Fulfilling e-commerce orders in today's market requires a carefully designed balance of centralization distribution and micro-fulfillment centers, says Kraig Foreman, vice president of operations with DHL Supply Chain.

SCB: In the world of regional and multi-node e-commerce, what's the greatest challenge your customers are facing today?

Foreman: The challenge differs based on who you are and what your business looks like. But if I had to boil it down, I would say there are two key things. One is the cost to serve, and the other is the capability to manage in that multi-node environment. You need to generate same-day and next-day delivery out of your fulfillment centers. You can do it through the parcel networks, but at a cost. The question is, does the cost make sense, compared with having inventory in those markets?

When you start getting into additional modes, inventory deployment becomes a different concept than what most retailers are used to dealing with. Maybe they were managing replenishment into a distribution center or store. But when it comes to e-commerce sales, you're looking at inventory deployment rather than replenishment. You need predictive analytics to understand which SKUs should be in that market to execute orders placed online.

SCB: Prediction is never 100% perfect. There's got to be a point at which actual buying patterns differ from the forecast, and you suddenly need product where it's not at.

Foreman: That's where these strategies are taking different shapes. Over the last five years, everybody's been trying to do multi-nodal regional deployment,. They built multiple, full-line D.C.s to enable fulfillment. What people are realizing right now, because the parcel networks are so strong, is that there are different ways to attack that. The micro-fulfillment center concept involves placing selected SKUs in those markets. You don't have to have duplicate inventory across everything — you're just putting in targeted inventory that enables the service offering. It's the 80/20 rule — I can put 20% of my SKUs in the market to satisfy 80% of my orders.

SCB: Is it all about speed these days?

Foreman: There’s been a lot of talk about the Amazon effect, where everybody wants it today or tomorrow because that's the expectation. But when you actually do studies of consumer behavior, consumers just want choice. They want options. It's about building a network that satisfies those options. Not everybody needs it today or tomorrow. A large percentage of the time they're going to opt for cheaper delivery.

SCB: But when they do want next-day or same-day, they're not always willing to pay for it. To what extent are consumers actually being charged for “free shipping”?

Foreman: They think they're not, but typically that’s built into a cost of goods in some way. In a lot of circumstances, there’s menu pricing when you get to your shipping options. Nearly every retailer is doing that now. If you choose standard delivery, or get over a certain price point on your basket size, it's free. If I want it today or tomorrow, I may have a $15 surcharge that goes along with that. There has to be a subsidy coming from the consumer.

SCB: Tell me more about these micro-fulfillment centers. What do they look like? Where are they? Are some of them actually in retail stores?

Foreman: Absolutely. There are many different methods. Depending on the size of your business, whether you're pure play e-commerce or also a brick-and-mortar retailer can drive different strategies. But with micro concept, as long as I have the foundation of a centralized D.C. as my safety net, I can satisfy all orders out of there. I can forward deploy and be strategic about what inventory I put in that market.

SCB: You’re carving out space from an existing retail store in order to create this?

Foreman: Or a fulfillment center that has multiple customers in it. If you have a 150,000-square-foot building somewhere just outside of Manhattan, you could put 10 different customers in there, each having 15,000 square feet. That allows them to customize the solution for their businesses.

SCB: On the other hand, we’re seeing a trend of placing big centralized D.C.s. within urban centers. How common is that going to be, and is it necessary in order to bring product closer to the customer and enable next-day and same-day service?

Foreman: I think we're going to see more of that trend. It might involve fulfillment centers taking over the big store in the mall. It's going to involve a lot of different concepts. Where that ends up, it's hard to say at this point in time, but I think it's safe to say that there’s going to be a great deal more fulfillment in urban centers, to drive courier capability into last-mile delivery.

SCB: Would you advocate developing a master network engineering plan now, even if you don't need that capability immediately?

Foreman: This is something I'm very passionate about. I focus on e-commerce customers in North America, and my phone rings the most in December. Either it’s somebody who's had a very successful peak season and wants to make sure they continue that growth, or they’ve had a tough season and want to build something based on what they know now. That's a tough space to play in. I advocate for building a five- to 10-year master plan, but it doesn't mean you have to do it all right now. You do have to know where you want your business to go, and at what point you need bring new infrastructure into the mix. There has to be certain thresholds that trigger that reaction, so you end up ahead of the game. Those who are sitting there waiting for the dust to settle to figure out where they need to be are going to get run over.