Scale vs Quality of Service: The Impact of Market Growth on Delivery Times

Abstract

Supply chains typically benefit from economies of scale due to market growth. However, are there any tradeoffs due to rapid market growth? In particular, what is the impact on customer experience? While it is well-established that there are diminishing returns for scale in supply chains in terms of marginal costs, our empirical results suggest that there is also a tradeoff between scale and quality of service for new customers. We use data from the e-commerce platform JD that describe customer transactions and deliveries for a single product category for March 2018. We analyze 184,085 shipments and regress various metrics related to delivery speed and supply chain operational complexity while controlling for district-, SKU-, customer-, warehouse-, and order-related effects. We find that newer customers suffer from slower shipping compared to customers who have been using JD's platform longer. For example, customers who started using JD's platform within the last 6 months are about 4% less likely to get single-day shipping than customers who signed up around 4 years ago. As the historical centers of demand exhaust their growth, new customers come from progressively more distant areas with smaller warehouses, and the existing supply chain cannot keep up such geographically dispersed market growth. Hence, rapidly growing firms that are keen on acquiring and retaining their new customers may want to carefully manage this tradeoff since slow shipping can lead to a high customer churn.