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Achieving Higher Order Fill Rates Through Integrated Channel Order Fulfillment

 

Flexibility with inventory is key to maximizing sales in today’s economy, but a variety of challenges prevent multichannel businesses with direct fulfillment centers and retail stores from maximizing the inventory they have.  For instance, e-commerce, catalog and retail have different planning methods, and different accuracy issues; it’s one thing to get the size distribution right for a region and store, and another to plan for the way colors sell.  Many e-commerce sites will not take an order if the fulfillment center is out of stock or on back order, giving customers the erroneous impression that the item isn’t available from your company—even though it may be available in stores. And even if it is available, it may not be in a store nearby.  If you’re a retail company, you don’t want inventory riding around on trucks between stores or back to the fulfillment center to fill direct orders.  At the same time, if you’re a store manager, you don’t want direct orders to strip your inventory of best selling items if you don’t get credit for the sale.  All the channels—retail, web, catalog or wholesale—compete for best sellers.

The majority of companies we consult with on inventory management projects are taking a very conservative approach for this year’s Fall and Holiday seasons; they will pass up sales rather than be significantly overstocked. Do you really want to “lose the sale” because an item is not available for direct order fulfillment, or you can’t get it conveniently to your customer?

Potential Solutions

Here are some ideas you can consider for achieving channel synergy, with resulting improvements in fill rates, customer service, sales, and profitability. 

  • Develop a nimble inventory strategy; don’t let inventory get “frozen” in a channel. 
  • Determine who, in your merchandising or inventory control organization, will make decisions about inventory planning by channel; who will decide on purchases, planning assortments, etc.?
  • Consider implementing customer remote order with store pick up.
  • Improve merchandise planning by channel through an understanding of how items and categories sell differently.
  • Get the marketing and merchandising planning forecasts in synch.
  • Get merchandise demand projections and receipt plans in line with marketing’s weekly projections.
  • Protect inventory availability for a channel until initial selling trends are apparent.
  • Extend vendor product offerings and reduce inventory levels through vendor drop ship.
  • Adopt retail store fulfillment of e-commerce or catalog customer orders. 

Explore Filling Direct Orders From Stores

Your first priority should always be to have optimal inventory available in the fulfillment center; it’s the lowest cost way to serve the customer.  However, when that fails, you’ll want to “save the sale”—and the idea of filling customer orders from retail stores isn’t anything new. What is new is the ability to automate store fill allocation of customer orders with a variety of user-defined business rules.  Systems that do this are either batch or on-line integrated to the retailer’s merchandising systems, plus they place affordable systems in the stores for order fulfillment.  Here are just a few examples of retailers that have implemented somewhat different solutions from two vendors.

  • Jos A. Bank, with over 450 men’s apparel stores nationwide, were early adopters of cross-channel order processing from MICROS-Retail, a part of Columbia, MD-based MICROS Systems, Inc. Store associates have access to the inventory positions of other retail locations via MICROS-Retail’s Tradewind POS or to their direct commerce operation utilizing MICROS-Retail’s CWDirect Order Management System.  As an example, store associates can place an order against direct commerce inventory and that order will seamlessly flow through the fulfillment process as if it came directly from the customer.
  • Title Nine Sports is using MICROS-Retail’s Cross-channel Inventory Broker (Locate).  Each company can identify inventory in alternative channels and have those items reserved against demand.  Those orders will be shipped to the customers’ home, office or gift recipient or set aside at their appropriate retail location for store pick-up.

MICROS-Retail Locate’s Order Broker module has system controlled business rules that determine where a product can be picked and shipped from.   Prior to Order Broker a user had to manage all the decisions.  Order Broker has decision rules for checking to see if there is a PO that will come in within days, the location that has the most inventory, and stores which are not available for picking (for example, a new store).

  • Jones Apparel Group, parent of an 800-store women’s apparel and shoe chain that includes Jones New York, Nine West, Anne Klein, Bandolino and Easy Spirit, has successfully installed VendorNet’s StoreNet system.  In developing StoreNet, Sharon Gardner, founder and president of VendorNet (Delray Beach, FL), applied the systems concepts in her firm’s vendor drop ship software to fulfillment of direct orders from stores.  Jones Apparel gives StoreNet rave reviews for maximizing e-commerce sales through store fulfillment without adverse effects on store operations and inventory.
  • CompUSA is also live with StoreNet, initially in two pilot stores, and will have 50 stores on the system when complete.

The StoreNet order fulfillment process allocates orders and publishes them to stores based on user defined rules such as inventory availability, safety stock levels, proximity to the customer and store preference setting.  At the store, a salesperson prints pick tickets for allocated orders.  Inventory is picked from the store and staged for packing and shipment.  Picked inventory quantities are confirmed in StoreNet, which produces packing slips and shipping labels for confirmed items.  When a carrier picks up the package, a ship confirmation triggers an update to the order management system for billing to the customer. 

At the heart of store fulfillment systems like these is a user controlled set of complex business rules taking into account saleable inventory quantities, safety stocks, overstocks, newly allocated orders, split shipment rules, proximity to the customer, and more.

What Are the Benefits?

We believe such “save-the-sale” concepts can create a marked increase in customer retention and satisfaction, and drive retailers’ top line revenue.  They allow you to maximize e-commerce sales through expanded product selection (and size and color availability), impacting the growth rate of e-commerce sales compared to store revenues (less foot traffic, more click traffic). They increase your ability to reach new customers with store merchandise, while making you more efficient at selling down corporate-wide inventory—hopefully at full price. Efficiency is also increased through elimination of store-to-store calls and transfers, with reduced manual effort.  Second package shipment costs are offset by closer proximity to the customer.  With stores able to go on and off store fulfillment by the user defined business rules—rules that can also give credit to the store salesperson for filling the order—turf battles over inventory are lessened.

At a time when inventory is lean, this approach can maximize sales and customer satisfaction, with business rules that give you the flexibility you need.


Paul Sobota is a vice president of F. Curtis Barry & Company, a multichannel consulting firm specializing in systems selection and implementation, inventory management and fulfillment. Paul can be reached at 804-740-8743 or psobota@fcbco.com. Learn more online at http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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Using Logistics to Win in a Multi-Channel Retail World

 

The Increased Importance of Transportation and Logistics Management in Improving Multichannel Companies’ Profitability and Supply Chain Efficiency

Your boss walks into your office and shuts the door. He sits down. He looks worried and a little uneasy. “Our executive management committee just finished meeting with our board. It seems we need to tighten our logistics operations,” he announces, tilting back in his chair. “We know we definitely need to reduce costs, but without sacrificing our service. Your new job is to figure out how — where to direct our focus, which initiatives to dust off the shelves, what must be expanded, where the new efficiencies are. We, or rather you, need to overhaul the entire logistics function of this company.” He holds your gaze for a second, nods twice to be sure you understand, and leaves the door wide open.

Executive Summary

Operating across three channels — retail, catalog and Internet — creates complex logistical scenarios. Store consumers want in-stock product, while catalog and Web shoppers want to have their orders shipped same-day and to be able to track their order status in real time. The more efficiently and seamlessly these operations take place, inside the warehouse, with vendors and at stores, the faster the turnaround times. There are other important benefits as well — increased visibility of incoming shipments, reduced shipping costs, better customer service and more room for continued growth.

The ongoing challenge for multichannel retailers is to combine back-end operations and logistics in order to present the consumer with a consistent customer experience, whether in-store, online, or at the point of merchandise delivery. Many businesses forge ahead without even developing an operations and transportation plan. But multichannel retailers must partner with logistics vendors to optimize the flow of goods into and out of the warehouse, reduce overhead expenses and minimize costs. What’s needed is more communication among marketing, merchandising and management — working in concert with vendors — to fine-tune the process. From a logistics standpoint, the catalog and e-commerce channels of retailing require efficiencies in terms of picking orders the same day or within 24 hours and also require efficiencies with regard to cost-effective outbound transportation. Typically, in businesses with more than one warehouse, these operations functions are mirrored for both warehouses. Figure 1 illustrates such a multichannel business network.

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Click for Larger Image

This white paper details logistics network functions and relevant solutions that are available for multichannel businesses, while demonstrating several actions a company can take immediately to make its supply chain operate at peak effectiveness. The introduction provides a high-level view of the areas in which logistics plays a significant role in a multichannel retail operation and describes common, related cost trade-offs. “Four Key Logistics Goals” — increased efficiency, improved customer service, increased sales, building relationships —outline a strategy to optimize multichannel retail logistics management. The goals are illustrated with tested best practices used in operations departments in areas including vendor compliance, managing back orders and returns and building vendor relationships. A final section gives specific examples of logistics solutions in such areas as inbound and outbound logistics, IT and merchandising that can help multichannel retailers to achieve optimum supply chain efficiencies.

I. Introduction

The Council of Supply Chain Management Professionals defines logistics management as “that part of Supply Chain Management that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.” Logistics, an integral part of the supply chain and logistics networks, systems and management of these operations have become increasingly more complex and in multichannel businesses, logistics management is now responsible to plan for, implement and control:

  • Inbound merchandise from offshore and domestic vendors to the warehouse.
  • Replenishment of stores by both warehouse operations and vendors.
  • Cross-docking merchandise to stores or directly to the pack line for direct back orders.
  • Outbound small package delivery through zone skipping or vendor drop-shipping.
  • Reverse logistics for single customer returns or to consolidate returns.
  • Other logistics requirements including warehouse-to-warehouse transfers, store-to-store transfers and retail store “sends” directly to the customer.
  • Multi-warehouse logistics, including warehouse-to-warehouse transfers, vendor receipts and in sophisticated multi-warehouse operations, reception of vendor shipments at the warehouse closest to the vendor and distribution of the inventory to the warehouses and stores.

Multichannel operations increase competition for sales and customers. Such companies as Cabela’s, Harry & David and Coldwater Creek are examples of traditional direct marketers who make substantial investments in store retailing. But since the dot-com revolution of the late 1990s, most retailers have also entered the e-commerce environment, pushing their operations into the arena of logistics and fulfillment of small-order, pick, pack and ship. Many traditional direct marketers’ sales are more than 40 percent e-commerce in origin. Such operations must continually add functions that reflect the different channels’ requirements.

Most direct marketers and retail companies focus on the customer. They realize that it’s more important for a shopper to experience good customer service than to pinpoint which channel the customer uses to shop. A recent study says that 66 percent of consumers shop in all three channels — online, catalog and in-store, yet only 33 percent of merchants offer a consistent customer experience across all channels. Here is one point at which logistics plays a crucial role.

Retail stores want more frequent deliveries so that products are in stock a higher percentage of the time, in part because of the limited backroom space of most specialty stores. In other words, multichannel companies’ supply chains are dynamic and constantly changing and to remain competitive, operations management must invest in continual process improvement. 

Benchmark studies conducted by F. Curtis Barry & Company have concluded that shipping costs for retail and direct sales is significant, equaling or exceeding the internal warehouse processing costs for many companies. Figure 2 (on next page) summarizes this data, the range of data values and the cost per order. (For comparative purposes, the cost of shipping has been left out of the total warehouse costs because including it has a tendency to distort comparisons between businesses.) “Total warehouse costs” here includes direct labor, indirect labor, occupancy costs and packaging materials. As the figure demonstrates, logistics influence efficiencies, operating costs, gross margin, service levels and sales. 

Figure 2: Cost of Shipping Compared to Total Warehouse Costs

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Note: *Eliminating out-of-range values

II. Four Key Logistics Goals

For the supply chain to be effective in a multichannel operation, it is necessary for management to meet the following four goals:

1. Increased efficiency
2. Improved customer service
3. Increased sales
4. Improved relationships

Each of these goals is presented below in terms of definitive and specific objectives required within an operation and with best practices to help achieve those objectives.

1. Increased Efficiency

To increase efficiency, a company must develop cost-effective transportation rates while reducing its overhead, total inventory and overall cost-per-order processing. Warehouse operations, including processes, layout and flow, can be positively effected by closely working with your transportation provider. Establish a two-way relationship with your transportation carrier to frequently share best practices, issues and opportunities.  Conversely, disjointed transportation flow ties up space on the receiving dock. For example, if a product doesn’t meet specifications, it must be double-handled, possibly repackaged, stored and shipped back to the source. This process uses extra labor and space. Additionally, lack of a reliable delivery time requires the retailer to carry more inventories, which decreases inventory turns and increases costs for the added storage space. 

