Behind The Scenes

Stacie McCullough's experience last December was, unfortunately, all too typical. A veteran e-shopper, she ordered a fancy gift basket for her in-laws ("they're only SLIGHTLY important people, right?" she winces) from the online division of Balducci's, the New York-based gourmet food specialist.

"They received the order and told me it usually takes two or three days to ship, so I should expect it to be delivered in five to seven days," McCullough recalls. "Around the 18th, I talked to my in-laws to be sure they had received the gift. When they said they hadn't received anything, I called the company. They said they had no record of the order. Two days later, however, they called to say they found the order on their fax machine. It turns out they were giving a real-time response but it wasn't connected to anything. The order finally arrived on the 30th."

As an analyst for Forrester Research Inc. specializing in e-commerce, McCullough is much more e-savvy than most e-shoppers, and she knows that her disappointing experience with her in-laws' gift was, unfortunately, not unique. Thousands of consumers have had similar experiences with sloppy or nonexistent e-tailing fulfillment because Web integrators are neglecting one of their most important responsibilities: the back end of the e-commerce solutions they design for their customers. All the flash and interactivity of a slick Web page won't make happy customers if the e-shoppers don't get the goods they ordered at the time they were promised.

"Marketing and sales people are often put in charge of an e-commerce initiative," McCullough says. "They're very focused on the brand and how they make themselves well-known and attract customer eyeballs. The logistics aspect is often very much an afterthought."

The result? Misplaced orders, late shipments, errors, a nonexistent returns policy and an infuriated customer who might never do business online again. (If Balducci's is counting on repeat business from McCullough, it's out of luck.)

You Need Logistics Expertise

Some of the dot.com customers of Web integrator Organic Inc. are surprised to find logistics experts in the room with creative people when they have their first meeting with the integrator, says Dan Lynch, president of logistics for San Francisco-based Organic. "They're taken aback a little at the thought that, yeah, they're going to have to answer e-mails, get an 800 line, and get goods to their customers. Surprisingly often, logistics are still an afterthought. But overall, the industry is becoming more sensitive, especially after what took place last holiday season."

If last year was the midterm exam for many e-tailers, this year is finals. If their logistics fail the test, they'll be out of business. "Customer expectations are incredibly high and tolerance is slim," says Mark Layton, CEO of Plano, Texas-based e-logistics outsourcer PFSweb. "In the consumer's mind, we have had plenty of opportunities to learn what the infrastructure requirements are, and I don't think people will be tolerant of slow Web sites, slow deliveries, late deliveries, broken promises or non-real-time inventory interfaces that don't allow them to see what's in stock and what's not. This is the year dot.com companies are going to have to cut bait. This Christmas is going to be the finish line for a lot of startup dot.coms."

Providing good customer fulfillment is, in some ways, a thankless task. If you do it well, you get little positive effect. But if you do it poorly, you'll quickly lose customers forever, says Tony Blasetti, a supply-chain consultant in e-business for KPMG Consulting LLC, New York. "If the third-party provider does its job, then it gets an overall neutral reaction from the customers in terms of whether or not they come back, because customers assume they will get excellent service. But if the order arrives five days late or the order is incomplete or they bill you incorrectly, in most cases the customers never come back to that site," Blasetti says. "There's limited upside experience but very severe downside potential."

Your Customers Have To Invest in Fulfillment Strategies

Both pure-play e-tailers and clicks and mortar retailers who succeed "are the ones who have invested in the infrastructure to fulfill at the individual consumer level," says Blasetti, who notes that this is easy to say but sometimes difficult to do. If it's a consumer-products manufacturer used to shipping truckloads or pallets to distribution centers, but now it has to take the items one at a time and package them, label them and ship them to individual customers' residences, it's a lot more complicated and difficult than a lot of people believed going in. That's where a lot of third-party fulfillment companies are finding a niche, Blasetti adds.

Catalog businesses have had an easier transition, Blasetti says, than businesses that have sold goods through traditional retail channels. The catalog business is already fulfilling down to the individual customer level. They're now using electronic catalogs rather than paper-based catalogs, but everything on the back end is pretty much the same. "So the Lands Ends of the world probably have an easier transition overall than bricks and mortar retailers," he says.

What it comes down to is core competencies. "The question we always ask our clients is where they feel they differentiate themselves in the marketplace. The ones who answer 'supply chain' are more often than not better suited to run their own fulfillment operations. The ones who say 'branding' or 'retail' more often than not should go with a third party. Otherwise, fulfillment would distract from their focus," Blasetti says.

