Most catalog/Internet companies are looking for opportunities to reduce expenses across the enterprise — given the current economy, they’d be crazy not to try to cut costs. Does that mean you should suspend IT investments until business picks up?
Not necessarily. Most merchant companies have more IT projects and enhancements than can be done in a couple of years, so they have to prioritize technical spending. This is even more critical in a down economy.
But rather than halt spending altogether until things get better, it may make sense to invest now in technology that can improve your business. Some operational investments can wait; others can’t.
An earlier article (“Eying IT Expenditures,” August 2008) focused on the applications with the highest return on investment (ROI). Now we’ll look at some tips based on how our clients are prioritizing their tech spend.
- Think long-term productivity, not short-term savings
IT often has little flexibility to lower its expenses, even though management may initially dictate across-the-board expense cuts. In my experience, it’s often better for management to look at which IT projects, if initiated and completed, can positively affect departmental productivity and lead to savings in other areas.
Balancing a company’s short-term needs against long-term information systems strategy requires both creativity and an objective look at options to avoid disabling long-term goals. You know you need to gain as much in savings as you can from all aspects of your operations.
But as you look at all the possibilities, determine which actions will result only in short-term savings — and may, if taken, actually hurt long-term planning and execution. What you do in the short term may set back the long-term gains of your business once the economy rebounds.
For example, stopping the implementation of an order management system will basically scrap the project. When the project resumes, your team and the vendor’s personnel may have serious restart issues — such as specifications and programming for modifications and conversions, initial training — depending on the length of the delay.
Some of the work may still be usable, but many times a serious delay in implementation results in the team having to “mentally” reinvent some of the solutions it had been considering. Worse yet, the vendor’s team may be reassigned to another project.
Another consideration is that a high portion of project costs are generally paid early in the implementation. Between 50% to 75% of the total investment in a commercial system — including the initial deposit, progress payments, training, hardware and software assets — is made early in the process.
So once you’ve committed, it doesn’t really save you much money to stop. Better to get the system installed and gain the benefits.
- Focus on features/functions to increase sales
Your top priority should be any projects that generate an increase in sales. The most likely candidates are in e-commerce, marketing, merchandising or e-mail marketing.
Some companies give the highest priority to marketing and merchandising, in terms of additional analysis tools and programming of special requests to assist in analysis. Several of our clients are increasing their traditional promotional post-mortem analyses.
Two retail clients are implementing analysis of net contribution to profit to identify (at the classification level) how to expand or contract the number of items in each category. These analyses fully load fulfillment and overhead costs rather than stopping at square-inch profitability.
- Manage your biggest asset
Any IT spending that improves management of inventory — the largest balance sheet asset in most companies — is bound to pay off. Mistakes made here have a direct effect on customer sales and satisfaction, with increased cost of back orders, lost sales and the liquidation of overstocks sharply reducing profitability.
To determine what could help improve inventory performance, do an assessment of your strategies such as planning, forecasting, purchasing, end-of-season analysis and liquidation.
A stand-alone internal inventory system and exception reporting can increase merchandise turnover, reduce back orders, improve initial customer order fill rates, and allow you to take faster action on overstocks. This type of system may have a 12- to 18-month ROI.
- Implement a WMS to tame complex operations
In most fulfillment businesses, the issue isn’t so much warehouse size as it is the complexity of multichannel operations. Picking, packing and shipping processes must be efficient for both small orders in e-commerce/catalogs, and in larger store replenishment and wholesale orders.
To really become efficient, you’ll need a full-function warehouse management system, which provides benefits in labor productivity, space utilization and inbound and outbound transportation. Proper inventory slotting and full barcoding of the total inventory process is key.
- Schedule personnel efficiently
Scheduling software is most prevalent in the call center. Our experience is that companies can save as much as 10% to 15% in call center labor with more sophisticated scheduling software. The major benefits are improving schedule adherence and occupancy, and adding flexibility to the scheduling process.
- Use business intelligence (BI) tools intelligently
Many companies are implementing executive dashboards and OLAP (online analytical processing) analysis across the enterprise. Senior management rarely gets more than 10% of their critical data from any one system; they rely on spreadsheets and other analyses to get their information.
BI tools are now available with templates for the direct industry and can incorporate data from any and all systems, including fulfillment, call center and telephony systems, merchandising, marketing, inventory control, finance and spreadsheets. These BI tools also allow importing plans, history and other key performance indicators that have not been available in transactional systems.
- Keep software support contracts
Considering the sizable cost of most software support contracts, eliminating them may be a tempting way to cut expenses. Be very careful here, though: Openly ask your vendors what their policies are; some may charge you a high fee to restart the support, and also to upgrade.
If you are behind several release levels of annual maintenance, you may have to pay for those anyway, and go through the conversions to get to current release levels again. In other words, canceling software contracts could be more expensive in the long run.
- Outsource when practical
Look at outsourcing to see what opportunities exist to change a fixed expense into a variable expense.
Several of our clients have outsourced IT systems, call center and fulfillment rather than invest in new order management software; some have successfully implemented Software as a Service.
SaaS hasn’t yet been proven in this industry for large companies that have many integrations and complex conversions, from what I’ve seen. On the other hand, it may make sense to outsource e-mail marketing, modeling, customer mailing file maintenance and other applications.
- Get more out of what you have
Most companies are trying to do more with less. But with systems, there’s generally much more functionality designed into applications than companies use. In some cases, we have found companies using less than 50% of a commercial application’s functionality.
Do a post-implementation audit of your application set to see what possibilities exist; also, identify what additional training would benefit the user departments. Find out if there is functionality in the application that will bring you additional benefits, productivity or savings.
There’s no doubt that with some creativity, IT can come up with many different possibilities for prioritizing and redirecting your company’s IT spend. The key lies in being objective, looking at everything from a fresh perspective, and having the ability to recognize potential.
Curt Barry is president of F. Curtis Barry & Co. (www.fcbco.com), a multichannel operations and fulfillment consultancy.