June 30, 2011, 12:00 AM

Fulfillment Services

The tax man casts a shadow as e-retailers try to fulfill faster.

Thad Rueter

Senior Editor

Lead Photo

Fulfillment is emerging as the next frontier for e-commerce. With online shoppers expecting lightning-fast delivery of orders on their terms, and e-commerce becoming an ever more important part of retail spending, web merchants are putting more focus into making sure they can meet shipping demands.

As part of its 10th Annual Merchant Survey report, research firm The E-tailing Group Inc. asked web retailers about their fulfillment priorities for 2011, and the results suggest that consumers are applying more pressure when it comes to shipping and delivery. 59% of the merchants who responded to the survey said that being able to fulfill an order by shipping to multiple consumer addresses was a priority this year, up slightly from 57% last year. Additionally, 43% said they would give high attention to enabling consumers to pick up and return online orders inside bricks-and-mortar stores, up significantly from 24% last year.

A study earlier this year from Retail Systems Research LLC suggests that retailers will have to further expand such fulfillment options as consumers become more sophisticated about shopping via multiple channels, including checking reviews and prices via their smartphones while in the aisles of bricks-and-mortar stores. In a survey of 76 retail chains by RSR from November 2010 to February 2011, 64% of those retailers deemed "winners"—that is, those with comparative-store sales growth better than the industry average of 3%—offered some form of in-store pickup of non-store orders. The RSR survey also found that 8% of the winners in the study use order management technology that can take non-store orders and fulfill them from any warehouse or store that has the desired inventory.

Free shipping

In-store pickup is becoming more important as free shipping becomes more valuable as a promotional tool for web merchants, with 69% of respondents to The E-tailing Group survey saying that tactic is a high promotional priority this year, up from 55% last year. Only sales/specials and seasonal promotions ranked higher for retailers among their promotional priorities this year.

That's not to say all merchants are doing better when it comes to fulfillment. The E-tailing Group, in its mystery shopping survey from the fourth quarter of 2010, found that on average, it takes online retailers 4.26 days to get an item into the hands of a customer, up from 4.05 a year earlier. And four merchants out of the 100 included in the survey took at least nine days to deliver goods ordered online. "That is unacceptable even by early e-commerce standards," the report says. It may be a sign some retailers are seeking slower, lower-cost shipping methods on low-priority orders in order to fund free shipping offers.

Many online retailers, however, are investing in improving their fulfillment capabilities in order to keep up with leading competitors. "The supply chain itself has been our Achilles' heel in this company for the last couple of years, as it is for any company scaling like us," says Christopher Halkyard, vice president of operations for Gilt Groupe Inc., which had Internet Retailer-estimated sales of $425 million last year, up 150% from $170 million in 2009. The flash-sale retailer offers large discounts on small quantities of products for a limited amount of time, and depends on being able to receive, sell and ship those products in a quick and efficient manner.

With a different 10% of its inventory typically on sale on a given day, Gilt turned to one of the rising trends in e-commerce fulfillment: robots. The mechanized helpers, which look like small boxes on wheels, can move around pods of inventory in the warehouse, bringing items to human employees for inspection and shipment right as orders come in, making more efficient use of warehouse shelving space and cutting down delivery times.

Using a robotic fulfillment system enabled department store chain Von Maur Inc. last year to fulfill orders during the busy holiday shopping season without calling on some 35 employees from other departments to man the warehouse, as it had during previous peak periods. The robotic system moves product to people, instead of requiring people to go to the product. "A product can be in 15 different units around the warehouse, but the system knows where it's sitting, so you don't have to worry about moving products around on shelves," says Melody Westendorf, Von Maur's chief operating officer. "That is such a colossal waste of manpower and time." And now, instead of needing up to four days to fulfill an order, the retailer and its robots move merchandise out the door in as little as an hour, helping the chain meet the needs of impatient customers.

Von Maur is hardly the only retail chain spending significant money on e-commerce fulfillment. Urban Outfitters Inc., Macy's Inc. and Toys "R' Us Inc. are among the large chains that have recently announced plans to open dedicated e-retail distribution centers. And Kohl's, which hopes to reach $1 billion in e-commerce sales this year, wants to open in time for the holidays its third e-commerce fulfillment center, this one in Maryland. Meanwhile, the world's largest online retailer, Amazon.com Inc., says it will build nine distribution centers by year's end—half of them outside North America—giving the web-only merchant about 70 such facilities around the world.

Going global

Beyond such areas as free shipping and in-store pickup, one of the next places where many e-retailers will feel fulfillment pressure is likely to be international sales. According to an Internet Retailer survey earlier this year of 69 retail executives—including chain retailers, web-only merchants, catalogers and consumer brand manufacturers—70.1% sell online to consumers outside of the United States. Most of those merchants, 53.2%, fulfill orders from international customers by shipping products from warehouses located in the United States. About 13% shipped from a warehouse in the customer's country, with another 4% drop shipping from either a U.S. vendor or an overseas supplier.

