In-house Fulfillment Strategies to Help You Scale Your Ecommerce Operation
To say that order fulfillment is an important part of any modern ecommerce business would be an understatement. Order fulfillment is all about getting your product where it needs to be—in the hands of your customers—as cheaply, efficiently, and fast as possible, and that makes it an integral piece of the logistics puzzle. This is especially important for burgeoning ecommerce businesses who are beginning to expand.
Identifying the right distribution model now, while your operation is in its earlier stages, will allow you to build a supply and distribution chain that meets your current as well as your future projected needs. And that reduces the risk that you’ll need an expensive and disruptive overhaul of your operation as volumes and complexity grow.
This will save you a lot of expensive time and resources as your business grows.
So ask yourself: Is the order fulfillment model your operation uses now truly the one that you should be using as you scale? Does it allow you to deliver orders as efficiently and effectively as possible, and will it continue to facilitate your growth as you expand? Is it making the most of the available space in your facility and can it accommodate more SKUs or other changes? Is labor plentiful in your region?
If the answer to any of those questions is “no,” then it would be wise for you to spend some time developing a master order fulfillment strategy that will allow your operation meet current needs and adapt to your growth challenges ahead.
Need an Expert Opinion?
Making sure that your order fulfillment strategy aligns with both your ecommerce operation’s physical limitations and your customers’ demands is crucial to long-term growth and success. Because understanding your options is so important, we’ve pulled together this guide looking at some of the most common issues faced by various types of modern ecommerce businesses, as well as the different technologies and strategies that you can use to make sure you stay competitive in today’s constantly changing ecommerce landscape.
Steps to Take Before Selecting Your Strategy
Before you set out identifying and implementing an order fulfillment strategy for your ecommerce operation, it is important that you spend some time gathering the insights and data that you’ll need to make an effective decision. Otherwise, you may find that the enhancements that you choose ultimately do not benefit your operation and cost you more than just capital, valuable customers.
1. Understand your customers’ behavior.
How your customers interact with your business, and the level of service that they expect from you, will have a tremendous impact on the order fulfillment strategies that you ultimately employ. That’s why it is essential that you have a firm understanding of your customers’ behavior before you set about making any changes to the way that you fulfill orders.
Some questions you should ask include:
How are orders placed?
If you have an ecommerce operation, then at least a portion of your orders are being placed online. But it is also important to understand whether orders are coming from any other channels. In addition to online, can customers place orders through an app, in person, through a mail-in catalog, on the phone, or in some combination?
How orders are placed will be an important consideration as you settle your inventory management system. When you have multiple channels for placing orders, it is crucial that you have real-time insights into your inventory, or else you risk aggravating customers.
In addition to understanding how your customers are placing orders today, it is also important that you anticipate how they will be placing orders in the future: 12, 24, even 36 months from now. Retail and ecommerce are rapidly changing thanks to new technologies—Amazon’s checkout-free stores and drone delivery among them.
As consumers grow more and more accustomed to these and other advancements, they will expect to see them elsewhere, and those expectations could have major repercussions on customer satisfaction, possibly affecting your bottom line.
When do your customers expect their orders to be delivered?
Thanks to Amazon Prime and other online retailers, customers have been trained to expect overnight and next-day delivery—often for free. You need to know what your customers expect in terms of ship time so that you can put in place systems that will allow you to meet those expectations.
In order to meet those expectations, you need to design your operation around the delivery date, but you also need to understand the amount of time you have to process orders on any given day.
For example, if you promise same-day shipment, you have a set a cutoff time when orders can be placed. In order to set your cutoff time, you need to know what the latest time your parcel carriers will pick up. Depending on the distance to your carrier’s facilities, your pick-up time could be between 5–9pm. For a 5pm pick-up, you may have to set your customer order cutoff time at 2–3pm. The shorter the time you have to process late day orders the more you will need a faster, likely automated solution.
Also important: ensuring that if you specify a delivery date and you meet it. 69% of shoppers are less likely to do business with a company in the future if a purchase is not delivered within 2 days of the date promised.
When do your customers shop?
