You know it, we know it: These are tough times in the multichannel marketing industry — on the front end and back end. And with many merchants now heading into the busiest period of the year, there isn’t a whole lot of time to reflect on the state of fulfillment.
But it’s important to stay on top of operations trends to try to keep your costs down and your service up. Based on our company’s consulting assignments and proprietary data from the F. Curtis Barry & Co. Benchmarking ShareGroups, we have a pretty good idea of what’s going on in multichannel fulfillment. Among the key challenges: the need to increase productivity, managing the rise in transportation costs, and reducing operations costs.
We should point out that “cost of operation” now encompasses the concept of maximizing return on all assets, including employees, facility, inventory, material handling equipment, and systems and software. The number-one issue for many direct operations is how to reduce the two largest costs — direct labor and inbound and outbound freight.
Managing multichannel operations is another issue, as more merchants are opening stores and selling wholesale in addition to catalog and Web channels. Fulfillment has had to become more complex to handle processing small-order pick, pack, and ship or shift to larger regular store replenishment or large wholesale orders.
What else is going on in the industry? Let’s take a look at 12 trends.
- MANAGING MULTIPLE WAREHOUSE LOCATIONS
As companies strive to deliver faster to the customer, keep their ability to supply stores within a day’s transportation time, and decrease freight costs, many are considering multiple distribution centers. The downsides include the increased span of control necessary, more inventory, and the need for fulfillment systems with inventory functions robust enough to manage more than one DC. In evaluating potential new locations, consider labor cost, quality, and availability; inbound and outbound freight costs; facility expenses; and economic incentives.
- GETTING A HANDLE ON PERFORMANCE REQUIREMENTS AND METRICS
Improvement requires measurement, and more fulfillment operations recognize the need to capture metrics for regular and overtime man-hours and labor dollars worked and paid. Marketers also must develop comparisons to volume measurement such as units, lines, or orders shipped. (See “Fulfillment operations metrics,” left, for some current direct fulfillment operations standards.)
- DEALING WITH LABOR COST, AVAILABILITY, AND QUALITY
Good help is hard to find, as multichannel merchants must frequently compete for workers with other warehouse operations. It’s also expensive: Pay rates in many markets have risen above $11 per hour, compared to $7 per hour just five years ago. In site location studies, we are finding that labor availability and quality compete with transportation costs as the most important factor in deciding to move a DC.
This increase in labor cost is often accompanied by a decrease in absolute productivity in terms of units of work output. Since direct labor is 50% or more of the fulfillment expense, companies must find ways to reverse this trend. The basis for improvement is to set expectations for performance (such as units per man-hour for pick/pack), measure results, and provide feedback to employees and management.
- KEEPING THE GOOD WORKERS
Employee turnover is expensive, so you want to hang on to your star workers. It helps to clearly communicate what is expected and then give employees feedback, and to create a work culture that makes people want to stay. Most people want to know how they are doing and to be part of a team. Staff development is a big part of this: You need to hire strong first-line managers. Typical issues include improving production; motivating employees; getting first-line managers to help plan changes to accommodate order and inventory volume growth; managing a multilingual workforce; and overseeing a workforce with flexible schedules.
- IMPROVING THE CAPACITY OF EXISTING FACILITIES
Expanding or relocating a facility is expensive and it puts customer service at risk. The trend is to improve space utilization and increase warehouse capacity rather than to relocate immediately. A company can frequently extend the life of an existing facility for two or more years through an operational assessment to identify possible reconfigurations. Though even this level of internal change may be disruptive, it does not compare to moving to a new facility and training a new workforce.
- SEEKING THE RIGHT SYSTEM
Merchants want warehouse automation and software that can provide an acceptable return on investment. This may entail redesigning distribution centers, operating processes, and systems to improve capacity and throughput and to lower the cost per order. A warehouse management system is critical to enabling the design of new processes. Along those lines, many chief financial officers now require a 12- to 18-month payback on major capital projects. So businesses need to perform a benefit analysis that includes hard savings and intangibles.
- LATE HOLIDAY ORDERING
Many consumer businesses heavily depend on the October-December holiday period for the majority of their sales and profits. Customers have been buying closer to the holiday, causing larger sales spikes. This means that businesses must consider hiring and training of seasonal workers not only for higher peaks but also for shorter periods. One way to deal with the issue is to stay in contact with good part-time workers throughout the year. You might consider paying them an incentive to come back or offering an incentive to ensure they stay through the season. Hire workers earlier so you have enough time to train them.
- OUTSOURCING FULFILLMENT
Finding a good match with a third-party fulfillment provider is becoming more difficult because of consolidations, changes in marketing direction by providers, and volatility in client-third-party relationships related to costs and service levels. You might consider using a structured methodology for bidding out such work: evaluation and selection of vendors, including an RFP, site visits, and reference checks. Be sure the vendor you choose has experience with your product type and order volume.
