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The Age of Amazon has forced e-commerce sellers of all sizes to meet increasingly stringent requirements for delivering goods to consumers. Yet most providers aren’t fully prepared for a world that demands next-day delivery, or even faster.
“Achieving competitive service levels, and doing so without incurring excessive costs, has become a significant challenge for many distributors,” says Ian Hobkirk, president and founder of Commonwealth Supply Chain Advisors LLC. Following are four major challenges that e-tailers face today, as they strive to meet demand.
Managing surges and peak periods. By its nature, e-commerce is ruled by spikes and valleys. Prior to the dominance of the internet, the brick-and-mortar Christmas shopping season was spread over multiple weeks. Because merchandise arrived at stores well in advance, retailers were able to level out the peaks. Now, retailers are focusing their marketing strategies on targeted dates such as Black Friday and Cyber Monday, forcing the alignment and reshaping of buying behavior. During these surges, distribution centers struggle with volumes that are 10 to 20 times those of normal demand. Many lack the infrastructure and labor to get that much product out the door in a timely fashion.
Fortunately, with the availability of smart technologies and optimized processes, designing and building infrastructure to facilitate these peak periods is more feasible than ever. As companies redesign their distribution centers to meet fluctuating demand, they should ask themselves a key question: What capacity level are we designing for? Or, put another way: Are we building a church for Easter Sunday, or for a regular Sunday in June?
Space and throughput should be viewed as different animals; companies can more easily rent the first than the second. It makes sense to design a warehouse to handle peak throughputs, but not necessarily peak storage requirements. The latter can be fulfilled through the rental of additional space during peaks. Technology, too, can play a key role: Investing in warehouse automation is critical to achieving greater order accuracy and volumes.
The need for immediate fulfillment. There’s an emerging consensus regarding acceptable e-commerce service levels: If an order arrives by 3 p.m., it ships the same day. Distribution centers capable of meeting this requirement differ in design from those that fulfill retail store orders. For efficiency’s sake, traditional retail orders with long lead times can be batched. But when thousands of e-commerce orders arrive in a single day, the luxury of batching diminishes. Warehouses must maintain a continuous stream of orders to the floor, with picking in real time. Compared with traditional order fulfillment, this model requires a completely different mindset.
The need for two-day ground service. Distribution centers aren’t the only step in the process that needs to change to meet modern-day e-commerce service levels. Transformation is occurring throughout the supply chain. Goods from Asia entering a U.S. West Coast port move quickly to a nearby DC. From there, the cost of e-commerce shipping is typically borne by the retailer. Demand-centric models, driven by the need to minimize both cost and time, are increasingly dictating the relocation of distribution facilities closer to the point of ultimate demand. To reach any customer within two days, retailers will need at least two DCs, one in the west and another in the east.
Warehouse labor is scarce and expensive. Distribution operations have struggled for years to find sufficient staff, but COVID-19 greatly accelerated that trend. Fears over the safety of work environments, coupled with changes to unemployment benefits, has led to a severe shortage of workers. And for those willing to show up to work, the incentive of higher wages is often necessary. All of that has strengthened the business case for at least some degree of automation, and not just for Fortune 100 firms. Much smaller companies can now justify the investment in robotics and other types of technology designed to minimize the need for human workers in the warehouse.
It’s not always easy for organizations to take the leap. Many executives are unsure of their companies’ readiness to respond to new consumer demands, such as two-day delivery. Their hesitancy is due in part to the need to embrace the unfamiliar world of modern digital technologies. It means making decisions and setting up systems that support an accelerated transition to full-scale e-commerce.
Nevertheless, retailers and distributors, often with the help of technologically savvy third-party logistics (3PL) providers, are moving steadily toward the adoption of new designs and systems for e-commerce distribution. A recent report by Gartner predicts that by 2023, half of “global product-centric enterprises” will have invested in real-time transportation visibility platforms. They cite multiple reasons for their enthusiasm in the technology, including the need to control freight spend, speed up delivery and meet customer demands for real-time visibility of their orders. Service features that used to differentiate a retailer are fast becoming a ticket for admission to the game.
Commonwealth Can Accelerate Change
Commonwealth Supply Chain Advisors is a private, Boston-based consultancy that helps clients design efficient supply chain networks and distribution centers. A major focus of Commonwealth’s work in recent years has been enabling the growth of e-commerce distribution channels for their customers. At the same time, it works with clients to solve supply chain problems without automatically resorting to expensive technology.
Commonwealth has helped hundreds of companies take on highly complex distribution and supply chain challenges. They include such problems as reducing distribution-related labor costs, improving warehouse space utilization, and achieving (within budget) precise customer service objectives.
Among the key services that Commonwealth provides to clients, one has stood out during the COVID-19 pandemic: designing demand-centric supply chain networks, which are the essential ingredient in any advanced e-commerce distribution system. Many of the strategies to emerge from such engagements have been applied within industries that were once slow to adopt e-commerce fulfillment models.
Many companies experienced the pandemic as a time of intense struggle, marked by widely fluctuating demand and record peaks of e-commerce activity. Many found themselves unprepared for the crisis. But forward-looking organizations are turning to experts like Commonwealth to gain new insights that can be built into the heart of their corporate roadmaps for future growth.
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