What's behind the curtain?
Glitzy Web storefronts set up for online ordering abound, but when you look behind the curtain at their "e-fulfillment" operations, there's not much new there.
By James A. Cooke, Senior Technology Editor -- Logistics Management, 7/1/2002
Online ordering ... the term conjures up visions of sophisticated, high-tech operations. But behind the scenes, e-fulfillment today doesn't look much different from the traditional fulfillment practices of yesteryear—that is, fulfillment without the "e." E-tailers taking orders online still fill them from warehouse stock or pass the request on to a supplier, which drop-ships the part or product from its warehouse. And although manufacturers involved in e-procurement may exchange forecast information, their suppliers still deliver shipments based on plan rather than online demand data.
"Collaboration has been limited to information sharing regarding demand and supply forecasts," says Scott Pulsipher, director of solutions for supply chain software vendor Yantra Corp. of Tewksbury, Mass. "[Most companies still] can't collaborate on the execution of orders and order fulfillment. The limitation is the existing information technology (IT) infrastructure, which was optimized for internal processes."
Although a few pioneers have reportedly begun making forays into this area, true collaboration won't become reality until online order demand can be synchronized with production. By all accounts, that's a ways off. "No one has enough confidence in the supply chain yet to risk the company's revenue on the supplier's ability to fill an order each and every time," observes John Fontanella, an analyst with AMR Research in Boston. "We're not seeing 'You order one; you make one.' [The process] is still being buffered by inventory."
Making Money the Old-Fashioned Way
Of all the retailers in business today, the dot-com merchants, which take customer orders over the Internet, would seem the most likely candidates to achieve true collaboration with their suppliers. But right now most cyberstores either ship from stock on hand in their warehouses or else have their suppliers drop-ship the items. "The inventory sits at the supplier's facility, and the order is transmitted to the supplier, which ships to the consumer," says Andrew Krainin, a former executive at SameDay Technologies, a start-up e-fulfillment company that sold its assets to Ryder Logistics last year.
Cooking.com of Santa Monica, Calif., is typical in this regard. The successful e-tailer of culinary products and specialty foods ships most of its product from its own warehouse, although it does collaborate with some suppliers on the drop- shipping of fresh foods, reports Bryan Handlen, Cooking.com's vice president of logistics.
That type of coordination with suppliers, says Yantra's Pulsipher, is really information sharing between retailer and supplier, and doesn't truly qualify as collaboration. "There's not a lot of true collaboration going on," he adds. "Customers or suppliers are merely managing orders via online mechanisms."
Still, the retail industry appears to be at least taking baby steps in that direction. Some online merchants that sell directly to consumers are moving toward automatic replenishment. When the quantity of an item falls below a preset level in the retailer's warehouse, it triggers an order for resupply. Global Sports Inc., a King of Prussia, Pa.-based company that handles Web site design, merchandising, customer service and fulfillment for such retailers as The Sports Authority, Dick's Sporting Goods, and Bluelight.com, has set up an automatic replenishment system with five of its suppliers, says spokeswoman Patricia Henderson. "Basically, we tell them how much we always want to have of each style in stock," she says. "When we sell down to the preset number, it restocks by automatically generating a purchase order for replenishment."
Updated Forecasts
Though Global Sports has pushed ahead with automatic replenishment, Pulsipher believes that most online merchants are wary of collaboration because of the cost implications. "In the B-to-C [business-to-consumer] environment, [collaboration] drives up the cost of fulfillment," he explains. "If I allow a customer to change the delivery date or up the order quantity, it blows out the cost structure for the fulfillment process."
But this isn't as much of a concern in the business-to-business (B-to-B) market. In certain industries such as high-tech, a few pioneering manufacturers have reached forecast-based agreements with their suppliers to replenish stock once buffer inventory falls to a preset level. "Several companies have contracted for service based on inventory and replenishment," reports Joshua Clark, president of Softchain Inc. of Burlingame, Calif., "but they need a forecast to determine that replenishment level."
