The ecommerce boom is reshaping DTC fulfilment


E-commerce is in the midst of a long-term, sustained, global growth trend that is transforming the retail landscape as well as retail fulfillment operations. Although the trend is global, the US Census Bureau provides detailed, official domestic estimates that assist in quantifying the magnitude of this transformation. Total US retail sales grew at an average annual rate (CAGR) of 3.4 percent from 2013 to 2018. Meanwhile, the e-commerce portion of these sales grew at an average annual rate of 14.6 percent over that same period. This shift accelerated in 2020 due to the coronavirus pandemic. E-commerce sales in the second quarter of 2020 increased 44.5 percent when compared to the second quarter of 2019. This is likely to moderate, but still remain substantial. While e-commerce sales still only represent about 10 percent of total retail sales, the percentage is much greater in some product categories.



Processing and Handling


The shift away from retail store sales to e-commerce sales has greatly impacted warehouse operations. A smaller percentage of total inventory units are being sent to retail stores. At the same time, a rapidly increasing percentage of total inventory units are being shipped directly to consumers. The overall number of distinct fulfillment orders is also increasing rapidly (one store replenishment order may be 100 items whereas one e-commerce order may be just one item).


Each fulfillment order requires its own processing such as planning, allocation, and shipping. It also requires its own handling processes such as picking, packing, labelling, and shipping. As a result, a warehouse that moves the same number of physical items through direct-to-consumer as opposed to retail store replenishment will be processing substantially more distinct orders; picking, handling, and separately moving items of a smaller weight and size; and subsequently packaging and labelling this higher volume of items for shipment. The facilities, processes, and technologies were already in place to handle the traditional fulfillment flows. But the complexities in fulfilling e-commerce orders is generating significant changes to warehouse operations.



The Amazon Effect


Much of the competitive dynamics stemming from e-commerce has been attributed to the presence and actions of Amazon. These actions include broad product selection and availability, expedited delivery, and reduced hurdles to returns processing (an e-commerce shortcoming in my opinion).


As a result the relentless pressure Amazon puts on brick-and-mortar retailers, the competitive dynamics in retail has shifted. The customer experience in traditional store retail was heavily shaped by the shopping and customer service experience. In contrast, much of the customer experience in e-commerce today is shaped by product availability, accurate fulfillment, rapid product delivery, and less burdensome returns.



Warehouse Process and Technology Changes


As a result of today’s e-commerce growth, warehouses are pressured to adjust their processes and supporting technologies. Pressures to offer broad product selection are resulting in what supply chain practitioners call “SKU proliferation” – the requirement to hold an increasingly broad range of items in stock.


This trend is encouraging the investment in warehouse technology and automation that supports high storage density (a lot of different items in a given cubic space). The processing of direct to consumer orders is labor intensive, especially when compared to the total value of the order. This is placing cost pressures on warehouses. These pressures are encouraging manual warehouses to reconfigure processes to wring out additional efficiencies.


Changes in warehouse processes are often supported by warehouse software intelligence. Examples include more optimal task assignment, bulk processing activities such as order item consolidation through the use of put-walls, and other means of reducing low value activities while maximizing labor resources. In addition, e-commerce warehouses are investing in automation to reduce their variable costs of fulfillment – and ultimately establishing opportunity for increased profit margins.


But these investments require high volumes and time to cover the fixed costs of investment. At the same time, warehouses are dealing with increased variability in order volumes, order profiles, and other measures. This variability is increasing the value of adaptable automation – as automation investments must remain aligned with fulfillment requirements over multiple periods to enable the variable cost benefits to offset the upfront fixed costs.


Finally, fulfillment responsiveness has become a competitive necessity as consumer expectations of next day delivery affect purchase and repeat purchase decisions. Some brick and mortar retailers are experimenting with fulfilling a higher proportion of their orders from stores. A portion of the store becomes, in effect, a small warehouse fulfillment center. These “dark stores” in metropolitan areas are located closer to many customers, allowing for more responsiveness.


E-commerce orders fulfilled by more traditional warehouses are often shipped through parcel carriers that have more frequent carrier cut-off times than traditional line haul providers. This need to meet more frequent cut-off times has increased the use of pull-based fulfillment that is more responsive than traditional overnight batching processes.


Clearly, warehouse operations have become more important to brand equity and the customer experience. But at the same time, cost pressures and shorter fulfillment horizons have placed additional pressure on these operations. Add in the increased variability of operations, which makes long-term capital investments riskier, and you have the formula for a delicate balancing act between investing in adaptable automation vs. using more human labor, responsiveness vs. efficiency, and product availability vs. inventory carrying costs.


Article courtesy of Forbes here


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