Is demand for your product seasonal? Are there certain times of day that your customers are particularly active? If you promise next day delivery and a customer places an order at midnight, what constitutes “next day”?
You need to know this information to ensure that your facility can handle both seasonal and daily peaks, as well as to plan (and make clear to your customer) daily cutoffs for overnight/next-day shipping. Capacity analysis will help you plan for specific technologies and systems to meet your current and future needs.
2. Understand your typical order.
In order to ensure that whatever systems are ultimately put in place for your ecommerce operation, you need to have a clear understanding of what your typical order looks like because this will help to paint a picture of peak rates, seasonality, and other intricacies that your order fulfillment system will require.
This will inform your own decisions, but also the guidance of any outside experts you choose to bring into the discussion, like a systems integrator or warehouse design consultant.
Important order history data for you to have on hand will vary from industry to industry, but, in general, will include:
- Order volume: How many orders are placed per day
- Average day orders (if an average day exists)
- Peak daily orders
- Average order profile: How many orders per day included certain items (fast movers, slow movers, etc.)
- Lines per order: How many different SKUs are in each order. This is the metric used to calculate your picking efficiency. It can also point you in a direction for the fulfillment strategy (ex. 50% are single line orders)
- Do most of your orders have similar (fast moving SKU’s)? How many only have fast movers?
- What percentage of your orders have a slow moving SKU?
- Date and time (up to the hour, or minute) that the order was picked: This will show when an item is picked compared to when it leaves the facility (system to door), which can help to point out inefficiencies in your processes. Knowing the baseline allows you to find ways to increase efficiency so that you can handle more items and orders per day
- Items in the order: To understand the number of units picked
- When an order was placed: To see how it relates to pick time and ship time
In the best case, you should have data for the last year’s worth of orders. In many cases, six months’ worth of data will be sufficient. Regardless of the amount of historical data you have, it should be sure to include the seasonal or peak periods of your business.
But here is a quick rule of thumb: Depending on how much SKU turnover your facility experiences, more or less data may be better. For example, if you turn over a lot of SKUs on a regular basis, a 6-month or 3-month window of data may be better. As always, though, it is better to have too much data and have to narrow it down than to have too little data.
Also worth noting are any exemptions or asterisks. If there is anything in your product handling, storage, or order fulfillment workflows that isn’t reflected in the data, but could impact design, it is good to know. This might include inventory such as oversized items, sales-promotion related variances, and other abnormalities.
3. Understand your current infrastructure.
You will, naturally, need to consider your current infrastructure when settling on an order fulfillment strategy for your ecommerce operation, as this will form the skeleton of whatever strategy you move forward with.
Important questions about infrastructure that you should consider include:
How do you currently fulfill orders, and is that strategy working well for you?
In the earliest stages of an ecommerce operation, it’s possible to be highly successful fulfilling orders on a completely manual basis: human workers picking, packaging, and shipping orders to customers. But as your operation begins to grow, you need to decide when it makes sense to bring automation into the equation.
Take a look at how you are currently fulfilling your orders. Whether it is completely manual or you have implemented some sort of automation, ask yourself: Is this scalable? Would it work with double the number of SKUs? Double the daily orders? Would it work in a facility twice the size of your current facility? Or in an operation based out of multiple warehouses, based in multiple states or multiple countries? Now ask yourself: Even if it would be scalable, would it be the most efficient strategy or would you be wiser to consider putting a different plan in place?
What are your parcel carrier options?
There are several questions in this category that need to be answered. They will help you define the amount of time you have to process orders to meet the service levels (SLA) you promise your customers. You need to know how many orders you have to process at the end of the day. Let’s face it, most customers wait until the last minute to place their orders.
- What is your SLA?
- Orders shipped same or next day?
- Guaranteed delivery date (next day or 2-day)?
- How is freight paid
- Shipped for “free” or included in the price?
- Customer-paid shipping?
- Orders over a certain amount (usually $35.00–$50.00)
- What carriers offer service in your pick-up area and delivery areas?
- How late will they pick up from your fulfillment center?
- What do they charge for your SLA and delivery areas?
- Do they deliver on the days you offer your customers (Saturday and Sunday)?
