( This article is excerpted from the complimentary report
Optimizing the Customer Experience with Exceptional Home Delivery,
available for download here. )
In part one of this series, we looked at the myth of free shipping and how the convergence of etailer and retailer is creating challenges in profitably delivering while meeting customer expectations. Here in part two, we look at how continuous optimization can help create profitable home delivery, by giving the customer a set of choices at the time they place an order, designed to incent them to pick optimal delivery choices.
In Home Delivery, the Customer’s Experience Starts While They Are Still Shopping
Nor does it end when the truck is on the road … and maybe not even when the order arrives —
Creating a home delivery process that works for retailers, service providers, and of course, customers, is an integrative process of learning and refining. So at the outset it needs to be said that ideas about what will work, what the service offerings and policies might be, and the whole definition of Omni-channel business for a given retailer may change over time. That should be expected. Retail competitors are offering new approaches — some will stick and some will not. And ‘why not’ is due ultimately to the lack of profit1 as well as changing customer tastes and retail business models.
What, then, needs to be considered in the home delivery process?2 In the new Omni-order world, retailers need to offer their customers various options (since customer needs differ) while the customer is evaluating merchandise. Behind the scenes, concurrently, the system is evaluating many options.
It is critical to understand that the cost of these offerings is a highly variable factor. For example, one week there may be only one customer in a particular territory and thus, that one order has to bear the burden of the entire cost of that route. Yet on another week there may be twenty customers, significantly reducing the cost per order. Or one day a customer may order a pair of shoes — small parcel — and another day, an entire home entertainment system that they wish to have installed, requiring a two-man team and a larger truck. These and other types of factors will make the cost of that route to the retailer vary from day to day.
Beyond the view of orders, we know that in-transit changes will happen — too much traffic, cancelled or new orders, and so on. We have to be prepared for the unexpected. So we say optimization never really stops until the delivery is finally made.
Think about it. That delivery is not just miles on a map, but a mesh of information and decisions that need to be made:
- What are the terms of the order?
- When and where will the merchandise be ready for shipment?
- How will it be fulfilled — the type of equipment (van, truck, refrigerated, and so on)?
- Personnel (e.g., two people to carry in, setup, and install?)
- Which carrier may provide this service best?
- How do I poll other parties, such as fulfillment services or suppliers, on inventory availability and then prepare them to fulfill?
Order administration today is more than checking customer credit and payment; it includes all this plus scheduling the delivery with the customer and all the players who are involved in fulfillment.
For the carrier, although this may be a standard route, it may only be the beginning of the selling period with the possibility of more customer orders. That can present opportunities to leverage routes to provide more deliveries and thus increase the revenue and profit for that route.
Many retailers have their own private or dedicated fleet, but may also use for-hire carriers as well as parcel services. When optimizing and planning a profitable home delivery, all of these elements need to be taken into account. In an always-on world, orders can happen whenever. Hence, scheduling and pricing methods also have to be always on, with the ability to offer services and dynamically price them for each custom event. Old models of creating and optimizing routes after a cut-off period just can’t support this customer-centric way of working. That is why we say the system has to be continuous. Continuous optimization is a concurrent analytic, always running behind the scenes to determine the best options for the customer, retailers and logistics. In Figure 1, we walk through some elements of this continuously optimizing process.
Continuous Optimization — How It Works
Widening the Vista
Often in optimization we narrow choices, but in a continuous model we are opening the choices with a more inclusive view of available options — a wider decision space — that the software can consider in offering a profitable service to the customer. A shorter decision window (order-to-delivery cycle time) may limit the decision space, but by using continuous delivery optimization, retailers can still open up the vista to more possibilities such as additional carriers, which may lead to many affordable options.3 Often, organizations have fixed contracts with certain carriers or their own fleets, but as more and more customers choose home delivery, those select few just might not be enough.
Retailers who do use parcel carriers need more fine tuning and understanding of today’s parcel carriers’ rating systems4 and their competencies in different locales. Retailers need to use this data not only to design optimal services for consumers, but to rethink their pack and ship methods. Significant dollars are lost here not just in faulty decisions about delivery options, but packing methods. Even a few pennies saved using less cardboard or mailers add up.
