Why finance managers need to monitor e-commerce fulfilment



eCFO: Why finance managers need to monitor e-commerce fulfilment

Key points:

  • Most finance managers don't monitor the delivery of online goods at all
  • A fulfilment system is the largest capital outlay an online merchant makes
  • A poorly managed fulfilment system severely undermines an online operation
  • To online shoppers, a delay in receiving an order definitely qualifies as poor customer service

By Lauren Gibbons Paul 15 December 2000

The idea of selling groceries over the Internet has always been a bit of a puzzler, reports eCFO, a publication of The Economist Group

Why would anyone with any degree of sanity take a business with paper-thin margins and wed it to a costly fulfilment system? Prospects for profitability would seem, at best, dim. And in fact, online grocers--once trumpeted as future stars in the new economy--have stumbled badly of late. In April 2000, for example, Netherlands-based Royal Ahold acquired a 51% stake in struggling cyber-grocer Peapod for $73m. Then in October, Priceline.com announced it was shutting down its online grocery operation. All this doom and gloom begs the question: what's up with Robert Swan?

Mr Swan, CFO and COO at online grocer Webvan Group Inc, remains undeterred by the recent troubles in the industry--even though the Foster City, California-based company lost $74m in the second quarter of 2000. More remarkable, the redoubtable Mr Swan insists he can raise the operating margins at Webvan to 12%--or four times that of land-based grocers. A neat trick--if he can pull it off. Webvan's bold strategy--and perhaps the company's survival--depends on the e-tailer's ability to serve a maximum number of customers while wringing every drop of revenue out of its fulfilment and delivery systems.

Mr Swan says that at full capacity, each of Webvan's distribution centres could fulfil 8,000 orders per day, seven days a week, at an average $103 per order. A tall task. To make sure Webvan is moving towards its targets, Mr Swan watches fulfilment data like a hawk. 'CFOs must drive operational performance to meet financial goals,' he explains. 'Therefore I monitor the fulfilment operation on a daily and hourly basis.'

The search for fulfilment
Oddly, CFOs at many clicks-and-mortar operations barely look at e-fulfilment performance, let alone track it by the hour. In fact, most finance managers don't monitor the delivery of online goods at all, choosing instead to let executives in customer service or logistics handle the chore. But as executives at pureplay e-tailers know, passing the fulfilment buck is playing with fire. Typically, a fulfilment system is the largest capital outlay an online merchant makes. Without reliable data, it's hard to analyse the return on the investment--a big blind spot. 'Fulfilment is a huge spend,' says Ted Augustine, chief logistics officer at Santa Monica, California-based eToys Inc. 'It has to be very closely monitored and managed.' Note that eToys, which pays considerable attention to delivery of merchandise, is still in business. Analysts say a poorly managed fulfilment system severely undermines an online operation--no matter how good the products are. 'Fulfilment is part of customer service,' notes Geri Spieler, California-based research director of e-business services at research firm Gartner, based in
Stamford, Connecticut. 'Merchants lose customers more from bad customer service than from any other reason.'

And to online shoppers, a delay in receiving an order definitely qualifies as bad customer service. In some cases, Mr Spieler says, '[fulfilment] problems have forced enterprises to shut down their websites.'

Even when an e-tailer manages to hold on to customers, inefficient fulfilment systems can slow down the company's cash conversion cycle, in effect eating away at working capital and profit margins. 'Every second a product that could be shipped out sits in a distribution centre is money down the drain,' notes Stacie Kilgore, senior analyst for e-business applications at marketing research firm Forrester Research Inc in Cambridge, Massachusetts.

By contrast, a well-oiled fulfilment system not only maximises inventory churn, it also keeps customers happy, generates return business and therefore plumps up a company's top line. 'Fulfilment may be a company's biggest cost,' Ms Kilgore grants, 'but the real opportunity is to look at fulfilment from a revenue-generating perspective.'

Looking at it at all would be good. At Webvan's cavernous Oakland, California, distribution centre, the company's intricate order management system automatically pushes items needed for each order in plastic totes (identified via bar-coded licence plates) to stations via 4.5 miles of conveyor belt. At the stations, pickers receive the correct items and place them in the plastic totes to fill the order. To meet performance goals, each picker has to pick more than 100 items per hour. If everything runs smoothly, one worker can pick 16 orders simultaneously. When pick rates lag for a particular product, Mr Swan's team goes online and modifies the placement of the product in the Oakland distribution centre. If the change yields better performance, he makes the same adjustment for Webvan facilities in Sacramento, Atlanta and Chicago. 'I make tweaks all the time,' he explains. 'I check the demand on various SKUs. It affects profitability on a minute-to-minute basis.'

