Risk Versus Reward in a Declining Business Environment

BY HAL ALTMAN

It’s no secret that our industry, the direct response industry, has been and is still going through tough times in today’s economy.

With unemployment numbers in double digits, foreclosures and credit card debt reaching record numbers every day, it’s no wonder that direct response is taking a beating. The trickledown effect reaches every company in our industry–from media to production, product financing, telemarketing and fulfillment.

There are many important variables we can control such as creativity, product design, production, media selection and vendor choice…but the state of the economy is an area where we just become spectators.

Those companies that are veterans in the direct response wars recognize the danger signs of higher gas prices, massive unemployment, foreclosures and an unpredictable stock market that reaches out and grabs the mind and checkbook of the potential direct response customer. When credit card debt becomes unmanageable and debit cards cannot become authorized, sales are forced to shrink–which have a horrific effect on the industry.

Banks have tightened up or just refused lines of credit that before were just an ordinary paperwork procedure. Just recently, one of the largest retailers of large screen televisions and entertainment centers closed its doors after 40 years; not for the lack of customers, but for the lack of available lines of credit from the banks necessary to finance its inventory.

When first reading this or similar comments on the economy, one would think they better fold their tent or at least hibernate until the storm blows over. The answer to this is definitely no. Now is the time re-trench and move ahead. Be creative. Look for opportunities when potential clients need more help than ever to sell a product, protect an image or create a consumer need. There isn’t any successful company, small or large, that at some time or multiple times has had to take a calculated risk in order to move forward.

Be Proactive
“Risk is reward” if it is done so in a calculated manner that does not jeopardize your company’s future if this new mobility does not pan out or if it’s not as successful as it looked on the drawing board.

If you bury your head in the sand until the world changes, it will probably be too late. There are enough companies and people who will not sit back and let the economic times of today muzzle their creativity and desire to move ahead.

In every industry where economic hard times have hit, someone is taking advantage of the situation to fill a need, create an answer or come up with a solution that the consumer can afford and feel good about. It may not be the same product or service that was successful five years ago, but instead it’s an exciting product that is currently affordable and can make a marginal profit now.

Internally, new programs can be written and companies can be PCI compliant (eventually all will be required). They can also update internal software and try to renegotiate outgoing shipping costs with major carriers.

Streamlining your workforce and combining job descriptions may become a reality and essential to keeping the doors open and maintaining a positive foothold in the marketplace.

It comes down to the term “business flexible,” which literally means that you or your company can adjust to the current financial and market needs and then re-adjust when needed. Whether it is labor, media dollars or production, flexibility means longevity. Doing nothing means going out of business.

Hal Altman is president and co-founder of Motivational Fulfillment & Logistics Services in Chino, Calif. Contact Altman at hal@mfals.com.

The Art of Refurbishing

BY HAL ALTMAN

In today’s economy, “I can save you money—perhaps hundreds of thousands of dollars,” are the sweetest words a company can hear. When a client engages either a direct response fulfillment company or a 4PL retail logistics provider, the message is the same, “save us money.”

Locked into fixed costs like labor, freight and materials, fulfillment vendors must look to additional services to save their customers money. One such service is refurbishing, also known by other names such as “reworks,” “restoration” or “remanufacturing.” The bottom line is the same: converting returned merchandise into good merchandise that can be reshipped to customers.

Opportunities for refurbishing arise when consumers or retail stores return goods because they just don’t want them or they only want them for minor or major problems with the product. Rather than looking at returns as a one-way street resulting in substantial losses, companies should see returns as an opportunity to save money and generate additional income through refurbishing.

In order to successfully and efficiently refurbish returns, a company—along with its fulfillment vendor—must focus on several different factors.

Deciding What Is Worth Saving
The first decision that must be made is what returns can be refurbished and at what cost. Although the client is the ultimate decision-maker in terms of which products get refurbished, the decision must be informed by the labor costs and materials needed to put the merchandise back into a condition that can be resold. Developing an appropriate protocol is essential to ensure that products warranting refurbishing are, in fact, refurbished while avoiding spending valuable time and money on products that cannot effectively be refurbished.

