Sept/Oct 2003

There's still no consensus on whether it's better to do your own e-fulfilment or contract it out to a specialist. Peter Rowlands considers the pros and cons, and hears from e-tailers on both sides of the fence

Whether you're an individual selling online from your back bedroom, or a giant multinational extending your high street sales through an e-tail Web site, you'll have one thing in common. You'll outsource at least part of the e-fulfilment job.

The reason is simple: retailers and e-tailers simply aren't equipped to do nationwide home deliveries - especially not of small items. The job requires a national infrastructure of vans and couriers, and someone to manage it all.

So although you might not think of it this way, outsourcing of a kind is native to nearly all forms of fulfilment in the world of e-tailing and direct-to-consumer selling.

Grocery retailing is an exception. Supermarkets realised early in the dotcom era that they couldn't achieve the quality, reliability and control they needed unless they ran their own home delivery fleets. But even they tend to outsource maintenance or management of their little vans. Asda is a typical example; its latest 100 Mercedes-Benz Sprinters are being managed by VIA Solutions (see page 4).

Catalogue retailers, being old hands at the delivery game and having vast infrastructures already in place, also tend to do much of their own fulfilment. But everybody else has to use carriers of some kind to do their deliveries.

So the question they all face at one time or another is how much more of the operation to outsource over and above the delivery itself. Do you keep all your other fulfilment functions in-house (stockholding and despatch, for instance), or do you outsource these to a specialist contractor as well?

The classic view is that e-tailers tend to go through three stages of evolution. At start-up they will naturally do all their own fulfilment; this looks to them like a fundamental part of the e-tail proposition. Then they'll reach the stage where they can't keep up with the management demands posed by their escalating stock-keeping and fulfilment requirements, so they contract the job out. Then they get bigger still, build their own warehouse, and take back control of the job (or some parts of it).

It sounds plausible, and undoubtedly does happen. A good example is provided by Boots. It launched its original online sales channel on a modest basis, then expanded it into the now-discontinued Wellbeing operation and contracted out fulfilment to MetaPack. Then it took the fulfilment job back in-house (although retaining MetaPack involvement). The boots.co.uk operation is still active today.

Sometimes you can catch an e-tailer at an earlier phase of its evolution, and see a similar phenomenon in progress. Edwards China supplies fine china products worldwide from its base at Hanley in the Potteries, having built up its online presence from modest beginnings with Actinic Web store software. Currently the company does all its own storage, picking, packing and despatch, using Royal Mail and Parcelforce to do the deliveries; but director Richard Edwards admits: "I can see a time when we eventually might contract out the job."

When the very busy Christmas season looms, he says the company faces an increasingly tough task coping with the surge in delivery requirements. "That's when we would benefit most." But he adds ruefully: "I still feel the idea of contracting out goes against the grain."

By no means all e-tailers go through this classic process of moving from in-house to outsourced fulfilment, though; and it would be a mistake to imagine that sheer scale of activity is always an indicator of when might happen. Take the John Lewis Direct operation, for instance. Within a year of its launch in 2001 it operated the sixth most-visited Web site in the UK; but it contracted out fulfilment from the start, and has maintained that approach ever since. iForce does the job, using most of a 65,000 sq ft warehouse in the outskirts of Birmingham.

Why did John Lewis contract out? Simon Palethorpe, the managing director who pushed the project through, makes it plain enough. "We needed an expert in individual pick, pack and despatch," he says. "Online selling is a very different operation from sending pallets to one of our stores."

That's an oft-expressed sentiment in this market, but it's not the only one. Take Robinsons Country Leisure, a supplier of riding equipment and accessories.. Online sales account for about a quarter of its substantial £12 million turnover, yet the company handles fulfilment entirely in-house, including picking, packing and despatch. It recently opened its own 62,000 sq ft warehouse.

Core function

The reason it has kept the work in-house, according to financial director Nigel Best, is that his company sees fulfilment as a core function. "We'd lose control if we contracted out," he says, "and control is the key to generating revenue." But the company does of course outsource final deliveries; regular carriers include Business Express and Nightfreight (which handles larger palletised items).