Ways to improve logistical efficiencies might include:

  • Work toward having value-added services like packaging, marking and quality inspections performed by the vendor. This improves the chance of catching errors at the source and source-based services speed product flow through the warehouse.
  • Build transportation integrally into the warehouse process and layout and avoid making it an afterthought. Consider inbound and outbound conveyances, queuing up shipments by carrier and the capability to pull orders later in the day to increase customer service.
  • Determine that carriers are able to accommodate business demands, depending on product type and turnaround time. For example, some multichannel retailers have carriers come into the center to help load trucks, while other retailers have an in-house USPS post office for shipping.
  • Consider whether facilities issues could affect your operation. For instance, limited delivery door access can force companies to rely on their carrier to move a loaded trailer and replace it with an empty one. During peak order shipment periods, this causes down time and an interruption to the workflow when there’s no empty trailer ready to load. Additional loading doors could solve this issue.

Vendor compliance
Vendor compliance is at the heart of efficient supply chain management. To achieve vendor compliance, it is necessary to determine what company policies and procedures will be when dealing with vendors. Simply defined, vendor compliance means that product arrives from a vendor in proper condition and is delivered in the agreed-upon manner. In addition to product quality, some vendor compliance standards include: packaging and shipping requirements, advanced shipping notices, master-case and inner-case sizes, case labeling, product packaging and polybag specifications, accounting and paperwork requirements, logistics requirements and routing guides, scheduling appointments and statistical sampling requirements, to name only a few.

The proactive step of instituting a charge-back policy should be clearly stated in a vendor compliance manual, with the support from senior management. Retailers would rather have receipts arrive on time and be compliant than deal with the hassle of collecting charge-backs. But it’s necessary to put financial penalties for non-compliance into effect. Without setting these standards, a warehouse will have to absorb repackaging and re-labeling costs. And without compliance policies and enforcement, it’s difficult to implement more advanced systems of cross-docking, ASNs, just-in-time inventory, source marking and ticketing, or radio frequency identification. 

Regaining control over the retail supply chain
Traditionally, vendors, rather than retailers, have controlled inbound freight decisions. This practice costs retailers a premium of 20 percent to 60 percent above actual transportation costs, according to industry estimates. But today, more retailers are taking control of inbound freight, which in turn enables them to influence their economies of scale and negotiating power to reduce costs.  This is not an easy transition to make, when you consider the number of documents, parties, languages and currencies involved in global sourcing. But the benefits are numerous — lower costs, improved visibility of the inbound goods in transit and the ability to schedule receipts.  On the domestic side, controlling inbound logistics costs is another opportunity for multichannel retailers. Not only do large retailers gain efficiencies, but smaller retailers reap benefits, too. DiversDirect, an eight-store retailer with online and catalog operations, was able to increase its gross margins 0.7 percent by consolidating freight shipments among its vendors (for more on DiversDirect, see “Case Studies”).

Another major advantage of controlling inbound freight is the ability to combine inbound, outbound and reverse logistics to get higher discounts. This always needs to be balanced with the issue of putting all your transportation eggs in one basket. Carriers have areas of strength and weakness. Select vendors for their strengths. Approximately one-third of companies are using multiple carriers — a growing trend.

2. Improved Customer Service

In direct marketing enterprises, fulfillment operations are in partnership with marketing and merchandising. This partnership is like a three-legged stool — without all three legs the stool cannot stand. Fulfillment operations’ inbound and outbound transportation is key to delivering marketing’s promise to the customer to get the shipment delivered on time and in good condition.

In direct marketing, customer service must be balanced with costs. First is the cost to acquire a customer, which stands at $10 to $25, depending on the efficiency of the prospecting. This figure includes catalog and other marketing costs, as well as the cost of non-responses. In many businesses, 50 to 70 percent of all first-time buyers do not purchase a second time. Most direct businesses need a customer to purchase two or three times to break even.  

The second cost element to consider is the high cost of being on back order. Hundreds of customer studies show that in most direct businesses it costs between $7 and $12 to process one back-ordered unit of merchandise.

Figure 3 shows the breakdown of back-order costs for a small direct business. If this business had 200,000 orders with 400,000 units — and back orders were calculated at 20 percent — then 40,000 back-ordered units would occur. At $7.37 per unit, back orders would cost this direct marketer $294,800. More importantly, the numbers don’t include hidden costs for the buyers’ time to accelerate back orders, air freight to bring stock in faster, or a loss of customer good will. Permanently losing a customer because of poor service has the highest cost.

Figure 3: Back-order Costs

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The third type of cost element is the erosion of gross demand by customer returns and customer and company cancellations. Figure 4 shows typical return rates by category. The higher the fashion nature of the product, the higher the return rate tends to be. Sized or tailored fashion products have higher returns.

Figure 4: Selected Return Rates by Merchandise Category

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Returns
Returns also cost far more than orders to process and in many businesses, only one-third of the returns are exchanges. Cost of processing a return includes:

  • Original cost of order processing (which is $3 to $6 in most direct business) including indirect and direct labor, credit card processing fees, occupancy costs and phone lines.
  • Prospecting costs to acquire the customer.
  • Cost to process returns and refurbishing items, including indirect and direct labor, occupancy costs.
  • Loss of shipping and handling revenue if refunded from outbound or inbound transaction.
  • Loss of gross margin.
  • Potential loss of customer if shopping or return processing experience is not suitable.

For high-return categories and businesses, reverse logistics services typically allow customers to send returns into the pipeline closest to their location, either at home or via a retail outlet. The reverse logistics provider should offer systems that provide visibility into goods being returned in advance of receipt in the retailer’s distribution center. This will not only allow the merchant to schedule resources accordingly, but it will also give the merchant an estimate of return goods that will be available to fill new customer orders. Additionally, some retailers start the refund or credit process when customer returns have been received.

Another aspect of costs is cancellations. Industry standard for excellent customer service puts cancellations as a percent of demand at 2 percent or less. However, for apparel direct marketers it is not unusual for cancella-tions to be between 4 and 8 percent, since business must be based on estimations. There is no historical selling data for apparel because of the high percentage of new product. New products can run 50 to 75 percent, four seasons annually — that’s simply the nature of the apparel industry. Catalogs with fewer new products, or with categories that have a higher ability to be reordered, have lower cancellation rates. Business-to-business cancellation rates may be less than 1 percent to several percent; home décor rates may be from 1 to 3 percent.

Obviously, the speed of getting resalable returns back into inventory availability and the reduction of costs of returns can greatly affect profitability. Leading retailers acknowledge returns as part of the cost of doing business and include a convenient return process as part of the customer experience.

On the inbound side, shaving several weeks off receiving can save some of the back-order costs and reduce loss of customers. This is where a potential problem with global sourcing lies. Most direct marketers are unable to reorder except in large quantities. Receipts are generally not planned in multiple shipments because of the minimum purchases required.

Increases in supply chain efficiency can reduce inventory levels and out-of-stocks. For example, take the radio frequency identification (RFID) used at Wal-Mart. Wal-Mart’s use of RFID is early in its implementation, but results are already impressive. According to Linda Dillman, Wal-Mart’s chief information officer, using radio-frequency identification has reduced out-of-stock merchandise by 16 percent at participating stores, while improving customer service during the past 12 months. The concentration has been in higher-priced, faster-moving product. Additionally, Dillman says, the company can restock RFID-tagged items three times faster than non-tagged items. Wal-Mart has only implemented RFID with about 130 vendors, using 5.4 million tags in the past year, and approximately 1,000 stores are ready to receive RFID product. The company expects to have added 200 more suppliers by January 2006.

Getting efficient inbound logistics systems and vendor compliance in place is the first priority.  While RFID is in the future for most companies, others need to implement solutions that optimize supply chain efficiency today.

3. Increased Sales

How can inbound and outbound logistics and transportation help a retailer’s sales? Several opportunities exist for improving service, and those in turn, can be used to marketing’s advantage. Look at inbound and outbound freight as separate operations with separate requirements, as described in Figure 1. Bundle the volumes wherever possible with your carriers, but recognize the differences between the channels.

Inbound logistics
With direct promotions and advertised retail product, maintaining on-time and in-stock position is a must. Sales potentially could be lost without an available, reliable source of merchandise. Because it’s difficult to project sales, you need to get product quickly and safely into the logistics pipeline. Product damage from inbound transportation can seriously affect product availability, and without product you can sell, profits decline.

Begin by tracking what you have coming inbound, where it is and when it will be delivered. Import and assemble containers of priority product, since delivery by air freight is costly and may exceed the margin of low-priced product. Be aware that direct channels are subject to the FTC’s 30/60 day rule: Direct marketers must notify customers of a possible delay in receiving and, as a result, outbound shipment, or cancel their orders entirely. In addition, warehouses are increasingly becoming the “back room” for specialty store operations in the multichannel retailing environment. If you don’t have product that can be moved quickly into a retail outlet, you can miss the sale.

As companies become leaner, transportation becomes even more important to meeting sales goals. Plus, there’s a difference between merchandising stores and catalog promotions. Retail customers may substitute another product for what they originally came in to purchase, but in direct promotions the customer is very negative toward substitution. That’s why many catalogs adopt charge-backs for late delivery, back orders incurred and substituted product.

Outbound logistics
The logistics of delivering to the customer can affect sales if the customer’s expectations are not met, for example, with the late delivery of a gift, or a damaged or poor appearance of product upon arrival. If the customer doesn’t want the product that arrives, returns increase the cost of operation.

Conversely, logistics can factor into a company’s marketing plan if transportation costs are under control. According to BizRate Research, 79 percent percent of e-commerce companies were planning to offer free shipping and handling. For the first time in three holiday seasons, L.L. Bean offered free shipping on all orders. Free shipping has proven to increase sales and average order. Most marketers don’t want to give up this source of revenue, or offer it only to their best customers or higher-average order buyers. If your company’s transportation costs are out of control, you’re going to be less willing to offer shipping promotions.

4. Building Relationships

True two-way collaboration between retailer and carrier is key to the success of overall logistics execution. Measures of success are: total cost, time in transit and responsiveness of the carrier representative.

The single-carrier versus multi-carrier philosophy is one of the primary issues that need to be addressed with regard to carrier relations. Using one carrier allows a higher aggregate volume of shipments, which can result in lower negotiated rates. The downside is total dependence on one carrier and the resulting possible problems if there is a carrier service interruption. Both issues should be weighed carefully.

A good relationship between the retailer and the carrier representative is vital to making the activity work. Inevitably there will be issues that must be addressed. Trust and a positive attitude can influence how those issues are resolved. Most vendors can meet the technical needs of their business; the difference can be how relationships affect business. It’s always more than a matter of cost that breeds success.

Merchandisers have the initial primary relationship with vendors in many retail and direct marketing organizations. In re-buying merchandise, this relationship is often delegated to inventory planning or purchasing. In most companies, changes are required in vendor logistics to acquire the blessing of the merchandisers and to achieve vendor compliance. Additionally, gross margin and freight-in are often goals of the merchandising department and the buyers — standards upon which performance objectives and bonuses are evaluated. Obviously, increases in efficiency that yield savings will win partners.

Use a structured approach to comparing vendors. When soliciting bids, make sure the retailer should give carriers as much information about its business requirements as possible. Throughout the bidding process, and later when working with carrier partners, retailers should follow these guidelines:

  • Stay involved with the process.
  • Verify results and reports.
  • Audit bills.
  • Consider the total costs of transportation in your analysis and reviews.
  • Keep options open and treat carrier contracts and relationships as dynamic and evolving — not like a fixed three-year arrangement.

In direct retailing businesses, the purchasing and inventory control functions have responsibility for analyzing inventory requirements, purchasing and purchase-order writing, receipt-planning, vendor communication, routing deliveries, improving back orders, coordinating required receipts to prevent back orders and stock-outs. They are generally good partners with fulfillment in enforcing vendor compliance. In multichannel and multi-warehouse operations, the purchasing and inventory control departments have the prime responsibility to balance or level inventory between channels, warehouses and stores to optimize sales and profitability.

Information technology
Systems implications abound for integrating partner systems, implementing supply chain improvements and managing necessary IT resources. Hundreds of vendors sell software systems to streamline the supply and logistics process — an indication of the complex requirements for controlling the management of logistics. Many IT vendors deal with market niches, while others deal more generally with logistics overall. Among the functions addressed by these vendors are:

  • Manifesting and rate shopping plus integrated load and yard management.
  • Inbound transportation management and freight auditing.
  • ASN/EDI.
  • Inbound and outbound product tracking.
  • Transportation procurement.
  • Purchase order management.
  • Transportation planning and execution and routing guide management.
  • Carrier management.
  • Enterprise-wide approach to supply chain.

