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Expert Column Fulfillment Services, New Distribution Trends in the Age of e-Commerce

Registration dateSEP 14, 2021

Guarantees Customer Fulfillment in the e-Commerce Era - Samsung SDS Cello Square Digital Fulfillment Service Guarantees Customer Fulfillment in the e-Commerce Era - Samsung SDS Cello Square Digital Fulfillment Service
Fulfillment Services: New Distribution Trends in the Age of e-Commerce Until the 1700’s, British colonies in America concentrated along the continent’s coasts before the British Empire began to venture further inland. The transition was largely driven by the important role played by warehouses. American merchants just had to prepare the goods desired by European merchants and store them in warehouses near the port, ready to be transported to European merchant ships as soon as they arrive. This process greatly reduced the length and cost of shipping and transportation. This led to higher demands for products from American colonies in England and Europe, which allowed colony residents go deeper inland to produce products.
In the 21st century, the world is witnessing a similar innovation named ‘fulfillment services’, similar to an innovation during the 18th century eastern United States where logistics costs and transportation time was saved by advancing products that consumers want closer to their location. The growth of e-commerce completely changed the purchasing patterns of consumers.

In the past, when consumers had to visit retailers to buy products, retailers were endpoints of logistics networks. However, in the age of e-commerce, the endpoints have been moved to consumers’ doorsteps. Since e-commerce began in earnest in the 2000’s, the industry has recorded stellar growth rates. e-Commerce sales take up more than 20% and 10% of all retailer sales in Korea and the United States, respectively, resulting in news headlines as ‘the end of offline distribution’ and the ‘Amazon Shock’ in the latter country. Thus, e-Commerce has penetrated consumers’ lives deeper than we thought. In addition, many of today’s consumers order diverse products in small quantities. Traditional logistics methods cannot keep up with these changes in purchasing patterns. Fulfillment services emerged in these contexts.

With the rise of FedEx founder Frederick Smith, the hub and spoke model replaced the point-to-point model as the golden standard of the logistics industry. The latter approach directly connects the starting point with the end point, whereas the former model gathers all goods at a hub before sending them away to their respective destinations. Hub and spoke replaced point to point because the former model’s centralized network structure offered high efficiency in product shipping. At the time, when the role of the logistics sector was limited to supporting the manufacturing sector, the hub and spoke model was the most efficient and cost-effective way to distribute manufacturers’ products along retail channels across the country. However, the birth of e-commerce changed everything.
Hub and spoke offered great efficiency in the ‘first mile’ between production sites and warehouses or distribution network, where goods are transported in masses in accordance with predetermined plans. However, the birth of e-commerce and the extension of logistic endpoints to consumers’ doorsteps greatly enhanced the importance of the last mile, that is, the last leg of the products’ journey to consumers’ homes.. The purchase of diverse products in small quantities, and the widespread and low-density distribution of consumers in the e-commerce age lowered the efficiency of cargo transportation through hubs. The existence of a hub increases the traveling distance of products in the last mile, and the need for collecting and distributing products lead to shipping delays.
The emergence of fulfillment services may be a natural development under the circumstances. Whereas manufacturers can differentiate themselves with their products, distribution businesses only have two options in their competitiveness arsenal: price and shipping services. As for shipping, the ability to deliver products faster to consumers is a great boon for consumers in the age of e-commerce. As such, fulfillment services emerged as a way to deliver products faster and increase purchases.
Then, what are fulfillment services exactly? To answer this question, we need to get back to the warehouses in the East Coast of the 18th century United States. The warehouses built along the region’s coastlines were used to store products from inland farms and load them onto merchant ships after they enter the ports. Fulfillment services share similar base concepts. The term refers to a series of services of storing sellers’ products and, when a customer places an order, releasing, packing, and delivering the ordered products.
One of the greatest benefits of fulfillment services is the reduced number of shipping stages required. In conventional parcel delivery services, when a customer places an order, the B2C business requests a delivery company to deliver the products, and the company collects the products and delivers them to the consumer through its main terminal and hub terminal. In fulfillment services, once a consumer places an order, the ordered products are shipped from the nearest warehouse from the consumer, which means drastically shorter shipping distance and time.

Concept and Benefits of Fulfillment Services: a Case Study Fulfillment services also greatly benefit business-to-consumer (B2C) businesses as well. With fulfillment services, they can enjoy the benefits of warehouses without actually owning one. Furthermore, they can focus on marketing and sales efforts while the fulfillment service provider takes care of product release and shipping. Another important benefit is that fulfillment services offer the value of fast shipping and customer satisfaction, which may lead to even more sales.
At this point, fulfillment may sound much like third party logistics (3PL). However, fulfillment is vastly different from 3PL in terms of customer contact point. While both types of services represent the outsourcing of logistics tasks, 3PL focuses more on the efficiency of traditional logistics, making it more suitable for business-to-business (B2B) transactions, whereas fulfillment is more suitable for B2C businesses on account of the values that it offers for customers.
Let us examine the case of Amazon, which adopted the fulfillment concept for the first time. When Amazon launched the paid membership service Amazon Prime, it offered two-day shipping to subscribers. In a country as vast as the United States, two-day shipping is simply unattainable for open-market services in which sellers take care of inventory management and shipping. As such, Amazon launched Fulfillment by Amazon (FBA) in 2006. This system involves storing Amazon sellers’ products at Amazon’s warehouses before shipping them out to customers. FBA allowed the company to greatly reduce the travel distance of products, as consumers received products released from their nearest Amazon warehouses.
Coupang’s Rocket Delivery is another service utilizing the fulfillment concept. Coupang was able to ‘rocket-deliver’ products to customers by shipping the products ordered by consumers from more than twenty Coupang Logistics Centers across Korea.

