Curbing Fulfillment Costs

HOW OMNICHANNEL RETAILERS CAN IMPROVE EFFICIENCY TO REDUCE THE FINANCIAL IMPACT OF SERVING THE DIGITAL CONSUMER.

SARAH JONES

Throughout Covid-19, e-commerce use has skyrocketed, with retailers seeing the equivalent of multiple years of growth in mere months. However, fulfillment costs have risen, too.

A pre-pandemic Capgemini survey of supply chain executives found that last-mile delivery accounts for 41 percent of retailers’ total supply chain costs. “Not only are inventory and shipping among the biggest costs in a retail supply chain, but these are also the most challenging to manage,” said Rafay Ishfaq, W. Allen Reed associate professor in the Department of Supply Chain Management at Auburn University.

Meeting online shopping demands may be an expensive endeavor, but retailers can optimize their processes to cut costs and improve margins while also satisfying shoppers.

MULTICHANNEL MARGINS

For multichannel retailers, in-store shopping represents the least expensive fulfillment option. And replenishing goods to stores has been optimized for efficiency. “Traditionally, store-based retailers have built their supply chain prowess on sourcing and moving products in large quantities across their distribution networks,” said Ishfaq. “They developed efficient supply chain processes to keep logistics costs low by moving products in bulk…But now, omnichannel has disrupted this retail strategy.”

The next best option for reducing cost is adding buy online, pick up in store (BOPIS). With in-store or curbside pickup, retailers eliminate shipping costs since the consumer does the traveling for them. BOPIS also boosts impulse add-on sales. An International Council of Shopping Centers survey found that 67 percent of customers purchase additional items when they pick up their online order.

BOPIS also offers a level of instant gratification that pureplay e-tailers can’t match. “What the [pandemic] did for retail, is it forced them to find a more cost-effective way of fulfilling those orders. And in so doing… they also have created an enormous advantage against Amazon and other e-commerce companies,” said Antony Karabus, CEO of HRC Retail Advisory.

Delivering merchandise to consumers’ homes is costlier than BOPIS. McKinsey es-

timates that online fulfillment costs per unit are between four to five times more expensive than replenishing product to brick-and-mortar stores, in part because the basket sizes are generally smaller for e-commerce purchases.

With distribution centers typically situated in the middle of the U.S., sending merchandise direct to consumer from these facilities can be costly, as goods often end up traveling hundreds of miles. As an alternative, multichannel merchants can position merchandise closer to consumers by leveraging their stores as localized fulfillment hubs. “The closer the shipping distance, the lower the cost will be of fulfillment,” said Karabus.

Along with reducing the distance that individual parcels must travel, this model mobilizes salespeople already in the store for picking and packing. However, Gabi Ledesma, vice president of consumer products, retail and distribution at Capgemini, noted merchants might need to add staff to run both store and fulfillment operations.

Per Karabus, retailers can further reduce final mile costs by using local delivery services. Rather than sending a parcel through a carrier, some stores have instead partnered with food delivery companies. For instance, Old Navy leveraged Postmates during the 2019 holiday season to send orders to shoppers’ homes, and Dick’s Sporting Goods has teamed with grocery platform Instacart for same-day delivery in about 10 states.

In 2017, Target announced a $7 billion investment aimed at turning its stores into localized hubs, leveraging the fact that most shoppers have a Target store within 10 miles. Target also acquired delivery platform Shipt in 2017, expanding its same-day delivery capabilities.

When Target saw its online business boom last March, its same-day fulfillment investments paid off. Curbside pickup, instore pickup and Shipt were popular even before the pandemic, but the adoption grew. “Millions of guests were loving them because they’re fast and easy,” said John Mulligan, executive vice president and chief operating officer at Target Corporation, on a recent earnings call. “Without the shipping expense, these orders look much more like a store sale than a traditional online transaction, costing on average 90 percent less than if we’d shipped it from a warehouse.” Additionally, shipping via carriers from stores offers a 40 percent savings compared to sending packages from warehouses.

