Outsourcing logistics and supply chain management functions by Mark Hewitt, CEO of iForce

There are many advantages for outsourcing traditional store replenishment logistics but when it comes to the logistics of online retail, outsourcing to a niche service provider is essential, writes Mark Hewitt, CEO of iForce.

Many companies choose to outsource logistics and supply chain management functions to third party logistics service providers (3PLs). Clearly a major draw is the elimination of fixed logistics costs from the balance sheet and switching to a 3PL removes the requirement for capital investment in warehouses, materials handling equipment and transport fleets, and the maintenance of these assets.

Of course where a 3PL can add true value is in the delivery of an integrated logistics service that can be scaled and tailored to meet the customer’s needs. Economies of scale, more direct routing, additional expertise, stricter inventory control and improved technology will all contribute to cost savings for a retailer.

But the expertise, flexibility and added value that a specialist contractor can provide will deliver more than cost savings; a good 3PL will enable a business to enjoy shorter order cycles, better customer service and improved all-round efficiency, allowing the retailer to concentrate on what it does best: selling goods.

While the case for outsourcing traditional retail logistics for replenishment of stores is strong, for outsourcing the logistics for online retailing, it is overwhelming.

Logistics and warehousing systems developed by many retailers to maximise the efficiency of store replenishment will not be effective for online retail. This is because e-commerce logistics, the practice known as fulfilment, has a completely different dynamic to traditional logistics and is much more specialised.

Traditional retail is about replenishing stores with pallet and case loads. Online retailers’ customers, however, want individual items so retailers will need single-pick warehousing systems. Simply trying to do this as part of traditional logistics operations will confuse the way your warehouse works leading inevitably to poor customer service, which is unacceptable in a sector demanding 100% service levels.

While online retail business may start off as a small operation, the rapid growth of the sector will soon see this business develop into a significant part of the retailer’s overall operation. Being able to scale year on year growth of 50-70% – the typical rates for this sector – is virtually impossible to achieve without outsourcing to a 3PL that has the facilities and technology in place to accommodate this. Then there are 6 big operational challenges that set the logistics of online retail apart from traditional retail, for which outsourcing provides the answer.

1. Putaway and confirmation of stock. The fulfilment challenge begins with putaway of incoming goods from suppliers. Most of the put-away involves single items, which makes it a time intensive process yet incoming goods need to be pre-sorted, confirmed into the system, labelled and put away into stock within 12 hours. Managing all aspects of the fulfilment procedure requires a functional, integrated Warehouse Management System (WMS), with integrated Sales Order Processing (SOP), which is designed specifically to provide the computing engine required to meet the high demands of the e-commerce fulfilment marketplace. A bespoke system will be designed to meet the specific challenges as opposed to ‘packaged’ WMS that has been adapted to serve fulfilment operations. The WMS will need to integrate with many web solutions and have bi-directional data feeds to ensure a high quality consumer offer can be maintained. This, allied to a flexibility in how it integrates and handles the varying mechanics of the fulfilment requirements of the outsourced provider’s clients, will set a good fulfilment system apart from other standard WMS systems. A key is the dynamism afforded by the high degree of user-driven configurability available within the system architecture. For example, given the importance of put-away and picking operations, it is vital to have WMS that can be tailored to suit the requirements of the client precisely, rather than have the client alter its procedures to fit around the requirements of packaged software. It is also important to have a team of IT personnel to support this system to enhance this flexibility and carry out modification with speed.

2. Accommodating a wide range of SKUs. Each SKU needs an assigned a pick location in the warehouse, planned according to the speed at which the products sell. This needs to be determined by examining product velocities at item level through ABC analysis. Such data can support clients’ inventory management systems with analysis of inventory holding and demand data, which can be used to assess and implement optimum stock holding and replenishment quantities. For retailers holding a vast range of SKUs, such as department stores, a great deal of creative thinking needs to go into providing satisfactory locations because a big selling, fast moving item may be a small product like an iPod but might equally be something that’s bulky and awkward to handle such as a rug.