Comments | 4 Responses

  • Your article is very interesting not only from the point of view of large ecommerce retailers, but also for small to medium sized enterprises who are leveraging outsourced fulfilment services not terribly different;y than their much larger competitors. As a fulfillment company sales director, I see the International Shipping piece as the greatest oppornityfor the our small to medium sized clients o expand their businesses globally and grow as a result. We are working very hard to get shipping right to emerging markets so that we can help our clients gain traction in those markets. It takes patience and in some cases is more of an art than a science to establish shipping methods that are cost effective, but the rewards for our clients are enormous and represent the opportunity to capture marketshare for the products. I hope that the larger e-commerce retailers will help create the means for smaller companies to follow suite more easiliy.

  • Very informative article & well written... As a product fulfillment center, I'd like to add some points to what you wrote, & mention a couple of other reason as to why customers are looking for a fulfillment center as a solution. Warehouse & Taxes: Lots of customers are not aware that by using a fulfillment center in another state you are required to pay that state taxes. Like inventory, sales & corporate taxes… For smaller sellers with low volume & low overall prices this is not a big issue. But for bigger Sellers that might not be familiar with all the local taxes in that state, only to later to be slapped a big bill. Here are 2 examples to bring out above point: 1: A company needing fulfillment that's based in NJ, is using a fulfillment center in Texas. The company notifies them one day about a bill for $8,500 in state inventory tax. So he left that fulfillment center, but still had to pay the bill. So know your facts before you commit. Most fulfillment centers won’t bother mentioning to you the fine print before, & won't take responsibility if an issue arises later on; they will just pass it along to you. 2: A company selling small toys is using fulfillment by Amazon, but FBA decides to move his inventory from warehouse to warehouse without notifying him. His problem with FBA fulfillment by Amazon doing this is they don't notify him that they are moving his inventory, ( and might not have to according to their terms). But... He's left figuring out with his accountants each month how much sales & other taxes he owes in each state they moved it to. Which turned into a fulfillment by Amazon nightmare for him, because when the state comes to collect their taxes from FBA, Amazon will send them to you. Fulfillment by Amazon won't help you with this nor do they tell you about this before signing up, nor would they even bother notifying you that they are moving around your inventory.

  • Another important factor to point for people looking for a product or e-commerce fulfillment center is location: If you're company is based in CA, & you are using a fulfillment center in CA, you shipping costs will be double, compared to using a fulfillment center in the west coast for west coast orders, & a east coast fulfillment center for east coast orders. Fulfillment is for all year around not just Holiday season: During holiday season fulfillment centers see an increase in sales, & requests for their services. Having a plan is especially important for e-commerce sellers, since you never know when you might see a surge sales, which at that point it might get out of control. Even a one day delay for a customer during a holiday season, or all year around can be a lost customer. The most successful e-commerce companies these days are the ones that sell a product & ship it fast. People don't like waiting, & don't like hearing about delays. They want buy & get it quickly!!!! Getting overburdened with orders can be a big problem for companies all year around too, especially start ups. In my experience in fulfillment I've seen companies take their business online, where they grew very quickly, only to see their business go backward, because....... They couldn’t manage their daily order fulfillment, which turned into a 2 pronged problem. A: Unsatisfied customers, delayed orders & insufficient inventory. B: Losing focus, instead of being busy focusing on sales, marketing, & product development, they were spending their day running around their warehouse trying to get their daily orders out. At that point they started looking for solutions, which the 1st option was outsourcing their daily order processing to a fulfillment center specializing in e-commerce product fulfillment. It was a solution that worked but came a bit late, since at that point the company was seeing a huge downturn in sales & losses due to their incompetence & lack of foresight into thinking how they will manage their daily orders. "Focus on what your good in, you're product line, not packing & shipping"

  • Savings on software: The saving will quickly add up when using a fulfillment center, you will save on rent, employees, hardware, software, security systems, utilities, shipping rates & shipping supplies. For most med sized companies the 2 biggest savers will be rent & software. Rent: When you rent a warehouse you pay per month if you use it or not, if it’s half full or empty, you pay for the space in between the aisles & above the aisles. With a fulfillment center you pay for what you use, no more. Most usually calculate it by exact daily usage rate. So you pay only for what you used per that day. Some like fulfillment by Amazon charge you high prices for storage, then charge you a average monthly rate. So do your research… Software: Any company selling a product online needs software & hardware. Software for inventory & for shipping, receiving, etc.. Hardware, computers, printers, scanners, (machinery for packing)… Please respond to this post with your comments. Joe @ Fulfillrite Product Fulfillment

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