My last blog post took a closer look at the possibility of outgrowing FBA. If businesses do need to expand with multi-channel fulfillment, it’s not feasible to just start selling on eBay, when the sole inventory is held at Amazon Fulfillment Centers for the existing FBA business.
In some sense, this is a follow-up article: We will be taking a closer look at multi-channel fulfillment from a logistics perspective.
Becoming a multi-channel merchant
There are two distinct ways to become a multi-channel merchant, depending on the starting point. The first, starts with an existing online business. The second starts from brick-and-mortar stores, called stationary retail. Some new businesses pursue a multi-channel strategy right from the start. We are currently working with exactly such a business, but for the purposes of our article, let’s stick with the first two types of businesses.
From a fulfillment perspective, adding online channels to an existing stationary business is more complex. It has all the implications of an additional sales channel, but has a much larger impact on existing fulfillment operations, that are used to handle large replenishment orders for a limited amount of shops.
Adding another channel to your business
So what changes for an existing business when it adds a new online sales channel? The first thing is additional order sources. This is an important and rather obvious point. But why is it so important? Because customer experience is key in e-commerce. Models like Amazon’s Prime-enabled Fulfillment-by-Merchant or eBay Plus have very stringent, and different, requirements. Examples are limits for order cancellations (max. 0.5% in the case of Seller-Fulfilled-Prime) and on-time shipping.
As a merchant, you have to be able to collect numbers and KPIs for each sales channel individually. This adds an additional axis to most of the existing KPIs, instead of one single KPI for order cancellations, you are going to have one line for each sales channel under Order Cancellations.
Another important change are changes in average order size. And this is the biggest difference between stationary retailers adding B2C online sales and eCommerce retailers adding a new marketplace. The latter already are a B2C online business, all processes are used to small orders from a high number of customers. Stationary retailers on the other hand, are now faced with a lot of small customer orders, something their physical stores cover for the existing business.
And of course, there is also the question of inventories. The most efficient way of handling multi-channel fulfillment, is to use one inventory for all sales channels. Using one inventory for all sales channels, doesn’t mean that this inventory has to be held at the same location. There can be, for example, two warehouses to be closer to customers. As long as both warehouses can fulfill orders from all sales channels, it is still one inventory.
It is also possible to use the same inventory to fulfill customer orders directly and to replenish, for example, local stores and FBA inventory. Which of these setups is better suited is impossible to answer generally, so the decision should take into account the following factors:
- Logistical capabilities
- Sales for each individual sales channel or marketplace
- Availability of interfaces
Integration with other marketplaces
Having more than one source of customer orders raises the question of how to integrate existing ERP- and fulfillment systems to multiple sales channels and online marketplaces. There are basically two options: use dedicated middleware that is already connected to the marketplaces, or connect directly to these marketplaces. Which solution works best largely depends on the business in question. Personally, I would connect to the most important marketplaces directly, if possible. Simply because, for things like Amazon’s Fulfillment by Merchant Prime model, I’d like to have the maximum amount of control. Directly integrating, also reduces complexity, there is only interface instead of two, and makes root cause analysis in case of issues a lot easier. That being said, most ERP-systems out there can be connected to any other system by using XML
What else has to change once customer orders are coming from multiple sources?
First, any warehouse-management system has to be able to distinguish between these sources. As mentioned earlier, it makes a huge difference if a given order is Amazon Prime or, for example, a normal eBay order. The warehouse has to be able to prioritize picking, implement optimized picking algorithms, and adhere to specific pick-up times. Separating customer orders by source and type, e.g. Prime or non-Prime, also enables a merchant to break down KPI accordingly, and thus manage their online business more efficiently.
This system setup will have downsides. Complexity increases significantly. Almost every customer-facing fulfillment KPI gets additional break-downs. Warehouse operations have to find solutions for different order types and additional carriers. With additional carriers, rate structures become more complex, one carrier might base parcel rates on weight and assumed parcel dimensions, while another carrier might only use dimensions and an overall weight limit. Just which carrier is the most economic becomes a tricky question. Answering that question needs close involvement of controlling and finance. This aspect can easily be forgotten, which bears the very real risk of negatively impacting profitability.
Variations of order sizes
Customer behavior differs across devices, product groups, and sales channels. This is shown in Average Order Values, one example article covers this. The problem with Order Value, from a fulfillment perspective, is that the value of an item is among the least important attributes of an article. Fulfillment is driven by dimensions, by weight. And by Number of Units per order.
Regardless of the particular business, it is fair to assume that additional sales channels and marketplaces will increase variability of order sizes. Even more so if a stationary merchant adds B2C online sales. We already took a look at increased complexity for fulfillment by having to:
- Add new pick algorithms
- Additional carrier pick-ups
- Additional order attributes impacting KPIs
Now, fulfillment also has to cope with a greater variation of units to be picked per order. This can mean changes to the general pick strategy. Orders have possibly been picked directly into shipping cartons in the past (which is a rather efficient way of picking), but the new order sizes make it necessary to put dedicated Packing Stations in place.
Strangely, it is easier to cope with these variations for stationary retailers, once fulfillment processes and operations are put in place, than e-Commerce merchants. Stationary retailers can, and should, separate B2C eCommerce operations from their stationary business. Online merchants, or any merchant already having some kind of B2C operation, cannot separate fulfillment for each marketplace.
A multi-channel business model is a project
All of these points and challenges can be solved. However, it is important to include fulfillment from the start when additional sales channels are added. I recommend starting with a limited number of articles/products when launching a new channel. This allows everyone involved to hammer out all issues that may come up. And once processes run stable, the selection for the new channel can be increased.
By creating efficient processes first, the business may experience slower growth in the beginning, but any growth further down the road is much more sustainable and steeper. If processes and systems are set-up to manage, say, 5 articles from a new channel in a reliable way, 5 additional articles is no more difficult than adding 500. On the contrary, not having stable processes can make that impossible.
3PLs or own warehouses
I already touched this point in the last post about outgrowing FBA, so I won’t spend too much time on that question here. In my experience, merchant-owned warehouses have a tendency to be less flexible, because they are highly specialized for whatever business they served in the past. 3PLs, on the other hand, can be more flexible, because they are already serving different customers and businesses. Also, 3PLs may already have some necessary interfaces. That being said, 3PLs are a people business, so much depends on the specific team at the specific 3PL site.
How greenleaves.io can help
At greenleaves.io, we have experience managing this type of project or growth. We can evaluate the impact of new sales channels for existing fulfillment operations, we can also take over these operations for merchants. This can be interesting if merchants are outgrowing FBA because now they need a dedicated team to manage fulfillment. It can also be the case for merchants branching out to e-commerce. In that case, an external partner like us can reduce the needed management effort significantly.