Tips for Finding Third-Party Fulfillment

Mar 29, 2010 7:30 PM  By

When it comes to order fulfillment and customer service, most multichannel marketers keep it inhouse. Just 20% use an outside service for fulfillment, according to Multichannel Merchant’s Outlook 2010 Survey on Operations & Fulfillment, and only 4% of respondents that don’t are considering it.

About the same percentage of survey respondents (22%) use an outside provider for call center services, while 14% are considering it.

But I expect to see more companies turning to third-party providers in the near future.

Why? Many companies realize that their core competencies are in marketing and merchandising, and not operations. Any lack of internal expertise or experience in this area can be supplemented through outsourcing.

Cost is probably an even bigger factor: Fulfillment costs are continuing to rise.

For some direct merchants, the cost of internal fulfillment has reached a point where it makes sense financially to consider an outside provider. By placing the fulfillment function with someone with greater volume, you can reduce potential cost increases.

For example, one of the largest fulfillment expenses is the cost incurred in shipping product to your customers. Some of the larger service providers can leverage their shipping volumes to save you money on your outbound freight costs.

And outsourcing can give merchants a leg up with technology. For instance, marketers today need to offer customers a wide variety of payment methods. This requires system support that can be found in most outsourced service providers.

Of course, outsourcing your fulfillment poses some risks, too. You’re entrusting your customer care to an outside company, which is great if it improves service levels — and detrimental to your brand if the service is not as good as yours.

You have to be sure that your fulfillment partner’s reps understand your brand and know your product line. Some merchants simply prefer to have their own employees dealing with customers if they can.

Whether outsourcing is right for your company depends on many factors. The bottom line is, you need to find the best fulfillment option that you can afford while meeting your customers’ expectations.

MAKING OUTSOURCING WORK

If you do decide to outsource, there are many service providers to choose from to meet your needs. And most third-party fulfillment companies today offer more than the traditional “pick, pack and ship” functions.

The October article “Is outsourcing an option for you?” detailed the evaluation and search process for selecting a third-party provider, including the request for proposal (RFP), checking references and finalizing contracts. You can’t underestimate the importance of finding the right partner, so here are a few more tips on that front.

  • Compare current cost levels

    Pricing is a key consideration, so make sure you have included all of your current appropriate costs in order to make a valid cost comparison to the vendor’s response to your RFP. Look for the total annual cost calculation and avoid surprises later.

    A common complaint with outsourcing is that the actual cost per order is higher than the client expected. You have to know your current costs and be able to calculate projected vendor costs as accurately as possible.

  • Make sure the provider can handle your product

    Any vendor under consideration should have fulfillment experience with your type of merchandise. There is a wide variety of fulfillment characteristics that differ from product to product.

    For instance, a third-party provider experienced with book fulfillment may not be the right fit for an apparel merchant. Typically, the ideal product for fulfillment is a high-volume, small size, nonperishable item.

  • Examine inventory capabilities

    Speaking of products, your largest asset is probably your inventory. So you’ll want to investigate the tools the potential vendor has available to accurately manage your inventory.

    Most contracts include an inventory accuracy clause, but don’t rely on this for protection. It does little good to collect monies if your credibility with your customers is damaged by poor inventory information.

  • Sample the service

    As you might expect, merchants differ in their requirements for customer service. Make sure your potential vendor can meet your specific requirements, and test the company’s service.

    If you are considering outsourcing your call center activities, listen to phone calls to determine how the customers are being handled by the vendor’s agents.

    You should also examine a potential partner’s communication strategies with its clients. The vendor’s reporting capabilities and the written and verbal communication skills and systems can be critical to success. What’s more, try to meet the person who will be responsible for the day-to-day handling of your account.

  • Go on site before signing

    Be sure to pay a visit to the operation of any potential fulfillment provider. Although you will try to define your business and its needs in the RFP, there are always issues that arise when officials at the vendor company can actually see what they will be asked to do for you. Avoiding surprises is key to increasing the likelihood of success.

    One of the most critical qualitative factors is determining if there is any “chemistry” between the vendor and your company. Feeling you can trust the vendor to do what is right will go a long way toward a successful partnership. One thing is for certain: There will be times that require the vendor to react and face unplanned issues on your behalf.

  • Look to the future

    When hammering out a contract, try to negotiate a term that makes sense for both parties. Something in the two- to three-year range usually works.

    As part of the contract, make sure you address some control of future price increases. An initial “lowball” cost may not be in your best long-term interest.

Keep in mind that even if you outsource, you will still have to be an active participant in your back-end operations. Don’t assume that because someone else is meeting your fulfillment needs, you will not spend any time managing the process.

Four signs you should take a look at outsourcing
  1. The fulfillment function is not the core competency of the staff.
  2. Internal fulfillment costs have increased to the point where it would be cheaper to pay someone else to handle it.
  3. Seasonal spikes in your business require a significant short-term ramping up of fulfillment capacity.
  4. You’ve experienced rapid business growth without the resources required to meet the fulfillment needs of this growth (which can sometimes turn into unprofitable growth). — CB

Many clients are surprised at the amount of time required to manage a third-party service-provider relationship to make sure it works properly.

What happens when the relationship doesn’t work out? It’s always difficult to change outsourced vendors. The physical transition as well as the emotional trauma can be significant. That’s why the time and resources required to change make it imperative that you make the right choice.

But if you find that it’s necessary to move to another vendor, make sure the terms of how you separate are clearly spelled out in the contract. Remember that it is easier to get married than it is to get divorced.

Curt Barry (cbarry@fcbco.com) is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy.