Fulfilling the Promise

Summertime...and it’s beginning to look a lot like Christmas. In conference rooms and warehouses, on servers testing real-time inventory and in forecasting models pinned to office walls, the buzz of activity among e-retailers and their suppliers says holiday shopping is on the way as surely as the sound of Salvation Army bells jangling on street corners.

Last year, some e-retailers, many of them barely off the ground, waited until September to begin scaling up for the blitz. They paid dearly for their ill-preparation. Just ask Toys “R” Us, which had to tell disappointed shoppers at the 11th hour that it had accepted more orders than it could deliver on time. Others managed to rig up fulfillment systems that worked, systems that could be swamped if ambitious sales forecasts that triple or even quadruple last year’s levels materialize as expected.

Fogdog Sports, for instance, is aiming at annual sales of $33 million, an olympic-sized jump from last year’s $7 million. The largest chunk will come in the fourth quarter. Fogdog has contracted with Keystone Internet Services to handle 22% of its fulfillment and has been huddling with the firm since spring on Christmas planning. Any later “is almost too late,” says Mohan Komanduri, director of fulfillment for Fogdog. “If you don’t have good fulfillment solutions in place by the end of June or early July and implemented by the end of August or early September, you’re not going to be in good shape to scale up for the last quarter.”

At Smith-Gardner, which sells customer service software that links front- and back-end functions for Web merchants, an estimated 30% of new business this year is from e-retailers seeking to bulk up their systems in preparation for the holiday blitz. At Keystone, retail clients are making a new priority of merchandise planning and inventory forecasting—and they now look a year—not six months—ahead. And luxury goods e-retailer Indulge.com is already working with SubmitOrder.com on tighter integration of their technology platforms and putting services such as engraving at the distribution center—all to fill orders faster.

Geri Spieler, a Web fulfillment analyst with the Gartner Group, keeps tabs on back-end spending. “It’s unscientific, but from what I see, e-retailers are spending about 20% more of their IT budget on fulfillment than last year,” she says. “We’re seeing a huge change in awareness among e-merchants that they have to somehow establish control of the cost of distribution.” But a problem identified is not a problem solved. To sidestep fulfillment fiascoes, e-retailers are splitting into two camps: those taking control of fulfillment by hauling it in-house and those outsourcing all or part of it.

EToys is taking no chances this year. The Web’s largest toy store pulled fulfillment away from a cadre of outsourcers and entirely back in-house. A leased 730,000-square foot facility on the West Coast and an additional 995,000-square feet of space at two East Coast facilities will roughly quadruple its directly-controlled distribution capacity this holiday shopping season.

“A lot of companies want to be able to bring fulfillment in house and say it’s a core competency—they’re unique, they do things differently,” says Stacie McCullough, logistics analyst with Forrester Research, Cambridge, Mass. “Companies believe that as they get to a certain size, it’s going to be more cost-effective.”

By some industry standards, warehouses become scale-efficient beyond 15,000 transactions a day, or inventories occupying 250,000 square feet of warehouse space. Few e-retailers currently hit those numbers. So even though e-merchants may want to bring fulfillment in-house, adds McCullough, “Whether or not it’s the right goal for everyone is another question.”

A study by Bain & Co. and Mainspring Communications calls outsourcing the best choice for most. But it warns that cost efficiency must be balanced with the ability to meet customer service demands. Gartner’s Spieler couldn’t agree more: “It’s not always cheaper. You don’t necessarily look to outsourcing to do something less expensively.”

Outsourcing may not be cheaper, but it can be better. Third parties may have the capacity, for example, to handle sudden demand from promotion-driven spikes or holiday volumes that e-retailers aren’t equipped to handle. Add experience, labor and already-installed systems in a state-of-the-art warehouse, and as the demands of the fourth quarter approach, outsourcing may start to look as good as a shiny new bike parked under the Christmas tree.

