Podcast: How Elite Profitable Brands Optimize Shipping & Fulfillment
Episode Summary
In this episode of The Free to Grow CFO Podcast, host Jon Blair sits down with Tony Runyan, Chief Client Officer at Red Stag Fulfillment, to discuss the intricacies of optimizing shipping and fulfillment costs to maximize profitability. Tony shares his unique journey into the logistics world and provides invaluable insights into how e-commerce brands can better manage their shipping strategies. From understanding dimensional weight to navigating peak surcharges, Tony breaks down the complexities of shipping in a way that's easy to understand. Tune in to learn how to turn shipping from a cost center into a competitive advantage.
Key Topics:
Tony's background and path to Red Stag Fulfillment.
Breakdown of shipping rates: actual vs. dimensional weight, zones, and surcharges.
Practical tips for designing products with shipping efficiency in mind.
Red Stag's origin story and its unique approach to solving e-commerce fulfillment challenges.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Tony Runyan - https://www.linkedin.com/in/tonyrunyan/
Free to Grow CFO - https://freetogrowcfo.com/
Red Stag Fulfillment - https://redstagfulfillment.com/
Meet Tony Runyan
Tony Runyan serves as the Chief Client Officer at Red Stag Fulfillment where he has been since 2017. Before working at Red Stag, Tony helped run a software company that primarily served major media brands including Disney, Fox Sports, and NBC Universal. Tony is married to his wife Read and they have three beautiful children: Jack, Ellie, and Silas.
Transcript
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[00:00:00] Welcome and Introduction to Tony Runyan
[00:02:23] Tony Runyan's background and journey to Red Stag Fulfillment
[00:06:52] The founding story of Red Stag Fulfillment
[00:10:16] Basics of how shipping rates work
[00:17:01] The impact of packaging on shipping costs
[00:23:57] Tips on carrier selection
[00:33:03] Strategic discount negotiation
[00:35:31] Self-fulfillment vs. using a 3PL
[00:43:39] Fulfillment network optimization
[00:53:46] Final Thoughts
[00:00:01] Jon Blair: Hey, hey, what's happening, everyone? Welcome back to another episode of the Free to Grow CFO Podcast, where we dive deep into conversations about scaling a DTC brand with what? A profit-focused mindset. That's right, we're always talking about profitability over here. I'm your host, Jon Blair, founder of Free to Grow CFO, the go-to outsource finance and accounting firm for eight and nine-figure DTC brands. Today, I'm super stoked to be here with my buddy Tony Runyan, Chief Client Officer at Red Stag Fulfillment. Tony, what's happening, man?
[00:00:32] Tony Runyan: How's it going? It's good to be here, Jon. Thanks for having me on.
[00:00:37] Jon Blair: Yeah, yeah. Tony and I go back several years. Guardian Bikes, our core fulfillment provider for quite a number of years, was Red Stag. So I've worked with Tony on that level, but have remained kind of friends and colleagues since then. So we actually chat once or twice a month. It's fun to actually finally bring some of those conversations onto the podcast, so I'm excited for everyone to be able to learn a little bit from you about what, what are we talking about today? Optimizing shipping and fulfillment costs to maximize profitability. And so here's the thing, why are we talking about this today? We're talking about this because obviously, in addition to cost of goods sold and marketing costs, which I feel like we talk a lot about those things on the show, the next biggest cost is fulfillment, right? As a physical goods brand, we're shipping everything, right, to clients. And in the D2C context, we're shipping direct to the consumer. We're not realizing really big economies of scale of palletizing shipments and shipping them to retailers, right? which is something that B2B focused brands really get to enjoy and D2C brands don't. And so understanding how shipping and fulfillment costs work and how to leverage the understanding of how these costs are structured is really important to remaining profitable as you continue to scale your D2C brand. Before we get into the nuts and bolts of shipping and fulfillment, I'd love to first just get a little high-level background from you on kind of your background and your journey to joining Red Stag Fulfillment.
[00:02:23] Tony Runyan: Yeah, absolutely. Happy to do that. So for me, the journey into the supply chain world or logistics and that sort of thing, I kind of took a curved path here. So I went to the MBA program at the University of Tennessee straight out of college, wasn't exactly sure what I wanted to do yet. So that was kind of my next step. And while I was there, became a consultant for a software startup that was really focused in the media company. So, or in the media industry, I should say. And so spent a lot of time, actually almost 10 years working with the software company, helping build a product that helped engage users around interactive events and that sort of thing and sponsorships. And that company actually merged with an agency. And at that point of I think for me, there was just a change in terms of I lost some of that entrepreneurial spirit in what I was doing on a daily basis and was kind of looking for that next thing, trying to figure out how to scratch that in. So I'd actually reached out to Jordan Mollenhour, who was one of the founders of Red Stag Fulfillment. He was in the MBA program just a couple of years before me. And really just to have coffee and talk to him. And so those conversations kind of led him to walk me through Red Stag in the early days. I think at the time they had been in business about two years and it was really you know, very early on. And they've gotten to this point where they were going to start to scale the company. And we're looking for someone to really lead the engagement with existing clients to ensure that we're nurturing those relationships, understanding what those clients needed and that sort of thing. So that was just over seven years ago that I got involved with Red Stag. Didn't really know a whole lot about this world or anything about shipping or shipping parcel or anything. And I still remember Jordan told me, Hey, let me walk, walk you through this startup. I think it'd be something really exciting for you. And I walked through the warehouse for the first time and I saw all the product on the racking, and I saw the racking and the equipment. And my thought was like, this isn't a startup. Look at all these assets, you know? And I came from the software world, so it was literally like four or five guys in a room and some Amazon server somewhere, and that was all we had. So to see all of this, I was kind of thinking, oh, this is a lot more established than I realized. And then a few weeks into starting at Red Stag, I was like, yeah, this is definitely a startup, just in its own way. So it's been a blast to kind of ride this wave, you know, the last seven years. And lots happened, you know, COVID in itself was years of learning, so.
