https://www.flexe.com
Welcome to Logistics 2.0. I'm Karl Siebrecht with FLEXE. In 2015, ecommerce sales reached 7.5% of total retail sales. Also in 2015, Amazon topped $100 billion in revenue. It's clear that ecommerce is no longer a growing trend. It is mainstream. And at the same time that it has fundamentally changed the way consumers buy, it is also fundamentally changing the way retailers must distribute and fulfill those orders through their logistics networks.
We've talked a lot in these episodes about how Amazon is driving innovation. In today's episode, we want to talk about how some smaller ecommerce high-growth companies are managing in this environment.
Most companies selling products over the web start out with a single distribution point. Whether they manufacture their products in the country or outside of the country, this single distribution point is usually a drop-ship location. If growth continues, sometimes that distribution point will transition or migrate to a single distribution warehouse. This makes sense because small companies need to limit the amount of capital that they spend and also want to maintain flexibility as they grow through uncertain growth cycles.
But soon, if things go according to plan and growth continues, these ecommerce companies run into a common bottleneck. Just as brick-and-mortar retailers must keep up with changing consumer expectations and try to get product out to consumers in one or two days, these ecommerce companies must try to, again, achieve that same expectation within consumers. From one distribution point, a company is faced with two options. The first is they could charge the consumer shipping, which often on a per-unit basis can be very high, simply to ship a product from the West Coast all the way to East Coast in two days, whether it's expedited or air, that can be a significant cost to the consumer and therefore a higher overall total cost of product compared to other options.
The second choice is the company can decide to subsidize those costs themselves. Again, not a great choice particularly for small companies that can be cash-strapped as they go through their growth cycles. The natural response to this often is to increase the number of distribution points so that you can lower shipping costs by reducing the number of zones that you have to ship product across. This is a fantastic idea but comes with a significant challenge, and that is that increasing the number of distribution points always comes with fixed cost increases for real estate investments, labor, and equipment across that network, or comes with long-term fixed-cost commitments by signing up with a service provider to provide these capabilities for you.
Add that dynamic to the fact that, again, a lot of these startups are not only high-growth but their growth can be very, very unpredictable. It can come from different pockets geographically or from different products as they continue to launch and build their product line. This uncertainty can be fundamentally incompatible with making these fixed-cost investments for a larger distribution network.
Some ecommerce companies are finding new ways to solve this challenge. As they sit down and do their network analysis, instead of only considering fixed investments in a fixed warehouse network, they're starting to leverage a new solution that is on-demand warehousing to build a more flexible, dynamic warehousing network.
Here's how it works. For example, a company has one distribution point. They may be shipping 30% of their products to their consumers in total, or 30% of orders, within that 2-day shipping window. If they have a goal to get that above a 50%, it's probably going to take at least a second if not a third distribution network. Through on-demand warehousing, they can find warehouse locations in those markets. These are warehouses that have excess capacity and already are providing these services for themselves or others. This ecommerce company can plug into that capability on a variable basis. Instead of committing to a long-term contract, they can experiment with now distributing their goods in that second or third warehouse, getting that order shipment up to maybe 50% or 60% of orders delivered in two days.
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