Many retailers make even more than half of their annual profits in the last quarter of the year, or rather the period between the beginning of November and December 23. This regularity applies to both traditional and online retailers and is all the more evident in the case of businesses associated with gift purchases or events taking place around Christmas. Everyone is rubbing their hands counting on the highest possible revenues. You will also need to add bills for logistics services to the balance sheet – whether from couriers or logistics operators or settle internal warehouse costs reliably.
The logistics sector is the group of entities that, while also rubbing their hands counting on a significant increase in revenues, suffers from increased blood pressure and headache resulting from challenges that it has to face in such a short period. Logistics is an industry that likes peace, planning and rational activities. The commercial fever and its requirements clearly turn this calmness into a storm and cause numerous turbulences – both organizational and financial.
Long-term contracts for retail or e-commerce logistics are based on averaged data on the number of operations or the volume of warehousing. The prospect of a short-term increase of these indicators by 200, 300 percent and sometimes more is a challenge for logistics specialists.
Let’s start with the warehouse space. If a warehouse is able to absorb 200 percent more goods without problems – it means that for the rest of the year it is often unused and is not cost-effective. If a warehouse is optimally stocked on a daily basis (80-85 percent) – it will not be able to absorb surplus goods without threatening nominal operational efficiency during a period of increased activity.
It is true that the larger the warehouse, the easier it is to stuff an additional 2-3 thousand pallets for a short time (in blocks, alleys, storage areas). But these activities can have a very negative impact on the smoothness of operations and even on the safety of employees. Of course, when we deal with goods from local suppliers – it makes the most sense to fragment the supplies and replenish stocks in batches optimal for business continuity. However, in the case of imports, e.g. from the Far East, this solution is not an option.
We then face the challenge of short-term sublease of additional space (preferably in the same warehouse complex), or we try to stuff the maximum amount of goods in the space we own. Both solutions involve costs and risks. Additional space will often be more expensive than the current one, and overfilling your own warehouse will result in a decrease in pick & pack performance and may lead to potential accidents.
The situation is similar when it comes to operations. Agreements usually contain a certain level of SLA (Service Level Agreement) specifying the expected performance of the logistics operator and deadlines of order fulfillment. Sometimes these contracts also provide for seasonal fluctuations, so in order to properly implement such a contract, the operator must be prepared to handle significantly increased traffic. However, even in the case of contracts with permanent SLA, failure to efficiently service the customer’s “sales hikes” may not be associated with contractual penalties, but will result in a loss of trust and may become a reason for changing the operator in the future. Customer and consumer loyalty is fragile. If we give them reasons to be dissatisfied, even if they are to blame, we will suffer dire consequences.
A story of a courier company, that has been indicated in surveys as the best-perceived courier for e-commerce, is a good example. All it took was one season in which thousands of consumers did not receive their packages before Christmas and the following year the company dropped to the second place in the ranking (data from Gemius reports: E-commerce in Poland from 2016-2019). It did not matter that customers ordered parcels at the last minute, or that they themselves chose the courier on stores’ websites, and that it was well known that the company had staffing shortages. Often failed consumers’ decisions incurred odium for the company which has suffered the consequences of both management and buyers’ mistakes.
Regardless of whether the operator’s contract with the client assumes seasonal increases and expresses them in figures or not, the operator must prepare for the season. And in practice, this means an increase in costs, which is not always balanced proportionally with the growth of revenues. Of course, a significant increase in the number of operations translates into an expected increase in the number of invoices issued to our clients for December. Unfortunately, we must also be aware that a rise in operations is associated with:
– an increased number of losses in the warehouse (the greater the traffic and confusion – the more chances for mistakes, damage to goods; the more people in the warehouse – the greater the risk of minor thefts and other depletion of entrusted property);
– an increased unit cost of operations – both performed by permanent employees (due to the often necessary overtime) and temporary employees (the time spent on teaching a new employee costs in two ways: the time of the mentor and the apprentice, as well as lower efficiency of the temporary employee whose costs are often comparable with the permanent employee);
– a perspective of an increase in fixed costs that occurs in warehouses operating usually 1 to 2 shifts 5 days a week. The need to start a 3 shift or work on weekends causes a surge in non-wage costs. Lighting and heating a warehouse with an area of several thousand sq m for one weekend will add additional costs.
All these factors should be taken into account and we should be aware of the fact that our nominal margin on logistics services may suddenly drop from e.g. 12 percent to less than 10 percent after the December settlement.
Courier companies have been struggling with this problem for years – high competition and huge market requirements have prompted them to take decisive actions aimed at acquiring the appropriate pool of subcontractors since November. However, labour market conditions force companies to allocate funds disproportionate to the normal cost structure in the industry for this purpose. This year, many companies that use the services of top couriers on the market have been surprised to read the messages sent to them at the end of October/beginning of November. The form and content varied, but in practice, it came down to a unilateral statement:
Due to increased demand, we will apply additional peak surcharge of “x” percent to all shipments in December 2019.”
Of course, because of such messages, some of the parcel traffic will flow to those companies that have not imposed any surcharges. But a precedent has already been set and it should be taken into account that it will become the annual practice in business.
Can we afford the same in warehouse and logistics operations? It depends on how strong our market position is and whether our quality and reputation will help to keep customers despite a temporary increase.
Is it worth fighting for? In my opinion, yes – a business based on the win-win principle should accept this solution with understanding. If our partner is satisfied with timely and quality service – he or she should accept arguments resulting directly from mathematics and allow us to adjust the prices of services temporarily, which will be acceptable to both parties.
Photo: Bartosz Wawryszuk