April 2, 2014, 11:07 AM

Bursting at the seams

Many online shoppers received Christmas orders late in December, highlighting the strain growth is putting on the e-retail fulfillment infrastructure. Retailers are working to prevent a recurrence this year.

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When many online shoppers did not get the items they ordered in time for Christmas, front-page newspaper stories in late December immediately pointed fingers at delivery services UPS Inc. and FedEx Corp. UPS conceded that the 14% increase it saw in average daily package volume over the prior year was double what the company had projected, and overwhelmed its capacity. FedEx maintained it essentially met its commitments, and suggested many retailers fell short in getting last-minute orders out the door.

While FedEx may not have won many friends with those comments, there is evidence that online retailers were at least in part to blame, especially those that extended their shipping deadlines to within a couple of days of Christmas. Retail consulting firm Kurt Salmon studied more than 175 orders placed on the last day for which a retailer promised Dec. 24 delivery and found 15% did not arrive on time—and that 56% of the delays were the retailer's fault, mainly due to internal processing errors or a failure to upgrade to a faster shipping method.

Strains showed up earlier in the holiday season. On the first Monday after Thanksgiving, commonly called Cyber Monday and the biggest online sales day of 2013, only 40% of orders shipped from a warehouse within one day, compared to 53% within one day on Cyber Monday 2012, according to a study of some 230 retailers by fulfillment vendor Innotrac Corp. That it took longer to get orders out the door suggests fulfillment operations aren't keeping pace with sales growth.

Fulfillment was not only slow, but also sloppy. Roughly 10% of packages delivered by all carriers in November and December arrived damaged, according to an analysis of 1,006 packages by customer service research firm StellaService Inc. FedEx chairman Fred Smith said last month most damage stems from faulty packaging, again putting the blame on retailers' fulfillment operations.

Not that UPS and FedEx always got the job done once they had a package in hand. But the delays were mainly concentrated in last-minute orders, says Satish Jindel, president of shipping consultancy SJ Consulting Group Inc., which also provides ShipMatrix fulfillment software. While both carriers maintained near-perfect on-time deliveries for ground shipping on Christmas Eve, Jindel says delays showed up in express deliveries. On Dec. 24, UPS Express delivered 83.0% of packages on time, versus 96.6% on Christmas Eve 2012, according to ShipMatrix data; FedEx Express posted a 90.0% on-time rate on Dec. 24, 2013, versus 97.6% in 2012.

Higher volumes of last-minute orders no doubt contributed to the poorer performance. SJC estimates carriers delivered some 73 million packages on Dec. 24—roughly 31 million by the U.S. Postal Service, 26.4 million by UPS, 14.4 million by FedEx and 1.0 million by smaller companies—100% more than on a normal day. "The volume increase for the same day in 2012 was about 50% more than a normal day," Jindel says.

As retailers consider how to avoid disappointing shoppers next Christmas, rethinking how late they accept web orders is high on the list.

"We all have to be more realistic as to what we can get delivered those last few days before Christmas," Kohl's Corp. chief financial officer Wesley McDonald told analysts in February. Kohl's admits it disappointed many online shoppers in the last two weeks before Christmas, although it has not said how many. UPS says more than 70 e-retailers took orders up to late on Dec. 23 for next-day delivery.

While every retailer wants to book every order possible, the past holiday season made it clear that e-retailers have to take account of the steady growth in online sales, which shows no sign of abating. U.S. online retail sales grew at a compound annual rate of around 16.3% for the decade through 2013, per U.S. Department of Commerce statistics, including 16.9% last year.

Each additional package that must be delivered to an online shopper stretches the e-commerce infrastructure—warehouses, parcel carriers, inventory management systems and people. As last season's delays illustrate, it sometimes stretches so far it snaps. To prevent that from happening again in 2014, retailers are looking at the investments they need to make to handle growing demand, and how they can make every aspect of their fulfillment operations more efficient. Along the way, they're occasionally stumbling into successes they likely would not have enjoyed without these changes.

The two major shipping services, UPS and FedEx, will play a big role again in the upcoming season, and executives of both have addressed what they are doing to improve performance.

UPS, which added 30,000 additional temporary workers as the 2013 holiday season unfolded in addition to the 55,000 temporaries already hired, says it will invest $500 million to expand capacity and modernize its delivery hubs in 2014. In addition, chief operating officer David Abney told analysts, "We will begin with increased collaboration with high-impact customers to further develop predictive models that incorporate changing consumer behavior and sales promotions. With a better understanding of the impact these customers will have on our network, UPS will be prepared to make the necessary adjustments."

The shipping carrier also plans to improve its technology and communications with retailers to have more information about shipments, Abney said. Many containers of packages were dropped at UPS facilities without the vendor knowing what was inside, a problem it aims to fix for next year, he added. UPS will also invest in facility expansion, process automation, job simplification and new technology, he said. For example, by the end of 2014, 45% of UPS drivers will be using a sophisticated routing technology that the shipping carrier currently is developing.

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