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+++ S P E C I A L R E P O R T +++
"Order Fulfillment for Your Small E-business:
Should You Beg, Borrow, or Buy?"
By Art Avery http://www.elogistics101.com 
The #1 source for Internet fulfillment info.
Art (at)elogistics101.com Copyright 2000
January 26, 2000

Moderator's Comments


Hi All:

As promised, we have a special report today from logistics guru Art Avery. And, as with all of Art's reports, it is filled with excellent tips. Thanks Art.

George Matyjewicz, C.M.O.
Moderator, E-Tailer's Digest

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" Order Fulfillment for Your Small E-business - Should You Beg, Borrow, or Buy?"
By Art Avery http://www.elogistics101.com 

Recently, I was interviewed by two publications, one an on-line and one an off-line, on the topic "How should a Mom and Pop Internet shop handle order fulfillment?" This article grows directly out of these interviews. I will use the same question and answer format, because those interested in E-tailing of products, ordered by and delivered to individual customers are universally asking these questions.

GETTING STARTED

Q: Can you tell me EXACTLY what a small business owner has to do to get started with online shipping?

A: Download the tracking software off the UPS, USPS or FedEx sites and follow directions. A really small company can just take its packages to a UPS drop-off service, or to the local Post Office.

Q: Are the UPS, USPS, and FedEx systems integrated into a small business e-commerce system? Or can they be accessed through separate systems--where a small business owner simply signs up for service through one of these delivery company's Web sites?

A: There are services that will handle the whole back end, such as Paul Purdue <ppurdue(at)ifulfill.com> and 2000logistics.com. Other small fulfillers will just ship the goods. Contact kevin.corrigan(at)unitedfulfillment.com for more info on this or Brad Davis bradd(at)shipper.com.

Q: What do you mean by fulfillment companies that handle the "whole back end".

A: I mean that they provide full service. They process the credit cards, supply current inventory levels to your web site, do the reordering, send notice of shipping, handle returns, etc. It is what you would do in your own system, if you were to run it yourself. 

Q: Do these shipping companies usually help with customer service or automated email responses?

A: Depends on the contract you have with the shipper. They will usually help, for a price.

Q: What does a small company do to make sure that a package is getting shipped on time, using the major carriers?

A: Have a copy of the e-mail with the package tracking number sent to the customer and the company. If a fulfillment company is doing the shipping, this is a good way to monitor the fulfiller's performance.

Q: What about the other shipping companies such as Airborne Express, DHL, freight forwarders, etc.? 

A: A freight forwarder might get involved with importing product to sell, or exporting larger shipment overseas. DHL is good for international shipments, but UPS or FedEx can do this also. Airborne is a smaller express carrier, but you can frequently negotiate good second-day delivery rates, once you have significant shipping volumes.

Q: What is the amount of money people usually spend on their fulfillment operations?

A: It shouldn't cost more than 10% of sales plus the actual freight cost. The cost of handling returns and any special handling like gift-wrapping, would be extra. Additionally, fulfillment companies will charge extra for "storing" pallets of reserve product, or may have a minimum charge per item stored, to discourage holding items that do not actually sell (very slow movers and obsolete items).

Q: Can a hosting or Web design company help with these details?

A: There are a few companies that claim to handle both Web sites and "back end" fulfillment. I am not personally aware of any that do it successfully. The skill sets are quite different.

Q: When does it make good financial sense for small businesses to outsource their fulfillment (based on number of orders, I assume)?

A:
1. When the owner (or his/her helpers) has more money than time. When you need every penny, do it yourself. When you can earn more doing other things with your time, look outside.
2. When you reach the point where your present method just has to be expanded and the incremental cost of expansion would be expensive, go outside.
3. When you really need some advanced technology to take over the manual sending of e-mails. printing labels, etc. Rather than buy and learn to use expensive software and hardware, subcontract fulfillment.
4. When your wife (husband, significant other) tells you that either the boxes go, or she/he goes!

Q: Have you ever heard of a small company using a competitor's or similar Web fulfillment organization to ship goods? Is this a trend?

A: It is not impossible, but the problem is that if the competitor ships goods to YOUR customer, the following may occur:

1. He may give your customers poorer service than his own.
2. Since he has your customers' names, he may steal them from you and "leave you in the cold."

Q: What kinds of shipping and fulfillment options do most E-tailer companies offer? Do they use the major carriers (UPS, FedEx, USPS), or do they use 3rd party logistics companies? 

A: UPS, USPS Priority, or FedEx delivers almost ALL small shipments. Who does the fulfillment (taking orders, picking, and packing) is a separate issue. These can be 3PLs, fulfillment houses, in-house operations, distributor, etc.

WHOLESALER/DISTRIBUTOR V.S. FULLFILLMENT COMPANY 

Q: In your opinion, would a mom and popper tend to use a fulfillment house or a drop-shipper/wholesaler/distributor?

A: If they want to offer a wide range of products that they do not have to buy and keep in inventory, then they might use a distributor/drop shipper (one or possibly several). If they put together a very select assortment, they would then have to inventory and ship it themselves or, contract with a fulfillment house to do it for them.

