Operations

3 ways DTC brands can optimize their supply chain and fulfillment to get more profitable

Bainbridge Growth's Virgil Leung shares metrics, strategies and a few fulfillment hacks.

a plane wing flying over ships at sea

This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.

For direct-to-consumer brands, supply chain and fulfillment operations are critical components in ensuring items reach customers in a timely fashion. They can also play an unsung role in driving profitability.

In this post, we'll dig into the reasons why managing your supply chain is critical for DTC brands and explore three strategies you that can help you:

  • Increase customer satisfaction
  • Increase Contribution Profit
  • Enable higher CAC’s so you increase customer acquisition
  • Increase top-line revenue

Let's start with the "why."

COVID put the supply chain front and center

Remember, 90% of all goods are shipped by container ship. Recent supply chain stats are bleak:

  • By October 2021, 600 container ships were stuck outside of ports while waiting for capacity to be cleared and moved for import clearing.
  • By September 2021 shipping containers hit a high of $19.5k per container and ended the year at $9.5k per container as compared to the year prior of under $2.0k (that's about 5x times higher!).
  • Transit time can be anywhere from 2 to 6 months without delays and up to 8 to 9 months with delays.

The increased costs and times have a cascading impact on a DTC business.

  • Do you have the cash to increase inventory levels?
  • If you buy too little or get timing wrong, you will have stockouts and miss revenue opportunities
  • Are you able to predict and time the inflow of inventory and have the cash to fund ad spend at that time to drive sales?

But there's another impact that you may not think about - supply chain inefficiencies can actually impact your CAC. Here's what I mean:

How supply chain issues affect your Customer Acquisition Cost

At Bainbridge, we believe Contribution Profit is a critical metric especially in terms of setting your CAC. Understanding your LTV:CAC ratios and payback periods are critical to profitable growth. So we focus on fully-loaded CAC compared to Contribution Profit over fixed time periods such as six months, 12 months, 18 months.

As you save dollars on supply chain and fulfillment, you increase Contribution Profit. That increased Contribution Profit can then be used to increase your target customer acquisition cost (CAC). This just means that when you save one dollar in expenses, you increase your profit by one dollar and therefore you can use that extra profit for customer acquisition.

So to illustrate how this works, we put together a simple table that shows the units economics, an individual unit’s profitability, before and after supply chain optimization. As you can see in the example, the optimization reduces supply chain and fulfillment costs which can be reallocated to customer acquisition purposes. The company in our example below, can increase their CAC from $30 to $42, a whopping 40% increase and achieve the same Contribution Profit After Marketing. What would you do if you could increase your CAC budget by 40%?

So, how do you make these paper savings real? Here are three strategies you can implement.

1. Ordering the optimal inventory amount

Ordering the right amount of inventory and improving your timing of orders is a good place to start. You have to balance the fine line of ordering sufficient quantities to avoid stockouts without over-ordering inventory. Over-ordering inventory can lead to increased warehouse storage fees, increased spoilage, and inefficient cash trapped in unsold inventory that you could be using to sell through that same inventory.

We have illustrated a depiction below for two storage cost scenarios. Under both scenarios we use the same sales velocity, the same total sales and time frame, but as you can see the Cost Per Bin/Month is one-third the cost of the inefficient inventory ordering.

So how do you efficiently order inventory? Companies that are good at this are usually good at what-if scenarios. They have access to data and models that allow them to quickly simulate multiple scenarios with multiple assumptions. They can quickly test smaller orders, unexpected delays, different timing of payments in order to find the balance where they feel comfortable. And because they have tested the scenarios, they know what they can do if the unexpected happens.

The below table shows the cost savings you can achieve by ordering the optimal inventory amounts to unlock sea shipping and reduced unused storage space.

2. Streamlining packaging and kitting

We all know that packaging is an important part of customer experience and especially for DTC ecommerce brands where that is the first physical point of touch for a customer. But have you thought of the things you can do to optimize your fulfillment that could result in faster delivery or reduced costs?

When you set out to create an amazing packaging that your customers would love you probably weren’t thinking about associated fulfillment costs and shipping expenses. You may be surprised to hear that your packaging may actually be the reason you are spending up to 40% more on shipping. Because shipping carriers have to standardize the shipping costs and the way they calculate it, they have a very rigid shipping calculation structure and your product has to fit into one of them. This means that if you miss a dimension by just 1/10th of an inch, you will be categorized in another (generally way more expensive) shipping category.

In more dramatic cases, we have seen that simply re-organizing the packaging allowed shipping savings of more than 40% which dramatically improved unit economics and allowed the DTC ecommerce brand to re-invigorate a new and more scalable customer acquisition and business strategy.

3. Optimizing warehouse location

Warehouse locations are a key component to a successful DTC ecommerce business. A good location can shorten the customer fulfillment time and enhance the customer journey. As we know, a positive customer experience leads to higher repeat purchases. Additionally, warehouse locations can have a major impact on the shipping costs and therefore potential to achieve massive savings as opposed to your less savvy competitors. A smart warehouse location plan can help you take reduce costs by taking advantage of a few fulfillment "hacks":

Legally Avoid Import Taxes

Yes, we said it and you heard us right. Section 321 is a Customs and Border Protection (“CBP”) shipping type that allows for goods to clear through customs tax and duty-free. This shipping type exempts low-value (less than $800/day/customer) shipments from taxes and duties as long as the shipment complies with the eligibility requirements. This strategy can save up to 15% off on your cost of goods. We've seen this strategy attribute high-single digits to DTC ecommerce net income margins.

Benefit from shortened shipping zones

US shipping carriers use shipping zones to standardize and determine the distance of the product you are shipping. As you probably already know, the further you ship an item the more it costs…especially if it is heavy. Savvy DTC ecommerce businesses understand this concept and utilize it as part of their supply chain and fulfillment strategies.

As you can see in the below pictures, you have a US map that has only one fulfillment center (left) and another US map that has three fulfillment centers (right). When only one fulfillment center is considered you might have shipping zones up to Zone 8 as opposed to the shipping zones of three fulfillment centers down to Zone 5.

The below is a generic warehouse selection to help visualize the effect of shipping zones. In order to strategically select the best location for yourself, you should analyze which areas you have historically shipped to the most.

Moving from a single 3PL to three 3PLs across multiple regions has an average cost savings of 25% and a 15% reduction in average transit time to customers. The below table shows the cost savings warehouse location strategies by eliminating import duties and choosing warehouses that are closer to their destination.

The takeaway

Although every business is unique and there is no one size solution that fits all, we do know that every business can benefit from a more optimized supply chain and fulfillment strategy. By making your packaging more efficient, switching or adding warehouse locations, drilling down into your current 3PL vendor expenses, or capturing tax benefits through Section 321, you can achieve massive savings anywhere.

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