Logistics is an issue often overlooked by startups, yet an ingenious idea will dramatically lose its value if it doesn’t arrive on time and as described.
Failed deliveries are costing up to £780 million according to the IMRG, the UK’s online retail association. Ensuring that they succeed as planned in the most efficient and cost-effective way is no easy task in a system as complex as the supply chain.
“A lot of startups fail because really they fail to plan, and you have to accept that there is a cost of a supply chain, there’s a cost of logistics, there’s a cost of getting that product to market,” says Tony Leach, the global supply chain product director at logistics specialists Horizon International Cargo.
“The sooner you can factor in that cost and the sooner you can manage that within your cash flow, you can also look at your order to cash cycle, and your order can meet your customers’ expectations the better.”
His company has been providing freight forwarding services since 1991 for clients including Sony and GoPro from producer to market through its bases in Europe, the USA and Asia.
In recent years Horizon has increasingly been working with startups, often in collaboration with crowdfunding organisations such as Indiegogo.
Much of their work is done before the campaign launched, but payment is only requested once if the physical object is moving.
Often the initial conversation completely restarts the business plan. Perriman recently spoke to a couple of entrepreneurs who wanted to deliver customers a box comprised of uplifting treats within two hours of ordering.
The idea was interesting and there were talented people behind it, but the cost of the buying, assembling, packaging and posting the items so quickly made it untenable. Horizon may not have backed the concept, but their advice will hopefully help the people behind it with their next venture.
What is your end game?
“We need to understand what they want to achieve, and not just on this project,” says Horizon’s UK supply chain development manager Richard Perriman.
“Know your market. It can change, but then so will your options and costs. Consider where you think the orders are going to come from and go for critical mass.”
Larger shipments will offer better value but some areas with small orders and high costs may be best avoided.
Perriman recommends that startups outline the logistical details of their business as early as possible. This should cover the product details, including any potential issues around materials, the specific details of their orders, such as size and number of units, whether they have a code from customs, the markets they expect to sell in and the order numbers in those markets.
The end customer experience dictates everything,” he says. “Decide what you want that experience to be.”
The customer experience will affect shipping choice and force you to prioritise price, speed or safety. Short-term savings might not be worth the risk of returns.
“You don’t want returns,” says Perriman. “If you have to bring it back to depot, a return shipment can cost you as much as it did to send it in the first place.”
Negative feedback can also be destructive for a startup, while building brand loyalty around good service provides a strong foundation for the future.
In 2014 Horizon was introduced to DIY computer kit company Kano. They had 15,000 computers to deliver to consumers globally, and a company had offered them a high price to do this, with no advice on how to import the product into different markets
Horizon suggested the wrapped up its shipping into one consignment, sort out the customs requirements in advance, ship the product for US customers by boat to LA and then organise the final mile delivery through a tracked service.
“It cut their costs by 30 percent and made it a much smoother experience,” says Perriman.
Through word of mouth Horizon’s name grew in the startup scene, and so did that of Kano. When Horizon began to work with the company in 2013 it was embarking on a Kickstarter campaign with a $100,000. It eventually raised $1.5 million, and in 2016 it was named by NextWeb as the UK’s fastest growing tech startup and received praise from Prime Minister Theresa May.
The best method of transport will depend on the size of your shipment and your needs around transit times, traceability and budget. The cost of shipping by sea is usually a quarter of that of air, which is cheaper than courier because it involves bulk quantities.
Horizon uses a number of different delivery services, from DHL to Singapore Post, depending on the client’s specific requirements. Regardless of which is used, the final mile will normally equate to 50-60 percent of your total cost.
“The final mile is everything,” says Perriman. “That’s the bit that costs the most money because you’re now delivering one item on its own.”
Design challenges for imports
The choice of materials and form of an item can have a major impact on the cost of delivering it.
Technology products often contain lithium batteries, which face stringent shipping regulations due to their potential fire hazard.
An MSDS (Material Safety Data Sheet) certificate may be required as evidence that it has been inspected. If it hasn’t been done by a reputable company, the MSDS may not be accepted. Horizon relies on its partners in each region for advice on which companies will be permitted.
Certain substances have unique delivery requirements, while the size and shape or something can have a major impact on the cost of packaging and transporting it. Just fitting an item through a letterbox can have a major impact on your service, as it reduces costs by ensuring delivery on the first attempt.
Perriman told one of his clients that he could half his shipping bill by slicing three superficial centimetres off the design of his product.
“It fell into another bracket and that doubled the price,” he says.
FDA approval is another potential barrier. Perriman recommends adding all the information to the technical data sheet and then asking Horizon to make the application to the FDA on your behalf.
Tax and regulation
Duty and tax rates vary around the world. Customs authorities determine them using the Harmonized System (HS) classification code to identify the relevant duty and tax rates of globally traded products.
Each country also has a threshold at which a product becomes dutiable, and another at which it becomes VATable.
The costs these add to a product can be included in the purchase price or listed separately.
Sometimes the costs of duty and tax can be higher than buying the product domestically, and the specific customs code required can be unclear if the product is new.
The United States is particularly complex. It has its own classification system, the Harmonized Tariff Schedule (HTS), more than 12,000 taxing jurisdictions across the country, and the rate of sales tax required will varies depending on the item.
International businesses only need to collect sales taxes in states where they have nexus, also known as “sufficient physical presence.” What exactly this amounts to varies between states.
It isn’t all delivery doom and gloom stateside.
The threshold in the US at which duties and taxes are imposed on imports was recently raised from $200 to $800, which saves money and time-to-delivery, as the formal customs procedures can be averted.
Startups can sometimes benefit from the slow speed of changes in legislation. It can be slow to incorporate loopholes such as crowdfunding pledges into taxation systems.
“Legislation can’t keep up with the ecommerce phenomenon,” says Perriman.