Bedroom to boardroom

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A guide to the maturity curve of EFulfilment. …

A guide to the maturity curve of EFulfilment.
Email simon.dixon@hatmill.co.uk if you would like a pdf copy.

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  • 1. Ecommerce Fulfilment: Bedroom to Boardroom A guide to understanding where your fulfilment operation is and what to do next
  • 2. Fulfilling the customer promise in ecommerce supply chains continues to be challenging The continued growth in ecommerce has seen increasing numbers of start up etailers entering the market with a variety of product offerings. Typically they will have developed an excellent website, be focussed on their SEO and marketing and have an excellent social media strategy. What is often seen as an afterthought is the fulfilment of the products, or more accurately, the fulfilment of their end-to-end customer proposition. So why is fulfilment so important in the battle for online customers? Fundamentally, the customer proposition doesn’t end at the checkout. The fulfilment and delivery is the only time customers will see and feel the process – so it’s vital that it is executed perfectly. As the final component in the relationship etailers have with their customers, the faster and more efficient it is the better. For example, research has shown that delivery factors are responsible for two thirds of abandoned carts, costing an estimated £1bn per year in lost sales (Royal Mail Delivery Matters 2011). Getting delivery right is therefore key to generating customer loyalty. The same research suggests 90% of home shoppers will buy from an etailer again if they are happy with the delivery. Leading online retailers offer convenience and choice for their customers, including, same day, next day, standard and click and collect options, as well as a transparent and simple returns process. Indeed, 79% of retailers offer a choice of delivery options, with 68% also offering next day. (Micros Delivery Report 2013) Therefore, offering a choice of delivery options and an easy returns experience is a huge part of delivering the customer proposition. By getting this right etailers can significantly differentiate themselves from their competitors. Expediting these options and offering a seamless fulfilment solution is therefore key to the customer’s online experience. What ensures this happens can vary significantly from etailer to etailer, depending on their volumes, growth, business model and the sector they operate in. There is, however, a typical journey followed by most etailers, shown on the following fulfilment maturity curve. An understanding of where they are on the curve can enable an etailer to better develop a strategy for improving their operation resulting in reduced costs and a broader customer proposition.
  • 3. Heroics: • Volume growing • Expanded into small premises • Staff performing heroics to fulfil orders in line with customer proposition • Some technology used to manage orders • Inefficient, poorly designed processes • Wasted time and cost • Picking errors and late deliveries • Carrier collections but at supplier discretion • Carrier rates uncompetitive Start-up:  Small scale  Utilising existing office space / kitchen table / spare bedroom  Manual order management  Spreadsheets managing data  Daily trips to local carrier depot for despatches  Adhoc returns processing Performance Differentiated Optimised Managed Heroics Start up Managed: • Recognise need to invest in dedicated fulfilment centre or to outsource to experts (failure to do so can result in a significant downturn in performance ) • Standard operating processes utilised • Systems implemented to manage orders, inventory and warehouse • Consistent ways of working are defined, deployed and maintained • Regular, but suboptimal carrier collections • Reduced carrier costs Growth Differentiated: • Industry leading productivities • Significant automation of processes • Multiple sites • Understood and minimised cost to serve • Full spectrum of delivery options including same day, click and collect and timed windows Optimised: • Integrated web platform, ERP, WMS and order management systems • Elements of automation of processes implemented • Benchmarked and highly efficient productivities • Improved cost per unit • Spectrum of carriers utilised • Improved delivery options achievable • Later carrier collection times • Effective returns management strategy
  • 4. Understanding where etailers are on the maturity curve and how to progress to the next stage The features of each stage of the maturity curve may vary according to individual etailers. However, if the majority of them are very apparent then a business can quickly begin to understand what they need to do to progress towards the next phase in their fulfilment operations. The failure to do so can lead to a significant reduction in the performance of the fulfilment operation and ultimately seriously damage the brand. Leading etailers understand this and are continuously striving to marry their fulfilment operations to ever increasing customer expectations. Start up – The features apparent at this stage will be familiar to most etailers who’ve started out by utilising the likes of a spare bedroom. Initially this is a cost effective way to start, you remain in control of the process and volumes dictate that significant investment in infrastructure won't provide a sensible ROI. If the business continues to grow, etailers will quickly move up the curve towards the next stage where additional resource is required. It is likely that this will include recruiting some staff to pick and pack orders and probably take on some additional space to house and process stock. Typically businesses should seek as much flexibility here in terms of employee T&C’s and the lease. Volumes will fluctuate so minimising unnecessary overheads is key. A location as near to carrier hubs as possible without impacting your control of the operation should also be considered. Heroics - By this stage etailers will begin to develop an understanding of the processes involved in fulfilment and will begin to improve them. The opportunity to improve buying terms with suppliers, particularly carriers and packaging providers, will also occur as order volumes grow. The reality is that owners and staff are likely to be working additional hours to fulfil orders and there will be inefficiencies and waste causing a risk to the brand and staff burnout. Focus can quickly move from core activity such as sales and marketing to just “getting it out of the door”. This is where the real step change will occur and etailers should be asking themselves questions such as: • Do we have the knowledge and expertise to do this ourselves? • If not, how do we become experts? • Can we afford to invest in the systems and infrastructure required to maintain our customer proposition? This is the tipping point in fulfilment terms and at this stage businesses without sufficient internal know-how should be seeking advice as to how to move the business forward to the next stage. To really gain an insight into improving fulfilment operations, activities at this point should include; developing an understanding of what their competitors are doing; utilising their network for recommendations and advice; instructing specialist consultants; and visiting similar operations.
