Order Fulfillment Delivering On The E Promise Bain

Summary

Order
Fulfillment:
Delivering
on the
E-Promise
e S t r a t e g y B r i e f
Order fulfillment: How can an online retailer avoid service failures
Delivering on the E-Promise and develop a winning strategy? To answer, focus
on two key questions:
In the scramble to get goods to customers, online
• First, what performance capabilities are
retailers are trying almost every approach. Amazon
“profit-effective,” in other words, will
invests in its own warehousing, and UK grocer
satisfy customers' order fulfillment needs
Tesco serves Internet customers directly from its
and deliver acceptable profit margins?
stores with order pickers acting like shoppers

Buy.com outsources to bricks-and-mortar third • Second, which of those capabilities should
parties, like Ingram Micro, while the need for be owned, and which should be outsourced?
dispatch propels others to odd alliances. There's
Customer needs dictate capabilities
colossal retailer Wal-Mart, a $216 billion company,
fulfilling some orders through Fingerhut, with 1999 Within order fulfillment, critical customer concerns
revenues reportedly less than $2 billion, only a include accurate delivery, product availability and
fraction coming from online fulfillment. At the other ease of returns.1 Few online retailers have nailed
end of the spectrum, UK fashion retailer Boo.com, these steps—and they are expensive. To perfect
with almost no revenues, is allied with United Parcel them requires significant capabilities in logistics and
Service (UPS), a $27 billion logistics giant. order tracking. So, where to start? Where should
you locate warehouses? How many should you
For a business leader trying to determine the right
have? Should you depend on ground transport
strategy for fulfillment—the process that moves
or air freight to move products to and from the
customer orders to actual deliveries and accounts
customer? And what happens when the shirt
for returns—the emerging message is muddled

doesn't fit? What returns process best meets online
What is clear is that flawless fulfillment is a key
customers' needs? For e-logistics, customer
driver of customer retention and long-term
expectations of delivery time, cost, and returns
profitability, and few online retailers are riveting
handling will dictate the optimal response

customers with their current performance

Instead, fourteen percent of Christmas 1999 orders
went unfilled, leaving prominent players like
Amazon and eToys fighting defections, and
challengers like Toys “R” Us begging customers'
forgiveness with $100 gift certificates

Within order fulfillment, critical customer concerns
include accurate delivery, product availability and
ease of returns. Few online retailers have nailed
these steps—and they are expensive

1Source: Bain/Mainspring Online Retailing Survey, December 1999
B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 1
Those expectations will, of course, differ by product: (at least relative to bananas or computer chips)

The sweet spot for suppliers of these products
• Grocery consumers expect their Internet
is a network of four-to-six fulfillment centers
retailer to provide a full line of products,
around the country, enabling two-day delivery
including perishables like meat and produce

via ground transport

And most want groceries delivered the same
day or next day, within a narrow interval. • In Consumer Electronics, on the other hand,
Transportation costs are high relative to high storage costs—up to three-to-five percent
the value of the goods. These factors mean of the goods' value per month in many cases—
products must typically be stored locally with dominate the economic equation. The sensible
fulfillment centers in major metro areas. Tesco solution is often a single fulfillment center
has achieved one-day grocery delivery by with air-express delivery to meet urgent
simply treating local stores as “warehouses.” delivery timelines

• Book buyers seem willing to wait three-to-five To determine the right e-logistics for your product
days or pay a premium for overnight delivery. or products, think through freight and inventory
Transportation costs are lower relative to holding costs relative to value. (Figure 1)
the value of the goods. And, critically,
there is limited spoilage or “obsolescence”
Figure 1: Customer delivery expectations
vary by product
Office Products
Low
Local Stocking (13+)
• Copier paper
• Writing tablets
Inventory Cost as Percent of Sales
Multi-Warehouse (2- 12 locations)
• Filing cabinets
• Toner cartridges
• Staplers
• Ball point pens
Single Warehouse
• Fax machines
• CD ROM
• Mechanical pencils
High
Low High
Transportation Cost as Percent of Sales
Source: Bain & Company eLogistics Study, November 1999
B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 2
IT capabilities
The next challenge after mapping out the The Internet has become a catalyst that
ideal physical fulfillment network is assuring will make online retailers re-examine their
an appropriate information technology (IT) sourcing strategies and invest in IT systems
infrastructure to support it. Customers want to needed to increase the responsiveness of
know what products are available for delivery their back office

immediately and which are out of stock. They
want instant quotes including taxes, duties, and
Phasing out inventory
freight costs. And they want to track orders online

