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Fulfillment: Rage Against the Machine

Many CFOs barely look at E-fulfillment; most delegate the task entirely to executives in customer service or logistics. The result is not just angry customers, but a slower cash conversion cycle that eats away at working capital and profit margins.

The idea of selling groceries over the Internet has always been a bit of a puzzler. Why would anyone with any degree of sanity take a business with paper-thin margins and wed it to a costly fulfillment system? Prospects for profitability would seem, at best, dim. And in fact, online grocers-once trumpeted as future stars in the new economy-have stumbled badly of late. In April 2000, for example, Netherlands-based Royal Ahold (www.ahold.nl) acquired a 51 percent stake in struggling cyber-grocer Peapod (www.peapod.com) for $73 million. Then in October, Priceline.com (www.priceline.com) announced it was shutting down its online grocery operation.

All this doom and gloom begs the question: What’s up with Robert Swan? Swan, CFO and COO at online grocer Webvan Group Inc., remains undeterred by the recent troubles in the industry — even though the Foster City, California-based company lost $74 million in the second quarter of 2000. More remarkable, the redoubtable Swan insists he can raise the operating margins at Webvan to 12 percent — or four times that of land-based grocers.

A neat trick — if Swan can pull it off. Webvan’s bold strategy — and perhaps the company’s survival — depends on the E-tailer’s ability to serve a maximum number of customers while wringing every drop of revenue out of its fulfillment and delivery systems. Swan says that at full capacity, each of Webvan’s distribution centers could fulfill 8,000 orders per day, seven days a week, at an average $103 per order. A tall task. To make sure Webvan is moving toward its targets, Swan watches fulfillment data like a hawk. “CFOs must drive operational performance to meet financial goals,” he explains. “Therefore, I monitor the fulfillment operation on a daily and hourly basis.”

The Search for Fulfillment

Oddly, CFOs at many click-and-mortar operations barely look at E-fulfillment performance, let alone track it by the hour. In fact, most finance managers don’t monitor the delivery of online goods at all, choosing instead to let executives in customer service or logistics handle the chore.

But as executives at pure-play E-tailers know, passing the fulfillment buck is playing with fire. Typically, a fulfillment system is the largest capital outlay an online merchant makes. Without reliable data, it’s hard to analyze the return on the investment — a big blind spot. “Fulfillment is a huge spend,” says Ted Augustine, chief logistics officer at Santa Monica, California-based eToys Inc. (www.etoys.com). “It has to be very closely monitored and managed.”

Note that eToys, which pays considerable attention to delivery of merchandise, is still in business. (In early 2001 eToys announced that it will shut down its operations.) Analysts say a poorly managed fulfillment system severely undermines an online operation — no matter how good the products are.

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