Follow these principles to ensure that customers get royal treatment, whether you are a third-party services provider or an e-merchant seeking top-to-bottom expertise in DTC fulfillment

Being a may no longer have the cachet it used to, but there’s no question that electronic commerce is here to stay. Just about every direct-to-customer merchant sells through an online channel and faces the order fulfillment hurdles that go with it. Whether you are a brick-and-mortar retailer, manufacturer, or pure-play e-merchant, you’re unlikely to survive today’s market shakeout, much less end up king of the hill, unless you build a flexible, customer-oriented fulfillment operation.

In the online DTC business model, attracting and keeping customers requires both virtual and physical assets. The virtual assets are related to attracting customers (catalog, Web site, infomercial) and processing transactions (e-commerce engine, call center, real-time inventory availability, credit authorization and settlement) and are generally limited by ideas, time, and money – that is, the ability to get things programmed, printed, or produced.

Get real It is the physical assets, including inventory and its distribution, that challenge most organizations. Availability of buildings, resources in those buildings, and manufacturing lead times and delivery schedules determine how a company handles its physical assets. Warehouses have specific lead times for operations, ranging from how long it takes to build a facility to the time it takes for throughput of goods from the receiving dock to availability for sale. Manufacturers have the same problem with lead time in the raw-material-to-finished-goods process. In macroeconomic terms, virtual assets are in infinite supply if you can find people and money, whereas physical assets not only require people and money, they are in finite supply and need significant lead time to build.

Because of these constraints, businesses that already operate distribution centers or brick-and-mortar stores may choose to start shipping orders from those facilities. However, most will find this task to be overwhelming in a short period if their facilities are not set up for DTC order-taking and shipping – and let’s not forget about returns. That’s when merchants must choose either to build dedicated internal facilities for direct-to-customer shipping or outsource the entire fulfillment function to a third-party logistics provider. Many direct marketers, wary of the rocky online retail landscape, have decided to outsource their e-fulfillment. There are now over 200 third-party fulfillment (3PF) providers in the United States. Clearly, supply is starting to catch up with demand.

Like any other business, third-party fulfillment is about relationships. It’s about exceeding the expectations of the businesses for which the provider is shipping packages, as well as exceeding the expectations of the customer who sent in the order. Today 3PFs are enjoying a market of high demand. But even when the supply outweighs the demand, it will remain difficult to find the outside contractor who is just right for your business.

Each 3PF typically has its own specialty. One company may be exceptionally good at getting fragile items to its clients in one piece, while another is focused on shipping multiple items in the same package. Another may specialize in same-day or next-day shipping, and a fourth will be superb at low-cost, high-volume batch processing. Usually, the broader the capabilities, the higher the cost of providing those capabilities. Most companies that consider outsourcing their direct-to-customer fulfillment view the decision as a means to an end: “How do I get my goods to the consumer in a timely, cost-effective matter?” Cost becomes the primary driver. But the question they should ask is, “What experience do I want my customers to have when they order from my company and get this package?” In many cases it is also prudent to ask, “How do my customers return this product if they don’t like it?”

Information please Whether ordering online, or from a catalog, an infomercial, or other direct marketing offer, the customer wants to know when his or her order was processed and when the package should arrive (increasingly, the Federal Trade Commission would like to know this as well), and would like to be notified that it is on its way. Customers want to buy an item, forget about it, and then receive it at their doorstep a few days later. They do not want to worry about where the package is (or isn’t); whether it will come in time for their deadline, their son’s birthday party, or Christmas; or if it will be the product they ordered.

It is the job of a third-party fulfillment provider to take away these worries and to be available for contact if customers have questions. For fulfillment providers and the DTC merchants who use them, the following principles are key to world-class third-party fulfillment:

Meaningful relationships. Customer relationship management (CRM) is more than just another term of the millennium or a software package that will count the spots on your customer’s Dalmatian. It’s about anticipating the customer’s needs, putting a relevant offer in front of the client when he wants to make the decision to buy, and obtaining the necessary information to process the order. It’s about a partnership that includes daily contact between provider, client, and any other parties that may be involved. This applies to your relationship with your customers as well as your relationship with your third-party service provider.