What does your current supply chain look like?
Does your operation consist of a single warehouse serving a single state or region? Do you have multiple warehouses spread across the country or world? How many warehouses? How many different jurisdictions? Does your business have physical retail space in addition warehouses, or do you operate entirely on a direct-to-customer business model? How do these facilities communicate with each other to paint a picture of accurate inventory levels?
The answer to these questions will play an outsized role in determining the strategies you utilize in your operation, either opening doors (and options) or closing them, so it’s important to have a clear sense of your distribution architecture before you begin considering strategies to put in place.
What are your future plans for expansion/growth?
Though your immediate concern is, of course, going to be ensuring your current demands are met, it is important to have a sense of how you see your operation growing and performing in the next 3 to 5 years. After all, you don’t want to put new systems and processes in place now only to need to replace them in a few years due to growth. Remember that growth doesn’t only mean the volume of orders. Think about what you will have to do to get the volume growth. Will you have to add additional SKUs or entirely new product categories? If you are currently 100% direct to consumer, will growth include selling to retailers or opening your own stores? When you grow will entirely new market segments require new SLA’s?
Order Fulfillment Strategies for Ecommerce Operations Beginning to Scale
Which order fulfillment strategy you choose to employ for your ecommerce operation will depend on your answers to the questions above, as well as some other factors.
That being said, below we discuss some of the more common order fulfillment strategies used by ecommerce operations. In addition to outlining what these strategies entail, we also discuss some of the common issues that an operation employing these strategies may experience, as well as the different kinds of technology and automation that can be put in place to ease these concerns.
1. Direct-to-Consumer Order Fulfillment
Direct-to-consumer order fulfillment is an order fulfillment strategy wherein an ecommerce operation receives an order from a customer and then ships that order directly to the customer. Whether the customer is another business (B2B) or an end user (B2C) doesn’t change the classification.
How exactly direct-to-consumer order fulfillment works will depend on the size and maturity of your ecommerce operation. Smaller and younger operations may have a single facility that acts as a corporate headquarters as well as a warehouse that stores inventory, while more established operations may have multiple warehouses responsible for servicing different states, regions, or countries.
In either case, when an order is placed, workers within the warehouse are responsible for all steps of processing: Picking, packing, and shipping.
Common Problems with Direct-to-Consumer Order Fulfillment
Dealing with SKU proliferation and its consequences is one of the most challenging aspects of operating within a direct-to-consumer order fulfillment model.
Nearly all ecommerce operations will experience SKU proliferation while they are in business. It’s a natural part of the business cycle, which allows an operation to continuously improve and build upon their product offerings to capture more revenue from their customers.
But as customers demand more and more items, ecommerce operations are forced to stock a larger and larger number of SKUs. According to the Pareto Rule, only 20% of SKUs will account for 80% of your business. The more your SKU count grows that ratio will get worse. This means that each additional SKU added will represent a smaller and smaller portion of revenue and profit.
Unfortunately, this doesn’t mean that an operation can decide only to stock its fast movers: If a customer is unable to complete their whole order in a single transaction through your business, they are liable to turn to other sellers who can meet their needs and get it all shipped for free. To retain business, operations must stock the SKUs that their customers expect and want, even if they are slow moving.
This can lead to a number of problems, including:
- Inefficient inventory slotting: Naturally, you are going to stock less of your slow movers than your fast movers. This means that you are producing (or purchasing) lesser amounts of your slow-moving inventory—often partial cases and totes. These are more difficult to slot than full cases due to poor cube utilization.
- Cumbersome and expensive picking processes: The more inventory you have, the more aisles, racks, and general space you will need to house it. All of this space adds up to longer travel distances for your pickers, which translates into longer order cycle times.
- Challenging replenishment practices: As mentioned above, an operation is going to stock less of a slow mover than they are a fast mover. This can make replenishment less cost-effective. It takes more labor to receive and put away a single unit than it does a full pallet of the same SKU.
- Increased overhead: All of that inventory needs to be stored somewhere. This will eventually translate into the need for a larger facility, which brings with it increased costs from utilities, taxes, land purchase, etc. All inventory needs to be managed, so more inventory will require more analysis and handling labor.
