Why should retailers care about their Order Fulfillment Process?
Order fulfillment may seem like a fairly straightforward process and according to the generic “high-level” definition, it is.
Unfortunately, this notion of simplicity makes it easy for retailers to overlook the underlying importance of order fulfillment and the significant impacts and benefits it can provide to their respective retail businesses.
In today’s market, putting the right fulfillment system in place gets you a competitive edge. In fact, the best order fulfillment processes become sources of revenue, profit, and even customer loyalty.
So what is order fulfillment, what does fulfillment processing mean and how does it all work?
This article will answer those questions while also looking at the best practices being used today, and how to pick the right order fulfillment model.
What is order fulfillment?
As mentioned earlier, in its simplest form, order fulfillment is the physical process of getting a purchased product from a storage location to the customer. While this is true, it leaves out the key elements of order fulfillment that make the physical process achievable.
To find out what these are, let’s dig a little deeper into the order fulfillment process.
3 key elements of order fulfillment:
1. Sourcing
The retailer decides where the item is being picked based on specific parameters.
- Is inventory stored in warehouses or in-store?
- Is inventory coming directly from the vendor and therefore needs to be dropshipped?
Some factors affecting this decision include the proximity of the storage location to the customer, inventory availability, and the labour involved.
2. Shipping
Methods are established to transfer inventory from storage to customer.
Method of transportation, routes to be taken, as well as labour and delivery costs, need to be optimized during the supply chain fulfillment step.
One way retailers seek to optimize shipment is by asking, “Can this be consolidated?”
3. Customer preference (fulfillment)
How, when, and where the customer prefers to experience their product fulfillment affects the sourcing and shipping decisions.
Customers may want their items to be delivered directly to their home, or they may prefer to choose an alternative fulfillment option such as BOPIS, or curbside pick-up. This is usually dependent on how long they are willing to wait to get the product in their hands.
Developing an effective order fulfillment process requires retailers to make the right decisions when purchasing and allocating inventory so that product is available in the right place when a purchase is made.
Why is an efficient order fulfillment process important?
It all boils down to meeting customer needs and expectations.
In fact, recent McKinsey industry research found that when delivery (fulfillment) times are too long, almost half of consumers will shop elsewhere.
Why is this happening?
Well, the industry has gone through a rapid digital transformation. It used to be that consumers mostly shopped at stores geographically close to them. Retailers would compete by offering consumers a wider product assortment, better quality products, or lower prices.
E-commerce has enabled shoppers to seek out the best products and prices around the world without leaving home.
As a result, product assortment, quality and even price have little competitive leverage.
What consumers want is a retailer that meets their shopping experience expectations – such as:
- Is the product in stock?
- What fulfillment options are available?
- How quickly can they receive their item?
- Are they able to track their order?
- How complicated is the returns process?
Of course, trying to give customers everything they want can be very expensive, especially when competing with the likes of e-commerce giants like Amazon.
So, to remain competitive across all channels, retailers have to optimize their order fulfillment process on an ongoing basis. This includes everything from purchasing inventory to returns management.
When they are able to do so, retailers have a better chance of meeting their consumer’s needs and are able to save time and money.
Optimizing the order fulfillment process flow – 5 retail operations
Okay, so we know that an efficient order fulfillment process is important, but that doesn’t answer the question of how to do it.
Let’s be honest, optimizing order fulfillment is no easy feat, but it is achievable.
A comprehensive approach to the order fulfillment process flows through 5 different retail operations that all play a significant role in its overall effectiveness.
The performance of each operation will determine how efficient and effective the overall order fulfillment process will be.
Having a detailed knowledge of the performance and capabilities of each section will lay the groundwork for how to optimize the order fulfillment process flow.
Let’s take a look at each operation and how they impact the order fulfillment process.
1. Purchasing
Remember when you were caught eating in class and the teacher asked “Did you bring enough for everybody?”
For order fulfillment to be successful the retailer has to purchase the product customers want to buy and bring enough for everybody.
Purchase order management is often the first stumbling block to a smooth fulfillment process.
Deciding on the breadth and depth of an assortment to be purchased is often made by referencing past sales history. Unfortunately, a host of factors can make past sales history a poor indicator of future sales.
Changes in geodemographics, seasonality, pricing, new inventory, and cannibalization are only a few of the factors influencing product demand.
An accurate forecast must account for how relevant factors will affect each SKU at the store level. Manually computing this much data is impossible, but retailers can use advanced analytics tools to get an optimal forecast in minutes.
These highly accurate demand forecasts enable retailers to purchase the inventory they will actually sell.
What does this look like for order fulfillment?
- Provide product customers actually want – satisfy consumers and increase sales
- Bring enough inventory to meet demand – satisfy consumers and avoid lost sales
Okay, so you bought what you need, but where should it go?
2. Allocation
The fact that you have a warm winter coat in stock at the Portland location, won’t be much consolation to the cold customer in Toronto looking at an empty shelf.
