Accelogix President Seth Patin sat down with John Stern of eCommerceCIO to discuss how ecommerce distribution is disrupting traditional supply chains. A write-up of the conversation follows.

eCommerce Distribution: Making Consumers Happy

Have you ever considered the hope and expectation you feel when you place your two day delivery order with Amazon, the rush of adrenaline when the box arrives, the excitement of opening it, and that warm, happy feeling when you see Amazon fulfilled their promise to you, delivering what you wanted, when you wanted it, and where you wanted it?

In short, have you ever noticed that what Amazon is really selling you, the consumer, is an emotional experience–a feeling of happiness?

Seth Patin, President of Accelogix, thinks about this phenomenon a lot, and more importantly, what it takes behind the scenes in eCommerce distribution operations to make this addictive emotional response occur again and again without fail.

Seth is a formally trained Computer Engineer and has spent his professional life optimizing Supply Chain and Distribution Operations. He has helped over 100 different distribution operations in industries ranging from highly regulated pharmaceutical and food industries to consumer goods and industrial products. If it ships, chances are Seth has experience in how it gets distributed.

Recently I spent some time with Seth discussing eCommerce and his insight on how selling happiness, how banking on consumer emotion, has become a driving force in distribution operations.

Here are some select excerpts from that conversation. Sit down, buckle in, and get ready for this look at how eCommerce gets that box to your front door!

“The tricky part is remaining cost effective while meeting these shorter shipping windows.”

– Seth Patin, President

eCommerceCIO: Over the past couple of years, has the “ask” you receive from your customers changed, and what is driving that change? What are the noticeable trends in Distribution?

Seth Patin: The changes have really been driven by eCommerce, and that is why I wanted to do this article. I think the message you are bringing to CIOs and other executives is spot on. Telling them, “Hey folks, this is coming, and it is going to be more disruptive than any business change you have ever undertaken,” is correct and the right thing to do.

The other significant driver outside of eCommerce has been regulatory requirements, specifically serialization and ePedigree, but that is for certain industries and product types only.

Back to eCommerce, honestly, the biggest change I have seen over the past couple of years is how we ship. Our clients are asking us for shorter and shorter shipping windows. I see it every day, across industries. Everybody is moving to faster fulfillment, direct-to-consumer fulfillment.

However, the tricky part is remaining cost effective while meeting these shorter shipping windows. Getting product picked and out the door fast, that’s easy. Getting it to the customer faster, that’s easy. Doing both without going broke, that’s the hard part!

eCommerceCIO: Do you see this on-demand, direct to consumer delivery model intensifying into the future, or are we hitting saturation?

Seth Patin: From a futurist perspective, as we move more into the “Internet of Things,” in fact, maybe we should be thinking the “Internet of Everything,” consumers will be more closely tied to products in their lives. This will translate through the Supply Chain. Companies will have to become more and more responsive to customer and consumer whims, and this means responsiveness will only increase–not decrease.

Even without this perspective, though, Amazon is investing, and will continue to invest almost every dollar to drive to new levels. So yes, they will continue to raise the bar, which means this ask will continue, and no we are not hitting saturation.

eCommerceCIO: To compete with Amazon, both WalMart and Home Depot are investing billions of dollars in eCommerce distribution facilities. What is unique or different about an eCommerce distribution facility that ships to a consumer, as opposed to a manufacturer DC that services big box retailers for instance?

Seth Patin: It all hinges on unit quantities. Think “Eaches” rather than “Pallets” or “Cases.”

In the 50s and 60s, companies centralized their supply chain to leverage “Pallet-In, Pallet-Out” operations. These were very economical operations. A truck comes in, one guy with a forklift could unload a bunch of pallets, another could put the pallets away, and another could load a pallet for shipping. A couple of workers, a couple of forklifts, a couple of minutes of work.

Big Box retailers disrupted this flow with Case ordering, but that was relatively easy to adapt to with existing facilities and operations. Now we have eCommerce. Every order is one unit, and each unit must be handled separately. When you look at the basics, Receiving might remain close to the same, but Conveyance, Put-Away, Pick, Pack, and Ship – all must be handled differently at the Each level than Pallet or Case.

This stock keeping unit difference drives tremendously different facility design requirements, different ways of doing things, a new management mind-set, different staffing requirements, and of course, intelligent systems.

eCommerce unit quantities force Amazon and their competitors to invest in dedicated eCommerce distribution facilities. You simply cannot co-mingle operations for all three unit types, Pallet, Case, and Each. It does not work.

eCommerce Distribution at Amazon

eCommerceCIO: Many small to medium sized manufacturers and perhaps even retailers focus their investment dollars in the customer facing systems, the website. What do they need to do within their Operations and Distribution facilities to be competitive?

eCommerce unit quantities force Amazon and their competitors to invest in dedicated eCommerce distribution facilities. You simply cannot co-mingle operations for all three unit types, Pallet, Case, and Each. It does not work.

