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The New World Economy of E-Commerce

This article was written by Peter Buxbaum and originally appeared in Freight Business Journal North America. To read the full article, please link here.

Modern e-commerce warehouse

The highly competitive e-commerce business has come a long way in the last fifteen years to take its place as an important segment of the world economy. Once largely confined to retailing small consumer goods, e-commerce vendors now also sell everything from household appliances to the gamut of business-to-business products.

The customer experience is now king in the e-commerce world, and that covers not only the appearance of the website and the ease of ordering, but also product selection and availability and the speed and reliability of deliveries. Given the current state of e-commerce, it’s not surprising that transportation and logistics have emerged near the top of companies’ priorities. Third-party logistics providers are increasingly beefing up their e-commerce expertise and offerings, deploying new systems to deal with the explosion in e-commerce-related shipments and data and reimagining themselves to provide the visibility and flexibility that e-commerce companies need to succeed.

At Zulily, an online retailer that sells to consumers, transportation and logistics are thought of as core competencies. Zulily’s business model revolves around product “events,” a fancy word for sales, perhaps 100 of them a day, that offer special prices and that typically last 72 hours. “We’ve created a different way to shop,” said Rudy Landram, Zulily vice president for transportation and vender operations. “It’s more entertainment than transactional.”

So, if you’re looking for a particular pair of shoes to buy, Zulily is probably not the website you’ll be visiting. Instead, Zulily seeks to engage with customers interested in “special values on unique products,” said Landram, knowing that “new products may be offered every day” but that others “may be going away.”

From a logistics standpoint, Zulily fulfills customer orders in three ways: from inventory held in company fulfillment centers, by having third-party vendors supply product to fulfillment centers based on purchase orders, and by vendors drop shipping orders directly to consumers. In any case, Zulily owns the freight processes involved in getting products to end users.

Complex Logistics Scenarios

Zulily’s example highlights the increasingly complex logistics scenarios presented by e-commerce. “E-commerce used to be seen as an extension of retailing,” said Bryan Canfield, special handling manager at C.H. Robinson Worldwide. “But now it’s really providing a gateway for brand owners, and manufacturers to sell direct to consumers. Traditional supply chains are being disrupted. E-commerce sellers are increasingly turning to 3PLs to help them redefine their supply chains and make them more dynamic.”

Some leading 3PLs are indeed developing capabilities required by e-commerce players, but many in the industry are “coming along grudgingly,” said Cathy Roberson, founder and head analyst at Logistics Trends & Insights. As a result, there are a lot of startups popping up – companies like Flexport, for example, “to address issues not being addressed by traditional logistics providers.” In the age of e-commerce, transactions and processes are moving online, and that’s exactly what this new breed of logistics provider is doing for freight forwarding and logistics.

One feature of Zulily’s business model is to keep inventory levels low. Only 27% of Zulily products are fulfilled from stock kept in the company’s fulfillment centers in McCarran, NV; Bethlehem, PA; Lockbourne, OH, and Shanghai, China. Zulily’s US fulfillment centers total 2.2 million sq. ft. and employ 3,200 workers.

Drop shipping is reserved for products that require more flexibility, such as large or bulky objects like furniture, customizable pieces, consumables such as food, and, hazardous materials such as perfumes and electronic devices with batteries. The typical shipment involves an order placed during a Zulily event, at which point the company sends a purchase order to its vendor, and the items are sent to an FC, where the merchandise is packaged, consolidated when possible, and shipped to the customer.

Two-thirds of Zulily’s domestic inbound freight is processed via truckload and LTL transportation. “But for a retailer of our size, we uniquely have one-third of our inbound shipments arriving via small parcel,” said Landram. “We’ve developed an inbound transit management system that is able to rate shop not only between methods to ensure we assign the most cost-effective time-sensitive carrier for the route and the most cost-effective and time-sensitive method.”

