Historically, the majority of the world’s consumer products have been distributed to retail stores in bulk, and the most efficient method for handling this merchandise has predominantly been pallet movement and full case selection. But now, e-commerce is fundamentally changing the nature of the retail supply chain. 

As online shopping continues to compete with and, in many instances, overtake bricks-and-mortar retail, traditional retailers are looking for more and more ways to expand their multi-channel operations. According to Datamonitor’s Global Online Retail 2011, the global online retail sector had total revenues of $434.6 billion (USD) in 2010, representing a compound annual growth rate (CAGR) of 16.3% for 2006 to 2010. 2010 alone had a growth rate of 17.8%.

Due to this increase in online sales, many brick and mortar retailers are outgrowing this traditional supply chain infrastructure. In addition to scheduled weekly store deliveries of pallets and cases, retailers must now factor in split-case picking, item-level touches and multi-line item sortation to fulfill fluctuating volumes of online orders that frequently require delivery to consumers within 24 hours. 

Now take these challenges and compound them with the emergence of mobile commerce, or “smartphone shopping.” The instant gratification culture that has taken over with the growth of mobile has put even more onus on the retail supply chain to deliver more products faster, literally from mobile device to doorstep in a matter of hours, not days.

Strain on Supply Chain

From the moment a customer places his or her online order to when that order gets picked, packed, and shipped, every step in the process must be handled efficiently, consistently, and cost-effectively. In e-commerce, it is the distribution center that provides most of the customer experience. The DC is the store. 

Simply delivering goods is no longer an adequate mission for the fulfillment center, and customer satisfaction must be a leading priority. Take, for example, relentless SKU proliferation. Internet retailers need to support an ever-increasing selection of merchandise that typically includes fast moving items along with an ever-growing assortment of many very slow moving items. How these SKUs are picked and handled presents two very different operations.

The ‘new breed’ of retail e-commerce consumer expects a lot more in addition to competitive prices: cross-channel services such as “click-and-collect” and “order-to-deliver;” wider online SKU offerings; in-store kiosks; consistent brand experience across the brick and mortar and online storefronts; order accuracy; fast and free delivery; free returns through any channel; and a mobile retail site. 

Of these expectations, the consumer demand for free and fast delivery is causing supply chain managers the biggest challenge, which retailers need to closely assess to remain competitive. Factoring in also is the threat of under-stocking, influenced by unknown or seasonal demand. An online retailer cannot be caught flatfooted, unable to meet a shopper’s request and risking loss of sales and goodwill.

Specific E-Commerce Challenges 

When these consumer needs are compared to the challenges of distribution in an 
e-commerce environment, there are significant obstacles for fulfillment. These challenges include:

a) Large SKU counts with a very long, slow-moving tail;
b) High and unpredictable growth;
c) High penalty for poor performance resulting in potential brand damage;
d) Uncertain business terrain that demands flexible and adaptive solutions;
e) Demand for real-time and accurate inventory visibility;
f) Small number of orderlines per order;
g) High returns from end customer;
h) Extreme peak season volumes.

As brick and mortar retailers integrate e-commerce and transform into multi-channel organizations, they increasingly are forced to separate the inventory in their supply chains. The challenge with this process relates to having the right systems in place to dynamically process orders for e-commerce channels versus historical store re-stocking fulfillment.

Within e-commerce, where unpredictability is a constant factor, flexibility in the supply chain becomes critical. Flexibility can be derived from implementing the right system, one that can support the fluidity that e-commerce cross-channel services require. 

Fulfillment in Three Dimensions

E-commerce fulfillment is fundamentally a piece-pick operation, which is historically a hands-on procedure. It is perhaps counterintuitive, then, that the right automation will bring about minimized manual touch, resulting in more accurate orders, improved ergonomics, lowered labor costs and travel time, lessened returns and saved space by operating in a smaller footprint.

To be sure, a stepped approach to e-commerce automation, especially where future demand is difficult to predict, is often the best route. With scalable software and infrastructure in place, retailers can build out automation as their e-commerce business grows. In essence, the automation can be targeted. Automation that addresses specific tasks, such as picking for fast or slow-moving SKUs, can sometimes turn a better ROI than completely automating a full warehouse. 

The gold standard of flexibility for any e-commerce business is to be able to easily increase fulfillment throughput and SKU density over time in a capital-efficient manner. Such an order fulfillment system should be able to scale seamlessly with a business year after year.

Data Interchange

Because of the digital nature of e-commerce, its infrastructure actually permits integration of systems to help unify information across multi-channel inventory, order management, promotions, merchandising and distribution systems. Going multi-channel provides a streamlined means for interconnections across all of a retailer’s divisions or business units! 

E-commerce allows companies to record the relevant details of each pallet, parcel, and item being shipped. Parcel shipments can be tracked and proof of delivery quickly confirmed. Retailers can further analyze each customer’s transportation costs and performance, thus helping the retailer negotiate rates and improve service, organically over time.

Retailers suddenly find themselves able to record every customer transaction and track consumer behavior and sentiment. This makes possible the ability for retailers to analyze millions of data, resulting in a real understanding of what consumers are purchasing, how to get into their online carts, and how to become part of their repeat purchase cycle. The result has been the emergence of new retail supply chains that are consumer-focused rather than product-focused. 

The emerging solution for efficient and timely e-commerce order fulfillment is one base on an integrated WMS driving an automated storage and retrieval system, married in the end to efficient goods-to-person piece picking technology. Systems using fast shuttle or robotic bin technology can ensure that real-time inventory is always accurate so that when customers place orders, confirmations of the pick and pack process can be provided back to the consumer in less than 30 minutes.

With the emergence of such automated systems, fully integrated to a retailer's on-line customer interface, a new level of flexibility and efficiency, above and beyond the capabilities of conventional automated and manual material handling systems, can now be realized for the movement of retail e-commerce products. 

Parting Thoughts

E-commerce, and now smartphone shopping, are fundamentally changing the nature of the retail supply chain. Distributors must learn how to adapt to rapidly expanding and changing e-commerce conditions. Efficiently optimizing inventory, storage space, labor, costs, and time in e-retailing is required to attain not only customer satisfaction, but a profitable operation. 

The key to managing this challenge is automated warehousing and distribution technology that has the speed to provide almost immediate feedback to consumers as to the status of their orders, along with the flexibility to adapt to changes in supply chain systems, distribution networks, and processes.

Bill Leber serves as Director of Business Development for North America at Swisslog. Prior to joining Swisslog, Bill worked 26 years for Ciba Specialty Chemicals in a variety of roles including manufacturing, logistics, sales & marketing, business development and general management. Bill received his B.S. degree in Chemical Engineering and an MBA in Management from Rensselaer Polytechnic Institute.