Spring is upon us, but the holidays are still fresh in the minds of retailers as they look for ways to improve their customer service and order fulfillment performance in advance of the 2014 peak shipping season.

With retailers forecasting continued growth of e-commerce holiday sales—which in 2013 rose 9.3% year over year, according to the National Retail Federation—shipping and fulfillment issues are a chief concern, as delivery delays infuriated customers who were promised that the packages they ordered would arrive by Christmas.

But while most retailers are still struggling to meet consumer expectations, some standout companies have created inventory and communication processes that have allowed them to outshine the competition, Kurt Salmon found after partnering with StellaService to examine shipping, fulfillment and refund processes during the 2013 holiday season. Omnichannel retailing, it turns out, is both the challenge and the solution: On one hand, it’s forcing retailers to step up their game when it comes to rapidly fulfilling orders—whether that involves accurately forecasting the timing of deliveries or processing refunds for dissatisfied customers. On the other hand, integrating back-end processes in order to provide the seamless experience that customers now expect will help retailers keep up with demand and deliver a consistently high level of service, both online and in-store.

The season’s top performers when it came to shipping and refunds are highlighted below, alongside the problem areas and best practices that emerged. The methodology is detailed toward the end of this report.

Cyber Monday Standouts

Our analysis included a review of orders containing multiple items from over 70 retailers placed on Cyber Monday, the biggest online shopping day of the year, and then ranked the top retailers based on their average delivery times (the number of days elapsed between placing and receiving an order).

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What Makes Top Performers in Shipping Shine?

Retailers who ranked at the top of the list pulled out all the stops to offer fast and free shipping and to deliver an exceptional customer experience regardless of increased order volume.

Speed

Top performers excelled in quick turnaround, especially during crunch time, with the top five retailers on the list averaging 1.6 delivery days for multi-unit orders placed on Cyber Monday. The average delivery time across all retailers examined in the study during peak season (between Black Friday and Christmas) was nine days—including 3.4 days for processing and 5.5 days for shipping. In a prior shipping study, we found that during non-peak times, average delivery time dropped to six days, with processing averaging 1.5 days and shipping 4.5 days.

“Many retailers are still playing catch-up with the omnichannel movement and are investing heavily in their in-store Black Friday promotions, but aren’t similarly preparing for an influx of online shopping over the course of the Thanksgiving weekend,” said Michelle Bogan, a partner in Kurt Salmon’s Retail and Consumer Products Group. “For the past two years, online sales have outpaced in-store purchases during Thanksgiving weekend, and while Cyber Monday remains the biggest online shopping day of the year, Black Friday is quickly catching up.

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“This means Thanksgiving weekend is becoming one of the highest traffic times of the year for e-commerce, and for some retailers, the volume of orders can overwhelm their existing systems and slow down fulfillment until the weekend’s backlog has cleared,” she said. “Retailers at the top of their game, however, had adjusted their forecasts and prioritized resources to ensure that fulfillment kept up with demand.”

Presentation

During peak season, the top fulfillment retailers were focused on quality in addition to speed. Orders from Neiman Marcus, for example, were wrapped in tissue paper, and Zappos’ orders came with a handwritten “thank you.”

Such features are important, noted Bogan, because customers expect a human touch across channels. “One essential component in creating an effective, seamless omnichannel experience is ensuring that online customer service matches the standards set in-store,” she said. “Consumers want to know that there is a real person carefully handling their items and ensuring that they make it to their destination in great condition.”

Free Shipping

A growing number of retailers are adjusting their online order shipping policies during the holidays —and throughout the year—in order to meet rising consumer expectations and to remain competitive. A Shop.org survey conducted just prior to the 2013 holiday season found that more retailers were offering free shipping year-round than the prior year, and more than one-quarter were starting free shipping holiday promotions earlier due to the sluggish economy and its impact on consumer spending. While many retailers tout free shipping for a limited time or once orders reach a certain price threshold, top retailers including Zappos, Net-A-Porter— and, more recently, Neiman Marcus—offer it as a feature for all online orders.

A majority of retailers (70%) in our study offered free shipping with Cyber Monday orders. Indeed, retailers face intense competitive pressure for online shoppers during this time, and free shipping has proven to be a valuable tool in minimizing shopping cart abandonment. A 2013 consumer survey by Newgistics, a retail e-commerce solutions provider, found that 85% of shoppers admitted to not completing a purchase after selecting an item to order—and their top reason was the cost of shipping.