[00:05:16] Jon Blair: Yeah. I mean, I've, I've said it on other episodes. Um, cause it's the truth when I was, um, running guardian bikes in the middle of COVID alongside red stack. Cause you guys were our fulfillment provider at that time. I, everyone was so burned out. My whole leadership team, my whole like frontline management team, they were so burned out, especially anyone who was like, had anything to do with supply chain, because it was just like every day. Costs were changing. Transit times were changing. Will it show up? Will it not show up? Will the truck pick it up? You never knew, right? And I used to sit down with my leadership team and one of the things that I used to kind of use to rally the troops is like, guys, this is not going to go on forever. and you're getting a PhD in supply chain management. You will run circles around anyone who didn't have to go through COVID in the supply chain world. And I know it's exhausting, but you're going to come out of this having learned so much. One thing I want to ask you about RedStag actually that's interesting. This is one thing that really piqued my interest when I was searching for 3PLs because we were using a different 3PL originally that's big in the bike space at Guardian and we just weren't quite getting the service that we wanted. And so I was actually the one that went around and kind of shopped the market. And one thing that was really intriguing about RedStag was really how it was born. It was born out of like the actual frustration that the founders had trying to run an e-commerce brand. Can you just tell me a little bit about that? Because I think it's an interesting story.
[00:06:52] Tony Runyan: Absolutely. So the co-founders, Jordan and Dustin, had an e-com business that they were running and they really started to scale quickly. So they were originally fulfilling for themselves like a lot of e-com companies do in that the growth was so quick, they thought, hey, we've got to figure out how to work with the volatility of demand. We don't really want to focus on this whole fulfillment thing was kind of the thought, of course. So they started to begin that journey of finding a partner who could help scale with them. And I think, you know, They went through a few partners and there were, you know, one partner they used that did a pretty good job. They just couldn't scale quickly enough. They just weren't big enough. And then went more of like the national route search and went through, you know, kind of an interview process with a lot of different 3PLs and eventually landed on one, selected it. And what they found was, you know, kind of what they thought they were supposed to be and what they said they were going to be didn't turn out to be, you know, what actually happened. And there was a Christmas one year when one of the co-founders called the president of the 3PL and just said, look, I'm going to be down there, you know, tomorrow to help fulfill these orders. Like, I hope your team will join me because we are weeks behind trying to get these orders out. And he showed up there. And what he noticed when he was there is this is not something that can be fixed. by me coming down here. It's a cultural issue where they saw that the break rooms were in terrible shape and they were a mess and you didn't even want to go into the bathrooms. And this whole idea that the way that these employees were treated really directly impacted how those employees treated the job that they did. So that was a big, I guess, catalyst for why they said, hey, we're going to have to do this ourselves. And the other pieces were some of those big pain points, which are, number one, we want the order to ship on time, right? We wanted to ship accurately. So, hey, put the right thing in the right box. It doesn't matter if you, you know, you ship it out on time if it's the wrong item. And then the other was the inventory accuracy. Things like shrinkage really hurt them. And the thought that someone was allowed to lose or damage a certain amount of inventory with no consequence was just bizarre. You know, how is that okay? So, for sure, those are really the things that they kind of built RedStag on.
[00:09:24] Jon Blair: Those were the things I was experiencing at the other 3PL that I was leaving at the time. And so when I came across those guarantees, those service delivery guarantees, I was sold because I was experiencing that left and right. And when you're operating a D2C brand, I mean, I think this goes with any kind of brand, but D2C specifically, There's still like, you know, part of the D2C experience that you promise, right, as a brand is it's a better experience than going to a store, right? And if it's not a better experience than going to a store because you get stuff late or you get the wrong stuff in the box, then what is the consumer thinking? The consumer's like, man, I should have just gone to the store for that, right? And so it's really important that you nail that. It's incredibly important. It's one of the things that differentiates DTC from an in-store experience. And so, um, so look, I want to now chat about like. how do shipping rates actually work, right? There's all of this, there's all this jargon, there's base rates, there's fuel surcharges, there's peak surcharges, there's zones, like, what does it all mean, right? Like, what is it, Austin Powers, Basil, what does it all mean? Like, it just, bringing it back on that one. You know, when, when, if, if, when someone comes to you and it's like, Tony, I just think there's so much, I, I don't understand it all. How do you break down just the basics of how shipping rates actually work?
