2021 Parcel Rates: 3 Areas for Attention

The average rate increase for primary services provided by UPS and FedEx mirrors that same familiar 4.9 percent increase that we have seen for many years. 

And just as we have seen for many years, the 2021 parcel rates increase announcements are just a visible layer in the carriers’ rate and service pricing structures. With multiple layers, the complex pricing and surcharge practices of UPS and FedEx can make it difficult to determine the true cost for your small package shipments. 

Beyond the average increase on standard services, it is also important to recognize that surcharges, accessorials, new fees and tweaks to the carriers’ terms and conditions could require you to budget a 2021 cost increase closer to 8.5 percent. Capacity pressures created by exponential e-commerce growth during the pandemic and uncertainty about mid-year or peak surcharges for 2021 creates an environment of unknowns.

You need to understand how your shipment characteristics align with carrier networks. If you are a large shipper with a great contract, be prepared to defend that as tight capacity drives renegotiation motives for UPS and FedEx. Your parcel partner can be a real asset during this time if they have the ability to analyze your historic performance and determine areas for future cost savings that do not jeopardize performance. 

Let’s explore three aspects of this year’s parcel rate increase that could drive new costs in your transportation budget. 

  • Expanded ZIP Codes for Delivery Area Surcharge 

More ZIP codes than ever before will be eligible for Delivery Area Surcharges (DAS) for both UPS and FedEx. Both carriers adjust the applicable ZIP codes every year, but the past two years have reflected significant changes. In 2021, these charges will apply to almost 38 percent of the United States.

The increase for UPS DAS areas will apply to almost 12.3 million people, while the FedEx changes will affect about 11 million people. Ultimately, that means you are facing an additional surcharge for more of your customers. 

This is a difficult adjustment to calculate on your own, but when that much of your customer-base is affected by new costs, deep analysis is required to determine how these changes will impact your budget in 2021.

We talked more about the changes around DAS during our recent parcel rates webinar. Watch the replay for more insight on the how and the why behind this move by the carriers. 

  • Additional Handling Charges for Large Parcels and More to Come

    If your packages measure over 105 inches in length and girth combined, you will be charged an Additional Handling Fee of $16. This dimension change on the fee targets packages that barely miss the Oversize criteria of 130 inches (L and W combined). It applies to packages that take up a lot of space on conveyor belts, but do not get charged high dimensional weight.  

    Parcel carriers are becoming increasingly selective about the packages that move through their automated networks. Large packages, in certain instances, can cause significant problems in an automated facility. Moving them often requires more work from human resources, a costly and time-consuming element. 

    Beyond this $16 charge, UPS is also implementing a new structure for additional handling and large package rates that will differ by zone. Those rates will be announced at a later date, April 11, 2021 for non-hundred-weight packages and July 11, 2021 for hundredweight packages. 

    For heavy retail customers that are not clothing-oriented, this change could create a significant impact. We work with clients to identify specific impacts and solutions to mitigate the added cost.
  • Lightweight 2021 Parcel Rates Face Steepest Increases

    It is important to understand that when the carriers have a rate increase, it is not a universal rate increase across all weights and zones. The average rate increase is 4.9 percent. The level of rate increase for your volume depends on your shipping characteristics. For many shippers a larger percentage of their packages qualify for minimum charges, especially larger shippers with more aggressive pricing. 

    This year, parcel shippers charged at the zone 2, 1-pound minimum will face a steeper increase – about 6.4 percent – than their counterparts in other weight and zone combinations. Likewise, UPS and FedEx rates match between 1 and 15 pounds, and for these lightweight shipments the increases are generally higher than those for heavier packages. 

This strategy of larger increases on lightweight packages is an abrupt change for UPS and FedEx. Two factors likely affect the decision:

  • Competition from Priority Mail: Last year (before COVID-19), FedEx and UPS were both concerned with competition from Priority Mail. Lightweight Priority Mail rates are significantly lower than UPS and FedEx Ground rates, especially to residential addresses. Heading into 2021 with the parcel industry at capacity, there is less concern on competitiveness and more emphasis on profitability.’
  • Profitability: Lightweight packages are typically less profitable for small package carriers than heavier weight packages. Carriers are likely to continue to increase lightweight packages at higher levels as long as there are capacity constraints. Regional carriers can offer an efficient alternative in some of your lightweight shipping scenarios. In light of capacity challenges and other disruptions during 2020, many of these operations have filled a niche and grown. These carriers can sometimes be easier to implement, and they don’t often bring the surcharges the national carriers apply.

    During our Parcel Rates Roundtable we share tips for leveraging regional carriers as part of your parcel program. Watch the webinar to make sure that type of move does not drive up cost with your national carrier due to your tier commitments.

Parcel Bills: Do Not Pay Late

Another area for attention: when its GRI takes effect Jan. 4, 2021, FedEx will begin applying a 6 percent late payment fee. UPS implemented this fee in 2004, and this gives FedEx customers cause to pay close attention to the payment terms in their contracts. 

Not paying your bills on time now becomes a more financially impactful decision, and these fees can add because they apply at the invoice level.

Master Your Parcel Plan, Minimize Rate Impact. 

Do you have your finger on the pulse of your parcel program so you can understand the true cost impact of the 2021 annual General Rate Increase across your end-to-end supply chain?

Questions to consider:

  • How do your contract terms and conditions address volume caps?
  • How will volume caps affect your actual rate increase, surcharges and other fees?
  • How does your customer base change now that more than 11 million people have been added to the DAS delivery charge?
  • How do you budget for these changes?

Open our Parcel Rate Outlook 2021 for our expert support in preparing a plan that carefully considers these questions – and all changes across the parcel environment. Leveraging deep parcel expertise, tools and technology, we’re able to provide rate impact analysis specific to your personal needs and design a business solution that controls cost and protects experience.

