Online shopping has seen consistent growth over the last few decades, and the effects of the COVID-19 pandemic have amplified this trend, with consumers around the world taking more and more of their shopping online.1 Increased online shopping is likely to remain a feature of consumer behavior even after the restrictions put in place due to the pandemic ease.2 Even as brick-and-mortar sales are recovering, e-commerce is here to stay. However, the rapid growth in e-commerce is beginning to put strain on third-party logistics (3PL) companies as they grapple with complex customer demands, rising costs, and increased competition.
Adopting a multi-client fulfillment model could help 3PLs address these pressures and allow them to stay competitive in an increasingly challenging environment. Analysis suggests that multi-client fulfillment has the potential to achieve cost savings when compared to dedicated fulfillment models.3 However, successfully implementing and unlocking the benefits of this model requires changes to service offerings, commercial structure, warehouse operations, and technology.
This article examines the fast-changing e-commerce landscape and the challenges that 3PLs face in this environment. It details the benefits of multi-client fulfillment by drawing on examples of how best-in-class e-tailers have organized their multi-client warehouses to meet customer demands, reduce costs, and generate value across their businesses. It concludes by offering approaches that 3PLs may consider when looking to implement a multi-client fulfillment model.
The changing e-commerce landscape is putting pressure on the traditional 3PL business model
The explosive growth in e-commerce—by 25 percent in 2020—led to increased demand for 3PL services, but at the same time the costs to deliver these services have risen, and the e-commerce environment has become far more competitive.
Customers are shopping online more, and for a greater number of categories than ever before, putting pressure on 3PLs to meet customer demand across product categories and requiring greater flexibility in warehouse inventory management, picking and packing. At the same time, customers are expecting ever faster delivery times and delivery speed is a key differentiator. In fact, 25 percent of customers are willing to pay a premium for same-day delivery.4
Logistics costs have risen by around 5 percentage points since 2010, primarily driven by the increasing complexity of e-commerce logistics, such as returns, the demand for faster fulfillment, and the need to increase capacity to meet rising demand.5 According to McKinsey analysis, logistics costs currently represent 12 to 20 percent of e-commerce revenues, and this figure is likely to continue to grow. With the current pressure on wages and increased final-mile costs, logistics costs may increase to 15 to 25 percent of e-commerce revenues in the near future.
The increasing scarcity of warehouse space is also contributing to costs. Forecasts suggest that there will be a shortage of around 190 million square feet of warehouse space within the next five years, which could lead to an increase in rental prices and put further pressure on 3PLs.6 Labor, too, is in short supply, as demand for labor has increased by 12 percent a year since 2015. The labor shortage was exacerbated by the COVID-19 pandemic, with the result that post-COVID-19 wages in transport and logistics are four times higher than before the pandemic, compared to two to three times for the private sector as a whole.7
Furthermore, e-commerce is becoming an increasingly competitive area, with several new players emerging, particularly marketplace providers that offer fulfillment, and new technology-led entrants. Consequently, 3PLs must now compete with end-to-end solutions offering “click-to-door” services. As customers’ delivery experience is a key success factor, 3PLs are under pressure to match the offerings of these new competitors.
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How can 3PLs remain competitive in this increasingly challenging environment?
Fulfillment models vary in value proposition
Fulfillment operations range from a single-client model, a partially integrated multi-client model, to a fully integrated multi-client operation (exhibit). Dedicated single-client operations rely on long-term contracts and are customized to meet one particular client’s needs. These generally require significant resources and there is little room for flexibility in staffing models.
A partially-integrated multi-client model combines integrated and customer-dedicated functions, and can share labor across functions. This model requires technology solutions that can integrate with systems and coordinate operations and decision making across multiple clients.
Large e-tailers typically use a fully integrated multi-client model that realizes cost savings from highly efficient space utilization and shared resources across all areas of the business. It also allows for very fast delivery times. This generally requires more sophisticated technology solutions, and greater use of automation, than the single-client or partially integrated model.
Success factors for the fully integrated approach include using technology-driven solutions for decision making and planning, such as artificial intelligence or machine learning that can be applied to demand management and labor management. Frontline operations are technology assisted, for example through the use of automated picking. Large e-tailers also make use of integrated systems, such as warehouse execution systems, to allow for orchestration across multiple automation systems.
Additionally, activities and resources are shared across clients wherever possible, creating greater flexibility across processes. For instance, receiving docks process inventory across clients, thereby using available labor more efficiently. And employees pick items across orders and client inventory, and use the same pack stations and packaging across clients, to maximize efficiency.
Fulfillment operations range from a dedicated single-client model, where operations are customized to client requirements, to the fully integrated multiclient model favored by large e-tailers (see sidebar, “Fulfillment models vary in value proposition”). A partially integrated multi-client fulfillment model may provide ways for 3PLs to remain competitive in the e-commerce space.
Lessons can be drawn from the way major e-retailers organize their multi-client warehouses, which may be applicable to the partially integrated multi-client model. In particular, technology and automation are deployed wherever possible, and activities and resources are shared across clients—leading to significant cost savings. Although smaller companies may lack the scale to adopt this approach, a partially integrated multi-client model could still result in significant cost reductions (Exhibit 1).
Multi-client fulfillment operations can create value for e-tailers in several ways and as such provide a major growth opportunity for the 3PLs that service them. These operations generally have a broader footprint, which allows e-tailers to be closer to the customer—reducing lead times and allowing them to compete with two-day and same-day delivery offered by market leaders. They can lower e-tailers’ costs as overheads such as labor, automation, and real estate can be shared with other e-tailers. And they can provide greater flexibility than dedicated single-client operations, as they avoid long-term commitments to 3PLs. Savings are achieved through economies of scale, essentially allowing e-tailers to reach more customers, faster, without increasing their square footage (Exhibit 2).
And the model can lead to cost savings for 3PLs too. Multi-client fulfillment can lead to cost savings of between 7 and 9 percent, compared to dedicated fulfillment. Such savings could be achieved through several drivers, including demand smoothing, site scaling, automation, and final-mile savings (Exhibit 3). Around 90 percent of logistics experts believe that e-fulfillment currently leads to profits of around 5 to 10 percent.8 Adding the savings that could be achieved through multi-client fulfillment could ultimately increase e-commerce profitability by two to three times.
However, 3PLs looking to adopt a multi-client model should be aware that successfully implementing one requires a shift in mindset and concrete changes to their business model. For instance, the commercial structure would need to accommodate upfront costs, including real estate and automation, which are typically paid by dedicated clients. And making the leap from one to multiple clients may require new offerings and pricing strategies, as well as revamped operations and process. But there are measures that 3PLs can take to overcome these challenges.
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How can a multi-client model be successfully implemented?
Successfully implementing a multi-client approach may require changes to a 3PL’s real estate, service offering, commercial structure, operations—and would likely require new technology to support front and back-end operations.
3PLs may need to consider the following four factors when it comes to real estate. First, there is a choice to be made on whether it would be more suitable to convert an existing facility from single to multi-tenant operations, or to find a new facility to do so. Second, 3PLs could proactively acquire real estate that would be attractive to multiple clients with different needs—for example, one client could be looking to outsource all of their distribution, and one client may want to add a node to an existing network. Third, new land / space should be suitable for e-commerce, given that e-commerce facilities typically require more employees in the space than traditional distribution centers, and require additional employee facilities such as break rooms or parking. Finally, 3PLs would need to decide whether to own and develop the facility themselves or partner with a developer who would set up the facility and lease it to them. This decision would be based on the 3PLs capital structure and expertise in executing such a project.
In terms of service offerings, 3PLs may need to develop a portfolio of standard services that customers can mix and match to create a solution that best meets their requirements—while also maintaining profitable operations for 3PLs. To do so they could create a dedicated and agile e-commerce service function that stays abreast of market changes and responds to clients’ needs. This dedicated business unit could sit at the intersection of client focus, business strategy, and operations.
The switch from a single-client to a multi-client model may bring commercial challenges. For instance, the fulfillment center may not reach capacity right away as clients are onboarded over time. And operations will only reach an optimal cost structure after economies of scale are reached. Start-up costs and fixed costs will likely only be recovered once operations have scaled, which could impact pricing. To bridge this gap, 3PLs could develop ancillary revenue streams such as transport management, value-add services, or data monetization to boost revenue during ramp up.
3PLs would need to adjust warehousing and operations to make the most of efficient use of available resources such as space and labor. They may need dedicated inventory-management teams and new tools to handle the added complexity of co-mingled goods. They may also look to adopt flexible and modular automation solutions that can scale with volume, and handle varied inventory across multiple clients (Exhibit 4).
Finally, these changes will likely require new technology to support the business and its revamped processes and operations. Such technology could provide end-to-end visibility and be integrated across all areas of the business (Exhibit 5).
3PLs looking to implement multi-client operations may wish to consider the following four actions:
- Develop proactive service offerings. 3PLs could consider creating an e-commerce service function at the intersection of client, business, and operations strategy that would develop a portfolio of standard services that customers can mix and match.
- Transform the commercial structure. This includes redesigning the go-to-market model and adjusting the pricing structure to align with a new operating model and customer base.
- Redesign warehouse operations for flexibility across clients. In the new model, a warehouse could include complementary client verticals and services, enhanced inventory-management capabilities, dynamic allocation of resources between clients, a network of last-mile carriers, and scalable and modular automation solutions.
- Implement a flexible technology system to create end-to-end connectivity. 3PLs could create a tech stack that is able to integrate with customers at all points and assist with each step of the fulfillment process (from inventory management to returns) as well as labor planning.
Multi-client fulfillment presents opportunities for 3PLs to continue to take advantage of the current boom in online shopping while meeting the challenges of increasing costs, complex customer demand, and rising competition. The model provides ways to serve more clients—and to help these clients reach more end consumers—faster and in ways that make the most efficient use of resources, thereby lowering costs and boosting productivity.