The IT department is the hub of managing and controlling your company’s information resources. It’s important to investigate current state-of-the-art systems and invest in those that will add value to your operation. Develop an IT partnership to revitalize your supply chain systems.

III. Transportation and Logistics Solutions

Determining how a company is going to transport product through the supply chain from the source to the customer is a complex challenge. It is more crucial than in the past, due to global sourcing and the multichannel nature of retailing. Multichannel retailers must depend on relationships with trusted vendors for inbound and outbound logistics as well as for handling merchandise returns. Refer to Figure 1 for illustrative purposes.

Inbound logistics
On the domestic front, retailers controlling inbound logistics will work with vendors to coordinate the most effective transportation methods to move merchandise from their vendors’ DCs to retailers’ DC or stores. Depending on dollar value, inventory turns, dimensions and other factors, the retailer may choose between truckload (TL), less-than-truckload (LTL), parcel ground, or parcel express transportation options.

Leading retail customers tell us that domestic inbound transportation is estimated at 2 to 4 percent of the cost of goods sold (COGS). For global merchandising, the costs are higher. Overseas product sourcing gives the merchant a more effective way to compete on price and to earn larger gross margins. There is competitive pressure on gross margin, since many businesses today import more than 70 percent of their products. Retailers that import products generally have an initial markup 10 to 15 points higher than those for domestically sourced products. This is allowable due to the lower cost of sourcing merchandise overseas. The initial markup is necessary to offset the expenses of buying trips, customs duties, agents’ fees and freight costs. Yet these merchants still seem to maintain higher gross margins, despite all the added expense. For example, multichannel retailer Levenger, which sells high-end office furnishings through its catalog, Web site and retail stores, has been buying more of its product from Asia over the last few years. As its international sourcing increased, the company worked to obtain more cost-effective rates on its inbound freight shipments. (For more on Levenger, see “Case Studies.”)

But global sourcing also increases the layers of operations complexity. Globalization requires companies to file more than 30 documents and interface to over 20 parties — including customs, carriers, freight forwarders and banks. Additionally, these transactions require multiple currencies and languages and are conducted across multiple time zones. There also is a trend toward networks supported by multiple distribution centers. With the rising cost of freight, a single warehouse on one coast adds significant shipping and handling costs to customer orders delivered to the other coast. Adding to this pressure is the competitive need to deliver products within two days at competitive rates. This is especially important for business-to-business sellers who compete with local distributors. Efficient logistics help to build their market share.

Convert your vendors from freight-paid to freight-collect. In this connection, FedEx offers a Vendor Enablement Program (VEP) and Inbound Consignee status as inbound logistic solutions for retailers. For example, CompUSA saved $1 million per year in inbound logistics costs as a result of consolidating inbound logistics. DiversDirect increased its gross margins by 0.7 percent as a result of an Inbound Consignee program.

Outbound logistics
Seventy percent of retailers source their merchandise from overseas. The trade-off decision is a lead-time versus transportation cost decision. Faster lead-time solutions influence air imports and parcel-facilitated transportation to ship merchandise from overseas to retail stores in three to four days. Longer lead time and more cost-efficient solutions prompt ocean containers, ground parcel and LTL transportation to ship merchandise in 22 to 28 days. For example, outdoor marketer Timberland, which sources much of its product offshore, recently began taking advantage of scanning technology by implementing a process of scanning items as they are packed at the factories in Asia and then having the information transmitted back to the U.S. (See “Case Studies” for more detail.)

In addition, having access to a full portfolio of outbound transportation services could ideally align well with your customer segments. An assortment of one- to two-day services for your “A” customers, with one- to five-day ground services to your “B” customers and a possible longer lead-time, lower-cost service for your “C” customer segment could be an interesting discussion with your Merchandising and Segmentation group.

Overseas labeling
Retailers leveraging offshore inbound logistics solutions can allocate merchandise to individual stores by sending an allocation file to FedEx at the point of overseas origin. This international inbound service offers the advantage of clearing customs as one shipment (Air Express or Ocean Container) and then injecting the shipment into the FedEx network through FedEx Express®, FedEx Ground®, or FedEx Freight®. Retailers may direct delivery to individual retail stores and bypass their DCs to reduce time-to-market for their merchandise.

FedEx offers FedEx International Priority DirectDistribution®, FedEx Trade Networks Ocean-Ground Distribution® and FedEx Trade Networks Air-Ground DistributionSM . The retailer 7-Eleven has taken advantage of FedEx Trade Networks Ocean-Ground Distribution. For its holiday replenishment program, the company increased its merchandise gross margins by 5.5 percent as a result of a FedEx solution.

Multiple-vendor consolidation
Retailers managing an efficient supply chain coordinate their inbound logistics to consolidate transportation from multiple vendors. As a result of careful planning and forecasting, retailers consolidate shipments originating in nearby vendors’ DCs to reduce total transportation cost per unit.

Direct-to-store vendor shipments are commonplace for specialty store chains. Retailers who manage a collaborative supply chain with open vendor communication have their shipments sent directly from vendors to retailer stores, bypassing the retailer’s DC. As a result, inventory carrying cost (ICC) is drastically reduced, due to less handling at the DC, less labor and resources and less possibility of theft and damage. FedEx offers FedEx® Third Party Consignee as a solution.

Catalog and e-commerce orders
Retailers fulfilling consumer orders need to offer an array of transportation options, and FedEx offers a variety of outbound logistics solutions for domestic customer shipping of catalog and e-commerce orders, from express (overnight or two-day), to residential delivery (one- to five-day and lead-time service with a specialized network for residential consumers), to FedEx SmartPost®, which features a longer lead time, lower-cost service, a five- to nine-day lead time and uses the U.S. Postal Service for final delivery with FedEx Home Delivery® service.

International customer shipping
Most retailers see international sales as their largest opportunity for growth. Internet Retailer magazine recently published a list of the biggest hurdles for retailers to do business overseas. The difficulty of shipping merchandise was identified by 42 percent of retailers as their No. 1 hurdle in doing more business internationally. Overall, 20 percent of retailers’ international orders are abandoned due to lack of total landed cost (cost of shipping + cost of shipping + custom, duties and taxes).

FedEx offers Total Landed Cost solutions such as FedEx® Global Regulatory Trade Services for large retailers and FedEx® Global Trade Manager for smaller-sized retailers. These services can take a retailer’s SKU and match it to the harmonized tariff system code to estimate custom duties and taxes. Integrating FedEx Global Trade Manager into a retailer’s call center operations or Web site, allows the retailer to quote total landed cost to the consumer, providing a more convenient customer experience.

Transport consolidation and zone-skipping
Retailers who wish to reduce their transportation costs can use a zone-skipping program in which parcels are shipped part of the way to their destination by the shipper and then dropped at a carrier’s facility or hub to complete delivery. On average, retailers who use zone-skipping can reduce transportation costs per unit by double-digit numbers. However, there is a trade-off in the lack of parcel visibility on the front leg of the zone-skip.

FedEx Ground and/or FedEx Freight services can be used to bypass hubs and stations, which reduces overall zone and translates into lower transportation costs per unit. These services are used when a retailer has a high density of shipments or stores located in a concentrated area or region, thus allowing for greater rates of truckload build. These solutions are also appropriate for shipments from warehouses to stores, or when vendors drop-ship orders directly to the customer.

Reverse logistics
Reverse logistics services include returns from individual customers, consolidated aggregated returns, return-to-vendor items from warehouses and the seasonal return of merchandise from stores to warehouses. FedEx offers a variety of returns solutions, including preprinted labels, which are generally sent with an outbound shipment or shipped out by the consumer to the return merchant, or electronic return labels, which provide ease of use and better tools for retailers to control their return processes. Some of the benefits of using electronic return labels are the ability to print an outbound and return label at the same time, maintaining a shipping history of all return shipments, increased return shipment visibility through the FedEx InSightâ service and precise customer reference (including RMA) number availability for tracking and invoicing. Electronic labels are sent by secure e-mail directly to the return shipper without exposing the retailer’s account information. The return shipper prints labels from its own printer, places the labels on the packages and drops off or requests pickup for the shipment. FedEx also offers a driver-delivered label option that combines the delivery of labels with the pickup function so consumers don’t have to create a label or drop off the package.

FedEx can support retail store operations by “sends” of individual customer shipments purchased in-store, by shipping merchandise purchased in-store directly out of the warehouse and by handling inter-store transfers to balance stock levels. In addition, the FedEx Shipment Integrity Program provides a unique shipment identifier to help prevent and analyze the cause of split shipments in order to reduce the chance that a retailer with a product release or store opening might not receive items for a particular event.

The FedEx Ground Multiweight® service option optimizes moving multiple packages from one location to the same destination on the same day. It allows multiple packages collectively weighing 200 lbs. or more to be rated as one shipment. This option requires no palletizing, shrinkwrapping, staging or segregation. The shipment is rated both as individual packages and as a single shipment and the customer pays the lower shipping rate.

Multi-warehouse logistics solutions
More sophisticated multi-warehouse operations are receiving vendor shipments at the warehouse closest to the vendor and then distribute the inventory to the warehouses and stores. Retailers can utilize transportation visibility tools to know when their shipments will arrive and for WISMO calls, reduce call-center minutes. FedEx InSight is a Web-based management tool that allows customers to view real-time status of their inbound, outbound and third-party shipments without a tracking number. Using account numbers and/or company name and address, it provides status information about their shipments in multiple languages, so customers can more effectively manage their supply chain processes. FedEx InSight also provides proactive notification via e-mail, Internet, or wireless devices, for critical shipping events like clearance delays and delivery attempts — and then suggests recommended actions to accelerate delivery.

IV. Conclusion

The competition is fierce in the multichannel retailing environment. A business that hopes to grow and prosper requires a comprehensive logistics and transportation strategy, executed flawlessly. The dilemma for management lies in trying to meet consumers’ growing expectations while keeping costs in check. In response to these issues of multichannel growth, more and more carriers are branching out to offer logistics services. Those businesses that work to build successful relationships with logistics and transportation vendors will find that their efforts lead to improved customer service and profitability. It’s not an easy task, but it is certainly one that’s achievable with the tools and technology available today.
After all, you could have answers to your boss’ request …


Curtis Barry is president of F. Curtis Barry & Company, a Richmond, Va-based consultancy specializing in operations and fulfillment for catalog, retail and e-commerce companies. The company conducts benchmarking and best practice ShareGroups for retail distribution, direct fulfillment, customer contact centers, inventory management and chief financial officers, as well as Executive Forums for company owners and management. Curt can be reached at 1.804. 740.8743, by e-mail at cbarry@fcbco.com, or go to the company’s site www.fcbco.com.

Jose Li is responsible for developing and implementing the corporate-wide marketing strategy and solutions for the retail industry. The FedEx Retail Industry Solutions team leads the evolution of FedEx to more of an industry-focused solutions orientation and shipping services organization, enabling retailers to increase customer service levels, maximize investments and improve margins. He can be reached at jose.li@fedex.com, 1.901.263.8487, or go to http://retail.fedex.com to learn more.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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Controlling and Reducing Your Fulfillment Costs

 

We all know we’re in a tough business climate. With many companies coming out of less than perfect fall and holiday seasons, there is an urgent need to increase productivity and reduce costs without having to make major capital purchases to do so. Here are five major areas and 25 ways to reduce your cost per order, increase capacity without expansion, and improve service levels in warehouse and fulfillment. The source of this information is experience gained in our consulting work with multichannel companies, as well as from the F. Curtis Barry & Company Benchmarking and Best Practice ShareGroups for Fulfillment.

Perform an Operational Audit

An operational audit is a starting point. Operational assessments should identify your needs, and help recognize potential improvements to process, layout and use of space, staff productivity, systems and freight analysis. The objectives are to lower the cost per order, increase storage capacity within the center, reduce inbound and outbound freight costs, and improve service levels and turnaround times. 

Because they represent the largest expenditures, the areas of greatest potential savings are:

  • Direct labor
  • Indirect labor
  • Outbound freight
  • Inbound freight
  • Occupancy
  • Packing materials

Benchmarking

A program to set up internal benchmarks will reduce your cost per order or hold the cost in line as volumes increase. Translate these as goals down to department and individual work standards. 