How You Can Ensure Success
Obviously, it is critical that you manage your SKU proliferation from the start, choosing only to add SKUs that are likely to translate into profit for your ecommerce operation.
But beyond simply managing the process of SKU proliferation, there are certain technologies that can be put in place in order to make direct-to-consumer order fulfillment more manageable. Automated storage and retrieval systems (AS/RS) and Goods-to-Person (G2P) technology are two solutions that can help you better manage your slow-moving inventory.
One of the reasons that SKU proliferation is such a costly issue for order fulfillment operations is the fact that each inventory item is typically touched a number of times. Each time that inventory needs to be touched or moved, the cost of doing business increases. AS/RS technology can reduce this cost by minimizing the total number of times that inventory is touched.
If slow moving items are received directly into an automated storage and retrieval system, and both the reserve storage and forward picking inventory is found in the automated cell, this can be a game changer for an operation. The AS/RS can shuffle the correct SKUs to the floor-level picking location on a daily (or even hourly) basis, and once a SKU has been picked (for the day or for the shift) it can be automatically returned to the optimal upper-level storage location that i. A new SKU can then automatically be brought down to the pick level.
As a result, the only touch was the picker picking the item.
With the proper analysis, SKUs can be consolidated into subdivided containers with several SKUs in each container. Manual operations can be forced to store one SKU per storage location (rack or shelving) and generate 50% or more unused cube. AS/RS systems don’t require nearly as much space above the container for a picker to reach into and lift the product out: Instead, the system slides the container in and out of the storage location and the product is removed at a remote picking station outside of the storage area.
Additionally, while the automation is moving SKUs to and from the pick and storage location, a replenishment (induction) function can be sustained on a continual or off-shift basis. The AS/RS will, during picking or on an off-shift, bring case/totes from a replenishment-induction station to either a storage or a picking location.
Picking, storage, and replenishment happen at the same time with minimal touches, helping make your operation more efficient and reducing the cost of doing business. Replenishment in AS/RS is much more efficient than manual systems because the product to be replenished is pulled in large batches minimizing travel time and then the putaway function requires no travel at all because the Goods-to-Person principal is used in replenishment also.
Ecommerce operations with medium order volumes (~5000 orders per day) seem to have an increasing average number of lines per order, and that increases the cost to pick an order. This appears to be driven by minimum order size to receive free shipping. Historically, their best way to improve productivity was to increase batch size while they pick discrete orders (usually to a cart).
Shuttle AS/RS systems provide the ability to handle a large amount of SKUs and increase picking productivity. By batch-picking multiple orders, a shuttle-fed pick station can pick 300–500 lines per hour per picker, while significantly reducing the footprint of storage space required.
2. Using Stores as Distribution Nodes
For operations that already have a network of retail locations (i.e., stores) but only a young ecommerce presence, using stores as distribution nodes can be a powerful strategy to accelerate their push into ecommerce order fulfillment and possibly drive more traffic into them.
Centralized shipping from regional distribution centers or warehouses used to be the most efficient way for retail operations to fulfill ecommerce orders, as it allowed them to consolidate inventory and more simply ship product to both stores and customers. But thanks to the explosion of online shopping (BOPS and free shipping), this is no longer the only way of doing business.
By opting to use your existing stores or retail locations as distribution nodes, it’s possible to create what is, in essence, a network of miniature warehouses, which can bring with it a number of powerful benefits including:
- Faster delivery: By stocking items at your retail locations, you can ship from whichever location is closest to your customer, reducing the amount of time that the order will be in transit and keeping the customer happy.
- Lower freight costs: Again, by shipping from the location that is closest to the customer, shipping costs can be dramatically reduced as opposed to shipping from a centralized warehouse.
- Ability to sell older inventory: Not by running sales but by filling orders with the oldest stock from across the retail chain.
- Inventory balancing across your network by using stores as distribution points. This allows you to have a virtual inventory without regard to location, thus reducing overall inventory levels.
- Increased margins: Selling store inventory to ecommerce customers increases inventory turns. This may not increase overall revenue, but increased inventory turns is more profitable for the company.
