Emerging Options for Omni-Commerce Logistics Strategy

At SCI Logistics in addition to fulfilling millions of e-commerce orders on an annual basis, we also spend a significant amount of time studying the optimal methods of helping our customers serve consumers in Canada. And by the way, if you’re not already serving online consumers in Canada, you might want to read ‘Looking For Growth in Lean Times? Look North to Canada!‘ to see the opportunity you may be missing!

Every week I’m interacting with more and more e-commerce professionals whose day to day job is coming up with the best methods of delivering Omni-Commerce solutions for their customers.

One thing I can say is there seems to be a lot of angst, confusion, and misinformation out there, so I thought it might be helpful to share some of the best practice options, opinions and trends that seem to be emerging.

MatrixCommerceThose of you who know me are aware of my work in coining and developing the ‘Matrix Commerce‘ concept, however I’m sure you’ll have noted today that I’m using term Omni-Commerce. This is simply a reflection of blunt reality, before any firm can even think of accomplishing a full Matrix Commerce implementation, they and their organizations will have to master and implement the basics of Omni-Commerce logistics. Think of how mountain climbers get to the summit of Mount Everest, the first step in that trek is to get to Base Camp and when it comes to implementing Matrix Commerce in your organization, the first step or Base Camp is to effectively implement Omni-Commerce logistics.

Simply put Omni-Commerce is allowing your customers to effectively access, research and purchase your products in any manner they choose PC, mobile, tablet, kiosk, virtual store, in-store; and then deliver them, or have them available for pick up, when and where your customer would like. To do this you need to ensure that at ALL locations where stock is held or displayed for retail sale, that ACCURATE and TIMELY inventory information is available. Without this you don’t have a hope of delivering even a basic level of satisfactory omni-commerce customer experience.

As this post is about the logistics strategies and approaches to support Omni-Commerce I will not deal with the front end ordering or online technologies, but rather the logistics surrounding where product will be stocked, picked and shipped from for either delivery or pick up by your customers.

The options we will explore are the major models being utilized to date:

– National Fulfillment Centre

– Regional Fulfillment Centres

– Ship From Distibution Centre

– Ship From All Stores

– Regional Hub Stores

– Pick Up Centres and/or Lockerboxes

– Drop Ship From Vendors

Each of the above will be briefly explained and then we’ll touch on some of the potential advantages and disadvantages of each approach. And of course it is important to note that the above are not mutually exclusive and ultimately many retailers will utilize a combination of these approaches to support their online clients.

National Fulfillment Centre

To date this has been the most widely used model where one main fulfillment centre is implemented to service the entire country. The majority of national fulfillment centres are in eastern Canada, typically Toronto, with some in Montreal. Although, there are also some outliers with national fulfillment centres operating in Western Canada in Vancouver or Calgary.

Establishment of a national fulfillment centre is the most common and a natural response in order to implement e-commerce delivery.

Slide1

Almost all of these national fulfillment centres are run as separate operations from retailer’s store distribution networks and a number of them are operated for retailers by third party logistics providers.

The majority of these national fulfillment centres are operated in a conventional manner with little or no automation, however as e-commerce volumes continue to grow the trend towards automation will also continue to increase. Please see the below chart to get an idea of the advantages and disadvantages of operating a national fulfillment centre.

Slide2

Retailers operating on a national fulfillment centre basis in Canada will typically have service level issues with customers located on the opposite end of the country. So retailers who have national fulfillment from the west will have service levels of 3 or 4 days or more to eastern Canada and beyond. And those retailers with a national fulfillment centre in the east would have similarly delayed delivery service levels to western Canada.

Regional Fulfillment Centres

As customer’s continue to demand more rapid delivery service levels we are seeing an increase in retailers utilizing multiple fulfillment centres to support the storage, picking, packing and delivery of their e-commerce orders.

Slide3

This is an area and phenomena we’ve been following closely and have highlighted “The Power of Two” to discuss related details and highlight the potential benefits of introducing secondary or regional fulfillment centres.