The table, Total Warehouse Cost Per Order, shows 20 direct companies back end fulfillment expenses including direct and indirect labor, occupancy and packing materials.  Total Warehouse Cost Per Order column does not include shipping costs nor does it include any offset for shipping and processing revenue.  The reason for excluding   these is that they distort comparisons because of average package weight and distance. 

All these businesses have been 1.5 and 2.5 items per order.

Company Code Company Annual Orders Total Warehouse Costs Per Order
A gifts 1,300,000 $9.40
B gifts 500,000 $8.30
C hobby 500,000 $7.00
D apparel 4,800,000 $5.80
E apparel 800,000 $5.80
F gifts 700,000 $5.60
G home 870,000 $5.40
H apparel 2,400,000 $5.20
I hobby 200,000 $5.00
J apparel 700,000 $4.80
K gifts 250,000 $4.55
L apparel 6,500,000 $4.30
M apparel 780,000 $3.45
N gifts 500,000 $3.20
O apparel 14,000,000 $2.90
P hardgoods 1,700,000 $2.80
Q gifts 5,000,000 $1.90
R apparel 3,400,000 $1.55
S gifts 650,000 $1.45
T apparel 5,200,000 $1.40
U gifts 3,000,000 $1.10
       
Average     $4.33

Source: F. Curtis Barry & Company Benchmarking and ShareGroup data.

The illustration shows 20 direct companies back end fulfillment expenses including direct and indirect labor, occupancy, packing materials. All companies average between 1.5 and 2.5 items per order. Total Warehouse Costs Per Order does not include shipping costs or any offset from shipping and processing revenue which would distort the cost per order. While external benchmarking will give you valuable insight into other's practices, the best benchmark is against yourself.

 

While external benchmarking will give you valuable insight into other businesses productivity and practices, it’s always best to develop work standards that apply to your business type, product type, level of warehouse automation, labor rates, etc.  Then benchmark against yourself – meaning to continually compare your productivity against standard to your actual performance by week, month, season and year.

The accompanying graph shows the breakdown of direct labor, indirect labor, occupancy and packing costs as a percent of the Total Warehouse Cost Per Order for average company.  It also points out the importance of focusing attention on the management of the Direct Labor cost factor in the warehouse.

F. Curtis Barry & Company looks at industry wide benchmarking numbers that represent an extensive range of business types, sizes, productivity levels, and pay rates.   The overall average per cost per order is between $3.00 and $5.00 comprised of direct labor, indirect labor, occupancy and packing costs. 

In the table, Total Warehouse Cost per Order, the cost per order at the low end of the table ($1.10 to $2.90) have a high degree of automation implemented in the center.  There are others above this level that also have automation but are not as productive. 

Additionally, it’s interesting that order volume doesn’t always translate to lower cost per order.  Direct labor costs range between $10.00 and $14.00 plus anywhere from 15% to 30% benefits depending on the company.

Another variable in the costs are the facilities themselves.  Some are very modern, air conditioned facilities and highly automated; others are very basic.

Management often wants to compare companies based on percent to net sales.  Percent to net sales can be a dangerous measure to compare because of the wide range of average order values in this industry.  However, the average company is in the range of 3% to 5% of net sales.   

Using this range of values and determining where you fit within this range can point out areas where you might want to focus attention. If you are approaching “Best in Class” numbers, you might want to consider investing your time and attention on other areas where that investment would yield a greater return on your investment. If you find yourself at the higher end of the range, there are possible cost savings available.

All of the variability in these external metrics doesn’t make comparability invalid.  You just have to get behind the numbers and understand their basis.  Additionally, by exchanging benchmarks and touring other’s facilities, you learn a great deal about how others gain efficiency, provide customer service and apply best practices.

Managing the Work Force

Develop labor budgets
Have a labor budget by season, month and week based on order forecasts and planned productivity. This is the tool to use to determine your detailed staffing plan, hiring and training plan and seasonal hiring.

Take a good look at your current staffing ratio. Full time, if not kept productive, may be costly. Change the mix of full time, part time and flex time staff.  Consider different shift structures and schedules to match regular labor to the volume (3 12-hour or 4 10-hour shifts, or split weeks).

Manage the labor force
Labor is the largest controllable expense item in your DC. Capture regular and premium hours and labor dollars. Set these daily against volumes (e.g. orders, lines, etc.). Include history as a cumulative report by month, week and day, and measure your continual improvement internally against yourself. This history helps with your budgeting next season. Look for ways to improve picking and packing as about 50% of the labor dollars are in these two areas. 

Hiring, retention and attrition (turnover)
Review the reasons attrition is so high and work to close the gap. Review your hiring, retention and training practices. How well are you able to staff for the peaks? Consider some type of incentives for keeping good people. Spend more time in the hiring process explaining the job and your expectations. Don’t underestimate the need for adequate training; consider cross-training in jobs where it makes sense. Use your staff to provide leads for new hires. Stay in touch with past seasonal help and offer them incentives to return.

Using an agency for peaks
If you just can’t staff for the peak, seek out a good temporary agency. How can this bring more flexibility to your operation?  The trade offs are overstaffing or overtime.

Scheduling
Take advantage of off-shift functions such as primary pick slot replenishment, staggering start times by functions (picking and packing), multiple shifts, and doing your slot moves at night. Better utilization of space means less congestion, and improves labor efficiency and MHE utilization. 

Team building
Successful organizations take team building seriously. Use team building to take your organization to a new level and improve productivity. You can communicate your vision and your plans, while involving the team in the planning and decisions. Set goals and objectives to maintain the corporate vision and hold your management team accountable in achieving the vision. Do effective personnel evaluations which tie in productivity and goals. 

Transportation Management

Controlling inbound and outbound freight costs can make the difference between profit and loss for your business.

Inbound freight
Represents 2% to 4% of gross sales for domestic product and 6% to 12% of imported product. Freight consortiums like DM Transportation have lowered some of our clients’ inbound costs by 15% to 24%. Equally important are the vendor compliance and inbound in transit visibility that shippers can provide so that you can schedule receipts, plan labor, and alert buyers and, ultimately, the customer to product availability. Your company, not the vendor, should control the routing and carriers for inbound receipts. 

Outbound freight
Can represent 6% to 8% of the average order. Customers are becoming more sensitive to the cost of shipping in their purchasing decisions. Expedited carrier plans have 90+ accessorial charges which continually increase the shipping costs. Continually look at renegotiating contracts. Use USPS and zone skipping where tracking and slower delivery will be acceptable. Use a qualified consultant to negotiate contracts. 

Best Practices and Process Improvement

Use what you have more productively
This is a mantra in fulfillment today. By not taking care of the basics of fulfillment, you are adding costs to the warehouse operation. Increasing current capacity and utilizing that capacity more effectively are key objectives. Do the basics well before you consider more sophisticated systems and methods. Get as much productivity as possible out of the existing layout, processes and systems first. Keep the processes simple so that part-time people can be hired and become productive in shorter times.

Reduce handling and touches
The fewer touches of product, the less cost of incurred to process orders. Streamline the operation and apply industry best practices to reduce handling and costs. Flow chart the receiving process through putaway, and the picking process including replenishment through to the shipping function. The areas for improvement will become more obvious.

Replenishment
Effective replenishment is the basis of efficient order fulfillment. Inefficient replenishment will cost a huge amount of dollars and negatively impact customer service. Use a combination of min/max and demand practices to fill forward pick locations. Make sure replenishments are scheduled and completed prior to the start of the picking process.

Slotting
Effective slotting practices can lower your costs for picking, replenishment, and putaway warehouse labor. Try to have seven days of average demand in the primary pick location. This reduces the number of times the picker finds an empty pick slot. Use velocity slotting to determine pick locations and reduce travel time. Consider the development of a dynamic hot pick zone for very fast selling items.

Inventory control
Effective inventory management is the single most important tool to improve customer service and reduce cost of operation. Aisle mapping—verifying product to all locations— is a fundamental way to improve inventory control. Cycle counting—counting product in all locations for a single SKU—insures inventory accuracy. Cycle count programs can eliminate annual physical inventory taking. Using bar codes throughout the inventory process (from inbound cartons and pallets, to putaway, through picking, pack confirmation and shipping) increases accuracy to 99.9% and dramatically increases efficiency.

Picking options
How can you use best practices to improve picking productivity? Match the method to the pick problem. Batch pick singles. Consider cart/bin or zone picking for multi-line orders. Batch picking and sorting as a separate functions. Consider the total cost of a combined operation of picking and packing as an alternative.  

Packing options
The key to packing performance is to keep the packer at the station. All materials, inserts and supplies must be within the packer’s reach. Insure good ways of moving sealed packages to the shipping and manifesting stations. Are there automated sealers that give an return on investment (ROI) for your volume and shipping containers? Consider the design of the pack station as a critical factor (e.g. height, work surface size, fatigue mats, supply storage, etc.). 

Receiving practices and cross docking
Efficient receiving starts with having all purchase orders in the receiving system prior to merchandise arrival. Review your company policies regarding vendor compliance. Cross docking is an effective practice to reduce handling costs while improving customer service, as in filling back orders. Advanced Shipping Notices (ASNs) improve efficiency and accuracy, speed dock-to-stock, and allow scheduling of receipts and labor.

Use proper levels of quality assurance throughout the warehouse
Are you “over inspecting” customer orders, rather than basing inspections on the benefit gained? Focus inspection activity on the outbound process at the pack station. Some operations do inspection activities to the point of diminishing returns; avoid spending money that does not result in an ROI. 

Overstocks
How much space in the center is taken up by overstocks that merchants are sitting on?  One center we are working with has, conservatively, 15% of its space tied up in overstocks. Together with merchants and management, they are undertaking a revamping of planning, forecasting and liquidation practices to avoid the need for expansion. 

Process returns more efficiently
Returns cost more than orders to process because you lose the product margin; returns require refurbishing and return processes are not as streamlined as order processing. The best return policy is to try to eliminate the causes of returns before they happen. Large return categories of goods (e.g. electronics, apparel, etc.) have high labor costs and require significant space use. Untimely processing of customer credits, refunds and exchanges can damage customer service. Look at use of staff, space, service levels and systems to improve productivity. These operations also generate lots of trash. Do you have the right equipment to take it away? Are you selling recyclable waste at a profit?  

Outsourcing as an option
There are practical and cost effective reasons to outsource part or all of your business. It may be to deal with a peak, adding new product categories, or when fulfillment is not a company core competency. It may also help to serve a new market, such as Canada or the opposite coast. One large electronics retailer that we worked with implemented Canadian outsource fulfillment which serves the customers well and at an affordable cost.

Finding the right level of automation and systems
ROI analysis could put automation into your planning for cost improvement. The wrong material handling equipment can be creating hidden lost time and inefficient product flow, impacting cost and customer service.

Warehouse management/bar code systems

This should include reviewing how bar coding is used throughout the warehouse. Conveyance, material handling and warehouse management systems can improve productivity, increase accuracy and service levels and reduce costs.


Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.

Conducting a Post Season Audit on Your Fulfillment Operations

 

Although the 2007 holiday season hasn’t ended yet for many multichannel merchants, many of our clients are already preparing for holiday 2008. You should, too, by conducting a post-season audit. This process enables you to challenge your group to find ways to reduce costs and at the same time get critical data and observations to be used for the next holiday season.

In this article we will cover both the basics of performing a post-season audit as a base line for process improvement and cost reduction, as well as discuss the major potential cost reduction areas of the distribution center.

