While retailers know quite a bit about how the activities on their floor affect sales (how many ups, closing rates, average sale, etc.), many retailers, when asked, are unaware of what they actually spend on deliveries each year. If you’re one of the few retailers still offering in-house deliveries, it’s important to understand what your true cost is.
Every home furnishings retailer wants to improve their bottom line and increase profitability, however, there’s a significant hole in your wallet that’s eating up your profits with each and every delivery. In all cases, your cost to deliver goes well beyond a tank of gas and the hourly wage of a couple employees.
To begin, you must identify and control your costs in three major areas as it relates to your deliveries; Labor Costs, Operational Costs and Vehicle Costs.
When considering labor costs, many retailers fail to calculate the underside of the iceberg. If a single delivery takes one hour round trip and requires two of your employees at $12.00 per hour, you just see the tip of the iceberg. However, the underside of the iceberg reveals your direct labor costs which include; FICA, unemployment, health and welfare, vacations, turnover and workmen’s comp insurance.
Take a look at one example of the direct cost for a typical employee:
Wage $12 / hr
Workmen’s comp $0.65 (6.5 %)
Pension plan $1.00 ($1.00 / hour)
Med/Social Security $0.77 (7.65%)
Personal / Sick time $0.20 (five days)
Holiday time $0.20 (five paid holidays)
Vacation time $0.40 (two week vacation)
Health insurance $3.34 (monthly cost of $550.00)
Total direct cost for this employee is $18.56 per hour, based on the above examples. With this common scenario, a one hour delivery now has a direct cost of over $35 in labor expense but doesn’t stop there. In the case of unexpected absenteeism, there is also the great expense of acquiring temp labor and providing them proper training. Often, retailers overlook the hours their management spends simply managing the entire delivery process and fail to attribute that portion of their salary to delivery cost.
If you’re like most retailers, you’ve kept good records to track your operational cost over the course of a year. But even some of the strongest retailers that keep the best of records fail to tie some of their operational costs to their very source-home deliveries.
Don’t make the common mistake of chalking up these operational costs to the cost of doing business. These are the costs directly associated with home deliveries: routing, service issues, discounts, property damage, product damage and adequate equipment such as dollies, pads, straps, uniforms, etc.
Even route optimization is critical in improving efficiency to lower delivery cost. Whether you route your deliveries yourself or utilize specialized logistics software, routing requires both skill and time, both of which come with a price.
Also overlooked are service issues and how expensive they are to resolve. From missing product to damaged product, studies show that your typical exchange can cost up to 5x the original delivery cost and all too often, these costs exceed the margin or even the total cost of the item. In addition, there are costs associated with unnecessary customer agitation, future lost business, and negative word of mouth advertising.
And of course, we can’t ignore the customer’s floor we just scratched or the smudge mark on your customer’s brand new mattress they just purchased. In Furniture World Magazine over 400 of their readers participated in an online survey that showed 62% of those surveyed stated that damage was their number one delivery issue. I’m sure your delivery crew does their very best to make every delivery incident free, but should an unfortunate accident take place, this cost adds up and over the course of time should be averaged out and considered part of your direct delivery cost.
Years ago, I purchased my first Mercedes Benz and got an incredible deal. After performing much research, taking test drive after test drive and comparing prices at every lot, finally I was the proud owner of the car I had always wanted. Three months later, I wasn’t so sure I wanted it. I spent $4,000 on repairs to the automatic air ride system and $349 on my first oil change.
Today, the U.S. Energy Information Administration is pricing diesel at $2.90 per gallon. That’s $.36 higher than this time last year. That rarely goes unnoticed and most of us like to think we pay close attention to every detail. But even after all the research and comparison shopping I did before purchasing my Mercedes, I failed to consider the true cost of even a simple oil change. Now I know, you’re probably not running a fleet of Mercedes, but there are always other delivery vehicle expenses that should be considered part of your direct cost, such as insurance, registration, maintenance, repairs and even depreciation.
Of course, insurance and registration requirements never go away and depreciation is one of the most overlooked vehicle expenses. Like I did with my Mercedes, failing to take even the smallest details into account can cause you to overlook the true costs of your vehicle.
So what’s the solution?
It could very well be hiring a third party delivery management company.