– Seth Patin, President

Seth Patin: Keep in mind, in the eCommerce world, we are talking about service level expectations with customers who for the most part are making decisions based on emotions and not contracts. The cost of failure is an upset customer who is most likely going to share their discontent on social media outlets, and who will shift their alliance for even minor infractions of expected performance. Perfection is the requirement, almost to the point where it is probably better to not be in the game, than to be in the game half-baked.

That said, for companies who decide to venture into this world, and most are, there are three important considerations to first get right:

1. Facility Layout
2. Supervisory Mindset
3. Systems

Regarding facility layout, as we just discussed, companies are investing because operations for unit quantities simply do not mix. This means if a company is not outsourcing eCommerce operations to a 3PL like Amazon for instance – this, by the way, is where Amazon makes much of its money, did you know they are effectively the largest eCommerce 3PL in the world – and has decided to internally build capacity, then they must dedicate space to eCommerce operations, and by that I mean a place to pick and pack eaches at the very least.

In eCommerce distribution, the goal is maximum density in the pick location, which essentially means the most stuff in the closest location to reduce travel for pickers. How can they get what they need – say, a pair of shoes – to put in the box by moving as little as possible? Can they just reach over to a shelf and pull what they need? Contrast this with a Pallet of shoes where the picker drives his forklift across a warehouse to retrieve the pallet for shipping.

While Amazon may be the 800lb gorilla in the room, there are many 3PL operations that can fulfill orders very effectively at much lower costs than the sometimes double digit percentages Amazon charges.

– Seth Patin, President

For small or medium sized companies who are just making the transition to eCommerce, I would not advocate investing in a completely dedicated eCommerce facility. It is costly, and the ramp up on the sales side can take time so you risk making a huge investment with a long wait on the return. Rather, if it is available, carve some pick space out of existing facilities (just make sure it is truly dedicated) or consider outsourcing fulfillment to an eCommerce 3PL. While Amazon may be the 800lb gorilla in the room, there are many 3PL operations that can fulfill orders very effectively at much lower costs than the sometimes double digit percentages Amazon charges.

Shifting to Supervisory Mindset, given the sheer number of stock keeping units, orders, ship-to’s, etc., the Supervisor has to be comfortable giving up control to the system and allowing the system to do what it does. The area I have seen the most push-back is with supervisors who want to control as they did when they were handling pallets, and their basic distrust of batch or automated systemic order management (whether it be wave processing or fully automated priority-based systemic work management.) Having a Supervisor who refuses to accept this function for whatever reason is a recipe for disaster.

And third, Systems. Perhaps the smallest organizations who are selling only a few items can work with sub-par systems, but add any complexity to the product mix and heightened service level expectations, and systems become the enabler of the entire model, without which you cannot succeed.

eCommerceCIO: In the Order to Ship cycle, where do you see the greatest amount of inefficiencies, or time leakage? How can a WMS or other software help reduce or eliminate this waste?

Seth Patin: You know, this is a great question, and the answer is not what you would expect. It is not Pick, Put Away, or Receiving. Slotting is a massive issue for eTailers. We have a customer who has over 1.1 million items in their Item Master, stocks 70,000 different items on any given day, and ships 50,000 to 60,000 different items. Where do you put these items for Maximum Density in Pick? Slotting in this world is driven by a very different algorithm than large quantity, high mover pallet-based DCs with say 500 of your top movers closest to pick path, and the rest back in the depths because they rarely move.

That said, the biggest waste overall in eCommerce distribution is actually in Packaging, and this is also where the biggest risk resides. As I mentioned earlier, eCommerce requires perfectly meeting customer expectations. If you fail to package the right item, or break it, or screw up in some way, it results in a chink in the armor of your brand, and could be fatal with regards to your relationship with that customer. Customers expect “Cheap, Fast, Now, and Right”. There is no room for error.

Amazon has invested so much into its distribution network because it is betting on that adrenaline rush, and customers have come to expect it, so when there is a failure in packaging, the disappointment can be earth-shaking.

I will add that there is basically no way to conduct packaging correctly in any eCommerce operation that offers meaningful volume and product mix without the right systems.

eCommerceCIO: How important is same day order fulfillment in the eCommerce channel? How important is it for inventory availability to be visible to the consumer in the eCommerce channel?

Seth Patin: This really gets to the psychology of eCommerce, and goes back to meeting customer expectations, which are amazingly high thanks to Amazon, with the goal of protecting your brand identity and feeding the customer impulse.

When you think about it, Amazon is not selling anything that we simply must have by tomorrow.

Compare what Amazon sells to insulin, for instance. A diabetic must have their insulin available now and always. But do we really need that new piece of workout equipment, or running shoes, or book the day after tomorrow? We may want it, but we probably don’t need it. Put another way, we are being conditioned to get what we want, not what we need, when we want it, and not when we need it.

That said, same day order fulfillment is not necessarily the mark by which operations live or die yet, but it will be in the next 3 to 5 years. If an order is placed at 10 am customers will expect a tracking number by 4pm.

Today, it is possible to compete as a boutique that provides excellent customer service in product evaluation and selection, for instance, and not be a same day shipper. Or, maybe offer unique products not available on Amazon, or offer some sort of crazy cost advantage.