By fulfilling e-commerce orders from stores, Target has more flexibility to react to ebbs and flows in demand. This includes more easily adjusting staffing and storage space to deal with peaks.

On the flip side, building and running distribution centers may be a significant investment, but automation can make it

“Not only are inventory and shipping among the biggest costs in a retail supply chain, but these are also the most challenging to manage.” —Rafay Ishfaq, Auburn University

more efficient than fulfilling from stores. Neil Saunders, managing director, retail at GlobalData, says that most large fashion retailers’ volumes justify having a direct-operated DC. To balance out the upfront expenditure, merchants can ramp up productivity in their warehouses.

Gap recently opened a new fulfillment center in Ohio designed for multichannel retailing, with a peak daily capacity of 1 million units. Giving the automated facility more flexibility for off-peak times, one of the two sorters can be turned off to process just 500,000 daily units.

Translating DC-style automation to the brick-and-mortar environment, retailers can create micro fulfillment centers at the back of their existing stores. Compared to picking and packing from the sales floor, these mini warehouses can boost the efficiency and speed of fulfilling, bringing down labor costs per order. The upfront investment is also lower than building a separate distribution center.

“Retailers have to analyze their physical store network to understand if they have to close exiting stores or repurpose them for fulfillment only,” said Ledesma.

HIDDEN COSTS

Some expenses of fulfillment, such as infrastructure upgrades, are readily apparent. What is tougher to calculate are some of the hidden costs.

Shipping from a warehouse might be more efficient than picking and packing goods from a store, but retailers have to factor in the higher return rates for online sales. GlobalData’s Saunders calls returns apparel’s “elephant in the room.” He added, “When you look at the cost without returns, some of the business models don’t look too bad. As soon as you start factoring in return costs, they significantly deteriorate, so that is a big area that retailers have to manage.”

When it comes to returns, BOPIS has a leg up on home shipping. If consumers choose to make a return while still in-store, the retailer incurs lower processing costs than if goods are shipped back to a distribution center.

Split shipments, or orders that are sent from different nodes, also add up, according to Ishfaq. Another hidden cost is related to extra inventory. “BOPIS creates an inventory-related challenge dealing with competition for limited store inventory between in-store customers and online orders,” he said. “This situation can lead to stores trying to increase their inventory stock, which increases retailers’ costs.”

As store staff adopt new fulfillment tasks alongside existing duties, it can also be a challenge to calculate their labor costs versus the amount of time a warehouse worker takes to process an order.

Plus, by having store staff add picking and packing responsibilities, they might neglect customer service, sales floor recovery and restocking, resulting in missed sales opportunities.

THE FREE SHIPPING EXPECTATION

Given the expense of offering speedy fulfillment, retailers might be tempted to pass along some of the cost to consumers. This is largely out of the question, as shoppers have become accustomed to fast, free delivery. A UPS survey showed about a third of shoppers will search for promotional codes, pick slower delivery timeframes or raise their cart amount to qualify for free shipping. Around a quarter opted for BOPIS to avoid fees.

“[Free, speedy delivery] obviously comes with a cost attached for retailers,” said Saunders. “But unfortunately the market is so competitive that retailers really have to respond to those expectations—or lose out.”

While instituting blanket shipping fees is a challenge, retailers can provide delivery options to the shopper, such as giving them free standard shipping and premium paid tiers for faster service. Retailers could also establish minimum basket sizes for free delivery to make up for the cost or encourage less expensive options, such as BOPIS.

Even though retailers are cost conscious, they can’t lose sight of the customer experience. Successfully delivering in the last mile could have a significant impact on future sales, with Capgemini finding that 72 percent of satisfied customers will increase their spend. “At the end, retailers who provide great last-mile service will realize significant benefits,” said Ledesma.