A Drop-ship Enablement Pioneer Leads the Way

Meet a Drop-Ship Enablement Pioneer

CommerceHub (http://www.servigistics.com) is an Albany, New York (US)-based provider of hosted supplier integration and order management services for multichannel retailers. These retailers include QVC, Target, Sears, Staples, ShopNBC, Costco, and Federated, all of which have since reportedly reduced costs of owning, warehousing, and distributing inventory. The vendor is privately held, albeit with limited outside funding, and has operated profitably for the last few years. CommerceHub's hosted platform provides one single, universal hub- or bus-like connection between a retailer's business and all its distributors, suppliers, and manufacturers.

Part One of the series A Drop-ship Enablement Pioneer Leads the Way

By providing a single plug-and-play connection to multiple trading partners, CommerceHub strives to enable basically any retailer to electronically integrate with its suppliers, regardless of the idiosyncratic systems and capabilities that might exist among them. Such system-to-system communication allows both merchants and suppliers to eliminate costly, inefficient, and error-prone manual procedures, from point-of-sale (POS) through delivery. In addition to connectivity, its applications enable retailers to simplify order management and gain near real-time visibility into their entire supply chains, and control over transactions to ensure the proper delivery of goods under a variety of fulfillment models. Last but not least, the applications were devised to enable merchants to expand product offerings, preserve brand identity, and manage, analyze, and deliver inclusive order information to their customers, all with a lesser inventory risk.

Drop-shipping is not a new concept, but CommerceHub's founders had a notion that the Internet should change the way retailers and manufacturers communicate to make drop-shipping work. For more information on retailing trends and drop-shipping, see Consumers Shop Everywhere: Understanding Multichannel Sales), Retailing Trends—Shopping Anyway and Everywhere, The Challenge of Fulfillment, and Drop-Shipping—Internet Retailers' "Little Helper"?.

Company History

The company was founded in 1997 as an e-commerce integrations firm connecting suppliers to retail partners, after recognizing significant barriers to establishing supplier integration and managing the fulfillment process. The emergence of the Internet and associated technologies like extensible markup language (XML) has also brought about the promise of electronic data interchange (EDI) connections (if not necessarily the complete demise of manual communication methods), and expanded the role and value proposition of traditional value-added networks (VANs).

The company's board of directors and top executives have vast experience and resumes from Internet pioneers like iQVC (the Internet division of QVC), Kmart's equivalent BlueLight.com initiative, and JC Penney's Internet division, to name only some. Frank Poore, the company's co-founder, president, and chief executive officer (CEO), had previously developed an intranet for Nike's world finance division in the early 1990s. A few years later, he was working for a video game company, when he had an epiphany: 100 retailers having to connect to 100 suppliers meant 10,000 simultaneous information technology (IT) projects. He then envisioned a "universal connection platform" that would serve as middleware (resembling, to a degree, a credit card clearing facility), invisibly translating one computer dialect into another, in a manner of speaking, so that the same scenario would require only 200 total connections, no matter how many different dialects were involved. The idea was to design and deploy an advanced infrastructure enabling any merchant organization, regardless of internal systems or capabilities, to connect to all of its trading partners, by establishing only a single connection to CommerceHub.

To use an analogy with simultaneously translating to and from a multiplicity of human languages (as during United Nations [UN] sessions), it would be as if the connection platform took Spanish (or Russian, or Swahili for that matter) instructions from the retailer, and translated them into English (or German, or Chinese) for the supplier, and then translated the supplier's English response back into Spanish for the retailer. CommerceHub's hosted application is similar—regardless of any differences between their system formats (for example, the retailer's format might be some EDI standard, and the supplier's format might be XML, or even flat files), partners can communicate without errors by passing their information through CommerceHub's universal translator. The painstaking process of adding suppliers and getting everyone on the same page involves evaluating each participant's current order processing protocol, and either agreeing on a common format or creating a translator for CommerceHub's private exchange, based on the retailer's and supplier's requirements. If any participating company is still in a low-tech environment (working through phone and fax exclusively), CommerceHub can set up a web interface for the supplier.

As an example of solving dialect problems, there is the case of a renowned musical instrument manufacturer that could not send the retail customer tracking numbers for its shipments, which was an important piece of information for the retailer. Yet it was not the case that the supplier did not have the information, but that the company was using different EDI messages to move tracking numbers, as compared to those the retailer used. Fixing the problem on the manufacturer's end would have entailed a great deal of programming expense. Instead, CommerceHub's staffers extracted the information from the supplier's messages, and inserted it into the type of message the master retailer used.

What is important to note about CommerceHub's infrastructure is that it acts as an invisible translation tool, converting all styles of XML, EDI, web form, or even custom file data transmissions from one party into a format that can be digested by the other. This eliminates the need for a master retailer to impose a common data standard onto hundreds of supplying companies, or to work out expensive hardwired data connections with each of them.

In addition to this sort of plug-and-play supply chain integration via the Universal Connection Hub product, CommerceHub's value proposition to a retailer is that it can fairly quickly expand product offering without owning, warehousing, or distributing inventory. And by being able to brand itself across multiple channels, a retailer can provide customers with a seamless shopping experience, whether a product has been shipped from internal warehouses, remote suppliers, distributors, or manufacturers.

