E-fulfillment Poses New Challenge For Multi-User Warehousing
The traditional challenges inherent in managing a multi-customer warehouse - balancing space requirements, juggling labor to accommodate seasonal demands, having in place the proper systems and equipment to meet varied customer requirements - only intensify with the flood of e-commerce initiatives.
"Two guys in a basement can set up an online storefront to sell product in a matter of hours. It's easy to overlook what it takes to ship all those orders out." - John Clark of Provia Software | |
As 3PL service providers bring e-fulfillment programs into their facilities alongside more traditional warehouse activities, they face a new set of challenges. In general, these newcomers require far greater system visibility and faster turns of shipments that are increasing in number and decreasing in size.
From the "big picture" perspective, the biggest challenge for operators of multi-customer warehouses is the ability to capitalize on the opportunities that technology and the internet offer to them, says Rich Sherman, senior vice president and director of "visioneering" for EXE Technologies.
EXE recently completed for internal purposes a survey of 900 dotcom companies, from which it received approximately 250 responses. Of those, says Sherman, less than 20 percent were operating with a fulfillment facility larger than 20,000 square feet. Virtually all respondents indicated significant problems with issues critical to customer service and fulfillment, such as the ability to maintain appropriate stock, to fill orders profitably and to track customer orders.
"There's a tremendous demand for fulfillment management, or e-fulfillment," Sherman points out. "While there are a small number of highly visible dotcoms currently building and operating warehouses, a very high percentage of these companies are looking to someone else - the 3PL service providers - to manage their fulfillment operations."
Sherman sees it as a huge opportunity for the 3PL industry. "Most of these dotcoms are both funded and focused on branding and building market share," he says. "Only a few of them have the capital to actually build e-fulfillment centers." The 3PL market always has been competitive, adds Sherman, "but never has been as hot as it is right now."
The emergence of e-fulfillment needs and the much quicker speed to market being demanded by all these new dotcoms is spawning a hybrid species of 3PL, the e-3PLs, says John Clark, manager of corporate communications for Provia Software. "Two guys in a basement can set up an online storefront to sell product in a matter of hours. It's easy to overlook what it takes to ship all those orders out."
The e-3PLs are more savvy as to the requirements for dotcom success and offer the value-added services that these start-ups need, including the automated small-parcel shipping inherent in online selling, he says.
They also understand that dotcom companies need a quick implementation time - faster than anything in the traditional warehousing world, Clark adds. "A company contracting with an experienced e-3PL should be up and running and able to ship product out in a matter of weeks."
There really are two models for e-commerce fulfillment, says Dan Trew, vice president of product strategy for Catalyst. One is a brick-and-mortar model, where the distribution warehouse is like an extension of the e-commerce company's internet site, fulfilling its own orders and managing its own stock levels.
The other model is for pure internet plays. "These companies have the storefront on their web site, but they may not be responsible for any order fulfillment and instead look to a 3PL service provider to be responsible for that function," says Trew.
Clock Is Ticking
That puts the pressure on the 3PL's warehouse manager, who then is responsible for a very short turnaround on a lot of orders for a specific owner. "After all, people who order on the internet want their stuff tomorrow," Trew adds.
The explosion of e-commerce places extreme requirements for system visibility on the fulfillment side of the equation. "One thing that both traditional 3PL and now e3PL end clients are beginning to demand is visibility - not just for them, but for their end customers as well," says Clark. "When someone places a web order, they want to know the real-time status of that order, so 3PLs and e3PLs will need to offer this functionality in order to succeed."
"When a company goes online, their inefficiencies are more visible," says Henry Bruce, CEO of Optum. "They really have to have it together on the fulfillment operation. You have to be able not only to execute within a delivery time window and meet expectations, but you also have to provide visibility."
