Logistics Cost Reduction Strategies For Retailers & D2C
Losses due to expenditure on transportation, logistics, last-mile delivery, and recurring costs impose a major burden on retailers, D2C brands, and others in the industry. In the same way that sales revenues contribute to the bottom line, minimizing expenditure helps in preserving those profits and keeping the organization's balance sheet in the black. Executed effectively, such measures can also contribute to customer satisfaction.
The Importance of Cost Reduction
For organizations in the retail sector, minimizing costs, streamlining operations for greater speed, and creating an outstanding customer experience engagement point are primary goals. Strategies employed in meeting these objectives must focus on creating visibility, agility, and transparency while enabling organizations to become more efficient, smarter, and strategic with how information is disseminated.
The need for cost-cutting and streamlining initiatives is partly being driven by changes in customer behavior. Today's consumers expect greater convenience regarding where, when, and how they shop. This puts the onus on retailers and their value chain partners to make every necessary effort in speeding up and simplifying their operations without lowering the standards of service that demanding consumers now take for granted.
In a competitive marketplace, those same consumers place a priority on getting value for money — all the while expecting greater levels of choice with locally available produce, sustainable practices, bigger assortments of goods, niche or exotic products, etc. Keeping prices down to acceptable levels requires organizations to limit and optimize the usage of their own resources.
New Strategic Approaches
In response to these shifts in customer behavior, savvy retailers are shifting tack. With the growth of digital commerce, new methods of outreach, fulfillment, and delivery are required. Organizations are aligning strategies to an omnichannel approach whose foundation is an optimized supply chain that can guarantee efficiency and reliability of service to the consumer.
To this end, retailers are working more closely with transportation services, logistics providers, and packaging specialists on sustainability initiatives. This collaboration is both a cost reduction initiative driven by the Primary market and a customer expectation initiative designed to address the concerns of retail customers.
Keeping Transportation Costs Down
Transportation costs can make up a significant proportion of a retail organization's overall logistics spend. With rises in fuel prices, the part of a budget allocated to transportation can be upwards of 50%. These costs must be factored into the price of goods, and they are eventually passed on to the consumer. However, retail organizations can use a number of transportation strategies to help reduce costs.
Rationalizing Your Number of Carriers
Procurement and purchasing departments routinely streamline the number of vendors they use in order to get better prices with higher volume. This same mindset may be applied to transport management and the number of carriers that an organization uses.
By reducing your number of carriers, the amount of work offered to the transportation services remaining on your roster will increase. With a larger volume of work, these carriers should be able to offer lower rates across all routes. And over time, their incentive will be to keep those rates low, so as to retain the increased volume of business.
On the surface, such rationalization runs counter to the transportation manager's traditional approach of engaging multiple carriers and negotiating the best deal for each route. With a reduced set of contractors, it might be the case that the rate negotiated on some routes with a particular carrier is not as good as it was with one of the discarded services. But overall, the rates across all routes should be lower.
As with the vendors and suppliers of physical goods, there is, of course, a danger in relying on a small number of providers for essential services. If one of the carriers on your list goes out of business for example, the organization will quickly have to identify a new carrier to cover those routes. This emphasizes the importance of thoroughly vetting providers — both for their ability to provide the required service and to ascertain that the carrier has the stability not to fall into bankruptcy.
Consolidating Shipments
Charging rates for transport carriers are calculated on the basis of shipment weight, distance to travel, and other variables. Consolidating shipments so that fewer trips have to be made enables retailers to reap the benefits of lower rates based on larger consignments.
This approach requires transportation managers to move away from less than truckload (LTL) shipments to truckload (TL) shipments. Cost reductions will generally derive from the fact that discounts are almost always available for larger shipments.
Using A Single Source for All Transportation
Purchasing departments often use a single source of supply for a range of products. In a similar manner, retail managers can offer all transportation out to bids via a request for quotation (RFQ). To do this effectively, the organization should provide prospective carriers with a detailed outline of requirements, including all special needs that fall outside the remit of what standard transportation providers usually offer.
The same caveat applies to this strategy as with carrier rationalization: Bidders should be submitted to due diligence to establish their true levels of service and financial stability.
Taking A Logical Approach to Packaging
A lot of carriers agree that if consignments were packaged differently, costs would not be so much of a concern for the organizations using their transport services. Retail transportation managers can do several things before products are ever loaded to greatly reduce risk and cut costs.
