The Digital Commerce Chronicles: Book Three: Third Party Logistics

Book Three Prelude

The Digital Commerce Chronicles are all about helping you navigate successfully through your ongoing quest for Digital Commerce excellence!

Hope you've enjoyed Books One & Two of The Digital Commerce Chronicles, if you haven't read them yet, here's link to the Genesis Story & Index to get you started!

First step is to develop an understanding of the need for creation of a Distributed Logistics network to get closer to your customers (see Book One if you haven't already).

Once the concept of Distributed Logistics is understood and accepted, comes the realization of the need for Distributed Order Management (DOM), so that your Distributed Logistics network will be able to function effectively. (see Book Two).

Book Three - Third Party Logistics is where things get real! How do you make your Distributed Logistics network a reality? My answer is through leveraging Third Party Logistics providers & robotic automation and you'll soon learn why! Cheers!

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The Debate Is Over! Third Party Logistics Wins!

Ever since Third Party Logistics burst on the supply chain industry scene as an alternative option for in-house operations in the early 1990s, a debate has been raging about which approach is best for your business In House or 3PL operated.

Over the last five years, and especially this last pandemic year, the interplay of five key trends / strategies have in our view swung the balance firmly in favor of Third Party Logistics operations as the most logical, and in our view soon to be dominant, footing for successful, flexible and reliable logistics operations.

Let's walk through each of these five trends / strategies to better understand how they're supporting our assertion that Third Party Logistics is now clearly the best operational choice for retailers and brands:

Ecommerce Specialization

As ecommerce continues to explode and grow across brand retail markets, a stark reality is now facing many in-house businesses. Ecommerce at scale is completely different than the wholesale case and pallet pick operations most are used to. Even if an in house operation was able to support a small Direct To Consumer operation in a corner of the warehouse, expanding this to a large scale and maintaining the much different requirements for successful ongoing Ecommerce fulfillment operations are not the same thing. Ecommerce specialization in 3PLs has been ongoing since the late 1990's - early 2000's, and has different operational and systems requirements to be successful on a sustained basis. And brand/retail buyers beware, just because a Third Party Logistics company "says" they can do ecommerce, doesn't always mean they actually can. You don't EVER want to be the brand that any 3PL "learns" how to do ecommerce on as such a move can be very painful and even fatal for the success and growth of your online shopping operations and customer experience.

Distributed Logistics

Have written at length over the last three years about Distributed Logistics and how important this will be to competing successfully mid to long term in the ecommerce game. By employing a Distributed Logistics strategy using a network of selected and ecommerce capable 3PLs means you're able to deliver faster, at lower cost and more sustainably than any centralized fulfillment operations. For an in-house operation to pull off Distributed Logistics (many sites spread across the country) on their own for even the larger brand and retail companies out there is almost certainly cost prohibitive, plus the nature of growing and shifting ecommerce sales activity means that as soon as an in-house network was completed, it would already likely require reset and changes for market shifts. Ecommerce capable Third Party Logistics providers by their very nature have built multi-client flexibility and the ability to shift and change volumes and locations based on client needs into their business operating models so you don't have to.

People Shortages 

Even before the CoronaVirus Pandemic struck, warehouse operators were having difficulty getting and keeping skilled and capable employees. Fast forward 12 to 18 plus months of pandemic operations and this situation has gotten dramatically worse, whether it's actual fear of contracting the virus working in people intensive ecommerce picking operations or even worse still the need to close warehouses or departments in warehouses. In House operators and their HR teams are dealing with requirements to send workers home for self quarantine 14 days at a time and still operate effectively to get burgeoning ecommerce orders out to ever more demanding consumers. In the end is this a skill set your brand or retail company really needs to develop in house or again does it make more sense to leave it to 3PL experts who are dealing with this at nationwide or even global scales?

Redundancy / Resilience / Growth

The people point above and potential need for rolling closures of warehouses is nearly impossible for in-house operators to build into their networks. Large scale ecommerce capable 3PLs are much better positioned to build needed redundancy, resiliency and growth management strategies into their networks as they're working at an aggregated overall level for all combined client business needs, not just the needs of one business. So the ability to connect to 3PLs seamlessly and rapidly make shifts between given sites due to any interruptions in specific site operations is key to keeping your ecommerce orders flowing Smart brands and retailers are looking to how they can proactively leverage a connected network of 3PLs to meet their rapidly changing and growing ecommerce fulfillment needs!

