E-Fulfillment Challenge – The Holy Grail of B2C and B2B E-Commerce
"Where's the package I ordered the other day off the Internet?"
That was probably the most commonly asked question during the 2000 holiday season. That season was to be business-to-consumer (B2C) e-commerce's big coming out party. And sure enough, toys, clothing, software, books, home electronics, and millions of dollars of other goods were ordered off the Internet. The problem was, a lot of people waited to receive what they ordered.
The click-and-mortars soon discovered a fulfillment gap. The traditional fulfillment solutions did not live up to expectations implied by B2C e-commerce. As a result, consumers became less than bullish about e-commerce.
From that experience, e-fulfillment has become a hot topic, so much so that it has the potential to be an excellent play - financially and competitively - in the new world of e-commerce. This is particularly true for those players already in the fulfillment market for some time; they are most likely to overcome the fulfillment challenge.
Most industry observers agree that if the challenge of B2C fulfillment was great, the B2B challenge will be even gretaer. Why? Because the variety of B2B channels is very large, the fulfillment requirements of these channels are still being defined, and e-fulfillment can't provide the breadth of fulfillment capabilities required by all of these channels.
Integrated fulfillment is an e-fulfillment approach with a broad end-to-end supply chain performance objective. Integrated fulfillment combines:
- Newly emerging warehousing, transport, and customer service solutions that deliver operational excellence in fulfillment
- New types of relationships that lead to creating integrated and responsive supply chain networks between supply chain participants
- New technologies and services to support these supply chain networks
B2B E-Fulfillment Channels
E-fulfillment includes activities such as order management, call center management and telemarketing operations, online credit checking and credit card processing, all aspects of customer service, procurement and inventory management, warehousing and shipping, and processing and disposition of returns. Together, these activities can represent most of the tangible assets supporting a company's e-commerce strategy. More important, they can be responsible for delivering some of the most memorable aspects of service to customers - one of the bases for repeat customers.
This conventional view of e-fulfillment is breaking down. The problem is that consumer-direct models are putting high demands on the distribution system as a result of smaller, more frequent, more time-sensitive orders to an often significantly broadened geographic base. This pressure is further exacerbated by product returns processes. Now add e-commerce. The dramatic escalation of trade volume through e-procurement environments - and anticipated volumes through e-marketplaces - has created a B2B opportunity estimated to be 10-times that of B2C.
Figure 1 - E-Commerce Channels (Source: Accenture)
As B2B business models evolve to satisfy this explosive growth, the basic trade relationships among supply chain partners are evolving as well. In particular, B2B e-fulfillment is migrating from long-term one-to-one relationships to fluid many-to-many relationships. Traditional third-party outsourced fulfillment arrangements are evolving into complex service bundlings involving warehousing, picking, shipping, information systems support, labor augmentation and management - all provided by one service company operating under one long-term contract. (Currently, these services are increasingly available in smaller components, making it possible for organizations to partner with the best-in-class provider for each capability.)
For the enterprise selecting the appropriate channel for customer-facing fulfillment, two issues stand paramount: the importance of the buyer to the seller and, conversely, the importance of the seller to the buyer. These issues exist regardless of distribution channel, each channel having its own fulfillment requirements.
Mutual Partnership (B2B)
Often where the supplier and customer are strategic to each other's business, the emphasis is on high logistics availability to support rapid, often just-in-time (JIT), replenishment. For this, the relationship makes heavy use of automated re-ordering through electronic data interchange or the Internet, as well as vendor-managed inventory services. In the latter case, the supplier might take on the burden of monitoring material levels at the customer's sites, even to the point of using telemetry. The capabilities providing physical fulfillment are varied, often involving physical or electronic kanbans (at the bulk, pallets, and tote bins levels, for example) to support JIT replenishment direct to assembly.
E-Procurement (Primarily B2B)
Products in this channel arrangement are frequently supplied from multiple supplier locations to a single customer location. While several possible product characteristics will influence the fulfillment solution, the solution typically involves consolidating items from the multiple sources into a single delivery or a repetitive set of deliveries.
