e-Commerce logistics is a complex but integral part of running an online business.
While there’s no surefire formula to acing the e-commerce logistics race, we’ve found some proven strategies that contributed to the success of the world’s leading e-commerce sellers.
This article explores the topic of e-commerce logistics, covering what it is, how it works, best practices as well as proven strategies adopted by e-commerce giants like Amazon, Jingdong and Walmart. Read on to learn more!
- What is e-commerce logistics?
- How does e-commerce logistics work?
- 3 best practices for e-commerce logistics
- 3 proven strategies for winning the e-commerce logistics race
- Some last words
What is e-commerce logistics?
E-commerce logistics, sometimes known as e-logistics, refers to the process of storing goods and delivering products to your customers after an online order is placed.
Sometimes when customers request a refund or product exchange, returning goods is part of the e-commerce logistics process too.
How does e-commerce logistics work?
The entire process of e-commerce logistics occurs along your supply chain, engaging various stakeholders and locations such as your warehouse, fulfillment center, carrier, and customers.
Following, we’ll explain how e-commerce logistics works by reference to the stakeholders and locations involved.
- Supplier: Inbound goods are delivered from the supplier to your warehouse, to be stored until they are dispatched to your customers.
- Warehouse: This is where your inventory stays until you receive an order for the goods. Different inventory management techniques can be used to keep track of your inventory effectively.
- Fulfillment center: After customers have placed an order, goods are moved to the fulfillment center for packing and shipping.
In some businesses, however, the warehouse also serves as a fulfillment center. Amazon is an example which fulfills e-commerce orders in its warehouses.
- Carrier: Parcels are then handed off to a carrier, such as UPS, FedEx or SF Express, to be delivered to your customers.
Pro tip: A lot could happen during shipment. Make sure you use proper e-commerce packaging to protect your goods from damage.
- Customer: The e-commerce logistics process doesn’t end immediately after your goods arrive in customers’ hands.
There’s a possibility that purchasers will return what they bought, so you should prepare for reverse logistics as well.
3 best practices for e-commerce logistics
There are many stages in the e-commerce logistics process, and each is crucial for maintaining an efficient supply chain.
Below are three best practices that you can adopt to optimize your supply chain management.
1. Optimize your inventory management
Many people think that poor inventory management only leads to problems of over-stocking and stock-out. Little do they realize it could take a toll on their supply chain and finances.
To illustrate this, a landmark research published by IHL Group, a retail analyst firm, once found that mismanagement of inventory is costing $1.75 trillion in lost sales and costs for retailers worldwide in a year.
Behind this 13-figure global loss are culprits known as overstocks, stock-outs and preventable returns, IHL Group reported. In other words, by getting a better handle on inventory control, global retailers could be saving some $1.75 trillion annually.
Here is how you can optimize your inventory management process.
(a) Keep proper records of your inventory
You can begin by assigning stock keeping units (SKUs) to your products. An SKU is a unique combination of letters and/or numbers that identifies each of your products.
(b) Invest in inventory management software
Manual data entry and inventory tracking are time-consuming and prone to human errors. Using software to keep an organized and centralized database of inventory is an investment today which could save you thousands of dollars in the future.
A report by McKinsey & Company found that on average, retailers that use software to automate their demand planning process see a 25% reduction in stock shortage. They also report significant cost savings and higher gross margins.
(c) Synchronize data across channels
As customers today find favor with cross-channel and cross-border e-commerce, many retailers have felt the need to establish a large and distributed fulfillment network.
However, a lack of visibility on your inventory along the supply chain often leads to stock-out situations, and stock-outs are frustrating for consumers and retailers alike.
For example, a customer orders two t-shirts at your online store. One of the tees is available in your warehouse, from which online orders are fulfilled, but the other is only in stock at your physical retail store.
You could arrange an ad hoc transfer of goods from your store to the warehouse to fulfill the order, but the customer will have to wait longer, and the costs of order fulfillment would increase significantly.
Inter-connection of inventory systems at different nodes of your fulfillment network is therefore important to reduce order lead time while maximizing your profit margins from each order.
2. Consider working with a third-party logistics company
A third-party logistics (3PL) company helps you handle all the work related to e-commerce order fulfillment. For example, Boxful Fulfillment is a 3PL provider that offers a suite of services covering storage, picking and packing as well as return processing.
