REDUCING YOUR COST PER ORDER

Mar 01, 2000 10:30 PM  By

All catalogers would like to increase profits, but in today’s competitive marketplace, there’s a limit to how much you can raise your prices or lower your cost of goods. And what with hikes in postage and paper costs, you’re already working hard to hold down the in-the-mail cost of prospecting. So what’s left? Reducing your cost per order.

On this front, there’s quite a bit you can do to rein in operations expenses – and the payoff can be significant. But first off, you have to determine your current cost per order – that is, the total cost of taking and fulfilling customer orders. The cost per order consists of two major functions: the call center (customer service) and the distribution center (fulfillment). The former includes all front-end processes: receiving the order; processing mail orders; order entry; customer service; and everything else up to the point of generating pick tickets. The latter is all back-end functions, from generating pick tickets through shipping packages, including the warehouse procedures of receiving, checking, marking, replenishing stock , and processing returns.

Roughly speaking, the total costs per order are split equally between the front-end and back-end processes. These costs include direct labor, such as supervision, benefits, facilities, utilities, and telecommunications. For this comparison, we are excluding outbound shipping costs and the offset of shipping and handling income. The wide disparity in parcel shipping costs depending on the weight of the items shipped makes it too difficult to factor these costs in.

The biggest component of cost per order is direct labor, which typically adds up to a whopping 50% of the per-order cost. Note that this figure does not include the cost of supervision and benefits – just rank-and-file wages. But if labor is the biggest single expense in order fulfillment, it’s also where you have the most potential to reduce your cost per order. “Productivity” is the key word here. From the service rep in the call center to the packer on the pack line, productivity can make or break your per-order cost, and, ultimately, your bottom line.

But how do you measure productivity? An axiom from the field of industrial engineering has it that you cannot improve what you have not measured. It has been my experience that many catalogs don’t measure productivity particularly well. Part of the problem is that management has not created systems to set goals and measure the cost per unit of work performed in the various departments.

While catalog management systems and automated call distributors (ACDs) collect and report transaction totals, it takes some creativity and discipline to measure call center productivity. You need to collect the daily, weekly, and monthly units of work processed and time worked in the call center, and then use a spread sheet to report the results. In comparison, warehouse management systems generally do a better job of collecting the data in the distribution center, but external reporting systems may still be required to report the goals and actual results by department and by individual.

It’s important to zero in on which data you are measuring. In the call center, for example, it’s vital to measure 1) the number of calls taken; 2) the number of telephone, mail, and e-commerce orders processed; and 3) the rate of calls per hour. These may vary by the number of lines, or items, per order, so you should collect and report the cost per contact (phone call, e-mail, or written communication), the cost per order, and the cost per unit of merchandise processed. Additionally, your service level standards, such as your planned call abandonment rate (the number of callers on hold that hang up before you answer) and the percentage of calls answered in 20 seconds, can have a significant effect on your results.

Looking at the averages

Once you’ve calculated your total cost per order for all departments over a period of time, you need to evaluate it. Just how much improvement can you expect? Industry averages are a good place to start. For a two-line order, internal call center and distribution costs generally average $7-$10 per order. If you contract out your fulfillment, then the total cost per order typically averages $12-$14.

In the call center, the major costs include direct labor, benefits, and telecommunications. The direct labor cost for a telephone order of two lines or less is typically $1.10-$1.55. Orders of two to four lines typically cost $1.30-$1.65. A two-line mail order can efficiently be keyed for $0.44-$0.58, while the cost of e-commerce orders is estimated at around $1 each.

In a productive operation, a representative takes 8-10 orders per hour during the peak season period. (You arrive at this figure by dividing the number of orders taken by the number of paid hours).

But you also need to look at how many calls translate into actual sales. Typically, call center reps handle 35%-50% more contact calls than ordering calls. A highly efficient rate would be only 25%-35% more contacts than orders. Remember, these rates are achieved by low backorder and out-of-stock rates.

Variations in telecommunications costs can also dramatically affect your cost per order. You can negotiate costs per minute with service providers based on the number of minutes used. Small operations typically have T1 lines, with rates around $0.08 per minute. Midsize users of 18 million-20 million minutes per year can achieve around $0.06 per minute, while large catalogs (those using more than 20 million minutes per year) spend about $0.045 per minute. But there’s a lot happening in telecommunications: Improved negotiations and combinations with other data, voice, and broadband services will cut costs.

Another way to analyze your costs per order is to calculate them as a percentage of sales. Again, industry benchmarks can help you evaluate your operations. For instance, in the call center, direct labor costs are typically 2.05%-3.5% of net sales, not including benefits; the total cost of fulfillment for the most efficient catalogs is 8%-10% of net sales. But many profitable catalogs have a higher total fulfillment cost – between 10%-15% of net sales. And because they lack some economies of scale, small catalogs often have difficulty achieving fulfillment costs of less than 20% of net sales.

Don’t put too much stock in your percentage of net sales, however; percentages can be misleading. Let’s assume that your total cost of fulfillment is $10 per order. Therefore, for a $100 order, the $10 cost represents 10% of net sales. But if you spend the same $10 fulfilling a $75 order, your $10 represents 13.3% of net sales. Then again, certain types of products or orders may cost more or less to fulfill, so in looking at cost as a percentage of net sales, you need to keep in mind that the nature of your business and what you sell will greatly influence the percentage of net sales.

