Introduction

Even with the general economy facing potentially bleak near-term growth, e-commerce continues to grow at a significant rate. One recent study cited a 25% per year increase in direct to consumer (DTC) for the past three years. For Internet orders, that number goes up to 37% and orders are projected to continue growing at a rate in excess of 20% over the next three years (Figure 1).

Companies that haven’t already exploited DTC as a distribution channel are scrambling to catch-up, and front runners in the race are pushing to expand and optimize their DTC fulfillment capabilities. 

Figure 1. Growth of Internet Orders, based on Supply Chain Consortium Data

For many organizations, DTC fulfillment optimization includes the design and implementation of dedicated DTC distribution centers. Planning for, designing and implementing a consumer direct distribution center looks very similar to the same activities associated with multi-channel distribution centers; however, there are some unique considerations that require special attention. Failure to take these unique needs into consideration can have disastrous consequences.

An All Too Common Mistake

The most common mistake companies make when they decide to build a DTC distribution center is to “lead with technology.” This happens for a variety of reasons:

• The individual driving the implementation has previous experience (good or bad) with a particular material handling technology or warehouse management system (WMS) that influences the process.
• The need to “keep up with the Joneses” – only this time it’s not the type of car in the driveway, but the degree of automation in the distribution facility as compared to a competitor.
• An integrator or equipment manufacturer is engaged too early. Many integrators are either original equipment manufacturers (OEMs), or distributors for OEMs. Therefore, it shouldn’t be a surprise when their proposed system is built around the equipment that delivers the highest margin to them – regardless of whether the technology is the right fit for an application.
• A WMS package is selected and the vendor is engaged before the new facility’s requirements have been clearly defined. The solution is chosen based off of the vendor’s reputation, or someone’s past experience. It may or may not be the right package for the job. But the project becomes focused on software and WMS functionality rather than true operational and business needs.
• The drive for a “lights out” system at all costs. The reality is that there are many times (especially in fledgling DTC operations) that the flexibility afforded by manual operations far outweighs the benefits of automation.

Most horror stories regarding implementation failures can be traced back to putting the proverbial cart before the horse and selecting a vendor or technology too early in the DTC distribution center design process.

So what is the answer? Following a classic and rigorous “systems engineering” approach to DC design and implementation is the only way to ensure initial success while optimizing a system’s flexibility to handle rapidly changing future requirements.

It is important to keep in mind that a “system” is more than the equipment in a DC that’s profiled on the cover of an industry trade magazine. It’s more than the software interfacing to and controlling the equipment. It’s more than the people and processes required to operate the equipment. It’s all of the above. True systems integration must bring them all together on the schedule required to make an implementation successful.  

This white paper looks at how this process is done in its “ideal” form for a new DTC distribution center.

Key Takeaways:

• DTC is here to stay and growing quickly.
• DO NOT “lead with technology” when embarking on a DTC distribution center design.
• Ensure that every aspect of a system (people, processes, IT and equipment) is taken into account.

Requirements Definition

The first step of a successful implementation is to establish requirements that the system must satisfy. These will include business, operational, and IT requirements as well as many that don’t fit neatly into a particular category. The following high-level process flow in Figure 2 illustrates the basic steps that have proven to be the most effective for completing a thorough job of establishing system requirements.

 Figure 2. High-level View of Establishing System Requirements

Figure 3 illustrates the high-level categories of data and typical sources that must be reviewed to produce a complete system requirements document.

Figure 3. Categories of Data and Typical Sources

For DTC operations, the following factors require particular attention when developing system requirements:

Order profiles – In most DTC operations, order profiles are typically small—both in lines per order and units per line. About 95% of units shipped DTC are individual pieces (Figure 4), and the average order consists of 2.6 items per order (Figure 5). However, periodic spikes will occur if product is seasonal or holiday based. Order picking technologies, SKU slotting and location configuration, packing station design, replenishment approach, conveyor and sortation system design, and returns handling need to be considered in light of the specific application’s anticipated order profile (both current and future).

Figure 4. Percentage of Product Order Lines Shipped,  based on Supply Chain Consortium Data.

