More and more companies today are outsourcing fulfillment to avoid making investments in that non-core area, or in the technology necessary for it. We’ve also seen hundreds of start-up e-commerce companies that simply don’t want to be in the fulfillment business. All of these companies are turning to third-party fulfillment (3PF) providers like you. With so much riding on it, it is very important that your front-end (call center, customer service, and marketing) and back-end (warehousing, order management, and fulfillment) systems and technology give you a continuing competitive advantage. The systems you select will have significant ramifications for your personnel’s productivity, as well as how effectively you serve your customers and help them grow their businesses—and the management information these systems provide can help you grow your business. No matter what type of system you’re considering, the purchase is a long-term investment. In short, selecting the right front- and back-end systems for your 3PF business is a major undertaking.
In this article, we’re going to lay out the major functional considerations for new software and the methodology for selecting a system. Over our past 25 years as industry consultants, we have both assisted companies in selecting third-party fulfillment providers and helped third-party providers select new front- and back-end systems to improve their fulfillment services, reduce costs and improve customer service.
General Considerations
As you start to review systems, it’s important to consider the uses for which these systems will be implemented. As we all know, there are many types of products and services that have different fulfillment system requirements. These business differences include:
- Catalog management
- E-commerce
- Retail store replenishment
- Infomercial
- Printed point of sale and point of purchase materials
- Collateral and printed materials
- Replacement parts
- Returns processing
The point is that you need to be sure the focus of your fulfillment operation can be accommodated functionally by the application. A good example is catalog management. Does the customer service system allow identification of e-commerce versus catalog orders? Does the pricing engine accommodate all the pricing, discounts and services that a catalog requires? Are the analysis systems geared to page, depiction, merchandise analysis price range, and other catalog-specific requirements? Additionally, some types of products such as apparel with color size matrix or multi-dimensional matrix require on-line displays and reporting geared to this merchandise.
Overall, since a company using third-party fulfillment is giving up direct contact and control with the customer, the system and process needs to be highly functional. But there isn’t a single “one size fits all” solution that typically fits all businesses. The application needs to be scalable to high peak volumes and be very flexible to accommodate differences in client businesses. And since not all clients will want the full line of services, can the system be used in a modular fashion?
With these general comments in mind, the following specific points are important for front-end, back-end and analytical tools required by 3PF providers. In each major system function we will list key functionality to be considered.
E-Commerce
Today, the traditional catalog company has more than 50 percent of its sales coming from the Internet and e-commerce. Most catalog management feels that a high percentage of e-commerce sales result from receipt of the catalog. So the functionality that 3PF companies have to provide must support the expansive growth of e-commerce. Many 3PF companies offer expanded services to build and support client Web sites as a way of providing a one-stop service. Among the major e-commerce functions:
- Business system to Web site integration for inventory, customer and shipment tracking
- Search engine optimization (SEO)
- Personalization
- Ability to build and support client Web sites
- Ability to customize the look and feel of the site
- Integration with other industry leading Web analytics, search, rich media and review systems
- Support of e-mail campaigns
Call Center, Customer Service and CRM
One of the major areas of functionality at which third-party software has to excel is to have complete multi-company functionality throughout the entire application. Even for e-commerce and “bricks and mortar” companies that don’t have catalog, there are call center requirements that have to be provided. Some of the larger providers, such as GSI, have many major retailers that have outsourced their call center and e-commerce support. Additionally, the more effective call centers are really tuned into revenue generation for the client. This not only takes the form of up-selling and cross-selling functions, but also outbound selling of product.
Important functionality in this area includes:
- Multi-client, multi-title front end
- PCI compliance
- Expanded customer and order notes
- Multiple addresses for ordered by, bill to and ship to
- Ability to flag customers for future action using a workbench or workflow system
- Ability to handle pop-up of company and customer through CTI
- Full customer order-taking and service for catalog and Internet
- Up-selling and cross-selling capabilities
- Remote call monitoring through the ACD
- Customer purchase, segmentation and lifetime value history
- Outbound selling
- Internal fraud checking
- Ability to set credit limits and thresholds
- Interface to major credit card processing providers
Pricing Engine
A third-party system needs a good pricing engine in order to be able to effectively handle multiple clients’ business rules, as well as various rules imposed by individual clients, for promotional pricing, discounting, targeted pricing by customer segmentation, free shipping, and a multitude of other options.
