By Ian Hobkirk
President of Commonwealth Supply Chain Advisors
E-commerce is a term that conjures up a disparate set of images, depending on the reader. For example:
The average consumer may have a pleasant image of hassle-free shopping with merchandise delivered directly to their door.- The day-trader may remember with chagrin the “dot-com bust” of the early 2000’s, fueled in part by too many companies rushing to sell their products directly to the consumer without first mastering the logistics implications.
- The corporate executive may view e-commerce as a profitable new sales channel.
- The chief supply chain officer may view it as a dreaded trend that complicates an operational ecosystem that has taken years to create.
Regardless of individual perspective, e-commerce has indisputably become a permanent fixture within the consumer goods supply chain. Unlike some distribution trends, which have risen and fallen on the whims of retail compliance mandates, e-commerce represents the expressed will of millions of individual consumers who have voted with their pocketbooks for their channel of choice.
E-commerce sales are expected to grow to more than $400 billion in the next several years, with Forrester Research estimating $414.0 billion in sales in 2018 and eMarketer estimating $491.5 billion in 2018. (Source: Internet Retailer) Companies operating in the consumer goods supply chain are feeling the impact of this consumer shift differently, depending on their positions within the supply chain (i.e., manufacturer or retailer) and which channels they were already serving.
Commonwealth has identified six basic scenarios that companies are likely to find themselves in with respect to their e-commerce fulfillment adoption strategy. In this two-part blog post, we’ll explore these scenarios and discuss how a company’s e-commerce strategy will vary based upon which scenario they find themselves in.
Scenario #1: Manufacturers Filling E-Commerce Orders Directly to their Consumer Clients
Manufacturers filling their own consumer orders often have the greatest level of control over the levels of e-commerce in their supply chain, as they can gradually choose which products to offer directly to the consumer, and how aggressively to promote them. As the initial shift to e-commerce began, some manufacturers resisted selling products directly to the consumer—both to avoid competing with their existing wholesale or retail channels, or to avoid the headaches of managing e-commerce logistics. We’ve had a number of conversations with manufacturers recently that would suggest that some of those companies are revisiting this strategy and gradually introducing e-commerce on their corporate websites. For these companies, e-commerce represents a new way of picking and shipping orders—often very different from the full case or full pallet orders they are used to handling.
Many of these manufacturers initially address e-commerce by setting up small sub-sections of an existing distribution center to manage these orders. Since these companies control their e-commerce destinies, the distribution center rarely is overwhelmed with orders, but the handling of these orders is usually done rather inefficiently since economies of scale do not exist. Service levels may be good, but average labor content per order is high. This approach may suffice when order volumes are low, but if increasing e-commerce sales is a key company growth strategy, the operations team will be served well by having a plan in place for how to scale e-commerce fulfillment to efficiently handle higher volumes of e-commerce orders.
Scenario #2: Manufacturers Filling E-Commerce Orders on Behalf of Retailers
While some companies have been able to plan their gradual transitions to e-commerce, other manufacturers are dealing with retail clients that want them to fill e-commerce orders directly to the consumer, and on the retailer’s behalf. For these companies, in addition to the normal challenges of e-commerce, retail compliance mandates must now be met.
These manufacturers may have little or no e-commerce business of their own, but in order to retain or expand their business with retail customers, they are pressured to begin fulfilling direct-to-consumer orders for these retail clients. In contrast with other initiatives, e-commerce retail mandates tend to be “softer” mandates, motivated by the carrot, not the stick – for now. Manufacturers may not be required to handle this business, but they have a potentially large opportunity to fill these orders if they are able to take it on.
Retail-compliant e-commerce orders are more challenging to fill for a number of reasons. To begin with, the retailer controls the sale and promotion of the products. The manufacturer may find itself unexpectedly inundated with e-commerce orders due to promotional activity by the retailer. The manufacturer must have systems in place that will allow it to scale rapidly to handle these surges. Additionally, these e-commerce orders usually must be labeled and packed in a certain way with the retailer’s branded materials. Failing to pack orders in the correct manner, or failing to meet consumer service-level requirements, can result in expensive penalties.
Companies in this situation must make a deliberate decision to either be “in” or “out” of the e-commerce business, and then backup that decision with a rapidly scalable strategy in the distribution center. “Dabbling” in e-commerce is not an option in this case. Processes and technology must work nearly perfectly right from the start.
Scenario #3: Pure E-Commerce Retailers
These companies have had a direct-to-consumer channel from birth. This channel may have initially been driven by mail-order catalog sales, and then evolved into web sales over time. However, the basic act of filling an order in the distribution center remained the same throughout the transition. For these retailers, e-commerce is not a new challenge, but rather an integral part of their business model.
These companies likely already have a basic platform of automation in the distribution center, with the ability to efficiently piece-pick orders and pack them in large volumes. Smaller companies have often already invested in a basic Warehouse Management Software (WMS) system to allow the rapid picking of small orders, but frequently the efficiencies do not carry over into the packing and shipping areas. These companies may need to focus on implementing process changes and automation in the packing area to reduce labor costs here and improve throughput.
We’ll explore three more e-commerce fulfillment scenarios in Part II of this blog series. Can’t wait? Read the whitepaper today, “E-Commerce in the Distribution Center: Making a Graceful Transition.”