The Internet transforms warehouse and distribution—often in subtle ways
By David P. Himes
The Internet may not have changed everything but it’s changing a lot, including traditional activities such as warehousing and distribution. Just as the Internet has sped the flow of information and diversified the availability of data, it is also changing the way retailers use warehouses and distribution centers to manage the flow of inventory. In fact, among the most significant impacts of the Internet may be its ability to improve the match between demand and inventory.
Warehousing and distribution have changed, both as practical solutions in an evolving industry and as companies have increased their focus on direct marketing and relied more on the Internet to drives sales. This evolution will continue to change how inventory is managed to meet consumer demand.
For many years, the role of warehousing and distribution networks has been to hold inventory and position it at optimal levels near the point of demand and then move it to the point of demand at the most economically effective time. Fundamentally, this role will never change—at least not until we, like the crew of the Starship Enterprise, can simply ask the computer for “Tea, Earl Grey, Hot” and have it materialize just before we open the sliding door to retrieve it. Until that time, we’ll have to concern ourselves with inventory availability, location and transportation.
What the Internet has done is change how we measure demand for inventory, where we can stage it and how we move it to the point of demand. This paradigm will continue to vary depending upon the characteristics of the inventory and the nature of the demand. Perhaps, as the following set of examples show, what has really changed most about warehousing and distribution is that there is now no single strategy which will meet the needs of every manufacturer, wholesaler or retailer. The walls between manufacturer and retailer will continue to crumble.
Here are some of the ways the Internet has changed warehousing and distribution.
1. Better match between demand and inventory
Before the advent of Internet technology, demand was often measured only weeks or months after the fact. Today, it is measured by the day, the hour and even the minute. The timeliness of such data makes it much more possible to move inventory more quickly to the point of demand. A major fashion retailer with several hundred stores, as well as a catalog and web store, often moves inventory from brick-and-mortar stores to its web store because a particular set of SKUs is selling on the Internet, where demand is aggregated from all over the country, but is weak at individual stores. Similarly, this company sometimes moves inventory from its web and catalog warehouse to stores in specific regions to meet high demand for certain merchandise when nationwide demand for that merchandise is weak. This allows the company to maximize revenue for its merchandise and minimize remainder inventory, which must be liquidated.
The ability to create this match of inventory and demand is predicated upon inventory visibility and demand visibility across all channels—which is easier said than done. Warehouse management systems that are optimized for retail inventory and distribution generally are not optimized for web or catalog distribution. Retail systems are configured toward handling cartons of goods, shipped by case, pallet or truck-load, while web or catalog systems deal more effectively with “eaches” demanded by a single end-buyer.
In a similar way, there are differences between how demand is measured in the store channel as opposed to the web or catalog channel. Demand at the retail store is measured by declining inventory, so monitoring product velocity in the warehouse management system is an adequate measure. However, with a web-store or catalog, demand is measured in real units sold plus units requested by customers whose orders could not be filled due to lack of inventory. Web-store and catalog demand measure is a much more complete measure of demand.
Historically, these inventory and demand channels have been measured and monitored separately, utilizing disparate systems. The multi-channel merchant must integrate this measuring and monitoring activity.
2. Expectation of more rapid turnaround on orders
Just a few years ago, an order for merchandise, whether for a single item shipped to a consumer or cases of merchandise shipped to a store, might take days to be processed and shipped. Today, consumers who order merchandise in the morning probably expect it to be shipped that afternoon. Retailers expect small replenishment orders to be handled in a similar way. Distribution operations have responded by learning how to move orders quickly. Today, in many warehouses, it costs the operator more to hold an order for later shipment than to process it immediately.
Fulfilling this expectation of rapid turnaround may be a technology project, a workplace culture project, or both. Most current operations management applications can support this rapid pace of execution. Older systems may support it, but require more operator intervention to tighten and shorten the schedule of certain batch processes.
But in either case, it requires the marketing department to become better forecasters of the sales activity and the operations department to become better managers to that forecast. Staff must be flexed up and down with the anticipated volume of activity. It’s not sufficient to have 10 pickers and 20 packers every day of the week. The burden on supervisors and managers is much greater. And the burden on marketing is the highest of all.
3. Expectation of real-time data and status information
Both consumers and retailers demand visibility to orders all along the supply chain, and larger retailers may even refuse delivery if the order is not received within the proper window. Consumers expect to be able to check delivery status for any order, either by calling a customer service center or going to a web site. This demand for data integration has permeated every aspect of warehouse and distribution systems. No longer can the warehouse management system be separated from the order management system or from the accounting system.
Many operations management systems already have this data, but the information is not being used. Sometimes, it’s because the data is not easy to get to because it is buried in a legacy database. Other times, it’s simply because no one has gone to the trouble to make it available.
This is a pure technology task. Applications are available which monitor databases for changes to data in specified fields and when such a change occurs, the application triggers an automatic notification to the customer or the merchant-buyer. The most obvious example of this is package tracking. UPS, FedEx and Airborne web sites have become hugely popular as a way for consumers to find out where their packages are. But it is possible for someone else to pro-actively notify the customer of where the package is—most simply haven’t done it, yet.
Customers, both business and consumer, expect you to provide information in a pro-active way. If you have information on their order, they expect you to tell them about it—they should not have to seek it out. This customer service phenomenon is leading to event-driven messaging in warehouse and distribution systems. It ties the warehouse management system to customer service in a way that most operators find intrusive. But they have to get used to it—it is becoming another part of the new reality.
4. Warehouse and distribution come closer to the front office
There has always been tension between marketing departments and operations departments. However, the tension level has increased with the shortened timeline between the conception of a marketing idea, its execution, and the need to process and ship an order generated by that marketing effort. Online marketers such as America Online literally change the marketing execution in the middle of the day and distribution operations must be able to respond. The distance in time and data between the front office and the back office today can be measured in seconds.
Once again, accomplishing this requires both a technology and cultural change. The technology must provide the data to support this interaction. The primary issue is speed of access to the information. As a marketer, I phrased it this way to technology people, “I want to be able to get an answer to a question I haven’t thought of yet.”
But even when useful information is available in the timeliest way, marketing and operations must recognize their interdependence. They must create a collaboration to accomplish mutual goals, rather than remain opponents. This means regular, frequent, face-to-face meetings, even at the most contentious moments when faced with the most difficult problems.
It’s clear that the Internet has raised the bar on warehouse and distribution operations in almost every way and that the changes of the last few years will continue to develop over the next few. The struggle along the way is to maximize the value of existing infrastructure and at the same time leverage new investments to meet growing demands. Finding this balance is the increasing burden of warehouse and distribution center operators.
David P. Himes is senior vice president of business process solutions for
NewRoads Inc., a business process outsourcer of fulfillment and customer care
services based in Greenwich, Conn. He can be reached at david.himes@newroads.com.
