OUTSOURCING

The goal of outsourcing fulfillment should not be one of short-term cost reduction, but rather speed to market. That is because in the long run, outsourcing usually costs more than an in-house system. The benefits of using a FSP is that it provides a reliable method of getting the product to the customer while keeping in-house control of important data such as inventory, reorder levels, and delivery confirmations. The other advantage of outsourcing fulfillment is that it allows a web-based business to focus its energy and resources on marketing, product development, sales, and building its customer base.

We’ve discussed outsourcing throughout this chapter; this section is where we really dig into the subject. While outsourcing can make fulfillment and distribution simpler and more efficient it does have limitations and drawbacks.

• Outsourcing is not cheap.
• Many FSPs will not service a website unless it has reached a decent shipping volume.
• An inventory that consists of a large variety of products can affect service and price. For example, it’s more costly and time-consuming to prepare packages that contain different combinations of items than it is single-product packages.
• Some FSPs will only respond to inquiries regarding the status of an order while others will provide full product support.
• The level of services in warehousing and inventory management also may vary from company to company. In some cases, the FSP will order stock directly from the manufacturers while others will expect the website to ship the products to the FSP’s main warehouse for packaging and delivery.
• The drop-shipment option may result in multiple shipping charges for some orders.
• Websites using drop-shippers will have to deal with customer confusion due to packages arriving at different times from different shipping locations sometimes without the website’s brand anywhere in site on the packages.
• The drop-shipment option requires complex tracking and returns procedures compared to FSP shipments.

When Should You Outsource?

Outsourcing to a FSP offers quick access to proven state of the art technologies and thus can be a good starting point for a new web-based business. Lower start-up costs preserve scarce start-up capital. These initial savings however mean a higher per product cost during the operation of the website. Then there is the concern that any outsourcing model presents: How to keep control of the management of quality, accuracy, accountability, and customer service priorities, as well as integrating it into your backend systems.

Outsourcing to a FSP only makes good financial sense for a startup website if, in its day-to-day operations, it has more money than time. When every penny counts, keep fulfillment in-house. If the web-based business’ competency lies elsewhere and it can earn more utilizing its staff in their areas of competency, look outside. If an established website currently handles fulfillment in-house, it should look at outsourcing only when it has reached the limits of its current facilities and infrastructure and the incremental cost of expansion would be a prohibitive expense or it can’t have the disruptions that a rebuild of its infrastructure would bear on business.

A web-based business might consider contracting with a FSP for the same reason it chose to outsource its website to a web-hosting services — because an FSP can afford the very best software and hardware solutions, and because its costs are spread over many customers. Thus, even though there is an additional cost involved with outsourcing, it can give a web-based business the additional benefit of having a cutting edge fulfillment process at its fingertips.

What an FSP Offers

The average FSP offers everything a web-based business might need for its fulfillment processes. These services will take the ordered products from the warehouse shelves, pack them, and hand them to shippers. Then they will follow-up by sending an automated email response with the website’s branding to the customer to let them know the package is in transit. Many also will handle your credit-card processing, supply current inventory levels to the website, reorder products, offer call-center services, send notices of shipping, and handle returns. There are literally thousands of these companies to choose from, but the best way to find one that suits your specific e-business’ needs is by referral.

Some FSPs offer everything: web design and hosting, order capturing, shopping cart tools, credit card processing, merchant accounts, picking and packing, shipping, invoice generation, inventory management, return/exchange logistics, and customer service. Plus some will provide, for an additional fee, extra services such as wrapping gifts and packing catalogues or other promotional items with each shipped package.

It sounds good, but remember some of these areas may not be among the FSP’s core competencies and may not be the best solution for your web-based business. Carefully evaluate your needs, the FSP and what it offers, and then pick and choose.

Most FSPs will let an e-commerce business mix and match the fulfillment services it needs. For example, if a website already has a shopping cart and credit-card function, it can limit its selection to inventory warehousing, pick, pack and ship service, returns processing and customer service support. An e-commerce operator may want to use a combination of fulfillment options. For some websites, it may be more cost effective to handle the processing of small items in-house and only outsource the bulkier items. Other websites may have some of their products handled by drop-ship methods and others by the FSP.

Should an e-commerce business choose a small or larger FSP? Each offers advantages and disadvantages. A small local FSP may be best, especially if it makes it easier for quick replenishment of inventory or because it offers more personalized service. A larger national FSP, on the other hand, can give a nervous startup confidence that its customers will be adequately served throughout the United States.

