Tom Butt, chief customer success officer at Summit Advisory Team and Elevate, was first featured on the , where he and Lori talked all things peak season. Now, Tom is back to explain how merchants can improve profit margins by decreasing their cost to serve.
Cost to serve (CTS) encompasses four main costs: cost of goods sold (COGS), shipping, labor, and supplies. When you drive these costs down, profit margins go up.
While all these costs influence a business’s supply chain, Tom points out that “it's that shipping piece that people are really struggling to figure out.”
Are your customers buying things in the store? Buying online and picking up at the store? Getting the product shipped to them?
Tom explains that you should “be intentional with placing your merchandise in the place that your customer wants to buy it.” Before you can cut costs, you have to understand the customer buying journey through data analysis.
One of Tom’s go-to metrics is operating margin. To calculate, determine your revenue, then subtract all your costs.
Operating margin = revenue from sale – (cost of goods + shipping cost + labor cost + supplies cost)
“If you can look at that at a granular order level, you can see how much money you made on any particular order.”
Lori Boyer 00:00
Welcome everyone to Unboxing Logistics. We're glad you're back again with us. I'm Lori Boyer, your host here on the vodcast, and I am really excited about today's topic because we are going to be talking about money. Or at least costs, which isn't quite as exciting. We're going to be digging all into the costs that come with creating a product and getting it all the way through to market and to people's homes and hopefully how to reduce those costs and save a little money because spoiler, there's a lot of costs that come with it.
I have invited back to our studio today Tom Butt. He is a great friend of mine and an awesome person who knows I am just thrilled to have him here. Welcome, Tom.
Tom Butt 00:53
Yeah, thanks for having me back, Lori.
Lori Boyer 00:55
Tell our viewers, in case they don't quite remember you, who you are, your background, and ...
Tom Butt 01:02
So I'm Tom Butt.
I'm one of the ... co founders of our Elevate product. We're part of the wider Simpler Postage family with EasyPost. And I am the chief customer success officer over both Elevate, which is our data product business intelligence tool, and then over our professional services group. So Summit Advisory Team.
So if you see both of those, we're all part of one big happy family. And I'm chief customer success officers as I mentioned I just make sure that our customers across professional services across our data product are getting the most out of the services that we offer and making sure that they're getting the synergies of using data to make better decisions.
And, you know, really drawing from our wealth of expertise in the Summit team to make sure that we're helping them manage costs. And we're going to be talking about that today. But also just from an execution standpoint, making sure that they're, they're executing and implementing you know, improvement projects, transformational projects, sustaining, but also doing some strategy work on the front end to make sure that they're, they're following the right path and that they're they're developing a winning strategy to help their business succeed.
Lori Boyer 02:09
Nice. I love strategy, and I love somebody keeping me on task. Somebody like that in my personal life, I think. Okay, before we get started and dive into all the cost to serve and the metrics and analytics and everything, we're gonna do a fun little game just to get to know you a little better.
Okay. This is our This or That Questions with Tom Butt. So, just tell me which you prefer. Indoor activities or outdoor activities?
Tom Butt: 02:37
Lori Boyer: 02:38
Outdoor. You're an outdoor guy.
Tom Butt: 02:39
Lori Boyer: 02:40
You told me recently you moved to Colorado just for outdoors, right?
Tom Butt: 02:42
Yeah. Fly fishing, snowboarding, hiking, camping.
Lori Boyer: 02:46
Which season, you enjoy them all?
Tom Butt: 02:47
I like fall a lot. It's cooling off a little bit more. It's beautiful with the leaves, so just love doing that and getting outside with my wife, so.
Lori Boyer: 02:54
Okay. Are you a traditional note taker with a pen or do you do notes all digitally?
Tom Butt: 03:01
So, I am a digital note-taker. So I've got a constant notepad flowing and I feel like it's flexible and I can copy and paste and adjust it pretty easily.
Lori Boyer: 03:11
I feel so much better about that because I feel like so many people are traditionalists and they tell me all these benefits of writing stuff by hand. So, if Tom Butt does it, I can do it too. That makes me feel good. Basketball or football?
Tom Butt: 03:22
Football. Although our Denver Nuggets just won the NBA championship, so it's been fun to watch them too.
Lori Boyer: 03:27
Oh, do you have a favorite team then? Is it the Nuggets?
Tom Butt: 03:29
I'm going to say the Nuggets for now. I used to live in Milwaukee, the Bucs have a place in my heart, and I'll keep supporting them.