[00:10:55] Tony Runyan: Yeah, happy to do that. And what I'll say, it's parcel shipping. It's one of those things where the more I learn about it, the more I realize I don't know. You know, doing this seven years, and I think I've got all the nuances down only to like discover something new, you know, that impacts things. So I think carriers do a good job at keeping you on your toes. And it's a complicated thing. But that being said, there are some basics that can really help you get your head wrapped around it pretty quickly. For the most part, carriers do try to align cost with their labor and the effort required for them to deliver a package. So if you keep that in mind, most of the time it makes common sense when you walk through things. So really what you want to know is the size of the package, which includes the dimensions and the weight, and how far it is being shipped are the two primary things that impact the cost for shipping. So, I'll kind of break that down a little bit more because it's easy to do that. But the one thing you want to look at is what is the build weight of a package? And that is, there's the actual weight. Hey, this thing weighs 20 pounds. And then there's the dimensional weight. And that's a lot of things. It's been around a long time, but even now that some people get caught off guard about, which is, If you ship a feather in a box that's really big, historically, carriers would charge you for the weight of that feather, right? And they realize, wait a minute, this doesn't make sense. It takes up a lot of room on my truck. It takes a lot of room in the warehouse. So what they did is they created this, what they call a DIMM divisor. And so that, for example, for UPS and FedEx, it's length times width times height divided by 139, which is the dimensional divisor. And what they do is say, okay, we'll take that weight, and we call that the dimensional weight, and we'll take the actual weight, and whichever one is bigger, that's the one we're going to charge for. So that's kind of the first thing to understand. And because now all of a sudden your mind starts going through, oh, like, The size of the package matters. There's things we can do to adjust packaging to help us there if we're getting billed dimensional weight instead of actual. And then the next is the distance, right? If I'm shipping from Florida to California, that's a long way to go. And so the carriers do this by what they call zones, which most of the time is really determined by how many miles away is the destination from the origin. So, you know, I think you look at like 150 miles away is zone 2, you know, up to 300 miles away is a zone 3, and it goes all the way up and domestically is typically a zone 8 is the way that that works. Those are the two biggest determinants, but then what you can get into with larger packages are these other surcharges and even not just the size, but things you hear about residential surcharge. Is it going to a residence? Okay, there's more on top of that. Is it way out in the boonies, right? And then that's going to be a delivery area surcharge or an extended area surcharge. There's obviously a fuel surcharge that's on top of all of that. And then you get into what we call these additional surcharges, which are going to be things like, hey, if it's over 48 inches and it's longest side, then it's going to get hit with a surcharge. If it's greater than 30 inches on its second longest side, it's going to get hit with something. If it's more than 50 pounds, there's a surcharge for that. So there are a variety of surcharges based on the size as well. And then there's two other things I'll hit on that kind of make up what I'll consider the basics, which is First is what's called a reduction to minimum or a minimum fee. So all carriers will charge a minimum fee for a package, and this is when you're considering lighter weight packages more than anything, where There's a certain, it doesn't matter how high your discounts are, there's a certain minimum or a certain floor that a carrier is going to charge you for a package. And that is called the minimum. So you've got to keep that in mind. And then lastly, to your point, these peak surcharges are demand surcharges. And It's kind of interesting. So peak surcharges are things that carriers decided to add several years ago during the peak, during the holiday season. Because they're like, hey, we've got all this extra work, all these extra packages. We're going to add these surcharges on top to help us cover our costs to make sure we can deliver your package on time. Yeah, that makes sense. So they started doing that each year, and then came COVID.
[00:15:55] Jon Blair: But then they still tell you that, like, oh, we can't guarantee that this gets there on time. Oh, yeah. Because of demand. Exactly. Don't get a refund on that charge, though.
[00:15:57] Tony Runyan: That's right. There's definitely that window of time that doesn't matter how much they add to it. You're not going to get guaranteed. You move past that and we hit COVID, and now all of a sudden it was, hey, this whole time's peak. All during COVID, this is volumes like we've never seen. Again, something that makes sense. All this increased volume, they're trying to figure out how to handle it. So what they did is they extended the peak surcharges beyond peak to help continue to cover for those costs within their network. What we have found, of course, is that because it was outside of peak, a lot of folks were like, hey, when does this peak surcharge go away? So what do they do? They change the name from peak to demand surcharge. So now whenever there's demand or high demand, right, we're going to charge it. Where that doesn't really make sense or it starts to kind of break down is the fact that what we're seeing right now in the industry is there's a lot of capacity available. Guess what? There's still a demand surcharge. So even now there's demand surcharge available and what we see is You know, the carriers, FedEx actually originally pulled back those fees and a lot smaller. And then UPS announced in February that they were going to keep theirs at a certain higher rate. And what do you know, two weeks later, FedEx's went back up.
