As online retail sales gain significance hitherto unheard of, reaching 5.2 per cent of all retail sales in 2007, e-fulfilment is no longer an issue that can be ignored. For many high street brands online sales are now critical to overall profitability. Just make sure you get it right.
What exactly is e-fulfilment? In supply chain circles, fulfilment is well understood as the processes centred around order preparation/picking, dispatch and physical distribution to, say, a retail outlet. But with the prefix of an “e”, fulfilment takes on a very specific meaning relating to the order picking, dispatch and distribution of goods for online customers.
Fulfilling orders for online sales is a booming sector for logistics service providers and reflects the tremendous growth in online retail sales in recent years. According to Verdict Research, online retail sales grew from virtually nothing in 1996 to £14.7bn in 2007 – accounting for 5.2 per cent of all retail sales. And Verdict expects this to more than treble by 2012 to £44.5bn.
But fulfilling online orders requires a very different distribution strategy, one geared to the order-picking, packaging and delivery of much smaller order quantities (more often than not single items), in contrast to the high street retail distribution operations designed for replenishing high street stores in much greater quantities, involving case loads or pallet loads of goods.
However, with online sales gaining a dominance that was previously unheard of – John Lewis’ online business is now its largest store – it is becoming difficult to draw a distinct line between high street and online approaches. One important consideration these days is that consumers expect the same level of service and product offering from a brand across both its high street retail outlets and its online shop front. Price, product range and service have to be consistent, regardless of the channel, especially as research indicates that 47 per cent of customers believe that if a product isn’t available online it won’t be in the stores either, which could lead to the risk of the online channel letting down the core brand.
Complicating matters still further, consumers now expect to be able to “mix and match” the way they use channels, perhaps researching prices online and buying on the high street, or buying online and picking up from a store. What’s more, consumers want to be able to buy online and return goods to a store. This has created considerable challenges for retailers in meeting these needs and has led many forward thinking retailers to adopt an integrated multi-channel retailing strategy.
But with this change in reaching out for online spend retailers are often unaware of the differences in fulfilment strategy that are needed to maintain efficiency in the supply chain. Some believe that running updates on transactions on a daily basis is sufficient, which might be okay on the high street, but in online retailing this misses a key advantage of the web – its immediacy.
Mark Needham, director of integration at specialist e-fulfilment logistics services company, iForce, explains, “If we have stock in at 8am in the morning, then we would far rather be selling that product by 9am, rather than waiting a whole day. It’s a bit of an eye-opener for new clients when they realise that we normally update our files every five to 15 minutes, which means that we can update inventory figures for the web front-end very quickly and therefore increase sales through greater availability of stock.”
Another popular preconception held by retailers new to e-fulfilment is that you just treat your e-fulfilment facility as you would any store. So if a store sells a single item, you replenish a single item. But Needham emphasises the importance of fulfilling in singles but replenishing in cases and pallet loads, “you can move a lot of stock inbound quickly, which is far more cost efficient than bringing goods in as singles”.
The team responsible for integrating new business at iForce has to respond to the growing demand for scaleable operations, necessary given the very high growth rates experienced in online sales.
A prime example is department store, John Lewis. The retailer’s online business has grown exponentially in recent years and has now just moved into the top slot becoming its largest outlet, taking more orders than the company’s flagship Oxford Street branch.
John Lewis’ e-fulfilment operations started out in just a corner of one of iForce’s warehouses but soon took over the entire shed. It was not long before a second iForce facility was needed. Then at the end of 2006 it became apparent that it would not be able to grow and meet its next peak demand, so the decision was taken to move from two sheds into a larger single operation. Keeping the contract with iForce a lease was signed in July 2007 for a 230,000 sq ft warehouse in Redditch and by mid-October Redd42 went into operation.
Illustrating the importance big high street brands are placing on web sales, Tesco Direct was set up in September 2006 and in its first year of operation achieved revenues of £230 million. That might be fairly small beer for Tesco but such rapid growth gives an indication as to the way things are heading.
Also, department store British Home Stores, has just signed a three-year contract with DHL worth £3.6 million for e-fulfilment services. DHL will process more than 150,000 customer orders and returns across the retailer’s clothing, gifts, home and lighting lines each year. The plan is to grow its online ordering business, reduce operating costs and improve service levels.
According to John Owen, general manager e-commerce at DHL Exel Supply Chain, one of the key differences of an e-fulfilment operation is that it’s “really a mix of being a fulfilment centre and a retail operation.
“The next person who is going to touch that product after you have packed it is going to be the end consumer. Therefore you need to have a set of processes in place that produce a high degree of accuracy. When it’s shipped out to the customer, it has to be absolutely the right product – the right size and colour. A high degree of accuracy is needed in meeting the customer’s expectations and if they have been promised delivery for tomorrow, then that’s when they have to receive that delivery.”
Owen sees “unpredictability” as the biggest challenge in e-fulfilment. “We will typically have 30-35 per cent of the week’s demand on the peak day of the week, which is usually a Monday because that’s when you receive the Friday, Saturday and Sunday orders. That daily profile can We will typically have 30-35 per cent of the week’s demand on the peak day of the week, which is usually a Monday because that’s when you receive the Friday, Saturday and Sunday orders.be significantly impacted by the weather – last year we had a fairly poor summer [surely an understatement!], but the August bank holiday was reasonably good, so in the week that followed that August bank holiday the whole profile for that week was different because people had been out and about and the last thing on their mind was ordering on the internet.”
