The Fulfillment Doctor on… The Price of Free Holiday Shipping

Question: I am the operations manager of a large multichannel hardgoods and apparel merchant. My rough shipping and processing calculations for our company in Q4 this year would have been: 1) $70 million – $72 million gross revenue collected from shipping and processing, 2) $52 million – $54 million outbound shipping expenses, and 3) $18 million – $20 million net profit attributed to shipping and processing.

I say “would have been” because I just found out that we have started offering our customers unconditional free shipping and processing to entice holiday shoppers to start buying now. So my company is willing to pay out roughly $54 million in shipping fees as well as lose the estimated $20 million in net profit.

What are the underlying reasons behind offering free shipping and processing to customers? Is this common practice in other companies in the multichannel industry? Can anything positive come from giving free shipping to our customers?

Answer: You’re correct that shipping and processing costs tend to be a rather large percent of sales. It is typically 6% to 8% of the average order, while shipping revenue is usually between 8% and 10% of the average order. So yes, the VP of Marketing is making your company cover the shipping and processing costs this holiday season as well as giving away revenue in order to get sales.

That’s not necessarily a bad idea, however. We hear the complaint about free shipping from fulfillment and operations managers and directors all the time. Merchants must balance the use of free shipping and processing against the reality of the overall retail environment.

If your company is healthy, and you have a high average order value, you can afford to offer free shipping and processing. Other factors have to be in place for this enticement to work; such as having inventory available, adequate profit margins, productive and efficient operations, and deep outbound carrier discounts. What you really need to do is consider what the alternative might be.

We received an e-mail not long ago from a large, high-end multichannel women’s apparel company offering 60% off all items. That’s right: 60% off everything—in October. This is a clear indication of the kind of pressure multichannel businesses are under heading into the last two months of the year.

What’s more, the order curve has been moving closer and closer to Christmas ever year, shifting a couple of days every year for the past 10 years. Peak weeks used to be in October, then shifted into November, and currently are in early December. This shift affects everybody, from forecasting to staffing. The fulfillment and distribution workforce that used to be packed up and home long before Christmas are now all working up to Dec. 23 to get the product out.

The reason for this shift? Customers are waiting until later in the season to get the best deals, as they know that retailers are going to start dropping their prices as it gets closer to the holiday. Those retailers who offer free shipping early on are trying to jumpstart orders and get the customers shopping earlier.

The idea is to attempt to move that curve back. If you get the customer shopping earlier, you’re essentially taking dollars out of the holiday pot that they’d be spending elsewhere, because there’s only so much money that’s going to be spent in the holiday season.

Fulfillment and operations managers have just as much interest in moving that curve back as well. You want to get the shipping started early as well, so you don’t have the influx of orders and having to cram six weeks of shipping into two weeks.

Though free shipping and processing seems a big chunk of money you’re losing, it may be necessary to get those sales, get the shipping started, and spread that shipping out over the fourth quarter of the year.

Look at the example we used of the large women’s apparel company, and ask yourself: Isn’t free shipping and processing better than losing 60% of the revenue of the item itself? It really is a balancing act for each company that goes down the road of free shipping and processing.

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com

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The Fulfillment Doctor on…Cross-border Commerce

Q: I need a local fulfillment operation in Canada to effectively grow my business there. How would I proceed to develop an external fulfillment operation in Canada?

A: First and foremost, you have to develop a business model for the designated selling area. This is a three- to five-year strategic plan comprised of historical data and a projected forecast. A few pieces to the model are:

  • Three to five years projected sales as orders, detailed to a weekly/daily (where appropriate) plan
  • Average units and lines per order shipped
  • Seasonal or peak volume increases as orders shipped, average lines per order, average units per line, average cartons per order
  • Method of shipment and percentage of volume by type for purchase orders (small parcel, LTL, T/L, container)
  • Preferred method(s) of shipping by percent of total volume
  • Average weight per order shipped

Second, identify where your projected concentration of sales will be and determine the most advantageous physical location within the new selling area for a fulfillment operation for your projected business model. Site selection is critical to managing shipping costs and to assuring there is an adequate labor pool.

Third, decide whether you should handle your own fulfillment or contract a third-party logistics provider. You must identify any tax implications related to opening a new business as an employer. Normally the least-cost method of establishing a new operation is with a 3PL provider. Unless tax concessions for new employers are significant and long-term, it will likely be more economical to operate for the first two to three years with a third party. You can use the Internet to identify potential 3PLs. However, we definitely recommend a visit to prospective partners as a preliminary to any further conversation. It is much better to have a visual image later as you review respective proposals.

Third-party fulfillment
If you do decide to explore contracting with a 3PL, you must develop a request for proposal. The primary content of the RFP is your business model. The more accurate the information you supply about your business, the more effective the proposals from 3PLs will be. Send the RFP, with a clear deadline, to three to six 3PLs that you believe are stable, industry-proven, and can effectively handle the volume from your business.

It is important to identify clearly every statement of what the candidates propose to do and not to do, and every requirement and cost within a proposal. Establish a spreadsheet so you can compare proposals and details. If your team does not possess the experience to review and negotiate agreements, pursue the services of a consultant. Next you have to negotiate all the standards of work and contract terms to assure that the 3PL can actually provide the service you expect.

