Distribution Network Design: The e-commerce effect

The ongoing upswing in e-commerce and mobile commerce activity continues to make a significant impact on how retailers, distributors, and third-party logistics providers (3PL) approach their distribution network processes, according to recent research from global real estate firm Jones Lang LaSalle (JLL).

In its report entitled Retail 3.0: The Evolution of Multi-channel Retail Distribution, JLL notes that more and more retailers are leveraging a multi-channel approach to meet buyer expectations and compete for market share. It adds that about 80 percent of retailers say that online sales have gone up in the last five years—with some saying by as much as 25 percent. This, in turn, has certainly led to retailers modifying traditional distribution networks to better match up with how they handle e-commerce-related business.

“E-commerce was on the radar screen five years to 10 years ago, but people were not really doing anything about it,” says Kris Bjorson, managing director of JLL’s retail and e-commerce distribution group. “But now everyone has some type of plan around it.”

However, these plans can vary, with retailers letting third-party service providers that specialize in e-commerce fulfillment handle things, or choosing to partner with another retailer building out of its own e-commerce distribution network that it independently owns and operates, says Bjorson.

Determining transport strategy
Across the retail spectrum, Bjorson says that companies are at opposite ends of extremes and trying to define their multi-channel strategies—and when it is defined then determining how to implement that strategy inside or outside of their own distribution networks.

According to Bjorson, the approach retail shippers usually take starts with the service strategy that they need to meet customer demand from both a delivery and transportation mode perspective. On the delivery side, retail shippers need to know specifically what a customer wants as well as where it will be buying product.

This basic premise has seen customers get more comfortable with e-commerce in recent years, and in turn has upped the ante for retailers to have a reliable delivery service strategy. This has, of course, ushered in the need to take a longer look at how retailers view their transportation planning processes, which are contingent on specific delivery time frames or windows.

“Both shippers and carriers are looking to use greater windows of time to deliver product to consumers,” says Bjorson. “Our retail clients are always asking if there’s an alternative mode they can use, and every one is looking at their modes and asking if they should hire a third party to move their freight via truckload, less-than-truckload, or ground parcel—or alternatively, set up a private fleet to take more control over its service capabilities.”

For those not ready to commit to a private fleet, Bjorson says that retail shippers need to have at least three to four carriers with good rate structures on the lanes they’re moving freight. And if they elect to leverage intermodal for larger products, they need to make sure that they have a distribution center (DC) that’s served by rail so they can cross-dock and locally transfer freight as needed.

“Having rail service is being viewed more as a must by many retailers,” notes Bjorson. “It’s still primarily based on the inbound supply of inventory, and not as much on the outbound side or getting it to the customer.”

If the DC site is not rail-served, then the shipper needs to identify an intermodal yard in close proximity. “We’ll have to map out and model what it costs to get product from that intermodal yard to the DC. If it makes sense for the shipper to use intermodal, whether it be for a sustainability initiative or due to trucking capacity constraints, then that box is checked.”

What is that optimal distribution network?
Once the transportation strategy comes into clearer view, then the shipper needs to implement what JLL describes as the “optimal distribution network”—one that Bjorson defines as achieving the balance between service and cost.

However, this ideal network is becoming harder to realize due to the fact that it’s getting tougher to make long-term projections on how retailers will need to have their distribution networks perform five to 10 years out.

Ideally, these projections will need to be based on how revenue and demand is expected to grow and the products retailers will carry. There are other factors to consider, such as making significant capital investments in DCs, including the more sophisticated materials handling systems that act as the foundation of many e-commerce business plans.

“Today, it’s hard to even see 18 months out for these types of projections, with three years being the new stretch for planning and projections,” says Bjorson. “It takes six months to get a study done and another 12 months to implement it. That’s 18 months of that three years right there, and when the implementation is done you are back to studying it again. This process is called distribution network optimization.”

These implementation steps are wide-ranging, with some retailers expanding networks through acquisition, as was the case with Walgreens acquiring drugstore.com, or Bed Bath and Beyond opening up multiple e-commerce distribution centers.

These steps are vital, as retailers are meshing new shopping channels to add complexity and flexibility into their supply chains, observes Bjorson. This entails taking steps to do things like reconsidering store footprints and total inventory levels.

In its report, JLL notes that retailers are seeing more cost-effective advantages to boost online logistics operations over opening up new brick and mortar locations. One way retailers are doing this is by augmenting regional distribution networks by rolling out e-commerce specific DCs.

This is becoming more apparent by looking at the annual reports of retailers, nearly all of which foreshadow growth in e-commerce. This is being addressed, according to Bjorson, by the investments retailers are making into elements such as inventory, technology, and real estate to further support that growth.

These investments are crucial, as these centers also require more of a capital investment, as e-commerce DCs center around direct order fulfillment and are more costly and require more staff. What’s more, many retailers are dealing with declining store growth counts, as e-commerce sales growth continues to climb.

“In terms of supply chain improvements, it’s really all about speed as it relates to productivity and picking individual items, like with Amazon.com buying Kiva Systems,” says Bjorson. “Using this type of [robotic] technology helps Amazon quickly process an order and box it up and send to a consumer who needs it tomorrow.”

Speed drives service. And with that mantra in mind, Bjorson adds that e-tailers need to have facilities located close to UPS or FedEx ground locations to keep up with new expectations.  “Consumers want next-day delivery of their orders,” he says. “If you can pick an order faster and get it to a later cut-off time to deliver to a customer next day, then you’re running ahead of the game and building in new efficiencies.”

Design and technology
Where these DCs are located subsequently forces retailers to think about the design of their facilities. They now need to make sure that they’re quickly picking individual items and have enough dock doors and trailer space to re-circulate trucks.

To successfully do this, retailers need to be nimble and flexible with their “inside the box” operations and have a fluid transportation network set-up intact. And with inventory management now more crucial than ever in supply chain management processes, technology is a linchpin for speed and efficiency from point of sale to the inventory fulfillment mechanism.

“Technology is where you talk about evolution in the e-commerce distribution world,” says Bjorson. “One of the big requirements is a technology investment. From technology it goes down to the materials handling level as the next big investment in terms of importance, with real estate further down.”

Even with technology being higher up on that list, the investment in materials handling systems is roughly 40 percent more, according to Bjorson.

Bigger business picture
From a business perspective, Bjorson says that it’s key for JLL and similar research and consulting firms to work with retailers to fully understand their multi-channel strategies—which requires an initial business assessment and then an assessment of their current business distribution networks.

“Most retailers work within a regional distribution center network, and need to have proximity to ground hubs, as well as have the size and needed workforce to have an e-commerce distribution facility,” Bjorson says. “On that assessment, there are instances where retailers find they’re not in the right locations or in that states that do not have Internet taxes.”

It’s then vital to look at the costs needed to convert those regional distribution centers into a regional e-commerce DC. Bjorson adds that if it’s found that a retailer cannot make the conversion, it then needs to consider working with a third-party provider for e-commerce related work, or finding an alternative location to roll out an initial e-commerce facility.