An ounce of prevention is worth a pound of cure when fulfillment flounders
By Mary Wagner
For an e-retailer trying to balance growth demands, marketing and advertising, staffing and the multitude of other balls that web merchants must juggle, sometimes it makes sense to parcel out parts of the business to professed experts. So no one was more surprised than Barrie Pace, Smithsonian, Bra Smyth and a number of other e-commerce site operators when AB&C Group, the outsourced fulfillment services vendor they were using, suddenly and unexpectedly closed its doors in March.
What caused the vendor’s abrupt ceasing of operations still is being unraveled, but there are many reasons an outsourced vendor you use this year may not be available next year, ranging from consolidation and mergers to strategic refocusing to business trouble. Sometimes merchants have advance notice their vendor is exiting the business, but other times, as in the case of these retailers, it happens without warning. Whatever the reason, the effects on AB&C Group’s retailer clients were clear and immediate: They were left to scramble for alternative solutions and smooth things over with affected customers.
Forced to find a fast alternative, some turned to warehouse and fulfillment consultants such as F. Curtis Barry & Co. to speed the process of identifying, contracting with and transitioning to a new vendor; others are still in transition. Smithsonian, for example, bound by a government-mandated RFP process and procedure, didn’t re-open its online store with a new vendor, Strark Bro’s Fulfillment Services, until August.
AB&C Group, a provider of fulfillment and call center services for direct-to-consumer retailers, had been in business for some 30 years when BlueSky Brands, a company that also operated four e-commerce sites of its own, acquired it in 2006. AB&C had a long history in the industry and few e-commerce operators had any inkling of trouble at the company.
Events beyond their control at provider partners are a risk in any relationship retailers have with outsourced service vendors. So how does any web merchant that uses outsourced fulfillment services protect itself from the unanticipated closing of its vendor, or the vendor’s decision to take its business in a new direction? And what should it do in the event of such a split to separate data and systems, reclaim inventory, and find a new provider fast so as to keep its own doors open?
“It’s like marriage,” says Bob Betke, vice president and partner at Curtis Barry. “It’s easy to get married, but pretty hard to get divorced.”
If that merchant/vendor bond is analogous to marriage, then some of the same rules for relationship longevity might be said to apply, a concept reflected in experts’ advice to retailers facing this situation. That is: know what you’re getting into, pick the right partner and hammer out acceptable terms. And in the event that the relationship might fail, get the equivalent of a pre-nup written into your contract.
Look before you leap
For retailers, knowing what they are getting into includes looking not just at a vendor’s proposal and client references, but also into the vendor’s financials to the extent possible.
“Given the times we live in, where marginal performers are going to fail, it’s more important than ever to check financial references. If you can run a D & B (Dun & Bradstreet report on creditworthiness), it’s useful,” says Paula Rosenblum, managing partner of consultants RSR Research LLC.
When outsourced fulfillment providers are private companies, their financials are harder to come by. “You are not easily going to see their P&Ls, but they will give them to you in some form if you keep asking for them,” Betke says.
Randy Moore, a principal at consultants Kurt Salmon and Associates, advises retailers’ senior management to be in regular contact with vendors’ senior management during the vetting process and throughout the relationship, including creating face time at the vendor’s facility.
Rosenblum points out that knowing a vendor’s lenders can also provide insights as to financial health. Finally, she adds, don’t underestimate the value of keeping one’s ear to the ground. While gossip is most often just that, sometimes it offers clues to future events. For example, Rosenblum says there were industry rumblings about trouble at retailer Steve & Barry’s for a few months before the apparel retailer surprised many by filing for Chapter 11 bankruptcy in July.
Experts say retailers should avoid switching fulfillment providers whenever possible because of the difficulty involved. Lost inventory isn’t just lost inventory, for example; it’s also lost revenue. “If the third party can’t find all the inventory, retailers might have to drop items from their web site and not offer as many things for sale. If you have to cut back on what you list on your site, the lost revenue can be enormous,” Moore says. In some cases, he adds, the cost of moving adds up to millions for larger retailers when they calculate the cost of upgrading shipping to meet deadlines and higher return rates from disgruntled customers.
Four changes
Under non-emergency circumstances, when a retailer decides for whatever reason to part ways with a fulfillment vendor, it can take 90 to 120 days or longer to launch a search for a new provider, assemble an RFP, evaluate proposals, then plan and enact a transition, according to Moore and others.
Anne Kelly, CEO of apparel merchant Junonia, is one retailer who knows how challenging such a move can be. Her company, which has outsourced fulfillment ever since it hit $5 million in sales, has done it four times.
In no case was the move to a new provider initially sought by Junonia. Its first vendor decided to exit the third party fulfillment business at the end of the contract term. Kelly found a good alternative in a second provider, but eventually systems integration issues forced Junonia to look elsewhere when that contract term was up. Junonia then moved to AB&C, but moved on at the end of its contract in 2005 when the two sides could not agree on new terms. Junonia now uses a smaller local fulfillment provider.
Along the way, Kelly has learned some lessons that could come in handy for any web merchant looking to outsource fulfillment and to prepare at the same time for the possible end of that relationship. One is to avoid warehouse liens. Under a warehouse lien, provided for in some state laws, the warehouse operator can hold onto inventory on its premises owned by the merchant in resolution of a monetary dispute; for instance, a disagreement over a final bill. “It’s important to have a lawyer who really understands outsourced fulfillment,” Kelly says.
