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eCommerce

Cost Reduction Techniques in Logistics

By Shipware | eCommerce, Shipping Knowledge | No Comments

Whether companies ship items in high volumes or just occasionally, logistics can contribute a large percentage of costs. One consideration when looking at the annual budget is ensuring the company has a cost-effective logistics operation. Management and logistics are a big part of the supply chain, and fortunately, many areas can be trimmed and tweaked to work more efficiently. But it does take thought and understanding, which can be achieved through logistics consulting and an audit on your shipping invoice. A company must be willing to seriously dive into various cost centers and departments, while keeping an open mind to upgrading systems and processes. The top reason that businesses reexamine their supply chains is to lower the overall operating costs, according to the 2019 Third-Party Logistics Study

Here are several methods and tips for cost-effective logistics.

1. Understanding Your Costs

Logistics management covers many areas, including warehouse space and inventory-carrying costs, picking and packing, and transportation. The total logistics expenditure as a percentage of sales revenues was 11% in 2019, per the study, a percentage that remained stable over the past few years. The first step to reducing logistics costs is looking at your current costs. Understanding the landed costs of goods is important to understanding the big picture, as it can influence the various components and choices involved. A shipper might choose to source or manufacture goods from a different location if tariffs become unreasonable and don’t balance out the lower production costs, for example. 

2. Business Processes Automation and Planning Software

One way to better understand costs is by using business processes software. In this connected era, it seems surprising that not all shippers rely on modern software. Some companies continue to do what has worked for them for decades: using paper and pencil or an Excel sheet. About 72% of shippers surveyed use enterprise resource planning software (ERP), 56% use warehouse management systems (WMS), and 38% use transportation management systems (TMS). About 38% of shippers use supply chain visibility software, and others are also using analytics systems. Integrating planning software systems can make a world of difference when implementing cost-effective logistics management plans.

While understanding costs helps, lowering distribution costs is the main focus. These software systems offer different ways to help operate a business while assisting with cost-effective logistics.

Warehouse or Inventory Management Software

Warehouse management software has several components that help with logistics, including real-time inventory tracking, reordering, warehouse organization, and forecasting tools. 

  • Inventory tracking: By tracking inventory accuracy in real-time, the company can alter its eCommerce fulfillment strategy or better control it. The eCommerce fulfillment strategy might be first in, first out, or first expired, first out. Using tracking software for this, warehouse staff can better identify the correct items to pick so that the products are freshest (e.g. food), or are the oldest products, to ensure these don’t become obsolete before they can be sold. This reduces inventory loss, increases inventory accuracy, and tracks specific items so the best ones are sent to meet your company’s goals. 
  • Reordering products: The WMS software can help determine reorder timing so the right amount of product is in the warehouse at any given time. By setting parameters and automating this process, your company minimizes warehouse storage costs. 
  • Forecasting: Demand forecasting is an art and a science. However, getting it wrong means overstocking or understocking. That results in less cost-effective logistics because of lost sales or excess inventory that is tough to sell. Using forecasting software, the algorithms and data from previous sales are used to deliver more accurate forecasts. Forecasting can be done on a location level as well as a global level for your business.
  • Warehouse organization: WMS systems offer warehouse space organization tools to help maximize the storage space, while helping employees find items more easily when picking. It also tracks individual items in the system. This helps with accuracy in fulfillment and distribution, and decreases rates of return due to error.

Transportation Management Systems

TMS software allows companies to increase efficiency and reliability for the use of transportation companies. The software focuses on planning, optimization, and execution of the modes of transportation, with greater visibility and information. The more helpful the TMS is, the less time you need to spend managing your air freight, ocean freight, or land transportation needs. That means your time can be better spent on other activities, whether getting new customers, optimizing the warehouse space, or working on other company initiatives. Some components of TMS are:

  • Route planning and optimization: Using these features for both inbound and outbound shipping, along with load building, can help reduce shipping costs and increase efficiency.
  • Carrier selection: The software helps companies track their carriers and modes of transportation, along with affiliated information, like fees, transactions, savings opportunities with higher booking levels, carrier availability, and sometimes carrier ratings.
  • Customer service: Whether selecting a carrier or planning a route, your customer will be affected. Understanding how the customer is affected influences choices made around transportation companies. Carriers with high excellent delivery time and ratings, and low damage or loss rates is important to customer service. So is a transportation company’s reporting capabilities. These features may be more important than price, to retain customers and give them the service they deserve. 

Alternative Software

Companies are using other software systems to increase operational efficiency and improve the cost-effectiveness of their logistics.

  • Analytics: Big data is a big concept these days, for good reason. Companies are often swimming in data but unsure how to use what they generate to their advantage. Big data analytics programs can sift through the data to provide actionable ideas that can save the company money and provide insights into the operations. That includes process quality, resource utilization, worker performance, manufacturing performance, financial insights, and other areas of interest. Especially when using predictive analytics, these programs can include assistance with decision making in all areas of business, including logistics.
  • Visibility: Control tower type visibility programs provide eyes into various data streams and operations. Using transportation data, companies can integrate weather, traffic, and shipment information to better optimize load and labor scheduling.

3. Logistics Automation

Warehouses have increased their use of logistics automation, with good results. Business process software applications not only help warehouses efficiently place items in particular places, but help the picker find them easily and quickly. They track what products are entering and leaving the warehouse, to plan for new stock. Fulfillment operations using logistics automation can determine the appropriate packaging, the right shipping service, apply the proper postage, and route the packages to the warehouse pick-up spot so it can get to the recipient in the shortest time possible.

Robot usage has increased in warehouses, in multiple ways. Robots can palletize cargo without causing injuries or worker’s compensation claims. Robots can work independently or with warehouse staff to shift items in the warehouse for storage or fulfillment. Automated conveyors swiftly carry parcels through the warehouse to other locations, using sensors and the internet of technology, or RFID tags. 

The result is a more efficient operation with cost-effective logistics. Warehouse space can be maximized, with fewer mistakes and more insights into the operations. It can help with key performance indicators.

4. Supply Chain Planning and Collaboration

Collaborations help with cost-effective logistics. Shippers don’t have to do it alone. Shippers commonly collaborate or outsource to 3PLs, and collaborate with competitors and their network to lower prices for everyone, while increasing the service quality. 

One way to do this is by mitigating supply chain disruption. When shippers don’t have a plan in place for dealing with possible disruptions, that leaves them scrambling when the unthinkable happens. With any disruption, distribution costs can increase for the shipper. By anticipating and mitigating those disruptions, it’s easier to plan for them financially. Disruptions come in all forms:

  • Increased logistics and transportation expenses: Rising real estate prices can increase warehouse costs. Rising gas prices or constrained trucker availability can increase transportation prices. A tight labor market can mean higher fulfillment costs. Increased carrier rates can also increase logistics costs. 
  • Increase in supplier expenses: Suppliers of all stripes impact costs paid by shippers. That includes product or raw ingredient costs, as well as increased energy prices. A shortage or competition for specific items means higher rates for you.
  • Transportation and logistics network disruptions: Natural disasters can flood roads or delay air freight. Pandemics can halt the supply of needed ocean freight or shut down manufacturing. 

Instead of planning for these alone, shippers should be working with partners to share ideas and resources. The idea that two heads can be better than one is true – it benefits both parties. Using each other’s expertise and contacts, mitigating potential disruptions can be easier.

5. Reducing Transportation Costs

One of the most common concerns for shippers in 2019, according to the survey, was transportation and logistics network disruption, at 73%. But the top concern for 75% of shippers, was the increase in transportation and logistics cost. 

One way to collaborate and reduce logistics costs is to share transportation costs with other companies – even a competitor. Shippers who have multiple suppliers in one area, even one country, can do load consolidation. This may allow them to use a full container or full truckload, rather than a partial one, saving in the process. 

Another way to reduce transportation costs is by focusing on last-mile delivery. Having a cost-effective logistics strategy for last-mile delivery is paramount, and only 53% of shippers surveyed felt they effectively managed those needs. Outsource to a 3PL, or use newer alternatives, like delivering to storage lockers. There’s no right answer, and much of it depends on your customers and what makes sense for your business.

6. Audit Service and Contract Negotiation

Managing the actual costs of shipping is another way to improve what you’re spending on logistics. There are two ways to do this: contract optimization and negotiation and invoice auditing. You probably know that carriers are constantly adjusting prices to remain competitive, especially for fuel fees. Contracts can be regularly renegotiated as well. 

Shipping Contract Negotiation

Going into a parcel contract negotiation without a good plan is just planning to fail. Experts, like those at Shipware, can offer more insights than typical shipping departments of companies. Shipware’s experts have decades of experience working at the shipping companies themselves. Shipware has benchmarking data and the expertise to know what terms can be negotiated, and by how much. Shipware experts can do the negotiating for you, or provide the information for you to conduct negotiations yourself. Either way, you’ll gain more benefits than by doing it without this help, thus saving more money.

Shipping Invoice Audit and Recovery

Conducting a parcel audit is another way to save. Parcel carriers like FedEx and UPS offer guarantees to customers, and if those guarantees aren’t met, they give money back. Manually tracking each parcel or shipment to determine if all elements of the carrier agreement were met is impossible, and not worth the time. Here’s where logistics automation comes in. Using a cloud-based solution, Shipware’s auditing software gives line-by-line visibility into the tracking information and carrier agreement, identifying logistics savings opportunities and sending claims to the carriers on a daily basis. The fees come from cost savings, with no out-of-pocket costs for the service. 

Call us to see how we can help you save money on your logistics.

How Logistics Automation Cuts Costs

By Shipware | eCommerce, Shipping Knowledge | No Comments

Robots. Software applications. Smart machines. Internet of technology. All these modes of logistics automation can make a major difference in a logistics company’s efficiency and operations, resulting in lower costs. Companies don’t have to use every method of logistics consulting available to take advantage of the benefits of logistics automation. But they should know what’s available and formulate a plan to find the methods that make the most sense for their situation.

Logistics automation uses automated machinery or business process automation to improve logistics operations’ efficiency. That can be in a warehouse, a distribution center, or other areas of the supply chain including transportation, procurement, forecasting, and enterprise resource planning software (ERP). Systems working together to coordinate inputs and outputs are the best suited to make the biggest impact on cost-cutting. 

Of course, there are other benefits of logistics automation that can’t be overlooked. It can also impact labor, improve quality and accuracy. Ultimately, that means improving customer service.