Get our Parcel Rate Outlook 2021 today and make sure your 2021 transportation budget considers the nuances lurking in the layers below the 4.9 percent average rate increase.

Why Audit Parcel Service Now? Here’s 4 Reasons

If you don’t think the delivery experience is directly related to customer retention, think again. According to Dimensional Research, of customers who report a bad experience, almost all of them (97 percent) changed their future buying decisions. Further, 58 percent stopped buying from the company, more than half went to a different company for the product or service, and 52 percent told others not to buy the product or service. 

Maybe the shipment was late, perhaps it was damaged, maybe it was delivered to the wrong house, or perhaps the shipping label was wrong in the first place. In the small package shipping environment, it is hard to have awareness of the problem without parcel audit validating the service received.

Whatever caused the problem, the bottom line is that this and other issues could be making you lose customers right at a time when no company can afford to have this happen. Between the global pandemic, the economic recession, and the business volatility occurring in most industries, organizations need to be at the top of their games when it comes to customer service. 

$1.50 Per Package Adds Up Fast

No matter how much customers love your product, many won’t come back if the experience is not good. This should be reason enough to conduct frequent service audits. 

There are also other reasons, some of which do not relate to the customer experience. For example, Transportation Insight recently worked with a shipper that noticed a significant change in its per-package shipping costs. After a service audit, it realized that its cost-per-package had increased by about $1.50 due to a billing adjustment error made by the carrier (for early-morning deliveries). 

Had the shipper not conducted that analysis, there’s no telling when it would have recognized that it was being overcharged by $1.50 per package. Multiply that number times thousands of shipments per year and the value of frequent service audits becomes crystal clear.  

Why Bother Auditing?

With service guarantees being waived right now, many companies are wondering if they still need to audit their invoices and charges. The answer is “yes,” and here’s why: even with these waivers, there are still a high number of errors and ways to ferret out savings on pretty much any transportation bill. 

For example, shippers are still being hit with duplicate charges and other billing errors on top of late, incorrect and damaged shipments — problems that can directly impact customer service and retention. With fewer drivers on the road and higher demand for parcel capacity — largely due to the massive uptick in e-commerce shopping — both loss and damage incidences have increased. 

By auditing every package to make sure it’s successfully delivered, companies can manage the loss and damage process from start to finish. Audits can also uncover data regarding insufficient packaging and ensure that payments are accurate and on time. In fact, auditing is a great risk management tool that companies can use during both peak and regular seasons.    

Here are four more reasons why you need to continue service audits:

  • Good visibility into what you’re actually paying. The audit platform you use should break down carrier invoice details to the charge level to analyze all peak season surcharges, rates, and discounts. This year, we’ve seen a number of rate errors and worked on our clients’ behalf to recover over $1.4 million in savings. We’re also identifying duplicate charges and billing errors at the charge level, which is impossible to do without an invoice audit in place.
  • Make sure it gets there on time and in one piece. Sure, some service guarantees are waived right now, but shippers should still want to audit every package to ensure it is delivered and not lost in transit or damaged. This year, we’ve seen the perfect storm of greater-than-usual demand, fewer drivers, and more retailers shipping items that normally would be purchased and picked up in store. Without a doubt, that’s caused an increase in lost and damaged packages. 
  • Tracking losses and damages. The best approach is to manage the entire loss and damage process from identification to resolution and recovery. So far this year, Transportation Insight has secured over $1.7 million in loss and damage savings, and all while providing data regarding insufficient packaging details down to the SKU level. This is particularly helpful for companies that are introducing new products and/or shipping with new vendors.  
  • Pay accurate bills on time. The data collected during a service audit provides insights into how new surcharges or new carrier rules will impact transportation and the related costs. For example, FedEx recently announced a new late-payment fee effective January 2021. Using a compliance audit, companies can keep close tabs on these types of fees and either avoid them completely (by paying on time) or correcting errors (by flagging erroneous late fees). With so many staffing changes and work-from-home scenarios taking place in 2020, shippers need to be especially careful about paying their carrier invoices correctly and on time.

Helping You Rest Easier

Transportation Insight is the only parcel audit and logistics solution provider that undergoes an annual SOC 1 Type II third-party compliance audit. We check every parcel package within your supply chain to make sure you’re getting the service you selected at your contracted price. For example, if your company is paying for guaranteed service, Saturday pickup or delivery, or other services, we’ll make sure you get them. We also check for invalid pickup, as well as identify and follow up on lost or damaged packages.

Possessing deep industry expertise, our parcel team also monitors ongoing changes in the small package environment to help keep shippers apprised of the emerging cost-drivers that affect their profitable performance. 

E-commerce Supply Chain: 6 Challenges

The e-commerce supply chain challenges this year will be as long a family’s shopping list.

Here are the top 6 challenges to consider during the holiday peak shipping season.

