The physical challenges of the virtual sale

Once an online order comes in, cyber-retailers must deliver the merchandise quickly. That's not always as easy as it sounds.

By James Aaron Cooke, Senior Technology Editor -- Logistics Management, 10/1/2000

Conventional wisdom would have it that fulfilling orders placed over the Internet is really no different from fulfilling orders placed any other way. But nothing could be further from the truth, says consultant Steve Mulaik, a director of the logistics systems practice at the Progress Group in Atlanta. Mulaik recalls the case of an e-tailer that placed an advertisement on America OnLine (AOL) for a slow-moving product that was languishing in a corner of its warehouse. "The marketing guys placed a log-in ad on AOL without telling distribution," says Mulaik. "Suddenly, they got 2,000 orders for this product." Needless to say, filling these orders quickly presented a serious challenge to the company.

Unpredictable demand is just one of many new challenges facing distribution managers who oversee e-fulfillment-the delivery of goods ordered from online stores. Unlike traditional distribution, which involves orders placed in case, pallet, or even truckload quantities, e-tail distribution requires suppliers to fill individual consumers' orders, which is much more time consuming.

What's more, customers of online stores have a higher level of expectations for service. "There's a demand for speed that these orders carry with them," notes Bob Silverman, president of the consulting firm Gross and Associates in Woodbridge, N.J. "[Consumers expect] same-day picking and next-day delivery." Andy Greenawalt, director of operations at the e-tailer Ethnicgrocer.com in Chicago, agrees. "When customers order on the Internet by noon," he says, "they expect the order to be shipped out that afternoon."

e-Challenges Throughout the Chain

For some online merchants, the challenges begin even before their products arrive in the distribution center. Andy Greenawalt of Ethnicgrocer.com reports that his company has experienced problems with the accuracy of incoming shipments because it sources two-thirds of its product from small suppliers or importers. Ethnicgrocer.com has solved this issue by turning over its distribution operations to a third-party company. That third party weighs the incoming product and even applies bar codes to help identify merchandise in storage. The third-party logistics company performing this task, says Greenawalt, is "far better equipped to handle this function than we are."

Although not all dot-com retailers face receiving problems, all cyberstores are required to provide updated information about their warehouse inventory to their virtual storefronts. Recently, the Federal Trade Commission cracked down on seven Internet retailers that failed to deliver merchandise advertised on their Web sites last Christmas-a problem some analysts attribute to a lack of integration among their information systems. "They had not integrated their online order-taking systems with their warehouse management systems," reports Steve Banker, an analyst with ARC Research in Dedham, Mass. "If they had a good [system of] integration, they would know what is stocked in their warehouse and what is available to promise."

Even Web stores that have conquered the integration problem confront the job of filling individual orders with promptness and accuracy. "Many companies that handle e-fulfillment have no history of picking small orders," notes Silverman. "The challenge is moving from larger picks and cases to being a 'piece' operation."

Distribution centers that handle online order fulfillment, moreover, typically deal with a wider range of items within a given order than facilities servicing more traditional channels do. "The confluence of multiple SKUs (stock-keeping units) into the same carton is a major challenge," observes Foster Finley, principal of A.T. Kearney's e-Services Practice who is based in the company's Atlanta office.

e-Fulfillment operations also generally face higher throughput demands than a more traditional facility does, especially during holiday seasons. "The volume is often much, much higher than what is found in traditional retail warehousing," notes consultant Jim Tompkins, president of Tompkins Associates Inc. in Raleigh, N.C. "Third-party fulfillment distribution centers today are taking about 20,000 to 30,000 orders per day. An e-fulfillment operation might be [handling] two, three, or even 10 times that volume."

Although e-fulfillment centers may have to pick and pack more orders than traditional distribution centers do, their customers have no tolerance for errors. "[e-Fulfillment] requires 100-percent accuracy," says Art St. Onge, president of the materials-handling consulting company St. Onge Co. in York, Pa. "The catalog customer is more forgiving [than an online buyer is]."

The Right Layout

Given the volume of order throughput they must accommodate, warehouses specializing in e-fulfillment must be designed so that workers can find items and then pack them into shipping cartons quickly. Consultant Chris Merritt of Kurt Salmon Associates in Atlanta says that companies engaged in e-fulfillment should consider "product profiling" of the items stored in the warehouse. Accurate profiling allows companies to identify fast-moving items or those likely to be ordered on the company's Web site so that they can be placed close to where order selectors go to pick them, in an effort to reduce walking time.

