Operations is probably the most valuable part of the entire chain and the part that your end customers care about most, despite the lack of credit it gets.

It’s the least sexy, most complicated and often overlooked part of any business, but potentially the largest lever for cost efficiency and building customer trust.

Therefore, finding ways to consistently overcome short and long-term operational complexities is vital for your organization’s financial performance, and most importantly to the end customer.  

We believe there are numerous potential trip wires in 2024 to look out for, but any great operator will be aware that the forward-looking time horizon for operations is 3-5 years. The decisions we make today, given some of the investments are substantial, need to ensure commercial and customer benefit over the longer-term.  

The subjects we choose to highlight in this piece all complement each other in the current climate. These are:

• Labor cost inflation
• Capital allocation
• Choosing the right automation and software
• Increasing customer lifetime value (LTV) and retention
• Continual improvement - raising the bar

We separate each with a version of how we, as THG Ingenuity’s fulfillment offering, Fulfil by THG, are tackling these global challenges, and emphasize how we have navigated choppy waters over the last few years.

Leave these topics unaddressed, they can hurt more than a last-minute winner against your favourite football team!

Labor cost inflation

How does labor cost inflation impact fulfillment?

To set the scene:  

• January 2024 – Poland increased average wage by 21%.
• USA 20% wage inflation in the last 2-years.
• UK 28% wage inflation in the last 3-years.

The operational arm of any business plays a pivotal role in the success of any organization, and labor inflation within this domain can significantly impact operational efficiency, cost structures, and overall business performance. With unemployment rates in the US and UK below 4%, these pressures are unlikely to abate in the near-term.

Navigating wage inflation in operations requires a proactive and multifaceted approach.

By understanding the specific causes and impacts within the operational context and implementing strategic workforce management practices, alongside the need to introduce or increase forms of automation, organizations can foster a resilient and sustainable service with a smaller highly skilled workforce with less reliance on agency personnel.

As a result, ensuring continued operational success in the face of wage inflation challenges.  

Conversely, some businesses with insufficient capital deployment or capability are forced to adapt their business models to absorb inflationary pressures simply to survive. This often results in loss of market share by selling a lower volume for higher gross profit per unit – an unsustainable model for many if costs cannot be passed on.

Capital allocation

What are the main challenges of capital allocation?

One of the biggest considerations is whether to invest in future automation or infrastructure now. At THG Ingenuity, if we hadn’t been bold to build for the future, we would almost certainly be having to stomach a higher cost environment.

Therefore, ensuring you understand your current and future operating model is of paramount importance when considering these types of investments. Simply choosing to invest without proper foresight could be worse than deferring the decision to a later date.

The skill to accomplish this is to be vertically integrated within your own business if feasible, versus outsourcing to keep costs as low as possible. In addition, all expected key performance indicators should be aligned to future business goals, without third parties taking a proportion of the available cash to invest.  

Our guide within the world of Fulfil by THG is that any operational investment needs to pay back within 24 months, maximum.

Common challenges with capital allocation which we have discussed with a multitude of international clients include:

• Overleveraging: Taking on too much debt can limit a company's ability to allocate capital effectively, as a significant portion of earnings may go towards servicing debt rather than investing in growth. 
• Poor investment decisions: Companies may struggle if they make poor choices in allocating capital to projects that do not yield a satisfactory return on investment. 
• Market dynamics: Economic downturns, industry disruptions, or unexpected market changes can impact a company's ability to allocate capital effectively. 
• Inadequate financial planning: Companies may face challenges if they don't have a robust financial planning process, making it difficult to allocate capital wisely.

As an operator who has faced these challenges and more whilst building a global fulfillment network alongside rapidly scaling multiple online consumer brands, we offer a unique perspective to investment decisions, through the lens of a brand-builder.

Choosing the right automation and software

What criteria should businesses consider when selecting automation for fulfillment?

How do you choose the right automation or operational investment when every day there seems to be another provider in the market promoting another idea of how to save everyone money?

In our opinion, an agenda where all business stakeholders are aligned, should consider the following:

• Identify your business objectives: Clearly define operational and automation objectives, whether it is improving efficiency, reducing errors, or enhancing customer experience – what is the desired end goal for your business?
• Compatibility and integration: Ensure the selected automation solution integrates seamlessly with existing software and hardware infrastructure. If you do not have the luxury of having your own warehouse management system then the assessment that the chosen provider can cost effectively integrate and constantly turn the screw on required software adaptations will be of paramount importance for ongoing operational efficiencies. These efficiencies could reduce the need to invest further if you can improve the ingesting, storing or picking capability within the same initial investment.
• Customization capabilities: Prioritize automation tools that allow customization to meet specific business processes and requirements. You may need bespoke capability which neither software providers currently enable - one aspect to most certainly bear in mind. On the flip side to this potential need is;
• Scalability and flexibility: Selecting solution(s) that can scale to accommodate business growth and adapt to evolving automation needs without having to pay a software integrator to retrieve your own data.
• Vendor support and training: A very basic requirement to ensure the level of support provided by the vendor is adequate and ongoing, agreed in contractual terms, including training resources and any relevant assistance.
• ROI analysis: Conduct a thorough return on investment (ROI) analysis to evaluate the financial benefits of the chosen automation solution. This should drive a certain level of internal conflict between internal stakeholders and CAPEX committees concerned with investment sign-off. If it doesn’t, then you should question the level of detail being assessed. Nothing is ever straight forward as assumptions will need to be made to calculate any return of investment, be prudent with your assumptions at the very least.
• Security features: Prioritize automation tools with robust security features to protect any sensitive data and ensure compliance with regulations. If the vendor is holding any of your data, then the relevant data protection assessment needs to be vigorous and be included in any disaster management assessment.
• Trial period: With more automated operational services on the market than ever before, it is entirely possible to gain trial periods. This could save valuable time and cost, and confirm you were on the right track.
• Customer referencing: We cannot recommend this enough. As a rule of thumb you should speak with at least 2-3 current users of the operational solution you wish to deploy without the vendor present as they are not likely to tell you warts n’all if a vendor is hovering you’re your shoulder. We have been quickly turned off from certain complimentary forms of automation by speaking to existing customers, yet we have also been fueled with confidence when we meet current users and they confidently speak highly about their solution and ROI periods. This can also be just as important if you have different forms of automation expecting to work with one another, with different layers of software responsibilities. It’s not easy to find the customers and arrange meetings without vendors present but if you can, it could be one of the most important things you do in the decision-making process.