  1. The traditional holiday peak converges with elevated online demand due. E-commerce sales will match or surpass brick-and-mortar. Consumers have multiple ordering channels to tap. E-commerce supply chain fulfillment and delivery operations need to respond to this decentralized − and unprecedented − demand-pull.
  2. Many supply chains remain out of kilter, one of the pandemic’s many legacies. U.S. inventories are at their lowest levels in five years, according to several analysts. Stock-outs have been common. U.S. imports are spiking. However, those goods may not reach store shelves or distribution centers in time to satisfy peak consumption needs.
  3. Parcel networks have been overwhelmed by demand since March 2020. This has led to inconsistent delivery performance across the board. National and regional parcel carriers have maxed out their fulfillment and distribution infrastructures. Late deliveries mean that consumers will be forced to accept holiday service levels that are beneath their expectations. If there is good news, it’s that e-commerce consumers are aware of the problems and will be more tolerant of slower delivery. What they demand, and should expect, is access to real-time information about any service issues.
  4. Consumers may order goods earlier than usual, allowing the supply chain to spread out delivery timetables to create a “load-leveling” effect. That would be positive news, but it should not automatically be counted upon.
  5. Warehouse space is severely constrained. Retailers with brick-and-mortar exposure need to position stores as “forward fulfillment” nodes. This allows orders to be pulled from store inventory and delivered over relatively short distances. Store networks will also support what is expected to be major demand spikes for in-store and curbside pickups of online orders. Pure-play e-tailers without store networks need to get creative.
  6. FedEx and UPS are levying meaningful peak surcharges on volumes from their largest customers. The U.S. Postal Service imposed the first peak surcharge in its history. Carriers say the fees are needed to offset their higher costs to serve. That is true, up to a point. Demands on delivery networks will be unprecedented, and carriers are pricing their services accordingly. Companies will have to consider this in their free shipping strategies to maintain profitability.

THE CLOCK IS TICKING

Retailers relying on the e-commerce supply chain are racing the clock and capacity constraints during holiday peak season.

Is it too late for shippers and retailers to get their holiday house in order?

Not necessarily, but it will take fast action and deep e-commerce supply chain planning. The challenges, as we’ve laid out, are immense. One key is to get ahead of the “demand curve.” When shippers gain visibility into end demand, they can prepare and execute a plan that enhances customer satisfaction and does so profitably. After all, meeting customer demands while losing money in the process is the hollowest of victories.

Managing the upstream channel is just as critical. Calibrating inventory flows with replenishment needs is a year-round challenge, and especially so during peak. The challenge is magnified this year with the headwind of COVID-19. Retailers need a clear line of sight into supplier production so they can forecast their inventory replenishment. In normal times, lack of visibility can lead to costly over-ordering to ensure adequate buffer stock. This season, however, over-ordering may be an adequate response, given how and where the inventory is positioned. 

During CSCMP’s EDGE 2020 Virtual Conference, Target Executive Vice President and Chief Supply Chain and Logistics Officer Arthur Valdez advised to “not be afraid to overreact.” That may sound counter-intuitive, but it can be an appropriate step during this peak. Target will be investing heavily in transportation services with a focus on improving delivery timing, Valdez said. Again, that appears to run against the grain as transport is considered a cost center. Yet it will be less costly than failing to execute deliveries because capacity is not available. A seasoned logistics partner can map out a strategy to leverage a customer’s existing assets, as well as to bring in outside capabilities that profitably meets customer demands.

This is especially important as shippers encounter an increasingly complex surcharge environment constructed by FedEx, UPS and, to a smaller degree, USPS and regional carriers.  High-volume FedEx and UPS customers could be looking at surcharges as high as $4 to $5 per piece. These are by far the most expensive surcharges we have ever seen. They can spell the difference between peak season success and failure, even if everything else breaks right. Any shipper expecting to tender significant traffic to either or both must be able to navigate those surcharges all within the framework of their logistics execution.

Amid the coming storm, it may be hard for folks to get a good fix on demand profiles beyond the holidays. But it pays to do so. For example, we may see another e-commerce surge early next year as fears of a combined COVID-seasonal flu cycle keep more consumers homebound. Already, we are seeing 2021 budget plans being adjusted to account for the lingering effect of COVID-19. We also expect similar peak season patterns for the next 3-5 years even after a coronavirus vaccine is approved and distributed. A strong logistics partner not only can help you get through 2020. It can prepare you for 2021, 2022, and beyond.

Cost Changes Hide in Shift to Online Fulfillment

By expediting moves toward ship-from-store, buy-online-pickup-in-store (BOPIS) and other alternative fulfillment options, those retailers seized a growth opportunity in a slow economy. At the same time, they continued to move inventory, employ associates, and effectively utilize brick-and-mortar assets all while delighting customers.

However, in the rush to make those changes and meet consumer demand, it is not enough to have resources capable of adapting and executing your supply chain network strategy. It is essential that those resources provide a clear understanding of how alternative services affect costs across your transportation network.

While offering service alternatives to a demanding consumer base can drive revenue growth, profit margins can quickly disappear without awareness to how those new delivery options can affect freight cost, time-in-transit and carrier utilization, among other key transportation performance metrics.

We help our retail clients recognize the financial implications of their service changes with a transportation alignment study that helps them quickly redesign their network strategy, execute on transportation procurement and access the evidence required for decision-making that protects profitable performance.

Evolving Fulfillment Strategy to Meet Online Demand

When the pandemic began affecting U.S. retailers, many of our clients with distribution centers faced the risk of closure due to “Stay at Home, Work Safe” guidelines issued by federal and local agencies. At the same time, revenue was stagnant for retailers with brick-and-mortar storefronts that were required to close due to social distancing expectations.

With online sales booming, some of our retail clients took brave action to convert darkened stores into mini-fulfillment centers. Deploying staff from distribution centers and stores to complete fulfillment activity at the retail locations, these clients are not only able to keep staff gainfully employed, they are also utilizing store inventory that might have otherwise gone unsold.

Making this type of move with your fulfillment strategy can happen quickly – scenarios within 10 days have been reported for some retailers. Adding BOPIS with curbside capabilities can happen in 60 days. These types of changes have become a necessity for retailers across the country, but by changing fulfillment models, these organizations also completely changed their supply chain and distribution network. Unfortunately, because this adaptation occurred so quickly and with such a need to continue business, it is not always supported by the essential transportation study and analysis that determines the cost implications of the network changes.

Do you have the systems in place to determine how these changes affect freight cost, profit margin and customer experience?

