Executive Briefings

Demand Volatility Challenges Logistics Network and Fulfillment Strategies

Analyst Insight: The rise of omnichannel fulfillment and e-commerce is having a dramatic impact on distribution network design. As omnichannel fulfillment becomes the new normal for consumers, distribution and logistics professionals are increasingly reassessing their fulfillment networks, the attributes of their distribution facilities and the expectations placed on their partners. This reassessment is leading to more innovative fulfillment options, but uncertainty remains on the profitability of additional customer service solutions. – Barry Blake, Vice President, Research, SCM World

Demand Volatility Challenges Logistics Network and Fulfillment Strategies

Demand volatility-Public Enemy # 1: Two SCM World studies fielded in 2014 point to one primary culprit wreaking havoc on fulfillment networks and the ability to manage supply chain risks: customer demand volatility. In a comprehensive distribution and logistics study from March, 48 percent of respondents cited demand volatility as the most challenging factor when designing distribution and logistics networks. This was corroborated later in the year in our Chief Supply Chain Officer study when respondents cited customer demand volatility as the risk of greatest concern to their supply chains.

Demand volatility isn't anything new to supply chain executives, yet the scope of the transformation brought on by mobility and e-commerce has inflated fulfillment complexity, requiring greater and greater agility in supply networks. As SKU counts increase, and order patterns get more complex, supply chain practitioners are re-imagining the limits of what’s possible in their distribution networks, the services available to customers, the relationships required with supply chain partners, and the range of capabilities expected from logistics professionals.

Critical logistics and distribution capabilities: In the past, distribution and logistics was focused on transportation management and distribution center and warehouse operations. Simple pick-pack-and-ship was sufficient expertise for the logistician. Now logisticians are expected to provide visibility into the flow of materials, finished goods, assets and information up and down the supply chain; they are expected to be skilled relationship managers; to handle the reverse supply chain; to support packaging innovations and the launch of new products; and in some cases, to handle cash collection on behalf of their companies, and manage some aspects of production processes.

At the same time, facility design is trending towards larger, more centralized distribution centers to handle the additional complexity and uncertainty in customer demand. In our Chief Supply Stain Officer Study, over one third of respondents indicated they planned to invest in larger, more centralized DCs as opposed to one fifth citing investment in smaller, more local DCs over the coming years. These larger facilities centrally located around large logistics parks increasingly support a range of value-added services and customized solutions for customers. These capabilities include each-picking, custom packs and kits, shelf-ready packaging for certain industries, control tower information exchange, and in some cases, final assembly and test.

However, the big question that companies are grappling with is whether or not these additional services are profitable. Without adopting a robust cost to serve capability, companies will struggle to answer this question.              

The Outlook

3PLs in the eyes of customers are not innovatively meeting the demands of omnichannel. According to shippers in the SCM World community, 3PLs do pretty well on the basics of service; that is, they are considered pretty reliable and speedy, but struggle to offer more innovative solutions beyond the basics. The basics simply will not suffice in a world with as dramatic demand volatility as we see in today’s omnichannel environment.

Demand volatility-Public Enemy # 1: Two SCM World studies fielded in 2014 point to one primary culprit wreaking havoc on fulfillment networks and the ability to manage supply chain risks: customer demand volatility. In a comprehensive distribution and logistics study from March, 48 percent of respondents cited demand volatility as the most challenging factor when designing distribution and logistics networks. This was corroborated later in the year in our Chief Supply Chain Officer study when respondents cited customer demand volatility as the risk of greatest concern to their supply chains.

Demand volatility isn't anything new to supply chain executives, yet the scope of the transformation brought on by mobility and e-commerce has inflated fulfillment complexity, requiring greater and greater agility in supply networks. As SKU counts increase, and order patterns get more complex, supply chain practitioners are re-imagining the limits of what’s possible in their distribution networks, the services available to customers, the relationships required with supply chain partners, and the range of capabilities expected from logistics professionals.

Critical logistics and distribution capabilities: In the past, distribution and logistics was focused on transportation management and distribution center and warehouse operations. Simple pick-pack-and-ship was sufficient expertise for the logistician. Now logisticians are expected to provide visibility into the flow of materials, finished goods, assets and information up and down the supply chain; they are expected to be skilled relationship managers; to handle the reverse supply chain; to support packaging innovations and the launch of new products; and in some cases, to handle cash collection on behalf of their companies, and manage some aspects of production processes.

At the same time, facility design is trending towards larger, more centralized distribution centers to handle the additional complexity and uncertainty in customer demand. In our Chief Supply Stain Officer Study, over one third of respondents indicated they planned to invest in larger, more centralized DCs as opposed to one fifth citing investment in smaller, more local DCs over the coming years. These larger facilities centrally located around large logistics parks increasingly support a range of value-added services and customized solutions for customers. These capabilities include each-picking, custom packs and kits, shelf-ready packaging for certain industries, control tower information exchange, and in some cases, final assembly and test.

However, the big question that companies are grappling with is whether or not these additional services are profitable. Without adopting a robust cost to serve capability, companies will struggle to answer this question.              

The Outlook

3PLs in the eyes of customers are not innovatively meeting the demands of omnichannel. According to shippers in the SCM World community, 3PLs do pretty well on the basics of service; that is, they are considered pretty reliable and speedy, but struggle to offer more innovative solutions beyond the basics. The basics simply will not suffice in a world with as dramatic demand volatility as we see in today’s omnichannel environment.

Demand Volatility Challenges Logistics Network and Fulfillment Strategies