Logistics Procurement and Outsourcing expert Gideon Hillman FCILT, explores the benefits of logistics provider’s shared user e-fulfilment facilities to small to medium size internet retail businesses.
Dealing regularly with many on-line retailers of all sizes, as well as many Third Party Logistics Providers (3PLs), I have observed the significant impact that the rapid growth of e-commerce has had on the 3PL sector, and how 3PLs have reacted to the many demands with shared user e-fulfilment facilities. Not only have traditional high street retailers had to adapt to internet selling to remain competitive with each other, but also with the plethora of new internet retailers (e-tailers) and wholesale/manufacturers who can now sell direct. So as an SME e-retailer do you run your own logistics and distribution operation or outsource it to a 3PL shared user operation? Perhaps more importantly how and when do you make that decision? How big is your business and what are your customer expectations and service levels? A key aspect of the decision making process is to fully understand what internet selling requires in terms of logistics infrastructure, and what is the benefit of a good 3PL shared user e-fulfilment service offering.
The problem is us…
There is no doubt that we the consumers love the scope and range of products available on the internet and the freedom to shop whenever we like. However, the fact still remains that we often like to touch and see product before we make the emotional commitment to purchase. This luxury is not available to us when making an internet purchase, and we have to make the emotional commitment to purchase as soon as we click the mouse and submit the payment confirmation. The euphoria of making that purchase soon fades; the nagging doubt of suitability of the recent purchase creeps in, followed by the fear of an undefined delivery window and whether we will be at home when the delivery van arrives. Regardless of when our payment is actually processed we have in our own minds made that commitment to purchase, yet we have nothing show for it apart from an automated confirmation email. On a sub-conscious level we feel almost cheated and all of a sudden we have the urge to scream out ‘I want it now!’
Once we have received our purchase a state of calm resumes as we are relieved that we have not been cheated by the invisible retailer, and we can relax in the knowledge that we can send our purchase back thus enabling us to start the whole process again. The seasoned internet shopper will order many variants (e.g. size or colour) of the same product at the same time safe in the knowledge that they can return the incorrect ones for free and have still received the one they actually want on the first delivery. The Distance Selling Regulations are there to make sure we can do just that, and so they should be because it is all about us – the consumer. The result of this emphasis towards internet buying is that the key drivers for the e-fulfilment logistics service need to be more focused on the direct consumer buying patterns and not just the e-tailer’s requirements.
This is great for the consumer but what about the e-tailer?
It’s not just a website…
The e-tailer thinks that they have made some good sales at a good margin whilst still having discounted the high street retail price because they dont have the same overhead, or do they? Have the true costs of meeting this inflexible and demanding consumer actually been accounted for? The fact remains that the e-tailer needs payment systems, administration and customer service personnel, warehousing and stock management systems and a physical logistics infrastructure to provide the same service as a high street shop. It just isn’t visible to the consumer.
Delivery costs of e-tailer B2C sales are usually a greater proportion of the total internet sale due to smaller order size (as opposed to bulk pallet movements to a high street retailer), so can the retailer also justify increasing sales costs to cover the cost of returns – after all they are selling in a highly competitive market place where discounts from the RRP are considered the norm? It is not just the direct cost of return transport, but also the indirect costs of receiving and processing a return, carrying out a quality check prior to repacking for re-sale and returning the product to the pick face ready to be sent out again.
All of the direct and indirect costs mentioned must be built into the total cost model of an e-fulfilment operation and all too often they are not. For the SME e-tailer the outsourced 3PL e-fulfilment facility may appear on the surface to be more expensive than an in-house operation, but the complete service they offer can be the difference between survival and failure in this highly competitive world.
It’s all about maintaining customer service levels…
If the e-tailer has a large operation, and benefits from economies of scale with a fairly consistent demand pattern; or internet sales are an additional sales channel to an already established larger retailer, then the e-fulfilment operation can often be integrated into the existing logistics operations.
New e-tailer businesses with a good product tend to grow exponentially. All too often I am contacted by e-tailers who have rapidly out-grown their own warehouses and IT system capability and are concerned about meeting customer service levels. They are often under resourced for seasonal peaks and product promotions, and over resourced for low volume periods. The in-house operation is not able to react in line with business needs and the result is often a mix of the in-house fulfilment operation and some external pallet and bulk storage. This is not an ideal model as the e-tailer now has stock held at two sites, and has the additional issues of managing stock transfer between sites.
So how do you choose to outsource or not?
The decision to outsource should be made on a cost to serve basis – in other words what is the best cost for the best service to ensure that customers receive products when they want them?
The first step is to identify all the elements that are needed to make up the perfect e-fulfilment operation: IT system infrastructure to link the website with payment gateways, order processing and receipt, order picking/ packing and despatch, stock and returns management, links to courier systems for order tracking, links to customer service/call centre systems providing real time order and stock information etc… And that’s just the IT systems! The physical operation requires warehousing for bulk and replenishment stock, optimised pick face layouts and work areas, pickers/packers, forklift operators, materials handling equipment, customer service, call centre personnel, courier relationship management – to name just some of it! This can be the first hurdle as the task of putting all this together can be overwhelming to the e-tailer who just wants to sell product and does not have the experience or desire to implement the required operation.
Step two is to determine the capital investment requirement for an in-house operation with all of the elements above, and one that can cope with the high season demand and future-proofed for the next 3 to 5 years. This is often the final hurdle as the levels of investment can be high and unaffordable especially when investing for the current and future needs of the business.
Step three is deciding whether to outsource or not based upon the outcomes of the two steps above and weighing up the services available in an equally competitive market – the 3PL shared user e-fulfilment facilities.
The 3PL has already made investment into the IT systems and physical resource, as well as having well established partnerships and links with courier services. The 3PL should also charge at a rate per order despatched (broken down into the different service elements) and a weekly rate for pallet storage; therefore remaining flexible and providing the e-tailer with a flexible cost base almost on a ‘pay as you go’ basis.
What to expect from your 3PL e-fulfilment partner?
The 3PL market has reacted well to the needs of the e-tailers and it is not just the big 3PLs that provide e-fulfilment services. There are some very good lesser known specialist e-fulfilment businesses that provide excellent shared user services, and cost benefit to e-tailers of all sizes.
The e-tailer should shop around with a clear list of exactly what they need for their e-fulfilment operation. The range of services available from the 3PLs include the IT systems, interface requirements, and the physical operations as well as established and well trained customer service personnel and call centres. Some of the 3PLs will even manage the invoicing and payment collection for the e-tailer. One of the key elements for the e-tailer is complete visibility of their business, so access via a web portal to the 3PL real time reporting systems is important, and the content of the reports tailored to the e-tailer’s specific requirements.
Most importantly what the e-tailer wants is to ensure that their customers are happy with all aspects of their on-line shopping experience.
What the 3PL providing the e-fulfilment service wants is to ensure both the e-tailer and the e-tailer’s customers are happy with all aspects of the service provided.
All the consumer cares about is getting what they want at the right price; and of course we want it now!
Gideon Hillman Consulting Ltd.
Tel: +44 (0) 1926 430 883