I got an East and a West thing going there.
Lori Boyer: 03:37
You've got like your backups. In case you have somebody. Okay, pizza or burgers?
Tom Butt: 03:42
Lori Boyer: 03:43
Me too. Which is worse? Zombies or vampires?
Tom Butt: 03:47
Ooh. I feel like vampires are, they're more shrewd, so you have to watch out for them a little. Vampire, er zombies you can just kinda push them away.
Lori Boyer: 03:56
They're a little stupid and can kinda run. Yeah. Yeah, I'm with ya on that.
Tom Butt: 03:59
Trick them easily.
Lori Boyer: 04:00
Board game or video games?
Tom Butt: 04:02
Board games. Board games. A little more social. I like just kind of getting together with friends and doing that and I know there's there's the video games over online stuff, but I just I never got into that.
Lori Boyer: 04:13
I was gonna say I realized with video games because I like to video game sometimes, I only like it when I'm playing with other people. So it must be a social thing too. But I love board games as well. Kay, would you take, I think I have a guess on this, but would you take an adventure vacation or a relaxation vacation?
Tom Butt: 04:28
Ooh, I'm all about the adventure. But you do need some of those times when you're between adventuring and just some downtime to chill a little bit.
Lori Boyer: 04:37
Yeah. 3PL or an in-house logistics team? Say you owned a big company, which would you do?
Tom Butt: 04:43
I gotta go with the, with the in-house logistics team. And granted, the caveat there is you have, you're big enough to have a team and to necessitate that. If you're just a startup or something like that, 3PL might be the right fit. So it's kind of dependent on your conditions. I do like a good team that you can build on, develop and do some of the, you know, just career development as well.
And you start to kind of hit a groove and become a well oiled machine.
Lori Boyer: 05:09
Yeah, I love that. Which is worse, increased government regulation in the industry or a big labor shortage in the industry? We're gonna have debate about this in our comments. Which, which is worse? The more government regulation or worse labor?
Tom Butt: 05:25
I'm gonna go with the government regulation is worse, just because I'm a little bit more of a laissez-faire. You can, labor shortages, yes, you can increase. Costs can increase. However, you start to drive some innovation and you start to get creative with some of that stuff. And I know we talked earlier about holiday readiness and just with a good plan and the right people and the right analytics, it's more manageable.
Lori Boyer: 05:50
And it kind of comes and goes where the government regulations are sort of like stuck there and you're gonna have to deal with them.
Tom Butt: 05:54
Yeah, and you're kind of at the whim of what's happening, so.
Lori Boyer: 05:58
Yeah, I agree with that. Do you like chatbots or actual phone call support?
Tom Butt: 06:05
I'm a phone call support person.
Lori Boyer: 06:07
I was gonna say, you are over customer support.
Tom Butt: 06:09
I'm a little bit, I'm a little bit of a Luddite, maybe in that sense, but there is a time, there is a time and a place, and our, our chief analytics officer would, would hawk the, the chatbot stuff.
Especially, especially from a cost management aspect, but I do like a good customer service person.
Lori Boyer: 06:25
Yeah, there's, I mean, there's a lot of pros and cons, right? And there's pros to both, and cons to both, so I love hearing your opinion. Okay, so we're going to dive into the good stuff, though. I want to talk about costs, and I would love if you gave us a little bit of background.
So that we start, you know, kind of just in general with costs, what kind of trends have we seen for businesses when it comes to operating costs, what's going on in the industry?
Tom Butt: 06:49
Sure. So a couple things just real quick to identify cost to serve. When I think about that, I typically think about you know, there are capital costs and building expenses and things like that.
But typically when I talk cost to serve, I'm talking about the cost to fulfill a particular order, excluding any of the hard assets that you might be depreciating or paying off. So it's really that variable cost component of your cost of goods. So that's something that your, your product teams are gonna kind of manage on the front end and your procurement teams.
You also have your labor costs. So labor costs or any of the variable labor that goes into fulfilling a product, moving it through your warehouse or your DC or getting it to your stores.
Lori Boyer: 07:33
Does that include the cost of creating it? Like you said the cost of goods, the goods are already created.
Tom Butt: 07:38
Yeah, so, so I'm thinking of it more in terms of a cost of goods is sort of all things that go into, you know, the manufacturing, those sorts of things. A lot of times, your teams are managing that upstream and your buying teams and procurement teams are working to, to mitigate those. So it's, it's a lot more focused, for me at least, on the operational costs, things that you can control.