Also keep in mind that while it’s important to do external benchmarking, setting up internal productivity reporting systems – measuring goals and actual productivity from season to season and year to year – is even more important.

Room for improvement

While calculating your cost per order involves looking at the systems and procedures you have in place, reducing that cost can involve a multitude of approaches. Some address existing systems, while others require ground-zero thinking about the entire operation. Some require a global view, while others call for micromanaging the smallest details. Overall, you’ll want to examine everything from the service levels you’ve set as goals to the clarity of your catalog copy and art. Once you start, you’ll find there’s a lot you can do.

Because direct labor accounts for half of your costs, increasing the productivity of your labor force is one of the chief ways to reduce your cost per order. The four key elements to increasing productivity are:

- improving the process (reducing unnecessary steps; streamlining procedures and work flow; adding equipment or computer systems that help operations);

- increasing work pace by reducing delays (making sure product is available in primary slots for picking; cutting picker travel time by keeping high-velocity items in one place; stocking enough boxes and packing materials);

- increasing volume handled; and

- improving the quality and quantity of initial and ongoing training.

It’s also essential to improve inventory forecasting and management. When merchandise isn’t in stock to be shipped when the customer places an order, this directly hurts your bottom line: Each backorder costs you roughly $7-$12. (This reflects the total cost in both the call center and the distribution center.)

Why do backorders cost you so much? Consider the direct labor and communications costs for second and subsequent calls from customers asking, “Where’s my order?” If you have a split shipment, in which you ship out the products that are in stock and then later have to send the backordered goods, you must add in a second round of packing and shipping materials. You’re also losing shipping and handling income on split shipments of these backordered items because you have to absorb the costs. Then there’s the expense of mailing backorder notification cards. And you always have to contend with cancellation of late orders.

In evaluating your inventory management, consider the following questions: Will a specialized inventory forecasting system aid in preseason purchase planning? What back-up arrangements can you negotiate with vendors to compensate for errors and omissions in the forecast? What additional methods of liquidation will reduce overstocks? How much more flexibility will these methods give your inventory managers?

Another potential source of reducing costs is in improving your personnel scheduling. Having the right number of call center agents in their seats at the right time can boost sales, because when calls are answered promptly, you reduce your call abandonment rate and the resulting loss of orders. Our experience shows that for optimum efficiency, call center reps must be in their seats and ready to take calls at least 75%-80% of the time (lunch hours, breaks, and vacations are considered time that reps are not in their seats).

The many work-force management software systems on the market are valuable here. What once took hours and pages of schedules can now be done in minutes by computer systems that factor in everything from lunch breaks to vacations. Depending on how efficient you are already, these programs can improve your personnel scheduling 5%-15% in terms of productivity.

In the distribution center, scheduling is vital, too, as is cross-training. Are there individuals or departments you can cross-train to gain more labor flexibility? For instance, inventory control workers may be trained to pick, pack, or receive during peak periods.

Speaking of employees, don’t neglect to evaluate your recruiting strategy. Are you hiring the right people for the job? Can your wage structure attract the labor pool you need to deliver your desired service levels and operate efficiently? Our experience with benchmarking surveys in 70 call centers over the past two years revealed that starting rates for telephone service reps (TSRs) and customer service reps (CSRs) ranged from $6.80 to $12.40 per hour – for the same position. To get the best applicants in your market, you need to make sure your pay scale is competitive.

Providing competitive benefits may also help you attract and retain qualified job candidates. Note that the rates quoted above don’t include benefits. Part-time benefits average 14% of payroll costs, while full-time benefits are about 24%. More and more businesses, especially large companies, are offering benefits from the first day of hire as a way of attracting the best candidates.

Attracting and keeping good operations help has become increasingly important, as call centers have morphed into customer contact centers that support not only catalogs but also e-commerce. Suddenly, service reps are required to answer e-mails and type instant messages in response to customers who are waiting online for real-time answers. For this you need agents who are able to compose messages or select from available prescripted texts and personalize them. They may require typing speed and accuracy as well as proficiency in the written word. So attracting qualified employees will be more important than ever in keeping productivity – and ultimately cost per order – where you want it.

And finally, you should aim to reduce your percentage of customer returns. Each category of merchandise has a natural level of returns. For instance, in the apparel sector, casual clothing has a return rate of 10%-12%, while fashion apparel returns typically exceed 30%. But you can reduce your costs if you try to get your returns down to the minimum. To do this, collect data on reasons for returns, and try to improve those factors that can be controlled internally: for instance, picking and packing errors, and creative issues, such as catalog copy and pictures that do not adequately describe items. You should also look at your order purchasing specifications and at how your merchandise vendors are complying.

There is much you can do to improve cost per order. And as the e-commerce and catalog industries become more competitive, and as distribution costs continue to rise, these improvements will become imperative.

Costs per order cited in this article do not include shipping and handling costs or the S&H income offset. This area is more the purview of the marketing department. In a 1999 F. Curtis Barry & Co. study of 26 catalogers, we found that 21 earned an impressive average of $2.26 per order over the cost of shipping supplies and outbound shipping.

You should try to make a profit of several percentage points over the shipping and handling costs – although this won’t be easy with the recent parcel carrier rate hikes. With the rapid changes in United Parcel Service costs and the increased productivity of the U.S. Postal Service, it is worth seeing what package consolidation and zone skipping can be accomplished for parcels weighing 3 lbs. or less.