Changes in commerce have a direct effect on distribution networks and processes, says JLL report
May 29, 2012 - LM Editorial
The ongoing upswing in e-commerce and mobile commerce activity continues to make a significant impact on how retailers, distributors, and third-party logistics approach distribution network processes, according to a new report from global real estate firm Jones Lang LaSalle (JLL).
This is occurring on multiple fronts for them in terms of how they approach multi-channel retailing and supply chain management processes in terms of inventory management and warehousing as e-commerce and multi-channel retailing continues to flourish.
In its report, entitled “Retail 3.0: the evolution of multi-channel retail distribution.” JLL noted that retailers are leveraging a multi-channel approach to meet buyer expectations and compete for market share. And it added 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, which, in turn, has 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-to-10 years ago, but people were not really doing anything about it,” said Kris Bjorson, managing director of JLL’s Retail/e-commerce Distribution Group. “But now everyone has some type of plan around it.”
These plans can vary, though, with retailer’s letting third-parties such as GSI Commerce handle things, or another retailer building out its own e-commerce distribution network that it independently owns and operates, he said. Across the retail spectrum, Bjorson said 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 it inside or outside of their own distribution networks.
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, observed Bjorson. This entails taking steps to do things like reconsidering store footprints and total inventory levels. In the report, JLL noted that retailers are seeing more cost-effective advantages to boost online logistics operations over opening up new brick and mortar locations, with one way of doing this being to augment regional distribution networks by rolling out e-commerce distribution centers.
But these centers also require more of a capital investment, as e-commerce distribution centers center around direct order fulfillment and are more costly and require more staff.
“In terms of supply chain improvements, it is really all about speed as it relates to productivity and picking individual items, like with Amazon.com buying Kiva Systems,” said 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. Retailers need to have facilities located close to UPS or FedEx ground locations because consumers want next-day delivery of their orders. If you can pick an order faster and get it to a later cut-off time to deliver to a customer the next day.”
This subsequently forces retailers to think about the design of their facilities to make they are quickly picking individual items and have enough dock doors and trailer space to re-circulate trucks, he said. 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 crucial for 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,” said Bjorson. “One of the big requirements is a technology investment. From technology it goes down to the material handling level as the next big investment in terms of importance, with real estate further down.”
Even with technology being higher up, the investment in material handling systems is roughly 40 percent more, according to Bjorson.
From a business perspective, Bjorson said it is key for JLL to work with customers 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,” he said. “On that assessment, there are instances where retailers find they are not in the right locations or in states that do not have Internet taxes. We then look at costs needed to convert that regional distribution center into an e-commerce/regional distribution center.”
If it is found off of an assessment of an existing portfolio that it 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.