Promises Kept - The Challenge of E-Fulfillment
The Importance of E-Fulfillment
The rise of the Internet as a channel for selling products to consumers and businesses is now one of history's most rapid revolutions in business. It has captured the world's attention. It heralds a new world order where information flows freely and consumers have increasing power to choose what they will buy, from whom they will buy it, and most importantly, how their demand will be met. Much of the attention during this rise has been on new marketing capabilities enabled by the Internet - its ability to captivate a market and generate demand. Web sites, banner ads, portals - indeed much of the new vocabulary that has surrounded the rise of this medium - are words that have been newly coined to describe the phenomenon. One of the biggest impacts of the Internet is to transform products that are traditionally purchased in physical stores into seemingly virtual products that can be obtained on demand, at the point of use, and even be priced on a per-use basis. Despite this focus on the virtual world, a huge portion of Internet commerce
still revolves around presenting, selling, and then delivering physical products
to consumers and businesses. Delivery of the product - e-fulfillment
as Accenture has come to call it - is the essential link between the virtual
and physical worlds. It is the point of convergence. It has also proven to be
the Achilles heel of many, if not most, businesses that attempt to utilize the
Internet channel to reach their customers. Accenture refers to these businesses
as e-tailers.
Challenge of E-Fulfillment
Why is e-fulfillment so difficult? After all, catalog and mail order businesses have been delivering products on demand to consumers and businesses for more than 100 years. What's different about this new way of doing business? In many ways, e-fulfillment is the same as catalogue or mail order fulfillment, and it would be easy to mistake one for the other on a first look at the operations supporting them. However, some subtle aspects of e-fulfillment make it so challenging that even the most experienced operators have difficulty with delivery execution.First, customers expect a level of performance, speed, and precision for e-fulfillment that is significantly beyond their performance expectations for more traditional businesses. Compounding the affect of high expectations, Internet technologies make it possible for customers to access vast amounts of information, and customers expect ready access to the status of their orders. Every step, or misstep, is visible to the customer, often as the process is occurring. This visibility places a tremendous premium on e-tailers being both reliable and fast during each phase of their operations.
Finally, in the world of the Web, everything is dynamic. This is potentially true of the products and services offered to customers. It is quite literally possible for an e-tailer to change its entire offering in a matter of minutes, which from a marketing perspective is a distinct advantage. However, this advantage can wreak havoc on carefully designed fulfillment processes, material handling systems, and warehouse buildings. These physical processes suffer from the limitations of physical matter which, unlike a Web site, cannot change instantly to accommodate a new offering.
Getting all aspects of e-fulfillment right is clearly an important key to success in Internet commerce. It will affect how likely customers are to buy from you, and most importantly, it will affect a substantial portion of the costs of the business. It may even be argued that effective e-fulfillment is the differentiation needed for e-tailers to make a profit.
Consumer Expectations and E-Fulfillment Performance
Most e-tailers seem to be principally concerned with capturing customers - profits can come later. To understand how e-fulfillment contributes to that goal, it is crucial to understand what consumers want when they shop on the Web.Prior to the 1999 holiday season, Accenture conducted a thorough study of experienced Internet buyers in order to determine their plans for holiday gift buying. The results of the study have important implications for the development of capabilities that e-tailers need to possess, and for how they should be organized to achieve those capabilities.
Demographics of Shoppers
The typical Internet shopper is likely to be a relatively young male, with more than a high-school education and with children at home. The typical Internet shopper is also likely to be experienced with the Internet and has been online for two or more years. According to the most conventional measures, this profile of shopper appears to comprise an ideal target market.
Propensity to Shop
Importantly, over half of the shoppers in the survey often or always make comparisons between the Web, retail stores, and catalogues to find what they need. Even though they religously comparison shop, online purchasing does not yet capture a substantial portion of the attention of these buyers. In fact, less than half of them actually buy online more than once a month, which is much less frequent than their purchases through conventional shopping channels. These facts support the notion that there is a tremendous market potential for e-commerce retailers who can provide service that is as easy and reliable as store-based retailers. It also supports the conclusion there is a big gap between what consumers value and the service perceptions they have about Internet shopping. So what exactly do they value?
