Omnichannel Fulfillment for 3PLs - Challenges and Solutions

Introduction

The omnichannel order fulfillment process has become the next big leap for e-commerce brands of all sizes. It has led retailers and 3PLs to focus on ensuring brand loyalty and customer satisfaction simultaneously. 2020 has witnessed the growth of e-commerce by 44% followed by 7.3% growth in the second quarter of 2022.

Consumers in the digital space expect seamless customer experience from their favorite brands, from product search experience to post-purchase care. The rise of customer expectations has made it more challenging for brands to fulfill the demands.

While modern third-party logistics are working hard to deliver a consistent shopping experience, irrespective of the sales channels, their customers are constantly striving for achieving improved customer experience.

The commitment towards fulfilling orders on time despite the size, distance, and quantity brings multiple challenges which are described below along with the potential technological solutions.

Modern Omnichannel Landscape

As the name suggests, omnichannel refers to the act of catering to the customers or stakeholders on the channel of their choice - whether online marketplace or physical stores. The term retail omnichannel has traditionally been used in the marketing context but this particular term has garnered extreme relevance in the fulfillment and logistics industry.

One of the significant catalysts for omnichannel fulfillment operations has been the growth of eCommerce businesses. Online sales are growing at a healthy double-digit which is temporarily accelerated by the pandemic but growing nevertheless.

Rise in Omnichannel Fulfillment Solutions

The contribution of eCommerce sales as a percentage of total retail sales was in the low single digit about a decade ago. It has rapidly risen to around 15-16% of the total retail sales at present. And It will account for about a third of total retail sales in less than 5 years from now.

It has breached the trillion-dollar threshold due to the rapid acceleration during covid. It means no brand can dismiss eCommerce as a fad or temporary phenomenon. They have to up their game to cater to the customer base on both offline and online channels for serving enhanced customer experience.

Factors Behind the Omnichannel Growth

To contextualize what is happening in the recent phenomenon, going back two decades back will help us to understand the situation in a better way.

2004 to 2008 was the time frame when the origins of the digital ecosystem were taking shape. That was the time when Apple came out with the iPhone and then others followed.

Facebook, Google, and other social media channels were becoming mainstream in the digital landscape.

The rapid growth of digital channels, particularly social media, and the wider adoption of smartphones has ensured that the initial touchpoint between the brand and the consumer almost always happens online. Most of the touches are today online. Even offline store traffic is driven by online interactions.

Nowadays, brands are converting prospects into customers and are also the ones that are good at managing customer experience across various channels. Hence, no brand today wants to lose out to its competitors on any channel be it physical, digital, or social.

As per an NRF survey from 2021, 83% of the shoppers cited convenience as the top-most influencing factor for making a purchase decision. And what can be more convenient than pressing the buy button on your phone from the comfort of your couch?

Evolving Consumer Expectations in Omnichannel Retail

The rise of eCommerce platforms and the consequent emergence of omnichannel have also resulted in changing consumer behavior and expectations.

The Amazon Phenomenon

The biggest catalyst for this changing behavior is none other than Amazon's fulfillment center. Amazon has just taken the shopper experience to the next level with ease of product discovery, inventory management, costs of shipping, seamless returns, and a lightning-fast fulfillment experience. More than 51% of the retailers and their fulfillment partners offer same-day delivery and 65% of them plan to offer it within 2 days while focusing on reducing shipping costs.

Constant Availability of Products

Stock levels for these checkouts across channels need to match instantly. And also seamless process around order returns especially for e-commerce is essential. A brand will either work with Amazon’s prime logistic service or work with a modern 3PL that can offer that kind of logistics operations.

Role of 3PLs in Enabling Brands for Omnichannel Selling

Not every brand or retailer can be Amazon themselves or afford the high fees that they pay for Amazon’s fulfillment services. But the brands do need to get as close as possible to Amazon in terms of providing that seamless shopper experience. And that's where the 3PLs come in.

Omnichannel Fulfillment Strategy

In traditional commerce and especially in the digital world, the emphasis has primarily been on the buyer’s journey from the shopper’s perspective. But a wide range of factors including the amazon phenomenon and external shocks like the pandemic had put a stronger emphasis on the post-purchase and the fulfillment experience.

Not all brands can focus on building an in-house fulfillment capability and they shouldn’t because their core focus should be on product innovation and building brand equity. This is where the role of 3PLs in the retail supply chain becomes very important.