Figure 5. Average Number of Units per Order Line, based on Supply Chain Consortium Data

Shipping carton cubing, consolidation and packing – Providing value to the customer includes minimizing shipping and handling costs. Regardless of the pricing model employed, failure to address these costs will impact competitiveness. Using the optimal number and size of shipping cartons for each order is undoubtedly important to most DTC operations. But the trick for many operations is to do so in a manner that does not have a negative impact on picking and packing productivity.

DTC operations typically seek to balance picking and packing productivity and shipping carton optimization through technology. This balancing act can be complicated by the need to consolidate order lines from separate pick modules for value-added services and packing. Operations employ everything from unit sorters to consolidation carousels to WMS-driven cart picking to meet specific needs. Frequently, they optimize one portion of the overall flow without carefully thinking through the impact on other areas. For example, a DTC distributor may make a major investment in a tilt-tray sorter only to find out that pulling processes to the sorter or packing station activities are creating major bottlenecks.  

In the early days of DTC operations, maybe an operation could be unconcerned with consolidating multiple line items into one shipping carton. But as purchasing via the Internet has increased, customers have become more discriminating and “green” has grown (providing ever more pressure to minimize packaging). The requirements for order consolidation and packing have become more and more aggressive. Thankfully, both the number of picking technologies and features within individual technologies has expanded dramatically over the last several years.

Additionally, intelligent warehouse control systems (WCSs) have stepped in to fill the void often present between WMS functionality and the real-time control of equipment. This development facilitates the level of product tracking necessary to ensure that order consolidation and packing areas are fed in a manner to optimize overall system performance, even under the most demanding scenarios.

Flexibility in order processing – By their nature, DTC operations are not shielded from the demands of the end user in the way that traditional distribution operations are safeguarded. In the DTC world, there are no intermediate links between the distribution center and the customer. This requires an additional degree of flexibility in order processing, as demands can change suddenly. A system must be able to process a wide variety of orders, whether through automated conveyance and sortation systems or special handling areas. The ability to consolidate orders in a manner in which parcels are processed seamlessly is the goal. Inclusion of non-conveyable station(s) into the system design to handle parcels that fall outside of 90/10 rule is often missed in an initial design, resulting in a “cobbled together” final layout and associated process.

The system must also be flexible in its ability to handle spikes in volume. As an extreme, real-life example, one company with normal DTC daily volume between 3,500 to 5,000 outbound shipments grew exponentially to peak volumes of 35,000 outbound shipments for specific holidays such as Valentine’s Day and Mother’s Day. A deliberately and unusually flexible system design enabled this DTC to meet its customers’ expectations – even through such drastic peak shipping days.

Specific high-level design features to be considered that offer order processing flexibility are:

• Easily changeable sortation point assignment based upon that day's anticipated shipping volume and locations.
• Ability to quickly change sortation point assignment for maintenance purposes.
• “Do not ship” capability (order cancelled by customer or accounting).
• Multi-carrier manifest system.
• Carrier Drop Ship capability to specific high volume destinations.
• Ability to change shipping method based upon the parcel’s actual shipping weight, or previously downloaded information, or other criteria while the box is in transit on the system.
• Flexibility to use all or a portion of system as volume dictates without a loss of productivity in either scenario.
• Capability to process totes and multiple parcel containers (from poly bags to corrugate cartons to oversize).
• Ability to incorporate in-motion scale(s) easily if they are not a part of the initial system.
• Capability to scan and sort parcels with multiple barcodes on the label. 

Failure to hit customer service level commitments – When customers place orders over the web or through a direct call to the company, they want to receive their order as soon as possible — regardless of which shipping method they selected. Their expectation is typically tied to the earliest time for delivery and not the maximum. Maintaining customer satisfaction requires not only staying within the committed service level, but consistently overperforming. To accomplish this requires a high degree of DTC fulfillment system level reliability and flexibility.  

For instance, one business made a last-minute request that their system be modified so that they could guarantee deliveries by Christmas to meet a late-breaking customer satisfaction initiative. Two weeks before Christmas, a simple change was made to the manifest system which allowed for selected ground shipments to ship at the 2-day service level. One week before Christmas, the 2-day service level was changed to next-day service. This was achieved strictly in the manifest system, without requiring any changes to their WMS. Modification costs were minimal, and the client’s critical customer service level requirements were successfully met.

