The More Things Change

Jan 01, 2001 10:30 PM  By

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.