Proven abilities and client references. Due to high demand for third-party fulfillment services, many new companies will join the market fray. For some this will mean access to the latest technology in supply chain management, order management, and CRM. For others it will mean lack of execution due to the newness of systems and inexperience of the people entering the business.

Dedicated staff. A third-party fulfillment provider should dedicate an internal account manager to be an advocate for each client. The client should view this account manager as its employee within the vendor’s company and should expect to pay for that person’s time. An account manager will analyze the client’s business, look at the client’s competition, and make appropriate suggestions based solely on the provider’s and the client’s needs.

Full-service offerings. Most 3PF companies have the ability to offer value-added services (gift wrapping, premium insertion), call center capability, and returns processing, in addition to basic fulfillment services. Increasingly, you will see an ability to unbundle best-of-breed services, allowing a third-party provider to outsource each component of its business to a firm best qualified to provide that service, and to have all those companies work together for the good of their mutual client. For example, a number of companies have recently been formed to handle returns processing exclusively, indicating the difficulty and expense of performing this task.

Flexibility. The vendor-client relationship is heavily dependent on give and take. It’s necessary for clients to work with vendors to understand the cost-benefit ratio of every decision. Clients must also understand that although most vendors will accommodate just about anything, unique solutions may not only be extremely difficult to support, but difficult to transfer to another vendor.

Throughput and efficiency. Third-party fulfillment facilities are designed to maximize the velocity of goods in and out of the facility. Clients should make it absolutely clear to their marketing personnel that their direct-to-customer business is about knowing their customers and gauging with some certainty what they will want. Most distribution and fulfillment facilities are designed with a certain number of pick locations that will drive a certain number of picked orders and packed orders. If one of those is out of sync, the facility becomes less efficient than it was designed to be, which means that eventually clients will pay more on a per-order basis.

Sharing knowledge. Most businesses that come to a fulfillment provider for services are novices in delivering product directly to the customer. The client should be able to get advice from the 3PF on how to inventory, improve benchmarks for receiving and shipping, lower costs for materials, provide value-added services, and so on. In other words, a 3PF should act as a consultant for its clients. And clients should listen carefully to the companies they are paying for this expertise.

Mutual success. If a 3PF isn’t successful and making a reasonable profit, neither will the client. Somewhat less obviously, third-party fulfillment services are not successful unless their clients are.

Honesty and integrity. Clients should communicate with their vendors openly and expect the same sort of frank communication from their vendors. It is difficult to maintain a long-term relationship with someone you can’t trust.

Accurate forecasting. If you can’t forecast your business precisely, that is OK. But a client should expect to pay for the greater cost of either actual or projected use of 3PF space, since a 3PF provider cannot in good conscience sell the same asset twice. The converse is also true: If the client is willing to pay, the vendor must be prepared to support the initiative.

Red flags It’s good to accentuate the positive, but there are some serious potential pitfalls in the development of a good working relationship between a 3PF and a direct marketing client. For instance, beware of any decision to outsource based solely on price. It’s great to save money, but what exactly are you getting for that price, and when is your contract price going to increase? What about hidden costs? The overall label price may be low, but most projects, particularly those involving e-fulfillment, are often overtaken by surprises. Anticipate information systems glitches, and don’t forget to add set-up costs, account management fees, charges for consultants, and so forth.

Despite a perceived need to minimize time to market, allowing a go-live date to drive a schedule rather than vice versa is an invitation to disaster. Physical constraints can always come into play and sabotage aggressive plans. This is one area where it pays to plan your work and work your plan very carefully.

Phone home How much of a project’s success does a client’s behavior affect? One hundred percent. There are several ways in which clients can work with contractors to ensure a successful partnership.