The first step in the audit is to form a post-season review team, which should include fulfillment supervisors and some key personnel in the DC. The team’s observations of what went right, what was marginal, and what needs to be fixed before next year should include finding answers to these questions:

  • What was the labor cost per order shipped during the increased staffing period of your holiday season, vs. your balance-of-year average cost per order shipped? This identifies how effectively you used the temporary holiday labor and how it performed.
  • What was the cost of training the seasonal labor force? Were they brought in at the right time for sufficient training and to match volume surges, or were they on the payroll too early?
  • What was the found error rate and subsequent rework required? Are they higher than normal? Why did they increase?
  • Did you use your experienced associates to pick and teach seasonal temps to pack? You should: It is easier and faster to teach packing than to teach picking, and if you use your experienced people to pick, your error rate should be lower.
  • Did you cross-train all regular associates to pack during the course of the year? Were they available to fill in for peaks after performing such tasks as receiving, put away, administrative/clerical, etc.? This enables you to hold down the number of seasonal temps required.
  • What was the rate of overtime during the holiday season versus the balance of the year? Also calculate labor man-hours per order shipped during the holiday season vs. the balance-of-year average. Low wages paid to temps may drive down the cost per order, but man hours used will identify your true performance.
  • What was the turnover rate for seasonal employees and for what reasons? How many rehires did you have to make, adding to training cost and putting inexperienced people to work? Too frequently, inexperienced and insufficiently trained people make little contribution and drive up costs.
  • Were there any issues with shortages of supplies? Why?
  • How did holiday volume perform to the sales forecast? A post-season audit is critical to understanding DC management’s responsiveness.
  • How did the DC perform daily against order volume? Did the facility fall behind scheduled shipments? How far behind by day? What was the order carryover identified as both orders and a percent carryover by day?
  • Did your carriers perform? Were their pickups on schedule?
  • Were there any bottlenecks in the flow of work? Why did they occur and how can they be averted next year?
  • What was your post-holiday season rate of returns? What were the reasons for returns, which were DC related (i.e. picking error, broken in transit, etc)? What was the turn around period between receiving the return and processing refund or exchanges? Any areas or bottlenecks in the returns process that need to be corrected? Was there sufficient receiving space? Did it infringe on outbound space?

To help answer these questions, use departmental reports throughout the center. These include transaction volume reports for orders received, picked, shipped, manifested, returns, back orders processed; service levels achieved (standard or plan and actual) payroll and productivity reports (budgeted and actual); DC inventory control reports about inventory adjustments, products not found in picking process, error reporting, etc.

Implementing Changes in Your Distribution Center

With the peak volume of the holiday season over, you should have just about finished your post-season audit of your operation. As we discussed previously, this will give you a good idea of how and where you can reduce and control expenses in your distribution center.

Now it's time to implement some changes. Where should you start?  Here’s a checklist of some steps to take.

  • Bring your workforce down to the size required for your post-holiday business forecast. Nothing increases costs more than excess people on the payroll—and by attempting to manage hours with too large a staff, you’ll wind up sending employees home early multiple days per week, running the risk of losing key associates who can’t afford to work less than 40 hours.

    This is also a great time to evaluate all employees and retain the workers who performed best. Frequently you’ll find gems in the seasonal staff who are better than some of your regular associates. So bite the bullet, make the difficult decisions, and reduce staff quickly.
  • Perform inventory consolidation in your storage area, both to organize storage and create space for new product arrivals. Consolidating inventory now will save inbound labor dollars later, as well as ease and expedite the ability to locate product.
  • Assure your key performance metrics are in place for pick, pack, ship, replenish, receive and put away. Be certain you are generating reporting on all the key indices which will help you manage expenses, including labor hours and dollars (regular and premium) measured against volumes received and shipped (units, lines, orders, boxes).  
  • Reconfigure your slotting and pick locations to reduce travel time to a minimum.  Relocate items appropriately to slow moving or to fast moving picks to create efficiency.  Remove seasonal items from the pick line so you are not walking by them each day.
  • If you didn’t cross-train all regular associates to pack last year, begin now for next year and continue cross-training throughout the year. Be sure any new employees retained from the seasonal worker ranks are fully trained and performing to standard. Training for seasonal associates is often quick, so if you are retaining people, make sure they are properly trained to be successful.
  • Develop a fulfillment to-do list from your post-season audit. Assign responsibilities and follow up to assure the tasks are being performed.

    If you have never developed goals and objectives for your operation and your fulfillment staff, this is the perfect time to start. Goals and objectives or key performance indicators are the most objective method of evaluating individual performance.  Successful accomplishment of goals and objectives adds to the profitability of the company.  
  • Create your fulfillment budget for the next fiscal year. Remember that an effective budget reflects improvement in performance and reduction of expense to enable the company to offer wage increases where appropriate.
  • Review transportation contracts. When shipping volume is down, every penny of cost becomes critical. Knowledgeable review of both inbound and outbound transportation contracts and costs can typically yield savings up to 20%.
  • Consult with your supply vendors for packaging, corrugated, styrofoam, etc. Are you able to return overstock for credit? Again, every penny saved during slow periods is important.
  • Determine if this is the time for experienced help to assist you in reconfiguring the warehouse. There are many ways to improve layout within your current walls to expand capacity and improve efficiency.

    Along those lines, are your systems generating the necessary results in the required time periods, or is your fulfillment center losing efficiency because your systems are unable to perform?  This is a great time to develop a systems requirement document identifying your needs for growth and for performance.
  • Conduct objective individual performance evaluations for your salaried staff. Objective and honest evaluations of individual performance are the building blocks of great teams.

And finally, the only good thing about slow volume is that it affords you the opportunity to evaluate past performance failures and to implement change for future performance successes.


Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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Why and How to Conduct a Warehouse Assessment

 

In today’s challenging and competitive world, your success can hinge on whether your warehouse operation is productive and effective enough to meet your expectations and those of your customers. One way to gauge how effectively your warehouse operations are meeting these expectations is to conduct a warehouse operations assessment: a systematic review of the warehouse functions looking for possible improvements in efficiency and service. An good operations assessment takes a quantitative and qualitative look at the productivity and service levels of your warehouse operation; it enables you to measure productivity and service and identify patterns and trends; it tells you exactly where you are and what you need to do to meet your goals. It also allows you to compare your measurements with your own in-house goals as well as industry benchmarks.

Remember, if you can’t measure something, it is difficult—if not impossible—to improve it. An operational assessment can help you improve productivity; use distribution center space more efficiently; improve throughput and capacity of orders processed in the warehouse; streamline work-flow by reducing steps; improve service levels, processes and costs; and generally achieve higher profits and lower costs. If these are your goals, combining measurement of the various components of the operation with a structured approach to develop improvements is the key to successfully acting on the assessment findings.  Once you gather the information and make the comparisons, you’ll be able to draft an action plan.

Five Basic Components of an Assessment
The assessment process enables you to identify areas where you can improve operational performance. The five basic components of the assessment are:

1. Walkthrough and observations of the operation
2. Data gathering of necessary information and metrics
3. Interviews with key staff members
4. Report analysis to determine current productivity and service levels
5. External benchmarking to look for areas of potential improvement

Walkthrough. One of the first steps in the assessment is to take time to walk through the facility and observe general operating conditions and effectiveness of the processes being used. This is not a detailed analysis, but developing overall impressions can guide the more detailed steps of the assessment to be completed later. Many times, the initial walkthrough and observations help focus and direct the assessment process. After you have seen enough facilities, it is possible to form initial opinions as to the current level of productivity and service very quickly. The general cleanliness of the facility, employee attitude and morale, overall work pace, information posting for employees, congestion, appropriate use of automation, bar code applications, space and cube utilization, etc. are all issues that can be observed during the walkthrough that can provide clues as to the appropriate focus for the assessment. Using all of the tools available can provide valuable information for the direction of the detailed assessment.

Data gathering. The assessment will involve some new research, but chances are you’ve already been collecting a lot of the data for other purposes. Designing an assessment is a matter of putting it all together. Most assessments are a combination of research analysis, report review and on-site fact-finding. The first step is to gather all the research you already have and collect any that you are missing. It is always necessary to establish expectations or standards as the baseline for any comparisons. Measurement against these standards identifies areas where expectations are not being met and action is required.

Staff interviews. Another important step is to talk to those staff members directly involved in the activity being assessed. Interview key management staff to gauge their perspective on the operation and any future plans for growth, product changes, or planned process changes. Then talk to the workers on the floor doing the work in the warehouse. If anyone knows where the problems and opportunities lie, it is the people who live with the issues day in and day out. Don’t miss this important resource; they are many times the best source for information.

Report analysis. Among the types of reports you should consider are basic internal operations performance reports, including service levels such as order shipping accuracy, order turnaround time, etc.; receiving; quality assurance; stock putaway; returns; inventory control; replenishment; and picking, packing and shipping. Examining these reports can help reveal which departments are reaching desired levels and which ones need some attention. The reports usually will include information relating to budgets or expectations compared to actual results in key areas of the business, covering productivity as well as service metrics.

Benchmarking is important. Your assessment should compare your desired standards of service and productivity with your actual performance. Comparing your own figures—both actual and goals—to that of other catalog and multi-channel marketing companies can help you evaluate your performance, too. Just be careful to compare “apples to apples” and pick companies that are as much like yours as possible. External comparisons can lead you to certain areas or processes within your operation that are candidates for further study. But remember that you cannot take someone else’s standards or performance expectations and make them your own; there are always too many differences in operations to do this. Our opinion is that it is always better to compare your results against yourself and against a set of standards or expectations over an established time period. This permits the identification of trends as well as snapshot evaluations. It is really desirable to combine both internal and external benchmarks to evaluate where you stand.

It is also very important to make sure you measure activities and costs that are relevant and actionable. Reviewing true productivity metrics in terms of work units and man-hours is better than looking at a percent to sales measure. The percent measure is dramatically affected by price points and labor market conditions, which usually are out of the operation’s control. Emphasis should be placed on comparable benchmarks, which can lead to some action steps by the operations group.

The types of metrics commonly found in a warehouse benchmark assessment are:

a. Total warehouse cost per order/line/unit
(includes direct labor, indirect labor, occupancy costs, and packaging)
b. Units per man hour
Receiving
Putaway
Replenishment
c. Units and lines per man hour
Picking
d. Boxes per man hour
Packing
Shipping
e. Outbound Shipping costs
f. Orders and Net Sales $’s per square foot of warehouse space
g. Orders per FTE (Full Time Equivalent)
h. Average base pay
i. Cost factors as a % of Net Sales
j. Service Level
Order turnaround time
Order and inventory Accuracy
k. % utilization of available space
l. Seasonality - % of business by quarter

Four Critical Areas to Assess
There are four key areas that should be evaluated in the warehouse. They make up the most critical aspects of any fulfillment operation. They are:
1. Labor
2. Facilities
3. Workflow and procedures
4. Systems

Labor is incontestably the most expensive area on your profit and loss statement relating to fulfillment, so it’s important to get the most for your payroll dollar. Labor, in turn, consists of four areas, the first two of which can be easily quantified; the others are more difficult to quantify but should not be ignored.

Productivity.Simply a measure of the number of work units processed in a given amount of time, either by employee or by department. Work units can be orders, shipments, lines, etc. as appropriate for each fulfillment function.

Cost of labor.Can be divided into “Direct” labor—the part of your labor force directly involved in physically moving merchandise, accounting for a full 50 percent of overall fulfillment costs—and Indirect labor—clerical workers, managers, supervisors, administrative staff, security, etc.—-accounting for about 17 percent of overall fulfillment costs. Both have to be evaluated in the assessment process. The relationship of labor cost and labor productivity is critical to understanding where to place your emphasis.

Turnover and training:The effect of your turnover rate is difficult to quantify, but rest assured, it is real. The turnover rate itself can be derived from a simple calculation, and should not be overlooked. If your work force changes frequently, productivity is likely to suffer, as group after group of new employees work through the learning curve to reach full competence. In addition, the cost of hiring—screening, drug testing, training, etc.—is escalating. By contrast, a stable work force that knows the system and processes can continually work toward new efficiencies. Ask yourself what you can do to reduce the turnover rate. How efficient is your training process? Are training procedures documented? Are there enough training materials and manuals on hand? All these factors will make a difference in the effectiveness of your training efforts.

Local labor market:Your local labor pool will also affect productivity and costs in a way that is likewise hard to measure but nevertheless real. A low unemployment rate may mean that in order to hire the quality of worker who can achieve the productivity levels you desire, you will have to pay higher wages (thereby increasing labor costs, already a hefty chunk of the cost column). A higher unemployment rate may have the opposite effect. The local economy is largely beyond your control, yet it can have a profound influence on your operations—all the more reason to get a handle on those factors that you control.

Facilities should be examined to determine whether you have enough space and whether you are using the space you have efficiently and cost effectively. Components include:

The cube: Focus cube utilization on Storage, Picking and Packing, areas which together typically account for 70 to 80 percent of warehouse space. Are you using the whole “cube” (square footage and height) effectively? An assessment gives you the ability to maximize the use of existing facilities before spending money and effort to add resources, so that any future justifications for expenditures will be valid and generate an accurate Return on Investment.

Costs:Typically, occupancy costs (lease or depreciation costs of building and equipment, utilities, maintenance, taxes and insurance) amount to 18 to 22 percent of the total fulfillment dollar. Beyond that, there are many ways, such as calculating the occupancy cost per order or call, to map your facility’s costs and compare the results to other companies.

