Take any list of recent dot-com casualties, and Internet retailers—online grocers, in particular—are sure to figure prominently. Many times, their problems can be traced to logistics. A number of these dot-com merchants have foundered because they couldn't master the trick of picking individual items and then distributing those products direct to the consumer's door economically.

Yet one upstart e-tailer thinks that it has come up with a survival strategy. Webvan Group Inc. of Foster City, Calif., is banking on an array of high-tech tools to help it thrive. These include customized software to manage the ordering process and highly sophisticated materials-handling technology that facilitates the picking of "eaches" in its warehouses. It has also implemented an electronic hub-and-spoke routing system that will help it move goods efficiently and rapidly to the consumer's door.

"Logistics plays an integral role in Webvan's overall strategy," confirms David Rock, Webvan's vice president, development. "We believe that our integrated proprietary fulfillment system provides the foundation for revolutionizing the way people shop, from the moment customers order to the time their order is hand-delivered to their home at the time they choose."

Louis Borders, who founded the retail chain Borders Books, started Webvan in 1997. Launched in the San Francisco Bay area, the company quickly expanded into the Sacramento, Atlanta, and Chicago metropolitan areas. It gained additional markets in Seattle, Portland, Orange County, Los Angeles, and San Diego when the online retailer acquired rival HomeGrocer.com last year. Webvan, however, has since pulled out of Dallas, Atlanta, and Sacramento.

Webvan started out as an online grocer, selling produce, dry goods, and health and beauty aids. It has now expanded its product line to include books, compact discs, household and pet supplies, office goods, and even consumer electronic items. "Customers start shopping with groceries and expand to other categories," reports spokeswoman Amy Nobile, who notes that deliveries are free if the order exceeds $75. "The goal is to eliminate various errands on Saturday."

Like many Internet retailers, Webvan has yet to turn a profit. For fiscal year 2000, it reported sales of $259 million, an increase of 642 percent over the previous year, but its losses are reportedly even higher. Although its operations are still not in the black, Webvan, which recently brought in Robert Swan as its CEO in hopes of turning things around, is betting that its logistics operations will build it a loyal customer base that will make it a profitable retail business.

The high-tech distribution process begins the moment a customer places an order online (Webvan accepts no phone or fax orders). The information moves directly from the company's Web site into an order-management system (OMS) that is actually an enterprise resource planning (ERP) software package from PeopleSoft Inc., with some modules customized by Webvan.

The OMS splits the customer's order into one of three product categories for picking: ambient (dry goods), chilled goods, or frozen items. It then transfers the orders to the warehouse management software (WMS) package that oversees distribution center operations.

Like the ERP software, the WMS package was purchased from an outside vendor, Optum, but the application itself was tailored to fit Webvan's needs. Henry Bruce, Optum's vice president of market strategy, says that the two companies worked together to develop a single integrated solution that optimized the materials-handling equipment and all warehouse functions, such as order picking, check-in, and put-away. One of Webvan's goals, Bruce says, was to design the user interface screens in Optum's software to eliminate any unnecessary radio-frequency device scans or the need to key entries into a handheld terminal.

Besides picking, the WMS oversees the receipt of inbound product at Webvan's warehouses, which are leased facilities. Webvan has divided each building into areas for dry, refrigerated, and frozen-food items. Bruce describes these DCs as massive—typically 350,000 square feet. "Each DC looks like the biggest grocery store you've ever seen," he reports, "except that there are no people walking around with shopping carts."

Webvan uses flow racks to hold its frozen items and the majority of its refrigerated items. But for dry-goods storage, it uses carousels, which can pack a lot of items into a given area and expedite the picking process. "We employ carousel technology to increase the SKU density," says Rock. Webvan wrote special interfaces between the WMS and the operating software for the carousels, which are made by Diamond Phoenix.

The carousel technology has gone a long way toward enhancing warehouse efficiency because it optimizes picking of the largest product category, dry goods. To expedite picking as well as putaway, the software uses a mathematical formula called a "round robin algorithm" to assign inbound product to a carousel location. "The use of this round robin algorithm minimizes wait time [for the workers picking product] and keeps the picking process moving very quickly," says Bruce.

The software directs the carousels to spin baskets containing the desired product within easy reach of the worker, who picks multiple customer orders at one time. "They wanted the inventory to come to the pickers," says Bruce. The worker then places the picked items into totes at stations called pods that are joined together by miles of conveyor. One worker is assigned to each pod, which occupies a 12- by 20-foot space. Both totes and stored products are marked with bar codes for identification. "We have a master system that knows where the tote is at any point in the process," reports Rock.

The system keeps tabs on how many totes of product are required for each customer order, generally assigning an individual tote for each category of goods (ambient, chilled, or frozen items). It also directs workers to place the heaviest items into each tote first and coordinates product selection so that frozen goods are picked last.

Once the totes are packed, all of the containers that make up a customer's order are marshaled at the dock for loading into a trailer. Webvan operates its own fleet of leased tractors and trailers to move the consumer-bound products to a transfer station. The online grocer has seven to nine transfer stations in each metropolitan area. At the station, the totes are transferred into a so-called "city" van, which is an Isuzu truck with a refrigeration unit. The totes are loaded into the van in the order in which the local courier will make his delivery stops.

Here again, Webvan relies on customized off-the-shelf software to manage its delivery operation. The online grocer uses the Resource In Motion Management System (RIMS) package from Descartes Systems, to perform dynamic routing, reconfiguring a van's delivery stops as new customer orders come into Webvan. "Before a customer order is delivered, the software might switch it from van to van 10 to 12 times," says Rock.

That route-planning tool is also integrated into Webvan's online storefront so that customers have a say in selecting the drop-off time. "When new customers go to the Web site and place orders, they put in their address," explains David Waksberg, vice president of product strategy at Descartes. "The optimizer [engine in the application] looks at the schedule and sees where the trucks are going to be at a given time. It then tells Webvan which delivery slots are good." Within a couple of seconds, Webvan presents the delivery options to the customer on its Web site. (Waksberg notes that the Descartes software even has the ability to assign a higher level of service based on the profitability and loyalty of a customer.)

The routing tool has proved invaluable to the company's effort to achieve logistics efficiencies. "Webvan is trying to balance a couple of values that on their face are contradictory," Waksberg notes. "It wants to provide superior customer service on the one hand, and on the other, it wants to aggregate stuff to achieve greater densities. When you are promising deliveries on an incremental basis, you need to optimize the deliveries as you make appointment promises. This tool gives you the ability to achieve greater densities."

Webvan promises to deliver the customer his or her items within 60 minutes of the specified appointment time. "You choose which hour you want," says Rock, "and our system essentially will reserve that time slot for you." Even though the delivery requirements are stringent, Rock says that Webvan has met most of its appointment promises. He notes that his company's on-time delivery performance ranges from 97 to 99 percent.

Webvan's founders spent considerable time planning their logistics operation to maximize throughput and to master two of distribution's most daunting tasks: individual order picking and direct consumer delivery. If enough customers can be persuaded to change their shopping habits, then Webvan believes that its logistics system can provide the requisite customer service and turn a profit.

How many is "enough customers"? Webvan won't say, but Optum's Bruce is willing to speculate. "I've read that they've scaled their distribution centers to handle up to 8,000 orders a day with an average value of $100 an order," he says. "That's their goal. They say they'll break even once they reach half that amount of orders."