Over-packaging is one of the biggest errors, leading to greater transportation costs, increased costs for the business overall, and the generation of unnecessary amounts of waste packaging material. The addition of packaging materials often results in retailers paying money to transport waste.
Though a lot of freight requires strapping, wrapping, and bracing to prevent damage during shipment, there are less material-intensive and more sustainable options than increased layers of wrapping. For instance, wooden pallets fitted with wooden pallet collars can help keep products secure during transportation without all the extra weight. Adding collars to pallet walls also allows for adjustable configurations that apply to small or large loads and deliver the same levels of protection.
With fewer packaging materials obscuring the goods, products can be displayed right in the pallet, while collars can be removed for easy access as the inventory gets lower. This assists retailers in product display and makes transportation safer and easier for carriers.
Optimizing Logistics and the Supply Chain
Retail organizations can face internal pressures from trying to balance the demands of the distribution center (DC) with requirements in the store. While Replenishment calls for more frequent deliveries, Category Management may request a wider assortment of merchandise. At the same time, Store Operations and eCommerce divisions may be calling for measures to meet the delivery requirements of consumers.
Overcoming these challenges requires effective Supply Chain Planning (SCP) optimization. This enables the organization to raise its filling rates, reduce the distances that have to be covered by transport services, keep trucks on the road, and streamline its DC operations.
With a leaner and more efficient supply chain, operating costs come down. Increasing transportation efficiency translates into greater efficiency in-store, while improved execution of transport and delivery increases customer satisfaction.
From a strategic standpoint, optimization requires a tactical switch, with management developing delivery schedules that balance the work in the distribution center while still meeting the demands for volume and assortment of inventory in stores.
Operationally, utilization must be optimized by centralizing transportation schedules and combining loading and routing and/or the splitting of orders.
An SCP optimization platform should also be in place to provide the data-gathering and analytics capability needed for using real-time information to assist in updating, communication, and additional planning.
Reducing Logistics and Supply Chain Costs
The cost implications of logistics and supply chain management should not be underestimated. Any organization that fails to effectively monitor, manage, and minimize its supply chain costs may suffer an erosion of its bottom line. Yet cost minimization for logistics often conflicts with other business priorities such as revenue maximization, on-time in-full (OTIF) delivery performance, customer satisfaction, and inventory optimization.
With the complex and inter-connected supply chains characteristic of today's retail landscape, cost reductions in one area of operations may result in a cost spike in another. Retail logistics finance managers must therefore fully understand the relationships between various processes in the supply chain and the impact on the entire ecosystem of slashing costs in one area. They must also be able to identify the main drivers of cost in the supply chain.
For retailers, it's essential to populate the supply chain with providers who are consistently able to deliver the right products and materials at the right times, to the right places, and at the lowest prices. To minimize procurement costs, organizations must be able to identify and retain the services of such suppliers. This requires finance managers to be able to use historical and real-time data in evaluating and comparing the performance and pricing of various suppliers.
Retail organizations must also rely on inventory as a buffer against changing cycles of supply and demand. However, stockpiling and storing inventory can cause costs to escalate (this includes warehousing and transportation costs) while tying up capital that could otherwise be used to fuel business growth.
For effective cost minimization, the goal should be to reduce excess inventory and to maintain a stock of merchandise that can meet the demand for specific product ranges at the various outlets of your distribution network.
The Role of Collaboration and Partnership
Small to medium-sized organizations in the consumer-packaged goods (CPG) sector may lack the resources, technological capacity, and freight volumes that larger competitors use to drive efficiencies. One way for smaller firms to generate big savings without having to make major capital investments is through collaboration with a third-party logistics provider (3PL) specializing in consumer goods distribution to mass retailers and grocery chains.
More generally, entering an associative partnership with other retailers can enable organizations to punch with greater weight, and it gives them some hope of competing with the same-day delivery and fulfillment options offered by the likes of Amazon.
Becoming part of an automated, multi-client, distributed logistics ecosystem can enable organizations to handle their direct-to-consumer logistics via a common platform, and thereby reduce their store footprint. This, in turn, will reduce their store operating costs and give retailers greater freedom to use physical space to house innovative or entertaining features that attract more business.
Reducing the Financial and Service Impact of Last-Mile Delivery
For smaller items and perishables, consumers are now accustomed to same-day or two-day delivery — expectations that are fueled and made possible through digital channels of ordering and information exchange.