However, engaging a third party to manage your logistics entails recurring service fees. Many small business owners are disinclined to use 3PL for this reason.
While 3PL companies represent an extra expense item on your financial statements, they’ll soon prove their worth. As will be explained below, 3PL providers bring both financial and non-monetary benefits to your business in the medium and long run.
Financial benefits of working with a 3PL
- Reduce capital investment: You don’t have to pay for equipment and software needed to streamline operations in your warehouse and fulfillment centers. These costs are borne by 3PL providers.
- Leverage economy of scale: 3PL providers handle orders for a large number of clients.
Operating at scale enables them to reduce unit costs in multiple aspects, such as through discounted shipping rates and lower packaging costs.
- Save labor costs: 3PL providers with technical know-how are likely to perform with higher operational efficiency. Compared with the money you expend on in-house man hours, 3PL could be a more cost-effective logistical solution.
Non-financial benefits of working with a 3PL
- Access to external resources: 3PL providers offer what you need but what you don’t have in your company.
Warehouse space, inventory management software and trained personnel are some examples of infrastructure and capabilities that might be cheaper when offered by your 3PL provider than when you rent, own or pay them.
- Reduce distractions: By outsourcing the non-core but critical logistical procedures, you can focus back on your business’s core competencies, such as expanding your product suite or developing innovative software solutions.
The above are but some advantages of 3PL. These benefits may not be immediately apparent after you start working with a 3PL provider, but a forward-looking business executive would understand the economic efficiency that 3PL yields in the long run.
This is perhaps the reason why the 3PL sector has been rapidly expanding in the past few years, with the global third party logistics market growing at a CAGR of 8.2% (2021-2027)and expected to hit US$1,656.7 billion by the end of the forecast period.
That being said, it may be too bold to say that every small and medium-sized e-commerce business needs a 3PL partner. But the least you could do is size up your options and make the right call for your company.
Interested in knowing more? You can learn about 3PL in our article on e-commerce order fulfillment.
3. Prepare for reverse logistics
Reverse logistics, which involves the return of goods from customers to sellers, is an important but often overlooked aspect of e-commerce logistics.
A recent survey by the National Retail Federation found that some 20% of online customers return what they buy online. In the United States alone, the value of returned goods totalled $218 billion in the year 2021.
When viewed under the global lens, e-commerce returns could be a trillion-dollar phenomenon.
Given that return processing is unavoidable for e-commerce sellers, here is what you can do to embrace it.
(a) Create a painless return experience
Customers who put in a return request are in no way delighted by what you’ve sent them. Making them go through convoluted product return procedures will no doubt aggravate them even more. A painless return experience is necessary.
For starters, your company’s return policy should be accessible on your website and easily comprehensible. Allowing drop-off at multiple locations and multi-channel returns are also desirable (e.g. products bought online can be returned at your brick-and mortar store).
Asphalte, a Parisian clothing company, even goes to such great lengths that it sends a courier to customers’ home or workplace to pick up products that need to be returned or returned.
With their customer-first approach in this regard, Asphalte is the epitome of an e-commerce brand providing a seamless product return experience.
(b) Offer free returns
With the prevalence of e-commerce sellers offering attractive return policies, customers are accustomed to free returns when they buy online.
In fact, this could be a sales driver as 86% of consumers are most likely to make online purchases with a brand that offers free returns.
It also means that money might be slipping through your fingers if you don’t provide matching return policies as your rivals.
(c) Use product return data to inform demand planning
Demand forecasting and product return handling are stages far apart from each other in the e-commerce logistics chain. Yet, these two processes are intertwined in ways that you may never have imagined before.
To illustrate this, an original equipment manufacturer (OEM) could replenish their forward logistics inventory with usable units returned by their customers. In other words, having incoming goods from product returns means you don’t have to buy as much inventory from your supplier as you planned.
According to a case study on reverse logistics optimization, informing demand planning with product return data helped a consumer electronics OEM increase demand forecast accuracy to 99%, up from 35% prior to the implementation of a returns management program.
The amount of obsolete inventory was also reduced by 75%, helping the OEM achieve significant cost savings.
→ Quick summary: This section discusses how you can optimize your e-commerce supply chain.
3 proven strategies for winning the e-commerce logistics race
The 21st century e-commerce boom has spawned millions of online sellers around the world.