Warehousing/transportation is in the top four market segments using logistics management that are ripe for automation, according to McKinsey Global Institute. That’s because of the labor shortage in recent years, as well as growth in e-commerce. Warehousing/management is behind accommodation/food services, manufacturing industries, and agriculture. Technological advancements make automation possible now more than any time before.  

Types of Automation

In warehouses, logistics automation comes in many forms. 

Machinery

Warehouse operations (as well as manufacturing industries) use many types of automated or smart machinery. For example, automated storage and retrieval systems employ robots, which allows for denser storage and better use of existing space. Some warehouses find success with automated guided vehicles to move cargo and items to the human workers for picking and packing or storage. Machines can weigh packages, determining if items are the right weight. Or that automated weight machine helps with packaging determinations, some even applying postage, after the software determines the appropriate amount.

Industrial Robots

Larger robots are used to load, unload, and move pallets and cargo. These may do so using RFID tags or bar codes. Arm sensors can determine the size and shape of a package to best grasp it, without dropping or damaging it.

Conveyor and Sortation Systems 

Conveyor and sortation systems in some warehouse operations are automated to route bins and other items into specific parts of the warehouse, using scanners.  

Software

Business process automation is a big part of what the software can do. Amazon warehouses, for example, use software applications to determine the best storage spot for e-commerce items, to place in a moveable bin. Items are tracking with a barcode. The software monitors not only the product placement, but chooses which products should be moved to a different warehouse for fulfillment if needed. The fulfillment operations software determines a pick list, sending the robots to retrieve items from the closest bins to go to the fulfillment operations picker. Software applications serve many purposes in the automated logistics setting, whether it’s the ERP, TMS, or another type. The business process automation software can be used for analytics, route or shipment optimization, energy savings, or other uses.

3D printing

3D printers can print needed parts or goods, saving time, labor, and expenses.

Drones

Drones are increasingly used for logistics management in warehouses and yards for inventory management, whether reading RFID tags or delivering items in a small area. 

Assisted Fulfillment Operations Picking

Even when human workers are doing the warehouse picking, they still may be assisted with automated logistics technologies. One example is smart glasses, where images of the items appear in the glasses, and a robot directs them to the next item. 

The Challenges of Automating

Not all logistics companies are automating. They might resist because they don’t yet know which technologies will be most helpful. Automation can be expensive to implement and the planning process can be long, depending on the plan. Some companies have a hard time proving value to the decision-makers in the C-suite. Or logistics companies don’t want to invest without knowing they have contracts to pay for it.

In the various market segments, warehouse automation is projected to have the slowest growth, according to McKinsey research. They estimate warehouse automation to grow at 3% to 5% annually until 2025. Yet in response to warehouse automation, costs could fall 40% owing to the cross-functional alignment between operations and cost-effective logistics. In comparison, McKinsey estimates that the pharmaceutical industry’s logistics automation will grow at 8% to 10% annually, and retail and automotive sectors will grow their automation at 6% to 8% annually.  

Market Segments in the Supply Chain Management

Other market segments and their supply chain management can also benefit from logistics automation

  • Transportation: This sector offers opportunities in logistics management for air, ocean, rail, long-haul trucking, and last-mile delivery. In rail, some terminals are already using automated machines to move containers on and off trains. Automated safety systems like Positive Train Control (PTC) allow the trains to slow down or stop when a safety issue is detected, especially important for avoiding human operator error.
  • Retail: This sector finds logistics automation and logistics management especially helpful when operating in an omnichannel environment. Shippers can’t always find a logistics company that can meet their automation needs, so they create their own solutions or have a hard time evaluating companies because they don’t know what would help them. 
  • Parcel: Companies in this sector rely on the benefits of logistics automation to remain competitive and carry increasing numbers of packages and cargo. They’re using automation software that provides visibility and tracking for customers and for themselves. This allows customers to schedule services without needing help from the parcel or logistics company. The software provides efficient routing for drivers and delivery proof. Logistics automation is important in the sortation of shipments as well. Given the time expectations and guarantees, the parcels must move efficiently, and automation is key for that. Loading and unloading in the hubs is an important part of this. Parcel services use automation equipment which increased employee productivity, to an estimated 3,000 items per hour in unloaded shipments, up from 700 to 1,000 items per hour.
  • Trucking: This sector introduced the electronic logging device, which is controversial, but stores information about the driver’s hours on the road. Truckers also use logistics automation to schedule pick-ups, accept jobs, and allow customers to see where the trucks are at any given time. Some logistics systems allow refrigerated trucks to track temperature to ensure quality, feeding this information to cloud-based solutions for instant updates. And of course, there’s the move toward automated driving of these long-haul trucks. It’s estimated that if trucks were fully automated, operating costs would decrease by 45%, saving $85 to $125 billion per year.

Areas to Employ Logistics Automation

Labor

The first reason to consider automation is the labor pool. Until the coronavirus hit, the U.S. was experiencing record low unemployment rates. Warehouse operations were paying higher wages and needed to use recruiting companies to fill roles. Finding labor was difficult. It remains to be seen how the pandemic will affect labor availability. But until a successful immunization is widely circulated, with herd immunity, safety might continue dictating that employees need more space between them. Increased worker illness rates can lead to more employee absence. Automation can help the facility run more smoothly.

E-commerce

E-commerce is bringing in more business, and the winners are companies that are stocked and able to ship and deliver quickly. Customers are accustomed to getting their deliveries within a day or two, often with free shipping. If a retailer doesn’t offer that, the customers often take their business elsewhere. Logistics automation can increase the efficiency and visibility of the retailer’s ability to deliver goods at the right price and at the right time. 

Transportation

A transportation management system (TMS) can bring freight savings. The shipper receives live carrier rates, choosing the best options and understanding all the terms. The TMS system might also give statistics and analysis of on-time rates and other quality factors. This can mean actual savings for companies as they reduce transportation costs, or it can mean keeping a customer happy even if costs a little more.

Customer Service

Keeping customers happy is imperative. It’s cheaper to retain current customers than to accrue new ones. The benefits of logistics automation include customer service. Companies can offer customers the right type of insurance, live tracking, customer-specific freight accounting, automated scheduling, and other perks. 

Error Reduction

Does your company have higher error rates than you’d like? Perhaps manual data entry introduced costly errors or the wrong freight classification system was chosen. Errors from human workers can be expensive and difficult to track and fix.

Cost Recovery

Parcel carriers like UPS and FedEx offer service guarantees. It’s hard to manually track each package to see if it was delivered on time, using the correct elements of the carrier agreement. Not only is manual labor expensive to use for this task, but it’s also time-consuming. It’s more efficient and arguably more accurate to use a well automated auditing system.

Shipware uses cloud-based solutions that provide line-by-line visibility into the carrier agreement and tracking information. The system identifies each savings opportunity, automatically sending claims daily. The service takes its fee from those cost savings, so there are no out-of-pocket costs. 

Reaping the Benefits of Logistics Automation

The benefits of logistics automation can be reaped even with baby steps. A seemingly small project can yield quick savings with surprisingly little effort. Shipware’s parcel audit and recovery system is one project that pays off instantly and is a quick fix with big results. It can be set up in five minutes and runs in the background. It requires no installation and provides found money. The shipping optimization tool results in returns of deserved savings from the parcel company, without any hassles or haggling on the customer’s part. Parcel contract negotiation is another one-and-done solution that provides automated cost savings going forward. Call us to see how it works and we can set you up with a trial and see how much we can save you.

Ecommerce Shipping: Costs and Solutions

By Shipware | eCommerce, Parcel Market Trends, Shipping Knowledge | No Comments

Today, eCommerce is not a side gig for your business. In some cases, it is a driver of growth and, for many businesses, it is the only area of revenue. Many business owners, large and small, have to convert from retail and warehouse operations to consider the unique challenges of eCommerce. Ecommerce is distinctly different from brick and mortar or store distribution operations. Besides the small number of units per order, the additional customer service, and other challenges, the other major difference is the need for parcel shipping. 

With the help of our shipping consulting experts, we’ve put together a guide on how to save on your eCommerce shipping costs.

The Current State of Ecommerce Parcel Shipping

Ecommerce generates more packages, smaller in size, and higher in cost per unit than other forms of sales. Instead of pallets, you produce cartons, pouches, or envelopes. Instead of lump-sum charges covering more than one sale, you end up with one or multiple shipping charges per sale. And, instead of mutually interpreted terms, your charges often depend on the judgment of personnel multiple times in the life of the shipment.  

Parcel shipping has a few major players and new, more regional providers emerging every month. Depending on how many services you use, you may have different terms and conditions, possibly even multiple sets per shipping provider. It is important to follow those regulations to avoid any surprise shipping fee, but that is not enough.

Estimated Shipping Costs

Some shipping platforms can estimate shipping on the order based on product weights and other stored information (like oversize product dimensions). This takes a great deal of daily management as new products are introduced to your eCommerce store and updating existing products with new packaging information. The resulting shipping estimate can help you decide what to pass on to your customers and a rough budget for your shipping costs.

Discretionary Charges

Note that is a rough estimate. Why? Because some charges are dependent on the final package dimensions, terms in your contract, and even the discretion of a handler at the parcel shipping company who handles the package. Some of those charges can show up after the billing period, even months later. So, the control of your shipping costs is sloppy at best. It can be an expensive and futile exercise to improve that estimate, almost like balancing a teeter-totter on a ship underway.

How to Save On Ecommerce Shipping Costs

With the shipping industry being tricky and costs adding up due to estimated shipping and discretionary charges, what can you do to save costs? Follow these steps.

1. Estimate the Impact

Well, first, use that estimator. Even if the value is inaccurate, having a shipping cost estimate per order can help you understand trends in weight, cost, and services requested by your customers. This can help you plan how to apply free shipping, the budgets for shipping in general, and even the impact of your packaging on your costs.

But that is not enough. You need more advanced options and cost-reduction strategies. Ones that help you ensure you pay what you should, not just what you are billed. Let’s start with auditing your invoices.

2. Audit Your Invoice

First, why? Well, all of the surcharges are discretionary, depending on the supervisor or delivery driver. Even things like discounted shipping rates for bundled packages or signature options can be misapplied at either end of the shipping process. You need to check your invoices to find out if all of the charges make sense. And, depending on the shipping service each package used, you should verify if your parcel shipping carrier met their service guarantee. This is a big one if you are a smaller shipper and paying extra for overnight or even a 2-day shipping service. You have to deal with the customer service implications but you should not have to pay for the extra cost with no benefit.