So there's that labor component, so that's typically your, your wage, wage rates that you're paying for your warehouse workers, your store teams.
Lori Boyer: 08:08
People have to pay for that?
Tom Butt: 08:10
Yeah. Believe it or not. Believe it or not. But then you also have your materials costs. So, your shipping cartons, your dunnage.
If you have a good shipping supplies contact, those are, those are gold. So make sure you establish those relationships, especially if you can get them at ... So and then there's the the shipping cost component of it. So not the materials that you're using to ship, but the postage that you're paying.
So that would be to, you know, your FedEx or UPS, your DHL USPS. And you know, those are the sorts of things that you're negotiating costs with the carriers on the front end. You hopefully are getting some leverage year over year. One of the things that I'm seeing is as we're coming out of COVID we're seeing that shippers, so people that are retailers, people that are shipping things have a little bit more leverage than they had during COVID.
So as volume shifted to online, you had, you know, the big carriers that really had, they had a need that everyone wanted. Right. So they had a little bit more leverage and were able to increase and jack up ...
Lori Boyer: 09:24
A lot more leverage.
Tom Butt: 09:25
Oh, totally, totally. Yeah, I don't want to understate that, but but basically you know, as we've come out and as capacity has increased and as carriers are growing you know, there's a little bit more leverage that you have.
Lori Boyer: 09:38
It's a little bit more of a shipper's market.
Tom Butt: 09:39
Correct. A little bit.
It's a, it's it's not quite still a shippers market, just a little bit more that way. So, so there's those costs. And then there's, you know, some of the reverse logistics costs. So that would be any of your cost of returns. So, you know, you, you take a sale, you get it all the way to the customer, hopefully on time and in full.
But you know, the customer for whatever reason says, Eh, I don't want this. So you got to ingest that back into your network and pay for some of those things. And then there's the support costs, right? So you have your call center teams that are fielding calls and are, you know, trying to smooth things over when things don't quite go right. So all of that is sort of this downstream operational cost. And when I think of cost to serve, those are the main components for me.
Lori Boyer: 10:23
And what are the challenges? that our industry is facing when it comes to these costs. What, where are we seeing increases?
Tom Butt: 10:30
Sure, so I think a big one, you know and it's maybe loosening up a little bit, but the, just the labor costs that are out there.
So it's, labor markets are getting tighter and tighter. And so ...
Lori Boyer: 10:41
And labor's hard in this industry to start. I mean, we have huge turnover rates compared to all other industries. So you're saying that you're seeing that even increasing further.
Tom Butt: 10:49
Correct. So it's, it's maybe not accelerating as much as it was.
It's kind of plateauing a little bit, but it has certainly come up over the last couple of years here. So seeing that again mentioned, you know, during COVID, some of the price increases that the carriers were pushing down on people, that was a big component of it. So I think the other thing is just warehouse space. So you look at the real estate market you know, commercial real estate and things where, you know, office space, things like that is pretty vacant right now.
Kind of two areas where you're seeing increases. So one is in data processing. So you're seeing that market is still pretty hot in terms of having capacity to process data. And then the warehouse space is another big one. So that's something where, you know, if you're looking at 3PLs and things like that, you're those costs are constantly sort of going up there as well.
Lori Boyer: 11:44
Okay, wow. So are we having some issues with kind of inventory spreading thin across, like, our fulfillment networks? I've been hearing about that sort of buzz and wondering if that tied in.
Tom Butt: 11:57
Yeah, so, so one of the things you know, we're, we are seeing some softening in, in demand. That's broad brush stroke for, for the retail industry.
But I think a lot of, I think a lot of retailers would identify with that. And so you know, with some of those sales flattening or softening a little bit we're seeing merchandising teams try to be a little bit more aggressive in terms of managing their inventory and kind of thinning that out.
So, you know, they're trying to trim out things that are unproductive SKUs, trying to liquidate things. So they're trying to trying to make sure that whatever inventory they have is productive. But then as as we've seen, omnichannel fulfillment, so you know, fulfillment across DCs, 3PLs, direct ship vendors stores.
Those inventory pools, people are trying to understand, where should I have that inventory? And I can't just have, can't just increase inventory across the board. I need to be strategic about where I'm placing that inventory and how I'm making sure that it's productive.
Lori Boyer: 13:01
How does where you place the inventory impact their costs?
