An interview with Robert E. Mann

Q. What do you mean by e-Fulfillment?

A. e-Fulfillment refers to the unique aspects of the process of providing products and services to e-Commerce customers. e-Fulfillment includes activities such as telemarketing, customer service, warehousing and shipping, procurement and inventory management, processing, and disposition of returns. Together, these activities represent most of the tangible assets of e-Commerce companies and deliver some of the most memorable aspects of service to their customers.

Q. Is this really any different from regular distribution?

A. Essentially, e-Fulfillment is much the same as the operations of most catalog marketers. For some basic technologies and processes, like materials handling and telephone operations, the techniques used by catalog marketers work well for e-Fulfillment. Of course, for a manufacturer without any form of one-to-one shipment capability, almost everything about e-Fulfillment differs from regular distribution.

And even organizations with experience in more traditional one-to-one shipping encounter subtle but significant differences when they move to e-Fulfillment. First, e-Commerce customers expect speed and service reliability above the levels typically offered by catalogs. Second, customers expect things like inventory availability and order status to be fully visible and perfectly accurate. Third, to obtain this level of performance, organizations must integrate Web-based customer systems with more traditional order-processing and warehouse-management systems. Fourth, the one constant in e-Commerce is rapid change: products, customers, markets, and services all can change overnight to require capabilities very different from those of existing processes. Any one of these four factors presents a big challenge for most companies. Taken together, they can be daunting to even the most experienced one-to-one marketer.

Q. What are the implications for business today?

A. The main challenge today is to find a way to meet e-Fulfillment requirements, not to lose customer loyalty through poor performance, and not to commit to assets that don't fit your needs or that limit flexibility. Ultimately, e-Fulfillment costs need to be as low as is practical, but right now reliability and service are all that matters. Companies that don't capture customers with their product offering and their service capability won't have the opportunity to make cost improvements later. They won't even be in the game. So, making the right choices the first time is critical.

Q. Why should a company that already has competitive distribution pay attention to e-Fulfillment?

A. Quite possibly, the companies that are at greatest risk in facing the challenge of e-Fulfillment are those that already have a well-established distribution capability. The danger comes from assuming that e-Commerce is just another way to take orders. It is not. These distribution-savvy companies also have the most to lose; they risk not only losing out on growth in new e-Commerce channels and offerings, but also losing existing customers as they inevitably change to e-Commerce sources. In addition, these companies often face the biggest barriers to change: entrenched processes, older information systems, and massive investments in physical assets. Moving toward e-Commerce may mean destroying the past as much as it means creating the future.

Q. Where is a CFO going to see the bottom-line impact of e-Fulfillment?

A. The choice of an e-Fulfillment business model will have enormous implications for the growth and profitability of any product-based e-Commerce venture. Good, reliable service performance is one of the most powerful determiners of repeat sales. After all, if the expectations established in the selling process are not satisfied when the product arrives, the loss of trust can eradicate future selling opportunities. At the same time, an overly costly e-Fulfillment process, particularly if it involves heavy investment, can significantly hamper a new venture. Admittedly, the market does not seem to demand short-term profits from e-Commerce ventures. But e-Commerce is very cost competitive. Excessive fulfillment costs ultimately increase the sustainable price charged. And because easy availability of information makes these price differences completely visible to consumers, such a situation inevitably affects market share and profits.

Q. How are leading companies executing e-Fulfillment?

A. We have identified six distinct business models for the physical fulfillment processes supporting e-Commerce (see accompanying exhibit). Only four of these models apply to companies without a retail store base, such as pure e-tailers, most manufacturers, and most distributors. The differentiation between the models is determined by ownership of product, physical assets, and the point of delivery to the ultimate customer.

Model number one, "integrated distribution," involves building e-Fulfillment capability into an existing bulk distribution center—a tempting but problematic model for many retailers. Toys R Us has abandoned this model in its move to an acquired, dedicated e-Fulfillment center (model number two). Third-party e-Fulfillment models, number three, are often faster to set up and, therefore, attractive to start-up e-tailers. All of the principal small-package carriers, UPS, FedEx, and so forth, offer some level of e-Fulfillment service capability. Because outsourcing to a third party offers quick access to proven technologies and known performance, this can be good starting point for a company.

The fourth model—or "virtual" model—may turn out to be the most cost-effective model overall. If the supplier has proven capability for one-to-one shipping, it has many of the advantages of a third-party model. Amazon.com initially adopted this model through Ingram Books. The approach, however, has a potentially fatal flaw: By combining sale of product and the fulfillment service through the distributor, it shifts substantial negotiation power away from the e-Commerce company to the supplier. Amazon.com has progressively moved to model two by building its own operations. From a consumer perspective, this model is easily the least-expensive process. If the value-chain relationships can be resolved equitably and the technology to synchronize deliveries from many points can be improved, this model may come to predominate. The store-based models are potentially very attractive to existing retailers.

Model five, typified by Peapod's original fulfillment method for groceries, in general has not been seen as successful. In this model an order is placed electronically but is fulfilled by specialized order pickers who pick stock from regular retail shelves and deliver to the customer's door. Quality control and technology integration across many fulfillment points are seen as big barriers to this approach.