Agents and Distributors (B2C and B2B)
Two broad categories of fulfillment models exist in this channel environment: stocked and stockless. The fulfillment solution to support the stockless environment is similar to the e-procurement channel.
However, agents and distributors typically need to maintain a large number of stocked items to meet delivery lead time requirements. From this buffer stock, they must rapidly assemble many small orders. Automated picking using sophisticated materials handling systems can be appropriate in this environment. However, automation should be used sparingly as inappropriate automation can result in expensive, inflexible solutions that can not adapt to changing fulfillment needs.
Regardless of automation, agents and distributors might consider these fulfillment strategies:
- Segregating large and small items into different picking facilities
- Utilizing trans-shipment locations to transfer stock into smaller vehicles for delivery
- Holding fast-moving items at local replenishment facilities and slow-moving items centrally
- Different lead times and availability policies for different products
Direct Channel (B2B and B2C)
Direct channels range from "low-cost direct," where the emphasis is on reducing the customer and the supplier's transaction costs, to "high-value interactive," which focuses on increasing the breadth of service provided to the customer. In both cases, customers can place and track their orders with a supplier.
Where the service and delivery requirements are similar to traditional channels, fulfillment will typically be through the existing fulfillment network. Where requirements are significantly different, new fulfillment solutions are required. This is especially the case where a direct channel is being used to bypass existing distributor, wholesaler, or retailer channels. Specialist fulfillment services are emerging to meet this need; however, they are relatively immature and there are no clear leaders.
Exchanges and Auctions (Primarily B2B)
While transaction volumes are still very low among the enormous variety of B2B marketplaces that have emerged in the past 12 months, the pressure is on for these e-marketplaces to turn their attention to the fulfillment solutions required to support the anticipated transaction volumes. In these solutions, real time is key in two key areas: confirming availability of fulfillment capacity and providing a price for delivery.
Digital Transaction Hubs (B2B)
These hubs, which focus on reducing the cost of integration between buyers and sellers, differ from trade exchanges in that participants in the former routinely buy and sell product from one another. They do not require the buyer/seller matching capability provided by exchanges. Digital hubs let member companies collectively outsource fulfillment activities they do not consider to be a part of their core competency or a competitive differentiator. Through outsourcing, the member companies can achieve enormous economies of scale that individually would have been impossible.
Conversely, a provider of fulfillment services need only integrate into the digital hub - not the individual member companies - in order to provide services to all of the member companies. Thus connected, the provider can offer value-added services, such as inventory, transportation, and supply chain management, at a cost and on a scale previously unimaginable.
In balancing the aforementioned channels with an e-fulfillment solution, the e-commerce enterprise must consider factors such as speed of implementation, degree of customer contact and operational control, reliability and flexibility of service, and initial and ongoing costs. On top of that is one of the most critical considerations: how best to combine an enterprise's capabilities with those of chosen supply chain partners. Such business relationships include the use of spot shipments, consolidators, market-level logistics services providers, as well as developing a fixed relationship with a fulfillment service provider. The advantages of each of these relationships depends upon the degree of specialization required, and whether shipments are bulk or less-than bulk.
The Three Keys to Integrated Fulfillment
The variety of distribution channels available to an enterprise creates a concomitant complexity in that enterprise's supply chain. This emphasizes the importance of carefully aligning three key aspects of the enterprise and fulfillment providers before embarking on a vision of integrated fulfillment.
Merging operational excellence with e-commerce opportunities is the first key aspect. Such excellence is not to be taken lightly. To be successful, e-retailers must embrace an almost Zen-like "back-to-basics" approach to delivering their products to customers on time, at the right quality, and at the right cost. This approach is fundamentally the same as it has always been:
- Segment customers according to needs
- Customize the logistics network
- Integrate demand and supply planning
- Integrate product, information, and financial flows through the supply chain
- Differentiate the product closer to the customer
- Source strategically
- Use supply chain spanning performance metrics
What's changed today are the new technologies that broaden the possibilities in achieving this operational excellence. For example, in the electronics and high tech industry, supply chain collaboration technologies make outsourcing manufacturing and distribution to the best-in-breed provider possible. In the automotive industry, automakers and their OEM suppliers now have visibility to demand and inventory in the dealership network, thereby letting the manufacturers postpone final assembly until an order is received.
