New business-to-consumer e-commerce practices are rapidly changing the way retailers and their supply chain providers operate, as well as how governments apply trade oversight.
It’s no secret that changes in the business-to-consumer e-commerce space are now impacting the retailer and supply chains industries, as well as government oversight of those industries.
The U.S. Department of Commerce has reported that Americans purchase goods at the pace of $1.2 billion a day online, double the average rate five years ago, and is projected to double again in the next five years. The e-commerce phenomenon has become entrenched in our culture and shows no signs of slowing its rapid expansion.
The retail industry is watching closely, as is the supply chain support system that is the true engine of e-commerce. In addition, the U.S. government also needs to keep pace with this fast changing marketplace and be sensitive to existing and prospective regulations that could negatively impact this important marketplace shift.
Amid this e-commerce explosion, Amazon recently announced its intent to hire 50,000 employees in the month of August. At the same time, many longtime retailers are closing hundreds of stores and doing away with commission-earning positions. In effect, retail jobs are now rapidly shifting from shopping malls to warehouses located in rural areas, as warehousing requires large areas of land. Delivery systems are now being honed not only from rural areas in the United States for delivery to U.S. households, but even from far-off distribution warehouses in Asia.
The existing North American Free Trade Agreement (NAFTA) does not contain any updated e-commerce or digital trade provisions, but according to the U.S. Trade Representative’s (USTR) recently released NAFTA negotiation priorities, the Trump administration is seeking to change that. Some of the e-commerce provisions were already negotiated by the United States, Canada and Mexico under the Trans-Pacific Partnership. Therefore, new rules concerning digital trade should not be unexpected because all three countries had already agreed to them.
One of the most important issues to retailers is the goal of the U.S. government to raise the de minimis level for the payment of duties to $800. A specific negotiating priority for the United States is for all three countries to have a similar de minimis level before duties are owed. Canada now has a de minimis level of about $15, while Mexico has a de minimis level of about $50. These low de minimis levels are obstacles to e-commerce sales by U.S. companies to Canada and Mexico, since at the current levels there is a definite bottleneck which impedes the efficient flow required by e-commerce.
Customs and Border Protection (CBP) states on its website: “[w]orldwide e-commerce sales are expected to reach over $4 trillion by 2020 – the branch will work to address the various complexities resulting from this new global shift.”
“The branch” is a reference to CBP’s very recent establishment of the E-commerce and Small Business Branch within the agency’s Office of Trade. There are definite issues brewing with respect to CBP’s current ability to process thousands of small parcels originating from overseas fulfillment centers efficiently and still ensure the safe and legitimate flow of trade, while at the same time identifying and preventing inferior, unsafe, and counterfeit merchandise from entering into the global commerce. E-commerce players with overseas fulfillment centers will need to coordinate efforts with CBP so that e-commerce flows as smoothly as possible and still maintains CBP required safeguards. The recent NAFTA renegotiations have the following objectives to streamline customs and trade facilitation which will impact e-commerce favorably:
• To provide for streamlined and expedited customs treatment for express delivery shipments, including shipments above de minimis thresholds;
• To increase transparency of customs laws, regulations and procedures by publication on the internet as well as identifying points of contact for follow-up questions from the trading public;
• And to ensure that, to the greatest extent possible, shipments are released immediately after determining compliance with applicable laws and regulations, and provide for new disciplines on timing of release, automation and use of guarantees.
One alternative model to the overseas service centers is the proliferation of fulfillment warehouse facilities here in the United States, strategically located with well-managed inventory, to provide timely, efficient door service throughout the country. This model requires sophisticated forecasting and inventory management platforms coupled with supplier network design and strategies.
In addition, domestic fulfillment centers minimize to a significant degree the CBP issues, since the importation transaction destined to the retailers’ fulfillment warehouses in the United States does not involve door delivery to individuals at this import stage. This model provides greater controls for the retailer, but as noted, requires effective inventory forecasting, supplier sourcing models and high velocity, quick response and efficient distribution facilities, which can be costly. In this model, the consolidation from suppliers still occurs mainly in Asia but the importation process is to single consignee customers, avoiding the CBP crush noted above.
