Today’s supply chain continues to grow in complexity, and the fulfillment strategies necessary to meet customers’ needs are likewise becoming more and more complex. Much more than just picking, packing, and shipping, fulfillment today includes a whole view of the supply chain: inbound logistics; presenting those products into retail distribution and direct-to-customer distribution operations; receiving, and managing that inventory; the traditional pick, pack, and ship operations with value-added activities such as kitting, assembly, gift-wrapping, marketing inserts, and product personalization; outbound logistics in terms of mode, selection, rate, and contract management; and finally returns handling and product refurbishment.
Combine all these elements in the direct-to-customer distribution of product with the invariable peaks and valleys of order volumes, and you have the added challenge of scale. Having in place the right systems, people, and processes to handle a peak volume spike of 40%-50% of your annual volume in a six-week period is no simple task.
All this complexity begs the question, What business is my company really in? Are we in the business of merchandising and selling product, or are we in the fulfillment business? Looking to an outside provider of fulfillment services can free up your capital and human resources so that your business can focus on merchandising and sales.
Providing fulfillment services inhouse has its benefits. Many companies simply prefer to have these processes under their roof in order to have a greater sense of control with respect to operations. They also can then drive the investments necessary to meet customer needs at their own discretion.
There are inherent benefits in outsourcing fulfillment operations, however, especially in the direct-to-customer world with its innate peaks and valleys of customer demand. With e-commerce growth outpacing retail growth by a significant factor, the ability of third-party providers to scale their operations allows merchants to deal with the issue of future capacity needs to support such explosive growth. Outside providers leverage their fixed-cost investments across multiple clients and therefore typically offer a significantly lower total operations cost. Using a third-party firm also helps merchants with working capital management–many companies look to outsourcing companies to avoid the required cash to build the operations and facilities to support their expanding customer base. Outsourcing also has the traditional benefits of lowering cost through innovation and continuous process improvement that results in improving overall customer satisfaction.
Strategically, outsourcing can help companies turn cost centers into profit centers by leveraging the provider’s expertise to increase revenue streams. Most fulfillment providers can also provide clients with the ability to move from a fixed-cost to a variable-cost model, better aligning their revenue with costs. Finally, outsourcing can give companies access to enabling, cutting-edge technologies while avoiding the capital expenditures required for such upgrades in these assets.
The third-party landscape
In the realm of fulfillment outsourcers, a large range of options exists. From the largest firms with more than 1 million square feet, national distribution networks, and high levels of automation to the smallest mom-and-pop fulfillment houses that are little more than specialized warehouses, a myriad of players are in place to meet a merchant’s specific needs. Fulfillment firms stretch from those that offer solely in the most basic pick, pack, and ship solutions to those providing more complete, or end-to-end, offerings from inbound logistics to returns processing.
Fulfillment companies’ information technology strategies also differ greatly. Many are based upon proprietary, home-grown systems, while others use commercially available software. Regardless of the nature of the systems, a key item to note is how well the company has integrated those systems into e-commerce systems, back-end systems, and other clients’ systems similar to your own.
If your company does decide to outsource fulfillment, there are several factors to consider when shopping for a provider. The primary rationale that drives most outsourcing decisions is cost, and choosing a provider based solely upon the lowest cost is a common mistake. You need to also take into account the quality of the services, processes, and additional capabilities that make a successful relationship.
First and foremost, you need to thoroughly review the provider’s capabilities and how they mesh not only with your business today but with where you expect your business to be in the coming months and years. Is its DC footprint well positioned to your customer base? Does the procider have experience fulfilling your type of product? Does it have the IT systems and experience in place to be able to seamlessly integrate with your existing technology?
Customer service is also critical. Ask to see the provider’s service-level performance against key metrics, during normal volume and during your peak season. The latest in facility automation and technology can mean little if the outsourcer cannot consistently perform at the level you require.
One significant item that is often not given enough scrutiny is a provider’s financial stability and profitability. Investing time and energy in selecting a viable partner can be utterly wasted if the provider is losing money and you face the risk of breaks in service or, worse, a bankrupt partner.
What is the outsourcer’s commitment to process excellence and continuous improvement? Without a firm commitment in this area, you may end up with a fulfillment company that will not be able to keep up with the ever-increasing needs and expectations of your customer base.
Check references. When you feel comfortable with an outsourcer’s core capabilities, scalability, technology solutions, customer service performance, financial stability, and continuous improvement commitment, ask to speak with some of its existing clients.
Finally, the most important criterion is the people. Do you have confidence in and feel comfortable with the team you will be working with? A fulfillment provider is an extension of your brand and a true partner in your business, and you need to be confident that its employees understand your brand and will deliver to the exacting standards your customers demand. When things invariably go wrong or demand far exceeds your forecast, you need a partner you can rely on that will do whatever it takes to get the job done. And that, of course, is why the people are the most important.
Tom Barone is executive vice president, marketing and business development for Huntersville, NC-based Accretive Commerce, an outsource service provider.