The problem with auditing, though, is that you have a learning curve. Which services to which shipping zones have the most problems? Should you be looking at actual vs. dimensional cubic weights for discrepancies? Or, is the occasional address correction or handling charge something to watch instead? It can become an activity that may or may not save you money, or at least enough money to justify the effort.  

In that case, consider a professional firm like Shipware to take care of a parcel audit. Our experience helps reduce that learning curve to almost nothing.  And, as our exposure to your shipping efforts increases, we’ll help you find new ideas and strategies to help you control your existing costs

How much can this shipping solution help? Over time, you might save between 1 and 5% of your total shipping parcel cost depending on what you ship, the type of service you use, and even where your shipments are headed.  

At this point, you have tools to budget both your spending and your customer service options for shipping and a way to catch mistakes on your invoices. You have more control and maybe some appreciable savings. With that said, even more can be done to help you save costs.

3. Negotiate Your Shipping Contract Terms

Negotiating your shipping contract will give you the most desirable outcome and the best shipping options for eCommerce operations. However, this is best done with help. There are several concepts to consider when you look at a new parcel contract.  

  1. The salesman you work with is not your ally. They are a resource to work with, helping you to use their company’s services to do business. But they are paid by the parcel shipping carrier to make as much money as possible from you. Therefore, that contract? It probably benefits them more than you.  
  2. Averages are bad. Not because the math is incorrect, but because an “average increase” or “net change” often does not impact your total costs the same as the individual charges or costs in that “average”.
  3. This is a contract, not a bill. All of it can be negotiated. The nuance is knowing which areas of the contract are better to pursue than others.
  4. Given your business changes, this contract may not fit your evolving needs. International shipments, new product lines, and even new shipping locations may radically affect the contract and its impact on your expenses.

Like auditing your own invoice, you can negotiate your own contract but you have a learning curve. For every term or clause you bend to your benefit, you also have to look for other areas your shipping provider is holding onto. Which are valuable to you? Which are worth pursuing, given how you ship? And do you know how your parcel shipping company will adjust with annual GRI announcements, zone changes, or even service alterations during the contract to negate your savings?

Get A Partner to Audit and Negotiate

This is why you need an expert in your corner.  Not because you can’t do the job of negotiation, but you can’t learn fast enough to overcome the years of experience your eCommerce parcel shipping company has.  

Finding the Loopholes

So where do they focus on? What would a parcel contract negotiation company zero in on first?

They look for shipping surcharges that you shouldn’t need to pay. Additional handling, address corrections, even oversize package charges may be due to how the shipping company interprets their own terms. You might be able to avoid them with internal efforts like packaging changes or correcting your customer address database.

They look for surcharges that everyone pays, but may be possible to reduce. Fuel surcharges and the dimensional weight calculation get applied to every shipment, to every carton you ship. Knowing what other companies have negotiated for their sliding scale fuel surcharges or even the calculation of dimensional weight helps you to know where there is “fluff” to negotiate with.

They look for minimum charges that can negate savings. The trend of shipments to go into smaller packages, envelopes or pouches mean that the minimum charge applies to more shipments than you expect. Add in a new drop shipping location, shipping site, or partner company and you may be losing savings due to that minimum.

They even look for service level versus cost mismatches. Are you using a service that costs more but goes to addresses that can be served just as fast as a cheaper service? They know how to identify options for this, as well as where alternate services like hundredweight or cross-border consolidation might be beneficial to add to a contract.  

Impacting Your Bottom Line

So how does this help you? Depending on how much you ship and how much you spend to do that, you could save between 10 and 30% of your bill. While you might be able to reach those levels in a few years of experience with negotiating these contracts, a partner can help you get there much faster, saving you much more money more quickly and helping you increase profit margin at the end of the day.

Control Your Costs Now

To control your eCommerce shipping costs, get ahead of those cases. Estimate your shipping cost for each order to have a forecast for future billing. Audit your current invoices to make sure you only pay what you should. And to get real control, negotiate your contract to avoid fees, cap your maximum charges, or reduce their impact whenever you can. With these eCommerce shipping solutions, you’ll be able to cut costs significantly and improve your eCommerce shipping strategy.

The best way to do all of these is to consult experts who not only know nuances of the industry, they know how to find the savings in your data to benefit you quickly.  Shipware supplies not only the knowledge but deep industry negotiating experience to both audit and aid your negotiations. Wondering how you can improve other aspects of your eCommerce business’ supply chain? Check out our tips for cost-effective supply chain management!

4 Tips for Cost-Effective Supply Chain Management

By Shipware | eCommerce | No Comments

In the light of current events, supply chain management has received more attention to its use than at any time in its life. From stockouts of products at the store to the impact of isolation measures on manufacturing, understanding supply chain management and its uses is more important than ever. But how do you do this in a manner that controls your costs, not just your capacities? For starters, seeking out shipping consulting can help just about any business get a better understanding of their supply chain’s transportation costs. But, here are also a few top tips to help you improve your overall supply chain strategy.

1.  Know where your money goes OR know your numbers

The first tip has several nuances. At first pass, it means knowing how your budget is being spent and why. In the past, a supply plan was determined in a company. Focusing mostly on storing inbound goods in local warehouses, it controlled costs by bulk buying and whittling the over purchase down over time.  The new world of supply chain management does not use this process. Instead of stockpiles, the focus is now to provide a global conveyor of goods at just the right time, in just the right amount, in just the right locations. This means that most of the activity a purchasing group makes is in motion, not static. So the question of numbers is not just on the items themselves and their costs, but also the method of transport. And when change happens, there are costs that are accepted as “part of doing business”.   

Take, for instance, the practice of air shipping late shipments to meet a customer’s needs.  How often do you have to air ship products to meet order demands?  How often does that expedited product not get used or only partially used? And most importantly in this situation, why did it happen?  

Knowing your costs and which ones were necessary allows you to make changes where needed. For example, if you’re trying to understand how your transportation costs play into the supply chain, consider a parcel audit of your shipping invoice with Shipware. A thorough audit of your shipping charges allows you to understand which costs were “part of doing business” and which ones may have been errors.

Analyze possible departures of the plan

Knowing your numbers means not only analyzing the plan, but also the departures from the plan. The stance in the past has been to look for the lowest cost option for both sourcing and shipping the goods to your facilities. But the issue is that when an “excursion” from that plan occurs, you need to know all of the implications. The extra labor to find enough product to airship, the cost of the shipment, and even the impact on the cost of the remaining balance can all add up, but take weeks or months to finally hit the books.

Know the true cost of your supply chain

There is a deeper level of knowing the cash flow, though, that is only now being considered valuable. Do you know where your supplier’s money is going to fulfill your order? This is vital to know for emergencies, and for understanding the true cost of getting your needs met.

This is not an easy area to research. Between privileged business information, confidentiality clauses in contracts, and the use of spot markets for some aspects, it can be difficult to understand how your supplier does business. Add in cultural differences and corporate accounting methods, and it gets more complicated. So why bother?

Understand what costs can be controlled

The value is understanding what the fixed and variable parts of your purchases can be controlled, and to what level. For the most valuable SKUS in your catalog, it can help you understand the impact of industry news items but also help you understand the abilities of your supply chain partners to meet your needs. And in the long term, knowing more about your supply chain can help you minimize fulfillment costs and increase profit margins for e-commerce. 

2.  Know your friends

That raises the second tip. Know what your “friends” can do, what they can’t do, and what limits they have on their abilities. Again, in the past, you merely ordered what you needed from an agent that said “No problem, we can do that”. You waited until the order was ready, and you (or they) arranged the delivery of the items to your facility. But how did they “get the job done”?  

The new reality is that how they sourced your order is almost as important to you as the cost.  Ethical manufacturing or sourcing requires you to know if they outsourced the order to any degree. It is often much easier to tell a supplier your requirements and let them figure it out than it is to establish controls on who they use, or can’t use to finish fulfillment. And knowing how much, how often and how quickly tells you about their ability to do the work themselves.  

Most of your suppliers will have their own suppliers in turn for parts, machining, even labor.  The lag between your order and the ability for those sub-suppliers to react is often key for making intelligent plans for the rapidly changing consumer world. Ecommerce and topical sales often require quick responses that push the entire supply chain to respond. It might be possible to do this once or for a short period. Asking sub-suppliers to keep to those rapid tempos, however, is going to cost you (if they can even keep up).

So that means you have to know how far your current supplier can go to deliver on your needs.  Not just the contractual ones, but the ones you give them over the phone when your sales department overcommits. Or you have a disaster and inventory is covered in fire suppression foam. Or your entire worksite is shut down. If they can’t meet those needs or you have limits they want to cross to do the work, you need to know what else can be done. Even when you barely know what is coming next.

3.  Know your options

Medical responses for disasters are often obtained from nearby, non-local sources. A large forest fire will put pressure on one area and the fire response teams from other areas respond.  A medical crisis will have supplies shipped or flown into the affected region. This response is built into the planning of every emergency response manager. The basis for this is knowing the options.  

Your suppliers have limits. And you have pressures to adapt your supply chain, either to change or to emergent crises. Knowing what your supplier can handle is a start, but the next issue that comes up is how to fill the gap between what you need. You have to start your strategic planning by analyzing what options exist. Is there a local supplier who may have stock on hand? How about a foreign supplier who is willing to discuss an immediate shipment? Are there alternate airports or ports that can route smaller shipments or containers around an affected region? And can these new supplier-route combinations be cost-effective for more than a single-use? All of these questions should be considered in your decision-making process

You have to know what the options are to be able to adapt. Learning about other suppliers, different shipping options, and the abilities of both is something that can be done before you need them. Like the planning for emergencies, the researching of options needs to be done before you need them, not in the middle of the need. If you need more motivation to research other suppliers, remind yourself that having an abundance of market information is not just convenient in a crisis, but it’s also an excellent cost reduction strategy that can save you thousands of dollars that would have been lost to supply chain downtime.