Another, good reason for choosing the smaller FSP is that an e-commerce business could have its fulfillment services in numerous regional locations allowing it to emulate a just-in-time inventory model (discussed later in this chapter). Having more than one FSP also can alleviate concerns about relying on a single fulfillment resource (i.e., redundancy). There are many options. Discuss them all with each potential FSPs until you find a provider and a solution that fits your business’s specific needs.

Where and how can you find fulfillment service providers? Begin with Yahoo!’s directory. To reach your goal click on the following: Business and Economy > Business to Business > Marketing and Advertising > Fulfillment Services. The list should provide you with at least four or five companies that suit your needs.

Drop-shipping

In a perfect world the drop-ship model would be the way all e-commerce sites would want to go. If everything worked flawlessly, the website would concentrate on sales and therefore sell more products, which in turn benefits both the website and the drop-shipper. The website does not have inventory cost and the drop-shipper does not have the marketing costs; this enables both to make more money by reducing the retail price. But it’s not a perfect world.

Although many small and home-based websites may go with the 100% drop-ship model when first opening shop, most gradually move into a hybrid solution — they still have relationships with drop-ship manufacturers and distributors but they also have begun to amass an inventory and deal with in-house fulfillment processes.

The drop-ship model has been discussed throughout this chapter, but as explained earlier, a website that uses the drop-ship model takes orders and payment for product and forwards its orders to the drop-shipper who will “drop-ship” products directly to the website’s customers. When using a 100% drop-ship model, the website realizes some advantage from delegating the physical labor of the entire fulfillment process — from the order and stocking of product through the picking and shipping of the products to the customers — although as the reader should understand, the website does not totally avoid fulfillment expenses. That’s because the e-commerce operator is compelled to be particularly diligent to guarantee that the fulfillment process is completed to the customer’s satisfaction. If you fail in this task, you will lose control over your fulfillment process — you won’t know when orders are shipped, or how they are shipped (including the number of packages, shipper, and method).

NOTE
Another challenge that the drop-ship model presents to e-commerce operators is managing, synchronizing, and consolidating customers orders so that all packages comprising any one order arrives at the customer’s door on the same day by the same shipper.

Regional Distribution Centers

Suppose a FSP ran a network of distribution centers, and each center could ship product for dozens of large and small e-commerce sites. A web-based business could contract with one of the FSPs with multiple distribution centers, giving it a presence in many regional areas.

Using the regional distribution center model allows a web-based business to use just-in-time (JIT) inventory management, thus saving on inventory holding costs. With the JIT inventory model, vendors agree to deliver products right at the time needed — not so early that you wind up with unnecessary warehousing expenses, but not so late that you miss out on customer sales. Since needed products arrive at the warehouse just in time for shipment, you can keep your inventory at a level that is just enough to cover ongoing orders but not tie up capital.

Just-in-time inventory management and delivery works best with companies that have projects that are carefully scheduled and effectively managed so that work is performed according to a strict schedule. For example, construction companies may effectively use just-in-time delivery so that goods and materials arrive at the construction site just in time. Money is saved largely by not having to provide warehouse facilities for these goods and materials.

For websites that have substantial warehousing costs and large well-scheduled projects, just-in-time delivery may make sense. Those companies should ensure that there is no premium in the price for such delivery — or, if there is, that the premium is more than offset by the savings in warehousing costs.

When a business has only one distribution center its products are usually received in large quantities and stored in pallet racks until needed. As items are picked, more products have to be dropped from the pallet racks to replenish the picking area. This receive-store-replenish-pick cycle is a repeated expense, and, if replenishment is too slow, out-of-stock notices may occur even when product is in the building.

If a website uses the JIT model and outsources some or all of its fulfillment needs, it should look for a FSP that has supply chain management software to accommodate just-in-time shipping; thus allowing products and orders to flow smoothly from manufacturers and distributors to regional distribution centers and finally to your customers. Adoption of a JIT model can result in increasing the frequency with which inbound shipments of product are scheduled, but decreasing the lead times and size of these shipments. Web-based businesses that adopt the JIT model often reduce the number of suppliers and transport companies with which they must deal and select suppliers that are close to their regional distribution centers, enabling delivery of shipments with short lead times. In addition, each regional distribution center has only a portion of the website’s total stock, so it is a simple task to shelve all received product directly into the pick area.

Another reason for choosing this distribution model is that many web-based businesses want to give their customers reasonably priced next day delivery or 2nd day delivery. A website could place its inventory in numerous regional centers, thereby increasing its inventory holding costs, decreasing its overall shipping costs, and increasing its customer satisfaction ratio.

