-commerce sales channels. This is described as disintermediation resulting in certain intermediation roles in the chain becoming redundant. On the other hand, in large markets such as transport, parties in the chain may have difficulty finding the information they are looking for or may not be able to handle it. It is this area that is opening up new opportunities with new roles in the supply chain filled by information brokers or infomediaries. Impact on distribution Time and cost advantages of e-commerce brought about through order processing and logistics planning increase the emphasis on time-definite delivery. Therefore, patterns of distribution are also likely to change both globally and locally. In global e-commerce, the impact on air cargo is likely to be significant. As inter-continental transactions become more common, it is reasonable to expect that e-commerce segments will contribute to air cargo growth, in order to fulfil the global requirement for speed and bespoke delivery especially in B2B. However, document transmission, which may eventually be siphoned off by the internet, stands out as a major uncertainty. Another challenge is in local distribution, which expects rapid delivery while being price-sensitive, and which normally favours surface-based transport. Roads are likely to remain the surface mode of choice because of the inherent flexibility of vehicles involved and their usage. Rail and inland water are likely to prove less adaptable to the flexible distribution of goods. Shipping costs remain one of the biggest deterrents for consumers who are considering online purchase of physical goods. Traditional warehouse and distribution centres are not well suited to the business of ecommerce fulfilment. Newly-designed systems are needed. Lack of low-cost and efficient distribution systems are impeding the economic advantages of online shopping and it may be that traditional retailers will have to address this themselves. Difficulties in distribution may lead to switching from high density channels such as warehouse and shopping centres to low density routes involving factory and residential areas One may imagine a scenario in the future in which cities are occupied by small freight vans practising just-for-you distribution to a consumer. The vans depart from distribution centres at city boundaries. Traffic between such distribution centres and production centres would usually be long distance but efficiently organised by large-scale cooperation and consolidation to accommodate small unit shipment. Therefore, it is possible to conceive of two divergent impacts on transport: first, greater disaggregation of freight flows at the urban level, but second, greater consolidation of long distance consignments. E-commerce can contribute to achieving an efficient distribution system. For example, transportation exchange by e-commerce can affect distribution by replacing the time-consuming role of agents who brought together those offering cargo and those offering shipping capacity. By using website approaches, 7

shippers can bid for container space offered by carriers and provide information on their needs to various carriers. They can search online and select ones offering the best rates or transport conditions. Conversely carriers can bid on shippers available cargo and provide information on unsold capacity. This online sale of transportation improves the efficiency of distribution at very low cost. Another positive impact of e-commerce on distribution is shipment tracking employing interactive internet applications. This is particularly pronounced in the express parcel delivery service industries and now constitutes a significant share of internet applications used in freight transport services. It involves global positioning systems keeping track of vehicles so that customers know exactly where the shipment is at any given time. Combined with bar coding, records of a parcels location are monitored at all times from pickup at the origin to final destination. This is a major contribution to reducing the incidence of loss or theft. These developments can lead to increased outsourcing and consolidation of transport services. Therefore, it may lead the way to a better utilisation of intermodal transport services, especially in long-distance transport, which is likely to increase by globalisation of supply chains. However, in local distribution, the ability of the transport system to accommodate highly fragmented freight shipment (less than full truckloads) could represent a threat for intermodal transport.

3.

Policy implications

Present government actions Governments in many OECD countries have recognised the growth of e-commerce and its potential to revolutionise the commercial world through vastly increased choice for consumers and access to markets for suppliers. The prediction is that business will be transformed by e-commerce and that there will be further unforeseeable technological breakthroughs before 2008. It has been argued however that the extraordinary evolution of the internet and e-commerce applications of it have been possible in the first instance precisely because of the absence of a regulatory straitjacket. Therefore, government strategy must be flexible enough to capitalise on this situation and not lock citizens, business, and government into rigid structures However, in this process of rapid business change catalysed by e-commerce, there are several underpinning issues that need to be addressed if the system is to flourish on firm foundations. Governments will need to address and come to terms with the global and trans-frontier nature of the new networks and communications systems and establish a framework in which global e-commerce can flourish. This requires international co-operation. OECD studies have already indicated that several key issues need to be addressed, such as: building user and consumer trust, establishing simple predictable regulatory frameworks, ensuring access, and logistical issues such as customs clearance, parcel delivery and payment systems. Therefore, governments are starting to take action to foster ICT developments by: (1) providing the underlying legislative, regulatory, informational and infrastructure systems required for the effective use of electronic systems in commerce, and (2) revising their own procedures and approaches to embrace the e-commerce philosophy as a feature of the workings of government itself: e-government. (1) Providing necessary systems to support e-commerce

