Selling Online? What It Means for Your Logistics Network Design

This article was first published in the July/July 2018 issue and with kind permission from MHD Supply Chain Solutions.

Online retail is accounting for an ever-larger part of total retail sales. Consumers armed with smartphones now expect increased choice, convenience, and price savings by buying online. If enterprises are to provide such advantages, their logistics must be organised to match. ‘Born digital’ companies like Amazon and Alibaba started with a green field. Now, traditional ‘bricks and mortar’ companies like supermarket chain Woolworths in Australia and international home furnishings company IKEA are adding ecommerce to operations already in place to become ‘clicks and mortar’ operations.

Make No Assumptions

Ideally, in a clicks and mortar business, logistics activities would be the same between fulfilment of online and physical sales. A common logistics network means simplification, efficiency, overall reduction of inventory and effort, and lower costs. By comparison, ‘variation breeds inventory’ and other expenses.

However, even if the process of designing a network stays the same, no assumptions can be made about current logistics practices being optimised for online retail. For example:

• In physical retailing, your sales and service points, perhaps tens or hundreds of them, are probably collocated with geographical concentrations of customers. Your regional distribution centres may follow a similar pattern. At each outlet local sales staff serve customer who travel to the outlets to buy.
• In online retailing, your sales people may all be in just one customer call centre on the Web. Your distribution centres (perhaps now just one or two big ones) may be remote from any cities. On the other hand, you now need to ship to thousands or millions of customer locations (their home addresses).

Let Customer Needs Drive Network Design

Logistics network design for online retail must start from your customer service offer. Factors for consideration include:

• Order size and predictability. In online retailing, orders tend to be individually smaller and less predictable than those shipped to physical sales outlets.
• Shipping destinations. With internet access widely available, ecommerce customer demand can originate almost anywhere.
• International shipments. E-fulfilment may be more complex internationally than shipping for traditional distribution.
• Return logistics. Online retailing may have higher product return rates for a variety of reasons. Examples are unsuitability of products that consumers cannot see or handle before ordering, damage in transit, or undeliverability. Some products generate especially high returns. Statistics indicate that online consumers return 20% to 30% of orders of apparel.

Fast Shipment, Free Delivery, and Other Online Retail Myths

Unfortunately, some traditional companies rushed into online retail. They were lured by new revenue or scared of falling behind competitors but omitted to plan the logistics. Attractive conditions were proposed to customers without checking the financial impact. Free home delivery was a prime example. This was often offered in haste and regretted at leisure, especially with last-mile shipment expenses accounting for as much as 28% of total transport costs.

Although product range, convenience, delivery speed, and prices are all factors in the design of a logistics network, trade-offs between them are possible.

Unless you have a good reason for trying to be best-in-class in each category, your online retail logistics network may achieve overall customer satisfaction and profitability without offering fast shipment, free delivery, or rock-bottom prices.

• Retailers of mass-produced novelty goods and electronics accessories in China offer low prices but take a week or more to deliver. By batching international shipments into one container travelling by sea, for example, they can reduce shipping expenses. Customers in Europe and the US accept the lead time in exchange for low cost.
• JingDong, the biggest online competitor to Alibaba in China, delivers products to password-protected pickup lockers and to nearby convenience stores for customers when home delivery slots are not mutually agreeable.
• Somebody, somewhere, will always offer a given product at a lower price. So, why engage in a lose-lose price war? Amazon prices while competitive are not always the lowest. On the other hand, the company offers huge choice, a reliable, secure payment mechanism, and a simple returns policy, and has gained an enviable reputation for customer satisfaction and loyalty.
• IKEA makes no bones about charging for delivery. The firm’s website shows clearly how much extra customers will pay. However, for avoiding the hassle of trying to pick up bulky items like sofas directly from a physical sales outlet and counterbalanced by the distinctive ‘only-at-IKEA’ products, the delivery charge is acceptable to many consumers.

