There’s a LOT that makes up the modern ecommerce supply chain. In this guide, you’re going to learn how to structure a modern ecommerce supply chain that focuses on your most important asset – CUSTOMERS. We’ve did our best to try and identify each core element, it’s one of the best articles online right now. This guide will thread the needle with comprehensive yet condensed insight you won’t want to miss.
This article is full of real-world experiences we’ve had here at Thill Inc., many of these have helped us. There’s a lot of lessons to be learned here, so we’re sharing lessons we’ve learned on our way to how we picture the modern ecommerce supply chain.
If you sell online and are looking to understand how to optimize your supply chain, this guide is for you.
How ecommerce and brick-and-mortar supply chains differ
We’ll start with the basics, but it’s crucial to remember that an ecommerce company differs from a brick-and-mortar (B&M) one in fundamental ways, which means the supply chain that supports such a business is going to be quite different.
Certain pillars of the supply chain are critical, while others are less essential, but some may not exist at all. A good example to use would be this: fulfillment centers (FC) are built and designed differently for ecommerce delivery. Ecommerce fulfillment centers can be another example, these are specifically designed to focus on ecommerce fulfillment. On the other hand, distribution centers (DC) may be completely shut off since they don’t need to deliver items to a storefront. There are some significant variations between these two cases.
Now, let’s look at a few more key differences between the two;
- Fulfillment centers (FC) have higher averages of SKUs for ecommerce businesses versus B&M models, this means FC is going to have more variability with processes and packaging.
- Inbound Logistics attempts to optimize allocation while inbound logistics focuses on uniform distribution and delivery optimization (overs/unders) to DCs.
- The e-commerce inbound logistics is directly linked to a consumer purchase. Amazon’s “More on the way” notification indicates that any future purchases of the out-of-stock item will be sent to the customer as soon as possible.
- Fulfillment centers (FC) focus on an “individual workflow” or streamlining picking to sorting to packaging an order.
- Returns management can be a different experience, which makes reverse logistics different (store visit versus label printing and shipping).
- Service Level Agreements (SLAs) matter more for ecommerce models, as the expectations are different for the movement of goods to consumers.
- It’s easier to forecast demand for ecommerce businesses than for a vacant shelf in a physical store. It has an impact on purchase orders and allocation as well.
With that being said, we’ll start with the ecommerce business model.
Your ecommerce supply chain strategy and plan
The ecommerce supply chain plan is a bit more crucial than a brick-and-mortar one. Unlike with bricks and mortar, the delivery of goods is one of the few interactions customers have with your business. In a physical society, experience is concentrated on store layouts, aesthetics, people on the floor who handle the merchandise, checkout lines, etc.
Customers engage with your company primarily digitally on your site or applications, but secondarily through delivery. As a result, access, speed, and ease all influence brand experience. The supply chain now has a greater responsibility for customer loyalty and lifetime value.
Your supply chain is also important for financial reasons. Ecommerce systems will typically require less capital expenditures in things like stores and personnel, allowing both capital and operational expenses to account for a larger proportion of total cost, such as establishing a new FC (capital) or shipping costs per unit (operational).
With that in mind, lowering expenses has a much greater influence on the amount of “found money” available to reinvest into other areas of the business. This technique, specifically, is a major factor in determining winners and losers in the DTC market, as well as online retail more generally.
This example demonstrates that a modern supply chain with a focus on cost reduction will become a key differentiator for sales growth, which is something brick-and-mortar retail models at scale can’t achieve.
Key performance indicators (KPIs)
It’s important to get your supply chain analytics correct since what you measure determines the shape of your business. Customer-centric metrics are prioritized by smart ecommerce firms.
The most significant indicator: order-to-deliver, sometimes called click-to-deliver. There is no metric that better reflects the client’s priorities than how quickly they will receive their item once they’ve completed their purchase.
Metrics such as time-to-pack or click-to-ship are useful tools, but they should never be used to define the core cadences of your operation. They should not be the primary measurement that influences your operational rhythm.
Order-to-deliver rolls up all kinds of metrics to give a single view into how well the supply chain is supporting the strategic initiatives of the business.
A few other customer-centric metrics to consider:
- Delivery promise accuracy: How often did we deliver when we said we would?
- Stock levels: When a client views a product page, the percentage of stock availability is closely linked to brand perception and consumer pleasure.
- WISMO: Reverse logistics performance is also linked to customer experience metrics such as WISMR (Where is my return?) and WIRLR (Where is my stuff?).
- Recovery percentage: Returns are essentially a result of an exception farther upstream. By tracking the recovery percentage, you can gauge how successful your supply chain is performing.
Inventory placement and allocation
You can only send items from where they’re made. With that in mind, how you distribute your inventory and where you do it has a significant impact on everything that follows.
The big idea: The closer merchandise is to prospective buyers, the faster and cheaper delivery will be.
Intelligently allocating inventory across your network will open up the ability to offer fast or free shipping programs.
