Direct-to-consumer challenges for distribution

Electronic commerce is booming as more consumers embrace online shopping. According to Forrester Research Inc., e-commerce retail sales in the United States reached US $197 billion in 2011 and are forecast to increase to US $279 billion in 2015. If we look at month-by-month sales figures for e-commerce provided by IHS Global Insight, we see that even in this sluggish economy, online retail sales continued to rise (see Figure 1).

The growth in direct-to-consumer distribution is adding to the complexity and flexibility of supply chains, introducing unique challenges to a process that has been lean for a long time. Distribution centers (DCs) have progressed from cross-docking shipments to handling pallet loads, to case picking, and now to "each" picking.

Article Figures

[Figure 1] E-commerce retail sales (seasonally adjusted, billions of U.S. dollars) Enlarge this image

Direct-to-consumer order fulfillment places a number of demands on distribution operations. DCs today receive orders that may consist of just one item, and they must pick, pack, and then ship that single item to an individual consumer. They require more robust fulfillment systems to manage the handling of these individual orders. In addition, a very high number of stock-keeping units (SKUs) must be kept on-site, with little or no turnover predictability. And because consumers have very high expectations for order timeliness, tracking, and accuracy, they demand extreme accountability, down to a single item and order, from DC operators.

As a result, e-commerce is driving distribution centers to increase their unit flow in less space and in less time. The process of sending a large order that includes "each" picks to a retailer, which seemed so complex just a few years ago, is now an easy assignment compared to sending an individual product to a consumer. It is especially challenging for companies that are doing both types of fulfillment from the same facility.

A vision of success
Looking forward, companies may have to re-evaluate the design of their distribution centers to be sure they can meet the e-commerce challenge. Redesigns may involve changing the layout—a plan that is often met with great resistance, as it is never a pleasant experience. Introducing more automation into the distribution center is becoming necessary to accommodate the fast-growing e-commerce channel. In that regard, DCs now have to look at implementing systems that can manage inventory from receipt to order fulfillment in a more sophisticated way. Warehouse management systems are becoming less of "an option" and more of a "must have" for companies that are planning to tackle this new channel. In addition, unit sortation systems are becoming more and more applicable, especially in the apparel industry, where e-commerce seems to be achieving its biggest growth around the world.

In order to compete, companies are going to have to coordinate their marketing communications with their supply chain and logistics organizations. In addition, having a storefront with a physical address will enhance business opportunities for "storefronts" with a Web address. That's because retail stores have a certain credibility that a "dot-com" business may lack. Moreover, consumers still want to see, feel, and touch products in many cases before they buy online. This dual relationship will become the norm for the foreseeable future.

In the next three to five years, a company's vision as it relates to e-commerce is going to be critical to its success. That is why many companies are now looking to consultants and systems integrators that have experience in managing this growing distribution channel to help them move into the next chapter of their business. Companies that adapt their distribution operations to the new era of e-commerce (and service providers that help them achieve that goal) will have the brightest future.