DC Velocity - February 2018

www.dcvelocity.com FEBRUARY 2018 DC VELOCITY 53 ing in small-footprint distribution centers in urban areas that offer same-day delivery for a limited assortment of stock-keeping units (SKUs). A third option mentioned by respondents is a “dark store”—a facility that’s set up like a retail store but is used for assembling e-commerce orders, which are then delivered to consumers or to pickup locations. In Gibson’s view, the benefit of the latter two options compared with in-store fulfillment is that it avoids disrupting store operations and offers quick access to backup inventory if a nearby store runs out.

The cost of meeting consumers’ expectations is forcing retailers to rethink how they deliver orders in cities. Some are testing the use of employees to drop off packages on their way home from work. Others are setting up their own private fleets of local-delivery vehicles. But they’re most likely to use for-hire services, such as Uber, Lyft, Shipt, and Instacart, because of their flexible capacity and variable cost structure, according to Gibson.

; Working with logistics service providers. As retailers con-
tend with changing business models, their relationships
with 3PLs are also changing. Their strategies appear to
follow two different paths. Several executives said they are
seeking fewer, more strategic partnerships with 3PLs in
order to reduce complexity. This trend is leading service
providers to expand their portfolios in hopes of becoming
a “one-stop shop” for big retail accounts, Ishfaq says. Of
course, when 3PLs expand their reach and their service
portfolios, their costs go up—and so do the prices they
charge their customers. That, he says, could undermine
one of their core value propositions: that they can handle
logistics activities more cost-effectively than their clients
could on their own.

That’s one reason why other executives are considering a different approach: taking some warehousing and distribution activities back from 3PLs. “If a market was mature and the service demand was stable and predictable, then some would talk about doing it in-house,” Ishfaq says, adding that these were all “really big players with thousands of stores who see the scale in a particular brand or product category.” In addition, concerns about transportation capacity are prompting some to consider private delivery fleets or dedicated contract carriage. Still, interviewees said they would continue working with 3PLs when expansion to a new market/location or the rollout of new services was involved.

As customers put pressure on retailers to improve their service, the retailers, in turn, expect 3PLs to “up their game,” Ishfaq says. But those expectations seem to be changing faster than the 3PLs can keep up with. “That has put pressure on them from both a cost and a perfor-