The Evolution of Retail Distribution

E-commerce is a major driver for global change in the logistics industry. E-Commerce sales are fast outpacing traditional brick and mortar sales and the impact on logistics is significant due to changes in physical distribution networks, including massive e-fulfillment centers, sortation hubs, parcel hubs, and urban fulfillment centers for quicker order fulfillment. The logistics distribution process to get product’s into the hands of consumers has transformed significantly over the last 50 years and there are some similarities that can be made between past changes and e-commerce logistics even though the physical distribution process is vastly different. Previous transformations may shed some light on where the e-commerce logistics supply chain is headed. From a distribution perspective, this evolution has passed through various general phases and can be classified very broadly as follows:

1960’s and 1970’s – Supplier Control of Distribution

Supply chains (not even a buzzword until the 1990’s) were primarily controlled by suppliers and the majority of distribution was done directly from suppliers/wholesalers to retail stores. Direct to store deliveries were made on an infrequent basis and retailers had little control over the distribution process. Retailers viewed the supply chain as a series of disparate functions with materials management and physical distribution management functions managed separately.

1980’s – Retailer Control of Secondary Distribution

The 1980’s marked a sea-change in logistics due in part to the emergence of personal computers that enabled massive improvements to logistics planning, optimization, and execution. Armed with more powerful computational tools, retailers started to centralize their supply chain functions and constructed large regional distribution centers. Retailers increased their control over secondary distribution (regional warehouses to stores) by routing inventory from suppliers to their own distribution centers and consolidating products from multiple suppliers for onwards delivery to their stores. This period of centralization enabled retailers to reduce transportation costs, reduce lead times, and give greater product availability to consumers in their stores.

1990’s - Retailer Control of Primary Distribution

In the 1990’s, further technological advances led retailers to implement internal systems such as ERP, supply chain planning, supply chain execution systems and focus on optimization initiatives such as cross-docking, vendor managed inventory, lean supply chain management, and supply chain collaboration. Retailers were able to create synergy amongst the once disparate supply chain functions and exert more control throughout the supply chain extending back to primary distribution (from suppliers to regional warehouses) and demand more frequent deliveries of smaller quantities.

2000s - The Rise of eCommerce

The advent of e-commerce led pure play online retailers to construct massive e-fulfillment centers and leverage the logistics infrastructure of parcel carriers to handle last mile delivery. For brick and mortar retailers, online retailing was a sideshow to store sales but as e-Commerce sales began to outpace traditional brick and mortar sales, retailers began focusing more resources into e-Commerce.

Brick and mortar retailers initially fulfilled orders from their warehouses but gradually realized that fulfilling some merchandise directly from stores and offering ‘click and ‘collect’ pickup from stores led to a competitive advantage against pure play online retailers. This was the birth of multi-channel fulfillment.

Present Day - ‘Last Mile’ Delivery is the Key

Ultimately, e-fulfillment, especially the ‘last mile’ problem of delivering goods to the final customer, holds the key to success in this channel. Customers have become increasingly demanding, expecting ever-higher levels of product and service performance. Instant gratification is what many customers are after and the supply chain needs to be constructed in such a manner to satiate the consumers desire for instant gratification. The future of retail (and logistics) will be shaped by the consumer's desire for convenience and immediacy.

So, what are the common themes here:

  • Control: Power has shifted further down the supply chain - from suppliers, to retailers, and now to consumers. The true value of transportation has always benefited the receiver of goods and this is in line with fickle customer expectations in that they want to order from anywhere, send to anywhere, and receive or collect at any time of the day or night. Retailers went from having little control over distribution to having full control of distribution and are now back to having little control of the delivery process and, by the way, shipping costs are high! In this respect, online retailers faced similar challenges as retailers in the 1970s - no control over the last mile delivery.
  • Complexity: Logistics networks have become increasingly complex and many logistics networks are still operating under the old model of distribution -  pallets loads or full cases to stores. Warehouses designed to send bulk shipments to a fixed number of stores need to be re-configured so that workers can quickly assemble, package, and ship many small parcels to many different locations.

How these themes continue to evolve over the next 10 years or so will be fascinating.