3.  Walk the balance beam

The final tip is that supply chain management is a balance beam. You will never get the perfect amount at the right time in the right place. Too many factors like weather, labor issues, delays or changes in shipping, or even supply quality can make you miss that target. You have to plan for a little safety stock, held strategically in the system, and heavy amounts of communication to understand changing priorities to help. Maintaining a balance between working the plan and adapting the plan is key to cost effective supply chain management. Every business wants to save on e-commerce shipping costs, and the new world of supply chain management is constantly trying to find ways to remove ambiguity, time and cost from the system. But no one can see the future. You must walk the balance beam of lean and still recognize the need for flexibility.

Conclusion

These 4 tips should help you to approach and implement cost effective supply chain management in a more mentally organized way. It is more than just making demands and pushing suppliers to be ever more adaptable. It is knowing your business, understanding the capabilities of each link in the chain, planning and then managing the flow as needed for efficiency. Businesses in all industries rely on efficient supply chain processes– and whether their main goal is cost reduction, increased customer satisfaction, or faster order fulfillment, taking the time to analyze your operations data and understand your supply chain partners always pays off. The better you have of the ins and outs of your supply chain, the less surprised by cost, change or demand you will be. And that makes your efforts cost effective.

How to Save on Your 3PL Fulfillment Costs

By Shipware | eCommerce, Shipping Knowledge

If you find yourself in need of the services of a 3PL (3rd party logistics) company, you will find yourself in a confusing land of charges, fees, and cost calculations. It can become even worse when special fulfillment services and large inventories are involved. Understanding your options and your exact needs is key to making better choices, and a knowledgeable shipping consulting company can help you sort through these options. Making the best choices as early as you can in the outsourcing of your order fulfillment is the key to saving on your total costs.

The costs will generally fall into 2 categories, activity costs, and monthly costs. The activity costs will cover the acts of receiving, pick/pack, shipping and special projects. The monthly costs will cover the cost of storage and normal inventory control. Each category requires different approaches to control costs. Read on for our top tips on how to save on your fulfillment costs.

Activity Fees

Step 1: Receiving

Begin with the act of receiving your goods at the 3PL fulfillment center or warehouse. All 3PL or order fulfillment companies charge for the initial inbound processing of your goods. Why? Because they need your products labeled, verified, and stored appropriately. A mistake here will cause inventory, handling and picking issues. As you get more experience with your provider, they can prepare inventory for quality checks, later picking, and less handling. A more expensive receiving cost may be offset with fewer issues and costs later in the fulfillment process.

Some fulfillment solutions providers will charge you for the entire shipment as one cost. Some may charge you a cost per line (SKU). Some even charge per unit (either case, inner pack or each). Some charge a combination of these. Smaller receipts, more frequent receipts or badly packed receipts can increase your cost to receive per unit, even while the total size does not change.

Step 2: Pick and Pack

Next, consider the pick and pack activities. If you are receiving pallets from your vendors, and shipping the same out to customers, you have limited pick and pack needs. On the other hand, if you are packing and shipping e-commerce orders, you have the need to pick and pack each item, many of them a single-line single-unit order. Again, your order fulfillment provider makes this a little confusing. You can receive a charge per order, per line, and per unit. In addition, you may receive a packaging charge or packing charge, especially if your items are delicate, easily tangled, or not individually packed in their own bag, box or cover. The strategy here is to prepare your items from your vendor in the form you want to ship to your customers. It is much less expensive to have them prepared there than in the hands of your third-party logistics provider.

Step 3: Shipping Costs

Third, consider your shipping costs. Shipping is a hidden cost for order fulfillment, often because the 3PL provider does not pay this directly. Some providers merely pass through the costs, others insist clients have their own accounts with carriers, and even others (Fulfilled by Amazon (FBA) in particular) will have routing guides for their own services. Your costs are only estimates at the time of shipping, finally being seen days or weeks later in the bill for an individual order. If you ship internationally, the lag could be months. To control this, ask for a clear understanding of what your provider can do (or has done before) to control your shipping costs. A company that provides logistics consulting, like Shipware, can help you get visibility into your 3PL costs and the best pricing.

Step 4: Special Projects/Services

Finally, we reach the area of special projects. This covers fulfillment operations such as kitting, quality inspections, repacking, even seasonal gift wrapping. The issue with this cost area is that unless your third-party logistics provider (and you) knows an activity is upcoming, you end up paying the default 3PL fees. While the actual work is usually per hour, the uncontrolled portion of the work is the coordination, instructions, and reporting. Getting set up, efficient and productive will take time. And that is going to be charged as well.

Monthly Fees

The other category of cost for order fulfillment is the monthly charges, which are linked to inventory. But even here, the cost you pay has nuances. 

By Unit Storage Fees

The most common breakdown for storage is by cubic foot or by “unit”. A unit can be a pallet, a case, a bin, or shelf depending on the type of packaging. The confusion of pallets, cases, and the areas they are stored in created the desire for the cubic foot storage fee. But that has its own issues as well. For instance, bins stored on shelving may take much more space in a warehouse than pallets, due to the amount of air space needed for access. While easier to charge, it becomes much harder to understand why inventory charges increased in a period when receipts were low. The breaking of full pallets and the movement to shelving or bins can explain the increase, but it can be hard to analyze and track. 

Archival Inventory Storage Fees

Even more confusing, some 3PL providers charge an archival inventory storage fee when your activity drops below thresholds. For them, this is the “mothballing” and packing of inventory to pallets to stack away from production areas. More high-tech fulfillment operations will also be looking at removing items from high-speed picking areas and condensing the items into more dense forms of storage. When activity picks up, they return the goods to circulation or picking areas. This additional labor to pack and unpack inventory is factored into the deep storage fees they charge.

Administrative Fees

The other monthly charge is often an administrative fee to cover the work required to maintain records, paperwork like bills of lading, billing, and reporting. In many 3PLs, this is referred to as a customer service fixed fee, an inventory management fee, or some form of inventory control fee. Make sure you know what you get for that fee.

How to Save on The Fees

Now that you have a better handle on the normal pricing structure elements of 3PL and order fulfillment services, let’s dig into how to better control them so your business can minimize costs and increase profit margins.

1. Know your business 

This seems like a simple concept. But knowing how your inventory is packed, what the stock on hand per SKU in pallets, cases, or eaches will be, and how your customer orders is key to knowing which fulfillment charges will be seen most often. Focus your attention on the most frequent charges to have the most control.

2. Know how your fulfillment provider would bill each portion of your business with them. 

Making sure you know how your billing works, like knowing how your vendors and customers work. Understanding how the billing works allows you to understand the details when you receive them. Should you change how you restock inventory? Perhaps finding ways to increase the lines per order would be more profitable than total orders? And the knowledge to recognize unusual charges will be crucial at some point.

3. Make sure you eliminate as many labor-intensive operations as possible. 

The items that really pressure your profit margins on order fulfillment costs are usually labor-related. Whether it’s pick/pack, rework, or quality inspections, labor at your order fulfillment provider is expensive. Anything that can be done upstream in your supply chain will reduce your fulfillment costs and help you achieve cost-effective supply chain management. Customer-facing packaging, removing dunnage (cushioning material) in the cartons, and even ensuring the cartons fully use the area and height of a standard pallet opening all will help control your e-commerce shipping costs.

4. Actively manage your inventory

Product that does not sell has a double penalty to you. One, the capital is tied up in the inventory. But, worse, you are going to see inventory charges month after month. Purge that inventory and you might be able to recover some of the capital outlay. But, if you do, you will definitely reduce your future inventory costs. So, don’t let inventory sit. Getting rid of old inventory before it consumes the margin of your profitable inventory is one of the simplest cost reduction strategies a business can employ.

5. Keep track of inventory

One of the worst periods a customer of a 3PL can have is when the “books” become unsynced. While the finger-pointing and confusion is not fun, the true cost of reconciling your inventory records and your provider’s is not just the labor hours. It is also the lost e-commerce sales for inventory that was missing, and the need to adjust your records both in quantities and in dollars. To avoid this, keep track of what you think should be inbound and outbound. Verify those items and quantities, calling out discrepancies as soon as you feel something is wrong. Ignorance will never make this a reconciliation less painful.

6. If you know certain activities will be needed, negotiate them into your contract at rates you can handle. 

Just knowing you will need seasonal wrapping or kitting for a big customer order is useful. Push for better rates for those needs and you have more control over your costs. Remember, any charge or 3PL fee you did not negotiate upfront will be charged at their book rates. So, should you negotiate every rate, just in case? Yes- it might be a waste of time for all of them, but the return on your efforts for services you need is high.

Conclusion

When you outgrow your garage for your fledgling e-commerce business or need someone knowledgeable about the demands of a major retailer, few options beat a 3PL or order fulfillment provider. Just remember to do your homework before you sign that contract with a fulfillment partner. The way to avoid paying too much is to know your business and negotiate ahead of time, not when the bill arrives. If you need help with navigating 3PL providers, reach out to Shipware today!

How to Increase Profit Margin for E-Commerce

By Shipware | eCommerce, Shipping Knowledge

While pure e-commerce companies don’t have to factor stores into the profit margin equation, there are many other costs involved. Managing those costs to increase gross profit margins and net profit margins is a tricky dance that all retailers must do. Companies offering e-commerce as part of their business strategy, along with brick and mortar stores, have other factors to consider. For any e-commerce business, investing in shipping consulting is one of the best ways to increase profits with ease. 

Generally speaking, there are two ways to increase a company’s gross profit margins. That is by either decreasing operating expenses (cutting costs) or increasing sales. We’ve put together our top ideas on how to increase profit margin below.

1. Fulfill Elsewhere

Wondering how to improve operating profit margins? Check out fulfillment. Fulfillment strategies change depending on the business type. Some companies with brick and mortar stores find it better to fulfill out of the actual stores, whether from the floor or the storage area. Others prefer to use distribution centers. Pure e-commerce retailers may perform fulfillment with their own staff, or they may outsource it to a warehouse and 3PL. There are cost factors in each approach. Self-fulfillment includes labor costs, insurance for the labor pool, and fixed real estate payments. Depending on company size and location, there are potentially longer shipping distances and higher prices if customers are scattered throughout the country. 

Some e-commerce companies find it more economical to use third party fulfillment. One warehouse location can be the hub, or the goods can be strategically placed at various warehouses for shorter shipping times and even with different mixes of goods. Outsourcing fulfillment can decrease overhead expenses, however, you’ll want to seek out logistics consulting to ensure you are getting the best price for your 3PL. For more information on 3PL, check out our guides on minimizing fulfillment costs and saving on e-commerce shipping costs.

