The ongoing coronavirus pandemic continues to elevate the importance of e-commerce channels. If your company has navigated through the initial supply and demand fires and is looking to get ahead of this here-to-stay trend, now is the time to check how well you are modeling parcel costs in your supply chain network.
The COVID-19 pandemic has certainly increased the popularity of the e-commerce channel. However, the consumer economy has been on this trajectory since the late 1990s. The rapid supply chain changes that many companies are experiencing were brought forward due to various stay-at-home advisories and the growing reluctance of many consumers to shop in person. Savvy companies are moving to quickly expand their e-commerce operations to serve their customers better. However, these rapid expansions can be costly and deteriorate margins if the associated costs are only partially or poorly modeled.
If you are considering the introduction or expansion of parcel shipments in your network, here are the three areas you want to get right:
1. Include the right amount of warehouse space
Most warehouses are set up for storing, moving, and shipping pallets. Whether standalone or within an existing facility, e-commerce operations require additional space to break down those pallets, pick individual items, store packing materials, and prepare items for shipment. The cost of this additional capacity must be factored into your network model. And don’t forget the additional cost of the labor that is required to perform these extra touches.
The need for extra space is only compounded in this COVID-19 environment. Various local or even corporate social distancing requirements apply even more pressure on the amount of space required to fulfill e-commerce orders. If your facility is already at capacity, you may be forced to reduce the number of workers able to process and ship parcel packages, effectively creating a bottleneck in your e-commerce operations.
To avoid issues like this in the future, you must develop a complete understanding of the amount of storage and distribution space required to support your e-commerce operation—both under current conditions and for various growth scenarios.
2. Use accurate parcel transit times
E-commerce has stringent service requirements that are continuously being driven higher by the Amazon effect. Having an accurate understanding of how many customers you can reach in one or two days (and how much it will cost) is critical to staying competitive. Unlike full truckload shipments, where the transit time can be pretty accurately estimated based on the distance between your warehouse and the shipping destination, parcel transit times are harder to predict. Parcel transit times depend on how a parcel carrier’s network is structured. Just because the distance from one origin is closer than the distance from an alternative origin doesn’t mean that the package will arrive faster (or cheaper).
For example, one of our clients with a facility 30 miles south of Chicago O’Hare airport wondered if there was a better warehouse location for providing next day service to zip codes in all directions. With the help of our Parcel Network Optimizer, we were able to model transit times based on the parcel carrier’s transit time tables. We found that a location 30 miles to the north by the airport served more zip codes to the south with next-day service than the existing facility. This is because the parcel carrier’s network was set up to route packages through their facility by the airport before sending them south. Using accurate parcel data by zip code can help you maximize the reach of new facilities when building your network model.
3. Explore your last-mile delivery options
Last-mile delivery can be up to 53% of the total cost of parcel shipping. As shipping volumes and rates have increased, many companies have sought savings on low-weight package delivery through services like UPS SurePost and FedEx SmartPost. These services utilize the U.S. Postal Service for last-mile delivery within the continental United States, combining the consistency and reliability of a parcel carrier for the line-haul portion of the move with the cost-effectiveness of last-mile delivery by a postal carrier. However, these services come at the cost of slower delivery times, which are not practical for many e-commerce operations.
One alternative way to leverage the U.S. Postal Service network for last-mile parcel delivery is the USPS Parcel Select service. The key to leveraging Parcel Select is locating your warehouse close to a USPS regional sorting center. Packages dropped at that facility before a specified cut-off time will arrive at the zip codes serviced by that sorting center the very next day, at a lower cost than shipping directly from your facility. To take advantage of this opportunity for cost savings, you must consider proximity to USPS sorting centers when designing your network model.
If you can address these three things—warehouse space requirements, parcel transit times, and last-mile delivery options—in your supply chain network model, you will be well on your way to designing a profitable e-commerce operation poised for growth.
E-commerce volumes have reached unprecedented levels as a result of COVID-19. If your company cannot take full advantage of this here-to-stay shift, or if you need help getting started, reach out to us. Chainalytics’ combination of top supply chain talent, proven methodologies, and exclusive market intelligence consistently puts our clients ahead of the curve.
Charlie Marge is a supply chain modeling and optimization expert with 25+ years of experience in consulting and software. At Chainalytics, Charlie leads projects spanning strategic supply chain network design to operational advanced planning & scheduling. He has worked in all major industries with a particular focus on Food, Beverage, and CPG.
