Efficiency Drive for Supply Chain

I’m not sure who was the first wise person to coin the phrase “there’s nothing so constant as change” but it certainly applies to what’s happening to e-business supply chains.

In recent years the Internet has enabled many new businesses to start up and grow rapidly thanks to relatively low levels of capital required compared to, say, starting up a high street presence.  They grow to a certain size, somewhere in the £5m to £15m turnover range and then hit a glass ceiling.  In other words they get to a point where the approach to business and the processes being followed that got them off the ground run out of steam.

It may be that the product range is too limited or the market too small.  It may be that competitors have come in and the niche market that looked so tempting on start-up is now main stream.  Or it may be that the business needs to take control of its supply chain, bring focus to an aspect that has previously received little attention and start to drive efficiency through its supply chain.

So what are the key elements of the supply chain that need to be included in a drive for efficiency?  Of course this will vary from business to business but the common themes are:-

• Sourcing
• Buying and stock management
• Warehousing and fulfilment
• Service levels
• Shipping
• Returns
• Customer support

Sourcing

Most Internet businesses start with some great products sourced from any number of different places.  Because overheads usually start low the cost price of the products is not always the most important consideration, and in any case with low start up columns the business has little buying power anyway.  As sales grow overheads often rise even faster and sourcing becomes more important.  The temptation now is to go for the lowest price.  With access to China and the Far East getting easier every day direct sourcing from the factory becomes a possibility for even small companies.  But beware.  Make sure that the temptation of those very low prices is tempered with a realistic evaluation of the operating conditions and costs that come with them.  It is likely that large volumes will have to be committed to, upfront deposits are likely to be required and then there are all of the logistics costs associated with getting the product to your warehouse.  Also take account of the fact that you will probably have to cover the cost of faulty items and make sure you have an exit strategy if you end up stuck with surplus stock.  The experience of many companies that have gone down this route is that they end up with large amounts of obsolete stock.  In practice, when all costs are taken into account, sourcing in the UK or Europe is not as expensive as it at first appears.

Buying and stock management

Here’s where you have to learn to walk the tightrope.  Run out of stock and your customer may never return - few organisations understand the true cost of a lost sale.  Order too much and not only are you tying up cash but what is less well understood are the other costs of having too much stock in your business.  It takes up space which has a cost, it gets in the way which is likely to reduce efficiency and it is likely to incur markdown costs when you finally decide to get rid of it.

No one can predict the future so don’t go over the top trying to develop bigger and better forecasts.  Focus on finding sources of supply with short lead times and find out the optimum purchase quantities.  Quite often a supplier will give great discounts if you order in full cases, pallets or even containers.  If you can make life easier for them  they are likely to share the benefits of that with you so make sure you know what their case, pallet or container factors are.  Surprisingly few companies capture and maintain this information.

Warehousing and fulfilment

This is an area that really needs close attention as businesses grow.  It has already been pointed out that there is a danger of costs rising faster than scales in the early years of an on-line business.  This is because few businesses have the necessary skills in house and make poor decisions when setting up their warehouse.  It is quite common to find an operation that ran well when small but started to come apart as volumes grow because the people running the operation have no experience of operating at these higher levels and the operating processes prove not to be scalable.

Some organisations, recognising that this a problem, outsource their fulfilment.  It is clearly better to have it done well by a third party than poorly by yourself but remember that you will be paying a management fee to a third party which can have a significant impact on your margin.

Far better to get the skills you need in house.  But recognise that businesses go through transition points where the scale of business requires radical change to processes.  It is often the case that the team that takes the business through one phrase of growth lacks the skills to take it through the next.  For example that “can-do” attitude that is vital in the early years can prove expensive later on when formalised processes and management of a much larger team become key.

Once you have the right skills the next step is to consider technology.  Investing in technology is not simply a question of improving quality and efficiency although those are important goals.  It is also about raising the cost of market entry for your competitors.  Technology broadly divides into physical infrastructure (mechanisation or automation) and IT.

The type and layout of physical infrastructure that is best of your business is entirely dependant on the dynamics of your products.  If your average items per order is one, or close to it, the solution will be different to if it’s say two or three, when zone picking becomes attractive, to ten or more when a full, one stage order pick might work better.  In each case you have the opportunity to mechanise or automate as much or as little as you like.  It all depends on your attitude to risk and access to capital.  Automated systems will usually be cheaper to operate but the depreciation charges result in a higher percentage of the costs being fixed as opposed to manual operations where overall costs are higher but more flexible.

