Retail Logistics Bets on E-Commerce
For retailers, e-commerce—and its impact on supply chain management—is no longer a roll of the dice; it’s a sure thing. Here’s how successful retailers beat the odds.
In late February 2017, mega retailer Target Corporation announced it was investing $7 billion in capital over the next three years, along with $1 billion in annual operating profits starting in 2017, to grow sales and gain market share. To reach these goals, the retailer will be “putting digital first,” according to CEO Brian Cornell. The company plans to revamp its stores, digital channels, and supply chain “to work together as a smart network,” he says.
For instance, the backrooms of Target stores no longer will simply hold products before they move to the sales floor. By 2019, all the retailer’s backrooms will “double as hyperlocal distribution centers,” Cornell says, from which Target ships orders to nearby customers.
Target’s plans are a clear sign of the impact e-commerce is having on the supply chain. While the impact is most pronounced with companies that deal directly with consumers, it’s also reaching business-to-business firms. “Inventory used to be a backroom system,” says Curtis Barry, president of F. Curtis Barry & Co., an Henrico, Va.-based warehousing consultancy. “Now it’s a customer-facing application.”
E-commerce behemoth Amazon is one reason. “Amazon is transforming supply chain management,” says Tom Craig, president of LTD Management, a supply chain consulting firm based in Allentown, Pa. “Thanks to Amazon, we’re in the early stages of a global supply chain revolution.”
Amazon’s ability to fill and deliver orders quickly, aided by its use of technology, proliferating warehouses—as of December 2015, it owned or leased more than 120 million square feet of fulfillment, data, and other centers—and even its decision to lease planes, is influencing all supply chains. “Amazon is the leader, ahead of a lot of laggards,” Craig notes.
The current shifts are likely to become even more pronounced. Retail e-commerce sales across the globe will jump from $1.9 trillion in 2016 to more than $4 trillion by 2020, predicts eMarketer. By then, it will account for 14.6 percent of total retail spending.
The rise of e-commerce impacts supply chain management in significant ways. For starters, consumer e-commerce orders often consist of no more than three items, Barry says. In contrast, an order from a retail store may consist of containers full of products.
That introduces “the tension of flexibility versus standardization,” says Jason Tham, CEO of Nulogy, a developer of contract packaging software based in Toronto, Ontario. High-volume lines, with long runs and few changeovers, can efficiently produce core SKUs, although they offer less flexibility for last-minute changes, he notes.
Taking Up Space
Filling numerous small, differing e-commerce transactions tends to be time consuming and labor intensive. Accommodating any volume of such orders often requires either a separate space within a distribution center that’s dedicated to processing small orders, or, if the volume warrants, an entirely separate center.
Manufacturers that sell directly to consumers via e-commerce sites often work with partners that can help them manage these orders. For example, at wellness company Cooper Healthy Living, about half its business comes through its retail partners, about 40 percent is online, and about 10 percent comes from phone orders. The company typically ships between 1,600 and 1,700 orders each month, says company president Jill Turner, who also oversees the company’s Cooper Complete line of nutritional supplements.
Before Turner joined the company in 2003, Cooper had engaged a warehouse company to handle order fulfillment.
“That created a lot of ongoing consternation,” she says. The reason? Cooper exported its web orders to an FTP site for the warehouse company to download and process. However, the warehouse company often was unable to view the orders, leading to unhappy customers and lost revenue.
Cooper Complete now works with Speed Commerce, an omni-channel solutions provider based in Dallas, to handle its e-commerce business. The provider warehouses Cooper’s inventory in a climate-controlled space in Dallas, and packs and ships orders. Orders received before noon each business day are shipped same day.
Just as important, Turner has access to Speed Commerce’s information systems. “I’m able to see a dashboard any time I want,” Turner says. She can review the number of orders received and shipped each day, the items making up each order, and the revenue generated, among other data.
