How do you manage your shipping strategy to optimize both top-line and bottom-line results? Much has been said and written about how e-commerce results can be optimized through better management of the shipment portion of the customer experience.
The key questions are what has been tried and what’s proven to separate the best in class from the rest? These four areas are critical if you’re going to the “next level” and want to compete with the best in class:
1. What do you measure? The old saying “you can’t manage what you can’t measure” has a special application to small package e-commerce shipping. Did you know that every package has at least two billable events to your bottom line, and many have as many as five fees that can show up across three different invoice periods?
The impact of these billing activities from the small package carriers can affect the final cost of a package by as much as 30 percent. “Best in class” processes manage this cost in near real time, from the creation of an order to the final allocation of transportation cost. There’s tremendous benefit in basing your freight and margin strategies on accurate cost metrics when determining your promotion and merchandising strategies.
Maintaining a competitive carrier contract continues to be the best solution to optimizing cost and protecting against unplanned expense. However, most retailers don’t have the process or system in place to measure the contract. Your small package e-commerce contract is a fluid document that manages an ever-changing cost structure. You may not be aware of it, but your UPS, FedEx, DHL and LTL costs don’t just change in January of each year.
Measure critical metrics that allow tight management of your shipping program. Instead of measuring what you can, wouldn’t it be nice to measure what you need?
2. How do you account for the cost of shipping in your merchandising and promotion decisions? Cost allocation of small package expense is a critical enabler in unlocking your options for managing both merchandising and promotion decisions. Best-in-class practices allocate the total expense at the transportation category level down to each product SKU.
Imagine a promotion on a custom “T” advertised for under $20. Every 20 cents of transportation expense equates to 1 percent margin. Understanding the exact expense of shipping, and how it shows up in your order-to-cash cycle can dramatically alter the metrics you use to make promotion and merchandising decisions. You might be shocked at the cost most retailers incur because “pass through” shipping cost strategies are actually negative margin realities.
Many retailers today allocate their expense in bulk at the account number level for UPS, FedEx, DHL or USPS options. This is a losing strategy.
3. How are you positioning your freight options, and what effect does that have on margin? Having a strategic plan for what you measure, and clear visibility into the effect of cost on your margins, changes your options. Flat-rate shipping, free shipping, shipping as percent of order value, marked-up shipping and pass-through shipping all become legitimate strategies across different times of the year because you make better decisions based on accurate margin.
One “best in class” strategy for positioning freight options is to go non-modal. You can still leverage the brand value of promoting big brown or purple as your carrier/partner, while using a non-modal offering to optimize your cost. For example, committing to one-day delivery instead of FedEx Priority Overnight or UPS NextDay Air allows you to leverage your warehouse management system capabilities and use the least expensive mode to meet the goal.
Just be careful, some second- and third-day air options really take two days and three days, even if a ground movement would be faster!
4. Other critical issues everyone is facing … The continued pressure on the market capacity for peak season deliveries is creating problems for even the largest of players in the e-commerce world. There’s a lot of inaccurate information about what Amazon.com is actually doing and the effect on the entire market going forward. Carriers are continuing to optimize the cost to “access” their networks in December, and that’s showing up in many of the pricing strategies we see in the annual rate change announcements and other rule-related changes for shipping.
Being purposeful about your strategy and informed about your options is important. Christmas on a Sunday? The day of the week Christmas falls on turns the order-to-delivery cycle on its head during December. Delivery options become more and more expensive as the day of the week changes, limiting options for delivery. 2016 is one of the most challenged years we will face, and understanding your options is critical in order to manage this dynamic.
Patti Hester is chief strategist, e-commerce and distribution at Platinum Circle Partners, a company that specializes in logistics information management and transportation solutions. Patti is also an associate member of the Women in Retail Leadership Circle.