Based on her experience with multiple moves to new fulfillment vendors, Kelly also advises retailers to find vendors that are on the same software and systems that the retailer uses, as Junonia does now. “It softens the pain of moving considerably,” she says. “The order management software is key because we remotely mange our inventory, enter purchase orders and pull sales reports. Not having to do a complicated systems integration makes it all a lot easier.”
No time for questions
Becky Simon, CEO of Bra Smyth, one of the retailers forced to find a quick alternative when AB&C closed its doors, also encourages retailers moving to a new fulfillment provider to pay close attention to the prospective vendor’s systems, particularly if the systems are proprietary. Bra Smyth moved its fulfillment operation to another provider successfully with the help of consultants F. Curtis Barry. But on the very compressed time frame involved, Simon wasn’t able to delve into the new vendor as deeply as she might have otherwise.
“When we found we were moving to a new vendor on a proprietary system, I didn’t ask any questions about that system. Now I would,” she says. “We took them at their word that they have sufficient IT staff to support it. But if they have 15 people, and people leave or are fired, they could suddenly have five. It’s not something you can anticipate, but when someone tells you they have a proprietary system, explore that very carefully. Look at how purchase orders are received, and put it through its paces.”
While it’s tough to anticipate and plan for every contingency, a well-written contract can provide at least some protection for the retailer suddenly having to separate from its fulfillment vendor. Contracts typically spell out the metrics that constitute acceptable performance, for example, that orders will be filled within a designated time and that the vendor will record inventory status at a specified level of accuracy. They also spell out the basis of pricing for service. But contracts also provide an a opportunity to build in additional terms that could ease an unexpected move.
Kelly, for example, says many retailers don’t understand the need to write into a contract provisions that relieve the retailer of the warehouse lien in the event of an end to the relationship, and it may not appear in the provider’s contract boilerplate because vendors want the assurance on their side that if the retailer goes out of business, they can cover their costs by liquidating that inventory.
Making ownership clear
Junonia always structures contracts with outsourced fulfillment vendors to state that no matter what happens, even if the retailer still owes payment on the final bill, the warehouse operator is not entitled to the inventory. It’s an extra measure of assurance against the possibility of contention at the sudden end of the relationship.
“We might still owe them for the last bill and they could come after us as any vendor would for an unpaid bill, but they can’t keep our goods to reconcile a billing,” Kelly explains.
But what if it’s the fulfillment vendor, not the retailer, that suddenly closes its doors with inventory owned by the retailer inside? If a fulfillment house suddenly shuts down under circumstances such as a bankruptcy, for example, does the inventory in that third-party warehouse go into the asset pool targeted by the third party’s creditors?
“Normally, no,” says Moore. “Your contract should clearly state if the retailer owns that inventory, and that the third party is liable for any damage to the inventory. In the case of a business failure, the third party has to provide for the retailer to have access to get its inventory out of there.”
But getting access solves only part of the problem. Another challenge for retailers is that they have to know exactly what they’ve got at the warehouse, including the quantity of each item. With retailers receiving periodic updates to their own systems from the third party’s systems, recorded inventory levels may be out of synch to a degree but should provide a rough idea of what inventory the retailer has at the warehouse.
Because neither party plans to fail, most contracts don’t go as far as setting out a fully-developed exit plan. But it pays to lay out at least some aspects of how a separation would be accomplished, beyond just specifying the performance levels that would justify contract termination, according to Betke. For example, the contract might include specific language about what happens to the retailer’s inventory and to the retailer’s data that resides on the third party’s system in the event the third party suddenly ceases to operate.
Buyout option
Some contracts address ownership of software, if the partnership has customized packaged software. “They spell out whether you can negotiate to license that software if you leave,” Betke says. That also goes for buying back shelving or other equipment the fulfillment provider may have acquired to support the retailer’s business, particularly useful if the retailer intends to take fulfillment in-house.
Kelly takes that approach one step further. Currently, Junonia has what she calls “a gentleman’s agreement” with its outsource fulfillment provider, a local company new to the business, for first option to buy the warehouse and equipment if the provider ever decides to exit the business, but Kelly says that language will go into her next contract with the vendor. “That would put us in the business of operating it directly, but I think that might be less painful than moving again,” she says.
Contracts don’t cover what experts say can be one of the most potentially damaging parts of having to jump to a new fulfillment provider, depending on how smoothly that transition goes—that of meeting customer expectations during the transition. For instance, retailers may want to expedite shipping to meet promised delivery deadlines. “You have to repair your service as fast as you can,” Moore says. “Be proactive with your customers. Let them know forthrightly what has happened and why, and try to retain as much of your customer base as possible.”
Smithsonian first posted a letter of explanation on its web site stating that is fulfillment vendor had unexpectedly closed and that order taking was temporarily suspended as a result. Later, Smithsonian updated the letter with another stating that it had identified a new fulfillment vendor, was in transition and expected to re-open its e-commerce store soon.
Any business partnership involves some risk, and if an outsourced fulfillment vendor for whatever reason closes its doors, retailers can’t force it to stay in business. That means the best moves to minimize the difficulty are to exercise due diligence in the initial vendor selection process and sharpen up key details of an exit plan in the contract.
The rest is staying actively involved in the operation, even after the retailer has handed off that function to the outside. “There is an expectation that you are going to turn the whole fulfillment business over to a third-party service provider and just walk away from it, and that they will take care of it all,” Betke says. “The reality is that there is a significant amount of time needed to make sure it all happens to your satisfaction.”
mary@verticalwebmedia.com