Order fulfillment can get very expensive if a retailer is constantly shipping inventory from low-demand locations to high-demand locations. Worse still, customers will simply go to a competitor, and the retailer will suffer lost sales.
The issue is that retailers are overwhelmed by the number of SKUs and locations that need to be considered. Many cope by using generalized approaches for allocation like category-level inventory management.
Of course, anyone who’s looked for a large t-shirt in a stack of Mediums knows that generalized allocation is ineffective.
The fact is that no two locations have the same product demand. Regional climate, demographics, store type, and assortment mix, among other conditions, affect sales at the store/SKU level.
Optimized allocation enables a cost-effective and efficient order fulfillment process.
With thousands of SKUs and locations across North America, retailers like Simons and HardRock Cafe rely on advanced analytics to optimize inventory distribution. Knowing demand at the SKU/store level means that inventory is allocated to the customer’s closest location.
Textbooks don’t need to languish on shelves and be subject to drastic markdowns, while students are turned away at the out-of-stock university bookstore.
3. Order Processing
In the next stage – order processing, fulfillment systems receive the customer’s order from the e-commerce system.
Warehouse staff then use picking lists to collect each product in the customer’s order so that they can be packed. Then packing lists are created to tell employees the size and type of box to use plus any packing material required to ensure safe delivery.
Order processing fulfillment often requires manual and very repetitive tasks. This provides order management fulfillment professionals with various ways to optimize this stage of the order fulfillment process through automation.
For example; reducing labour costs through automation (i.e. robots) is only one benefit. This type of automation can also improve workplace safety and give employees more productive tasks to accomplish.
Further automation is achieved by pre-emptively sending inventory to its optimal location.
Using demand forecasting tools will identify where a product will sell and can trigger the allocation process. In this way, the order can be processed and fulfilled much faster and at a lower cost.
Of course, any order that the automated systems cannot handle will require a human touch.
4. Shipping
The shipping stage of the order fulfillment process flows naturally out of the processing stage.
But what is often overlooked is that it involves more than simply putting the packed box on a truck.
An envelope with a pair of socks can be stuffed into your mailbox, but nobody wants a refrigerator dropped outside their apartment building.
Some considerations for optimizing shipment include:
- The location from which to ship
- Type of carrier and best route
- Cost of shipment/labour
- Consolidated shipping
- Last-mile delivery method
- Door front or in-home delivery
- Delivery to non-home location
Ideally, inventory is available in the location nearest to the customer. If the retailer has been optimizing the fulfillment process flow with the guidance of an accurate demand forecast, they will be prepared for orders before they have been placed.
For example; smart allocation evaluates all possible inventory sources from fulfillment centers to store locations to vendor warehouses; to identify where inventory can be consolidated for shipment to save time and money.
Customers get the product they want and retailers don’t break the bank when trying to compete with the fulfillment speeds of retail giants like Amazon.
5. Returns
The unfortunate reality of the retail industry is that product returns are inevitable, especially with online sales.
Even if nothing is wrong, the product’s style may not be what the customer expected. Setting up the right reverse logistics processes will minimize the impact of product returns.
Too often, however, retailers look at returns as a cost of doing business rather than as the opportunities they are.
Resalable products should not go back to the original fulfillment center. Instead, the product should go somewhere that still has demand and it can still be sold at full price. That new destination could be another fulfillment center or a brick-and-mortar store.
Retail analytics solutions can help pick that destination based on demand and inventory across every sales channel. It will also balance that destination’s shipping cost with the expected selling price.
All this happens in real time as the customer enters their return request and generates the shipping label.
Optimizing the process flow will streamline fulfillment, saving time, and money while creating a satisfied customer base.
Although the exact order fulfillment process varies from retailer to retailer, depending on the business structure and consumer needs, there is no need to reinvent the wheel.
Let’s take a look at some of the most common order fulfillment models.
Common order fulfillment models
To better fulfill customer orders, it helps to understand the available options and how they can align with your specific business structure.
These five order fulfillment models are widely used across the retail industry:
1. In-house order fulfillment
Many established retailers start with a do-it-yourself approach.
They already have warehouses supporting their stores. It’s easy to carve out space for picking, packing, and shipping activities.
New online-only retailers may go DIY out of necessity. Since they can’t afford warehouses and logistics experts, they turn their garage into a fulfillment center.
With in-house fulfillment, you take responsibility for all aspects of the order fulfillment process.
Besides giving you control over inventory and the customer experience, the DIY approach can make you more competitive.
Using store inventory to offer same-day or two-hour delivery, for example, beats out many online retailers.
There are a few downsides to this fulfillment model;
- The retailer bears the cost of storage, logistics, and labour.
- It can be difficult to scale this type of fulfillment model if the business is growing quickly.
However, for some retailers in addition to maintaining control, in-house fulfillment has become a secondary business.
2. Dropshipping
In the drop-shipping model, a retailer does not purchase products upfront, as is standard for brick-and-mortar retail. Instead, the customer’s order triggers a purchase out of the vendor’s inventory.
