Supply Chain & Logistics

Supply Chain:
The Logistical Pitfalls of Free Shipping

Dominic Regan,
Senior Director for Value Chain Execution in Western Europe at Oracle, @Dominic_J_Regan


How to Stop Free Shipping Becoming a Logistical Nightmare

Let’s face it: Christmas shopping can be dreadful. The crowds that swarm high streets and shopping centres Europe-wide can make this seasonal retail experience exhausting and stressful; not least around peak shopping milestones such as Black Friday. No wonder so many of us choose to avoid the stress and do most of our shopping online. Why brave the crowds when you can go online and find the perfect gifts from the comfort of your home?

Dominic Regan

Dominic Regan, Senior Director for Value Chain Execution in Western Europe at Oracle

And online retailers are, for their part, doing everything they can to encourage this trend through special offers and incentives, including the offer of free delivery and returns. In fact, research recently conducted by the National Retail Federation found 93 percent of online shoppers in the US intend to use a free shipping offer when shopping for Christmas gifts this year.

This is all great news for shoppers, of course, but it does lead to some significant logistical challenges for the shippers that are expected to fulfil the orders. For a start, such offers encourage substantially larger orders at a time that is already busy for companies across the entire online retail supply chain. Secondly, there is a major cost implication to free shipping that must be thought through with due care. After all, if online retailers are to offer free shipping the significant cost of deliveries and returns must be borne by the shipper.

Free shipping promotions undeniably help online retailers differentiate their offering and successfully encourage customers - new and current alike - to visit their websites to view their products. However the high expectation of free online shipping and returns puts the supply chain costs under increasing pressure to deliver, both literally and metaphorically.

So what can shippers do to ensure they can continue to offer free shipping promotions while at the same time protecting their margins?

For my money, the key lies in the ability of shippers to completely understand the product, their customers and their logistics operations.

It goes without saying that if you do not understand how a promotion such as free shipping will affect profitability, you’re putting your business at risk. Similarly, a deep knowledge of customers is required: customer segmentation allows retailers to understand which part of their customer base actually responds to promotions such as free shipping in the first place, and then the subsequent profitability of such customers given both their initial purchase behaviour and their propensity to make return purchases. Obviously if they do not respond to promotions, or if this customer segment is loss-leading, there may be only a limited upside to running such promotions.

Finally shippers must fully understand the impact of these promotions on logistics. For example: can shippers adequately scale up their operations to deal with any upswing in demand from the promotion; do they have fully costed processes in place for dealing with returns; have they secured sufficient transportation capacity to cater for both the outbound and potential return volumes; have they catered for the possible differences in geographical flows of shipments; do they understand roughly where demand will be most for free shipping services; and have they adequately factored in the price impacts of international shipping costs?

It is quite clear that free shipping should not simply be offered because everyone else is offering it. To be successful the full consequences of the promotion need to be analysed in-depth and accurate forecasts produced to understand the financial affect. Importantly, if during this planning phase forecasting suggests that the offer might do more harm than good to the business, it should not be put into action.

However, if the forecasts predict a positive effect on profitability through free shipping, it is vital that brands prepare fully. The entire operations of the company need to be readied for the free shipping season with additional resources brought online to deal with the uptick in demand. This requires a focus on operational delivery, including clear visibility of all domestic and international shipments; optimised delivery to cope with larger shipment volumes; and a transport management system capable of providing rich intelligence about tracked items, orders and shipments. The latter is particularly important, not only for managing the returns process but also for monitoring actual performance during the promotional period against targets, benchmarks and forecasts – crucial for understanding profitability.

Free shipping promotions are, therefore, a great way for businesses to ramp up demand around the Christmas season. However, as with anything, they only deliver value if planned for effectively. Companies must keep one eye on ensuring that margin and profitability can be protected and the other focused on ensuring that operations are well prepared to deliver on demand. By getting this right, companies can ensure a rewarding Christmas season and happy customers.


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