Accelerating Fulfillment Requires Balance

This article first appeared in the November/December issue of Industrial Distribution. To view it in the original format, please click here.

Learn the benefits and impacts of same-day fulfillment

Same-day fulfillment is no longer the holy grail of distribution. Leaders are enabling faster fulfillment and reaping real bottom line and competitive advantage benefits. The key is balancing potential revenue gain or service level improvement against investment and operating costs required to deliver on the promise. And the pivot point is your cut-off time. Choosing the right strategy and cut-off time(s) depends on understanding the impacts not just within the DC, but across the organization. This article outlines the benefits and key considerations of enabling same-day shipping.

The Bar Has Been Raised
In today’s instant gratification culture, it’s not surprising that distributors are focused on reducing the time it takes to get an order into the hands of a customer.  With more companies following Amazon’s lead in offering same-day delivery and free shipping, customers now expect shorter order to delivery cycles — which requires faster order fulfillment from the distribution center. And companies are looking at compressing fulfillment time as a way to compress their “cash to cash” cycle. Faster delivery to the customer often means faster payment, and ultimately, an opportunity to get paid before the invoice comes due on that inventory.

In a recent customer experience study, 48 percent of customers stated they are not willing to wait more than five days for a purchase and more than 40 percent of online shoppers indicated they have abandoned their shopping cart because of an issue with the estimated delivery date. Depending on where your customers are in relation to your distribution centers, this may mean compressing fulfillment time to hours or minutes instead of one day.

Same-day fulfillment is not new — it’s been the goal of a lean logistics strategy that reduces touches in the DC and minimizes waste. But customer expectations for faster order-to-delivery time and the need to reduce inventory levels across the supply chain are driving some companies to push for fulfillment times to an hour or less and offer later order cut-off times for stores and customers.

This strategy may offer a key competitive advantage and help to lower overall inventory costs, but it may also increase labor costs and require additional infrastructure investment. For example, companies may put in more automation or even do counterintuitive things such as add “touches” that were removed as part of a lean initiative to achieve this level of service. It’s a delicate balancing act between service and cost. The best way to start is to understand the potential benefits that come from improving service.

Same-Day Fulfillment: What are the Benefits?
In addition to meeting customer demand for faster order processing, same-day fulfillment holds the potential for several other benefits.

Competitive advantage. Accelerating fulfillment often results in revenue growth and increased market share.

The first to get the product to the customer gets the sale. Ask yourself, does being first have an advantage for your business? One automotive parts retailer uses same-day delivery from its DCs to its stores as a competitive differentiator. With hundreds of thousands of SKUs in inventory, it’s impossible to stock them all at each of its stores. But having the right part available at the right time is important to customers, especially for mechanics working on repairs. So the company makes a number of same-day deliveries from its DCs to its retail stores to ensure that any part in its inventory is available when the customer needs it. In some industries, it is not uncommon for a customer to order the same product from more than one company, with the intention of keeping the first one delivered and returning any later arrivals.

Later cut-off times combined with same-day fulfillment can be a differentiator that leads to larger orders. By extending its customer service cut-off times to 8 pm, the latest cut-off times in its industry, MSC Industrial Supply Company found that customers place larger orders. Knowing that MSC also backs its next-day delivery promise with a financial guarantee, provides its customers confidence that they can hold orders until late in the day and still get next-day delivery. MSC’s service promise is unique in its industry and has become a competitive advantage for the company.
Lower inventory costs. Companies benefit from lower inventory costs when they allow stores to offer a broader inventory assortment without carrying as much safety stock.

Lower inventory costs. Companies benefit from lower inventory costs when they allow stores to offer a broader inventory assortment without carrying as much safety stock.

Companies that consistently deliver on the promise of same-day fulfillment can eliminate excess safety stock, which reduces capital expense. A distribution network that can deliver any SKU any day to the retail store frees its stores from the burden of keeping high levels of inventory as a buffer against the slow replenishment of out of stocks by the DC.

And if stores can rely on the DC to fulfill orders the same day, eliminating safety stock and freeing up space in the stores — retailers can potentially offer a broader array of SKUs in the same retail space. Greater breadth of inventory without deep safety stock requirements equals more sales opportunity.

Higher margins. Time-sensitivity can mean less price-sensitivity.

Simply put, when a customer is in a hurry and needs something delivered the next day, they are less sensitive to cost. One industrial parts distributor earns better margins on unplanned purchases (such as critical parts needed for repairs) than on planned purchases (work gloves) because its fulfillment network supports same-day fulfillment and next-day delivery.

Lower shipping costs. Less reliance on expedited shipping opens the possibility of less expensive shipping options.

Distributors that fulfill orders quickly increase their transit time window and can therefore use less expensive shipment options to meet their committed delivery dates. In addition, when orders can consistently be fulfilled same-day, it eliminates the need for expedited shipping costs to meet service requirements.

Same-Day Fulfillment: Consider the Costs
While the benefits of enabling same-day fulfillment are sound, companies need to consider the costs.  For most companies, it comes down to choosing an order cut-off-time that balances potential revenue gain or service level improvement with incremental investment and operating costs. It’s a cross-functional, cross-channel effort, and it has big impacts — both inside and outside of the DC.

Companies should consider why they are doing same-day fulfillment in the first place. What’s the goal? Look at your service commitment (“If you order today, it will be on a truck to you by tomorrow”) versus the cost to deliver on that promise. Balancing fulfillment strategy against business requirements is crucial. And increasing fulfillment speed without decreasing accuracy is a challenge.  