Tom Butt: 13:04
Sure. So I think. across the different fulfillment channels that you may have, so that could be, you know, ship to customer. So from either a store or a DC or 3PL, shipping to customers is one. You have the buy online, pickup in store, which is sort of the hybrid. So you're still going to a brick and mortar store.
And then you have the, you know, just the in store brick and mortar experience. So typically, and I should mention ship from store. So you are shipping from, from a store that's part of that, that ship to customer experience. But kind of what we're seeing is across those different fulfillment channels, there's different costs to serve, right?
So, so typically your cheapest option is going to be your customer walking into your store and going and doing the fulfillment for you. So you don't have to. You do have to worry about a little bit of labor cost and a little bit of shipping to get it to the store to land it. But the customer is typically going to come in and they're going to do the product inspection.
There's maybe a lower return rate because they're able to physically look at the product.
Lori Boyer: 14:06
This is somebody who's purchased it online, but picks up at the store. Or this is the person who goes into the store, just looks around and buys something?
Tom Butt: 14:13
So this is the person that just goes into the store, looks around and buys something.
I would say next cheapest fulfillment option is that buy online, pick up in-store option that you just mentioned. So the reason it's a little bit more expensive is you do have somebody that in the store has to go take time out of their day to go retrieve the merchandise. It's more convenient for the customer.
However, you are spending a little bit of labor for that associate to go get that particular product. You know that one, the two items or kind of do the scavenger hunt on the stores. And then typically, it doesn't always have to be this way, typically fulfilling out of your distribution center is next.
Or out of your, your 3PL or your out of your vendor network. And the reason for that is typically when you're fulfilling from warehouse, you're getting economies of scale. You're also in this case, now we, now we introduce the concept of having to pay for the shipping, right?
So you have that shipping piece where you're having to pay your carrier to get it to your customer, and that's that's a big component. So we typically see you know 5 to 10x the cost of labor to do the fulfillment in that that shipping carrier cost so yeah.
Lori Boyer: 15:19
So 5 to 10 over the next cheapest option?
Tom Butt: 15:23
Over those options where you don't have to do that. So again, you're paying, you know, maybe a dollar or two to fulfill things, but you're paying five bucks sometimes, depending on how many units you're getting in a package.
And we'll talk about that in a second. But you're paying for that, that cost to get it out to your customer.
Lori Boyer: 15:40
And what are customers expecting in terms of cost? I mean, my understanding, free, at least as a shopper, I want it free. You know, how fast, what is the standard?
Tom Butt: 15:49
So these days, everyone wants fast and free.
We have big retailers out there that set that expectation. They want everything, you know, two days or less, and they don't want to have to pay for it. Now, we have done some, some market research, and what we're seeing is people prefer free over fast. Fast and free is best, but they do prefer ... Free over having to pay for something.
Lori Boyer: 16:11
Okay, that's interesting everybody. So, free over fast, although both is best.
Tom Butt: 16:16
Both is best.
Lori Boyer: 16:18
But if you can choose one, free over fast.
Tom Butt: 16:19
And almost never do people want to pay for something that they're gonna get really slowly. Yeah, so so there there will be people that will abandon cart when they see that. They may abandon it if they see they're gonna get it in, you know five days plus. But they're really gonna abandon it where they're like, hey I'm just gonna go look for somewhere where I don't have to pay to ship this myself.
Lori Boyer: 16:39
So the 3PLs, DCs, those were our next.
Tom Butt: 16:44
Yep, so most expensive typically from what I've seen is your ship from store.
Yeah. And the reason for that is your stores, you're trying to serve two purposes. So you're trying to leverage that inventory by exposing it to the walking customer, but at the same time, you're saying, hey, I want to turn my store into a distribution center. So you have people that depending on how hot the item is, you may have an online customer that buys a product in a store that a walking customer comes and gets before you can't see it or before you can fulfill it. And so typically your stores, you ha- you don't have pick paths set up. You're kind of going maybe shuffling amongst your walking customers. And the other thing is your inventory depth in your stores is typically shallower, and the problem that that creates is if you have a wide assortment that you offer your customers online, making sure that all of that product is located.
So it's a four four unit order Make sure that that's all located at the same location so you can fit into one shipping box versus hey that product may be across multiple locations. You may have to pay for shipping two or three times, in which case you're degrading that margin, so.
Lori Boyer: 17:55
And I think I read somewhere that even just inventory counts, and you can correct me if I'm wrong, but inventory counts in store are almost twice as likely to be inaccurate compared to like, you know, at a DC or something.