Value-added services – Normally, these services are greater for DTC operations than for standard fulfillment. According to one study, 15.4% of all items shipped DTC receive some type of value-added service. Personalization and gift wrapping are examples of commonly performed services that require unique system designs. Each requires the DTC to be flexible enough to handle seasonal and quickly changing requirements. And this is yet another area that is often given little attention during the design phase because requirements are frequently immature. It pays big dividends to think through the different directions that are possible and put “hooks” in the system design to accommodate future possibilities.

Carrier selection / manifesting – Accuracy, reliability and flexibility are required whether a “stand-alone” or WMS manifest system is used. The ideal system will have the ability to interact with a wide range of sortation systems and devices. A robust manifest system works well within increasingly common distributed process control architectures and interacts seamlessly with the WMS (if it’s separate from the WMS). It must account for every outbound shipment, have the flexibility to process multiple bar codes and symbologies on a package-to-package basis, handle carrier-specific rules and regulations compliance, and be able to add carriers and change shipping rates easily (ideally without requiring assistance from the manifest system vendor).  

A properly architected distributed control system for sortation and manifesting balances both real-time and non-real-time processing, resulting in an overall system that functions quickly and efficiently throughout the course of operation.  Ideally, while packages are being inducted, weighed, scanned and sorted to their respective destinations, the system operator should be able to log in and open trucks, control the opening, trimming and closing of sortation points, maintain or change mapping for the sortation system, create shipments, assign the shipment to trucks and ultimately close the trucks and manifest the items without any interruption of the sorting process.

The system should also have the flexibility to map multiple destinations to the same sortation point for low volume shipping destinations, as well as assigning multiple sort lanes to the same shipping destination if the volume warrants. It should provide the ability to change destination sort lane mappings without shutting down the system or impacting any in-process activities. For example, the system should be able to change the ship method based on the shipping weight, and redirect a carton to a different sortation point or to a reject gate. It should support in-line check weighing and manifesting, and allow the co-mingling of parcel carriers and service classes. In addition, the system should provide robust alerts and reports for exception conditions.

Excessive carrier accessorials – This is another challenge for the IT system and the flexibility of the various software applications supporting DTC operations. This challenge starts with obtaining the correct information at time of order placement and determination of shipping method, either customer selected or defaulting to “least cost” method. Many carriers have surcharges for carton sizes that exceed specific dimensional limits. These dimensional surcharges are independent of the shipping weight, so knowing the physical shipment size is essential to correctly computing parcel shipping costs. Failure to note and properly rate cartons during the manifesting process with dimensions that exceed carrier normal limits will result in unanticipated carrier fees. 

In addition, many DTCs now receive invoices from carriers for miscellaneous issues such as the parcel having an incorrect address or house number on the label. Accessorial charges have steadily increased in volume, variety, and enforcement over the last few years, making it even more critical that distribution systems accurately weigh, measure, and label everything leaving the facility.

IT system challenges – Like other distribution operations, DTC distributors rely on a variety of software applications to drive business needs. But the very nature of DTC commerce presents some unique challenges that must be addressed by the systems responsible for order fulfillment, inventory management, and shipping. Small orders are continuously placed through web storefronts and catalogue call centers. The volume of orders flowing to the DC for execution can vary dramatically by season or even time of day. DTC operations can set windows where an order received by a specified time will ship today; however, the competitive nature of the business constantly pressures these windows to be more customer friendly regardless of the operational impact. 

Customer expectations also encourage flexible order change and cancellation policies. They also press DTC operations to provide customers with more personalization, special handling, and carrier service options. Multi-channel distributions face the additional challenge of balancing inventory between retail and DTC. All this requires tight integration between order entry, customer service, and warehouse execution systems. Effectively supporting a system that provides the flexibility, visibility, and control needed to succeed in the DTC world can easily overwhelm any IT organization.  

In many cases, a WMS, WCS and/or flexible manifest system will be able to extend the DTC with additional IT capability for specific functions. Another real-life scenario applies here. One company was a large DTC that shipped over 200,000 parcels a day to the U.S. and Canada and required an upload of information formatted for a specific carrier in addition to their normal sortation and manifest system information upload. The manifest system was able to meet the requirement with a modification that was completed months ahead of the estimated completion date for IT to do it internally.