Advantages, Disadvantages and Benefits – Regional Fulfillment Centres

There are of course pros and cons to each of these omni-commerce logistics approaches and we have developed the chart below to highlight these for Regional Fulfillment Centres.

Slide4

Over the last twenty plus years, logistics professionals in North America have been consolidating and centralizing their distribution and logistics networks. In a world where carbon is not considered an issue this was indeed the lowest cost, however a much higher carbon, solution. Specifically the elimination of regional DCs means much higher amounts of outbound transportation in the logistics network which is where the carbon is generated.

Fast forward to 2014 and now carbon is becoming more and more significant a variable in business planning and at the same time online consumers are becoming more and more demanding of rapid delivery. Next day seems to be becoming the new standard service with same day or ASAP / immediate delivery the premium service. These two trends to the environment and rapid local delivery seem to fit together very well and a strong driver for examining potential for regional fulfillment centres.

Ship From Distibution Centre

Although not optimal some have chosen to utilize their existing distribution centres to service e-commerce business. Thought is to leverage existing building assets, people and inventory to support the online business. Typically we see this method applied for either large or bulky items as well as very slow moving items which wouldn’t work as well in the high volume fulfillment centre model.

Slide5

In most cases, traditional distribution centres are designed and utilize systems more for full case and pallet picks versus the each picking requirements associated with e-commerce picking.
Advantages, Disadvantages and Benefits
There are of course pros and cons to each of these omni-commerce logistics approaches we are reviewing here and we have developed the chart shown below to highlight a number of these points for Ship From Distribution Centres.

Slide6

Of course utilizing the same inventory of products to service multiple demand streams can be positive and DCs are much better trained, positioned and have more cost effective space and access to packing materials than the model we will discuss next, Ship From Store.

Ship From All Stores

Some retailers rather than introduce a fulfillment centre or ship from their distribution centres have decided to ship their online orders directly from the closest store to the end customer.
Although there are some specific retail scenarios where this might make sense, the Ship From Store model may not be the nirvana it’s being touted as. For a ‘tongue in cheek’ review of some of the issues surrounding the “Ship From Store” phenomena see my recent article “Beware the Ship From Store Spin Cycle0”.

Slide7

One thing that’s clear from all of the retailers who’re successfully using this e-commerce logistics model is that even with Ship From Store, there’s still a requirement for back up fulfillment centres for 30 to 50% of their orders. Retailers implementing pure Ship From Store without such back up in place risk serious customer service and experience issues and potential related damage to their e-commerce business.

Advantages, Disadvantages and Benefits – Ship From All Stores

Putting “tongue in cheek” satire aside, below we’ve created a chart which plainly lays out the advantages and disadvantages of the Ship From All Stores method to lay out for retailers considering this option what positives and negatives they may encounter using Ship From All Stores.

Slide8

Make no mistake, Ship From Store is still a relatively new phenomena and as it matures new models and methods may emerge that address some of the disadvantages and while at the same time capturing some the positive items. Could our next omni-commerce logistics model “Regional Hub Stores” be the first stage in this evolution?

Regional Hub Stores

Recently, keeping our ear to the ground on omni-commerce logistics innovations we have seen the emergence of Regional Hub Stores. Specifically what we’re looking at here is instead of using all retail stores for Ship From Store, this model is to focus the demand in each region on one specific store or Hub Store for e-commerce fulfillment.

One of the innovators in this case is The Gap and details on their use of Hub Stores are shared in the article “How Gap Connects Stores and Online Channels.” Not only does this methodology focus fulfillment issues in less stores, it also simplifies the inventory search to a more manageable number of their literally 1000’s of stores.

Slide9

So although all of the disadvantages of the Ship From Store model are not eliminated, there are somewhat lessened and more focused. In many ways these regional hub stores are very similar to regional fulfillment centers in function however operating using much more expensive real estate with typically much more difficult access and egress for delivery and pick up vehicles.