How much a company should outsource depends on that core competency. Some people outsource everything, including outbound distribution, delivery, transportation, returns and call centers. It depends on the client's willingness to partner with a third party.

Help Them Decide Whether to Outsource or Build These Skills

The make-versus-buy decision is critical, agrees JT Kreager, president and COO of Columbus, Ohio-based SubmitOrder.com, a young (established last year) e-fulfillment business for e-commerce companies.

If their click and mortar companies already have substantial infrastructure devoted to fulfilling orders for individual clients, Web integrators may want to recommend developing some or all back-end fulfillment in-house. Otherwise, outsourcing is the way to go, especially for pure-play dot.commers trying to grow rapidly enough to establish themselves as leading e-tailers in particular vertical market spaces.

In those cases, integrators' most important responsibility--in many ways, more important than the actual marketing and technology behind a Web site's creation itself--is to help their clients find a fulfillment house that will deliver on the dot.commer's e-promises. Organic went through a thorough RFP process with more than 50 e-commerce fulfillment providers, building a list of the top 25, then sending engineers and operations experts out to examine the infrastructures of the would-be providers.

"We found some really good providers out there and some providers with existing legacy challenges who were just slapping an e-commerce sign on the door in hopes of attracting business," Organic's Lynch says. "You never know their strengths until you have an opportunity to go out there and see them."

Knowing Who to Turn to for Help Is Half the Battle

Potential fulfillment outsourcers, each with their own strengths and weaknesses, include traditional catalog companies like Fingerhut; traditional third-party logistics providers trying to convert to e-commerce; new companies springing up to fill the needs of the dot.com world; traditional package carriers like UPS and Federal Express who are broadening out from transportation into providing more complete solutions; and traditional IT distributors who are hoping to leverage their logistics expertise into other verticals.

Companies like Fingerhut and HanoverDirect have "a wonderful infrastructure set up, so they're the closest to being ready to handle this dot.com fulfillment business," Lynch says. "They're now two of the most sought after organizations in the game."

On the other hand, Lynch points out, startup organizations had the luxury of starting from scratch, so they avoided many legacy computer system challenges and were able to adopt some of the newer technology. Lynch listed PFSweb and SubmitOrder.com as two of the more successful new Web fulfillment houses.

Some traditional IT distribution houses also are making a play for dot.com business, leveraging their strength in assembling and delivering individually ordered computer systems into non-IT verticals.

Finding an effective fulfillment partner begins with the kind of thorough qualification process Organic conducts. "It's not like moving freight where this week you can use Yellow Freight, next week Roadway," says Carl Young, a principal with Arthur Andersen. "Defining the scope of work, doing the hands off, and dealing with transition issues take months and months of work to get a third party integrated into your environment."

Know Who You Are Recommending

In addition to the kind of on-site visits Lynch and others recommend, Jean-Gabriel Henry, a senior analyst with Jupiter Communications Inc. who specializes in online customer service, recommends that integrators go out of their way to thoroughly check fulfillment house references for their dot.com clients.

"It seems as if every outsourcing firm gives you three reference accounts," Henry says. "I would ask for five that have not been references for anyone else in the last three months. They all claim hundreds of satisfied customers. If they have hundreds, they can give you five."

KPMG's Blasetti advises his clients to consider two- or three-year contracts that allow the dot.commer to decide at the end of the term whether to bring fulfillment in-house, contract with a different third-party fulfillment company or continue the arrangement. Meanwhile, the contract also specifies that the dot.commer have representatives at the fulfillment business learning as much as possible about how fulfillment works so the client can make an informed outsourcing decision at the end of the contract term.

"We encourage our clients to do two or three levels of awareness [building exercises]," Blasetti explains. "One is to have an on-site presence. We firmly believe that makes for better operations. Not only does it give you eyes and ears on site, but it also gives the third-party provider a conduit for information. The second level is to look at pricing and the contractual agreement itself to make sure you capture the performance information you can use to judge performance. It's not all about pure cost per unit; it's also about services provided. We typically put in place a compliance or performance measurement system that helps our clients monitor performance and work collaboratively with the third party to make sure all service levels are achieved."

