Operational Costs

Cost saving in your eCommerce business using the 5 Performance Objectives

There’s more to running a successful eCommerce business than just selling products online. Get your back-end operations wrong and you could be losing money unnecessarily.

There are really only two options when it comes to growing an eCommerce business – increase revenue and/or decrease the operating costs. Managers often focus too heavily on cutting costs to increase profits. They fail to see that severe cuts to operating costs can often hinder productivity and may actually reduce profit.  An alternative way to reduce costs is to review the business using the five performance objectives of quality, speed, dependability, flexibility and cost. This method can be applied to any business that considers operational management as a core priority within their business. It allows management to highlight areas of poor performance and identify opportunities to reduce costs.

This is especially true in eCommerce where profit margins are tight and unnecessary costs can make or break a business. To thrive online, try applying these five performance objectives to reduce costs logically without a reduction in productivity.

  • Quality – Look at ways to improve the quality of your processes to improve customer satisfaction and drive down costs. One thing you can do is to make each warehouse packer responsible for the quality of their own packing in order to reduce the number of mis-packs. This would save substantially on the operational costs of returns and re-packing.
  • Speed – When selling online speed is of utmost importance especially when competing against the retail giants who have this down to a fine art. Make sure your products can be ordered, processed and delivered with as little friction and overhead as possible to keep a cap on costs. This could be addressed by negotiating ‘just in time’ delivery of goods with suppliers to reduce inventory value and storage costs, thereby improving cashflow and the pressure on finances.
  • Dependability – Dependability is vital for the success of an eCommerce store. Customers need to know they will receive their order when the store says it will arrive. Miss the delivery date too often and you will see customer satisfaction and sales dwindle. One way to save costs through improved dependability is to tighten the warning controls on the dispatch system to alert management if the expected number of parcels are not sent out by the end of the day. This will reduce the number of parcels that incur an extra charge when they need to be upgraded to express deliveries the following day.
  • Flexibility – There are significant service improvements and cost savings to be made by introducing flexibility into your business. The ability to change and adapt to market forces, competition and demand from customers can help you win in the eCommerce game. This can be anything from the ability to easily introduce new products, to flexibility in delivery schedules. One way to tackle operational costs is to adopt a flexible working scheme so that busy periods can be covered without reliance on overtime.
  • Cost – This is perhaps the simplest of the five performance objectives and an amalgamation of the previous four. Look at the cost of suppliers, the cost of warehousing, the cost of staff and the cost of deliveries to see if there are any savings to be made in the management of your business. An efficient ecommerce team should constantly look at new partnerships and ways of working to minimise base costs and maximise profits.

Case Study Analysis

To illustrate the potential savings to be made by adopting the five performance objectives, we’ll look at the hypothetical case of www.example.com. This is an online retailer that sells approximately five million items per year, which are typically sold individually.  They purchase their products from a selection of suppliers all around the UK, receive goods into their warehouse for storage until they pick orders that contain the widgets and dispatch them through a distribution company. Despite the business posting modest profits each year, the management now wishes to turn its attention to reducing its operating costs.  Following a brainstorming exercise, a few changes were made which resulted in a reduction in costs.

  • Making each warehouse packer responsible for their own packing quality reduced mis-packs from 0.5% – to zero (or very close), thus saving £4 per item in re-packing costs. With five million parcels a year, this quality improvement prevented 25,000 re-packs and realised the company £100,000 in cost savings.
  • Tightening the warning controls on the end of day dispatch system eliminated the 1% of parcels which required express delivery at an extra cost of £3 per item. This meant 50,000 parcels were sent out on time, saving £150,000 saving per year thanks to improved dependability.
  • Negotiating ‘just in time’ delivery of goods with suppliers significantly reduced overheads. As well as a £2,000,000 reduction in stock, this speed improvement netted additional savings of £200,000 in storage fees charged at 10% of inventory value.
  • By adopting a flexible working scheme that meets demand in busy periods in exchange for hours off in the low periods, the company made further savings. Despite making an extra payment of £100,000 per year to compensate workers for less work in low periods, the company eliminated an overtime bill of £300,000, making a net gain of £200,000 per year through workforce flexibility.

Conclusion of savings to be made

By viewing the hypothetical scenario of an eCommerce business through the paradigm of the five performance objectives, we have demonstrated a total cost saving to the business of £650,000 and an additional inventory stock reduction of £2,000,000.

The beauty of all of these actions above is that they are sensible, logical and significant operating savings that also maintain the ability for the business to continue to increase sales revenues and therefore profitability.

Put the five performance objectives into practice to see how your eCommerce business can combat costs to continue to succeed and grow online.

If you would like to see if there are any ‘performance  objective’ cost savings that can be made in your business to increase profitability then don’t hesitate to contact Clay Cowie from  S.M.A.R.T Turnaround team on 01752 68 38 68 or email hello@smartturnaround.co.uk

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