The More Things Change

Historically, the direct-to-customer fulfillment industry has tended to view the outsourcing of fulfillment operations as unacceptable. That attitude is rapidly changing as the third-party fulfillment (3PF) services marketplace is transformed, largely by e-commerce. 3PFs now represent a viable operating alternative for direct commerce companies with in-house operations.

At present, fewer than 2% of U.S. DTC businesses employ a third-party fulfillment supplier. The rationale is that a company should concentrate on its core business and leave other functions to outside specialists.

Clearly, the 3PF industry has suffered over the years from an image problem. One widely held misconception is that 3PFs do not possess the financial and management resources to develop sophisticated and scalable IT and material handling capabilities. Other beliefs are that 3PFs are not cost-competitive with well-managed in-house operations, and that DTC businesses view contact with the customer as a strategic or core competency and not as a tactical or non-core function.

No more disrespect This negative image of the 3PF industry is no longer justified. E-commerce actually places a premium on virtual enterprises, and as a result, the size of the 3PF market is expected to grow from $350 million in 1999 to over $10 billion in 2005. The number of service providers has increased dramatically in the last two years. In addition, these new service providers are larger, more sophisticated, and better financed than many of their predecessors.

Among direct-to-customer businesses, the typical users of outsourced fulfillment services have been small start-ups. A 3PF can supply these start-ups with a level of fulfillment expertise and scalability that is difficult for most new ventures to duplicate. Plus, the 3PF can implement a new program quickly: Once selected, an outsourced fulfillment operation can be up and running in two to three months. Service fees are usually variable, with only minimal installation charges and ongoing fixed costs. The three examples listed below exemplify the different types of 3PFs that can be found in the market:

NewRoads is an example of a new “roll-up” company. It is privately held and formed by the acquisition of several traditional, established 3PF companies, including National Catalog Corp., QuikPak, Interactive Marketing Services, and others. The resulting company has 21 facilities throughout the United States, with about three million sq. ft. of distribution space and over 1,500 CSRs in its customer interaction centers., founded in 1999, is a start-up 3PF company established to provide services to the e-commerce sector and funded by Silver Lake Partners and The Barksdale Group. SubmitOrder has two facilities with a total of more than one million sq. ft. of distribution and storage space and a daily processing capacity of 200,000 orders. Call center services are provided from two centers, one in Ohio and one in Florida, with a total of over 700 stations between the two.

Keystone Internet Services is a 3PF provider established in 1997 as a division of direct merchant Hanover Direct, Inc. Keystone has call center and distribution facilities in Pennsylvania and Virginia, as well as a newly acquired operation in Arkansas. The company boasts more than 1,000 call center stations and about 1.7 million sq. ft. of storage and distribution space. A proven legacy system, MACS, runs on a HP platform and offers real-time updates to customer, inventory, and shipping records, in addition to e-commerce support.

Although not all 3PFs operate on the scale of these three examples, most can provide a wide range of functions necessary to support a DTC business, including:

Telemarketing: Receive customer calls; respond to customer service inquiries; perform computer entry of orders, and operate 24 hours a day, 7 days a week.

E-commerce: Retrieve orders directly from client’s Web site; provide access to inventory and customer history; provide shipment tracking capability; and manage e-mail communications.

Order processing: Receive and process orders; authorize credit cards electronically; and key and reconcile orders.

Customer service: Respond to customer inquiries and process adjustments such as refund checks and cancellations.

Information services: Create shipping directives; maintain backorders and prepare FTC notices; produce inventory control, marketing, and financial reports; and build and maintain a customer file.

Physical fulfillment: Receive, inspect, and warehouse merchandise; pick, pack, and ship orders; and receive and process returns.

Special services: Perform marking and pre-packing functions when required; take physical inventories; and pack and return merchandise to vendors.

The fine print Information systems have been the Achilles’ heel of the typical fulfillment contractor. Few service companies were either willing or able to make the investment in an IS capability that could fully support the complex processing and reporting requirements of a direct commerce enterprise. In recent years most 3PFs have developed a systems capability that can satisfy these requirements.

Turnaround performance – the time taken to process orders and other customer contacts – is the most common service standard applied to a fulfillment operation. Most 3PFs will commit to a turnaround service level of one to two business days. They typically manage their call centers to ensure that at least 80% of the calls are being answered in 20 seconds.

In terms of costs, few small- to medium-sized in-house operations can operate at a cost per order equal to the fees associated with a 3PF. Only well-run larger operations can do business at substantially lower costs.

Unbundling The leading 3PFs have begun to unbundle their services. For example, a DTC client might decide to manage its own call center, using an order management information system and physical fulfillment provided remotely by the 3PF. At the other end of the spectrum, given the significant resources of some of the larger 3PFs, an outside contractor could assume responsibility for a direct marketer’s entire fulfillment function, including facilities, staff, and systems.

A DTC business might be well served by identifying areas of its operations that might benefit from being outsourced – specifically, fulfillment activities that are not “mission critical” and that could be replaced or augmented by a contractor with minimal risk and without increased cost or lower service and quality levels.

