How to Make Free Shipping Profitable (Even With COVID-19), Part 7

There are hidden costs in order fulfillment that can be minimized or eliminated by streamlining your supply chain. Options such as buy online, pick up in-store (BOPIS) and ship-from-store are increasingly popular among merchants as lower-cost fulfillment, especially during the COVID-19 pandemic. Any cost reduction within the supply chain can ease the burden of offering free shipping to cash-strapped end customers. In part seven of this 10-part series, I cover e-commerce-friendly supply chain improvements that would help you offer free shipping profitably, even during these difficult economic times. (Here are parts one, two, three, four, five and six in this multipart series.)

1. Ship-From-Store

Offering free one- or two-day shipping is tough if you don't have multiple fulfillment locations. If your orders cannot reach your customers quickly by ground shipping, then you would end up paying double or more to use the faster air service. However, merchants with brick-and-mortar stores can enable physical stores to do fulfillment. Through this method, store associates pick, pack and ship online orders. This is exactly what lululemon athletica is doing during the COVID-19 pandemic (its stores have been closed since March 16). lululemon plans to restaff a few stores to fulfill online orders. Ship-from-store can also improve the profits and productivity of physical stores during normal times because store employees can process online orders during slow periods of the day, and move inventory in stores faster.

Leading brick-and-mortar retailers such as Best Buy and Target have adopted ship-from-store very successfully. A well-established nationwide footprint reduces costs and delivery time by shipping from the nearest store. Merchants typically use an order management system (OMS) that can determine which location should ship the order. An OMS analyzes inventory levels, delivery cost, and delivery time to make decisions.

Credit: Cahoot

Pros:

• Improve physical store productivity by fulfilling online orders during slow hours.
• Merchants can reduce costs and increase delivery times by shipping from stores closest to the customer.
• Shared inventory reduces safety stock in case of split inventory.

Cons:

• It requires a robust technology that can sync inventory in real time for stores to power one- and two-day delivery.
• The physical spaces in stores need to be redesigned and retooled to enable the packaging and shipping of online orders.
• Additional training is needed for store employees.

2. Buy Online, Pick Up In-Store (BOPIS)

Another way merchants with physical stores can differentiate themselves is through in-store pickup. Store pickups allow customers the flexibility to get their items within the same day at a low cost to them and the merchant. It’s not free shipping per se, but a low-cost alternative that can also boost store traffic.

Store pickup works best for items that are needed quickly, like healthcare products during an illness or grocery items. BOPIS bypasses the shipping process, cutting delivery time from days to mere hours. Retailers with a high volume of store pickups, like Walmart, have recently introduced self-service package lockers to minimize additional staffing needs and wait times.

BOPIS is particularly suited to weathering the COVID-19 outbreak, as it can limit the time consumers spend in public areas, and merchants can continue operating even as home delivery services come under strain. Consumers are already shifting towards these services: BOPIS shopping grew 28 percent year-over-year in February, according to data from Adobe Analytics. This trend lays out a potential survival strategy for retailers to follow as coronavirus concerns grow. For example, Books-A-Million has just expanded its BOPIS service with a curbside option. Consumers can purchase books online and a store associate will bring them to their car when they arrive.

Credit: Walmart

Pros:

• Customers can get their products within hours.
• Eliminate shipping costs through store pickups.
• Store pickups drive more traffic to a retail location, which would entice additional sales.

Cons:

• Customers can get frustrated and dissatisfied if the pickup isn't convenient or takes a long time.
• Requires a robust inventory management system to check store inventory in real time.
• BOPIS requires store associates’ time to prepare orders accurately and efficiently.
• Like shipping from the store, it may require physical spaces to be redesigned or retooled to accommodate a special pickup area for BOPIS orders.

3. Just in Time (JIT) Inventory

Just-in-time (JIT) inventory stocking is a common inventory management technique and a lean methodology to increase efficiency. An excellent example of JIT in action is Zara, the fast-fashion brand. Zara only produces half of its line each season. Throughout the rest of the season, it designs and manufactures variations of popular models that sell well. To do this, Zara has invested in an extremely fast and reliable production process.

Applying Zara’s methods, sellers can quickly gather and process historical sales data to make better demand predictions. A good sourcing strategy with JIT concepts would minimize markdowns and dead inventory.

According to the March 23 survey of 1,300 international firms from RapidRatings, 59 percent of U.S. companies said they would be unable to continue shipments for more than two weeks after a production stoppage due to the coronavirus pandemic. The primary culprit is a cross-industry reliance on JIT manufacturing.