The fulfillment company typically gets bonuses for exceeding performance levels in a contract Blasetti negotiates. Contracts with the fulfillment providers are crucial, agrees Jupiter's Henry. "You've got to monitor them, and you have to have very, very clear service level agreements about what is acceptable and what is not acceptable as well as who owns the information on your customers. You have to own the database," he says.

One of the most important criteria in the selection of any third-party fulfillment partner is its IT systems: "In evaluating these providers, we've found that almost all of them are making investments but most aren't quite there in terms of IT support," Blasetti warns.

"Most of these dot.coms are trying to be almost exclusively virtual," Andersen's Young says. "They don't have inventory. When they get a sales order, they cut a purchase order, then delegate the inbound logistics responsibility back to the vendor. A given is that you've got to have leading-edge supply-chain technologies. You have to have the ability to electronically communicate not only with your customers, but also with your suppliers. The dot.coms should have the ability to watch the logistics flow from the time it leaves the manufacturer's dock until the time it's in the hands of the consumer."

Real-time inventory is essential, agrees Lynch, meaning the dot.commer (and its customers) need to know exactly what is in the warehouses and available for shipping at any time.

IT systems must not only deal with shipping but also with receiving and with the many returns that are endemic to e-commerce as practiced today, Lynch says. "If you have to manually receive all of those goods, you end up getting into a bottleneck. You have three categories: products going out the door, replenishment coming in, and then returns being processed, which is another very labor-intensive activity. The more those are automated, the more efficient you're going to be at crunch time."

If You Outsource, You Must Train the Logistics Team's Staff

Effective outsourcing depends on training, Jupiter's Henry says. Much of the consumer's shopping experience will be interaction with employees of the third-party fulfiller, meaning those employees need to be continually trained to act as extensions of the e-tailer.

"If you don't spend a lot of time training the outsourcing company, it's guaranteed they will do an exceptionally poor job servicing your customers," Henry says. "That's what a lot of dot.coms overlook; they don't spend a lot of time on the outsourcing firms. And you carry the risk that if they lose a person you've trained, you've got to go back in and train them again."

Well-trained employees, even if they work for third-party businesses, act as extensions of the e-tailer, helping to provide the unique experience that is part of brand identification when customers call, chat or e-mail to place orders, gain further information or discuss problems.

Branding also can happen at delivery. Says SubmitOrder.com's Kreager, "We take branding to the nth degree. The process starts with planning with a new client. We take time to understand their business plans and goals, then have a sit-down with their executive team. We ask what the brand means to them and what the experience is. We have sent some of our team to work in customer stores and had store personnel come to work in our operations so we all understand what the new experience is going to be. We focus on having the same product knowledge and philosophy as the people in any given store."

E-tailers who are operating with near total virtuality may want to outsource some or all of their call center operations as well. Although Lynch says he suggests to some customers that they retain some of their call center operations in-house to maintain control of critical customer contacts, Kreager says a split operation can result in the right hand not knowing what the left hand is doing. He usually recommends that as much as possible be done under one roof to prevent conflicts and duplication.

Does Vertical Market Focus Matter?

Whether fulfillment businesses that specialize in verticals are superior to those that say they can store, pick and ship almost anything is a matter of debate. Kreager says SubmitOrder.com can handle everything from clothes to electronics, from fragile items like glassware to bulky items like canoes. At present, the company doesn't handle perishables or pharmaceuticals, but otherwise, SubmitOrder.com will take over the fulfillment of almost anything a consumer would want to click and order.

But Andersen's Young and other e-logistics experts say a vertical focus is the way to go: "The players that are going to win are the guys that focus on industry verticals instead of trying to service on a generic basis." A company that specializes in receiving, storing and delivering clothes on hangers will build an expertise in that kind of processing that will be difficult to transfer to the skills needed to pick and pack fragile glassware.

Whether they line up partnerships with vertical specialists or generalists, every integrator of e-commerce solutions needs to put logistics on the front burner for their clients. B2C dot.commers need all the help they can get to pass what for many of them will be their e-tailing final examination: Christmas 2000.

"There's definitely still time to get ready for Christmas," Blasetti says. "But companies have to start working at Internet speed. They can't spin their wheels. In our business, in the past, if you were developing a supply-chain strategy, it would be a 10- to 16-week process, but we're now being asked to do it in four weeks. The reality is, instead of a high level of due diligence, we have to work collaboratively with our clients to make assumptions and develop solutions that are a 90 percent fit, because speed to market is everything."