The second key to realizing integrated fulfillment is in creating new kinds of relationships and services. New relationships are necessary because e-commerce is stretching the traditional relationships between providers and users of fulfillment services - a relationship that remains primarily at arm's length. Some of the characteristics of these new kinds of relationships are:
- More collaboration between service providers and users.
- Win-win commercial arrangements.
- A true understanding of core competencies and re-assessment of activities that can be outsourced.
- Arrangements that provide services to both networks as well as individual companies.
For service providers, integrated fulfillment demands skills and capabilities far beyond that provided by conventional carriers and third-party logistics providers (3PLs). For fulfillment service users, integrated fulfillment requires a substantial cultural shift if partners are to participate in fulfillment networks that could include competitors.
The fact is, technology is no longer the primary competitive advantage to realizing integrated fulfillment. Instead, the ability to change, develop new kinds of relationships, and implement new solutions will be the key differentiators.
New and Emerging Capabilities
This brings us to the last key aspect of integrated fulfillment. In the past, fulfillment services were provided by individual firms to individual firms. These services were relatively easy to classify, such as 3PL, haulage, freight forwarding, and parcel carrier. No longer. Completely new kinds of services are necessary because e-commerce demands a dramatic change in the fulfillment solution landscape. New fulfillment capabilities are needed to support B2B2C and to better compete among emerging marketplaces. We have classified these capabilities under three broad types of services.
Figure 2 - The Changing Fulfillment Solution Landscape (Source: Accenture)
Fulfillment E-Marketplaces
Fulfillment e-marketplaces match buyers and sellers of a product or service, or they provide a mechanism (including exchanges, auctions, and reverse auctions) for setting a price, or both. These marketplaces fall into two categories: public and private. Public marketplaces are open to any carrier or shipper that wishes to participate. Private marketplaces are restricted to member providers and users, are typically constructed around a specific synergistic opportunity, and they tend to be focused on specific modes and geographies. Public marketplaces are currently more prevalent, but private marketplaces could rapidly gain traction as:
- They are constructed around a specific synergy opportunity.
- They are focused on a specific requirement.
- Service providers are pre-vetted and known by users.
- All participants are committed to the success of the exchange.
Infomediaries
Infomediaries provide information throughout a network that supports synchronized decision-making at the operational, tactical, and strategic levels. This information, provided to a community of users, ranges from specific track-and-trace information to industry trends, prices, and news feeds.
In the context of fulfillment, infomediaries primarily focus on the provision of track-and-trace information. And for good reason: Not only does the information need to be collated and presented in a format customized to the needs of the user (arguably the relatively easy part), it also needs to be gathered at the point where the information was created (for instance, at the loading dock, in transit, or on the assembly line).
The practical challenges to capturing and recording high-quality and complete track-and-trace information across the supply chain are great. Traditional approaches, such as keyboard entry and barcode scanning, are now being complemented by technologies such as global positioning satellite, mobile phone, and radio tagging. As these technologies mature, we can expect to see the range of infomediary services continue to develop.
Flow Management Services
Flow Management Services manage the flow of transactions through the network. An extension of this capability is to provide supply chain planning services (for example transportation and warehouse management systems, demand planning) to network participants; that is, end-to-end order management visibility throughout the entire order life cycle. Such capability lets enterprises outsource not only fulfillment execution and scheduling, but also the management and optimization of these activities across complex, multi-partner supply chains. Just now emerging within these flow management services is custom business logic to identify business exception conditions that alert management to take action through some Web-enabled communications tools.
Who's Going to Win?
With expertise in transport and distribution, 3PLs should be dominating the new world of e-fulfillment. However, traditional logistics companies are generally lagging in developing capabilities to support the dynamics of B2B e-commerce. For many, managing contracts, assets, and industrial relations have been core competencies; they have less experience with new requirements for technology, planning, and service development competencies.
