Build-A-Box

Tags: Supply Chain Management, Logistics, Supply Chain

To help subscription box services manage orders amidst rapidly increasing demand, logistics providers bring the whole package—from kitting and tying bows to delivery and returns.

Subscription boxes are the e-commerce age answer to the Fruit of the Month Club. From cookies to clothes to crafts, there's a subscription box service for just about everybody. Eating gluten free? Gotcha covered. Sports fan? No problem. Comics aficionado? Might be hard to pick just one.

Box subscribers pay a monthly fee to receive a package compiled according to a number of content models. With the "curated" option, subscribers provide no input about what they receive. In another model, subscriber input is controlled through a profile that contains their answers to questions that vary according to product category—skin type and tone for beauty products, for example, or preferred fiction genres for books. In yet another option common with clothing boxes, subscribers preview the service's selection and make any necessary changes before it's shipped.

Many companies ship on a shared drop date so customers get their boxes at the same time—a must when social media reveals are part of the brand experience—while others ship on the subscriber's order anniversary date each month.

Frequency and payment can vary, too. Some send one box every month for the same fee until the subscriber cancels. Others offer one-, three-, and six-month or longer options. Some don't send a second package until you tell them to.

And while most charge a flat fee based on the number of products in the box—three? five? seven?—clothing services might charge a monthly styling fee that's credited toward the price of garments purchased.

Reverse logistics are part of the puzzle, especially with loaned goods that have a nearly 100-percent return rate. Services that include clothing, toys, and jewelry employ turbocharged return procedures for cleaning, repair, and quality inspections.

Data also plays a significant role. Predictive analytics help services forecast each month's volume and get increasingly better at selecting what each subscriber wants and needs in a box.

E-commerce With a Twist

Conventional e-commerce involves shipping one-off orders as they're received, while the subscription box industry requires sending as many as hundreds of thousands of similar orders within a tight timeframe.

"The biggest difference is the commonality you have with subscription orders," says Jeff Jones, vice president of omni-channel fulfillment at Saddle Creek Logistics Services, a Florida-based third-party logistics (3PL) provider. "You might be sending the same product to 2,000 people rather than shipping 2,000 unique orders."

If it sounds complicated, that's because it is. And yet, it's an industry that's popular with entrepreneurs who start small, filling monthly orders in living rooms and garages. Once they hit a certain subscriber volume—usually between 2,000 and 5,000 monthly subscribers—many consider outsourcing fulfillment to a 3PL.

Uncorked Ventures, a northern California wine-of-the-month service, fills its own monthly orders. Founder Mark Aselstine, who sends an average of 400 orders in three configurations each month, doesn't anticipate changing his approach because of alcohol industry restrictions.

"A fulfillment house would be hard to permit for wine," he says, referring to federal regulations. "There's a long checklist that includes a separate area with a different lock and key for the entrance to wine storage." The cost of outsourcing would also bring his lowest-priced option, the $55-per-month club, close to break-even, he adds.

Kali, a Fort Lauderdale, Fla., subscription service for feminine hygiene products, has the opposite problem: Self-fulfillment isn't an option because of different government regulations. The one-year-old company that now serves an average of 1,000 women monthly ships four or five different configurations of sanitary napkins and tampons made from organic cotton.

Tampons are considered medical devices because they're inserted in the body, so orders must be filled in an FDA-compliant facility. Mad Factory, the fulfillment arm of a local creative services agency, has set up an FDA-approved space in its warehouse to house the imported organic products and ship orders every month for Kali.

"We've cordoned off one area of our air-conditioned warehouse to keep the dust out as required," says Marc Aptakin, president of Mad Factory's parent company, Mad Studios. "Requirements include cleaning the floors a certain way, wiping down the tables after they're wheeled in, and wearing gloves when packing. It takes about one hour to stage the space."

Industry pioneer Birchbox, one of the most popular subscription services with more than 1 million subscribers, charges $10 per month for a box of five beauty samples curated according to customer profiles. Inventory and fulfillment are handled by a 3PL that has worked closely with Birchbox from the beginning to develop procedures.

To Outsource or Not?

"When we started in 2010, the subscription box industry didn't exist, so we didn't have the luxury of simply asking a 3PL to execute," says Pooja Agarwal, vice president of operations at New York City-based Birchbox. "We worked with our 3PL to figure out what this process should look like."