St. Onge notes that e-fulfillment has resulted in a revival of the so-called "put system." In a traditional warehouse, an order selector goes through the racks to retrieve an item for shipping and brings it back to a packing station. In a put system, by contrast, a mechanical device pulls an item from storage and puts it onto a conveyor, which, in turn, transports the product to a worker who puts it in a shipping container. St. Onge notes that put systems can boost productivity in an e-fulfillment operation. "If you have a fair number of SKUs," he says, "it's a superior system."

A good warehouse layout will also maximize employee productivity, which has become an issue in a booming economy where skilled workers are in short supply. As in other segments of distribution, companies engaged in e-fulfillment are having a hard time finding good workers, particularly at holiday crunch periods. "Finding temps is a real challenge," says Finley. "By the time they are self-managing, they are gone."

To circumvent labor woes, more and more warehouses engaged in e-fulfillment are considering sophisticated materials-handling systems. "Because so much of the work is piece picking, pick-to-light systems, carousels, and voice-recognition systems allow for faster turnaround time," notes Silverman. "None of these is designed specifically for e-commerce, but they support speed and fast turnaround time."

St. Onge predicts that more e-tailers will mechanize their operations to maintain the levels of efficiency and productivity needed to fill online orders. "Mechanization will definitely be a major factor as these centers reach the volume where they can afford the equipment," he says. "At a certain point, it becomes impractical for people to perform manual operations."

Although automation can help boost efficiency, consultant Finley says that a company must make sure its operation can justify such an expensive investment. "If you have a complex aggregation of orders from a large base of SKUs, additional materials-handling equipment may be necessary," he notes. "Still, there is no one right materials-handling solution-it's got to be based on order characteristics, product value, and product velocity."

Return Headaches

Once an order has been picked and shipped out the door, the e-fulfillment operation's job is far from over. Elaine Chen, an analyst with the market research firm Xceed Intelligence in New York City, notes that online buyers want Web merchants to furnish them with information on the whereabouts of their product in the distribution channel. "Returning e-mails [with an order confirmation] within 24 hours is no longer sufficient," says Chen. "[Customers] also want easy electronic tracking of orders. They want the merchant to e-mail the FedEx tracking number."

In addition, e-fulfillment operations must be ready to handle another post-delivery task-processing product returns. In the traditional retail scenario, a customer who is dissatisfied with a product simply brings it back to the place where he or she bought the item. But unhappy online shoppers ship their merchandise back to distribution centers, forcing companies focused on pushing product out quickly to shift gears and take product back.

On top of that, online retailers experience more returns than catalog merchants do; consultant Finley says he's seen returns for online apparel retailers run as high as 45 percent of their orders. He attributes that high return rate to the tendency among online customers to order more than one size of an item to ensure the clothing fits them. "If you have a no-questions-asked return policy, a money-back guarantee, and you supply a return mailing label," he observes, "then back the item goes."

In fact, returns have proved to be one of the most troubling aspects of e-distribution. Finley says some online merchants have solved this problem by establishing a centralized return center. Such a facility can employ workers whose primary assignment is simply deciding whether the returned item is defective or resaleable. "Using a centralized return center simplifies the process," Finley notes. "It doesn't let a deluge of returns clog up the daily operations."

But setting up a dedicated return center isn't the only option available to e-tailers today. Analyst Ting Piper at International Data Corp. in Framingham, Mass., suggests that online merchants consider outsourcing product returns to a returns-management service. Such services operate local drop-off centers, located in existing grocery or retail outlets, where online shoppers can return merchandise themselves rather than ship it back to a return center.

In the future, companies engaged in e-fulfillment will not only have to master returns but also work to reduce the overall cost of their operations and figure out how to distribute their products globally. Forrester Research in Cambridge, Mass., last year surveyed 40 executives working for dot-coms, retailers, and manufacturers. These executives cited international distribution as the biggest challenge facing companies involved in e-fulfillment. Second, in their view, was reducing fulfillment costs. (See the graph on Page 71.)

Global fulfillment has proved tricky because dot-coms frequently are unable to provide the total or "landed" charges-including duties and tariffs-for shipping a product overseas at the time of an order. "Landed cost is the issue that comes up most often from retailers," confirms Stacie McCullough, an analyst with Forrester Research.

Virtual Shopping Trip

Clearly, e-fulfillment creates a host of operational and system challenges for distribution professionals. To support companies engaged in online selling, the warehouse operation must be more nimble and flexible than in the past. That requires distribution managers and their workers to bring a new mindset to their jobs.

That mindset calls for placing themselves in the virtual buyer's shoes. After all, the test for any e-fulfillment operation is to pick the order for the online buyer with the same degree of personal attention and care that the buyer would use. "If you go into a retail store, you can get what you want if it's there," points out St. Onge. "To create that same experience on the Internet is clearly what companies are trying to do."