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Logistics, the Backbone of eCommerce World

Logistics, the Backbone of eCommerce World

Phuc Le
May 5, 2023

First of all, what is logistics? According to Wikipedia, logistics is “the detailed organization and implementation of a complex operation”. In other words, it's the art and science of getting stuff from point A to point B in the most efficient and effective way possible. Sounds simple, right? Well, not quite. Logistics involves a lot of planning, coordination, communication, problem-solving, and creativity. It also requires a lot of resources, such as people, vehicles, equipment, warehouses, software, and money.

How it all began…

Logistics has been around for a long time. In fact, some historians trace its origins back to ancient times, when people had to transport goods and materials across long distances using animals, carts, ships, and roads. Some of the earliest examples of logistics include the construction of the pyramids in Egypt, the Silk Road trade route in Asia, and the Roman Empire's military campaigns. These civilizations understood the importance of logistics for their survival and prosperity.

However, logistics has evolved a lot over the centuries. Thanks to technological innovations and globalization, logistics has become more complex and dynamic than ever before. Nowadays, we live in a digital world where we can order almost anything online with just a few clicks or taps. We expect our products to be delivered fast, cheap, and safe to our doorstep or our nearest pickup point. We also want to track our orders in real time and have the option to return or exchange them if we are not satisfied.

This is where eCommerce comes in. eCommerce is the buying and selling of goods and services over the internet. It has revolutionized the way we shop and do business. eCommerce has also created new opportunities and challenges for logistics. On one hand, eCommerce has increased the demand for logistics services, as more and more customers shop online and expect fast and reliable delivery. On the other hand, eCommerce has also increased the competition and complexity for logistics providers, as they have to deal with more orders, more destinations, more regulations, more risks, and more customer expectations.

This is why logistics is so important for eCommerce. Logistics is not just a cost factor or a support function for eCommerce. It is a strategic advantage and a key differentiator for eCommerce businesses. Logistics can make or break an eCommerce business. A good logistics system can help an eCommerce business to increase its sales, customer satisfaction, loyalty, and retention. A bad logistics system can hurt an eCommerce business's reputation, profitability, and growth.

Logistics is important for eCommerce

Logistics exists in many forms and models!

There are many ways to classify logistics, but one of the most popular is based on the direction of the flow. According to this classification, there are three main forms of logistics: inbound, outbound, and reverse.

  • Inbound logistics refers to the activities involved in sourcing, receiving, and storing raw materials, components, or finished goods from suppliers or manufacturers. Inbound logistics is closely linked to procurement and inventory management. For example, Amazon’s “More on the way” message means any purchases of the out-of-stock item will be immediately shipped to the fulfillment center as soon as they arrive from the supplier.
  • Outbound logistics refers to the activities involved in picking, packing, shipping, and delivering products or services to customers or distributors. Outbound logistics is closely linked to order fulfillment and customer service. For example, Shipium is a software company that helps ecommerce businesses optimize their outbound logistics by providing real-time visibility, predictive analytics, and proactive communication.
  • Reverse logistics refers to the activities involved in collecting, processing, and disposing of returned, damaged, or unwanted products or materials from customers or distributors. Reverse logistics is closely linked to quality control and sustainability. For example, Patagonia is a clothing company that encourages its customers to return their worn-out products for recycling or repair through its Worn Wear program.

Three main forms & models of logistics

Now that we know the three main forms of logistics, let's take a look at logistics models from another perspective. For example, you must have heard about 1PL, 2PL, 3PL and so on, so what does it mean?

  • 1PL stands for first-party logistics, which means that a company handles its own transportation and warehousing of goods. In other words, they do everything themselves, from sourcing raw materials to delivering finished products to customers. Sounds simple, right? Well, not quite. As you can imagine, managing all aspects of logistics can be very costly and time-consuming for a company. That's why many businesses outsource some or all of their logistics functions to third-party providers. And that's where the other PLs come in.
  • 2PL stands for second-party logistics, which means that a company hires another company to provide transportation services. For example, a manufacturer might contract with a trucking company to move its goods from the factory to the distribution center. The trucking company is the 2PL provider in this case.
  • 3PL stands for third-party logistics, which means that a company hires another company to provide a range of logistics services, such as transportation, warehousing, inventory management, order fulfillment, and more. For example, an online retailer might contract with a 3PL provider to store its products in a warehouse, pack and ship orders to customers, and handle returns and exchanges. The 3PL provider is the one-stop shop for all the retailer's logistics needs.
  • 4PL stands for fourth-party logistics, which means that a company hires another company to manage and coordinate its entire supply chain. For example, a multinational corporation might contract with a 4PL provider to oversee its global network of suppliers, manufacturers, distributors, and retailers. The 4PL provider is the mastermind behind the scenes who optimizes the supply chain performance and efficiency.
  • 5PL stands for fifth-party logistics, which means that a company hires another company to provide advanced logistics solutions using technology and data. For example, an eCommerce platform might contract with a 5PL provider to leverage artificial intelligence and machine learning to analyze customer behavior, demand patterns, and market trends. The 5PL provider is the innovator who creates new value and opportunities for the eCommerce platform.