Leveraging Data, Analysis to Manage Cost of Online Fulfillment

As our retail clients are rapidly responding to the changes the pandemic is driving in consumer behaviors, we use technology tools and industry expertise to support network alignment studies that clarify cost implications of service changes.

Using historical shipping data, analysis and multi-modal expertise, we help clients manage cost/identify opportunity by providing greater visibility to:

  • Impact of network changes to overall transportation cost
  • Time in transit through predictive modeling based on carrier zone information
  • Freight expense as percentage of cost to serve
  • Margin impact by product level
  • Consumer geography and accessorial changes
  • Overlapping shipment details
  • Store-level profitability
  • Split-order percentage trends
  • “True” customer experience metrics
  • Consumer behavior analysis

With the results of our network alignment/margin management study, we help our retail clients make changes to their carrier contracts, their carrier utilization or their market response. In doing so, we’re able to help make sure they are fulfilling orders in a profitable way, while protecting customer experience.

Master Online Fulfillment

Organizations that create a supply chain personalized to the expectations and behaviors of their customers can achieve greater brand loyalty and improve customer retention. At the same time, the shippers that establish a nimble network can rapidly respond to fluctuations in supply and demand and capitalize on opportunities for growth.

If your business is pursuing rapid deployment of alternative fulfillment practices, make sure you understand fulfillment costs at the retail store location. Retailers that can manage network costs associated with a strategy adjustment in order fulfillment can realize competitive advantage. That’s especially meaningful in a tumultuous environment where rapid supply chain pivots are required to capitalize on changes in consumer behavior.

As a supply chain master, we’ve worked with hundreds of organizations mapping thousands of supply chains. Applying expertise across diverse retail categories and industry segments, multi-modal transportation management capabilities and technology-enabled data management and analysis, we help clients align their transportation practices with their business goals.

To master your online order fulfillment and deploy a variety of final delivery options talk to one of our experts today.

Parcel Volume Caps Emerge Amid Retail Slump

Bound for a stay-at-home society quarantined under COVID-19 guidelines, a whipsaw in residential delivery volume is a burden on small package carriers like FedEx and UPS which are accustomed to commercial service driving operational revenue.

In response to the dynamics of the current norm, service providers across the e-commerce supply chain are taking unprecedented steps to control their own financial performance while still delivering a satisfying shopping and delivery experience.

Effects of the COVID-19 disruption are still emerging, even as organizations work to pivot their processes to meet the needs of a post-pandemic supply chain. Shippers that understand how shifts in consumer demands manifest across small package networks can pivot their supply chain strategy to control costs, avoid risk and capitalize on opportunity.

Retail Sales Plunge During April

U.S. retail sales dropped 16.4 percent during April, the largest drop of its kind since 1992. The April decline doubled the previous record for one-month tumble in the sales indicator – set just a month prior during March’s 8.3 percent record drop.

While the U.S. Department of Commerce reports the sharpest dips for clothing, electronics and furniture stores, society’s continued migration toward the online sales platform accelerates.

Month over month, the online segment posted 8.4 percent growth in April as Americans shopped from home for an expanding diversity of products, from groceries to office supplies. Compared to last year, the changes in consumer behavior accelerated by COVID-19 has increased e-commerce sales 21.6 percent.

DHL, which provides local e-commerce delivery in major U.S. markets, reported volume increases of 36 percent compared to February numbers. Increase is sharpest in the Northeast, according to a release that also stated that an increase in e-commerce orders over the past five weeks has pushed DHL’s parcel volume to peak season levels.

As U.S. businesses begin reopening their doors, monitoring the evolution of consumer buying habits after COVID-19 will be an important piece in maintaining an optimal parcel shipping strategy. Will the U.S. embrace on-site shopping again, particularly in malls and other brick-and-mortar establishments? How much of your retail sales will continue to come through the e-commerce channel?

Whether your organization is an e-commerce legacy or you’re seizing new market share, serving online customers requires an expert understanding of the service implications on transportation costs. In the hurry to serve peaking customer demand, it is easy to lose sight of profitability at the order and item-level. Lacking that visibility could prevent you from capitalizing in growth areas emerging in the same environment as broader economic changes.

FedEx Limits Parcel Shipments for Kohl’s and Others

FedEx limited the number of items that about two dozen other retailers can ship from certain locations. Applied in certain geographies where volume is heaviest, the move comes as retailers across the nation have increasingly begin using closed storefronts to fulfill online orders.

For retailers, this alternative fulfillment strategy facilitates sales even when other conditions pre-empt an on-site purchase. When fulfillment alternatives are included in supply chain contingency planning, retailers can quickly pivot their network to serve emerging customer segments or specific geographies, and still maintain optimal transportation cost.

“These customers have seen significant volume growth since the spread of Covid-19,” FedEx said last week in a notice to its Ground workers reviewed by The Wall Street Journal. “In a time of already high volume growth, capping the number of packages to be picked up at these locations will limit any negative impacts to the FedEx Ground network.”

While retailers are able to keep inventory moving off shelves though online fulfillment, the volume increases in certain parts of the country have challenged FedEx facilities that were not prepared to handle a rapid increase. This is most prevalent along the East Coast and West Coast, particularly the Pacific Northwest, where the COVID-19 impacted has persisted the longest.

Customers initially affected by FedEx shipping limitations included: Kohl’s, Belk Inc., Neiman Marcus Group Inc. and Nordstrom Inc., retailers like Abercrombie & Fitch Co., Bed Bath & Beyond Inc., Hobby Lobby Stores Inc. and Eddie Bauer, and other sellers like Groupon Inc. and Young Living Essential Oils LLC. The limits varied at each location.

