January 31, 2008, 12:00 AM

Time & Money

Thanks to integrated systems, better logistics and stricter cost control, many merchants now view fulfillment and shipping as a profit center.

Time is money, especially in fulfillment where retailers face tight deadlines and cost pressure to get orders out the door on time. But having made the time and committed the money to build automated and complex order processing systems, retailers no longer see their fulfillment hub as just overhead. Instead, thanks to highly integrated systems, better logistics planning and stricter cost control, many merchants now view fulfillment and shipping as a profit center, according to Internet Retailer’s latest monthly survey.

The survey-this one on order management and fulfillment-reveals that web retailers are finding new and better ways to keep processing costs down while raising the rates they charge customers for shipping orders. 53.9% of chain retailers, catalogers, web merchants and consumer brand manufacturers taking part in the survey spend $6 or less to process and ship an order, compared with 54.5% of retailers participating in a similar Internet Retailer study two years ago.

At the same time retailers are charging higher shipping rates. The survey finds that 72.1% of merchants now charge $6 and above to ship an order, up from 59.1% in 2006. Higher shipping fees that cover basic labor and transportation costs and generate bigger profits are a direct result of the cost efficiencies and automation retailers are applying to order processing and fulfillment.

“More merchants are running a profitable fulfillment department because they are doing a better job of crunching the numbers and looking for even more sophisticated methods to improve warehouse management and logistics,” says Brian Neale, senior manager with Sedlak Management Consultants Inc., a Highland Hills, Ohio, retail logistics and distribution planning company. “Web retailers are making money on shipping because their systems are integrated and they know how to weed out unnecessary costs and procedures.”

Systems integration

In recent years, retailers have improved fulfillment operations by integrating e-commerce platforms to customer service operations and other back-end supply chain, inventory management and logistics planning systems. As a result the survey finds that many web merchants can now process and ship orders in less time.

The survey was e-mailed in early January to all subscribers of IRNewsLink, the magazine’s e-newsletter, and all responses were collected and analyzed by Vovici Corp., which has partnered with Internet Retailer in a series of surveys on the e-retailing industry. The survey, which summarized answers from 53 chain retailers, 39 catalog companies, 169 virtual merchants and 34 consumer brand manufacturers, finds that 81% of merchants now process and ship orders in just two business days, including 51.1% within one business day.

Better internal systems integration is one measure driving more efficient order processing. More than three-fourths of retailers taking part in the research-77.8%-operate their fulfillment department in house. 67% have order management applications integrated with other e-commerce and data reporting applications.

The survey finds that retailers are utilizing a wider variety of tools and procedures to expedite fulfillment. For example, more retailers are now using real-time reporting tools linked to logistics records stored in multiple databases to ship items at the lowest possible rate. “If a merchant has universal systems and online reporting tools, they are using those tools to ship smarter,” says Neale. “They can predict package weights, analyze carton and envelope sizes and use logistics to determine the most cost-efficient shipping scenario.”

A customer favorite

Another area where retailers are controlling costs and enhancing profits is by limiting free holiday shipping and raising the threshold on the amount customers must spend before the merchant will ship an order at no charge. Free shipping is a customer favorite and the top incentive many retailers use to drive holiday sales. But this past Christmas, driven by rising fuel costs and other factors, it’s clear that more merchants offered less unrestricted free shipping.

For example, 72.5% of merchants taking part in the Internet Retailer survey set a minimum amount that customers had to spend in order to qualify for free holiday shipping. Of those merchants, 27% required their customers to spend at least $100, 28% required a minimum purchase of $76 to $100, 26%, $51 to $75, 12%, $26 to $50. Only 7% paid for shipping if the customer spent $25 or less.

Among specific groups, the survey shows that virtual merchants were the largest category of online retailers that required shoppers to spend more before their order was shipped at no charge. The survey shows that 85.2% of virtual merchants required customers to spend at least $51 to qualify for free shipping, compared with 83.3% of catalogers, 81.6% of consumer brand manufacturers and 74% of chain retailers.

“More web merchants are keeping their fulfillment operations running in the black because they are scrutinizing when it makes sense to offer free holiday shipping and under what conditions,” says Al Sambar, principal and analyst with Kurt Salmon Associates Inc., a retail and consumer brand manufacturer supply chain management and business operations consulting firm. “Retailers aren’t just rolling packages out to the loading dock and then telling delivery companies to take it from there. With programs such as free holiday shipping, they are taking a harder look at their business conditions and determining the best prices and procedures that boost profitability.”

Multiple carriers

To diversify their shipping operation and find the best rates, web merchants are working with multiple carriers. The survey finds that 71.2% of retailers ship orders using multiple delivery companies, with 44.4% of merchants listing UPS as their most frequently used carrier, followed by the U.S. Postal Service at 27.5%, FedEx at 18.3% and DHL International Ltd. at 4.9%. Retailers are also adding customer service tools to their web sites, but not looking to outsource their order management applications and fulfillment departments to an outside third party.

Of the retailers participating in the survey, only 36.6% use an outside order management system and only 23.3% expect to install a new vendor-supplied application within one year. Many retailers also aren’t expecting to replace their internal shipping department through outsourcing. The survey finds that only 18.8% of merchants plan to replace their current fulfillment provider in the next 12 months. But an astonishing 43.9% of merchants expect to open a new facility.

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