FULFILLMENT MODELS

The “back-office” subsystems of e-commerce sites — those that provide the link between the customer experience and the actual physical delivery of goods to the customer — are a challenge for web-based businesses. These parts, which include inventory management, order capture and management, and reconciliation, often prove to be more difficult than the construction of the site itself.

Online stores generally fit into one of six order fulfillment models, each with distinct benefits and faults. Let’s take a closer look at each of these models.

The Single Website Order Model

The product is ordered off the website and shipped from an in-house fulfillment center (a basement or a garage for a home-based business; a warehouse or distribution center, possibly automated, for larger businesses) to the customer in one shipment. This model has one great advantage over other models — easy returns — since it gives the web-based business an increased level of control over every moment of the brand experience. This is what the mail order catalog business has been doing for years. However, it requires know-how, labor, facilities and often, special equipment and software, all of which may be outside the area of expertise and budget of the average web-based business. Also there is usually only the one shipping location, which means that same-day delivery is impossible (except in a small geographical area) and next-day delivery can be expensive.

Kiosk Order Model

Some brick-and-mortars use this model (and in the future you may even find pure-play web-based businesses in this space). The customer orders products, using a kiosk with a computer and high-speed connection located at a store or mall. With this model, your customers don’t need a home computer and generally can even pay in person for the products ordered. This model makes it possible to order products online and pay in cash. Customers also have the choice of picking up the order on their next trip to the kiosk location or having it shipped. The big advantage of this model is a possible increase in customer loyalty — there is human interaction (the store clerk who takes the payment and hands over the products). Also, with a kiosk model, an almost unlimited range of products can be made available at a neighborhood store, provided the customer can wait a couple of day (if they are not willing to pay for next day delivery). Internet kiosks may become as prevalent as ATMs, so you can order your favorite books, wine, clothing, and gourmet food at your corner coffee shop or dry cleaners and pick up the order a few days later.

The Drop-Ship Model

This model is popular with some small e-commerce businesses, primarily because it reduces initial capital expenditures. With this model, a customer clicks the “buy” button on a website, the website then forwards the order to it’s drop-shipper(s) (a wholesaler or distributor that owns a variety of products). The drop-shipper then fills that order by shipping the product directly to the website’s customers.

The web-based business owns the customer database, while the drop-shipper owns the products. The drop-shipper typically pays the web-based business a sales commission on each product sold.

Here’s how the drop-ship model works: You take orders on your website and you are responsible for collecting payments for all charges. Then at the end of the day, you put together a set of receipts and packing slips to forward to your drop-shipper(s). This can be done either by fax, email, EDI, or via the drop-shipper(s) website. The drop-shipper then takes the order information, packs a box, puts your receipt in the box, and ships it out. If you’ve done your homework and negotiations correctly, the customer won’t even know that the drop-shipper exists.

However, before you take your first order, you must have a rock solid contract in place with the your drop-shipper(s). Sharpen your negotiation skills because every little detail must be put in writing or you may find yourself continually arguing over little things such as tacked on stocking fees, extra shipping fees, etc. Spell out everything in your contract including your payment terms.

The drawbacks of this arrangement are that there is little or no control over how the products are packed and shipped. Furthermore, unless you are diligent in your contract negotiations, your products may be shipped with the drop-shipper’s name on the packaging instead of your brand. This can cause confusion and difficulty in retaining a customer base loyal to your website.

There are two ways to drop-ship. One is actually to buy the inventory and the drop-shipper charges you to store it and to ship it for you. The other is to work out a cost per item (plus fees) and then whatever you sell over that cost will be your commission or profit.

Those e-commerce operators that adopt the drop-ship model essentially reduce their capital risk in exchange for higher, overall operating costs. Here’s why. If you offer products from more than one drop-shipper, the manhours it takes to manage these vendor relationships, to get the proper orders timely delivered to the drop-shipper, to make sure the product and service is good, and to update a sales and tracking system, can really eat into your profits. Also you must be careful not to let the drop-ship model obscure your band name or jeopardize your customer relationships.

The best way to adopt a drop-ship model is to start small with one company that has a good reputation and that offers a lot of products. Negotiate the best deal you can, make sure your deal has some sort of “out” clause in it. Once you have increased sales volume, you can come back and get a better deal.

Another downside to the drop-ship model is that it requires the e-commerce business give up much of its control of the fulfillment process. Although the e-commerce operator may establish rigid guidelines for the drop-ship suppliers, the business is still putting its brand into the hands of strangers. This includes everything from quality of product, delivery to the customers, and communication with customers concerning tracking, shipping, delivery dates, returns, and so forth.