Speed Commerce’s agreements with a major carrier also is key. “Their rate for shipping a box is less than half my rate,” Turner says. Many orders are shipped via SmartPost; 85 percent are delivered within two days. With SmartPost, the carrier moves each order to the post office within the ZIP code of its final destination. The U.S. Postal Service carries it the rest of the way. “Saving money on transportation is a way for us to avoid raising prices, and to provide better value,” Turner says.
Covering the Costs
Shipping costs present a significant challenge in many e-commerce transactions. Outbound shipping costs can exceed the sum of all remaining fulfillment costs, including management, hourly labor, and facilities and other costs.
In the past, some companies used shipping charges to cover other costs, explains Troy Graham, vice president of business development with Waterloo, Canada-based The Descartes Systems Group Inc., which provides solutions for logistics-intensive businesses. But companies today have less ability to do this now that consumers have become more demanding, he says.
Instead, companies need to squeeze any excess costs from their shipping expense. Several years ago, they may have made changes once they could cut at least a few dollars from the cost to move a package. Now, they take steps to cut even 20 or 30 cents from the cost of shipping a small package.
Efforts to reign in shipping costs while still offering rapid order fulfillment are influencing the size and location of warehouses, fulfillment centers, and last-mile distribution centers. The “last mile,” which can be several hundreds of miles, is the most costly, complex, and congested segment along the entire supply chain for retailers and other e-commerce companies, says Ed Mendence, senior vice president and senior director of the northern California industrial and research and development team with real estate firm Transwestern.
Retailers need to leverage last-mile distribution centers near metropolitan population centers “to compete more effectively, reduce costs and delivery time, and more reliably deliver increased single and smaller packages,” he says.
The growth of e-commerce is nudging customers’ expectations upward. They want more choices, faster delivery, order status updates, and hassle-free returns, at no extra cost. Spencer Moore, executive vice president with Speed Commerce, uses himself as an example: He ordered almost all his Christmas gifts through Amazon Prime, and returned about 15 percent of them, at no extra cost.
Moreover, it’s not just consumers placing orders for new shoes or the latest bestsellers whose expectations continue to rise. “Business people requesting products from their vendors now have the mindset of the Amazon delivery model,” Graham says.
As recently as five years ago, a supplier could let a customer know a product wouldn’t be back in stock for one month. Now, a worker replacing a broken machine part is likely to order it from the plant floor via a mobile app, and will look for delivery in days, if not hours. “Customers who historically had more patience now expect more,” Graham says.
Barry’s consultancy firm has seen its B2B clients open additional distribution centers to serve customers more quickly. The shift isn’t as pronounced as it is with consumers, but it’s still noticeable, he adds.
The growth in e-commerce also is blurring the lines between retailers and suppliers. One example: Retailers are asking more suppliers to hold products and fill e-commerce orders, says Jeremy Hanks, founder and CEO with Dsco, an integration platform that creates networked supply chains. This helps retailers offer an expanded product assortment online—sometimes referred to as “the endless aisle”—without carrying products likely to sell in only small quantities.
For instance, a shoe manufacturer will hold on to shoes in very small or very large sizes, and then drop-ship the products as they’re ordered through the retailers’ websites. The retailer doesn’t handle the products at all, Hanks says.
Successfully executing this shift requires a partnership between retailers and suppliers. “It’s a different way to think of the relationship,” Hanks says. Both retailers and suppliers need visibility to orders and inventory levels so they know what products are on hand, and where they’re located. In a traditional B2B supply chain, a manufacturer might provide inventory updates to its retailer partners once each week. Manufacturers that drop-ship items for retailers often provide such updates once every 15 minutes, Hanks notes.
As Target’s announcement shows, e-commerce also is eliminating the distinction between retail outlets and distribution centers. “They’ll meld together,” Graham predicts. For instance, a company may ship an e-commerce order from a retail store closer to the end customer than the firm’s distribution center.
Moving the functions of a warehouse to a retail outlet can present challenges. Graham recalls working with a large university bookstore whose workers—mostly students who didn’t see career potential in their positions—had to distinguish from among dozens of similar items when trying to fill an order for a gray sweatshirt. The solution? Barcode technology, Graham says.