- IMPROVING CUSTOMER SERVICE
Repeat business requires complete customer satisfaction. Direct customers expect merchants to ship their orders the same day that an order is placed, or at least the next day; they expect to receive the order in good condition; and they do not tolerate a negative performance.
As noted earlier, fourth-quarter holiday customers are ordering later each year. This means merchants must plan in order to secure repeat business. Everyone in the company needs to understand service level metrics, which should be reported just like productivity metrics. Fulfillment delivers on your company’s marketing and merchandising promises. Promise realistically and over-deliver.
- MASTERING WAREHOUSE INVENTORY MANAGEMENT
Part of providing good service is increased attention to inventory management. Customer service improves as the initial order fill rate improves, and the cost of operations declines when a business no longer needs to spend time looking for lost or unavailable inventory and no longer incurs the cost of expedited delivery to offset missed shipping dates. Accurate inventory removes barriers to productivity. Four critical factors: Know what you own, how much, and where it is, and locate products in the most advantageous area.
- REDUCING THE COST OF INBOUND AND OUTBOUND FREIGHT
The cost of freight is possibly the most volatile of the major direct expenses. If you want to lower costs through competitive bidding, you need to evaluate multiple carriers. Cost reduction is important, but so are service plans and customer service. Investigate inbound and outbound consolidation. Consider a consultant experienced in negotiating with carriers to reduce costs. For outbound freight, use rate-shopping and best-way shipping; for inbound freight, use collect rather than vendor-paid or prepaid.
- STEPPING UP SUPPLY CHAIN EFFICIENCY
The best way to optimize the supply chain? Enlist vendors to do as much as possible, since they can typically do it at a lower cost. What’s more, pre-processed products will move through the center more quickly, and most vendors can provide value-added services such as marking, packaging for retail/direct, color/size sortation, etc.
Merchants are also looking to push quality assurance up the supply chain, catching and correcting errors while a product is still in the vendor’s factory. More companies are adopting electronic purchase orders, advanced shipping notices, and drop-ship systems to connect the retailer and drop-ship vendors. More and more companies are strengthening their vendor compliance policies and manuals.
Curt Barry is president of F. Curtis Barry & Co., a Richmond, VA-based fulfillment operations consultancy.
|The China syndrome|
At our September Forecasting and Inventory ShareGroup, several inventory control managers expressed concerns about public safety, citing recalls during the past few months of Chinese-manufactured toys and household goods that contain lead. They worried about negative effects on consumer buying, increased testing of products at Chinese government-approved labs, and a slowdown in exports.
Indeed, as companies become more diligent about product specifications and testing, other problems in other countries are likely to surface. And this will probably result in slower import lead times and some lost sales. Merchants need to improve product specifications and require proof of independent testing. They need to think through with the merchants what such changes could mean to receiving goods and to customer service.
Many marketers now import more than 50% of the products they sell, and most of the goods come from Asia. It’s important to stay on top of quality control and consumer safety issues with imported goods, or the risks of offshore manufacturing can quickly outweigh the rewards.
|Fulfillment operations metrics|
|Cost per order (fully loaded)|
$8-$13, including call center and warehouse. This cost includes direct labor, indirect labor, benefits, occupancy, packing supplies, telecom and credit card processing; it does not include shipping and handling revenue or shipping costs. Costs are evenly split between warehouse call center costs; 50% or more is direct labor in call center and warehouse.
|Order processing turnaround time|
For in-stock products, 100% in 24 hours. Leaders such as Crutchfield and Backcountry.com are shipping all orders the same day, if the order is received by 5 p.m. The e-commerce sector is pushing toward same-day shipment.
|Initial customer order fill rate|
The initial customer order fill rate — the percentage of customer orders shipped complete in 24 hours (or whatever your shipping standard is) — dramatically affects fulfillment performance. A few best-practice benchmarks by category:
- Advanced fashion: 70%-80%
- Reorderable apparel: 80%-90%
- Gifts/home: 85%-95%
- Business supplies: 98%-100%
- 99.5% without barcode
- 99.9% with full inventory process barcode
- Barcoded: 99.8%-99.9%
- Conventional: 99.5%
- Receiving units: 150-170 per hour
- Picked units: 140-180 per hour
- Orders packed: 25-30 per hour
- Packages shipped/manifested: 140-160 per hour
- Orders processed: 11-13 per full-time worker/hour
- Returns processed per hour(24-hour to 48-hour processing time)
- Apparel: 15-20 per hour
- Hard goods: 35-40 per hour
Source: F. Curtis Barry & Co., Benchmarking Fulfillment ShareGroups, 2007