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How Can Retailers Afford to Offer Free Holiday Shipping?

The holiday season is approaching. More big retailers are joining forces, whether online only or of the big-box variety, to entice consumers with promises of free shipping for all their orders, regardless of the volume of their purchase. Amazon always offers this perk to its Prime customers, but now companies like Target and Best Buy are removing purchase minimums for the holidays in order to compete. At this point, free shipping (particularly this time of year) is becoming a necessity, rather than a perk. “Without free shipping, you lose a lot of customers,” according to Edward Jones & Co. analyst Brian Yarbrough, via JSonline.com. “Retailers have been finding that the time when most people abandon their order online is when it shows the shipping charges at the end.” Allowing customers to take what could add up to a substantial discount off the price of their merchandise may seem like a step that only massive retailers can afford. It’s not just large quantities of sales and name recognition that allow these companies to make back their profits: A large part of what makes free shipping economically feasible is quality inventory management. Learning how to manage the supply chain, from warehousing to retail, creates savings that can then be passed on to their new and returning customer base; with a little forethought any company can do this. Inventory isn’t just the finished product that appears on the shelves: It’s the raw materials and work-in-progress goods as well, meaning that inventory management involves tracking and minimizing inefficiencies all along the supply chain. Every company has a supply chain, and some companies recognize the strength of their chain better than the other companies: Dell Inc. calls their supply chain “the biggest leverage point we have,” and a study by Bain & Company showed that companies with sophisticated supply chain methods are 12 times as profitable as those without.

Related Article: Managing Holiday Inventory

The first step in moving into the world of sophisticated inventory, warehouse and retail management is utilizing automated software and systems to track inventory movement. This is a given for big-box retailers, but the Wasp Barcode State of Small Business report tells a different story for SMBs: 46% of all small businesses still don’t track inventory at all, or they use a manual process to do so. While not investing in inventory control software seems like a money-saving tactic in the short-term, the time, money and resources needlessly wasted to adhere to an outdated and antiquated system will kill a company’s savings and profitability down the line. According to Entrepreneur.com, companies can save 20 to 50% with careful inventory management. How does that savings work, especially with upfront investments in barcode or RFID technology to track goods?

Balanced inventory turnover ratio

This key metric is found by simply taking the cost of goods sold and dividing that number by the cost of the average inventory held. Sales divided by inventory, that’s it. A ratio that is too low (low cost of goods but high average inventory) means that the company has too much inventory on hand, while a high ratio (high cost of goods, low average inventory) leads to understocking and an inability to meet demand. Turnover ratio can be volatile during the winter months, when holiday shopping picks up and buying habits change. A system that balances this ratio from quarter-to-quarter and recognizes increased need in the months and days leading up to Christmas is critical for a business especially for inexpensive but popular items.

Prioritized and optimized inventory management

Knowing exactly how much inventory is on hand, or needs to be shipped out, is borderline impossible with a manual system. Retailers realize huge savings by understanding which items can be moved quickly, and at high volume. Optimized warehouses leave items with high turnover in easily accessible places, or put high-selling items together to reduce excess movement, to speed up the fulfillment process and garner deals from shipping companies that often offer discounts for dealing in bulk.

Lowered carrying costs of inventory

There are costs to inventory beyond simply buying it and producing it. A balanced inventory ratio reduces these costs, but “hidden” fees pile up when excess inventory is on hand. The fees include storage space cost (rent, utilities, security and upkeep of warehouses), service cost (insurance and taxes), risk cost (the amount lost when inventory loses its value by deteriorating or otherwise being obsolete) and shrinkage (loss due to theft, including by employees).

Improved customer service

Inventory management is a huge boom to customer service. It helps deliver the products consumers desire to their door quickly and completely, without multiple deliveries or the need to back order. It reduces ordering and shipment errors that would otherwise result in returned items, which then requires additional resources to fix the problem for the customer’s satisfaction. Additionally, the use of barcode technology has allowed businesses to help customers (and customer service representatives) track their orders from the point-of-sale (POS) throughout the shipping process with transparency and more importantly, with accuracy.

Increased adaptability to trends

As cloud computing and mobile technology become more prevalent in retail, businesses must keep up on both the front and back-end. Walmart predicts that 75% of its website traffic will come from mobile devices this holiday season (up 5% from the year before); in order to ensure that their inventory records remain accurate, they must use a POS software system that scans stock upon arrival at the warehouse, and is scanned again before shipment. Employees can use barcode scanners or mobile computers, which connect to the company’s central database of inventory, to update any product’s status. Smart businesses large and small know that good inventory management saves time and money, increases accuracy and efficiency and results in more sales completed faster and with greater satisfaction. Free shipping may be a perk for customers, but free shipping can quickly become a liability for retailers unless the retailer takes the necessary steps to ensure that their process for moving inventory is as cost-effective as new technology allows it to be. How would implementing a proper inventory management system help your business during the holidays?