2. Streamline Operations

Dive into your operating expenses to see where you might have waste. It could be excess paid overtime, which means you don’t have enough staff members or they’re not working efficiently. Your management may not be adequately planning the workload, so there’s a rush at certain times of the month or year.

Look at your packing materials to see if there are better ways to make a good impression on customers while spending less. Perhaps you’re using more expensive filling material or customizing the packages. Customization can be a great thing if you’re charging enough for it, and the effect isn’t wasted on the consumer. Sometimes the packaging makes a difference in branding and sets up your company as a luxury retailer. But if it doesn’t, then you should source packing materials that are sturdy and attractive, but less costly. Cost-effective supply chain management is imperative for e-commerce businesses. 

3. Shipping Solutions

Shipping is a huge part of e-commerce, so it pays to get this one right. Whether offering free shipping or the customer pays the shipping, maximizing shipping costs means the difference between the ability to improve profit margins, and well, losses. 

  • Audit your shipping: Before making any changes to improve profitability, get a better understanding of your shipping situation. That can include numbers of packages shipped each week, shipping destination, distance shipped, carriers used (if you send packages via multiple carriers), package sizes and weights, timeliness of shipping, percentage of orders shipped on time in full, and other key metrics. If your company doesn’t have the time and know-how to conduct a complete audit, use an outside vendor like Shipware.  
  • Audit recovery: E-commerce businesses should audit shipping records automatically, as carriers often miss their guaranteed delivery time or make errors on invoices. Just as automating other parts of your business can increase your operating profit margin, doing so with shipping will pay huge dividends. Shipware’s parcel audit technology pays itself through your savings, so there is no out-of-pocket cost. The service automatically scans all your FedEx and UPS invoices to identify unclaimed refunds and incorrect surcharges, requesting those invoice credits directly. The credits appear on your future invoices. That is not only found money but an increase in operating profit margins.
  • Negotiating shipping contracts: Each year or when contracts renew, take a good look at to see what can be renegotiated, with contract optimization. Some companies have the knowledge to do this in-house, but many will save money and increase net profit margins by getting expert help. Shipware’s experts, for example, used to negotiate from the carrier side, and better understand negotiable terms and pricing, as well as pricing paid by other e-commerce companies. Businesses taking advantage of negotiating help, whether they conduct the actual negotiations or Shipware does, save on shipping. It’s a service that pays for itself. 

4. Automation

Automation is a broad cost reduction strategy that can lower labor costs and increase your operating profit margin. Not sure how to improve profit margins with automation? Ask employees about their daily tasks and how long they take each day, week or month. Can any of them be automated? This can include accounts payable, accounts receivable, scanning documents, printing shipping labels, determining package sizing, scheduling employees, linking sales data with accounting software, timesheets, and more. By streamlining operations and automating specific tasks, you can reduce the time spent on them, and either work with fewer employees or deploy employees to other complex tasks.

5. Know Your Data

Inventory management is a huge priority in e-commerce. This is another area that should be automated in order to see a gross profit margin increase. Understanding what products you have on hand, what’s ordered, what is selling and not selling, can help with forecasting and analyzing. You can renegotiate with vendors to ask for discounts if you can order increased quantities going forward. Data helps you project these numbers and model your sales. 

Knowing your data helps you manage inventory. Businesses want to weigh running out of stock versus having excess stock. Customers interested in a specific product may leave your site to find it elsewhere, but if you have too much you can’t sell, that eats into your net profit margins. Having an excess of products is a big issue with trendy or seasonal items. It’s also important in certain e-commerce businesses like subscription boxes, where excess inventory may not be usable because it doesn’t go with the next month’s theme. 

6. Increase Average Order 

In order to improve the average profit margin for orders, you’ll need to increase the average order size. There are several ways to do this. 

  • Recommendations: Develop an algorithm or key in links for adjacent products when adding new merchandise to the website. Good automation is better for efficiency, with someone spot-checking how appropriate the recommendations are, for fine-tuning. An algorithm might suggest that other customers viewed or purchased a specific list of products when they viewed or purchased the current one. You’ve seen this done on Amazon and other sites, and it works. Good items to consider are refill items for products, or different sizes, along with comparison charts. In the same way that a restaurant’s special typically provides a high-profit margin, a smart algorithm will always suggest more profitable products over less profitable ones. After a consumer commits to purchasing a product, encourage increased spending by recommending additional relevant items or impulse buys, at sales checkout. This can improve total revenue.
  • Free shipping: If you’re not already offering free shipping, consider doing so for certain thresholds. Many consumers are willing to add items to the cart to qualify, and the gross profit margin can increase as a result, with increased sales.

7. Change Your Pricing Strategy

There are many external factors that retailers must be able to react to, such as competitor pricing strategy, site traffic, conversions, seasonality, cost of goods sold and more. Try different pricing strategy models to see what increases your gross profit margins. Here are some different techniques to try.

  • Discounts: The key to providing great discounts is making sure shoppers feels they’re getting a deal and that there’s time pressure to make the purchase at the discounted price. Volume orders are one way to do this – order two or more of the same item, and the price for each goes down. Even using a buy-one-get-one-half-off can work, in some circumstances, depending on the cost of goods sold. It doesn’t take a warehouse worker much additional time to add another product to the order, and shipping costs will increase incrementally.
  • Dynamic pricing: When retailers include dynamic pricing in their pricing strategy, they are able to better keep up with market fluctuations. Dynamic pricing is when pricing changes depending on demand. This can happen in seconds – a good example is airline tickets. Doing this manually is difficult, and this is another area where automation can save you time and money. A dynamic pricing strategy helps e-commerce retailers stay nimble and react quickly to market forces.
  • Tiered pricing: Offering consumers a choice in price brackets can result in more sales, and potentially sales with a higher average profit margin depending on the cost of goods sold. Some e-commerce retailers find success with deluxe and standard pricing. Offering different quality items at different prices, and pricing the deluxe items considerably higher, can lead to consumers willing to pay more for higher quality and perceived higher value. If offering three tiers of products, the low-priced alternatives make the mid-range and high-range items look upscale, while much higher pricing on the high-end products makes mid-range and-low range items appear to be the best value.
  • Raise sales prices: If your products don’t have a lot of competition, consider raising prices. For e-commerce retailers with regular customers, you can note the reason for increased prices, such as higher supplier charges, the cost of goods, increased tariffs, or decreased supply. That type of transparency helps pave the way for consumer understanding. If your products are similar to the competition, you may need to market them differently to raise prices, like sales on white label versions and better marketing copy to show value.

No matter what versions of pricing changes you try, perform A/B testing to see what works, so you’ll have solid data to rely on. Changing pricing models can improve the total revenue.

8. Customer Service and Retention

There’s a saying that any money you must spend after making sales, lowers your profits. And in some cases that’s true. Customer service is one area that e-commerce retailers ignore, figuring there are so many customers, it’s okay to lose a few disgruntled ones. We urge you to think about it in a different way. Excellent customer service can help your company stand out. If customers know you will back up your products, your shipping, and the entire experience, they’re more likely to become loyal customers, even if that means they sometimes pay more than they’d pay with a competitor. Set up a call center and email support with expectations for how long follow up should take, what the proper procedures are, and then monitor what happens. Auditing the work of the customer service agents is imperative to maintain that good reputation. 

Retaining customers is another way to increase profitability. It’s much cheaper to sell to existing customers than to get new customers. Marketing efforts focused on current customers are likely to get higher purchase rates than for potential customers, with less marketing dollars behind them. 

Small Changes, Big Rewards

Increasing profit margins and increasing sales requires some forethought and work, but it’s doable even in a difficult economy. Making small tweaks to the supply chain can have big impacts on your business’ profitability, and is one of the easiest ways to improve your company’s performance. Contact Shipware for a 30 day free trial, to reduce your shipping costs now and become more profitable.

Cost Reduction Strategies for Businesses

By Shipware | eCommerce, News, Shipping Knowledge

With the recent COVID-19 pandemic, many businesses are suffering due to the dwindling economy and are looking for ways to cut costs anywhere. Cost reduction strategies have suddenly become the number one priority for every business. However, no matter the state of the economy, businesses and management should be watching the bottom line at all times. Money flowing out the door without a good return is a drag on the business. It shouldn’t take the threat of a pandemic, recession or an economic slowdown of any type for a business to implement cost reduction strategies. Time should be set aside each fiscal year, at a minimum, to delve into ways to reduce costs without jeopardizing operations. One of the main areas that businesses can turn to in order to reduce costs is shipping, and seeking out the help of shipping consulting is one of the easiest ways to reduce such costs. Here are some categories and ways a business can reduce costs, some very simple, and others requiring more effort. Read below for the top cost reduction methods you need to implement immediately.

1. Automate Accounts Payable

If your vendors are receiving checks, it’s time to look into automated accounts payable (AP). Do you know your total cost per invoice, the amount to process and pay one invoice? That total cost ranges from $7.50 to upwards of $30, depending on the business. The calculation includes AP labor, technology and overhead costs. Plus it can include labor time for those in other business units and management manually approving invoices, interruption time from vendors seeking information about payment status, and invoice preparation time for audits. With automated AP services, the total cost per invoice can drop to $1.25, and some AP staff can be redeployed to do different work, like implementing other cost-saving strategies. 

A cost reduction strategy is decreasing the need to pay late fees. Renegotiating terms to receive discounts for paying earlier is another. Automated AP services increase the transparency for your entire supply chain, giving your business a better understanding of when bills are paid and under what payment terms. By negotiating small discounts for earlier payment, these small discounts add up. Ask for a 2% decrease to pay in 10 days, if you’re able. And change to vendors offering better terms.

2. Energy Reduction

Has your business undergone an energy audit? Whether you’re a small office or a larger enterprise occupying multiple buildings and warehouses, saving energy adds to the bottom line and lowers operating costs. Simple fixes include programmable thermostats set to reduce heating or cooling at night when no one is working in the building. Larger fixes for warehouses might mean adding insulation, light sensors, LED lighting, high volume low-speed fans, and painting the rooftop white to reduce heat. Adding renewable energy sources like solar panels can save money. Proper maintenance of HVAC equipment can also lower the operating costs. Energy reduction strategies can lower costs in the total supply chain and decrease both your operating costs and manufacturing costs, and increase profit margin.