[00:17:20] Jon Blair: So it's always, it's always like a tit for tat with those two, with those two carriers. Like it's, I mean, I mean, penny for penny, not even dollar for dollar, like penny for penny. Okay, so there's a lot to unpack there. One thing that I want to call out is this concept of being intentional and being proactive when you're developing products, when you're actually designing products, right? Because there's a couple things that go into that. Part of a sound product development process is doing unit economic analysis. Unit economic meaning like what is the per unit cost of the product you're developing? And that's not just cost of goods sold, not just landed cost of goods sold. What is the per unit economic cost of shipping and fulfillment? And when we're at Guardian, when I was at Guardian Bikes, this is where I learned about how all this stuff works. looking at our unit economics for each of our SKUs, we were pouring over like, man, how can we pull half an inch out of this dimension, right, on this particular bike and get us below the threshold for that extra dimensional charge, right? And so, but we're going back to the drawing board and going like, okay, where do we put the wheel? Where do we put the, you know, where do we put the front tire? Where do we put the, How do we hang the handlebar? What if we did this? What if we did that? And the reason why we spend so much time doing that was because, you know, if you extrapolate the savings, let's say that the, you know, I mean at retail rates back then, at least the additional handling surcharge for dimensional was like
[00:19:08] Jon Blair: 14 to $16 a unit, right? If you, if you pull back your packaging on whatever dimension is triggering that and you get below that, $14 to $16 a unit is a massive savings. Extrapolate that across all your volume. It's huge, right? And so what I want to call out is that there is a lot of strategy and intentionality around designing the product such that it drives packaging that drives optimal shipping and fulfillment. And the problem is, If you are not intentional about that and you bring that product to market and then you find out about that dimensional surcharge after the fact, man, it's hard to go backwards, right? Cause you've got tooling out for packaging. You've got, um, I mean, even the number of times that we changed packaging at guardian, we had to go like, Hey, well, we've got the stock that we've got to completely deplete of the old packaging. And then we've got to make sure the factory changes to the new packaging. It is a huge effort to switch packaging. Now, if you've already got products that you've brought to market, I'm not saying don't work on your packaging. Most certainly do that, but the best time to do it is up front when you're designing and developing the product. I highly recommend get your 3PL or shipping expert to actually review your packaging. We used to send stuff to you guys at Red Stag when we were designing new products and go, hey guys, can you give us an estimate on the shipping cost and is there anything we're not thinking about? That's actually how we learned a lot of this stuff was from you guys giving us advice and like, ah, well man, I know you guys want to launch that 26 inch bike, but if you have that length dimension, Man, this is gonna be a really expensive bike to ship, so make sure you're proactive, make sure you bring your 3PL or shipping expert in on the front end. I think the other thing is, you brought up these minimum fees for each carrier, no matter how light or small the package is. In my experience, that is part of what drives that carrier selection strategy, right? Because, you know, there's certain minimums on FedEx and UPS that are higher than some other carriers. How, from your perspective, what are some tips on like considering the minimum fee across carriers, how that should drive potential different carriers that you might want to select for certain kinds of products?
[00:21:28] Tony Runyan: Yes. All great points. And first off, let me say to your point, we have seen what you mentioned so many times where we get containers of product only to find that there's a new fee that's going to get hit that was not considered. Right. And that will just destroy your unit economics. And an important part of that piece is if those additional handling surcharges. Also, you won't get hit with more than one on a package, but it's very important to know if it's over 50 pounds and greater than 48 inches, which one is it going to get hit with? For sure. Because you might design to hit to avoid one, but then you get hit with another. And another is if it's got straps on it, right? Say you designed it smaller and more compact. Hey, we're going to put these straps on here. So that'll take care of it. And you realize, hey, you eliminated those. But there's this fee called the additional handling packaging fee to where now that fee gets added.
[00:22:38] Jon Blair: We made that mistake at Guardian. I don't know if you remember that. I do, yeah. At one point, I believe the factory told us This is the other thing, the factory recommended we added the straps, and it had something to do with, it had something to do with pallet, or I mean, container loading, right? And a few other things. And so we listened to them. And then those got to you guys. And then we fulfilled those units. And we got tagged with that fee. And then all of a sudden, we're calling the factory and saying, get those straps off of there. Because like, Like whatever they charge us an additional fee to like load the container was cheaper than what FedEx was charging us for those straps. So, you know, I mean, some of it's live and learn. There's a lot to cover and there's a lot to know. Right. And so I'm not suggesting that any of you brands out there like. understand all of this to the T. I'm saying, make sure you have someone in your court and hopefully a 3PL who can really help you navigate these things. And like, they would be happy to review your packaging ahead of time because quite frankly, the 3PL doesn't want you to be upset. They want you to have great unit economics so that you can scale. And so both of your businesses can grow. Right. Um, so anyways, I know we kind of like went off a tangent, but carrier selection, what are some tips you have on like thinking through which carriers are better for, for different situations?
[00:23:57] Tony Runyan: Yeah, I mean, there's so many things to take into account. And I mean, you know, you can kind of go like this, this cheapest all route if you if you want, depending upon what your clients or your customers look for, right? Like if you have a customer who's very sensitive to transit times, that might change who you consider. But what I would say is we typically find, you know, FedEx and UPS For packages, if you're talking about a very lightweight package, there are so many, there's the minimum fee, then there's the residential fee, then there's the fuel surcharge, and all that stuff kind of stacks and adds on. Now, what they've done is they've began offering these economic type services like a SurePost, a SmartPost, some that use USPS and some that don't, but the key there is they use USPS, and the reason is, USPS isn't charging a residential delivery fee. So, the cost that you get there is all in. It's that fee plus fuel. So, what we do is we look at USPS, we look at Pitney Bowes or DHL, and then also some regional carriers even. who may be in a situation to negotiate even a little bit more. And so that kind of goes to the next point, which is having a 3PL that can help you dive into specific discounts can really be beneficial as well. Let's say that you just cannot uh, get your packaging down, you know, and it's still be quality to not hit an additional handling surcharge. Well, that's where it can really be beneficial to work with a partner to say, Hey, I've got to pay it. Uh, maybe I can get some sort of discount off of publish, which, uh, of course anybody can, can go and ask for it, but having volume, um, within a particular area makes that a lot more attractive for a carrier to discount it. And then that can be passed through to a brand as well. But to your point, we certainly look at typically for lighter weight packages, we kind of have certain shipping methods that we look at in certain carriers. And then as they get larger, of course, I mean, there are some carriers that won't even accept packages that are longer than 48 inches, right? Or that are more than 50 pounds, at which point it kind of narrows the scope of what you can consider.
