On-line business is growing +30% worldwide from year to year. COVID-19 Crisis provided a huge increase since confinement and is opening the eyes of the last skeptical…consumers are adopting the on-line channel as preferred.
Paradoxically, most of companies does not recognize the On-line channel as profitable. Recent studies show that only 10% of companies in Grocery and 50% in Retail recognize benefits in their On-line channel; the exception is the Luxury sector with 80% of companies satisfied with their On-line channels´ profit then, what is happening?
After an analysis of the situation and several years of experience, I can recommend from the Operations & Supply Chain point of view to do a deep analysis of the strategies to adopt for 3 main factors: Logistics, Returns and Pricing.
- Logistics Strategy to storage and distribute the products
The answer for this question requires a deep analysis of the business itself (Assortment of products to offer, target market, operational capacities…etc.) as the decisions to take at this stage will highly influence the profitability of the business. To stablish a correct strategy, we must have the relation between the value and the size of our products very clear as different costs weight will impact the performance. Despite the complexity of each business in the different sectors, we can identify 3 main Value-Volume situations:
- High value and small or medium volume goods (i.e. luxury goods, pharma, Perfumes & Cosmetics…etc.) can be manage under a Logistics Centralized Strategy as transport (even air shipments) will impact very little the logistics cost. This strategy allows us to be inventory-cost-driven optimizing the working capital impact in the business.
- Low value and big volume goods or with special delivering requirements (i.e. homewares, home appliances, fresh products…etc.) can be managed under a Logistics Decentralized Strategy, closer to demand, as cost of transport will be key for this business. In case of a Retail Network already in place delivering from stores is a good option.
- Low value and low volume goods (i.e. books, electronics, accessories…etc.) this business is driven by many orders with a few units that must be delivered within 24 hours or even less. An intensive handling workforce is needed, therefore the key factor, far from the transport or inventory cost, is the cost of our internal operation at the distribution center. In this case the better strategy is to concentrate the operation in a high automated warehouse.
In all cases we must consider if a logistic outsourcing can benefit the On-line channel but in the last case (Low value and low volume goods), where an outsourcing can help more.
- Returns Strategy to minimize additional costs
Cost of returns are considered above 50% of the initial delivery but the internal cost to re-introduce returns into the supply chain is about 3 to 5 times the initial delivery. Returning goods are part of the business as usual in the Online Channel not only because of the home delivery that increases the delivery attempts per shipment but also because in sectors like Fashion it is common to offer Free Returns for unwanted garments.
A good solution is to enable our stores as drop-off points avoiding transport cost and reducing dramatically the time-to-market of the garment but is only viable if our Retail Network is extended enough. Another possibility is to implement, in agreement with the carrier, a Delivery-and-wait solution where the immediate return is accepted without cost.
If there is no other solution than collecting unwanted goods at the client´s home; then a deep analysis must be done in order to understand the total cost involved to budget it in the business case prior to launch the On-line business.
- Pricing model Strategy to assure business viability
For better or worse, most consumers expect a Free Delivery offer as part of the game or in other words, some of your competitors are already offering this service. What we all know is that Order Fulfillment Operations are not free due to cost of storage, handling and transportation. On the other hand, we are avoiding other costs typically associated to physical stores like premises, salesforce, general expenses, maintenance…etc. In any case, we must know the logistics cost involved in our Online Operation in order to avoid anticipate the impact in the business results.
Once we understand that Free delivery does not mean Free cost operation, we must understand if our market will assume the delivery cost as an addition to the Retail Price or not and act in consequence. We have two main options:
- Delivery cost is accepted as an addition: Traditionally we will offer a tariff rate based on delivery lead-time (24-48h…) but we can also offer low rates for out-of-peak hours of the day or longer lead-times what will reduce our costs.
- Delivery cost is not accepted as an addition: In this case we can simply add the cost of an average delivery to the goods as part of the Retail Price or take the chance to offer a membership instead under a low rate ( i.e. amazon prime) that can compensate the cost.
Costs exist, the question is how to know what the better way is to transmit to consumers in each sector: buying a book on-line might be different from buying homeware.
A correct Logistics, Returns and Pricing Strategies are key factors to get success in the On-line business. Based on my experience, taking time to analyze these aspects in depth before launching the On-line Business will not only assure the success of the business but also avoid extra costs and extra effort during the implementation.
Author: Alejandro Ruiz
Publication date: 7 April 2020