In an e-commerce environment, warehouses are taking up more and more slow-moving items as part of their general sales strategy to raise revenues. For some retailers, it’s the main source of their revenues and profits. Amazon was one of the first companies that saw the potential of keeping slow moving items in stock. This phenomenon is called the long tail. Chris Anderson’s best-selling book, ‘The Long Tail’, made the business success clear.
The 3 long tail forces
The long tail effect is strengthened by 3 forces:
- Everyone can produce: Think about the possibility of 3D printing your own accessories or writing your own book. What you made, can be easily shared and sold online. This means more products are entering the market, but in lower quantities.
2. Democratizing distribution: Thanks to websites such as YouTube, Facebook, Alibaba and Amazon marketplace, you can target the whole world instead of just your friends, family and neighbours. The internet is giving full, worldwide exposure to products that could be sold to a potential market of 7 billion people.
Zalando, the biggest online fashion store in Europe, is opening their online platform to others so they can target a bigger audience. Zalando Fulfillment Solutions is taking care of all the back office e-fulfilment operations. Their warehouse assortment increased from 50.000 SKU’s to 250.000 SKU’s. For sure, the amount of slow moving items increased more than the fast moving assortment.
3. Matching supply & demand: Which tool do you use to find that specific book of ‘Japanese Gardening and Growing Bonsai’ or get that old-school Super Mario Bros video game? You just Google it and immediately find the (e-)shops that are selling your product. No search time (or associated costs) are incurred. Everything what you’re looking for, can be found and bought on the World Wide Web.
Pareto is dead
Keeping more SKU’s in your warehouse has a huge impact on your operations. In the past the idea of the Pareto rule (20% of the SKU’s are generating 80% of the picks) made sense. But when your number of SKU’s is exploding the 80-20 rule in the warehouse has become dead (Investigated by Brynjolfsson and Hu, Goodbye Pareto principle, Hello Long Tail; 2006).
Nowadays around 90% of the SKU’s are generating 20% or less of total picks. (We didn’t make an error in the calculation, but in the new normal of long tail, it doesn’t make sense that we have rules that count to 100 %; high runners will be 10% of your product range and 80% of your picks)
People are willing to pay a premium to get that ‘hard to find product’, as they save search time and have the easy task of ordering online. It allows businesses to move away from the red ocean price war on popular, fast moving items and raise profit margins. This, on the condition that warehouses are using resources in the most optimal way.
Get more out of your resources
To reach the desired level of customer satisfaction, a perfect logistics backbone is needed to meet the delivery time.A Deloitte survey shows that fast shipping expectations of customers are rapidly changing. Now fast shipping means for customers a maximum of 2 days.
Warehouse space is limited and expensive to expand. Some lean warehousing tactics may help to overrule the efficiency KPI (check our previous blog post how to start to become lean).
It’s key for your success to measure the filling rate of your warehouse.
- How many different SKU’s are stored in your warehouse?
- How many locations are occupied?
- What’s the percentage of product volume in your total warehouse volume (aisles included)?
Do you see room for improvement here?
Can you compress the remaining air in your warehouse, so you could stock more SKU’s on 1 m² / ft.?
Then you would be able to major the bottom line of your company’s results.