How Some Manufacturers and Distributors Are Thriving in the Age of Amazon: Part Two--Optimizing
on Jul 24, 2018
Amazon subsidizes their fulfillment costs by billions of dollars annually. This has set expectations for free or very low cost shipping, not just for consumers, but businesses as well. Here we discuss ways to integrate channels more effectively, continually drive out costs, and increase efficiencies in fulfillment and operations tom compete in today's world.
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( This article is excerpted from the complimentary report: Surviving the Amazon Effect: Differentiating and Optimizing to Thrive in the Age of Amazon, available for download here. )
In Part One of this series, we looked at examples of three companies that are competing by differentiating via unique services and experiences. Here in part two, we look at how companies can optimize their operations to more effectively compete.
Optimize—Creating an Integrated, High-Performance Omnichannel Engine
In addition to differentiating from Amazon and others, businesses must also optimize their execution in order to profitably meet the rising customer expectations that Amazon has created. Even small and medium sized businesses need to have a business that is an integrated, high-performance, omnichannel engine. This means that behind the scenes, no matter how folksy or relationship-oriented their brand is, a business needs to be fast, efficient, integrated, and profitable. Two key elements of this are A) rapid profitable fulfillment, and B) integrated channels.
Rapid, Profitable Fulfillment
As everyone is acutely aware, modern expectations now include ever‐faster order‐to‐delivery cycles. 7-day used to be standard, then came 3-day, 2-day, next day, same day, and in some cases 2 hours or less. Expedited delivery, especially over long distances, can be very expensive, and Amazon is making it even harder for competitors with their practice of subsidizing their own shipping costs. In 2016, Amazon’s shipping costs exceeded their shipping revenue (including all Prime subscription fees) by $7.2B (about 5% of revenue) and that figure is estimated to have grown to over $10B in 2017. Another way to look at this is that Amazon is sacrificing profit to subsidize shipping costs and grow market share. They can do this in part because of their highly profitable AWS business, but also because the stock market continues to reward them for high growth over high profits.
Amazon’s competitors do not have that same luxury, so those competitors must become as efficient as possible to offer rapid delivery, while still turning a profit. In practice, there are several keys to this:
Improved forecasting and Inventory optimization—This is not just about forecasting the right aggregate quantities. It is also about understanding where those units are going to be consumed and being able to forward-position the right amounts at the right places. This allows you to move inventory most of the way there in bulk, slow, low cost shipments, and rapidly deliver the last mile at a reasonable cost. But forecasting at a granular location level is difficult. If inventory is in the wrong place (or worse yet out-of-stock) then it becomes impossible or painfully expensive to provide rapid delivery. In addition, having a platform and inventory processes to achieve accurate network-wide inventory visibility is critical. This means that the same platform should be able to track inventory at the plant, DCs, distributors, retail outlets … everywhere across the chain. Practices to ensure accurate per-item per-location inventory should be in place, such as procedures to double check receiving and shipping quantities,1 to minimize incorrectly shipped items and quantities, while improving perpetual inventory accuracy.
Fulfillment optimization—Having the right inventory in the right places is the first step. To truly optimize fulfillment, a company can use a Distributed Order Management (DOM) system that optimizes each order, shipping it from the best location, using the best mode, at the lowest cost, while still meeting customer delivery requirements. Smaller companies usually do not need a full-blown DOM, but can still benefit from a simple DOM-like rules engine, to help them make smarter fulfillment and shipping decisions. Some manufacturers and wholesalers who ship both large bulk shipments and small individual orders have been able to do ‘zone skipping’—this is where the smaller orders piggyback or ‘hitch a ride’ on bulk orders to take advantage of the lower cost LTL or TL2 rates for those large shipments. At the destination, the individual orders are then separated out and delivered the rest of the way via parcel to the end customer, for a much lower rate than if they were shipped via parcel the whole way. Zone skipping is a fairly sophisticated practice, requiring the ability to figure out which small orders are eligible for zone skipping (i.e. a truck is headed to their zone, and will arrive in time for the delivery window), the ability to interleave the small orders in with the big orders, and facilities at the destination to send it the final mile. Often the labeling and request to the parcel carrier is all done at the origin, simplifying the destination operation.
Compressed cycle times/digital supply chain—Providing rapid fulfillment requires continually working on compressing cycle times throughout the end-to-end fulfillment process and across the supply chain. This is a combination of rethinking existing processes to eliminate steps and waste, and automation, moving towards a fully digital supply chain. The former (process improvement) requires a mindset of continuous improvement among all employees and a culture of empowerment where suggestions are taken seriously and those resulting in improvements are rewarded. The latter (automation/digitization) requires having the right system(s) in place for automating not only your own processes, but your supply chain partners as well, and the linkages in-between. Manual paper-based processes are a major culprit adding delays and errors.
Today’s customers expect seamless integration across online, call center, physical locations, and onsite services. They lose patience quickly when dealing with a company whose left hand doesn’t know what the right hand is doing. Meeting these expectations requires tight integration between all of the systems involved, across all channels, on both the frontend and backend. Stitching together multiple best-of-breed systems is possible, but is expensive, difficult to maintain, and often not truly seamless. Often a better approach is to have a single integrated system that includes ecommerce, fulfillment functions, core financials, product information management, order management, logistics (warehouse and transportation), and unified billing.
Furthermore, to avoid the pain of having to switch horses midstream (i.e. implement a new ERP system just when the company is growing fast), it is recommended to choose a system that can take you the distance, enabling growth from a small startup to S1B and beyond. That requires complete support for multi-division entities (with all the financial tools needed), and deep localization across a wide range of geographies for things like taxes (these can get really complicated), regulatory requirements, languages, currencies and exchange rates, local conventions, and preferably a local presence on the ground that understands the culture and keeps up with regulatory and legal changes.
In addition, a system should have the ability to run bulk orders and individual small order fulfillment in the same facility. Of course, these two streams will have very different ways of storing materials (pallets vs. eaches), material handling systems, different picking, packing, and shipping, replenishment, and so forth. But this should not be done with two separate, unintegrated systems or else economies of scale and the ability to pool inventory is lost. It is critical to have a unified forecast, a single accurate view of inventory across channels and locations, and the ability to easily shift inventory from one pool to another to meet demand. It also can be valuable to be able to interleave the two streams (bulk and individual orders) for smoother utilization of labor, ability to handle priority shipments without interrupting the operations, and to take advantage of lower cost bulk shipping.
Thriving in the Age of Amazon
Amazon and other innovators continue to set new heights for customer expectations. Whether small or large, businesses can thrive in this competitive environment, provided they relentlessly differentiate and optimize. An integrated system, with full omnichannel capabilities, is crucial to support the competitive differentiation and optimization needed for success.
1 For example, some companies use scales to weigh boxes after they have been packed, but before they have been sealed. These scales are connected to a system that brings together the order information with data about the weight of each item and the shipping carton. Thereby, the system knows exactly what the shipment should weigh. If it varies from that, the shipment is flagged to be checked to ensure a mistake hasn’t been made. For some firms, order accuracy is important enough that they have a second person barcode scan all items in the order, to ensure it matches what was ordered. -- Return to article text above 2 LTL = Less-than-truckload, TL = Truck-load -- Return to article text above
To view other articles from this issue of the brief, click here.