Q: Would a drop-shipper/wholesaler/distributor apply a company's logo and address on a package (as would a full-service fulfillment company or in-house operation)? I received something from babystyle.com yesterday, and there were labels on it to indicate that it came from babystyle.com, but there was also a label that said "California Distributors". (It's probably a regular distributor, right?)

A: A package MUST have the return address (and perhaps the name) of the actual shipper. The address label might or might not have the Mom & Pop name on it. This can be a little confusing to the customer who buys the product from Mom and Pop, Inc., but gets the box from Big Distributor, Inc.

Q: I'm still a little confused about the differences between a drop- shipper and a fulfillment company.

A: A drop shipper (or wholesaler) owns and stocks the goods and ships them directly to your customers. Generally, he services several retailers. A fulfillment house is an agent that handles YOUR goods, fills YOUR company's orders, for YOUR customers.

Q: So, a drop-shipper owns the goods, not the retailer. Doesn't a fulfillment company also handle several customers?

A: A fulfillment company may have several customers with widely differing product lines. His return address is on the package, but he will customize labels etc. so it looks as though Mom & Pop did the actual shipping. It is YOUR business and he just provides a pick/ship service. He might also put your catalog in with the order, but would probably charge for it as an item pick.

Look at it this way, the fulfillment house is just like hiring a shipper with his own tools - he works for YOU (and maybe others) and the orders are YOURS. You own the product and the customer.

With a wholesaler, you are just a salesman. You do the selling - he ships his own product - to YOUR customer. You own the customer, he owns the product and pays you a sales commission. He pays for all the product, handling, shipping, etc. It is really HIS business and he can steal your customer list anytime he so chooses. (I am not saying he would, but he could).

Q: What is the downside of outsourcing fulfillment for small companies?
A: 
1. Difficulty of finding someone that is reliable and that wants the business of a small company.
2. You lose control of how things are happening, and have to become much more systematic. You can't just go running out to the garage to fill that new rush order like you used to.
3. If your fulfiller "screws up" in your peak season, you can lose your entire business.

Q: Considering that a bad fulfillment provider can kill an online business, is there anything that merchants can do to protect themselves before signing on (in addition to checking with the company's other clients?

A: Interesting question! For instance, I have had people ask me for an alternative to their major third party logistics company, because they felt that they were receiving poor service. I would suggest the following:

1. Have a personal relationship with the owner or key manager of your provider.
2. Follow results closely and get in touch at any degradation of service. Show you care about good service.
3. Be willing to pay a price that allows both parties to make a profit.
4. Make sure the provider is located in an area with a ready source of labor for your peak demand period.
5. Start well before your peak period to make sure you and your provider have all the "bugs" out.
6. Try to have a backup. Either do some of the fulfillment yourself or have an East and a West Coast provider, if that is possible. Also, split your freight between two carriers. You want to avoid "having all your eggs in one basket."
7. Don't promise your customers more than your provider can comfortably deliver.
8. Pick a smaller provider, one who feels YOUR business success is important to HIS business success.

WAREHOUSE MANAGEMENT SYSTEMS

Q: What is a WMS, and what does it do, exactly.

A WMS = Warehouse Management System. It provides software and portable and/or CRT terminals to receive product, putaway, replenish, pick, pack, ship and sometimes reorder, using complex and (usually) expensive software.

Q: Do most small businesses use warehousing systems? 

A: Depends on what you mean by "small", and how much stock you have. For 100-200 items, just store the product on shelves and use visual reordering when stock gets low. For over 500 items, you start to need some kind of control system. A WMS is for a medium size company (50+ people), as they are expensive and require a fair amount of training to use and maintain. There are accounting software packages such as "Great Plains" and "Mail Order Manager" for the smaller shops.

Q: What can accounting software do here?

A: Good accounting software can do many of the functions of a WMS, but with less automation and much lower cost.

Q: What do you mean by visual reordering?

A: You walk by every slot in the warehouse to find the items that need to be reordered. This is the way they reorder at most grocery and Wal-Mart stores.

THIRD PARTY LOGISTICS


Q: What are 3rd party logistics companies?

A: True 3PLs do the whole distribution operation, usually for large manufacturing companies. Catalog and other "distributors" usually do their own distribution, because that is their field of expertise.

Q: Are 3rd party logistics companies required? 

A: Not at all. 3PLs have only been around for about 5 years. They grew out of the desire of many companies to get out of activities where they could not be "best of breed", in order to concentrate on their "core competencies".

SUMMARY

Q: In the grand scheme of things, where do you see fulfillment options going for small to medium size companies.

A: There are some smaller fulfillment companies that are looking to capture the small E-tailer market. I know of a few and will post them on my site when I have more information. The bigger fulfillment houses do not seem interested in the small E-tailer - too much trouble for too little revenue.

I see a real market for small operators to start up fulfillment operations aimed at the small E-tailer, especially if they have an inexpensive way to attract clients (like a great web site, good search engine placements, a good newsletter, or they contribute frequently to Internet forums).

It is hard to find potential fulfillment customers without good web marketing and search engine skills. I will be glad to provide information and articles to anyone interested in getting into this field, to make startup easier. Also, I can give national search engine and directory exposure through my editing of the Internet Fulfillment category of the "Open Directory Project".

Art Avery - Principal Consultant Avery & Associates
Free logistics newsletter http://www.elogistics101.com
Distribution & logistics solutions for "Internet time"

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