Impact of E-commerce on Warehousing Strategy
Reading time: 3 mins
by Kumar Singh, Research Director, Automation & Analytics, Supply Chain Management, SAPinsider
E-commerce was destined to grow significantly even before the pandemic but the advent of pandemic has accelerated the growth. Such was the boom in e-commerce during this pandemic that even some of the struggling e-commerce companies, are doing good business. The current level of online shopping will change again with time for sure but will never fall down to pre-pandemic levels in many categories.
As e-commerce volume expands for organizations that traditionally were brick and mortar focussed, there are many challenges that they have to grapple with now and those challenges are pushing warehouse operations leaders to re-think their strategy. Some of those challenges are:
- Shorter lead times
- Significant increase in SKU portfolio
- Increased packaging complexity due to parcel delivery requirements (which then leads to challenges in handling and storage)
- Online shopping induced seasonality (like Black Friday)
Impact on Warehousing Strategy
Pure play e-commerce companies started with an advantage since their warehouses were designed for e-commerce centric parcel delivery. The challenge is being faced by brick and mortar companies who are now also selling online to adapt to an e-commerce heavy setup. Let us review what aspects of warehousing strategy are getting impacted by rise in e-commerce volumes:
Type of warehouse and warehouse location
Warehouse type: The decision being faced here is:
- Have dedicated e-commerce facilities, OR
- Upgrade existing warehouses, OR
- Fulfill from stores and micro fulfillment centers, OR
- Combination of two or more from above
Warehouse location: With companies rushing to provide 2 days, next day and same day services, the number of locations that they need will increase since they need to be closer to the customer. This decision also ties to the warehouse type, since brick and mortar organizations also have the capability to leverage their store footprint as fulfillment centers.
There are no “standard blueprints” for e-commerce warehouse designs since the requirements of an e-commerce warehouse design will vary from one industry to another and in some cases, from one company to another in the same industry. And there are many aspects that go into the planning process. For example, the size of the warehouse will depend not only on the volume but also on the type of automation used. Similarly, flow paths will be dependent on use of robotics for picking. Organizations like Amazon, that handle extremely large volumes and have gone through the exercise of doing this (setting up e-commerce warehouses) over and over again, have developed unique, customized systems capable of handling extremely large volumes of different types of products. Brick and mortar companies unfortunately do not have that expertise yet (I believe likes of Walmart and Target may be an exception but most of the others may not be there yet).
The anywhere, every where value proposition of e-commerce, combined with the constraint of delivering products in a ziffy makes Inventory placement decisions also extremely challenging. And as you can see with each and every aspect above, these all tie with each other (the classic supply chain conundrum !).
The complexity of transportation operations also increases significantly. Unless an organization wants to stock every product at every DC, there will now be a much bigger middle mile operation (from DC to DC). Also, even though most organizations will partner with a parcel delivery company for the last mile delivery, managing that relationship also is a complexity since that last mile experience significantly impacts your customer experience.
What does this mean for SAPinsiders ?
Optimal answer can be uncovered by leveraging Advanced Analytics
The answer to the question- How do I design an optimal warehousing strategy for e-commerce and omnichannel”, can be found by leveraging advanced analytics.
The optimal answer can be derived only by a combination of quantitative and qualitative analytics. Models that combine strategic network design aspects with Multi-echeleon Inventory Optimization, transportation optimization and Industrial engineering analytics (that can help perform SKU level slotting analysis for example) are needed for determining warehouse type and locations simultaneously, otherwise decision will always be suboptimal.
The good news is that once you have developed such a model, it become a digital representation of your supply chain, wich you can use to play around every time you have to make a major decision. This should not be confused with a network model, which is relatively much much simpler and is a strategic model in nature.
Kumar Singh, Research Director, Automation & Analytics, SAPinsider, can be reached at firstname.lastname@example.org