Four Key Logistics Goals

Mar 15, 2006 9:15 PM  By

This is the second in a three-part series discussing ways multichannel merchants can improve profitability and supply chain efficiency. Last week the authors wrote about operating more seamlessly across three channels; to read that article, visit Using Logistics to Win in a Multichannel World.

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

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

Each of these goals includes definitive and specific objectives required within an operation. Fortunately, there are proven best practices to help you achieve those objectives.

1) Increased efficiency
To increase efficiency, a company must develop cost-effective transportation rates while reducing overhead, total inventory, and overall cost-per-order processing. You can improve your warehouse operations, including processes, layout, and flow, by working closely with your transportation provider. Establish a two-way relationship with your 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. What’s more, lack of a reliable delivery time requires you to carry more inventory, which decreases inventory turns and increases costs for the added storage space.

To improve logistical efficiencies, consider having the vendor perform value-added services such as packaging, marking, and quality inspections. This improves the chance of errors being caught at the source; source-based services speed product flow through the warehouse.

Also, avoid making transportation an afterthought; try to build it into the warehouse process and layout. 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 which carriers are able to accommodate business demands, depending on product type and turnaround time. For example, some multichannel merchants have carriers come into the center to help load trucks, while others have an inhouse U.S. Postal Service 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 downtime and an interruption to the workflow when there’s no empty trailer ready to load. Additional loading doors could solve this issue.

Vendor compliance is at the heart of efficient supply chain management. 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, advanced shipment notices (ASNs), just-in-time inventory, source marking and ticketing, or radio frequency identification.

Traditionally vendors, rather than merchants, have controlled inbound freight decisions. This practice costs merchants an estimated premium of 20%-60% above actual transportation costs. But today more merchants are taking control of inbound freight, enabling 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.

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 roughly $10-$25, depending on the efficiency of the prospecting. This figure includes catalog and other marketing costs, as well as the cost of nonresponses. In many businesses, u to 70% 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 backorder. Hundreds of customer studies show that in most direct businesses it costs $7-$12 to process one backordered unit of merchandise.

Figure 1 shows the breakdown of backorder costs for a small direct business. If this business had 200,000 orders with 400,000 units, and backorders were calculated at 20%, then 40,000 united would be backordered. At $7.37 per unit, backorders would cost this direct marketer $294,800. More important, the numbers don’t include hidden costs: the buyers’ time to accelerate backorders, air freight to bring stock in faster, the loss of customer goodwill. Permanently losing a customer because of poor service has the highest cost.

The third type of cost element is the erosion of gross demand by customer returns and customer and company cancellations. Figure 2 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.

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

  • the original cost of order processing ($3-$6 in most direct business), including indirect and direct labor, credit-card processing fees, occupancy costs, and phone lines
  • customer acquisition costs
  • the cost to process returns and refurbishing items, including indirect and direct labor and 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 unsatisfactory.

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 merchants 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% or less. For apparel direct marketers, however, it is not unusual for cancellations to be 4%-8%.

There are no historical selling data for apparel, because of the high percentage of new product. New products can run 50%-75%, four seasons a year — 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% to several percent; home decor rates may be from 1% to 3%.

Obviously the speed of getting resalable returns back into inventory availability and the reduction of costs of returns can greatly affect profitability. Leading merchants 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 backorder 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. 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 RFID has reduced out-of-stock merchandise by 16% 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 nontagged items.

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. Bundle the volumes wherever possible with your carriers, but recognize the differences between the channels.

With direct promotions and advertised retail product, maintaining on-time and in-stock position is a must. Without an available, reliable source of merchandise, you could end up losing sales and customers. 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 reduce product availability, and of course 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 Federal Trade Commission’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. (A note of clairification: The 30-day promise to deliver begins after take the consumer’s order. If you tell the consumer their order is backordered for two weeks, the thirty days start from the backordered date. At the end of the thirty days, you’re required to send the customer notice. If you reach the 60-day point you have to notify the customer the order is still backordered.) In addition, warehouses are increasingly becoming the “back room” for specialty store operations in the multichannel 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 catalog and Internet customers are less likely to accept substitutes. That’s why many catalogs adopt charge-backs for late delivery, backorders incurred, and substituted product.

The logistics of delivering to the customer can hurt sales if the customer’s expectations are not met–for example, if a gift is delivered late or arrives damaged. 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% of e-commerce companies were planning to offer free shipping and handling during the past holiday season. Free shipping has proven to increase sales and average order sizes. Most marketers don’t want to give up this source of revenue, though, or they 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 logistics execution. Measures of success are total cost, time in transit, and responsiveness of the carrier representative.

The single-carrier vs. multicarrier philosophy is one of the primary issues you need to address 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 the carrier and possible problems if there is a carrier service interruption.

A good relationship with your carrier representative is vital. Inevitably there will be issues that must be addressed. Trust and a positive attitude can influence how those issues are resolved.

Use a structured approach to comparing carriers. When soliciting bids, give carriers as much information about your business requirements as possible. Throughout the bidding process, and later when working with carrier partners, 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 businesses, the purchasing and inventory control departments are responsible for analyzing inventory requirements, purchasing and purchase-order writing, receipt planning, vendor communication, routing deliveries, improving backorders, and coordinating required receipts to prevent backorders and stock-outs. They are generally good partners with fulfillment in enforcing vendor compliance. In multichannel and multiwarehouse 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.

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

Read Part III, Using Logistics to Win in a Multichannel Retail World: Transportation and Logistics Solutions