To stand any chance of being efficient you will need to have some reasonably sophisticated IT for sales order processing, inventory management and warehouse management at the very least.  With warehouse management comes choices for how you instruct the warehouse tasks.  It can be done by paper but there are big benefits to be had from paperless operation using Radio Frequency (RF) mobile terminals.  The two most common applications are on trucks to record the movement of pallets and to support picking.  These remote terminals are carried by the picker and used to instruct the picker what to pick next.  Quality is improved by confirming each item as it is picked perhaps by entering a location  check digit or better by scanning a product barcode.  In general we advise against using hand held devices for this even though they are the most common.  Having to carry an RF device in one hand seriously impairs the picker’s productivity.  Much better solutions are either wrist mount terminals combined with finger scanners or voice terminals, both of which keep the pickers hands free.

Service levels

Service levels are important - often vitally so - but there is a growing trend  of macho retailing where companies compete to offer even bigger ranges and ever shorter delivery lead times.  And yet how often do these companies actually ask their customers if this is what they want and is important to them.  For many, good service is more about fulfilment accuracy and predictability of delivery.  The on-line grocery businesses have understood very early on that customers prefer narrow, predictable delivery windows with plenty of choice outside of normal working hours to short overall lead times.  In other words I don’t need my groceries first thing tomorrow.  In three days time is fine but I must have them between 6.00pm and 8.00pm.

And yet the parcel delivery companies have not followed suite in any meaningful way.  True the issues for them in offering this service are more difficult to solve but they will have to move in this direction and forward thinking retailers will need to push them to do it.

The core message here is not to fall into the trap of over serving your customer.  It may seem an odd thing to say but offering customers more than they want simply adds to cost.

Shipping

Unless you have a particularly bulky or fragile product or one that requires specialist skills, shipping is not something you should do yourself.  It is highly unlikely that you will have the scale to do it efficiently.  But that is not to say that shipping is a fit and forget item.  Shipping will probably represent one of your bigger costs and the amount of this cost that you have to pass on to the customer can become a point of differentiation in increasingly competitive on-line markets.  Furthermore it is the point at which your product leaves your control and yet is a part of the process that can have a big impact on your customers buying experience.

When setting up contracts for shipping make sure you have a clear specification of requirements including volumes, destinations, insurance levels, service levels and systems.  Do you need on-line track and trace?  Are you offering next day delivery?  What do you want the driver to do if the customer is not in?  In addition you need to understand the supplier’s capabilities and whether you have opportunities to reduce costs and/or improve service by organising yourself differently.  So for example, you might want a dedicated service to your most distant customers so that you can have a later cut-off for everyone else, giving you more time to pick and pack.  Some level of pre-sort of parcels may help your carrier to accept a later pick up or a price reduction.  You may even find that different carriers are more competitive on different routes or for different service levels.

Returns

Returns are a fact of life but there are steps that can be taken to minimise what can be a costly part of the business.  Depending on the market you are in, the systems you employ and the quality of your work, returns rates can vary between one or two percent right up to thirty or forty percent.  Of course the first step is to make sure that your products are reliable, of appropriate quality and that the customer has sufficient information about the product to be clear what they are buying.  It is beyond the scope of this piece to advise how best to do that.  The next step is to ensure that you pick and pack exactly what the customer has ordered.  There are various ways of doing this - having separate pick and pack processes so that the packer checks the picker’s work, or the use of RF devices as described above to positively check that the correct item has been picked.  Some companies limit the problem by making it hard or costly for the customer to return goods but whether you choose to do that depends on your business strategy.  Finally you have to device what to do with the returns - to return them to stock, to the supplier or factory then out to a third party.  All have a cost which needs to be carefully managed.  It is vital to make sure that the process is as efficient as possible to avoid loosing even more margin.

Customer support

Throughout the sales process and beyond customers will want to communicate with you.  Most of us have had experience of on-line retailers who seem to do everything they can to make that difficult to keep their heads firmly lodged in the sand whenever there is a hint of something going wrong.

What a waste.  A waste of an opportunity for your customers to be part of the process of improving your efficiency and ultimately of increasing your profit.  And you don’t even have to pay them to do it.

Your customers are one of the best sources of information you have.  They will perform a level of quality checking on your products and processes that could never hope to achieve.  Make sure you encourage them to feed back their findings and have a process in place to use that information into improving your products and services.  This will lead to improves sales and reduced costs.

This article has sought to illustrate how to go about improving the efficiency of supply chains for e-commerce businesses.  The first hurdle however is to recognise that your supply chain is just as important as your products and the way you market them.  Without an efficient supply chain to back up your sales, at best you may not be maximising your profit potential, at worst you will be putting your business in jeopardy.  And in the current economic climate that is not something any of us can afford to do.