[00:26:13] Jon Blair: Man, we're going to have to have you back on another time because I'm just looking at how much time we have left and like, you know, we're not going to get to everything in the next 25 minutes, but that's OK. So so there's a couple of things there that I want to that I want to dive into. Let's first go with like what I have learned over the years. And I think what we've talked about at this point is a good backdrop for the audience to understand this. What I've learned over the years is that like If you start thinking about if you want to start a brand or you're thinking about the next products that you want to bring to market for your brand, the holy grail is small and or light, higher price point, right? Heavy and or big, lower to medium price point. gets really hard. Why? Because shipping rates are driven by weight and size, right? And so if you have a low value product that is heavy and big, it's going to be really hard. It's actually one of the reasons why Beverage is really tough D2 C in my opinion because beverages are heavier. When you think about their weight compared to their size, they're heavy and they're low value. You're not selling a $100 beverage. The reason why things worked for us at Guardian bikes are heavy and big, but we had a high price point, right? It's hard, but we have a premium bike. We had a really high quality bike, safest kid's bike, direct to your door, can't flip over the handlebars because of our patented brake system. It's hard for mass market bike brands like Schwinn and Huffy, big and heavy, low price point. It's really hard for them to go D2C. That's an important takeaway for everyone listening to understand. If you're going to have a heavy, low price point product, B2B going through retail is probably your way to profitability because you can get economies of scale on shipping and fulfillment by either palletizing or even better, a lot of brands at the beginning, they use the actual retailer's shipping rates at the beginning and they just pass those through to you. And then it's a volume play because the retailer can order a lot of volume at once. This is a really important takeaway. There's a lot of brands who've made mistakes. And earlier in my career, I was naive and didn't understand this. A lot of brands who've made mistakes and not thought about this. And so, super important. Another thing is the strategic discounts, I'll call it. This plays into another question that I was thinking about when we were preparing. Not all 3PLs are made equal. I have my own opinions as to why they're not all made equal, but definitely one area is strategic discounts. Where is that 3PL focusing on negotiating their discounts? Before I ask this next question, I want to just set the stage for the audience. Here's the thing. Every brand that reaches scale, whether they self-fulfill or use a 3PL, part of their economies of scale and their improving profitability is 1000% through negotiating discounts with carriers. Every elite brand does that, right? Just getting a blanket discount across the board is a bad strategy unless you have products that are all across the board in terms of size and weight, right? But being very strategic on negotiating the right discounts is really important. And it's also important when you're going to choose a 3PL is understanding what has been their strategy for discount negotiation and where are their discounts concentrated? What kind of like advice or tips do you have about that subject, Tony?
[00:30:05] Tony Runyan: Yeah, no, I think it's a great point and one that we talk about frequently at RedStag because for us, when we started, our founders started, the product that they were shipping was heavier and more dense. So really, we kind of naturally started with carriers talking through, hey, what can you do for these heavier packages or larger packages? And what we found very quickly is like that is not the majority of the e-com space, right? When you think about an Amazon box or, you know, what, what is the, in terms of velocity of volume, it's 10 pound or less packages, right? Is what you see a lot of. So as a result of that, the majority of the 3PLs and partners that you see out there are going to have been negotiating a lot. a lot more aggressively on those lighter weight packages. And this is kind of, I'm not going to say it's a race to the bottom, but in reality, when you get down to where you're paying the minimum, right, for a service, you can negotiate even what's called the reduction to minimum. Like, hey, how much is a carrier willing to reduce that minimum amount to you for? You're still, you're working with nickels and dimes, right? Not dollars. And so what we have found is like a 3PL who says they do it all. It's probably not a very. accurate picture, or if they do, their rates are not going to be super aggressive across the board. They're going to have more, like you said, more of a flat rate across versus, hey, we've really focused on this area. So for RedStag, as we've grown, you know, we have definitely been originally in this heavier space. And then as what we found is naturally with heavier items came bulkier items. So this is where you hit the AHS or the oversized products. But just like with bicycles, you're going to have helmets, bells, pedals, accessories. So what we have found is that's where using alternate carriers can have an impact because I may go with, you know, one carrier and really negotiate oversize fees. And from there, we're able to filter and flow that oversize product through that carrier. But we want to be aggressive enough in the lightweight space to where you're able to ship an accessory or whatever the case. And I might use a different approach with a different carrier and target that. So then they win, the carrier wins that volume, this carrier wins that volume, and we both win in terms of the discounts. So there's definitely something to having a multi-carrier strategy in that piece as well, and not necessarily going, hey, This carrier gave me this. Can you match it? Hey, this carrier gave me this. Can you match it? Because at that point, you kind of get you do get into that race to the bottom. And at some point, they're gonna say, Where's this volume?