Important Values and Concerns
Consumers perceive convenience and price as values available to shoppers on the Web. These values have been effectively communicated and delivered by e-tailers. This fact, supported by another Accenture holiday study of e-tailers' ordering and fulfillment performance, showed that it typically takes 11 to 14 minutes to place an order on the Internet, almost certainly less time than a store visit would take. This isn't the problem then. What other aspects of confidence are missing?
Repeatedly, studies have shown that consumer confidence in a business is almost entirely determined by the degree to which promises of performance are kept. Accenture believes that there is little confidence among consumers that e-tailers can make and keep high quality fulfillment performance promises. The earlier Accenture study also identified four specific barriers to consumer acceptance that are directly related to fulfillment performance: returns, shipping and handling costs, lack of online customer service, and difficulty accepting deliveries. In addition to fulfillment performance reliability, these factors need to be priority issues for e-tailers.
One example of how consumer confidence is undermined is the finding that orders attempted could not even be placed 26 percent of the time - for a variety of reasons having to do with Web site issues or network performance. While this doesn't relate to fulfillment, it certainly does create a lack of confidence among consumers. Essentially, more than one-quarter of the time, customers who were ready to buy were locked out of the store. How long would a store-based retailer last under these conditions?
Consumers want to know that an e-tailer has the product they want, and can
deliver it in a timely manner. Less than half (45%) of all e-tailers studied
could tell a customer whether the product desired was in stock. Even worse,
fewer - less than 40% - could give even a range of delivery dates for an order.
Compounding these factors, almost a third of the e-tailers didn't confirm customer
orders via e-mail and only 20 percent of them sent any sort of shipment confirmation.
Having these kinds of services goes a long way in developing confidence among
consumers. Interestingly, recent M.I.T. research has seemingly refuted one of
the central beliefs of e-commerce retail sales - that the Internet creates a
frictionless
environment. First, price differentials across the Internet
- the difference between highest and lowest prices for a particular product
- are actually greater on the Internet than they are for a typical brick-and-mortar
retail market. Despite the fact that these price differentials are theoretically
more visible on the Web, some companies are able to charge substantially more
than others are. Second, consumers have a greater tendency to stay with a preferred
site that has served them well, despite price savings available on other sites.
In fact, it appears that consumers will pay as much as a 10% price premium for
the best performance. This value of higher performance far outstrips its cost.
Furthermore, it suggests that the market will reward those e-tailers that succeed
in making and keeping performance promises with both higher customer loyalty
and higher prices.
Speed alone is not sufficient to create increased consumer confidence. Although there seems to be a natural tendency to expect higher speed from an electronic medium, this expectation does not seem to translate into things like shipping lead times. Consumers seem to be quite happy to accept the speeds that are commonly delivered by e-commerce companies. What they are not prepared to accept is a promise that is not kept. In other words, it is quite acceptable to offer a standard service level of five to seven days for delivery. It is not acceptable to then miss that offer by even a single day. Whatever is promised must be delivered - without fail!
Making Good Promises
What does it take to make and keep e-tail promises? Fundamentally, seven activities must be integrated in order to make service promises that have the potential to be kept by the organization. These include activities such as delivery capability, order management, inventory management, capacity management, and customer service (see Figure 1.0).
Figure 1.0
Business components needed to make good promises.
Within each of these activities, there are both technology and process obstacles to effective integration. Furthermore, each activity must be closely tied to the others, in a web of synchronization, so that before a promise is made to a customer, a complete picture of the organization's operational capabilities are viewed. This goal is particularly challenging for e-fulfillment because such integration often involves external parties, like parcel delivery companies, and potentially a complex web of third-party service providers handling everything from Web site operations to telemarketing and fulfillment center operations. Integrating e-fulfillment activities is challenging enough for a company trying to do it all internally. However, when such a business model includes third-party service providers and other supply chain participants, it can become almost overwhelming. Luckily, advancements are being made that will make this integration easier over time.
