Meeting the e-Fulfillment Challenge
By J. Eric Peters -- Supply Chain Management Review, 11/1/2000
"People are primarily dropping out for privacy or security issues, or because they've had a bad shopping experience online and want to deal with a real person."—Wharton Forum on Electronic Commerce, 1999.
Read the news and it can appear as though there are more reasons not to shop online than there are reasons to shop online. Business-to-consumer (B2C) stocks are out of favor, online retailers are going broke, and the vast majority of goods are still purchased the old-fashioned way. So what happened along the way to Nirvana? Is e-commerce truly more complex than simply putting up a Web site and ringing up the sales? Could something as tactical and boring as fulfillment prove to be the Achilles' heel of e-commerce?
A basic analysis of customer expectations vs. fulfillment realities reveals the real challenge in the online marketplace. As Exhibit 1 makes clear, customer expectations are not aligned with e-fulfillment realities. So how do we solve this problem? First, by understanding e-fulfillment, and second, by developing a comprehensive e-fulfillment strategy. The understanding starts with a basic knowledge of certain e-fulfillment principles, as follows:
Principle 1. e-Fulfillment is more than reengineering the picking process in the warehouse.
Some people naively believe that e-fulfillment is nothing more than catalog fulfillment. The reality is that if e-fulfillment were no more complex than a catalog order, 70 percent of the online shoppers would not be abandoning their carts at checkout. The Federal Trade Commission would not be levying fines against online retailers for late shipment or non-shipment of orders. And consumers would not be curtailing their online spending because of privacy concerns. The fact is that e-fulfillment is more than catalog shipping. It is a complex, multi-faceted process that will continue to strain the growth of e-commerce in the United States and abroad.
Principle 2. e-Fulfillment can affect any business.
e-Fulfillment is typically thought of as a business-to-consumer (B2C) solution. Yet the reality is that e-fulfillment can be a B2C, business-to-business (B2B), or even consumer-to-consumer (C2C) solution. Furthermore, the lines dividing these segments are beginning to blur. Online payment offers an example of this blurring. C2C sales have been one of the Internet's early success stories. C2C payment company PayPal has become the preferred medium of payment between individual consumers via the Internet. The company now claims 2.9 million members in the C2C payment space. PayPal recently expanded into the B2B space, demonstrating that its solution can be applied in other e-commerce segments. It's showing that the same benefits provided by its solutions in the consumer space can be realized in B2B. The message: New solutions will emerge from unlikely places as e-commerce continues to grow.
The interesting parallel is that if an e-fulfillment requirement emerges in one marketspace, it is likely that the same requirement will eventually emerge in all marketspaces. Whether you are a "B" or a "C" in the transaction, fulfillment is going to affect you.
Principle 3. The customer perspective has changed.
Traditionally, the supply chain has been viewed as a horizontal entity. Each participant in the chain typically interacted only with adjacent members in the chain (see Exhibit 2). The consumer, for example, interacted with the retailer—and the retailer owned that relationship. This created certain tendencies between trading partners that eventually became the rules governing how business would be conducted.
Today, however, a new hierarchy has emerged wherein the consumer enjoys visibility into every step in the process. The horizontal view has become a pyramidal view, with the customer sitting at the top of the pyramid (see Exhibit 3). In this new orientation, the customer expects every online retailer to provide the same level of service as the best performer. If one retailer offers track and trace, the customer expects all retailers to offer that service. If one retailer offers free shipping and handling, then all retailers are expected to do the same. And the list of expectations goes on and on. The bottom line is that customer expectations must be integrated into the creation of any e-fulfillment strategy.
With these principles serving as a background to creating an e-fulfillment strategy, the next step is to understand the five business processes that constitute e-fulfillment. They are order management, customer care, Web presentation, physical fulfillment, and reverse logistics. By understanding and integrating these process requirements into your e-fulfillment solution, you can increase your chances for success in the marketplace.
Order Management
In the e-economy, order management is done on a one-to-one level. So, in addition to being able to process the purchase order (PO) from the mega-retailer, you need to be able to handle the credit card order from John Doe, Main Street, Anytown, USA. This dichotomy creates a less controlled and more chaotic environment in the distribution center.