Order Management & Fulfillment
Third-party order management and fulfillment embodies what we consider to be the most critical functionality for the back-end application. In order to ensure profitability, the order management system has to make the fulfillment provider efficient in terms of labor, capacity and facility utilization. Among the most important areas:
- Picking options: batch pick, zone pick, pick to cart, pick to tote, pick to light, etc.
- Velocity slotting and cube utilization
- Random or directed put away
- Pick slot replenishment
- Hot pick processing
Labor involved with picking and packing is more than half the total direct labor cost, while direct labor is more than 50 percent of the cost per order, not including outbound shipping costs. Functionality such as picking methods, slotting, hot pick areas, streamlined returns processing, etc. all help to keep costs in line.
- Wide variety of product types and sizes requires different WMS storage functionality
A major challenge facing 3PF businesses is the frequent need for storage and fulfillment of a wide variety of products encompassing various weights and dimensions.
- Rate shop shipping methods
- Interface to major shipping systems
Outbound shipping has become the largest single expense, even exceeding direct labor costs. Rate shopping and interfaces to major shipping systems are critical to helping your customers lower their shipping costs.
- Bar code scanning receiving, put away, replenishment, picking, packing, shipping, returns, cycle counting
Bar coding inventory through the processes will allow you to reduce shrinkage and to track inventory throughout the center.
- Multi-warehouse capabilities
For multi-facility operations, consider: what are the business rules that are under your control? Issues include partial shipment of multi-line orders and the ability to project item inventory by center.
- Expedite warehouse processing of returns
Streamlining returns processing in apparel businesses is important because returns can vary between 10% and 40% by category, depending on its fashion content. Tailored fit and color/size selection also increase the return rate. Your objective should be to handle returns in as few steps as possible, including the inventory disposition and the customer return, credits, refunds and exchanges.
- Drop ship vendor processing
Vendor processing systems have greatly improved with regard to drop shipments. Even though the client is not asking you to warehouse 100% of their product, a streamlined drop ship system can greatly increase sales without having the inventory in stock. The better systems put low cost terminal/printer combinations in the vendor environment. Orders are downloaded on-line or in batches. Confirmed pick transactions are interfaced to the customer service files. The client can track the vendor’s shipping status, service levels, etc.
Other important areas of order management and fulfilllent functionality include:
- Multichannel support for catalog/Internet, retail, wholesale which have radically different order and product profiles
- Extremely flexible to handle different client operating requirements
- Security between client info and data
- Supports vendor compliance programs which differ by client
- Cartonization for box size selection
- Scalable for peak volume processing
- DC inventory management including cycle counting and shrinkage control
- Productivity transaction capture and reporting
- Track client transactions and activities for billing purposes
Inventory Management
Inventory is the major balance sheet asset in most direct and retail businesses. Accurate inventory tracking reduces shrinkage and identifies bestsellers and candidates for liquidation, assisting clients in building sales and earning more margin. To provide services to the client’s merchants and inventory control departments, inventory planning and forecasting functionality includes:
- Catalog pre-season planning
- In-season forecasting product requirements by campaign, offer, drop
- Demand planning products across promotions
- Master scheduling of when stock-outs will occur
- Some or all of these functions may be provided by interfacing standalone specialized systems
Purchasing
Most companies provide the systems functions for purchase order placement. One trend in fulfillment services is to actually do the purchasing and printing of collateral for clients. Purchasing functionality can include:
- Ability to generate purchase orders
- Full function support for client vendors and factors
- Advance shipping notices from vendor (ASNs)
- Visibility into inbound receiving
- Vendor portals for processing POs, invoicing, viewing inventories, etc.
Marketing
Understanding the complex nature of multichannel marketing is a key function you need from your fulfillment system. How can you help your clients better understand their businesses from a marketing perspective?
- Measurement of catalog, space, e-mail media and offer results
- Customer purchase segmentation analysis
- Lifetime Value Analysis
- Analyzing customer channel preference and profitability by channel
Merchandising
Offering unique and profitable product is at the heart of a direct marketer and retailer’s success. How will your system assist your client’s merchants to be better selectors and sell more product? Functionality in this area may include:
- Multichannel category and item sales trends
- Fast and slow seller results
- Contribution to profit by channel and by product
- Vendor scorecards based on merchandise analysis and meeting fulfillment standards
Plans and History
Many systems do not capture and archive history sufficiently to support multichannel businesses. Functionality needed includes:
- Multi-year and seasonal history for channels, catalogs/promotions, products and retail stores
Executive Analytics and Dashboards
Industry leaders have developed executive analytics, KPI alerts and dashboards which make senior management users of the customer service, fulfillment, merchandising, marketing systems, etc. for the first time. This will generally provide an advantage that in-house IT departments usually only develop or acquire in the largest companies.
