This is the Coronavirus Case Studies series. Every post in this series will talk about how the coronavirus pandemic of 2020 will affect different businesses for years to come. We’re all still processing this massive, life-changing event. This week, we talk about how coronavirus will affect the order fulfillment industry.
What is the order fulfillment industry?
Unlike most of the articles we’ve done in this series so far, the order fulfillment industry serves a very specific and defined purpose. At its core, an order fulfillment company stores other companies products and ships them to their customers when orders come in. The idea could not be simpler, though the business itself is quite tricky to run.
You might also hear order fulfillment companies referred to as third-party logistics companies, or 3PLs. Services provided by 3PLs include:
- Storing inventory
- Receiving large shipments
- Retrieving items from storage
- Packing orders
- Shipping orders
- Handling returns
This may still sound a bit abstract, but consider the following: basically everything you order online is shipped to you by a 3PL. In fact, Fulfillment by Amazon is a 3PL service provided by Amazon itself. Between the growth of eCommerce in general and the amount of people stuck at home, it’s no wonder that the industry has grown massively.
Customers want their items faster than ever
With intense growth comes growing pains, though. Order fulfillment is growing in large part as a response to the rapid growth in eCommerce. Before the novel coronavirus was even discovered, eCommerce was projected to grow a whopping 19% in 2020.
As eCommerce rapidly grew, customers found themselves with more and more shopping options. When that happens, customers tend to become really picky. For example, in 2016, 63% of customers considered 3-4 day shipping “fast.” That dropped to 42% in 2017. There’s no reason to think that trend went away either.
Customers were being trained by giant companies like Amazon to expect packages to show up on their doorstep two days after ordering. Smaller organizations, therefore, knew that in order to keep up with demand, the would have to outsource fulfillment to third parties. That’s exactly what they did.
Even with the coronavirus causing massive shipping delays, customers still have extremely high expectations. Empirical data won’t be around for a while, but there has been a lot of negative press directed toward Amazon for slow shipping. This isn’t their fault, of course, and I’ll explain why in a moment.
Coronavirus badly disrupted the supply chain
In early April, on one of our client’s blogs, I wrote a post about how the coronavirus disrupted the supply chain. The impacts were profound and obvious five months ago. At the time I wrote that post, Italy had just shut down, as had New York State and California.
To say the coronavirus utterly pummeled our modern supply chain is to put it lightly. There were ten specific impacts that led to everything from toilet paper shortages to three-week waiting lists for Xboxes:
- Logistics companies involve a lot of people in close contact. Health and safety needs slowed down extremely time-sensitive processes.
- Country-wide lockdowns and travel restrictions made it really hard to ship items.
- Panic buying made it impossible for many industries to estimate demand.
- Supply chains had to be reconfigured to deliver medical supplies.
- Prices fluctuated unpredictably. At one point, oil had a negative cost.
- Communication slowed down.
- Just-in-time supply chains fell apart when the steady flow of materials stopped.
- Rigid supply chains snapped when they couldn’t implement a Plan B.
- Confusing supply chains became unmanageable in complexity.
- It became extremely obvious how dependent much of the western world was on China for certain items.
So, yeah, all that is why two-day shipping was unavailable on Amazon for a while. The order fulfillment industry, through no fault of their own, was pure chaos for a while.
Ecommerce is booming
For all the sprawling havoc wreaked by coronavirus on shipping companies, business is good. Phenomenal, in fact. That’s because the eCommerce industry, which the order fulfillment industry directly serves, is booming.
We used this same quote in the eCommerce post, but it bears repeating here.
Ecommerce sales are about 40% higher for the week of May 26-June 1, compared with its pre-pandemic benchmark week Feb. 24-March 1Shoppers buy more online compared with before the pandemic, Digital Commerce 360
There are very few industries in the world that have experienced a spike in demand that fast. Order fulfillment companies, quite simply, made this growth possible. Otherwise, you would still be waiting now for items you ordered in June.
It’s getting harder and more expensive to ship
There is one last element that’s dramatically affecting the order fulfillment industry, and it’s a doozy. Postage rates have been increasing faster than inflation for years on end. For example, the 2020 rate hike in USPS postage was about 4%. There was another behind-the-scenes hike that affected international shipping in July too.
Rate hikes like this are constantly in the background in the order fulfillment industry. Order fulfillment companies provide a modest buffer against these rate hikes. The reason is simple: they can negotiate better rates on behalf of their customers. That’s why some business weirdly wind up saving money by having someone else handle order fulfillment for them.
It’s really hard to do a good job right now, but competent order fulfillment is in extremely high demand
The order fulfillment industry is one characterized by delays, rising shipping costs, massive increases in demand, high uncertainty, and high expectations. Taken together, this is an absolutely brutal competitive landscape in which to carve out a niche. It is hard, hard, hard work.
And yet…if you have sufficient capital and expertise to run an order fulfillment company, it’s hard to imagine a business with more growth potential. Some experts say that the coronavirus accelerated eCommerce growth by as much as 4-6 years, and that’s a take that I agree with. That demand has to be met one way or another.
If you can pull it off, then, well, to the victor go the spoils!
What do you think the future holds for the shipping and fulfillment industry? Do you think this article is spot-on or off-base?
Let me know in the comments below. I’d love to hear what you have to say so we can process this together.