Practical Ecommerce

Order Fulfillment: Keep It Simple And Beware Of All The Costs

I used to manage the fulfillment operations of a mid-size online retail company. We adopted the “Why” method to correct and eliminate fulfillment errors and complexities. That is, each time a new fulfillment glitch arose, we asked ourselves, “Why?”

The “Why” method in practice

Here’s how we implemented the “Why” method:

  1. Write down why customers call you. Categorize reasons and make a page-size graph.

  2. Ask Why-Why-Why to identify underlying issues. For example, if the product did not arrive on time, ask “Why?” Perhaps, for example, it was because the warehouse was supposed to send FedEx Overnight but shipped FedEx Ground. If so, ask “Why?” Perhaps the warehouse shipped everything by default with FedEx Ground and requires you to call for a change of service. Why? There is no API between your system and their system and you fax all the orders.

  3. List underlying issues and assign cost to fix each of them.

  4. Eliminate unnecessary services and policies that make your life a misery and do not drive your profits.

ALTMy team and I have been through this cycle numbers of times. Most common things we eliminated were expedited shipping methods, complicated returns scenarios and free products with the purchase. Each of those things can help increase customer conversion but cost you a fortune in fulfillment.

Simplicity means profits

Let’s take expedited shipments as an example. If your online business drop ships its products, most of the manufacturers will not expedite unless you ask them in a very specific way and then carefully follow up on each order. Dealing with, say, 200 vendors, you’ll need to implement and maintain 200 solutions. This is not simple. It’s difficult to scale and would be very time consuming to do.

Return policies can be another nightmare. It is all nice and easy when you work with five vendors and 100 products. If you have 100 vendors and 5,000 products, following up with each of the vendors on restocking fees and return invoices becomes very burdensome. Here are three suggestions I’d like to share to keep your returns simple and trouble-free.

  1. Keep your policies simple. A sample policy: “No returns for custom-built products, for all other products 20% restocking fee plus 2-way actual shipping costs to be deducted from your refund.”

  2. Train your customer service to calculate refund amounts on the fly. Pre-calculate your scenarios and train your customer service folks (or outsourced team) on when to offer a discount, when to suggest that a customer throws the product away and when to arrange a return delivery.

    Let’s take a $129 end table as an example. Say the wholesale price for the product is $50 and your shipping costs are $35 each way. Let’s say, too, that the product is dropped-shipped and the manufacturer has a 20% restocking fee. If you accept a return for this table, the customer refund can be calculated as:

    • Retail price $129
    • Shipping, both ways -$35 x 2 = -$70
    • Restocking fee -$50 x 20% = -$10
    • Customer refund ($129 – $70 – $10) = $49

    Most of the customers do not realize that their refund may be significantly less then the price they paid. Frequently, just doing this calculation with a customer is enough to save an order. You can always add a sweetener and give a $10 discount making your customer feel appreciated (and keeping a hefty margin).

  3. Know your own costs to make the most effective decisions. In this scenario, assume the $129 table was damaged in transit. You can file a claim (with your shipping company) for the invoice amount and, depending on how good your claims process is, recover 20-40 per cent of the retail value or $25 – $50. Keeping in mind that you still pay the vendor his $50 wholesale cost, you are at a loss. Here are your costs for this scenario:

    • Wholesale price -$50
    • Shipping to the customer -$35
    • Damage claim recovery $50
    • Total -$35

    So, your best policy should be offering a discount to keep the order. A simple way to calculate the maximum discount is:

    • Retail $129
    • Wholesale price –$50
    • Shipping to the customer -$35
    • Refund amount ($129 – $50 – $35) = $44

    If you cannot convince the customer to keep the table, request that he send you the pictures showing damage and ask him to scrap the product. This way you will still be entitled to recovering money from the carrier and save on return shipping and storage.

    To help you make decision of scrap or return, consider this logic:

    • Liquidation value (10 % of retail) $12.90
    • Return shipping cost -$35
    • Warehouse inspection cost -$10
    • Expected value ($12.90 – $35 – $10) = -$32.10

Conclusion

To achieve an effective order fulfillment process, ask yourself why errors occur. Then, implement simple rules to help reduce your return costs and keep more customers happy.

Maxim Mironov

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  1. Sam Singhal August 28, 2008 Reply

    Great Article. Another important related issue, is how to find the right fulfillment company. The main criterion for that is the proximity to your customers, so you can get the goods out fast and save on shipping. We have a search engine at http://www.SpaceSpecials.com where you can seek out order fulfillment companies based on their geographic location and the type of goods they handle.

    Also, many of the order fulfillment companies are offering special discounts when you sign up with them, such as 25% off on shipping or waving the storage costs for the first 3 months etc. You can find these specials listed on our website as well.

    Hope this helps a lot of companies looking to outsource order fulfillment.

  2. John Lindberg March 1, 2009 Reply

    I really like your approach of keeping everything to do with order fulfillment as simple as possible. Just as you say, the more things there are to go wrong, the more waste and expense there will be at the end of the day.

    One rule of thumb that I like is to use USPS first class mail for packages under 13 ounces, use priority mail for packages 14 ounces to 3 pounds and UPS ground (or air if needed) for packages over 3 pounds. I realize there are hundreds of shipping alternatives available, but keeping it simple keeps costs down.

    John Lindberg – President
    EFULFILLMENT SERVICE INC