If you only have one fulfillment center in your network, then allocation is simple, but results will be poor. You’ll cut off cheap and fast delivery to half your market.
Two FCs make a different, but now you need to decide how to allocate inventory. The following point is going to assume you have 2, 3, or more FCs in your network, even if using 3PLs.
Generally, putting all skews in all locations is a good first pass. If the physical attributes of your product are simple—small, light, consistently the same size—then it might make sense to always do it this way.
As companies grow and their SKUs differentiate, more complex strategies are needed.
For most companies, allocation is going to be planned as follows:
- Take the global forecast for a SKU.
- Analyze buying patterns for the SKU geographically.
- Attach cost structures to where that SKU is placed.
- Calculate the probable cost of storing and shipping that SKU to probable buyers per FC.
- Take those results and split up SKU allocation across FCs based on the outlay.
Inventory management: supply chain perspective
The trend in ecommerce business models is an increase in inventory management. This has challenged previous concepts, as ABC analysis was once useful when data was more difficult to obtain. However, because of the computing edge provided by ecommerce systems, it may not be as beneficial compared to probabilistic forecasting across all inventory selections.
Decisions are going to be vital to keeping track of inventory. You’ll constantly be making key decisions in your business — Do I need to buy more of this specific SKU? What size should I get it in? Is it necessary to relocate this other SKA to another FC? Those are going to be the thought process.
The accumulation of inventory decisions are meant to optimize your position along a spectrum of two risks:
- Holding Risk — This refers to the costs of maintaining inventory that is not being sold.
- Stockout Risk — The lost revenue, or opportunity cost, of not having inventory available when people want to buy it, and that’s on top of additional hard costs like idle labor or under-utilized machinery.
The major concept for ecommerce firms: Although perfect optimization in the middle is difficult, you may usually get closer than brick-and-mortar models because of the capability for the entire ecommerce supply chain to be interoperable. Purchase a system that can handle the extra data accessible to you through modern partners while also being sophisticated enough to use the new analytics to make data-driven decisions.
Another goal of this paper is to provide recommendations on how FCs can be managed in a failure scenario and how inventory should be allocated to those FCs. We’ll go over that in more detail below.
The delivery experience
The delivery experience is largely controlled by the supply chain. Four categories may be used to track design and subsequent improvements.
- Speed: Customers want their goods as soon as possible, but not at any expense. Both data from the market and our own observations suggest that 2-3 days is ideal, with anything longer than 7 days being a deal breaker. For certain items, 3-5 days is acceptable, but you must be upfront about the time.
- Transparency: Let’s move on to the second point. Customers want to know when they will receive a purchased item before they make a purchase. Upfront transparency and accuracy are becoming increasingly important in cart conversion.
- Communication: Keeping customers informed throughout and after the transaction is becoming a more important memory connection that leads to repeat business. Customer loyalty will be lost if dates change and a customer is unaware.
- Cost: Lastly, and perhaps most significantly, customers despise paying for delivery. You must choose how to handle this preference, and the answer is up to your company. Recommendations: Make it a component of the product price; shift some of the “found money” from cost savings elsewhere to compensate for low-cost or no-cost delivery; or accept it.
The culmination of all these points should be your focus on delivery. Customers want a fast shipping option, that’s “free” or cheap, to see the delivery date up front, with good communication along the way.
We recommend an implementation of an Estimated Delivery Date to help increase cart conversions.
Likewise, it’s all about great customer experience.
Every link in the ecommerce supply chain
Some elements in an ecommerce supply chain are valued over others, and legacy components are sometimes overlooked. It’s a good idea to learn as much as you can first. Then it’s up to you how you want to design it, but here is the most basic design any ecommerce company may use to plan their logistics.
(1) FC/3PL management
Picking the right fulfillment partner matters. Here’s what you should be thinking about:
- 3PLs who work only with ecommerce businesses will typically be a better choice because their design is best aligned with the needs of an ecommerce business.
- Your business is specific to you, which means it’s best to find a 3PL who specializes in your type of business. Some 3PLs specialize in large products like appliances; others specialize in products under a pound of weight; while others specialize in fashion and apparel whereas others electronics, and so on.
- The more automation, the better, although don’t over-prioritize or overpay for robotics or AI (yet).
- Interoperability of data matters.
- Returns is a critical piece to any ecommerce business model. Pick a 3PL partner who has a strong returns program, whether it be something custom you build, or tight integration with some of the modern returns solutions out there.
(2) Demand forecasting and sourcing
Because ecommerce is inherently digital and data is more frequently centralized even when distributed across several channels, procurement, or purchase orders, may be handled differently for ecommerce organizations.
A few other things to think about:
- Because holding of merchandise is more centralized than across many stores, the standard benefit of volume breaks has an even more pronounced impact on profit. Consider investing in buying more inventory than you would initially expect.
- Lead time still matters but in a different way.