In an environment when parcel carriers are limiting volumes, shippers can improve critical business decision making through on-demand access to dashboards that reveal real-time access to your order volume, historical transportation transactions, carrier volume requirements and accessorial trends. Increased visibility to these and other Key Performance Indicators can deliver improved cost management and increased awareness of cost-service trade-offs.

Supply Chain Master Can Map, Mitigate Risk

Organizations that are re-calibrating their supply networks to address the weaknesses and opportunities emerging during COVID-19 can benefit significantly from the support of a supply chain expert.

Our unrivalled expertise gained across thousands of supply chains allows us to offer guidance when the way forward is unclear. We’re currently helping hundreds of clients assess their small package program to make sure they have the network in place to meet e-commerce delivery demand today and tomorrow. Deploying a best-in-class technology platform to gather, manage and analyze your parcel data, we provide evidence to support your go-forward strategies.

Leveraging this technology alongside deep parcel industry knowledge and multi-modal expertise, shippers can effectively identify any existing supply chain gaps impact performance and cost management.

To learn more about how we can map your strategies for e-commerce success in the face of supply chain disruption, talk to an expert today.

Serve Customers With a Personalized Supply Chain

Society’s sudden move to a shelter-in-place and work-from-home environment dramatically affected buying behaviors, and, in the process, expectations increased on companies responding to demand.

Organizations equipped with an agile, customer-centric supply chain network are capitalizing by evolving their service to the current environment. Distributors are re-locating inventory to meet emergent demand for products needed to support COVID-19 response in specific geographies. Retailers have kept Americans fed and working by adjusting online fulfillment strategies to utilize brick-and-mortar curbside pick-up or alternate home delivery methods. Manufacturers are drop-shipping products directly to homes to meet newfound interests in exercise.

As customer preferences carry even greater weight in modern supply network planning, the organizations with a holistic network view will deliver the most cost-effective shipping strategies that empower choice-conscious clients.

Customers Take Control

In 2016, parcel and express delivery volume bypassed railroads to become the second-largest transportation sector behind motor freight, according to the Council of Supply Chain Management Professionals’ 28th Annual State of Logistics Report. With that leap, consumers seized control of logistics spending and “supply chain as we’ve known it” changed forever.

In the past, traditional retail strategies put the brand in control, using a push-based system with consumers at the end of the supply chain. Throughout the rest of the supply network, past experience drove inventory decisions, and product was pushed to stores based on what consumers “should” like and purchase.

Ongoing expansion of e-commerce has increasingly shifted decision-making for many organizations toward the customer experience. With the outbreak of COVID-19, historical buying behaviors are no longer valid and the consumer is in charge now more than ever. Companies that didn’t have a consumer-centric approach are adapting to survive.

Adopting a consumer-centric approach isn’t automatic, however. It requires thorough understanding of your customers’ preferences from point of purchase to final delivery.

Consumer Behaviors Changing Forever

While society has steadily shifted more buying to online platforms, COVID-19 sent more people online to buy a broader array of products than ever before.

In March, online grocery sales hit an all-time high. And in April, online grocery retailers topped that record by about 37%, according to survey data from grocery consultant Brick Meets Click (BMC) and research firm Symphony RetailAI.

Driving the sales growth was a 33.3% increase in the total number of orders: 62.5 million in April vs. 46.9 million in March. Spending per order grew more modestly, as did the number of online grocery shoppers.

Retailers like Wal-Mart and Target are reporting record online sales growth as well, giving further evidence that more buyers are turning to e-commerce sales channels for everyday needs. As the convenience of online buying appeals to a broader population, the need for diverse delivery options will increase, just as it has since parcel transportation took the No. 2 spot in logistics spend in 2016.

Effectively fulfilling those customer delivery demands requires a transportation strategy supported by multi-modal expertise and technology. Transportation management systems that integrate vital transportation information from freight and parcel service providers, along with historical shipping data, can offer a strong basis for decisions that improve customer service and protect bottom line profitability.

A Case for a Personalized Supply Chain

Organizations that can create a supply chain personalized to the expectations and behaviors of their customers can achieve greater brand loyalty. By allowing customers more control over their delivery experience, brands can create greater loyalty and improve customer retention.

At the same time, the shippers that establish a nimble network can rapidly respond to fluctuations in supply and demand and capitalize on opportunities for growth.

To learn more about creating a truly personalized supply chain that serves your customers’ needs, read Transportation Insight’s Guide to Mastering Your Supply Chain.

In it, we share more data about emerging customer trends as well as strategies and tactics to create a stronger supply chain that ultimately drives growth. Read it today to evolve your supply chain to meet your customers changing fulfillment and delivery needs.

Service Merchandise omnichannel fulfillment

Master Omnichannel Fulfillment, Enhance Experience

Retail has changed a lot in nearly four decades since Service Merchandise – and its catalog – was familiar in households across North America. Still, many of the retailers’ leading-edge concepts are just as applicable in an e-commerce age that requires customer service capabilities across multiple channels.

Let’s look at some supply chain practices that can support an omnichannel service that enhances the experience of your customers – whether they are shopping in-store, online at their desktop on their smartphone or by telephone.

Can You Compete with Amazon? Should you Try?

Most retailers are still trying to figure out the right recipe for omnichannel. Revisiting the strategies that anchored the success of Service Merchandise, alongside modern supply chain best practices can help retailers focused on managing fulfillment costs and expanding growth across all sales venues.

Companies have to decide where they want to play. With more service comes more cost. You have to understand your customer base and understand who you want to compete against. Can you compete against Amazon at a national level? Maybe not, and if you try you may bankrupt yourself.

With customers’ rising expectations for free shipping and 2- or 3-day delivery, retailers need to be able to design a distribution network where every customer in the U.S. can be reached within two days.

For companies that have brick and mortar locations, the question becomes: How do you leverage all inventory assets to decrease customer lead time – and do it cost effectively?