What Best does acknowledge is that in-house fulfilment demands a powerful and reliable control system. Robinsons uses the Maginus software package, including the supplier's Web Store retail front end. There is a Megastream link between the order-taking process at one base and the Oracle-based product database at another. "It's invaluable to be able to see how product is moving, what the back-orders and how the numbers are fluctuating."

However, contracting out need not mean the loss of this kind of visibility and reporting; increasingly, such resources are also deployed by e-fulfilment contractors. Suppliers such as Braywood, iForce, Intermail, Prolog, 2Touch and Zendor make a particular feature of their ability to provide management information to clients in real time. Some of them (Intermail is one) develop their own systems; others use software packages from suppliers such as Maginus and Sanderson.

In the early days of the dotcom boom, many fulfilment contractors rushed to offer software development capabilities themselves, either through their own resources or by buying in expertise from elsewhere. Catalogue retailer GUS, for example, acquired a Web development company called Reality, and later gave the name to its entire White Arrow home delivery business. Rival N Brown acquired Web development house Eunite, which was later merged with its Zendor fulfilment business.

Many e-fulfilment contractors continue to offer software development resources, although it's probably fair to say that not all of them are equally proficient at all aspects of fulfilment. If they are, they can find themselves in a strong position to attract business from e-tailers who want to start their online business from scratch.

Sony Computer Entertainment UK found itself looking for exactly that kind of contractor when it decided last year to launch its own dedicated UK Playstation Web site. While the group already had an international Web presence, online product manager Andy Reynolds says the company felt a fully-fledged UK site would be more likely to generate significant sales.

"But we'd never had an e-fulfilment capability before, so we couldn't do that part ourselves. We didn't have the infrastructure. Our history was in selling through traditional retail channels. So when we went looking for a contractor, we wanted one that could act as a one-stop shop, doing everything from developing and operating a secure transactional Web site to doing the storage, picking, packing and delivery."

Zendor was the contractor it chose. So how did it reach that decision? "We wanted a company with core competence," Reynolds says. "One with a solid and effective back-end fulfilment capability." Deep experience of Web site development was also a prerequisite, he adds. "We also looked at what other e-tailers were doing, and took account of Zendor's experience of working with customers in similar markets. The fact that they had that kind of track record was very important to us."

In the early days of e-tailing, there was some expectation that as soon as the high-street giants gained the fulfilment expertise they initially lacked, they would want to take control of their own fulfilment. In practice, however, this doesn't seem to have happened. Picking and despatching single items to consumers' homes continues to be regarded as a niche function that is better served by outside specialists.

As more and more major consumer equipment manufacturers and retailers establish an online presence for themselves, it therefore seems likely that this kind of all-in fulfilment capability will be seen as increasingly important.

For the contractors, they key is probably safeguarding the client's brand image. As Sony Entertainment's Andy Reynolds says: "When you get a third-party contractor to look after your brand, you have to be able to trust them. That's incredibly important."

Very small e-tailers will probably continue to do their own fulfilment, as they usually do now. It's clear that some bigger operators are also happily doing their own thing in terms of fulfilment. But once throughput rises above a certain threshold, there can be no denying that contracting out becomes an increasingly appealing alternative.

Web front ends - to outsource or not to outsource? Whilst the debate about outsourcing fulfilment services is central to the e-commerce market, a related decision is whether to outsource the provision of the Web front end. In the past, software developers tended to offer stand-alone systems that users themselves could host on relatively modest hardware, and leaders such as Actinic continue to support this approach. Its dealers, however, can and do host systems if required, and the company itself offers some hosted services. The alternative approach, which seems to be gaining popularity in some quarters, is a fully hosted solution, which is offered by suppliers such as Shopcreator. Chief executive Andy Kitchener says his company can guarantee service levels "better than 99.5 per cent," and maintains that a hosted system is easier to upgrade and augment. He adds that as users become increasingly concerned about security issues, they tend to value the fact that Shopcreator "has three staff working purely in intrusion protection." For some applications the company aims to partner fulfilment houses such as iForce to develop all-in packages.