E-retailers may be hastening their own demise if they make the wrong fulfillment choice

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.”

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.

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.

“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.”

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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.

Vcommerce and Schatsky agree that it is impractical to outsource fulfillment for expensive items. In fact, Vcommerce won’t handle such items.

The lack of fulfillment experience is also seen among retailers. “Many retailers who thought they could provide in-house retailing have come running for cover,” Vcommerce’s Kuhns says. “They have found they don’t have the expertise required. They also found in-house fulfillment does not allow them the flexibility to adjust to the seasons. Going from Q4 to Q1 becomes a trauma because your organization has been built to handle your high point.”

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That is harder than it sounds. “It requires a pretty sophisticated IT-driven order management system,” says Ashford.com’s COO Bill Hensler. Ashford’s in-house system is fully integrated from ordering through customer service through shipping so that nobody has to re-key any information. “Being able to integrate the order, special instructions such as gift cards, have it packaged, and a tracking number and label printed within 20 minutes can’t be done with just hard work and good intentions,” Hensler says.

And integration is important even when outsourcing fulfillment. “A good fulfillment company will give you real-time reports so you can watch your inventory to see when things are being pulled and shipped,” says Barbara Brooke, fulfillment manager with MuseumShop.com. MuseumShop uses Fulfillment Plus to warehouse and ship orders.

BlueLight.com’s outsource fulfillment company integrated the warehouse management system with BlueLight’s order management system. “They are the masters of our inventory,” says Alex McNealey, BlueLight’s director of operations. “They replicate the warehouse management in our order management so that there is real-time inventory knowledge displayed at the storefront.” At BlueLight, the online arm of Kmart Corp., orders move directly from the order page to the fulfillment house.

Even with an outsourced fulfillment system, the retailer should never have to intervene in a transaction, says Michael Small, vice president of sales with Skokie, Ill.-based 3PF. Systems must be integrated so the shopping cart ties to the inventory. It is critical that both the front and backend are adjusted for returns and new stock, Small says. And with technology what it is, there is no reason e-retailers with outsourced fulfillment should re-key any of the order information—the customer should do all the work online. “The beauty of the Internet is that the retailer should not be touching the order,” Small says.

The 4-year-old SmartMail has 12 Smart Centers in major metropolitan areas such as New York, Chicago, Los Angeles and San Francisco. The company will pick up packaged and addressed items from clients’ warehouses, verify each item’s address, add a tracking code and ship the items through the U.S. Postal Service. SmartMail President and CEO Jim Martell says the company doesn’t pick-and-pack items. “We take it from that point on; we are an alternative to any other shipping means,” he says. This service will save retailers about 15% on shipping costs compared with first-class postage, Martell says. The savings come from standard USPS discounts for volume shipping. Martell says his clients also save on internal costs from not dedicating staff to verify addresses and entering tracking information.

“Our customers say they save 5 cents to 10 cents per piece shipped after we take over,” he says. And because the company matches USPS’s service, SmartMail does not add to the delivery time.

David Schatsky, research director for Jupiter Media Metrix, says managing costs is a major headache for fulfillment. Shipping cost was the No. 2 concern among online retailers, according to a Jupiter study. “In many cases they are losing money because they are not managing their costs effectively,” he says. “As we see more retailers looking for ways to cut costs, a company like this may have an answer for some of them.”

But this service works better for some than it would for others. It makes most sense for customers shipping high-volume, lower-value, more durable items, Martell says. And although SmartMail will not turn a customer away, those who will realize the most savings are ones with items lighter than 5 pounds, with several hundred items per day and within 75 miles of a Smart Center. The company offers free daily pick-up for customers within 75 miles that meet minimum order size; others can drop off items.

“We’re a nice match for online companies that deliver things like pharmaceuticals, books and videos,” Martell says. In fact, one of Martell’s clients is bookseller Barnes & Noble “Not everybody’s going to order a Harry Potter book and have it shipped Federal Express because it’s too expensive,” he says. “Nor do they want to wait 10 days for ground mail; we fit right in between them.”