Tom Butt: 18:07
Yeah, benchmark that we would see, in a distribution center, you're seeing 99. 5%, 99. 9 percent accuracy in terms of doing cycle counts and inventory counting in your distribution centers. In stores, if you can get 95%, 97%, that's gonna be what I would say good. But again, you have customers walking in, they're moving things, they're maybe taking stuff into changing rooms. There's some inventory shrink potentially.
Lori Boyer: 18:37
Yeah, so it may seem like a great idea like, Hey, let's fulfill from our store. But in the long run, the costs there are a lot higher. So you've got to just calculate that.
Tom Butt: 18:45
Potentially. So you got to make sure that you are managing again, your inventory levels and that you're strategic about what you sell from stores. It may be things where, you know, you do something where you're looking at, Hey, I've got merchandise that's about to go to clearance. And so what you want to do is you may have a client that's or customer that's across the country that wants to buy that. Now you have to ship it to that customer, but you may maintain some margin by not taking that that discount on that product and having to mark it down. So, you're shipping potentially further and spending a little bit of money to ship it, but you're not having to take that discount on the product.
Lori Boyer: 19:21
Okay, that totally makes sense. So, more costs. You mentioned personnel, labor. How does labor kind of tie into the costs here? What are we seeing? How's that driving up costs?
Tom Butt: 19:33
Sure. So I think just in general you know, labor rates are going up. It's, markets are becoming more competitive. Yeah you know ...
Lori Boyer: 19:39
By labor rates, you just mean like their actual pay rate.
Tom Butt: 19:41
The pay rate of the individuals that are coming in to be ...
Lori Boyer: 19:43
Not the number of people who want to come work.
Tom Butt: 19:46
Yeah, correct. Correct. And, you know, so, so I think just you know, tighter labor markets is, is becoming a thing. And I, I did mention you know, there's, the warehousing space is, is kind of exploding lately.
So there's a lot of those jobs out there and, you know, certain markets may be a little bit better than others, but typically we're seeing increases there.
Lori Boyer: 20:08
Increases in wage. Are you seeing increases? Have you seen anything in terms of other benefits or anything that people are demanding?
Tom Butt: 20:16
I think, you know, as people, as the industry matures, people are demanding more of the ...
Less of there's the hourly wage and they are looking at things like, you know, health care packages and, you know, things that you may need to offer to be competitive with what else is out there.
Lori Boyer: 20:34
Okay, so we've got our cost to serve. How do we start? What do we look at? What are factors that we should be considering if you're evaluating it?
Tom Butt: 20:45
Sure. So I think, you know, first and foremost is understanding how your customer wants to buy your product, right? So we mentioned the different channels that your customers are coming to buy products. And so what you want to do is be intentional with placing your merchandise in the place that your customer wants to buy it, right?
So for those walk-in customers, you want to make sure that when they come into the store that they have the products that they want. So there's no kind of worse feeling as a shopper where you, you go into a store and you take time out of your day and you drive to that store to go try something on.
And then they're out of the thing that you need, right? So the, the shoes that you need, the size and the color that you're looking for, you want to make sure that you have that trip assurance in there so that you're taking those sales at a lower hit to margin or a lower cost because your customer is doing that fulfillment.
Lori Boyer: 21:37
I assume this is going to be really variable depending on what you're selling. Right? Like you've mentioned before to me that you like to buy clothes in person but buy lots of other stuff online. Right? So, how can a company know, I guess, where their best method is of where people want to buy their stuff?
Tom Butt: 21:56
And some of that's going to be dependent on the type of product. So again, clothing is classical where people, they may know like a brand or something that they want and the sizing. Those, those customers may be a little bit more apt to go buy online.
Lori Boyer: 22:10
And I've seen like Amazon has like try before you buy or something.
Tom Butt: 22:13
Yeah, there's, and there's, there's a lot of, there's a lot of creative solutions out there to basically mitigate the, the risk of return. So making sure that you have those free returns options, things like that. So that people are willing to take that jump and to, to buy something online. But typically things like commodities that might be out there.
So I think of like batteries, right? Some AAA batteries, no matter what you buy. Or where you buy it from, you're going to get AAA batteries that fit no matter what. So so with those sorts of things where it's, it's more of a known commodity or if it's maybe more of a direct to consumer brand that has a strong brand presence, people are going to be potentially more likely to buy online versus something where it's again, personal style or choice that they might want to make.
It's a little bit more subjective. People may want that in-store experience. So the other thing in terms of people and understanding your customers, how much, when they place an order, when they buy something, what else do they buy with it? So what's that affinity to other things that they might be, be purchasing, right?
