Fulfillment 101: Online orders present new distribution challenges

Judging by studies from both Forrester Research and Jupiter Communications and a host of horror stories from this past Christmas, the No. 1 problem with e-commerce customer satisfaction is fulfillment. Too often purchases arrive late – if at all.

And yet the catalog industry has long had systems in place for fast and reliable order shipping. Shouldn’t these be just as effective in an age of electronic media?

That question is “almost too profound to answer,” says Chris Long, vice president of strategic marketing at OrderTrust, Lowell, MA.

For Long, online order fulfillment requires a model that’s hybrid and flexible.

“It used to be you needed a catalog to buy. Now you can log on and there’s the catalog,” he explains. “But it’s more profound than that: In an Internet catalog you can have millions of SKUs you could not afford to [handle] in a paper-based world. Amazon.com, for example, has 4.3 million SKUs or products.”

“The result,” he continues, “is direct access to SKUs that consumers didn’t have access to before.”

This increased access by electronic media requires new fulfillment methods. To provide service to customers who can order any number of items, Long suggests a hybrid model.

“The small percent that are high-margin items are stocked on your shelves,” he says. “The rest are SKUs that are drop-shipped from wholesalers. Fulfillment is passed on to them.”

As an example, Long cites Staples, where he was director of e-commerce, responsible for establishing the office supply giant’s first e-commerce site. Only 5,000 or 6,000 products listed in the catalog are in stock.

For such items as office furniture, for example, Staples reaches back to wholesalers who drop-ship the orders.

However, the pioneer in what he calls “the virtual supply chain” is SkyMall, an OrderTrust client. As a catalog of catalogs, it doesn’t hold any inventory, it just routes orders. Someone else – the catalog from which the product has been ordered – handles the shipments for SkyMall.

“The bottom line is that SkyMall was a virtual supply chain before the Internet,” he says. “But it wasn’t a compelling niche model. E-commerce brought it into the mainstream.”

Of course, there’s a downside. “You’re managing more information than before, but you have less physical control,” Long explains.

At risk is brand equity: the credibility of the company to deliver the product that has been ordered. “In the old days, you could yell at someone,” he says. “Now you have to be careful who you work with. You need service-level agreements. You need tools to monitor that the level is being met.”

The Fenvessy Model

If the late fulfillment guru Stanley Fenvessy can be said to have an heir, it would be Spaide Kuipers and Co., Bala Cynwyd, PA, founded by two of Fenvessy’s senior partners.

Bill Kuipers, a partner in the consultancy, sees little change in fulfillment as a result of electronic media. “You still have to warehouse, pack and ship,” he says.

For Kuipers, electronic media raises new managerial and customer service issues. He sees electronic media in general, and the Internet in particular, as another alternative channel. It is not – nor will it ever be – a replacement for mail, telephone or even retail stores.

However, he says, you need to plan for the fulfillment process when the Internet is used. Planning has to include such things as customers having the ability to look up the shipping status of their orders online.

In addition to such self-help factors, as Kuipers calls them, there is e-mail management: How soon do you process and respond to Internet posts?

“There are high expectations and service standards. Customers are looking for a response the same day – and not later than the next day,” he says.

In terms of fulfillment, e-commerce is inclined to outsource the operations. “They don’t have the systems or infrastructures and they don’t want to be in the warehousing business,” Kuipers says. “They hire third-party service bureaus to sort, pick, pack and ship the product.”

He also notes that the systems distribution environment – how well it works – has to be done right.

“It’s not just philosophical. It’s a tactical process in place to measure and report service performance,” he says. That means collecting the right information and having the right functional capabilities available for the DR channel, as opposed to funding.

Integrating the systems and the channels is better. “A catalog system would be the best e-commerce could get,” he adds.

Beyond high service expectations, the next issue for Kuipers is the lack of predictable order spikes, which can often make stocking difficult. “There is no reliable way to forecast Web sales,” he says, pointing out the contrast to catalog sales where spikes are, in his opinion, projectable based on response rates.

“You know the mail. You know what percent of people who see the ad are going to buy. You don’t know how many people are going to see an offer on the Web.”

Kuipers adds that e-commerce is closer to retail in terms of forecasting sales.

Despite his enthusiasm for the Web’s potential in a multichannel environment, Kuipers complains: “I’m getting hoarse singing this song, but what the young turks of e-commerce need is a shot of Fenvessy. They treat fulfillment and service as incidental rather than fundamental. They’re interested in technical capabilities – instant messages, e-mail, click to talk – and don’t realize [they need] a polished customer fulfillment infrastructure,” he says.

“It’s not rocket science,” Kuipers concludes, “and it will bite you if you don’t focus on it and get the fundamentals in place.”

Stanley J. Fenvessy published “Fenvessy on Fulfillment” 12 years ago, just after the beginning of the personal computer revolution. Despite its old- fashioned tone and question-and-answer format, the information in the volume remains just as fresh and valid today. There are even what Fenvessy describes as “over 100 lists of problems, proposals, policies, procedures and programs.” Here’s a sampling of what Fenvessy says e-commerce needs to know.

Ten Steps in the Fulfillment Cycle

1. Order forms and instructions:

These are the elements that start the whole chain of subsequent events.

2. Order receipt:

By mail or telephone and the initial clerical and data entry processing steps.

3. Credit approval:

>From a company’s own credit program or obtaining authorization from bank, >travel or entertainment card centers.

4. Computer processing:

Which produces the information required for steps 5 through 8.

5. List maintenance:

Accumulation of customer database information used for marketing and mailing.

6. Inventory control:

Production and review of inventory statistics used to forecast stock requirements of individual items.

7. Billing:

Either the customer directly or a credit card agency and the production of a warehouse picking directive.

8. Reports:

Production of marketing, merchandising, financial and operating control detail and summaries.

9. Order filling and shipping:

Receiving, stocking, picking, packing and shipping products.

10. Customer service and returns:

Handling of inquiries, complaints and adjustments, and the processing of merchandise returned by customers for credit or exchange.

Fenvessy also has a list of four methods to guarantee customer satisfaction.

– Delivering the order.

– Responding to customer service mail.

– Completing the order.

– Answering telephone calls.

And here’s his list of fulfillment alternatives for new direct marketers:

– Contract out the total fulfillment task.

– Employ a data processing center.

– Utilize a physical fulfillment contractor.

– Use a telephone contractor.

– Establish own fulfillment function.