In conclusion, navigating software restrictions and choosing the right automation solution involves a careful assessment of current challenges, future needs, and the capabilities of available tools.

A strategic and well-informed approach can lead to successful automation implementation and improved business processes.  

We have learned that if you have assessed acutely and done your homework, you will gain efficiencies in year 1 from simply having the solution deployed and live. Highly likely reducing the head count requirement for equivalent, if not more volume, in years 2, 3+.

It will come down to how much you can squeeze from the software to gain further efficiencies, pushing the need to re-invest further down the line. 

Increasing customer lifetime value (LTV) and retention

Strategies for maximizing customer LTV and enhancing retention rates

As part of THG PLC and as brand owners ourselves, this has been an obsession for years. Everything we have built within operations has been built with one obsession in mind: the end customer.

Increased speed and throughput of unit volume is likely to be a core KPI, along with the ability to have various pick strategies. We are able to share insights into how we care for our customers as we firmly believe (and our data confirms), that delighting customers unexpectedly has a direct correlation to LTV, order frequency and stickiness to brands – a self-fulfilling ecosystem!

In 2023 we started upgrading UK customers who opted for a standard delivery option, to a next day service, free of charge for orders placed before 3pm each day in the UK. We enabled this across multiple brands through our deep and direct courier relationships and through efficiencies and savings delivered through automating fulfillment.

The first indication we saw was from Trustpilot, where customers share thoughts about their experiences with businesses in the UK. 82% of THG’s Trustpilot reviews in Q4 2023 were 5 stars, with >50% referencing a positive delivery experience.

Thanks to the efficiency of automation and renegotiations with couriers, we used our data and order management system to show how we could serve the remaining new customers who ordered after 3pm with next day delivery – even the 25% of customers who ordered between 10pm and midnight. Once implemented, we were successfully upgrading nearly every new customer shopping with the chosen brands, every day, 7 days per week!  

The positive customer feedback kept coming in waves, so we knew we were on the right track and since then we have deployed this capability in the East and West of the USA and next up is deploying in parts of the GCC region in the Middle East.  

We upgraded millions of orders in 2023 to next day services, which drove improved retention and accelerated repeat spend within a 90-day period. A clear proof point that operational services drive customers and cash back into the business.

If you are not working with fulfillment or courier management services which provides this level of customer foresight, we believe you should be re-assessing your operational partners.

Continual improvement - raising the bar 

The challenges of ongoing performance optimization

Beating last year’s performance needs to be the minimum benchmark any business should set its operational function. With the constant weight of inflation, reduction in available cash and internal nervousness to buy into further forward-looking investments, it can be a real battle.

That said, any reputable business will have a 3-5 year time horizon given the length of time it takes to design, engineer, procure, deploy, learn and optimize a solution to ensure it keeps up to speed with the explosion of customer demands and personalised requirements, plus the mass amount of data that comes with it to fine tune your offering to customers to differentiate yourself from the competition.

Complacency in the operations arena is the silent killer. We are all only as good as our last customer delivery.

Client case study: Cult Beauty

Delivering more for clients thanks to cost savings and reliable deliveries

Cult Beauty, the UK-based online beauty retailer of prestige and emerging independent brands, migrated their fulfillment operations to THG’s North West automated warehouse in early 2022. In addition to substantial cost savings across rent and rates, packaging costs reduced by over 25%.  

By integrating into Fulfil by THG’s courier management system, Cult Beauty unlocked savings of around £6m in UK and international postage costs.  

Through a lower fulfillment cost of sale and accelerated, reliable delivery – Cult Beauty delivered more for their customers at a fraction of the cost.

We are constantly striving to put the customer front and center of decision making, as an end-to-end customer-obsessed business, and our clients benefit from our tenacity and passion for value and first-class service.  

This passion we carry through to all our partnerships, enabling clients to be asset light whilst leveraging THG's best-in-class automated facilities and proprietary software, which have been developed with a DTC customer first view.

Our clients also benefit from leading UK delivery service levels and a sophisticated courier management system, a non-negotiable to today’s consumer.

Optimizing fulfillment and overcoming complexities is a dynamic challenge. Reach out to the team at fulfil@thg.com for a comprehensive introduction of our services.

About the author

Tom Killeen is the Chief Operating Officer of THG Ingenuity, responsible for the operational infrastructure that powers all THG’s brands and THG Ingenuity’s clients.

Tom has spent the last 11 years at THG, having initially played a pivotal role in building Myprotein into the world’s leading online sports nutrition brand, navigating complex operational challenges, expanding into 60 territories across the globe.

As COO, Tom is passionate about bringing THG Ingenuity’s unique fulfillment and courier management offering via Fulfil by THG to market, enabling third parties to take advantage of THG Ingenuity’s extensive know-how and fulfillment infrastructure.