Make Policies Dynamic
Retailers have developed policies governing the services they provide and at what price. However, these policies are frequently based on inaccurate and outmoded cost structures. Rarely have we seen a retailer who has a costing system that evaluates the actual cost per order and uses that to determine polices. Regardless, as mentioned before, route costs are highly variable.
But there is more to consider. Logistics systems, in the past, have not been integrated to customer value factors such as order histories, the customer value over time, or other data analytics that are available today in our open web world that might indicate a highly prized new customer opportunity. So those orders judged solely upon dollar volume may be missing these customer loyalty or new customer opportunity factors.5
Policies have been narrow and rigid, tied merely to fixed thresholds — over fifty dollars, a hundred dollars, and so on for free shipping, for example. Hence, the methods for judging the service level offered per order need to be updated to include not just this sale, but possibly all the sales and the cost to deliver per order/per item/per customer.
Today the opportunity exists for more dynamism. In fact, it is required. As we keep emphasizing, the pressure for free or fast puts a burden on the retailer. But with a continuous model, an order can be scheduled into existing plans available with very low cost. Then the retailer can assess whether conditions can support a fast or free shipment and, through analytics, who best qualifies for that free shipment. That can be done only with that more integrated and real-time view of the order and within the context of a broad array of choices across many routes and rates (cost to serve).6
Optimize the Offerings
In the new world, customers are online evaluating the product and service. Thus, in the background, retailers should also be analyzing and presenting options in real-time, showing alternative appointment schedules, services, and prices. This is true customer service. The old processes did not work this way and in fact, most retailers still don’t work this way. They can’t, because logistics processes and systems are divorced from online catalogues and commerce. Even within their logistics systems there is no access to their own or their carrier’s current delivery plan. Their plans are only created the night before the truck leaves. This leaves a very narrow decision space and it offers the retailer little option but to go with an assumption of service without knowing the actual cost to serve.
And since the carrier actually has no plan, the question remains: Can they provide reliable and consistent service?
Carriers are regularly over or under capacity because of the narrow decision space in which to optimize their routes and schedules. And if they don’t have the right alignment of resources, services will suffer. Hence, the retailer who uses third parties of any type needs to ensure that what they are offering the customer can actually occur. It is one thing to say, “Here is a special offer,” but another to deliver on it.
If the commerce/retailer’s system does not know what its options or availability are, the retailer can’t really offer it. Connectivity through mobility,7 rapid planning, and monitoring of third parties all the way through to post-delivery provides an advantage over the current disconnected model between the retailer and the logistics providers.
In the final installment of this series, part three, we will look at other practices that can help achieve profitable home delivery excellence, including integrating logistics into commerce platforms, broadening and integrating mode selection/choices, and integrating inbound and outbound transportation planning and execution.
1 It is worth noting Amazon’s quiet change of shipping policies. Prime has no assumption of free for every item anymore. — Return to article text above
2 For further reading we refer you to: Home Delivery — More Sales/Less Cost, where we discuss the business aspects of home delivery; Always On where various optimization approaches are discussed; and Winning at Home Delivery, in which we discuss the technology requirements. — Return to article text above
3 For example, Home Depot’s approach can evaluate, from customer location, which of their major fulfillment centers or stores to ship from to optimize the customers’ time-sensitive requirements. Based on the goods to be shipped plus location, they can choose parcel carriers to carry out same-day shipping or use their own fleet. — Return to article text above
4These are based upon dimensions, weight, and so on. Different parcel carriers have advantages and disadvantages based on these factors, thus impacting cost and service. — Return to article text above
5 In fact, dollar value very often does not correlate to the true value of the order. Consider customers who are buying promotional or marked down items: the total order may be high, but there is no margin. This plus free shipping may mean the customer is getting goods below wholesale cost. — Return to article text above
6 Of course, if the retailer is using a parcel carrier, they do have a fixed price. But again, this is not tied to the real cost of logistics or what it could be. — Return to article text above
7With small carriers, mobile updates are sufficient to keep retailers and customers informed of locations, shipments, and delivery to customer. — Return to article text above
To view other articles from this issue of the brief, click here.