In confronting this new reality, companies need to keep several things in mind. For one, B2B has a different order-management requirement than B2C. To a large degree, business-to-business orders will still closely mimic current order practices. One difference, though, is that more B2B orders will be placed via electronic marketplaces. This means there will be greater variability in order quantities and frequency of delivery. In addition, new customers may emerge that have not been captured in the non-exchange environment. Despite these changes, the company, in all likelihood, will still generate POs, pick case quantities, and send out invoices.
e-Fulfillment's impact is expected to be greater in the B2C market. Most companies do not have order-management systems or business procedures that efficiently process consumer orders. The consumer is using a credit card, not a purchase order, to make a purchase. He or she may want to pay for merchandise with a digital wallet or use a C2C payment service. Traditional fulfillment operations were not designed for these small individual payments.
If payments are an issue in e-fulfillment, fraud is an even bigger issue. Fraud is higher in the virtual world than in the physical world. The main reason is that the online merchant is unable to request identification or physically see the credit card used to conduct the transaction. In and of itself, this would not be that big an issue—but in this case, the merchant is responsible for the fraud. Internet orders are viewed as a "card-not-present" transaction, and in such transactions, the merchant is financially responsible for any fraud that might occur. What usually happens is that the warehouse has already shipped the order by the time the merchant becomes aware of any problem.
Finally, personalization is a major consideration with Internet fulfillment. The better the personalization on your Web site, the higher the chance the online consumer will complete the transaction. Fortunately or unfortunately, however, online personalization can translate into personalization requirements in the warehouse. And these requirements will typically complicate the order process.
Take greeting cards as an example. Go to any greeting card store and you have two choices: cards with pre-written text inside them and a smaller number of cards that are blank inside. Now take the example of Sparks.com, an online retailer. Sparks will personalize the inside of the card in a font you choose. It will make suggestions as to what you should write inside the card and let you select the stamp that goes on the card. Sparks even will mail the card for you or mail it to you. The bottom line is that the warehouse is performing all of these personalization services—and these personalization requirements will only continue to grow.
Customer Care
Customer care on the Internet is different from customer care in the physical world. Poor customer service in the local grocery store will result in an upset customer. But that customer will probably come back because of the store's geographic convenience. On the Internet, however, every merchant is in your geographic zone. Consequently, poor customer service equates to an upset customer who is only a click away from your competitors.
The first reality to understand is that customer care in the Internet world can be much more expensive as a percentage of sales than customer care in the physical world. Internet customer care can run upward of 20 percent of revenue. Companies must plan for this or else their customers will just move a click away. Importantly, customer care investment is not just an investment in call centers but also an investment in the distribution infrastructure needed to provide superior service.
The second thing to understand is that Internet customer care requires a multi-channel response capability. Customer contact may come via phone, fax, or e-mail. Customers also expect a response within 24 hours and want that response to be personalized. This means that the warehouse cannot ignore customer inquiries but must follow up on such questions as where the order is in the warehouse and whether it was shipped on time. Warehouses typically have not viewed this aspect of customer care either as their job or their particular area of expertise.
Finally, it's important to remember that all customers are not alike. High-volume customers require a certain level of customer care that you may not be able to offer to the occasional shopper. When there is a core group of customers that make up the bulk of your business, the 80/20 rule of customer care applies.
Web Presentation
The new ways in which companies interact with their customers are changing how we need to construct solutions. A poor Web site, a slow Web site, and an unsatisfactory online experience all equate to a less-than-delighted potential customer. The best back-end distribution system in the world will count for little if the customer cannot get past the Web experience.
From a fulfillment perspective, there are two considerations in Web presentation. The first is to determine what order-status information should be made available via the Web site. The trend is toward providing as much information as possible. For that to happen, the warehouse must have real-time order-processing and visibility capabilities; it must have real-time inventory knowledge; and it must be able to show when an order has shipped. These are all-important pieces of information, particularly as the items being bought online become more costly or critical.
The other consideration is how to integrate the back office and/or supply chain systems with the Web front end. This is not a trivial task, and though new tools are emerging to help with this integration, it is not a 30-day implementation job. There needs to be a tradeoff between the need to display this information on the Web site and the effort required to integrate this information into the site. Don't make promises your technology can't deliver.