But there’s fulfillment outsourcing and then there’s e-fulfillment outsourcing. The Internet has expanded the definition from the pick, pack and ship functions perfected by catalog merchants to take in tasks never part of the catalog world. That means e-retailers seeking fulfillment help must weed through a dizzying array of options. Internet speed requires that orders are tracked and inventory levels debited in real-time rather than batched. That information, in turn, must be linked in real-time to order taking, so that orders aren’t accepted for merchandise no longer in stock.

Multiply the management and communication challenges of dealing with a single warehouse by several warehouses used by larger Web stores—or by dozens of manufacturers drop shipping for Internet merchants who carry no inventory—and it’s easy to see why there’s a big market for outsourced solutions that tie it all together.

E-retailers can source all or part of their fulfillment needs from a growing list of vendors that offer soup to nuts logistics, either home-grown or through partnerships with warehouses or call centers. Several either specialize in or will break out software solutions that handle targeted functions—say order management or inventory control—for distribution center operators that need to tool up the technology on their fulfillment offerings, and directly to e-retailers who need help but don’t want or can’t afford to farm out the whole process.

Bodyflash.com, a jewelry and accessories site in business only five months, works with 20 manufacturers that drop ship orders directly to customers. Bodyflash processes more than 100 online orders per month—manually up to now. Yet with sales goals edging toward $2 million by the fourth quarter, Karen Post, the company’s president and cofounder, has put order management software on her wish list. In fact, Bodyflash hopes to close a deal with OrderTrust in the next several months. For now, Post says, the manual system can handle up to four times the current order volume. But with no automated system in place and a small staff that also functions as the call center, Post concedes, “I think if we got really, really busy, that’s something that would keep me up at night.”

OrderTrust, formed in 1995, was one of the first back-end order management software systems to stake its flag in the sand. But it didn’t take long for the space to fill up. “A year ago, when we looked at order processing houses, there was one company,” says Forrester’s McCullough. “Now there are about 15 companies like that, and they’re all growing at about 300%. More and more e-retailers are realizing that they have to put an emphasis on the technologies that help them keep connected and serve customers.”

Another software vendor, Smith-Gardner, has automated direct-marketing sales for retailers since 1988 and branched into e-commerce fulfillment in 1997. Its Web-enabled applications go beyond back-end management to integrate real-time support of front-end sales and customer service for retailers selling online and in other channels. “Fulfillment has been a real learning curve for retailers new to the direct sale model of the Internet,” says Sharon Gardner, vice president of marketing. “When a lot of them get past focusing on the front-end and realize they need a distribution system, they go out and find a warehousing partner or a warehouse management software system. But they’re still missing the middle order management piece that follows the entire life cycle of the order.”

That missing piece caused chaos in the warehouse at American Musical Supply, a Midland Park, N.J.-based supplier of instruments and accessories, says chief operating officer Peter Rubacky. Until two years ago, the retailer and cataloger made do with an order management process spliced together using various software. But a growth spurt and a move online was taxing the system beyond its limits. “Our volume was being capped by the number of brush fires we had to put out every day,” says Rubacky. “Reps would call in to make someone actually check to see if the product was stocked and on the shelf—they didn’t believe the inventory numbers. They’d even come over and check themselves.”

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Online sales promised to exacerbate the problem. “In the catalog environment, if something is not right you have someone there on the phone to track things down and act as the customer’s advocate. But when things aren’t working on the Web site, it’s a less forgiving environment,” says Rubacky.

The company went on the Smith Gardner platform for its catalog operation in 1998 and added a Web Order for its online business in 1999. The result? “We’ve been able to ship every order, every day—that alone is what’s helping the business grow,” says Rubacky.

Catalog fulfillment veterans also have entered e-fulfillment, claiming the expertise of decades. But some e-retailers aren’t convinced that experience guarantees success online. “You walk into a catalog warehouse and it looks like what you need to do for e-commerce, but e-commerce is a very different animal,” says Gerry Brunk, vice president of business development at Indulge.com, a luxury goods retailer launched last year. “A lot of fulfillment providers claim they have the technology to support e-commerce, but when you look under the hood, there’s nothing there.”

