Fulfillment: A New Frontier in Southeast Asia


According to Bain, the Southeast Asian ecommerce market only comprises of 3% of total retail sales compared to 7.3% in America. The rapid urbanization and macroeconomic growth in the ASEAN region, with the forecast of 5.5% annual growth over the next decade consequently offers firms the opportunity to reach a growing, yet untapped market.

However, the unique geographical, infrastructural and socio-political characteristics of Southeast Asia has made fulfillment an unusually difficult process for many firms in the region. As the consumer’s last interaction with the company, fulfillment is integral to the prices and quality of experience that the firm can ultimately offer to its customers. It is subsequently worthwhile for managers to closely consider what fulfillment options best suit their strategic and operational vision before they enter the Southeast Asian market.

In-House Fulfillment

There is a strong sense of comfort from controlling one’s own logistics, as it is very difficult to hand over such a critical process to an external party. An in-house operation also makes it much easier for firms to utilize their internal data and expertise to optimize their operations to fit their current strategies. However, the significant fixed costs and expertise required to set up a complex supply chain in a foreign environment makes it prohibitive for many newcomers to perform fulfillment as an in-house operation. The successful in-house fulfillment models in Southeast Asia have subsequently come from highly experienced and capitalized firms which can leverage the economies of scale and resources from their logistics department. But the difficulty of expanding means that even highly experienced firms such as Alibaba will typically acquire local firms such as Lazada to bypass the difficulty of setting up such complex supply chains.

Outsourced Fulfillment

The intensive competitive pressures in the logistics industry have driven down costs as 3PL firms seek to optimize their operations as more firms enter the market. In a risky and unknown environment, companies are also often unwilling to make the large fixed investments into the logistics infrastructure required to run an in-house fulfillment process. Outsourcing logistics subsequently allows firms to transfer the risk and costs of setting up a logistics system to 3PL firms so they can focus on their core competencies. Some of the primary reasons to outsource the fulfillment needs of a company are:

Lower Costs: The larger economies of scale that 3PL firms have allowed them to deliver significant cost savings to their customers. It also makes it economically feasible for them to invest in the latest fulfillment technologies, strengthening the efficiency and quality control of the fulfillment process. The intensive amount of competition in more commoditized aspects of logistics such as transportation from firms such as DHL is a prime example of how external providers can provide quality services at a significantly cheaper price.

Isolated Costs: An in-house logistics operation cannot be simply isolated to one single cost center. The vast range of indirect and fixed costs that are involved makes it particularly difficult to understand how much money is going towards logistics. But when the work is outsourced to a third party, the costs will only consist of the fees negotiated with the provider. This also means that the firm can focus on the core competencies that drive its business.

Scalability and Volatility Management: The demand for fulfillment tends to be linked to a vast range of idiosyncratic and systematic risks which are difficult to predict. This is particularly true in Southeast Asia, where the constant political and seasonal changes further increase the volatility of fulfillment demands. These fluctuations make it extremely difficult for in-house operators to scale their logistics arm without carrying significant excess capacity in its operations. In contrast, 3PL firms are able to diversify their customer base through their pricing to ensure that their capacity is being fully utilized. Firms that outsource their fulfillment to 3PL firms are consequently able to quickly scale their logistics to meet increased demand.

Localized Risks and Culture: The experience and capital investments required to reach customers in rural and lower tier cities in Southeast Asia make it prohibitive for many firms to operate in these environments. For example, Indonesia consists of almost 18,000 islands. The cost and difficulty in operating in all of these islands subsequently makes it more effective to cooperate with local logistics providers who already have the infrastructure and expertise to operate in each of these areas.

Subsequently, even operations backed by significant experience and resources such as MatahariMall have chosen to pursue their local fulfillment strategies with the cooperations of local 3PL firms. Backed by a $500 million investment from Lippo Group, MatahariMall decided to set up a central warehouse in Java while hiring different 3PL firms to manage their logistics across the other islands. This logistics approach, combining MatahariMall’s fleet and capital assets with localized expertise has enabled MatahariMall to become Indonesia’s third biggest ecommerce site within one year, with a forecast to reach sales of at least 1 billion dollars by 2017.

Analytical Insights: On one hand, maintaining in-house operations allows you to maintain your information in strict confidence. However, a cooperative relationship with a trusted partner would allow them to leverage a greater level of understanding and data to maximize the targeting and cost efficiencies of the fulfillment process. This is particularly apparent in Southeast Asia, where the lack of data has forced firms to make educated guesses about which customer segments they should target.

But through the process of conducting operations in localized regions, 3PL firms can gather shipping, traffic, demographic and weather data and perform continued analyses on them to understand which routes can minimize last-mile delivery times across different conditions. As last-mile delivery traditionally acts as a bottleneck for the logistics processes of larger transportation firms such as DHL, last-mile delivery is often dominated by mid-sized firms that have the resources, data and flexibility to optimize this process.

In-Store Fulfillment: The first stage for brick-and-mortar stores in setting up an online presence is usually to set up an in-store fulfillment model. Using retail stores as warehouses negates the need to build an expensive warehouse, and subsequently allows firms to reach online consumers with lower fixed costs.

However, the complexity of an in-store fulfillment model will require a larger investment into a proper inventory management system such as Manhattan that would be both costly and difficult to implement. But nevertheless, a proper inventory management system will be required to ensure that firms can properly track their inventory across their stores and warehouses.An investment in such as system in such a system would also pay enormous dividends throughout the rest of the firm’s supply chain. The large margins offered in the less developed markets of Southeast Asia in logistics also makes this a striking value proposition for brick and mortar firms which are willing to invest in these systems.

Make to Order Fulfillment
The make to order fulfillment model is usually only viable for higher margin and larger batches of customized orders. This is because the manufacturers contracted to produce one-off batches will need to fit their production model to the requirements of the batch. The absence of a large upper-middle consumer class that values such customization means that there are no obvious opportunities from such a business model.

Concluding Results

The choice of fulfillment model ultimately depends on the requirements and resources of the company. Firms such as Amazon with an abundance of resources and logistical expertise at their disposal will perform the majority of their fulfillment by themselves, while other firms will typically outsource more of their logistical needs. But as with most cases, the uniqueness of the supply chain for each individual firm means that they should carefully consult and analyze their goals before developing their fulfillment capacity.