The Big Send-Off

June, 2009

To fulfill through an outsourcing partner, first pick and pack the right criteria

To fulfill through an outsourcing partner, first pick and pack the right criteria

By Paul Demery

After a promising first year as an online retailer of strings, picks and other parts used to play and maintain guitars, Music Parts Plus stopped the music for several months to replace an in-house fulfillment operation that sent out too many wrong orders. "We reached $1.2 million in sales our first year, shipping about 200 packages a day," says founder and CEO Dominick Moreo. "But we had an order error rate of close to 10%. That led to a reduction in repeat orders, unhappy customers, and our overall expenses going sky high." Moreo decided to virtually sweep his in-house fulfillment operation clean, including shutting his warehouse, and seek an outsourcing provider. He checked out a couple, considered them incapable of handling his large number of small items like six-piece sets of guitar picks, and eventually chose Quiet Logistics, a Boston-based fulfillment company that has turned around his order accuracy while receiving and managing inventory in its own warehouse, and picking, packing and shipping orders. Nearing 100% accuracy The move has paid off, Moreo says, with orders processed in much higher daily volumes while hitting close to 100% accuracy. "In the past, we did about 250 orders in a day; now we can do 250 orders in one and a half hours," he says. "And our feedback from customers has been 100% positive. It's not just general comments like 'great job;' a big chunk of them say 'good shipping' or 'super fast shipping.'" Finding the right outsourcing partner for all or part of a retailer's fulfillment needs can make all the difference in a retailer's ability to provide a high level of service while operating efficiently. But how to choose an outsourced vendor is not always easy—and the steps to take and questions to ask are not always apparent. "It's easy to find outsourced fulfillment that's cheap and ineffective or that's effective and expensive, but it's hard to find something that's both inexpensive and effective," says Marc Tanowitz, a principal with fulfillment consultants Pace Harmon. But retailers can find good and fairly priced outsourced fulfillment arrangements, he adds, if they identify their needs, such as improving customer service and order-to-delivery times, and review potential fulfillment providers' capabilities before nailing down a contract.

10 key questions Here are ten questions to ask a prospective provider.

1. What will my fixed and variable costs be? Retailers operating fulfillment centers must factor in costs of building and maintaining their own warehouses, labor and shipping. Some choose this route to have maximum control over where their inventory is located and how it's handled, but outsourcing offers the ability to pay only for the amount of warehouse capacity and labor required to meet demand. Retailers must verify the full scope of fees a fulfillment provider charges, experts say. Some charge a percentage of sales volume, but others such as Xpert Fulfillment charge flat per-order and per-item fees, then apply discounts based on volume. Fulfillment providers may also add fees related to packaging, receiving and storing inventory. "It's important to find partners who can be flexible with you in the financial arrangement," says Dean Arnold, vice president of operations for Kenco Logistic Services. "Some retailers need a variable cost structure while others, usually larger retailers, want a consistent, predictable structure that provides an overall cost savings."

2. Do you back up performance? Retailers can work out service-level agreements that set discounts based on performance in areas such as order-to-delivery times. Such an agreement, for example, might establish a 5% discount if more than 95% of order-to-delivery times take longer than a certain average within a month, followed by higher discounts in subsequent months, Tanowitz says. A retailer could also seek terms to create incentives for fulfillment performance related to its most important products—for example, those most popular with customers or with the highest profit margins, he adds.

3. How efficiently do you re ceive and manage inventory? To meet fulfillment performance levels, a provider must offer an organized and efficient way to receive and store inventory, and quickly and accurately update a retailer about what new inventory has arrived and what remains from past orders. The fulfillment provider should offer a way to check the retailer's purchase orders against incoming delivery documents for accuracy, and alert the retailer of any discrepancies. "The time it takes to receive goods on a warehouse dock and place them in warehouse stocking locations can range from hours to days, so retailers should find out the average time this takes at fulfillment partners," says Bob Boylan, president of Xpert Fulfillment. At the same time, the retailer needs to use this updated inventory data to manage merchandise planning and ensure that it has ordered enough stock to support fulfillment performance targets. "Much of fulfillment optimization comes from the way you manage inventory," Tanowitz says. "In the current economic environment, the largest issue is figuring out how much inventory to invest in and which stock is worth keeping in large quantities."

4. How fast and accurately do you pick orders? A retailer should ensure that a fulfillment provider can get orders ready for shipment by a certain time each day so the retailer can meet promised delivery times without resorting to the most costly shipping options. "This is the part that can make or break an e-commerce business," Moreo says. Music Parts Plus chose Quiet Logistics partly because it uses a robotic picking system that automatically brings inventory to warehouse workers, replacing the need for the workers to find and pick stock for each customer order. The robotic system from Kiva Systems Inc. uses web services to integrate with Quiet's warehouse management system and Music Parts Plus' Infopia order management system. Kiva robots, which look like small boxes on wheels that fit under portable inventory racks, are designed to operate with the most efficient movement between locations. They deliver an inventory rack to a worker at an assigned packing station. "The time from the moment we get an order online to the moment we have a package with a shipping label and ready to leave the building can be as little as 14 minutes," Moreo says. "In the past, it could have been 24 to 48 hours."

