News

Designing a multi-channel warehouse for stores and e-commerce

22.12.2010

E-commerce customers lack patience when it comes to delivery times, delivery quality and delivery information.

E-commerce also gives a completely different order mix and transport flow than traditional retail logistics, not to mention a flow of returned goods in a league of its own. How do you design a warehouse management system that can handle all of these things?

90 billion Swedish kroner. That is how much Scandinavians spent on internet purchases in 2009 according to Posten Norden’s May 2010 survey, "Distance commerce in Scandinavia, 2010". This represents an increase of about 17.4 percent in relation to 2008. E-commerce is now undeniably a part of our everyday lives. The retail sector must take e-commerce very seriously in the coming years; for example, e-commerce now comprises 5.2% of retail sales in Denmark and everything indicates this figure will continue increasing in the future.

According to consultant Mikael Brorsson from Consafe Logistics, the internet is a fantastic platform for trade in consumer goods and services for private consumers, and retailers have excellent opportunities for improving sales and market share while expanding via new e-commerce business opportunities.

E-commerce presents logistics challenges

But he also points out that retailers face a significant challenge when it comes to organising logistics fulfilment processes during and after transactions in webshops, as well as designing a multi-channel warehouse that can manage the traditional and e-commerce flows simultaneously.

"It’s one thing to sell the product and collect payment via an attractive website. It is quite another matter to pick, package and transport the product to the customer, when the customer is home, without the seller being knocked out by costs. E-commerce logistics is very different from traditional logistics. E-commerce is characterised by large volumes of very small orders. It is completely different from picking and packaging a pallet or two for a store. E-commerce logistics is a difficult matter," says Mikael Brorsson.

E-customers are less loyal

According to Mikael Brorsson, e-commerce customers are less loyal than customers in physical shops. The internet is full of price comparison services where consumers can easily and quickly find an overview of prices, service and quality offered by the various suppliers. If you get poor ratings on Pricerunner, then you have problems - it’s that simple!

"E-commerce customers’ most frequent complaints are about delayed deliveries and a lack of delivery information. As e-commerce customers often pay in advance, their patience is very low regarding changes to the expected transaction process. This means that e-commerce orders must be prioritised in the warehouse management system; they must delivered first and error-free," he says, adding: "If problems arise, it is better for e-commerce companies to deal with the consequences themselves."

Therefore, he recommends that companies using e-commerce design their order flow with this in mind.

Four e-commerce challenges

He cites four major challenges in e-commerce logistics:

• large volume of very small orders
• major variations in the order flow
• delivery of the product to a private consumer who is not always home to receive the goods
• large quantity of troublesome returned goods

Thus, e-commerce logistics are not sufficiently supported by the existing logistics processes. The supply chain processes must be designed to simultaneously support traditional shop logistics and e-commerce logistics. According to the Warehousing Report 2009 from Cap Gemini Consulting, this involves the following important strategic decisions:

• Should we implement a dedicated e-fulfilment warehouse for e-commerce orders, or should we integrate all warehouse processes (distribution to shops and end customers) in a single, multi-channel warehouse?
• Should we insource or outsource warehouse processes?
• How should we organise demand planning and inventory replenishment?

Designing a multi-channel warehouse

"The two most important components of going from a ‘shop warehouse’ to a multi-channel warehouse are: a modern WMS and closer cooperation with haulage contractors that can manage B2C distribution. A modern WMS makes it easier to support the new processes and unique challenges discussed above. E-commerce logistics involves a completely different transport flow that requires the haulage contractor to provide completely different solutions. The biggest challenge here is the delivery of the order to the customer, which requires the development of new and flexible delivery solutions such as: evening delivery, delivery in garages or other locations as agreed, delivery to 24-hour boxes, notification via text message and e-mail, etc," says Mikael Brorsson, adding: "It is also important to include the collection of returned goods in the distribution concept."

He generally agrees with the recommendations from Cap Gemini Consulting’s Warehousing Report 2009, which says that the decision to implement a multi-channel warehouse involves the following strategic and tactical considerations:

• Dedicating an area of the warehouse to e-fulfilment (physical or administrative) or using a combined warehouse for all deliveries
• Combining purchase orders or using separate purchase orders and reception processes for the e-fulfilment warehouse
• Which products should remain at the warehouse and which products should be distributed using cross-docking and/or direct deliveries from suppliers?
• How should single item orders and multiple item orders be picked, given that the e-commerce flow involves large quantities of single item picking? Should orders be compiled according to product group, packaging or transport type, and how do you ensure that multiple item orders are picked, packed and sent in the most efficient way?
• How should documents such as invoices, letters and brochures be added? Should they be inside the package or attached to the outside of the package?
• What kind of address label should be used: a picking list/invoice or a separately printed label?
• Should the orders be packed as a part of the picking process or at a dedicated packing station?

Equipment and automation

E-fulfilment in a warehouse is marked by a broad range of products, low inventory levels and many small orders. As the volume increases, the warehouse reaches a point that justifies investments in equipment handling equipment, e.g.:

• Mini-load systems for storing small quantities of products in boxes
• Automated sorting systems for sorting products for multiple item orders
• Box folding and box closing machines for automated closing of shipment boxes

But the nature of the e-commerce order flow, which involves many small orders from many private consumers, means that it is not possible to automate the e-fulfilment processes to the same degree as traditional shop logistics, which involves many whole pallets for one recipient.

Consequences for WMS

Fulfilment of B2C orders requires additional functionality in the Warehouse Management System, in the form of a new interface and new operating functions. New interface requirements include registration of customer address data, registration of special customer requests e.g. gift wrapping, and handling documents that must accompany the order. Often, it is also necessary to exchange information with the ERP system about the inventory status of items to ensure that customers receive correct information about item availability. The WMS must generate transport orders that can be integrated with the haulage contractor’s systems and give the haulage contractor correct information while supporting traceability.

E-fulfilment activities also place specific requirements on WMS support of e-processes at the warehouse. Generally speaking, this involves the definition of new inventory and picking strategies in the system. There may be need for printing specific documents to accompany item shipments, e.g. invoices and personalised letters. And you might wish to include a brochure, product sample, etc. with the order. It might also be necessary to support special activities such as gift wrapping and printing address labels adapted to specific haulage contractors.

The troublesome return flow

One of the biggest challenges for e-logistics is the increased volume of returned goods. Many e-commerce customers purposely order clothing in several sizes just to be sure. The clothing in incorrect sizes is then returned to the seller. There are also many incorrect and undesired purchases, and it is not unusual for e-commerce companies to experience return rates up to 50% or more.

Of course, it is expensive to transport items back to the warehouse and process the returned item at the warehouse. This requires manual reception, product inspection, cleaning, repackaging and positioning in the warehouse. The process of receiving returned goods must be very quick so that the item can be re-entered into the system as available, thereby minimising capital binding - or, in the case of fashion goods, the items risk becoming outdated and ending up as scrapped goods.