As an increasing number of e-commerce players join the race, consumers’ expectations are likewise on the rise. Speed, accuracy and quality — they want it all.
In the face of climbing customer expectations and logistical challenges of different sorts, leading industry players have found their ways around obstacles and consistently excelled in the e-commerce battle.
This section looks into the logistical strategies of some of the world’s largest e-commerce companies — Amazon and Warlmart in the West, as well as JD.com in China.
We’ll draw on their successful experiences to inform present-day strategic decisions, helping you build a future-proof supply chain to win the e-commerce logistics race.
1. Automate warehouse operations
At the time this article is written, warehouse workers in the United States have an average base salary of $21.29 per hour. When training hours, employee benefits and inflation are factored in, the true costs of warehouse labor could be much higher.
Warehouse managers in the old days may have been troubled by ever-increasing labor costs, but the present incumbents have a modern solution to this problem — automation.
Case study: Amazon’s tech-enabled warehouses
Amazon stands not only at the forefront of e-commerce revolution, but also at that of innovative automation.
In a bid to reduce costs and improve operational efficiency, Amazon has introduced dozens of automation technologies into its warehouses in the past decade. Here is how Amazon does it.
- Inbound logistics: Simply by feeding goods into a system, incoming inventory items are automatically scanned and listed for sale on Amazon.com. Payment to vendors will also be triggered upon receipt of goods.
- Order picking: Instead of having workers run around warehouse facilities to pluck goods from the shelves, Amazon has robots that carry goods to human employees.
- Product packing: Before being shipped to customers, products are placed on a conveyor belt to be scanned and boxed by a system, not human.
- Warehouse resource planning and scheduling: In the past, human supervisors were the ones who managed warehouse operations. In Amazon’s facilities, a large portion of that duty is delegated to software and algorithms.
Computer instructions are now given to workers about what they should do, how many people are needed in each shift, and which truck is best positioned to quickly deliver goods to customers.
The results of automation are efficiency and accuracy in decision-making.
- Autonomous mobile robots: Amazon’s autonomous mobile robots can navigate warehouse facilities independently.
They help move packages around to lessen the physical workload of human workers, who can then focus on tasks that require analytical thinking.
The takeaway from Amazon
Since the acquisition of Kiva Systems, a tech-driven order fulfillment company in 2012, Amazon has noticeably geared towards a more efficient workflow and a leaner warehouse workforce.
Amazon’s use of innovation technology to automate its warehouse and fulfillment operations is remarkable. It not only automates the tangible workflow of e-commerce logistics (e.g. picking and packing), but also many non-physical aspects such as resource planning and scheduling.
Looking forward, it’s helpful to keep abreast of industry trends and re-think how automation can be applied in every step of the e-commerce logistics chain. There are limitless possibilities that you have never thought of before.
2. Build a robust logistics network
E-commerce market leaders don’t rely on third-party logistics networks. They build their own — which is what JD.com (Jingdong, formerly 360buy.com) did to bolster its e-commerce empire.
As will be seen in the case study of JD.com below, internalizing logistics capabilities yields various benefits:
- Quality control: It gives e-commerce companies greater, if not total control over the quality of delivery services.
- Timely delivery: Speed of delivery can be improved as stakeholders (e.g. warehouse personnel and the carrier) in the logistics network work more closely than in a third-party relationship.
- Higher scalability: Limited capacity of external logistics services providers could be a bottleneck to the expansion of fast-growing e-commerce companies.
Having a self-owned logistics network allows for enhanced scalability and agility as a company can decide when and how to grow its logistics network to accommodate the growth in order volume.
Case study: JD.com and its gigantic logistics network
JD.com, sometimes dubbed the Amazon of China, started building its logistics network as early as in 2007, covering infrastructure such as warehouses, express delivery teams and pickup stations.
The decision to establish its own logistics arm (now known as JD Logistics) stemmed from the need to overcome the bottleneck in logistics efficiency, which at that time severely hindered the growth of the up-and-coming e-commerce platform.
Building a nation-wide logistics infrastructure from the ground up was not cheap, but the $1.5 billion investment proved worthwhile as it helped the e-commerce behemoth bypass the major obstacle to expansion, unlocking potential for exponential growth.
More than a decade later, JD.com is reaping the fruit of what it sowed in the past.