It's not enough just to take the order and have the goods show up; once you arm the buyer with a browser, the scenario changes drastically. "The need to make information available to the end user during the fulfillment process has skyrocketed," says Bruce. For companies that were in the traditional mode - whether they received orders by EDI, FAX or on paper - the only lifeline to the customer was the telephone. "Now, when you put a browser in the hands of the buyer, they fully expect to be able to use that same browser as a vehicle to keep tabs on where their order is."
Bruce points to a Forrester study completed early last year that focused in part on the changed buying habits of a group of frequent travelers who had stopped using travel agents to arrange trips, opting instead to make their own arrangements on the internet. "They found that when a person booked flights through a travel agent, the tendency was to do a status check one or two times before the tickets arrived," he says. "Forrester found that the same traveler using the internet tends to check the status of that booking 10 or 11 times before the departure date."
That kind of scrutiny or need-to-know puts an enormous strain on the service environment and underscores the fact that the rules have changed, says Bruce
"In a traditional fulfillment operation, what happened between the time an order was placed and when it showed up was a big void," Bruce explains. Even customers placing orders via EDI received only skeletal responses such as order confirmations and advanced shipping notice.
Even Those Without Warehouses Need OMS Software |
"But now, companies are working cycle times and delivery windows that are extremely precise, and everybody's moving from just-in-case to just-in-time," says Bruce. "Buyers are placing orders today and expecting delivery tomorrow, and they want to know if it will arrive between 9 a.m. and 10 a.m. or 2 p.m. and 3 p.m."
These customers have a need-to-know in order to schedule their personal days and/or plan work within their own facilities, he adds. For the buyer of the product, there can be a huge difference between having a shipment show up at 9 a.m. or having it arrive at 3 p.m., particularly in a business-to-business scenario where the buyer may be using the incoming goods as components of another product waiting to be assembled and shipped outbound, or is taking that inbound shipment and putting it into a retail channel.
One thing e-commerce companies and their 3PL service providers need to remember, says Bruce, is that it's not the number of first-time buyers they attract - it's the number of repeat buyers they accumulate. "That's the critical statistic," he says. "If you don't create a positive experience during that first-time buy, you're not going to get a chance to do it again."
The name of the game is adding more value to existing relationships, Bruce adds. "It costs more money to go out and find new business than it does to keep a customer. The loyalty factor is becoming the differentiating piece, and the mantra is becoming 'what are you going to do for me?' And the more you can do for that customer in terms of that business relationship, the more business that customer is going to place with you."
This phenomenon is evident in electronics, high-tech and automotive, just to name a few industries. "The partnerships between buyers and sellers are getting bigger and bigger simply because they are adding more value," Bruce adds. "You can squeeze costs out of the supply-chain relationship, but if you add more value, it means greater margins and more business."
The challenge of balancing the needs of newer e-commerce operations with those of more traditional fulfillment operations has 3PL service providers seeking warehouse management and other systems that are specifically built to facilitate the management of multi-owner inventory and dynamic slotting of products of different companies. The traditional WMS was designed to manage inventory owned by a single company. As a result, many warehouse systems, in order to accommodate multi-owner inventories, had to create zones within the warehouse for those individual companies, says Sherman.
"Obviously, capacity and space utilization is critical to the profitability of the 3PL, so the capability to have a system that dynamically locates inventory regardless of its ownership and based on the optimal use of space and location within that facility is going to have a tremendous cost benefit to the third-party operator.
Secondly, absolutely critical to a 3PL firm is the ability to accurately cost and bill for all the activities and services it provides to its customers. The ability to have an integrated task management, activity-management, activity based costing and billing system is actually critical to the profitable ownership of that 3PL.
A particularly interesting challenge for 3PLs hinges on whether those existing service providers can go to their existing traditional customer base and present them with the opportunity to get into the e-commerce segment faster with their services. The e-commerce marketplace offers an opportunity not only for the 3PL from a dotcom perspective, but also to very quickly present to their customers how they can help those customers enable an e-commerce strategy and enter the e-commerce arena, says Sherman. "I can guarantee you this: Every customer of each 3PL is having a discussion in their boardroom as to how they can capitalize on the opportunities that e-commerce offers. The sooner the 3PL can identify that and work with its vendors to enable that internet channel and provide that guidance to their customers, the better are the chances that the individual 3PLs will be able to retain those existing customers over time and gain the incremental revenue."