Here’s how it works. A business has one distribution center in (let’s say) Nashville, Tennessee and a customer in Oregon who places an order for 2nd day delivery. Normally that order could be shipped for delivery within the two-day time period. But, what if there is a problem (which happens frequently). Now the business has to ship “next day” at additional cost (which it has to “eat”) to meet the 2nd day delivery time limitation.

Now take that same scenario, but the business has its inventory in four regional distribution centers. The Oregon customer’s order is sent to a regional distribution center in Utah; and, even if there is a mix-up which causes a delay in shipping the product, it can avoid the “extra cost” next-day shipping method due to the proximity of the distribution center to the customer. In other words, with strategically located distribution centers throughout the country a website can promise 2nd day delivery with more certainty due to the proximity of the product to the customer.

It isn’t always necessary to increase inventory. With the right technology running behind the scenes, a web-based business can maximize its normal inventory levels. Take the same scenario: the Oregon customer’s order is sent to the Utah distribution center, but that center is out of stock and cannot fill the order. The fulfillment system can transmit the order seamlessly to another distribution center and still meet the 2nd day delivery deadline by using the more expensive “next day” shipping option. The web-based business did not carry extra inventory, but because of its data network it could still adopt the just-in-time model. Using this system, premium shipping charges would still be incurred to meet the 2nd day delivery deadline, but not in every instance, every day.

Your Outsourcing Plan

Nothing succeeds without a plan — this time it’s an outsourcing plan, written as an addendum to the logistics plan. First, determine the services the website needs and expects from a fulfillment provider and what they will need to know about the website — for example, its expected order volume, its business’ terms, and whether it’ll pay handling on a per-piece-picked basis or on a package-shipped basis.

FSPs differ widely on the variety of options they provide and the type of client they serve. Finding the right fit for a web-based business requires in-depth research, which includes asking for referrals. Once the research is completed and the information compiled, it will be possible to price out the most cost effective and efficient method of getting the products to the customer while maintaining an adequate profit margin. But it’s not an easy decision.

The first step is to look at your carefully drawn up outsourcing plan. If the solution is still unclear, consider the following while keeping in mind that fulfillment is the last form of customer contact — if a website fails to embrace order fulfillment with the same vigor as it embraced online selling, it will experience not only distribution headaches, but also, customer defection.

Look at the current volume of orders and project what the volume is expected to be in six months, one year, three years and five years. With figures in hand, take a long hard look at the website’s staff — can they handle the workload. If the website takes off and workload exceeds the staff’s capacity, its customers won’t be happy with the poor service that they may receive from a harassed and overworked staff. The web-based business may have jeopardized its hard-earned success with the wrong fulfillment decision.

Also, consider the web-based business’ core competency, fulfillment may not be one of them. Stay on top of fulfillment issues, and as the business grows, re-evaluate. Before making your decision, get a pencil and paper out and compare the costs of adding more staff and facilities (including automation) with the cost of delegating the fulfillment process to an outside company.

If the website is still in the first growth period and has expectations of a huge growth spurt within the next six months — outsource. However, if the grow is projected to increase steadily over time and the in-house staff can currently adequately manage the fulfillment process, then there is time to build a proper in-house fulfillment infrastructure that can scale as the order volume increase.

A start-up website that expects to handle a substantial volume of orders from the get-go and does not have a warehouse and staff in place might find that in the beginning it could be more cost-effective to outsource its fulfillment processes to a FSP. In that case, the web-based business should ensure that its back-end is built so that it is scalable enough to accommodate a move to an in-house fulfillment processes when the need arises

If a website’s order volume is low and inventory requirements are not onerous, then it is probably better to handle fulfillment in-house until the volume justifies a more formal order fulfillment procedure.

Your Product. Look at the products offered for sale via your website. If the answer is “yes” to either of the following two questions then the decision to outsource is a no-brainer.

1. Do your products require special handling, i.e., fragile, sensitive to temperature changes, or require special licensing (alcohol, perfumes, pharmaceuticals, etc.)?
2. Will the majority of the product orders include multiples of different products? This makes the picking and packing more labor intensive.

With a yes answer, a FSP should be found that will accommodate the specific product needs and still allow the e-business to earn a profit.

However, if it isn’t possible to find an FSP to provide the special services required, an e-business has two choices: to outsource all fulfillment except the products requiring special handling, which will be handled in-house, or to keep all fulfillment processes in-house.

Customer Service. FSPs are well aware of customer service issues and most offer services that integrate well with the typical website infrastructure. Some of the customer service issues to be considered when instituting a fulfillment process include:

• Managing inventory (so the customer is confident the product is available and the website can cross-sell, if necessary).
• Offering multiple shipping options.
• Tracking orders (so the customer can stay informed).
• Handling returns and disputes.

