As e-commerce growth continues unabated; there are common pitfalls and unforeseen challenges that can be diminished at the outset if discussed early enough before committing to large customer websites or online selling sites
There are many benefits to the consumer and supply companies of using e-commerce buying solutions which make online selling a compelling choice, here’s just a few:
- Choice and comparability of offer
- Convenience to the user
- Ease of transaction
- Easy returns and right to cancel
However, the benefits enjoyed can come as an unforeseen ‘cost’ that the consumer / supplier is often unaware. Also, the reality of the results may not be in parallel with personal / company values, such as sustainability and protecting the environment.
Actual scenarios and outcomes
Our own business consultant Paul Blackman has a plethora of experience in this very subject and helps businesses to overcome or preferably set up with tailored processes that suit the overall business vision and needs. Here he shares some unnamed scenarios and outcomes. If any resonate with you and your business challenges, please get in touch we’re here to help through this potentially costly process, ensuring success!
We asked Paul to give us the most common areas of error, these are his findings split into anonymous but very real scenarios:
- Green Credentials
- Total Cost
Scenario - Inventory
When lead-time is a factor ‘Inventory growth’ is common, often down to imported product. This becomes impacted when selling on-line to meet customer demand and maintain an ‘in-stock’ status (note some e-commerce sellers impose a fine).
The following example is typical; but responsibility is still not considered collectively in many businesses.
“The Business had realised it had to maintain a cost to sales ratio to enable realistic margins to be achieved. This was fundamentally because selling price needed to be competitive at all times. It was a historical point that ‘buy price’ was the measure NOT overall cost. This ratio was the first KPI that the business focussed on. As a consequence, the relationship between total expenditure and rate of sale (ROS) was not established correctly. I discovered that the buy cost of a unit was measured somewhat obsessively whilst checking ROS was somewhat haphazard and without independent scrutiny. In addition, the product cost was created on a ‘standard cost’ model that did not interrogate variances in ‘real time’ but only allowed half yearly checking and annual changes. As a consequence, the business had inadvertently created a conflict between functions and not one of business sense.”
Findings – Pressures of online selling affected ‘in stock’ status, product storage, flexible price competitiveness at acceptable margins.Here the stock was incorrectly valued; stocks were high and margins inaccurate!
This is the outline of Paul’s Improvement Remedy on a single scenario, relevant to one client:
Research and record / react to ‘current on line price’ (selling COP) set inventory levels at lead time replenishment plus 20%. Then use weekly and monthly rate of sale to confirm performance.
Before reordering - calculate in ‘real time’ that the ‘selling price’ and ‘buy price’ created an agreed margin position Based on real rate of sale and balanced inventory.
Both sales and purchasing had to produce data that could be verified by finance and all three areas had to ‘sign off’ the expenditure
This approach revealed that many products where not financially viable and needed revision. Inventory as a consequence had to be sold off in non-conflicting markets to release working capital
Scenario - Green Credentials
When the production of your product is created with green credentials; then changed to meet extended markets and increased volumes, involving additional suppliers - you’re not necessarily in control of all factors and accreditations!
“This example is again typical. At product launch, the Marketing department had created a compelling brand and product story around Tradition, Heritage and internal Skills that contributed to a real reduction in travel related carbon footprint and environmental damage. The historical point was true, as the company made much ‘in house’ and sourced locally from like-minded businesses for the balance. What became untrue was that local suppliers had begun sourcing from the Far East, to hold margins and the Purchasing function had not checked and sought realistic verification. In addition, many of the products / processes used were clearly not ‘green’ and had known environmental negatives. This would have been considered but the emphasis was on the look and feel of a traditional product not how this was achieved.”
