Fulfillment and Contact Centers: Making the Internal vs. Outsourcing Decision

Many multichannel merchants continue to find that their internal fulfillment and contact centers are cost-effective, solid strategic fits. However, a growing number, large and small, are exploring third-party logistics (3PL) as an alternative to expanding staff and facilities and ongoing investments in technology upgrades.

Is 3PL for you? An informed decision based on “apples to apples” comparisons requires in-depth analyses of your current internal operations, as well as potential 3PL options, for four core factors: costs, technology, expansion plans and scalability of present facility, and achievable service levels.

Analyze internal costs
To establish key, comparable metrics, measure your internal contact center’s costs in terms of total cost per call, per order and per contact. Measure total costs for backend fulfillment (including warehousing, order fulfillment, returns processing and other functions) in terms of cost per order, per box shipped and per unit processed.

To arrive at those metrics, you’ll need to use actual or budgeted, fully-loaded costs. For the contact center, these include all cost items within:

  • Direct and indirect labor (recruiting, benefits and payroll taxes, vacation/overtime pay)
  • Occupancy, utilities and phone/communications
  • Equipment and software (depreciation/amortization/leasing)
  • IT (programming and operations support)

The fulfillment operations cost analysis should include all of the above, plus packaging supplies.

In addition, because of their complexity, outbound shipping costs for both internal and outsourced fulfillment should be analyzed as a separate item to enable a clear assessment of their impacts. Determine how these costs will vary based on the locations of potential outsource providers’ facilities, and compare these with outbound costs for your internal fulfillment center. (You’ll find that many 3PL providers can pass on significant transportation/freight savings due to the combined volume of their clients.)

Define your strategic needs
The outsourcing bidding or request-for-proposal (RFP) process requires providing 3PL candidates with a company and product profile that details your current business and service needs/requirements, as well as those associated with your strategic growth/expansion plans, service-level goals, and any desired capabilities enhancements.

To provide context for comparing/analyzing the options once you’ve received provider bids, you should also assess projected investments/costs (physical space, staffing, equipment/technology, etc.) for continuing to perform fulfillment/call-center operations in-house, based on your strategic plan/goals.

Conduct initial provider research
In addition, you’ll need to do some research on the available 3PL options to find which are most likely to meet your needs and participate in the bidding process.

One key example: Many 3PLs offer backend order fulfillment and strong warehouse-management systems, but not all have their own contact centers or order-management systems. Some offer these services by partnering with a contact-center provider. If you’re considering outsourcing some or all of both operations, are you are willing to be serviced by multiple 3PLs, or do you prefer/require a single provider?

Getting bids from 3PL providers
Fulfillment and contact-center providers use pricing menus. All candidates’ bids should include a list specifying the price for each required service, based on the business needs detailed in your company/product profile.

At minimum, the company profile for your contact center should include:

  • All services required (including whether you want live-chat)
  • Number of calls
  • Call-to-order ratio
  • Number of emails received and sent
  • Estimated customer service correspondence volume
  • Desired service-level metrics/standards

For fulfillment services, you’ll need to supply:

  • All services required
  • Number of orders
  • Number of wholesale orders, and direct-to-customer or retail replenishment orders
  • A detailed order profile for each channel
  • Number of boxes shipped
  • Number of receipts and total units
  • Storage requirements (averages for pallets/units on hand, versus peak periods)
  • Desired service-level metrics/standards

Specifying service-level metrics

Here are some of the key service-level metrics you should require from 3PLs (and your internal operations):

Contact center:
Call abandonment rate: 2% to 3%
Call-answering time: 80% to 90% answered within 20 seconds
Number of chat sessions that can be handled at one time: three to five

Same-business-day customer order processing for in-stock product: 50% to 70% (and all in-stock orders within 24 hours)
Receipts for in-stock orders: one day (four hours is the best-in-class standard)
Receipts for back orders: same-day cross-docking and shipping
Returns: 24 hours for all steps (inventory disposition, return-to-stock, customer service)
Error rates: less than 0.2% to 0.5% of shipments

These standards—and the specifics of how they will be measured/assessed—should be written into the performance section of all 3PL contracts.

