The Future of Catalog Fulfillment & Operations

Crystal-ball gazing is not a widely practiced art in the world of fulfillment. Being very much a tactical discipline, fulfillment is more focused on the here and now.

With calls having to be answered in 20 seconds and orders to be shipped in 24 hours, fulfillment is a near real-time, decision-making process — one that historically owes as much to operational flexibility as it does to operational planning.

In the catalog industry, marketing innovation has spawned major developments in fulfillment operations. Marketers have been the dogs that wag an operation’s tail, and in the end it’s the marketers who determine the direction fulfillment will take in the future.

So with the caveat that fulfillment is primarily a marketing-driven process — and as such, not in complete control of its own destiny — here are my top 10 trends to watch in operations and fulfillment during the next few years.

1. E-commerce has, and will continue to have, the biggest impact on fulfillment since the introduction of the toll-free phone number.

The introduction of round-the-clock, toll-free calling almost 30 years ago fundamentally changed the operating landscape of fulfillment. The transition from the weekly batch processing of mail orders to the real-time answering of phone calls dramatically accelerated the fulfillment process. Delivery commitments to the customer were cut by more than half, from four to six weeks to less than two weeks.

Furthermore, with the customer now on the phone demanding to know order status, accurate and timely information regarding inventory availability became essential. Information “float” — the time it takes to get data to the end-user — compressed from weekly to real-time availability. To support these rigorous operating requirements, fulfillment managers underwent a sea change in terms of technology and techniques, most of which remain in place today.

The impact of e-commerce on fulfillment operations has been and will continue to be no less significant. Despite imploding under the weight of its own early hyperbole, e-commerce has evolved into a major channel of sales for catalogers, to the point where the future growth of this industry would appear to be entirely dependent on the Web.

Additionally, the operating promise of the Web — new customer support technologies and lower labor costs — might actually be fulfilled.

This isn’t to say that catalogers’ experiences with the Internet were always so positive. At first, fulfillment managers secretly wished the Web would simply go away. What a difference a few years make. With today’s more robust Web sites and users more comfortable with the Internet-shopping experience, catalogers are getting fewer live customer contacts to the point where some (not I) believe phone ordering eventually will go the way of mail orders.

Also, Web-based customer support technology has evolved; the leading direct commerce order management systems, and even traditional enterprise systems, now offer at least some level of functionality that facilitates the handling of electronic contacts.

This combination of fewer live contacts and more effective systems support surely will reduce fulfillment operating costs.

2. Investment in fulfillment infrastructure will increase dramatically.

Given the uncertainty about the economy in the last few years, catalogers have delayed investing in operating infrastructure and systems, instead relying on short-term fixes to survive until the next season.

When the economy eventually does rebound, there will be significant pent-up demand for operational investment. In making infrastructure investments, U.S. catalogers typically have spent less on new technologies and more on expanding existing technical and operational capacities and improving business processes. All of this may change with the technologically challenged catalog operations poised to finally come of age.

The evolution will be driven by the increase in available capital coupled with a decrease in the cost of the technology as a result of the recent proliferation of direct commerce operations and technologies that should make customer relationship management (CRM), warehouse management systems (WMS) and other fulfillment-

related applications more prevalent, and as a result, more affordable even for smaller catalog operations.

3. IT environments will be Web-based, best-of-breed applications with open systems architecture and Graphical User Interface (GUI) navigation.

John Marrah, president of Ecometry, a leading direct commerce order management software supplier, recently said he believes there will be a fundamental shift in our industry’s systems environment in the coming years with the introduction of a new technology known as Web Services.

This technology allows a company to link applications — even those coded in different programming languages — both internally and with those of its customers and suppliers via the Internet, in much the same way Web pages are linked together.

For example, using this technology a catalog company will find it much easier to integrate its order-management application with a CRM or WMS package from another supplier. Also, this technology will facilitate the establishment of remote call centers, warehouses and de-centralized marketing/merchandising departments.

Finally, the ubiquitous “green-screen” interface (still found in many catalog customer contact centers) will make way for GUI screens. Since most people have access to computers, the interface they’re most familiar with uses Windows/GUI-based navigation. The benefits will be most apparent to seasonal staffers who will be able to more quickly learn customer support functions.

4. Increased use of wireless and other automation technologies will result in paperless fulfillment operations.

In the next stage of Web integration, customers will place orders and check their status using wireless devices such as PDAs and cell phones. Fulfillment operations also use will PDAs to capture and verify critical operating data.

As an example, officials at the Levenger catalog already use PDAs to confirm ship-alone merchandise, eliminating the need for these bulky items to be moved to a regular shipping station for shipment/manifesting.

