May 12, 2009, 12:00 AM

When outsourcing fulfillment, check all the fees, experts say

Retailers can save on the cost of maintaining their own warehouses by outsourcing fulfillment, but they should clarify the full scope of fees a provider charges, experts say.

Retailers can save on the cost of maintaining their own warehouses by outsourcing fulfillment, but they should clarify the full scope of fees a provider charges, experts say.

Retailers operating their own fulfillment operations must factor in costs of building and maintaining their own warehouse facilities, labor and shipping. Some choose this route to have maximum control over where their inventory is located and how it’s handled. Outsourcing offers the advantage that the retailer pays only for the amount of warehouse capacity and labor required to meet current demand.

But retailers still need to verify the full scope of fees an outsource partner charges, says Marc Tanowitz, principal of logistics consultants Pace Harmon, which advises larger retailers. Some outsourcing providers charge a percentage of sales volume, while others may charge flat per-order and per-item fees, then apply discounts based on the level of volume.

Fulfillment partners may also add additional fees related to packaging, receiving and storing inventory.

To ensure that retailers are getting their money’s worth, they should consider working out service-level agreements that set levels of discounts in case a fulfillment provider fails to meet agreed-upon performance in areas such as order-to-delivery cycle times, Tanowitz says. Such an agreement, for example, might establish a 5% discount if more than 5% of deliveries are late one month, followed by a 7.5% discount in a second consecutive month, and 10% in a third consecutive month.

A retailer could also seek terms that would establish larger discounts for low fulfillment performance levels related to its most important product categories-those most popular with customers or with the highest profit margins, for instance.

To meet expected fulfillment performance levels, however, a fulfillment provider must also offer a highly organized and efficient way to receive and store inventory, with an effective way to quickly and accurately update a retailer about what new inventory has arrived and what remains. The fulfillment provider should offer a way to check the retailer’s purchase orders against incoming delivery documents for accuracy, and alert the retailer of any discrepancies.

“The time it takes to receive goods on a warehouse dock and place in warehouse stocking locations can range from hours to days, so retailers should find out the average time this takes at fulfillment partners,” says Bob Boylan, president of fulfillment services provider Xpert Fulfillment.

At the same time, the retailer needs to use this updated inventory data to manage its merchandise planning and ensure that it has ordered enough stock to support fulfillment performance targets, experts say. “Much of fulfillment optimization comes from the way you manage inventory,” Tanowitz says. “In the current economic environment, the largest issue is figuring out how much inventory to invest in, and which stock is worth keeping in large quantities.”

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