Toysrus.com wasn’t the first company to lose its way in the brave new world of online retailing, but it was certainly one of the best known. Blessed with a famous brand, the virtual arm of the giant toy-store chain seemed ready last November to take the E-commerce world by storm, wowing parents with a guarantee of on-time Christmas deliveries for their kids’ presents. The marketing ploy made Toysrus.com the fifth- most-visited E-commerce site on the planet during the holiday season.
That’s when trouble hit. The deluge of orders overwhelmed Toysrus.com’s understaffed Memphis warehouse. Inventory of hot products, such as Furbys and Pokémon toys, ran out. The worst day was December 23, when Toysrus.com publicly admitted it wouldn’t be able to fulfill all its online holiday orders. In recompense, the company offered $100 gift certificates to customers who didn’t get their packages. Now the company is facing class-action lawsuits for disappointing the kiddies.
Mindful of the potential damage not just to its bottom line but also to its brand, Toysrus.com determined to set things right. In December the Woodcliff Lake, New Jerseybased subsidiary hired a new CFO and COO, Jon Foster. A restructuring expert from investment banking firm Lazard Freres & Co. LLC, Foster vowed to strengthen Toysrus.com’s logistics infrastructure.
Warehousing was an obvious weakness. The company’s single, 500,000-square-foot warehouse was fine for old- fashioned bulk distribution, but not at all suited to fulfill individual orders from the Web. In April, Toysrus.com announced that two brand-new, $25 million fulfillment centers were ready for E-business, giving the company a total of 1.9 million square feet of distribution and warehousing space. The warehouses have to be staffed, and so Foster increased manpower by 300 percent, to 2,500. And Toysrus.com is also spending an estimated $12 million on new order-fulfillment, warehouse-management, and tracking systems to make sure Santa delivers this year.
“It’s all about planning, capital, and training,” says Foster. “Our objective is to have efficient and timely delivery to the customer.”
Toysrus.com isn’t the only E- tailer determined not to repeat the mistakes of Christmas past. Hundreds of companies are working feverishly to get their logistics, warehousing, ordering, inventory management, and transportation systems ready for December 2000, says Chris Newton, an analyst at AMR Research Inc., in Boston. Suddenly, all that old-fashioned, low-on-the-totem- pole stuff, much of it carried out by minimum-wage workers in distant warehouses, is incredibly important. And CFOs, adds Newton, “are now realizing that delivery of the right product at the right time is vital to customer retention, and that the entire logistics operation is a strategic differentiator.”
How Webvan Delivers
One dot-com that is betting the store on its command of logistics is Foster City, California-based Internet grocer Webvan Group Inc., launched in January 1997 by Louis Borders (of Borders Books fame). In July 1999, Webvan entered into a partnership with engineering and construction giant Bechtel Group Inc. to build 26 specially designed automated warehouses throughout the United States. Cost: $1 billion.
The company already operates two such warehouses–$25 million, climate-controlled, 330,000-square-foot facilities in Oakland, California, and in Atlanta. When a customer clicks on www.webvan.com, he can order from among 30,000 competitively priced items, including perishables like fresh fruit and fish. Warehouse pickers don’t have to hunt for goods; instead, four and a half miles of conveyor belts, as well as a series of carousels, deliver some 8,000 bins full of items to them. Items are picked per the individual order and placed in a bar- and color- coded tote, or box. (Refrigerated items, for example, go in green totes.) Concurrently, each product is coded in special trays, and the original packaging is sent automatically on a conveyor belt to be recycled. The average 25-item order is filled within an hour, the company claims.
Once the order is complete, the tote arrives at the outbound area of the distribution center, where the routing systems sort all totes by neighborhood. Refrigerated trucks then deliver the totes to any of a dozen or so “docking stations” serving a 40-square-mile radius in the Bay Area and a 60-mile radius in Greater Atlanta. Couriers at the docking stations load the totes into a van equipped with a global positioning system, drive no more than 10 miles to the customer’s home, and deliver orders within 30 minutes of the specified time.
The devil, of course, is in the details. While the company claims an on-time delivery rate of 92 percent, a few customers have complained that their orders are incomplete or incorrect. To keep delicate items like strawberries or eggs from getting crushed, Webvan had to purchase heftier containers. To comply with restrictions around delivery of alcohol or tobacco, Webvan is careful to deliver only within one state, and the courier must have the customer sign for the delivery.
“We’ve had to work out all these issues and exceptions to the last detail,” says senior vice president of area operations Mark Zaleski. “The trick is to begin with the end in mind, correct problems as you go, and go over and over and over the business processes until you make it right.”