In a sense, CommerceHub can be regarded as a traditional VAN provider, albeit with many more benefits that go well beyond the mere connectivity of VANs. VANs serve the purpose of a "glue" connecting merchants with their drop-shippers, by leveraging EDI to allow information files to flow back and forth. With a multi-supplier scenario in place, order flow (and tracking each order back to every drop-shipper) gets terribly confusing and time-consuming if there a hub-like exchange to handle this complexity and monitor any exceptions. To that end, CommerceHub allows trading partners to electronically transmit and receive documents like purchase orders, retailer-branded packing slips, shipment confirmations, carrier tracking numbers, inventory updates, cancellations, returns, invoices, payment remittance, advance shipping notices (ASNs), and more. But contrary to traditional VANs, connectivity and integration options for suppliers range from full data- and process-based integration to collaborative web browser use, while communication methods can be via Internet browser, file transfer protocol (FTP), virtual private network (VPN), and VAN.

Going Beyond Mere Connectivity

As hinted earlier, besides connectivity, CommerceHub delivers both near real-time order status visibility into the supply chain, and advanced exception-based management applications to overcome the complexities associated with multichannel retailing. This ensures that orders reach their end destination in the most efficient manner possible, without sacrificing quality or service levels. The product enables the customer's team to create their own exceptions definitions (for example, per supplier, per item, per item group, and so on), which can be individually monitored, along with the ability to track the performance of suppliers and carriers through customized reporting and supplier report cards.

CommerceHub Drop-Ship Master is a suite of applications that provides retailers with the supplier management tools necessary to confidently build and expand inventory-less drop-shipments directly to customer programs. On the other hand, CommerceHub's Bulk-Ship Master is a suite of applications that provides retailers with the supplier management tools necessary to minimize warehouse and store-level inventories. On a high level, Drop-Ship Master features the following applications and capabilities:

  • Real-time supply chain monitoring, to provide near real-time visibility into the supply chain and enable the user merchant organization to manage its entire fulfillment process from order capture through carrier delivery.

  • Business rule enforcement, to automate information management by applying the user organization's business rules to data exchange among various trading partners. CommerceHub has long been offering automated messaging services so that the management can always be in touch with their operations: merchants and suppliers can receive appropriate e-mail alerts to pagers, cell phones, or their desktops, in order to quickly respond to any delay or shortage before it becomes a problem.

  • Customized branding and labeling, to produce printer-ready, partner-branded packing slips, barcode labels, coupons, and promotional materials at the supplier's locations, with relative ease. Merchants can transmit a customized and personalized promotion with each order they route through CommerceHub, and in turn, suppliers can perpetuate the merchant's branding and promotions by printing out the files locally and including the documents with every order they ship on a merchant's behalf. Suppliers thus have an opportunity to make themselves true extensions of a merchant's organization. Further, the Catalog Manager handles product images and descriptions, so as to eliminate supplier headaches of reformatting product content to fit the requirements of each of their merchant partners. On the other hand, for merchants CommerceHub reduces the effort required to assemble their web sites, catalogs, and promotional materials.

  • Inventory synchronization, to simplify and streamline the management of inventory between the user merchant company and its business partners, regardless of differences in systems. As a centralized solution, CommerceHub aggregates product photos and descriptions into the repository so that merchants do not have to customarily chase the various elements down in order to promote new products. In addition, the products are individually linked to the actual suppliers so that merchants can get real-time inventory reports for the product without ever placing a phone call.

  • Reverse logistics, to support customer product returns to a user retailer's suppliers, enabling a retailer to process customer credit without actually handling and warehousing returned merchandise. The returns processing capabilities allow virtual stores to remain virtual, since customer service agents can communicate return authorization numbers to suppliers right through CommerceHub, and in this way, the return information becomes part of the order history. Alternatively, merchants can have bar-coded return material authorizations (RMAs) integrated with the branded packing slips that accompany each of their drop-ship orders. Either way, merchants obtain real-time notification as soon as the supplier receives the return, ensuring that the accounting department can promptly and correctly issue any credits.

By leveraging these solutions, the idea is for a retailer to be able to achieve the same levels of management, control, and fulfillment performance from a remote supplier fulfillment network as they can from goods shipped from internal warehouses. To track its orders, the merchant customer can, for example, use a private Internet site that connects it with its suppliers, where the site will employ a color-coded system that ranks the level of inventory on each product. If a particular item is marked yellow, that signals availability is low; if green, then the retailer should know that it can promote the item on its public site and that delivery should not be a problem.

The Proof-of-concept Customer

CommerceHub's flagship customer was QVC, and the relationship was an important "proof of concept" for both parties around the turn of the century. QVC, a multibillion-dollar company, is an e-commerce leader, marketing a wide variety of brand name products in such categories as home furnishing, licensed products, fashion, beauty, electronics, and fine jewelry. QVC reaches over 80 million homes in the US, and its other divisions and subsidiaries include QVC.com, Q Direct, QVC Publishing, Q Records and Video, QVC @, QVC Local, QVC ProductWorks, and Pioneer Studios. The QVC Studio Tour is located at the company's world headquarters in West Chester, Pennsylvania (US).

