In its second-largest acquisition, Amazon buys the company for $970 million.
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Small says his company charges about $3 to $5 per order when there are about 20 SKUs to pick from-but the price increases as SKUs increase. The price is driven by the retailer’s inventory mix and order diversity, he says.
Brooke advises retailers not to be put off by initial price quotes. “If price is the reason they are not getting your business, then they will find some way of working it out with you,” she says.
By contrast, large retailers who do their own fulfillment will have a lower cost per item-but, of course, they will have incurred higher costs in setting up the system. Lori Lease, Lands’ End’s senior outbound manager, says its in-house fulfillment cost about $1 per order for a standard order to make its way through the warehouse. Extras such as monograms add to that cost. Lands’ End has two warehouses in Wisconsin, including one in Dodgeville of 550,000 square feet, with a third scheduled to open this summer. The company employs as many as 5,000 workers (many part-time) and ships upwards of 60,000 orders per day during peak times. In fact, Lands’ End is so big it is negotiating with an unnamed retailer to become its fulfillment provider.
For some, choosing between in-house and outsource fulfillment comes down to more than cost. For retailers like Lands’ End and luxury retailer Ashford.com, which also operates its own fulfillment system-including a 40,000-square-foot warehouse that ships as many as 5,000 packages per day during the peak Christmas season-it comes down to control.
“If the nature of our product were bulkier, of lower value and the package appearance didn’t matter, like dog food for instance, we would consider an outsource partner,” says Bill Hensler, Ashford’s COO. But Ashford doesn’t sell dog food, it sells diamonds and expensive watches. And those products require a level of care the company is not willing to trust to anyone.
“Initially, the order volume was low, so there wasn’t much question about outsourcing,” Hensler says. “A couple things drove us to keep it in-house as the business grew. We really wanted final control over the look and feel of the product.” Ashford uses gift packaging on all its orders as a way to build brand identity. “We are able to train and monitor the packing operations for all those items. The next person who looks at an item will likely be the recipient. They may be opening it in front of a group or a spouse, so it needs to come out of the shipping box looking like a gift.”
Some retailers believe they can get the same level of fulfillment from an outsourced service that they can get in-house, it just takes managing the process and making expectations clear.
Although MuseumShop outsources fulfillment, Brooke says she still expects the merchandise to be handled as though it were in-house. “You need someone you can trust,” she says. “If you don’t have a fulfillment center that’s going to treat your customers like they are their customers, then you’re not going to make it. We have a great relationship: they know my inventory and I trust them with my inventory.”
That trust, she says, is established by talking with fulfillment company employees about how they like their job, talking with other retail clients about the service, and by having access to an account manager who makes decisions and takes the time to learn the inventory.
Small agrees that it is unlikely that a business arrangement between retailer and fulfiller will work if the retail management is not comfortable. Retailers must accept that they are giving up a degree of control. Retailers need to make sure they are comfortable with the outsource company’s management, and its ability to be flexible in working with the retailers’ system. “The best relationships we have are where retailers feel we are part of their team,” he says.
A good fulfillment company is like a good baseball umpire: when he is doing the job right, nobody notices. “The key to a successful drop-ship network is that the end customer doesn’t realize it is a drop-ship network,” says John Kitzie, Vcommerce’s senior vice president of merchandising. “It must perform at or above the levels of someone operating their own warehouse.”
Controlling quality when working with an outsource company is critical, Schatsky says. The retailer will have to keep close tabs on the fulfillment partner to monitor performance. That will involve dedicating staff time to working with those third-party relationships.
And that’s advice BlueLight has taken to heart. “We devote one full-time staff person to work at our fulfillment house,” McNealey says. “That person is the point person and keeps communication efficient between them and our corporate office.”
Schatsky adds that one way to ease quality concerns is to find a fulfillment partner that is a good match. “A drop shipper that typically handles small- or medium-sized items, won’t be a good fit for a retailer that ships bulky items,” he says. “The core competencies of the retailer and the shipper should match.”
For Ashford the need for control exceeds concerns of quality; there are security issues at stake. “When companies talk to us about outsource fulfillment, it gets tough for them when we start talking about $5 million to $10 million in diamonds or watches in 15,000 square feet,” Hensler says. “You can’t maintain physical control over the product with temporary workers or without security. If you’re shipping pet food and someone steals a bag of Puppy Chow, it wouldn’t be the end of the world. The loss of a significant size diamond-or any diamond-would be a huge event.”
To protect its wares, Ashford uses surveillance cameras and armed guards at its fulfillment center. “Also, we have a large, secure vault for expensive items; most fulfillment centers would not have a vault,” Hensler says.