[00:33:03] Jon Blair: Yeah, for sure. I know that they'll give you a chance or two. And when you don't hit it, that's really hard to get back in their graces. Like I mean, you You lose your reputation and you lose your leverage with them. And there's only so many stories you can tell them about why the volume didn't come. So I totally agree with that strategy. I've come across a lot of 3PLs who who basically pitched that they are everything to everyone with those mass discounts across the board. And I'm always super skeptical because I know how it works. And I haven't really seen any carriers really be successful with that, quite frankly, or I mean, sorry, any three peels really be successful with that. Yeah. I mean, one other thing I want to mention, like this may go without saying for the people that listen to this podcast, but like One of the advantages to using a 3PL, especially in the early days, but this is going to actually segue into another question that I have for you, Tony, is like, you don't have the volume to negotiate really incredible rates, right? Like, but a 3PL does because they are able to consolidate the volume of a ton of different brands, right? And so they're able to, as a service, pass down a discount and a shipping rate you could never get on your own and still make a margin because 3Peels are in business as well, right? They got to make a margin. They can mark up their rate and you get a better rate, they make a margin, everybody wins, right? But there is obviously, and I know you deal with this all the time, Tony, there's obviously this allure of beginning to fulfill yourself at some point when you reach a certain volume because you're like, basically the theory, the general theory is I can cut out the middleman, which is the 3PL, right, and cut out their markup and their margin, and I can go get the, quote, negotiated wholesale rate myself, And yeah, I'm going to have to run a warehouse, but the savings that I'm going to get by cutting out the 3PL on the rates is going to more than offset the impact of start the fixed costs of operating a warehouse, right? Rent, the people, the equipment, all that kind of stuff. What are your thoughts or opinions on if and when self-fulfilling actually does become better for a brand? And what are your thoughts on how far can a brand really run with a 3PL?
[00:35:31] Tony Runyan: Yeah, that's again a great question. And one of those that's like, I'll give my standard answer and then also leave the the idea that it can be different for every brand, right? In a lot of ways. But like, I think what we see is really there tends to be, uh, like at the beginning phase of, uh, of an econ business, it may make sense to fulfill for yourself right at the beginning. Right. And while we say that is there could be, you're figuring out the packaging, you're trying to figure out what is it going to cost? Like if I ship these different sorts of boxes and you kind of get that understanding, you're able to do some very special, uh, individual touch and customizations to products, maybe when you're trying to build your customer base and get loyalty and create these experiences and that sort of thing. So I think like at the beginning, when your order is small, maybe low volatility and you want that customization, it makes sense. You might have to pay a little bit more on the shipping side as you kind of learn that. And then you kind of hit this point where, okay, now a 3PL makes sense, right? And I think our founders saw that same thing in their business. So as you do that, there are certain things you give up. For example, having someone walk out on the floor and, hey, these people order these three things and the system says to ship them separately, but I bet I can open this box and put something inside of that box. Well, some of that stuff can be programmed, but some of it, it's like, You don't have the expertise when you've got 300, 500, whoever, employees who are shipping for hundreds of different brands, right? So you kind of keep in mind, okay, there's going to be these experiences, which is why it might be even more important to tailor that stuff before it gets to the warehouse, right? As well as maybe you can do some special projects like kidding or something to do that stuff on the front end. And then to your point, That allows you to take advantage of the economies of scale of that 3PL, the shipping, but also it's on them to figure out the warehouse leases, the labor, handle the spikes in volume, and that sort of thing. And for sure, what we see is like this curve and there's like this sweet spot, right, where it works really great. And then, I mean, there's obviously a point at which you outgrow a 3PL. And I think depending upon the product category, like what you're doing within your industry and that sort of thing, those things can vary. But what I would say is, what you have to consider is, to your point, can you optimize for labor costs? Can you optimize for inbound and outbound costs? Like, can you optimize for transit times? Do you have someone who's an expert in real estate? Do you have in-house ops expertise? Do you have the capital? That's the other thing. You know, capital intense, it's a capital intensive business. If you need
[00:36:03] Tony Runyan: racking and you need to buy a pit equipment and you know, some of these other things that you've got to fund, can you do that and also buy enough inventory to keep your stuff in stock? Right. So there's going to be a capital aspect of that as well. And then just the matter of, do you want to deal with it? It's a headache. Like we know because we deal with it every day to deal with it. And it may be that you're big enough, you know, and that makes sense, but definitely an investment there. And a lot of factors go into it, but you're going to have to hit a certain velocity before it makes sense.
[00:39:09] Jon Blair: Yeah, and you know what, like, I mean, obviously, as a fractional CFO for D2C brands, like we see most brands use a 3PL, but we have a few that that self-fulfill and we get asked this question all the time. And I think of it the same way about as I do about in-house manufacturing, which is that it can represent a huge economies of scale and margin and profitability improvement. but you have to have volume. It's a volume play. Economies of scale, by definition, means like, you know, basically unit economic improvements that you get because of scale, right? And what I see, a mistake I see brands make is do it too early, is try to bring fulfillment and even manufacturing in-house too early. And generally, this is not a perfect answer it because there's a lot of nuance like Tony said as it relates to product category in each brand but like if you're not on your way to like 50 plus million in revenue and like probably like really setting yourself up to be a nine-figure brand it may not make sense to take over fulfillment. It doesn't mean that there isn't a place to take over fulfillment and it actually make profitability sense before 50 million, but generally speaking, you need to be doing at least that much revenue to really, really squeeze out the the value that you want out of it. And why? It's because there's a lot of fixed overhead or what is called operating leverage that you bring on to the business. And what operating leverage and high fixed costs do is it makes it harder to break even. You have to do more revenue to break even. That's the downside. The upside is once you pass your break even point, if you have excess capacity in those fixed costs, you start turning a massive profit after that. But if you keep growing, like Tony was saying, you are going to have to be able to source the next round of fixed overhead, which is labor resources, possibly bigger real estate, more equipment. And so you're kind of playing this stair step game where like, you know, you're not really that profitable because you brought on all these people. leases, equipment, and then you start scaling, and then you start turning a huge profit, but you keep growing, and you're like, man, I gotta get the next round of people, real estate, equipment, and you become very little, there's very little profit, but then you keep growing, and you start squeezing a ton of profit out of those assets, and so it's like, it's just a question, it's a different game. It's not a bad game or a good game, it's a different game, and so I always tell brands, like, listen, What are your goals? If you have goals and it looks like you can hit 100 million, yeah, at some point you're gonna need to bring this stuff in house, but be careful about doing it too early. And definitely make sure that you bring on some sort of a VP or leader who knows this stuff really well, who can put the systems, the processes, and recruit the people, because it is a whole, I know when Guardian went to self-fulfilling, which in my opinion, It made a lot of sense for Guardian once they hit a certain point, not just from a volume standpoint, but they had to bring manufacturing back to the U.S. for their brand. This is like they had to as a part of their strategy. And so it's hard to do your own manufacturing. and not impossible but but it's hard to do your own manufacturing and not also do the fulfillment if you're already going to acquire the real estate and bring all those people on board and put the systems in place right but um yeah but it is a huge effort it was a lot of work on guardian bikes to figure that out and they're still working on it every day and the company went from like 30 people to like There's like a hundred people at guardian bikes now. Right. And so it's, it's, it's just a different business and you've got to be ready to get into that different business, you know?