E-commerce activity requires government action in areas such as regulation, consumer protection, taxation procedure, licensing, security, privacy and other such legally-based instruments. Companies are already looking closely at the regulatory factors that might affect growth potential for example security, integration with existing systems, privacy, customer relationships and taxation. Governments need to define clear policy directions and provide necessary regulatory frameworks for achieving their objectives. The basis of these policy needs is that virtually any commercial transaction depends on trust. Therefore, commercial activities in an electronic environment need to provide assurance to consumers and businesses that the system is secure, reliable and verifiable. Also, it must be recognised that the legal and commercial frameworks that govern business transactions were designed before the age of e-commerce and the parties involved are looking to governments to ensure that similar rules to those of the physical work also apply to e-commerce. If e-commerce is to continue its spectacular growth whether in a B2B or B2C situation, more particularly the latter, these questions of trust and confidentiality must be addressed and the necessary assurances provided. This will need a mix of reliable and secure technology, efficient and effective regulatory arrangements, involving government/taxation rules, and public awareness. OECD itself has been active in this area in relation to privacy and personal data, secure infrastructure and technologies, and certification, as a result of the deliberations of an ICCP Working Party on information security and privacy. A number of countries are actively engaged in making such provisions, so that consumer concerns about fair-trading and privacy are addressed for e-commerce in the same way as they are for conventional trading. For example in Canada, there are already initiatives for clarifying rules for the digital marketplace and establishing legal policy and regulatory frameworks. (2) e-government Many governments are also actively developing electronic provisions of government services and information to their citizens in ways analogous to e-commerce. For example, in the UK, targets have been set and are monitored at Prime Ministerial level. By 2002, 25% of dealings with UK government have to be capable of public electronic usage as defined in departmental public service agreements. With only limited operational or policy exceptions, 50% of government dealings should be delivered electronically by 2005 and 100% by 2008. Also, a government e-envoy position is established and an initiative is moving forward through which citizens, private businesses and government will be able to interact in future through a government gateway enabling integration of IT systems through a central point of access. Already UK online for business established by the government provides a range of information and access to government services available on the web. An e-commerce task force has been established, and is in the process of determining the impact of e-commerce on business models by 2010. A dedicated minister for small firms and e-commerce has been created, with the e-envoy being required to submit monthly reports on progress to the Prime Minister. Such government initiatives effectively underpin future developments in the provision of e-commerce as a trading platform and an effective mechanism for improvement of supply chains. It means that the electronic platform is not seen as just an improvement in present systems, but heralds a completely new way of doing things with significant impacts on the way in which society functions. Transport policies in the future What is the transport policy agenda for the future likely to contain? There are certain features of ecommerce that in future will influence the development of transport policy directly. E-commerce is global, it operates all the time, it is available to everybody through the internet small companies, large 9

companies, governments, NGOs, and various other types of organisation. It can be tailored specifically to individual customer needs so that such needs rather than production considerations are the determinant. As a result it can change the way in which transport operates or has to operate in its present rigid format in the short term. Furthermore, because of the potential effect on peoples lifestyles it could change the form of provision of transport drastically in the future to meet both the needs of moving goods and people. Therefore, transport policy need to be considered both in the shorter term and in the longer term. (1) Transport policy in the shorter term For e-commerce to develop, distribution needs to be efficient, effective and low-cost. Therefore, transport policy considerations in the shorter term will need to embrace the impact of e-commerce on distribution and change existing distribution systems so that efficient and effective use will be made of them. Ecommerce and the application of ICT can contribute to driving such changes. One model for the way in which present distribution systems might change would be for large loads to continue to be moved from manufacturing base to distribution centre possibly over long distances, using the most efficient transport mode. However, distribution from the peripheries of centres of population to the eventual user will increasingly be effected by small vehicles with bespoke loads. This might lead to an increase in transport usage particularly if many repeat runs are required in delivery of goods until someone is at home to receive them. To address this, secure delivery systems can be devised or alternatively more thought be given to the development of possible customer collection points where assembled purchases from a variety of suppliers are collected by the purchaser. These innovative developments within the present transport infrastructure will represent drivers for policy particularly at national and regional levels. Infrastructure and advanced ICT need to be utilised in order to maximise logistics efficiencies both in each transport mode and intermodally. These will require a re-shaping of policy development and implementation in the shorter term, if the impacts of e-commerce on present transport systems are not to cause impediment and retard overall economic growth. Although the speed of change is rapid, movement of transport provision away from the present infrastructural capacity along present modal lines will have to evolve. Difficulties might be foreseen within the transition process. It might be anticipated that governments will have to work increasingly with the private sector in order to deliver government services and information and perhaps provide capability for those groups which might be disadvantaged by the process of change within transport provision as stimulated by the increasing use of e-commerce (for example, the elderly and people in rural communities). One example under consideration in the UK involves a local shop or post office and/or the use of collections and delivery points (CDPs) as some form of nodal distribution point. Issues relating to less developed countries (LDCs) also need to be considered. In LDCs, for example in Africa, the main barriers can be summarised as follows: physical infrastructure is insufficient, electronic transaction infrastructure is deficient, and the legal and regulatory framework is inadequate. However, even in countries with poor infrastructure and access to ICT, there is evidence of dynamic enterprises. LDCs can derive benefits from participation through contributing to lower transaction costs and reducing geographical disadvantage. But in the absence of appropriate domestic and international action, this growing economy could by-pass them and there would then be a risk of them being on the wrong side of a growing digital divide. Therefore, specific and co-ordinated action is necessary to allow LDCs to integrate profitably into the emerging global information/knowledge economy. These actions include development of infrastructure, both physical and ICT, and training of professionals.