Seasonality: Your warehouse will operate differently in peak and off-peak seasons; take both into consideration. In fact, the frenetic activity of peak season is a good time for assessment; you’ll see whether your space is sufficient and whether your systems hold up. Whenever you perform your assessment, keep peak-season needs in mind.

Housekeeping/Maintenance: Cost of occupancy goes up as housekeeping standards go down. Congestion, inadequate lighting, floors in poor condition and lack of proper maintenance will slow work and put your work force at risk of costly accidents that drain profits. Dirty conditions can affect products, resulting in costly returns, and also adversely affect the operation of bar coding equipment, automated conveyances, and mechanical sorting devices. Besides, the attitude, productivity, morale and retention of your work force will be higher in a tidy workplace.

Workflow and Procedures are often the easiest areas in which to make improvements. Your goal is to minimize the number of times a product is handled, and the number of steps your crew has to take to move the product through the facility. Providing the potential to match future needs is critical.

Flow charts:Develop one detailing how product moves from receiving and returns through replenishment, and a second detailing how orders move from pick ticket generation to shipment. As you trace the movement of goods through the facility, take note of how its layout helps, or hinders, workflow. Consider if departmental workflows contradict each other; whether you are using conveyors where you should, employing the right material handling equipment, and have the best storage methods for your product. Work paths should minimize travel time and merchandise movement. Departments should be situated logically in relation to one another to minimize travel between them.

Slotting systems:Your slotting program will determine how efficiently your staff can pick. The goal should be to ensure product is available when the picker reaches the pick slot while managing the number of replenishments needed. Proper slotting is a key to effective replenishment. The ideal slotting system gives you flexibility. You should re-profile your primary pick slots as part of a dynamic, ongoing process.

Packaging materials: Failure to keep enough materials on hand, right at the work station, for the warehouse crew to do their jobs (e.g., shipping cartons, dunnage, gift wrap, taping, picking tote boxes, etc.) will mean productivity suffers while workers lose valuable time gathering materials or waiting for them to be delivered.

Quality control: Identifying errors early saves money; cost of an undetected error is typically $25 to $50. Don’t rely just on returns from customers to gauge your accuracy or quality performance. Make sure you are measuring and reporting internal quality checks and taking action as needed. The assessment should review both incoming and outgoing quality. Vendor compliance manuals should be reviewed as well.

Systems should provide the functionality and flexibility you need, supporting efforts to maximize space and labor efficiency. In most warehouse operations, the three key areas of concern are slotting, replenishment, and location control. Basic warehouse management system (WMS) functionality should include:

Inventory management is the most important WMS function. It should track product by SKU, quantity, location and transactions against the location, and ensure inventory accuracy.

Bar coding will not only significantly improve the accuracy of inventory transactions; but also will help you track productivity in four-walls inventory tracking (receiving, stock put away, pick, pack and ship) and productivity by individual, activity and/or department. It can dramatically reduce paperwork.  

Replenishment: Your WMS should control bulk-to-forward movement of goods, through minimum and maximum inventory triggers. It should also monitor demand quantity in waves of pick tickets, to make sure sufficient quantities are in the forward pick location. Look for opportunities to cross-dock back orders.

Pick ticket selection: The WMS should enable you to print and sort pick tickets in a variety of ways, depending on order priorities and resource availability.

Pack verification: You should be able to scan items to check accuracy before shipping.

Tracking: Your WMS should track orders throughout the fulfillment process and integrate order status to your customer service department.

Returns: Your WMS should minimize steps for processing returns to keep costs low.

It is critical that all systems communicate with each other as needed and use common data as much as possible to maximize operations efficiency and productivity.

Final Steps: From Assessment to Action
Once you’ve gathered and analyzed all the information you can, patterns will emerge and you’ll have a quantifiable picture of what you do well and what needs to be improved. But your assessment isn’t over. The final step—the action plan—is what will make your assessment yield meaningful results. In creating your plan, focus on areas that will yield the greatest benefit. Before you tally up a long list of changes that will leave your team feeling overwhelmed, recall that Pareto’s 80/20 Law usually works. Where can you get the biggest improvements from the smallest number of changes?

Finally, write your action plan so that it provides for continual improvements over time. It should include detailed action steps, assignment of accountability, and expected completion dates. Manageable changes introduced gradually will be more effective and more readily accepted by your workforce than one massive overhaul. Gradual change helps make continual improvement a part of your corporate culture. Make sure any plans you develop include clear action steps, accountabilities, and timelines.

And don’t assume that one operational assessment is enough. Comprehensive assessments should be conducted on an ongoing basis to stay in touch with customer needs, accommodate your company’s growth, keep pace with your competition’s improvements—and to keep up with whatever promises your marketing department is dreaming up right now.


Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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Keeping Vendors Compliant

 

A formal compliance program can help reduce costs

How important is vendor compliance? Imagine the following scenario: An apparel retailer's shipment of dresses for a catalog drop arrives late; in the meantime, hundreds of customer orders have gone on back order. Or how about this one: A hardware merchant finds that a shipment of tools has reached the distribution center — but the products are all the wrong sizes, because the factory failed to label them correctly.

These are the sorts of issues that vendor compliance policies seek to eliminate. Although it cannot eliminate every possible problem, a well-thought-out formal policy can protect you by specifying sanctions and charge-backs for vendors' mistakes.

While picking, packing, and shipping are the final steps in making sure customers get what they ordered, a truly efficient direct merchant will have planned to eliminate as many potential pitfalls as possible long before the merchandise is pulled off the shelf in the DC. At any significant scale of operation, the relationship between merchant and vendor has to run on more-structured and stringent guidelines than mutual trust. Companies without vendor compliance policies run a much greater risk of snafus than those that have spent the time it takes to develop detailed guidelines.

The Challenge

There's no doubt that rationalizing vendor relations poses a significant challenge to the retailer. All direct marketers receive goods from offshore and/or domestic vendors. Most merchants have to handle inbound consolidation of product from multiple vendors; multichannel merchants may need to cross-dock shipments directly to stores without opening, inspecting, or repackaging them. All merchants use reverse logistics to consolidate their inevitable returns, and many may also be faced with such complex, vendor-related logistics as warehouse-to-warehouse transfers, vendor-direct-to-store shipments, or merchandise shipped from a vendor to the closest warehouse that then must be allocated to other warehouses.

So it's easy to see why vendor compliance is at the heart of efficient supply chain management. Routing inbound shipments to reduce costs and scheduling inbound appointments can help speed product flow through the DC, significantly helping in turn to reduce inventory levels. Automating the supply chain through advanced shipping notifications (ASNs), RFID, and cross-docking to stores can go a long way to reducing costs, but these measures are not a substitute for a comprehensive vendor compliance policy.

Considering that labor accounts for 50% of the cost per order, anything a merchant can do to reduce the number of times product is touched — by way of repackaging, marking, and inspection, for instance — will help to reduce those costs. Domestic inbound freight accounts for 2%-4% of the cost of goods sold. Although offshore sourcing costs are higher, the increased margin pays for freight and product development costs. Some industries are especially prone to high labor costs. Because of the high return rates in the apparel industry, for example, costs for receiving and returns can be as much as 30%-35% of a DC's total direct labor costs.

All Aboard

Establishing and monitoring vendor compliance is a team effort among the merchandising, operations, finance, and inventory control departments. Everyone has to be in agreement. In fact, a frequent obstacle to implementing vendor compliance programs is that merchants are afraid that a more comprehensive and careful accounting may upset vendor relationships that [What you need to know to implement an effective vendor compliance program] they have worked to develop. The merchant has to weigh that possibility against the probability that improved vendor compliance will reduce costs and improve customer service over time.

For the many companies that have major problems in processing receipts in a timely fashion — those companies that incur higher warehouse costs and costs per order than their competitors, and whose store replenishments are not streamlined to flow through their DCs to stores or directly to stores from vendors — vendor compliance is a necessary step to reducing costs by increasing efficiency.

Without a formal vendor compliance policy, the warehouse has no recourse but to absorb both direct and hidden costs for noncompliance. Without compliance it is impossible for a merchant to implement advanced supply chain systems, ASNs, just-in-time inventory, source marking and ticketing, or future RFID programs. A good vendor compliance policy will not only avoid pitfalls, but it also will help the merchant get receipts on time and in compliance, which in turn will reduce the time spent dealing with vendor disputes, claims, and charge-backs.

Making it Formal

WHAT CAN GO WRONG:
VENDOR CHARGE-BACK
CATEGORIES:

The following is a sample of chargeback categories from a midsize direct merchant whose vendor compliance manual is 25 pages long:

-Improper purchase order (PO)
number on carton or label
-Wrong product sent
-Product not labeled with SKU #
-Style or product substitution
without approval
-Inbound receipt past
cancellation date
-Incorrect labels or placement of
labels
-Merchandise not bagged to specs
-Product not labeled with country
of origin
-Shipment lacks certificate of
origin
-Invalid PO
-Product specs not sent in
advance of shipment
-No photo sample
-Merchandise not packaged
according to specs, repackaging
required
-Early shipment without approval
-Merchandise required 100%
inspection
-Mixed POs on pallet or in
cartons
-Mixed SKUs per carton
-Failure to meet cross-dock-to-
store requirements
-Bill of lading not complete
-Shipment did not conform to
routing guide
-Late delivery, causing
backorders
-Merchandise damage not
attributed to carrier
-Did not ship in correct option
-Incorrect placement of packing
list, incomplete packing list, no
packing list
-Shipment on nonstandard pallet
-Failure to protect fragile
merchandise
-Delivery to wrong address
-Delivery without appointment

Ultimately vendor compliance works best when a company can clearly state to its vendors consistent compliance parameters and goals — and just as important, specific sanctions for noncompliance. The major benefits of a formal vendor compliance policy are significant: reduced cost of warehousing, reduced freight in, and increased speed of processing orders and through-to-store replenishments. These benefits in turn have a direct effect on customer satisfaction because they reduce return rates due to incorrect sizing, color, and damages.

How comprehensive should a vendor compliance policy be? Best practice calls for a company to develop a detailed, written policy and to then enforce it by instituting a charge-back policy to which both vendors and management agree. In general, a merchant should aim to push compliance back up the supply chain. One way to accomplish this is to have as many value-added services as possible — packaging, marking, quality inspections — performed by vendors or merchant reps in factories. Catching errors at the source and using source-based services speeds inventory flow, and any such issues are cheaper to deal with in the vendor's environment.

It's a good idea to ask the vendors to review the policy, sign off on it, and fax the signed copy back to inventory control. Many multichannel companies also have their compliance policy manuals on their Website and give vendors a link to it.

Starting a program may seem daunting, since a fully developed vendor compliance manual for a midsize company can run to 50 single-spaced pages of instructions and explanations. Such manuals have usually been developed over time, and although the draft of a new manual may be based on an example from another business, each individual company will have to use its own history and data to develop a compliance manual.

If you're just beginning to implement a comprehensive vendor compliance policy, it may be more useful to concentrate on some areas over others. Here are some key compliance starting points:

• Create a routing guide (or shipping instructions) that tells vendors how to ship small packages, pallets, and containers via the carriers you have negotiated rates with. The shipping instructions should include when to use which transportation companies based on weight, dimensions, and other criteria. Vendors charge a 20%-60% premium for shipping, so a best practice that yields big savings is to switch from vendor-paid to collect or third-party consignee billing.
• Make human-readable and bar-code labeling requirements.
• On-time merchandise delivery should be a priority.
• Enforce quality by stating item specifications for each product.

Charge-back rates vary widely, and it's up to the individual merchant to determine the real charge-back costs in his business. On the low end of the scale charges are $25-$50 per shipment, but some companies charge $100 or more per shipment (see “What can go wrong: vendor charge-back categories” table). For late shipment of merchandise that causes backorders, companies use a cost per backorder — $7-$12 in actual cost for most companies. Or they may use a graduated percent of the cost value of the late shipment and invoice.

