Challenges and assumptions
Six business models of physical fulfilment processes supporting e-commerce have been identified. Only four of these models apply to companies without a retail store base such as pure e-tailers, most manufacturers, and most distributors. The differentiation between the models is determined by ownership of product, physical assets, and the point of delivery to the ultimate customer.
Model number 1, “integrated distribution”, involves building eFulfilment capability into an existing bulk distribution centre - a tempting, but problematic model for many retailers. Toys R Us has abandoned this model in its move to model two – an acquired, dedicated eFulfilment centre.
An American online grocer tackled model 2 head-on and drove down costs from their home delivery service. The grocer is investing US$1bn in building 26 dedicated distribution centres and a tiered fleet of delivery vans to service their customers with high-quality dry and perishable goods, at competitive prices, within a 30-minute delivery window chosen by the customer. Their first automated centre handles 20 times the volume of a typical supermarket distribution centre, enabling customer orders to be directly transmitted from the Web to the grocer’s proprietary fulfilment applications, then routed to machines that pick goods from the shelves without human intervention.
Third-party eFulfilment models, model number 3, are often faster to set-up and therefore attractive to start-up e-tailers. Outsourcing eFulfillment service to a third party with proven technologies and known performance can be a good starting point for a company. All of the principal small-package carriers, such as UPS and Fedex, offer some level of such eFulfilment service capability.
The 4th model, a “virtual” model, may turn out to be the most cost-effective model overall. If the supplier has proven capability for one-to-one shipping, it has many of the advantages of a third-party model. Amazon.com initially adopted it through Ingram Books. However, it has a potentially fatal flaw. As the products were sold through and fulfilment service by the same distributor, substantial negotiation power is shifted away from the e-commerce company to the supplier. Amazon.com has progressively moved to model two by building its own operations.
Model 5 is generally not perceived as successful. In this model, an order is placed electronically but is fulfilled by specialised order pickers who pick stock from regular retail shelves and deliver to the customer’s door. Technology integration across many fulfilment points, and quality control are the barriers to this approach.
In model 6, a "pure play" e-commerce retailer, a bricks & mortar retailer with no local stores, or a manufacturer ships products to an affiliated store for local delivery or to a designated customer pick-up location. For example, an appliance manufacturer might sell a refrigerator though the Internet to a consumer, but deliver it to a local supply company which would either deliver the goods or allow the consumer to pick it up at their store. There aren't many of these scenarios happening today, but as the use of the Internet evolves, this model could become significant.
It is too early to tell if there is a “right” way to do eFulfilment. There are many factors that contribute to the decision of what a particular company does: What are customer expectations? What capabilities are needed to satisfy them? What are the existing assets and capabilities? Can the resulting value-chain support a viable business? - to name a few. Every company’s situation is going to be different and the e-Fulfilment “answer”, at least at first, will also be different.
Making it happen