Ability to accommodate rapidly shifting market demands – This is a real test for all fulfillment operations, but particularly so for DTC distribution centers because they are the last link in the supply chain directly under a company’s control. From the IT system architecture, to the modularity of the equipment, to the building’s physical boundaries – it’s critical to establish the expertise to modify the system “on the fly” to accommodate the whims of a fickle marketplace. Failure to do so results in higher operating costs and inability to hit customer service level commitments (resulting in damaged company reputation and lost market share). 

Returns processing – This is a critical consideration in many DTC operations. It includes the need to account for each item returned, credit the customer’s account, and determine whether the item can be returned to stock, repackaged or sent to trash.  Thoughtful, comprehensive design of returns processing operations and the associated necessary systems infrastructure is critical to minimizing subsequent operating costs.

Excellent examples of the importance of returns processing on DTC operations include companies that distribute items using continuity programs (monthly or periodic ordering placement time period) because these historically have a return percentage of 30%. A DTC using a continuity program with a negative option (periodic ordering cycles that the customer will be sent specific item(s) unless the customer replies with a notification to decline that month’s item) will have a return rate of 40% to 50%. Returns at these extremely high volumes typically justify automation to reduce operating costs. It’s not hard to see how a poorly designed returns processing area in one of these operations could cripple the overall distribution center. Positive orders (in which the customer selects the item(s) they wish to purchase whenever they wish) normally have a return rate in the 5% range, which may be considered for a manual returns system.

High operating costs – Because of the inherently high degree of flexibility required by DTC operations, the starting point for operating costs is typically high.  Couple that fact with a failure to do the best job possible addressing the different aspects of DTC system design described above, and it’s obvious to see why a DTC operation has the potential to dramatically exceed projected operating costs in short order.  

Final face for the customer – In a traditional distribution center, product is shipped to stores, which are then responsible for the final presentation of the product to the customer. But when a parcel leaves a DTC operation nobody “fixes” product presentation before the customer sees it. If the packaging looks “cheap,” it impacts the customer’s perception of the product quality. If the parcel is oversized, clients will often complain that they paid too much for “shipping air” – regardless of whether that was the case or not. If the parcel does not adequately protect the product, chances are high that a customer has been lost. Details such as cosmetic appearance of packaging and condition of labels and inserts can have a huge impact on customer satisfaction. A DTC fulfillment system must be able to efficiently support whatever is required to optimize the parcel and product’s “final face” for the customer.

Key Takeaways:

• Developing a comprehensive set of system requirements is critical to the success of a DTC fulfillment system design.
• A thorough, accurate data analysis and understanding of pertinent business rules is critical for this phase's success.
• DTC operations have a number of unique attributes that must be accounted for diuring the requirements definition phase.

Concept Design

Now that requirements have been established, it’s time to produce and evaluate different design concepts. Here’s where it’s especially important to exercise “out of the box” thinking – ideally with a team that includes experts in material handling technologies with no vested interest in pursuing a particular direction.  

The simple flow diagram in Figure 6 illustrates the advanced steps associated with this phase.

Figure 6. High-level Steps in Concept Design

An excellent practice is to generate a spectrum of designs that range from completely manual operations to fully automated with one to two levels of semi-automated concepts in between. Each area of the system should have alternatives developed that map to the specific requirements associated with that area. Items to be examined should include:

• Storage equipment types
• Picking equipment types
• Mobile equipment types in all processing areas
• Alternative layouts that fit equipment requirements
• Staging configurations at the docks
• Work-in-process methods
• Aisle widths
• Transport methods between processes
• Process control types

Figure 7 shows a sample mapping diagram for a picking operation.

Figure 7. Sample Mapping Diagram for a Picking Operation

After alternatives have been developed, the evaluation and justification step commences. Experience shows that it is beneficial to evaluate design alternatives using four categories:

• Quantitative evaluation – includes labor standards to develop staffing requirements and evaluate productivity, space standards to determine square footage, cube requirements to determine equipment options, and capital required for space and equipment.
• Qualitative evaluation – focuses on factors such as ergonomics, congestion, product and traffic flow, system flexibility, expansion capability, labor management options etc.
• Economic and sensitivity analyses – (Figure 8)

Figure 8. Alternative Evaluation and Economic Justification

The alternative that meets the quantitative and qualitative criteria at the lowest possible net present value, while also exhibiting flexibility in the face of changing business conditions, is selected as the design recommendation.

