Richard Palarea is the COO of PA & Associates, Inc., among the fastest growing privately held companies according to the Baltimore Business Journal. PA & Associates has been saving companies money by negotiating strategic small package carrier agreements for seventeen years. Mr. Palarea can be reached at 866-200-SAVE (7283) x 201, rich@paaa.com or www.paaa.com
On February 20, 2008 troubled retailers Sharper Image Corp. and Lillian Vernon Corp. filed for creditor protection under Chapter 11, citing both the weak holiday season coupled with the struggling economy as the collective straws breaking the back of these formidable camels.
Sharper Image’s CFO Rebecca Roedell told CNN Money that the company had been experiencing declining sales since 2004, a severe liquidity crisis and began posting losses in fiscal 2005 that have continued through the first quarter of this year. Further pressure has come in the form of overseas price competition. The organization obviously had issues that it could not chart a recovery from, having installed its third CEO in 17 months. The market has been soft for its two mainstay products; air purifiers and massage chairs.
Of more concern to me was the Chapter 11 filing by Lillian Vernon. A veritable distribution legend, the 56-year old company specializes in home and garden items, personalized gifts and low price-point knick-knacks. The company had branched out from its traditional sales channel—a 90-page catalog containing 700-plus items – to the Internet. The online store seemed a natural fit and an efficient method of enhancing their already popular personalized gifts service.
Although the companies cite reasons in common for their demise, more than one Lillian Vernon statement I read stated “insurmountable costs from soaring printing and mailing expenses” and that their “$8 million mailing and shipping cost increases in 2007 ate up profits”.
Like my kitchen the morning after cooking fish for dinner… something doesn’t smell quite right.
It would seem that a catalog company specializing in distribution would have a handle on its printing and shipping costs. The Lillian Vernon website boasts that it shipped 3.3 million packages in 2006 from its Virginia Beach, VA national distribution center. The “center” is 827,000 square feet – the size of 18 football fields.
Another somewhat puzzling fact is that both Lillian Vernon and Sharper Image charge customers for shipping based on the ticket price of the order. While the method has been around for decades, it seems less relevant to employ this model today than it might have in years past. Why? With strategically-negotiated carrier agreements, significant control is available over shipping costs based on distance (zone) and weight. Furthermore, the pressures on ground pricing and market share acquisition are producing ground discounts-from-list rate those of us in the small package consulting and negotiating business would never have dreamed of in years prior. For direct-to-consumer operations like Sharper Image and Lillian Vernon, there have never been more competitive and strategic options for the residential delivery of ground packages.
I concede that hiding behind the delivery-charge-by-order-total method may be a way for retailers to run a shipping profit center, but with today’s tight integration of warehouse management systems, order entry/ERP systems, shipment creation systems and back end accounting systems, exacting control is well within reach. Logistics managers of medium to large shipper that cannot account to the penny for shipping expenses versus revenue ought to consider why they think they will have a job on Monday morning.
I recently toured the impressive facility of a prospect account in the check printing business. The company is one of the largest custom check printers in the nation and spends $6 million annually with UPS; mostly for residential fulfillment. The spend comprises only 20% of their annual distribution expense; the remainder of packages are sent by U.S. Postal Service. It’s an enormous operation.
The upcoming postal increase of $0.01 scheduled to hit our pockets on May 12, 2008 will result in a $2 million expense increase to this client. Is he rolling over and dying? It didn’t appear to be the case as I toured the thriving plant and met with this manager who was so intimate with his fulfillment pricing and how to leverage it correctly that I wouldn’t be surprised if his home wasn’t wallpapered with copies of his current UPS agreement.
My point is this; every business…large or small…should avail themselves completely of every ounce of information available. These are lean times and businesses need to pay attention to every dollar being spent. Gone are the days when supply chain elements, especially outbound delivery, can be viewed as a sunk cost. These are highly variable, strategic and controllable elements which must be leveraged completely for any business to be healthy, survive and thrive.
Rich
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