Some trailblazers are even moving to the next stage, striving to incorporate real-time demand into revised forecasts. Royal Philips Electronics of Amsterdam, for one, is experimenting with relaying customer forecast information on one U.S.-made product line back to its suppliers for forecast revision purposes. Ian Wakefield, director of operations for Philips Components BU Connectivity in Sunnyvale, Calif., says his unit began sharing online order information on its wireless local area network (LAN) components a year ago.
When Philips receives a new forecast from a customer, it now shares that information electronically with its suppliers, subject to security considerations. Both parties benefit from this practice, he explains, noting that Philips can check with its suppliers on available-to-promise inventory and capable-to-promise inventory. Wakefield adds that his company intends to expand this program to other company units in the future.
For the most part, these pioneers are comparing order execution to forecast demand—a process termed "distributed event management." That practice depends on visibility into the suppliers' inventory. "Demand and inventory are coordinated in real time and then replenishment against demand is monitored in real time," explains Dave Tompkins, vice president of marketing for WorldChain Inc. of Fremont, Calif. "When a problem arises—such as a service issue or an overstock situation—it triggers an alert."
Although the industry leaders are sharing demand information with suppliers and monitoring forecasts against actual demand, they have yet to work together on individual order collaboration. In other words, they are not yet capturing an individual order and then breaking that order down into components and spreading those parts requests among multiple suppliers. But the world may not have to wait too long. "That's coming in 12 to 24 months," predicts Chris Caren, vice president of solutions marketing for software vendor Manugistics Group Inc. of Rockville, Md.
Obstacles to Collaboration
Collaboration's slow start can be traced to a variety of technical and political obstacles. For starters, Tompkins notes that many times, trading partners lack the links between computer systems needed for information exchange. A buyer or retailer has to have the capabilities to send demand information back to suppliers. It also has to be able to handle information coming back from the disparate software systems used by multiple vendors.
Wakefield confirms that integrating the various trading partners' computer systems proved the most difficult aspect of Philips' collaboration effort. "Putting up a collaboration tool was the easy part," he observes. "Integrating it with existing legacy systems was much more difficult than we expected. Most collaboration engines depend on the legacy transaction system as the system of record [for orders]."
Further complicating matters, data may have to be scrubbed or translated to be usable by the receiving party. "As information is grabbed from different systems, there will be transaction discrepancies," explains Tompkins. "What the supplier specified to the original equipment manufacturer (OEM) regarding part numbers, prices and quantities is often different from what the OEM said it received." In addition, trading partners have to establish and agree upon specific parameters regarding service issues such as leadtimes and costs, says Tompkins.
But political obstacles may prove more daunting to true collaboration than the technological hurdles. Trading partners are still wary of sharing information out of a fear that valuable secrets will be exposed to competitors. "A lot of companies are hesitant to release competitive information," says Pulsipher of Yantra.
Analyst Dwight Klappich agrees with Pulsipher that most suppliers want to keep the amount and type of stock they have on hand a secret. "Suppliers don't want to reveal information on their inventory because they want to use supply and demand to their benefit," says Klappich, a senior program director with the Meta Group, a market research firm based in Stamford, Conn. "There are a lot of business process issues that have to be resolved before collaboration can take place."
Finally, some question whether it's even practical to collaborate on individual orders except for special high-margin make-to-order products, such as personal computers. "Customer expectations won't allow this to happen," says Caren of Manugistics. "Procter & Gamble cannot make toothpaste to order. And I'm not willing to wait a month for it."
Even on those products offering high margins, most manufacturers are unlikely to start the process entirely from scratch once an order is received. That's because the manufacturer often needs premade subassemblies to fabricate its product, and building all the required subassemblies to order would create a delivery delay that customers would find unacceptable. "You have to forecast demand to build subassemblies to meet customer demand," says Caren. "Otherwise, the leadtime to shipment is longer than most customers are willing to wait."
Despite the technical and political hurdles, many industry experts still contend that manufacturers and retailers will push ahead with efforts to collaborate with suppliers on the e-fulfillment of online orders. Klappich, for one, believes that channel masters—large companies that dominate an industry segment—will be the ones most likely to keep the pressure on. "We'll see this first with channel masters who have the ability to leverage their buying power and dictate that their suppliers participate," says Klappich, "but it will be several years before it gets to this."
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