The more things change…

Ruth Anderson is vice president of Penns Creek, PA-based Walnut Acres Organic Farms, a catalog of whole foods and health-related products. Annual sales, $5 million-$10 million; annual circulation, less than 10 million.

The biggest change in our production process is that we’re now using digital photography for the entire book. It took us a while to start using it because we’re a food catalog, so our photographs have to be perfect. But it saves us so much time-at least a week or two-and the process is so much easier.

By reducing our production time, we’re reducing the time our designer spends on the book, so we are realizing some savings there. We’re also working with a copywriter who can just format the copy and send it to us digitally, and that saves time, too.

One place we’re definitely saving money is at the printer. We bid out our printing for two-year contracts, and the discount is considerable. We’ve also taken advantage of other services offered by the printer, including color separations, and this saves us a great deal.

Don Snyder is president of Wind & Weather, a Mendocino, CA-based catalog of weather instruments and garden decorations. Annual sales, approximately $5 million; annual circulation, 2 million.

For one thing, we went from using a remote service bureau with a drum scanner to a local service bureau using a flatbed scanner. We gained some savings, and we feel there’s no distinction in quality between these methods. We’re also using lighter paper inside the catalog, dropping the weight from 45# to 40# in the inner signature. We’ll save around $32,000 between the lower paper cost and the lower postage cost. We’re not worried about a negative reaction from our customers. We’d have to lose about 1-1/2% in sales to negate the savings, but we expect not to lose any.

In general, our production costs have edged downward a bit. It seems like the printers we deal with are experiencing some idle press time, so we think we can keep reducing our production costs. We’re considering a slight reduction in trim size to further cut paper and postage costs. Right now we buy paper from our printer, but we’re looking at buying it ourselves, or at least negotiating prices with our printer.

George Emmons is president of kite catalog Into the Wind, based in Boulder, CO. Annual sales, less than $2 million; annual circulation, 600,000.

About two years ago I made the change from inhouse production to having the book designed outside, and from laying out the book by hand to going computer-to-plate. I’d been doing the production myself, so we definitely didn’t save any money by hiring an outside designer, but I’d been putting off going digital for about three years. We were lagging behind the technology, and we couldn’t wait any longer. We still use regular photography, though, because for outside shots the quality of the digital camera shots isn’t there yet.

We’ve also changed formats from a digest to a slim-jim, and this year back to a digest. The costs don’t vary significantly, but the digest layout just works better for us because we don’t want to show more than three items per page.

Carole Ziter is president of Burlington, VT-based Sweet Energy, a mailer of food catalogs and newsletters. Annual sales, $2 million; annual circulation, 700,000.

Not much has changed, although the price of paper has certainly gone down a bit. We still produce the catalog the same way that we’ve always done it, and we’ve been using the same service bureau to produce film for the last six or seven years. In fact, it actually costs less now, because we have some products we don’t need to reshoot. I’m in the food business, so apricots are apricots, and if I have a good photograph, that’s what I use.

Richard Zontag is president of McClure & Zimmerman, a mailer of flower bulbs based in Friesland, WI. Annual sales, less than $10 million; annual circulation, less than 500,000.

We added a separate spring bulb catalog this year, instead of including a supplement to our fall book as we usually do. The new catalog did well enough to mail again, and this year we’re going to use a slim-jim format instead of our standard 8-1/2″ x11″. The trim size reduction plus a break in postal regulations will make it even cheaper than last year’s mailing.

Like the core M&Z catalog, the bulb book will be black-and-white with a two-color cover and illustration artwork-no photography. Our artist creates the illustrations, and we scan them into QuarkXPress. From that point on, we’re already fully digital.

Bill Heyman is vice president/co-owner of Supreme Audio, a Marlborough, NH-based catalog of professional audio equipment. Annual sales, approximately $2 million; annual circulation, 140,000.

Our costs were not significantly different this year, although we’ve increased circulation modestly. In fact, I was surprised that costs have remained so steady. Our manufacturing costs per book increased exactly 7/100 of a cent.

As for changes, we’re using more manufacturer-provided line art than photos. Some of my suppliers send me a CD-ROM with line art illustrations of all their products, and the result is definitely superior. You can now read every function button on these units, and to my customers, that can make all the difference. And our costs stay the same. We’re not using CTP yet-my understanding is the size of our runs is too small to really benefit the way a bigger mailer would.

How has the production of your catalog changed in past year? Catalog production has reached a peculiar crossroads. New technology such as computer-to-plate (CTP) and digital photography can speed the process, eliminate steps, and ultimately reduce costs, but not without some investment on the part of catalogers and printers. Meanwhile, because conventional printing technologies remain available and costs have held steady, some catalogers haven’t felt compelled to change their methods. So at least for now, the new and the old will co-exist. But no matter how this month’s forum participants produce their catalogs, the one thing they agree on is that amid all the changes and the new production options available, their costs and their catalogs remain largely unchanged.