Order Management for eCommerce explained

Order Management is how a business ensures orders placed online by customers are fulfilled accurately, cost-efficiently and on-time.

A simple order management process passes an order placed on the website to a warehouse for fulfillment, and the order management system records each event that happens to the order and handles any exceptions. Events include authorization of payment, picking and packing of the product, and collection of the package by a carrier.

Large and complex businesses may invest millions of dollars in an order management software implementation project, in order to achieve speed, efficiency and cost reduction in order processing.

There are twelve key order management business processes. In a separate article I describe 19 order management system (OMS) software vendors to consider for a shortlist.

Key order management processes

Order management processes start once a customer has placed their order, on a website, on a marketplace such as Amazon, through a mobile App, or by a store associate using the POS or a store tablet. These are the sales channels through which orders are captured.

1. Order consolidation and validation

The first step in order management is to consolidate orders from the sales channels, allowing subsequent processes to act on a consolidated view of all orders from all sources.

Each order must be validated to ensure it is correct - for example a payment authorization has been acquired, an account customer's credit limit has not been exceeded, and delivery details are complete.

2. Order routing

Validated orders are routed to a physical location holding stock. In this article I am describing only orders for physical products, not digital goods like downloads or subscriptions to digital services.

A retailer may have access to multiple locations where stock is held - in warehouses, in retail stores, or at suppliers. Order routing considers:

1. Locations with stock of all of the items in the order, as splitting an order is more expensive to fulfill
2. Locations with stock that can fulfill the delivery promise (e.g. next day delivery, store pickup) made to the customer when they placed the order
3. Locations with the lowest cost (labor, shipping) to complete the order
4. For store fulfillment (i.e. ship from store), which store has labor capacity to fill the order, which store is low on stock and should be protected and which store is overstocked and should be used to avoid a future price markdown on that overstock?

When no locations hold all of the ordered items, the order may be cancelled, or split into multiple sub-orders for fulfillment, with each sub-order going through the above steps.

For many orders routing is obvious, for example:

• A customer order to pick a product up from the Main St. store will be routed to that store if that store has that product in stock
• An order for a product not stocked in stores, but only in the ecommerce warehouse, will be routed to the warehouse that holds it that is closest to the delivery address
• An order for a product from the retailer's extended catalog provided by a supplier will be routed to that supplier to "drop ship" that product to the customer.

More sophisticated routing logic is required when an order has multiple potential fulfillment points, to achieve an efficient, profitable operation.

3. Order orchestration

Order orchestration is the heart of order management - describing the steps to guide an order through the retailer's processes towards successful completion. Orchestration is where:

• Dependencies are managed:
  • an order is not routed until it has been validated
  • payment is taken only once the order is ready for dispatch
• Retailer's teams' activities are coordinated:
  • order to be filled from store stock is notified to the store staff
  • customer services is notified of an unusual order requiring fraud checks
• Notifications received from outside the retailer are processed:
  • the courier signals it has delivered the order
  • a customer sends a request to return an item from their order
• External parties are sent notifications by the retailer:
  • a customer is informed when a parcel is ready to be picked up
  • an external company is notified to activate a warranty

Orchestration is not a process in itself, it describes how the processes that make up order management relate and combine, and the correct steps are executed in the right sequence so that the order is successfully processed to meet customer expectations, and handle exceptions and minimize cost.

4. Payment

For most ecommerce orders a payment card is authorized during checkout and later settled (payment taken) when the order is dispatched. Some retailers offer transactional finance, to allow a customer to pay for orders by instalment. Subscription services where a consumable (e.g. printer toner, razors, pet food) is ordered today for regular delivery adds the requirement to set up authorization for future payments.

Retailers must detect and avoid fraud. Fraud attempts globally are 5.3% of all attempted orders in April 2020 according to ACI Worldwide. In its True Cost of Fraud report July 2020, Lexis Nexis reports each $1 of fraud suffered by a US merchant translates into $3.36 of cost, as the retailer puts resources into detecting it and deals with the aftermath.

5. Pick and pack

At the warehouse, warehouse management processes take over from order management, the order is added to an "order well", items are added to "pick waves" where automation equipment or warehouse workers retrieve items from storage to a station for packing. 

6. Value add services

Some orders require additional processing such as personalization or gift wrapping. For made-to-order products such as custom furniture, manufacturing processes are invoked by order management.

7. Dispatch

A carrier is selected for each parcel to be delivered. The carrier provides a consignment reference and enabling the warehouse to print a packing note to place inside the parcel, and a carrier label to affix to the outside. This reference number is passed to the ecommerce platform so a customer can track their order. Notification emails/SMS will be sent at this time, confirming dispatch and the estimated or guaranteed time of arrival.

8. Ship from store / fulfill from store

When an order is fulfilled from a retail store it is picked from stock on the shop floor. A store associate is notified when an order arrives and follows these steps:

• Acknowledge receipt of the order
• Find the stock in the store
• Confirm that stock has been found and set aside
• Confirm order has been packed and is ready either to be collected by the customer or a carrier

At each step there is a chance of exceptions. An associate may not receive the order or fail to acknowledge it, may not find the stock on the shop floor, may fail to notify the system that an order has been packed and is ready. Exception processes serve to handle this, for example by re-allocating an order to an alternative store.

9. Carrier management

For orders to be shipped a carrier is booked, shipping label printed and attached to the parcel. In a warehouse this may be highly automated, in a retail store it will normally be quite manual.

When a parcel is delivered the carrier notifies the retailer and this triggers post-sales messaging or services. Parcels that fail delivery attempts are sent back to the retailer and a returns and refund process runs.

10. Exchanges, returns and refunds

Returns and subsequent refunds are common in ecommerce, including when a customer changes their mind or decides a product is unsuitable. Fashion orders are subject to high returns rates, often 40%. The returns process ("reverse logistics") is well-organized to minimize cost.

11. Pre-orders and back orders

Pre-orders are orders for products not yet been in stock but expected in the future (e.g. a disc of a new movie release). The order management process needs to handle payment authorization and deposits.

Back orders are for products that are temporarily out of stock. If less stock arrives than there are back orders, order management allocates stock to the earliest orders received or to VIP customers.

12. Customer service

Customer service can be a significant cost. Self-service is preferred to minimize this. Enabling a customer to view progress of their order online and make changes prior to dispatch helps minimize calls to the customer service team.

See also: Order Management System (OMS) Software Vendors Compared