Fulfillment centers take the center stage of fulfillment services. Warehouses came to be called logistics centers with the widespread recognition of the value of logistics. After the emergence of fulfillment services, the same facilities are gradually called ‘fulfillment centers.’ The change of names reflects changes in the fundamental functions that they provide.
Traditionally, warehouses were used only for storing products. They were built on cheaper lands, as storage itself does not generate any profit or added values. As such, conventional warehouse businesses were closer to property lease businesses than logistics businesses. The most important factor is the method of loading products into the warehouses efficiently.
However, with the growth of logistics networks based on the hub and spoke model, warehouses became hubs that go beyond mere storages. That is why logistics companies began to build ‘logistics centers’ at locations selected based on access to transport networks along with land prices.

Significance and Importance of Fulfillment Centers Unlike ‘logistics centers,’ fulfillment centers need to be placed near end consumers because they are the starting points of the ‘last mile’ delivery. As such, consumer values became one of the key considerations for these centers, along with accessibility. This change reflects the transition to consumer-centered on-demand markets, where customer satisfaction and retention means delivering what consumers want when and where they want. This explains the seemingly questionable decisions of companies such as Amazon and Boxed to build their fulfillment centers in New York, a region infamous for its high land prices. Another result of the increased significance of fulfillment centers is the birth of micro fulfillment centers (MFCs).
A fulfillment service provider needs to rapidly collect sellers’ products, manage their inventory in real-time, and deliver them through the optimal routes to minimize shipping time and costs, all the while identifying possible issues in each phase of the shipping, offering solutions, and minimizing claims from consumers. That is why, unlike conventional logistics centers, fulfillment centers extensively use information technologies
Human capabilities are not sufficient to maximize efficiency along the course of reception-loading-picking-packing-release-shipping. A close combination of artificial intelligence (AI), big data, and Internet of Things (IoT) is required to operate fulfillment centers.

IT-Intensive Fulfillment Centers of Global Leaders For example, Amazon fulfillment centers make active use of robots to pick products ordered by customers. These shelf transportation robots, called “Drive Units” identify and deliver shelves storing the required products. RoboStows, which are robot arms for cargo transportation, move and load products. Amazon uses these robots to optimize product stacking, pick products in the order of arrival, minimize travel distance, and improve overall efficiency. In addition, 6 River Systems’ fulfillment solutions “Mobile Sort” and “Packout” are used to manage sorting and packing processes, display instructions to employees, and test results to prevent issues and improve productivity.

IT Capabilities and Fulfillment Services of Samsung SDS Samsung SDS’s fulfillment service, “Cello Square” is also the culmination of the company’s logistics and IT capabilities. The company utilizes various technologies at each stage ranging from ordering to shipping for optimized fulfillment service process.
In B2C businesses, online orders are characterized by high variations and unpredictability. To address this challenge, Samsung SDS uses big data to predict daily demands and manage the accuracy of its demand predictions. Then, based on the predictions, the company assigns inventories to fulfillment centers. Then, taking account of product releases, the company uses AI to assign inventories starting with the nearest locations to the releasing docks, taking account of picking routes and efficiency. The daily demand predictions and AI-based reception/release planning allow the fulfillment centers to meet highly volatile online orders and improve their efficiency.

[Samsung SDS Fulfillment Services] (Source: Samsung SDS) (Source: Samsung SDS)

In addition, by optimizing the picking process, the company can lower transportation and operation costs. Real-time image analysis prevents product loss and changes in the percentages of different box types, thereby, allowing the company to identify different issues and situations and improve productivity and efficiency. By optimizing AI control and integrating monitoring activities like the above, Samsung SDS supports optimization of its fulfillment services along every step of the way, as well as fast decision making and offers total solutions that improves operational efficiency and stability.
On top of providing fulfillment solutions, Samsung SDS also operates fulfillment centers at key locations of e-commerce consumption in Korea and Overseas. These centers utilize the company’s operational knowhow and high-tech capabilities. With these centers, the company can link up order information from various channels with global transportation services in real-time. Cello Square’s digital fulfillment service portal allows users to monitor global logistics status in real-time and respond to global issues via Samsung SDS’ Overseas locations.
Fulfillment services are currently evolving into cross-border e-commerce (CBEC), and the value of CBEC is increasing in the e-commerce market. Samsung SDS’ fulfillment services are CBEC-compatible, and the company continues to expand their scope.

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Kim Young-Jun, Reporter Kim wrote A War of Alleyways and Multifactors. Kim's columns on economic and business issues are widely read and trusted by economic experts.Kim Young-Jun, Reporter Kim wrote A War of Alleyways and Multifactors. Kim's columns on economic and business issues are widely read and trusted by economic experts.