Brands today have to work with distinct sets of specialized 3PLs. One provider for their eCommerce fulfillment and a different provider altogether for their bulk fulfillment that ships to brick-and-mortar stores or other wholesale channels. They are doing it because very few 3PL providers can offer a seamless omnichannel fulfillment experience.

A few examples of Omnichannel Fulfillment Strategies are:

Ship-from-DC (warehouse)
Ship-from-3PL (or manufacturer)
Ship-from-Store
Ship-to-Store (for In-store Pickup)
Ship-to-Partner (pickup depot | carrier | post outlet | locker)

How Omnichannel Commerce transformed 3PLs

Traditional 3PLs

The traditional 3PLs cater to the traditional wholesale channel, relying on pen & paper, emails, spreadsheets, or simple legacy applications if any. They were more focused on getting goods in and out at a pace that perhaps is no longer cutting it.

Modern 3PLs

The modern 3PLs on the other hand are the ones that are investing in advanced warehouse management and execution systems, deploying robots to achieve high levels of digitization and automation. The reason behind this is to match the same-day or 2-day fulfillment with a high level of accuracy.

Challenges Faced by 3PLs

In terms of Competition

Shipping containers and pallets to distributors or retail locations vs offering pick-pack ship services for small parcels at a high degree of accuracy requires different capabilities in terms of people, process, and technology.

3PL used to be an extremely fragmented industry. On one side medium to large 3PLs eg. DHL, Geodis, GXO have a host of smaller/local operations with 1-3 or more facilities across the country. While the larger 3PLs can afford to spend to augment their capabilities, the smaller ones also have to battle these challenges and figure out a way to stay relevant and competitive.

Threat of Large Fulfillment Networks

Not just that, there is a challenge brewing on a different front too. The rise of new-age tech-enabled 4PLs flushed with venture cash is outspending the incumbents in acquiring customers through digital channels.

For instance, if someone searches in Google for a 3PL service in any major city across the country, the ads of Flexe, Stord, and ShipBob pop up on all the AdWords or paid links. These 4PLs in turn work with the 3PLs to use their capacity for fulfillment.

As a result, the 3PLs are pushed down the value chain and don’t end up owning the customer relationship. This puts them in a spot where they are always in a price war with their peers to be part of this 4PL network.

Warehouse Layout and Capacity

Another challenge is finding space and maintaining enough facilities across the network. Ecommerce businesses have different space and layout requirements - those facilities are either Multi-storied or horizontally wider B2B facilities that can be more compact with higher ceilings. 65% of 3PLs have reported warehouse capacity as a major challenge. If a 3PL wants to expand into an e-commerce fulfillment network, it should have 3 or ideally 4 facilities at least across the country to reach more than 95% of the population in less than 2 days.

This is also resulting in capacity challenges. Facilities are not being built fast enough to match the consumer demand which causes a steep rise in the rentals around the traditional warehouse markets along the coasts. Hence either the 3PLs have to pay a rental at premium or look at alternatives like moving inland with good connectivity.

As per an estimate, 1.25 million square feet of space are needed for every 1B in eCommerce space, and we are adding close to 200 billion every year if not more. So there are huge real-estate challenges that lie ahead of the 3PLs.

Warehousing And Storage Global Market Report 2022 Statistics:

The global warehousing and storage market is expected to grow from $601.68 billion in 2021 to $658.51 billion in 2022 at a compound annual growth rate (CAGR) of 9.4%.
The market is expected to grow to $906.4 billion in 2026 at a compound annual growth rate (CAGR) of 8.3%.

Layout complexities are additionally dictated by various product categories:

Dry storage vs Cold storage for perishables like groceries, or personal care products.
B2B vs B2C
Maintaining floor storage, vs buffer and overflow bins to ensure that the facilities cater to the right inventory/SKU velocity for both bulk shipments and small parcels.

Legacy Software

The other major challenge for the 3PLs has been to deal with the limitations of the legacy warehouse inventory management software particularly the WMS from the first generation ERP vendors like SAP, Oracle, Microsoft, and Infor, to name a few.

These systems were not built for the modern connected and omnichannel world. They were rather designed for the era when brands or manufacturers shipped products to distributors or retailers through pallets and containers.

To be more specific, these WMS softwares don’t follow the principles of open connectivity to facilitate a seamless flow of data from sales channels to the warehouse and the shipping carriers

If a 3PL is servicing multiple clients that are using different ERPs or selling on multiple e-commerce platforms, it should invest time in consulting or system integration services for the legacy WMS to integrate with those systems. That’s a huge time and money drain thereby eating into the 3PL margin. This process is repeated every time a 3PL onboards a new client.

