Alex Mills, sales & marketing director at ProSKU
Even though they might not realise, sooner or later most start-ups and growing online retailers will need to manage their physical stock more effectively. When they come to this realisation the challenge is not just which type of solution meets their needs but whether they can justify the investment.
The majority of online retailing and e-commerce businesses start with a great idea and are driven by the passion of the founders. The initial priority and hard work will be on the customer-facing experience that generates sales. There are plenty of excellent shopfront and e-commerce platforms that allow users to be up and running quickly and with minimal technical expertise. But businesses will face a dilemma when the reality kicks in that managing the physical stock to support their sales will soon, or worse, has already, become cumbersome, overbearing and expensive.
Managing physical stock is a critical business process for any retailer. Knowing how many items are in stock is important but so, equally, is knowing where it is physically located, whether it is accessible and available for meeting current orders, its size and weight, date of manufacturer (and/or expiry) and more. Integration of this information with customer-facing and back-office applications can save laborious time and reduce errors, which helps to improve customer service and business efficiency. At a most basic level, simply knowing where an item is will save time and money when you need to find it.
Warehouse management systems (WMS) are widely used in larger organisations where stock and order volumes demand a high level of control. But in smaller companies, although stock turn and order volumes are lower, much the same problems are experienced when handling ‘physical stock’.
The usual route for the growing company is to perceive a need for ‘stock control’ at a certain stage of their development. Software modules that provide it are often a component of accounts systems or (in the e-retail sector) shop-front solutions. Most businesses need accounts and order capture so there is a logical step to using the stock or inventory-type solutions that come with them.
This is where complications can emerge. These systems are generally OK but their scope and capabilities may be limited. If you do not hold the stock yourself – for example when you use a third-party fulfilment service - you may only need a numeric stock total in order to advise availability to your customers. Many customers base their purchasing decision on a combination of availability, delivery time and price and this information can easily be presented accurately at the front end assuming the number of items in stock is known. Once the purchase has been made, the heavy lifting of completing delivery can be passed to a third party using information captured and transferred by the shop-front application. Similarly, basic systems using simple stock level visibility could also be adequate if you hold small inventories or have low order volumes. But as your business expands the problem of relying on a system for stock accuracy that does not control stock in the physical sense - or is not linked to one that does - becomes bigger. Retailers who manage their own large - and growing – inventories will probably need something better.
These limitations should not be a surprise. Shop-front and e-commerce systems generally don’t have their own built-in payment facilities – relying instead on superior third-party integrations - so why would anyone expect them to have anything like a fully featured stock control system? Yet many start-ups, in particular, appear to be unaware that better alternatives exist. Those that are aware will most likely have come across the fully-featured warehouse management systems that are used by larger and established retailers. These are probably too complex and expensive to contemplate for the time being, if ever, for the majority of businesses. Nor is it ever going to be worthwhile creating your own solution. So the logical choice is something off-the-shelf that can be integrated quickly and easily with existing applications.
Larger companies nearly always consider WMS to be essential. As you expand, hold more stock and process higher numbers of orders, the level of operational control you need to do so efficiently increases. This is where the control offered by WMS - based on system instruction, verification of stock transactions, and (increasingly) real-time movement updates - becomes the only true form of stock ‘control’. In other words, these businesses need to know not just how much stock they have but also other information such as where it is located, dimensions, age and weight and probably more besides. This will allow them to calculate shipping costs and timeframes accurately and provide an excellent customer experience while also managing internal processes such as stock rotation and returns more efficiently.
So what stops smaller businesses embracing the WMS system? Clearly, the cost has been a deterrent in the past, with little available in the market for the smaller company. But now, cloud-hosted systems are available by monthly subscription which makes them accessible to a wide range of companies. For many businesses the inherent accessibility and portability of a cloud-based solution are going to make them more attractive than conventional managed or hosted solutions, leaving aside considerations of implementation and complexity. Monthly costs can represent a minimal sum compared with the total labour and operating expenses and require little cost justification in the traditional sense.
The latest cloud-based solutions enable all the key stock control functions, and often many that you won’t need. However, to keep costs down to a sensible level and avoid the complexity that quickly arises once bespoke features are demanded, vendors will want to offer a standard set of features. This is not to say that the functionality of these systems is limited. They have been developed with this type of business in mind and should – most do – have all the important stock tracking and control features as standard. Indeed, they will probably support flexible ways of working to support different types of business and/or emphasis.
These systems will almost certainly have been designed to support simple integration with customer-facing and back-office systems. To get started, users typically have to do little more than enter some basic stock-related information and details of their storage locations. This can be imported from other applications – and in simple CSV files - to speed things up. Most applications can be up and running within a week or so, whereas traditional large-scale systems can take months to configure and implement.
It would be wrong to say ROI does not matter, but it is of less concern than with capital projects. A capital spending involves a cash outlay, so a decision to invest in software rather than other business areas needs to be justified. You need to know when you will get your money back! A service-based solution, on the other hand, need only be justified to the extent of its minimum term (in our case one month!). This can de-risk the exercise, enabling benefits to be realised (or assessed) at low cost.
The potential upheaval to implement a WMS system also deters smaller users. But now, with no need to install big infrastructure, manage servers or administer a database, things are much simpler. Systems developed specifically for the cloud with the latest web technology and API functionality mean fewer integration issues. And in our own case, we have used the experience of larger company projects to refine the set-up processes and perfect a system genuinely accessible to the smaller user.
So does a WMS pay for itself in the smaller company? People often say “we’ve only two people in the warehouse, it wouldn’t give us any benefit”. We disagree. Even with just two people, you will see some savings. They will not be huge, as the cost of using a system is higher as a proportion of labour cost. But based on expected improvements, savings become significant at around four warehouse employees, when annual efficiency gains would equate in value to around one staff member. That said, in many smaller businesses, the ability to make existing employees more productive and able to undertake additional duties using the time freed by adopting better systems may be more important than the actual cost savings in themselves.
As staff numbers hit double figures, you could expect savings of around 45-50k per year, or two to three staff members, based on employee costs of around £8.00 per hour, plus minimum on-costs. Bear in mind this is probably a cautious estimate. The number of factors you can improve by using a WMS and their knock-on business effects mean you could see considerably greater benefits. In the end, what value do you put on customer satisfaction and retention?
Photo credit: scharfsinn86 (Fotolia)