The Fulfillment Doctor….On Third-Party Fulfillment

IQ: We’re thinking about using third-party fulfillment and call center services. How should we go about selecting the vendor?

A: Most of the direct world uses internal fulfillment.  Many companies don’t think that they can achieve and maintain high service levels using third-party fulfillment (3PF), or they fear that outsourcing will cost more per order. And, of course, many are dubious about turning over control.  

But in reality, fulfillment and operations distractions often do not let companies concentrate on marketing and merchandising, which are vital to profitable growth.

Dozens of nonprofit businesses use outsourcing because they recognize that fulfillment is not a core competency. Many seasonal merchants don’t want to recruit and train the auxiliary staff needed during their brief peak season. Outsourcing can enable a multiwarehouse fulfillment strategy, which may reduce inbound and outbound freight costs. Start-ups should seriously consider outsourcing to limit their capital expenditures.  

If you’re considering outsourcing your fulfillment, follow these steps:

1) Define your requirements. Start out by understanding your current costs.  For the contact center analyze your internal cost per contact, call, and order. For back-end fulfillment try to analyze the various departments’ functions and their costs. Many vendors invoice at a function level (order processing, returns, backorders, prep time, receiving), so breaking out your current costs this way will enable you to compare vendors’ pricing fairly.

2) Determine the business parameters, metrics, and customer service levels that will be used by the vendors for pricing.  Business parameters include average call length, call and order volumes per month, call-to-order ratio, split rate of multibox shipments, historical backorder rates, returns percentages, and number of units to be received. You should develop a three- to five-year order projection to use with the vendors.

In terms of customer service levels and standards, what do you expect of your 3PF? For the contact center you need to define an acceptable abandonment rate, average time to answer, call length, and e-mail turnaround time, among other metrics. For fulfillment you need to specific receiving and quality-assurance standards, picking error rates, inbound shipment receipt to put away times, returns processing times, and percent of orders shipped same day.

3) Determine the processing functions you expect the 3PF to deliver. In the contact center, do you expect services other than order-taking and customer service—online chat, for instance, or e-mail handling? Likewise, in the fulfillment center, do you expect the 3PF to handle gift wrapping and personalization, receiving, returns processing, and prep work as well as picking, packing, and shipping?  

4) Assess your current and future information systems needs. Remember that the outsource service also becomes your IT department for many functions.  Identify your systems needs including order management system , Website development and integration, real-time inventory, inventory purchasing, forecasting, data warehousing, circulation analysis, product category and item analysis of results, and financial reporting. Is their data warehousing robust enough to allow you to extract and analyze your data easily? You need to be sure the vendor’s systems are proper for your business. You don’t want to customize systems unless absolutely imperative.  

5) Develop the request for proposal (RFP). One of the gravest mistakes you can make is to try to select a vendor without a detailed RFP and competitive bidding. The vendor responses and costs become the standards content for the contract of the finalist.  For example, there will be a significant cost difference for contact center service levels (e.g. 80% calls answered in 20 seconds vs. 70% in 30 seconds). The RFP levels the playing field among vendors and sets forth your expectations.

When developing the RFP, spell out your operations environment as well as the system functions and reports you expect. Ask the vendor for references, who ideally would be in businesses similar to yours. Have the vendor spell out its implementation methodology and timeframe. Get a sample contract. And don’t forget to identify who in your company is responsible for this project and to provide the vendor with a deadline for when the RFP response is due.

6) Develop a short list of qualified vendors. Use industry resource guides, conferences, networking, and Web searches to identify potential vendors. Call 3PF providers, talk with them about your requirements, the types of business they handle (hard goods, collateral, apparel), the number of active clients they have, and the locations of their facilities. You generally don’t want to send an RFP to more than five vendors or fewer than three. So do your qualifying and homework up front.

7) Distribute the final RFP. Before you send the RFP off to the vendors on your short list, get a sign-off internally that the RFP represents your business’s requirements. Once you send out the RFP, allow the vendor two to three weeks to respond. During this time the vendor will likely need to call or e-mail you to clarify certain specifications so that it can provide you with an accurate and realistic response.

8) Set up a decision-and-cost matrix spreadsheet. This should allow you to prepare a detailed side-by-side comparison of the short list of vendors. If vendors respond in an incomplete manner, after several tries you should disqualify them.  The decision-and-cost matrix should compare pricing, service levels and standards, functions expected, implementation methodology, and systems required to be provided by each vendor.  Use a weighting factor to prioritize the functions and features that are most important to your business decision.     

9) Select the finalists.
Select the best two choices after you have validated the responses as best you can over the phone or in person.  This should obviously be made based on cost, standards agreed to, system and account management support, transition plan, and the “trust” factor.

10) Check references and make a site visit.
Work up a standard list of questions you can ask each reference. The vendor will give you its best references, obviously. Ask each vendor for its total client list, and take the time to follow up.  Call as many references as you can for your type of business. For the site visit, plan on spending a day at each finalist’s facility. Take your matrix and study materials so that you can ask any necessary questions and validate responses.  

11) Make the final selection. After the reference calls and the site visit, make sure that you have the finalist respond to any open questions and pricing changes.

12) Negotiate the contract.  Proposals and verbal representations must be written down and reflected in the contract.  Be sure to clearly identify the functions and standards that you expect the provider to perform. Use an attorney who is experienced in this type of law.

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