Some real-life cost proposals
3PLs’ proposed costs will be based on your company’s profile, including required services, order and transaction volumes, and service level-standards. However, for general information purposes, some examples of actual outsourcing bids (for three of our clients) may be useful. These are fully loaded costs.

For a small apparel company with 24,000 active SKUs and annual volumes of 125,000 orders and 75,000 calls, total cost-per-order bids for combined call-center/backend fulfillment services ranged from $5.98 to $9.01.

For a health/beauty merchant with 300 products and 200,000 annual orders, using 530,000 contact-center minutes annually, total cost-per-order for contact center and fulfillment (excluding shipping costs) ranged from $7 to $8.60 across three bidders. On the shipping front, outsourcing will save this company an estimated $125,000 per year.

For a large apparel b-to-b wholesaler with 5,000 products and 200,000 orders (800,000 cartons) annually, bids for backend fulfillment only ranged from $6.07 to $10.14 per order.

For comparison purposes, our proprietary database shows that internal fulfillment costs vary widely, depending on order volume and efficiency levels. In efficient companies with annual sales exceeding $25 million, the fully loaded (excluding IT and shipping) cost-per-order ranges between $9 and $12. For smaller companies lacking sufficient year-round sales volume to amortize overhead and other costs, the cost-per-order can be $15 or more.

Which functions are candidates for full/partial outsourcing?
In rare cases, business realities may rule out exploring outsourcing an operation or specific function. For instance, for a consumer electronics merchant, outsourcing fulfillment is probably worth exploring, but outsourcing the call center may not be realistic due to the level of product/tech training and expertise required for quality customer service.

However, the optimal solutions for a given company generally become clear only after a formal bidding/analysis process.

On the whole, in large part because of the growth of Internet-based sales/order-taking, many more companies are outsourcing contact centers than backend fulfillment. One reason: Contact-center outsourcing can be an attractive alternative to upgrading order-management systems to meet Level 1 PCI/DSS certification standards.

For one small retailer with five stores, a fall/holiday catalog business and a web business, we found no cost justification for outsourcing backend direct order and retail replenishment (although there were large 3PLs in close proximity). On the other hand, it was clearly far more cost-efficient to outsource calls than continue to operate/staff a small contact center in a large metro area.

That said, as with call-center operations, leveraging the volumes and efficiencies possible by outsourcing fulfillment can often yield significant savings.

Again, for some, there is real advantage in not having to absorb overhead costs during off-peak periods, which may span half of the year. (Conversely, some large companies outsource some fulfillment during peak periods to cost-effectively meet their labor needs and expand their distribution-center network.)

3PLs’ lower, volume-based shipping costs can produce substantial savings, particularly for small- to mid-size companies. Additionally, some specific business needs may be handled more cost effectively by an outside provider. For instance, if your strategy calls for delivering to a high percentage of customers within a day or two by ground shipment, using a 3PL may be an alternative to opening company-run fulfillment centers.

There may also be management time/labor cost advantages. For instance, a 3PL relationship might be overseen by a liaison manager, rather than a director/VP of operations.

Letting go of assumptions and control issues
Too often, companies fail to realize potentially significant cost savings and/or revenue-enhancement opportunities because of entrenched assumptions that may no longer be valid—and/or fears associated with giving up internal control of contact-center and fulfillment operations.

Here are two perceptions/concerns frequently voiced by owners/managers, and the objective realities:

Perception: “We can perform these fulfillment/call-center operations more cost-effectively internally.”

Reality: Until you do detailed, reality-based internal/outsourcing comparisons in today’s environment (too much has changed to rely on analyses conducted even a few years ago), you can’t know whether or not this is true.

Perception: “We will lose control of our customer service/fulfillment standards, alienate our customers and lose business.”

Reality: The client can exercise close control and ensure that its standards are met consistently through the contractually specified standards detailed above.

Regarding customer service, some 3PL contact centers are willing to use the client’s order-management system, as well as be online with security control for all transactions. You can fully and seamlessly serve customers by giving the 3PL access to customer records, orders and returns, shipping information and inventory availability. Your contract should also include the ability to monitor customer calls and survey customers on their experiences.

What matters to customers is that they continue to experience seamless, quality service. And with rare exceptions (like highly specialized knowledge/training requirements), that’s quite achievable in a 3PL relationship.

Curt Barryis president ofF. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm.

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