My colleagues and I have written a number of articles about the widespread growth of e-commerce and its effect on distribution operations. Many companies are opening new facilities for e-commerce fulfillment and others are using traditional replenishment facilities to fulfill e-commerce orders as well. It’s well-known that e-commerce growth is affecting the requirements placed on many organizations. But to what degree is the movement of goods through the supply chain shifting? And to what degree are handling units changing? Clearly direct-to-consumer shipments are smaller in size and greater in volume than traditional fulfillment. But to what degree is this shift occurring? ARC’s survey research, conducted in partnership with DC Velocity, provides some cross-sectional insights into the magnitude of these shifts.
Warehouse Capabilities and Priorities
Accuracy, Responsiveness, Throughput, and Adaptability are all importance capabilities of a fulfillment operation. But is the prioritization of these capabilities changing? Well, our research (Figure 1) shows “adaptability” (defined as the ability to handle a wide range of order profiles) as the fulfillment capability expected by most to increase in importance over the next five years. One respondent, from a fashion accessories brand, stated that they are becoming nimbler and more adaptable, geared more towards direct-to-customer fulfillment than ever before. And “adaptability” is followed by “fulfillment responsiveness,” a high priority in today’s next-day delivery environment. A respondent from a workplace or office supply wholesale, said that they have been increasing e-commerce direct to consumer shipments. This change requires greater responsiveness due to customer expectations and parcel carrier shipment frequencies.
Changing Fulfillment Paths
We listed four common fulfillment paths between nodes in today’s supply chains and asked respondents to indicate the degree to which they’re operations engage in these processes. Replenishment of downstream DCs and stores were the most prevalent responses. However, when asked about anticipated change, the responses (Figure 2) provided insight into the changes taking place, as direct-to-consumer and drop-ship (shipping goods directly from the manufacturer) were the paths expected by most practitioners to “increase extensively”. I expected the increase in direct-to-consumer, but underestimated the degree to which drop-ship is expected to increase. This statistic on drop-ship shows the degree to which e-commerce is affecting the extended supply chain. One respondent, from a branded apparel company, specifically noted an increase in sales through Amazon.com that are fulfilled by the apparel company.
Digging deeper into warehouse operations, we asked respondents about how they anticipate the prevalence of picking unit types to change over the next three years. We chose “picking” because it is typically the most labor intensive process within a warehouse. Piece (eaches) is the unit type that most said would increase. In contrast, less than half of survey respondents anticipated an increase in pallet retrieval. The response profile (Figure 3) supports the view that picking units are generally getting smaller as warehouses increasingly fulfill e-commerce orders. At the same time, upstream partners are expected to support those downstream with greater SKU variability and smaller volumes of the same SKU. This puts pressure on upstream partners to reduce their picking units from pallets to cases. For additional insight, I broke down responses to this question by respondent sector (Retail, Wholesale, and Manufacturing). Sixty-five percent of retailers expect piece picking to increase, with 30 percent expecting it to increase extensively. Although some retailers do expect case and pallet loads to increase, none of them expect either load type to increase extensively. Wholesalers expectations are best stated as “the smaller the unit type, the greater likelihood of an increase over the next three years.” Finally, the responses from manufacturers were dispersed across the picking types, with case picking as the most frequently noted picking unit expected to increase.
To put our survey-based warehouse findings into a narrative… The ongoing transformation in the fulfillment environment, primarily driven by the explosive growth in e-commerce, has shifted order profiles and warehouse operations, placing a premium on adaptability and responsiveness. Direct-to-consumer fulfillment is expected to increase extensively, as is the practice of drop-shipments. Logically enough, the change in fulfillment paths and order profiles is expected to continue to influence picking processes. The smaller the unit, the greater the expectation of its increase over the next three years. As you move closer to the end-consumer, the greater the expectations for a shift in picking units within the facility.