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(2) Transport policy in the longer term Longer term policy thinking in relation to transport will have to address more fundamental issues. Here the policy goal is not simply to make what presently exists function more efficiently or effectively but to consider how e-commerce might influence the very way in which societies function and therefore will use transport in the future. E-commerce has the potential to influence work patterns whether within small businesses or large enterprises. Stock inventory may become a thing of the past and bespoke production the norm with the customer tracking the state of provision of the purchase throughout the production and distribution process. Indeed the product purchased may no longer be a single output of a production process but a number of products assembled together with an appropriate service to suit the requirements of particular individuals at particular times and over particular periods. Purchasing influences might increasingly be determined by environmental, safety, and sustainability issues or other societal considerations for which the supplier has to assume responsibility and demonstrate assured capability. Such influences made possible by the technology of e-commerce have the potential to change completely planning for work and leisure both individually, at a societal level, nationally and even globally. As ICT and e-commerce systems increasingly influence industrial production and supply chains on a global basis, transport may increasingly be seen as a component of the production process in which some aspects, for example of assembly, will be undertaken in transit. Increased leisure activity can be envisaged which may in turn lead to an increased transport requirement at the simple level the shopping trip being replaced by leisure or socially-induced journeys. Shopping itself could be foreseen as becoming more of a leisure activity and shopping centres may become a focus of leisure activity rather than simply fulfilling essential everyday needs, with customers simply collecting their groceries or other goods ordered over the internet. Transport will be part of a complex of the requirements of society to provide the basic essentials of life and the freedoms that are an intrinsic component of the quality of that life. These are increasingly derived from the expectation that any physical delivery of products and services required will occur without difficulties for the customer or undue delay. Alongside such expectations are the perceptions that higher level societal concerns relating to environmental issues, sustainability, disposal of waste, safety, privacy, security, quality, regulation and control of criminal activity can all be addressed in this new era of business and governmental communication. Transport policy therefore will have to become far more integrated in the way it is developed, embracing facets of manufacturing production, patterns of work and leisure behaviour, environmental and sustainability aspirations, requirements for safety and standards of quality, planning considerations, vehicle design and so on. It will have to be undertaken in a very wide context embracing a shift from the infrastructural drivers of the past, the technological drivers of the present, to societal drivers in the future. This envisaged change in the development of transport policy in turn implies changes in potential areas for policy-relevant research. The need in future will be for research on the societal changes being stimulated by e-commerce and ICT applications. For example a Foresight Panel in the UK has recommended research into the development of e-commerce and associated logistics systems including reverse logistics that are economically, socially and environmentally sustainable. It has recommended research projects to examine behaviour and intentions of e-commerce consumers as a basis for understanding future traffic flow and hence environmental and social impact on local communities.

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Clearly such research requirements are very different from those of transport policy-relevant research undertaken in the past or indeed at the present time. This presents a challenge for policy-makers and researchers. There will be a need for researchers with skills, experience and attitudes of a different nature to those who have often been involved in transport research issues that have had a more technological or engineering dimension.

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