Warehouse Automation & Robotics

Last but certainly not least, automating as many ecommerce fulfillment functions as possible is ABSOLUTELY KEY to the mid to long term success of your direct to consumer ecommerce business. Not only does it help to address and minimize the impact people shortages on the business, it also delivers a lower cost per order to fulfill, which will be a key profit differentiator as ecommerce becomes an even greater percentage of your overall business. Only the very largest Brands and Retailers can justify the tens or even hundreds of millions required to effectively automate fulfillment centers on a nationwide or global basis. And will also add to this that new autonomous fulfillment robotics solutions are bringing even more cost effective, flexible and scalable options needed for automating local fulfillment operations and making any needed network changes and rests faster and easier than ever before.

And if for some reason the five points above are not enough to convince you that 3PL now rules, let me finish by sharing two additional personal insights from my 30 plus years working on both sides of this equation:

Firstly, after spending 15 years working for a major department store retailer, the team I was part of had made significant improvements across the board and towards the end of my time there we hit a point of diminishing opportunities to improve. What this meant was there were no more low hanging fruit relative to potential operational and systems improvements, but of course the CEO kept demanding more. After racking my brain for where else we could focus to improve costs and performance, the answer I came up with was actually to outsource our entire network to a Third Party Logistics firm, sell them all the distribution and logistics assets, then just pay our operating costs.

Secondly, not only do I now see this as a required cost cutting opportunity for "best in class" logistics operations, there's also a competitive threat posed by holding onto these huge multi-site, in most cases inflexible distribution operations. If this interests you further and you'd like a potential plan to execute such a strategy leveraging third party logistics companies you may enjoy reading my article Retail Infrastructure Obsolescence is Now Inevitable.

No pressure, but what you do next has the potential to be key to the long term success and profitability of your business. Firmly embracing the flexible use and tightly integrated management of Third Party Logistics providers is an idea whose time has come and those brands and retailers who move quickly towards this shift will have the pick of the best providers out there!

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Creating Your Distributed Logistics Network Using Third Party Logistics Providers

By now you’ve probably already heard me sharing all the positives around utilizing Distributed Logistics, as well as the unique benefits available to brands who decide to engage third party logistics providers to run their operations.

Imagine my excitement now on being able to today combine both of these passions into one article and then share it with many of you who have the power to actually implement such a strategy!

Design Your Ultimate Distributed Logistics Network

Like any design process, the first step is deciding what you'd like to build.

In this case a Distributed Logistics network to improve Customer Experience AND Reduce Costs is the remit.

Begin with determining your Customer Delivery timing goals, are you looking for Same Day Delivery, Next Day Delivery or more Relaxed 3 to 5 day delivery? (Note: The shorter your delivery lead time, the more Distributed Logistics Fulfillment Centers will be required to meet these standards)

Don't worry if you're unsure about which of these options to choose at this point, as you can model the cost for each option, make an informed decision on where to start, and then set milestones to continuously improve your delivery lead times as your volumes grow.

In order to begin the needed modeling you must first collect and assemble the required data.

There are three main components here; What you're going to sell, including the actual product/sku list with dimensional and weight details of the items you plan to sell online? How many of each product you plan to sell? And last but certainly not least where are you planning to sell/ship them? To complete this data collection, you need a copy of your detailed Sku Master with actual/projected volumes by sku, and if available a year's worth of detailed sales history in an Order File including all final delivery address information by zip/postal code.

For those of you just getting started in your online sales journey, you'll need to base this information on your projections relative to Products/Skus you plan to sell and volumes. And as you won't have an Order File yet, determination of where products will be shipped/sold can initially be based off of population density as a starting point.

Working with skilled Distributed Logistics modelers will then allow you to determine the best location for 1 Fulfillment Center, 2 Fulfillment Centers, 3 Fulfillment Centers and so on until your target delivery service level is reached.