Conversely, Le Tote, a San Francisco-area fashion rental company that ships more than 1.5 million products annually, manages logistics internally. Subscribers pay a flat monthly fee for a box that includes apparel and accessories. There's no set return date for the borrowed goods, but subscribers are charged each month whether they've returned the items in the pre-paid polybag yet or not.

Founded in 2012, Le Tote's fulfillment model is closer to traditional e-commerce than those of brands that ship the same box or even a slightly personalized box to everyone. The system selects three garments and two accessories according to the subscriber's profile; the customer reviews the order before it's shipped and makes any necessary changes. The result is highly customized, with 90 percent of subscribers personalizing their totes.

"We looked at the possibility of outsourcing, but our business operation is fairly complex with a lot of moving parts," says Viljay Khare, vice president of operations and customer experience. "There isn't a 3PL with experience doing exactly what we're doing with everything under one roof. Plus, we're too young of a company to abdicate that to someone else."

Many subscription box services, however, are happy to outsource inventory management and fulfillment to a specialist, especially after they've gone the do-it-yourself route for several months. That was the case with Vinyl Me, Please, a record-of-the-month service. Each box has three pieces: an album that has been pressed exclusively for that month's subscribers, an art print, and a cocktail recipe. The company filled orders in-house until it reached about 5,000 monthly subscribers.

"Fulfillment took more time than was justifiable and was probably costing more money than if we outsourced," says Matt Fiedler, co-founder and CEO of the Denver company.

After an unsatisfactory experience with a local 3PL, Fiedler partnered with Saddle Creek. "They process millions of units every month with thousands of different permutations, so they have the technology, systems, and capabilities to take our fulfillment and scale it," he says.

Record of Success

Having the right logistics partner in place is particularly important to Fiedler because of challenges the company faces with its primary product: record albums.

"The vinyl manufacturing process requires a three- to four-month lead time, so forecasting the number we need can be difficult," he says. As a result, the company has built a more robust forecasting model that takes into account historical performance for overstocks and returns.

Japan Crate, a company offering subscription services for Japanese candy, collectibles, premium ramen, and beauty products, has become more sophisticated in its forecasting process as it has gained experience.

"Forecasting was a guessing game in the beginning because we didn't have a model to work from," says Cody Radcliff, director of logistics. "Not many subscription box companies are open about how they do business."

Two years later, and with the help of subscription software Cratejoy, the company uses analytics that include churn (drop-off) rate and monthly customer averages to better predict inventory needs.

Forecasting to an Estimate

Forecasting is a challenge for most subscription box companies, notes Lori Homsher, CEO of EchoData Group, a global order fulfillment house based in Pennsylvania.

"Promotions drive subscription box volume," she says. "When they do a promotion, they give us their forecast, but it's just an estimate. If the promotion falls flat, we've staffed up for more volume than we get. If it takes off, we might not have enough staff. The numbers uncertainty is a constant."

The in-house data science team at Bombfell, a men's apparel subscription company, crunches the numbers to get a confidence score recommendation on who will order and what they'll buy that month.

"Our data science group works closely with buyers to build a bottoms-up granular forecast of what demand will look like to make sure inventory matches requirements at the size and shape level," says Bernie Yoo, co-founder and CEO of the New York City-based company. Data on returns, return timing, anticipated demand, and seasonality are combined to provide snapshots of future volume projections and inventory needs, as well.

Bombfell also uses data to make sure the company provides the right garments with the right fit for each subscriber. Whether clients return or keep an item, they complete a feedback form that gives the system insight into what does and doesn't work for them.

"That feedback goes into our recommendation engines and informs them on the right type of fit or style for them and similar customers," Yoo adds.

Inventory issues aren't just about appropriate product selection. Ensuring products going into boxes arrive at the distribution center on time can be an ongoing problem, regardless of the operation's size. Aselstine at Uncorked Ventures drove with his young children to a Napa Valley winery on a December Saturday morning to pick up five cases of wine because it was the only way to get it on time.

Japan Crate is moving its fulfillment from northern California to Japan so it has better access to the Japanese products it currently buys through local importers.

"If a product or component is hung up in customs or faces some other delay, we need a quick turnaround for receipt and shipping when it does arrive," says Homsher. "In many cases, this requires staffing flexibility, adding shifts, or reworking the entire job."

