How to Think About Operations for an Ecommerce SMB
by Paul Vinuelas
There are a lot of things to think about when trying to build operations correctly for Small to Medium size businesses (SMB). Every business grows differently, with some putting more emphasis on operations than others. While it's tough to say that operations is a direct driver of growth for businesses, it's much easier to say that growth can not happen without good operations.
So what goes into a good operations set-up for SMBs? In my experience, the SMBs that succeed and continue to grow account for three major factors in their operations: costs, process, and scalability. Knowing the full cost of a service or process is crucial for proper operational budgeting, which ensures you pay for only what's necessary to keep your operations running. Building efficient operational processes ensures you maximize the value of your product and your business actions, which prevents unnecessary costs from eating into your profits. Ensuring scalability of process prevents nasty readjustment periods for businesses as they enter different stages of growth.
As you build out your business operations for your small or medium-sized business, remember to keep these three things in mind - preventing unnecessary cost, creating efficient processes, and ensuring scalability.
Accurately Logging Operational Costs
Most people assume that operational costs come down to two main categories: product cost (the cost to purchase or create your product) and variable cost (a catchall category that covers fulfillment labor and shipping costs).
For very small SMBs that don't require robust business operations, this is true. When you're fulfilling products yourself in your home or your office, the only costs to figure out are the product cost and the variable cost.
But once you start relying on 3PLs or your own warehouse, some new categories of costs start appearing on your ledger.
Fixed Warehousing Costs
- Warehousing: Includes the cost of renting or owning the space required to store your products in before shipment.
- Fixed Warehousing Assets: The cost of fixed assets used to help store or ship your products (e.g. shelves, tables, computers, label printers, forklifts, fulfillment robotics, etc.)
Variable Warehousing Supply Costs
- Shipping Supplies: The cost of supplies directly related to storing or shipping your products (e.g. boxes, tape, shipping labels, packaging materials, etc.)
Then there are another set of costs that might not show up on an 3PL's invoice, but are related to how you approach your business operations. We call these "Trade-Off" costs, in the way that cutting costs in one area (like shipping) can lead to higher costs in another (like customer service):
Lower Shipping Costs -> Higher Customer Service Costs
- There's a balancing act between saving on shipping, limiting strain on your customer service team, and preventing refunds due to customer complaints. If you exclusively ship using discount carriers, you'll save a ton on shipping, but you also run the risk of customers complaining about delayed deliveries. Not only does this gum up your customer support, it also hurts your brand.
Bulk Product Purchasing Discounts -> Higher Long Term Storage Costs
- Sure, there's always discounts available from your manufacturer if you purchase products in huge quantities. But there's the added cost of storage that you have to account for before pulling the trigger on that big purchase order. If the products don't sell as fast as you intend, you'll be paying more in storage costs than you should. This is why inventory management is also a very important part of ecommerce business operations. Forecasting the right amount of inventory is how businesses prevent unnecessary storage costs and make the right purchasing decisions.
We could also go into a litany of other costs associated with ecommerce operations, but the main thing here is to look out for any and every cost associated with your business operations. Examine how much you're paying, determine what the fair price actually is, and plan accordingly from there. And remember, saving on one aspect of your operations could lead to higher costs somewhere else, so be sure to think about the implications of each purchasing decision before you make them.
Processes Behind Efficient Ecommerce Operations
Processes are usually born out of necessity in the early stages of an operation. Usually they stop evolving as soon as they “get the job done”. But this causes many issues in the operations early on, because requirements change as your business grows. Since your business is unique, we can't provide you with a bulletproof process to plug-and-play into your business. But what we can provide is a “best practice” process creation cycle to apply to all of your operational flows moving forward. By using this cycle, you'll be able to elevate your business operations beyond most of your competitors:
- Identify a process that "gets the job done"
- This provides an actionable baseline, which you can then improve upon.
- Do a time study for each step in the process
- Time studies are process analyses that track the amount of time spent on each step of the process, allowing you to highlight inefficiencies.
- Identify areas where the most mistakes happen (or are likely to happen)
- It's critical to take a look at each step and ask "how can I make a mistake, and what are the consequences of this mistake"
- It's just as important to know when mistakes will likely be made. This gives you a head start on troubleshooting and contingencies when issues inevitably pop up.
- Prioritize what you will improve upon from the data gathered in steps 2 and 3
- Time-intensive steps in the process should be analyzed to see if they can be made more efficient.
- Steps that have thin margins for error, or have higher likelihoods of errors should be shored up with contingencies and backups to mitigate potential fallout.
- It's important to prioritize improvements, as this will help you see things from both efficiency and accuracy perspectives.
- Implement improvements, and repeat
- Implement improvements based on prioritization, and plan for future process analyzation to continue iterating and improving upon the process.
Most people incorrectly assume scalability translates into doing more with the same process at a larger scale. This is false, scalable means the ability to do more with less: less people, less cost, less time. It is very rare for a process, designed around your initial company volume, will be the same “scalable” process as your company grows. The core of true scalability is finding ways to compress resources and time, while still producing the same or better outcomes. Operational problems multiply in complexity with scale, which means processes must be kept as simple, reliable, and efficient as possible to maintain consistency with scale.
When focusing on scaling it helps to ask these questions:
- Can I automate all or parts of a process assigned to human labor? Automation allows you to reassign crucial human labor to more important tasks and provide a more efficient agent in performing unskilled but important tasks.
- Are all these steps necessary? Judge the value of each step of the process, and see where you can either compress or cut out unnecessary steps. The goal here is to provide the same result without so many touch points and actions.
- Is the point of this manual step more important than increasing the throughput? Providing a human touch is good for branding, but when scaling up, it can be cumbersome (and expensive) to provide a custom touch to every package you send out. Compare the value between spending more to maintain a manual touchpoint, or cutting out the touchpoint to increase daily shipment volume.
- Can I train an unskilled worker to do this task? If not, how can I simplify this task so that they can? As you scale up and hire more people, you'll want to make it as easy as possible for them to hit the ground running and start producing. Having overly complicated tasks prevents a smooth transition and holds up your entire operation.
Get Out There And Grow!
As an SMB owner, it's going to be an exciting and terrifying time for you. You're at the point in your business where you'll see the fastest growth, which is going to present new operational challenges for you at every turn. Remember to keep these three key operational elements in mind - cost, process efficiency, and scalability - and you'll have the right operational mindstate to continue humming as you cultivate your own success. Good luck out there!