How to Setup Logistics for E-commerce from Scratch
Logistics are a vital part of any e-commerce business’s operations. In this article, we will look at 1) logistics for e-commerce, 2) important considerations in e-commerce logistics, 3) best practices, and 4) examples.
LOGISTICS FOR E-COMMERCE
The increasing popularity and success of e-commerce and setting up of online stores has meant a parallel change in the existing support structures in place to facilitate the retail system. Traditional business models are evolving and traditional supply chains and logistics processes are also evolving to accommodate this new mode of doing business.
Conventionally, a customer had the responsibility of becoming the last link in the supply chain by travelling to a store location and making their purchase. To facilitate and encourage customers, businesses would need to make significant investments in creating the perfect store in the perfect location. The costs associated with this would then be reflected in the final price of the good available for sale. The seller would also need to keep a particular level of inventory on hand and this would need to be regularly replenished.
Several changes have occurred to the system because of the shift towards online selling. The major changes include:
- The Sellers – Some sellers in the new marketplace are entirely online, with no physical retail presence at all. Concurrently, there has been widespread adoption of online retailing by traditional brick-and-mortar stores as well. In many cases, the new system allows the seller to be both a retailer and a distribution and fulfillment center.
- Flexibility in Locations – Because online sellers do not need to be overly concerned with the location of their operation, they enjoy a lot more flexibility in choosing a place that allows them to minimize costs. Smaller online sellers can even use their own house as a warehouse, while bigger more established ones often choose to have a network of distribution locations to better meet the needs to regional markets and minimize distribution costs.
- Connection to Supply Chain – Customers communicate with the store directly and are in essence, connected directly to the supply chain itself.
- Tracking – A customer who chooses to shop online is also choosing a method where the gratification can be significantly delayed. This means that a purchase is made without actually having experienced the product firsthand and the customer needs to wait a while before the order is received. This means that they will expect a bit more from the delivery process and demand accurate and real time transit information for their purchase. This means that there need to be information systems in place to provide this information.
E-Commerce in China: How online shopping is transforming logistics market?
Though there is not enough information at the moment on the consequences of these changes in logistics, there are some trends that can be observed. These trends relate to how e-commerce is changing physical distribution systems.
For one thing, traditional stores had put their focus on economies of scale through large stores in key locations. The new system challenges this by instead focusing on warehouses that are located in less urban and metropolitan areas and ship high numbers of smaller parcels to individual buyers. Economies of scale similar to traditional sellers can be achieved if a large volume of online sales is achieved and the shipments can be consolidated to a degree.
Another important aspect of this change is the cost of moving purchases from the point of sale to the point of consumption. Traditionally, this was the responsibility of the customer. But with e-commerce, this system, though still often paid for by the customer, needs to be integrated into the distribution process. This means more focus on aspects such as packaging and a lot more freight actually shipped. A traditional logistics system would not be able to handle this additional requirement.
Evolution of Logistics
As mentioned above, the importance of the changes to traditional logistics models is only now being understood and considered by retailers who chose to sell online. Over the last 40 years, the field of logistics has evolved in several ways and a broad timeline is:
- 1970s: Generally, retail stores were stocked by deliveries direct from suppliers and/or wholesalers
- 1980s: A trend towards centralization of store deliveries was seen and this was done through distribution centers under the retailers control
- 1990s: Global sourcing gained popularity and a trend towards import centers was seen. These import centers were created to receive and process shipments in containers.
- 2000s: The popularity of e-commerce meant the creation of e-fulfillment networks for distribution.
IMPORTANT CONSIDERATIONS IN E-COMMERCE LOGISTICS
Major Requirements of E-commerce Logistics
As online retail has grown, especially in non-food related industries such as fashion or electronics, where goods are shipped to customers through postal or freight networks, there has been a need for four major functions from logistics:
- Mega E-Fulfillment Centers: The merchandise to be sold is stocked in these centers. These centers may either be maintained by the e-commerce retailer themselves of by a third party logistics service provider. These facilities can be as large as or larger than one million square feet in size and usually operate 24 hours a day, seven days a week.