Staffing Up

Clearly, proper staffing for fulfillment is essential. While technology is a key component for managing inventory and organizing order picking, people still pick and pack. Managing the workforce needed is slightly easier when subscription companies ship on the customer's order anniversary date because companies or their 3PLs can fill orders throughout the month as needed.

Kitting is often an ongoing process, however, even when there's a shared drop date. When the subscription model uses a "base" product offering that everyone gets, workers can build those boxes first, adding in the personalized products closer to drop date.

Even so, staffing to fulfill hundreds of thousands or even millions of orders with a shared drop date once each month means outsourced logistics providers often employ temporary labor.

Subscription clients at Saddle Creek send orders to list sizes ranging from 2,000 to 3 million monthly. It's not surprising, then, that its fulfillment workforce includes temporary labor. Employment agencies with offices on-site help, but even with that assistance, it's an ongoing challenge given the variability, Jones says. At the same time, 3PLs have the advantage of sharing labor across multiple accounts.

Because branding and image is crucial to men's clothing service Bombfell, its Massachusetts-based apparel e-commerce provider Quiet Logistics recruits workers with retail experience. "They know how to fold, handle, and display clothes," says Brian Lemerise, president of Quiet Logistics. "They're also used to providing good customer service. Even though they don't meet our clients' customers face to face, they know whose doorstep their boxes will land on."

Finishing Touches

In addition to making sure the products are prepared properly, services often use other packaging elements for branding as well. For some, the box says it all, as any Birchbox subscriber knows. Extras for some brands might include tissue paper, stickers, ribbons, and bows.

"Some subscription box companies want the paper to be crinkled a certain way and sealed with a sticker in a specific position, but they can get to the point where they've got as many as 17 packing touches," says Mike McComb, vice president of development at 3PL and digital commerce provider Newgistics in Austin, Texas. "We help them reduce that number but still find an effective solution."

In some cases, just as much attention to detail is required for the returns process. Because most of Le Tote's loaned apparel and accessories is returned, it needs to be inspected, repaired if needed, and cleaned before it returns to inventory. This happens quickly to reduce carrying costs.

"We have an elaborate cleaning plant at our distribution center that uses proprietary technology to clean a wide assortment of products as quickly as possible while maintaining longevity and a fresh look," says Khare. "The sequence we use from check-in to cleaning to quality inspection resembles an assembly line."

Quick Returns

Quiet Logistics sees an average return rate of 30 to 40 percent on subscription services. To get those products back into inventory quickly, companies work to make the process easy for subscribers and speedy for the services. The growth of e-commerce and subsequent volume of returns make it possible for Quiet Logistics to use consolidation centers when it makes sense.

"Early on, it took longer at a consolidation center to get a full pallet to put on a truck. But with the volumes we're seeing, it now only adds one or two days to the transit time," Lemerise says. Quiet Logistics makes up that time on the back end with a "super quick" and efficient returns process, he adds.

"It involves a lot more logistics planning and analytics than people realize," says McComb. "You can end up with limited inventory to sell, then lose customers because your assortment isn't good enough."

Shipping is a major expense for services on the front end—sending boxes out—and for returns. To keep it cost-effective, distribution is scheduled to allow for less-expensive ground transportation, except in the case of perishables. Transportation companies used might vary depending on volume and local sort center capacity.

A Holistic Approach

UPS advises its subscription service customers to look at transportation costs holistically. "We like to talk about cost and value across the whole supply chain," says Louis DeJianne, director of marketing for consumer goods, apparel, and retail. "If we can help you be more efficient, the end cost of delivery is less important."

As subscription box companies grow and become more familiar with customer preferences, some solidify the relationship and boost revenue by adding traditional e-commerce to their online offerings. For example, if subscribers like a sample, they can buy the full-size product from the subscription company's website. Birchbox has about 3 million non-subscriber customers who purchase online or at its Manhattan retail store.

Vinyl Me, Please has added e-commerce for additional revenue but also to help deal with overstocks. "Otherwise, it can take us one year to work through a 10- to 15-percent overage," says Fiedler.

Subscription box services is a complicated business that requires careful attention to metrics and costs. Companies that can't figure it out and scale fail quickly—13 percent of the services tracked by MySubscriptionAddiction.com have ceased operations. And those that thrive? Dollar Shave Club, one of the best known, was acquired by Unilever for $1 billion five years after it was founded.

Who knows? That next big deal might be for dog treats, beauty products, or healthy snacks in a box.