The Availability of Parts
With some refurbishing, it is possible to “cannibalize” parts from other returns to use in the conversion. In other situations, new original parts are needed and they may only be obtained by the original manufacturer from their factory. With this situation, timing and costs again become a major consideration.

The Type of Product
Certain product categories allow for a high degree of refurbishing while other products are limited. Determining the complexities of refurbishing each category of product is essential. For example, you must be very careful in refurbishing cosmetics and ingestibles. Both of these categories play a major role in DR and returns can represent a high percentage of sales, especially if continuity is involved. There are two steadfast rules in refurbishing these products. First, any cosmetic or ingestible items that have been opened or used must be discarded and cannot be refurbished. Unopened, sealed items can be refurbished and shipped to customers. Second, in order to refurbish cosmetics or ingestibles correctly, the fulfillment center must receive this merchandise with expiration dates and manufacturing lot numbers. When returns are sorted, they must be refurbished with corresponding expiration dates and manufacturers’ lot numbers in case a future recall of merchandise is necessary.

Refurbishing small electrics is a bit more complicated since all refurbishing has to be done following strict factory standards in order to reship those products as “new” merchandise. Laptop computers is a category that cannot be refurbished and resold as new goods, but can be refurbished and sold as reworked or refurbished either online or to certain retailers who sell them as refurbished, blemished, dented, etc.

Packaging Requirements
When refurbishing for retail, the cartons and inside packaging must be identical to the original shipments in order to match the existing inventory already on the shelves. In most cases, the replacement boxes and interior packaging must come from the manufacturer and the timing and availability have to be monitored very carefully.

When refurbishing for DR, a white or brown corrugated box can often be substituted for direct shipment to the consumer. This not only eliminates the issue of the availability of like packaging materials, but it allows a company to save money as corrugated boxes are far less expensive than multi-color litho boxes.

Returns are a fact of life either in direct response or retail sales. The question really comes down to: “How do I turn these into money?” One way to look at it is to say that every refurbished item that can be put back into inventory—or resold—is literally a piece of free merchandise. Think of refurbishing usable merchandise as cash. When refurbishing is done properly and efficiently, it is possible to convert 70 to 80 percent of returned inventory into cash that is added to a company’s bottom line.

Hal Altman is president and co-founder of Motivational Fulfillment and Logistics Services in Chino, Calif. He can be reached at (909) 517-2200.

Big Box Versus Online

BY HAL ALTMAN

In years past when a manufacturer or distributor spoke about taking their product to the retail market, it meant the “big box” department stores or warehouse types like Costco, Sam’s or hardware and drug chains.

Today, retail distribution companies, known as 3PL or 4PL logistic providers, have to be able to process and ship for a completely different retail outlet—the Internet.

Companies such as Costco, Walmart, Best Buy, Target and Apple have shifted a major share of their in-store revenue to their respective websites.

OPPORTUNITIES FROM THE WEB
Big-box retailers are now competing with themselves in many ways. History shows them that when they can bring shoppers into the stores and let them roam the aisles, they will in most cases add an additional item or two that wasn’t on their original shopping list.

In 2009, online retail spending in the U.S. totaled $129.8 billion, down from the $130.1 billion from 2008, but still a gigantic bite out of the consumer dollar spent directly in the store.

Retail e-commerce sales for the fourth quarter were 35.9 billion, an increase of 4.5 percent from the third quarter of 2009. The fourth quarter 2009, e-commerce estimates increased 14.4 percent from the same period 2008, while total retail sales only increased 2.2 percent in the same period. E-commerce sales in the fourth quarter of 2009 account for 3.8 percent of total sales, according to the U.S. Department of Commerce.

Those billions in online sales have more than a “trickle” down effect in the big-box retail stores, in many cases it is a disastrous downpour.

Major chains such as Macy’s, Saks, Circuit City, Home Depot, and Sam’s Club and Mervyns have been forced to either completely go out of business, or close stores and lay off workers.