The product drop-ships directly to the customer from the vendor’s warehouse.
Although drop shipping is more expensive than buying inventory in bulk, you might balance out the higher unit cost in other areas.
For instance, when introducing new inventory the retailer runs the risk of sinking money into the bulk inventory, transportation, and storage of a product that has low demand.
Dropshipping lets you see how the product performs without much inventory risk.
Additionally, drop-shipping is an excellent choice for smaller e-commerce-only retailers who do not have physical storage locations.
3. Third-party fulfillment
The infrastructure, expertise, technology, and business relationships needed to do fulfillment at scale do not come cheap or fast.
Walmart and Amazon invested billions over decades to build their world-class systems. These retail giants use a two-pronged approach that focuses on logistics and analytics to create the optimal fulfillment process.
Third-party fulfillment providers offer similar systems that let you punch above your weight — for a price.
At one end of the spectrum, fulfillment houses will take care of logistics by storing your inventory and shipping products to customers.
At the other end, analytics solution vendors provide solutions for planning, inventory management, as well as, pricing and promotions.
4. BOPIS (Buy online, pick up in-store)
The BOPIS fulfillment model gives brick-and-mortar retailers an edge over their online competitors.
Customers can buy products online from inventory in their local store, another location, or even the online store.
The online purchase triggers order processing and shipping. Once the item is located and shipped to the store, the customer receives a ready for a pick-up notification.
To receive their purchase, customers approach a BOPIS or customer service desk inside the physical store.
A popular variation of this model is a curbside pickup.
This fulfillment process follows the same steps, but the customer does not go into the store. Instead, they wait in a designated parking area, and their purchase is brought out to them by an associate.
This option is often faster and less expensive than shipping to home. The customer enjoys the opportunity to check their purchase before taking it home.
In addition, BOPIS enables the retailer to leverage potential upselling opportunities.
5. Hybrid fulfillment system
Most retailers combine two or more of the above options into a hybrid fulfillment model.
They can use the model that is most appropriate for different scenarios such as:
- Using third-party fulfillment to support geographical expansions.
- Fulfilling orders in-house to improve the experience for premium customers.
- Dropshipping high-price, low-volume products to offer an expanded assortment.
Even giants like Amazon will use other fulfillment models when it makes sense.
For example; Amazon Lockers at Whole Foods Market stores give customers a local option for picking up their Amazon purchases.
Each model has its value which begs the burning question; which model will work best?
Choosing an Order Fulfillment Model
No two retailers are the same, so when choosing an order fulfillment model, retailers will need to take an in-depth look at every part of their business.
Here are some of the questions you should ask:
How large is your order volume — not just now, but in the future?
If you serve a market with predictable, stable order volumes, then an in-house system would work.
For rapidly growing retailers, though, there could be too much cost and risk of quickly scaling an in-house fulfillment system, therefore they should favour third-party options.
Which models work best for your assortment?
How products need to be handled and shipped will influence your choice.
Fulfillment models that work for apparel may not work as well for appliances.
Which sales channels are you supporting?
A pure e-commerce merchant, an online operation independent of the retailer’s stores, and a true omnichannel retailer will use fulfillment models in different ways.
Where will you place the fulfillment centers?
Having one fulfillment center lets you manage inventory efficiently.
Multiple fulfillment centers close to your customers will reduce shipping costs and delivery times.
A balance of both will need to be established.
Where are your customers?
Dropshipping to a rural customer base can be difficult since the USPS may be the only delivery option.
If you sell internationally, your third-party fulfillment provider needs to understand export regulations.
How much control do you want over the fulfillment process?
In-house and BOPIS are the clear winners when you need control over the entire process.
Some fulfillment houses offer system integrations, but that will raise your costs.
Leverage your fulfillment into a competitive advantage
Optimizing the process of getting a product into the hands of the shopper is key to keeping pace in today’s retail market.
Getting your new order fulfillment system in place is the first step in an ongoing process.
As time progresses there will be opportunities to improve performance throughout the system, such as:
- Granular analysis of retail data can reveal insights that let you maintain optimal assortments.
- Visibility across your business will let you reduce the impact of vendor delays, storage overflow, inconsistent or broken assortment, and other disruptions.
- Constantly aligning purchasing and inventory with true demand lets you optimize how you allocate and store your fulfillment system’s inventory.
- Automation reduces manual activities, letting you streamline order processing and boost worker productivity.
Advanced order fulfillment software enables you to optimize your fulfillment process as a whole. On top of the benefits we talked about earlier, the right AI-powered systems can:
- Give real-time recommendations for fast, cost-effective fulfillment.
- Protect against product cannibalization
- Recommend replenishment orders based on true market demand.
- Minimize out-of-stock across all sales channels and inventory locations.
- Identify the ideal returns destination based on product demand.
Discover how an advanced order fulfillment solution will increase revenue and profits from your order fulfillment process.
