Distributed Logistics for Digital Commerce Series, Article 2: Primary Functions of Distributed Logistics

Distributed Logistics: It's what the most successful online brands and sellers have in common.

Pop quiz: What three things do many of the most successful online sellers often have in common?

One: They sell through multiple sales channels, never putting all their business eggs in one basket. Especially if that basket is called “Amazon”.

Two: They have figured out how to manage inventory so they can promise the same inventory across multiple channels with minimal risk of under or overselling. That minimizes their inventory investment while increasing inventory turns, inventory ROI and margins.

Three: They created multiple methods of fulfillment. This lets them use the lowest cost method to fulfill an order, participate in marketplace programs like two-day delivery and, again, reduces their risk since they aren’t dependent on one method – like Amazon FBA – when things go south and that method may no longer be reliable.

Distributed logistics is the art and science of making these three things happen to boost online sales and revenue. And to make distributed logistics happen, we’ve found that there are three primary problems our clients are looking to solve.

The first is that they struggle with systems that aren't working together. Each sales channel has its own requirements for product listings. Fulfillment partners such as 3PLs have their own systems for order and warehouse management. Advanced fulfillment methods like drop shipping and just-in-time cross docking require tight coordination with supplier systems. And most of these systems were not designed to work together, represent large sunk investments in time and money, and are not known for their flexibility.

The next thing that clients run into is the challenge of trying to understand what true demand is across all of these channels. Part of this is a systems issue caused by selling on multiple channels. But often the issue is caused by something sellers do to be successful: they leverage their inventory in many different ways. They may offer a single unit across all channels. Then they may offer multi-packs across some channels. Or they bundle products together with other products to create kits or promotional packages in an attempt to create a listing that they can “own”. Trying to aggregate all these product variations back into a basic unit of measure to create inventory and production plans can be very challenging.

The third problem that we run into involves fulfillment. Amazon has trained consumer to expect fast – often “free” delivery. Other channels have followed Amazon’s lead. They all favor sellers who participate in these programs with preferred placement in listings and increased buy box wins. To meet these demands, clients are forced to distribute their inventory into a network of possible sources of supply. These could include client-owned facilities, fulfillment partners like 3PLs, suppliers and retail locations. As we’ve seen, each of these may have its own operational management systems, but they also each have a different cost to fulfill an order. The challenge becomes routing the order to the option that can meet shopper expectations and marketplace requirements with the lowest fulfillment cost for that specific order.

While the challenges are complex, they can be simplified by looking at the five touchpoints all ecommerce sales transactions require no matter what channel you are selling on and then touch on the supply side capability needed to deliver the required information.

The accompanying video for this article goes into a lot more detail, so we’ll just touch on them at a high level here.

These are the five touchpoints:

  1. The listing

First of all, you need to tell the channel what it is that have to sell. That involves selecting the categories and subcategories where the product should be offered. Then, depending on the subcategories you choose, what information is required by the channel and what optional content can be added. This required information and its format is called the channel “taxonomy” and every channel is different.

You’ll want to have a multi-channel, Product Information Management (PIM) system so you can enter the information from a single source of truth and then automatically push it out to the channels in the format each channel requires.

2. Inventory availability for that listing

The second component involves telling each channel how many units of the product that you have to available sell. So you have to be able to learn how to publish up to these channels in the way that they want to see it. But more importantly, you have to be able to know how many total units you have available to sell across your entire network of supply, how many multiples of that you can safely publish across the channels, and be able to adjust the available inventory across each channel as you buy and sell.

The requires an Inventory Management System (IMS) purpose-built for the complexities of distributed logistics and managing a network of inventory sources.

3. The price

The third component is the price you are charging for the product. Most online sellers use automated pricing and repricing software and product cost is a basic input to the pricing algorithms used by these programs. But a distributed logistics network requires a much more sophisticated approach. Remember, you are dealing with a network of supply, many different points of distribution, and multiple options to fulfill and ship the order that depend on the location of inventory. Each option has a different cost that should be analyzed, the best option needs to determined, and then the fulfillment cost of the option is factored into the price shown to individual shoppers.

So you need a dynamic pricing engine capable of handling regional shipping cost models for each of your options and able to factor that information into the pricing displayed to a customer based on their location and proximity to all sources that have inventory that you have available to fulfill their order.

4. Order information

Of course, the channel provides the order information. What’s more important is what you do with that information. Based on the customer location, the delivery requirements, and all your sources of inventory that could fulfill the order, you need to route that order to the location that can meet the delivery requirements at the lowest cost.

It’s called Dynamic Order Management (DOM) and you’ll need an Order Management System (OMS) capable of actually routing orders based on fulfillment cost and the best source of inventory. But beware, many software platforms claim to offer DOM, but they are just using the customer’s zip code and then routing the order to the nearest source inventory – which may not be the lowest cost option.

5. Shipping confirmation and tracking

Finally, you’ll need to send the channel confirmation that the order has shipped with the information needed to track the package.

Beyond these five touchpoints, there are a few other components that help make everything work together and work at scale:

  • Channel Centric Architecture

We’ve already talked little bit about taxonomies – how each sales channel has its own way of processing information regarding these five touchpoints. But this isn’t just a sales channel issue. Often, each source of inventory on the supply side also has unique technology integration requirements. You might need to deal with EDI at one source. You might need to deal with flat files at another. Still another might require integration through an API.

Therefore, you need an architecture that will allow you to have each endpoint on the sales and supply side function in different ways, but then bring everything back to the center to be normalized and managed.  

  • Automation & Self-Monitoring Capabilities

The beauty of managing your inventory and fulfillment as a network is that it provides flexibility and a lot of options. The downside is that these options can quickly get out of hand unless you introduce automation and the ability to monitor what’s happening across all the touchpoints. That way, you can quickly identify and deal with exceptions while the day-to-day processes across these touchpoints happens automatically.

  • Data Warehouse & Reporting

Automation requires data integrity. If you don't have data integrity and something goes wrong, the only thing automation will do is dig a hole for you that much faster. But done right, automation and data integrity produces huge amounts of data that, with a data warehouse and the right reporting tools, can give you insights into your business that were never possible before.

Understanding the touchpoints and the components needed to pull everything together is an important step in adopting a distributed logistics mindset. But it also has another advantage. Take a look at your current distributed commerce operations platforms and see how they stack up to these requirements. Examining current operations – or potential new platforms – through the lens of the five touchpoints helps cut through the complexity of how to actually implement a networked inventory strategy in your company.

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This is the second in an eight-part series of videos and articles focusing on distributed logistics and how it can create options for succeeding in the unpredictable world of online selling. If you’d like to learn more, check out the accompanying video.  

For an overview of the basic concepts behind digital commerce and digital logistics, check out the first part of the series. Distributed Logistics for Digital Commerce: A Change in Paradigm, and Why It Matters.

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