Beyond the Speed-Price Trade-Off

In the early days of online retailing, e-commerce companies fulfilled consumer demand from a small number of large-scale warehouses that carried similar catalogs of items. Retailers stocked inventory for low-volume products in as few locations as possible while maintaining service levels that met customer expectations. It was a way to keep inventory costs low and take advantage of the economies of scale that large fulfillment centers provide. Since consumers were willing to wait for deliveries, proximity and speed were less important than cost savings.

But the online retail market has changed. Today’s shoppers want more than low prices — they also want the products they order delivered quickly. To achieve same-day delivery, retailers are experimenting with new business and operations models, including using third parties (such as local city-specific delivery services), crowdsourcing (such as paying individuals by the task to shop for and deliver groceries), self-service (such as setting up physical lockers where customers retrieve their packages), and even unmanned aerial vehicles, or drones (which could deliver packages in less than 30 minutes in some locations). At the same time, many retailers, including Amazon.com, Nordstrom, and Macy’s, have recently redesigned their distribution networks. A growing number of omnichannel retailers are using their physical store networks to fulfill online orders (for example, they may be shipping online customers’ orders from physical stores or allowing online customers to pick up their packages at physical stores), while online-only retailers are adding warehouses, particularly near major urban markets.

The trade-off between cost and response time has traditionally been one of the primary factors companies consider when designing their supply chain networks. Historically, if you wanted something right away, you expected to pay significantly more to account for the costs retailers incurred to maintain local inventory or provide high-speed shipping. Lately, however, the terms of competition have changed.

In response to increasing consumer demand for fast deliveries at no extra cost, more companies are implementing IT solutions that enable access to real-time sales data and inventory data across the whole enterprise. Real-time sales and inventory information, coupled with advanced analytics (such as recently developed network-wide fulfillment algorithms), enable networks to accommodate fluctuations and changes in the business environment quickly, a quality we call distribution agility. The result: Retailers can treat their whole distribution footprint as a single entity as opposed to a group of individual depots.