Ordering Out

Jun 01, 2004 9:30 PM  By

SOME COMPANIES KEEP ORDER FULFILLMENT — and control — at home, while others turn to outside contractors for creative, custom-made solutions to handle all or part of their operational functions. Whether that means bringing a third-party provider in-house, teaming up with merchants that have opposite business cycles, or sharing space with competitors, savvy companies do whatever it takes to streamline fulfillment. This month, six direct-commerce operations executives discuss the pros and cons of using third parties to fulfill orders.

1

One of our titles, Boston-based puzzle cataloger Bits & Pieces, outsources order fulfillment entirely. As Bits & Pieces is a holiday-oriented business, they outsource to another catalog company that has a countercyclical seasonal flow, with higher-volume business in the spring. Even though order fulfillment is outsourced to a third party, it operates like it is Bits & Pieces’ own business, because their entire inventory is with one outsourced vendor in one facility.

When we acquired the title [in 1997], the original owners had outsourced fulfillment. They were more interested in the marketing end of the business, and didn’t want to take on the operational logistics of doing fulfillment. Since outsourcing had worked out so well, we decided to leave it that way. There’s no reason for Bits & Pieces to take fulfillment in-house at this point.

Overall, at The Paragon catalog, we typically would not outsource order fulfillment to a third party since we would have to decide who would fulfill orders on an item-by-item basis, providing inventory to them for the portion of orders they were fulfilling. Instead, we rely on Paragon or temporary employees.

The disadvantage of outsourcing is that you lose a bit of control. You don’t have your own people managing the entire process and delivering the kind of customer service and satisfaction that you would deliver. The advantage is that outsourcing is more flexible in meeting your needs in terms of quantity.
Steve Rowley, President/CEO
Paragon Holdings
Westerly, RI

2

I have done order fulfillment both ways — in-house and through outsourcing — at various companies. Paul Fredrick does everything internally. With a small or mid-sized company, I prefer having the entire operation under one roof. The managers of those areas are truly part of your management team. They live the culture, understand the service levels you expect, and participate in the training activities. The merchandise is on hand, the buyers are here if you have questions — everyone is on the same page.

Outsourcing, however, can help a company to avoid making capital investments. I experienced this working at Exposures, a picture frames and gift cataloger where I spent five years. Exposures was founded and developed with venture capital investment support, and because the end game plan was to make a profit on selling the business, they were not keen on making an investment in bricks and mortar. Also, once you get to a certain size, perhaps the economies of automating a lot of the functions are cost prohibitive, and it may be worthwhile to consider outsourcing.

The disadvantages of outsourcing are that since it’s not at your facility, you don’t have day-to-day oversight. You lose the communication between the call center and customer service people and the fulfillment folks. Also, at the companies where we’ve done it internally, we’ve always been able to do it for less. A third party needs to make a profit on pick, pack, ship — that’s what they do for a living.
Allen Abbott, Senior VP, Marketing
Paul Fredrick MenStyle
Fleetwood, PA

3

At [shoe cataloger] Aerosoles, we have a third-party service provider, Distribution Management Group, which fulfills orders for us. All of the orders are taken on our system, and we transfer the data into DMG’s warehouse management system. The people doing the picking, packing, and shipping work for DMG. We lease our space in the warehouse from DMG. DMG also fulfills orders in the warehouse for two of their other customers, who are competitors of ours, but we don’t care as long as they get our orders out.

Our partnership goes back to the inception of the company. The CEO, Jules Schneider, chose not to do the order fulfillment in-house. That was not his forte, and he preferred to outsource to a company that specialized in order fulfillment. Schneider required that fulfillment be in the same building because he wanted to be able to see it and touch it.

We have a contract and pay monthly for base-point transactional activity. We resolved that it’s better to outsource from many points of view — they have to deal with labor unions and have the expertise to manage order fulfillment.

