Internet shopping - are you sitting profitably?

The dotcom bubble has long since burst and of course we’ve had another financial calamity since then but it’s not uncommon for dotcoms retailers to lose money.  And those are the pure players.  The multi channel operators don’t always know if their direct business is making money as they often treat them as another store (rather than a distribution centre) which can give a different version of the truth.

Of course losing money now as you build market share may be the right thing to do but you need to be sure that long term profit is there.  You probably also need to know at what level of turnover the number turn black. And even if you don’t its certain your investors will be taking keen interest.

This sort of financial modelling is usually undertaken by the Finance team but, particularly with Internet shopping, the key to accurate profit forecasting lies in understanding the supply chain costs and those are best understood by Supply Chain professionals.

As businesses grow, throughput and storage requirements increase and additional capacity has to be procured.  There are always different ways of doing this.  Some will be easy to manage, others very difficult.  For example if you think your storage requirement will exceed capacity it is always possible to find off site storage and usually possible to find stock to put into it without comprising service.  On the other hand if your picking capacity is likely to be exceeded you cannot just move some of this to another site without incurring additional shipping costs or double handling or order consolidation costs.  Or you may have to consider moving to a two or more site fulfilment strategy.  So an important aspect of the planning processes is to understand when capacity limits are likely to be broken and what actions are required to develop additional capacity.  The next issue is that you can rarely turn that additional; capacity on a short notice.  There are lead times.  If a new building is required or you are considering some automation for example then this could be more than a year.  A period during which you will be incurring costs without the benefit of the additional capacity it brings.  This is often overlooked.

Next you need to be aware how sensitive your business is to transport and delivery costs.  In a few cases the in-bound transport will be the main consideration and if much of your product is imported then proximity to the ports of entry may be significant.  In most cases through the out-bound transport will be much more significant.

If you are typically shipping small parcels a more centralised solution located close to the parcel courier hubs may be best but if you deal in bulkier items or have particularly tight service levels you may be better going for a more regional model where the additional stock holding cost of multiple sites is more than offset by the benefit of being closer to your customers.  These are all factors that need to be considered in a profit forecasting model.

And there are other factors to consider.  As volumes grow you should be able to achieve economies of scale.  Operational expertise is needed to understand realistically what these are likely to be.  It may be that you have opportunities to balance out peaks and troughs by adding product ranges that are counter cyclical to the core range.  It may be that as volumes grow you can do more direct sourcing that may increase your storage requirement but will reap big rewards in reduced purchase costs.  Equally a supply chain view will need to ensure that such savings are realistic and not offset by other costs.

These are just a few of the factors to take into account if you are to realistically model your future profitability.  Of course the only predictable thing about the future is that it is unpredictable so your model needs to be reviewed regularly and capable of having fresh data loaded without having to start again.  If you would like assistance in building such a model then THE LOGISTICS BUSINESS can help.

Who knows? Maybe a supply chain modelling tool will help to bring forward that day when the red numbers turn black and allow you to sit back and relax …. well until the next day anyway.