So if they come into your website or come onto your website, are they buying five to 10 things per order or are they buying one thing per order? And the reason that's important is because if you see your customers buying one thing, you're likely only gonna ship that item by itself and you're gonna have to absorb that shipping cost on that one item. So you're gonna take a margin hit there. If you buy four to five things, if you can ship all of those things in one box and you can shape your customers' demand in a way where you offer incentives to buy more You may be able to offset the incremental cost of shipping on each of those items by fitting it all into one box.
Lori Boyer: 24:01
So what are people doing to try to get people to buy more?
Tom Butt: 24:06
I mean, there's, there's things like you know, toggling where your free shipping cutoff may be so so that may be something you know, making suggestions in your market basket, maybe another way. So you know, have you thought about this?
Other customers are buying this. So there's, there's things that you can do in that, in that respect. When your customers are buying many things, again, it's, it's imperative that those products are all co located so that you can ship in, in one box and not split, split that order up across multiple.
Lori Boyer: 24:34
So how do you do that? How do you make sure that they're all on the same DC?
Tom Butt: 24:38
And that's, that's where we get into the fun of some of the analytics of this. So you start to look at ...
Lori Boyer: 24:41
That's why the supply chain is so complex.
Tom Butt: 24:43
Yeah, yeah. So what you're looking for is, you know, you look at your, your customer.
You look at how many units they, they purchase per order. What's the, the units per basket or the units per transaction. And then you can take a breakout and do a cross-section of ... You know, how many customers, kind of do a histogram breakout, how many customers are just buying the one item, how many buying, you know, ten plus, how many buying two, three, four, five, and so on.
And what you can do then is look at, for those products that they're buying, is there any sort of affinity? So is there anything, you know, you think about somebody who's buying shoes, are they buying socks with it? Can you put those things together, and then over time, are those things that are those things that, you know, you see those, those common patterns. So you might see footwear in winter, everyone's buying boots and thick socks.
Right. In summer, they might just be buying a pair of sandals so you want to look at across time how persistent are those, those buying patterns.
Lori Boyer: 25:41
And it seems obvious, but I assume that you would recommend that there's some sort of software, just data that they can pull up. They don't have to actually look through it.
Tom Butt: 25:52
Yeah, so typically you're going to want a more advanced analytics type of product to be able to do that, to be able to see what's being bought with what else. And you want to see, again, across your product categories, what are they buying? Just the one item? What are they buying with other things? And then what level of predictability do you have in terms of ...
That person buying consistently the same, how frequently are they buying the socks and the shoes? Is it 90 percent of the time? Is it 10 percent of the time? That's gonna dictate again, some of the complexity of that, that market basket and then how creative you need to be to mitigate the costs of fulfillment of that, that holistic order.
So I'd say two things that are really important to understand that. One is cost per, cost per order, and cost per unit. So how much are you spending in those operational costs that we outlined? How much are you spending on the order to fulfill that order and how much are you spending for each of those, each of the items? So again if you have a complex order, you know, you can smooth some of those costs out, maybe find ways to, to leverage and to mitigate. And typically the sign of a more mature organization is they're managing that. They've come up with strategies to mitigate those.
You may see for companies that maybe are a little less mature. They're splitting a lot of packages, they're sending, you know, one thing from the store, they're sending one item from one DC, another item from another DC, and all of a sudden, if you're not looking at managing those costs, you could be losing money on that order, and scrambling in other ways at your organization to make up for that.
Lori Boyer: 27:28
If they are getting to the point where they are seeing that, let's say it's a fairly large company, big enough that they've got, you know, in-person stores, they've got a few DCs, however it is, I mean, what potential savings could they have by optimizing the way that they're managing their inventory?
Tom Butt: 27:45
Sure. So on the order, over order level, I mean, we're talking about potentially cutting costs in half if you're putting the right things in place.
Lori Boyer: 27:52
Wow, in half! Those are big words.
Tom Butt: 27:54
Yeah. Again a lot of that is just because, again, if you're taking two boxes to ship something that you'd have shipped in one three boxes you know, you may want to you may have a lot of opportunity to cut down on some of those costs. Like I said typically, cost of goods sold is going to be your, your highest cost category. Okay. Next is going to be your shipping cost and then third is going to be your labor cost and last is going to be your supplies cost. So typically merchant organizations, buying procurement teams, are good at mitigating the COGS costs.