Physical Fulfillment
The principal difference between e-commerce fulfillment and traditional fulfillment has been well documented. In an e-fulfillment environment, the distribution center performs single-item picks as opposed to traditional case and pallet picks. e-Fulfillment sounds simple. But in reality, it's a complicated task.
The primary challenge is to determine if the equipment, layout, and systems support a single-pick distribution environment. e-Fulfillment order picking requires an environment that supports fast and efficient single-item picks.
In attempting to create the right environment, however, companies can fall into two potential traps. The first is to overinvest in automation. Automation has a role in e-fulfillment, but it is not the shortcut to operational success. Companies must balance their automation investment against the return from that automation. It does a company no good to have the most efficient distribution center in the world in terms of automation if the cost of that automation can never be recovered. Further, automation without the necessary process change often results in a company's becoming more efficient in making mistakes. If the process is broken, automation is not the solution. Fix the process, justify the level of automation, and then implement the solution.
The second mistake companies sometimes make is thinking that they can do e-fulfillment halfway. They don't dedicate staff, space, or equipment to fill e-commerce orders. Instead, e-fulfillment is viewed as just another warehouse activity and is performed within the context of the existing fulfillment operations.
Beyond equipment, layout, and systems in the distribution center, other considerations when developing an e-fulfillment solution include:
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Real-time inventory management.
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Pack-in-transit capabilities.
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Parcel tracking.
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Shipment and delivery.
It is absolutely unacceptable for a consumer to go to a Web site to order something and not know for certain whether the item is in stock to be shipped. That kind of experience basically guarantees that the customer will not be a repeat customer. Real-time inventory management capabilities require that a distribution center have a warehouse management system (WMS) to keep the warehouse inventory in synch with the corporate inventory management system. A WMS also can help provide an accurate ship date for merchandise based on workload planning algorithms. It is becoming more and more common for companies to provide this type of information to their customers on their Web sites.
Pack-in-transit is an emerging supply chain capability. Retailers that completely outsource their e-fulfillment distribution operations or use multiple distributors face pack-in-transit challenges. For example, an online retailer that sells both DVDs and DVD players online may source those orders from two different distributors. Consumers don't care how the merchandise is sourced; they just expect the items ordered to arrive at their home or office together, preferably in a single package. This expectation is causing delivery and third-party logistics companies to offer pack-in-transit services to their customers.
A track-and-trace capability serves two purposes in e-fulfillment. First, it makes good service sense. Customers have grown accustomed to tracking their orders via the Internet. With each Christmas season, UPS reports a growing number of consumers checking their package status online. In fact, consumers can check just about anything online—and they're doing so with increasing frequency. Stock prices, bank balances, frequent flyer points, and even flight location and expected arrival time now can all be found on the Internet. With this track-and-trace mentality now extending beyond the PC to wireless devices, the capability to let your customers track their orders via the Internet seems almost elementary. If you cannot offer this "basic" online service, customers may question whether you are a capable Internet merchant. In e-commerce, you never want to get too far behind your competition or you may never be able to catch up.
Second, online track-and-trace capabilities can help relieve overall customer care demands. According to Forrester Research, consumers last year checked on the status of their parcels via the Internet an average of six times per parcel. Though that number may seem high, it makes sense based on the number of late shipments last Christmas season and the apparent ease of checking order status online. At the same time, this high frequency reinforces the need for track-and-trace capabilities, which can translate directly to a smaller call center operation.
Finally, shipment and delivery challenges must be addressed. First, do you charge for shipping and handling? Most companies calculate shipping and handling charges in a largely arbitrary manner that does not reflect the true cost of shipment. With that in mind, what type of strategy should you employ regarding these costs, particularly since they contribute directly to the margin on the product? Second, what types of delivery classes will you offer and which delivery companies will be your preferred carriers? This decision must balance both the cost of the service and the dependability of the service relative to the type of product being shipped. A bad shipping experience reflects poorly on your company. It is difficult enough to capture and maintain customers on the Internet; making a bad decision in selecting a delivery partner makes things that much tougher.
Reverse Logistics
Reverse logistics is the return of either consumer or commercially purchased goods to the merchant or vendor. The process can involve returns authorization, returns refurbishing, restocking or destruction, processing return credits, and returns packaging/transportation. Returning an item purchased over the Internet can be a fairly complex process, usually involving multiple nodes and paths. (The reverse-logistics flow path in Exhibit 4 depicts the complexity.)
