The Fulfillment Dilemma
January 1 2000 by Peter Buxbaum
The current state of online retailing recalls the tale of the hapless storekeeper who was meeting with his accountant. “I don’t understand how you make a living,” said the CPA. “You’re losing money on every sale.” “Yes,” answered the man, “but I make it up in volume.”
These days, according to a Forrester Research report, less than half of online sellers earn a profit on each package they ship. So the projections that say on-line sales are expected to grow by 750 percent over the next 18 months aren’t necessarily good news.
The profitability problem lies, in large part, with the failure of these etailers to recover shipping costs. Some merchants, for example, charge a flat shipping fee when the actual costs vary. Others, in order to encourage on-line sales, sell merchandise-delivered-for the same price as in their stores.
And the problem will continue to grow as on-line sales volumes-together with the concomitant number of small package shipments-explode. The latter phenomenon is likely to wreak havoc on traditional logistics systems more geared toward delivering merchandise in bulk to a warehouse dock than depositing small parcels at consumers’ doorsteps.
In fact, today’s conventional wisdom among e-tailers is something akin to applying a bandaid to stop a hemorrhage, according to Forrester analyst Stacie McCullough, who prepared the report. Online merchants are “easing into selling goods on-line,” she says, by holding back their entire complement of products from the Web. As a result, on-line sales account for less than 10 percent of total revenue among Forrester’s interviewees, with median orders of 400 per day.
This Web shyness will ill serve the on-line business of the future, if, as expected, e-commerce grows in importance as a distribution channel. The emphasis, therefore, must be less on Web selling, which, says McCullough, companies have figured out how to do fairly well, and more on delivering merchandise to customers according to their increasingly exacting expectations.
The Forrester report recommends the adoption of a three-tiered end-toend logistics model:
1. Empower the customer. Set realistic expectations by informing the customer, prior to placing an order of product availability, delivery window, and total cost. Give customers the opportunity to track the status of their shipment over the Web. (Online customers check order status an average of seven times, according to the report.)
2. Optimize distribution for parcels, not pallets. Merchants must consolidate multiple items into single shipments; add value with services such as custom assembly and gift packaging; and drive down back orders by implementing demand management systems.
3. Deliver to the doorstep, globally. At this point, only 10 percent of Web retailers are willing to incur the hassles of shipping to all destinations worldwide. Merchants who fail to exploit global opportunities will miss out on the 30 percent of on-line shoppers located outside of North America, says Forrester. Global logistics services providers can smooth the process by taking over the last leg of the delivery. And trade logistics software can ease global regulatory compliance as well as provide actual landed-cost calculations.
For the future, expect third parties to emerge with well-developed competencies in the inventory management and fulfillment strategies that are required for successful on-line sales delivery. On-line merchants will help themselves by setting tighter time commitments for their own suppliers. And the giants of e-commerce, the Amazon.coms, will tackle fulfillment in-house.
Finally, the report says, new Web-based exchanges will be popping up, designed to match the spot needs of shippers with the spot capacity of carriers “for every form of movement from home deliveries to truckload shipments.”