E-commerce growth reshapes traditional supply chains

Shippers may have to start locating distribution centers closer to consumers, as growth in e-commerce is pressing retailers to deliver goods inexpensively and quickly, and challenging traditional logistics models.

Since 2000, growth in e-commerce has been significant, with a 19 percent compound annual growth rate through 2013, according to data from a recent survey conducted by consulting firm AlixPartners and presented by Stifel Transportation & Logistics Research Group. In the last two years, in particular, there has been a 45 percent increase in the average number of annual orders made online, with 50 percent of survey respondents now ordering online at least once a month.

E-commerce growth has sparked a need for free shipping and quick delivery services, as consumers “want it now.” In 2012, the average acceptable wait time for free delivery was 5 ½; in 2014, that number fell to five days, AlixPartners reported. A quarter of respondents in AlixPartners’ survey said they now expect free shipping in three days or less.

“This push for same-day or two-day delivery is making things more complicated,” Kurt Cavano, vice chairman and chief strategy officer at GT Nexus, told JOC.com. “With this spike in services like Amazon Prime, which guarantees two-day shipping, more retailers are moving toward that, too.”

When delivery to the home or office is not an option, 55 percent of survey respondents said they would opt to buy online and pick up at the store.

These e-commerce trends are putting pressure on traditional supply chains and the providers that support them, AlixPartners said. Traditional retail models involve inbound freight moving into one of potentially many regional distribution centers, with shipments then moved via private fleet or dedicated truckload to stores. However, with the growth of e-commerce, some retailers have established dedicated dot-com fulfillment centers, which then service the end customer via FedEx, UPS or the U.S. Postal Service. Many have moved into “even more varied and evolved models,” AlixPartners said, including fulflillment centers within distribution centers, and locating closer to the final mile customers to satisfy expectations for faster transit.

“Parcel delivery companies need to make sure they have the capacity to handle e-commerce growth, but the real question is whether retailers can receive the products at warehouses and get them packaged quickly enough so that parcel delivery companies can make deliveries on-time,” Cavano said. “If retailers aren’t prepared, it’s not going to happen.”

Shippers are also starting to think more creatively about return shipping, Cavano said. For example, German e-tailer Zalando, which Cavano called the “Zappos of Europe,” allows customers to retrieve and return packages for free at thousands of locations at supermarkets, newsstands and gas stations, powered by logistics firm Hermes.

“The key is really good visibility into the supply chain,” Cavano said. “Without that, you can’t fulfill orders. You need to know where your products are when they’re on a ship on their way in, or when they’re already in your warehouse or stores, so that you can have the flexibility to deliver online, in a store or when customers ‘click and pick.’ ”

So far, traditional retailers have been busy and successful converting their business models to include Internet sales and tap into the new consumer omnichannel expectations. Companies from Macy’s and Nordstrom’s to medical supplier Medline have restructured their facilities and supply chains to accommodate the explosive e-commerce growth. In U.S. industrial real estate markets, developers are scrambling to keep up with demand for omnichannel and dedicated e-commerce fulfillment centers.

In terms of outbound logistics, aside from FedEx, UPS and USPS, no individual final mile companies have started to take meaningful share in the domestic ground market, although opportunities in this market are expected to continue to emerge, according to AlixPartners. As an aggregate, these individual final-mile companies now constitute 10 percent, compared with UPS at about 57 percent; FedEx, 26 percent; and USPS with 7 percent of the U.S. ground market.

“Carriers running a low-cost model should be able to differentiate themselves and build density faster and more easily,” Alix Partners said. “Ultimately, shippers prefer working with a limited number of carriers with scale, better technology, more financial stability, and, thus, more perceived service reliability and market longevity. As a result, consolidation among final-mile carriers should continue, and there may be opportunities for asset-light or non-asset-based brokerage/technology companies to build a successful super-regional platform.”

Contact Grace M. Lavigne at glavigne@joc.com and follow her on Twitter: @Lavigne_JOC.


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