Blog postsOctober 28, 2016
Bed-in-a-box eRetailers Make Fulfillment Sexy
» In this article
- Build a distribution network without long-term commitments and high capital costs
- Launch a distribution network in 2-3 weeks vs. 3-4 months
- See how one bed-in-a-box firm cut transportation costs and began 1-2 day delivery immediately
Mattresses are coming late to the e-commerce boom. No one really paid attention to mattress fulfillment in the past because no one was selling mattresses online. The U.S. market share for e-commerce mattress brands was 1.8% last year, according to KeyBanc Capital Markets analyst Brad Thomas.
In just one year, the market share for online mattress sales has jumped 255%, from 1.8% in 2015 to 4.6% today. This group of startups has busted into the $14 billion mattress industry by making mattress shopping convenient, fast and online.
The key to keeping happy customers for these companies is delivering on promises like free shipping, 100-day guarantees and free returns.
Identifying the right fulfillment strategy is a big part of staying competitive in this market. Any advantage with faster, lower cost shipping can be a game changer when convenience and speed are driving sales.
This article explores the potential of pop-up fulfillment as a competitive advantage in the bed-in-a-box industry. It illustrates the obstacles facing mattress fulfillment and the opportunities with a variable cost supply chain. It also details how one of the leading bed-in-a-box firms has leveraged pop-up fulfillment into a winning strategy.
Obstacles to Mattress Fulfillment
The bed-in-a-box industry faces a handful of supply chain obstacles that are unique to its industry:
- Mattresses are big, bulky and expensive to ship long distances
- The market is new, which means it’s nearly impossible to predict seasonality
- Most companies are startups, so there isn’t a ton of cash to invest in fixed cost fulfillment solutions
- Many companies choose to drop-ship directly from the manufacturer, which dramatically lowers the percent of on-time, correct orders—a key driver in customer satisfaction and repeat orders
Pop-up fulfillment helps address many of these obstacles because it offers a truly flexible approach to building a distribution network.
Startups that don’t have the capital to insource new distribution centers use pop-up fulfillment as a way to augment their supply chain and scale without costly acquisitions.
Retailers can now pop-up distribution centers when, where and for however long they need them. It takes half the time to set-up (three weeks vs. three months) and costs a fraction of the traditional solutions because there are no long-term commitments or service fees.
Fixed vs. Variable Supply Chain Costs
Pop-up fulfillment is an old idea with a new twist. Retailers have been popping-up distribution space to add capacity for years, but it has been a clunky and expensive process.
Adding extra capacity to supplement a short, three-month peak, usually meant committing to a full year lease and sometimes a service contract costing upwards of $250K. Today, technology exists that makes this process on-demand.
Essentially, retailers are trading fixed costs—like service contracts and long-term sub-leases—for variable costs—such as temporary fulfillment centers with no long-term commitments or service fees.
The variable cost model makes good sense for emerging e-commerce industries, like bed-in-a-box, because it allows companies to make immediate changes to their distribution networks without incurring any capital losses.
When there is zero risk, it is easier to pick a spot and begin building your distribution center model. For example, if the manufacturing strategy changes or customer demand patterns shift, companies can make real-time adjustments to their distribution network by popping-up and popping-down capacity as they need it.
The Name of the Game is “Get Closer to your Customers”
75% of shoppers say whether the store will pay for delivery “greatly impacts” their decision to buy a product online, according to a survey by consulting group AlixPartners. And, a national survey on consumer expectations from Dropoff states 60% of consumers say slow delivery will stop them from purchasing.
Consumers’ median expectation for retail delivery is now two days, but 40% say they would like it to be same day.
It’s no surprise a new study by McKinsey & Company predicts the market for same-day and instant delivery will grow by 40 percent year-on-year until 2025.
The rapidly growing market for fast, free delivery is putting strain on distribution channels across the U.S. And, it’s making fast, responsive supply chains a must-have to stay competitive.
By using pop-up fulfillment to introduce speed and responsiveness into the supply chain, bed-in-a-box firms can offer one- and two-day shipping right out of the gate. From the first day the firm makes a sale, they can be meeting customer expectations for fast, low-cost delivery.
By locating pop-up fulfillment centers closer to customers, eRetailers can:
- Run market promotions for same- and next-day shipping
- Cut transportation costs by positioning inventory close to customers, retailers and wholesale partners
- Solve reverse logistics challenges by putting return centers close to high density areas
- Pop-up retail store fronts, like the Warby Parker model, to give customers a way to see and test products
Pop-up Fulfillment Improves Delivery Time and Cuts Transportation Costs for a Leading Bed-in-a-box Firm
When one of the leading bed-in-a-box firms decided to switch from a pure drop-ship model to a distribution model, it chose pop-up fulfillment as it’s solution.
The company had outgrown a pure drop ship from the manufacturer model and was looking to begin shipping via a distribution model and start carrying inventory. The company’s high growth rate made picking a starting point and making commitments toward a distribution network difficult and risky. In addition, the large, heavy nature of the product and the customer promise of 1-2 day delivery was predicted to bring significant outbound transportation costs.
Pop-up fulfillment was able to introduce speed and responsiveness into its supply chain without the risk of long-term commitments and high service fees. The variable cost model was exactly what they needed to stay resilient and be able to pivot if customer demand patterns changed or their manufacturing strategy shifted.
The bed-in-a-box firm ran a network analysis to find out it’s optimal fulfillment center strategy and it was able to have the distribution network up and running in three weeks. Traditional solutions would have taken three-to-four months.
The pop-up centers’ technology platform gave the firm full, real-time visibility into operations (outbound, inventory, order status) and was fully integrated and functioning within the three weeks it took to launch.
The optimized distribution network immediately started saving the firm money on transportation costs by cutting travel distances and the company was able to start delivering on its 1-2 day delivery promise immediately.
Moving from a manufacturer drop-ship model to an optimized distribution network also raised its on-time orders and accuracy rates from around 60% to 99%.
The company is now positioned to handle seasonal inventory spikes and overflow problems without missing a beat. The strategy allows them to pop-up and pop-down capacity whenever and wherever they need it without delays and high capital costs.
Deciding on the Right Fulfillment Strategy
Bed-in-a-box firms rely on customer promises like free shipping, 100-day guarantees and free returns to win customers. Deciding on the right fulfillment strategy is closely tied to these customer promises.
There are multiple ways to answer the question, “where should I put my distribution centers and how many should I have?” The best way to figure it out is through a quick network analysis. This is the same approach the firm above took to figure out the best strategy for cutting transportation costs and positioning itself to handle inventory fluctuations.
The key variables that influence each companies’ fulfillment strategy are:
- Customer promises
- Manufacturing locations
- How much the firm wants its shipping costs to be
- How much inventory the firm wants to carry
The analysis is run through a network modeling tool that runs all the variables through its system and calculates the true optimal solution. This includes how many distribution centers a firm should have and where they should be located.
Bed-in-a-box firms who are considering building a distribution network can use the network analysis to quickly see what makes the smartest and most cost-effective sense. If you think this strategy might work for your company, please sign up for a free network analysis. It’s an easy process that can save significant money and time in the long-run by mapping out optimal solutions.