3. Communicating stock availability. Another major difference with traditional store replenishment is that the fulfilment operator needs to provide information immediately to the front end of the retail web site so that the retailer’s customers know what they can buy. From the time stock is physically put in the pick location it should only take about 1 hour for the website front end to register the stock as available. The outsource fulfilment company should be able to send messages to the retailer, allowing it to pick up the information when required. The retailer should also be able to link straight into a fulfilment operator’s WMS from a desktop PC to check orders, stock and service performance.
Never forget, a consumer in store is disappointed if he/she can’t find the item on the shelf; this pales into insignificance if they order online and the item is not delivered in line with the service offered. Good inventory management is essential to ensure no failures.

4. Order Picking. The 100% service levels required by fulfilment calls for a WMS that can provide for a vast number of pick routines that allow pick by zone, by product, by order type and by destination. Skilled use of pick wave engineering allows optimised picking productivity as well as segmenting and prioritising order pick. This functionality allows the fulfilment operator to negotiate extended collection times with its network carrier partners, by providing orders for extreme destinations earlier. How scalability issues will affect order picking also has to be considered. It’s not just about catering for year on year growth, with online retail there are large peak demand periods to deal with – order picker staff levels might rise ten fold during these peaks. These staff not only have to be recruited but they also need to be trained to hit the ground running if the service levels are to be maintained. When bringing in temporary short term peak staff they will need to go through an intensive training academy to enable them to gain the abilities of full time employees. Peak issues will also determine the way a picking system may operate. Sometimes this might negate the use of technologies such as handheld data terminals because it would mean a large number of units sitting redundant for the majority of the year, so effective flexible systems will be required.
It is also worth noting that the product range can change significantly during peak. This creates its own challenges in regard to the need to maintain efficiency in pick walks and routines.

5. Packing. Flexible WMS is particularly relevant when it comes to packing, which is a significant element of how the fulfilment process is set apart from traditional 3PL operations. The ‘parcel’ compiled by a fulfilment operation will be going directly to a customer’s home and may only include one item. Because a customer will generally consider any parcel they receive at home to be ‘special’, deliveries need to be packed with thought; it’s not the same as sending out a pallet or case load of goods to a store. Rather than complying to the basic instructions of a WMS designed for sending out case and pallet loads, a fulfilment operator should use the experience and expertise of its staff to configure the parcel containing the picked products in a space efficient, secure yet aesthetically pleasing manner so that when the customer receives the parcel the experience is a pleasant one. Again, with an order potentially comprising a wide range of products, this craft assembly of parcels requires a great deal of creativity. How, for example, do you go about packing an order for a rocking horse, an ironing board and a wine glass? Some clients may require a gift-wrapping service. A fulfilment operator that can provide a WMS that takes volumetric data on goods receipt, together with the capture of packaging type and size data to accurately select the optimum outer carton or bag for the items within the order will offer a big advantage. Not only will this reduce the number of parcels per order, but it will also reduce packaging consumerables and fill costs.

6. Managing carriage. Delivery is a critical aspect of fulfilment process. By using information such as consignment dimensions and value a fulfilment operator can decide which integrated carrier will provide the optimum service and route it to the chosen carrier. An outsourced operator utilising software that can do this efficiently, using its knowledge of a wide range of carriers and carrier services to determine the appropriate routing of parcels and packages, can reduce carriage costs by 10-15% against a non-streaming solution. The fulfilment operator can also add value by allowing clients to make preference decisions regarding factors such as cost, service level and insurance valuation. The system should be able to make preferences on carrier limitations such as volume, weight and product content – are they items such as aerosols, glass, etc? Using this information, will allow a decision on which carrier will provide the optimum service within the pre-determined boundaries. Ongoing consignment tracking within the system will allow the parcels to be tracked from the warehouse to the customer’s door. This is an important ability for a fulfilment WMS in so far as the continuing e-commerce challenge is still defined as a business by the ‘last mile’. With integration to a range of carriers allowing clients to track deliveries to their customers’ door, a vital piece of the consumer offer is monitored. This results in early notification of issues and potential failures within the business and thus allows for early communication with the customer.

To overcome these 6 big challenges you should be thinking of outsourcing online retail fulfilment even if you are not thinking about outsourcing your traditional store logistics, furthermore, you also need to examine carefully which outsource fulfilment operator can provide the experience and abilities to meet these challenges most effectively.