Operational Assessment Shows Cost of an Error to Your Business

Many multichannel businesses are partners with marketplaces like Amazon and eBay, and big-box retailersbigstock-Portrait-of-screaming-business-64199725 like Sears, Walmart and the like.  With them, you’re not just processing orders, managing inventory and agreeing to performance standards.  Working with one of our clients recently in their call center’s support operations for their marketplaces, we focused our attention on the cost of an error.  

READ: Key Principles to Assessing Your Warehouse Operations

When was the last time you conducted an operational or warehouse assessment to analyze the cost of various types of errors? Not just the number of times monthly or annually a particular error occurs, but what is the actual cost of that type of fulfillment error?  The types of errors I’m referring to are mis-picks, customers' lost packages by the carrier, packages damaged in transit, etc.  The best place to obviously capture these are in the call center and fulfillment center.  

Cost Per Error Example

Let me give you an example from one of our clients. Their product assortment is more than 50% single item shipments, and has an average shipping cost of $17 per package.   Shipping costs will vary depending on the product and its weight and method of shipment.   This company ships about 200,000 orders per year. 

Here is a cost breakdown of an error:

Original call center phone direct/indirect labor  $3.00
Original fulfillment direct/indirect labor/unit  $0.62
Original outbound shipping – (avg $17/package) $17.00
Customer call/resubmit order - direct/indirect labor $2.49
Returns processing $2.50
2nd fulfillment direct and indirect labor $0.62
2nd outbound shipping cost (avg $17/package) $17.00
Total cost $43.23

The real important cost isn’t even tallied here.  What’s the cost of losing the individual customer and their lifetime over an error?  Or worse yet, not meeting the standards of Amazon's or eBay's Marketplaces.

A few other notes.  This company has chosen to conservatively use call tags because they cost $8.25 each.  In their experience, 25% of the time the customer keeps the product because of its low retail value vs. the cost of shipping the item back.  So when they have to resend a replacement, they lose the product cost, profit and the call center and fulfillment costs.  In the case of packages being lost by the carrier, you probably don’t get reimbursed the full value of the product. 

How to Proceed

1.       Capture errors. Conduct an operational assessment to identify where in your operation you can capture the various types of errors and the reasons they occur;

2.       Costs and elapsed timeframes.  Determine what the typical costs are by working with the employees that work these transactions.  Include your direct and indirect labor costs as well as external costs such as shipping;

3.       How can you reduce costs of these transactions?   Involve your staff in an operational assessment to see where the opportunities are for reducing costs and elapsed times to resolve the customer’s problem.

4.       Are there customer service practices which should change?  Like the example above, under a certain retail value and considering the shipping cost, does it make sense for the customer to return the product or just ask the customer to dispose of it if damaged or to keep it? As another example, do you require the customer to return the product first before you reship the correct one?  With this, you have already caused an issue.  Consider shipping out the replacement before receiving the mis-picked product.  Essentially, with this step identify what are other customer service issues you should changing.

5.       Management reporting and awareness. Post these errors and their costs monthly where it can get visibility and include it in your management’s KPI reporting. 

With regard to best practice, we often get the question about what level of error is acceptable. IN the example above. our client had these types of errors happen on 0.5% of the shipments or 1,000 times per year. At that rate, it costs roughly $43, 230 annually across the call center and fulfillment. The percent soudns good, but you need to keep addressing and reducing  the errors and their costs. If you are teh customer and its your order, thats a real issue!