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 import problems.
Fulfillment Operations Metrics
Order Processing Turnaround Time
Initial Customer Order Fill Rate
Inbound Receipts, Dock to Stock
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.
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 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
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.
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.
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.
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.
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.
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.