There's still some opportunity there. Okay. But it's that shipping piece that people are really struggling to figure out and is something that we can, we can look at and that organizations should be able to look at to drive costs out of the supply chain.
Lori Boyer: 28:40
Why do you think that that's an area that struggles more than the others?
Tom Butt: 28:44
I think a big part of it is there's sort of this probabilistic nature of like, what does your customer ordering and it's not as mature because as these supply chains have evolved and as we've gone through COVID and more people are shopping online, we're getting more creative at fulfilling. It's, there's a lot of variables and if you don't have those all dialed in you can be saving money in one place but spending money somewhere else.
Lori Boyer: 29:09
Yeah, so it's just due to complexity.
Tom Butt: 29:11
It's the complexity of it and you know with complexity, I think a big part is the analytics piece. So creating visibility to what's going on so that you can understand, how are you spending money?
Where are you infusing more costs than you need to? And you know, where, where are the places that you can create leverage, right? So so some of those things you should have, as I always recommend, have a plan, right? So work with your finance team, look at your costs, come up with a plan so that you can look at year over year as your organization matures, how are you, how are you leveraging spend or where are things that you can maybe get a little bit more creative. Another just strategy that I would recommend is take a look at how you're offering your products to your customer. So for example, if you have, you know, something that's really cheap in your stores it may make sense to sell it in the store.
You don't necessarily need to put that particular item online unless it's in part of a bigger basket where you can say hey, you know, this customer is either offsetting this cost by paying for the cost themselves so you're generating some shipping revenue. Or what you can do is you can say you know, this might just not be an item that we want to sell online.
So you restrict that item for online sale. You just let the walking customer buy that.
Lori Boyer: 30:34
Is there a cutoff range you recommend? Like, oh, this thing costs 50 cents, we're not going to ship it, or?
Tom Butt: 30:40
Yeah, I think you know, typically if it's less than a couple bucks, if you ship it by itself, it's going to be something that you either want to capture that shipping revenue through minimum shipping charge or you make sure that's part of a bigger basket.
So I would say if it's less than a couple bucks, it's, it may be worth it depending on if your customer needs that as part of a bigger basket set. But if it's something that they're going to just buy on its own and you're giving them free shipping, you might be underwater on that particular sale.
Lori Boyer: 31:11
Awesome. What metrics do you think are essential for understanding your operating expenses? What, you know? What kind of things do people need to look at?
Tom Butt: 31:20
So, so I think, you know, obviously your labor rate. So I would, I would say first and foremost, if you can bring everything together through what I'd call like an operating margin.
That would be the number one thing that I would look at.
Lori Boyer: 31:32
So that's just, adding up all the different costs you got from all the places. Put them together and that's your list.
Tom Butt: 31:38
So, so you look at your revenue from your sale. You look at your, any revenue that you capture by charging for shipping.
Okay. Then you subtract off your cost of goods, you subtract off your shipping cost, you subtract off your labor cost, and then you subtract off your shipping supplies cost. So what that leaves you with, if you can look at that at a granular order level, is you can see how much money you made on any particular order, and you can then look at and say, what is my margin for this particular order?
Did I make 50 percent?
Lori Boyer: 32:10
And you look at orders, not items?
Tom Butt: 32:11
You look at orders, you can look at it, slice it at the item level as well. So so I would say both both are useful. Wanting to measure that, that margin, you get that dollar amount and then you look at a percentage. And one caveat to that is, you know, we see customers that have really high value items that are out there and we have customers that have really low value items. Those things, you can't really do an apples-to-apples comparison.
Lori Boyer: 32:42
Like in terms of percentage?
Tom Butt: 32:43
Correct. You can't really do an apples-to-apples comparison because some customers may have a wide set of products and they want to, they want to scale and they want to do volume, so they're selling stuff for, for cheap.
That's a different nut to crack than if you go after somebody who's selling a premium good or something like, you know, electronics or Rolex.
Lori Boyer: 33:02
So, is there kind of a best practice, percentage that you would say people should look at and be like, ooh, my margins are off? And again, knowing you just said, yeah, it's gonna vary.
Tom Butt: 33:13
I would say it's what's more relevant is if you can get any sort of industry benchmark. So, you know in like the apparel type of category, I would say somewhere between 15 to 25 percent. Again, depending on the type of product that's out there, you know, premium electronics, or you should see higher margins.