Bricks-and-mortar retailers need to invest in the Present systems are largely designed to move out a
IT to provide these services and integrate their pre-manufactured supply of goods to asset-intense
on- and offline organizations for seamless response. stocking locations. Suppliers “push” goods towards
customers and then respond to orders. The Internet
But remember that you are investing in an infant
allows real-time customized interactions between
industry. Today's model is a crude iteration of what
the retailer and consumer, giving far better
will exist in a few years. Customers' expectations
information about what consumers want. We
are rapidly increasing as their Internet sophistication
already are seeing a shift towards “customer pull,”
grows and competitors' logistics improve. There
where goods are supplied to meet individual
is potential to further tighten the standard for
consumers' specifications. Dell has set the standard
fulfillment from two days to next day to same day
—and captured the lead in the PC market—by
in some cases

assembling computers to individual specifications
On the IT side, even Amazon's current systems and shipping them on the same day

typically give only general guidance about
The capabilities and infrastructure you put in place
availability, such as: “usually ships within 24 hours.”
now will need to evolve over time to a less asset-
Other online retailers are still operating in the
intense, more IT-intense system. In the future,
world of “allow four-to-six weeks for delivery.”
there will be less emphasis on inventory and more
They can't tell you if an item is in stock or, if not,
emphasis on a “build-to-order” or just-in-time
when it will be. Customers are accepting this, for
approach, particularly for high-specification items
now. But companies like i2, UPS and FedEx are
(see Figure 2). While just-in-time supply is not
creating supply chain software that will change
new, its application is about to mushroom. The
expectations. Indeed, UPS has poured a stunning
Internet has become a catalyst that will make
$11 billion into technology in the past decade to
online retailers re-examine their sourcing strategies
make possible immediate knowledge of a good's
and invest in IT systems needed to increase the
every movement. Online retailers will be able to
responsiveness of their back office

promise precise delivery dates—and hit them, while
consumers will be able to check their product's
exact whereabouts at a mouse click. Such
technology soon will become the benchmark
by which retailers are judged

B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 3
Figure 2: Shift towards “customer pull”
Evolution Time
"Push" "Pull"
Intensity Rating
Warehousing Product Flow Direct Ship Made to Order
Coordination
Low High
Supply based on forecast Inventory received Stage and ship Orders submitted,
Description and held in distribution from multiple sources directly from manufactured, and
centers until time of sale and consolidated into manufacturer locations shipped directly
common outbound lanes to customer
Inventory Levels
Asset Intensity
IT Intensity
• General Motors • Amazon • Ethan Allen • Dell
Examples • Safeway • Staples • Bose • Chipshot
Source: Bain & Company/ Mainspring Analysis
But “customer pull” is not a panacea. “Make-to- The economics of “make vs. buy”
order” eliminates safety stocks but generally demands After determining your order fulfillment strategy,
a sacrifice in delivery time that's inappropriate for a key issue becomes whether to outsource all or
some customers or products. There will always be part of its implementation. Do you make or buy?
people who want ready-made fast food instead of a To answer this question, you'll need to calculate
sandwich made to their specification. The winning the minimum scale required to amortize both
strategy may bifurcate. Some retailers will carry warehouse space and the investment in IT required
lots of stock and eat the inventory cost to win on to keep you on the cutting edge of customer
service, typically selling low-specification, low service. In more and more cases, companies will
depreciation, or frequent-use products—like Staples find outsourcing the most economical

selling stationery or Tesco selling groceries. Others
will eliminate stock and ship from manufacturing
sites on a just-in-time basis. The latter vendors
will sell high-value, multi-specification products like The winning strategy may bifurcate. Some
bicycles, cars, or computers, as Dell does. Retailers retailers will carry lots of stock and eat the
providing a broad range of products, like Wal-Mart, inventory cost to win on service, typically
may need to do both. selling low-specification, low depreciation, or
frequent-use products. Others will eliminate
stock and ship from manufacturing sites
on a just-in-time basis

B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 4
Consider the following: Warehouses become scale- of the same warehouse. If the IT is right, you can
efficient beyond about 15,000 transactions per achieve cost savings and still provide customers
day,2 (Figure 3) or about 250,000 square feet. access to inventory and order tracking information
If your e-commerce order fulfillment strategy in multiple locations

requires four warehouse locations, it's not cost-
On the other hand, mail-order companies, through
effective to build your own facilities unless you
integration of catalog and online operations, have the
anticipate over 60,000 total transactions daily, or
scale to own and enhance order fulfillment assets
roughly a million square feet. Even Amazon, the
cost-effectively. Lands' End (150,000 transactions
largest pure-play online retailer, has only 33,000
per day), L.L. Bean (125,000) and J. Crew (95,000)
transactions per day. The next largest, CDnow,
have some of the most successful online sites. Some
has 23,000, and PlanetRx has only 4,000.3 Smaller
bricks-and-mortar companies, like Tesco, will find a
vendors typically will have to outsource, to
short-term solution in using their stores

