November 2000

The year 2000 has been one of rapid learning for the consumer-direct sellers. As traditional retailers join them in a multi-channel market, consultant Britt Dayton of Kurt Salmon Associates reviews some of the fulfilment issues that have arisen

How life has changed. In the "good old days," suppliers built simple distribution operations around pallet-in and pallet-out (or case-out) flows, shipping full truck loads to relatively few customer destinations. Retailers, too, had a straightforward requirement to distribute full cases to each of their stores, with very little split-case order fulfilment.

The advent of quick response (QR) in the clothing sector, and then efficient consumer response (ECR) in food and general merchandise, meant that retailer order quantities decreased, while shipping destinations proliferated and retailers looked to push more value-added processing back up the supply chain.

At first, suppliers felt most of the pain as they engineered unit pick/pack operations and quasi-manufacturing processes to provide customer-specific pre-retailing, and began shipping small packages via parcel delivery services directly to retail stores. Now retailers are faced with much the same requirements as they venture into consumer-direct fulfilment alongside their traditional store-based selling. T

he key to successful fulfilment is the interaction between the seller and the purchaser. Around 80 per cent of all purchasers make at least one telephone call about their order, and handling that query can save or lose that purchase. According to Forrester Research, the losses resulting from poor customer service are running into billions of dollars a year. In fact being able to advise a customer on the status of their order has now become as high a priority as the ability to make the actual complete delivery. Knowing exactly when a purchase will arrive goes a long way to replacing the immediacy of shopping at a store, and providing the reassurance consumers are looking for.

As a result, efficient consumer-direct fulfilment requires a high degree of precision in the setting of delivery date/time expectations and execution. Consumers need to know precise delivery timings because they often have to make special arrangements to be at home to receive their order. Until a buffer between delivery and receipt of orders becomes commonplace ­ such as local collection points or secure drop-boxes ­ companies will find that consumers are much less tolerant of delivery uncertainty than business customers.

Many of the biggest problems can occur with large orders which require multiple packages. Parcel carriers do not always guarantee all packages that are shipped at the same time will arrive at the same time. Providing good, clear information about the order inside each shipping box will give the customer reassurance if they only receive part of their shipment.

This information must reference each item ordered and specifically state if that item was packed in the received box or shipped separately. If separately, there should be a tracking number for the additional boxes so that the customer can check the status of the remaining items. The quality of the information provided goes a long way to reducing what the catalogue companies have come to call WISMOs ­ "where is my order" enquiries ­ which have to be handled by relatively expensive call-centre staff.

While the most efficient way to serve the new multiple-channel environment is to have a single pool of inventory, this does present challenges in terms of allocating scarce product across those channels. Branded suppliers have wrestled with this problem over the years, and developed fairly sophisticated systems functionality to encode customer service objectives into the allocation process. Simple rules relating to order size or customer priority are sometimes not robust enough.

There are times when shipping related product together on one order is critical, and short-shipping one item results in customer dissatisfaction. Take the example of an order for a digital camera and carrying bag designed to arrive in time for a once in a lifetime holiday. If the bag is out of stock it may be acceptable to deliver the camera, but not vice versa.

An additional complexity in sharing inventory across channels can be found in the area of pre-marked product. In the grocery sector, many products are pre-priced by the supplier and prices may differ from one channel to another. It is not always straightforward to remove the price from the packaging, so unless shops are using shelf-edge price labels, products must still be individually priced before being sold. This requires a significant processing effort in the DC during the order fulfilment process, which can cause lengthy delays and demand additional labour resources unless designed into the order preparation process.

Predicting both capacity and staffing levels is extremely difficult in these early days of electronic selling, where there are as yet no established demand patterns. This applies even in "normal" trading conditions; so how do you cope, for example, with a sudden demand for a replica football jersey worn by the player scoring an unexpected winning goal in a major match? The implications on inventory planning alone are chilling, but building a fulfilment capability that could react quickly to this spike in demand without a massive investment in normally idle capacity seems almost impossible.

 

The solution in the future will be a virtual fulfilment capacity, where resources of partner companies can be leveraged on an as-needed basis through advanced information systems technology. To solve the football jersey example, a potential solution for the sporting goods retailer involved would be to have a network of partner-distributors and suppliers who also carry the ordered item, and are constantly sharing product availability across the partnership. When one partner exceeds capacity, the system quickly identifies an alternative source of the desired product and passes the order to that partner for fulfilment. The business in this arrangement will have commercial agreements and systems functionality to compensate each other.

Given the complexity of fulfilment, it is not surprising that 85 per cent of the respondents in a recent Forrester survey in the US said that they would not be handling international orders. However, while sales within Europe are not likely to be as complex, there are still some important issues to consider.

For instance, there are political reasons why some countries do not allow the importation of products made in certain others. Some cultures will not accept, say, food items and natural products such as leather if mixed in the same package. Most companies deal with these international shipping requirements as an exception to the normal processing flow. However, if there is a significant volume of international shipments, then it is worth engineering the information systems and material handling equipment to process them.

When it comes to the issue of trying to lower fulfilment costs and improving efficiency, it is a case of looking at multiple product flows and picking methods as well as transportation rates.

Picking and packing will become more prevalent as retail stores move towards one-for-one pull replenishment and as consumer-direct shipping increases. There will still be a need to send full cases in business-to-business (B2B) scenarios, as well as to larger format/volume stores. There can also be full-pallet moves in a DC for cross-docking, or for the highest volume commodity-like products. This variety of product flows within the four walls means that warehouse management systems will need advanced functionality to plan the work in each operational area; to assist management in effective deployment of staff to complete the work; to manage the synchronisation of the flows into the shipping dock; and to monitor progress of work and identify bottlenecks and straggling orders. On-site supervisory skills will need to improve to manage this complexity of flows, so companies will need to attract and retain a professional DC management team.

One issue that really demands a whole article in itself is returns management. Suffice it to say here that with returns reaching a 30 to 40 per cent level in some markets, companies simply must engineer an efficient returns management process as a priority. Neglect it at your peril.

Entering the new world of multi-channel selling can have a significant impact on your fulfilment operations. Trying to meet the changes by adjusting existing processes and systems will usually suffice only for small transaction volumes. As throughput grows, the only real answer is to engineer true multi-channel capabilities, or consider outsourcing to specialist operators. This brings with it the challenge of managing the outsourcing party against high customer service level expectations, and may result in inventory fragmentation. The right answer for any particular company may be some combination of these approaches.