5. How do you manage returns? In addition to arranging with carriers such as UPS, Newgistics and the U.S. Postal Service to ship returns back to retailers or suppliers—or to forward returned merchandise to new customers—fulfillment providers should give retailers immediate updates on the status of returns. At Music Parts Plus, Moreo receives electronic alerts from Quiet Logistics of when it has received returned packages so the retailer can process refunds or exchanges. "We can now calculate how much time we spent on a return, including the time to e-mail the customer instructions on how to return a product, and how long it took us to get the product back and update the Infopia system to relist it," Moreo says. Quiet also has developed a process by which it records items received damaged from suppliers or customers to ensure those items are not placed into regular inventory stocks.

6. Can you handle global fulfillment? One of the biggest barriers for entering into multinational e-commerce markets is dealing with international logistics, returns, value-added taxes and managing overseas warehouses. Outsourcing fulfillment providers such as E4X Inc. and Shipwire Inc. handle all trans-border matter such as customs clearance and showing a full landed cost to a retailer's foreign customers. With E4X, which works with a retailer's own fulfillment operation, retailers ship to its East Coast warehouse to have E4X handle the international shipment to 34 countries. Shipwire operates nearly 2 million square feet of warehouse space in six facilities in the U.S., Canada and the U.K. It integrates with an online retailer's shopping cart to accept orders, then handles the warehouse management, international customs and tariffs.

7. Can you scale up to match my expected growth? CoffeeServ Inc.'s CoffeeForLess.com is using the flexibility fulfillment provider Webgistix Corp. offers in warehouse space to better understand customer demand and improve inventory management for customers in the Midwest and on the West Coast, CoffeeServ CEO Ben Kirshner says. Webgistix, which integrates its fulfillment management software into clients' shopping cart software, has customized software that sends Coffee For Less daily e-mail reports that match orders from West Coast and Midwest customers with what is stocked in the Webgistix Las Vegas warehouse. If those reports show significant demand for items not available in Las Vegas, the retailer will adjust inventory to allocate more stock to that facility instead of its Philadelphia warehouse, Kirshner says.

8. Can you be flexible with technology systems? It's fairly common for retailers to use some of their own systems, such as for maintaining financial transaction data through their own order-to-cash processing system, then forward orders to the fulfillment partner's warehouse. Others also have the fulfillment partner maintain inventory records in the retailer's own warehouse management system, Tanowitz says. Either way, he adds, it's important for retailers to check how their systems and their partner's systems can work together. A retailer's warehouse management system may not be optimized for the fulfillment partner's warehouse, requiring the partner to do extra legwork in matching incoming orders with the location of products in the warehouse, Tanowitz says. On the other hand, if a retailer relies on the partner's warehouse management system, the retailer may find that it does not support the characters needed to describe the retailer's products, he adds.

9. How do you manage fulfillment mistakes? While it may be impossible to prevent all fulfillment mistakes, an outsourcing partner must have a policy of immediately addressing problems and keeping the retailer informed of both the problems and their solutions. Quiet Logistics, for example, provides an online platform for communicating and resolving problems. "If a shipment gets damaged while in transit, Quiet has given me the ability to resolve the issue in mere seconds online, rather than a lengthy review process on my own end," he says. Shipwire provides immediate alerts to a client web portal, or through e-mail or phone contact, if an order goes out with the wrong items or if an order is damaged in transit, says vice president of marketing Nate Gilmore. It also insures each shipment to cover any loss during international or domestic shipment, he adds.

10. How can you help me cut fulfillment costs? Some fulfillment providers may emphasize their ability to ship with multiple carriers, but this doesn't necessarily result in lower costs to the retailer. Although rate shopping can search for the best deal for each shipment, companies shipping in high volumes often get the best rates by giving most of their business to a single carrier. Retailers should also clarify how a provider charges fees for different types of shipping, Boylan adds. Fulfillment providers generally earn higher margins on next-day shipments forwarded to carriers, and as a result may charge lower per-order and per-item fulfillment fees. Coffee For Less, which still operates its own warehouse on the East Coast, enlisted Webgistix to help it get through the 2008 holiday shopping season with better shipping service for customers on the West Coast. Although the fees Coffee For Less pays Webgistix are about the same as the labor and warehouse management costs at the retailer's Philadelphia facility, the shipping cost to the West Coast from Las Vegas is about 50% less than from Philadelphia, Kirshner says. And when it comes to getting efficient fulfillment services, there's no better time than the holiday rush.

About Quiet Logistics
Quiet Logistics, Inc. is the industry's first Third Party Logistics company to deliver a complete outsourced fulfillment solution that leverages the game-changing material handling robotics of Kiva Systems. Quiet Logistics' "One Touch" fulfillment service is an alignment of best-in-class operations experience and a fully integrated technology platform with a simplified business model to improve distribution throughput, accuracy, scalability and flexibility at costs that are 30-50% lower than the competition. For more information on Quiet Logistics and its services, please visit www.quietlogistics.com.