White paper. Outsourcing e-commerce logistics: pros and cons.

Transcription

1 White paper Outsourcing e-commerce logistics: pros and cons.

2 White Paper. Outsourcing e-commerce logistics: pros and cons. 2 Contents Introduction 3 The need for e-fulfillment warehouses 4 State of the market 6 Outsourcing logistics activities 7 Insourcing logistics activities 9 Custom solutions 10 Sources 11

3 White Paper. Outsourcing e-commerce logistics: pros and cons. 3 Introduction While traditional retail sales are increasing by around 4 5% per year, growth ratios in e-commerce are at least three times higher. 1 Growth is even stronger in some countries. Such as China and India, which experienced growth of 43% and 30% respectively in But online consumers have high expectations, and retailers must offer flexible delivery options to keep them happy. One in two online shoppers abandons the transaction before completion due to dissatisfaction with the available delivery options. 3 Above all, consumers want insight into the delivery process. Many retailers are still lacking in this area. 4 However, in recent years, there has been lot of investment in track-and-trace solutions, enabling the status of orders to be monitored online. Instead, products will move through complex networks and interconnected facilities, including bricks-and-mortar shops, distribution centers, click and collect pick-up points, and so on. In their attempts to satisfy demanding online consumers, many retailers are gradually reaching the limits of what existing supply chains can do. Over the next few years, there will be a strong focus on logistics networks in retail. 5 The key question of whether e-commerce logistics should be kept in-house or outsourced also needs to be answered. A great challenge facing retailers is that the supply chain network of the future will no longer be linear from factories by way of distribution centers to stores. Over the next few years, there will be a strong focus on logistics networks in retail.

4 White Paper. Outsourcing e-commerce logistics: pros and cons. 4 The need for e-fulfillment warehouses The average order turnaround time in the supply process must be less than an hour to ensure orders are delivered fast enough. There are several reasons why traditional warehouses are not best suited to e-commerce logistics. Firstly, the choice of online consumers is no longer limited to the products available in the shop. Consumers want to be able to order any product at any moment in any quantity. As a consequence, there is a shift in supply-chain thinking from push to pull. 6 In a push model, suppliers push their products to consumers through the distribution channel. In the pull model, consumers create the demand and suppliers respond. Secondly, in e-commerce order quantities are smaller than production quantities that are typically sent to stores. On average, online consumers spend around $56 ( 51) per order. Top 10 consumers spend an average of $167 ( 153) per order. 7 This impacts the way the warehouse is set up. E-tailers need to keep loose products in stock rather than lots of pallets. So e-fulfillment sites are typically equipped with shelving racks and mezzanines to increase floor space. Thirdly, e-commerce is bringing sales and marketing aspects into the warehouse. E-commerce and digitization are driving demand for personalized products. As a result, some value-adding steps have moved from the production environment to the warehouse. An example is product labeling and repackaging. 8 A fourth important reason for separate e-commerce warehouses is the need to deal efficiently with returns and demand peaks. In addition to seasonal variability, which also plays a role in the traditional supply chain, the online channel must also take daily peak patterns into account. 9 Typically, the peak for an e-commerce warehouse is toward the end of the afternoon and lasts throughout the evening. There is also a peak on Mondays following weekend orders, and usually on Fridays too, to ensure all orders are dispatched before the weekend. The average order turnaround time in the supply process must be less than an hour to ensure orders are delivered fast enough. This demands enormous flexibility from e-fulfillment warehouse staff. 10

5 White Paper. Outsourcing e-commerce logistics: pros and cons. 5 In addition, at least three times as many employees are needed as in a traditional distribution center, due to the required speed, additional handling and stricter quality checks because goods go directly to the end customer. One thing that does not differ between traditional and e-commerce fulfillment centers is the importance of the location. That said, as well as being as close as possible to the most important and the largest number of customers, e-commerce warehouses must also be connected to the network of express services, logistics service providers and postal operators. picking locations can be set up containing a small quantity of each product, which can be continually restocked. 11 Bearing in mind all the requirements an e-fulfillment warehouse must satisfy, retailers clearly face many challenges in adapting their traditional supply chain infrastructure to the needs of online retail. At the same time, it is important to switch to online retail quickly so as to be able to meet to current consumer demand. So outsourcing e-commerce logistics is worth considering. Establishing e-fulfillment centers as close as possible to urban areas is advantageous, as big cities are home to the largest number of consumers and tight transport networks are already in place. However, generally expensive warehouse space must also be factored in those locations where every square foot is precious. Which is why the focus at e-fulfillment centers is increasingly on building warehouses higher so that more goods can be stacked in a smaller floor space. To maintain the required picking speed, active