To begin with, if online initiatives are a new business for your company, make sure you have the people and infrastructure in place to support your goals and objectives. In addition to assigning a primary contact person to be in touch with the 3PF account manager, you should establish a dedicated organization to support your new sales initiative.

Daily conversations among all concerned parties during implementation are a must. Once a 3PF solution is in place, clients, account managers, and partners must arrange conference calls at least once a week. All of your team players should be involved in these phone meetings. Ask your questions up front. Understand the linkages required between the various fulfillment organizations.

Many operational decisions will be made during the implementation process. If you are one of the major decision makers, you should be involved throughout the implementation so that choices can be made quickly. If you cannot spare the time, delegate authority to another team member who can. Delayed decisions at this stage mean delayed go-live dates, a new plan, and possibly a scuttled project.

Clients need to understand their vendors’ operations clearly, since they may want to base some marketing decisions on a vendor’s ability to deliver on those initiatives. A free shipping offer, for instance, might be driven by a vendor’s capacity to provide zone skipping and save money.

The clients of a 3PF also should understand the order fulfillment process. Most 3PFs are systems-based operations that require clients’ set-up and operation to proceed in a particular sequence of events. If an order needs to bypass the normal pick planning, pick wave, and pack wave processes, so be it, but a client should expect a cost in dollars and time lost.

As clients become more knowledgeable about their vendor partnerships, their requirements inevitably will evolve. This is how it should work. The account management team should bring suggestions to the client on how to make its business more effective and less costly. Clients must share new efficiencies and ways to do things that they have learned from their experiences, and should plan to hold a quarterly audit of services provided by the 3PF, meeting as an internal team and to review the performance of both partners. Once both the client and the vendor have determined the problems and the opportunities, they should come together and discuss future projects and potential obstacles.

Bottoms up Even in the best of market conditions, third-party fulfillment services are a low-margin business. Companies in the DTC business must work with their third-party service providers to understand how 3PFs make their money, and what they, as clients, can do to improve the bottom line for both partners. Direct-to-customer fulfillment may well be a different business than the one the client presently operates. If a third-party fulfillment provider asks a client to modify something, it’s probably because the 3PF has done it differently from what the client proposed, and been successful.

If you are a client, make sure that your vendor and all other parties involved have a clear understanding that the client is the partner who pays the bills. And don’t forget to compliment your 3PF for a job well done; this is a difficult business. Anyone who can provide world-class e-fulfillment services deserves a crown.

No matter how good the level of service provided, e-fulfillment inevitably requires processing of returned orders. For companies focused on the outbound flow of goods, returned products can throw a wrench into the most finely tuned operation. As the market for third-party e-fulfillment providers grows, specialists in returns processing for online orders have begun to flourish. One example is Returns Online, Inc., which has developed a multi-channel returns management solution for the retail industry.

The Mercer Island, WA, company takes the burden of product returns off the shoulders of its merchant customers by managing the product through every step of the returns process. Returns Online does this through a wide array of services: returns authorization, processing, information collection, disposition (RAPID[TM]), and Instant E-Refund[TM].

“To be truly comprehensive, returns management must involve five areas: order management, transportation, processing, disposition, and financial management,” says Shannon Hauser, CEO of Returns Online.

The returns management process begins with the customer’s request for a return authorization number and a shipping label. A completely integrated order management system sends the return request to Returns Online’s processing facility and a transportation partner. The customer drops off the package at a U.S. Postal Service drop-off point. Then the Postal Service delivers the item to one of Returns Online’s National Returns Centers.

At the company’s facility, employees scan, open, verify, and assess the condition of returned products. The items are then automatically routed to the disposition designated by the merchant. Returns Online’s multiple options include reclamation, repair, refurbishment, salvage, return to manufacturer, online auction, waste disposal, return to inventory, repackaging, and donation. The end-to-end returns process includes a fully integrated financial system that features 24/7 reporting.