One more disadvantage of this model becomes apparent when you try to integrate the front-end customer experience with the drop-ship fulfillment process. A good example is the shopping cart software. It’s difficult to use most of the traditional shopping carts to gather your orders. Many plug-in shipping calculators and carts aren’t compatible with drop-shipping needs. They can’t deal with orders that contain products with varying point-of-origin zip codes. There are work-arounds, however. For example, look for a shopping cart that can be modified and then find a shipper that can provide a plug-in that can calculate live shipping rates based on different zip code origins of different products within a single order. Finally, if you are using a web-hosting service, the server needs a specific module installed on it to deal with the new shipping calculation technology.

If adopting this model, be sure to:

• Research shopping cart applications very carefully — the product you purchase must be able to be modified to your specifications as a website that uses drop-shipping.
• Determine whether you are limited as to what shipping companies you can use to deliver products to your customers.
• Keep control over when an order will be shipped to the customer and in how many packages.
• Determine how to keep track of what your drop-shipper has in inventory. The best way is to only deal with vendors that can provide you with a direct feed of current inventory; this way you can keep the products on your website current, avoiding backorders and out-of-stock problems. If that isn’t possible, be proactive —know what products are in stock on any given day.
• Realize that it’s up to you, not the drop-shipper, to provide your customers with up-to-date tracking or shipping status information.
• If using multiple drop-shippers, realize that they may want to receive orders in multiple formats (EDI, XML, email, fax, etc.). It’s up to you to determine how this will be accomplished.
• Ensure that your brand is on the documents and packaging sent to the customer (e.g. packing slip, shipping label, box) — not the drop-shipper’s information.

Keep in mind that during contract negotiations with a drop-shipper, your first priority is to protect your company, your brand, and your customers. However, if you are diligent and put in place procedures to maintain a firm upper hand, you have a reasonable chance of building and maintaining a satisfied and loyal customer base using the drop-ship model.

Same-Day Home Delivery Model

The products are ordered online, picked, and packed at a local distribution center, and delivered the same day to the customer. This approach offers the convenience of local shopping with an added benefit of being a timesaver. However, to provide same day delivery is always more expensive than other fulfillment models — both for the web-based business and its customers. Still, most customers that frequent websites that offer same day delivery feel it is a good tradeoff — personal time for money.

This model requires a very complex distribution and delivery network. It also is limited to specific geographic areas (how is a website located in Connecticut going to give same day delivery to a farmer in the outreaches of Minnesota or a customer in the mountains of New Mexico).

Fulfillment Service Provider Model (FSP)

With this model, the e-commerce business outsources its warehousing and distribution services to a third party. Companies that offer these type of services are called “third party logistics providers,” “fulfillment service providers,” or “fulfillment houses” (this book uses “fulfillment service provider” or “FSP”). This model gives the web-based business a good deal of control over all aspects of product quality, distribution and messaging. If you use this fulfillment model, you might want to consider contracting for more than one distribution center — each strategically located nationwide or worldwide, and each center carrying inventory levels relative to their regional market.

The FSP receives merchandise from not only your e-commerce business, but also numerous other clients and then stores the merchandise in its warehouse(s). It picks and ships the orders received by its clients. Since the FSP provides this service to numerous client businesses, it can spread the costs of the operation across a large base. However, web-based businesses may find that maintaining the optimum service levels require adjustments — give everyone at least four or five months to work out all of the bugs. In particular, many of these providers make it difficult for a web-based business to obtain real-time information about inventory status and order status. Don’t sign a contract with a new FSP just before the Christmas buying rush.

Many large websites use this model. They feel (and rightly so) that, in the short-term, it’s good business practice to concentrate on their core strengths and contract with experts for other areas, such as a FSP. The FSP will, for an up-front agreed price, provide whatever services are needed, e.g. the FSP will receive a website’s products, warehouse them, and when customers orders are received, it will pick and fill the orders, and pack and ship each order by the method that the website and/or its customers choose. The provider works for the web-based business and therefore the labels and packing lists carry the website’s name and logo.

The fulfillment service provider model is frequently identified as the future of e-commerce, but it’s not there yet. While many web-based businesses give this model a try, many eventually find that the expense of fulfillment eventually outweighs its benefits.

In-Store Fulfillment Model

This is strictly a click-and-mortar model. When an online order is received by the website, that order is fulfilled by employees who pick stock from the traditional retail store’s shelves. From there, the product delivery process is basically the same as any other model. This model incurs lower startup costs in the short term, which is why some brick-and-mortars use this model to “dip their toe” into the e-commerce arena. In the end though, this model can be very expensive due to the overhead and the complexity in tracking and pricing the same inventory for store and web sales. The tricky part is identifying and separating costs to each entity.