Philip Hall, Managing Director Europe, CommerceHub
The warehouse is an inevitable part of any retail supply chain, providing the backbone for retail operations. The boom of ecommerce has driven the evolution of the warehouse, from merely storing stock to becoming a fulfilment hub dealing with hundreds – if not thousands – of ecommerce orders every day.
With new retail challenges constantly arising, from demands for same-day or next-day delivery to new economic pressures, retailers need agility, adaptability and a supply chain that is demand-driven and responsive with the ability to evolve and improve to meet ever-changing conditions. Add this to the need for retailers to be increasingly aware of how much waste they’re creating and its impact on the environment, and the challenge increases. How can retailers meet these challenges head-on, while also protecting their margins and keeping the customer experience intact?
Getting ready for a long-term commitment
Despite the challenging environment, retailers are determined to put growth on the agenda. Research shows that 75% of retail decision makers believe that adding more products or product categories to their ecommerce channels is a top priority for businesses, and 84% of those who are making expanding their product range a priority are doing so in the hope that it will increase revenue. There are real benefits that can be reaped from an expanded range; it can help bring web traffic and provide increased choice for customers. Retailers who use a drop ship or marketplace model can expand their range without the need to invest as much in warehouse expansion, resources and inventory.
Even with this in mind, 64% of retail decision makers believe that increasing warehouse capacity is the most viable and attractive way to deal with an expanded range online. Owning something is perceived as being a more comfortable path, but is it affordable? Warehouses can limit retailers in more ways than one. Warehouse leases are often a long-term commitment, with many ranging from five to ten years. So when a supply chain director signs on the dotted line to build that new warehouse, they are placing a bet that the level of demand will be there to warrant needing it several years down the road. For retailers to truly prioritise expansion, they must consider other options that add flexibility and visibility into their supply chain, allowing them to be both proactive and reactive to demand and anomalies that might impact them.
Riding the wave of uncertainty
Uncertainty in the retail sector dominated the majority of 2019, leaving many retailers choosing to invest in contingency plans to accommodate issues around stock availability and fulfilment, particularly across borders. However, uncertainty is not a one-off event, a global supply chain can be derailed by any number of events, from failure of shipping companies to strikes. During uncertain periods, a warehouse can be a drain on capital and resources, and retailers must look to the future and protect their margins as much as possible.
So what’s the alternative? Nearly 50% of businesses are currently utilising drop ship and/or retailer marketplaces, with an additional 20% planning to adopt one of these approaches within the next 12 months. The benefits speak for themselves, with the ability to help both UK and global supply chains become considerably more flexible, reduce operational costs and offer more products via a direct-to-consumer strategy. It also helps to minimise the risks and cost associated with purchasing and moving stock unnecessarily, particularly during periods of uncertainty and heightened demand, possibly even negating the need to build that expensive warehouse. The advantage of dropship over marketplace is that in terms of control, it’s the next best thing to having your own warehouse, as retailers can still maintain full ownership of the customer experience and top line revenue.
‘Never out of stock’
Historically, drop-ship models were used for ‘difficult-to-sell’ or ‘unwanted’ clearance products; however, dropship has evolved to become a powerful tool for retailers that never want to be out of stock of particular items. If a retailer has several suppliers or distributors fulfilling similar items such as toasters or televisions, this solution can keep the customer experience intact if one source of supply goes out of stock. Drop ship can be a viable backfill option for owned inventory products if the drop-ship solution has inventory by location capabilities.
Drop shipping also enables retailers to engage with smart fulfilment based on customer location, helping to optimise the supply chain further and reduce shipping costs for the retailer, which can also translate into lower customer pricing. For example, if a customer in Leeds orders a television but the distribution centre is in Southampton, shipping the product will cost the retailer more. By using smart fulfilment, the customer location can be married with the nearest source of supply. The importance of this capability is recognised by retailers as 46% of retail decision makers valued the fast shipping and delivery flexibility of drop shipping.
By utilising a sophisticated drop-ship model, which comes with an inherently distributed network of inventory, retailers can avoid having a single point of failure. Retailers can, therefore, increase the pool of inventory available to them without the costly process of investing in more warehouses and buying more stock. Ultimately, this creates a better, less frustrating shopping experience for the customer, who is able to find the item they want and receive it on time.
Furthermore, this method can help retailers to work towards their sustainability goals. With an optimised supply chain and smart fufilment, retailers can make sure they are not holding unnecessary stock that may go out of season quickly, reducing waste. Less waste, of course, is not only beneficial for the environment and the global sustainability agenda, but also saves the retailer significant funds and protects profit margins. With the visibility and accuracy inventory by location offers, better decisions can be made to reduce transport costs.
Retailers don’t need to buy another warehouse; they need to invest in flexible solutions that maintain the customer experience while optimising the supply chain to keep pace with changing demands, all the while reducing waste and protecting profit margins. Drop shipping allows retailers to expand globally, maintain low overhead and provide a great customer experience without capital investment tied up in warehousing, that could become a liability when the going gets tough.
Please note, all statistics sourced from a CommerceHub survey held in 2019 which drew on the views of a 100 decision makers in retail.