General Requirements
- Ability for clients to log in and manage their business remotely
- Individual company ability to get reports as they desire
- Interface to other corporate systems (merchandising, marketing, accounting, Web sites, etc.)
The Selection Process
We recommend you follow a four-step selection process; these four major steps will ensure that you have taken into account and considered all the use and functionality required to replace your existing system.
Step 1: Organize the Project Internally
- Management should appoint a senior management “sponsor” to represent system user interests and get management’s input— to elevate the project’s perceived importance and encourage participation in the process.
- Set up a project steering committee representing all areas affected by the new system. Steering committee draws up written plan for evaluating and selecting vendor and installing system; meets monthly to review progress.
- Identify business functions to be accomplished by the new system. Management should provide company growth plans; anticipated changes in business direction; budget guidelines; and decide whether the new system should run on existing hardware.
- A project coordinator who is well disciplined and organized can help keep the project on schedule and within budget. This person is responsible for the day-to-day system selection and vendor activities.
Step 2: Define Your Requirements
- Deciding what system functions you want is critical to pick the right “match” for your needs. The most effective systems generally have a 70 to 80 percent fit before modification. Modifications and complex integrations are risky, expensive and can cause serious delays.
- Prioritize functional requirements and get department manager input for each subsystem (e.g., order-entry, inventory, fulfillment, merchandising, marketing, etc.). Include unique requirements, key data elements missing from the current system, major screens and reports, and/or data interfaces to other systems.
- A decision matrix is critical to evaluating a vendor’s specific system functionality against those you require, and to make comparisons on an apples-to-apples basis between vendors.
Step 3: Evaluate the Vendors
- Document business requirements; list each and every task the new application needs to accomplish now and in the future.
- Send a detailed request for proposal (RFP) to each vendor.
- Specify that bidders include in writing all of the pricing, guarantees and schedules for the application; the software and hardware to be provided; pre-installation training; modifications required before and after installation; a list of other package systems with which it has successfully integrated; and file conversion and support.
- Evaluate responses in a comparative format, as discussed above.
- Narrow choices down to two or three; bring the top two vendors in for scripted demos, keeping a third vendor “in reserve” just in case.
- Base scripted demos on business functions and transactions specific to your business. Work with each user department to address their major concerns, reviewing in detail how the software can accomplish these requirements. Remember, you control the software demonstration; require vendors to show functions that you want to see rather than the functions that the vendor wants to show you.
- While still fresh in everyone’s mind, get participants from each functional area to rank the pluses and minuses of the software demonstration on the matrix.
- Use the RFP responses and scripted demos to work through which system has a better fit for your company.
- Review in detail what the vendors feel the costs of customization and integration will be. The purchase price when installed will often be 40% to 50% professional services. These are at best difficult to estimate. Determine what reporting is available compared to your current system. What will need to be developed? What integrations will require additional services?
- Determine the total cost of ownership for replacing your complete application.
- Request a detailed implementation schedule and what the vendor’s assumptions are regarding involvement and time required of your company’s personnel. It usually involves a major time commitment by your company.
- Include as part of your evaluation process how well the vendor will continue to update, enhance and support the system.
- Check vendor references. Ask to see the full customer list, not just the vendor’s selected references. Make sure that you will not be either the largest or smallest client of a particular vendor.
- For the reference checks, ask the same questions of each vendor’s clients, allowing comparison later.
- Choose one or two of each vendor’s clients that are similar to your business to visit for a much deeper perspective than you would get from a phone conversation. If possible, make these trips without the vendor present, to allow users to be as open and frank as possible.
Step 4: Examine the System’s Potential ROI
- Determine the ROI of a new business system purchase before you make that major investment. What savings and benefits do you expect to gain?
- Don’t base your ROI calculation on the vendor’s promotional data. To get the most accurate sense of your potential ROI upfront, ask: How long will it take to recoup the investment?
By the end of this four-step selection process you should have gathered enough information to make a well-founded purchase decision—but don’t rush into anything. Be thorough; the devil is in the details. The more detailed your planning, the better chance of the application being implemented on-time and within budget and delivering real savings.
Summary
Front- and back-end systems encompassing call center, customer service, marketing, warehousing, order management, and fulfillment functionality are at the heart of the services that you provide your fulfillment clients. They are essential to assist your clients in growing their businesses and in making your business as efficient and profitable as possible. Selecting the right systems is critical to your success as a third-party provider.
