Keeping Up with the E-Giants

Keeping Up with the E-Giants

Whether through automation, warehouse management systems, or outbound quality control, it is imperative to embrace omnichannel fulfillment—or lag behind the leaders.

Since 1995 when Amazon.com shipped its first order and the precursor to eBay held its first online auction, the world of e-commerce continues to evolve and change drastically. The early days of e-commerce were focused on limited items such as books and computers, and now, the selection of items for sale on the web is endless.

Today, the leading online product categories are computers and apparel, footwear and accessories, followed by appliances, electronics, toys/video games, and music and videos. E-commerce has grown to $680 billion worldwide and $197 billion in the U.S.

By 2015, e-commerce is expected to be worth $1.4 trillion of business worldwide and $280 billion in the U.S. By far, the U.S. has the largest online sales, followed by Japan, China, Germany, France, United Kingdom, Italy, Canada, Spain and South Korea.

Online sales in the U.S. currently represents approximately 9% of total retail sales, which is up 5% from five years ago. The online sales ratio is 10% in the United Kingdom, 3% in Asia Pacific, and 2% in Latin America.

Many experts project that, globally, online sales will top out at as much as 20% of total sales. Online penetration by category varies widely with computers topping the list at 52%, followed by books at 20%, music and video at 16%, electronics 14%, toys and video games 13%, sporting goods 11%, jewelry 10%, apparel, footwear and accessories 9%, and flowers 8%.

Blurring Lines between Retailing and E-tailing

In the past, for the majority of retailers, there was only one channel. Of course there were major exceptions, such as Sears and J.C. Penney, that also had a large catalog business. After 1995, more and more traditional retailers began a direct-to-consumer business through the web. Now, almost all large retailers also go to market via the web.

This new direct business was competing with the traditional business and created unhealthy competition and rivalries. Some companies even had three channels of distribution: traditional retail, catalog and Internet; this is referred to as multi-channel distribution. Through time, and with the adoption rates of e-commerce, many of these multi-channel distributors blended their catalog business with their Internet business and dubbed it direct-to-consumer.

As technology advances, it will be harder and harder to tell the difference between a retail sale and an e-commerce sale.

It is estimated today that digital information influences approximately 50% of retail sales. Whether it is a smart phone, website, kiosk, direct mail and catalog, call center, social media, mobile device, gaming console, television, or a networked appliance, consumers are using digital information to influence their retail purchases.

The number of retail sales influenced by these devices is expected to continue increasing in the future. Many refer to this blend of technology and retail as omnichannel.

There are many examples of omnichannel. Consider the example of shopping for shoes at a department store and finding the store is out of stock on the required shoe size. The sales associate looks at inventory online and determines that a neighboring store has the shoes in stock. He then offers the customer the option to pick them up in-store or have them shipped directly to the customer’s home overnight. This example is real and happens every day.

Another example is shopping for a flat screen television at the local electronics store while searching online with a smart phone for a better price at a club store and using that lower price to garner the price matching discount at the electronics store.

Customers are out in front of the omnichannel trend, and as the use of smart phones and iPads and tablets increase, this will continue. Retailers that do not embrace this trend may find themselves lagging behind the leaders and losing critical market share.

How e-Commerce

Leads the Way

Clearly Amazon is the market leader when it comes to e-commerce. Nearly all e-commerce companies follow them closely and try to emulate their practices. Amazon has 18% market share in e-commerce in the U.S., and that is estimated to increase to 33% by 2016. Amazon’s worldwide sales are greater than $34 billion, and in 2010, they grew by 39.5%.

With the expectation that Amazon will outpace e-commerce growth by 2 to 1, competitors who are hoping to keep pace with them must do the same. Amazon sets the tempo of the online industry with low costs, wide selection, convenience and customer service.

Low Costs

Amazon’s low-cost lead is attributed to several areas. First of all, Amazon has a sales tax advantage over many of its competitors, which automatically puts them at a lower cost position. Likewise, the company’s large scale provides advantages in operating costs, while their large number of facilities and inventory strategies allow them to position inventory closer to customers, helping minimize outbound shipping costs.

The leaders certainly have an advantage in scale, which may not be the case for many competitors. However, there are two key areas to focus on to help reduce costs and improve margins.

The first is fulfillment center efficiencies, which is commonly tracked as fulfillment cost per unit. This includes all costs associated with processing within the four walls of the distribution center. There are many strategies employed to reduce cost per unit such as exploiting the order profile to look for opportunities to efficiently process orders. One such example is “single line” orders. Typically there are a high percentage of orders which only have a single line and unit per order. These orders can be handled extremely efficiently with batch picking and automated packaging.

The second opportunity to reduce cost is on the shipping side. Savings can be gained by performing a competitive bid with parcel carriers to obtain the best possible discounts and service levels.

Wide Selection

Since its conception, Amazon has felt that depth and breadth of products was a key competitive advantage. Today, they have taken that approach to a large number of categories, and through the Amazon Marketplace, they are able to provide a massive selection of products to online consumers.

Many other e-tailers have made a wide selection of products a key pursuit of theirs. They have also adapted their fulfillment centers to handle a wide range of products and have the flexibility to expand new products when required.

Internet fulfillment centers vary from traditional distribution centers in which the majority of product is stored in case locations and there is limited pallet storage.

A successful strategy that facilitates wide product selection is having very large picking areas with picking directly out of case storage. The strategy also includes having faster moving items in multiple locations throughout the picking area and having only a single case of slow moving items in the picking area.

Advances in warehouse management system functionality and order management make it possible to optimize pick paths and minimize travel while maintaining a large pick area with a wide assortment of products.

Convenience

Amazon has developed many innovations in regard to online convenience, most notably with their one-click checkout and advanced search and recommendation functionality. Amazon’s scale also provides an advantage in shipping speed. A true measure of convenience is the average delivery time from click to delivery. Amazon and some of the other leaders average three days, which includes order processing time, credit check, fraud check, and other order processing requirements, plus shipping transit time.

The leaders are able to provide superior delivery speed due to having a multi-facility distribution strategy and optimally locating their facilities near customer demand to minimize in-transit time. With best-in-class order processing times of one day, the leaders are averaging three days of in-transit shipping time to reach their customers.

A single fulfillment center strategy will not be able to meet those numbers but a strategy with two distribution centers can approach those numbers. To compete with the leaders on delivery speed, a distribution network optimization can help locate fulfillment centers near demand to help reduce transit time and increase customer convenience.

Customer Service

Amazon’s Zappos has always made customer service their top priority, and it has been a hallmark of the company. Their first of ten core values is to “deliver WOW through service.” On the Zappos website WOW is defined by the following: free shipping, free returns, free 365 day return policy, 24/7 customer service and happiness.

It is clear that customer service is a key priority among online shoppers and a real differentiator for the leaders. A key component of customer service is order accuracy, and it is imperative that fulfillment centers pay close attention to this. Whether accuracy is enhanced through automation, warehouse management systems, or outbound quality control, it is imperative that the followers focus on this area and do not lose ground to the leaders.

Keeping Up with Amazon

Although Internet fulfillment has existed for less than 20 years, there has been a significant evolution in how products are purchased online and the expectations of online shopping and fulfillment. Amazon is the leader in many areas and is poised to continue to capture market share. If others wish to gain market share, they must continue to focus on reducing costs, providing a broad assortment of products, providing convenience, and finally providing high levels of customer service.

Jim Tompkins is CEO of Tompkins International (www.tompkinsinc.com), a supply chain consulting firm, and Dan Avila is a partner with the firm. Tompkins is also a member of MH&L’s Editorial Advisory Board.

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