piggyback on the scale of multiple other customers
Figure 3: The cost of owning vs. outsourcing
45
40
35
Cost to Own
Percent of Sales
30
25
20
15
Cost to Outsource
10
5
0
1,000 1,500 2,000 2,500 15,000 78,000 130,000 150,000
Number of Transactions/Day
Recommendation:
Buy Make
Source: Bain & Company/ Mainspring Analysis
2Assumptions: typical outsourcing cost is 10% of sales; the cost to build a 780,000 sq. ft facility is approximately $51 million, depreciated over 23 years. Average transaction
value is $30. Fixed costs include 1000 fixed workers at $20 per hour, 1500 variable workers at $8 per hour, and maintenance costs of 0.5% of sales

3Average daily transactions for January 2000. Source: PC Data Online

B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 5
Leading edge order fulfillment and tracking
technology is very expensive and difficult to
integrate with existing IT systems. At the same
time, some logistics companies, like UPS, with If you're not far down the learning curve on
its 4,000 programmers and technicians, are in a logistics, it may pay to let specialists do the
position to invest and offer their systems to development work and outsource to the best

customers on a “pay per drink” basis. Just a taste
of the capabilities offered: UPS tracks 13 million
packages daily, and customers can access that
Why is Wal-Mart, the acknowledged master
information on their computers, phones, or Palm
of distribution logistics, choosing to outsource
Pilots. In addition, the company has moved into
Internet fulfillment? Why is WebVan spending
the world of electronic funds transfer (with a cash-
a billion dollars on logistics while its online
on-delivery program) and into retailing, running
grocery volumes remain paltry? Because the
a call center on behalf of Nike.com. If you're not
“make versus buy” decision is not treated strictly
far down the learning curve on logistics, it may
as an economic issue. Strategic intent and time-to-
pay to let specialists do the development work
market are important criteria and companies have
and outsource to the best

other reasons for keeping control, including:
At first glance, the choices some players are making
today may not make sense. (Figure 4)
Figure 4: The rationales of owners and outsourcers
Order
Retail Example Warehousing Shipping Returns Advantages Disadvantages
Management
• Scale experience • Quality control
UPS/FedEx/ • Time to market • Lack of
Primarily
WAL*MART Walmart Fingerhut US Postal Fingerhut • Low up-front specialization
Outsourced
Service cost
• Focus and control • Quality control
Approaches
UPS/FedEx/ of strategic • Lack of
In-house/
Combination amazon.com In-house US Postal In-house components specialization
Valley Media
Service • Lower up-front
costs
• Quality control • Large up-front
• Customizable and ongoing
Fully In-House webvan In-house In-house In-house In-house • Asset becomes costs
strategic • Requires
advantage substantial scale
Source: Bain & Company/Mainspring Analysis
B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 6
• Fulfillment is the core competency of the When the Internet marketplace matures, its true
company. WebVan has vowed to build 26 winners will be cost leaders. They will also be
high-tech warehouses around the country, those with enough control of order fulfillment
geared to same-day delivery of groceries and capabilities to craft a back office that enhances sales
other urgent goods. The company went and marketing. For example, Amazon increases site
in-house because this infrastructure simply hits by allowing customers to track order fulfillment

doesn't exist elsewhere. More importantly, The Gap and Nordstrom increase traffic in their
with these capabilities WebVan can expand into bricks-and-mortar stores by allowing customers
other product categories and make money to return Internet purchases at street level

through cross-selling or becoming a fulfillment
Today, online retailing is only cutting its teeth

provider itself. But it's a risk—this approach
And no teething pain has cost Internet retailers
is a long way from proving cost-effective

more money, or generated more customer
In fact, WebVan is hemorrhaging cash

complaints, than fulfillment. Toys “R”Us fell
• In-house capabilities allow the company to behind expectations and paid with its reputation,
provide better customer service. PlanetRx's its pocket book and, most recently, its stock. Two
in-house warehouse capability enables them months after Christmas, it gave Softbank and other
to add “surprises” to each package before investors 20% of the store to raise $60 million to
shipping—something they might not trust fix its infrastructure. WebVan is making a billion-
to an outsourcer. Again, the jury is out on dollar bet it can leapfrog expectations, beating
whether profits will follow. supermarkets at customer service and cost. They
could make a killing. But if the economics of
• Integrating online fulfillment is a short-term
their offer turns out even slightly wrong, they'll
solution to speed to market. Tesco's approach,
get killed

although clumsy—imagine Internet customers'
“shelf-pickers” crowding the aisles and check- The urgent task is to keep up with changing
out stands alongside conventional clientele— expectations, and to avoid disappointing customers or
has allowed the grocer to move online fast. making expensive investments that become obsolete
As scale builds, Tesco will need to adopt a before they show a return. Managers who continue
more efficient approach before rivals do. to shortchange order fulfillment will eventually
surrender their customers—and revenues—to those
• Outsourcing is a short term solution to speed to
with superior infrastructures. They will cede business
market. Wal-Mart has chosen to subcontract—
to competitors who assemble “profit-effective”
for now. It's paying a premium for fulfillment
capabilities that build customer loyalty, and to
capabilities, but it's also getting the chance to
those who correctly determine which capabilities
test the water and understand demand. This
should be owned and which outsourced

will position the company to weigh in, once
down the experience curve, with in-house,
scale-based capabilities