Basic Online Retail Network Design

Online retail has grown more strongly for articles like electronic products, sports apparel, and fashion goods. These products are relatively easy to send through the post, compared to others such as groceries. Online logistics network design for easy-to-post products may look like this:

• Large centres for e-fulfilment with warehousing and picking of products for shipping as parcels.
• Parcel hubs, geographically close to the e-fulfilment centres, for sorting parcels by post code.
• Local parcel delivery centres for last-mile delivery.

The e-fulfilment centres may be operated by the retailer or by a supplier or a 3PL. In some cases, the retailer never handles the products it sells online. It takes the customers’ orders via the web or mobile, and issues instructions to the product supplier for fulfilment. This assumes certain guarantees on levels of service by the supplier, to avoid situations where the retailer makes delivery promises to customers that are then not respected.

Getting Smarter About e-Fulfilment

Although online retailing often means dealing with numerous, smaller, unknown customers, it presents a significant opportunity to gather information in ways that may not be possible in physical retailing alone. Because the customer interaction is digital, data can be collected automatically. It can then be used to get acquainted with, analyse, and influence customer behaviour, while optimising logistics activities for efficiency and profitability.

Clicks-and-mortar retailers can also use data to decide if they should fulfil an online order from an e-fulfilment centre or from a physical sales outlet. The trade-off is between labour costs in the sales outlet and transport costs from the e-fulfilment centre. If it also turns out that the sales outlet has excess stock of the product concerned, direct fulfilment from the outlet avoids the transport costs of transferring the product to another location where the product is moving faster.

Omnichannel and Return Logistics

As retailers discover possible commonality between online and physical retail logistics, customers are also pushing for the same standard of service across all channels, including physical sales outlets, phone sales, and online shopping.

Combining and optimising service over multiple channels is naturally more complex than over just one channel.

However, besides the flexibility of fulfilling orders from an e-fulfilment centre or a physical sales outlet, multiplying fulfilment channels can sometimes give clicks-and-mortar companies advantages over pure-play ecommerce firms.

For instance, a product, whether bought in a shop or ordered online, can be delivered at the customer’s option in a shop. The customer can then immediately check for suitability. An unwanted product can be absorbed into shop stock without the extra transport costs of being returned from the customer’s home address.

Similarly, for an unwanted product ordered online and delivered directly to the customer’s address, a clicks-and-mortar retailer can invite a customer to return the product via the nearest physical sales outlet. The retailer saves on return transport costs and gains in ‘foot traffic’ and the possibility that in the shop the customer will buy something else.

(How Much) Should You Do Online Logistics?

There is always the choice of not doing online retail and simply avoiding the issue of online retail network design. A recent study showed that online retail profitability can be hard to achieve in some sectors. Less than half of online fashion goods retailers made money out of their activity. For online grocery, the figure dropped to below 10%. While immediate profit may not be the only objective (Amazon was unprofitable for several years after starting), losses cannot be sustained forever.

However, there are also other options. Companies may choose to restrict the range of products they sell, to match customer needs without sacrificing margins. They may also be well-positioned to use the same supply chain and logistics for a large part of both their online and physical retailing. IKEA for example sells many of its products in its stores as flat-packs. The same products can be delivered ‘as is’ to customers making online purchases. On the other hand, companies may decide to deliberately separate parts of their online and physical sales logistics. UK supermarket chain Tesco recently constructed purpose-built food product picking and fulfillment centres for online sales after having used its existing supermarket infrastructure.

Conclusion

While still growing, online retailing seems unlikely to supplant physical retailing. As large traditional retailers add ecommerce to their activities, large online retailers are integrating physical retail outlets. A recent example was the acquisition by Amazon of Whole Foods Market. The future of retail may be a combination of online and physical retailing supported by hybrid logistics networks, each network designed to the customer requirements and business strategy of the retailer concerned.

About The Author: Rob O’Byrne has 40+ years experience in Supply Chain management. In 1997, he founded the Logistics Bureau Group which has now expanded to provide consulting, performance Benchmarking and Education services.  He even established his own Supply Chain Leaders Academy in 2012 and Supply Chain Leaders Insights in 2016 to follow his passion for education.