6 White Paper. Outsourcing e-commerce logistics: pros and cons. 6 State of the market In Europe, logistics is the third-most outsourced activity. But the extent to which companies outsource their activities differs from sector to sector. The Fast Moving Consumer Goods (FMCG) sector outsources the most, followed by the automotive industry. This could be due to the high price pressure and consequently lower profit margins in these sectors, which place more emphasis on cost efficiency. 12 The pressure on margins is definitely a concern with online orders, given that many businesses must account for a part of the fulfillment and delivery costs themselves. Hardly any online stores charge end consumers the full cost of fulfillment and delivery. Many e-tailers try to offset this loss by increasing their product margin, but an efficient fulfillment chain remains one of the main strategic drivers of A Capgemini study reveals a relatively predictable ebb and flow pattern when it comes to outsourcing versus insourcing. When viewed over a long period, there is a gradual trend toward outsourcing logistics services. Shipping companies that source logistics services from third parties will, on average, spend 36% of their total logistics budget on these services this year. Domestic transport (80%), international transport (70%) and warehousing (67%) are the most frequently outsourced logistics activities. The top five are all operational and repetitive activities. More strategic, customer-oriented and IT-intensive logistics activities, such as order management and fulfillment, are outsourced least often. 14 competitiveness for e-tailers. 13 Most frequently outsourced logistics activities 67% 70% 80% Warehousing International transport Domestic transport

7 White Paper. Outsourcing e-commerce logistics: pros and cons. 7 Outsourcing logistics activities Optimizing costs remains the primary reason for outsourcing. 6% 11% 23% Less stock Lower costs Saving on logistics costs There are various reasons to outsource logistics activities, but optimizing costs is number one. Shippers say that by outsourcing logistics activities they cut costs by 11% on average, hold 6% less stock and save an average of 23% on fixed logistics costs. 15 By outsourcing their activities, e-tailers have fewer fixed costs, such as labor and warehouse rental. Cost savings can also be achieved through economies of scale which is especially true for smaller businesses. Companies can get volume discounts when contracting an e-fulfillment business. Outsourcing also has a beneficial effect on cash flow as shipping fees can be paid 14 to 30 days after the receipt of the invoice fees rather than up front. That means e-tailers hold on to their money longer and spend it on additional products or extra marketing. In a fast-changing market, outsourcing logistics activities also means that businesses can stay up to date without having to continually invest in the latest e-fulfillment technologies. In e-commerce, it is not unusual for the wrong product to be shipped. This costs a lot of money in returns and can also have a negative impact on brand image. There are solutions that provide virtually 100% quality assurance, such as weight checks and item scanning prior to dispatch. However, purchasing these solutions is a big investment for e-tailers. A dip in quality is almost inevitable when online stores experience strong growth. This is often when businesses contract an e-fulfillment service provider. 22% of British e-tailers say not having to invest in new systems is the main reason for outsourcing. 16

8 White Paper. Outsourcing e-commerce logistics: pros and cons. 8 Outsourcing also has advantages not directly related to costs. For example, outsourcing logistics activities can help deal with seasonal and daily peaks, enable businesses without e-fulfillment centers to roll out online activities sooner, and usually enable e-tailers to offer consumers more delivery options. 17 Another big plus in outsourcing e-commerce logistics is that e-tailers can focus on their core activities. Online retailers invest a lot of time in setting up a good balance of online marketing and sales activities. But this pays for itself, because web optimization, social media strategy and digital marketing pull in more online visitors and so generate more sales. Additionally, organizing logistics activities can often be time-consuming and e-tailers make meager savings Businesses stand to further optimize their processes by drawing on the knowledge and expertise of external parties. In regions like Northern Europe, this is a significant motivation for outsourcing. 19 Logistics service providers, express delivery companies and postal operators have in recent years invested heavily in IT systems that support track-and-trace technology. Online consumers clearly demand this additional transparency in the supply chain. by doing so themselves. 18 Logistics service providers, express delivery companies and postal operators have in recent years invested heavily in IT systems that support track-and-trace technology.