(3) Placements/Allocations
The impact of the initial placement, or “first allocation,” of orders on unit costs can be significant. Many 3PLs believe that you must ship stuff from where it’s kept, which implies picking a location for products has a big financial impact. This information also contributes to why most ecommerce firms are surprisingly sluggish in adding more FCs.
Rule of thumb: Place merchandise as close to the expected customer as possible to realize the maximum amount of savings possible. This is why fulfillment centers like Thill Inc. have multiple fulfillment center locations through the U.S.
More considerations:
- The sooner an allocation decision is made, the less cost allocation will be. This is why predictive analytics and demand forecasting are so intimately connected to first allocation decisions.
- Re-balancing is expensive, so getting first allocation right is so critical. Yet, re-balancing is a sunk cost that is still cheaper at scale than shipping goods from an FC far away from the customer.
(4) Carrier selection
It should be an easy decision to pick the fastest and cheapest outbound delivery option, right?
It turns out carrier selection is a puzzle most businesses struggle with. It becomes one of the key points of the chain where ecommerce models can squeeze out additional cost savings that can give the business an advantage at scale versus old brick-and-mortar competitors.
First, get the right contracts in place. Shop around by talking to the carriers directly (UPS, FedEx, USPS). But also talk with your 3PL partner or other possible partners who might have a contract that gives you even cheaper rates. In general, though, it’s best to not have multiple contracts via multiple parties going at once as it adds complexity to your system, while it is wise to consider multiple contracts with multiple carriers so you can scheme them off each other.
As much as $1/unit can be saved by intelligently picking between carrier options at the time of shipment generation. Much of those savings is tied to being close to the customer, which is yet another point to explain why ecommerce companies should invest in at least two FCs earlier than they typically do.
(5) Packaging
Packaging is important to the customer experience, but it’s also a major expense for businesses, therefore the range of trade-offs can be quite vast. It’s most likely the component of your supply chain that best reflects your company’s requirements. Some businesses should be totally optimized towards the cheapest packaging possible. There are many elements to consider before choosing an appropriate package design. For example, while most businesses can use basic, simple packaging, other firms may require costly but experiential packing. There is no right or wrong answer; rather, whatever is best for your company should be what is chosen.
Since packaging is one of the key moments of physical engagement with customers, it also becomes a compelling area to invest in strategic differentiation. Sustainable packaging is an excellent example. While sustainable packaging is beneficial for the environment, it is also gaining popularity when consumers make a purchase selection. However, sustainable packaging is more expensive to produce and need extra resources and processes, which is actually a benefit to you as a small ecommerce firm. An established brick-and-mortar business may be too
(6) Post-order tracking
Shoppers expect transparency and communication, so the post-order experience is a key factor to determining repeat customers.
One key consideration is how post order tracking ties into your other systems. It’s not immune to interoperability needs. In fact, we are seeing many retailers look at “digital unboxing” as a key part of packaging (discussed earlier), yet much of the digital unboxing experience requires accurate post-order information via APIs.
(7) Last-mile
Final mile delivery is expensive and difficult, which is why several companies have jumped into the space lately, from incumbents to startups.
Here’s the key point for ecommerce companies: Your specific business model will determine whether to work with incumbents like USPS or new startups. You might be just fine doing normal shipping with a regular carrier. But you might find major cost savings and a better customer experience with a specialty last-mile company like Roadie.
(8) Returns management
Ecommerce businesses are dealing with a slew of issues when it comes to returns. They take away from margin. The concept that returns should be free and simple has also evolved over time, as consumers’ expectations have changed. According to industry data, the most common reasons for returns are retailer mistakes, but when you look at the numbers more closely, it’s all about consumer behavior changing and expecting that they can return anything at any time for free, which means they buy a lot of items at once (usually to obtain free shipping) and then return what they don’t want.
The first thing to think about when it comes to returns is that the most significant benefit is in ensuring that the process is cost-effective and does not eat into profit margins.
Beyond that, ecommerce companies are particularly vulnerable to a faulty returns procedure that affects customer experience. Returns aren’t only costly, but asking consumers to pay for return shipping has been shown to result in as much as 81 percent of customers never returning again.
In short, a few guiding principles around returns has proven to be the best model for ecommerce businesses:
- Make sure you don’t charge restocking fees
- Make sure you offer free shipping
- Make the return procedure easier, which may imply including a returns label in the box right away or, to save money, integrating with other vendors and making printing a label simple on your site.
- Present your returns policy clearly up front on the product detail page, since over 60% (same study) of shoppers check the return policy immediately before a decision to purchase.
Let’s close it up
That was a lot! But hopefully this helped.
Ecommerce supply chains are complex and they’re difficult to optimize, but not impossible.
These best practices are going to apply to a major percentage of your supply chain, likely 3/4 or higher.
Most ecommerce supply chains are consistent across companies and due to this, best practices can be applied.
As always, if you need help, we’re always here. Reach out to one of our fulfillment and supply chain experts here.