For each of these scenarios, rough comparative costs can be developed to assist you in deciding your best next steps, ie; where to begin with initial site(s) or where to migrate for those with an existing fulfillment center or network.

Develop Optimal Roll Out Sequence and Timing

So if you read and listened to the above, now you have a rough design for the Distributed Logistics network you need, or with a bit of work you soon will!

Many questions now arise on how do you get from today's status quo to where you ultimately want to be?

Based on your Distributed Logistics design, you should have already identified the optimal national location for a single fulfillment center.

If you already have one fulfillment site operating, the next analysis is whether it's near any of the future optimal Fulfillment Center locations you've identified or not?

Another question is, should you build your own In House logistics network, use 3PLs/ Third Party Logistics providers to build and operate, or perhaps a combination of the two?

Having worked 30 plus years on just about all sides of the business, there's no doubt that Third Party Logistics needs to be part of your solution as shared above.

Even if you decide to operate one or more sites In House based on perhaps density, and the personal need to keep your hands on pulse of your unique logistics operations, there will be markets or regions where 3PLs simply just make more sense.

Seek Out and Identify Skilled Network Ready 3PL Providers in Required Locations

As I've said many times all third party logistics providers are not created equally!

Ecommerce fulfillment is much different than basic 3PL case & pallet handling as both operating methods and the Systems needed differ in many regards. There's too many specifics to list them all here, but suffice it to say you need to work with team members or outside advisors who "know" and can "confirm" that any potential 3PLs you're considering working with have the requisite ecommerce experience.

In addition to this, one of the most critical capabilities you need to confirm with potential 3PL providers is that their ability to connect and integrate systems with your company is rapid and well developed. If you'd like to better understand these requirements, check out my article Solving for the Biggest Bottleneck in Ecommerce Third Party Logistics.

As it's highly unlikely that you'll find a single provider that can cover all the needed regions you've identified in your Distributed Logistics network design, it's almost a given that you'll likely have to work with different providers to meet your needs. In order to connect and manage these disparate 3PLs means that you'll need a Digital Ecosystem Management (DEM) capability to "connect" all of these providers and have them work seamlessly together as one network.

Successfully creating a Distributed Logistics ecommerce fulfillment network by connecting a series of skilled and network ready Third Party Logistics providers needs to be a very well thought out, carefully sequenced and deliberate process leveraging both specialized expert resources and purpose built platforms.

As challenging as the above may sound, if executed properly the end result will be the most cost and customer delivery effective, resilient and flexible digital commerce solution possible.

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The Local Automation Imperative for Third Party Logistics Survival

Numerous times recently I've found myself saying (and tweeting) that...

‘Going forward Fulfillment automation is no longer just an option.'

Having been a contributor to many SWOT (Strengths, Weaknesses, Opportunities & Threats) analyses for e-commerce service providers, retailers and even CPG manufacturers, I've lost count of how many times I've warned all who would listen that fulfillment automation will be a significant threat to their online business in the future.

Today I'm going even further to state that this threat has now evolved into what I'm coining as simply 'The Automated Local Fulfillment Imperative.'

So just how do we define "imperative" in this context?

Definition: imperative(n) [im-per-uh-tiv] noun: a command, rule, duty, etc., that is very important or necessary. Serious edict issued with or from position of authority or advanced knowledge.

The imperative in this case is that in the not too distant future not only will your fulfillment operations need to be automated, but also that this automation will need to be applied at the local level of your supply chain.

Automation in logistics operations has been around for many years beginning with the use of simple conveyors and evolving into advanced sortation, automatic storage and retrieval systems (ASRS); and now the latest in Automated Picking Systems for e-commerce fulfillment.

As sexy and cool as many of these materials handling technologies seem to appear, getting the design and implementation right can be a very challenging (and costly) task and one of the scariest factors of these implementations is the lack of flexibility to change with your business.

It's also important to note that these major automated picking and fulfillment operations are built out on volume projections which are typically 3 to 5 years out. What this means is that you're paying for equipment and capacity you won't need for another 3 or 4 years from start up, that is assuming there's no changes to the overall network and consumer demand for those areas turns out as planned.