3. Space and resource management

If your business has extra space in the building, consider renting it out or reconfiguring it for efficient use. With more employees working from home, dedicated desk and office space can be reconfigured for hoteling options. This provides temporary desk space when employees come in, and doesn’t leave desks or offices sitting empty for long periods of time, which increases overhead costs. If reconfiguring the physical infrastructure, the office can add small rooms for phone calls, additional meeting rooms, and storage or locker space for those who aren’t in the office full time. 

Research your waste disposal options. Some waste can be diverted for recycling, saving money or even bring in money to pay for the program. Metal recycling is the best from a financial perspective, but cardboard also has value. Food waste can be diverted for animal feed, to reduce costs for disposal and decrease what’s sent to landfill. Programs like these have another benefit: increasing a business’s sustainability efforts and ratings. With investors and customers paying attention to sustainability scores, changes like these can increase visibility and funding. Businesses can hire services to coordinate the waste program, which helps lower operating costs.

4. Office Expenses

The fiscal year budget review is a good time to make changes in a cost reduction program. Each business unit and its management should review programs and overhead costs. That means revisiting recurring expenses like phone bills, memberships, subscriptions, energy providers, and service providers (copy machines, cleaning and legal). Are the terms of service appropriate for the business size and needs? Would your business be better off leasing or trying to increase purchasing of new equipment? Are the legal retainer hours and amounts appropriate? Work with an insurance broker to ensure that all policies are providing adequate coverage at the right price. That might mean consolidating policies with one business or changing carriers. Bank accounts may offer a better deal and more personalized service by switching all accounts over to them. Office supply purchasing might be more economical through procurement services through a group purchasing organization, for additional cost savings and efficiency in purchasing operations.

5. Shipping Solutions

Whether companies ship a lot of packages or a few, eCommerce shipping costs or general transportation costs matter a lot in your total supply chain. A business should audit their parcel and LTL shipping usage each fiscal year to understand current usage— doing so is a great approach to reducing unnecessary spending, and thus operating expenses. What size packages are shipped? Where do they go? What carriers are used? What packages have exceptions and additional costs? How often are they on time? Are you paying for rush delivery more than needed? What rates and terms are given? This type of audit is a painstaking process, and can easily be handled by an experienced outside firm that deals with it full time. 

Some easy fixes for strategic cost savings might be adjusting the packaging type and size, to better fit the contents and reduce the shipping rates. Using carrier packaging is sometimes cost savings as well, especially for shipping heavier items in flat rate boxes. Outsourcing to certain third-party logistics can also minimize fulfillment costs. Renegotiating shipping contracts can save a bundle, whether the business does it themselves, or uses a service like Shipware offers. However, Shipware’s experts used to negotiate from the carrier side, so we know what terms can be tweaked and what pricing others are getting. This gives businesses an inside advantage. We can walk you through a negotiating strategy so you can conduct it yourself, or we can do it for you. 

Lastly, your business should be auditing your shipping records daily, to ensure the carriers are meeting their obligations. For example, they should be refunding you if your packages show up outside of the guaranteed time. It’s time-consuming to check that yourself, but Shipware’s parcel audit technology can automatically scan all your UPS and FedEx invoices, identifying incorrect surcharges and unclaimed refunds. The Shipware fees come directly out of the cost savings. That means businesses not only save money on shipping, but they don’t have to pay extra to do so.

6. Travel

Cutting back on travel expenses is a big category to consider as a cost reduction method. More meetings are done by video calls these days, and giving everyone access can be much less expensive (and more efficient) than sending an employee across the country for a business meeting. Of course, some travel is essential. If your business units and management haven’t created policies for what is considered appropriate expenses, those should be developed. That can include traveling only in coach airline seats, or booking with a specific hotel group for preferred rates.

7. Staffing

Retaining quality staff members is less expensive than finding new ones, even if you pay the current ones more than new hires. The search process, whether done in house or using a recruiter’s services, is labor-intensive and that costs money. With low rates of unemployment, it’s hard to find highly qualified employees for many positions. Provide employees with cross-training, so they have a good understanding of other roles. That way, if an employee leaves there is someone who knows enough about their job to fill in, and less institutional knowledge is lost. That additional training may also be an incentive for people to stay on board, so they don’t get bored and look for outside opportunities.

When using contractors for specific projects, total cost is always a consideration. But quality is as well. Hiring a business or independent contractor with low rates but less experience or less cultural understanding of your business can come back and bite you. Think twice before using this as a cost-cutting strategy. Work that must be redone because it doesn’t hit the mark means your employees now increase their time spent to correct it, and that defeats the purpose of using lower-cost vendors. It also lowers your employee efficiency.

8. Benefits

Valuing staff means providing good benefits to increase morale and length of service. Revisit your benefits policies each fiscal year, and find out what options are new, how costs differ between insurance plans and benefits and give employees a say in what’s offered. Some benefits don’t have to cost an employer extra money, as the employee pays for them but may not have access on their own. Tax-advantaged savings accounts, for example, allow employees to take a stake in their healthcare choices, to reduce costs and risk for the employer. Services provided by a benefits company or insurance provider can give additional cost-saving benefit ideas.

9. Cloud Storage

A big expense for many companies is information technology. Hardware gets outdated quickly and more and more is needed to store a business’s data on-premises. Outsourcing to cloud storage can be a good cost-cutting method, eliminating not only storage hardware but the real estate for that hardware. Paying for cloud storage is generally by usage. Companies should have someone in charge of monitoring the usage and ensuring that what’s used is vital, and setting limits for what reports are run, what data is added, and who has access. 

Cut Costs Now

Whether your company implements just one or all 9 of these types of cost reduction, you’ll be able to reduce costs without a lot of effort. To learn more about how your business can cut costs, check out our blog on tips for cost-effective supply chain management. Contact Shipware for a 30 day free trial, and reduce your shipping costs now.

amazon-effect-consumer-expectations_shipware

The Amazon Effect & Consumer Expectations: A Guide

By Shipware | eCommerce, News, Shipping Knowledge

Amazon emerged as a small online bookstore, and transformed into an e-commerce giant with 300 million users and a net income topping $177 billion. Each order placed on Amazon has contributed to what is called the “Amazon Effect,” which describes the shift in customer habits and expectations due to Amazon’s popularity.

The Amazon Effect started when the company began offering free shipping on orders of $25 or more. The popularity of this program was significant, so in 2005, the company upped the ante and created Amazon Prime, a membership program that would allow customers to get unlimited free two-day shipping for an annual fee. But the Amazon Effect doesn’t stop at shipping — it has caused widespread changes and influences to customers’ buying habits.

Post-Amazon Effect customers want more than a good buying experience. They want to go from “need” to “purchased” with a single click and to have items arrive to their doors as fast as possible. Understanding the Amazon Effect and its impact on customer expectations can help retailers of all sizes compete and generate more revenue. But how have expectations changed, and what’s in store for the future?

The Demand for Instant Gratification has Increased

In the past, customers figured that shipping costs were the price you had to pay for shopping online, but today paying for shipping is a huge hurdle for buyers — one that could result in significant loss of sales.

The channels in which people shop are also changing. With the advent of the smartphone in 2007 and the tablet shortly after, customers aren’t just shopping during brick-and-mortar stores’ hours — they are ordering around the clock. This creates expectations for an “on demand” experience in which customers get their needs fulfilled quickly. What’s more, customers expect retailers to understand those needs in greater depth. In fact, 76 percent of consumers report that they expect organizations to understand individual needs, which gives rise to the demand for personalization.

Advancements in technology are another factor that play a pivotal role in today’s retail environment, and studies show that customers are becoming more and more inpatient. In fact, 41 percent of respondents report that technology has made them more impatient than they were only five years ago. Customers want to order products with ease and receive those products quickly and with no charge for shipping, with 62 percent of online shoppers ranking free shipping as the most important perk that a company can offer.

Customers also demand less friction in the buying cycle. A customer may have visited several stores to find the right item in the past, but the Amazon Effect has changed that.

Customers can now view products within seconds, check prices, read reviews, and use “one click” buying features to quickly purchase products and have them shipped to their homes. This creates less friction in the buying process and generates large amounts of revenue for retailers.

The majority of customers (81 percent) expect improved response times from the companies with which they do business. When a customer has a problem with shipping or the product, he or she expects the company to harmonize that experience quickly.

The Price-Obsessed Customer has Emerged

The majority of customers today (79 percent) report shopping online. This doesn’t mean that customers aren’t still visiting brick-and-mortar stores, but most are either shopping online occasionally or, in some cases, more frequently. Regardless, there has been a huge spike in online orders since 2000, when only 22 percent of buyers reported shopping online.

What’s more, mobile shopping is the fastest-growing segment in e-commerce, worth $3.2 trillion in 2017, which is a jump over the $1.5 trillion reported in 2013.

Customers aren’t only shopping at their desktops or laptops at home, but they’re also shopping on the go — during their commutes, standing in line for coffee, and while watching their child’s sports practices. While doing all this shopping, they are empowered to view competitors’ prices within a few simple clicks.

Amazon has empowered customers, changing expectations to the point where not only do they expect free shipping, but they also expect lower prices. With a few simple clicks, they can move through the shopping process faster than ever. And this new consumer, one who is price-sensitive and empowered with the tools to shop competitively faster, frequently starts his or her search for a product with Amazon.

In fact, nearly half of all product searches start with Amazon. Customers think of a product they want, visit the company’s website, check reviews, and make a fast purchase decision. Amazon has actually surpassed the popularity of Google when it comes to product searches.

Amazon is constantly working behind the scenes to deliver competitive pricing, using technology that updates various prices thousands of times a day. Competing with Amazon requires retailers to contend with customers who are constantly comparing prices online and making snap decisions. In addition, it’s not only pricing that is influenced by the Amazon Effect, but it’s also customers’ expectations about the information they receive regarding products and services.

Customers Want More Product Information

The Amazon Effect has influenced customers’ expectations regarding how they shop and how they expect to receive information. Even customers who shop at brick-and-mortar stores are still using Amazon to justify their purchases.

Here is an example of a common scenario today: A customer enters a brick-and-mortar retailer to find a new computer. The salesperson makes a recommendation based on the customer’s needs and budget. The salesperson steps away, giving the customer time to consider the offering, and in an instant, the customer grabs his or her own smartphone and jumps online. The destination is Amazon. Once reaching Amazon’s site, the customer checks prices and reads reviews to learn what other customers like and dislike about the product.

