The peak holiday shopping season is a make-or-break period for retailers, as consumers rush to stores and websites with gift lists in hand. Many companies make the bulk of their annual revenue in that hectic three- to four-week period from the day after Thanksgiving to Dec. 23, so the stakes are high for retailers, their carriers, and their logistics service providers (LSPs).
Botched execution can dent a company's profit margin as well as its reputation. Atlanta-based transport and logistics giant UPS Inc. saw that happen in 2013 when the carrier drew sharp criticism for significant delivery delays after underestimating the last-minute surge in e-commerce orders that hit its network in the final days of the peak season. The company spent heavily to avoid that scenario in following years but watched its profit margins shrink in the 2016 peak as it struggled to handle a record 712 million packages.
So how do companies handle traffic surges without blowing their budgets for the rest of the year? DC Velocity asked some logistics service providers to share lessons learned from their experiences in 2016 and tell us what they would do differently in 2017.
GET CREATIVE WITH LABOR
A growing challenge for any logistics provider is hiring and training the temporary employees it needs to ramp up operations during peak season. "It has become more and more challenging to get access to qualified material handling labor, and the wages required to keep these workers have increased," said Todd Everett, president and CEO of Newgistics, an Austin, Texas-based provider of e-commerce services for retailers. "You're more than doubling the workforce for a very short period of time."
That growing worker shortage has led Newgistics to seek out new sources of labor, offer hiring incentives, and launch engineering studies to find ways to reduce the labor required to handle the swelling volume of e-commerce orders. The company is also looking for ways to use its warehouse and labor management software to simplify material handling tasks in the DC, streamline training for warehouse jobs, and quickly move workers to new tasks in response to changes in demand.
"You have to make sure you're not training everyone to do everything," Everett said. "So we use task-specific training. We bring people in and train five of them to do receiving, five to do packing, five to do shipping, and five to do basic prep and dock cleanup or whatever's needed."
The increasingly tight labor supply means warehouse managers often find they are competing against each other for the same people, said Spencer Moore, executive vice president of sales for Speed Commerce, a Richardson, Texas-based provider of fulfillment solutions.
To land the best employees, warehouses are offering signing bonuses and boosting pay by two or three dollars per hour, Moore said. Across the industry, DCs have started peak season hiring earlier in the year and are offering incentives like free lunches or raffling off a television set. Some are even busing in workers from neighboring cities while feeding them breakfast and dinner during the commute, he said.
KEEP AN EYE ON THE FORECAST
Whether an LSP plans to cope with the surge by hiring more labor, renting additional warehouse space, or reserving extra trailers, an accurate business forecast is critical to staying profitable during peak season, said Moore. "Every company does forecasting a different way. We require a forecast every month, with updates every week," Moore said. "[Retailers] need to treat us like we're an extension of their own business, which we are."
Forecasts are a critical part of service contracts, which often include service-level agreements (SLAs), such as a pledge to ship all orders by 2 p.m. the same day they're received, he said. By collaborating, retailers and fulfillment centers can react to changes and make sure products reach consumers on time.
When retailers and 3PLs discuss those forecasts, they should review near-term key performance indicators (KPIs) and long-term business outlooks, as well as discuss the impact of business initiatives such as product launches, store openings, or sales.
For example, if a retailer forecasts in late April that it will have 30,000 orders in May, but its marketing department then decides to run a 30-percent-off sale, the retailer should make sure the fulfillment center knows about the change. "[Retailers] may not be able to fix mistakes in forecasting, but they can relax the SLA. After all, they would have the same problem if they ran their own facility," Moore said.
As for when retailers should bring partners into the planning process, the earlier the better, said Brené Hudspeth, vice president of transportation management at Transplace, a Dallas-based third-party logistics service provider.
Between the rise of omnichannel commerce and the shift from brick-and-mortar stores to e-commerce sites, consumer demand can change overnight, making forecasts irrelevant. "Our clients allow us to come into their planning process," Hudspeth said. "Instead of just being sent purchase orders or store delivery data for the next week, we need to be in the planning process for the next two, four, six, or eight weeks."
To minimize the need to hire additional carriers at the last minute, Transplace uses computer analytics to run different scenarios with each partner, Hudspeth said. Using its transportation management system (TMS), the company models the impact of proposed changes to help find the optimal balance between cost and service. For example, the modeling would allow clients to see what would happen if they spread shipments over five or six weeks instead of two, staged certain inventory in transit, used cross-docks to handle spikes in demand, or changed routes to run through Charlotte or Orlando instead of Atlanta.
That willingness to update forecasts and make changes is crucial in an era when e-commerce patterns are changing the market faster than ever before, said Gary Colangelo, vice president of client services for Spend Management Experts (SME), an Atlanta-based financial supply chain consultancy.
"Peak season is always the elephant in the room, for both shippers and carriers," Colangelo said. "They try to prepare for it—everyone's investing in their networks—but the problem is the lack of historical data for e-commerce. You're shooting from the hip because the market is changing so rapidly."
Some companies deal with demand fluctuations by renting flexible warehousing space or deploying pop-up hubs to handle overflow volume, or by adding days of service, like Saturday and Sunday deliveries, to achieve better asset utilization, he said. But the best approach to managing change is to work closely with the small number of clients who drive the bulk of the holiday surge to avoid last-minute surprises, Colangelo said.
LSPs also have to be mindful about the mix of companies that will share space in the facility, adds Newgistics' Everett. One of the key challenges of running a multi-tenant e-commerce fulfillment organization is balancing the workload, he explained. "In an ideal world, you'd have one tenant with a peak in January, one in February, and one in March, but that's not how it works," Everett said. "Most of them align to the traditional retail peak."
To avoid a full-on peak season meltdown, LSPs may have to be selective about the customers they take on. "All business is not good business," Everett said. "You've got to be smart about which tenants you sign up and what operations you're going to need throughout the year. It won't work if 100 percent of your customers have peaks in the same week."
Whatever strategy a company may choose to survive peak season, industry experts agree that the only constant is change. Shipping patterns in the retail market are changing quickly in the era of online shopping and omnichannel fulfillment.
Improving warehouse hiring strategies or fine-tuning sales forecasts can cushion the blow. But in the end, experts say, the best approach is a close partnership between client and service provider.
Whatever the date on the calendar, it is never too early to start preparing for the next peak. "Peak season planning starts right after the last peak ends," SME's Colangelo says. "Success comes down to the timing of when you begin that forecasting and your sense of urgency in getting it right."