All shippers have a set of performance metrics or key performance indicators (KPIs) to work toward on the fulfillment front. On-time in-full (OTIF) is one broad goal for every order, while order accuracy, days to delivery, returns turnaround time, meeting next-day shipping commitments, and other metrics also factor into the equation.
Hitting these goals can be difficult in today’s fast-paced fulfillment environment, and particularly if fulfillment is not a core competency for the shipper. The online retailer whose business has grown rapidly over the last two years, the manufacturer that focuses on producing quality products, and the brick-and-mortar store that’s had to shift over to more online sales may all struggle with new fulfillment realities.
Knowing this, the third-party logistics (3PL) sector has been stepping up its game and offering a broader portfolio of services to a wider variety of customers. Once the domain of very high-volume operations, now even the small business that sells apparel online realizes the value of outsourcing some or all of its fulfillment operations to a reliable third party.
The e-commerce boom has clearly driven more companies to explore the 3PL route. Expected to cross the $1 trillion mark for the first time ever in 2022—a milestone that was originally set for 2024, but that was moved up courtesy of the pandemic—U.S. e-commerce sales have been on a tear.
Globally, e-commerce sales are expected to total $5.5 trillion worldwide in 2022—a number that’s expected to continue growing over the next few years. According to Shopify, more than 20% of the total global retail sales in 2022 will be generated online. That means more than $0.22 of every $1 spent on retail goods this year will be transacted over the Internet.
“Over the past year, we’ve seen e-commerce retail sales continue to ride the momentum of 2020, in which sales increased very drastically due to pandemic related restrictions and the closure of brick-and-mortar stores,” says Nia Hudson, research analyst at Transport Intelligence Ltd. (TI). “Customers continue to shop online more, and for a greater number of categories than ever before. As a result, an increasing number of businesses are choosing to move online to capture a wider audience, particularly small- to mid-sized enterprises.”
Hudson says these trends have placed increasing pressure on 3PLs to provide flexible, automated e-fulfillment options, and particularly those aimed at the direct to consumer (D2) market.
The momentum also drove nearly 20% growth in the global e-commerce logistics market in 2021 (compared to 2020), according to TI’s data. At the same time, a number of new marketplace providers that offer fulfilment and technology-led platforms have also emerged, ready to help companies tackle the rigors of e-commerce logistics.
“The convenience and speed of online shopping is a big draw for customers, who increasingly expect faster, more accurate delivery times,” says Hudson. They also want more flexible returns policies, particularly in the apparel industry. “Fast fashion has one of the highest rates of returns due to the practice called bracketing,” she adds, “where customers buy more than one size of a certain item to try and find the best fit and then return the unwanted ones.”
These are just some of the new customer demands that shippers and their 3PLs must address in order to remain competitive. “At the same time, 3PLs are also dealing with increasing shipping costs, shortage of warehousing space and higher labor costs,” Hudson explains. “As e-commerce takes off and the subsequent fulfillment operations become increasingly complex, 3PLs will be rethinking how they can alleviate these complexities for shippers.”
Increasingly, e-commerce shippers are turning to their 3PL providers for help meeting changing customer expectations and dealing with the supply chain disruption, labor constraints, transportation woes, inflation and other challenges that have become the “new normal” in today’s operating environment.
In response, 3PLs are providing shippers with strategic locations, space to accommodate higher inventory volumes and a greater array of delivery options.
As returns volumes have risen in the past year, e-commerce shippers also want to work with 3PLs that can provide a simplified returns process for customers. “Omni-channel logistics services are also in demand,” says Hudson, “with automation being a key cornerstone of e-fulfillment processes.”
Traditional 3PLs have responded by adding new technological capabilities that help customers achieve both cost savings and efficiency gains. They’ve also been creating specific divisions dedicated to e-fulfillment.
DHL Supply Chain, for example, recently won a five-year contract with Revolution Beauty. The 3PL will scale up its existing robotics and automated solutions to manage the fulfillment of Revolution Beauty’s UK and international e-commerce orders, says Hudson, who is also seeing more micro-fulfillment/dark stores being placed in strategic locations in order to minimize delivery times and costs.
