Modern Trade vs Traditional Trade: A Logistics Management Overview!
Traditional (or general) trade is more prevalent in Asian countries than in North America. However, things are rapidly changing, and unorganized pockets of distribution networks are becoming more and more organized. To continue further, it is important to understand how traditional trade differs from modern trade in terms of distribution and logistics management.
Traditional Trade
Traditional trade is associated with a spread-out distribution network of small retailers, dealers, stockists, wholesalers, and distributors. Its an intricate network which serves localized customer demand through regular orders with short lead times and varying fill rates. Fill rate (fulfillment rate) is the immediate customer demand which can be met with in-stock inventory. It is also calculated in terms of the total order delivered out of the total orders requested. Lead time is the time it takes for a delivery to fulfilled once the order is successfully recorded.
Demand is assessed and interpreted by the retailers and the order is placed. Sometimes, the field agent taking the order is accompanied by the delivery person (in the delivery vehicle) and the order is filled right there.
Traditional trade builds on inter-personal relations between the customers and the retailers. Even the retailers interact in more personal and direct manner with the field agents. The field agents take the orders on behalf of the distributors. The distributors fill the order with a lead time of a day or two. The distributors, in turn, deal with the manufactures to maintain adequate inventory to keep up a healthy fill rate for the orders. The credit cycle extended to these retailers is often short.
Traditional trade is prone to erratic demand which leads to empty shelves or the need to push alternate products onto the customers. This, in turn, leads to quick and ad-hoc orders which put a strain on the schedule planning and last mile delivery for the distributors.
Modern Trade
Modern trade involves a more planned and organized approach to distribution and logistics management. Modern trade includes the larger players such as supermarket chains, mini-markets (Indonesia), hypermarkets, etc. This involves aggregation of demand across a diverse product range.
Some of the key differences are:
| Metric | Traditional trade | Modern Trade |
| Demand | Erratic or Seasonal | Consistent (Interim promotions) |
| Customer interaction | Personal (retailer hands out the products to the customer) | Customer can pick and choose the items and then proceed to check-out. This gives the benefit of choice to the customer, where they can evaluate multiple products side-by-side |
| Order placement | Based on current stocks | Strategically planned to meet promotional demands |
| Lead time | Short – Direct | Structured (preempted) |
| Product range | Limited | Extravagant |
| On-time deliveries | Comparatively lower focus | Comparatively higher focus |
| Order fulfillment time | Can be accommodated at different times | Has to be specific to pre-decided time-slots (missing which might raise a penalty on the distributor) |
| Economies of scale | Goods traded on MRP | Retailers can absorb cost and give promotional discounts to drive purchases |
| Credit cycle | Short | Long (customized) |
The main difference, as you might have seen, is that the distribution is more organized in modern trade. These retailers often deal directly with the manufactures. Many large supermarket chains have vertically integrated to offer their own brands in groceries and apparel. The focus is on giving the customer a good buying experience and value for money. And to sustain this, they require a potent logistics management system backing them.
Modern retailers maintain their fill rate above their safety stock (minimum stock they require to fulfill immediate demand, and which is also a trigger to reorder the product) to balance the inventory along the economic order quantity (minimizing carrying and ordering cost while increasing total demand fulfillment). This requires them to be particular about their delivery windows. They have clear time-slots for each product replenishment and they often penalize distributors if the delivery time-slot is missed or delayed. Since the modern retailers occupy a sizeable business for the distributors, the distributors (or manufacturers) turn to technology to support better schedule and route planning for their deliveries.
Last Mile Delivery Enabling Retail Transformation
Traditional trade occupies close to 90% in key developing markets. By leveraging cloud-based technology, last mile delivery can be optimized for such distribution networks, bringing in organized patterns within the industry.
Schedule planning of field agents’ visits can be done through intuitive machine-learning backed algorithms. The planning engine would suggest the best journey plan for the agents. For example, if each visit to a retail outlet caters to only one product category, then the field agent can be trained to be well versed in that category and drive higher revenue for the distributor. Similarly, each other day the retail outlet would be visited a different field agent with a different product category. This would control the order taking process and lead times within the network. It would also better the relationship between the retailer and the category-specific field agent.
Route optimization for the field agents can help them cater to more outlets in a single day. This would increase field resource utilization and drive overall product category revenue.
Once the order is processed, the distributor (or manufacturer) can plan the delivery schedules to sustain the promised lead times and fill rates across the distribution network. Considering the specific delivery time-slots for each retailer, the distributor must maximize the capacity of the vehicles while ensuring on-time delivery for all the handover points.
Capacity optimization of the vehicles brings down overall logistics movement costs while increasing resource utilization.
Optimization of delivery routes can further help ensure on-time deliveries by avoiding local traffic conditions. Fastest routes with minimum distance traveled while fulfilling deliveries at multiple retail outlets can bring down over fuel consumption.
Crate and unit level tracking of each merchandise by electronically recording the details within a logistics optimization system such as LogiNext Mile, at the time of loading and unloading helps bring transparency in the delivery process.
Real-time tracking of each vehicle helps distributors be more agile and responsive in case of any delay or detention.
Validation and authentication of each delivery through electronic proof of delivery help reduce invoice-based errors and streamlines the credit cycle.
Optimization of the distribution network can help organize traditional trade and generate more value for all the stakeholders involved namely the retailers, the distributors, the manufacturers, and the end-customers.
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A very good and rich content all over scenario that modern trade is comparatively much better than traditional trade . And although the risks of expanding overseas are rather poignant, the benefits can outweigh them if foreign business is executed to good effect. More benefitted in terms of International growth , ROI , spreading business risk and exchange rates as well.
The trade is change according to new technologies. The transition from traditional to modern is very drastic. Thanks for the blog!