The majority of customers (70 percent) report that they look at product reviews before making a purchase. What’s more, product reviews are 12x more trusted than product descriptions from manufacturers.

In an effort to keep up with the Amazon Effect, many retailers have created their own place for customers to leave product reviews online, giving customers an additional resource to check when making buying decisions. Customers want product information. And they aren’t simply looking at product details. They also want information about other buyers’ experiences with these products, including detailed photos, size dimensions, and more.

The Demand for Personalization is Rising

The Amazon Effect has changed expectations around personalization. Pre-Amazon, customers might be delighted if brick-and-mortar salespeople remembered their names, preferences, and details that made them feel known. But Amazon took this personalized shopping experience and expanded it at scale.

The early days of Amazon included the “people who bought this item also bought …” notice while people were online in order to entice someone to consider additional products. This “endless aisle” feature was a powerful tool in helping customers view similar products online, but it also made the experience feel more personalized.

Amazon is leading the efforts in personalization in e-commerce shopping, and although the “people who purchased” widget is still there, it’s taking a deeper dive into serving up personalized options, and these expansions trickle down to all retailers. Customers don’t just appreciate personalization — they demand it.

Studies show that 86 percent of consumers say that personalization plays a major role in their purchasing decisions. Online shoppers are 45 percent more likely to shop on a website that makes personalized recommendations. What’s more, 56 percent of online shoppers report being more likely to return to sites that offer these recommendations.

Amazon uses technology to get to know their customers, leveraging their purchase history, items they’ve looked at and items they’ve rated, and then pools all that data with the profiles of customers with similar interests. Customers don’t just enjoy personalization during the buying process, it’s proven to generate more sales. Amazon found that 35 percent of all their sales are generated by the recommendation engine.

Personalization also builds loyalty with customers as they begin to feel truly known by a retailer. As a result, they crave these personalized experiences with retailers due to the Amazon Effect, and those companies that don’t deliver it won’t enjoy the benefits of building relationships that are lasting and foster loyalty.

The Speed of Innovation Continues to Shape Expectations

The Amazon Effect is built on the speed of innovation. Amazon brought customers free shipping, but they also brought them fast shipping. Receiving a package in two days pre-Amazon would have come with a big price tag. And shipping items that were light, such as a ball of yarn or a tube of lipstick, was unrealistic due to shipping prices. But Amazon has changed all of this, shipping many items at no cost to the consumer. These capabilities are built from the company’s innovation and technology resources.

Once customers adjust to the new innovation, it transforms into something that is expected. Retailers are then left to figure out strategies to keep up. Founder Jeff Bezos said:

“We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.”

Wise retailers are keeping an eye on Amazon’s new innovations. Each one has the ability to transform the Amazon Effect yet again. For example, the company recently introduced Amazon Key, which is an in-house and in-car delivery service. It allows customers to receive shipments inside their homes or cars by purchasing a kit that provides key access and comes equipped with a video camera (the video camera allows the customer to watch their item being delivered remotely).

In addition, Amazon has also created “Prime Air,” which is a delivery system that is designed to get items to customers within 30 minutes of their order. The items are delivered via drone and, by 2020, Amazon forecasts the company will have over 450,000 drones in its fleet and be operating this delivery model worldwide.

The Amazon Effect is constantly changing customer expectations and retailers should stay apprised of the current effects but also anticipate those in the future, so they can create strategies for keeping up and staying competitive.

Finding the Way Forward

Amazon has come a long way from an online bookstore competing in a market that was heavily saturated with many different options. The company has expanded into nearly every corner of the world with product variety, offering customers everything from groceries to clothing in a single click. The company’s earnings continue to grow, with revenue doubling from 2015 to 2017.

Amazon’s work in raising the bar on the customer experience has created a gap between what customers expect and what some retailers deliver. The key to success is learning more about the expectations of your customers and working to close that gap. It’s through this data and insight that you can begin competing with the Amazon Effect. Once you accomplish this, you can create experiences that involve less friction and deliver results that delight customers and grow revenue.

About Shipware

Shipware delivers volume parcel and less-than-truckload shippers intelligent and innovative distribution solutions and strategies. Whether you ship with FedEx, UPS, USPS or regional carriers, our invoice audit and negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption of current operations. Our team of experts has more than 200 years of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts – saving our clients an average of 19 percent.

amazon-effect-shipping-industry_shipware

What the Amazon Effect Means for the Shipping Industry

By Shipware | eCommerce, News, Shipping Knowledge

Decades ago, the idea of receiving an item that you ordered minutes ago within the hour was unthinkable. The logistics seemed impossible. Even receiving an item within a couple of days without having to pay any shipping fees appeared incredible. But today there is nothing incredible about either of these situations and, they have, in fact, become the “new normal.”

Amazon has innovated the market, changing the way that customers think about choice, convenience, and price. Customers have become conditioned to the low-cost, two-day, one-day, and even same-day shipping. They have access to a rapidly expanding menu of products that are available online, including everything from appliances to packs of chewing gum.

The Amazon Effect is a force to be reckoned with for retailers. All of the customers shopping through Amazon bring the same expectations to your doorstep. And if you don’t measure up, dissatisfaction trickles down to your bottom line.

A big piece of customer satisfaction involves shipping. Customers want packages to arrive faster and don’t want to pay a cent on shipping. But how is this affecting the shipping industry, and what effect is that having on retailers? A true understanding requires a closer look at the Amazon Effect and the underlying pressures it creates for retailers and shippers alike.

What is the Amazon Effect?

In 1994, founder Jeff Bezos started Amazon, originally as an online bookstore. But it quickly diversified into other offerings, such as DVDs, music, video games, electronics, and even clothing. The company now has roughly 269,000 employees and has transformed the way that people shop.

Amazon introduced buyers to an entirely frictionless experience. Shopping for an item or group of items is no longer a time-consuming chore requiring an afternoon of visiting various stores and making trips that may yield no success. This is likely why more than half of customers start the buying process with Amazon. In fact, Amazon leads over Google as a starting point for online shopping.

The moment customers think of a product, they can move through the shopping experience within minutes, with the product delivered to their home within a matter of days rather than weeks. And in some cases, delivery is the same day.

The Amazon Effect, however, has widespread impacts, and one major area where this is true is shipping. A retail study found that nine out of 10 consumers say free shipping is the #1 incentive to shop online. What’s more, in addition to free shipping, 69 percent of consumers listed one-day delivery as an incentive to shop online more.

Nearly half (49 percent) said that same-day shipping would make them more likely to shop online, while only 9 percent reported using same-day shipping during the past year. Demand for faster and free shipping started with Amazon, but now all retailers are seeing the effects.  

When Amazon started as a bookseller, the first offering of free shipping was no-cost shipping on purchases of $25 or more. In 2005, the company created Amazon Prime, which offered free two-day shipping on all orders for consumers who paid an annual membership. Now customers not only received free shipping, but they got their orders faster too. As customers became conditioned to fast, free shipping, expectations spilled over to other retailers. Why pay for shipping when you can get it free on Amazon? The result is a shipping industry that operates under a new set of expectations and intense pressure.

Shipping Sizes and Weight

Once the Amazon Effect took hold, shippers experienced higher volumes of packages to ship. Fewer people were visiting brick-and-mortar stores; instead, they were opting to shop online and get packages delivered easily to their doorsteps. The volume of packages being delivered to homes quickly skyrocketed. The U.S. Department of Transportation projects that by 2040, U.S. annual freight volume will increase by 45 percent to 29 billion tons. The pressure put on shippers increased as more packages began shipping directly from retailers to customers.

At the inception of online shipping, customers were picky about what they would ship. After all, they were footing the bill. Shipping a ball of yarn or a package of pencils was unthinkable, let alone affordable. A tube of lipstick was purchased at the local grocery store or cosmetics store, not sent through mail. The cost of shipping simply didn’t make sense. But this all changed with the expectation of free shipping. If the company is paying the shipping bill, why not buy the small stuff online? Free shipping was offered on many items online, including the small stuff.

Does a customer need a spatula for cooking? The customer won’t hesitate to purchase it online. School supplies that were previously purchased from the local office supply store are now purchased online, without any consideration for shipping, because it’s free.  

This shift created issues for shippers and how they needed to charge for services. Charging by weight no longer made sense to carriers. With the Amazon Effect in full swing, they needed to change their pricing model. Many carriers started charging for actual weight and dimensional weight, which takes into account the width and height of each box, which is now an industry-wide practice.

The result is that shipping costs aren’t necessarily low just because an item is light. This has forced retailers to rethink how they’re shipping items. Amazon, for example, often packages items together in the same order rather than shipping them separately, allowing the company to minimize costs and expenses.

New Delivery Methods

The Amazon Effect has created intense pressure to offer customers free shipping, but retailers are challenged with striking the right balance between a positive customer experience and their own company’s costs. Some carriers, such as UPS and FedEx, created services to help retailers manage costs, such as SurePost and SmartPost.

These services target the most expensive part of delivery, which is the “last mile.” This last mile can encompass a few busy city blocks or a hundred miles of rural road. Regardless, delivering a package directly to a home is expensive. Large, heavy trucks, manned by employees and subject to gas price fluctuations, create extra expense. The carriers developed these services to reduce the cost for this last mile of delivery by partnering with USPS.

The USPS visits most addresses in the United States daily. By leveraging this partnership, carriers drive down costs. For example, UPS or FedEx might drop off packages at the local post office or USPS distribution center, and those packages are then transferred to the appropriate USPS truck and delivered to the recipient’s mailbox.

These types of services are more cost-effective, easing the pressure of free shipping expectations; however, they can also affect delivery time. In most cases, SurePost and SmartPost will be slower than the carrier’s normal delivery time, but that might be an acceptable tradeoff for free shipping, depending on customer expectations. Additionally, the USPS delivers on Saturdays and this provides an additional delivery date to assist with speeding up delivery.

New delivery methods continue to evolve to meet the demands created by the Amazon Effect. The problem with the Amazon Effect for competitors, though, is that it’s not a static target, but instead, it’s constantly changing.

For example, Amazon recently introduced Amazon Key, which is an in-home and in-car delivery service that allows authorized shippers to gain access to Amazon Prime customers’ homes, post office boxes or the trunks of their cars at specific times. The purpose of the service is to reduce risk for theft. On higher-ticket purchases, customers may become worried when packages are left on the doorstep, especially if they know they will be away or have planned vacations.

