Logistics Quality Issues- A Drain to Bottom-line & Customer Satisfaction for Direct Selling/ eCommerce Companies

Hi Friends

During my corporate career of more than 2 decades I had the opportunity to lead the Quality Management and Process/ Tools deployment function (Projects Division) for a multinational organization. I was fortunate to have qualified and experienced QA experts in my team who were big support for the effective deployment and off course for my own learning. It is a vast subject and we have seen many Schools-of-Thoughts including Deming, Juran, Goldratt, Six Signa, and many more which have enlightened the function during last century.

My views today are specifically tuned for the Direct Selling Organizations, and also true in parts for E-commerce companies in general.

Before I share my points on topic It would make sense to define the term "Quality" the way I see as a Customer, and also my understanding based on my Professional experience:  

"Quality is the Experience that Customers Undergo Over the Entire Life Cycle of Product(s) or Service(s), starting from their First Interaction (direct or Indirect, formal or informal) and till the end of useful or projected life of the Product or Service."

Broadly we can divide the Experience in three parts*,based on the stage of customer interaction or touch points: 

1. Decision forming phase 

2. Decision Execution Phase

3. Decision Experience Phase

(* The complete process of Quality function planning and deployment at the manufacturing level is not considered here as that is internal to seller or supplier but the outcome is definitely felt by the customer in their various experiences outlined above). 

Decision Forming Phase covers the period of exploration, customer has got a need and trying to find the solution or sources, weighing different options, getting information from the sellers, asking queries,  going through reviews and finally decide to buy or own the product or service.  

Decision Execution Phase defines the period when customer goes for placing its trust, and decodes to order and this period extends up to the point when the delivery of desired product happens.

Decision Experience Phase begins after the customers get the delivery and they start using the product or services. The phase extends till the product has completed its useful life and or customer has stopped the usage for some reason that is not related to product directly. But the reason which demands attention from the supplier and manufacturer is the forced stoppage of usage before the warranted life or projected useful life. 

Ideally the Customer is entitled for a "wow" experience throughout all stages, and professional organizations make every effort to deliver same. Still failures do happen for variety of reasons and despite the best intentions and design / planning, there are always scope for improvement. 

Here the most important point to understand and note is the the adverse impact on Brand value,  Bottom-line (profits) and top-line (Sales or Revenue) that a "poor or bad"** experience can bring. 

**When Customer's expectations are not met or if it feels or perceives a raw or unfair deal.

Key Logistics Quality Issues in Direct Selling Business

1.    Damaged / Leaked or Unusable product (poor packing, mishandling and poor product sealing) 

2.    Wrong or Missing product delivery (mostly human error, also related automated system deployed            in dispatch section/ ware houses)

3.    Quantity mismatch (same reason as put against point 2 above)

(for this discussion the product quality issue is not considered as the same does not fall under logistics)

As numbers especially language of money always delivers more impact or meaning, let us workout a high level estimate of cost of poor quality related to logistics issues which organizations have to bear and thus absorb direct hit to their bottom line. 

Let us workout a hypothetical case with following assumptions

Company Turnover                                     INR 1000 Crore

Avg Order Value                                          INR 3000

Defect Rate (logistics Quality Issues)         2 %

Estimated no of deliveries                          (1000 X 10,000,000) / 3000     =     3,333,000 approx

For 2 % defect rate which comprise all the deliveries which see any of the three above listed logistic quality issues. Each such event calls for  two additional dispatches (one return dispatch by customer and one re dispatch by the company. Additionally in case of damage to the product there is additional cost towards replacement.

Total no of additional dispatches                   2% x 3,333,000 x 2    = 66,660

i.    Assuming Cost (per event) incurred incl overheads towards dispatch (courier charges) = Rs 250

ii.   Incase of damage of product (s), assuming avg replacement cost 

      per event and 50% frequency (1% only)             =        Rs 1000

A.    Total Cost Estimates towards logistics (courier only) =    250 x 66,660 = INR 16,665,000

B.    Replacement Cost for damaged / unusable products   =    1000 x 66,660 x 0.5 = INR 33,330,000

Total Cost Estimates towards logistics quality issues         =     49,995,000 (almost 5 crore)

This is approximately of 0.5% of total Company Sales which can be easily optimized by introducing better system and processes to monitor the key activities. The figure becomes more disturbing if look at from the profitability parameter. If a company is making net profit of 10% then there is definite opportunity loss of 0.5% in net margin. Infact this is 5% of total profit company is presently making.

Besides the direct hit to bottom-line there is a medium / long term term adverse impact on Sales as such bad experience may lead to loss of customer especially if the events are repeated. The other cause of anxiety, pain and dissatisfaction for customers are elated to additional work they have to do for logging the claim and then making arrangements for the dispatch (some companies do offer their pickup services) etc.

The idea here is not to get lost in number jugglery but to initiate a discussion and conscious efforts towards minimizing the events thus preventing financial losses due to logistics quality issues. There are several ways we can mitigate, distribute or transfer the risks, all depends on leadership vision and drive which starts with  acknowledging the existence of such logistic issues and associated adverse impacts.  

How to address such issues- Based on my experience the best way to manage these type of issues is to create "Short Term Improvement Projects" with clear objectives and timelines.  The project should be assigned to a small cross functional team of talents. A structured approach with logical use of various Quality tools (brain storming, Pareto charts, Fish bone, Process diagrams, mapping etc) and regular reviews with the Steering Committee works very well.

Views and feedback are most welcome.

Have a Happy Peaceful Life ....