Many retailers view implementing a ship-from-store (SFS) capability as one of the pillars of omnichannel success, which it can be. But now that SFS has been around for a few years, many are looking at its end-to-end costs and benefits and thinking hard about how to best use it.
For most retailers, while enabling SFS is essential for success, it shouldn’t be a routine order fulfillment option for all items. For example, using SFS for some small, inexpensive or lightweight items can be cost prohibitive, and for merchandise that, once shipped, will need to be replenished back into the store, SFS adds handling costs without capturing incremental margin. In those and many other scenarios, SFS should be used only as a last resort.
Why? First, shipping charges are rising and SFS can compound this problem by often forcing an order to be split into multiple shipments coming from multiple stores or locations. For example, last holiday season, SFS packages contained 1.6 units per package versus 2.3 units per package for similar orders shipped from a fulfillment center, according to Kurt Salmon’s 2016 Omnichannel Fulfillment Study.
The second problem is equally challenging, because it adds labor costs in the form of an extra “touch” to each SFS order. When the sold merchandise is still in its primary selling window (not at markdown), a replacement unit will need to be replenished to the store from a distribution center or supplier. In that situation, the retailer pays for extra labor and packaging on the initial order, and then has to pay for additional transportation and labor to restock the item in the store—all without any additional margin lift to offset the extra expense. Conversely, in the case of seasonal goods, the margin opportunity to sell the item at full price, before markdown, can offset the extra packaging and labor costs, and there is no need for store replenishment.
Finally, there are a number of hidden costs that, while not quantified, are becoming easier to understand after a few years of shipping orders from stores. The most notable is the opportunity cost of taking associates off the floor and away from serving customers in order to fulfill orders. Many retailers have found ways to try to fit SFS activities in and around customer service needs, but that’s challenging in practice and hard to quantify operationally.
It’s important to mention that while omnichannel fulfillment options like buy online, pick up in store (BOPIS) are run on the same system as SFS, they can often be run much more profitably and can provide other benefits, like getting consumers into the store to increase basket size while eliminating shipping costs.
Not only does an overreliance on SFS end up costing retailers more in the short term, it can come back to bite them the following year as well. The majority of retailers currently systematically recognize an SFS order as an order that originated from that store, not online, so demand dictates that they should order that product back to that store the next time. Inventory is thereby misallocated again and the cycle continues.
All that said, there are circumstances where SFS can improve service, profitably sell through seasonal goods and help smooth peak demands on the supply chain. However, our recent work in the space shows that a cost-to-serve analysis is critical to determining the types of goods where SFS is a profitable venture— and where it’s not. Retailers have a complex set of priorities to balance, and a sophisticated methodology to help manage the margin on these transactions is critical to long-term profitable growth.
CASE STUDY: WEIGHING THE SFS PROS AND CONS
Issue: A national multibillion-dollar chain was building an omnichannel fulfillment strategy and wanted to understand the impact of SFS on its margins.
Solution: Kurt Salmon found that shipping and labor costs of store fulfillment were nearly 16% higher on average than those shipped from the fulfillment center (FC). Shipping charges for direct-to-consumer orders fulfilled via SFS were an average of 1%, or $.04, less per package than those fulfilled by an FC. However, actual labor costs of orders shipped from stores averaged 2.5 to 4 times higher than those fulfilled by the FC, negating the savings found by sourcing an order from a fulfillment store closer to the customer.
Result: The company built its strategy with this information in mind, resulting in a 20% reduction in overall shipping costs per unit.