[00:43:04] Tony Runyan: And I don't want to leave out, there is the hybrid type, too, that we've seen, where someone has a 20,000-square-foot facility on their own. Maybe they're managing, but then they outsource that volume as well. And sometimes that can be a location-based benefit, where it's like they're on the East Coast and they can use a 3PL on the West Coast or vice versa, but it's also that partner can help handle some of the volatility and the spikes or even their growth into it while they're able to control some of the other parts of the experience in their own space.
[00:43:49] Jon Blair: Well, that was the perfect segue, I must say into fulfillment network optimization, which is the next thing I wanted to talk about. So, um, and yes, you're right. Like, like fulfillment, when you're talking about, uh, you know, optimizing your fulfillment network, meaning. Where are your fulfillment centers located and, and what, and I would say alongside that, what routes, what inbound freight routes are you taking? to get to that network. So it's not just, it's inbound plus outbound optimization, right? There definitely is a place for 3PL to aid in that, even if you have stuff in source. But let's just talk about the situation where you're using a 3PL exclusively, which is most of the brands that we work with. Fulfillment network optimization is a huge opportunity to improve profitability over time. But again, from my vantage point as a D2C focused fractional CFO, I see a lot of brands get too excited too early about this. It comes with As with basically everything else in the economy scale in fulfillment, there are huge opportunities, but if you do them wrong or if you execute them at the wrong time before you have enough volume, it can cause a lot of problems. So like what are the high level do's and don'ts or common mistakes that you kind of see out there when it comes to brands wanting to optimize into multiple FCs?
[00:45:10] Tony Runyan: Yeah, so the initial point is right there that you made, which is a lot of times there's like this excitement of, ooh, like seven locations, let's go, right? Yeah. And inventory management's hard. And it does it, especially if your product is coming from overseas where there's a huge lead time, right? That's a biggie. But even if it's coming domestically, making sure you have enough product in all the locations can be a huge beast to manage. And if you start, and for us, and this is what I'm more familiar with too, is if your products are more expensive, if they're larger, if they're bulkier and that sort of thing, then you also have to balance that with like, my inventory carrying costs. Now I need more of this expensive item to have somewhere and it costs even more if I stock out to ship it from the wrong location. So you definitely don't want to outpace your in-house expertise to manage the inventory. So that's that's one piece of it. And the other is is like what are your clients?But a couple things number one what what's the customer expectation right depending upon what you ship like if you're if you're shipping a cat fountain right or you're shipping socks or or it's something that's like a a medical-related thing that somebody needs, like if they're sick, they order it then, right? Okay, so the expectation there for the customer is going to be different, even though there's this overall two-day expectation built by Amazon, right? I think even with that, there's still this understanding with consumers' expectations, and COVID helped with this, where it's like, look, I get it. I ordered a bike, I ordered a chair, whatever it is. it takes three days to get there, that's not that big a deal. It's not like I needed it, right? And if I did, then there's this expedited shipping method that I can choose to get it there. So that's one thing to keep in mind is like, what is your customer expectation? Also, where is your customer? So like, we think about the product that you ship, and it's like, if you're shipping paddle boards, or if you're shipping something that's like used mostly in the wintertime in the Northeast, right? Or whatever it may be, The locations you choose could be different, right? It's not that important to have it maybe in some of these other areas. So you don't want to just do it because the overall U.S. distribution makes it look like it's the best place. You want to look at your specific customer data and say, oh, based on these things, it looks like these would be the best locations for us to ship. And the other thing is what we find, some e-com owners fall into is this idea of like, oh, having a warehouse at port. That's the way to go. And in some instances, it absolutely may be right. But think about like a California warehouse which may come with additional taxes, additional expenses, and that sort of thing. But you say, hey, I'm coming in from China to California. It's great. I can just get it sent straight over to this warehouse. I don't have to pay this fee. But what we like to look at is what we call the total cost of fulfillment. Because if you're looking at a container that comes in, and let's just say that it's got 500 items on it, and it costs you $1,000 more. to go from California to a state that's further inland, right? And so like on average, you're paying $2 more per unit to get it there. But what you find is because of your distribution of customers, you're able to save $2.50 on outbound costs, right? Whenever you ship it out. So now all of a sudden it's actually $0.50 cheaper to ship it inland. That's not always true, but it's something to look at. And a lot of times we have customers who might just look at one or the other instead of considering the entire picture. So those are a few of the things we see.