In Owen’s view there are five main approaches to e-fulfilment, appropriate from when a company trials e-commerce, through critical mass to it becoming a core competency.
The first is around leveraging a store fulfilment DC. If a retailer has sufficient space and staff then one option is to use that DC for e-fulfilment by drawing a notional line on the floor denoting where the e-fulfilment operation takes place. Then the DC feeds that e-commerce operation in exactly the same way it would serve any other store, except the store happens to be located in the same physical location.
The second option is multi-user e-fulfilment. Here the operation would be outsourced to a 3PL and integrated into a multi-user e-fulfilment operation, sharing facilities with others and running alongside other e-fulfilment operations, operating a standard set of processes. This offers the potential for a fast and cost effective start up.
The third offering from a 3PL would be a dedicated e-fulfilment operation, and that may be centred around the processes a 3PL, such as DHL, operate or are maybe more tailored to the retailer’s specific process needs. This could be in a dedicated warehouse or co-located in a facility that is also undertaking other activities. It could stand alone, or they could be sharing the facility but operating their own processes.
Option number four is direct to consumer. If the retailer is looking to offer a wider range of product on the internet than it is offering through its stores, one possible solution is for the 3PL to organise the collection from the supplier, linking that in with the retailer’s own stock product and shipping out to the end consumer. In this scenario the product never sits in the 3PL or retailer’s DC, it goes direct from the vendor.
The final option is the integrated multi-channel approach. This is very similar to leveraging the store fulfilment DC, except that systems have been developed so that multi-channel orders sit in with store fulfilment orders. The benefit being that the double handling associated with option one (ie the store fulfilment DC picks items to go into a separate pick pack area before being shipped outwards) disappears, so that it’s picked just once. Owen says: “Typically, you should be expecting to gain 25-30 per cent labour savings, but it often takes 18 months to two years of systems development to integrate the systems.”
“Many companies will start with a basic approach, until they understand what their needs for the market are, but it’s only once e-commerce becomes a core competency that companies tend to go down the integrated multi-channel route.”
Another key concern is returns. Owen believes retailers “need to give as much thought to returns as they do their initial offering to the market place. It’s all around how easy or difficult you make it for customers to return goods. The top end retailers make it as easy as possible for the consumer to return their goods and to give them the choice of returning to a store, even if they have ordered over the Internet. This is particularly complex where there are concessions in the retailer’s stores.”
An increasing demand for more efficient e-fulfilment operations has focused attention on the potential for automated material handling solutions. Steve Richmond of Jungheinrich’s projects division says: “Clearly the dramatic rise in internet shopping has forced many retailers and their logistics service providers into a fundamental rethink of their warehouse design. Faced with falling distribution volumes but increasing order frequencies, the ability to flex picking cycles and prioritise urgent orders is critical to winning online customers.” Richmond believes that retailers with standard warehouse installations will be left scratching their heads and wondering where they went wrong as higher volumes of sales come from internet savvy consumers who insist on next day delivery of single item orders. He says: “As a result, traditional bulk stores are giving way to facilities with greater numbers of picking faces and increased picking efficiencies.”
“High volume retail distribution centres are not suitable for picking single customer orders,” says Paul Brooks, divisional director at logistics services company, Unipart Logistics. “Having said that, in certain circumstances, such as sometimes seen in the fashion sector, if the retail DC tends to pick in singles and each SKU is not particularly high moving, then integrated solutions may be appropriate. If you have a heavy collation factor then it’s less suitable; if you have more singles then you want to align it with the environment because you can then bulk pick and pack out separately. If you have between two and three items per order, then you are going to have to have some sort of forward pick location within your DC that is unique to your multi-channel offer.”
Brooks sees e-fulfilment as one of the fastest growing areas of business. Unipart Logistics has recently won a contract with pet foods and pet accessories retailer, Pets at Home, to service the e-fulfilment needs of its new online channel which has been set up to complement the company’s network of over 200 stores.
“With our main retail store business doing so well and growth for the full range of our products online as yet unproven, we were looking for a low-risk way to assess the potential of an online offering with a great customer experience,” says Catriona Marshall, commercial director of Pets at Home.
Phil Steeds, sales director at TGW in the UK, sees great potential for the application of automation within the e-fulfilment operations of the online grocery retail sector. “The only company that has made big investments in picking solutions is Ocado, with highly automated facilities in Hatfield. They are setting the standard for where things are going,” he says. “However, Tesco has gone down a manual route, picking in-store through to manual picking within warehouses.”
But according to Steeds, “Ocado have been very focused on how they scale things and the volumes they have available to them, which is significantly different to what you would get in a pick-in-store operation.”
Many companies will start with a basic approach, until they understand what their needs for the market are, but it’s only once e-commerce becomes a core competency that companies tend to go down the integrated multi-channel route.
It’s a bit of an eye-opener for new clients when they realise that we normally update our files every five to 15 minutes which means that we can update inventory figures for the web front-end very quickly.