- Easier returns: You may be able to more easily capture revenue from returned products by repackaging and reselling the product from the store and not incur transportation costs back to the DC if the customer brings the product back in person.
- Increased store traffic: The least costly shipping method for you and your customer is Buy Online Pickup in Store (BOPS). This is especially true with larger bulky products. If you can encourage customers to use BOPS they will be coming into your stores to pick up orders and give you an opportunity to sell them other products and services.
Common Problems with Using Stores as Distribution Nodes
While using stores as distribution nodes can be an effective order fulfillment strategy for the right kind of retail operation who is making the push into ecommerce, it is not without its challenges.
One of the most daunting of these challenges is the likely need for an order management system that is more flexible and integrated than whatever is currently in place. Because orders will be placed from and fulfilled through a number of different channels, it is extremely important that the order and inventory management systems are accurate as to true inventory levels across locations. And because retail locations are notoriously subject to loss (stolen or misplaced goods), regular inventory counts become more critical to keep this data clean.
Additionally, retail locations (especially older locations) generally are not built with order fulfillment in mind. This means that any operation moving to the strategy of using stores as distribution nodes would need to, in essence, retrofit their facilities to handle the fulfillment processes:
- Picking, packing and shipping product from stores
- Training personnel on new processes
- Getting your parcel carriers to provide volume discounts regardless of the packages shipped from any one location
- Putting in place a cost-effective return policy
And while a central warehouse can put in place cost-effective automation technologies to make their operation more efficient, these technologies will typically be out of reach for most retail locations. This may, ultimately, increase the cost of order fulfillment on a per-touch basis if not handled judiciously. Depending on the volume shipped from any one store it may require additional labor at the store, especially during seasonal peaks.
How You Can Ensure Success
That being said, there are ways that you can make the strategy of using stores as distribution nodes work for your operation.
The single most important step that you can take will be to put in place proper inventory and order management systems. The right system will track all of the inventory both in your centralized warehouses and DCs, as well as at each retail location. It will also need to track orders in-house as well as determine the location that it will be most efficient to ship from. The more accurate these systems are, the better the service will be to your customers.
Beyond this, individual retail locations will likely need to undergo at least some kind of retrofitting to enable direct shipping. Because most retail stores were not designed to pick, pack, and ship product, you will need to have space to store shipping materials (boxes, bags, void fill material, tape, etc.) and pack/ship those orders.
Vertical Lift Modules (VLM) are a great automation technology that can be deployed in both the DC and retail location where floor space is at a premium or where products have a high cost and/or require additional security. They use every bit of overhead space, restrict access to the product, and are also faster than an employee walking across a 20,000 square foot store.
BOPS could also change the profile of the orders your DC ships to your stores. The orders may be larger and have a wider range of SKUs. This may make it possible to put in place automation at your central warehouse which will make replenishing product at your individual retail locations easier. For example, it may make sense to use an AS/RS system to pick larger orders that have more SKUs and require more travel time in a manual picking operation.
3. Omni-Channel Order Fulfillment
Omni-channel order fulfillment is a very broad term that has evolved to mean many things to many different people.
At its heart, omni-channel order fulfillment allows a customer to buy product and place orders through any of a number of sales channels—from your brick-and-mortar store to your website or mobile application to your product catalog—and have it delivered through any of a number of shipping channels, whether that be buying online and picking up in store (BOPS), direct delivery, or delivery by a third-party distributor.
Operations that pursue an omni-channel order fulfillment strategy will, therefore, be tasked with fulfilling a number of different kinds of orders, and delivering them through a number of different channels, depending on their capabilities and the needs/wants of their customers.
This can be incredibly complicated (as we’ll discuss below), so many operations may wonder why, exactly, anyone does it at all. Simply put, though there are some challenges inherent in effectively implementing an omni-channel order fulfillment strategy, there are also a number of benefits that can make it attractive to the right kind of operation.
For starters, omni-channel allows you to leverage your brick-and-mortar retail locations as a part of your ecommerce supply chain. Like using stores as distribution nodes (above), an omni-channel strategy allows an operation to leverage their physical locations by turning stores into miniature warehouses that can be used to fulfill orders, saving time and cost of delivery.
