Editor’s Note: The following is an excerpt from Part 1 an Executive Brief series co-written by Adrian Gonzalez, President of Adelante SCM, and Mike Glodziak President & CEO of LEGACY Supply Chain Services. You can download the full brief at LEGACY’s website.
The rules for success in e-commerce and omni-channel fulfilllment are still being written, and they will likely be different tomorrow than today. What’s clear is that customers, whether they are consumers or other businesses, are now the center of every company’s supply chain universe; they are the center of gravity that all supply chain processes must revolve around and respond to.
This new customer-centric reality is prompting manufacturers and retailers of all sizes to revisit their strategies and capabilities to succeed in this highly- dynamic, highly-uncertain, and highly-competitive environment.
In March 2017, for example, Walmart pulled the plug on building a 1.2-million-square-foot distribution center in Merced, CA. Originally proposed in 2005, the planned facility no longer makes sense because “the nature of retail has changed since the project was announced 12 years ago,” said Delia Garcia, Walmart’s senior director of communications, as reported in the Merced Sun-Star. Ms. Garcia added: “We are innovating our business. We are transforming our business. We are investing heavily in e-commerce, and our e-commerce capability.”
The Changing Nature of Retail
The nature of retail has indeed changed since 2005. Twelve years ago, according to the U.S. Department of Commerce, e-commerce sales totaled $91.4 billion and represented just 2.5 percent of total retail sales in the United States; in 2016, e-commerce sales reached $394.9 billion and accounted for 8.1 percent of total retail sales. In terms of overall growth rates, total retail sales grew just 2.9 percent in 2016 compared to 2015, while e-commerce sales grew over 15.1 percent!
This rapid growth, coupled with more demanding customer expectations (such as faster, more reliable, and free delivery), is having a ripple effect on supply chain and logistics processes, networks, and technology requirements. Simply put, as customers expect faster, cheaper, and better service, finding the right balance between inventory, transportation, and labor costs is more complex than ever.
Determining the Right E-Commerce and Omni-Channel Fulfillment Strategy
There are many questions and factors companies must consider when determining the right e-commerce and omni-channel fulfillment strategy. Here are just a couple:
Do we build dedicated fulfillment centers for e-commerce or have all of our fulfillment operations under one roof? Many manufacturers and retailers have started down one path only to change course later as the scale and scope of their operations changed. In many cases, the catalyst for change was driven by rising inventory costs (too much inventory at some locations, not enough at others), rising transportation costs (because you’re too far away from customers or need to make multiple shipments per order), and/or poor service levels.
Back to Walmart, the retailer is changing course and building new distribution centers and channels for e-commerce. As reported in the Wall Street Journal, when a customer orders different products today from Walmart “— say, shampoo, a toy and an Apple Inc. iPad — [it] may have to be filled from three separate locations. The goal of Wal-Mart’s new centers is to provide a single place stocked with a wide variety of products to get shipments collected and sent faster.”
Should we collaborate with our suppliers and have them drop-ship more orders? A research report published in January 2017 by Retail Systems Research (RSR) in cooperation with SPS Commerce showed that 40 percent of the 563 companies surveyed (including retailers, manufacturers, distributors, and logistics service providers) plan to increase the number of drop-ship vendors in 2017, while logistics service providers expect large increases in drop-ship relationships over the next three years. Home Depot, Macy’s, and Pier 1 Imports are among the growing number of retailers that are increasing their drop-shipping activities.
But the biggest question of all, particularly for companies that are just getting started, is this: How do we scale our e-commerce and omni-channel fulfillment capabilities while minimizing risk, cost, and time-to-market?
Rather than completely re-inventing the wheel, many companies are leveraging their existing network, resources, and relationships, especially with logistics service providers, to address this challenge.
What are some key ingredients for success when deciding whether your current third-party logistics (3PL) provider can help address your e-commerce challenges? Download the full Executive Brief for more insights on this topic.