Findings – The product changes impacted on price and availability. The increased demand forced supply chain changes where updates to credentials were not captured. A knock on effect of inaccurate online brand statements, potentially leading to brand damage! The Green Credentials were fundamental to the online seller
This is the outline of Paul’s Improvement Remedy on a single scenario, relevant to this client:
Create a master list of all parts supplied showing country of origin, process and a statement on environmental issues including carbon, societal damage, health risks as a consequence. [This has also proved invaluable for closing out country of origin issues and capturing accurate details when exporting finished product thus avoiding tariffs.]
Proving origins allowed a full review of the product design and a removal of items that were produced externally that had a clear link to poor worker health.
In addition, an internal audit on all aspects of manufacture and supply to ensure claims made are accurate and sustainable. This is additionally verified annually to ensure compliance.
Scenario - Total Cost
When there are insufficient measures in place to capture realistic production / sales costs, in line with the current online price expectation identified by relevant comparison sites and expected by e-commerce sellers
“This often has conflicting internal and ‘online’ measurement criteria. Those businesses with traditional accounting models are the most likely; in my experience, to have errors and exclusions. This example included all these elements and had been instrumental in the business poor (loss making) financial performance. As is often the case the business internal functions were in ’blame’ mode without actually realising that the problem was self-generated.
I often find that Logistics costs and the purchase of parts and other expenses are not allocated correctly particularly if they are outside of the ‘normal’ purchase system. This is very prevalent when companies use online Merchant sites or buy through distributors. This was very much the case here and when including the inbound costs on container imports the discrepancy was considerable.
In addition, the accounting models are not ‘real time’ and not revised as it was believed that data will be corrupted when making comparisons.
The reality is that costs were not recorded correctly, as they created a variance /un-coded ledger! subsequently the margin calculations that justify supply are at best inaccurate.
It would be unfair to suggest this was just a finance issue as the sales function were very vocal in arguing that they had to meet a ‘price’ to protect business.
It is not always straightforward to create a totally accurate ‘customer profile’, but this is not really necessary when completing total costs on a category / product group basis instead.”
Findings – the internal cost model failed due to the flexibility required when using an online selling platform
This is the outline of Paul’s Improvement Remedy on a single scenario, relevant to this client:
Firstly, work to create a realisation that the creation of accurate data and removal of blame was priority one.
Once this was achieved then ensure all costs were allocated and reviewed against category by all parties against an agreed target gross and net Margin.
This revealed that the idea of hitting a price was; at best, unsustainable and a revised selling model was created based on collaboration and value. This required me to work closely with the senior team, entering into realistic discussion with B2B customers and increase prices to B2C. It was tough and difficult overall, but turned loss into profit on a sustainable basis.
So, what happens next?
If you are already selling via a large e-commerce site, or are thinking of doing so, be aware the attraction is great and there are many benefits, but it is essential you align your e-commerce sales plan (and all it entails) with your internal business plan and measurement criteria
Things can easily get out of control, especially when the focus is on sales / volume. However, your business depends on margin, to ensure success
You need to manage the system – not let the system manage you!
In our experience, the total costs involved, including logistics and environmental damage, are rarely fully appreciated. This is initially by supplying businesses in the drive to grow both revenue and satisfy consumer requirements, against a backstop of positive online affirmation via reviews and social media platforms. This on review; often requires a strategic review that has far reaching implications, that may not be that palatable in the short term but is necessary to move forward effectively.
Firstly, the remedy is complex and must be against the context of ‘how did we collectively get to this point?’ This is where we help, by helping businesses to realise their plan and implement it realistically and sustainably
A review of the number of lines your supply on-line along with a revision in how goods are supplied will affect availability and as a consequence, reduce choice BUT if done well will increase sales over the reduced number of lines.
True demand serviced by the producers will ultimately reduce consumption of materials that ultimately only create inventory and a diminishing return for all parties involved.
We help by supporting clients to ask the right questions, review the current status and overlay with future direction. This helps to give some of the answers that will put the business in a positive position for a changed reality and a more profitable outcome
Contact us to arrange a virtual chat or meet up to go through some ideas of how we can help you