B a i n & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 7
Bain & Company: Mainspring
Strategy for sustainable results eStrategy Consulting
Bain is one of the world's leading global business Mainspring is the leading eStrategy consulting
consulting firms. Its 2,500 professionals serve major firm that focuses exclusively on developing
multinationals and other organizations through an actionable Internet strategies. It enables Fortune
integrated network of 26 offices in 18 countries. 1000 companies to protect, evolve, and transform
Its fact-based, “outside-in” approach is unique, and their business for sustained competitive advantage
its immense experience base, developed over 27 by offering an integrated process of business,
years, covers a complete range of critical business customer, and technology strategy planning. Its
issues in every economic sector. Bain’s entire proprietary process hinges on the following
approach is based on two guiding principles: activities to help guide clients effectively through
eStrategy development:
1) working in true collaboration with clients to
craft and implement customized strategies that • Building the Business Model
yield significant, measurable, and sustainable • Creating the Customer Experience
results, and • Defining the Solution Architecture
• Commercializing the Business Plan
2) developing processes that strengthen a client’s
organization and create lasting competitive Working with Mainspring, companies identify,
advantage. The firm gauges its success solely define, and formulate a portfolio of strategic
by its clients’ achievements. Internet initiatives that are customized for their
business and designed to create sustainable
Bain & Company’s global e-commerce practice
competitive advantage

helps businesses achieve outstanding results in the
new economy. We work with traditional companies Mainspring’s core services include eStrategy
to launch and manage online operations, and with Consulting, eStrategy Direct, and the eStrategy
pre-IPO clients to hone business models and accelerate Executive Council. These services are provided
to market. We also work with entrepreneurs to to companies in the financial services; retail and
incubate new ideas into viable businesses, in some consumer goods; technology, communications, and
cases taking equity stakes through our bainlab media; and manufacturing industries. Mainspring
subsidiary. Our e-commerce practice professionals was founded in 1996 and has offices in Cambridge,
work around the globe in every major industry. Massachusetts and New York City

8Bain & C o m p a n y, I n c . Order Fulfillment:Delivering on the E-Promise 8
By Miles Cook and Darrell Rigby
of Bain & Company; Julian Chu
of Mainspring
BAIN & COMPANY, INC. MAINSPRING
Two Copley Place One Main Street
Boston, Massachusetts 02116 Cambridge, Massachusetts 02142
Tel: (617) 572 2000 Tel: (617) 588 2300
Fax: (617) 572 2427 Fax: (617) 588 2305
www.bain.com www.mainspring.com
Atlanta • Beijing • Boston • Brussels • Chicago • Dallas • Hong Kong • Johannesburg • London • Los Angeles • Madrid • Mexico City
Milan • Munich • New York • Paris • Rome • San Francisco • São Paulo • Seoul • Singapore • Stockholm • Sydney • Tokyo • Toronto • Zurich

On the other hand, mail-order companies, through integration of catalog and online operations, have the scale to own and enhance order fulfillment assets cost-effectively. Lands' End …

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Frequently Asked Questions

What is order fulfillment?

Order fulfillment is a process consisting of receiving and processing goods for distribution to customers. What does order fulfillment mean? Order fulfillment means fulfilling a sales order to the customer’s specifications. That is, delivering goods as promised at the time of sale.

What is order promising?

Order promising helps you reliably promise delivery dates to your customers and gives you flexibility so that you can meet those dates. Order promising calculates the earliest ship and receipt dates, and is based on the delivery date control method and transport days. You can select among the following delivery date control methods:

How are lines shipped from unified order fulfillment invoiced?

Lines shipped from unified order fulfillment are invoiced from the back office similar to if the order is invoiced directly from the back office. Lines being shipped from unified order fulfillment are not loaded into the transaction view and there is no tendering performed at the time the lines are shipped.

How can retailers optimize order fulfillment?

Many retailers would like to optimize order fulfillment by enabling stores to fill orders. Order fulfillment at the store level can help to ease overstock scenarios for a specific store, or may be needed from a logistical standpoint in cases where a store has extra capacity or is located within closer shipping distance to the customer.