Alibaba’s ambition to make China’s logistics system smarter?

Beyond its label as a gigantic e-bay-like e-commerce platform for physical goods or as a Cayman island registered Chinese company trying to manipulate U.S. investors, it is a technology revolutionizer of China logistics industry.

As the largest e-commerce platform in China, Alibaba is twice the size of Amazon (Alibaba’s 2015 GMV $486 billion). [a] Different from Amazon with self-owned logistics network, Alibaba acts as a EBay-like platform connecting sellers and buyers and only works with 3rd party logistics providers.

As Alibaba rides on the booming trend of Chinese online consumption, challenges related to logistics started to emerge.

First, Chinese online consumers are demanding more on quality goods and delivery service. Access to products and cheaper bargains are no longer enough. Issues of slower delivery and missing items became known as common risks to customers shopping on Alibaba. At the same time, Alibaba’s biggest competitor, which self-build delivery teams, is gaining strong customer traction and now catches up to almost 15% of Alibaba’s size thanks to its quality delivery.

Second, while the rise of E-commerce led to the phenomenal growth of China’s logistics industry, it also presented huge operational challenges. China’s daily parcel delivery volume surpassed U.S. by 80% (57M vs. 33M) [a]. Alibaba alone contributed 57% of the total national volume every day. However, the timing of Alibaba’s promotional events created huge spikes in delivery demand and often led to reported crashes at partners’ facilities. One extreme example is the annual “Singles Day” sales event on Nov 11th; 2015 Singles’ Day sales reached 360 million orders, up 30% YoY. [c] It led to significant burden on the logistics networks and often took weeks to digest the volume post sales. Partners also faced with shortage of space and personnel capacity and large amount of investments.

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As a result, Alibaba established Cainiao Logistics Company – an asset-light, smart and data-driven logistics network company to solve the overage and complexity issues in China logistics. Instead of building its own delivery teams, Alibaba builds a centralized data platform that connects to its express delivery partners and pushes for technological innovations. So far, we have seen measurable impacts on efficiency improvements in overall logistics industry.

  1. Launching central delivery system incorporating 20+ express delivery providers. Connecting a central platform to the backend of its delivery partners’, Alibaba enables merchants with real-time information on delivery options, price, and time. It optimizes demand volatility through merchants’ end. Alibaba also recommends smarter selections from its predictions of the supply and demand of that day.
  1. Creating standardized E-shipping label. Previously, each of the 20 delivery providers used its own paper-based labeling systems, leading to higher labor time to sort and output/input the data. Adoption of a universal E-shipping labels on Cainiao central platform has greatly reduced order processing time by 30% on delivery partners’ end upon parcel pick-up[c]. Current adoption rate is 67% versus 5% 2 years ago [e].
  1. Providing “smart-routing” data service to logistics providers. Previously, delivery companies simply aggregated the picked-up parcels into the nearest transfer warehouses and relied on sorting specialists (takes 6 months to train) to sort the parcels using memorized routing rules to the correct bins for the next transfer destination. Accuracy rate was 95%. Now, Alibaba’s smart-routing data service provides suggestions on the optimal transfer points upon pick-up. It is based on analysis of real-time aggregated industry delivery data that is not accessible by any individual logistics company. Companies which use this service reported a 3% improvement in accuracy soring rate versus before [d] and reduction of delivery time.
  1. Providing demand forecast to manage inventories at partners’ warehouse. Studying consumer transaction data, Alibaba forecasts parcel demand volatility by time of the year and geographic location. It provides data intelligence to its logistics partners’ to help optimize the inventory levels at different transfer warehouses and delivery nodes. Partners can also better plan on part-time labor hiring or temporary warehouse rental to deal with predictable upcoming spike in demand.

Post 2015 Singles Day event, it took only 7 days for all the delivery partners to deliver 240 million parcels versus 16 days for 2014. And no crashes of its partners’ logistics warehouses was reported in the news [b].

Customers are happier with faster and trackable delivery on their mobile Alibaba app. Logistics partners are happier with better planning and improved operational efficiency. Alibaba now keeps its promise of providing the best e-ecommerce experience for all the stakeholders plus adds a new revenue stream – charging a % as service fee from its 3rd party logistics networks. But there are more to be done:

  • Push for further technological adoption within logistics industry to reduce inefficiency. Possible initiatives include adoption of cloud service to make data-driven decisions on routing and investment decisions, and leveraging of mobile maps/phones at the delivery men level for Just-in-time pick up to reduce idle time and lost efficiency.
  • Push for more collaborations across different logistics partners to share best practices or even develop new business models to trade idle fixed resources such as warehouse space to improve efficiency.

(801 words)





[a] Alibaba FY2016 Investor Day Presentation.

[b] CaiNiao Company News.

[c] Cainiao Company News.

[d] Cainiao Company News.

[e] Goldman Sachs Alibaba Investor Day report




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Student comments on Alibaba’s ambition to make China’s logistics system smarter?

  1. This article actually rings personally for me. Just before moving back to the States, I’d purchased a stroller on Alibaba for pickup at my hotel when I was swinging through Beijing. It got mis-sorted into the wrong shipping partner warehouse, and as a result, I wasn’t able to get my stroller before leaving and had to pay the hotel to ship it to the States (still cheaper than buying one here!! 🙂 ).

    At that time, and as a I read your blog post, I wonder why Alibaba still continues to work with external logistics partners instead of trying to build out their own logistics service in the way that has. It’s certainly not because Alibaba lacks cash–maybe they consider it too margin dilutive? Maybe there are logistics considerations Alibaba has at 50%+ of daily shipping volume that doesn’t have?

    In any case, super cool to see how Alibaba has moved to reduce variability among their shipping partners. China definitely has the most impressive eCommerce market in the world; the rest of us have a lot to learn it!

  2. Olivia, really interesting to get a sneak peek into the backend of the behemoth Alibaba! I also echo Spencer’s comment above and wonder why they have chosen to retain a fragmented logistics model especially when companies like Amazon has begun owning more stages of the shipping journey and handles same-day delivery service through its own fleet of leased cargo jet carriers, cutting out any third-party shippers. Especially since Alibaba actually has an entire logistics arm that they launched in 2013 called the Cainiao Network, of which Alibaba owns a 47% stake in. The acquisition and its integration into the Alibaba business has always been opaque but it would be logical to leverage its capabilities more and eventually, transition into bring all their logistics in-house. Cainiao seems like an incredibly complimentary business model since their business proposition is centered around streamlining China’s fragmented package delivery system using data and digital intelligence. Cainiao’s expansive warehouse and delivery footprint is also a plus since Alibaba does not hold their own inventory. Lastly, Cainiao’s goal of building a global network is aligned with Alibaba’s interest in growing its retail network beyond China.
    ( See : )
    I also wonder if there is an opportunity to simplify Alibaba’s logistics network by offering more in-store pick up options or locker pick up options perhaps.

  3. Hi Olivia! Thanks for sharing about Alibaba’s logistic strategy. It was a real surprise for me to see that Alibaba doesn’t own its logistic fleet compared to JD or e-commerce players in South-East Asia like Lazada or ZALORA when top quality logistic is a key competitive strengths of e-commerce companies, especially in this region of the world. With the recent acquisition of Lazada, I wonder if Alibaba is not going to go a step even further and try to scale up the in-house logistic capabilities the south-east asian start-up has built over the last few years as suggested in this WSJ article which was published at the time of the acquisition “Separately, an Alibaba spokesman said the company will be able to tap into “Lazada’s logistics backbone.”

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