As such, reducing or eliminating shipping costs can serve as a competitive advantage, especially around the holidays. “But retailers ought to reevaluate when and how to effectively dangle free shipping as a feature and measure that against the potential hit to their margins,” said Bogan.

Distribution Method

Most of the purchases examined in the study were shipped from a retailer’s fulfillment center; only 14% of orders were shipped directly from stores. When retailers did ship from their stores, the average delivery time tended to be significantly shorter.

In the study, a staggering 38% of orders originated from two or more shipping points (including stores and distribution centers), indicating that some retailers did not have the necessary inventory or systems in place to efficiently fill orders. While most of these multilocation orders were filled across two or three shipping points, nearly 10% came from three or more locations.

“What we are seeing is a trend to leverage store inventory to ‘save the sale’ and maximize margins when a fulfillment center or a single store might not have the inventory to support the entire order,” Bogan observed.

Shipping multi-unit orders from multiple fulfillment centers creates significant cost challenges for retailers, adding expense and depressing margins. “When retailers fulfill orders through two fulfillment locations, shipping costs essentially double to account for the additional parcel shipped from a second location,” said Mike Gregory, partner and director of the Supply Chain practice at Kurt Salmon.

“Unfortunately, retailers can’t pass these costs through to the consumer, as that fundamentally violates the value promise of online shopping.”

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The study identified a second key inefficiency in the shipment process: Forty-two percent of multi-unit orders arrived in multiple packages originating from a single distribution center. “In some instances, multiple shipments may be unavoidable for items that are bulky or that cannot be packed with other orders,” noted Gregory. “However, in many of the cases we observed, the splitting of shipments was indicative of broader systems and fulfillment design issues that allowed items that could have been packaged together to ship separately.”

Such inefficiencies point to outdated inventory systems unable to keep up with consumer shopping habits. Online shopping allows customers to purchase items from anywhere; the challenge for retailers is being able to quickly identify where items are stored and, ideally, shipping them all at once to avoid sinking money into shipping additional packages. An efficient inventory system comprehensively tracks the availability of stock at both store locations and distribution centers, and it can nimbly identify those locations that can ship all units in a single order at the same time.

Such a system demands that a retailer have the capacity to ship product from its stores. In some cases, the store itself may be better stocked and better able to get a shipment out the door quickly. However, retailers must make significant investments in their ship-from-store programs to ensure that they are able to keep up with consumer demand in the same way a warehouse would. Using effective inventory tracking software and developing strong relationships with carriers are key to enabling in-store employees to keep up with online orders as effectively as their distribution center counterparts.

“Delivery partner relationships, which don’t usually exist at the store level or which aren’t tailored to meet the different turnaround time needs of ship-from-store, can heavily impact success,” said Bogan. “Moreover, inventory balance can be a challenge, with retailers struggling to find ways to effectively track their in-store inventory against what they have in their distribution centers.”

Shipping Delays: An Inside Job

Our study analyzed more than 175 online orders placed on the last day that retailers guaranteed delivery by Christmas and found that 15% of the orders did not reach their destinations in time. Most (83%) of the delays occurred with expedited one- or two-day shipments. While news headlines were quick to blame major carriers like UPS and FedEx, accusing them of being ill-prepared for high volume and poor weather, our study found that retailers were responsible for a majority (56%) of delays.

Retailer-originated delays occurred in 8.5% of all last-minute orders tracked in the study. Often, delays were the result of poor management of the fulfillment process or inventory issues. The most frequently cited issue was failure to upgrade an order’s shipping status (40%). For example, one retailer processed a ship-from-store order on December 19 for standard ground shipping, but the shipment was going from California to Connecticut, and the store staff failed to ensure that the shipping method would guarantee on-time delivery. In other cases, the retailer turned packages over to the carrier a day late, but did not appropriately upgrade the shipment type to ensure that the parcels made it to their destinations according to the customers’ selected timetable.

Last-Minute Shipping Stars

Despite the hype around delivery issues, more often than not, retailers successfully planned and executed last-minute holiday shipping campaigns. We identified the top five retailers who successfully delivered on orders placed at the latest ship dates for Christmas. These retailers are actively examining and constantly readjusting fulfillment strategies to minimize problems during peak selling periods. More importantly, they implicitly understand that many consumers shop later in the holiday season and that they must devote equal energy to serving these customers as they do to those who prefer to get their shopping done earlier.