But if you cannot do what Amazon does on fulfillment, and most cannot, then you really need to offer something that lets you stand out and differentiates you in other ways.

Another example. Amazon does not want to ship hazardous materials, or regulated items. There are niches where regulatory requirements trump “Fast, Cheap, Now”, and somebody can compete on being able to sell these items even if common eCommerce expectations are not supported.

Inventory availability can be a killer, though. If you say you have the item, and take an order for it, but then have to turn around and tell a customer, especially a Millenial, that not only will they not receive it per their requested order date, but the item is on back-order, you will lose that Millenial as a customer forever. Their expectations have been set, and are not going backwards.

Make-to-Order retailing is acceptable and even common on communities such as Etsy.com that allow artisans to market their made-to-order products, but you have to make this point very clear to your customers, and set, then meet, delivery dates.

eCommerceCIO: How important is automation with a distribution center? Do you think a “lights-out”, 100 pct automated operation is feasible?

Seth Patin: No, not so much. We are getting closer, but for a complex or varied stock set, fully automated may not make sense. I think the evaluation process a company must undergo includes asking these questions:

1. Is our Product conducive to lights-out operations?
2. Is our service offering conducive to lights-out operations?
3. Do we know enough to engineer 100 pct of what we need to do perfectly with no defects?

In most cases, it is the third part that really makes taking on 100 pct automated facilities impractical, and a challenge Management for the most part will not want to undertake. Robots will do what you tell them to do, but they will only do what you tell them to do. This makes 100 pct automation unfeasible in my opinion.

Partial automation – as much as possible, but no more, to borrow loosely on a phrase by Einstein – is another story, and it absolutely makes sense in the right places within parts of distribution operations. If you ever want to see a cool look into eCommerce automation, look up a company called Quidsi. They are an Amazon subsidiary and parent company of Diapers.com, and a number of other popular and successful consumer goods eTail sites. They have a video demonstrating their use of Kiva robots in their distribution centers and its absolutely fascinating to watch (Amazon liked the robots enough to acquire Kiva Systems in 2012.)

eCommerceCIO: How can a company transitioning to eCommerce and real-time operations make the transformation successful?

Seth Patin: Most industry experts agree that Amazon defined and continues to redefine the concept of eCommerce. They have branched into countless other business models in a relentless effort to make themselves the first and only place a consumer goes to look for the products they sell. Their technology is proprietary, not for sale, and constantly being improved. Today they have over 100 distribution facilities and are growing at the rate of one per month. That being said, this is a company that generated $20 billion last quarter in revenue, but only realized $120 million in EBITDA. They are operating on 0.006 pct profit margin…basically break-even. Their revenue is enviable, but with limited profitability, their overall model is not viable for any other company and legitimate questions exist about how long they will be able to operate on their current model.

When you think about their customer connection, though, that emotional reaction of “they make me happy,” then it becomes a little more clear on how companies can build their “Path to Value” in eCommerce to borrow your phrase.

eCommerce needs to be about building and maintaining a relationship with your customer, as you point out in your article on customer-centric systems. Also, at one point didn’t you have a tagline about, “promoting dynamically textured relationships between a company and its consumers across a digital platform?” That is spot on. It is about relationships and happiness – this is where you can compete. Analytics and understanding your customer are top-of-mind on the customer facing side of systems.

Amazon’s biggest claim to fame is that they sell everything…but that is also their Achilles Heel. Their business model is built around directly selling a number of products, and providing a marketplace for third parties to sell their products through Amazon. You cannot call Amazon to get product recommendations and there is no guarantee that if one product you like from a particular brand is available from them that another similar product from that same brand is also available. Therein lies the largest opportunity for companies to achieve success in eCommerce. Consumers want options and explanations. They want to feel like they’ve been given an opportunity to pick the perfect item for their tastes. Companies that effectively reinforce their retail brand identity through their eCommerce offerings will be successful in maintaining the loyalty of their retail customers.

With that in mind, assuming you have done your homework, analyzed your product portfolio, and decided that eCommerce is right for you, then I see three fundamentals to this transformation on the Operations side:

• Start small and grow eCommerce organically
• Plan your operations, especially consider leveraging 3PLs and investment in internal facilities if that is the chosen direction
• Apply the Right Systems, WMS and supporting, and be willing to continually innovate to keep pace with constantly developing consumer expectations

eCommerceCIO: What do you most enjoy about what your company does for its customers?

Seth Patin: Making something complex and difficult like a distribution system come to life is an endorphin rush for me, but I derive a deep, deep satisfaction out of knowing we have delivered an asset to our clients which contributes to their bottom line, which makes their business successful. I absolutely love that!

This article was originally posted on eCommerceCIO.com on July 17, 2014.

Learn more about Accelogix Cloud here!

Sign up for our newsletter to receive the latest news and free expert advice.

Email *

Comments

*Required

We respect your privacy and do not tolerate spam and will never sell, rent, lease or give away your information (name, address, email, etc.) to any third party.