The High Variable Cost Structure of Omnichannel Order Fulfillment

Can this be minimized?

By: Gene Tyndall
Executive Vice President, Tompkins International

One of the serious challenges with building omnichannel order fulfillment operations and information systems is the fact that there is an inherent variable cost structure that is unavoidable in this strategy and business model. The challenges with fulfillment network location and optimization, inventory allocations and assortments, variable process operations, and system features and functions, are examples of the causes of increasing costs to supply chains, logistics, and inventory management.

We note that many retailers are learning this fact as they work toward providing omnichannel order fulfillment using, large Fulfillment Centers (FC), smaller FC, Stores, Click and Collect, and variations of these, all requiring new ways of doing business, as well as, supporting systems and practices. Thus, as omnichannel order fulfillment expands, costs grow faster than sales, and margins continually erode. This is new to most retailers who have operated with practices and systems that are designed and built to support stores and large-scale stock replenishments. 

Consumers, of course, could care less about omnichannel. They increasingly want easy ordering with efficient deliveries “when and anywhere they choose”.

Leading retailers are beginning to focus on certain objectives:

  • Plans to re-platform their systems’ architecture to support multiple stocking and shipping points with centralized management.
  • Searching for fulfillment efficiency across their stocking locations and shipping capabilities.
  • Analyzing their inventory allocations to multiple locations, as well as, assortments with the focus on unit profitability.
  • Identifying ways to use “control towers” to plan and manage centrally and operate locally with standard processes and practices.
  • Re-thinking their networks to re-position stocks closer to metro areas and other population markets.
  • Determining how to achieve speed and flexibility, and time-to-market, without incurring high variable costs.

All these efforts and others, are designed to minimize variable costs and move toward fixed costs, which are more predictable, better understood, needed for product pricing points, and more open to efficiency gains.

Our view is that these are worthwhile objectives, as long as, omnichannel operations are the business strategies driving order fulfillment. Achieving their successes, however, is complex, challenging, and expensive. Capital investments are limited and can also be high risk. As the eCommerce market evolves and expands Amazon, for example, keeps raising the bar on efficiencies as the costs are managed and the service requirements are increased.

Is there an alternative? Are there opportunities for retailers to avoid huge capital investments and ever-increasing variable and fixed costs and still meet consumer expectations? How can any retailer alone meet these goals without the scale of volumes necessary to reduce variable costs and lower fixed costs?

This is the underlying and foundational goal of The MonarchFx Alliance. Providing an alternative to retailers that reduces their variable costs and lowering their fixed costs, while meeting consumer service requirements. Speed and flexibility are critical, collaboration is necessary, and operational efficiencies are critical success factors.

The operational efficiencies come from the use of common best practices and standard costs. FC with the right material handling equipment integrated and managed by the right Execution System, with workforce standards, will lower fixed costs, as well as, the variable costs normally experienced with multiple locations and uncommon standards.

Speed is derived from best operational practices, seamless operations, and the power of standard systems, the Order Management System (OMS), Fulfillment Center System, and Transportation System, are all best in class, all integrated from Order to Delivery and Returns. This standard platform is cloud-based, used as needed, and is based on leading practices. Flexibility is achieved by allowing sellers to determine their allocations and assortments (the OMS can help), consumer service levels, and value-added services such as, gift wrapping and returns processing, while staying within The MonarchFx Alliance operations strategy.

Retailers that engage The MonarchFx Alliance will pay an Operating Expense rather than CapEx for the ongoing operations of their order fulfillment strategies. While there is an up-front expense for start-up, the ongoing transactional expenses (orders/lines) are shared with other retailer members, thus achieving the volume scale that lowers variable and fixed costs, which are not possible by a single retailer alone. As more and more retailers engage The MonarchFx Alliance, these volume expenses are reduced, and each retailer shares in that reduction.

The financial benefits to sellers can be large, as variable costs are reduced, and fixed costs are managed and controlled. Going forward, sellers can better predict their expenses for eFulfillment orders, while at the same time meet the consumer demands for levels of service. They can also avoid the high costs of building their own omnichannel operations and systems and never reach the volumes that enable lower costs of omnichannel eFulfillment. 

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