The e-commerce market is growing rapidly as more and more people are willing to buy goods and services online. At the same time, retailers are facing more demanding consumers. Consumers expect next day delivery in a narrow time slot and at a self chosen location without a surcharge. In addition, they want to switch interchangeably between online and offline channels for the delivery and the returns of their goods. Retailers need extensive fulfillment capabilities to succeed in this more and more complex market.
Online pure players such as Amazon tend to be the forerunners in the e-commerce market. New concepts and services are launched rapidly. Delivery on Sunday, pick-up-point at offices and delivery by drones are just a couple examples. The question is whether these pilot services will be robust, future proof and profitable in the long run.
Due to the growth in online volumes, growth in customer expectations and focus on delivery costs, retailers are rushing to redesign their e-fulfillment network.
Most retailers are struggling with the fulfillment and delivery of products to their consumers, especially the traditional retailers who own stores. Traditional retailers are facing issues such as:
- The product range to be offered on the internet
- The way products will be fulfilled and distributed (e-fulfillment model)
- The services at delivery
- Whether they should outsource their fulfillment operations.
In this blog, five e-fulfillment models will be described and explained. We will outline the drivers for each of these models, showing why retailers chose for a specific e-fulfillment model for (part of) their products.
An e-fulfillment model displays the way products flow from the retailer’s suppliers to their consumers. When looking at the market, five pure models can be distinguished for the fulfillment of products in the online channel. Figure 1 shows a graphical presentation of each of the models.
- Drop shipments: Products bought at an online retailer are fulfilled directly by the supplier of the product. The retailer does not add any logistical service to the product.
- Direct supplies to e-commerce DC: Products are delivered from the supplier directly to the retailer’s dedicated warehouse for the online channel (eDC).
- Combined online & offline DC: Products are delivered to a normal distribution center (DC) of the retailer. This DC is used for the online as well as the offline channels.
- Pick-in-store: Products ordered online are picked in one of the retailer’s physical shops.
- Traditional DC supplies e-commerce DC: Products ordered online are delivered from a dedicated eDC which is supplied from a normal DC by suppliers.
Next, we’ll outline the reasons retailers choose each model.
1. Current physical infra-structure
The most important driver for selecting an e-fulfillment model is the retailer’s physical infrastructure of warehouses and stores. The starting point of each retailer is different and it is not possible pick-in-store if there is not a national network supporting this. The offline and online network can reinforce each other, by taking advantage of economies of scale.
Many retailers are organized locally, for example in a franchise model. This greatly complicates the online channel, because the customer expects to deal with a single party. For example in-store returns will confront shop owners with costs but they do not profit from online sales if this is managed an independent entity. Also cannibalization of offline sales is a challenge when consumers shift their spending to the online channel.
3. Product type (fresh / slow-moving / price / volume / value)
Product characteristics are another important driver for selecting an e-fulfillment model. The difference between slow-movers and fast-moving product has a large influence. Because the online shopping space is unlimited, slow-movers can be added without effort. Fulfillment of these items can be challenging because physical storage space is costly. In this case drop-shipments are a good option.
4. Online revenue
Most retailers start their online channel as a pilot to learn about the market. A key consideration at this stage are the investment costs, and optimize operations once sales increase. Most brick-and-mortar retailers start their e-fulfillment in-house as part of their offline operations and later outsource these activities after some time to benefit from the economies of scale that specialists can leverage. These companies can invest in mechanized solutions and use their buying power to negotiate better contracts with delivery partners as a result of their scale. However, the larger online retailers consider in-sourcing the operations as soon as they reach the tipping point themselves in order to cut out the middle man. In fact some large online shops are turning their e-fulfillment operation into a profit center by offering it as a service to others, a good example of this is the Amazon marketplace.
In a world of where lead times and delivery performance are becoming key differentiators, retailers need to be able to guarantee good service. Value added services increase sales and build brand intimacy. In the furniture industry it is common to install the product and to take care of the old product and other waste. Electronic retailers are moving in this direction as well.