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From SCDigest's On-Target E-Magazine

- Nov. 20, 2012 -

Logistics News: Should E-Commerce Fulfillment and Regular Distribution Be Housed in the Same Distribution Center? Part 2

Start with a Few Basic Questions, Gilmore and Schneider Say; Can You and Should You?


SCDigest Editorial Staff

Last week, we ran an article relative to the question of whether retailers should perform e-commerce fulfillment in the same distribution centers where they do regular store shipments, featuring comments from one industry expert, enVista CEO Jim Barnes. (See Should E-Commerce Fulfillment and Regular Distribution Be Housed in the Same Distribution Center?)

SCDigest editor SCDigest editor Dan Gilmore saw that piece of course, and decided he would weigh in with some thoughts on the topic, while we also solicited some comments from David Schneider, a former retail logistics executive who now runs his own consulting firm.

SCDigest Says:

Schneider notes that in the many retail sectors in which the distribution model is "push," the main flow of the distribution center is usually a cross dock design, making it hard to mix ecommerce into the same operations.
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Gilmore says there are two critical questions that must be addressed
"First, does a retailer have or can easily develop the capabilities to do e-fulfillment effectively, whether in existing DCs or a separate facility or facilities," Gilmore said. "The second questions is this: should the retailer or any company really do it in house, or should e-fulfillment be outsourced?"

Gilmore adds that the framework for answering these two questions starts with a few basics. Clearly, if a retailer has a catalog business already, managing a similar order profile, then that infrastructure might be leveraged to handle e-commerce orders as well. The question would then be whether the web volumes will be so high that it will soon overwhelm the catalog fulfillment capabilities.

Gilmore says another key consideration is space.

"It's obviously basic, but do you have to space, not just immediately but over time as the business grows, to do e-fulfillment in an existing DC or DCs?" Gilmore asked. "Not many retail DCs I have seen have lots of extra space, and of course there may be installed material handling systems that present floor space allocation constraints as well."

He said that with regard to space you really have to consider the potential volumes that might come as the dot com business grows. Overall e-commerce volumes are growing about 15% annually, but many companies are exceeding that number.

"Can you expand the building?" Gilmore noted. "That may be the key determinant right there."

Next, Gilmore said companies need to assess whether they have the right Warehouse Management and material handling systems to support the dot com channel.

"Many retailers, including Walmart, have home grown or legacy WMS systems that have been modified over time to do exactly what was needed in that DC." Gilmore said. "And that usually didn't include e-commerce. The material handling system design may be optimized strictly for store replenishment."

Companies obviously need to evaluate whether those systems can be modified to support e-commerce, and at what cost, time frame, and risk. The risk aspect is often not vetted enough, Gilmore says.

Lastly, Gilmore said retailers and others need to know what they don't know.

"Your guessing on volumes and growth rates, you don't really understand the operational requirements and how they interact with e-commerce profitability," Gilmore observed. "There's something to be said for letting someone else do it for you for a while, see where the volume go, understand the business, and then take it back in house when and if it makes sense."

Gilmore did note, however, that taking e-fulfillment to a separate facility or facilities will usually result in extra inventory versus running regular distribution and dot com business inside the same DC, where at least in theory some inventory pooling should be possible.

(Distribution/Materials Handling Story Continues Below )


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"That should also reduce out-of-stocks on the dot come side as well," Gilmore noted.

Don't Let E-Fulfillment End Up Like a Monte Python Movie


David Schneider agrees that you have to start at some very basic questions.

"The idea of multi-channel distribution under a single roof is like the Holy Grail that King Arthur and his knights searched for," Schneider told SCDigest. "Hopefully along the way, we logisticians don't end up with the same ending as the Monty Python movie."

He said you have to start with clearly defining the goal of the e-fulfillment strategy.

"If you fail to ask and answer that question with sufficient vigor, you will not find your e-fulfillment grail," Schneider says. "You have to look at the idea of multi-channel distribution under one roof from a variety of viewpoints and outcomes. In the rush to exploit dot com, that basic and obvious question is often not really answered."

Schneider noted that the question of where and how to do e-fulfillment can vary even within retail, depending on the specific sector of the retail industry.

For example, Schneider notes that in the many retail sectors in which the distribution model is "push," (meaning the merchandise assortment is pushed out into the store and then sold, versus models say that are based on store orders), the main flow of the distribution center is usually a cross dock design, making it hard to mix e-commerce into the same operations.

"Most of the apparel sector, for example uses the push model, with limited store replenishment," Schneider say. "The space used for replenishment, which is usually based on piece picking, is what could support the e-commerce area," making dot com and store replenishment often a good fit.

Schneider also says it is critical to assess whether how much it is possible to optimize picking and packing for e-fulfillment.

"Must you pick the order as soon as it comes in, or can it marinate for a period of time until you get 30 to 50 pick assignments in an aisle?" Schneider says he encourages clients to investigate. "If you can hold the orders, then you can batch pick the aisle, picking multiple items into a tote. If the orders don't build a good work plan, marry aisle assignments together until they do. Dispatch the totes to a packing station where the station is designed for the packer to scan an item and then pack it. This method will work for the majority of e-commerce orders where the order is a single line item" - and significantly reduce total picking and packing costs, Schneider says.

Relative to Gilmore's comments, Schneider thinks it is important to note that just because a company decided to outsource e-fulfillment doesn't mean there may be great challenges keeping up if demand soars. Use of a 3PL is not a panacea for e-commerce growth pains. A fast growing e-commerce channel could easily outstrip a given 3PL's capability to deliver.

In the end though, it seems Schneider thinks looking to outsource e-fulfillment is often the smart one.

"Often we logisticians get caught up in the minutia of the operations. The constant focus of finding that next penny to save in the operations," Schneider says. "That quest for the next few points of cost reduction blinds us to the overall goal of businesses: make more money, today, and tomorrow. In our effort to cut costs we make the inventory flow slower, building up excess, or worse, duplicating inventory. Duplicating inventories because we can't get our systems to do a better job managing them is borderline stupidity. The mindset that you have to run your own distribution may prove to be a financial millstone in e-commerce."

How do you think about the question of combining e-commerce and traditional distribution in the same facility? What are the decision drivers? Less us know your thoughts at the Feedback section below.

Recent Feedback

A company's systems capability is only one item of two that will determine whether it is possible to provide a standard crossdock, distribution and e-commerce operation from a single building.  The second item is the material handling capability that is available in the building. Generally speaking, small warehouse operations are unsuitable for e-commerce operations as they have very limited, if any, automated material handling systems. Hence only simple picking, combined with cross-dock operations can be combined and carried out efficiently provided the systems can mix the two operations. If the system is capable, then there are opportunities to make substantial savings in transportation.

To make up orders for e-commerce or catalogue orders, where multiple pick-to-packing stations are needed, can only be performed efficiently with the aid of sorters, pick-to-tote equipment - such as carousels and case-to-belt picking equipment. This type of operation can run in parallel with pallet picking and cross-docking, but must usually occupy a different section of the building with a conveyor to door melding to generate overall transportation savings. This would also imply that the pick cycles, by destination, in all processes need to be coordinated by the computer system. This is perfectly reasonable to do, but the capital expenses of installing efficient pick-pack operations will often confine this combined type of operation to larger organizations.


Tony Tyler
eF3 Systems Inc
Nov, 29 2012