Two-day shipping for smaller packages has also been changing consumer expectations for larger format deliveries. While two days may be impractical for commodities like furniture, retailers are playing to the new consumer standard by offering other benefits such as free delivery, installation, and even same-day pick up. Customers are nonetheless demanding more control over delivery dates and times, and have high expectations for shipment tracking.
This has necessitated a change in strategies for last-mile delivery. Last-mile logistics are reckoned to make up 28% of a product's transportation expense. And according to IMRG, the last mile is costing retailers, couriers, and consumers a collective $2 billion a year. Last-mile logistics solutions can make or break the revenue source of a brand, as well as its customer retention capacity.
Customer demand for rapid delivery is fueling a drive toward localization and the transformation of supply chains for optimal positioning and volumes of inventory. With localization making it possible to minimize the average length of haul over the last mile, many organizations are trying to move fulfillment centers closer to their customers.
Last-mile shipment requires an optimized supply chain that reduces damage to products and maximizes customer satisfaction. Having a broad network of reliable, high-quality home delivery carriers to represent your brand and handle your products is one way of achieving this. Since last mile carriers may not offer nationwide coverage under an individual banner, your organization can gain shipment visibility and access to high-quality providers through a single third-party logistics provider (3PL) integration.
Besides speed and localization, the implementation of your returns policy is also critical to the last mile. Mistakes will inevitably occur (a couch arriving with mismatched cushions, the delivered item is not what the customer expected), which leads to the refusal of a delivery. Customer loyalty can be made or broken over the return experience.
With some 92% of consumers saying that they will buy something again if returns are easy, it's important to have mechanisms in place for last-mile delivery personnel to capture the details of each transaction, evaluate the condition of a product, and make the appropriate decision in real time.
As the technology improves, machine learning solutions can factor in routes, traffic conditions, employee capabilities, and vehicle fleet mixes to provide a multi-dimensional approach that minimizes errors. Artificial intelligence can enable route optimization by analyzing historical data, real-life constraints, and distribution models using deep machine learning engines to adapt and improve the system continually, thereby providing enhanced solutions for last-mile delivery and logistics.
Via data-driven planning and execution, systems may be configured for the servicing of critical time-bound deliveries (Scheduled & On-demand), allowing organizations to prioritize orders and minimize customer complaints.
Minimizing Recurrent Costs and General Expenditure
Whether you're on a tight budget, looking to widen your profit margins, or you simply wish to free up funds for investment purposes, there are ways of minimizing your recurrent costs and general expenditure without alienating your workforce or detracting from the customer experience.
You can begin by looking at your organization's budget to find areas that can be cut completely or trimmed back. Comparison shopping and buying in bulk can introduce savings for items that are deemed vital to the business. There may also be expenses that can be negotiated for better rates or terms. The same applies to essential services such as communications, internet, and utilities.
Redundant or unwanted inventory may be sitting on shelves or in your warehouse, simply taking up space and costing you money. You could lower your product development and marketing expenses by discontinuing these lines while freeing up capital that's tied up in this inventory.
Co-location or sub-letting portions of your premises can reduce the bite that rent takes out of your budget. Allowing other retailers to share your space can also introduce opportunities by widening the base of consumers that visit your location.
It's accepted wisdom that acquiring new customers is more expensive than keeping existing ones. Effective customer retention strategies that harness resources and data you already have will save you from spending large amounts of revenue on outreach, advertising, or other customer acquisition methods.
For example, customer profiles can yield information that enables your organization to launch personalized campaigns based on location, previous purchases, and other criteria.
Losing and replacing your staff can also be an expensive endeavor, so investing in the happiness and education of your employees is essential for minimizing costs. Positive reinforcement, training, and added perks such as flexible working hours can go a long way in fostering employee retention.
The Implications of Inaction
Failing to minimize your expenditure really isn't an option. Organizations that get this wrong will continue to hemorrhage dollars they could otherwise be saving. Keep in mind, however, that product quality and customer satisfaction must be your main concerns. These should not be sacrificed while attempting to save on your operating costs.
Minimizing transportation, logistics, recurring, and last-mile costs helps preserve the bottom line and contributes to customer satisfaction. These cost reductions also offer indirect benefits such as having reliable, predictable working methods, getting the right products to the right stores at the right time, and enabling your organization to meet the various conditions and demands at your stores and distribution centers.
Cost reduction and supply chain optimization will be key topics at Retail Finance Connect 2020, which takes place at the JW Marriott Miami, Miami, FL., from June 22 - 24, 2020.
Download the agenda for more information and insights.