Continuous e-commerce growth has prompted an increasing number of retailers
to use third-party logistics providers for handling their direct-to-consumer fulfillment.
But for retail logistics executives, assessing 3PL capabilities that best fit their company’s requirements
can be a challenge, yet critical for optimum ROI.
by Jeffrey B. Graves, President, Sedlak Management Consultants, Inc.
As e-commerce continues its rapid growth into virtually every market sector, retailers are anxious to expand their presence online to capture this market share. Between 2006 and 2010 global online retail sales grew by 16.3 percent annually, according to Global Online Retail 2011, published by Datamonitor. Online retail sales for 2010 alone showed an annual growth rate of 17.8 percent on total revenues of $434.6 billion (USD). This level of expansion of Internet sales is fundamentally changing the nature of the retail supply chain.
For decades, consumer products have been distributed to retail stores in bulk, via pallet loads and cases. Now, online ordering is pushing brick and mortar retailers beyond this traditional supply chain infrastructure. Traditional brick and mortar fulfillment encompassing receiving, put away/storage, picking, transport through the DC, sortation, VAS, packing and shipping is a poor option for handling the needs of e-commerce. To compete in this virtual arena, pick, pack and ship of single items and small volume orders to consumers is the name of the game. Orders require delivery to customers, not weekly or bi-weekly as with retail stores, but with increasing frequency within 24 to 48 hours.
Add to this continual SKU proliferation. Internet retailers need to support an ever-increasing selection of merchandise that typically includes fast moving items and many very slow moving items. How these SKUs are picked and handled can present two very different operations.
From the moment the online order is placed to when it is picked, packed and shipped, every step in the process must be handled efficiently, consistently and cost-effectively. In e-commerce, it is the distribution center that provides much of the customer
experience. Simply delivering the goods is no longer an adequate mission for the fulfillment center. Customer satisfaction has to be a critical priority. The typical e-commerce consumer expects a wide selection of SKU offerings, a mobile site ordering capability, order accuracy, fast and free delivery, and free returns.
Understanding how online consumers shop and purchase across channels is critical to the success of online fulfillment. More and more consumers are browsing the Internet for features and selection, testing products at brick and mortar stores, acquiring discounts through social media, then purchasing the product online through the convenience of their mobile device.
Some retailers, however, including those that also sell through catalogs, have been in the direct-to-consumer marketplace for some time. These companies have fulfillment facilities established and information technologies in place to manage orders with speed and efficiency, doing it well and profitably. But to many distribution executives, online fulfillment poses a significant challenge to their existing knowledge, experience and resources.
Smarter 3PLs Improve E-commerce Fulfillment
As an alternative to in-house fulfillment, a large number of retailers have turned over processing of their Internet orders to third-party logistics providers (3PLs) that are equipped and experienced to handle these online needs. Retailers whose online orders are growing at an accelerated rate often prefer the flexibility of working with a 3PL that can help them continue to expand. 3PL usage is experiencing rapid growth, expanding at the rate of 12 – 15 percent annually, clearly influenced by the corresponding growth in online purchases.
But 3PLs are also continuing to gain acceptance by online retailers because of the sophisticated software engines they have put in place to capture orders on the front end, and process these orders through their warehouse management systems (WMS). On the front end this includes managing the web portal, the website and updating website content. As well as supplying telephone call centers with live operators that take orders, dispense product information, provide tech support and process return orders. Efficient speed of processing of return orders becomes a major benefit in e-commerce, considering the much higher number of returns compared to brick and mortar sales.
Because of the digital nature of e-commerce, its infrastructure permits integration of systems that help unify information across multi-channel inventory, order management, promotions, merchandising and distribution systems. The most advanced 3PLs operating within e-commerce provide this capability.
These systems allow 3PLs to record the relevant details of each item and parcel being shipped. Parcel shipments can be tracked and proof of delivery quickly confirmed. A customer's transportation costs and performance can be analyzed, thus helping the 3PL to negotiate rates and improve service.
Integrated ordering and parcel tracking is made possible through the 3PL’s WMS, which is an ideal system for the precise and efficient tracking of products. The WMS, communicating with the ERP, along with PLCs and sensors in the pick and pack systems, and conveying equipment are capable of monitoring individual SKUs as they are stored and moved through the facility.
3PLs now also have the opportunity to record every customer transaction, and track consumer behavior and sentiment. Forwarded to their clients, this data makes possible the ability for retailers to analyze millions of pieces of data, resulting in a real understanding of what its consumers are purchasing, how to get into their online carts, and how to become part of their repeat purchase cycle.
This level of supply chain analytics allows 3PLs to maintain precise control on their products through every stage of the supply chain handling, from receipt of products to storage and picking, through shipping.
Pick, Pack and Ship
E-commerce fulfillment is basically a piece-pick operation, which is historically a hands-on procedure. The right automation facilitates the minimization of manual touch, resulting in more accurate orders, improved ergonomics, lower labor costs and worker travel time, lessened returns and saves space by operating in a smaller footprint.