Advantages, Disadvantages and Benefits – Regional Hub Stores

The chart below highlights the advantages and disadvantages identified in association with the use of Regional Hub Stores. Clearly this approach mitigates some of the negatives associated with the Ship From All Stores model.

Slide10

Over the last twenty plus years, logistics professionals in North America have been consolidating and centralizing their distribution and logistics networks. In a world where carbon is not considered an issue this was indeed the lowest cost, however a much higher carbon, solution. Specifically the elimination of regional DCs means much higher amounts of outbound transportation in the logistics network which is where the carbon is generated.

Fast forward to 2014 and now carbon is becoming more and more significant a variable in business planning and at the same time online consumers are becoming more and more demanding of rapid delivery. Next day seems to be becoming the new standard service with same day or ASAP / immediate delivery the premium service. These two trends to the environment and rapid local delivery seem to fit together very well and a strong driver for examining potential for regional fulfillment centres.

Pick Up Centres and/or Lockerboxes

One variant on traditional online delivery models is the introduction and use of Pick Up Centres or Lockerboxes. These have been spreading in both the United States and Europe and other than a few retailers who’ve had them removed from their stores, have for the most part been well received.

The methodology is to have unattended lockerboxes, similar to airport lockers which work automatically using barcodes or codes to open for the online consumer when they arrive to retrieve their product(s) at any hour of the day.

Slide11

Our below chart on these Omni-Commerce logistics options, shares some of the pros and cons we were able to identify relative to retailers utilizing the Pick Up Centre / Lockerbox delivery methodology.

Advantages, Disadvantages and Benefits – Pick Up Centre / Lockerboxes

Slide12

In Canada, there was a start up founded called BufferBox which after being acquired by Google in 2012 this service will be sunset by Google at the end of April 2014. One of the benefits of this model other than 24 hour access convenience is that all the consumer deliveries are consolidated to one point instead of delivered direct to home individually. Some carbon benfit should be expected as consumers stop by to pick these deliveries up at the Lockerbox on their way to or from work or while already at the location for other shopping purposes.

Drop Ship From Vendors

As many online sellers seek to expand their assortment and cover more product categories in their online offerings they shift to an “endless aisle” model where products are listed on their site and kept in inventory at the original vendor’s warehouse. As soon as a product is sold on the website, the order is passed along to the vendor who then Drop Ships the product to the end consumer.

Slide13

Likewise, many retailers continue to drive inventory out of their operations to become more efficient. When it comes to a specific product each retailer may stock the same item in several different warehouses and the vendor in their warehouse as well. Any of you familiar with the laws of logistics knows one of the big ones is the Square Root Law of Inventory which basically means the more locations one stocks inventory the amount of inventory in the system grows geometrically based on the number of locations stock is held. So if all the inventory is focused in vendor held and owned locations the duplication, triplication and more of the same item being held by multiple retailers can be reduced if not entirely eliminated.

Advantages, Disadvantages and Benefits – Drop Ship Vendors

Slide14

So what is the correct answer when it comes to your omni-commerce logistics strategy? Bottom line is that this answer will be different for many companies. One size will certainly not fit all, and in almost all cases, the best solution will be to utilize a combination of these solutions optimized to provide the best cost, service and customer experience to fit each retailer.

In order to determine the best combination of omni-commerce logistics components for a given retailer requires the completion and analysis of the business utilizing a sophisticated omni-commerce network strategy model. Feel free to ping me through the contact details below should you like to learn more about these omni-commerce logistics options or the required network strategy model development.

My next article will discuss the most appropriate combinations of these omni-commerce logistics models which will vary across different sku velocities, product types as well as delivery service levels.

In the meantime, hopefully the above review will give you a clearer understanding of your potential logistics options and the related advantages, disadvantages and benefits of each acting as a starting point or perhaps even a reset point for your omni-commerce logistics journey.

Cheers

Jeff Ashcroft

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