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Do you need to benchmark your retail and ecommerce logistics costs?

With logistics costs typically higher for ecommerce than store retail (5%-15% and 1%-5% of retail sales respectively) and sales increasingly moving to the ecommerce channel, there is a growing focus on the cost to serve. Competitive logistics costs are now a core enabler of a profitable customer proposition.

For retailers, it is hard to know how their logistics costs compare with their competitors’ costs, so a benchmarking exercise (carried out by a third party) can prove very insightful.

Successful benchmarking requires two core parts:

  • Normalising costs, so that the costs are fully comparable. Ensuring that all relevant costs are included and that costs are measured in the same way across different companies is not straightforward; it takes time and some detailed discussions to get right.
  • Choosing a relevant competitor set. The competitors need to be in the same category and of reasonable scale. For example, fashion logistics has very different characteristics from grocery, ecommerce is very different from retail, and they need to be benchmarked separately.

There are five factors that impact on costs, which in the short term are hard to change:

  1. Network model. For example, a multi-centre, regional distribution model will typically have lower transport costs and higher warehousing costs than a single centre, national distribution model.
  2. Range (assortment) size. For example, the high volume, limited assortment operations of the discounters enable significant picking and transport efficiencies, and these are reflected in the logistics costs.
  3. Warehouse location. Wages vary across the UK, and parts of the South East and various logistics ‘hotspots’ have to pay higher wages to attract and retain staff.
  4. Order and delivery size. Smaller orders and deliveries incur a higher transport cost per item than larger orders.
  5. Warehouse lifecycle. Typically, for a growing retailer, a new warehouse is only partly used as it is sized for growth. The additional fixed cost of this space has a significant impact on costs when compared with a ‘full’ warehouse.

Taking into account these factors, benchmarking reveals five trends:

  1. There is very little cost difference between the average automated warehouses and the best manual warehouses. Good manual operations have very focused management, workforce incentive schemes and simple optimised operations, and therefore very low cost. Some retail automated warehouses have been poorly designed and/or not implemented well, and so do not achieve some of the hoped-for productivity.
  2. Within fashion and general merchandise ecommerce, online only retailers are significantly lower cost than omni-channel retailers. Online only retailers optimise product presentation to suit online picking, whereas omni-channel retailers need product to be both retail- and online-ready, and this drives additional tasks in the warehouse.
  3. Demand peak and service offer drive cost. Typically, peak-week demand is compared to average-week demand, and when this ratio starts to move above 2 to 1, costs increase due to a necessary increase in capacity. The trend towards later ecommerce order cut-off, for next day delivery or collection, is also adding cost, as these services increase demand for very short periods across the supply chain and therefore require capacity that is not used during the rest of the day.
  4. Relatively commoditised services (such as outbound and returns ecommerce parcel services) have much greater cost differences than expected, which suggests that some retailers are smarter about parcel streaming and negotiate better with their third parties.
  5. Lastly and most importantly, the average logistics costs is 50% to 100% more expensive than best in class, and the worst performer is 200% to 300% more costly than the best. The opportunity to improve logistics costs for many retailers is typically fairly large, with potential savings of around 0.5%–1% of retail sales, all of which flows through to the bottom line.

Benchmarking for most retailers reveals significant opportunities to reduce costs, and typically is the start point for a major cost reduction programme, delivering strong bottom line benefit.

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