Improving and Expanding: The Road Ahead for a Drop-ship Facilitator

Recent Developments

The year 2005 marked several major customer wins for CommerceHub (http://www.commercehub.com), an Albany, New York (US)-based provider of hosted supplier integration and order management services for multichannel retailers. 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. 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.

For more background information, see A Drop-ship Enablement Pioneer Leads the Way.

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

The company (now employing about seventy) also forged a partnership with Home Dcor Products, a renowned online retailer of home improvement products. Consequently, revenue grew 50 percent over the previous year, and the transaction volume grew by nearly two million orders year over year. CommerceHub charges the retailer customer a one-time $75,000 (USD) charge to set up the private exchange, and thereafter both the retailer and supplier are charged $0.50 (USD) per order, whereby one can do the math and realize a healthy business model with a recurring revenue stream.

In the second half of 2005, CommerceHub introduced its Partner Relationship Management (PRM) application. As part of CommerceHub's Drop-Ship Master solution, PRM should help retailers more effectively manage their trading partner network by giving them centralized and complete visibility into many facets of their relationships. Until now, retailers have had limited visibility into supply chain and fulfillment performance patterns, partner connections, and testing status, as well as partner profile information. With the launch of PRM, CommerceHub claims that its retailer customers should gain a holistic view of existing partner relationships, and improve their ability to establish new trading connections, allowing them to manage and grow their extended supply chains more efficiently. Retailers should gain invaluable insight into their supply chain networks through reports and scorecards that will provide a performance snapshot for individual partners, groups of partners, and even the entire supply chain. Additionally, retailers will be able to directly compare a partner's performance against other partners, groups of partners, or the entire supply chain, which should enable a retailer to ensure it has the best partners possible in its extended supply chain.

The Drop-Ship Master PRM application includes the following new features:

• Supply chain performance: This includes graphical performance reports, historical trends, supplier scorecards, and so on, whereby retailers can see the bigger picture of how their supply chain is performing over time.
• Drop-Ship Master Executive Dashboard: This should help retail executives obtain a more complete view of supply chain performance by giving them immediate business intelligence (BI) regarding the status of their overall fulfillment operation in a single view.
• Connection Status Tracker: This feature allows retailers to track partners' on-ramping activities, including connection status, testing history, and more.
• Partner portfolio: This provides access to specific information about a retailer's trading partners such as up-to-date contact information, geographic location, warehouse information, hours of operation, and more.

The announcement of the PRM launch came on the heels of the announcement in late 2004 of the availability of Drop-Ship Master 4.0, which was a substantial re-engineering of the platform that provided significant new functionality, scalability, and flexibility for the client base wanting to handle larger drop-ship volumes with as few customer service problems as possible. With Drop-Ship Master 4.0, CommerceHub trading partners have been offered the following set of features that provide control over their drop-ship fulfillment networks:

• Visibility: This provides an integrated, bi-directional view of order flow that includes a common dashboard, customizable searches, and real-time visibility to exceptions in the fulfillment process.
• Intelligence: This feature provides enhanced management of the fulfillment process with data search and reporting tools that allow for the creation of real-time reports, summarized and presented based on user selection.
• Efficiency: This increases productivity with more efficient navigation, and an improved layout that includes customizable work screens, multitask tabbing, quick-click data access, and reporting.

Look for more enhancements along the lines of additional wizard-driven ad hoc reporting and analytics applications, and self-service setup and testing. Also, one should expect further improvements in the user interface (UI), since a good web site design (meaning streamlined site navigation, and search and checkout processes) enables the kind of sales process that best fits the customer's and retailer's needs, as does good site performance, and intuitiveness. One will indeed never achieve proper order fulfillment without a self-evident navigational structure, the right search, help, linking of the site to the support center for synchronous user support, and so on. Front-end business-to-customer (B2C) e-commerce success also requires good product information and pricing, because it is easy for Internet customers to comparison-shop. A difference of two dollars or so in the retail price of a DVD can have a large impact on sales volume when the competition is only one click away.

Room for Improvements Remains

While CommerceHub certainly has a leadership position in drop-shipping (although competition can also come from the likes of Vcommerce), most leading retailers (prospective and existing customers) have to provide for diverse and possibly more complex fulfillment methods, while creating true multichannel experiences for consumers. This means seamless, ongoing personalized interactions throughout the shopping process, including promotions, gift or loyalty card integration, technical specialist availability at home if necessary, real-time online availability, pricing and line item shipping status for business partners and customers, and so forth. There should also be a number of appropriate financial services available, such as payment gateway, merchant account, fraud screening, and business payment services. Thus, some other, better rounded players might provide a better fit with their offerings, especially in light of some traditional connectivity providers like Sterling Commerce, Inovis, General Exchange Services (GXS), and SPS Commerce recently acquiring value-adding applications along those lines.

Also, traditional brick and mortar retail stores still rely on store clerks and managers to support customers, while multichannel retailers must provide similar support via call centers that are adequately staffed (so that customers do not have to be on hold for overly long periods) and available around the clock. There is a trend of moving from mere case management to translating and predicting customer needs by knowledgeable staffers, which at the end of the day might result in an up- and cross-sale rather than the loss of a customer. Some contact center applications vendors such as Amdocs, Aspect Software, Kana, ATG, and Ecometry have been responding to the needs of multichannel retailers.

The likes of Best Buy, Staples, Target, and Lowe's have been carving out niches and capturing growth and profits from multichannel, customer-centric marketing in a competitive market dominated by Wal-Mart's well-oiled retail machine. While Wal-Mart can match these retailers' growth in absolute numbers just from opening new stores, it will hardly take more business in the competitive market of serving multichannel customers with personalized shopping experiences and delivery on every complex customer's requirement.

