January 3, 2005, 12:00 AM

It’s a web services world—in fulfillment

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Retailers generally look for an outsource fulfillment solution for two reasons, says Frank Poore. CEO of drop-ship systems provider CommerceHub. Some are seeking operational efficiencies to speed up order delivery times to customers. Others are looking for a way to expand their assortment through drop shipping, a process that can be challenging to manage because of the integration required between the retailer and the multiple systems of multiple suppliers.

“Retailers all have new categories they would like to be in but aren’t,” Poore says. “When thinking about drop shipping they will think about large items first. They’re too big to store in the warehouse, and they’re too expensive to double-handle from the supplier to the retailer’s own warehouse and then from the warehouse to the customer. But once they get connected and see what it’s like, it becomes a merchandising decision and it can extend to everything from perishable foods to high SKU-count items like books or video games-any category where they are not going to be able to warehouse the right assortment.”

Drop-shipping’s role

Shopping channel QVC, for example, has its own merchandise in its own warehouse, and only a limited number of items are drop-shipped to TV shoppers directly from suppliers. It’s a different story at QVC.com. With an assortment that’s broader than what’s shown on QVC-TV, QVC.com vice president of operations Steve Hamlin calls the web site “QVC Plus.” The QVC warehouse acts as a distributor for QVC products, but QVC.com also drop ships to customers from more than 200 outside suppliers.

That’s where it uses the services of CommerceHub. CommerceHub’s platform functions as a universal translator that that allows QVC.com to integrate with the disparate systems of outside suppliers without having to change its legacy systems, says Hamlin, who requires any supplier doing business with QVC.com to integrate with CommerceHub’s platform. That integration provides full viability into the fulfillment status of any order through QVC.com at any drop ship supplier.

“One of our missions when we extended our assortment through drop shipping was to match the customer service levels we have in our own warehouse,” Hamlin says, adding that since QVC.com launched on CommerceHub in 1999, the metrics show the fulfillment services provider has delivered. The average confirmation time on orders from drop-ship suppliers has dropped by 39% during that time, for example, while customer order cancellations for fulfillment-related issues such as late or lost orders decreased 80% to 1.1%.

One of the biggest winning metrics-a 50% reduction in related manual labor costs-stems from one particular web-based service addition to the platform: exception-based order management. That alerts QVC.com to take action only when order processing performance falls below pre-set, rules-based thresholds. Hamlin, a 25-year fulfillment industry veteran, calls exception-based order management “the greatest technology to come along in drop-shipping.”

Boosting productivity

“Before, we had to check on every single order manually,” he says, adding that having to check only on the outliers has allowed QVC.com to reduce head count and pushed up productivity per rep by 26%. “They can handle more transactions because they just review the exceptions,” Hamlin says.

With the web powering an increasing number of back-end operations, fulfillment providers are even expanding what they will do for retailers to offer services historically more closely tied to manufacturing. Personalized and customized products are now one of the hottest trends on online retailing, and that’s partly because web technology has compressed order fulfillment cycles.

“Personalization is great for providing incremental sales without adding additional inventory risk, because you’re taking something already in inventory, adding value, and driving additional sales. But one of the problems, especially during the Christmas season, was long lead times on orders,” says GSI Commerce’s Murphy.

To shorten that cycle for retail clients such as Linens ‘n Things, GSI Commerce this year ended its arrangement with a third-party monogramming supplier and brought the equipment in-house, building an order entry and validation tool into its platform that takes the order specifications in on the retailer’s web site and communicates it directly to the monogramming and fulfillment operations at GSI. That means that orders for monogrammed towels, robes and the like meet the same service level metrics as identical non-monogrammed products. Ditto for accessories it can customize for clients like handheld maker PalmOne, using laser inscription equipment it operates in-house.

Realizing the new fulfillment possibilities offered by web services requires a strong, integrated platform and IT professional team, one reason industry analysts like Rob Garf of AMR Research Inc. say more retailers are seeking fulfillment services outside their own walls. “We’re seeing an up tick in retailers’ interest in the outsource model for the operational savings and the speed to market,” says Garf. “It’s attractive even for smaller to mid-sized businesses because they don’t need to have the upfront investment in infrastructure.”

Achieving economies

Garf says the economics on outsourcing fulfillment changes with scale. AMR fixes the point at which retailers should consider investing to bring outsourced fulfillment services in-house at $80 million to $100 million in annual revenues. But the economics of scale shouldn’t be the only consideration.

“The challenge becomes integration not just from a technology but a process perspective between the retailer and the fulfillment operation as managed by a third party,” Garf adds. “Web-based architecture makes integration easier, but at the end of the day it’s an enabling technology. The trick is process integration.”

He advises retailers outsourcing fulfillment operations to pay particular attention to their service level agreements with providers, including a clear understanding of the specific roles and responsibilities on each side, and how those processes are to be coordinated.

From Linens ‘n Things, which studied its alternatives for a full year before deciding to outsource its entire e-commerce operation including fulfillment, Kimple offers another piece of advice. “Whenever you go to a new provider, you look for the same functionality that you already have, but more importantly, what future functionality you can get, and how flexible and robust that provider will be in listening to your needs and fulfilling them down the road,” she says. “Retailers should be looking for today but planning for the partner that is going to be able to support them tomorrow.”


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