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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.

“Fulfillment is part of customer service,” notes Geri Spieler, California-based research director of e-Business Services at research firm Gartner (www.gartner.com), based in Stamford, Connecticut. “Merchants lose customers more from bad customer service than from any other reason.” And to online shoppers, a delay in receiving an order definitely qualifies as bad customer service. In some cases, Spieler says, “[fulfillment] problems have forced enterprises to shut down their Web sites.”

Even when an E-tailer manages to hold on to customers, inefficient fulfillment systems can slow down the company’s cash conversion cycle, effectively eating away at working capital and profit margins. “Every second a product that could be shipped out sits in a distribution center is money down the drain,” notes Stacie Kilgore, senior analyst for ebusiness applications at marketing research firm Forrester Research Inc. (www.forrester.com), in Cambridge, Massachusetts.

By contrast, a well-oiled fulfillment system not only maximizes inventory churn, it also keeps customers happy, generates return business, and therefore plumps up a company’s top line. “Fulfillment may be a company’s biggest cost,” Kilgore grants, “but the real opportunity is to look at fulfillment from a revenue-generating perspective.”

Looking at it at all would be good. At Webvan’s cavernous Oakland, California, distribution center, the company’s intricate order management system automatically pushes items needed for each order in plastic totes (identified via bar-coded license plates) to stations via 4.5 miles of conveyor belt. At the stations, pickers receive the correct items and place them in the plastic totes to fill the order. To meet performance goals, each picker has to pick more than 100 items per hour. If everything runs smoothly, one worker can pick 16 orders simultaneously.

When pick rates lag for a particular product, Swan’s team goes online and modifies the placement of the product in the Oakland distribution center. If the change yields better performance, Swan makes the same adjustment for Webvan facilities in Sacramento, Atlanta, and Chicago. “I make tweaks all the time,” explains Swan. “I check the demand on various SKUs. It affects profitability on a minute-to-minute basis.”

For an online grocery like Webvan, delivering goods with all due speed is not just a good idea-it’s a necessity. “Food is highly perishable,” explains Kilgore. “If it sits on a rack too long, you don’t just discount it, you have to write it off altogether.” Compounding the problem: Webvan delivers products in its own fleet of trucks, which makes fulfillment more complex. Therefore, Webvan managers meticulously choreograph every step in the value chain — from the receipt of goods from suppliers to directing merchandise to the picker’s station to the automatic planning of routes for company truck drivers in local neighborhoods.

Forrester’s Kilgore says Webvan’s diligence — particularly in managing its inventory forecasting — is unusual. “Most companies review inventory reorder points or demands trends on a six-month or yearly basis,” she says. “Companies that don’t change their forecasting mechanisms on a daily basis — as Webvan does — are unprepared for sudden changes in demand for certain items. By the time they review inventory trends to tweak their sourcing, the picture has changed dramatically.”

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