Why Companies’ E-Commerce Fulfillment Networks Aren’t so Fulfilling for Merchants

Instead of walls and hurdles, preventing growth and advancement, true next-generation fulfillment solutions can facilitate collaboration between all members of the value chain.

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The future of e-commerce order fulfillment must be efficient, where all components of the supply chain work together to profitably and responsibly serve the customer. Instead of walls and hurdles, preventing growth and advancement, true next-generation fulfillment solutions can facilitate collaboration between all members of the value chain.

Today, however, multiple major marketplaces in the United States have their own preferred e-commerce order fulfillment networks. Each network gives merchants an edge over competitors within those platforms. Benefits like better visibility, buy box prominence and lower fulfillment costs on marketplaces punish businesses that use non-preferred fulfillment networks. Thus, many merchants are flocking to these networks. This contradicts the trend of selling multi-channel and comes at the merchants’ sole expense. There are hidden costs of maintaining inventory across multiple “exclusive” fulfillment networks. Let’s break it down:

1.      Redundant inventory in key markets. Imagine a merchant wants to offer fast shipping to customers in California and that merchant operates in three different marketplaces. The merchant will need to store inventory in California but at three separate warehouses for each marketplace while serving the same customers.

2.       Multiple inbound shipments. If merchants sign up with three fulfillment networks, they will have to transport their inventory to three warehouses in every major region. This will be more expensive because merchants must split one large inbound shipment into multiple smaller inbounds. Dividing shipments for three locations can raise costs by at least 12%. For example, using UPS retail LTL rates, a 300-pound pallet of merchandise going from California to New Jersey can cost approximately $75. Splitting the pallet into three shipments would cost approximately $280 each, nearly $100 more.

3.       Safety stock. Splitting the same amount of inventory between multiple warehouses increases the amount of safety stock merchants must maintain, resulting in more money held up in inventory. The square root law of inventory dictates the additional safety stock needed to keep as the merchants expand their order fulfillment locations. For example, a merchant with one warehouse has 4,000 units of safety stock; with three warehouses, the safety stock needed jumps 73% to 6,928 units.

4.       Clearance through multiple channels. If a product doesn’t sell well, merchants incur the costs of clearing the dead stock through each of these redundant fulfillment channels. So instead of paying inventory removal once, merchants might end up paying inventory removal three times.

5.       Returns through multiple channels. Returned merchandise is sent back to each marketplace’s warehouse, not back to the merchant. Merchants have to compensate or pay for returns processing to every platform, which can be as high as the fulfillment cost for some networks.

Apart from the tangible costs, there are other headaches associated with managing multiple order fulfillment programs, for example, the added complexity of juggling multiple contracts, billing audits and keeping track of ever-changing rates and terms.

Merchants should also consider the cost to the environment – unnecessary and redundant inventory results in a larger carbon footprint. It excessively multiplies transportation and warehousing operations. The repercussions are hard to ignore when humanity is inching towards irreversible damage to the climate every day. Merchants are losing, and so is the planet.

Merchants’ agility is hindered in this uncertain holiday season

With limited brick-and-mortar shopping, online is the primary way people will shop this year. Many people are still reluctant to shop in person; the 2020 Deloitte Holiday Retail Survey reported 51% of customers are anxious about shopping in-store during the holiday season due to the Coronavirus disease (COVID-19).  

In an uncertain environment like the pandemic, demand is hard to predict. With millions of Americans still unemployed and uncertain support from the government, it is unclear which SKUs will sell well. The Deloitte survey also found that two out of five holiday shoppers expect to spend less this year. Having a lot of merchandise locked in fulfillment benefits the marketplace, as it ensures products are available in that marketplace. However, merchants could lose the flexibility and agility needed to respond to changing demand.

By being locked in these fulfillment networks, shipping across marketplaces becomes expensive or, at times, simply impossible. This leaves merchants vulnerable when demand is unpredictable. For example, if a particular SKU sells out in Walmart Fulfillment, merchants cannot use Amazon Fulfillment to continue selling on Walmart.

The future of order fulfillment is wide open

The platforms and marketplaces are doing what’s best for them. They are building their own e-commerce order fulfillment networks to drive revenue and tie merchants to their platforms. What’s best for marketplaces may not be best for merchants. Captive order fulfillment services add unnecessary costs and do not scale to a seamless customer experience across channels.

The optimal future of order fulfillment is customer-centric. It means delivering goods to customers the way they prefer, not limited to the options thrust upon them by merchant or fulfillment partners. The options should not be limited to lightning-fast delivery or curbside pickup. Merchants should also allow the customer to choose delivery options that are greener for the earth or have the order delivered the same day from a local store without costing an arm and a leg. When order fulfillment networks operate under this new paradigm, they can offer these options and more to merchants of all sizes. Such services will not be luxuries limited to large multi-billion-dollar retailers.

The current system of captive order fulfillment models owned by a few major marketplaces does not work. It’s a system that benefits marketplaces while sacrificing merchants’ profits and limiting customers’ choices. We need to re-imagine and re-design fulfillment to a system that can benefit both merchants and marketplaces and put customers at the center of it.