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According to Debbie Fortnum, senior vice president of supply chain at Belk, “We expected the end of the holiday season would be more challenging from a fulfillment perspective because there was one less week between Thanksgiving and Christmas. But we were ready. We developed an integrated shipping plan, including volume expectations and timing, with our carrier partners that aligned with our promotional schedule. Our priority was delivering on our promise to shoppers, so careful preparation and coordination were key.”

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Preparing for the Next Peak Season

Retailers looking at shipping performance improvements for the next holiday season should consider fine-tuning the following areas:

Omnichannel Strategy

Customers expect a seamless experience when transitioning from a brick-and-mortar store presence to mobile and online sites.

“Traditional brick-and-mortar retailers are largely struggling with how to integrate and manage their supply chain to deliver a seamless experience,” said Gregory. “It’s easy for marketing to send a promotional email to customers highlighting last-minute shipping deadlines without a sense of what’s happening in their fulfillment centers. An acceptable practice has always been an aligned promotional plan communicated across all departments. In an omnichannel world, that plan cannot remain static. Promotional plans will need to account for near-real-time demand and capacity signals to ensure that they are achievable.”

Management of Shipping Process

As we discussed previously, the majority of shipping problems occurred with expedited one- or two-day shipments. Not surprisingly, our study found that the later the last ship date, the lower the success rate tended to be.

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“As more customers turn to e-commerce sales channels during the holidays, it’s important to set realistic expectations for customers and with carriers by conducting an honest evaluation of the capabilities necessary to achieve what is promised,” said Gregory. “The right processes and checkpoints must be in place—both at fulfillment centers and at the store—to make customer satisfaction a focal point from start to finish. Often, that requires better execution systems and planning tools to manage the process.”

Carrier Relationships

Carrier-originated shipment delays occurred in only 7% of the total last-minute orders our study examined. However, to the customer, the technical issues of whom to blame don’t matter; in the end, it’s the retailer’s reputation that is impacted.

“Most retailers have already begun working with their existing carriers on post-mortem reviews of the 2013 holiday season and are identifying ways to improve on their delivery model for the upcoming season,” said Gregory. “Nearly everyone is reevaluating their overall shipping strategy and trying to get their ducks in a row now.”

Forecasting

Some retailers may have been surprised by the uptick of online activity right before Christmas. But now that retailers are aware of the consumer expectation to order at the last minute, it’s important to adjust peak season forecasts to ensure seamless operations that account for a later influx of orders.

Post-Holiday Refunds

The study also tested and reviewed refund processes and speed with 50 retailers. Just as consumers have come to expect speedy deliveries, they also expect their returns to be processed quickly and easily. The retailers at the head of the pack on this front implemented streamlined processes in three key areas:

  1. Easing the process for the consumer. Shoppers don’t want to go out of their way to return merchandise. Best practices for simplifying the return process on the consumer end include sending prepaid return shipping labels with all orders and offering convenient carrier options (such as the choice to use a private carrier, like FedEx, or the postal service).
  2. Rapid transportation. Retailers cannot process returns until the merchandise arrives at the appropriate facility. For many companies, this is a multistep process that involves many checkpoints along the way, ultimately slowing down the customer’s refund. The more effective retailers, however, found ways to streamline the transportation time and reduce obstacles. For example, limiting the number of carriers who touch the process and strategically locating returns processing centers throughout the country may allow shipments to make it back to the retailer more quickly.
  3. Keeping up with the influx. It takes time to process a return once it arrives at the appropriate facility; not only must the retailer handle the financial transaction of refunding the consumer, but they must also process the merchandise back into circulation or out of stock. The volume of returns retailers must turn around increases substantially during the holiday season. Speedy retailers implemented systems and software that allowed them to process both phases of the return swiftly, helping to clear the holiday season backlog and keep operations moving.

“Consumers who are ultimately unhappy with their purchases—perhaps it wasn’t the right size, or it was a gift they didn’t much like—want their dollars back in their pocket as soon as possible,” said Gregory. “And it behooves retailers to cater to this expectation. The sooner the customer has his or her money back, the sooner they can think about their next purchase and put those funds toward a new, more satisfactory purchase.”

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Omnichannel has opened new doors for shoppers to make purchases anywhere at any time. Those retailers who truly succeeded during the peak season in terms of both customer satisfaction and sales performance not only anticipated the increase in demand omnichannel would cause, but also implemented systems to ensure that the promise of omnichannel—speedy, highquality service—was kept. Applying the lessons of sales channel integration from the consumer side to the fulfillment side ultimately helped the successful retailers meet or exceed customers’ expectations while identifying efficiencies that protected sales margins.

31 March 2014