Information Needs
Making good promises requires the exchange of large quantities of information. Consider the example of a customer placing a single order on a Web site. The customer first wants to know that the product is available. This requires that the e-tailer have a connection between its inventory management systems and its Web site that is 100% up-to-date and real-time. Then, the customer wants to know when the product will arrive. This requires the e-tailer to have a way of assessing available fulfillment and delivery capacity compared to accumulated demand in prior orders. Again, the comparison must be done dynamically and immediately. If the desired arrival date cannot be met with the e-tailer's standard delivery service, the customer may want a recommendation about the best way to get their product. Finally, the customer wants confirmation of payment acceptance, package tracking information, and other transactional information that will allow them to assess that the service promise made by the e-tailer is satisfied. A large number of interconnections and a great deal of information must be employed to present these answers to the customer. One way integration will become easier is by the use of data interchange standards
at a business process level. The Internet standard for this is XML, which allows
information to be tagged
in a meaningful way so that recipients can
interpret and incorporate it into their own business needs. Traditional electronic
data interchange (EDI) protocols that rely on periodic, batch exchanges of information
are simply too slow to support most e-fulfillment activities. Data dictionaries,
which define the meaning of the various types of information that can be exchanged
in XML, have been created for only some of the industries that need them. The
availability of such standards will improve as projects such as RosettaNet demonstrate
more and more of the power of this level of business interconnection. However,
XML interchanges will still likely be built one by one with trading partners.
Accenture expects major application providers to increasingly incorporate this
type of technology in their products, making it easier to create these customized
connections. The company Electron Economy typifies another route to tight integration
of these activities, which is very specific to eFulfillment and the supply chain.
Electron Economy seeks to create a standard interconnection model through a clearinghouse approach. By providing translation and physical interconnection services between service partners, they hope to make it simple for their customers to not only create tight integration, but also to change their partners very rapidly as conditions dictate. For example, the clearinghouse will have pre-established connections with several fulfillment operations providers. A client company e-tailer will then be able to connect to the clearinghouse and access any or all of the already-connected fulfillment services. So far, this capability has been demonstrated only in a limited way. Ultimately, the extended network approach may give rise to closely cooperating groups of companies that can provide wide-ranging functional and geographic services, perhaps targeted to particular vertical e-tailing markets.
Process Needs
More than information is needed to make and keep good promises to customers: execution reliability is essential to actually making it happen. Consistency in execution is also needed, requiring consistent measurements that are relevant to the types of promises being made. Again, this can be very challenging when an e-tailer partners with other organizations for their e-fulfillment. For things to work well and reliably, each organization must measure things like process lead-time, quality, and productivity so that all participants work to the same performance goals that are directed toward the ultimate objective of customer service.Capacity flexibility is another aspect of the process that is extremely important for effective e-fulfillment. During the 1999 holiday season, almost every e-tailer was troubled by demand that exceeded most predictions, which was many times the typical demand on fulfillment capacity. It is important to be able to recognize capacity issues in making promises to customers, but it is also important to be able to flex capacity upward by large amounts when demand dictates it. Otherwise, an e-tailer runs the risk of not being able to keep the promises it makes to its customers - and will take too long to fulfill orders in the desired timeframe.
Labor flexibility, which is a growing challenge due to low unemployment, is one way to provide flexible capacity. This approach places a premium on very disciplined training, supported by technology, to enable the quick integration of new employees into the process - employees who may only be with the e-tailer for a few weeks. Point-of-need training is a feature that is increasingly being incorporated into e-fulfillment models.
Capacity flexibility is also being achieved by creating a network of service providers that can take on a portion of the volume as demand rises. Obviously, this approach compounds integration challenges and raises the importance of the technology solutions discussed earlier.
Conclusion
Success at Internet retailing depends on effective fulfillment of customers' needs and expectations. This success requires well-run operations and a facility for making service promises that can be met, and then delivering on those promises. A complex network of information and process interconnections is required - something that has been difficult for many companies to achieve. As e-tailers increasingly turn their sights toward profits - not just sales - being able to do this continually and efficiently will be essential. Otherwise, customers will gravitate to those businesses that are best able to make and keep their promises, reliably and at a fair price.Copyright© 2000 Accenture LLP