Amazon Key requires customers to purchase a kit that Amazon installs. The customer receives a notification through the Amazon Key app that advises of the four-hour delivery window. A camera is included with the kit, which allows customers to watch deliveries in real time. Retailers that wish to compete should keep their eye on not only what the Amazon Effect looks like today, but also what it could look like in the future.

The Rise of Drones

One additional way that the Amazon Effect is changing shipping is by paving the way for the future of drone carriers. The company launched “Prime Air,” which is a delivery system designed to get packages to customers in 30 minutes or less using unmanned aerial vehicles. Last year, Amazon reported that its fleet of Boeing 767 cargo jets was up to 32 freighters. But Amazon isn’t the only one investing heavily in this shipping option – UPS is investing in drones as well.

Commercial drones travel up to 100 mph and have the ability to deliver small goods, typically weighing under 5 lbs. Each trip costs as little as $1 per shipment, which could create huge savings. In addition, faster shipments could translate into higher revenues because 86 percent of abandoned carts online are the result of expensive shipping costs. UPS estimates that cutting off just one mile on the routes of each of the company’s delivery drivers would result in $50 million in savings.

By 2020, Amazon estimates that it will have more than 450,000 drones in its fleet, operating with delivery worldwide. The introduction of drones could shake up the shipping environment even further – putting additional pressure on retailers to make faster deliveries, and forcing them to figure out how to accomplish this while keeping costs low. Drones might provide an interesting shipping option for retailers, with potential impacts to overall shipping costs.

Understanding the Future of Shipping

The shipping industry of the future will no doubt look different than it does today. Drones could be handling smaller packages, transforming logistics and potentially driving down costs for retailers. And there will likely be shipping options that haven’t even been thought of yet that could affect shipping costs and logistics. But as retailers look into the future, they shouldn’t just aim to keep up — they should aim to get ahead.

The way to accomplish this is by investing in technology that helps make shipping more efficient and — equally important — cost-effective. For example, technology that helps audit invoices assists with identifying where money is overspent and reducing costs. With intense pressure to meet evolving customer needs, savings are critical to keeping earnings stable and healthy.

The Amazon Effect and its influence on shipping processes will continue to alter how retailers strategize and operate. Customer expectations will continue to evolve, and these expectations will continue to influence the decisions that retailers make about shipping. Striking the right balance between meeting expectations and managing costs will ensure that your operation runs efficiently today and in the future.

About Shipware

Shipware delivers volume parcel and less-than-truckload shippers intelligent and innovative distribution solutions and strategies. Whether you ship with FedEx, UPS, USPS or regional carriers, our invoice audit and negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption of current operations. Our team of experts has more than 200 years of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts – saving our clients an average of 19 percent.

Amazon effect and the supply chain

The Amazon Effect & Your Supply Chain: What to Know

By Shipware | eCommerce, News, Shipping Knowledge

Amazon has changed commerce forever. It has disrupted the way that people shop. Customers are now able to order items 24/7 using a variety of devices available at their fingertips – smartphones, tablets, laptops and even voice-activated personal assistants, such as Amazon Alexa. This is called the “Amazon Effect.”

By disrupting the way that people shop, Amazon has created a ripple effect that extends far beyond individual customer experiences and affects the entire retail industry as a whole. But what about your supply chain?

Understanding the Amazon Effect

Amazon has grown to generate $61 billion in revenue to date, and holds the title of “world’s largest online retailer.” The company, which was started out of the founder’s garage when he was 30 years old, has redefined the buying experience for consumers. E-commerce accounts for approximately 10 percent of United States retail sales. What’s more, Amazon accounts for 53 percent of the growth of online shopping. In fact, one study showed that more than half of all new product searches start on Amazon. 

The Amazon Effect is a general term, describing the changes in customer habits and expectations due to the popularity of Amazon. Thanks to Amazon, shopping has never been easier than it is today. A person can think of a product that he or she needs, and have that product on its way to their home within seconds. The time to receive that product is also shrinking from weeks to a matter of a couple days and even 24 hours. Areas around expectations for shipping, convenience, and pricing have all been influenced by the rise of Amazon as well.

In addition, Amazon launched their “Amazon Key” service in 2017. This service for Prime members brings the shipping experience to new levels with the ability to allow delivery drivers to drop packages inside a customer’s home. Users purchase a kit, which costs about $250 and includes a security camera and compatible smart lock.

While it might have been acceptable to place an order and wait a week for delivery in the past, the Amazon Effect has changed that. Customers now expect packages faster than ever. Plus, not only do customers expect quick delivery, but they also want delivery charges to be eliminated. These expectations place additional pressure on retailers and their supply chain.

Amazon effect and retail supply chain

The Role of Amazon Prime in the Amazon Effect

The Amazon Effect started out with free shipping, which allowed no-cost shipping on items priced higher than $25. While initially competing retailers only had to deal with free shipping, after Amazon Prime rolled out, they had to deal with fast, two-day shipping as well.

The market response to Prime was overwhelmingly positive, and membership now includes more than 100 million subscribers. In the age of instant gratification, two-day shipping was a huge success, and it wasn’t long before it had become the gold standard by which customers compared all retailers. In some cases, the ability to access faster and free shipping is the tipping point when customers are deciding between two different retailers.

A promise of fast delivery translates to a supply chain that must be highly efficient. One way in which Amazon does this is to move inventory closer to metropolitan areas. Recently, Amazon made efforts to position inventory in locations within 100 to 200 miles of major metro areas to help meet the promise of fast shipping. This has a trickle-down effect in many areas, including how much inventory to keep on hand at multiple locations.

Creating the 24/7 Experience & The Supply Chain To Support It

A few decades ago, people shopped when stores were open, but this expectation has drastically changed with the rise of Amazon and smartphones. Customers are operating in an “always on” environment and are fiercely tethered to their devices.

With this always-on environment, customers expect their favorite retailers to serve them long after doors close. A 24/7 shopping environment is the norm. If a customer places an order that is promised in two days, he or she expects it to be there in two days — or faster — and has little tolerance for delays in receipt. 

Retailers may have previously batched orders together and shipped them during efficient times throughout the week pre-Amazon Effect. But in today’s lightning-speed environment, more retailers must have continuous shipments going out all day to expedite receipt times and keep customers happy. Managing the Amazon Effect involves producing efficiencies and cost savings through warehousing, disruption, and transportation.

This 24/7 experience also requires shipping a larger volume of products directly to the customers rather than shipping pallets to stores, and this is costlier and more complicated. In addition, new methods for inventory organization are required, since customers require products fast. Software is being used to keep up with these intense demands and fulfill multiple online orders efficiently, including programs that handle automation, scanners and even artificial intelligence.

Succeeding in the environment requires a supply chain that is agile, uses data efficiently, and has analytics in place that transforms data into decision-making information. The right tools allow companies to more efficiently manage supply chains and meet the intense demands created by the Amazon Effect.

The Challenges Associated With Achieving Speedy Deliveries

There are many challenges in the supply chain to work out when responding to the Amazon Effect. Loyalty is the currency of shopping, and creating the right experiences allows retailers to cash in. Creating this loyalty through providing faster shipping, however, affects many parts of the supply chain, including the following:

Small lots must be produced. Resellers must build large warehouses to store more inventory and figure out how to fill orders faster. Additionally, machine changeovers must be faster to accommodate a faster demand schedule.

Procurement is affected. The way in which materials are purchased much be changed. Procurement must respond faster to manufacturing needs and get the products manufacturers need at a faster pace in order to meet aggressive delivery demands.

Faster delivery systems must be put into place. The demand for faster deliveries transfers to carriers that must pick up items quicker and deliver them sooner. Inventory turn times must be quicker, and an expanded logistics network with higher levels of safety stock is required.

Retailers that want to compete with the Amazon Effect must update every part of their supply chain to be more responsive and flexible in order to respond to rapidly evolving demands, starting with achieving a better understanding of customer demands.  

The Supply Chain & Customer Wants

The Amazon Effect isn’t a fixed target, but instead is moving and constantly changing. Keeping up isn’t only about responding to what customers want today, but it is also about how their demands might change in the future.

Accomplishing this successfully requires asking the right questions to get to know customers and their changing expectations. The Harvard Business Review recommends asking the following questions.

  • What types of products do consumers want?
  • How much are they willing to spend?
  • How does the product differ from similar products?
  • How can we improve the shopping experience beyond that of Amazon?
  • Will consumers respond to marketing?
  • What type of marketing campaign will work?
  • Which brands have used this style of campaign before?
  • What were the results?
  • What conversion rate would be necessary to meet profit margins?
  • Will we match local competitor pricing?
  • What shipping options are available?  

Once you answer these questions, you can create a strategy that helps you get ahead of the competition. Equally important, you can create a supply chain foundation that delivers the products that customers want most.

For example, expedited shipping is an important feature to customers today, but what will be their needs in the future? One example of this is Amazon’s new delivery model in which the carrier brings the package inside the home. What is next for your customers? Once you figure this out, you can figure out how to position the supply chain.

Oftentimes, technology provides the answer. For example, if the goal is fast shipping, you can reduce transportation spending by using invoice audit software that helps identify where you are overspending and saves money in order to provide customers with a more seamless experience. Enhanced visibility into your freight and parcel shipping spending enables you to make better and more cost-saving decisions.

Improving the Customer Experience Through the Supply Chain

One of Amazon’s strong points is its technology. Technology that adds personalization and technology that gets products from screen to front porch quickly is key to customers. This requires companies to invest in the technology side of their businesses and not shy away from testing new innovations.

Companies must design new and improved processes and think creatively about the future and what their customers will demand not only today, but also in the next decade. The key isn’t keeping up with the Amazon Effect; rather, it’s staying one step ahead. Using technology to accomplish this allows you to position your company to thrive in the future and continue earning more revenue in a fiercely competitive retail environment.

Amazon effect and the supply chain

About Shipware

Shipware delivers volume parcel and less-than-truckload shippers intelligent and innovative distribution solutions and strategies. Whether you ship with FedEx, UPS, USPS or regional carriers, our invoice audit and negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption of current operations. Our team of experts has more than 200 years of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts – saving our clients an average of 19 percent.