So there you have it: a brief introduction to the different types of logistics providers. Of course, there is much more to learn about each PL and how they operate in the digital world of eCommerce and supply chain. But hopefully this section has given you some basic knowledge and sparked your curiosity to explore more.

How can my eCommerce business improve its logistics?

Well, there is no one-size-fits-all solution for this question. Each eCommerce business has its own unique needs and goals when it comes to logistics. However, some general principles that can help an eCommerce business optimize its logistics system are:

  • Understand your customers' needs and expectations. Know who your customers are, where they are located, what they want to buy from you, how they want to receive their orders, how much they are willing to pay for shipping and handling fees, how often they shop online from you or your competitors.
  • Choose your logistics partners carefully. Find reliable and reputable logistics providers who can offer you the best quality service at the best price. Compare different options and negotiate contracts that suit your needs and budget. Establish clear communication channels and performance indicators with your logistics partners.
  • Invest in technology and innovation. Use software tools and platforms that can help you manage your inventory, orders, shipments, tracking information etc., automate your processes reduce errors improve efficiency save time money etc., integrate your systems with your logistics partners' systems etc., leverage data analytics artificial intelligence machine learning etc., enhance your visibility control optimization decision making etc., explore new technologies such as drones robots blockchain etc., that can improve your delivery speed accuracy security sustainability etc.
  • Optimize your supply chain network design. Design your supply chain network according to your product characteristics customer segments market conditions etc., balance your trade-offs between cost service quality risk etc., choose your distribution channels modes methods etc., locate your warehouses fulfillment centers distribution centers etc., strategically near your suppliers customers markets etc., optimize your inventory levels safety stocks reorder points etc., according to your demand patterns seasonality variability etc., implement lean agile resilient green etc., supply chain practices

Top 5 criterias for an effective logistics 

After optimizing your logistics, you would want to measure your result in a quantifiable manner, but based on what criterias can we determine a logistics is effective? There are multiple indicators that we can consider, depending on the context. However among them, these 5 are generally regarded as the most important criterias:

  • Cost: The cost of logistics includes all the expenses related to transportation, warehousing, inventory, packaging, labor, taxes, and fees. An effective logistics aims to minimize these costs while maintaining or improving the service level.
  • Speed: The speed of logistics refers to how fast the products or services can reach the customers or distributors from the point of origin. An effective logistics aims to reduce the lead time and increase the delivery reliability.
  • Quality: The quality of logistics refers to how well the products or services meet the expectations and requirements of the customers or distributors. An effective logistics aims to prevent or reduce errors, damages, losses, defects, and complaints.
  • Flexibility: The flexibility of logistics refers to how well the logistics system can adapt to changes in demand, supply, environment, or regulations. An effective logistics aims to increase the responsiveness and resilience of the logistics operations.
  • Visibility: The visibility of logistics refers to how much information is available and accessible about the status and location of the products or services throughout the logistics process. An effective logistics aims to improve the transparency and accuracy of the data and communication.

To measure and track these criteria, businesses can use various key performance indicators (KPIs) such as cost per unit shipped, order cycle time, fill rate, on-time delivery rate, return rate, inventory turnover ratio, etc.

Top 5 criterias for an effective logistics 

In conclusion…

Logistics plays a pivotal role in the success of any eCommerce business operating in the digital world. By prioritizing logistics, you can significantly enhance your customer service, optimize your costs, and expand your market presence. Neglecting the importance of logistics for your online store may have a detrimental effect on your business, and it could potentially make or break your success. Therefore, it is crucial to recognize the pivotal role that logistics plays in your eCommerce operations and to invest accordingly.

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