That requires analysis, good data, good tools and people who know how to interpret that information.

A 21st Century Hurdle

One obstacle facing today’s retailers that Service Merchandise didn’t have to deal with: massive SKU proliferation. While the retailer probably carried a significant number of SKUs in its backroom, it also knew that most of its customers were not walking in the door with the goal of buying 10+ items.

This didn’t pose a problem until the definition of “convenience” changed. The world’s super centers caught onto the shift and started carrying dozens of different “similar” items – all on the sales floor.

At that point, all that a shopper had to do was walk in, fill a cart, and walk out the door.

In today’s landscape, if you are competing against retail and e-tail giants, it is critical to understand the profit performance of each product you offer, particularly in light of any associated fulfillment and delivery costs.

Model Networks to Manage Mistakes

Modelling exercises help retailers determine cost trade-offs versus service before you start an initiative. This can allow you to determine where to guarantee 2-day delivery in certain areas, while offering longer service time and lower cost in other areas.

One of the core benefits of network modelling: you can do all the what-if scenarios so you know how the network reacts before you invest dollars and make a mistake.

Data-driven network modelling is also an asset when disruption threatens the order-to-cash cycle. This type of proactive modelling allows a shipper to identify response options before disaster occurs and jeopardizes successful final delivery.

Leverage the Right Resources

Most retailers may not have resources to manage massive amounts of data and then turn around to review and reproduce network designs every six months or faster – all while managing a separate returns network and a separate dot-com network.

Many organizations cannot afford to obtain the people, obtain the tools and manage to keep them. If you do have a staff on site, those people may not always be needed for network design or analysis. You end up re-tasking them with other things so they are not staying fresh on their modelling skills, and when it is time to update the model – what if they are working on other critical projects? That work falls by the wayside.

Another downside of an internal modelling team: They get to know your business, and how it works. There’s a tendency to get into a modelling rut, modelling within your constraints rather than challenging “sacred cows”.

Someone outside your organization knows what other companies have done, what works and what doesn’t, – and they’re not limited by your constraints. That’s why consulting companies exist. They can think outside the box and apply your constraints rather than operating under assumptions.

Master Your Domain

Retail companies in particular should focus on their strengths.

Buying the best products and marketing to customers is the core competency of most retailers – not transportation and logistics. In that case, an outside expert can offer an unbiased, view informed by supply chain best practices effective in varied industries and many different retail organizations.

Hire an outside expert that can leverage fulfillment expertise, data and supply chain planning to help take care of customer delivery demands, so you can focus on the retail areas where you excel.

Manage Fulfillment Cost, Support Prime Performance

We are in an era where higher fulfillment costs continue to erode retail margins. It’s time for stores to think harder about how to fulfill orders across all channels, while also factoring in parcel transportation costs and how to package in a way that minimizes dimensional charges.

The complexities of omnichannel fulfillment and all the requirements that come along with it drives many retailers to rethink store layout plans, network design and support partners. Applying the Service Merchandise approach to customer experience in the 1980s could give today’s retailers a competitive advantage in the marketplace.

To help retailers understand how Service Merchandise delivered experience and omnichannel excellence we created “Prime Before Its Time: The Service Merchandise Experience.”

Download the guide to learn how the retail innovations of yesterday can help you deliver a prime performance today.

Omnichannel: 3 Ways Service Merchandise Got it Right

In its heyday, Service Merchandise was a retail force. With 413 stores and $4 billion in revenues at its peak, the company singlehandedly turned the “catalog showroom” shopping experience into one that consumers flocked to for fine jewelry, electronics, toys, and other merchandise. 

Hindsight being 20/20, modern-day concerns like high inventory carrying costs, the escalating cost of expansive retail space, and the labor-intensive nature of its decidedly non-DIY showroom should have all been red flags for Service Merchandise. Despite these oversights, the company definitely had a few things nailed when it comes to omnichannel. Let’s look at three areas where Service Merchandise excelled.

Lesson 1: Sales in the Front, Fulfillment in the Back

Service Merchandise stored inventory in the backroom versus in the front of the house and basically understood the value of the omnichannel model as far back as the 1980s.

Stores aren’t meant to be fulfillment centers. Employees don’t know how to pack boxes efficiently. They rely on their own judgment about how much packing material and product to load into a box for a ship-to-home customer. That can get expensive when dimensional minimums come into play. For example: If a box is too large relative to the weight going into the box, the shipper is going to overpay. 

Service Merchandise escaped these challenges.

  • All inventory was maintained at the store level, in the back of the house, where customers couldn’t touch it until they ordered it, initially using a clipboard and written order and later using the “Silent Sam” ordering system.
  • Employees were trained on efficient fulfillment techniques: The goods were either sent by conveyor to the customers or shipped to their homes. 

“The average price of an item sold in the store was $30. The average transaction was $55, so we were selling less than two items per transaction,” says Service Merchandise CEO Ray Zimmerman. “Because they were $30 items, it was less expensive for us to handle it on a pick and conveyor basis than it was to stack it out and let the customer pick it up.”

Obstacles emerge when fulfillment creeps into a retailer’s sales floor customer-facing roles:

  • Store employees picking orders instead of taking care of customers. 
  • Aisles congested with big carts and harried fulfillment individuals trying to fill orders quickly. 
  • Online shipments packed inefficiently by store employees untrained in the fine points of fulfillment. 
  • Unnecessary touches: product is received, unpacked, put on store shelves, retrieved, repacked and shipped back out. 
  • Multiple touches create a high volume of dunnage and corrugate waste.

Just think about how far a store employee has to walk to collect all of the items from an online order, versus someone who was working in a warehouse with very high pick densities. Warehouses also incorporate technology (i.e., pick-to-light and voice options) that makes picking and packing more efficient.

