The dawning of the $1 trillion e-commerce market: meeting delivery expectations and staying profitable

You’d think consumer demand would be hitting the pause button. But retail e-commerce sales remain strong despite 8 percent inflation and concerns that a recession may be in the offing. Indeed, US e-commerce sales have topped $1 trillion for the first time.

That puts shippers, still reeling from the pandemic and resulting supply chain snafus, under significant pressure. High consumer expectations aren’t helping. For many customers, next- or same-day-delivery, free shipping and returns, and real-time updates have simply become the price of their patronage. Surveys consistently show that 40 percent of consumers ignore sellers that don’t offer free shipping or return options. As a result, same-day delivery is forecast to grow by 21 percent annually through 2024.

Meanwhile, the cost of delivering is on the rise. Labor and fuel costs are up significantly, and shippers have invested heavily in facilities to be closer to customers. Together these factors are threatening to put a dent in profitability. In short, in a race to meet customer demands regardless of cost, many companies are overextending themselves. It’s simply not sustainable.

Finding the right path to profitability

There’s a better way: fit-for-purpose fulfillment.

What companies need is a comprehensive approach with three imperatives. First, customer services and experience remain at the core. Second is designing the most efficient networks, fulfillment centers, and delivering solutions to meet the customer service and forecasted demands. And finally, there is a clear, realistic understanding of the financial outcomes to ensure the model is attractive. Too often, especially during COVID, shippers have focused on just one or two of these imperatives. But failure to address all three as an interconnected whole is no longer viable.

Such an interconnected fulfillment approach establishes a virtuous circle in which the delivery solutions and the subsequent offering inform one another in a constant feedback loop.

A fit-for-purpose fulfillment strategy can take many forms. For example, a network and fulfillment strategy could emphasize speed and service to customers. Typically, this would require inventory closer to the customer (for example, store, MFC, or close RDC), faster delivery solutions (for example, two-day, sub-same-day), and greater visibility. The faster the solution and further inventory is from the customer, the higher the fulfillment cost. To be profitable, this would require a higher gross margin. Alternatively, a lower service model could open up a larger assortment shipped from a more central FC or even supplier (including supplier plant DC for DTC). This could be lower cost, lower inventory yet open up a wider, more unique assortment.

Regardless of what strategy a company chooses to pursue, a common set of guiding principles must drive decision-making.

·???????Customer experience is still front and center. Offerings must be designed to meet the delivery expectations of retail and business customers, informed by commercial realities and cost curve trade-offs.

·???????Margins set the parameters. The margin equation must be incorporated into the service offering. That means analyzing demand—by product line, geography, season, peak, time of day or week, and delivery option—is essential.

·???????Digital orchestration makes it happen. Data needs to inform the last-mile offering, providing end-to-end shipment visibility. These analytics ensure both cost-efficient fulfillment execution and real-time customer transparency and communication.

·???????“Being you” is central to the offering. Follow-the-leader is not the answer. Companies each have distinct economics, customer bases, market positions, and business objectives. While best practices are useful, a company’s unique attributes are central to developing and executing a successful set of service options.

Fit-for-purpose in action

Fulfillment innovation can take many forms, and even the largest players are still experimenting with ways to create a great customer experience at a reasonable cost. For example, Home Depot incorporates a diverse fleet of third-party and in-house cars, vans, and trucks, including flatbeds. They are aiming to build out 150 fulfillment centers and cross-dock locations for local, big, bulk, and flatbed loads. At the same time, they offer incentives for customer pickup. Amazon pairs artificial intelligence (AI) and machine learning (ML) with automation. Its customer order/network density optimizer (CONDOR) algorithm optimizes miles driven, including split shipments.

Elsewhere, shippers are using a range of technologies, from integrated control towers and inbound virtual networks to warehouse software that adjusts product flow in real time to optimize deliveries. Others are addressing labor and retention issues with workplace safety, flexible work, and childcare programs for warehouse employees. And still, others are concentrating on customer priorities by adding customer-focused last-mile capabilities for which consumers say they would be willing to pay extra.

Recalibrating the economics of delivery is achievable. For shippers, the challenge is finding innovative ways to control the cost of fulfillment and transportation while accommodating evolving customer preferences. But by harnessing the power of analytics and emerging technologies, companies can deliver a unique value proposition to their customers both now and in the years to come.

This article was written by Jeff and Ingo and sent as part of a monthly perspective Kearney shares with our clients on the bigger trends unfolding across the operations landscape.

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Jeff Sexstone is a partner in Kearney’s strategic operations practice with more than 20 years of experience in e-commerce fulfillment and integrated business planning. He is based in Atlanta.

Ingo Schr?ter is a partner in Kearney’s strategic operations practice with more than 20 years of consulting experience in supply chain management, procurement, and logistics. He is based in Munich.