Additionally, because of the high capital cost of major automated picking and fulfillment systems, huge volumes are required to cost justify them almost always resulting in single, or perhaps at most dual national fulfillment operations in the United States.

So what forces are driving 'The Automated Local Fulfillment Imperative'?

The Need for Speed

Consumer demands for rapid delivery just continue to grow. People used to be satisfied with delivery in 3 to 5 days which meant that one national fulfillment center would do the trick.

This expectation then evolved into 2 day delivery which many consumers now consider to be an acceptable standard. From a fulfillment perspective this means additional fulfillment center locations or 3PL partner providers are now required to meet this need.

But of course the consumer's need for speed hasn't ended there and online shoppers will most likely soon see Next Day or even Same Day delivery as their expected standard for delivery.

And depending on what percentage of the population an online retailer wishes to guarantee this service level to will determine how many local fulfillment centers are needed to support effectively.

And although many are still resisting the move to Same Day delivery, the inexorable growth in consumer delivery demands is unlikely to stop until this ultimately becomes the new normal for consumer service reality.

The need for speed in these cases results in the addition of more locations, but to meet these timings it also has an impact on fulfillment, especially at high order volume levels. This drives the need to have automated fulfillment locally in order to rapidly fulfill orders and get them out on delivery PDQ (Pretty Darn Quick) and meet those ever growing consumer delivery demands.

Cost Conundrum

Obviously the addition of all these locations requiring ultra rapid fulfillment to meet delivery timelines comes at a higher cost relative to both inventory and operational requirements. These higher costs can at least be partially offset through the implementation of local to local deliveries to reduce Last Mile delivery costs. Exacerbating this need to reduce cost is the fact that consumers want to pay less (if anything at all) for fulfillment and delivery services.

And unfortunately the traditional automated fulfillment picking systems which can deliver lower piece picking costs require massive volumes in order to justify and deliver a satisfactory return on investment.

This is a problem screaming for a solution and one that is now offered through the robotic automated local fulfillment systems either Automated Mobile Robots, Collaborative Robots, Microfulfillment and sooner or later NanoFulfillment Centers!

Fit and Flexibility

If you've been following along with this train of thought, we now have a local solution that delivers the needed speed and low variable costs, closer to the customer to meet the increase in consumer delivery demands.

However, two other important features are also required, the first of which is 'Fit'.

As mentioned, typically when automated fulfillment solutions are implemented, they're heavy on capital investment and built to support a 3 to 5 year growth requirement. Effectively this means you're paying now for capacity which won't be needed until some future date assuming there's no change in expected volumes.

By selecting the right automated local fulfillment solution 'Fit' is customized to meet your business and only your current consumer delivery needs and locations from Day One.

And even better still, on an annual commitment basis you're able to make any changes needed in fulfillment volumes and locations, because we all know the speed at which the e-commerce business is changing.

The second factor is 'Flexibility', (which justifies it's own blogpost coming soon), but suffice it to say that the modular automated robotic solutions being described here are dramatically more flexible and even potentially portable should unforeseen changes to your business arise. Check out the below video to see this flexible fulfillment technology in action.

So the bad news is that for all of the above reasons 'The Automated Local Fulfillment Imperative' is real.

But the great news is that new, innovative and flexible local automated fulfillment solution options for Distributed Logistics are now rapidly emerging to solve these challenges. Brands and Third Party Logistics providers who embrace and build their business around these automated solutions will not only survive, but set themselves up to prosper!

Cheers

Jeff Ashcroft

Look out for The Digital Commerce Chronicles: Book Four – Rising Robotics & Automation coming next in June! Find out who will soon be challenging any 3PLs who don't rapidly automate, improve and evolve their networks to support the Distributed Logistics needs of Direct To Consumer brands as they endeavor to get closer to their customers!

Return to The Digital Commerce Chronicles Index & Genesis Story

Ready to see how Distributed Logistics and Digital Ecosystem Management can improve your Supply Chain Costs, Sustainability and Customer Experience? Reach out to me now and I can help! Cheers!

Email: jeff@supplychainnetwork.com Phone: 416.990.6433 Twitter: @JeffAshcroft

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