Using Logistics to Win in a Multichannel Retail World: Transportation and Logistics Solutions

Mar 29, 2006 10:45 PM  By

This is the third article in a three-part series. Part one discussed the challenges involved in product transportation for multichannel merchants; part two covered four key logistics goals: increasing efficiency, improving customer service, increasing sales, and improving relationships with service providers.

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 business. A multichannel merchant not only has to track inbound goods from offshore and domestic vendor, but it also has to handle outbound small-package delivery, often using zone skipping and vendor drop-shipping; replenish stores; cross-dock store receipts and in the warehouse to fill catalog and Web backorders; transport, consolidate, and process returns regardless of the channel where the customer purchased the product; and provide warehouse-to-warehouse transfers, inter-store transfers, and retail sends directly to the customer and receipt of goods at the warehouse closest to the vendor.

To handle these myriad tasks successfully, multichannel merchants must depend on relationships with trusted vendors for inbound and outbound logistics as well as for handling merchandise returns.

Inbound logistics
Leading customers tell us that domestic inbound transportation is estimated at 2%-4% of the cost of goods sold (COGS). For global merchandising, the costs are higher. Merchants that import products generally have an initial markup 10-15 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, Levenger, which sells high-end office furnishings and leather goods through its catalog, Website, and stores, has been buying more than 70% of its product from Asia during the past few years. As its international sourcing increased, the company worked with FedEx to obtain more cost-effective rates on its inbound freight shipments and outbound customer shipments by combining volumes.

But global sourcing also increases the layers of operations complexity. Globalization requires companies to file more than 30 documents and interface with more than 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.

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

United Parcel Service continues to evolve its LTL services, with its integration of Overnite Corp. (now called UPS Freight) demonstrating UPS’s strategy to provide customers with a full range of supply chain solutions. UPS has already deployed a hand-held computer to UPS Freight drivers (called DIAD) that improves shipment tracking for LTL. Many UPS customers are benefiting from the combination of small-package and ground freight services.

Another growing trend is to convert inbound logistics from prepaid freight to freight collect. In the prepaid model, the rates are controlled by the vendor that is shipping the goods to you. With freight collect, the purchaser controls the routing of the inbound goods and the rates charged by the carrier. In this connection, FedEx offers a Vendor Enablement Program (VEP) and Inbound Consignee status as inbound logistic solutions for retailers. For example, with FedEx, CompUSA saved $1 million a year in inbound logistics costs as a result of consolidating inbound logistics. DiversDirect increased its gross margins by 0.7% as a result of FedEx’s Inbound Consignee program.

DM Transportation Management Services of Boyertown, PA, specializes in inbound freight management. DM will conduct a confidential, cost-free audit and analysis of freight costs and service requirements. It will then provide a comprehensive report outlining opportunities to reduce expense, improve control, and make use of its inbound information technology. The findings report includes management and cost recommendations for all modes of international and domestic transportation.

Seventy percent of merchants source merchandise from overseas. The trade-off decision is one of lead time vs. transportation costs. Faster lead-time solutions influence air imports and parcel-facilitated transportation to ship merchandise from overseas to stores in three or four days. Longer lead times and more cost-efficient solutions prompt ocean containers, ground parcel, and LTL transportation to ship merchandise in 22-28 days.

Outdoor apparel and footwear merchant 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. The information is transmitted to Timberland in near real time via a portal. Shipment-related information, including container numbers and packing lists, is also sent electronically to FedEx, streamlining the previously paper-driven process. Retailers leveraging offshore inbound logistics solutions can allocate merchandise direct 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. This enables retailers to bypass their DCs, reduce time to market for their merchandise.

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

Direct-to-store vendor shipments are commonplace for specialty0store chains. Retailers that 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.

Outbound logistics
The two- and three-day shipping environment continues to be extremely competitive between the major consumer package logistics providers. The advent of FedEx Express Saver, UPS 3 Day Select, and the U.S. Postal Service Priority flat-rate boxes require that the smart multichannel merchant keep a close eye on rates while seeking opportunities to improve delivery service and manage shipping costs.

FedEx can support 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 a store opening might not receive items for a particular event.

Another leading transportation consultancy, AFMS, addresses domestic and international air freight, express package shipments, ground shipments, USPS, and LTL transportation. Acting as an independent transportation consultant, AFMS’s goal is to help clients negotiate and implement world-class contracts with their domestic and international parcel and heavy-weight carriers, reducing transportation expenditures, improving service levels, and bolstering the merchants’ bottom line.

Many merchants use zone skipping to reduce their transportation costs, With a zone-skipping program, the merchant (or a company hired by the merchant) ships parcels part of the way to their destination before dropping them at a carrier’s facility or hub to complete delivery. On average, merchants that use zone skipping can reduce transportation costs per unit by double-digit numbers.