Lower costs and improved software also will substantially increase the use of other forms of automation. Proven technologies commonly found in other industries and in larger direct-commerce operations will find their way into most catalog operations. The introduction of identification methods such as bar codes or RF-ID, ASNs in the receiving process, and paperless picking using either voice recognition or radio frequency should all but eliminate paper-based transactions.

5. Fulfillment outsourcing finally will gain a measure of industry acceptance.

In the past, the catalog industry hasn’t viewed the outsourcing of fulfillment operations as a viable operating alternative. Indeed, less than 5 percent of U.S. catalogers employ third-party fulfillment (3PF) suppliers.

This belief runs counter to conventional wisdom outside the catalog industry that posits outsourcing as one of the top strategies successfully employed by high-performing companies.

The influx of new multichannel marketers who have a history of using outsourcers and often don’t possess an internal direct operation will trigger a paradigm shift. The old model of a vertically integrated catalog company (a popular notion in the 1980s and 1990s) that performs all requisite activities, from merchandising and marketing to fulfillment and operations, will be replaced by a flexible multichannel marketing company focusing on its core competencies with established outsourced relationships for the more tactical business processes.

6. Business process outsourcing will grow within the catalog industry.

To attract larger, more established direct-commerce marketers with in-house operations, several major 3PFs introduced a new type of service offering called business process outsourcing (BPO). Although new to the catalog industry, BPO transactions are common in large-scale IT and logistics operations.

In this type of transaction the third-party service provider assumes responsibility for all, or a major component of, a client’s fulfillment and customer-support activities, including purchasing the client’s assets involved in such activities and assuming the client’s leases and other obligations connected with these activities. The third party then sells back the fulfillment support services to the client on a per-transaction basis.

7. Fulfillment-related services that can be delivered digitally (e.g. teleservices, IT) will become more globalized.

The trend in the teleservices industry has been to employ offshore suppliers. As a result of the extremely low labor costs and the availability of a highly educated workforce, contact-center services in countries such as India, the Philippines, Canada and Mexico can provide an acceptable level of service at about half the cost of U.S-based suppliers. In fact, very few large teleservices programs that were outsourced during the last few years have remained with U.S.-based suppliers.

The compelling cost implications even have catalogers considering foreign-based teleservices alternatives. However, because of the extensive overhead resources required to oversee these arrangements, to date only large- and medium-sized companies have been able to justify the move overseas.

8. The use of reverse logistics service providers will increase.

Although a small piece of the supply chain, returns processing is another fulfillment-related activity that should benefit from the emergence of a group of outsourcers that specialize in reverse logistics for catalogers. This type of outsourcing also has an established track record outside the catalog industry.

Effective returns management is a key opportunity for improving customer satisfaction and financial performance with small improvements in streamlining return operations having significant impact on the bottom line.

Given the need of suppliers to pool large numbers of returns to make the service economically viable, it would appear that only catalogers with a high volume of returns would benefit from this type of service.

9. New logistics strategies will address increasing freight costs.

Non-traditional freight carriers, including regional expeditors, will play a larger role in consumer parcel delivery. This type of service will leverage the U.S. Postal Service’s stated strategy of having more of their upstream processing handled by third parties.

Private carriers will pick up parcels at your dock and haul them to regional expeditors for delivery to your customer’s local post office, which will handle the last mile. The delivery time frame is equivalent to UPS Ground (three to eight days) at a projected cost of a $1 to $1.50 less than UPS Ground. This network of carriers will be managed internally for larger organizations or by third parties.

Also, the number of remote branch distribution centers (DC) will increase — another trend in which catalogers will emulate a practice already prevalent in related industries. Typically, catalogers have had a single DC while non-direct distributors often employ multiple regional DCs to reduce outbound freight costs.

10. Although the growth of customer support staff will be reduced, the caliber of employees will increase.

With the order channel shifting increasingly toward the Web and with improved Web-based self-service technologies, the number of live customer contacts likely will decrease for most catalogers. However, the need for well-managed and highly skilled contact centers will continue.

Staff composition will change, with a marked increase in the higher-skilled positions (e.g., service consultants, support services, Internet/correspondence). Of course, some catalogers will continue to encourage direct contact with a real person, especially in high-value businesses.

Conclusion

Several core elements of fulfillment won’t change in the coming years. Fulfillment will continue to be an extremely difficult activity to manage effectively, given the complex processing requirements, high service expectations, extreme seasonality, and need for both a low-wage workforce and constant balancing of service with cost.

Successful operations will continue to require close management of a flexible and productive workforce performing processes that are efficient, standardized and measured.

William J. Spaide is a partner in the management consulting firm of Spaide, Kuipers & Co. The firm has provided operations management and information technology consulting services to more than 300 direct marketers, retailers, publishers, institutions and distributors during the past 15 years. Contact him at (610) 668-8296 or e-mail: spaide@spaidekuipers.com.