And beyond this, implementing an omni-channel strategy gives your customers options. Today’s ecommerce shoppers are used to having more options than ever before, and an omni-channel fulfillment strategy allows customers to shop and receive their orders in whatever way works best for them. This choice can help you build customer loyalty and retain and grow your business.
Common Challenges with Omni-Channel Order Fulfillment
One of the primary challenges with pursuing an omni-channel order fulfillment strategy is the fact that you will need to pick and ship dissimilar order types at the same time and from a single location. If this is not handled correctly, this can result in a lot of confusion and increase the likelihood of errors in your orders.
For example, consider the following:
Retail orders are often anywhere from 30 to 60 line items (SKUs) and 50 to 100 units per order. This results in orders consisting of multiple cartons. Ecommerce orders, on the other hand, are typically much smaller: One to eight line items and one to eight units per order. This usually results in a single carton per order.
The challenge here is that operations typically employ significantly different methods to pick, sort, package, and ship these different types of orders. This means that an operation employing an omni-channel fulfillment strategy may need to invest in:
- Additional inventory (and storage)
- Training for two types of picking, packing, and shipping techniques
- Special weighing and labeling technologies
How You Can Ensure Success
Implementing and utilizing the right technologies will be a critical determinant of success when pursuing an omni-channel fulfillment strategy.
For example, Goods-to-Person shuttles can significantly reduce the complexity of your pick operation if you choose to pursue omni-channel order fulfillment from a single facility.
By implementing goods-to-person tech, all split case picking can be done from a single shuttle system, with pick stations configured differently for retail and ecommerce orders. Often, pick stations handling retail orders will be tasked with four to six orders per station, while pick stations handling ecommerce orders will be tasked with eight to ten orders per station.
In addition to streamlining the pick-process, this also allows for the efficient handling of an unlimited number of SKUs. Fast and slow movers can be housed in the same system, and the technology is both flexible (able to handle orders of any size) and scalable (storage and picking capacity can be added with little disruption to an operation).
Aside from technology, there are other strategies that retail operations can and should consider when pursuing an omni-channel strategy.
Other Options for Order Fulfillment: Dropshipping and 3PL
In addition to the direct order fulfillment strategies outlined above, some ecommerce operations may decide that they don’t want to be directly responsible for order fulfillment. These operations have other options besides direct fulfillment.
For an operation that does not manufacture their own goods, but instead purchases goods from a distributor, dropshipping may be a viable strategy as opposed to direct fulfillment. Dropshipping is an order fulfillment strategy wherein an operation does not physically stock the goods that they sell: They purchase goods from a distributor only when an order has been placed. In this model, when an order is placed by a customer, it is routed to a third-party distributor, who then picks, packs, and ships the order directly to the customer.
Employing a third-party logistics provider (3PL) is another option that is similar to, but notably different from, dropshipping. If you employ a dropshipping strategy, the third-party distributor handles goods from start to finish. If, on the other hand, you employ a 3PL strategy, the goods originate with your operation, whether you manufacture the goods directly or you purchase them from a distributor. You then send these goods in bulk to your 3PL partner, who stores them. When an order is placed by a customer, your 3PL partner is responsible for picking, packing, and shipping.
Though these 3rd party fulfillment strategies make sense for some ecommerce operations, adding another party to your supply chain comes at a cost—literally—and many operations will decide to transition into direct fulfillment once they reach a maturity level (and revenue) that makes this possible.
Understanding Your Options
Selecting the appropriate order fulfillment strategy for your specific ecommerce operation is one of the most significant decisions that you will make for your burgeoning business, as it will become the bedrock upon which all of your other systems and strategies are built. For that reason, it’s incredibly important that you fully understand your options and select the strategy that is right for you.
This can be challenging, and understandably so, as it means bringing together an understanding of your current business and customers, as well as your future goals, and pairing that with the technology and strategy you need to be successful in both the short and long term.
A trusted systems integrator can help you to evaluate your current systems and processes to understand the role that automation and technology will play in making your operation as efficient as possible.