  • 5. Managed– Having invested in an in-house solution or outsourced to a third party, at this stage businesses will have defined and consistent ways of working deployed and maintained. Efficiency benefits will be realised and better commercial and operating terms will be agreed with suppliers. Now is the time to optimise fulfilment operations to realise the benefit on the cost per order and ultimately the bottom line. The etailer will need to understand who the industry leaders are and benchmark themselves against this (a good 3PL should be able to provide this data if outsourced). A clear growth strategy and understanding of the growth plans are essential to developing the optimised fulfilment solution for the business that provides scope for expansion. Process improvement projects will need to be applied in line with this end state vision to drive process efficiencies and realise significant savings. An investment in elements of automation to eliminate wasted hours and resource may also be required. The increased volume coupled with reduced cost per order will also facilitate the broadening of the customer proposition. Wider and cheaper delivery options can be achieved with a variety of carriers (free standard delivery is fast becoming the norm as demonstrated by the likes of Amazon and ASOS) to improve conversion rates and average order values. Optimised – Once an etailer has reached an optimised stage in their fulfilment operations they will have fit for purpose, integrated systems with highly efficient processes driven by a good understanding of their cost to serve and benchmarked productivities. The focus will then move to leveraging this position to differentiate them from their competitors. Where range and price are key battle grounds online, a differentiated fulfilment proposition can be key to growing sales and improving margins. It is likely that significant investment in the automation of processes and additional fulfilment centres will be required. This will speed up fulfilment times and facilitate the likes of cheaper and easier same day deliveries and a broader range of convenient collection points for customers. A detailed evaluation of their end to end supply chain to understand their cost to serve will be required to ensure the right supplier base and product mix to maximise margin. Differentiated – Having established industry leading fulfilment operations, designed to ensure the customer proposition is met and exceeded at minimal cost to the business, it is vital that etailers don’t sit still. The speed at which the industry is changing means continuous improvement and innovation are vital to ensuring the position on the maturity curve is maintained.
  • 6. Managing the fulfilment centre in-house or outsourcing to a third party provider Third party logistics providers (3PLs) provide fulfilment services to their clients. Typically, the clients own the stock and the 3PL provides the infrastructure, systems and equipment to manage the fulfilment of the stock. A number of fulfilment providers are increasingly offering one stop shop propositions, including customer service, photography and web platform build, although this provision can vary from contract to contract. Typically clients will use 3PLs as they do not possess the skills or expertise to manage their own fulfilment operations and see them as ‘non-core’ to their business, particularly when volumes reach a tipping point necessitating this move. Benefits of using 3PLs • They can operate shared user facilities so fixed costs can be divided between two or more clients • They can provide the flexibility and scale for fluctuating seasonal and annual growth • As fulfilment specialists hey have significant knowledge and efficient practices to deliver their clients’ business requirements • There may be pre-existing capacity in a 3PL’s network that would match the businesses requirements, avoiding the need for the retailer to find premises • It can pass some risk from the business to the 3PL • Access to lower cost services, such as carriers and packaging suppliers • Allows the business to focus the majority of resources on their core competencies However, there are also a number of factors to consider regarding the use of 3PLs before deciding on a course of action. • Would the cost of a 3PL management fee represent good value relative to the benefit derived? • Can the business operate to a set criteria of service provision (e.g. providing data and accurate forecasts) to the 3PL to allow them to operate efficiently? • Can the 3PL operate at a lower cost than could be achieved in-house? • Does the business want to stay in control of their brand, particularly if their product requires high levels of customer interaction, by keeping logistics responsibility and accountability in house ? Summary The growth in ecommerce does not show any signs of slowing so etailers must be able to deliver excellent fulfilment solutions to ensure they stay ahead of the competition. What this looks like will vary depending upon the size and scale of their business. What is required is a clear understanding of their fulfilment maturity and what they need to do to improve their fulfilment performance. To arrive at a clear understanding it is good practice to assess the costs, benefits and risks of realising this step change. This will typically take the form of evaluating the savings to be made through improved productivities; the sales benefits from a broader choice and more convenient customer proposition; the costs of investment in infrastructure and systems and the ability of the organisation to manage the change and subsequent operation.
  • 7. About the authors Simon Dixon is the Managing Director of Hatmill, a management consultancy advising clients on all aspects of Supply Chain and Logistics. He is the former leader of PwC’s logistics consulting team and gained his industry experience with Asda. Simon Dixon simon.dixon@hatmill.co.uk +44 7885 688 287 John Hayward is a Logistics and Supply Chain consultant with Hatmill, with a focus on ecommerce fulfilment. He gained his industry experience in 3PLs with Wincanton and Amethyst Group. John Hayward john.hayward@hatmill.co.uk +44 7734 414 953 Hatmill is a Supply Chain and Logistics management consultancy. We work with clients in a range of sectors to improve their end to end supply chain costs, efficiency and service. www.hatmill.co.uk This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Hatmill Limited, its Directors, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.