Much of the recent investment in automation by e-commerce 3PLs has been driven by a desire to improve order picking, packing and shipping processes, with a focus on picking. And the most basic form of automation for e-commerce in 3PLs is the augmentation of manual order picking with IT support, such as pick-to-light, hands-free voice systems, zone routing or dynamic slotting.
In most distribution centers, picking is the most labor-intensive function of the DC, and usually can provide the most cost-savings when automated. IT-based picking options exist that have significantly lowered capitalization costs and can exert a sizable positive impact on a DC’s throughput efficiency while reducing operating costs. For many distribution centers, and especially for e-commerce 3PLs, IT-based picking options can provide the ideal automation solution to streamline their throughput cost-effectively, while realizing a short-term ROI.
E-commerce 3PLs are finding that their clients are progressively requiring shorter term contracts – where once five-year and ten-year contracts were typical, now three-year to five-year contracts have become the standard. 3PLs need to factor their automation investment for a much shorter ROI, which makes heavily capitalized equipment a poor option.
For dynamic e-commerce picking, highly automated robotic and shuttle-based systems provide accurate and rapid goods-to-person solutions. These systems can achieve performance levels of many hundreds of order lines per hour with precision accuracy. However, for e-commerce fulfillment within 3PLs, it is difficult for these organizations to factor the capital equipment ROI over such a short three to five year span.
Equally important is the scalability of the automation, as a 3PL’s client needs increase or decrease, and the flexibility to move the automation for use in a new location, when and if the contract does terminate. This is further pointed up by the fact that e-commerce retailers can fluctuate in their use of 3PLs. Having retained a 3PL to handle their e-commerce fulfillment for several years, a retailer can pull the fulfillment back in-house, then several years later put the fulfillment back out for bid consideration again by the 3PLs. From the perspective of the 3PL operator, the more flexible and scalable the pick, pack and ship equipment, the better possibility of achieving their return on investment on that equipment.
The focus on automation for any e-commerce 3PL should be to easily increase fulfillment throughput and SKU density over time. Such a system should enable e-commerce 3PLs to pick, pack and ship orders and handle returns fast and accurately, while reducing labor costs and shipping errors, and realize equipment ROI over the life of the contract.
Assessing 3PL Capabilities for E-commerce
Within e-commerce, unpredictability is a constant factor. Flexibility in the 3PL supply chain, therefore, becomes critical. This can be derived from implementing the right software and automated systems that can support the fluidity that e-commerce requires.
3PLs under consideration for handling a retailer’s e-commerce fulfillment should be assessed against the following criteria as to their performance capability. These points represent potential troublesome areas frequented in e-commerce fulfillment:
a) Large SKU counts, with a high percentage of slow movers;
b) Small number of pieces per order;
c) Extreme peak season volumes;
d) Under-stocking, due to unpredictable changes in market demand;
e) Front end order processing;
f) Fast 24 – 48 hour delivery;
g) High volume of returns from end consumers;
h) High potential for brand damage from poor fulfillment performance;
i) Real-time, and accurate inventory and order visibility.
These points can best be addressed in concert with an independent logistics consultant, who can provide considerable value to logistics executives at both the retailer and 3PL.
The methodology of independent logistics consultants permits an objective examination of all e-commerce options, helping both parties to determine underlying costs and design for facilities, automation and labor within the 3PL. Consultants size the facility based upon the retailer’s requirements, the anticipated level of operator cost, and what the 3PL plans to invest, factoring in the optimum level of automation.
Independent consultants draw on solutions from many e-commerce 3PL options used in different applications, thus providing a broad perspective on potential solutions that might otherwise not be considered. This depth of experience can make the critical difference in selecting the right 3PL and the right equipment that will meet retailers’ requirements for throughput and efficiency, and the 3PL’s need for minimized capital outlay that will deliver the expected return on investment.
About the Author
Jeffrey Graves has held the position of President of Sedlak Management Consultants since 1989, providing vision and leadership to the firm and executive project management expertise to a wide range of challenging projects. Since joining Sedlak in 1972, he has been responsible for the conceptualization and development of more than 80 major projects exceeding 20 million square feet of space.
About Sedlak Management Consultants, Inc.
Sedlak Management Consultants (Sedlak) is a supply chain consulting firm specializing in distribution consulting. Founded in 1958, Sedlak is one of the longest-standing and leading edge consultancies in North America with expertise in the retail, manufacturing, wholesale, direct-to-consumer and third-party logistics industries.
Sedlak’s professional disciplines are in supply chain strategy, industrial engineering, mechanical engineering, architecture and information systems. The firm’s broad experience with facility and distribution/fulfillment allows it to integrate the latest technology, best practices and industry benchmarks to help its clients achieve supply chain excellence.
As experts in the planning, design and implementation of automated fulfillment facilities, Sedlak has completed over 2,000 projects for more than 1,000 clients. Throughout its history, the firm has become extremely knowledgeable in identifying why projects fail, are delayed and run over budget. Sedlak is recognized as the leader in mitigating project risk and providing successful solutions to meet client needs. The firm’s entire focus is driving supply chain benefits and cost savings to its clients.