August 28, 2008, 12:00 AM

Exit Strategy

An ounce of prevention is worth a pound of cure when fulfillment flounders.

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.

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