Lesson 2: Technology is Integral to Omni-Channel Success.

Retail has come a long way since the 1980s, but it’s clear that Service Merchandise’s leaders had a knack for understanding their customer base and serving it well. They also weren’t afraid to invest in technology long before terms like omnichannel, automation, robotics, and Amazon were common vernacular for retailers. 

“We had a great group of IT people – and that was unique for most companies at the time,” Zimmerman says. “At the time, there was no point-of-sale system that had an alpha numeric. They were programming in BASIC language, it was very simple, but that’s how we developed all these systems.”

Those systems monitored inventory, too.

“We had to keep inventory tight and we spent a lot of time monitoring to make sure that stores were making inventory adjustments,” Zimmerman says. “If they didn’t have any adjustments, the store wasn’t doing its job verifying inventory count; if there were too many, the store was having a shrinkage problem.”

If afforded today’s technology advances, omnichannel data management and its innovative mindset, here’s what a profitable “Service Merchandise 2020” might look like.

  • An early adopter of warehouse automation, it deploys advanced technologies like robotics.
  • Warehouse pickers are equipped with wearable technology that enables them to do their jobs faster in a hands-free environment. 
  • Integrating automated co-bots, conveyors and cranes into its stockrooms, it effectively leverages technology to shorten fulfillment times and hit two-day and one-day shipping windows.
  • Leverage artificial intelligence (AI) and machine learning to optimally determine placement and levels inventory based on predicted customer demand. 

Lesson 3: Give Customers an Experience

Customers like going into stores to look at and touch products. 

Service Merchandise knew that its customers really wanted to experience a product before buying it, which meant stores didn’t really need to have all of their inventory visible and stacked to the ceiling when those customers walked in the door. 

With its part-catalog/part-showroom approach, Service Merchandise was meeting customers where they were in the ‘80s.

“The catalog was not for people to order from. It was an advertising tool – people could pick what they want and come into the store,” Zimmerman says. “If that customer drove 3 blocks to come into our store, they expected to get it. We had to be in stock every day, on every item.”

Many people still remember fondly a key aspect of the Service Merchandise experience, even if the retailer’s dominant presence has faded.

“When the company liquidated, I bought the name to keep it in the family. I put up a website – it didn’t sell much merchandise, but it got a tremendous amount of comments,” Zimmerman says. “Many wanted to tell me how much they loved watching the merchandise coming down the conveyor belt.”

Putting it all Together

Retailers are still trying to figure out the right recipe for omnichannel success. A multichannel approach to sales focused on providing customers with a seamless shopping experience — be it online, on a desktop, via a mobile device, by telephone, or in a brick-and-mortar store — omnichannel is pushing companies into new terrain when it comes to fulfillment, transportation, and delivery.

To help retailers understand how to improve omnichannel performance, we created “Prime Before Its Time: The Service Merchandise Experience.”

Download the guide to learn how the retail innovations of yesterday can help you deliver a prime performance today.

The Service Merchandise Experience: Omnichannel in the ‘80s

Standalone brick-and-mortar structures with expansive parking lots — most of which were packed with cars during business hours — Service Merchandise stores were where people went, catalog in hand, to look at product displays and check off their selections on order forms – or in a computer terminal. A few minutes later, their goods appeared on a conveyor straight out of the onsite stockroom.

Let’s explore Service Merchandise’s roots, dig into its retail strategy, and see how its strategies for customer experience can apply in today’s omnichannel retail environment. 

Customer Experience Innovator

Headquartered in Brentwood, TN, Service Merchandise was built on an innovative business. The company broke new ground in a handful of retail landscapes. In fact, many of its competitive moves were well ahead of their time, leading us to believe that Service Merchandise may have actually mastered “omnichannel retail” decades before the term was even coined.  model. Initially a variety store opened in 1934, it went from being a chain of dime stores to a catalog business. Operating from warehouses in Tennessee, that business eventually morphed into the showroom concept that made Service Merchandise famous. 

  • 1980 – Allowed customers to place orders via specially equipped TV sets.
  • 1981 – Developed a computer program that used demographics and a specific location’s characteristics to predict the market.
  • 1982 – Installed a cash register that allowed customers to check on product availability and order merchandise right on the sales floor. 

Three years later, it implemented a computerized inventory replenishment system that helped it reduce inventory carrying costs while also reducing its out-of-stocks. In 1986 it opened an automated, 752,000-square-foot warehouse in New York.

Convenient Fulfillment Options

For retailers, having the right inventory at the right place and at the right time has become table stakes. Service Merchandise served multiple channels efficiently from its brick-and-mortar locations. It had walk-in business, for example, and it also had a successful catalog component. Really, the latter is no different than today’s online environment, where “order online-pickup in store” is the newest dynamic that retailers are trying to harness. 

“The catalog was not for people to order from,” says Raymond Zimmerman, CEO of Service Merchandise. “It was an advertising tool – people could pick what they want and come into the store. If that customer drove three blocks to come into our store, they expected to get it. We had to be in stock every day, on every item.”

Service Merchandise also leveraged brick and mortar locations to meet retail customers where they were. Inspired by UK-based retailer Argos’ fulfillment model that allowed freight deliveries to a secured inventory room without store access, Service Merchandise tested a warehouse-only model. 

In Metro Atlanta, a handful of 13,000 square-foot suburban stores opened with the catalog as the main attraction along with a few display items. Customers could access Service Merchandise inventory in the warehouse and have it shipped to the catalog store for next-day pick-up.

Everything was in stock, but very little was on display. 

“All the online guys are opening brick-and-stores or they are creating places where you can pick up merchandise in the existing stores,” Zimmerman says. “That’s where we were going – to have all those 10-15,000-square foot stores, so we could open hundreds of them close to the customer. … In the ‘80s and ‘90s, we were where everybody is trying to get to now. It was the implementation that was our failure.”

