Who does the best job of e-fulfillment?

An exclusive study by Andersen Consulting and Logistics Management Magazine looks at how well three types of e-tailers fill orders placed online. The results may surprise you.

By -- Logistics Management, 11/1/2000

With the rocket-like growth of Internet retailing come considerable challenges for online merchants. Not only must they operate under the glare of the media spotlight, but they also have to satisfy some of the most demanding customers on the planet-customers with very high expectations regarding speed and order accuracy.

To no one is this more apparent than to the distribution staff members who are charged with filling online orders: They have to provide extraordinarily high levels of service while controlling distribution costs. This challenge has proven especially critical for the startup dot-coms, the companies that sprang to life to exploit the Internet as a new retail channel. They have no previous experience in distribution, yet in many cases, they're under increasing pressure from investors to keep costs to rock-bottom levels.

On the positive side, although those startup e-tailers may lack logistics experience, they also bring no preconceptions or bad habits to the task. Thus, the question becomes, do startup cyberstores do a better job of handling e-fulfillment than the traditional catalog merchants or retailers with chains of stores across the country? Which group provides better customer service and which has the lowest costs? And, finally, which of these e-tailers stands the best chance of success?

Brave New World

To get some answers to these questions, Andersen Consulting and Logistics Management Magazine surveyed three categories of online merchants: pureplays (companies launched specifically to sell goods over the Internet), catalog merchants, and incumbent retailers (retailers that had operated traditional bricks-and-mortar retail outlets prior to entering the brave new world of e-tailing). The researchers conducted in-depth interviews with 26 companies engaged in e-fulfillment. Although the sample size might appear small, respondents answered a detailed survey with more than 60 questions about their business operations and processes.

The survey respondents, which included a number of well-known companies (see the accompanying sidebar), fell into one of three categories as follows: 10 were pureplays; eight were catalog retailers that had entered Web-retailing after years of experience selling merchandise via the mail; and eight were incumbent retailers.

Annual revenues reported by the respondents varied widely: One-quarter of the companies surveyed reported revenue of under $100 million, while another quarter of the recipients said their revenues exceeded $5 billion, the remainder falling into the broad range of between $100 million and $5 billion. Better than one-third of all respondents reported they had been conducting e-commerce for between two and three years.

As might be expected, the catalog companies and traditional retailers for the most part forecast that e-commerce sales as a percentage of their total revenue would climb over the next five years. The catalog merchants, for example, said that e-commerce, which accounts in aggregate for 25 percent of their annual sales today, would account for 40 percent of their revenues in five years' time.

Our survey showed that catalog respondents were taking more orders over the Internet on average than their pureplay and retailer counterparts were. The catalog merchants surveyed said they handled 22,428 orders per day as a group compared with 3,484 for the incumbent retailers and 1,181 for the pureplays. Catalogers reported that their average order included 2.8 items, while incumbent retailers reported an average order size of 2.7 items and pureplays 1.8.

Procedures for filling customer orders placed on the Internet also varied tremendously from company to company. (See Figure 1.) Four of the 10 pureplays relied on their suppliers to fill all orders for them, while three did it themselves. Three pureplays did some fulfillment themselves while looking to suppliers for help on occasion. By contrast, only one of the catalog merchants relied exclusively on its suppliers to handle the fulfillment of orders placed on its Web site.

Six of the eight incumbent retailers surveyed said that they used either retail store inventory or stock from an existing retail distribution center to fill orders. Another three respondents had their suppliers ship directly to customers. (Note that in many cases, respondents used more than one method of filling orders.)

For their part, six of the eight mail-order merchants had set up a distribution center strictly to handle e-commerce. One respondent had hired a third party to run its distribution operation. In addition, five noted that they sometimes had suppliers ship merchandise to their customers.

The survey found that pureplays had a preference for outsourcing. Seven of the 10 pureplay respondents reported that they had subcontracted out their warehousing operations. By contrast, only one of the eight catalogers turned warehousing over to an outside facility, while three of the eight traditional retailers did so.

Given that they handled fewer orders on average, it was no surprise that the pureplays operated their facilities fewer hours per day than their rivals did. Pureplays reported that they kept their warehouses open 12.5 hours per day during non-peak times and 15.8 hours per day during peak seasons. Incumbent retailers, on the other hand, said they operated their warehouses 15.9 hours per day during non-peak times and 20.3 hours during peak periods. Catalogers ran their facilities 14.1 hours a day during non-peak times and 20.0 hours per day during peak periods.

