Outsourcing or Internal Order Fulfillment? Important Considerations

1. The shape of the grocery fulfillment market today

With nearly half of retailers reporting an increase in omnichannel demand, it’s clear, more efficient fulfillment should be at the top of the operational priority list. 

Also, it’s not just demand that has increased. According to Scandit & VDC Research, online basket sizes have swelled too, with around 44% of retailers reporting a 16-30% increase. 

These two insights alone show how important it is for retailers to invest in the right online fulfillment processes to stay ahead of the competition and build customer loyalty.

Against this backdrop, we were keen to find out how the structure of the fulfillment market is shaping up. 

When we spoke to grocery retailers across the US, this is how they described their current fulfillment process.

Either way, scaling up omnichannel capabilities has proven to be tricky for many retailers. Logistics and inventory visibility, managing staff requirements, and the limited availability of scanning devices are some of the top fulfillment challenges. 

2. Future trends impacting grocery fulfillment

“Offering a compelling omnichannel experience used to be the leading edge of retail. Now it’s a requirement for survival.”
McKinsey & Co

The upward trend of omnichannel demand will stay. It’s no longer a nice to have but an essential customer offering.

INCISIV research reports that 20% of all grocery orders will be through digital channels by 2025. But such expected growth comes at the cost of profitability, and grocers will need to focus on improving their digital execution.

Consumers do not distinguish between e-commerce and brick and mortar shopping. So, delivering a seamless end-to-end fulfillment experience will define those that survive and those that fail.

According to Forrester, in the short term, retailers will continue to fulfill orders in-house and will focus on upgrading their systems and technology to meet growing demand. However, long-term, the preferred setup is still unclear. 

Regardless of which trend dominates in the future, it’s clear that fulfillment technology investments made today need to meet increased demand in years to come.

3. The challenges of outsourcing or self-fulfillment

Retailers face a fulfillment conundrum. Do they fulfill orders themselves or outsource to a third-party? 

In the following two chapters, we explore the challenges associated with both strategies and the impact each has on labor, inventory visibility, and profitability. 

Outsourcing order fulfillment considerations 

Many assume the solution for bolstering fulfillment capacity is third-party outsourcing. 

66% of grocery retailers believe they can’t scale their online business without third-party fulfillment partners – seeing it as a growth opportunity. Source: INCISIV – Wynshop, Digital Grocery Study

And with 8.3% of all grocery sales expected to come from third-party providers, is it the nirvana for increasing fulfillment capacity?

If you delve deeper, you soon realize it comes at a cost. Here are some reasons third-party outsourcing could threaten a grocery retailer:

Risk of severed relationships 

Retailers spend years, even decades, building a relationship with their customers. Without day-to-day physical and digital interaction, retailers risk losing vital consumer connections and customer loyalty. 

Loss of data

Retailers lose access to insightful customer data without transacting with customers directly. They can no longer analyze shopping habits and preferences to give customers a truly personalized omnichannel experience.

Reduced margins and no control on pricing

Outsourcing to third-parties can increase operational expenditure and, therefore, profit margins. Also, by handing over fulfillment, retailers lose control of pricing strategies. 

Increased threat of competition 

Relinquishing control of in-store fulfillment to a third-party and enabling them to get closer to customers risks them becoming direct competitors. 

Internally resourced order fulfillment considerations

Since the pandemic, technologically savvy grocery retailers have stepped up their order picking and fulfillment capability, using their store associates. 

For others, scaling fulfillment has been trickier.

For internally resourced fulfillment to be genuinely effective, retailers need to address some fundamental issues:

Siloed channels

E-commerce and store operations are often unconnected, with separate supporting systems. Full integration is necessary to ensure store associates get the right information at the right time. 

But, making sure information flows accurately is an immense challenge.

Investment decisions

Improving the alignment between physical and online stores is often the focus. But only a third of highly agile retailers prioritize integration investments.

Legacy infrastructure

Phasing out legacy infrastructure and the increased cost of servicing customer orders is an enormous obstacle to introducing new digital capabilities. 

Existing infrastructure is often overlooked when exploring other options.

Higher costs, lower profits  

The average gross margin for a digital order was just 9% in 2020. This is due to the higher costs associated with e-commerce fulfillment compared with in-person shopping. Order picking efficiencies, better labor utilization and increased inventory visibility will drive out costs.

4. The impact of fulfillment strategies on labor, inventory visibility and profitability

Covid has provided a major boost to e-commerce. Customers who had barely ordered online shifted to online shopping overnight. As a result, retailers have had to respond quickly. 

Operations, HR and IT Managers continue to grapple with how to embed these changes longer-term. The real challenge is profitability and efficiency. 

Before 2020, it’s fair to say the digital operations of grocery retailers were  immature compared to other retail sectors. 

Introducing online fulfillment services

Facing the pandemic head-on, forced to meet a 5x increase in orders and introduce new services rapidly (Curbside Pick-up, for instance), left many stores exposed. 

Outsourcing order fulfillment to third-party companies has been a popular solution in the past few months. But this introduced new challenges like a reduced connection with customers. 

Retailers are looking into a different long-term solution – mainly internalizing these processes (or scaling up internal capacity). At the same time, internally-resourced fulfillment brings its own challenges. 

Here are a few: 

• The inefficiency of the order picking process and the cost of manual processes
• Knowing where products are through real-time inventory visibility
• The under-utilization of labor resources
• Spiraling labor costs associated with high churn rates (up to 50% sometimes), as well as finding, training, and keeping hold of staff 
• Using technology to onboard people faster and motivate them in their fulfillment role

5. Choosing technology that gives order fulfillment flexibility

A major advantage of building and scaling in-house capability is it preserves customer relationships and precious real-time data insight. 

In-house fulfillment also gives grocery retailers a tighter grip on the purse strings and pricing strategies. 

Labor can be utilized more effectively and enrich an employee’s job. For example, when given a flexible mobile scanning tool, store associates can switch effortlessly between tasks, like shelf management, order picking and Click & Collect, all in one shift.  

And by leveraging the ubiquity of the smartphone, retailers can equip every employee with a familiar and user-friendly scanning device. There’s no need to share devices. This is especially beneficial for scaling staff resources and onboarding staff during peak seasons. 

Scandit’s Smart Data Capture platform, for instance, gives every store associate a pocket assistant in the form of a smart device. It brings the flexibility to do an array of tasks with one tool. 

See how easily in-store picking is with Scandit’s SDK barcode scanner and MatrixScan AR on a smartphone app: 

In-house fulfillment using smartphone scanning also allows retailers to reduce costs and boost profit margins. 

Smartphones reduce the total cost of ownership by two-thirds compared with using dedicated devices. Time and money are saved on staff training and onboarding because the device is already familiar to them. 

If you like to discuss more about your fulfillment strategy and how high performance smartphone scanning can help, please get in touch.