Over time, the number of stores will decline, and “e-commerce will become the dominant supply chain,” Craig predicts. Conversely, many warehouses will increase in size so they can accommodate spaces dedicated to filling e-commerce orders.
Riding the Technology Train
Automation has been key to supply chain success at omni-channel company Lionel LLC, the company behind Lionel Trains as well as Lionel Racing, the officially licensed diecast of NASCAR and NHRA drag racing. In 2012, the company consolidated its train and NASCAR operations from several facilities across the Midwest to one location in North Carolina.
“We wanted to get onto the same technology platform, improve operations, and reduce expenses,” explains CIO Rick Gemereth, who also oversees the company’s supply chain.
Once the consolidation occurred, inventory levels in North Carolina quadrupled and shipping levels tripled. Yet the operation still needed to maintain proper inventory control, and ship accurately and on time to customers across multiple sales channels, including e-commerce, mass retailers, dealers and wholesalers, and direct-to-consumer.
Lionel’s previous fulfillment process was manual and paper-based. Each morning, the warehouse team printed stacks of tickets with instructions on what inventory to ship that day. Workers had to check the location of the items, walk and pull them off the shelves, take the items to the shipping station, and manually record the inventory movement.
Gemereth and his team introduced scanning technology into the process. Now, rather than print tickets, orders are electronically delivered to workers’ scan guns, which direct them to the location of the inventory to pull. When they remove the products, the technology automatically deducts the items from inventory. In all, Lionel cut 22 hours from the time required to process orders, and boosted the accuracy of orders to its dealer/wholesale channel, Gemereth says.
Lionel also replaced a legacy software solution with Descartes OzLink for NetSuite, a cloud-based solution. Because OzLink integrates with major shippers and EDI solutions, it cut the cost and time required to fill orders across all channels. For instance, it helps Lionel consolidate multiple orders for delivery to dealers and wholesalers, and to create branded boxes for direct-to-consumer orders. “The time from when an order is received until it has to ship continues to shrink,” Gemereth says. “Technology helps us stay abreast.”
Digitized Supply Chains
As Gemereth observes, technology is key to meeting the ever-increasing expectations of both consumers and business clients. A critical element is software that allows supply chain managers to quickly and intelligently determine how each product should move. Should it head to a distribution center? To a store? Is it more important to get the item to the customer as quickly as possible, or will a slower, more economical route suffice? “You need data to make the decision,” Hanks says.
The digitization of the supply chain also requires technology that provides visibility so all parties required to deliver an order—shippers, packaging companies, third-party logistics providers, and others—know their roles. For instance, a supplier working with a packager needs to know its orders are filled and packed correctly. The supplier also needs to know what’s selling and in what quantities.
Robotics are likely to assume a greater role in e-commerce warehouses, Mendence says. Among other uses, robots will be able to efficiently obtain products for same-day shipping.
As the influence of e-commerce expands and intensifies, supply chain managers will need to make time to assess their operations and identify areas that need improvement.
“It’s hard to step back and ask, ‘what can we do better and what is the impact of more efficient supply chain processes?'” Graham acknowledges. However, retailers that don’t ask those questions risk coming out on the losing end.
Betting on Returns
E-commerce highlights the criticality of a solid returns process. Statistics vary, but some estimates say up to 40 percent of online purchases are returned. “You have to manage returns, or a lot of dollars are tied up,” says Troy Graham with Descartes.
Doing so isn’t easy, however. “Open a trailer of returns, and it looks like an eight-year-old loaded the truck,” says Tom Craig of LTD Management. “Yet companies need to develop a process for efficiently handling them.”
Cutting the volume of returns in the first place offers the most potential for cost savings. Supply chain efficiency can be key. The faster individuals receive their orders, the less time they have to change their minds about them. Better visual tools, such as 3D product images, also can cut the percentage of returns.