As many dot-coms have learned, making the wrong fulfillment decisions can be business suicide. Toysrus.com was clobbered with delivery problems and a fine from the Federal Trade Commission following Christmas 1999. The next year it partnered with Amazon.com and its fulfillment problems disappeared. With fulfillment being one of the most crucial indicators of online success, e-retailers must choose between in-house and outsourced fulfillment. Making the wrong choice can spell the end.
“Many early online retailers didn’t have a lot of depth in operational expertise,” says David Schatsky, research director for Jupiter Media Metrix. “They had marketing people, a business idea and financing, but no deep expertise in logistics and operations. It is especially appealing for those folks to outsource.”
But outsourcing can be as dangerous as fulfilling in-house. “Picking the wrong fulfillment company can break you,” says Barbara Brooke, fulfillment manager with MuseumShop.com. Before coming to MuseumShop, Brooke worked for a fulfillment company. “They can destroy your business if the fulfillment service is not up to par because customers aren’t nice people. Customers want what they want, when they want it. If your fulfillment center can’t give it to them, then your bombing-it’s over.”
Retailers and experts agree that whether outsourced or in-house, a fulfillment system must be completely integrated with the rest of the retail system (see “It’s an integration thing”).
Choosing which fulfillment system is right for a given e-retail operation will come down to cost, product control and the level of fulfillment expertise available.
One of the first costs to consider is the amount of capital invested in a fulfillment process. “Retailers need to look at what cost structure they can support,” Schatsky says. “Do they have the resources and expertise to build out and operate an in-house fulfillment operation? Outsourcing is the way to manage costs and minimize capital investments.”
Michael Small, vice president of sales with third-party fulfillment house 3PF, says that a large part of the capital investment goes to ensuring the fulfillment operation can handle peak periods. “You need 10- to 20-fold the employees and space if you are selling toys during Christmas,” he says. “If you are outsourcing, you can basically expand and contract at will.”
One small e-retailer learned how bad it can be to do in-house fulfillment without the proper resources and experience. MuseumShop, which partners with noted museums to sell replica museum pieces, did not make a large investment in fulfillment.
Museumshop.com began its retail life having its orders shipped directly from its 20 museum partners. The museums were not experts in fulfillment and often made shipping orders a low priority, Brooke says. When someone purchased an item form MuseumShop, the order waited for the museums to pick it up from MuseumShop’s site. When the museum shipped the order, it posted the tracking information back on Museumshop.com, at which time the customer’s credit card was charged.
“When customers called to check on an order we were left out in left field,” Brooke says. “Items could take weeks to reach the customer.” In addition to slow delivery, museums often lost or never filled them. “That was a very difficult and agonizing process. The museum partners were not shippers, they had other things on their plate,” she says.
MuseumShop now uses Waltham, Mass.-based Fulfillment Plus Inc. to warehouse and ship its items. MuseumShop shipped 653 orders in December 1999 before turning to outsourcing. In December 2000, it shipped 4,000 orders. “I couldn’t imagine having to fulfill those 4,000 orders using the old system,” Brooke says.
Even the biggest retailers, though, may want to consider outsourcing. BlueLight.com, the online arm of Kmart Corp., knew from the beginning that it did not have the time or resources to do in-house fulfillment. It uses SubmitOrder for its fulfillment. “We had a very aggressive timeline when we launched,” says BlueLight Director of Operations Alex McNealey. “By outsourcing we quickly got a partner who had the infrastructure, staff and experience, versus trying to do it ourselves on an unknown plan which would require a larger capital budget and take from nine to 12 months to get a facility up and running.”
Making stock roll out
One of the predictors of fulfillment cost is the volume being shipped. “At very small or very high volumes, doing things in-house can make sense-small volumes because it’s easy to manage and high volumes because you get economies of scale,” Schatsky says. “The wide middle range, whose boundaries are tough to define because of the range in product categories, is a good area for companies to look at outsourcing.” A recent Jupiter study says 44% of e-retailers lose money on shipping and handling. Jupiter also says that fulfillment networks, similar to Vcommerce Corp., can save retailers as much as 25% in labor costs. Jupiter also believes these models will grow substantially during the next four years.
Vcommerce, a Scottsdale, Ariz.-based commerce integration provider, agrees with Schatsky that low-volume retailers will save money with in-house fulfillment. Companies with annual sales of less than $3 million will not likely see much of cost savings using Vcommerce, Chief Marketing Officer Debra Kuhns says. One company with revenue of $10 million that switched form in-house to Vcommerce saved 50% on fulfillment costs, she says.
Vcommerce charges clients a set-up and installation fee plus a monthly fee based on the size of the retailer. The company provides front to backend solutions, and can latch on to any front-end system and provide seamless fulfillment, Kuhns says. Vcommerce clients can choose to maintain their own inventory or draw from Vcommerce’s 300 vendor partners.
Brooke pays Fulfillment Plus about $7 to $10 per order. MuseumShop is billed in a line-item format for each time the outsourcer touches its merchandise. “The value definitely outweighs the cost of fulfillment,” she says. Some fulfillment companies are beginning to charge a percentage of overall sale-usually 15%, Brooke says. This, she says, allows the fulfiller to make more money as the retailer grows.