By Matt Kulp | Supply Chain Quarterly
A distribution center designed to support retail stores may not have what it takes to meet the demands of direct-to-consumer fulfillment. The right material handling equipment can help retailers efficiently serve both channels.
With multichannel order fulfillment becoming a requirement for almost every retailer today, serving customers has become more complicated than ever. Until recently, most retailers’ distribution centers fulfilled orders through the two traditional sales channels: their own networks of brick-and-mortar stores and (for some) wholesale distribution. Although order profiles for the retail and wholesale channels are different, they can be managed relatively easily. Over the last decade, however, a third channel—direct-to-consumer—has developed. While that channel is providing both the highest growth and the greatest untapped potential, it also has presented the biggest challenges to retailers.
One of those challenges lies within the four walls of the distribution center (DC). A DC that’s designed to support retail stores may not have the right layout, equipment, or processes in place to meet the specific demands of direct-to-consumer fulfillment. This article will focus on the material handling aspect—what kinds of material handling solutions can help retailers efficiently serve direct-to-consumer demand within a multichannel facility.
[Figure 6] Continuous efficiency loop Enlarge this image
Before discussing material handling equipment, it’s helpful to be aware of some of the considerations retailers are facing today in a multichannel environment. These concerns necessarily influence their choices regarding material handling solutions.
Some of those considerations involve overall supply chain questions, such as how many distribution centers to build, where to locate them, and whether they should be single channel or multichannel facilities. When a company does decide to operate a multichannel distribution center, it must then determine whether a single warehouse management system (WMS) will support the different types of business it plans to handle in that facility. For example, order entry and order management systems for retail and direct-to-consumer typically are different, so companies will want to make sure they select a WMS that can integrate with multiple business systems. Figure 1 shows an example of the types of systems a WMS could support and how they integrate with each other. That integration can be accomplished through enterprise application-integration middleware, either provided with the WMS suite or purchased separately.
Another consideration is the complexity of inventory management in a multichannel environment. Consumers can buy merchandise on a mobile device or online and have the order shipped to the home; buy on a mobile device or online and pick up the order in a store; buy in a store and have it shipped home; and buy in the store and carry it home. Retailers must therefore track consumer demand and behavior patterns across multiple sales channels and allocate inventory accordingly.
It is simple to say, “We’ll have one set of inventory and ship it to everyone.” However, this can be difficult to put into practice. Even when e-commerce and brick-and-mortar channels are part of the same company, they often are managed independently. Issues related to inventory ownership, distribution charges, and product allocation must be settled. But even after those concerns have been addressed, other inventory-related problems may arise.
Something as apparently simple as product packaging, for example, could present a challenge to a common inventory platform. E-commerce material handling solutions often require product to be identifiable with bar codes at the unit level. However, some products that are distributed to stores, such as garments, are most economically bagged, labeled, and packaged in size assortments at the offshore manufacturing plants. The assortment case can then be cross-docked to the stores at the distribution center. But splitting up product into different types of packaging at the source makes it harder for retailers to maintain economic buys on large purchase orders. And if prepackaged product must be moved between channels—for example, when actual sales do not match the original forecasts—the labor costs for repackaging at the destination DC will be higher than at the original manufacturer.
Companies that are involved in direct-to-consumer fulfillment must satisfy an extremely demanding clientele. Every retailer wants each and every order shipped to its customers to be perfect, and in e-commerce, consumers both expect and demand it. At a minimum, the perfect order ships all items ordered (percent order complete) without error (percent order accuracy) and on-time to the customer (percent on-time delivery). This raises the question of what the customer really means by “on time.” The current trend is toward all orders moving, at a minimum, via next-day shipping. As e-commerce competition ramps up, an increasing number of online retailers are offering same-day shipping, and a few are even offering “same-hour shipping” for selected stock-keeping units (SKUs) in selected geographic areas. Retailers that can provide same-hour shipping likely will deliver from a store in the relevant area rather than from a distribution center.
Such high levels of service are expensive, though. That’s why multichannel retailers should ask themselves this important question: “Do the majority of our customers really require next-day shipping?” Some certainly will, but the majority may prefer a discount on the shipping price in exchange for later delivery. Offering these options will provide distribution operations with flexibility that can help with smoothing order demand and balancing staffing. Moreover, relaxing next-day service levels in peak season, even to 48-hour delivery, will significantly reduce the capital investment in material handling systems required to meet customers’ expectations.
Another particular challenge in a multichannel facility is handling returns. Even after all due diligence has been taken to implement the most flexible and responsive operation possible, it’s still likely that 15-20 percent or more of direct-to-consumer shipments will be returned. In addition to the usual need to decide on the disposition of the product (for example, return to stock, sell as “seconds,” or destroy), companies also will have to determine the right material handling equipment for processing such a high level of product flow. If the volume is great enough, however, they often will outsource returns handling to specialized third-party logistics service providers (3PLs).