Brick-and-mortar retailers have traditionally tried to protect against “showrooming,” where shoppers would go to stores to evaluate products and then purchase them on websites specializing in e-commerce sales of consumer goods. Many retailers have taken various routes in responding to this phenomenon. Now startups, as well as longtime retailers such as Sears, Nike, Bose, Samsung and Microsoft, are embracing the concept of showrooming at brick-and-mortar facilities and marketing their products through traditional e-commerce platforms. This has become a competitive imperative in order to keep up with the Amazons and Zappos of the world. The trend now for retailers is to seek out e-commerce platforms focused on mobile commerce (as opposed to desktop searches) and social media. Platforms such as Shopify, BigCommerce, Magneto and others seem to be the go-to marketing platforms at the moment.
In short, retailing is clearly in a paradigm shift that is still in a dynamic phase. But what are the supply chain challenges for retailers and other industry players, such as global and domestic logistics/distribution providers, and last-mile courier and other transport services in this fast changing marketplace environment?
The retail industry, logistic/distribution providers, couriers and other transportation companies should take into consideration the following when creating business models in search of a successful e-commerce program:
• Structuring of efficient and strategically located fulfillment facilities in the United States and abroad through creative purchase and/or leasing of warehousing facilities, which involve contractual commitments from both the logistics/distribution providers and retail entities marketing products through e-commerce;
• Structuring of realistic fulfillment facility pricing and services agreements between retailers and fulfillment facilities to cover services such as forecasting and inventory management, kitting and assembly, returns inspection and testing, online order fulfillment, and myriad other technical topics which make up a successful fulfillment operation;
• Interfacing with price-effective, efficient delivery systems from domestic and foreign fulfillment centers involving air courier and other transport/delivery sources to the customer’s door, providing that important last mile in the delivery system;
• Keeping a finger on the pulse on the NAFTA renegotiation efforts to streamline the e-commerce process and ensuring that the newly created CBP E-commerce and Small Business Branch is properly funded and has the appropriate marketplace perspectives;
• Addressing the issues of forecasting and inventory management, which is especially relevant since many companies receive their inventory from numerous small to medium-sized suppliers worldwide, which in turn can cause transit lead times to be long, result in a high level of stock-keeping units (SKUs) to forecast and manage, and is subject to supplier performance, making it difficult to schedule for changing demand patterns;
• Reviewing the design of efficient distribution centers to efficiently accommodate high volume and varying demand patterns whether they are internally or third-party operated. The warehouse cycle time must be efficient, quick and consistent in order to meet the delivery promise dates which the customers expect, and related topics concerning important and cost-saving efficiencies which result from warehouse engineering design;
• And reviewing the factors that constitute strategically located distribution centers that can service the vast majority of customers quickly and efficiently. The analysis required to do this is both critical and complicated, including an analysis of the geographical sales patterns that drive demand and the service requirements (cycle time and inventory fill rate) that are being promised to the customer.
Like any other innovations in technology-driven spending patterns, e-commerce will remain in a constant state of evolution. In this consumer-driven development, government interference should be minimized, notwithstanding that it may have legitimate interests in overseeing the process to prevent inferior, unsafe and counterfeit merchandise from entering into the global market.
The one thing we know for sure is this is a rapidly changing marketplace, and the players, including the retail industry, supporting couriers, other carriers, and fulfillment centers and logistics companies need to be especially alert to technology changes and government actions impacting this industry, and will need to continuously reevaluate their business models to stay in the race.
Carlos Rodriguez, a partner at Husch Blackwell LLP, and works with the Washington, D.C. law firm’s Real Estate, Development and Construction group with respect to the purchase and leasing of warehouses domestically and abroad related to e-commerce projects.
Jeff Cascini is the managing director of Cascini & Associates, a supply chain, management and engineering consulting firm. Before that, he spent 10 years as a senior corporate consultant and project manager with General Electric corporate staff where he sold, participated on and/or managed more than 75 projects in supply chain, manufacturing and other management consulting areas.