The retailer developed inventory management systems that, if one location was out of stock, store staff could identify the five closest stores with the item on site. The customer could pick it up there or have it shipped to their home by UPS. 

“We took that system and expanded it so that you could go to a store in Columbus, Ohio, pay for something and send it down the conveyor belt in the Tuscaloosa, Alabama store,” Zimmernan says. “At the time, customers couldn’t go online and order and then pick up in the store.”

Customers Want to Experience their Purchases

Service Merchandise knew that its customers really wanted to experience a product before buying it. They like to go into the stores to look at and touch products. Stores didn’t really need to have all of their inventory visible and stacked to the ceiling when those customers walked in the door. 

But they did need to make sure items promoted in the catalog were available in local store inventory.

“The hottest item that wasn’t in the catalog was less important than the worst item in that catalog,” Zimmerman says. “The customer that comes in has pre-shopped and they knew what they want.” 

So the question becomes, is there really a need for high levels of inventory on the retail floor, if all customers want to do is experience the product versus walk out the door with it? 

Ultimately, customer experience was enhanced by the Service Merchandise strategy of separating the sales floor from order fulfillment in the warehouse.

Many retailers trying to fulfill multiple channels from physical stores often threaten their in-store success. Likely earmarked for in-store or curbside pick-up, those orders consume labor and get in the way of a pleasant shipping experience for customers. The sales floor isn’t very welcoming when aisles are congested with big carts and harried fulfillment individuals trying to quickly fill carts.

Omnichannel Fulfillment Jeopardizes Performance

We’re in an era where higher fulfillment costs continue to erode retail margins. It’s time for stores to think harder about how to fulfill orders across all channels while also factoring in parcel transportation costs and how to package in a way that minimizes dimensional charges.

Knowing the struggles that retailers face as they navigate the complexities of omnichannel fulfillment, reflecting on how Service Merchandise approached the customer experience could give companies a clear advantage in the marketplace. 

To help retailers understand how to protect customer experience while balancing the cost of service, we created “Prime Before Its Time: The Service Merchandise Experience.”

Download the guide to learn how the retail innovations of yesterday can help you deliver a prime performance today.

What Do We Do with All These Returns? E-commerce and Reverse Logistics

That’s because consumers return goods bought online more often than they return in-store purchases. The Reverse Logistics Association reports that e-commerce return rates are three to four times higher than brick-and-mortar store rates. The volume you can expect varies according to product category, but plan on an average return rate of 25 to 35 percent.

Navigating reverse logistics requirements is new ground for most manufacturers that don’t experience processing and filling direct-to-consumer orders. It’s important to consider what’s involved and various process options, including outsourcing, before launching an e-commerce operation. 

Efficiency is Important to Both Brands and Shoppers

Returned goods must be inspected, re-packaged if necessary, and returned to inventory as quickly as possible so they can be purchased again. Getting returns back into inventory immediately is particularly important with popular items, merchandise with a short selling season, and during the intense holiday selling season. 

An effective reverse logistics process goes beyond getting sellable merchandise back into inventory quickly. It has an impact on brand loyalty, too. According to the Narvar Consumer Report 2018, customers are more likely to buy from you again if it’s easy to return merchandise. Of the nearly 70 percent of surveyed consumers who described their recent e-commerce return experience as easy or very easy, almost all – 96 percent – said they’d shop with that retailer again because of that ease. 

A successful reverse logistics process, then, needs to work for both the e-tailer and its customers. Consumers want an easy returns process; manufacturers want and need one that’s affordable and effective. 

Reverse Logistics Requirements

To meet these requirements, companies take into account:

  • Physical requirements: The reverse 
    logistics operation needs a  separate space dedicated to receiving, inspecting, and processing returns. 
  • Product inspection: Every returned item needs to be inspected by trained staff to determine next steps. 
  • Inspection outcomes: Inspectors make next-step decisions based on product condition and consumer demand. Options include returning it to inventory immediately, replacing the packaging, repairing or refurbishing, donating, and discarding.  

Manufacturers new to e-commerce often lack the expertise needed to manage these and other aspects of an efficient reverse logistics operation. Outsourcing the function to trusted partners allows brands to master the order fulfillment processes and identify trends and patterns in returns before deciding whether to bring reverse logistics in-house. 

Managing Reverse Logistics Costs

An experienced enterprise logistics provider can also positively impact on reverse logistics expenses. When working with an omni-channel accessories company to refine its online shopping and returns experience, Transportation Insight was able to help the company reduce its overall transportation spending by 21 percent. In addition, Transportation Insight’s solution helped the company marry parcel costs with actual product costs to determine net profit on every product shipped.

Brands continue to look for ways to reduce the number of returns and the associated transportation expenses. One major online apparel retailer is working to reduce the number of returns by doing more before the purchase to help consumers feel confident that they’re ordering the right size.

In situations involving heavy home products such as furniture and appliances, companies are getting creative. To reduce the number of deliveries rejected and returned because of damage, some manufacturers unbox and inspect the merchandise in regional fulfillment centers before home delivery. In other situations, delivery personnel are empowered to negotiate with the customer during delivery to resolve potential problems in a way that reduces the return rate. 

E-commerce businesses need more than a reverse logistics process – they need one that encourages consumers to continue to buy from them, gets goods returned as cost-effectively as possible, and restores merchandise to inventory quickly. 

Ready to learn how manufacturers can create an efficient and effective e-commerce program that includes reverse logistics? Download Transportation Insight’s e-commerce guide, “Start the Cart: A Manufacturer’s Guide to Achieving E-Commerce Fulfillment Excellence.”