Control. If a website decides to outsource with an FSP, then the FSP must become an integral part of the web-based business’s processes. As such, it is important that everyone coordinate their business processes and infrastructure to maximize the benefits of each business’ strengths.

Integration. A web-based business will need to send its customers’ orders via email or FTP directly to the FSP’s warehouse facility. The optimal FSP is one that offers software to enable a website to integrate its systems with the FSP’s back-end systems so that there is real-time inventory information. The FSP should offer continuous technical support to assure that the operation runs smoothly from both ends. Bear in mind that the FSP selected will become a partner in the value chain, and as such, an essential arm of your e-commerce operations.

Issues Specific to a Small Website

It is possible to find FSPs that cater to the small business, allowing even the busy home-based website to take advantage of the latest cost- and time-saving techniques, such as supply chain software, and orders sent directly to the distribution center floor for picking.

Hence, a small web-based business that chooses to outsource fulfillment, should select a FSP that specializes in servicing small businesses, especially if it receives fewer than 10 orders per day. Do the due diligence — if the FSP falls down on the job during a peak selling season, a small website might not recover and could lose its entire business.

For the majority of small website’s the cost per order is significantly increased when an FSP is brought into the picture. Outsourcing makes good financial sense ONLY when you have more money than time. If you need to make every cent count, handle your fulfillment in-house.

A series of coordinated steps is required to bridge the gap between (1) a customer clicking the buy button, thus sending the order to the shopping cart software and into the “pipeline” and (2) the customer receiving the products. Ad-hoc solutions to handle the communication with a FSP and/or drop-shipper(s) can be put into place that may be sufficient for a website with low sales volume and limited inventory. However, if sales increase substantially, then even a small website must deal with the lack of standards for data representation and transmission requirements. This means dealing with the API issues or taking the EDI and XML approach (discussed earlier in this chapter) for communication between systems so as to be able to interact with each outsourcer (FSP and/or drop-shipper). Eventually, the “string and sticky tape” method will fail and proper integration will become essential.

EVALUATING THE OUTSOURCER

Keep in mind that an when you partner with an outsourcer (FSP and/or drop-shipper), it must become an integral part of your website’s operations. Therefore, find an outsourcer that not only offers the services the website needs, but also is a comfortable fit in other ways — location(s), technology, mission statement, financial wherewithal, etc. To determine whether a prospective outsourcer meets a web-based business’ needs, ask it how it approaches key fulfillment issues, such as:

• What types of products does the outsourcer have in stock for other clients?
• What is the minimum volume the outsourcer will handle? Is that minimum per month or averaged over a set period?
• How does it handle the packing? What type of packaging materials will be used? How will the box be labeled? In other words, is the website’s brand used or also the outsourcer’s brand? It’s important, that the website’s brand isn’t diluted.
• Determine that the outsourcer does not require an exclusive contract to fill all of the website’s product orders. The web-based business may want the flexibility of processing some of its orders in-house and also it may want to hedge its bets with a secondary FSP or additional drop-shippers.
• Is there a setup fee? If so, how much and is it a one-time fee?
• Does the outsourcer offer special services such as gift-wrapping or sub-assembly? If so, what are the fees? Will the outsourcer include the website’s catalogs or other branding materials or special offers in the shipments? If so, is there an extra fees and what is the fee?
• How quickly will orders to be filled? Is there a guarantee?
• What volume of orders can the outsourcer reasonably handle and how scalable is its capacity?
• How will the website’s infrastructure be integrated with the outsourcer’s systems? Will special hardware and/or software be needed? What support does the outsourcer offer for the integration process?
• What credit cards and alternative payment methods does the outsourcer accept?
• How are sales taxes handled?
• How does the web-based business get paid and how quickly? (The drop-ship model.)
• How will the website and its customers track orders?
• How will the web-based business monitor and replenish inventory?
• What reports does the outsourcer provide?
• How will returns and disputes be handled?
• Does the outsourcer offer customer service support?
• Does the outsourcer handle international orders? If so, how? Are there extra costs involved?
• What shipping arrangement does the outsourcer have, and is there flexibility in that arrangement to allow for the use of other shippers if they have better rates?
• What kind of account servicing does the outsourcer offer?

Be sure to ask for references and a customer list of at least 10 customers. Call all the references and customers. Ask the customers (if you can get away with it) all the questions set out above, but at least ask what kind of products the outsourcer handles for them and how well the outsourcer meet its obligations to them. Ask them if they have any complaints or reservations about the outsourcer. Ask them if they plan to renew the contract when it comes due.