To remain competitive, the traditional 3PLs must undergo significant organizational change. To date, many have created e-commerce divisions, yet many of these are not integrated with the rest of the business, which leads to confusion about customer ownership, varied service levels, minimal knowledge sharing, multiple customer entry points, and limited scalability.
In addition, and despite current narrow profit margins, these companies will have to invest substantially to integrate and scale their e-commerce operations. Information technology may be their biggest barrier to success - many lack the latest in client/server information systems. But there are also non-technology limitations to overcome. Most 3PLs have single-user or occasionally dual-user operations, they use internal carriers, and have limited geographic coverage. In addition, while closed-book third-party agreements tend to work better in the e-commerce environment, some 3PLs only operate on an open-book basis.
Mail order companies have the potential to create an end-to-end offering that includes payments, call centers, and physical fulfillment. However, they will have to improve their service levels to operate effectively in an e-commerce environment. Fulfillment houses are generally multi-user enterprises that use multiple carriers. For the most part, these operations are not particularly technologically sophisticated. Conversely, traditional catalog retailers are generally technologically sophisticated, but they face a market already saturated by existing businesses and channels, plus conflicts with potential B2C customers. Despite having an already extensive network of home delivery, they still need to enhance their fulfillment capabilities to meet the demands of the Internet shopper.
Seizing the Opportunities
The convergence of the vision and reality of integrated fulfillment provides abundant opportunities for new, competitive services across the supply chain. For shippers, these include leveraging new workflow management and infomediary solutions to achieve new levels of supply chain integration, filling spot fulfillment needs through public exchanges, and participating in private networks.
For carriers, integrated fulfillment helps in developing targeted e-channel strategies, establishing service differentiation (through infomediary and workflow management services), targeting markets where differentiation is possible through services or cost, participating in private networks, and selling marginal capacity through public exchanges.
Last, for B2B e-commerce in general, the opportunities include providing vertical, geographic, or mode-specific infomediary or workflow management services, or both, and integrating with public and private logistics exchanges.
The bottom line: No matter which model an enterprise selects, the enterprise will be providing consumers with a new service - often for free - while trying to maintain profit margins. In the old world, picking items from retail shelves, paying and packaging at counters, loading purchased goods into transport, and delivering those goods to the home were carried out by the consumer and were not generally recognized as components of the total shopping cost. With the exception of a segment of consumers who value the convenience factor of home delivery and are prepared to pay a premium for it, today's consumers expect their complete online shopping experience to be competitively priced with traditional retailers' shelf prices.
The reality is that high e-fulfillment costs will inevitably increase the sustainable price to consumers. Moreover, price differences on the Internet are apparent, therefore e-fulfillment costs have the potential to destroy any competitive advantage an enterprise might claim. (In addition, the variable costs associated with product returns may invalidate a heretofore acceptable operating model.)
For all of these reasons, the fulfillment strategy is just as critical in the development of an e-commerce strategy as the choice of product offering, marketing approach, and website design. Apparently this message got through to the online B2C store fronts operating during the 2000 holiday season. According to results of Accenture's second annual U.S. e-fulfillment study, online U.S. e-tailers developed strategies to address e-fulfillment and supply chain issues. More important, they improved their execution, making great improvements in service levels that consumers value. (Of note, 92% of the attempted holiday purchases over the Internet were successful this past holiday season; in the 1999 holiday season, upwards of 25% of the attempted online holiday purchases were unsuccessful.)
Such improvements come from rigorously questioning the underlying logic of potential fulfillment models. The success of any one model will rely on the development of warehousing, transport, and customer service solutions designed to deliver operational excellence. Also key will be the establishment of new kinds of relationships between supply chain participants, such as increased collaboration between service providers and users, win-win commercial arrangements, and a true understanding of core competencies and re-assessment of activities that can be outsourced.
Clearly, the approach to integrated fulfillment has enormous implications for the growth and profitability of any product-based e-commerce venture and requires a strategic selection that not only recognizes the need for exemplary service performance, but that also delivers a competitive cost advantage