If you can look at margin in comparison to how you've done in the past, look at spikes. You have at least a reference point to go from there. If you're lucky enough to be able to benchmark off of somebody else who's in your same industry selling a similar product set, that's another good place to measure the temperature of your margin. So I would say that's that's a big one to measure, and then within that starting to look at the cost per unit, cost per order, I mentioned that.
But doing that at the cost per order and cost per unit for shipping. And then breaking that out by labor as well. And so what that does is allows you to isolate those variables and then manage each of those.
Lori Boyer: 34:09
See where you can tweak it. Let's say if your margins are off, and you're not where you want them or they're going down or getting worse compared to yourself in the past, what are the first things that you should look for?
Tom Butt: 34:20
Sure. So I think with that big one to look at is just gonna be, you know, are you. Again if you have that complex order profile for your customer, are you splitting more of your packages, right? So how many units are you fitting in a box and then across that, how many boxes are you using to fulfill each order?
So packages per order is a really important one for me. And the reason for that again, if you can see that certain promotions or certain times of year, customers are splitting things out a little bit more, you may be some, you may be doing something to inadvertently drive that. It could be your inventory placement.
It could be other things.
Lori Boyer: 34:59
Yeah, so kind of look for trends and see what correlates to it.
Tom Butt: 35:02
Look for trends. Again, if you can work with your finance team to come up with a plan and then, again, measure your current progress against those plans across all of these different metrics, you're able to see, when you start to see anomalies or variances, you might just want to take a deeper look.
Lori Boyer: 35:19
Okay. Awesome. Any other tips along our cost to serve? Any other strategies that people can use to mitigate costs?
Tom Butt: 35:28
I think, you know, obviously the, the labor piece is a big component of it. A big one though that I would say is make sure that as you're negotiating with your carriers, your parcel rates make sure that you're, you're being aggressive and that you're knowing where you can get away with, with pushing back on your carrier.
So as again, I said, you know, some of the, the carriers are opening up a little bit more. You maybe have a little bit more leverage. Negotiate those, those per package rates. You can use leverage across carriers. So, you know, if you've been using one of the major carriers, it's always worth just asking and saying, Hey, you know, other, other big carrier, this is what rate I'm getting, what can you do for me?
And even if you end up staying with your current carrier, you might have leverage, or you at the very least know that you're getting a currently competitive rate.
Lori Boyer: 36:19
Right, and you've investigated. So would you recommend, so let's say that you went and approached another carrier. They're gonna give you a better rate Would you try to lock them in long term?
Do you feel like you're stuck at that rate? Do you have recommendations that way?
Tom Butt: 36:36
That one's going to be a little bit dependent on, I would say if you, your volumes are going to be another factor to consider there. So do you have enough volume where you can diversify across a wider carrier set, or do you have low amount of volume where you maybe don't have as much leverage and you're, you're not quite as able to, to diversify and you can't, you can't justify multiple carrier pickups on the same day. So that, that's going to be another factor that's in there. I would, I would say, you know, you're over your contracts, but again, look at, look at what fuel prices are doing. Look at what, you know, you're getting with your current carrier. Are you getting good leverage with the new carrier?
And kind of go back and forth and see, see where you can gain more. You know, if the carrier is willing to move quite a bit, maybe you want to lock them in for a longer time period.
Lori Boyer: 37:28
Yeah, right. Okay, awesome. Any other ... tips, takeaways? We're about out of time, but it's been so awesome having you and you have shared so many great ideas. So just before we go, final message if somebody wants out there to get started with looking at their cost to serve.
Tom Butt: 37:49
I would say again just make sure that you're able to break down those costs into different categories, and then start breaking down what are those contributing factors to that.
So that could be, again, number of packages, it could be your labor rates, it could be how frequently you're split splitting packages, it could be ... You know, how you're marking down your merchandise. So I would say just cast a wide net and crunch the numbers and just make sure that, again, you're looking at things holistically and going from there.
Lori Boyer: 38:20
Awesome. I love it. Okay, Tom, where can people reach you if they want to connect?
Tom Butt: 38:25
So easiest place to reach me is gonna be on LinkedIn. So Tom Butt with Summit Advisory Team and Elevate. Feel free to reach out to me there. Always love good messages.
Lori Boyer: 38:35
He's really nice in person. Yeah, you don't have to be scared of him at all.
Tom Butt: 38:39
Yes, please, please reach out. So yeah, thank you Lori.
Lori Boyer: 38:42
We have loved having you here. It has been great to learn about this topic and for the rest of our logistics community, throw some comments in, make sure you subscribe and we'll see you next time!