Mail-order merchants kept their distribution centers open the most days per week on average-5.7 days per week during non-peak times and 6.5 days per week during peak periods. Pureplays and incumbent retailers operated their distribution centers about the same number of days per week. Pureplays reported keeping their warehouses open 5.3 days per week during non-peak times and 5.9 days per week in peak periods. Incumbent retailers operated their distribution centers 5.0 days per week during non-peak periods and 6.0 days per week during peak times.

The Software of Choice

No matter whether they filled the order themselves or relied on a supplier, 63 percent of the incumbent retailers in the survey said they updated inventory posted on their site in real time or near real time. This compared with 56 percent of the catalog merchants and only 50 percent of the pureplays. In fact, surprisingly for companies operating in a market with high customer expectations, 38 percent of the pureplays said they updated the inventory information on their site only once a day.

The pureplays' failure to update inventory information more frequently than once a day came as a surprise given that a high percentage of respondents use warehouse management systems (WMS), the software that oversees warehousing and inventory tasks. A full 18 of the 26 respondents reported that their operations used a WMS and another three reported plans to install this type of software in the future. Only one cataloger and one pureplay said they had no plans to use that type of program. Of the e-tailers that had a WMS in place, 76 percent updated the inventory information on their Web sites in real time or near real time.

The most popular software application mentioned by the survey respondents was customer contact management. A full 19 of the 26 respondents had deployed that type of software. (See Figure 2.) Warehousing management systems were the second most commonly used application. Third in popularity were order management systems (OMS), which were employed by 17 survey respondents. All eight catalog companies in the survey reported using OMS applications as did five traditional retailers and four of the pureplay e-tailers.

As for other software applications used by e-tailers, only six of those surveyed were using enterprise resource planning (ERP) software, but four said they had plans to do so in the future. Eight of the respondents said they were using transportation management systems (TMS) and three said plans were in the works for the use of such software.

Fifteen respondents were using electronic data interchange (EDI) with their suppliers to exchange data on inventory levels. Eleven of the 26 also reported sourcing over the Internet with their suppliers, and nine respondents said they used demand-planning software to help forecast customer requirements.

Although all three categories of e-tailers made use of logistics-related software, the pureplays in this survey weren't using other types of technology as frequently as the catalogers and incumbent retailers did. For instance, only a third of the pureplay e-tailers reported using bar codes, while 78 percent of the catalog merchants and 63 percent of the bricks-and-mortar retailers did so. Three-quarters of all incumbent retailers employed radio-frequency handheld terminals in their operations compared with half of the catalogers and only one of the pureplay companies. Catalogers did use more hand-wired terminals-half of all catalog-company respondents, in fact, reported using these devices compared with only one bricks-and-mortar company and one pureplay respondent.

Although three-quarters of the catalog companies and five of the eight incumbent retailers used package-sortation equipment in their e-fulfillment operations, none of the pureplays employed that technology. Similarly, only four of 10 pureplays surveyed reported using conveyor systems, while all but one incumbent retailer and three-quarters of the catalogers did so. One pureplay respondent did report that it used automatic guided vehicles-equipment not used by any of the other respondents. (See Figure 3.)

Delivering the Goods

Once the online orders are picked, the challenge becomes getting them into the customers' hands. This is a significant task for the e-tailers participating in the study: The average number of packages shipped per day was 29,536 for survey participants as a group. Pureplays sent the fewest packages per day on average: 1,918. (Note that these figures do not reflect holiday season spikes in volume.) Bricks-and-mortar retailers sent out 4,224 packages on average per day, while mail-order merchants shipped 72,975 on average. That number was somewhat skewed because one respondent reported shipping nearly a half million packages per day. When that company's response was factored out, the average number of packages shipped per day by catalogers participating in our survey fell to 19,114.

When it came to choosing a carrier to handle those shipments, the pureplays tended to call UPS. In fact, the pureplays reported a decided preference for UPS ground service, shipping nearly 52 percent of their shipments via that service on average. Incumbent retailers, in contrast, sent only 26 percent of their shipments via UPS ground, while catalogers sent 17.8 percent of their merchandise in that manner. Compare that with U.S. Postal Service (USPS) priority mail movements. Pureplays used that shipping method for only 2 percent of their packages compared with 22 percent for incumbent retailers and 20 percent for catalog merchants. (See Figure 4.)

By the way, our study showed no clear pattern in the way e-tailers charged customers for shipments. In fact, "other" was the most common category checked by respondents when asked to specify how they collected shipping and handling fees. Of the remainder, three of the eight incumbent retailers said they charged a fixed fee regardless of shipment size. Two of the catalogers said they assigned specific charges for each item ordered. As for the pureplays, there was no consensus whatsoever: Each of the respondents reported using a different pricing method. e-Tailers evidently are still trying to determine the best approach in this area.