In many cases, same-day fulfillment is the cost of remaining competitive. Where the marketplace is demanding this level of service as a standard and migrating from next day delivery as an upgrade option to a key part of the order decision criteria, the key is in understanding the true “cost to serve” by developing costs models associated with different processing alternatives.

From an IT perspective, a system that provides holistic inventory visibility across the entire supply chain (including merchandise that is in-transit between the DC and stores/branches, as well as goods being shipped from suppliers) is a critical first step.

To enable same-day fulfillment, a fundamental shift from batch processing to event-driven processing of orders must occur. It’s a transition from having between one and several days’ visibility into incoming order volume, to having hours or minutes of visibility or no visibility at all. The resulting process changes can cause you to do things in the DC that seem counterintuitive. For example, a change from picking via zone routing to a pick–pass-consolidate process might mean you increase the overall number of touches to enable more parallel processing of orders, but the net result generates greater throughput and allows for a later cut-off time. It’s a delicate balancing act where the pivot point is your order-cut off time.

The impacts go beyond receiving and replenishment. Companies working to compress their fulfillment time need to examine the impacts in several areas:

Systems: Companies cannot enact same-day fulfillment without robust demand planning and forecasting systems. Legacy systems – which are usually batch-oriented – will need an upgrade or transformation to match demand with inventory in real time. You need clear rules for allocating inventory to facilitate fast decision making and exception handling (If you have two orders and one item, how do you prioritize orders? How do you fulfill demand for the other one?). Consider the value of integrating their commerce platform with ERP and shipping systems to improve speed-of-service and eliminate errors.

Order entry and order management solutions are also top priorities. Companies need to examine:
• How are orders coming in?
• How is inventory availability validated?  
• How quickly can you get that order to the floor for processing?
• How can you flag it as a priority order?

Systems that allow for dynamic picking assignment and real time issuance of tasks may be needed to drive pick paths that support overall order fulfillment requirements.

Workforce management systems must provide a real time, visual picture of fulfillment center staffing, as well as visibility to orders in various warehouse zones. Calculations of warehouse capacity versus work time remaining in the day are essential to managing same-day fulfillment.

Culture/Labor: How will labor be impacted? A change in process necessitates a change in labor standards and metrics for personnel. And there are changes involved in planning labor in a same-day fulfillment environment. Shifting the focus to speed requires different ways of measuring productivity or labor, which can have an impact on employee morale and performance. Examine your culture to determine how big of a change same-day fulfillment represents for your company, and consider the need for change management as part of the transformation.

Shipping: Same-day fulfillment should not be considered in isolation, but in concert with transportation strategy — otherwise you run the risk of sub-optimizing. For example, if the DC rushes to ship same-day but the delivery carrier keeps it for a full day in their hub, then the benefit to the customer has been lost. Carrier pick-up times and delivery times must be aligned with DC processing times too. Can you still leverage your current delivery infrastructure if cut-off times and truck pull times are altered?

Equipment: Same-day fulfillment drives more single order processing. This is a critical path item for same-day fulfillment. If your DC is not equipped to handle picking or packing efficiently, you may need to invest in different approaches to flow and equipment to accommodate the change. Process changes can also drive the need for different types of storage and picking media.

Inventory: Determining the right inventory levels and controls is crucial for executing same-day fulfillment. Considerations include:
• How much inventory to keep in stores/branches vs. the DC?
• Will you carry all of your SKUs in all of your DCs?
• Do you offer same-day fulfillment for all of your SKUs?
• What are the optimal safety stock levels?
• SKU breadth vs. depth.

Inventory accuracy and visibility are also key when moving from batch to single-unit processing. As inventory levels change, managers need the ability to see every order at every stage and the aging of orders on the floor.

Seasonal and Promotional Peaks: It may be a challenge for companies to offer same-day fulfillment during peak times. Decisions around how to handle peak significantly impact DC design and levels of investment in material handling equipment. If companies want to continue to offer same-day fulfillment during peak without supersizing fulfillment engines, they may need to include alternative flow paths for single orders and some offline processing as a way to meet demand during peak.

Additional Impacts: There can also be a few less obvious impacts where same-day fulfillment shortens the window for back of house processing and communication, including:
• Increased need for efficient error and exception handling.
• Increased need for faster checks and balances processing before orders get to the floor. Companies must speed up the processes for credit checks; address validation; communication of inventory availability, stock-outs and backorders; and how they release orders to the floor.

The Bottom Line
When considering a move to same-day fulfillment, you want to balance the cost of the changes required against the potential gains.

Moving to same-day fulfillment has brought marquis companies like Amazon, Macy’s, and Nordstrom significant benefits — chiefly, the ability to meet customer demand for faster order-to-delivery time. As a rising tide lifts all boats, these leaders are raising the bar for you in the process, and same-day fulfillment is becoming the new normal. But the move to accelerate fulfillment means sweeping change for the DC and other parts of the organization.

The question for most companies goes beyond whether they can do same-day fulfillment, to how to do it in a way that makes sense for the business. How do you determine that? The key is in balancing service with cost, and the pivot point of that fulcrum is choosing the right cut-off time that makes same-day fulfillment a realistic approach for meeting customer demand and capturing a competitive advantage.

About Fortna: Companies with complex distribution operations trust Fortna to help them meet customer promises and competitive challenges profitably. Fortna’s expertise spans supply chain strategy, distribution center operations, material handling, supply chain systems, organizational excellence, and warehouse control software. For more information, visit www.fortna.com.

 

More in Supply Chain