The disadvantage of outsourcing is that whenever there is an issue like a misplaced label that causes a chargeback, we really have to be keen on catching it. If the outsourcer’s job is to pick, pack, and ship, they are not necessarily going to focus on those issues, and we need to be ready to react to a problem and address it.
Andrew Scott, VP,
Operations
Aerosoles
Edison, NJ

4

The best reason to outsource your fulfillment is that you really save a lot of money because you know what your fixed costs are — you know it’s X amount per order. Make sure that the company you choose is the best at what they do because that determines whether it’s a painful experience or a great marriage. We’ve had both. Currently, we use Demis Products, a wood products manufacturer in Lithonia, GA. They were fulfilling their own orders as well as orders for a few other small companies, and manufacturing for us. I offered to pay them $6,000 a month; they ship whatever I need shipped.

Another advantage to outsourcing order fulfillment is that I don’t have to deal with personnel problems. The outsourcer can hire and fire — the bottom line is that they have to provide me excellent service based on the price that we agreed on. If I do fulfillment here, when I get a 40% cost increase in health insurance, then that affects my fulfillment cost, whereas if I’ve made a contract with somebody for three years to fulfill my orders for $2 a box, then the cost is not going to change.

The downside of outsourcing is that you lose the everyday contact with your business and the direct contact with that customer. You don’t see your packages going out or get the consumers’ notes that they put in their returns. And let’s face it: Customer service is what really keeps your customers coming back.
Paul Benamy
Executive VP, Benamy International Atlanta, GA

5

We outsource all order fulfillment to Plano, TX-based PFS Web. The orders are taken in Plano through the call center and shipped out of their shipping facility in Memphis.

The biggest advantage of outsourcing is the financial savings. We’re taking advantage of their ability to handle us during lower periods of sales when it has typically been more costly for us to fulfill an order. We’re primarily a gift catalog, so we’re a big fourth-quarter business, and there were months through the summer when we lost money fulfilling orders. Now, our fees are based on transactions, so whether we do 100 or 1,000 orders a month, we pay the same cost per order.

We’ve gone from having order fulfillment in-house to using a third-party provider. A disadvantage of outsourcing is that there’s a lot more involvement than most people realize. You don’t just turn over your entire business. You do a lot of monitoring and they do a lot of reporting. When an outside provider takes the calls, if there is a problem, it’s a little slower to get the information to the right people and to make a decision. If there is a problem with the product, they’ll take the call in Plano, the buyers are here in DC, and fulfillment is in Memphis. We have to notify someone in Memphis to go and take it out of stock and look at it, and it takes time before the issue is resolved.

When the facilities are all together, you can immediately have someone on the phone contact your manager, the manager contacts the warehouse manager, they look at it, the buyers are there and take a look at it — you have immediate resolution for a problem.
David Giovarelli, Office Director
Smithsonian Catalog
Washington, DC

6

One pro of outsourcing order fulfillment is that you can leverage infrastructure. If you are doing it yourself, you typically have to own or lease the building, the infrastructure — including the systems and technology — and all of the ancillary equipment that goes along with it (the forklifts, the rack shelving, etc.), which is a considerable capital investment. By taking advantage of companies that focus exclusively on fulfillment, you don’t have to focus on non-core competencies.

The disadvantages are that you lose some of the control because you are investing in a partnership and you have to have a partner you can trust. Aside from due diligence, gaining this trust is always like a “chicken-and-egg” problem. A company has to be willing to take the dive to get the outsourcing experience, but once they do it they become pretty skilled at it and learn which companies are good at whatever types of outsourcing they’re considering, and it just gets better and better.

Outsourcing is appropriate for companies that have heavy fulfillment needs that aren’t part of their core competencies. It’s the right time to outsource if you can’t focus on your core business. For example, we’re in a business where we sell widgets, and all of a sudden we can’t focus on the next-generation widget because we’ve got all these distribution problems. We then search for outsourcers who can help us while we focus on building the next-generation product.
Todd Bartlett, Senior VP, Operations
ClientLogic
Nashville, TN