No Clue

Jul 01, 2001 9:30 PM  By

Total pricing for 3PF services is about 18% to 22% of gross sales

Following the stock market, consumer confidence indices, and recent earnings reports for clues about the future business climate is like trying to figure out “who done it” in a good mystery book. One minute you’ve got it, but by the next page something new is revealed and you suddenly don’t have a clue. This atmosphere of uncertainty has led many companies to both plan more conservatively and focus on cost-cutting measures.

Direct-to-customer merchants are no exception to this trend. Growth in retail and catalog sales has slowed, leaving many catalog companies with no choice but to scale back activity or risk going out of business. “Scaling back” for catalogers can mean, among other things, eliminating staff, reducing the number of catalogs mailed, cutting back the number of pages in the catalog, eliminating poor-selling items, and focusing on mailing to the best-performing lists and/or house file segments.

In addition to cuts in these mainly marketing/merchandising areas, retailers now have a potentially significant opportunity to save by shifting in-house operations to outsourcing. Given the current uncertain business climate and the excess capacity among third-party fulfillment (3PF) providers, it is surprising to me that more direct-to-customer merchants are not investigating outsourcing their operations services.

A promising lead

Current data varies, but it appears that between 3% and 5% of direct-to-customer retailers outsource some or all of their operations. That is an incredibly low percentage, especially given the number, size, and expertise of third-party fulfillment companies currently providing services.

The most compelling benefits associated with outsourcing would appear to be:

  • 3PF pricing structure. Companies that operate in-house services are faced with fixed costs that include buildings, a portion of wages, systems, etc. These fixed costs are especially worrisome to businesses whose order activity has a seasonal bias. The typical 3PF pricing model is a variable structure based on transactions such as orders taken, product shipped, and space utilized. This type of pricing means that a 3PF client pays for most services only when they are utilized — no orders, no order charge.
  • No need to build/update operations infrastructure. Start-up companies that use 3PFs are not faced with building an expensive infrastructure to support unknown, hoped-for order activity.
  • Expertise. Companies providing complete fulfillment services possess for the most part the expertise to provide at least comparable service levels and reporting capability of in-house operations.
  • Industry capacity. There is currently an abundance of excess capacity in the 3PF industry. Breaking this down in Economics 101 terminology, the current 3PF market can be characterized as “too much capacity chasing too little demand.” I just returned from the annual NCOF conference in Dallas, where I was amazed to see over 50 companies listed as exhibitors under the “Outsource Fulfillment” category. There are two recent entrants into the 3PF arena: Bertelsmann Services, Inc., and Spiegel-Hermes General Services.

Hot on the trail

Whatever the reason, all these companies are trying to sell in a market where there is a reduced demand for their services. This situation has led to some interesting business/market dynamics. Those dynamics — excess capacity/reduced demand — could result in 3PF pricing that is very attractive to catalogers, online retailers, and other direct marketers.

Typically, total pricing for 3PF services works out to be about 18% to 22% of gross sales, and initial contract lengths are normally two years, with automatic one-year renewals. It is difficult to say with certainty just how much impact the current excess capacity will have on prices, but an educated guess says that there will be a softening in rates. Of course, there is no guarantee that rates will be reduced at all. The important thing is that in either case, both prices and contract terms should be highly negotiable.

Who done it?

If you are interested in a complete listing of the 3PF companies that exhibited at NCOF, the information is available in the conference exhibitor listing. Some of the major players (in addition to those mentioned elsewhere in this article) include NewRoads, AB&C Group, eSpeed Fulfillment, Quality Fulfillment Services, Access Logistics, and the list goes on and on.

With so many providers from which to choose, how can you simplify your search?

It can be done, but not easily. One efficient way to proceed with an outsourcing study/search is to utilize the services of a consulting firm that specializes in 3PF vendor searches. Although you can complete your search successfully on your own, it is likely to be a daunting task.

Regardless of who conducts the search, the basic process will be the same.

  • Do your research and reduce the possibilities to a manageable number — five or six. When coming up with your shortlist, consider 3PFs with experience commensurate with your needs.
  • Consider vendor size. Several 3PF companies — Bertelsmann, Spiegel, and Access Logistics, for instance — are large direct-to-customer retailers in their own right. The issue you have to resolve is whether you want to be a rather small fish in a much larger firm. The fact that these providers are large companies does not mean they will not provide excellent service or give clients the appropriate attention. A major advantage offered by larger providers (and I would include NewRoads in the “larger” category) is their potential to gear up quickly to meet client growth.

Smaller providers offer their own advantages. They are typically more closely managed from the top, meaning more high-level attention by senior management. Smaller 3PFs sometimes tend to be more flexible in both their service offerings and their ability to accommodate clients’ special requests quickly.

Provide each potential 3PF with detailed information about your business. The list of information should be as detailed as possible and must include data on number of orders, shipments, and product and storage information, etc. Remember, the more information you can provide the 3PF, the more targeted its response and pricing will be.

Analyze the initial responses and further narrow the field to two or three. Plan to visit these facilities. This helps both parties get a clearer understanding of the retailer’s needs and 3PF’s capabilities.

Lew Waddey is a practice specialist with Spaide, Kuipers & Co. The firm provides outsource search services to the direct marketing industry, with offices in Pennsylvania, New Jersey, and Tennessee. Waddey can be reached at (423) 886-5255 or (610) 668-8296, and at waddey@spaidekuipers.com.