Question

Why do Internet retailers sometimes prefer to set up their own warehouses and distribution channel even though the initial motivation was to lower their fixed costs by avoiding brick and mortar stores?

A. To reduce their breakeven point.

B. To lower delivery costs.

C. To offer discounted merchandise

D. To increase customer satisfaction and increase repeat buying frequency

Answer 1

Answer : D. To increase customer satisfaction and increase repeat buying frequency

Explanation for the answer :

Lets understand with the help of explanation and example below why own warehouses are required by internet retailers :

When Amazon.com first introduced its “Fulfillment by Amazon” (FBA) program in 2006, it was impossible to know whether the online retailer fully recognized the growth prospects of the market it was walking into. Ironically, Amazon’s owner, Jeff Bezos, has joked about the difficulties of packing and shipping orders from his home-office during Amazon’s early years. In the mid- to late 90s, in-house fulfillment represented a massive challenge for his small team of employees.

But what a difference 20 years can make. Fast-forward to today, and it’s Amazon’s same-day and next-day delivery capabilities that are setting the standard for all other businesses that sell products online. With over 84 percent of Amazon’s top-selling merchants choosing to leverage the FBA service, competitors like Shopify, eBay, Walmart, and even shipping providers like UPS and FedEx are under pressure to upgrade their own distribution networks to keep pace. However, as new providers enter the e-commerce fulfillment landscape and look to duplicate what Amazon has established, many of the solutions have focused specifically on small businesses. Why is this?

Although industries still dominated by older generations (i.e., baby boomers) aren’t as impacted by heightened preferences for shipping speeds, the expectations of younger generations are more demanding. In fact, a 2019 UPS study found that 82 percent of 17-24 year-olds were open to paying extra for accelerated delivery options.

The ability to cost effectively ship orders in one day to two days requires access to a nationwide distribution network that few small businesses can establish or maintain themselves. Today, the costs of purchasing their own warehouses or leveraging a traditional “3pl” are too exorbitant for most SMBs. Instead, many small businesses must continue to rely on just a few in-house staff to pack and ship orders directly out of a single office or storage facility.

For SMBs operating in this fashion, it often takes five-plus days for orders to arrive to customers, especially those that are located far away. And as their customer bases grow, SMBs are caught between lacking the resources and bandwidth to fulfill orders internally, but also lacking access to scalable and affordable solutions within the market that can accommodate them. However, this is the challenge that Amazon, eBay, Shopify, and a host of other new fulfillment providers are now looking to solve.

Although most businesses are familiar with Amazon and its FBA fulfillment service, there are a host of other providers introducing similar solutions. In June 2019, Shopify announced the development of an in-house fulfillment network available for merchants (mainly SMBs) that use its e-commerce platform. Shortly thereafter, eBay announced the formation of its own fulfillment network to address the same need. These announcements come at the same time that shipping providers like UPS are introducing “on-demand” SMB-focused fulfillment networks that provide streamlined warehousing and fulfillment solutions. And just very recently, Walmart introduced plans to create its own “Fulfilled by Walmart” offering to directly compete with Amazon’s service.

Essentially, all of these fulfillment providers are looking to create nationwide distribution networks (consisting of anywhere from 10-1,000-plus warehouses) that guarantee one-day to two-day shipping speeds, while allowing merchants to access portions of this warehouse space to store inventory as close as possible to their end customers. They then manage all pick, pack and shipping services on the merchant's behalf.

In practice, SMBs save time and money by not having to purchase their own warehouses or manage the fulfillment process internally, and the provider makes money because it can collectively service hundreds, if not thousands, of smaller merchants through a single network.

Therefore, if you’re a small business that sells online and needs access to a more advanced distribution network beyond what in-house operations can provide, what options are available to you?

• E-Commerce Marketplace/Platform Fulfillment: E-commerce facilitators like Amazon, Shopify, eBay, and Walmart allow businesses to store the inventory they sell online at distribution centers owned by the e-commerce provider, which then manage all fulfillment workflows on the merchant's behalf. These offerings tend to operate exclusively for inventory sold on each provider’s respective online marketplace.
• On-Demand Warehousing: On-demand solutions provide a network of warehouses across the country that SMBs can use to store inventory closer to customers. The on-demand provider manages all storage, pick, pack and delivery services for SMBs, and guarantees shipping within one day to two days for its customers. These offerings are site agnostic, meaning merchants can use the provider to store and fulfill orders occurring across any marketplace or platform.
• Drop Shipping: Drop shipping is a fulfillment method where a merchant never keeps any of its inventory in stock itself. Instead, when a customer purchases a product, the merchant buys the product from a third-party supplier, which then ships it directly to the end customer. Today, drop-shippers can be deployed directly through Shopify’s application network or via a range of other channels. Offerings exist that are tied to both individual marketplaces as well as ones that are site agnostic.