In model six, a "pure play" e-Commerce retailer, a bricks-and-mortar retailer with no local stores, or a manufacturer ships product to an affiliated store for local delivery or to a designated customer pickup location. For example, a big-ticket appliance manufacturer might sell a refrigerator though the Internet to a consumer but deliver it to one of its regular customers, a local building-supply company. It would then either deliver and install the appliance or allow pickup at its location, providing the consumer with instructions and materials to complete the installation. A variation on this model might use a common neighborhood location such as a convenience store that serves as a central pickup point for a number of different deliveries—for example, dry cleaning, groceries, purchases from local stores, and UPS or FedEx deliveries of a non-urgent nature. This isn't happening much today. But as the use of the Internet evolves, this model could become significant. Given the variety of options to consider, it is no surprise many companies struggle with finding the best solution.

Q. Is there a "right way" to do e-Fulfillment?

A. It is too early to tell. Many factors contribute to each company's decision: What are customer expectations? What capabilities are needed to satisfy them? What are the existing assets and capabilities? Can the resulting value chain support a viable business? Every company's situation is going to be different and the e-Fulfillment answer, at least at first, also will be different.

Q. What capabilities are the most difficult to create?

A. Managing people and information is the most difficult aspect of e-Fulfillment. Ironically, the hard capabilities—the facilities, equipment, and other physical accoutrements of e-Fulfillment operations—though potentially expensive, are actually the easiest to acquire and use. By contrast, setting up information systems, which requires internal and external integration, and recruiting and training the workforce are extremely difficult tasks to perform quickly and well. In fact, the difficulty of managing information and people is the main reason for outsourcing e-Fulfillment operations to a third party. A good third party's proven technologies and access to a trained, effective work force should be the primary consideration of a company contemplating a third-party model for e-Fulfillment.

At a more technical level, integrating Web-front-end operations with procurement systems, inventory management systems, and warehouse management systems is very challenging. Though the providers of these supply chain execution systems have made great strides in recent years, most of the leading systems just now are beginning to be designed to work in the Web-based environment. It will probably be a few years before the core execution systems can comfortably deal with the instantaneous updates and perfect accuracy minimally required for the Web.

Q. In this speed-sensitive environment, will one transportation mode achieve greater significance?

A. Speed sensitive it may be, but customers and companies are also price sensitive. It seems that the right combination of cost and speed is currently offered in the United States by the U.S. Postal Service, since it is the predominant parcel carrier for e-Fulfillment by a wide margin. Whether it stays that way remains to be seen. The first parcel carrier to demonstrate a consistent, general, economical method for synchronizing deliveries from many sources to one customer will have a sizable advantage in a fully virtual world. These capabilities are being built. The first carrier to synchronize deliveries will enjoy the increasing economies of scale that are a hallmark of the Web and, consequentially, will be hard to catch.

Q. How should companies judge the success of e-Fulfillment?

A. Like all supply chain operations, e-Fulfillment should be judged using a balanced scorecard. The basic measures are the same as those for all supply chain operations: total cost per order filled, accuracy of fulfillment, accuracy of inventory, speed of order fulfillment, reliability of fulfillment speed, and inventory turns, for example. The difference is each failure is experienced by a customer, so each failure costs. The focus, therefore, must be on the degree of perfect total execution. Good average performance in every dimension can be meaningless if some failure still occurs on every order.

This standard of performance is far beyond the level conventional firms deliver, and it is very challenging to achieve. What level is sufficient? Well, ask yourself how much cost and effort is going into generating every one of the orders placed and, even more important, ask what that order contributes to the goal of creating the economy of scale that drives Web commerce. You can see that it is crucially important to delight every customer.

Q. How will e-Fulfillment affect the relationships between supply chain partners?

A. The evolution of e-Commerce is affecting many of the basic trade relationships among supply chain partners. Today, for example, third-party outsourcing arrangements tend to involve complex packages of services provided by one service company. Warehousing, picking, shipping, information systems support, labor provision, and management all are provided under one long-term contract.

But increasingly, these services are available in smaller pieces. For example, Celarix Inc. offers a global package-tracking service for a monthly fee. Some software vendors are considering making things like warehouse management, procurement management, and similar supply chain applications available on a subscription or transaction-fee basis. This virtualization of basic business processes increases the number of options for—and potential complexity of—a company's supply chain. Virtualization and fragmentation is also likely to extend to the services suppliers offer their customers. Overall, increasing the options is good for service buyers and will put price pressure on providers. Consumers will ultimately benefit.

Q. What should I do today to prepare for an e-Fulfillment future?

A. If you have already begun to serve an e-Commerce channel, ask yourself if the fulfillment process you are using gives you the performance and flexibility the business really requires. If you are doing things the same old way, then it is possible that your customers want more. If you are beginning to conceive an e-Commerce strategy, give as much thought to your e-Fulfillment strategy as you do to your product offering, marketing approach, and Web site design. Don't put yourself in the position of driving a new car with an old engine. Get the help of partners who have succeeded in e-Commerce. There is a lot of value in experience. Making the right e-Fulfillment choices at the start can make all the difference to your overall success.

Robert E. Mann is an associate partner in the Andersen Consulting Supply Chain Practice. He is based in the firm's Atlanta office.