This online bonanza has caused traditional 3PL or 4PL retail distribution companies to expand their services to processing and drop shipping individual orders to consumers, rather than their traditional business of shipping pallets to distribution centers.

Most online retailers use a processing EDI service called a VAN (Value Added Network) to download these individual orders to their fulfillment resources. The fulfillment provider prepares the labels picks, packs and ships and uploads the ship confirmations and tracking numbers through the VAN to be sent to the online retailer.

The fulfillment company has to be prepared to accept individual consumer returns and process these back through the VAN.

The moral of this story is a blatant message to both the fulfillment/logistics providers and the manufacturers or marketers—be prepared to deal with the new duo retail profile. Be able to produce goods that are packaged and designed for individual consumer shipments, and to the logistics provider—get in the consumer fulfillment mode.

If both these groups cannot see the video screen on the wall, their growth and future existence is in question.

Hal Altman is president and co-founder of Motivational Fulfillment and Logistics Services in Chino, Calif. He can be reached at (909) 517-2200.

Retail Logistics: A Moving Trend

BY HAL ALTMAN

For the last decade, retail merchandise from the Far East was synonymous with the ports of Los Angeles or Long Beach. It was an accepted fact that merchandise being manufactured in Taiwan or China would move through these two major ports on their way to your favorite retail store.

In a peak year of 2006, over 15 million sea containers passed through these two ports forcing them to work 24-hour shifts, seven days a week. Thousands of applicants would show up for a hundred openings when these ports had to increase workforce. The retail economy was literally driven by the success and growth of these ports. Compare this to last year’s slump in retail and direct response business where these two ports handled a little over 11 million containers.

Run the calendar a mere four years and the impact looks completely different. Why? The economy and competition has reached out and given growth and opportunity to not only new American ports, but also sites in Canada and Mexico.

Ports in Vancouver, Canada; Manzanilla, Mexico and Lázaro Cárdenas, Mexico, are all now attracting retailers along with additional U.S. ports in the Gulf Coast and East Coast. Smaller ports in Savannah, Houston and New Orleans are bringing in merchandise on a regional basis.

IT’S A LOCATION MATTER
Retailers are willing to pay a little more and even wait longer for their merchandise, thinking that closer distribution hubs and stores are better than having everything coming through Southern California.

That’s all said and good for the steam ship companies and the ports receiving this additional work, but that doesn’t do anything for the logistics companies dealing in goods for both direct response and retail that previously came through Long Beach and Los Angeles ports.

The challenge to stay in business and profitable now requires the retail logistics divisions to provide their customers with multiple receiving and shipping locations close to these secondary ports.

Coupled with the additional costs of multiple warehouses, staff, overhead and the reduction of close to 30-percent shrinkage in overall container business, it now puts an even heavier burden on the existing companies dealing in both direct response and retail distribution.

It appears the major buying habits of most retailers won’t be changing until mid 2010 or closer to Christmas 2010, but it is never too early to prepare.

Direct response merchandisers have been trying to figure out if it is more cost effective to drop ship individual consumers and retail accounts from multiple locations with still no conclusive evidence either way.

With lightweight items (under 10 pounds) arriving on the West Coast and with favorable negotiated outgoing UPS/FedEx/USPS rates, it‘s not always a for-sure savings by taking the West Coast container cross country to drop ship zone 6-7-8.

Combine high costs of fuel and rail charge, sending 10 or 20 containers a month to various locations in the Midwest or East does not always look as good as it sounds.

Major direct response merchandisers selling to retail can easily use up to 50 containers a month (depending on item cube and weight) and multi-warehousing becomes a costly and timing issue.

It is easier to process regional orders for retailers if the merchandise is “store” ready and does not have to be tagged, sorted, re-packaged or configured, or in need of any additional value-added services.

It is important as a merchandiser—who combines direct response with traditional retail sales or chooses one versus the other—to bear in mind the logistics of where, how and when your merchandise arrives. Consider the many costs and demands of your customers, and then match these to your logistics provider.

Hal Altman is president and co-founder of Motivational Fulfillment and Logistics Services in Chino, Calif. He can be reached at (909) 517-2200.