Your work is not complete even after you have negotiated an agreement. Developing a successful 3PL partnership requires a significant amount of time, effort, and follow-up by the client company. You need to make clear that you have relinquished only the physical handling of your product to the 3PL, not the responsibility to manage your business.

Identify key client contacts and decision-makers who will be issuing direction to the 3PL. The 3PL provider needs to clearly understand who will provide direction and who is responsible for resolving problems.

Remember that the 3PL is proud of how it manages its business. Use the same consideration communicating with the 3PL that you would extend to your most valued associates inside your own company. Never ignore issues or problems, but be firm and respectful in resolving them. The 3PL is normally quite aware of who is paying the bills and who owns the inventory. The 3PL exists to serve; you should be a gracious ruler.

Communicate daily with 3PL management and visit the site as frequently as travel restrictions permit. Discuss the basics of the previous day’s operations—receiving, shipping, inventory management—and always inquire what you can do to assist them to achieve their goals and objectives. If possible, visit monthly, but no less than quarterly. This sort of relationship can become a classic case of “out of sight, out of mind.”

The client has to be diligent in managing the 3PL through daily reporting. You are now managing a remote location, and therefore your best source of information is the 3PL’s daily reporting and invoices. This is no different than managing your own operation. Master the information reporting so you can identify trends and immediately spot issues as they appear.

Inventory management is the most important reporting in managing a 3PL. The client has to know where to look for issues such as lost or damaged inventory, out-of-stock, and when the inventory records indicate adequate supply. These are indications of performance concerns requiring the client’s follow-up and resolution.

Receiving performance reports and inbound scheduling are next in importance for daily follow-up. The client has to know if there are vendor delivery problems or 3PL receiving issues that will affect the customer service level. This is also where the daily phone follow-up will indicate any “carry-over” receiving issues on a purchase order.

Normal daily shipping follow-up is important, but the most important point is to know what did not ship.

Returns reporting is crucial not only to identifying customers’ satisfaction with your product, but also to discovering any 3PL –related performance issues. Detailed reason code reporting is imperative, and cumulative graphing is valuable in discussions with the 3PL.

Growing a business by expanding operations to Canada is an exciting and challenging prospect. If you take the time to lay the groundwork by developing a comprehensive business model and researching site selection and possible 3PL involvement carefully, you will significantly reduce the challenges and increase your chances of success.

Gary Conrad is a vice president at F. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com

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The Fulfillment Doctor on….Improving Outbound Freight Contracts

Question: My outbound freight to ship packages now exceeds my direct labor costs. I can’t seem to control the expense. What can I do to reduce it?

Answer: Outbound freight exceeding the direct labor for fulfillment is a fact in many businesses. Here are some ways to reduce those expenses. Outbound freight costs continue to rise, but it is possible for direct marketers to optimize their situations. The good news is that all carrier contracts can be improved—most contracts have a short-term termination clause.

However, there are two important steps you must take to achieve all or part of the potential improvement: 1) You have to know more about your distribution than the carrier does, and 2) you must honestly assess whether your company has the knowledge and skills to negotiate a better contract, or whether you will do better with the help of a qualified consultant. First, you must understand a few things about your distribution:

  • Know your annual spend and historical volume.
  • Understand your carrier’s contract pricing and incentives.
  • Leverage your volume—single-sourcing yields a discount.
  • Understand accessorial charges—these could be up to 40% of spend and more than 40 different charges.
  • Use technology. Get on electronic invoicing so you can see the information necessary to negotiate effectively and have access to the same information the carrier has.

How do you make sure you have access to this critical information? To begin with, it is important to partner with the right carrier for your business. One important factor in choosing a carrier is to identify the right individual to be your account representative: a good representative will help achieve better service and optimum performance for you. Your rep should ensure that you receive effective management reports and schedule quarterly business reviews.

These quarterly reviews should be detailed accounts of your volume and charges, not simply social visits. These reviews can help you better understand the cost of performance. Your contract entitles you to professional service. Your carrier and account representative should be willing to work with you to perform the value-added services they provide, for example, a packaging analysis to optimize your performance and to reduce costs.

Some of the many contract details to review are:

  • discount rates.
  • rebate incentives
  • ground minimums
  • revenue qualifiers
  • quick payment discount
  • service-level guarantees and subsequent performance
  • value-added services available to you
  • benefits of automation (electronic invoicing)
  • accessorial charges

Assuring that you have a quick payment discount is one easy and automatic method of cost reduction. Routine auditing of your invoices is critical to ensuring that you are invoiced correctly and that the carrier is performing to contractual service levels. It is conceivable that an audit of your invoices might identify invoice errors of 4% or higher in the carrier’s favor. Skilled and knowledgeable auditing of your invoices guarantees that you receive all the benefits of your agreement with the carrier. The question is whether you have the skill and knowledge within your company to perform these invoice audits effectively.

That brings up the second key to improving your carrier agreement. Your outbound freight costs are one of your greatest operating costs. There is no room for pride or a false sense of knowledge when you are negotiating the terms for cost of operation. Be honest with yourself. If you or your company does not possess the skills and knowledge to effectively negotiate all the terms of the agreement discussed above and more, or if you do not possess the skills and knowledge to perform a monthly audit of your invoices—get help.

Gary Conrad is a vice president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy specializing in direct-to-customer systems, distribution and logistics, inventory control, e-commerce solutions, and benchmarking.

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