Another reason for demanding a customer list is so you can look it over to determine that there is any conflict between your business’ product line and others that the outsourcer handles. The customer list will also alert you to any large clients that may compromise the outsourcer’s resources, especially during a busy holiday shopping season.

How Much Does It Cost?

The cost is dependent upon which services the web-based business requires and the volume of orders it forwards to the outsourcer since many of the fees or commissions are set on a sliding scale based on volume. On the average, you will pay an FSP a monthly fee for warehousing the products of around three cents per small item, or $15 for each pallet of products. An inventory count is usually performed monthly and the fees are assessed on the products your business has in the FSP’s warehouses at that time. The FSP may also charge a handling fee for each package and for incidentals, such as mailing labels, boxes, packing material, and then, of course, shipping.

There are no outright, up-front expenses involved with the drop-ship model. The drop-shipper pays the website a commission, which can range anywhere from 10% to 30% or more of the product(s) sales price.

The Contract

Once you have decided upon an outsourcer, the next step is to perform due diligence concerning such issues as financial health, union related issues, stability of management, the customer list, references, and the physical plant (lease, ownership, condition of building and equipment, etc.).

If the due diligence turns up nothing untoward about the FSP, the next step is to get your attorney involved. Have him or her draft the contract, which should clearly outline both your and the FSP’s expectations, services to be provided, fees to be paid, and guarantees. Give your attorney the logistics plan and the outsourcing plan to use as a guide. Keep in mind that both the website and the outsourcer want to maximize revenues, so it is important that everyone agrees on a compensation rate that is fair to all.

The contract that is signed should be for a limited term since outsourcing is a choice that you will reassess throughout the business relationship. However, the contract should be a concrete document that defines the services and responsibilities of both the website and the outsourcer.

After everything has been signed, the next task is integrating your website’s systems with the FSP’s back-end so that fulfillment processes are executed so seamlessly that your customers won’t know the difference.

The Results

Now it’s time for the outsourcer to go to work. If the FSP is handling credit-card settlement for your website, then the charge to the customer’s credit card is authorized and settled for the order amount. The products are then shipped to the shipping address using the selected carrier. If a product requested by the customer is not available, the customer’s order is placed on hold (backorder), until inventory is replenished.

During all of this the customer must be kept informed as to the order status. In addition, it is desirable that the customer be able to go to your website to bring up the order history and to request a real-time order-status query. If it’s supported, the site communicates with the outsourcer via secure HTTP and requests the status. The response message should include details of all shipments, cancellations, backorders, and other transactions that have taken place while processing the order.

Most outsourcers send order status files that describe all of the day’s order activity nightly, via FTP or encrypted email. By law, a business can’t charge (settle) a customer’s credit card until the order has been shipped. So, the order information returned to the website by the outsourcer(s) must be verified for accuracy before the credit-card information is processed.

Without valid information, the website can’t post a shipment invoice to the order management system. Settlement tasks run periodically to process shipment invoices that need collection. The settlement process communicates with the clearinghouse to charge the buyer’s credit card (note that when the order was originally placed, funds were only allocated [authorized] but not disbursed). If the site and the outsourcer(s) don’t agree on order details, customers may be charged the wrong amount.

Then the information is transferred from the order management system to the website’s financial system for purchase order generation, accounts payable, and so on.

Once the products are in the customer’s hands, the website and the outsourcer jointly need to handle any post-purchase activity such as returns or exchanges, and to perform transaction reconciliation.

Caveats

Despite the many advantages of using a FSP and/or drop-shipper, there are a few potential downsides. Putting someone else between a website and its customer can be a risky proposition, and there are significant data integration issues. When sorting through these issues, it pays to see what others have done — get out there and talk to everyone you know who uses or has used an FSP and/or drop-shipper.

No matter what outsourcer(s) become your e-commerce fulfillment partner(s), issues will arise. What happens when the busy and ever important Christmas season arrives and it comes time to decide between shipping an order for a smaller company (maybe like your website) or shipping an order for Amazon? Which one is the outsourcer going to choose? It’s a given, the big guy will get the most attention.

A smaller web-based business can protect itself to some degree by establishing a detailed service-level agreement to ensure performance (get the legal eagles involved).

The Internet is a great equalizer. With the right FSP and the right integration between the FSP and the web-based business, all websites can do business on the same playing field with the same type of equipment and the same type of personnel.

Want to know more? Check out Opsandfulfillment.com (subscribe to the magazine) and read the author’s book Logistics and Fulfillment for e-business (CMP Books).