01 Mar E-Commerce Supply Chain: What you Need to Know in 2022
As a result of COVID and the subsequent supply chain issues, 2021 was a challenging year. E-commerce supply chain challenges impacted small businesses and online sellers disproportionately.
The disruptions drove many online stores to reduce their product offering. Large product catalogs couldn’t compete with big businesses like Walmart or Target, so store owners were forced to focus on a niche and ensure sufficient supply in that niche.
Currently, supply chains continue to change due to an extremely volatile market. In this challenging retail environment, it’s important to be up to date on the latest supply chain management trends.
In this article, we are going to look at strategies that e-commerce companies can implement to combat e-commerce supply chain challenges. From working with third-party logistics companies to reverse logistics, order management, bulk buying, and more.
Third-Party Logistics Partners Are Critical for Online Sellers
While the third-party logistics (3PL) sector grew by 8.2% in 2021, since the beginning of the COVID-19 pandemic the sector has been on a bit of a rollercoaster ride. With massive drops in trade in 2020 (transatlantic trade was down around 50%) and the subsequent bottleneck when economies reopened, 3PL companies have been investing in new technology and approaches to meet demand.
The increasing popularity of third-party logistics companies is expected to bring a more efficient system. These systems are generally taking the form of a renewed focus on digitalization, or processes to streamline shipping and logistics, as much as possible. There is no doubt that the industry is booming, as more and more e-commerce companies look to outsource logistics.
The focus on innovation, however, has gone beyond new software and processes into physical investments as well. So-called “Microwarehouses”, small hyper-local shipping points, have seen a surge in growth in the last few years. They have been driven in part by consumer demand for next-day (or 2-day) shipping. Microwarehouses offer logistics services on a more local scale. They’re closer to your consumers and your business.
Increased warehousing capacity means that logistics companies can handle higher order volumes. Larger and more local warehousing can ultimately make for more efficient services for your business.
Better delivery times and more efficient service can reduce your manufacturing and purchase journey, thus providing a better experience for you and your consumers.
The returns system is one of the most challenging elements of the e-commerce experience for both the business and the consumer. Ease of returns can be one of the key components in a consumer’s experience with your business. It has the potential to make or break the relationship.
To address this challenge some retailers are coming up with innovative solutions. As an example, in 2019 Amazon launched a partnership with the retailer Kohls whereby Amazon products can be returned in Kohls stores. This is a win-win; easier and cheaper returns for Amazon and more foot traffic for Kohls.
No matter how you slice it, our returns processes need to be cost-effective and efficient. In the end, these factors will benefit both your business and your consumer.
Ultimately, your returns’ delivery system and its associated costs are taken away from your overall profit margin. Typically, the product cannot be sold again. Therefore, returns need to be as low in price as possible.
Many companies are expected to focus on improving their reverse logistics this year. It’s important that you keep up to date with the best delivery, warehousing, and inventory systems to adapt.
The general sizes of orders placed at your store have a direct impact on your individual supply chain. Small orders require less inventory, and big orders require more inventory.
The supply chain crisis has resulted in customers making smaller orders. When shoppers can’t find all their items at one retailer, they shop around. This trend is continuing from the final quarter of 2021. Around 76% of shoppers admit to shopping periodically, rather than making one big purchase.
So, what does that mean for the e-commerce supply chain? Smaller orders might mean that you need to change your inventory quantities or available range.
It’s also important to consider the available delivery methods or costs, for both your incoming supply, and outgoing orders. If you offer free shipping, smaller orders might result in reduced margins. Generally, larger orders translate into higher margins because of the shipping efficiencies you will realize.
In recent years, many businesses have moved to “just-in-time” inventory management. However, this method is less viable for e-commerce businesses that need to absorb the cost of small orders.
Consider whether you can keep your incoming delivery costs low, by making bulk purchases. Overall, it is cheaper to ship one large order, instead of multiple small ones to keep on top of stock.