- Parcel Hubs: Parcel hubs or sortation centers are points where the outgoing parcels are divided based on destinations so that they can be sent to the parcel delivery centers.
- Parcel Delivery Centers: The parcel delivery center is the last stage before the package reaches the customer. The sorted parcels arrive to these centers and are then sent out to the customer.
- Integrated Technology: To allow faultless delivery of the right items to each customer, there needs to be technology that seamlessly integrates all aspects of the e-commerce operation to each other. Predominately, the shopping cart needs to be connected to the transport system to ensure that shipping costs and time frames communicated to the customer are accurate and updated.
- Shipping Costs: One common e-commerce dilemma for store owners are the abandoned carts. This happens when the customer adds in all the items but then gets either distracted or put off by the shipping charges. The additional costs are almost never factored in when the purchase decision is made and most often the item suddenly appears to cost more than its worth. When setting up e-commerce logistics, a store owner needs to have a clear shipping strategy in mind, which is a balance between being attractive to the customer as well as making business sense for the seller. There are a few options available for these, including:
- Free Shipping: Free shipping is bound to get the customers attention and generate interest. Though offered usually for domestic orders, this option can cut into a seller’s profits. So if a seller does decide to capitalize on the advantages of this method, they will have to be ready to either absorb the cost of shipping or raise prices enough to cover this. One way to balance this is to set a minimum amount shopped before shipping becomes free. This will help increase average order amounts and help bring up profits against which to offset shipping costs. If free shipping is offered, it should be advertised as such to gain maximum conversion rates and bring in customers. Whether the free shipping decision is made or not is based on the nature of the business and industry. A niche product category or a luxury item seller may find it easy to build in shipping costs into the price structure or charge shipping, while a more competitive market may not be able to do so easily. For larger items or more delicate, fragile ones, specialized shipping may be required and this may not be an option that can be offered for free.
- Charge the Customer What You Are Charged: This option means that the customer is charged almost the exact amount that the shipper has to pay for the item to be sent. This option presents a higher likelihood of breaking even between the shipping costs incurred and those paid for by the customer. Providing a real time shipping calculator can help build trust with the customer since they can be sure that there are no inflated shipping fees or raised item prices to offset shipping costs. This remains a good option for those specialized items such as furniture or fragile items that cannot be shipped free to a customer.
- Flat Rates: Another option is to offer a flat shipping rate for all kinds of packages. Other variations of this option could be bands based on either weight of the package or total purchase amounts. Some work needs to go into this option as there needs to be a projection of what average purchased amounts would be and what it will cost to ship packages. The seller will need to figure out what flat rate works well for them as well as for the customer.
- Shipping Modes: Along with options for shipping rates, there are also different modes of shipping that a retailer can chose to offer or use for their business. These include:
- Ship to Home: This is the most basic option, where the item is directly delivered to a customer’s home
- Ship to Store: Sometimes, customers opt for a store pickup, where the item ordered online is shipped to a physical store of their choice. This is obviously only an option for those retailers who maintain both an online and a physical store presence. This is an attractive option because it is usually completely free of cost and no one has to be present at home to collect.
Reverse Logistics Considerations
When a product flows backwards from the point of consumption to the point of production, this process is called reverse logistics. This process is one of the fundamental operational challenges faced by companies involved in e-commerce activities. The reason for this is that the volume of items that go through this reverse flow are immense and the cost of making this happen can become substantial. As many as 3% to 50 % of all shipped items can lead to returns and this can translate into high volumes of items travelling backwards along the supply chain.
Reverse logistics remain an imperative aspect of the logistics of e-commerce and any logistics setup would be incomplete without planning and implementation in this area. An effective reverse logistics process can have clear benefits in terms of customer satisfaction, as well as in several storage and distribution costs.
