Executive Briefings

Profitable Home Delivery - A Prerequisite in Omnichannel World

Analyst Insight: Too many retailers, wholesalers and manufacturers are in a race to the bottom, when it comes to what they charge for shipping. This is not sustainable over the long run. Those that create their own granular, real-time intelligence about where they hold inventory, understand total fulfillment costs, and have the ability to dynamically steer customers to the most profitable options, will be able to satisfy and attract customers, while creating profitable order deliveries. - Bill McBeath, Chief Research Officer, ChainLink Research

Profitable Home Delivery - A Prerequisite in Omnichannel World

As omnichannel excellence has become table stakes for retailers and manufacturers, consumers' expectations about home delivery keep growing, fueled by fierce competition and by many retailers offering free or low-cost shipping, in every shorter time frames (e.g., next-day, same-day), to lure shoppers. In many cases, their current approach is not profitable or sustainable. Thus, the ability to profitably offer attractive delivery options is becoming more and more important.

The formulation of a profitable delivery strategy requires retailers and wholesalers to take into consideration the full range of costs, including DC operations, store fulfillment costs, inventory carrying costs and inventory optimization strategies, transportation costs, service and installation costs, call center operations, dispatching, and the information systems required to support all these operations. Those who better understand the expected demand patterns—not just how many of each item customers are going to buy but also where and how they will want them delivered—and understand the impact of all these cost drivers, can better position inventory to minimize the cost of fulfilling orders. Perhaps more important, they can incentivize customers to choose options that are most profitable for the retailer.

More advanced retailers have dynamic, rather than static systems, that can adjust these incentives as orders are placed, taking into account current conditions such as availability and location of inventory, already planned deliveries near the customer, and other factors. In the case of home delivery via the retailers’ own fleet, continuous optimization (offering the customer a set of delivery options at the point that the order is taken that are profitable for the retailer) is a promising approach being done by some retailers.

These are advanced practices, many of them requiring new technologies and practices. Furthermore, the very definition of omnichannel and the ways in which customers expect to be served, are continually evolving and morphing. Thus, profitable delivery is a journey, not a destination.

The Outlook

The financial pressures will continue to increase on those retailers who persist in offering unprofitable delivery options. We are already seeing some retailers backing off from giving away too much. But the real winners will be those retailers who can understand true total costs and put in place smarter inventory and fulfillment strategies, as well as the intelligence and systems that maximize the customers’ options (perception of choice), while steering demand to profitable delivery options.

As omnichannel excellence has become table stakes for retailers and manufacturers, consumers' expectations about home delivery keep growing, fueled by fierce competition and by many retailers offering free or low-cost shipping, in every shorter time frames (e.g., next-day, same-day), to lure shoppers. In many cases, their current approach is not profitable or sustainable. Thus, the ability to profitably offer attractive delivery options is becoming more and more important.

The formulation of a profitable delivery strategy requires retailers and wholesalers to take into consideration the full range of costs, including DC operations, store fulfillment costs, inventory carrying costs and inventory optimization strategies, transportation costs, service and installation costs, call center operations, dispatching, and the information systems required to support all these operations. Those who better understand the expected demand patterns—not just how many of each item customers are going to buy but also where and how they will want them delivered—and understand the impact of all these cost drivers, can better position inventory to minimize the cost of fulfilling orders. Perhaps more important, they can incentivize customers to choose options that are most profitable for the retailer.

More advanced retailers have dynamic, rather than static systems, that can adjust these incentives as orders are placed, taking into account current conditions such as availability and location of inventory, already planned deliveries near the customer, and other factors. In the case of home delivery via the retailers’ own fleet, continuous optimization (offering the customer a set of delivery options at the point that the order is taken that are profitable for the retailer) is a promising approach being done by some retailers.

These are advanced practices, many of them requiring new technologies and practices. Furthermore, the very definition of omnichannel and the ways in which customers expect to be served, are continually evolving and morphing. Thus, profitable delivery is a journey, not a destination.

The Outlook

The financial pressures will continue to increase on those retailers who persist in offering unprofitable delivery options. We are already seeing some retailers backing off from giving away too much. But the real winners will be those retailers who can understand true total costs and put in place smarter inventory and fulfillment strategies, as well as the intelligence and systems that maximize the customers’ options (perception of choice), while steering demand to profitable delivery options.

Profitable Home Delivery - A Prerequisite in Omnichannel World