After taking all of the above considerations into account, retailers can then look at which material handling equipment might work best for direct-to-consumer order fulfillment within a multichannel facility. Flexibility should be a primary attribute for any direct-to-consumer material handling system. Many time-tested solutions can be effective, but the differences between store distribution and direct-to-consumer fulfillment—not to mention the constantly changing nature of e-commerce—may mandate different approaches. Store replenishment orders most often consist of multiple full cases or pallets shipped to a retail store. Direct-to-consumer orders, by contrast, typically consist of one piece of three or four different items that are individually picked and repacked for shipment to homes or offices. Because these order profiles greatly differ, the material handling equipment that can best service them is different.
Labor is the greatest expense item associated with direct-to-consumer fulfillment, with picking and packing individual orders typically generating the largest share of those costs. One of the most time-consuming aspects of labor is travel—distribution center associates walking or riding around the building en route to or from product storage locations. Any material handling solution that reduces travel, then, will reduce expenses and offer a substantial opportunity for financial justification. And as more retailers engage in time-sensitive same-day, next-day, and even next-hour delivery, reducing travel time could become even more important.
One traditional approach to reducing travel within a DC is to build pick modules that give order pickers access, on foot, to SKUs stored three or four levels high. Pre-formed cartons or totes are routed through these modules and are diverted only to the pick zones that contain the products needed for a particular order. (See Figure 2.) As a result, pickers travel only within their own pick zones, rather than throughout the facility to pick all of the items needed to complete orders.
The zone-divert pick modules deliver order containers to the locations where the pieces are stored. The next level of automation might include picking thousands of orders in one batch. This will significantly reduce travel, but it will create the need to sort all of those pieces to the appropriate orders for packing. For this approach, cross-belt sorters (Figure 3) and tilt-tray sorters (Figure 4) are often installed, where picking-related savings again justify the capital expenditure.
In addition to reducing or nearly eliminating workers’ travel within a DC, “parts to picker” systems (also referred to as “goods to person” systems) make it easier to inject rush orders into the current processing stream. This is a frequent requirement in direct-to-consumer business that offers next-day delivery. Traditional “parts to picker” solutions include carousels, miniloads, and vertical lift modules. These systems contain bins or totes where product is stored, often after being removed from the original vendor’s case. When a picker enters an order, the equipment automatically delivers the appropriate storage bins or totes to the pick station, where the picker removes the items from the storage bin and places them in the order carton or tote.
Shuttle systems, such as the example shown in Figure 5, are an emerging technology that is well suited to direct-to-consumer order fulfillment. These systems deliver totes to front-end picker stations, much like the traditional miniload. In a miniload system, moving cranes pull one or two totes forward at a time. As a result, miniloads are not fast enough for larger e-commerce retailers. Shuttle systems, however, have decoupled the horizontal and vertical tote movement. In these systems, shuttles—think of them as little robotic cars—located on each storage level bring totes to the front of the aisle on their level (the horizontal move); from there, a lift moves the totes to the pick station system (the vertical move). The result is a significant increase in throughput to better meet the piece-pick, order-line demand that is typical of direct-to-consumer fulfillment.
One of the issues facing any multichannel retailer is justifying the return on capital investment in assets (ROA) for material handling technology. That’s complicated by the fact that retail systems are designed to support peak demand, which most often falls around the Christmas holiday. As a result, these systems often operate at 50 percent of capacity or less for 10 months of the year. ROA can be managed by installing higher levels of automation for 60-80 percent of peak demand and a more manual (and therefore less expensive) solution to handle additional demand.
One semimanual approach that is gaining in popularity is to install put-to-light walls in addition to automated equipment like a unit sorter. A put-to-light wall is a shelving unit (oftentimes containing totes) that is divided into segments, with light displays on the shelves under individual locations. Orders are assigned to these locations, and when an associate scans a universal product code (UPC), the light associated with the matching order will illuminate, showing the associate where to put the ordered product.
This solution works well for many reasons. First, it does not change the picking process. Orders in the pick wave can be assigned either to unit sorter chutes (like those in figures 3 and 4) or to put walls. Product is picked to totes, and a tote sorter will route the totes to the correct location. There will be a slight loss in pick efficiency as the pickers perform sorts to totes based on destination, but the incremental and temporary increase in staffing is often worth the reduced capital investment and added flexibility.