[00:49:11] Jon Blair: Well, yeah. So I mean, really, when you're looking at fulfillment network optimization scenarios or potential decisions, what you should be looking for is the net cost impact of carrying costs, inbound freight, any freight transfers, and outbound. You can't just like, usually, usually, I mean, I think I would say actually always, in all the times I've ever analyzed this, whatever outbound savings you're gonna get by moving into multiple locations, you're always looking at that as kind of like, that's the gross benefit, and does that outweigh the cost of Carrying cost increases because you're going to have more minimum inventory levels you have to hold. Probably some inbound changes and you're going to have to forecast some amount of transfers or suboptimal shipments. It's the net of all of those things that really help you understand your profitability impact. One other thing I want to mention There's like this whole world of supply chain network optimization. You can hire really expensive consultants. They run all these fancy models. I'm not saying there's no value to those. We got lucky that we had Mr. Shane Strange on our team, who you know, and who was, it was a supply chain network optimization consultant before I brought him on board. And so most people don't get that. Those are all pictures of an ideal world, right? And we don't live in an ideal world. And so there is no such thing as optimal. It's closer to optimal, right? And it's the same thing when we build financial models for clients, like our financial model, when you look at the P&L projection, the balance sheet projection, cash flow projection, it's not meant to give you a perfect prediction of the future, right? It's meant to say if these variables turn out to be true. Here's what the output is going to look like. And we're always having to make some sort of, uh, we're gonna have to make some sort of judgmental, like adjustments to those models to account for the fact that we live in reality, not in an ideal world. So I just, I want to take that pressure off of founders. Like it's not a, you'll never be optimal. And as soon as you're optimal, your demand locations will change, something changes and you're gonna have to change again. So it's very much iterative. It's like, what's the best we can do today? And then let's analyze it on some regular basis. At Guardian, we used to analyze it quarterly, depends on the volume. and the volatility in your space, maybe annually is fine. It's more about revisiting it and just saying like, what incremental impact can we make? And if you keep making incremental impacts over time, you will find yourself getting economies of scale. And one other thing I wanna mention here too is just that like, going back to the, this is just kind of sum up a bunch of different things that we've been talking about into a single statement. When you're going out there and you're looking at four or three PL, It's not just about discounts, it's about where are the discounts, what are the service levels of the 3PL, and where are their locations. It's all of those things, right? And certainly there's other factors, but it's not just one dimensionally. This 3PL has a 69% discount, and this one has a 45% discount. You have to take into account, we actually went from a 3PL that had steeper discounts and moved to RedStag, which did not quite have as much steeper discounts, but we calculated the service level, the cost of products going out not on time and the wrong stuff being shipped, more than offset the fact that RedStag's discounts weren't quite as aggressive. And that's okay. It's the total cost of the relationship, right? That if there's one thing for everyone to like take away from today's episode, whether we're talking about how shipping rates work, talking about fulfillment network optimization, you're talking about, um, outsourced choosing a 3PL, it's the total net cost. Right. Um, of all of those things that you need to take into account. And so, um, I just want everyone to take that away from today's episode. Before we land the plane though, I always like to ask a personal question because at Free to Grow, the balance of personal and professional life is near and dear to my heart and it's a big part of our core values and guiding principles. You and I both share on the personal front, you know, as brothers in Christ, we're both Christians. We talk a lot about our faith and just how it shapes our personal life and our work life. And I just want to ask you for yourself, as a Christian, how has your faith shaped your personal and work life?
[00:53:59] Tony Runyan: Yeah, I mean, gosh, the short answer to that is in every way, right? And I think that, so for me, having the ability to have an impact that is eternal or overreaching and far beyond just what I do day-to-day in my life. If I can use my relationships that I build, whether that be at Red Stagger with our clients or in whatever whatever I'm doing as part of this to establish a longer standing relationship, to be able to share others the love of Christ and the kindness that we are shown as Christians with that. One incredible thing to do. And it's really easy, I think, to get caught up in the minutiae of day to day and what, you know, our jobs, right? And then to not be able to step back and look at, hey, it's about a lot more than that. So, you know, it's great to be able to have conversations with you and to check in, you know, regularly to help make sure we're keeping our eyes on that and focused on that when we have everything else going on around us.
[00:55:09] Jon Blair: Yeah, man. Hardest thing to do, but what a great joy. And I appreciate you more than you know on not just the work level, but on the personal level and on the spiritual level. So before we close up here, where can people find more information about RedStag?
[00:55:29] Tony Runyan: So I mean, going to redstagfulfillment.com is obviously a way to go. And honestly, reach out to me. You know, if you have questions specifically, you can just send an email to Tony@redstagfulfillment.com. And always happy to answer questions. I mean, we really like to be advisors, you know, and that may be us advising that we're not a good fit. That happens regularly and that's okay with us. I think ultimately like that we know that You don't want to force a fit, especially in a business like this, right? So we want it to be a place where it makes a lot of sense for both parties and we think it's going to be a long-term relationship where we both benefit.
[00:56:10] Jon Blair: Awesome, awesome. Definitely check them out. If you want more helpful tips on scaling a profit-focused D2C brand, consider following me, Jon Blair, on LinkedIn. If you're interested in learning more about how Free to Grow's DTC accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at freetogrowcfo.com. Until next time, scale on.