Success Stories

Here are several examples of what retailers have saved by developing, adopting, and enforcing vendor compliance policies:

• Scuba gear merchant Divers Direct — with eight stores, a catalog, and a Website — achieved a gross margin improvement of 0.7% and better accounting control. With Federal Express consignee billing, its vendors now use FedEx as the preferred carrier, so Divers Direct can better manage its inbound shipments and realize significant savings on inbound freight costs. Another benefit is to use FedEx InSight to track shipments online and then to use FedEx DirectLink to download invoices automatically and allocate all freight invoices to the appropriate general ledger accounts.
• Timberland, which sells footwear, apparel, and accessories, improved its inbound visibility using a “scan and pack” process as product was packed at factories in Asia (90% of Timberland's product is imported). Shipment-related data, including container number and packing list, are sent electronically to the retailer's receiving system.
• In October 2005, Wal-Mart touted the early results of its mandated RFID compliance program. They are impressive: It has reduced out-of-stocks by 16% in stores where RFID is installed, as well as reduced excess inventory. It is three times faster to restock RFID-tagged items than to restock comparable items that are instead marked with bar codes. Overall, RFID-enabled stores were 63% more effective in replenishing out-of-stocks than the control stores.

As automation helps extend supply chains, the last frontier in efficiency and in automation may well be the way in which direct merchants manage their vendor relations. Those that ignore this potentially volatile aspect of their operations do so at their peril, while those with a seasoned, well-planned vendor compliance program can achieve significant savings.

LOOK IT UP IN THE MANUAL

Vendor compliance manuals typically address these elements:
-Company history, vision, and expectations for customers
-Cost of backorders to the
business
-Service standards
-On-time delivery to committed
delivery date
-Products delivered in proper
condition, delivered in agreed 
upon manner
-Product quality according to    
specs

-Product packaging and polybag specs
-Label marking for retail
shipments vs. direct
-Supply chain systems
requirement (electronic POs,
ASNs, etc.)
-Master pack and inner pack sizes
-Case labeling guidelines
Accounting and paperwork
requirements
-Logistical requirements
-Routing guides to reduce costs

-Scheduling appointments
-Cross-docking requirements
-Direct-to-store requirements
-Drop-ship instructions
-Schedule of charge-backs for
noncompliance
-Customer return of merchandise  and credits
-Contact list, including
merchandising, distribution
center, accounts payable, drop-
ship orders, and inventory control


Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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What Are Your Shipping Options?

 

In the next few weeks, all the carriers will complete their 2008 pricing announcements. As we look at the future, it’s probably a good bet that these carriers’ rates aren’t going down any more than the cost of oil. So what’s the impact and action plan for your business? Given the size of the increases that have been announced so far, multichannel companies need to look at all the options open to them and develop short and long-term strategies to reduce the impact.

UPS has announced that they will be increasing Ground rates by 4.9% in 2008, which is equal to last year. (FedEx will most likely match the UPS Ground increase, but that information has not yet been released.) Under new rates, the Ground commercial zone 2, 1-lb. rate has increased 5.0% over last year—overall, a 16% increase over three years, from $3.62 in 2005 to $4.20 in 2008. For 1-70 lb. packages the average increase is 4.8%. However, if the majority of your shipments are in zones 4 or 5 –like many businesses are- the increase is about 5.16%. Depending on your warehouse location and the predominant zones in which you ship to customers, the impact could be more or less than this average. Meanwhile, the Ground residential minimum charge increased to $6.15, a combination of the base rate for zone 2 and the Ground residential surcharge. In a quick survey of shipping tables of 66 multichannel companies, we found that 71% of the tables were lower than this $6.15 minimum charge.

As AFMS Logistics Management Group’s Managing Director Rick Collins points out, “The announced rate increases of 4.9% for Ground and 6.9% for Air from FedEx and UPS masks the true impact for many shippers. The base rates may average the announced increases across the board; however higher zone express shippers could experience increases in the 9-10% range. Additionally, surcharges are increasing up to 20% in some cases. Surcharges for irregular and large packages are up 8.3% to 12.5%. Commercial remote add-ons are increasing 7.1% and residential fees are up 5.4% for Ground.”

All is not totally gloom. There was some good news on November 15, when the Postal Service Governors announced that future prices will be adjusted using new regulations issued by the Postal Regulatory Commission (PRC) on October 29. Consistent with the Postal Accountability and Enhancement Act of 2006, future price increases for mailing services will be capped at the rate of inflation. Said Postmaster General John E Potter, “This delivers one of the main goals of the new law for business mailers—a predictable price schedule.” The new pricing regulations give the Postal Service added flexibility for shipping services. “We intend to use this new flexibility to grow our competitive business,” said Potter, “offering volume discounts and contract pricing.”

Looking at the industry as a whole, however, Edward Wolfe, transportation stock analyst for Bear Stearns & Co., had this to say: “Our sense is FedEx is clearly trying to send a message of pricing strength to both its customers and to competitors UPS and DHL.”

I think we’ve gotten the message. Now we need to do everything we can to reduce costs.

With the continual increases in the cost of oil and shipping, we think that companies need to assess both short and longer-term strategies. Here are 15 short- and long-term options to investigate:

  1. Renegotiate your contract.
  2. Can you use USPS to your advantage?
  3. Are you using best-way rate shopping? 
  4. Consider package weighing, and take out inserts when they push the package into a higher bracket.
  5. Can you leverage economies of scale using the same carriers for inbound and outbound freight?
  6. Investigate the economics of a second warehouse to reduce the distance and cost to ship to the customer. 
  7. Reassess your shipping and handling table in light of the changes.
  8. If you’re going to use free shipping, re-assess the minimum dollar order value and its effects on your transportation costs. Should the minimum be increased?
  9. Review whether you should use by-item shipping charges in your web and catalog copy for heavy and oversize products.
  10. Can you make use of package consolidators and zone skipping?
  11. Assess your total operation and determine if other costs can be reduced to help offset these increases.
  12. Improve your inventory forecasting and systems to improve inventory position and decrease the cost of back orders; keep in mind the $6.15 Ground residential minimum charge.
  13. From marketing and merchandising perspectives, how can the average order value be increased so that shipping cost is not such a large percent of the average or small order?
  14. Review your policies for giving away free freight to return merchandise.
  15. Is it time to use an experienced transportation consulting company to help you get savings? Or are you big enough to hire an internal specialist to continually assess and hopefully lower your costs?

Contract renegotiation is your #1 weapon. How much can be saved will depend on a number of factors: how well prepared you are in terms of knowing your package shipping profile; knowledge of carrier pricing and what can be discounted and negotiated; the 70+ accessorial charges and how they make up your total costs, etc. An increase in the carrier’s list rates does not necessarily translate to higher shipping costs. Bear Stearns’ Wolfe says, “At this point, we continue to expect the market, not announced large rate increases, to determine the direction of pricing.” “The market” means competitive bidding and your ability to negotiate. Another factor to consider is how important your account is to the depot or hub. We’ve learned that sometimes smaller accounts are much more important than management might realize, given the outbound volume.

The most nimble multichannel companies will determine how to offset these foreboding continual increases. We believe it will take all the weapons—both short-term tactics and longer-term strategies—to keep profitability from eroding.


Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.

Trends, Best Practices, and Metrics in Fulfillment

 

These are challenging times for the multichannel industry. On the basis of our consulting assignments in multichannel operations and fulfillment and proprietary data from the F. Curtis Barry & Company Benchmarking ShareGroups, we have identified several current trends in multichannel fulfillment, and ways in which businesses are addressing these trends by implementing industry best practices.

In the most positive light, challenges can also present opportunities in managing fulfillment. The challenges we see include: A need to increase productivity; dramatic increases in transportation costs; a continual rise in direct labor costs as well as in the availability and quality of the work force; compressed seasonal order peaks; higher customer expectations; more companies focusing on supply chain opportunities to decrease costs and increase customer service; competitors reducing costs and service times; and China import problems.

Fulfillment Operations Metrics

Cost per Order (fully loaded)

  • $8–$13 including call center and warehouse includes direct labor, indirect labor, benefits, occupancy, packing supplies, telecom and credit card processing. DOES NOT include shipping and handling revenue or shipping costs.  Distorts comparability between companies.  50% are warehouse costs and 50% call center costs; 50% or more is direct labor in call center and warehouse.

Order Processing Turnaround Time

  • For in stock products 100% in 24 hours. Leaders like Crutchfield and Backcountry.com are shipping all orders the same day, if the order is received by 5 P.M.
  • E-commerce is pushing toward same-day shipment.

Initial Customer Order Fill Rate
While this is an inventory control metric, initial customer order fill rate does dramatically affect fulfillment performance.

  • Definition: Percentage of customer orders shipped complete in 24 hours (or whatever your shipping standard is). Typically good performance is indicated below.
  • Advanced fashion: 70%–80%
  • Reorderable apparel: 80%–90%
  • Gifts/home: 85%–95%
  • Business supplies:  98%–100%

Order Accuracy

  • 99.5% without bar code
  • 99.9% with full inventory process bar code

Inbound Receipts, Dock to Stock

  • Through all processes
  • 8–24 hrs. turnaround time
  • Can be 2 hours if you make dock “live” for inventory picking

Per-Hour Benchmarks

  • Receiving  units per hour 150–170
  • Picked units: 140–180 per hour
  • Orders packed:  25–30 per hour
  • Packages shipped/manifested:  140–160 per hour
  • Total orders processed: 11–13 per FTE/hour
  • Returns processed per hour: 
    • 24–48 hours processing time
    • Apparel: 15-20 per hour
    • Hard goods: 35–40 per hour

Inventory Accuracy

  • Bar-coded: 99.8%–99.9%
  • Conventional: 99.5%
  • Good cycle counts can eliminate physical inventories.

Source:  F. Curtis Barry & Company, Benchmarking Fulfillment ShareGroups, 2007

Reducing operations costs
The phrase “cost of operation” now encompasses the concept of maximizing return on all assets, including employees, facility, inventory, material handling equipment, and systems and software. The No. 1 issue for many direct operations is how to reduce the two largest costs—direct labor and inbound and outbound freight.

Acquisitions
In the past few years, venture capital and private equity firms have acquired an unprecedented number of major multichannel businesses.  We see many multi-brand operations being merged and consolidated into a smaller number of larger call centers and fulfillment centers that process multiple titles or brands. These companies are continually looking at process improvements in order to stay competitive.

Multiple warehouse locations
As companies strive to deliver faster to the customer, keep their ability to supply stores within a day’s transportation time, and decrease freight costs, many are considering multiple distribution centers.  The downside of such a move includes the increased span of control necessary, increased inventory, and the need for fulfillment systems with inventory functions robust enough to manage multiple centers. In evaluating potential new locations, a business should look at these critical success factors: labor cost, quality, and availability; inbound and outbound freight costs; facility costs; and economic incentives.

Performance requirements and metrics
Improvement requires measurement, and fulfillment operations now recognize the need to capture metrics for regular and overtime man hours and labor dollars worked and paid, and then to develop comparisons to volume measurement as units, lines, or orders shipped (see sidebar, “Fulfillment Operations Metrics”) for current direct fulfillment operations standards.

Labor cost, availability, and quality
Direct companies must frequently compete for workers with other warehouse operations. Pay rates in many markets have risen above $11.00 per hour, compared to $7.00 per hour just five years ago. In site location studies, we are finding that labor availability and quality compete with transportation costs as the most important factor in deciding to move a DC. 

This increase in labor cost is often accompanied by a decrease in absolute productivity in terms of units of work output. Since direct labor is 50% or more of the fulfillment expense, companies must find ways to reverse this trend. The basis for improvement is to set expectations for performance (such as units per man hour for pick/pack), measure results, and provide feedback to employees and management.

Employee retention
Employee turnover is expensive. Employers need to tell employees what is expected and give them feedback, and to create a work culture that makes people want to stay.  Most people want to know how they are doing and to be part of a team.  

Staff development and communication
Many businesses are realizing that they need stronger first-line managers.  Typical issues include how to get better production; motivating employees; getting first-line managers to help plan changes to accommodate order and inventory volume growth; managing a multilingual workforce; and managing a workforce with flex schedules. Is there a career path company-wide for potential managers?

Improving the capacity of existing facilities
Expanding or relocating a facility is expensive and places customer service at risk.  The trend is to improve space utilization and increase warehouse capacity rather than to relocate immediately. A company can frequently extend the life of an existing facility for two or more years through an operational assessment to identify possible reconfigurations.  Though even this level of internal change may be disruptive, it does not compare to moving to a new facility and training a new workforce. 

Warehouse automation and software
Companies of all sizes are looking for warehouse automation that can provide an acceptable return on investment. This may entail redesigning distribution centers, operating processes, and systems to improve capacity and throughput and to lower the cost per order. A WMS is critical to enabling the design of new processes.

