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The Challenge of Fulfillment

Written By: Predrag Jakovljevic
Published On: August 14 2006

Introduction

Genuine, integrated multichannel retailing will inevitably become the norm, so that if a customer does not see the desired appliance model (for example) on the shelves, the next step will simply be to use an in-store Internet kiosk to order it from the store's web site. And at the store's customer service desk, it will be possible to return items bought online as easily as if the customer had bought them off the shelves. In an evolution from the early Internet (where online retailer ["e-tailer"] pioneers were manually processing online orders, with many consequent fulfillment glitches), fulfillment methods of today are based on a new generation of technology solutions, although these may leverage some of the ideas of traditional mail catalog order fulfillment.

Although better web design and a wider offering of online products are important, the key to multichannel success lies in understanding the factors that drive revenues and the ability to fulfill web orders. The ability to fulfill requires a strong infrastructure, in terms both of information technology (IT) systems and traditional physical stocking, warehousing, picking, and shipping practices. Some retailers such as Best Buy have been good at grasping the innate differences between virtual and physical storefronts, and have used technology to bridge that gap and enable almost painless purchase-online-and-pickup-in-store effort. Although Sears, Roebuck and Co (merged with Kmart) reportedly did not sell anything online until 1997, (and although it did not have more than one product category until 1999), the company's strategy from the beginning of the Internet revolution was to at least maintain one face to the customer—to make sure there was no rift between the "online Sears" and the "offline Sears." That is to say that Sears lets products bought online be picked up at stores; it lets those very products be returned at stores, if necessary; it allows customers to schedule service visits to the stores online; and it has near real-time inventory visibility across all stores. See Consumers Shop Everywhere: Understanding Multichannel Sales. Also see Retailing Trends—Shopping Anywhere and Everywhere.

In any case, the ubiquity of the Internet has bolstered consumers' increasing expectations for mass customization and personal care, even to the degree of expecting that virtually anything should be able to be purchased over the web. This, of course, poses a problem for online retailers or e-tailers (and even for traditional retail stores that want to engage in the multichannel game): how to effectively manage the availability of a virtually endless number of potential inventory items (to make available an infinite amount of choices via every possible combination of color, say, or size, style, and so on), so that customer satisfaction is maintained, if not constantly improved (see The Perfect Order—Inside-out or Outside-in?).

Retailers and merchants can address this perfect order fulfillment conundrum in a couple of different ways. One is more obvious, but likely more daunting: this is the task of predicting, sensing (and even shaping) customer demand, and trying to keep the optimal inventory levels in the supply chain network so that the customer can immediately pick the order from one of the supply network nodes. This is the case for traditional bulk distribution, where a retailer will buy a certain number of units from the supplier or manufacturer, which will in turn put the pallets on a truck upon manufacturing and packing completion. The retailer will then unpack the truck and put the units on the shelves (which means double-handling [at least] units between the manufacturer and retailer). At the end of the thirty days (or more, depending on the terms of payment), the retailer has a payable due to the supplier, regardless of how many units are left on the shelves. Thus, while it's advantageous to ensure the customer's instant gratification and maintain more control over when and how the merchandise is shipped (order fulfilled), the downside is the cost and risk of maintaining a huge inventory (it may still be virtually impossible to physically stock every possible item variant).

Offer More Without Stocking More?

To this end, some firms have been using certain specialized software applications to address a range of activities, including the management of item information, category planning and review, assortment, pricing, promotions, warehouse replenishment, multichannel ordering, store replenishment, forecasting, inventory and supply chain optimization, pricing management, order determination, and so on. For more information on some of these applications, see Inventory Planning and Optimization: Extending Your ERP System, Sales and Operations Planning; Part One: Identifying and Forecasting Demand, The Case for Pricing Management, and Predictive Analytics: the Future of Business Intelligence.

Some recent success for online retailers has come from their ability to tremendously improve customer service (order tracking and fulfillment), as compared to the unacceptably poor delivery record of several seasons ago, with improved efficiency (partly through the consolidation or reduction of warehouses and staff members), while also offering reasonably priced quality products across a number of segments (a wider selection). Some retailer have also announced further savings for customers by adding a free delivery option for qualifying orders over certain amount, which should alleviate much customer resentment towards the hidden costs (shipping and sales tax) that often equal the price of one item (such as a book or CD).

Still, even with the best use of these applications, which are neither inexpensive nor simple to implement (see Predictive Demand Supply), it might simply be too cumbersome or risky to physically store large quantities of some large and bulky items (such as furniture or fitness equipment), or items with short life spans, like computers and consumer electronics. One good example would be local (based in New England [US]) discount furniture retailer Bob's Furniture, which limits the number of available items and options (which in turn gives it better economy-of-scale deals for full-truck or full-freight loads, and lowers total landed costs when importing the goods from overseas). Each store has only available items on display: the item in the store is exactly the same as the item that is sold, and it is delivered in an impressive time bracket (of only a few days at most), not to mention at a reasonable price (if one is willing to forgive the retailer for its annoying and incessant local TV and radio commercials).

On the other hand, the offers of most other competitive furniture retailers may not be limited to the capacity of their own warehouses. However, the downside is typically higher nominal unit prices (if one does not count the promotional markups designed to get rid of slow-moving inventory) and delivery times of several weeks (if not months) for more particular items as a matter of course. But instead of just shipping pallets of goods to the retailer, the store's suppliers can instead drop-ship goods directly to its customers from their warehouses, albeit in the retail store's name.

User Recommendations

The main challenges in drop-shipping center around electronic integration, visibility, and exception management. The next challenge is to optimize the set of partners that make up a drop-shipping network: the master retailer has to pay particular attention to service level agreements (SLAs), including a clear understanding of the specific roles and responsibilities on each side, and of how processes are going to be coordinated and exceptions handled. For example, after how long since the supplier has not acknowledged an order should the retailer escalate the issue, or even redirect the business to another supplier? While it is important to harmonize the data that the trading partners will be sending to one another, processes will have to be fine-tuned too.

Retailers should exercise caution in partnering with drop-shippers, unless they have Wal-Mart's clout and ability to impose their own full-of-rules vendor manual for drop shippers. In addition to the viability of these businesses, merchants must thoroughly research their quality tracks too. They should scrutinize factors such as the missed shipping rate, the frequency with which the supplier accidentally ships the wrong product, and the quality of the merchandise (for instance, many wholesalers will accept returns, only to put them back on the shelf for future sales, in order simply to displease another customer with "re-gifted" defective goods). When looking for a wholesaler or supplier, the retailer should occasionally place a test order. This should determine, among other things, how the box is labeled when it shows up at the customer's door. Even after a relationship is established, some continued test ordering is advised, as well as ongoing surveying and monitoring of shopper satisfaction.

 
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