The
explosive growth of online retailing has created opportunities for many
companies. Companies come from different backgrounds, but as they grow and
distribution pressures increase sooner or later the following questions need to
be answered by all growing online retailers:
1. Should we outsource
fulfillment or invest in distribution as a core competency?
2. How do we ensure our
distribution network maximizes service and flexibility while minimizing
operating costs, capital investment and risk?
3. When should we
automate and to what level?
4. How can we accelerate
fulfillment within our DC?
5. How can we improve DC
workforce performance? In this series we’ll explore answers to these questions
and others as they relate to growing e-tailers and offer perspective on how
companies like yours can enable growth and competitive advantage through
distribution.
Part 1: Should we outsource fulfillment or invest in distribution
as a core competency?
Companies
often outsource distribution for good reasons. But if your volume or service
requirements are growing significantly it may be time to re-evaluate your
distribution strategy to ensure it can handle increased complexity. When does
it make sense to outsource and when should you invest in your own distribution
infrastructure?
Q: Are there circumstances
under which it makes sense to outsource distribution?
A: A well-designed
distribution network often includes third party logistics providers (3PLs) as a
valuable extension of your distribution capabilities. Companies commonly
outsource for a number of reasons:
·
to
handle excess volume during peak seasons or while planning and building for
increased capacity
·
to
service volume that’s too low to justify building the capability internally
·
to
mitigate risks when entering new markets or channels or when testing a new
brand
·
the
model is such that distribution is not a core competency of the business
In any of the above scenarios, outsourcing can add tremendous value and help with short-term goals. But when the business is growing or reaches certain thresholds of growth you need to re-evaluate the value of outsourcing distribution to a 3PL against investing in your own distribution capabilities.
Q: When does a company need
to consider a change in distribution strategy?
A: When significant
growth and/or change occurs companies sometimes find themselves with an
outsourced operation that no longer meets the needs of the business. A 3PL may
have been the best solution at one time, but as costs rise and requirements
change you may need to consider investing in your own infrastructure. Do any of
these characteristics apply to your business?
·
Large
or significantly increasing volumes High growth projections
·
Complex
product storage requirements
·
New
legislative requirements
·
Increasing
environmental responsibilities
These
things signal the need to review your distribution operation and costs for
opportunities that drive greater efficiencies and/or cost savings.
Q: Why should I consider
investing in distribution as a competency? What are the benefits?
A: Flexibility is key.
Often it’s customer requirements that drive companies to build their own
distribution capabilities. Contracts with 3PLs are generally short-term, and
getting shorter to remain competitive. Growing companies don’t want to be
locked in to contracts over long periods because it limits their flexibility as
the business grows. And 3PLs can’t afford to be all things to all people so
they try to maintain standardized processes and systems to keep costs low.
Today’s online consumer has high service expectations –speed, customization,
real-time communications and a seamless experience are just the beginning. When
expectations reach a certain point you may find that you can service your
customers more cost effectively with an operation designed specifically for
your business.
The
benefits of investing in distribution as a core competency include:
·
Facility
design and systems functionality customized for your business requirements •
Longer business case horizon for capital investment
·
Increased
flexibility in choosing service providers
·
Systems
that provide industry or market specific critical information (batch/lot
control)
·
Reduced
risk from contractual obligations
·
Tax
benefits of depreciating assets
The greatest reason of all for investing in distribution is that it enables the business. The ability to enable growth, improve service and deliver competitive advantage rests on your distribution capabilities. It’s the value of being able to share promise your customer same-day shipping, improve order accuracy and reduce returns, and the flexibility to adjust to an unknown future.
In
summary, If you are unsure which course of action is right for your growing
company, the best way to start is by assessing where you are today as well as
where your growth projections will take you in the future.
Contributed by Sorab Mullan, Business Development Executive, Fortna EMEA
