March 2021 | Commentary | The Lean Supply Chain

Omnichannel Delivers, But at What Cost?

Tags: Retail, E-commerce, Last Mile Delivery

Amazon, the most successful e-commerce company of all, gained a competitive advantage through its two-day free delivery for Prime customers. Many other pure e-tailers and brick-and-mortar retailers moving to omnichannel retail—where customers engage with companies in a variety of ways, including in a physical store, or via websites and mobile apps—have followed suit to some degree.

Paul A. Myerson, Instructor, Management and Decision Sciences, Monmouth University and author of books on Lean and the Supply Chain for McGraw-Hill, Pearson, and Productivity Press, 732-571-7523

Amazon's dirty little secret, however, was that it was losing billions each year ($7.2 billion in 2016). The reason you didn't hear more about it was that profits from the Amazon Web Services business more than offset the losses.

Since that time, Amazon and other e-tailers and omnichannel retailers have struggled to adjust to this new world. Amazon is experimenting with drones, a private fleet of planes and food delivery trucks, as well as Amazon Logistics, where independents sign up to buy their own vans and deliver Amazon products.

As a result of focusing on these costs, Amazon is reducing per-package and per-order transportation expenses every quarter of every year.

Non-Amazon omnichannel retailers who can't buy their own fleet of planes or vans have had to turn to other options, such as minimum order sizes for free shipping, curbside/in-store/locker pickups, and even having employees drop off orders on their way home.

Reducing Fulfillment Costs

It has been estimated that up to 18 cents out of every dollar generated online goes to fulfillment costs (shipping and handling), driving e-commerce and omnichannel retailers alike to reduce fulfillment costs in a variety of ways.

Walmart, for example, charges $5.99 for shipping and handling on orders of less than $35. Because shipping alone averages $2.99-$3.99, that is about the minimum a retailer can charge and break even. This charge varies based on each order's size, weight, and distance.

Last-mile delivery is a critical part of an organization's transportation network, as it can make up 28% of a shipment's total cost. Ways to reduce last-mile delivery costs include offering a range of shipping options, dropping off packages at access points such as lockers, limiting distance, and changing/optimizing box sizes.

Before delivering orders, you have to process them. Fulfillment, which technically includes delivery, as well as receiving and processing of orders, is another area of focus.

Twenty-five years ago, it took 5 days to process an order for shipment from a warehouse. Today, orders typically are processed and shipped within 24 hours, sometimes same day.

To gain a competitive advantage in fulfillment, consider and understand your true fulfillment costs per order, necessary metrics and benchmarks (costs, productivity, service), picking and slotting efficiency, employee turnover, management experience and level of training/education, use of technology, outsourcing, facility size, location and functionality (i.e., e-commerce only or a blend with retail replenishment).

In the long term, the e-commerce and omnichannel retail winners will be those who master fulfillment and last-mile operations and costs.






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