For an online grocery like Webvan, delivering goods with all due speed is not just a good idea--it's a necessity. 'Food is highly perishable,' explains Ms Kilgore. 'If it sits on a rack too long, you don't just discount it, you have to write it off altogether.' Compounding the problem: Webvan delivers products in its own fleet of trucks, which makes fulfilment more complex. Therefore Webvan managers meticulously choreograph every step in the value chain--from the receipt of goods from suppliers to directing merchandise to the picker's station to the automatic planning of routes for company truck drivers in local neighbourhoods. Forrester's Ms Kilgore says Webvan's diligence--particularly in managing its inventory forecasting--is unusual. 'Most companies review inventory reorder points or demands trends on a six-month or yearly basis,' she says. 'Companies that don't change their forecasting mechanisms on a daily basis--as Webvan does--are unprepared for sudden changes in demand for certain items. By the time they review inventory trends to tweak their sourcing, the picture has changed dramatically.'

That lack of real-time data has led countless e-tailers to book orders for products that are out of stock--or worse, discontinued. Such miscues can permanently tarnish an e-tailer's reputation, sending irate customers to competitors. 'Fulfilment is the name of the game,' Mr Swan says flatly. 'It will make us or break us.'

Attention shippers
You don't have to sell eToys' Mr Augustine on the merits of fulfilment management. As chief logistics officer at the online toy seller, he is fully aware of the importance of shipping merchandise in a timely fashion. 'This isn't a business in which you want to deliver a product three days after someone's birthday,' he says. Since there is little existing fulfilment data--or time to benchmark other e-tailers' shipping performance--eToys relies on veteran logistics managers to set targets and gauge performance. 'Our people have a broad range of experience, from steel to fast food to computer products and components,' says Mr Augustine, who is the former head of logistics at Gateway Inc. The logistics department at eToys has set high standards, too. The company endeavours to ship most products within 24 hours of receipt of the order. To make sure the online toy seller meets that goal, management employs a team of industrial engineers to oversee the e-tailer's distribution centres in
Ontario, California and Danville, Virginia. The logistics department also conducts time-use studies, which Mr Augustine believes are more valuable than benchmarking the fulfilment performance of other companies.

Webvan also relies on internal benchmarking of its inventory and distribution systems. 'We follow the best practices of our people,' says Mr Swan, 'many of whom have been in pick environments before.' Moreover, managers at e-tailers like eToys and Webvan have learned hard lessons in the dotcom wars, which may be why they're more adept at managing e-commerce fulfilment than many clicks-and-mortar operators. Interviewed for an article in an earlier issue of eCFO ('The dotcom before the storm'), eToys CFO Steve Schoch argued that pureplay e-tailers are further along the fulfilment learning curve than old-economy managers: 'We are in a unit-based business,' Mr Schoch noted. 'But [traditional retailers] are used to moving pallets. None of the assets of land-based companies are appropriate for running an Internet operation.'

A number of old-economy retailers have been slow off the e-commerce mark, that's for sure. Retailing giant Kmart Corp is one. The Troy, Michigan-based company's website, BlueLight.com (www.bluelight.com), ran into some operational snags early on and didn't relaunch until this June--well after most e-tailers and even some traditional businesses had put up virtual stores. Playing catch-up meant BlueLight.com didn't have time to develop its own fulfilment operation before going live. So managers at the San Francisco-based online retailer outsourced the company's order fulfilment to SubmitOrder.com (www.submitorder.com).

That adds yet another layer of complexity in fulfilment management. So, too, does a whopping increase in business. According to Chris Lien, BlueLight's chief financial officer, the company is forecasting more than half a million SKUs by Christmas--somewhat more than the 80,000 the cyberstore has now. And as some e-tailers discovered in the 1999 holiday season, such an explosion in volume can overwhelm a fulfilment system (see 'Highway Patrol').

Nevertheless, BlueLight.com is setting some high standards for fulfilment. 'We're looking to model ourselves after an Amazon-level customer experience,' Mr Lien says. In other words, most items should ship within one to two days of order. No easy task. Like Webvan's Mr Swan, Mr Lien says it's crucial he stay on top of key fulfilment metrics, including pick-and-rate numbers for product groups. BlueLight will monitor SubmitOrder's key fulfilment metrics, including pick wave results, order status and outbound order flows. To monitor the outsourcer's performance, Mr Lien will look at real-time data feeds between SubmitOrder's warehouse and BlueLight's Oracle order management system. 'I'll check to see if the right items got picked and packed,' he says, 'and if the customer received the right items.'

Even a small mistake can gum up the works. Customer service representatives are forced to get involved. Data must be manually corrected. A returned item has to be processed, the correct item ordered, then shipped. Meanwhile, the clock ticks--and no cash comes in from the sale. 'That's the stuff,' concedes Mr Lien, 'that blows away our financial metrics.'

Source: eCFO.

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