Oct/Nov 2015

Part two of three. Read part one here.

Previously, we described how the change in the way customers buy what they want from retailers had challenged fulfillment operations in distribution centers. Retailers today must serve customers online as well as in stores, accelerating the delivery of orders from the days of “we’ll order it for you, and call you when it is in” to expecting the doorbell to ring an hour after you placed the order. Open the door and there might just be an Uber driver acting the role of delivery person. This is not your father’s supply chain anymore.

There has been a progression from early eCommerce (“e” for “electronic”) efforts, to mCommerce (“m” is for “mobile”) and on to omnichannel commerce. As each of these came into prominence, interrelating devices and applications expanded, customers adapted buying behaviors to exploit their potentials, and created a massive shift away from traditional “ship to stores” fulfillment practices to “ship direct” requirements that have accelerated order volume growth and fulfillment time expectations beyond the structural and human resource capabilities of the retailers.

eCommerce retailers such as Amazon have led the revolution with an unwavering commitment to relentless improvements to how and when your order comes to you. Putting things in context, Amazon began twenty years ago in 1995. At that time, the Internet was just 26 years old (it started as the ARPANET in 1969, the year we first landed on the Moon. The World Wide Web, founded in 1989 (the “www” in a URL Web address), was just about six years old in 1995. Putting aside that the first personal computers came in kits “hobbyists” had to assemble, the first fully functioning out of the box PC was introduced in 1977, making PCs (personal computers) about 18-years-old in 1995.

In 1995, when Amazon got started in eCommerce, The First Browser War commenced, pitting Netscape Navigator against Window Internet Explorer. What is probably the most interesting aspect of the ecosystem in which Amazon launched eCommerce was in 1995, there were 160 Internet providers in the U.S. AOL, founded in 1985 and just 10 years old in 1995, had to compete with a myriad of providers. The average per month charge in 1995 was about $18 after tax was added. And for that, the “dial up” connection was slow. Most homes used a dial up connection to access the Internet, and with the introduction of High Speed Internet by cable television companies in the early 2000s, homes shifted significantly away from telecoms to cable providers for Internet access.

Telecoms began making a comeback with the start of mCommerce, the access to the Internet through smartphones and other smart devices like tablets. It was not around in 1995, getting formally under way in 1997. Smartphones with the application capabilities as we know them today emerged and really gained traction with the introduction of Apple’s iPhone in 2007. This was the seminal event for the explosion of mCommerce in the U.S. As in Asia, smartphones had been in use from late 1990s.

With mCommerce, customers could scan product codes while in a retailer’s store, find a link to it, and then shop for the best price and delivery option.

This is where Amazon, with its relentless push to accelerate order fulfillment, delivery time, and with the introduction of Prime, eliminated the last two barriers to making a purchase in the store a better option: sales taxes and delivery charges.

This capability to shop for an alternative supplier while standing in a retail store has a name: showrooming.

Coupled with the viral word-of-mouth capabilities of social networks, a friend could instantly tell a friend that they could get a better deal from “X” rather than make the drive to the store.

Customer behavior like showrooming actually turned the retail business model upside down. Traditional retailing gave control to the retailer because you had to come to the store to buy what you wanted. The timing for merchandise displays, pricing, and demand-driving discounting gave retailers control over the brands they were selling.

PCs and smartphones changed the dynamic: brands could engage directly with the customer to offer their own value propositions, and while in the early days of eCommerce, would not directly fulfill the orders, would have the ability to direct a customer to the retailer offering most favorable positioning and promotion to the brand.

mCommerce further disrupted the traditional model: the freedom to shop anywhere and at any time through the smartphone put both the brands and retailers on notice. And again, along came Amazon with its experimentation around same day delivery.

Think about this for a moment using a different kind of retail experience: food shopping. The first same day online ordering and delivery service for food was Webvan, which went bankrupt in 2001. Fast forward to today, and there are now a host of successful startups (including Amazon’s) that are growing at phenomenal rates.

The difference: In 2001, the traditional food industry fulfillment center was oriented to “ship to stores” methodologies, and the cost of operating a same day, rapid delivery business such as Webvan tried, so fundamentally different in its order fulfillment requirements than those supporting daily shipments to brick-and-mortar stores, devastated the profitability of the business model.

In recent years, brands and retailers have come to understand that as smartphones and other devices have given power to customers to make purchase choices not heard of ten years ago, there is a need to use all methods of engagement to capture and keep customers, thus the rise of omnichannel or multichannel commerce. Simply put, use all means to engage the customer from her initial efforts to research a product she may want to buy, through to enabling her to make that purchase at any venue from online, on the smartphone, or even at the store.

As the expectations of customers to have what they want as fast and as cheaply as possible have risen exponentially, so has the disconnect between traditional order fulfillment and rapid response fulfillment operations in distribution centers.

There has been a great awakening, sometimes a brutal one, among brands and retailers to the fact that as the shift from “ship to stores” fulfillment is rapidly being replaced by “ship direct” with the corresponding increase of smaller orders that have to be right going out the door (to prevent angering a customer who, as industry statistics show, will not place a future order because of the bad experience).

Not even three years ago, if I were to take you to a typical retailer’s distribution center, you would see racks stretching from floor to ceiling jammed with full cases of products. Aisle after aisle for hundreds of feet, this is what you would see. Workers on forklifts would scurry about, stopping at a particular location, jumping off the lift, and pulling a couple of cases onto the wooden pallet held by the lift. He or she would continue to do this, building pallet after pallet that would be staged in a location near a loading door. At sometime during the early evening, trucks start to be loaded. Every truck would have one or more stops at stores, where the pallets would be delivered, and store workers would restock the store shelves in anticipation of next day’s business.

Incredibly, this “ship to store” model has been relatively unchanged for more than 30 years.

What eCommerce and mCommerce have forced on retailers is an entirely different order fulfillment process. They are now struggling to accommodate. We will describe this process, its challenges, especially the dramatic increase in human workers, and how Amazon has changed the game around this new fulfillment model. In the newest generation Amazon fulfillment center, you will hear yourself whisper, “Toto, I’ve a feeling we’re not in Kansas anymore.”

And we’ll tell you about the new class of munchkins you will find there….

Tim Lindner is senior business consultant with a software company, and a regular contributor to Connected World. He can be reached at tlindner@connectedworld.com

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