Toward that end, emerging technology to help 3PL operators of multi-customer warehouses effectively cost and bid new business could prove highly beneficial to service providers as well as their customer base.
"In the 3PL industry, we talk a lot about partnerships, but until recently, people haven't had the opportunity to clearly articulate the value and cost of particular partnerships," says Sherman. On occasion, disagreements about cost and value factors have led to some very non-partner-like exchanges between buyer and seller. "A lot of companies have been underbidding some of these projects, and it has been very difficult for some of the 3PLs. There's not a lot of margin in many of these relationships."
Many of the cost-to-value elements of a third-party relationship are abstract in nature and difficult to quantify. "Most companies estimate that it costs anywhere from $40,000 to $80,000 just to prepare a bid for business, and that's in addition to the normal cost of sales, such as solicitation calls and demos," says Sherman.
However, recent technology emerging from WMS vendors provides the opportunity to assign costs and values to detailed aspects of the third-party relationships, and 3PLs are moving to embrace this tool not only to fine-tune their service proposals but to qualify candidates as customers.
"A lot of times people don't really understand what actually goes into the creation of the value they perceive in a business relationship, so the ability to clearly document, present and actually visually represent the cost of activities associated with these proposals is something this new technology provides," says Sherman. "It makes for a much more fact-based presentation that enables the prospective client to see what the real costs are in terms of providing these services. And anytime you can get into a fact-based negotiation, you are going to have a much more realistic win-win outcome."
This new technology helps optimize facility layout, item location, racking and material handling replete with cost basis. "As the 3PL gathers the information to formulate a proposal for a new client, the 3PL can determine exactly how much space is needed, what the cost will be, how much labor, and how much equipment will be required," says Sherman. This allows the 3PL very quickly to identify what its cost and facility requirements are going to be not only with the initial volumes expected to flow through the facility within the first few weeks of opening day, but also project costs and requirements according to projected growth models provided by the client. "They can do a five-year cost analysis and plan for presentation to a prospective customer in a very short period of time."
According to Trew, a lot of 3PL service providers basically manage bulk stock, receiving and then sending out to an owner pallets of merchandise. For these 3PLs to open their doors to e-commerce fulfillment, they not only have to be set up to handle the higher number of picks, but they need the systems to track costs and activity data.
Accounting Challenge
"On the accounting side of the operation, one of the 3PL's prime challenges is making sure that the metrics are in place to manage and segregate stock by owners," says Trew. Systems also need to be able to track the paradigm used to bill each respective customer - an increasingly complex task. Services can be billed on a transactional basis or in a number of other methods, such as according to a level of activity or the amount of space or labor used in the fulfillment operation. Systems must have the capability to accurately track the time the 3PL spends picking one owner's product versus another owner's product.
UPS Worldwide Logistics traditionally houses a mix of different clients in its multi-customer facilities and currently operates five such facilities at its Louisville, Ky., campus alone. In some spaces UPS employees are preparing Fender guitars for export, while in other spaces people perform computer repairs or reconfigure hard disks or program cellular telephones. There also are service parts logistics operations where customers maintain strategic stocks and send out parts on a next-flight-out basis.
UPS currently has a healthy stable of e-commerce customers, including Nike.com and Boo.com, but the logistics giant plans to add a new twist to the mix this summer when it launches UPS e-Logistics, a product of UPS e-Ventures.
The e-Logistics subsidiary will have facilities specifically dedicated to e-commerce customers and tailored to quick start-ups. In facilities that mix traditional and e-commerce businesses, system challenges can be considerable as UPS Logistics generally has to be connected to its customers legacy systems. However, in the new e-commerce operation, customers will select from among a group of software systems offered by UPS.