With a 220,000-people army of delivery men and some 1,300 warehouses covering an aggregate gross floor area of over 24 million square meters, the scope and scale of Jingdong’s logistics network are hard to match.
It is with this extensive logistics network that JD.com is now equipped with the unparalleled capability to provide same- or next-day express delivery across 50 Chinese cities.
Most impressively, Jingdong’s logistics infrastructure remains robust even during the most turbulent times.
When most other e-commerce platforms had to suspend third-party delivery services due to disrupted transportation amid the Covid-19 outbreak, Jingdong’s delivery network remained “largely unscathed by the pandemic”, Nikkei Asia reported.
The takeaway from JD.com
Doubtless, the self-owned logistics network has become the unique competitive advantage of Jingdong.
It has set a high, perhaps insurmountable entry barrier to the e-commerce battlefield in China — anyone hoping to unseat Jingdong as the leading market player must first find the ways and means to surpass its enormous logistical capabilities.
However, without abundant financial resources like Jingdong, it’s near impossible for any ordinary e-commerce company to duplicate the logistics infrastructure that Jingdong has built.
In fact, JD.com’s biggest competitor, Taobao, doesn’t have a self-owned logistics network (it forms strategic partnerships with carriers instead).
Jingdong’s case study nonetheless demonstrates the importance of a reliable and resilient supply chain.
It shows us that last-mile delivery is not merely a means or procedure to get the goods to your customers’ doorsteps — it could be a key differentiator that sets you apart from your rivals.
3. Innovate to elevate the customer experience
According to Statista, online retail sales in 2021 amounted to $4.9 trillion worldwide, and the figure is expected to grow by more than 50% to $7.4 trillion by 2025.
The e-commerce battlefield has never been so crowded before.
With intense competition comes the need to innovate. Walmart, the multinational retailer which announced its pivot from brick-and-mortar stores to e-commerce in 2016, is a noteworthy forward-thinker.
Case study: Walmart’s modern approach to the decade-old problem of product returns
Among all product categories shopped online, clothing is the most popular one: 77% of online purchases include apparel.
Yet, the most popular purchase option also creates the most problems. Size, cutting, color and texture — so many things can go wrong when customers cannot see, touch or try their desired apparel, making product returns a common phenomenon among buyers of clothing.
So Walmart decided to move fitting rooms online.
Amongst other moves to establish its footing in the fashion space, Walmart acquired Zeekit, a virtual fitting room startup in mid-2021.
Zeekit’s technology will allow shoppers to digitally try on clothing items available on Walmart’s online store. Customers can choose a model that matches their physique, skin and hair color, or upload a picture of themselves to see how the clothes will look on them.
The benefits of online fitting rooms are manifold. They create an inclusive, immersive and personalized experience for online shoppers, according to Denise Incandela, executive vice president of apparel and private brands at Walmart U.S.
This new feature also allows consumers to try and test, at least visually, clothing items before making an online purchase. From a logistics perspective, this is a huge step towards reducing product returns.
The takeaway from Walmart
For long, competition has been the driver of innovation, and innovation is the key to success.
Walmart pioneered the digitization of fitting rooms for fashion lovers, transforming customers’ online shopping experiences whilst addressing the sellers’ pain point of handling countless return requests.
The American retailer’s novel strategy in the fashion space isn’t meant to be a playbook to how the entire e-commerce industry should play out. It’s rather a reminder for other Internet players to develop an innovative mindset, and stay on top of competition.
→ Quick summary: This section delves into the strategies adopted by leading e-commerce companies to better their logistics value chain. Here’s what we’ve learnt:
Some last words
Winning the e-commerce logistics race no doubt requires a strong mix of strategy, foresight and execution capability. But what underpins the apparent success of fast-growing e-commerce companies is funding.
E-commerce sellers, be they large or small, all need funding to turn their vision into reality — and Choco Up is here to help.
As the leading revenue-based financing and growth platform in Asia, we offer funding ranging from US$10K to $10M to e-commerce companies. With our quick and flexible funding, we’ve helped hundreds of businesses fuel their growth and accomplish remarkable results.
About Choco Up
Founded in 2018, Choco Up is the leading revenue-based financing platform in Asia Pacific, offering non-dilutive growth capital to fast-growing companies.
Currently covering more than 10 markets and 10 sectors, Choco Up has helped hundreds of businesses capture growth while protecting equity upside.
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