9 White Paper. Outsourcing e-commerce logistics: pros and cons. 9 Insourcing logistics activities Although the general trend is to increasingly rely on third parties for logistics services, some organizations deliberately choose not to outsource. They usually do so to maintain control over their logistics chain, though other factors also play a role. Businesses that view logistics as one of their core competencies are not quick to outsource their logistics activities. In particular, organizations that have an extremely complex logistics network tend to keep their logistics and so their knowledge of various processes in-house. Such organizations are closely linked with another often-heard reason for insourcing logistics activities: No one knows our organization as well as we do. 20 The belief that outsourcing logistics activities does not cut costs also holds e-tailers back from working with an e-fulfillment partner. The failure to meet cost savings targets or optimize logistics processes are the other most-cited reasons for taking these activities be cast in a standard mold, meaning that outsourcing still requires strategic partnerships to be developed. Technology is providing many new ways to integrate data and services over and above traditional Electronic Data Interchange (EDI). An example is the integration of real-time Internet of Things (IoT) data. 22 Yet IT integration and the lack of transparency can sometimes be a barrier to outsourcing logistics activities for many companies. Outsourcing e-commerce activities also requires trust in the third party. Sharing confidential information is key to a smooth and efficient logistics service. For organizations that have managed their activities in-house for decades, handing over their supply chain operations to a third party can be a difficult step. Outsourcing logistics activities can sometimes be a bridge too far, particularly for organizations that do not view their delivery service providers as cooperative partners. 23 back in-house. 21 Another challenge in outsourcing logistics activities is managing the performance of outsourced services. In a recent survey by ChainLink Research, 55% of respondents cited this as an obstacle to outsourcing activities. Logistics activities are a critical component in the organization of e-commerce businesses. When goods delivery goes wrong it has a direct impact on brand image and customer experience. Logistics activities significantly influence customer satisfaction and market share. As such, outsourcing logistics activities is more critical than outsourcing more internally focused functions, such as payroll management. Plus, logistics activities cannot simply Outsourcing e-commerce activities demands trust in the third party the logistics partner.

10 White Paper. Outsourcing e-commerce logistics: pros and cons. 10 Custom solutions The reality is rarely black and white. Every business has to look at its own processes, requirements and strategy, and decide for itself which logistics activities can and cannot be outsourced. We, at Landmark Global, have a strong belief in the need for a constructive dialogue with our clients in which we identify the advantages of each model together. Last-mile delivery is a great example of a logistics activity that is increasingly being outsourced, especially in cross-border e-commerce. Customers used to bridge the last few miles from shop to home themselves. 25 Landmark Global s intricate network now offers an excellent alternative. By outsourcing fulfillment services, e-tailers can enjoy more attractive rates. Online consumers in turn enjoy a broad range of delivery options it is a win-win situation. E-tailers that experience significant international growth can outsource their e-fulfillment and lastmile delivery to Landmark Global. We have various fulfillment sites across the globe, allowing e-tailers to compete on a level playing field with local players by delivering faster and cutting costs. Our technology also creates transparency across all sites. This allows e-tailers to check their stock levels in real time, no matter when. E-commerce logistics poses complex supplychain challenges for e-tailers. Because not only online consumers are demanding more; e-tailers themselves are also making greater demands on e-commerce logistics. It is our strong conviction that by outsourcing logistics e-commerce activities, e-tailers are able to concentrate on their core activity and so safeguard their sustainable growth. Partnerships enable businesses to respond to new innovations and changing market demand faster and more flexibly, giving them a competitive edge in an increasingly aggressive, globalized market. Our e-commerce solutions International Parcel Delivery E-commerce Solutions Fulfillment Services Trade Services Returns Management

11 White Paper. Outsourcing e-commerce logistics: pros and cons. 11 Sources 1 The E-Commerce Imperative, Cassidy Turley, Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging- Markets/ Econsultancy Multichannel Retail Survey Position Paper Cross Border e-logistics, Ecommerce Europe 5 The Shed of the Future, E-Commerce: its impact on warehouses, Deloitte, Logistics and E-Commerce, The Impact of E-Commerce on Logistics Real Estate, CBRE, mei The 3 most important e-commerce benchmarks and how you can crush them, Big Commerce Blog, maart The Shed of the Future, E-Commerce: its impact on warehouses, Deloitte, Logistics and E-Commerce, The Impact of E-Commerce on Logistics Real Estate, CBRE, mei Outsourcing in Europe, An in-depth review of drivers, risks and trends in the European outsourcing market, Ernst & Young, th Annual Third-Party Logistics Study, Capgemini, Logistiek & e-fulfillment: zelf doen of uitbesteden?, Logistiek, januari Notable Views: Fulfillment Outsourcing, Pros and Cons, John Lindberg, Logistiek & e-fulfillment: zelf doen of uitbesteden?, Logistiek, januari Outsourcing in Europe, An in-depth review of drivers, risks and trends in the European outsourcing market, Ernst & Young, Outsourcing versus insourcing, ASL blog. 21 Outsourcing in Europe, An in-depth review of drivers, risks and trends in the European outsourcing market, Ernst & Young, Meeting the outsourcing challenge, ChainLink Research, februari Commerce/Insourcing_of_outsourcing/ 25 Developing the last mile of a parcel delivery service concept for consumers, Laurea Leppävaara, Outsourcing in Europe, An in-depth review of drivers, risks and trends in the European outsourcing market, Ernst & Young, 2013.

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