For example, Target once had a different order management system to support each of its several direct-to-customer sales channels. Nowadays, Yantra's distributed order management (DOM) product (now part of Sterling Commerce) manages orders across all these channels, and the orders range from standard pick-pack-ship fulfillment to complex multistep fulfillment and delivery processes. Some consumer electronics retailers claim that the likes of Comergent Technologies and Yantra have been responding to a stringent requirement of click-to-release time of no more than fifteen minutes per order (measured from the time the customer clicks to buy an item online to the moment the warehouse staff has a ticket to pick and pack the order). One should also not forget about the PRM and channel management capabilities of the likes of Click Commerce (see What Does the Future Hold for PRM?).

Moreover, CommerceHub should explore a way to better accommodate the trend of online buying and delivery of personalized and customized products (for example, monogramming, engraving, and the like). Also, it should investigate how to better enable delivery of computers, digital televisions, and imaging and entertainment software, which are all the high-end, configurable, service-rich products. All these products require a supply chain that delivers products and information as needed and as promised. In other words, cross-channel promotions, Web self-service and guided search, integrated sales and service touch points' might all be coordinated at, say, Best Buy via its DOM solution, again provided by Yantra. A threat might also be coming from the rapidly maturing PRM, order management, and fulfillment applications fro, traditional enterprise resource planning (ERP) providers such as SAP, Oracle, Microsoft (see Microsoft Business Network (MBN)—Coming of Age?), IBS, Infor, Epicor, SYSPRO, and so on.

One of the ways in which many successful retailers have been able to achieve the goal of a single channel for multichannel customers (as well as the goal of automating supplier relationships) has been to pay paramount attention to product data quality. The goal in this regard is to concentrate data in one location as one repository for all product information, which drives the financial, logistics, and legacy systems. Sears reportedly has one vendor master file that holds payment terms, contact information, electronic data interchange (EDI) routing and setup information, insurance requirements, and so on. In the field of product information management (PIM), Sears has worked closely with QRS (now part of Inovis) to address the problem of global data synchronization (GDS) between retailers and suppliers.

Accurate product descriptions, specifications, pictures, and so forth, should give consumers and business partners more confidence that they will receive exactly what they want. Consequently, product categories beyond traditional books, CDs, DVDs, and games are becoming more popular for multichannel retailing. QRS, which keeps a file of 90 million universal product codes (UPCs), is the bridge between disparate product information protocols used by suppliers and the single repository Sears prefers. For more information, see The Role of PIM and PLM in the Product Information Supply Chain: Where is Your Link?. CommerceHub's response to this requirement has so far been a casual partnership with Cardonet.

Last but not least, in the long term CommerceHub holds the promise of becoming the backbone for the bigger picture of collaborative planning, forecasting, and replenishment (CPFR), trade promotions, new product design and introduction (NPDI), sourcing, procurement, and so on, but given its current size and low global brand recognition, the vendor is still far from being a leader in these enterprise applications areas.

User Recommendations

Retailers with a need to outsource their fulfillment operations should evaluate CommerceHub's functional capabilities as a way to leverage a single integration platform for their fulfillment chain, regardless of where goods are being shipped from. This especially includes those dealing with small and medium sized manufacturing and distribution businesses as suppliers, which have unsophisticated business-to-business (B2B) integration practices, but which need to flexibly connect with their trading partners, with demand-driven supply chain concerns. Potential customer benefits could come from a relatively quick product assortment expansion, since a retailer should be able to fairly easily plug into new trading partners (distributors, suppliers, and manufacturers) and to add new products without taking on additional inventory risks. Also, in this way all trading partners should not have to make major additional investments in technology, since the platform eliminates expensive point-to-point integration, by establishing a single connection to the supply network and enabling suppliers to easily produce the retailer's branded labeling and packing slips. Some operational improvements frequently cited by existing customers entail lower total delivered costs; improved fulfillment performance, productivity, and customer satisfaction; eliminated manual processing costs; decreased inventory, carrying costs, and customer service expenses; and reduced backorders and returns processing costs. This allows the retailer to focus on its core business competencies.

Retailers must start with an understanding of what will generate the most revenue and profit across multiple channels: e-tailing Web sites must not be seen as totally independent of other channels, but quite the contrary. Web storefront usability should be addressed first, but the focus on PIM or GDS and cross-channel inventory visibility and fulfillment infrastructure should follow soon. It is certain that multichannel retailers will attract new business, on the condition they continue with good delivery service, wide product and service selection, and reasonable price incentives.

The main challenges in drop-shipping center around electronic integration, visibility, and exception management, which the likes of CommerceHub seem to handle well. The next challenge is to optimize the set of partners that make up a drop-shipping network, where 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 the processes are going to be coordinated and how exceptions are going to be 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 each other, processes will have to be fine-tuned too.

Retailers that do not have Wal-Mart's clout to impose their own vendor manual full of rules for their drop-shippers should exercise caution in partnering with drop-shippers. In addition to these businesses' viability, merchants must thoroughly research their quality tracks too. They should scrutinize facts like the missed shipping rate, how often the supplier accidentally ships the wrong product, and the quality of the merchandise (many wholesalers will accept returns, only to then put them back on the shelf for future sales, just to displease another customer with "re-gifted" defective goods). When looking for a wholesaler or supplier, the retailer should occasionally place a test order, which 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 end shopper satisfaction.

This concludes the series A Drop-ship Enablement Pioneer Leads the Way.