Last Christmas season, many merchants and pundits were surprised at the impact that returned merchandise had on e-commerce. The irony is that it should have been no surprise at all. Returned-goods processing always has been a difficult and often poorly managed operation. Companies typically don't invest in returns operations; they almost always view this activity as a cost center, not a profit center. Returns will accumulate in some out-of-the-way place in the distribution center (DC) to be addressed only when they either consume too much floor space or the DC is low on work—the thinking being, why spend labor hours on an area where no one has any financial accountability?
That mentality worked fine when the returns were coming in from companies. Credit them for the return, write it off, and go on with business, comfortable in the knowledge that the customer would continue to buy your product to stock its stores. Now fast forward to a consumer return. Make the return process difficult and the consumer will not be coming back for more. In fact, the difficulty in processing returned goods is actually hampering online sales. Fully 37 percent of online buyers would buy more if the returns process were easier.1 The consumer very clearly has a different set of expectations than the corporate customer does. Specifically, the consumer's point of view is characterized by the following beliefs:
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No returned-goods authorization number should be required.
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Pickup of returned merchandise should be free.
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There must be no cost to the consumer.
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Credits and exchanges must be quick and painless.
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Returned items can be brought to brick-and-mortar locations.
These expectations do not necessarily align with the current capabilities of online merchants.
The first challenge facing the online merchant is that the true cost to process a return is between $8 and $17. This does not balance well with the consumer expectation that returns should be free. As Exhibit 4 shows, an e-commerce return can follow a number of possible nodes and paths. One of the keys to reducing the cost of a return is to identify the most efficient path back to the return's ultimate point of disposition. This path may not lead all the way back to the originating distribution center. It may be more efficient to destroy some items at the point of use rather than send them all the way back to the distribution center. To illustrate, the return postage for a CD can exceed the actual cost of goods sold, not to mention the cost to process the return. Why have customers return an item that has such a negative impact?
The second challenge is to make the returns process convenient. Unfortunately, consumers do not associate convenience with going to a parcel company's local office. They visit the supermarket or convenience store far more often than they go to the local parcel depot. Over and above the frequency of visits, consumers like the thought of being able to go to a brick-and-mortar store and get immediate credit without having to pack up the merchandise and ship it somewhere. Online merchants may well come to feel pressure to develop alternate channels for returning merchandise beyond having the customer send a package through the mail. In turn, these alternate channel requirements will create a need for new locations that support consumer returns. For example, the supermarket chain Winn-Dixie plans to provide host locations for The Return Store, a new business that will offer returns service for both e-commerce and traditional merchants. Consumers will simply go to the store with the item they wish to return along with the receipt and will receive instant credit. The arrangement thus satisfies the two needs of convenience and instant credit. The Return Store is scheduled to be in 400 to 600 Winn-Dixies, mostly in the Southeast, by the end of 2001.
Improvements in reverse logistics will not happen overnight. In fact, things will probably get worse before they get better because of the lack of robust, established software solutions for reverse logistics. With that said, though, the tremendous market potential is driving software providers to develop reverse-logistics solutions. As these become available, the problems associated with reverse logistics will start to diminish, eventually becoming less of a drag on e-commerce growth.
Guidelines for Success
One of the difficulties in transitioning to an e-fulfillment model is that the traditional responses to the fulfillment challenge do not work. New responses must be developed that acknowledge the realities of e-commerce. Exhibit 5 lists the typical fulfillment responses and describes the harsh realities that such responses now face.