For example, CJ Logistics recently teamed up with SK Energy in South Korea to set up micro-fulfillment centers and GEODIS’ City Delivery service offers customers micro-fulfillment options that help lower costs and speed up deliveries.
In surveying the current e-commerce fulfillment landscape in the U.S., Evan Armstrong, president at Armstrong & Associates, Inc., says that even with expectations for a “cooling” economy in the near future, demand for 3PL services will likely continue.
With e-commerce sales on track to pass the $1 trillion market domestically this year, for example, companies will still need a place to store their inventory and reliable partners to receive, stock and ship those goods for them. “For 2023, we expect both warehousing and e-commerce fulfillment to be among the stronger growth areas for third party logistics in general,” says Armstrong.
Currently, Armstrong says most 3PL providers offer some type of e-commerce fulfillment operations as part of their broader service portfolios.
The larger 3PLs have multiple e-commerce operations, says Armstrong, who points to Geodis, DHL, Ryder, JD Logistics (in Asia) as a few of the larger players that have been active in the e-commerce space. Smaller providers have followed suit and are also offering e-commerce fulfillment. “In most cases, these 3PLs have operations for e-commerce fulfillment that are separate from their traditional, business-to-business (B2B) types of warehousing operations.”
Going forward, Armstrong expects more 3PLs to add further value in the last mile of the supply chain, where getting big and bulky items from the final point of distribution to the customer’s location is still a major challenge. Getting furniture, fitness equipment and other large items to customers’ doors requires extra planning, and particularly when they want fast delivery times.
The process can also be expensive and time-consuming. “That last-mile part of the market is still pretty fragmented, with XPO Logistics and Ryder ranking among the largest last-mile providers,” says Armstrong. “There are other 3PLs providing last-mile services, but this is a point in the supply chain where a lot of things can go wrong and where quite a bit of expertise is needed beyond just e-commerce fulfillment pick/pack operations.”
Returns are a necessary evil in the online world, where about 20.8% of all goods purchased online in 2021 were returned to their sellers (versus 16.6% for brick-and-mortar sales).
In total, U.S. consumers returned more than $761 billion in merchandise last year, accounting for 16.6% of all U.S. retail sales. Managing this backflow is a two-pronged process: not only do the physical goods have to be brought back and resold or disposed of, but the consumer has to get a replacement, credit or refund.
While 3PLs have always offered returns processing, Sarah Banks, managing director at Accenture, sees them playing an even bigger role in sustainable returns management. In other words, instead of letting the returned goods pile up in the corner and potentially disposing of the unsaleable ones in the landfill, 3PLs can create pathways for the resale, reuse and/or repurposing of those items.
This, in turn, may reduce the carbon footprint of both the shipper and the 3PL. A measure of a company’s impact on the environment, its carbon footprint represents the total quantity of GHG emissions (including carbon dioxide and methane) that are generated by its actions.
“I’m excited to see what evolves in terms of returns and the sustainability lens of the returns management process,” says Banks. “This is an untapped area and I’m eager to see how the 3PL community responds to the sustainable challenges that exist in e-commerce.”
This is important because the e-commerce distribution model itself is ripe for improvement on the sustainability front, and namely because it’s “not always the highest-density, lowest carbon footprint option to get products delivered to people’s doorsteps.”
In a similar vein, Banks sees 3PLs playing an important role in helping their customers more effectively manage their inventory and put that inventory even closer to their customers—and all with an eye on limiting CO2 emissions.
Then, when that 20.8% of all goods sold makes its way back through the supply chain, the 3PL can implement more sustainable processing of those orders, ensuring that the goods don’t get “dumped.”
Instead, they can be either refurbished for resale or otherwise reused and/or repurposed. “I view that as a huge opportunity for third-party logistics players to evolve into that,” says Banks, “because it’s going to become a mandatory component for [product-centric] companies to solve.”