Commentary: When manufacturers become retailers

With the rise of e-commerce, traditional retailers now have to figure out how to effectively and profitably fulfill orders both in-store and direct-to-consumer, as well as face threats from pure e-commerce retailers and manufacturers fulfilling direct.    So I had been planning for a while to write a column about an inherently “unfair” wrinkle of e-commerce logistics: the idea that the internet enables manufacturers to become retailers, while there’s no such clear cut path for retailers to become manufacturers.
   This development has big implications for retailers, since e-commerce essentially increases not only the new channels they have to manage themselves, but also the level of competition they face. Traditional retailers now have to figure out how to effectively and profitably fulfill orders both in-store and direct-to-consumer (and all the different permutations of those broader categories), they have to face the threat of pure e-commerce retailers of all sizes across the globe, and also the threat of manufacturers fulfilling direct-to-consumer.
   Recent research from IDC Manufacturing Insights projects that by 2020, half of all manufacturers will have the capability to deliver direct-to-consumer. According to a report in CSCMP’s Supply Chain Quarterly magazine, IDC analysts believe manufacturers will have three ways to develop this capability: in-house, outsourced
to 3PLs, or through fulfillment partnerships with retailers.
   That last one could potentially create an interesting dynamic for retailers, as certain manufacturers desiring to be direct sellers may not be able to completely untether themselves from the retail channels they previously used. And that’s a good thing for those retailers.
   But it also means retailers will have to become so proficient at direct-to-consumer fulfillment that they essentially become service providers in their own right. If that sounds like a familiar model, it’s because Amazon has been doing this for years now.
   Considering most retailers struggle to fulfill their own omni-channel sales profitably, however, it would be a tall task to achieve in the next three years, to say the least.
This is where 3PLs and supply chain software providers come in. A retailer is in a unique position in that it knows the inbound patterns of its universe of suppliers, and they then generally take over on the outbound leg. But applying that experience of managing inbound suppliers to a new channel—direct-to-consumer—means being able to transfer unstructured, sometimes anecdotal knowledge to an entirely new process.
   A retailer heavily reliant on its 3PLs will turn to those service providers to help it navigate this change, but that, in turn, creates other competitive pressures down the road. If a manufacturer is using a retailer as an outsourced fulfillment provider, and that retailer is essentially outsourcing that function to a 3PL, for example, why wouldn’t the manufacturer just work directly with the 3PL?
   More likely, however, is a scenario in which big enterprise retailers build capabilities in-house to fulfill direct-to-consumer orders for their suppliers. And those endeavors will inevitably be based on robust software that bundles some combination of e-commerce, inventory, transportation, and warehousing management.
   In theory, this would simply entail a retailer being able to plug into a manufacturer’s e-commerce platform or order management system to know when and where an order needs to be delivered, the status of production on the product, and whether the product needs to be customized in any way.
   In other words, retailers could view this managed fulfillment as another channel, rather than an outright and separate service-oriented business unit. Or put another way, a tweak to the vendor-managed inventory model.
   From a freight perspective, that upstream collaboration with manufacturers could allow retailers to better optimize inbound and outbound freight moves, depending on the nature of the relationship with a particular supplier.
   For instance, if a retailer typically stocks only enough of a certain type of product to fill part of an ocean container, perhaps the supplier of that product’s projected direct-to-consumer sales could be enough incremental volume to fill an entire container. Outbound truck moves from a distribution center housing both the retailer’s direct-to-consumer inventory and its supplier’s direct-to-consumer inventory could similarly be consolidated.
   But this all requires accurate forecasting and planning, as well as intricate execution. Done right, it would dull some of the pain of losing revenue through a retailer’s own sales. If the retailer became proficient enough, it might even win fulfillment business from suppliers it never worked with before, in which case the business would be net new revenue and not merely an offset to the cost of lost sales.
   The good news is that the software to orchestrate this all largely exists today. The bad news is that there is a steep learning curve, and it’s a fast-moving environment. It would be behoove retailers to start thinking not just about the role that e-commerce will play in their own supply chains, but what role they may play in the fulfillment strategies of their own suppliers, because 2020 isn’t too far away.