We recently worked on a project where the company, a Direct-to-Customer (DTC) e-commerce company, moved from third party fulfillment (3PL) to internal order fulfillment. This case underscores the considerations most DC transition teams will have to face and solve during a transition to internal order fulfillment. We expect it will help you think about the planning and start up challenges for your facility.
Our client has another channel fulfilled internally, which will stay at low order levels with non-DTC systems and processes. The direct portion of the business has much high order levels and excellent growth plans. Once the initial business concept was proven, the owners felt they wanted to move to internal fulfillment.
The existing warehouse management personnel are good managers, but did not have any DTC order fulfillment process or system experience. The hourly workers are all new hires with no DTC experience, either.
Here are the considerations that the company had to solve in order to meet their business goals of transitioning order fulfillment in house. Can these considerations help you think through a similar transition at your e-commerce company?
Space and facilities considerations
To expand capacity, the company needed to greatly increase the square footage to receive more receipts, store more inventory, have room to make up kits, process orders and ship orders. There were few available facilities in their market, and there was no consideration to leave their area, which would have meant losing the entire distribution staff. The tradeoff is that the company will unfortunately face space problems in two years. Under-sizing space requirements is often very common in planning new facilities. Do your longer range projection of space if you have the time.
New DC ramp up period
As the facility opens and ramps up, the speed at which new employees can reach high productivity varies and may take up to six months or longer. Initially, this company under planned the ramp-up period at 2 to 3 months and contracted with the 3PL to transition orders over increasing weekly for 2 months.Know that a ramp up period at your new DC will take up to six months and plan accordingly.
Managing order production
Our client’s marketing department is very accurate at daily order projections, which allows for accurate manpower planning. Many of the products are kits that are assembled on-site in advance of picking.
From an order curve perspective, their largest volume days are Mondays (over 3,000 orders, including weekend orders). The curve decreases each day, so there may only be a couple hundred orders on Fridays.
The plan with the 3PL was to release increasing numbers of orders to the new internal DC.
The biggest hurdle was to have all the internal employees at the DC reaching acceptable productivity on a daily basis. This is common in new facilities. Some days early in the week, they processed 600 to 700 orders for the day. Realizing the tsunami they were facing, our client’s management team regrouped, quickly worked through order flow changes, re-emphasizing goals, working with everyone to understand where they were during the day.
After two months, they are keeping up with incoming orders and incurring minimal carryover. This is very fast compared to other new center experiences we have had. They are still working to consistently hit their weekly goals, but the hourly fulfillment staff is putting more and more successful days on the board, resulting in increasing morale. Many double shifts and weekend work was required.
One area that you’ll have to monitor closely and solve for (our client is still working on this, too) is forecasting inventory projections, especially the BOM for make up of kits. For our client, they are steadily improving product/inventory projections by unit and kit.
New DTC system
As stated earlier, our client’s other channel did not use DTC processes or systems. A separate order management system selection process is underway and will be implemented this year. The management adapted the processes of the old system to work in the interim.
When you’re considering a new DC or bringing your operations in house, you may need to select a new order management system and almost certainly amend your processes. This will lengthen the project considerably.
Qualitative standards
The direct business is a much faster-paced business, so the standards had to change. Examples include: clearing dock receipts within the shift; shipping 100% of orders daily; planning replenishments to not interfere with picking; etc.
Early temp employee evaluation
The labor market for hourly temp work has low unemployment of just 3%. Our client relies almost totally on a hiring agency. They give hourly employees less than a day to show what they are capable of. If they feel they can’t make the grade quickly, the new hire goes back to the agency. The temp workers are evaluated on production, accuracy, etc.
In opening a new facility, plan for turnover of new hires and an occasional new manager. There’s almost always turnover in new hires, maybe as much as 25%. The reasons? Most employees will not have DTC experience. The work pace may be faster than prior warehouses. Full case, retail store replenishment, pallet, etc. are totally different forms of fulfillment compared to small order pick, pack and shipping. All these factors add uncertainty to the DC ramp up and require planning.
Floor management, communication and coaching
When making the change to internal order fulfillment, we advised our client on several key things, which resulted in overcoming serious issues. First, managers are on the floor. They have a minimum of meetings and don’t sit separately in offices. This allows them to be nimble and catch and address issues early.
Secondly, they are communicating well with hourly employees. They are correcting start up problems, answering questions, catching errors, and communicating whether they will meet the daily goals, etc.
Thirdly, they coach employees either on the floor or after hours.
Every distribution center will have different challenges, systems start up and processes. Like our client, your management team will have to plan, execute well and overcome great obstacles. If your e-commerce company is planning a similar transition, we’d like to help make the process go more smoothly. You may tell us more about your project here.
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