It doesn’t matter if your business has recently entered the ecommerce market as a globally known brand, as a startup with a cool new product or as a distributor for various brands, scaling ecommerce logistics operations will always be a challenge. Operations in this case means everything between placement of the order all the way to its delivery to the end customer.
There are typically three phases:
Phase One: Start Up
In the first phase, the business usually has just started its ecommerce business-to-consumer (B2C) operations, has low sales volumes and no prediction about growth. At this stage, the focus most likely is on marketing of the product and getting funding. There is no time to worry about how to store, fulfill and deliver the product. If monthly orders remain 1,000 and under, it’s best to keep it simple and cost efficient with these initiatives:
Use an established service provider
Share your outsourced operations by working with a service provider who already has other clients to leverage on existing space, systems and/or people. Don’t overinvest.
Skip the middleman
Ship directly from the supplier to the end customer to avoid inventory holding and improve cash flow.
Turn your store into a ‘warehouse’
Avoid double inventory holding by implementing in–store fulfillment. In this model, the store becomes a ‘warehouse’ to carry your inventory, which can be managed by a warehouse management system connected to each store’s point-of-sale (POS) system.
Once a sales item is available at a certain store, it can be reserved in the POS system and picked up and delivered conveniently to the end customer.
Incubate your B2C business
If there exists business-to-business (B2B) operations already, only ample space is needed to set up a B2C incubator area. As long as the B2B and B2C operations don’t interfere with each other, this model saves many resources.
Phase Two: Smart Up
After sales volumes pick up and exceed 1,000 orders per month, it’s time to smarten up. The first phase is about getting orders to customers without high costs. The second phase focuses on scaling and understanding the cost drivers of the entire fulfillment operation.
With increasing volumes, investments in space, people and systems are necessary:
Choose the most appropriate systems
Many warehouse or order management systems out there – especially the ones developed in-house – don’t support scaling to thousands of orders per day, instant bottleneck. Not every system is equally flexible in supporting different value added services during fulfillment, for example, bundling of multiple products to sell together. It makes more economic sense to switch to an enterprise product such as Manhattan or SAP.
Determine the needed space
Space will surely become an issue with higher order volumes since the amount of SKUs is increasing and the inventory is doubling or tripling. Extra space is always handy as there are recurring spikes in demand thanks to marketing initiatives and public holidays. aCommerce has seen cases where these spikes can be as high as eight times the daily volume.
Outsourcing to a service provider with fulfillment centers provides support for short notice peaks in volume but there are things to look out for. For example, it is crucial that there are options for future expansion. Every potential corner in the warehouse should be racked up or if needed, there should exist a short term storage space close by.
But by utilizing another warehouse, the pick and processes will be much more complex and time consuming, so use only as an interim solution.
Hire the right people
Running scalable and efficient operations require strong leadership with experienced logistics managers. In many cases, companies simply hire blue collar workers and someone to oversee the warehouse and distribution operations on the side.
Because logistics costs can contribute 15 to 25% of total product costs, it is reasonable to hire someone who understands the logistics business, drives down the cost per order and at the same time maintains quality customer experience.
To accommodate spikes, you may consider hiring contract workers, which is especially easy in many Southeast Asian markets, but rates can be 60% higher per month compared to permanent warehouse staff.
In many cases, contract workers do not have any system and/or process knowledge risking reduction in productivity and quality. There is no secret permanent to contract staff ratio but if the latter represents more than 50% of your workforce, you should ensure systems are easy to use and there are plenty of quality checks before an order makes its way to the end customer.
Phase Three: Scale Up
Only a few companies actually scale as high as 100,000 orders per month – this means almost 5,000 orders per day for a five day operation. If the pick, pack and ship of one order takes 12 mins, this would entail a workforce of 140!
This doesn’t even include any overhead such as a supervisor, team leads, returns workers, quality control staff or managers.
If you are a Fitbit enthusiast, then reckon, if 60% of the total labor does picking only of 4,762 orders with an average of 1.5 units per order and 160 meters to and from the operations area, this would result in 13,000 meters per day or roughly 17,000 steps per day.
With an average of 240 workdays per year, this sums up to around 3,000 kilometers (2,000 miles) earning each picker the India Badge, which would thrill the American Heart Association.
It also gets interesting from a space perspective. Let’s assume there are 2.5 million units for storage and presume each SKU has the same measurements allowing the same amount of SKUs to fit into one storage box.
2.5 million units leads to a 9,000sqm warehouse without accounting for office space, canteen, packaging storage, returns, shipping and other operations. The third phase requires a sustainable warehousing and distribution model to accommodate the sheer size of manpower and space involved.
At such scale, even the smallest details can add up to impact the efficiency and costs significantly. Here’s what to watch out for:
Plan processes in the smallest details
It is absolutely essential to understand all processes in the warehouse to predict possible bottlenecks for future set ups. Imagine operators needed if a redundant step is repeated 4,762 times daily during processing.
Robots and other forms of pricey automation can be evaluated but requires justification in terms of efficiency and return on investment since salaries in most of Southeast Asian countries are still quite moderate.
Customize to maximize efficiency
Sometimes overlooked, the layout of the warehouse can add extra steps, time, and costs to order processing. For example, if the warehouse layout has mezzanine floors, order processing time can double due to longer walk ways.
In an ideal world, each country is full of 10,000sqm warehouses ready for move in, but unfortunately in Southeast Asia, warehouses are rarely fitted and planning of the space has to be done from scratch.
In Indonesia, aCommerce converted an old carpet manufacturing factory into a 7,000sqm world class warehouse fitted with four level mezzanine and semi automation for its client. Additionally, complete warehouse processes as well as running the operations were set up for the client in less than three months. You may want to consult professionals or outsource warehouse operations to ensure smooth scaling.
Choose suitable last mile transportation
Build strategic partnerships with third party logistics (3PL) who offer guaranteed volumes or have a wide network in the country for quick delivery and Cash on Delivery (COD) options. The last mile delivery from the warehouse to the end customer should not be overlooked.
It can take up to four weeks to get the reconciled COD money back from the customer upon delivery in Indonesia as third party logistics providers tend to outsource part of their deliveries. If 100,000 orders per month at an average value of $20.00 are bought with COD as the delivery method by 60% of customers, somewhere floating around in the network is $1.2 million. Minimizing COD reconciliation time is crucial to any company’s cash flow and can be achieved by in-country hubs where daily COD money is deposited directly to the company’s bank account.
No matter whether you are in startup, smart up or scale up phase, your logistics staff should always keep the big picture in mind and decide what fits your purpose in each phase. If trying to ‘smart up’ or ‘scale up’, it’s best to seek a professional opinion as the operations process can make or break your business.