The other foundation of Webvan’s fulfillment system is a complex warehouse management system (WMS) from White Plains, New Yorkbased Optum Inc. The Optum software integrates with the company’s custom- designed inventory, materials handling, order-tracking, accounting systems, and transportation- management systems. The plethora of systems–which required some 100 programmers to build and maintain–keeps tabs on every individual order, from the time the customer clicks “submit” all the way through delivery.
“We’re taking the grocery industry and completely reengineering it from the inside out,” says Zaleski. “There’s nothing out there that resembles this distribution and delivery system. We’re conquering the last mile of E- commerce.”
Of course, all this technology costs a pretty penny. In 1999 alone, Webvan reported that it spent $15 million on software development (the company reported a $144.6 million loss on sales of $13.3 million). Such expenditures, coupled with the enormous cost of new warehouses and the fact that online grocery shopping may take a while to catch on, underscore just how risky this business is.
Nevertheless, most observers give Webvan–which had $541 million in cash and marketable securities at the end of Q1 2000- -a better shot at success than, say, the struggling Internet-grocery firm Peapod Inc., which, analysts say, failed to take advantage of existing services and warehouse products. (Peapod was recently revived by a 51 percent investment from Dutch grocery giant Royal Ahold NV.) Webvan’s stock tumbled from its November 1999 initial public offering price of 15 to a low of 43/8 in April, but rebounded slightly to around 6 at press time.
“Webvan has put a lot of emphasis on building their own infrastructure, and they have a very smart management team with a tremendous technology background,” says AMR’s Newton. “If they can convince consumers to buy their groceries online, their chance is as good or better than any player in this new market.”
One thing is clear: Building a complex distribution system is very, very costly. Although a company can purchase WMS software for $150,000, the attendant costs of installation, training, and warehouse organization can run into the millions. “Even if you set a budget, you can easily go 10 to 15 percent over budget,” Toyrus.com’s Foster notes. Tony Ross, a partner with Ernst & Young’s consulting practice in Irving, Texas, warns that companies that build a distribution system in-house should plan on 50 percent more in addition to hardware and software for labor and implementation costs.
Should You Try This at Home?
As if the cost weren’t daunting enough, there’s also the planning, which can take months. And in the world of the Web, companies find themselves planning for the unknown. All this means that CFOs need adjustable business plans that allow for dramatic fluctuations in inventory levels. And they must budget for technologies and specialists that can link together various areas of the business–order entry, call centers, financial and crediting systems, warehousing, inventory systems, shipping systems, and supplier systems.
“All these systems need to be in sync and Web-enabled in real time,” says Lynnette McIntire, spokesperson for the Logistics Group of United Parcel Service, which advises companies how to set up distribution systems and then manages them. “If they aren’t, you run into frustrated customers who experience back orders, delayed credits for returns, slow fulfillment and delivery times, ‘product unavailable’ alerts, and other unhappy surprises.”
Bricks-and-mortar companies dabbling in E-commerce for the first time, like Toys ‘R’ Us, face different challenges, McIntire adds. “Traditional companies’ distribution centers are set up to handle pallets or truckloads of goods, not single small packages shipped to hundreds of different residential addresses that might also be international,” she says. “This requires retooling the entire order-processing system.”
The sheer complexity of building a WMS is one reason why companies under a time crunch are choosing to outsource, rather than build, their distribution systems. Outsourcers can scale up quickly, and many, such as UPS, offer a global network so that international expansion (customs clearance, duties and tax collection, international delivery) is simpler. Some third-party logistics operations can even handle returns, warranty service, repair operations, parts, and product upgrades.
Outsourcing isn’t for everyone, however. “Outsourcing sounds great on the surface, but it’s hard to control the customer’s experience,” says AMR’s Newton. “It’s hard to control the inserts, the branding, the packaging, the whole ‘customer experience’ of the product from a service provider.” Moreover, a company will need to make sure that it’s getting the right level of service from a third party serving as the outsourcing agent for many different organizations.
Regardless of whether they purchase automated solutions or turn to a third party, companies can expect that, at least for the next few years, their focus will be on tightening up their fulfillment systems. In 2000, companies will be working hard to avoid the mistakes of last year, and to concentrate on customer satisfaction,” predicts Jim Tompkins, president of logistics consultancy Tompkins Associates. “But next year, the big issue will be whose fulfillment system is better than whose.”
Bronwyn Fryer is a freelance writer in Santa Cruz, California.
Four E-commerce fulfillment providers:
Fingerhut Business Services Inc.
Provides outsourced order management, information management, product fulfillment, and returns processing.
Hanover Direct Inc.
Develops E-commerce fulfillment, E-tail distribution, customer response, and support technologies and solutions.
UPS Logistics Group
Provides global supply-chain- network management, transportation- management services, supply-chain technologies, and consulting.