When old solutions won't solve new problems, what should a company do? The Internet is unforgiving. One bad shopping experience and the consumer is gone—sometimes forever. Remember this and consider the following guidelines when developing your response to this new business environment:
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Know Your Outsourcer
Now more than ever, companies must either outsource the solution or develop new capabilities in-house. Forrester Research believes that any retailer expecting more than 10,000 online orders per day should bring its e-commerce fulfillment in-house (although, at present, hardly any retailer is doing this level of business). The first part of the challenge is deciding which strategy—outsourcing or handling the task in-house—is right for your organization. If the right solution is to outsource, it becomes extremely important to find a third-party provider that has deep fulfillment experience in single-unit picking. You are handing over an important part of your business. It is essential that your outsourcer not be the reason why you have no online customers. -
Get a Handle on Returns Now
Walmart.com offers the convenience of bringing returns to Wal-Mart brick-and-mortar stores. It also has a 90-day return policy, with Wal-Mart sending a self-addressed label to facilitate fast and free returns. That pretty clearly spells out what your minimum returns policy needs to be to compete with Wal-Mart on the Internet effectively. The bar has been set fairly high, but that is just one consideration for companies formulating return policies. Returns can prove to be a very costly part of your business. Make returns convenient to your customer, but also make the internal returns process as efficient as possible. No company wants to leave margin on the table, especially in industries with razor-thin margins. -
Don't Sell What You Can't Ship
It's hard to sell something that you can't find in inventory. (It also can be a violation of Federal Trade Commission rules.) It is better to turn a customer away than to create a false promise. If inventory is constantly being lost in the warehouse, fix the problem before you no longer have any customers to sell that inventory to. If poor inventory planning is an issue, increase inventory on hand or accept lost sales until the problem can be fixed. In any event, do not promise to ship something you cannot find. -
Ship When You Promise
Just as important as selling only what you have is shipping when you promise you will ship. Airlines offer a classic example of this guideline at work. In order to keep the percentage of on-time arrivals high, they have increased the times associated with a trip. In some cases, in fact, the scheduled times have increased by as much as 25 percent over what they were 10 years ago. A flight scheduled for one hour last year might be scheduled for one hour and 15 minutes this year. Consumers don't seem to mind the increase as long as the flight arrives when it is supposed to arrive. The same holds true for e-commerce. Consumers are less likely to worry about delivery times if the parcel arrives as scheduled. And the faster the delivery time, of course, the happier the consumer. -
Learn How to Ship Internationally
Two billion people live in India and China. Do you think you should be selling in these marketplaces? Eventually, all companies will be global; that is the nature of the Internet. The sooner you embrace the world marketplace, the faster you'll get traction. First movers do have an advantage. Furthermore, international shipping is not that difficult. You just need the proper focus and the right resources to be successful.
Remember the quote that began this article? "People are primarily dropping out for privacy or security issues, or because they've had a bad shopping experience online and want to deal with a real person." The privacy issue will have to play itself out on Main Street and in the corridors of the Capitol. Security issues will always be out there, but online consumer protection continues to improve. In fact, as long as there are limits on credit card liability, consumers are relatively safe. But a bad shopping experience is something that can be avoided—and something you can do something about.
Follow the e-fulfillment guidelines and principles discussed here, and you may have one less e-business headache to worry about. In fact, the only time your customers may want to speak with a "real person" is to thank you for your excellent service.
Exhibit 1
Customer Expectations vs. Fulfillment Realities
| Customer Expectations | Fulfillment Realities |
| The Internet offers the lowest cost. | e-Commerce orders are the least effective method of picking on a per-unit basis. |
| The Internet offers unlimited selection. | SKU proliferation drives up costs because of the direct relationship between SKU count and operating costs and capital investments. |
| I want to be able to track my package through the complete order cycle. | Supply chain systems are not built to support tracking from order release through delivery. |
| When I hit the purchase button, the package will arrive tomorrow. | e-Commerce fulfillment is a multifaceted process that relies on synchronization between order entry, warehousing, and transportation. |
Exhibit 5
Traditional Responses vs. Fulfillment Realities
| Traditional Responses | Fulfillment Realities |
| Outsource to solve a distribution problem. | Few third-party providers are e-commerce capable. |
| Returns will go away. (Hide the returns in the corner and we will get to them later.) | The percentage of units returned increased faster than sales volume increased in 1999. Brick-and-mortar retail stores are not prepared for e-commerce returns. |
| Build inventory and manage picking to smooth seasonality issues. | e-Commerce seasonality cannot be smoothed. It is real-time fulfillment based on real-time demands with no buffer between the consumer and your DC. |
| Build more space. | Building more space is easy. Building the right type of space is a lot more difficult. |
| If we missed a ship date, we send send tomorrow. | A missed shipment equals a lost customer. |
| We can't find the inventory, so put it on back order. | If it goes on back order, you lose a customer. The customer orders the item from someone else and then hits you with a return when you finally do ship. |
| We don't ship internationally. | The customer base is now global. |
| Footnotes |
| 1 Jupiter Communications, 2000. |
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