A typical logistics process will usually begin with a sales forecast which is then used to determine how much of the product will be needed. This product is then manufactured or procured to be shipped to a distribution center and from there on to a retail location. In a reverse logistics process however, there is no initiation from the business itself based on any plan. Instead, the process is initiated when a consumer makes a move in this regard. A returned product is collected and moved back to a distribution center. Relevant information is recorded such as item descriptions, condition and reason for return and the customer’s data. There is often inaccuracy in this information capture in the current reverse logistics scenario.
Key Components of a reverse logistics framework include:
- A clearly stated Returns Policy
- An established process for Returns Preparation
- A process for Receiving returned items
- A process to Ship an item exchanged, offer a refund or store credit
- A systematic way to Inspect and Sort returned items
- An Asset Recovery System that may include things such as restocking, repackaging for sale, return to a vendor and disposal or scrapping.
Though quite complicated and often costly, an effective reverse logistics framework in a requirement for any online business. This is because it can offer the following benefits:
- Reduction in Costs to the Firm: Reverse logistics allow a company to send unsold items back to a producer and receive items from a consumer. These items can then be taken apart, reassembled or recycled which can lead to cost savings.
- Improved Customer Satisfaction: If a customer feels that the company pays attention to defective products and gives importance to customer preferences, they are more likely to return to the store and become loyal to it. These customers can then also be a source of feedback that can be used to make improvements to the process and to understand the reasons behind why products are actually returned.
Whenever an online seller plans a logistics process, there are some key points to keep in mind. These apply to both larger sellers and smaller ones and can help either type of seller achieve logistics success.
- Flexibility: It is important to keep the logistics process simple and flexible. This flexibility will allow expansion in workstations and temporary employees during times of increased work such as the holiday season.
- Order Auditing: The key element of a logistics process is ensuring that the right customer receives the right order in the time specified. Customer satisfaction will take a serious hit if the customer opens their package to find the wrong items. An audit process can help ensure that order accuracy is maintained throughout the logistics chain. An automated system in this area can be a great way to ensure that this happens.
- Proper Packaging: An important aspect of the logistics of e-commerce is the packaging. Not only does the packaging need to protect the items inside and make a great first impression, it also needs to be cost effective for the company to ship.
- Accurate Inventory Management: There are periods of high sales and ones of low sale. In either case, there needs to be an accurate measure of inventory in stock and this needs to be maintained to ensure that all orders can be fulfilled at the right time.
Lessons from Zappos
A large online retailer of shoes, Zappos has managed to create a successful company with some key business practices. In terms of logistics, there are some key lessons we can learn from Zappos. These include:
To Drop ship or Not?
Drop shipping is a useful system for a company that is just in its initial stages of business. Zappos also used this method and in 2003, as many as 25% of all sales were coming from drop shipping. The company, which prides itself for its customer service, was facing many challenges along this front. There was a 95 percent accuracy rate meaning that 5 percent of the drop ship orders would not be filled. The individual brands would also not ship as efficiently as the company’s own warehouse. This led to a lot of unhappy customers, and eventually the decision was made to stop this logistics method altogether.
Warehousing and Inventory Management
Initially, Zappos used an order fulfillment and inventory management service. Eventually, the problems with this led to the decision to create their own warehouse space. The company felt that no third party could care as much about the customers as Zappos itself could. The warehouse runs 24/7 and allows the company to maximize the customer experience.
Zappos aims to maintain great supplier relations by treating the supplier less like an enemy and more like a trusted business partner. According to Zappos,
“If vendors can’t make a profit then they don’t have money to invest in research and development, which in turn means that the products they bring to market will be less inspiring to customers, which in turn detriments the retailer’s business because customer’s aren’t inspired to buy. People want to cut costs and negotiate aggressively because there’s a limited amount of profit to be shared by both sides. As a result of this ‘death spiral,’ most retailers fail.”
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