In choosing SubmitOrder.com, Indulge picked a company spun off by technology distributor Digital Storage. SubmitOrder handles traditional warehousing functions such as receiving, inventory, storage, and pick, pack and ship—but with a twist. Based on forecasting models, clients’ inventory is kept on a “forward pick” location for easy picking—not on pallets or racks as a traditional warehouse would do.

That Cartier watch you ordered from Indulge? It sits inside a caged, high-security area until the shipment is ready. But don’t expect it to show up in the same package with the Petrossian caviar you ordered at the same time. Lower-volume, perishable goods are drop-shipped from the supplier. It’s all handled by automation—and within 24 hours—a goal SubmitOrder was largely able to meet during last year’s Christmas rush, when its distribution centers handled 8,000 to 10,000 orders a day.

With that kind of demand, e-fulfillment technology is critical—undoubtedly a reason why Keystone Fulfillment recently changed its name to Keystone Internet Services. The switch reflects its investment in the needed tech platform. But technology wasn’t the issue last October, when Fogdog signed up with Keystone, a sister company of cataloger Hanover Direct. The draw was fulfillment experience.

“We started out as a Web development company,” says Fogdog’s Komanduri, “so we’ve built our own systems for order management. We’ve grown it to match the scale of our business. We have yet to find a software vendor out there who has what we need.”

Fogdog, which works with more than 40 fulfillment sources, including manufacturers and distributors, needed help in making sure products keep flowing once holiday volumes begin to build. Keystone handles most of the retailer’s owned inventory.

The sporting goods industry is fragmented and serves many niche markets. Fogdog’s manufacturers know their products, but aren’t necessarily geared to ship direct to consumers. So the e-retailer is identifying those with potential problems if volume soars. “We’re working with Keystone to get our projections as close as possible,” says Komanduri. “They’ve got a good idea of the December spike in relation to normal business. They’ve added value by forcing us to look beyond our normal planning window. In the past we looked ahead six months. Keystone convinced us to look nine months or a year out.

If Christmas 2000 already looks different than 1999, Christmas 2001 promises still more developments. With the online retailers’ new focus on fulfillment, the dance cards of e-fulfillment providers are filling up. The most ambitious already are looking far ahead: Increasingly, as they pick and pack for e-retailers, they’ll be picking and choosing which ones they want as partners.

“We’re trying to find brands that have a track record or that we think have the management and perspective to be a leader,” says J.T. Kreager, president of SubmitOrder.com. In April, his firm signed a long-term agreement to provide fulfillment services to Kmart Corp.’s BlueLight.com. Under the deal, BlueLight will take an undisclosed equity stake in SubmitOrder, a deal Kreager says he’d do again for the right partner.

“We’re being more selective, and capacity isn’t the issue,” adds Keystone president Richard Metzler. “A la carte solutions don’t guarantee my clients’ success. It’s easier to build a back-end than to build a brand—great brands are built over a generation. So the people that have them are the multichannel markets, the people who are just starting brand development have a much bigger hill to climb and a higher risk profile.”

The e-fulfillers

Most people have made a purchase on the Internet by now,” says Forrester’s Stacie McCullough. “It’s no longer a toy. Now they want real customer service.” Various companies providing various e-fulfillment services aim to do just that. The following is an abridged version of what’s available in a field that grows more crowded by the day.

Keystone Internet Services: Once the customer hits the “buy” button, this Keystone, Pa.-based provider of end-to-end logistics offers the physical distribution capacity and technology platform capable of handling the rest. Competitors of similar scale include Fingerhut and Submit Order.com.

Smith-Gardner: Offering Web-enabled customer relationship applications, the Delray Beach, Fla., company’s suite of e-fulfillment software links front- and back-office order management functions to provide a single view at all points along the fulfillment process.

SubmitOrder.com: A new challenger in the end-to-end fulfillment space. With both the technology infrastructure and the physical distribution centers, this Columbus, Ohio, provider, unlike competitors that grew out of catalog fulfillment, sprang from the technology side as a unit of distributor Digital Storage.

OrderTrust: This Lowell, Mass.-based provider has expanded its technology platform to support e-fulfillment order processing—something it’s been doing for direct-selling merchants since the mid-1990s.