Dependent upon the size and complexity of the operation, this step will last from several weeks to several months. For a large, complex system, it’s an excellent idea to validate the concept design with simulation. Simulations themselves can run from relatively straightforward spreadsheet analyses of different operational scenarios to full blown three dimensional models that can provide extremely robust operational analyses in addition to “picture quality” visual representations of the system in action (Figure 9).

Figure 9. Example of a “Picture Quality” Simulation

Key Takeaways:

• The requirements developed during the requirements definition phase must be accurately mapped to options evaluated during the concept design phase across multiple areas inside individual concepts. 
• It’s important to evaluate a mix of quantitative and qualitative factors in addition to the economic and sensitivity analyses when determining the best concept for implementation.
• Some form of simulation should be conducted prior to making the final decision to move ahead with a specific concept.

Implementation

If a company (as end user) lacks an in-house project management team with distribution center implementation experience and the time to devote exclusively to managing the project from vendor selection through transition to operations, then it’s critical to bring that expertise on board. Ideally, continuity should be maintained from the front end of the project through system go-live. Many projects struggle or fail due to poor handoffs between front-end consultants and implementation teams. Part of the reason such continuity is vital is found in the number of different vendors that are typically involved in a DTC distribution center implementation. Suppliers will bring potential value and ideas to the process that may or may not have been considered to this point. However, they do not have a thorough understanding of the design and decisions made to date. Below is a short list of the types of vendors who will be involved in a typical implementation:

• General contractor
• Conveyor and sortation vendor
• Rack vendor
• Automated storage and retrieval vendors
• Equipment controls vendor
• Forklift vendor
• Dock equipment vendor
• WMS vendor
• Systems hardware vendors

Dependent upon the size and complexity of the implementation, the project could range in duration from a few months to 2-3 years. The process flow diagram (Figure 10) illustrates the steps that must be followed to ensure a successful automated material handling system implementation. Unfortunately, shortcutting this process has predictable and all too common results that are undesirable.

A high-level, but comprehensive list of the roles that must be successfully conducted during the implementation phase is shown in Figure 11.

Figure 11. Key Roles During Implementation Phase 

Key Takeaways

• A successful DTC distribution center implementation requires continuity among key project team members from the beginning of the requirements definition phase through the end of the implementation.
• "Underneath the hood" of an implementation lies a tremendous amount of complexity.
• The implementation includes everything from traditional project management through training and startup support. Ensure that all aspects are planned for and actively managed.

Conclusion

A successful DTC distribution center design and implementation shares many of the same attributes of traditional DC implementation, yet it does include some unique challenges. The good news is that overcoming these challenges will allow you to capitalize on one of the strongest growth areas in today’s economy. Regardless of whether the effort is managed using internal or external resources, the credibility of a company and its DTC operations is immediately impacted by the success or failure of the implementation. As a result, it’s critical to establish an experienced team that will guide the process from the front end of the design phase through system go-live and the subsequent transition to operations.

Tompkins Associates designs and integrates global end-to-end solutions for companies that embrace supply chain excellence. The company is headquartered in Raleigh, NC.

Tech Conveyor, Inc, for over 25 years has provided innovative turnkey material handling solutions consisting of sortation systems, parcel manifesting systems, in-motion weighing systems, control and the re-control of existing sortation systems to the distribution industry.  Tech Conveyor, Inc. is located in Phillipsburg, NJ.  For more information call 1-908454-1515 or visit www.techconveyor.com.

References

Much of the data for this paper was compiled from the following topics of the Supply Chain Consortium database:

• Direct: Channel Profile 
• Direct: Delivery Practice
• Direct: Fulfillment Centers
• Direct: Cost and Performance Metrics

The Supply Chain Consortium offers a number of resources to achieve world-class supply chain excellence.  In developing any strategy, one-on-one networking with other supply chain executives can be invaluable.  Knowledgeable peers can be found through the PeerNet resource on the Consortium's Resource Center page.