Pros:

• Lower inventory holding costs leading from smaller storage space requirement and less dead stock.
• Free up cash flow (money not used to stockpile inventory can be reinvested elsewhere).
• Capture trends quickly by testing the market and sourcing as needed.
• Less dead stock means less disposal/inventory return fees and markdowns.

Cons:

• Requires a very accurate estimation of demand to minimize stock-outs.
• Buying inventory frequently makes you more sensitive to price fluctuations; margins will slump if supply prices suddenly go up.
• Requires reliable suppliers and inbound deliveries to not fall behind schedule.

4. Drop-Shipping

Drop-shipping takes away the majority of your cost of storing and fulfilling items. Under this model, merchants forward the orders to suppliers, and the items get shipped directly to customers.

One of the big benefits of this model is the low investment and capital needed to start selling items. Merchants don’t stock the items in their warehouse, effectively making it a zero-inventory business. Drop-shipping can also help merchants with market testing for new products. You can quickly bolster your catalog while storing inventory only for your best-selling items.

However, the ease of getting started also results in many merchants selling the same thing. Intense competition drives the retail price down, and margins are typically slim on drop-ship items. Therefore, it’s tricky to offer free shipping for drop-ship items. To counter this, merchants can offer free shipping with a minimum order value. Another downside to drop-shipping is you don't have control over the fulfillment process, like marketing inserts, packaging, or limited shipping options.

With the Coronavirus pandemic, drop-shippers should prepare for fulfillment delays and make sure to get that message across to their customers. While merchants wait for factories to open back up in China, it's important to save as much money as possible during this time. Another way to change your drop-ship product strategy is to find new product opportunities due to the spreading virus. Products such as hand sanitizer, vitamins, supplements, masks, and other health-related items are a given, but also online grocery sales are booming.

Credit: Cahoot

Pros:

• The supplier handles all fulfillment operations, including shipping and returns.
• Less capital is required to start the business as the seller doesn't need to hold inventory.
• Operating costs are also lower since there's no need for warehouse or fulfillment facilities.
• It's easier to start an online business with drop-shipping.

Cons:

• Low margins, and sellers often compete on price because they’re selling the same products.
• Very few suppliers can support today’s one- and two-day delivery expectations.
• Drop-shipping offers little to no control in fulfillment, such as packing quality, shipping options, inserts, etc.
• Drop-shipping is frowned upon by leading marketplaces such as Amazon.com, and may lead to suspension or penalty.

5. Other Supply Chain Improvements

Mastering the supply chain is both an art and science. Whichever model(s) you settle on, the key is continuous improvement. Whether you’re a veteran or just starting, it's always good to step back and reassess your supply chain for improvements. Purposeful improvements in the supply chain can help you improve your cost structure and allow you to offer free shipping profitably.

Here are a few high-level recommendations:

• Optimize sourcing: As you scale your sales and increase your bargaining power, you should look beyond your current suppliers. From time to time, consider alternative suppliers that align with your selling strategy, which can fall in the spectrum from a cost leader to a high differentiator.
• Optimize fulfillment location: As your volumes grow, inbound and outbound freight becomes a significant cost. Being closer to your customers can save you money and delight them with faster shipping. On the other hand, being closer to your vendors will help you reduce lead time and inbound costs. Both factors should be considered in deciding the optimal fulfillment center location. In addition, some locations also enjoy cheaper labor costs and government incentives.
• Optimize on-hand inventory: More inventory allows you to grow sales faster with promotions without fear of going out of stock. However, item popularity/best-seller ranks fluctuate over time, and customer tastes change quickly. If you stockpile too much inventory, you might get stuck with piles of slow-moving product. As discussed above, JIT concepts and drop-shipping can be explored to minimize inventory accumulation. Also, having a robust demand planning process and tools are key to efficient inventory management.
• Optimize inventory distribution: Distributed warehousing is excellent for satisfying the customer expectation of free and fast shipping. However, the costs of splitting inventory are often overlooked. According to the square root law of safety stock, splitting inventory increases the safety stock requirements, which in turn will increase your total storage and operation costs.
• Optimize sales channels: It's a good practice for brands to sell through multiple channels simultaneously. You sell more by improving item availability and discoverability. Channels like Shopify, BigCommerce, Magento, eBay, Wish, and Walmart have less competition than Amazon, which has more than 8 million third-party sellers vying for customer attention worldwide. By comparison, Walmart only has about 33,000 third-party sellers (as of January 2020). Large Amazon sellers have a chance to be a bigger fish in a smaller pond on Walmart's marketplace.

Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer order fulfillment network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.