The final material handling equipment stop for a direct-to-consumer order passing through a fulfillment center is the shipping sorter. This is an area where it can be easy to leverage retail distribution assets in a multichannel environment. That’s because retail and direct-to-consumer fulfillment orders peak at different times, so throughput capacity on the shipping sorter usually is available for both channels when needed.
Achieving picking and packing efficiency is the greatest challenge in direct-to-consumer fulfillment because there is so much variability in packaging in consumer orders. This is where the greatest amount of labor is required to pick each piece as discussed above. The resulting output of bags and cartons usually can be handled with traditional warehouse carton sorters. If the cartons are lightweight, equipment with a positive divert mechanism that pushes cartons off the conveyor and down a chute to the shipping door (such as shoe sorters and swing-arm sorters) will perform better than equipment with under-carton diverts like pop-up wheels and steerable wheels, because light cartons may jump over under-carton divert mechanisms.
The most common challenge is handling bags and envelopes. Shoe sorters can handle many bags and envelopes. But bags don’t convey well on roller conveyors, so “after sort” (after the carton/bag is pushed off of the sorter) conveyor chutes that deliver packages into large receptacles for loading onto the truck would be used in place of the roller conveyor run-outs used for cartons. It is possible, though, to handle bags and envelopes on the same “after sort” equipment by placing them into totes and sorting them down the carton conveyor to the appropriate trailer.
A continuous efficiency loop
Traditionally, the justification for investment in material handling equipment has centered on reducing labor and other costs. But in multichannel commerce, the current trend is toward higher levels of investment to meet increasingly aggressive and complex business and customer requirements. For example, more retailers are promising next-day or two-day delivery in order to remain competitive with their Internet-based counterparts. To consistently meet that service commitment, they will need more equipment to handle peak periods and spikes in demand. Think about what would be required to process and ship all the e-commerce orders placed on “Cyber Monday” after Thanksgiving, instead of smoothing out that demand over the subsequent week.
Here’s another example: Because retailers’ order volumes peak around the December holidays, many retail distribution centers must hire additional seasonal employees during their peak period. But competition for seasonal warehouse and DC employees is increasing. One reason is that as online sales and therefore shipping volumes through fulfillment centers continue to grow, fulfillment operations are trending toward bigger facilities. At the same time, retailers seek to strategically locate their operations in areas that provide the lowest cost of transportation or fastest delivery times to population densities. This means that the competition for seasonal labor will only continue to intensify. Investing in higher levels of material handling automation will allow companies to reduce, although not eliminate, their dependency on the ever-shrinking seasonal labor pool.
A number of other developments sparked by the growth in multichannel retailing are further encouraging investment in material handling solutions. Consumer demand for customized orders and the need to process high levels of returned product are having an impact. The holiday peak demand pattern in direct-to-consumer fulfillment also provides a reason for companies to invest in more energy-efficient equipment solutions. For example, controls solutions can run equipment such as shipping sorters at lower, more energy-efficient speeds for 10 months of the year and at higher speeds only during peak season when greater throughput is needed.
As previously noted, retailers’ need to hold costs down while providing high service levels continues to keep the focus on labor efficiency. This makes the “parts to picker” solutions that further reduce travel compared to traditional solutions especially attractive in multichannel facilities. As both marketplace competition and the installation base of these newer solutions increase, pricing should trend downward. Businesses that are lucky enough to have high order demand will find some level of application for these solutions to gain lower cost-per-unit-delivered metrics.
And finally, combining direct-to-consumer fulfillment with retail and wholesale channels into a multichannel fulfillment center increases the opportunities to leverage automation investments. In markets where end-of-year gift-giving drives merchandise sales, store replenishment peaks earlier than direct-to-consumer order demand. In the United States, for example, shipping volume for brick-and-mortar stores preparing for the end-of-year holidays will peak in the fall, while direct-to-consumer demand typically peaks from Thanksgiving through the days before Christmas. That means pick-and-pack automation that can be used for both retail store replenishment and direct-to-consumer shipments will have an extended period of peak usage. The resulting system will achieve higher annual utilization rates and facility efficiency that is greater than the sum of the individual channels operating independently.
Material handling equipment designs will continue to make multichannel retailers more efficient, with benefits for retailer and customer alike. From the customer’s perspective, the benefit is 100-percent accurate orders shipped and received on time. From the retailer’s perspective, the right kind of material handling solutions ensures that orders are shipped at increasingly lower costs per unit. Those savings can then be passed on to the customer, creating a continuous efficiency loop like the one shown in Figure 6.
The variability of direct-to-consumer demand and order profiles requires flexible solutions. Put that together with the very different needs of store replenishment and wholesale distribution, and it’s clear that no single approach will be right for every circumstance. The “best” material handling solutions for multichannel order fulfillment will be as diverse as the companies that implement them.