QVC debuted as a broadcast-based direct marketer in 1986 (via a twenty-four-hour electronic retailing television network), and jump-started the electronic retailing concept with over $110 million (USD) in revenue during its first year. Today, its total customer file consists of more than 20 million people in 4 countries, and it gains about 250,000 new customers each month. Once the Internet gained momentum, QVC became an early adopter of an e-commerce strategy, going online with its web division iQVC (http://www.qvc.com) in 1996.

Building iQVC involved a strategy of offering choice to customers, whereby the Internet was merely an evolution for QVC, not a revolution. Namely, when iQVC was set up on the Internet, the two operations were completely integrated from the beginning (in terms of order processing, customer service and record files, and shipping and handling) with pricing being consistent across channels. It all took place back in the mid-1990s, when the terms e-commerce and multichannel integration were not even figments of anyone's imagination. Not only was QVS way ahead of the e-commerce bandwagon curve, but its electronic dealings have not been limited to business-to-consumer (B2C) relationships either: electronic communication plays a key role in iQVC's business-to-business (B2B) dealings with trading partners as well. For more information, see Differences in Complexity between B2C and B2B E-commerce.

However, when iQVC launched, the company recognized that differences in buyers' activity and behavior between the Web and TV channels would require different fulfillment models (in terms of who should ship the merchandise). The TV channel primarily uses the just-in-time (JIT) inventory model, and operates four warehouses throughout the US: QVC orders a relatively large quantity of each product into its warehouses, and features each one on TV until it inevitably sells out. It only sells the quantities it has on hand (this figure can be seen in real time on the TV screen, and is not necessarily a subtle pressure gimmick) and ships the products directly to its customers. On the other hand, iQVC does not operate its own warehouses, but works with its suppliers in a virtual warehouse or drop-shipping environment, whereby any certified supplier working strictly with the Web division ships iQVC's orders for it.

The parent company's direct fulfillment infrastructure would not work as well for iQVC, simply due to the nature of Internet surfing, and the far broader scope of merchandise available on iQVC. Without the time constraints of hourly television programming, the Web division gives customers more options (and QVC more opportunities) for sales. In addition to the about 2,000 products seen on TV each week that are available for purchase online at anytime, the Web site works with about 200 additional vendors which only sell through iQVC. This offers a wider breadth of products, which are sometimes extensions of on-air features, and QVC's surveys of new customers have reportedly shown that a good percentage of those who see a product on-air will go later online to find out more before they buy. A customer shopping through both channels reportedly tends to buy 20 percent more than a customer who uses only one, which has validated the company's integrated marketing and technology philosophy between the two buying channels.

After some significant time spent piloting the concept, at the end of 2001 CommerceHub announced that QVC.com had chosen CommerceHub's Product Master to assist the company in swiftly adding new product categories to its online operation. As a result of an agreement between the two companies, CommerceHub has since provided QVC.com customers with access to a vast selection of new products in the electronic and entertainment categories of books, music, movies, and video games. CommerceHub's Product Master has been hosting product content, including images and descriptions, thus enabling QVC.com to integrate entirely new product lines and suppliers without having to modify its existing systems. Additionally, as a result of this program, QVC.com has not had to stock any of the items, as the products have been fulfilled by drop-ship enabled suppliers already integrated to the network. Soon after this agreement, the two companies significantly expanded their relationship: QVC's core TV business has also been using the same CommerceHub technologies that have been successfully employed by its online division, QVC.com, to manage its drop-ship fulfillment program when required.

However, the QVC relationship has by no means been exclusive for CommerceHub. With nearly a decade of experience working with Top 25 retailers and a wide array of major brand name suppliers, CommerceHub nowadays manages nearly $1 billion (USD) in goods annually on behalf of such industry leaders as Costco, QVC, ShopNBC, Staples, Circuit City, eToys, Kmart, Macys/Federated, Sears, Target, Walgreens, Dell, Toshiba, Sanyo, Kohl's, Home Depot, and so forth. In addition to this Who's Who of retail clients, other customers include major manufacturers (and suppliers of the above retailers) such as Gateway, Minolta, Coleman, Seiko, and Little Tikes.

This leads us to another possible value proposition of CommerceHub, which would be that it can provide some help in finding trusted drop-shippers and manufacturers for prospective online merchant clients (whose search on their own could be futile and frustrating, given that competitor merchants typically guard the identity of their wholesalers as proprietary secrets). Commerce Hub has a community of about 2,500 merchants, vendors, and products, and a new merchant customer can chose from such well-known brands as Titleist, AT&T, GE, Samsung, Nintendo, Wilson, Sony, Black & Decker, Canon, Microsoft, HP, Seiko, and the like. This is yet another value add that the vendor offers over traditional VAN providers such as SPS Commerce, Inovis, Sterling Commerce, and Mercury Commerce, which until recently have been mainly focused on the business connectivity ("plumbing") aspect of VANs.

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