Given the desire of customers to receive their orders quickly and Zulily’s commitment to the customers experience, the company often employs airfreight for items that originate overseas. Indeed, e-commerce is seen as a major factor in the air cargo boom seen in that last few months of 2017.

“We emphasize speed for our incoming international and domestic freight,” said Landram. “We fly our international inbound product and have established automated processes that assist U.S. customs to approve our freight to its destination quickly.”

The air cargo industry posted some impressive numbers in 2017, a (% growth in demand, the industry’s strongest performance since 2010. “The last holiday season saw a big impact on airfreight with growth in e-commerce and customer expectations for speedy deliveries,” said Stuart Leung, Flexport vice president for operations and logistics.” Amazon has set high expectations and everyone is trying to catch up.”

The tight airfreight supply/demand picture pushed airfreight rates up during the second half of 2017. “During the holiday season, if you didn’t charter an airplane beforehand you were out of luck as a shipper,” said Roberson. “You either had to cough up a lot of money to book space or just wait it out.”

“We ran dozens of full charters in December for e-commerce customers,” related Benno Forster, Head of Airfreight USA, DB Schenker. “If you need a large quantity of a given product in two days there is no other way than to organize a full 747 charter. We get these kinds of calls a couple times a week from China and other hot spots.”

Benno Forster, Head of Airfreight USA, DB Schenker.

Zulily’s inbound air shipments typically arrive on pallets to one of its three domestic fulfillment centers, where they are processed further for delivery. The company’s FC in Shanghai ships products originating in Asia directly to customers. “The idea,” said Landram, is to get product to customers even faster and to provide them with a better experience.”

Zulily’s ownership of freight processes, fulfillment, and deliveries means it stands in a 3PL-type relationship with vendors. One thing Zulily has on common with e-commerce 3PLs is a bias toward building proprietary systems to manage supply chains. In Zulily’s case, these include warehouse management software and its shipping system. “Our FC teams work hand in hand with software developers,” said Landram. “This allows for quick code deployment as well as a rapid cadence of technology innovations.”

Zulily’s shipping system allows it to make decisions at the ship point rather than the order point for inbound and outbound packages. “This allows us to be nimble and remain focused on providing a wide variety of desired products to our customers, by utilizing both consolidated and drop-ship methods of delivery,” explained Landram.

Flexport, a full-service ocean and air freight forwarder, also uses proprietary software and, given its digital bent, uses that software “to enhance the customer experience,” according to Leung.

Other forwarders have deployed digital platforms, Leung acknowledged, but many of those were built in the last century. “Ours was developed in the last few years,” said Leung, which allows it to incorporate the latest data analytics and decision support features of modern software. The Flexport platform also features an open application programming interface which allows for easy mapping and integration with its customers’ ERP systems. Above all, it provides e-commerce shippers with the end-to-end visibility they require to manage inventory, including inventory in transit, to make quick decisions based on changing circumstances.

Zulily plans continued investments in its transportation and logistics capabilities, with an expansion of its reverse logistics transportation and processing capabilities slated for the next six months. “We also plan to add more inbound consolidation of our parcel shipments, which saves both money and reduces time to arrival of our product,” said Landram. “We will also be applying advanced shipment notice information into our shipment consolidation algorithm to looks farther upstream to our inbound shipments viewing what product could be consolidated into another product shipping out to the same customer.”

E-Commerce Equation

E-Commerce is a rapidly evolving business and companies need to be prepared for developments over the horizon. Given the increase in airfreight rates, e-commerce players may have to reconsider their transportation options.

“Shippers may be forced to think about other transportation solutions,” said Roberson. “Maybe they’ll use more ocean freight, but if that’s the case they’ll need to plan accordingly.”

Indeed. Ocean transportation may lower costs, but will increase delivery times. That means sellers will have to keep more inventory on hand for quick fulfillment and delivery.

These kinds of developments could turn some business models on their heads. It’s hard to say what the future holds, but one thing is certain: e-commerce sellers and their service providers had better stay on their toes.



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