If it isn’t possible to make bulk purchases due to funding or supply issues, it’s important to implement efficient management systems. Ensure your inventory management and purchase forecasting are as effective as possible. From there, you can make purchases from suppliers only when you really need to.
Supply Chain as a Service
SCaaS is a relatively new innovation. These companies offer procurement, manufacturing, quality control, warehousing and logistics.
Big retailers, both e-commerce and traditional, are looking to save costs by employing SCaaS. The service trims down the supply chain and ideally makes the process more efficient.
SCaaS could present a challenge for smaller e-commerce retailers as they may have a hard time competing with larger retailers’ shrinking supply chain costs.
To stay competitive, consider where you might be able to cut costs in your existing supply chain. If this is difficult, demonstrate what you have to offer in comparison. For example, handmade goods might prove to be better quality than large retailers’ assortment – something consumers are willing to pay a premium for.
Flexible Supply Chain Management
Flexible supply chain management has become a bit of a buzzword in the last few years. When we use this term we are really talking about supply chain resilience and the ability for a supply chain to quickly shift in response to short-term disruptions and longer-term shifts.
You need to take concrete steps both in terms of processes and tools to build a robust, flexible supply chain.
The following elements need to be effective when optimizing for flexibility:
Supply Chain Segmentation
While the biggest retailers spend millions of dollars on software and processes to manage and segment their supply chains, McKinsey and others argue this is even a challenge for them. At its heart, supply chain segmentation is a simple idea: break your supply chain (both upstream and downstream) into its requisite parts and plan for when and where you need each piece of your product.
By understanding the parts that make your product and the time and place they are needed, it can change your business model. As an example, you might find you are spending too much money on shipping a finished product across country, when you could instead set up a small production unit there and work from the raw materials. But more importantly, in the context of supply chain management, a segmented supply chain allows for greater flexibility. If there is disruption in one segment, it’s easier to address than if there is a disruption affecting your whole supply chain.
The best approach here is not to put all of your metaphorical eggs in one basket. Perhaps you keep some inventory with Amazon and some with a 3PL partner warehouse. Of course, you need to start by understanding what the right level of inventory is based on demand, but then you need to use tools to keep an eye on inventory levels to make sure they don’t fall too low, while keeping in mind potential delays in your upstream supply chain.
When calculating demand, most of the time we just look at the last two years: what was the growth in that time, and then assume roughly the same growth for next year. The problem is that when the last two years were the COVID pandemic, the numbers can be skewed.
That’s why a new breed of advanced, often AI-powered, forecasting tools is slowly entering the market. According to Gartner, 45% of the biggest companies are already using them. Most of these tools require companies to have an ERP, and not all e-commerce companies do. There are good tools on the market for small and medium-sized companies, but you can also do some of this forecasting manually by looking back before COVID at your growth and making an educated guess for the year.
Sustainability may also be a buzzword these days, but it is an important aspect of supply chain management. Modern-day customers want to know the details of their retailer’s businesses, including the behind-the-scenes.
Businesses need to demonstrate their commitment to environmental issues. Big retailers in particular are already making the move towards greener suppliers and logistics. As an example, Wal-Mart has launched new sustainability standards for suppliers. For smaller companies, it can be harder, but even committing to using recycled packaging materials can be a small step in this direction. Consumers expect both large and small retailers to be as environmentally friendly as possible.
Consider whether you could source more locally. You could also look to make larger orders with your suppliers to require less frequent shipping. It’s also important to discuss environmental impacts with suppliers and logistics companies. Ensure your supply chain aligns with your preferences and those of your customer base.
Sustainability, unfortunately, isn’t always cost-effective. However, it has the potential to improve your relationships with your customers. According to a McKinsey study, one in four consumers say that they are planning to focus on the environment and sustainability when making purchasing decisions and 60% said they are willing to pay more for environmentally conscious products.