There is a trade-off, however, in the lack of parcel visibility on the front leg of the zone skip. Another trade-off is keeping tabs on the speed of service to customers. It is amazing the number of times a lower-density-zone trailer will sit for days at a DC shipping lane awaiting to be completely filled. To minimize the effect of a zone-skipping program on customer service, you need to have a good handle on forecasted order volume by zone, which can vary greatly depending on the seasonality of your business. For most multichannel merchant, not all zones can be treated equally, and therefore not all zones are candidates for zone skipping.

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. The multichannel merchant that will ultimately win is the one that realizes that returns are an integral part of retail and direct selling. Although returns are not desirable, they are part and parcel to the direct selling business model.

Seeking solutions that streamline the returns cycle (or reverse logistics) is absolutely critical to effectively managing the overall supply chain. Newgistics, a leading reverse logistics provider, in a study indicated that 82% of direct consumers won’t shop again with a company if the return process in inconvenient. Conversely, 92% will shop again if the return process is convenient. Leading companies clearly post their return policies on web sites and clearly print them in prominent locations within their catalogs.

Newgistics has developed a SmartLabel capability that integrates with the USPS. Whether it’s via a preprinted, prepaid label included with the original order or by using Newgistics ReturnCart returns management system on the Internet, a customer is able to easily obtain a return SmartLabel. The customer initiates the return by applying the label to the return package and drops the package off at any USPS mailbox. By obtaining the package scan data from the Postal service, Newgistics is able to provide customers, customer service agents, and company operations management visibility of in-transit returns. The SmartLabel also allows for the return merchandise to be sorted and aggregated as it flows through the returns management network. The potential benefits of an advanced returns management system such as this are many, including the ability to communicate returns status to your customer through multiple points in the returns pipeline, the ability to issue credit to customers sooner, an ability to forecast staffing levels required for returns processing operations, and an ability to dispose of inventory or reroute to the appropriate refurbishment operations center prior to coming all the way back to your own distribution center.

In addition, FedEx, UPS, and the USPS all provide Internet-enabled abilities to print and/or e-mail return labels to customers. Many companies now include a preprinted return label with the original customer shipment.

Third-party logistics provider Genco specializes in reverse logistics. Throughout North America it operates a network of returns centers engineered to meet each customer’s needs. Genco also offers a proprietary returns processing system called R-Log. This system standardizes and streamlines the returns process, helps eliminate errors, and significantly reduces paperwork and duplication of effort in managing returns.

FedEx also offers a variety of returns solutions. Its preprinted labels, for instance, are generally sent with an outbound shipment or shipped out by the consumer to the return merchant; its electronic return labels maintain a shipping history of all return shipments, increased return shipment visibility through the FedEx InSight service, and precise customer reference number availability for tracking and invoicing. FedEx 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 his 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 that consumers don’t have to create a label or drop off the package.

UPS has developed an extensive portfolio of services to manage both business-to-business and consumer-to-business returns. The services are designed to meet customers’ individual needs in terms of convenience, transit times, returns package information, compatible technology, and price. Each service can be used with UPS’s commercial or residential Ground service, as well as its premium air express services.

USPS, meanwhile, offers an Electronic Merchandise Return service that can be integrated with e-commerce sites. This service allows customers to print labels right from a multichannel merchant’s Website for Priority Mail, First Class Mail, Parcel Post, Media Mail, and Bound Printed Matter.

Multiwarehouse logistics solutions
More sophisticated multi-warehouse operations receive vendor shipments at a warehouse closest to the vendor and then distributing the inventory throughout their own network of warehouses and stores. Merchants can use transportation visibility tools to know when their shipments will arrive and for WISMO (“where is my order?”) calls, reducing contact center minutes.

Having a fully integrated set of logistics applications enables the world-class multichannel merchant to come out on top in terms of customer service and profitability. Having real-time visibility of inbound shipments, warehouse transfers, actual order demand, and returns is an absolute must in today’s environment. Many vendors will tout the benefits of their specific application, yet the true benefit to the business manager is the ability of a point solution to integrate with the rest of the enterprise. Managing a multiwarehouse, multistore, multichannel enterprise requires a level of sophistication that can sometimes catch a vendor by surprise. Make sure you ask the appropriate probing questions of a vendor to determine the match between your requirements and its services, its ability to integrate with your existing company systems, the ability to provide the inbound and outbound visibility of your shipments, and obviously the cost.

Curt Barry is president of Richmond, VA-based consultancy F. Curtis Barry & Co. www.fcbco.com Jose Li is retail industry manager for Memphis-based FedEx Corporate Services http://retail.fedex.com