December 26, 2000, 9:55 AM

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 is already working with 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.

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