Direct Industry Best Practices for Fulfillment

  • Assess your first-line managers and develop a plan to meet your organization’s needs.
  • Try to get two, three, or more years from an existing facility by undertaking an operational assessment and reconfiguration.
  • Redesign distribution centers, operating processes, and systems to improve capacity, throughput, and lower the cost per order.
  • For capital expenditures, perform a benefit analysis that includes hard savings and intangibles.
  • Stay in contact with good part-time workers throughout the year—pay them an incentive to come back.
  • Recognize the differences in warehouse processing requirements for each channel and develop processes that reflect these differences.
  • Use structured methodology for bidding out third-party fulfillment work: vendor evaluation selection, including RFP, site visits, and reference check.
  • Everyone in the company needs to understand the service level metrics, which should be reported just like productivity metrics.
  • Warehouse inventory controls: Know what you own; how much, where it is, and locate products in the most advantageous area.
  • As costs increase, continually assess how to lower them through competitive bidding.
  • In the supply chain, get as much done as possible by vendors, with the idea that they can do it more cheaply, and pre-processed products will move through the center more quickly.
  • Merchants need to improve product specifications and require proof of independent testing.

Return on investment
Many CFOs now require a 12–18 month payback on major capital projects. To achieve this, businesses need to perform a benefit analysis that includes hard savings and intangibles. Some companies are looking for ways to increase capacity for the future, rather than to reduce costs immediately.

Late holiday ordering 
Many consumer businesses are heavily dependent on the Oct.–Dec. holiday period to produce the majority of their sales and profits. Customers have been buying closer to the actual holiday, causing larger sales spikes. This means that businesses must consider hiring and training of seasonal workers not only for higher peaks but for shorter periods. One way to deal with the issue is to stay in contact with good part-time workers throughout the year—pay them an incentive to come back. Pay them an incentive to stay through the season. Hire workers earlier so there is time to train them. Create management structure—temporary managers—to get through the peak. Some companies are successfully using temp agencies to take up this slack, but to make agencies work requires building a year-around relationship.

Multichannel operations
More companies are opening retail stores and selling wholesale in addition to catalog and e-commerce channels. Each channel has different requirements in terms of order processing, and corresponding warehouse processes should reflect these differences.  Many fulfillment operations have had to become more complex in order to process small-order pick, pack, and ship or shift to larger regular store replenishment or large wholesale orders.

Outsourcing fulfillment
Finding a good match with a third-party fulfillment provider is becoming more difficult because of consolidations, changes in marketing direction by providers, and volatility in client–third-party relationships related to costs and service levels. One way is to use structured methodology for bidding out such work: evaluation and selection of vendors, including an RFP, site visits, and reference check. Be sure the vendor you choose has experience with your product type and order volume. 

Customer service
Repeat business requires complete customer satisfaction. Direct customers expect merchants to ship their orders the same day that an order is placed, or at least the next day, they expect to receive the order in good condition, and they do not tolerate a negative performance (see service level metrics in the table Fulfillment Operations Metrics). As noted earlier, Q4 holiday customers are ordering later each year.  This pattern of delayed purchase is a trend for which merchants must plan in order to secure repeat business.  Everyone in the company needs to understand service level metrics, which should be reported just like productivity metrics.Fulfillment delivers on your company’s marketing and merchandising promises. Promise realistically and over-deliver.

Warehouse inventory management
Increased attention to inventory management is another trend. Customer service improves as the initial order fill rate improves, and the cost of operations declines when a business no longer spends time looking for lost or unavailable inventory and no longer incurs the cost of expedited delivery to offset missed shipping dates. Accurate inventory removes barriers to productivity that other activities use as a crutch for poor performance. Four critical factors:  Know what you own; how much, and where it is, and locate products in the most advantageous area.

Reducing the cost of inbound and outbound freight
When you look at major direct expenses, the cost of freight is possibly the most volatile. This year, following the postal rate increase, almost every company is directly addressing the cost of freight.

If you’re a company assessing how to lower costs through competitive bidding you need to evaluate multiple carriers.  Cost reduction is important, but so are service plans and customer service. Investigate inbound and outbound consolidation.  Use a consultant experienced in negotiating with carriers to reduce costs.  For outbound freight, use rate-shopping and best-way shipping. Inbound: Use collect rather than vendor-paid or prepaid.

Supply chain
Merchants seeking to optimize the supply chain is enlisting vendors to do as much as possible, with the idea that vendors can do it more cheaply, and that pre-processed products will move through the center more quickly. Vendors can provide value-added services such as marking, packaging for retail/direct, color/size sortation, etc. Merchants are also looking to push quality assurance up the supply chain, catching and correcting errors while a product is still in the vendor’s factory. More and more companies are adopting electronic purchase orders, advanced shipping notices (ASNs), and drop-ship systems to connect the retailer and drop-ship vendors.  More and more companies are strengthening their vendor compliance policies and manuals.

China import problems
At our September 2007 Forecasting and Inventory ShareGroup, inventory control managers expressed concerns about public safety, citing recalls over the last few months of Chinese-manufactured toys and household goods that contain lead. They were concerned about negative effects on consumer buying, increased testing of products at Chinese government-approved labs, and a slowdown in exports. We are sure that as companies (many now import over 50% of the products they sell) become more diligent about product specifications and testing, other problems in other countries may surface, and this will probably result in slower import lead times and some lost sales. Businesses need to improve product specifications and require proof of independent testing.  They need to think through with the merchants what such changes could mean to receipts and customer service.

Summary
These are challenging times but also exciting times for companies as the direct industry changes, adapting to become truly multichannel and simultaneously responding to the expectations of customers and to the need to make a profit.  If there’s one element in this mix that does not change, it is the fact that productivity and customer service go hand in hand.


Curt Barry is president of F. Curtis Barry & Company a multichannel operations and fulfillment consulting firm with various focuses in systems, warehouse, call center and including inbound and outbound freight cost reduction. Learn more on our website at http://www.fcbco.com and http://www.fcbco-blog.com

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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Rising Transportation Costs - and What to Do About Them

 

For most multichannel merchants, transportation of goods is the highest operational expense. Inbound freight costs for domestically sourced product typically range from 2%-4% of gross sales, while for imported product, inbound freight costs 6% to 12% of gross sales. Outbound transportation costs typically average 6% to 8% of net sales.

And these costs are going up. FedEx recently announced a 6.9% increase in its net average shipping rate for FedEx Express, offset by a 2% reduction in fuel surcharge and a net increase of 4.9% on paper.

Parcel carriers always rate rates at the end of the year, more increases will be announced in the next few weeks. But labor issues could be pushing costs higher this year.

For instance, the courts have recently ruled FedEx drivers can file class action suits to reclassify them as company employees rather than independent contractors and thus eligible for benefits not currently paid them. United Parcel Service just reached an early labor agreement with the Teamsters Union equating to increased costs of $9.00 per hour in wages and benefits over five years. The value exceeds the 2002 UPS and Teamsters contract of $9.0 billion for six years.

The new UPS agreement calls for average annual wage and benefits increases of $1.80 per hour; the 2002 agreement averaged $1.46 per hour wage and benefit increases. Starting pay for UPS workers increases to $16.10 and workers with 24 months seniority increase to $20.75. Right now, the highest-paid UPS driver earns about $28.00 per hour.

What’s more, under the new contract UPS agreed to pay the Teamsters $6 billion to allow UPS to withdrawal from the Teamsters Central States Pension fund. UPS will pay the costs of establishing a new pension fund for the involved participants.

Bottom line: The multichannel industry depends on parcel carriers and these providers’ prices continually increase at rates higher than most other costs. What’s your plan to deal with and reduce these expenses?

Here are a few tips from the MCM Live Webinar “Reducing Transportation Costs” I presented last week. You can click on the above link to review the full webinar.

Look at transportation in the context of the total supply chain efficiency. A few examples: implement vendor compliance to aid in product flow-through the distribution center, push compliance up the supply chain, implement vendor added-value services to reduce costs and speed product through the DC, build transportation into facility design, and implement supply chain IT systems to provide more timely and accurate information.

Institute vendor compliance policies, include routing guides for inbound carriers. Do not permit vendor-controlled freight, which can cost you 20% more.

For high returns businesses, such as apparel, use return services to process them more efficiently and provide a customer service.

Join an inbound freight consortium with contracted carriers and negotiated best rates. Get audited invoices and consolidated billing to your business while saving money.

Do your homework. You have to understand your volume and shipping characteristics, contract pricing, the 70-plus accessorial charges, available technology, rebate incentives, ground minimums, service level guarantees; available value-added services—to name just a few things that affect rates.

Consider a freight consultant, which can reduce costs 15% to 25%. Keep in mind the carriers have teams of pricing professionals negotiating your contract. Do you have the internal expertise to deal with these complexities and changes that determine your shipping costs? Specialized freight consulting firms will do a study, recommend areas for negotiation and contract structure, and make a commitment to savings up front.


Curt Barry is president of F. Curtis Barry & Company a multichannel operations and fulfillment consulting firm with various focuses in systems, warehouse, call center and including inbound and outbound freight cost reduction. Learn more on our website at http://www.fcbco.com and http://www.fcbco-blog.com

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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The Fulfillment Doctor on... The Price of Free Holiday Shipping

 

Question: I am the operations manager of a large multichannel hardgoods and apparel merchant. My rough shipping and processing calculations for our company in Q4 this year would have been: 1) $70 million - $72 million gross revenue collected from shipping and processing, 2) $52 million - $54 million outbound shipping expenses, and 3) $18 million - $20 million net profit attributed to shipping and processing.

I say “would have been” because I just found out that we have started offering our customers unconditional free shipping and processing to entice holiday shoppers to start buying now. So my company is willing to pay out roughly $54 million in shipping fees as well as lose the estimated $20 million in net profit.

What are the underlying reasons behind offering free shipping and processing to customers? Is this common practice in other companies in the multichannel industry? Can anything positive come from giving free shipping to our customers?

Answer: You’re correct that shipping and processing costs tend to be a rather large percent of sales. It is typically 6% to 8% of the average order, while shipping revenue is usually between 8% and 10% of the average order. So yes, the VP of Marketing is making your company cover the shipping and processing costs this holiday season as well as giving away revenue in order to get sales.

That’s not necessarily a bad idea, however. We hear the complaint about free shipping from fulfillment and operations managers and directors all the time. Merchants must balance the use of free shipping and processing against the reality of the overall retail environment.

If your company is healthy, and you have a high average order value, you can afford to offer free shipping and processing. Other factors have to be in place for this enticement to work; such as having inventory available, adequate profit margins, productive and efficient operations, and deep outbound carrier discounts. What you really need to do is consider what the alternative might be.

We received an e-mail not long ago from a large, high-end multichannel women’s apparel company offering 60% off all items. That’s right: 60% off everything—in October. This is a clear indication of the kind of pressure multichannel businesses are under heading into the last two months of the year.

What’s more, the order curve has been moving closer and closer to Christmas ever year, shifting a couple of days every year for the past 10 years. Peak weeks used to be in October, then shifted into November, and currently are in early December. This shift affects everybody, from forecasting to staffing. The fulfillment and distribution workforce that used to be packed up and home long before Christmas are now all working up to Dec. 23 to get the product out.

The reason for this shift? Customers are waiting until later in the season to get the best deals, as they know that retailers are going to start dropping their prices as it gets closer to the holiday. Those retailers who offer free shipping early on are trying to jumpstart orders and get the customers shopping earlier.

The idea is to attempt to move that curve back. If you get the customer shopping earlier, you’re essentially taking dollars out of the holiday pot that they’d be spending elsewhere, because there’s only so much money that’s going to be spent in the holiday season.

Fulfillment and operations managers have just as much interest in moving that curve back as well. You want to get the shipping started early as well, so you don’t have the influx of orders and having to cram six weeks of shipping into two weeks.

Though free shipping and processing seems a big chunk of money you’re losing, it may be necessary to get those sales, get the shipping started, and spread that shipping out over the fourth quarter of the year.

Look at the example we used of the large women’s apparel company, and ask yourself: Isn’t free shipping and processing better than losing 60% of the revenue of the item itself? It really is a balancing act for each company that goes down the road of free shipping and processing.


Curt Barry is president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com

F. Curtis Barry & Company is a national consulting firm for catalog, e-commerce, and retail businesses offering clients expertise in order management systems, warehouse management systems; warehousing and distribution; inventory management and forecasting solutions; and operational benchmarking for all business channels.

Please contact Jeff Barry to discuss your upcoming projects at jbarry@fcbco.com or 804-457-4028.
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