Serving the Customer

Online customers expect a high level of service. When a package doesn't arrive as promised, they're apt to register a complaint. Likewise, when they request order-status information, they want it right away. When answering customer questions, the pureplays and incumbent retailers were practically tied for the quickest response time. Some 63 percent of the pureplays in our survey and 62 percent of the incumbent retailers said they responded to customer inquiries in less than four hours. Some 56 percent of the catalogers responding to the survey also dealt with customer inquiries in less than four hours.

When it came to returns, the pureplays that responded to the survey reported the lowest return rate-6.4 percent. Incumbent retailers said 8.5 percent of their shipments were returned to them on average, while catalogers experienced a return rate of 12.9 percent. But handling those returns posed the most significant financial burden for pureplays. The average cost for returns incurred by pureplays was $17.51, although it should be noted that one company singlehandedly increased that number by reporting a $50.00 cost. When that response was excluded from the calculations, the cost for handling product returns dropped to $7.26.

Catalogers incurred an average cost of $11.02 for handling returns. But again that number was skewed because one respondent also reported a $50.00 cost. When the average was recalculated without that retailer's response, the number fell to a more reasonable $3.21. Our survey found that incumbent retailers had done the best job of mastering return costs: Their per-shipment return cost was only $2.35.

As for handling returns, all of the catalog companies reported that they performed the task themselves. Three-quarters of the incumbent retailers also handled returns internally, while the other quarter outsourced the task to a third party. By contrast, only one pureplay handled customer returns internally. Three of the 10 hired a third-party logistics company to process returns, and two had a joint arrangement with their suppliers. (The other pureplays chose not to answer this question)

The catalogers responding to our survey were the quickest to credit a customer's account for a returned item. On average, mail-order merchants took a single day to credit an account, while pureplays took six days and retailers took five.

Performance Indicators

Interesting, pureplay companies were less likely than their counterparts were to participate in traditional methods of quality control. Only two of the 10 pureplays reported that they had a quality inspection procedure in place covering picking. By contrast, five of the eight mail-order companies and three-quarters of the bricks-and-mortar concerns had a quality inspection program for picking.

When it came to cycle counting their inventory, however, all eight of the catalog companies performed that type of inspection, while five of the traditional retailers and only one pureplay did. On top of that, all of the catalogers and three-quarters of the retailers that responded to the survey performed quality inspections of their receiving function. Yet only one pureplay respondent applied quality checks to that activity.

As for assessing their performance, the three groups of e-tailers favored different metrics. Pureplay merchants focused on cases or orders picked per hour. Two of the 10 pureplays said they checked cases per hour, a metric that was not employed by catalogers or incumbent retailers to measure productivity. Three of the pureplays said that "orders picked per hour" was a key productivity measure. Again, only one incumbent retailer and one cataloger used that measurement.

Catalog companies preferred pieces picked per hour-half of those surveyed used that metric. Likewise, two of the eight incumbent retailers measured pieces picked per hour.

As for the future, all three groups of e-tailers agreed that handling increasing volumes was the most critical issue they faced. But they split on the second most critical issue: Incumbent retailers and pureplay e-tailers cited finding ways to decrease fulfillment costs as a percentage of revenue. But the catalog merchants felt that global distribution was the second biggest challenge they faced.

The Work Ahead

The research suggests that pureplays, which have so far concentrated on launching their business, may have to start paying more attention to logistics quality if they wish to succeed. This would include employing more of the traditional performance measurements to achieve e-fulfillment excellence. Online dot-coms still need to manage more by the numbers and rigorously employ performance and operation metrics as catalogers and retailers do.

The pureplays would also be well advised to abandon their reluctance to invest in technology such as radio-frequency applications. The incumbent retailers appear to be leveraging their investments in technology and equipment to gain an advantage in e-fulfillment efficiency, putting the dot-coms at risk of falling behind.

To meet customer expectations, pureplays should be achieving a 100-percent fill rate on orders. For many of them, this means synchronizing their WMS and OMS systems with Web-front interfaces to provide customers with information on inventory available to promise.

Although the survey suggests that pureplays may have to work harder at mastering the behind-the-scenes aspects of distribution, the catalogers and incumbent retailers may have to do more to improve their responsiveness to customers, such as providing speedy e-mail responses to inquiries. As the e-commerce field develops, all three types of e-tailers will be forced to refine their services continually as their increasingly demanding customers raise the bar for everyone.

Editor's note: To learn more about this topic, join Logistics Magazine's first technology Webcast: "Can you survive the e-fulfillment revolution?" on Dec. 7, 2000. Register by logging onto our Web site, www.logisticsmgmt.com, to receive a password that will allow you to participate in the seminar.