These systems don’t integrate well with hardware or robotic devices either. So if the 3PLs get to a scale where they have to deploy robots or ASRS systems or sorting conveyors, they have to avail the services of system integrators again to move data between these devices and their legacy WMS.

Also, legacy software was primarily built for record-keeping, and not to offer any intelligence to run fulfillment operations in an optimal way. Whereas, modern WMS software provides optimization, visibility, and ecosystem capabilities.

Visibility for Key Stakeholders

For the 3PLs, having the right visibility themselves and providing the necessary visibility to various stakeholders is also an extremely important requirement today and is not easily possible through the tools and software of the past. Imagine a 3PL’s inbound container is stuck in the middle of the Suez and has no visibility into it.

From a 3PL’s client perspective, the brands need to know where the inventory is, how it is moving through the facility or the network, and their order lead times and fill rates. The shippers need to know the scheduled pickup times and the delivery volume. The end consumers need to know the expected delivery times and the status of their orders

Another important aspect for the brands here is that they get billed by the third-party logistics provider on various inbound/outbound and storage activities. For e.g, One of Hopstack’s Midwestern 3PL clients mentioned that they were spending a few days every week just to reconcile the billing amount because the 3PL omnichannel retail software they used before Hopstack wasn’t capturing all the activity well to its granular detail.

Possible Solutions for 3PLs

Surviving a Changing Environment

Not everyone can be great at everything. So the smaller and midsize 3PLs should focus on their strengths and double down on them. For e.g, some of the smaller 3PLs and fulfillment companies are good at specialized material handling like perishables or hazardous materials, have a good local distribution network, and have great relationships with carriers.

Hence, they should focus on building on that. Not to mention, going that extra mile for the clients. Amazon fulfillment network will reject shipments even for a misplaced label. So if a third-party logistics provider goes that extra mile to work with the brands to offer personalized service, they’ll always win the brand’s confidence over others.

Most importantly they make the brands and the end customers involved in the process. This means that the 3PLs should be investing in 3PL warehouse management systems that provides the brand/client-facing portal as well as an interface for the end customers

Some of Hopstack’s 3PL clients have reported that they were able to shave off days of laborious effort every month answering various support calls. Now the 3PLs just onboard their clients as additional users on the Hopstack platform and help them get full visibility into their inventory levels and order velocity.

Digitization of the 3PL

It is surprising how incredibly untouched by technology the world of 3PL is. More than 70% of the operators still are dependent on emails and spreadsheets.

Investing in technology should be the number one priority, and it's not even an option now, but a bare necessity for survival. Unlike in the old days, fulfillment companies and 3PLs don’t need to spend hundreds of thousands of dollars with those legacy enterprise vendors and system integrators.

Onboarding a cloud-based platform through monthly or quarterly subscriptions can get them going in a matter of days and weeks. They should also invest in digital data capture devices like scanners, barcode printers, and mobile PDAs.

One of Hopstack’s 3PL customers went from 110 picks an hour to 300 picks an hour by empowering the pickers with high-velocity mobile scanners powered by Hopstack’s 3pl warehouse software.

Some of the 3PLs especially the mid-sized ones with a national presence can focus on moving up the value chain to provide that managed value-added services to the brands as some of the previously mentioned 4PLs do. It's easier once the 3PLs become more tech-savvy and good at the digital game.

Hopstack’s Solution set for 3PLs Warehousing Management

We have seen significant success in enabling the 3PLs to overcome most of these challenges. At Hopstack, we offer wms for 3pl - a full-stack solution for the 3PLs to run omnichannel operations. The platform comes with out-of-the-box integrations with various components of the ecosystem right from e-commerce marketplaces for B2C and ERP systems for B2B to the shipping carriers.

The platform’s No-code workflow designer and rule engine allows for modeling any business scenario or setup automation role without requiring the users to have any technical expertise. Such agility helps our 3PL clients onboard a new brand or add a new facility to their network with few mouse clicks and not needing to invest in any in-house software capabilities.

The underlying analytical engine makes recommendations around process optimizations such as ideal picking wave size, optimal picking route, inventory slotting, and task allocation.

Hopstack has enabled all its clients to achieve greater inbound and outbound efficiency across the board resulting in near-perfect order accuracy and greater than 98% fill rates.

One of Hopstack’s 3PL customers specializing in discretionary consumer goods has reported more than 200% improvement in their fulfillment throughput by onboarding their operations on the platform. They went from handling 2000 orders a day to 15k orders during peak season without adding a single dollar to their payroll costs.